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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 20, 1999
REGISTRATION NO. 333-78029
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
GADZOOX NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3670 77-0308899
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
5850 HELLYER AVENUE
SAN JOSE, CALIFORNIA 95138
(408) 360-4950
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BILL SICKLER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GADZOOX NETWORKS, INC.
5850 HELLYER AVENUE
SAN JOSE, CALIFORNIA 95138
(408) 360-4950
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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JUDITH M. O'BRIEN WILLIAM D. SHERMAN
BRUCE M. MCNAMARA STEPHEN J. SCHRADER
THOMAS I. SAVAGE JUSTIN L. BASTIAN
WILSON SONSINI GOODRICH & ROSATI ROCHELLE A. KRAUSE
PROFESSIONAL CORPORATION MORRISON & FOERSTER LLP
650 PAGE MILL ROAD 755 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050 PALO ALTO, CALIFORNIA 94304-1018
(650) 493-9300 (650) 813-5600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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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 MAY 20, 1999
Shares
gadzoox LOGO
GADZOOX NETWORKS, INC.
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. The initial public offering price of our common stock is expected to be
between $ and $ 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
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
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<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.
This prospectus is dated , 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..... 17
USE OF PROCEEDS.................. 17
DIVIDEND POLICY.................. 18
CAPITALIZATION................... 19
DILUTION......................... 21
SELECTED FINANCIAL DATA.......... 23
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...... 24
BUSINESS......................... 35
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Page
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MANAGEMENT....................... 53
CERTAIN TRANSACTIONS............. 64
PRINCIPAL STOCKHOLDERS........... 68
DESCRIPTION OF CAPITAL STOCK..... 71
SHARES ELIGIBLE FOR FUTURE
SALE........................... 74
UNDERWRITING..................... 76
NOTICE TO CANADIAN RESIDENTS..... 78
LEGAL MATTERS.................... 79
CHANGE IN INDEPENDENT
ACCOUNTANTS.................... 79
EXPERTS.......................... 79
ADDITIONAL INFORMATION........... 79
INDEX TO FINANCIAL STATEMENTS.... F-1
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL , 1999 (25 DAYS AFTER THE COMMENCEMENT OF THE
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS
OR SUBSCRIPTIONS.
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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 $ of our convertible
note into 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 hardware and software products for storage
area networks, or SANs. We pioneered the development of SANs by applying a
networking model to the connectivity of enterprise servers and storage devices.
Our SAN products are designed to capitalize on the capabilities of fibre channel
technology to enable companies to more effectively manage the growth of
mission-critical data. According to International Data Corporation (September
1998), multiuser disk storage grew significantly from approximately 10,000
terabytes in 1994 to approximately 116,000 terabytes in 1998, and will reach
approximately 1,400,000 terabytes in 2002.
To address the needs of the SAN market, we introduced the industry's first
gigabit fibre channel hub, the industry's first fibre channel managed hub, the
industry's first fibre channel switch to support data backup without a server,
the industry's first modular, scalable, multi-protocol chassis switch, and the
industry's first SAN management software application. 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. Additionally, we believe that we have
built one of the largest networks of distributors and resellers to serve the SAN
market. According to International Data Corporation (January 1999), our
installed base of fibre channel networking ports represents the largest share of
the total combined hub and switch ports shipped in 1997 and 1998.
Our SAN products are designed to overcome the limitations of the
traditional captive storage architecture in the following ways:
- Capacity Scalability, to more effectively support the growth of
enterprise data;
- Increased Performance, to provide rapid access to data in proportion to
the increased volume of data;
- Manageability, to provide centralized monitoring and management of SAN
devices and data;
- Data Availability and Disaster Tolerance, to help ensure continuous
access to mission-critical data in the event of system failures or site
disasters;
- Interoperability, to allow seamless installation of products and enhance
the protection of existing customer investments;
- Modular Scalability, to provide users with a building block approach to
extend capacity and management capabilities;
- Increased Network Stability, to help ensure reliable access to data and
unlimited distance and capacity scaling; and
- Platform for Advanced Data Management, to provide new methods for more
reliable and secure data management.
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We believe that the SAN infrastructure created by our networking 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 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.
THE OFFERING
Common stock offered.......... shares
Common stock to be outstanding
after this offering......... shares(1)
Use of proceeds............... General corporate purposes, including capital
expenditures, working capital and potential
acquisitions
Proposed Nasdaq National
Market symbol................. ZOOX
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(1) Based on the number of shares of our common stock outstanding as of March
31, 1999. This number excludes the following:
- 4,529,692 shares issuable upon exercise of outstanding stock options as
of March 31, 1999 with a weighted average exercise price of $0.97 per
share;
- 1,441,478 shares reserved for issuance under our Amended and Restated
1993 Stock Plan, 1999 Director Option Plan and 1999 Employee Stock
Purchase Plan (including amounts authorized for issuance subsequent to
March 31, 1999);
- up to shares issuable upon conversion of the balance of our
convertible note upon the closing of this offering at a conversion price
per share of $7.65; and
- 47,849 shares issuable upon exercise of warrants outstanding as of March
31, 1999 with a weighted average exercise price of $5.96 per share.
For more detailed information regarding our options, warrants and
convertible note, see "Management -- Stock Options," "Certain Transactions" and
"Description of Securities -- Warrants."
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SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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YEAR ENDED MARCH 31,
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1995 1996 1997 1998 1999
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STATEMENTS OF OPERATIONS DATA:
Net revenues................................ $ -- $ 104 $ 823 $ 9,811 $24,821
Loss from operations........................ (316) (881) (3,856) (10,013) (15,706)
Net loss.................................... (310) (856) (2,089) (9,640) (15,932)
Basic net loss per share.................... $ (0.59) $ (2.41) $ (3.33)
Weighted average shares used in computing
basic loss per share (1)................. 3,551 3,995 4,789
Pro forma basic net loss per share
(unaudited).............................. $ (0.91)
Weighted average shares used in computing
pro forma basic net loss per share
(unaudited) (1)(2)....................... 17,594
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MARCH 31, 1999
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PRO FORMA
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
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BALANCE SHEET DATA:
Cash and cash equivalents.......................... $12,202 $12,202 $
Working capital.................................... 15,912 15,912
Total assets....................................... 28,598 28,598
Long-term obligations.............................. 15,057 15,057
Total stockholders' equity......................... 5,659 5,659
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(1) See Note 2 of Notes to the Financial Statements for an explanation of the
determination of the number of shares used in computing basic net loss and
pro forma basic net loss per share data.
(2) Based on the number of shares of common stock outstanding (on a pro forma
basis to give effect to the conversion of all outstanding shares of our
preferred stock into 13,907,399 shares of common stock effective
automatically upon the closing of this offering). Excludes the following:
- 4,529,692 shares issuable upon exercise of outstanding stock options as
of March 31, 1999 with a weighted average exercise price of $0.97 per
share;
- 1,441,478 shares reserved for issuance under our Amended and Restated
1993 Stock Plan, 1999 Director Option Plan and 1999 Employee Stock
Purchase Plan (including amounts authorized for issuance subsequent to
March 31, 1999);
- up to shares issuable upon conversion of the balance of our
convertible note upon the closing of this offering at a conversion price
per share of $7.65; and
- 47,849 shares issuable upon exercise of warrants outstanding as of March
31, 1999 with a weighted average exercise price of $5.96 per share.
See "Management -- Incentive Stock Plans" and Note 10 of the Notes to
Financial Statements.
(3) Reflects the conversion of all outstanding shares of our preferred stock
into 13,907,399 shares of common stock effective automatically upon the
closing of this offering.
(4) The pro forma as adjusted reflects (1) the sale of
shares of common stock in this offering at an assumed initial public
offering price of $ 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
$ of our convertible note into 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. These risk factors contain forward-looking statements that involve
risks and uncertainties. Our actual results could differ materially from those
anticipated in the forward-looking statements.
WE HAVE INCURRED SIGNIFICANT LOSSES SINCE OUR INCEPTION AND MAY NOT BECOME
PROFITABLE.
We have incurred significant losses since inception and expect to continue
to incur losses on both a quarterly and annual basis for the foreseeable future.
As of March 31, 1999, our accumulated deficit was $29.1 million. 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, we
may not be able to sustain or increase profitability on a quarterly or annual
basis.
OUR BUSINESS IS DIFFICULT TO PREDICT BECAUSE WE HAVE A LIMITED OPERATING
HISTORY.
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 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."
OUR STOCK PRICE MAY FLUCTUATE DUE TO EXPECTED FLUCTUATIONS IN OUR QUARTERLY AND
ANNUAL NET REVENUES AND OPERATING RESULTS.
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;
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- 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 over time 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 the prices we expect; 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.
OUR SUCCESS IS DEPENDENT UPON THE DEVELOPMENT OF THE EMERGING AND EVOLVING
STORAGE AREA NETWORK MARKET.
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
- 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 EXISTING PRODUCTS AND NEW PRODUCTS
MUST ACHIEVE WIDESPREAD MARKET ACCEPTANCE.
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
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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, widespread market acceptance of these products is critical
to our future success. Some of these products have been only recently
introduced. Accordingly, the demand for, and market acceptance of, these
products is uncertain.
Factors that may affect the market acceptance of our products, some of
which are beyond our control, include the following:
- growth 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.
WE MUST DEVELOP NEW AND ENHANCED PRODUCTS THAT MEET THE CHANGING NEEDS OF THE
STORAGE AREA NETWORK MARKET.
Our future success depends upon our ability to address the rapidly changing
storage area network market including changes in relevant industry standards and
the changing needs of our customers by developing and introducing high-quality,
technologically-progressive, cost-effective products, product enhancements and
services on a timely basis. For example, we recently announced the launch of our
Capellix switch and plan to announce other switching products. We expect to
begin commercial shipment of the Capellix switch product in the third calendar
quarter of 1999. Our future net revenues growth will be dependent on the success
of these and other new products, and we may not be able to develop and introduce
these or other new products successfully in the timeframe we expect. 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.
WE WOULD BE UNABLE TO MANUFACTURE OR SELL OUR PRODUCTS IF OUR SOLE PRODUCT
MANUFACTURER IS UNABLE TO MEET OUR MANUFACTURING NEEDS.
Sanmina Corporation, a third-party manufacturer for numerous companies,
manufactures all of our products at its Santa Clara, California facility.
Sanmina Corporation is not obligated to supply products to us for any specific
period, or in any specific quantity, except as may be provided in a particular
purchase order which has been accepted by Sanmina Corporation. If Sanmina
Corporation experiences delays, disruptions, capacity constraints or quality
control problems in its manufacturing operations, then product shipments to our
customers could be delayed, which would negatively impact our net revenues and
our competitive position and reputation.
Further, our business would be harmed if we fail to effectively manage the
manufacture of our products. We generally place orders with Sanmina Corporation
at least two months prior to scheduled delivery of products to our customers.
Accordingly, if we inaccurately forecast demand for our products, we may be
unable to obtain adequate manufacturing capacity from Sanmina Corporation or
adequate quantities of components
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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.
WE DEPEND ON SOLE SOURCE SUPPLIERS AND LIMITED SOURCE SUPPLIERS FOR KEY
COMPONENTS.
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.
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 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.
WE DEPEND ON A FEW KEY ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS AND THE LOSS OF
ANY OF THESE CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR NET REVENUES.
We depend on a few key original equipment manufacturer customers. In fiscal
1999, sales to Compaq Computer Corporation, Digital Equipment Corporation and
Hewlett-Packard Company each accounted for more than 10% of our net revenues,
and approximately 84% of our net revenues came from five customers. In fiscal
1998, approximately 69% of our net revenues came from sales to two customers.
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. 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. The loss of any of our key
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customers, or a significant reduction in sales to those customers, could
significantly reduce our net revenues.
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 our ability to initiate, manage and expand our
relationships with significant original equipment manufacturer customers, our
ability to attract distribution channel partners that will sell our products and
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. This evaluation
process is lengthy and may range from six months to a year. 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 other product or are being sold as an option or
add-on. Sales to distribution channel partners may also require lengthy sales
and marketing cycles. As a result, we may expend significant resources in
developing partner relationships before recognizing any revenue.
We may not be able to manage and expand our relationships with original
equipment manufacturer customers and distribution channel partners successfully
and they may not 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.
IF WE CANNOT COMPETE SUCCESSFULLY IN THE FUTURE AGAINST EXISTING OR POTENTIAL
COMPETITORS, OUR OPERATING RESULTS WILL SUFFER.
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 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
10
<PAGE> 12
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 OUR PRODUCT PRICES DECLINE, OUR NET REVENUES AND GROSS MARGINS MAY DECLINE.
We anticipate that 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 these factors by increasing our sales volumes, our net revenues
will decline. In addition, to maintain our gross margins we must continue to
reduce the manufacturing cost of our products. Further, as average unit prices
of our current products decline, we must develop and introduce new products and
product enhancements with higher margins. If we cannot maintain our gross
margins, our business could be seriously harmed, particularly if the average
selling price of our products decreases significantly.
UNDETECTED SOFTWARE OR HARDWARE ERRORS COULD INCREASE OUR COSTS AND REDUCE 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 LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL,
WE MAY NOT BE SUCCESSFUL.
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. 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
11
<PAGE> 13
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 MUST CONTINUE TO IMPROVE OUR OPERATIONAL SYSTEMS AND CONTROLS TO MANAGE
FUTURE GROWTH.
We have recently experienced a period of rapid growth. At March 31, 1997,
we had a total of 38 employees, and at March 31, 1999, we had a total of 149
employees. We plan to continue to expand our operations significantly to pursue
existing and potential market opportunities. This growth will place a
significant demand on our management and our operational resources. In order to
manage growth effectively, we must implement and improve our operational
systems, procedures and controls on a timely basis. Our key personnel have
limited experience managing this type of growth. If we cannot manage growth
effectively, our business could suffer.
IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY, WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY.
We rely on a combination of patent, copyright, trademark and trade secret
laws and restrictions on disclosure to protect our intellectual property rights.
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."
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
12
<PAGE> 14
- 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 reduced.
IF WE, OUR KEY SUPPLIERS OR OUR CUSTOMERS FAIL TO BE READY FOR THE YEAR 2000
CALENDAR CHANGE, OUR BUSINESS AND NET REVENUES MAY BE DISRUPTED.
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.
We have completed testing our products' readiness for the year 2000
calendar change. Nevertheless, we may discover that our current products or any
new products or 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."
OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT
REGULATIONS.
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.
13
<PAGE> 15
OUR INTERNATIONAL SALES ACTIVITIES SUBJECT US TO ADDITIONAL BUSINESS RISKS.
Our international sales will be limited if we cannot establish
relationships with international distributors, establish additional foreign
operations, expand international sales channel management, hire additional
personnel and develop relationships with international service providers. Even
if we are able to successfully continue international operations, we may not be
able to maintain or increase international market demand for our products. Our
international operations are subject to a number of risks, including:
- multiple protectionist, adverse and changing governmental laws and
regulations;
- reduced or limited protections of intellectual property rights;
- potentially adverse tax consequences resulting from changes in tax laws;
and
- political and economic instability.
To date, none of our international net revenues and costs have been
denominated in foreign currencies. As a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products more
expensive and thus less competitive in foreign markets. A portion of our
international net revenues may be denominated in foreign currencies in the
future, which would subject us to risks associated with fluctuations in those
foreign currencies.
WE MAY BECOME INVOLVED IN COSTLY AND TIME-CONSUMING LITIGATION.
We may from time to time become involved in various lawsuits and legal
proceedings which arise in the ordinary course of our business. For example, in
May 1999, a former employee filed a complaint against us. We believe this claim
is without merit and that resolution of this claim will not have a material
adverse effect on our financial condition. However, litigation is subject to
inherent uncertainties, and an adverse result in this or other matters that may
arise from time-to-time may harm our business.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS 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;
14
<PAGE> 16
- 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, directors and
principal stockholders who hold 5% or more of the outstanding common stock and
their affiliates will beneficially own, in the aggregate, approximately %
of our outstanding common stock. As a result, these stockholders will be able to
exercise significant control over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, which could delay or prevent an outside party from acquiring or
merging with us. For a full presentation of the equity ownership of these
stockholders, see "Principal Stockholders."
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL OF OUR COMPANY AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Provisions of our certificate of incorporation and bylaws may discourage,
delay or prevent a merger or acquisition that a stockholder may consider
favorable. These provisions include:
- authorizing our board of directors to issue preferred stock without
stockholder approval;
- providing for a classified board of directors with staggered, three-year
terms;
- prohibiting cumulative voting in the election of directors;
- requiring super-majority voting to effect significant amendments to our
certificate of incorporation and bylaws;
- eliminating the ability of stockholders to call special meetings;
- prohibiting stockholder actions by written consent; and
- establishing advance notice requirements for nominations for election to
the board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
Certain provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us, which may cause the market price of
our common stock to decline.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT
OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
There has been no public market for our common stock prior to this
offering. The initial public offering price for our common stock will be
determined through negotiations between the underwriters and us. This initial
public offering price may vary from the market price of our common stock after
the offering. If you purchase shares of common stock, you may not be able to
resell those shares at or above the initial public offering
15
<PAGE> 17
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.
WE MAY BE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS WHICH WOULD LIMIT OUR
ABILITY TO GROW.
We believe that the net proceeds of this offering, together with our
existing cash balances, credit facilities and cash flow expected to be generated
from future operations, will be sufficient to meet our capital requirements at
least through the next 12 months. However, we may be required, or could elect,
to seek additional funding prior to that time. In the event we are required to
raise additional funds we may not be able to do so on favorable terms, if at
all. Further, if we issue new equity securities, stockholders may experience
additional dilution or the new equity securities may have rights, preferences or
privileges senior to those of existing holders of common stock. If we cannot
raise funds on acceptable terms, we may not be able to develop or enhance our
products, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements. For additional information on our
anticipated future capital requirements, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS
OUR STOCK PRICE.
Our current stockholders hold a substantial number of shares, which they
will be able to sell in the public market in the near future. Sales of a
substantial number of shares of our common stock after this offering could cause
our stock price to fall. In addition, the sale of these shares could impair our
ability to raise capital through the sale of additional stock. You should read
"Shares Eligible for Future Sale" for a full discussion of shares that may be
sold in the public market in the future.
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
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.
16
<PAGE> 18
Accordingly, if you purchase common stock in the offering, you will incur
immediate dilution of approximately $ 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."
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of
the federal securities laws that relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "anticipates,"
"believes," "estimates," "predicts," "intend," "potential" or "continue" or the
negative of such terms or other comparable terminology. In addition, these
forward-looking statements include, but are not limited to statements regarding
the following: (1) anticipated development and release of new products, (2)
anticipated sources of future revenues, (3) anticipated product return rates,
(4) future third-party manufacturing arrangements, (5) anticipated expenditures
for research and development, sales and marketing and general and administrative
expenses, (6) the adequacy of our capital resources to fund our operations and
(7) our assessment of our readiness to address, and risks relating to, year 2000
issues. These statements are only predictions. Our actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including the risks outlined under "Risk Factors" and
elsewhere in this prospectus.
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 $ from the sale
of the shares of common stock, and an additional
$ if the underwriters exercise their over-allotment option in full, at
an assumed initial public offering price of $ 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.
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<PAGE> 19
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."
18
<PAGE> 20
CAPITALIZATION
The following table sets forth our capitalization and short-term debt as of
March 31, 1999 on the following three bases:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of our preferred stock into 13,907,399 shares of common stock effective
automatically upon the closing of this offering; and
- on a pro forma as adjusted basis to reflect (1) the sale of
shares of common stock in this offering at an
assumed initial public offering price of $ 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 $ of our convertible note into
shares of common stock upon the closing of this offering.
You should read this table in conjunction with our Financial Statements and
the Notes thereto and Selected Financial Data included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
---------- ----------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
DATA)
<S> <C> <C> <C>
Current portion of long-term obligations.... $ 1,451 $ 1,451 $ 1,451
-------- -------- --------
Long-term obligations, less current
portion................................... 15,057 15,057
Stockholders' equity:
Preferred Stock, $0.005 par value per
share: 16,500,000 shares authorized,
13,907,399 shares outstanding, actual;
10,000,000 shares authorized, no shares
outstanding pro forma and pro forma as
adjusted............................... 69 -- --
Common stock, $0.005 par value per share:
40,000,000 shares authorized, 5,589,729
shares outstanding, actual; 40,000,000
shares authorized, 19,497,128 shares
outstanding, pro forma; 150,000,000
shares authorized, shares
outstanding, pro forma as
adjusted(1)............................ 28 97
Additional paid-in capital................ 37,081 37,081
Deferred compensation..................... (2,425) (2,425) (2,425)
Accumulated deficit....................... (29,094) (29,094) (29,094)
-------- -------- --------
Total stockholders' equity........ $ 5,659 $ 5,659 $
-------- -------- --------
Total capitalization.............. $ 22,167 $ 22,167 $
======== ======== ========
</TABLE>
19
<PAGE> 21
- -------------------------
(1) The number of shares of common stock outstanding after this offering
excludes the following:
- 4,529,692 shares issuable upon exercise of outstanding stock options as
of March 31, 1999 with a weighted average exercise price of $0.97 per
share;
- 1,441,478 shares reserved for issuance under our Amended and Restated
1993 Stock Plan, 1999 Director Option Plan and 1999 Employee Stock
Purchase Plan (including amounts authorized for issuance subsequent to
March 31, 1999);
- up to shares issuable upon conversion of the balance of our
convertible note upon the closing of this offering at a conversion price
per share of $7.65; and
- 47,849 shares issuable upon exercise of warrants outstanding as of March
31, 1999 with a weighted average exercise price of $5.96 per share.
20
<PAGE> 22
DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma as adjusted net tangible book value per share of
our common stock after this offering. In the table below, we have calculated net
tangible book value per share by dividing the net tangible book value (total
assets less intangible assets and total liabilities) by the number of
outstanding shares of common stock.
The pro forma net tangible book value of our company at March 31, 1999, was
$5,659,000, or $0.29 per share of common stock. Pro forma net tangible book
value per share represents total tangible assets less total liabilities, divided
by the number of outstanding shares of common stock after giving effect to the
conversion of all outstanding shares of our preferred stock into 13,907,399
shares of common stock effective automatically upon the closing of this
offering. After giving effect to the sale of the shares of
common stock at an assumed initial public offering price of $ per share
(less underwriting discounts and commissions and estimated offering expenses)
and conversion of approximately $ of our convertible note (including
accrued interest) our pro forma as adjusted net tangible book value at March 31,
1999, would be , or $ per share. This represents an immediate
increase in the pro forma as adjusted net tangible book value of $ per
share to existing stockholders and an immediate dilution of $ per share
to new investors, or approximately % of the assumed offering price of
$ per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share..................... $
Pro forma net tangible book value per share at March 31,
1999................................................... $0.29
Dilution per share attributable to conversion of our
convertible note.......................................
Increase per share attributable to this offering..........
-----
Pro forma as adjusted net tangible book value per share
after the offering........................................
-----
Dilution per share to new investors......................... $ $
=====
</TABLE>
The following table shows on a pro forma as adjusted basis at March 31,
1999, after giving effect to the sale of the shares of
common stock at an assumed initial public offering price of $ per share
(less underwriting discounts and estimated offering expenses), conversion of
approximately $ 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......... % $ % $
New investors.......... $
---------- ---------- ---------- ---------- ----------
Total........ 100% $ 100%
</TABLE>
21
<PAGE> 23
- -------------------------
(1) The number of shares of common stock outstanding after this offering
excludes the following:
- 4,529,692 shares issuable upon exercise of outstanding stock options as
of March 31, 1999 with a weighted average exercise price of $0.97 per
share;
- 1,441,478 shares reserved for issuance under our Amended and Restated
1993 Stock Plan, 1999 Director Option Plan and 1999 Employee Stock
Purchase Plan (including amounts authorized for issuance subsequent to
March 31, 1999);
- up to shares issuable upon conversion of the balance of our
convertible note upon the closing of this offering at a conversion price
per share of $7.65; and
- 47,849 shares issuable upon exercise of warrants outstanding as of March
31, 1999 with a weighted average exercise price of $5.96 per share.
22
<PAGE> 24
SELECTED FINANCIAL DATA
You should read the selected financial data set forth below in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our Financial Statements and the Notes thereto included
elsewhere in this prospectus. The statement of operations data for the years
ended March 31, 1997, 1998 and 1999 and the balance sheet data at March 31, 1998
and 1999 are derived from, and are qualified by reference to, the audited
Financial Statements and Notes thereto appearing elsewhere in this prospectus.
The statements of operations data for the years ended March 31, 1995 and 1996
and the balance sheet data as of March 31, 1995, 1996 and 1997 are derived from,
and are qualified by reference to, financial statements not appearing in this
prospectus. Historical results are not necessarily indicative of results that
may be expected for any future period.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues..................... $ -- $ 104 $ 823 $ 9,811 $ 24,821
Cost of revenues................. -- 68 483 7,898 18,638
-------- -------- -------- -------- --------
Gross margin..................... -- 36 340 1,913 6,183
-------- -------- -------- -------- --------
Operating expenses:
Research and development...... 230 458 2,168 7,178 13,928
Sales and marketing........... -- 126 1,126 2,974 5,765
General and administrative.... 86 333 902 1,774 1,649
Amortization of deferred
compensation................ -- -- -- -- 547
-------- -------- -------- -------- --------
Total operating
expenses............... 316 917 4,196 11,926 21,889
Loss from operations............. (316) (881) (3,856) (10,013) (15,706)
Interest income, net of interest
expense....................... 6 25 259 373 (226)
Sale of electronic test equipment
rights, net................... -- -- 1,508 -- --
-------- -------- -------- -------- --------
Net loss......................... $ (310) $ (856) $ (2,089) $ (9,640) $(15,932)
======== ======== ======== ======== ========
Basic net loss per share......... $ (0.59) $ (2.41) $ (3.33)
======== ======== ========
Weighted average shares used in
computing basic loss per
share(1)...................... 3,551 3,995 4,789
======== ======== ========
Pro forma basic net loss per
share (unaudited)............. $ (0.91)
========
Weighted average shares used in
computing pro forma basic net
loss per share
(unaudited)(1)................ 17,594
========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-----------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term
investments........................ $ 690 $ 1,729 $ 7,067 $ 4,624 $12,202
Working capital....................... 674 1,647 6,895 6,385 15,912
Total assets.......................... 772 2,108 8,825 14,942 28,598
Long-term obligations, less current
portion............................ -- -- 16 1,426 15,057
Total stockholders' equity............ 710 1,859 7,820 8,169 5,659
</TABLE>
- -------------------------
(1) See Note 2 of Notes to the Financial Statements for an explanation of the
determination of the weighted average common and common equivalent shares
used to compute net loss per share and pro forma net loss per share.
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our Financial
Statements and the Notes thereto included elsewhere in this prospectus. The
results described below are not necessarily indicative of the results to be
expected in any future period. Certain statements in this discussion and
analysis are forward-looking statements within the meaning of the federal
securities laws. These forward-looking statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or our predictions. See "Special Note Regarding
Forward-Looking Statements."
OVERVIEW
We are a leading provider of hardware and software products for storage
area networks, or SANs. Our SAN products are designed to leverage the
capabilities of fibre channel technology to enable companies to better manage
the growth in mission-critical data by overcoming the limitations of the
traditional captive storage architecture. We sell our SAN products, primarily
through leading original equipment manufacturers, including Hewlett-Packard
Company, Compaq Computer Corporation, Avid Technology Corporation and Data
General Corporation. We also sell our products through distribution channel
partners.
We were founded in April 1992 and initially developed electronic test
equipment. Since October 1995, we have focused on developing fibre channel
network products that address the needs of the SAN market. In fiscal 1997, we
sold our patent rights to the electronic test equipment. Prior to fiscal 1998,
our operating activities related primarily to increasing our research and
development capabilities, designing and developing the hardware and software
products which we currently sell and staffing our administrative, marketing and
sales organizations. Since our inception, we have incurred significant losses
and as of March 31, 1999, we had an accumulated deficit of $29.1 million. 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 substantially all of our net
revenues in fiscal 2000 will continue to be generated from sales of our hub
products. We may not be successful in our efforts to diversify our product base
and introduce switch products to our customers.
We depend on a few key customers. In fiscal 1999, approximately 84% of our
net revenues came from five customers with sales to Compaq Computer Corporation,
Digital Equipment Corporation and Hewlett-Packard Company each accounting for
more than 10% of our revenue. In fiscal 1998, 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
24
<PAGE> 26
of original equipment manufacturer customers and distribution channel partners.
We may not be successful in our efforts to diversify our customer base.
We record product net revenues upon shipment, with the exception of sales
to several distribution channel partners whose product return rates we cannot
reasonably estimate. Where product return rates cannot be reasonably estimated,
revenue is recognized upon sell-through to the end user by the distribution
channel partner. Allowances for estimated sales returns are provided at the time
of revenue recognition.
Our gross margins are affected by fluctuations in demand for our products,
the mix of products sold, the mix of sales channels through which our products
are sold, the timing and size of customer orders and product implementations,
new product introductions both by us and by our competitors, changes in our
pricing policies and those of our competitors, component costs, and the volume
manufacturing pricing we are able to obtain from our contract manufacturer.
Although we enter into general sales contracts with our customers, none of
our customers are obligated to purchase any amount of our products pursuant to
these contracts. We rely on our customers to submit purchase orders for specific
quantities of our products. All of our sales contracts contain provisions
regarding the following:
- products and pricing;
- order dates, rescheduling and cancellations;
- warranties and repair procedures; and
- marketing and/or sales support and training obligations.
Our original equipment manufacturer contracts generally contain additional
provisions regarding product technical specifications, labeling and boxing
instructions and other customization instructions. Several of our original
equipment manufacturer sales contracts contain favored pricing provisions as
well as confidentiality provisions. Two of our original equipment manufacturer
sales contracts provide the original equipment manufacturer the right to
manufacture our product in the event of a material default we are unable to cure
within a specified time period.
Our contracts with our distribution channel partners generally contain
additional provisions for stock rotation, which provide for a right of return
for up to 10% of the value of purchases during the prior three months, to be
offset with an immediately deliverable order in an amount equal to or greater
than the stock to be rotated. For these customers, we record a sales return
reserve equal to the amount returnable. Two of our distribution channel partners
have broader rights of return. For those two distribution channel partners, we
defer recognition of revenues until their right of return has lapsed. Although
we also provide a reserve for general product returns, we have not experienced
significant product returns from any of our customers. However, our past product
return experience may not be indicative of future product return rates.
We currently outsource substantially all of our manufacturing to Sanmina
Corporation, a third-party manufacturer. Our agreement with Sanmina Corporation
provides for two months of rolling purchase orders and rolling forecasts for the
nine months immediately following the purchase order period. Purchase prices are
negotiable throughout the three-year contract period. We are liable for
materials that Sanmina Corporation purchases on our behalf that we cannot use,
cannot be cancelled before receipt or are unique parts otherwise unusable by
Sanmina Corporation. The agreement restricts our ability to reschedule orders
and allows us to cancel existing orders subject to penalties
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<PAGE> 27
of up to the total purchase price. Sanmina Corporation provides warranties on
workmanship and pass-through warranties on component parts. Sanmina Corporation
purchases most of the key components used to manufacture our products. We obtain
some of these key components, such as our application specific integrated
circuits, or ASICs, from sole sources and other components, such as power
supplies and chassis, from limited sources. If we inaccurately forecast demand
for our products, Sanmina Corporation may be unable to provide us with adequate
manufacturing capacity. In addition, Sanmina Corporation may not be able to
obtain adequate supplies of components to meet our customers' delivery
requirements. Alternatively, excess inventories may be accumulated by Sanmina
Corporation for our account. In order to reduce the costs of sales, we
anticipate that we may relocate our manufacturing operations from Sanmina
Corporation's manufacturing facility in Santa Clara, California to its
manufacturing facility in Guntersville, Alabama during the second half of fiscal
2000. Additionally, we may consider moving the outsourced manufacturing to other
new locations or to a new contract manufacturer. These relocations could be time
consuming and expensive and there can be no assurance that such moves would not
disrupt the manufacturing of our products. Such disruptions could cause us to
lose net revenues and damage our customer relationships.
RESULTS OF OPERATIONS
The following table sets forth financial data for the fiscal years
indicated as a percentage of total revenue:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Net revenues...................................... 100.0% 100.0% 100.0%
Cost of revenues.................................. 58.7 80.5 75.1
------ ------ ------
Gross margin...................................... 41.3 19.5 24.9
------ ------ ------
Operating expenses:
Research and development....................... 263.4 73.1 56.1
Sales and marketing............................ 136.8 30.3 23.2
General and administrative..................... 109.6 18.1 6.7
Amortization of deferred compensation.......... -- -- 2.2
------ ------ ------
Total operating expenses.................. 509.8 121.5 88.2
------ ------ ------
Loss from operations.............................. (468.5) (102.0) (63.3)
Interest income, net of interest expense.......... 31.5 3.8 (0.9)
Sale of electronic test equipment rights, net..... 183.2 -- --
------ ------ ------
Net loss.......................................... (253.8)% (98.2)% (64.2)%
====== ====== ======
</TABLE>
YEARS ENDED MARCH 31, 1997, 1998 AND 1999
Net Revenues
We began volume shipments of our SAN product line in fiscal 1997, and
recognized $823,000 of net revenues for that year from continued sales of our
Bitstrip product hub and initial sales of our Gibraltar 10-port hub. Net
revenues increased to $9.8 million in fiscal 1998 through sales of the Bitstrip
product and our Gibraltar 10-port and 12-port products. In fiscal 1999 we began
sales of our Gibraltar 6-port hub and Denali switch and recognized $24.8 million
in net revenues. Net revenues increased in each of these years, primarily due to
a broadening of our product line, additions of new original equipment
manufacturer customers and an expansion of our sales through our distribution
channel partners.
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<PAGE> 28
Gross Margin
Gross margin increased from $340,000 in fiscal 1997 to $1.9 million in
fiscal 1998 to $6.2 million in fiscal 1999. Gross margin as a percentage of net
revenues decreased from 41.3% in fiscal 1997 to 19.5% in fiscal 1998 and
increased to 24.9% in fiscal 1999. The decrease in gross margin as a percentage
of net revenues from fiscal 1997 to fiscal 1998 was primarily due to the
introduction of new products with low initial sales volumes and manufacturing
difficulties experienced by our previous contract manufacturer. The increase in
gross margin as a percentage of net revenues from fiscal 1998 to fiscal 1999 was
primarily due to higher sales volumes, resulting in economies of scale and cost
savings due to our transition to Sanmina Corporation for contract manufacturing.
Research and Development Expenses
Research and development expenses consist primarily of salaries and related
personnel expenses, fees paid to consultants and outside service providers,
material costs for prototype and test units and other expenses related to the
design, development, testing and enhancements of our products. We expense our
research and development costs as they are incurred. Research and development
expenses increased from $2.2 million in fiscal 1997 to $7.2 million in fiscal
1998 and to $13.9 million in fiscal 1999. These increases were primarily due to
additional research and development personnel, including the addition of our
strategic research and development team and our two ASIC development teams
primarily devoted to our development of the Capellix and other switch products.
As net revenues have increased, these expenses have declined as a percentage of
revenues from 263.4% in fiscal 1997 to 73.1% in fiscal 1998 and to 56.1% in
fiscal 1999. We believe that a significant level of investment for product
research and development is required to remain competitive. Accordingly, we
expect to continue to devote substantial resources to product research and
development such that research and development expenses will increase in
absolute dollars.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, commissions and
related expenses for personnel engaged in marketing, sales and customer
engineering support functions, as well as costs associated with trade shows,
promotional activities and travel expenses. Sales and marketing expenses
increased from $1.1 million in fiscal 1997 to $3.0 million in fiscal 1998 and to
$5.8 million in fiscal 1999. As revenues have increased, these expenses have
declined as a percentage of net revenues from 136.8% in fiscal 1997 to 30.3% in
fiscal 1998 and to 23.2% in fiscal 1999. In absolute dollars the increase in
each of these years was primarily due to the hiring of additional sales and
marketing personnel and the expansion of our sales and marketing efforts. We
intend to expand our sales and marketing operations and efforts substantially,
both domestically and internationally, in 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
27
<PAGE> 29
information systems. General and administrative expenses increased from $902,000
in fiscal 1997 to $1.8 million in fiscal 1998 and decreased to $1.6 million in
fiscal 1999. The increase in absolute dollars from fiscal 1997 to fiscal 1998
was primarily due to increased staffing and associated expenses necessary to
manage and support our increased scale of operations. During fiscal 1997 and
fiscal 1998, administrative services were provided to functional departments
from a central administration pool. The decrease in general and administrative
expenses in absolute dollars in fiscal 1999 was primarily due to the transfer of
several employees from the general and administrative area to other departments,
such as sales, marketing, manufacturing and research and development. As
revenues have increased, these expenses have declined as a percentage of net
revenues from 109.6% in fiscal 1997 to 18.1% in fiscal 1998 and to 6.7% in
fiscal 1999. We expect these expenses to increase in absolute dollars as we add
personnel and incur additional costs related to the growth of our business,
expansion of our information infrastructure and our operation as a public
company.
Amortization of Deferred Compensation
In connection with the grant of stock options to employees, we recorded
deferred compensation within stockholders' equity of approximately $3.0 million,
representing the difference between the estimated fair value of the common stock
for accounting purposes and the option exercise price of these options at the
date of grant. We recorded amortization of deferred compensation of $547,000
during fiscal 1999. At March 31, 1999, the remaining deferred compensation of
approximately $2.4 million will be amortized as follows: $1.3 million during
fiscal 2000, $670,000 during fiscal 2001, $350,000 during fiscal 2002 and
$120,000 for fiscal 2003. The amortization expense relates to options awarded to
employees in all operating expenses categories. The amount of deferred
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited. See
Note 10 of the Notes to the Financial Statements.
Interest Income, Net of Interest Expense
Interest income, net of interest expense related to our debt and lease
obligations, includes income from our cash investments net of expenses related
to our financing obligations. Interest income, net of interest expense, totaled
$259,000 in fiscal 1997 and $373,000 in fiscal 1998. Interest expense, net of
interest income, totaled $226,000 in fiscal 1999. The increase from fiscal 1997
to fiscal 1998 was primarily due to interest income from proceeds from issuances
of our preferred stock, partially offset by increased interest charges on debt
and capital lease obligations. The interest expense, net of interest income,
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.
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<PAGE> 30
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results for each of the eight
quarters in the period ending March 31, 1999. The information for each of these
quarters is unaudited and has been prepared on the same basis as the audited
financial statements appearing elsewhere in this prospectus. In the opinion of
management, all necessary adjustments (consisting only of normal recurring
adjustments) have been included to present fairly the unaudited quarterly
results when read in conjunction with our audited Financial Statements and Notes
thereto appearing elsewhere in this prospectus. These operating results are not
necessarily indicative of the results of any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1997 1998 1998 1998 1998 1999
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS, EXCEPT AS A PERCENTAGE OF NET REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues.......................... $ 651 $ 1,573 $ 3,238 $ 4,349 $ 5,406 $ 5,851 $ 5,983 $ 7,581
Cost of revenues...................... 631 1,299 2,580 3,388 4,181 4,412 4,550 5,495
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.......................... 20 274 658 961 1,225 1,439 1,433 2,086
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............ 1,133 1,590 1,877 2,578 3,112 3,411 3,750 3,655
Sales and marketing................. 590 495 776 1,113 1,347 1,240 1,577 1,601
General and administrative.......... 376 414 423 561 262 301 434 652
Amortization of deferred
compensation...................... -- -- -- -- 28 87 184 248
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 2,099 2,499 3,076 4,252 4,749 5,039 5,945 6,156
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.................. (2,079) (2,225) (2,418) (3,291) (3,524) (3,600) (4,512) (4,070)
------- ------- ------- ------- ------- ------- ------- -------
Total other income (expense)... 121 112 112 28 (21) (40) (51) (114)
------- ------- ------- ------- ------- ------- ------- -------
Net loss.............................. $(1,958) $(2,113) $(2,306) $(3,263) $(3,545) $(3,640) $(4,563) $(4,184)
======= ======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET REVENUE:
Net revenues.......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues...................... 97.0 82.6 79.7 77.9 77.3 75.4 76.0 72.5
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.......................... 3.0 17.4 20.3 22.1 22.7 24.6 24.0 27.5
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development............ 174.0 101.1 58.0 59.3 57.6 58.3 62.7 48.2
Sales and marketing................. 90.6 31.5 24.0 25.6 24.9 21.2 26.4 21.1
General and administrative.......... 57.8 26.3 13.0 12.9 4.9 5.1 7.2 8.6
Amortization of deferred
compensation...................... -- -- -- -- 0.5 1.5 3.1 3.3
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 322.4 158.9 95.0 97.8 87.9 86.1 99.4 81.2
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.................. (319.4) (141.5) (74.7) (75.7) (65.2) (61.5) (75.4) (53.7)
------- ------- ------- ------- ------- ------- ------- -------
Total other income (expense)... 18.6 7.2 3.5 0.6 (0.4) (0.7) (0.9) (1.5)
------- ------- ------- ------- ------- ------- ------- -------
Net loss.............................. (300.8)% (134.3)% (71.2)% (75.1)% (65.6)% (62.2)% (76.3)% (55.2)%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
29
<PAGE> 31
Net revenues increased in each of the eight quarters ended March 31, 1999.
This quarterly increase was primarily due to the introduction of our Gibraltar
12-port and 6-port products, increased sales of our Bitstrip and Gibraltar
10-port products, and the addition of new original equipment manufacturer and
distribution customers. These increases may not be indicative of future
quarterly revenues.
Gross margins have generally increased in each of the eight quarters ended
March 31, 1999 with the exception of a decrease in the quarter ended December
31, 1998. This decrease was primarily due to the transition from our prior
contract manufacturer to Sanmina Corporation and the resulting increased costs.
Additionally, sales of our Bitstrip and Gibraltar 10-port products, our older
and more stable products, during this period were lower than in previous
quarters, while sales of our newer Gibraltar 12-port and 6-port products,
initially lower margin products, were higher than in previous quarters.
Research and development expenses increased in each of the eight quarters
ended March 31, 1999 primarily due to the addition of personnel and costs
incurred for the development of the Capellix switch and other new products. We
expect research and development costs to continue to increase in absolute
dollars.
Sales and marketing expenses have generally increased due to our increasing
net revenues. Additionally, sales and marketing expenses in the June and
December quarters have historically been higher primarily due to the
Networld+Interop tradeshow in the June quarters and the Comdex tradeshow during
the December quarters. We expect sales and marketing costs to continue to
increase in absolute dollars.
General and administrative expenses increased for each of the four quarters
ended March 31, 1998. During this period of time, administrative personnel
provided functions to all departments from a centralized pool of personnel.
During the four quarters ended March 31, 1999, we transferred several employees
from the general and administrative area to other departments such as sales,
marketing, manufacturing and research and development resulting in a decrease in
general and administrative costs. During the quarter ended December 31, 1998, we
moved to a new corporate headquarters facility in northern California, incurred
moving costs and wrote off the unamortized portion of leasehold improvements
from the prior facility. We increased our facility size from approximately
27,000 square feet to approximately 53,000 square feet, increasing facility
costs during the quarter ended March 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through private
sales of convertible preferred stock, the issuance of a convertible note and
equipment financings.
In fiscal 1999, we used $15.7 million in cash for operations, an increase
of 33% from $11.8 million used in fiscal 1998. This increase was primarily due
to an increase in our net loss from $9.6 million in fiscal 1998 to $15.9 million
in fiscal 1999, partially offset by increased non-cash charges in fiscal 1999.
In fiscal 1999, we used $1.6 million in cash from investing activities to
acquire property and equipment. In fiscal 1998, we received proceeds of $6.9
million from the sale of available-for-sale securities and used $1.4 million of
cash to acquire property and equipment.
In addition to convertible preferred stock, we have used debt and leases to
partially finance our operations and capital purchases and plan to continue this
practice. In fiscal 1999, we generated $24.9 million in cash from financing
activities, an increase of 132.7%
30
<PAGE> 32
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,
Inc. purchased a convertible note in the aggregate principle amount of $15.0
million, which bears simple interest on the unpaid principal balance at a rate
equal to 5.75% per annum with principal and interest maturing on September 18,
2001. At our sole option, any portion or all of the then outstanding balance of
principal and interest on this convertible note into shares of our Series G
preferred stock at a price of $7.65 per share.
The agreement also provides that, without our consent, conversion of the
convertible note may not result in Seagate holding more than 19.9% of our
outstanding shares of common stock. Accrued interest is converted prior to any
principal owing under this convertible note. See "Certain Transactions." In the
event of a default, as defined in the convertible note agreement, Seagate may
declare all outstanding interest and principal immediately due and payable in
cash. We may, upon 30 days written notice to Seagate, prepay the convertible
note in whole or in part.
In October 1998, we converted approximately $59,000 of interest and
approximately $1.8 million of principal into 242,694 shares of Series G
preferred stock. At March 31, 1999, there was a total of approximately $13.6
million of unpaid principal and interest which, if converted, would have
converted into 1,771,759 shares of Series G preferred stock. For a more complete
discussion of the convertible note and our agreement with Seagate, see "Certain
Transactions."
In fiscal 1998 and 1999, we acquired $3.3 million in equipment under
capitalized leases. At March 31, 1999, we had $2.4 million in capitalized lease
obligations outstanding.
In January 1998, we entered into a revolving credit agreement with a bank,
which provided for maximum borrowings of an amount not to exceed the lower of
70% of eligible accounts receivable or $5.0 million. On March 15, 1999, we
renewed this agreement, which expires on February 1, 2000. Currently, there are
no borrowings under this line of credit. Borrowings under this line of credit
are secured by all of our assets and bear interest at the bank's prime rate plus
0.5% per annum (approximately 8.25% at March 31, 1999). The agreement requires
that we maintain certain financial ratios and levels of tangible net worth and
also restricts our ability to pay cash dividends. See Note 8 of Notes to the
Financial Statements.
Cash, cash equivalents and short-term investments totaled $12.2 million at
March 31, 1999, up from $4.6 million at March 31, 1998. The increase was
primarily due to proceeds from our financing activities, net of cash used in
operations and the purchase of design tools, leasehold improvements and other
equipment.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and expense associated with
expanding our distribution channels, and other factors. We expect to devote
substantial capital resources to continue our research and development efforts,
to hire and expand our sales, support, marketing and product development
organizations, to expand marketing programs, to establish additional facilities
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
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<PAGE> 33
for at least the next 12 months. However, we may require additional financing
within this time frame and additional funding, if needed, may not be available
on terms acceptable, or at all.
YEAR 2000 READINESS
The Year 2000 Issue
The year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations which are triggered by
advancement of date records past the year 1999. For example, if software that
uses the calendar year in computations is not ready for the millennial calendar
change, it may interpret a 21st century date as a 20th century date (for
example, mistaking 2001 for 1901).
Readiness of Our Products
We have designed our products to be ready for the year 2000 calendar
change. We represent to our customers that each hardware, software and firmware
product supplied by us will accurately process date data from, into and between
the 20th and 21st centuries and the years 1999 and 2000, including leap year
calculations, when used in accordance with the product documentation provided by
us. We also represent to our customers that upon notification of any year 2000
problems with our products, we will remedy it by product repair or replacement.
We do not represent to our customers that the storage area networks and
local area networks that incorporate our products will not have problems with
year 2000 issues, since these networks incorporate hardware and software
products supplied by other companies. We cannot evaluate the readiness of our
products for year 2000 with the innumerable combinations possible with other
companies' products. We may, therefore, face claims or complaints based on year
2000 problems related our customers' networks, even when we are not the source
of their problem. We are not aware of any such claims or complaints about us or
other companies building products for storage area networks, but we may incur
the cost of legal or other defense and explanation of our product regardless of
the merits of such claims.
Readiness of Our Systems and Facilities
Our business may be affected by year 2000 issues. We plan to complete our
systems updates, upgrades and replacements of non-ready systems by Fall 1999.
Systems include internal hardware and software as well as external services
provided by other companies, including contract manufacturing, product
development, information processing and facility services. We will prepare
contingency plans for unexpected internal system failures and failures of
external systems. We are not currently aware of any unresolved year 2000
problems relating to any of our internal systems. We do not believe that we have
any significant systems that are not year 2000 compliant. Most of our software,
hardware and operating systems have been acquired as new product in the last two
years. Most of it is shrink wrapped product and is still maintained by vendors
extant. We do not believe that we have any significant systems that contain
embedded chips that are not year 2000 compliant. Most of our hardware is made of
branded components and has been acquired in the last two years from
manufacturers extant. We are not using legacy hardware or software that would be
more likely to have calendar issues because of its age.
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<PAGE> 34
Cost of Product and Internal Systems Preparation
Based on our assessment to date, we do not expect the total cost of year
2000 preparation and remediation to be material to our business. To date, our
costs of analysis of our year 2000 readiness have not been material.
Risks
An internal or external business disruption caused by the year 2000 issue
could interrupt our operations and damage our relationships with our customers.
An internal disruption unique to us could give a comparative advantage to our
competitors. Failure of our internal systems and critical external services to
be ready for the year 2000 could delay order processing, issuing invoices or
development and shipment of products. The cost of recovery from failures could
be significant.
Our customers' purchasing plans could be affected by year 2000 issues if
they need to expend significant resources to fix their existing systems. This
situation could divert funds and resources otherwise available for new product
purchase. In addition, some customers may wait to purchase our products until
after the year 2000, which may reduce our net revenues in the near future.
We are unable to determine at this time whether these or other year 2000
failures will occur and will have a material impact on our business, results of
operations, or financial condition. This inability is particularly due to the
potential scope of the year 2000 problem and the inability to assure the
readiness of external service providers, including utilities, government
entities and other vendors. We have not developed, and we have no current plans
to develop in the near future, a contingency plan to deal with the effects of
this worst case scenario.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income," which we adopted in fiscal 1999. SFAS No. 130 requires
companies to report a new, additional measure of income on the statement of
operations or to create a new financial statement that has the new measure of
income on it. "Comprehensive Income" is to include amounts which have been
previously excluded from net income and reflected instead in equity.
Comprehensive loss for each of the three years ended March 31, 1999 approximated
net loss.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information," which
we adopted in fiscal 1999. SFAS No. 131 establishes standards for disclosures
about operating segments, products and services, geographic areas and major
customers. We are organized and operate as one operating segment: the design,
development, manufacturing, marketing and selling of SAN products. We sell our
SAN products internationally. During fiscal 1997, product net revenues amounted
to 95% of total net revenues, in fiscal 1998 they amounted to 99%, and in fiscal
1999 they amounted to 98%.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-1 "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use," which we adopted in fiscal
1999. SOP No. 98-1 requires entities to capitalize certain costs related to
internal-use software once certain criteria has been met. The adoption did not
have a material impact on our financial position or results of operations.
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<PAGE> 35
In April 1998, the American Institute of Certified Public Accountants
issued SOP No. 98-5 "Reporting on the Costs of Start-Up Activities," which we
adopted in fiscal 1999. SOP No. 98-5 requires that all start-up costs related to
new operations must be expensed as incurred. In addition, all start-up costs
that were previously capitalized must be written off when SOP No. 98-5 is
adopted. The adoption did not have a material impact on our financial position
or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. We will become subject to SFAS No. 133
beginning on July 1, 1999. Because we do not currently hold any derivative
instruments and do not engage in hedging activities, we do not believe that the
adoption of SFAS No. 133 will have a material impact on our financial position
or results of operations.
In December 1998, the American Institute of Certified Public Accountants
issued SOP 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4 by
extending the deferral of the application of certain provisions of SOP 97-2,
amended by SOP 98-4, through fiscal years beginning on or before March 15, 1999.
All other provisions of SOP 98-9 are effective for transactions entered into in
fiscal years beginning after March 15, 1999. We do not expect the adoption of
SOP 98-9 to have a significant effect on our financial position or results of
operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET INTEREST RATE SENSITIVITY
The primary objective of our investment activities is to preserve principal
while at the same time maximizing the income we receive from our investments
without significantly increasing risk. Some of the securities that we may invest
in may be subject to market risk. This means that a change in prevailing
interest rates may cause the principal amount of the investment to fluctuate.
For example, if we hold a security that was issued with a fixed interest rate at
the then-prevailing rate and the prevailing interest rate later rises, the
principal amount of our investment will probably decline. To minimize this risk
in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, government and non-government debt securities. In general,
money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate. As of March 31, 1999,
all of our investments were in money market funds. See Note 2 of the Notes to
the Financial Statements.
We have operated primarily in the United States and all sales to date have
been made in U.S. dollars. Accordingly, we have not had any material exposure to
foreign currency rate fluctuations.
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<PAGE> 36
BUSINESS
OVERVIEW
We are a leading provider of hardware and software products for storage
area networks, or SANs. We pioneered the development of SANs by applying a
networking model to the connectivity of enterprise servers and storage devices.
Our SAN products are designed to leverage the capabilities of fibre channel
technology to enable companies to better manage the growth of mission-critical
data by overcoming the limitations of the traditional captive storage
architecture, and creating a foundation for data centralization.
We believe that we have developed the most comprehensive line of products
in the SAN industry. These products include (1) the Bitstrip active hub, the
industry's first gigabit fibre channel hub, which provides a cost-effective
solution for entry-level SANs; (2) the Gibraltar line of hubs, the industry's
first managed hubs designed to provide centralized management of a SAN; (3) the
Denali area switch, the industry's first fibre channel switch to support data
backup without a server; (4) the Capellix chassis switch, the industry's first
modular, scalable, multi-protocol chassis switch; and (5) the Ventana SAN
Manager, the industry's first SAN management software application, which
provides monitoring and control of SAN devices.
We began commercial shipments of our SAN products in October 1995. Our
primary customers include original equipment manufacturer customers and
distribution channel partners. Our original equipment manufacturer customers
include Hewlett-Packard Company, Compaq Computer Corporation, Data General
Corporation and Avid Technology, Inc. Additionally, we have developed a two-tier
distribution channel comprised of distributors and resellers including Andataco,
Inc., Bell Microproducts, Inc., Decision Support Systems, Inc., Merisel, Inc.,
Rorke Data, Inc. and Tokyo Electron Limited. According to International Data
Corporation (January 1999), our installed base of fibre channel networking ports
represents the largest share of the total combined hub and switch ports shipped
in calendar 1997 and 1998. We believe we have the largest installed base of SAN
networking ports.
We believe that the SAN infrastructure created by our network products
forms the foundation for a new data management architecture. Just as the
infrastructure created by local area networks, or LANs, formed a platform for
the development of client-server computing, we believe that the SAN
infrastructure has the potential to enable the development of a distributed data
management architecture. We plan to leverage our technological expertise, our
market leadership and strength of our partnerships to drive the development of
this architecture and create new opportunities for our business.
INDUSTRY BACKGROUND
Growth of Enterprise Data
The volume of data generated in today's enterprise environment continues to
grow at a significant rate. International Data Corporation (September 1998)
estimates that multiuser disk storage grew from approximately 10,000 terabytes
in 1994 to approximately 116,000 terabytes in 1998, and will reach approximately
1,400,000 terabytes in 2002. This growth in the volume of enterprise data has
been fueled by a number of factors, including:
- the emergence and rapid growth of data-intensive applications such as
e-commerce, online transaction processing, web-serving, digital video and
other multimedia applications and enterprise resource planning;
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<PAGE> 37
- the increasing importance of digital information as a strategic business
asset;
- the need for redundant depositories of data to enable continuous access;
- advances in storage technology and the resulting decline in the cost of
storage capacity; and
- a trend toward distributing data in the enterprise client-server
environment.
Traditional Captive Storage Architecture
The growth of the amount of enterprise data has resulted in a corresponding
need to manage, share, back-up and make data widely accessible. This need has
traditionally been addressed by storage architectures consisting of individual
servers connected to dedicated storage devices. This connection is accomplished
through the use of the small computer system interface, or SCSI, technology.
[GRAPHIC: GRAPHICAL REPRESENTATION OF THE TRADITIONAL STORAGE ARCHITECTURE]
The traditional captive storage architecture has several significant
limitations, including:
- Capacity Constraints. SCSI cannot typically support more than 15
individual disk drives. In general, to add additional storage capacity,
additional servers must be added, which is costly and inefficient.
- Performance Constraints. The bandwidth of commercially-available SCSI is
fixed at 40 or 80 megabytes per second. Accordingly, the addition of a
new storage device may not result in a proportional increase in
performance because the available bandwidth may be fully utilized by the
amount of data already flowing between the server and the existing
storage devices. Further, the addition of new storage devices may
actually degrade performance as more devices compete to utilize available
bandwidth.
- Lack of Management. SCSI does not have any inherent management
capability for connections, storage or data. As a result, servers are
burdened with the management tasks. This is cumbersome because there is
no centralized monitoring and control. This is also inefficient because
server bandwidth is spent managing data and not serving clients,
generating a need for more servers. We believe this lack of centralized
management has resulted in a total cost of ownership model where the cost
of managing storage exceeds the cost of the storage devices themselves.
- Lack of Availability and Disaster Tolerance. In general, a
SCSI-connected device can only be accessed by its dedicated server. If
the server becomes unavailable for any reason, such as a breakdown of the
server or a disaster affecting the entire data center, data on its
connected storage devices becomes inaccessible. This lack of fault and
disaster tolerance makes the enterprise vulnerable to server or data
center failures. Because the SCSI standard typically limits the distance
between servers and storage devices to 25 meters, redundant storage
devices in remote locations are generally not practical or
cost-effective. As a result, sustained data availability in a captive
storage architecture following a system failure or disaster is difficult
to achieve.
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<PAGE> 38
Development of Fibre Channel
In 1994, the American National Standards Institute approved the fibre
channel standard as an open standard technology specifically for high
performance, input/output intensive environments such as server-storage
connectivity. Commercially available fibre channel products offer over 1 gigabit
per second of bandwidth. Multiple fibre channel links of up to 10 kilometers
each may be interconnected to enable long distances between servers and storage
devices. Fibre channel technology also enables hundreds of storage devices and
servers to be interconnected.
The Need for a New Storage Architecture
Despite the greater bandwidth and capacity offered by fibre channel, fibre
channel alone does not address the data management, data availability and
disaster tolerance issues resulting from the growth of enterprise data. A new
storage architecture comprised of a new connectivity model and a foundation for
distributing data management applications is needed.
THE GADZOOX SOLUTION
We sell hardware and software products that create storage area networks,
or SANs, for the intelligent management of enterprise data. To address
limitations of the traditional captive storage architecture, we pioneered the
development of the SAN by leveraging the capabilities of fibre channel to create
a new network architecture that is designed to enable multiple storage devices
to be connected to multiple servers. We believe the combination of our technical
innovation and our market vision has influenced and will continue to impact the
evolution of the SAN market. According to International Data Corporation
(January 1999), our installed base of fibre channel networking ports represents
the largest share of the total combined hub and switch ports shipped in 1997 and
1998. We believe we have the largest installed base of SAN ports.
We developed some of the first storage area network devices and introduced
products that are designed to manage data from within a SAN without relying on
servers. We introduced the first active hub, the first hub with intelligent
diagnostics, the first area switch and the first chassis switch for SANs.
Utilizing the proven principles of centralized network management for LANs, we
were also the first to deliver managed network devices and management software
for SANs. These devices are designed to centralize the monitoring, diagnosis and
control of a storage area network.
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<PAGE> 39
Our storage area network solution is based on the following topology:
[GRAPHIC: Graphical representation of the topology of the SAN.]
Our storage connectivity products address the limitations of traditional
captive storage architectures in the following ways:
Capacity Scalability
Our hub, switch and SAN management products are designed to allow users to
scale servers and storage capacity independently to meet their individual needs.
For example, our proprietary PerfectPort feature is designed to enable the
reliable linking of multiple hubs and switches to scale storage capacity. As a
result, our products help users realize fibre channel's ability to connect
hundreds of storage devices or subsystems to multiple servers. This is more
cost-effective than the traditional captive storage architecture, which requires
enterprises to purchase one or more servers to facilitate the addition of
storage devices.
Increased Performance
Our products are designed to provide access to data at speeds exceeding 1
gigabit per second. In addition, our Capellix switch has greater port capacity
and a faster switching backplane than the 8-port and 16-port SAN switches
currently available in the market. This enables higher performance and more cost
effective scaling because more devices can be connected through a single
Capellix switch with higher available bandwidth than can be connected through
existing switches. Our products leverage the multiple server/multiple storage
device topology of SANs to allow multiple users simultaneously access to stored
data over independent paths within the SAN. This permits faster access to data
by more users than is possible in a traditional captive storage architecture.
Manageability
Our management products are designed to provide centralized monitoring and
control of storage and networking devices in a distributed SAN environment. For
example, our proprietary management features and Ventana SAN Manager software
are designed to minimize downtime by monitoring, detecting, isolating and
troubleshooting faults as they occur. Our products leverage the SAN environment
to facilitate the sharing of storage resources, such as disk arrays and tape
backup devices, and reduce the total cost of ownership of storage networks. We
believe that centralized management results in a total cost of ownership model
where the cost of data management is significantly less than the cost of the
storage devices themselves.
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<PAGE> 40
Data Availability and Disaster Tolerance
Our products are designed to further enhance SANs through their high
availability configuration features, which allow network administrators to
specify primary and secondary failover links. SANs are substantially more fault
tolerant than the traditional captive storage architecture because access to
storage devices on a SAN is independent of any single server. As a result, even
if one or more servers fail, data stored on SAN storage devices is still
accessible by other servers connected to the SAN. In addition, because fibre
channel allows devices to be located farther apart physically than SCSI, storage
devices on the same SAN can be placed in remote locations to increase disaster
tolerance.
Our products offer the following additional benefits and features:
Interoperability
Our products leverage the fibre channel arbitrated loop protocol. This
protocol is the most widely-deployed fibre channel standard. As a result, our
products are compatible with substantially all major fibre channel servers and
storage subsystems. This interoperability allows customers to install our
products into their existing SANs, which allows them to preserve their
investment in legacy equipment.
Modular Scalability
The modular design of our products allows users to scale and upgrade the
capabilities of their SANs as required. Our customers are able to meet their
evolving storage and performance needs through the incremental installation or
upgrade of hubs, switches and SAN management features.
Increased Network Stability
Our proprietary Reflex feature is integrated in all of our products and is
designed to automatically bypass faulty links and devices to help ensure network
stability. Our proprietary PerfectPort feature is designed to increase the
reliability of each fibre channel link to our hub or switch products. This
enhances the reliability of the SAN. In addition, the use of PerfectPort in each
link enables all devices in the SAN to be interconnected without limitation in
the number of network devices or the distance between SAN devices.
Platform for Advanced Data Management
We have embedded intelligence in our products that is designed to allow
storage devices to share data without the intervention of a server. This
intelligence creates a platform that helps enable third-party applications such
as serverless backup, an application that allows backups to be performed over a
SAN without a server. Serverless backup helps alleviate servers and LANs of
backup traffic so they can more effectively serve clients.
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<PAGE> 41
STRATEGY
Our objective is to maintain and extend our leadership position in the SAN
market by continuing to deliver enhanced and innovative network products. Key
elements of this strategy include the following:
Leverage Technology Leadership
We intend to leverage our technological leadership and expertise to
introduce high-quality, cost-effective products and product enhancements to meet
the needs of the evolving SAN market. We have significant technological
expertise in both storage and networking. Several of our employees were involved
in the establishment of the original fibre channel standards, which allowed us
to have early insight into the potential of fibre channel as the enabling
technology for SANs. We believe that this technological expertise has been
instrumental in developing our SAN architecture and introducing innovative
products. We intend to continue to devote substantial resources to our product
development efforts.
We remain committed to advancing the standardization of SAN capabilities
through our participation in industry standards organizations, trade groups and
strategic partnerships. Today, our technical personnel are members of more than
11 standards organizations and chair four working groups that are developing new
open standards.
Develop Products Consistent with SAN Evolution
We develop and introduce products timed to the development of the SAN
market. Recognizing that the SAN architecture was a new storage connectivity
paradigm, we targeted our initial product development efforts to the
introduction of active hubs as the basic building block of SANs. As the SAN
architecture began to gain market acceptance, we introduced managed hubs and SAN
management software to allow centralized monitoring and control in larger
distributed environments. We then introduced area switches that support
applications such as remote backup, serverless backup and remote SAN to SAN
connectivity. In May 1999, we announced the introduction of Capellix, our
chassis switch. When configured with storage switch plug-in modules, the
Capellix switch is designed to provide highly scalable switching capabilities
without the need to change other elements of the SAN such as servers and storage
devices. In preserving compatibility with existing SAN devices, the need to
reengineer systems to accommodate the more complex fibre channel fabric protocol
is diminished. By focusing on the delivery of products consistent with SAN
evolution, we believe we have been a significant factor in the emergence of the
SAN market. As the SAN architecture gains wider market acceptance, we intend to
continue to introduce products designed to enable greater capabilities.
Leverage Modular Architecture
We intend to continue to implement product designs that offer upgradability
and extensibility to provide a broad range of products, enhancements and
services to our growing installed base. This represents a significant
opportunity because we believe we have the largest installed base of SAN ports.
The modular design of our products allows users to scale and upgrade the
capabilities of their SANs as required. Our products serve as a foundation that
facilitates growth by supporting downloadable agents, "plug-in" expansion
modules and upgradable software applications.
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Develop Data Management Architecture
We plan to leverage the SAN infrastructure to develop a new data management
architecture. Although the SAN architecture addresses a number of problems
resulting from the growth of enterprise data, we believe that its role will
continue to evolve over time. Similar to the way that the LAN architecture
evolved from a connectivity method for the sharing of data and printers into an
infrastructure that enabled the advent of client-server computing, we believe
the SAN architecture holds the potential of enabling further changes in the way
data is managed. By eliminating the dependency between individual servers and
the access to storage, the SAN architecture enables the removal of data
management applications from the server. In doing so, server processing capacity
can be applied to business critical applications while data management functions
are distributed within the SAN infrastructure. We believe that the improvements
in reliability and security resulting from a distributed data management
environment can enhance overall data availability. Correspondingly, the elevated
role of an intelligent SAN infrastructure can result in higher-value SAN product
segments. To influence these evolutionary steps, we plan to work with industry
standards organizations, original equipment manufacturer customers, distribution
channel partners and strategic partners to develop, standardize and promote a
distributed SAN-based data management architecture.
Focus on Key Original Equipment Manufacturer Customers and Expand Distribution
Channel
We intend to continue to focus on our original equipment manufacturer
customer relationships and to expand distribution channels to develop new
markets. We believe that by continuing to partner with leading original
equipment manufacturer customers, we are well-positioned to introduce new
products and develop new markets. Our original equipment manufacturer customers
currently include the following:
<TABLE>
<S> <C>
Compaq Computer Corporation Fujitsu Limited
Hewlett-Packard Company Hitachi Limited
Data General Corporation Groupe Bull, S.A.
Avid Technology Corporation MTI Technology Corporation
NEC Limited
</TABLE>
While our original equipment manufacturer customers have accounted for the
majority of our net revenues, we believe that our success depends in part on the
successful creation of an open market channel through distributors and
resellers. To this end, we have developed a network of over 60 leading
distributor and reseller partners in 15 countries. We offer comprehensive
training and marketing program support to our partners through our Gadzoox
Associates in Networking (GAIN) program. We intend to enter into agreements with
additional distributors and resellers, both in the United States and abroad, to
increase our geographic coverage and address new vertical markets. We expect
that sales through our distribution channels will constitute an increasing
portion of our total sales.
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Work Closely with Strategic Partners
We intend to continue working closely with leaders in the storage,
networking and computing industries to develop new and enhanced SAN products. We
believe that establishing strategic relationships with technology partners is
essential to facilitate the efficient and reliable integration of their
capabilities into SAN solutions. To this end, we have developed strategic
relationships with leading technology companies, including the following:
ATL Products, Inc.
(data backup applications)
Compaq Computer Corporation
(storage management)
EMC Corporation
(Internet Engineering Task
Force standards)
Exabyte Corporation
(data backup applications)
Legato Systems, Inc.
(data backup applications)
Microsoft Corporation
(server clustering and web-based
management)
Seagate Technology, Inc.
(storage device interface
technologies)
Sun Microsystems, Inc.
(storage management architecture)
Veritas Software Corporation
(storage management architecture)
Employ Reusable Elements
Our products incorporate reusable ASIC cores and firmware agents. This
allows us to accelerate time-to-market, reduce development costs and leverage
interoperability with existing products. We intend to continue developing
reusable elements and leverage them in order to quickly respond to changes in
market requirements.
PRODUCTS
We offer a comprehensive line of products, consisting of SAN hubs, switches
and management software. Our products are designed to address the needs of our
existing and potential customers and enable the adoption and growth of SANs for
a broad range of markets and applications.
[GRAPHIC: A diagram showing Gadzoox products in the SAN Topology.]
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> 44
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>
- Industry's first - Enables a
gigabit fibre channel cost-effective solution
hub for entry-level SANs
Bitstrip October 1995 - 9-port active hub - Compact, simple design
enhances ease of
installation and use
---------------------------------------------------------------------------------------
- Entry-level managed - Enables cost-effective
hub centralized management
Gibraltar GL May 1998 - 6-port managed hub of work-group
environments
- Management via Ventana
- -------------------------------------------------------------------------------------------------
</TABLE>
HIGH-END HUB
<TABLE>
<C> <S> <C> <C> <C> <C>
- Industry's first - Enables efficient
managed hub scalability for
Gibraltar C/XM February 1997 - 10-port managed hub enterprise
environments
- Management via Ventana
---------------------------------------------------------------------------------------
- Industry's first - Provides modular
modular managed hub management and
- 12-port managed hub scalability for high-
Gibraltar GS August 1997 capacity enterprise
environments
- Management via Ventana
- -------------------------------------------------------------------------------------------------
</TABLE>
ENTRY-LEVEL SWITCH
<TABLE>
<C> <S> <C> <C> <C> <C>
- Industry's first - Protocol compatibility
switch to support with existing SAN
embedded backup agents devices enhances ease
for serverless backup of installation
Denali GM September 1998 - 3-port area switch - Supports remote backup
and mirroring
topologies to enhance
disaster tolerance
- Management via Ventana
- -------------------------------------------------------------------------------------------------
</TABLE>
HIGH-END SWITCH
<TABLE>
<C> <S> <C> <C> <C> <C>
- Industry's first - High bandwidth
multi- protocol chassis backplane enables more
switch effective scalability
- Modular chassis-based than 8-port or 16-port
design switches
- Scalable from 6 ports - Designed to be
to 34 ports integrated without
- 28-gigabit per second reengineering or
switching backplane changes to existing
Capellix (1) - Innovative, standards- devices
based storage switch - "Plug-in" modules
technology provide configuration
- Supports multiple flexibility
fibre channel and - Modular hardware and
networking protocols agent design offers
through protocol plug upgradability and
in modules extensibility
- Management via Ventana
- -------------------------------------------------------------------------------------------------
</TABLE>
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(1) Capellix is currently in Beta evaluation with several of our key original
equipment manufacturer partners. We expect to begin commercial shipments in
the third calendar quarter of 1999. However, we cannot assure that shipments
of Capellix will begin in this timeframe.
Management Products
Our modular, upgradable management products are designed to enable users to
deploy management capabilities as required and enhance the ability to maintain
compliance with future management standards. To minimize the requirement for
multiple connections from managed hubs and switches to a management console, our
products employ our proprietary IntraCom proxy management system. Unlike other
products that impose distance limitations or require multiple connections, our
proxy management system is designed to enable a single managed "master" device
to manage other "slave" devices over existing fibre channel links without
impacting the flow of data.
The following table summarizes the key features and benefits of our
management products:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
FIRST DESCRIPTION BENEFITS
PRODUCT NAME COMMERCIAL
SHIPMENT
- -----------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C> <C>
</TABLE>
MANAGEMENT APPLICATION
<TABLE>
<C> <S> <C> <C> <C> <C>
- Industry's first SAN - Centralizes network and
management application 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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CUSTOMERS
We began commercial shipment of our SAN products in fiscal 1996, and as of
March 31, 1999 have shipped products to over 130 organizations in 15 countries.
Original Equipment Manufacturer Customers
Our primary customers are original equipment manufacturers. The following
is a list of our top five original equipment manufacturer customers based on net
revenues in fiscal 1999:
<TABLE>
<S> <C>
Hewlett-Packard Company Digital Equipment Corporation
Compaq Computer Corporation Avid Technology Corporation
Data General Corporation
</TABLE>
In fiscal 1999, Hewlett-Packard Company's Enterprise Storage Solution
Division represented 28% of our net revenues, Compaq Computer Corporation
represented 15% of our net revenues and Hewlett-Packard Company's Network Server
Division represented 14% of our net revenues. In fiscal 1998, Hewlett-Packard
Company's Enterprise Storage Solution Division represented 58% of our net
revenues, Compaq Computer Corporation represented 5% of our net revenues and
Hewlett-Packard Company's Network Server Division represented less than 1% of
our net revenues.
Distribution Channel Partners
Our other customers include distribution channel partners comprised of
distributors and resellers. Our top four distribution channel partners based on
net revenues in fiscal 1999 were as follows:
<TABLE>
<S> <C>
Bell Microproducts, Inc. Ideal Hardware plc
Tokyo Electron Limited Itochu Limited
</TABLE>
In addition, we have recently shipped products to distributors and
resellers such as Merisel, Inc., Andataco, Inc., Cranel, Inc. and Agate
Technology Pty Limited.
SALES, MARKETING AND CUSTOMER SERVICE
Our sales and marketing strategy is focused on the development of the SAN
market through relationships with original equipment manufacturer customers and
distribution channel partners. By maintaining a balance of both of these
indirect models, we believe that we can leverage each of their strengths to help
the market evolve and to enhance our ability to address a large end-user base.
As of March 31, 1999, our sales and marketing organization consisted of a
total of 28 people, including field sales representatives, systems engineers,
applications engineers, customer service personnel, product marketing, product
management, channel marketing, marketing communications and market research
personnel. Our field sales personnel are located in Austin, Texas, Boston,
Massachusetts, Houston, Texas and Swallowfield, England.
Original Equipment Manufacturers
Historically, we have focused on sales to original equipment manufacturer
customers because we believed that they were most capable of influencing the
development of the early SAN market. We believe that by partnering with leading
original equipment manufacturer customers, we will continue to be
well-positioned to introduce new products
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<PAGE> 47
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(R) NT servers and high-end disk and tape storage subsystems.
Original equipment manufacturer customers have been a key to our growth in the
various stages of the emerging market and have represented a significant portion
of our revenues. We believe that this is largely due to the ability of our
original equipment manufacturer customers to deliver complete,
factory-configured solutions, which are installed and serviced by their
dedicated technical support organization. Even as the technology of a given
solution matures and becomes suitable to transition to an open market
integration model, the evolutionary nature of the SAN market should enable us to
continue to present our original equipment manufacturer customers with the
opportunity to integrate and deploy new capabilities as they are developed. To
help ensure the successful deployment of these capabilities, we plan to continue
to strengthen our original equipment manufacturer customer relationships and
focus on the advancements of technology and standards.
Distribution Channel Partners
As the SAN market has matured, we have developed a two-tier distribution
channel that is comprised of distributors and resellers. We believe that our
channel, consisting of over 60 partners in 15 countries as of March 31, 1999, is
one of the largest in the SAN market. We believe that as the market for SANs
matures, open-market sales through distributors will represent an increasing
percentage of our sales.
In addition to providing an open market fulfillment path for more mature
enterprise applications and solutions, distributors enable us to more
effectively pursue a number of vertical markets. Vertical markets and
applications such as e-commerce, Internet service providers, digital video,
digital publishing, oil and gas exploration and medical imaging are targets of
our channel partners.
In October 1998, we announced the launch of a two-tier distribution
marketing program. Our Gadzoox Associates in Networking (GAIN) program addresses
the SAN market development challenges and opportunities. By providing our
partners with a comprehensive set of sales tools and in-depth training in
technology, products, interoperability and applications, we believe that we
enhance their ability to identify sales opportunities and successfully deploy
solutions. In addition to partner development activities, we also actively work
on end-user education. With the goal of generating awareness and pull-through
demand for SAN solutions, we have participated in a number seminars with
partners such as ATL Products, Inc., Data General Corporation, Exabyte, Inc.,
Hewlett-Packard Company, Legato Systems, Inc., Meta Group, Inc., Microsoft
Corporation, Seagate Software, Inc., Veritas Software Corporation and Seagate
Technology, Inc. We plan to continue these educational seminars in conjunction
with our channel partners and strategic partners as an important component of
the GAIN program.
Customer Service
Our customer service organization provides product and technical support to
our original equipment manufacturer customers and distribution channel partners.
Through our indirect sales model and our partner training programs we minimize
the need for a large end-user support organization. We provide direct
self-service support for our products
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<PAGE> 48
through our website. As of March 31, 1999, our customer service organization
included two full-time employees. We plan to augment that staff as required in
the future.
TECHNOLOGY
We believe that we possess a high level of multi-disciplinary technological
expertise, which we utilize in designing our products. This expertise includes
fibre channel technology, LAN and wide area network (WAN) technologies, core
ASIC design, system design and software design. We believe that our expertise in
these technologies provide us with competitive advantages in time-to-market,
cost-to-market, interoperability and product capabilities.
Fibre Channel and Other Networking Technologies
Fibre channel has been adopted by and is being supported by most major
computer and storage device manufacturers including International Business
Machines Corporation, Sun Microsystems, Inc., Hewlett-Packard Company, Compaq
Computer Corporation, Seagate Technology, Inc. and EMC Corporation.
There are two main industry standards for the fibre channel protocol: fibre
channel arbitrated loop (FC-AL) and fibre channel switched fabric (FC-SW),
commonly known as "Fabric." Based on the cost-effective nature and wide industry
deployment of the FC-AL protocol, we elected to base the design of our initial
hub and switch products on that standard. As the needs of the market evolve and
as more third-party products are developed to interoperate with other protocols,
including Fabric, we plan to introduce products and modular enhancements that
support these protocol standards. As fibre channel standards are enhanced and
new industry standards are developed, we expect to contribute to these
developments by leveraging our technical expertise in areas such as SCSI, next
generation input/output (NGIO), ethernet, asynchronous transfer mode (ATM) and
transmission control protocol/Internet protocol (TCP/IP).
We believe that knowledge in fibre channel technology is critical in
achieving and maintaining a leadership position. We employ a number of
technologists that have been significant contributors in the development and
standardization of fibre channel. Based on their expertise, we believe that we
possess insight and understanding of the capabilities and limitations of the
technology.
Core ASIC Design
We design our own core ASICs and employ personnel with expertise in
semiconductor process and design methods. Our proprietary ASICs are manufactured
using gallium arsenide (GaAs) and CMOS technologies. We have successfully
designed proprietary GaAs ASICs clocked at over 1 gigahertz. We have a strategic
and business partnership with GaAs foundry Vitesse Semiconductor, Inc. Our CMOS
ASIC staff possesses expertise in ASIC architecture, design and test. We have a
CMOS foundry relationship with LSI Logic Corporation.
System Design
We employ our own computer aided design (CAD) engineers and design our
printed circuit boards (PCBs). Our system design team has expertise in the
containment of high-frequency electromagnetic interference (EMI), which is
inherent in high-speed networking devices. We have expertise in chassis design,
including design for manufacturability, testability, usability, reliability and
low cost.
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<PAGE> 49
Software
As of March 31, 1999, our engineering staff included 16 software engineers
with expertise in embedded firmware, distributed agents and graphical user
interface technologies. The team has experience in programming for several
microprocessor and operating environments. We have considerable experience in
software implementation to support fibre channel protocol standards such as
FC-PH, FC-AL, FCP, FC-FLA, FC-GS and FC-SW. We have also demonstrated
development capabilities in proprietary and standard SAN management protocols.
Our team also possesses expertise in the areas of graphical user interface
software and network management middleware. We employ personnel with expertise
in a variety of application development environments and tools. Our graphical
user interface development efforts focus on the Microsoft Windows(R) family of
operating systems, as well as platform-independent applications, through the
Java programming environment.
MANUFACTURING
Contract Manufacturing
Our manufacturing strategy focuses on the use of contract manufacturing
sites for the material procurement, assembly, test, packaging, warehousing and
shipment of our products to our customers. Based on its strength in the volume
manufacture of high-speed data networking equipment, we selected Sanmina
Corporation as our contract manufacturing partner. Using a contract manufacturer
allows us to reduce costly investment in manufacturing capital and inventory
warehousing. To reduce our cost of sales, we anticipate that we may relocate our
manufacturing operations to Sanmina Corporation's manufacturing facility in
Guntersville, Alabama during the second half of fiscal 2000. In the future we
may need to find a new contract manufacturer that can manufacture our products
in higher volume and at a lower cost. As our needs and the needs of our
customers continue to evolve, we plan to reassess our manufacturing requirements
on a periodic basis and address changes as we deem necessary. See "Risk
Factors -- Any failure by our sole product manufacturer to meet our
manufacturing needs would negatively impact our ability to manufacture and sell
our products."
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 -- We depend on sole source suppliers and limited source suppliers for
key components."
ISO 9001
In April 1999, we received recommendation for ISO 9001 registration from
SGS International Certification Services, Inc. We believe that our customers
value the processes, control and traceability that are required to achieve ISO
9001 certification.
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<PAGE> 50
RESEARCH AND DEVELOPMENT
Our research and development expenses were $13.9 million in fiscal 1999,
$7.2 million in fiscal 1998 and $2.2 million in fiscal 1997. We believe that our
research and development efforts are essential to our ability to deliver
innovative products that address the needs of the market and help evolve the
capabilities of SANs. As of March 31, 1999, our staff included personnel with
expertise in several key areas, including 4 people engaged in standards and
architecture, 2 people engaged in advanced technologies, 14 people engaged in
ASIC design, 16 people engaged in software design, 11 people engaged in
manufacturing engineering, 30 people engaged in product development and
engineering and 8 people in purchasing, administrative and supporting functions.
We recognize the need to integrate new and enhanced technologies into our
products and to continue to extend the open SAN architecture. Research and
development programs that we are currently involved in include 2 and 4 gigabit
per second ASIC cores and transceivers, high availability clustering
architectures, SAN management application programming interfaces (APIs),
distributed SAN management agents, and the integration of SAN, LAN and WAN
technologies. In addition to the development of proprietary core technologies,
we plan to continue partnerships with other leading providers of SAN
technologies, products and services to jointly develop architectures and
industry standards.
Our product development efforts may not result in commercially viable
product, and our products may be made obsolete by changing technology or new
product announcements by other companies. See "Risk Factors -- We have limited
product offerings and our existing products must achieve widespread market
acceptance."
COMPETITION
The competitive environment in the SAN market is still developing. We
anticipate that the market for our products will be highly competitive,
continually evolving and subject to rapid technological change. New SAN products
are being introduced by various server and storage providers, and existing
products will be continually enhanced. We face competition primarily from other
manufacturers of SAN hub and switch products, including Emulex Corporation and
Vixel Corporation in the SAN hub market and Ancor Communications, Inc., Brocade
Communications Systems, Inc. and Vixel Corporation in the SAN switch market.
Furthermore, although we currently offer products that are complementary to SAN
software products offered by companies such as Legato Systems, Inc. and Veritas
Software Corporation, they and other enterprise software developers may in the
future compete with us. We also compete with providers of data storage solutions
that employ traditional technologies, including SCSI-based technology, such as
Adaptec, Inc., LSI Logic Corporation and QLogic Corporation.
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;
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<PAGE> 51
- strength of distribution channel;
- ability to meet delivery schedules; and
- customer service and technical support.
Some of our current and potential competitors have longer operating
histories, significantly greater resources and name recognition and a larger
installed base of customers than we have. As a result, these competitors may
have greater credibility with our existing and potential customers. They also
may be able to adopt more aggressive pricing policies and devote greater
resources to the development, promotion and sale of their products than we can
to ours, which would allow them to respond more quickly than we can to new or
emerging technologies and changes in customer requirements. In addition, some of
our current and potential competitors have already established supplier or joint
development relationships with divisions of our current or potential customers.
These competitors may be able to leverage their existing relationships to
discourage these customers from purchasing additional products from us or
persuade them to replace our products with their products. Increased competition
could result in pricing pressures, reduced sales, reduced margins, reduced
profits, reduced market share or the failure of our products to achieve or
maintain market acceptance. We may not have the financial resources, technical
expertise or marketing, manufacturing, distribution and support capabilities to
compete successfully in the future. Additionally, we may not be able to compete
successfully against current or future competitors and competitive pressures may
materially harm our business.
INTELLECTUAL PROPERTY
Our success depends on our proprietary technology. We rely on a combination
of patents, trademarks, and trade secrets, as well as confidentiality agreements
and other contractual restrictions with employees and third parties, to
establish and protect our proprietary rights. We currently hold two United
States patents with respect to our SAN-related technology. We also have six
pending patents in the United States with respect to our technology and are
seeking patent protection for certain aspects of technology in selected
international locations. However, it is possible that patents may not be issued
for these applications. All of our software products are copyrighted with our
banners and notices. We have been granted registration of two trademarks in the
United States. Despite precautions, third parties could copy or otherwise obtain
and use our products or technology without authorization, or develop similar
technology independently. The measures we undertake may not be adequate to
protect our proprietary technology, and these measures may not preclude
competitors from independently developing products with functionality or
features similar to our products. There can be no assurance that the 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
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development and release of our products, or require us to develop non-infringing
technology or enter into royalty or licensing arrangements. Such royalty or
licensing arrangements, if required, may not be available on terms acceptable to
us, or at all. For these reasons, infringement claims could materially harm our
business.
BACKLOG
At March 31, 1999, backlog for our products was approximately $4.1 million,
of which 94%, or approximately $3.9 million, is scheduled for delivery to
customers during the June 1999 quarter, compared to backlog of approximately
$3.2 million at March 31, 1998, of which 97%, or approximately $3.1 million was
for scheduled delivery to customers during the June 1998 quarter. Typically, our
original equipment manufacturer customers forecast expected purchases on a three
to six month rolling basis, as compared to channel partners which order as
required with minimal order fulfillment time. All orders are subject to
cancellation or delay by the customers with limited or no penalty. Therefore,
our backlog is not necessarily indicative of actual sales for any succeeding
period.
EMPLOYEES
As of March 31, 1999, we had 149 employees, 146 of whom were full-time. 66
employees were engaged in research and development, 19 were in engineering
services, 28 were in sales and marketing, 21 were in manufacturing and 15 were
in finance, administration and information services. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be very good.
Our future performance depends in significant part upon the continued
service of our key technical, sales and senior management personnel, none of
whom is bound by an employment agreement requiring service for any defined
period of time. The loss of the services of one or more of our key employees
could have a material adverse effect on our business, financial condition and
results of operations. Our future success also depends on our continuing ability
to attract, train and retain highly qualified technical, sales and managerial
personnel. Competition for such personnel is intense, and we may not be able to
retain our key personnel in the future.
LITIGATION
From time to time we may be a party to various litigation matters
incidental to the conduct of our business. We do not believe that any current or
threatened legal proceedings to which we are a party are likely to have a
material adverse effect on our financial position or results of operations. See
"Risk Factors -- We may become involved in costly and time-consuming
litigation."
FACILITIES
Our corporate headquarters facility of approximately 53,000 square feet, is
located in San Jose, California, pursuant to a lease that expires in November
2005. In addition, we have agreed to begin leasing an additional 12,000 square
feet in this facility beginning in October 1999. We believe this existing
facility is adequate for our needs through September 2000.
We lease approximately 27,000 square feet in San Jose, California, pursuant
to a lease that expires in January 2001. We vacated this facility in October
1998 when we moved to
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our corporate headquarters facility. We sublease approximately 21,500 square
feet of this facility to sub-tenants pursuant to subleases which expire in
January 2001.
Our Southern California research and development facility of approximately
7,800 square feet is located in Placentia, California. The lease on this
facility expires in October 1999 and we are currently seeking to extend that
lease or locate a suitable new facility. Although we believe a suitable facility
can be obtained to meet our future requirements, we cannot be certain that we
will be able to find such a facility on commercially reasonable terms.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding our executive
officers and directors as of the date of this prospectus:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Bill Sickler................. 50 President, Chief Executive Officer and Director
Dr. Alistair Black........... 37 Chief Technology Officer and Director
Howey Chin................... 40 Chief Strategy Officer
Christine E. Munson.......... 49 Chief Financial Officer, Vice President of
Administration
Kurt Chan.................... 43 Vice President of Development
Wayne Rickard................ 40 Senior Vice President, Research and Development
Kent Bridges................. 53 Vice President of Worldwide Sales
David Tang................... 37 Vice President of Marketing
William Hubbard.............. 55 Vice President of Manufacturing
Dr. Milton Chang(1).......... 56 Director
Dr. Denny R. S. Ko(2)........ 59 Director
Peter Morris(2).............. 43 Director
Robert Kuhling(1)............ 50 Director
Stephen J. Luczo............. 42 Director
</TABLE>
- -------------------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
Bill Sickler has served as our President, Chief Executive Officer and a
director since April 1996. From March 1995 to April 1996, Mr. Sickler was
executive director of software business development for Seagate Technology,
Inc., a software developer and manufacturer of disk drives. From December 1992
to March 1995, he was president and chief executive officer of Networking
Computing, Inc., a provider of network management software for local area
networks. Mr. Sickler is a director of Savoir Technology Group, Inc., a
distributor of computer, storage and networking equipment. Mr. Sickler holds a
B.S. in engineering from Princeton University and an M.B.A. from the University
of California, Berkeley.
Dr. Alistair Black co-founded Gadzoox in April 1992 and has served as a
director and our Chief Technology Officer since April 1996 and as Chief
Executive Officer and Chief Financial Officer 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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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 ATM networking company. Mr. Bridges
holds a B.S. in marketing and finance from Brigham Young University.
David Tang has served as our Vice President of Marketing since March 1998
and served as our Director of Business Development from December 1996 to March
1998. From September 1994 to November 1996, Mr. Tang served as senior manager of
strategic marketing for Quantum Corporation, a computer data storage company.
Mr. Tang studied electrical engineering at the University of Delaware and is a
graduate of Stanford University's Executive Institute for High Technology
Business Management.
William Hubbard has served as our Vice President of Manufacturing since
September 1997. From May 1995 to July 1997, Mr. Hubbard served as vice
president, manufacturing for Gregory Associates, a contract manufacturing
company. From March 1994 to May 1995, Mr. Hubbard was vice president of
operations for Hughes Lan Networks, a supplier of local area networking
equipment. Mr. Hubbard holds a B.S. in manufacturing technology from Montana
State University and an M.S. in Management Science and Engineering from
Worchester Polytechnic Institute.
Dr. Milton Chang has served as a director of our company since its
inception in April 1992. Dr. Chang is chairman of the board of directors of New
Focus, Inc., a company that supplies photonics tools for laser applications,
which he founded in 1990. From 1996 to 1998, Dr. Chang served on the Visiting
Committee for Advanced Technology of the National Institute of Standards and
Technology. Dr. Chang is a member of the board of
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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, and chairman
of the board of directors of Seagate Software, Inc. 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. 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 also serves
on the board of directors of Veritas Software Corporation. Mr. Luczo received a
M.B.A. from Stanford University Graduate School of Business, after completing
his undergraduate work at Stanford University where he received his A.B. degree
in economics and psychology.
BOARD OF DIRECTORS
We currently have seven directors. During fiscal 1999, our board of
directors met six times. Currently all directors hold office until the next
annual meeting of stockholders or until their successors are duly elected. Our
board of directors will be divided into three classes, each with staggered
three-year terms, subject to applicable law. As a result, only one class of
directors will be elected at each annual meeting of our stockholders, with the
other classes continuing for the remainder of their respective three-year terms.
Board Committees
Our board of directors currently has an audit committee and a compensation
committee. The audit committee consists of Dr. Ko and Mr. Morris. The audit
committee makes recommendations to the board of directors regarding the
selection of independent
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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 are currently or have
ever been, at any time since our formation, one of our officers or employees. No
member of the compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more officers
serving as a member of our board of directors or compensation committee.
EXECUTIVE OFFICERS
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
Compensation
The following table sets forth information concerning compensation for
services rendered to us in all capacities earned in the fiscal year ended March
31, 1999 by our Chief Executive Officer and the four next most highly
compensated executive officers who earned more aggregate cash compensation
exceed $100,000 during fiscal 1999 (collectively, our "Named Executive
Officers"):
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<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL ------------
COMPENSATION SECURITIES
------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS
--------------------------- -------- ------- ------------
<S> <C> <C> <C>
Bill Sickler(1)................................. $198,827 -- 100,000
President and Chief Executive Officer
Kent Bridges.................................... 160,357 $41,693(2) 20,000
Vice President of Worldwide Sales
Alistair Black.................................. 142,721 -- 55,000
Chief Technology Officer
Wayne Rickard................................... 141,932 -- 45,000
Senior Vice President of Research and
Development
Kurt Chan(3).................................... 138,489 -- 20,000
Vice President of Development
</TABLE>
- -------------------------
(1) In April 1996, Mr. Sickler acquired 1,200,000 shares of restricted stock at
$0.075 per share, subject to our right to repurchase such shares in the
event of the termination of his employment. Our right to repurchase lapses
at a rate of 25% per year. As of March 31, 1999, Mr. Sickler held 350,000
shares of restricted common stock no longer subject to our right of
repurchase, with an aggregate value of $1,583,750 (based on a per share
price of $4.60, the fair market value of our common stock as of March 31,
1999, as determined by our board of directors). No dividends will be paid on
this stock.
(2) Represents sales commissions.
(3) In November 1995, Mr. Chan acquired 200,000 shares subject to our right of
repurchase in the event of his termination. Our right to repurchase lapses
at a rate of 25% of these shares per year. As of March 31, 1999, Mr. Chan
held 33,333 shares of restricted common stock subject to our right of
repurchase, an aggregate value of $152,498 (based on a per share price of
$4.60, the fair market value of our common stock as of March 31, 1999, as
determined by our board of directors). No dividends will be paid on this
stock.
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Option Grants in Fiscal 1999
The following table sets forth information with respect to stock options
granted to each of our Named Executive Officers during the fiscal year ended
March 31, 1999. In accordance with the rules of the Securities and Exchange
Commission, also shown below is the potential realizable value over the term of
the option (the period from the grant date to the expiration date) based on
assumed rates of stock appreciation of 5% and 10%, compounded annually. These
amounts are mandated by the Securities and Exchange Commission and do not
represent our estimate of future stock price. Actual gains, if any, on stock
option exercises will depend on the future performance of our common stock.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF PERCENT OF TOTAL ANNUAL RATES OF
SECURITIES OPTIONS GRANTED STOCK APPRECIATION
UNDERLYING TO EMPLOYEES EXERCISE FOR OPTION TERM(5)
OPTIONS IN FISCAL PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) 1999(2) SHARE(3) DATE(4) 5% 10%
---- ---------- ---------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bill Sickler(6)...... 100,000 8.9% $2.00 05/12/08 $125,780 $318,750
Kent Bridges(7)...... 20,000 1.8 3.10 11/18/08 38,999 98,810
Alistair Black....... 55,000 4.9 2.00 05/12/08 69,180 175,310
Wayne Rickard........ 25,000 2.2 3.10 01/20/09 48,740 123,520
20,000 1.8 3.10 11/18/08 38,990 98,810
Kurt Chan............ 20,000 1.8 3.10 11/18/08 38,990 98,810
</TABLE>
- -------------------------
(1) The options for each of the Named Executive Officers vest at the rate of
2.08% of the shares subject to the option per month, except for the option
granted to Mr. Black. Mr. Black's option vests at the rate of 3.79% of the
shares subject to the option per month.
(2) Based on an aggregate of 1,119,400 options we granted to our employees and
consultants, including the Named Executive Officers, in fiscal 1999.
(3) The exercise price per share of each option was equal to the fair market
value of the common stock on the date of grant as determined by our board of
directors.
(4) Options may terminate before their expiration dates if the optionee's status
as an employee is terminated or upon the optionee's death or disability.
(5) The potential realizable value is calculated assuming that the fair market
value of the common stock on the date of grant appreciates at the indicated
annual rate compounded annually for the entire term of the option (ten
years) and that the option is exercised and sold on the last day of its term
for the appreciated stock price.
(6) Upon a change of control, the unvested portion of stock options held by Mr.
Sickler will automatically accelerate as to a number of shares equal to the
lesser of: (1) 25% of the initial number of shares subject to the option or
(2) a number of shares such that following acceleration, 12.5% of the
initial number of shares subject to the option, or if a total of less than
12.5% remain unvested, such total remaining amount, will remain unvested.
Upon a change of control and the involuntary termination of Mr. Sickler, all
of the unvested portion of stock options held by him will automatically
accelerate.
(7) Upon a change of control, 50% of the unvested portion of each stock option
held by Mr. Bridges will automatically accelerate.
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<PAGE> 60
Aggregate Option Exercises in Fiscal 1999 and Fiscal Year-End Option Values
With respect to our Named Executive Officers, the following table sets
forth information concerning option exercises in fiscal 1999 and exercisable and
unexercisable options held as of March 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT MARCH 31, 1999 MARCH 31, 1999(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bill Sickler(2)........ 108,333 $207,729 62,500 129,167 $ 242,396 $431,709
Kent Bridges(3)........ -- -- 192,917 167,083 847,826 684,975
Alistair Black......... -- -- 179,166 75,834 770,623 277,377
Wayne Rickard.......... -- -- 241,626 149,374 1,078,062 540,268
Kurt Chan.............. -- -- 93,501 72,499 410,948 264,882
</TABLE>
- -------------------------
(1) Based on a value of $4.60 per share, the fair market value of our common
stock as of March 31, 1999, minus the per share exercise price, multiplied
by the number of shares underlying the option.
(2) Upon a change of control, the unvested portion of stock options held by Mr.
Sickler will automatically accelerate as to a number of shares equal to the
lesser of: (1) 25% of the initial number of shares subject to the option or
(2) a number of shares such that following acceleration, 12.5% of the
initial number of shares subject to the option, or if a total of less than
12.5% remain invested, such total remaining amount, will remain unvested. If
a change of control had occurred on March 31, 1999, an additional 75,000
shares subject to options held by Mr. Sickler would have vested. Upon a
change of control and the involuntary termination of Mr. Sickler, all of the
unvested portion of stock options held by him will automatically accelerate.
(3) Upon a change of control, 50% of the unvested portion of each stock option
held by Mr. Bridges will automatically accelerate. If a change of control
had occurred on March 31, 1999, an additional 83,542 shares subject to
options held by Mr. Bridges would have vested.
STOCK PLANS
Amended and Restated 1993 Stock Plan
Our Amended and Restated 1993 Stock Plan, as amended and restated, was
adopted by our board of directors in May 1999. We anticipate that our
stockholders will approve this plan, as amended and restated, at their next
annual meeting. This plan provides for the grant of incentive stock options to
our employees and nonstatutory stock options and stock purchase rights to our
employees, directors and consultants. We have reserved an aggregate of 8,180,000
shares of common stock for issuance under this plan. The number of shares
reserved for issuance under this plan will be subject to an annual increase on
the first day of each fiscal year equal to the lesser of (a) 1,500,000 shares,
(b) 5% of the outstanding shares on that date, or (c) a lesser amount as
determined by the board of directors. As of March 31, 1999, options to purchase
4,529,692 shares of common stock were outstanding, 2,465,151 shares had been
issued upon exercise of options, net of repurchases, and 1,214,478 shares would
have been available for future grant assuming that the amendment and restatement
of the stock plan were effective as of March 31, 1999.
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<PAGE> 61
The compensation committee of our board of directors administers the stock
plan and determines the terms of options granted, including the exercise price,
the number of shares subject to individual option awards and the vesting period
of options. The exercise price of nonstatutory options must generally be at
least 85% of the fair market value of the common stock on the date of grant. The
exercise price of incentive stock options cannot be lower than 100% of the fair
market value of the common stock on the date of grant and, in the case of
incentive stock options granted to holders of more than 10% of our voting power,
not less than 110% of the fair market value. The term of an incentive stock
option cannot exceed 10 years, and the term of an incentive stock option granted
to a holder of more than 10% of our voting power cannot exceed five years.
Options granted under our stock plan will accelerate and become fully
vested in the event we are acquired, unless the successor corporation assumes or
substitutes other options in their place. Our board of directors may not,
without the adversely affected optionee's prior written consent, amend, modify
or terminate the stock plan if the amendment, modification or termination would
impair the rights of optionees. Our stock plan will terminate in 2009 unless
terminated earlier by the board of directors.
1999 Employee Stock Purchase Plan
Our 1999 Employee Stock Purchase Plan was adopted by our board of directors
in May 1999. We anticipate that our stockholders will approve this purchase plan
at their next annual meeting. This plan provides our employees with an
opportunity to purchase our common stock through accumulated payroll deductions.
We initially reserved 150,000 shares of common stock for issuance under this
purchase plan. As of March 31, 1999, we had not issued any shares under this
plan. The number of shares reserved for issuance under the purchase plan will be
subject to an annual increase on the first day of each fiscal year equal to the
lesser of (a) 250,000 shares, (b) 1.0% of the outstanding shares on that date,
or (c) a lesser amount as determined by our board of directors.
Our purchase plan will be administered by our board of directors or by a
committee appointed by the board of directors. The purchase plan permits
eligible employees to purchase our common stock through payroll deductions of up
to 10% of his or her compensation or up to 500 shares of common stock for each
offering period, up to a maximum of $25,000 for all purchases within the same
calendar year. Employees are eligible to participate in this purchase plan if
they are customarily employed by us at least 20 hours per week and more than
five months in any calendar year.
Unless our board of directors or its committee determines otherwise, this
purchase plan will be implemented in a series of consecutive, overlapping
offering periods, each approximately six months in duration. Offering periods
will begin on the first trading day on or after August 1 and February 1 of every
year and terminate on the last trading day in the period six months later,
provided that the first offering period will commence on the effective date of
this offering and will end on January 31, 2000, or the last trading day prior
thereto. If we are acquired and the successor corporation does not assume all
outstanding options under this purchase plan, then the offering and purchase
periods then in progress will be shortened so that all options will be
automatically exercised immediately prior to the date of acquisition. The price
at which common stock will be purchased under this purchase plan is equal to 85%
of the fair market value of the common stock on the first day of the applicable
offering period or the last day of the applicable purchase period, whichever is
lower. Employees may end their participation in the offering period at any time,
and participation automatically ends on termination of
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<PAGE> 62
employment or on the 91st day following an extended leave of absence from which
they have not returned. Our board of directors may not, without the adversely
affected optionee's prior written consent, amend, modify or terminate this
purchase plan at any time if the amendment, modification or termination would
impair the rights of plan participants. This purchase plan will terminate in May
2009, unless terminated earlier in accordance with its provisions.
1999 Director Option Plan
Our 1999 Director Option Plan was adopted by our board of directors in May
1999. We anticipate that this plan will be approved by our stockholders at their
next annual meeting. This director plan provides for the grant of nonstatutory
stock options to non-employee directors. We have reserved a total of 50,000
shares of common stock for issuance under it. The number of shares reserved for
issuance under the plan will be subject to an annual increase every April equal
to a number of shares sufficient to bring the number of shares available for
future option grants to 50,000 shares.
Our director plan provides for the automatic grant of 5,000 shares of
common stock to each of our non-employee directors serving as a member of our
board of directors on the date we adopted the plan and to each newly elected
non-employee director upon their election. Additionally, each of our
non-employee directors shall automatically be granted an option to purchase
2,500 shares of common stock each year on the date of the annual meeting of our
stockholders, if on that date he or she has served on our board of directors for
at least the preceding six months. Each option shall have a term of three years,
and each option is immediately exercisable. The exercise price of all options
shall be 100% of the fair market value per share of the common stock, as
determined by our board of directors, prior to the existence of a public market
for our common stock, or after the existence of a public market, as reported on
The Nasdaq Stock Market's National Market as the closing price of our common
stock on the date of grant or on the last trading day prior to the date of
grant, if the grant is made on a holiday.
Options granted under the director plan must be exercised within 3 months
after the end of an optionee's tenure as a member of our board of directors, or
within 12 months after his or her death or disability, but in any case not later
than the expiration of the option's term.
401(k) Plan
On March 11, 1996, our board of directors adopted a Retirement Savings and
Investment Plan covering our full-time employees located in the United States.
This plan is intended to qualify under Section 401(k) of the Internal Revenue
Code of 1986, as amended, so that contributions to this plan by employees, and
the investment earnings thereon, are not taxable to employees until withdrawn.
Pursuant to this plan, employees may elect to reduce their current compensation
by up to the lesser of 20% of their annual compensation or the statutorily
prescribed annual limit ($10,000 in calendar 1998) and to have the amount of
such reduction contributed to this plan. This plan does not permit additional
matching contributions by us on behalf of plan participants.
CHANGE OF CONTROL AGREEMENTS
We have entered into change of control agreements with Bill Sickler and
Kent Bridges. In the event of a change of control (as defined in the agreements)
and regardless of whether the employment relationship continues following the
change of control, a
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<PAGE> 63
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 other agents to the fullest extent permitted by law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent for
any liability arising out of his or her actions in such capacity, regardless of
whether the bylaws would permit indemnification.
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<PAGE> 64
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> 65
CERTAIN TRANSACTIONS
TRANSACTIONS WITH DIRECTORS, EXECUTIVE OFFICERS AND 5% STOCKHOLDERS
On April 15, 1996, we sold 1,200,000 shares of common stock at a price of
$0.075 per share to Bill Sickler for an aggregate purchase price of $90,000.
On September 5, 1996, we sold 4,444,444 shares of Series E preferred stock
at a price per share of $1.80 to a group of private investors that included the
following of our directors and 5% stockholders:.
<TABLE>
<CAPTION>
PURCHASER SHARES OF SERIES E STOCK
--------- ------------------------
<S> <C>
NEA Entities:
New Enterprise Associates VI, L.P............... 1,944,446
NEA Presidents Fund, L.P........................ 41,666
NEA Ventures 1996, L.P.......................... 2,778
ONSET Enterprise Associates II, L.P............... 1,388,888
Dynamics Technology, Inc.......................... 228,106
Milton Chang...................................... 277,778
</TABLE>
New Enterprise Associates VI, L.P., NEA Presidents Fund, L.P. and NEA
Ventures 1996, L.P. are affiliated entities and together are considered a
greater than 5% stockholder. Peter Morris, one of our directors, is a partner of
New Enterprise Associates VI, L.P., NEA Presidents Fund, L.P. and NEA Ventures
1996, L.P. Mr. Morris disclaims any beneficial ownership of the securities held
by such entities, except that due to his proportional partnership interest in
the entities. Rob Kuhling, one of our directors, is a partner of ONSET
Enterprise Associates II, L.P. Mr. Kuhling disclaims any beneficial ownership of
the securities held by ONSET Enterprise Associates II, L.P., except that due to
his proportional partnership interest in the entity. Dr. Denny R. S. Ko, one of
our directors, is the chairman of Dynamics Technology, Inc. Mr. Ko disclaims any
beneficial ownership of the securities held by such entities.
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<PAGE> 66
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
Alistair Black......................... 5/13/98 100,000 2.00
Howey Chin............................. 4/19/97 76,000 0.27
11/19/98 20,000 3.10
Christine Munson....................... 3/19/97 180,000 0.27
11/19/98 20,000 3.10
Kurt Chan.............................. 4/9/97 76,000 0.27
11/19/98 20,000 3.10
Wayne Rickard.......................... 4/9/97 76,000 0.27
11/19/98 20,000 3.10
1/21/99 25,000 3.10
Kent Bridges........................... 1/9/97 340,000 0.18
11/11/98 20,000 3.10
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
William Hubbard........................ 9/16/97 155,000 0.72
11/19/98 20,000 3.10
</TABLE>
RELATIONSHIP WITH SEAGATE TECHNOLOGY, INC.
We have developed a strategic partnership with Seagate Technology, Inc.
pursuant to which we have collaborated with Seagate on the development of
industry standards, the design and development of new SAN products, the
interoperability of products, strategic planning and SAN market development. In
addition, Seagate has made several investments in us as described below. Stephen
J. Luczo, one of our directors, is also the chief executive officer of Seagate.
On May 21, 1997, we sold 2,092,234 shares of Series F preferred stock at a
price per share of $4.78 to Seagate for an aggregate purchase price of
$10,000,879. On June 16, 1998, we sold 652,569 shares of Series G preferred
stock at a price per share of $7.65 to Seagate for an aggregate purchase price
of $4,992,153.
On September 18, 1998, we entered into a $15,000,000 convertible note
purchase agreement with Seagate. The convertible note bears simple interest of
5.75% per annum with principal and interest maturing on September 18, 2001. We
have the option to convert any portion of the then outstanding balance of
principal and interest into Series G preferred stock or common stock, after
completion of this offering, at a price per share of $7.65. Accrued interest
must be converted prior to any principal. We may, upon thirty days written
notice to Seagate, prepay any portion of the convertible note in cash. In the
event of a default, as defined in the agreement, Seagate may declare all
outstanding 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.
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<PAGE> 67
On October 12, 1998, we converted approximately $59,000 of accrued interest
and approximately $1,797,000 of principal into 242,694 shares of Series G
preferred stock. As of March 31, 1999, the total amount of outstanding principal
and accrued interest was $13,554,000.
Pursuant to an agreement that we entered into with Seagate and a
third-party investor on October 12, 1998, Seagate has the right to maintain its
current percentage interest in our common stock of 19.9% and the other investor
has the right to maintain its current percentage interest in our common stock of
4.9%. Accordingly, within 30 days of the closing of this offering, Seagate and
the other investor each 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% for Seagate and 4.9% for the other investor. Seagate is
obligated to first convert interest and principal owing under its convertible
note into shares of common stock before it purchases additional shares of common
stock to maintain its percentage interest. The rights of Seagate and the other
investor to maintain terminate 30 days after the closing of this offering.
Also pursuant to this stockholders agreement, Seagate and the other
investor have agreed to certain restrictions on their ownership of our common
stock. Specifically, unless our board of directors consents, Seagate and the
other investor have agreed not to:
- acquire beneficial ownership of any of our shares of capital stock if
after acquiring the shares (1) with respect to Seagate, Seagate would
beneficially own more than 19.9% of our outstanding voting stock and (2)
with respect to the other investor, the other investor would beneficially
own more than 4.9% of our outstanding voting stock;
- form, join or in any way participate in a group acting together for the
purpose of acquiring, holding or disposing of shares of our capital stock
if the group beneficially owns more than 5% of our outstanding voting
stock;
- submit any resolution to our stockholders or become a participant in a
proxy solicitation in opposition to the recommendation of a majority of
our directors; or
- enter into any voting arrangement with respect to any shares of our
capital stock.
In addition, if Seagate acquires more than 19.9% of our voting stock or if
the other investor acquires more than 4.9% of our voting stock, we have the
right to purchase from Seagate and the other investor a sufficient number of
shares of voting stock so as to reduce the voting stock held by Seagate to no
more than 19.9% of our outstanding voting stock and the voting stock held by the
other investor to no more than 4.9% of our outstanding voting stock. To purchase
shares held by Seagate or the other investor pursuant to this right, we will
have to pay the average per share cash price paid by Seagate or the other
investor calculated on a last purchased, first sold basis.
These limitations on Seagate's and the other investor's ownership of our
capital stock expire upon the earlier of (1) 3 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 and the other investor
each agreed that they will not nor will they permit any of their affiliates to
sell or transfer any shares of our capital stock to a person or entity that as
of October 12, 1998 was engaged in or had publicly announced its intention to
enter into the business of developing, manufacturing, marketing or selling
storage area networks.
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<PAGE> 68
In addition, with respect to Seagate, for so long as Seagate owns at least
7% of our outstanding voting stock and with respect to the other investor, for
so long as the other investor owns at least 1.75% of our outstanding voting
stock, Seagate and the other investor each agreed that they will not nor will
they permit any of their affiliates to sell or transfer any shares of our
capital stock, except under the following circumstances:
- to a person or entity who owned Gadzoox voting stock immediately prior to
the closing of this offering;
- to us or to any person approved by us;
- pursuant to a bona fide public offering registered under the Securities
Act;
- pursuant to Rule 144 under the Securities Act;
- pursuant to a bona fide pledge of shares of our capital stock to an
institutional lender to secure a loan, guarantee or other financial
support, provided that the lender agrees to hold such stock subject to
the same restrictions applicable to Seagate or the other investor;
- in the event of a merger or consolidation in which we are acquired by
another corporation, or pursuant to a plan of liquidation of Gadzoox;
- to a wholly-owned subsidiary that has executed an agreement to be bound
by the same restrictions applicable to Seagate or the other investor;
- sales into any tender or exchange offer (A) which is made by us or on our
behalf; (B) which is made by another person or group and is not opposed
by our board of directors; or (C) subject to our right of first refusal,
which is made by another person or group and which would result in such
person or group owning more than 50% of our total outstanding voting
stock; or
- public distributions, provided that, in cases other than public
distributions underwritten by an underwriter selected by us, no single
purchaser is known to be acquiring more than 5% of our outstanding
capital stock in the distribution.
Pursuant to the stockholders' agreement, Seagate and the other investor
granted us certain rights of first refusal with respect to any shares of our
common stock that they will hold immediately after the closing of this offering
or those shares of common stock issuable to Seagate upon conversion of the
convertible note we issued to Seagate. With respect to these shares, we have a
right of first refusal to purchase any of these shares sold by Seagate or the
other investor for so long as: (1) with respect to Seagate, Seagate owns at
least 7% of our outstanding voting stock and (2) with respect to the other
investor, the other investor owns at least 1.75% of our outstanding voting
stock. Certain sales of our voting stock by Seagate or the other investor,
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 -- Limitation of 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> 69
PRINCIPAL STOCKHOLDERS
The following table sets forth information known to us with respect to the
beneficial ownership of our common stock as of March 31, 1999, and as adjusted
to reflect the sale of common stock offered hereby by (i) each stockholder known
by us to own beneficially more than 5% of current common stock, (ii) each Named
Executive Officer, (iii) each of our directors and (iv) all current directors
and executive officers as a group. As of March 31, 1999, there were 19,497,128
shares of common and preferred stock outstanding.
<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)............................... 3,857,882 19.8% (4)
c/o Seagate Technology, Inc.
920 Disc Drive, Building One
Scotts Valley, CA 95066
Seagate Technology, Inc........................ 3,847,987 19.7 (4)
920 Disc Drive, Building One
Scotts Valley, CA 95066
Peter Morris(5)................................ 1,988,890 10.2
c/o New Enterprise Associates
2490 Sand Hill Road
Menlo Park, CA 94025
Entities associated with New Enterprise 1,988,890 10.2
Associates VI, Limited Partnership (6).......
2490 Sand Hill Road
Menlo Park, CA 94025
Alistair Black(7).............................. 1,711,666 8.7
Denny R. Ko(8)................................. 1,601,206 8.2
c/o Dynamics Technology, Inc.
21311 Hawthorne Boulevard
Suite 300
Torrance, CA 90503-5610
Dynamics Technology, Inc.(9)................... 1,601,206 8.2
21311 Hawthorne Boulevard
Suite 300
Torrance, CA 90503-5610
Bill Sickler(10)............................... 1,404,841 7.2
Rob Kuhling(11)................................ 1,388,888 7.1
c/o ONSET Ventures
2490 Sand Hill Road
Menlo Park, CA 94025
ONSET Enterprise Associates II, L.P............ 1,388,888 7.1
2490 Sand Hill Road
Menlo Park, CA 94025
Milton Chang................................... 1,223,166 6.3
c/o New Focus, Inc.
2630 Walsh Avenue
Santa Clara, CA 95051
</TABLE>
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<PAGE> 70
<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).................................. 300,416 1.5
Wayne Rickard(13).............................. 257,916 1.3
Kent Bridges(14)............................... 207,916 1.1
All directors and executive officers as a group
(14 persons)(15)............................. 14,443,620 70.1 (4)
</TABLE>
- -------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock subject to options or warrants held by that person
that are currently exercisable or will become exercisable within 60 days
after March 31, 1999 are deemed outstanding, while such shares are not
deemed outstanding for purposes of computing percentage ownership of any
other person. Unless otherwise indicated in the footnotes below, the
persons and entities named in the table have sole voting and investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable. The number of shares beneficially owned
assumes the conversion of all outstanding shares of preferred stock into
common stock as of March 31, 1999.
(2) Assumes no exercise of the underwriters' over-allotment option.
(3) Mr. Luczo is the chief executive officer of Seagate and a director of our
company. Includes 3,847,987 shares held by Seagate, 8,333 shares of Common
Stock held by Mr. Luczo and 1,562 shares issuable upon exercise of options
held by Mr. Luczo exercisable within 60 days of March 31, 1999.
(4) Based on shares held upon consummation of the offering, including shares to
be issued concurrently with the offering upon conversion of the convertible
note held by Seagate.
(5) Mr. Morris is a general partner of New Enterprise Associates and a director
of our company. Includes 1,944,446 shares held by New Enterprise Associates
VI, Limited Partnership, 41,666 shares held by NEA Presidents Fund, L.P.
and 2,778 shares held by NEA Ventures 1996, L.P. 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) Includes 1,944,446 shares held by New Enterprise Associates VI, Limited
Partnership, 41,666 shares held by NEA Presidents Fund, L.P. and 2,778
shares held by NEA Ventures 1996, L.P.
(7) Includes 191,666 shares issuable upon exercise of options held by Mr. Black
exercisable within 60 days of March 31, 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) Dr. Ko is the chairman of Dynamics Technology, Inc. and a director of our
company. Includes 1,579,206 shares held by Dynamics Technology, Inc. and
22,000 shares issuable upon exercise of options held by Dynamics
Technology, Inc.
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<PAGE> 71
exercisable within 60 days of March 31, 1999. Dr. Ko disclaims beneficial
ownership of the shares held by this entity.
(9) Includes 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 March 31, 1999.
(10) Includes 350,000 shares subject to a right of repurchase in favor of
Gadzoox, which lapses over time, 75,000 shares issuable upon exercise of
options held by Mr. Sickler exercisable within 60 days of March 31, 1999,
1,308,333 shares held by K. William Sickler and Gail A. Sickler, Trustees
UTA Dated July 16, 1992, 15,238 shares held by the Kenneth J. Sickler
Living Trust, of which Mr. Sickler is the Trustee, and 6,270 shares held by
K. William Sickler, Trustee UA 10-14-92 Kenneth J. Sickler Grandchildren's
Trust Agreement.
(11) 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. Mr. Kuhling disclaims beneficial ownership of shares held by this
entity, except for his proportional interest arising from his partnership
interest in ONSET Ventures.
(12) Includes 33,333 shares subject to a right of repurchase in favor of Gadzoox
which lapses over time and 100,416 shares issuable upon exercise of options
held by Mr. Chan exercisable within 60 days of March 31, 1999.
(13) Represents 257,916 shares issuable upon exercise of options held by Mr.
Rickard exercisable within 60 days of March 31, 1999.
(14) Represents 207,916 shares issuable upon exercise of options held by Mr.
Bridges exercisable within 60 days of March 31, 1999.
(15) Includes shares described in footnotes 3, 5, 7, 8 and 10 - 14 that are
beneficially owned by the directors and officers and an aggregate of
1,108,559 shares issuable upon exercise of options held by these
individuals exercisable within 60 days of March 31, 1999.
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<PAGE> 72
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, Gadzoox will be authorized to issue
150,000,000 shares of common stock, $0.005 par value, and 10,000,000 shares of
undesignated preferred stock, $0.005 par value. The following description of our
capital stock does not purport to be complete. This description is subject to
and qualified in its entirety by our certificate of incorporation and bylaws,
which are included as exhibits to the registration statement of which this
prospectus forms a part, and by the provisions of applicable Delaware law.
COMMON STOCK
As of March 31, 1999, there were 19,497,128 shares of common stock
outstanding that were held of record by approximately 77 stockholders (assuming
conversion of all shares of preferred stock outstanding as of March 31, 1999).
There will be 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 $ of
our convertible note (including accrued interest) into an aggregate of
shares. There are outstanding options to purchase a total of 4,529,692
shares of our common stock.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Our stockholders
do not have cumulative voting rights in the election of directors. Accordingly,
holders of a majority of the shares voting are able to elect all of the
directors. Subject to preferences that may be granted to any then outstanding
preferred stock, holders of common stock are entitled to receive ratably only
those dividends as may be declared by the board of directors out of funds
legally available therefor, as well as any distributions to the stockholders.
See "Dividend Policy." In the event of a liquidation, dissolution or winding up
of Gadzoox, holders of common stock are entitled to share ratably in all assets
of Gadzoox remaining after we pay our liabilities and distribute the liquidation
preference of any then outstanding preferred stock. Holders of common stock have
no preemptive or other subscription or conversion rights.
PREFERRED STOCK
Our certificate of incorporation filed in connection with this offering
provides that our board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series. The rights,
preferences and privileges of each series of preferred stock may be greater than
the rights of Gadzoox common stock. It is not possible to state the actual
effect of the issuance of any shares of preferred stock upon the rights of
holders of our common stock until the board of directors determines the specific
rights of the holders of any preferred stock that may be issued. However, the
effects might include, among other things: (1) restricting dividends on the
common stock, (2) diluting the voting power of the common stock, (3) impairing
the liquidation rights of the common stock and (4) delaying or preventing a
change in control of Gadzoox without further action by the stockholders. Upon
the closing of this offering, no shares of preferred stock will be outstanding,
and Gadzoox has no present plans to issue any shares of preferred stock.
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<PAGE> 73
WARRANTS
As of the closing of this offering, there will be warrants to purchase
28,242 shares of our common stock at an exercise price of $4.78, which will
remain exercisable until July 30, 2007. In addition, as of the closing of this
offering, there will be warrants to purchase 19,607 shares of our common stock
at an exercise price of $7.65, which will remain exercisable until July 6, 2003.
REGISTRATION RIGHTS
Pursuant to a registration and information rights agreement entered into
between us and holders of 3,026,364 shares of common stock and holders of
13,907,399 shares of common stock issuable upon conversion of our Series A,
Series B, Series C, Series D, Series E, Series F, Series G and Series H
preferred stock and upon conversion of the convertible note held by Seagate, we
are obligated, under limited circumstances and subject to specified conditions
and limitations, to use our best efforts to register the registrable shares.
We must use our best efforts to register shares of the registrable shares:
- if we receive written notice from holders of 50% or more of the
registrable shares requesting that we effect a registration with respect
to not less than 20% of the registrable shares then held by the holders
requesting registration (or a lesser percentage where the reasonably
anticipated price to the public of the sale of the registrable shares
will exceed $2,000,000);
- if we decide to register our own securities (except in connection with
this offering); or
- if (1) we receive written notice from holders of 25% or more of the
registrable shares requesting that we effect a registration on Form S-3
(a shortened form of registration statement) with respect to shares of
the registrable shares, the reasonably anticipated price to the public of
which exceeds $1,000,000 and (2) we are then eligible to use Form S-3
(which at the earliest will occur twelve calendar months after the
closing of this offering).
However, in addition to certain other conditions and limitations, if
requested to register shares of registrable shares, we can delay registration
not more than once in any 12-month period and for not more than 90 days. In
addition, unless the request is for a registration on Form S-3, we are obligated
to effect only two registrations requested by the holders of the registrable
shares. In any case where we decide to register our own securities pursuant to
an underwritten offering, the managing underwriter may limit the registrable
shares to be included in the registration to not less than 10% of the total
value of securities to be registered.
These registration rights terminate with respect to each registrable share
upon the first to occur of when the holder can transfer his or her registrable
shares pursuant to Rule 144 or five years after the closing of this offering. In
addition, the holders of these registration rights have entered into lockup
agreements and waived their registration rights until 180 days following the
closing of this offering.
STOCKHOLDERS' AGREEMENT
We have entered into a stockholders' agreement with two of our
stockholders, pursuant to which we granted those stockholders certain rights,
and those stockholders
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<PAGE> 74
agreed to limitations and restrictions with respect to their shares of our
capital stock. For a more complete discussion of this stockholders' agreement,
see "Certain Transactions -- Relationship with Seagate Technology, Inc."
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Certain provisions of Delaware law and our certificate of incorporation and
bylaws could make more difficult the acquisition of our company by means of a
tender offer, a proxy contest or otherwise and the removal of incumbent officers
and directors. These provisions, summarized below, may discourage certain types
of coercive takeover practices and inadequate takeover bids and encourage
persons seeking to acquire control of our company to first negotiate with our
company. We believe that the benefits of increased protection of our company's
potential ability to negotiate with the proponent of an unfriendly or
unsolicited proposal to acquire or restructure our company outweigh the
disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms.
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless (with certain exceptions) the "business
combination" or the transaction in which the person became an interested
stockholder is approved in a prescribed manner. Generally, a "business
combination" includes a merger, asset or stock sale, or other transaction
resulting in a financial benefit to the interested stockholder. Generally, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior to the determination of interested
stockholder status, did own) 15% or more of a corporation's voting stock. The
existence of this provision would be expected to have an anti-takeover effect
with respect to transactions not approved in advance by the board of directors,
including discouraging attempts that might result in a premium over the market
price for the shares of common stock held by stockholders.
Our certificate of incorporation eliminates the right of stockholders to
act by written consent without a meeting. The certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors. The
authorization of undesignated preferred stock makes it possible for the board of
directors to issue preferred stock with voting or other rights or preferences
that could impede the success of any attempt to change control of our company.
These and other provisions may have the effect of deterring hostile takeovers or
delaying changes in control or management of our company. The amendment of any
of these provisions would require approval by holders of at least 66 2/3% of our
outstanding common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is BankBoston, N.A.
NATIONAL MARKET LISTING
We have applied to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "ZOOX."
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<PAGE> 75
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock (including shares
issued upon exercise of outstanding options and warrants) in the public market
following this offering could adversely affect market prices prevailing from
time to time and could impair our ability to raise capital through sale of its
equity securities. As described below, no shares currently outstanding will be
available for sale immediately after this offering because of certain
contractual restrictions on resale. Sales of substantial amounts of common stock
of our company in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of our company to raise
equity capital in the future.
Upon completion of this offering, we will have outstanding
shares of common stock (based upon shares outstanding as of
March 31, 1999), assuming no exercise of the Underwriters' over-allotment option
and no exercise of outstanding options or warrants after March 31, 1999. Of
these shares, the shares sold in this offering will be
freely tradable without restriction under the Securities Act except for any
shares purchased by "affiliates" of our company as that term is defined in Rule
144 under the Securities Act.
The remaining 19,497,128 shares of common stock held by existing
stockholders are "restricted shares" as that term is defined in Rule 144 and 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. On
, 1999, approximately restricted
shares will be eligible for resale, subject in some cases to compliance with the
volume limitations and other restrictions under Rule 144. In addition, on
, 1999, the lock-up agreements will expire as to
shares held by employees of our company.
Our officers, directors and other stockholders and the underwriters have
entered into lock-up agreements in connection with this offering. These lock-up
agreements provide that, with certain limited exceptions, the stockholder will
not offer, sell, contract to sell or otherwise dispose of any of our securities
that are substantially similar to our common stock, including but not limited to
any securities that are convertible into or exchangeable for, or that represent
the right to receive, our common stock or any such substantially similar
securities (other than pursuant to employee stock option plans existing on, or
upon the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of the lock-up agreement) for a period of 180 days
after the date of this prospectus without the prior written consent of Credit
Suisse First Boston Corporation. Upon expiration of the lock-up agreements,
approximately restricted shares will be eligible for
resale, subject in some cases to compliance with the volume limitations and
other restrictions under Rule 144. Of the remaining shares,
shares will become eligible for sale at various times from
, 1999 through , 2000 and
shares will become eligible for sale on
, 1999, subject in some cases to the volume and manner of
sale limitations under Rule 144. Any early release of the lock-up agreements by
Credit Suisse First Boston Corporation, which, if granted, could permit sales of
a substantial number of shares and could adversely affect the trading price of
our shares, may not be accompanied by an advance public announcement by our
company. In addition, certain holders of common stock have the right to include
their shares in any future registration of securities effected by our company
and to require our company to register their shares for future sale, subject to
certain exceptions.
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<PAGE> 76
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned Restricted Shares for at
least one year (including the holding period of any prior owner except an
affiliate) would be entitled to sell within any three-month period a number of
shares that does not exceed the greater of: (i) 1% of the number of shares of
common stock then outstanding (which will equal approximately
shares immediately after this offering); or (ii) the
average weekly trading volume of the common stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about our
company. Under Rule 144(k), a person who is not deemed to have been an affiliate
of our company at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701, as currently in effect, permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions, including the
holding period requirement, of Rule 144. Any employee, officer or director of or
consultant to our company who purchased shares pursuant to a written
compensatory plan or contract may be entitled to rely on the resale provisions
of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under
Rule 144 without complying with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144. All holders of
Rule 701 shares who have not executed lock-up agreements in connection with this
offering will be able to sell such shares beginning on ,
1999.
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<PAGE> 77
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.............................................
========
</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 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>
Total
--------------------------------
Without With
Per Share Over-allotment Over-allotment
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting Discounts and Commissions
paid by us............................. $ $ $
Expenses payable by us................. $ $ $
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
We and our executive officers, directors and certain other securityholders
of Gadzoox have agreed not to offer, sell, contract to sell, announce an
intention to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission a registration statement under
the Securities Act relating to, any shares of common stock or securities
convertible into or exchangeable or exercisable for any common stock without the
prior written consent of Credit Suisse First Boston Corporation for a period of
180 days after the date of this prospectus.
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<PAGE> 78
The underwriters have reserved for sale, at the initial public offering
price up to shares of the common stock for employees,
directors and certain other persons associated with us who have expressed an
interest in purchasing common stock in this offering. The number of shares
available for sale to the general public in this offering will be reduced to the
extent these persons purchase the reserved shares. Any reserved shares not so
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or contribute to payments which the underwriters may be required
to make in that respect.
We have applied to list the shares of common stock on The Nasdaq Stock
Market's National Market under the symbol "ZOOX."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be determined by negotiation
between us and the underwriters. The principal factors to be considered in
determining the public offering price include: the information in this
prospectus and otherwise available to the underwriters; the history and the
prospects for the industry in which we will compete; the ability of our
management; the prospects for our future earnings; the present state of our
development and our current financial condition; the general condition of the
securities markets at the time of this offering; and the recent market prices
of, and the demand for, publicly traded common stock of generally comparable
companies.
The representatives, may engage in over-allotment, stabilizing
transactions, syndicate covering transactions and penalty bids in accordance
with Regulation M under the Exchange Act. Over-allotment involves syndicate
sales in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so long
as the stabilizing bids do not exceed a specified maximum. Syndicate covering
transactions involve purchases of the common stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the representatives to reclaim a selling concession from a
syndicate member when the common stock originally sold by the syndicate member
are purchased in a syndicate covering transaction to cover syndicate short
positions. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
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<PAGE> 79
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.
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<PAGE> 80
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult with their own legal and
tax advisors with respect to the tax consequences of an investment in our common
stock in their particular circumstances and with respect to the eligibility of
our common stock for investment by the purchaser under relevant Canadian
legislation.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for
Gadzoox by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California. Certain legal matters will be passed upon for the Underwriters
by Morrison & Foerster LLP. As of the date of this prospectus, WS Investment
Company 95B an investment partnership composed of certain current and former
members of and persons associated with Wilson Sonsini Goodrich & Rosati,
Professional Corporation, in addition to certain current individual members of
Wilson Sonsini Goodrich & Rosati, Professional Corporation, beneficially own an
aggregate of 39,138 shares of Gadzoox common stock.
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective February 1998, Arthur Andersen LLP was engaged as our independent
accountants and replaced other auditors who were dismissed as our independent
accountants on the same date. The decision to change accountants was approved by
our board of directors. Arthur Andersen LLP's reports for each of the three
years in the period ended March 31, 1999, did not contain an adverse opinion or
disclaimer of opinion qualified or modified as to any uncertainty, audit scope
or accounting principle. During our last two fiscal years, there were no
disagreements with our former auditors on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of our former auditors, would
have caused them to make reference thereto in any of their reports. Our former
auditors have not audited or reported on any of the financial statements
included in this prospectus. Prior to February 1998, we had not consulted with
Arthur Andersen LLP on items that involved our accounting principles or the form
of audit opinion to be issued on our financial statements.
EXPERTS
The audited financial statements and schedule included in this prospectus
and elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-1. This prospectus, which forms a part of the Registration
Statement, does not contain all the information included in the Registration
Statement. Certain information is omitted and you should refer to the
Registration Statement and its exhibits. With respect to references made in this
prospectus to any contract or other document of Gadzoox, such references are not
necessarily complete and you should refer
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<PAGE> 81
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.
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<PAGE> 82
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> 83
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> 84
GADZOOX NETWORKS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, 1999
MARCH 31, PRO FORMA
------------------- STOCKHOLDERS'
1998 1999 EQUITY (NOTE 9)
-------- -------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 4,624 $ 12,202
Accounts receivable, net of allowance of $65 and $150,
respectively........................................... 3,424 5,981
Inventories............................................... 3,463 5,306
Prepaid expenses and other current assets................. 221 305
-------- --------
Total current assets.............................. 11,732 23,794
Property and equipment, net................................. 3,125 4,553
Other assets................................................ 85 251
-------- --------
$ 14,942 $ 28,598
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable........................... $ 345 $ 371
Current portion of capital lease obligations.............. 550 1,080
Accounts payable.......................................... 3,302 4,488
Compensation related accruals............................. 767 705
Deferred revenue and other................................ 383 1,238
-------- --------
Total current liabilities......................... 5,347 7,882
Convertible note............................................ -- 13,554
Note payable, net of current portion........................ 567 196
Capital lease obligations, net of current portion........... 859 1,307
-------- --------
Total liabilities................................. 6,773 22,939
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity:
Convertible preferred stock, $0.005 par value; aggregate
liquidation preference of $34,219 as of March 31, 1999;
12,256,064, 16,500,000 and 10,000,000 shares authorized
in 1998, 1999 and pro forma, respectively; 12,227,822
and 13,907,399 shares issued and outstanding in 1998
and 1999, respectively, and no shares outstanding pro
forma.................................................. 60 69 $ --
Common stock, $0.005 par value; 40,000,000 shares
authorized in 1998 and 1999, respectively, 150,000,000
authorized pro forma; 5,078,328 and 5,589,729 shares
issued and outstanding in 1998 and 1999, respectively,
19,497,128 shares outstanding pro forma................ 26 28 97
Additional paid-in capital................................ 21,245 37,081 37,081
Deferred compensation..................................... -- (2,425) (2,425)
Accumulated deficit....................................... (13,162) (29,094) (29,094)
-------- -------- --------
Total stockholders' equity........................ 8,169 5,659 $ 5,659
-------- -------- ========
$ 14,942 $ 28,598
======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-3
<PAGE> 85
GADZOOX NETWORKS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
---------------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Net revenues................................. $ 823 $ 9,811 $ 24,821
Cost of revenues............................. 483 7,898 18,638
------- -------- --------
Gross margin............................ 340 1,913 6,183
------- -------- --------
Operating expenses:
Research and development................... 2,168 7,178 13,928
Sales and marketing........................ 1,126 2,974 5,765
General and administrative................. 902 1,774 1,649
Amortization of deferred compensation...... -- -- 547
------- -------- --------
Total operating expenses................ 4,196 11,926 21,889
------- -------- --------
Loss from operations......................... (3,856) (10,013) (15,706)
------- -------- --------
Other income (expense), net:
Sale of electronic testing equipment
rights, net............................. 1,508 -- --
Interest income............................ 264 524 489
Interest and other expense................. (5) (151) (715)
------- -------- --------
Total other income (expense), net....... 1,767 373 (226)
------- -------- --------
Net loss..................................... $(2,089) $ (9,640) $(15,932)
======= ======== ========
Basic net loss per share..................... $ (0.59) $ (2.41) $ (3.33)
======= ======== ========
Weighted average shares used in computing
basic net loss per share................... 3,551 3,995 4,789
======= ======== ========
Pro forma basic net loss per share
(unaudited)................................ $ (0.91)
========
Weighted average shares used in computing pro
forma basic net loss per share
(unaudited)................................ 17,594
========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-4
<PAGE> 86
GADZOOX NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED
STOCK COMMON STOCK ADDITIONAL TOTAL
--------------------- ------------------ PAID-IN DEFERRED ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
----------- ------- --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31,
1996..................... 5,691,144 $28 4,152,000 $21 $ 3,243 $ -- $ (1,433) $ 1,859
Issuance of common stock
for cash............... -- -- 1,236,650 6 87 -- -- 93
Repurchase of common
stock for cash......... -- -- (400,000) (2) (8) -- -- (10)
Issuance of preferred
stock for cash, net.... 4,444,444 22 -- -- 7,945 -- -- 7,967
Net loss................. -- -- -- -- -- -- (2,089) (2,089)
---------- --- --------- --- ------- ------- -------- --------
BALANCE AT MARCH 31,
1997..................... 10,135,588 50 4,988,650 25 11,267 -- (3,522) 7,820
Issuance of common stock
for cash............... -- -- 146,000 1 51 -- -- 52
Repurchase of common
stock for cash......... -- -- (56,322) -- (1) -- -- (1)
Issuance of preferred
stock for cash, net.... 2,092,234 10 -- -- 9,928 -- -- 9,938
Net loss................. -- -- -- -- -- -- (9,640) (9,640)
---------- --- --------- --- ------- ------- -------- --------
BALANCE AT MARCH 31,
1998..................... 12,227,822 60 5,078,328 26 21,245 -- (13,162) 8,169
Issuance of common stock
for cash............... -- -- 511,401 2 128 -- -- 130
Deferred compensation.... -- -- -- -- 2,972 (2,972) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 547 -- 547
Issuance of preferred
stock for cash, net.... 1,436,883 8 -- -- 10,881 -- -- 10,889
Issuance of preferred
stock upon partial
conversion of
convertible note....... 242,694 1 -- -- 1,855 -- -- 1,856
Net loss................. -- -- -- -- -- -- (15,932) (15,932)
---------- --- --------- --- ------- ------- -------- --------
BALANCE AT MARCH 31,
1999..................... 13,907,399 $69 5,589,729 $28 $37,081 $(2,425) $(29,094) $ 5,659
========== === ========= === ======= ======= ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-5
<PAGE> 87
GADZOOX NETWORKS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-----------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(2,089) $ (9,640) $(15,932)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 149 730 1,739
Amortization of deferred compensation......... -- -- 547
Allowance for doubtful accounts............... 50 15 85
Accrued interest.............................. -- -- 460
Loss on disposal of fixed assets.............. -- -- 181
Changes in current assets and liabilities:
Accounts receivable......................... (361) (3,093) (2,642)
Inventories................................. (309) (3,036) (1,843)
Prepaid expenses and other assets........... (40) (239) (250)
Accounts payable and accrued liabilities.... 713 3,490 1,939
------- -------- --------
Net cash used in operating activities.... (1,887) (11,773) (15,716)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.............. (807) (1,405) (1,598)
Purchases of available-for-sale securities....... (6,932) -- --
Proceeds from sale of available-for-sale
securities.................................... 500 6,920 --
------- -------- --------
Net cash provided by (used in) investing
activities............................ (7,239) 5,515 (1,598)
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible note................... -- -- 15,000
Proceeds from note payable....................... -- 1,082 --
Payments on note payable......................... -- (170) (345)
Payments on capital lease obligations............ (18) (166) (782)
Proceeds from issuance of common stock........... 93 52 130
Repurchase of common stock....................... (10) (1) --
Proceeds from issuance of convertible preferred
stock, net.................................... 7,967 9,938 10,889
------- -------- --------
Net cash provided by financing
activities............................ 8,032 10,735 24,892
------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (1,094) 4,477 7,578
Cash and cash equivalents at beginning of year..... 1,241 147 4,624
------- -------- --------
Cash and cash equivalents at end of year........... $ 147 $ 4,624 $ 12,202
======= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest........................... $ 4 $ 54 $ 240
======= ======== ========
Property and equipment acquired under capital
lease obligations............................. $ 61 $ 1,532 $ 1,750
======= ======== ========
Partial conversion of convertible note to
convertible preferred stock................... $ -- $ -- $ 1,856
======= ======== ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
financial statements.
F-6
<PAGE> 88
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
1. BACKGROUND
Gadzoox Networks, Inc. ("Gadzoox" or the "Company"), formerly Gadzoox
Microsystems, Inc., was incorporated in the state of California on April 2, 1992
and was reincorporated in Delaware on January 6, 1998 (see Note 2). The Company
is a provider of products for storage area networks ("SANs"). The Company's SAN
products are designed to leverage the capabilities of fibre channel technology
to enable companies to better manage the growth in mission-critical data by
overcoming the limitations of traditional captive storage architecture and
creating a foundation for data centralization.
The Company is subject to a number of risks associated with companies in a
similar stage of development, including reliance on a limited number of key
customers, reliance on a limited number of products, the emergence and
volatility of the storage industry, reliance on a limited number of key
suppliers, dependency on key employees for technology, potential competition
from larger, more established companies, the ability to penetrate the market
with new products, and the ability to obtain adequate financing to support its
growth.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Gadzoox considers all highly liquid investments with an original maturity
of 90 days or less to be cash equivalents. Cash equivalents at March 31, 1998
and 1999 consist of cash deposited in money market accounts.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Gadzoox to concentrations of
credit risk consist principally of bank deposits and accounts receivable. The
Company places its cash and cash equivalents in checking and money market
accounts in high credit quality financial institutions. The Company's accounts
receivable are derived primarily from sales to original equipment manufacturer
customers and distribution channel partners, located primarily in the U.S., who
are generally large, well established companies. The Company performs ongoing
credit evaluations of its customers and maintains an allowance for potential
doubtful accounts.
F-7
<PAGE> 89
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
At March 31, 1998 and 1999, approximately 83% and 76%, respectively, of
accounts receivable were concentrated with four customers, as follows:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Customer A............................... 59% 44%
Customer B*.............................. 11% 32%
Customer C............................... 13% --%
</TABLE>
- -------------------------
* Data for Customer B reflects the combined accounts receivable for two
customers who merged during fiscal 1999.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Provisions, when required, are made to reduce excess and obsolete
inventories to their estimated net realizable values.
The Company's supplier arrangement for the production of wafers is
concentrated with one key supplier (the "Supplier"). Although there are a number
of other suppliers that could provide similar services, a change in suppliers
could cause a delay in manufacturing and possible loss of sales, which could
adversely affect operating results.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciation and amortization
are provided using the straight-line method based upon the estimated useful
lives of the related assets. Useful lives range from three to five years, or
over the applicable lease term. The components of property and equipment at
March 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ -------
<S> <C> <C>
Computer and laboratory equipment................... $2,407 $ 4,161
Software............................................ 787 1,678
Furniture and equipment............................. 551 809
Leasehold improvements.............................. 299 393
Construction in progress............................ -- 80
------ -------
4,044 7,121
Accumulated depreciation and amortization........... (919) (2,568)
------ -------
Property and equipment, net......................... $3,125 $ 4,553
====== =======
</TABLE>
Included in property and equipment are assets acquired under capital lease
obligations with an original cost of approximately $1,593,000 and $3,370,000, as
of March 31, 1998 and 1999, respectively. Related accumulated amortization of
these leased assets was approximately $213,000 and $1,043,000 as of March 31,
1998 and 1999, respectively.
During fiscal 1999, Gadzoox moved to new headquarter facilities and is
taking steps to fully sublet its previous facilities. Management anticipates
that the sublease income will approximate the Company's lease expense related to
the previous facility. At the time of
F-8
<PAGE> 90
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
the move, the Company disposed of improvements made to the prior facility that
had an original cost of $271,000 and accumulated amortization of $90,000.
REVENUE RECOGNITION
Gadzoox records product revenue upon shipment, with the exception of sales
to several distribution channel partners where product returns cannot be
reasonably estimated. Where product returns cannot be reasonably estimated,
revenue is recognized upon sell-through to the end user by the distribution
channel partner. Allowances for estimated sales returns are provided at the time
of revenue recognition.
WARRANTY
Gadzoox warrants its products against defects in materials and workmanship
for one to three year periods. The estimated cost of warranty obligations is
recognized at the time of revenue recognition.
STOCK-BASED COMPENSATION
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS No. 123"), in October 1995. SFAS No. 123
permits the use of either a fair value based method or the method defined in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") to account for stock-based compensation arrangements.
Companies that elect to employ the valuation method provided in APB 25 are
required to disclose the pro forma net income (loss) that would have resulted
from the use of the fair value based method. Gadzoox has elected to continue to
determine the value of stock-based compensation arrangements under the
provisions of APB 25, and, accordingly, it has included the pro forma
disclosures required under SFAS No. 123 in Note 10.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Cost of Computer Software to be Sold, Leased, or Otherwise
Marketed", development costs incurred in the research and development of new
software products are expensed as incurred until technological feasibility in
the form of a working model has been established. To date, Gadzoox' software
development has been completed concurrent with the establishment of
technological feasibility and, accordingly, all software development costs have
been charged to research and development expense in the accompanying statements
of operations.
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.
F-9
<PAGE> 91
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
In May 1997, the Company's Board of Directors approved the reincorporation
of the Company in Delaware. Upon reincorporation, the Company issued new shares
with a par value of $0.005 per share to all convertible preferred and common
shareholders. All convertible preferred and common share amounts in the
accompanying financial statements have been adjusted retroactively to give
effect to this change.
BASIC NET LOSS PER SHARE AND PRO FORMA BASIC NET LOSS PER SHARE
Historical net loss per share has been calculated under Statement of
Financial Accounting Standards No. 128, "Earnings Per Share." Basic net loss per
share on a historical basis is computed using the weighted average number of
shares of common stock outstanding. No diluted loss per share information has
been presented in the accompanying statements of operations since potential
common shares from conversion of the convertible note, convertible preferred
stock, stock options, and warrants are antidilutive. The total number of shares
excluded from diluted loss per share relating to these securities was
12,882,458, 16,481,009 and 20,256,699 shares for fiscal 1997, 1998 and 1999,
respectively.
Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin No. 98, convertible preferred stock and common stock issued or granted
for nominal consideration prior to the anticipated effective date of the initial
public offering must be included in the calculation of basic and diluted net
loss per common share as if they had been outstanding for all periods presented.
To date, Gadzoox has not had any issuances or grants for nominal consideration.
Pro forma basic net loss per share has been calculated assuming the
conversion of convertible preferred stock into an equivalent number of common
shares, as if the shares had converted on the dates of their issuance.
F-10
<PAGE> 92
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
The following table presents the calculation of basic and pro forma basic
net loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
----------------------------
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Net loss................................. $(2,089) $(9,640) $(15,932)
======= ======= ========
Basic:
Weighted average shares of common stock
outstanding............................ 4,936 4,980 5,374
Less: Weighted average shares of common
stock subject to repurchase............ (1,385) (985) (585)
------- ------- --------
Weighted average shares used in computing
basic net loss per share............... 3,551 3,995 4,789
======= ======= ========
Basic net loss per share................. $ (0.59) $ (2.41) $ (3.33)
======= ======= ========
Pro forma:
Net loss................................. $(15,932)
========
Shares used above........................ 4,789
Pro forma adjustment to reflect weighted
average effect of assumed conversion of
convertible preferred stock
(unaudited)............................ 12,805
--------
Weighted average shares used in computing
pro forma basic net loss per share
(unaudited)............................ 17,594
========
Pro forma basic net loss per share
(unaudited)............................ $ (0.91)
========
</TABLE>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Comprehensive Income." ("SFAS No. 130"), which was adopted by Gadzoox in fiscal
1999. SFAS No. 130 requires companies to report a new, additional measure of
income on the statement of operations or to create a new financial statement
that has the new measure of income on it. "Comprehensive Income" is to include
amounts which have been previously excluded from net income and reflected
instead in stockholders' equity. Comprehensive loss for each of the three years
in the period ended March 31, 1999 approximated net loss.
In June 1997, the Financial Accounting Standards Board also issued SFAS No.
131 "Disclosures About Segments of an Enterprise and Related Information" ("SFAS
No. 131"). Gadzoox adopted SFAS No. 131 in fiscal 1999. SFAS No. 131 establishes
standards for disclosures about operating segments, products and services,
geographic areas and significant customers. Gadzoox is organized and operates as
one operating segment: the design, development, manufacturing, marketing and
selling of SAN products. For fiscal 1997, 1998 and 1999, product net revenues
amounted to 95%, 99% and 98%, respectively,
F-11
<PAGE> 93
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
of total net revenues. Gadzoox sells its SAN products domestically and
internationally. See Note 3 regarding significant customers and export sales.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 98-1 "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use" ("SOP No. 98-1"). SOP
No. 98-1 requires entities to capitalize certain costs related to internal-use
software once certain criteria has been met. Gadzoox adopted SOP No. 98-1 in
fiscal 1999. The adoption did not have a material impact on Gadzoox's financial
position or results of operations.
In April 1998, the AICPA issued SOP No. 98-5 "Reporting on the Costs of
Start-Up Activities" ("SOP No. 98-5"). SOP No. 98-5 requires that all start-up
costs related to new operations must be expensed as incurred. In addition, all
start-up costs that were previously capitalized must be written off when SOP No.
98-5 is adopted. Gadzoox adopted SOP No. 98-5 in fiscal 1999. The adoption did
not have a material impact on Gadzoox's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
SFAS No. 133 will be effective for Gadzoox on July 1, 1999. SFAS No. 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. Because the Company does not currently hold
any derivative instruments and does not engage in hedging activities, management
does not believe that the adoption of SFAS No. 133 will have a material impact
on the Company's financial position or results of operations.
In December 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions," ("SOP
98-9"). SOP 98-9 amends SOP 97-2 and SOP 98-4 by extending the deferral of the
application of certain provisions of SOP 97-2, amended by SOP 98-4, through
fiscal years beginning on or before March 15, 1999. All other provisions of SOP
98-9 are effective for transactions entered into in fiscal years beginning after
March 15, 1999. Management does not expect the adoption of SOP 98-9 to have a
significant effect on the Company's financial position or results of operations.
3. SIGNIFICANT CUSTOMERS AND EXPORT SALES
For the years ended March 31, 1997, 1998 and 1999, certain customers
individually accounted for more than 10% of net revenues as follows:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
--------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Customer A................................ 18% 58% 42%
Customer B................................ -- -- 15%
Customer C................................ -- 11% 10%
Customer D................................ 16% -- --
</TABLE>
F-12
<PAGE> 94
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
Sales to Europe and Japan represented approximately 17% (Germany comprising
12%) and 3%, respectively, of net revenues for fiscal 1999. In years prior to
fiscal 1999, export sales were less than 10% of net revenues.
4. INVENTORIES
Inventories consist of the following as of March 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Raw materials.................................. $1,539 $2,565
Work-in-process................................ 1,730 210
Finished goods................................. 194 2,531
------ ------
$3,463 $5,306
====== ======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS
During fiscal 1998 and 1999, Gadzoox acquired certain equipment under
capital leases. Additionally, the Company leases three facilities under
non-cancelable operating leases which expire November 1999, January 2002 and
November 2005. Future minimum lease payments under all capital and operating
lease agreements as of March 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
2000........................................ $1,206 $1,358
2001........................................ 1,042 1,477
2002........................................ 332 1,531
2003........................................ 3 1,486
2004........................................ -- 1,256
Thereafter.................................. -- 2,186
------ ------
2,583 $9,294
======
Less amounts representing interest (weighted
average interest rate of 7.25%)........... (196)
------
Present value of minimum lease payments..... 2,387
Less: current portion....................... 1,080
------
Non-current portion......................... $1,307
======
</TABLE>
For the years ended March 31, 1997, 1998 and 1999, rent expense under non-
cancelable operating lease agreements was approximately $144,000, $382,000 and
$781,000, respectively.
LEGAL PROCEEDINGS
From time to time, the Company may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business. For example,
in May 1999, a
F-13
<PAGE> 95
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
former employee filed a complaint against the Company. Management believes this
claim is without merit and that resolution of this claim will not have a
material adverse effect on the Company's financial position or statements of
operations. However, litigation is subject to inherent uncertainties, and an
adverse result in this or other matters may arise from time to time that may
harm the Company's business.
6. CONVERTIBLE NOTE
In September 1998, Gadzoox entered into a $15,000,000 convertible note
purchase agreement (the "Agreement") with Seagate Technology, Inc. ("Seagate").
Under this Agreement, Seagate purchased a convertible subordinated promissory
note in the aggregate principal amount of $15,000,000 (the "Convertible Note"),
bearing simple interest on the unpaid principal balance at a rate equal to 5.75%
per annum with principal and interest maturing in September 2001. As further
outlined and defined in the Agreement, the Company may convert, at its sole
option, any portion or all of the outstanding balance of principal and interest
on the Convertible Note into shares of Series G preferred stock at a price of
$7.65 per share. Accrued interest is converted prior to any principal owing
under the Convertible Note. The Agreement also provides that without the
Company's consent, conversion of the Convertible Note may not result in Seagate
holding more than 19.9% of the Company's outstanding shares. In the event of a
default, as defined in the Agreement, Seagate may declare all outstanding
interest and principal immediately due and payable in cash. Gadzoox may, upon 30
days written notice to Seagate, prepay the Convertible Note in whole or in part.
In October 1998, the Company converted $59,000 of interest and $1,797,000
of principal into 242,694 shares of Series G preferred stock. At March 31, 1999,
there was a total of $13,554,000 of unpaid principal and interest outstanding
under the Convertible Note which, if converted, would have converted into
1,771,759 shares of Series G preferred stock.
7. NOTE PAYABLE
In August 1997, the Company entered into a loan agreement (the "Note")
secured by equipment. The face amount of the Note was $1,082,000. The repayment
period is 36 months with 35 monthly payments of principal and interest of
approximately $33,000 and a final installment of approximately $162,000 due on
September 1, 2000. The Note bears interest at approximately 9.0% per annum. As
of March 31, 1999, principal maturities under the Note are $371,000 and $196,000
in fiscal 2000 and 2001, respectively.
8. REVOLVING CREDIT AGREEMENT
In January 1998, Gadzoox entered into a revolving credit agreement (the
"Line") with a bank, which provided for maximum borrowings of an amount not to
exceed the lower of 70% of eligible accounts receivable or $5,000,000. On March
15, 1999, the Company renewed the Line, which now expires on February 1, 2000.
Borrowings under the Line are secured by all of the Company's assets and bear
interest at the bank's prime rate plus 0.5% per annum (approximately 8.25% at
March 31, 1999). The agreement requires that the Company maintain certain
financial ratios and levels of tangible net worth and
F-14
<PAGE> 96
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
also restricts the Company's ability to pay cash dividends. During fiscal 1998
and 1999, there were no borrowings outstanding under the line.
9. CONVERTIBLE PREFERRED STOCK
Convertible preferred stock, at par, consists of the following as of March
31 1998 and 1999 (in thousands, except share information):
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Series A, 856,600 shares authorized, issued and outstanding
in 1999 and 1998, liquidation preference of $217.......... $ 4 $ 4
Series B, 660,000 shares authorized, issued and outstanding
in 1999 and 1998, liquidation preference of $250.......... 3 3
Series C, 1,454,544 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference of
$800...................................................... 7 7
Series D, 2,720,000 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference of
$2,103.................................................... 14 14
Series E, 4,444,444 shares authorized, issued and
outstanding in 1999 and 1998, liquidation preference of
$8,000.................................................... 22 22
Series F, 2,120,476 shares authorized in 1999 and 1998,
2,092,234 issued and outstanding in 1999 and 1998,
liquidation preference of $10,000......................... 10 10
Series G, 3,243,936 shares authorized in 1999 and none in
1998, 895,263 issued and outstanding in 1999 and none in
1998, liquidation preference of $6,849.................... -- 5
Series H, 1,000,000 shares authorized in 1999 and none in
1998, 784,314 issued and outstanding in 1999 and none in
1998, liquidation preference of $6,000.................... -- 4
--- ---
$60 $69
=== ===
</TABLE>
Series A, B, C, D, E, F, G and H convertible preferred stock (collectively,
the "preferred stock") are convertible into common stock at the option of the
shareholder on a one-for-one basis, subject to antidilution adjustments.
Conversion is mandatory concurrent with a firm underwritten public offering of
not less than $10,000,000 and with a per share price of not less than twice the
per share issuance price of Series A, B, C, D, and E and of not less than one
times the per share issuance price of Series F, G and H subject to adjustments.
The holders of the preferred stock have voting rights equal to the voting
rights of the common shareholders on an as-if converted basis.
Series A, B, C, D, E, F, G and H preferred shareholders are entitled to
receive noncumulative dividends, when and as declared by the Board of Directors,
at an annual amount of $0.02, $0.03, $0.045, $0.06, $0.145, $0.38, $0.612 and
$0.612 per share, respectively. No cash dividends have been declared to date by
the Board of Directors.
In the event of a liquidation, Series A, B, C, D, E, F, G and H preferred
shareholders are entitled to receive, prior to, and in preference to any
distribution to the holders of common stock, $0.25275, $0.37875, $0.55, $0.74,
$1.80, $4.78, $7.65 and $7.65 per share,
F-15
<PAGE> 97
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
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 1,771,759 shares of
Series G preferred stock (see Note 6) does not automatically occur in connection
with the IPO and, accordingly, such conversion is not reflected in the unaudited
pro forma stockholders' equity.
10. COMMON STOCK
At March 31, 1999, shares of common stock were reserved for future
issuances as follows:
<TABLE>
<S> <C>
1993 Stock Plan:
Outstanding options and rights................... 4,529,692
Reserved for future grants....................... 741,478
Conversion of preferred stock...................... 13,907,399
Conversion of Convertible Note..................... 1,771,759
Warrants to purchase Series F preferred stock...... 28,242
Warrants to purchase Series G preferred stock...... 19,607
----------
20,998,177
==========
</TABLE>
F-16
<PAGE> 98
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
STOCK OPTION PLAN
Under the 1993 Stock Plan (the "Plan"), Gadzoox may grant incentive stock
options to employees, nonstatutory stock options to employees, consultants and
nonemployee directors of the Company and stock purchase rights up to 7,680,000
shares of common stock. During the year ended March 31, 1999, the Board of
Directors increased the number of stock options available for future grant by
1,100,000. All incentive and nonstatutory stock option grants must be at prices
of at least 100% and 85%, respectively, of the fair value of the stock on the
date of grant, as determined by the Board of Directors.
The options are exercisable as determined by the Board of Directors.
Generally, stock options vest ratably over a four-year period except for options
granted to new employees which vest 25% on the first anniversary of the grant
date and vest ratably over the remaining three years. The options expire upon
the earlier of ten years from the date of grant or thirty days following
termination of employment. Stock purchase rights granted under the Plan must be
accepted within ninety days from the date of grant. Shares purchased pursuant to
the grant of a stock purchase right shall be subject to repurchase, and the
repurchase option shall lapse at a minimum rate of 20% per year.
A summary of transactions under the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING
OPTIONS AND RIGHTS
SHARES -----------------------------
AVAILABLE WEIGHTED-AVERAGE
FOR GRANT NUMBER EXERCISE PRICE
---------- ---------- ----------------
<S> <C> <C> <C>
Balance at March 31, 1996.............. 2,095,610 1,295,870 $0.074
Authorized........................... 1,551,120 -- --
Granted.............................. (2,691,650) 2,691,650 0.130
Cancelled............................ 4,000 (4,000) 0.025
Exercised............................ -- (1,236,650) 0.075
---------- ----------
Balance at March 31, 1997.............. 959,080 2,746,870 0.128
Authorized........................... 1,028,800 -- --
Granted.............................. (1,664,450) 1,664,450 0.877
Cancelled............................ 77,875 (77,875) 0.098
Exercised............................ -- (108,500) 0.091
Restricted shares repurchased........ 56,322 -- --
---------- ----------
Balance at March 31, 1998.............. 457,627 4,224,945 0.423
Authorized........................... 1,100,000 -- --
Granted.............................. (1,119,400) 1,119,400 2.759
Cancelled............................ 303,251 (303,252) 1.270
Exercised............................ -- (511,401) 0.235
---------- ----------
Balance at March 31, 1999.............. 741,478 4,529,692 0.969
========== ==========
</TABLE>
F-17
<PAGE> 99
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
The following table summarizes the stock options outstanding and
exercisable as of March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- ------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE NUMBER YEARS PRICE NUMBER PRICE
- ---------------- ------------ ----------- --------- ------------ ---------
<S> <C> <C> <C> <C> <C>
$0.025.......... 11,870 4.4 $0.025 11,870 $0.025
0.075 - $0.083... 1,251,500 6.9 0.076 878,667 0.075
0.18 - $0.27... 1,322,126 7.9 0.23 641,168 0.23
0.72........... 436,967 8.4 0.72 132,663 0.72
1.20........... 207,350 8.7 1.20 69,233 1.20
2.00........... 548,829 9.1 2.00 90,750 2.00
3.10........... 751,050 9.6 3.10 25,867 3.10
--------- ---------
4,529,692 0.969 1,850,218
========= =========
</TABLE>
At March 31, 1999, 391,667 shares previously issued under stock purchase
rights were subject to repurchase at a weighted-average price of $0.066.
VALUATION OF STOCK OPTIONS
Gadzoox has elected to follow APB 25, under which no compensation expense
is recognized when stock options are granted at a price equal to the fair market
value of the underlying shares on the date of grant. Had compensation expense
for the Plan been determined consistent with SFAS No. 123, the Company's pro
forma net loss (reflecting adjustment for compensation expense consistent with
SFAS No. 123) would have been $2,099,000, $9,741,000 and $16,129,000 in fiscal
1997, 1998 and 1999, respectively, and the Company's pro forma net loss per
share (reflecting adjustment for compensation expense consistent with SFAS No.
123) would have been $(0.59), $(2.44), and $(3.37) in fiscal 1997, 1998 and
1999, respectively.
The weighted-average fair value of options granted during fiscal 1997, 1998
and 1999 was $0.015, $0.22 and $0.49, respectively. To determine compensation
expense under SFAS No. 123, Gadzoox used the following assumptions to estimate
the fair value of each option granted on the date of grant using the
Black-Scholes option valuation model: risk-free interest rates ranging from 4.56
to 6.73 percent, expected dividend yields of zero percent, an average expected
life of 4 years, expected volatility of 0.01%.
DEFERRED COMPENSATION
In connection with the grant of certain stock options to employees during
fiscal 1999, Gadzoox recorded deferred compensation within stockholders' equity
of approximately $3.0 million, representing the difference between the estimated
fair value of the common stock for accounting purposes and the option exercise
price of these options at the date of grant. The Company recorded amortization
of deferred compensation of $547,000 during fiscal 1999. At March 31, 1999, the
remaining deferred compensation of approximately $2.4 million will be amortized
as follows: $1.3 million during fiscal 2000, $670,000 during
F-18
<PAGE> 100
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
fiscal 2001, $350,000 during fiscal 2002 and $120,000 during fiscal 2003,
respectively. The amortization expense relates to options awarded to employees
in all operating expense categories. The amortization of deferred compensation
has not been separately allocated to these categories. The amount of deferred
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.
11. SALE OF ELECTRONIC TEST EQUIPMENT RIGHTS
In November 1997, Gadzoox sold its rights to the high-speed parametric test
equipment to a third party for $1,550,000 and recorded $42,000 in expenses. As
part of the sale, a patent with no historical basis held by Gadzoox relating to
the testing technology was assigned to the third party.
12. RELATED PARTY TRANSACTIONS
The holder of the Series H convertible preferred stock (the "Series H
Holder") is a customer of the Company. During fiscal 1999, the Company entered
into a commercial relationship with the Series H Holder providing that the
Series H Holder would reimburse the Company for certain research efforts
undertaken by the Company. During fiscal 1999, the Company received
approximately $489,000 of such reimbursement which has been recorded within
Deferred Revenue and Other on the accompanying balance sheet as of March 31,
1999. In April 1999, the Series H Holder advised the Company of its intent to
exit the SAN market and divest its shares of Series H. The Company has a right
of first refusal for the purchase of the Series H. Management is currently
evaluating whether to exercise its repurchase rights and is negotiating with the
Series H Holder to terminate their commercial relationship. The deferred revenue
will not be recognized until the Company and the Series H Holder reach agreement
on the terms of terminating the commercial relationship. The Series H Holder
accounted for approximately 2% of the Company's net revenues for fiscal 1999.
Management does not anticipate that the termination of the commercial
relationship will have a material effect on the Company's financial position or
results of operations.
13. INCOME TAXES
Due to the Company's loss position, there was no provision for income taxes
for the years ended March 31, 1997, 1998 and 1999.
F-19
<PAGE> 101
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
The components of the net deferred tax asset at March 31, 1998 and 1999
were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- --------
<S> <C> <C>
Net operating loss carryforwards.......... $ 4,258 $ 9,555
Cumulative book to tax differences........ 964 1,751
Tax credit carryforwards.................. 649 1,699
------- --------
5,871 13,005
Valuation allowance....................... (5,871) (13,005)
------- --------
$ -- $ --
======= ========
</TABLE>
A valuation allowance has been recorded for the entire deferred tax asset
as a result of uncertainties regarding the realization of the asset balance due
to the variability of operating results. As of March 31, 1999, Gadzoox has net
cumulative operating loss carryforwards for Federal and state income tax
reporting purposes of approximately $26,759,000 and $3,324,000, respectively.
The Company also has Federal and state research and development tax credit
carryforwards of approximately $877,000 and $822,000, respectively The net
cumulative operating loss and credit carryforwards will expire at various dates
beginning in the years 1999 through 2014, if not utilized. Utilization of net
operating losses and credits may be subject to a substantial annual limitation
due to the ownership change limitations provided by the Internal Revenue Code of
1986, as amended, and similar state provisions. The annual limitation may result
in the expiration of net operating losses before utilization.
14. SUBSEQUENT EVENTS (UNAUDITED)
1999 EMPLOYEE STOCK PURCHASE PLAN
In May 1999, the Board of Directors approved the adoption of the Company's
1999 Employee Stock Purchase Plan (the "Stock Purchase Plan"), subject to
stockholder approval. A total of 150,000 shares of common stock have been
reserved for issuance under the Stock Purchase Plan. The number of shares
reserved for issuance under the Stock Purchase Plan will be subject to an annual
increase to be added on the first day of the Company's fiscal year, beginning in
2000, equal to the lesser of (i) 250,000 shares, (ii) 0.5% of the outstanding
shares on such date or (iii) a lesser amount determined by the Board of
Directors. The Stock Purchase Plan allows eligible employees to purchase shares
of common stock through payroll deductions at 85% of the fair market value of
the common stock.
1993 STOCK OPTION PLAN
In May 1999, the Board of Directors approved and adopted, subject to
stockholder approval and effective upon the closing of the proposed initial
public offering, an Amended and Restated 1993 Stock Option Plan (the "Amended
Plan"). Under the Amended Plan, the number of shares authorized for issuance is
increased to 8,180,000. The number of shares reserved for issuance under the
Amended Plan will be subject to an annual increase to be added on the first day
of the Company's fiscal year, beginning in 2000, equal to the
F-20
<PAGE> 102
GADZOOX NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
MARCH 31, 1999
lesser of (i) 1,500,000 shares, (ii) 1% of the outstanding shares on such date,
or (iii) a lesser amount determined by the Board of Directors.
1999 DIRECTOR STOCK OPTION PLAN
In May 1999, the Board of Directors approved the adoption of the 1999
Director Stock Option Plan (the "Director Plan") which provides for the
automatic grant of 5,000 shares of common stock to each non-employee director on
the later of the date of adoption of the Director Plan or the date on which such
person first becomes a director (the "Initial Grant"). After the Initial Grant,
the non-employee director will receive an automatic annual grant of 2,500 shares
of common stock. All shares granted under the Director Plan are 100% vested at
the grant date and expire upon the earlier of three years or the resignation of
the director from the Board of Directors. A total of 50,000 shares of common
stock have been reserved for issuance under the Director Plan. The number of
shares reserved for issuance under the Director Plan will be subject to an
annual increase, beginning with the fiscal year beginning in 2000, sufficient to
bring the number of shares available for future issuance to 50,000 shares.
F-21
<PAGE> 103
LOGO
<PAGE> 104
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........................................ $13,900
NASD filing fee............................................. 5,500
Nasdaq National Market listing fee.......................... 5,000
Printing and engraving costs................................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Blue Sky fees and expenses.................................. 25,000
Transfer Agent and Registrar fees........................... 5,000
Miscellaneous expenses......................................
-------
Total............................................. $
=======
</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
II-1
<PAGE> 105
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 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.
II-2
<PAGE> 106
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-listed transactions was exempt from any registration
requirements by virtue of Section 4(2) or Regulation D of the Securities Act, or
Rule 701 of the Securities Act for issuances of securities pursuant to
compensatory benefit plans and contracts relating to compensation.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- -------
<C> <S>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
4.1 Specimen Common Stock Certificate.*
4.2 First Amended and Restated Registration and Information
Rights Agreement, dated as of October 12, 1998.
4.3 Warrant to purchase shares of Series F Preferred Stock of
the Registrant issued to Comdisco, Inc.
4.4 Warrant to purchase shares of Series G Preferred Stock of
the Registrant issued to Comdisco, Inc.
4.5 First Amended and Restated Series F, G and H Preferred
Stockholders' Agreement, dated as of October 12, 1998.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.*
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2 Amended and Restated 1993 Stock Plan and form of agreements
thereunder.
10.3 1999 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4 1999 Director Option Plan and form of agreement thereunder.
10.5 Agreement for electronic manufacturing services between the
Registrant and Sanmina Corporation dated December 29, 1998.+
10.6 Convertible Subordinated Promissory Note, dated October 12,
1998, made by the Registrant and payable to Seagate
Technology, Inc.
10.7 Change of Control Agreement between Registrant and K.
William Sickler, as amended.
10.8 Change of Control Agreement between Registrant and Kent
Bridges.
10.9 Restricted Stock Purchase Agreement between Registrant and
K. William Sickler.
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.
II-3
<PAGE> 107
(b) Financial Statement Schedules
<TABLE>
<S> <C>
Schedule II -- Valuation and Qualifying Accounts............ S-2
</TABLE>
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> 108
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended, the
registrant has duly caused this Amendment No. 1 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Jose, State of California, on the 20th day of May, 1999.
GADZOOX NETWORKS, INC.
By: *
-----------------------------------
Bill Sickler, President,
Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* President, Chief May 20, 1999
- --------------------------------------------------- Executive Officer and
Bill Sickler Director (Principal
Executive Officer)
/s/ CHRISTINE E. MUNSON Chief Financial Officer, May 20, 1999
- --------------------------------------------------- Vice President of
Christine E. Munson Administration
(Principal Financial
Officer)
* Chief Technology Officer May 20, 1999
- --------------------------------------------------- and Director
Dr. Alistair Black
* Director May 20, 1999
- ---------------------------------------------------
Dr. Milton Chang
* Director May 20, 1999
- ---------------------------------------------------
Dr. Denny R. S. Ko
* Director May 20, 1999
- ---------------------------------------------------
Robert Kuhling
* Director May 20, 1999
- ---------------------------------------------------
Stephen J. Luzco
</TABLE>
II-5
<PAGE> 109
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
* Director May , 1999
- ---------------------------------------------------
Peter Morris
*By: /s/ CHRISTINE E. MUNSON
- ---------------------------------------------------
Christine E. Munson
Attorney-in-fact
</TABLE>
II-6
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER PAGE
- ------- ----
<C> <S> <C>
1.1 Form of Underwriting Agreement.*
3.1 Amended and Restated Certificate of Incorporation.
3.2 Amended and Restated Bylaws.
4.1 Specimen Common Stock Certificate.*
4.2 First Amended and Restated Registration and Information
Rights Agreement, dated as of October 12, 1998.
4.3 Warrant to purchase shares of Series F Preferred Stock of
the Registrant issued to Comdisco, Inc.
4.4 Warrant to purchase shares of Series G Preferred Stock of
the Registrant issued to Comdisco, Inc.
4.5 First Amended and Restated Series F, G and H Preferred
Stockholders' Agreement, dated as of October 12, 1998.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.*
10.1 Form of Indemnification Agreement between the Registrant and
each of its directors and officers.
10.2 Amended and Restated 1993 Stock Plan and form of agreements
thereunder.
10.3 1999 Employee Stock Purchase Plan and form of agreements
thereunder.
10.4 1999 Director Option Plan and form of agreement thereunder.
10.5 Agreement for electronic manufacturing services between the
Registrant and Sanmina Corporation dated December 29, 1998.+
10.6 Convertible Subordinated Promissory Note, dated October 12,
1998, made by the Registrant and payable to Seagate
Technology, Inc.
10.7 Change of Control Agreement between Registrant and K.
William Sickler, as amended.
10.8 Change of Control Agreement between Registrant and Kent
Bridges.
10.9 Restricted Stock Purchase Agreement between Registrant and
K. William Sickler.
16.1 Letter of Ernst & Young LLP.
23.1 Consent of Arthur Andersen LLP, Independent Accountants.
23.2 Consent of Counsel (see Exhibit 5.1).*
24.1 Power of Attorney.**
27.1 Financial Data Schedules.**
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment to be requested as to certain portions of this
exhibit.
<PAGE> 111
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Board of Directors and Stockholders
of Gadzoox Networks, Inc.
We have audited, in accordance with generally accepted auditing standards,
the financial statements of Gadzoox Networks, Inc. included in this Registration
Statement and have issued our report thereon dated April 30, 1999. Our audits
were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying schedule is the responsibility of
the Company's management and is presented for the purpose of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
San Jose, California
April 30, 1999
S-1
<PAGE> 112
GADZOOX NETWORKS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended March 31, 1997:
Allowance for returns and doubtful
accounts........................ $ -- $50,000 $ -- $ 50,000
Year ended March 31, 1998:
Allowance for returns and doubtful
accounts........................ $50,000 $15,000 $ -- $ 65,000
Year ended March 31, 1999:
Allowance for returns and doubtful
accounts........................ $65,000 $88,535 $3,535 $150,000
</TABLE>
S-2
<PAGE> 1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
GADZOOX NETWORKS, INC.
Gadzoox Networks, Inc., a corporation organized and existing under the
laws of the State of Delaware, hereby certifies as follows:
A. The name of the corporation is Gadzoox Networks, Inc. The
corporation was originally incorporated under the same name, and the original
Certificate of Incorporation of the corporation was filed with the Secretary of
State of the State of Delaware on August 26, 1997.
B. This Amended and Restated Certificate of Incorporation has been
duly adopted in accordance with the provisions of the General Corporation Law of
the State of Delaware by the Board of Directors and the Stockholders of the
corporation.
C. Pursuant to Sections 242 and 245 of the General Corporation Law
of the State of Delaware, this Certificate of Incorporation restates and
integrates and further amends the provisions of the Certificate of Incorporation
of this corporation.
D. The text of the Certificate of Incorporation is hereby amended
and restated in its entirety to read as follows:
ARTICLE I
The name of the corporation is Gadzoox Networks, Inc. (the
"Corporation").
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is 1209 Orange Street, in the City of Wilmington, Delaware 19801,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of Delaware.
<PAGE> 2
ARTICLE IV
(a) This Corporation is authorized to issue two classes of shares to
be designated, respectively, Common Stock and Preferred Stock. The total number
of shares of Common Stock which this Corporation shall have the authority to
issue shall be 150,000,000, $.005 par value, and the total number of shares of
Preferred Stock this Corporation shall have authority to issue shall be
10,000,000, $.005 par value.
(b) The Preferred Stock may be issued from time to time in one or
more series pursuant to a resolution or resolutions providing for such issue
duly adopted by the Board of Directors (authority to do so being hereby
expressly vested in the Board of Directors). The Board of Directors is further
authorized to determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock and to fix the number of shares of any series of Preferred Stock and the
designation of any such series of Preferred Stock. The Board of Directors,
within the limits and restrictions stated in any resolution or resolutions of
the Board of Directors originally fixing the number of shares constituting any
series, may increase or decrease (but not below the number of shares in any such
series then outstanding) the number of shares of any series subsequent to the
issue of shares of that series.
ARTICLE V
The Corporation is to have perpetual existence.
ARTICLE VI
Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
ARTICLE VII
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation.
ARTICLE VIII
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
-2-
<PAGE> 3
ARTICLE IX
(a) To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director of
the Corporation shall be indemnified by the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director.
(b) The Corporation shall indemnify to the fullest extent permitted
by law any person made or threatened to be made a party to an action or
proceeding, whether criminal, civil, administrative or investigative, by reason
of the fact that he, his testator or intestate is or was a director, officer or
employee of the Corporation or any predecessor of the Corporation or serves or
served at any other enterprise as a director, officer or employee at the request
of the Corporation or any predecessor to the Corporation.
(c) Neither any amendment nor repeal of this Article IX, nor the
adoption of any provision of this Corporation's Certificate of Incorporation
inconsistent with this Article IX, shall eliminate or reduce the effect of this
Article IX, in respect of any matter occurring, or any action or proceeding
accruing or arising or that, but for this Article IX, would accrue or arise,
prior to such amendment, repeal or adoption of an inconsistent provision.
ARTICLE X
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE XI
Vacancies created by the resignation of one or more members of the Board
of Directors and newly created directorships, created in accordance with the
Bylaws of this Corporation, may be filled by the vote of a majority, although
less than a quorum, of the directors then in office, or by a sole remaining
director.
ARTICLE XII
Advance notice of new business and stockholder nominations for the
election of directors shall be given in the manner and to the extent provided in
the Bylaws of the Corporation.
ARTICLE XIII
Stockholders shall not be entitled to cumulative voting rights.
-3-
<PAGE> 4
ARTICLE XIV
No action shall be taken by the stockholders of the Corporation except
at an annual or special meeting of the stockholders called in accordance with
the Bylaws, and no action shall be taken by the stockholders by written consent.
ARTICLE XV
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
ARTICLE XVI
Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law that might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the voting stock required by law, this Certificate
of Incorporation or any rights of designation of Preferred Stock conferred on
the Board of Directors pursuant to Article IV, the affirmative vote of the
holders of at least 66 2/3% of the voting power of all of the then-outstanding
shares of voting stock, voting together as a single class, shall be required to
alter, amend or repeal Article XIII, Article XIV or this Article XVI.
-4-
<PAGE> 5
IN WITNESS WHEREOF, the Company has caused this Amended and Restated
Certificate of Incorporation to be signed by Christine E. Munson, its Chief
Financial Officer, effective as of May __, 1999.
GADZOOX NETWORKS, INC.
By:
-------------------------------------
Christine E. Munson
Chief Financial Officer and
Assistant Secretary
-5-
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
GADZOOX NETWORKS, INC.
A DELAWARE CORPORATION
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE I CORPORATE OFFICES......................................................................1
1.1 REGISTERED OFFICE.................................................................1
1.2 OTHER OFFICES.....................................................................1
ARTICLE II MEETINGS OF STOCKHOLDERS..............................................................1
2.1 PLACE OF MEETINGS.................................................................1
2.2 ANNUAL MEETING....................................................................1
2.3 SPECIAL MEETING...................................................................1
2.4 NOTICE OF STOCKHOLDERS' MEETINGS..................................................2
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS...................2
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE......................................3
2.7 QUORUM............................................................................3
2.8 ADJOURNED MEETING; NOTICE.........................................................4
2.9 VOTING............................................................................4
2.10 WAIVER OF NOTICE..................................................................4
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING...........................4
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS.......................4
2.13 PROXIES...........................................................................5
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE.............................................5
2.15 CONDUCT OF BUSINESS...............................................................5
ARTICLE III DIRECTORS............................................................................6
3.1 POWERS............................................................................6
3.2 NUMBER............................................................................6
3.3 CLASSES OF DIRECTORS..............................................................6
3.4 RESIGNATION AND VACANCIES.........................................................6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..........................................7
3.6 REGULAR MEETINGS..................................................................8
3.7 SPECIAL MEETINGS; NOTICE..........................................................8
3.8 QUORUM............................................................................8
3.9 WAIVER OF NOTICE..................................................................8
3.10 ADJOURNED MEETING; NOTICE.........................................................9
3.11 CONDUCT OF BUSINESS...............................................................9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING.................................9
3.13 FEES AND COMPENSATION OF DIRECTORS................................................9
3.14 REMOVAL OF DIRECTORS..............................................................9
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE IV COMMITTEES...........................................................................10
4.1 COMMITTEES OF DIRECTORS..........................................................10
4.2 COMMITTEE MINUTES................................................................10
4.3 MEETINGS AND ACTION OF COMMITTEES................................................10
ARTICLE V OFFICERS..............................................................................11
5.1 OFFICERS.........................................................................11
5.2 APPOINTMENT OF OFFICERS..........................................................11
5.3 REMOVAL AND RESIGNATION OF OFFICERS..............................................11
5.4 CHAIRMAN OF THE BOARD............................................................12
5.5 CHIEF EXECUTIVE OFFICER..........................................................12
5.6 PRESIDENT........................................................................12
5.7 VICE PRESIDENT...................................................................12
5.8 SECRETARY........................................................................13
5.9 CHIEF FINANCIAL OFFICER..........................................................13
5.10 ASSISTANT SECRETARY..............................................................13
5.11 AUTHORITY AND DUTIES OF OFFICERS.................................................14
ARTICLE VI INDEMNITY............................................................................14
6.1 THIRD PARTY ACTIONS..............................................................14
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION....................................14
6.3 SUCCESSFUL DEFENSE...............................................................15
6.4 DETERMINATION OF CONDUCT.........................................................15
6.5 PAYMENT OF EXPENSES IN ADVANCE...................................................15
6.6 INDEMNITY NOT EXCLUSIVE..........................................................15
6.7 INSURANCE INDEMNIFICATION........................................................15
6.8 THE CORPORATION..................................................................16
6.9 EMPLOYEE BENEFIT PLANS...........................................................16
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES......................16
ARTICLE VII RECORDS AND REPORTS.................................................................16
7.1 MAINTENANCE AND INSPECTION OF RECORDS............................................16
7.2 INSPECTION BY DIRECTORS..........................................................17
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS...................................17
ARTICLE VIII GENERAL MATTERS....................................................................17
8.1 CHECKS...........................................................................17
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.................................18
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES...........................................18
8.4 SPECIAL DESIGNATION ON CERTIFICATES..............................................18
8.5 LOST CERTIFICATES................................................................19
8.6 CONSTRUCTION; DEFINITIONS........................................................19
8.7 DIVIDENDS........................................................................19
8.8 FISCAL YEAR......................................................................19
8.9 SEAL.............................................................................20
8.10 TRANSFER OF STOCK................................................................20
8.11 STOCK TRANSFER AGREEMENTS........................................................20
8.12 REGISTERED STOCKHOLDERS..........................................................20
ARTICLE IX AMENDMENTS...........................................................................20
ARTICLE X DISSOLUTION...........................................................................21
ARTICLE XI CUSTODIAN............................................................................21
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES......................................21
11.2 DUTIES OF CUSTODIAN..............................................................22
ARTICLE XII LOANS TO OFFICERS...................................................................22
</TABLE>
-iii-
<PAGE> 5
BYLAWS
OF
GADZOOX NETWORKS, INC.
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the Corporation shall be 1209 Orange Street, in
the City of Wilmington, County of New Castle, State of Delaware, 19801. The name
of the registered agent of the Corporation at such location is The Corporation
Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any
place or places where the Corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside
the State of Delaware, designated by the board of directors. In the absence of
any such designation, stockholders' meetings shall be held at the registered
office of the Corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and
at a time designated by the board of directors. At the meeting, directors shall
be elected and any other proper business may be transacted.
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
(i) board of directors, (ii) the chairman of the board, (iii) the president,
(iv) the chief executive officer, or (v) one or more stockholders holding a
majority of the outstanding voting shares.
If a special meeting is called by any person other than the board of
directors, the request shall be in writing, specifying the time of such meeting
and the general nature of the business proposed to be transacted, and shall be
delivered personally or sent by registered mail or by telegraphic or other
facsimile transmission to the chairman of the board, the president, any vice
president, or the
<PAGE> 6
secretary of the corporation. No business may be transacted at such special
meeting otherwise than specified in such notice. The officer receiving the
request shall cause notice to be promptly given to the stockholders entitled to
vote, in accordance with the provisions of Sections 2.4 and 2.5 of this Article
II, that a meeting will be held at the time requested by the person or persons
who called the meeting, not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after the receipt of the request, the person or persons requesting the
meeting may give the notice. Nothing contained in this paragraph of this Section
3 shall be construed as limiting, fixing, or affecting the time when a meeting
of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall
be sent or otherwise given in accordance with Section 2.6 of these Bylaws not
less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting. The notice shall specify the
place, date and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 ADVANCE NOTICE OF STOCKHOLDER NOMINEES AND STOCKHOLDER BUSINESS
To be properly brought before an annual meeting or special meeting,
nominations for the election of director or other business must be (a) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the board of directors, (b) otherwise properly brought before the
meeting by or at the direction of the board of directors, or (c) otherwise
properly brought before the meeting by a stockholder. For such nominations or
other business to be considered properly brought before the meeting by a
stockholder, such stockholder must have given timely notice and in proper form
of his intent to bring such business before such meeting. To be timely, such
stockholder's notice must be delivered to or mailed and received by the
secretary of the Corporation not less than 120 days prior to the same day and
month of the current year that the Corporation's prior year's proxy was mailed
in the previous year if the meeting is an annual meeting or at least 30 days
prior to any special meeting. To be in proper form, a stockholder's notice to
the secretary shall set forth:
(i) the name and address of the stockholder who intends to
make the nominations and, as the case may be, the name
and address of the person or persons to be nominated or
the nature of the business to be proposed;
(ii) a representation that the stockholder is a holder of
record of stock of the Corporation entitled to vote at
such meeting and, if applicable, intends to appear in
person or by proxy at the meeting to nominate the person
or persons specified in the notice or introduce the
business specified in the notice;
(iii) if applicable, a description of all arrangements or
understandings between the stockholder and each nominee
and any other person or persons (naming such
-2-
<PAGE> 7
person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder;
(iv) such other information regarding each nominee or each
matter of business to be proposed by such stockholder as
would be required to be included in a proxy statement
filed pursuant to the proxy rules of the Securities and
Exchange Commission had the nominee been nominated, or
intended to be nominated, or the matter been proposed,
or intended to be proposed by the board of directors;
and
(v) if applicable, the consent of each nominee to serve as
director of the Corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of
any person or the proposal of any business not made in compliance with the
foregoing procedure.
2.6 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the Corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.7 QUORUM
The holders of a majority of the stock issued and outstanding and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the certificate of
incorporation. If, however, such quorum is not present or represented at any
meeting of the stockholders, then either (i) the chairman of the meeting, or
(ii) the stockholders entitled to vote thereat, present in person or represented
by proxy, shall have power to adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
When a quorum is present or represented at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, by express provisions of the statutes or
of the certificate of incorporation, a different vote is required, in which case
such express provision shall govern and control the decision of the question.
-3-
<PAGE> 8
2.8 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these
Bylaws otherwise require, notice need not be given of the adjourned meeting if
the time and place thereof are announced at the meeting at which the adjournment
is taken. At the adjourned meeting the Corporation may transact any business
that might have been transacted at the original meeting. If the adjournment is
for more than 30 days, or if after the adjournment a new record date is fixed
for the adjourned meeting, a notice of the adjourned meeting shall be given to
each stockholder of record entitled to vote at the meeting.
2.9 VOTING
The stockholders entitled to vote at any meeting of stockholders shall
be determined in accordance with the provisions of Sections 2.12 and 2.14 of
these Bylaws, subject to the provisions of Sections 217 and 218 of the General
Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors
and joint owners of stock and to voting trusts and other voting agreements).
Except as may be otherwise provided in the certificate of incorporation,
each stockholder shall be entitled to one vote for each share of capital stock
held by such stockholder.
2.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the stockholders need be specified in any written waiver of notice unless so
required by the certificate of incorporation or these Bylaws.
2.11 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
The stockholders of the Corporation may not take action by written
consent without a meeting but must take any such actions at a duly called annual
or special meeting.
2.12 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors
-4-
<PAGE> 9
may fix, in advance, a record date, which shall not be more than 60 nor less
than 10 days before the date of such meeting, nor more than 60 days prior to any
other action.
If the board of directors does not so fix a record date, the fixing of
such record date shall be governed by the provisions of Section 213 of the
General Corporation Law of Delaware.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.13 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the Corporation, but no such
proxy shall be voted or acted upon after 3 years from its date, unless the proxy
provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a Corporation shall
prepare and make, at least 10 days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The stock ledger shall
also be produced and kept at the time and place of the meeting during the whole
time thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list of stockholders or the books of the
Corporation, or to vote in person or by proxy at any meeting of stockholders and
of the number of shares held by each such stockholder.
2.15 CONDUCT OF BUSINESS
Meetings of stockholders shall be presided over by the chairman of the
board, if any, or in his absence by the president, or in his absence by a vice
president, or in the absence of the foregoing persons by a chairman designated
by the board of directors, or in the absence of such designation by a chairman
chosen at the meeting. The secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting. The
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chairman of any meeting of stockholders shall determine the order of business
and the procedures at the meeting, including such matters as the regulation of
the manner of voting and conduct of business.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these Bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the Corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
3.2 NUMBER
The authorized number of directors of the Corporation shall be seven
(7). No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 CLASSES OF DIRECTORS
The Directors shall be divided into three classes designated as Class I,
Class II and Class III, respectively. Directors shall be assigned to each class
in accordance with a resolution or resolutions adopted by the Board of
Directors. At the first annual meeting of stockholders following the closing of
the Initial Public Offering, the term of office of the Class I Directors shall
expire and Class I Directors shall be elected for a full term of three years. At
the second annual meeting of stockholders following the closing of the Initial
Public Offering, the term of office of the Class II Directors shall expire and
Class II Directors shall be elected for a full term of three years. At the third
annual meeting of stockholders following the closing of the Initial Public
Offering, the term of office of the Class III Directors shall expire and Class
III Directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, Directors shall be elected for a full
term of three years to succeed the Directors of the class whose terms expire at
such annual meeting.
Notwithstanding the foregoing provisions of this Article, each Director
shall serve until his successor is duly elected and qualified or until his
earlier death, resignation or removal. No decrease in the number of Directors
constituting the Board of Directors shall shorten the term of any incumbent
Director.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the
Corporation. Stockholders may remove directors with or without cause. Any
vacancy occurring in the board of directors with
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or without cause may be filled by a majority of the remaining members of the
board of directors, although such majority is less than a quorum, or by a
plurality of the votes cast at a meeting of stockholders, and each director so
elected shall hold office until the expiration of the term of office of the
director whom he has replaced.
Unless otherwise provided in the certificate of incorporation or these
Bylaws:
(i) Vacancies and newly created directorships resulting from
any increase in the authorized number of directors
elected by all of the stockholders having the right to
vote as a single class may be filled by a majority of
the directors then in office, although less than a
quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or
series thereof are entitled to elect one or more
directors by the provisions of the certificate of
incorporation, vacancies and newly created directorships
of such class or classes or series may be filled by a
majority of the directors elected by such class or
classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
Corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may apply to the Court of Chancery for a decree summarily
ordering an election as provided in Section 211 of the General Corporation Law
of Delaware.
If, at the time of filling any vacancy or any newly created
directorship, the directors then in office constitute less than a majority of
the whole board (as constituted immediately prior to any such increase), then
the Court of Chancery may, upon application of any stockholder or stockholders
holding at least 10% of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the Corporation may hold meetings, both
regular and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
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3.6 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.7 SPECIAL MEETINGS; NOTICE
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the Corporation. If the notice is mailed, it
shall be deposited in the United States mail at least 4 days before the time of
the holding of the meeting. If the notice is delivered personally or by
telephone or by telegram, it shall be delivered personally or by telephone or to
the telegraph company at least 48 hours before the time of the holding of the
meeting. Any oral notice given personally or by telephone may be communicated
either to the director or to a person at the office of the director who the
person giving the notice has reason to believe will promptly communicate it to
the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
Corporation.
3.8 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation.
3.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the
General Corporation Law of Delaware or of the certificate of incorporation or
these Bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these Bylaws.
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3.10 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors,
then the directors present thereat may adjourn the meeting from time to time,
without notice other than announcement at the meeting, until a quorum is
present.
3.11 CONDUCT OF BUSINESS
Meetings of the board of directors shall be presided over by the
chairman of the board, if any, or in his absence by the chief executive officer,
or in their absence by a chairman chosen at the meeting. The secretary shall act
as secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting. The chairman of any
meeting shall determine the order of business and the procedures at the meeting.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
Bylaws, the board of directors shall have the authority to fix the compensation
of directors. The directors may be paid their expenses, if any, of attendance at
each meeting of the board of directors and may be paid a fixed sum for
attendance at each meeting of the board of directors or a stated salary as
director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
3.14 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of
incorporation or by these Bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors. If at any time a class
or series of shares is entitled to elect one or more directors, the provisions
of this Article 3.14 shall apply to the vote of that class or series and not to
the vote of the outstanding shares as a whole.
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ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
one or more of the directors of the Corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the Bylaws of the Corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the Corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the Corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the Corporation or a revocation
of a dissolution, or (v) amend the Bylaws of the Corporation; and, unless the
board resolution establishing the committee, the Bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these Bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.6 (regular
meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum),
Section 3.9 (waiver of notice), Section 3.10 (adjournment and notice of
adjournment), Section 3.11 (conduct of business) and 3.12 (action without a
meeting), with such changes in the
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context of those Bylaws as are necessary to substitute the committee and its
members for the board of directors and its members; provided, however, that the
time of regular meetings of committees may also be called by resolution of the
board of directors and that notice of special meetings of committees shall also
be given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
Bylaws.
ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the Corporation shall be a chief executive officer, one
or more vice presidents, a secretary and a chief financial officer. The
Corporation may also have, at the discretion of the board of directors, a
chairman of the board, a president, a chief operating officer, one or more
executive, senior or assistant vice presidents, assistant secretaries and any
such other officers as may be appointed in accordance with the provisions of
Section 5.2 of these Bylaws. Any number of offices may be held by the same
person.
5.2 APPOINTMENT OF OFFICERS
Except as otherwise provided in this Section 5.2, the officers of the
Corporation shall be appointed by the board of directors, subject to the rights,
if any, of an officer under any contract of employment. The board of directors
may appoint, or empower an officer to appoint, such officers and agents of the
business as the Corporation may require (whether or not such officer or agent is
described in this Article V), each of whom shall hold office for such period,
have such authority, and perform such duties as are provided in these Bylaws or
as the board of directors may from time to time determine. Any vacancy occurring
in any office of the Corporation shall be filled by the board of directors or
may be filled by the officer, if any, who appointed such officer.
5.3 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors or, in the case of an officer appointed by
another officer, by such other officer.
Any officer may resign at any time by giving written notice to the
Corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Corporation under any contract to which the officer is a
party.
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5.4 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these Bylaws. If there is no chief
executive officer, then the chairman of the board shall also be the chief
executive officer of the Corporation and shall have the powers and duties
prescribed in Section 5.5 of these Bylaws.
5.5 CHIEF EXECUTIVE OFFICER
The Chief Executive Officer of the Corporation shall, subject to the
control of the Board of Directors, have general supervision, direction and
control of the business and the officers of the Corporation. He or she shall
preside at all meetings of the stockholders and, in the absence or nonexistence
of a Chairman of the Board at all meetings of the Board of Directors. He or she
shall have the general powers and duties of management usually vested in the
chief executive officer of a Corporation, including general supervision,
direction and control of the business and supervision of other officers of the
Corporation, and shall have such other powers and duties as may be prescribed by
the Board of Directors or these Bylaws.
The Chief Executive Officer shall, without limitation, have the
authority to execute bonds, mortgages and other contracts requiring a seal,
under the seal of the Corporation, except where required or permitted by law to
be otherwise signed and executed and except where the signing and execution
thereof shall be expressly delegated by the Board of Directors to some other
officer or agent of the Corporation.
5.6 PRESIDENT
Subject to such supervisory powers as may be given by these Bylaws or
the Board of Directors to the Chairman of the Board or the Chief Executive
Officer, if there be such officers, the president shall have general
supervision, direction and control of the business and supervision of other
officers of the Corporation, and shall have such other powers and duties as may
be prescribed by the Board of Directors or these Bylaws. In the event a Chief
Executive Officer shall not be appointed, the President shall have the duties of
such office.
5.7 VICE PRESIDENT
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform all
the duties of the chief executive officer and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the chief executive
officer. The vice presidents shall have such other powers and perform such other
duties as from time to time may be prescribed for them respectively by the board
of directors, these Bylaws, the chief executive officer or the chairman of the
board.
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5.8 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the Corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the Corporation or at the office of the Corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names of
all stockholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings
of the stockholders and of the board of directors required to be given by law or
by these Bylaws. He shall keep the seal of the Corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these Bylaws.
5.9 CHIEF FINANCIAL OFFICER
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the Corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable times
be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the Corporation with such depositaries as may
be designated by the board of directors. He shall disburse the funds of the
Corporation as may be ordered by the board of directors, shall render to the
chief executive officer and directors, whenever they request it, an account of
all of his transactions as treasurer and of the financial condition of the
Corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these Bylaws.
5.10 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
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5.11 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
Corporation shall respectively have such authority and perform such duties in
the management of the business of the Corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 THIRD PARTY ACTIONS
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a director or officer of the Corporation, or that such
director or officer is or was serving at the request of the Corporation as a
director, officer, employee or agent of another Corporation, partnership, joint
venture trust or other enterprise (collectively "Agent"), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement (if
such settlement is approved in advance by the Corporation, which approval shall
not be unreasonably withheld) actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
6.2 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the
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circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Delaware Court of Chancery or such other
court shall deem proper.
6.3 SUCCESSFUL DEFENSE
To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 6.1 and 6.2, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
6.4 DETERMINATION OF CONDUCT
Any indemnification under Sections 6.1 and 6.2 (unless ordered by a
court) shall be made by the Corporation only as authorized in the specific case
upon a determination that the indemnification of the director, officer, employee
or agent is proper in the circumstances because he has met the applicable
standard of conduct set forth in Sections 6.1 and 6.2. Such determination shall
be made (1) by the board of Directors or the Executive Committee by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit or proceeding, or (2) or if such quorum is not obtainable or, even if
obtainable, a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by the stockholders.
6.5 PAYMENT OF EXPENSES IN ADVANCE
Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount if it
shall ultimately be determined that he is not entitled to be indemnified by the
Corporation as authorized in this Article VI.
6.6 INDEMNITY NOT EXCLUSIVE
The indemnification and advancement of expenses provided or granted
pursuant to the other subsections of this section shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another while holding such office.
6.7 INSURANCE INDEMNIFICATION
The Corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation, as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the
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Corporation would have the power to indemnify him against such liability under
the provisions of this Article VI.
6.8 THE CORPORATION
For purposes of this Article VI, references to "the Corporation" shall
include, in addition to the resulting Corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
any person who is was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
and subject to the provisions of this Article VI (including, without limitation
the provisions of Section 6.4) with respect to the resulting or surviving
corporation as he would have with respect to such constituent corporation if its
separate existence had continued.
6.9 EMPLOYEE BENEFIT PLANS
For purposes of this Article VI, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably deemed to have acted in a manner "not opposed to the best interests
of the Corporation" as referred to in this Article VI.
6.10 CONTINUATION OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The indemnification and advanced of expenses provided by, or granted
pursuant to, this Article VI shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The Corporation shall, either at its principal executive office or at
such place or places as designated by the board of directors, keep a record of
its stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these Bylaws as amended to date,
accounting books, and other records.
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Any stockholder of record, in person or by attorney or other agent,
shall, upon written demand under oath stating the purpose thereof, have the
right during the usual hours for business to inspect for any proper purpose the
Corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
Corporation at its registered office in Delaware or at its principal place of
business.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his position as a director. The Court of Chancery is
hereby vested with the exclusive jurisdiction to determine whether a director is
entitled to the inspection sought. The Court may summarily order the Corporation
to permit the director to inspect any and all books and records, the stock
ledger, and the stock list and to make copies or extracts therefrom. The Court
may, in its discretion, prescribe any limitations or conditions with reference
to the inspection, or award such other and further relief as the Court may deem
just and proper.
7.3 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the chief executive officer, any vice
president, the chief financial officer, the secretary or assistant secretary of
this Corporation, or any other person authorized by the board of directors or
the chief executive officer or a vice president, is authorized to vote,
represent, and exercise on behalf of this Corporation all rights incident to any
and all shares of any other corporation or corporations standing in the name of
this Corporation. The authority granted herein may be exercised either by such
person directly or by any other person authorized to do so by proxy or power of
attorney duly executed by such person having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the Corporation, and only the persons so authorized
shall sign or endorse those instruments.
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<PAGE> 22
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these Bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
Corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates,
provided that the board of directors of the Corporation may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
Corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the Corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
Corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the Corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of issue.
The Corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the Corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the Corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the Corporation is authorized to issue more than one class of stock
or more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and"or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General Corporation Law of
Delaware, in lieu of the foregoing requirements there may be set forth on the
face or back of the certificate that the Corporation shall issue to represent
such class or series of
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<PAGE> 23
stock a statement that the Corporation will furnish without charge to each
stockholder who so requests the powers, the designations, the preferences, and
the relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and"or rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the Corporation and cancelled at the same time. The Corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these Bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a Corporation and a natural
person.
8.7 DIVIDENDS
The directors of the Corporation, subject to any restrictions contained
in the certificate of incorporation, may declare and pay dividends upon the
shares of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the Corporation's
capital stock.
The directors of the Corporation may set apart out of any of the funds
of the Corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
Corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
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<PAGE> 24
8.9 SEAL
The Corporation may adopt a corporate seal, which may be altered at
pleasure, and may use the same by causing it or a facsimile thereof to be
impressed or affixed or in any other manner reproduced.
8.10 TRANSFER OF STOCK
Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The Corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
Corporation to restrict the transfer of shares of stock of the Corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The Corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
Except as provided below, these Bylaws of the Corporation may be
adopted, amended or repealed by the vote of stockholders holding more than 50%
of shares entitled to vote thereon; provided, however, that the Corporation may,
in its certificate of incorporation, confer the power to adopt, amend or repeal
Bylaws upon the directors. The fact that such power has been so conferred upon
the directors shall not divest the stockholders of the power, nor limit their
power to adopt, amend or repeal Bylaws. Notwithstanding the foregoing, any
amendment, change or repeal of Sections 2.3, 2.5, 2.11, 3.2 or 3.3 or this
Article IX, or any other amendment to these Bylaws that will have the effect of
permitting circumvention of or modifying Sections 2.3, 2.5, 2.11, 3.2 or 3.3 or
this Article IX, shall require the favorable vote, at a stockholders' meeting,
of the holders of at least 66 2/3% of the then-outstanding shares of capital
stock of the Corporation entitled to vote.
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<PAGE> 25
ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of
directors of the Corporation that the Corporation should be dissolved, the
board, after the adoption of a resolution to that effect by a majority of the
whole board at any meeting called for that purpose, shall cause notice to be
mailed to each stockholder entitled to vote thereon of the adoption of the
resolution and of a meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the Corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's becoming
effective in accordance with Section 103 of the General Corporation Law of
Delaware, the Corporation shall be dissolved.
ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint
one or more persons to be custodians and, if the Corporation is insolvent, to be
receivers, of and for the Corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to
elect successors to directors whose terms have expired
or would have expired upon qualification of their
successors; or
(ii) the business of the Corporation is suffering or is
threatened with irreparable injury because the directors
are so divided respecting the management of the affairs
of the Corporation that the required vote for action by
the board of directors cannot be obtained and the
stockholders are unable to terminate this division; or
(iii) the Corporation has abandoned its business and has
failed within a reasonable time to take steps to
dissolve, liquidate or distribute its assets.
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<PAGE> 26
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver
appointed under Section 291 of the General Corporation Law of Delaware, but the
authority of the custodian shall be to continue the business of the Corporation
and not to liquidate its affairs and distribute its assets, except when the
Court of Chancery otherwise orders and except in cases arising under Sections
226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware.
ARTICLE XII
LOANS TO OFFICERS
The Corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the Corporation or of its
subsidiaries, including any officer or employee who is a Director of the
Corporation or its subsidiaries, whenever, in the judgment of the Board of
Directors, such loan, guarantee or assistance may reasonably be expected to
benefit the Corporation. The loan, guarantee or other assistance may be with or
without interest and may be unsecured, or secured in such manner as the Board of
Directors shall approve, including, without limitation, a pledge of shares of
stock of the Corporation. Nothing in this Bylaw shall be deemed to deny, limit
or restrict the powers of guaranty or warranty of the Corporation at common law
or under any statute.
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<PAGE> 27
CERTIFICATE OF ADOPTION
OF
AMENDED AND RESTATED BYLAWS
OF
GADZOOX NETWORKS, INC.
ADOPTION BY SECRETARY
The undersigned hereby certifies that she is the duly elected, qualified
and acting Secretary of Gadzoox Networks, Inc. and that the foregoing Amended
and Restated Bylaws, comprising 23 pages, were submitted to the stockholders and
the number of shares voting in favor of adoption of the foregoing Amended and
Restated Bylaws exceeded the vote required.
------------------------------------
Judith M. O'Brien, Secretary
<PAGE> 1
EXHIBIT 4.2
GADZOOX NETWORKS, INC.
-----------------------------------------------------------------
FIRST AMENDED AND RESTATED
REGISTRATION AND INFORMATION RIGHTS AGREEMENT
OCTOBER 12, 1998
-----------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
SECTION 1 Definitions..........................................................................2
SECTION 2 Registration Rights..................................................................4
2.1 Requested Registration..............................................................4
2.2 Company Registration................................................................6
2.3 Registration on Form S-3............................................................7
2.4 Limitations on Subsequent Registration Rights.......................................8
2.5 Expenses of Registration............................................................8
2.6 Obligations of the Company..........................................................8
2.7 Indemnification.....................................................................9
2.8 Information by Holder..............................................................11
2.9 Rule 144 Reporting.................................................................11
2.10 Transfer of Registration Rights....................................................12
2.11 Stand-off Agreement................................................................12
2.12 Termination of Registration Rights.................................................12
SECTION 3 Restrictions on Transferability of Securities; Compliance with Securities Act;
Registration Rights.......................................................................13
3.1 Restrictions on Transfer...........................................................13
3.2 Restrictive Legend.................................................................13
3.3 Notice of Proposed Transfers.......................................................13
SECTION 4 Affirmative Covenants of the Company................................................14
4.1 Financial Information..............................................................14
4.2 Additional Information.............................................................14
4.3 Rights of Inspection...............................................................15
4.4 Assignment of Rights to Financial Information......................................15
4.5 Board of Directors.................................................................15
4.6 Market Standoff Agreements.........................................................16
4.7 Termination of Covenants...........................................................16
SECTION 5 Miscellaneous.......................................................................16
5.1 Governing Law......................................................................16
5.2 Successors and Assigns.............................................................16
5.3 Entire Agreement; Amendment........................................................16
5.4 Prior Agreement; Waiver and Termination............................................16
5.5 Notices, etc.......................................................................17
5.6 Counterparts.......................................................................17
5.7 Severability.......................................................................17
5.8 Titles and Subtitles...............................................................17
5.9 Share Numbers......................................................................17
</TABLE>
<PAGE> 3
EXHIBIT
A Schedule of Holders and the shares of Gadzoox Networks, Inc. owned
by each Holder
<PAGE> 4
GADZOOX NETWORKS, INC.
FIRST AMENDED AND RESTATED
REGISTRATION AND INFORMATION RIGHTS AGREEMENT
This First Amended and Restated Registration and Information Rights
Agreement is made as of October 12, 1998, (the "Agreement") by and among (1)
Gadzoox Networks, Inc., a Delaware corporation having its principal executive
offices at 6840 Via Del Oro, San Jose, California 95119 (the "Company"); (2) the
persons and entities listed on Exhibit A (the "Series A Holders") to that
certain Series A Preferred and Common Stock Purchase Agreement dated May 12,
1992 (the "Series A Agreement"); (3) the persons and entities listed on Exhibit
A (the "Series B Holders") to that certain Series B Preferred Stock Purchase
Agreement dated December 28, 1993 (the "Series B Agreement"); (4) the persons
and entities listed on Exhibit A (the "Series C Holders") to that certain Series
C Preferred Stock Purchase Agreement dated January 9, 1995; (5) the persons and
entities listed on Exhibit A (the "Series D Holders") to that certain Series D
Preferred Stock Purchase Agreement dated January 12, 1996 (the "Series D
Agreement"); (6) the persons and entities listed on Exhibit A (the "Series E
Holders") to that certain Series E Preferred Stock Purchase Agreement dated
September 5, 1996 (the "Series E Agreement"); (7) Seagate Technology, Inc., a
Delaware corporation (the "Series F Holder" and the "Series G Holder" and
collectively with the Series A Holders, the Series B Holders, the Series C
Holders, the Series D Holders and the Series E Holders, the "Prior Holders"),
that is the purchaser of Series F Preferred Stock pursuant to that certain
Series F Preferred Stock Purchase Agreement dated May 21, 1997 (the "Series F
Agreement") and the purchaser of Series G Preferred Stock pursuant to that
certain Series G Preferred Stock Purchase Agreement dated June 16, 1998 (the
"Series G Agreement"), and upon conversion of certain convertible promissory
notes (the "Notes") pursuant to the Note Purchase Agreement dated September 18,
1998 (the "Note Purchase Agreement"); and (8) 3Com Corporation, a Delaware
corporation (the "Series H Holder" and collectively, with the Prior Holders, the
"Preferred Holders"), that is the purchaser of Series H Preferred Stock pursuant
to that certain Series H Preferred Stock Purchase Agreement of even date
herewith (the "Series H Agreement"). This Agreement amends in its entirety and
supersedes in all respects the Registration and Information Rights Agreement
dated September 18, 1998 among the Company, the Prior Holders (the "Prior
Registration Rights Agreement").
WHEREAS, the Company has agreed to grant to the Series H Holder certain
registration rights and certain information rights on a pari passu basis with
the rights granted to the Prior Holders under the Prior Registration Rights
Agreement, which rights are being granted pursuant to this Agreement; and
WHEREAS, in order to induce 3Com Corporation to purchase the shares of
Series H Preferred Stock pursuant to the Series H Agreement, the Prior Holders
desire to amend and replace the Prior Registration Rights Agreement with this
Agreement and to include the Series H Holder hereunder.
NOW THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree as follows:
1
<PAGE> 5
SECTION 1
Definitions
As used in this Agreement, the following terms shall have the following
respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
"Conversion Stock" shall mean the Common Stock issued or issuable
pursuant to conversion of the Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred, Series F Preferred, Series G
Preferred or Series H Preferred.
"Holders" shall mean any investor holding Registrable Securities and any
holder of Registrable Securities to whom the rights granted under Section 2 have
been transferred in accordance with Section 2.10 hereof.
"Initiating Holders" shall mean the Holders or transferees of the
Holders under Section 2.10 hereof who, in the aggregate, are Holders of at least
fifty percent (50%) of the Registrable Securities.
"Preferred Stock" shall mean the Series A Preferred, the Series B
Preferred, the Series C Preferred, the Series D Preferred, the Series E
Preferred, Series F Preferred, Series G Preferred and Series H Preferred.
"Registrable Securities" means (i) the Conversion Stock, (ii) the Common
Stock issued to the Holders pursuant to the Series A Agreement, and (iii) any
Common Stock of the Company issued or issuable in respect of the Conversion
Stock or other securities issued or issuable pursuant to the conversion of the
Preferred Stock upon any stock split, stock dividend, recapitalization or
similar event, or any Common Stock otherwise issued or issuable with respect to
the Preferred Stock; provided, however, that shares of Common Stock or other
securities shall no longer be treated as Registrable Securities if (A) they have
been sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, (B) they have been sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act so that all transfer restrictions and restrictive legends
with respect thereto are removed upon consummation of such sale, (C) (1) such
securities are held by a Holder who then holds less than one percent (1%) of the
then outstanding Common Stock of the Company (determined on the basis of assumed
conversion of all securities convertible into Common Stock), (2) the Company has
previously consummated an initial public offering and (3) the shares are
available for sale, in the opinion of counsel to the Company, without compliance
with the registration and prospectus delivery requirements of the Securities Act
so that all transfer restrictions and restrictive legends with respect thereto
may be removed upon the consummation of such sale or (D) (1) such securities are
held by a Holder who then holds two percent (2%) or less of the then outstanding
Common Stock of the Company (determined on the basis of assumed conversion of
all securities convertible into Common Stock), (2) the Company has previously
consummated an
2
<PAGE> 6
initial public offering and (3) such Holder may sell such securities under Rule
144(k) of the Securities Act.
The terms "register," "registered" and "registration" refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company
in complying with Sections 2.1, 2.2 and 2.3 hereof, including, without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company, blue sky fees
and expenses, normal audit expenses (but not including the expense of any
special audits incident to or required by any such registration where the
Company is not registering any of its securities, excluding the compensation of
regular employees of the Company which shall be paid in any event by the
Company) and the reasonable fees and disbursements of one counsel for all
Holders.
"Restricted Securities" shall mean the securities of the Company
required to bear the legend set forth in Section 3.2 of this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
commissions and stock transfer taxes applicable to the securities registered by
the Holders.
"Series A Preferred" shall mean the Series A Preferred Stock issued
pursuant to the Series A Agreement.
"Series B Preferred" shall mean the Series B Preferred Stock issued
pursuant to the Series B Agreement.
"Series C Preferred" shall mean the Series C Preferred Stock issued
pursuant to the Series C Agreement.
"Series D Preferred" shall mean the Series D Preferred Stock issued
pursuant to the Series D Agreement.
"Series E Preferred" shall mean the Series E Preferred Stock issued
pursuant to the Series E Agreement.
"Series F Preferred" shall mean the Series F Preferred Stock issued
pursuant to the Series F Agreement.
"Series G Preferred" shall mean the Series G Preferred Stock issued
pursuant to the Series G Agreement and issuable upon conversion of the Notes
pursuant to the Note Purchase Agreement.
3
<PAGE> 7
"Series H Preferred" shall mean the Series H Preferred Stock issued
pursuant to the Series H Agreement.
SECTION 2
Registration Rights
2.1 REQUESTED REGISTRATION.
(a) Request for Registration. In case the Company shall
receive from Initiating Holders a written request that the Company effect any
registration, qualification or compliance with respect to not less than twenty
percent (20%) of the shares of Registrable Securities then held by such
Initiating Holders (or any lesser percentage if the reasonably anticipated
aggregate price to the public of such shares, net of underwriting discounts and
commissions, would exceed $2,000,000), the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders and
(ii) as soon as practicable, use its best efforts to
effect such registration, qualification or compliance (including, without
limitation, appropriate qualification under applicable blue sky or other state
securities laws and appropriate compliance with applicable regulations issued
under the Securities Act and any other governmental requirements or regulations)
as may be so requested and as would permit or facilitate the sale and
distribution of all or such portion of such Registrable Securities as are
specified in such request, together with all or such portion of the Registrable
Securities of any Holder or Holders joining in such request as are specified in
a written request received by the Company within twenty (20) days after receipt
of such written notice from the Company;
Provided, however, that the Company shall not be obligated to
take any action to effect any such registration, qualification or compliance
pursuant to this Section 2.1:
(A) In any particular jurisdiction in which
the Company would be required to execute a general consent to service of process
in effecting such registration, qualification or compliance unless the Company
is already subject to service in such jurisdiction and except as may be required
by the Securities Act;
(B) Prior to July 31, 2000 or within six (6)
months after the effective date of a registration statement relating to an
underwritten public offering of the Company's securities filed under the
Securities Act;
(C) After the Company has effected two such
registrations pursuant to this Section 2.1 (a), and such registrations have been
declared or ordered effective; or
4
<PAGE> 8
(D) If the Company shall furnish to such
Holders a certificate signed by the President of the Company stating that in the
good faith judgment of the Board of Directors it would be seriously detrimental
to the Company or its shareholders for a registration statement to be filed in
the near future, then the Company's obligation to use its best efforts to
register, qualify or comply under this Section 2.1 shall be deferred for a
period not to exceed one hundred eighty (180) days from the date of receipt of
written request from the Initiating Holders; provided, however, that the Company
shall not exercise such right more than once in any twelve (12) month period.
Subject to the foregoing clauses (A) through (D), the Company
shall file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable, after receipt of the request
or requests of the Initiating Holders.
(b) Underwriting. If the Initiating Holders intend to
distribute the Registrable Securities covered by their request by means of an
underwriting, they shall so advise the Company as part of their request made
pursuant to Section 2.1 hereof and the Company shall include such information in
the written notice referred to in Section 2.1(a)(i) above. In such event, the
right of any Holder to registration pursuant to Section 2.1 shall be conditioned
upon such Holder's participation in the underwriting arrangements required by
this Section 2.1, and the inclusion of such Holder's Registrable Securities in
the underwriting to the extent requested shall be limited to the extent provided
herein.
The Company shall (together with all Holders proposing to
distribute their securities through such underwriting) enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by a majority in interest of the Initiating Holders, but
subject to the Company's reasonable approval. Notwithstanding any other
provision of this Section 2.1, if the managing underwriter advises the
Initiating Holders in writing that marketing factors require a limitation of the
number of shares to be underwritten, the managing underwriter may limit the
Registrable Securities to be included in such offering. The Company shall so
advise all Holders of Registrable Securities and the number of shares of
Registrable Securities that may be included in the registration and underwriting
shall be allocated among all Holders thereof in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Holders at the time of filing the registration statement. No Registrable
Securities excluded from the underwriting by reason of the underwriter's
marketing limitation shall be included in such registration. To facilitate the
allocation of shares in accordance with the above provisions, the Company or the
underwriters may round the number of shares allocated to any Holder to the
nearest one hundred (100) shares.
If any Holder of Registrable Securities disapproves of the terms
of the underwriting, such person may elect to withdraw therefrom by written
notice to the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities and/or other securities so withdrawn shall also be
withdrawn from registration.
If the underwriter has not limited the number of Registrable
Securities to be underwritten, the Company may include securities for its own
account or the account of others in such registration if
5
<PAGE> 9
the underwriter so agrees and the number of Registrable Securities which would
otherwise have been included in such registration and underwriting will not
thereby be limited.
2.2 COMPANY REGISTRATION.
(a) Notice of Registration. If at any time or from time to
time the Company shall determine to register any of its securities, either for
its own account or the account of a security holder or holders, other than (i) a
registration relating solely to employee benefit plans or (ii) a registration
relating solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice
thereof, and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within twenty (20) days after receipt of such written notice
from the Company by any Holder.
(b) Underwriting. If the registration of which the Company
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 2.2(a)(i). In such event the right of any Holder to
registration pursuant to Section 2.2 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein.
All Holders proposing to distribute their securities through
such underwriting shall (together with the Company and the other holders
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the managing underwriter selected
for such underwriting by the Company. Notwithstanding any other provision of
this Section 2.2, if the managing underwriter determines that marketing factors
require a limitation of the number of shares to be underwritten, the managing
underwriter may limit the Registrable Securities to be included in such
registration. In such event, the managing underwriter shall first limit or
exclude up to all of the securities of holders (other than Holders) proposing to
distribute their securities through such underwriting to be included in such
registration and may thereafter limit the Registrable Securities to be included
in such registration to not less than ten percent (10%) of the total value of
the securities to be distributed through such registration and underwriting,
provided, however, that the managing underwriter may exclude up to all of the
Registrable Securities to be included in the first firm commitment underwritten
public offering of shares of Common Stock of the Company. The Company shall so
advise all Holders and other holders distributing their securities through such
underwriting and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated first among all
Holders and thereafter to other holders, all such allocations among Holders and
among other holders respectively, being made in proportion, as nearly as
practicable, to the respective amounts of Registrable Securities and Common
Stock held by such Holders and other holders at the time of filing the
registration statement. To facilitate the allocation of shares in accordance
with the above provisions,
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the Company may round the number of shares allocated to any Holder or holder to
the nearest one hundred (100) shares.
If any Holder or holder disapproves of the terms of any such
underwriting, he may elect to withdraw therefrom by written notice to the
Company and the managing underwriter. Any securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration.
(c) Right to Terminate Registration. The Company shall have
the right to terminate or withdraw any registration initiated by it under this
Section 2.2 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration.
2.3 REGISTRATION ON FORM S-3.
(a) If any Holder or Holders who, in the aggregate, are
Holders of at least twenty- five percent (25%) of the Registrable Securities,
request that the Company file a registration statement on Form S-3 (or any
successor form to Form S-3) for a public offering of shares of the Registrable
Securities, the reasonably anticipated aggregate price to the public of which
would exceed $1,000,000, and the Company is a registrant entitled to use Form
S-3 to register the Registrable Securities for such an offering, the Company
shall use its best efforts to cause such Registrable Securities to be registered
for the offering on such form; provided, however, that the Company shall not be
required to effect more than one registration pursuant to this Section 2.3 in
any 12-month period. The Company will (i) promptly give written notice of the
proposed registration to all other Holders and (ii) as soon as practicable, use
its best efforts to effect such registration (including, without limitation, the
execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder of
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of such written notice from
the Company. The substantive provisions of Section 2.2(b) shall be applicable to
each registration initiated under this Section 2.3.
(b) Notwithstanding the foregoing, the Company shall not be
obligated to take any action pursuant to this Section 2.3, (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act; (ii) if the Company, within
ten days of the receipt of the request of the Initiating Holders, gives notice
of its bona fide intention to effect the filing of a registration statement with
the Commission within ninety (90) days of receipt of such request (other than
with respect to a registration statement relating to a Rule 145 transaction or
to an employee benefit plan); (iii) within six (6) months after the effective
date of a registration statement relating to an underwritten public offering of
the Company's securities filed under the Securities Act or (iv) if the Company
shall furnish to such Holder a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors it
would be seriously detrimental to the Company or its shareholders for
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registration statements to be filed in the near future, then the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a period not to exceed one hundred eighty (180) days from the
receipt of the request to file such registration by such Holder; provided,
however, that the Company will not exercise such right more than once in any
twelve (12) month period.
2.4 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and after
the Closing Date, the Company shall not enter into any agreement granting any
holder or prospective holder of any securities of the Company registration
rights with respect to such securities unless (i) such new holder or prospective
holder receives such rights by becoming a party to this Agreement and this
Agreement is amended in accordance with Section 6.3 to make such holder or
prospective holder a party hereto; or (ii) such new registration rights,
including standoff obligations, are subordinate to the registration rights
granted to each Holder hereunder.
2.5 EXPENSES OF REGISTRATION.
(a) All Registration Expenses, including the reasonable fees
and expenses of one counsel to the Holders of securities being registered,
incurred in connection with (i) the two registrations pursuant to Section 2.1,
(ii) all registrations pursuant to Section 2.2 and (iii) two registrations
pursuant to Section 2.3, shall be borne by the Company. Unless otherwise stated,
all Selling Expenses relating to securities registered on behalf of the Holders
and all other Registration Expenses shall be borne by the Holders of such
securities and the Company, if it registers securities on its behalf as part of
such registration, pro rata on the basis of the number of shares so registered.
(b) All Registration Expenses and Selling Expenses incurred
in connection with the third and subsequent registrations pursuant to Section
2.3 shall be borne pro rata by the Holder or Holders requesting the registration
on Form S-3, according to the number of Registerable Securities included in such
registration.
(c) The Company shall not be required to pay for expenses of
any registration proceeding begun pursuant to Sections 2.1 or 2.3, the request
for which is subsequently withdrawn by the Initiating Holders for reasons other
than a material adverse change in the business or financial condition of the
Company occurring prior to the effectiveness of such registration statement, in
which case, such expenses shall be borne by the Holders of Registrable
Securities requesting such withdrawal, pro rata on the basis of the number of
shares of Registrable Securities so included in the registration request unless
the Holders of a majority of Registrable Securities agree (i) to forfeit their
right to one requested registration pursuant to Section 2.1 in which event such
right shall be forfeited by all Holders or (ii) if such rights under Section 2.1
have been exhausted, to forfeit their right to have the Company pay the
registration expenses of one registration under Section 2.3.
2.6 OBLIGATIONS OF THE COMPANY. Whenever required under this Section
2 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
(a) Prepare and file with the Commission a registration
statement with respect to such Registrable Securities and use its diligent best
efforts to cause such registration statement to become
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effective, and, upon the request of the Holders of a majority of the Registrable
Securities registered thereunder, keep such registration statement effective for
up to ninety (90) days.
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement as may be necessary to comply with
the provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the
securities covered by such registration statement under such other securities or
blue sky laws of such jurisdictions as shall be reasonably requested by the
Holders, provided that the Company shall not be required in connection therewith
or as a condition thereto to qualify to do business or to file a general consent
to service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter
into and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by
such registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
2.7 INDEMNIFICATION.
(a) To the extent permitted by law, the Company will
indemnify each Holder, each of its officers and directors and partners, each
person controlling such Holder, within the meaning of Section 15 of the
Securities Act, with respect to which registration, qualification or compliance
has been effected pursuant to this Agreement, each underwriter, if any, and each
person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they were made, not misleading, or any violation by the Company of any federal,
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state or common law rule or regulation applicable to the Company in connection
with any such registration, qualification or compliance, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein. Further, to the extent permitted by
law, the Company will reimburse each such Holder, each of its officers and
directors, and each person controlling such Holder, each such underwriter and
each person who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission, made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.
(b) To the extent permitted by law, each Holder will, if
Registrable Securities held by such Holder are included in the securities as to
which such registration, qualification or compliance is being effected,
indemnify the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, and each other such Holder, each of its
officers and directors and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or 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. To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder and
stated to be specifically for use therein. Notwithstanding the foregoing, the
liability of each Holder under this subsection (b) shall be limited in an amount
equal to the public offering price of the shares sold by such Holder.
(c) Each party entitled to indemnification under this
Section 2.7 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall
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not unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 2 unless the failure to
give such notice is materially prejudicial to an Indemnifying Party's ability to
defend such action and provided further, that the Indemnifying Party shall not
assume the defense for matters as to which there is a conflict of interest or
separate and different defenses. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation. No Indemnified Party shall consent to entry of any
judgment or enter into any settlement without the consent of each Indemnifying
Party, which consent shall not be unreasonably withheld.
(d) Each Holder agrees that in the event the Company enters
into an underwriting agreement in connection with a registration under Section
2.1, 2.2 or 2.3, which contains indemnification provisions, such indemnification
provisions shall supersede in all respects the provisions of Sections 2.7(a),
2.7(b) and 2.7(c) hereof.
2.8 INFORMATION BY HOLDER. The Holder or Holders of Registrable
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the Company may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification or compliance referred to in this Section
2.
2.9 RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Restricted Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to use its best efforts to:
(a) Make and keep public information available, as those
terms are understood and defined in Rule 144 under the Securities Act, at all
times after the effective date that the Company becomes subject to the reporting
requirements of the Securities Act or the Securities Exchange Act of 1934, as
amended.
(b) File with the Commission in a timely manner all reports
and other documents required of the Company under the Securities Act and the
Securities Exchange Act of 1934, as amended (at any time after it has become
subject to such reporting requirements).
(c) So long as a Holder owns any Restricted Securities, to
furnish to the Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Securities Exchange Act of 1934 (at
any time after it has become subject to such reporting requirements), a copy of
the most recent annual or quarterly report of the Company,
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and such other reports and documents of the Company and other information in the
possession of or reasonably obtainable by the Company as a Holder may reasonably
request in availing itself of any rule or regulation of the Commission allowing
a Holder to sell any such securities without registration.
2.10 TRANSFER OF REGISTRATION RIGHTS. The rights to cause the Company
to register securities granted Holders under Sections 2.1, 2.2 and 2.3 may be
assigned to a transferee or assignee, reasonably acceptable to the Company, in
connection with any transfer or assignment of Registrable Securities by a Holder
provided that: (i) such transfer may otherwise be effected in accordance with
applicable securities laws and (ii) such assignee or transferee acquires the
lesser of 200,000 shares of Registrable Securities (appropriately adjusted for
stock splits, combinations, recapitalizations and the like) or all of the shares
of Registrable Securities held by a Holder . Notwithstanding the foregoing, the
rights to cause the Company to register securities may be assigned to any
constituent partner, or retired partner, or to the estate of any of its partners
or retired partners of a Holder, without compliance with item (ii) above,
provided written notice thereof is promptly given to the Company.
2.11 STAND-OFF AGREEMENT. Each Holder agrees, in connection with the
initial public offering of the Company's securities and upon request of the
Company or the underwriters managing any underwritten offering of the Company's
securities, to not sell, make any short sale of, loan, grant any option for the
purchase of, or otherwise dispose of any Registrable Securities (other than
those included in the registration) or other securities of the Company without
the prior written consent of the Company or such underwriters, as the case may
be, for such period of time (not to exceed one hundred eighty (180) days) from
the effective date of such registration as may be reasonably requested by the
underwriters and to enter into an agreement with the underwriter, which
agreement shall be in form and substance satisfactory to such underwriter, not
to sell, make any short sale of, loan, grant any option for the purchase of, or
otherwise dispose of any Registrable Securities (other than those included in
the registration) or other securities of the Company without the prior written
consent of the Company or such underwriters, as the case may be, for such period
of time (not to exceed one hundred eighty (180) days) from the effective date of
such registration as may be reasonably requested by the underwriters; provided,
however, that all other holders of one percent (1%) or more of the Company's
outstanding securities and the officers and directors of the Company who own
securities of the Company also agree to substantially the same such
restrictions. The shares held by all constituent partners of any entity holding
registration rights hereunder shall be aggregated in determining whether such
one percent (1%) threshold is met, and all such constituent partners shall be
bound by this stand-off agreement.
2.12 TERMINATION OF REGISTRATION RIGHTS. The Registration Rights
granted in this Section 2 shall terminate five (5) years from the date the
Company consummates an initial public offering.
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SECTION 3
Restrictions on Transferability of Securities;
Compliance with Securities Act; Registration Rights
3.1 RESTRICTIONS ON TRANSFER. The Preferred Stock will be subject to
the restrictions on transfers set forth in Section 3 hereof. Holders will cause
any proposed transferee of the Shares held by such Holder to agree to take and
hold such securities subject to the provisions and upon the conditions specified
in this Section 3.
3.2 RESTRICTIVE LEGEND. Each certificate representing (i) the Shares
purchased, (ii) shares of Conversion Stock and (iii) any other securities issued
in respect of the Preferred Stock or the Conversion Stock upon any Stock split,
Stock dividend, recapitalization, merger, consolidation or similar event, shall
be (unless otherwise permitted by the provisions of Section 3.3 below) stamped
or otherwise imprinted with a legend in substantially the following form (in
addition to any legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE
AGREEMENT RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY
WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE
SECRETARY OF THE CORPORATION AT THE PRINCIPAL OFFICE OF THE CORPORATION.
3.3 NOTICE OF PROPOSED TRANSFERS. The holder of each certificate
representing Preferred Stock or Conversion Stock by acceptance thereof agrees to
comply in all respects with the provisions of this Section 3.3. Prior to any
proposed transfer of any Preferred Stock or Conversion Stock unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer. Each such notice shall describe the
manner and circumstances of the proposed transfer in sufficient detail, and
shall be accompanied (except in transactions in compliance with Rule 144) by
either (i) an unqualified written opinion of legal counsel who shall be
reasonably satisfactory to the Company addressed to the Company and reasonably
satisfactory in form and substance to the Company's counsel, to the effect that
the proposed transfer of the Preferred Stock may be effected without
registration under the Securities Act, or (ii) a "no action" letter from the
Securities and Exchange Commission (the "Commission") to the effect that the
distribution of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with respect
thereto, whereupon the holder of such Preferred Stock or Conversion Shares shall
be entitled to transfer such Preferred Stock in accordance with the terms of the
notice delivered by the holder to the Company. Each certificate evidencing the
Preferred Stock or Conversion Stock transferred as above provided shall bear the
appropriate restrictive legend set forth in Section 3.2 above, except that such
certificate shall not bear such restrictive legend if in the opinion of counsel
for the Company such legend is not required in order
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to establish compliance with any provisions of the Securities Act.
Notwithstanding the foregoing, any Preferred Stock or Conversion Stock may be
transferred to any constituent partner, or retired partner, or to the estate of
any of its partners or retired partners of a Holder, without compliance with
this Section 3.3, provided however, that each certificate evidencing the
Preferred Stock or Conversion Stock transferred as above provided shall bear the
appropriate restrictive legend set forth in Section 3.2 above, except that such
certificate shall not bear such restrictive legend if in the opinion of counsel
for the Company such legend is not required in order to establish compliance
with any provisions of the Securities Act.
SECTION 4
Affirmative Covenants of the Company
The Company hereby covenants and agrees as follows:
4.1 FINANCIAL INFORMATION. As long as a Holder is a holder of at
least 1,000,000 shares of the Preferred Stock or the Conversion Stock or a
combination thereof (as appropriately adjusted for all stock splits, dividends,
subdivisions, combinations, recapitalizations and the like), the Company will
mail to each such Holder:
(a) As soon as practicable after the end of each fiscal
year, and in any event within ninety (90) days thereafter, consolidated balance
sheets of the Company and its subsidiaries, if any, as of the end of such fiscal
year, and consolidated statements of income and consolidated statements of
changes in financial position of the Company and its subsidiaries, if any, for
such year, prepared in accordance with generally accepted accounting principles
and setting forth in each case in comparative form the figures for the previous
fiscal year (or, at the election of the Company, setting forth in comparative
form the budgeted figures for the current fiscal year), all in reasonable detail
and audited by independent public accountants of national standing selected by
the Company and approved by the Board of Directors.
(b) As soon as practicable after the end of the first,
second and third quarterly accounting periods in each fiscal year of the Company
and in any event within forty-five (45) days thereafter, a consolidated balance
sheet of the Company and its subsidiaries, if any, as of the end of each such
quarterly period, and consolidated statements of income and consolidated
statements of changes in financial condition of the Company and its subsidiaries
for such period and for the current fiscal year to date, prepared in accordance
with generally accepted accounting principles (other than for accompanying
notes), subject to changes resulting from year-end audit adjustments, all in
reasonable detail and signed by the principal financial or accounting officer of
the Company.
4.2 ADDITIONAL INFORMATION. As long as a Holder holds not less than
1,000,000 shares of Preferred Stock or Conversion Stock or a combination thereof
(as appropriately adjusted for all stock splits, dividends, subdivisions,
combinations, recapitalizations and the like), the Company will deliver or
provide to such Holder (i) as soon as practicable after the end of each month
and in any event within
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twenty (20) business days thereafter, an unaudited consolidated balance sheet
and statement of income of the Company and its subsidiaries, showing comparative
data against the Company's annual financial business plan, (ii) an annual
financial and business plan for the Company as soon as it is available and in
any event within ninety (90) days after the commencement of each fiscal year,
(iii) written notice of any transaction or other event which, in the opinion of
the officers of the Company, may have a material effect on the financial or
business condition of the Company and (iv) with reasonable promptness, such
other information and data, including access to books and records of the Company
and its subsidiaries, as any such holder may from time to time reasonably
request; provided, however, that the Company shall not be obligated to provide
any information that it considers in good faith to be a trade secret or to
contain confidential information, or any information that is classified by any
government agency. For the purposes of meeting the minimum number of shares
required by this Section 4.2, shares held by any constituent partner or
affiliated person or entity of a Holder shall be deemed to be held by such
Holder; provided, however, that the Company can satisfy its obligations pursuant
to this Section 4.2 (or pursuant to Section 4.3 below), to any such Holder who
would not meet the required minimum number of shares absent the aggregation of
share holdings permitted by this sentence, by providing the information required
by this Section 4.2 (or the rights of inspection established by Section 4.3) to
a representative of each set of constituent partners and affiliated persons and
entities who so aggregate share holdings.
4.3 RIGHTS OF INSPECTION. For so long as a Holder is eligible to
receive reports under Section 4.2, it shall also have the right, at its expense,
to visit and inspect any of the properties of the Company or any of its
subsidiaries and to discuss their affairs, finances and accounts with their
officers, all at such reasonable times and as often as may be reasonably
requested; provided that the Company or any subsidiary shall not be required at
any time to disclose any manufacturing or trade secret or secret process or
other data the disclosure of which the Company reasonably believes may adversely
affect its business, and provided, further, that the Company or any subsidiary
shall not be required at any time to disclose any customer data to any Holder
engaged in a business reasonably similar to the business in which the Company or
any of its subsidiaries is engaged at such time, and provided, further, that the
Company or any subsidiary shall not be required at any time to disclose any
information or data that is classified by any governmental agency.
4.4 ASSIGNMENT OF RIGHTS TO FINANCIAL INFORMATION. The rights
granted pursuant to Sections 4.1, 4.2 and 4.3 may not be assigned or otherwise
conveyed by any Holder or by any subsequent transferee of any such rights
without the prior written consent of the Company; provided, however, that any
Holder may assign such rights, after giving notice to the Company, to any
transferee, who acquires at least 1,000,000 shares of Preferred Stock,
Conversion Stock or a combination thereof (as appropriately adjusted for all
stock splits, dividends, subdivisions, combinations, recapitalizations and the
like) provided such transferee is not (1) a competitor of the Company or (2) a
company engaged in a reasonably similar business.
4.5 BOARD OF DIRECTORS.
(a) For so long as Dynamics Technology, Inc. holds not less
than 250,000 shares, of the Company's Series C Preferred or Conversion Stock or
a combination thereof (adjusted for stock splits, dividends, subdivisions,
combinations, recapitalizations and the like), the Company shall use its
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best efforts to cause the representative designated by the Series C Holders to
be nominated for election to the Company's Board of Directors at each meeting of
shareholders at which directors are elected.
(b) The Holders (other than the Holders of the Series E
Preferred Stock) and the Company shall use their best efforts to cause the Chief
Executive Officer of the Company to be elected to serve as a member of the
Company's Board of Directors at each meeting of shareholders at which directors
are elected.
4.6 MARKET STANDOFF AGREEMENTS. The Company will require that all
current and future purchasers of the Company Common Stock or Preferred Stock
will execute a market standoff agreement with terms substantially similar to the
provisions of Section 2.11 hereof.
4.7 TERMINATION OF COVENANTS. The covenants set forth in Sections
4.1, 4.2, 4.3, 4.4, 4.5 and 4.6 shall terminate and be of no further force or
effect at such time as the Company becomes subject to the reporting requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended.
SECTION 5
Miscellaneous
5.1 GOVERNING LAW. This Agreement shall be governed in all respects
by the internal laws of the State of California.
5.2 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, the
provisions hereof shall inure to the benefit of, and be binding upon, the
successors, assigns, heirs, executors and administrators of the parties hereto.
5.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and thereof, and no party shall be liable or bound to any other
party in any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought;
provided, however, that holders of a majority of the Registrable Securities may,
with the Company's prior written consent, waive, modify, amend or terminate on
behalf of all holders, this Agreement or any terms or provisions hereof.
5.4 PRIOR AGREEMENT; WAIVER AND TERMINATION. This Agreement
supersedes and replaces the Prior Registration Rights Agreement in its entirety,
and such Prior Registration Rights Agreement shall be of no further force or
effect upon execution of this Agreement by the Company and the Holders, subject
to limitations on termination for each Prior Holder set forth in Section 5.3 of
the Prior Registration Rights Agreement.
16
<PAGE> 20
5.5 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, or otherwise delivered by hand or by messenger,
addressed (a) if to any other holder of any Registrable Securities, at such
address as such holder shall have furnished the Company in writing, or, until
any such holder so furnishes an address to the Company, then to and at the
address of the last Holder of such shares who has so furnished an address to the
Company or (b) if to the Company, one copy should be sent to its address set
forth above and addressed to the attention of the Corporate Secretary, or at
such other address as the Company shall have furnished to the holders of
Registrable Securities.
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given (a) when delivered if
delivered personally or by messenger, or, (b) if sent by mail, at the earlier of
its receipt or seventy-two (72) hours after the same has been deposited in a
regularly maintained receptacle for the deposit of the United States mail,
addressed and mailed as aforesaid.
5.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which may be executed by less than all parties to this
Agreement, each of which shall be enforceable against the parties actually
executing such counterparts, and all of which together shall constitute one
instrument.
5.7 SEVERABILITY. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision.
5.8 TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not considered in construing or
interpreting this Agreement.
5.9 SHARE NUMBERS. All share numbers stated herein reflect the
two-for-one stock split effected by the Company in May 1997.
17
<PAGE> 21
The foregoing agreement is hereby executed as of the date first above
written.
"COMPANY"
GADZOOX NETWORKS, INC.
a Delaware corporation
By:__________________________________________
Title:_______________________________________
"HOLDERS"
PREFERRED STOCKHOLDERS:
The Linda Wei-Lee Chang Trust
By:__________________________________________
Its:_________________________________________
The Michael Minhall Chang Trust
By:__________________________________________
Title:_______________________________________
David C. Munson and Magdalene G.
Munson TTEES FBO Munson
Revocable Trust U/A dtd 2/9/90
By:__________________________________________
Its:_________________________________________
Tony Hsu & Lily Pao Hsu, TTEES
Tony & Lily Hsu Family Trust
U/A/D 11/8/89
By:__________________________________________
Its:_________________________________________
[Signature page - Registration and Information Rights Agreement]
<PAGE> 22
TransCorp Pension Service
Incorporated IRA Cust FBO
David Carl Munson A/C #IRZ-6132-OT
By:__________________________________________
Its:_________________________________________
_____________________________________________
Lin Lee and Yeelean Lee
Dynamics Technology, Inc.
By:__________________________________________
Its:_________________________________________
John Kensey, TTEE of the Avalon
Capital Corporation Defined Benefit
Pension Plan
By:__________________________________________
Its:_________________________________________
John Kensey, TTEE of the John P. and Susan S.
Kensey Family Trust, U/T/D dtd 2/12/87
By:__________________________________________
Its:_________________________________________
_____________________________________________
Scott Silfvast
_____________________________________________
Milton Chang
[Signature page - Registration and Information Rights Agreement]
<PAGE> 23
Bradford C. O'Brien and Judith
Mayer O'Brien, TTEES of the O'Brien
Family Trust, U/D/T 7/1/92
By:__________________________________________
Its:_________________________________________
WS Investment Co. 95B
By:__________________________________________
Its:_________________________________________
John J. Gottsman, TTEE of the John J.
Gottsman Trust, U/D/T dtd 8/15/95
By:__________________________________________
Its:_________________________________________
_____________________________________________
Luis Villalobos
Tom A. Kelley, TTEE, Thomas A.
Kelley & Associates PSMPP U/A
dtd 7/07/71
By:__________________________________________
Its:_________________________________________
_____________________________________________
Kenneth J. Sickler
[Signature page - Registration and Information Rights Agreement]
<PAGE> 24
New Enterprise Associates VI,
Limited Partnership
By: NEA Partners VI, General Partner
Its General Partner
_____________________________________________
NEA Presidents Fund, L.P.
By: NEA Partners VI, General Partner
Its General Partner
_____________________________________________
NEA Ventures 1996, L.P.
By:__________________________________________
Its: Vice President
-----------------------------------------
ONSET Enterprise Associates II, L.P.
By:__________________________________________
Its:_________________________________________
Henry C. Pao & Deborah Y. Pao,
TTEES for their Trust dtd 10/4/83
By:__________________________________________
Its:_________________________________________
_____________________________________________
Yunni Pao
[Signature page - Registration and Information Rights Agreement]
<PAGE> 25
SEAGATE TECHNOLOGY, INC.
By:__________________________________________
Its:_________________________________________
3COM CORPORATION
By:__________________________________________
Its:_________________________________________
[Signature page - Registration and Information Rights Agreement]
<PAGE> 26
GADZOOK NETWORKS, INC.
SHARES SUBJECT TO REGISTRATION RIGHTS
<TABLE>
<CAPTION>
COMMON SERIES A SERIES B SERIES C SERIES D
STOCK
------ -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
3 Com Corporation
The Savage/Black Living Trust 1,482,964
Linda Wei-Lee Chang Trust 180,000 220,000 111,000 89,000
Milton Chang 946,388
Michael Minhall Chang Trust 180,000 220,000 111,000 89,000
David Chu 223,400
Dynamics Technology, Inc. 909,090 670,116
John J. Gottsman Trust 28,506
Tony & Lily Hsu Family Trust 100,000 132,000 45,454 90,676
Thomas A. Kelley & Associates 10,000
Kensey Family Trust 91,818 202,702
John Kensey, Avalon Capital
Lin Lee and Yeelean Lee 90,910 137,090
Munson Revocable Trust 17,416
NEA Presidents Fund
New Enterprise Associates
NEA Ventures 1996, L.P.
O'Brien Family Trust 7,538
Onset Enterprise Associates
Henry C. Pao
Yunni Pao
Seagate Technology 184,600 90,000 252,784
Kenneth J. Sickler
Scott Silvfast 45,454 33,784
Thomas M. Tobin 960,000
Transcorp Pension 174,000 123,800
Luis Villalobos 154,090
WS Investment Co. 18,244
Total 3,026,364 742,016 528,000 1,450,726 2,675,718
</TABLE>
<TABLE>
<CAPTION>
SERIES E SERIES F SERIES G SERIES H TOTAL
-------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C>
3 Com Corporation 784,314 784,314
The Savage/Black Living Trust 1,482,964
Linda Wei-Lee Chang Trust 600,000
Milton Chang 277,778 1,224,166
Michael Minhall Chang Trust 600,000
David Chu 223,400
Dynamics Technology, Inc. 1,579,206
John J. Gottsman Trust 28,506
Tony & Lily Hsu Family Trust 55,556 423,686
Thomas A. Kelley & Associates 11,112 21,112
Kensey Family Trust 45,000 339,520
John Kensey, Avalon Capital 15,000 15,000
Lin Lee and Yeelean Lee 228,000
Munson Revocable Trust 121,000 136,416
NEA Presidents Fund 41,666 41,666
New Enterprise Associates 1,944,446 1,944,446
NEA Ventures 1996, L.P. 2,778 2,778
O'Brien Family Trust 5,556 13,094
Onset Enterprise Associates 1,388,888 1,388,888
Henry C. Pao 138,890 138,890
Yunni Pao 33,890 33,890
Seagate Technology 333,106 2,092,234 895,263 3,847,987
Kenneth J. Sickler 15,238 15,238
Scott Silvfast 79,238
Thomas M. Tobin 960,000
Transcorp Pension 297,800
Luis Villalobos 2,000 156,090
WS Investment Co. 18,244
Total 4,431,904 2,092,234 895,263 784,314 16,626,539
</TABLE>
<PAGE> 1
EXHIBIT 4.3
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY
COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS.
WARRANT AGREEMENT
To Purchase Shares of the Series F Preferred Stock of
GADZOOX NETWORKS, INC
Dated as of July 30, 1997 (the "Effective Date")
WHEREAS, Gadzoox Networks, Inc., a California corporation (the
"Company") has entered into a Loan and Security Agreement dated as of July 28,
1997, and related Promissory Note(s) (collectively, the "Loans") with Comdisco,
Inc., a Delaware corporation (the "Warrantholder"); and
WHEREAS, the Company desires to grant to Warrantholder, in consideration
for such Loans, the right to purchase shares of its Series F Preferred Stock;
NOW, THEREFORE, in consideration of the Warrantholder executing and
delivering such Loans and in consideration of mutual covenants and agreements
contained herein, the Company and Warrantholder agree as follows:
1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK. The Company hereby
grants to the Warrantholder, and the Warrantholder is entitled, upon the terms
and subject to the conditions hereinafter set forth, to subscribe to and
purchase, from the Company, 12,552 fully paid and non-assessable shares of the
Company's Series F Preferred Stock ("Preferred Stock") at a purchase price of
$4.78 per share (the "Exercise Price"). The number and purchase price of such
shares are subject to adjustment as provided in Section 8 hereof.
2. TERM OF THE WARRANT AGREEMENT. Except as otherwise provided for
herein, the term of this Warrant Agreement and the right to purchase Preferred
Stock as granted herein shall commence on the Effective Date and shall be
exercisable for a period of (i) ten (10) years or (ii) five (5) years from the
effective date of the Company's initial public offering, whichever is longer.
3. EXERCISE OF THE PURCHASE RIGHTS. The purchase rights set forth in
this Warrant Agreement are exercisable by the Warrantholder, in whole or in
part, at any time, or from time to time, prior to the expiration of the term set
forth in Section 2 above, by tendering to the Company at its principal office a
notice of exercise in the form attached hereto as Exhibit I (the
<PAGE> 2
"Notice of Exercise"), duly completed and executed. Promptly upon receipt of the
Notice of Exercise and the payment of the purchase price in accordance with the
terms set forth below, and in no event later than twenty-one (21) days
thereafter, the Company shall issue to the Warrantholder a certificate for the
number of shares of Preferred Stock purchased and shall execute the
acknowledgment of exercise in the form attached hereto as Exhibit II (the
"Acknowledgment of Exercise") indicating the number of shares which remain
subject to future purchases, if any.
The Exercise Price may be paid at the Warrantholder's election
either (i) by cash or check, or (ii) by surrender of Warrants ("Net Issuance")
as determined below. If the Warrantholder elects the Net Issuance method, the
Company will issue Preferred Stock in accordance with the following formula:
X = Y(A-B)
A
Where: X = the number of shares of Preferred Stock to be
issued to the Warrantholder.
Y = the number of shares of Preferred Stock
requested to be exercised under this Warrant
Agreement.
A = the fair market value of one (1) share of
Preferred Stock.
B = the Exercise Price.
For purposes of the above calculation, current fair market value
of Preferred Stock shall mean with respect to each share of Preferred Stock:
(i) if the exercise is in connection with an initial
public offering of the Company's Common Stock, and if the Company's Registration
Statement relating to such public offering has been declared effective by the
SEC, then the fair market value per share shall be the product of (x) the
initial "Price to Public" specified in the final prospectus with respect to the
offering and (y) the number of shares of Common Stock into which each share of
Preferred Stock is convertible at the time of such exercise;
(ii) if this Warrant is exercised after, and not in
connection with the Company's initial public offering, and:
(a) if traded on a securities exchange, the fair market value
shall be deemed to be the product of (x) the average of the closing prices over
a twenty-one (21) day period ending three days before the day the current fair
market value of the securities is being determined and (y) the number of shares
of Common Stock into which each share of Preferred Stock is convertible at the
time of such exercise; or
(b) if actively traded over-the-counter, the fair market value
shall be deemed to be the product of (x) the average of the closing bid and
asked prices quoted on the NASDAQ system (or similar system) over the twenty-one
(21) day period ending three days before
-2-
<PAGE> 3
the day the current fair market value of the securities is being determined and
(y) the number of shares of Common Stock into which each share of Preferred
Stock is convertible at the time of such exercise;
(iii) if at any time the Common Stock is not listed on
any securities exchange or quoted in the NASDAQ System or the over-the-counter
market, the current fair market value of Preferred Stock shall be the product of
(x) the highest price per share which the Company could obtain from a willing
buyer (not a current employee or director) for shares of Common Stock sold by
the Company, from authorized but unissued shares, as determined in good faith by
its Board of Directors and (y) the number of shares of Common Stock into which
each share of Preferred Stock is convertible at the time of such exercise,
unless the Company shall become subject to a merger, acquisition or other
consolidation pursuant to which the Company is not the surviving party, in which
case the fair market value of Preferred Stock shall be deemed to be the value
received by the holders of the Company's Preferred Stock on a common equivalent
basis pursuant to such merger or acquisition.
Upon partial exercise by either cash or Net Issuance, the Company
shall promptly issue an amended Warrant Agreement representing the remaining
number of shares purchasable hereunder. All other terms and conditions of such
amended Warrant Agreement shall be identical to those contained herein,
including, but not limited to the Effective Date hereof.
4. RESERVATION OF SHARES.
(a) Authorization and Reservation of Shares. During the term of
this Warrant Agreement, the Company will at all times have authorized and
reserved a sufficient number of shares of its Preferred Stock to provide for the
exercise of the rights to purchase Preferred Stock as provided for herein.
(b) Registration or Listing. If any shares of Preferred Stock
required to be reserved hereunder require registration with or approval of any
governmental authority under any Federal or State law (other than any
registration under the Securities Act of 1933, as amended ("1933 Act"), as then
in effect, or any similar Federal statute then enforced, or any state securities
law, required by reason of any transfer involved in such conversion), or listing
on any domestic securities exchange, before such shares may be issued upon
conversion, the Company will, at its expense and as expeditiously as possible,
use its best efforts to cause such shares to be duly registered, listed or
approved for listing on such domestic securities exchange, as the case may be.
5. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of the Warrant,
but in lieu of such fractional shares the Company shall make a cash payment
therefor upon the basis of the Exercise Price then in effect.
6. NO RIGHTS AS SHAREHOLDER. This Warrant Agreement does not
entitle the Warrantholder to any voting rights or other rights as a shareholder
of the Company prior to the exercise of the Warrant.
-3-
<PAGE> 4
7. WARRANTHOLDER REGISTRY. The Company shall maintain a registry
showing the name and address of the registered holder of this Warrant Agreement.
8. ADJUSTMENT RIGHTS. The purchase price per share and the number
of shares of Preferred Stock purchasable hereunder are subject to adjustment, as
follows:
(a) Merger and Sale of Assets. If at any time there shall be a
capital reorganization of the shares of the Company's stock (other than a
combination, reclassification, exchange or subdivision of shares otherwise
provided for herein), or a merger or consolidation of the Company with or into
another corporation whether or not the Company is the surviving corporation, or
the sale of all or substantially all of the Company's properties and assets to
any other person (hereinafter referred to as a "Merger Event"), then, as a part
of such Merger Event, lawful provision shall be made so that the Warrantholder
shall thereafter be entitled to receive, upon exercise of the Warrant, the
number of shares of preferred stock or other securities of the successor
corporation resulting from such Merger Event, equivalent in value to that which
would have been issuable if Warrantholder had exercised this Warrant immediately
prior to the Merger Event. In any such case, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made in
the application of the provisions of this Warrant Agreement with respect to the
rights and interest of the Warrantholder after the Merger Event to the end that
the provisions of this Warrant Agreement (including adjustments of the Exercise
Price and number of shares of Preferred Stock purchasable) shall be applicable
to the greatest extent possible.
(b) Reclassification of Shares. If the Company at any time shall,
by combination, reclassification, exchange or subdivision of securities or
otherwise, change any of the securities as to which purchase rights under this
Warrant Agreement exist into the same or a different number of securities of any
other class or classes, this Warrant Agreement shall thereafter represent the
right to acquire such number and kind of securities as would have been issuable
as the result of such change with respect to the securities which were subject
to the purchase rights under this Warrant Agreement immediately prior to such
combination, reclassification, exchange, subdivision or other change.
(c) Subdivision or Combination of Shares. If the Company at any
time shall combine or subdivide its Preferred Stock, the Exercise Price shall be
proportionately decreased in the case of a subdivision, or proportionately
increased in the case of a combination.
(d) Stock Dividends. If the Company at any time shall pay a
dividend payable in, or make any other distribution (except any distribution
specifically provided for in the foregoing subsections (a) or (b)) of the
Company's stock, then the Exercise Price shall be adjusted, from and after the
record date of such dividend or distribution, to that price determined by
multiplying the Exercise Price in effect immediately prior to such record date
by a fraction (i) the numerator of which shall be the total number of all shares
of the Company's stock outstanding immediately prior to such dividend or
distribution, and (ii) the denominator of which shall be the total number of all
shares of the Company's stock outstanding immediately after such dividend or
distribution. The Warrantholder shall thereafter be entitled to purchase, at the
Exercise Price resulting from such adjustment, the number of shares of Preferred
Stock (calculated to the nearest whole share) obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
-4-
<PAGE> 5
shares of Preferred Stock issuable upon the exercise hereof immediately prior to
such adjustment and dividing the product thereof by the Exercise Price resulting
from such adjustment.
(e) Antidilution Rights. Additional antidilution rights
applicable to the Preferred Stock purchasable hereunder are as set forth in the
Company's Certificate of Incorporation, as amended through the Effective Date, a
true and complete copy of which is attached hereto as Exhibit __ (the
"Charter"). The Company shall promptly provide the Warrantholder with any
restatement, amendment, modification or waiver of the Charter. The Company shall
provide Warrantholder with prior written notice of any issuance of its stock or
other equity security to occur after the Effective Date of this Warrant, which
notice shall exclude all stock option grants but include (a) the price at which
such stock or security is to be sold, (b) the number of shares to be issued, and
(c) such other information as necessary for Warrantholder to determine if a
dilutive event has occurred.
(f) Notice of Adjustments. If: (i) the Company shall declare any
dividend or distribution upon its stock, whether in cash, property, stock or
other securities; (ii) the Company shall offer for subscription pro rata to the
holders of any class of its Preferred or other convertible stock any additional
shares of stock of any class or other rights; (iii) there shall be any Merger
Event; (iv) there shall be an initial public offering; or (v) there shall be any
voluntary dissolution, liquidation or winding up of the Company; then, in
connection with each such event, the Company shall send to the Warrantholder:
(A) at least twenty (20) days' prior written notice of the date on which the
books of the Company shall close or a record shall be taken for such dividend,
distribution, subscription rights (specifying the date on which the holders of
Preferred Stock shall be entitled thereto) or for determining rights to vote in
respect of such Merger Event, dissolution, liquidation or winding up; (B) in the
case of any such Merger Event, dissolution, liquidation or winding up, at least
twenty (20) days' prior written notice of the date when the same shall take
place (and specifying the date on which the holders of Preferred Stock shall be
entitled to exchange their Preferred Stock for securities or other property
deliverable upon such Merger Event, dissolution, liquidation or winding up); and
(C) in the case of a public offering, the Company shall give the Warrantholder
at least twenty (20) days written notice prior to the effective date thereof.
Each such written notice shall set forth, in reasonable detail,
(i) the event requiring the adjustment, (ii) the amount of the adjustment, (iii)
the method by which such adjustment was calculated, (iv) the Exercise Price, and
(v) the number of shares subject to purchase hereunder after giving effect to
such adjustment, and shall be given by first class mail, postage prepaid,
addressed to the Warrantholder, at the address as shown on the books of the
Company.
(g) Timely Notice. Failure to timely provide such notice required
by subsection (f) above shall entitle Warrantholder to retain the benefit of the
applicable notice period notwithstanding anything to the contrary contained in
any insufficient notice received by Warrantholder. The notice period shall begin
on the date Warrantholder actually receives a written notice containing all the
information specified above.
-5-
<PAGE> 6
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
(a) Reservation of Preferred Stock. The Preferred Stock issuable
upon exercise of the Warrantholder's rights has been duly and validly reserved
and, when issued in accordance with the provisions of this Warrant Agreement,
will be validly issued, fully paid and non-assessable, and will be free of any
taxes, liens, charges or encumbrances of any nature whatsoever; provided,
however, that the Preferred Stock issuable pursuant to this Warrant Agreement
may be subject to restrictions on transfer under state and/or Federal securities
laws. The Company has made available to the Warrantholder true, correct and
complete copies of its Charter and Bylaws, as amended. The issuance of
certificates for shares of Preferred Stock upon exercise of the Warrant
Agreement shall be made without charge to the Warrantholder for any issuance tax
in respect thereof, or other cost incurred by the Company in connection with
such exercise and the related issuance of shares of Preferred Stock. The Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved and the issuance and delivery of any certificate in a name
other than that of the Warrantholder.
(b) Due Authority. The execution and delivery by the Company of
this Warrant Agreement and the performance of all obligations of the Company
hereunder, including the issuance to Warrantholder of the right to acquire the
shares of Preferred Stock, have been duly authorized by all necessary corporate
action on the part of the Company, and the Loans and this Warrant Agreement are
not inconsistent with the Company's Charter or Bylaws, do not contravene any law
or governmental rule, regulation or order applicable to it, do not and will not
contravene any provision of, or constitute a default under, any indenture,
mortgage, contract or other instrument to which it is a party or by which it is
bound, and the Loans and this Warrant Agreement constitute legal, valid and
binding agreements of the Company, enforceable in accordance with their
respective terms.
(c) Consents and Approvals. No consent or approval of, giving of
notice to, registration with, or taking of any other action in respect of any
state, Federal or other governmental authority or agency is required with
respect to the execution, delivery and performance by the Company of its
obligations under this Warrant Agreement, except for the filing of notices
pursuant to Regulation D under the 1933 Act and any filing required by
applicable state securities law, which filings will be effective by the time
required thereby.
(d) Issued Securities. All issued and outstanding shares of
Common Stock, Preferred Stock or any other securities of the Company have been
duly authorized and validly issued and are fully paid and nonassessable. All
outstanding shares of Common Stock, Preferred Stock and any other securities
were issued in full compliance with all Federal and state securities laws. In
addition:
(i) The authorized capital of the Company consists of
(A) 4,969,453 shares of Common Stock, of which 4,969,453 shares are issued and
outstanding, (B) 856,600 shares of Series A Preferred Stock, of which 856,600
shares are issued and outstanding and convertible into 856,600 shares of Common
Stock, (C) 660,000 shares of Series B Preferred Stock, of which 660,000 shares
are issued and outstanding and convertible into 660,000 shares of Common Stock,
(D) 1,454,544 shares of Series C Preferred Stock, of which 1,454,544 shares are
issued and outstanding and are convertible into 1,454,544 shares of Common
Stock, (E) 2,720,000 shares of
-6-
<PAGE> 7
Series D Preferred Stock, of which 2,720,000 shares are issued and outstanding
and are convertible into 2,720,000 shares of Common Stock, (F) 4,444,444 shares
of Series E Preferred Stock, of which 4,444,444 shares are issued and
outstanding and are convertible into 4,444,444 shares of Common Stock, (G)
2,092,234 shares of Series F Preferred Stock, of which 2,092,234 shares are
issued and outstanding and are convertible into 2,092,234 shares of Common Stock
(ii) The Company has reserved 3,725,067 shares of Common
Stock for issuance under its Qualified Stock Option Plan, under which 3,263,370
options are outstanding at an average price of $0.174 per share. There are no
other options, warrants, conversion privileges or other rights presently
outstanding to purchase or otherwise acquire any authorized but unissued shares
of the Company's capital stock or other securities of the Company.
(iii) In accordance with the Company's Articles of
Incorporation, no shareholder of the Company has preemptive rights to purchase
new issuances of the Company's capital stock.
(e) Insurance. The Company has in full force and effect insurance
policies, with extended coverage, insuring the Company and its property and
business against such losses and risks, and in such amounts, as are customary
for corporations engaged in a similar business and similarly situated and as
otherwise may be required pursuant to the terms of any other contract or
agreement.
(f) Other Commitments to Register Securities. Except as set forth
in the Fourth Amended Shareholder Agreement, the Company is not, pursuant to the
terms of any other agreement currently in existence, under any obligation to
register under the 1933 Act any of its presently outstanding securities or any
of its securities which may hereafter be issued.
(g) Exempt Transaction. Subject to the accuracy of the
Warrantholder's representations in Section 10 hereof, the issuance of the
Preferred Stock upon exercise of this Warrant will constitute a transaction
exempt from (i) the registration requirements of Section 5 of the 1933 Act, in
reliance upon Section 4(2) thereof, and (ii) the qualification requirements of
the applicable state securities laws.
(h) Compliance with Rule 144. At the written request of the
Warrantholder, who proposes to sell Preferred Stock issuable upon the exercise
of the Warrant in compliance with Rule 144 promulgated by the Securities and
Exchange Commission, the Company shall furnish to the Warrantholder, within ten
days after receipt of such request, a written statement confirming the Company's
compliance with the filing requirements of the Securities and Exchange
Commission as set forth in such Rule, as such Rule may be amended from time to
time.
10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. This Warrant
Agreement has been entered into by the Company in reliance upon the following
representations and covenants of the Warrantholder:
(a) Investment Purpose. The right to acquire Preferred Stock or
the Preferred Stock issuable upon exercise of the Warrantholder's rights
contained herein will be acquired for
-7-
<PAGE> 8
investment and not with a view to the sale or distribution of any part thereof,
and the Warrantholder has no present intention of selling or engaging in any
public distribution of the same except pursuant to a registration or exemption.
(b) Private Issue. The Warrantholder understands (i) that the
Preferred Stock issuable upon exercise of this Warrant is not registered under
the 1933 Act or qualified under applicable state securities laws on the ground
that the issuance contemplated by this Warrant Agreement will be exempt from the
registration and qualifications requirements thereof, and (ii) that the
Company's reliance on such exemption is predicated on the representations set
forth in this Section 10.
(c) Disposition of Warrantholder's Rights. In no event will the
Warrantholder make a disposition of any of its rights to acquire Preferred Stock
or Preferred Stock issuable upon exercise of such rights unless and until (i) it
shall have notified the Company of the proposed disposition, and (ii) if
requested by the Company, it shall have furnished the Company with an opinion of
counsel (which counsel may either be inside or outside counsel to the
Warrantholder) satisfactory to the Company and its counsel to the effect that
(A) appropriate action necessary for compliance with the 1933 Act has been
taken, or (B) an exemption from the registration requirements of the 1933 Act is
available. Notwithstanding the foregoing, the restrictions imposed upon the
transferability of any of its rights to acquire Preferred Stock or Preferred
Stock issuable on the exercise of such rights do not apply to transfers from the
beneficial owner of any of the aforementioned securities to its nominee or from
such nominee to its beneficial owner, and shall terminate as to any particular
share of Preferred Stock when (1) such security shall have been effectively
registered under the 1933 Act and sold by the holder thereof in accordance with
such registration or (2) such security shall have been sold without registration
in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been
issued to the Warrantholder at its request by the staff of the Securities and
Exchange Commission or a ruling shall have been issued to the Warrantholder at
its request by such Commission stating that no action shall be recommended by
such staff or taken by such Commission, as the case may be, if such security is
transferred without registration under the 1933 Act in accordance with the
conditions set forth in such letter or ruling and such letter or ruling
specifies that no subsequent restrictions on transfer are required. Whenever the
restrictions imposed hereunder shall terminate, as hereinabove provided, the
Warrantholder or holder of a share of Preferred Stock then outstanding as to
which such restrictions have terminated shall be entitled to receive from the
Company, without expense to such holder, one or more new certificates for the
Warrant or for such shares of Preferred Stock not bearing any restrictive
legend.
(d) Financial Risk. The Warrantholder has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment, and has the ability to bear the economic
risks of its investment.
(e) Risk of No Registration. The Warrantholder understands that
if the Company does not register with the Securities and Exchange Commission
pursuant to Section 12 of the 1934 Act (the "1934 Act"), or file reports
pursuant to Section 15(d), of the 1934 Act, or if a registration statement
covering the securities under the 1933 Act is not in effect when it desires to
sell (i) the rights to purchase Preferred Stock pursuant to this Warrant
Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to
purchase, it may be required to hold such securities for an
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<PAGE> 9
indefinite period. The Warrantholder also understands that any sale of its
rights of the Warrantholder to purchase Preferred Stock or Preferred Stock which
might be made by it in reliance upon Rule 144 under the 1933 Act may be made
only in accordance with the terms and conditions of that Rule.
(f) Accredited Investor. Warrantholder is an "accredited
investor" within the meaning of the Securities and Exchange Rule 501 of
Regulation D, as presently in effect.
11. TRANSFERS. Subject to the terms and conditions contained in
Section 10 hereof, this Warrant Agreement and all rights hereunder are
transferable in whole or in part by the Warrantholder and any successor
transferee, provided, however, in no event shall the number of transfers of the
rights and interests in all of the Warrants exceed three (3) transfers. The
transfer shall be recorded on the books of the Company upon receipt by the
Company of a notice of transfer in the form attached hereto as Exhibit III (the
"Transfer Notice"), at its principal offices and the payment to the Company of
all transfer taxes and other governmental charges imposed on such transfer.
12. MISCELLANEOUS.
(a) Effective Date. The provisions of this Warrant Agreement
shall be construed and shall be given effect in all respects as if it had been
executed and delivered by the Company on the date hereof. This Warrant Agreement
shall be binding upon any successors or assigns of the Company.
(b) Attorney's Fees. In any litigation, arbitration or court
proceeding between the Company and the Warrantholder relating hereto, the
prevailing party shall be entitled to attorneys' fees and expenses and all costs
of proceedings incurred in enforcing this Warrant Agreement.
(c) Governing Law. This Warrant Agreement shall be governed by
and construed for all purposes under and in accordance with the laws of the
State of Illinois.
(d) Counterparts. This Warrant Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(e) Notices. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal delivery,
facsimile transmission (provided that the original is sent by personal delivery
or mail as hereinafter set forth) or seven (7) days after deposit in the United
States mail, by registered or certified mail, addressed (i) to the Warrantholder
at 6111 North River Road, Rosemont, Illinois 60018, attention: James LabJ,
Venture Group, cc: Legal Department, attn.: General Counsel, (and/or, if by
facsimile, (847) 518-5465 and (847) 518-5088 and (ii) to the Company at 6840 Via
Del Oro, Suite 290, San Jose, CA 95119, attention: Chris Munson (and/or if by
facsimile, (408) 360-6079 or at such other address as any such party may
subsequently designate by written notice to the other party.
(f) Remedies. In the event of any default hereunder, the
non-defaulting party may proceed to protect and enforce its rights either by
suit in equity and/or by action at law,
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<PAGE> 10
including but not limited to an action for damages as a result of any such
default, and/or an action for specific performance for any default where
Warrantholder will not have an adequate remedy at law and where damages will not
be readily ascertainable. The Company expressly agrees that it shall not oppose
an application by the Warrantholder or any other person entitled to the benefit
of this Agreement requiring specific performance of any or all provisions hereof
or enjoining the Company from continuing to commit any such breach of this
Agreement.
(g) No Impairment of Rights. The Company will not, by amendment
of its Charter or through any other means, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate in order to protect the rights
of the Warrantholder against impairment.
(h) Survival. The representations, warranties, covenants and
conditions of the respective parties contained herein or made pursuant to this
Warrant Agreement shall survive the execution and delivery of this Warrant
Agreement.
(i) Severability. In the event any one or more of the provisions
of this Warrant Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Warrant Agreement shall be
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision, which
comes closest to the intention of the parties underlying the invalid, illegal or
unenforceable provision.
(j) Amendments. Any provision of this Warrant Agreement may be
amended by a written instrument signed by the Company and by the Warrantholder.
(k) Additional Documents. The Company, upon execution of this
Warrant Agreement, shall provide the Warrantholder with certified resolutions
with respect to the representations, warranties and covenants set forth in
subparagraphs (a) through (d), (f) and (g) of Section 9 above. If the purchase
price for the Loans referenced in the preamble of this Warrant Agreement exceeds
$1,000,000, the Company will also provide Warrantholder with an opinion from the
Company's counsel with respect to those same representations, warranties and
covenants. The Company shall also supply such other documents as the
Warrantholder may from time to time reasonably request.
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be executed by its officers thereunto duly authorized as of the
Effective Date.
Company: GADZOOX NETWORKS, INC.
By:
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Title:
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Warrantholder: COMDISCO, INC.
By:
-------------------------------------
Title:
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<PAGE> 12
EXHIBIT I
NOTICE OF EXERCISE
To: _________________
(1) The undersigned Warrantholder hereby elects to purchase _____
shares of the Series __ Preferred Stock of __________, pursuant
to the terms of the Warrant Agreement dated the ____ day of
__________, 19__ (the "Warrant Agreement") between
___________________ and the Warrantholder, and tenders herewith
payment of the purchase price for such shares in full, together
with all applicable transfer taxes, if any.
(2) In exercising its rights to purchase the Series __ Preferred
Stock of __________________, the undersigned hereby confirms and
acknowledges the investment representations and warranties made
in Section 10 of the Warrant Agreement.
(3) Please issue a certificate or certificates representing said
shares of Series __ Preferred Stock in the name of the
undersigned or in such other name as is specified below.
- ----------------------------
(Name)
- ----------------------------
(Address)
Warrantholder:
COMDISCO, INC.
By:
-------------------------------------
Title:
----------------------------------
Date:
-----------------------------------
<PAGE> 13
EXHIBIT II
ACKNOWLEDGMENT OF EXERCISE
The undersigned __________________, hereby acknowledge receipt of the
"Notice of Exercise" from Comdisco, Inc., to purchase __________ shares of the
Series __ Preferred Stock of __________, pursuant to the terms of the Warrant
Agreement, and further acknowledges that __________ shares remain subject to
purchase under the terms of the Warrant Agreement.
Company:
By:
-------------------------------------
Title:
----------------------------------
Date:
-----------------------------------
<PAGE> 14
EXHIBIT III
TRANSFER NOTICE
(TO TRANSFER OR ASSIGN THE FOREGOING WARRANT AGREEMENT EXECUTE THIS FORM AND
SUPPLY REQUIRED INFORMATION. DO NOT USE THIS FORM TO PURCHASE SHARES.)
FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights
evidenced thereby are hereby transferred and assigned to
---------------------------------------------------------------
(Please Print)
whose address is
-----------------------------------------------
-----------------------------------------------
Dated:
-----------------------------------------
Holder's Signature:
----------------------------
Holder's Address:
------------------------------
------------------------------
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Signature Guaranteed:
--------------------------------------------------
NOTE: The signature to this Transfer Notice must correspond with the name
as it appears on the face of the Warrant Agreement, without
alteration or enlargement or any change whatever. Officers of
corporations and those acting in a fiduciary or other representative
capacity should file proper evidence of authority to assign the
foregoing Warrant Agreement.
<PAGE> 1
EXHIBIT 4.4
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AS AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH MAY BE COMPANY
COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT
REQUIRED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE
SECURITIES LAWS.
WARRANT AGREEMENT
To Purchase Shares of the Series G Preferred Stock of
GADZOOX NETWORKS, INC.
Dated as of July 6, 1998 (the "Effective Date")
WHEREAS, Gadzoox Networks, Inc., a California corporation (the
"Company") has entered into a Master Lease Agreement dated as of July 6, 1998,
Equipment Schedule No. VL-2 and VL-3 dated as of July 6, 1998, and related
Summary Equipment Schedules (collectively, the "Leases") with Comdisco, Inc., a
Delaware corporation (the "Warrantholder"); and
WHEREAS, the Company desires to grant to Warrantholder, in consideration
for such Leases, the right to purchase shares of its Series G Preferred Stock;
NOW, THEREFORE, in consideration of the Warrantholder executing and
delivering such Leases and in consideration of mutual covenants and agreements
contained herein, the Company and Warrantholder agree as follows:
1. GRANT OF THE RIGHT TO PURCHASE PREFERRED STOCK. The Company hereby
grants to the Warrantholder, and the Warrantholder is entitled, upon the terms
and subject to the conditions hereinafter set forth, to subscribe to and
purchase, from the Company, 19,607 fully paid and non-assessable shares of the
Company's Series G Preferred Stock ("Preferred Stock") at a purchase price of
$7.65 per share (the "Exercise Price"). The number and purchase price of such
shares are subject to adjustment as provided in Section 8 hereof.
2. TERM OF THE WARRANT AGREEMENT. Except as otherwise provided for
herein, the term of this Warrant Agreement and the right to purchase Preferred
Stock as granted herein shall commence on the Effective Date and shall be
exercisable for a period of (i) five (5) years or (ii) two (2) years from the
effective date of the Company's initial public offering, whichever is longer.
3. EXERCISE OF THE PURCHASE RIGHTS. The purchase rights set forth in
this Warrant Agreement are exercisable by the Warrantholder, in whole or in
part, at any time, or from time to time, prior to the expiration of the term set
forth in Section 2 above, by tendering to the Company at its principal office a
notice of exercise in the form attached hereto as Exhibit I (the
<PAGE> 2
"Notice of Exercise"), duly completed and executed. Promptly upon receipt of the
Notice of Exercise and the payment of the purchase price in accordance with the
terms set forth below, and in no event later than twenty-one (21) days
thereafter, the Company shall issue to the Warrantholder a certificate for the
number of shares of Preferred Stock purchased and shall execute the
acknowledgment of exercise in the form attached hereto as Exhibit II (the
"Acknowledgment of Exercise") indicating the number of shares which remain
subject to future purchases, if any.
The Exercise Price may be paid at the Warrantholder's election
either (i) by cash or check, or (ii) by surrender of Warrants ("Net Issuance")
as determined below. If the Warrantholder elects the Net Issuance method, the
Company will issue Preferred Stock in accordance with the following formula:
X = Y(A-B)
------
A
Where: X = the number of shares of Preferred Stock to be issued to
the Warrantholder.
Y = the number of shares of Preferred Stock requested
to be exercised under this Warrant Agreement.
A = the fair market value of one (1) share of Preferred
Stock.
B = the Exercise Price.
For purposes of the above calculation, current fair market value
of Preferred Stock shall mean with respect to each share of Preferred Stock:
(i) if the exercise is in connection with an initial public
offering of the Company's Common Stock, and if the Company's Registration
Statement relating to such public offering has been declared effective by the
SEC, then the fair market value per share shall be the product of (x) the
initial "Price to Public" specified in the final prospectus with respect to the
offering and (y) the number of shares of Common Stock into which each share of
Preferred Stock is convertible at the time of such exercise;
(ii) if this Warrant is exercised after, and not in connection
with the Company's initial public offering, and:
(a) if traded on a securities exchange, the fair market
value shall be deemed to be the product of (x) the average of the closing prices
over a twenty-one (21) day period ending three days before the day the current
fair market value of the securities is being determined and (y) the number of
shares of Common Stock into which each share of Preferred Stock is convertible
at the time of such exercise; or
(b) if actively traded over-the-counter, the fair market
value shall be deemed to be the product of (x) the average of the closing bid
and asked prices quoted on the NASDAQ system (or similar system) over the
twenty-one (21) day period ending three days before the day the current fair
market value of the securities is being determined and (y) the number of
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<PAGE> 3
shares of Common Stock into which each share of Preferred Stock is convertible
at the time of such exercise;
(iii) if at any time the Common Stock is not listed on
any securities exchange or quoted in the NASDAQ System or the over-the-counter
market, the current fair market value of Preferred Stock shall be the product of
(x) the highest price per share which the Company could obtain from a willing
buyer (not a current employee or director) for shares of Common Stock sold by
the Company, from authorized but unissued shares, as determined in good faith by
its Board of Directors and (y) the number of shares of Common Stock into which
each share of Preferred Stock is convertible at the time of such exercise,
unless the Company shall become subject to a merger, acquisition or other
consolidation pursuant to which the Company is not the surviving party, in which
case the fair market value of Preferred Stock shall be deemed to be the value
received by the holders of the Company's Preferred Stock on a common equivalent
basis pursuant to such merger or acquisition.
Upon partial exercise by either cash or Net Issuance, the Company
shall promptly issue an amended Warrant Agreement representing the remaining
number of shares purchasable hereunder. All other terms and conditions of such
amended Warrant Agreement shall be identical to those contained herein,
including, but not limited to the Effective Date hereof.
4. RESERVATION OF SHARES.
(a) Authorization and Reservation of Shares. During the term of
this Warrant Agreement, the Company will at all times have authorized and
reserved a sufficient number of shares of its Preferred Stock to provide for the
exercise of the rights to purchase Preferred Stock as provided for herein.
(b) Registration or Listing. If any shares of Preferred Stock
required to be reserved hereunder require registration with or approval of any
governmental authority under any Federal or State law (other than any
registration under the Securities Act of 1933, as amended ("1933 Act"), as then
in effect, or any similar Federal statute then enforced, or any state securities
law, required by reason of any transfer involved in such conversion), or listing
on any domestic securities exchange, before such shares may be issued upon
conversion, the Company will, at its expense and as expeditiously as possible,
use its best efforts to cause such shares to be duly registered, listed or
approved for listing on such domestic securities exchange, as the case may be.
5. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of the Warrant,
but in lieu of such fractional shares the Company shall make a cash payment
therefor upon the basis of the Exercise Price then in effect.
6. NO RIGHTS AS SHAREHOLDER. This Warrant Agreement does not entitle the
Warrantholder to any voting rights or other rights as a shareholder of the
Company prior to the exercise of the Warrant.
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<PAGE> 4
7. WARRANTHOLDER REGISTRY. The Company shall maintain a registry showing
the name and address of the registered holder of this Warrant Agreement.
8. ADJUSTMENT RIGHTS. The purchase price per share and the number of
shares of Preferred Stock purchasable hereunder are subject to adjustment, as
follows:
(a) Merger and Sale of Assets. If at any time there shall be a
capital reorganization of the shares of the Company's stock (other than a
combination, reclassification, exchange or subdivision of shares otherwise
provided for herein), or a merger or consolidation of the Company with or into
another corporation whether or not the Company is the surviving corporation, or
the sale of all or substantially all of the Company's properties and assets to
any other person (hereinafter referred to as a "Merger Event"), then, as a part
of such Merger Event, lawful provision shall be made so that the Warrantholder
shall thereafter be entitled to receive, upon exercise of the Warrant, the
number of shares of preferred stock or other securities of the successor
corporation resulting from such Merger Event, equivalent in value to that which
would have been issuable if Warrantholder had exercised this Warrant immediately
prior to the Merger Event. In any such case, appropriate adjustment (as
determined in good faith by the Company's Board of Directors) shall be made in
the application of the provisions of this Warrant Agreement with respect to the
rights and interest of the Warrantholder after the Merger Event to the end that
the provisions of this Warrant Agreement (including adjustments of the Exercise
Price and number of shares of Preferred Stock purchasable) shall be applicable
to the greatest extent possible.
(b) Reclassification of Shares. If the Company at any time shall,
by combination, reclassification, exchange or subdivision of securities or
otherwise, change any of the securities as to which purchase rights under this
Warrant Agreement exist into the same or a different number of securities of any
other class or classes, this Warrant Agreement shall thereafter represent the
right to acquire such number and kind of securities as would have been issuable
as the result of such change with respect to the securities which were subject
to the purchase rights under this Warrant Agreement immediately prior to such
combination, reclassification, exchange, subdivision or other change.
(c) Subdivision or Combination of Shares. If the Company at any
time shall combine or subdivide its Preferred Stock, the Exercise Price shall be
proportionately decreased in the case of a subdivision, or proportionately
increased in the case of a combination.
(d) Stock Dividends. If the Company at any time shall pay a
dividend payable in, or make any other distribution (except any distribution
specifically provided for in the foregoing subsections (a) or (b)) of the
Company's stock, then the Exercise Price shall be adjusted, from and after the
record date of such dividend or distribution, to that price determined by
multiplying the Exercise Price in effect immediately prior to such record date
by a fraction (i) the numerator of which shall be the total number of all shares
of the Company's stock outstanding immediately prior to such dividend or
distribution, and (ii) the denominator of which shall be the total number of all
shares of the Company's stock outstanding immediately after such dividend or
distribution. The Warrantholder shall thereafter be entitled to purchase, at the
Exercise Price resulting from such adjustment, the number of shares of Preferred
Stock (calculated to the nearest whole share) obtained by multiplying the
Exercise Price in effect immediately prior to such adjustment by the number of
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<PAGE> 5
shares of Preferred Stock issuable upon the exercise hereof immediately prior to
such adjustment and dividing the product thereof by the Exercise Price resulting
from such adjustment.
(e) Right to Purchase Additional Stock. If, the Warrantholder's
total cost of equipment leased pursuant to the Leases exceeds $3,000,000,
Warrantholder shall have the right to purchase from the Company, at the Exercise
Price (adjusted as set forth herein), an additional number of shares, which
number shall be determined by (i) multiplying the amount by which the
Warrantholder's total equipment cost exceeds $3,000,000 by 5%, and (ii) dividing
the product thereof by the Exercise Price per share referenced above.
(f) Antidilution Rights. Additional antidilution rights
applicable to the Preferred Stock purchasable hereunder are as set forth in the
Company's Certificate of Incorporation, as amended through the Effective Date, a
true and complete copy of which is attached hereto as Exhibit __ (the
"Charter"). The Company shall promptly provide the Warrantholder with any
restatement, amendment, modification or waiver of the Charter. The Company shall
provide Warrantholder with prior written notice of any issuance of its stock or
other equity security to occur after the Effective Date of this Warrant, which
notice shall exclude all stock option grants but include (a) the price at which
such stock or security is to be sold, (b) the number of shares to be issued, and
(c) such other information as necessary for Warrantholder to determine if a
dilutive event has occurred.
(g) Notice of Adjustments. If: (i) the Company shall declare any
dividend or distribution upon its stock, whether in cash, property, stock or
other securities; (ii) the Company shall offer for subscription prorata to the
holders of any class of its Preferred or other convertible stock any additional
shares of stock of any class or other rights; (iii) there shall be any Merger
Event; (iv) there shall be an initial public offering; or (v) there shall be any
voluntary dissolution, liquidation or winding up of the Company; then, in
connection with each such event, the Company shall send to the Warrantholder:
(A) at least twenty (20) days' prior written notice of the date on which the
books of the Company shall close or a record shall be taken for such dividend,
distribution, subscription rights (specifying the date on which the holders of
Preferred Stock shall be entitled thereto) or for determining rights to vote in
respect of such Merger Event, dissolution, liquidation or winding up; (B) in the
case of any such Merger Event, dissolution, liquidation or winding up, at least
twenty (20) days' prior written notice of the date when the same shall take
place (and specifying the date on which the holders of Preferred Stock shall be
entitled to exchange their Preferred Stock for securities or other property
deliverable upon such Merger Event, dissolution, liquidation or winding up); and
(C) in the case of a public offering, the Company shall give the Warrantholder
at least twenty (20) days written notice prior to the effective date thereof.
Each such written notice shall set forth, in reasonable detail,
(i) the event requiring the adjustment, (ii) the amount of the adjustment, (iii)
the method by which such adjustment was calculated, (iv) the Exercise Price, and
(v) the number of shares subject to purchase hereunder after giving effect to
such adjustment, and shall be given by first class mail, postage prepaid,
addressed to the Warrantholder, at the address as shown on the books of the
Company.
(h) Timely Notice. Failure to timely provide such notice required
by subsection (f) above shall entitle Warrantholder to retain the benefit of the
applicable notice period
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<PAGE> 6
notwithstanding anything to the contrary contained in any insufficient notice
received by Warrantholder. The notice period shall begin on the date
Warrantholder actually receives a written notice containing all the information
specified above.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY.
(a) Reservation of Preferred Stock. The Preferred Stock issuable
upon exercise of the Warrantholder's rights has been duly and validly reserved
and, when issued in accordance with the provisions of this Warrant Agreement,
will be validly issued, fully paid and non-assessable, and will be free of any
taxes, liens, charges or encumbrances of any nature whatsoever, provided,
however, that the Preferred Stock issuable pursuant to this Warrant Agreement
may be subject to restrictions on transfer under state and/or Federal securities
laws. The Company has made available to the Warrantholder true, correct and
complete copies of its Charter and Bylaws, as amended. The issuance of
certificates for shares of Preferred Stock upon exercise of the Warrant
Agreement shall be made without charge to the Warrantholder for any issuance tax
in respect thereof, or other cost incurred by the Company in connection with
such exercise and the related issuance of shares of Preferred Stock. The Company
shall not be required to pay any tax which may be payable in respect of any
transfer involved and the issuance and delivery of any certificate in a name
other than that of the Warrantholder.
(b) Due Authority. The execution and delivery by the Company of
this Warrant Agreement and the performance of all obligations of the Company
hereunder, including the issuance to Warrantholder of the right to acquire the
shares of Preferred Stock, have been duly authorized by all necessary corporate
action on the part of the Company, and the Leases and this Warrant Agreement are
not inconsistent with the Company's Charter or Bylaws, do not contravene any law
or governmental rule, regulation or order applicable to it, do not and will not
contravene any provision of, or constitute a default under, any indenture,
mortgage, contract or other instrument to which it is a party or by which it is
bound, and the Leases and this Warrant Agreement constitute legal, valid and
binding agreements of the Company, enforceable in accordance with their
respective terms.
(c) Consents and Approvals. No consent or approval of, giving of
notice to, registration with, or taking of any other action in respect of any
state, Federal or other governmental authority or agency is required with
respect to the execution, delivery and performance by the Company of its
obligations under this Warrant Agreement, except for the filing of notices
pursuant to Regulation D under the 1933 Act and any filing required by
applicable state securities law, which filings will be effective by the time
required thereby.
(d) Issued Securities. All issued and outstanding shares of
Common Stock, Preferred Stock or any other securities of the Company have been
duly authorized and validly issued and are fully paid and nonassessable. All
outstanding shares of Common Stock, Preferred Stock and any other securities
were issued in full compliance with all Federal and state securities laws. In
addition:
(i) The authorized capital of the Company consists of
(A) 5,352,140 shares of Common Stock, of which 5,352,140 shares are issued and
outstanding, (B) 856,600 shares of Series A Preferred Stock, of which 856,600
shares are issued and outstanding and convertible into
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<PAGE> 7
856,600 shares of Common Stock, (C) 660,000 shares of Series B Preferred Stock,
of which 660,000 shares are issued and outstanding and convertible into 660,000
shares of Common Stock, (D) 1,454,544 shares of Series C Preferred Stock, of
which 1,454,544 shares are issued and outstanding and are convertible into
1,454,544 shares of Common Stock, (E) 2,720,000 shares of Series D Preferred
Stock, of which 2,720,000 shares are issued and outstanding and are convertible
into 2,720,000 shares of Common Stock, (F) 4,444,444 shares of Series E
Preferred Stock, of which 4,444,444 shares are issued and outstanding and are
convertible into 4,444,444 shares of Common Stock, (G) 2,120,476 shares of
Series F Preferred Stock, (H) 652,569 shares of Series G Preferred Stock.
(ii) The Company has reserved 4,608,760 shares of Common
Stock for issuance under its Qualified Stock Option Plan, under which 4,283,233
options are outstanding at an average price of $0.57 per share. There are no
other options, warrants, conversion privileges or other rights presently
outstanding to purchase or otherwise acquire any authorized but unissued shares
of the Company's capital stock or other securities of the Company.
(iii) In accordance with the Company's Articles of
Incorporation, no shareholder of the Company has preemptive rights to purchase
new issuances of the Company's capital stock.
(e) Insurance. The Company has in full force and effect insurance
policies, with extended coverage, insuring the Company and its property and
business against such losses and risks, and in such amounts, as are customary
for corporations engaged in a similar business and similarly situated and as
otherwise may be required pursuant to the terms of any other contract or
agreement.
(f) Other Commitments to Register Securities. Except as set forth
in the Fourth Amended Shareholder Agreement, the Company is not, pursuant to the
terms of any other agreement currently in existence, under any obligation to
register under the 1933 Act any of its presently outstanding securities or any
of its securities which may hereafter be issued.
(g) Exempt Transaction. Subject to the accuracy of the
Warrantholder's representations in Section 10 hereof, the issuance of the
Preferred Stock upon exercise of this Warrant will constitute a transaction
exempt from (i) the registration requirements of Section 5 of the 1933 Act, in
reliance upon Section 4(2) thereof, and (ii) the qualification requirements of
the applicable state securities laws.
(h) Compliance with Rule 144. At the written request of the
Warrantholder, who proposes to sell Preferred Stock issuable upon the exercise
of the Warrant in compliance with Rule 144 promulgated by the Securities and
Exchange Commission, the Company shall furnish to the Warrantholder, within ten
days after receipt of such request, a written statement confirming the Company's
compliance with the filing requirements of the Securities and Exchange
Commission as set forth in such Rule, as such Rule may be amended from time to
time.
-7-
<PAGE> 8
10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER. This Warrant
Agreement has been entered into by the Company in reliance upon the following
representations and covenants of the Warrantholder:
(a) Investment Purpose. The right to acquire Preferred Stock or
the Preferred Stock issuable upon exercise of the Warrantholder's rights
contained herein will be acquired for investment and not with a view to the sale
or distribution of any part thereof, and the Warrantholder has no present
intention of selling or engaging in any public distribution of the same except
pursuant to a registration or exemption.
(b) Private Issue. The Warrantholder understands (i) that the
Preferred Stock issuable upon exercise of this Warrant is not registered under
the 1933 Act or qualified under applicable state securities laws on the ground
that the issuance contemplated by this Warrant Agreement will be exempt from the
registration and qualifications requirements thereof, and (ii) that the
Company's reliance on such exemption is predicated on the representations set
forth in this Section 10.
(c) Disposition of Warrantholder's Rights. In no event will the
Warrantholder make a disposition of any of its rights to acquire Preferred Stock
or Preferred Stock issuable upon exercise of such rights unless and until (i) it
shall have notified the Company of the proposed disposition, and (ii) if
requested by the Company, it shall have furnished the Company with an opinion of
counsel (which counsel may either be inside or outside counsel to the
Warrantholder) satisfactory to the Company and its counsel to the effect that
(A) appropriate action necessary for compliance with the 1933 Act has been
taken, or (B) an exemption from the registration requirements of the 1933 Act is
available. Notwithstanding the foregoing, the restrictions imposed upon the
transferability of any of its rights to acquire Preferred Stock or Preferred
Stock issuable on the exercise of such rights do not apply to transfers from the
beneficial owner of any of the aforementioned securities to its nominee or from
such nominee to its beneficial owner, and shall terminate as to any particular
share of Preferred Stock when (1) such security shall have been effectively
registered under the 1933 Act and sold by the holder thereof in accordance with
such registration or (2) such security shall have been sold without registration
in compliance with Rule 144 under the 1933 Act, or (3) a letter shall have been
issued to the Warrantholder at its request by the staff of the Securities and
Exchange Commission or a ruling shall have been issued to the Warrantholder at
its request by such Commission stating that no action shall be recommended by
such staff or taken by such Commission, as the case may be, if such security is
transferred without registration under the 1933 Act in accordance with the
conditions set forth in such letter or ruling and such letter or ruling
specifies that no subsequent restrictions an transfer are required. Whenever the
restrictions imposed hereunder shall terminate, as hereinabove provided, the
Warrantholder or holder of a share of Preferred Stock then outstanding as to
which such restrictions have terminated shall be entitled to receive from the
Company, without expense to such holder, one or more new certificates for the
Warrant or for such shares of Preferred Stock not bearing any restrictive
legend.
(d) Financial Risk. The Warrantholder has such knowledge and
experience in financial and business matters as to be capable of evaluating the
merits and risks of its investment, and has the ability to bear the economic
risks of its investment.
-8-
<PAGE> 9
(e) Risk of No Registration. The Warrantholder understands that
if the Company does not register with the Securities and Exchange Commission
pursuant to Section 12 of the 1934 Act (the "1934 Act"), or file reports
pursuant to Section 15(d), of the 1934 Act, or if a registration statement
covering the securities under the 1933 Act is not in effect when it desires to
sell (i) the rights to purchase Preferred Stock pursuant to this Warrant
Agreement, or (ii) the Preferred Stock issuable upon exercise of the right to
purchase, it may be required to hold such securities for an indefinite period.
The Warrantholder also understands that any sale of its rights of the
Warrantholder to purchase Preferred Stock or Preferred Stock which might be made
by it in reliance upon Rule 144 under the 1933 Act may be made only in
accordance with the terms and conditions of that Rule.
(f) Accredited Investor. Warrantholder is an "accredited
investor" within the meaning of the Securities and Exchange Rule 501 of
Regulation D, as presently in effect.
11. TRANSFERS. Subject to the terms and conditions contained in Section
10 hereof, this Warrant Agreement and all rights hereunder are transferable in
whole or in part by the Warrantholder and any successor transferee, provided,
however, in no event shall the number of transfers of the rights and interests
in all of the Warrants exceed three (3) transfers. The transfer shall be
recorded on the books of the Company upon receipt by the Company of a notice of
transfer in the form attached hereto as Exhibit III (the "Transfer Notice"), at
its principal offices and the payment to the Company of all transfer taxes and
other governmental charges imposed on such transfer.
12. MISCELLANEOUS.
(a) Effective Date. The provisions of this Warrant Agreement
shall be construed and shall be given effect in all respects as if it had been
executed and delivered by the Company on the date hereof. This Warrant Agreement
shall be binding upon any successors or assigns of the Company.
(b) Attorney's Fees. In any litigation, arbitration or court
proceeding between the Company and the Warrantholder relating hereto, the
prevailing party shall be entitled to attorneys' fees and expenses and all costs
of proceedings incurred in enforcing this Warrant Agreement.
(c) Governing Law. This Warrant Agreement shall be governed by
and construed for all purposes under and in accordance with the laws of the
State of Illinois.
(d) Counterparts. This Warrant Agreement may be executed in two
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(e) Notices. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given upon personal delivery,
facsimile transmission (provided that the original is sent by personal delivery
or mail as hereinafter set forth) or seven (7) days after deposit in the United
States mail, by registered or certified mail, addressed (i) to the Warrantholder
at 6111 North River Road, Rosemont, Illinois 60018, attention: James Labe,
Venture Group,
-9-
<PAGE> 10
cc: Legal Department, attn.: General Counsel, (and/or, if by facsimile, (847)
518-5465 and (847) 518-5088) and (ii) to the Company at 6840 Viia Del Oro Suite
290, San Jose, CA 95119, attention: (and/or if by facsimile, (408) 360-4951 or
at such other address as any such party may subsequently designate by written
notice to the other party.
(f) Remedies. In the event of any default hereunder, the
non-defaulting party may proceed to protect and enforce its rights either by
suit in equity and/or by action at law, including but not limited to an action
for damages as a result of any such default, and/or an action for specific
performance for any default where Warrantholder will not have an adequate remedy
at law and where damages will not be readily ascertainable. The Company
expressly agrees that it shall not oppose an application by the Warrantholder or
any other person entitled to the benefit of this Agreement requiring specific
performance of any or all provisions hereof or enjoining the Company from
continuing to commit any such breach of this Agreement.
(g) No Impairment of Rights. The Company will not, by amendment
of its Charter or through any other means, avoid or seek to avoid the observance
or performance of any of the terms of this Warrant, but will at all times in
good faith assist in the carrying out of all such terms and in the taking of all
such actions as may be necessary or appropriate in order to protect the rights
of the Warrantholder against impairment.
(h) Survival. The representations, warranties, covenants and
conditions of the respective parties contained herein or made pursuant to this
Warrant Agreement shall survive the execution and delivery of this Warrant
Agreement.
(i) Severability. In the event any one or more of the provisions
of this Warrant Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Warrant Agreement shall be
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision, which
comes closest to the intention of the parties underlying the invalid, illegal or
unenforceable provision.
(j) Amendments. Any provision of this Warrant Agreement may be
amended by a written instrument signed by the Company and by the Warrantholder.
(k) Additional Documents. The Company, upon execution of this
Warrant Agreement, shall provide the Warrantholder with certified resolutions
with respect to the representations, warranties and covenants set forth in
subparagraphs (a) through (d), (f) and (g) of Section 9 above. If the purchase
price for the Leases referenced in the preamble of this Warrant Agreement
exceeds $1,000,000, the Company will also provide Warrantholder with an opinion
from the Company's counsel with respect to those same representations,
warranties and covenants. The Company shall also supply such other documents as
the Warrantholder may from time to time reasonably request.
-10-
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be executed by its officers thereunto duly authorized as of the
Effective Date.
Company: GADZOOX NETWORKS, INC.
By:
---------------------------------
Title:
------------------------------
Warrantholder: COMDISCO, INC.
By:
---------------------------------
Title:
------------------------------
-11-
<PAGE> 12
EXHIBIT I
NOTICE OF EXERCISE
To: _________________
(1) The undersigned Warrantholder hereby elects to purchase _____
shares of the Series __ Preferred Stock of __________, pursuant
to the terms of the Warrant Agreement dated the ____ day of
__________, 19__ (the "Warrant Agreement") between
___________________ and the Warrantholder, and tenders herewith
payment of the purchase price for such shares in full, together
with all applicable transfer taxes, if any.
(2) In exercising its rights to purchase the Series __ Preferred
Stock of __________________, the undersigned hereby confirms and
acknowledges the investment representations and warranties made
in Section 10 of the Warrant Agreement.
(3) Please issue a certificate or certificates representing said
shares of Series __ Preferred Stock in the name of the
undersigned or in such other name as is specified below.
- -------------------------------
(Name)
- -------------------------------
(Address)
Warrantholder:
COMDISCO, INC.
By:
----------------------------
Title:
-------------------------
Date:
--------------------------
<PAGE> 13
EXHIBIT II
ACKNOWLEDGEMENT OF EXERCISE
The undersigned __________________, hereby acknowledge receipt of the
"Notice of Exercise" from Comdisco, Inc., to purchase __________ shares of the
Series __ Preferred Stock of __________, pursuant to the terms of the Warrant
Agreement, and further acknowledges that __________ shares remain subject to
purchase under the terms of the Warrant Agreement.
Company:
By:
---------------------------------
Title:
------------------------------
Date:
-------------------------------
<PAGE> 14
EXHIBIT III
TRANSFER NOTICE
(TO TRANSFER OR ASSIGN THE FOREGOING WARRANT AGREEMENT EXECUTE THIS FORM AND
SUPPLY REQUIRED INFORMATION. DO NOT USE THIS FORM TO PURCHASE SHARES.)
FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights
evidenced thereby are hereby transferred and assigned to
---------------------------------------------------------------
(Please Print)
whose address is
-----------------------------------------------
-----------------------------------------------
Dated:
-----------------------------------------
Holder's Signature:
----------------------------
Holder's Address:
------------------------------
Signature Guaranteed:
--------------------------------------------------
NOTE: The signature to this Transfer Notice must correspond with the name
as it appears on the face of the Warrant Agreement, without
alteration or enlargement or any change whatever. Officers of
corporations and those acting in a fiduciary or other representative
capacity should file proper evidence of authority to assign the
foregoing Warrant Agreement.
<PAGE> 1
EXHIBIT 4.5
GADZOOX NETWORKS, INC.
--------------------------------------------------
FIRST AMENDED AND RESTATED
SERIES F, G AND H PREFERRED
STOCKHOLDERS' AGREEMENT
OCTOBER 12, 1998
---------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1. Definitions..............................................................................1
2. Agreements Concerning Voting of the Shares...............................................3
3. Right of First Refusal...................................................................3
4. Right of First Offer.....................................................................6
5. Right to Maintain........................................................................8
6. Limitation on Ownership of Stocks........................................................9
7. Restriction Upon Transfer of Shares......................................................9
8. Company Right of First Refusal..........................................................10
9. Restriction Upon Sale of Shares.........................................................11
10. Confidential Information................................................................12
11. Right to Repurchase Shares..............................................................12
12. Equity Method Accounting................................................................13
13. 3Com Nomination to Board of Directors...................................................13
14. Miscellaneous...........................................................................14
</TABLE>
-i-
<PAGE> 3
GADZOOX NETWORKS, INC.
FIRST AMENDED AND RESTATED
SERIES F, G AND H PREFERRED STOCKHOLDERS' AGREEMENT
This First Amended and Restated Series F, G and H Preferred
Stockholders' Agreement is made as of October 12, 1998, (the "Agreement") by and
among (i) Gadzoox Networks, Inc., a Delaware corporation having its principal
executive offices at 6840 Via Del Oro, San Jose, California 95119 (the
"Company"); (ii) Seagate Technology, Inc., a Delaware corporation ("Seagate") a
holder of shares of the Company's Series F Preferred Stock and Series G
Preferred Stock pursuant to that certain Series F Preferred Stock Purchase
Agreement dated May 21, 1997 (the "Series F Agreement"), Series G Preferred
Stock Purchase Agreement dated June 16, 1998 (the "Series G Agreement") and
issuable upon conversion of certain convertible promissory notes (the "Notes")
pursuant to the Note Purchase Agreement dated September 18, 1998 (the "Note
Purchase Agreement"); and (iii) 3Com Corporation, a Delaware corporation
("3Com") a purchaser of shares of the Company's Series H Preferred Stock
pursuant to the Series H Preferred Stock Purchase Agreement of even date
herewith (the "Series H Agreement"). Seagate and 3Com are collectively referred
to herein as the "Investors." The number of shares of the Company's Series F, G
and H Preferred Stock are listed on Exhibit A opposite the name of each
Investor. This Agreement amends in its entirety and supersedes in all respects
the Series F, G and H Stockholders' Agreement dated September 18, 1998 (the
"Prior Agreement").
WHEREAS, the Company and Seagate have granted each other certain rights
in connection with the purchase and sale of Series F and Series G Preferred
Stock pursuant to Superseded Provisions; and
WHEREAS, the Company and the Investors wish to restate the Prior
Agreement and to apply such rights to include the holders of Series H Preferred
Stock.
NOW THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree as follows:
1. DEFINITIONS. As used in this Agreement, the following terms
shall have the following respective meanings:
"Certificate" shall mean the Company's Amended and Restated
Certificate of Incorporation.
"Change of Control" shall mean any merger, consolidation or sale
of all or substantially all of the assets or stock of the Company which results
in the holders of the Company's Voting Stock prior thereto owning less than
fifty percent (50%) of the Voting Stock of the Company or such surviving entity
outstanding immediately after such merger, consolidation or sale.
"Closing Date" shall mean the date of this Agreement.
<PAGE> 4
"Commission" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
"Conversion Stock" shall mean the Common Stock issued or
issuable pursuant to conversion of the Series A Preferred, Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred, Series F Preferred,
Series G Preferred and Series H Preferred.
"Initial Public Offering" shall mean the closing of the initial
public offering of securities of the Company to the general public which is
effected pursuant to a registration statement filed with, and declared effective
by the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended.
"New Securities" shall have the meaning set forth in Section
3(b) hereof.
"Preferred Stock" shall mean the Company's Preferred Stock.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Series A Preferred" shall mean the Series A Preferred Stock.
"Series B Preferred" shall mean the Series B Preferred Stock.
"Series C Preferred" shall mean the Series C Preferred Stock.
"Series D Preferred" shall mean the Series D Preferred Stock.
"Series E Preferred" shall mean the Series E Preferred Stock.
"Series F Preferred" shall mean the Series F Preferred Stock
issued pursuant to the Series F Agreement.
"Series G Preferred" shall mean the Series G Preferred Stock
issued pursuant to the Series G Agreement and issuable upon conversion of the
Notes.
"Series H Preferred" shall mean the Series H Preferred Stock
issued pursuant to the Series H Agreement.
"Significant Event" means (i) any amendment to the Certificate
or Bylaws, (ii) recapitalization or (iii) liquidation of the Company.
"Specified Number of Shares" shall have the meaning set forth in
Section 3(a) hereof.
2
<PAGE> 5
"Voting Agreement" shall mean that certain Second Amended and
Restated Voting Agreement dated of even date herewith by and among the Company
and holders of the Company's Preferred Stock, as such agreement may be amended
from time to time.
"Voting Stock" shall mean the Company's Common Stock and
Preferred Stock and other securities issued by the Company having the ordinary
power to vote in the election of directors of the Company (other than securities
having such power only upon the happening of a contingency).
2. AGREEMENTS CONCERNING VOTING OF THE SHARES.
(a) Following the termination of the Voting Agreement, each
Investor agrees to vote all shares of Voting Stock owned by such Investor in
favor of any merger, sale of all or substantially all of the assets or similar
disposition of the Company that is approved by the (i) Board of Directors of the
Company (the "Board") and (ii) the holders of a majority of the then outstanding
shares of the Company's Voting Stock.
(b) Additionally, each Investor agrees that if it acquires a
number of shares which at the time of said share acquisition, represents fifteen
percent (15%) or more of the then outstanding shares of the Company's Voting
Stock, following such date and for so long as it owns at least fifteen percent
(15%) of the outstanding Voting Stock, it will take such actions as may be
required so that all shares of Voting Stock or other voting securities of the
Company owned by such Investor (i) are voted for management's nominees to the
Board of Directors of the Company, consistent with the provisions of Article
Fourth, Section 6(b) of the Certificate, or similar provision as amended from
time to time, and (ii) unless the Company otherwise consents in writing, are
voted with management on all other matters to be voted on by holders of Voting
Stock in not less than the same proportion as the votes cast by the other
non-Investor holders of Voting Stock with respect to such matters; provided,
however, that Voting Stock owned by an Investor may be voted as the Investor
determines in its sole discretion on any Significant Event presented to the
holders of Voting Stock for a vote.
(c) Each Investor, as the holder of shares of Voting Stock,
shall be present, in person or by proxy, at all meetings of stockholders of the
Company so that all shares beneficially owned by such Investor may be counted
for the purposes of determining the presence of a quorum at such meetings.
(d) This Section 2 shall terminate upon the Initial Public
Offering.
3. RIGHT OF FIRST REFUSAL. The Company hereby grants to each
Investor, the right of first refusal to purchase up to the Specified Number of
Shares (as defined in this Section 3) of New Securities (as defined in this
Section 3) which the Company may, from time to time, propose to issue and sell.
Any amount in excess of the Specified Number of Shares may be sold by the
Company without regard to the right of first refusal set forth in this Section
3.
(a) The "Specified Number of Shares" shall mean (i) with
respect to Seagate, a number of shares of the Company's Voting Stock (as defined
in Section 1 above) which results in Seagate owning, following such purchase,
not more than 19.9% of the Company's outstanding Voting
3
<PAGE> 6
Stock, including shares issued and issuable upon the Notes (except to the extent
said 19.9% is increased pursuant to the penultimate sentence of subsection (e)
of this Section 3 below) and (ii) with respect to 3Com, a number of shares of
the Company's Voting Stock (as defined in Section 1 above) which results in 3Com
owning, following such purchase, not more than 4.9% of the Company's outstanding
Voting Stock (except to the extent said 4.9% is increased pursuant to the
penultimate sentence of subsection (e) of this Section 3 below).
(b) Except as set forth below, "New Securities" shall mean
any shares of capital stock of the Company, including Common Stock and Preferred
Stock, whether now authorized or not, and rights, options or warrants to
purchase shares of Common Stock or Preferred Stock, and securities of any type
whatsoever that are, or may become, convertible into shares of the Company's
Common Stock or Preferred Stock. Notwithstanding the foregoing, "New Securities"
DOES NOT include (i) securities offered to the public generally pursuant to a
firm commitment underwriting registration statement under the Securities Act,
(ii) securities issued in connection with the acquisition of another corporation
by the Company by merger, purchase of substantially all of the assets or other
reorganization whereby the stockholders of the Company prior to such merger,
purchase or reorganization retain following such merger, purchase or
reorganization not less than a majority of the voting power of the Company or
the surviving or successor corporation in such merger, purchase or
reorganization, (iii) subject to the provisions of Sections 3(c) and 3(e) hereof
and solely with respect to the rights granted to Seagate under this Section 3,
securities issued pursuant to a joint venture arrangement or other strategic
financing arrangement whereby the stockholders of the Company prior to such
issuance of securities retain not less than a majority of the voting power of
the Company subsequent to such issuance provided that the partner in such
arrangement is not an independent disk drive manufacturer whose primary business
is the sale of disk drives, (iv) subject to the provisions of Sections 3(d) and
3(e) hereof and solely with respect to the rights granted to 3Com under this
Section 3, securities issued pursuant to a joint venture arrangement or other
strategic financing arrangement whereby the stockholders of the Company prior to
such issuance retain not less than a majority of the voting power of the Company
subsequent to such issuance and the partner in such arrangement is not (A) Cisco
Systems, Inc., (B) Bay Networks, Inc., Nortel Business or (C) Intel Corporation
or any majority-owned subsidiary or successor thereto (provided, however, that
notwithstanding this subsection (iv), securities issued to (A) Cisco Systems,
Inc., (B) Bay Networks, Inc., Nortel Business or (C) Intel Corporation or any
majority-owned subsidiary or successor thereto pursuant to a joint venture
arrangement or other strategic financing arrangement shall NOT be deemed "New
Securities" on and after the earlier to occur of (A) the Initial Public Offering
and (B) the first anniversary of the date of this Agreement), (v) shares of
Common Stock or options to purchase Common Stock issued to employees, officers
and directors of, and consultants to, the Company, pursuant to any arrangement
approved by the Board of Directors of the Company, (vi) securities issued
pursuant to any rights or agreements, including without limitation convertible
securities, options and warrants, provided that the rights of first refusal
established by this Section 3 apply with respect to the initial sale or grant by
the Company of such rights or agreements, (vii) securities issued to financial
institutions or equipment lessors of the Company pursuant to any arrangement
approved by the Board of Directors, or (viii) securities issued in connection
with any stock split, stock dividend or recapitalization by the Company.
4
<PAGE> 7
(c) If Seagate owns at least seven percent (7%) of the
outstanding Voting Stock as of the date of the applicable issuance and prior to
such issuance (the "Calculation Date"), securities issued pursuant to subsection
(iii) of Section 3(b) shall only be excluded from the definition of New
Securities with respect to Seagate, to the extent that all securities sold in
reliance on such subsection after the Closing Date aggregate a percentage of the
Company's Voting Stock (calculated as of the Calculation Date of each issuance
under such subsection), which is equal to or less than the percentage of the
Company's Voting Stock owned by Seagate as of such Calculation Date (the
"Seagate Percentage Interest").
(d) If 3Com owns at least one and three-quarters percent
(1.75%) of the outstanding Voting Stock as of the Calculation Date, securities
issued pursuant to subsection (iv) of Section 3(b) shall only be excluded from
the definition of New Securities, with respect to 3Com, to the extent that all
securities sold in reliance on such subsection after the Closing Date aggregate
a percentage of the Company's Voting Stock (calculated as of the Calculation
Date of each issuance under such subsection), which is equal to or less than the
percentage of the Company's Voting Stock owned by 3Com as of such Calculation
Date (the "3Com Percentage Interest").
(e) Notwithstanding the provisions of Sections 3(c) and
3(d), the Company may sell securities to strategic partners pursuant to
subsection (iii) and (iv) of this Section 3(b) in excess of the Seagate
Percentage Interest, with respect to Seagate, and in excess of the 3Com
Percentage Interest, with respect to 3Com, if it also provides Seagate and 3Com
respectively with the opportunity to purchase additional shares of the Company's
Voting Stock (at the same price and on substantially the same terms as sold to
such strategic partners, or if there are multiple sales to strategic partners,
in the sale which triggered the operation of this sentence) up to a number of
shares of Voting Stock which results in Seagate or 3Com, as the case may be,
owning, after said issuances, the greater of (i) a percentage of the Company's
outstanding Voting Stock equal to the percentage owned by the strategic partner
(other than Seagate) which holds the largest percentage of Voting Stock, or (ii)
(X) with respect to Seagate, up to 19.9% of the Company's outstanding Voting
Stock and (Y) with respect to 3Com, up to 4.9% of the Company's outstanding
Voting Stock. Such sale to Investors shall be on the terms and in accordance
with the procedures set forth in Sections 3(f) and (g) hereof.
(f) In the event the Company proposes to undertake an
issuance of New Securities, it shall give each Investor written notice of its
intention (the "Sale Notice"), describing the type of New Securities, and the
price and terms upon which the Company proposes to issue the same. Each Investor
shall have the right to purchase all or any part of such New Securities (not to
exceed the Specified Number of Shares) for the price and upon the terms
specified in the notice, by giving written notice to the Company within fifteen
(15) days from the date of receipt of the Sale Notice and stating therein the
quantity of New Securities to be purchased (not to exceed the Specified Number
of Shares). If an Investor elects to purchase the New Securities, the sale
thereof shall close as promptly as reasonably possible, provided that if such
sale is subject to compliance with the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), the parties shall cooperate and make
all filings and get all clearances required thereunder as promptly as reasonably
possible. If (a) within one hundred fifty (150) days of the date of filing of
the necessary documents under the HSR Act, (i) the waiting period under the HSR
Act shall not have expired, or (ii) a second request has been issued and the
Justice
5
<PAGE> 8
Department or the Federal Trade Commission (as applicable) shall not have
terminated the waiting period thereafter, or (b) an order, decree, ruling or
other action is issued or taken by a governmental entity which has the effect of
permanently restraining, enjoining or otherwise prohibiting the purchase of the
New Securities or only permits said purchase if certain actions are taken by
either the Company or the Investor, and which order, decree, ruling or action is
final and non-appealable, then in any such case, the Investor's right of first
refusal shall terminate with respect to such New Securities and the Company may
sell such New Securities to a third party. If the Company so requests, each
Investor shall assist the Company in obtaining financing during the pendency of
the foregoing described proceedings under the HSR Act to the extent that
Investor is legally permitted to do so.
(g) In the event an Investor fails to exercise the right of
first refusal within said fifteen (15) day period or an Investor's right of
first refusal terminates as provided in Section 3(f), the Company shall have one
hundred twenty (120) days thereafter to sell or enter into an agreement
(pursuant to which the sale of New Securities covered thereby shall be closed,
if at all, within one hundred twenty (120) days from the date of said agreement)
to sell the New Securities not elected to be purchased by the Investors at a
price and upon terms no more favorable to the purchaser of such securities than
specified in the Company's Sale Notice. In the event the Company has not sold
the New Securities or has not entered into an agreement to sell the New
Securities within said one hundred twenty (120) day period (or sold and issued
New Securities in accordance with the foregoing within one hundred twenty (120)
days from the date of said agreement), the Company shall not thereafter issue or
sell any New Securities without first offering such securities to the Investors
in the manner provided above.
(h) The rights of first refusal granted to Seagate and 3Com
under this Section 3 shall terminate (A) with respect to Seagate, upon the first
to occur of (i) the acquisition by Seagate of at least 19.9% of the then
outstanding Voting Stock of the Company (or, if applicable, upon the closing of
the purchase by Seagate of a percentage greater than 19.9% pursuant to Section
3(e) hereof) and (ii) the Initial Public Offering and (B) with respect to 3Com,
upon the first to occur of (i) the acquisition by 3Com of at least 4.9% of the
then outstanding Voting Stock of the Company (or, if applicable, upon the
closing of the purchase by 3Com of a percentage greater than 4.9% pursuant to
Section 3(e) hereof) and (ii) the Initial Public Offering.
(i) The rights of first refusal granted hereunder are not
assignable or transferable by an Investor except to a wholly owned subsidiary of
such Investor which has executed an agreement to be bound by the same terms as
such Investor.
4. RIGHT OF FIRST OFFER. If the Company decides to commence
discussions with, or receives a written proposal from, any party with respect to
any transaction which would result in a Change of Control of the Company (as
defined in Section 1 above) and the Board reasonably believes such Change of
Control transaction would be in the best interests of the Company and its
stockholders, the Company shall promptly provide each Investor with notice
describing the price and general terms of such proposal and a copy of such
written proposal (the "Right of First Offer Notice"). Thereafter, each Investor
shall have a right to make an offer to acquire the Company (a "Right of First
Offer") subject to and upon the following terms:
6
<PAGE> 9
(a) 3Com shall have five (5) business days after receipt of
the Right of First Offer Notice to provide the Company with a written counter
offer to acquire the Company which shall set forth the principal, proposed terms
of such acquisition (the "3Com Counter-Offer"). Further, 3Com shall have the
opportunity to present the terms and conditions of the 3Com Counter-Offer to the
Company's Board of Directors.
(b) After the earlier of (i) 3Com has presented the
Company's Board of Directors with the 3Com Counter-Offer (or 3Com has delivered
the 3Com Counter-Offer to the Company if 3Com chooses not to present the 3Com
Counter-Offer to the Company's Board) and (ii) the 3Com Offer Period has
expired, the Company shall deliver the 3Com Counter-Offer to Seagate, and
Seagate shall have five (5) business days after receipt of both the Right of
First Offer Notice and the 3Com Counter-Offer (if any) (or if no such 3Com
Counter-Offer is received, five (5) days after receipt of the Right of First
Offer Notice and a notice from the Company that no 3Com Counter-Offer was
received within the five business day period) to provide the Company with a
written counter offer to acquire the Company which shall set forth the
principal, proposed terms of such acquisition (the "Seagate Counter-Offer").
(c) In comparing and assessing the terms of the third party
offer to Investors' counter offers, the Board shall consider all factors they
deem reasonable and in the best interest of the Company's stockholders.
(d) In the event any Investor fails to deliver its
respective counter-offer within the applicable time periods set forth above or
the Board determines in its reasonable business judgment that the counter-offers
are less favorable to the Company and its stockholders than the transaction
described in the Right of First Offer Notice or any other counter-offer, the
Company shall have one hundred twenty (120) days thereafter to enter into an
agreement (the "Definitive Agreement") pursuant to which the Change of Control
transaction covered thereby shall be closed, if at all, within one hundred fifty
(150) days from the date of the Definitive Agreement. Such Definitive Agreement
may be on terms different from those set forth in the Right of First Offer
Notice or contained in any other counter-offer. In the event the Company has not
entered into a Definitive Agreement within the one hundred twenty (120) day
period or does not close the Definitive Agreement within an additional one
hundred fifty (150) days from the date of the Definitive Agreement, the Company
shall not thereafter complete any Change of Control transaction without again
providing each Investor with a Right of First Offer as described herein.
(e) Notwithstanding anything to the contrary in this
Agreement or elsewhere, the Company may commence discussions, negotiate, and/or
consummate (in accordance with the terms and conditions of this Section 4) a
Change of Control of the Company with any party including, but not limited to,
(i) Cisco Systems, Inc., (ii) Bay Networks, Inc., Nortel Business and (iii)
Intel Corporation.
(f) The rights set forth in this Section 4 shall expire upon
the closing of the Initial Public Offering.
(g) The rights set forth in this Section 4 shall not be
assigned or transferred, except that such rights are assignable, in whole, by an
Investor to any wholly-owned subsidiary of such Investor which has executed an
agreement to be bound by the same terms as such Investor.
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<PAGE> 10
5. RIGHT TO MAINTAIN. In the event the Company issues and sells
shares of its Voting Stock either in a transaction described in Section
3(b)(iii), 3(b)(iv) above or in the Initial Public Offering, the Investors shall
have the right to maintain their respective percentage interest in the Company
by purchasing a number of shares of such Voting Stock (determined as described
below) at the same price and on substantially the same terms as were sold (or as
are being sold) by the Company in such transaction. If the issuance to which the
right applies is the Initial Public Offering, the price per share to each
Investor shall be net of underwriting discounts and commissions. The number of
shares which each Investor may so purchase is the number equal (a) to Investor's
percentage ownership of the outstanding shares of Voting Stock of the Company
owned immediately prior to such transaction multiplied by the total number of
shares of Voting Stock issued in such transaction less (b) the number of shares
purchased by such Investor in connection with such transaction pursuant to
Section 3 hereof. Each Investor shall pay the legal fees and other expenses
incurred by the Company in connection with the exercise by such Investor of its
rights in this Section 5.
(a) With respect to Seagate, in lieu of purchasing shares of
Voting Stock pursuant to its right to maintain in this Section 5, Seagate shall
first convert its Notes into shares of Series G Preferred Stock in order to
maintain its percentage interest in the Company; and only at such time and to
the extent that all shares issued upon conversion of all Notes is less than the
number of shares Seagate is entitled to purchase pursuant to this Section 5,
shall Seagate be entitled to purchase shares of the Company's Voting Stock
pursuant to this Section 5.
(b) Prior to the date which is fifteen (15) days after the
Company issues and sells shares in such a transaction, the Company shall provide
written notice to each Investor which shall state the number of additional
securities, if any, that such Investor is entitled to purchase and the purchase
price thereof.
(c) Each Investor shall have ten (10) days from the date of
receipt of such notice to exercise its option. Each Investor shall exercise its
option by delivering to the Company written notice of exercise of such right
accompanied by its check for the full purchase price of the Voting Stock which
it wishes to purchase. Each Investor may purchase all or any portion of the
number of shares of Voting Stock which it is entitled to purchase through this
Section 5. To the extent that an Investor does not exercise its option within
said ten (10) day period, the option shall expire; provided that if such
purchase is subject to the HSR Act, the provision of Section 3(f) concerning
filings under such HSR Act and termination of purchase rights shall apply to
said purchase.
(d) The provisions of this Section 5 shall expire upon the
first to occur of (i) April 30, 2003, or (ii) thirty (30) days after the closing
of the Initial Public Offering.
(e) The rights granted under this Section 5 shall not be
assigned or transferred by an Investor except to a wholly owned subsidiary of
such Investor which has executed an agreement to be bound by the same terms as
such Investor.
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<PAGE> 11
6. LIMITATION ON OWNERSHIP OF STOCKS. Without the consent of the
Company's Board of Directors, for a period which shall expire upon the earlier
of (i) three (3) years after the Company's Initial Public Offering, (ii) April
30, 2003, (iii) such time as a tender offer is made for not less than 50% of the
outstanding shares as evidenced by a filing with the Securities and Exchange
Commission of Schedule 14D-1 and the actual dissemination of tender offer
materials to stockholders, or (iv) such time as another entity or group acquires
not less than 25% ownership of the total combined voting power of all
outstanding shares, no Investor nor any partnership, syndicate or group of which
an Investor is a member or any entity affiliated with an Investor or with which
an Investor is acting in concert will:
(a) except as permitted by Section 3(e) hereof, acquire
beneficial ownership of any Company shares if after such acquisition (X) with
respect to Seagate, would beneficially own more than 19.9% of the outstanding
Voting Stock of the Company and (Y) with respect to 3Com, would beneficially own
more than 4.9% of the outstanding Voting Stock of the Company;
(b) form, join or in any way participate in a group (a "13D
Group") acting together for the purpose of acquiring, holding or disposing of
Company shares which would be required to file a statement on Schedule 13D if
such 13D Group beneficially owns more than 5% of the outstanding Company shares
(other than a 13D Group composed of Investor and its affiliates);
(c) submit any resolution to the Company's stockholders or
become a participant in a proxy solicitation in opposition to the recommendation
of a majority of the Company's directors; or
(d) enter into any voting arrangement with respect to any
Company shares other than the as set forth herein and the Voting Agreement.
7. RESTRICTION UPON TRANSFER OF SHARES. With respect to Seagate,
for so long as Seagate owns at least seven percent (7%) of the Company's
outstanding Voting Stock and with respect to 3Com, for so long as 3Com owns at
least one and three-quarters percent (1.75%) of the Company's outstanding Voting
Stock, such respective Investor agrees that it will not nor will it permit any
of its affiliates to sell or transfer any of the shares of the Company acquired
hereunder or otherwise except (i) to an existing stockholder of the Company as
of the date first set forth above, or a person or entity who owns Voting Stock
of the Company immediately prior to the closing of the Company's Initial Public
Offering; (ii) to the Company or to any person approved by the Company; (iii)
pursuant to a bona fide public offering registered under the Securities Act;
(iv) pursuant to Rule 144 under the Securities Act; (v) pursuant to a bona fide
pledge of such shares to an institutional lender to secure a loan, guarantee or
other financial support, provided that such lender agrees to hold such stock
subject to all provisions of this Agreement and any sale or disposition by such
lender of such pledged stock shall be subject to the limitations of this
Section; (vi) in the event of a merger or consolidation in which the Company is
acquired by another corporation, or pursuant to a plan of liquidation of the
Company; (vii) to a wholly-owned subsidiary of such Investor which has executed
an agreement to be bound by the same terms as such Investor; (viii) sales into
any tender or exchange offer (A) which is made by or on behalf of the Company;
(B) which is made by another person or group and is not opposed by the Board of
Directors of the Company; or (C) subject to the Company's right of first refusal
set forth in Section 8 below, which is made by another person or group and which
would result in such person or group owning more than fifty
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<PAGE> 12
percent (50%) of the total outstanding voting power of the Company; or (ix) any
public distribution (including any Rule 144 sale), provided that, in cases other
than public distributions underwritten by an underwriter selected by the
Company, no single Investor (other than an underwriter) is known to be acquiring
more than five percent (5%) of the outstanding Company shares in such
distribution. In addition to the foregoing restrictions, each Investor agrees
that it will not nor will it permit any of its affiliates to sell or transfer
any of the shares of the Company to a person or entity which as of the date of
such transfer, is engaged in or has publicly announced its intention to enter
into the business of developing, manufacturing, marketing or selling storage
area networks. For purposes of this Section 7, an acquisition or merger of an
Investor by or into another entity, in which such entity following the
acquisition or merger owns at least a majority of the outstanding capital stock
of such Investor, shall not be deemed a transfer or sale of the Voting Stock of
the Company held by such Investor.
8. COMPANY RIGHT OF FIRST REFUSAL. With respect to Seagate, for so
long as Seagate owns at least seven percent (7%) of the Company's outstanding
Voting Stock and with respect to 3Com, for so long as 3Com owns at least one and
three-quarters percent (1.75%) of the Company's outstanding Voting Stock and
upon execution of this Agreement, such respective Investor shall not sell,
assign, pledge, or in any manner transfer any of the shares or securities or
other rights convertible into shares of the Company acquired under the Series F
Agreement, the Series G Agreement, the Note Purchase Agreement or the Series H
Agreement or otherwise or any right or interest therein, whether voluntarily of
by operation of law, or by gift or otherwise, except by a transfer which meets
the requirements hereinafter set forth:
(a) If an Investor desires to sell or otherwise transfer any
of its shares or Notes of the Company, then such Investor shall first give
written notice thereof to the Company. The notice shall name the proposed
transferee and state the number of shares of the Company or principal amount of
the Notes to be transferred, the proposed consideration, and all other terms and
conditions of the proposed transfer.
(b) For thirty (30) days following receipt of such notice,
the Company shall have the option to purchase or cause an assignee of the rights
hereunder to purchase, any or all of the shares or Notes specified in the notice
at the price and upon the terms set forth in such notice; provided that if the
purchase by the Company of less than all of the shares or Notes specified in the
notice would cause such Investor to be unable to sell all of the shares or Notes
at the price set forth in the notice, the Company's option shall only be
exercisable if it purchases all of the shares or Notes specified in the notice.
In the event of a gift, property settlement or other transfer in which the
proposed transferee is not paying the full price for the shares or Notes, and
that is not otherwise exempted from the provisions of this Section 8, the price
shall be deemed to be the fair market value of the stock or Notes at such time
as determined in good faith by the Company's Board of Directors. In the event
that such Investor does not agree with such price of the stock or Notes as
determined by the Company's Board of Directors, the parties shall engage an
independent appraiser to determine the fair market value of the stock. In the
event that the Company elects to purchase any or all of the shares or Notes, it
shall give written notice to such Investor of its election and settlement for
said shares or Notes shall be made as provided below in Section 8(c).
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<PAGE> 13
(c) In the event the Company and/or its assignee(s) elect to
acquire any of the shares or Notes of an Investor as specified in such
Investor's notice pursuant to 8(b) hereof, the Secretary of the Company shall so
notify such Investor and settlement thereof shall be made in cash within thirty
(30) days after the Secretary of the Company receives such Investor's notice;
provided that if the terms of payment set forth in such Investor's notice were
other than cash against delivery, the Company and/or its assignee(s) shall pay
for said shares or Notes on the same terms and conditions set forth in
Investor's notice.
(d) In the event the Company and/or its assignee(s) do not
elect to acquire any of the shares or Notes specified in such Investor's notice,
such Investor may within the ninety (90) day period following the expiration of
the option rights granted to the Company and/or its assignee(s) herein or such
later time as reasonably agreed to by such Investor and the Company, transfer
the shares or Notes specified in such Investor's notice which were not acquired
by the Company and/or its assignee(s) as specified in such Investor's notice.
All shares or Notes so sold by such Investor shall no longer be subject to the
provisions of this Section 8.
(e) Anything to the contrary contained herein
notwithstanding, the following transactions shall be exempt from the provisions
hereof:
(i) transactions permitted under Section 7(i), (ii),
(iii), (iv), (v), (vii)(A) and (vii)(B); or
(ii) an Investor's transfer of any and all of its
shares or Notes pursuant to and in accordance with the terms of any merger,
consolidation, reclassification of shares or capital reorganization of such
Investor, or pursuant to a sale of all or substantially all of the stock or
assets of such Investor.
(f) Any sale or transfer, or purported sale or transfer, of
securities of the Company shall be null and void unless the terms, conditions,
and provisions hereof are strictly observed and followed.
(g) The certificates representing shares of stock and Notes
of the Company owned by an Investor shall bear on their face the following
legend so long as the foregoing right of first refusal remains in effect:
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO A RIGHT OF FIRST REFUSAL OPTION IN FAVOR OF THE
COMPANY AND/OR ITS ASSIGNEE(S), AS PROVIDED IN AN
AGREEMENT BETWEEN THE COMPANY AND THE HOLDER OF THIS
CERTIFICATE, WHICH IS AVAILABLE FOR REVIEW AT THE
COMPANY."
9. RESTRICTION UPON SALE OF SHARES. Until the earlier to occur of
(i) the first anniversary of the date of this Agreement and (ii) the Initial
Public Offering, and subject to the continuing rights of the Company to effect a
Change of Control of the Company to any entity as set forth in Section 4(e)
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<PAGE> 14
hereof, the Company shall not sell any Voting Stock of the Company to (i) Cisco
Systems, Inc., (ii) Bay Networks, Inc., Nortel Business, or (iii) Intel
Corporation.
10. CONFIDENTIAL INFORMATION.
(a) The Company will from time to time pursuant to this
Agreement disclose to an Investor and such Investor's designee to the Board, if
any, certain business information, technical information, proprietary
information or such other information which the Company deems to be
confidential. No Investor shall disclose such information to third parties until
the earliest of (i) the date upon which such information becomes public
knowledge through no fault of such Investor, (ii) the date upon which the
Company discloses such information to a third party on an unrestricted basis, or
(iii) the fifth anniversary of the date of disclosure to such Investor.
(b) If so requested by the Board of Directors of the
Company, the designee of Investor, if any, shall excuse himself from all
deliberations or discussions of the Board of Directors of the Company concerning
(a) competitors of such Investor or (b) relationships between the Company and
Investor or the Company and such competitor or (c) with respect to any
discussions relating to the merger or sale of all or substantially all of the
assets or stock of the Company either to such Investor or in a transaction in
which such Investor has a Right of First Offer. Upon notice to such Investor's
designee, if any, the Company may refrain from sending or providing to such
Investor, or such Investor may refuse to receive, any information otherwise
disseminated to the directors of the Company concerning any matters set forth in
this Section 10. The Company does not currently compensate its outside
directors. The Company shall provide all rights and benefits of indemnity to
such designee, if any, as are provided such directors.
11. RIGHT TO REPURCHASE SHARES.
(a) Except to the extent such Voting Stock is purchased in
accordance with the second to last sentence of Section 3(e), if at any time
after the date first set forth above and before the expiration of the provisions
of Section 6 hereof an Investor acquires Voting Stock, any securities
convertibles or exchangeable for Voting Stock, or any other right to acquire
Voting Stock, (except, in any case, by way of stock dividends or other
distributions or offerings made available to holders of any Voting Stock
generally and except, with respect to Seagate, the acquisition of the Notes or
the conversion thereof in accordance with their terms) such that the Voting
Stock owned by such Investor represent (X) with respect to Seagate, in excess of
19.9% of the outstanding Voting Stock of the Company and (Y) with respect to
3Com, in excess of 4.9% of the outstanding Voting Stock of the Company, the
Company shall have the right to purchase, in accordance with the provisions of
this Section 11, from such Investor shares of Voting Stock so as to reduce such
Investor's aggregate voting power (X) with respect to Seagate, to no more than
19.9% of the outstanding Voting Stock of the Company and (Y) with respect to
3Com, to no more than 4.9% of the outstanding Voting Stock of the Company.
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<PAGE> 15
(b) The Company may repurchase any such Voting Securities in
the following manner:
(i) The Company shall give notice (the "Repurchase
Notice") to such Investor in writing of such intention specifying the amount of
Voting Stock proposed to be repurchased and the other material terms upon which
such disposition is proposed to be made, including the proposed closing date.
(ii) Upon receipt of the Repurchase Notice, such
Investor shall promptly, but in no event in more than five (5) business days,
deliver notice to the Company of the average per share cash price paid by such
Investor for the number of shares of Voting Stock being purchased by the Company
from such Investor, such price calculated on a last purchased, first sold basis
(the "Purchase Price").
(iii) The Company shall have the right, exercisable by
written notice by the Company to such Investor within ten business days after
receipt of such notice from such Investor, to purchase all or part of the Voting
Securities specified in such Repurchase Notice for cash per share equal to the
Purchase Price.
(iv) If the Company exercises its rights of
repurchase hereunder, the closing of the purchase of the Voting Stock with
respect to which such right has been exercised shall take place within thirty
(30) calendar days after the Company gives notice of such exercise, which period
of time shall be extended in order to comply with applicable securities laws and
regulations. Upon exercise of its rights of repurchase, the Company and such
Investor shall be legally obligated to consummate the purchase contemplated
thereby and shall use their best efforts to secure any approvals required in
connection therewith.
12. EQUITY METHOD ACCOUNTING. If an Investor desires at some date to
account for its investment in the Company pursuant to the equity method, the
Company shall furnish to such Investor all information that is required by
generally accepted accounting principles to enable such Investor so to account,
to the extent reasonably available to the Company. To the extent reasonably
requested by an Investor, the Company shall provide information, to the extent
reasonably available, regarding the Company and will otherwise cooperate with
such Investor so as to enable such Investor to prepare financial statements in
accordance with accounting principles generally accepted in the United States
and to comply with its reporting requirements under applicable United States
securities laws and regulations.
13. 3COM NOMINATION TO BOARD OF DIRECTORS.
(a) Contingent upon and effective as of the closing of the
sale of Series H Preferred Stock to 3Com pursuant to the Series H Agreement (the
"Series H Financing") and in accordance with Article 2a of the Company's Bylaws,
the Board of Directors of the Company (the "Board of Directors") will be
increased from seven (7) members to eight (8) members until such number is
changed by a subsequent resolution duly adopted by the Board of Directors.
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<PAGE> 16
(b) Contingent upon and effective as of the closing of the
Series H Financing and in accordance with Article 2b of the Company's Bylaws,
the Board of Directors will elect and fill the newly created directorship on the
Company's Board of Directors with a person (the "3Com Designee") designated by
3Com, provided that such 3Com Designee is and at all times during his tenure on
the Company's Board of Directors shall remain at the level of at least a Vice
President of 3Com, and such 3Com Designee shall hold such directorship until the
first to occur of (i) the next annual meeting of shareholders for the election
of directors and (ii) the date at which such 3Com Designee ceases to serve as at
least a Vice President of 3Com.
(c) At the next annual meeting of the shareholders of the
Company for the election of directors, if 3Com has entered into an agreement
with the Company to develop jointly future products with the Company in which
3Com has agreed to pay the Company substantial nonrecurring engineering costs
(the "3Com Commitment"), then the Board of Directors will include the 3Com
Designee in the management's nominees for the Board of Directors and submit such
management nominee at the next annual meeting of shareholders for the election
of directors; provided, however, that at the time of any annual meeting of the
shareholders for the election of directors, if 3Com has not achieved the 3Com
Commitment, the Board of Directors shall have no obligation to nominate the 3Com
Designee, provided that if the Board of Directors nonetheless includes the 3Com
Designee in the management's nominees for the Board of Directors, the Board of
Directors reserves the right at any subsequent annual meeting of the
shareholders not to include the 3Com Designee in the management's nominees for
the Board of Directors.
(d) The rights and obligations of the Company under this
Section 13 shall cease upon the earlier to occur of (i) the Initial Public
Offering, (ii) a Change of Control of the Company, and (iii) at such time as
3Com ceases to hold at least 350,000 shares of Series H Preferred Stock or
Common Stock issued upon conversion of such shares of Series H Preferred Stock.
14. MISCELLANEOUS
(a) Governing Law. This Agreement shall be governed in all
respects by the internal laws of the State of California.
(b) Successors and Assigns. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
(c) Entire Agreement; Amendment. This Agreement constitutes
the full and entire understanding and agreement between the parties with regard
to the subjects hereof and thereof, and no party shall be liable or bound to any
other party in any manner by any warranties, representations or covenants except
as specifically set forth herein or therein. Except as expressly provided
herein, neither this Agreement nor any term hereof may be amended, waived,
discharged or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought; provided, however, that holders of a majority of the outstanding
shares of Series F Preferred, Series G Preferred (including for such purpose the
number of shares of
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<PAGE> 17
Series G Preferred issuable on conversion of the Notes, which shall be deemed to
be outstanding) and Series H Preferred voting together as a class may, with the
Company's prior written consent, waive, modify, amend or terminate on behalf of
all Investors, this Agreement or any terms or provisions hereof.
(d) Prior Agreement; Waiver and Termination.
(i) This Agreement supersedes and replaces the Prior
Agreement and such Prior Agreement shall be of no further force or effect upon
execution of this Agreement by the Company and the Investors.
(ii) Seagate hereby waives any and all rights,
including, without limitation, rights of first refusal and rights to maintain,
if any, with respect to the issuance and sale of the Series H Preferred and
notice of such sale and issuance which it may have under the Prior Agreement.
(e) Notices, etc. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, or otherwise delivered by hand or
by messenger, addressed (a) if to any other Investor, at such address as such
Investor shall have furnished the Company in writing, or (b) if to the Company,
one copy should be sent to its address set forth above and addressed to the
attention of the Corporate Secretary, or at such other address as the Company
shall have furnished to the Investors.
Each such notice or other communication shall for all purposes
of this Agreement be treated as effective or having been given (a) when
delivered if delivered personally or by messenger, or, (b) if sent by mail, at
the earlier of its receipt or seventy-two (72) hours after the same has been
deposited in a regularly maintained receptacle for the deposit of the United
States mail, addressed and mailed as aforesaid.
(f) Counterparts. This Agreement may be executed in any
number of counterparts, each of which may be executed by less than all parties
to this Agreement, each of which shall be enforceable against the parties
actually executing such counterparts, and all of which together shall constitute
one instrument.
(g) Severability. In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to be
illegal, unenforceable or void, this Agreement shall continue in full force and
effect without said provision.
(h) Titles and Subtitles. The titles and subtitles used in
this Agreement are used for convenience only and are not considered in
construing or interpreting this Agreement.
(i) Binding Effect and Transfers. Except as specifically set
forth in this Agreement, this Agreement is for the benefit of, and shall be
binding upon, the parties hereto and their respective heirs, personal
representatives, successors and assigns (each a "Transferee"). Any transfer of
Voting Stock shall be subject to the voting requirements and restrictions of
this Agreement without any further act or deed by such transferee or by any
other party. Any such Transferee receiving Voting Stock shall
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<PAGE> 18
be deemed an Investor for purposes of this Agreement with respect to the voting
of such shares of Voting Stock. Any Transferee shall hold such Voting Stock
subject to the terms hereof and shall comply in all respects with this
Agreement.
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<PAGE> 19
The foregoing First Amended and Restated Series F, G and H Stockholders'
Agreement is hereby executed as of the date first above written.
"COMPANY"
GADZOOX NETWORKS, INC.
a Delaware corporation
By: ______________________________________
(Signature)
Name: ______________________________________
(Printed Name)
Title: ______________________________________
"INVESTORS"
SERIES F AND G STOCKHOLDER AND
NOTEHOLDER:
SEAGATE TECHNOLOGY, INC.
a Delaware corporation
By: ______________________________________
(Signature)
Name: ______________________________________
(Printed Name)
Title: ______________________________________
SERIES H STOCKHOLDER:
3COM CORPORATION
a Delaware corporation
By: ______________________________________
(Signature)
Name: ______________________________________
(Printed Name)
Title: ______________________________________
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<PAGE> 20
EXHIBIT A
GADZOOX NETWORKS, INC.
SERIES F, SERIES G AND SERIES H PREFERRED STOCKHOLDERS
<TABLE>
<CAPTION>
No. of No. of Series G Preferred No. of
Shares Shares Stock issuable upon Shares
Series F Series G conversion of Notes Series H
--------- --------- -------------------- --------
<S> <C> <C> <C> <C>
Seagate Technology.... 2,092,234 895,263 1,725,504*
3Com Corporation...... 784,314
</TABLE>
* Number of shares to be issued upon conversion of the 13,200,103.29
Convertible Subordinated Promissory Note issued October 12, 1998 at 5.75% per
annum simple interest. The exact number will vary based upon the time and rate
of conversion.
<PAGE> 1
EXHIBIT 10.1
GADZOOX NETWORKS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("AGREEMENT") is entered into as of the ___
day of __________, 1998 by and between Gadzoox Networks, Inc., a Delaware
corporation (the "COMPANY") and ("INDEMNITEE").
RECITALS
A. The Company and Indemnitee recognize the continued difficulty in
obtaining liability insurance for its directors, officers, employees, agents and
fiduciaries, the significant increases in the cost of such insurance and the
general reductions in the coverage of such insurance.
B. The Company and Indemnitee further recognize the substantial increase
in corporate litigation in general, subjecting directors, officers, employees,
agents and fiduciaries to expensive litigation risks at the same time as the
availability and coverage of liability insurance has been severely limited.
C. Indemnitee does not regard the current protection available as adequate
under the present circumstances, and Indemnitee and other directors, officers,
employees, agents and fiduciaries of the Company may not be willing to continue
to serve in such capacities without additional protection.
D. The Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve the Company and, in part, in
order to induce Indemnitee to continue to provide services to the Company,
wishes to provide for the indemnification and advancing of expenses to
Indemnitees to the maximum extent permitted by law.
E. In view of the considerations set forth above, the Company desires that
Indemnitee be indemnified by the Company as set forth herein.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Indemnification of Expenses. The Company shall indemnify to the
fullest extent permitted by law if Indemnitee was or is or becomes a party to or
witness or other participant in, or are threatened to be made a party to or
witness or other participant in, any threatened, pending or completed action,
suit, proceeding or alternative dispute resolution mechanism, or any hearing,
inquiry or investigation that Indemnitee in good faith believe might lead to the
institution of any such action, suit, proceeding or alternative dispute
resolution mechanism, whether civil, criminal, administrative, investigative or
other (hereinafter a "CLAIM") by reason of (or arising in part out of) any event
or occurrence related to the fact that Indemnitee is or was a director, officer,
employee, agent or fiduciary of the Company, or any subsidiary of the Company,
or is or was serving at the request of the Company
<PAGE> 2
as a director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of any
action or inaction on the part of Indemnitee while serving in such capacity
(hereinafter an "INDEMNIFIABLE EVENT") against any and all expenses (including
attorneys' fees and all other costs, expenses and obligations incurred in
connection with investigating, defending, being a witness in or participating in
(including on appeal), or preparing to defend, be a witness in or participate
in, any such action, suit, proceeding, alternative dispute resolution mechanism,
hearing, inquiry or investigation), judgments, fines, penalties and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) of such Claim and any federal,
state, local or foreign taxes imposed on Indemnitees as a result of the actual
or deemed receipt of any payments under this Agreement (collectively,
hereinafter "EXPENSES"), including all interest, assessments and other charges
paid or payable in connection with or in respect of such Expenses. Such payment
of Expenses shall be made by the Company as soon as practicable but in any event
no later than twenty days after written demand by Indemnitees therefor is
presented to the Company.
(b) Reviewing Party. Notwithstanding the foregoing, (i) the
obligations of the Company under Section 1(a) shall be subject to the condition
that the Reviewing Party (as described in Section 10(e) hereof) shall not have
determined (in a written opinion, in any case in which the Independent Legal
Counsel referred to in Section 1(c) hereof is involved) that Indemnitee would
not be permitted to be indemnified under applicable law, and (ii) the obligation
of the Company to make an advance payment of Expenses to Indemnitee pursuant to
Section 2(a) (an "EXPENSE ADVANCE") shall be subject to the condition that, if,
when and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company shall be
entitled to be reimbursed by Indemnitee (who hereby agree to reimburse the
Company) for all such amounts theretofore paid; provided, however, that if
Indemnitee has commenced or thereafter commence legal proceedings in a court of
competent jurisdiction to secure a determination that Indemnitee should be
indemnified under applicable law, any determination made by the Reviewing Party
that Indemnitee would not be permitted to be indemnified under applicable law
shall not be binding and Indemnitee shall not be required to reimburse the
Company for any Expense Advance until a final judicial determination is made
with respect thereto (as to which all rights of appeal therefrom have been
exhausted or lapsed). The Indemnitee's obligation to reimburse the Company for
any Expense Advance shall be unsecured and no interest shall be charged thereon.
If there has not been a Change in Control (as defined in Section 10(c) hereof),
the Reviewing Party shall be selected by the Board of Directors, and if there
has been such a Change in Control (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section 1(c) hereof. If there has been
no determination by the Reviewing Party or if the Reviewing Party determines
that Indemnitee substantively would not be permitted to be indemnified in whole
or in part under applicable law, Indemnitee shall have the right to commence
litigation seeking an initial determination by the court or challenging any such
determination by the Reviewing Party or any aspect thereof, including the legal
or factual bases therefor, and the Company hereby consents to service of process
and to appear in any such proceeding. Any determination by the Reviewing Party
otherwise shall be conclusive and binding on the Company and Indemnitee.
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<PAGE> 3
(c) Change in Control. The Company agrees that if there is a Change
in Control of the Company (other than a Change in Control which has been
approved by a majority of the Company's Board of Directors who were directors
immediately prior to such Change in Control) then, with respect to all matters
thereafter arising concerning the rights of Indemnitees to payments of Expenses
and Expense Advances under this Agreement or any other agreement or under the
Company's Certificate of Incorporation or Bylaws as now or hereafter in effect,
Independent Legal Counsel (as defined in Section 10(d) hereof) shall be selected
by Indemnitees and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law and the
Company agrees to abide by such opinion. The Company agrees to pay the
reasonable fees of the Independent Legal Counsel referred to above and to fully
indemnify such counsel against any and all expenses (including attorneys' fees),
claims, liabilities and damages arising out of or relating to this Agreement or
its engagement pursuant hereto.
(d) Mandatory Payment of Expenses. Notwithstanding any other
provision of this Agreement other than Section 9 hereof, to the extent that
Indemnitee has been successful on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, in defense of any
action, suit, proceeding, inquiry or investigation referred to in Section (1)(a)
hereof or in the defense of any claim, issue or matter therein, Indemnitee shall
be indemnified against all Expenses incurred by Indemnitee in connection
therewith.
2. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all Expenses
incurred by Indemnitee. The advances to be made hereunder shall be paid by the
Company to Indemnitee as soon as practicable but in any event no later than
twenty days after written demand by Indemnitee therefor to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
Claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). In addition, Indemnitee shall give the Company such information
and cooperation as it may reasonably require and as shall be within Indemnitee's
power.
(c) No Presumptions; Burden of Proof. For purposes of this
Agreement, the termination of any Claim by judgment, order, settlement (whether
with or without court approval) or conviction, or upon a plea of nolo
contendere, or its equivalent, shall not create a presumption that Indemnitee
did not meet any particular standard of conduct or have any particular belief or
that a court has determined that indemnification is not permitted by applicable
law. In addition, neither the failure of the Reviewing Party to have made a
determination as to whether Indemnitee has met any particular
-3-
<PAGE> 4
standard of conduct or had any particular belief, nor an actual determination
by the Reviewing Party that Indemnitee has not met such standard of conduct or
did not have such belief, prior to the commencement of legal proceedings by
Indemnitee to secure a judicial determination that Indemnitee should be
indemnified under applicable law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by the Reviewing Party or otherwise as to whether Indemnitee is
entitled to be indemnified hereunder, the burden of proof shall be on the
Company to establish that Indemnitee is not so entitled.
(d) Notice to Insurers. If, at the time of the receipt by the
Company of a notice of a Claim pursuant to Section 2(b) hereof, the Company has
liability insurance in effect which may cover such Claim, the Company shall give
prompt notice of the commencement of such Claim to the insurers in accordance
with the procedures set forth in the respective policies. The Company shall
thereafter take all necessary or desirable action to cause such insurers to pay,
on behalf of Indemnitee, all amounts payable as a result of such action, suit,
proceeding, inquiry or investigation in accordance with the terms of such
policies.
(e) Selection of Counsel. In the event the Company shall be
obligated hereunder to pay the Expenses of any Claim, the Company shall be
entitled to assume the defense of such Claim with counsel approved by
Indemnitee, which approval shall not be unreasonably withheld, upon the delivery
to Indemnitee of written notice of its election so to do. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same Claim; provided that, (i) Indemnitee shall have the right to
employ Indemnitee's counsel in any such Claim at Indemnitee's expense and (ii)
if (A) the employment of counsel by Indemnitee has been previously authorized by
the Company, (B) Indemnitee shall have reasonably concluded that there is a
conflict of interest between the Company and Indemnitee in the conduct of any
such defense, or (C) the Company shall not continue to retain such counsel to
defend such Claim, then the fees and expenses of Indemnitee's counsel shall be
at the expense of the Company. The Company shall have the right to conduct such
defense as it sees fit in its sole discretion, including the right to settle any
claim against Indemnitee without the consent of the Indemnitee.
3. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. The Company hereby agrees to indemnify Indemnitee to the
fullest extent permitted by law, notwithstanding that such indemnification is
not specifically authorized by the other provisions of this Agreement, the
Company's Certificate of Incorporation, the Company's Bylaws or by statute. In
the event of any change after the date of this Agreement in any applicable law,
statute or rule which expands the right of a Delaware corporation to indemnify a
member of its Board of Directors or an officer, employee, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this
Agreement the greater benefits afforded by such change. In the event of any
change in any applicable law, statute or rule which narrows the right of a
Delaware corporation to indemnify a member of its Board of Directors or an
officer, employee, agent or fiduciary, such change, to the extent not
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<PAGE> 5
otherwise required by such law, statute or rule to be applied to this Agreement,
shall have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 8(a) hereof.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall be in addition to any rights to which Indemnitee may be entitled under the
Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of
stockholders or disinterested directors, the General Corporation Law of the
State of Delaware, or otherwise. The indemnification provided under this
Agreement shall continue as to Indemnitee for any action Indemnitee took or did
not take while serving in an indemnified capacity even though Indemnitee may
have ceased to serve in such capacity.
4. No Duplication of Payments. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Certificate of Incorporation, Bylaw or otherwise)
of the amounts otherwise indemnifiable hereunder.
5. Partial Indemnification. If Indemnitee is entitled under any provision
of this Agreement to indemnification by the Company for some or a portion of
Expenses incurred in connection with any Claim, but not, however, for all of the
total amount thereof, the Company shall nevertheless indemnify Indemnitee for
the portion of such Expenses to which Indemnitee is entitled.
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee.
7. Liability Insurance. The Company shall, from time to time, make the
good faith determination whether or not it is practicable for the Company to
obtain and maintain a policy or policies of insurance with reputable insurance
companies providing the officers and directors of the Company with coverage for
losses from wrongful acts, or to ensure the Company's performance of its
indemnification obligations under this Agreement. Among other considerations,
the Company will weigh the costs of obtaining such insurance coverage against
the protection afforded by such coverage. In all policies of directors' and
officers' liability insurance, Indemnitee shall be named as an insured in such a
manner as to provide Indemnitee the same rights and benefits as are accorded to
the most favorably insured of the Company's directors, if Indemnitee is a
director; or of the Company's officers, if Indemnitee is not a director of the
Company but is an officer; or of the Company's key employees, if Indemnitee is
not an officer or director but is a key employee. Notwithstanding the foregoing,
the Company shall have no obligation to obtain or maintain such insurance if the
Company determines in good faith that such insurance is not reasonably
available, if the premium costs for such insurance are disproportionate to the
amount of coverage provided, if the coverage provided by such insurance is
-5-
<PAGE> 6
limited by exclusions so as to provide an insufficient benefit, or if Indemnitee
is covered by similar insurance maintained by a subsidiary or parent of the
Company.
8. Exceptions. Any other provision herein to the contrary notwithstanding,
the Company shall not be obligated pursuant to the terms of this Agreement:
(a) Excluded Action or Omissions. To indemnify Indemnitee for
Expenses resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under this Agreement or applicable
law;
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
to Indemnitee with respect to Claims initiated or brought voluntarily by
Indemnitee and not by way of defense, except (i) with respect to actions or
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other agreement or insurance policy or under the Company's
Certificate of Incorporation or Bylaws now or hereafter in effect relating to
Claims for Indemnifiable Events, (ii) in specific cases if the Board of
Directors has approved the initiation or bringing of such Claim, or (iii) as
otherwise required under Section 145 of the Delaware General Corporation Law,
regardless of whether Indemnitee ultimately is determined to be entitled to such
indemnification, advance expense payment or insurance recovery, as the case may
be;
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by Indemnitee with respect to any proceeding instituted by Indemnitee
to enforce or interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in such
proceeding was not made in good faith or was frivolous; or
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Period of Limitations. No legal action shall be brought and no cause of
action shall be asserted by or in the right of the Company against Indemnitee,
Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
10. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Company"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have
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<PAGE> 7
had power and authority to indemnify its directors, officers, employees, agents
or fiduciaries, so that if Indemnitee is or was a director, officer, employee,
agent or fiduciary of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee, agent
or fiduciary of another corporation, partnership, joint venture, employee
benefit plan, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on Indemnitee with respect to an employee
benefit plan; and references to "serving at the request of the Company" shall
include any service as a director, officer, employee, agent or fiduciary of the
Company which imposes duties on, or involves services by, such director,
officer, employee, agent or fiduciary with respect to an employee benefit plan,
its participants or its beneficiaries; and if Indemnitee acted in good faith and
in a manner Indemnitee reasonably believed to be in the interest of the
participants and beneficiaries of an employee benefit plan, Indemnitee shall be
deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
(c) For purposes of this Agreement a "Change in Control" shall be
deemed to have occurred if, on or after the date of this Agreement, (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended), other than a trustee or other fiduciary
holding securities under an employee benefit plan of the Company acting in such
capacity or a corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportions as their ownership of stock of
the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing more
than 50% of the total voting power represented by the Company's then outstanding
Voting Securities, (ii) during any period of two consecutive years, individuals
who at the beginning of such period constitute the Board of Directors of the
Company and any new director whose election by the Board of Directors or
nomination for election by the Company's stockholders was approved by a vote of
at least two thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved, cease for any reason to constitute a
majority thereof, or (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation other than a merger or
consolidation which would result in the Voting Securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
related transactions) all or substantially all of the Company's assets.
(d) For purposes of this Agreement, "Independent Legal Counsel"
shall mean an attorney or firm of attorneys, selected in accordance with the
provisions of Section 1(c) hereof, who shall
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<PAGE> 8
not have otherwise performed services for the Company or Indemnitees within the
last three years (other than with respect to matters concerning the rights of
Indemnitees under this Agreement, or of other indemnitees under similar
indemnity agreements).
(e) For purposes of this Agreement, a "Reviewing Party" shall mean
any appropriate person or body consisting of a member or members of the
Company's Board of Directors or any other person or body appointed by the Board
of Directors who is not a party to the particular Claim for which Indemnitee are
seeking indemnification, or Independent Legal Counsel.
(f) For purposes of this Agreement, "Voting Securities" shall mean
any securities of the Company that vote generally in the election of directors.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
12. Binding Effect; Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns, including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business and/or assets of the Company, spouses, heirs,
and personal and legal representatives. The Company shall require and cause any
successor (whether direct or indirect by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business
and/or assets of the Company, by written agreement in form and substance
satisfactory to Indemnitee, expressly to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform if no such succession had taken place. This Agreement shall
continue in effect with respect to Claims relating to Indemnifiable Events
regardless of whether Indemnitee continues to serve as a director, officer,
employee, agent or fiduciary of the Company or of any other enterprise at the
Company's request.
13. Attorneys' Fees. In the event that any action is instituted by
Indemnitee under this Agreement or under any liability insurance policies
maintained by the Company to enforce or interpret any of the terms hereof or
thereof, Indemnitee shall be entitled to be paid all Expenses incurred by
Indemnitee with respect to such action, regardless of whether Indemnitee is
ultimately successful in such action, and shall be entitled to the advancement
of Expenses with respect to such action, unless, as a part of such action, a
court of competent jurisdiction over such action determines that each of the
material assertions made by Indemnitee as a basis for such action was not made
in good faith or was frivolous. In the event of an action instituted by or in
the name of the Company under this Agreement to enforce or interpret any of the
terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses
incurred by Indemnitee in defense of such action (including costs and expenses
incurred with respect to Indemnitee's counterclaims and cross-claims made in
such action), and shall be entitled to the advancement of Expenses with respect
to such action, unless, as a part of such action, a court having jurisdiction
over such action determines that each of Indemnitee's material defenses to such
action was made in bad faith or was frivolous.
-8-
<PAGE> 9
14. Notice. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given (a) five (5) days after deposit with the U.S. Postal
Service or other applicable postal service, if delivered by first class mail,
postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day
after the business day of deposit with Federal Express or similar overnight
courier, freight prepaid, or (d) one day after the business day of delivery by
facsimile transmission, if delivered by facsimile transmission, with copy by
first class mail, postage prepaid, and shall be addressed if to Indemnitee, at
the Indemnitee's address as set forth beneath Indemnitee's signature to this
Agreement and if to the Company at the address of its principal corporate
offices (attention: Secretary) or at such other address as such party may
designate by ten days' advance written notice to the other party hereto.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the Court of
Chancery of the State of Delaware in and for New Castle County, which shall be
the exclusive and only proper forum for adjudicating such a claim.
16. Severability. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including, without limitations, each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable.
17. Choice of Law. This Agreement shall be governed by and its provisions
construed and enforced in accordance with the laws of the State of Delaware, as
applied to contracts between Delaware residents, entered into and to be
performed entirely within the State of Delaware, without regard to the conflict
of laws principles thereof.
18. Subrogation. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee who shall execute all documents required and shall do all
acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
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<PAGE> 10
20. Integration and Entire Agreement. This Agreement sets forth the entire
understanding between the parties hereto and supersedes and merges all previous
written and oral negotiations, commitments, understandings and agreements
relating to the subject matter hereof between the parties hereto.
21. No Construction as Employment Agreement. Nothing contained in this
Agreement shall be construed as giving Indemnitee any right to be retained in
the employ of the Company or any of its subsidiaries.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
GADZOOX NETWORKS, INC.
a Delaware corporation
By:
--------------------------------
Name:
--------------------------------
Address: Gadzoox Networks
6840 Via Del Oro
San Jose, CA 95119
AGREED TO AND ACCEPTED BY:
- -------------------------------
Address:
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<PAGE> 1
EXHIBIT 10.2
GADZOOX NETWORKS, INC.
AMENDED AND RESTATED
1993 STOCK PLAN
(AS AMENDED AND RESTATED MAY 4, 1999)
1. Purposes of the Plan. The purposes of this 1993 Stock Plan are:
o to attract and retain the best available personnel for
positions of substantial responsibility,
o to provide additional incentive to Employees, Directors
and Consultants, and
o to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
(g) "Company" means Gadzoox Networks, Inc., a Delaware
corporation.
(h) "Consultant" means any person, including an advisor, engaged
by the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
<PAGE> 2
(j) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company. A
Service Provider shall not cease to be an Employee in the case of (i) any leave
of absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable; or
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.
(o) "Nonstatutory Stock Option" means an Option not intended to
qualify as an Incentive Stock Option.
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(p) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option or Stock
Purchase Right grant. The Notice of Grant is part of the Option Agreement.
(q) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(r) "Option" means a stock option granted pursuant to the Plan.
(s) "Option Agreement" means an agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
The Option Agreement is subject to the terms and conditions of the Plan.
(t) "Option Exchange Program" means a program whereby outstanding
Options are surrendered in exchange for Options with a lower exercise price.
(u) "Optioned Stock" means the Common Stock subject to an Option
or Stock Purchase Right.
(v) "Optionee" means the holder of an outstanding Option or Stock
Purchase Right granted under the Plan.
(w) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(x) "Plan" means this Amended and Restated 1993 Stock Plan.
(y) "Restricted Stock" means shares of Common Stock acquired
pursuant to a grant of Stock Purchase Rights under Section 11 of the Plan.
(z) "Restricted Stock Purchase Agreement" means a written
agreement between the Company and the Optionee evidencing the terms and
restrictions applying to stock purchased under a Stock Purchase Right. The
Restricted Stock Purchase Agreement is subject to the terms and conditions of
the Plan and the Notice of Grant.
(aa) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(bb) "Section 16(b) " means Section 16(b) of the Exchange Act.
(cc) "Service Provider" means an Employee, Director or
Consultant.
(dd) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 13 of the Plan.
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(ee) "Stock Purchase Right" means the right to purchase Common
Stock pursuant to Section 11 of the Plan, as evidenced by a Notice of Grant.
(ff) "Subsidiary" means a "subsidiary corporation", whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
the Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 8,180,000 Shares, plus 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) 1,500,000 shares, (ii) 5% of the outstanding shares on such date or (iii) a
lesser amount determined by the Board. The Shares may be authorized, but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
4. Administration of the Plan.
(a) Procedure.
(i) Multiple Administrative Bodies. The Plan may be
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the
Administrator determines it to be desirable to qualify Options granted hereunder
as "performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided above,
the Plan shall be administered by (A) the Board or (B) a Committee, which
committee shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
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(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and
Stock Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock
to be covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the
Plan;
(v) to determine the terms and conditions, not
inconsistent with the terms of the Plan, of any Option or Stock Purchase Right
granted hereunder. Such terms and conditions include, but are not limited to,
the exercise price, the time or times when Options or Stock Purchase Rights may
be exercised (which may be based on performance criteria), any vesting
acceleration or waiver of forfeiture restrictions, and any restriction or
limitation regarding any Option or Stock Purchase Right or the shares of Common
Stock relating thereto, based in each case on such factors as the Administrator,
in its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an Option Exchange Program;
(viii) to construe and interpret the terms of the Plan
and awards granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and
regulations relating to the Plan, including rules and regulations relating to
sub-plans established for the purpose of qualifying for preferred tax treatment
under foreign tax laws;
(x) to modify or amend each Option or Stock Purchase
Right (subject to Section 15(c) of the Plan), including the discretionary
authority to extend the post-termination exercisability period of Options longer
than is otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option or Stock Purchase Right that number of Shares
having a Fair Market Value equal to the amount required to be withheld. The Fair
Market Value of the Shares to be withheld shall be determined on the date that
the amount of tax to be withheld is to be determined. All elections by an
Optionee to have Shares withheld for this purpose shall be made in such form and
under such conditions as the Administrator may deem necessary or advisable;
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(xii) to authorize any person to execute on behalf of
the Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary
or advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on all
Optionees and any other holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal
year of the Company, Options to purchase more than 1,000,000 Shares.
(ii) In connection with his or her initial service, a
Service Provider may be granted Options to purchase up to an additional
1,500,000 Shares which shall not count against the limit set forth in subsection
(i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is cancelled in the same fiscal year
of the Company in which it was granted (other than in connection with a
transaction described in Section 13), the cancelled Option will be counted
against the limits set forth in subsections (i) and (ii) above. For
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<PAGE> 7
this purpose, if the exercise price of an Option is reduced, the transaction
will be treated as a cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan (as amended
and restated) shall become effective upon its adoption by the Board. It shall
continue in effect for a term of ten (10) years (until May 3, 2009) unless
terminated earlier under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the
Incentive Stock Option is granted, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company or any Parent
or Subsidiary, the per Share exercise price shall be no less than 110% of the
Fair Market Value per Share on the date of grant.
(B) granted to any Employee other than an
Employee described in paragraph (A) immediately above, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option, the per
Share exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be
granted with a per Share exercise price of less than 100% of the Fair Market
Value per Share on the date of grant pursuant to a merger or other corporate
transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
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<PAGE> 8
(c) Form of Consideration. The Administrator shall determine the
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which said Option shall be exercised;
(v) consideration received by the Company under a
cashless exercise program implemented by the Company in connection with the
Plan;
(vi) a reduction in the amount of any Company liability
to the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) any combination of the foregoing methods of
payment; or
(viii) such other consideration and method of payment
for the issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options granted hereunder shall be tolled during any unpaid leave of
absence. An Option may not be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock,
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<PAGE> 9
notwithstanding the exercise of the Option. The Company shall issue (or cause to
be issued) such Shares promptly after the Option is exercised. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Shares are issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of Shares
thereafter available, both for purposes of the Plan and for sale under the
Option, by the number of Shares as to which the Option is exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's death
or Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination (but in no event later than the expiration of
the term of such Option as set forth in the Option Agreement). In the absence of
a specified time in the Option Agreement, the Option shall remain exercisable
for three (3) months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the Plan.
If, after termination, the Optionee does not exercise his or her Option within
the time specified by the Administrator, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is specified
in the Option Agreement (but in no event later than the expiration of the term
of such Option as set forth in the Notice of Grant), by the Optionee's estate or
by a person who acquires the right to exercise the Option by bequest or
inheritance, but only to the extent that the Option is vested on the date of
death. In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to his or
her entire Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws of descent
or distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
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<PAGE> 10
(e) Buyout Provisions. The Administrator may at any time offer to
buy out for a payment in cash or Shares an Option previously granted based on
such terms and conditions as the Administrator shall establish and communicate
to the Optionee at the time that such offer is made.
11. Stock Purchase Rights.
(a) Rights to Purchase. Stock Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Stock Purchase Rights under the Plan, it shall
advise the offeree in writing or electronically, by means of a Notice of Grant,
of the terms, conditions and restrictions related to the offer, including the
number of Shares that the offeree shall be entitled to purchase, the price to be
paid, and the time within which the offeree must accept such offer. The offer
shall be accepted by execution of a Restricted Stock Purchase Agreement in the
form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines
otherwise, the Restricted Stock Purchase Agreement shall grant the Company a
repurchase option exercisable upon the voluntary or involuntary termination of
the purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
exercised, the purchaser shall have the rights equivalent to those of a
stockholder, and shall be a stockholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and
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<PAGE> 11
Stock Purchase Right, the number of shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Options or Stock
Purchase Rights have yet been granted or which have been returned to the Plan
upon cancellation or expiration of an Option or Stock Purchase Right, the price
per share of Common Stock covered by each such outstanding Option or Stock
Purchase Right and the number of shares set forth in Sections 6(c)(i) and (ii),
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock split,
stock dividend, combination or reclassification of the Common Stock, or any
other increase or decrease in the number of issued shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be deemed
to have been "effected without receipt of consideration." Such adjustment shall
be made by the Board, whose determination in that respect shall be final,
binding and conclusive. Except as expressly provided herein, no issuance by the
Company of shares of stock of any class, or securities convertible into shares
of stock of any class, shall affect, and no adjustment by reason thereof shall
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee at least fifteen days prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Optioned Stock covered thereby, including Shares as
to which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully vested and exercisable for a
period of fifteen (15) days from the date of such notice, and the Option or
Stock Purchase Right shall terminate upon the expiration of such period. For the
purposes of this paragraph, the Option or Stock Purchase Right shall be
considered assumed if, following the merger or sale of assets, the option or
right confers the right to purchase or receive, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right immediately prior to the merger or
sale of assets, the consideration (whether stock, cash, or other securities or
property) received in the
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<PAGE> 12
merger or sale of assets by holders of Common Stock for each Share held on the
effective date of the transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon the
exercise of the Option or Stock Purchase Right, for each Share of Optioned Stock
subject to the Option or Stock Purchase Right, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase
Right shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall be
provided to each Optionee within a reasonable time after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Company shall obtain stockholder
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to the
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of
an Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
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<PAGE> 13
17. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which authority
is deemed by the Company's counsel to be necessary to the lawful issuance and
sale of any Shares hereunder, shall relieve the Company of any liability in
respect of the failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Stockholder Approval. The Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
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<PAGE> 1
GADZOOX NETWORKS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
1. Purpose. The purpose of the Plan is to provide employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" shall mean the Common Stock of the Company.
(d) "Company" shall mean Gadzoox Networks, Inc., a Delaware
corporation, and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross
earnings and commissions, exclusive of payments for overtime, shift premium,
incentive compensation, incentive payments, bonuses and other compensation.
(f) "Designated Subsidiary" shall mean any Subsidiary which has
been designated by the Board from time to time in its sole discretion as
eligible to participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of
the Company for tax purposes whose customary employment with the Company is at
least twenty (20) hours per week and more than five (5) months in any calendar
year. For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
Period.
(i) "Exercise Date" shall mean the last day of each Offering
Period.
<PAGE> 2
(j) "Fair Market Value" shall mean, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day on the date of such determination, as reported in
The Wall Street Journal or such other source as the Board deems reliable, or;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean of the closing bid and asked prices for the
Common Stock on the date of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(iv) For purposes of the Enrollment Date of the first
Offering Period under the Plan, the Fair Market Value shall be the initial price
to the public as set forth in the final prospectus included within the
registration statement in Form S-1 filed with the Securities and Exchange
Commission for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Period" shall mean a period of approximately six
(6) months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after August 1 and terminating on the
last Trading Day in the period ending the following January 31, or commencing on
the first Trading Day on or after February 1 and terminating on the last Trading
Day in the period ending the following July 31; provided, however, that the
first Offering Period under the Plan shall commence with the first Trading Day
on or after the date on which the Securities and Exchange Commission declares
the Company's Registration Statement effective and ending on the last Trading
Day on or before January 31, 2000. The duration of Offering Periods may be
changed pursuant to Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
(m) "Purchase Price" shall mean an amount equal to 85% of the
Fair Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower; provided, however, that the Purchase Price
may be adjusted by the Board pursuant to Section 20.
(n) "Reserves" shall mean the number of shares of Common Stock
covered by each option under the Plan which have not yet been exercised and the
number of shares of Common Stock which have been authorized for issuance under
the Plan but not yet placed under option.
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<PAGE> 3
(o) "Subsidiary" shall mean a corporation, domestic or foreign,
of which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(p) "Trading Day" shall mean a day on which national stock
exchanges and the Nasdaq System are open for trading.
3. Eligibility.
(a) Any Employee who shall have been employed by the Company for
at least six months on a given Enrollment Date shall be eligible to participate
in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding,
no Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive
Offering Periods with a new Offering Period commencing on the first Trading Day
on or after August 1 and February 1 each year, or on such other date as the
Board shall determine, and continuing thereafter until terminated in accordance
with Section 20 hereof; provided, however, that the first Offering Period under
the Plan shall commence with the first Trading Day on or after the date on which
the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or before January 31,
2000. The Board shall have the power to change the duration of Offering Periods
(including the commencement dates thereof) with respect to future offerings
without stockholder approval if such change is announced at least five (5) days
prior to the scheduled beginning of the first Offering Period to be affected
thereafter.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of EXHIBIT A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the
first payroll following the Enrollment Date and shall end on the last payroll in
the Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
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<PAGE> 4
6. Payroll Deductions.
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be
credited to his or her account under the Plan and shall be withheld in whole
percentages only. A participant may not make any additional payments into such
account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by completing or filing
with the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) hereof, a
participant's payroll deductions may be decreased to zero percent (0%) at any
time during an Offering Period. Payroll deductions shall recommence at the rate
provided in such participant's subscription agreement at the beginning of the
first Offering Period which is scheduled to end in the following calendar year,
unless terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or
at the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
eligible Employee participating in such Offering Period shall be granted an
option to purchase on the Exercise Date of such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Offering Period more than 500
shares (subject to any adjustment pursuant to Section 19), and provided further
that such purchase shall be subject to the limitations set forth in
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<PAGE> 5
Sections 3(b) and 12 hereof. Exercise of the option shall occur as provided in
Section 8 hereof, unless the participant has withdrawn pursuant to Section 10
hereof. The Option shall expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Offering Period, subject to earlier withdrawal by the participant as provided in
Section 10 hereof. Any other monies left over in a participant's account after
the Exercise Date shall be returned to the participant. During a participant's
lifetime, a participant's option to purchase shares hereunder is exercisable
only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, the shares purchased upon exercise of his or
her option.
10. Withdrawal.
(a) A participant may withdraw all but not less than all the
payroll deductions credited to his or her account and not yet used to exercise
his or her option under the Plan at any time by giving written notice to the
Company in the form of EXHIBIT B to this Plan. All of the participant's payroll
deductions credited to his or her account shall be paid to such participant
promptly after receipt of notice of withdrawal and such participant's option for
the Offering Period shall be automatically terminated, and no further payroll
deductions for the purchase of shares shall be made for such Offering Period. If
a participant withdraws from an Offering Period, payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not
have any effect upon his or her eligibility to participate in any similar plan
which may hereafter be adopted by the Company or in succeeding Offering Periods
which commence after the termination of the Offering Period from which the
participant withdraws.
11. Termination of Employment. Upon a participant's ceasing to be an
Employee for any reason, he or she shall be deemed to have elected to withdraw
from the Plan and the payroll deductions credited to such participant's account
during the Offering Period but not yet used to exercise the option shall be
returned to such participant or, in the case of his or her death, to the person
or persons entitled thereto under Section 15 hereof, and such participant's
option shall be automatically terminated. The preceding sentence
notwithstanding, a participant who receives payment in lieu of notice of
termination of employment shall be treated as continuing to be an Employee for
the participant's customary number of hours per week of employment during the
period in which the participant is subject to such payment in lieu of notice.
5
<PAGE> 6
12. Interest. No interest shall accrue on the payroll deductions of a
participant in the Plan.
13. Stock.
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 150,000 shares, plus 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) 1.0% of the outstanding shares on such date or (iii) a lesser
amount determined by the Board. If, on a given Exercise Date, the number of
shares with respect to which options are to be exercised exceeds the number of
shares then available under the Plan, the Company shall make a pro rata
allocation of the shares remaining available for purchase in as uniform a manner
as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in
shares covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall
be registered in the name of the participant or in the name of the participant
and his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision and
determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to an
Exercise Date on which the option is exercised but prior to delivery to such
participant of such shares and cash. In addition, a participant may file a
written designation of a beneficiary who is to receive any cash from the
participant's account under the Plan in the event of such participant's death
prior to exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its discretion, may deliver
such shares and/or cash to the spouse or to any one or more
6
<PAGE> 7
dependents or relatives of the participant, or if no spouse, dependent or
relative is known to the Company, then to such other person as the Company may
designate.
16. Transferability. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each
participant in the Plan. Statements of account shall be given to participating
Employees at least annually, which statements shall set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution,
Liquidation, Merger or Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase per Offering Period (pursuant to Section 7), as well as
the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New
7
<PAGE> 8
Exercise Date and that the participant's option shall be exercised automatically
on the New Exercise Date, unless prior to such date the participant has
withdrawn from the Offering Period as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all
or substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, the Offering Period
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date"). The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
20. Amendment or Termination.
(a) The Board of Directors of the Company may at any time and for
any reason terminate or amend the Plan. Except as provided in Section 19 hereof,
no such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its stockholders. Except as provided
in Section 19 and Section 20 hereof, no amendment may make any change in any
option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any other applicable law, regulation or stock exchange rule), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation
of the Plan may result in unfavorable financial accounting consequences, the
Board may, in its discretion and, to the extent necessary or desirable, modify
or amend the Plan to reduce or eliminate such accounting consequence including,
but not limited to:
8
<PAGE> 9
(i) altering the Purchase Price for any Offering Period
including an Offering Period underway at the time of the change in Purchase
Price;
(ii) shortening any Offering Period so that Offering
Period ends on a new Exercise Date, including an Offering Period underway at the
time of the Board action; and
(iii) allocating shares.
Such modifications or amendments shall not require stockholder approval
or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
23. Term of Plan. The Plan Shall become effective upon the earlier to
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
9
<PAGE> 10
GADZOOX NETWORKS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: __________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________ hereby elects to participate in
the Gadzoox Networks, Inc. 1999 Employee Stock Purchase Plan (the "Employee
Stock Purchase Plan") and subscribes to purchase shares of the Company's Common
Stock in accordance with this Subscription Agreement and the Employee Stock
Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the
amount of ____% of my Compensation on each payday (from 1 to 10%) during the
Offering Period in accordance with the Employee Stock Purchase Plan. (Please
note that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for
the purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I understand
that if I do not withdraw from an Offering Period, any accumulated payroll
deductions will be used to automatically exercise my option.
4. I have received a copy of the complete Employee Stock Purchase Plan.
I understand that my participation in the Employee Stock Purchase Plan is in all
respects subject to the terms of the Plan. I understand that my ability to
exercise the option under this Subscription Agreement is subject to stockholder
approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should
be issued in the name(s) of (Employee or Employee and Spouse only):.
6. I understand that if I dispose of any shares received by me pursuant
to the Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares), I will be treated for
federal income tax purposes as having received ordinary income at the time of
such disposition in an amount equal to the excess of the fair market value of
the shares at the time such shares were purchased by me over the price which I
paid for the shares. I HEREBY AGREE TO NOTIFY THE COMPANY IN WRITING WITHIN 30
DAYS AFTER THE DATE OF ANY DISPOSITION OF SHARES AND I WILL MAKE ADEQUATE
PROVISION FOR FEDERAL, STATE OR OTHER TAX WITHHOLDING OBLIGATIONS, IF ANY, WHICH
ARISE UPON THE DISPOSITION OF THE COMMON STOCK. The Company may, but will not be
<PAGE> 11
obligated to, withhold from my compensation the amount necessary to meet any
applicable withholding obligation including any withholding necessary to make
available to the Company any tax deductions or benefits attributable to sale or
early disposition of Common Stock by me. If I dispose of such shares at any time
after the expiration of the 2-year holding period, I understand that I will be
treated for federal income tax purposes as having received income only at the
time of such disposition, and that such income will be taxed as ordinary income
only to the extent of an amount equal to the lesser of (1) the excess of the
fair market value of the shares at the time of such disposition over the
purchase price which I paid for the shares, or (2) 15% of the fair market value
of the shares on the first day of the Offering Period. The remainder of the
gain, if any, recognized on such disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock
Purchase Plan. The effectiveness of this Subscription Agreement is dependent
upon my eligibility to participate in the Employee Stock Purchase Plan. 8. In
the event of my death, I hereby designate the following as my beneficiary(ies)
to receive all payments and shares due me under the Employee Stock Purchase Plan
NAME: (Please print)
-----------------------------------------------------------
(First) (Middle) (Last)
- --------------------------------------------------
Relationship
- --------------------------------------------------
(Address)
Employee's Social Security Number:
----------------------------------------
Employee's Address:
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
-------------------------------------------------------
2
<PAGE> 12
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT
THROUGHOUT SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
------------------------------ --------------------------------------
Signature of Employee
--------------------------------------
Spouse's Signature
(If beneficiary other than spouse)
<PAGE> 13
EXHIBIT B
GADZOOX NETWORKS, INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the Gadzoox
Networks, Inc. 1999 Employee Stock Purchase Plan which began on ___________,
______ (the "Enrollment Date") hereby notifies the Company that he or she hereby
withdraws from the Offering Period. He or she hereby directs the Company to pay
to the undersigned as promptly as practicable all the payroll deductions
credited to his or her account with respect to such Offering Period. The
undersigned understands and agrees that his or her option for such Offering
Period will be automatically terminated. The undersigned understands further
that no further payroll deductions will be made for the purchase of shares in
the current Offering Period and the undersigned shall be eligible to participate
in succeeding Offering Periods only by delivering to the Company a new
Subscription Agreement.
Name and Address of Participant:
- ------------------------------------
- ------------------------------------
- ------------------------------------
Signature:
- ------------------------------------
Date:
------------------------------
<PAGE> 1
EXHIBIT 10.4
GADZOOX NETWORKS, INC.
1999 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this Gadzoox Networks,
Inc. 1999 Director Option Plan are to attract and retain the best available
personnel for service as Outside Directors (as defined herein) of the Company,
to provide additional incentive to the Outside Directors of the Company to serve
as Directors, and to encourage their continued service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended.
(c) "Common Stock" means the common stock of the Company.
(d) "Company" means Gadzoox Networks, Inc., a Delaware
corporation.
(e) "Director" means a member of the Board.
(f) "Employee" means any person, including officers and
Directors, employed by the Company or any Parent or Subsidiary of the Company.
The payment of a Director's fee by the Company shall not be sufficient in and of
itself to constitute "employment" by the Company.
(g) "Exchange Act" means the Securities Exchange Act of
1934, as amended.
(h) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market,
its Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a
recognized securities dealer but selling prices are not reported, the Fair
Market Value of a Share of Common Stock shall be the mean between the high bid
and low asked prices for the Common Stock for the last market trading day prior
to the time of determination, as reported in The Wall Street Journal or such
other source as the Board deems reliable; or
<PAGE> 2
(iii) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(i) "Inside Director" means a Director who is an Employee.
(j) "Option" means a stock option granted pursuant to the
Plan.
(k) "Optioned Stock" means the Common Stock subject to an
Option.
(l) "Optionee" means a Director who holds an Option.
(m) "Outside Director" means a Director who is not an
Employee.
(n) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(o) "Plan" means this 1999 Director Option Plan.
(p) "Share" means a share of the Common Stock, as adjusted
in accordance with Section 10 of the Plan.
(q) "Subsidiary" means a "subsidiary corporation," whether
now or hereafter existing, as defined in Section 424(f) of the Internal Revenue
Code of 1986.
3. Stock Subject to the Plan. Subject to the provisions of Section
10 of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is 50,000 Shares, plus an annual increase to be added on the
first day of the Company's fiscal year (beginning in 2000) equal to the number
of Shares needed to restore the maximum aggregate number of Shares available for
sale under the Plan to 50,000 Shares (the "Pool"). The Shares may be authorized,
but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan. All grants
of Options to Outside Directors under this Plan shall be automatic and
nondiscretionary and shall be made strictly in accordance with the following
provisions:
(a) No person shall have any discretion to select which
Outside Directors shall be granted Options or to determine the number of Shares
to be covered by Options granted to Outside Directors.
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<PAGE> 3
(b) Each Outside Director shall be automatically granted an
Option to purchase 5,000 Shares (the "First Option") on the date on which the
later of the following events occurs: (i) the effective date of this Plan, as
determined in accordance with Section 6 hereof, or (ii) the date on which such
person first becomes an Outside Director, whether through election by the
stockholders of the Company or appointment by the Board to fill a vacancy;
provided, however, that an Inside Director who ceases to be an Inside Director
but who remains a Director shall not receive a First Option.
(c) Each Outside Director shall be automatically granted an
Option to purchase 2,500 Shares (a "Subsequent Option") on May 1 of each year
provided he or she is then an Outside Director and if as of such date, he or she
shall have served on the Board for at least the preceding six (6) months.
(d) Notwithstanding the provisions of subsections (ii) and
(iii) hereof, any exercise of an Option granted before the Company has obtained
stockholder approval of the Plan in accordance with Section 16 hereof shall be
conditioned upon obtaining such stockholder approval of the Plan in accordance
with Section 16 hereof.
(e) The terms of a First Option granted hereunder shall be
as follows:
(i) the term of the First Option shall be three (3)
years.
(ii) the First Option shall be exercisable only while
the Outside Director remains a Director of the Company, except as set forth in
Sections 8 and 10 hereof.
(iii) the exercise price per Share shall be 100% of
the Fair Market Value per Share on the date of grant of the First Option.
(iv) subject to Section 10 hereof, the First Option
shall become fully exercisable immediately.
(f) The terms of a Subsequent Option granted hereunder shall
be as follows:
(i) the term of the Subsequent Option shall be three
(3) years.
(ii) the Subsequent Option shall be exercisable
immediately.
(iii) the exercise price per Share shall be 100% of
the Fair Market Value per Share on the date of grant of the Subsequent Option.
(g) In the event that any Option granted under the Plan
would cause the number of Shares subject to outstanding Options plus the number
of Shares previously purchased under Options to exceed the Pool, then the
remaining Shares available for Option grant shall be granted under Options to
the Outside Directors on a pro rata basis. No further grants shall be made until
such time, if any, as additional Shares become available for grant under the
Plan through action of
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<PAGE> 4
the Board or the stockholders to increase the number of Shares which may be
issued under the Plan or through cancellation or expiration of Options
previously granted hereunder.
5. Eligibility. Options may be granted only to Outside Directors.
All Options shall be automatically granted in accordance with the terms set
forth in Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect to
continuation of service as a Director or nomination to serve as a Director, nor
shall it interfere in any way with any rights which the Director or the Company
may have to terminate the Director's relationship with the Company at any time.
6. Term of Plan. The Plan shall become effective upon the date of
the receipt of stockholder approval of this Plan. It shall continue in effect
for a term of ten (10) years unless sooner terminated under Section 11 of the
Plan.
7. Form of Consideration. The consideration to be paid for the
Shares to be issued upon exercise of an Option, including the method of payment,
shall consist of (i) cash, (ii) check, (iii) other shares which (x) in the case
of Shares acquired upon exercise of an Option, have been owned by the Optionee
for more than six (6) months on the date of surrender, and (y) have a Fair
Market Value on the date of surrender equal to the aggregate exercise price of
the Shares as to which said Option shall be exercised, (iv) consideration
received by the Company under a cashless exercise program implemented by the
Company in connection with the Plan, or (v) any combination of the foregoing
methods of payment.
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any
Option granted hereunder shall be exercisable at such times as are set forth in
Section 4 hereof; provided, however, that no Options shall be exercisable until
stockholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
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<PAGE> 5
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Continuous Status as a Director. Subject
to Section 10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's death or total and permanent disability (as
defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her
Option, but only within three (3) months following the date of such termination,
and only to the extent that the Optionee was entitled to exercise it on the date
of such termination (but in no event later than the expiration of its three (3)
year term). To the extent that the Optionee was not entitled to exercise an
Option on the date of such termination, and to the extent that the Optionee does
not exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event Optionee's status
as a Director terminates as a result of total and permanent disability (as
defined in Section 22(e)(3) of the Code), the Optionee may exercise his or her
Option, but only within twelve (12) months following the date of such
termination, and only to the extent that the Optionee was entitled to exercise
it on the date of such termination (but in no event later than the expiration of
its three (3) year term). To the extent that the Optionee was not entitled to
exercise an Option on the date of termination, or if he or she does not exercise
such Option (to the extent otherwise so entitled) within the time specified
herein, the Option shall terminate.
(d) Death of Optionee. In the event of an Optionee's death,
the Optionee's estate or a person who acquired the right to exercise the Option
by bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its three (3) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent or distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger
or Asset Sale.
(a) Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of Shares covered by each
outstanding Option, the number of Shares which have been authorized for issuance
under the Plan but as to which no Options have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option, as well
as the price per Share covered by each such outstanding Option, and the number
of Shares issuable pursuant to the automatic grant provisions of Section 4
hereof shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock
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<PAGE> 6
split, stock dividend, combination or reclassification of the Common Stock, or
any other increase or decrease in the number of issued Shares effected without
receipt of consideration by the Company; provided, however, that conversion of
any convertible securities of the Company shall not be deemed to have been
"effected without receipt of consideration." Except as expressly provided
herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation or the sale of substantially all of the
assets of the Company, outstanding Options may be assumed or equivalent options
may be substituted by the successor corporation or a Parent or Subsidiary
thereof (the "Successor Corporation"). If an Option is assumed or substituted
for, the Option or equivalent option shall continue to be exercisable as
provided in Section 4 hereof for so long as the Optionee serves as a Director or
a director of the Successor Corporation. Following such assumption or
substitution, if the Optionee's status as a Director or director of the
Successor Corporation, as applicable, is terminated other than upon a voluntary
resignation by the Optionee, the Option or option shall become fully
exercisable, including as to Shares for which it would not otherwise be
exercisable. Thereafter, the Option or option shall remain exercisable in
accordance with Sections 8(b) through (d) above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
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(a) Amendment and Termination. The Board may at any time
amend, alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation or stock exchange rule, the Company shall obtain stockholder
approval of any Plan amendment in such a manner and to such a degree as
required.
(b) Effect of Amendment or Termination. Any such amendment
or termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall,
for all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares, if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
Stockholder Approval. The Plan shall be subject to approval by the
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under applicable state and federal law and any stock exchange rules.
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EXHIBIT 10.5
SANMINA CORPORATION
AGREEMENT FOR
ELECTRONIC MANUFACTURING SERVICES
This Agreement between Gadzoox Networks, Inc. hereinafter referred to
as "Customer" or "Gadzoox", and Sanmina Corporation hereinafter referred to as
"Sanmina" is entered into on December 29, 1998. Sanmina shall perform
manufacturing services for the Customer under the terms and conditions set forth
herein.
I. TERM
This Agreement shall be in effect for [*] from the date of this
Agreement. This Agreement shall automatically renew for a period of one year
unless termination notice is provided [*] prior to the termination date.
II. SCOPE OF WORK PERFORMED
Customer wishes Sanmina to manufacture a range of Electronics products
or Assemblies on behalf of Customer at the prices identified in Exhibit A.
Sanmina and the Customer shall mutually agree upon a delivery schedule for the
Products.
Customer shall be liable for [*] is defined in Section IV. A. 1.) that
Sanmina procures or otherwise contracts for in order to manufacture the products
that Customer wishes to buy from Sanmina on a turnkey basis.
Sanmina shall purchase components for the Products in accordance with a
vendor list approved by Sanmina and the Customer ("AVL"). In the event Sanmina
cannot purchase a component from an approved vendor for any reason, including
unavailability or commercial unfeasibility of the purchase of such components,
Sanmina may purchase such components from an alternate vendor with the prior
written consent of the Customer.
III. GENERAL PLANNING AND PROCUREMENT PROCESS
A. On the date this Agreement is executed and [*] thereafter, the
Customer shall provide Sanmina with firm, monthly, rolling
purchase orders covering a minimum period of [*] ("Purchase
Order").
B. [*] the Customer shall provide Sanmina with additional
monthly, rolling [*] forecast ("Forecast") covering
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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[*] immediately following the Purchase Order period. Forecast
does not incur any liability for either Sanmina or Customer
except that of any [*] for which the forecast would cause
procurement activity, and, even in such a situation such
liability for Customer would be limited per Section IV and it
sub-sections.
C. Sanmina will take the Purchase Orders and Forecast referred to
in III(A) and III(B) above and generate a Master Production
Schedule (MPS) for a [*] using the process described in
Section III(D) below.
D. This MPS will define the master plan on which Sanmina will
base its procurement, internal capacity projections and
commitments.
1. Sanmina will use the Purchase Orders
referred to in III A to generate the
[*] of the MPS.
2. Sanmina will use the Forecast referred to in
III B to generate the [*] of the MPS.
3. The MPS created as described above does not
incur any liability for either Sanmina or
Customer except that of any [*] for which
the forecast would cause procurement
activity, and, even in such a situation such
liability for Customer would be limited per
section IV and it sub-sections.
E. Per this agreement Sanmina will plan and schedule material to
be at Sanmina within sufficient time to allow for
manufacturing to occur before the products are due to ship to
Customer.
F. Sanmina will also release (launch) orders to suppliers of
materials sometime prior to the anticipated date that the
material is needed (per section III(E) above). When these
orders are launched will depend on the Vendor lead-time that
Sanmina will determine from time to time and maintain as a
parameter of Sanmina's manufacturing or materials planning
systems.
G. Sanmina, through its MRP System will also issue an instruction
(MRP Signal) to its procurement group to buy parts
approximately [*] before the order is due to be placed
per section F above.
H. When Sanmina places an order with its suppliers per the
sections above, Sanmina will order parts in various quantities
(defined in periods-worth-of-supply) that are defined by the
part's ABC Classification. This classification as well as the
expected distribution or characteristics of various classes of
parts, and, the periods-worth-of-supply (Periods-of-Supply)
that will be bought for each class of part is shown on Table
1.
Table 1. ABC Classifications, Descriptions and Periods-of-Supply
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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<TABLE>
<CAPTION>
Part Class Total Parts % of Total Value (Of Periods Worth of
Gross Supply to be Bought
Requirements) with Each Order
<S> <C> <C> <C>
A [*] [*] [*]
B [*] [*] [*]
C [*] [*] [*]
</TABLE>
I. In addition to ordering parts for various periods-of-supply,
Sanmina will order parts according to various minimum-buy
quantities, tape and reel quantities, and, multiples of
packaging quantities.
J. The components Sanmina purchases or orders to fulfill the
Purchase Order and the Forecast on behalf of the Customer to
manufacture the Products, and any associated expenses related
to purchasing, ordering, manufacturing (labor and overhead),
shipping, storing and eliminating such components and agreed
upon mark-up shall constitute a part of the Customer's Total
Liability ("Total Liability") as defined in Section IV below.
IV. LIABILITIES FOR MATERIALS
A. Customer's Total Liability for material that Sanmina has
procured is limited to the following:
1. Parts that Sanmina, having ordered per the
guidelines above, [*] are their
responsibility and are defined as any part
that a) has not been used by Sanmina for any
other customer or internal usage in the most
recent [*] and b) for which there is no
demand in the MRP system or c) for which
projected demand over the [*] is not
adequate to consume the inventory of parts.
Common parts used by other customers will
not be considered as part of Customer's
Total Liability for the parts that can not
be otherwise utilized by Sanmina after
Sanmina deduction for the number of common
parts in the MRP system for the next [*].
This includes parts that may not be
cancelable by virtue of having insufficient
time between the MRP signal to cancel and
the expected or real receipt date at
Sanmina.
2. Parts that Sanmina, having ordered per the
guidelines above, cannot return to the
vendors and where the total extended value
of each specific part number using the most
recent purchase costs [*] and where Sanmina
has made reasonable efforts to return the
parts (for at [*]).
3. For part numbers with a total extended value
of [*], using the most recent purchase
costs, Sanmina is not required to attempt
return to
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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vendors. Customer's Total Liability is
limited to the lesser of actual cost or [*]
for all part numbers that are defined in
this section.
4. See also Section VII, Cancellations which
describes Customer's Total Liability for
Cancellations. The cost of cancellations, as
described in Section VII is also considered
part of Customer's Total Liability.
B. Where Sanmina is able to return parts with a re-stocking or
other fees, those fees shall also become part of Customer's
Total Liability.
C. If necessary and with the Customer's written consent as
evidenced by Customer Purchase Order, Sanmina shall purchase
any necessary tools to fulfill the Purchase Order and Forecast
and charge the Customer according to the Purchase Order. All
such tooling (which tooling can include, for example,
stencils, test fixtures, tooling plates, burn in chambers,
etc) purchased by Sanmina on behalf of the Customer shall
remain the Customer's property, and Sanmina shall return such
tooling (normal wear and tear excepted) to the Customer upon
request, the completion of the relevant order or the
termination of the Agreement.
D. Customer's Total Liability for the material defined in the
previous sections will be at the [*] as agreed between Sanmina
and Customer. Sanmina will use its best efforts to reduce
Customer's Total Liability.
V. RESCHEDULES AND INCREASES
The Customer may increase the quantity of any Product to be delivered
against any Purchase Order subject to the following matrix:
<TABLE>
<CAPTION>
NOTICE PRIOR TO PERCENT OF ORIGINAL
ORIGINAL QUANTITY THAT CAN BE
DELIVERY DATE INCREASED
-------------- --------------------
<S> <C>
[*] [*]
</TABLE>
As an example, if the Customer notifies Sanmina in writing between [*]
prior to the scheduled delivery date of the Products, the Customer may increase
a [*] of the total amount of the Products to be delivered on such date.
A. For a decrease in quantity of Products to be delivered on a
specific delivery date, Sanmina and the Customer shall
mutually agree upon a date to deliver the undelivered Products
[*] from the original delivery date. Customer may reschedule
delivery any number of times as long as the ultimate delivery
date is [*] from the original delivery date.
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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B. Any change in the delivery dates of any Product for a period
[*] in the aggregate shall be deemed [*] the Customer with
respect to such Products. If the Customer's schedule change
results in additional expenses to Sanmina to store such
Products or to acquire additional components, such additional
expenses shall be deemed Part of the Customer's Total
Liability and in the event that storage services are required,
the parties will negotiate in good faith the cost of such
storage services.
C. Sanmina agrees to maintain the proper buffer stock that will
allow Gadzoox to increase customer shipments in accordance
with this Section V which describes increases in quantity to
be delivered and will become subject to Customer Total
Liability as described in Section IV.
The buffer stock required to ensure increases in customer shipments, as
described herein will be based on the forecast demand provided to Sanmina by
Customer on a monthly basis and inventory required to deliver product subject to
Increases as herein described.
VI. REVISIONS
In the event the Customer requests and engineering change to a product,
Sanmina shall notify the Customer of any impact on the cost and/or scheduled
delivery of such Products within [*] of the receipt of Customer's request.
Unless the Customer consents to the amended notification from Sanmina, the
requested engineering change shall be deemed canceled. Any increases in the cost
of the Products resulting from such Engineering Change Order ("ECO") shall be
deemed a part of the Customer's Total Liability as defined above and will be
negotiated in good faith by the parties and in accordance with Customer's Total
Liability as described in Section IV. Similarly, any parts made obsolete or
excess as a result of such an ECO shall be deemed part of the Customer's Total
Liability and will be negotiated in good faith by the parties in accordance with
Customer's Total Liability as described in Section IV. Any Customer liability
arising from an ECO will be paid to Sanmina [*] of Sanmina invoice date.
VII. CANCELLATIONS
The Customer may cancel any order by notifying Sanmina in writing at
[*] prior to the delivery date of such order.
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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If such cancellation occurs within [*] of scheduled delivery, Sanmina
shall provide the Customer with the amount of the Customer's total liability
related to such canceled order. Customer's Total Liability shall include the
following:
Liability for Materials (parts) as defined in Section IV and V
Buffer/Safety Stock/ABC Classifications as defined in Section III, H,
Table 1 Liability for Work-in-Process ("WIP") as defined below
Liability for Finished Goods as defined below
Customer liability for Work In Process will be limited to only units
that have labor applied to them. All WIP will be invoiced to Gadzoox based on
which step in the manufacturing process the product was when Sanmina was
notified. The process steps are defined in Exhibit A. There are [*] defined so
each part number will be evaluated based on which step it is in the production
process. If we have partial steps completed Gadzoox & Sanmina will negotiate in
good faith to determine the cost applied to that step. The cost for each step is
defined as the latest quoted price to Gadzoox. The total cost will be an
accumulation of the cost for each step, however, some products may not go
through each step in which case Gadzoox will be invoiced for only steps that
have been applied to that product.
The Customer shall pay such cancellation amount to Sanmina on a [*]
basis.
After payment by Customer of Customer's Total Liability of such
cancellation, Sanmina shall deliver to the Customer, at the Customer's expense,
any WIP, Finished Goods or components purchased but unused as a result of such
cancellation or scrap such components, at the sole direction of the Customer.
Sanmina will use its best efforts to minimize Customer's Total Liability as
described in Section IV.
VIII. PRICING
The prices for the Products are shown in Exhibit A and shall remain
fixed until adjusted by mutual agreement of Sanmina and Customer. Such pricing
will be reviewed quarterly. Sanmina will use its best efforts to effect an
aggressive price reduction of materials, labor and overhead with a goal of at
least [*] per quarter.. Pricing will be adjusted in accordance with the Overhead
reduction as shown in Exhibit A. This reduction is based on total dollar volume
and will not be used to meet the [*] reduction goal. Gadzoox will receive
[*] of all cost reductions, regardless of whether Sanmina or Gadzoox initiated
the cost reduction through material purchasing, redesign, rework, testing
protocols or any other method, until total costs charged Customer by Sanmina
reach the below listed amounts, ("Price Ceiling") as described in Exhibit A.
After that time, Gadzoox will receive [*] of future cost reductions and Sanmina
will receive [*] of future cost reductions. For other products not covered in
Exhibit A,
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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Gadzoox will receive all cost reduction dollars up to the [*]. All cost
reductions after that time will be shared [*] to Sanmina and [*] to Gadzoox.
IX. DELIVERY
Delivery of all items under this Agreement shall be delivered F.O.B.
Sanmina's plant located at the address specified by Gadzoox at which time risk
of loss and title shall pass to the Customer. Product will be shipped from
Sanmina to any location as specified by Gadzoox.
Sanmina shall deliver early 5 working days with 0 days late to the
agreed to delivery date. Sanmina will notify Customer immediately if it will be
unable to deliver product previously committed for delivery by Sanmina. Late
deliveries, previously committed by Sanmina, shall be considered a material
breach of this Agreement. Sanmina will use its best efforts to deliver as soon
as possible and will apprise Gadzoox on a daily basis until previously committed
deliveries are made in full. Should Sanmina be habitually late in delivering
previously committed deliveries, Gadzoox may terminate this Agreement.
Unless otherwise specified by the Customer, Sanmina shall transport the
Products by the method Sanmina deems most advantageous in order effect an
on-time delivery, to the Customer's address or to an address specified in
writing by the Customer. All freight, insurance and other shipping expenses from
the delivery point shall be borne by the Customer. When special packaging is
requested or, in the opinion of Sanmina, is required under the circumstances,
written notice of special packaging shall be provided to the Customer who must
approve the additional expenses related to such special packaging.
X. PAYMENT AND INVOICING
Payment terms will be [*] days from invoice date. Sanmina will provide
the Customer with a credit limit set at (to be determined) and shall deliver
such credit limit information in writing to the Customer. In the event that the
Customer exceeds this credit limit Sanmina and Customer will negotiate in good
faith a higher credit limit. In the event Customer owes outstanding invoices
which are more than [*] past due, and after written notice is provided to
Customer and Customer has failed to pay late invoices within [*] days of such
notice, Sanmina may stop shipments of Products to Customer until the Customer
makes sufficient payment to bring its account consistent with terms outlined
above.
XI. WARRANTY AND REPAIR
Sanmina warrants that the Products (excluding components purchased from
third-party vendors ("Vendor Components")) shall be free from any defects in
workmanship for a period of [*] from the date of manufacture. Warranty on
components is limited to the warranty provided by the component manufacturer.
Sanmina will comply, at all times, with Quality and Acceptance criteria outlined
in Exhibit B. Sanmina shall pass on any unexpired warranty for such Vendor
Components provided by third-party vendors or passed on by such third-party
vendors from the original manufacturers until the expiration
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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of such warranties or up to a maximum of [*] from date of manufacture of the
Product by Sanmina, whichever is shorter. Sanmina and Gadzoox will work
diligently with parts vendors to extend their respective warranty periods to at
least [*]. As the Customer's sole remedy under the warranty, Sanmina will, at no
charge, rework, repair and retest any such Products returned to Sanmina and
found to contain such defects caused by Sanmina. Warranty coverage does not
include failures due to the Customer design errors, the supply or selection of
improper or defective parts or materials used by the Customer, the Customer
requested changes, damages caused by the Customer's misuse, unauthorized repair
or negligence. Sanmina does not assume any liability for expendable items such
as lamps and fuses. Sanmina reserves the right to inspect the Products and
verify that they are defective or non-conforming. Sanmina's total liability
shall be limited to the value of the Product supplied under this Agreement.
The warranty afforded to these assemblies is limited to these items,
parts and defects that are within the capability of existing test equipment,
program and processes.
The performance of any repair or replacement by Sanmina does not extend
the warranty period for any Products beyond the period applicable to the
Products originally delivered.
EXCEPT FOR THE ABOVE EXPRESS WARRANTIES, SANMINA MAKES AND THE CUSTOMER
RECEIVES NO WARRANTIES OR CONDITIONS ON THE PRODUCTS, EXPRESS, IMPLIED,
STATUTORY, OR OTHERWISE, AND SANMINA SPECIFICALLY DISCLAIMS ANY IMPLIED WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
For any product which requires repair under Warranty, ("Defective
Product"), Sanmina will repair or replace such Defective Product and return to
Gadzoox, or to such location as Gadzoox so directs, within [*] days after
receipt. Gadzoox will pay for the shipment of Defective Product to Sanmina.
Sanmina will pay for the shipment of Defective Product to Gadzoox, or to other
such location as Gadzoox so directs. Sanmina, at its sole expense, will carry in
its inventory, parts and subassemblies required for repair of Defective Product.
In the event that a Product completely fails to function within the
first forty-eight (48) hours of installation ("dead-on-arrival" or "DOA"),
Sanmina agrees to replace the failed Product with a new Product within [*] days
after receipt.
Sanmina will provide support hereunder for the current and immediately
preceding [*] Major Releases (including all interim releases) and during the
Warranty repair of Product, bring such Product to the latest revision level, to
the extent practicable and unless otherwise directed by Gadzoox. For Products
that are or are not within Warranty, Gadzoox and Sanmina will negotiate in good
faith the cost of such support.
In addition to the warranties specified above, Sanmina shall warrant
that all Products against epidemic failure against workmanship for a period of
[*] after
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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shipment and for the period of time in which components are under warranty from
the original vendors. An epidemic failure shall mean the occurrence of the same
root cause failure in [*] of the total of each Product shipped within the
immediately preceding [*]. Sanmina shall dedicate the required resources, and
make best efforts, to determine the root cause of the failures and to submit a
corrective action plan as quickly as possible. Such corrective action plan shall
be implemented as quickly as possible but within a maximum of [*] from the
initial notice by Gadzoox of such epidemic failure, unless otherwise agreed to
by both parties. In the case of an epidemic failure, Sanmina shall reimburse
Gadzoox for all reasonable costs incurred by Gadzoox in recalling, replacing, or
repairing the affected Products, until such time as the reported failure rate
drops to less than the occurrence stated above. Such reasonable costs shall be
limited to the transportation of failed Products, both inbound and outbound to
and from Sanmina, as well as the reasonable transportation costs of Gadzoox
required for epidemic failures.
Sanmina and Gadzoox will establish a swap program ("Swap Program")
whereby Product to be repaired ("Swap Product"), when returned to Sanmina will
be immediately exchanged for new Product. The Swap Product will then be repaired
or replaced by Sanmina and put into Finished Goods.
Should greater than [*] of Product returned to Sanmina during any
calendar quarter for repair for which no trouble was found ("NTF Product"), then
Sanmina and Gadzoox will work together in good faith to determine the cause for
such returns. If the occurrence of NTF Product returns has not been decreased to
[*] or below by the next calendar quarter, Sanmina and Gadzoox will negotiate in
good faith the charge for testing of NTF Product which exceeds the [*] threshold
on a prorated basis for the prior [*].
XII. General Indemnity
The Customer shall indemnify Sanmina against, and hold it harmless from
any loss, cost, liability or expense (including court costs and the reasonable
fees of attorneys and other professionals) to the extent that such loss, cost,
liability or expense arises out of, or in connection with, in whole or in part,
(A) infringements of any patent, trademark, copyright or other intellectual
property of the Customer, or (B) any negligence or willful misconduct by the
Customer, its employees or agents and subcontractors, including but not limited
to any such act or omission that contributes to: (i) any bodily injury,
sickness, disease, or death; (ii) any injury or destruction to tangible or
intangible property of the injured party or any loss of use resulting therefrom;
or (iii) any violation of any statute, ordinance or regulation.
Sanmina shall indemnify Gadzoox against, and hold it harmless from any
loss, cost, liability or expense (including court costs and the reasonable fees
of attorneys and other professions) to the extent that such loss, cost,
liability or expense arises out of, or in connection with, in whole or in part,
any negligence or willful misconduct by Sanmina, its employees or agents and
subcontractors, including but not limited to any such act or omission that
contributes to: (i) any bodily injury, sickness, disease, or death; (ii) any
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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injury or destruction to tangible or intangible property of the injured party or
any loss of use resulting therefrom; or (iii) any violation of any statute,
ordinance or regulation.
XIII. Quality, Inspection and Reporting
The Customer will have the right at all reasonable times, upon
reasonable advance notice, to visit Sanmina's plant to inspect the work
performed on the Products. Inspection of the work shall not relieve Sanmina of
any of its obligations under the Agreement or purchase orders. Sanmina shall
provide Customer with all mutually agreed upon quality reports at agreed upon
intervals as defined in Exhibit B. Sanmina reserves the right to restrict the
Customer's access to the plant or any area within it as necessary to protect
confidential information of Sanmina or its other customers.
If Customer demands inspection of the Products prior to the delivery of
such Products as a condition of acceptance of such Products, the Customer must
inspect the Products [*] of a transmission of written notice by facsimile or
other electronic or telephonic delivery system from Sanmina informing the
Customer that the Products are ready to be shipped. If Customer does not inspect
the Products within such [*], Customer shall be deemed to have waived its right
to inspect the Products as a condition of acceptance of such Products.
Customer and Sanmina will implement a joint quality improvement program
that will develop and implement a continuous quality improvement that is in
compliance with the requirements as defined in Exhibit B.
XIV. Termination
Either party may, without penalty, terminate this Agreement upon [*]
written notice to the other party in either one of the following events:
a) The other party materially breaches this Agreement and such
breach remains uncured for [*] following written notice of
breach the non breaching party;
The other party becomes involved in any voluntary or involuntary bankruptcy or
other insolvency petition or proceeding for the benefit of its creditors, and
such petition, assignment or proceeding is not dismissed within [*] after it was
filed.
Upon termination, Sanmina shall provide the Customer with an invoice of
the Customer's Total Liabilities. In addition, the Customer shall be liable for
all work-in-progress and any outstanding charges. Upon termination, Customer
shall pay all invoiced charges in net [*].
XV. Limitation of Liability
IN NO EVENT WILL SANMINA BE LIABLE FOR ANY SPECIAL, INDIRECT,
CONSEQUENTIAL, OR INCIDENTAL DAMAGES, HOWEVER
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THIS AGREEMENT.
THIS LIMITATION WILL APPLY EVEN IF THE CUSTOMER HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL
PURPOSE OF ANY LIMITED REMEDY PROVIDED HEREIN.
XVI. Miscellaneous
A. Governing Law. This Agreement will be governed by and
interpreted under the laws of the State of California, without
reference to conflict of laws principles.
B. Jurisdiction. For any dispute arising out of this Agreement,
the parties consent to personal and exclusive jurisdiction of
and venue in the state and federal courts within Santa Clara
County, California.
C. Entire Agreement; Enforcement of Rights. This Agreement sets
forth the entire agreement and understanding of the parties
relating to the subject matter herein and therein and merge
all prior discussions between them. No modification of or
amendment to this Agreement, nor any waiver of any rights
under this Agreement, will be effective unless in writing
signed by the party to be charged. The failure by either party
to enforce any rights thereunder will not be construed as a
waiver of any rights of such party.
D. Assignment. The rights and liabilities of the parties hereto
will bind and incur to the benefit of their successors,
executors or administrators.
E. Notices. Any required notices thereunder will be given in
writing at the address of each party set forth above, or to
such other address as either party may substitute by written
notice to the other in the manner contemplated herein, and
will be deemed served when delivered by facsimile or mail or
when tendered in person.
F. Unless otherwise stated, the term "days" means business days.
G. Force Majeure. Neither party shall be liable to the other for
any alleged loss or damages resulting from failure to perform
due to acts of God, natural disasters, acts of civil or
military authority, government priorities, fires, flood,
epidemics, quarantine, energy crisis, war or riots. Each party
shall promptly notify the other party of such event. If
Sanmina is unable to deliver in accordance with agreed
delivery schedules for a period of more than [*], Gadzoox may
either (i) extend the time of performance, or (ii) cancel the
uncompleted portion of the Purchase Order at no cost to
Gadzoox.
Notices shall be sent to the following:
<TABLE>
<CAPTION>
Sanmina Customer
- -------- --------
<S> <C>
Curt Cooper William Hubbard
Sanmina Corporation Gadzoox Networks, Inc.
355 East Trimble Road 5850 Hellyer Avenue
San Jose, CA 95131 San Jose, CA 95138
</TABLE>
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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<TABLE>
<S> <C>
355 East Trimble Road 5850 Hellyer Avenue
San Jose, CA 95131 San Jose, CA 95138
(408) 954-5286 (408) 360-4950
</TABLE>
H. Counterparts. This Agreement may be executed in two or more counterparts,
each of which will be deemed an original and all of which together will
constitute one instrument.
I. For the length of this contract as stated in Section I, Sanmina will
be given first right of refusals on all new manufacturing programs.
Sanmina and Gadzoox will negotiate in good faith costs on new
manufacturing programs, using a cost model described in this Agreement
and will work together to reduce cost on all products in an effort to
reduce total costs. This Agreement is non-exclusive.
J. To the best of their knowledge, Sanmina and Gadzoox are not aware of
any infringements of any patents, trademark, copyrights, confidential
manufacturing or test processes, or other intellectual property of
others.
K. If within [*] of the execution of this Agreement, the anticipated
manufacturing volume is significantly less than initially anticipated,
Sanmina and Gadzoox will meet and negotiate, in good faith, future
pricing for manufacturing services.
L. Quarterly Review Meeting. At least once per quarter Sanmina and
Gadzoox will meet to discuss, among other topics including, but not
limited to, vendor warranty issues, pricing and cost reduction, quality
status and goals for improvement.
Signed: /s/ Signature Illegible Signed: /s/ Signature Illegible
------------------------- ------------------------
Name: CURTIS M. COOPER Name: William E. Hubbard
------------------------- ------------------------
Title: V.P. ?? Operations Title: V.P. of Manufactures
------------------------- ------------------------
SANMINA CORPORATION GADZOOX NETWORKS. INC.
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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EXHIBIT A
Gadzoox volume Pricing:
[*]
[*]
[*]
[*]
[*]
[*]
Price Ceiling
<TABLE>
<CAPTION>
Ceiling
Product Name Amount Date
--------- --------------
<S> <C> <C>
Gz 12 Port M5(*) [*] [*]
</TABLE>
(*) Price for each of the Gadzoox 12 Port-based Products, regardless of model
or version; Price for the Gadzoox 6 Port will be less than, and in
proportion to, the Price ceiling for the Gadzoox 12 Port Products.
HOURLY LABOR RATES:
<TABLE>
<CAPTION>
San Jose Alabama
-------- -------
<S> <C> <C>
SMT Assembly Rates [*] [*]
Hand Load Assembly [*] [*]
ICT Test [*] [*]
Board Functional Test [*] [*]
Box Assembly [*] [*]
Box Functional Test [*] [*]
Box Burn In [*] [*]
Packout & ship [*] [*]
</TABLE>
OVERTIME RATES:
Labor - [*]
Test - [*]
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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WIP PROCESS STEPS AND PERCENTAGE OF COMPLETION:
WIP Process Step
- ----------------
[*]
Material Mark-ups:
<TABLE>
<CAPTION>
<S> <C>
Material [*]
Consigned Material
PCB's
</TABLE>
Price Reduction:
Pricing margin (OH for labor & SGA-Profit) will be reduced as Gadzoox's total
dollar volume of business increases as shown below.
<TABLE>
<CAPTION>
Cum dollars spent with Sanmina Pricing margin
<S> <C>
[*] [*]
</TABLE>
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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EXHIBIT B
PROCEDURE TITLE: SUPPLIER QUALITY AGREEMENT
DOCUMENT NUMBER: QAP020
REVISION: B
FUNCTIONAL DEPARTMENT: QUALITY
APPROVALS
<TABLE>
<CAPTION>
Name Title Signature Date
<S> <C> <C> <C>
Kevin McCarroll Materials Manager
Bill Hubbard VP Operations
[*]
Deanna VanWestenberg Quality Manager
</TABLE>
Document Control:
REVISION HISTORY
<TABLE>
<CAPTION>
Revision Page(s) Author Description Date
<S> <C> <C> <C> <C>
01 Deanna ALL 1/12/98
A All Deanna Release 4/19/98
B 2, 5, 6, 11 Deanna Minor changes 11/9/98
</TABLE>
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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1 PURPOSE
This document establishes the Quality System Requirements and
Reliability provisions which shall apply to all Suppliers manufacturing
Gadzoox products. The Quality System Requirements are based on 9002. It
is expected that Gadzoox' Suppliers are ISO Registered. If Supplier is
not registered, it is expected that Supplier will pursue and obtain ISO
registration within a mutually acceptable date.
2 SCOPE
This Quality Agreement applies to all Suppliers, who supply material,
sub-assemblies, finished product or services. This document is intended
as a guideline with product specific goals. In certain instances this
document may be supplemented by a product specific quality plan
customized by the responsible Supply Base Engineer.
3 REFERENCES
ISO 840 Quality Vocabulary
ISO 9000 Quality management and quality assurance standards
ISO 9002 Model for QA in Production, Installation & Servicing.
ANSI/ASQC- Guidelines for Quality System Audits
Q10011
MTP018 Gadzoox Packaging & Handling Electrostatic Sensitive
Devices
MFP003 Gadzoox Product Identification & Labeling Specification
4 DEFINITIONS
QA - Quality Assurance
IQC - Incoming Quality Control
MRB - Material Review Board
SPC - Statistical Process Control
TQC - Total Quality Control
CPI - Continuous Process Improvement
ORT - On-Going Reliability Testing
BI - Burn-In
PM - Defects Per Million
Failures - The part/product fails to meet the specification
OOBA - Out of Box Audit
CLCA - Closed Loop Corrective Action
MTBF - Mean Time Between Failure
5 RESPONSIBILITY
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SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
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Gadzoox strongly supports the premise that the Supplier take full
ownership of the quality and reliability of the product that is being
purchased by Gadzoox. It is also the responsibility of Supplier to
adhere to the guidelines set forth in this Quality Agreement as well as
the product quality and performance specified. It is agreed that
Supplier will not knowingly ship defective product to Gadzoox.
In certain cases Gadzoox may participate with Supplier or conduct
activities in parallel to provide its own confidence that the product
specifications or quality requirements are met. However, this does not
imply that Supplier is relieved of the responsibility of supplying
defect free product.
The Gadzoox product team will be responsible for ensuring that the
requirements set forth in this document are met prior to product
manufacturing release. After manufacturing release the Quality Engineer
will be responsible for ensuring continued compliance to these
requirements.
6 QUALITY SYSTEM REQUIREMENTS
6.0.0 Supplier agrees to maintain a formal Quality Assurance Program that
ensures the achievement and maintenance of Gadzoox' quality and
reliability goals as set forth by this document and the product
specification.
6.1.0 Compliance to ISO Requirements may be consistent with many portions of
this document; however, the specifics detailed in this document, the
Business Agreement and the product specification take precedence.
6.2.0 Supplier shall submit to Gadzoox Commodity Team a Quality Manual
annually which details the actual practices in use throughout the
process including the following information:
6.2.1 An organization chart identifying Company organizations or
groups.
6.2.2 A statement of the functions and responsibilities of each
organizational element involved in the design, manufacture,
procurement, inspection and testing of items deliverable under
this order.
6.2.3 Reference to specific policies and procedures governing
management of the quality assurance required herein.
6.2.4 A manufacturing and inspection flow diagram that identifies
points of inspection/test and the inspection/test documents
employed, including the criteria used to determine
acceptability at each inspection test point.
6.2.5 Supplier's Vendor Control procedures.
6.2.6 MRB administration.
6.2.7 CLCA Process implementation.
6.2.8 Sampling plan criteria.
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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6.3.0 Approval of the Supplier's Quality Assurance Program as defined by the
QA Manual [*].
6.4.0 Supplier shall maintain control of its manufacturing process, utilizing
Statistical Quality Control techniques, Process Flow Diagrams, Assembly
Instructions, Test Procedures, etc, [*].
6.5.0 Supplier agrees that no process changes, design changes, or
process-step discontinuances affecting product performance (whether
specified or not), the mechanical form/fit, the compatibility or
chemical characteristics, or the reliability of products shall be made
without prior written approval from Gadzoox Commodity Team. The process
flow shall be logical and well defined to prevent material co-mingling
and promote prompt disposition of defective material. It is expected
that Supplier will achieve continuous improvement throughout the
product lifecycle in terms of costs and quality, and Supplier has the
latitude to make changes in its process to achieve that. However, if
critical process changes are made, then Gadzoox must be notified in
writing and written approval by Gadzoox will be required.
6.6.0 Workstations and equipment shall be ergonomically designed to reduce
defects associated with human factor issues. Each process step must
have a current copy of work instructions, assembly aids or other
documents which detail proper operating procedures, at the relevant
workstation.
6.7.0 At Gadzoox discretion, each shipment pursuant to this Quality Agreement
may be accompanied by objective evidence of acceptance by the
Supplier's Quality organization. [*] Gadzoox Commodity Team approval
shall be obtained for acceptance of assembly & test procedures, ICT,
BI, OOBA and inspection audit points prior to conducting tests on
electronic assemblies to be delivered under this Quality Agreement.
6.8.0 Written procedures should define the inspection methodology and
equipment used for IQC and In-Process inspection. The procedure should
also include the characteristics to be measured and the frequency of
inspection. [*].
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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6.9.0 Final Inspection: Supplier must have a formalized inspection document
that identifies defect characteristics and records actual test results
or dimensions. PASS/FAIL results may be acceptable with approval from
Gadzoox Commodity Team. [*]
6.10.0 Out-Of-Box-Audit (OOBA): An OBA will be accomplished and documented.
Sampling level will be subject to approval by Gadzoox Quality. [*]
6.11.0 First Article Inspection: Pre-production samples with dimensions or
test data indicating the product meets all specifications may be
reviewed at the Supplier site or at Gadzoox facility. [*]
6.12.0 Lot Acceptance/Rejection: Material is subject to inspection and
approval after delivery. If specifications are not met, material may be
rejected and the entire lot returned at Supplier's expense. Gadzoox
will notify Supplier of any rejected lots prior to return. Supplier is
required to take corrective action for the causes of the non-conforming
items prior to shipment of succeeding lots. Rejection can occur by the
following:
6.12.1 Receiving Department: Damaged material or packaging. Material
does not conform to Purchase Agreement or Receiving
specification.
6.12.2 Quality Department: Non-conformance of engineering
specification. Process related failures.
6.12.3 [*]
6.13.0 Supplier shall provide and maintain a training and certification
program for special processes (such as soldering, wiring, etc,)
wherever these processes are used in the performance of work pursuant
to this Quality Agreement. A description of Supplier's training
program, testing procedures, and certification procedures shall be
submitted to Gadzoox Quality for approval. It is the responsibility of
Supplier to pursue other training programs targeting SPC, TQM, Problem
Solving and Quality Basics.
6.14.0 All test/measurement devices which provide a quantitative value for the
production of the end item must have certificates of traceability to
the National Institute of Technology with conformance with
MIL-STD-45662 or the equivalent locally recognized national standard. A
formal calibration program defining the calibration cycle must be in
place and actively monitored for compliance.
6.15.0 All machine performance, both mechanical and electronic, must be
measured, monitored and optimized per a formal documented maintenance
schedule. Any
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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adjustments, repairs or modifications shall only be done by factory
trained personnel using current OEM approved procedures and components.
6.16.0 The Supplier shall take the proper precautions throughout the process
to prevent damage to static sensitive devices used in the production of
the end item. This includes the training of personnel, use of
anti-static containers/bins, and the proper grounding of workbenches
and personnel involved in the handling and assembly of subassemblies.
6.17.0 Packaging of the end item will be of natural or anti-static material
[*]. No static generating material shall be received at Gadzoox.
7 DOCUMENTATION
7.0.0 Supplier shall make available to Gadzoox any documents that define the
quality management systems and processes as well as product specific
documentation that Gadzoox is procuring. Documentation may exist in the
form of procedures, flow charts, work instructions, test procedures,
etc, This documentation will be used as a basis for conducting the on
site quality system assessment. If Supplier has multiple sites then
each site must provide the documentation that is specific to that site.
8 QUALITY ASSESSMENTS
8.0.0 Prior to awarding a contract or a purchase order, the Gadzoox Commodity
Team will conduct [*] audit of Supplier's processes. If there are
multiple sites then each site will be surveyed prior to issuance of the
contract or purchase order as deemed necessary.
8.1.0 Supplier shall provide all reasonable facilities and assistance for the
safety and convenience of the representative in the performance of
their duties. The Gadzoox Commodity Team will also conduct periodic
evaluations to determine compliance to ISO registration or to this
Quality Agreement. Any non-compliance's found during the initial audit
or subsequent audits will be documented and it is the Supplier's
responsibility to correct within a defined time frame set by the
Supplier and Gadzoox.
9 PRODUCT REQUIREMENTS
9.0.0 Burn-In: All electronic assemblies are required to undergo an effective
burn-in to eliminate infant mortality or remove marginal design
tolerances. [*]
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
20
<PAGE> 21
==========================================
CONFIDENTIAL
CERTAIN INFORMATION HAS BEEN REDACTED
CONFIDENTIAL TREATMENT REQUESTED.
==========================================
[*]
9.1.0 Supplier is expected to perform appropriate accelerated life testing as
required to precipitate failures and aid in the problem detection,
analysis, and correction process. Supplier shall provide documented
test results to Gadzoox each month for all problems related to units
under contract. Accelerated life testing will conform to the Arhenius
Model. Calculation of the expected reliability will be done to the
current Mil-STD-217, Belcore or equivalent method approved by Gadzoox
Quality.
9.2.0 On-Going Reliability Testing (ORT): [*] The exact nature of the ORT
plan is to be designed by the Supplier and Gadzoox Quality for approval
prior to first shipment. ORT Definition: A continual process of MTBF
demonstrations using regular production units. This will indicate if
the product being produced continues to meet the product specification
and that no latent defects have been introduced during the latest
production run.
9.3.0 Design or component changes implemented to improve Field MTBF to
specified levels must be incorporated in all field return units in
accordance with engineering change orders. The Supplier must conduct
their own qualification presenting the results to Gadzoox indicating
fit for use and that conformance to specification has been achieved.
[*]
9.4.0 Supplier shall, in the performance of this Quality Agreement, provide
and maintain a system of traceability on all material used in the end
item for purposes of recall if necessary. Traceability is defined as
the ability to match a certain type or date code of a component to a
specific range of end items.
9.5.0 A unique Serial Number shall be assigned to each unique electronic
assembly prior to any testing being performed. Complete test
traceability by shippable unit serial number is required. [*] The same
serial number shall not be used more than once for a particular model
type. If a serial number is scrapped, that number must die with the
unit. Serial numbers shall not be duplicated on a subsequent purchase
agreement. [*].
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
21
<PAGE> 22
9.6.0 Supplier shall label each item as required by Gadzoox Product
Identification & Labeling Specification MFP003.
10 INFORMATION REQUIREMENTS
10.0.0 Supplier shall have procedures and resources in place to collect,
analyze and report data which is to be used for measurement which
drives CLCA and CPL This data must be collected utilizing statistically
valid techniques based on established SPC methods. Measurement tools
used throughout the process, such as control charts, Pareto analysis
shall be clearly posted and monitored by personnel that can institute
corrective action in the case of breakdown. Measurement tools and
resources must be designated to identify the type, range and causes of
defects and clearly report the information to appropriate personnel on
a regular basis. Statistical tools (CPk, DOE) shall be implemented to
assess and optimize procedure and machine capability.
10.1.0 Gadzoox will provide Supplier with all documents, which Gadzoox deems
necessary to enable Supplier to produce products, and shall be treated
as proprietary information. Supplier agrees not to use this
documentation for other than the purpose of providing to Gadzoox
products manufactured and developed under this agreement.
10.2.0 Supplier agrees to only use components approved by Gadzoox for use in
the product as specified on the drawings, AVL and BOM's. Change will be
encouraged and approved by Gadzoox.
10.3.0 Supplier agrees not to implement any changes to product that may affect
any approval or certification of any of the safety agencies, whether
the application for such approval or certification is completed or
pending, without prior written approval by Gadzoox. Information
describing all of the items on this Quality Agreement must be supplied
before qualification can begin. This information will be acceptable in
the form of catalogue sheets or other published documents containing
identification, markings, physical dimensions, typical test data or
other pertinent information upon which receiving inspection can be
based. All changes must be made through, and in accordance with Gadzoox
Document Control Department practices and procedures.
10.4.0 Suppliers design drawings, fabrication methods, work instructions, and
applicable product specification shall be approved by the Gadzoox
Commodity Team. They shall not be changed except by written approval
from the Gadzoox Commodity Team.
10.5.0 For electronic assemblies, a monthly report detailing quality activity
is due by the 10th of the month following the month covered. The format
of this report will be
22
<PAGE> 23
==========================================
CONFIDENTIAL
CERTAIN INFORMATION HAS BEEN REDACTED
CONFIDENTIAL TREATMENT REQUESTED.
==========================================
determined by the Supplier and Gadzoox Quality Engineer [*]:
10.5.1 [*]
10.5.2 [*]
10.5.3 [*]
10.5.4 [*]
10.5.5 [*]
10.5.6 [*]
10.5.7 [*]
10.5.8 [*]
10.5.9 [*]
11 CORRECTIVE ACTION PROCESS
11.0.0 For all items that are non-conforming, Supplier will analyze the causes
for the defects and submit a written CLOSED LOOP CORRECTIVE ACTION form
or equivalent within [*] from the date that the defective material
is received at the Supplier's facility. Initial defect verification and
assessment must take place within [*]. Corrective actions must be
effective and permanent and must be approved by the Gadzoox Supplier
Quality Engineer. Corrective action data must be returned to Gadzoox
indicating the symptom, root cause, and solution to the specific
problem and state what action was taken to prevent the problem from
recurring. Subsequent occurrences of the same nature are cause for
disqualification.
11.1.0 All Corrective Action Reports must include:
11.1.1 Root cause of problem.
11.1.2 Number of units affected by serial number range and date code.
11.1.3 Date and method of discovery by Supplier.
11.1.4 Disbursement of affected units by inventory locations (i.e.
Supplier's inventory, in-transit, Gadzoox inventory, customer,
and field).
11.1.5 Short term corrective action.
11.1.6 Final corrective action.
11.1.7 Rework plan on future returns affected by the problem but not
recalled.
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
23
<PAGE> 24
==========================================
CONFIDENTIAL
CERTAIN INFORMATION HAS BEEN REDACTED
CONFIDENTIAL TREATMENT REQUESTED.
==========================================
11.2.0 On reject/returned lots, the Supplier is expected to identify all
non-conforming items not just the rejected characteristics. Care should
be taken not to introduce other non-conforming conditions during
rework. [*]
11.3.0 All rejected/returned material must be re-submitted as unique lots and
not mixed with new material.
12 GADZOOX RESPONSIBILITY
12.0.0 Expectations from Gadzoox as pertaining to Suppliers process
compliance, product quality and specifications should be shared with
the Suppliers so they are able to meet and exceed Gadzoox expectations.
12.1.0 Evaluations and results of all audits and quality data will be shared
with the Suppliers on a periodic basis as determined by Gadzoox and the
Supplier. However, quality data will be sent to Suppliers every month.
[*]
13 QUALITY MEASUREMENTS
13.0.0 In-Process Failures/Defects: In process defects in terms of defects per
million (DPM) or percent failures will be measured at open box and
final inspection. This can be done once the part or subassembly is
received at Gadzoox, or during in-process inspections performed at the
Supplier by Gadzoox Source and/or Supplier Auditors. It is expressed by
the number of failures that occur at a process step divided by the
total number of parts processed through that process step. The
calculation is:
DEFECTS PER UNIT FAILURE RATE
Total Number Defects * 1,000,000
--------------------------------
Total Number Units Inspected
DEFECTS PER MILLION OPPORTUNITY - DPM
Total Number Defects * 1,000,000
--------------------------------
Qty Inspected * Qty Defect Opportunities
[*]
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
24
<PAGE> 25
==========================================
CONFIDENTIAL
CERTAIN INFORMATION HAS BEEN REDACTED
CONFIDENTIAL TREATMENT REQUESTED.
==========================================
13.1.0 Out of Box Failures & ORT Failures: These failures, in terms of percent
failure rate. This failure implies that the part has been integrated
with the Gadzoox (or Gadzoox Customer system) and then failed after all
routine manufacturing operations have been completed.
[*]
13.2.0 DOA Failures: These failures, expressed in percent fail rate, are the
number of failures that occur in the first 30 days of operation after
installation. DOA's for a particular month will be DOA failures that
get reported in that month divided by the total number shipped for the
prior month.
[*]
13.3.0 Field Failures: These are failures that occur past the first 30 day
window for DOA's, termed as DR's. Field failures are a direct
correlation to the reliability of the product. This is measured by the
failures reported in a month (not counting DOA's) divided by the total
installed base up to that month.
FIELD FAILURE RATE % = 100 *
Current month failures (excluding DOA's
---------------------------------------
Total Installed Base
[*]
13.4.0 Quality Requirements
The table below contains the quality requirements for the product. This
information is to be filled in and agreed to by both the Supplier and
Gadzoox.
In cases where "design errors" have been identified and Gadzoox is in
agreement, those errors will still be reported, but not be included in
the quality measures.
In some cases the quality requirements would be defined in the higher
level product specifications, and this section would remain blank.
TABLE 1. QUALITY REQUIREMENTS
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
25
<PAGE> 26
==========================================
CONFIDENTIAL
CERTAIN INFORMATION HAS BEEN REDACTED
CONFIDENTIAL TREATMENT REQUESTED.
==========================================
<TABLE>
<CAPTION>
IN-PROCESS AUDITS OOBA DOA'S DR'S
<S> <C> <C> <C> <C>
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
[*] [*] [*] [*] [*]
</TABLE>
* Time "0" equals Gadzoox EPR (Product Release)
** Quality Requirements may be determined later based on historical
quality indicators.
13.5.0 Exceptions to This Document
The table below contains any exceptions to this document that are
agreed to by both the Supplier and Gadzoox.
In some cases these exceptions would be defined in the higher level
product specification, and this section may remain blank.
TABLE 2. EXCEPTIONS TO THIS AGREEMENT (IF ANY)
SECTION DESCRIPTION OF EXCEPTION
[*] CONFIDENTIAL INFORMATION IN THIS EXHIBIT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
26
<PAGE> 1
EXHIBIT 10.6
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
THIS NOTE AND THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS
TO THE SECURITIES UNDER SAID ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.
CONVERTIBLE SUBORDINATED PROMISSORY NOTE
$13,200,103.29 October 12, 1998
San Jose, California
FOR VALUE RECEIVED, Gadzoox Networks, Inc., a Delaware corporation (the
"Company"), promises to pay to Seagate Technology, Inc., a Delaware corporation
(the "Holder"), or its registered assigns, the principal sum of $13,200,103.29,
or such lesser amount as shall then equal the outstanding principal amount
hereof, together with interest from the date of this Note on the unpaid
principal balance at a rate equal to 5.75% per annum simple interest, computed
on the basis of the actual number of days elapsed and a year of 365 days. All
unpaid principal, together with all accrued interest and other amounts payable
hereunder, shall be due and payable in accordance with Sections 3 and 4 hereof,
subject to the terms and conditions of Section 5 hereof. This Note is one of the
"Notes" issued pursuant to the Note Purchase Agreement dated September 18, 1998
(as amended, modified or supplemented, the "Note Purchase Agreement") between
the Company and the Purchaser (as defined in the Note Purchase Agreement).
The following is a statement of the rights of Holder and the conditions
to which this Note is subject, and to which the Holder hereof, by the acceptance
of this Note, agrees:
1. DEFINITIONS. As used in this Note, the following capitalized
terms have the following meanings:
(a) "Company" includes the corporation initially executing
this Note and any Person which shall succeed to or assume the obligations of the
Company under this Note.
(b) "Certificate" shall mean the Amended and Restated
Certificate of Incorporation of the Company in effect on September 18, 1998.
<PAGE> 2
(c) "Equity Securities" of any Person shall mean (a) all
common stock, preferred stock, participations, shares, partnership interests or
other equity interests in and of such Person (regardless of how designated and
whether or not voting or non-voting) and (b) all warrants, options and other
rights to acquire any of the foregoing.
(d) "Holder" shall mean the Person specified in the
introductory paragraph of this Note or any Person who shall at the time be the
registered holder of this Note.
(e) "Indebtedness" shall mean and include the aggregate
amount of, without duplication (a) all obligations for borrowed money, (b) all
obligations evidenced by bonds, debentures, notes or other similar instruments,
(c) all obligations to pay the deferred purchase price of property or services
(other than accounts payable incurred in the ordinary course of business
determined in accordance with generally accepted accounting principles), (d) all
obligations with respect to capital leases, (e) all guaranty obligations; (f)
all obligations created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person, (g) all
reimbursement and other payment obligations, contingent or otherwise, in respect
of letters of credit.
(f) "Initial Public Offering" shall mean the closing of the
initial public offering of securities of the Company to the general public which
is effected pursuant to a registration statement filed with, and declared
effective by the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended.
(g) "Majority in Interest" shall mean, more than fifty
percent (50%) of the aggregate outstanding principal amount of the Notes issued
pursuant to the Note Purchase Agreement.
(h) "Maturity Date" is September 18, 2001.
(i) "Obligations" shall mean all principal and accrued
interest due hereunder.
(j) "Person" shall mean and include an individual, a
partnership, a corporation (including a business trust), a joint stock company,
a limited liability company, an unincorporated association, a joint venture or
other entity or a governmental authority.
(k) "Senior Indebtedness" shall mean, unless expressly
subordinated to or made on a parity with the amounts due under this Note, the
principal of (and premium, if any), unpaid interest on and amounts reimbursable,
fees, expenses, costs of enforcement and other amounts due in connection with,
(i) indebtedness of the Company outstanding as of the date hereof, including
without limitation, Indebtedness of the Company, or with respect to which the
Company is a guarantor, to commercial financial institutions regularly engaged
in the business of lending money, which is for money borrowed, or purchase or
leasing of equipment in the case of lease or other equipment financing, by the
Company, whether or not secured, and (ii) any such indebtedness or any
debentures, notes or other evidence of indebtedness issued in exchange for such
Senior Indebtedness referred to in clause (i) of this Section 1(k), or any
indebtedness arising from the satisfaction of such Senior Indebtedness by a
guarantor provided, however, that (x) indebtedness in an amount not to exceed
$40,000,000 to any bank
<PAGE> 3
or other institutional lender which extends financing to the Company for working
capital and other needs, and (y) indebtedness in an amount not to exceed
$15,000,000 pursuant to one or more equipment lease financing arrangements shall
be deemed Senior Indebtedness whether or not such indebtedness is outstanding as
of the date hereof or incurred in the future.
(l) "Transaction Documents" shall mean this Note, each of
the other Notes issued under the Note Purchase Agreement and the Note Purchase
Agreement.
(m) "Voting Stock" shall mean the Company's Common Stock and
Preferred Stock and other securities issued by the Company having the ordinary
power to vote in the election of directors of the Company (other than securities
having such power only upon the happening of a contingency).
2. INTEREST. Accrued interest on this Note shall not be due and
payable, except under an Event of Default; rather such interest shall accrue
until the principal amount and all accrued interest is converted pursuant to
Section 7 hereof.
3. EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an "Event of Default" under this Note.
(a) Representations and Warranties. Any material
representation, warranty, certificate or other statement (financial or
otherwise) made or furnished by or on behalf of the to Holder in writing in
connection with the essence of this Note or any of the other Transaction
Documents, shall be false, incorrect or misleading in any material respect when
made or furnished; or
(b) Voluntary Bankruptcy or Insolvency Proceedings. The
Company shall (i) apply for or consent to the appointment of a receiver,
trustee, liquidator or custodian of itself or of all or a substantial part of
its property, (ii) be unable, or admit in writing its inability, to pay its
debts generally as they mature, (iii) make a general assignment for the benefit
of its or any of its creditors, (iv) be dissolved or liquidated in full, (v)
become insolvent (as such term may be defined or interpreted under any
applicable statute), (vi) commence a voluntary case or other proceeding seeking
liquidation, reorganization or other relief with respect to itself or its debts
under any bankruptcy, insolvency or other similar law now or hereafter in effect
or consent to any such relief or to the appointment of or taking possession of
its property by any official in an involuntary case or other proceeding
commenced against it, or (vii) take any action for the purpose of effecting any
of the foregoing; or
(c) Involuntary Bankruptcy or Insolvency Proceedings.
Proceedings for the appointment of a receiver, trustee, liquidator or custodian
of the Company or of all or a substantial part of the property thereof, or an
involuntary case or other proceedings seeking liquidation, reorganization or
other relief with respect to the Company or the debts thereof under any
bankruptcy, insolvency or other similar law now or hereafter in effect shall be
commenced and an order for relief entered or such proceeding shall not be
dismissed or discharged within thirty (30) days of commencement; or
4. RIGHTS OF HOLDER UPON DEFAULT. Upon the occurrence or existence
of any Event of Default (other than an Event of Default referred to in Paragraph
3(a)) and at any time thereafter during
<PAGE> 4
the continuance of such Event of Default, Holder may declare all outstanding
Obligations payable by the Company hereunder to be immediately due and payable
in cash. Upon the occurrence or existence of any Event of Default described in
Paragraphs 3(b) and 3(c), immediately and without notice, all outstanding
Obligations payable by the Company hereunder shall automatically become
immediately due and payable in cash. In addition to the foregoing remedies, upon
the occurrence or existence of any Event of Default, Holder may exercise any
other right, power or remedy granted to it by the Transaction Documents or
otherwise permitted to it by law, either by suit in equity or by action at law,
or both.
5. SUBORDINATION. The Obligations evidenced by this Note are hereby
expressly subordinated, to the extent and in the manner hereinafter set forth,
in right of payment to the prior payment in full of all of the Company's Senior
Indebtedness.
(a) Insolvency Proceedings. If there shall occur any
receivership, insolvency, assignment for the benefit of creditors, bankruptcy,
reorganization, or arrangements with creditors (whether or not pursuant to
bankruptcy or other insolvency laws), sale of all or substantially all of the
assets, dissolution, liquidation, or any other marshaling of the assets and
liabilities of the Company, (i) no amount shall be paid by the Company in
respect of the principal of, interest on or other amounts due with respect to
this Note at the time outstanding, unless and until the principal of and
interest on the Senior Indebtedness then outstanding shall be paid in full, and
(ii) no claim or proof of claim shall be filed with the Company by or on behalf
of the Holder of this Note which shall assert any right to receive any payments
in respect of the principal of and interest on this Note except subject to the
payment in full of the principal of and interest on all of the Senior
Indebtedness then outstanding.
(b) Default on Senior Indebtedness. If there shall occur an
event of default which has been declared in writing with respect to any Senior
Indebtedness, as defined therein, or in the instrument under which it is
outstanding, permitting the holder to accelerate the maturity thereof and Holder
shall have received written notice thereof from the holder of such Senior
Indebtedness, then, unless and until such event of default shall have been cured
or waived or shall have ceased to exist, or all Senior Indebtedness shall have
been paid in full, no payment shall be made, if any, in respect of the principal
of or interest on this Note.
(c) Further Assurances. By acceptance of this Note, the
Holder agrees to execute and deliver customary forms of subordination agreement
requested from time to time by holders of Senior Indebtedness, and as a
condition to the Holder's rights hereunder, the Company may require that Holder
execute such forms of subordination agreement; provided that such forms shall
not impose on Holder terms less favorable than those provided herein.
(d) Subrogation. Subject to the payment in full of all
Senior Indebtedness, the holder of this Note shall be subrogated to the rights
of the holder(s) of such Senior Indebtedness to receive payments and
distributions of assets of the Company applicable to the Senior Indebtedness. No
such payments or distributions applicable to the Senior Indebtedness shall, as
between the Company and its creditors, other than the holders of Senior
Indebtedness and the Holder, be deemed to be a payment by the Company to or on
account of this Note; and for purposes of such subrogation, no payments or
distributions to the holders of Senior Indebtedness to which the Holder would be
entitled except for the
<PAGE> 5
provisions of this Section 5 shall, as between the Company and its creditors,
other than the holders of Senior Indebtedness and the Holder, be deemed to be a
payment by the Company to or on account of the Senior Indebtedness.
(e) No Impairment. Subject to the rights, if any, of the
holders of Senior Indebtedness under this Section 5 to receive cash, securities
or other properties otherwise payable or deliverable to the Holder of this Note,
nothing contained in this Section 5 shall impair, as between the Company and
Holder, the obligation of the Company, subject to the terms and conditions
hereof, to pay to the Holder the principal hereof and interest hereon as and
when the same become due and payable, or shall prevent the Holder of this Note,
upon default hereunder, from exercising all rights, powers and remedies
otherwise provided herein or by applicable law.
(f) Reliance of Holders of Senior Indebtedness. Holder, by
its acceptance hereof, shall be deemed to acknowledge and agree that the
foregoing subordination provisions are, and are intended to be, an inducement to
and a consideration of each holder of Senior Indebtedness, whether such Senior
Indebtedness was created or acquired before or after the creation of the
indebtedness evidenced by this Note, and each such holder of Senior Indebtedness
shall be deemed conclusively to have relied on such subordination provisions in
acquiring and holding, or in continuing to hold, such Senior Indebtedness.
6. PREPAYMENT. Upon thirty (30) days prior written notice to
Holder, the Company may prepay this Note in whole or in part; provided that: (i)
any prepayment of this Note may only be made in connection with the prepayment
of all Notes issued under the Note Purchase Agreement on a pro rata basis, based
on the respective aggregate outstanding principal amounts of each such Note, and
(ii) any such prepayment will be applied first to the payment of expenses due
under this Note, second to interest accrued on this Note and third, if the
amount of prepayment exceeds the amount of all such expenses and accrued
interest, to the payment of principal of this Note. Any mandatory conversion of
the Note effected in accordance with Section 7 hereof shall not be deemed a
prepayment of the Note subject to the requirements of this Section 6.
7. CONVERSION.
(a) Mandatory Conversion into Series G Preferred. Upon the
earlier to occur of (i) the closing (or first in a series of closings) of an
equity financing in which the Company receives, or shall receive in such series
of closings, an aggregate of at least $5,999,000 (excluding the amount of
principal and interest due on the Notes which convert in such financing, if any)
(the "Equity Financing"), (ii) the Company's Initial Public Offering, (iii) a
Change of Control (as defined below), or (iv) the Maturity Date, the sum of the
principal and accrued interest then outstanding on the Note, or any portion of
the principal and accrued interest then outstanding on the Note at the sole
option of the Company, will automatically convert in accordance with the
provisions of 7(b) hereof into shares of Series G Preferred Stock of the Company
(the "Series G Preferred") at a price of $7.65 per share (the "Conversion
Price"), subject to adjustment as set forth herein; provided, however, if an
Event of Default has occurred on or prior to the conversion event specifically
set forth in clauses 7(a)(iii) (Change of Control) or 7(a)(iv) (Maturity Date)
above, then the Holder may, at its sole option, delay automatic conversion of
the Note
<PAGE> 6
pursuant to this Section 7 for a period not exceeding twelve (12) months from
the date of such event of conversion. For purposes of this Section 7(a), a
"Change of Control" shall mean any (i) merger or consolidation of this Company
with or into another entity which results in the voting securities of the
Company outstanding immediately prior thereto representing immediately
thereafter less than a majority of the combined voting power of the voting
securities of the Company or such surviving or acquiring entity outstanding
immediately after such merger or consolidation, (ii) sale of all or
substantially all of the assets of the Company, or (iii) sale of shares of
capital stock of the Company, in a single transaction or series of related
transactions, representing at least eighty percent (80%) of the Voting Stock of
the Company. The sale and issuance by the Company of Series H Preferred Stock
pursuant to the Series H Preferred Stock Purchase Agreement, dated September 18,
1998 by and between the Company and 3Com Corporation, shall be deemed an Equity
Financing under this Section 7(a).
(b) Conversion Procedure. At such time this Note is
automatically converted into Series G Preferred, the Company shall deliver
written notice to the Holder of this Note at the address last shown on the
records of the Company for the Holder or given by the Holder to the Company for
the purpose of notice or, if no such address appears or is given, at the place
where the principal executive office of the Company is located, notifying the
Holder of the conversion to be effected, specifying the terms and conditions of
the Equity Financing, the Series G Preferred Equivalents, the principal and
accrued interest outstanding of the Note to be converted, the date on which such
conversion will occur and calling upon such Holder to surrender the Note to the
Company, in the manner and at the place designated in the Note. Such conversion
shall be deemed to have been made contemporaneously with the closing of the
Equity Financing or immediately prior to the closing of an Initial Public
Offering or Change of Control, as the case may be.
(c) Limitation on Conversion. Upon the occurrence of an
event described in clauses 7(a)(i) (Equity Financing) or 7(a)(ii) (Initial
Public Offering) above, then the principal and accrued interest under the Note
shall be converted to Series G Preferred Stock of the Company pursuant to
Section 7(a) above, at the sole option and discretion of the Company, only to
the extent that following such conversion the Holders' percentage ownership of
the Voting Stock of the Company is equal to or less than 19.9% of all
outstanding Voting Stock on the date of such event (a "Partial Conversion"). In
the event of a Partial Conversion, accrued interest shall be converted first;
and outstanding principal on the Note, which has not been converted, shall
continue to earn and accumulate interest at the rate and manner set forth in
this Note. On or after the Partial Conversion, the Company may, at any time and
at its sole option and discretion, convert all or part of the unconverted
principal and then accrued interest, if any, on the Note into Series G Preferred
Stock pursuant to the procedures in Section 7(b) hereof. Shares of Series G
Preferred issuable upon conversion of this Note shall be deemed outstanding for
purposes of calculating the Holder's Right of First Refusal and Right to
Maintain (as described in the Series F, G and H Stockholders' Agreement, dated
September 18, 1998 as amended from time to time). The limitation under this
subsection 7(c) may be waived in writing by the Company.
(d) Mechanics and Effect of Conversion. No fractional shares
of Preferred Stock shall be issued upon conversion of this Note. In lieu of the
Company issuing any fractional shares to the Holder upon the conversion of this
Note, the Company shall pay to the Holder the amount of outstanding principal
that is not so converted, such payment to be in the form as provided below. Upon
conversion
<PAGE> 7
of this Note pursuant to Section 7, the Holder shall surrender this Note, duly
endorsed, at the principal office of the Company. At its expense, the Company
shall, as soon as practicable thereafter, issue and deliver to such Holder at
such principal office a certificate or certificates for the number of shares of
such Preferred Stock to which the Holder shall be entitled upon such conversion
(bearing such legends as are required by the Note Purchase Agreement and
applicable state and federal securities laws in the opinion of counsel to the
Company), together with any other securities and property to which the Holder is
entitled upon such conversion under the terms of this Note, including a check
payable to the Holder for any cash amounts payable as described above. Upon a
Partial Conversion, the Company shall, at its expense, issue and deliver to such
Holder at such principal office a new Note representing the balance of principal
and interest, if any, not converted pursuant to such Partial Conversion. Upon
full conversion of this Note, the Company shall be forever released from all its
obligations and liabilities under this Note.
8. CONVERSION PRICE ADJUSTMENTS.
(a) Adjustments for Stock Splits and Subdivisions. In the
event the Company should at any time or from time to time after the date of
issuance hereof fix a record date for the effectuation of a split or subdivision
of the outstanding shares of Series G Preferred or the determination of holders
of Series G Preferred entitled to receive a dividend or other distribution
payable in additional shares of Series G Preferred or other securities or rights
convertible into, or entitling the holders thereof to receive directly or
indirectly, additional shares of Series G Preferred (hereinafter referred to as
"Series G Preferred Equivalents") without payment of any consideration by such
holder for the additional shares of Series G Preferred or the Series G Preferred
Equivalents (including the additional shares of Series G Preferred issuable upon
conversion or exercise thereof), then, as of such record date (or the date of
such dividend distribution, split or subdivision if no record date is fixed),
the Conversion Price of this Note shall be appropriately decreased so that the
number of shares of Series G Preferred issuable upon conversion of this Note
shall be increased in proportion to such increase of outstanding shares.
(b) Adjustments for Reverse Stock Splits. If the number of
shares of Series G Preferred outstanding at any time after the date hereof is
decreased by a combination of the outstanding shares of Series G Preferred,
then, following the record date of such combination, the Conversion Price for
this Note shall be appropriately increased so that the number of shares of
Series G Preferred issuable on conversion hereof shall be decreased in
proportion to such decrease in outstanding shares.
(c) Conversion or Redemption of Series G Preferred Stock.
Should all of the Company's Series G Preferred be, or if outstanding would be,
at any time prior to full payment of this Note, redeemed or converted into
shares of Company's Common Stock in accordance with the Certificate, then this
Note shall, following the Maturity Date, become convertible into that number of
shares of the Company's Common Stock equal to the number of shares of the Common
Stock that would have been received if this Note had been converted in full and
the Series G Preferred received thereupon had been simultaneously converted
immediately prior to such event at the Conversion Price equal to the conversion
rate, as set forth and defined in the Company's Certificate converting Series G
Preferred Stock into Common Stock on that date.
<PAGE> 8
(d) Notices of Record Date, etc. In the event of:
(1) Any taking by the Company of a record of the
holders of any class of securities of the Company for the purpose of determining
the holders thereof who are entitled to receive any dividend (other than a cash
dividend payable out of earned surplus at the same rate as that of the last such
cash dividend theretofore paid) or other distribution, or any right to subscribe
for, purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right; or
(2) Any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of all or substantially all of the assets of the Company to any other
Person or any consolidation or merger involving the Company; or
(3) Any voluntary or involuntary dissolution,
liquidation or winding-up of the Company; or
(4) Any Initial Public Offering.
The Company will mail to the Holder of this Note at least ten
(10) days prior to the earliest date specified therein, a notice specifying the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and the amount and character of such dividend,
distribution or right; and the date on which any such reorganization,
reclassification, transfer, consolidation, merger, dissolution, liquidation or
winding-up is expected to become effective and the record date for determining
stockholders entitled to vote thereon.
(e) Reservation of Stock Issuable Upon Conversion. In the
event that this Note is still outstanding after the Maturity Date, at the
request of the Holder, the Company agrees to use its best efforts to amend its
Certificate to increase the number of authorized shares of Series G Preferred
for the purpose of effecting the conversion of this Note and all other then
outstanding Notes as shall be sufficient to effect the conversion of principal
and accrued interest of all of the Notes.
9. SUCCESSORS AND ASSIGNS. Subject to the restrictions on transfer
described in Section 11 below, the rights and obligations of the Company and the
Holder of this Note shall be binding upon and benefit the successors, assigns,
heirs, administrators and transferees of the parties.
10. WAIVER AND AMENDMENT. Any provision of this Note may be amended,
waived or modified upon the written consent of the Company and the holders of a
Majority in Interest of all then outstanding Notes issued pursuant to the Note
Purchase Agreement.
11. TRANSFER OF THIS NOTE OR SECURITIES ISSUABLE ON CONVERSION
HEREOF. With respect to any offer, sale or other disposition of this Note or
securities into which such Note may be converted, the Holder will give written
notice to the Company prior thereto, describing briefly the manner thereof if so
requested, the Company, as promptly as practicable, shall notify such Holder
whether such Holder may sell or otherwise dispose of this Note or such
securities, all in accordance with the terms of the
<PAGE> 9
notice delivered to the Company. Each Note thus transferred and each certificate
representing the securities thus transferred shall bear a legend as to the
applicable restrictions on transferability in order to ensure compliance with
the Securities Act of 1933, as amended (the "Act"), unless in the opinion of
counsel to the Company such legend is not required in order to ensure compliance
with the Act. The Company may issue stop transfer instructions to its transfer
agent in connection with such restrictions. Subject to the foregoing, transfers
of this Note shall be registered upon registration books maintained for such
purpose by or on behalf of the Company as provided in the Note Purchase
Agreement. Prior to presentation of this Note for registration of transfer, the
Company shall treat the registered holder hereof as the owner and holder of this
Note for the purpose of receiving all payments of principal and interest hereon
and for all other purposes whatsoever, whether or not this Note shall be overdue
and the Company shall not be affected by notice to the contrary.
12. REGISTRATION, TRANSFER AND REPLACEMENT OF THE NOTES. This Note
shall be a registered note. The Company will keep, at its principal executive
office, books for the registration and registration of transfer of this Note.
Prior to presentation of this Note for registration of transfer, the Company
shall treat the person in whose name such Note is registered as the owner and
holder of such Note for all purposes whatsoever, whether or not such Note shall
be overdue, and the Company shall not be affected by notice to the contrary.
Subject to any restrictions on or conditions to transfer set forth in this Note,
the holder of this Note, at its option, may in person or by duly authorized
attorney surrender the same for exchange at the Company's chief executive
office, and promptly thereafter and at the Company's expense, except as provided
below, receive in exchange therefor one or more new Note(s), each in the
principal requested by such holder, dated the date to which interest shall have
been paid on this Note so surrendered or, if no interest shall have yet been so
paid, dated the date of this Note so surrendered and registered in the name of
such person or persons as shall have been designated in writing by such holder
or its attorney for the same principal amount as the then unpaid principal
amount of this Note so surrendered. Upon receipt by the Company of evidence
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Note and (a) in the case of loss, theft or
destruction, of indemnity reasonably satisfactory to it; or (b) in the case of
mutilation, upon surrender thereof, the Company, at its expense, will execute
and deliver in lieu thereof a new Note executed in the same manner as this Note
being replaced, in the same principal amount as the unpaid principal amount of
this Note.
13. TREATMENT OF NOTE. To the extent permitted by generally accepted
accounting principles ("GAAP"), the Company will treat, account and report the
Note as debt and not equity for accounting purposes and with respect to any
returns filed with federal, state or local tax authorities.
14. NOTICES. Any notice, request or other communication required or
permitted hereunder shall be in writing and shall be deemed to have been duly
given if personally delivered or mailed by registered or certified mail, postage
prepaid, or by recognized overnight courier or personal delivery at the
respective addresses of the parties as set forth in the Note Purchase Agreement
or on the register maintained by the Company. Any party hereto may by notice so
given change its address for future notice hereunder. Notice shall conclusively
be deemed to have been given when received. The Company will provide the Holder
notice of any proposed underwritten public offering of the Company's securities
or merger or sale of all or substantially all of the Company's assets.
<PAGE> 10
15. PAYMENT. Payment shall be made in lawful tender of the United
States.
16. EXPENSES; WAIVERS. If action is instituted to collect this Note,
the Company promises to pay all costs and expenses, including, without
limitation, reasonable attorneys' fees and costs, incurred in connection with
such action. The Company hereby waives notice of default, presentment or demand
for payment, protest or notice of nonpayment or dishonor and all other notices
or demands relative to this instrument.
17. GOVERNING LAW. This Note and all actions arising out of or in
connection with this Note shall be governed by and construed in accordance with
the internal laws of the State of California, without regard to the conflicts of
law provisions.
<PAGE> 11
IN WITNESS WHEREOF, the Company has caused this Note to be
issued as of the date first written above.
COMPANY:
GADZOOX NETWORKS, INC.
a Delaware corporation
By: ______________________________________
(Signature)
Name: ______________________________________
(Printed Name)
Title: ______________________________________
HOLDER:
SEAGATE TECHNOLOGY, INC.
a Delaware corporation
By: ______________________________________
(Signature)
Name: ______________________________________
(Printed Name)
Title: ______________________________________
<PAGE> 1
EXHIBIT 10.7
GADZOOX MICROSYSTEMS, INC.
6840 Via Del Oro
San Jose, California 95119
April 29, 1997
K. William Sickler
14665 La Rinconada Drive
Los Gatos, California 95030
Dear Bill:
This letter agreement is to memorialize our agreement with respect to
the option (the "Option") to purchase 100,000 shares of Common Stock of Gadzoox
Microsystems, Inc. (the "Company") granted by the Company to you in April 1996
pursuant to a Stock Option Agreement (the "Option Agreement") as well as 60,000
shares of the Company's Common Stock (the "Restricted Shares") sold to you
(along with 540,000 additional shares) pursuant to the Restricted Stock Purchase
Agreement dated April 15, 1996 (the "Purchase Agreement").
The Company hereby acknowledges that more than one hundred (100%)
percent of the 1997 Revenue Plan (as defined in the Purchase Agreement) was
achieved. Accordingly, the Restricted Shares shall vest in accordance with the
last paragraph of Section 3(a)(ii)(x) of the Purchase Agreement and the term
"Revenue Shares," as defined in the Purchase Agreement, shall mean 60,000
shares.
Additionally, the parties agree that despite the fact that less than two
hundred (200%) percent of the 1997 Revenue Plan was achieved, the Option shall
apply to 100,000 shares and the term "Revenue Shares," as defined in the Option
Agreement, shall mean and refer to the entire 100,000 shares subject to the
Option. Such Revenue Shares shall vest as set forth in the second to last
sentence of Section I.1(ii) of the Option Agreement.
In consideration of the foregoing, the Company and you have agreed to
amend the Change of Control Agreement between the Company and yourself effective
as of April 15, 1996 (the "Change of Control Agreement") to provide as set forth
in the Amendment to Change of Control Agreement attached to this letter
agreement as Exhibit A.
If the foregoing accurately reflects our understanding, please sign the
enclosed copy of this letter as well as the attached Amendment to Change of
Agreement and return them to Christine Munson at the Company for the Company's
records.
GADZOOX MICROSYSTEMS, INC.
By:
Milton Chang, Director
The foregoing is hereby agreed to.
K. William Sickler
<PAGE> 2
GADZOOX MICROSYSTEMS, INC.
AMENDMENT TO CHANGE OF CONTROL AGREEMENT
This Amendment to Change of Control Agreement (the "Amendment") is made
and entered into by and between K. William Sickler (the "Employee") and Gadzoox
Microsystems, Inc., a California corporation (the "Company") effective as of
April 29, 1997.
RECITALS
A. On April 15, 1996 the Company and Employee executed a Change of
Control Agreement (the "Agreement") certain provisions of which the parties now
wish to amend.
NOW, THEREFORE, for good and valuable consideration the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. All capitalized terms used in this Amendment, shall have the
meaning ascribed to them in the Agreement unless such terms are otherwise
defined herein.
2. Section 3 of the Agreement is hereby replaced and amended in its
entirety to provide as follows:
"3. Change of Control Benefits.
(a) Change of Control. Employee shall be entitled to receive
from the Company the benefits provided in this Section 3 if there is a Change of
Control that occurs while the Employee is employed by the Company.
(b) Involuntary Termination. "Involuntary Termination" shall
mean (i) without the Employee's express written consent, a significant reduction
of the Employee's duties, position or responsibilities, or the removal of the
Employee from such position and responsibilities, unless the Employee is
provided with a comparable position (i.e., a position of equal or greater
organizational level, duties, authority, compensation and status); (ii) without
the Employee's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space and
location) available to the Employee immediately prior to such reduction; (iii) a
significant reduction by the Company in the base compensation of the Employee as
in effect immediately prior to such reduction; (iv) a material reduction by the
Company in the kind or level of Employee benefits to which the Employee is
entitled immediately prior to such reduction with the result that the Employee's
overall benefits package is significantly reduced; (v) without the Employee's
express written consent, the relocation of the Employee to a facility or a
location more than 30 miles from the Employee's then present location; (vi) any
purported termination of the Employee by the Company which is not effected due
to the permanent disability of Employee, or for Cause or any purported
termination for which the grounds relied upon are not valid; or (vii) the
failure of the Company to obtain the assumption of this Agreement by any
successors contemplated in Section 6(a) below.
<PAGE> 3
(c) Cause. "Cause" shall mean (i) any act of personal
dishonesty taken by the Employee in connection with his responsibilities as an
Employee and intended to result in substantial personal enrichment of the
Employee, (ii) the conviction of a felony which the Board reasonably believes
had or will have a material detrimental effect on the Company's reputation or
business, (iii) a willful act by the Employee which constitutes gross misconduct
and which is injurious to the Company, and (iv) continued violations by the
Employee of the Employee's reasonable obligations which are demonstrably willful
and deliberate on the Employee's part after there has been delivered to the
Employee a written demand for performance from the Company which describes the
basis for the Company's belief that the Employee has not substantially performed
his duties.
(d) Option and Restricted Stock Accelerated Vesting.
(i) In the event of a Change of Control that occurs
while Employee is employed by the Company, the unvested portion of any stock
option and any restricted stock held by the Employee shall automatically be
accelerated as to a number of shares which equals the lesser of (x) 12/48ths of
the initial number of shares subject to the option as well as the repurchase
option, as applicable, or (ii) a number of shares such that following such
acceleration, 6/48ths of the number of shares initially subject to such option
and repurchase option, as applicable, shall remain unvested and subject to such
repurchase option, as applicable. Any unvested shares following such
acceleration shall continue to vest in accordance with the terms of the
agreement under which the option was initially granted and the restricted stock
initially sold. For example, if a Change of Control occurred nineteen months
prior to the end of the vesting period of an option initially granted for
100,000 shares which vested over four years, upon the occurrence of the Change
of Control, 12/48ths of the 100,000 shares would immediately become vested and
the final 7/48ths of the 100,000 shares would continue to vest as to 1/48th of
the 100,000 shares each month thereafter as provided in the initial option
agreement. Similarly, if the Change of Control occurred eleven months prior to
the date upon which such option would have been fully vested, only 5/48ths of
the shares would become vested and 6/48ths of the shares would continue to vest
at the rate of 1/48th of the shares each month thereafter. If the Change of
Control occurred four months prior to the date that such option would have been
fully vested, no adjustment to the vesting schedule shall occur and the option
shall continue to vest over the remaining four months. A comparable adjustment
shall be made with respect to the repurchase option applicable to any restricted
stock held by Employee. If Employee has one or more options and/or one or more
restricted stock purchases, a comparable analysis shall be applied to each
separate agreement under which an option was granted or restricted stock was
sold.
(ii) In the event of Employee's Involuntary
Termination following a Change of Control that occurs while Employee is employed
by the Company, in addition to the shares which are accelerated pursuant to
Section (d)(i) above, the remaining unvested portion of any stock option held by
the Employee shall automatically be accelerated in full and any repurchase
option applicable to restricted stock shall immediately terminate in full such
that the option is fully exercisable and the restricted shares cease to be
subject to a repurchase option and become fully vested.
(iii) Notwithstanding the foregoing, if such vesting
acceleration would
<PAGE> 4
cause a contemplated Change of Control transaction that was intended to be
accounted for as a "pooling-of-interests" transaction to become ineligible for
such accounting treatment under generally accepted accounted principles, as
determined by the Company's independent public accountants (the "Accountants")
prior to the Change of Control, Employee's stock options and restricted stock
shall not be subject to accelerated vesting as hereinabove provided; provided
that if such result is caused by the execution of this Amendment and rescinding
this Amendment and reinstating the prior Agreement would cure such problem, the
parties agree to rescind this Amendment and replace it with the unamended terms
of the prior Agreement dated April 15, 1996.
4. In all other respects, the Agreement is hereby ratified and confirmed
and shall remain unchanged.
IN WITNESS WHEREOF, each of the parties has executed this Amendment, in
the case of the company by its duly authorized officer, as of the date set forth
above.
GADZOOX MICROSYSTEMS, INC.
Christine Munson, Vice President, Finance
K. William Sickler
<PAGE> 5
GADZOOX MICROSYSTEMS, INC.
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "AGREEMENT") is made and entered
into by and between K. William Sickler (the "EMPLOYEE") and Gadzoox
Microsystems, Inc., a California corporation (the "COMPANY"), effective as of
April 15, 1996.
R E C I T A L S
A. It is expected that the Company from time to time will consider
the possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "BOARD") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interests of the
Company and its stockholders to provide the Employee with an incentive to
continue his employment and to motivate the Employee to maximize the value of
the Company upon a Change of Control for the benefit of its stockholders.
C. The Board believes that it is imperative to provide the Employee
with certain benefits upon a Change of Control which provides the Employee with
enhanced financial security and provides incentive and encouragement to the
Employee to remain with the Company notwithstanding the possibility of a Change
of Control.
D. Certain capitalized terms used in the Agreement are defined in
Section 4 below.
The parties hereto agree as follows:
1. TERM OF AGREEMENT. This Agreement shall terminate upon the date
that all obligations of the parties hereto with respect to this Agreement have
been satisfied.
2. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as defined
under applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control,
unless the termination is to avoid this agreement, the Employee shall not be
entitled to any payments, benefits, damages, awards or compensation other than
as provided by this Agreement, or as may otherwise be available in accordance
with the Company's established employee plans and practice or pursuant to other
agreements with
<PAGE> 6
the Company.
3. CHANGE OF CONTROL BENEFITS.
(a) Change of Control. Employee shall be entitled to receive
from the Company Severance Benefits as provided in this Section 3 if there is a
Change of Control that occurs while Employee is employed by the Company,
regardless of whether Employee's employment relationship with the Company
continues following such Change of Control.
(b) Option and Restricted Stock Accelerated Vesting. In the
event of a Change of Control that occurs while Employee is employed by the
Company, the unvested portion of any stock option or restricted stock held by
the Employee shall automatically be accelerated in full and any repurchase
option applicable to restricted stock shall terminate in full so as to become
completely vested; provided that vesting under the 100,000 share option granted
May 8, 1996 under which vesting is accelerated based upon achieving more than
100% of the 1997 Revenue Plan (as defined therein) as well as release of the
repurchase option with respect to 60,000 shares pursuant to Section 3(a)(ii)(x)
of the Restricted Stock Purchase Agreement dated April 15, 1996 between Employee
and the Company shall be accelerated or released only pursuant hereto only if
the Change of Control occurs on or after April 1, 1997 and shall only be
accelerated or released only to the extent of the number of Revenue Shares
calculated under Section 1(ii) of such Stock Option Agreement and Section
3(a)(ii)(x) of the Restricted Stock Purchase Agreement respectively.
Notwithstanding the foregoing, if such vesting acceleration would cause a
contemplated Change of Control transaction that was intended to be accounted for
as a "pooling-of-interests" transaction to become ineligible for such accounting
treatment under generally accepted accounting principles, as determined by the
Company's independent public accountants (the "ACCOUNTANTS") prior to the Change
of Control, Employee's stock options and restricted stock shall not have their
vesting so accelerated.
4. ATTORNEY FEES, COSTS AND EXPENSES. The prevailing party,
determined without regard to whether or not the action results in a final
judgment, shall be entitled to collect from the other party its reasonable
attorneys' fees, costs and expenses incurred in connection with any action
brought by either party in connection with the subject matter of this Agreement.
5. DEFINITION OF CHANGE OF CONTROL. "CHANGE OF CONTROL" means the
occurrence of any of the following events:
(a) Any "PERSON" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"BENEFICIAL OWNER" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities
other than in a private financing transaction approved by the Board of
Directors; or
(b) The stockholders of the Company (x) approve a merger or
consolidation
<PAGE> 7
of the Company with any other corporation, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity) at least fifty percent (50%) of the total voting power represented by
the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or (y) approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all the Company's assets.
6. SUCCESSORS.
(a) Company's Successors. Any successor to the Company
(whether direct or indirect and whether by purchase, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"COMPANY" shall include any successor to the Company's business and/or assets
which exe cutes and delivers the assumption agreement described in this Section
6(a) or which becomes bound by the terms of this Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and
all rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
7. NOTICE. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
8. MISCELLANEOUS PROVISIONS.
(a) Waiver. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(b) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in
<PAGE> 8
this Agreement have been made or entered into by either party with respect to
the subject matter hereof.
(c) Choice of Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California as applied to agreements entered into and performed
within California solely by residents of that state.
(d) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(e) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
date set forth above.
COMPANY GADZOOX MICROSYSTEMS, INC.
_____________________________________________
Alistair Black, Chief Technical Officer
EMPLOYEE _____________________________________________
K. William Sickler
<PAGE> 1
EXHIBIT 10.8
GADZOOX MICROSYSTEMS, INC.
CHANGE OF CONTROL AGREEMENT
This Change of Control Agreement (the "AGREEMENT") is made and entered
into by and between Kent Bridges (the "EMPLOYEE") and Gadzoox Microsystems,
Inc., a California corporation (the "COMPANY"), effective as of December __,
1996.
R E C I T A L S
A. It is expected that the Company from time to time will consider
the possibility of an acquisition by another company or other Change of Control.
The Board of Directors of the Company (the "BOARD") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is imperative to provide the Employee
with certain benefits upon a Change of Control which provides the Employee with
enhanced financial security and provides incentive and encouragement to the
Employee to remain with the Company notwithstanding the possibility of a Change
of Control.
The parties hereto agree as follows:
1. TERM OF AGREEMENT. This Agreement shall terminate on the earlier
of (i) the date that all obligations of the parties hereto with respect to this
Agreement have been satisfied or (ii) the date upon which this Agreement
terminates by consent of the parties hereto.
2. AT-WILL EMPLOYMENT. The Company and the Employee acknowledge
that the Employee's employment is and shall continue to be at-will, as defined
under applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control,
unless the termination is to avoid this agreement, the Employee shall not be
entitled to any payments, benefits, damages, awards or compensation other than
as provided by this Agreement, or as may otherwise be available in accordance
with the Company's established employee plans and practice or pursuant to other
agreements with the Company.
3. DEFINITION OF CHANGE OF CONTROL. "CHANGE OF CONTROL" means the
occurrence of any of the following events:
<PAGE> 2
(a) Any "PERSON" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"BENEFICIAL OWNER" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing 50% or more of the total
voting power represented by the Company's then outstanding voting securities
other than in a private financing transaction approved by the Board of
Directors; or
(i) the direct or indirect sale or exchange by the
stockholders of the Company of all or substantially all of the stock of the
Company;
(ii) a merger or consolidation in which the Company
is a party and in which the stockholders of the Company before such Ownership
Change do not retain, directly or indirectly, at a least majority of the
beneficial interest in the voting stock of the Company after such transaction;
(iii) or an agreement for the sale or disposition by
the Company of all or substantially all the Company's assets.
4. CHANGE OF CONTROL BENEFITS.
(a) Change of Control. Employee shall be entitled to receive
from the Company the benefits as provided in this Section 4 if there is a Change
of Control that occurs while Employee is employed by the Company, regardless of
whether Employee's employment relationship with the Company continues following
such Change of Control.
(b) Option and Restricted Stock Accelerated Vesting. In the
event of a Change of Control that occurs while Employee is employed by the
Company, fifty percent (50%) of the unvested portion of any stock option or
restricted stock held by the Employee shall automatically be accelerated and any
repurchase option applicable to restricted stock shall terminate so as to become
completely vested for such shares. The balance of any unvested shares not
accelerated (the "Remaining Shares") shall continue to vest on the same time
schedule as existed before the Change of Control with respect to such Remaining
Shares. Notwithstanding the foregoing, if such vesting acceleration would cause
a contemplated Change of Control transaction that was intended to be accounted
for as a "pooling-of-interests" transaction to become ineligible for such
accounting treatment under generally accepted accounting principles, as
determined by the Company's independent public accountants (the "ACCOUNTANTS")
prior to the Change of Control, Employee's stock options and restricted stock
shall not have their vesting so accelerated.
5. ATTORNEY FEES, COSTS AND EXPENSES. The prevailing party,
determined without regard to whether or not the action results in a final
judgment, shall be entitled to collect from the other party its reasonable
attorneys' fees, costs and expenses incurred in connection with any action
brought by either party in connection with the subject matter of this Agreement.
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<PAGE> 3
6. LIMITATION ON PAYMENTS. In the event that the benefits provided
for in this Agreement or otherwise payable to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section, would be
subject to the excise tax imposed by Section 4999 of the Code, then the
Employee's severance benefits under subsection 3(b) shall be payable either
(a) in full, or
(b) as to such lesser amount which would result in no
portion of such benefits being subject to excise tax under Section 4999 of the
Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis, of the greatest amount of
benefits under subsection 3(b), notwithstanding that all or some portion of such
benefits may be taxable under Section 4999 of the Code. Unless the Company and
the Employee otherwise agree in writing, any determination required under this
Section 6 shall be made in writing by the Company's independent public
accountants (the "Accountants"), whose determination shall be conclusive and
binding upon the Employee and the Company for all purposes. For purposes of
making the calculations required by this Section 6, the Accountants may make
reasonable assumptions and approximations concerning applicable taxes and may
rely on reasonable, good faith interpretations concerning the application of
Sections 280G and 4999 of the Code. The Company and the Employee shall furnish
to the Accountants such information and documents as the Accountants may
reasonably request in order to make a determination under this Section. The
Company shall bear all costs the Accountants may reasonably incur in connection
with any calculations contemplated by this Section 6.
7. SUCCESSORS.
(a) Company's Successors. Any successor to the Company
(whether direct or indirect and whether by purchase, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"COMPANY" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this Section 7
(a) or which becomes bound by the terms of this Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and
all rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributes, devisees and legatees.
-3-
<PAGE> 4
8. NOTICE. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
9. MISCELLANEOUS PROVISIONS.
(a) Waiver. No provision of this Agreement shall be
modified, waived or discharged unless the modification, waiver or discharge is
agreed to in writing and signed by the Employee and by an authorized officer of
the Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by the
other party shall be considered a waiver of any other condition or provision or
of the same condition or provision at another time.
(b) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.
(c) Choice of Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California as applied to agreements entered into and performed
within California solely by residents of that state.
(d) Severability. The invalidity or unenforceability of any
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(e) Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together will constitute one and the same instrument.
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<PAGE> 5
IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
date set forth above.
COMPANY GADZOOX MICROSYSTEMS, INC.
_____________________________________________
K. William Sickler, President
EMPLOYEE _____________________________________________
Kent Bridges
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<PAGE> 1
EXHIBIT 10.9
GADZOOX MICROSYSTEMS, INC.
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made this 15th day of April between Gadzoox
Microsystems, Inc., a California corporation (the "Company") and K. William
Sickler (the "Purchaser").
In consideration of the mutual covenants and representations herein set
forth, the Company and the Purchaser agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
the Purchaser hereby agrees to purchase an aggregate of 600,000 shares of the
Company's Common Stock (the "Shares"), at the price of $.15 per Share for an
aggregate purchase price of $90,000.
2. Payment of Purchase Price. The purchase price for the Shares shall
be paid by delivery to the Company at the time of execution of this Agreement
of a check in the amount of the purchase price or a promissory note in form
satisfactory to the Company and secured by the Shares.
3. Limitations on Transfer. In addition to any other limitation on
transfer created by applicable securities laws, Purchaser shall not assign,
encumber or dispose of any interest in the Shares while the Shares are subject
to the Company's repurchase option, right of first refusal except in compliance
with the provisions of this Section 3.
(a) Repurchase Option
(i) In the event of the voluntary or involuntary termination of
employment of Purchaser with the Company for any reason, with or without cause
(including death or disability) (a "Termination") as well as under the
circumstances described in subsection (ii)(x) below, the Company shall, upon the
date of such termination or as described in such subsection (ii)(x), have an
irrevocable, exclusive option (the "Repurchase Option") for a period of 90 days
from such date to repurchase from Purchaser, at the original purchase price per
Share (the "Repurchase Price"), all or any portion of the Shares held by
Purchaser as of such date, to the extent such Shares have not yet been released
from the Company's Repurchase Option. The Repurchase Option shall be exercised
by the Company by written notice to Purchaser or his executor and, at the
Company's option, (x) by delivery to the Purchaser or his executor, with such
Notice, of a check in the amount of the purchase price for the Shares being
repurchased, or (y) in the event the Purchaser is indebted to the Company, by
cancellation by the Company of an amount of such indebtedness equal to the
Repurchase Price for the Shares being repurchased, or (2) by a combination of
(x) and (y) so that the combined payment and cancellation of indebtedness equals
such Repurchase Price. Upon delivery of such notice and payment of the
Repurchase Price in any of the ways described above, the Company shall become
the legal and beneficial owner of the Shares being repurchased and all rights
and interest therein or related thereto, and the Company shall have the right to
transfer to its own name the number of Shares being repurchased by the Company,
without further action by Purchaser.
(ii) The Repurchase Option shall terminate as follows:
<PAGE> 2
(x) With respect to 60,000 of the Shares the Repurchase
Option shall apply to 100% of such 60,000 shares if a Termination occurs prior
to March 31, 1997 and thereafter such Repurchase Option shall terminate based
upon achievement of the revenues set forth in the 1997 Revenue Plan to be
hereafter developed by management and approved by the Board of Directors on or
before September 30, 1996 pursuant to a formal resolution of the Board. On or
before June 30, 1997, the Company shall determine in accordance with generally
accepted accounting principles consistently applied its actual revenues
recognized during the fiscal year ended March 31, 1997, such revenues to be
audited by an accounting firm of national reputation ("Actual Revenues"). If
the Actual Revenues are between 0% and 100% of the 1997 Revenue Plan, the
Company shall multiply the applicable percentage of the 1997 Revenue Plan by
100,000 and thereafter shall subtract from such number, 40,000. The resulting
number is hereinafter referred to as the "Revenue Shares". If the 1997 Revenue
Plan is achieved by more than 100%, the number of Revenue Shares shall be
60,000. If less than 100% of the 1997 Revenue Plan is achieved, the Company
shall be entitled to exercise the Repurchase Option with respect to a number of
shares equal to the difference between 60,000 and the number of Revenue Shares
at any time prior to July 31, 1997 in accordance with the procedure set forth
in subsection (i) above. The purchase price of such shares shall be the
Repurchase Price. For example, if the Company achieved 60% of the 1997 Revenue
Plan, the formula would be:
.60 (100,000) - 40,000 = 20,000 = Revenue Shares
The remaining 40,000 shares would be subject to the Repurchase Option.
The Repurchase Option shall apply to 100% of the 60,000
shares until March 31, 1997 as of which time 12/48ths of the Revenue Shares (as
thereafter actually calculated) shall be released. Thereafter, 1/48th of the
Revenue Shares shall be released from the Repurchase Option on the last day of
each calendar month thereafter, provided in each case the Purchaser is an
employee of the Company on the date of each said release. Fractional shares
shall be rounded to the nearest whole share.
(y) With respect to 540,000 of the Shares (the "Immediately
Vesting Shares"), if a Termination occurs at any time after April 8, 1996 and
prior to April 7, 1997 (the "Initial Period"), the Repurchase Option shall
apply to 100% of the Immediately Vesting Shares. On the last day of the Initial
Period, 12/48ths of the Immediately Vesting Shares (135,000 shares) shall be
released from the Repurchase Option and 1/48th of the Immediately Vesting
Shares (11,250 shares) shall be released from the Repurchase Option on each
monthly anniversary thereafter, provided in each case the Purchaser is an
employee of the Company on the date of each said release. Fractional shares
shall be rounded to the nearest whole share.
(b) Right of First Refusal. Before any Shares may be sold or
transferred (including transfer by operation of law), such Shares shall first
be offered to the Company (the "Right of First Refusal").
2
<PAGE> 3
(i) In the event the Purchaser wishes to sell the Shares,
Purchaser shall deliver a notice ("Notice") to the Company stating (A) his bona
fide intention to sell or transfer such Shares, (B) the number of such Shares
to be sold or transferred, (C) the price for which he proposes to sell or
transfer such Shares, and (D) the name of the proposed purchaser or transferee.
(ii) Within thirty (30) days after receipt of the Notice, the
Company or its assignee may elect to purchase all or none of the Shares to
which the Notice refers, at the price per Share specified in the Notice. The
purchase of the Shares in either such event shall occur at a closing held at
the Company's principal office at a mutually agreed upon time which in no event
shall be more than thirty (30) days following the end of the time period in
which the Company had to elect to purchase such Shares.
(iii) If all of the Shares to which the Notice refers are not
elected to be purchased, as provided in Section 3(b) hereof, Purchaser may sell
the Shares to any person named in the Notice at the price specified in the
Notice or at a higher price, provided that such sale or transfer is consummated
within one hundred twenty (120) days of the date of said Notice to the Company,
and provided, further, that any such sale is in accordance with all the terms
and conditions hereof.
(c) Termination of Restrictions. Notwithstanding the provisions of
Section 3(b) above, the Company's Right of First Refusal shall terminate
immediately as to all Shares upon the occurrence of the first to occur of the
following events:
(i) the acquisition of the Company by another entity by means of
the merger or consolidation of the Company with or into another corporation in
which the stockholders of the Company own less than 50% of the voting
securities of the surviving entity,
(ii) the sale of all or substantially all of the assets of the
Company, or
(iii) the date upon which a public market exists for the Company's
capital stock (or any other stock issued to purchasers in exchange for the
Shares purchased under this Agreement). For the purpose of this Agreement, a
"Public Market" shall be deemed to exist if (i) such stock is listed on a
national securities exchange (as that term is used in the Securities Exchange
Act of 1934) or (ii) such stock is traded on the over-the-counter market and
prices are published daily on business days in a recognized financial journal.
(d) Assignment. Whenever the Company shall have the right to purchase
Shares under this Section 3, the Company may designate and assign one or more
employees, officers, directors or shareholders of the Company or other persons
or organizations to exercise all of the Company's purchase rights under this
Agreement and purchase all of such Shares; provided that if the fair market
value of the Shares to be purchased on the date of such designation or
assignment (the "Repurchase FMV") exceeds the purchase price of the Shares
(determined as described hereinabove) to be purchased, then each such designee
or assignee shall pay the Company cash equal to the difference between the
Repurchase FMV and the purchase price of the Shares which such designee or
assignee shall have the right to purchase.
3
<PAGE> 4
(e) Exempt Transfers. The provisions of this Section 3 shall not
apply to a transfer of any Shares by Purchaser, either during his lifetime or
on death by will or intestacy to his ancestors, descendants or spouse, or any
custodian or trustee for the account of Purchaser or Purchaser's ancestors,
descendants or spouse; provided, in each such case that the transferee shall
receive and hold such Shares subject to all of the provisions of this Section 3
and there shall be no further transfer of such Shares except in accordance
herewith.
4. Standoff Agreement. Purchaser agrees, in connection with the Company's
initial public offering of its equity securities, not to sell, make any short
sale of, loan, grant any option for the purchase of or otherwise dispose of any
Shares (other than those included in the registration, if any) without the prior
written consent of the Company or such underwriters, as the case may be, for
such period of time (not to exceed one hundred eighty (180) days) from the
effective date of such registration as may be requested by the Company or such
underwriters, provided, that the officers and directors of the Company who own
stock of the Company also agree to such restrictions.
5. No Transfer Except in Compliance with the Restrictions Herein. The
Company shall not be required (i) to transfer on its books any Shares which
shall have been sold or transferred in violation of any of the provisions set
forth in this Agreement, or (ii) to treat as owner of such Shares or to accord
the right to vote as such owner or to pay dividends to any transferee to whom
such Shares shall have been so transferred. Purchaser shall not sell, transfer,
pledge, hypothecate or otherwise dispose of any shares which remain subject to
the restrictions on transfer set forth in Section 3 hereof.
6. LEGENDS. All certificates representing any of the Shares subject to
the provisions of this Agreement shall have endorsed thereon the following
legends:
(a) THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISPOSITION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE
SECURITIES ACT OF 1933.
(b) THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED
ONLY IN ACCORDANCE WITH THE TERMS OF AN AGREEMENT BETWEEN THE COMPANY AND THE
SHAREHOLDER, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
(c) Any legend required to be placed thereon by the applicable blue
sky laws of any state.
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<PAGE> 5
7. Escrow.
(a) The Shares issued under this Agreement shall be held by an
escrow holder designated by the Company (the "Escrow Holder"), along with a
stock assignment executed by the Purchaser in blank, until the expiration of
the Company's options and right of first refusal with respect to such Shares as
set forth above.
(b) The Escrow Holder is hereby directed to permit transfer of the
Shares only in accordance with this Agreement or instructions signed by both
parties. In the event further instructions are desired by the Escrow Holder, he
shall be entitled to rely upon directions executed by a majority of the
authorized number of the Company's Board of Directors. The Escrow Holder shall
have no liability for any act or omission hereunder while acting in good faith
in the exercise of his own judgment.
(c) If the Company or any assignee exercises its Repurchase Option
or Right of First Refusal hereunder, the Escrow Holder, upon receipt of written
notice of such exercise from the proposed transferee, shall take all steps
necessary to accomplish such transfer.
(d) When the Repurchase Option or Right of First Refusal have been
exercised or expire unexercised or a portion of the Shares has been released
from the provisions of Section 3 hereof, upon Purchaser's request the Escrow
Holder shall promptly cause a new certificate to be issued for such released
Shares and shall deliver such certificate to the Purchaser.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a stockholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the provisions of Section 3, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of his ownership of the Shares shall be immediately subject to this
escrow, deposited with the Escrow Holder and included thereafter as "Shares"
for purposes of this Agreement and the Company's Repurchase Option or Right of
First Refusal.
8. Investment Representations. In connection with the purchase of the
Shares, the Purchaser shall, concurrently with the purchase of the Shares,
deliver to the Company his Investment Representation Statement attached hereto
as Exhibit A.
9. Adjustment for Stock Split. All references to the number of Shares
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company after the date of this Agreement.
10. Tax Consequences. The Purchaser has reviewed with the Purchaser's own
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions
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<PAGE> 6
contemplated by this Agreement (including any tax consequences that may result
under recently enacted tax legislation). The Purchaser is relying solely on
such advisors and not on any statements or representations of the Company or
any of its agents. The Purchaser understands that the Purchaser (and not the
Company) shall be responsible for the Purchaser's own tax liability that may
arise as a result of this investment or the transactions contemplated by this
Agreement. The Purchaser understands that Section 83 of the Internal Revenue
Code, as amended (the "Code"), taxes as ordinary income both (i) the difference
between the fair market value of the Shares when the Company granted the
Purchaser the right to purchase the Shares and the fair market value of Shares
on the date of this Agreement and (ii) the difference between the amount paid
for the Shares and the fair market value of the Shares as of the date any
restrictions on the Shares lapse. In this context, "restriction" includes the
right of the Company to buy back the Shares pursuant to certain of its rights
under Section 3.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO
MAKE THIS FILING ON THE PURCHASER'S BEHALF.
11. Termination of Employment. PURCHASER UNDERSTANDS AND ACKNOWLEDGES
THAT PURCHASER'S EMPLOYMENT RELATIONSHIP WITH THE COMPANY IS AT THE WILL OF
EITHER PARTY AND THAT NOTHING IN THIS AGREEMENT, SHALL CONFER ANY RIGHT UPON
PURCHASER WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS
EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE. THIS AGREEMENT DOES NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED EMPLOYMENT FOR ANY PERIOD.
12. General Provisions.
(a) Governing Law. This Agreement shall be governed by the laws of
the State of California. This Agreement represents the entire agreement between
the parties with respect to the purchase of Common Stock by the Purchaser and
may only be modified or amended in writing signed by both parties.
(b) Notices. Any notice, demand or request required or permitted to
be given by either the Company or the Purchaser pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally or deposited in the U.S. mail, First Class with postage prepaid, and
addressed to the parties at the addresses of the parties set forth at the end
of this Agreement or such other address as a party may request by notifying the
other in writing.
Any notice to the Escrow Holder shall be sent to the Company's
address with a copy to the other party not sending the notice.
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<PAGE> 7
(c) Assignment. The rights and benefits of the Company under this
Agreement shall be transferable to any one or more persons or entities, and all
covenants and agreements hereunder shall inure to the benefit of, and be
enforceable by the Company's successors and assigns. The rights and obligations
of the Purchaser under this Agreement may only be assigned with the prior
written consent of the Company.
(d) Waiver. Either party's failure to enforce any provision or provisions
of this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party thereafter from enforcing each
and every other provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a waiver of either party's right
to assert all other legal remedies available to it under the circumstances.
(e) Additional Actions. The Purchaser agrees upon request to execute any
further documents or instruments necessary or desirable to carry out the
purposes or intent of this Agreement.
(f) Arbitration. At the option of either party, any and all disputes or
controversies, whether of law or in equity, and of any nature whatsoever
arising from or respecting this Agreement, unless otherwise expressly provided
herein, shall be decided by arbitration by the American Arbitration Association
in accordance with the rules and regulations of that Association.
(i) The arbitrators shall be selected as follows: In the event the
Company and Purchaser agree on one arbitrator, the arbitration shall be
conducted by such arbitrator. In the event the Company and Purchaser do not so
agree, the Company and Purchaser shall each select one independent, qualified
arbitrator and these two arbitrators shall select a third arbitrator. The
Company reserves the right to reject any individual arbitrator who shall be
employed by or affiliated with a competing organization.
(ii) Arbitration shall take place at Palo Alto, California, or any
other location mutually agreeable to the parties. At the request of either
party, arbitration proceedings will be conducted in secrecy. In such case all
documents, testimony, and records shall be received, heard, and maintained by
the arbitrators in secrecy under seal, available for inspection only by the
Company and the Purchaser and their respective attorneys and their respective
experts who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known. The arbitrators, who shall act
by majority vote, shall be able to decree any and all relief of an equitable
nature, including but not limited to such relief as a temporary restraining
order, a temporary or a permanent injunction, or both, and shall also be able
to award damages (with or without an accounting), costs, and reasonable
attorneys' fees. The decree or judgment of an award rendered by the arbitrators
may be entered in any court having jurisdiction thereof.
(iii) Reasonable notice of the time and place of arbitration shall be
given to all personS, other than the parties, as shall be required by law, in
which case such persons or their
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<PAGE> 8
authorized representatives shall have the right to attend and participate in all
the arbitration hearings to the extent and in such manner as the law shall
require.
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of
the day and year first set forth above.
GADZOOX MICROSYSTEMS, INC. PURCHASER:
a California corporation
By: /s/ ALISTAIR BLACK /s/ K. WILLIAM SICKLER
------------------------- -------------------------
Alistair Black K. William Sickler
K. William Sickler hereby assigns all of his right, title and interest in
and to the shares hereinabove purchased to K. William Sickler and Gail Sickler,
Trustees UTA dated July 16, 1992 (the "Trustees") and the Trustees hereby agree
to be bound by and comply in all respects with the terms of the foregoing
agreement and acknowledge that the shares shall be subject in all respects to
the Repurchase Option, the Right of First Refusal and other restrictions set
forth in the foregoing agreement. The Company hereby consents to such
assignment on the foregoing terms.
Dated: April 15, 1996
/s/ K. WILLIAM SICKLER GADZOOX MICROSYSTEMS, INC.
- ---------------------------
K. William Sickler
By: /s/ ALISTAIR BLACK
-------------------------
Alistair Black
/s/ K. WILLIAM SICKLER
- ---------------------------
K. William Sickler, Trustee
/s/ GAIL A. SICKLER
- ---------------------------
Gail A. Sickler, Trustee
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<PAGE> 9
CONSENT OF SPOUSE
I, Gail A. Sickler, spouse of K. William Sickler, have read and approve
the foregoing Agreement. In consideration of granting of the right to my spouse
to purchase shares of Gadzoox Microsystems, Inc., as set forth in the
Agreement, I hereby appoint my spouse as my attorney-in-fact in respect to the
exercise of any rights under the Agreement and agree to be bound by the
provisions of the Agreement insofar as I may have any rights in said Agreement
or any shares issued pursuant thereto under the community property laws of the
state of California or similar laws relating to marital property in effect in
the state of our residence as of the date of the signing of the foregoing
Agreement.
Dated: April 15, 1996
Signature: /s/ GAIL A. SICKLER
---------------------------
Gail A. Sickler
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<PAGE> 10
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, K. William Sickler and Gail A. Sickler, Trustees,
hereby sell, assign and transfer unto _______________________ (________) shares
of the Common Stock of Gadzoox Microsystems, Inc. standing in my name of the
books of said corporation represented by Certificate No. ______ herewith and do
hereby irrevocably constitute and appoint Wilson, Sonsini, Goodrich & Rosati,
attorney, to transfer the said stock on the books of the within named
corporation with full power of substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between Gadzoox Microsystems, Inc. and the undersigned
dated April 15, 1996.
Dated: ________, 199__
Signature: /s/ K. WILLIAM SICKLER
---------------------------
K. William Sickler, Trustee
---------------------------
/s/ GAIL A. SICKLER
---------------------------
Gail A. Sickler, Trustee
10
<PAGE> 11
EXHIBIT A
INVESTMENT REPRESENTATION STATEMENT
PURCHASER : K. William Sickler
COMPANY : GADZOOX MICROSYSTEMS, INC.
SECURITY : COMMON STOCK
AMOUNT: : 600,000 shares
In connection with the purchase of the above-listed Securities, I, the
Purchaser, represent to the Company the following:
(a) I am sufficiently aware of the Company's business affairs and
financial condition to reach an informed and knowledgeable decision to acquire
the Securities. I am purchasing these Securities for my own account for
investment purposes only and not with a view to, or for the resale in
connection with, any "distribution" thereof for purposes of the Securities Act
of 1933, as amended (the "Securities Act").
(b) I understand that the Securities have not been registered under
the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein. In this connection, I understand that,
in the view of the Securities and Exchange Commission (the "SEC"), the
statutory basis for such exemption may be unavailable if my representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future.
(c) I further understand that the Securities must be held
indefinitely unless subsequently registered under the Securities Act or unless
an exemption from registration is otherwise available (such as Rule 144 or the
resale provisions of Rule 701 under the Securities Act). Moreover, I understand
that the Company is under no obligation to register the Securities. In addition,
I understand that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel for
the Company.
(d) I am familiar with the provisions of Rule 144, promulgated under
the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired,
1
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directly or indirectly, from the issuer thereof (or from an affiliate of such
issuer), in a non-public offering subject to the satisfaction of certain
conditions, including, among other things: (1) The availability of certain
public information about the Company, (2) the resale occurring not less than
two years after the party has purchased, and made full payment for, within the
meaning of Rule 144, the securities to be sold; and, in the case of an
affiliate, or of a non-affiliate who has held the securities less than three
years, (3) the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker, as said term is
defined under the Securities Exchange Act of 1934 (the "Exchange Act") and the
amount of securities being sold during any three month period not exceeding the
specified limitations stated therein, if applicable. The Purchaser further
understands that the resale provisions of Rule 701 will not apply until 90 days
after the Company becomes subject to the reporting obligations under the
Exchange Act (typically upon the effective date of a company's initial public
offerings). There can be no assurances that the requirements of Rule 144 or
Rule 701 will be met, or that the Securities will ever be saleable.
(e) I further understand that at the time I wish to sell the
Securities there may be no public market upon which to make such a sale, and
that, even if such a public market then exists, the Company may not be
satisfying the current public information requirements of Rule 144, and that,
in such event, I would be precluded from selling the Securities under Rule 144
even if the two-year minimum holding period had been satisfied.
(f) I further understand that in the event all of the applicable
requirements of Rule 144 are not satisfied, or that the resale provisions of
Rule 701 are not available, registration under the Securities Act, compliance
with Regulation A, compliance with some other registration exemption or the
notification to the Company of the proposed disposition by me and the
furnishing to the Company of (i) detailed information regarding the
disposition, and (ii) and opinion of my counsel to the effect that such
disposition will not require registration (I understand such counsel's opinion
shall concur with the opinion by counsel for the Company and I shall have been
informed of such compliance) will be required and that, notwithstanding the
fact that Rule 144 is not exclusive, the Staff of the SEC has expressed its
opinion that persons proposing to sell private placement securities other than
in a registered offering and otherwise than pursuant to Rule 144 will have a
substantial burden of proof in establishing that an exemption from registration
is available for such offers or sales, and that such persons and their
respective brokers who participate in such transactions do so at their own risk.
Signature of Purchaser:
/s/ K. WILLIAM SICKLER
----------------------------------------
K. William Sickler
Date: April 15, 1996
-2-
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ELECTION UNDER SECTION 83(b)
OF THE INTERNAL REVENUE CODE OF 1986
The undersigned taxpayer hereby elects, pursuant to the above-referenced
Federal Tax Code, to include in his gross income for the current taxable year,
the amount of any compensation taxable to him in connection with his receipt
of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
<TABLE>
<S> <C> <C>
NAME : TAXPAYER: K. William Sickler SPOUSE: Gail A. Sickler
ADDRESS : 14665 LaRinconada Drive 14665 La Rinconada Dr.
Los Gatos, CA 95030 Los Gatos, CA 95030
IDENTIFICATION NO. OF TAXPAYER: ###-##-#### SPOUSE: ###-##-####
FILE JOINTLY UNDER THIS TAX ID. NO.
TAXABLE YEAR: 1996
</TABLE>
2. The property with respect to which the election is made is described as
follows:
600,000 shares (the "Shares") of the Common Stock of Gadzoox Microsystems,
Inc., (the "Company").
3. The date on which the property was transferred is: April 15, 1996.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on certain
events. This right lapses with regard to a portion of the Shares over
time.
The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is: $.15 per share
6. The amount (if any) paid for such property is: $90,000
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
except with the consent of the Commissioner.
Dated: April 15, 1996 /s/ K. WILLIAM SICKLER
--------------- --------------------------------
K. William Sickler, Taxpayer
/s/ GAIL A. SICKLER
--------------------------------
Spouse
<PAGE> 1
EXHIBIT 16.1
May 20, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the paragraph comprising Change in Independent Accountants included
in the Form S-1 (Registration No. 333-78029) dated May 20, 1999, of Gadzoox
Networks, Inc. and are in agreement with the fourth and fifth sentences of the
paragraph. We have no basis to agree or disagree with any other statements
contained in that paragraph.
Ernst & Young LLP
<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.
San Jose, California ARTHUR ANDERSEN LLP
May 19, 1999
