<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER: 000-26541
GADZOOX NETWORKS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0308899
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
5850 HELLYER AVENUE
SAN JOSE, CA 95138
(408) 360-4950
(ADDRESS, INCLUDING ZIP CODE, OR REGISTRANT'S
PRINCIPAL EXECUTIVE OFFICES AND TELEPHONE
NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Common Stock on December
31, 1999 was 25,776,120 shares.
Page 1 of 31 pages.
<PAGE> 2
GADZOOX NETWORKS, INC.
FORM 10-Q
QUARTER ENDED DECEMBER 31, 1999
INDEX
<TABLE>
<CAPTION>
Page
----
PART I - FINANCIAL INFORMATION
<S> <C>
Item 1. Financial Statements
Condensed Balance Sheets as of December 31, 1999 and March 31, 1999
Condensed Statements of Operations for the Three Months and Nine Months
Ended December 31, 1999 and 1998
Condensed Statements of Cash Flows for the Nine Months Ended
December 31, 1999 and 1998
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risks
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
SIGNATURES
This Form 10-Q contains forward-looking statements (as defined in the
Private Securities Litigation Reform Act of 1995), including but not limited to
statements regarding Gadzoox' expectations, hopes or intentions regarding the
future. Actual results and trends could differ materially from those discussed
in the forward-looking statements. In addition, past trends should not be
perceived as indicators of future performance. Among the factors that could
cause actual results to differ from the forward-looking statements are those
detailed elsewhere in this Quarterly Report in Management's Discussion and
Analysis of Financial Condition and Results of Operations and in Risk Factors,
as well as in Gadzoox' other filings with the Securities and Exchange
Commission.
Page 2 of 31 pages.
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GADZOOX NETWORKS, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------------ ---------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 30,346 $ 12,202
Short-term investments 49,242 -
Accounts receivable, net 9,986 5,981
Inventories 6,163 5,306
Prepaid expenses and other current assets 803 305
--------- ---------
Total current assets 96,540 23,794
Property and equipment, net 5,420 4,553
Other assets 289 251
--------- ---------
$ 102,249 $ 28,598
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of note payable $ 291 $ 371
Current portion of capital lease obligations 1,503 1,080
Accounts payable 5,013 4,488
Compensation related accruals 1,497 705
Deferred revenue and other 1,069 1,238
--------- ---------
Total current liabilities 9,373 7,882
Convertible note 4,290 13,554
Note payable, net of current portion - 196
Capital lease obligations, net of current portion 1,398 1,307
--------- ---------
Total liabilities 15,061 22,939
--------- ---------
Stockholders' equity:
Convertible preferred stock - 69
Common stock 129 28
Additional paid-in capital 124,597 37,081
Deferred compensation (1,461) (2,425)
Accumulated deficit (36,077) (29,094)
--------- ---------
Total stockholders' equity 87,188 5,659
--------- ---------
$ 102,249 $ 28,598
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
financial statements.
Page 3 of 31 pages.
<PAGE> 4
GADZOOX NETWORKS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- -----------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues $ 12,561 $ 5,983 $ 32,852 $ 17,240
Cost of revenues 6,903 4,550 18,642 13,143
-------- -------- -------- --------
Gross margin 5,658 1,433 14,210 4,097
-------- -------- -------- --------
Operating expenses:
Research and development 4,461 3,750 12,919 10,273
Sales and marketing 2,742 1,577 6,544 4,164
General and administrative 959 434 2,587 997
Amortization of deferred compensation 321 184 964 299
-------- -------- -------- --------
Total operating expenses 8,483 5,945 23,014 15,733
-------- -------- -------- --------
Loss from operations (2,825) (4,512) (8,804) (11,636)
-------- -------- -------- --------
Total other income (expense), net 1,027 (51) 1,821 (112)
-------- -------- -------- --------
Net Loss $ (1,798) $ (4,563) $ (6,983) $(11,748)
======== ======== ======== ========
Basic net loss per share $ (0.07) $ (0.93) $ (0.40) $ (2.50)
======== ======== ======== ========
Weighted average shares used in computing 25,614 4,915 17,523 4,704
basic net loss per share ======== ======== ======== ========
Pro forma basic net loss per share $ (0.07) $ (0.24) $ (0.30) $ (0.67)
======== ======== ======== ========
Weighted average shares used in computing
pro forma basic net loss per share 25,614 18,659 23,137 17,532
======== ======== ======== ========
</TABLE>
The condensed notes are an integral part to these condensed
financial statements.
Page 4 of 31 pages.
<PAGE> 5
GADZOOX NETWORKS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (6,983) $(11,748)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,835 1,210
Amortization of deferred compensation 964 299
Accrued interest 393 263
Changes in operating assets and liabilities:
Accounts receivable (4,005) (3,120)
Inventories (857) (2,137)
Prepaid expenses and other assets (536) (309)
Accounts payable and other accrued liabilities 1,107 2,528
-------- --------
Net cash used in operating activities (8,082) (13,014)
-------- --------
Cash Flows from Investing Activities:
Purchases of property and equipment (1,275) (1,186)
Purchase of available for sale investments (49,242) -
-------- --------
Net cash used for investing activities (50,517) (1,186)
-------- --------
Cash Flows from Financing Activities:
Proceeds from convertible note - 15,000
Payments on note payable (276) (257)
Payments on capital lease obligations (914) (570)
Proceeds from issuance of common stock to employees 438 80
Proceeds from issuance of common stock in the initial public offering 84,525 -
Offering costs relating to the issuance of common stock (7,030) -
Proceeds from issuance of preferred stock, net - 10,910
-------- --------
Net cash provided by financing activities 76,743 25,163
-------- --------
Net increase in cash and cash equivalents 18,144 10,963
Cash and cash equivalents at beginning of period 12,202 4,624
-------- --------
Cash and cash equivalents at end of period $ 30,346 $ 15,587
======== ========
Supplemental Cash Flow Information:
Cash paid for interest $ 195 $ 168
======== ========
Property and equipment acquired under capital
lease obligations $ 1,427 $ 1,309
======== ========
Partial conversion of convertible note to
common stock $ 9,617 $ 1,857
======== ========
Conversion of convertible preferred stock into common stock $ 34,219 $ -
======== ========
</TABLE>
The condensed notes are an integral part to these condensed
financial statements.
Page 5 of 31 pages.
<PAGE> 6
GADZOOX NETWORKS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Information for the three and nine months ended
December 31, 1999 is unaudited)
1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
Gadzoox Networks, Inc. ("Gadzoox") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. In the opinion of management,
the disclosures are adequate to make the information not misleading. The
condensed balance sheet as of March 31, 1999, has been derived from the audited
financial statements as of that date, but does not include all disclosures
required by generally accepted accounting principles. These financial statements
and notes should be read in conjunction with the audited financial statements
and notes thereto, included in Gadzoox' Registration Statement on Form S-1 filed
with the Securities and Exchange Commission.
In the opinion of management, the unaudited condensed financial statements
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of financial position, results of operations
and cash flows for the periods indicated. The results of operations for the
three and nine months ended December 31, 1999, are not necessarily indicative of
the results that may be expected for future quarters or the fiscal year ending
March 31, 2000.
2. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share are presented in conformity
with Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
("SFAS No. 128") for all periods presented. In accordance with the Securities
and Exchange Commission Staff Accounting Bulletin No. 98, common stock and
convertible preferred stock issued or granted for nominal consideration prior to
the anticipated effective date of an initial public offering must be included in
the calculation of basic and diluted net income (loss) per share as if such
stock has been outstanding for all periods presented. To date, Gadzoox has not
had any issuances or grants for nominal consideration.
In accordance with SFAS No. 128, basic net income (loss) per share has
been computed using the weighted-average number of shares of common stock
outstanding during the period, less shares subject to repurchase. Pro forma
basic net loss per share has been computed as described above and 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.
Page 6 of 31 pages.
<PAGE> 7
The following table presents the calculation of basic and pro forma
basic net loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ -----------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1999 1998
-------- -------- ----------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net loss $ (1,798) $ (4,563) $ (6,983) $(11,748)
======== ======== ======== ========
Basic:
Weighted average shares of common
stock outstanding 25,749 5,450 17,757 5,339
Less: Weighted average shares of
common stock subject to repurchase (135) (535) (234) (635)
-------- -------- -------- --------
Weighted average shares used in
computing basic net loss per share 25,614 4,915 17,523 4,704
======== ======== ======== ========
Basic net loss per share $ (0.07) $ (0.93) $ (0.40) $ (2.50)
======== ======== ======== ========
Pro forma:
Net loss $ (1,798) $ (4,563) $ (6,983) $(11,748)
======== ======== ======== ========
Shares used above 25,614 4,915 17,523 4,704
Pro forma adjustment to reflect
weighted average effect of
conversion of convertible preferred
stock - 13,744 5,614 12,828
-------- -------- -------- --------
Weighted average shares used in
computing pro forma basic net
loss per shares 25,614 18,659 23,137 17,532
======== ======== ======== ========
Pro forma basic net loss per share $ (0.07) $ (0.24) $ (0.30) $ (0.67)
======== ======== ======== ========
</TABLE>
3. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investment securities with original maturities of three
months or less are considered cash equivalents. Available for sale investments
with original maturities of more than three months are considered short-term
investments. Management determines the appropriate classification of investments
in debt and equity securities at the time of purchase. All of Gadzoox'
investments are classified as available for sale. At December 31, 1999, Gadzoox
held $30,346,000 and $49,242,000 in cash and cash equivalents and short-term
investments, respectively. All investments are stated at fair market value which
approximates cost.
Page 7 of 31 pages.
<PAGE> 8
4. INVENTORIES
Inventories are stated at the lower of cost or market, on a first in, first out
method. Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, March 31,
1999 1999
------ ------
(unaudited)
<S> <C> <C>
Raw materials $2,771 $2,565
Work-in-progress 1,081 210
Finished Goods 2,311 2,531
------ ------
$6,163 $5,306
====== ======
</TABLE>
5. 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 balance at a rate equal to 5.75% per annum
with principal and interest maturing September 2001. As further outlined and
defined in the Agreement, Gadzoox 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 common 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 Gadzoox' consent, conversion of the
Convertible Note may not result in Seagate holding more than 19.9% of Gadzoox'
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 July 1999, in connection with the closing of Gadzoox' initial public
offering, Gadzoox converted approximately $9,617,000 of outstanding principal
and interest into 1,257,074 shares of common stock. At December 31, 1999, there
was approximately $4,290,000 of unpaid principal and interest outstanding under
the Convertible Note which, if converted, would have converted into 560,784
shares of common stock.
6. LEGAL PROCEEDINGS
From time to time, Gadzoox may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business. In May 1999, a
former employee filed a complaint against Gadzoox. Management believes this
claim is without merit and that the resolution of this claim will not have a
material adverse effect on Gadzoox' financial condition or results of
operations. However, litigation is subject to inherent uncertainties, and an
adverse result in this or other matters could arise from time to time that may
harm Gadzoox' business and, financial condition and results of operations.
Page 8 of 31 pages.
<PAGE> 9
7. INITIAL PUBLIC OFFERING
On July 20, 1999, Gadzoox completed its initial public offering of 4,025,000
shares of its common stock, including 525,000 shares sold to the underwriters
upon the exercise of their over-allotment option. The aggregate offering
proceeds of the shares registered was $84,525,000, $5,917,000 of which was
applied toward the underwriters' discounts and commissions. Other expenses
related to the offering were approximately $1,113,000. Gadzoox received net
proceeds of approximately $77,495,000 from the sale of common stock in the
initial public offering.
Concurrent with the closing of the initial public offering, 13,907,399
shares of convertible preferred stock were converted into 13,907,399 shares of
common stock.
8. COMMON STOCK
1999 EMPLOYEE STOCK PURCHASE PLAN
In May 1999, the Board of Directors approved the adoption of Gadzoox'
1999 Employee Stock Purchase Plan (the "Stock Purchase Plan"). The Stock
Purchase Plan was approved by the stockholders on June 19, 1999. 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 Gadzoox' fiscal year, beginning in 2000, and equal to the lesser of (a)
250,000 shares, (b) 1% of the outstanding shares on such date, or (c) 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 an Amended and
Restated 1993 Stock Option Plan (the "Amended Plan"). The Amended Plan was
approved by the stockholders on June 19, 1999 and was effective upon the closing
of Gadzoox' initial public offering on July 20, 1999. 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 Gadzoox' fiscal year,
beginning in 2000, and equal to the lesser of (a) 1,500,000 shares, (b) 5% of
the outstanding shares on such date, or (c) 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"). The Director Plan was approved
by the stockholders on June 19, 1999. The Director Plan 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 annual
increases, beginning with the fiscal year beginning in 2000, sufficient to bring
the number of shares available for future issuance to 50,000 shares. As of
December 31, 1999, options to acquire 25,000 shares of common stock were
outstanding under the Director Plan.
Page 9 of 31 pages.
<PAGE> 10
9. BUSINESS SEGMENTS
During the year ended March 31, 1999, Gadzoox adopted Statement of
Financial Accounting Standards No. 131 "Disclosures About Segments of an
Enterprise and Related Information ("SFAS No. 131") which requires a new basis
of determining reportable business segments, i.e., the management approach. This
approach requires that business segment information used by management to assess
performance and manage company resources be the source for information
disclosure. On this basis, Gadzoox is organized and operates as one business
segment, the development, manufacture, marketing and sales of hubs and switches
for storage area networks.
10. FACILITY LEASE
In October 1999, Gadzoox executed a facility lease for approximately
14,000 square feet of office and development space in a shared facility in
Irvine, California (the "Irvine Facility") and Gadzoox intends to relocate its
Placentia, California development operations to the Irvine Facility upon
completion of construction, which is estimated to occur approximately March
2000. Our lease for the Placentia, California facility expired at the end of
October 1999, and we will continue to rent this facility in the short-term, on a
month-to-month basis.
Payment of rent for the Irvine Facility commences one month following
occupancy at an initial rate of approximately $22,000 per month, triple net,
escalating ratably to approximately $25,000 per month for the last year of the
lease. Gadzoox anticipates its share of the facilities' common costs, utilities
and maintenance to be approximately $7,000 per month. The lease term is five
years and one month from the date of occupancy.
Page 10 of 31 pages.
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the
condensed interim financial statements and the notes thereto included in Item 1
of this Quarterly Report and with Management's Discussion and Analysis of
Financial condition and Results of Operations contained in Gadzoox' Registration
Statement on Form S-1 filed with the Securities and Exchange Commission and
dated July 19, 1999.
FORWARD-LOOKING INFORMATION IS SUBJECT TO RISK AND UNCERTAINTY
Except for the historical information contained herein, the discussions
on this Form 10-Q in general may contain certain forward-looking statements. In
addition, when used in this Form 10-Q, the words "anticipates," "believes,"
"expects" and similar expressions are intended to identify forward-looking
statements. Actual future results could differ materially from those described
in the forward-looking statements as a result of factors discussed in "Risk
Factors" set forth herein, and in Gadzoox' Prospectus filed with the Securities
and Exchange Commission and dated July 19, 1999. Gadzoox cautions the reader,
however, that these lists of risk factors may not be exhaustive. All
forward-looking statements included in this Form 10-Q are based on information
available to Gadzoox on the date hereof. Gadzoox expressly disclaims any
obligation or undertaking to release publicly any updates or changes to these
forward-looking statements that may be made to reflect any future events or
circumstances.
COMPANY OVERVIEW
Gadzoox is a leading provider of hardware and software products for
storage area networks, or SANs. Our SAN hub and switch 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 limitation
of traditional captive storage architecture. We sell our SAN products primarily
through leading original equipment manufacturers ("OEM"), including
Hewlett-Packard Company, Compaq Computer 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 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 December 31, 1999, we had an accumulated deficit of $36,077 and our
net loss for the quarter ended December 31, 1999, was $1,798. 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 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.
Currently, we hold four United States patents for our SAN-related
technology and have four pending patents, 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
Page 11 of 31 pages.
<PAGE> 12
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.
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. We commenced commercial shipment of our Capellix switch products
during the quarter ending December 31, 1999. While sales of Capellix during the
quarter ending December 31, 1999 were approximately 28% of net revenues, we
expect that the majority 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. Also, we may not be successful in the
adoption of new products, in particular our Capellix switch. Additionally, even
if our customers adopt Capellix, we can not assure you that our net revenues
will increase.
We depend on a few key customers. In fiscal 1999, approximately 68% of
our net revenues came from three customers with sales to Compaq Computer
Corporation, Digital Equipment Corporation and Hewlett-Packard Company each
accounting for more than 10% of our net revenues. For the three and nine months
ended December 31, 1999, approximately 61% and 68%, respectively, of our net
revenues came from three customers. For the three and nine months ended December
31, 1999, approximately 20% and 22%, respectively, of our net revenues were from
Compaq Computer Corporation, approximately 10% and 7%, respectively, of our net
revenues were from Tokyo Electron Ltd., and approximately 31% and 35%,
respectively, from Hewlett-Packard Company.
We generally record product net revenues upon shipment except in
circumstances where product return rates cannot be reasonably estimated. Revenue
for sales to one OEM customer is not recognized until the OEM takes delivery
from a third-party warehouse where we inventory products for them. Where product
return rates cannot be reasonably estimated, revenue is recognized upon
sell-through to the end user by the distribution channel partner. We provide
allowances for estimated sales returns 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,
the volume manufacturing pricing we are able to obtain from our contract
manufacturer and other factors.
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.
Page 12 of 31 pages.
<PAGE> 13
Our OEM contracts generally contain additional provisions regarding
product technical specifications, labeling and boxing instructions and other
customization instructions. Several of our OEM sales contracts contain favored
pricing provisions as well as confidentiality provisions. Two of our OEM sales
contracts provide the OEM the right to manufacture our product in the event of a
material default we are unable to cure within a specified time period.
We currently outsource substantially our entire product manufacturing to
Sanmina Corporation, a third-party manufacturer which manufactures our products
in two of their locations in the United States. Our agreement with Sanmina
Corporation provides for two months of rolling purchase orders and rolling
forecasts for 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
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 components used to manufacture our products. Gadzoox
obtains some key components, such as our application specific integrated
circuits, or ASICs, from sole sources and other components, such as optical
transceivers. 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 cost of sales, during the quarter ended December 31, 1999, we
relocated substantially all of our manufacturing operations from Sanmina
Corporation's manufacturing facility in Santa Clara, California to its
manufacturing facility in Guntersville, Alabama. 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.
Page 13 of 31 pages.
<PAGE> 14
QUARTERLY RESULTS OF OPERATIONS
The following table presents our operating results represented by
selected items from the unaudited Condensed Statements of Operations for the
three and nine month periods ended December 31, 1999 and 1998 as a percentage of
net revenues. This table should be read in conjunction with the Condensed
Financial Statements included elsewhere herein.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------- --------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100% 100 % 100 % 100%
Cost of revenues 55 76 57 76
Gross margin 45 24 43 24
Operating expenses:
Research and development 36 63 39 59
Sales and marketing 22 26 20 24
General and administrative 8 7 8 6
Amortization of deferred compensation 3 3 3 2
---- ---- ---- ----
Total operating expenses 69 99 70 91
---- ---- ---- ----
Loss from operations (24) (75) (27) (67)
Total other income (expense), net 8 (1) 6 (1)
---- ---- ---- ----
Net Loss (16)% (76)% (21)% (68)%
==== ==== ==== ====
</TABLE>
Net Revenues
Net revenues for the three months ended December 31, 1999, increased by
approximately $6,578 or 110% to $12,561 compared to net revenues of $5,983 in
the same quarter in fiscal 1998. Net revenues for the nine months ended December
31, 1999, increased by approximately $15,612 or 91% to $32,852 from $17,240 in
the same period of fiscal 1998. For the quarter ended December 31, 1999,
approximately 31% of our net revenues came from sales to Hewlett-Packard
Company, approximately 10% of our net revenues came from Tokyo Electron Ltd. and
approximately 20% of our net revenues came from sales to Compaq Computer
Corporation. For the quarter ended December 31, 1998, approximately 24%, 37% and
13% of our net revenues came from sales to Hewlett-Packard Company, Compaq
Computer Corporation and Data General, respectively.
The increase in net revenues is primarily attributable to greater sales
of our hub products and the first sales of our Capellix switch products which
approximated 28% of our net revenues for the three months ended December 31,
1999. For the three and nine months ended December 31, 1999, 61% and 68%,
respectively, of our revenues came from sales to OEM customers as compared to
85% and 83% of net revenues represented by sales to OEM customers during the
quarter and nine months ended December 31, 1998, respectively. International
sales represented 30% and 26% of our net revenues for the quarter ended December
31, 1999 and December 31, 1998, respectively.
Page 14 of 31 pages.
<PAGE> 15
Gross Margin
Gross margin increased 295% to $5,658 for the quarter ended December 31,
1999, up from $1,433 for quarter ended December 31, 1998. For the nine months
ended December 31, 1999, gross margin increased by 247% to $14,210, up from
$4,097 in the nine months ended December 31, 1998. Actual gross margin for the
quarter ended December 31, 1999, was 45%, compared to actual gross margin of 24%
for the quarter ended December 31, 1998. Actual gross margin for the nine months
ended December 31, 1999, was 43%, compared to actual gross margin of 24% for the
nine months ended December 31, 1998. The increase in gross margin is primarily
due to higher sales volumes which have resulted in economies of scale, cost
savings relating to our transition to Sanmina Corporation's Guntersville,
Alabama facility, higher sales volume to distribution channel partners for which
gross margins are typically higher than for OEM customers and the mix of
products sold, some of which derive higher gross margins. For the quarter ended
December 31, 1998, Gadzoox used the services of a prior contract manufacturer
and completed the transition to Sanmina Corporation for all manufacturing during
the quarter ended March 31, 1999. Prior cost savings may not be indicative of
cost savings in the future.
Research and Development Expenses
Research and development expenses consist primarily of salaries and
related personnel costs, 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 by 19% to $4,461 for the
quarter ended December 31, 1999, up from $3,750 for the quarter ended December
31, 1998. For the nine months ended December 31, 1999, research and development
expenses increased by 26% to $12,919 from $10,273 in the same period in fiscal
1998. These increases are primarily due to additional research and development
personnel, including the addition of our strategic research and development team
and our two ASIC development teams, and the cost of development of the Capellix
switch product and other future products. We believe that a significant level of
investment in 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 continue to increase in absolute dollars.
Sales and Marketing Expenses
Sales and marketing expenses consist primarily of salaries, commissions
and other related expenses for personnel engaged in marketing, sales and
customer engineering support functions, as well as, costs associated with trade
shows, promotional activities, travel expenses and other related expenses.
Sales and marketing expenses increased by 74% to $2,742 during the
quarter ended December 31, 1999, up from $1,577 for the quarter ended December
31, 1998. For the nine months ended December 31, 1999, sales and marketing
expenses increased by 57% to $6,544 from $4,164 in the same period in fiscal
1998. The increases are primarily attributable to increased staffing, the cost
of supporting OEM customers, trade show participation, providing sales support
for distribution customers through Gadzoox Associates in Networking ("GAIN")
program, comprehensive sales tools, in-depth training and other marketing and
sales activities.
We intend to continue to significantly expand our sales and marketing
operations and efforts, both domestically and internationally, in order to
increase market awareness and to generate additional sales of
Page 15 of 31 pages.
<PAGE> 16
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 additional 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 continue to increase in
absolute dollars in the future.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and
related expenses for executive, finance, accounting, information technology,
facilities and human resources personnel, recruiting expenses, professional fees
and costs associated with expanding our information systems.
General and administrative expenses increased by 121% to $959 for the
quarter ended December 31, 1999, up from $434 for the quarter ended December 31,
1998. For the nine months ended December 31, 1999, general and administrative
expenses increased by 159% to $2,587 from $997 in the same period in fiscal
1998. These increases are primarily attributable to increased facility costs
related to relocation of our corporate headquarters to a new facility in
November 1998 and increased costs associated with operating as a public company.
We expect general and administrative expenses to continue 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
approximately $321 and $184 for the quarters ended December 31, 1999 and 1998,
respectively. For the nine months ended December 31, 1999, compared to December
31, 1998, we amortized deferred compensation of approximately $964 and $299,
respectively. The amortization expense relates to options awarded to employees
in all operating expense 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.
Other Income (Expense), net
Interest income, net of interest expense, related to our debt and lease
obligations, includes income from our cash and cash equivalents and short-term
investments, net of expenses related to our financing obligations.
Interest income, net of interest expense, totaled $1,027 for the quarter
ended December 31, 1999. For the quarter ended December 31, 1998, interest
expense, net of interest income, totaled $51. This increase is primarily due to
interest income earned from investment of the net proceeds received from the
issuance of common stock from our initial public offering in July 1999 and by
lower interest expense charged on the convertible note due to partial conversion
of the note in connection with our initial public offering. This increase was
partially offset by increased interest expense charged on higher capital lease
obligations. For the nine months ended December 31, 1999, interest income, net
of interest expense totaled $1,821 compared to interest expense net of interest
income of $112 for the same period in 1998.
Page 16 of 31 pages.
<PAGE> 17
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, equipment financing and proceeds from our initial public offering.
For the nine months ended December 31, 1999, we used $8,082 in net cash
for operations compared to $13,014 for the same period in 1998. This represents
a decrease of 38% and is primarily due to a decrease in our net loss to $6,983
in the nine months ended December 31, 1999, compared to our net loss of $11,748
for the same period in fiscal 1998.
For the nine months ended December 31, 1999, Gadzoox used $1,275 in cash
from investing activities to acquire property and equipment compared to $1,186
used in the same period in 1998. Additionally, we invested $49,242 of the
proceeds from our initial public offering during the nine months ended December
31, 1999 in short-term investments.
Net cash provided by financing activities was $76,743 and $25,163 for
the nine months ended December 1999 and 1998, respectively. For the nine months
ended December 31, 1999, the primary source of cash generation was from the sale
of common stock in our initial public offering. Additionally, we used debt and
leases to partially finance operations and capital purchases, and we plan to
continue this practice.
For the nine months ended December 31, 1999 and 1998, we acquired $1,427
and $1,309, respectively, in equipment under capitalized leases. At December 31,
1999, we had $2,901 in outstanding capitalized lease obligations.
Cash, cash equivalents and short-term investments totaled $79,588 at
December 31, 1999, up from $12,202 at March 31, 1999. This increase is primarily
due to the cash raised from the sale of common stock in our initial public
offering. This increase was partially offset by net cash used in operations of
$8,082 and capital expenditures of $1,275.
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 our
existing cash balances, credit facilities and cash generated from future
operations will be sufficient to fund our operations for at least the next 12
months. However, we may require additional financing within this time frame and
there can be no assurances that this additional funding, if needed, will be
available on terms acceptable to us or at all.
Year 2000 Readiness
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. Our transition of date records
to the year 2000 has been uneventful, however, other situations such as hardware
and software not used every day could cause problems when first used during the
year 2000. Therefore, problems could still occur.
Page 17 of 31 pages.
<PAGE> 18
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. To date, we have not received any notification
from our customers that our products are not year 2000 compliant.
We do not represent to our customers that storage area networks and
local area networks that incorporate our products will not have problems with
year 2000 issues, since these networks incorporate hardware and software
products supplied by other companies. We cannot evaluate the readiness of our
products for year 2000 with the innumerable combinations possible with other
companies' products. We may, therefore, face claims or complaints based on year
2000 problems related to our customers' networks, even when our products are not
the source of their problems. 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 previously completed the identification of year 2000 issues
and made system updates, upgrades and replacements of non-ready systems. Systems
include internal hardware and software as well as external service provided by
other companies, including contract manufacturing, product development,
information processing and facility services. We have not experienced any year
2000 issues to date and we do not believe that we will have any significant
problems later during the year 2000 relating to any of our internal systems. The
majority of our software, hardware and operating systems have been acquired as
new products in the last two years. Most of it is shrink-wrapped product and is
still maintained by existing vendors. We do not believe that we have any
significant systems that contain embedded chips that are not year 2000 compliant
that may cause us problems later in the year 2000. Most of our hardware is made
of branded components that have been acquired in the last two years from
manufacturers that are still in business. We are not using legacy hardware or
software that would be more likely to have calendar issues because of its age.
Based on our efforts to date, including our cost of analysis of our year
2000 readiness, the total cost of year 2000 preparation and remediation has been
immaterial to our business.
Year 2000 Risks. An internal or external business disruption caused by
an issue later in the year 2000 could interrupt our operations and damage our
relationships with our customers. An internal disruption unique to us could give
competitive advantages to our competitors. Failure of our internal systems and
critical external services to continue to be year 2000 compliant could delay
order processing, issuing invoices or development and shipment of products. The
cost of recovery from failures could be significant.
We are unable to determine whether these or other year 2000 failures
could still occur and have a potentially 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.
Page 18 of 31 pages.
<PAGE> 19
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this Form 10-Q for the quarter ended December 31, 1999.
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 occur, 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. See also page 2 of this document for
discussion of forward-looking statements.
WE HAVE INCURRED SIGNIFICANT LOSSES IN EVERY FISCAL YEAR AND FISCAL QUARTER
SINCE OUR INCEPTION AND WE MAY NEVER BECOME PROFITABLE.
We have incurred significant losses since inception and expect to
continue to incur losses on both a quarterly and annual basis for the
foreseeable future. As of December 31, 1999, our accumulated deficit was $36.1
million. From inception through the fiscal year ended March 31, 1999, our net
loss was $29.1 million, and for the nine months ended December 31, 1999, our net
loss was $7.0 million. Although our net revenues have grown in recent quarters,
we may not be able to sustain this growth, and we may not realize sufficient net
revenues to achieve profitability. We also expect to incur significant product
development, sales and marketing and administrative expenses and, as a result,
we will need to generate increased net revenues to achieve profitability.
Further, even if we achieve profitability, given the competition in, and the
evolving nature of the storage area networking market, we may not be able to
sustain or increase profitability on a quarterly or annual basis.
DUE TO OUR LIMITED OPERATING HISTORY, WE MAY HAVE DIFFICULTY ACCURATELY
PREDICTING REVENUES FOR FUTURE PERIODS AND APPROPRIATELY BUDGETING FOR EXPENSES,
AND, BECAUSE MOST OF OUR EXPENSES ARE FIXED IN THE SHORT-TERM, WE MAY NOT BE
ABLE TO DECREASE OUR EXPENSES IN A TIMELY MANNER TO OFFSET ANY UNEXPECTED
SHORTFALL IN REVENUES.
We have generated net revenues for less than five years and, thus, we
have only a short history from which to predict future net revenues. This
limited operating experience, combined with the rapidly evolving nature of the
storage area network market in which we sell our products, reduces our ability
to accurately forecast our quarterly and annual revenue. Further, we plan our
operating expenses based primarily on these revenue projections. Because most of
our expenses are fixed in the short-term or incurred in advance of anticipated
revenue, we may not be able to decrease our expenses in a timely manner to
offset any unexpected shortfall in revenue. For example, in July 1998, Digital
Equipment Corporation cancelled orders for our Bitstrip product, which resulted
in a corresponding decrease in net revenues. If a similar situation were to
occur in the future, we may incur additional unexpected losses which could
seriously harm our business. For further financial information relating to our
business, see "Notes to Condensed Financial Statements" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
WE HAVE A HISTORY OF QUARTERLY AND ANNUAL FLUCTUATIONS IN OUR NET REVENUES AND
OPERATING RESULTS, AND EXPECT THESE FLUCTUATIONS TO CONTINUE, WHICH MAY RESULT
IN VOLATILITY IN OUR STOCK PRICE.
Our quarterly and annual net revenues and operating results have varied
significantly in the past and are likely to vary significantly in the future due
to a number of factors, many of which are outside of our control. The primary
factors that may cause our quarterly net revenues and operating results to
fluctuate include the following:
Page 19 of 31 pages.
<PAGE> 20
- fluctuations in demand for our products and services
- the timing of customer orders and product implementations,
particularly large orders from our customers
- our ability to develop, introduce, ship and support new products and
product enhancements
- the rate of adoption of storage area networks as an alternative to
existing data storage and management systems
- announcements and new product introductions by our competitors and
deferrals of customer orders in anticipation of new products, services
or product enhancements introduced by us or our competitors
- decreases in the prices at which we can sell our products
- our ability to obtain sufficient supplies of components, including
sole or limited source components, at expected prices
- 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.
BECAUSE WE DEPEND ON A FEW KEY ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS, THE
LOSS OF ANY OF THESE CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR NET REVENUES.
We depend on a few key original equipment manufacturer customers. In
fiscal 1999, approximately 68% of our net revenues came from three customers
with sales to Compaq Computer Corporation, Digital Equipment Corporation and
Hewlett-Packard Company each accounting for more than 10% of our net revenues.
For the nine months ended December 31, 1999, approximately 22% of our net
revenues came from Compaq Computer Corporation and approximately 35% from
Hewlett-Packard Company. In fiscal 1998, approximately 69% of our net revenues
came from sales to Hewlett-Packard Company and Digital Equipment Corporation.
Although we intend to expand our original equipment manufacture customer base,
we anticipate that our operating results will continue to depend on sales to a
relatively small number of customers. None of our current customers have any
minimum purchase obligations, and they may stop placing orders with us at any
time, regardless of any forecast they may have previously provided. The loss of
any of our key customers, or a significant reduction in sales to those
customers, could significantly reduce our net revenues. For example, in July
1998, Digital Equipment Corporation cancelled orders for our Bitstrip product,
and in December 1998, Hewlett-Packard Company unexpectedly reduced orders for
our Gibraltar 10-port product. Digital Equipment Corporation's order
cancellation resulted in a reduction of anticipated net revenues by
approximately 12% for the fiscal year ended March 31, 1999.
THE STORAGE AREA NETWORK MARKET IN WHICH WE COMPETE IS NEW AND UNPREDICTABLE,
AND IF THIS MARKET DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE, OUR BUSINESS
WILL SUFFER.
The market for storage area networks and related hub and switch products
has only recently begun to develop and is rapidly evolving. Because this market
is new, it is difficult to predict its potential size or future growth rate. Our
products are used exclusively in storage area networks. Accordingly, wide spread
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. The speed at which customers adopt current
and new products for storage area
Page 20 of 31 pages.
<PAGE> 21
networks is highly unpredictable. 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
- predict and base our products on standards which ultimately become
industry standards
- predict and deliver new and innovative products demanded by the
storage area marketplace.
In addition, storage area networks are often implemented in connection
with deployment of new storage systems and servers. Accordingly, our future
success is also substantially dependent on the market for new storage systems
and servers.
WE HAVE LIMITED PRODUCT OFFERINGS AND OUR BUSINESS MAY SUFFER IF DEMAND FOR ANY
OF THESE PRODUCTS DECLINES OR FAILS TO DEVELOP AS WE EXPECT.
We derive a substantial portion of our net revenues from a limited
number of products. Specifically, in fiscal 1999 and the first nine months of
fiscal 2000, the majority of our net revenues were derived from our hub
products. We expect that net revenues from our hub products will continue to
account for a substantial portion of our total net revenues for the foreseeable
future. Although we introduced our Capellix switch in May 1999 with initial
commercial shipments occurring during the quarter ended December 31, 1999, there
is no assurance that this product will be adopted by our OEM or distribution
customers or that significant net revenues would be derived if adopted. As a
result, for the foreseeable future, we will continue to be subject to the risk
of a significant decrease in net revenues if demand for our hub products
decline. Therefore, continued market acceptance of our hub products and market
acceptance of our switch products is critical to our future success. Factors
that may affect the market acceptance of our products, some of which are beyond
our control, include the following:
- growth and changing requirements of the storage area network and hub
and switch product markets
- availability, price, quality and performance of competing products and
technologies
- performance, quality, price and total cost of ownership of our
products
- successful development of our relationships with existing and
potential original equipment manufacturer customers and distribution
channel partners.
OUR BUSINESS WILL SUFFER IF WE FAIL TO DEVELOP AND SUCCESSFULLY INTRODUCE NEW
AND ENHANCED PRODUCTS THAT MEET THE CHANGING NEEDS OF OUR CUSTOMERS.
Our future success depends upon our ability to address the rapidly
changing storage area network market including changes in relevant industry
standards and the changing needs of our customers by developing and introducing
high-quality, technologically-progressive, cost-effective products, product
enhancements and services on a timely basis. For example, in May 1999, we
announced the launch of our Capellix switch and commenced initial shipments in
the quarter ended December 31, 1999. Our future net revenue 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 time
frame we expect. Further, we cannot be certain of the demand for, and market
acceptance of, these and other new products. In addition, we must manage
successfully the introduction of new or enhanced products to minimize disruption
in our customers' ordering patterns, avoid excessive levels of older product
inventories and ensure that adequate supplies of new products can be delivered
to meet our customers' demands. Our net revenues may be
Page 21 of 31 pages.
<PAGE> 22
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 WILL BE UNABLE TO MANUFACTURE OR SELL OUR PRODUCTS IF OUR SOLE CONTRACT
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 and
Guntersville, Alabama facilities. Sanmina Corporation is not obligated to supply
products to us for any specific period, or in any specific quantity, except as
may be provided in a particular purchase order which has been accepted by
Sanmina Corporation. If Sanmina Corporation experiences delays, disruptions,
capacity constraints or quality control problems in its manufacturing
operations, then product shipments to our customers could be delayed, which
would negatively impact our net revenues and our competitive position and
reputation. Further, our business would be harmed if we fail to effectively
manage the manufacture of our products. We generally place orders with Sanmina
Corporation at least two months prior to scheduled delivery of products to our
customers. Accordingly, if we inaccurately forecast demand for our products, we
may be unable to obtain adequate manufacturing capacity from Sanmina Corporation
or adequate quantities of components to meet our customers' delivery
requirements or we may accumulate excess inventories. In addition, we anticipate
that we may relocate our manufacturing operations to other Sanmina Corporation
manufacturing facilities in the future. We could experience difficulties and
disruptions in the manufacture of our products while we transition to new
facilities. 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,
or other third party manufacturers, to rapidly achieve volume production.
Although we have not experienced supply problems with Sanmina Corporation, we
have experienced delays in product deliveries from one of our former contract
manufacturers. Moreover, we may in the future need to find a new contract
manufacturer that can manufacture our products in higher volume and at lower
costs. We may not find a contract manufacturer that meets our needs.
Additionally, qualifying a new contract manufacturer and commencing volume
production is expensive and time consuming. If we are required or choose to
change contract manufacturers, we may lose net revenues and our customer
relationships may suffer.
BECAUSE WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR KEY
COMPONENTS, WE ARE SUSCEPTIBLE TO SUPPLY SHORTAGES THAT COULD ADVERSELY AFFECT
OUR OPERATING RESULTS.
We depend upon a single source for each type of our application-specific
integrated circuits, or ASICs, and limited sources of supply for several key
components, including power supplies, chassis and optical transceivers. We have
in the past experienced and may in the future experience shortages of, or
difficulties in acquiring, these components. If we are unable to buy these
components, we will not be able to manufacture our products on a timely basis
which would harm our business.
BECAUSE WE ORDER COMPONENTS AND MATERIALS BASED ON ROLLING FORECASTS, WE MAY
OVERESTIMATE OR UNDERESTIMATE OUR COMPONENT AND MATERIAL REQUIREMENTS, WHICH
COULD INCREASE OUR COSTS OR PREVENT US FROM MEETING CUSTOMER DEMAND.
We use rolling forecasts based on anticipated product orders to
determine our component requirements. Lead times for materials and components
that we order vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for such components. As a
result, our component requirement forecasts may not be accurate. If we
overestimate
Page 22 of 31 pages.
<PAGE> 23
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.
OUR RELIANCE ON ORIGINAL EQUIPMENT MANUFACTURER CUSTOMERS AND DISTRIBUTION
CHANNEL PARTNERS AND THE LENGTHY PROCESS REQUIRED TO ADD THESE PARTNERS MAY
IMPEDE THE GROWTH OF OUR NET REVENUES.
We rely on original equipment manufacturer customers and distribution
channel partners to distribute and sell our products. As a result, our success
depends substantially on (1) our ability to initiate, manage and expand our
relationships with significant original equipment manufacturer customers, (2)
our ability to attract distribution channel partners that will sell our products
and (3) the sales efforts of these original equipment manufacturer customers and
distribution channel partners. Our original equipment manufacturer customers
typically conduct significant evaluation, testing, implementation and acceptance
procedures before they begin to market and sell new technologies, including our
products. Based on our experience with our larger original equipment
manufacturer customers, this evaluation process is lengthy and has historically
been as long as nine months. This process is also complex and may require
significant sales, marketing and management efforts on our part. The complexity
of this process increases if we must qualify our products with multiple
customers at the same time. In addition, once our products have been qualified,
the length of the sales cycle of each of our original equipment manufacturer
customers may vary depending upon whether our products are being bundled with
another product or are being sold as an option or add-on. Sales to distribution
channel partners may also require lengthy sales and marketing cycles. As a
result, we may expend significant resources in developing partner relationships
before recognizing any revenue. We may not be able to manage and expand our
relationships with original equipment manufacturer customers and distribution
channel partners successfully and they may not market our products successfully.
Moreover, our agreements with original equipment manufacturer customers and
distribution channel partners have no minimum purchase commitments. Our failure
to manage and expand our relationships with original equipment manufacturer
customers and distribution channel partners or their failure to market our
products could substantially reduce our net revenues and seriously harm our
business.
OUR OPERATING RESULTS MAY SUFFER BECAUSE OF COMPETITION IN THE STORAGE AREA
NETWORK MARKET, AS WELL AS ADDITIONAL COMPETITION FROM DATA NETWORKING COMPANIES
AND ENTERPRISE SOFTWARE DEVELOPERS.
The market for our storage area network hub and switch products is
competitive, and is likely to become even more competitive. In the storage area
network market, our current competitors include Ancor Communications, Inc.,
Brocade Communications Systems, Inc., Emulex Corporation and Vixel Corporation.
In addition to these companies, we expect new storage area network competitors
to emerge. In the future, we may also compete against data networking companies
which may develop storage area network products. Furthermore, although we
currently offer products that complement the software products offered by Legato
Systems, Inc. and Veritas Software Corporation, they and other enterprise
software developers may in the future compete with us. We also compete with
providers of data storage solutions that employ traditional storage
technologies, including small computer system interface-based technology such as
Adaptec, Inc., LSI Logic Corporation and QLogic Corporation. Increased
competition could result in pricing pressures, reduced sales, reduced margins,
reduced profits, reduced market share or the failure of our products to achieve
or maintain market acceptance. Some of our competitors and potential competitors
have longer operating histories, greater name recognition, access to larger
customer bases, more established distribution channels or substantially greater
resources than we have. As a result, they may be able to respond more quickly
than we can to new or changing opportunities, technologies, standards or
customer requirements. Moreover, we have only recently begun to offer storage
area network
Page 23 of 31 pages.
<PAGE> 24
switch products. Therefore, we may not be able to compete successfully in the
storage area network switch product market.
IF WE CANNOT INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER
MARGIN PRODUCTS TO OFFSET ANTICIPATED REDUCTIONS IN THE AVERAGE UNIT PRICE OF
OUR PRODUCTS, OUR OPERATING RESULTS MAY SUFFER.
Although we have not experienced an overall decrease in the average
selling prices of our products, we anticipate that as products in the storage
area market become more commoditized, the average unit price of our products may
decrease in the future in response to changes in product mix, competitive
pricing pressures, new product introductions by us or our competitors or other
factors. If we are unable to offset the anticipated decrease in our average
selling prices by increasing our sales volumes, our net revenues will decline.
In addition, to maintain our gross margins, we must continue to reduce the
manufacturing cost of our products. Further, as average unit prices of our
current products decline, we must develop and introduce new products and product
enhancements with higher margins. If we cannot maintain our gross margins, our
business could be seriously harmed, particularly if the average selling price of
our products decreases significantly.
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS,
WHICH COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR NET REVENUES.
Networking products frequently contain undetected software or hardware
errors when first introduced or as new versions are released. Our products are
complex and we have from time to time found errors in existing products, and we
may from time to time find errors in our existing, new or enhanced products. In
addition, our products are combined with products from other vendors. As a
result, should problems occur, it may be difficult to identify the source of the
problem. The occurrence of hardware and software errors, whether caused by our
or other vendors' 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 relationship problems.
IF WE DO NOT HIRE, RETAIN AND INTEGRATE HIGHLY SKILLED MANAGERIAL, ENGINEERING,
SALES, MARKETING, FINANCE AND OPERATIONS PERSONNEL, OUR BUSINESS MAY SUFFER.
Our success depends to a significant degree upon the continued
contributions of our key personnel in engineering, sales, marketing, finance and
operations, many of whom would be difficult to replace. We do not maintain key
person life insurance on most of our key personnel and do not have employment
contracts with any of our key personnel. The loss of the services of any of our
key personnel could have a negative impact on our business. We also believe that
our success depends to a significant extent on the ability of our key personnel
to operate effectively, both individually and as a group. Many of our employees
have only recently joined us. If we are unable to integrate new employees in a
timely and cost-effective manner, our operating results may suffer. We believe
our future success will also depend in large part upon our ability to attract
and retain highly skilled managerial, engineering, sales, marketing, finance and
operations personnel. Competition for these people is intense, especially in the
San Francisco Bay area where our operations are headquartered. In particular, we
have experienced difficulty in hiring qualified ASIC, software, system, test and
customer support engineers and we may not be successful in attracting and
retaining individuals to fill these positions. If we are unable to attract or
retain qualified personnel in the future, or if we experience delays in hiring
required personnel, particularly qualified engineers and sales personnel, our
ability to develop, introduce and sell our products could be harmed. In
addition, companies in our industry whose employees accept positions with
competitors frequently claim that their competitors
Page 24 of 31 pages.
<PAGE> 25
have engaged in unfair hiring practices. We may be subject to such claims in the
future as we seek to hire qualified personnel. Any claim of this nature could
result in material litigation. We could incur substantial costs in defending
ourselves against these claims, regardless of their merits.
WE HAVE EXPERIENCED A PERIOD OF RAPID GROWTH, AND IF WE ARE NOT ABLE TO
SUCCESSFULLY MANAGE THIS AND FUTURE GROWTH, OUR BUSINESS MAY SUFFER.
We have recently experienced a period of rapid growth. At March 31,
1997, we had a total of 38 employees, and at December 31, 1999, we had a total
of 167 employees. We plan to continue to hire new employees to expand our
operations significantly to pursue existing and potential market opportunities.
This growth will place a significant demand on our management and our
operational resources. In order to manage growth effectively, we must implement
and improve our operational systems, procedures and controls on a timely basis.
Our key personnel have limited experience managing this type of growth. If we
cannot manage growth effectively, our business could suffer.
BECAUSE OUR INTELLECTUAL PROPERTY IS CRITICAL TO THE SUCCESS OF OUR BUSINESS,
OUR OPERATING RESULTS WOULD SUFFER IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY.
Because our products rely on proprietary technology and will likely
continue to rely on technological advancements for market acceptance, we believe
that the protection of our intellectual property rights will be critical to the
success of our business. To protect our intellectual property rights, we rely on
a combination of patent, copyright, trademark and trade secret laws and
restrictions on disclosure. We also enter into confidentiality or license
agreements with our employees, consultants and corporate partners, and control
access to and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may copy or otherwise obtain and use our products or technology.
Monitoring unauthorized use of our products is difficult and the steps we have
taken may not prevent unauthorized use of our technology, particularly in
foreign countries where the laws may not protect our proprietary rights as fully
as in the United States. If we are unable to protect our intellectual property
from infringement, other companies may be able to use our intellectual property
to offer competitive products at lower prices. We may not be able to effectively
compete against these companies.
WE RELY HEAVILY ON OUR INTELLECTUAL PROPERTY, AND EFFORTS TO PROTECT IT MAY
CAUSE US TO BECOME INVOLVED IN COSTLY AND LENGTHY LITIGATION WHICH COULD
SERIOUSLY HARM OUR BUSINESS.
Although we are not currently involved in any intellectual property
litigation, we may be a party to litigation in the future either to protect our
intellectual property or as a result of an alleged infringement of others'
intellectual property. These claims and any resulting litigation could subject
us to significant liability for damages and could cause our proprietary rights
to be invalidated. Litigation, regardless of the merits of the claim or outcome,
would likely be time-consuming and expensive to resolve and would divert
management time and attention. Any potential intellectual property litigation
could also force us to do one or more of the following:
- stop using the challenged intellectual property or selling our
products or services that incorporate it
- obtain a license to use the challenged intellectual property or to
sell products or services that incorporate it, which license may not
be available on reasonable terms, or at all
- redesign those products or services that are based on or incorporate
the challenged intellectual property.
Page 25 of 31 pages.
<PAGE> 26
If we are forced to take any of the foregoing actions, we may be unable
to manufacture and sell our products, and our net revenues would be
substantially reduced.
IF WE, OUR KEY SUPPLIERS OR OUR CUSTOMERS FAIL TO BE READY FOR THE YEAR 2000
CALENDAR CHANGE, OUR BUSINESS MAY BE DISRUPTED AND OUR NET REVENUES MAY DECLINE.
The year 2000 issue refers to the potential for disruption to business
activities caused by system failures or miscalculations that are triggered by
advancement of date records past the year 1999. A failure due to year 2000
issues involves numerous risks including:
- potential product warranty or other claims from our customers
- negative impact on market demand for storage area networks or related
hub and switch products until preparations for the calendar change by
existing and potential customers are complete
- manufacturing, information, facility and development systems
problems, both those that are unique to us and those that affect
geographical areas where our business and employees reside.
Although we are past January 1, 2000, and to date have not experienced
any material problems related to the year 2000 issue, we may yet discover that
our current products, any of our new products or any product enhancements we
develop in the future may 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 may still find problems with our internal systems.
In this event, our business may be adversely affected and we may experience
delays or disruptions in sales or deliveries of our product.
INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS AFFECTING OUR BUSINESS EVOLVE
RAPIDLY, AND IF WE CANNOT DEVELOP PRODUCTS THAT ARE COMPATIBLE WITH THESE
EVOLVING STANDARDS, OUR BUSINESS WILL SUFFER.
Our products must comply with industry standards. For example, in the
United States, our products must comply with various regulations and standards
defined by the Federal Communications Commission. Internationally, our products
are also required to comply with standards established by authorities in various
countries. Any new products and product enhancements that we introduce in the
future must also meet industry standards at the time they are introduced.
Failure to comply with existing or evolving industry standards or to obtain
timely domestic or foreign regulatory approvals or certificates could materially
harm our business. Our products comprise only a part of the entire storage area
network. All components of the storage area network must comply with the same
standards in order to operate efficiently together. We depend on companies that
provide other components of the storage area network to support the industry
standards as they evolve. Many of these companies are significantly larger and
more influential in effecting industry standards than we are. Some industry
standards may not be widely adopted or they may not be implemented uniformly,
and competing standards may emerge that may be preferred by original equipment
manufacturer customers or end users. If larger companies do not support the same
industry standards that we do, or if competing standards emerge, market
acceptance of our products could suffer.
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES WHICH WILL SUBJECT US TO
ADDITIONAL BUSINESS RISKS.
For the nine months ended December 31, 1999, 30% of our net revenues
were from international sales activities, and for the fiscal year ended March
31, 1999, 21% of our net revenues were from international sales activities. We
plan to increase our international sales activities. Our international sales
will be limited if we cannot establish relationships with international
distributors, establish additional foreign operations, expand international
sales channel management, hire additional personnel and develop relationships
with international service providers. Even if we are able to successfully
continue
Page 26 of 31 pages.
<PAGE> 27
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
- political and economic instability.
To date, none of our international net revenues and costs have been
denominated in foreign currencies. As a result, an increase in the value of the
U.S. dollar relative to foreign currencies could make our products more
expensive and thus less competitive in foreign markets. A portion of our
international net revenues may be denominated in foreign currencies in the
future, which would subject us to risks associated with fluctuations in those
foreign currencies.
WE MAY BECOME INVOLVED IN COSTLY AND TIME-CONSUMING LITIGATION THAT MAY
SUBSTANTIALLY INCREASE OUR COSTS AND THEREBY HARM OUR BUSINESS.
We may from time to time become involved in various lawsuits and legal
proceedings which arise in the ordinary course of our business. For example, in
May 1999, a former employee filed a complaint against us. We believe this claim
is without merit and that resolution of this claim will not have a material
adverse effect on our financial condition. However, litigation is subject to
inherent uncertainties, and an adverse result in this or other matters that may
arise from time-to-time may harm our business.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS' EQUITY AND
CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.
As part of our strategy, we expect to review opportunities to buy other
businesses or technologies that would complement our current products, expand
the breadth of our market or enhance our technical capabilities, or that may
otherwise offer growth opportunities. While we have no current agreements or
negotiations underway, we may buy businesses, products or technologies in the
future. In the event of any future purchases, we could:
- issue stock that would dilute our current stockholders' percentage
ownership
- incur debt
- assume liabilities.
These purchases could also involve numerous risks, including:
- problems integrating the purchased operations, technologies or
products
- unanticipated costs
- diversion of management's attention from our core business
- adverse effects on existing business relationships with suppliers and
customers
- risks associated with entering markets in which we have no or limited
prior experience
- 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.
As of December 31, 1999, our executive officers and directors and their
affiliates beneficially owned, in the aggregate, approximately 66% of our
outstanding common stock. As a result, these stockholders may be able to
exercise significant control over all matters requiring stockholder approval,
Page 27 of 31 pages.
<PAGE> 28
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.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL OF OUR COMPANY AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.
Provisions of our certificate of incorporation and bylaws may discourage, delay
or prevent a merger or acquisition that a stockholder may consider favorable.
These provisions include:
- authorizing our board of directors to issue preferred stock without
stockholder approval
- providing for a classified board of directors with staggered,
three-year terms
- prohibiting cumulative voting in the election of directors
- requiring super-majority voting to effect significant amendments to
our certificate of incorporation and bylaws
- limiting the ability of stockholders to call special meetings
- prohibiting stockholder actions by written consent
- 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.
IF WE ARE UNABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, WE MAY BE UNABLE TO
DEVELOP OR ENHANCE OUR PRODUCTS, TAKE ADVANTAGE OF FUTURE OPPORTUNITIES OR
RESPOND TO COMPETITIVE PRESSURES OR UNANTICIPATED REQUIREMENTS, EACH OF WHICH
WOULD MATERIALLY HARM OUR BUSINESS.
We believe that the net proceeds of our initial public offering in July
1999, 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 o privileges senior to those of existing holders of
common stock. If we cannot raise funds on acceptable terms, we may be unable to
develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements. For additional
information on our anticipated future capital requirements, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.
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 December
31, 1999, all of our investments were in
Page 28 of 31 pages.
<PAGE> 29
cash equivalents and short-term
investments. See Note 3 of the Notes to the Condensed 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.
Page 29 of 31 pages.
<PAGE> 30
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with its initial public offering in July of 1999, Gadzoox
filed a Registration Statements on Form S-1, SEC File No. 333-78029 (the
"Registration Statement"), which was declared effective by the Securities and
Exchange Commission on July 19, 1999. Pursuant to the Registration Statement,
Gadzoox registered 4,025,000 shares of its common stock, par value of $0.005 per
share, including 525,000 shares sold to the underwriters upon the exercise of
their over-allotment option. The aggregate offering price of the shares
registered was $84,525,000, $5,916,750 of which was applied toward the
underwriters discounts and commissions. Other expenses related to the offering
were approximately $1,113,000. Gadzoox received net proceeds of approximately
$77,495,000 from the sale of common stock in the initial public offering.
Managing underwriters of the offering were Credit Suisse First Boston, Hambrecht
& Quist, and Morgan Keegan & Company, Inc.
Gadzoox invested the proceeds from the offering in short-term investment
grade, interest bearing securities and intends to use the proceeds 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. The use of proceeds from the offering does
not represent a material change in the use of proceeds described in the
prospectus.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
Page 30 of 31 pages.
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf by the undersigned
thereunto duly authorized.
Dated: 2/14/2000 GADZOOX NETWORKS, INC.
---------------------------- (Registrant)
/s/ Christine E. Munson
------------------------
CHRISTINE E. MUNSON
Chief Financial Officer and
Vice President of Administration
Page 31 of 31 pages.
<PAGE> 32
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 30,346
<SECURITIES> 49,242
<RECEIVABLES> 9,986
<ALLOWANCES> 0
<INVENTORY> 6,163
<CURRENT-ASSETS> 96,540
<PP&E> 5,420
<DEPRECIATION> 0
<TOTAL-ASSETS> 102,249
<CURRENT-LIABILITIES> 9,373
<BONDS> 0
0
0
<COMMON> 129
<OTHER-SE> 87,059
<TOTAL-LIABILITY-AND-EQUITY> 102,249
<SALES> 12,561
<TOTAL-REVENUES> 12,561
<CGS> 6,903
<TOTAL-COSTS> 8,483
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (0)
<INCOME-PRETAX> (1,798)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,798)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,798)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
