<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 16, 1999
REGISTRATION NO. 333-81347
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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
VIXEL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3669 84-1176506
(STATE OF OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
11911 NORTHCREEK PARKWAY SOUTH
BOTHELL, WASHINGTON 98011
(425) 806-5509
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
JAMES M. MCCLUNEY
PRESIDENT AND CHIEF EXECUTIVE OFFICER
VIXEL CORPORATION
11911 NORTHCREEK PARKWAY SOUTH
BOTHELL, WASHINGTON 98011
(425) 806-5509
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
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JAMES C. T. LINFIELD, ESQ. GREGORY M. GALLO, ESQ.
GREGORY B. ABBOTT, ESQ. GRAY CARY WARE & FREIDENRICH LLP
COOLEY GODWARD LLP 400 HAMILTON AVENUE
5200 CARILLON POINT PALO ALTO, CA 94301
KIRKLAND, WA 98033-7355 (650) 833-2000
(425) 893-7700
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
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,
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
number 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 number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE(3)
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Common Stock, $0.001 par value......... 4,255,000 $12.00 $51,060,000 $14,195
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(1) Includes 555,000 shares which the underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(3) $11,120 Previously paid.
------------------------
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 THAT 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 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 WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 16, 1999
[LOGO]
SHARES
COMMON STOCK
Vixel Corporation is offering 3,700,000 shares of our common stock. This is
our initial public offering. We anticipate that the initial public offering
price will be between $10.00 and $12.00 per share. We have applied for approval
for quotation of our common stock on the Nasdaq National Market under the symbol
"VIXL."
-------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 3.
-------------------------
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PER SHARE TOTAL
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Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds to Vixel........................................... $ $
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THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We have granted the underwriters a 30-day option to purchase up to an
additional 555,000 shares of our common stock to cover over-allotments.
BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock
to purchasers on , 1999.
-------------------------
BANCBOSTON ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
NEEDHAM & COMPANY, INC.
THE DATE OF THIS PROSPECTUS IS , 1999
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[EDGAR ARTWORK DESCRIPTIONS]
Location: inside front cover
Title: "Bringing connectivity and management to Storage Area Networks" is
centered at the top and is in white lettering against a black background. The
image of a purple Fibre Channel borders the left edge of the page. The remainder
of the words are in black lettering against white background.
Below the title, flush right, are the words "Vixel Corporation", in bold font.
Beneath our name are the words in bold font "Designing and producing the
essential building blocks for connecting high-speed storage area networks or
SANs:" followed by the words "management software, fabric switches, managed
hubs, entry-level hubs and fiber optic transceivers."
In the lower half of the page is another caption, "Optimizing the benefits of
storage networking:", in bold font and underlined, followed by these stacked
phrases: "Scaling from entry-level to complex enterprise SANs", "SAN
interconnect management from a single platform", "Designed-in interoperability
across the product suite", "Engineered for serviceability to maximize uptime"
and "Facilitates SANs for both Unix and NT environments."
In the lower right corner of the page is our logo, which is the word "Vixel",
with a black background and white lettering, and a green slanted oval over the
letter "x".
Location: top of cover bi-fold
Title: The words "Vixel Overview" at the upper flush left position of the
bi-fold. Following the title are the words "Building Storage Area Networks".
Image: The image consists of three graphical components, all of which are
connected to one another. The top component consists of a local area network,
labeled "LAN", represented by a green and blue straight line running across the
top of the page, approximately 85% up from the bottom of the page. Above the LAN
are five clusters of images, each connected by a line to the LAN, four
consisting of an image of computer monitors and computers, the fourth of which
is labeled "End-Users", and the fifth consisting of an image labeled "Router",
which connects by a bent line to a blue and green cloud image containing the
acronym "WAN", or wide area network. The computers and monitors are colored
green, blue, gray or black, and one monitor contains the letters "NT" in white,
one contains the Apple Computer logo and one has the words "Sun Microsystems" in
white letters.
There are seven lines intersecting below the LAN at 90 degree angles.
The first line connects to an image entitled "Traditional SCSI Cabling",
consisting of a purple device labeled a "Server", which connects to a blue
device labeled a "Disk".
The second line connects an image entitled "Vixel 1000 Entry-Level Arbitrated
Loop Hub". The image consists of a device labeled "Server", which connects by
another line to a hub, which connects by three lines to three objects, labeled
"Disks".
The third and fourth lines connect to an image entitled "Vixel 2006 Managed
Arbitrated Loop Hub". The image consists of two devices, labeled "Servers",
which connect to a hub, which connects by one line to an image labeled "Tape
Subsystem", by three additional lines to three disks, and by one line to an
image of a gigabit interface converter. To the right of the gigabit interface
converter are the words "Vixel GBICs in All Active Ports of Switches and Hubs".
The fifth, sixth and seventh lines connect to one device each. The devices,
labeled "Servers" in two places, connect by separate lines to a switch labeled
the "Vixel 8100 Fabric Switch". Five additional lines connect the Vixel 8100
Fabric Switch to different devices. The Vixel 8100 Fabric Switch and these
devices are depicted in a cloud labeled "SAN", or Storage Area Network, on the
right side of the cloud. The first line from the Vixel 8100 Fabric Switch
connects to a device labeled "Storage Array", another line connects to
<PAGE> 4
a device labeled "Shared Tape Library" and the third, fourth and fifth lines
connect to three separate switches, each labeled a "Vixel 8100 Fabric Switch".
Each of the Vixel 8100 Fabric Switches within the cloud are connected to one
another by lines.
Of the three additional Vixel 8100 Fabric Switches, the first connects by two
additional lines to two devices, labeled "Storage Arrays", and by three
additional lines to three of the other Vixel 8100 Fabric Switches within the
cloud.
Three additional lines run from the second additional Vixel 8100 Fabric Switch.
The first line, the distance of which is labeled "10 kilometers", connects to an
additional switch labeled a "Vixel 8100 Fabric Switch", which in turn connects
by two lines to the image of two storage arrays, labeled "Storage Arrays". The
second and third lines connect to two images entitled "Storage Arrays".
The third Vixel 8100 Fabric Switch is connected by two lines to two devices
labeled "Storage Arrays" and by a third line to an image entitled "Vixel 2000
Managed Arbitrated Loop Hub", which in turn is connected by three lines each
connecting to images entitled "Disks".
In the lower center of the bi-fold is the SAN InSite logo, which consists of the
words "SAN InSite(TM)" placed against a double oval to the left side of the
logo.
Computer and Monitor Image:
The image is located in the lower middle portion of the bi-fold, partly in the
left side of the cloud image. It consists of a computer monitor and a computer.
The words "Managed SAN Interconnect" appear above the image.
Spoke and Hub Image: The image is located in the middle section on the left side
of the cover bi-fold. It consists of a spoke and hub design. The Vixel logo is
the hub, and it connects by a separate line to names and logos of the following:
Amdahl, Veritas, Sun Microsystems, Legato, K*TEC, Interphase, IBM, Hewlett
Packard, Emulex Network Systems, EMC(2)-The Enterprise Storage Company, Compaq,
Bell Microproducts and Avid Sports.
Location: Bottom left of cover bi-fold
Title: "Vixel's Total SAN Solution"
Stacked phrases: Proactive Management with SAN Insite Software
True Fabric Switches
Managed Arbitrated Loop Hubs
Entry-level Artibrated Loop Hubs
Fiber Optic Transceivers
In the lower right corner of the right-hand page is our logo, which is the word
"Vixel", with a black background and white lettering, and a green slanted oval
over the letter 'x". Below the logo flush right on the page are the words
"Making the Fibre Channel Connection", with a purple background and white
lettering.
<PAGE> 5
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
Until , 1999, 25 days after the date of this prospectus, all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
-------------------------
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.......................................... 1
Risk Factors................................................ 3
You Should Not Rely on Forward-Looking Statements Because
They are Inherently Uncertain............................. 14
Use of Proceeds............................................. 15
Dividend Policy............................................. 15
Capitalization.............................................. 16
Dilution.................................................... 17
Selected Financial Data..................................... 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 30
Management.................................................. 44
Certain Transactions........................................ 55
Principal Stockholders...................................... 57
Description of Capital Stock................................ 59
Shares Eligible for Future Sale............................. 62
Underwriting................................................ 64
Legal Matters............................................... 66
Experts..................................................... 66
Where You Can Find Additional Information................... 66
Index to Financial Statements............................... F-1
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All share information contained in this prospectus gives effect to a
two-for-three reverse stock split in our common stock anticipated to be
completed before the closing of this offering.
Unless otherwise indicated, this prospectus assumes that the underwriters
have not exercised their option to purchase additional shares. It also assumes
the conversion of 19,889,331 shares of preferred stock, which includes 894,333
shares of preferred stock issuable upon exercise of warrants, into 13,259,554
shares of common stock.
We own or have rights to the trademarks or tradenames that we use in
conjunction with the sale of our products and services. Vixel(R) and SAN
InSite(TM) are trademarks owned by us. This prospectus also makes reference to
trademarks of other companies which are the property of their respective owners.
We were incorporated in Colorado in June 1991 as Photonics Research
Incorporated and reincorporated in Delaware in February 1995 as Vixel
Corporation. Our corporate headquarters are located at 11911 Northcreek Parkway
South, Bothell, Washington 98011 and our telephone number is (425) 806-5509. Our
website address is www.vixel.com. Information contained on our website is not
part of this prospectus.
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PROSPECTUS SUMMARY
You should read this summary together with the more detailed information
and our financial statements and notes appearing elsewhere in this prospectus.
THE COMPANY
We are a leading provider, based on revenue and number of ports shipped, of
comprehensive solutions used in storage area networks, or SANs. SANs are
networks that are specifically designed to interconnect computer systems and
data storage devices. Our comprehensive SAN interconnect solutions consist of a
variety of products that connect computers to data storage devices in a network
configuration. Our products utilize the Fibre Channel protocol, which is an
American National Standards Institute, or ANSI, defined standard for the
transfer of information between computers and storage devices. Our Fibre Channel
product portfolio consists of our SAN systems, which include our SAN management
software and switches and hubs, and other components, which include our
transceivers. Our products enable data storage devices to connect to one or more
computer systems and facilitate the reliable exchange of large amounts of data
at high speeds. Our products are fully interoperable and designed to perform in
concert so that customers can easily deploy a range of SAN configurations, from
simple point-to-point connections to more complex high-performance networks. We
believe our unique SAN InSite management software optimizes the performance of
our switches, hubs and transceivers, supports network stability, and reduces
enterprise information technology staffing, training and support requirements.
In recent years there has been a significant increase in the volume of data
created, processed and accessed throughout the enterprise. This growth has been
fueled by the rapid expansion of the Internet, measured both by the number of
users as well as the number of web-based corporate initiatives which require
continuous access to critical business information 24 hours a day, seven days a
week. Enterprises traditionally have attempted to support and manage storage
requirements by linking single servers to dedicated storage devices. Fibre
Channel technology addresses the limitations of traditional server-to-storage
connections and enables data to be transferred from one network device to
another, allowing any server to access any storage device on the network. When
utilized in SANs, Fibre Channel technology combines the connectivity and
distance features of networking with the simplicity and reliability benefits of
the channel, or the dedicated circuit that carries information to and from data
storage devices. In January 1999, International Data Corporation estimated that
worldwide revenue from SAN products would grow from approximately $2.5 billion
in 1998 to over $13.3 billion in 2002, representing a compound annual growth
rate of over 50%.
Our objective is to expand our position as a leading developer and supplier
of comprehensive SAN interconnect solutions. Key elements of our strategy
include the following:
- Offer new and existing customers a full Fibre Channel interconnect
product portfolio;
- Leverage our technology platforms and expertise to address rapidly
evolving SAN market demands;
- Extend our leadership in SAN interconnect management software;
- Partner with major storage solutions providers to promote
interoperability and enhance functionality;
- Expand our distribution channels; and
- Promote the Vixel brand in order to position ourselves as the leading
provider of high-performance, cost-effective SAN interconnect solutions.
We primarily market and sell our products to original equipment
manufacturers, or OEMs, which are companies that combine our products with their
own products and sell the combined products under their own brands. We also sell
to resellers. To date we have shipped to more than 30 OEMs and resellers
products representing over 500,000 Fibre Channel ports, which we believe are
more ports than any other Fibre Channel interconnect vendor has shipped.
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THE OFFERING
COMMON STOCK OFFERED BY VIXEL................... 3,700,000 shares
COMMON STOCK TO BE OUTSTANDING AFTER THIS
OFFERING........................................ 21,629,003 shares
USE OF PROCEEDS................................. Repayment of a promissory
note and accrued interest,
totaling $2.0 million,
working capital, general
corporate purposes and
repayment of other corporate
indebtedness.
PROPOSED NASDAQ NATIONAL MARKET SYMBOL.......... VIXL
All share information contained in this prospectus reflects a two-for-three
reverse stock split in our common stock anticipated to be completed before the
closing of this offering. The number of shares outstanding after the offering is
based on shares outstanding as of July 4, 1999 and does not include 2,217,179
shares of common stock subject to outstanding options under our equity incentive
plans or 269,865 shares of common stock issuable upon exercise of warrants. It
also assumes the conversion of 19,889,331 shares of preferred stock, which
includes 894,333 shares of preferred stock issuable upon exercise of warrants,
into 13,259,554 shares of common stock.
The as adjusted balance sheet data summarized below reflects the conversion
of our preferred stock into 13,259,554 shares of common stock upon the
completion of this offering and the application of the net proceeds from the
sale of 3,700,000 shares of common stock offered by us at an assumed initial
public offering price of $11.00 per share, after deducting underwriting
discounts and commissions and our $900,000 estimated offering expenses. See note
1 to our financial statements for an explanation of the determination of the
number of shares used in calculating per share data.
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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FISCAL YEAR ENDED SIX MONTHS ENDED
------------------------------ ------------------
DEC. 29, DEC. 28, JAN. 3, JUNE 28, JULY 4,
1996 1997 1999 1998 1999
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(UNAUDITED)
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STATEMENT OF OPERATIONS DATA:
Revenue:
SAN systems................................ $ 163 $ 3,282 $ 13,389 $ 6,557 $10,806
Components and other....................... 6,778 19,501 26,056 14,677 11,253
-------- -------- -------- -------- -------
Total revenue................................ 6,941 22,783 39,445 21,234 22,059
Gross profit (loss).......................... (401) 3,736 3,246 4,502 6,386
Loss from operations......................... (17,260) (13,525) (29,560) (12,713) (8,974)
Net loss..................................... (17,652) (13,759) (21,233) (3,930) (9,856)
Basic and diluted net loss per share
(unaudited)................................ $ (10.32) $ (2.42)
Pro forma basic and diluted net loss per
share (unaudited).......................... $ (1.46) $ (.59)
Weighted-average shares outstanding.......... 2,075 4,113
Pro forma weighted-average shares outstanding
(unaudited)................................ 14,552 16,776
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JULY 4, 1999
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ACTUAL AS ADJUSTED
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(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 595 $ 36,664
Investments................................................. 2,563 2,563
Working (deficit) capital................................... (8,037) 28,032
Total assets................................................ 25,169 61,238
Long-term obligations and noncurrent portion of capital
leases.................................................... 12,223 10,223
Mandatorily redeemable preferred stock...................... 20,101 --
Total stockholders' (deficit) equity........................ (27,929) 30,241
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones we face. If any of the following risks actually occur, our business,
financial condition or results of operations could be materially and adversely
affected. In that case, the trading price of our common stock could decline, and
you may lose all or part of your investment.
WE HAVE INCURRED SIGNIFICANT LOSSES SINCE OUR INCEPTION, WE EXPECT FUTURE
LOSSES, AND WE MAY NOT BECOME PROFITABLE.
We have incurred significant losses since inception and expect to incur
losses in the future. As of July 4, 1999, we had an accumulated deficit of $66.1
million. We cannot be certain that we ever will realize sufficient revenue to
achieve profitability. We expect to incur significant product development, sales
and marketing and administrative expenses, and we will need to generate
significant revenue to achieve and maintain profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability.
OUR OPERATING RESULTS ARE DIFFICULT TO FORECAST, MAY FLUCTUATE ON A QUARTERLY
BASIS AND MAY BE ADVERSELY AFFECTED BY MANY FACTORS, WHICH MAY RESULT IN
VOLATILITY IN OUR STOCK PRICE.
Our revenue and results of operations have varied on a quarterly basis in
the past and may vary significantly in the future due to a number of factors,
many of which may cause our stock price to fluctuate. Some of the factors that
could affect our operating results include:
- the size, timing, terms and fluctuations of customer orders, particularly
large orders from a limited number of OEMs;
- our ability to attain and maintain sufficient reliability levels for our
SAN interconnect products;
- the timing of the introduction or enhancement of products by us, our OEMs
and our competitors;
- decreases in the prices at which we can sell our products;
- the mix of products sold, as our switches and hubs typically have higher
margins than our transceivers, and the mix of distribution channels
through which our products are sold;
- the ability of our contract manufacturers to produce and distribute our
products in a timely fashion;
As a result of these and other factors, we believe that period to period
comparisons of our operating results should not be relied upon as an indicator
of our future performance. It is likely that in some future period our operating
results will be below your expectations or those of public market analysts.
A COMPONENT USED IN OUR TRANSCEIVERS HAS EXPERIENCED AN ABNORMALLY HIGH FAILURE
RATE WHICH HAS ADVERSELY AFFECTED AND COULD IN THE FUTURE AFFECT OUR SALES.
Our gigabit interface converter transceivers, or GBICs, and our gigabaud
link module transceivers, or GLMs, manufactured prior to March 1999 incorporate
a compact disk, or CD, laser manufactured by a third party. GBICs are removable
and GLMs are non-removable devices that convert optical and electrical signals.
We have observed, and some customers have confirmed, that in certain
applications our GBIC and GLM transceivers that incorporate this CD laser have
experienced an abnormally high failure rate. Although we recorded a warranty
reserve of $3.6 million in the fourth quarter of fiscal 1998 as a result of
these problems, there is a risk that this reserve will be inadequate to
implement a remedy that is satisfactory to our customers. In addition, we cannot
assure you that, over time, failure rates for products that incorporate these CD
lasers will not increase or that the lasers which we began using in our GBIC
transceiver products in March 1999 will not experience problems. Claims against
us in excess of the amount of our reserve could have a material adverse effect
on our business and financial condition. Sun Microsystems has reduced its
purchases of GBIC transceivers as a result of this problem. In addition, if
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<PAGE> 9
we are unable to resolve this matter to our customers' satisfaction, or if
failure rates in transceiver products increase, our reputation and relationships
with current and prospective customers could be damaged and adversely affect the
sales of all of our products.
OUR OEMS HAVE UNPREDICTABLE ORDER PATTERNS WHICH MAY CAUSE OUR REVENUE TO VARY
SIGNIFICANTLY FROM PERIOD TO PERIOD.
Our OEMs tend to order sporadically, and their purchases can vary
significantly from quarter to quarter. Our OEMs generally forecast expected
purchases in advance, but frequently do not order as expected and tend to place
purchase orders only shortly before the scheduled delivery date. For example,
during the quarter ended September 27, 1998, our SAN systems revenue declined to
$2.5 million, primarily as a result of decreases in purchases of our entry-level
hubs by two OEMs during that quarter. We plan our operating expenses based on
revenue projections derived from our OEMs' forecasts. 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. These order habits cause our backlog
to fluctuate significantly. Moreover, our backlog is not necessarily indicative
of actual sales for any succeeding period, as orders are subject to cancellation
or delay by our OEMs with limited or no penalty. Also, we typically generate a
large percentage of our quarterly revenue in the last month of the quarter.
THE LOSS OF ONE OR MORE KEY CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR REVENUE.
Our success will depend on our continued ability to develop and manage
relationships with significant OEMs and resellers, as well as on the sales
efforts and success of these customers. Sun Microsystems, Compaq,
Hewlett-Packard and Interphase represented 34.4%, 19.8%, 11.8% and 10.4% of our
total revenue, respectively, for the six months ended July 4, 1999. In fiscal
1998, sales to our top two customers, Sun Microsystems and Hewlett-Packard,
represented 54.4% and 12.3% of our total revenue, respectively. Although we are
attempting to expand our base of OEMs, most of our future revenue may come from
a small number of OEMs.
Our agreements with our customers do not provide any assurance of future
sales to those customers. For example:
- our OEMs and resellers can stop purchasing and marketing our products at
any time;
- our OEM and reseller agreements are not exclusive and contain no renewal
obligation; and
- our OEM and reseller agreements do not require minimum purchases.
We cannot be certain that we will retain our current OEMs and resellers or
that we will be able to recruit additional or replacement customers. Many of our
OEMs and resellers carry or utilize competing product lines. If we were to lose
one or more important OEMs or resellers to a competitor, our business, results
of operations and financial condition could be significantly harmed.
OUR SUCCESS IS DEPENDENT UPON ACCEPTANCE OF FIBRE CHANNEL TECHNOLOGY AND THE
GROWTH OF THE EMERGING SAN MARKET.
Our SAN InSite management software, switches, hubs and transceivers are
used exclusively in SANs. Accordingly, widespread adoption of SANs is critical
to our future success. The market for SANs and related software, switches, hubs
and transceivers has begun to develop only recently and is evolving rapidly.
Because this market is new, it is difficult to predict its potential size or
future growth rate. SANs are often implemented in connection with deployment of
new storage systems and servers. Potential end-user customers that have invested
substantial resources in their existing data storage and management systems
4
<PAGE> 10
may be reluctant or slow to adopt a new approach, such as SANs. Our success in
generating revenue in this emerging SAN market will depend on, among other
things, our ability to:
- demonstrate the benefits of SANs and our SAN InSite management software,
switch, hub and transceiver products to OEMs, resellers and end-users;
- develop, maintain and build relationships with leading OEMs and
resellers; and
- accurately predict the direction of industry standards and base our
products on those industry standards.
Our failure to do any of these activities would adversely affect our
ability to successfully compete in the emerging SAN market.
BECAUSE A SIGNIFICANT PORTION OF OUR REVENUE IS DERIVED FROM SALES OF
ENTRY-LEVEL HUBS AND TRANSCEIVERS, WE ARE DEPENDENT ON CONTINUED WIDESPREAD
MARKET ACCEPTANCE OF THESE PRODUCTS.
We currently derive substantially all our revenue from sales of our
entry-level hubs and transceivers. We derived approximately 89.9% and 93.8% of
our total revenue from sales of these products for the six months ended July 4,
1999 and fiscal 1998, respectively. We expect that revenue from these products
will continue to account for a substantial portion of our total revenue for the
foreseeable future. If the market does not continue to accept our entry-level
hubs and transceivers, our revenue will decline significantly. Some of these
products have been introduced and shipped in volume only recently. Accordingly,
the demand for and market acceptance of these products are uncertain. Factors
that may affect the market acceptance of our products include the continued
growth of the market for SAN interconnect products, the performance, price and
total cost of ownership of our products, the availability, functionality and
price of competing products and technologies, and the success and development of
our OEMs and resellers. Many of these factors are beyond our control.
WE EXPECT THAT A GROWING PERCENTAGE OF OUR FUTURE REVENUE WILL BE DERIVED FROM
OUR SWITCH AND MANAGED HUB PRODUCTS, AND OUR SUCCESS WILL DEPEND ON WIDESPREAD
ACCEPTANCE OF THESE PRODUCTS.
Our future success depends upon our ability to address the rapidly changing
needs of our customers by developing and introducing high-quality,
cost-effective products as well as product enhancements and services on a timely
basis and by keeping pace with technological developments and emerging industry
standards. If we do not successfully develop, introduce and market new products,
especially our switch and managed hub products, our revenue may decline. In
particular, our future revenue growth will depend on the success of new product
launches of our switch and managed hub products and success of our current
switch and managed hub products. In addition, as we introduce new or enhanced
products, we will have to manage successfully the transition from older products
in order to minimize disruption in our customers' ordering patterns, avoid
excessive levels of older product inventories and ensure that enough supplies of
new products can be delivered to meet our customers' demands. To the extent
customers defer or cancel orders in expectation of new product releases, any
delay in development or introduction of new products could cause our operating
results to suffer.
COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED PRICES AND SALES OF OUR PRODUCTS,
INCREASED LOSSES AND REDUCED MARKET SHARE.
The markets for SAN interconnect products are highly competitive. Our
current competitors include a number of domestic and international companies,
many of which have substantially greater financial, technical, marketing and
distribution resources than we have. We expect that more companies, including
our customers, may enter the market for SAN interconnect products. We may not be
able to compete successfully against either current or future competitors.
Increased competition could result in significant price erosion, reduced
revenue, lower margins or loss of market share, any of which would have a
material adverse effect on our business, results of operations and financial
condition.
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For fabric switch sales, we compete primarily with Ancor Communications,
Brocade Communications and McDATA. For hub sales, we compete primarily with
Emulex Corporation and Gadzoox Networks. For transceiver sales, we compete
primarily with Cielo Communications, Finisar, Hewlett-Packard and IBM. Although
we do not believe that any other vendor offers comprehensive SAN interconnect
management software that directly competes with ours, other vendors, such as
Brocade and Gadzoox, provide single point-device managers for either fabric
switch or hub products, but not across multiple interconnect devices, including
fabric switches, hubs and transceivers. Our competitors continue to introduce
improved products with lower prices, and we will have to do the same to remain
competitive. Furthermore, larger companies in other related industries or our
customers may develop or acquire technologies and apply their significant
resources, including their distribution channels and brand recognition, to
capture significant SAN market share. Therefore, we may not be able to compete
successfully in the SAN market.
OUR FAILURE TO ENHANCE OUR EXISTING PRODUCTS AND INTRODUCE NEW PRODUCTS ON A
TIMELY BASIS COULD CAUSE OUR REVENUE TO FALL.
Given the product life cycles in the markets for our products, any delay or
unanticipated difficulty associated with new product introductions or product
enhancements could significantly harm our business, results of operations and
financial condition. Product development delays may cause our revenue to
decrease and the price of our stock to fall. We may not be able to develop,
manufacture and market new products or product enhancements in a timely manner
that achieve market acceptance. We also may not be able to develop the
underlying core technologies necessary to create new products and enhancements,
or to license these technologies from third parties. Product development delays
may result from numerous factors, including:
- changing OEM product specifications;
- difficulties in hiring and retaining necessary personnel;
- difficulties in reallocating engineering resources and overcoming
resource limitations;
- difficulties with independent contractors;
- changing market or competitive product requirements; and
- unanticipated engineering complexities.
THE SALES CYCLE FOR OUR PRODUCTS IS LONG AND WE MAY INCUR SUBSTANTIAL
NON-RECOVERABLE EXPENSES AND DEVOTE SIGNIFICANT RESOURCES TO SALES THAT DO NOT
OCCUR WHEN ANTICIPATED OR AT ALL.
OEMs and resellers typically conduct significant evaluation, testing,
implementation and acceptance procedures before they begin to market and sell
new solutions that include our products. This evaluation process is lengthy and
may range from six months to one year or more. This process is complex and may
require significant sales, marketing and management efforts on our part. This
process becomes more complex as we simultaneously qualify our products with
multiple customers. As a result, we may expend significant resources to develop
customer relationships before we recognize any revenue from these relationships.
FAILURE TO MANAGE OUR OEM AND RESELLER RELATIONSHIPS AND EXPAND OUR DISTRIBUTION
CHANNELS COULD SIGNIFICANTLY REDUCE OUR REVENUE.
We rely on OEMs and resellers to distribute and sell our products. Our
success depends substantially on our ability to initiate, manage and expand our
relationships with OEMs, our ability to attract additional resellers and the
sales efforts of these OEMs and resellers. Our failure to manage and expand our
relationships with OEMs and resellers, or their failure to market our products
effectively, could substantially reduce our revenue and seriously harm our
business.
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ANY FAILURE BY US TO SUCCESSFULLY EXECUTE OUR DISTRIBUTION STRATEGY WILL
NEGATIVELY IMPACT OUR REVENUE.
Our distribution strategy focuses primarily on developing and expanding
indirect distribution channels through OEMs and resellers, as well as expanding
our field sales organization. Our failure to execute this strategy successfully
could limit our ability to grow or sustain revenue. Furthermore, as we expand
our sales to resellers, we may increase our selling costs as these parties
generally require a higher level of customer support than our OEMs. If we fail
to develop and cultivate relationships with significant resellers, or if these
resellers are not successful in their sales efforts, sales of our products may
decrease and our operating results would suffer. Many of our resellers also sell
products that compete with our products. We cannot assure you that our resellers
will market our products effectively or continue to devote the resources
necessary to provide us with effective sales, marketing and technical support.
Our failure to successfully manage our reseller relationships or their failure
to sell our products could reduce our revenue.
In order to support and develop opportunities for our indirect distribution
channels, we plan to expand our field sales and support staff significantly. We
cannot assure you that this expansion will be successfully completed, that the
cost of this expansion will not exceed the incremental revenue generated or that
our expanded field sales and support staff will be able to compete successfully
against the significantly more extensive and well-funded sales and marketing
operations of many of our current or potential competitors. Our inability to
effectively establish our distribution channels or manage the expansion of our
field sales and support staff would have a material adverse effect on our
ability to grow and increase revenue.
IF WE DO NOT SUCCESSFULLY COMPLETE THE TRANSITION OF OUR PRODUCT MANUFACTURING
TO K*TEC ELECTRONICS, OUR BUSINESS MAY SUFFER.
We rely on outside contract manufacturing firms, K*TEC Electronics, a
division of Kent Electronics, and Solectron Corporation, to manufacture our
products. Currently K*TEC manufactures our switches, hubs and GBIC transceivers,
and Solectron manufactures our GLM transceivers. We are in the process of
transitioning all GLM manufacturing to K*TEC. Our failure to manage this
transition effectively may disrupt the manufacture of our products. Any
difficulties or disruptions in the manufacture of our products could prevent us
from making timely customer deliveries and result in lost opportunities and
reduced revenue.
THE LOSS OF K*TEC, THE FAILURE TO FORECAST ACCURATELY DEMAND FOR OUR PRODUCTS OR
TO MANAGE SUCCESSFULLY OUR RELATIONSHIP WITH K*TEC WOULD NEGATIVELY AFFECT OUR
BUSINESS.
Once the transition to K*TEC is complete, as we expect it to be in the
second half of 1999, we will rely exclusively on K*TEC to manufacture, store and
ship our products. We share K*TEC's manufacturing capacity with numerous
companies whose manufacturing needs may conflict with ours. If K*TEC is unable
or unwilling to complete production runs for us in the future, or experiences
any significant delays in completing production runs or shipping our products,
the manufacturing and sale of our products would be temporarily suspended. We
have in the past experienced delivery problems based on capacity constraints for
production test and material supply. As our product volume requirements
increase, we may find it necessary to augment our manufacturing capacity by
exploring new subcontract manufacturers. We may not be successful in finding
qualified manufacturers that meet our needs. An interruption in supply of our
products, or additional costs incurred to qualify and shift production to an
alternative manufacturing facility, would significantly harm our business,
results of operations and financial condition.
K*TEC is not obligated to supply products for us, except as may be provided
in a particular purchase order that K*TEC has accepted. We place purchase orders
with K*TEC based on periodic forecasts. While most of the materials used in our
products are standard products, some are proprietary and/or sole-source and
require extended lead times. Our business will be adversely affected if we are
unable to accurately forecast demand for our products and manufacturing capacity
or if materials are not available at K*TEC to meet the demand. Lead times for
materials and components vary significantly and depend on
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the specific supplier, contract terms and demand for a component at a given
time. We also may experience shortages of components from time to time, which
could delay the manufacture of our products.
We plan to regularly introduce new products and product enhancements, which
will require that we coordinate our efforts with K*TEC to rapidly achieve volume
production. If we do not effectively manage our relationship with K*TEC, or if
K*TEC experiences delays, disruptions, capacity constraints or quality control
problems in its manufacturing operations, our ability to ship products to our
customers could be delayed and our competitive position and reputation could be
harmed. Qualifying a new contract manufacturer and commencing volume production
is expensive and time consuming. If we are required to or choose to change
contract manufacturers, we may lose revenue and damage our customer
relationships.
WE MAY LOSE SALES IF OUR SOLE SOURCE SUPPLIERS FAIL TO MEET OUR NEEDS.
We currently purchase several key components from single sources. We depend
on single sources for our vertical cavity surface emitting lasers, or VCSELs,
our application specific integrated circuits, or ASICs, and our microprocessors.
VCSELs are laser components that maintain a high quality signal and consume a
low amount of power. ASICs are custom designed computer chips that perform
specific functions very efficiently. In addition, we license from a third party
software that is incorporated into our switches and hubs. If we cannot supply
products due to a lack of components, or are unable to redesign products with
other components in a timely manner, our business, results of operations and
financial condition would be materially adversely affected. For a more complete
discussion of our supplier arrangements, see "Business -- Manufacturing" on page
40.
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 particular
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.
A DECREASE IN THE SELLING PRICES OF PRODUCTS WOULD REDUCE OUR REVENUE AND GROSS
MARGINS.
As the markets for SAN interconnect products mature, it is likely that the
average unit prices of our products will decrease in response to competitive
pricing pressures, increased sales discounts, new product introductions by us or
our competitors or other factors. If our efforts to reduce the cost of our
products through manufacturing efficiencies, design improvements and cost
reductions, as well as through increased sales of higher margin products are not
successful, our revenue and gross margins will decline, significantly harming
our operating results and financial condition which may cause our stock price to
drop.
UNDETECTED SOFTWARE OR HARDWARE DEFECTS COULD INCREASE OUR COSTS AND REDUCE OUR
REVENUE.
SAN interconnect products frequently contain undetected software or
hardware defects when first introduced or as new versions are released. Our
products are complex and problems may be found from time to time in our
existing, new or enhanced products. Our products incorporate components
manufactured by third parties. We have in the past experienced difficulties with
quality and reliability of components obtained from third parties and we could
experience similar problems in the future. In addition, our products are
integrated with products from other vendors. As a result, when problems occur,
it may be difficult to identify the source of the problem. These problems may
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.
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IF WE FAIL TO SUCCESSFULLY DEVELOP THE VIXEL BRAND, OUR REVENUE MAY NOT GROW AND
OUR STOCK PRICE MAY FALL.
We believe that establishing and maintaining the Vixel brand is a critical
aspect of our efforts to maintain and develop strategic OEM and reseller
relationships, and that the importance of brand recognition will increase due to
the growing number of vendors of SAN interconnect products. Our failure to
successfully develop our brand may prevent us from growing our revenue, which
could cause the price of our stock to fall. We intend to increase our spending
on programs, including advertising campaigns and marketing events, to create and
maintain brand loyalty among our customers. If we do not generate a
corresponding increase in our revenue as a result of our branding efforts or
otherwise fail to promote our brand successfully, or if we incur excessive
expenses in an attempt to promote and maintain the Vixel brand, our business,
results of operations and financial condition may be materially adversely
affected. In addition, if our OEMs, resellers and end users of our SAN
interconnect products do not perceive our products to be of high quality, or if
we introduce new products or technologies that are not accepted by the market,
the value of the Vixel brand will decline and our business will suffer.
OUR MANAGEMENT TEAM IS NEW AND MAY NOT BE ABLE TO WORK TOGETHER SUCCESSFULLY
WHICH COULD HARM OUR BUSINESS.
Our success depends to a significant degree upon the continued joint
contributions of our key management, many of whom we only recently hired. In
April 1999, we hired a new president and chief executive officer, James M.
McCluney, and in September 1998, we hired a chief financial officer, Kurtis L.
Adams. Other members of our management team also joined us only recently.
Because of the limited time in which our management team has been working
together, we cannot assure you that management will be able to work effectively
as a team.
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL,
WE MAY NOT BE SUCCESSFUL.
We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, technical, sales and marketing,
finance and operations personnel. In particular, we will need to increase the
number of technical staff members with experience in high-speed networking
applications as we further develop our product line. Competition for these
highly skilled employees in our industry is intense. Our failure to attract and
retain these key employees could have a material adverse effect on our business,
results of operations and financial condition.
We are seeking additional sales and marketing personnel. Competition for
qualified sales and marketing personnel is intense and we might not be able to
hire the kind and number of sales and marketing personnel we are targeting.
Unless we expand our sales and marketing force, we may not be able to increase
our revenue or extend our brand awareness. We also have a small customer service
and support organization and will need to increase our staff to support new OEMs
and resellers and the expanding needs of our existing customers. Hiring customer
service and support personnel is very competitive in our industry due to the
limited number of people available with the necessary technical skills and
understanding of SAN interconnect products.
The loss of the services of any of our key employees, the inability to
attract or retain qualified personnel in the future or delays in hiring required
personnel could hinder the development and introduction of and negatively impact
our ability to sell our products. In addition, employees may leave our company
and subsequently compete against us. Moreover, 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 claims
of this type in the future as we seek to hire qualified personnel and some of
these claims may result in material litigation. We could incur substantial costs
in defending ourselves against these claims, regardless of their merits.
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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 experienced a period of rapid growth, which has placed and
continues to place a significant strain on our resources. Unless we manage our
growth effectively, we may make mistakes in operating our business, such as
inaccurate sales forecasting, material planning and financial reporting, which
may result in fluctuations in our operating results and cause the price of our
stock to decline. We plan to continue to expand our operations significantly.
This growth will place a significant demand on our management and 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.
OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT
REGULATIONS, AND IF WE CANNOT DEVELOP PRODUCTS THAT ARE COMPATIBLE WITH THESE
EVOLVING STANDARDS, OUR BUSINESS WILL SUFFER.
The market for SAN products is characterized by the need to support
industry standards as they emerge, evolve and achieve acceptance. To remain
competitive, we must continue to introduce new products and product enhancements
that meet these industry standards. All components of a SAN must utilize the
same standards in order to operate together. Our products comprise only a part
of an entire SAN and we depend on the companies that provide other components,
many of which are significantly larger than we are, to support industry
standards as they evolve. The failure of these providers to support these
industry standards could negatively impact market acceptance of our products.
In addition, in the United States, our products must comply with various
regulations and standards defined by the Federal Communications Commission and
Underwriters Laboratories. Internationally, products that we develop also will
be required to comply with standards established by authorities in various
countries. 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.
WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS.
Our revenue from international sales represented 17.9% and 17.3% of our
total revenue for the six months ended July 4, 1999 and fiscal 1998,
respectively. Prior to 1998, we derived less than 5% of our total annual revenue
from international sales. We plan to expand our international sales activities
significantly. In 1999 and 2000, we intend to expand our sales activities in
Europe and Asia. Our international sales growth will be limited if we are unable
to establish relationships with international distributors, establish foreign
operations, effectively manage international sales channels, hire additional
personnel and develop relationships with service organizations. We cannot be
certain that we will be able to establish, generate and build market demand for
our products internationally. Our international operations will be subject to a
number of risks, including:
- increased complexity and costs of managing international operations;
- multiple protectionist, conflicting and changing governmental laws and
regulations;
- reduced or limited protections of intellectual property rights; and
- political and economic instability.
These factors and others could harm future sales of our products to
international customers which would negatively impact our business and operating
results. To date, none of our international revenue and costs has 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. In the future, a portion
of our international revenue may be denominated in foreign currencies, including
the Euro, which would subject us to risks associated with foreign currency
fluctuations.
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Our SAN interconnect products are subject to U.S. Department of Commerce
export control restrictions. Neither we nor our customers may export those
products without obtaining an export license. These U.S. export laws also
prohibit the export of our SAN interconnect products to a number of countries
deemed by the United States to be hostile. These restrictions may make foreign
competitors facing less stringent controls on their products more competitive in
the global market than are we or our customers. The U.S. government may not
approve any pending or future export license requests. In addition, the list of
products and countries for which export approval is required, and the regulatory
policies with respect thereto, could be revised. The sale of our SAN
interconnect products could be harmed by our failure or the failure of our
customers to obtain the required government licenses or by the costs of
compliance.
OUR INTELLECTUAL PROPERTY PROTECTION MAY PROVE TO BE INADEQUATE WHICH COULD
NEGATIVELY AFFECT OUR ABILITY TO COMPETE.
We believe that our continued success depends on protecting our proprietary
technology. We currently rely on a combination of patents, copyrights,
trademarks, trade secrets and contractual provisions to establish and protect
our intellectual property rights. In addition, 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. Our failure to protect our
intellectual property rights could have a material adverse effect on our
business, results of operations and financial condition. We cannot be certain
that the steps we take to protect our intellectual property will adequately
protect our proprietary rights, that others will not independently develop or
otherwise acquire equivalent or superior technology or that we can maintain any
of our technology as trade secrets. In addition, the laws of some of the
countries in which our products are or may be sold may not protect our products
and intellectual property rights to the same extent as the laws of the United
States or at all.
THIRD-PARTY CLAIMS OF INFRINGEMENT OF THEIR INTELLECTUAL PROPERTY RIGHTS COULD
ADVERSELY AFFECT OUR BUSINESS.
In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. We occasionally
receive communications from third parties alleging patent infringement, and
there always is the chance that third parties may assert infringement claims
against us. For example, we recently settled claims of patent infringement
related to our transceivers, which require us to make future payments. We
established a reserve for these payments in the fourth quarter of fiscal 1998.
Future patent infringement disputes, with or without merit, could result in
costly litigation, cause product shipment delays or require us to enter into
royalty or licensing agreements. We cannot be certain that the necessary
licenses would be available or that they could be obtained on commercially
reasonable terms. If we fail to obtain these royalty or licensing agreements in
a timely manner and on reasonable terms, our business, results of operations and
financial condition would be materially adversely affected.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND CAUSE US
TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.
We expect to review opportunities to buy other businesses or technologies
that would complement our current products, expand the breadth of our markets 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. If we make any
future purchases, we could issue stock that would dilute existing stockholders'
percentage ownership, incur substantial debt or assume contingent liabilities.
These purchases also involve numerous risks, including:
- problems assimilating the purchased operations, technologies or products;
- unanticipated costs associated with the acquisition;
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- diversion of management's attention from our core business;
- adverse effects on existing business relationships with suppliers and
customers;
- incorrect estimates made in the accounting for acquisitions;
- risks associated with entering markets in which we have no or limited
prior experience; and
- potential loss of key employees of purchased organizations.
OUR FAILURE AND THE FAILURE OF OUR SUPPLIERS AND CUSTOMERS TO BE YEAR 2000
COMPLIANT COULD HARM OUR BUSINESS.
The year 2000 computer issue creates risks for us. Failure of our products
to recognize date information correctly when the year changes to 2000 could
result in significant decreases in market acceptance of our products, increases
in warranty claims and legal liability for defective software. We have not
tested our products in every possible computer environment, and therefore our
products may not be fully year 2000 compliant. Our internal year 2000 compliance
review is focused on reviewing our internal computer information and security
systems for year 2000 compliance, and developing and implementing remedial
programs to resolve year 2000 issues in a timely manner. Additionally, we are
contacting our third party suppliers and requesting their assurances that their
systems are year 2000 compliant.
If our suppliers, vendors, major distributors and partners fail to correct
their year 2000 problems, these failures could result in an interruption in, or
a failure of, our normal business activities or operations. If a year 2000
problem occurs, it may be difficult to determine which vendor's products have
caused the problem. These failures could interrupt our operations and damage our
relationships with our customers. Due to the general uncertainty inherent in the
year 2000 problem resulting from the readiness of third-party suppliers and
vendors, we are unable to determine at this time whether any year 2000 failures
will harm us. We believe our year 2000 worst case scenario would be the failure
of a sole or limited source supplier to be year 2000 compliant. The failure of
one of these suppliers to be year 2000 compliant could seriously interrupt our
manufacturing process, which could substantially reduce our revenue.
As we have not yet completed our year 2000 assessment, we have not
developed a contingency plan. We anticipate that our full year 2000 review,
necessary remedial actions and contingency plan will be substantially complete
by the end of November 1999. To date our year 2000 costs primarily have been
driven by the cost of our personnel conducting the year 2000 compliance review.
We estimate that the costs of completing any required modifications, upgrades or
replacements of our internal systems will not exceed $280,000, almost all of
which we believe will be or has been incurred during fiscal 1999. However, this
amount may increase as we identify and address remaining issues.
Additionally, 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 may reduce funds available to purchase our products.
Therefore, some customers may wait to purchase our products until after the year
2000, which may reduce our revenue.
MANAGEMENT CAN SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH OUR
STOCKHOLDERS MAY
NOT AGREE.
Except for the promissory note and accrued interest totaling $2.0 million
which we are required to pay to Western Digital upon completion of this
offering, our management will be able to spend the remaining net proceeds from
this offering in ways with which our stockholders may not agree. We cannot
assure you that our investments and use of the net proceeds of this offering
will yield favorable returns or results.
OUR PRINCIPAL STOCKHOLDERS WILL EXERCISE SIGNIFICANT CONTROL OVER VIXEL AND MAY
TAKE ACTIONS THAT MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS.
Upon completion of this offering, our executive officers and directors and
their affiliates will beneficially own, in the aggregate, approximately 38.4% of
our outstanding common stock. As a result,
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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 someone from
acquiring or merging with us.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL OF VIXEL AND MAY REDUCE THE MARKET PRICE OF OUR COMMON STOCK.
Provisions in 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 the issuance of 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 certain amendments to our
certificate of incorporation and bylaws;
- limiting the persons who may call special meetings of stockholders; and
- prohibiting stockholder actions by written consent.
Other provisions of Delaware law also may discourage, delay or prevent
someone from acquiring or merging with us.
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. The market
price of our common stock after the offering may vary from the initial public
offering price. If you purchase shares of our common stock, you may not be able
to resell those shares at or above the initial public offering price. The market
price of our common stock may fluctuate significantly in response to the
following factors, some of which are beyond our control:
- actual or anticipated fluctuations in our operating results;
- losses of our key OEMs;
- changes in financial estimates by securities analysts;
- 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;
- 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 on page 64 for a more complete
discussion of the factors to be considered in determining the initial public
offering price of our common stock.
WE MAY NOT BE ABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, LIMITING OUR ABILITY
TO GROW.
We believe that the net proceeds of this offering, after repayment to
Western Digital of a promissory note and accrued interest totaling $2.0 million,
together with our existing cash balances, credit facilities and the cash flow we
expect to generate from future operations, will be sufficient to meet our
capital
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requirements at least through the next 12 months. However, we may need, or could
elect, to seek additional funding prior to that time. If we need to raise
additional funds, we may not be able to do so on favorable terms, or at all.
Further, if we issue equity securities, existing stockholders may experience
additional dilution or the new equity securities may have rights, preferences or
privileges senior to those of existing holders. 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 funding requirements.
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. The 3,700,000
shares sold in this offering will be freely tradable. The other 17,929,003
shares outstanding will be restricted securities as defined in Rule 144 of the
Securities Act. Approximately of those shares will be freely tradable
beginning 180 days after the effective date of this offering, and the remainder
of these will become freely tradable at various later times. 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 WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price is substantially higher than the book
value per share of our outstanding common stock. Accordingly, if you purchase
common stock in the offering, you will incur immediate dilution of approximately
$9.82 in the book value per share of our common stock from the price you pay for
our common stock.
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS
BECAUSE THEY ARE INHERENTLY UNCERTAIN
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "expects,"
"future," "intends," "plans" and similar expressions to identify forward-looking
statements. These statements are only predictions. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements. You should not place undue reliance on these forward-looking
statements, which apply only as of the date of this prospectus. Our actual
results could differ materially from those anticipated in these forward-looking
statements for many reasons, including the risks faced by us and described on
the preceding pages and elsewhere in this prospectus.
We believe it is important to communicate our expectations to our
investors. However, there may be events in the future that we are not able to
predict accurately or over which we have no control. The risk factors listed
above, as well as any cautionary language in this prospectus, provide examples
of risks, uncertainties and events that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Before you invest in our common stock, you should be aware that the occurrence
of the events described in these risk factors and elsewhere in this prospectus
could have a material adverse effect on our business, operating results,
financial condition and stock price.
14
<PAGE> 20
USE OF PROCEEDS
Our net proceeds from the sale of the 3,700,000 shares of common stock we
are offering are estimated to be $37.0 million, or $42.6 million if the
underwriters' option to purchase additional shares is exercised in full,
assuming an offering price of $11.00 per share and after deducting underwriting
discounts and commissions and estimated offering expenses.
We will use $2.0 million of the net proceeds to repay a 8.69% promissory
note and accrued interest due Western Digital. We currently expect to use the
remaining net proceeds for working capital and general corporate purposes,
including increased sales and marketing expenditures, increased research and
development expenditures and capital expenditures made in the ordinary course of
business and the repayment of other corporate indebtedness. Repayment of
corporate indebtedness might include the early repayment of a $7.5 million
promissory note due to Greyrock Capital on September 30, 2000. The promissory
note bears interest at the London inter-bank offer rate, or LIBOR, plus 4.75%
and represents the entire amount due Greyrock Capital under our term loan
agreement. In addition, we may use a portion of the net proceeds for further
development of our product lines through acquisitions of products, technologies
and businesses. However, we have no present commitments or agreements to make
any such acquisitions. Our management will have broad discretion concerning the
allocation and use of the net proceeds of the offering to be received by us.
Pending such uses, we will invest the net proceeds in short-term, investment
grade, interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently intend to retain any future earnings to fund the development and
growth of our business and do not currently anticipate paying any cash dividends
in the foreseeable future. Future dividends, if any, will be determined by our
board of directors. In addition, we have entered into agreements with creditors
which restrict our ability to pay dividends.
15
<PAGE> 21
CAPITALIZATION
The following table sets forth our capitalization as of July 4, 1999:
- on an actual basis;
- on a pro forma basis to reflect the conversion of all outstanding shares
of preferred stock, which includes 894,333 shares of preferred stock
issuable upon exercise of warrants, into 13,259,554 shares of common
stock; and
- on a pro forma as adjusted basis to reflect the sale of the common stock
in this offering at an assumed initial public offering price of $11.00
per share and the application of the net proceeds, after deducting
estimated underwriting discounts and commissions and our estimated
offering expenses.
The pro forma and pro forma as adjusted information set forth below is
unaudited and should be read in conjunction with our financial statements and
notes and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
AS OF JULY 4, 1999
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
----------- ------------ --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations and noncurrent portion of capital
leases................................................ $ 12,223 $ 12,223 $ 10,223
Redeemable preferred stock, $.001 par value; 4,623,482
shares authorized, 4,529,221 shares issued and
outstanding, actual; no shares authorized, issued or
outstanding, pro forma and pro forma as adjusted...... 20,101 -- --
-------- -------- --------
Stockholders' (deficit) equity..........................
Preferred stock, $.001 par value, 15,536,522 shares
authorized, 14,465,777 shares issued and
outstanding, actual; no shares issued or
outstanding, pro forma and pro forma as adjusted... 14 -- --
Common stock, $.001 par value, 30,000,000 shares
authorized, 4,669,449 shares issued and
outstanding, actual; 17,929,003 shares issued and
outstanding, pro forma; 21,629,003 shares issued
and outstanding, pro forma as adjusted............. 5 26 30
Additional paid-in capital............................ 51,233 72,445 109,392
Deferred compensation................................. (7,787) (7,787) (7,787)
Notes receivable from stockholders.................... (5,246) (5,246) (5,246)
Treasury stock, at cost; 66,666 shares................ (50) (50) (50)
Accumulated deficit................................... (66,098) (66,098) (66,098)
-------- -------- --------
Total stockholders' (deficit) equity............... (27,929) (6,710) 30,241
-------- -------- --------
Total capitalization............................. $ 4,395 $ 5,513 40,464
======== ======== ========
</TABLE>
The outstanding share information in the table above is as of July 4, 1999
and excludes:
- 2,217,179 shares issuable upon exercise of outstanding options at a
weighted average exercise price of $2.55 per share;
- 269,865 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $10.88 per share; and
- 1,973,230 shares available for future issuance under our equity incentive
plans.
16
<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 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.
As of July 4, 1999, our pro forma net tangible book value was approximately
$(12.5) million, or $(.69) per share of common stock. Pro forma net tangible
book value per share represents the amount of our total tangible assets less
total liabilities divided by the pro forma number of shares of common stock
outstanding. Without taking into account any other changes in net tangible book
value after July 4, 1999, other than to give effect to the receipt by us of the
net proceeds from the sale of the 3,700,000 shares of common stock offered by us
at an assumed initial public offering price of $11.00 per share, our pro forma
net tangible book value at July 4, 1999 would have been approximately $25.6
million, or $1.18 per share. This represents an immediate increase in net
tangible book value of $1.87 per share to existing stockholders and an immediate
dilution of $9.82 per share to new investors purchasing shares of common stock
in this offering. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Pro forma net tangible book value per share as of July 4,
1999................................................... $(.69)
Increase per share attributable to new investors.......... 1.87
-----
Pro forma net tangible book value per share after the
offering.................................................. 1.18
------
Dilution per share to new investors......................... $ 9.82
======
</TABLE>
The following table summarizes on a pro forma basis, as of July 4, 1999,
the number of shares of common stock purchased from us, the total consideration
paid to us and the average price per share paid to us by existing stockholders
and by new investors purchasing shares of common stock in this offering. The
information presented is based upon an assumed initial public offering price of
$11.00 per share, before deducting estimated underwriting discounts and
commissions and estimated offering expenses of this offering.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 17,929,003 82.9% $51,017,000 55.6% $ 2.85
New investors...................... 3,700,000 17.1 40,700,000 44.4 11.00
---------- ----- ----------- -----
Total.............................. 21,629,003 100.0% $91,717,000 100.0%
========== ===== =========== =====
</TABLE>
The information presented above with respect to existing stockholders
assumes the conversion of 19,889,331 shares of preferred stock, which includes
894,333 shares of preferred stock issuable upon exercise of warrants, into
13,259,554 shares of common stock, . This information is as of July 4, 1999 and
excludes:
- 2,217,179 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $2.55 per share;
- 269,865 shares of common stock issuable upon exercise of warrants
outstanding at a weighted average exercise price of $10.88 per share; and
- 1,973,230 shares of common stock available for future issuance under our
equity incentive plans.
The issuance of common stock in connection with the exercise of these
options and warrants will result in further dilution to new investors. For a
complete discussion of these options and warrants, see "Management -- Employee
Benefit Plans" on page 49 and note 1 to our financial statements.
17
<PAGE> 23
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other financial
information appearing elsewhere in this prospectus. We derived the statement of
operations data for the fiscal years ended December 29, 1996, December 28, 1997
and January 3, 1999, and balance sheet data as of December 28, 1997 and January
3, 1999, from the audited financial statements in this prospectus. The statement
of operations data for the fiscal years ended December 31, 1994 and 1995 and the
selected balanced sheet data set forth below for us as of December 31, 1994,
December 31, 1995 and December 29, 1996 is derived from our audited financial
statements not included in this prospectus. Those financial statements were
audited by PricewaterhouseCoopers, LLP, independent accountants. We derived the
statement of operations data for the six months ended June 28, 1998 and July 4,
1999 and balance sheet data as of July 4, 1999 from the unaudited financial
statements included in this prospectus. The historical unaudited financial
statements include, in the opinion of management, all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information contained in them. The results of operations for the six months
ended July 4, 1999 are not necessarily indicative of results expected for the
full fiscal year 1999 or future results. Net loss available to common
stockholders shown below includes our net loss, as well as the accretion related
to our redeemable preferred stock.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
---------------------------------------------------- -------------------
DEC. 31, DEC. 31, DEC. 29, DEC. 28, JAN. 3, JUNE 28, JULY 4,
1994 1995 1996 1997 1999 1998 1999
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenue:
SAN systems........................................ $ -- $ -- $ 163 $ 3,282 $ 13,389 $ 6,557 $ 10,806
Components and other............................... 1,713 399 6,778 19,501 26,056 14,677 11,253
------ ------- -------- -------- -------- -------- --------
Total revenue................................ 1,713 399 6,941 22,783 39,445 21,234 22,059
Cost of revenue...................................... 448 521 7,342 19,047 36,199 16,732 15,673
------ ------- -------- -------- -------- -------- --------
Gross profit (loss).................................. 1,265 (122) (401) 3,736 3,246 4,502 6,386
------ ------- -------- -------- -------- -------- --------
Operating expenses:
Research and development........................... 537 1,678 4,474 9,360 11,110 5,249 6,233
Acquired in-process technology..................... -- -- 8,633 -- 5,118 5,118 --
Selling, general and administrative................ 961 967 3,549 7,629 14,521 6,237 6,664
Amortization and writedown of goodwill and
intangibles...................................... -- -- 167 222 2,057 611 680
Amortization of deferred compensation.............. 38 38 36 50 -- -- 1,783
------ ------- -------- -------- -------- -------- --------
Total operating expenses..................... 1,536 2,683 16,859 17,261 32,806 17,215 15,360
------ ------- -------- -------- -------- -------- --------
Loss from operations................................. (271) (2,805) (17,260) (13,525) (29,560) (12,713) (8,974)
Other (expense) income............................... (135) (154) (392) (234) 8,327 8,783 (882)
------ ------- -------- -------- -------- -------- --------
Net loss............................................. $ (406) $(2,959) $(17,652) $(13,759) $(21,233) $ (3,930) $ (9,856)
====== ======= ======== ======== ======== ======== ========
Net loss available to common stockholders............ $ (406) $(2,959) $(17,693) $(13,955) $(21,424) $ (4,029) $ (9,954)
====== ======= ======== ======== ======== ======== ========
Basic and diluted net loss per share................. $(0.12) $(26.42) $ (56.87) $ (18.90) $ (10.32) $ (2.64) $ (2.42)
====== ======= ======== ======== ======== ======== ========
Weighted-average shares outstanding.................. 3.389 112 311 738 2,075 1,528 4,113
====== ======= ======== ======== ======== ======== ========
Pro forma net loss available to common stockholders
(unaudited)........................................ $(21,233) $ (9,856)
======== ========
Pro forma basic and diluted net loss per share
(unaudited)........................................ $ (1.46) $ (.59)
======== ========
Pro forma weighted-average shares outstanding
(unaudited)........................................ 14,552 16,776
======== ========
</TABLE>
<TABLE>
<CAPTION>
DEC. 31, DEC. 31, DEC. 29, DEC. 28, JAN. 3, JULY 4,
1994 1995 1996 1997 1999 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................................... $ 202 $ 7,883 $ 19,883 $ 3,776 $ 3,841 $ 595
Investments.................................................... -- -- -- -- 2,490 2,563
Working capital (deficit)...................................... 746 7,959 18,477 2,352 285 (8,037)
Total assets................................................... 4,923 12,318 29,374 19,934 28,165 25,169
Long-term obligations and noncurrent portion of capital
leases....................................................... 3,149 2,056 6,012 6,057 13,856 12,223
Mandatorily redeemable preferred stock......................... -- -- 19,327 19,523 19,993 20,101
Total stockholders' equity (deficit)........................... 818 8,980 (18,937) (14,030) (19,924) (27,929)
</TABLE>
18
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and the related notes included elsewhere in this prospectus.
OVERVIEW
We are a leading provider of comprehensive interconnect solutions for use
in SANs. Our portfolio of Fibre Channel products, including our SAN management
software, fabric switches, arbitrated loop hubs and transceivers, is fully
interoperable and designed to perform in concert to address a wide variety of
data and storage needs.
We incorporated in Colorado in June 1991 under the name Photonics Research
Incorporated and initially developed fiber optic components for data
communications and related applications. In February 1995, we reincorporated in
Delaware and changed our name to Vixel Corporation. In the first quarter of
1996, we acquired the Fibre Channel hub and transceiver product lines from
Western Digital Corporation. In 1997 we began developing our SAN InSite software
to manage our SAN interconnect solutions. In the first quarter of 1998, we
acquired Arcxel Technologies, Inc., a developer of Fibre Channel switches. In
early 1998, we sold our laser diode fabrication facility and gigabit Ethernet
transceiver product line to Cielo Communications, Inc., and have since been
focused exclusively on designing, developing and marketing our Fibre Channel SAN
interconnect solutions.
We derive substantially all of our revenue from the sale of SAN
interconnect products, including switches, hubs and transceivers. We currently
include our SAN InSite software with our switches and managed hubs, and we do
not sell this software separately from our other products. We sell our products
primarily to a limited number of OEMs. Sun Microsystems, Compaq Computer,
Hewlett-Packard and Interphase represented 34.4%, 19.8%, 11.8% and 10.4% of our
total revenue, respectively, for the six months ended July 4, 1999. In fiscal
1998, five OEMs accounted for 81.6% of our total revenue, with sales to Sun
Microsystems and Hewlett-Packard accounting for 54.4% and 12.3% of our total
revenue, respectively. No other individual customer represented more than 10.0%
of our total revenue in either period. While we are seeking to diversify our
customer base and expand the portion of our revenue which is derived from sales
through various channels, we anticipate that our operating results will continue
to depend on volume sales to a relatively small number of OEMs and distribution
channel partners. We may not be successful in our efforts to diversify our
customer base and the loss of one of our key customers could significantly
reduce our total revenue.
We currently have one distributor in North America and one in Japan. These
distributors which sell our products to VARs and end users currently represent
only a small percentage of our total revenue. We plan to expand our sales
channels to include systems integrators, VARs and additional distributors in
North America and Europe.
We generally recognize revenue at the time of product shipment, unless we
have future obligations for installation or when we ship product demonstration
units. Revenue from products shipped with future installation obligations is
recognized when we meet our future obligation. Revenue is not recognized on
demonstration units unless the customer ultimately purchases the unit, and the
related revenue is recognized at that time. Our agreement with our North
American distributor provides for price protection and for stock rotation based
on a percentage of shipments for the preceding quarter when an offsetting order
is requested. Revenue for the percentage of shipments subject to these stock
rotation rights is deferred until the stock rotation period has passed. We
provide an allowance for price protection rights. We also maintain a reserve for
product warranty costs based on a combination of historical experience and
specifically identified potential warranty liabilities.
Our gross profit as a percentage of total revenue is affected by the mix of
products sold, sales channels and customers to which our products are sold. Our
gross profit as a percentage of total revenue also is affected by fluctuations
in manufacturing volumes and component costs, manufacturing costs
19
<PAGE> 25
charged by our contract manufacturers, new product introductions, changes in our
product pricing and estimated warranty costs. We expect that average unit
selling prices for our products will decline over time in response to
competitive pricing pressures, increased sales discounts, new product
introductions by us or our competitors and other factors. We seek to maintain
gross profit as a percentage of total revenue by selling a higher percentage of
higher margin products and reducing the cost of our products through
manufacturing efficiencies, design improvements and cost reductions for
components.
We currently outsource our product manufacturing to two contract
manufacturers, K*TEC Electronics, a division of Kent Electronics, and Solectron
Corporation. We are in the process of moving all our product manufacturing to
K*TEC, and we expect to complete this process in the second half of 1999. Our
strategy with this transition is to reduce indirect costs associated with
supplier management and performance tracking and to leverage the efficiencies of
K*TEC's consolidated purchasing power and materials management capabilities to
reduce average cost of goods sold. Our contract manufacturers also provide
distribution and repair operations and most of our materials management. We
purchase certain components directly from suppliers and resell them to our
contract manufacturers at our cost and recognize no revenue from these
transactions. We also outsource the manufacturing of our ASICs to third-party
manufacturers that ship these components to K*TEC for assembly.
In connection with the grant of stock options to employees during the first
six months of fiscal 1999, we recorded deferred compensation of $9.6 million.
Deferred compensation is presented as a reduction of stockholders' equity. The
balance is expensed on a graded vesting method over the vesting period of the
options. During the first six months of fiscal 1999, we recognized $1.8 million
of the deferred compensation as compensation expense.
Since our inception, we have incurred significant losses. As of January 3,
1999, we had operating loss carryforwards of $31.1 million for federal income
tax purposes. These operating loss carryforwards expire on various dates through
2017. We have recorded a valuation allowance equal to the gross deferred tax
asset balance because our accumulated deficit, history of recurring net losses
and possible limitations on the use of carryforwards give rise to uncertainty as
to whether the deferred tax assets are realizable. Further, these operating loss
carryforwards could be subject to usage limitations due to changes in our
ownership resulting from equity financings.
As of July 4, 1999, we had an accumulated deficit of $66.1 million and we
expect to continue to incur significant losses for the foreseeable future. We
also expect to incur significant product development, sales and marketing and
administrative expenses. We cannot be certain that we will ever realize
sufficient revenue to achieve profitability. Even if we do achieve
profitability, we may not be able to sustain or increase profitability.
ACQUISITIONS AND DIVESTITURES
In March 1996, we acquired the ModuLink business of Western Digital
Corporation for a total purchase price of $11.3 million. This acquisition
represented the start of our Fibre Channel business. At the time of the
acquisition, ModuLink had one commercial transceiver product, a low-speed GLM,
which represented a significant portion of our total revenue in 1996.
Also at the time of this acquisition, in-process development projects
included a full-speed GLM, a GBIC transceiver and an entry-level hub. Acquired
in-process technology related to these projects was valued at $8.6 million, 76%
of the total purchase price, and was expensed immediately. Of the total value of
in-process technology approximately 30% was associated with the GLM project
which was estimated to be 74% complete at the time of acquisition, approximately
46% with the GBIC project which was estimated to be 83% complete and
approximately 24% with the entry-level hub which was estimated to be 75%
complete. The value of the in-process technology related to each of these
projects was determined by estimating the future net cash flows resulting from
products anticipated to result from these projects and discounting the net cash
flows to the date of acquisition using a discount rate of 25%. All of these
projects subsequently resulted in commercialized products, including the Vixel
1000 entry-level hub. Combined with the low-speed GLM, these products have
represented a significant portion of our total revenue
20
<PAGE> 26
through July 4, 1999. Since this acquisition, we have also developed our managed
hub products, the Vixel 2000 and Vixel 2006, and our SAN InSite management
software to manage these products.
In February 1998, we acquired Arcxel Technologies, Inc. for a total
purchase price of $14.8 million. Arcxel Technologies was a developer of Fibre
Channel switches for the SAN market. We acquired this switch company to obtain
products and technology to expand our total SAN interconnect portfolio of
products to include management software, switches, managed hubs, entry-level
hubs and transceiver products. At the time of the acquisition, Arcxel had just
introduced its first product, a Fibre Channel switch. This product became our
Vixel 4000 switch.
Also at the time of the Arcxel acquisition, in-process development projects
included an ASIC, a fabric switch and a switching hub. Both the fabric switch
and the switching hub were being designed to use the in-process ASIC, which was
the key technology being developed by Arcxel. Of the total value of the acquired
in-process technology, approximately 74% was associated with the ASIC which was
estimated to be 70% complete at the time of the acquisition, approximately 22%
with the fabric switch which was estimated to be 27% complete and approximately
4% with the switching hub which was estimated to be 8% complete. The value of
the in-process technology related to each of these projects was determined by
estimating the future net cash flows resulting from products anticipated to
result from these projects and discounting the net cash flows to the date of
acquisition using a discount rate of 35%. Since this acquisition, we completed
the development of the ASIC and the fabric switch, which became our Vixel 8100
product. The Vixel 8100 began generating revenue in the quarter ended July 4,
1999. Also, subsequent to the acquisition, we decided not to complete the
development of the switching hub that was in process, rather we are devoting our
resources to developing other fabric switches that will use the ASIC that was in
development at the time of the acquisition.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of revenue, statement of
operations data for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
----------------------------- -------------------
DEC. 29, DEC. 28, JAN. 3, JUNE 28, JULY 4,
1996 1997 1999 1998 1999
-------- -------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
SAN systems........................................ 2.3% 14.4% 33.9% 30.9% 49.0%
Component and other................................ 97.7 85.6 66.1 69.1 51.0
------ ----- ----- ----- -----
Total revenue.............................. 100.0 100.0 100.0 100.0 100.0
Cost of revenue...................................... 105.8 83.6 91.8 78.8 71.1
------ ----- ----- ----- -----
Gross profit (loss).................................. (5.8) 16.4 8.2 21.2 28.9
------ ----- ----- ----- -----
Operating expenses:
Research and development........................... 64.4 41.1 28.1 24.7 28.3
Acquired in-process technology..................... 124.4 -- 13.0 24.1 --
Selling, general and administrative................ 51.1 33.5 36.8 29.4 30.2
Amortization and writedown of goodwill and
intangibles..................................... 2.4 1.0 5.2 2.9 3.1
Amortization of deferred compensation.............. 0.5 0.2 -- -- 8.1
------ ----- ----- ----- -----
Total operating expenses................... 242.8 75.8 83.1 81.1 69.7
------ ----- ----- ----- -----
Loss from operations................................. (248.6) (59.4) (74.9) (59.9) (40.8)
Other (expense) income, net........................ (5.7) (1.0) 21.1 41.4 (4.0)
------ ----- ----- ----- -----
Net loss............................................. (254.3)% (60.4)% (53.8)% (18.5)% (44.8)%
====== ===== ===== ===== =====
</TABLE>
21
<PAGE> 27
SIX MONTHS ENDED JULY 4, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 28, 1998
Revenue. Total revenue for the six months ended July 4, 1999 was $22.1
million, an increase of $825,000 compared with $21.2 million in the six months
ended June 28, 1998. Total revenue includes SAN systems revenue as well as
component and other revenue. SAN systems revenue consists of revenue generated
from our SAN switches and hubs. SAN systems revenue for the six months ended
July 4, 1999 was $10.8 million, an increase of $4.2 million compared with $6.6
million in the six months ended June 28, 1998. This 64.8% increase was the
result of an increase in sales of each of our switch and hub products.
Component and other revenue consists of revenue generated from the sale of
our GBIC and GLM transceivers, service revenue and other miscellaneous revenue.
Component and other revenue in the six months ended July 4, 1999 was $11.3
million, a decrease of $3.4 million compared with $14.7 million in the six
months ended June 28, 1998. Performance issues with our CD based transceiver
products sold primarily in 1997 were identified in late 1998 and early 1999 and
resulted in decreased purchases of our transceiver products in the six months
ended July 4, 1999. We anticipate that our component revenue will continue to
decrease as a result of our decision to focus our resources on our SAN systems
as well as a result of our customers' perceptions of our transceiver performance
problems. For a more complete discussion of the performance problems with our
transceivers, see "Risk Factors -- A component used in our transceivers has
experienced an abnormally high failure rate which has adversely affected and
could in the future affect our sales" on page 3.
Gross Profit. Cost of revenue includes the cost to acquire finished
products from third party manufacturers of our products, expenses we incur
related to inventory management, product quality testing and customer order
fulfillment, and provisions for warranty expenses and inventory obsolescence.
Gross profit in the six months ended July 4, 1999 was $6.4 million, an increase
of $1.9 million, compared with $4.5 million in the six months ended June 28,
1998. Gross profit as a percentage of total revenue was 28.9% in the six months
ended July 4, 1999 and was 21.2% in the six months ended June 28, 1998. The
increases in both absolute dollars and percentage of total revenue reflect a
change in our product mix, as sales of switch and hub products increased while
sales of transceivers declined. Our switch and hub products generally have
higher gross margins than our transceiver products. Our provisions for warranty
expenses as a percentage of total revenue were 8.1% and 2.4% for the six month
periods ended July 4, 1999 and June 28, 1998, respectively.
Research and development expenses. Research and development expenses
consist primarily of salaries and related expenses for personnel engaged in the
design, development and sustaining engineering of our products, consulting and
outside service fees, costs for prototype and test units and other expenses
related to the design, development, testing and enhancements of our products.
Research and development expenses in the six months ended July 4, 1999 were $6.2
million, an increase of $1.0 million compared with $5.2 million in the six
months ended June 28, 1998. This increase was primarily the result of adding
personnel to our ASIC and switch development teams.
Acquired in-process technology. Acquired in-process technology in the six
months ended June 28, 1998 related to our acquisition of Arcxel Technologies in
February 1998. This acquired in-process technology was identified and valued by
an independent third party at $5.1 million, 34.5% of the total purchase price,
and was expensed immediately. The value of the acquired in-process technology
was determined by estimating the stage of development of each in-process
research and development project at the date of acquisition and estimating
future net cash flows resulting from anticipated revenue generated from those
projects, and then discounting the projected net cash flows to the date of
acquisition.
Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries, commissions and related
expenses for personnel engaged in marketing, sales, finance and information
technology support functions, as well as professional fees, allowance for
doubtful accounts receivable, trade shows and other marketing activities.
Selling, general and administrative expenses in the six months ended July 4,
1999 were $6.7 million, an increase of $427,000, compared with $6.2 million in
22
<PAGE> 28
the six months ended June 28, 1998. This increase was primarily the result of
hiring additional personnel during fiscal 1998 and the first six months of 1999.
Amortization and writedown of goodwill and intangibles. Amortization of
goodwill and intangibles in the six months ended July 4, 1999 was $680,000, an
increase of $69,000, compared with $611,000 in the six months ended June 28,
1998. This increase was the result of amortization of goodwill and intangibles
resulting from our acquisition of Arcxel Technologies in February 1998.
Amortization of deferred compensation. Amortization of deferred
compensation in the six months ended July 4, 1999 was $1.8 million as a result
of stock options granted in that period for which we recorded deferred
compensation of $9.6 million. We incurred no amortization of deferred
compensation in the six months ended June 28, 1998.
Other (expense) income, net. Other (expense) income, net, consists of the
gain or loss on the sale of business divisions or product lines, interest
income, interest expense and other miscellaneous income or expense. Other
expense, net, in the six months ended July 4, 1999 was $882,000, compared with
other income, net, of $8.8 million in the six months ended June 28, 1998. Other
income, net, in the six months ended June 28, 1998, included a one-time $9.1
million gain on the sale of our laser diode fabrication laboratory and gigabit
Ethernet transceiver product line to Cielo Communications.
FISCAL YEARS ENDED JANUARY 3, 1999, DECEMBER 28, 1997 AND DECEMBER 29, 1996
Revenue. Total revenue was $39.4 million, $22.8 million and $6.9 million in
fiscal 1998, 1997 and 1996, respectively. Our SAN systems revenue was $13.4
million, $3.3 million and $163,000 in fiscal 1998, 1997 and 1996, respectively.
The 308.0% increase in SAN systems revenue in fiscal 1998 compared with fiscal
1997 was the result of increased sales of our entry-level hubs as well as
revenue generated by our switch and managed hub products that were introduced
during fiscal 1998. The 1,913.5% increase in revenue in fiscal 1997 compared
with fiscal 1996 was the result of an increase in sales of our entry-level hub
that was introduced in the second half of fiscal 1996.
Component and other revenue was $26.1 million, $19.5 million and $6.8
million in fiscal 1998, 1997 and 1996, respectively. The 33.6% increase in
fiscal 1998 compared with fiscal 1997 was primarily the result of an increase in
sales of our transceiver products. The 187.7% increase in fiscal 1997 compared
with fiscal 1996 was primarily the result of an increase in revenue from our
transceiver products that were introduced in late fiscal 1996 and during fiscal
1997.
Gross profit. Gross profit (loss) was $3.2 million, $3.7 million and
$(401,000) in fiscal 1998, 1997 and 1996, respectively, representing 8.2%, 16.4%
and (5.8)% of total revenue, respectively. The lower gross profit percentage in
fiscal 1998 compared with fiscal 1997 was the result of recording an increase in
our warranty provisions of $3.6 million during fiscal 1998 for our GBIC
transceivers and a writedown in the fourth quarter of fiscal 1998 of developed
technologies capitalized as part of our purchase of Arcxel Technologies. The
increase in our warranty provisions in fiscal 1998 related to the estimated
costs to repair or replace those transceiver products that contain lasers that
are showing signs of faster deterioration than we historically have experienced.
Indications of this problem were first noticed in late fiscal 1998 to early
fiscal 1999. The improvement in gross profit as a percentage of revenue in
fiscal 1997 compared with fiscal 1996 was primarily due to efficiencies achieved
from an increased volume of product shipped. Our provisions for total warranty
expenses as a percentage of total revenue were 11.0% and 1.3% in fiscal 1998 and
1997, respectively. There was no provision for warranty cost or warranty
expenses in fiscal 1996.
Research and development expenses. Research and development expenses were
$11.1 million, $9.4 million and $4.5 million in fiscal 1998, 1997 and 1996,
respectively, representing 28.1%, 41.1% and 64.4% of total revenue,
respectively. The increase in research and development expenses in fiscal 1998
compared with fiscal 1997 primarily was due to increased development costs
relating to our management software, switch and managed hub products. This
increase partially was offset by a $4.8 million reduction in research and
development expenses as a result of the sale of our laser diode fabrication
facility and gigabit Ethernet transceiver product line to Cielo Communications
in February 1998. The increase from
23
<PAGE> 29
fiscal 1996 to 1997 primarily was the result of increased costs relating to the
development of our management software and hub products.
Acquired in-process technology. Acquired in-process technology expenses in
fiscal 1998 related to our acquisition of Arcxel Technologies in February 1998.
This acquired in-process technology was identified and valued by an independent
third party at $5.1 million, 34.5% of the total purchase price, and was expensed
immediately. Acquired in-process technology expenses in fiscal 1996 related to
our acquisition of the ModuLink operations of Western Digital in March 1996.
This acquired in-process technology was valued by an independent third party at
$8.6 million, 76.4% of the total purchase price, and was expensed immediately.
The value of acquired in-process technology was determined by estimating future
net cash flows resulting from products anticipated to result from the in-process
projects and discounting the net cash flows to the date of acquisition.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $14.5 million, $7.6 million and $3.5 million in
fiscal 1998, 1997 and 1996, respectively, representing 36.8%, 33.5% and 51.1% of
total revenue, respectively. The increases in absolute dollars in fiscal 1998
compared with fiscal 1997 and fiscal 1997 compared with fiscal 1996 were
primarily related to increases in sales, marketing and administrative personnel
to support our revenue growth. In addition, fiscal 1998 expenses increased in
absolute dollars and as a percentage of revenue as compared with fiscal 1997 as
a result of expenses we recognized in fiscal 1998 in connection with our defense
and settlement of certain patent lawsuits.
Amortization and writedown of goodwill and intangibles. Amortization and
writedown of goodwill and intangibles in fiscal 1998, 1997 and 1996 were $2.1
million, $222,000 and $167,000, respectively, representing 5.2%, 1.0% and 2.4%
of total revenue, respectively. The increase in fiscal 1998 compared with fiscal
1997 primarily was the result of amortization of goodwill and intangibles
resulting from our acquisition of Arcxel Technologies in February 1998. In
addition, the increase in fiscal 1998 compared with fiscal 1997 was the result
of the write-off of goodwill associated with capitalized developed technology
written down in fiscal 1998. The amounts amortized in fiscal 1997 and 1996
related to goodwill and intangibles resulting from our acquisition of the Fibre
Channel hub and transceiver product lines from Western Digital in the first
quarter of fiscal 1996.
Amortization of deferred compensation. Amortization of deferred
compensation in fiscal 1997 and 1996 was $50,000 and $36,000, respectively,
which we recognized as a result of stock option grants to nonemployees. There
was no amortization of deferred compensation recognized in fiscal 1998.
Other (expense) income, net. Other income, net, was $8.3 million in fiscal
1998. Other expense, net, was $234,000 and $392,000 in fiscal 1997 and 1996,
respectively. Other income, net, in fiscal 1998 included a one-time $9.1 million
gain on the sale of our laser diode fabrication laboratory and gigabit Ethernet
transceiver product line to Cielo Communications.
24
<PAGE> 30
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth statement of operations data for the ten
quarters ended July 4, 1999, as well as the percentage of our total revenue
represented by each item. This information has been derived from our unaudited
financial statements. The unaudited quarterly information has been prepared on
the same basis as our audited financial statements and includes all adjustments,
consisting only of normal recurring accruals, that our management considers
necessary for a fair presentation of such information when read in conjunction
with our annual audited financial statements and notes thereto appearing
elsewhere in this prospectus. Operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------
MARCH 30, JUNE 29, SEPT. 28, DEC. 28, MARCH 29, JUNE 28, SEPT. 27,
1997 1997 1997 1997 1998 1998 1998
--------- -------- --------- -------- --------- -------- ---------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
SAN systems................... $ 24 $ 317 $ 1,186 $ 1,755 $ 2,753 $ 3,804 $ 2,475
Components and others......... 3,036 4,698 5,362 6,405 7,870 6,807 5,393
------- ------- ------- ------- ------- ------- -------
Total revenue........... 3,060 5,015 6,548 8,160 10,623 10,611 7,868
Cost of revenue................. 3,006 4,119 5,320 6,602 8,365 8,367 6,487
------- ------- ------- ------- ------- ------- -------
Gross profit (loss)............. 54 896 1,228 1,558 2,258 2,244 1,381
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research and development...... 2,078 2,371 2,015 2,896 2,460 2,789 2,813
Acquired in-process
technology.................. -- -- -- -- 5,118 -- --
Selling, general and
administrative.............. 1,488 1,796 1,959 2,386 2,874 3,363 2,942
Amortization and writedown of
goodwill and intangibles.... 56 55 57 54 230 381 369
Amortization of deferred
compensation................ 12 12 13 13 -- -- --
------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 3,634 4,234 4,044 5,349 10,682 6,533 6,124
------- ------- ------- ------- ------- ------- -------
Operating loss.................. (3,580) (3,338) (2,816) (3,791) (8,424) (4,289) (4,743)
Other income (expense), net..... 130 68 7 (439) 8,926 (143) (158)
------- ------- ------- ------- ------- ------- -------
Net (loss) income............... $(3,450) $(3,270) $(2,809) $(4,230) $ 502 $(4,432) $(4,901)
======= ======= ======= ======= ======= ======= =======
<CAPTION>
QUARTER ENDED
-----------------------------
JAN. 3, APRIL 4, JULY 4,
1999 1999 1999
-------- -------- -------
(IN THOUSANDS, UNAUDITED)
<S> <C> <C> <C>
Revenue:
SAN systems................... $ 4,357 $ 4,306 $ 6,500
Components and others......... 5,986 6,216 5,037
-------- ------- -------
Total revenue........... 10,343 10,522 11,537
Cost of revenue................. 12,980 7,529 8,144
-------- ------- -------
Gross profit (loss)............. (2,637) 2,993 3,393
-------- ------- -------
Operating expenses:
Research and development...... 3,048 3,101 3,132
Acquired in-process
technology.................. -- -- --
Selling, general and
administrative.............. 5,342 3,045 3,619
Amortization and writedown of
goodwill and intangibles.... 1,077 340 340
Amortization of deferred
compensation................ -- 112 1,671
-------- ------- -------
Total operating
expenses.............. 9,467 6,598 8,762
-------- ------- -------
Operating loss.................. (12,104) (3,605) (5,369)
Other income (expense), net..... (298) (443) (439)
-------- ------- -------
Net (loss) income............... $(12,402) $(4,048) $(5,808)
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
------------------------------------------------------------------
MARCH 30, JUNE 29, SEPT. 28, DEC. 28, MARCH 29, JUNE 28,
1997 1997 1997 1997 1998 1998
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
SAN systems.................... 0.8% 6.3% 18.1% 21.5% 25.9% 35.8%
Components and others.......... 99.2 93.7 81.9 78.5 74.1 64.2
------ ----- ----- ----- ----- -----
Total revenue............ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue.................. 98.2 82.1 81.2 80.9 78.7 78.9
------ ----- ----- ----- ----- -----
Gross profit (loss).............. 1.8 17.9 18.8 19.1 21.3 21.1
------ ----- ----- ----- ----- -----
Operating expenses:
Research and development....... 67.9 47.3 30.8 35.5 23.1 26.3
Acquired in-process
technology................... -- -- -- -- 48.2 --
Selling, general and
administrative............... 48.6 35.8 29.9 29.2 27.1 31.7
Amortization and writedown of
goodwill and intangibles..... 1.8 1.1 0.9 0.7 2.2 3.6
Amortization of deferred
compensation................. 0.4 0.2 0.2 0.2 -- --
------ ----- ----- ----- ----- -----
Total operating
expenses............... 118.7 84.4 61.8 65.6 100.6 61.6
------ ----- ----- ----- ----- -----
Operating loss................... (116.9) (66.5) (43.0) (46.5) (79.3) (40.5)
Other income (expense), net...... 4.2 1.4 0.1 (5.4) 84.0 (1.3)
------ ----- ----- ----- ----- -----
Net (loss) income................ (112.7)% (65.1)% (42.9)% (51.9)% 4.7% (41.8)%
====== ===== ===== ===== ===== =====
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
----------------------------------------
SEPT. 27, JAN. 3, APRIL 4, JULY 4,
1998 1999 1999 1999
--------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenue:
SAN systems.................... 31.5% 42.1% 40.9% 56.3%
Components and others.......... 68.5 57.9 59.1 43.7
----- ------ ----- -----
Total revenue............ 100.0 100.0 100.0 100.0
Cost of revenue.................. 82.4 125.5 71.6 70.6
----- ------ ----- -----
Gross profit (loss).............. 17.6 (25.5) 28.4 29.4
----- ------ ----- -----
Operating expenses:
Research and development....... 35.8 29.5 29.5 27.1
Acquired in-process
technology................... -- -- -- --
Selling, general and
administrative............... 37.4 51.6 28.9 31.4
Amortization and writedown of
goodwill and intangibles..... 4.7 10.4 3.2 2.9
Amortization of deferred
compensation................. -- -- 1.0 14.5
----- ------ ----- -----
Total operating
expenses............... 77.9 91.5 62.6 75.9
----- ------ ----- -----
Operating loss................... (60.3) (117.0) (34.2) (46.5)
Other income (expense), net...... (2.0) (2.9) (4.2) (3.8)
----- ------ ----- -----
Net (loss) income................ (62.3)% (119.9)% (38.4)% (50.3)%
===== ====== ===== =====
</TABLE>
25
<PAGE> 31
Our total revenue increased each quarter from the quarter ended March 30,
1997 through the quarter ended March 29, 1998, when our total revenue reached
$10.6 million. Our SAN systems revenue increased in each quarter from the
quarter ended March 30, 1997 through the quarter ended June 28, 1998. These
increases were primarily the result of increased sales of our entry-level hub
that was introduced in the second half of fiscal 1996. During the quarter ended
September 27, 1998, our SAN systems revenue declined to $2.5 million, primarily
as a result of decreases in purchases of our entry-level hub by Compaq and Sun
during that quarter. In the quarter ended June 28, 1998, these two OEMs
purchased larger volumes of products that filled some of their demand in the
quarter ended September 27, 1998. The increase in SAN systems revenue in the
quarter ended July 4, 1999 compared with the quarter ended April 4, 1999 was
primarily the result of increases in sales of our switch and entry-level hub
products.
Our component and other revenue increased in each quarter from the quarter
ended March 30, 1997 through the quarter ended March 29, 1998. These increases
were primarily the result of increased sales to existing and new customers.
Component and other revenue declined to $6.8 million in the quarter ended June
28, 1998, primarily as a result of a reduction in purchases by Hewlett-Packard.
Component and other revenue continued to decline to $5.4 million in the quarter
ended September 27, 1998, primarily as a result of Sun reducing its purchases of
transceiver products. Component and other revenue in each of the next two
quarters increased, but declined to $5.0 million in the quarter ended July 4,
1999, primarily as a result of some of our customers' perceptions regarding the
reliability of our CD based transceivers. For a more complete discussion of the
performance problems with our transceivers, see "Risk Factors -- A component
used in our transceivers has experienced an abnormally high failure rate which
has adversely affected and could in the future affect our sales" on page 3.
Gross profit dollars and gross profit as a percentage of total revenue
increased each quarter from the quarter ended March 30, 1997 to the quarter
ended March 29, 1998, primarily as a result of volume efficiencies associated
with increased revenue during these periods. Our gross profit was negative in
the quarter ended January 3, 1999 as a result of recording a warranty provision
of $3.6 million during the quarter for transceiver products shipped in prior
quarters and the write-down of developed technology during the quarter. The
increase in our warranty provision was for anticipated costs to repair or
replace those transceivers that contain lasers that are showing signs of faster
deterioration than expected.
Research and development expenses generally have increased during the ten
quarters presented as a result of increases in the number of personnel devoted
to these activities. Quarterly fluctuations in research and development expenses
have occurred primarily as a result of the timing of prototype purchases and
outside contracting fees related to the development and testing of new products
at various times.
Selling, general and administrative expenses increased in each quarter from
the quarter ended March 30, 1997 through the quarter ended June 28, 1998,
primarily due to higher levels of staffing for sales, marketing and
administrative functions to support our revenue growth. These expenses decreased
in the quarter ending September 27, 1998, primarily as a result of decreased
sales in that period. The substantial increase in selling, general and
administrative expenses in the quarter ended January 3, 1999 reflects the cost
of settling patent lawsuits and the cost related to the recruitment, relocation
and termination of executive management personnel.
Other income, net, in the quarters ended March 30, 1997, June 29, 1997 and
September 28, 1997 resulted primarily from interest income on invested cash
received from the sale of series E preferred stock in the fourth quarter of
1996. Other income, net, in the quarter ended March 29, 1998, included a one-
time $9.1 million gain on the sale of our laser diode fabrication facility and
gigabit Ethernet transceiver product line. Other expenses, net, in each of the
other quarters of fiscal 1998 and 1999 primarily consisted of interest expense.
Amortization and writedown of goodwill and intangibles increased in the
quarter ended January 3, 1999 as a result of the writedown of goodwill
associated with our decision to discontinue manufacturing a product using
developed technology acquired through our purchase of Arcxel Technologies.
26
<PAGE> 32
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity at July 4, 1999 consisted of $3.2
million in cash and cash equivalents, a $2.5 million capital equipment lease
line of credit and a working capital credit facility with a borrowing limit of
the lesser of $7.5 million or 80.0% of eligible accounts receivable. As of July
4, 1999, we had utilized $723,000 under the capital equipment lease line.
Borrowings under the capital equipment lease line of credit bear interest at
8.25% per annum, are payable ratably over a 36 month term and are secured by the
fixed assets that we lease under the line of credit. As of July 4, 1999, $2.8
million borrowings were outstanding under the working capital credit facility.
This working capital credit facility expires on September 30, 2000. At July 4,
1999, we had outstanding a $7.5 million note payable to a bank. This note is due
on September 30, 2000. Both the working capital credit facility and the note
payable bear interest at LIBOR, plus 4.75% (9.97% as of July 4, 1999).
Since inception, we have financed our operations primarily through the sale
of common stock and preferred stock with aggregate proceeds of approximately
$29.8 million. Additionally, we have financed our operations through capital
equipment lease lines, working capital credit facilities, notes payable and $6.9
million in net cash received from the sale of our laser diode fabrication
facility and gigabit Ethernet product line.
Cash utilized by operating activities was $5.3 million in the six months
ended July 4, 1999, $9.2 million in fiscal 1998, $13.6 million in fiscal 1997
and $7.3 million in fiscal 1996. The cash utilized in each of these periods was
due to net losses, as well as working capital required to fund our increased
operations. Cash used in investing activities primarily consisted of capital
expenditures of $1.7 million, $1.0 million and $535,000 in fiscal 1998, 1997 and
1996, respectively, and $1.3 million paid as part of the acquisition of Western
Digital assets in fiscal 1996.
We will use $2.0 million of the net proceeds to repay a promissory note and
accrued interest due to Western Digital. We believe that after the repayment of
this amount, the remaining net proceeds of this offering, together with our
existing cash balances and available lines of credit, will be sufficient to meet
our cash requirements at least through the next twelve months. However, we may
be required, or could elect, to seek additional funding prior to that time. Our
future capital requirements will depend on many factors, including our future
revenue, the timing and extent of spending to support product development
efforts and expansion of sales, general and administrative activities, the
timing of introductions of new products, and market acceptance of our products.
We cannot assure you that additional equity or debt financing, if required, will
be available on acceptable terms or at all.
YEAR 2000 READINESS DISCLOSURE
The year 2000 problem refers to the potential disruption of business
activities caused by failures or miscalculations by computers, software and
other equipment 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 millennium calendar change, it may recognize a date
represented as "00" as the year 1900 rather than the year 2000.
Products. Our products were designed so as not to affect date sensitive
data, and we expect them to be year 2000 compliant when configured and used in
accordance with the related documentation, provided that the host machine's
underlying operating system and any other software used with or in the host
machine or our products are also year 2000 compliant. We continue to respond to
customer questions about our products on a case-by-case basis.
We have tested our products and their third-party components for year 2000
compliance, but do not warrant the overall installation of our solutions because
we cannot guarantee the compliance of other vendors' products. Our general
purchase terms and conditions require that products and components supplied to
us are year 2000 compliant. We have obtained and continue to seek written
assurances from developers of products incorporated into our products that their
products are year 2000 compliant. If we identify a material year 2000 compliance
issue with a third party supplier, we will work with that supplier
27
<PAGE> 33
to resolve the issue or source the parts or services from a supplier that is
year 2000 compliant. We believe all critical components of our products obtained
from third-party suppliers are year 2000 compliant, and expect that we will be
able to resolve any significant year 2000 problems in these components with
them. We cannot be certain, however, that these suppliers will resolve any or
all year 2000 problems before the occurrence of a material disruption to the
operation of our business. Any failure of these third parties to timely resolve
year 2000 problems with their systems could harm our business.
Internal information technology systems. We expect to complete testing,
modifying, upgrading and replacing existent critical internal information
technology systems, including our own software products and third-party software
and hardware technology, by November 1999. To the extent that we are not able to
test the technology provided by third-party vendors, we have obtained and
continue to seek written assurances from these vendors that their systems are
year 2000 compliant. To date, we have identified one of our enterprise systems
that utilizes a database system that will require an upgrade to be year 2000
compliant. This upgrade is currently available and anticipated to be installed
in the early fall of 1999. Given the short time period between the completion of
our compliance efforts and the end of the year, we may not have the time to
implement solutions or such solutions may be costly or unavailable.
Systems other than information technology systems. We are assessing the
potential effect and costs of remediating the year 2000 problem on our office
equipment and facilities, but are not aware of any significant operational year
2000 issues or costs associated with our non-information technology systems. The
majority of the infrastructure of our offices has been constructed within the
last three years. However, we may experience significant unanticipated problems
and costs caused by undetected errors or defects in the technology used in these
systems.
Most likely consequences of the year 2000 problem. A business disruption
caused by the year 2000 problem could interrupt our operations and damage our
relationships with our customers. An internal disruption or product failure
unique to us could give our competitors a comparative advantage. Failure of our
internal systems to be year 2000 ready could delay order processing, invoicing
and developing products and could require us to devote significant resources to
correcting such problems. Further, our customers' purchasing plans could be
affected by year 2000 preparation and remediation of the need to expend
significant resources to fix their existing systems. In addition, some customers
may wait to purchase our products until after the year 2000, which may reduce
our revenue in the near future.
Cost. We have funded our year 2000 plan from cash balances and separately
have accounted for these costs. We estimate that the total cost to us of
completing any required modifications, upgrades or replacements of our internal
systems will not exceed $280,000, almost all of which we believe will be or has
been incurred during fiscal 1999.
Contingency Plans. We are developing contingency plans to be implemented if
our efforts to identify and correct year 2000 problems affecting our internal
systems are not effective. We expect to complete our contingency plans by
November 1999. Depending on the systems affected and because of the short time
period before the year 2000, these plans could be costly and might include:
- accelerated replacement of affected equipment or software;
- short to medium-term use of backup equipment and software;
- increased work hours for our personnel; and
- use of contract personnel to correct, on an accelerated schedule, any
year 2000 problems that arise or to provide manual workarounds for
information systems.
The need to or cost of implementing any of these contingency plans could
adversely affect our business.
28
<PAGE> 34
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," which establishes
guidelines for the accounting for the costs of all computer software developed
or obtained for internal use. We are required to adopt SOP 98-1 for the fiscal
year beginning on January 4, 1999. Our adoption of SOP 98-1 is not expected to
have a material impact on our financial statements.
As of December 29, 1997, we adopted Financial Accounting Standards Board
Statement No. 130, "Reporting Comprehensive Income," which establishes standards
for reporting and displaying comprehensive income and its components in a full
set of general-purpose financial statements. We had no material components of
comprehensive income. The adoption of this statement has had no impact on our
financial position, stockholders' equity (deficit), results of operations or
cash flows. Accordingly, our comprehensive loss for fiscal 1998 is equal to our
reported loss.
The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information," which
establishes standards for the way business enterprises report information in
annual statements and interim financial reports regarding operating segments,
products and services, geographic areas and major customers. This statement is
effective for financial statements for fiscal years beginning after December 15,
1997. The adoption of this statement did not have a material impact on the way
we report information in our financial statements.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material interest rate risk exposure. Therefore, no
quantitative tabular disclosures are required.
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BUSINESS
OVERVIEW
We are a leading provider, based on revenue and number of ports shipped, of
comprehensive solutions in storage area networks, or SANs. SANs are networks
that are specifically designed to interconnect computer systems and data storage
devices. Our comprehensive SAN interconnect solutions consist of a variety of
products that connect computers to data storage devices in a network
configuration. Our products utilize the Fibre Channel protocol, which is an
American National Standards Institute, or ANSI, defined standard for the
transfer of information between computers and storage devices. Our Fibre Channel
product portfolio consists of our SAN systems, which include our SAN management
software and our switches and hubs, and other components, which include our
transceivers. Our products enable data storage devices to connect to one or more
computer systems and facilitate the reliable exchange of large amounts of data
at high speeds. Our products are fully interoperable and designed to perform in
concert so that customers can easily deploy a range of SAN configurations, from
simple point-to-point connections to more complex high-performance networks. By
offering and supporting the key components necessary to connect servers and
storage, we enable our customers to turn to one vendor for their SAN
interconnect needs. To date, we have shipped products representing over 500,000
ports to more than 30 OEMs and resellers, including Compaq Computer,
Hewlett-Packard, IBM and Sun Microsystems.
INDUSTRY BACKGROUND
Significant growth in enterprise data requirements
In recent years there has been a significant increase in the volume of data
created, processed and accessed throughout the enterprise. This growth has been
fueled by the rapid expansion of the Internet, measured both by the number of
users as well as the number of web-based corporate initiatives which require
continuous access to critical business information 24 hours a day, seven days a
week. Rapid growth of data-intensive applications, such as online transaction
processing, e-commerce, Web hosting, data warehousing, data mining, enterprise
resource management and the sharing of multimedia-based information, has
dramatically increased the need for high-capacity, high-performance storage
devices and systems. This demand is compounded when organizations create
redundant sources of data to enable continuous error-free access to data. The
growth in stored data has been facilitated by the continued decline in the cost
per unit of storage capacity. In September 1998, International Data Corporation,
or IDC, an independent research firm, estimated that the worldwide volume of
stored data would grow from over 10,000 terabytes in 1994 to approximately
116,000 terabytes in 1998 and would grow to approximately 1.4 million terabytes
in 2002, representing a compound annual growth rate of over 85%.
The need to support ever-increasing storage requirements presents
enterprises with a number of significant challenges. As employees, customers and
suppliers depend increasingly on data for fundamental business processes,
storage systems and servers must handle greater volumes of input and output
transactions, or I/Os. Additionally, many of the mission-critical applications
utilized in the enterprise today require rapid access to massive amounts of
data. These requirements have placed significant stress on current storage
technology and software applications, many of which were not designed to handle
large volumes of dispersed data. Also, as the number of storage devices
increases, management of data becomes more complex. Organizations have attempted
to address these storage challenges by devoting additional financial and
personnel resources.
Traditional server-to-storage connection solutions are inadequate and
expensive
Enterprises traditionally have attempted to support and manage storage
requirements by linking single servers to dedicated storage devices through
storage interfaces such as the small computer system interface, or SCSI, a
technology that facilitates this captive connection. However, the most commonly-
used SCSI-based storage architecture has significant constraints: it can connect
a single server with only 15 devices; it supports transmission distances of only
25 meters; and it typically permits data transmission
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speeds of only 40 or 80 megabytes per second, or MBps. Furthermore, SCSI-based
storage devices are dependent on the servers to which they are attached,
creating captive pockets of storage behind each server. This architecture
increases the stress on the server through which all data must pass and results
in loss of access to data if the server goes down. Some enterprises have
responded to the limitations of SCSI by deploying more servers and more storage
devices, but this response increases the complexity and cost of maintaining such
storage systems.
Development of Fibre Channel technology and storage area networks
To address the limitations of traditional server-to-storage connections, a
family of Fibre Channel standards was developed in the early 1990s to facilitate
high-performance storage connectivity solutions. Fibre Channel technology
enables data to be transferred from one network device to another, allowing any
server to access any storage device on the network. The technology combines the
connectivity and distance features of networking with the simplicity and
reliability benefits of the channel, or the dedicated circuit that carries
information to and from data storage devices. Merging network and channel
technologies, Fibre Channel can carry storage as well as network traffic over
the same physical connection. Furthermore, Fibre Channel is capable of
supporting up to 15.5 million devices and transferring data across distances of
10 kilometers at speeds of 200 MBps. Fibre Channel also supports multiple
protocols, including SCSI and Internet Protocol, or IP.
Since first receiving American National Standards Institute, or ANSI,
approval in 1994, the family of Fibre Channel standards has acquired broad
industry support and has been implemented in network configurations known as
storage area networks, or SANs. In a SAN, one or more storage devices are
attached through connection points, known as ports, to an interconnecting
device, commonly referred to as an interconnect. These interconnect devices
include switches, hubs and transceivers. As shown below, typical Fibre Channel
SAN configurations include point-to-point connections between two devices, an
arbitrated loop for up to 126 devices or a switched network, or fabric, which
can enable the connection of millions of devices.
Image:
The image consists of three components.
Component 1:
Title: The "Switched Fabric" title is in the top right corner of the image.
Description: Beneath the title is an image of a switch, to which run lines
connecting the switch to a device labeled "Disks", two devices labeled "Storage
Array", one device labeled a "Tape Library" and one device labeled a "Server".
The Server is connected by a line to a local area network, labeled a "LAN".
Component 2:
Title: The "Arbitrated Loop" title is located in approximately the middle of the
image.
Description: Beneath the title is a hub. The hub is connected by three lines to
three devices labeled "Storage Arrays", by one line to a device labeled "Tape
Library" and by one line to a server labeled "Server", which is connected by a
line to a local area network, labeled a "LAN."
Component 3:
Title: The "Point to Point" title is located in the lower left corner of the
image.
Description: The image depicts one device labeled a "Storage Array" and one
device labeled a "Server", which are connected by a line. Connecting the Storage
Array to the line is a GLM transceiver, which is labeled as such. Connecting the
Server to the line is a GLM transceiver, which is labeled as such. Above the
line are the words "Optical Fiber".
These configurations allow SANs to meet a wide variety of storage and
network requirements, from the smallest server-to-storage configuration to
complex enterprise networks. By bringing networking
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capabilities into the storage environment, a SAN offers storage flexibility,
fault tolerance, ease of management and a lower cost of ownership. In January
1999, IDC estimated that worldwide revenue from SAN products would grow from
approximately $2.5 billion in 1998 to over $13.3 billion in 2002, representing a
compound annual growth rate of over 50%.
Need for a comprehensive SAN solution
Fibre Channel standards have been in place for over five years and the
technology has been adopted by a broad customer base. However, the deployment of
Fibre Channel-based SANs is still at an early stage. In order to meet exploding
data requirements, enterprises typically have turned to multiple Fibre Channel
vendors with point, or single, products. Furthermore, enterprises commonly have
installed multiple SAN configurations provided by different solutions providers
in different areas of their network. These mixed solutions and point products
typically are managed by multiple, disparate software applications.
These partial solutions offer some but not all of the benefits associated
with Fibre Channel. They are often difficult to deploy and manage as a complete
system and may not interoperate with other Fibre Channel devices. Also, the
additional time needed to test and qualify these fragmented solutions results in
delayed implementation. Furthermore, it may be difficult to integrate these
systems with other enterprise management software and applications. As a result,
enterprises that implement fragmented solutions may not be able to realize the
full benefits of SANs. To handle increased data and performance requirements as
well as growing network complexity, organizations are seeking comprehensive,
integrated SAN management solutions that address a wide variety of data and
storage needs. SAN solutions must accommodate a range of interconnect products
that can interoperate with other products, be deployed easily and scale as the
SAN grows, be managed under one management software solution and be robust
enough to support mission-critical networks.
OUR FIBRE CHANNEL SAN SOLUTION
We are a leading provider of comprehensive SAN interconnect solutions that
utilize a variety of devices to connect computers to storage devices in a
network configuration. We offer a broad portfolio, which includes our:
- SAN management software;
- fabric switches, devices that provide high-speed connections between
multiple computers and storage devices;
- managed hubs, devices that connect multiple computers and devices in a
shared environment and can be controlled remotely;
- entry-level hubs, devices that connect computers and devices without
remote management functionality; and
- transceivers, devices that are typically embedded in other Fibre Channel
products to convert optical and electrical signals.
Our comprehensive SAN interconnect solutions address the difficulties
customers may encounter when they assemble SAN components from multiple
suppliers. Further, we offer customers the convenience of dealing with a single
full-service vendor, allowing them to avoid the time-consuming and costly
process of qualifying and certifying multiple SAN interconnect vendors.
Image:
The image consists of four components. The first two components are placed
completely within a line forming the shape of an oval, the third component
intersects the line forming the shape of an oval, and the fourth component falls
outside the line forming the shape of an oval.
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Component 1:
Title: The "Switched Fabric" title and the component are in approximately
the 1:00 position within the oval.
Description: Beneath the title is a device labeled "Vixel Switch", which is
at the center of a hub and spoke configuration. The Vixel switch connects by one
line to a device labeled "Disks", by a second line to a device labeled "Storage
Array", by a third line to a device depicting a storage array, by a fourth line
to a device labeled "Tape Library" and by a fifth line to a device labeled
"Server." The Server connects by a line to three additional lines intersecting
at ninety degree angles, depicting a local area network, labeled a "LAN."
Additionally, the Vixel switch connects by a line to an oval-shaped image
labeled "Vixel Hubs." This image consists of a hub, which connects by four lines
to four devices labeled "Storage Arrays", and by one line to a device labeled a
"Server."
Component 2:
Title: The "Arbitrated Loop" title and the component are in approximately
the 7:00 position within the oval.
Description: Beneath the title is an oval-shaped image labeled "Vixel
Hubs." This image consists of a hub which connects by three lines to three
devices labeled "Storage Arrays", by one line to a device labeled "Tape Library"
and by one line to a server. The server connects by a line to three additional
lines intersecting at ninety degree angles, depicting a local area network,
labeled a "LAN."
Component 3:
Title: The "Vixel SAN Management" title and the component are in
approximately the 5:00 position, partially inside and partially outside the
oval.
Description: The image is of a computer monitor sitting on top of a desktop
computer. Within the computer monitor is the SAN InSite logo, which consists of
the words "SAN InSite" placed within an oval.
Component 4:
Title: The "Point to Point" title and the component are in approximately
the 7:00 position, placed completely outside the oval.
Description: Beneath the title is an image labeled "Vixel Transceivers",
and beneath those words, in smaller font, are the words "Fiber Optical." The
image depicts two devices, set opposite one another, labeled a "Storage Array"
and "Server", respectively. The Storage Array and Server are connected by a
line. At the point of intersection of the Storage Array and the line is a
gigabit link module, labeled "GLM." At the point of intersection of the Server
and the line is a gigabit link module, labeled "GLM."
Our SAN interconnect solutions provide customers with the following key
benefits:
Our broad product portfolio addresses a wide spectrum of storage
requirements. We offer a wide range of high-performance Fibre Channel
interconnect products, including fabric switches that support scalable Fibre
Channel device connections, managed and entry-level hubs that support arbitrated
loop SAN configurations and transceivers that enhance data transport and device
connectivity throughout the SAN. Our switches, managed hubs and transceivers are
proactively managed from a single platform by our SAN InSite interconnect
management software and support a wide range of SAN configurations. Because we
design our own ASICs that drive the performance capabilities of our products, we
are able to rapidly develop solutions that meet varying data storage
requirements.
Our software provides comprehensive SAN management. Our SAN InSite software
is a unified platform that offers a single system view from one computer screen
down to the port level of our fabric switches, managed hubs and transceivers.
Our SAN InSite software provides comprehensive status, control and diagnostics
for fabric switches, arbitrated loop hubs and transceivers under a single
management software umbrella. It is also designed to seamlessly integrate with
other enterprise software applications,
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such as storage management and network management platforms. As a result,
storage network management functions, such as proactive monitoring, reporting,
policy management, security and fault tolerance, can be integrated and optimized
across our devices in the SAN. We believe this comprehensive network management
solution enhances SAN performance, offers high rates of data availability,
promotes network stability and reduces enterprise information technology
staffing, training and support requirements.
Interoperability of our products optimizes SAN deployment and
functionality. We design standards-based interoperability into our products from
the beginning of the design cycle. Our fabric switches, hubs, transceivers and
SAN management software are engineered to perform in concert to handle the
rigorous requirements of enterprise networks and enable highly-available,
scalable and manageable SANs. Furthermore, because our products adhere to Fibre
Channel ANSI standards, they are compatible with other Fibre Channel
standards-based products. Also, our SAN InSite software has been designed to
interoperate with other enterprise management applications. We believe our
enhanced interoperability allows our OEMs and resellers to streamline the
testing and qualification process and increase their time to market. We also
believe the interoperability of our products reduces end users' deployment time
and enhances the functionality and performance of their SANs.
Our range of solutions support cost-effective scaling. Because we offer the
essential building blocks for SAN interconnects, our solutions can be
efficiently scaled as users' data and storage requirements expand. Our solutions
enable seamless additions of devices and ports to the SAN, regardless of the
installed Fibre Channel configuration. Our advanced fabric switch design allows
our switches to be easily installed and to immediately interact with existing
equipment, enabling legacy arbitrated loop configurations to scale to full
fabric switched SANs. Furthermore, our single management software platform can
support the management of our products that are part of or added to SAN
configurations. We believe our interoperable products supported by our SAN
InSite software reduce personnel and financial resource requirements, providing
our end users with a more cost-effective storage solution.
STRATEGY
Our objective is to expand our position as a leading developer and supplier
of comprehensive SAN interconnect solutions. Key elements of our strategy
include the following:
Offer customers a full Fibre Channel interconnect product portfolio. We are
committed to offering a complete, high-performance SAN interconnect solution
consisting of a full portfolio of switches, hubs, transceivers and management
software. We are focused on selling our SAN solutions to new customers as well
as extending our full product portfolio to existing customers who may be using
only some of our products. To date we have shipped products representing over
500,000 Fibre Channel ports to more than 30 OEMs and resellers which we believe
is more ports than any other Fibre Channel interconnect vendor has shipped. We
plan to leverage our existing customer base and spectrum of hardware and
software products to move beyond single product sales and aggressively offer and
market complete SAN interconnect solutions. With the adoption of our full
portfolio of products, a customer realizes the increased performance and cost
benefits of our interoperable, integrated SAN solution.
Leverage our technology platforms and expertise to address rapidly evolving
market demands. We seek to leverage our proven Fibre Channel expertise to
continually develop an expanding range of products in key areas of the SAN
interconnect, including fabric switches, hubs, transceivers and the software
that manages SAN interconnects. As a comprehensive SAN interconnect solutions
provider, we have accumulated extensive Fibre Channel expertise in all SAN
configurations, including point-to-point, arbitrated loop and fabric.
Furthermore, we have taken an active leadership role in Fibre Channel standards
boards that drive the development of Fibre Channel standards. We believe our
extensive Fibre Channel expertise, our internally-developed ASICs, and our
experienced engineering teams enable us to rapidly develop and market products
that address evolving market demands. To enhance our technological advantage, we
plan to continue to invest significant engineering resources in product
development.
Extend our SAN interconnect management software leadership. We believe we
offer the most comprehensive and best performing SAN interconnect management
software solution. We intend to extend
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our leadership position by developing new management tools, offering additional
functionality and enabling further interoperability with other storage and
systems management platforms. We believe these enhanced SAN interconnect
management solutions will increase SAN reliability and functionality while
decreasing total costs of ownership.
Partner with major storage solutions providers. We intend to continue to
expand our relationships with key storage system and server OEMs, resellers, and
other leading Fibre Channel component and device vendors. To date we have
established strategic relationships with leading storage solutions providers,
including EMC, Legato and Veritas, to enhance multi-vendor interoperability. We
plan to leverage existing and establish new strategic relationships to promote
Fibre Channel solutions and interoperability, and to enhance the functionality
of our products. We will also continue to seek opportunities to participate in
joint technology development with key strategic partners in order to offer our
customers robust, interoperable solutions. We seek to accelerate time to market
and simplify deployment of our solutions by continuing to expand our test and
verification lab, the Vixel Verification Lab, or the V(2) Lab, and by initiating
pre-certification programs with additional storage solutions providers.
Expand our distribution channels. We plan to extend our comprehensive
portfolio of product offerings to existing OEMs as well as sell to new OEMs.
Currently, our major OEMs include Amdahl, Avid Sports, Compaq, Emulex,
Hewlett-Packard, IBM, Interphase and Sun Microsystems. As we expand our OEM
base, we plan to introduce new products, develop new markets and leverage the
systems and service capabilities of industry-leading OEMs. As end-user awareness
of Fibre Channel benefits increases, we believe that resellers, including
distributors and VARs, have the potential to become significant sources of
revenue. We intend to establish relationships with, and increase sales to,
resellers in order to increase our market presence. We also are actively working
to expand our breadth of internationally-based resellers, particularly those in
Europe and Asia.
Promote the Vixel brand. We plan to continue building awareness of the
Vixel brand in order to position ourselves as the leading provider of
high-performance, cost-effective SAN interconnect solutions. We believe an
established brand will become increasingly important as our distribution
channels expand to include resellers. To promote our brand, we plan to increase
our investments in a range of marketing programs, including trade show
participation, advertising in print publications, direct marketing, public
relations and web-based marketing.
OUR PRODUCTS
We offer a comprehensive portfolio of SAN interconnect products, including
SAN management software, high-performance fabric switches, managed and
entry-level hubs, and transceivers including gigabaud link modules, or GLMs, and
gigabit interface converters, or GBICs. Our broad family of interoperable
products enables customers to easily deploy a wide variety of SAN
configurations, from simple point-to-point connections to more complex
high-performance networks built with a combination of managed arbitrated loop
hubs and fabric switches. Furthermore, by offering and supporting the key
components necessary to connect servers and storage, we enable our customers to
turn to one vendor for their SAN interconnect needs. We began commercial
shipments of our SAN products in 1996, and as of July 4, 1999, we had shipped
switches, hubs and transceivers representing over 500,000 Fibre Channel ports.
SAN InSite Interconnect Management Software
Our SAN InSite interconnect management software provides comprehensive
management functionality across our Fibre Channel fabric switches, managed hubs
and transceivers. SAN InSite provides status and control of the devices that
transport data in a SAN interconnect, and it includes management tools that
proactively detect, isolate and recover from storage networking and data access
problems. We believe our SAN InSite solution is the only management application
in the industry that provides proactive management of fabric switches,
arbitrated loop hubs and transceivers from a single management workstation. The
first version of our interconnect management software was available to customers
in early
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1998. Our current version, SAN InSite, is installed in mission-critical accounts
which require a high level of visibility and control over the storage area
network. Key features of our SAN InSite interconnect management software
solution include the following:
- Single system view. Utilizing a simple graphical user interface and a
single computer screen, SAN InSite offers a complete view of all managed
devices in one or more SAN clusters.
- Built-in fault management. Leveraging the unique architecture and
embedded software of our fabric switches and managed hubs, SAN InSite is
able to recognize when a port is bypassed due to a malfunctioning storage
or server device. When these problems occur, SAN InSite either reports
that the problem has been automatically corrected or notifies the
administrator of the need to take corrective action.
- Monitoring and reporting. SAN InSite automatically monitors the status of
each SAN interconnect device and keeps track of its activity in an
electronic record. With a suite of color-coded icons and legends
displayed on a single computer screen, users can easily monitor and
quickly identify any changes to the SAN environment. SAN InSite also
provides special traffic performance monitoring for our Vixel 8100 fabric
switch. This feature facilitates capacity planning and is displayed
through on-screen traffic meters.
- Advanced device configuration management and diagnostics. A rich set of
advanced diagnostic tools allows support personnel to test and verify
communications with new server or storage devices. Using SAN InSite's
intuitive graphical user interfaces, the user can quickly configure our
switches and hubs for specific application requirements. We believe this
simplified interface minimizes training and staffing requirements,
presents a consistent look and feel across our product set and gives
customers cost-effective, flexible options for configuring a variety of
SAN applications.
- Integrated with other leading functional storage software. We actively
partner with storage management software vendors in order to facilitate
the integration of SAN InSite's powerful tools into other enterprise
management applications. For example, SAN InSite can be launched by
Veritas' Storage Manager and Hewlett-Packard's HP OpenView, and our
switches and managed hubs can be configured to send notifications to
other management platforms.
We currently include our SAN InSite software with our switches and managed
hubs, and we do not sell this software separately from our other products at
this time.
Vixel 4000 and Vixel 8100 Fibre Channel Switches
Fibre Channel switches connect a wide range of server and storage devices
and provide a high level of performance and flexibility in building large
configurations in a SAN. We began commercial shipment of our first switch
product, the Vixel 4000, in February 1998. The eight port Vixel 4000 offered
distinct advantages over other switches available at that time, including
support for non-fabric arbitrated loop devices. Our next generation eight port
Vixel 8100 Fibre Channel switch was made commercially available in June 1999,
and extends our technology leadership in the switch arena. We believe our Vixel
8100, with its patent-pending architecture, is one of the highest performing,
most cost-effective fabric switches in the industry. In addition to supporting
fabric switch functionality, our Vixel 8100 has the following significant
features:
- High speed and high bandwidth. Our Vixel 8100 supports full speed, which
is 1.0625 gigabits per second, or Gbps, in transmit and receive
directions per port. In addition, our Vixel 8100 architecture supports
wire-speed full bandwidth, which is 100 MBps, in both directions per
port. Unlike other commercially available switch products, our Vixel 8100
provides consistent 100 MBps bandwidth between any two ports, which
enables reliable high-speed traffic in any configuration.
- Support for non-fabric arbitrated loop devices in a fabric switch. A
large number of devices currently deployed in SANs cannot communicate
with fabric configurations. Our patent-pending
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capability of our Vixel 8100 enables these devices to benefit from their
attachment to a fabric SAN.
- Support for arbitrated loop or fabric-attached topologies by the same
fabric port hardware. The flexible port architecture of the Vixel 8100
supports both arbitrated loop and fabric configurations and offers
significant flexibility and interoperability when building SANs.
- Hardware-based zoning. With hardware-based zoning capabilities, our Vixel
8100 allows potentially conflicting operating systems, such as Unix and
Windows NT, to co-exist in a single SAN environment.
- Full fabric software support services. Our Vixel 8100 supports
ANSI-defined fabric services such as the simple name server and state
change notification. Devices attached to a fabric configuration use these
services in order to create a full-functioning switched SAN.
- Scalable architecture. Multiple Vixel 8100 fabric switches can be
interconnected without sacrificing performance, enabling the creation of
large, complex SANs.
- Extensive port buffering. Because of the extensive port buffering
capabilities designed into our Vixel 8100, data can be efficiently
transported through our switch.
Vixel 2000 and Vixel 2006 Managed Hubs
Our managed hubs connect devices in a SAN arbitrated loop configuration and
monitor the status of loop and port activity through auto-recovery functionality
and advanced diagnostic capabilities. Our managed hubs were available in
November 1997 and are designed to enhance customer uptime by proactively
responding to conditions that otherwise would disrupt system availability. Key
features of our managed hubs include:
- Six and 12 port configurations using removable GBICs. Our managed hubs
give customers the flexibility to deploy small or large arbitrated loop
installations. Because our managed hubs include full GBIC support,
customers can mix different transceiver types on the same hub and install
additional GBICs if needed.
- Loop status indicators. An indicator light on the front of our hub
products continuously reports to the operator whether the SAN arbitrated
loop is operating properly. Loop status also is reported through SAN
InSite's graphical user interface on a management workstation. These loop
status information features accelerate problem detection and resolution.
- Loop integrity and auto-recovery. Our managed hubs automatically detect
and bypass malfunctioning ports. An alert is posted to the operator via
SAN InSite, or another management application, so that further corrective
action can be taken. In addition, our managed hubs have a recovery
routine that can correct problems without disrupting ongoing loop
operations. Without this feature, the network would be down until an
administrator could manually reset each device.
- Full console interface and event logging. In addition to the SAN InSite
graphical user interface, our managed hubs support the full command line
interface favored by some Unix users. This interface facilitates remote
support of our product by OEMs, resellers or third-party support
organizations. Our hubs also support time-stamped event logging, a useful
tool for monitoring SAN status during unattended operation.
Vixel 1000 Entry-Level Hub
Our Vixel 1000 entry-level hub provides a cost-effective solution that
addresses SAN interconnect requirements, linking low and middle range servers
with storage devices. By enhancing functionality and reducing costs for
entry-level products, we are well positioned to address a broad segment of the
SAN interconnect market. Introduced in October 1996, our Vixel 1000 has been
tested and proven in a wide range of demanding, mission-critical networks and
continues to be a popular choice for cost-conscious,
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entry-level SAN installations. Our Vixel 1000 hub supports full gigabit data
transfer speeds and automatically bypasses failed or unused ports in a SAN. Its
GBIC-based design allows customers to add, move or delete storage capacity and
Fibre Channel devices on the SAN as needed. The flexible design of our
entry-level hub also enables different combinations of copper, short-wave
optical and long-wave optical transceiver types in a single SAN solution.
Transceivers
Our transceivers provide fiber optic connectivity between devices installed
in a SAN. Our fiber optic transceivers include GLMs, which are attachable
modular interfaces for Fibre Channel host bus adapters and disk controllers, and
GBICs, which are removable transceivers for switches, hubs, host bus adapters
and disk controllers. We have been shipping gigabit GLMs since September 1996
and we are supplying full-speed GLMs to a variety of customers for use in host
bus adapters and disk controllers.
As one of the original authors of the GBIC Specification, we have played a
strategic role in enabling modular, high-speed transceivers for Fibre Channel
environments. We have been shipping GBICs to customers since September 1996. Our
current optical GBIC employs state-of-the-art vertical cavity surface emitting
laser, or VCSEL, technology specifically designed for high-speed data transport
among disk controllers, arbitrated loop hubs and fabric switches. Our GBICs
support Serial ID, allowing host enclosures to solicit asset information,
including manufacturer, date of manufacture, serial number and batch number
directly from the GBIC. With our integrated product portfolio, this GBIC Serial
ID information can be read by our managed hubs and fabric switches and reported
to the user via SAN InSite. This feature allows a network administrator to track
inventory information from a single management platform, regardless of where the
GBIC is installed in a fabric switch or managed hub.
OUR TECHNOLOGY
We believe that our Fibre Channel expertise across a wide range of Fibre
Channel products and SAN configurations has enabled us to develop and ship in
volume leading high-performance SAN interconnect solutions. Key components of
our technology platform include the following:
Leadership in SAN interconnect management software. We have a core
competency in the development of SAN interconnect management software which, we
believe, provides us with a significant competitive advantage. We have leveraged
our knowledge of SAN interconnect components such as fabric switches, managed
and entry-level hubs, and transceivers to develop software that enables a
comprehensive solution to SAN interconnect management.
Fabric switch architecture. We have developed a full-featured and
high-performance architecture for our fabric switches. Our fabric switches
incorporate advanced features, such as extensive port buffering, to offer high
performance in a low-cost architecture. In addition, our switch architecture is
scalable, facilitating development of new generations of switches, including our
Vixel 8100 switch, that support more ports and faster transmission speeds. We
have several patents pending covering our switch architecture.
ASIC design expertise. We employ state-of-the-art ASIC design methodologies
and have demonstrated a successful track record of achieving short design cycles
for high-performance, complex ASICs. We use our own internally developed ASICs
in our Fibre Channel products which enables us to maximize our products'
reliability, functionality and interoperability while minimizing time to market.
Fabric switch and managed hub embedded software. Our embedded software
expertise covers a wide range of SAN interconnect devices, including our fabric
switches and managed hubs. We believe we are the only company that designs,
develops and markets a full range of SAN interconnect components. As a result,
we believe we are uniquely positioned to further develop embedded software that
maximizes interoperability and functionality of all of these SAN components
while supporting ANSI and Internet standards.
Designed-in interoperability. We design standards-based interoperability
into our products from the beginning of the design cycle and thoroughly validate
interoperability throughout the product release
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<PAGE> 44
process. Our products also are extensively tested with other vendors' products
to ensure cross-vendor interoperability. In January 1998, we launched our V(2)
Lab to facilitate robust interoperability testing and analysis of our products
within a multi-vendor system environment. We believe that our investment of
personnel and capital equipment in this facility has enhanced interoperability
and time to market for our OEMs and resellers. We also use this lab to certify
specific SAN configurations and reduce the need for our distribution partners to
undergo costly and timely testing processes.
CUSTOMERS
Our primary customers are OEMs and resellers who sell to end users and
VARs. Following is a list of our customers who have purchased more than $500,000
of our products since the beginning of fiscal 1998:
<TABLE>
<S> <C>
Amdahl Hewlett-Packard
Avid Sports IBM
Avid Technologies Interphase
Bell Microproducts Nissho Electronics
Compaq Computer Sun Microsystems
Emulex
</TABLE>
In some cases, we sell our products to our customers' contract
manufacturers who in turn sell them to our customers. Sun Microsystems, Compaq
Computer, Hewlett-Packard and Interphase represented 34.4%, 19.8%, 11.8% and
10.4% of our total revenue, respectively, for the six months ended July 4, 1999.
In fiscal 1998, Sun Microsystems and Hewlett-Packard represented 54.4% and 12.3%
of our total revenue, respectively.
CUSTOMER SERVICE AND SUPPORT
We emphasize customer service and support in order to provide our customers
and their end users with the knowledge and resources necessary to successfully
implement and integrate comprehensive, high-performance Fibre Channel solutions.
We offer a variety of support options for our products, including 24 hours a
day, seven days a week support and immediate parts replacement that enables
continuous customer response and rapid replacement of products at end-user
locations. Our customer service and systems engineering teams provide extensive
pre- and post-sale customer support, including consultation, network design and
in-depth training on SAN technology and product implementation.
In October 1998, we launched our Vixel Care Services program to further
enhance the support we provide to our OEMs and resellers. This program includes
comprehensive education and training for our products and Fibre Channel SANs,
telephone support, customized remote support contracts and onsite installation
consulting services. We also have an initiative with our OEMs and resellers to
extend train-the-trainer techniques so they may quickly develop their own
service organizations to support SAN installations that include our products and
SAN InSite management software. We intend to continue providing a high level of
education and service to further support and optimize SANs deployed at end-user
sites.
SALES AND MARKETING
We sell our SAN solutions, including SAN interconnect management software,
fabric switches, hubs and transceivers, to OEMs and select resellers. We
primarily sell to OEMs of specific operating systems-based servers including
Unix and Windows NT, as well as to OEMs of high-end disk and tape storage
subsystems. Our OEMs utilize our products to deliver to end users complete
factory-configured solutions, which are installed and field-serviced by OEMs'
technical support organizations.
As the markets for Fibre Channel products and SAN solutions evolve and as
end-user awareness of the benefits of Fibre Channel increases, we believe an
increasing volume of sales will occur through alternative distribution channels,
including resellers and systems integrators. To support our reseller channel, we
recently introduced our Premier Value Added Reseller program that provides
select resellers
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<PAGE> 45
with the advanced technical training and sales support necessary to successfully
begin designing, installing and supporting complete, integrated SAN solutions.
As the SAN market continues to develop, we plan to establish additional
relationships with select domestic and international resellers to reach
additional markets and increase our geographic coverage. By serving the needs of
both OEMs and resellers, we can leverage the strengths of our range of customers
to further develop the Fibre Channel market and enhance our ability to address a
large end-user base.
We currently distribute our products in Japan though our relationship with
Nissho Electronics Corporation. We intend to continue expanding internationally
by partnering with additional OEMs and resellers who have a strong international
presence and are capable of selling and installing complex SAN solutions.
Our marketing efforts are focused on increasing awareness of our Fibre
Channel products and our Vixel brand, promoting SAN-based solutions in general,
and advocating industry-wide standards and interoperability. Key components of
our marketing efforts include:
- extending our strategic alliances with other Fibre Channel, SAN storage
management and enterprise vendors to promote standardization and enhance
interoperability;
- promoting our SAN solutions under the Vixel brand name to strengthen
sales through distribution and VAR channels;
- continuing our active participation in industry associations and
standards committees to promote and further enhance Fibre Channel
technology and increase our visibility as industry experts;
- leveraging major trade show events and SAN conferences to promote our
comprehensive solution and to continue our leading role in educating
customers on the value of SANs;
- expanding our web-based marketing program to provide both product and
sales information; and
- in cooperation with other vendors, certifying and packaging complete SAN
solutions with proven interoperability between SAN interconnects, devices
and applications.
MANUFACTURING
We outsource our manufacturing which reduces our need to make costly
investments in capital equipment and manufacturing facilities. K*TEC
Electronics, a division of Kent Electronics, and Solectron Corporation currently
manufacture our products. They are responsible for nearly all material
procurement, assembly and testing, packaging and shipment of our products. Our
switches, hubs and GBIC transceiver products are manufactured at K*TEC, and our
GLM transceivers are manufactured at Solectron; however, we are in the process
of transitioning our GLM manufacturing to K*TEC. We currently do not have a
long-term supply contract with K*TEC or Solectron. Therefore, they are not
obligated to manufacture products for us, except as may be provided in
particular purchase orders that they have accepted. We place purchase orders
with our manufacturers based on periodic forecasts. In the future, we may need
to add new manufacturing partners to achieve higher production volumes and/or
lower costs.
While our manufacturing partners are responsible for all facets of the
manufacturing process, we are directly involved in qualifying our vendors and
the key components that are used in our products. Most of our product components
can be obtained from multiple qualified manufacturers. While most of the
materials used in our products are standard, some are proprietary or sole
sourced and require extended lead times. Although we design our own ASICs, they
are manufactured by LSI Logic and VLSI. Motolora and Intel are currently our
sole suppliers for microprocessors. Honeywell is our sole supplier of the VCSEL
used in our transceivers. In addition, we license software for our hubs from
Wind River Systems. Our supply management team works closely with strategically
important suppliers who offer proprietary or sole-sourced products. In addition,
our operations team is focused on production test equipment development,
manufacturability, effective transfer of products from development to
production, and monitoring of supplier performance and quality.
40
<PAGE> 46
RESEARCH AND DEVELOPMENT
We focus our research and development efforts on developing products that
meet the evolving needs of the SAN market. We are developing our SAN
interconnect management software to provide higher levels of management
capabilities for our products and others, including the ability of SAN InSite to
manage other vendors' devices. We also are developing interfaces that interact
with leading systems management software in order to more effectively manage
data transport and data storage throughout the enterprise. Our switch and hub
development efforts are focused on enhancing functionality through the
development of higher-level ASICs, increasing the number of ports and
transmission speed capabilities, and enhancing interoperability with other
vendors' devices. In addition to the development of our core technologies, we
plan to continue to partner with other leading providers of SAN technologies,
products and services to jointly develop high performance SAN products and
support industry standards.
Our research and development expenses were $6.2 million in the six months
ended July 4, 1999 and $11.1 million in fiscal 1998. We believe that our
research and development efforts are key to our ability to maintain technical
competitiveness and to deliver innovative products that address the needs of the
market. However, our product development efforts may not result in commercially
viable products, and our products may be made obsolete by changing technology or
new product announcements by us or our competitors.
COMPETITION
The SAN interconnect market has become increasingly competitive. New
SAN-enabled products are being offered by a growing number of server, storage,
tape and storage management vendors. Because we offer a broad product portfolio,
each of our products competes with a different set of competitors. For fabric
switch sales, we compete primarily with Ancor, Brocade and McDATA. For hub
sales, we compete primarily with Emulex and Gadzoox. For transceiver sales, we
compete primarily with Cielo, Finisar, Hewlett-Packard and IBM. Although we do
not believe that any other vendor offers comprehensive SAN interconnect
management software that directly competes with ours, other vendors, such as
Brocade and Gadzoox, provide single point-device managers for either hub or
fabric switch products, but not across multiple devices, including fabric
switches, hubs and transceivers. As the market for SAN interconnect products
grows, we may face competition from traditional networking companies and other
manufacturers of networking equipment. These networking companies may enter the
SAN interconnect market by introducing their own products or by acquiring or
entering into an alliance with an existing SAN interconnect provider. It also is
possible that our OEMs could develop and introduce products competitive with our
product offerings.
We believe the primary competitive factors in the SAN interconnect market
are the following:
- product performance and features;
- product reliability and interoperability;
- the size of installed customer base;
- price;
- strength of distribution channel;
- ability to meet delivery schedules; and
- customer service and technical support.
We believe we compete favorably with our competitors based on these
factors. However, because many of our existing and potential competitors have
longer operating histories, greater name recognition, larger customer bases and
substantially greater financial, technical, sales and marketing resources, they
may have larger distribution channels, access to more customers and a larger
installed customer base than we do. These competitors may be able to undertake
more extensive marketing campaigns and adopt more aggressive pricing policies
than we can. To remain competitive, we believe we must, among other things,
41
<PAGE> 47
invest significant resources in expanding our distribution channels, developing
new products and enhancing our current products. If we fail to do so, our
products will not compete favorably with those of our competitors which will
significantly harm our business.
INTELLECTUAL PROPERTY
Our success depends on our proprietary technology. We attempt to protect
our technology through a combination of patents, copyrights, trade secret laws,
trademarks, as well as confidentiality agreements and other contractual
restrictions. There can be no assurance that our intellectual property
protection measures will be sufficient to prevent misappropriation of our
technology or that our competitors will not independently develop technologies
that are substantially equivalent or superior to our technology. In addition,
the laws of many foreign countries do not protect our intellectual property
rights to the same extent as the laws of the United States. Our failure to
protect our proprietary information could have a material adverse effect on our
business, financial condition and results of operations.
We have been awarded one patent with respect to our GBIC transceivers. We
also have four pending patent applications in the United States and selected
countries abroad with respect to a broad scope of SAN technology including our
SAN management capabilities and switch and hub architecture. However, it is
possible that patents may not be issued for the pending applications and that
our issued patent may not adequately protect our technology from infringement or
prevent others from claiming our technology infringes that of third parties. All
our software products have copyright notices. We own several trademarks
including Vixel and SAN InSite. We also rely on trade secret law and contractual
provisions to protect our intellectual property, including technology
development which we have determined not to patent or copyright, or which is not
capable of more formal protection.
We may need to initiate litigation 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 infringement claims of other parties' proprietary rights. For
instance, a competing supplier of transceivers sued us, claiming that features
of our GBIC products infringed its patents. This lawsuit was settled in May
1999. We incurred significant costs in defending and settling such claims.
Infringement or other claims could be asserted or prosecuted against us in the
future, and it is possible that past or future assertions or prosecutions could
harm our business. Any such claims, with or without merit, could be
time-consuming, result in costly litigation and diversion of technical and
management personnel, cause delays in the development and release of our
products, or require us to develop non-infringing technology or enter into
royalty or licensing arrangements. Such royalty or licensing arrangements, if
required, may not be available on terms acceptable to us, or at all. For these
reasons, infringement claims could materially harm our business.
EMPLOYEES
As of July 31, 1999, we had 181 employees, 178 of who were full-time. Of
our employees, 80 were engaged in research and development, 39 in sales and
marketing, 34 in operations and 28 in finance, administration and information
services. None of our employees are represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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<PAGE> 48
FACILITIES
Our corporate headquarters are located in Bothell, Washington and occupy
approximately 43,000 square feet. Our lease for this facility expires in January
2002. In addition, we have a research and development and sales facility located
in Irvine, California that occupies approximately 13,000 square feet. Our lease
for this facility expires in November 2002. We believe these existing facilities
will be adequate to meet our needs for the next 12 months. If our growth
continues, we will need larger facilities after that time. We cannot assure you
that suitable additional facilities will be available as needed on commercially
reasonable terms. We also lease five domestic sales offices in San Jose,
California, Columbia, Maryland, Gloucester, Massachusetts, Nashua, New Hampshire
and Houston, Texas.
43
<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of July 31, 1999 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James M. McCluney......................... 48 President, Chief Executive Officer and Director
Kurtis L. Adams........................... 44 Chief Financial Officer, Vice President of Finance,
Secretary and Treasurer
Stuart B. Berman.......................... 42 Chief Technology Officer
Richard G. Helgeson....................... 47 Vice President of Sales
Robert R. Lux............................. 55 Vice President of Customer Satisfaction and
Corporate Quality
Jay R. O'Donald........................... 56 Vice President of Operations
Stanley H. Reese.......................... 58 Vice President of Product Development
Arun K. Taneja............................ 52 Vice President of Marketing
Ronald G. von Trapp....................... 51 Vice President of Worldwide Sales
Donald P. Wenninger....................... 49 Vice President of Information Technology
Gregory R. Olbright....................... 43 Chairman of the Board of Directors
Kevin A. Fong(1).......................... 45 Director
Charles A. Haggerty(2).................... 57 Director
Juan A. Rodriguez......................... 58 Director
Timothy M. Spicer(1)...................... 49 Director
Werner F. Wolfen(2)....................... 69 Director
</TABLE>
- -------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
James M. McCluney has served as our president, chief executive officer and
director since April 1999. From October 1997 to January 1999, he served as
president and chief executive officer of Crag Technologies, formerly Ridge
Technologies, a storage system manufacturer. From October 1994 to September
1997, Mr. McCluney served in various positions at Apple Computer, including
senior vice president of worldwide operations and vice president of European
operations.
Kurtis L. Adams has served as our chief financial officer and vice
president of finance since September 1998. From December 1995 to September 1998,
he was chief financial officer and vice president of finance of Health Systems
Technologies, Inc., a software company. Mr. Adams was the corporate controller
from November 1989 to February 1991 and the corporate controller and chief
accounting officer from March 1991 to October 1995 for Chipcom Corporation, a
networking company.
Stuart B. Berman has served as our chief technology officer since February
1998. In July 1996, he co-founded Arcxel Technologies, Inc., a networking
company, and through February 1998 served as its chairman and chief technology
officer. From February 1993 to June 1996, Mr. Berman was a Fibre Channel
architect for Emulex Corporation, a networking company.
Richard G. Helgeson has served as our vice president of sales since January
1998. From May 1997 to January 1998, he served as vice president of sales for
Atreiva Corporation, an Internet services company. From June 1995 to May 1997,
Mr. Helgeson was vice president of sales at CNT Corporation, a networking
company. From June 1990 to May 1995, Mr. Helgeson held various senior sales
positions at Wellfleet Communications, Inc., a networking company.
Robert R. Lux has served as our vice president of customer satisfaction and
corporate quality since June 1999. From January 1999 to June 1999, he served as
a sales, marketing and corporate quality consultant to us. From November 1998 to
May 1999, he served as general partner of Lux & Associates, a consulting firm.
In April 1995, Mr. Lux founded Bay Stone Software, a software company, and
through
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<PAGE> 50
October 1998 served as its chairman, president and chief executive officer. From
January 1994 to March 1995, Mr. Lux served as general partner of Lux &
Associates.
Jay R. O'Donald has served as our vice president of operations since
February 1998. In July 1996, Mr. O'Donald co-founded Arcxel Technologies, and
through February 1998, he served as its president and chief executive officer
and director. From April 1993 to July 1995, Mr. O'Donald was the vice president
of engineering at Emulex Corporation.
Stanley H. Reese has served as our vice president of product development
since January 1999. From July 1997 to January 1999, he was the vice president of
research and development at VitalCom Corporation, a medical systems company.
From December 1989 to July 1997, Mr. Reese was the vice president of research
and development at Cubix Corporation, a computer company.
Arun K. Taneja has served as our vice president of marketing since July
1997. From February 1998 to February 1999, he was senior vice president of
marketing and from February 1999 to July 1999 senior vice president of business
development, for Andataco, a storage solutions provider. From June 1996 to
October 1997, Mr. Taneja was vice president of marketing for Invincible
Technologies Corporation, a storage solutions provider. From July 1994 to
February 1996, Mr. Taneja served as vice president of marketing at Axil
Computer, Inc., a manufacturer of SPARC-based workstations and servers.
Ronald G. von Trapp has served as our vice president of worldwide sales
since July 1999. From October 1997 to July 1999, he was vice president of
worldwide sales and marketing at Mylex, Inc., a developer of hardware and
software for data management. From January 1997 to October 1997, Mr. von Trapp
served as vice president, Americas at Maxtor Inc., a data storage hardware
company. From June 1989 to June 1996 he served as director of sales at Quantum
Corp., a data storage hardware company.
Donald P. Wenninger has served as our vice president of information
technology since November 1997, and as our director of information systems since
December 1996. From April 1986 to November 1996, Mr. Wenninger served in various
positions in operations and information systems at Intermec Technologies
Corporation, an automated data collection and mobile computing systems provider.
Gregory R. Olbright founded Vixel and has served as a director since our
inception in 1991. From June 1991 to February 1999, he was our president and
chief executive officer. Since May 1999, Mr. Olbright has served as our chairman
of the board of directors. Mr. Olbright serves as a part-time employee for us,
providing advisory services to our chief executive officer.
Kevin A. Fong has served as one of our directors since October 1995. He has
served as a general partner with the Mayfield Fund, a venture capital fund, from
1998, and has been a general partner of several venture capital funds affiliated
with Mayfield since 1990. Mr. Fong is a member of the board of directors of
Legato Systems, Inc., a publicly held enterprise storage management software
company.
Charles A. Haggerty has served as one of our directors since March 1996.
Since July 1993, he has been chairman, president and chief executive officer of
Western Digital Corporation, a publicly held data storage company.
Juan A. Rodriguez has served as one of our directors since 1994 and as our
chairman of the board of directors from January 1995 to May 1999. Since May
1996, he has been chairman and chief executive officer of Ecrix Corporation, a
data storage company. From September 1993 to March 1994, Mr. Rodriguez was the
chairman and chief executive officer for Datasonix, a data storage company. He
has also been a professor at the University of Colorado, Boulder, since 1992.
Timothy M. Spicer has served as a one of our directors since February 1998,
and served as our interim chief executive officer from February 1999 to April
1999. He has been the president and chief operating officer of San Francisco
Sentry Investment Group, a registered investment advisor, since 1993. Mr. Spicer
serves as a director of Union Bank of Switzerland.
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<PAGE> 51
Werner F. Wolfen has served as one of our directors since July 1994. He is
a retired partner of the law firm of Irell & Manella where he was co-chairman of
the firm's executive committee from 1982 to 1992. Mr. Wolfen is a member of the
board of directors of Broadcom Corporation, a publicly held networking company.
BOARD COMPOSITION
We currently have authorized seven directors. Upon the closing of this
offering, the terms of office of our directors will be divided into three
classes: Class I, whose term will expire at the annual meeting of stockholders
to be held in 2000 or special meeting held in lieu thereof, Class II, whose term
will expire at the annual meeting of stockholders to be held in 2001 or special
meeting held in lieu thereof and Class III, whose term will expire at the annual
meeting of stockholders to be held in 2002 or special meeting held in lieu
thereof. The Class I directors are Messrs. Fong and Rodriguez, the Class II
directors are Messrs. Olbright and Wolfen and the Class III directors are
Messrs. Haggerty, McCluney and Spicer. At each annual meeting of stockholders
after the initial classification or special meeting in lieu thereof, the
successors to directors whose terms will then expire will be elected to serve
from the time of election and qualification until the third annual meeting
following election or special meeting held in lieu thereof. In addition, our
certificate of incorporation will provide that the authorized number of
directors may be changed only by resolution of the board of directors. Any
additional directorships resulting from an increase in the number of directors
will be distributed among the three classes so that, as nearly as possible, each
class will consist of one-third of the directors. This classification of the
board of directors may have the effect of delaying or preventing changes in
control or management of Vixel, although our directors may be removed for cause
by the affirmative vote of the holders of a majority of our common stock.
BOARD COMPENSATION
The chairman of our board of directors, Gregory Olbright, receives $50,000
per year for serving in this capacity. We do not currently provide our other
directors with cash compensation for their services as members of the board of
directors, although we reimburse our directors for reasonable expenses they
incur in connection with attendance at board and committee meetings. Directors
are eligible to participate in our equity incentive plans. See "-- Employee
benefit plans" on page 49. In May 1999, the board of directors granted each
director who was not an employee, a fully vested option to purchase 16,667
shares of common stock at a price of $6.00 per share. Each director immediately
exercised the option to purchase 16,667 shares of common stock and delivered to
us a $100,000 full-recourse promissory note. In April 1999, the board of
directors granted a special option to purchase 26,667 shares of common stock at
a price of $3.08 per share to Timothy Spicer, one of our directors, and paid Mr.
Spicer $40,000 for his service as our interim chief executive officer from
February through April 1999.
BOARD COMMITTEES
The board of directors has an audit committee and a compensation committee.
The audit committee meets with our independent auditors at least annually
to review the results of the annual audit. The audit committee also recommends
to the board the independent accountants to be retained and reviews the
accountants' comments as to controls, adequacy of staff and management
performance and procedures in connection with our audit and financial controls.
The audit committee is composed of two non-employee directors, Messrs. Fong and
Spicer.
The compensation committee makes recommendations to the board concerning
salaries and incentive compensation, awards stock options to employees and
consultants under our stock option plans and performs other functions regarding
compensation as delegated by the board. The compensation committee is composed
of two non-employee directors, Messrs. Haggerty and Wolfen.
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<PAGE> 52
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee is or has been, at any
time since our formation, an officer or employee of Vixel. No member of our
compensation committee and none of our executive officers serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of our board of directors or
compensation committee.
EXECUTIVE COMPENSATION
The following table sets forth all compensation awarded to, earned by, or
paid by us during the fiscal year ended January 3, 1999 to (A) our current chief
executive officer and president, (B) our president and chief executive officer
during the fiscal year ended January 3, 1999, and (C) our five most highly
compensated executive officers, other than the chief executive officer, whose
salary and bonus for the fiscal year exceeded $100,000 and who served as an
executive officer of Vixel during such year collectively, these individuals are
referred to as "Named Executive Officers".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------- ---------------------
ALL OTHER SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS(#)
--------------------------- -------- ------- ------------ ---------------------
<S> <C> <C> <C> <C>
James M. McCluney(1)......................... -- -- -- --
President and Chief Executive Officer
Stuart B. Berman............................. $128,082 -- -- 60,534
Chief Technology Officer
Richard G. Helgeson(2)....................... 127,212 $80,000 $ 2,181 160,000
Vice President of Sales
Jay R. O'Donald(3)........................... 130,481 -- 50,686 82,836
Vice President of Operations
Former Executive Officers
Gregory R. Olbright.......................... 249,039 -- 823,577 1,400,000
President and Chief Executive Officer(4)
Marlu E. Allan............................... 133,923 -- 25,535 --
Vice President of Business Development(5)
Karen L. Howard.............................. 129,808 -- 50,491 --
Vice President of Human Resources(6)
</TABLE>
- -------------------------
(1) Mr. McCluney joined Vixel in April 1999.
(2) Bonus consists of commissions and bonuses related to sales activities. Other
compensation consists of 401(k) plan matching contributions.
(3) Other compensation includes $42,857 in relocation payments and $7,829 in
401(k) plan matching contributions.
(4) Mr. Olbright resigned as president and chief executive officer of Vixel in
February 1999. Other compensation includes $473,643 in relocation expenses,
$250,000 in accrued severance, $90,334 in interest forgiveness and $9,600 in
401(k) matching contributions. With respect to securities underlying
options, an option to purchase 700,000 shares of common stock was exercised
in April 1998, and the shares acquired upon exercise were repurchased by us
at cost in October 1998.
(5) Ms. Allan resigned as an executive officer of Vixel in November 1998. Other
compensation includes $17,500 in accrued severance and $8,035 in 401(k)
matching contributions.
(6) Ms. Howard resigned as an executive officer of Vixel in January 1999. Other
compensation includes $42,703 in accrued severance and $7,788 in 401(k)
matching contributions.
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<PAGE> 53
The following table shows certain information regarding stock options
granted to the Named Executive Officers during fiscal 1998. No stock
appreciation rights were granted in fiscal 1998. All options granted to these
executive officers in the last fiscal year were granted under our 1995 stock
option plan. Unless otherwise noted, options vest 25% on the anniversary of the
vesting commencement date and monthly thereafter in 36 equal installments. The
percentage of total options set forth below is based on options for 3,587,866
shares granted to employees in fiscal 1998. All options are granted at the fair
market value as determined by the board of directors on the date of grant.
Potential realizable values are net of exercise price, but before associated
taxes based on the term of the option at the time of grant. The 5% and 10%
assumed annual rates of compounded stock price appreciation are mandated by the
SEC and do not represent our estimate or projection of the future common stock
price. Unless the market price of the common stock appreciates over the option
term, no value will be realized from the option grants made to the executive
officers. The assumed 5% and 10% rates of stock appreciation are based on the
assumed offering price of $11.00 per share.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE VALUE AT
TOTAL ASSUMED ANNUAL RATES OF
OPTIONS EXERCISE STOCK PRICE APPRECIATION
NUMBER OF SHARES GRANTED PRICE FOR OPTION TERM
UNDERLYING TO PER EXPIRATION ------------------------------
NAME OPTIONS GRANTED EMPLOYEES SHARE DATE 5% 10%
---- ---------------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
James M. McCluney....... -- -- -- -- -- --
Stuart B. Berman(1)..... 60,534 1.69% $0.11 9/21/07 $ 1,077,977 $ 1,720,449
Richard G. Helgeson..... 160,000 4.5 4.59 01/26/08 2,132,448 3,830,592
Jay R. O'Donald(2)...... 82,836 2.3 0.11 09/29/07 1,475,127 2,354,299
Gregory R.
Olbright(3)........... 700,000 19.5 5.00 03/03/08 13,563,690 24,707,760
700,000 19.5 3.08 12/08/08 15,584,940 26,729,010
Marlu E. Allan.......... -- -- -- -- -- --
Karen L. Howard......... -- -- -- -- -- --
</TABLE>
- -------------------------
(1) This option was substituted for an option originally granted by Arcxel, with
the exception of 2,088 shares which vested at the time of substitution, the
option vests at the rate of 2,088 shares per month for 28 months.
(2) This option was substituted for an option originally granted by Arcxel.
Except for 2,857 shares which had vested at the time of substitution, the
option vests at the rate of 2,857 shares per month for 28 months.
(3) The March 3, 1998 option was exercised for a promissory note in April 1998.
The shares acquired upon exercise were repurchased by us at cost in October
1998 in exchange for cancellation of the note. A new option was issued in
December 1998. With respect to the December 1998 option, 158,337 shares were
immediately vested, 208,340 shares vest monthly ratably over the first 15
months, 58,336 shares vest ratably over the next 12 months, 252,083 shares
vest ratably over the next 11 months and 22,903 shares vest in the last
month. In connection with Mr. Olbright's resignation as our president and
chief executive officer, options for 284,709 shares were cancelled in April
1999. At that time, Mr. Olbright exercised his option in full for the
remaining 415,291 shares. These shares are subject to a right of repurchase
in favor of Vixel which lapses according to the schedule above.
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<PAGE> 54
OPTION EXERCISES AND HOLDINGS
The following table sets forth the number of shares of common stock
acquired upon the exercise of stock options by the Named Executive Officers
during fiscal 1998, and the number and value of the shares of common stock
underlying unexercised options held by the Named Executive Officers as of
January 3, 1999. The value of unexercised in-the-money options is based on the
fair market value of our common stock as of January 3, 1999, which was $3.08 per
share, as determined by our board of directors, less the exercise price,
multiplied by the number of shares underlying the option. All options were
granted under our 1995 stock option plan. These options generally vest 25% on
the anniversary of the vesting commencement date and monthly thereafter in 36
equal installments.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT JANUARY 3, 1999 JANUARY 3, 1999
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
James M. McCluney............ -- -- -- -- -- --
Stuart B. Berman............. 37,566 $168,150 $111,464
Richard G. Helgeson.......... -- -- -- 160,000 -- --
Jay R. O'Donald.............. -- -- 31,423 51,413 93,238 152,549
Gregory R. Olbright.......... 900,000 $810,000 172,227 527,773 -- --
Marlu E. Allan............... 50,013 241,933 12,274 71,046 32,219 186,496
Karen L. Howard.............. 36,477 221,596 9,737 70,453 23,368 169,088
</TABLE>
EMPLOYEE BENEFIT PLANS
1995 Stock Option Plan
The 1995 Stock Option Plan was adopted by our board of directors and
approved by our stockholders in February 1995 and later amended by the board of
directors with stockholder approval in March 1998 (the "1995 Plan"). The 1995
Plan authorizes the grant of incentive and nonstatutory stock options, stock
appreciation rights and stock bonuses.
A total of 6,133,333 shares of common stock of the Company were reserved
for issuance under the 1995 Plan. Of that amount, 2,282,389 shares are reserved
for outstanding option grants to Company employees, officers and directors at
the time of this offering. As of July 31, 1999, there were 2,624,199 shares of
common stock issued under the 1995 Plan, held by employees at a weighted average
exercise price of $3.26 per share.
In December 1998, the board authorized the exchange of all outstanding
options under the 1995 Plan with an exercise price of $3.38 for new stock
options. As a result, optionees were given the opportunity to receive repriced
options at $3.08 per share. The repriced options had a new vesting schedule,
under which electing optionees received credit toward the vesting of their
option equal to one-half of the time elapsed under their old option. Options for
568,137 shares of common stock were repriced and exchanged for new options
issued in December 1998.
The 1995 Plan will terminate in July 2005, unless terminated sooner by the
board of directors. Outstanding options under the 1995 Plan will continue to be
governed by their existing terms which are discussed below.
1999 Equity Incentive Plan
The Company's 1999 Equity Incentive Plan (the "1999 Plan") was adopted by
our board of directors and approved by our shareholders in August 1999. The 1999
Plan is intended to serve as the successor
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<PAGE> 55
equity incentive program to the 1995 Plan. The 1999 Plan authorizes the grant of
incentive and nonstatutory stock options, stock appreciation rights, and the
right to receive or purchase restricted stock.
Effective upon the completion of this offering, we will have a total of
1,700,000 shares of common stock reserved for issuance under the 1999 Plan
following a two-for-three reverse stock split anticipated to be completed before
the closing of this offering. In addition, the number of shares of common stock
reserved for issuance under the 1999 Plan will automatically increase on the
first day of each calendar year, beginning in calendar year 2001, by an amount
equal to the lesser of 1,700,000 shares or 4% percent of the total number of
shares of common stock outstanding on the first day of the calendar year. Under
the 1999 Plan, the board of directors has the authority to designate a smaller
number of shares by which the reserve will increase for a particular year. In no
event, however, may any one participant in the 1999 Plan receive option grants
or direct stock issuances for more than 1,200,000 shares of common stock in the
aggregate per calendar year. The 1999 Plan will terminate in August 2009, unless
terminated sooner by the board of directors.
Provisions Common to Both the 1995 Plan and the 1999 Plan
The terms of the stock options, stock appreciation rights and stock bonuses
and restricted stock under both our 1995 Plan and our 1999 Plan are
substantially similar. Both plans provide for grants of incentive stock options
that qualify under Section 422 of the Internal Revenue Code of 1986, to our
employees, including officers and employee directors or the employees of our
affiliates. Both plans provide for the grant of nonstatutory stock options,
stock bonuses and stock appreciation rights to employees, officers, non-
employee directors and consultants to the Company.
The 1995 Plan and the 1999 Plan are each administered by the board of
directors or a committee appointed by the board of directors; references herein
to the board of directors shall include any such committee. The 1995 Plan and
the 1999 Plan have been administered by the board's compensation committee which
is comprised of Messrs. Haggerty and Wolfen, who are "non-employee directors"
under applicable securities laws and outside directors, as defined under the
Internal Revenue Code. After this offering, it is anticipated that both plans
will continue to be administered by the compensation committee. The board of
directors has the authority to determine to whom awards are granted, the terms
of such awards, including the type of awards to be granted, the exercise price,
the number of shares subject to the awards and the vesting and exercisability of
the awards under both plans.
The term of a stock option granted under the 1995 Plan and the 1999 Plan
generally may not exceed 10 years. The exercise price of options granted under
each plan is determined by the board of directors, but, in the case of an
incentive stock option, cannot be less than 100% of the fair market value of the
common stock on that date of grant, and in the case of a nonstatutory stock
option, the exercise price generally cannot be less than 85% of the fair market
value of the common stock on the date of grant except for an assumption or
substitution of an existing stock option. Options granted under the 1995 Plan
and 1999 Plan vest at the rate specified in the option agreement.
Except as expressly provided by the terms of a nonstatutory stock option
agreement, no option under each plan may be transferred by the optionee other
than by will or the laws of descent and distribution or, in certain limited
instances, pursuant to a qualified domestic relations order, provided that an
optionee under each plan may designate a beneficiary who may exercise the option
following the optionee's death. An optionee under each plan whose relationship
with us or any of our affiliates ceases for any reason, other than due to death
or permanent and total disability, may generally exercise vested options in the
three month period following such cessation, unless such options terminate or
expire sooner by their terms or in such longer or shorter period as may be
determined by the board and set forth in the option agreement. Vested options
under each plan may generally be exercised during the period ending on the
earlier of the end of the original term of the options or the 12-month period
after an optionee's relationship with us or any of our affiliates ceases due to
disability and the 18-month period after an optionee's relationship with us or
any of our affiliates ceases due to death.
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<PAGE> 56
Under both plans no incentive stock option may be granted to any person
who, at the time of the grant, owns or is deemed to own common stock possessing
more than 10% of our total combined voting power or any of our affiliates,
unless the option exercise price is at least 110% of the fair market value of
the stock subject to the option on the date of grant and the term of the option
does not exceed five years from the date of grant. In addition, the aggregate
fair market value, determined at the time of grant, of the shares of common
stock with respect to options, which become exercisable by an optionee during
any calendar year, may not exceed $100,000. Any options, or portions thereof,
which exceed this limit are treated as nonstatutory options.
Shares subject to stock awards that have lapsed or terminated, without
having been exercised in full, and any shares repurchased by us pursuant to a
repurchase option provided under the plans may again become available for the
grant of awards under the respective plan.
Rights to acquire restricted stock granted under the plans may be granted
subject to a repurchase option in favor of us that will expire pursuant to a
vesting schedule. The purchase price of these awards will be at least 85% of the
fair market value of the common stock on the date of grant. Stock bonuses may be
awarded in consideration for past services without the payment of a purchase
price. Rights under a stock bonus or restricted stock bonus agreement may not be
transferred other than by will, the laws of descent and distribution or a
qualified domestic relations order while the stock awarded pursuant to an
agreement remains subject to the agreement, provided that a holder of these
rights may designate a beneficiary who may exercise the right following the
holder's death.
Upon a change in control of Vixel, all outstanding stock awards under the
plans may be assumed by the surviving entity or replaced with similar stock
awards granted by the surviving entity. If the surviving entity does not assume
these awards or provide substitute awards, then with respect to persons whose
service with us or an affiliate has not terminated prior to the change in
control, the awards shall become fully vested and will terminate if not
exercised prior to the change in control.
Non-Employee Director Stock Option Grants Under the 1995 Plan and the 1999 Plan
Non-employee members of the board of directors are eligible to receive
nondiscretionary stock options under the 1995 Plan and the 1999 Plan. Under the
1999 Plan, an initial grant of nonstatutory options of 16,500 shares (following
a two-for-three reverse stock split in August 1999) of the common stock will be
made after the effective date of this Offering to each newly-elected
non-employee director on the date such individual is first elected to the board.
Beginning with the annual meeting of the stockholders of the Company (the
"Annual Meeting") in the year 2000, annual nonstatutory option grants will be
made to each non-employee director of five thousand (5,000) shares of common
stock as of the date of each Annual Meeting. The term of the stock options will
generally be ten years. The exercise price of the stock options shall be not
less than 100% of the fair market value of the stock. The stock options of a
director will vest annually over a three year period from the date of grant.
Employee Stock Purchase Plan
Effective upon the completion of this offering, we will implement an
employee stock purchase plan ("Purchase Plan"). A total of 300,000 shares of
common stock have been reserved for issuance under this purchase plan. Each
year, the number of shares reserved for issuance under the Purchase Plan will
automatically be increased by 1% of the total number of shares of common stock
then outstanding or, if less, by 300,000 shares. The Purchase Plan is intended
to qualify as an employee stock purchase plan within the meaning of section 423
of the Internal Revenue Code. Under the Purchase Plan, the board of directors or
a committee comprised of at least two members of the board of directors may
authorize participation by eligible employees, including officers, in periodic
offerings following the commencement of the Purchase Plan. The initial offering
under the purchase plan will commence on the effective date of this offering and
terminate on April 30, 2000.
Unless otherwise determined by the board of directors, employees are
eligible to participate in the purchase plan only if they are customarily
employed by us or one of our subsidiaries designated by the
51
<PAGE> 57
board of directors for at least 20 hours per week and five months per calendar
year and have completed at least ninety (90) days of continued employment.
Otherwise eligible employees who are employed on the effective date of this
offering with less than ninety (90) days of continued employment will be
immediately eligible to participate in the Purchase Plan with respect to the
first offering period provided that they remain in continued employment through
the end of the first offering period (April 30, 2000). Employees who participate
in an offering may have up to 15% of their eligible earnings withheld pursuant
to the Purchase Plan. The amount withheld is then used to purchase shares of the
common stock on specified dates determined by the board of directors. The price
of common stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the common stock at the commencement date of
each offering period or the relevant purchase date. Employees may end their
participation in an offering at any time during that offering, and their
participation will end automatically on termination of their employment with us
or one of our affiliates.
In the event of a merger, reorganization, consolidation or liquidation that
involves us, the board of directors has discretion to provide that each right to
purchase common stock will be assumed or an equivalent right substituted by the
successor corporation or the board of directors may provide for all sums
collected by payroll deductions to be applied to purchase stock immediately
prior to a merger or other transaction. The board of directors has the authority
to amend or terminate the Purchase Plan, provided, however, that no action may
adversely affect any outstanding rights to purchase common stock.
401(k) Plan
In January 1997, the board of directors adopted the Vixel Corporation
401(k) plan, which is intended to be a tax qualified employee savings retirement
plan, covering our employees who are at least 21 years of age, have at least six
months of service with us and work a minimum of 1,000 hours during the plan
year. Eligible employees may make pre-tax contributions to the 401(k) plan of up
to 15% of their eligible earnings, subject to a statutorily determined annual
limit. In addition, eligible employees may make roll-over contributions to the
401(k) plan from a tax-qualified retirement plan. The 401(k) plan allows us to
make discretionary matching and additional profit sharing contributions to an
employee's account.
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
In April 1999, we entered into an employment agreement with James M.
McCluney, our president and chief executive officer. Mr. McCluney will be paid
an annual base salary of $300,000 during his first year of employment, after
which time his base salary will be reviewed, and potentially adjusted, by the
compensation committee. The agreement also requires us to pay Mr. McCluney an
annual incentive bonus of up to 100% of his base salary rate then in effect,
with a target payout rate of 50%, subject to his satisfaction of performance
criteria to be determined by the compensation committee and so long as he serves
as our president and chief executive officer for the year and during the first
quarter of the following calendar year. Mr. McCluney may defer all or any
portion of his annual incentive bonus. We also agreed to reimburse Mr. McCluney
for his relocation expenses associated with moving his family to Washington. In
the event that Mr. McCluney is terminated without cause, he will be entitled to
severance in the amount of one year's base salary at the rate then in effect,
any deferred incentive bonuses and continued vesting of his stock options for
one year.
We also granted Mr. McCluney an option to purchase up to 1,000,000 shares
of our common stock at an exercise price of $3.08 per share. This option vests
with respect to 250,000 shares on April 26, 2000, and then monthly thereafter in
36 equal installments. Under the terms of the option agreement, Mr. McCluney may
exercise unvested options; however, Vixel has a right to repurchase any of his
unvested shares. If there is a change in control of Vixel, Mr. McCluney's
options will accelerate and vest immediately on the occurrences and in the
amounts as follows:
(1) 500,000 shares if there is a change of control before April 26, 2000
and his options are not assumed or replaced by substantially equivalent
options;
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<PAGE> 58
(2) the greater of 250,000 or half the unvested shares if there is a change
of control on or after April 26, 2000; and
(3) if his employment is terminated involuntarily, other than for cause, by
a successor company then as set forth above in (1) or (2) depending on
the date.
In December 1998, we entered into an employment agreement with Stanley H.
Reese, our vice president of product development. Mr. Reese is paid an annual
base salary of $150,000. He is also eligible to receive additional compensation
including a bonus linked to performance of up to $65,000 and additionally any
amounts that the compensation committee, in its sole discretion, may determine.
We granted Mr. Reese an option to purchase up to 216,667 shares of our common
stock at an exercise price of $3.08 per share. This option vests with respect to
54,167 shares on January 20, 2000, and then monthly thereafter in 36 equal
installments. If we terminate Mr. Reese prior to May 31, 2000 without cause, he
is entitled to receive $150,000 plus all accrued bonus that he has earned as of
the termination date.
In the fall of 1998 our then chief executive officer and the board of
directors agreed we would commence a search for a new chief executive officer
and that Mr. Olbright would continue as chief executive officer during the
course of the search and after selection of the new chief executive officer
would remain as chairman of the board. In November 1998, we entered into an
employment agreement with Mr. Olbright, in connection with his transition to
chairman of the board. Under the terms of his employment agreement, Mr. Olbright
receives an annual base salary of $50,000 while serving as our chairman. We
granted Mr. Olbright an option for 700,000 shares of common stock at an exercise
price of $3.08 per share. Under the terms of the option agreement, Mr. Olbright
may exercise unvested options; however, we have a right to repurchase any of his
unvested shares. This agreement also provides that Mr. Olbright will act as a
part-time employee, for which he will receive an annual salary of $25,000.
In September 1998, we entered into an employment agreement with Kurtis L.
Adams, our chief financial officer and vice president of finance. He is paid an
annual base salary of $140,000. Mr. Adams also is eligible to receive additional
compensation, bonus and benefits, in the sole discretion of the compensation
committee of our board of directors. We also granted Mr. Adams an option to
purchase up to 133,333 shares of our common stock at an exercise price of $6.75
per share. On the first anniversary of the grant, options for 29,167 shares will
vest. The remainder vest in monthly increments of 2,431 over the next 24 months
and then 3,819 per month until fully vested. Under the terms of the option
agreement, Mr. Adams may exercise unvested options; however, we have a right to
repurchase any of his unvested shares. As of May 31, 1999, Mr. Adams had
exercised options for 96,068 shares, all of which are subject to a right to
repurchase in our favor. If there is a change in control at any time prior to
September 21, 1999 and Mr. Adams is terminated without cause or there is a
significant change in his responsibilities, vesting of his options will
accelerate by 12 months. In addition, following a change in control subsequent
to September 21, 1999, if Mr. Adams is terminated without cause or there is a
significant change in his responsibilities, all his options immediately will
vest the greater of one half of any unvested shares or 12 months of accelerated
vesting.
In February 1998, we entered into employment agreements with Stuart B.
Berman, our chief technology officer, and Jay R. O'Donald, our vice president of
operations, in connection with our acquisition of Arcxel Technologies. These
employment agreements set the annual base salary for Mr. O'Donald at $147,500
and for Mr. Berman at $145,000. Their employment agreements provide, that if
either employee voluntarily terminates his employment with Vixel, is terminated
for cause, or in the event of a merger of Vixel in which his options are not
assumed or substituted by the acquiring entity with new options, we have the
right to repurchase any unvested shares then held by the employee. Mr.
O'Donald's agreement allows Vixel to repurchase up to 189,903 shares. This
number is reduced by 7,098 shares for each month of his employment from February
28, 1998 until January 31, 2000, after which the number is reduced at a rate of
3,912 shares per month. Mr. Berman's agreement allows Vixel to repurchase up to
318,661 shares. This number is reduced by 12,683 shares for each month of his
employment from February 28, 1998 until January 31, 2000, after which the
remaining balance is reduced at a rate of 2,859 shares per month. Both
employment agreements may be terminated at any time by either party.
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<PAGE> 59
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that a director
of a corporation will not be personally liable for monetary damages for breach
of that individual's fiduciary duties as a director except for liability (A) for
any breach of the director's duty of loyalty to the company or to its
stockholders, (B) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (C) for unlawful payments
of dividends or unlawful stock repurchases or redemptions as provided in section
174 of the Delaware General Corporation Law or (D) for any transaction from
which a director derives an improper personal benefit.
Our bylaws provide that we indemnify our directors and executive officers
and may indemnify our officers, employees and other agents to the fullest extent
not prohibited by law. We believe that indemnification under our bylaws covers
at least negligence on the part of an indemnified party. Our bylaws also permit
us to advance expenses incurred by an indemnified party in connection with the
defense of any action or proceeding arising out of his or her status or service
as a director, officer, employee or other agent of Vixel upon an undertaking by
him or her to repay any advances if it is ultimately determined that he or she
is not entitled to indemnification.
We intend to enter into separate indemnification agreements with our
directors and officers. These agreements will require us to, among other things,
indemnify the director or officer against expenses, including attorney's fees,
judgements, fines and settlements paid by the individual in connection with any
action, suit or proceeding arising out of the individual's status or service as
a director or officer of Vixel, other than liabilities arising from willful
misconduct or conduct that is knowingly fraudulent or deliberately dishonest,
and to advance expenses incurred by the individual in connection with any
proceeding against him or her individual with respect to which he or she
individual may be entitled to indemnification by us. We believe that our
certificate of incorporation and bylaw provisions and indemnification agreements
are necessary to attract and retain qualified persons as directors and executive
officers. We also maintain directors' and officers' liability insurance.
At present we are not aware of any pending litigation or proceeding
involving any director, officer, employee or agent of Vixel where
indemnification will be required or permitted. Furthermore, we are not aware of
any threatened litigation or proceeding that might result in a claim for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, executive officers or persons controlling Vixel,
we have been informed that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
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<PAGE> 60
CERTAIN TRANSACTIONS
Certain stock option grants to our directors and executive officers are
described in this prospectus under the caption "Management -- Board
Compensation" and "-- Executive Compensation."
WESTERN DIGITAL
In March 1996, we issued 2,000,000 shares of series D preferred stock and a
secured promissory note in the amount of $2.0 million to Western Digital
Corporation in connection with our purchase of certain assets. In March 1999, we
issued to Western Digital Corporation a warrant to purchase 16,490 shares of
series E preferred stock at an exercise price of $10.00 a share in connection
with an extension of the secured promissory note. Within two days of the closing
of this offering, we must pay off all outstanding principal and accrued interest
on the note, which currently totals $2.0 million. In connection with our
purchase of assets from Western Digital, Charles A. Haggerty, the chairman,
president and chief executive officer of Western Digital, joined our board of
directors.
SERIES E PREFERRED STOCK FINANCING
In October 1996, we issued, in a private placement transaction, 4,529,221
shares of series E preferred stock at a price of $4.50 per share. The following
table summarizes the shares of preferred stock purchased by Named Executive
Officers, directors and 5% stockholders, and persons and entities associated
with them:
<TABLE>
<CAPTION>
SERIES E
INVESTOR PREFERRED STOCK
-------- ---------------
<S> <C>
Kevin A. Fong/Entities affiliated with Mayfield Fund........ 202,222
Entities affiliated with Menlo Ventures..................... 202,222
Werner F. Wolfen............................................ 38,889
</TABLE>
CIELO COMMUNICATIONS
In February 1998, we sold our laser diode fabrication facility and gigabit
Ethernet transceiver product line to Cielo Communications for $6.9 million in
cash. In connection with this sale, Cielo assumed a portion of our liabilities.
Immediately prior to the asset purchase, Cielo sold $10.0 million of stock in a
private placement to investors including Herb Alpert and investment entities
managed by Mayfield Fund and Menlo Ventures, each a beneficial owner of more
than 5% of our capital stock. Gregory R. Olbright received, for strategic advice
given to the board of directors and executive officers of Cielo regarding
Cielo's strategy, structure and formation, 500,000 shares of Cielo and an option
to purchase 500,000 shares of Cielo at an exercise price of $0.20 per share. Mr.
Olbright is our chairman of the board of directors and, at the time of this
transaction, was our president and chief executive officer.
ARCXEL TECHNOLOGIES
In February 1998, we acquired Arcxel Technologies in exchange for 1,026,525
shares of common stock and 1,759,303 shares of series F preferred stock with an
aggregate value of approximately $5.1 million for the common stock and $7.0
million for the preferred stock. In connection with this acquisition, Timothy M.
Spicer, a director of Arcxel, joined our board of directors and Stuart B. Berman
and Jay R. O'Donald, the co-founders of Arcxel, became executive officers of
Vixel. The following table summarizes the shares of series F preferred stock and
common stock issued to our Named Executive Officers, directors and 5%
stockholders, and persons and entities associated with them in connection with
the Arcxel acquisition:
<TABLE>
<CAPTION>
SERIES F COMMON
INVESTOR PREFERRED STOCK STOCK
-------- --------------- -------
<S> <C> <C>
Stuart B. Berman............................................ 653,128
Jay R. O'Donald............................................. 363,202
Entities affiliated with Timothy M. Spicer.................. 1,744,011
</TABLE>
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<PAGE> 61
DIRECTOR AND OFFICER PROMISSORY NOTES
Between April 1998 and May 1999, Messrs. Olbright, McCluney and Adams
delivered promissory notes to us to finance their purchase of common stock upon
exercise of stock options. All of the notes are full-recourse, secured by the
shares purchased, bear interest at a rate of 5.75% and are due and payable upon
the earlier of four years from issuance or six months after the termination of
the officer's employment. In April 1998, Gregory R. Olbright, the chairman of
our board of directors, delivered to us a $3.5 million full-recourse promissory
note to purchase 700,000 shares of common stock. We repurchased these shares in
exchange for cancellation of the note in October 1998. In April 1999, in
connection with the exercise of a stock option for 415,290 shares of our common
stock, Mr. Olbright delivered to us a $1.3 million full-recourse promissory
note. In April 1999, in connection with the exercise of a stock option for
1,000,000 shares of our common stock, James M. McCluney, our president and chief
executive officer, delivered to us a $3.1 million full-recourse promissory note.
In May 1999, in connection with the exercise of stock options to purchase
121,068 shares of our common stock, Kurtis L. Adams, our chief financial
officer, delivered to us a $372,000 full-recourse promissory note.
In May 1999, in connection with the exercise of stock options by each of
our non-employee directors to purchase 16,666 shares of our common stock, these
directors delivered to us a $100,000 promissory note. All of the notes are
full-recourse, secured by the shares purchased, bear interest at a rate of 5.75%
and are due and payable the earlier of the date which is four years from
issuance or six months after the termination of the director's service to us.
In April 1999, we loaned $62,000 to Stuart B. Berman, our chief technology
officer. This loan is secured by the pledge of 653,128 shares of our common
stock held by Mr. Berman. This loan has similar terms as the other director and
officer notes except that it is due and payable on April 15, 2000.
INDEMNIFICATION AGREEMENTS
We intend to enter into separate indemnification agreements with our
executive officers and directors. These agreements will require us to, among
other things, indemnify the officer or director against liabilities that may
arise by reason of their status or service as an officer or director, other than
liabilities arising from willful misconduct of a culpable nature, and to advance
his or her expenses incurred as a result of any proceeding against them as to
which they could be indemnified.
REGISTRATION RIGHTS AGREEMENTS
A number of holders of common stock and warrants have registration rights
with respect to their shares of common stock and common stock issuable upon
exercise or conversion of their warrants.
CONFLICT OF INTEREST POLICY
All transactions with affiliates described above were approved by a
majority of disinterested directors and we believe were made on terms no less
favorable to us than could have been obtained from unaffiliated third parties.
Our policy is to require that a majority of the independent and disinterested
outside directors on our board of directors approve all future transactions
between us and our officers, directors, principal stockholders and their
affiliates. These transactions will continue to be on terms no less favorable to
us than we could obtain from unaffiliated third parties.
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<PAGE> 62
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to
beneficial ownership of our common stock as of July 31, 1999, and as adjusted to
reflect the sale of common stock offered hereby, as to (A) each person (or group
of affiliated persons) known by us to own beneficially more than 5% of our
outstanding common stock, (B) each of our directors, (C) each of the Named
Executive Officers and (D) all directors and executive officers of Vixel as a
group.
Unless otherwise indicated, the address for each of the named individuals
is c/o Vixel Corporation, 11911 Northcreek Parkway South, Bothell, Washington
98011. Except as otherwise indicated, and subject to applicable community
property laws, the persons named in the table have sole voting and investment
power with respect to all shares of common stock held by them.
Beneficial ownership is determined in accordance with the rules of the SEC.
Shares of common stock subject to options or warrants that are exercisable or
will become exercisable within 60 days of July 31, 1999, are deemed outstanding
for the purpose of computing the percentage of ownership of the person or entity
holding options or warrants but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person or entity. Percentage
of shares beneficially owned is based on 17,976,656 shares of common stock
outstanding as of July 31, 1999 and shares of common stock to be outstanding
upon the consummation of this offering.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY
OWNED
SHARES ------------------------
BENEFICALLY BEFORE AFTER
NAME AND ADDRESS OWNED OFFERING OFFERING
---------------- ----------- ---------- ----------
<S> <C> <C> <C>
NAMED EXECUTIVE OFFICERS AND DIRECTORS
James M. McCluney................................... 1,000,000 5.6% 4.6%
Stuart B. Berman(1)................................. 694,888 3.9 3.2
Richard G. Helgeson(2).............................. 66,665 * *
Jay R. O'Donald(3).................................. 420,335 2.3 1.9
Marlu E. Allan(4)................................... 66,679 * *
Karen L. Howard(5).................................. 48,626 * *
Gregory R. Olbright(6).............................. 1,638,750 9.1 7.6
Kevin A. Fong(7).................................... 1,512,631 8.4 7.0
Charles A. Haggerty(8).............................. 1,410,993 7.8 6.5
Juan A. Rodriguez(9)................................ 114,419 * *
Timothy M. Spicer(10)............................... 1,206,007 6.7 5.6
Werner F. Wolfen(11)................................ 155,888 * *
5% STOCKHOLDERS
Herb Alpert......................................... 2,070,424 11.5 9.6
360 N. La Cienega Boulevard
Los Angeles, CA 90048-1925
Mayfield Fund(12)................................... 1,495,964 8.3 6.9
2800 Sand Hill Road, Suite 250
Menlo Park, CA 94025-7076
Menlo Ventures(13).................................. 1,495,964 8.3 6.9
3000 Sand Hill Road, Building Four, Suite 100
Menlo Park, CA 94025-7116
Western Digital Corporation(14)..................... 1,344,326 7.5 6.2
8105 Irvine Center Drive
Irvine, CA 92718
AVI/Arcxel Investors L.P.(15)....................... 1,162,674 6.5 5.4
100 Pine Street, Suite 2700
San Francisco, CA 94111-5213
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A
GROUP(16)......................................... 8,423,382 46.2 38.4
</TABLE>
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<PAGE> 63
- -------------------------
* Represents beneficial ownership of less than 1%
(1) Includes 41,760 shares subject to options exercisable within 60 days of
July 31, 1999.
(2) All of these shares are subject to options exercisable within 60 days of
July 31, 1999.
(3) Includes 57,133 shares subject to options exercisable within 60 days of
July 31, 1999.
(4) Ms. Allan resigned as an executive officer of Vixel in November 1998.
(5) Ms. Howard resigned as an executive officer of Vixel in January 1999.
(6) Includes 272,102 shares held by Olbright LLC.
(7) Includes 1,495,965 shares held by the entities listed in note 12 below. Mr.
Fong is a general partner of the Mayfield Fund. Mr. Fong disclaims
beneficial ownership of these shares except to the extent of his pecuniary
interest therein.
(8) Includes 1,344,326 shares held by Western Digital Corporation and 50,000
shares held by Haggerty, Charles A. & Carleen R. Haggerty Trust. Mr.
Haggerty is president, chief executive officer and chairman of Western
Digital Corporation.
(9) Includes 66,667 shares held by the Juan A. Rodriguez Irrevocable Trust.
(10) Includes 1,162,674 shares held by the entities listed in note 14 below and
26,667 shares subject to options exercisable within 60 days of July 31,
1999. Mr. Spicer is a general manager of San Francisco Sentry Investment
Group, the general partner for the entities listed in note 15.
(11) Includes 139,221 shares held in trust for the current and former partners
of Irell and Manella LLP. Mr. Wolfen disclaims beneficial ownership of the
shares held in trust except to the extent of his pecuniary interest
therein. Excludes shares held by Herb Alpert and Jerome Moss for which Mr.
Wolfen has a general power of attorney. Mr. Wolfen disclaims beneficial
ownership of these shares except to the extent of his pecuniary interest
therein.
(12) Includes 1,421,166 shares held by Mayfield VII, a California limited
partnership, and 74,798 shares held by Mayfield Associates Fund II, a
California limited partnership. Mr. Fong, one of our directors, is a
general partner of Mayfield Associates Fund II and Mayfield VII Management
Partners, a California Limited Partnership, which is the general partner of
Mayfield VII. Mr. Fong disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein.
(13) Consists of shares held by certain entities affiliated with Menlo Ventures
and includes 22,137 shares held by Menlo Entrepreneurs Fund VI, L.P. and
1,473,827 held by Menlo Ventures VI, L.P. MV Management VI, L.P. is the
general partner of Menlo Entrepreneurs Fund VI, L.P. and Menlo Ventures VI,
L.P.
(14) Includes 10,993 shares issuable upon the exercise of a warrant. Charles A.
Haggerty, a director of Vixel, is chairman, chief executive officer and
chairman of Western Digital Corporation. Mr. Haggerty disclaims beneficial
ownership of the shares held by Western Digital.
(15) Of these shares, 573,478 shares are held by AVI/Arcxel Investors A, L.P.,
446,038 shares are held by AVI/Arcxel Investors B, L.P., and 143,157 shares
are held by AVI/Arcxel Investors C, L.P. The general partner of AVI/Arcxel
Investors A, L.P., AVI/Arcxel Investors B, L.P. and AVI/Arcxel Investors C,
L.P. is San Francisco Sentry Investment Group. Timothy M. Spicer, one of
our directors, is a general manager of San Francisco Sentry Investment
Group. Mr. Spicer disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest therein.
(16) Includes 267,094 shares subject to options exercisable within 60 days of
July 31, 1999.
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<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
On the closing of this offering, our authorized capital stock will consist
of 65,000,000 shares of common stock, $.001 par value, and 5,000,000 shares of
preferred stock, $.001 par value, after giving effect to the amendment and
restatement of our certificate of incorporation to delete references to series
A, series B, series C, series D, series E and series F preferred stock, which
will occur upon conversion of the preferred stock into common stock upon the
closing of this offering, and the subsequent authorization of shares of
undesignated preferred stock, as described below.
COMMON STOCK
As of July 4, 1999, there were 17,929,003 shares of common stock
outstanding that were held of record by approximately 210 stockholders after
giving effect to the exercise of warrants to purchase up to 894,333 shares of
series A preferred stock and the conversion of all of our outstanding preferred
stock into common stock. There will be 21,629,003 shares of common stock
outstanding after giving effect to the sale of the shares of common stock to the
public offered hereby.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably all dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available therefor. In
the event of the liquidation, dissolution or winding up of Vixel, the holders of
our common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock,
if any, then outstanding. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable, and the shares of common stock to be
issued upon completion of this offering will be fully paid and nonassessable.
PREFERRED STOCK
On the closing of this offering, our certificate of incorporation will
authorize 5,000,000 shares of preferred stock. The board of directors has the
authority to issue the preferred stock in one or more series and to fix the
rights, preferences, privileges and restrictions thereof, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of any series, without further vote or action by
the stockholders. The issuance of preferred stock may have the effect of
delaying, deferring or preventing a change in control of Vixel without further
action by the stockholders. For example, the board of directors could issue
preferred stock that has the power to prevent a change of control transaction.
The issuance of preferred stock with voting and conversion rights may adversely
affect the voting power of the holders of common stock, including the loss of
voting control to others. We currently have no plans to issue any of the
preferred stock.
WARRANTS
Upon completion of this offering, we will have outstanding warrants to
purchase up to 269,865 shares of common stock. Some of these warrants were
originally to purchase preferred stock, but upon the closing of the offering,
they will automatically become warrants to purchase shares of our common stock.
The numbers of shares, exercise prices and dates of these warrants are
summarized below:
<TABLE>
<CAPTION>
NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE
- ---------------- -------------- ---------------
<C> <C> <S>
117,143 $ 5.25 Five years after the closing of this offering
46,174 8.43 October 16, 2001
16,667 8.43 One year after the closing of this offering
Up to 12,222 11.25 December 18, 2003
77,660 15.00 November 25, 2003 to March 31, 2004
</TABLE>
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<PAGE> 65
REGISTRATION RIGHTS OF CERTAIN HOLDERS
After this offering, the holders of 10,120,213 shares of common stock and
warrants to purchase up to 269,865 shares of common stock will be entitled to
rights with respect to the registration of such shares under the Securities Act
of 1933. The holders of registration rights are those investors, including some
former officers and a founder that hold shares of our preferred stock and
warrants to purchase shares of our series C preferred stock and series E
preferred stock. Under the terms of the agreements between us and the holders of
these securities, the holders of 50% of these securities may require, on two
occasions at any time after October 1, 1999, that Vixel use its best efforts to
register these securities for public resale, provided the proposed aggregate
offering price is at least $15.0 million and the offering is for at least 20% of
the shares entitled to be registered then outstanding. Further, if we propose to
register any of our securities under the Securities Act, either for our own
account or for the account of other security holders exercising registration
rights, these holders are entitled to notice of the registration and are
entitled to include shares of common stock in these registration, subject to the
ability of the underwriters to limit the number of shares included in the
offering. Further, holders may require us to file additional registration
statements on Form S-3 subject to certain limitations. All fees and expenses of
these registrations, other than underwriting discounts and commissions, will be
borne by us.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
CERTIFICATE OF INCORPORATION
On the closing of this offering, our certificate of incorporation will
provide that all stockholder actions must be effected at a duly called meeting
and not by a consent in writing. This provision could discourage potential
acquisition proposals and could delay or prevent a change of control of Vixel.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to various exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
- prior to that date, the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by persons who are
directors and also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to that date, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock that is not owned by the
interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to various exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
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<PAGE> 66
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of
the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American
Securities Transfer & Trust Company.
LISTING
We have applied to list our common stock on the Nasdaq National Market of
the Nasdaq Stock Market, Inc., under the trading symbol "VIXL."
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<PAGE> 67
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. We cannot provide any assurances that a significant public market for our
common stock will develop or be sustained after this offering. Future sales of
substantial amounts of common stock in the public market, or the possibility of
such sales occurring, could adversely affect prevailing market prices for the
common stock or our future ability to raise capital through an offering of
equity securities.
After this offering, we will have outstanding 21,629,003 shares of common
stock. Of these shares, the 3,700,000 shares to be sold in this offering,
4,255,000 shares if the underwriters' over-allotment option is exercised in
full, will be freely tradable in the public market without restriction under the
Securities Act, unless those shares are held by "Affiliates" of Vixel, as that
term is defined in Rule 144 under the Securities Act.
The remaining 17,929,003 shares of common stock held by existing
stockholders as of July 4, 1999 will, upon completion of this offering, be
"restricted securities" as that term is defined under Rule 144. We issued and
sold these restricted securities in private transactions in reliance on
exemptions from registration under the Securities Act. These restricted
securities may be sold in the public market only if they are registered or if
they qualify for an exemption from registration under Rule 144 or Rule 701 under
the Securities Act, as summarized below.
Pursuant to certain "lock-up" agreements, all executive officers, directors
and stockholders of Vixel, who collectively hold shares, have
agreed not to offer, sell, contract to sell, grant any option to purchase or
otherwise dispose of any of these shares for a period of 180 days from the date
of this prospectus.
Upon expiration of the lock-up agreements, 180 days after the effective
date of the prospectus, shares that will not then be subject to
any repurchase option will be eligible for immediate sale. Following the
completion of this offering, warrants to purchase up to 269,865 shares will be
outstanding, which, if exercised pursuant to net-exercise provisions, would be
immediately salable without restriction upon the expiration of the 180 day
lock-up period. If those warrants were to be otherwise exercised, they would be
salable upon the expiration of various one-year holding periods, subject to
certain volume, manner of sale, and other limitations under Rule 144.
In general, under Rule 144 as in effect at the closing of this offering,
beginning 90 days after the date of this prospectus, a person who has
beneficially owned those shares for at least one year would be entitled to sell,
within any three month period, a number of shares that does not exceed the
greater of;
- 1% of the then-outstanding shares of common stock; or
- the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144 with respect to those
sale. Sales under Rule 144 are also subject to manner of sale and notice
requirements and to the availability of current public information about
Vixel.
Under Rule 144(k), a person who is not deemed to have been an Affiliate of
Vixel 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 who is not an Affiliate of
Vixel, is entitled to sell those shares without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
Of the options to purchase 2,217,179 shares of common stock outstanding as
of July 4, on the date 180 days following the assumed effective date of this
offering, options to purchase shares of common stock will be
fully exercisable and saleable pursuant to Rule 701 or registration on Form S-8.
We intend to file, within 180 days of effective date of this offering, a
registration statement on Form S-8 to register approximately
shares of common stock reserved for issuance under our
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<PAGE> 68
1995 stock option and employee stock purchase plans. The registration statement
will become effective automatically upon filing. Shares issued under these
plans, after the filing of the registration statement on Form S-8, may be sold
in the open market, subject, in the case of certain holders, to the Rule 144
limitations applicable to Affiliates, the above-referenced lock-up agreements
and vesting restrictions imposed by us.
In addition, following this offering, the holders of 10,120,213 shares of
common stock and warrants to purchase up to 269,865 shares of common stock, or
their transferees, will have rights to require us to register their shares for
future sale.
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<PAGE> 69
UNDERWRITING
The underwriters named below, acting through their representatives,
BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc. and Needham &
Company, Inc., have severally agreed with us, subject to the terms and
conditions set forth in the underwriting agreement, to purchase from us the
numbers of shares of common stock set forth opposite their names below. The
underwriters are committed to purchase and pay for all these shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
BancBoston Robertson Stephens Inc...........................
Bear, Stearns & Co. Inc.....................................
Needham & Company, Inc......................................
---------
Total.................................................. 3,700,000
=========
</TABLE>
We have been advised by the representatives that the underwriters propose
to offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus and to certain dealers at
that price less a concession of not in excess of $ per share, of which
$ may be reallowed to other dealers. After the initial public offering,
the public offering price, concession and reallowance to dealers may be reduced
by the representatives. No such reduction shall change the amount of proceeds to
be received by us as set forth on the cover page of this prospectus. The common
stock is offered by the underwriters as stated herein, subject to receipt and
acceptance by them and subject to their right to reject any order in whole or in
part.
The underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
Over-allotment option. We have granted to the underwriters an option,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to 555,000 additional shares of common stock at the same price per
share as we will receive for the 3,700,000 shares that the underwriters have
agreed to purchase from us. To the extent that the underwriters exercise this
option, each of the underwriters will have a firm commitment to purchase
approximately the same percentage of the additional shares that the number of
shares of common stock to be purchased by it shown in the above table represents
as a percentage of the 3,700,000 shares offered by this prospectus. If
purchased, the additional shares will be sold by the underwriters on the same
terms as those on which the 3,700,000 shares are being sold. We will be
obligated, pursuant to the option, to sell shares to the extent the option is
exercised. The underwriters may exercise the option only to cover
over-allotments made in connection with the sale of the shares of common stock
offered hereby. If the option is exercised in full, the total public offering
price and proceeds to us will be $46,805,000 and $42,629,000, respectively.
The following table summarizes the compensation to be paid to the
underwriters by us:
<TABLE>
<CAPTION>
TOTAL
----------------------
WITHOUT WITH
PER OVER- OVER-
SHARE ALLOTMENT ALLOTMENT
-------- --------- ---------
<S> <C> <C> <C>
Underwriting discounts and commissions payable by us....... $ $ $
</TABLE>
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<PAGE> 70
We estimate that expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will be
approximately $900,000.
Indemnity. The underwriting agreement contains covenants of indemnity
between the underwriters and us against certain civil liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-up agreements. All our executive officers, directors, stockholders of
record, optionholders and warrantholders have agreed with BancBoston Robertson
Stephens, for a period of 180 days after the date of this prospectus and subject
to certain exceptions, not to offer to sell, contract to sell, or otherwise
sell, dispose of, loan, pledge or grant any rights with respect to any shares of
common stock, any option or warrant to purchase any shares of common stock, or
any securities convertible into or exchangeable for shares of common stock owned
as of the date of this prospectus or, with certain exceptions, thereafter
acquired directly by such holders or with respect to which they have or
hereafter acquire the power of disposition, without the prior written consent of
BancBoston Robertson Stephens. However, BancBoston Robertson Stephens may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to the lock-up agreements. There are no agreements
between the representatives and any of our stockholders providing consent by the
representatives to the sale of shares prior to the expiration of the period of
180 days after this prospectus.
Future sales. In addition, we have agreed that during the period of 180
days after this prospectus, we will not, subject to certain exceptions and
without the prior written consent of BancBoston Robertson Stephens:
- Consent to the disposition of any shares held by stockholders prior to
the expiration of the period of 180 days after this prospectus; or
- Issue, sell, contract to sell or otherwise dispose of, any shares of
common stock, any options or warrants to purchase any shares of common
stock or any securities convertible into, exercisable for or exchangeable
for shares of common stock, other than (1) the sale of shares in this
offering, (2) the issuance of common stock upon the exercise or
conversion of outstanding options, warrants or convertible securities,
and (3) our issuance of stock options under our existing equity incentive
and stock purchase plans. For a more complete discussion of the shares
subject to a lock-up agreement, see "Shares Eligible for Future Sale," at
page 62.
Listing. We have filed an application to have the common stock approved for
quotation on the Nasdaq National Market under the symbol "VIXL."
No prior public market. Prior to this offering, there has been no public
market for our common stock. Consequently, the initial public offering price for
the common stock offered hereby will be determined through negotiations between
us and the representatives. Among the factors to be considered in these
negotiations are prevailing market conditions, certain of our financial
information, market valuations of other companies that we and the underwriters
believe to be comparable to us, estimates of our business potential, the present
state of our development and other factors deemed relevant.
Stabilization. The representatives have advised us that, pursuant to
Regulation M under the Securities Act, certain persons participating in this
offering may engage in transactions, including stabilizing bids, syndicate
covering transactions or the imposition of penalty bids, that may have the
effect of stabilizing or maintaining the market price of the common stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for the purchase of the common stock on behalf of the
underwriters for the purpose of fixing or maintaining the price of the common
stock. A "syndicate covering transaction" is the bid for or the purchase of the
common stock on behalf of the underwriters to reduce a short position incurred
by the underwriters in connection with this offering. A "penalty bid" is an
arrangement permitting the representatives to reclaim the selling concession
otherwise accruing to an underwriter or syndicate member in connection with this
offering if the common stock originally sold by that underwriter or syndicate
member is purchased by the representatives in a syndicate covering transaction
and has therefore not been effectively placed by the underwriter or syndicate
member.
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<PAGE> 71
The representatives have advised us that these transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discounted at
any time.
Directed share program. At our request, the underwriters have reserved up
to five percent of common stock offered by us for sale, at the initial public
offering price, to our directors, officers, employees, business associates and
related persons. The number of shares of common stock available for sale to the
general public will be reduced to the extent these individuals purchase the
reserved shares. Any reserved shares which are not so purchased will be offered
by the underwriters to the general public on the same basis as the other shares
offered hereby.
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby will be
passed upon for us by Cooley Godward LLP, Kirkland, Washington. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Gray Cary Ware & Freidenrich LLP, Palo Alto, California.
EXPERTS
The financial statements of Vixel Corporation as of December 28, 1997 and
January 3, 1999 and for each of the three-years in the period ended January 3,
1999 included in this prospectus have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements of Arcxel Technologies, Inc. as of December 31,
1997 and for the year then ended included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements of Arcxel Technologies, Inc. as of December 31,
1996 and for the period from June 18, 1996 (inception) to December 31, 1996 have
been included herein and in the Registration Statement in reliance upon the
report of KPMG LLP, independent certified public accountants, and upon the
authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act that registers the shares of our common stock to be sold in this
offering. The registration statement, including the attached exhibits and
schedules, contain additional relevant information about us and our capital
stock. The rules and regulations of the SEC allow us to omit certain information
included in the registration statement from this document.
In addition, upon completion of this offer, we will become subject to the
reporting and information requirements of the Securities Exchange Act and,
accordingly, will file periodic reports, proxy statements and other information
with the SEC. You may read and copy this information at the following public
reference rooms of the SEC:
<TABLE>
<S> <C> <C>
Washington, D.C. New York, New York Chicago, Illinois
450 Fifth Street, N.W., 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
</TABLE>
You may also obtain copies of this information by mail from the Public
Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, at prescribed rates. You may obtain information on the operation of
the public reference rooms by calling the SEC at 1-800-SEC-0330.
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<PAGE> 72
The SEC also maintains an internet website that contains reports, proxy
statements and other information about issuers, like Vixel, who file
electronically with the SEC. The address of that website is http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
audited financial statements, and make available to our stockholders quarterly
reports for the first three quarters of each fiscal year containing unaudited
interim financial information.
67
<PAGE> 73
INDEX TO FINANCIAL STATEMENTS
VIXEL CORPORATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheet as of December 28, 1997, January 3, 1999, and
July 4, 1999 (unaudited).................................. F-3
Statement of Operations for the fiscal years ended December
29, 1996, December 28, 1997 and January 3, 1999, and for
the six months ended June 28, 1998 and July 4, 1999
(unaudited)............................................... F-4
Statement of Changes in Stockholders' Equity (Deficit) for
the fiscal years ended December 29, 1996, December 28,
1997 and January 3, 1999 and for the six months ended July
4, 1999 (unaudited)....................................... F-5
Statement of Cash Flows for the fiscal years ended December
29, 1996, December 28, 1997 and January 3, 1999 and for
the six months ended June 28, 1998 and July 4, 1999
(unaudited)............................................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
ARCXEL TECHNOLOGIES, INC.
<TABLE>
<S> <C>
Reports of Independent Accountants.......................... F-25
Balance Sheet as of December 31, 1996 and 1997.............. F-27
Statement of Operations for the periods from June 18, 1996
(inception) to December 31, 1996, the year ended December
31, 1997 and the period from June 18, 1996 (inception) to
December 31, 1997......................................... F-28
Statement of Changes in Stockholders' Equity (Deficit) for
the period from June 18, 1996 (inception) to December 31,
1996 and the year ended December 31, 1997................. F-29
Statement of Cash Flows for the period from June 18, 1996
(inception) to December 31, 1996, the year ended December
31, 1997 and the period from June 18, 1996 (inception) to
December 31, 1997......................................... F-30
Notes to Financial Statements............................... F-31
Unaudited Pro Forma Combined Statement of Operations........ F-38
</TABLE>
F-1
<PAGE> 74
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Vixel Corporation
The recapitalization described in Note 12 to the financial statements has
not been consummated at August 12, 1999. When it has been consummated, we will
be in a position to furnish the following report:
"In our opinion, the accompanying balance sheet and the related statements
of operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of Vixel
Corporation at December 28, 1997 and January 3, 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
January 3, 1999, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above."
PricewaterhouseCoopers LLP
Seattle, Washington
May 19, 1999, except for paragraph 3 of Note 8
which is as of June 22, 1999.
F-2
<PAGE> 75
VIXEL CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DEFICIT AT
DECEMBER 28, JANUARY 3, JULY 4, JULY 4,
1997 1999 1999 1999
------------ ---------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets
Cash and cash equivalents................................. $ 3,776 $ 3,841 $ 595
Investments............................................... -- 2,490 2,563
Accounts receivable, net of allowance for doubtful
accounts of $36, $231 and $255 (unaudited),
respectively............................................ 5,604 6,032 6,763
Inventory................................................. 861 1,546 681
Prepaid expenses and other current assets................. 495 616 2,135
-------- -------- --------
Total current assets............................... 10,736 14,525 12,737
Property and equipment, net............................... 7,569 7,378 7,244
Goodwill and intangibles, net............................. 1,007 5,579 4,627
Other assets.............................................. 622 683 561
-------- -------- --------
Total assets......................................... $ 19,934 $ 28,165 $ 25,169
======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' DEFICIT
Current liabilities
Line of credit............................................ $ -- $ -- $ 2,825
Current portion of long-term debt and capital leases...... 3,457 1,564 3,572
Accounts payable.......................................... 2,571 4,821 6,459
Accrued liabilities....................................... 2,356 7,855 7,918
-------- -------- --------
Total current liabilities.......................... 8,384 14,240 20,774
Long-term debt and capital leases......................... 4,254 12,856 11,223
Other long-term liabilities............................... 1,803 1,000 1,000
-------- -------- --------
Total liabilities.................................... 14,441 28,096 32,997
-------- -------- --------
Commitments and contingencies (Note 10)
Mandatorily redeemable convertible preferred stock Series E;
$.001 par value; 4,623,482 shares authorized; 4,529,221
shares issued and outstanding; redemption and liquidation
value of $20,382, plus unpaid dividends................... 19,523 19,993 20,101 $ --
-------- -------- -------- --------
Stockholders' deficit
Convertible preferred stock (Note 12)....................... 12 14 14 --
Common stock, $.001 par value; 30,000,000 shares authorized;
1,011,452, 2,898,379 and 4,669,449 (unaudited) shares
issued and outstanding, respectively; 17,929,003
(unaudited) shares issued and outstanding pro forma....... 1 3 5 26
Additional paid-in capital.................................. 21,016 36,351 51,233 72,445
Deferred compensation....................................... (7,787) (7,787)
Notes receivable from stockholders.......................... -- -- (5,246) (5,246)
Treasury stock, at cost; 66,666 shares...................... (50) (50) (50) (50)
Accumulated deficit......................................... (35,009) (56,242) (66,098) (66,098)
-------- -------- -------- --------
Total stockholders' deficit.......................... (14,030) (19,924) (27,929) $ (6,710)
-------- -------- -------- ========
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' deficit.......... $ 19,934 $ 28,165 $ 25,169
======== ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-3
<PAGE> 76
VIXEL CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
----------------------------------------- -------------------------
DECEMBER 29, DECEMBER 28, JANUARY 3, JUNE 28, JULY 4,
1996 1997 1999 1998 1999
------------ ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
SAN systems.................... $ 163 $ 3,282 $ 13,389 $ 6,557 $ 10,806
Components and other........... 6,778 19,501 26,056 14,677 11,253
-------- ---------- ----------- ----------- -----------
Total revenue.................. 6,941 22,783 39,445 21,234 22,059
Cost of revenue.................. 7,342 19,047 36,199 16,732 15,673
-------- ---------- ----------- ----------- -----------
Gross profit (loss).............. (401) 3,736 3,246 4,502 6,386
-------- ---------- ----------- ----------- -----------
Research and development......... 4,474 9,360 11,110 5,249 6,233
Acquired in-process technology... 8,633 -- 5,118 5,118 --
Selling, general and
administrative................. 3,549 7,629 14,521 6,237 6,664
Amortization and writedown of
goodwill and intangibles....... 167 222 2,057 611 680
Amortization of deferred
compensation................... 36 50 -- -- 1,783
-------- ---------- ----------- ----------- -----------
Total operating expenses....... 16,859 17,261 32,806 17,215 15,360
-------- ---------- ----------- ----------- -----------
Loss from operations............. (17,260) (13,525) (29,560) (12,713) (8,974)
Interest expense................. (610) (920) (1,256) (521) (1,048)
Interest income.................. 461 620 414 155 163
Gain on sale of division......... -- -- 9,061 9,061 --
Other (expense) income, net...... (243) 66 108 88 3
-------- ---------- ----------- ----------- -----------
Net loss......................... $(17,652) $ (13,759) $ (21,233) $ (3,930) $ (9,856)
======== ========== =========== =========== ===========
Net loss available to common
stockholders................... $(17,693) $ (13,955) $ (21,424) $ (4,029) $ (9,954)
======== ========== =========== =========== ===========
Basic and diluted net loss per
share.......................... $ (56.87) $ (18.90) $ (10.32) $ (2.64) $ (2.42)
======== ========== =========== =========== ===========
Weighted-average shares
outstanding.................... 311,109 738,318 2,075,344 1,528,348 4,112,912
======== ========== =========== =========== ===========
Pro forma net loss available to
common stockholders
(unaudited).................... $ (21,233) $ (9,856)
=========== ===========
Pro forma basic and diluted net
loss per share (unaudited)..... $ (1.46) $ (0.59)
=========== ===========
Pro forma weighted-average shares
outstanding (unaudited)........ 14,552,300 16,776,241
=========== ===========
</TABLE>
See accompanying notes to the financial statements.
F-4
<PAGE> 77
VIXEL CORPORATION
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
------------------- ------------------ PAID-IN ---------------- DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION
---------- ------ --------- ------ ---------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........ 10,706,474 $10 223,586 $-- $12,703 66,666 $(50) $ (86)
Stock issued upon acquisition of
Western Digital assets.......... 2,000,000 2 7,998
Detachable stock warrants issued
with note and capital lease
agreements...................... 319
Stock options exercised........... 153,766 58
Amortization of deferred
compensation.................... 36
Accretion of mandatorily
redeemable convertible preferred
stock........................... (41)
Net loss..........................
---------- --- --------- --- ------- ------- ---- -------
Balance, December 29, 1996........ 12,706,474 12 377,352 -- 21,037 66,666 (50) (50)
Stock options exercised........... 634,100 1 136
Stock options granted to third
parties......................... 39
Amortization of deferred
compensation.................... 50
Accretion of mandatorily
redeemable convertible preferred
stock........................... (196)
Net loss..........................
---------- --- --------- --- ------- ------- ---- -------
Balance, December 28, 1997........ 12,706,474 12 1,011,452 1 21,016 66,666 (50) --
Stock issued upon acquisition of
Arcxel Technologies, Inc........ 1,759,303 2 1,026,525 1 12,116
Stock options assumed upon
acquisition of Arcxel
Technologies, Inc............... 2,566
Shares repurchased above fair
value........................... 251
Stock options exercised........... 860,402 1 378
Stock options granted to third
parties......................... 215
Accretion of mandatorily
redeemable convertible preferred
stock........................... (191)
Net loss..........................
---------- --- --------- --- ------- ------- ---- -------
Balance, January 3, 1999.......... 14,465,777 14 2,898,379 3 36,351 66,666 (50) --
Stock options exercised
(unaudited)..................... 1,771,070 2 5,346
Stock options granted to third
parties (unaudited)............. 64
Deferred compensation
(unaudited)..................... 9,570 (9,570)
Amortization of deferred
compensation (unaudited)........ 1,783
Accretion of mandatorily
redeemable convertible preferred
stock (unaudited)............... (98)
Net loss (unaudited)..............
---------- --- --------- --- ------- ------- ---- -------
Balance, July 4, 1999
(unaudited)..................... 14,465,777 $14 4,669,449 $ 5 $51,233 66,666 $(50) $(7,787)
========== === ========= === ======= ======= ==== =======
<CAPTION>
NOTES
RECEIVABLE TOTAL
FROM ACCUMULATED STOCKHOLDERS'
STOCKHOLDERS DEFICIT EQUITY (DEFICIT)
------------ ----------- ----------------
<S> <C> <C> <C>
Balance, December 31, 1995........ $ -- $ (3,598) $ 8,979
Stock issued upon acquisition of
Western Digital assets.......... 8,000
Detachable stock warrants issued
with note and capital lease
agreements...................... 319
Stock options exercised........... 58
Amortization of deferred
compensation.................... 36
Accretion of mandatorily
redeemable convertible preferred
stock........................... (41)
Net loss.......................... (17,652) (17,652)
------- -------- --------
Balance, December 29, 1996........ -- (21,250) (301)
Stock options exercised........... 137
Stock options granted to third
parties......................... 39
Amortization of deferred
compensation.................... 50
Accretion of mandatorily
redeemable convertible preferred
stock........................... (196)
Net loss.......................... (13,759) (13,759)
------- -------- --------
Balance, December 28, 1997........ -- (35,009) (14,030)
Stock issued upon acquisition of
Arcxel Technologies, Inc........ 12,119
Stock options assumed upon
acquisition of Arcxel
Technologies, Inc............... 2,566
Shares repurchased above fair
value........................... 251
Stock options exercised........... 379
Stock options granted to third
parties......................... 215
Accretion of mandatorily
redeemable convertible preferred
stock........................... (191)
Net loss.......................... (21,233) (21,233)
------- -------- --------
Balance, January 3, 1999.......... -- (56,242) (19,924)
Stock options exercised
(unaudited)..................... (5,246) 102
Stock options granted to third
parties (unaudited)............. 64
Deferred compensation
(unaudited).....................
Amortization of deferred
compensation (unaudited)........ 1,783
Accretion of mandatorily
redeemable convertible preferred
stock (unaudited)............... (98)
Net loss (unaudited).............. (9,856) (9,856)
------- -------- --------
Balance, July 4, 1999
(unaudited)..................... $(5,246) $(66,098) $(27,929)
======= ======== ========
</TABLE>
See accompanying notes to the financial statements.
F-5
<PAGE> 78
VIXEL CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED SIX MONTHS ENDED
---------------------------------------- -------------------
DECEMBER 29, DECEMBER 28, JANUARY 3, JUNE 28, JULY 4,
1996 1997 1999 1998 1999
------------ ------------ ---------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income..................................... $(17,652) $(13,759) $(21,233) $ (3,930) $ (9,856)
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Depreciation........................................ 1,094 1,962 2,334 1,790 1,161
Acquired in-process technology...................... 8,633 -- 5,118 5,118 --
Amortization of goodwill and intangibles............ 337 449 3,061 1,030 952
Writedown of impaired assets........................ -- -- 1,564 -- --
Amortization of debt discount....................... 216 77 192 -- 115
Stock-based compensation............................ 36 89 303 -- 1,847
Loss (gain) on disposal of property and equipment... 32 (264) -- -- 7
Gain on sale of division............................ -- -- (9,061) (9,061) --
Changes in:
Accounts receivable, net.......................... (1,431) (3,069) (857) 1 (731)
Inventory......................................... (110) (470) (667) (1,246) 865
Prepaid expenses and other assets................. (77) (752) (82) 133 (1,388)
Accounts payable and accrued liabilities.......... 1,610 2,156 10,100 2,047 1,701
-------- -------- -------- -------- --------
Net cash used in operating activities........... (7,312) (13,581) (9,228) (4,118) (5,327)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of short term investments.................... -- -- (2,490) (4,442) (73)
Purchase of property and equipment.................... (535) (1,022) (1,663) (406) (372)
Proceeds from disposal of property and equipment...... -- 92 -- -- --
Cash paid for acquisition of Arcxel Technologies,
Inc................................................. -- -- (16) (16) --
Cash paid for acquisition of Western Digital
Corporation assets.................................. (1,302) -- -- -- --
Proceeds from sale of division........................ -- -- 6,865 6,865 --
-------- -------- -------- -------- --------
Net cash (used in) provided by investing
activities.................................... (1,837) (930) 2,696 2,001 (445)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from line of credit, net..................... -- -- -- -- 2,825
Proceeds from issuance of long-term note payable...... -- -- 7,500 -- --
Proceeds from issuance of long term debt.............. 3,500 -- -- -- --
Principal payments on long-term debt and capital
leases.............................................. (1,605) (1,743) (1,308) (300) (411)
Amortization of debt issuance costs................... -- 10 27 13 10
Proceeds from issuance of preferred stock, net........ 19,210 -- -- -- --
Proceeds from issuance of common stock, net........... 44 137 378 123 102
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities.................................... 21,149 (1,596) 6,597 (164) 2,526
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents.... 12,000 (16,107) 65 (2,281) (3,246)
Cash and cash equivalents, beginning of period.......... 7,883 19,883 3,776 3,776 3,841
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period................ $ 19,883 $ 3,776 $ 3,841 $ 1,495 $ 595
======== ======== ======== ======== ========
Cash paid for interest.................................. $ 319 $ 397 $ 922 $ 507 $ 1,049
Equipment purchased under capital leases................ $ 1,233 $ 3,513 $ 3,187 $ 2,176 662
Issuance of detachable stock warrants................... $ 319 $ 89 $ 279 $ -- $ 9
Accretion of mandatorily redeemable stock............... $ 41 $ 196 $ 191 $ 99 $ 98
Acquisitions (Note 2)
Sale of division (Note 3)
</TABLE>
See accompanying notes to the financial statements.
F-6
<PAGE> 79
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Vixel Corporation (the "Company") is a leading provider of comprehensive
interconnect solutions for use in storage area networks, or SANS. Its products
include SAN management software, fabric switches, arbitrated loop hubs and
transceivers. The Company currently sells its products primarily to
manufacturers as well as resellers in the United States.
FISCAL YEAR
The Company has a 52 or 53-week fiscal year ending on the Sunday closest to
December 31. The fiscal years ended December 29, 1996, December 28, 1997 and
January 3, 1999 were 52, 52 and 53 weeks, respectively.
REVENUE RECOGNITION
Revenue is generally recognized at the time of product shipment, unless we
have future obligations for installation, or we ship product demonstration
units. Revenue from products shipped with future installation obligations is
recognized when the future obligation is met by the Company. Revenue is not
recognized on demonstration units unless the customer ultimately purchases the
unit, and the related revenue is recognized at that time. A portion of products
sold to a distributor is subject to stock rotation rights, and this portion of
revenue is deferred until the stock rotation period has passed. An allowance is
provided for estimated future warranty costs and sales returns. In addition to a
product warranty, the Company offers post-sale telephone customer support and
consulting and installation services. Consulting and most installation services
are billed to customers separately, and revenue for these services is recognized
when the service is provided. Telephone support is included in the sales price
of the Company's products and is not sold separately. The cost of providing this
telephone support is not material.
During the fiscal years ended December 29, 1996 and December 28, 1997,
revenue from government funded research and development arrangements was
recognized and recorded as an offset to the related research and development
expenses at the time specified milestones were met. The Company did not perform
any government funded research and development during fiscal 1998. The Company
performed government funded research and development of $2,250,000 and $993,000
during fiscal 1996 and 1997, respectively.
CONCENTRATION OF MANUFACTURING AND CREDIT RISK AND SALES TO MAJOR CUSTOMERS
Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily accounts receivable and cash
equivalents. The Company performs ongoing credit evaluations of its commercial
customers' financial condition and requires no collateral from these customers.
The Company maintains an allowance for doubtful accounts receivable based upon
its historical experience and the expected collectibility of all accounts
receivable. Credit losses to date have been within the Company's estimates. The
Company has a cash investment policy which generally restricts investments to
ensure preservation of principal and maintenance of liquidity.
Two customers represented 46% and 35% of revenue for the year ended
December 29, 1996. Four customers represented 50%, 13%, 13% and 10% of revenue
for the year ended December 28, 1997. Two customers represented 54% and 12% of
revenue for the year ended January 3, 1999.
The Company's inventory is produced by two contract manufacturers. The
Company believes that alternative manufacturing sources could be obtained and
qualified to supply its products.
F-7
<PAGE> 80
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
investments, accounts receivable, accounts payable, accrued liabilities,
short-term notes payable, long-term debt and capital leases and mandatorily
redeemable convertible preferred stock. Except for long-term debt, capital
leases and mandatorily redeemable convertible preferred stock, the carrying
amounts of financial instruments approximate fair value due to their short
maturities. The fair value of long-term debt and capital leases at December 28,
1997 and January 3, 1999 is not materially different from the carrying amount,
based on interest rates available to the Company for similar types of
arrangements. The Company considers the fair value of the mandatorily redeemable
convertible preferred stock to be the liquidation value plus unpaid dividends.
CASH AND CASH EQUIVALENTS
Highly liquid investments purchased with original maturities of three
months or less are considered to be cash equivalents.
INVESTMENTS
Investments consist of highly rated commercial paper and corporate bonds
which have original maturities between three and six months. These investments
are classified as available-for-sale and are recorded at market value, which
approximates cost. There were no material unrealized gains or losses at January
3, 1999.
INVENTORY
Inventory is stated at the lower of cost or market, cost being determined
by the first-in, first-out cost flow assumption.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets as
follows:
<TABLE>
<S> <C>
1 - 3
Test equipment.............................................. years
Furniture and office equipment.............................. 5 years
Computer equipment and software............................. 3 years
</TABLE>
Leasehold improvements are amortized over the shorter of their useful lives
or the term of the related lease. Maintenance and repairs, which neither
materially add to the value of the asset nor prolong its life, are charged to
expense as incurred. Gains or losses on dispositions of property and equipment
are included in operations.
GOODWILL AND INTANGIBLES
Intangibles include goodwill, which represents costs in excess of net
assets of businesses acquired, acquired technology and other intangible assets
(Note 6). Goodwill and intangibles are being amortized over periods ranging from
three to five years, using the straight-line method. Amortization of developed
technology is recorded as cost of sales. All other amortization is recorded as
amortization of goodwill and intangibles in the statement of operations.
F-8
<PAGE> 81
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
IMPAIRMENT OF LONG-LIVED ASSETS
The Company continually reviews the carrying value of long-lived assets
including, but not limited to, property and equipment and goodwill and
intangibles to determine whether impairment has occurred. The carrying value of
long-lived assets is considered impaired when the anticipated undiscounted cash
flow from such asset is less than its carrying value. In that event, a loss is
recognized for the amount by which the carrying value exceeds the fair value of
the long-lived asset. Fair value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved.
In December 1998, the Company identified an impairment in the value of
developed technology acquired in the purchase of Arcxel Technologies, Inc. (Note
2). The impairment arose as a result of the development of a next-generation
switch product which had better functionality and a lower cost than Arcxel's
existing switch product at the time of the acquisition. At the time of the
Arcxel acquisition, the Company believed that both the existing switch product
and the next-generation product which was under development could co-exist, each
serving different customer needs. However, the functionality and cost-
effectiveness of the next-generation switch exceeded the Company's original
expectations, which led to a much shorter product life than originally
anticipated for the existing switch product when the value of developed
technology was determined. Accordingly, the carrying values of both the
developed technology and the portion of goodwill allocated to the developed
technology have been written down to their fair value in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
Impairment losses of $1,564,000 and $691,000 have been recorded in cost of sales
and amortization expense, respectively, in the statement of operations.
PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED)
Effective upon the closing of this offering, the outstanding shares of the
Company's convertible preferred stock will automatically convert into 13,259,554
shares of common stock. The number of preferred shares converted includes
894,333 shares of preferred stock issuable upon exercise of warrants. These
preferred shares will convert into 596,222 shares of common stock. The pro forma
effects of these transactions are unaudited and have been reflected in the
accompanying pro forma stockholders' equity at July 4, 1999.
INCOME TAXES
The Company accounts for income taxes under the liability method, which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax bases of assets and liabilities. If it is more likely than not that
some portion of a deferred tax asset will not be realized, a valuation allowance
is recorded.
WARRANTY
The Company offers product warranties of one to five years. Estimated
future warranty obligations related to certain products are provided by charges
to operations in the period in which the related revenue is recognized. These
estimates are based on historical warranty experience and other relevant
information of which the Company is aware. During the years ended December 28,
1997 and January 3, 1999 warranty expense was $298,000 and $4,333,000,
respectively. The Company did not record any warranty expense during the year
ended December 29, 1996.
F-9
<PAGE> 82
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Basic net loss per share represents net loss available to common
stockholders divided by the weighted-average number of common shares outstanding
during the period. Diluted net loss per share represents net loss available to
common stockholders divided by the weighted-average number of common shares
outstanding including the potentially dilutive impact of common stock options
and warrants and convertible preferred stock. Common stock options and warrants
are converted using the treasury stock method. Convertible preferred stock is
converted using the if-converted method. Basic and diluted net (loss) income per
share are equal for the periods presented, except for the quarter ended March
29, 1998, because the impact of common stock equivalents is anti-dilutive.
Potentially dilutive securities totaling 603,606, 9,307,007 and 8,748,029 shares
for the fiscal years ended December 29, 1996, December 28, 1997 and January 3,
1999, respectively, and 15,780,137 and 15,746,598 shares (unaudited) for the six
months ended June 28, 1998 and July 4, 1999, respectively, were excluded from
diluted net loss per share due to their anti-dilutive effect.
Pro forma net loss per share is computed using the weighted-average number
of common shares outstanding, including the pro forma effects of the automatic
conversion of the Company's convertible preferred stock into shares of the
Company's common stock effective upon the closing of the Company's initial
public offering as if such conversion occurred on the date the shares were
originally issued.
F-10
<PAGE> 83
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
The following table sets forth the computation of the numerators and
denominators in the basic, diluted and pro forma net loss per share calculations
for the periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
----------------------------------------- -------------------------
DECEMBER 29, DECEMBER 28, JANUARY 3, JUNE 28, JULY 4,
1996 1997 1999 1998 1999
------------ ------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss................... $(17,652) $(13,759) $ (21,233) $ (3,930) $ (9,856)
Accretion of mandatorily
redeemable Convertible
preferred stock......... (41) (196) (191) (99) (98)
-------- -------- ----------- ----------- -----------
Net loss available to
common stockholders..... $(17,693) $(13,955) (21,424) $ (4,029) (9,954)
======== ======== ===========
Effect of pro forma
conversion of
securities:
Accretion of mandatorily
redeemable convertible
preferred stock......... 191 98
----------- -----------
Pro forma net loss
available to common
stockholders............ $ (21,233) $ (9,856)
=========== ===========
Denominator:
Weighted-average shares
outstanding............. 311,109 738,318 2,075,344 1,528,348 4,112,912
======== ======== ===========
Dilutive effect of pro forma
securities:
Preferred stock -- Series
A....................... 3,260,826 3,260,826
Preferred stock -- Series
B....................... 3,495,870 3,495,870
Preferred stock -- Series
C....................... 380,952 380,952
Preferred stock -- Series
D....................... 1,333,333 1,333,333
Preferred stock -- Series
E....................... 3,019,480 3,019,480
Preferred stock -- Series
F....................... 986,495 1,172,868
----------- -----------
Pro forma weighted average
shares outstanding
(unaudited)................ 14,552,300 16,776,241
=========== ===========
</TABLE>
STOCK OPTIONS
The Company's stock option plan is subject to the provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (FAS 123). Under the provisions of this statement, employee
stock-based compensation expense is measured using either the intrinsic-value
method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25), or the fair value method described in
FAS 123. Companies choosing the intrinsic-value method are required to disclose
the pro forma impact of the fair value method on net income. The Company has
elected to continue accounting for its employee and director stock-based awards
under the provisions of APB 25. The Company is required to implement FAS 123 for
stock-based awards to other than employees and directors.
F-11
<PAGE> 84
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates. Amounts in the
financial statements which are particularly susceptible to changes in estimates
include the allowance for doubtful accounts receivable and product warranty
costs.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement is effective
for the Company beginning January 4, 1999 and establishes accounting standards
for costs incurred in the acquisition or development and implementation of
computer software. These new standards require capitalization of certain
software implementation costs relating to software acquired or developed and
implemented for the Company's use. This statement is not expected to have a
significant effect on the Company's financial position or results of operations.
The Financial Accounting Standards Board (FASB) recently issued FAS No.
130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards
for reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity during a period
from non-owner sources. The Company adopted FAS 130 on December 29, 1997. To
date, the Company has not had any significant transactions that are required to
be reported as other comprehensive income other than its net (loss) income.
The FASB recently issued FAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (FAS 131). FAS 131 supersedes FAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management approach." The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. FAS 131 also requires disclosures about products
and services, geographic areas and major customers. The Company adopted FAS 131
on January 3, 1999. The Company has determined that it does not have any
separately reportable business or geographic segments.
UNAUDITED INTERIM FINANCIAL STATEMENTS
The interim financial data as of July 4, 1999 and for the six months ended
June 28, 1998 and July 4, 1999 is unaudited; however, in the opinion of
management, the interim data includes all adjustments consisting only of normal
recurring adjustments necessary to present fairly the Company's financial
position as of July 4, 1999 and the results of its operations and cash flows for
the six months ended June 28, 1998 and July 4, 1999.
RECLASSIFICATIONS
Certain items in the December 29, 1996 and December 28, 1997 financial
statements have been reclassified to conform to the January 3, 1999
presentation.
F-12
<PAGE> 85
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
2. ACQUISITIONS
In March 1996, the Company purchased certain assets and assumed certain
liabilities from Western Digital Corporation (WDC). The acquisition has been
accounted for using the purchase method of accounting in accordance with
Accounting Principles Board Opinion No. 16, "Business Combinations" (APB 16).
A summary of the purchase price is as follows (in thousands):
<TABLE>
<S> <C>
Consideration
Cash...................................................... $ 1,200
Value of Series D preferred stock......................... 8,000
Note payable.............................................. 2,000
Acquisition costs......................................... 102
-------
$11,302
=======
</TABLE>
The value of the Series D preferred stock was determined through
arms-length negotiations with WDC.
A summary of assets acquired and liabilities assumed at the date of the
acquisition, as determined in accordance with APB 16, is presented below (in
thousands):
<TABLE>
<S> <C>
Inventory................................................... $ 135
Property and equipment...................................... 1,141
Acquired in-process technology.............................. 8,633
Goodwill and intangibles.................................... 1,793
Liabilities................................................. (400)
-------
$11,302
=======
</TABLE>
On February 17, 1998, the Company acquired Arcxel Technologies, Inc.
(Arcxel), a manufacturer of fibre channel switches. The Company acquired all
outstanding shares of Arcxel's common stock and Series A preferred stock in
exchange for 1,026,525 shares of the Company's common stock and 1,759,303 shares
of the Company's Series F preferred stock. The acquisition has been accounted
for using the purchase method of accounting.
A summary of the purchase price paid is as follows (in thousands):
<TABLE>
<S> <C>
Consideration:
Value of common stock..................................... $ 5,081
Value of preferred stock.................................. 7,037
Fair value of assumed stock options....................... 2,566
Acquisition costs......................................... 157
-------
$14,841
=======
</TABLE>
The value of the Series F preferred stock issued to the sellers of Arcxel
was determined through arms-length negotiations with the sellers. The value of
the common stock issued to the sellers was determined by an independent
third-party appraisal, the methodology and assumptions of which are described as
follows. The value of the Company was determined using the "income approach"
discounted cash flow model. The assumptions used in the model included five year
income and cash flow projections, a discount rate of 35% and a terminal value
multiple of five times projected earnings before interest and taxes in the fifth
year of the projections. The value derived from the discounted cash flow model
was
F-13
<PAGE> 86
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
reduced by a 39% private company adjustment to reflect differences in size,
liquidity, predictability of earnings, access to capital and other
characteristics of the Company compared to a public company. The common stock
was valued as the residual of the total value of the Company less the value of
all classes of preferred stock outstanding.
The fair value of the Arcxel stock options assumed by the Company was
determined using the Black-Scholes model with the following weighted average
assumptions: exercise price of $0.45 per share, fair value of common stock of
$4.95 per share, expected life of 3.48 years, risk-free interest rate of 5.55%
and no volatility or dividend yield factors.
A summary of assets acquired and liabilities assumed at the date of the
acquisition, as determined in accordance with APB 16, is presented below (in
thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 141
Accounts receivable......................................... 53
Inventory................................................... 216
Prepaid expenses and other current assets................... 63
Property and equipment...................................... 404
Acquired in-process technology.............................. 5,118
Goodwill and intangibles.................................... 9,198
Other assets................................................ 161
Accounts payable............................................ (170)
Accrued liabilities......................................... (87)
Capital leases.............................................. (256)
-------
$14,841
=======
</TABLE>
The acquired in-process technology of WDC and Arcxel had not yet reached
technological feasibility and had no alternative future use. The acquired
in-process technology was recorded as expense at the time of acquisitions. The
valuations of the acquired in-process technology was based upon estimates by the
Company and a valuation by a third-party appraiser. The valuation of the
in-process technology related to these acquisitions was determined by estimating
the future net cash flows resulting from products anticipated to result from
these acquisitions and discounting the net cash flows to the date of acquisition
using a discount rate of 25% for WDC and 35% for Arxcel. All projects acquired
from WDC resulted in commercialized products and represent a significant portion
of the Company's fiscal 1996, 1997 and 1998 revenues. Given that the valuations
of the acquired in-process technology were an estimate, actual results may
change. If the estimate of the in-process technology were to decrease, the value
assigned to goodwill and intangibles would increase. Included in intangibles are
developed technology (products), core technology and other intangible assets.
The results of operations of WDC and Arcxel are included in the financial
statements from the dates of acquisition. Unaudited pro forma results as if WDC
and Arcxel had been included in the financial results since the beginning of the
year prior to their acquisition are as follows (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 28, JANUARY 3,
1996 1997 1999
------------ ------------ ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenue......................................... $ 8,924 $ 22,783 $ 39,497
Net loss........................................ (18,052) (17,836) (21,875)
Basic and diluted net loss per share............ (58.02) (24.17) (10.55)
</TABLE>
F-14
<PAGE> 87
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
The unaudited pro forma results are not necessarily indicative of the
results of operations that would have been reported had the acquisitions
occurred prior to the beginning of the periods presented. In addition, they are
not intended to be indicative of future results.
3. SALE OF DIVISION
On February 13, 1998, the Company sold substantially all of the laser diode
fabrication facility and gigabit Ethernet transceiver product line of its
Colorado division for cash proceeds of $7,250,000 and the assumption of net
liabilities of the Colorado division. The Company recorded a gain of
approximately $9,061,000 related to the sale. In connection with the sale,
certain employees of the division elected to receive accelerated vesting of
their stock options. The Company recorded an expense of $163,000 related to this
accelerated vesting. The Company also recorded cash expenses of $385,000 in
connection with this sale. Revenue and net loss of the Colorado division were
$133,000 and $7,530,000, respectively, for the fiscal year ended December 28,
1997. For the period from December 29, 1997 through February 13, 1998, revenue
and net loss of the division were $120,000 and $1,047,000, respectively. These
amounts are included in the Company's statement of operations.
4. INVENTORY
Inventory consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, JULY 4,
1997 1999 1999
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials.................................... $ 301 $ 606 $ 300
Work in process.................................. 211 -- 9
Finished goods................................... 642 1,423 715
Less: Writedown to expected realizable value..... (293) (483) (343)
----- ------ -----
$ 861 $1,546 $ 681
===== ====== =====
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, JULY 4,
1997 1999 1999
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Test equipment................................... $ 7,467 $ 5,034 $ 5,371
Furniture and office and computer equipment...... 2,669 3,414 3,842
Software......................................... 1,034 1,763 1,766
Leasehold improvements........................... 459 233 239
------- ------- -------
11,629 10,444 11,218
Less: Accumulated depreciation................... (4,060) (3,066) (3,974)
------- ------- -------
$ 7,569 $ 7,378 $ 7,244
======= ======= =======
</TABLE>
Assets underlying capital leases included above are $5,384,000, $7,408,000
and $8,086,000 (unaudited) at December 28, 1997, January 3, 1999 and July 4,
1999, respectively, and accumulated amortization thereon aggregates $800,000,
$2,038,000 and $2,676,000 (unaudited) at December 28, 1997, January 3, 1999 and
July 4, 1999, respectively.
F-15
<PAGE> 88
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
6. GOODWILL AND INTANGIBLES
Goodwill and intangibles consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, JULY 4,
1997 1999 1999
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill......................................... $ 946 $ 4,917 $ 4,917
Developed technology............................. 681 3,344 3,344
Core technology.................................. -- 2,183 2,183
Covenants not to compete......................... 166 166 166
Workforce........................................ -- 381 381
------ ------- -------
1,793 10,991 10,991
Less: Accumulated amortization................... (786) (3,156) (4,108)
Less: Impairment write-down...................... -- (2,256) (2,256)
------ ------- -------
$1,007 $ 5,579 $ 4,627
====== ======= =======
</TABLE>
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3, JULY 4,
1997 1999 1999
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued warranty costs........................... $ 306 $4,390 $3,887
Accrued payroll and related benefits............. 819 1,152 1,404
Accrued business taxes........................... 115 301 689
Accrued interest................................. 121 334 354
Accrued professional fees........................ 300 272 138
Accrued legal costs.............................. 153 600 600
Other............................................ 542 806 846
------ ------ ------
$2,356 $7,855 $7,918
====== ====== ======
</TABLE>
8. LINE OF CREDIT AND NOTE PAYABLE
In October 1998, the Company renewed its $5,000,000 line of credit facility
with a bank which matures on September 30, 1999 and bears interest at LIBOR
(5.108% at January 3, 1999) plus 4.75%. The outstanding principal balance cannot
exceed 80% of the Company's eligible accounts receivable. At January 3, 1999, no
borrowings were outstanding under this facility.
Concurrent with the renewal of the line of credit facility, the Company
entered into a $7,500,000 note payable to the bank due September 30, 1999. The
note bears interest at LIBOR (5.108% at January 3, 1999) plus 4.75% and is
collateralized by inventory, equipment, receivables, intangibles and deposit
accounts of the Company.
The Company increased its line of credit facility to $7,500,000 and on June
22, 1999 extended both the line of credit and the $7,500,000 note payable to
September 30, 2000.
F-16
<PAGE> 89
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
9. LONG-TERM DEBT AND CAPITAL LEASES
Long-term debt and capital leases consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1997 1999
------------ ----------
<S> <C> <C>
Note payable, interest rate of 8.69%, due the earlier of
March 31, 2000 or the occurrence of certain corporate
events; collateralized by certain assets acquired from
Western Digital Corporation............................... $ 1,649 $ 1,649
Note payable, interest rate of 9.86%, due September 30,
2000; net of unamortized discount of $172,000............. -- 7,328
Note payable, interest rate of 8.09%, monthly payments of
$60,000 through September 1999; net of unamortized
discount of $74,000; collateralized by certain
manufacturing and research and development equipment...... 1,233 --
Capital lease obligations, net of unamortized discount of
$106,000 and $34,000, respectively........................ 4,829 5,443
------- -------
7,711 14,420
Less: Current portion....................................... (3,457) (1,564)
------- -------
$ 4,254 $12,856
======= =======
</TABLE>
On February 17, 1998, the 8.09% note payable was assumed by the purchaser
of the Colorado division.
Maturities of long-term debt and capital leases at January 3, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
<S> <C>
1999......................................... $ 1,564
2000......................................... 10,901
2001......................................... 1,576
2002......................................... 585
-------
14,626
Less: Unamortized discount................... (206)
-------
$14,420
=======
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company has commitments under long-term operating leases, principally
for building space and office equipment. These leases require payment of
property taxes and include escalation clauses and options to extend the lease
terms for three to five years. The following table summarizes the future
F-17
<PAGE> 90
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
minimum lease payments under all noncancelable operating lease obligations at
January 3, 1999 (in thousands).
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
<S> <C>
1999.............................................. $ 632
2000.............................................. 639
2001.............................................. 658
2002.............................................. 220
------
$2,149
======
</TABLE>
Total rent expense was approximately $446,000, $897,000 and $1,235,000
during the fiscal years ended December 29, 1996, December 28, 1997 and January
3, 1999, respectively, and $615,000 and $591,000 (unaudited) during the six
months ended June 28, 1998 and July 4, 1999, respectively.
CAPITAL LEASES
The Company also leases certain equipment under capital lease agreements.
Future minimum lease payments under capital leases at January 3, 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------
<S> <C>
1999............................................. $ 2,224
2000............................................. 2,191
2001............................................. 1,766
2002............................................. 612
-------
Total minimum lease payments..................... 6,793
Less: Portion representing interest.............. (1,316)
Less: Unamortized discount....................... (34)
-------
Present value of capital lease obligations....... 5,443
Less: Current portion............................ (1,564)
-------
Capital leases, net of current portion........... $ 3,879
=======
</TABLE>
LEGAL PROCEEDINGS
During the fiscal year ended December 28, 1997, the Company was named as
the defendant in two patent infringement actions and was conducting the defense
of another patent infringement action brought against one of its contract
manufacturers, for which the Company was an indemnitor. Two of the patent
infringement actions, including the action brought against the contract
manufacturer, were dismissed without prejudice during the fiscal year ended
January 3, 1999. During the fiscal year ended January 3, 1999, the Company was
named as defendant in another patent infringement action filed by the plaintiff
in the remaining action.
In May 1999, the Company entered into a settlement agreement with the
plaintiff in these remaining patent infringement actions. Under the settlement
agreement, the Company is obligated to make certain future payments which have
been included in accrued liabilities and long-term liabilities at January 3,
1999.
F-18
<PAGE> 91
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
11. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company's Series E convertible preferred stock includes a provision
whereby, beginning in October 2001, holders of a majority of such stock have the
right to require the Company to repurchase the shares at a redemption price of
$4.50 per share plus any declared and unpaid dividends. The Company shall redeem
up to one-third of the Series E stock outstanding in October 2001, up to an
additional one-third in October 2002 and up to the remaining one-third in
October 2003.
The following is a summary of the number of shares, redemption price and
earliest redemption dates:
<TABLE>
<CAPTION>
EARLIEST
REDEMPTION REDEMPTION
SHARES PRICE DATE
------ ---------- ------------
<S> <C> <C>
1,509,741......................... $ 6,794 October 2001
1,509,740......................... 6,794 October 2002
1,509,740......................... 6,794 October 2003
-------
$20,382
=======
</TABLE>
The redemption value of the mandatorily redeemable convertible preferred
stock is being accreted over the period from issuance to the applicable earliest
redemption date using the effective interest method.
The Series E preferred stock is convertible, on a one-for-one basis, into
common stock at any time at the option of the holders. In the event of a
liquidation of the Company, the holders of Series E preferred stock will be
entitled to be paid out of the assets, prior and in preference to any payment of
Series A, Series B, Series C, Series D and Series F convertible preferred stock
(Note 12). The payment shall be an amount per share equal to the sum of $4.50
for each outstanding share of Series E preferred stock plus an amount per share
equal to all declared but unpaid dividends on each such share.
12. STOCKHOLDERS' EQUITY
STOCK SPLIT
On August 12, 1999, the Company's Board of Directors declared a
two-for-three reverse stock split of the Company's common stock which will
become effective prior to the Company's initial public offering. All share and
per share amounts have been restated to reflect this stock split.
F-19
<PAGE> 92
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
CONVERTIBLE PREFERRED STOCK
Convertible Preferred Stock consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 29, DECEMBER 28, JANUARY 3, JULY 4,
1996 1997 1999 1999
------------ ------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Series A, $.001 par value, $1.25 liquidation
value; 5,785,573 shares authorized, 4,891,239
shares issued and outstanding................... $ 4 $ 4 $ 4 $ 4
Series B, $.001 par value, $1.75 liquidation
value; 5,243,806 shares authorized, issued and
outstanding..................................... 5 5 5 5
Series C, $.001 par value, $1.75 liquidation
value; 747,143 shares authorized, 571,429 shares
issued and outstanding.......................... 1 1 1 1
Series D, $.001 par value, $4.00 liquidation
value; 2,000,000 shares authorized, issued and
outstanding..................................... 2 2 2 2
Series F, $.001 par value, $4.00 liquidation
value; 1,760,000 shares authorized, 1,759,303
shares issued and outstanding................... 2 2
--- --- --- ---
$12 $12 $14 $14
=== === === ===
</TABLE>
Shares of Convertible Preferred Stock have dividend rights, voting rights
and liquidation preferences, and are convertible, on a one-for-one basis, into
common stock at any time at the option of the holders. The holders of
Convertible Preferred Stock are entitled to receive cash dividends when and if
declared by the Company's Board of Directors. There have been no declared but
unpaid dividends to date.
The holders of the Series A and Series B preferred stock, each voting
separately as a class, are entitled to elect two members of the Board of
Directors of the Company, and the holders of the Series D and Series F preferred
stock, each voting separately as a class, are entitled to elect one member of
the Board of Directors of the Company. Additional members of the Board of
Directors, if any, will be elected by the holders of shares of common stock,
Series E convertible preferred stock and Convertible Preferred Stock, voting
together as a single class.
Upon liquidation, the preferred shareholders are entitled to distributions
in order of their liquidation preferences. The holders of the Convertible
Preferred Stock will be entitled to be paid out of the assets of the Company an
amount per share equal to the sum of the per share liquidation amounts shown
above plus an amount equal to all declared but unpaid dividends on each
outstanding share. The Series A, Series B, Series C, Series D, and Series F
preferred stock will rank on a parity as to the receipt of the respective
preferential amounts for each such series.
STOCK OPTIONS
The Company has a stock option plan which provides for the grant of
incentive and non-qualified stock options to directors, employees and
consultants to purchase common stock of the Company. At January 3, 1999,
5,133,333 shares of common stock have been reserved for issuance to plan
participants and 397,420 shares remained reserved and available for grant under
the Plan. In April 1999, an additional 1,000,002 shares were reserved for
issuance under the plan to plan participants.
Incentive stock options are granted at an exercise price not less than the
fair market value of the common stock on the date of grant, as determined by the
Board of Directors. Incentive stock options and
F-20
<PAGE> 93
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
non-qualified stock options for employees generally vest over four or five
years. Such options expire ten years after the date of grant. Non-qualified
stock options for non-employees generally vest immediately and expire five years
after the date of grant.
On December 14, 1998, certain option holders were given the opportunity to
cancel existing options and receive new options. In each case, the new option
price was equal to the fair value of the underlying stock on the date of grant,
as determined by the Board of Directors, and the expiration schedules were the
same as for any new grant. 50% of any vested options associated with the
canceled grant was carried over as part of the new grant upon election of
repricing.
During the fiscal year ended January 3, 1999, the Company issued to its
president a stock subscription note receivable of $3,497,000 or $5.00 per share
for a total of 700,000 vested and unvested common shares under the Company's
stock option plan. In October 1998, the Company canceled the portion of the note
receivable related to 569,441 unvested shares. Upon cancellation of the portion
of the note for the 130,558 vested shares, the Company recognized compensation
expense of $251,000 for the excess of the initial stock subscription price over
the fair value of the common stock.
The following table summarizes stock option activity for the three fiscal
years in the period ended January 3, 1999:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE FAIR
SHARES PRICE VALUE
---------- --------- ----------
<S> <C> <C> <C>
Outstanding at December 31, 1995............... 1,335,755 $0.23
Granted ..................................... 1,520,800 0.32 $0.09
Exercised.................................... (153,766) 0.27
Canceled..................................... (154,722) 0.12
----------
Outstanding at December 29, 1996............... 2,548,067 0.30
Granted...................................... 1,358,950 1.98 0.57
Exercised.................................... (634,100) 0.26
Canceled..................................... (712,564) 0.35
----------
Outstanding at December 28, 1997............... 2,560,353 1.20
Granted...................................... 3,426,073 3.79 1.25
Exercised.................................... (860,402) 2.49
Canceled..................................... (2,261,969) 3.66
----------
Outstanding at January 3, 1999................. 2,864,055 $2.27
==========
Options exercisable at:
December 29, 1996............................ 445,361 $0.23
December 28, 1997............................ 516,301 $0.36
January 3, 1999.............................. 645,947 $1.61
</TABLE>
F-21
<PAGE> 94
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
The following summarizes information about stock options outstanding and
exercisable at January 3, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.11 - $0.30.. 453,808 8.19 $0.17 201,995 $0.20
$0.45 - $0.98.. 692,889 8.44 $0.74 203,812 $0.75
$3.08 - $4.35.. 1,477,294 9.57 $3.21 232,409 $3.42
$4.59 - $6.75.. 240,064 9.08 $4.77 7,731 $6.75
--------- -------
2,864,055 645,947
========= =======
</TABLE>
During the fiscal years ended December 28, 1997 and January 3, 1999, the
Company recorded $39,000 and $52,000, respectively, of compensation expense
related to the issuance of stock options for services provided by consultants.
The value of these stock options was recorded using the Black-Scholes valuation
model. The Company did not issue any stock options to consultants during the
fiscal year ended December 29, 1996.
Had the Company determined compensation expense based on the fair value of
the option at the grant date for all stock options issued to employees, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below (dollars in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 28, JANUARY 3,
1996 1997 1999
------------ ------------ ----------
<S> <C> <C> <C>
Net loss
As reported........................... $(17,652) $(13,759) $(21,233)
Pro forma............................. (17,690) (13,837) (21,487)
Basic and diluted net loss per share
As reported........................... (56.87) (18.90) (10.32)
Pro forma............................. (56.99) (19.01) (10.45)
</TABLE>
In accordance with the guidance provided under FAS 123, fair values are
based on minimum values. The fair value of each employee option grant is
estimated on the date of grant using the minimum value option-pricing model
using the following weighted-average assumptions.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
DECEMBER 29, DECEMBER 28 JANUARY 3,
1996 1997 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Expected term...................... 5 years 5 years 5 years
Risk-free interest rate............ 6.07% - 7.76% 5.71% - 6.75% 4.22% - 5.64%
Dividend yield..................... 0% 0% 0%
Volatility......................... 0% 0% 0%
</TABLE>
Pro forma net loss amounts reported above reflect only options granted in
1995 through 1998. The full impact of calculating compensation expense for stock
options based on fair value at the grant date is not reflected in the pro forma
net loss amounts because compensation expense is reflected over the options'
vesting period. In addition, because the determination of the fair value of all
options granted after such time as the Company may become a public entity will
include an expected volatility factor in addition to the factors described
above, the above results may not be representative of future periods.
F-22
<PAGE> 95
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
The December 14, 1998 option-repricing event is considered a modification
of an existing option. For determination of the pro forma amounts, this
modification is treated as if a new option had been issued and any additional
incremental value recorded in the year of repricing is immediately recognized
for unvested options and amortized over the remaining vesting period for
nonvested options.
STOCK WARRANTS
All stock warrants have been valued using the Black-Scholes valuation
model.
In conjunction with the Series B preferred stock offering, the Company
issued warrants to purchase 654,333 shares of Series A preferred stock. The
warrants have an exercise price of $1.25 per share and expire on October 6,
2000. In conjunction with the Series E preferred stock offering in October 1996,
the Company issued warrants to purchase 69,261 shares of Series E preferred
stock. The warrants have an exercise price of $5.63 per share and expire on
October 16, 2001. As of January 3, 1999, the Company also had outstanding a
warrant to purchase 240,000 shares of Series A preferred stock at an exercise
price of $1.25 per share which expires on July 6, 2000.
During January and February 1996, the Company issued warrants to purchase
175,714 shares of Series C preferred stock at an exercise price of $3.50 per
share and terms ranging from eight to ten years. These warrants were issued in
conjunction with the Company's 8.09% note payable and a capital lease obligation
described in Note 9. These warrants were recorded at their fair value of
$319,000, which was recorded as an original issue discount and is being
amortized over the term of the note payable and a capital lease obligation. The
8.09% note and related debt discount was transferred to the acquirer of the
Colorado division (see Note 3).
During May 1997, the Company issued warrants to purchase 25,000 shares of
Series E preferred stock with an exercise price of $5.62 per share. These
warrants are exercisable through the earlier of (i) May 31, 2002, (ii) the
one-year anniversary of the effective date of an initial public offering of the
Company's common stock or (iii) the effective date of a merger of the Company or
sale of substantially all of the Company's assets. These warrants were issued in
conjunction with obtaining a capital lease line. The warrants were recorded at
their fair value of $89,000, which was recorded as a debt issue cost and is
being amortized over the terms of the lease line.
During December 1998, the Company issued warrants to purchase shares of
Series E preferred stock with a value of $137,500 at an exercise price equal to
the lesser of i) $10 per share or ii) the greater of $7.50 or the average of
$4.50 per share and the share value of the next round of financing. These
warrants are exercisable at any time after issuance for a period of five years.
These warrants were issued in conjunction with obtaining a capital lease line.
The warrants were recorded at their fair value of $48,766, which was recorded as
a debt issue cost and is being amortized over the term of the lease line. An
additional 100,000 shares of Series E preferred stock were also issued in
November 1998, in conjunction with obtaining a term loan as described in Note 9.
These warrants have an exercise price of $10 per share and are exercisable
through November 23, 2003. The warrants have been recorded at their fair value
of $230,000 as an original issue discount which is being amortized over the life
of the term loan.
13. INCOME TAXES
At January 3, 1999, the Company has net operating loss carryforwards of
approximately $31,100,000 which may be used to offset future taxable income.
These carryforwards expire beginning in 2010. The Internal Revenue Code places
certain limitations on the annual amount of net operating loss carryforwards
that can be utilized if certain changes in the Company's ownership occur. The
Company believes that, pursuant to Section 382 of the Internal Revenue Code,
there was a change in ownership of the Company
F-23
<PAGE> 96
VIXEL CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999
in 1995 and that a substantial portion of the net operating loss carryforwards
generated in or prior to 1995 (approximately $2,700,000) are significantly
limited and potentially unusable. Future changes in the Company's ownership may
further limit the use of such carryforward benefits.
A reconciliation of taxes on net loss at the federal statutory rate to
actual tax expense is as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
DECEMBER 29, DECEMBER 28, JANUARY 3,
1996 1997 1999
------------ ------------ ----------
<S> <C> <C> <C>
Tax at statutory rate........................... $(6,002) $(4,678) $(7,219)
Non deductible items............................ 15 57 2,236
Effect of state taxes........................... (618) (688) (734)
Change in tax credits........................... (243) (50) (990)
Change in valuation allowance................... 7,006 5,466 6,718
Other........................................... (158) (107) (11)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
</TABLE>
The Company's net deferred tax assets consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 28, JANUARY 3,
1997 1999
------------ ----------
<S> <C> <C>
Net operating loss carryforwards............................ $ 9,600 $ 12,144
Goodwill and intangibles.................................... 3,176 2,263
Credit carryforwards........................................ 350 1,340
Accrued warranty costs...................................... 119 1,712
Other accruals.............................................. 222 1,213
Other....................................................... 84 508
-------- --------
Gross deferred tax assets................................... 13,551 19,180
Less: Valuation allowance................................... (13,551) (19,180)
-------- --------
Net deferred tax asset...................................... $ -- $ --
======== ========
</TABLE>
The Company has recorded a valuation allowance equal to the gross deferred
tax asset balance because the Company's accumulated deficit, history of
recurring net losses and possible limitations on the use of carryforwards give
rise to uncertainty as to whether the deferred tax assets are realizable.
14. RETIREMENT SAVINGS PLAN
The Company sponsors a retirement savings plan that qualifies under
Internal Revenue Code Section 401(k). The plan covers all qualified employees.
The Company matches a percentage of an employee's contribution as determined by
the Board of Directors. The Company contributed $252 and $398 to the plan in
fiscal years 1997 and 1998, respectively. The Company did not make contributions
to the plan in fiscal year 1996.
F-24
<PAGE> 97
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Vixel Corporation
The recapitalization described in Note 9 to the financial statements has
not been consummated at August 12, 1999. When it has been consummated, we will
be in a position to furnish the following report:
"In our opinion, based upon our audit and the report of other auditors, the
accompanying balance sheet and the related statements of operations, of changes
in stockholders' equity (deficit) and of cash flows present fairly, in all
material respects, the financial position of Arcxel Technologies, Inc. (the
Company), a development stage enterprise, at December 31, 1997, and the results
of its operations and its cash flows for the year then ended and for the period
from inception (June 18, 1996) through December 31, 1997, in conformity with
generally accepted accounting principles. 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 audit. We did not audit the
financial statements for the period from inception (June 18, 1996) through
December 31, 1996, which statements reflect 14% of the cumulative net loss and
12%, 31% and 38% of the cumulative net cash flows from operating, investing and
financing activities, respectively, from inception (June 18, 1996) through
December 31, 1997. These statements were audited by other auditors whose report
thereon has been furnished to us, and our opinion, insofar as it relates to the
amounts for the period from inception (June 18, 1996) through December 31, 1996
is based solely on the report of the other auditors. We conducted our audit of
these statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit and the report of
other auditors provide a reasonable basis for the opinion expressed above.
As described in Note 9, on February 12, 1998 the stockholders approved and
authorized the acquisition of the Company by Vixel Corporation. The acquisition
was effective on February 17, 1998."
PricewaterhouseCoopers LLP
Seattle, Washington
April 24, 1998
F-25
<PAGE> 98
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Arcxel Technologies, Inc.:
We have audited the accompanying balance sheet of Arcxel Technologies, Inc.
(a development stage enterprise) as of December 31, 1996 and the related
statements of operations, stockholders' equity and cash flows for the period
from June 18, 1996 (inception) through December 31, 1996. 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 audit.
We conducted our audit 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 audit provides 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 Arcxel Technologies, Inc. as
of December 31, 1996, and the results of its operations and its cash flows for
the period from June 18, 1996 (inception) through December 31, 1996 in
conformity with generally accepted accounting principles.
KPMG LLP
Orange County, California
May 1, 1997
F-26
<PAGE> 99
ARCXEL TECHNOLOGIES, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1997
------ -------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 789 $ 582
Inventories, net.......................................... -- 166
Prepaid expenses.......................................... 5 101
------ -------
Total current assets.............................. 794 849
Property and equipment, net of accumulated depreciation... 53 366
Other assets.............................................. 3 161
------ -------
Total assets...................................... $ 850 $ 1,376
------ -------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities
Accounts payable.......................................... $ 12 $ 175
Accrued payroll and related benefits...................... 32 118
Other accrued liabilities................................. -- 16
Convertible notes payable to shareholder.................. -- 1,000
Current portion of capital lease obligations.............. -- 162
------ -------
Total current liabilities......................... 44 1,471
Long-term capital lease obligations......................... 55
------ -------
Total liabilities................................. 44 1,526
------ -------
Shareholders' equity (deficit)
Series A convertible preferred stock, $.01 par value;
authorized 5,000,000 shares; issued and outstanding
1,111,000 and 2,020,000 shares, respectively;
liquidation value $1.00 per share...................... 11 20
Common stock, $.01 par value; authorized 10,000,000
shares; issued and outstanding 1,170,000 and 1,495,000
shares, respectively................................... 1 4
Additional paid-in capital................................ 1,105 2,020
Deficit accumulated during the development stage.......... (311) (2,194)
------ -------
Total shareholders' equity (deficit).............. 806 (150)
Commitments and contingencies (Note 8)......................
Total liabilities and shareholders' equity
(deficit)........................................ $ 850 $ 1,376
====== =======
</TABLE>
See accompanying notes to the financial statements.
F-27
<PAGE> 100
ARCXEL TECHNOLOGIES, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
INCEPTION INCEPTION
(JUNE 18, 1996) YEAR ENDED (JUNE 18, 1996)
TO DECEMBER 31, DECEMBER 31 TO DECEMBER 31,
1996 1997 1997
--------------- ----------- ---------------
<S> <C> <C> <C>
Operating expense
Research and development........................ $ 204 $ 1,225 $ 1,429
General and administrative...................... 130 415 545
Sales and marketing............................. -- 255 255
---------- ---------- ----------
Total operating expenses................ 334 1,895 2,229
---------- ---------- ----------
Other (income) expense
Interest income................................. (23) (35) (58)
Interest expense................................ -- 26 26
Other........................................... -- (3) (3)
---------- ---------- ----------
(23) (12) (35)
---------- ---------- ----------
Net loss.......................................... $ (311) $ (1,883) $ (2,194)
========== ========== ==========
Basic and diluted net loss per share.............. $ (0.27) $ (1.49) $ (1.80)
========== ========== ==========
Weighted-average shares outstanding............... 1,134,184 1,264,384 1,218,895
========== ========== ==========
</TABLE>
See accompanying notes to the financial statements.
F-28
<PAGE> 101
ARCXEL TECHNOLOGIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEFICIT
SERIES A ACCUMULATED TOTAL
PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE SHAREHOLDERS
------------------ ------------------ PAID-IN DEVELOPMENT EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE (DEFICIT)
--------- ------ --------- ------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at inception, June 18, 1996..... -- $-- -- $-- $ -- $ -- $ --
Issuance of common stock for contributed
technology............................ -- -- 1,050,000 -- -- -- --
Issuance of common stock for cash....... -- -- 120,000 1 5 -- 6
Issuance of Series A convertible
preferred stock for cash.............. 1,111,000 11 -- -- 1,100 -- 1,111
Net loss................................ -- -- -- -- -- (311) (311)
--------- --- --------- --- ------ ------- -------
Balance at December 31, 1996............ 1,111,000 11 1,170,000 1 1,105 (311) 806
Issuance of Series A convertible
preferred stock for cash.............. 909,000 9 -- -- 900 -- 909
Exercise of stock options............... -- -- 325,000 3 15 -- 18
Net loss................................ -- -- -- -- -- (1,883) (1,883)
--------- --- --------- --- ------ ------- -------
Balance at December 31, 1997............ 2,020,000 $20 1,495,000 $ 4 $2,020 $(2,194) $ (150)
========= === ========= === ====== ======= =======
</TABLE>
See accompanying notes to the financial statements.
F-29
<PAGE> 102
ARCXEL TECHNOLOGIES, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION INCEPTION
(JUNE 18, 1996) YEAR ENDED (JUNE 18, 1996)
TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31,
1996 1997 1997
--------------- ------------ ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................ $ (311) $(1,882) $(2,193)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation................................. 9 148 157
Change in assets and liabilities:
Inventories................................ -- (166) (166)
Prepaid expenses........................... (5) (96) (101)
Other assets............................... (3) (159) (162)
Accounts payable........................... 12 163 175
Accrued payroll and related benefits....... 32 86 118
Other accrued liabilities.................. -- 16 16
------ ------- -------
Net cash used in operating activities...... (266) (1,890) (2,156)
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment............. (62) (137) (199)
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible preferred
stock........................................ 1,111 909 2,020
Proceeds from issuance of common stock.......... 6 18 24
Proceeds from issuance of convertible notes
payable to shareholder....................... -- 1,000 1,000
Principal payments of capital lease
obligations.................................. -- (107) (107)
------ ------- -------
Net cash provided by financing activities......... 1,117 1,820 2,937
------ ------- -------
Net increase (decrease) in cash and cash
equivalents..................................... 789 (207) 582
Cash and cash equivalents, beginning of period.... -- 789
------ ------- -------
Cash and cash equivalents end of period........... $ 789 $ 582 $ 582
====== ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Purchase of property and equipment under capital
lease obligations............................... $ -- $ 324 $ 324
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................................ $ -- $ 21 $ 21
Income taxes.................................... $ -- $ -- $ --
</TABLE>
See accompanying notes to the financial statements.
F-30
<PAGE> 103
ARCXEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Arcxel Technologies, Inc. (the Company) was formed on June 18, 1996 for the
purpose of developing and distributing fibre channel switches. During the period
from June 18, 1996 (inception) through December 31, 1997, the Company devoted
most of its efforts to activities such as financial planning, research and
development, acquiring property and equipment, and beginning production. At
December 31, 1997, the Company is a development stage enterprise, as it has not
yet generated revenue from its principal operations.
CASH AND CASH EQUIVALENTS
Cash equivalents are highly liquid investments readily convertible into
known amounts of cash and have original maturities of three months or less. The
Company maintains its cash accounts with two financial institutions that are
insured by the Federal Deposit Insurance Corporation up to $100,000.
The Company has cash equivalents potentially subject the Company to
concentrations of credit risk. The company has a cash investment policy which
restricts investments to ensure preservation of principal and maintenance of
liquidity.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts payable, accrued liabilities, convertible notes payable to shareholder
and capital lease obligations. Except for capital lease obligations, the
carrying amounts of financial instruments approximate fair value due to their
short maturities. The fair value of capital lease obligations at December 31,
1997 is not materially different from the carrying amount, based on interest
rates available to the Company for similar types of arrangements.
INVENTORIES
Inventories are stated at the lower of cost or market, cost being
determined by the first-in, first-out cost flow assumption.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful lives of the assets which
range from two to four years. The cost of additions is capitalized while
maintenance and repairs are expensed as incurred.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including but not limited to, property and equipment, when
events and circumstances warrant such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than its carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets to be disposed
of are determined in a similar manner, except that fair values are reduced by
the cost to dispose. No losses from impairment have been recognized in the
financial statements.
F-31
<PAGE> 104
ARCXEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
INCOME TAXES
The Company provides for income taxes under the principles of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," which
requires that provision be made for taxes currently due and for the expected
future tax effects of temporary differences between the book and tax bases of
assets and liabilities.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
STOCK COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for
Stock-Based Compensation". SFAS 123 permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS 123 allows entities to continue to apply the
provisions of Accounting Principles Board Opinion No. 25 (APB 25), "Accounting
for Stock Issued to Employees", and provide pro forma net loss disclosures for
employee stock option grants as if the fair-value-based method defined by SFAS
123 had been applied. The Company has elected to continue to apply the
provisions of APB 25. The provisions of SFAS 123 do not have a material impact
on the Company's financial statements (Note 7).
NET LOSS PER SHARE
Basic net loss per share represents net loss available to common
shareholders divided by the weighted-average number of shares outstanding during
the period. Diluted loss per share represents net loss available to common
shareholders divided by the weighted-average number of shares outstanding
including the potentially dilutive impact of common stock options, convertible
notes payable and convertible preferred stock. Common stock options are
converted using the treasury stock method. Convertible notes payable and
convertible preferred stock are converted using the if-converted method. Basic
and diluted net loss per share are equal for the periods presented because the
impact of common stock equivalents is anti-dilutive. Potentially dilutive
securities totaling 2,506,000 and 3,902,809 shares at December 31, 1996 and
1997, respectively, were excluded from diluted net loss per share due to their
anti-dilutive effect.
ESTIMATES
The financial statements have been prepared in conformity with generally
accepted accounting principles. In preparing the financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of the balance sheet
and revenues and expenses for the periods. Actual results could differ from
those estimates.
F-32
<PAGE> 105
ARCXEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
2. INVENTORIES
Inventories consist of the following at December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Raw materials......................................... $119
Work in process....................................... 23
Finished goods........................................ 48
----
190
Less: Inventory allowance............................. (24)
----
$166
----
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1997
----- ------
(IN THOUSANDS)
<S> <C> <C>
Computer software and equipment.............. $52 $ 484
Furniture and fixtures....................... 10 39
--- -----
62 523
Accumulated depreciation..................... (9) (157)
--- -----
$53 $ 366
--- -----
</TABLE>
4. CONVERTIBLE NOTES PAYABLE TO SHAREHOLDER
In both November and December 1997, the Company issued $500,000 of 8%
convertible notes payable to a shareholder (the Notes) due June 30, 1998 for a
total of $1,000,000. The Notes are automatically converted into preferred stock
upon (i) closing of the sale at least $3,000,000 of shares of preferred stock
(Preferred Stock Offering) or (ii) closing of a merger with Vixel Corporation.
The conversion price of an automatic conversion is equal to the lower of the
selling price of the Preferred Stock Offering or $3.6126 principal and accrued
interest amount at the Company's option, per share. The Notes are convertible
into Series A preferred stock at the option of the holder upon (i) receiving
notice from the Company of its intent to prepay any outstanding principal of the
Notes; (ii) receiving notice of the Company's intention to merge with a company
other than Vixel Corporation, liquidate or otherwise change the organization of
the Company as it currently exists; or (iii) receiving less than full repayment
of the Notes' principal and accrued interest as of June 30, 1998. The conversion
price of a voluntary conversion is $3.6126 principal and accrued interest amount
per share.
5. SHAREHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
On June 18, 1996, the Company authorized 10,000,000 shares of $.01 par
value common stock. On June 24, 1996, the Company issued 120,000 shares of
common stock for cash to two shareholders at $.05 per share and 1,050,000 shares
of common stock to two officers for their contribution of technology to the
Company. The technology contributed by the shareholders had minimal basis for
financial statement purposes and therefore the shares issued for this
contributed technology were assigned no value.
F-33
<PAGE> 106
ARCXEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
In September 1997, the Company issued 325,000 shares of common stock to an
employee who exercised stock options with an exercise price of $0.055 per share.
PREFERRED STOCK
On June 18, 1996, the Company authorized 5,000,000 shares of convertible
preferred stock with a par value of $.01 per share, 2,020,000 shares of which
are designated Series A preferred stock.
On June 25, 1996 and March 24, 1997, the Company issued 1,111,000 and
909,000 shares, respectively, of $1.00 Series A convertible preferred stock to a
venture capital firm and one private investor, respectively. The preferred stock
has liquidation preferences over common stock and the holders of outstanding
shares of preferred stock are entitled to receive one noncumulative dividend at
a rate of $.10 per share when and if declared by the Board of Directors. Each
share of preferred stock can be converted, at the option of the holder, into one
share of common stock. Each share of preferred stock shall automatically be
converted into shares of common stock upon (i) the closing of a firmly
underwritten public offering, provided that the price per share is not less than
$5.00 and the aggregate gross proceeds to the Company are not less than
$7,500,000 or (ii) upon the election of the holders of a majority of the shares
of preferred stock then outstanding. Holders of preferred stock are entitled to
one vote for each share held and on all matters which the common stockholders
are entitled to vote.
6. INCOME TAXES
A current provision for income taxes has not been recorded for the periods
from June 18, 1996 (inception) through December 31, 1996 and the year ended
December 31, 1997 due to taxable losses incurred during such periods. A
valuation allowance has been recorded for deferred tax assets because
realization is primarily dependent on generating sufficient taxable income prior
to expiration of net operating loss carry-forwards.
A reconciliation of taxes on income at the Federal Statutory rate to actual
tax expense is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Tax at statutory rate....................... $(106) $(640)
State taxes................................. (20) (89)
Non-deductible items........................ 1 2
Tax credits................................. -- (56)
Change in valuation allowance............... 125 783
----- -----
$ -- $ --
----- -----
</TABLE>
F-34
<PAGE> 107
ARCXEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
Deferred tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
----- -----
(IN THOUSANDS)
<S> <C> <C>
Net operating loss carry-forward............ $ 136 $ 805
Research and development credit
carry-forward............................. 56
Depreciation and amortization............... 8 20
Accrued employee benefits................... 4 16
Other....................................... (3) 11
Gross deferred tax assets................. 145 908
Less: Valuation allowance................... (145) (908)
----- -----
$ -- $ --
----- -----
</TABLE>
At December 31, 1997, the Company has net operating loss carry-forwards for
federal and state income tax reporting purposes of $2,065,000. These net
operating losses will expire beginning in 2011 and 2004, respectively, if not
previously utilized. In certain circumstances, as specified in the Internal
Revenue Code, a 50% or more ownership change by certain combinations of the
Company's shareholders during any three-year period would result in limitations
on the Company's ability to utilize net operating loss carry-forwards. The
Company has determined that such a change occurred in February 1998 (Note 9) and
the utilization of loss carry forwards generated through that period will be
limited.
7. STOCK OPTION PLAN
In June 1996, the Company adopted a stock option plan (the Plan) pursuant
to which the Company's Board of Directors may grant stock options to officers
and key employees. Options to purchase up to 2,330,000 shares of authorized but
unissued common stock are authorized under the Plan. Stock options have up to
ten-year terms and vest and become fully exercisable between two to four years
from the date of grant. Stock options granted to officers and key employees
during the periods from June 18, 1996 (inception) through December 31, 1996 and
the year ended December 31, 1997 were granted at no less than their estimated
fair value as determined by the Company's Board of Directors. Accordingly, no
compensation expense has been recorded under APB 25. If stock option grants in
1996 and 1997 had been recorded using the fair value method defined in SFAS 123,
pro forma net loss for both periods would not have been materially different
from the net loss as reported.
The following summarizes stock option activity from June 18, 1996
(inception) through December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Granted............................. 1,395,000 $0.05
Outstanding at December 31, 1996.... 1,395,000 $0.05
Granted............................. 536,000 $0.42
Exercised........................... (325,000) $0.06
Outstanding at December 31, 1997.... 1,606,000 $0.17
</TABLE>
F-35
<PAGE> 108
ARCXEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
The following summarizes information about stock options outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING AVERAGE WEIGHTED
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------ ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$0.05 - $0.06 1,170,000 5.13 $0.05 608,439 $0.05
$0.50 436,000 9.32 $0.50 --
--------- -------
1,606,000 608,439
========= =======
</TABLE>
At December 31, 1996, 281,500 stock options were exercisable at a weighted
average exercise price of $0.05 per share.
8. LEASE COMMITMENTS
The Company leases certain facilities under noncancelable operating lease
agreements which include escalation clauses. Future minimum operating lease
payments under all noncancelable operating leases as of December 31, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1998............................................. $169
1999............................................. 176
2000............................................. 183
2001............................................. 190
2002............................................. 181
----
Total minimum lease payments.......................... $899
====
</TABLE>
Rent expense was $13,000 and $45,000 for the period from June 18, 1996
(inception) through December 31, 1996 and 1997, respectively.
The Company also leases certain equipment under capital lease agreements.
Future minimum lease payments under capital leases as of December 31, 1997 are
as follows (in thousands):
<TABLE>
<S> <C>
YEAR ENDING DECEMBER 31,
1998............................................ $ 182
1999............................................ 57
-----
239
Less: Interest....................................... (22)
-----
Principal payments................................... 217
Less: Current portion................................ (162)
-----
Long-term capital lease obligations.................. $ 55
=====
</TABLE>
At December 31, 1997, the cost and accumulated depreciation of equipment
under capital leases was $324,000 and $104,000, respectively. No equipment was
under capital lease at December 31 1996.
F-36
<PAGE> 109
ARCXEL TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1997
9. SUBSEQUENT EVENTS
On February 12, 1998, the Company's shareholders approved and authorized
the acquisition of the Company by Vixel Corporation (Vixel), a leading provider
of comprehensive storage area networks. The acquisition was effective on
February 17, 1998. Vixel acquired all outstanding shares of the Company's common
stock and Series A preferred stock in exchange for 0.51 shares of Vixel common
stock for each share of the Company's common stock and 0.765 shares of Vixel
Series F preferred stock for each share of the Company's Series A preferred
stock as adjusted for a two-for-three reverse stock split approved by the Board
of Directors of Vixel Corporation on August 12, 1999. The Company's outstanding
stock options were converted into stock options for Vixel common stock at the
same exchange rate. The acquisition will be accounted for using the purchase
method of accounting.
Immediately prior to the acquisition, the convertible notes payable to
shareholder were converted into the Company's Series A preferred stock (Note 4).
F-37
<PAGE> 110
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
On February 13, 1998, Vixel Corporation sold all of the assets of its
Colorado division to Cielo Communications, Inc. for $7.25 million. On February
17, 1998, Vixel Corporation acquired the assets of Arcxel Technologies, Inc. for
approximately $14.8 million. The unaudited pro forma condensed statement of
operations is based on the individual unaudited statements of operations of
Vixel Corporation and Arcxel Technologies, Inc. appearing elsewhere in this
prospectus and has been prepared to reflect the acquisition by Vixel Corporation
of the assets of Arcxel Technologies Inc. and the sale of Cielo Communications,
Inc. The unaudited pro forma condensed statement of operations is based on
individual historical results of operations of Vixel Corporation and Arcxel
Technologies, Inc. for the fiscal year ended January 3, 1999, after giving
effect to the acquisition of Arcxel Technologies, Inc. and the sale of Cielo
Communications as if the transactions had occurred at the beginning of the
period presented.
The unaudited pro forma condensed financial statements should be read in
conjunction with the historical financial statements and notes thereto of Vixel
Corporation and Arcxel Technologies, Inc. The pro forma condensed financial
statements are presented for illustrative purposes only and are not necessarily
indicative of results of operations that would have actually occurred had the
acquisition of Arcxel Technologies, Inc. been effected on the dates assumed.
F-38
<PAGE> 111
VIXEL CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED JANUARY 3, 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADD: DEDUCT:
ARCXEL CIELO PRO FORMA
VIXEL TECHNOLOGIES, COMMUNICATIONS, ADJUSTMENTS
CORPORATION INC. INC. (NOTE 1) TOTAL
----------- ------------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenue......................... $ 39,445 $ 52 $ 120 $ 39,377
Cost of revenue................. 36,199 34 313 35,920
---------- ----- ------- ------- ----------
Gross profit.................... 3,246 18 (193) 3,457
---------- ----- ------- ------- ----------
Operating expenses
Research and development...... 11,110 264 394 10,980
Acquired in-process
technology................. 5,118 (5,118)(b) --
Selling, general and
administrative............. 14,521 108 517 14,112
Amortization and writedown of
goodwill and intangibles... 2,057 -- -- $ 274(a) 2,331
---------- ----- ------- ------- ----------
Total operating expenses... 32,806 372 911 (4,844) 27,423
---------- ----- ------- ------- ----------
Loss from operations.......... (29,560) (354) (1,104) 4,844 (23,966)
Other expense, net............ 8,327 (14) 57 8,256
---------- ----- ------- ------- ----------
Net loss...................... $ (21,233) $(368) $(1,047) $ 4,844 $ (15,710)
========== ===== ======= ======= ==========
Net loss available to common
stockholders............... $ (21,424) $(368) $(1,047) $ 4,844 $ (15,901)
========== ===== ======= ======= ==========
Basic and diluted net loss per
share...................... $ (10.32) $ (7.66)
========== ==========
Weighted average shares of
common stock outstanding
used in computing basic and
diluted net loss per
share...................... 2,075,344 2,075,344
========== ==========
</TABLE>
Note 1 -- Pro forma adjustments
The pro forma combined statement of operations gives effect to the
following pro forma adjustments necessary to reflect the Arcxel
acquisition and Colorado division disposition described in Notes 2 and
3, respectively, of the Vixel Corporation Financial Statements:
(a) Adjustment to reflect the amortization expense of goodwill
acquired developed technology, core technology and workforce. The
acquisition values of these intangible assets (in thousands) and
the related amortization periods are summarized as follows:
<TABLE>
<CAPTION>
VALUE LIFE
------ -------
<S> <C> <C>
Goodwill......................................... $3,971 5 years
Developed technology............................. 2,663 3 years
Core technology.................................. 2,183 5 years
Workforce........................................ 381 5 years
</TABLE>
(b) Adjustment to remove the expense for acquired in-process
technology. This amount is removed from the pro forma combined
statement of operations due to its non-recurring nature.
F-39
<PAGE> 112
(Inside Back Cover)
Title: The title consists of the Vixel logo, and the words "Vixel's Total SAN
Solution."
Image:
The image consists of an arch labeled "SAN Insite Management". At the lower left
corner of the arch is an image of a device labeled the "Vixel 1000", which
connects by a line to a device labeled "Vixel Shortwave GBIC". Moving up the
arch, from left to right, is an image of a device labeled "Vixel 2000," which
connects by a line to a device labeled "Vixel Shortwave GBIC". Next is a device
labeled "Vixel 8100", which connects by a line to a device labeled "Vixel
Shortwave GBIC". Next is a device labeled "Vixel 2006", which connects by a line
to a device labeled "Vixel Shortwave GBIC". The last image is a device labeled
"Vixel 1000", which connects by a line to a device labeled "Vixel Shortwave
GBIC".
Beneath these images are the following additional images:
Image: SAN InSite logo with TM superscript
Text: Comprehensive SAN Management Software for Fabric Switches, Hubs and
Transceivers
Image: Vixel Fabric Switch
Text: True Fabric Switches with Advanced Features for Fabric and Loop Support
Image: Vixel Managed Hub
Text: Managed Arbitrated Loop Hubs with Loop Auto-Recovery and Analyzer
Diagnostics
Image: Vixel Entry-level hub
Text: Entry-level Arbitrated Loop Hubs for Low and Mid-Range Applications
Image: One Vixel gigabit interface converter and one Vixel gigabaud link module
Text: Transceivers Based on Leading Edge Fiber Optic Technology
<PAGE> 113
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 the Company in connection
with the sale of common stock being registered. All amounts are estimates except
the SEC registration and the NASD filing fees.
<TABLE>
<S> <C>
SEC Registration fee........................................ $ 11,120
NASD fee.................................................... 4,500
Nasdaq National Market initial listing fee.................. 95,000
Printing and engraving...................................... 150,000
Legal fees and expenses of the Company...................... 350,000
Accounting fees and expenses................................ 200,000
Blue sky fees and expenses.................................. 5,000
Transfer agent fees......................................... 10,000
Miscellaneous............................................... 74,380
--------
Total............................................. $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933
(the "Act"). The Company's bylaws provides for mandatory indemnification of its
directors and officers and permissible indemnification of employees and other
agents to the maximum extent not prohibited by the Delaware General Corporation
Law. The Company's certificate of incorporation provides that, pursuant to
Delaware law, its directors shall not be liable for monetary damages for breach
of the directors' fiduciary duty as directors to the Company and its
stockholders. This provision in the certificate of incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Company for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Company has entered into indemnification agreements with its officers and
directors, a form of which is attached as Exhibit 10.1 hereto and incorporated
herein by reference. The indemnification agreements provide the Company's
officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. We maintain liability
insurance for its directors and officers. Reference is also made to Section 7 of
the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying
officers and directors of the Company against certain liabilities, and Section
3.10 of the Amended and Restated Investor Rights Agreement contained in Exhibit
4.2 hereto, indemnifying certain of the Company's stockholders, including
controlling stockholders, against certain liabilities.
II-1
<PAGE> 114
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) During the past three years, we have issued unregistered securities to a
limited number of persons as described below:
- an aggregate of 4,529,221 shares of series E preferred stock at $4.50 per
share in October 1996 to 37 investors;
- an aggregate of 1,759,303 shares of series F preferred stock and
1,026,525 shares of common stock with an aggregate value of approximately
$12,100,000 in connection with the acquisition of Arcxel Technologies,
Inc. in February 1998;
- warrants to purchase 229,084 shares of series E preferred stock in
December 1996, May 1997, October 1998, December 1998 and March 1999 to
five investors; and
- options to purchase 10,627,871 shares of common stock at an average
exercise price of $2.43 per share to our officers, directors, employees
and consultants.
All share information in this Item 15 reflects a two-for-three stock split
anticipated to occur before this offering.
(b) There were no underwritten offerings employed in connection with any of the
transactions set forth in Item 15(a).
The issuances described in Items 15(a) were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof as
transactions by an issuer not involving any public offering and in the case of
issuances to our founders, executives, employees and consultants are also exempt
from registration pursuant to Rule 701 promulgated under the Act. The recipients
of securities in each such transaction represented their intentions to acquire
the securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends where affixed
to the securities issued in such transactions. All recipients had adequate
access, through their relationships with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1+ Restated Certificate of Incorporation, as amended
3.2+ Form of Amended and Restated Certificate of Incorporation to
be effective on the closing of the offering made pursuant to
this Registration Statement
3.3+ Bylaws of the Registrant
3.4+ Bylaws of the Registrant to be effective upon the closing of
the offering made pursuant to this Registration Statement
4.1* Form of Registrant's Common Stock Certificate
4.2+ Amended and Restated Investors' Rights Agreement dated
February 17, 1998
4.3+ First Amendment to Amended and Restated Investors' Rights
Agreement dated February 17, 1998
4.4+ Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Comdisco, Inc.
4.5+ Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to MMC/GATX Partnership No. 1
4.6+ Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Silicon Valley Bank
4.7+ Warrant to purchase shares of Series E Preferred Stock of
the Registrant issued to Montgomery Securities
</TABLE>
II-2
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
4.8+ Warrant to purchase shares of Series E Preferred Stock of
the Registrant issued to Transamerica Business Credit
Corporation
4.9+ Warrant to purchase shares of Series E Preferred Stock of
the Registrant issued to Greyrock Capital
4.10+ Warrant to purchase shares of Series E Preferred Stock of
the Registrant issued to Comdisco, Inc.
4.11+ Warrant to purchase shares of Series E Preferred Stock of
the Registrant issued to Western Digital Corporation
5.1* Opinion of Cooley Godward LLP
10.1+ Form of Indemnity Agreement to be entered into by the
Registrant and each of its directors and executive officers
10.2 Amended and Restated 1995 Stock Option Plan and forms of
agreements thereunder
10.3+ Secured Promissory Note between the Registrant and Western
Digital Corporation dated March 29, 1996, as amended March
30, 1999
10.4+ Master Lease Agreement between Registrant and Transamerica
Business Credit Corporation dated May 23, 1997
10.5+ Master Lease Agreement between Registrant and Comdisco, Inc.
dated January 18, 1996, together with addendum dated January
18, 1996
10.6+ Term Loan and Security Agreement with Greyrock Capital, a
division of Nations Credit Corporation, with Registrant
dated November 26, 1997, as amended October 2, 1998
10.7+ Turnkey Manufacturing Agreement with K*TEC Electronics, a
division of Kent Electronics Company, dated May 5, 1997
10.8+ Employment Agreement between Registrant and Jay R. O'Donald
dated February 17, 1998
10.9+ Employment Agreement between Registrant and Stuart B. Berman
dated February 17, 1998
10.10+ Employment Agreement between Registrant and Gregory R.
Olbright dated November 30, 1998
10.11+ Employment Agreement between Registrant and Stanley Reese
dated December 29, 1998
10.12+ Employment Agreement between Registrant and James McCluney
dated April 26, 1999
10.13+ Restricted Stock Purchase Agreement between Registrant and
James M. McCluney dated April 16, 1999
10.14+ Restricted Stock Purchase Agreement between Registrant and
Gregory R. Olbright dated April 30, 1999
10.15* Restricted Stock Purchase Agreement between Registrant and
Kurtis L. Adams dated May 20, 1999
10.16+ Full Recourse Promissory Note between Registrant and Stuart
B. Berman dated April 16, 1999
10.17+ Form of Full Recourse Promissory Note between Registrant and
its executive officers
10.18+ Form of Full Recourse Promissory Note between Registrant and
its directors
10.19 Lease Agreement between Registrant and Sun Life Assurance
Company of Canada (U.S.) dated December 5, 1996, as amended
January 22, 1997
10.20+ Lease Agreement between Arcxel Technologies, Inc. and Aetna
Life Insurance Company, dated November 1, 1997, assigned to
Registrant August 24, 1998
10.21 Amendment to Term Loan and Security Agreement with Greyrock
Capital, dated June 21, 1999
10.22 Vixel Corporation 1999 Employee Stock Purchase Plan and
forms of agreements thereunder
10.23 Vixel Corporation 1999 Equity Incentive Plan and forms of
agreements thereunder
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of KPMG LLP, Independent Accounts
23.3 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.4* Consent of Counsel (see Exhibit 5.1)
24.1+ Power of Attorney (see Page II-5 of the Registration
Statement)
27.1+ Financial Data Schedule
</TABLE>
- -------------------------
* To be supplied by amendment.
+ Previously filed.
II-3
<PAGE> 116
(b) FINANCIAL STATEMENT SCHEDULES
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Vixel Corporation
Our audits of the financial statements referred to in our report dated May
19, 1999 appearing in the Registration Statement on Form S-1 also included an
audit of the financial statement schedules listed in Item 16 (b) of this Form
S-1. In our opinion, these financial statement schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements.
PricewaterhouseCoopers LLP
Seattle, Washington
June 22, 1999
Schedule II -- Valuation and qualifying accounts
For the Years Ended December 29, 1996, December 28, 1997 and January 3,
1999 (in thousands):
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended December 29, 1996....................... -- -- -- --
Year ended December 28, 1997....................... -- $ 36 -- $ 36
Year ended January 3, 1999......................... $ 36 400 $ 205 231
ALLOWANCE FOR WARRANTIES
Year ended December 29, 1996....................... 100 -- -- 100
Year ended December 28, 1997....................... 100 298 104 294
Year ended January 3, 1999......................... 294 4,333 237 4,390
ALLOWANCE FOR INVENTORY OBSOLENCE
Year ended December 29, 1996....................... -- -- -- --
Year ended December 28, 1997....................... -- 414 -- 414
Year ended January 3, 1999......................... 414 994 145 1,263
</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 Company 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 for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company pursuant
to the Delaware General Corporation Law, the Amended and Restated Certificate of
Incorporation or the Bylaws of the Company, Indemnification Agreements entered
into between the Company and its officers and directors, the Underwriting
Agreement, or otherwise, the Company has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act, and is, therefore, unenforceable. In
II-4
<PAGE> 117
the event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director, officer,
or controlling person of the Company in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Company 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 of whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the 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 Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the 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 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-5
<PAGE> 118
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Vixel
Corporation certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing this Amendment No. 1 to the registration
statement and has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Bothell,
King County, State of Washington, on this 16th day of August, 1999.
VIXEL CORPORATION
By: *
------------------------------------
James M. McCluney
President and Chief Executive
Officer
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>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* President, Chief Executive August 16, 1999
- ----------------------------------------------------- Officer and Director
James M. McCluney
/s/ KURTIS L. ADAMS Chief Financial Officer August 16, 1999
- -----------------------------------------------------
Kurtis L. Adams
* Chairman of the Board of August 16, 1999
- ----------------------------------------------------- Directors
Gregory R. Olbright
* Director August 16, 1999
- -----------------------------------------------------
Kevin A. Fong
* Director August 16, 1999
- -----------------------------------------------------
Charles A. Haggerty
* Director August 16, 1999
- -----------------------------------------------------
Juan A. Rodriguez
* Director August 16, 1999
- -----------------------------------------------------
Timothy M. Spicer
* Director August 16, 1999
- -----------------------------------------------------
Werner F. Wolfen
*By /s/ KURTIS L. ADAMS
------------------------------------------------
Kurtis L. Adams
(Attorney-in-fact)
</TABLE>
II-6
<PAGE> 119
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement
3.1+ Restated Certificate of Incorporation, as amended
3.2+ Form of Amended and Restated Certificate of Incorporation to
be effective on the closing of the offering made pursuant to
this Registration Statement
3.3+ Bylaws of the Registrant
3.4+ Bylaws of the Registrant to be effective upon the closing of
the offering made pursuant to this Registration Statement
4.1* Form of Registrant's Common Stock Certificate
4.2+ Amended and Restated Investors' Rights Agreement dated
February 17, 1998
4.3+ First Amendment to Amended and Restated Investors' Rights
Agreement dated February 17, 1998
4.4+ Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Comdisco, Inc.
4.5+ Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to MMC/GATX Partnership No. 1
4.6+ Warrant to purchase shares of Series C Preferred Stock of
the Registrant issued to Silicon Valley Bank
4.7+ Warrant to purchase shares of Series E Preferred Stock of
the Registrant issued to Montgomery Securities
4.8+ Warrant to purchase shares of Series E Preferred Stock of
the Registrant issued to Transamerica Business Credit
Corporation
4.9+ Warrant to purchase shares of Series E Preferred Stock of
the Registrant issued to Greyrock Capital
4.10+ Warrant to purchase shares of Series E Preferred Stock of
the Registrant issued to Comdisco, Inc.
4.11+ Warrant to purchase shares of Series E Preferred Stock of
the Registrant issued to Western Digital Corporation
5.1* Opinion of Cooley Godward LLP
10.1+ Form of Indemnity Agreement to be entered into by the
Registrant and each of its directors and executive officers
10.2 Amended and Restated 1995 Stock Option Plan and forms of
agreements thereunder
10.3+ Secured Promissory Note between the Registrant and Western
Digital Corporation dated March 29, 1996, as amended March
30, 1999
10.4+ Master Lease Agreement between Registrant and Transamerica
Business Credit Corporation dated May 23, 1997
10.5+ Master Lease Agreement between Registrant and Comdisco, Inc.
dated January 18, 1996, together with addendum dated January
18, 1996
10.6+ Term Loan and Security Agreement with Greyrock Capital, a
division of Nations Credit Corporation, with Registrant
dated November 26, 1997, as amended October 2, 1998
10.7+ Turnkey Manufacturing Agreement with K*TEC Electronics, a
division of Kent Electronics Company, dated May 5, 1997
10.8+ Employment Agreement between Registrant and Jay R. O'Donald
dated February 17, 1998
10.9+ Employment Agreement between Registrant and Stuart B. Berman
dated February 17, 1998
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ----------- ------------
<C> <S> <C>
10.10+ Employment Agreement between Registrant and Gregory R.
Olbright dated November 30, 1998
10.11+ Employment Agreement between Registrant and Stanley Reese
dated December 29, 1998
10.12+ Employment Agreement between Registrant and James McCluney
dated April 26, 1999
10.13+ Restricted Stock Purchase Agreement between Registrant and
James M. McCluney dated April 16, 1999
10.14+ Restricted Stock Purchase Agreement between Registrant and
Gregory R. Olbright dated April 30, 1999
10.15* Restricted Stock Purchase Agreement between Registrant and
Kurtis L. Adams dated May 20, 1999
10.16+ Full Recourse Promissory Note between Registrant and Stuart
B. Berman dated April 16, 1999
10.17+ Form of Full Recourse Promissory Note between Registrant and
its executive officers
10.18+ Form of Full Recourse Promissory Note between Registrant and
its directors
10.19 Lease Agreement between Registrant and Sun Life Assurance
Company of Canada (U.S.) dated December 5, 1996, as amended
January 22, 1997
10.20+ Lease Agreement between Arcxel Technologies, Inc. and Aetna
Life Insurance Company, dated November 1, 1997, assigned to
Registrant August 24, 1998
10.21 Amendment to Term Loan and Security Agreement with Greyrock
Capital, dated June 21, 1999
10.22 Vixel Corporation 1999 Employee Stock Purchase Plan and
forms of agreements thereunder
10.23 Vixel Corporation 1999 Equity Incentive Plan and forms of
agreements thereunder
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of KPMG LLP, Independent Accountants
23.3 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.4* Consent of Counsel (see Exhibit 5.1)
24.1+ Power of Attorney (see Page II-5 of the Registration
Statement)
27.1+ Financial Data Schedule
</TABLE>
- -------------------------
* To be supplied by amendment.
+ Previously filed.
<PAGE> 1
EXHIBIT 10.2
VIXEL CORPORATION
1995 STOCK OPTION PLAN
ADOPTED FEBRUARY 13, 1995
AS AMENDED THROUGH MARCH 3, 1998
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors and Consultants to the Company, and its Affiliates, may
be given an opportunity to benefit from increases in value of the stock of the
Company through the granting of (i) Incentive Stock Options, (ii) Nonstatutory
Stock Options and (iii) stock bonuses.
(b) The Company, by means of the Plan, seeks to retain the services
of persons who are now Employees or Directors or Consultants to the Company or
its Affiliates, to secure and retain the services of new Employees, Directors
and Consultants, and to provide incentives for such persons to exert maximum
efforts for the success of the Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses granted
pursuant to Section 7 hereof. All Options shall be separately designated
Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and
in such form as issued pursuant to Section 6, and a separate certificate or
certificates will be issued for shares purchased on exercise of each type of
Option.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in
accordance with subsection 3(c) of the Plan.
(e) "COMPANY" means Vixel Corporation, a Delaware corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by
the Company or an Affiliate to render consulting services and who is compensated
for such services, provided
1.
<PAGE> 2
that the term "Consultant" shall not include Directors who are paid only a
director's fee by the Company or who are not compensated by the Company for
their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
the employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave, or any other personal leave; or (ii) transfers between
locations of the Company or between the Company, Affiliates or their successors.
(h) "COVERED EMPLOYEE" means the Chief Executive Officer and the
four (4) other highest compensated officers of the Company.
(i) "DIRECTOR" means a member of the Board.
(j) "DISINTERESTED PERSON" means a Director: who either (i) was not
during the one year prior to service as an administrator of the Plan granted or
awarded equity securities pursuant to the Plan or any other plan of the Company
or any of its affiliates entitling the participants therein to acquire equity
securities of the Company or any of its affiliates except as permitted by Rule
16b-3(c)(2)(i); or (ii) is otherwise considered to be a "disinterested person"
in accordance with Rule 16b-3(c)(2)(i), or any other applicable rules,
regulations or interpretations of the Securities and Exchange Commission.
(k) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. 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 the value of the Common Stock of the
Company as determined in good faith by the Board.
(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.
(p) "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.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
2.
<PAGE> 3
(s) "OPTIONEE" means an Employee, Director or Consultant who holds
an outstanding Option.
(t) "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (as defined in
the Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an affiliated corporation receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an affiliated corporation at
any time, and is not currently receiving compensation for personal services in
any capacity other than as a Director, or (ii) is otherwise considered an
"outside director" for purposes of Section 162(m) of the Code.
(u) "PLAN" means this 1995 Stock Option Plan.
(v) "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.
(w) "STOCK AWARD" means any right granted under the Plan, including
any Option and any stock bonus.
(x) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons
eligible under the Plan shall be granted Stock Awards; when and how each Stock
Award shall be granted; whether a Stock Award will be an Incentive Stock Option,
a Nonstatutory Stock Option, a stock bonus, a Stock Appreciation Right, or a
combination of the foregoing; the provisions of each Stock Award granted (which
need not be identical), including the time or times when a person shall be
permitted to receive stock pursuant to a Stock Award.
(ii) To construe and interpret the Plan and Stock Awards
granted under it, and to establish, amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan as provided in Section 14.
3.
<PAGE> 4
(iv) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best interests of
the Company.
(c) The Board may delegate administration of the Plan to a committee
composed of not fewer than two (2) members (the "Committee"), all of the members
of which Committee shall be Disinterested Persons and may also be, in the
discretion of the Board, Outside Directors. If administration is delegated to a
Committee, the Committee shall have, in connection with the administration of
the Plan, the powers theretofore possessed by the Board (and references in this
Plan to the Board shall thereafter be to the Committee), subject, however, to
such resolutions, not inconsistent with the provisions of the Plan, as may be
adopted from time to time by the Board. The Board may abolish the Committee at
any time and revest in the Board the administration of the Plan. Additionally,
prior to the date of the first registration of an equity security of the Company
under Section 12 of the Exchange Act, and notwithstanding anything to the
contrary contained herein, the Board may delegate administration of the Plan to
any person or persons and the term "Committee" shall apply to any person or
persons to whom such authority has been delegated. Notwithstanding anything in
this Section 3 to the contrary, the Board or the Committee may delegate to a
committee of one or more members of the Board the authority to grant Stock
Awards to eligible persons who (1) are not then subject to Section 16 of the
Exchange Act and/or (2) are either (i) not then Covered Employees and are not
expected to be Covered Employees at the time of recognition of income resulting
from such Stock Award, or (ii) not persons with respect to whom the Company
wishes to avoid the application of Section 162(m) of the Code.
(d) Any requirement that an administrator of the Plan be a
Disinterested Person shall not apply (i) prior to the date of the first
registration of an equity security of the Company under Section 12 of the
Exchange Act, or (ii) if the Board or the Committee expressly declares that such
requirement shall not apply. Any Disinterested Person shall otherwise comply
with the requirements of Rule 16b-3.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 13 relating to adjustments
upon changes in stock, the stock that may be issued pursuant to Stock Awards
shall not exceed in the aggregate 7,699,996 shares of the Company's Common
Stock. If any Stock Award shall for any reason expire or otherwise terminate, in
whole or in part, without having been exercised in full, the stock not acquired
under such Stock Award shall revert to and again become available for issuance
under the Plan. Shares subject to Stock Appreciation Rights exercised in
accordance with Section 8 of the Plan shall not be available for subsequent
issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options and Stock Appreciation Rights
appurtenant thereto may be granted only to Employees. Stock Awards other than
Incentive Stock Options and Stock
4.
<PAGE> 5
Appreciation Rights appurtenant thereto may be granted only to
Employees, Directors or Consultants.
(b) A Director shall in no event be eligible for the benefits of the
Plan unless at the time discretion is exercised in the selection of the Director
as a person to whom Stock Awards may be granted, or in the determination of the
number of shares which may be covered by Stock Awards granted to the Director:
(i) the Board has delegated its discretionary authority over the Plan to a
Committee which consists solely of Disinterested Persons; or (ii) the Plan
otherwise complies with the requirements of Rule 16b-3. The Board shall
otherwise comply with the requirements of Rule 16b-3. This subsection 5(b) shall
not apply (i) prior to the date of the first registration of an equity security
of the Company under Section 12 of the Exchange Act, or (ii) if the Board or
Committee expressly declares that it shall not apply.
(c) No person shall be eligible for the grant of an Option if, at
the time of grant, such person owns (or is deemed to own pursuant to Section
424(d) of the Code) stock grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of such stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall
be not less than one hundred percent (100%) of the Fair Market Value of the
stock subject to the Option on the date the Option is granted. The exercise
price of each Nonstatutory Stock Option shall be not less than eighty-five
percent (85%) of the Fair Market Value of the stock subject to the Option on the
date the Option is granted.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to
an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, either at the time of the grant or
exercise of the Option, (A) by delivery to the Company of other Common Stock of
the Company, (B) according to a deferred payment or other arrangement (which may
include, without limiting the generality of the foregoing, the use of other
Common Stock of the Company) with the person to whom the Option is granted or to
whom the Option is transferred pursuant to subsection 6(d), or (C) in any other
form of legal consideration that may be acceptable to the Board.
5.
<PAGE> 6
In the case of any deferred payment arrangement, interest shall be
payable at least annually and shall be charged at the minimum rate of interest
necessary to avoid the treatment as interest, under any applicable provisions of
the Code, of any amounts other than amounts stated to be interest under the
deferred payment arrangement.
(d) TRANSFERABILITY. An Option shall not be transferable except by
will or by the laws of descent and distribution, and shall be exercisable during
the lifetime of the person to whom the Option is granted only by such person. A
Nonstatutory Stock Option shall not be transferable except by will or by the
laws of descent and distribution or pursuant to a qualified domestic relations
order satisfying the requirements of Rule 16b-3 and any administrative
interpretations or pronouncements thereunder (a "QDRO"), and shall be
exercisable during the lifetime of the person to whom the Option is granted only
by such person or any transferee pursuant to a QDRO. Notwithstanding the
foregoing, the person to whom the Option is granted may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an
Option may, but need not, be allotted in periodic installments (which may, but
need not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that period, and
may be exercised with respect to some or all of the shares allotted to such
period and/or any prior period as to which the Option became vested but was not
fully exercised. The Option may be subject to such other terms and conditions on
the time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The vesting provisions of
individual Options may vary but in each case will provide for vesting of at
least twenty percent (20%) per year of the total number of shares subject to the
Option. The provisions of this subsection 6(e) are subject to any Option
provisions governing the minimum number of shares as to which an Option may be
exercised.
(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination) but only within
such period of time ending on the earlier of (i) the date three (3) months after
the termination of the Optionee's Continuous Status as an Employee, Director or
Consultant (or such longer or shorter period specified in the Option Agreement),
or (ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of
termination), but only within such period of time ending on the earlier of (i)
the date twelve (12) months following such termination (or such longer or
shorter period specified in
6.
<PAGE> 7
the Option Agreement), or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, at the date of termination, the Optionee is
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under 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 and again
become available for issuance under the Plan.
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee
during, or within a period specified in the Option after the termination of, the
Optionee's Continuous Status as an Employee, Director or Consultant, the Option
may be exercised (to the extent the Optionee was entitled to exercise the Option
at the date of death) by the Optionee's estate, by a person who acquired the
right to exercise the Option by bequest or inheritance or by a person designated
to exercise the option upon the Optionee's death pursuant to subsection 6(d),
but only within the period ending on the earlier of (i) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement), or (ii) the expiration of the term of such Option as
set forth in the Option Agreement. If, at the time of death, the Optionee was
not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after death, the Option is not exercised within
the time specified herein, the Option shall terminate, and the shares covered by
such Option shall revert to and again become available for issuance under the
Plan.
(i) EARLY EXERCISE. The Option may, but need not, include a
provision whereby the Optionee may elect at any time while an Employee, Director
or Consultant to exercise the Option as to any part or all of the shares subject
to the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
7. TERMS OF STOCK BONUSES.
Each stock bonus shall be in such form and shall contain such terms and
conditions as the Board or the Committee shall deem appropriate. The terms and
conditions of stock bonus may change from time to time, and the terms and
conditions of separate agreements need not be identical, but each stock bonus
shall include (through incorporation of provisions hereof by reference in the
agreement or otherwise) the substance of each of the following provisions as
appropriate:
(a) PURCHASE PRICE. The purchase price shall be such amount as the
Board or Committee shall determine and designate. Notwithstanding the foregoing,
the Board or the Committee may determine that eligible participants in the Plan
may be awarded stock pursuant to a stock bonus agreement in consideration for
past services actually rendered to the Company or for its benefit.
(b) TRANSFERABILITY. No rights under a stock bonus shall be
transferable except by will or the laws of descent and distribution or pursuant
to a qualified domestic relations order satisfying the requirements of Rule
16b-3 and any administrative interpretations or
7.
<PAGE> 8
pronouncements thereunder, so long as stock awarded under such agreement remains
subject to the terms of the agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to
a stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or the Committee, according to a
deferred payment or other arrangement with the person to whom the stock is sold;
or (iii) in any other form of legal consideration that may be acceptable to the
Board or the Committee in their discretion. Notwithstanding the foregoing, the
Board or the Committee to which administration of the Plan has been delegated
may award stock pursuant to a stock bonus agreement in consideration for past
services actually rendered to the Company or for its benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or the
Committee.
(e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire any or all of the shares of stock held by that person which have not
vested as of the date of termination under the terms of the stock bonus or
restricted stock purchase agreement between the Company and such person.
8. CANCELLATION AND RE-GRANT OF OPTIONS.
The Board or the Committee shall have the authority to effect, at any
time and from time to time, (i) the repricing of any outstanding Options under
the Plan and/or (ii) with the consent of the affected holders of Options, the
cancellation of any outstanding Options under the Plan and the grant in
substitution therefor of new Options under the Plan covering the same or
different numbers of shares of stock, but having an exercise price per share not
less than fifty percent (50%) of the Fair Market Value (one hundred percent
(100%) of the Fair Market Value in the case of an Incentive Stock Option or, in
the case of a 10% stockholder (as described in subsection 5(c)), not less than
one hundred ten percent (110%) of the Fair Market Value) per share of stock on
the new grant date.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards.
(b) The Company shall seek to obtain from each regulatory commission
or agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares of stock upon exercise of the Stock Award; provided,
however, that this undertaking shall not require the Company to register under
the Securities Act either the Plan, any Stock Award or any stock issued or
issuable pursuant to any such Stock Award. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of stock under
8.
<PAGE> 9
the Plan, the Company shall be relieved from any liability for failure to issue
and sell stock upon exercise of such Stock Awards unless and until such
authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
11. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest pursuant to subsection 6(e) or 7(d), notwithstanding the
provisions in the Stock Award stating the time at which it may first be
exercised or the time during which it will vest.
(b) Neither an Employee, Director or Consultant nor any person to
whom a Stock Award is transferred under subsection 6(d), or 7(b) shall be deemed
to be the holder of, or to have any of the rights of a holder with respect to,
any shares subject to such Stock Award unless and until such person has
satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) Nothing in the Plan or any instrument executed or Stock Award
granted pursuant thereto shall confer upon any Employee, Director, Consultant or
other holder of Stock Awards any right to continue in the employ of the Company
or any Affiliate (or to continue acting as a Director or Consultant) or shall
affect the right of the Company or any Affiliate to terminate the employment or
relationship as a Director or Consultant of any Employee, Director, Consultant
or other holder of Stock Awards with or without cause.
(d) To the extent that the aggregate Fair Market Value (determined
at the time of grant) of stock with respect to which Incentive Stock Options
granted after 1986 are exercisable for the first time by any Optionee during any
calendar year under all plans of the Company and its Affiliates exceeds one
hundred thousand dollars ($100,000), the Options or portions thereof which
exceed such limit (according to the order in which they were granted) shall be
treated as Nonstatutory Stock Options.
(e) The Company may require any person to whom a Stock Award is
granted, or any person to whom a Stock Award is transferred pursuant to
subsection 6(d) or 7(b), as a condition of exercising or acquiring stock under
any Stock Award, (1) to give written assurances satisfactory to the Company as
to such person's knowledge and experience in financial and business matters
and/or to employ a purchaser representative reasonably satisfactory to the
Company who is knowledgeable and experienced in financial and business matters,
and that he or she is capable of evaluating, alone or together with the
purchaser representative, the merits and risks of exercising the Stock Award;
and (2) to give written assurances satisfactory to the Company stating that such
person is acquiring the stock subject to the Stock Award for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock
9.
<PAGE> 10
under the Stock Award has been registered under a then currently effective
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), or (ii) as to any particular requirement, a determination is
made by counsel for the Company that such requirement need not be met in the
circumstances under the then applicable securities laws. The Company may, upon
advice of counsel to the Company, place legends on stock certificates issued
under the Plan as such counsel deems necessary or appropriate in order to comply
with applicable securities laws, including, but not limited to, legends
restricting the transfer of the stock.
(f) To the extent provided by the terms of a Stock Award Agreement,
the person to whom a Stock Award is granted may satisfy any federal, state or
local tax withholding obligation relating to the exercise or acquisition of
stock under a Stock Award by any of the following means or by a combination of
such means: (1) tendering a cash payment; (2) authorizing the Company to
withhold shares from the shares of the Common Stock otherwise issuable to the
participant as a result of the exercise or acquisition of stock under the Stock
Award; or (3) delivering to the Company owned and unencumbered shares of the
Common Stock of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or
subject to any Stock Award (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or otherwise), the Plan will be appropriately adjusted in
the class(es) and maximum number of shares subject to the Plan pursuant to
subsection 4(a) and the outstanding Stock Awards will be appropriately adjusted
in the class(es) and number of shares and price per share of stock subject to
such outstanding Stock Awards.
(b) In the event of: (1) a dissolution, liquidation or sale of
substantially all of the assets of the Company; (2) a merger or consolidation in
which the Company is not the surviving corporation; or (3) a reverse merger in
which the Company is the surviving corporation but the shares of the Company's
Common Stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then to the extent permitted by applicable law: (i) any
surviving corporation shall assume any Stock Awards outstanding under the Plan
or shall substitute similar Stock Awards for those outstanding under the Plan,
or (ii) such Stock Awards shall continue in full force and effect. In the event
any surviving corporation refuses to assume or continue such Stock Awards, or to
substitute similar options for those outstanding under the Plan, then, with
respect to Stock Awards held by persons then performing services as Employees,
Directors or Consultants, the time during which such Stock Awards may be
exercised shall be accelerated and the Stock Awards terminated if not exercised
prior to such event.
13. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the
Plan. However, except as provided in Section 12 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company within twelve (12) months before or after the
adoption of the amendment, where the amendment will:
10.
<PAGE> 11
(i) Increase the number of shares reserved for Stock Awards
under the Plan;
(ii) Modify the requirements as to eligibility for
participation in the Plan (to the extent such modification requires stockholder
approval in order for the Plan to satisfy the requirements of Section 422 of the
Code); or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to satisfy the requirements
of Section 422 of the Code or to comply with the requirements of Rule 16b-3.
(b) The Board may in its sole discretion submit any other amendment
to the Plan for stockholder approval, including, but not limited to, amendments
to the Plan intended to satisfy the requirements of Section 162(m) of the Code
and the regulations promulgated thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan
in any respect the Board deems necessary or advisable to provide eligible
Employees, Directors or Consultants with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be altered or impaired by any amendment of the
Plan unless (i) the Company requests the consent of the person to whom the Stock
Award was granted and (ii) such person consents in writing.
14. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate on February 13, 2005 which shall be
within ten (10) years from the date the Plan is adopted by the Board or approved
by the stockholders of the Company, whichever is earlier. No Stock Awards may be
granted under the Plan while the Plan is suspended or after it is terminated.
(b) Rights and obligations under any Stock Award granted while the
Plan is in effect shall not be altered or impaired by suspension or termination
of the Plan, except with the consent of the person to whom the Stock Award was
granted.
15. EFFECTIVE DATE OF PLAN.
The Plan shall become effective as determined by the Board, but no Stock
Awards granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.
11.
<PAGE> 1
EXHIBIT 10.19
QUADRANT/KMS MANAGEMENT SERVICES
LEASE
THIS LEASE is made this 6th day of December, 1996, by and between Sun Life
Assurance Company of Canada (U.S.), a Delaware Corporation, as "Landlord," and
Vixel Corporation, a Delaware Corporation, as "Tenant." Landlord and Tenant
agree as follows:
1. BASIC LEASE TERMS. This section contains the Basic Lease Terms of this
Lease between Landlord and Tenant named below. Other sections,
paragraphs, and exhibits of the Lease referred to in this paragraph
explain and define the Basic Lease Terms in greater detail and are to be
read in conjunction with the Basic Lease Terms.
a. PREMISES:
Building 11911 Building Unit NA
Quadrant Business Park - Bothell (the "Corporate Park")
Address 11911 North Creek Parkway South
Bothell, WA 98011 (Paragraph 3)
b. AREA OF PREMISES:
Approximately 42,702 square feet. (Paragraph 3)
c. TERM: (PARAGRAPH 4)
(1) Commencement Date: February 1, 1997
(2) Expiration Date: January 31, 2002
(3) Number of Months: 60
(4) Rent Commencement Date: April 1, 1997
d. EXTENSION/RENEWAL OPTIONS: (PARAGRAPH 4(c))
Term Rental
Three (3) Years Market Rate - Similar Properties
e. MONTHLY BASE RENT: (PARAGRAPH 6)
Months 1 - 2 = $ 0.00/mo. NNN
Months 3 - 12 = $ 32,026.50/mo. NNN
Months 13 - 24 = $ 33,805.75/mo. NNN
Months 25 - 36 = $ 35,585.00/mo. NNN
Months 37 - 48 = $ 37,364.25/mo. NNN
Months 49 - 60 = $ 39,143.50/mo. NNN
f. PREPAID RENT AND SECURITY DEPOSIT: (PARAGRAPH 7)
(1) Total Initial Deposit: $416,344.50
(a) Prepaid Rent: $ 32,026.50 for Month 3
1.
<PAGE> 2
(b) Initial Security Deposit: $384,318.00 (Letter of Credit)
g. USE: (PARAGRAPH 8) TENANT'S USE OF PREMISES:
General office, warehouse, light manufacturing, assembly and
testing of electronic systems and components, research and
development.
h. TENANT'S INITIAL ESTIMATED SHARE OF COMMON COSTS AND EXPENSES:
(PARAGRAPH 9)
$12,298.18 per month; or $0.288 per square foot per month.
i. BROKERAGE COMMISSIONS: (PARAGRAPH 37)
(1) Brokerage Firm: Cushman & Wakefield of Washington,
Inc./CB Commercial
(2) Commission Paid By: Landlord
j. NOTICE ADDRESSES: (PARAGRAPH 32)
Landlord:
<TABLE>
<S> <C>
Sun Life Assurance Company of Canada (U.S.)
c/o Quadrant/KMS Management Services Telephone: (206) 455-2900
Property Management Facsimile: (206) 646-8300
P.O. Box 130
N.E. 8th at 112th
Bellevue, Washington 98009
Tenant:
Vixel Corporation
11911 North Creek Parkway Telephone: (303) 460-0700
Bothell, WA 98011 Facsimile: (303) 466-0290
Attn: ______________________
With a copy to:
Vixel Corporation
325 Interlocken Parkway
Building A, Suite 305
Broomfield, Co 80021
Attn: Chief Financial Officer
</TABLE>
The foregoing Basic Lease Term [LANGUAGE MISSING] a part of the Lease. Each
reference in the Lease to any of the Basic Lease Terms shall mean the respective
information set forth above. Tenant acknowledges that it has read and
understands all of the provisions contained in the entire Lease and all exhibits
which are a part thereof and agrees that the Lease, including the Basic Lease
Terms and all exhibits, reflects the entire understanding and reasonable
expectations of Tenant and Landlord regarding the Premises.
2. PARTIES. This Lease is made between Landlord and Tenant.
2.
<PAGE> 3
3. PREMISES. Landlord agrees to lease to Tenant the "Premises" described in
Exhibit A-1 and consisting of approximately the square feet designated
in paragraph 1.b. The Premises are a part of the "Building", which
Building is located on the real property described on Exhibit A-2 (the
"Property"). The Premises are improved or to be constructed pursuant to
the terms and conditions of Exhibit B (will be attached upon mutual
tenant improvement approval by Landlord and Tenant). The Premises,
Building, and Property are a part of the named Corporate Park stated in
paragraph 1.a ("Corporate Park").
4. TERM. The term of this Lease shall commence on the earlier of:
a. The date specified in paragraph 1.c(1); or Tenant obtaining an
occupancy permit for the Premises; or ninety (90) days after a
lease has been fully executed.
b. If Tenant shall occupy the Premises for the purpose of
commencing operations prior to the date specified in paragraph
1.c(1), then the date of such occupancy.
c. OPTION TO EXTEND TERM: Landlord will grant (1) Option to Extend
the Lease term and all provisions contained in this Lease,
except for the minimum monthly rent, for one three (3) year
period ("Extended Term") following expiration of the initial
term by giving notice of exercise of the Option ("Option
Notice") to Landlord at lease one hundred fifty (150) days
before the expiration of the initial term, provided that if
Tenant is in default of a material term of this Lease beyond the
applicable cure period on the date of giving Option Notice, the
Option Notice shall be ineffective, or if Tenant is in default
of a material term of this Lease beyond the applicable cure
period on the day the Extended Term is to commence, the Extended
Term shall not commence and this Lease shall expire at the end
of the initial term.
Landlord shall give Tenant its initial determination of the fair
market rent either promptly after the receipt of Tenant's notice
exercising Tenant's option to extend, or promptly after
receiving a request for such determination prior to receipt of
Tenant's exercise of its option if such request is received
during the ninety (90) days prior to the date such option must
be exercised. If Tenant disagrees with Landlord's initial
designation of the Fair Market Rent, Landlord and Tenant agree
to negotiate in good faith for a period of up to thirty (30)
days following Tenant's receipt of Landlord's initial
determination of Fair Market Rent in an effort to agree on the
Fair Market Rent, and if the parties cannot agree upon the Fair
Market Rent by the end of such thirty day period, then the Fair
Market Rent shall be submitted to arbitration as follows:
Within fifteen (15) days after the expiration of such thirty
(30) day period, Landlord and Tenant shall either agree on the
name of a single arbitrator or each give notice to the other
specifying the name and address of the arbitrator each has
chosen. The two arbitrators so chosen shall meet within ten (10)
days after the second arbitrator is appointed and if, within
twenty (20) days after the second arbitrator is appointed, the
two arbitrators shall not agree upon a determination of the Fair
Market Rent in
3.
<PAGE> 4
accordance with the following provisions of this Section they
shall together appoint a third arbitrator.
If said two arbitrators cannot agree upon the appointment of a
third arbitrator within ten (10) days after the expiration of
such twenty (20) day period, then either party, on behalf of
both and on notice to the other, may request such appointment by
the then President of the Washington State Commercial
Association of Realtors (or any successor organization) in
accordance with its then prevailing rules. If said President
shall fail to appoint said third arbitrator within ten (10)
after such request is made, then either party, on behalf of both
and on notice to the other, may request such appointment by the
American Arbitration Association (or any successor organization)
in accordance with its then prevailing rules. The sole
arbitrator, both arbitrators or the majority of the arbitrators
(as applicable) shall determine the Fair Market Rent of the
Premises for the extension term as of the first day of the
extension term and render a decision and award as to their
determination to both Landlord and Tenant within twenty (20)
days after the appointment of the last arbitrator chosen. In the
Event that all three arbitrators cannot agree upon such Fair
Market Rent within ten (10) days after the third arbitrator
shall have been selected, then each arbitrator shall submit his
designation of such Fair Market Rent to the other two
arbitrators in writing; and the Fair Market Rent shall be
determined by calculating the average of the two numerically
closest (or, if the values are equidistant, all three) values so
determined.
Each of the arbitrators selected as herein provided shall have
at least ten (10) years experience as a commercial real estate
broker in the Eastside (East of Lake Washington) area dealing
with properties of the same type and quality as the Building.
Each party shall pay the fees and expenses of the arbitrator it
has selected and the fees and expenses of the third arbitrator
and all other expenses (not including counsel fees, witness fees
and similar expenses of the parties, each of which shall be
borne separately by each of the parties) of the arbitration
shall be borne equally by the parties hereto except that the
fees and expenses of the sole arbitrator shall be borne equally
by the parties. Each party may offer to the arbitrators such
evidence as it desires. Each arbitrator shall be the judge of
the relevancy and materiality of the evidence offered, and
conformity to legal rules of evidence shall not be necessary.
All orally presented evidence shall be taken in the presence of
all arbitrators and each of the parties except where such party
is absent following reasonable notice or has waived the right to
be present, and copies of all written evidence shall be
concurrently presented to all arbitrators and each party. The
decision and award of the arbitrator(s) shall be in writing and
be final and conclusive on all parties, and counterpart copies
thereof shall be delivered to each of such parties. Judgment may
be had on the decision and award of the arbitrator(s) so
rendered in any court of competent jurisdiction.
If Tenant does not provide written notice of its option to
extend on or before the dates specified herein, Tenant's Option
to Extend shall be null and void and Tenant shall have no right
to extend the Term.
4.
<PAGE> 5
d. OPTION TO TERMINATE: Landlord shall grant a one-time option to
terminate this Lease after the 36th month. To exercise this
option Tenant must provide Landlord with six (6) months prior
written notice of its intent to terminate the Lease. Tenant must
also pay to Landlord prior to the effective cancellation date a
termination fee equal to the unamortized portion of Tenant
Improvements paid for by Landlord, brokerage fees and space
planning costs incurred by Landlord. The amortization rate will
be ten percent (10%). Additionally, Tenant shall pay to Landlord
a fee equal to four (4) months rent ($149,457.00).
The Lease Term shall expire on the Expiration Date specified in
paragraph 1.c(2), unless sooner terminated or extended as provided
herein.
5. POSSESSION.
a. Landlord shall deliver possession of the Premises to Tenant on
or before seven (7) days from the full execution of this Lease.
In the event that Landlord fails to deliver the Premises to
Tenant within such seven day period, Tenant shall have the right
to terminate this Lease upon notice to Landlord.
b. If Landlord permits Tenant to occupy the Premises prior to the
Commencement Date of the term, such occupancy shall be subject
to all the provisions of this Lease and shall not advance the
Expiration Date of this Lease. Tenant's Share of Common Costs
and Expenses shall be due and payable from the date of Tenant's
occupancy of the Premises for the purpose of commencing
operations.
c. If Tenant should cause any delay in Landlord's completion of the
Premises, thereby delaying Tenant's occupancy of the Premises
beyond the Commencement Date of this Lease, then the Landlord
may, at its option require the Tenant to commence payment of
rent on the stated Rent Commencement Date as specified in
paragraph 1.c.(4) herein.
d. In the event that Tenant is delayed in taking occupancy of the
Premises for the purpose of commencing its operations as a
result of any Landlord Delay in excess of three (3) business
days, the Commencement Date shall be delayed one business day
for each business day of delay resulting from such cause. The
term "Landlord Delay" shall mean any delay (i) in giving of
authorizations or approvals by Landlord; (ii) attributable to
the acts or failure to act of Landlord, its agents or
contractors, that materially interfere with, and thereby delay,
the completion of the tenant improvements; (iii) caused by the
failure of the Building to comply with all applicable laws,
rules regulations and orders for which the Landlord is
responsible for pursuant to the terms of this Lease, in effect
at the time Tenant commences construction of the tenant
improvements, provided Tenant immediately notifies Landlord of
any such failure to comply.
6. RENT. Without prior notice or demand, in advance, Tenant agrees to pay
to Landlord the Monthly Base Rent specified in paragraph 1.a on or
before the first day of each calendar month of the Lease Term. Payment
of Monthly Base Rent shall begin on the Rent Commencement Date specified
in paragraph 1.c.(4). Rent for any period during the Term hereof which
is for
5.
<PAGE> 6
less than one (1) month shall be a prorated portion of the monthly
installment herein, based upon a thirty (30) day month. Rent shall be
paid to Landlord at the address to which notices to Landlord are to be
given, without deduction, or offset in lawful money of the United States
of America, or to such other person or at such other place as Landlord
may from time to time designate in writing.
7. SECURITY DEPOSIT/LETTER OF CREDIT.
a. Landlord acknowledges receipt from Tenant of the Security
Deposit (Letter of Credit), to be held by Landlord, as security,
without interest, for and during the initial four (4) years of
the Lease Term. Tenant shall deposit with Landlord thirty nine
thousand one hundred forty-three dollars ($39,143.00) the first
day of the forty-ninth (49th) month. If all or any part of the
Security Deposit is applied to an obligation of Tenant
hereunder, Tenant shall immediately upon request by Landlord
restore the Security Deposit to its original amount. Tenant
shall not have the right to call upon Landlord to apply all or
any part of the Security Deposit to cure any default or fulfill
any obligation of the Tenant, but such use shall be solely in
the discretion of Landlord. Upon any conveyance by Landlord of
its interest under this Lease, the Security Deposit may be
delivered by Landlord to Landlord's grantee or transferee
provided Landlord is not in default at such time. Upon any such
delivery, Tenant hereby releases Landlord herein named of any
and all liability with respect to the Security Deposit, its
application and return, and Tenant agrees to look solely to such
grantee or transferee. It is further understood that this
provision shall also apply to subsequent grantees and
transferees.
b. Tenant shall furnish to Landlord, at Tenant's sole cost and
expense, a clean, irrevocable and unconditional letter of credit
in the face amount of three hundred eighty four thousand three
hundred eighteen dollars ($384,318.00), in the form of Exhibit D
and drawn in favor of Landlord on a lending institution
reasonably satisfactory to Landlord, together with a copy of the
issuer's corporate resolution or letter from Tenant President or
Board of Directors, authorizing execution of the Letter of
Credit. The Letter of Credit shall have an expiration date no
earlier than the first anniversary of the Commencement Date,
which expiration date shall be automatically extended without
amendment for additional periods of one year. Commencing on the
thirteenth (13th) month, provided the Tenant is not in default
beyond any applicable cure period under any material term of
this Lease (which includes but is not limited to paragraphs 6,
8, 9(a), 12, 15(b), 18, and 33(b), the Letter of Credit shall be
reduced to the face amount per the following schedule:
<TABLE>
<S> <C>
First day of the thirteenth (13th) month: $ 304,252.00
First day of the twenty-fifth (25th) month: $ 213,510.00
First day of the thirty-seventh (37th) month: $ 117,431.00
</TABLE>
and further provided that so long as Tenant is in occupancy of
any part of the Premises, unless the issuer of the Letter of
Credit notifies Landlord in writing that it elects not to renew
the Letter of Credit for such additional period. In the event
Landlord is so notified by the issuer, Landlord shall so notify
Tenant and Tenant shall, within 15 days
6.
<PAGE> 7
after Landlord's notice, deliver to Landlord a replacement
Letter of Credit, such that the first Letter of Credit or
replacement Letter of Credit shall be in effect at all times.
Any replacement Letter of Credit shall be substantially in the
form of Exhibit F, issued by a lending institution reasonably
satisfactory to Landlord, and delivered to Landlord together
with a copy of the issuer's corporate resolution authorizing
execution of the replacement Letter of Credit. If Tenant fails
to deliver to Landlord a replacement Letter of Credit within the
time limits set forth in this paragraph, it shall be a default
under this Lease and Landlord shall be entitled to draw down the
full amount of the Letter of Credit without further notice or
demand and retain the proceeds thereof as substitute security,
subject to the provisions of this Section (drawing down the full
amount of the Letter of Credit shall be deemed to cure Tenant's
failure to deliver the replacement Letter of Credit.)
Landlord shall hold the Letter of Credit as security for the
faithful performance and observance beyond applicable cure
periods by Tenant of the terms, provisions and conditions of
this Lease. It is understood and agreed that if any default by
Tenant occurs hereunder, Landlord shall have the right from time
to time, without further notice or demand and without prejudice
to any other remedy Landlord may have on account thereof, to
make presentment of the Letter of Credit in the full amount, and
Landlord may use, apply, or retain the whole or any part of the
proceeds to the extent required for payment of any Annual Rent
or additional rent to any other sum as to which Tenant is in
default beyond the applicable cure period or for any sum which
Landlord may expend or may be required to expend by reason of
any default by Tenant hereunder, including, but not limited to,
any damage or deficiency accrued before or after summary
proceedings or other reentry by Landlord. It is agreed tat
Landlord shall always have the right to apply the proceeds or
any part thereof, as aforesaid without prejudice to any other
remedy or remedies which Landlord may have, or Landlord may
pursue any other such remedy or remedies in lieu of applying the
proceeds or any part thereof. Tenant shall not have the right to
call upon Landlord to apply all or any part of the proceeds to
cure any default or fulfill any obligation of Tenant, such use
shall be solely in the discretion of Landlord. The proceeds will
be held by Landlord as Security and without any obligation to
segregate the proceeds from any other funds held by Landlord or
to accrue interest thereon for the benefit of Tenant. If
Landlord shall apply the proceeds or any part thereof, as
aforesaid, Tenant shall upon demand restore the Letter of Credit
to the face amount required under this Section or pay to
Landlord the amount necessary to restore the Letter of Credit to
its original amount. In the event that Tenant shall fully and
faithfully comply with all of the terms, provisions, covenants
and conditions of this Lease, the Letter of Credit, or any
remaining proceeds or cash deposits, shall be returned to Tenant
within 30 days after the expiration of the Term and after
delivery of entire possession of the Premises to Landlord. In
the event of a sale or other transfer of the Premises, or
leasing of the Premises, Landlord shall have the right to
transfer the Letter of Credit, or any remaining proceeds, to the
grantee, transferee or lessee (if the letter of credit is not
assignable, Tenant shall furnish Landlord's successor with a
replacement Letter of Credit showing such successor as payee,
provided that the original Letter of Credit then outstanding
shall be simultaneously returned to Tenant) and Landlord shall
thereupon be released by Tenant from any and all liability with
respect to the Letter of Credit, or any remaining proceeds, its
application and return, and Tenant agrees to look solely to the
grantee,
7.
<PAGE> 8
transferee or lessee. It is further understood that this
provision shall also apply to subsequent grantees, transferees
and lessees. Tenant further covenants that it will not assign or
encumber nor attempt to assign or encumber the Letter of Credit
or its proceeds and that neither Landlord nor its successors or
assigns shall be bound by any such assignment, encumbrance,
attempted assignment or attempted encumbrance. Any assignment or
encumbrance or the Letter of Credit or its proceeds by Tenant
shall be null and void and without force or effect at law or in
equity.
8. USE.
a. Tenant shall use the Premises for the purposes specified in
paragraph 1.g above and hereby agrees that it has determined to
its satisfaction that the Premises can be used for those
purposes. Tenant waives any right to terminate this Lease in the
event the Premises cannot be used for such purposes during the
Lease term. The Premises may not be used for any other purpose
without Landlord's written consent, such consent not to be
unreasonable withheld, delayed or conditioned.
b. Tenant shall not do or permit anything to be done in or about
the Premises or bring or keep anything therein which will in any
way increase the existing rate of or affect any fire or other
insurance upon the Building or any of its contents, or cause
cancellation or insurance policy covering the Building or any
part thereof or any of its contents.
c. Tenant shall not do or permit anything to be done in or about
the Premises which will in any way obstruct or interfere with
the rights or other tenants or occupants of the Building or
Corporate Park or, injure or annoy them or use or allow the
Premises to be used for any improper, immoral, unlawful, or
objectionable purpose. Tenant shall not commit or suffer to be
committed any waste, damage, or injury in or upon the Premises.
Tenant shall not place upon or install in windows or other
openings or exterior sides of doors or walls of the Premises any
signs, symbols, drapes, or other materials without written
consent of Landlord.
d. Landlord gives Tenant and its employees, authorized
representatives, and business invitees a nonexclusive right to
the reasonable use and enjoyment of the Common Areas, subject to
Landlord's rights set forth herein.
9. TENANT'S SHARE OF COMMON COSTS AND EXPENSES.
a. Tenant shall pay to Landlord, as additional rent, the amount
estimated by Landlord to be Tenant's Share of Common Costs and
Expenses ("Tenant's Share") as set forth in this paragraph 9.
Tenant's Share shall be payable on or before the first day of
the first full calendar month of the Term hereof or upon
Tenant's occupancy, whichever first occurs, and on the first day
of each and every successive calendar month thereafter during
the Term hereof. Tenant's Share for any period less than one
month shall be paid by the Tenant on a per diem basis, based on
a thirty (30) day month.
8.
<PAGE> 9
b. For the first accounting period of the Term, Tenant's Share
shall be estimated to be equal to the amount specified in
paragraph 1.h per month ("Tenant's Initial Estimated Share of
Common Costs and Expenses").
c. An accounting period is a calendar year; except the first
accounting period shall commence on the date the Lease Term or
Tenant's occupancy commences, as the case may be, and end on
December 31 of the same calendar year. The last accounting
period shall end on the Expiration Date of the Lease Term.
d. Landlord can adjust the Common Costs and Expenses at the
commencement of each new accounting period throughout the Lease
term, whereupon Tenant's Share shall be adjusted accordingly,
if, at any time during any accounting period, Landlord
determines that the actual Common Costs and Expenses for such
accounting period will vary by more than five percent (5%) from
Landlord's original estimate, Landlord may, by written notice to
Tenant, adjust the Common Costs and Expenses for the remainder
of such accounting period, and, accordingly, Tenant's Share to
be paid hereunder. Landlord shall furnish to Tenant, after each
accounting period, a statement showing the actual total Common
Costs and Expenses, the actual Tenant's Share, and the payments
made by Tenant as part of its Tenant's Share during such
accounting period. If the actual Tenant's Share exceeds Tenant's
payments,,, Tenant shall pay to Landlord the deficiency within
thirty (30) days of Tenant's receipt of such statement. If
Tenant's payments made during the accounting period exceed the
actual Tenant's Share, Landlord may, at Tenant's sole election,
pay the excess to Tenant at the time Landlord furnishes said
statement, or credit the excess toward Tenant's payments of
Tenant's Share in the next succeeding accounting period.
Landlord will keep books and records regarding the Common Costs
and Expenses in accordance with the system of accounts and
accounting practices consistently maintained ion a year-to-year
basis. Tenant shall have the right (no more frequently than
twice per calendar year) to review the books and records
pertaining to such costs. If in Tenant's opinion such review
discloses an error in Landlord's books and records with regard
to these costs, Tenant may cause an audit at Tenant's expense of
Landlord's books and records which will be conducted by an
independent certified public accountant designated by Tenant and
reasonably acceptable to Landlord, who does not represent or is
not employed by either Landlord or Tenant on any other matters.
If any audit discloses that Tenant overpaid the costs, Landlord
shall pay Tenant the amount of overpayment within thirty (30)
days after the results of the audit have been disclosed to both
parties. Tenant shall pay all costs and expenses of the audit
unless the audit shows Landlord overstated Tenant's share of the
costs for the subject calendar year by more than five percent
(5%) of the actual amount payable by Tenant, in which case,
Landlord will pay all costs of the audit, not to exceed the
amount of the overcharge, and will pay Tenant interest on the
overpaid amounts at the Default Rate.
e. Common Costs and Expenses shall include the "Property Taxes" and
"Operating Expenses". "Property Taxes" shall include, without
limitation, all real and personal property taxes, charges, and
assessments imposed on the Premises, Building, Property, or
Common Areas; and any other taxes, charges, ground rents, or
assessments assessed
9.
<PAGE> 10
against the Landlord, Premises, Building, Property, or Common
Areas in connection with the use or occupancy of the Premises at
any time during the term of this Lease. Property Taxes does not
include (i) any interest, penalties or fines relating to
Landlord's failure to pay any taxes, assessments or other
charges when due, or (ii) any taxes, surcharges and local
improvement and other assessments levied with respect to any
additional development or construction on the Property, except
that constructed by Tenant. Landlord agrees to pay all Property
Taxes in the maximum number of installments permitted by law.
The Property Taxes shall not be due and payable by Tenant except
in the year in which it is actually paid. Tenant shall only be
obligated to pay for Property Taxes that become due during the
Term of this Lease or any extension thereof. Tenant shall have
the right to have the assessed valuation of the Premises reduced
or may initiate proceedings to contest the Property Taxes. If
required by law, Landlord shall join in the proceedings brought
by Tenant. "Operating Expenses" shall mean the annual Operating
Expenses which include, without limitation, all operating costs
incurred by Landlord or on behalf of the Premises in
maintaining, operating, and providing services to and for the
Building, Property, Common Areas, and the Corporate Park,
including, without limitation, the costs of utilities, supplies,
insurance, independent contractors, property managers, other
suppliers, compensation of all persons who perform regular and
recurring duties connected with the Building, Property, and
Common Areas and Corporate Park, its equipment, utilities,
sprinkler systems, and parking facilities thereto, the cost of
improvements or alterations to the Building, Property, Common
Areas and Corporate Park as may be required by law or reasonably
determined by Landlord to be necessary to improve the operating
efficiency of the Building, Property, Common Areas and Corporate
Park, and allowance to Landlord or Landlord's agent for
supervision of such maintenance, operation,, services and repair
of the Building, Property, and Common Areas and any and all
assessments charged to Landlord or the Property by or through
the Owners Association of the Corporate Park, if any, in
connection with the operation, repair and maintenance of the
Common Areas and Corporate Park.
Notwithstanding anything above to the contrary, Operating
Expenses shall not include (A) debt service (including, without
limitation, interest, principal, points, fees and any impound
payments) required to be made on any real property mortgage or
deed or trust recorded with respect to the Property; (B) the
cost of any items for which Landlord is reimbursed by Insurance
proceeds, condemnation awards, or otherwise; (C) salaries of
officers, executives and owners of Landlord; (D) any costs
included in Expenses representing an amount paid to an entity or
person related to Landlord which is in excess of the amount
which would have been paid in the absence of the relationship;
(E) non-cash items, such as deductions for depreciation or
obsolescence of the Property and building equipment; (F) costs
incurred by Landlord for the repair of damage caused by fire,
windstorm or other casualty, condemnation or eminent domain; (G)
marketing costs including leasing commissions and attorneys'
fees incurred in connection with lease negotiations; (H) costs
incurred by Landlord due to the violation by Landlord of any
law, code, regulation, ordinance or the like or the defense of
Landlord's title to the Property or any part thereof; (I)
overhead and profit increment paid to Landlord or its affiliates
for goods and/or services rendered by unaffiliated third parties
on a
10.
<PAGE> 11
competitive basis; (J) Landlord's general corporate overhead and
general and administrative expenses; (K) costs incurred in
connection with upgrading the Property to comply with disability,
life, fire and safety codes, ordinances, statutes, or other laws
in effect prior to the Commencement Date including, without
limitation, the effect prior to the Commencement Date including,
without limitation, the ADA, including penalties or damages
incurred due to such non-compliance; (L) tax penalties incurred
as a result of Landlord's failure to make payments and/or to
files any tax or informational returns when due; (M) costs for
which Landlord has been compensated by a management fee, and any
management fees in excess of those management fees which are
normally and customarily charged by Landlords of comparable
property in the vicinity; (N) costs arising from the negligence
or fault of Landlord or its agents, or any vendors, contractors,
or providers of materials or services selected, hired or engaged
by Landlord or its agents; (O) notwithstanding any contrary
provision of the Lease, including, without limitation, any
provision relating to capital expenditures, any and all costs
arising from the presence of any Hazardous Material in or about
the Property including, without limitation, Hazardous Materials
in the ground water or soil, not placed on the Property by
Tenant; (P) costs arising from latent defects in the Building or
Common Areas installed by Landlord or repair thereof; (Q) costs
(including in connection therewith all attorneys' fees and costs
of settlement judgments and payments in lieu thereof arising from
claims, disputes or potential disputes in connection with
potential or actual claims, litigation or arbitrations pertaining
to Landlord and/or the Building and/or the Property; (R) any
expenses for repairs or maintenance which are reimbursed through
warranties or service contracts; (S) any costs relating to
landscaping to the property other than routine maintenence or
restoration due to damage of existing landscaping. Any
expenditures by Landlord for Operating Expenses that are
considered Capital Improvements under Landlord's standard
accounting practices as consistently applied, shall be amortized
over the useful life of such asset. Only the amortized portion of
such expenditure applicable to a particular period shall be
considered an item of Operating Expenses for such period.
10. REPAIR RESPONSIBILITY.
a. Landlord represents and warrants that to the best of its
knowledge as of the date of this Lease, the Building (including
Building systems) is in good condition and repair and in
compliance with all applicable existing laws, ordinances, rules,
regulations and orders. Tenant shall have no responsibility for
correcting any noncompliance of the Premises with any applicable
statues, ordinances, regulations, rules, and orders as of the
date of this Lease except for compliance with ADA within the
Premises. All such costs and expenses relating to correcting
such noncompliance shall be the responsibility of the Landlord.
By taking possession of the Premises, Tenant shall be deemed to
have accepted the Premises as being in good, sanitary order,
condition, and repair. Tenant shall, when and if needed, at
Tenant's sole expense, make repairs to the Premises and every
part thereof, including, without limitation, the heating,
ventilating, and air conditioning system, if any, serving only
the Premises. Tenant shall surrender the Premises to Landlord in
good condition upon the expiration or sooner termination of this
Lease; provided, however, that Tenant shall not be held
responsible for damage to the Premises from causes beyond the
reasonable control of Tenant, to the extent covered
11.
<PAGE> 12
by Landlord's fire and extended coverage insurance policy, or
for ordinary wear and tear. Except as specifically provided in
an exhibit, if any, to this Lease, Landlord shall have no
obligation whatsoever to alter, remodel, improve, repair,
decorate, or paint the Premises or any part thereof and the
parties hereto affirm that Landlord has made no representations
to Tenant respecting the condition of the Premises or the
Building, except as specifically herein set forth.
b. Landlord, at its option, may engage a maintenance firm to
maintain the heating, ventilating, and air conditioning system,
if any, servicing only the Premises. Tenant shall pay to
Landlord, or, at landlord's election, directly to the
maintenance firm, the cost of such maintenance, which shall be
in addition to Common Costs and Expenses.
c. Except as provided herein, Tenant shall, at its expense, clean,
maintain, and keep in good repair throughout the term of this
Lease the entire Premises and appurtenances, including, without
limitation, signs, windows, doors, and trade fixtures.
d. Notwithstanding the provisions of paragraph 10.a hereinabove,
but subject to the provisions of paragraph 16, Landlord shall
repair and maintain the structural portions of the Building,
including the basic plumbing, air conditioning, heating, and
electrical systems, installed or furnished by Landlord only
insofar as such heating, air conditioning, and electrical
systems provide service to the entire Building, unless such
maintenance and repairs are caused in part or in whole by the
act, neglect, fault, or omission of any duty by the Tenant, its
agents, servants, employees, or invitees, in which case Tenant
shall pay to Landlord the reasonable costs of such maintenance
and repairs. Landlord shall not be liable for any failure to
make any such repairs or to perform any maintenance unless
Landlord fails to promptly commence such work and diligently
prosecute it to its completion after written notice of the need
of such repairs or maintenance is given to Landlord by Tenant.
Except as provided in paragraph 16 and 17 hereof, there shall be
no abatement of rent and no liability of Landlord by reason of
any injury to or interference with Tenant's business arising
from the making of any repairs, alterations, or improvements in
or to any portion of the Building, the Premises, the Property,
or to fixtures, appurtenances, and equipment therein. Tenant
waives the right to make repairs at Landlord's expense under any
law, statute, or ordinance now or hereafter in effect.
e. Tenant shall comply with the provisions of the American
Disabilities Act (ADA) for improvements constructed by Tenant.
Landlord shall be responsible for reasonable costs for common
area and building exterior compliance for the American
Disabilities Act (ADA).
f. In the event of (i) Premises Partial Damage or (ii) Hazardous
Substance Condition for which Tenant is not legally responsible,
the Base Rent, Common Area Operating Expenses and other charges,
if any, payable by Tenant hereunder for the period during which
such damage or condition, its repair, remediation or restoration
continues, shall be abated in proportion to the degree to which
Tenant's use of the Premises is impaired, but not in excess of
proceeds from insurance required to be carried under Paragraph
15.
12.
<PAGE> 13
Except for abatement of Base Rent, Common Area Operating
Expenses and other charges, if any, as aforesaid, all other
obligations of Tenant hereunder shall be performed by Tenant,
and Tenant shall have no claim against Landlord for any damage
suffered by reason of any such damage, destruction, repair,
remediation or restoration.
g. If Landlord shall be obligated to repair or restore the Premises
under the provisions of this Paragraph 9 and shall not commence,
in a substantial and meaningful way, the repair or restoration
of the Premises within sixty (60) days after such obligation
shall accrue, Tenant may, at any time prior to the commencement
of such repair or restoration, give written notice to Landlord
and to any Lenders of which Tenant has actual notice of Tenant's
election to terminate this Lease on a date not less than sixty
(60) days following the giving of such notice. If Tenant gives
such notice to landlord and such Lenders and such repair or
restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the
date specified in said notice. If Landlord or a Lender commences
the repair or restoration of the Premises within thirty (30)
days after the receipt of such notice, this Lease shall continue
in full force and effect. "Commence" as used in this Paragraph
shall mean either the unconditional authorization of the
preparation of the required plans, or the beginning of the
actual work on the Premises, whichever occurs first.
11. MAINTENANCE AND MANAGEMENT.
a. Landlord shall maintain the Common Areas in good condition at
all times. Landlord shall have the right to establish and
enforce reasonable rules and regulations applicable to all
tenants concerning the maintenance, management, use, and
operation of the Common Areas; and to make changes to the Common
Areas, including, without limitation, changes in the location of
driveways, entrances, exits, vehicular parking spaces, parking
area, or the direction of the flow of traffic. Landlord
understands that Tenant has entered into this Lease for the
Property in part, based on the appearance of the Building.
Therefore, Landlord agrees that prior to making any material
alterations affecting the access and appearance of the front of
the Building, Landlord will consult with Tenant and consider
Tenant's recommendations prior to making any such alterations.
b. Common Areas, as defined in this Lease, mean all parts of the
Building, and related land areas and facilities outside the
Individual Premises, but constituting a part of Corporate Park.
Common Areas include, without limitation:
(1) the Property, pedestrian walkways and patios, landscaped
areas, sidewalks, loading areas, parking areas, and
roads located on the Property;
(2) the structural parts of the Building and other
improvements in which the Premises are located, which
structural parts include only the foundation, bearing
and exterior walls (excluding glass and doors),
subflooring, and roof (excluding skylights);
13.
<PAGE> 14
(3) the unexposed electrical, plumbing, and sewage systems
lying outside the Premises;
(4) window frames, gutters, and downspouts on the Building
in which the Premises are located; and
(5) those certain open areas, landscaped areas, and
roadways, utility systems and facilities located outside
the Premises but on the Property, and Building.
c. Landlord shall not be liable, nor shall the rent be abated,
because of interruption of services caused by accident, strikes,
necessity for repairs, or for any other reason beyond its
control.
12. UTILITIES. Tenant shall pay, as additional rent, prior to delinquency,
for heat, light, water, electricity, gas and other utility services
supplied to the Premises and will pay any required deposits therefor.
Water, electric, sewer, and other utility charges for which separate
billings are not available shall be prorated by Landlord and charged to
Tenant based on the ratio of the Premises to the total rentable square
footage of the Building, Buildings within the Corporate Park, or
Property, depending on the metering system then in place; provided,
however, that Landlord may increase Tenant's pro rata portion of any
such charges to reflect unusual or excessive utility systems demands.
Separate charges may be made to reflect unusual or excessive utility
system demands where not separately metered.
13. TENANT IMPROVEMENT ALLOWANCE/ALTERATIONS AND ADDITIONS BY TENANT.
a. Tenant shall submit all construction plans and specifications
describing all the proposed tenant improvements for Landlord's
approval. Upon submission of construction plans for Landlord
approval, Tenant shall identify any improvements to the Premises
that Tenant desires to remove upon termination of the Lease.
Landlord will approve or reject Tenant's proposal within 10 days
of receipt of the proposal. Landlord's failure to reject within
such 10 day period shall be deemed an approval of Tenant's plans
to retain ownership of such improvements. Landlord will provide
to Tenant a tenant improvement allowance of $132,400.00
($5.00/SF) on the office portion of the Premises, paid to Tenant
upon completion of construction and Tenant confirmation of full
payment for the work. All costs associated with construction
drawings and city permits and approvals necessary to build the
space in accordance to tenant requirements will be included in
the tenant improvement allowance. Landlord and landlord's
property manager shall be allowed to reasonably approve
construction plans, specifications, contractors and the work.
Tenant will deliver to landlord certificates of insurance for
the contractors naming Landlord as additional insured.
b. After obtaining the prior written consent of Landlord, which
shall not be unreasonably withheld, delayed or conditioned,
Tenant may make, at its sole expense, such additional
improvements or alterations to the Premises which it may deem
necessary or desirable. Any repairs or new construction by
Tenant shall be done in conformity with plans and specifications
approved by Landlord. All work performed shall be done in a
14.
<PAGE> 15
workmanlike manner and shall become the property of the
Landlord. At the time of approval of plans and specifications,
Landlord shall identify alterations or improvements Landlord may
require removed at the expiration of the term, such removal to
occur at Tenant's sole cost and expense; and Tenant shall repair
all damage to the Premises or Building occurring as a result of
such removal.
14. LIENS. Tenant shall keep the Premises, Building, and Property free from
any liens arising out of any work performed, materials furnished, or
obligations incurred by Tenant. Landlord may require, at Landlord's sole
option, that Tenant shall provide to Landlord, at Tenant's sole cost and
expense, a lien and completion bond in an amount equal to one and
one-half (1.5) times any and all estimated cost or any improvements,
additions, or alterations in the Premises, to insure Landlord against
any liability for mechanics' and materialmen's liens and to insure
completion of the work.
15. INSURANCE.
a. Landlord shall not be liable to Tenant, and Tenant hereby waives
all claims against landlord, for injury or damage to any person
or property in or about the Premises, Building, or Property by
or from any cause whatsoever; provided, that nothing contained
herein shall relieve Landlord from liability for any such injury
or damage caused by Landlord's negligence.
b. Tenant agrees to procure and maintain throughout the Lease Term,
at Tenant's sole cost and expense, comprehensive general
liability and property damage insurance with minimum liability
limits of ($1,000,000) per occurrence, aggregate bodily injury
and property damage; or $1,000,000 combined single limit. Such
policy shall name Landlord, and Landlord's designated
representative, as an additional insured, shall contain
cross-liability endorsements. Tenant shall provide Landlord with
a certificate of such insurance. The liability insurance policy
shall be issued by a firm reasonably satisfactory to Landlord
and shall contain endorsements requiring thirty (30) days notice
to Landlord prior to any cancellation or any reduction in amount
of the coverage.
c. The proceeds of any insurance policies maintained by or for the
benefit of Landlord shall belong to and be paid over to
Landlord. Tenant shall have no interest in or right to such
proceeds and shall make no claim against Landlord or the insurer
for any such proceeds. The insurance coverage which Tenant is
required to maintain hereunder, and any other insurance coverage
which Tenant elects to maintain, may not decrease the amount of
insurance available under any insurance policies maintained by
or for the benefit of Landlord.
d. Tenant, as a material part of the consideration to be rendered
to Landlord, hereby agrees to defend, indemnify, and hold
harmless Landlord against any and all claims, costs, and
liabilities, including reasonable attorneys fees, for damage or
injury (1) arising from Tenant's use of the Premises, or (2)
from the conduct of Tenant's business, or (3) from any activity,
work, or thing done, permitted, or omitted by Tenant or any of
Tenant's agents, contractors, or employees, or (4) from Tenant's
breach of any term of this
15.
<PAGE> 16
Lease, or (5) occurring in or about the Premises, Building, or
Property, unless caused by Landlord's negligence. The provisions
of this paragraph 15 shall survive the expiration or termination
of this Lease with respect to any events occurring prior to such
expiration or termination.
e. Landlord, as a material part of the consideration to be rendered
to Tenant, hereby agrees to defend, indemnify, and hold harmless
Tenant against any and all claims, costs, and liabilities,
including reasonable attorneys' fees, for damage or injury (1)
arising from Landlord's use of the Premises, or (2) from the
conduct of Landlord's business, or (3) from any activity, work,
or thing done, permitted, or omitted by Landlord or any of
Landlord's agents, contractors, or employees, or (4) from
Landlord's breach of any term of this Lease, or (5) occurring in
or about the Premises, Building, or Property, unless caused by
Tenant's negligence. The provisions of this paragraph 15 shall
survive the expiration or termination of this Lease with respect
to any events occurring prior to such expiration or termination.
16. DESTRUCTION. If the Premises or the Building is destroyed by fire,
earthquake, or other casualty to the extent that they are untenantable
in whole or in part, then Landlord may, at Landlord's option, proceed
with reasonable diligence to rebuild and restore the Premises or such
part thereof, provided that within thirty (30) days after such
destruction or injury, Landlord shall in writing notify Tenant of
Landlord's intention to do so. During the period from destruction or
damage until restoration, the rent shall be abated in the same ratio as
that portion of the Premises which Landlord determines is unfit for
occupancy shall bear to the whole Premises. If Landlord shall fail to
notify Tenant, then this Lease shall, at the expiration of the time for
the giving of notice as herein provided, be deemed terminated and at an
end. Landlord shall not be required to repair any injury or damage by
fire or other cause, or to make any repairs or replacements of any
panels, decoration, office fixtures, paintings, floor coverings, or any
other property installed in the Premises by Tenant. The Tenant shall not
be entitled to any compensation or damages from Landlord for loss of the
use of the whole or any part of the Premises, Tenant's personal
property, or any inconvenience or annoyance occasioned by such damage,
repair, reconstruction, or restoration. Notwithstanding any provision to
the contrary, in the event that the Premises and the property cannot be
repaired or restored to a condition that would allow Tenant to continue
its operations within 120 days from the date of such damage or
destruction, or if the Premises are not so repaired or restored within
such 120 day period, Tenant shall have the right to terminate this Lease
upon notice to Landlord without any further liability.
17. CONDEMNATION. If all or part of the Premises are taken under power of
eminent domain, or sold under the threat of the exercise of said power,
this Lease shall terminate as to the part so taken as of the date the
condemning authority takes possession. If more than 25% percent of the
floor area of Premises or the parking area for the Building is taken by
condemnation, Tenant may, by a written notice within ten (10) days after
notice of such taking (or absent of such notice, within ten (10) days
after the condemning authority takes possession), terminate this Lease
as of the date the condemning authority takes possession. If Tenant does
not so terminate, this Lease shall remain in effect as to the portion of
the Premises remaining except that the rent shall be reduced in the
proportion that the floor area taken bears to the original
16.
<PAGE> 17
total floor area; provided, that if circumstances make abatement based
on floor area unreasonable, the rent shall abate by a reasonable amount
to be determined by Landlord. In the event that Tenant elects not to
terminate the Lease with respect to any part of the Premises remaining
after condemnation, Landlord shall have no responsibility to restore
such part of the Premises to its condition prior to condemnation. Any
award for the taking of all or part of the Premises under the power of
eminent domain, including payment made under threat of the exercise of
such power, shall be the property of Landlord, whether made as
compensation for diminution in value of the leasehold or for the taking
of the fee or as severance damages; provided, that Tenant shall be
entitled to such compensation as may be separately awarded or
recoverable by Tenant in Tenant's own right for the loss of or damage to
Tenant's trade fixtures and removable personal property and moving
costs. Landlord shall not be liable to Tenant for the loss of the use of
all or any part of the Premises taken by condemnation.
18. ASSIGNMENT AND SUBLETTING. Tenant shall not assign, let, or sublet this
Lease or any part thereof, either by operation of law or otherwise, or
permit any other party to occupy all or any part of the Premises,
without first obtaining the written consent of Landlord, which shall not
be unreasonably withheld. Landlord agrees to respond to Tenant request
for approval of a sublease within ten (10) days from the receipt of such
request. This Lease shall not be assignable by operation of law.
Landlord and Tenant agree that landlord may charge Tenant a reasonable
sum to reimburse Landlord for legal and administrative costs incurred in
connection with such consent; and that from the date of such assignment,
let or sublease of this Lease, Landlord and Tenant shall share equally
in any rental and other proceeds paid to Tenant in excess of the rent to
be paid to Landlord under the terms of this Lease. If Tenant is a
corporation, any transfer of this Lease from Tenant by merger,
consolidation, or liquidation or any change in the ownership or power to
vote in the majority of the outstanding voting stock of Tenant shall
constitute an assignment for the purpose of this paragraph. If Tenant is
a partnership, any change in the individuals or entities of which the
partnership is composed shall constitute an assignment for purposes of
this section. Subject to the provisions above, this Lease shall be
binding upon and inure to the benefit of the parties, heirs and
successors and assigns. Tenant shall have the right to assign this Lease
to any person or entity without consent of Landlord but with prior
written consent thereof that (a) controls, is controlled by or is under
common control with Tenant, (b) purchases substantially all of Tenants
assets or a controlling interest in Tenant and such entity has a net
worth equal to or greater than Tenant's net worth at the time of this
Lease, or (c) an entity resulting from a merger or consolidation with
Tenant.
19. DEFAULT.
a. The occurrence of any one or more of the following events shall
constitute a material default and breach of the Lease by Tenant:
(1) vacation or abandonment of all of the Premises;
(2) failure by Tenant to make any payment required as and
when due, where such failure shall continue after five
(5) days written notice from Landlord;
17.
<PAGE> 18
(3) failure by Tenant to observe or perform any of the
covenants, conditions, or provisions of this Lease,
other than the making of any payment, where such
failure shall continue for a period of thirty (30) days
after written notice from Landlord; or
(4) (i) the making by Tenant of any general assignment or
general arrangement for the benefit of creditors; (ii)
the filing by or against Tenant a petition in
bankruptcy, including reorganization or arrangement,
unless, in the case of a petition filed against Tenant,
the same is dismissed within thirty (30) days; (iii) the
appointment of a trustee or receiver to take possession
of substantially all of Tenant's assets located at
Premises or of Tenant's interest in this Lease; (iv) the
seizure by any department of any government or any
officer thereof of the business or property of Tenant;
and (v) adjudication that Tenant is bankrupt.
b. Tenant shall notify Landlord promptly of any default by its
nature not necessarily known to Landlord.
c. Landlord shall not be in default unless Landlord fails to
perform its obligations within thirty (30) days after notice by
Tenant specifying wherein Landlord has failed to perform;
provided, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for performance,
Landlord shall not be in default if Landlord commences
performance within thirty (30) days of Tenant's notice and
thereafter completes Landlord's performance within a reasonable
time. In the event that Landlord fails to cure any default
within the applicable cure period, Tenant may exercise any of
its rights provided in law or at equity and shall have the
right, but not the obligation to cure any such even of default
and to deduct the costs incurred by Tenant to cure such default,
including legal fees and expenses, from the amounts next due and
owning under the Lease.
d. If, pursuant to paragraph 1.e, Tenant was not obligated to pay
Monthly Base Rent for any period of time during the Lease Term
("Rental Concession"), and if Tenant defaults in Tenant's
obligations at any time during the Lease Term, than the Rental
Concession shall be canceled and of no force or effect,
whereupon the full dollar amount of the Rental Concession as
specified in paragraph 1.e shall be due and payable as if no
Rental Concession had ever been granted and without regard to
whether this Lease is terminated by Landlord as a result of
Tenant's default.
In addition, all options and assumptions heretofore, if any, are
cancelled.
20. REMEDIES IN DEFAULT. In the event of any default or breach, Landlord
may, at any time without waiving or limiting any other right or remedy,
reenter and take possession of the premises, or terminate this Lease, or
pursue any remedy allowed by law or equity. Tenant agrees to pay
Landlord the cost of recovering possession of the Premises, the expenses
of reletting, and any other reasonable costs or damages arising out of
Tenant's default, including, without limitation, the costs of removing
persons and property from the Premises, the costs of preparing or
altering the Premises for reletting, broker's commissions, and legal
fees.
18.
<PAGE> 19
Notwithstanding any reentry or termination, the liability of Tenant for
the rent provided for herein shall not be extinguished for the balance
of the term of this Lease, and Tenant covenants and agrees to make good
to the Landlord any deficiency arising from reletting the Premises, at a
lesser rent than herein agreed to. Tenant shall pay such deficiency each
month as the amount thereof is ascertained by the Landlord.
21. ACCESS. Tenant shall permit Landlord to enter the Premises at reasonable
times for the purpose of inspecting, altering, and repairing the
Premises and the Building and ascertaining compliance with the
provisions hereof by Tenant, but nothing herein shall be construed as
imposing any obligation on Landlord to perform any such work or duties.
Landlord may also show the Premises to prospective purchasers or tenants
at reasonable times, provided that Landlord shall not unreasonably
interfere with Tenant's business operation.
22. WAIVER OF SUBROGATION. Anything in this Lease to the contrary
notwithstanding, Tenant and Landlord each waivers its entire right of
recovery, claims, actions, or causes of action against the other for
loss or damage to the Premises, Building, or Property or any personal
property of such party therein that is caused by or incident to the
perils covered by normal All Risk extended coverage clauses of standard
fire insurance policies carried by the parties and in force at the time
of damage or loss. Each party shall cause each insurance policy obtained
by it to provide that the insurance company waives all right to recovery
by way of subrogation against either party in connection with any such
loss or damage. If either Landlord or Tenant is unable to obtain its
insurer's permission to waive any claim against the other party, such
party shall promptly notify the other party of such inability.
23. HOLD-OVER TENANCY. If (without execution of a new lease or written
extension) Tenant shall hold over after the expiration of the term of
this Lease with Landlord's written consent, Tenant shall be deemed to be
occupying the Premises as a Tenant from month to month, which tenancy
may be terminated as provided by law. If Tenant shall hold over after
expiration of the term of this Lease without Landlord's written consent,
Tenant's rent payable shall be increased by one hundred percent (100%)
more than Tenant's Monthly Base Rent required in the last month of the
Term of this Lease. During any such tenancy, Tenant agrees to be bound
by all of the terms, covenants, and conditions as specified, insofar as
applicable.
24. COMPLIANCE WITH LAW. Tenant shall use the Premises or permit anything to
be done in or about the Premises which will in any way conflict with any
law, statute, ordinance, or governmental rule or regulation now in force
or which may hereafter be enacted or promulgated. Tenant shall, at its
sole cost and expense, promptly comply with all laws, statutes,
ordinances, and governmental rules, regulations, or requirements now in
force or which may hereafter be in force, and with the requirements of
any board of fire insurance underwriters or other similar bodies now or
hereafter constituted, relating to, or affecting the conditions, use, or
occupancy of the Premises, excluding structural changes not related to
or affected by Tenant's use of the Premises, improvements to the
Premises, or acts. The judgment of any court of competent jurisdiction
of the admission of Tenant in any action against Tenant, whether
Landlord be a part thereto or not, that Tenant has violated any law,
statute, ordinance, or governmental rule, regulation, or requirement,
shall be conclusive of the fact as between the Landlord and Tenant.
19.
<PAGE> 20
25. RULES AND REGULATIONS. Tenant shall faithfully observe and comply with
the reasonable rules and regulations that Landlord shall from time to
time promulgate. Landlord reserves the right from time to time to make
all reasonable modification to said rules. The additions and
modifications to those rules shall be binding upon Tenant upon delivery
of a copy of them to Tenant. Landlord shall not be responsible to Tenant
for the nonperformance of any said rules by any other tenants or
occupants.
26. PARKING. Tenants shall have the exclusive right to use the parking
facilities of the Building and Property subject to the reasonable rules,
regulations and exclusive use parking designations by Landlord, and any
charges of Landlord for such parking facilities which may be established
or altered by Landlord at any time or form time to time during the term
hereof at no charge.
27. MORTGAGES, DEEDS OF TRUST, PURCHASERS (ESTOPPEL STATEMENT). It is
understood and agreed that Landlord may sell mortgage, or grant deeds of
trust with respect to the Premises, the Building, or the Property and
that Tenant may obtain financing, other than mortgaging the Lease, or
enter into other Agreements that require confirmation of information
relating to this Lease. Tenant and Landlord agree to execute, within ten
(10) days following a request from the other party, such reasonable
certificates as may be required by a mortgagee or trust deed beneficiary
or such other party requiring a certificate stating that the Lease is in
full force and effect and the dates to which the rent and charges have
been paid. Upon a foreclosure or conveyance in lieu of foreclosure, and
a demand by Landlord's successor. Tenant shall attorn to and recognize
such successor as Landlord under this.
28. SUBORDINATION. Tenant agrees that this Lease shall be subordinate to the
lien of any mortgage, deeds or trust, or ground lessee now or hereafter
placed against the Property or Building of which the Premises comprise a
part, and to all renewals and modifications, supplements,
consolidations, and extensions thereof; provided however, in the event
that any mortgages or trust deed beneficiary shall so elect. Landlord
reserves the right to subordinate said mortgage lien to the Lease upon
the terms required by such mortgages or trust deed beneficiary. Landlord
agrees that Tenant's subordination pursuant to this Paragraph 28 is
conditioned on Landlord and its mortgages, beneficiary or ground lessor
agreeing that so long as Tenant is not in default under this Lease
beyond any applicable cure period. Tenant's rights under this Lease
shall not be disturbed.
29. TENANT'S PROPERTY. Furnishings, trade fixtures, and equipment installed
by Tenant shall be the property of Tenant. On termination of the Lease.
Tenant shall remove any such property. Tenant shall repair or reimburse
Landlord for the cost of repairing any damage to the Premises resulting
from the installment or removal of such property. At the expiration of
this Lease, Tenant shall return Premises to Landlord in the same
condition as when Tenant took occupancy, reasonable wear and tear
accepted.
30. REMOVAL OF PROPERTY. All personal property of Tenant remaining on the
Premises after reentry or termination of this Lease, if not so removed
by Tenant within 10 days from notice of Landlord, shall conclusively be
deemed abandoned and may be removed by Landlord. Landlord may store such
property in any place selected by Landlord, including, but not limited
to, a public warehouse, at the expense and risk of the owner thereof,
with the right to sell such stored property without notice to Tenant.
The proceeds of such sale shall be applied first to the
20.
<PAGE> 21
cost of such sales, second to the payment of the cost of removal and
storage. If any, and third to the payment of any other sums of money
which may then be due from Tenant to Landlord under any of the terms
thereof, and the balance, if any, to be paid to Tenant.
31. PERSONAL PROPERTY TAXES. Tenant shall pay, or cause to be paid, before
delinquency, any and all personal property taxes levied or assessed and
which become payable during the term hereof upon Tenant's Leasehold
improvements, equipment, furniture, fixtures, and personal property
locate din the Premises. In the event any or all of the Tenant's
leasehold improvements, equipment, furniture, fixtures, and personal
property shall be assessed and taxed with the Building, Tenant shall pay
to Landlord its share of such taxes within ten (10) days after delivery
to Tenant by Landlord of a statement in writing setting forth the amount
of such taxes applicable to Tenant's personal property.
32. NOTICES. All notices under this Lease shall be effective when mailed by
certified mail or delivered to Landlord and to Tenant at the addresses
specified in paragraph 1.j, or to such other address as either party may
designate to the other in writing from time to time.
33. CONDITIONS OF PREMISES: HAZARDOUS SUBSTANCES
a. Tenant accepts the land, buildings, improvements, environmental
condition, and all other aspects of the Premises in their
present condition, AS IS, including latent defects, without any
representations or warranties, express or implied.
b. Tenant shall not, without first obtaining Landlord's prior
written approval, generate, release, spill, store, deposit,
transport, or dispose of (collectively "Release") any hazardous
substances, sewage, petroleum products, hazardous materials,
toxic substances or any pollutants or substances, defined as
hazardous or toxic in accordance with applicable federal, state,
and local laws and regulations ("Hazardous Substances") in, on
or about the Premises. In the event, and only in the event,
Landlord approves such Release of Hazardous Substances on the
Premises, tenant agrees that such Release shall occur safely and
in compliance with all applicable federal, state, and local laws
and regulations. Tenant shall indemnify, hold harmless and
defend Landlord from any and all claims, liabilities, losses,
damages, cleanup costs, and expenses (including reasonable
attorneys' fees) arising out of or in any way related to the
Release by Tenant, or any of its agents, representatives, or
employees, or the presence of such Hazardous Substances in, on
or about the Premises occurring at any time after the
Commencement date specified in paragraph 1.c(1).
c. Landlord warrants and represents to the best of its knowledge,
no use storage, treatment, or transportation of Hazardous
Substance has occurred in or on the Premises or the property
before the date of this Lease which has not been in compliance
with all applicable federal, state and local laws, rules,
regulations, and ordinances. Landlord additionally warrants and
represents to the best of its knowledge that no release, leak,
discharge, spill, disposal, or emission of Hazardous Substance
has occurred in, on, or under the Premises or the Property and
that the same are free from Hazardous Substances as of the date
of this Lease.
21.
<PAGE> 22
d. Landlord shall indemnify, defend and hold Tenant harmless from
any and all claims, damages, fines, judgments, liabilities,
losses, costs, fees, penalties, charges and expenses assessed
against, or imposed upon Tenant (including without limitation,
any and all sums paid for settlement, attorneys' fees and costs,
consultant and expert fees) arising during or after the Lease
from or in connection with the presence or suspected presence of
Hazardous Substances in or on the Premises or the Property,
unless the Hazardous Substances are present as a result of
Tenant's acts or those of its agents, employees, contractors, or
invitees. Without limitation of the foregoing, this
indemnification shall include any and all costs incurred because
of any investigation, cleanup, removal, or restoration mandated
by a federal, state or local agency or political subdivision,
unless the Hazardous Substances are present as a result of
Tenant, or its agents, employees, contractors or invitees. This
indemnification shall specifically include any and all costs due
to Hazardous Substances which flow, diffuse, migrate, or
percolate into, onto, or under the Premises, Property or other
property after the date of this Lease.
e. The provisions of this paragraph 33 shall survive the expiration
or termination of this Lease with respect to any events
occurring prior to such expiration or termination.
34. SIGNS. The sign criteria for the Premises is set forth in Exhibit C.
35. GENERAL PROVISIONS.
a. ATTORNEYS' FEES. In the event either party requires the services
of any attorney in connection with enforcing the terms of this
Lease, or in the event suite is brought for the recovery of any
rent due under this Lease or for the breach of any covenant or
condition of this Lease, or for the restitution of said Premises
to Landlord and/or eviction of Tenant during said term or after
the expiration thereof, the prevailing party will be entitled to
a reasonable sum for attorneys' fees, witness fees, and court
costs, including costs of appeal.
b. CHOICE OF LAW. This Lease shall be governed by the laws of the
State in which the premises are located.
c. CUMULATIVE REMEDIES. No remedy or election hereunder shall be
deemed exclusive but shall, wherever possible, be cumulative
with all other remedies at law or in equity.
d. EXHIBITS. Exhibits, if any, affixed to this Lease are a part
thereof.
e. INABILITY TO PERFORM. This Lease and the obligations of the
Tenant hereunder shall not be affected or impaired because the
Landlord is unable to fulfill any of its obligations hereunder
or is delayed in doing so, if such inability is caused by
reasons of strike, labor trouble, acts of God, or any other
cause beyond the reasonable control of the Landlord.
f. INTERPRETATION. This Lease has been submitted to the scrutiny of
all parties hereto and their counsel, if desired, and shall be
given a fair and reasonable interpretation in accordance with
the words hereof, without consideration or weight being given to
its having been drafted by any part hereto or its counsel.
22.
<PAGE> 23
g. JOINT OBLIGATION. If there be more than one Tenant, the
obligations hereunder imposed upon Tenants shall be joint and
several.
h. KEYS. Upon termination of this Lease, Tenant shall surrender all
keys to the Premises to Landlord at the piece then fixed for
payment of rent and shall inform Landlord of all combination
locks, safes, and vaults, if any, in the Premises.
i. LATE CHARGES. Tenant acknowledges that late payment by Tenant to
Landlord of rent or other sums due hereunder will cause Landlord
to incur costs not contemplated by this Lease, the exact amount
of which would be extremely difficult and impractical to
ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be
imposed on Landlord by the terms of any mortgage or trust deed
covering the premises; therefore, in the event Tenant should
fail to pay any installment of rent or any other sum due
hereunder within ten (10) days after such amount is due. Tenant
shall pay to Landlord as additional rent a late charge equal to
five percent (5%) of each installment or the sum of $25.00 per
month, whichever is greater. A $5.00 charge will be paid by
Tenant to Landlord for each returned check. In addition, any sum
due and payable to Landlord under the terms of this Lease which
is not paid when due shall bear interest at the rate of two
percent (2%) plus the published prime rate of interest of
Seattle First National bank, Main Office, in effect as of the
first day of the calendar month of such default (and adjusted
accordingly as said prime rate of interest is adjusted) from the
date the same becomes due and payable until paid.
j. LIGHT, AIR, AND VIEW. Landlord does not guarantee the continued
present status of light, air, or view over any improvements
adjoining or in the vicinity of the Building.
k. MARGINAL HEADINGS. The marginal headings and section titles in
the sections of this Lease are not a part of this Lease and
shall have no effect upon the construction or interpretation of
any part hereof.
l. NAME. Tenant shall not use the name of the Building or Corporate
park for any purpose other than as an address of the business to
be conducted by the Tenant in the Premises.
m. PRIOR AGREEMENTS. This Lease contains all of the agreements of
the parties hereto with respect to any matter covered or
mentioned in this Lease, and no prior agreements of
understandings pertaining to any such matters shall be effective
for any purpose. No provision of hits Lease may be amended or
added to except by an agreement in writing signed by the parties
hereto or their respective successors in interest. This Lease
shall not be effective or binding on any party until fully
expected by both parties hereto.
n. RECORDATION. Tenant shall not record this Lease or a short form
memorandum hereof without the prior written consent of Landlord.
o. SALE. In the event of any sale of the Building or Property, or
any assignment of this Lease by Landlord. Landlord shall be and
is hereby entirely freed and relieved of all liability under any
and all of its covenants and obligations contained n or derived
from this Lease arising out of any act, occurrence, or omission
occurring after the consummation of such sale or assignment; and
the purchase or assignee at such sale or
23.
<PAGE> 24
assignment or any subsequent sale or assignment of Lease, the
Property, or Building, shall be deemed without any further
agreement between the parties or their successors in interest or
between the parties and any such purchaser or assignee to have
assumed and agreed to carry out any and all of the covenants and
obligations of the Landlord under this Lease.
p. SEVERABILITY. Any provision of this Lease which shall prove to
be invalid, void, or illegal shall in no way affect, impair, or
invalidate any other provision hereof and such other provision
shall remain in full force and effect.
q. TIME. Time is of the essence of this Lease and each and all of
its provisions in which performance is a factor.
r. WAIVER. The waiver by either party of any term, covenant, or
condition herein contained shall not be deemed to be a waiver of
such term, covenant, or condition on any subsequent breach of
the same or any other term, covenant, or condition herein
contained. The subsequent acceptance of rent hereunder by
Landlord shall not be deemed to be a waiver of any preceding
breach by Tenant of any term, covenant, or condition of this
Lease, other than the failure of the Tenant to pay the
particular rental so accepted, regardless of Landlord's
knowledge of such preceding breach at the time of acceptance of
such rent. NO covenant, term, or condition of this Lease shall
be deemed to have been waived by Landlord unless such wavier
shall be in writing and signed by Landlord's duly authorized
representatives.
s. RESEARCH AND DEVELOPMENT. Landlord agrees to cooperate with
Tenant in obtaining any tax benefit related to the construction
and use of the Premises for research and development. Landlord
agrees that any refund, rebate or other tax benefit from such
construction or use that effectively reduces the tax assessed on
the Premises will be used to reduce the taxes paid by Tenant in
Tenant's share of Common Costs.
36. AUTHORITY OF PARTIES.
a. If Tenant is a corporation, each individual executing this Lease
on behalf of said corporation represents and warrants that he is
duly authorized to execute and deliver this Lease on behalf of
said corporation. In accordance with a duly adopted resolution
of the board of directors of said corporation or in accordance
with its terms.
b. If the Landlord herein is a limited partnership, it is
understood and agreed that any claims by Tenant against Landlord
shall be limited to the assets of the limited partnership, and
Tenant expressly waives any and all rights to proceed against
the individual partners or the officers, directors, or
shareholders of any corporate partner, except to the extent of
their interest in said limited partnership.
37. COMMISSIONS. Commissions payable, if any, shall be paid those Broker(s)
and Agent(s) and by the party specified in paragraph 1.i pursuant to a
separate commission contract. Each party represents that it has not had
dealings with any other real estate broker or salesman with respect to
he Lease, and each party shall defend, indemnify, and hold harmless the
other party from all
24.
<PAGE> 25
costs and liabilities including reasonable attorneys' fees resulting
from any claims to the contrary.
THIS LEASE IS SUBJECT TO ACCEPTANCE BY LANDLORD.
AUTHORITY OF TENANT:
Tenant and each individual executing this Lease on behalf of Tenant
represents and warrants that it is duly authorized to execute and
deliver this Lease and that this Lease is binding upon Tenant in
accordance with its terms.
25.
<PAGE> 26
AGREED AND ACKNOWLEDGED:
TENANT:
VIXEL CORPORATION
a Delaware corporation
By: /s/ Mark Harrington
-------------------------------------
Mark Harrington
Its: CFO
------------------------------------
Date: 12/5/96
-----------------------------------
LANDLORD:
SUNLIFE ASSURANCE CO. OF CANADA (U.S.)
a Delaware corporation
/s/ Thomas V. Pedulla By: /s/ John G. Mulvihill
- ---------------------------------- --------------------------------------
THOMAS V. PEDULLA John G. Mulvihill
PROPERTY INVESTMENTS OFFICER
Its: Property Investments Officer
------------------------------------
Date: 12/6/96
-----------------------------------
STATE OF WASHINGTON
COUNTY OF SNOHOMISH
On this day personally appeared before me Mark Harrington to me known to
be the CFO of Vixel Corporation, the corporation that executed the within and
foregoing instrument and acknowledged the instrument to be the free and
voluntary act and deed of said corporation for the uses and purposes therein
mentioned, and on oath stated that he/she was duly authorized to execute said
instrument on behalf of the corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 5th day of
December, 1996.
/s/ Signature Illegible
-----------------------------------------
NOTARY PUBLIC in and for the state of
Washington residing at Edmonds
my commission expires: November 1, 2000
Commonwealth of Massachusetts )
26.
<PAGE> 27
) Ss
County of Norfolk )
On this 6th day of December, 1996 before me appeared Thomas V. Pedulla
and John G. Mulvihill, both to me known to be Property Investments Officer and
Property Investments Officer, respectively, of the Sun Life Assurance Company of
Canada, duly authorized to execute the annexed instrument, on behalf of Sun Life
Assurance Company of Canada (U.S.), and acknowledged the said instrument to be
the free and voluntary act and deed of said corporation, for the uses and
purposes therein mentioned, and on oath stated that they were authorized to
execute said instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ Marylu Lazzaro
-----------------------------------------
Notary Public
My Commission Expires: May 31, 2002
27.
<PAGE> 28
FIRST AMENDMENT
WHEREAS, Sun Life Assurance Company of Canada (U.S.) as Landlord and Vixel
Corporation as Tenant executed that certain Lease dated December 6, 1996 for the
Premises known as 11911 North Creek Parkway South, Bothell, Washington, and
WHEREAS, Landlord and Tenant wish to amend the Commencement Date and Rent
Commencement Date of the Lease.
NOW, THEREFORE, Landlord and Tenant hereby agree to amend the Lease as follows:
1) The Commencement Date specified in Section 1.c.91) of the Lease is
hereby amended by substituting "January 13, 1997" for "February 1,
1997".
2) The Rent Commencement Date specified in Section 1.x(4) of the Lease
is hereby amended by substituting "March 13, 1997" for "April 1, 1997."
Rent for the partial month of March 13, 1997 through March 31, 1997 is
$19,629.15.
Except as specifically amended by the First Amendment, the Lease is in full
force and effect and any conflict between this First Amendment and the Lease
shall be controlled by this First Amendment.
AGREED AND ACCEPTED:
SUNLIFE ASSURANCE CO. OF CANADA (U.S.) VIXEL CORPORATION
By: /s/ John G. Mulvihill By: /s/ Signature Illegible
---------------------------------- ---------------------------------
Date: 1/13/97 Date: 1/22/97
------------------------------- -------------------------------
1.
<PAGE> 1
EXHIBIT 10.21
AMENDMENT TO LOAN DOCUMENTS
BORROWER: VIXEL CORPORATION
ADDRESS: 11911 NORTHCREEK PARKWAY S.
BOTHELL, WASHINGTON 98011
DATE: JUNE 21, 1999
THIS AMENDMENT TO LOAN DOCUMENTS is entered into between GREYROCK
CAPITAL, a division of NationsCredit Commercial Corporation (formerly Greyrock
Business Credit) ("GBC"), whose address is 10880 Wilshire Blvd., Suite 1850, Los
Angeles, CA 90024 and the borrower named above ("Borrower").
The Parties agree to amend the Loan and Security Agreement between them,
dated November 26, 1997 (as amended, the "Loan Agreement"), as follows,
effective on the date hereof. (This Amendment, the Loan Agreement, any prior
written amendments to said agreements signed by GBC and the Borrower, and all
other written documents and agreements between GBC and the Borrower are referred
to herein collectively as the "Loan Documents". Capitalized terms used but not
defined in this Amendment, shall have the meanings set forth in the Loan
Agreement.)
1. Credit Limit. Section 1 of the Schedule, which presently reads
as follows:
"1. CREDIT LIMIT (Section 1.1): An amount not to exceed the
lesser of $12,500,000 or the sum of (a) and (b) below:
"(a) The unpaid principal balance of the Term Loan in
the original principal amount of $7,500,000 being made
concurrently herewith by GBC to Borrower (the `Term
Loan') and evidenced by the Secured Promissory Note
(`Term Note') made by Borrower to the order of GBC,
being executed and delivered to GBC concurrently
herewith; plus "(b) Loans (the "Revolving Loans") in an
amount not to exceed the lesser of (i) $5,000,000 at any
one time outstanding, or (ii) 80% of the amount of
Borrower's Eligible Receivables (as defined in Section 8
above)
"The Term Loan shall be made concurrently, in one disbursement.
GBC shall have no obligation to disburse the Term Loan if, at
the date of the disbursement, any Event of Default or event
which, with notice or passage of time or both, would constitute
an Event of Default has occurred and is continuing. "The Term
Loan shall bear interest and be repayable on the terms set forth
in the Term Note. The Term Loan once repaid may not be
reborrowed. The Term Loan and the Revolving Loans constitute
`Loans' for all purposes of this Agreement." is amended to read
as follows:
<PAGE> 2
"1. CREDIT LIMIT (Section 1.1): An amount not to exceed the
lesser of $15,000,000 or the sum of (a) and (b) below:
"(a) The unpaid principal balance of the Term Loan in
the original principal amount of $7,500,000 made by GBC
to Borrower (the `Term Loan') and evidenced by the
Secured Promissory Note (`Term Note') made by Borrower
to the order of GBC; plus
"(b) Loans (the "Revolving Loans") in an amount not to
exceed the lesser of (i) $7,500,000 at any one time
outstanding, or (ii) 80% of the amount of Borrower's
Eligible Receivables (as defined in Section 8 above)
"The Term Loan shall bear interest and be repayable on the terms
set forth in the Term Note. The Term Loan once repaid may not be
reborrowed. The Term Loan and the Revolving Loans constitute
`Loans' for all purposes of this Agreement."
2. Extension. The date "SEPTEMBER 30, 1999" in Section 4 of the
Schedule (as previously amended) is hereby amended by replacing said date with
the date "SEPTEMBER 30, 2000."
3. Fee. In consideration for GBC entering into this Amendment, the
Borrower shall pay GBC a fee in the amount of $175,000 (the "Transaction Fee"),
which shall be paid in installments of $14,583 per month, beginning July 31,
1999, and continuing on the last day of each month thereafter until paid in
full. Said fee shall be deemed fully earned and part of the Obligations on the
date hereof, shall be in addition to all interest and other fees, and shall be
non-refundable. Notwithstanding the foregoing, if Borrower shall terminate the
Loan Agreement and shall pay and perform in full all Obligations on or before
December 31, 1999, and no Event of Default shall have occurred and be
continuing, then GBC shall accept $100,000 as full payment of the Transaction
Fee.
4. Representations True. Borrower represents and warrants to GBC
that all representations and warranties set forth in the Loan Agreement are true
and correct.
5. General Provisions. This Amendment, the Loan Agreement, and the
other Loan Documents set forth in full all of the representations and agreements
of the parties with respect to the subject matter hereof and supersede all prior
discussions, representations, agreements and understandings between the parties
with respect to the subject hereof. Except as herein expressly amended, all of
the terms and provisions of the Loan Agreement and the other Loan Documents
shall continue in full force and effect and the same are hereby ratified and
confirmed.
<PAGE> 3
Borrower: GBC:
VIXEL CORPORATION Greyrock Capital, a Division of
Nationscredit Commercial Corporation
By /s/ Kurtis L. Adams
--------------------------------
President or Vice President By /s/ Signature Illegible
-------------------------------------
Title
----------------------------------
By /s/ Kay Church
--------------------------------
Secretary or Ass't Secretary
CONSENT
The undersigned, guarantor, acknowledge that its consent to the
foregoing Agreement is not required, but the undersigned nevertheless does
hereby consent to the foregoing Agreement and to the documents and agreements
referred to therein and to all future modifications and amendments thereto, and
any termination thereof, and to any and all other present and future documents
and agreements between or among the foregoing parties. Nothing herein shall in
any way limit any of the terms or provisions of the Continuing Guaranty of the
undersigned, all of which are hereby ratified and affirmed.
ARCXEL TECHNOLOGIES, INC.
By /s/ Kay Church
--------------------------------------
Title Controller
-----------------------------------
<PAGE> 1
EXHIBIT 10.22
VIXEL CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED BY THE BOARD OF DIRECTORS _______________ , 1999
APPROVED BY STOCKHOLDERS _______________ , 1999
1. PURPOSE.
(a) The purpose of the Plan is to provide a means by which Employees of
the Company and certain designated Affiliates may be given an opportunity to
purchase shares of the Common Stock of the Company.
(b) The Company, by means of the Plan, seeks to retain the services of
such Employees, to secure and retain the services of new Employees and to
provide incentives for such persons to exert maximum efforts for the success of
the Company and its Affiliates.
(c) The Company intends that the Rights to purchase shares of the Common
Stock granted under the Plan be considered options issued under an "employee
stock purchase plan," as that term is defined in Section 423(b) of the Code.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subparagraph 3(c) of the Plan.
(e) "COMMON STOCK" means the Common Stock of Vixel Corporation.
(f) "COMPANY" means Vixel Corporation, a Delaware corporation.
(g) "DIRECTOR" means a member of the Board.
(h) "ELIGIBLE EMPLOYEE" means an Employee who meets the requirements set
forth in the Offering for eligibility to participate in the Offering.
(i) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or an Affiliate of the Company. Neither service as a
Director nor payment of a director's fee shall be sufficient to constitute
"employment" by the Company or the Affiliate.
1.
<PAGE> 2
(j) "EMPLOYEE STOCK PURCHASE PLAN" means a plan that grants rights
intended to be options issued under an "employee stock purchase plan," as that
term is defined in Section 423(b) of the Code.
(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(l) "FAIR MARKET VALUE" means the value of a security, as determined in
good faith by the Board. If the security is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
then, except as otherwise provided in the Offering, the Fair Market Value of the
security shall be the closing sales price (rounded up where necessary to the
nearest whole cent) for such security (or the closing bid, if no sales were
reported) as quoted on such exchange or market (or the exchange or market with
the greatest volume of trading in the relevant security of the Company) on the
relevant determination date, as reported in The Wall Street Journal or such
other source as the Board deems reliable, or if such date is not a trading day,
then on the next preceding trading day.
(m) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
("Regulation S-K")), does not possess an interest in any other transaction as to
which disclosure would be required under Item 404(a) of Regulation S-K, and is
not engaged in a business relationship as to which disclosure would be required
under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a
"non-employee director" for purposes of Rule 16b-3.
(n) "OFFERING" means the grant of Rights to purchase shares of the
Common Stock under the Plan to Eligible Employees.
(o) "OFFERING DATE" means a date selected by the Board for an Offering
to commence.
(p) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
the Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(q) "PARTICIPANT" means an Eligible Employee who holds an outstanding
Right granted pursuant to the Plan or, if applicable, such other person who
holds an outstanding Right granted under the Plan.
(r) "PLAN" means this Vixel Corporation 1999 Employee Stock Purchase
Plan.
2.
<PAGE> 3
(s) "PURCHASE DATE" means one or more dates established by the Board
during an Offering on which Rights granted under the Plan shall be exercised and
purchases of shares of the Common Stock carried out in accordance with such
Offering.
(t) "RIGHT" means an option to purchase shares of the Common Stock
granted pursuant to the Plan.
(u) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3 as in effect with respect to the Company at the time discretion is
being exercised regarding the Plan.
(v) "SECURITIES ACT" means the Securities Act of 1933, as amended.
3. ADMINISTRATION.
(a) The Board shall administer the Plan unless and until the Board
delegates administration to a Committee, as provided in subparagraph 3(c).
Whether or not the Board has delegated administration, the Board shall have the
final power to determine all questions of policy and expediency that may arise
in the administration of the Plan.
(b) The Board (or the Committee) shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine when and how Rights to purchase shares of the
Common Stock shall be granted and the provisions of each Offering of such Rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of the
Company shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and Rights granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 14.
(v) To terminate or suspend the Plan as provided in paragraph 16.
(vi) Generally, to exercise such powers and to perform such acts
as it deems necessary or expedient to promote the best interests of the Company
and its Affiliates and to carry out the intent that the Plan be treated as an
Employee Stock Purchase Plan.
(c) The Board may delegate administration of the Plan to a Committee of
the Board composed of two (2) or more members, all of the members of which
Committee may be, in the discretion of the Board, Non-Employee Directors and/or
Outside Directors. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, including the power to delegate to a
3.
<PAGE> 4
subcommittee of two (2) or more Outside Directors any of the administrative
powers the Committee is authorized to exercise (and references in this Plan to
the Board shall thereafter be to the Committee or such a subcommittee), subject,
however, to such resolutions, not inconsistent with the provisions of the Plan,
as may be adopted from time to time by the Board. The Board may abolish the
Committee at any time and revest in the Board the administration of the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 13 relating to adjustments
upon changes in securities, the shares of the Common Stock that may be sold
pursuant to Rights granted under the Plan shall not exceed in the aggregate
three hundred thousand (300,000) shares of the Common Stock (the "Reserved
Shares"). As of each January 1, beginning with January 1, 2001, and continuing
through and including January 1, 2009, the number of Reserved Shares will be
increased automatically by the lesser of (i) one percent (1%) of the total
number of shares of the Common Stock outstanding on such January 1 or (ii) three
hundred thousand (300,000) shares. Notwithstanding the foregoing, the Board may
designate a smaller number of shares to be added to the share reserve as of a
particular January 1. If any Right granted under the Plan shall for any reason
terminate without having been exercised, the shares of the Common Stock not
purchased under such Right shall again become available for the Plan.
(b) The shares of the Common Stock subject to the Plan may be unissued
shares of the Common Stock or shares of the Common Stock that have been bought
on the open market at prevailing market prices or otherwise.
5. GRANT OF RIGHTS; OFFERING.
The Board may from time to time grant or provide for the grant of Rights
to purchase shares of the Common Stock under the Plan to Eligible Employees in
an Offering on an Offering Date or Dates selected by the Board. Each Offering
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate, which shall comply with the requirements of Section
423(b)(5) of the Code that all Employees granted Rights to purchase shares of
the Common Stock under the Plan shall have the same rights and privileges. The
terms and conditions of an Offering shall be incorporated by reference into the
Plan and treated as part of the Plan. The provisions of separate Offerings need
not be identical, but each Offering shall include (through incorporation of the
provisions of this Plan by reference in the document comprising the Offering or
otherwise) the period during which the Offering shall be effective, which period
shall not exceed twenty-seven (27) months beginning with the Offering Date, and
the substance of the provisions contained in paragraphs 6 through 9, inclusive.
6. ELIGIBILITY.
(a) Rights may be granted only to Employees of the Company or, as the
Board may designate as provided in subparagraph 3(b), to Employees of an
Affiliate. Except as provided in subparagraph 6(b), an Employee shall not be
eligible to be granted Rights under the Plan unless, on the Offering Date, such
Employee has been in the employ of the Company or the Affiliate, as the case may
be, for such continuous period preceding such grant as the Board may require,
but
4.
<PAGE> 5
in no event shall the required period of continuous employment be less than
ninety (90) days or equal to or greater than two (2) years; provided, however,
that Employees who are employed by the Company as of the Effective Date of this
Plan who would otherwise be Eligible Employees if not for the required period of
continuous employment with the Company shall be eligible to participate in the
Plan with respect to the first Offering Period without regard to their period of
prior continuous employment with the Company provided that they remain in
continuous employment through the end of the first Offering Period.
(b) The Board may provide that each person who, during the course of an
Offering, first becomes an Eligible Employee will, on a date or dates specified
in the Offering which coincides with the day on which such person becomes an
Eligible Employee or which occurs thereafter, receive a Right under that
Offering, which Right shall thereafter be deemed to be a part of that Offering.
Such Right shall have the same characteristics as any Rights originally granted
under that Offering, as described herein, except that:
(i) the date on which such Right is granted shall be the
"Offering Date" of such Right for all purposes, including determination of the
exercise price of such Right;
(ii) the period of the Offering with respect to such Right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board may provide that if such person first becomes an
Eligible Employee within a specified period of time before the end of the
Offering, he or she will not receive any Right under that Offering.
(c) No Employee shall be eligible for the grant of any Rights under the
Plan if, immediately after any such Rights are granted, such Employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of this
subparagraph 6(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any Employee, and stock which such Employee
may purchase under all outstanding rights and options shall be treated as stock
owned by such Employee.
(d) An Eligible Employee may be granted Rights under the Plan only if
such Rights, together with any other Rights granted under all Employee Stock
Purchase Plans of the Company and any Affiliates, as specified by Section
423(b)(8) of the Code, do not permit such Eligible Employee's rights to purchase
shares of the Common Stock or any Affiliate to accrue at a rate which exceeds
twenty five thousand dollars ($25,000) of the fair market value of such shares
of the Common Stock (determined at the time such Rights are granted) for each
calendar year in which such Rights are outstanding at any time.
(e) The Board may provide in an Offering that Employees who are highly
compensated Employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
5.
<PAGE> 6
7. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each Eligible Employee, pursuant to an
Offering made under the Plan, shall be granted the Right to purchase up to the
number of shares of the Common Stock purchasable either:
(i) with a percentage designated by the Board not exceeding
fifteen percent (15%) of such Employee's Earnings (as defined by the Board in
each Offering) during the period which begins on the Offering Date (or such
later date as the Board determines for a particular Offering) and ends on the
date stated in the Offering, which date shall be no later than the end of the
Offering; or
(ii) with a maximum dollar amount designated by the Board that,
as the Board determines for a particular Offering, (1) shall be withheld, in
whole or in part, from such Employee's Earnings (as defined by the Board in each
Offering) during the period which begins on the Offering Date (or such later
date as the Board determines for a particular Offering) and ends on the date
stated in the Offering, which date shall be no later than the end of the
Offering and/or (2) shall be contributed, in whole or in part, by such Employee
during such period.
(b) The Board shall establish one or more Purchase Dates during an
Offering on which Rights granted under the Plan shall be exercised and purchases
of shares of the Common Stock carried out in accordance with such Offering.
(c) In connection with each Offering made under the Plan, the Board may
specify a maximum number of shares of the Common Stock that may be purchased by
any Participant as well as a maximum aggregate number of shares of the Common
Stock that may be purchased by all Participants pursuant to such Offering. In
addition, in connection with each Offering that contains more than one Purchase
Date, the Board may specify a maximum aggregate number of shares of the Common
Stock which may be purchased by all Participants on any given Purchase Date
under the Offering. If the aggregate purchase of shares of the Common Stock upon
exercise of Rights granted under the Offering would exceed any such maximum
aggregate amount, the Board shall make a pro rata allocation of the shares of
the Common Stock available in as nearly a uniform manner as shall be practicable
and as it shall deem to be equitable.
(d) The purchase price of shares of the Common Stock acquired pursuant
to Rights granted under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair
market value of the shares of the Common Stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair
market value of the shares of the Common Stock on the Purchase Date.
8. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An Eligible Employee may become a Participant in the Plan pursuant
to an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll
6.
<PAGE> 7
deductions of up to the maximum percentage specified by the Board of such
Employee's Earnings during the Offering (as defined in each Offering). The
payroll deductions made for each Participant shall be credited to a bookkeeping
account for such Participant under the Plan and either may be deposited with the
general funds of the Company or may be deposited in a separate account in the
name of, and for the benefit of, such Participant with a financial institution
designated by the Company. To the extent provided in the Offering, a Participant
may reduce (including to zero) or increase such payroll deductions. To the
extent provided in the Offering, a Participant may begin such payroll deductions
after the beginning of the Offering. A Participant may make additional payments
into his or her account only if specifically provided for in the Offering and
only if the Participant has not already had the maximum permitted amount
withheld during the Offering.
(b) At any time during an Offering, a Participant may terminate his or
her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board in the Offering. Upon such withdrawal
from the Offering by a Participant, the Company shall distribute to such
Participant all of his or her accumulated payroll deductions (reduced to the
extent, if any, such deductions have been used to acquire shares of the Common
Stock for the Participant) under the Offering, without interest unless otherwise
specified in the Offering, and such Participant's interest in that Offering
shall be automatically terminated. A Participant's withdrawal from an Offering
will have no effect upon such Participant's eligibility to participate in any
other Offerings under the Plan but such Participant will be required to deliver
a new participation agreement in order to participate in subsequent Offerings
under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating Employee's employment
with the Company or a designated Affiliate for any reason (subject to any
post-employment participation period required by law) or other lack of
eligibility. The Company shall distribute to such terminated Employee all of his
or her accumulated payroll deductions (reduced to the extent, if any, such
deductions have been used to acquire shares of the Common Stock for the
terminated Employee) under the Offering, without interest unless otherwise
specified in the Offering. If the accumulated payroll deductions have been
deposited with the Company's general funds, then the distribution shall be made
from the general funds of the Company, without interest. If the accumulated
payroll deductions have been deposited in a separate account with a financial
institution as provided in subparagraph 8(a), then the distribution shall be
made from the separate account, without interest unless otherwise specified in
the Offering.
(d) Rights granted under the Plan shall not be transferable by a
Participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 15 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such Rights
are granted.
9. EXERCISE.
(a) On each Purchase Date specified therefor in the relevant Offering,
each Participant's accumulated payroll deductions and other additional payments
specifically
7.
<PAGE> 8
provided for in the Offering (without any increase for interest) will be applied
to the purchase of shares of the Common Stock up to the maximum number of shares
of the Common Stock permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional shares of the Common Stock shall be issued upon the exercise of
Rights granted under the Plan unless specifically provided for in the Offering.
(b) Unless otherwise specifically provided in the Offering, the amount,
if any, of accumulated payroll deductions remaining in any Participant's account
after the purchase of shares of the Common Stock that is equal to the amount
required to purchase one or more whole shares of the Common Stock on the final
Purchase Date of the Offering shall be distributed in full to the Participant at
the end of the Offering, without interest. If the accumulated payroll deductions
have been deposited with the Company's general funds, then the distribution
shall be made from the general funds of the Company, without interest. If the
accumulated payroll deductions have been deposited in a separate account with a
financial institution as provided in subparagraph 8(a), then the distribution
shall be made from the separate account, without interest unless otherwise
specified in the Offering. The amount of accumulated payroll deductions
remaining in any Participant's account that is less than the amount required to
purchase one whole share of Common Stock on the final Purchase Date of the
Offering shall be carried over to the next Offering or shall, if the Participant
requests or does not participate in the next Offering, be refunded.
(c) No Rights granted under the Plan may be exercised to any extent
unless the shares of the Common Stock to be issued upon such exercise under the
Plan (including Rights granted thereunder) are covered by an effective
registration statement pursuant to the Securities Act and the Plan is in
material compliance with all applicable state, foreign and other securities and
other laws applicable to the Plan. If on a Purchase Date in any Offering
hereunder the Plan is not so registered or in such compliance, no Rights granted
under the Plan or any Offering shall be exercised on such Purchase Date, and the
Purchase Date shall be delayed until the Plan is subject to such an effective
registration statement and such compliance, except that the Purchase Date shall
not be delayed more than twelve (12) months and the Purchase Date shall in no
event be more than twenty-seven (27) months from the Offering Date. If, on the
Purchase Date of any Offering hereunder, as delayed to the maximum extent
permissible, the Plan is not registered and in such compliance, no Rights
granted under the Plan or any Offering shall be exercised and all payroll
deductions accumulated during the Offering (reduced to the extent, if any, such
deductions have been used to acquire Shares) shall be distributed to the
Participants, without interest unless otherwise specified in the Offering. If
the accumulated payroll deductions have been deposited with the Company's
general funds, then the distribution shall be made from the general funds of the
Company, without interest. If the accumulated payroll deductions have been
deposited in a separate account with a financial institution as provided in
subparagraph 8(a), then the distribution shall be made from the separate
account, without interest unless otherwise specified in the Offering.
10. COVENANTS OF THE COMPANY.
(a) During the terms of the Rights granted under the Plan, the Company
shall ensure that the number of shares of the Common Stock required to satisfy
such Rights are available.
8.
<PAGE> 9
(b) The Company shall seek to obtain from each federal, state, foreign
or other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of the Common Stock upon
exercise of the Rights granted under the Plan. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of shares of the Common Stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell shares of the Common
Stock upon exercise of such Rights unless and until such authority is obtained.
11. USE OF PROCEEDS FROM SHARES.
Proceeds from the sale of shares of the Common Stock pursuant to Rights
granted under the Plan shall constitute general funds of the Company.
12. RIGHTS AS A STOCKHOLDER.
A Participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, shares of the Common Stock subject to
Rights granted under the Plan unless and until the Participant's shares of the
Common Stock acquired upon exercise of Rights under the Plan are recorded in the
books of the Company.
13. ADJUSTMENTS UPON CHANGES IN SECURITIES.
(a) If any change is made in the shares of the Common Stock subject to
the Plan, or subject to any Right, without the receipt of consideration by the
Company (through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
class(es) and maximum number of shares of the Common Stock subject to the Plan
pursuant to subparagraph 4(a), and the outstanding Rights will be appropriately
adjusted in the class(es), number of shares of the Common Stock and purchase
limits of such outstanding Rights. The Board shall make such adjustments, and
its determination shall be final, binding and conclusive. (The conversion of any
convertible securities of the Company shall not be treated as a transaction that
does not involve the receipt of consideration by the Company.)
(b) In the event of: (i) a dissolution, liquidation, or sale of all or
substantially all of the assets of the Company; (ii) a merger or consolidation
in which the Company is not the surviving corporation; or (iii) a reverse merger
in which the Company is the surviving corporation but the shares of the Common
Stock outstanding immediately preceding the merger are converted by virtue of
the merger into other property, whether in the form of securities, cash or
otherwise, then: (1) any surviving or acquiring corporation may assume Rights
outstanding under the Plan or may substitute similar rights (including a right
to acquire the same consideration paid to the Company's stockholders in the
transaction described in this subparagraph 13(b)) for those outstanding under
the Plan, or (2) in the event any surviving or acquiring corporation does not
assume such Rights or substitute similar rights for those outstanding under the
Plan, then, as determined by the Board in its sole discretion, such Rights
9.
<PAGE> 10
may continue in full force and effect or the Participants' accumulated payroll
deductions (exclusive of any accumulated interest which cannot be applied toward
the purchase of shares of the Common Stock under the terms of the Offering) may
be used to purchase shares of the Common Stock immediately prior to the
transaction described above under the ongoing Offering and the Participants'
Rights under the ongoing Offering thereafter terminated.
14. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 13 relating to adjustments upon changes
in securities and except as to minor amendments to benefit the administration of
the Plan, to take account of a change in legislation or to obtain or maintain
favorable tax, exchange control or regulatory treatment for Participants or the
Company or any Affiliate, no amendment shall be effective unless approved by the
stockholders of the Company to the extent stockholder approval is necessary for
the Plan to satisfy the requirements of Section 423 of the Code, Rule 16b-3
under the Exchange Act and any Nasdaq or other securities exchange listing
requirements. Currently under the Code, stockholder approval within twelve (12)
months before or after the adoption of the amendment is required where the
amendment will:
(i) Increase the number of shares of the Common Stock reserved
for Rights under the Plan;
(ii) Modify the provisions as to eligibility for participation in
the Plan to the extent such modification requires stockholder approval in order
for the Plan to obtain employee stock purchase plan treatment under Section 423
of the Code or to comply with the requirements of Rule 16b-3; or
(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code or to comply with the
requirements of Rule 16b-3.
(b) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide Employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to Employee Stock Purchase Plans
and/or to bring the Plan and/or Rights granted under it into compliance
therewith.
(c) Rights and obligations under any Rights granted before amendment of
the Plan shall not be impaired by any amendment of the Plan, except with the
consent of the person to whom such Rights were granted, or except as necessary
to comply with any laws or governmental regulations, or except as necessary to
ensure that the Plan and/or Rights granted under the Plan comply with the
requirements of Section 423 of the Code.
15. DESIGNATION OF BENEFICIARY.
(a) A Participant may file a written designation of a beneficiary who is
to receive any shares of the Common Stock and/or cash, if any, from the
Participant's account under the Plan in the event of such Participant's death
subsequent to the end of an Offering but prior to delivery to
10.
<PAGE> 11
the Participant of such shares of the Common Stock 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 during an Offering.
(b) The Participant may change such designation of beneficiary 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 of the
Common Stock 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 sole discretion, may deliver such
shares of the Common Stock and/or cash to the spouse or to any one or more
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. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board in its discretion may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate at the time that all of
the shares of the Common Stock subject to the Plan's reserve, as increased
and/or adjusted from time to time, have been issued under the terms of the Plan.
No Rights may be granted under the Plan while the Plan is suspended or after it
is terminated.
(b) Rights and obligations under any Rights granted while the Plan is in
effect shall not be impaired by suspension or termination of the Plan, except as
expressly provided in the Plan or with the consent of the person to whom such
Rights were granted, or except as necessary to comply with any laws or
governmental regulation, or except as necessary to ensure that the Plan and/or
Rights granted under the Plan comply with the requirements of Section 423 of the
Code.
17. EFFECTIVE DATE OF PLAN.
The Plan shall become effective simultaneously with the effectiveness of
the Company's registration statement under the Securities Act with respect to
the initial public offering of shares of the Company's Common Stock (the
"Effective Date"), but no Rights granted under the Plan shall be exercised
unless and until the Plan has been approved by the stockholders of the Company
within twelve (12) months before or after the date the Plan is adopted by the
Board, which date may be prior to the Effective Date.
11.
<PAGE> 12
VIXEL CORPORATION
1999 EMPLOYEE STOCK PURCHASE PLAN
OFFERING
ADOPTED _______________, 1999
1. GRANT OF RIGHTS.
(a) The Board of Directors of Vixel Corporation (the "Company"),
pursuant to the Company's 1999 Employee Stock Purchase Plan (the "Plan"), hereby
authorizes the grant of rights to purchase shares of the common stock of the
Company ("Common Stock") to all Eligible Employees (an "Offering"). The first
Offering shall begin simultaneously with the effectiveness of the Company's
registration statement under the Securities Act of 1933, as amended, with
respect to the initial public offering of the Company's Common Stock and end on
May 1, 2000 (the "Initial Offering"). Thereafter, Offerings shall begin on each
May 1 and November 1. After the Initial Offering, each Offering will be six (6)
months in duration. Offerings that begin on May 1 will end on the following
October 31 and Offerings that begin on November 1 will end on the following
April 30. The first day of an Offering is that Offering's "Offering Date." If a
scheduled Offering Date falls on a day on which the Common Stock is not actively
traded, then the Offering Date shall be the next preceding day on which the
Common Stock is actively traded.
(b) Prior to the commencement of any Offering, the Board of Directors
(or the Committee described in subparagraph 2(d) of the Plan, if any) may change
any or all terms of such Offering and any subsequent Offerings. The granting of
rights pursuant to each Offering hereunder shall occur on each respective
Offering Date unless, prior to such date (a) the Board of Directors (or such
Committee) determines that such Offering shall not occur, or (b) no shares
remain available for issuance under the Plan in connection with the Offering.
2. ELIGIBLE EMPLOYEES.
Except as described below, all employees of the Company shall be granted
rights to purchase Common Stock under each Offering on the Offering Date of such
Offering (each, an "Eligible Employee"). Notwithstanding the foregoing, the
following employees shall not be Eligible Employees or be granted rights under
an Offering: (i) part-time or seasonal employees whose customary employment is
less than twenty (20) hours per week or less than five (5) months per calendar
year, and (ii) 5% stockholders (including ownership through unexercised options)
described in subparagraph 6(c) of the Plan.
3. RIGHTS.
(a) Subject to the limitations contained herein and in the Plan, on each
Offering Date each Eligible Employee shall be granted the right to purchase the
number of shares of Common Stock purchasable with up to fifteen percent (15%) of
such Participant's Earnings (as defined in the Plan) paid during the period of
such Offering.
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(b) The maximum aggregate number of shares available to be purchased by
all Eligible Employees under an Offering shall be the number of shares remaining
available under the Plan on the Offering Date. If the aggregate purchase of
shares of Common Stock upon exercise of rights granted under the Offering would
exceed the maximum aggregate number of shares available, the Board shall make a
pro rata allocation of the shares available in a uniform and equitable manner.
(c) Notwithstanding the foregoing, no employee shall be granted a right
under the Plan which permits such employee's right to purchase stock under this
Plan and all other employee stock purchase plans (described in Section 423 of
the Code) of the Company to accrue at a rate which exceeds twenty-five thousand
dollars ($25,000) of fair market value of such stock (determined at the time
such option is granted) for each calendar year in which such option is
outstanding at any time.
4. PURCHASE PRICE.
The purchase price of the Common Stock under the Offering shall be the
lesser of eighty-five percent (85%) of the fair market value of the Common Stock
on the Offering Date or eighty-five percent (85%) of the fair market value of
the Common Stock on the Purchase Date.
5. PARTICIPATION.
(a) An Eligible Employee may elect to participate in an Offering only as
of the beginning of the Offering. An Eligible Employee shall become a
participant in the Plan by delivering an agreement authorizing payroll
deductions. Such deductions shall be made each pay period and must be in whole
percentages not to exceed fifteen percent (15%) of Earnings. The agreement shall
be made on such enrollment form as the Company or a designated Affiliate
provides and must be delivered to the Company or designated Affiliate before the
Offering Date to be effective for such Offering, unless a later time for filing
the enrollment form is set by the Company for all Eligible Employees with
respect to a given Offering Date. For the Initial Offering, the time for filing
an enrollment form and commencing participation for individuals who are Eligible
Employees on the Offering Date for the Initial Offering shall be determined by
the Company and communicated to such Eligible Employees. A participant may not
make additional contributions under the Plan.
(b) A participant may withdraw from an Offering and receive his or her
accumulated payroll deductions from the Offering (reduced to the extent, if any,
such deductions have been used to acquire Common Stock for the Participant),
without interest, at any time prior to the end of the Offering, by delivering a
withdrawal notice to the Company or designated Affiliate in such form as the
Company of designated Affiliate provides. A participant who has withdrawn from
an Offering shall not again participate in such Offering but may participate in
subsequent Offerings under the Plan by submitting a new participation agreement
in accordance with the terms thereof.
6. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date, each
participant's accumulated payroll deductions (without any increase for interest)
shall be applied to the
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purchase of whole shares of Common Stock, up to the maximum number of shares
permitted under the Plan and the Offering. "Purchase Date" shall be defined as
May 1, 2000 for the Initial Offering. For subsequent Offerings that begin on May
1, "Purchase Date" shall be defined as the following October 31. For subsequent
Offerings that begin on an November 1, "Purchase Date" shall be defined as the
following April 30. If a scheduled Purchase Date falls on a day preceding a day
on which the Common Stock is not actively traded, then the Purchase Date shall
be the nearest prior day on which the Common Stock is actively traded.
7. NOTICES.
Any notices or agreements provided for in the Offering or the Plan shall
be given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering shall be deemed effectively given upon
receipt or, in the case of notices and agreements delivered by the Company, five
(5) days after deposit in the United States mail, postage prepaid.
8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The rights granted under an Offering are subject to the approval of the
Plan by the stockholders of the Company as required for the Plan to obtain
employee stock purchase plan treatment under Section 423 of the Code or to
comply with the requirements of Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended.
9. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan), the provisions of the Plan
shall control.
3.
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EXHIBIT 10.23
VIXEL CORPORATION
1999 EQUITY INCENTIVE PLAN
ADOPTED _______________, 1999
APPROVED BY STOCKHOLDERS _______________, 1999
TERMINATION DATE: _______________, 2009
1. PURPOSES.
(a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive
Stock Awards are the Employees, Directors and Consultants of the Company and its
Affiliates.
(b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a
means by which eligible recipients of Stock Awards may be given an opportunity
to benefit from increases in value of the Common Stock through the granting of
the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock
Options, (iii) stock bonuses and (iv) rights to acquire restricted stock. The
Plan also provides for non-discretionary grants of Nonstatutory Stock Options to
Non-Employee Directors of the Company.
(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to
retain the services of the group of persons eligible to receive Stock Awards, to
secure and retain the services of new members of this group and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
2. DEFINITIONS.
(a) "AFFILIATE" means any parent corporation or subsidiary
corporation of the Company, whether now or hereafter existing, as those terms
are defined in Sections 424(e) and (f), respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a committee of one or more members of the Board
appointed by the Board in accordance with subsection 3(c).
(e) "COMMON STOCK" means the common stock of the Company.
(f) "COMPANY" means Vixel Corporation, a Delaware corporation.
(g) "CONSULTANT" means any person, including an advisor, (i) engaged
by the Company or an Affiliate to render consulting or advisory services and who
is compensated for such services or (ii) who is a member of the Board of
Directors of an Affiliate. However, the term "Consultant" shall not include
either Directors who are not compensated by the Company
1.
<PAGE> 2
for their services as Directors or Directors who are merely paid a director's
fee by the Company for their services as Directors.
(h) "CONTINUOUS SERVICE" means that the Participant's service with
the Company or an Affiliate, whether as an Employee, Director or Consultant, is
not interrupted or terminated. The Participant's Continuous Service shall not be
deemed to have terminated merely because of a change in the capacity in which
the Participant renders service to the Company or an Affiliate as an Employee,
Consultant or Director or a change in the entity for which the Participant
renders such service, provided that there is no interruption or termination of
the Participant's Continuous Service. For example, a change in status from an
Employee of the Company to a Consultant of an Affiliate or a Director will not
constitute an interruption of Continuous Service. The Board or the chief
executive officer of the Company, in that party's sole discretion, may determine
whether Continuous Service shall be considered interrupted in the case of any
leave of absence approved by that party, including sick leave, military leave or
any other personal leave.
(i) "COVERED EMPLOYEE" means the chief executive officer and the four
(4) other highest compensated officers of the Company for whom total
compensation is required to be reported to stockholders under the Exchange Act,
as determined for purposes of Section 162(m) of the Code.
(j) "DIRECTOR" means a member of the Board of Directors of the
Company.
(k) "DISABILITY" means the permanent and total disability of a person
within the meaning of Section 22(e)(3) of the Code.
(l) "EMPLOYEE" means any person employed by the Company or an
Affiliate. Mere service as a Director or payment of a director's fee by the
Company or an Affiliate shall not be sufficient to constitute "employment" by
the Company or an Affiliate.
(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(n) "FAIR MARKET VALUE" means, as of any date, the value of the
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market,
the Fair Market Value of a share of Common Stock shall be the closing sales
price for such stock (or the closing bid, if no sales were reported) as quoted
on such exchange or market (or the exchange or market with the greatest volume
of trading in the Common Stock) on the day of determination, as reported in The
Wall Street Journal or such other source as the Board deems reliable.
(ii) In the absence of such markets for the Common Stock, the
Fair Market Value shall be determined in good faith by the Board.
(o) "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.
2.
<PAGE> 3
(p) "IPO DATE" means the effective date of the initial public
offering of the Company's Common Stock.
(q) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or a subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or a subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(r) "NON-EMPLOYEE DIRECTOR OPTION" means a Non-Statutory Stock Option
granted pursuant to Section 7 hereof.
(s) "NON-EMPLOYEE DIRECTOR OPTION AGREEMENT" means a written
agreement between the Company and a Non-Employee Director evidencing the terms
and conditions of a Non-Employee Director Option grant. Each Non-Employee
Director Option Agreement shall be subject to the terms and conditions of the
Plan.
(t) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.
(u) "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.
(v) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock
Option granted pursuant to the Plan.
(w) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionholder evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(x) "OPTIONHOLDER" means a person to whom an Option is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.
(y) "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of Treasury Regulations promulgated under Section 162(m) of the Code),
is not a former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(z) "PARTICIPANT" means a person to whom a Stock Award is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Stock Award.
3.
<PAGE> 4
(aa) "PLAN" means this Vixel Corporation 1999 Equity Incentive Plan.
(bb) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange Act
or any successor to Rule 16b-3, as in effect from time to time.
(cc) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(dd) "STOCK AWARD" means any right granted under the Plan, including
an Option, a stock bonus and a right to acquire restricted stock.
(ee) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
(ff) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed
to own pursuant to Section 424(d) of the Code) stock possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of the
Company or of any of its Affiliates.
3. ADMINISTRATION.
(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan
unless and until the Board delegates administration to a Committee, as provided
in subsection 3(c). Any interpretation of the Plan by the Board and any decision
by the Board under the Plan shall be final and binding on all persons.
(b) POWERS OF BOARD. The Board shall have the power, subject to, and
within the limitations of, the express provisions of the Plan:
(i) To determine from time to time which of the persons
eligible under the Plan shall be granted Stock Awards; when and how each Stock
Award shall be granted; what type or combination of types of Stock Award shall
be granted; the provisions of each Stock Award granted (which need not be
identical), including the time or times when a person shall be permitted to
receive Common Stock pursuant to a Stock Award; and the number of shares of
Common Stock with respect to which a Stock Award shall be granted to each such
person.
(ii) To construe and interpret the Plan and Stock Awards
granted under it, and to establish, amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(iii) To amend the Plan or a Stock Award as provided in
Section 13.
(iv) Generally, to exercise such powers and to perform such
acts as the Board deems necessary or expedient to promote the best interests of
the Company which are not in conflict with the provisions of the Plan.
4.
<PAGE> 5
(c) DELEGATION TO COMMITTEE.
(i) GENERAL. The Board may delegate administration of the Plan
to a Committee or Committees of one (1) or more members of the Board, and the
term "Committee" shall apply to any person or persons to whom such authority has
been delegated. If administration is delegated to a Committee, the Committee
shall have, in connection with the administration of the Plan, the powers
theretofore possessed by the Board, including the power to delegate to a
subcommittee any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the
Committee or subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest in
the Board the administration of the Plan.
(ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY
TRADED. At such time as the Common Stock is publicly traded, in the discretion
of the Board, a Committee may consist solely of two or more Outside Directors,
in accordance with Section 162(m) of the Code, and/or solely of two or more
Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such
authority, the Board or the Committee may (1) delegate to a committee of one or
more members of the Board who are not Outside Directors, the authority to grant
Stock Awards to eligible persons who are either (a) not then Covered Employees
and are not expected to be Covered Employees at the time of recognition of
income resulting from such Stock Award or (b) not persons with respect to whom
the Company wishes to comply with Section 162(m) of the Code and/or (2) delegate
to a committee of one or more members of the Board who are not Non-Employee
Directors the authority to grant Stock Awards to eligible persons who are not
then subject to Section 16 of the Exchange Act.
4. SHARES SUBJECT TO THE PLAN.
(a) SHARE RESERVE. Subject to the provisions of Section 12 relating
to adjustments upon changes in Common Stock, the Common Stock that may be issued
pursuant to Stock Awards shall not exceed in the aggregate one million eight
hundred thousand (1,800,000) shares of Common Stock, plus an annual increase to
be added each January 1, beginning with January 1, 2001, equal to the lesser of
(i) four percent (4%) of the total number of shares of Common Stock outstanding
on such January 1 or (ii) one million eight hundred thousand (1,800,000) shares
of Common Stock. Notwithstanding the foregoing, the Board may designate a
smaller number of shares of Common Stock to be added to the share reserve as of
a particular January 1.
(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award
shall for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full, the shares of Common Stock not acquired under
such Stock Award shall revert to and again become available for issuance under
the Plan. In addition, if any stock award issued under the Company's 1995 Stock
Option plan shall for any reason expire or otherwise terminate, in whole or in
part, without having been exercised in full, the shares of Common Stock not
acquired under such stock award shall revert to and again become available for
issuance under this Plan.
5.
<PAGE> 6
(c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan
may be unissued shares or reacquired shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options
may be granted only to Employees. Stock Awards other than Incentive Stock
Options may be granted to Employees, Directors and Consultants.
(b) TEN PERCENT STOCKHOLDERS. A Ten Percent Stockholder shall not be
granted an Incentive Stock Option unless the exercise price of such Option is at
least one hundred ten percent (110%) of the Fair Market Value of the Common
Stock at the date of grant and the Option is not exercisable after the
expiration of five (5) years from the date of grant.
(c) SECTION 162(M) LIMITATION. Subject to the provisions of Section
12 relating to adjustments upon changes in the shares of Common Stock, no
Employee shall be eligible to be granted Options covering more than one million
two hundred thousand(1,200,000) shares of the Common Stock during any calendar
year.
(d) CONSULTANTS. A Consultant shall not be eligible for the grant of
a Stock Award if, at the time of grant, a Form S-8 Registration Statement under
the Securities Act ("Form S-8") is not available to register either the offer or
the sale of the Company's securities to such Consultant because of the nature of
the services that the Consultant is providing to the Company, or because the
Consultant is not a natural person, or as otherwise provided by the rules
governing the use of Form S-8, unless the Company determines both (i) that such
grant (A) shall be registered in another manner under the Securities Act (e.g.,
on a Form S-3 Registration Statement) or (B) does not require registration under
the Securities Act in order to comply with the requirements of the Securities
Act, if applicable, and (ii) that such grant complies with the securities laws
of all other relevant jurisdictions.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. All Options shall be separately
designated Incentive Stock Options or Nonstatutory Stock Options at the time of
grant, and, if certificates are issued, a separate certificate or certificates
will be issued for shares of Common Stock purchased on exercise of each type of
Option. The provisions of separate Options need not be identical, but each
Option shall include (through incorporation of provisions hereof by reference in
the Option or otherwise) the substance of each of the following provisions:
(a) TERM. Subject to the provisions of subsection 5(b) regarding Ten
Percent Stockholders, no Incentive Stock Option shall be exercisable after the
expiration of ten (10) years from the date it was granted.
(b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the
provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise
price of each Incentive Stock Option shall be not less than one hundred percent
(100%) of the Fair Market Value of the Common Stock subject to the Option on the
date the Option is granted. Notwithstanding the
6.
<PAGE> 7
foregoing, an Incentive Stock Option may be granted with an exercise price lower
than that set forth in the preceding sentence if such Option is granted pursuant
to an assumption or substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code.
(c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The exercise price
of each Nonstatutory Stock Option shall be not less than eighty-five percent
(85%) of the Fair Market Value of the Common Stock subject to the Option on the
date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(d) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to an Option shall be paid, to the extent permitted by applicable
statutes and regulations, either (i) in cash at the time the Option is exercised
or (ii) at the discretion of the Board at the time of the grant of the Option
(or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to
the Company of other Common Stock, (2) according to a deferred payment or other
similar arrangement with the Optionholder or (3) in any other form of legal
consideration that may be acceptable to the Board; provided, however, that at
any time that the Company is incorporated in Delaware, payment of the Common
Stock's "par value," as defined in the Delaware General Corporation Law, shall
not be made by deferred payment.
In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock
Option shall not be transferable except by will or by the laws of descent and
distribution and shall be exercisable during the lifetime of the Optionholder
only by the Optionholder. Notwithstanding the foregoing, the Optionholder may,
by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the
Optionholder, shall thereafter be entitled to exercise the Option.
(f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory
Stock Option shall be transferable to the extent provided in the Option
Agreement. If the Nonstatutory Stock Option does not provide for
transferability, then the Nonstatutory Stock Option shall not be transferable
except by will or by the laws of descent and distribution and shall be
exercisable during the lifetime of the Optionholder only by the Optionholder.
Notwithstanding the foregoing, the Optionholder may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionholder, shall thereafter be
entitled to exercise the Option.
(g) VESTING GENERALLY. The total number of shares of Common Stock
subject to an Option may, but need not, vest and therefore become exercisable in
periodic installments that may, but need not, be equal. The Option may be
subject to such other terms and conditions on
7.
<PAGE> 8
the time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The vesting provisions of
individual Options may vary. The provisions of this subsection 6(g) are subject
to any Option provisions governing the minimum number of shares of Common Stock
as to which an Option may be exercised.
(h) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's
Continuous Service terminates (other than upon the Optionholder's death or
Disability), the Optionholder may exercise his or her Option (to the extent that
the Optionholder was entitled to exercise such Option as of the date of
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the Optionholder's
Continuous Service (or such longer or shorter period specified in the Option
Agreement), or (ii) the expiration of the term of the Option as set forth in the
Option Agreement. If, after termination, the Optionholder does not exercise his
or her Option within the time specified in the Option Agreement, the Option
shall terminate.
(i) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement
may also provide that if the exercise of the Option following the termination of
the Optionholder's Continuous Service (other than upon the Optionholder's death
or Disability) would be prohibited at any time solely because the issuance of
shares of Common Stock would violate the registration requirements under the
Securities Act, then the Option shall terminate on the earlier of (i) the
expiration of the term of the Option set forth in subsection 6(a) or (ii) the
expiration of a period of three (3) months after the termination of the
Optionholder's Continuous Service during which the exercise of the Option would
not be in violation of such registration requirements.
(j) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise such Option as of the date of termination), but only
within such period of time ending on the earlier of (i) the date twelve (12)
months following such termination (or such longer or shorter period specified in
the Option Agreement) or (ii) the expiration of the term of the Option as set
forth in the Option Agreement. If, after termination, the Optionholder does not
exercise his or her Option within the time specified herein, the Option shall
terminate.
(k) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's
Continuous Service terminates as a result of the Optionholder's death or (ii)
the Optionholder dies within the period (if any) specified in the Option
Agreement after the termination of the Optionholder's Continuous Service for a
reason other than death, then the Option may be exercised (to the extent the
Optionholder was entitled to exercise such Option as of the date of death) by
the Optionholder's estate, by a person who acquired the right to exercise the
Option by bequest or inheritance or by a person designated to exercise the
option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but
only within the period ending on the earlier of (1) the date eighteen (18)
months following the date of death (or such longer or shorter period specified
in the Option Agreement) or (2) the expiration of the term of such Option as set
forth in the Option Agreement. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate.
8.
<PAGE> 9
(l) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionholder may elect at any time before the Optionholder's
Continuous Service terminates to exercise the Option as to any part or all of
the shares of Common Stock subject to the Option prior to the full vesting of
the Option. Any unvested shares of Common Stock so purchased may be subject to a
repurchase option in favor of the Company or to any other restriction the Board
determines to be appropriate.
(m) RE-LOAD OPTIONS. Without in any way limiting the authority of the
Board to make or not to make grants of Options hereunder, the Board shall have
the authority (but not an obligation) to include as part of any Option Agreement
a provision entitling the Optionholder to a further Option (a "Re-Load Option")
in the event the Optionholder exercises the Option evidenced by the Option
Agreement, in whole or in part, by surrendering other shares of Common Stock in
accordance with this Plan and the terms and conditions of the Option Agreement.
Any such Re-Load Option shall (i) provide for a number of shares of Common Stock
equal to the number of shares of Common Stock surrendered as part or all of the
exercise price of such Option; (ii) have an expiration date which is the same as
the expiration date of the Option the exercise of which gave rise to such
Re-Load Option; and (iii) have an exercise price which is equal to one hundred
percent (100%) of the Fair Market Value of the Common Stock subject to the
Re-Load Option on the date of exercise of the original Option. Notwithstanding
the foregoing, a Re-Load Option shall be subject to the same exercise price and
term provisions heretofore described for Options under the Plan.
Any such Re-Load Option may be an Incentive Stock Option or a
Nonstatutory Stock Option, as the Board may designate at the time of the grant
of the original Option; provided, however, that the designation of any Re-Load
Option as an Incentive Stock Option shall be subject to the one hundred thousand
dollar ($100,000) annual limitation on the exercisability of Incentive Stock
Options described in subsection 11(d) and in Section 422(d) of the Code. There
shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall
be subject to the availability of sufficient shares of Common Stock under
subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options
under subsection 5(c) and shall be subject to such other terms and conditions as
the Board may determine which are not inconsistent with the express provisions
of the Plan regarding the terms of Options.
7. NON-EMPLOYEE DIRECTOR STOCK OPTIONS.
Without any further action of the Board, each Non-Employee Director
shall be granted Nonstatutory Stock Options as described in subsections 7(a) and
7(b) (collectively, "Non-Employee Director Options"). Each Non-Employee Director
Option shall include the substance of the terms set forth in subsections 7(c)
through 7(k).
(a) INITIAL GRANTS. After the IPO Date, each person who is elected or
appointed for the first time to be a Non-Employee Director automatically shall,
upon the date of his or her initial election or appointment to be a Non-Employee
Director by the Board or stockholders of the Company, be granted an Initial
Grant to purchase sixteen thousand five hundred (16,500) shares of Common Stock
on the terms and conditions set forth herein.
9.
<PAGE> 10
(b) ANNUAL GRANTS. On the day following each Annual Meeting
commencing with the Annual Meeting in 2000, each person who is then a
Non-Employee Director automatically shall be granted an Annual Grant to purchase
five thousand (5,000) shares of Common Stock on the terms and conditions set
forth herein; and further provided, however, that if the person has not been
serving as a Non-Employee Director for the entire period since the preceding
Annual Meeting, then the number of shares subject to the Annual Grant shall be
reduced pro rata for each full quarter prior to the date of grant during which
such person did not serve as a Non-Employee Director.
(c) TERM. Each Non-Employee Director Option shall have a term of ten
(10) years from the date it is granted.
(d) EXERCISE PRICE. The exercise price of each Non-Employee Director
Option shall be one hundred percent (100%) of the Fair Market Value of the stock
subject to the Non-Employee Director Option on the date of grant.
Notwithstanding the foregoing, a Non-Employee Director Option may be granted
with an exercise price lower than that set forth in the preceding sentence if
such Non-Employee Director Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.
(e) VESTING. Each Non-Employee Director Option shall vest one third
per year from the date on which it is granted.
(f) CONSIDERATION. The purchase price of stock acquired pursuant to a
Non-Employee Director Option may be paid, to the extent permitted by applicable
statutes and regulations, in any combination of (i) cash or check, (ii) delivery
to the Company of other Common Stock, (ii) deferred payment or (iv) any other
form of legal consideration that may be acceptable to the Board and provided in
the Non-Employee Director Option Agreement; provided, however, that at any time
that the Company is incorporated in Delaware, payment of the Common Stock's "par
value," as defined in the Delaware General Corporation Law, shall not be made by
deferred payment. In the case of any deferred payment arrangement, interest
shall be compounded at least annually and shall be charged at the minimum rate
of interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.
(g) TRANSFERABILITY. A Non-Employee Director Option shall not be
transferable except by will or by the laws of descent and distribution and shall
be exercisable during the lifetime of the Non-Employee Director only by the
Non-Employee Director. Notwithstanding the foregoing, the Non-Employee Director
may, by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the
Non-Employee Director, shall thereafter be entitled to exercise the Non-Employee
Director Option.
(h) TERMINATION OF CONTINUOUS SERVICE. In the event a Non-Employee
Director's Continuous Service terminates (other than upon the Non-Employee
Director's death or Disability), the Non-Employee Director may exercise his or
her Non-Employee Director Option (to the extent that the Non-Employee Director
was entitled to exercise it as of the date of
10.
<PAGE> 11
termination) but only within such period of time ending on the earlier of (i)
the date three (3) months following the termination of the Non-Employee
Director's Continuous Service, or (ii) the expiration of the term of the
Non-Employee Director Option as set forth in the Non-Employee Director Option
Agreement. If, after termination, the Non-Employee Director does not exercise
his or her Non-Employee Director Option within the time specified in the
Non-Employee Director Option Agreement, the Non-Employee Director Option shall
terminate.
(i) EXTENSION OF TERMINATION DATE. If the exercise of the
Non-Employee Director Option following the termination of the Non-Employee
Director's Continuous Service (other than upon the Non-Employee Director's death
or Disability) would be prohibited at any time solely because the issuance of
shares would violate the registration requirements under the Securities Act,
then the Non-Employee Director Option shall terminate on the earlier of (i) the
expiration of the term of the Non-Employee Director Option set forth in
subsection 7(c) or (ii) the expiration of a period of three (3) months after the
termination of the Non-Employee Director's Continuous Service during which the
exercise of the Non-Employee Director Option would not violate such registration
requirements.
(j) DISABILITY OF NON-EMPLOYEE DIRECTOR. In the event a Non-Employee
Director's Continuous Service terminates as a result of the Non-Employee
Director's Disability, the Non-Employee Director may exercise his or her
Non-Employee Director Option (to the extent that the Non-Employee Director was
entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination or (ii) the expiration of the term of the
Non-Employee Director Option as set forth in the Non-Employee Director Option
Agreement. If, after termination, the Non-Employee Director does not exercise
his or her Non-Employee Director Option within the time specified herein, the
Non-Employee Director Option shall terminate.
(k) DEATH OF NON-EMPLOYEE DIRECTOR. In the event (i) a Non-Employee
Director's Continuous Service terminates as a result of the Non-Employee
Director's death or (ii) the Non-Employee Director dies within the three-month
period after the termination of the Non-Employee Director's Continuous Service
for a reason other than death, then the Non-Employee Director Option may be
exercised (to the extent the Non-Employee Director was entitled to exercise the
Non-Employee Director Option as of the date of death) by the Non-Employee
Director's estate, by a person who acquired the right to exercise the
Non-Employee Director Option by bequest or inheritance or by a person designated
to exercise the Non-Employee Director Option upon the Non-Employee Director's
death, but only within the period ending on the earlier of (1) the date eighteen
(18) months following the date of death or (2) the expiration of the term of
such Non-Employee Director Option as set forth in the Non-Employee Director
Option Agreement. If, after death, the Non-Employee Director Option is not
exercised within the time specified herein, the Non-Employee Director Option
shall terminate.
8. PROVISIONS OF STOCK AWARDS OTHER THAN OPTIONS.
(a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such
form and shall contain such terms and conditions as the Board shall deem
appropriate. The terms and conditions of stock bonus agreements may change from
time to time, and the terms and conditions of separate stock bonus agreements
need not be identical, but each stock bonus
11.
<PAGE> 12
agreement shall include (through incorporation of provisions hereof by reference
in the agreement or otherwise) the substance of each of the following
provisions:
(i) CONSIDERATION. A stock bonus may be awarded in
consideration for past services actually rendered to the Company or an Affiliate
for its benefit.
(ii) VESTING. Shares of Common Stock awarded under the stock
bonus agreement may, but need not, be subject to a share repurchase option in
favor of the Company in accordance with a vesting schedule to be determined by
the Board.
(iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the
event a Participant's Continuous Service terminates, the Company may reacquire
any or all of the shares of Common Stock held by the Participant which have not
vested as of the date of termination under the terms of the stock bonus
agreement.
(iv) TRANSFERABILITY. Rights to acquire shares under the stock
bonus agreement shall be transferable by the Participant only upon such terms
and conditions as are set forth in the stock bonus agreement, as the Board shall
determine in its discretion, so long as Common Stock awarded under the stock
bonus agreement remains subject to the terms of the stock bonus agreement.
(b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement
shall be in such form and shall contain such terms and conditions as the Board
shall deem appropriate. The terms and conditions of the restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate restricted stock purchase agreements need not be identical, but each
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions:
(i) PURCHASE PRICE. The purchase price under each restricted
stock purchase agreement shall be such amount as the Board shall determine and
designate in such restricted stock purchase agreement. The purchase price shall
not be less than eighty-five percent (85%) of the Common Stock's Fair Market
Value on the date such award is made or at the time the purchase is consummated.
(ii) CONSIDERATION. The purchase price of Common Stock acquired
pursuant to the restricted stock purchase agreement shall be paid either: (i) in
cash at the time of purchase; (ii) at the discretion of the Board, according to
a deferred payment or other similar arrangement with the Participant; or (iii)
in any other form of legal consideration that may be acceptable to the Board in
its discretion; provided, however, that at any time that the Company is
incorporated in Delaware, then payment of the Common Stock's "par value," as
defined in the Delaware General Corporation Law, shall not be made by deferred
payment.
(iii) VESTING. Shares of Common Stock acquired under the
restricted stock purchase agreement may, but need not, be subject to a share
repurchase option in favor of the Company in accordance with a vesting schedule
to be determined by the Board.
12.
<PAGE> 13
(iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the
event a Participant's Continuous Service terminates, the Company may repurchase
or otherwise reacquire any or all of the shares of Common Stock held by the
Participant which have not vested as of the date of termination under the terms
of the restricted stock purchase agreement.
(v) TRANSFERABILITY. Rights to acquire shares under the
restricted stock purchase agreement shall be transferable by the Participant
only upon such terms and conditions as are set forth in the restricted stock
purchase agreement, as the Board shall determine in its discretion, so long as
Common Stock awarded under the restricted stock purchase agreement remains
subject to the terms of the restricted stock purchase agreement.
9. COVENANTS OF THE COMPANY.
(a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Stock Awards.
(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from
each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Stock Awards and to issue and sell shares
of Common Stock upon exercise of the Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any
such Stock Award. If, after reasonable efforts, the Company is unable to obtain
from any such regulatory commission or agency the authority which counsel for
the Company deems necessary for the lawful issuance and sale of Common Stock
under the Plan, the Company shall be relieved from any liability for failure to
issue and sell Common Stock upon exercise of such Stock Awards unless and until
such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of Common Stock pursuant to Stock Awards shall
constitute general funds of the Company.
11. MISCELLANEOUS.
(a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have
the power to accelerate the time at which a Stock Award may first be exercised
or the time during which a Stock Award or any part thereof will vest in
accordance with the Plan, notwithstanding the provisions in the Stock Award
stating the time at which it may first be exercised or the time during which it
will vest.
(b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
of Common Stock subject to such Stock Award unless and until such Participant
has satisfied all requirements for exercise of the Stock Award pursuant to its
terms.
(c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any
instrument executed or Stock Award granted pursuant thereto shall confer upon
any Participant any right to
13.
<PAGE> 14
continue to serve the Company or an Affiliate in the capacity in effect at the
time the Stock Award was granted or shall affect the right of the Company or an
Affiliate to terminate (i) the employment of an Employee with or without notice
and with or without cause, (ii) the service of a Consultant pursuant to the
terms of such Consultant's agreement with the Company or an Affiliate or (iii)
the service of a Director pursuant to the Bylaws of the Company or an Affiliate,
and any applicable provisions of the corporate law of the state in which the
Company or the Affiliate is incorporated, as the case may be.
(d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that
the aggregate Fair Market Value (determined at the time of grant) of Common
Stock with respect to which Incentive Stock Options are exercisable for the
first time by any Non-Employee Director during any calendar year (under all
plans of the Company and its Affiliates) exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(e) INVESTMENT ASSURANCES. The Company may require a Participant, as
a condition of exercising or acquiring Common Stock under any Stock Award, (i)
to give written assurances satisfactory to the Company as to the Participant's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (ii) to
give written assurances satisfactory to the Company stating that the Participant
is acquiring Common Stock subject to the Stock Award for the Participant's own
account and not with any present intention of selling or otherwise distributing
the Common Stock. The foregoing requirements, and any assurances given pursuant
to such requirements, shall be inoperative if (iii) the issuance of the shares
of Common Stock upon the exercise or acquisition of Common Stock under the Stock
Award has been registered under a then currently effective registration
statement under the Securities Act or (iv) as to any particular requirement, a
determination is made by counsel for the Company that such requirement need not
be met in the circumstances under the then applicable securities laws. The
Company may, upon advice of counsel to the Company, place legends on stock
certificates issued under the Plan as such counsel deems necessary or
appropriate in order to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the Common Stock.
(f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a
Stock Award Agreement, the Participant may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of Common
Stock under a Stock Award by any of the following means (in addition to the
Company's right to withhold from any compensation paid to the Participant by the
Company) or by a combination of such means: (i) tendering a cash payment; (ii)
authorizing the Company to withhold shares of Common Stock from the shares of
Common Stock otherwise issuable to the Participant as a result of the exercise
or acquisition of Common Stock under the Stock Award; or (iii) delivering to the
Company owned and unencumbered shares of the Common Stock. Notwithstanding the
foregoing, the Company shall not be authorized to withhold shares of Common
Stock at rates in excess of the minimum statutory withholding rates for federal
and state tax purposes, including payroll taxes.
14.
<PAGE> 15
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common
Stock subject to the Plan, or subject to any Stock Award, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject to the Plan
pursuant to subsection 4(a) and the maximum number of securities subject to
award to any person pursuant to subsection 5(c), and the outstanding Stock
Awards will be appropriately adjusted in the class(es) and number of securities
and price per share of Common Stock subject to such outstanding Stock Awards.
The Board shall make such adjustments, and its determination shall be final,
binding and conclusive. (The conversion of any convertible securities of the
Company shall not be treated as a transaction "without receipt of consideration"
by the Company.)
(b) CHANGE IN CONTROL. In the event of (i) a dissolution, liquidation
or sale of substantially all of the assets of the Company, (ii) a merger or
consolidation in which the Company is not the surviving corporation or (iii) a
reverse merger in which the Company is the surviving corporation but the shares
of Common Stock outstanding immediately preceding the merger are converted by
virtue of the merger into other property, whether in the form of securities,
cash or otherwise, then, to the extent permitted by applicable law: (i) any
surviving corporation shall assume any Stock Awards outstanding under the Plan
or shall substitute similar stock awards (including an award to acquire the same
consideration paid to the stockholders in the transaction described in this
subsection 12(c)) for those outstanding under the Plan, or (ii) such Stock
Awards shall continue in full force and effect. In the event any surviving
corporation refuses to assume or continue such Stock Awards, or to substitute
similar stock awards for those outstanding under the Plan, then with respect to
Stock Awards held by Participants whose Continuous Service has not terminated,
the time during which such Stock Awards may be exercised shall be accelerated,
and the Stock Awards terminated if not exercised prior to such event.
13. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) AMENDMENT OF PLAN. The Board at any time, and from time to time,
may amend the Plan. However, except as provided in Section 12 relating to
adjustments upon changes in Common Stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3
or any Nasdaq or securities exchange listing requirements.
(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion,
submit any other amendment to the Plan for stockholder approval, including, but
not limited to, amendments to the Plan intended to satisfy the requirements of
Section 162(m) of the Code and the regulations thereunder regarding the
exclusion of performance-based compensation from the limit on corporate
deductibility of compensation paid to certain executive officers.
15.
<PAGE> 16
(c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the
Board may amend the Plan in any respect the Board deems necessary or advisable
to provide eligible Employees with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted
before amendment of the Plan shall not be impaired by any amendment of the Plan
unless (i) the Company requests the consent of the Participant and (ii) the
Participant consents in writing.
(e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time
to time, may amend the terms of any one or more Stock Awards; provided, however,
that the rights under any Stock Award shall not be impaired by any such
amendment unless (i) the Company requests the consent of the Participant and
(ii) the Participant consents in writing.
14. TERMINATION OR SUSPENSION OF THE PLAN.
(a) PLAN TERM. The Board may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate on the day before the
tenth (10th) anniversary of the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is earlier. No Stock
Awards may be granted under the Plan while the Plan is suspended or after it is
terminated.
(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan
shall not impair rights and obligations under any Stock Award granted while the
Plan is in effect, except with the written consent of the Participant.
15. EFFECTIVE DATE OF PLAN.
The Plan shall become effective on the date on which it is adopted by
the Board, but no Stock Award shall be exercised (or, in the case of a stock
bonus, shall be granted) unless and until the Plan has been approved by the
stockholders of the Company, which approval shall be within twelve (12) months
before or after the date the Plan is adopted by the Board.
16. CHOICE OF LAW.
The law of the State of Delaware shall govern all questions concerning
the construction, validity and interpretation of this Plan, without regard to
such state's conflict of laws rules.
16.
<PAGE> 17
VIXEL CORPORATION
1999 EQUITY INCENTIVE PLAN
STOCK OPTION AGREEMENT
(INCENTIVE AND NONSTATUTORY STOCK OPTIONS)
Pursuant to your Stock Option Grant Notice ("Grant Notice") and this
Stock Option Agreement, Vixel Corporation (the "Company") has granted you an
option under its 1999 Equity Incentive Plan (the "Plan") to purchase the number
of shares of the Company's Common Stock indicated in your Grant Notice at the
exercise price indicated in your Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option
will vest as provided in your Grant Notice, provided that vesting will cease
upon the termination of your Continuous Service.
2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of
Common Stock subject to your option and your exercise price per share referenced
in your Grant Notice may be adjusted from time to time for Capitalization
Adjustments, as provided in the Plan.
3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in
your Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise"
of your option is permitted) and subject to the provisions of your option, you
may elect at any time that is both (i) during the period of your Continuous
Service and (ii) during the term of your option, to exercise all or part of your
option, including the nonvested portion of your option; provided, however, that:
(a) a partial exercise of your option shall be deemed to cover
first vested shares of Common Stock and then the earliest vesting installment of
unvested shares of Common Stock;
(b) any shares of Common Stock so purchased from installments
that have not vested as of the date of exercise shall be subject to the purchase
option in favor of the Company as described in the Company's form of Early
Exercise Stock Purchase Agreement;
(c) you shall enter into the Company's form of Early Exercise
Stock Purchase Agreement with a vesting schedule that will result in the same
vesting as if no early exercise had occurred; and
(d) if your option is an incentive stock option, then, as
provided in the Plan, to the extent that the aggregate Fair Market Value
(determined at the time of grant) of the shares of Common Stock with respect to
which your option plus all other incentive stock options you hold are
exercisable for the first time by you during any calendar year (under all plans
of the Company and its Affiliates) exceeds one hundred thousand dollars
($100,000), your option(s) or
<PAGE> 18
portions thereof that exceed such limit (according to the order in which they
were granted) shall be treated as nonstatutory stock options.
4. METHOD OF PAYMENT. Payment of the exercise price is due in full
upon exercise of all or any part of your option. You may elect to make payment
of the exercise price in cash or by check or in any other manner PERMITTED BY
YOUR GRANT NOTICE, which may include one or more of the following:
(a) In the Company's sole discretion at the time your option
is exercised and provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, pursuant to a
program developed under Regulation T as promulgated by the Federal Reserve Board
that, prior to the issuance of Common Stock, results in either the receipt of
cash (or check) by the Company or the receipt of irrevocable instructions to pay
the aggregate exercise price to the Company from the sales proceeds.
(b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, by delivery of
already-owned shares of Common Stock either that you have held for the period
required to avoid a charge to the Company's reported earnings (generally six
months) or that you did not acquire, directly or indirectly from the Company,
that are owned free and clear of any liens, claims, encumbrances or security
interests, and that are valued at Fair Market Value on the date of exercise.
"Delivery" for these purposes, in the sole discretion of the Company at the time
you exercise your option, shall include delivery to the Company of your
attestation of ownership of such shares of Common Stock in a form approved by
the Company. Notwithstanding the foregoing, you may not exercise your option by
tender to the Company of Common Stock to the extent such tender would violate
the provisions of any law, regulation or agreement restricting the redemption of
the Company's stock.
(c) Pursuant to the following deferred payment alternative:
(i) Not less than one hundred percent (100%) of the
aggregate exercise price, plus accrued interest, shall be due four (4) years
from date of exercise or, at the Company's election, upon termination of your
Continuous Service.
(i) Interest shall be compounded at least annually and
shall be charged at the minimum rate of interest necessary to avoid the
treatment as interest, under any applicable provisions of the Code, of any
portion of any amounts other than amounts stated to be interest under the
deferred payment arrangement.
(iii) At any time that the Company is incorporated in
Delaware, payment of the Common Stock's "par value," as defined in the Delaware
General Corporation Law, shall be made in cash and not by deferred payment.
(iv) In order to elect the deferred payment alternative,
you must, as a part of your written notice of exercise, give notice of the
election of this payment alternative and, in order to secure the payment of the
deferred exercise price to the Company hereunder, if the Company so requests,
you must tender to the Company a promissory note and a security agreement
covering the purchased shares of Common Stock, both in form and substance
<PAGE> 19
satisfactory to the Company, or such other or additional documentation as the
Company may request.
5. WHOLE SHARES. You may exercise your option only for whole shares
of Common Stock.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the
contrary contained herein, you may not exercise your option unless the shares of
Common Stock issuable upon such exercise are then registered under the
Securities Act or, if such shares of Common Stock are not then so registered,
the Company has determined that such exercise and issuance would be exempt from
the registration requirements of the Securities Act. The exercise of your option
must also comply with other applicable laws and regulations governing your
option, and you may not exercise your option if the Company determines that such
exercise would not be in material compliance with such laws and regulations.
7. TERM. The term of your option commences on the Date of Grant and
expires upon the EARLIEST of the following:
(a) three (3) months after the termination of your Continuous
Service for any reason other than your Disability or death, provided that if
during any part of such three- (3-) month period your option is not exercisable
solely because of the condition set forth in the preceding paragraph relating to
"Securities Law Compliance," your option shall not expire until the earlier of
the Expiration Date or until it shall have been exercisable for an aggregate
period of three (3) months after the termination of your Continuous Service;
(b) twelve (12) months after the termination of your
Continuous Service due to your Disability;
(c) eighteen (18) months after your death if you die either
during your Continuous Service or within three (3) months after your Continuous
Service terminates;
(d) the Expiration Date indicated in your Grant Notice; or
(e) the tenth (10th) anniversary of the Date of Grant.
If your option is an incentive stock option, note that, to obtain the
federal income tax advantages associated with an "incentive stock option," the
Code requires that at all times beginning on the date of grant of your option
and ending on the day three (3) months before the date of your option's
exercise, you must be an employee of the Company or an Affiliate, except in the
event of your death or Disability. The Company has provided for extended
exercisability of your option under certain circumstances for your benefit but
cannot guarantee that your option will necessarily be treated as an "incentive
stock option" if you continue to provide services to the Company or an Affiliate
as a Consultant or Director after your employment terminates or if you otherwise
exercise your option more than three (3) months after the date your employment
terminates.
<PAGE> 20
8. EXERCISE.
(a) You may exercise the vested portion of your option (and
the unvested portion of your option if your Grant Notice so permits) during its
term by delivering a Notice of Exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition
to any exercise of your option, the Company may require you to enter into an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option, (2) the lapse of any substantial risk of forfeiture to which the
shares of Common Stock are subject at the time of exercise, or (3) the
disposition of shares of Common Stock acquired upon such exercise.
(c) If your option is an incentive stock option, by exercising
your option you agree that you will notify the Company in writing within fifteen
(15) days after the date of any disposition of any of the shares of the Common
Stock issued upon exercise of your option that occurs within two (2) years after
the date of your option grant or within one (1) year after such shares of Common
Stock are transferred upon exercise of your option.
9. TRANSFERABILITY. Your option is not transferable, except by will
or by the laws of descent and distribution, and is exercisable during your life
only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.
10. RIGHT OF REPURCHASE. To the extent provided in the Company's
bylaws as amended from time to time, the Company shall have the right to
repurchase all or any part of the shares of Common Stock you acquire pursuant to
the exercise of your option.
11. OPTION NOT A SERVICE CONTRACT. Your option is not an employment
or service contract, and nothing in your option shall be deemed to create in any
way whatsoever any obligation on your part to continue in the employ of the
Company or an Affiliate, or of the Company or an Affiliate to continue your
employment. In addition, nothing in your option shall obligate the Company or an
Affiliate, their respective shareholders, Boards of Directors, Officers or
Employees to continue any relationship that you might have as a Director or
Consultant for the Company or an Affiliate.
12. WITHHOLDING OBLIGATIONS.
(a) At the time you exercise your option, in whole or in part,
or at any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "cashless
exercise" pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company or an Affiliate, if any, which arise in connection
with your option. Notwithstanding
<PAGE> 21
the foregoing, the Company shall not be authorized to withhold shares of Common
Stock at rates in excess of the minimum statutory withholding rates for federal
and state tax purposes, including payroll taxes.
(b) Upon your request and subject to approval by the Company,
in its sole discretion, and compliance with any applicable conditions or
restrictions of law, the Company may withhold from fully vested shares of Common
Stock otherwise issuable to you upon the exercise of your option a number of
whole shares of Common Stock having a Fair Market Value, determined by the
Company as of the date of exercise, not in excess of the minimum amount of tax
required to be withheld by law. If the date of determination of any tax
withholding obligation is deferred to a date later than the date of exercise of
your option, share withholding pursuant to the preceding sentence shall not be
permitted unless you make a proper and timely election under Section 83(b) of
the Code, covering the aggregate number of shares of Common Stock acquired upon
such exercise with respect to which such determination is otherwise deferred, to
accelerate the determination of such tax withholding obligation to the date of
exercise of your option. Notwithstanding the filing of such election, shares of
Common Stock shall be withheld solely from fully vested shares of Common Stock
determined as of the date of exercise of your option that are otherwise issuable
to you upon such exercise. Any adverse consequences to you arising in connection
with such share withholding procedure shall be your sole responsibility.
(c) You may not exercise your option unless the tax
withholding obligations of the Company and/or any Affiliate are satisfied.
Accordingly, you may not be able to exercise your option when desired even
though your option is vested, and the Company shall have no obligation to issue
a certificate for such shares of Common Stock or release such shares of Common
Stock from any escrow provided for herein.
13. NOTICES. Any notices provided for in your option or the Plan
shall be given in writing and shall be deemed effectively given upon receipt or,
in the case of notices delivered by mail by the Company to you, five (5) days
after deposit in the United States mail, postage prepaid, addressed to you at
the last address you provided to the Company.
14. GOVERNING PLAN DOCUMENT. Your option is subject to all the
provisions of the Plan, the provisions of which are hereby made a part of your
option, and is further subject to all interpretations, amendments, rules and
regulations which may from time to time be promulgated and adopted pursuant to
the Plan. In the event of any conflict between the provisions of your option and
those of the Plan, the provisions of the Plan shall control.
<PAGE> 22
VIXEL CORPORATION
1999 EQUITY INCENTIVE PLAN
NON-EMPLOYEE DIRECTOR STOCK OPTION AGREEMENT
Pursuant to the 1999 Equity Incentive Plan (the "Plan") and this Non-Employee
Director Stock Option Agreement, Vixel Corporation (the "Company") has granted
you a Nonstatutory Stock Option under the Plan to purchase
__________________________ (________) shares of the Company's Common Stock at an
exercise price of $___________ per share. Capitalized terms not defined in this
Stock Option Agreement are defined in the Plan.
The details of your option are as follows:
1. NUMBER OF SHARES AND EXERCISE PRICE. Pursuant to your option, you
may purchase __________________________ (________) shares of the Company's
Common Stock at an exercise price of $___________ per share subject to the terms
and conditions set forth in this Stock Option Agreement and the Plan. The number
of shares and exercise price subject to your option may be adjusted from time to
time to reflect Capitalization Adjustments, as provided in the Plan.
2. VESTING. Your option is fully vested.
3. DATE OF GRANT. Your option has been granted effective ___________
(the "Date of Grant").
4. METHOD OF PAYMENT. Payment of the exercise price is due in full
upon exercise of all or any part of your option. You may elect to make payment
of the exercise price in cash or by check or by one or more of the following:
(a) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, then pursuant
to a program developed under Regulation T as promulgated by the Federal Reserve
Board which, prior to the issuance of Common Stock, results in either the
receipt of cash (or check) by the Company or the receipt of irrevocable
instructions to pay the aggregate exercise price to the Company from the sales
proceeds (a "cashless exercise").
(b) Provided that at the time of exercise the Common Stock is
publicly traded and quoted regularly in The Wall Street Journal, then by
delivery of already-owned shares of Common Stock (valued at their Fair Market
Value on the date of exercise) if (i) either you have held the already-owned
shares for the period required to avoid a charge to the Company's reported
earnings (generally six months) or you did not acquire the already-owned shares,
directly or indirectly from the Company, and (ii) you own the already-owned
shares free and clear of any liens, claims, encumbrances or security interests.
"Delivery" for these purposes shall include delivery to the Company of your
attestation of ownership of such shares of Common Stock in a form approved by
the Company. Notwithstanding the foregoing, your option may not be exercised by
tender to the Company of Common Stock to the extent such
<PAGE> 23
tender would constitute a violation of the provisions of any law, regulation or
agreement restricting the redemption of the Company's stock.
5. WHOLE SHARES. Your option may only be exercised for whole shares.
6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the
contrary contained herein, your option may not be exercised unless the shares
issuable upon exercise of your option are then registered under the Securities
Act or, if such shares are not then so registered, the Company has determined
that such exercise and issuance would be exempt from the registration
requirements of the Securities Act. The exercise of your option must also comply
with other applicable laws and regulations governing the option, and the option
may not be exercised if the Company determines that the exercise would not be in
material compliance with such laws and regulations.
7. TERM. The term of your option commences on the Date of Grant and
expires upon the EARLIEST of the following:
(a) three (3) months after the termination of your Continuous
Service for any reason other than death or Disability, provided that if during
any part of such three- (3-) month period your option is not exercisable solely
because of the condition set forth in the preceding paragraph relating to
"Securities Law Compliance," your option shall not expire until the earlier of
the Expiration Date or until it shall have been exercisable for an aggregate
period of three (3) months after the termination of your Continuous Service;
(b) twelve (12) months after the termination of your
Continuous Service due to Disability;
(c) eighteen (18) months after your death if you die either
during your Continuous Service or within three (3) months after your Continuous
Service terminates for any reason; or
(d) the tenth (10th) anniversary of the Date of Grant.
8. EXERCISE.
(a) You may exercise your option during its term by delivering
a Notice of Exercise (in a form designated by the Company) together with the
exercise price to the Secretary of the Company, or to such other person as the
Company may designate, during regular business hours, together with such
additional documents as the Company may then require.
(b) By exercising your option you agree that, as a condition
to any exercise of your option, the Company may require you to enter an
arrangement providing for the payment by you to the Company of any tax
withholding obligation of the Company arising by reason of (1) the exercise of
your option or (2) the disposition of shares acquired upon such exercise.
9. TRANSFERABILITY. Your option is not transferable, except by will
or by the laws of descent and distribution, and is exercisable during your life
only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company,
<PAGE> 24
you may designate a third party who, in the event of your death, shall
thereafter be entitled to exercise your option.
10. OPTION NOT A SERVICE CONTRACT. Your option is not a service
contract, and nothing in your option shall obligate the Company or an Affiliate,
their respective shareholders, Boards of Directors, officers or employees to
continue any relationship that you might have as a Director.
11. WITHHOLDING OBLIGATIONS.
(a) At the time your option is exercised, in whole or in part,
or at any time thereafter as requested by the Company, you hereby authorize
withholding from payroll and any other amounts payable to you, and otherwise
agree to make adequate provision for (including by means of a "cashless
exercise" pursuant to a program developed under Regulation T as promulgated by
the Federal Reserve Board to the extent permitted by the Company), any sums
required to satisfy the federal, state, local and foreign tax withholding
obligations of the Company or an Affiliate, if any, which arise in connection
with your option. Notwithstanding the foregoing, the Company shall not be
authorized to withhold shares of Common Stock at rates in excess of the minimum
statutory withholding rates for federal and state tax purposes, including
payroll taxes.
(b) Your option is not exercisable unless the tax withholding
obligations of the Company and/or any Affiliate are satisfied. Accordingly, you
may not be able to exercise your option when desired even though your option is
vested.
12. NOTICES. Any notices provided for in your option or the Plan
shall be given in writing and shall be deemed effectively given upon receipt or,
in the case of notices delivered by the Company to you, five (5) days after
deposit in the United States mail, postage prepaid, addressed to you at the last
address you provided to the Company.
13. GOVERNING PLAN DOCUMENT. Your option is subject to all applicable
provisions of the Plan, which are hereby made a part of your option, and is
further subject to all interpretations, amendments, rules and regulations which
may from time to time be promulgated and adopted pursuant to the Plan. In the
event of any conflict between the provisions of your option and those of the
Plan, the provisions of the Plan shall control.
<PAGE> 25
NOTICE OF EXERCISE
Vixel Corporation
_________________________
_________________________
_________________________ Date of Exercise: ____________
Ladies and Gentlemen:
This constitutes notice under my stock option that I elect to purchase
the number of shares for the price set forth below.
<TABLE>
<S> <C> <C>
Type of option (check one): Incentive [ ] Nonstatutory [ ]
Stock option dated: _______________
Number of shares as
to which option is
exercised: _______________
Certificates to be
issued in name of: _______________
Total exercise price: $______________
Cash payment delivered
herewith: $______________
Value of ________ shares of
Vixel Corporation common
stock delivered herewith(1): $______________
</TABLE>
By this exercise, I agree (i) to provide such additional documents as
you may require pursuant to the terms of the 1999 Equity Incentive Plan, (ii) to
provide for the payment by me to you (in the manner designated by you) of your
withholding obligation, if any, relating to the exercise of this option, and
(iii) if this exercise relates to an incentive stock option, to notify you in
writing within fifteen (15) days after the date of any disposition of any of the
shares of
Common Stock issued upon exercise of this option that occurs within two (2)
years after the date of grant of this option or within one (1) year after such
shares of Common Stock are issued upon exercise of this option.
- --------
(1) Shares must meet the public trading requirements set forth in the option.
Shares must be valued in accordance with the terms of the option being
exercised, must have been owned for the minimum period required in the option,
and must be owned free and clear of any liens, claims, encumbrances or security
interests. Certificates must be endorsed or accompanied by an executed
assignment separate from certificate.
<PAGE> 26
Very truly yours,
_____________________________________
<PAGE> 27
VIXEL CORPORATION
STOCK OPTION GRANT NOTICE
(1999 EQUITY INCENTIVE PLAN)
Vixel Corporation (the "Company"), pursuant to its 1999 Equity Incentive Plan
(the "Plan"), hereby grants to Optionholder an option to purchase the number of
shares of the Company's Common Stock set forth below. This option is subject to
all of the terms and conditions as set forth herein and in the Stock Option
Agreement, the Plan and the Notice of Exercise, all of which are attached hereto
and incorporated herein in their entirety.
Optionholder: _______________________________
Date of Grant: _______________________________
Vesting Commencement Date: _______________________________
Number of Shares Subject to Option: _______________________________
Exercise Price (Per Share): _______________________________
Total Exercise Price: _______________________________
Expiration Date: _______________________________
TYPE OF GRANT: [ ] Incentive Stock Option [ ] Nonstatutory Stock Option
EXERCISE SCHEDULE: [ ] Same as Vesting Schedule [ ] Early Exercise Permitted
VESTING SCHEDULE: [1/4th of the shares vest one year after the Vesting
Commencement Date. 1/16th of the shares vest monthly
thereafter over the next three years.]
PAYMENT: By one or a combination of the following items (described
in the Stock Option Agreement):
By cash or check
Pursuant to a Regulation T Program if the Shares
are publicly traded
By delivery of already-owned shares if the Shares
are publicly traded
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges
receipt of, and understands and agrees to, this Grant Notice, the Stock Option
Agreement and the Plan. Optionholder further acknowledges that as of the Date of
Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the
entire understanding between Optionholder and the Company regarding the
acquisition of stock in the Company and supersede all prior oral and written
agreements on that subject with the exception of (i) options previously granted
and delivered to Optionholder under the Plan, and (ii) the following agreements
only:
OTHER AGREEMENTS: _______________________________________
_______________________________________
VIXEL CORPORATION OPTIONHOLDER:
By: _____________________________ __________________________________
Signature Signature
Title: __________________________ Date: ____________________________
Date: ___________________________
ATTACHMENTS: Stock Option Agreement, 1999 Equity Incentive Plan and Notice of
Exercise
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1/A
of our reports dated May 19, 1999, except for the last paragraph of Note 8 which
is as of June 22, 1999, relating to the financial statements and financial
statement schedules of Vixel Corporation which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts"
and "Selected Financial Data" in such Prospectus. However, it should be noted
that PricewaterhouseCoopers LLP has not prepared or certified "Selected
Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
- ------------------------------------
PricewaterhouseCoopers LLP
Seattle, Washington
August 12, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Vixel Corporation
We consent to the use in this Amendment No. 1 to the Registration Statement
on Form S-1 of our report included herein dated May 1, 1997 relating to the
balance sheet of Arcxel Technologies, Inc. as of December 31, 1996 and the
related statements of operations, stockholders' equity and cash flows for the
period from June 18, 1996 (inception) to December 31, 1996, and to the reference
to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP
- ------------------------------------
KPMG LLP
Orange County, California
August 12, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1/A
of our report dated April 24, 1998 relating to the financial statements of
Arcxel Technologies, Inc., which appears in such Registration Statement. We also
consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Prospectus. However, it should be noted that
PricewaterhouseCoopers LLP has not prepared or certified "Selected Financial
Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
- ------------------------------------
PricewaterhouseCoopers LLP
Seattle, Washington
August 12, 1999
