<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1999
REGISTRATION NO. 333-86501
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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JNI CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 3674 33-074004
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION NUMBER) IDENTIFICATION NO.)
</TABLE>
9775 TOWNE CENTRE DRIVE
SAN DIEGO, CALIFORNIA 92121
(858) 535-3121
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DR. TERRY M. FLANAGAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JNI CORPORATION
9775 TOWNE CENTRE DRIVE
SAN DIEGO, CALIFORNIA 92121
(858) 535-3121
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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CAMERON J. RAINS, ESQ. DAVID A. KRINSKY, ESQ.
SCOTT M. STANTON, ESQ. KAREN K. DREYFUS, ESQ.
GRAY CARY WARE & FREIDENRICH LLP O'MELVENY & MYERS LLP
4365 EXECUTIVE DRIVE, SUITE 1600 610 NEWPORT CENTER DRIVE, 17TH FLOOR
SAN DIEGO, CALIFORNIA, 92121-2189 NEWPORT BEACH, CALIFORNIA 92660
(858) 677-1400 (949) 760-9600
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (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, please check the following box
and list the Securities Act registration 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 number of the earlier effective registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
We will amend and complete the information in this prospectus. Although we are
permitted by US federal securities law to offer these securities using this
prospectus, we may not sell them or accept your offer to buy them until the
documentation filed with the SEC relating to these securities has been declared
effective by the SEC. This prospectus is not an offer to sell these securities
or our solicitation of your offer to buy these securities in any jurisdiction
where that would not be permitted or legal.
SUBJECT TO COMPLETION OCTOBER 22, 1999
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<S> <C> <C>
Prospectus JNI LOGO
, 1999
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4,900,000 SHARES OF COMMON STOCK
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THE COMPANY:
- - We are a leading designer and supplier of fibre channel hardware and software
products that form critical elements of storage area networks.
- - JNI Corporation
9775 Towne Centre Drive
San Diego, California 92121
(858) 535-3121
www.jni.com
PROPOSED SYMBOL & MARKET:
- - JNIC/NASDAQ NATIONAL MARKET
THE OFFERING:
- - We are offering 2,800,000 shares of our common stock.
- - Jaymark, Inc., our principal stockholder, is offering 2,100,000 shares of our
common stock.
- - The underwriters have an option to purchase an additional 735,000 shares from
the selling stockholder to cover over-allotments.
- - This is our initial public offering, and we anticipate that the initial public
offering price will be between $12.00 and $14.00 per share.
- - We intend to use the net proceeds from this offering for repayment of
indebtedness and general corporate purposes, including product development,
sales and marketing and potential acquisitions of products, technologies or
companies.
- - Closing: , 1999.
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<CAPTION>
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Per Share Total
- -------------------------------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to JNI:
Proceeds to the selling stockholder:
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 5.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. NOR HAVE
THEY MADE, NOR WILL THEY MAKE, ANY DETERMINATION AS TO WHETHER ANYONE SHOULD BUY
THESE SECURITIES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
DLJDIRECT INC.
<PAGE> 3
[EDGAR ARTWORK DESCRIPTIONS]
Location: inside front cover
Title: "JNI Fibre Channel Technology" is in the upper right hand corner of the
page in black and red lettering.
In the upper right corner of the page, across from the title is the caption
"Focus" in white lettering against a red background. Directly behind the caption
is text that reads:
"We base all of our products on Fibre Channel technology. By focusing entirely
on the design and development of Fibre Channel products, we believe that we can
enhance our existing products and develop new products for SANs and other
applications rapidly and efficiently." Below the text is an image depicting a
Host Bus Adapter.
Directly below the title is the caption "Manageability" in white lettering
against a purple background. Directly below the caption is text that reads:
"Our software can help eliminate configuration errors, which are the most common
cause of SAN problems. Our EZ Fibre SAN management software is a powerful and
easy-to-use tool." Below the text is an image depicting a personal computer.
In the center of the page is the caption "Performance" in white lettering
against a green background. Directly below the caption is text that reads:
"Our ASIC technology enables an extraordinarily high performance connection to
the SAN. We believe that our products deliver exceptional price/performance
regardless of scale or configuration." Below the text is an image depicting
ASICs.
In the lower left corner of the page is the caption "Reliability" in white
lettering against a blue background. Directly below the caption is text that
reads:
"JNI products are installed in some of the most demanding business environments.
Our customers typically have extremely low tolerance for system down time."
In the lower right hand corner of the page is the caption "Quality" in white
lettering against a yellow background. Directly below the caption is text that
reads:
"We design, manufacture and test our products to exceed the high standards of
quality set by our customers. Each component is designed and tested to perform
in environmental conditions that are more extreme than what our customers will
encounter in normal use." Below the text is the JNI logo in white and red
lettering.
<PAGE> 4
[LOCATION: TWO PAGE FOLD-OUT]
JNI Technology
in the SAN
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[HOST BUS ADAPTER HOST BUS ADAPTERS 3 Disk Arrays 4 Enterprise Servers
GRAPHIC] [Disk Arrays Graphic] [Enterprise Servers Graphic]
Our Fibre Channel Host Bus
Adapters work with all SAN 3 ASICs and 3 ASICs and
topologies and with a wide 1 Host Bus Adapter 1 Host Bus Adapter
variety of operating systems, [Graphic] [Graphic]
including Windows NT, Solaris,
Linux, Mac OS, and Unix through
SBus and PCI Interfaces, making [JNI LOGO]
our host bus adapters offering Fibre Channel
the broadest currently available. Technology
Because of the high level of
reliability of our device driver
software and the functionality [Host Bus 3 ASICs and
of our Host Bus Adapters, we Adapter and 1 Host Bus Adapter
have been certified as a Personal Computer [Graphic]
designated supplier by leading Graphic]
storage and SAN OEMs. 3 Department Servers
5 Workstations [Department Servers
[ASIC GRAPHIC] ASICs [Personal Computer Graphic]
Graphic]
We incorporate our Emerald Fibre
Channel controller ASICs into our
latest generation of host bus [ASIC Graphic]
adapters. Commercially available
versions of the Emerald transmit
data at 1 gigabit per second, and Tape Library
we have recently introduced
versions capable of sustained
2 gigabit per second transmission [Tape Library Graphic]
speeds, the fastest in the industry.
[PERSONAL COMPUTER SOFTWARE
[GRAPHIC]
We offer software solutions
designed to simplify SAN
configuration and to provide
diagnostic and monitoring
information to SAN administrators.
Our software enables the user to
easily configure complex systems
that include multiple PCI busses
and multiple host bus adapters.
</TABLE>
The graphic radiates out from the central hub, which is the JNI Logo. The
five Workstations connect to the Host Bus Adapter/personal computer graphic
which in turn connects directly to the JNI Logo. The three Disk Array graphics
connect to the ASICs/Host Bus Adapter graphic which in turn connects directly
to the JNI Logo. The four Enterprise Server graphic connects to the ASICs/Host
Bus Adapter graphic which in turn connects directly to the JNI Logo. The three
Department Servers connect to the ASICs/Host Bus Adapter which in turn connects
directly to the JNI Logo.
<PAGE> 5
TABLE OF CONTENTS
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PAGE
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Prospectus Summary.................. 1
Risk Factors........................ 5
Forward-Looking Statements.......... 17
Use of Proceeds..................... 18
Dividend Policy..................... 18
Capitalization...................... 19
Dilution............................ 20
Selected Financial Data............. 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 23
Business............................ 34
</TABLE>
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<CAPTION>
PAGE
<S> <C>
Management.......................... 52
Certain Transactions................ 60
Principal and Selling
Stockholders...................... 64
Description of Capital Stock........ 65
Shares Eligible for Future Sale..... 68
Underwriting........................ 70
Legal Matters....................... 72
Experts............................. 72
Where You Can Find More Information
About JNI......................... 73
Index to Financial Statements....... F-1
</TABLE>
i
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights information appearing in other sections of this
prospectus. You should read this entire prospectus carefully. Unless otherwise
indicated, all information contained in this prospectus gives effect to the
conversion of all outstanding shares of our convertible preferred stock into
common stock upon the closing of this offering and assumes the underwriters'
over-allotment option is not exercised. All share and per share information in
this prospectus gives effect to a 0.7 for 1 reverse stock split effected in
October 1999.
JNI CORPORATION
We are a leading designer and supplier of Fibre Channel hardware and
software products that connect servers and data storage devices to form storage
area networks, or SANs. SANs were made possible by the emergence of Fibre
Channel technology, a new generation of server to storage communications
technology that improves data communication speeds, connectivity, distance
between connections, reliability and accessability. Our Fibre Channel
development efforts began in 1993, and we shipped some of the first commercially
available Fibre Channel products in 1995. Throughout our history, we have
designed Fibre Channel products for the most demanding enterprise-level systems
running applications that are integral to our customers' businesses. We
currently market high-performance application specific integrated circuits, or
ASICs, based on our proprietary technology, a broad range of Fibre Channel host
bus adapters and software that facilitates advanced SAN device integration and
management. Our products provide flexibility, scalability and availability, as
well as manageability and superior performance in network storage systems.
In recent years, the volume of electronic data generated, processed, stored
and manipulated has expanded significantly as a result of the growth of
data-intensive applications such as transaction processing, data mining, data
warehousing, multimedia and Internet applications. International Data
Corporation, or IDC, estimates that the amount of stored network data grew from
750 terabytes in 1994 to 10,500 terabytes in 1998, and that it will increase to
420,000 terabytes in 2002. With the dramatic increase in information storage and
data retrieval requirements, system performance has become increasingly
constrained by traditional input/output technologies, such as the currently
prevailing server to storage communications protocol small computer systems
interface, or SCSI. The lack of reliability of data delivery, the support for a
limited number of connections and the short transport distance that characterize
SCSI have limited the capabilities of traditional network storage architectures
and placed constraints on the size of the network. Fibre Channel overcomes the
limitations of traditional data communications technologies, because it offers
the connectivity, distance and access benefits of networking architectures
combined with the high performance and quick response needed for data storage
applications. IDC forecasts that the market for products based on Fibre Channel
technology will grow from approximately $2.0 billion in 1998 to approximately
$23.0 billion by 2002.
We offer a broad range of Fibre Channel host bus adapters for the SAN
market. Our products can be used both with the SBus interface developed by Sun
Microsystems and the peripheral component interconnect, or PCI, interface. Our
host bus adapters are also deployable across a wide variety of network
configurations and operating systems. We have designed our ASICs to work in the
most demanding, high-end enterprise applications and offer what we believe is
the lowest available latency in complex switched environments. We were the first
in the industry to demonstrate products capable of sustained 2 gigabit
1
<PAGE> 7
per second Fibre Channel transmissions. Our proprietary configuration and driver
software incorporates advanced features that significantly enhance and simplify
SAN device integration and management. We work closely with our customers to
tailor our products to their specific requirements by making software driver
modifications to optimize performance with our customers' products. Although our
Fibre Channel ASICs and host bus adapters find their primary application in
SANs, they have also been deployed for use with digital graphics, video networks
and non-linear digital editing systems in the advertising, broadcast and
entertainment industries as well as for high speed data processing applications
in a variety of industries including Internet service providers.
Our objective is to become the market leader in high-speed Fibre Channel
connectivity products for SANs and other applications by providing a family of
integrated ASIC, host bus adapter and software products that exceed competitive
offerings in features, flexibility and price/performance. Key elements of our
strategy include the following:
- focus exclusively on Fibre Channel;
- expand penetration of existing original equipment manufacturer, or OEM,
customers and leverage multiple distribution channels;
- leverage Fibre Channel technology and quality leadership;
- provide customer-driven product functionality and high-quality customer
service and support to meet end-user needs;
- promote the JNI brand; and
- establish and maintain strategic alliances and pursue acquisitions.
We sell our products domestically and internationally primarily through OEM
and distribution channel customers including distributors, system integrators
and value-added resellers who sell directly to end-users. We have long-term
relationships and strategic alliances with many of our customers, including
Amdahl, AVID, Chaparral, Data General, EDS, EMC, Hitachi, McData and StorageTek.
End-users of our products include Amazon.com, Boeing, Charles Schwab,
DaimlerChrysler, Federal Express, GTE, Lexis Nexis, Mobil, Morgan Stanley and US
WEST Capital Funding.
------------------------
Our principal offices are located at 9775 Towne Centre Drive, San Diego,
California 92121. Our telephone number is (858) 535-3121. Our website address is
www.jni.com. The information found on our website is not a part of this
prospectus.
2
<PAGE> 8
THE OFFERING
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Common stock offered:
By JNI.......................... 2,800,000 shares
By the selling stockholder...... 2,100,000 shares
----------
Total........................ 4,900,000 shares
Common stock to be outstanding
after this offering............. 21,782,895 shares (see "Capitalization")
Use of proceeds................... We intend to use the estimated net proceeds
from this offering for the following purposes:
- repayment of indebtedness of approximately
$4.3 million to Jaycor, Inc., an affiliate;
and
- working capital and general corporate
purposes, including product development, sales
and marketing and potential acquisitions of
products, technologies or companies. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol.......................... JNIC
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The shares of common stock outstanding after this offering include 840,000
shares of common stock issuable upon exercise of a warrant held by Adaptec, Inc.
with an aggregate exercise price of $100. The shares of common stock outstanding
after this offering exclude 6,884,241 shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which 5,066,691
shares are subject to outstanding options as of September 30, 1999 at a weighted
average exercise price per share of $1.63.
3
<PAGE> 9
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The tables below summarize financial data of JNI set forth in more detail
in the financial statements at the end of this prospectus. The As Adjusted
Balance Sheet data as of September 30, 1999, has been adjusted to reflect (a)
the conversion of convertible preferred stock into common stock at the closing
of this offering, (b) the sale of 2,800,000 shares of common stock by JNI at an
assumed initial public offering price of $13.00 per share and (c) the
application of the net proceeds from such sale. See "Use of Proceeds." For more
information regarding the calculation of the number of shares used in per share
computations, see Note 1 to the Financial Statements included elsewhere in this
prospectus.
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NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................. $ 374 $ 2,903 $12,189 $6,929 $25,764
Gross margin.................. 26 1,651 6,828 3,820 16,069
Operating income (loss)....... (1,487) (1,054) 603 26 1,745
Net income (loss)............. (1,487) (1,184) 311 (169) 2,207
Earnings (loss) per common
share:
Basic...................... $ (3.54) $ (2.82) $ 0.74 $(0.40) $ 5.25
Diluted.................... (3.54) (2.82) 0.02 (0.40) 0.10
Number of shares used in per
share computations:
Basic...................... 420 420 420 420 420
Diluted.................... 420 420 17,977 420 22,867
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<CAPTION>
AS OF SEPTEMBER 30,
1999
-------------------
AS
ACTUAL ADJUSTED
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ (232) $32,545
Total assets............................................. 25,553 54,078
Due to affiliate......................................... 4,252 --
Stockholders' equity..................................... 14,937 47,714
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4
<PAGE> 10
RISK FACTORS
You should carefully consider the following risk factors and all of the
other information included in this prospectus before purchasing our common
stock. Investing in our common stock involves a high degree of risk. Any of the
following risks could materially adversely affect our business, operating
results or financial condition and could result in a complete loss of your
investment.
RISKS RELATING TO OUR BUSINESS
WE HAVE A LIMITED OPERATING HISTORY AND A LIMITED HISTORY OF PROFITABILITY THAT
MAKE AN EVALUATION OF OUR BUSINESS DIFFICULT.
We commenced operations in 1993 as a division of Jaycor, Inc., and, as part
of a corporate reorganization of Jaycor in February 1997, we were incorporated
as a subsidiary of a newly-formed company named Jaymark, Inc., which also became
the parent of Jaycor in that reorganization transaction. We have only recently
begun to operate as an independent entity. While operating as a division of
Jaycor, we shipped our first commercially available Fibre Channel products in
1995, but we did not achieve operating income until the quarter ended September
30, 1998. Because we have a limited operating history, you must consider the
risks and difficulties frequently encountered by early stage companies such as
ours in new and rapidly evolving markets. Although our net revenues have grown
in recent quarters, we may not be able to sustain this growth, and we may not
realize sufficient net revenues to maintain profitability. In addition, because
of the competition in the Fibre Channel and SAN markets and the evolving nature
of these markets, sustaining profitability may be extremely challenging.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO
FLUCTUATE.
Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside of
our control. Accordingly, you should not rely on quarter-to-quarter comparisons
of our operating results as an indication of future performance. It is possible
that in some future periods our operating results will be below the expectations
of public market analysts and investors. In this event, the price of our common
stock will likely decline. Factors which may cause our revenues and operating
results to fluctuate include the factors described in "-- Risks relating to our
business."
Because our revenues in a given quarter depend substantially on orders
booked in that quarter, a decrease in the number of orders we receive is likely
to adversely and disproportionately affect our quarterly operating results. This
is because our expense levels are partially based on our expectations of future
sales, and our expenses may be disproportionately large as compared to sales in
a quarter with reduced orders. Hence, we may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Any shortfall
in sales in relation to our quarterly expectations or any delay of customer
orders would likely have an immediate and adverse impact on our business,
quarterly operating results and financial condition.
BECAUSE WE FOCUS EXCLUSIVELY ON FIBRE CHANNEL PRODUCTS, OUR REVENUES WILL BE
LIMITED IF FIBRE CHANNEL TECHNOLOGY DOES NOT ACHIEVE WIDESPREAD MARKET
ACCEPTANCE.
The growth of the market for our products is dependent upon the broad
acceptance of Fibre Channel technology as an alternative to other technologies
traditionally utilized for network and storage communications. The Fibre Channel
market, while rapidly evolving and attracting an increasing number of market
participants, is still at an early stage of
5
<PAGE> 11
development. If the Fibre Channel market fails to develop, develops more slowly
than anticipated or attracts more competitors than we expect, our business,
operating results and financial condition would be materially adversely
affected. We cannot be certain that Fibre Channel products will gain broader
market acceptance or that customers will choose our technology and products.
To achieve widespread market acceptance, Fibre Channel must supplant
current widely accepted alternative technologies such as SCSI. Because many
technology companies with SCSI-based product portfolios already have (a)
well-established relationships with our current and potential customers, (b)
extensive knowledge of the markets we serve, (c) better name recognition and (d)
extensive development, sales and marketing resources, it may be difficult to
convince customers to adopt Fibre Channel technology. If Fibre Channel does not
replace existing technologies such as SCSI in emerging applications such as SANs
or otherwise achieve broad market acceptance, our growth will be limited.
Additionally, new technologies, such as system input/output, are currently in
development that may compete for market share with Fibre Channel if they are
successfully developed and commercialized. Because these competing new
technologies are likely to have support from technology companies with more
significant resources than we and other Fibre Channel companies have, they may
limit the growth of the Fibre Channel market and therefore our growth.
THE SAN MARKET IN WHICH WE COMPETE IS NEW AND UNPREDICTABLE, AND IF THIS MARKET
DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE, OUR BUSINESS WILL SUFFER.
The market for SANs and the related equipment, including the host bus
adapters, ASICs and management software that we offer, has only recently begun
to develop and is rapidly evolving. If this market does not develop as rapidly
as we anticipate, our operating results may be below the expectations of public
market analysts and investors, which would likely cause our stock price to
decline. Because this market is new, it is difficult to predict its potential
size or future growth rate. Our products are principally purchased for use in
SANs. Accordingly, widespread adoption of SANs as an integral part of
data-intensive enterprise computing environments is critical to our future
success. Potential end-users who have invested substantial resources in their
existing data storage and management systems may be reluctant or slow to adopt a
new approach like the SAN.
BECAUSE WE DEPEND ON A SMALL NUMBER OF OEM AND DISTRIBUTION CHANNEL CUSTOMERS
FOR A SIGNIFICANT PORTION OF OUR REVENUES IN EACH PERIOD, THE LOSS OF ANY OF
THESE CUSTOMERS OR ANY CANCELLATION OR DELAY OF A LARGE PURCHASE BY ANY OF THESE
CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR NET REVENUES.
Historically, a limited number of OEMs and distribution channel customers
has accounted for a significant majority of our total net revenues in each
fiscal period. The loss of any of our key customers, or a significant reduction
in sales to those customers, could significantly reduce our net revenues. We
anticipate that our operating results in any given period will continue to
depend to a significant extent upon revenues from a small number of customers.
In addition, because none of our customers are contractually obligated to
purchase any fixed amount of products from us in the future, they may stop
placing orders with us at any time, regardless of any forecast they may have
previously provided. If any of our large customers stop or delay purchases, our
revenues and profitability would be adversely affected, which could cause our
stock price to decline. We cannot be certain that we will retain our current OEM
or distribution channel customers or that we will be able to recruit additional
or replacement customers. As is common in an emerging technology industry,
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<PAGE> 12
our agreements with OEMs and distribution channel customers are typically
non-exclusive and often may be terminated by either party without cause.
Moreover, many of our OEM and distribution channel customers utilize or carry
competing product lines. If we were to suddenly lose one or more important OEM
or distribution channel customers to a competitor, our business, operating
results or financial condition could be materially adversely affected. Moreover,
some of our OEM customers could develop products internally that would replace
our products. The resulting reduction in sales of our products to any such OEM
customers, in addition to the increased competition presented by these
customers, could have a material adverse effect on our business, operating
results or financial condition.
CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE THAT WE INCUR
COSTS TO UPGRADE OUR INFRASTRUCTURE.
We have recently experienced a period of rapid growth and expansion which
has placed, and continues to place, a significant strain on our resources.
Unless we manage such growth effectively, we may make mistakes in operating our
business such as inaccurate sales forecasting, incorrect material planning or
inaccurate financial reporting, which may result in unanticipated fluctuations
in our operating results. Our management team has had limited experience
managing such rapidly growing companies on a public or private basis. We may not
be able to install adequate control systems in an efficient and timely manner,
and our current or planned personnel, systems, procedures and controls may not
be adequate to support our future operations.
OUR OPERATING RESULTS MAY SUFFER BECAUSE OF INCREASING COMPETITION IN THE FIBRE
CHANNEL MARKET, AS WELL AS ADDITIONAL COMPETITION FROM ALTERNATIVE DATA STORAGE
SOLUTIONS.
The market in which we compete is intensely competitive. As a result, we
will face a variety of significant challenges, including rapid technological
advances, price erosion, changing customer preferences and evolving industry
standards. Our competitors continue to introduce products with improved
price/performance characteristics, and we will have to do the same to remain
competitive. Increased competition could result in significant price
competition, reduced revenues, lower profit margins or loss of market share, any
of which would have a material adverse effect on our business, operating results
and financial condition. We cannot be certain that we will be able to compete
successfully against either current or potential competitors in the future.
Many of our current and potential competitors have substantially greater
financial, technical, marketing and distribution resources than we have. We face
the threat of potential competition from new entrants into the fibre channel
market, including large technology companies who may develop or acquire
differentiating technology and then apply their resources, including established
distribution channels and brand recognition, to obtain significant market share.
It is also possible that we will face increased competition due to mergers or
consolidations of existing or potential competitors. Emerging companies
attempting to obtain a share of the existing market act as potential competition
as well. Our products may also compete at the end-user level with other
technology alternatives, such as SCSI. Further, businesses that implement SANs
may select fully-integrated SAN systems that are offered by large technology
companies. Because such systems do not interoperate with products from
independent open system suppliers, like us, customers that invest in these
systems will be less likely to purchase our products. Other technologies
designed to address the applications served by Fibre Channel today are under
development, and because we focus exclusively on Fibre Channel, our business
would suffer as a result of competition from such competing technologies.
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BECAUSE WE HAVE OPERATED AS A SUBSIDIARY WITHIN A CONSOLIDATED GROUP, OUR
HISTORICAL RESULTS MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS A SEPARATE
COMPANY, AND WE MUST IMPLEMENT SYSTEMS AND HIRE PERSONNEL TO OPERATE AS AN
INDEPENDENT COMPANY. IF WE DO NOT EFFECTIVELY MANAGE THIS TRANSITION, OUR
BUSINESS MAY SUFFER.
JNI was formed as a subsidiary of Jaymark, Inc. in February 1997. Prior to
that time, our operations were conducted as a division of Jaycor, which is also
currently a subsidiary of Jaymark. We have recently taken steps to separate our
operations from those of Jaymark and its affiliates, including plans to
implement financial and accounting systems and the hiring of new management
personnel. Because we have limited experience in operating as an independent
company, we may fail to manage this transition effectively. Any such failure
could adversely affect our business, financial condition or operating results.
The financial information included in this prospectus may not necessarily
reflect our operating results, financial position and cash flows in the future
or what the operating results, financial position and cash flows would have been
had we been a separate, stand-alone entity during the periods presented. We have
historically relied upon Jaycor for many operational functions, such as
accounting, human resources, income tax reporting and purchasing, which we are
now transitioning to JNI personnel. Our financial and accounting systems will
continue to be integrated with and managed by Jaycor through the fiscal quarter
ending December 31, 1999, and it is possible that we will not complete the
transition to our own financial and accounting systems according to schedule. We
also currently rely on our revolving credit agreement with Jaycor for our
working capital, and our insurance coverage is integrated with Jaycor's. We
intend to establish our own credit and insurance arrangements in the near
future, but such arrangements may not be available to us on commercially
reasonable terms, or at all.
IN OUR INDUSTRY, TECHNOLOGY AND OTHER STANDARDS CHANGE RAPIDLY, AND WE MUST KEEP
PACE WITH THE CHANGES TO COMPETE SUCCESSFULLY.
The market for our products is characterized by rapidly changing
technology, evolving industry standards and the frequent introduction of new
products and enhancements. If we do not keep pace with these changes, we may
lose market share to our competitors and fail to meet our financial and
operational objectives. Because our products are designed to work with software
produced by third parties, our operating results could be adversely affected if
such third parties delay introduction of new versions of their software for
which we have designed new products or if they make unanticipated modifications
to such software. Our future success depends in a large part on our ability to
enhance our existing products and to introduce new products on a timely basis to
meet changes in customer preferences and evolving industry standards. We cannot
be certain that we will be successful in designing, supplying and marketing new
products or product enhancements that respond to such changes in a timely manner
and achieve market acceptance. We also cannot be certain that we will be able to
develop the underlying core technologies necessary to create new products and
enhancements, or that we will be able to license the core technologies from
third parties. Additionally, changes in technology and customer preferences
could potentially render our current products uncompetitive or obsolete. If we
are unable, for technological or other reasons, to develop new products or
enhance existing products in a timely manner in response to technological and
market changes, our business, operating results and financial condition would be
materially adversely affected.
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THE SALES CYCLE FOR OUR PRODUCTS IS LONG, AND WE MAY INCUR SUBSTANTIAL,
NON-RECOVERABLE EXPENSES OR DEVOTE SIGNIFICANT RESOURCES TO SALES THAT DO NOT
OCCUR WHEN ANTICIPATED.
Our sales cycle, particularly to OEMs, typically involves a lengthy
qualification cycle during which we generally invest significant resources in
addressing customer specifications. Because of the length of the sales cycle, we
may experience a delay between increasing expenses for research and development
and sales and marketing efforts and the generation of higher revenues, if any,
from such expenditures. The purchase of our products or of solutions that
incorporate our products typically involves significant internal procedures
associated with the evaluation, testing, implementation and acceptance of new
technologies. This evaluation process frequently results in a lengthy sales
process, typically ranging from three months to longer than a year, and subjects
the sales cycle associated with the purchase of our products to a number of
significant risks, including budgetary constraints and internal acceptance
reviews. The length of our sales cycle also varies substantially from customer
to customer.
THE FAILURE OF OUR OEM CUSTOMERS TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE
AND TO SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS COULD ADVERSELY AFFECT
OUR NET REVENUES.
Our ability to generate increased revenues depends significantly upon the
ability and willingness of our OEM customers to develop and promote products on
a timely basis that incorporate our technology. If our OEM customers do not
successfully develop and market the solutions which incorporate our products,
then sales of our products to the OEM customers will be adversely affected. The
ability and willingness of OEM customers to develop and promote such products is
based upon a number of factors beyond our control.
While we have secured numerous design wins for our fibre channel products
from OEM customers, nearly all of these customers are still at the very early
stages of initial commercial shipments or at the developmental stage of
incorporating fibre channel into their systems. Only a limited number of OEM
customers are in full commercial production of products that incorporate our
products. If our developmental and early stage customers are unable to or
otherwise do not ship systems that incorporate our products, or if their shipped
systems are not commercially successful, our business, operating results or
financial condition could be materially adversely affected.
WE EXPECT THE AVERAGE SELLING PRICES OF OUR PRODUCTS TO CONTINUE TO DECREASE
RAPIDLY, WHICH MAY REDUCE GROSS MARGINS OR REVENUES.
The market for Fibre Channel products has experienced rapid erosion of
average selling prices due to a number of factors, including competitive pricing
pressures and rapid technological change. We may experience substantial
period-to-period fluctuations in future operating results due to the erosion of
our average selling prices. We anticipate that the average selling prices of our
products will decrease in the future in response to competitive pricing
pressures, increased sales discounts, new product introductions by us or our
competitors or other factors. Therefore, to maintain our gross margins, we must
develop and introduce on a timely basis new products and product enhancements
and continually reduce our product costs. Our failure to do so would cause our
revenue and gross margins to decline, which could materially adversely affect
our operating results and cause the price of our common stock to decline.
DELAYS IN PRODUCT DEVELOPMENT COULD ADVERSELY AFFECT OUR MARKET POSITION OR
CUSTOMER RELATIONSHIPS.
We have experienced delays in product development in the past and may
experience similar delays in the future. Given the short product life cycles in
the markets for our
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products, any delay or unanticipated difficulty associated with new product
introductions or product enhancements could cause us to lose customers and
damage our competitive position. Prior delays have resulted from numerous
factors, such as:
- changing OEM product specifications;
- difficulties in hiring and retaining necessary personnel;
- difficulties in reallocating engineering resources and other resource
limitations;
- difficulties with independent contractors;
- changing market or competitive product requirements;
- unanticipated engineering complexity;
- undetected errors or failures in software and hardware; and
- delays in the acceptance or shipment of products by OEM customers.
BECAUSE WE RELY ON THIRD PARTIES FOR SUBSTANTIALLY ALL OF OUR MANUFACTURING AND
ASSEMBLY, FAILURES BY THESE THIRD PARTIES TO PROVIDE PRODUCTS OF SUFFICIENT
QUALITY AND QUANTITY COULD CAUSE US TO DELAY PRODUCTS SHIPMENTS, WHICH COULD
RESULT IN DELAYED OR LOST REVENUES OR CUSTOMER DISSATISFACTION.
Taiwan Semiconductor Manufacturing Company, or TSMC, manufactures our
Emerald ASICs, and Adaptec packages and tests these ASICs so that we purchase
and receive only finished products. SCI Systems in Rapid City, South Dakota, and
SMS in Escondido, California perform substantially all assembly operations for
our host bus adapters. We have no direct contractual relationship with TSMC and
no long term contracts with SCI or SMS. Accordingly, our major suppliers, other
than Adaptec, are not obligated to supply products to us for any specific
period, or in any specific quantity, except as may be provided in a particular
purchase order, and Adaptec's ability to meet its obligations to us depends on
the ability of third parties, including TSMC, to supply sufficient quantity and
quality of components. If any of our third-party manufacturers experiences
delays, disruptions, capacity constraints or quality control problems in its
manufacturing operations, then products shipments to our customers could be
delayed, which would negatively impact our net revenues, competitive position
and reputation. In that regard, TSMC has recently experienced an interruption in
its ability to manufacture products due to a severe earthquake in Taiwan. While
we believe that this interruption will not have a material adverse effect on our
business, we cannot assure you that TSMC will be able to continue to satisfy our
inventory needs.
Further, our business would be harmed if we fail to effectively manage the
manufacture of our products. Because we place orders with our manufacturers
based on our forecasts of expected demand for our products, if we inaccurately
forecast demand, we may be unable to obtain adequate manufacturing capacity or
adequate quantities of components to meet our customers' delivery requirements,
or we may accumulate excess inventories.
We may in the future need to find new contract manufacturers in order to
increase our volumes or to reduce our costs. Our manufacturing agreement with
Adaptec expires in November 2000, but we anticipate that we will seek
alternative manufacturing arrangements prior to that time. We may not be able to
find contract manufacturers that meet our needs, and even if we do, qualifying a
new contract manufacturer and commencing volume production is expensive and time
consuming. If we are required or elect to change contract manufacturers, we may
lose revenues, and our customer relationships may suffer.
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BECAUSE WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR KEY
COMPONENTS, WE ARE SUSCEPTIBLE TO SUPPLY SHORTAGES THAT COULD ADVERSELY AFFECT
OUR OPERATING RESULTS.
We rely on third-party suppliers for components which are used in our
products, and we have experienced delays or difficulty in securing components in
the past. Key components that we use in our products may only be available from
single sources with which we do not have long-term contracts. In particular,
Hewlett-Packard is currently the sole supplier of certain components in certain
of our SBus host bus adapters. The components we use for our products are based
on an emerging technology and may not be available with the performance
characteristics or in the quantities that we require. Any inability to supply
products due to a lack of components or to redesign products to incorporate
alternative components in a timely manner could materially adversely affect our
business, operating results or financial condition.
BECAUSE A SIGNIFICANT PORTION OF OUR PRODUCTS IS DESIGNED TO WORK WITH HIGH-END
SERVERS FROM SUN MICROSYSTEMS AND STORAGE ARRAYS FROM EMC, OUR BUSINESS COULD
SUFFER IF SUN OR EMC DISCONTINUES PRODUCTION OF SUCH EQUIPMENT OR IF WE FAIL TO
DEVELOP PRODUCTS THAT WORK EFFECTIVELY WITH SUCH EQUIPMENT. SUN HAS ANNOUNCED
ITS INTENTION TO DISCONTINUE PRODUCTION OF SERVERS WITH THE SBUS INTERFACE, AND
THEREFORE, SALES OF OUR PRODUCTS DESIGNED FOR THE SBUS INTERFACE WILL DIMINISH
OVER TIME.
Our host bus adapters have achieved their greatest market acceptance in
computing environments built with servers from Sun Microsystems due to our
products' interoperability with the Sun Solaris operating system and the SBus
interface developed and promoted by Sun. A significant portion of our products
is currently used to connect high-end Sun servers that incorporate SBus
interfaces to SANs, and these products have accounted for the substantial
majority of our historical revenues. In particular, sales of our FibreStar host
bus adapters designed to work with the SBus interface accounted for
approximately 86% of our net revenues in 1998 and 84% of our net revenues in the
nine months ended September 30, 1999. In addition, a significant portion of our
host bus adapters are used to form connections to storage arrays manufactured by
EMC. Accordingly, we depend to a certain extent upon the increased market
penetration of Sun and EMC systems and our ability to continue to develop
products that interoperate effectively in Sun and EMC environments. Sun has
announced its intention to phase out production of servers with the SBus
interface in 2001. Accordingly, we anticipate that the percentage of our
revenues attributable to sales of our SBus host bus adapters will decline over
time. If Sun accelerates its phase out of such workstations, our business would
suffer due to decreased sales of SBus host bus adapters.
BECAUSE OUR INTELLECTUAL PROPERTY IS CRITICAL TO THE SUCCESS OF OUR BUSINESS,
OUR OPERATING RESULTS WOULD SUFFER IF WE WERE UNABLE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY.
We currently rely on a combination of copyrights, trademarks, trade secret
laws and contractual provisions to establish and protect our intellectual
property rights in our products. 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 such technology as
trade secrets. In addition, the laws of some of the countries in which our
products are or may be developed, manufactured or sold may not protect our
products and intellectual property rights to the same extent as the laws of the
United States, or at all. Our failure to protect our intellectual property
rights could have a material adverse effect on our business, operating results
or financial condition.
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WE MAY BECOME INVOLVED IN COSTLY AND LENGTHY PATENT INFRINGEMENT OR INTELLECTUAL
PROPERTY LITIGATION WHICH COULD SERIOUSLY HARM OUR BUSINESS.
We occasionally receive communications from third parties alleging patent
infringement, and there is the chance that third parties may assert infringement
claims against us. Any such claims, with or without merit, could result in
costly and time-consuming litigation or cause product shipment delays which
would adversely affect our business, financial condition or operating results.
It is possible that patent holders will assert patent rights which apply broadly
to our industry, and that such patent rights, if valid, may apply to our
products or technology. These or other claims may require us to stop using the
challenged intellectual property or to enter into royalty or licensing
agreements. We cannot be certain that the necessary licenses will be available
or that they can be obtained on commercially reasonable terms. If we were to
fail to obtain such royalty or licensing agreements in a timely manner or on
reasonable terms, our business, operating results or financial condition could
be materially adversely affected.
THE LOSS OF OR FAILURE TO ATTRACT KEY TECHNICAL PERSONNEL COULD ADVERSELY AFFECT
OUR BUSINESS.
Our success depends to a significant degree upon the performance and
continued service of engineers involved in the development of our Fibre Channel
technology and technical support of products and customers. Our future success
depends upon our ability to attract, train and retain such personnel. We will
need to increase the number of technical staff members with experience in high
performance ASIC design as we further develop our product line. In addition, we
are currently seeking to hire additional skilled development engineers who are
currently in short supply. Competition for such highly skilled employees in our
industry is intense, and we cannot be certain that we will be successful in
recruiting or retaining such personnel. In addition, employees may leave our
company and subsequently compete against us. The loss of these key technical
employees could have a material adverse effect on our business, operating
results and financial condition.
IN ORDER TO MEET OUR OBJECTIVES, WE MUST ATTRACT AND RETAIN QUALIFIED PERSONNEL,
AND THE FAILURE TO DO SO COULD LIMIT OUR GROWTH.
In addition to our reliance on key technical personnel, our success depends
to a significant degree upon the continued contributions of our key management,
sales and marketing and manufacturing personnel, many of whom would be difficult
to replace. We do not maintain key person life insurance on any of these
personnel, and we do not have employment agreements with any of these personnel
obligating them to continue to provide services to JNI. If we lose key
personnel, we may have difficulties in identifying suitable replacements or in
reallocating their responsibilities, either of which would place an additional
strain on our resources and could adversely affect our business, operating
results or financial condition.
We also believe that our success depends to a significant extent on the
ability of our key personnel to operate effectively, both individually and as a
group. Many of our employees have only recently joined us, and we intend to
expand our employee base significantly. If we are unable to identify, hire and
integrate new employees in a timely and cost-effective manner, our operating
results may suffer.
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OUR EXPORT SALES SUBJECT US TO RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
Export sales accounted for 17% of our net revenues in the nine months ended
September 30, 1999, compared to 14% of net revenues in 1998 and 14% of net
revenues in 1997. Accordingly, we encounter risks inherent in international
operations. Because all of our sales are currently denominated in U.S. dollars,
if the value of the U.S. dollar increases relative to foreign currencies, our
products could become less competitive in international markets. Our export
sales could also be limited or disrupted by any of the following factors:
- restrictions on the export of technology;
- longer accounts receivable payment cycles;
- reduced and limited protections of intellectual property rights;
- trade restrictions; and
- changes in tariffs.
FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS BY US OR OUR OEM CUSTOMERS COULD
REDUCE OUR SALES OR REQUIRE DESIGN MODIFICATIONS.
Our products are subject to U.S. Department of Commerce and Federal
Communications Commission regulations as well as various standards established
by authorities in other countries. Failure to comply with existing or evolving
U.S. or foreign governmental regulation or to obtain timely domestic foreign
regulatory approvals or certificates could materially harm our business by
reducing our sales or requiring design modifications to our products or the
products of our OEM customers. Neither we nor our customers may export such
products without obtaining an export license. U.S. export laws also prohibit the
export of our 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
we or our customers are. 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.
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS
THAT COULD LEAD TO AN INCREASE IN OUR COSTS, REDUCE OUR NET REVENUES OR DAMAGE
OUR REPUTATION.
Products as complex as ours frequently contain undetected software or
hardware errors when first introduced or as new versions are released. We have
from time to time found errors in existing products, and we may from time to
time find errors in our existing, new or enhanced products. The occurrence of
hardware or software errors could adversely affect sales of our products, cause
us to incur significant warranty and repair costs, divert the attention of our
engineering personnel from our product development efforts and cause significant
customer relations problems.
OUR FAILURE, OR THE FAILURE OF OUR KEY SUPPLIERS, TO ADEQUATELY PREPARE FOR THE
YEAR 2000 ISSUE COULD INTERRUPT OUR BUSINESS OR CAUSE OUR REVENUES TO DECLINE.
Many existing computer systems and applications use two digits rather than
four to define the applicable year. These programs were designed without
considering the impact of the upcoming change in the century. If such programs
are not corrected, many computer systems could fail or create erroneous results
at or beyond the year 2000. We consider a product to be "Year 2000 compliant" if
the product's performance and functionality are unaffected by the processing of
dates prior to, during and after the year 2000. We believe that our current
products are all Year 2000 compliant.
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Although we have initially assessed how we may be impacted by the Year 2000
and have commenced implementation of a detailed plan to address certain aspects
of the Year 2000 problem, we have not completed this plan and cannot be certain
to what extent we may be impacted by the Year 2000 problem. We believe our
greatest risks related to the Year 2000 issue involve our relationships with
critical third party suppliers and service providers. Potential impacts include
an interrupted product flow from critical suppliers due to their Year 2000
interruptions and potential infrastructure collapse such as interruptions in
public utilities, electricity or telecommunications. Any of the foregoing risks,
as well as the fruition of a combination of lesser risks, could adversely impact
our business, financial condition or operating results. We have formulated
contingency plans scheduled for completion by November 1, 1999 to mitigate or
reduce these risks. However, because many third party service providers such as
the public utilities are not controlled by JNI, it is possible that our
contingency plans will not be adequate. For a more complete description of our
plans with respect to Year 2000 compliance, please see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--The Year 2000
Issue."
MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF THE NET PROCEEDS OF THIS
OFFERING AND MAY FAIL TO USE SUCH FUNDS EFFECTIVELY.
We intend to use the net proceeds from the sale of the common stock offered
hereby for repayment of indebtedness to Jaycor of approximately $4.3 million and
working capital and general corporate purposes, including product development,
sales and marketing and potential acquisitions of products, technologies or
companies. Because only a small portion of the net proceeds is allocated to
specific items, management will have significant flexibility in applying the net
proceeds of this offering. The failure of management to apply such funds
effectively could have a material adverse effect on our business, operating
results or financial condition.
RISKS RELATED TO SECURITIES MARKETS
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE TO FUND THE GROWTH OF OUR BUSINESS,
AND FINANCING MAY NOT BE AVAILABLE.
We currently anticipate that our available capital resources, combined with
the net proceeds from this offering and cash flows from operations, will be
sufficient to meet our expected working capital and capital expenditure
requirements for at least the next 12 months. However, we cannot assure you that
such resources will be sufficient to fund the growth of our business.
We may also raise additional funds through public or private debt or equity
financings if such financings become available on favorable terms, but such
financings would likely dilute our stockholders. We cannot assure you that any
additional financing we may need will be available on terms favorable to us, or
at all. If adequate funds are not available or are not available on acceptable
terms, we may not be able to take advantage of unanticipated opportunities,
develop new products or otherwise respond to competitive pressures. In any such
case, our business, operating results or financial condition could be materially
adversely affected.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS' EQUITY AND
CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.
We may pursue acquisitions that could provide new technologies or products.
Future acquisitions may involve the use of significant amounts of cash,
potentially dilutive
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issuances of equity or equity-linked securities, the incurrence of debt, or
amortization expenses related to goodwill and other intangible assets.
In addition, acquisitions involve numerous risks, including:
- difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
- the diversion of management's attention from other business concerns;
- risks of entering markets in which we have no or limited prior
experience; and
- the potential loss of key employees of the acquired company.
We currently have no commitments or agreements with respect to any such
acquisition. In the event that such an acquisition does occur and we are unable
to successfully integrate businesses, products, technologies or personnel that
we acquire, our business, operating results or financial condition could be
materially adversely affected.
YOU WILL SUFFER DILUTION IN THE VALUE OF YOUR SHARES.
Investors in this offering will incur immediate and substantial dilution of
$11.27 per share, assuming an initial public offering price of $13.00 per share,
in the net tangible book value per share of our common stock. See "Dilution" for
more information regarding the amount of dilution you will suffer.
OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.
The stock market in general, and the stock prices of technology-based
companies in particular, have experienced extreme volatility that often has been
unrelated to the operating performance of any specific public company. Prior to
this offering, there has not been a public market for our common stock. We
cannot predict the extent to which investor interest in JNI will lead to the
development of a trading market or how liquid that market might become. The
initial public offering price for the shares will be determined by negotiations
between us and the representatives of the underwriters and may not be indicative
of prices that will prevail in the trading market. Changes in analysts'
estimates of our earnings as well as any of the factors described in "Risk
Factors" could have a significant impact on the market price of our common
stock.
Investors may be unable to resell their shares of our common stock at or
above the offering price. In the past, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. If we were the subject of securities class
action litigation, it could result in substantial costs and a diversion of
management's attention and resources.
JAYMARK, INC. WILL BE ABLE TO CONTROL ANY STOCKHOLDER VOTES AND HAS THE POWER TO
TAKE OR PREVENT CORPORATE ACTIONS WITHOUT CONSIDERING THE BEST INTERESTS OF
OTHER STOCKHOLDERS.
Upon completion of this offering, Jaymark will beneficially own
approximately 71.2% of our outstanding common stock. If the underwriters
exercise the over-allotment option in full, Jaymark's ownership will be reduced
to approximately 67.7%. As a result, Jaymark will be able to determine the
outcome of all corporate actions requiring stockholder approval. Because Jaymark
has the ability to control us, it has the power to act without taking the best
interests of our company into consideration. For example, Jaymark will continue
to exercise significant influence over decisions with respect to the following:
- the direction and policies of our company, including the election and
removal of directors;
- mergers or other business combinations involving us;
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- amendments to our certificate of incorporation or bylaws; and
- future issuances of our common stock or other securities.
Any of these powers could be used by Jaymark for its own advantage to the
detriment of our other stockholders and our company. This in turn may have an
adverse effect on the price of our common stock.
WE DO NOT PLAN TO PAY CASH DIVIDENDS ON OUR COMMON STOCK.
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We intend to retain future
earnings, if any, to finance the growth and expansion of our business and for
general corporate purposes. Accordingly, unless the price of our common stock
increases above the initial public offering price, you will not have an
opportunity to profit from your investment in our common stock.
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET BY EXISTING INVESTORS MAY BEGIN
180 DAYS AFTER COMPLETION OF THE OFFERING AND COULD CAUSE OUR STOCK PRICE TO
DECLINE.
Our current stockholders, Jaymark, Inc. and Adaptec, Inc., hold a
substantial number of shares, which they will be able to sell in the public
market in the near future. After giving effect to the offering, Jaymark will
continue to hold approximately 71.2% of our outstanding stock, or 67.7% if the
underwriters exercise their over-allotment option, and Adaptec will hold
approximately 9.1% of our outstanding stock, assuming exercise of the warrant
for 840,000 shares, regardless of the exercise of the underwriters'
over-allotment option. Subject to limitations on volume under Rule 144, which
are explained in detail in "Shares Eligible for Future Sale," Jaymark will be
able to sell all the shares of our common stock that it holds beginning, upon
the expiration of an agreement with the underwriters, 180 days after the date of
this prospectus. At the same time, and subject to the same limitations, Adaptec
will be able to sell 1,132,895 shares of our common stock that it holds. Jaymark
may also distribute the shares of our common stock that it holds to its
stockholders, who could then be eligible to sell such shares in the public
market. In addition, our employees hold options to purchase a large number of
shares, and they will also be able to sell the shares they may acquire upon
exercise of those options in the near future. Sales of a substantial number of
shares of our common stock after this offering could cause our stock price to
decline. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional stock. You should read "Shares Eligible
for Future Sale" for a full discussion of shares that may be sold in the public
market in the future.
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FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements," which may include
the following:
- our business strategy;
- the timing of and plans for the introduction of new products and
enhancements;
- plans for hiring additional personnel;
- anticipated growth in the market for Fibre Channel products;
- entering into strategic alliances; and
- the adequacy of anticipated sources of funds, including the proceeds from
this offering, to fund our operations for at least the 12 months
following the date of this prospectus.
Other statements about our plans, objectives, expectations and intentions
contained in this prospectus that are not historical facts may also be
forward-looking statements. When used in this prospectus, the words "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar
expressions are generally intended to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties, actual
results could differ materially from those expressed or implied by these
forward-looking statements for a number of reasons, including those discussed
under "Risk Factors" and elsewhere in this prospectus. We assume no obligation
to update any forward-looking statements.
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USE OF PROCEEDS
The net proceeds to JNI from the sale of the 2,800,000 shares of common
stock we are offering will be approximately $32.8 million, assuming an initial
public offering price of $13.00 per share, after deducting estimated
underwriting discounts and commissions and estimated offering expenses. JNI will
not receive any proceeds from the sale of shares in this offering by the selling
stockholder.
We intend to use the net proceeds of this offering for:
- repayment of indebtedness of approximately $4.3 million to Jaycor; and
- working capital and other general corporate purposes, including product
development, sales and marketing and potential acquisitions of products,
technologies or companies.
While we from time to time engage in preliminary discussions with respect
to acquisitions, we are not currently a party to any agreements, understandings
or commitments with respect to such transactions. Pending the uses described
herein, we will invest the net proceeds in short-term, interest bearing,
investment grade securities.
Borrowings under our revolving loan agreement with Jaycor bear interest at
a floating rate equal to Jaycor's incremental cost of borrowing (13.4% as of
September 30, 1999). Advances under the agreement are due on demand, and if no
demand is made, within ten years of the date of each advance. At September 30,
1999, we owed Jaycor $4.3 million for advances made under this agreement. The
amounts advanced under this agreement were used for working capital purposes and
acquisition of fixed assets.
Based on our current operating plan, we anticipate that the net proceeds of
this offering, together with expected interest income and funds from operations,
should be sufficient to finance our capital requirements for at least the next
12 months. This estimate is based on assumptions that could be negatively
impacted by the matters discussed in "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
do not anticipate paying such cash dividends in the foreseeable future. We
currently anticipate that we will retain all of our future earnings for use in
the development and expansion of our business and for general corporate
purposes. Any determination to pay dividends in the future will be at the
discretion of our board of directors and will depend upon our operating results,
financial condition and other factors as the board of directors, in its
discretion, deems relevant.
18
<PAGE> 24
CAPITALIZATION
The following table sets forth the capitalization of JNI as of September
30, 1999. The As Adjusted column gives effect to (a) the conversion of each
outstanding share of convertible preferred stock into a share of common stock
upon the closing of this offering, (b) the receipt of the net proceeds from the
sale of 2,800,000 shares of common stock at an assumed initial public offering
price of $13.00 per share, and (c) the application of such net proceeds. The
table does not reflect the 5,066,691 shares of common stock issuable upon
exercise of outstanding options at September 30, 1999 at a weighted average
exercise price per share of $1.63 or the 840,000 shares issuable upon exercise
of an outstanding warrant at a nominal exercise price. See "Management--Stock
Option Plans."
This table should be read in conjunction with our Financial Statements and
the related notes included elsewhere in this prospectus. Also see "Use of
Proceeds" and "Certain Transactions."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS, EXCEPT
SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C>
Short-term debt -- due to affiliate...................... $ 4,252 $ --
======= =======
Stockholders' equity:
Preferred stock, par value $0.001 per share: 35,000,000
shares authorized and 17,722,895 shares issued and
outstanding, actual; 5,000,000 shares authorized and
no shares issued and outstanding, as adjusted....... $ 18 $ --
Common stock, par value $0.001 per share: 100,000,000
shares authorized and 420,000 shares issued and
outstanding, actual; 100,000,000 shares authorized
and 20,942,895 shares issued and outstanding, as
adjusted............................................ -- 21
Additional paid-in capital............................... 17,530 50,304
Unearned stock-based compensation........................ (1,516) (1,516)
Accumulated deficit...................................... (1,095) (1,095)
------- -------
Total stockholders' equity........................ 14,937 47,714
------- -------
Total capitalization.............................. $14,937 $47,714
======= =======
</TABLE>
19
<PAGE> 25
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $3,550,000, or $0.20 per share. Pro forma net tangible book value
per share represents the amount of JNI's pro forma stockholders' equity, less
intangible assets, divided by the pro forma number of shares of common stock
outstanding as of September 30, 1999 after giving effect to the automatic
conversion of all convertible preferred stock into common stock upon closing of
this offering. The as adjusted pro forma net tangible book value of JNI as of
September 30, 1999 would have been $36,327,000, or $1.73 per share, after giving
effect to the sale of 2,800,000 shares of common stock offered by JNI at an
assumed initial public offering price of $13.00 per share, after deducting
estimated underwriting discounts and commissions and estimated offering expenses
payable by us. The foregoing discussion assumes no exercise of outstanding
options or warrants, and, to the extent these options or warrants are exercised,
investors in this offering will suffer further dilution.
This represents an immediate increase in pro forma net tangible book value
of $1.53 per share to existing stockholders and an immediate dilution in pro
forma net tangible book value of $11.27 per share to investors purchasing common
stock in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share before this
offering............................................... $0.20
Increase per share attributable to new investors.......... 1.53
-----
As adjusted pro forma net tangible book value per share
after this offering....................................... 1.73
------
Dilution per share to new investors......................... $11.27
======
</TABLE>
As of September 30, 1999, assuming exercise of options to purchase
5,066,691 shares and warrants to purchase 840,000 shares that were outstanding
at September 30, 1999, pro forma net tangible book value per share before this
offering was $0.15. The investment by new investors in this offering increases
the as adjusted pro forma net tangible book value per share by $1.20 per share
to $1.35 per share after this offering resulting in dilution to new investors of
$11.65 per share.
The table below summarizes, on a pro forma basis, the differences between
the existing stockholders and the new investors purchasing common stock in this
offering with respect to (a) the total number of shares purchased from JNI, (b)
the total consideration paid and (c) the average price per share paid (based
upon an assumed initial public offering price of $13.00 per share).
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED ----------------------------------------
----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PAID PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 18,142,895 87% $15,360,000 30% $ 0.85
New investors............. 2,800,000 13 36,400,000 70 $13.00
---------- --- ----------- ---
Total..................... 20,942,895 100% $51,760,000 100%
========== === =========== ===
</TABLE>
20
<PAGE> 26
SELECTED FINANCIAL DATA
The following selected financial data of JNI presented below as of and for
the years ended December 31, 1994, 1995, 1996, 1997 and 1998 and as of and for
the nine-month periods ended September 30, 1998 and 1999 are derived from the
financial statements of JNI. The financial statements as of December 31, 1997
and 1998 and for each of the three years in the period ended December 31, 1998
have been audited and are included elsewhere in this prospectus. The selected
financial data as of December 31, 1994, 1995 and 1996 and as of September 30,
1999 and for the years ended December 31, 1994 and 1995 and for the nine-month
periods ended September 30, 1998 and 1999 are unaudited, have been prepared on
the same basis as the audited financial statements and, in our opinion, reflect
all adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial information in accordance with generally accepted
accounting principles. The selected financial data set forth below contains only
a portion of JNI's financial statements, and should be read in conjunction with
the Financial Statements and related Notes and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. In particular, see Note 1 to Financial Statements for an
explanation of the calculations of earnings (loss) per share and per share
amounts.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.......................... $ 35 $ 74 $ 374 $ 2,903 $12,189 $6,929 $25,764
Cost of revenues...................... 32 53 348 1,252 5,361 3,109 9,695
------ ------ ------- ------- ------- ------ -------
Gross margin........................ 3 21 26 1,651 6,828 3,820 16,069
Operating expenses:
Research and development............ 150 381 510 1,202 2,919 1,820 7,973
Selling and marketing............... 57 161 532 681 1,526 1,053 3,403
General and administrative.......... 144 73 471 822 1,698 921 2,145
Amortization of intangible assets... -- -- -- -- 47 -- 166
Amortization of stock-based
compensation..................... -- -- -- -- 35 -- 637
------ ------ ------- ------- ------- ------ -------
Total operating expenses......... 351 615 1,513 2,705 6,225 3,794 14,324
------ ------ ------- ------- ------- ------ -------
Operating income (loss)............... (348) (594) (1,487) (1,054) 603 26 1,745
Interest expense...................... -- -- -- 130 265 195 394
------ ------ ------- ------- ------- ------ -------
Income (loss) before income taxes..... (348) (594) (1,487) (1,184) 338 (169) 1,351
Income tax provision (benefit)........ -- -- -- -- 27 -- (856)
------ ------ ------- ------- ------- ------ -------
Net income (loss)..................... $ (348) $ (594) $(1,487) $(1,184) $ 311 $ (169) $ 2,207
====== ====== ======= ======= ======= ====== =======
Earnings (loss) per common share:
Basic................................. $ (.83) $(1.41) $ (3.54) $ (2.82) $ 0.74 $(0.40) $ 5.25
====== ====== ======= ======= ======= ====== =======
Diluted............................... $ (.83) $(1.41) $ (3.54) $ (2.82) $ 0.02 $(0.40) $ 0.10
====== ====== ======= ======= ======= ====== =======
Pro forma basic(1).................... $ 0.74 $ 3.34
======= =======
Pro forma diluted(1).................. $ 0.03 $ 0.11
======= =======
Number of shares used in per share
computations:
Basic(2).............................. 420 420 420 420 420 420 420
Diluted(2)............................ 420 420 420 420 17,977 420 22,867
Pro forma basic(1).................... 634 732
Pro forma diluted(1).................. 18,191 23,179
</TABLE>
21
<PAGE> 27
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................ $ 3 $178 $325 $(923) $(1,830) $ (232)
Total assets........................... 22 259 446 1,900 7,814 25,553
Due to affiliate....................... -- -- -- 1,950 3,061 4,252
Stockholders' equity (deficit)......... (26) 196 362 (740) 1,173 14,937
</TABLE>
- ---------------
(1) Pro forma earnings (loss) per common share represents historical earnings
(loss) per common share as if additional shares of common stock had been
issued at the assumed initial public offering price of $13.00 per share
after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by JNI at the beginning of each period
presented in order to retire our average due to affiliate balance during the
period.
(2) The number of shares used in the basic and diluted share computations
assumes the shares of common stock issued in February 1997 were outstanding
for all prior periods.
22
<PAGE> 28
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 contained elsewhere in this prospectus.
OVERVIEW
We are a leading developer and manufacturer of Fibre Channel hardware and
software products that form critical elements of SANs. We offer a broad line of
host bus adapters, ASICs and software that provides high bandwidth for data
communication, high speed data transmission without degradation over distances
of up to ten kilometers, guaranteed data delivery and scalability to large
numbers of network connections. We commenced operations in 1993 as a division of
Jaycor, Inc. In February 1997, Jaycor effected a corporate reorganization in
which it formed two new corporations: Jaymark, Inc. and JNI. Jaymark became the
parent of Jaycor and of JNI in that reorganization transaction. Jaycor then
transferred technology and assets relating to Fibre Channel to Jaymark, which in
turn contributed these assets to JNI. While operating as a division of Jaycor,
we shipped our first commercially available Fibre Channel products in 1995. We
commenced volume production of host bus adapters in 1996, and we are currently
the leading independent supplier of host bus adapters for the Sun Solaris
operating system. In late 1998, we obtained our initial certification from an
OEM customer for our host bus adapters for the PCI interface, and in 1999 we
introduced a much lower cost host bus adapter for the PCI interface based on
Fibre Channel products and technology acquired from Adaptec. We first achieved
operating income in the quarter ended September 30, 1998.
We derive substantially all of our revenue from sales of our FibreStar
lines of host bus adapters. Historically, we have derived the substantial
majority of our revenues from sales of our FibreStar host bus adapters designed
for the SBus specification. Sun Microsystems manufactures and sells
substantially all of the servers that incorporate the SBus interface, and Sun
has announced its intention to phase out production of this equipment in 2001.
Accordingly, we expect that sales of our products designed to work with the SBus
interface will eventually decline. We expect our Emerald-based host bus adapters
designed for the PCI bus to account for an increasing proportion of revenues in
the future. We also derive revenues from sales of our proprietary Emerald ASICs.
All of our sales are denominated in U.S. dollars. Historically, a limited number
of OEMs and distributor customers has accounted for a significant majority of
our total net revenues in each fiscal period. The loss of any of our key
customers, or a significant reduction in sales to those customers, could
significantly reduce our net revenues. We anticipate that our operating results
in any given period will continue to depend to a significant extent upon
revenues from a small number of customers.
We generally recognize revenue from product sales upon shipment. We provide
allowances for estimated sales returns at the time of revenue recognition. We
sell to our distribution channel customers under volume purchase agreements.
Certain of our agreements with distribution channel customers provide for stock
rotation, where the customer may return product provided that it places a new
order for replacement products. We reserve for estimated stock rotation,
uncollectable accounts and warranty claims based on past history and expected
future returns related to product shipped. We ship to our OEM customers with no
right of return except for warranty, and warranty costs to date have not been
material.
As our Emerald-based host bus adapters designed for the PCI interface
become a greater percentage of our revenues, we expect that the average selling
price of our products
23
<PAGE> 29
will continue to decrease. Further, the average selling prices of our new and
existing products are likely to continue to decline in the future as we and our
competitors introduce new and more technologically advanced products and as
price-based competition intensifies. In addition, sales price reductions tied to
volume shipments are typically part of our volume purchase agreements with our
distribution channel customers.
Cost of revenues is comprised principally of payments to our contract
manufacturers, final assembly costs, manufacturing and quality functions,
inventory management costs and support costs. We expect our gross margin to be
affected by many factors, including declines in average unit selling price,
fluctuations in demand for our products, the mix of products sold, the mix of
sales channels through which our products are sold, the timing and size of
customer orders, fluctuations in manufacturing volumes, changes in costs of
components, new product introductions both by us and our competitors.
Research and development expenses consist primarily of salaries and related
expenses for engineering personnel, fees paid to consultants and outside service
providers, depreciation of development and test equipment, prototyping expenses
related to the design, development, testing and enhancements of our products and
the cost of computer support services. We expense all research and development
costs as incurred. From inception, we have incurred significant expenses to
develop our products. We believe that continued investment in research and
development is critical to our strategic product and cost reduction objectives.
Accordingly, we expect to continue to devote substantial resources to research
and development such that these expenses will increase in absolute dollars.
In connection with the purchase of products and technology from Adaptec in
November 1998, we acquired in-process research and development projects related
to certain PCI interface ASICs and host bus adapter products and recorded a
related charge to operations in the amount of $18,000. We incurred approximately
$1.3 million of research and development costs related to these projects through
September 30, 1999 and expect to incur approximately $900,000 of additional
research and development expenditures through the completion of these products,
which is anticipated to occur in the first quarter of 2000. We expect to
commence sales of these products during the fourth quarter of 1999 and the first
quarter of 2000.
Selling and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
support functions, public relations, advertising, promotional and trade show
costs and travel expenses. We believe that continued investment in selling and
marketing is critical to the success of our strategy to expand our relationships
with leading OEMs, to establish and maintain relationships with partners and to
expand our sales though resellers and distributors and to end-users. We expect
these expenses to increase in absolute dollars as we add personnel to implement
this strategy.
General and administrative expenses include salaries and related expenses
for personnel engaged in finance, human resources, information technology,
administrative and legal activities and professional fees. We expect that these
expenses will increase in future periods in absolute dollars as we incur
additional costs to implement the infrastructure necessary to operate
independently from Jaycor, as well as costs related to the anticipated growth of
our business and our operation as a public company. To assist our transition to
operating independently from Jaycor, we and Jaycor have entered into a
Transitional Services Agreement whereby Jaycor has agreed to continue to perform
certain administrative and accounting services on our behalf, and we have agreed
to reimburse Jaycor for
24
<PAGE> 30
such services in amounts consistent with Jaycor's historical practice and
consistent with the presentation in our audited financial statements.
Amortization of intangible assets arises from the amortization of
intangible assets acquired in connection with the purchase of products and
technology from Adaptec in November 1998. In that transaction, we issued Adaptec
1,132,895 shares of our Series A preferred stock which will convert into an
equal amount of shares of common stock upon completion of this offering, and we
granted Adaptec warrants to purchase shares of our stock. We originally recorded
the fair value of the intangible assets acquired in that transaction at
$662,000. Upon an amendment to the purchase agreement executed in September
1999, the number of shares issuable thereunder was fixed at 840,000 shares,
subject to upward adjustment under certain circumstances. See "Certain
Transactions." As a result of the amendment, the warrant became immediately
exercisable, and we recorded additional intangible assets related to the core
technology equal to the fair value of the 840,000 shares, or $10.9 million. We
are amortizing the intangible assets over the remainder of their useful life.
Future amortization charges related to these balances will be as follows: $1.3
million during the remainder of 1999; $5.4 million during 2000; and $4.7 million
during 2001.
Amortization of stock-based compensation relates to deferred compensation
recorded in connection with the grant of stock options to employees in all
operating expense categories where the option exercise price is less than the
fair value of the underlying shares of common stock as determined for financial
reporting purposes. We have recorded deferred compensation within stockholders'
equity of approximately $2.2 million which is being amortized over the vesting
period of the related stock options, generally four years. The portion of this
liability that remains unamortized as of September 30, 1999 is $1.5 million, and
it will be amortized as follows: $205,000 during the remainder of 1999; $646,000
during 2000; $433,000 during 2001; $219,000 during 2002; and $13,000 during
2003. The amount of stock-based compensation amortization actually recognized in
future periods could decrease if options for which accrued but unvested
compensation has been recorded are forfeited. See Note 6 to the Financial
Statements.
We recognized an income tax benefit during the quarter ended June 30, 1999
due primarily to utilization of net operating loss carryforwards and the release
of a deferred tax valuation allowance in that period. For the periods prior to
June 30, 1999, due to our history of losses, we recognized $0 of tax benefits
for net operating losses and $0 of research and development tax credits. In the
quarter ended June 30, 1999, we determined that it was more likely than not that
we would be able to use the tax benefits in future periods. As a result, we
realized a tax benefit of $1.4 million in the quarter ended June 30, 1999, which
created a corresponding increase in net income in that period.
25
<PAGE> 31
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net
revenues for each of the periods shown.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ --------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
Net revenues....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................... 93.0 43.1 44.0 44.8 37.6
------ ----- ----- ----- -----
Gross margin.................... 7.0 56.9 56.0 55.2 62.4
Operating expenses:
Research and development........ 136.4 41.4 23.9 26.3 30.9
Selling and marketing........... 142.2 23.5 12.5 15.2 13.2
General and administrative...... 125.9 28.3 13.9 13.3 8.3
Amortization of intangible
assets........................ -- -- 0.4 -- 0.7
Amortization of stock-based
compensation.................. -- -- 0.3 -- 2.5
------ ----- ----- ----- -----
Total operating expenses... 404.5 93.2 51.0 54.8 55.6
------ ----- ----- ----- -----
Operating income (loss)............ (397.6) (36.3) 5.0 0.4 6.8
Interest expense................... -- 4.5 2.2 2.8 1.5
------ ----- ----- ----- -----
Income (loss) before income
taxes........................... (397.6) (40.8) 2.8 (2.4) 5.3
Income tax provision (benefit)..... -- -- 0.2 -- (3.3)
------ ----- ----- ----- -----
Net income (loss).................. (397.6)% (40.8)% 2.6% (2.4)% 8.6%
====== ===== ===== ===== =====
</TABLE>
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Net revenues. Net revenues increased $18.9 million, or 272%, to $25.8
million in the first nine months of 1999 from $6.9 million in the first nine
months of 1998. The substantial majority of the increase was due to an increase
in sales of SBus host bus adapters. To a lesser extent, the increase in net
revenues was due to an increase in sales of PCI host bus adapters. The increase
in revenues also reflects the growth in the market for Fibre Channel products
and the increased market acceptance of our products. In the nine months ended
September 30, 1999, our top five customers accounted for 62% of net revenues,
compared to 64% of net revenues for the top five customers in the nine months
ended September 30, 1998. Sales to customers outside of the United States
accounted for 17% of net revenues in the first nine months of 1999 compared to
8% of net revenues in the first nine months of 1998.
Gross margin. Gross margin increased $12.3 million, or 321%, to $16.1
million in the first nine months of 1999 from $3.8 million in the first nine
months of 1998. Gross margin as a percentage of net revenues increased to 62.4%
in 1999 from 55.2% in 1998. The increase was due to lower component and
manufacturing costs and the allocation of fixed manufacturing costs over a
greater revenue base.
Research and development. Research and development expenses increased $6.2
million, or 338%, to $8.0 million in the first nine months of 1999 from $1.8
million in the first nine months of 1998. The increase was due primarily to
higher personnel costs of $3,349,000 and contracted services of $480,000,
resulting from an increase in the number of personnel in order to staff a higher
level of research and development activities and the payment of incentive
bonuses in 1999. In addition, equipment purchases and rentals of $221,000 and
prototyping expenses increased to complete development of products based
26
<PAGE> 32
on the technology we acquired from Adaptec in November 1998. We also incurred
increased research and development expenses related to improvements in our SBus
host bus adapters. As a percentage of net revenues, research and development
expenses increased to 30.9% in the first nine months of 1999 from 26.3% in the
first nine months of 1998. We anticipate that research and development expenses
will increase in absolute dollars in future periods as we hire additional
personnel and introduce enhanced versions of our products.
Selling and marketing. Selling and marketing expenses increased $2.3
million, or 223%, to $3.4 million in the first nine months of 1999 from $1.1
million in the first nine months of 1998. The increase was primarily due to
higher personnel costs of $1,380,000, trade shows and promotional items of
$315,000, and travel expenses of $127,000 resulting from an increase in the
number of sales and marketing personnel and increased trade show participation.
Selling and marketing expenses as a percentage of net revenues decreased to
13.2% in the first nine months of 1999 from 15.2% in the first nine months of
1998 primarily due to the increase in our revenues. Although we anticipate that
selling and marketing expenses will increase in absolute dollars in future
periods as we hire additional personnel, selling and marketing expenses may
decline as a percentage of net revenues to the extent that net revenues increase
at a faster rate.
General and administrative. General and administrative expenses increased
$1.2 million, or 133%, to $2.1 million in the first nine months of 1999 from
$921,000 in the first nine months of 1998. The increase was primarily due to
higher personnel costs of $607,000, including $175,000 related to incentive
bonuses, and legal and accounting costs of $249,000 resulting from increased
business activity. General and administrative expenses as a percentage of net
revenues decreased to 8.3% in the first nine months of 1999 from 13.3% in the
first nine months of 1998 due to the increase in revenues.
Amortization of intangible assets. We amortized $166,000 of intangible
assets during the nine months ended September 30, 1999. There was no
amortization of intangible assets during the nine months ended September 30,
1998.
Amortization of stock-based compensation. In connection with the grant of
stock options to employees during the nine months ended September 30, 1999, we
recorded stock-based compensation within stockholders' equity (deficit) of $1.2
million and amortized stock-based compensation of $637,000. Amortization of
stock-based compensation during the nine months ended September 30, 1998 was $0.
Interest expense. Interest expense increased by $199,000 to $394,000 in the
first nine months of 1999 from $195,000 in the first nine months of 1998. The
increase resulted from higher intercompany revolver borrowings from Jaycor to
finance increased inventories and accounts receivable, reflecting the rapid
growth in revenues during that period.
Income tax provision (benefit). We recognized an income tax benefit of
$856,000 during the nine months ended September 30, 1999 due primarily to the
utilization of net operating loss carryforwards and the release of a deferred
tax valuation allowance. The valuation allowance was released during the second
quarter of 1999 based on management's determination that it became more likely
than not that our net deferred tax assets would be realized. This determination
was based on our historical operating results, which included the fourth
consecutive quarter of pre-tax net income (before non-deductible stock-based
compensation), and anticipated future operating results. An income tax provision
of $0 was recognized in the nine months ended September 30, 1998 due to our loss
position for that period.
27
<PAGE> 33
COMPARISON OF YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Net revenues. Net revenues increased $9.3 million, or 320%, to $12.2
million in 1998 from $2.9 million in 1997. Net revenues increased $2.5 million
in 1997 from $374,000 in 1996. These increases primarily reflect a higher level
of sales to our OEM customers resulting from increased market acceptance of
Fibre Channel technology and our products, and, in 1998, the initiation of sales
through our distribution channel customers. In the year ended December 31, 1998,
our top five customers accounted for approximately 57% of our net revenues,
compared to 54% for the top five customers in 1997 and 81% for the top five
customers in 1996.
Gross margin. Gross margin increased $5.1 million, or 314%, to $6.8 million
in 1998 from $1.7 million in 1997 due to increased revenues. Gross margin as a
percentage of net revenues decreased slightly to 56% in 1998 from 56.9% in 1997.
Gross margin increased in 1997 from 7% of net revenues in 1996 to 56.9% of net
revenues in 1997 due to allocating fixed costs over a higher revenue base.
Research and development. Research and development expenses increased $1.7
million, or 143%, to $2.9 million in 1998, primarily due to expenses related to
developing new products and enhancements to existing products. As a percentage
of net revenues, research and development expenses decreased to 23.9% in 1998
from 41.4% in 1997. This decrease was primarily attributable to the increase in
revenues. Research and development expenses increased $692,000, or 136%, to $1.2
million in 1997 from $510,000 in 1996 due to an increase in engineering
personnel.
Selling and marketing. Selling and marketing expenses increased $845,000,
or 124%, to $1.5 million in 1998 from $681,000 in 1997. The increase was
primarily due to additional salaries and expenses for marketing and sales
personnel. Selling and marketing expenses as a percentage of net revenues
decreased to 12.5% in 1998 from 23.5% in 1997 primarily due to the increase in
revenues. Selling and marketing expenses increased $149,000, or 28%, to $681,000
in 1997 from $532,000 in 1996 due to an increase in personnel.
General and administrative. General and administrative expenses increased
$876,000, or 107%, to $1.7 million in 1998 from $822,000 in 1997. The increase
was primarily due to higher personnel costs arising from the addition of new
employees. General and administrative expenses as a percentage of net revenues
decreased to 13.9% in 1998 from 28.3% in 1997 as a result of an increase in
revenues. General and administrative expenses increased from $471,000 in 1996 to
$822,000 in 1997 due primarily to higher personnel costs.
Amortization of intangible assets. We amortized $47,000 of intangible
assets during the year ended December 31, 1998. Amortization of intangible
assets during the years ended December 31, 1997 and 1996 was $0.
Amortization of stock-based compensation. In connection with the grant of
stock options to employees during the year ended December 31, 1998, we recorded
stock-based compensation within stockholders' equity (deficit) of $1.0 million.
We amortized $35,000 of that amount during 1998. Amortization of stock-based
compensation during the years ended December 31, 1997 and 1996 was $0.
Interest expense. Interest expense increased by $135,000, or 104%, to
$265,000 in 1998 from $130,000 in 1997. The increase resulted from higher
intercompany revolver borrowings from Jaycor to finance increased accounts
receivable and inventories to support the increased level of sales. Prior to
January 30, 1997, we were a division of Jaycor and, as such, recorded $0 as a
separate interest expense.
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<PAGE> 34
Income tax provision (benefit). In 1998, we recorded an income tax
provision of $27,000 which represented a current tax liability for alternative
minimum taxes. Due to our history of losses, our regular tax liability was
offset by net operating loss carryforwards for which no benefit had previously
been recognized. An income tax provision of $0 was recognized in 1996 and 1997
due to our loss position.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly operating information
for each of the seven quarters ending with the quarter ended September 30, 1999.
This data has been prepared on the same basis as the audited financial
statements contained elsewhere in this prospectus and, in the opinion of
management, includes all adjustments necessary for the fair presentation of the
information for the periods presented. This information should be read in
conjunction with the financial statements and notes thereto. The operating
results in any quarter are not necessarily indicative of the results that may be
expected for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................... $1,454 $2,372 $3,103 $5,260 $6,363 $ 8,549 $10,852
Cost of revenues........................... 673 1,057 1,379 2,252 2,287 3,166 4,242
------ ------ ------ ------ ------ ------- -------
Gross margin............................ 781 1,315 1,724 3,008 4,076 5,383 6,610
Operating expenses:
Research and development................ 438 631 751 1,099 2,182 2,756 3,035
Selling and marketing................... 252 416 385 473 936 1,137 1,330
General and administrative.............. 251 274 396 777 674 612 859
Amortization of intangible assets....... -- -- -- 47 55 55 56
Amortization of stock-based
compensation.......................... -- -- -- 35 163 238 236
------ ------ ------ ------ ------ ------- -------
Total operating expenses........... 941 1,321 1,532 2,431 4,010 4,798 5,516
------ ------ ------ ------ ------ ------- -------
Operating income (loss).................... (160) (6) 192 577 66 585 1,094
Interest expense........................... 44 74 77 70 133 156 105
------ ------ ------ ------ ------ ------- -------
Income (loss) before income taxes.......... (204) (80) 115 507 (67) 429 989
Income tax provision (benefit)............. -- -- -- 27 8 (1,413) 549
------ ------ ------ ------ ------ ------- -------
Net income (loss).......................... $ (204) $ (80) $ 115 $ 480 $ (75) $ 1,842 $ 440
====== ====== ====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
(AS A PERCENTAGE OF NET REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues............................. 46.3 44.6 44.4 42.8 35.9 37.0 39.1
----- ----- ----- ----- ----- ----- -----
Gross margin.............................. 53.7 55.4 55.6 57.2 64.1 63.0 60.9
Operating expenses:
Research and development.................. 30.1 26.6 24.2 20.9 34.3 32.2 28.0
Selling and marketing..................... 17.3 17.5 12.4 9.0 14.7 13.3 12.2
General and administrative................ 17.3 11.6 12.8 14.7 10.6 7.2 7.9
Amortization of intangible assets......... -- -- -- 0.9 0.9 0.7 0.5
Amortization of stock-based
compensation............................ -- -- -- 0.7 2.6 2.8 2.2
----- ----- ----- ----- ----- ----- -----
Total operating expenses............. 64.7 55.7 49.4 46.2 63.1 56.2 50.8
----- ----- ----- ----- ----- ----- -----
Operating income (loss)...................... (11.0) (0.3) 6.2 11.0 1.0 6.8 10.1
Interest expense............................. 3.0 3.1 2.5 1.3 2.1 1.8 1.0
----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes............ (14.0) (3.4) 3.7 9.7 (1.1) 5.0 9.1
Income tax provision (benefit)............... -- -- -- 0.6 0.1 (16.5) 5.0
----- ----- ----- ----- ----- ----- -----
Net income (loss)............................ (14.0)% (3.4)% 3.7% 9.1% (1.2)% 21.5% 4.1%
===== ===== ===== ===== ===== ===== =====
</TABLE>
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Quarterly revenues have steadily increased over the past seven quarters due
to new product introductions, a growing number of OEM customers that launched
Fibre Channel systems incorporating our products and technology and increased
end-user demand for fibre channel solutions. The upward trend in revenues is
substantially the result of growing sales of our SBus host bus adapter products
and, to a lesser extent, an increase in the sales of our PCI host bus adapter
products in late 1998 and 1999. Gross margins in absolute dollars have increased
due to increased sales. Gross margin as a percentage of net revenues declined in
the quarters ended June 30, 1999 and September 30, 1999 due to increased sales
of our PCI host bus adapter products which generally have lower gross margins
than our SBus host bus adapter products and due to increased sales to
distributors which generally have lower gross margins than sales to our OEM
customers. Research and development expenses have generally increased as a
result of our increased investment in product development. Research and
development expenses increased significantly in 1999 principally due to our
acquisition of Adaptec's fibre channel products and technology. Selling and
marketing and general and administrative expenses in absolute dollar terms have
generally increased to support our growth in revenues. As a percentage of
revenues, however, these expenses have generally declined as a result of
allocating these expenses over an increasing revenue base.
Our quarterly results are likely to vary due to a number of factors such as
demand for our products, the size and timing of significant orders, introduction
of new products by us and by our competitors, the relatively long sales and
deployment cycles for our products, changes in our operating expenses, changes
in costs or availability of materials and a variety of other factors discussed
in "Risk Factors" and elsewhere in this prospectus.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, borrowings from Jaycor, Inc., a wholly-owned subsidiary of
our parent corporation Jaymark, Inc., have been our principal source of working
capital.
During the nine months ended September 30, 1999, cash provided by operating
activities was $1.3 million, compared to $14,000 of cash used in operating
activities in the first nine months of 1998. The cash provided by operations
reflects net income before depreciation and amortization of approximately $4.0
million, further increased by an increase in accounts payable and accrued
liabilities and partially offset by the increase in accounts receivable,
inventories and deferred income taxes. In 1998, cash provided by operating
activities was $751,000. In 1997, cash used in operating activities was $1.7
million, and in 1996 cash used in operating activities was $1.6 million. Cash
used in operations in these periods primarily reflects our net losses.
Net cash used in investing activities was $2.1 million in the nine months
ended September 30, 1999, $358,000 in the nine months ended September 30, 1998,
$1.6 million in 1998, $219,000 in 1997 and $50,000 in 1996 and consisted solely
of capital expenditures. These expenditures reflect our investments in computer
equipment, software development tools and facilities which were required to
support our business expansion.
Net cash provided by financing activities was $797,000 in the nine months
ended September 30, 1999, $372,000 in the nine months ended September 30, 1998,
$846,000 in 1998, $1.9 million in 1997 and $1.7 million in 1996, all of which
was provided by advances from Jaycor. Prior to February 1997, we were a division
of Jaycor. During that period, it is assumed that the cash used by us was funded
by a Jaycor investment. Changes in stockholders' equity represent Jaycor's
contribution after giving effect to the net operating cash used by us and
amounts necessary to fund our operations prior to incorporation.
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<PAGE> 36
We had $0 of cash and cash equivalents at September 30, 1999. Working
capital increased to $(232,000) at September 30, 1999 from $(1.8) million at
December 31, 1998.
On February 1, 1997, we entered into a revolving loan agreement with Jaycor
whereby we agreed to consent to borrow and/or lend sums to each other as needed
from time to time in the ordinary course of business. We have never loaned money
to Jaycor under this agreement, and we do not intend to lend to Jaycor in the
future. Under the terms of the agreement, the advances bear interest at Jaycor's
incremental cost of borrowing (13.4% as of September 30, 1999). Advances under
the agreement are due on demand, and if no demand is made, within ten years of
the date of such advance. At September 30, 1999, we owed Jaycor $4.3 million for
advances made under this agreement. JNI intends to repay all advances under this
agreement with proceeds from the offering, and we anticipate that we will
terminate this facility promptly after such repayment.
We believe that the proceeds from this offering, together with the cash
flows from operations, will be sufficient to meet our working capital needs at
least through the next 12 months, although we could be required, or could elect,
to seek additional funding prior to that time. Our future capital requirements
will depend on many factors, including the rate of revenue growth, the timing
and extent of spending to support product development efforts and expansion of
sales and marketing, the timing of introductions of new products and
enhancements to existing products, and market acceptance of our products. There
can be no assurance that additional equity or debt financing, if required, will
be available on acceptable terms, or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was
issued. This statement will be effective for us on January 1, 2001. SFAS 133
requires certain accounting and reporting standards for derivative financial
instruments and hedging activities. Under SFAS 133, all derivatives must be
recognized as assets and liabilities and measured at fair value. We have not
determined the impact of the adoption of this new accounting standard on our
financial statements.
THE YEAR 2000 ISSUE
An unknown number of existing computer systems, software applications and
other non-IT control devices use only two digits to identify the year of a date
variable. Considering the impact of the upcoming change in the century, such
systems, applications and devices could fail or create erroneous results unless
corrected so that they can process data related to the year 2000 and beyond. We
rely on our systems, applications and devices in operating and monitoring all
major aspects of its business, including financial systems, customer services,
infrastructure, embedded computer chips, networks and telecommunications
equipment and products. We have initially assessed how we may be impacted by
Year 2000 and have commenced implementation of a detailed plan to address
certain aspects of the Year 2000 problem. The potential impacts to us identified
by the plan include internal information technology, or IT, systems, internal
non-IT systems, our products and the readiness of significant third parties with
which we have material relationships.
INTERNAL IT SYSTEMS
We have formed a Year 2000 task force that oversees the Year 2000 readiness
activities with representatives from engineering, manufacturing, sales and IT
departments. The Year 2000 task force has executive sponsorship and will be
periodically reporting
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<PAGE> 37
status to management. The Year 2000 task force is charged with raising awareness
throughout JNI, identifying critical IT business components that use date
variables, developing and monitoring plans to bring non-compliant applications
and infrastructure into compliance and identifying and resolving high-risk Year
2000 issues.
We are addressing Year 2000 issues in a phased approach comprised of the
following steps: (1) assessment; (2) replacement; (3) testing; and (4)
contingency planning. The assessment phase consists of taking an inventory of
internal IT and non-IT systems and assessing risk, identifying potential
solutions and estimating repair or replacement costs. The replacement phase
consists of replacing non-compliant components with manufacturer Year 2000
certified upgrades or replacement with competitive manufacturer Year 2000
certified components. The third phase, testing, includes identifying critical
components to test, designing comprehensive tests for each, performing the tests
and taking corrective actions. The last phase, contingency planning, involves
strategies for dealing with failures in any mission critical component.
We have completed assessment efforts for our critical information systems
and are on schedule for a November 1, 1999 completion of the replacement phase.
The testing phase is scheduled for completion on December 1, 1999. Contingency
planning is scheduled for completion November 1, 1999. Non-critical IT
components are in the testing phase.
INTERNAL NON-IT SYSTEMS
Our non-IT systems include, but are not limited to, those systems that are
not commonly thought of as IT systems, such as telephone and voice mail systems,
building security systems and environmental systems. We have completed the
replacement phase for our internal non-IT systems and are on schedule for
completion of our testing phase by December 1, 1999.
PRODUCTS
Our products include host bus adapters, ASICs and software. We have
completed an assessment of our products and has determined that they do not
contain specific date variables that would be impacted by the change in the
century.
MATERIAL THIRD-PARTY RELATIONSHIPS
Our third-party relationships include key suppliers, contract manufacturers
and OEM and distribution channel customers. We have reviewed the Year 2000
readiness disclosure of our key ASIC supplier and contract manufacturers, which
indicates in each case that such party either is Year 2000 compliant or that
such party has made substantial progress in addressing Year 2000 issues. We are
in the process of contacting other parties with whom we have material
relationships to obtain compliance statements and perform assessments of their
state of readiness for Year 2000. The assessment and interview phase is on
schedule for completion by December 1, 1999, with contingency plans scheduled
for finalization by November 1, 1999.
COSTS
We currently estimate that the costs associated with the Year 2000 should
not have a material adverse effect on our operating results or financial
position in any given year. Historical amounts spent on assessment, planning,
preparation and implementation have not been material to the operating results
and are part of the normal IT budget for fiscal 1999 and 2000.
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<PAGE> 38
RISKS
We believe our greatest risks related to the Year 2000 issue involve our
relationships with our critical third party suppliers and service providers.
Potential impacts include an interrupted product flow from critical suppliers
due to their Year 2000 interruptions and potential infrastructure collapse due
to interruptions in public utilities, electricity or telecommunications. Any of
the foregoing risks, as well as the fruition of a combination of lesser risks,
could adversely impact our financial condition and operations. We are
formulating contingency plans to mitigate or reduce these risks and to address
each area of our Year 2000 compliance plan, and we are on schedule for
completion by November 1, 1999. However, because the third party service
providers are not controlled by us, it is possible that the Year 2000 will have
a material adverse impact on our business, financial condition or operating
results.
ISSUES RELATED TO THE EUROPEAN MONETARY CONVERSION
On January 1, 1999, certain member states of the European Economic
Community, fixed their respective currencies to a new currency, the Euro. On
that day, the Euro became a functional legal currency within these countries.
During the three years beginning on January 1, 1999, business in these EEC
member states will be conducted in both the existing national currency, such as
the Netherlands guilder, French franc or Deutsche mark, and the Euro. Companies
operating in or conducting business in EEC member states will need to ensure
that their financial and other software systems are capable of processing
transactions and properly handling the existing currencies, as well as the Euro.
We are still assessing the impact that the Euro will have on our internal
systems and products. While we believe our enterprise-wide financial and
manufacturing information system will be Euro compliant, we have not tested this
system. We have not determined the costs related to any problems that may arise
in the future. Any such problems may materially adversely affect our business,
operating results or financial condition.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We have no material market risk exposure. Therefore, no quantitative
tabular disclosures are required.
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<PAGE> 39
BUSINESS
INDUSTRY BACKGROUND
GROWTH AND MANAGEMENT OF DATA
In today's information-based economy, a company's information and databases
are central to the value of the enterprise. The volume of business-critical data
generated, processed, stored and manipulated has grown dramatically over the
last decade, and managing the increase in data is one of the most important
challenges for organizations. International Data Corporation, an independent
industry research company, estimates that the amount of stored networked data
grew from 750 terabytes in 1994 to 10,500 terabytes in 1998, and that it will
increase to 420,000 terabytes in 2002. The dramatic increase in stored data is
the result of a variety of factors, including:
- the development of Web-based business operations and e-commerce;
- high volume database access and transaction processing;
- data warehousing and data mining of large databases;
- data replication services;
- digital video storage, transmission and editing; and
- business and scientific computing.
As a result, enterprises face heightened requirements for data storage
solutions that offer:
- improved access to shared data;
- efficient management of shared data;
- disaster tolerance and recovery;
- reduced costs of ownership;
- increased connectivity capabilities;
- higher performance; and
- greater reliability.
Today's enterprises generally access, share and manage the rapidly
expanding volume of data utilizing two major data communication technologies:
local area network and input/output. Local area network technologies enable
communications among servers and client computers, while input/output
technologies enable communication between servers and their attached high-speed
peripherals, such as storage devices. The servers and storage devices in
traditional architectures communicate using an input/output interface protocol
known as small computer systems interface, or SCSI. The SCSI protocol is based
on the concept of a single server transferring data in a serial manner to a
limited number of disk drives. While SCSI has achieved wide acceptance, it has
several limitations, such as short transport distance, lack of reliability and
support for a limited number of connections, which have restricted the
capabilities of traditional network storage architectures.
The traditional network storage architectures are commonly referred to as
local backup and network attached storage. In the widely-deployed local backup
architecture, each network server is linked to a limited number of storage
systems in close proximity using SCSI technologies. In the network attached
storage architecture, stored data can be accessed over the local area network
because the storage device is connected directly to the local area network by a
dedicated storage server. Due to the significant volume of data being stored in
today's business environment, however, both of these architectures have
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<PAGE> 40
become increasingly costly to maintain and expand because their reliance on
"tethered" storage devices makes them hardware intensive. The following diagram
illustrates the traditional architectures used to manage data storage and
access:
[Diagram of Traditional Architecture]
The traditional architectures can provide acceptable performance in smaller
enterprises and even in larger organizations when a single server runs the
complete application. Over the past few years, however, the explosive growth of
networked computers has led to the distribution of applications over hundreds or
even thousands of servers. This trend, in combination with the growth in stored
data, has highlighted a number of significant problems for enterprises using the
traditional architectures:
- Scalability. To increase the amount of storage capacity without degrading
network performance, a business using a traditional architecture will
generally increase the number of servers on the network as well as the
number of storage devices. Further, these architectures necessitate the
replication of data in multiple locations to eliminate bottlenecks, thus
increasing the cost of storing data.
- Availability. Because access to each storage device is controlled by a
single server in traditional architectures, data can become inaccessible
if the server goes down. Further, because the server must process all
requests for data in the storage device, the traditional model drains
server processing power and increases latency for network users which
results in degraded overall network performance.
- Speed and Distance. To achieve higher transmission speeds in traditional
architectures, the distance between storage devices and servers must be
limited to less than 12 meters. This close proximity increases network
configuration complexity and exposure to data loss in disaster
situations. Furthermore, in traditional architectures, data transmission
to or from the storage device to the client requesting the data must pass
through the SCSI connection, the server and the network. Because the SCSI
connection is typically much slower than the local area
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<PAGE> 41
network, the traditional architecture creates a bottleneck at the server
which degrades network performance and lengthens backup times.
- Manageability. Businesses that use traditional architectures must rely on
network servers to provide performance, configuration, accounting, fault
and security management of the SCSI connection and the stored data. This
decentralized management approach increases the costs of operating a
network and limits the ability to improve performance, ensure data
security and enable highly available data access.
As a result, the traditional architectures do not adequately support the
increasing requirements of today's data-intensive enterprises.
FIBRE CHANNEL TECHNOLOGY
In response to the demand for high-speed and high-reliability
storage-to-server and server-to-server connectivity, the Fibre Channel
interconnect protocol was developed in the early 1990s and received the American
National Standards Institute approval in 1994. Fibre Channel is an open,
efficient transport system supporting multiple protocols using Fibre Channel
guaranteed delivery services. Fibre Channel represents an integration of
channels and networks with active, intelligent communication among devices.
Fibre Channel technology has the following capabilities:
- Performance capability of over four gigabits/second;
- Support for distances up to 10 km without loss of speed;
- Serial transmission with small physical hardware;
- Scalable network configurations;
- Reliable data transmission capable of guarantee through multiple classes
of service;
- Interoperability with standard components;
- Support for multiple cost/performance levels, from small systems to
supercomputers; and
- Ability to carry multiple existing interface data protocols, including
Internet Protocol, SCSI and audio/video.
As a result of its broad range of features, many industry analysts consider
Fibre Channel to be the most reliable, scalable, gigabit communications
technology available today. Since its introduction, Fibre Channel has earned
increasing acceptance from industry and independent testing laboratories. IDC
forecasts that the market for products based on Fibre Channel technology will
exceed $23.0 billion within three years. Fibre Channel technology can be
implemented in a wide variety of applications, including computer clustering,
networking, digital video transmission and editing and storage access. To date,
the most widely accepted and deployed application for fibre channel technology
has been in SANs.
STORAGE AREA NETWORKS
A storage area network is a network of servers and data storage devices
which interconnects servers and storage devices at gigabit speeds. Fibre Channel
is the critical enabling technology that has made implementation of a SAN
possible. Businesses are investing in SANs because they have found that
establishing a separate network for storage takes data movement off the local
area network thereby freeing up network resources and reducing the impact on
network users. SANs provide an open, extensible platform for storage access in
data intensive environments like those used for data warehousing, storage
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<PAGE> 42
management and server clustering applications. Equally important, SANs can be
significantly less expensive to maintain and expand than traditional storage
architectures because they enable shared, high-speed access to stored data which
can significantly reduce data replication. The following diagram shows the basic
structure of the SAN in relation to the local area network:
[Diagram of SAN Architecture]
SANs provide the following benefits that address the growing challenges
facing businesses using data-intensive, mission-critical applications:
- Scalability. By combining networking models with advanced server
performance and mass storage capacity, a SAN eliminates the bandwidth
bottlenecks and scalability limitations imposed by traditional storage
architectures. Because Fibre Channel supports multiple topologies, SANs
can support up to 126 devices in simple configurations and up to 16
million devices in the most complex configurations. The network
architecture reduces the need to replicate data because all servers can
share access to each storage device.
- Availability. SANs enable businesses to eliminate the bottlenecks
inherent in the traditional architectures and to reduce the dependence on
a single server to access each storage device. Because SANs use Fibre
Channel technology and a networked approach, SANs can be designed with
multiple fail-overs to provide more reliable connections and thereby
assure availability of data in spite of failures of individual links or
components of the system.
- Speed and Distance. By using Fibre Channel technology, SANs support large
data block transfers at gigabit speeds and are therefore very effective
for data transfers between storage systems and servers. Fibre Channel has
demonstrated transmission speeds of up to two gigabits per second and is
designed to scale to significantly higher speeds. Additionally, Fibre
Channel supports a transmission distance of up to 10 kilometers without
loss of speed, which simplifies network configuration and significantly
reduces susceptibility to environmental disaster.
- Manageability. Fibre Channel facilitates the use of network management
software for monitoring and control. Thus, network administrators are
able to more closely monitor storage systems, giving them the control to
group storage devices into logical unit numbers, distribute data loading
more evenly across peripherals and reroute traffic under error
conditions. Fibre Channel hardware can be configured to
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<PAGE> 43
offer several levels of reliability which increases the security and
accessibility of stored data.
- Flexibility. SANs provide high-speed connectivity for data-intensive
applications across multiple operating systems, including UNIX, Mac OS
and Windows NT. SANs apply the distributed computing model to computer
storage systems and servers and take advantage of the inherent benefits
of a networked approach. SANs can be configured in multiple topologies,
and the various topologies contribute to the flexibility of the SAN to
solve storage management issues by offering enterprises alternatives in
cost and scale. The most commonly used topology in currently deployed
SANs is the arbitrated loop, or FC-AL, because it offers most of the
benefits of a SAN at a lower cost than the most complex topology. The
switched topology, or FC-SW, is the most complex and provides the most
aggregate throughput as it allows for multiple data transmissions to
occur simultaneously.
The SAN environment complements the ongoing advancements in local area network
technologies by extending the benefits of improved performance and capabilities
from the client local area network through to servers and storage.
COMPONENTS OF A SAN
Virtually all SANs use several basic components to make up the network,
including the following:
- servers and management software;
- storage devices and Fibre Channel disc controllers;
- switches, hubs and Fibre Channel to SCSI bridges;
- host bus adapters; and
- copper or fiber optic cables.
Regardless of topology, each server connects to a SAN through host bus
adapters, which are electronic circuit cards that fit standard sockets on
computer motherboards and enable high-speed data transfer. A host bus adapter
connects the server to other devices on a SAN via cables. The cables connect the
host bus adapter either directly to the Fibre Channel disc controller which is
installed in the storage device or to a hub or a switch.
A host bus adapter is one of the most critical and complex devices on the
SAN. A host bus adapter provides the necessary bridge between a SAN and a
computer bus, which is an internal communication pathway between the central
processing unit and internal memory or peripheral devices. By leveraging the
advantages of Fibre Channel, a single host bus adapter can handle a multitude of
tasks that previously required distinct host bus adapters for each protocol.
Host bus adapters are typically classified by (a) bus architecture, (b) computer
operating system and (c) topology. Each host bus adapter product is designed to
support a particular bus architecture, typically either the Sun Microsystems
SBus architecture or the Peripheral Component Interconnect, or PCI, bus
architecture. Because Fibre Channel host bus adapter functions are regulated by
software, each host bus adapter must include software designed to work with the
particular operating system being used by the server/storage solution. These
systems include all types of UNIX as well as Windows NT, Mac OS and mainframe
systems. Host bus adapters are therefore designed to work with one or more
operating systems and one or more Fibre Channel topologies. IDC projects that
the annual market for Fibre Channel host bus adapters will grow from $269
million in 1999 to over $1.6 billion by 2002.
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The core technology of host bus adapter and other components of a SAN is
embodied in application specific integrated circuits, or ASICs, that perform the
most complex functions, and software that enables the integration and management
of the SAN equipment. ASIC development is a lengthy and costly process that
requires significant technical expertise and resources. Likewise, developing
software to work with and manage SAN components involves an extensive design
effort. This effort is compounded by the need to test and debug software code
for each Fibre Channel product and ensure compliance with several distinct
operating platforms. These technological barriers to entry create a significant
market opportunity for companies that have developed and deployed Fibre
Channel-based products, particularly host bus adapters, that utilize proprietary
ASICs and software designed to work in the emerging SAN environment.
THE JNI SOLUTION
We are a leading developer and manufacturer of Fibre Channel hardware and
software products that form critical elements of SANs. We developed some of the
first commercially available Fibre Channel-based products and focus our efforts
exclusively on the Fibre Channel market. Because of our early and continuous
focus on developing technology and products based on the Fibre Channel standard,
we have successfully developed a broad line of host bus adapters, ASICs and
software that provide increased bandwidth for data communication, increased
distance for high speed data transmission, guaranteed data delivery and
scalability to large numbers of network connections. Our proprietary ASICs have
been designed to work in the most demanding, high-end enterprise applications
and are particularly effective in switched environments. We believe that we
offer the broadest range of Fibre Channel host bus adapters in the SAN industry.
Our proprietary configuration and driver software incorporates advanced features
that significantly enhance and simplify SAN device integration and management.
As a result of our advanced technology and broad product offering, we are able
to deliver the following benefits to our customers and end-users:
- Manageability. Our software can help eliminate configuration errors,
which are the most common cause of SAN failure. Our EZFibre SAN
management software is a powerful and easy-to-use tool for configuring
and managing a SAN and its components. EZFibre's point and click
interface and helpful diagnostic tools give the user an intuitive and
effective way to manage JNI products in SANs of all sizes.
- Flexibility. Our products can be used with both PCI and SBus interfaces,
work with all SAN topologies and interoperate with a wide variety of
operating systems and computer platforms, including Windows NT, UNIX, Mac
OS and others. In addition to SANs, customers have deployed our products
for use with digital graphics, video networks and non-linear digital
editing systems for the advertising, broadcast and entertainment
industries as well as for high speed data processing applications in a
variety of industries, including Internet service providers.
- Performance. Our ASIC technology enables an extraordinarily high
performance connection to the SAN. We believe that our products deliver
exceptional price/performance, regardless of scale or configuration. We
are the first in the industry to demonstrate products capable of
sustained 2 gigabit per second Fibre Channel transmissions. We also
believe that our ASICs provide the lowest latency available in the most
complex, switched SANs.
- Scalability. Our ASIC and host bus adapter architectures provide high
performance in simple, cost-sensitive SAN configurations, but they are
capable of
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scaling to switched, multi-terabyte enterprise solutions. Our products
include both workgroup class solutions and enterprise solutions that can
support the full range of connectivity enabled by the Fibre Channel
standard. Using our products, customers can seamlessly add storage to a
SAN while it is operating, and they can easily migrate from simple to
complex topologies to support larger networks.
- Availability. JNI products are installed in some of the most demanding
business environments, and our customers typically have extremely low
tolerance for system downtime. We conduct extensive testing with complex
simulations of user configurations to help ensure that our products will
not cause any data loss, data interruption, SAN crashes or lockups and
that our products can withstand most failures or interruptions in other
parts of the system.
- Quality. We design, manufacture and test our products to meet high
standards for quality. During the product design process, each component
is qualified by testing to provide the necessary performance over ranges
of environmental conditions that more extreme than what our customers
will encounter in normal use. Our latest ASIC technology has reduced the
number of parts on our host bus adapters, which improves quality by
simplifying data/error checking.
- Customization. We work closely with our OEM customers to tailor our
products to meet the customer's specific requirements. For UNIX
applications in enterprise level SANs, many of our OEM customers require
customized driver software to optimize performance with their products.
We have modified drivers to provide the required level of optimization
without sacrificing performance or robustness. We believe that our
capability to easily customize our software to meet customer needs will
be an important factor in increasing acceptance of our products in the
marketplace.
THE JNI STRATEGY
Our objective is to become the market leader in high-speed Fibre Channel
connectivity products for SANs and other applications by providing a family of
integrated host bus adapter, ASIC and software products that exceed competitive
offerings in features, flexibility and price/performance. The key elements of
our strategy are highlighted below:
Focus exclusively on Fibre Channel. We base all of our products on Fibre
Channel technology. We plan to enhance our presence in the SAN market by
focusing all of our resources on developing, marketing and supplying superior
Fibre Channel connectivity products. By focusing entirely on the design and
development of Fibre Channel products, we believe that we can enhance our
existing products and develop new products for SANs and other applications
rapidly and efficiently. We believe that our focus will provide us with a
competitive advantage in developing Fibre Channel products for complementary
applications as the markets for such applications develop.
Expand penetration of existing OEM customers and leverage multiple
distribution channels. We are focused on product sales to new customers and on
extending our product penetration within our existing OEM customer base. Once a
customer buys our product for one system in the SAN, our strategy is to then
offer complementary products. By integrating additional JNI products, a customer
can obtain the increased benefits of our product breadth by simplifying SAN
configuration using common device drivers, management utilities and vendor
support. We intend to increase our reseller programs to complement our
distribution channels. To complement and support our domestic and
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international reseller and OEM channels, we intend to increase our worldwide
field sales force.
Leverage Fibre Channel technology and quality leadership. Our technological
leadership is based on our proprietary ASIC, software and high-frequency circuit
designs. We intend to continue to invest our engineering resources in ASIC and
software development and provide leading technologies to increase the
performance and functionality of our products. We believe that early technology
and product leadership can translate into market leadership. We also recognize
that product quality is an indispensable condition of competitiveness, and we
are focused on continuously improving product quality, delivery, performance and
service. We have taken steps to obtain ISO9002 certification in early 2000 and
intend to obtain ISO9001 certification by the end of 2000.
Provide customer-driven product functionality and high quality customer
support. We seek to enhance customer satisfaction and build customer loyalty
through the quality of our service and support. In addition, we are committed to
providing customer-driven product functionality through feedback from key
prospects, consultants, distribution channel and OEM customers and customer
surveys. We intend to continue to enhance the ease of use of our products and
invest in additional support services by increasing staffing and adding new
programs for our OEM and distribution channel customers.
Promote the JNI brand. We plan to continue building awareness of the JNI
brand in order to position ourselves as a leading provider of high-performance
Fibre Channel connectivity products for high-end, enterprise-level business
applications. 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.
Establish and maintain strategic alliances and pursue acquisitions. We
intend to continue working closely with leaders in the storage, networking and
computing industries to develop new and enhanced Fibre Channel products. We
believe that establishing strategic relationships with technology partners is
essential to facilitate the efficient and reliable integration of our products
into SANs. To this end, we have formed strategic relationships and industry
alliances with leading technology companies, including Ancor Communications,
Brocade Communications, Crossroads Systems, Gadzoox Networks and McData. We also
intend to pursue joint ventures, licensing and acquisition strategies to meet
these goals. We believe that the emerging SAN industry will present numerous
opportunities to employ an acquisition or partnering strategy with key software
and hardware companies.
PRODUCTS
We believe we offer high quality Fibre Channel products with a superior
price/performance profile. Our products include a comprehensive suite of host
bus adapters, ASICs and software.
HOST BUS ADAPTERS
We design, manufacture and sell a suite of Fibre Channel host bus adapters
and related device driver software. A host bus adapter is an electronic circuit
card that fits standard sockets on motherboards for servers, workstations, disk
arrays and other SAN devices and enables high-speed data transfer within the
SAN. Communication between the host bus adapter and the operating system is
regulated by device driver software which is included with the host bus adapter.
In addition to communication, the device driver
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software provides a high-reliability data path from a user's application in a
SAN. Working in conjunction with our device driver software, our host bus
adapters can be used with both the SBus and the PCI interface, work with all SAN
topologies and interoperate with a wide variety of operating systems, making our
host bus adapter capabilities the broadest currently available. Because of the
high level of reliability of our device driver software and the functionality of
our host bus adapters, we have been certified as a designated supplier by
leading storage OEMs, including Compaq, Data General, EMC, Fujitsu, Hitachi,
McData and MTI. Our host bus adapter list prices range from $745 to $4,075.
We commenced volume production of host bus adapters in 1996 with our
FibreStar line of host bus adapters designed for the SBus interface, and we are
currently the leading independent supplier of host bus adapters for the Sun
Solaris operating system. In late 1998, we obtained our initial certification
from an OEM customer for our host bus adapters for the PCI interface. In 1999,
we introduced our lower cost Emerald-based host bus adapter for the PCI
interface based on Fibre Channel products and technology acquired from Adaptec.
The new Emerald-based host bus adapters for the PCI interface also offer
significantly improved performance and flexibility and include device driver
software for Solaris and other UNIX variants, Windows NT, Mac OS and NetWare.
The following tables provide information about our current offering of host bus
adapters:
WORKGROUP SOLUTIONS
<TABLE>
<C> <S> <C>
PRODUCT FEATURES TARGET MARKETS
FIBRESTAR HIGH-PERFORMANCE - Next generation PCI technology
PCI ADAPTERS - High-performance in all High-volume PC servers &
configurations applications, entry level SANs,
- Includes EZFibre management price/performance sensitive
utility customers
- Emerald-based architecture
- 32-bit and 64-bit PCI
connections
- ---------------------------------------------------------------
FIBRESTAR 32-BIT PCI - Single interface for network
ADAPTER and storage applications
- Compatibility with SBus
products
- ---------------------------------------------------------------
FIBRESTAR 2-GIGABIT PCI - Industry's first 2-Gigabit
ADAPTER fibre channel adapter
- Enabling 2-Gigabit OEM products
-------------------------------------------------------------------------------------------------
</TABLE>
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ENTERPRISE SOLUTIONS
<TABLE>
<C> <S> <C>
PRODUCT FEATURES TARGET MARKETS
FIBRESTAR SBUS ADAPTER - Designed for mission critical Critical database applications,
applications data warehousing, data mining
- Highly efficient architecture
- High-performance SBus
connectivity in all SAN
configurations
-------------------------------------------------------------------------------------------------
</TABLE>
ASICS
We incorporate our Emerald Fibre Channel controller ASICs into our latest
generation of host bus adapters and sell them to OEMs for products such as SAN
controllers for disk arrays, tape libraries and other SAN devices. In addition,
we sell our ASICs to OEMs who in turn incorporate them into the motherboards of
enterprise and department servers. Commercially available versions of the
Emerald transmit data at 1 gigabit per second, and we have recently introduced
versions capable of sustained 2 gigabit per second transmission speeds, which is
the highest speed demonstrated in the industry. Adaptec developed the original
architecture of the Emerald in a three year research and development program. We
acquired all of the technology related to the Emerald architecture from Adaptec
in November 1998. With enhancements we have implemented since the acquisition,
the reliability and the performance of the Emerald have been substantially
improved, and we are developing enhanced ASICs based on the Emerald
architecture. In addition to the circuits required for Fibre Channel data
formatting and control, the Emerald ASIC incorporates a PCI interface circuit,
leading to cost effective host bus adapter products.
<TABLE>
<CAPTION>
PRODUCT FEATURES TARGET MARKETS
<S> <C> <C>
EMERALD-III - High-performance PCI
interface
- 1- or 2-Gigabit interface
- ----------------------- Tape/disk storage system
EMERALD-IV* - Increased performance controller, board level
- 1- or 2-Gigabit interface products
- Small footprint for
motherboard applications
- -------------------------------------------------------------------------------
</TABLE>
* Scheduled for commercial availability in the fourth quarter of 1999.
SOFTWARE
We offer software solutions designed to simplify SAN configuration and to
provide diagnostic and monitoring information to SAN administrators. Introduced
in the third quarter of 1999, EZFibre is both sold separately for a list price
of $149 and included with our latest generation of Emerald-based host bus
adapters. Our EZFibre software is a management and configuration utility for
Windows NT that provides the user with an easy to use, graphical view of the
host bus adapters and other SAN components attached to the system. EZFibre
enables the user to easily configure complex systems that include multiple PCI
busses and multiple host bus adapters. EZFibre users can also view information
about
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the Fibre Channel SAN controllers and SAN devices attached to the system. The
SAN administrator can then configure the SAN for use in a multiple operating
system environment using the advanced capabilities built into the host bus
adapter and the driver software. These capabilities allow partitioning of a SAN
for use in a multiple operating system environment and the partitioning of
storage resources among different servers that may be running different
operating systems all by using the advanced capabilities built into the host bus
adapter and the driver software. Storage resources can also be reallocated and
repartitioned dynamically without the need to reboot the system. EZFibre also
provides a diagnostic utility that can be used to verify the operation of our
host bus adapters when installed in a SAN. Interfaces are also provided to allow
the host bus adapter management and diagnostic capabilities to be integrated
into larger network management packages such as those provided by HP, Legato,
Microsoft, Sun and Veritas.
<TABLE>
<CAPTION>
PRODUCT FEATURES TARGET MARKETS
<S> <C> <C>
EZFIBRE - Simplifies SAN
installation Windows NT-based SANs
- Improves manageability
and interoperability
- Easier scalability
- -------------------------------------------------------------------------------
</TABLE>
TECHNOLOGY
We possess a high level of multi-disciplinary technological expertise,
which we utilize in designing our products. This expertise includes Fibre
Channel technology, core ASIC design, system design, system integration and
software development. We believe that our expertise in these technologies
provides us with competitive advantages in time-to-market, price/performance,
interoperability and product capabilities.
ASIC design expertise. We employ state-of-the-art ASIC design methodologies
to develop high-performance, complex ASICs. Our proprietary Emerald ASIC
architecture utilizes an embedded processor with on-board memory to achieve
efficient command and data communication. This architecture significantly
reduces command processing time to enable complex communication, while
maintaining full performance when operating in any SAN topology. Our
architecture also allows us to implement significant portions of Fibre Channel
protocol in embedded software while keeping higher level functions in the device
driver software. As a result of this multi-layered software implementation and
reduced geometry CMOS technology, we are able to react quickly as technical
standards evolve or new standards are defined. Our expertise in ASIC design has
enabled us to offer products capable of sustained 2 gigabit per second
transmission speed, which is currently the fastest transmission speed in the
Fibre Channel market.
System Design. We employ computer aided design tools to engineer and design
our printed circuit boards. Our system design team has expertise in the
containment of high-frequency electromagnetic interference, which is inherent in
high-speed networking devices. We have expertise in chassis design, including
design for manufacturability, testability, usability, reliability and low cost.
System Integration. At our principal offices in San Diego, we have
established the JNI system integration lab, or SIL, to provide comprehensive
functional and system level integration/interoperability testing between our
host bus adapters and various computer platforms and Fibre Channel systems. To
facilitate expanded market penetration of our products and technology, our
integration test methodologies and software are continually evolving to mirror
qualification processes used by major SAN suppliers and OEMs. We conduct
functionality testing at our SIL in formal, repeatable processes using
documented
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product specifications and features to verify the operation of both our hardware
and our software. Our products are tested with departmental and enterprise class
servers, including platforms from Compaq, Dell, Sun and others, and from the
leading vendors of fibre channel hubs, switches and SAN systems, including
Amdahl, Ancor, Brocade, Data General, EMC, Gadzoox, LSI Logic, McData and Vixel.
Integration testing at our SIL combines our products with various Fibre Channel
SAN components to simulate the most commonly used functional configurations
defined by system integrators and major OEMs. The overall goal is to ensure
enterprise class performance and interoperability in real world SAN deployments.
Software. Our team of software developers has extensive experience in
developing software for Fibre Channel devices and applications. We have
considerable experience in programming to meet the requirements of enterprise
level systems running mission-critical applications. Our engineers have
experience in developing software for many major operating systems, including
Sun Solaris and other UNIX variants, Windows NT, Mac OS and NetWare. Our
software implementations support Fibre Channel protocol standards such as FC-AL,
SCSI over Fibre Channel, IP over Fibre Channel and FC-SW. Our team also
possesses expertise in SAN configuration and management as well as graphical
user interface software. Our graphical user interface development efforts focus
on platform-independent SAN management applications. As of September 30, 1999,
our engineering staff included 28 software engineers.
For a discussion of certain risks applicable to our focus on Fibre Channel
technology, please see "Risk Factors -- Because we focus exclusively on Fibre
Channel products, our revenues will be limited if Fibre Channel technology does
not achieve widespread market acceptance" and "Risk Factors -- In our industry,
technology and other standards change rapidly, and we must keep pace with
changes to compete successfully."
CUSTOMERS
We sell our products to OEMs and through distribution channels. The
following is a representative list of our key customers since the beginning of
1998:
<TABLE>
<CAPTION>
OEM DISTRIBUTION CHANNEL
<S> <C>
Amdahl Acal Electronics
AVID Bell Microproducts
Chaparral Core C EPM
Ciprico Daejin Computers
Compaq Electronic Data Systems
Consan INFO X
Data General Mitsui
McData Polaris Service
EMC Solectron
Hitachi Work Group Solutions
LSI Logic
MTI
Silicon Graphics
StorageTek
Stornet
</TABLE>
In the nine months ended September 30, 1999, our top five customers
accounted for 62% of our total net revenues, and, in the year ended December 31,
1998, our top five customers accounted for approximately 57% of our total net
revenues. In particular, in the
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<PAGE> 51
nine months ended September 30, 1999, Polaris Service accounted for 16% of our
net revenues, Data General accounted for 13% of our net revenues, Info X, Inc.
accounted for 16% of our net revenues and ACAL Electronic accounted for 12% of
our net revenues.
End-users of JNI products include the following:
<TABLE>
<S> <C>
Amazon.com Federal Express
Bear Stearns Fidelity Investments
Boeing GTE
Charles Schwab Lexis Nexis
Convergys (formerly Cincinnati Mobil
Bell Morgan Stanley Dean Witter
Information Systems) Safeway Stores
DaimlerChrysler US WEST Capital Funding
</TABLE>
For a discussion of the risks associated with our existing and potential
customer base, please see "Risk Factors -- Because we depend on a small number
of OEM and distribution channel customers for a significant portion of our
revenues in each period, the loss of any of these customers or any cancellation
or delay of a large purchase by any of these customers could significantly
reduce our net revenues."
CUSTOMER SERVICE AND SUPPORT
We offer a wide range of standard support programs that includes telephone
support 24 hours a day, seven days a week and advanced replacement of products.
In addition, we have designed our products to allow easy diagnostics and
administration. For example, users can access all of the configuration and
performance parameters of our host bus adapters from a single graphical user
interface for configuration, troubleshooting and maintenance. Our customer
service and support organization provides technical support to our OEM and
systems integrator customers, enabling them to provide technical support to
their end-users. We prepare our OEMs and systems integrator customers for
product launch through a comprehensive training program. In addition, we employ
systems engineers for pre- and post-sales support and technical support
engineers for field support. Our OEM and systems integrator customers provide
primary technical support to end-users of our products.
We have developed an extensive training course for our OEM and distribution
channel customers. The curriculum includes Fibre Channel configuration, SAN
implementation and JNI product training. Most of our OEM and channel customers
attend our training courses to learn fibre channel configuration and SAN
reliability design.
SALES AND MARKETING
We sell domestically and internationally to OEMs, distribution channel
customers, which include distributors, system integrators and value added
resellers, and directly to end users. We principally target OEMs and
distributors who resell our products as a part of complete SAN solutions to
end-users. Our sales and marketing strategy will continue to focus on the
development of the Fibre Channel market through these relationships. 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. In the future, as Fibre Channel becomes
targeted at end-users, we will evolve our strategy to include channel partners
who serve small- to medium-sized businesses.
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<PAGE> 52
Our marketing efforts are focused on increasing awareness of our Fibre
Channel products and our JNI brand, promoting SAN-based solutions, and
advocating industry-wide standards and interoperability. Key components of our
marketing efforts include:
- extending our strategic alliances to promote standardization and enhance
interoperability;
- promoting our products under the JNI brand name to strengthen sales
through distribution 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; and
- participating in major trade show events and SAN conferences to promote
our products and to continue our leading role in educating customers on
the value of SANs.
As of September 30, 1999, our sales and marketing organization consisted of
21 people, including field sales representatives, applications engineers,
customer service personnel, product marketing, product management, marketing
communications and inside sales personnel. Our field sales personnel are located
in San Diego, Irvine and Fremont, California, and Boston, Massachusetts. We
intend to establish a direct sales presence in both London and Japan.
OEMS
OEMs can exercise significant influence in the early development of our
market because they utilize our products to deliver to end users complete,
factory-configured solutions that are installed and field-serviced by OEMs'
technical support organizations. We intend to continue partnering with leading
OEM customers to introduce new products and develop new markets. OEMs will
continue to provide critical input as we develop the next generation of
products.
OEM customers have been integral to our growth in the emerging Fibre
Channel market and have represented a significant portion of our revenues. We
believe the evolutionary nature of the Fibre Channel market should enable us to
continue to present our OEM customers with the opportunity to integrate and
deploy new capabilities as they are developed. To help drive new technologies
and capabilities, we plan to continue to strengthen our OEM customer
relationships.
DISTRIBUTION CHANNEL CUSTOMERS
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 distribution channels. We have
established a two-tier distribution channel that is comprised of distributors
and resellers. We sell through distributors to customers in the United States,
Europe and Japan. We believe that our distribution channel, which accounted for
a significant portion of total net revenues in the nine months ended September
30, 1999, provides us with a diversified customer base. In addition, our
distribution channel relationships enable us to pursue a number of vertical
markets including e-commerce, Internet service providers, digital video, digital
publishing, oil and gas exploration and medical imaging. We believe that as the
market for Fibre Channel matures, we are well positioned to leverage sales
through distributors, and that such sales will represent an increasing percent
of our total net revenues. As this market continues to
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<PAGE> 53
develop, we plan to establish additional relationships with select domestic and
international resellers to reach additional markets and increase our geographic
coverage.
For a discussion of the risks associated with our sales and marketing
strategy and programs, please see "Risk Factors -- The sales cycle for our
products is long, and we may incur substantial, non-recoverable expenses or
devote significant resources to sales that do not occur when anticipated," and
"Risk Factors -- The failure of our OEM customers to keep pace with
technological change and to successfully develop and introduce new products
could adversely affect our net revenues."
MANUFACTURING, TEST AND ASSEMBLY
We outsource the majority of our manufacturing, and we conduct quality
assurance, manufacturing engineering, documentation control and certain finish
assembly operations at our headquarter facility in San Diego, California. This
approach enables us to reduce fixed costs and to provide flexibility in meeting
market demands. All of our contract manufacturers are ISO 9002 certified.
TSMC manufactures our Emerald ASICs, and Adaptec packages and tests the
ASICs so that we purchase and receive only finished product. We anticipate that
we will use parties other than Adaptec for packaging and testing of our future
ASICs, and we may transition a portion of these functions to other parties for
certain of our existing products in the near future. SCI Systems in Rapid City,
South Dakota, and SMS in Escondido, California perform substantially all
assembly operations for our host bus adapters. These contract manufacturers
purchase the components of our host bus adapters, including printed circuit
boards, third party ASICs and memory integrated circuits, and assemble them to
our specifications. The contract manufacturers deliver the assembled host bus
adapters to us, and we perform certain finish assembly procedures before testing
and packaging the final products with software and manuals in our San Diego
facility.
We believe most component parts used in our host bus adapters are standard
off-the-shelf items, which are, or can be, purchased from two or more sources.
We select suppliers on the basis of technology, manufacturing capacity, quality
and cost. Whenever possible and practicable, we strive to have at least two
manufacturing locations for each product. Nevertheless, our reliance on
third-party manufacturers involves risks, including possible limitations on
availability of products due to market abnormalities, unavailability of, or
delays in obtaining access to, certain product technologies and the absence of
complete control over delivery schedules, manufacturing yields, and total
production costs. The inability of our suppliers to deliver products of
acceptable quality and in a timely manner or our inability to procure adequate
supplies of our products could have a material adverse effect on our business,
financial condition or operating results.
For a discussion of the risks associated with our reliance on third party
manufacturers, please see "Risk Factors -- Because we rely on third parties for
substantially all of our manufacturing and assembly, failures by these third
parties to provide products of sufficient quality and quantity could cause us to
delay product shipments, which could result in delayed or lost revenues or
customer dissatisfaction."
RESEARCH AND DEVELOPMENT
Our success will depend to a substantial degree upon our ability to develop
and introduce in a timely fashion new products and enhancements to our existing
products that meet changing customer requirements and emerging industry
standards. We have made and plan to continue to make substantial investments in
research and development and to participate in the development of industry
standards. In the nine month period ended
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<PAGE> 54
September 30, 1999, our research and development expenses were $8.0 million and
in 1998, such expenses were $2.9 million, compared to $1.2 million in 1997 and
$510,000 in 1996.
We focus our development efforts on Fibre Channel ASICs and related
software drivers and tools. Before a new product is developed, our research and
development engineers work with marketing managers and customers to develop a
comprehensive requirements specification. After the product is designed and
commercially released, our engineers continue to work with customers on early
design-in efforts to understand requirements for future generations and
upgrades.
Research and development expenses primarily consist of salaries and related
costs of employees engaged in ongoing research, design and development
activities and subcontracting costs. As of September 30, 1999, we have 56
employees engaged in research and development. We are seeking to hire additional
skilled development engineers. Our business, operating results and financial
condition could be adversely affected if we encounter delays in hiring
additional engineers.
For a discussion of the risks we face in achieving our goals in research
and development, please see "Risk Factors -- Delays in product development could
adversely affect our market position or customer relationships" and "Risk
Factors -- The loss of or failure to attract key technical personnel could
adversely affect our business."
COMPETITION
The market in which we compete is intensely competitive and is
characterized by frequent new product introductions, changing customer
preferences and evolving technology and industry standards. Our competitors
continue to introduce products with improved price/performance characteristics,
and we will have to do the same to remain competitive. Increased competition
could result in significant price competition, reduced revenues, lower profit
margins or loss of market share, any of which would have a material adverse
effect on our business, operating results and financial condition.
We face competition for our ASICs from Hewlett-Packard and QLogic. Sun
Microsystems is our principal competitor in the SBus host bus adapter market.
Our principal competitors in the PCI bus host bus adapter market are Emulex,
QLogic, Interphase and Hewlett-Packard. Our products may also compete at the
end-user level with other technology alternatives, such as SCSI, which are
available from companies such as Adaptec, LSI Logic and QLogic as well as a
number of smaller companies. In the future, other technologies may evolve to
address the applications served by Fibre Channel today, and because we focus
exclusively on Fibre Channel, our business would suffer as a result of
competition from such competing technologies.
Some of our OEM customers could develop products internally that would
replace our products. The resulting reduction in sales of our products to any
such OEM customers, in addition to the increased competition presented by these
customers, could have a material adverse effect on our business, operating
results and financial condition.
We believe that the principal bases of Fibre Channel product competition
presently include reliability, scalability, connectivity, performance and
customization. We believe that other competitive factors include pricing and
technical support. We believe that we compete favorably with respect to each of
these factors. We also believe that we have a competitive strength in the
alliances we have built with customers, particularly our close relationships
with OEM customers. We believe that our experience with distribution channels
will provide competitive benefits as the Fibre Channel market matures. Some of
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<PAGE> 55
our other competitive advantages include our early entry into Fibre Channel
technology, our workforce of highly experienced researchers and designers and
our intellectual property.
INTELLECTUAL PROPERTY AND LICENSES
The intellectual property rights we have in our technology, which generally
consists of ASIC designs, system designs, software and know-how associated with
our product portfolio, principally arise from exclusive licenses and our own
internal development efforts. We began our commercial Fibre Channel development
efforts in 1993 while operating as a division of Jaycor. In February 1997, the
intellectual property rights arising from this development effort were
transferred to JNI pursuant to an exclusive license agreement with Jaymark. In
November 1998, we acquired Fibre Channel products and technology developed by
Adaptec, including the design, software, masks and documentation of the Emerald
ASIC architecture. The technology we acquired from Jaymark and Adaptec, in
conjunction with our significant development efforts undertaken to enhance such
technology, forms the central element of our host bus adapter and ASIC products
and is critical to our success. We attempt to protect our technology through a
combination of copyrights, trade secret laws, trademarks and contractual
obligations. 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 or operating results. In order to avoid disclosure of key
elements of our technology, we have not sought patent protection which may be
available to us. The lack of patent protection may make it more difficult for us
to prevent other parties from developing or using technology substantially
similar to ours. Our software products are protected by copyright laws, and we
have several common law trademarks.
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. We may receive in the future notice of infringement claims of
other parties' proprietary rights. Infringement or other claims could be
asserted or prosecuted against us in the future, and it is possible that such
assertions or prosecutions could harm our business. Any such claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause delays in the development
and release of our products, or require us to develop non-infringing technology
or enter into royalty or licensing arrangements. Such royalty or licensing
arrangements, if required, may not be available on terms acceptable to us, or at
all. For these reasons, infringement claims could materially harm our business.
BACKLOG
At September 30, 1999, backlog for our products was approximately $6.9
million, substantially all of which is scheduled for delivery to customers
during the quarter ending December 31, 1999, compared to backlog of
approximately $615,000 at September 30, 1998, substantially all of which was
scheduled for delivery to customers during the quarter ended December 31, 1998.
Typically, our OEM customers forecast expected purchases on a three to six month
rolling basis, as compared to distributor customers which order as required with
minimal order fulfillment time. All orders are subject to cancellation or delay
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by the customers with limited or no penalty. Therefore, our backlog is not
necessarily indicative of actual sales for any succeeding period.
FACILITIES
JNI leases approximately 23,500 square feet in San Diego, California from
Jaycor, an affiliate of JNI, for product development and test laboratories, for
manufacturing operations, and for administrative, engineering, marketing and
sales offices. The term of the lease expires in October 2004. JNI leases
approximately 7,000 square feet of office and laboratory space in Irvine,
California under a lease that expires in July 2000. JNI also leases
approximately 6,700 square feet in Fremont, California under a lease that
expires in August 2000. We believe that our current facilities will be adequate
to meet our needs until at least the end of 1999. After that time, we will be
required to obtain additional space. Although we believe that suitable
additional facilities will be available in the future as needed on commercially
reasonable terms, we cannot assure you that we will be able to obtain such
space.
EMPLOYEES
As of September 30, 1999, JNI had 113 employees, including 13 in
administration, 21 in sales and marketing, 56 in engineering and 23 in
operations. 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
From time to time, we may be involved in litigation relating to claims
arising out of our operations. As of the date of this prospectus, we are not a
party to any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on our business, financial
condition or operating results.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning executive officers,
directors and key employees of JNI as of September 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Executive Officers and Directors
Terry M. Flanagan.................. 61 President, Chief Executive Officer
and Director
Gloria Purdy....................... 51 Chief Financial Officer
Charles McKnett.................... 44 Chief Technology Officer
Thomas K. Gregory.................. 58 Chief Operating Officer
Roland Thibodeau................... 53 Executive Vice President, Sales
Eric P. Wenaas(1)(2)............... 57 Chairman of the Board of Directors
P. Randy Johnson(1)(2)............. 49 Director and Secretary
Thomas J. Bernard.................. 66 Director designate
John Bolger........................ 52 Director designate
Lawrence E. Fox.................... 56 Director designate
Key Employees
Scott Ruple........................ 39 Vice President, Marketing
Edward Tyburski.................... 40 Vice President, Engineering
Sassan Teymouri.................... 42 Vice President, ASIC Engineering
Paul Kim........................... 32 Vice President, Finance and
Corporate Controller
</TABLE>
- -------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Executive Officers and Directors
Terry M. Flanagan, Ph.D. became President, Chief Executive Officer and a
director of JNI upon the organization of JNI in February 1997. From 1977 to
1997, he served in various capacities at Jaycor, Inc., an affiliate of JNI, most
recently as Senior Vice President of the Systems Development Group. Dr. Flanagan
received a B.S. in physics from the University of Santa Clara and an M.S. and a
Ph.D. from Purdue University in physics.
Gloria Purdy joined JNI as Chief Financial Officer in August 1999. Prior to
joining JNI, from April 1998 through April 1999, she served as Chief Financial
Officer and Chief Operating Officer of Eloquent, Inc., a Web-based media
company. Prior to that time, from February 1992 through January 1998, she served
as Chief Financial Officer of Interlink Computer Sciences, Inc., an enterprise
software company. Ms. Purdy received a B.S. in accounting from Golden Gate
University and has completed Masters studies at the University of Santa Clara
and Stanford University.
Charles McKnett became the Chief Technology Officer of JNI upon the
organization of JNI in February 1997. From January 1989 to February 1997, Mr.
McKnett managed a variety of technology and development efforts, including the
development of fibre channel products, at Jaycor, Inc., an affiliate of JNI. Mr.
McKnett received his B.S. in Physics from the California Institute of Technology
and an M.S. in electrical engineering from the University of Southern
California.
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Thomas K. Gregory, Ph.D. has served as Chief Operating Officer of JNI since
March, 1999. Beginning in February 1997 through March 1999, he served as Vice
President, Engineering and Operations of JNI. He has a B.S. with a dual major in
physics and engineering from the University of Michigan and a Ph.D. in physics
from the University of Connecticut.
Roland Thibodeau has served as Executive Vice President, Sales of JNI since
its organization in February 1997. Prior to that time, beginning in September
1995, Mr. Thibodeau served as Director of Marketing for Jaycor, an affiliate of
JNI. From May 1982 to February 1995, Mr. Thibodeau was with Datacomm Management
Sciences, Inc., a data communications company, in the capacity of Vice President
of Marketing and Sales.
Eric P. Wenaas, Ph.D. has served as Chairman of the Board of Directors of
JNI since its organization in February 1997. Dr. Wenaas currently serves as
Chief Executive Officer of Jaycor, Inc., an affiliate of JNI, a position he has
held since March 1991. Dr. Wenaas is also Chief Executive Officer of Jaymark,
Inc., JNI's principal stockholder, a position he has held since Jaymark's
formation in January 1997.
P. Randy Johnson has served as a director of JNI since its organization in
February 1997. Mr. Johnson currently serves as Chief Financial Officer of
Jaycor, Inc., an affiliate of JNI, a position he has held since 1990 and as
Chief Financial Officer of Jaymark, Inc., JNI's principal stockholder, a
position he has held since Jaymark's formation in January 1997. Mr. Johnson has
tendered his resignation from the JNI board effective immediately prior to the
effectiveness of this offering.
Thomas J. Bernard has agreed to become a director of JNI upon the
effectiveness of this offering. He has served as Executive Vice President and
Director of Leap Wireless International since its formation is September 1998.
Prior to that time, he served as a Senior Vice President of Qualcomm
Incorporated and General Manager of Qualcomm Incorporated's Infrastructure
Product Division from April 1996 through June 1998. Prior to joining Qualcomm
Incorporated, Mr. Bernard was Executive Vice President and General Manager of
M/A-COM Telecommunications Division, Western Operations. Mr. Bernard serves on
the Board of Directors of Leap Wireless International, Inc. and Boatracs, Inc.
John Bolger has agreed to become a director of JNI upon the effectiveness
of this offering. Mr. Bolger is a retired Vice President of Finance and
Administration of Cisco Systems, Inc., a manufacturer of computer networking
systems. Mr. Bolger is currently an independent business consultant and serves
as a director of Integrated Device Technology, Inc., Integrated Systems, Inc.,
TCSI, Inc., Mission West Properties, Inc. and Sanmina Corp.
Lawrence E. Fox has agreed to become a director of JNI upon the
effectiveness of this offering. Mr. Fox has been a senior Vice-President of
First Chicago Equity Corporation since 1979 and currently heads the equity unit
of the Capital Investments Department. Mr. Fox is a director of Lafayette
Pharmaceuticals Inc., Sovereign Specialty Chemicals Inc. and Alpha Technologies
Group, Inc. Mr. Fox received his undergraduate degree from the University of
Wisconsin and an M.B.A. from the University of Chicago.
Key Employees
Scott Ruple has served as Vice President, Marketing for JNI since November
1998. From January 1997 to November 1998, Mr. Ruple was with G2 Networks, Inc.,
a networking equipment company, where he served as Vice President of Engineering
as well as Vice President of Marketing. From June 1994 to December 1996, Mr.
Ruple was the Senior Director of Marketing for Emulex Corporation, a Fibre
Channel connectivity
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<PAGE> 59
equipment manufacturer. Mr. Ruple has undergraduate degrees in accounting and
computer science from the University of Arizona and holds a Master's degree in
business administration from the University of Southern California.
Edward S. Tyburski has served as Vice President, Engineering of JNI since
June 1999. Prior to that time, beginning in November 1988 he served in a variety
of positions, most recently as Senior Director, SONET Products development, for
Applied Digital Access, Inc., a telecommunications equipment vendor.
Sassan Teymouri has served as Vice President, ASIC Engineering since
January 1999, and is responsible for JNI semiconductor operations in Fremont,
California. From September 1996 to October 1998, Mr. Teymouri was President and
CEO of Initio Corporation, a developer and marketer of commercial input/output
products based on proprietary ASICs. From May 1992 through September 1996, he
was the General Manager for the RAID group of Adaptec. Also, during his
employment at Adaptec, he served as an Engineering Director of Enterprise
Computing Networks. Mr. Teymouri received BSEE and MSEE degrees from the
University of Michigan.
Paul Kim has served as Vice President, Finance and Corporate Controller
since October 1999. Prior to joining JNI, he served as Vice President of Finance
and Administration for Datafusion Inc., a software development company, from
January 1998 until October 1999. From April 1996 to January 1998, he was the
Corporate Controller for Interlink Computer Sciences, Inc., an enterprise
software company. From January 1990 to April 1996, he worked for Coopers and
Lybrand L.L.P., leaving as an audit manager. Mr. Kim received a Bachelor of Arts
in economics from the University of California at Berkeley and is a Certified
Public Accountant.
Currently, all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Officers are elected and serve at the discretion of the board of directors.
There are no family relationships among the directors and officers of JNI.
Pursuant to the Investor's Rights Agreement dated as of November 12, 1998
between Jaymark, JNI and Adaptec, we have granted Adaptec the right to have an
observer present during our board meetings. Adaptec has indicated that it does
not intend to exercise these rights. Adaptec has signed a confidentiality
agreement to keep confidential all information discussed at any board meetings,
and we have the right to exclude the observer from any board meetings if we
determine that the matters to be discussed are particularly sensitive. In
addition, pursuant to a warrant to purchase shares of Jaymark common stock,
Jaymark granted a third party lender board observer rights for all of its
corporate subsidiaries' board meetings, including those of JNI.
BOARD COMMITTEES
The board of directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, which consists of Dr. Wenaas and
Mr. Johnson, reviews the results and scope of the annual audit and meets with
our independent accountants to review our internal accounting policies and
procedures. During 1998, the Compensation Committee consisted of Dr. Wenaas, Mr.
Johnson and Dr. Edward Frymoyer, a former director. The Compensation Committee,
which currently consists of Dr. Wenaas and Mr. Johnson, makes recommendations to
the board of directors with respect to our general and specific compensation
policies and practices and administers our 1997 Stock Option Plan, our 1999
Stock Option Plan and our 1999 Employee Stock Purchase Plan. Dr. Frymoyer was
also a member of the Compensation Committee for part of 1999.
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<PAGE> 60
Immediately prior to the effectiveness of the this offering, Mr. Johnson
and Mr. Wenaas will resign as members of the Audit and Compensation Committees.
Immediately after the effectiveness of this offering, the Audit Committee will
consist of Mr. Fox and Mr. Bolger and the Compensation Committee will consist of
Mr. Fox and Mr. Bernard.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Other than Mr. Johnson, none of the members of the Compensation Committee
is currently, or has ever been at any time since our formation, one of our
officers or employees. Mr. Johnson served as chief financial officer of JNI
during 1998 and through July 1999. In addition, we entered into a consulting
agreement with Dr. Frymoyer pursuant to which he provides services to JNI. Dr.
Frymoyer received approximately $70,000 under this agreement in 1998.
COMPENSATION OF DIRECTORS
JNI reimburses member of its board of directors for out-of-pocket expenses
incurred in the performance of their duties as directors of JNI. No member of
our board of directors currently receives any additional cash compensation for
his services as a director of JNI. From time to time, directors who are not
employees of JNI may receive options under our stock option plans as
compensation for their services as directors. In October 1999, the board of
directors granted to each of Mr. Bernard, Mr. Bolger and Mr. Fox an option to
purchase 20,000 shares of common stock at an exercise price equal to the initial
public offering price per share of our common stock upon the effectiveness of
this offering, subject in each case to their commencement of services as a
director. Also, each Audit and Compensation Committee member was granted an
option to purchase 1,000 shares of our common stock at an exercise price equal
to the initial public offering price per share of our common stock upon the
effectiveness of this offering subject to their commencement of services as a
member of the committee.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our certificate of incorporation, permitted
by Delaware General Corporation Law, which provide that directors of JNI shall
not be liable for monetary damages to JNI or its stockholders for any breach of
fiduciary duties to the fullest extent permitted by Delaware General Corporation
Law.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our by-laws authorize us to indemnify our officers, directors, employees
and agents to the fullest extent permitted by the Delaware Law. Section 145 of
the Delaware General Corporation Law empowers us to enter into indemnification
agreements with our officers, directors, employees and agents. We have entered
into separate indemnification agreements with our directors and executive
officers which may, in some cases be broader than the specific indemnification
provisions contained in the Delaware Law. The indemnification agreements may
require us, among other things, to indemnify such executive officers and
directors against liabilities that may arise by reason of status or service as
directors or executive officers and to advance expenses they spend as a result
of any proceeding against them as to which they could be indemnified. We also
intend to enter into agreements with our future directors and executive
officers.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of JNI where indemnification will be
required or permitted and we are
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<PAGE> 61
not aware of any threatened litigation or proceeding that may result in a claim
for such indemnification.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned by our
Chief Executive Officer and our other three most highly compensated executive
officers whose aggregate compensation during the year ended December 31, 1998
exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL YEAR 1998
ANNUAL COMPENSATION
NAME AND -------------------
PRINCIPAL POSITION SALARY BONUS OTHER ANNUAL COMPENSATION
<S> <C> <C> <C>
Terry M. Flanagan................... $186,060 $139,428 $25,609(1)
President and Chief Executive
Officer
Charles McKnett..................... 127,229 94,483 7,916(2)
Chief Technology Officer
Thomas K. Gregory................... 137,061 99,185 5,655(3)
Chief Operating Officer
Roland Thibodeau.................... 198,083 25,000 4,888(4)
Executive Vice President, Sales
</TABLE>
- ---------------
(1) Includes $9,303 paid to Dr. Flanagan in lieu of a raise, $8,641 paid as an
auto allowance, $1,824 paid as a matching contribution to Dr. Flanagan's
401(k) account and $5,841 paid for group term life insurance.
(2) Includes $3,147 paid as a matching contribution to Mr. McKnett's 401(k)
account, $549 paid for group term life insurance and $4,220 paid for
relocation expenses.
(3) Includes $3,029 paid as a matching contribution to Dr. Gregory's 401(k)
account and $2,626 paid for group term life insurance.
(4) Includes $3,281 paid as a matching contribution to Mr. Thibodeau's 401(k)
account and $1,607 paid for group term life insurance.
1998 OPTION GRANTS
There were no options granted to any of the individuals named in the
Summary Compensation Table in 1998. Accordingly, the table relating to option
grants in 1998 has been omitted.
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YEAR-END VALUES
The table below provides information about the number and value of options
held by the executive officers described above at December 31, 1998.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Terry M. Flanagan.............. -- 1,076,250(2) $-- $3,510,620
Charles McKnett................ -- 508,620(2) -- 1,659,068
Thomas K. Gregory.............. -- 565,110(2) -- 1,843,332
Roland Thibodeau............... -- 452,130(2) -- 1,474,803
</TABLE>
- ---------------
(1) The fiscal year-end value of "in-the-money" stock options represents the
difference or a portion of the difference between the exercise price of such
options, and the fair value of JNI's common stock as of December 31, 1998.
The fair value of JNI's common stock on December 31, 1998 determined for
financial reporting purposes on such date was $3.43 per share. The actual
value of "in-the-money" stock options will depend upon the trading price of
JNI's common stock on the date of sale of the underlying common stock and
may be higher or lower than the amount set forth in the table above.
(2) Options do not become exercisable until the effective date of this offering.
Options vest from the date of grant cumulatively 10% at the end of the first
year, 30% at the end of the second year, 60% at the end of the third year
and 100% after the fourth year. In the event that Jaymark no longer owns 50%
or greater of our outstanding shares of common stock, the vesting schedule
for the options will accelerate. Pursuant to the accelerated vesting
schedule, the options vest cumulatively 25% at the date of grant, 33% at the
end of the first year, 75% at the end of the second year and 100% at the end
of the third year.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
We have entered into Severance and Change of Control Agreements with Terry
M. Flanagan, Charles McKnett, Thomas Gregory, Roland Thibodeau and Gloria Purdy.
In the event that the employee is terminated without cause within one year after
a change in control of JNI, he or she will receive as a severance payment one
full-year of his or her then current total compensation, and all of his or her
unvested, outstanding options to purchase shares of stock in JNI will
immediately vest. Each of the employees who are parties to these agreements will
also receive these benefits if he or she resigns as a result of a reduction in
his or her total compensation within one year after a change in control of JNI.
STOCK OPTION PLANS
1997 Stock Option Plan
JNI's 1997 stock option plan (the "1997 Plan") allows for the issuance of
options to purchase up to 4,396,441 shares of common stock. Under the 1997 Plan,
all employees of JNI or any subsidiary, are eligible to receive nonstatutory
stock options or incentive stock options intended to qualify under Section 422
of the Internal Revenue Code of 1986. The
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<PAGE> 63
1997 Plan is administered by the compensation committee of the board of
directors of JNI, which selects the persons who will receive options, determines
the number of shares in each option, vesting schedules and prescribes other
terms and conditions, including the type of consideration to be paid to JNI upon
exercise, in connection with each option grant.
Under the 1997 Plan, for a nine-year period following the date of an option
grant, options are only exercisable in the event that JNI undergoes a "change in
control," generally defined as a sale of assets, merger or similar transaction,
or consummates a public offering of equity securities. Following such nine-year
period, but prior to the termination of such option, which generally terminates
ten years after the date of grant, the option may be exercised. However, in such
event, JNI has a right to repurchase such shares at the greater of the exercise
price or the fair market value of such shares. Options granted under the 1997
Plan generally vest over a four-year period, although vesting is accelerated in
the event Jaymark's ownership percentage of JNI falls below 50% of the total
combined voting power of JNI.
The exercise price of incentive stock options and nonstatutory stock
options granted under the 1997 Plan cannot be lower than 100% of the fair market
value of the common stock on the date of grant and, in the case of options
granted to holders of more than 10% of the voting power of JNI, not less than
110% of such fair market value. The term of an option cannot exceed ten years,
and the term of an ISO given to a holder of more than 10% of the voting power of
JNI cannot exceed five years. Options generally expire not later than 90 days
following a termination of employment, 12 months following the optionee's
disability, or not later than 12 months following the optionee's death.
As of September 30, 1999, there were outstanding options to purchase an
aggregate of 4,345,691 shares of common stock. No options to acquire shares have
been exercised. As of September 30, 1999, 50,750 shares of common stock were
available for future option grants under the 1997 Plan. If any option granted
under the 1997 Plan expires, terminates or is canceled for any reason, or if
shares of stock issued subject to a right of repurchase are repurchased by JNI,
the shares allocable to the unexercised option or the repurchased shares will
become available for additional option grants under the 1997 Plan.
Each share limit and option under the 1997 Plan is subject to adjustment
for certain changes in JNI's capital structure, reorganizations and other
extraordinary events. The 1997 and 1999 plans are not exclusive. The board of
directors (or its delegate), under Delaware Law, may grant stock and performance
incentives or other compensation, in stock or cash, under other plans or
authority.
1999 Stock Option Plan
JNI's 1999 stock option plan was approved by the board of directors and the
stockholders in April 1999 (the "1999 Plan"). The 1999 Plan authorizes JNI to
grant incentive stock options to employees, and non-statutory stock options to
employees, including officers, non-employee directors and consultants. Because
non-employee directors are eligible to receive grants under the 1999 Plan, JNI
has not adopted a separate plan which provides for the formula grant of stock
options to non-employee directors.
A committee of the board of directors administers the 1999 Plan. The
administering committee has the authority to select the persons to whom options
are granted and to determine the terms of each option, including:
(a) the number of shares of common stock covered by the option,
(b) when the option becomes exercisable,
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(c) the per share option exercise price, which must be at least 100% of the
fair market value of a share of common stock for incentive stock
options, at least 85% of the fair market value for non-statutory stock
options, or 110% of the fair market value for incentive stock options
granted to 10% stockholders, and
(d) the duration of the option, which may not exceed 10 years, or, with
respect to incentive stock options granted to 10% stockholders, five
years.
Generally, options granted under the 1999 Plan become exercisable pursuant
to a schedule established by the administering committee. Options granted under
the 1999 Plan cannot be transferred except by will or the laws of descent and
distribution.
In the event of a change in control of JNI, any outstanding options which
are neither assumed or substituted for by the acquiring corporation, nor
exercised as of the date of the change in control, terminate and cease to be
outstanding. If a JNI employee is terminated one month prior to, or within a
year after, a change in control, then 50% of the terminated employee's
outstanding unvested options will immediately vest.
The total number of shares reserved for issuance under the 1999 Plan, as
amended, is 2,312,800 shares of which, as of September 30, 1999, no shares have
been issued upon the exercise of options. As of September 30, 1999 options to
purchase a total of 721,000 shares of common stock were outstanding and
1,591,800 shares were available for future option grants, giving effect to the
increase in the option reserve approved by the board of directors and
stockholders on September 1, 1999
Each share limit and option under the plan is subject to adjustment for
certain changes in JNI's capital structure, reorganizations and other
extraordinary events. The 1997 and 1999 plans are not exclusive. The board of
directors (or its delegate), under Delaware Law, may grant stock and performance
incentives or other compensation, in stock or cash, under other plans or
authority.
1999 EMPLOYEE STOCK PURCHASE PLAN
A total of 175,000 shares of JNI common stock have been reserved for
issuance under our 1999 Employee Stock Purchase Plan, none of which has been
issued. The number of shares reserved for issuance under the purchase plan will
be subject to an annual increase on January 1 of each year beginning in 2001
equal to the lesser of (a) 87,500 shares, (b) 1.0% of the outstanding shares on
such date or (c) a lesser amount as determined by our board of directors. The
employee stock purchase plan permits eligible employees to purchase common stock
at a discount through payroll deductions, during 24-month offering periods.
Unless the board of directors establishes different periods, each offering
period will be divided into four consecutive six-month purchase periods. Unless
the board of directors establishes a higher purchase price, the price at which
stock is purchased under the employee stock purchase plan shall be equal to 85%
of the fair market value of the common stock on the first day of the offering
period or the last day of the purchase period, whichever is lower. The initial
offering period will commence on the effective date of this offering.
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CERTAIN TRANSACTIONS
AGREEMENTS WITH JAYMARK AND JAYCOR
Jaymark is a privately held holding company whose only asset is shares of
stock in other companies. Prior to this offering, Jaymark holds 93.8% of the
outstanding common stock of JNI and 100% of the outstanding common stock of
Jaycor. Jaycor is primarily a defense contractor for the U.S. government.
Some of our executive officers and directors are stockholders of Jaymark:
Eric Wenaas holds 300,000 shares, or approximately 14% of Jaymark's stock; Terry
Flanagan holds 111,000 shares, or approximately 5% of Jaymark's stock; and Randy
Johnson and Thomas Gregory each hold less than 1% of Jaymark's stock.
On January 30, 1997, we were incorporated in Delaware as a wholly-owned
subsidiary of Jaymark, Inc. ("Jaymark"). On February 3, 1997, Jaymark paid
$1,500 for 10,500 shares of our common stock. On March 5, 1997 we entered into a
Technology Assignment and License Agreement with Jaymark and Jaycor, Inc.,
another wholly-owned subsidiary of Jaymark. Pursuant to the agreement, Jaycor
assigned Fibre Channel products and technology to Jaymark in exchange for a
limited license to the assigned products. Jaymark, in turn, assigned the fibre
channel products and technology to us in exchange for 409,500 shares of our
common stock and 16,590,000 shares of our Series A preferred stock.
On February 1, 1997, we entered into a revolving loan agreement with Jaycor
whereby we agreed to consent to borrow and/or lend sums to each other as needed
from time to time in the ordinary course of business. We have never loaned
Jaycor funds under this agreement, and we do not anticipate making such loans in
the future. Under the terms of the agreement, the advances bear interest at
Jaycor's incremental cost of borrowing. Advances under the agreement are due on
demand, and if no demand is made, within ten years of the date of such advance.
At September 30, 1999 and December 31, 1998 and 1997, we owed Jaycor $4.3
million, $3.1 million and $2.0 million, respectively, for advances made under
this agreement. During the nine months ended September 30, 1999 and for the
years ended December 31, 1998 and 1997, we incurred interest expense on advances
from Jaycor of $394,000, $265,000 and $130,000, respectively. We have granted
Jaycor a security interest in our assets to secure our obligations under this
agreement. We have also guaranteed a $7.0 million credit line that Jaycor has
with a commercial lender. The lender has indicated that it will release our
guarantee obligation upon the completion of this offering and upon our repayment
to Jaycor of any amounts owing under the revolving loan agreement. All advances
and interest owed under the revolving loan agreement to Jaycor will be paid out
of the proceeds from this offering, and we anticipate that we will terminate
this facility promptly after such repayment.
We have entered into a Transitional Services Agreement, dated September 1,
1999, with Jaycor, whereby Jaycor has agreed to continue to provide certain
accounting and administrative services to us. This agreement will terminate on
December 31, 2000 or earlier if we notify Jaycor that we no longer require these
services. In return, we have agreed to compensate Jaycor in an amount determined
in accordance with Jaycor's historical practice of allocating expenses to us. We
anticipate that future amounts owing under this agreement will be approximately
$35,000 per month for the remainder of 1999, decreasing to approximately $15,000
per month in the first quarter of 2000. After the first quarter of 2000, amounts
payable under the Transitional Services Agreement are expected to be immaterial.
If Jaycor provides consulting services to us, we have agreed to reimburse Jaycor
on an hourly basis and at a billing rate consistent with Jaycor's billing
practices.
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Jaycor maintains, and pays the premiums on, certain umbrella insurance policies
which cover us. We reimburse Jaycor for the amount of the insurance premium
allocated to our coverage.
In October 1998, we entered into a sublease agreement with Jaycor, as
amended, whereby we subleased a certain portion of Jaycor's facilities on terms
consistent with Jaycor's primary lease. The sublease provides for a base monthly
rent and is subject to an annual increase based upon the consumer price index
percentage with a minimum increase of 2.5% and a maximum increase of 5%
annually. The term of the lease expires in October 2004. In addition, the
sublease requires the payment of a pro rata portion of the monthly operating
costs, taxes and utilities of the premises. As of December 31, 1998, our future
annual minimum lease payments due to Jaycor under this sublease were $462,000
for the year ending December 31, 1999, $557,000 for the year ending December 31,
2000, $567,000 for the year ending December 31, 2001, $577,000 for the year
ending December 31, 2002, $588,000 for the year ending December 31, 2003 and
$497,000 for the year ending December 31, 2004.
Pursuant to a Registration Rights Agreement dated as of September 1, 1999,
we have granted registration rights to Jaymark for the shares of our stock held
by Jaymark. 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,
holders of shares entitled to registration rights are entitled to notice of such
registration and are entitled to include their shares in such registration, at
our expense. Jaymark is also entitled to specified demand registration rights
under which Jaymark may require us to file a registration statement under the
Securities Act at our expense with respect to our shares of common stock, and we
are required to use our best efforts to effect this registration. Further,
Jaymark may require us to file additional registration statements on Form S-3.
All of these registration rights are subject to conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in the registration and our right not to effect a requested
registration within twelve months following the initial offering of our
securities, including this offering. All of these registration rights terminate
after we have effected two registration statements, or at the latest, four years
from the date of this offering.
Our historical results of operations have been included in Jaymark's
consolidated federal income tax return. We have entered into a Tax Sharing
Agreement with Jaymark dated September 1, 1999, under which the amount of
federal income tax allocated to us is generally determined as though we were
filing a separate federal income tax return. For periods during which Jaymark
and JNI are included in the same affiliated group for federal and state income
tax purposes, JNI and Jaymark have agreed that JNI's federal and state tax
obligations, if any, will be paid to Jaymark. At such time when we are no longer
included as a member of the Jaymark affiliated tax group, Jaymark will reimburse
us for the tax benefits associated with any net operating loss or credit
carryforwards previously utilized by Jaymark less any carryforwards utilized by
us.
AGREEMENTS WITH ADAPTEC
On November 12, 1998, we purchased certain products and technology of
Adaptec, Inc. relating to Adaptec's Fibre Channel products pursuant to an Asset
Acquisition Agreement. As payment for the Adaptec assets, we issued to Adaptec
1,132,895 shares of our Series A preferred stock (the "Series A Stock") and
warrants to purchase shares of our Series A Stock (the "Series A Warrants"). In
September 1999, we amended the first of the Series A Warrants to fix the number
of shares issuable thereunder at 840,000. The
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<PAGE> 67
number of shares issuable under the second and third warrants was reduced by
approximately 611,000 shares, and JNI anticipates that as a result of this
reduction no additional shares will become issuable under these warrants. The
first Series A Warrant is immediately exercisable at an aggregate purchase price
of $100, and expires in November 2005. All shares of Series A Stock will convert
into an equal number of shares of common stock upon completion of this offering.
In November 1998, JNI purchased certain Fibre Channel technology, products
and property and equipment from Adaptec. In connection with the asset
acquisition, JNI entered into the following agreements with Adaptec: a Fibre
Channel Cross-License Agreement; a Chip Manufacturing Agreement; a Board
Manufacturing and Transition Agreement; a Consulting Services Agreement; a
Volume Purchase Agreement; and two Occupancy License Agreements.
Pursuant to the Fibre Channel Cross-License Agreement, Adaptec granted JNI
four irrevocable, perpetual and non-exclusive licenses to certain of Adaptec's
Fibre Channel technology. Three of the licenses granted to JNI under this
agreement are fully paid and royalty-free and the fourth license contains a $25
per unit royalty fee. During the year ended December 31, 1998 and during the
nine-month period ended September 30, 1999, JNI incurred royalty obligations of
$0 and $30,000, respectively, pursuant to this agreement.
In addition and as part of the agreement, JNI granted Adaptec a
non-exclusive license to use and distribute any of JNI's error corrections,
updates and other future versions and releases of the licensed Fibre Channel
technology products. The license to Adaptec is royalty-free.
Pursuant to the Chip Manufacturing Agreement, Adaptec agreed to perform
manufacturing services with respect to Fibre Channel chip products for a
transition period not to exceed two years beginning in November 1998. The
agreement specifies that Adaptec will manufacture and package the products
according to specifications at a price initially equal to Adaptec's standard
cost plus 15 percent. The prices will be reviewed quarterly. During the year
ended December 31, 1998 and during the nine-month period ended September 30,
1999, JNI incurred costs of $19,000 and $650,000, respectively, for the
manufacture of these products.
Pursuant to the Board Manufacturing and Transition Agreement, Adaptec
agreed to perform manufacturing services with respect to Fibre Channel board
level products sold to JNI under the Asset Acquisition Agreement for a
transition period of six months beginning in November 1998. The agreement
specifies that Adaptec will manufacture and package the board level products
according to specifications at a price equal to Adaptec's standard cost plus 15
percent. JNI purchased $0 and $427,000 of board level products from Adaptec
during the year ended December 31, 1998 and the nine-month period ended
September 30, 1999, respectively, pursuant to this agreement.
Pursuant to the Consulting Services Agreement, Adaptec has agreed to
perform consulting services to assist JNI in the development of the technology
assets purchased in exchange for an hourly fee which varies based on the
particular consultant engaged. This agreement has a term of the earlier of one
year from the date of the agreement or the completion of all services noted in
the agreement. During the year ended December 31, 1998 and during the nine-month
period ended September 30, 1999 JNI incurred expenses of $0 and $248,000,
respectively, pursuant to this agreement.
Pursuant to the Volume Purchase Agreement, JNI agreed to sell to Adaptec
certain Fibre Channel products developed and manufactured by Adaptec for JNI
under the Chip
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<PAGE> 68
Manufacturing Agreement and the Board Manufacturing and Transition Agreement.
Per the agreement, the prices charged to Adaptec will not exceed: (1) the prices
charged any of JNI's other customers during the 90 day period preceding the
price quote purchasing "substantially similar" products or (2) 115% of JNI's
actual manufacturing cost or the price paid by JNI if manufactured by Adaptec.
Adaptec has the right to resell the products without restriction of any kind,
except that under certain conditions, Adaptec may not sell products
incorporating certain chip-level products.
The Volume Purchase Agreement expires in November 2000 and will
automatically renew for an additional one-year term unless either party notifies
the other of its intention to terminate the agreement within ninety days of the
expiration of the term. During the year ended December 31, 1998 and during the
nine-month period ended September 30, 1999, JNI had no sales to Adaptec pursuant
to this agreement.
Pursuant to two Occupancy License Agreements, Adaptec granted JNI the right
to occupy and use a portion of two of Adaptec's facilities located in Irvine and
Milpitas, California. The monthly license fee for the Irvine facility was
$15,000. The monthly license fee for the Milpitas facility was $3,000. These
rates were based on Adaptec's rental costs plus an increase in costs for
allocations of computer resources, telephone charges, supplies and other nominal
charges. The Irvine agreement had a term of four months and expired in February
1999. The Milpitas agreement had a maximum term of twelve months; however, JNI
exercised its right to terminate the Milpitas agreement pursuant to the
agreement in February 1999 without penalty. Amounts incurred under these
agreements totaled $35,000 during the year ended December 31, 1998 and $28,000
during the nine-month period ended September 30, 1999.
Accounts payable to Adaptec totaled approximately $19,000 and $316,000 at
December 31, 1998 and September 30, 1999, respectively. There were no purchases
from Adaptec during the years ended December 31, 1996 or 1997.
Under an Investor's Rights Agreement dated as of November 12, 1998, Adaptec
or its permitted transferees will have registration rights with respect to the
1,132,895 shares of our common stock acquired in November 1998 and with respect
to 840,000 shares issuable upon exercise of the warrants described above. If we
propose to register any of our securities under the Securities Act at any time
beginning two years after this offering, either for our own account or for the
account of other security holders, holders of shares entitled to registration
rights are entitled to notice of such registration and are entitled to include
their shares in such registration, at our expense. However, the underwriters of
any such offering have the right to limit the number of shares included in such
registration. These registration rights terminate after we have effected two
registration statements or, at the latest, four years from the date of this
offering.
We believe that all transactions with affiliates described above 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 approves all future
transactions between us and our officers, directors, principal stockholders and
their affiliates.
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<PAGE> 69
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the shares of our common stock as of September 30, 1999,
and as adjusted to give effect to the sale of 2,800,000 shares of common stock
in this offering by JNI assuming (a) conversion of all of JNI's outstanding
shares of convertible preferred stock into common stock and (b) no exercise of
the underwriters' over-allotment option, by:
- each person known to be the beneficial owner of 5% or more of the
outstanding shares of common stock, including the selling stockholder;
- each executive officer listed in the Summary Compensation Table;
- each director of JNI; and
- all executive officers and directors of JNI as a group.
Except in cases where community property laws apply or as indicated in the
footnotes to this table, JNI believes that each stockholder identified in the
table possesses sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by such stockholder. Of the shares
indicated as beneficially owned by Adaptec, Inc., 840,000 are issuable upon
exercise of a warrant. All of the shares indicated as beneficially owned by
executive officers in the following table are issuable within 60 days of
September 30, 1999 upon exercise of outstanding options granted under the 1997
Plan. The address of the individuals listed below is the address of JNI set
forth in the "Prospectus Summary."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING THE OFFERING
-------------------- SHARES BEING --------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
5% OR GREATER STOCKHOLDERS:
Jaymark, Inc....................... 17,010,000 93.8% 2,100,000 14,910,000 71.2%
Eric P. Wenaas, President and
Chief Executive Officer
9775 Towne Centre Drive
San Diego, CA 92121
Adaptec, Inc....................... 1,972,895 10.4 -- 1,972,895 9.1
691 South Milpitas Blvd.
Milpitas, CA 95035
EXECUTIVE OFFICERS:
Terry M. Flanagan................ 322,875 1.8 -- 322,875 *
Charles McKnett.................. 152,586 1.0 -- 152,586 *
Thomas K. Gregory................ 169,533 1.0 -- 169,533 *
Roland Thibodeau................. 139,839 * -- 139,839 *
DIRECTORS:
P. Randy Johnson................. -- -- -- -- --
Eric P. Wenaas................... -- -- -- -- --
DIRECTOR NOMINEES:
Thomas J. Bernard................ -- -- -- -- --
John Bolger...................... -- -- -- -- --
Lawrence E. Fox.................. -- -- -- -- --
EXECUTIVE OFFICERS AND DIRECTORS AS
A GROUP (SEVEN PERSONS):......... 784,833 4.1 -- 784,833 3.6
</TABLE>
- ---------------
* Represents less than one percent of the total.
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<PAGE> 70
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of JNI will
consist of 100,000,000 shares of common stock, par value $0.001 per share, and
5,000,000 shares of preferred stock, par value $0.001 per share. Prior to this
offering, the authorized capital stock of JNI also includes 30,000,000 shares of
Series A preferred stock. Upon the closing of this offering, each outstanding
share of Series A preferred stock will be automatically converted into one share
of common stock. Upon the conversion, the Series A preferred stock will be
canceled and retired and removed from the authorized capital stock of JNI.
COMMON STOCK
Assuming conversion of the Series A preferred stock as described above, as
of September 30, 1999 there were 18,142,895 shares of common stock outstanding
held by 2 stockholders of record. The holders of common stock are entitled to
one vote for each share held of record on all matters submitted to a vote of the
stockholders. Subject to preferences that may be applicable to any then
outstanding holders of preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared by the board of
directors out of funds legally available therefor. See "Dividend Policy."
In the event of a liquidation, dissolution or winding up of JNI, subject to
preferences that may be applicable to any then outstanding holders of preferred
stock, holders of the common stock are entitled to share ratably in all assets.
The common stock has no preemptive or conversion rights or other subscription
rights, and there are no redemptive or sinking fund provisions applicable to the
common stock. JNI has received full payment for all outstanding shares of its
common stock and cannot require its stockholders to make further payments on the
stock. The common stock to be outstanding upon completion of this offering will
have the same status.
PREFERRED STOCK
The board of directors has the authority, without further action by the
stockholders, to issue from time to time the preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers, and
relative, participating, optional or other special rights and the qualifications
or restrictions thereof. The preferences, powers, rights and restrictions of
different series of preferred stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and purchase funds and other matters. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock, and
may have the effect of delaying, deferring or preventing a change in control of
JNI. See Note 5 to financial statements for a description of the currently
outstanding preferred stock.
WARRANTS
In connection with our acquisition of technology from Adaptec in November
1998, we granted Adaptec warrants to purchase shares of our stock. In September
1999, we amended the warrants to fix the number of shares issuable thereunder at
840,000, subject to adjustment. The warrant for 840,000 shares is immediately
exercisable at an exercise price of $100. See "Certain Transactions."
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<PAGE> 71
REGISTRATION RIGHTS
Under an Investor's Rights Agreement dated as of November 12, 1998 Adaptec
or its permitted transferees will have registration rights with respect to the
1,132,895 shares of our common stock acquired in November 1998 and with respect
to any shares Adaptec acquires upon exercise of the warrants described above.
Jaymark, and its permitted transferees, also has registration rights under a
Registration Rights Agreement dated as of September 1, 1999 with respect to the
shares of our common stock that Jaymark currently holds. If we propose to
register any of our securities under the Securities Act at any time beginning
two years after this offering, either for our own account or for the account of
other security holders, holders of shares entitled to registration rights are
entitled to notice of such registration and are entitled to include their shares
in such registration, at our expense. Jaymark is also entitled to specified
demand registration rights under which Jaymark may require us to file a
registration statement under the Securities Act at our expense with respect to
our shares of common stock, and we are required to use our best efforts to
effect this registration. Further, Jaymark may require us to file additional
registration statements on Form S-3. All of these registration rights are
subject to conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares included in the registration and
our right not to effect a requested registration within twelve months following
the initial offering of our securities, including this offering. All of these
registration rights terminate after we have effected two registration statements
or at the latest, four years from the date of this offering.
DELAWARE ANTI-TAKEOVER LAW
We are required to follow Section 203 of the Delaware Law, an anti-takeover
law. In general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. A "business combination" includes a merger, asset or stock
sale or other transaction resulting in financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's outstanding voting stock. This provision may have the effect of
delaying, deterring or preventing a change of control of JNI without further
actions by the stockholders.
APPLICATION OF THE CALIFORNIA GENERAL CORPORATION LAW TO JNI
If our equity securities are held by less than 800 stockholders and a
majority of our outstanding shares are held by persons with California addresses
and we have operational characteristics that indicate that we have significant
contacts to California, we may be subject to Section 2115 of the California
General Corporation Law. In such event, we would be subject to certain key
provisions of the California General Corporation Law, including, without
limitation, those provisions relating to the number of directors to be elected
each year (all directors would be required to be elected each year under
California law applicable to companies with less than 800 beneficial holders of
their equity securities), the stockholders' right to cumulate votes at elections
of directors (cumulative voting would be mandatory under California law
applicable to companies with less than 800 beneficial holders of their equity
securities), the stockholders' right to remove directors without cause (which
under California law is subject to the stockholders' right to cumulative
voting), our ability to indemnify our officers, directors and employees (which
generally is more limited in certain situations in California than in Delaware),
our ability
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<PAGE> 72
to make distributions, dividends or repurchases (which generally is more
restrictive in California than in Delaware), inspection of corporate records
(which is generally more available in California than in Delaware), approval of
certain corporate transactions, and dissenters' rights. After consultation with
the underwriters of this offering, we anticipate that we will have more than 800
stockholders following the completion of this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation.
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<PAGE> 73
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering there has been no public market for the common stock
of JNI. Future sales of substantial amounts of common stock in the public market
could adversely affect market prices prevailing from time to time. As described
below, only a limited number of shares will be available for sale shortly after
this offering due to contractual and legal restrictions on resale. Nevertheless,
sales of substantial amounts of common stock of JNI in the public market after
the restrictions lapse could adversely affect the prevailing market price at
such time and the ability of JNI to raise equity capital in the future.
- Upon the closing of this offering, we will have outstanding an aggregate
of approximately 21,782,895 shares of common stock (including 840,000
shares issuable upon exercise of a warrant).
- Of these shares, the 4,900,000 shares of common stock to be sold in this
offering will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are held by
"affiliates" of JNI as such term is defined in Rule 144 of the Securities
Act.
- All remaining shares held by our existing stockholders were issued and
sold by JNI in private transactions and are eligible for public sale if
registered under the Securities Act or sold in accordance with Rule 144
or Rule 701 thereunder, which rules are summarized below.
Jaymark and Adaptec will collectively hold an aggregate of approximately
16,882,895 shares of common stock after the offering after giving effect to
conversion of the convertible preferred stock and the exercise of the warrant
held by Adaptec. These stockholders have signed lock-up agreements which prevent
them from selling any common stock owned by them for a period of 180 days from
the date of this prospectus without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. In addition, holders of all
outstanding options to acquire JNI common stock have entered into similar
lock-up agreements with the underwriters. When determining whether or not to
release shares from the lock-up agreements, DLJ will consider, among other
factors, the stockholder's reasons for requesting the release, the number of
shares for which the release is being requested and market conditions at the
time. As a result of lock-up agreements with the underwriters and the provisions
of Rule 144 and 701, approximately 16,042,895 additional outstanding shares of
common stock will be eligible for sale in the public market upon expiration of
the lock-up period.
In general, under Rule 144 as currently in effect, a person or persons
whose shares are aggregated, including an "affiliate," who has beneficially
owned shares for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of either 1% of the
then outstanding shares of common stock or the average weekly trading volume of
the common stock on the Nasdaq National Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to such sale. One
percent of the outstanding shares of common stock would be approximately 217,830
shares immediately after the offering. Sales under Rule 144 are also subject to
prescribed requirements regarding the manner of sale, notice and availability of
current public information about JNI.
In general, under Rule 701 of the Securities Act as currently in effect,
any employee, consultant or advisor of JNI who purchased shares from us in
connection with a compensatory stock or option plan or written employment
agreement is eligible to resell such shares 90 days after the effective date of
the offering in reliance on Rule 144, by complying with the applicable
requirements of Rule 144 other than the holding period
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<PAGE> 74
conditions. On the date 180 days after the effective date of this offering,
options to purchase approximately 1,147,370 shares of common stock will be
vested and exercisable and upon exercise may be sold pursuant to Rule 701.
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register approximately 6,884,241 shares of common stock issued
or reserved for issuance under our stock option and employee stock purchase
plans. Such registration statement is expected to be filed soon after the date
of this prospectus and will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will be
available for sale in the open market, unless such shares are subject to vesting
restrictions with JNI or the lock-up restrictions described above.
Beginning two years after the date of this offering, in the event that we
conduct subsequent registered public offerings of our common stock, Jaymark and
Adaptec will be entitled to certain rights to cause JNI to include in such
registration shares of our common stock that they hold. Registration of such
shares under the Securities Act would generally result in such shares becoming
freely tradable without restriction under the Securities Act immediately upon
the effectiveness of such registration. However, shares purchased by affiliates
of JNI would not be freely tradeable. See "Risk Factors- Sales of our common
stock in the public market by existing investors may begin shortly after
completion of the offering and could cause our stock price to decline."
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<PAGE> 75
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC,
Bear, Stearns & Co. Inc. and DLJdirect Inc. have severally agreed to purchase
from the selling stockholder and us the respective number of shares of common
stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS: SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.......
Bear, Stearns & Co. Inc...................................
Hambrecht & Quist LLC.....................................
DLJdirect Inc.............................................
--------
Total.............................................
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in this offering are subject to approval of legal matters by their
counsel and to customary conditions, including the effectiveness of the
registration statement, the continuing correctness of our representations and
those of the selling stockholder, the receipt of a "comfort letter" from our
accountants, the listing of the common stock for quotation on the Nasdaq
National Market and no occurrence of an event that would have a material adverse
effect on JNI. The underwriters are obligated to purchase and accept delivery of
all the shares of common stock, other than those covered by the over-allotment
option described below, if they purchase any of the shares of common stock.
The underwriters propose to initially offer some of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and some of the shares of common stock to
certain dealers, including the underwriters, at the initial public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share to other dealers. After the initial offering of the common stock to the
public, the representatives of the underwriters may change the public offering
price and such concessions at any time without notice. The underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The following table shows the underwriting fees to be paid to the
underwriters by the selling stockholder and by us in connection with this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
-------- --------
<S> <C> <C>
JNI:
Per share.................................. $ $
Total...................................... $ $
Selling Stockholder:
Per share.................................. $ $
Total...................................... $ $
</TABLE>
An electronic prospectus is available on the web site maintained by
DLJdirect Inc., one of the underwriters and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation. Other than the prospectus in electronic format,
the information on this web
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site relating to the offering is not part of this prospectus and has not been
approved and/or endorsed by JNI or the underwriters, and should not be relied on
by prospective investors.
The selling stockholder has granted to the underwriters an option,
exercisable for 30 days after the date of the underwriting agreement, to
purchase up to an aggregate of 735,000 additional shares of common stock at the
initial public offering price less the underwriting fees. The underwriters may
exercise this option solely to cover overallotments, if any, made in connection
with the offering. To the extent that the underwriters exercise this option,
each underwriter will become obligated, subject to conditions, to purchase a
number of additional shares approximately proportionate to the underwriter's
initial purchase commitment. We estimate expenses relating to this offering will
be $1,075,000.
The selling stockholder, the underwriter and JNI have agreed to indemnify
each other against liabilities, including liabilities under the Securities Act.
Each of JNI, our executive officers and directors and substantially all of
our securityholders (including the selling stockholder) has agreed that, for a
period of 180 days from the date of the final prospectus and subject to
exceptions, they will not, without the prior written consent of DLJ, do either
of the following:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers all or a portion
of the economic consequences associated with the ownership of any common
stock.
At our request, the underwriters have reserved up to five percent of the
shares offered by this prospectus for sale at the initial public offering price
to individuals associated with us and Jaymark. The number of shares of common
stock available for sale to the general public will be reduced to the extent
these individuals purchase or confirm for purchase, orally or in writing, such
reserved shares. Any reserved shares not purchased or confirmed for purchase
will be offered by the underwriters to the general public on the same basis as
the other shares offered by this prospectus.
Either of the foregoing transfer restrictions will apply regardless of
whether a covered transaction is to be settled by the delivery of common stock
or other securities, in cash or otherwise. In addition, during such period, we
have agreed not to file any registration statement with respect to, and each of
our executive officers and directors and the selling stockholder has agreed not
to make any demand for, or exercise any right with respect to, the registration
of any shares of common stock or any securities convertible into or exercisable
or exchangeable for common stock without DLJ's prior written consent.
Application will be made to list our common stock on the Nasdaq National
Market.
Other than in the United States, no action has been taken by the selling
stockholder, the underwriters or us that would permit a public offering of the
shares of common stock included in this offering in any jurisdiction where
action for that purpose is required. The shares of common stock included in this
offering may not be offered or sold, directly or indirectly, nor may this
prospectus or any other offering material or advertisement in connection with
the offer and sale of any such shares of common stock be distributed or
published in any jurisdiction, except under circumstances that will result in
compliance with the applicable rules and regulations of such jurisdiction.
Persons who receive this prospectus are advised to inform themselves about and
to observe any restrictions relating
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<PAGE> 77
to the offering of the common stock and the distribution of this prospectus.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of common stock included in this offering in any
jurisdiction in which that would not be permitted or legal.
STABILIZATION
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover such syndicate short position
or to stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if DLJ repurchases previously distributed common stock in syndicate
covering transactions, in stabilization transactions or otherwise or if DLJ
receives a report that indicates that the clients of such syndicate members have
"flipped" the common stock. These activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
PRICING OF THIS OFFERING
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price for the shares of common stock
offered by this prospectus will be determined by negotiation among JNI,
representatives of the selling stockholder and the representatives of the
underwriters. The factors to be considered in determining the initial public
offering price include:
- the history of and the prospects for the industry in which we compete;
- our past and present operations;
- our historical results of operations;
- our prospects for future earnings;
- the recent market prices of securities of generally comparable companies;
and
- the general condition of the securities markets at the time of the
offering.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for JNI by Gray Cary Ware & Freidenrich LLP, San Diego, California. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by O'Melveny & Myers LLP, Newport Beach, California.
EXPERTS
The financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 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.
72
<PAGE> 78
WHERE YOU CAN FIND MORE INFORMATION ABOUT JNI
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. When used in this prospectus, the term "registration
statement" includes amendments to the registration statement as well as the
exhibits, schedules, financial statements and notes filed as part of the
registration statement. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information in the
registration statement. This prospectus omits information contained in the
registration statement as permitted by the rules and regulations of the SEC. For
further information with respect to us and the common stock offered by this
prospectus, reference is made to the registration statement. Statements herein
concerning the contents of any contract or other document are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed with the SEC an exhibit to the registration statement, each
such statement being qualified by and subject to such reference in all respects.
With respect to each such document filed with the SEC as an exhibit to the
registration statement, reference is made to the exhibit for a more complete
description of the matter involved.
As a result of the offering hereunder, we will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance with such laws, will file reports and other information with
the SEC. Reports, registration statements, proxy statements, and other
information filed by us with the SEC can be inspected and copied at the public
reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at the SEC's Regional Offices: 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, New York, New York 10048. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The SEC maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
site is http://www.sec.gov.
We intend to furnish holders of the common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. We intend to furnish other reports as it may determine or as may be
required by law.
73
<PAGE> 79
JNI CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1997 and 1998 and
September 30, 1999 (unaudited)............................ F-3
Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998 and for the Nine Months Ended
September 30, 1998 and 1999 (unaudited)................... F-4
Statements of Stockholders' Equity (Deficit) for the Years
Ended December 31, 1996, 1997 and 1998 and for the Nine
Months Ended September 30, 1999 (unaudited)............... F-5
Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998 and for the Nine Months Ended
September 30, 1998 and 1999 (unaudited)................... F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 80
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of JNI Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of JNI Corporation at December
31, 1997 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998 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
San Diego, California
October 8, 1999
F-2
<PAGE> 81
JNI CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------- SEPTEMBER 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net.................................. $ 856 $ 3,300 $ 5,830
Inventories............................................... 736 1,175 2,436
Other current assets...................................... 59 236 804
Deferred income taxes..................................... -- -- 1,197
------- ------- -------
Total current assets.............................. 1,651 4,711 10,267
Property and equipment, net................................. 225 2,466 3,596
Intangible assets, net...................................... -- 633 11,387
Other assets................................................ 24 4 303
------- ------- -------
$ 1,900 $ 7,814 $25,553
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 484 $ 2,541 $ 3,980
Accrued liabilities....................................... 140 939 2,267
Due to affiliate.......................................... 1,950 3,061 4,252
------- ------- -------
Total current liabilities......................... 2,574 6,541 10,499
Other liabilities........................................... 66 100 117
------- ------- -------
Total liabilities................................. $ 2,640 $ 6,641 $10,616
------- ------- -------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, undesignated series, 5,000,000 shares
authorized; none issued................................ $ -- $ -- $ --
Convertible Preferred Stock, Series A, par value $.001 per
share; aggregate liquidation value $8,355 at December
31, 1998; 30,000,000 shares authorized; 16,590,000,
17,722,895 and 17,722,895 shares issued and
outstanding............................................ 17 18 18
Common stock, par value $.001 per share; 100,000,000
shares authorized; 420,000 shares issued and
outstanding............................................ -- -- --
Additional paid-in capital................................ 2,856 5,427 17,530
Unearned stock-based compensation......................... -- (970) (1,516)
Accumulated deficit....................................... (3,613) (3,302) (1,095)
------- ------- -------
Total stockholders' equity (deficit).............. (740) 1,173 14,937
------- ------- -------
$ 1,900 $ 7,814 $25,553
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 82
JNI CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues.............. $ 374 $ 2,903 $ 12,189 $ 6,929 $ 25,764
Cost of revenues.......... 348 1,252 5,361 3,109 9,695
------- ------- ---------- ------- ----------
Gross margin............ 26 1,651 6,828 3,820 16,069
------- ------- ---------- ------- ----------
Operating expenses:
Research and
development.......... 510 1,202 2,919 1,820 7,973
Selling and marketing... 532 681 1,526 1,053 3,403
General and
administrative....... 471 822 1,698 921 2,145
Amortization of
intangible assets.... -- -- 47 -- 166
Amortization of
stock-based
compensation......... -- -- 35 -- 637
------- ------- ---------- ------- ----------
Total operating
expenses..... 1,513 2,705 6,225 3,794 14,324
------- ------- ---------- ------- ----------
Operating income (loss)... (1,487) (1,054) 603 26 1,745
Interest
expense -- affiliate.... -- 130 265 195 394
------- ------- ---------- ------- ----------
Income (loss) before
income taxes............ (1,487) (1,184) 338 (169) 1,351
Income tax provision
(benefit)............... -- -- 27 -- (856)
------- ------- ---------- ------- ----------
Net income (loss)......... $(1,487) $(1,184) $ 311 $ (169) $ 2,207
======= ======= ========== ======= ==========
Earnings (loss) per share:
Basic................... $ (3.54) $ (2.82) $ 0.74 $ (0.40) $ 5.25
======= ======= ========== ======= ==========
Diluted................. $ (3.54) $ (2.82) $ 0.02 $ (0.40) $ 0.10
======= ======= ========== ======= ==========
Number of shares used in
per share computations:
Basic................... 420,000 420,000 420,000 420,000 420,000
Diluted................. 420,000 420,000 17,977,000 420,000 22,867,000
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 83
JNI CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK,
SERIES A COMMON STOCK ADDITIONAL UNEARNED PARENT
------------------- ---------------- PAID-IN STOCK-BASED CAPITAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION CONTRIBUTION DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995...... -- $-- -- $-- $ -- $ -- $1,138 $ (942)
Net parent advances........... 1,653
Net loss...................... (1,487)
---------- --- ------- -- ------- ------- ------ -------
BALANCE, DECEMBER 31, 1996...... -- -- -- -- -- -- 2,791 (2,429)
Net parent advances........... 82
Investment by parent.......... 16,590,000 17 420,000 -- 2,856 (2,873)
Net loss...................... (1,184)
---------- --- ------- -- ------- ------- ------ -------
BALANCE, DECEMBER 31, 1997...... 16,590,000 17 420,000 -- 2,856 -- -- (3,613)
Issuance of convertible
preferred stock............. 1,132,895 1 1,566
Stock-based compensation...... 1,005 (970)
Net income.................... 311
---------- --- ------- -- ------- ------- ------ -------
BALANCE, DECEMBER 31, 1998...... 17,722,895 18 420,000 -- 5,427 (970) -- (3,302)
Issuance of warrants
(unaudited)................. 10,920
Stock-based compensation
(unaudited)................. 1,183 (546)
Net income (unaudited)........ 2,207
---------- --- ------- -- ------- ------- ------ -------
BALANCE, SEPTEMBER 30, 1999
(UNAUDITED)................... 17,722,895 $18 420,000 $-- $17,530 $(1,516) $ -- $(1,095)
========== === ======= == ======= ======= ====== =======
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
<S> <C>
BALANCE, DECEMBER 31, 1995...... $ 196
Net parent advances........... 1,653
Net loss...................... (1,487)
-------
BALANCE, DECEMBER 31, 1996...... 362
Net parent advances........... 82
Investment by parent.......... --
Net loss...................... (1,184)
-------
BALANCE, DECEMBER 31, 1997...... (740)
Issuance of convertible
preferred stock............. 1,567
Stock-based compensation...... 35
Net income.................... 311
-------
BALANCE, DECEMBER 31, 1998...... 1,173
Issuance of warrants
(unaudited)................. 10,920
Stock-based compensation
(unaudited)................. 637
Net income (unaudited)........ 2,207
-------
BALANCE, SEPTEMBER 30, 1999
(UNAUDITED)................... $14,937
=======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 84
JNI CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $(1,487) $(1,184) $ 311 $ (169) $ 2,207
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Deferred income taxes................... -- -- -- -- (1,179)
Depreciation and amortization........... 17 86 243 97 969
Amortization of intangible assets....... -- -- 47 -- 166
Amortization of stock-based
compensation.......................... -- -- 35 -- 637
Accrued interest expense -- affiliate... -- 130 265 195 394
Changes in assets and liabilities:
Accounts receivable, net................ (76) (769) (2,444) (1,102) (2,530)
Inventories............................. (101) (511) (439) (251) (1,261)
Other assets............................ 23 (41) (157) (6) (867)
Accounts payable........................ -- 484 2,057 853 1,439
Accrued liabilities..................... 7 111 799 344 1,328
Other liabilities....................... 14 11 34 25 (1)
------- ------- ------- ------- -------
Net cash (used in) provided by operating
activities................................. (1,603) (1,683) 751 (14) 1,302
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures....................... (50) (219) (1,597) (358) (2,099)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from affiliate................ 1,653 1,902 846 372 797
------- ------- ------- ------- -------
Net change in cash........................... -- -- -- -- --
Cash, beginning of period.................... -- -- -- -- --
------- ------- ------- ------- -------
Cash, end of period.......................... $ -- $ -- $ -- $ -- $ --
======= ======= ======= ======= =======
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Purchase of property and equipment and
intangible assets in exchange for
convertible preferred stock and
warrants to purchase convertible
preferred stock....................... $ -- $ -- $ 1,567 $ -- $10,920
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 85
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
JNI Corporation ("JNI" or the "Company") commenced operations in 1993 as a
division of Jaycor, Inc. ("Jaycor"). In February 1997, Jaycor effected a
corporate reorganization in which it formed two new corporations: Jaymark, Inc.
("Jaymark") and the Company. Jaymark became the parent of Jaycor and of the
Company in that reorganization transaction. Jaycor then transferred technology
and assets relating to its fibre channel division to Jaymark, which in turn
contributed these to the Company in exchange for shares of the Company's common
and preferred stock.
The Company is a leading designer and supplier of fibre channel hardware
and software products that connect servers and data storage devices to form
storage area networks. Storage area networks were made possible by the emergence
of fibre channel technology, a new generation of server to storage
communications technology that improves data communication speeds, connectivity,
distance between connections, reliability and access. The Company operates in
one business segment.
BASIS OF PRESENTATION
The accompanying financial statements reflect the financial position,
results of operations, changes in stockholders' equity and cash flows as if the
Company was a separate entity for all periods presented. The financial
statements have been prepared using the historical basis in the assets and
liabilities and historical results of operations related to the Company's
business. When the Company was a division of Jaycor, the cash used by the
Company was funded by Jaycor. Subsequent to incorporation, the Company's cash
receipts and disbursements continue to be processed by Jaycor. The net balances
of the Company's accounts with Jaycor are included in Due to Affiliate.
General corporate overhead related to Jaymark's corporate headquarters and
common support divisions have been allocated to the Company generally based on
the proportion of the Company's total labor costs to the total of all of
Jaymark's subsidiaries' total labor costs. Allocated charges included in
operating expenses totaled $365, $336 and $509 for the years ended December 31,
1996, 1997 and 1998 and $327 and $699 for the nine-month periods ended September
30, 1998 and 1999 (unaudited), respectively. Management believes these
allocations fairly and reasonably approximate costs incurred by Jaymark on
behalf of the Company's operations. However, the costs allocated to the Company
are not necessarily indicative of the costs that would have been incurred if the
Company had performed these functions as a stand-alone entity. Since the Company
is operated as a combined unit, management is unable to differentiate between
the amounts allocated and the amounts that would have been incurred on a
stand-alone basis. Subsequent to the separation of the Company from Jaymark, the
Company will have its own staff perform necessary functions using its own
resources or purchased services and will be responsible for the costs and
expenses associated with the management of a separate independent company.
F-7
<PAGE> 86
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements for the nine-month periods ended
September 30, 1998 and 1999 have been prepared on the same basis as the audited
financial statements and, in the opinion of management, reflect all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
financial information set forth therein, in accordance with generally accepted
accounting principles. The data disclosed in the notes to the financial
statements for these interim periods are unaudited. Operating results for
interim periods are not necessarily indicative of operating results for an
entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market. Provisions, when necessary, are made to reduce excess and obsolete
inventories to their estimated net realizable values.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are depreciated over their
estimated useful lives, primarily using the straight-line method. Useful lives
range from three to five years for equipment and furniture and the shorter of
the useful lives or the terms of the leases (one to five years) for leasehold
improvements. Additions to property and equipment together with major renewals
and betterments are capitalized. Maintenance, repairs and minor renewals and
betterments are charged to expense as incurred.
LONG-LIVED ASSETS
The Company evaluates the carrying value of its long-lived assets when
events or changes in circumstances indicate that an asset's carrying value may
not be recoverable. An impairment loss is recognized when the sum of the
expected future undiscounted net cash flows is less than the carrying value of
the asset. An impairment loss would be measured by comparing the amount by which
the carrying value exceeds the fair value of the asset being evaluated for
impairment. No such losses have been identified by the Company.
F-8
<PAGE> 87
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets represent certain products and technology purchased in
November 1998 (Note 2) and are being amortized over their estimated useful lives
of three years using the straight-line method. Accumulated amortization totaled
$47 and $213 at December 31, 1998 and at September 30, 1999 (unaudited),
respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's payable to affiliate approximates fair
value as the rate of interest for this instrument approximates market rates of
interest currently available to the Company for a similar instrument. The
carrying value of the Company's accrued liabilities approximates fair value due
to the nature of their short-term maturities.
REVENUE RECOGNITION
Revenue from product sales to customers are recognized upon shipment.
Allowances for estimated sales returns are provided at the time revenue is
recognized.
The Company's current practice is generally to warrant its adapter products
against defects in materials and workmanship for a three-year period from the
date of shipment and its Application Specific Integrated Circuits ("ASICs")
products for a one-year period from the date of shipment. The estimated cost of
warranty obligations is accrued at the time revenue is recognized.
RESEARCH AND DEVELOPMENT COSTS
The Company is involved in a large and continuing research and development
effort that includes the continual development of new products and the
improvement of existing products. All research and development costs are
expensed as incurred.
The Company capitalizes eligible computer software development costs upon
the establishment of technological feasibility, which is defined as completion
of designing, coding and testing activities. The amount of costs eligible for
capitalization, after consideration of factors such as net realizable value,
have not historically been material and, accordingly, all software development
costs have been charged to research and development expense as incurred in the
accompanying statements of operations.
INCOME TAXES
The Company is a member of the Jaymark affiliated group of corporations
which files a consolidated federal income tax return and certain combined and
consolidated state income tax returns. Income taxes are calculated as if the
Company had filed separate tax returns for federal and state purposes.
F-9
<PAGE> 88
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
For periods during which Jaymark and the Company are included in the same
affiliated group for federal and state income tax purposes, the Company and
Jaymark have agreed that the Company's federal and state tax obligations, if
any, will be paid to Jaymark. At such time when the Company is no longer
included as a member of the Jaymark affiliated tax group, Jaymark will reimburse
the Company for the tax benefits associated with any net operating loss or
credit carryforwards previously utilized by Jaymark less any carryforwards
utilized by the Company.
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred tax asset and/or liability is computed
for both the expected future impact of differences between the financial
statement and tax bases of assets and liabilities and for the expected future
tax benefit to be derived from tax loss and tax credit carryforwards. Valuation
allowances are established when necessary to reduce deferred tax assets to the
amount expected to be "more likely than not" realized in future tax returns. Tax
rate changes are reflected in income in the period such changes are enacted.
STOCK-BASED COMPENSATION
The Company measures compensation costs related to stock option plans using
the intrinsic value method and provides pro forma disclosures of net income
(loss) and earnings (loss) per common share as if the fair value based method
had been applied in measuring compensation costs. Accordingly, compensation cost
for stock options is measured as the excess, if any, of the deemed fair value of
the Company's common stock at the date of grant over the amount an employee must
pay to acquire the stock and is amortized over the vesting period, generally
four years.
COMPREHENSIVE INCOME
The Company has had no items of comprehensive income for each of the three
years in the period ended December 31, 1998 or the nine-month period ended
September 30, 1999 (unaudited).
EARNINGS (LOSS) PER SHARE
All references in the financial statements to the number of shares
outstanding and per share amounts of the Company's Common, Preferred, and Series
A Convertible Preferred Stock have been restated to reflect a 0.7-for-1 reverse
stock split (Note 5).
Earnings (loss) per share is computed using the weighted average number of
shares of common stock outstanding and is presented for basic and diluted
earnings per share. Basic earnings (loss) per share is computed by dividing
income (loss) available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings (loss) per share is
computed by dividing income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the period increased
to include, if dilutive, the number of additional common shares
F-10
<PAGE> 89
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
that would have been outstanding if the potential common shares had been issued.
The dilutive effect of outstanding stock options is reflected in diluted
earnings per share by application of the treasury stock method. Basic and
diluted loss per share for the year ended December 31, 1996 is calculated as if
the common shares had been issued on January 1, 1996. The Company has excluded
all convertible preferred stock and outstanding stock options from the
calculation of diluted loss per share for the years ended December 31, 1996 and
1997 and for the nine-month period ended September 30, 1998 (unaudited) because
all such securities are antidilutive for these periods. The total number of
potential common shares excluded from the calculations of diluted loss per
common share for the year ended December 31, 1997 and for the nine-month period
ended September 30, 1998 (unaudited) were 15,136,000 and 16,590,000,
respectively.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)............ $(1,487) $(1,184) $ 311 $ (169) $ 2,207
======= ======= =========== ======== ===========
Denominator:
Denominator for basic
earnings (loss) per
share--weighted average
shares outstanding........ 420,000 420,000 420,000 420,000 420,000
Effect of dilutive
securities:
Dilutive warrants
outstanding............. -- -- -- -- 840,000
Dilutive options
outstanding............. -- -- 815,000 -- 3,884,000
Convertible preferred
stock................... -- -- 16,742,000 -- 17,723,000
------- ------- ----------- -------- -----------
Denominator for diluted
earnings (loss) per share
- adjusted weighted
average shares............ 420,000 420,000 17,977,000 420,000 22,867,000
======= ======= =========== ======== ===========
Basic earnings (loss) per
share........................ $ (3.54) $ (2.82) $ 0.74 $ (0.40) $ 5.25
Diluted earnings (loss) per
share........................ $ (3.54) $ (2.82) $ 0.02 $ (0.40) $ 0.10
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") was
issued. This statement will be effective for the Company on January 1, 2001.
SFAS 133 requires certain accounting and reporting standards for derivative
financial instruments and hedging activities. Under SFAS 133, all derivatives
must be recognized as assets and liabilities and measured at fair value. The
Company has not determined the impact of the adoption of this new accounting
standard on its financial statements or results of operations.
F-11
<PAGE> 90
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2. ACQUISITION
In November 1998, the Company purchased certain fibre channel technology,
products and property and equipment from Adaptec, Inc. ("Adaptec"). As
consideration for the purchase, the Company issued to Adaptec 1,132,895 shares
of the Company's Series A Convertible Preferred Stock with a fair value, as
determined for financial reporting purposes, of approximately $1.383 per share
for an aggregate purchase price of approximately $1,567.
The total purchase price included additional consideration given in the
form of three warrants to purchase a maximum of 2,436,551 additional shares of
Series A Convertible Preferred Stock which become exercisable based on product
introductions and revenues from products based on the acquired technology. Upon
a change in control of the Company, as defined, and which includes an initial
public offering of stock before January 31, 2001, the warrants become
exercisable to purchase a pro rata number of shares, dependent on sales of
products based on the acquired technology immediately prior to the change in
control. The pro rata calculation is based upon the actual revenues earned by
the Company on sales of products based on the acquired technology during the
period from February 1, 1999 to the date of the change in control (the
"Measurement Period") divided by a percentage of the revenue targets, as stated,
for sales of products based on the acquired technology during the Measurement
Period and based on the number of elapsed months in the Measurement Period.
On September 30, 1999, the Company and Adaptec amended the first of the
Series A warrants to fix the number of shares issuable thereunder at 840,000.
The number of shares issuable under the second and third warrants was reduced by
approximately 611,000 shares to approximately 1,597,000 shares. Based upon the
Company's estimate of applicable revenues that it will generate prior to the
anticipated effective time of the initial public offering, the Company
anticipates that, as a result of this reduction in shares issuable under the
second and third warrants, no shares will become issuable under these warrants.
As a result of the resolution of this contingency, additional purchase price
consideration of $10,920 was recorded on September 30, 1999. This additional
purchase price was allocated to intangible assets and will be amortized over the
remaining useful life of approximately two years.
NOTE 3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
------------- SEPTEMBER 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE:
Accounts receivable................................. $891 $3,433 $6,255
Less allowance for doubtful accounts and sales
returns.......................................... (35) (133) (425)
---- ------ ------
Total....................................... $856 $3,300 $5,830
==== ====== ======
</TABLE>
F-12
<PAGE> 91
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
-------------- SEPTEMBER 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
INVENTORIES:
Raw materials................................... $ 306 $ 645 $ 930
Work in process................................. 279 426 1,302
Finished goods.................................. 151 104 204
----- ------ -------
Total................................... $ 736 $1,175 $ 2,436
===== ====== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
-------------- SEPTEMBER 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Computer and test equipment..................... $ 308 $2,763 $ 4,644
Leasehold improvements.......................... 7 10 107
Office furniture and other equipment............ 41 64 108
----- ------ -------
356 2,837 4,859
Less accumulated depreciation and
amortization................................. (131) (371) (1,263)
----- ------ -------
Total................................... $ 225 $2,466 $ 3,596
===== ====== =======
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
-------------- SEPTEMBER 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ACCRUED LIABILITIES:
Accrued payroll and payroll related costs....... $ 123 $ 836 $ 1,914
Other........................................... 17 103 353
----- ------ -------
Total................................... $ 140 $ 939 $ 2,267
===== ====== =======
</TABLE>
At September 30, 1999 (unaudited), the Company had $612 of receivables,
included in other current assets, related to the transfer of inventory
components to a contract manufacturer.
NOTE 4. TRANSACTIONS WITH AFFILIATES
DUE TO AFFILIATE
On February 1, 1997, the Company entered into a revolving loan agreement
with Jaycor whereby Jaycor and the Company agreed to consent to borrow and/or
lend sums to each other as may be needed from time to time in the ordinary
course of business. Under the terms of the agreement, the advances bear interest
at a floating rate equal to Jaycor's incremental cost of borrowing (9.2%, 12.1%
and 13.4% at December 31, 1997 and 1998 and September 30, 1999 (unaudited)).
Advances under the agreement are due on demand,
F-13
<PAGE> 92
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4. TRANSACTIONS WITH AFFILIATES (CONTINUED)
and if no demand is made, within ten years of the date of such advance. During
the years ended December 31, 1997 and 1998 and for the nine-month period ended
September 30, 1999 (unaudited), the Company incurred interest expense on
advances from Jaycor of $130, $265 and $394, respectively. Prior to February 1,
1997, amounts advanced from Jaycor were recorded as capital contributions to the
Company and, therefore, no interest expense was incurred during 1996.
BUILDING SUBLEASE
In October 1998, the Company and Jaycor entered into a sublease agreement,
as amended, whereby the Company subleased a certain portion of Jaycor's
facilities for terms consistent with Jaycor's primary lease. The sublease
provides for a base monthly rent and is subject to an annual increase based upon
the Consumer Price Index (CPI) percentage with a minimum increase of 2.5% and a
maximum increase of 5% annually. The term of the lease expires in October 2004.
In addition, the sublease requires the payment of a pro rata portion of the
monthly operating costs, taxes and utilities of the premises. As of December 31,
1998, the Company's future annual minimum payments due to Jaycor under this
sublease were $462, $557, $567, $577, $588 and $497 for the years ending
December 31, 1999, 2000, 2001, 2002, 2003 and 2004, respectively.
AGREEMENTS WITH ADAPTEC
In November 1998, the Company purchased certain fibre channel technology,
products and property and equipment from Adaptec (Note 2). In connection with
the asset acquisition, the Company entered into the following agreements with
Adaptec: a Fibre Channel Cross-License Agreement; a Chip Manufacturing
Agreement; a Board Manufacturing and Transition Agreement; a Consulting Services
Agreement; a Volume Purchase Agreement; and two Occupancy License Agreements.
Pursuant to the Fibre Channel Cross-License Agreement, Adaptec granted the
Company four irrevocable, perpetual and non-exclusive licenses to certain of
Adaptec's fibre channel technology. Three of the licenses granted to the Company
under this agreement are fully paid and royalty-free and the fourth license
contains a $25 per unit royalty fee. During the year ended December 31, 1998 and
during the nine-month period ended September 30, 1999 (unaudited), the Company
incurred royalty expense of $0 and $30, respectively, pursuant to this
agreement.
In addition and as part of the agreement, the Company granted Adaptec a
non-exclusive license to use and distribute any of the Company's error
corrections, updates and other future versions and releases of the licensed
fibre channel technology products. The license to Adaptec is royalty-free.
Pursuant to the Chip Manufacturing Agreement, Adaptec agreed to perform
manufacturing services with respect to fibre channel chip products for a
transition period not to exceed two years beginning in November 1998. The
agreement specifies that Adaptec will manufacture and package the products
according to specifications at a price
F-14
<PAGE> 93
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4. TRANSACTIONS WITH AFFILIATES (CONTINUED)
initially equal to Adaptec's standard cost plus 15 percent. The prices will be
reviewed quarterly. During the year ended December 31, 1998 and during the
nine-month period ended September 30, 1999 (unaudited), the Company incurred
costs of $19 and $650, respectively, for the manufacture of these products.
Pursuant to the Board Manufacturing and Transition Agreement, Adaptec
agreed to perform manufacturing services with respect to fibre channel board
level products sold to the Company under the Asset Acquisition Agreement for a
transition period of six months beginning in November 1998. The agreement
specifies that Adaptec will manufacture and package the board level products
according to specifications at a price equal to Adaptec's standard cost plus 15
percent. The Company purchased $0 and $427 of board level products from Adaptec
during the year ended December 31, 1998 and the nine-month period ended
September 30, 1999 (unaudited), respectively, pursuant to this agreement.
Pursuant to the Consulting Services Agreement, Adaptec has agreed to
perform consulting services to assist the Company in the development of the
technology assets purchased in exchange for an hourly fee which varies based on
the particular consultant engaged. This agreement has a term of the earlier of
one year from the date of the agreement or the completion of all services noted
in the agreement. During the year ended December 31, 1998 and during the
nine-month period ended September 30, 1999 (unaudited), the Company incurred
expenses of $0 and $248, respectively, pursuant to this agreement.
Pursuant to the Volume Purchase Agreement, the Company agreed to sell to
Adaptec certain fibre channel products developed and manufactured by Adaptec for
the Company under the Chip Manufacturing Agreement and the Board Manufacturing
and Transition Agreement. Per the agreement, the prices charged to Adaptec will
not exceed: (1) the prices charged any of the Company's other customers during
the 90 day period preceding the price quote purchasing "substantially similar"
products or (2) 115% of the Company's actual manufacturing cost or the price
paid by the Company if manufactured by Adaptec. Adaptec has the right to resell
the products without restriction of any kind, except that under certain
conditions, Adaptec may not sell products incorporating certain chip-level
products.
The Volume Purchase Agreement expires in November 2000 and will
automatically renew for an additional one-year term unless either party notifies
the other of its intention to terminate the agreement within ninety days of the
expiration of the term. During the year ended December 31, 1998 and during the
nine-month period ended September 30, 1999 (unaudited), the Company had no sales
to Adaptec pursuant to this agreement.
Pursuant to two Occupancy License Agreements, Adaptec granted the Company
the right to occupy and use a portion of two of Adaptec's facilities located in
Irvine and Milpitas, California. The monthly license fee for the Irvine facility
was $15. The monthly license fee for the Milpitas facility was $3. These rates
were based on Adaptec's rental costs plus an increase in costs for allocations
of computer resources, telephone charges, supplies and other nominal charges.
The Irvine agreement had a term of four months and
F-15
<PAGE> 94
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4. TRANSACTIONS WITH AFFILIATES (CONTINUED)
expired in February 1999. The Milpitas agreement had a maximum term of twelve
months, however the Company exercised its right to terminate the Milpitas
agreement pursuant to the agreement in February 1999 without penalty. Amounts
incurred under these agreements totaled $35 during the year ended December 31,
1998 and $28 during the nine-month period ended September 30, 1999 (unaudited).
Accounts payable to Adaptec totaled approximately $19 and $316 at December
31, 1998 and September 30, 1999 (unaudited), respectively. There were no
purchases from Adaptec during the years ended December 31, 1996 or 1997.
REGISTRATION RIGHTS AGREEMENTS
Pursuant to a Registration Rights Agreement dated as of September 1, 1999,
the Company has granted registration rights to Jaymark for the shares of the
Company's stock held by Jaymark. If the Company proposes to register any of the
Company's securities under the Securities Act, either for its own account or for
the account of other security holders, holders of shares entitled to
registration rights are entitled to notice of such registration and are entitled
to include their shares in such registration, at the Company's expense. Jaymark
is also entitled to specified demand registration rights under which Jaymark may
require the Company to file a registration statement under the Securities Act at
the Company's expense with respect to the Company's shares of common stock, and
the Company is required to use its best efforts to effect this registration.
Further, Jaymark may require the Company to file additional registration
statements on Form S-3. All of these registration rights are subject to
conditions and limitations, among them the right of the underwriters of an
offering to limit the number of shares included in the registration and the
Company's right not to effect a requested registration within twelve months
following the initial offering of the Company's securities, including this
offering. All of these registration rights terminate after the Company has
effected two registration statements, or at the latest, four years from the date
of this offering.
Under an Investor's Rights Agreement dated as of November 12, 1998, Adaptec
or its permitted transferees will have registration rights with respect to the
1,132,895 shares of the Company's common stock acquired in November 1998 and
with respect to 840,000 shares issuable upon exercise of the warrants described
above. If the Company proposes to register any of its securities under the
Securities Act at any time beginning two years after this offering, either for
the Company's own account or for the account of other security holders, holders
of shares entitled to registration rights are entitled to notice of such
registration and are entitled to include their shares in such registration, at
the Company's expense. However, the underwriters of any such offering have the
right to limit the number of shares included in such registration. These
registration rights terminate after the Company has effected two registration
statements or, at the latest, four years from the date of this offering.
F-16
<PAGE> 95
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5. STOCKHOLDERS' EQUITY
REVERSE STOCK SPLIT
Effective October 1999, the Company declared a 0.7-for-1 reverse stock
split of Common, Preferred, and Series A Convertible Preferred Stock. All
references in these financial statements to the number of shares, per share
amounts and stock option data of the Company's Common Stock, Preferred Stock,
and Series A Convertible Preferred Stock have been restated to reflect this
stock split.
PREFERRED STOCK
The Board of Directors of the Company (the "Board") is authorized to issue
preferred stock or other senior securities and determine the series and number
of preferred shares to be issued and any related designations, powers,
preferences, rights, qualifications, limitations or restrictions. The total
number of shares authorized is 35,000,000. The Board has authorized and allotted
30,000,000 shares as Series A Convertible Preferred Stock. The remaining
5,000,000 shares are undesignated.
SERIES A CONVERTIBLE PREFERRED STOCK
The holders of Series A Convertible Preferred Stock are entitled to receive
annual dividends of $0.11 per share, such dividends to be payable only when and
if declared by the Board out of funds legally available therefor. The right to
such dividends shall not be cumulative and no rights to such dividends shall
accrue to holders of the Series A Convertible Preferred Stock if dividends on
said shares are not declared in any year. No dividends have been declared on the
Series A Convertible Preferred Stock. At December 31, 1998, the issued and
outstanding Series A Convertible Preferred Stock were convertible into
17,722,895 shares of the Company's common stock. The Series A Convertible
Preferred Stock will automatically convert into shares of common stock upon the
closing of a public offering, as defined, or upon the vote or written consent of
the holders of at least 50% of the authorized shares of Series A Convertible
Preferred Stock outstanding. The Series A Convertible Preferred Stock has a
liquidation preference of $0.47 per share, plus all declared and unpaid
dividends.
NOTE 6. BENEFIT PLANS
The Company's employees are covered by Jaymark's 401(k) salary deferral
plan (the "401(k) Plan"), which covers substantially all employees of the
Company. Jaymark modified the 401(k) Plan, effective July 1, 1998, to allow for
a Company matching contribution (the "Match") and, effective July 1, 1999, to
allow eligible new employees to enroll on the first day of the month following
their hire date. The Match is 100% of the employee's first five percentage
points of salary contributed; employees vest 20% per year on the second through
sixth anniversaries of their hire date. During the year ended December 31, 1998
and during the nine-month period ended September 30, 1999 (unaudited), the
charge to operations for the Match was $39 and $182, respectively.
F-17
<PAGE> 96
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6. BENEFIT PLANS (CONTINUED)
The Company offers deferred compensation arrangements to certain of its
employees. The agreements allow the employees to defer up to 100% of their
salaries, net of certain payroll withholdings, with interest accruing thereon at
specified rates, currently at 9%. Distributions commence upon retirement or
termination and continue for a period as prescribed in the respective
agreements.
During February 1997, the Company adopted an option plan (the "1997 Plan")
which provides for the issuance of 4,396,441 shares of the Company's common
stock. The 1997 Plan provides for the grant to employees and directors of the
Company of incentive stock options and non-qualified stock options to purchase
shares of the Company's common stock. For a nine-year period following the date
of grant, such options are only exercisable in the event that the Company enters
into certain transactions including a sale of assets, merger, or public offering
of equity securities. Following such nine-year period, but prior to the
termination of such option (ten years from the date of grant), the option may be
exercised. In such event, if the employee attempts to sell the stock or
terminates employment with the Company, the Company has the right to repurchase
such shares at the greater of the exercise price or the fair market value of
such shares. The exercise price of all options granted under the 1997 Plan are
not less than the fair market value of the Company's common stock as determined
by the Board on the date of grant. Options granted under the 1997 Plan generally
vest over a four-year period, although such vesting is accelerated to three
years in the event of certain transactions resulting in a transfer of control of
the Company. At September 30, 1999 (unaudited), there were 50,750 shares of the
Company's common stock available for future grant under the 1997 Plan.
In April 1999, the Company adopted a second option plan (the "1999 Plan"),
as amended, which provides for the issuance of up to 2,312,800 shares of the
Company's common stock. A portion of this reserve has been approved by the board
and stockholders contingent upon the effectiveness of the initial public
offering. The 1999 Plan provides for the grant to employees, consultants and
directors of the Company of incentive stock options and non-qualified stock
options to purchase shares of the Company's common stock. Options granted under
the 1999 Plan shall be exercisable at such time or upon such event and subject
to the terms, conditions and restrictions as determined by the Board provided,
however, that no option shall be exercisable after ten years from the date of
grant. The exercise price of all incentive stock options granted under the 1999
Plan are not less than the fair market value of the Company's common stock as
determined by the Board on the date of grant. Options granted under the 1999
Plan generally vest over a four-year period. At September 30, 1999 (unaudited),
there were 1,591,800 shares of the Company's common stock available for future
grant under the 1999 Plan, giving effect to the contingent increase in the stock
option reserve approved by the Board on September 1, 1999.
F-18
<PAGE> 97
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6. BENEFIT PLANS (CONTINUED)
A summary of the Company's stock option plans as of December 31, 1997 and
1998 and as of September 30, 1999 (unaudited) and changes during the periods is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------- SEPTEMBER 30, 1999
1997 1998 -----------------------
-------------------- -------------------- (UNAUDITED)
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 3,759,840 $0.17 4,038,741 $0.17
Granted.................. 3,759,840 0.17 808,500 0.17 1,081,500 7.05
Exercised................ -- -- -- -- -- --
Expired/surrendered...... -- -- (529,599) 0.17 (53,550) 0.65
--------- --------- ---------
Outstanding at end of
period................. 3,759,840 $0.17 4,038,741 $0.17 5,066,691 $1.63
========= ========= =========
Vested at end of
period................. -- 375,984 1,029,700
Exercisable at end of
period................. -- -- --
Weighted-average fair
value per option of
options granted during
the period............. $0.07 $1.34 $4.04
</TABLE>
The Company did not have a stock option plan at any time during the year
ended December 31, 1996.
The following table summarizes information regarding employee stock options
outstanding at December 31, 1998 and September 30, 1999 (unaudited), none of
which were exercisable:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
NUMBER CONTRACTUAL LIFE
EXERCISE PRICES OUTSTANDING (YEARS)
<S> <C> <C>
December 31, 1998:
$0.17..................... 4,038,741 8.7
========= ====
September 30, 1999
(unaudited):
$0.17..................... 4,214,441 8.0
$0.71..................... 131,250 9.4
$10.00.................... 366,450 9.7
$10.71.................... 354,550 9.9
--------- ----
5,066,691 8.3
========= ====
</TABLE>
Stock-based compensation is recognized using the intrinsic value method. In
connection with the grant of stock options to employees, the Company recorded
unearned stock-based compensation within stockholders' equity (deficit) of
$1,005 during fiscal 1998 and $1,183 during the nine-month period ended
September 30, 1999 (unaudited),
F-19
<PAGE> 98
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6. BENEFIT PLANS (CONTINUED)
representing the difference between the estimated fair value of the common stock
determined for financial reporting purposes and the exercise price of these
options at the date of grant. Amortization of unearned stock-based compensation,
net of any charges reversed during the period for the forfeiture of unvested
options, was $35 for the year ended December 31, 1998 and $637 for the
nine-month period ended September 30, 1999 (unaudited), respectively.
At September 30, 1999 (unaudited), the remaining unearned stock-based
compensation of approximately $1,516 will be amortized as follows: $205 during
the three months ended December 31, 1999, $646 in 2000, $433 in 2001, $219 in
2002 and $13 in 2003. The amount of stock-based compensation expense to be
recorded in future periods could decrease if options for which accrued but
unvested compensation has been recorded are forfeited.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans the Company's net income (loss) would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
------------------ SEPTEMBER 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
Net income (loss):
As reported......................... $(1,184) $ 311 $2,207
Pro forma........................... $(1,242) $ 231 $1,831
Diluted earnings (loss) per common
share:
As reported......................... $ (2.82) $0.02 $ 0.10
Pro forma........................... $ (2.96) $0.01 $ 0.08
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
----------------- SEPTEMBER 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
Weighted average grant-date fair value
of options granted:
Exercise price equal to estimated
fair value of stock on the grant
date:
Aggregate value................... $ 275 $ 12 $2,940
Per share value................... $0.07 $ 0.07 $ 4.08
Exercise price less than the
estimated fair value of stock on
the grant date:
Aggregate value................... -- $1,068 $1,433
Per share value................... -- $ 1.67 $ 3.97
</TABLE>
F-20
<PAGE> 99
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6. BENEFIT PLANS (CONTINUED)
The fair value of each option grant was estimated as of the date of grant
using the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 1997 and 1998
and the nine-month period ended September 30, 1999 (unaudited): no dividend
yield; risk-free interest rate of 6.00%, 4.83% and 5.62%; and expected terms of
9.9 years, 9.9 years and 9.2 years, respectively. The volatility of the
Company's common stock underlying the options was not considered because the
Company's equity was not publicly-traded as of December 31, 1997, 1998 and
September 30, 1999.
In September 1999, the Board approved the establishment, upon the closing
of an initial public offering of the Company's common stock (Note 10), of the
1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 175,000
shares of the Company's common stock have been reserved for issuance under the
Purchase Plan, none of which have been issued. The number of shares reserved for
issuance under the Purchase Plan will be subject to an annual increase on
January 1 of each year beginning in 2001 equal to the lesser of (a) 87,500
shares, (b) 1.0% of the outstanding shares on such date or (c) a lesser amount
as determined by the Board. The Purchase Plan permits eligible employees to
purchase shares of common stock at a fifteen percent (15%) discount through
payroll deductions during sequential 24-month offering periods. Each such
offering period is divided into four consecutive six-month purchase periods.
Unless the Board establishes a higher price, the price at which shares are
purchased under the Purchase Plan for such offering period is equal to 85% of
the lesser of the fair market value of the common stock on the first day of such
offering period or the last day of the applicable purchase period within such
offering period. The initial offering period will commence on the effective date
of an initial public offering of the Company's common stock.
NOTE 7. INCOME TAXES
The components of income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
(UNAUDITED)
<S> <C> <C>
Current:
Federal............................ $22 $ 213
State.............................. 5 110
--- -------
27 323
--- -------
Deferred:
Federal............................ -- (710)
State.............................. -- (469)
--- -------
-- (1,179)
--- -------
$27 $ (856)
=== =======
</TABLE>
F-21
<PAGE> 100
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 7. INCOME TAXES (CONTINUED)
Due to the Company's net loss position for the years ended December 31,
1996 and 1997, there was no provision for income taxes recorded. The provision
for 1998 relates to the federal and state alternative minimum tax.
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective tax rate:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ 1999
1996 1997 1998 (UNAUDITED)
<S> <C> <C> <C> <C>
Tax provision (benefit) at statutory
rate................................... (34)% (34)% 34% 34%
State tax, net of federal tax benefit.... (5) (3) 7 10
Research and development credits......... (1) (4) (21) (27)
Stock-based compensation................. -- -- 4 16
Amortization of intangible assets........ -- -- -- 6
Permanent differences.................... -- 1 3 2
Utilization of net operating loss
carryforwards.......................... -- -- (115) (79)
Net change in valuation allowance........ 40 40 96 (25)
--- --- ---- ---
--% --% 8% (63)%
=== === ==== ===
</TABLE>
The components of the Company's net deferred tax assets (liabilities) are
as follows:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, SEPTEMBER 30,
----------------- 1999
1997 1998 (UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.............. $ 1,394 $ 1,006 $ --
Research and development credit
carryforwards.............................. 91 172 614
Allowances and reserves....................... 43 120 448
Accrued payroll and payroll related costs..... 44 163 229
Depreciation.................................. 4 6 --
Alternative minimum tax credit
carryforwards.............................. -- 27 27
------- ------- ------
Total deferred tax assets............. $ 1,576 $ 1,494 $1,318
Deferred tax liabilities:
Other......................................... $ (113) $ (97) $ (121)
Depreciation.................................. -- -- (18)
------- ------- ------
Net deferred tax assets.................... 1,463 1,397 1,179
Less valuation allowance................... (1,463) (1,397) --
------- ------- ------
$ -- $ -- $1,179
======= ======= ======
</TABLE>
At December 31, 1997 and 1998, the Company recorded a valuation allowance
for the entire amount of the net deferred tax asset due to the uncertainty
surrounding the ultimate realization of such asset at that time. At September
30, 1999 (unaudited), there was no
F-22
<PAGE> 101
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 7. INCOME TAXES (CONTINUED)
valuation allowance recorded against the net deferred tax asset as management
determined at that time that it was more likely than not that the net deferred
tax asset will be realized based on historical and anticipated future pre-tax
results of operations of the Company.
As of December 31, 1998, the Company had federal and state net operating
loss carryforwards of approximately $2,454 and $1,938 and research and
development tax credit carryforwards of approximately $93 and $79, respectively.
As of December 31, 1998, the Company also had federal and state alternative
minimum tax credit carryforwards of approximately $22 and $5, respectively. As
of September 30, 1999 (unaudited), the Company had $0 federal and $0 state net
operating loss carryforwards and had research and development tax credit
carryforwards of approximately $290 and $324, respectively. As of September 30,
1999 (unaudited), the Company also had federal and state alternative minimum tax
credit carryforwards of approximately $22 and $5, respectively. The credit
carryforwards will expire at various dates beginning in the years 2009 through
2019, if not utilized to offset future taxable income of the Company.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company leases its operating facilities and certain office equipment
under noncancelable operating leases. The facility leases require the payment of
taxes, maintenance, utilities and insurance.
Future annual minimum lease payments due under noncancelable operating
leases consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
OPERATING
YEARS ENDING DECEMBER 31, LEASES
<S> <C>
1999........................................................ $ 700
2000........................................................ 672
2001........................................................ 567
2002........................................................ 577
2003........................................................ 588
2004........................................................ 497
------
Total minimum lease payments........................... $3,601
======
</TABLE>
Rent expense under all operating leases for the years ended December 31,
1996, 1997 and 1998 was $16, $118 and $353 and rent expense for the nine-month
periods ended September 30, 1998 and 1999 (unaudited) was $211 and $690,
respectively. Rent expense incurred from Jaycor (Note 4) was $0, $90 and $254
for the years ended December 31, 1996, 1997 and 1998 and $146 and $323 for the
nine-month periods ended September 30, 1998 and 1999 (unaudited), respectively.
The Company has also guaranteed a $7.0 million credit line that Jaycor has
with a commercial lender.
F-23
<PAGE> 102
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 9. CONCENTRATIONS OF RISK
The Company's products are concentrated in the storage area network
industry which is highly competitive and subject to rapid technological change.
The Company's revenues are concentrated with several major customers and certain
vital components of the Company's products are manufactured by a small number of
key suppliers. The loss of a major customer, the interruption of product supply
from a contract manufacturer, a change of suppliers or a significant
technological change in the industry could affect operating results adversely.
The Company sells its products to original equipment manufacturers,
distribution channel customers and directly to end users and extends credit
based on an evaluation of the customer's financial condition, generally without
requiring collateral. Exposure to losses on receivables is principally dependent
on each customer's financial condition. The Company monitors its exposure for
credit losses and maintains allowances for anticipated losses.
Sales to customers outside of the United States accounted for 60%, 14% and
14% of the Company's net revenues for the years ended December 31, 1996, 1997
and 1998 and 17% for the nine-month period ended September 30, 1999 (unaudited),
respectively. Of this amount, 60%, 14%, 4% and 3% of the Company's net revenues
were to customers located in Japan, 0%, 0%, 9% and 12% were to customers located
in Western Europe and 0%, 0%, 1% and 2% were to other foreign customers.
The percentage of sales to significant customers was as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------------- SEPTEMBER 30,
1996 1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C>
Customer A.................................. -- 8% 19% 16%
Customer B.................................. 6% 11 16 13
Customer C.................................. -- -- 6 16
Customer D.................................. -- -- 9 12
Customer E.................................. -- 13 6 5
Customer F.................................. 60 14 -- --
Customer G.................................. 12 1 -- --
</TABLE>
NOTE 10. PROPOSED INITIAL PUBLIC OFFERING
In September 1999, the Board approved the filing of the Company's
Registration Statement on Form S-1 with the Securities and Exchange Commission
to reflect the proposed sale by the Company and a principal stockholder of
shares of common stock.
If the proposed initial public offering of the Company's common stock is
consummated under the terms presently anticipated, all of the outstanding Series
A Convertible Preferred Stock will automatically convert into 17,722,895 shares
of common stock.
F-24
<PAGE> 103
[EDGAR ARTWORK DESCRIPTIONS]
LOCATION: Back cover
In the upper right hand corner of the page is the caption "Our Strategic
Relations" in yellow print on a purple background. Underneath the caption are
the following logos: Crossroads, Veritas, Legato, Vixel, Chaparral Network
Storage, Inc. and gadzoox.
In the center of page, flush left, is the caption "Our Distribution Channels"
in white print on a red background. Underneath the caption are the following
logos: Bell Microproducts, Acal, InfoX, EDS and Polaris.
In the lower right corner of the page is the caption "Our Original Equipment
Manufacturers" in white print on a green background. Underneath the caption are
the following logos: Storagetek, Sgi, Data General, McData, EMC(2), Avid,
Consan, Amdahl and Ciprico.
In the lower left corner of the page is text that states:
"The use of these logos is solely intended to identify current or recent
consumers of JNI products or computer equipment using JNI products. The logos
do not constitute an endorsement by the companies of JNI or its products."
In the lower right corner of the page is the JNI logo.
<PAGE> 104
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
JNI LOGO
4,900,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock may be required
to deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 105
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the registrant in connection with the sale
of the common stock being registered. JNI is paying all of the expenses incurred
on behalf of the selling stockholder, other than underwriting discounts and
commissions. All amounts shown are estimates except for the registration fee and
the NASD filing fee.
<TABLE>
<S> <C>
Registration fee............................................ $ 22,240
NASD filing fee............................................. 8,500
Nasdaq National Market fee.................................. 50,000
Blue sky qualification fees and expenses.................... 5,000
Printing and engraving expenses............................. 150,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 500,000
Transfer agent and registrar fees........................... 10,000
Fee for custodian for selling stockholder................... 5,000
Miscellaneous............................................... 24,260
----------
Total............................................. $1,075,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the DGCL permits indemnification of officers, directors, and
other corporate agents under certain circumstances and subject to certain
limitations. The registrant's certificate of incorporation and by-laws provide
that the registrant shall indemnify its directors, officers, employees and
agents to the full extent permitted by the DGCL, including circumstances in
which indemnification is otherwise discretionary under Delaware law. In
addition, the registrant has entered into separate indemnification agreements
with its directors and executive officers which require the registrant, among
other things, to indemnify them against certain liabilities which may arise by
reason of their status or service (other than liabilities arising from acts or
omissions not in good faith or willful misconduct).
These indemnification provisions and the indemnification agreements entered
into between the registrant and its executive officers and directors may be
sufficiently broad to permit indemnification of the registrant's executive
officers and directors for liabilities, including reimbursement of expenses
incurred, arising under the Securities Act.
The underwriting agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the underwriters of the registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
II-1
<PAGE> 106
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since inception, the registrant has sold and issued the following
unregistered securities:
(a) Issuances of Shares of Common Stock.
On February 3, 1997, the registrant issued to Jaymark, Inc., 10,500 shares
of common stock in exchange for $1,500.
On March 5, 1997, the registrant issued 409,500 shares of common stock to
Jaymark, Inc. as partial payment for technology purchased pursuant to a
Technology Assignment and License Agreement.
(b) Issuances of Shares of Preferred Stock.
On March 5, 1997, the registrant issued 16,590,000 shares of Series A
preferred stock to Jaymark, Inc. as partial payment for technology purchased
pursuant to a Technology Assignment and License Agreement.
On November 12, 1998, the registrant issued to Adaptec, Inc. 1,132,895
shares of Series A preferred stock and three Series A preferred stock purchase
warrants to purchase up to an additional 2,436,552 shares of Series A preferred
stock in exchange for products and technology. In September 1999, the registrant
amended the warrants to fix the number of shares issuable thereunder at 840,000,
subject to adjustment.
(c) Option Issuances to Employees and Directors.
From February 1997 through September 30, 1999, the registrant issued
options to approximately 60 employees to purchase a total of 5,066,691 shares of
common stock at a weighted average exercise price of $1.63 per share. No
consideration was paid to the registrant by any recipient of any of the
foregoing options for the grant of any such options. None of the granted options
have been exercised.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances described in Items 15(a) and 15(b) were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering. In
addition, the issuances described in Item 15(c) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The recipients of securities in each such transaction
represented their intention 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 were affixed to the share certificates and other instruments
issued in such transactions. All recipients either received adequate information
about the registrant or had access, through employment or other relationships,
to such information.
II-2
<PAGE> 107
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
1.1** Form of Underwriting Agreement
3.1** Third Amended and Restated Certificate of Incorporation of
the Company
3.2** By-laws of the Company
3.3** Fourth Amended and Restated Certificate of Incorporation
of the Company
4.1* Specimen Common Stock Certificate
4.2** Investor's Rights Agreement, dated November 12, 1998 by
and among JNI Corporation, Adaptec, Inc. and Jaymark, Inc.
4.3** Registration Rights Agreement, dated September 1, 1999
between JNI Corporation and Jaymark, Inc.
5.1** Opinion of Gray Cary Ware & Freidenrich LLP
10.1** Form of Indemnity Agreement for directors and executive
officers
10.2** 1997 Stock Option Plan, as amended, and forms of Incentive
Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder
10.3** 1999 Stock Option Plan, as amended, terms of Stock Option
Agreement and form of Stock Option Grant Agreement
thereunder
10.4** 1999 Employee Stock Purchase Plan and form of subscription
agreement thereunder
10.5** Technology Assignment and License Agreement, dated March
5, 1997 by and among Jaycor, Inc., Jaymark, Inc. and JNI
Corporation
10.6+ Asset Acquisition Agreement, dated November 12, 1998
between Adaptec, Inc. and JNI Corporation
10.7** Series A Preferred Stock Purchase Warrant, dated November
12, 1998 issued by the Company to Adaptec, Inc.
10.8** Series A Preferred Stock Purchase Warrant, dated November
12, 1998 issued by the Company to Adaptec, Inc.
10.9** Series A Preferred Stock Purchase Warrant, dated November
12, 1998 issued by the Company to Adaptec, Inc.
10.10+** Fibre Channel Cross-License Agreement, dated November 12,
1998 between JNI Corporation and Adaptec, Inc.
10.11** Letter Agreement, dated March 31, 1999 between JNI
Corporation and Adaptec, Inc.
10.12** Occupancy License Agreement, dated November 12, 1998
between JNI Corporation and Adaptec, Inc.
10.13** Occupancy License Agreement, dated November 12, 1998
between JNI Corporation and Adaptec, Inc.
10.14** Consulting Services Agreement, dated November 12, 1998
between JNI Corporation and Adaptec, Inc.
10.15+** Chip Manufacturing Agreement, dated November 12, 1998
between JNI Corporation and Adaptec, Inc.
10.16+** Amendment Number One to Chip Manufacturing Agreement,
dated March 9, 1999 between JNI Corporation and Adaptec,
Inc.
</TABLE>
II-3
<PAGE> 108
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
10.17+** Board Manufacturing and Transition Agreement, dated
November 12, 1998 between JNI Corporation and Adaptec,
Inc.
10.18** Volume Purchase Agreement, dated November 12, 1998 between
JNI Corporation and Adaptec, Inc.
10.19** Bill of Sale, dated November 12, 1998 between JNI
Corporation and Adaptec, Inc.
10.20** Board Observer Confidentiality Agreement, dated December
6, 1998 between JNI Corporation and Adaptec, Inc.
10.21** License Agreement, dated March 9, 1999 between JNI
Corporation and Adaptec, Inc.
10.22** Sublease, dated October 7, 1998, between Jaycor, Inc. and
JNI Corporation
10.23** First Amendment to Sublease, dated December 1, 1998
between Jaycor, Inc. and JNI Corporation
10.24** Second Amendment to Sublease, dated April 1, 1998 between
Jaycor, Inc. and JNI Corporation
10.25** Third Amendment to Sublease, dated May 15, 1999 between
Jaycor, Inc. and JNI Corporation
10.26** Fourth Amendment to Sublease, dated August 1, 1999 between
Jaycor, Inc. and JNI Corporation
10.27** Industrial Lease, dated January 7, 1999 between The Irvine
Company and JNI Corporation
10.28** Sublease, dated January 14, 1999 between Obsidian, Inc.
and JNI Corporation
10.29** Form of Severance and Change of Control Agreement, dated
September 1, 1999, entered into by JNI Corporation and
each of Terry M. Flanagan, Thomas K. Gregory, Charles
McKnett and Gloria Purdy
10.30** Revolving Loan Agreement, dated February 1, 1997 between
JNI Corporation and Jaycor, Inc.
10.31** Security Agreement, dated August 31, 1998 between JNI
Corporation and Jaycor, Inc.
10.32** Intellectual Property Security Agreement, dated August 31,
1998 between JNI Corporation and Jaycor, Inc.
10.33** Transitional Services Agreement, dated September 1, 1999
between JNI Corporation and Jaymark, Inc.
10.34** Tax Sharing Agreement, dated September 1, 1999 between JNI
Corporation and Jaymark, Inc.
10.35** Professional Services Agreement, dated February 1, 1998
between JNI Corporation and Edward Frymoyer, EMF
Associates
10.36** Amendment to Asset Acquisition Agreement, dated September
30, 1999 between JNI Corporation and Adaptec, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2** Consent of Counsel (included in Exhibit 5.1)
23.3** Consent of Director nominee: Thomas J. Bernard
23.4** Consent of Director nominee: John Bolger
</TABLE>
II-4
<PAGE> 109
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
23.5** Consent of Director nominee: Laurence E. Fox
24.1** Power of Attorney (see page II-6)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Filed previously with Registration Statement on Form S-1 (File No.
333-86501).
+ Confidential treatment has been requested with respect to portions of this
exhibit.
(B) FINANCIAL STATEMENT SCHEDULE.
Report of Independent Accountants on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions referenced in Item 14 of
this registration statement or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is therefore
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, employee or agent of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer, employee or agent in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, 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> 110
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, County of San
Diego, State of California, on the 22nd day of October, 1999.
JNI Corporation
By: /s/ TERRY M. FLANAGAN
------------------------------
Terry M. Flanagan
President, Chief Executive
Officer and Director
(Principal Executive
Officer)
Pursuant to the requirements of the Securities Act, this 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>
/s/ TERRY M. FLANAGAN President, Chief Executive October 22, 1999
- ------------------------------------------ Officer and Director
Terry M. Flanagan (Principal Executive
Officer)
/s/ GLORIA PURDY Chief Financial Officer October 22, 1999
- ------------------------------------------ (Principal Financial and
Gloria Purdy Accounting Officer)
/s/ ERIC P. WENAAS* Chairman of the Board of October 22, 1999
- ------------------------------------------ Directors
Eric P. Wenaas
/s/ P. RANDY JOHNSON* Director October 22, 1999
- ------------------------------------------
P. Randy Johnson
*By: /s/ GLORIA PURDY
- -----------------------------------------
Gloria Purdy
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 111
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of JNI Corporation
Our audits of the financial statements referred to in our report dated October
8, 1999 appearing in the Registration Statement on Form S-1 of JNI Corporation
also included an audit of the financial statement schedule listed in Item 16(b)
of this Registration Statement on Form S-1. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related financial
statements.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
October 8, 1999
II-7
<PAGE> 112
JNI CORPORATION
SCHEDULE II -- VALUATION & QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND TAKEN AGAINST END
OF PERIOD EXPENSES ALLOWANCE OF PERIOD
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
DESCRIPTION
Year ended December 31, 1996:
Allowance for sales returns and
doubtful accounts................ $ -- $ 6 $ -- $ 6
Year ended December 31, 1997:
Allowance for sales returns and
doubtful accounts................ 6 58 29 35
Year ended December 31, 1998:
Allowance for sales returns and
doubtful accounts................ 35 194 96 133
Year ended December 31, 1996:
Deferred income tax asset valuation
allowance........................ $ 388 $658 $ 57 $ 989
Year ended December 31, 1997:
Deferred income tax asset valuation
allowance........................ 989 509 35 1,463
Year ended December 31, 1998:
Deferred income tax asset valuation
allowance........................ 1,463 322 388 1,397
</TABLE>
II-8
<PAGE> 113
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
1.1** Form of Underwriting Agreement
3.1** Third Amended and Restated Certificate of Incorporation of
the Company
3.2** By-laws of the Company
3.3** Fourth Amended and Restated Certificate of Incorporation
of the Company
4.1* Specimen Common Stock Certificate
4.2** Investor's Rights Agreement, dated November 12, 1998 by
and among JNI Corporation, Adaptec, Inc. and Jaymark, Inc.
4.3** Registration Rights Agreement, dated September 1, 1999
between JNI Corporation and Jaymark, Inc.
5.1** Opinion of Gray Cary Ware & Freidenrich LLP
10.1** Form of Indemnity Agreement for directors and executive
officers
10.2** 1997 Stock Option Plan, as amended, and forms of Incentive
Stock Option Agreement and Nonstatutory Stock Option
Agreement thereunder
10.3** 1999 Stock Option Plan, as amended, terms of Stock Option
Agreement and form of Stock Option Grant Agreement
thereunder
10.4** 1999 Employee Stock Purchase Plan and form of subscription
agreement thereunder
10.5** Technology Assignment and License Agreement, dated March
5, 1997 by and among Jaycor, Inc., Jaymark, Inc. and JNI
Corporation
10.6+ Asset Acquisition Agreement, dated November 12, 1998
between Adaptec, Inc. and JNI Corporation
10.7** Series A Preferred Stock Purchase Warrant, dated November
12, 1998 issued by the Company to Adaptec, Inc.
10.8** Series A Preferred Stock Purchase Warrant, dated November
12, 1998 issued by the Company to Adaptec, Inc.
10.9** Series A Preferred Stock Purchase Warrant, dated November
12, 1998 issued by the Company to Adaptec, Inc.
10.10+** Fibre Channel Cross-License Agreement, dated November 12,
1998 between JNI Corporation and Adaptec, Inc.
10.11** Letter Agreement, dated March 31, 1999 between JNI
Corporation and Adaptec, Inc.
10.12** Occupancy License Agreement, dated November 12, 1998
between JNI Corporation and Adaptec, Inc.
10.13** Occupancy License Agreement, dated November 12, 1998
between JNI Corporation and Adaptec, Inc.
10.14** Consulting Services Agreement, dated November 12, 1998
between JNI Corporation and Adaptec, Inc.
10.15+** Chip Manufacturing Agreement, dated November 12, 1998
between JNI Corporation and Adaptec, Inc.
10.16+** Amendment Number One to Chip Manufacturing Agreement,
dated March 9, 1999 between JNI Corporation and Adaptec,
Inc.
10.17+** Board Manufacturing and Transition Agreement, dated
November 12, 1998 between JNI Corporation and Adaptec,
Inc.
10.18** Volume Purchase Agreement, dated November 12, 1998 between
JNI Corporation and Adaptec, Inc.
</TABLE>
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
10.19** Bill of Sale, dated November 12, 1998 between JNI
Corporation and Adaptec, Inc.
10.20** Board Observer Confidentiality Agreement, dated December
6, 1998 between JNI Corporation and Adaptec, Inc.
10.21** License Agreement, dated March 9, 1999 between JNI
Corporation and Adaptec, Inc.
10.22** Sublease, dated October 7, 1998 between Jaycor, Inc. and
JNI Corporation
10.23** First Amendment to Sublease, dated December 1, 1998
between Jaycor, Inc. and JNI Corporation
10.24** Second Amendment to Sublease, dated April 1, 1999 between
Jaycor, Inc. and JNI Corporation
10.25** Third Amendment to Sublease, dated May 15, 1999 between
Jaycor, Inc. and JNI Corporation
10.26** Fourth Amendment to Sublease, dated August 1, 1999 between
Jaycor, Inc. and JNI Corporation
10.27** Industrial Lease, dated January 7, 1999 between The Irvine
Company and JNI Corporation
10.28** Sublease, dated January 14, 1999 between Obsidian, Inc.
and JNI Corporation
10.29** Form of Severance and Change of Control Agreement, dated
September 1, 1999, entered into by JNI Corporation and
each of Terry M. Flanagan, Thomas K. Gregory, Charles
McKnett and Gloria Purdy
10.30** Revolving Loan Agreement, dated February 1, 1997 between
JNI Corporation and Jaycor, Inc.
10.31** Security Agreement, dated August 31, 1998 between JNI
Corporation and Jaycor, Inc.
10.32** Intellectual Property Security Agreement, dated August 31,
1998 between JNI Corporation and Jaycor, Inc.
10.33** Transitional Services Agreement, dated September 1, 1999
between JNI Corporation and Jaymark, Inc.
10.34** Tax Sharing Agreement, dated September 1, 1999 between JNI
Corporation and Jaymark, Inc.
10.35** Professional Services Agreement, dated February 1, 1998
between JNI Corporation and Edward Frymoyer, EMF
Associates
10.36** Amendment to Asset Acquisition Agreement, dated September
30, 1999 between JNI Corporation and Adaptec, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2** Consent of Counsel (included in Exhibit 5.1)
23.3** Consent of Director nominee: Thomas J. Bernard
23.4** Consent of Director nominee: John Bolger
23.5** Consent of Director nominee: Lawrence E. Fox
24.1** Power of Attorney (see page II-6)
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by Amendment.
** Filed previously with the Registration Statement on Form S-1 (File No.
333-86501).
+ Confidential treatment has been requested with respect to portions of this
exhibit.
<PAGE> 1
CERTAIN MATERIAL (INDICATED BY AN ASTERISK) HAS BEEN OMITTED FROM THIS DOCUMENT
PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT. THE OMITTED MATERIAL HAS BEEN
FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION.
EXHIBIT 10.6
ASSET ACQUISITION AGREEMENT
BETWEEN
JAYCOR NETWORKS, INC.
AND
ADAPTEC, INC.
DATED
NOVEMBER 12, 1998
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I DEFINITIONS..................................................................1
1.1 "Ancillary Documents......................................................1
1.2 "Assumed Liabilities......................................................1
1.3 "Blocks...................................................................1
1.4 "Closing".................................................................1
1.5 "Closing Date"............................................................1
1.6 "Contracts"...............................................................2
1.7 "Discrete Circuits".......................................................2
1.8 "Product Components.......................................................2
1.9 "Fibre Channel Products"..................................................2
1.10 "Encumbrances"............................................................2
1.11 "Excluded Assets".........................................................2
1.12 "Excluded Liabilities"....................................................2
1.13 "GAAP"....................................................................2
1.14 "Intangible Assets".......................................................2
1.15 "Permitted Encumbrances"..................................................2
1.16 "Product Designs".........................................................3
1.17 "Purchase Price"..........................................................3
1.18 "Purchased Assets"........................................................3
1.19 "Tangible Assets".........................................................3
1.20 "Technology Deliverables".................................................3
1.21 "Transfer Taxes"..........................................................3
ARTICLE II PURCHASE AND SALE OF PURCHASED ASSETS; ASSUMPTION OF LIABILITIES.............3
2.1 Purchase and Sale.........................................................3
2.2 Excluded Assets...........................................................3
2.3 Assumption of Liabilities.................................................4
2.4 Purchase Price............................................................5
2.5 Warrants..................................................................5
2.6 Trademark License.........................................................9
2.7 Allocation...............................................................10
2.8 Taxes....................................................................10
ARTICLE III THE CLOSING.................................................................10
3.1 The Closing..............................................................10
3.2 Instruments of Transfer and Sale.........................................10
3.3 Other Documents..........................................................10
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF SELLER....................................11
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4.1 Organization.............................................................11
4.2 Authorization............................................................11
4.3 No Conflicts; Consents...................................................11
4.4 Title to Tangible Assets.................................................11
4.5 Tangible Assets..........................................................12
4.6 Financial Reports........................................................12
4.7 Litigation and Claims....................................................12
4.8 Compliance with Laws and Regulations; Governmental Licenses, Etc.........12
4.9 [Intentionally Left Blank................................................12
4.10 Accuracy of Material Facts; Copies of Materials..........................12
4.11 Intangible Assets; Proprietary Rights....................................13
4.12 Contracts................................................................15
4.13 Purchase for Own Account.................................................15
4.14 Investment Experience....................................................16
4.15 Accredited Investor Status...............................................16
4.16 Restricted Securities....................................................16
4.17 Further Limitations on Disposition.......................................16
4.18 Legends..................................................................17
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PURCHASER.................................18
5.1 Organization.............................................................18
5.2 Authorization............................................................18
5.3 No Conflicts; Consents...................................................18
5.4 Capitalization...........................................................18
5.5 Valid Issuance of Stock..................................................19
5.6 Litigation and Claims....................................................20
5.7 Proprietary Assets.......................................................20
5.8 Registration Rights......................................................20
5.9 Financial Statements.....................................................20
5.10 Title to Property and Assets.............................................21
5.11 Interested Party Transactions............................................21
ARTICLE VI MUTUAL COVENANTS............................................................21
6.1 Publicity................................................................21
ARTICLE VII CONDITIONS TO CLOSING.......................................................22
7.1 Conditions to Each Party's Obligations...................................22
7.2 Conditions to Obligations of Seller......................................22
7.3 Conditions to Obligations of Purchaser...................................23
</TABLE>
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ARTICLE VIII POST-CLOSING MATTERS.....................................................24
8.1 New Purchaser Employees..................................................24
8.2 Further Assurances of Seller.............................................24
8.3 Non Compete..............................................................24
8.4 Employee Intellectual Property Infringement..............................25
8.5 Warranty Liability for Work in Progress..................................25
8.6 NEC Related Obligations..................................................25
ARTICLE IX SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION..............26
9.1 Survival of Representations and Warranties...............................26
9.2 Indemnification..........................................................26
9.3 Procedures for Indemnification...........................................27
9.4 Defense of Third Party Claims............................................28
9.5 Settlement of Third Party Claims.........................................28
9.6 Limits on Indemnification................................................29
ARTICLE X GENERAL.....................................................................29
10.1 Governing Law............................................................29
10.2 Assignment; Binding upon Successors and Assigns..........................29
10.3 Severability.............................................................30
10.4 Entire Agreement.........................................................30
10.5 Counterparts.............................................................30
10.6 No Solicitation..........................................................30
10.7 Confidentiality..........................................................30
10.8 Expenses; No Brokers.....................................................31
10.9 Other Remedies...........................................................32
10.10 Amendment and Waivers....................................................32
10.11 Waiver...................................................................32
10.12 Arbitration..............................................................32
10.13 Notices..................................................................33
10.14 Construction and Interpretation of Agreement.............................34
10.15 No Joint Venture.........................................................35
10.16 Absence of Third Party Beneficiary Rights................................35
</TABLE>
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<PAGE> 5
ASSET ACQUISITION AGREEMENT
THIS ASSET ACQUISITION AGREEMENT is entered into as of November 12, 1998
by and between JAYCOR NETWORKS, INC., a Delaware corporation ("Purchaser"), and
ADAPTEC, INC., a Delaware corporation ("Seller").
RECITALS
A. Seller intends to discontinue developing and marketing the fibre
channel chip and board level products defined herein as the Fibre Channel
Products.
B. Purchaser desires to acquire certain assets of Seller, including
intellectual property and technology related to the Fibre Channel Products and
is willing to assume certain obligations of Seller relating to the Fibre Channel
Products as described herein.
C. The parties desire that Seller sell, assign, transfer and convey
to Purchaser, and Purchaser purchase from Seller, certain specific assets of
Seller relating to the Fibre Channel Products and that Seller grant a license to
Purchaser, and Purchaser accept a license from Seller as to certain other
specific assets of Seller relating to the Fibre Channel Products in exchange for
securities of Purchaser and Purchaser's assumption of certain specific
obligations related to the Fibre Channel Products, upon the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the representations, warranties and
agreements herein contained, the parties agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the meanings
set forth or referenced below:
1.1 "Ancillary Documents" shall mean all documents or agreements set
forth on Schedule 1.1.
1.2 "Assumed Liabilities" shall have the meaning set forth in
Section 2.3(a) hereof.
1.3 "Blocks" shall mean the collection of cells related to a common
function set forth on Schedule 1.8 hereto. For clarification, "Blocks" do not
include the particular individual Discrete Circuits (as defined below) included
in the Blocks.
1.4 "Closing" shall mean the closing of the transactions
contemplated by this Agreement.
1.5 "Closing Date"shall mean November 12, 1998 or such other date as
the parties shall mutually agree to in writing.
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<PAGE> 6
1.6 "Contracts" shall mean all arrangements with customers and
suppliers and all other contracts, agreements and arrangements pursuant to which
Seller enjoys rights or benefits or undertakes any obligation related to the
Fibre Channel Products which are specifically assumed by Purchaser, subject to
the terms of Section 2.3(a)(i), and listed on Schedule 2.3 hereto, including all
rebates, refunds, deposits or credits with respect thereto and all claims,
demands, causes of action and other rights of Seller thereunder.
1.7 "Discrete Circuits" means mean discrete circuits, taking the
form of cells that provide one or more functionalities constituting a subset of
the aggregate functionalities of a Fibre Channel Product.
1.8 "Product Components" shall refer together to those Blocks, OSMs
and Product Designs listed on Schedule 1.8 hereto
1.9 "Fibre Channel Products" shall mean those products listed on
Schedule 1.9 hereto.
1.10 "Encumbrances" shall have the meaning set forth in Section 4.4
hereof.
1.11 "Excluded Assets" shall mean all assets of Seller other than the
Purchased Assets.
1.12 "Excluded Liabilities" shall have the meaning set forth in
Section 2.3(c) hereof.
1.13 "GAAP" shall mean generally accepted accounting principles,
applied consistently with prior periods.
1.14 "Intangible Assets" shall mean, excluding Discrete Circuits, the
following intellectual property rights related to or used by Seller solely in
connection with the Fibre Channel Products as of the Closing Date: (i) the
patents, trademarks, service marks, copyrights, and applications therefor and
registrations thereof, mask works and mask work registrations, trade names and
trade styles and the Seller invention disclosures, all as listed on Schedule
1.14 hereto; (ii) all trade secrets, know-how, processes, formulae, business and
marketing plans, and confidential and other proprietary information owned by
Seller or that may be assigned by Seller; and (iii) all of the computer software
and data, including without limitation, all source and object codes, all
developer notes and documentation, all manuals and other user materials, all
publishing rights with respect thereto and rights to derivations and
modifications thereof, and all intangible data contained in or stored on
computer hardware related to or used by Seller solely in connection with the
Fibre Channel Products as of the Closing Date, including, but not limited to the
Product Components and Technology Deliverables; provided, however, that
Intangible Assets shall not include and Seller will retain ownership and provide
Purchaser a non-exclusive license for those portions of such intellectual
property which relate both to the fibre channel technology and to Seller's
non-Fibre Channel Product technology pursuant to the terms of that certain Fibre
Channel Cross-License Agreement attached hereto as Exhibit A (the "Cross-License
Agreement").
1.15 "Permitted Encumbrances" shall mean liens for current taxes
which are not past due or such imperfections of title and other encumbrances
which are not material in character,
2
<PAGE> 7
amount or extent, and which do not detract from the value or interfere with the
present use of the property subject thereto or affected thereby. For purposes of
this definition, an encumbrance which can be removed by Purchaser for $500 or
less in total expenses shall be deemed to be not material in amount.
1.16 "Product Designs" means the particular arrangement of Discrete
Circuits and layouts and schematic databases that comprise the Fibre Channel
Products. For clarification, "Product Designs" do not include the particular
individual Discrete Circuits included in the Fibre Channel Products.
1.17 "Purchase Price" shall have the meaning set forth in Section 2.4
hereof.
1.18 "Purchased Assets" shall mean, the Tangible Assets, the
Intangible Assets, the Product Components, the Technology Deliverables and the
Contracts, together with all marketing materials and customer lists, customer
files, service records, forms and other documentation as of the Closing Date
(the "Customer Documents") relating solely to the Fibre Channel Products, and
copies of all Customer Documents that relate to both the Fibre Channel Products
and other parts of Adaptec's business.
1.19 "Tangible Assets" shall mean all of the equipment and other
tangible assets and properties listed on Schedule 1.19 hereto, as such Schedule
shall be amended to reflect changes therein occurring in the ordinary course of
the marketing and development of the Fibre Channel Products prior to the
Closing.
1.20 "Technology Deliverables" means the deliverables described on
Schedule 1.20.
1.21 "Transfer Taxes" shall mean all sales taxes, use taxes,
conveyance taxes, transfer taxes, filing fees, recording fees, reporting fees
and other similar duties, taxes and fees, if any, imposed upon, or resulting
from, the transfer of the Purchased Assets hereunder, except federal, state or
local income or similar taxes based upon or measured by revenue, income, profit
or gain from the transfer of the Purchased Assets.
ARTICLE II
PURCHASE AND SALE OF PURCHASED ASSETS;
ASSUMPTION OF LIABILITIES
2.1 Purchase and Sale. Subject to and upon the terms and conditions
of this Agreement, effective as of the Closing, Seller agrees to sell, assign,
transfer, convey and deliver to Purchaser, and Purchaser agrees to purchase from
Seller, all of Seller's right, title and interest in and to the Purchased
Assets.
2.2 Excluded Assets. Notwithstanding anything herein to the
contrary, Seller shall retain all of its right, title and interest in and to,
and Purchaser shall acquire no interest in, the Excluded Assets.
3
<PAGE> 8
2.3 Assumption of Liabilities.
(a) Subject to and upon the terms and conditions of this
Agreement, effective as of the Closing, Purchaser agrees to assume from Seller
and to pay, perform and discharge according to their terms all of the following
liabilities and obligations of Seller (the "Assumed Liabilities"):
(i) Contractual liabilities or obligations arising
on or after the Closing Date under the Contracts listed and described on
Schedule 2.3 hereto, subject to the assumption of obligations set forth in
Sections 2.3(d) and 8.5, and Purchaser also agrees to assume those contractual
obligations under the English version of that certain form of Purchase
Specifications document attached to Schedule 2.3 (the "NEC Purchase
Specifications"), to the extent that Seller determines that such NEC Purchase
Specifications document is a binding contract with NEC and is assigned from
Seller to Purchaser on or after the Closing Date, and also subject to the
assumption of obligations set forth in Sections 2.3(d) and 8.5, and provided
that Seller shall reimburse Purchaser for any loss or damages suffered by NEC or
other compensation claimed by NEC under Section 19 of such NEC Purchase
Specifications document.
(ii) Transfer Taxes.
(b) Nothing herein shall be deemed to deprive Purchaser of
any defenses, set-offs or counterclaims which Seller may have had or which
Purchaser shall have with respect to any of the Assumed Liabilities. Effective
as of the Closing, Seller agrees to assign, transfer and convey to Purchaser all
such defenses, set-offs and counterclaims and agrees to use reasonable efforts
to maintain, secure, perfect and enforce such defenses, set-offs and
counterclaims, including the execution of any documents, the giving of any
testimony or the taking of any such other action as is reasonably requested by
Purchaser in connection with such defenses, set-offs and counterclaims.
(c) Purchaser does not assume, and Seller does not transfer
or assign, any liabilities or obligations, whether or not related to the Fibre
Channel Products, and whether presently fixed and determined, contingent or
otherwise, other than the Assumed Liabilities to be expressly assumed by
Purchaser pursuant to Section 2.3(a) hereof. All such liabilities and
obligations not expressly assumed by Purchaser ("Excluded Liabilities") shall
remain liabilities of Seller, which shall be solely liable to perform and
discharge such liabilities and obligations. Excluded Liabilities shall include,
without limitation, the following:
(i) any outstanding obligations of Seller for
borrowed money due to banks or other lenders;
(ii) any obligation of Seller for legal, accounting
or other professional fees, or any other costs or expenses of Seller which are
related to the consummation of the transactions contemplated herein or otherwise
(except as expressly contemplated herein);
(iii) any and all obligations related to the Fibre
Channel Products existing prior to the Closing Date; and
4
<PAGE> 9
(iv) any and all federal, state or local taxes,
including, but not limited to, income or similar taxes based upon or measured by
revenue, income, profit or gain from the transfer of the Purchased Assets.
(d) Other than obligations undertaken by Seller pursuant to
Section 8.5 hereof, Purchaser agrees to provide warranty services for Fibre
Channel Products sold by Seller prior to the Closing, which services shall
include *
. Purchaser shall in no event
assume any liability of Seller for any claim of damages made by any third party
arising under, or relating to, Seller's warranty for Fibre Channel Products sold
prior to the Closing, including but not limited to any claim for indirect,
incidental or consequential damages; provided, however, that Purchaser shall
reasonably cooperate with Seller in Seller's efforts to limit or resolve any
such damages or claims. *
. Qualifying Warranty Costs shall not include warranty liabilities that
arise from warranty materials and services that are provided by Purchaser. Each
calendar quarter (or at the option of Purchaser, each calendar month), Purchaser
shall deliver to Seller a report that sets forth, in reasonable detail,
Qualifying Warranty Costs that were incurred by Purchaser since the most
recently received report (or for the initial report, since the Closing Date).
Seller shall reimburse Purchaser within * of receipt by Seller of
such a report.
2.4 Purchase Price. In consideration for the purchase of the
Purchased Assets and consummation of the other transactions contemplated hereby,
Purchaser shall deliver to Seller a stock certificate for 1,618,421 shares of
Purchaser's Series A Preferred Stock having the rights, preferences, privileges
and restrictions set forth in the Amended and Restated Certificate of
Incorporation of Purchaser attached to this Agreement as Exhibit B (the "Amended
and Restated Certificate") and the warrants described in Section 2.5. The shares
of Series A Preferred Stock issued pursuant to this Agreement will be
collectively hereinafter referred to as the "Preferred Shares" and the shares of
Common Stock issuable upon conversion of the Preferred Shares will be
collectively hereinafter referred to as the "Conversion Shares." Purchaser and
Seller agree the Preferred Shares and the Warrant have a value equal to $785,000
as of the date hereof (the "Purchase Price").
2.5 Warrants.
(a) Definitions. For purposes of this Section 2.5, the
following definitions shall apply:
"Event" shall mean (i) the consummation of the Purchaser's
initial public offering, or (ii) when the Purchaser shall (A) sell, convey, or
otherwise dispose of all or substantially all of its property or business or
merge or consolidate with any other corporation (other than a wholly owned
subsidiary corporation) where the stockholders of the Purchaser own
5
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 10
less than fifty percent (50%) of the voting power of the surviving entity after
such merger or consolidation or (B) effect any other transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of the Purchaser is disposed of, provided that this subsection (ii) shall not
apply to a merger effected exclusively for the purpose of changing the domicile
of the Purchaser.
"Measurement Period" shall mean the period from February 1, 1999
to January 31, 2001, inclusive.
"Net Sales Revenue" shall mean the amounts invoiced by JNI for
services, sales or other dispositions hereunder, less the following deductions
(to the extent they are not already reflected in the amount billed):
(i) discounts, returns, allowances, uncollectible
debt, and wholesaler chargebacks allowed and taken in amounts customary in the
trade;
(ii) import, export, excise, sales or use taxes,
tariffs or duties directly imposed and with reference to particular sales;
(iii) outbound transportation prepaid or allowed; and
(iv) amounts allowed or credited or retroactive price
reductions or rebates. All of the above provisions related to this definition
shall be determined in accordance with generally accepted accounting principles
consistently applied and in accordance with Purchaser's historical revenue
recognition practices.
"Qualified Revenue" shall mean all Net Sales Revenue derived by
Purchaser from:
(i) any sales, licenses or other transfers of the
Fibre Channel Products, any products that contain, incorporate or are otherwise
based upon, in whole or in part, the Fibre Channel Products or related
technology described on Schedule 1.9 hereto or Exhibit A to the Cross-License
Agreement, or any components thereof, and including without limitation any
updates thereto or derivatives thereof; and
(ii) any purchases of any of Purchaser's Fibre
Channel Products (except to the extent already included in subsection (i)
above), or other fibre channel related products or services by parties
introduced by Seller to Purchaser. Prior to the commencement of the Measurement
Period, Seller shall prepare a list of entities that Seller anticipates
introducing to Purchaser for the purpose of facilitating Purchaser's sale to
such entities of Purchaser's Fibre Channel Products or other fibre channel
related products or services. Such list shall be subject to prior approval by
Purchaser, which approval shall not be unreasonably withheld. The list shall be
reviewed and revised upon the mutual agreement of Purchaser and Seller at the
end of each three month period commencing February 1, 1999. Only revenue derived
under this subsection (ii) from introductions to Purchaser by Seller of entities
on such list or introductions to other
6
<PAGE> 11
mutually agreed upon entities (which shall then be added to the list) shall
count as Qualified Revenue.
"Successful Rio Product Introduction" shall mean the earlier of
(1) Production Release (as defined in Purchaser's internal policies and
procedures, attached hereto as Exhibit C) by Purchaser of the AIC-1165 Rio
Product set forth on Schedule 1.9 or (2) sale of One Thousand (1,000) units of
such Rio Product(s).
(b) Calculation of Future Equity Issuance. Purchaser shall
issue to Seller the Warrants substantially in the forms attached hereto as
Exhibits D-1, D-2 and D-3 (the "Warrants," or individually, a "Warrant"), each
of which shall be exercisable into shares of Purchaser's Series A Preferred
Stock upon the occurrence of each of the events set forth below.
(i) On the date of the Successful Rio Product
Introduction, the Warrant, in the form attached hereto as Exhibit D-1, shall be
exercisable for 326,954 (appropriately adjusted for any future stock splits,
stock dividends, reclassifications and the like) shares of Purchaser's Series A
Preferred Stock at an aggregate exercise price of $100, provided, however, if
there has not been a successful Rio Product Introduction by November 12, 2000
then the Warrant described in this subsection (i) shall not vest and shall not
be exercisable thereafter, provided further, however, if prior to the earlier of
a Successful Rio Product Introduction or November 12, 2000 there is an Event,
then immediately prior to such Event, the portion of the Warrant described in
this subsection (i) shall be immediately exercisable.
(ii) On the date that the Qualified Revenue earned
during the Measurement Period exceeds $24,450,000, the Warrant, in the form
attached hereto as Exhibit D-2, shall be exercisable for 1,540,620
(appropriately adjusted for any future stock splits, stock dividends,
reclassifications and the like) shares of Purchaser's Series A Preferred Stock
at an aggregate exercise price of $100.
(iii) On the date that the Qualified Revenue earned
during the Measurement Period exceeds $32,600,000, the Warrant, in the form
attached hereto as Exhibit D-3, shall be exercisable for 1,613,214
(appropriately adjusted for any future stock splits, stock dividends,
reclassifications and the like) shares of Purchaser's Series A Preferred Stock
at an aggregate exercise price of $100.
(iv) If during the Measurement Period there is an
Event, then subsections (ii) and (iii) above will be replaced by this subsection
and the Warrants referenced in those subsections shall be exercisable in the
aggregate, immediately prior to such Event, into that number of shares of
Purchaser's Series A Preferred Stock, at an aggregate exercise price of $100,
determined as follows:
If the Event occurs during the period from February 1, 1999 to January 31, 2000,
inclusive, then a qualified revenue target shall be determined in accordance
with the following formula:
7
<PAGE> 12
QRT = ( X ) ($12,600,000)
-------------
(12)
If the Event occurs during the period from February 1, 2000 to January 31, 2001,
inclusive, then a qualified revenue target shall be determined in accordance
with the following formula:
QRT = ( X ) ($20,000,000) + $12,600,000
--------------
(12)
After establishing a qualified revenue target, the Warrants shall be exercisable
for a number of shares of Purchaser's Series A Preferred Stock determined in
accordance with the following formula:
W = QR (3,153,834)
-------------
QRT
Provided, however, that the maximum number of shares issuable upon exercise of
the Warrants referenced in subsections (ii) and (iii) above is 3,153,834.
where W= the number of shares of Purchaser's Series A
Preferred Stock the Warrants are exercisable for
(in addition to any shares exercisable pursuant
to subsection (i) above); and
QRT= qualified revenue target at the time of the
Event.
QR= the amount of Qualified Revenue at the time of
the Event.
X= The number of whole months elapsed since the
beginning of the Measurement Period plus one for
any portion of a month.
For Example: If there is an Event on July 20, 1999 and at that time the
Qualified Revenue equals $4,000,000 then the qualified revenue
target shall be:
QRT= (6) ($12,600,000)
(12)
QRT= $6,300,000
and the Warrants referenced in subsections (ii) and (iii) shall
be exercisable for an aggregate of:
W= QR (3,153,834)
---
QRT
8
<PAGE> 13
W= $4,000,000 (3,153,834) = 2,002,434 shares of
---------- Series A Preferred Stock
$6,300,000
If there is an Event on November 15, 2000 and at that time the
Qualified Revenue equals $23,000,000 then the qualified revenue
target shall be:
QRT= (9) ($20,000,000) + ($12,600,000)
---
(12)
QRT= $15,000,000 + $12,600,000 = $27,600,000 and
the Warrants referenced in subsections (ii)
and (iii) shall be exercisable for an
aggregate of:
W= QR (3,153,834)
---
QRT
W= ($23,000,000) (3,153,834) = 2,628,195 shares of
------------- Series A Preferred Stock
($27,600,000)
(v) Audit Rights. Purchaser shall maintain for a
period of one (1) year after the end of the Measurement Period, complete records
of the transactions comprising the Qualified Revenue in order to calculate and
confirm Purchaser's equity issuance obligations hereunder. Upon reasonable prior
notice, Seller will have the right to appoint an independent accounting firm or
other agent reasonably acceptable to Purchaser, at Seller's expense, to examine
such financial books, records and accounts during Purchaser's normal business
hours to verify the Warrants issuable by Purchaser to Seller pursuant to this
Section 2.5, subject to execution of Purchaser's standard confidentiality
agreement by the accounting firm or agent; provided, however, that execution of
such agreement will not preclude such firm from reporting its results to Seller.
In the event such audit discloses that Purchaser should issue a Warrant or a
warrant exercisable for additional shares than was previously issued by
Purchaser hereunder, Purchaser shall promptly issue such Warrant to Seller and
reimburse Purchaser for all expenses of the accounting firm or other agent
appointed by Seller.
2.6 Trademark License. Subject to the terms and conditions of this
Agreement, Seller hereby grants to Purchaser and Purchaser accepts a worldwide,
nontransferable, fully-paid and royalty-free right and license to use the Seller
PCI ID and the Seller trademarks "AIC," "Adaptec" and the Adaptec stylized "a"
logotype (the "Adaptec Marks") solely as affixed or incorporated by Seller into
the Completed Fibre Channel Products (as defined below) and on corresponding
packaging supplied by Seller to Purchaser, whether at or after the Closing
(under this Agreement or otherwise);or (ii) in connection with manufacturing and
distributing of the Completed Fibre Channel Products by Purchaser. Purchaser
acknowledges and agrees that Seller owns and will continue to own all right,
title and interest in and to the Adaptec Marks and any and all goodwill therein
and thereto, whether arising as a result of Purchaser's use of the Adaptec Marks
or otherwise. Purchaser hereby assigns and, if and as Seller may request in the
future, agrees to assign and affirm assignment to Seller of all such right,
title and interest in the Adaptec
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<PAGE> 14
Marks and related goodwill. If requested by Seller, Purchaser will reasonably
cooperate with Seller in securing any trademark registrations and other indicia
of ownership for which Purchaser's cooperation is required as a matter of
applicable local law as a result of Purchaser's use of the Adaptec Marks.
Purchaser agrees to use the Adaptec Marks only in the exact manner of use by
Seller. Without limiting the preceding sentence, Purchaser agrees not to
combine, alter or obscure the Adaptec Mark in any way or authorize any third
party to do so. Purchaser agrees to use commercially reasonable efforts to cease
use of the Adaptec Marks as soon as feasible. Such reasonable efforts shall
include, without limitation, (i) repackaging Fibre Channel Products received
from Seller in packaging using Purchaser's marks, (ii) reprinting manuals and
other supporting documentation received from Seller such that such documents do
not contain Adaptec Marks or stickering over Adaptec Marks contained in such
documents with Purchaser's marks, and (iii) except for mask work tooling,
creating and using tooling that will not result in the necessary use of Adaptec
Marks by Purchaser to manufacture Fibre Channel Products. The term "Completed
Fibre Channel Products" shall mean those Fibre Channel Products listed on
Schedule 1.9 hereto which have the word "completed" in the status column
opposite their name (namely, AIC-1160, AHA-F940 and AHA-F950).
2.7 Allocation. The Purchase Price shall be allocated for all
federal, state and local tax purposes in the manner set forth on Schedule 2.7
hereto. Neither Purchaser nor Seller shall take any position for purposes of any
federal, state or local income tax respecting the allocation of the Purchase
Price which is inconsistent with such allocation.
2.8 Taxes. All Transfer Taxes shall be promptly paid by Purchaser.
All property taxes relating to the Purchased Assets shall be pro-rated between
the parties as of the Closing Date.
ARTICLE III
THE CLOSING
3.1 The Closing. The Closing shall take place at the offices of Gray
Cary Ware & Freidenrich, 4365 Executive Drive, Suite 1600, San Diego, CA 92121,
or at such other location as Seller and Purchaser may agree, at 10:00 a.m.,
California time, on the Closing Date.
3.2 Instruments of Transfer and Sale. At the Closing, Seller shall
deliver to Purchaser such bills of sale, endorsements, assignments and other
good and sufficient instruments of transfer, conveyance and assignment, in form
customary for such transactions and reasonably satisfactory to Purchaser's
counsel, as shall be effective to vest in Purchaser good title to the Purchased
Assets, free and clear of all liens and encumbrances, except Permitted
Encumbrances.
3.3 Other Documents. Each party shall deliver to the other at the
Closing such other documents, certificates, schedules, agreements and
instruments required by this Agreement to be delivered at such time.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF SELLER
Subject to and except for the information which is set forth on a list
of exceptions, identified by the Section of this Article IV to which they
pertain and contained in the Seller's Disclosure Schedules as separately
delivered by Seller to Purchaser, Seller hereby represents and warrants to
Purchaser as follows:
4.1 Organization. Seller is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware.
4.2 Authorization. This Agreement and all of the Ancillary Documents
to which Seller is or will be a party have been, or upon their execution and
delivery hereunder will have been, duly and validly executed and delivered by
Seller and constitute, or will constitute, valid and binding agreements of
Seller, enforceable against Seller in accordance with their respective terms,
except as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights generally
or by general equitable principles or the exercise of judicial discretion in
accordance with such principles. Seller has all requisite power and authority to
execute and deliver this Agreement and, at the time of the Closing, will have
all requisite power and authority to carry out the transactions contemplated by
this Agreement and the Ancillary Documents. All necessary corporate action on
the part of Seller has been taken to authorize the execution and delivery of
this Agreement and the Ancillary Documents.
4.3 No Conflicts; Consents. The execution and the delivery of this
Agreement and the Ancillary Documents by Seller do not, and the consummation of
the transactions contemplated hereby and compliance with the provisions hereof
will not, conflict with, result in a breach of, constitute a default (with or
without notice or lapse of time, or both) under or violation of, or result in
the creation of any lien, charge or encumbrance pursuant to, (i) any provision
of the certificate of incorporation or bylaws of Seller, (ii) any judgment,
order, decree, rule, law or regulation of any court or governmental authority,
foreign or domestic, or (iii) any provision of any agreement, instrument or
understanding that is material to Seller's fibre channel business and to which
Seller is a party or by which Seller or any of its properties or assets is bound
or affected, nor will such actions give to any other person or entity any
interests or rights of any kind, including rights of termination, acceleration
or cancellation, in or with respect to any of the Purchased Assets. No consent
of any third party or any governmental authority is required to be obtained on
the part of Seller to permit the consummation of the transactions contemplated
by this Agreement or the Ancillary Documents.
4.4 Title to Tangible Assets. Seller has good and marketable title
to all of the Tangible Assets owned by Seller. All of the Tangible Assets are
free and clear of restrictions on or conditions to transfer or assignment, and
free and clear of all claims, liabilities, liens, pledges, mortgages,
restrictions and encumbrances of any kind, whether accrued, absolute, contingent
or otherwise ("Encumbrances") affecting the Tangible Assets, except for
Permitted Encumbrances.
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At the Closing, Seller will sell, convey, assign, transfer and deliver to
Purchaser good, valid and marketable title and all the Seller's right and
interest in and to all of the Tangible Assets, free and clear of any
Encumbrances, except for Permitted Encumbrances.
4.5 Tangible Assets. The Tangible Assets located in Singapore and
identified as such on Schedule 1.19 are in good operating condition and repair,
ordinary wear and tear and routine maintenance excepted.
4.6 Financial Reports. The financial reports delivered by Seller to
Purchaser on September 21, 1998 and listed on Schedule 4.6 hereto (a) are in
accordance with the books and records of Seller (if applicable), (b) are in all
material respects, true, correct and complete and present fairly the data
contained therein at the date or dates therein indicated or for the period or
periods therein specified and (c) to Seller's knowledge, do not omit to state
material facts necessary in order to make the information contained therein not
misleading. From the respective date of each such report, there have been no
events that have had, or could reasonably have, a material effect on the
accuracy of the data presented in each report.
4.7 Litigation and Claims. There is no claim, action, suit,
proceeding or investigation in progress or pending before any court or
governmental agency, against or relating to the Fibre Channel Products or any of
the Purchased Assets or the Assumed Liabilities, nor, to Seller's knowledge, is
there any threat thereof which might result, either individually or in the
aggregate, and a material adverse change, financially or otherwise, to the
nature of the Fibre Channel Products or any of the Purchased Assets or the
Assumed Liabilities, nor is Seller aware that there is any basis for the
foregoing. Seller is not a party to any decree, order or arbitration award (or
agreement entered into in any administrative, judicial or arbitration proceeding
with any governmental authority) with respect to the Fibre Channel Products or
any of the Purchased Assets.
4.8 Compliance with Laws and Regulations; Governmental Licenses,
Etc. Seller is in compliance in all material respects with all statutes, laws,
rules and regulations with respect to or affecting the Fibre Channel Products or
the Purchased Assets or which could affect Assumed Liabilities or Purchaser's
use and enjoyment of the Purchased Assets from and after the Closing, including,
without limitation, laws, rules and regulations relating to anticompetitive or
unfair pricing or trade practices, false advertising, consumer protection,
export or import controls, occupational health and safety, equal employment
opportunities, fair employment practices, and sex, race, religious and age
discrimination. Seller is not subject to any order, injunction or decree issued
by any governmental body, agency, authority or court which could impair the
ability of Seller to consummate the transactions contemplated hereby or which
could adversely affect Purchaser's conduct of the Fibre Channel Products or its
use and enjoyment of the Purchased Assets from and after the Closing.
4.9 [Intentionally Left Blank].
4.10 Accuracy of Material Facts; Copies of Materials. No
representation, warranty or covenant of Seller contained in this Agreement, in
the Ancillary Agreements and in the documents referenced below, contains or
shall contain any untrue statement of a material fact. To
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Seller's knowledge, none of the documents jointly agreed upon by Purchaser and
Seller for purposes of this Section 4.10 consisting of all ECNs, EDAs, Stop
Action Notices and bug reports related to the Fibre Channel Products, omit to
state any material facts necessary in order to make the statements contained
therein not misleading. A conformed set of these documents will be delivered by
Seller to Purchaser as soon as practicable. Seller has delivered to Purchaser
complete and accurate copies of each contract, license, lease and other
agreement referred to in any Schedule hereto or included in the Purchased
Assets.
4.11 Intangible Assets; Proprietary Rights.
(a) Seller owns all right, title and interest in and to all
of the Intangible Assets, free and clear of all claims and Encumbrances
(including, without limitation, distribution rights) except Permitted
Encumbrances. The foregoing representation as it relates to software,
technology, know-how, processes, copyrights, trade secrets, patents or other
intellectual property rights of third parties ("Third Party Technology") is
limited to Seller's interest pursuant to the Third Party Licenses (as defined
below), each of which is valid and enforceable and in full force and effect.
(b) Schedule 4.11(b) contains a list of all licenses and
other agreements with third parties (the "Third Party Licenses") relating to any
Third Party Technology that Seller is licensed or otherwise authorized by such
third parties to use in connection with the design, development, manufacture,
marketing or distribution of the Fibre Channel Products.
(c) All of Seller's registered and issued trademarks or
tradenames related to the Fibre Channel Products as set forth in Schedule 1.14
are valid and in full force and effect; and consummation of the transactions
contemplated hereby will not alter or impair any such rights. Except as set
forth on Schedule 1.14, Seller has no registered and issued copyrights related
solely to the Fibre Channel Products.
(d) No claims have been asserted against Seller related to
the Fibre Channel Products (and Seller is not aware of any claims that are
likely to be asserted against Seller or which have been asserted against others)
by any person challenging Seller's use or distribution of any patents,
trademarks, trade names, copyrights, trade secrets, software, technology,
know-how or processes utilized by Seller related to the Fibre Channel Products
(including, without limitation, the Third Party Technology) or challenging or
questioning the validity or effectiveness of any license or agreement relating
thereto (including, without limitation, the Third Party Licenses). There is no
valid basis for any claim of the type specified in the immediately preceding
sentence that could in any material way relate to or interfere with the
continued enhancement and exploitation by Purchaser of any of the Fibre Channel
Products.
(e) None of the Completed Fibre Channel Products and neither
the Intangible Assets in Sections 1.14(ii) and (iii) nor the Technology
Deliverables used in or for the manufacture and design of such Completed Fibre
Channel Products, and to Seller's knowledge, none of the Incomplete Fibre
Channel Products (as defined below) and none of the other Intangible Assets in
Sections 1.14(ii) and (iii) or Technology Deliverables infringes on the rights
of, constitutes misappropriation of, or involves unfair competition with respect
to, any
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proprietary information or intangible property right of any third person or
entity, including without limitation any patent, trade secret, copyright,
trademark or trade name. The term "Incomplete Fibre Channel Products" shall mean
those Fibre Channel Products listed on Schedule 1.9 hereto which have the words
"in development" in the status column opposite their name (namely, AIC-1165,
AHA-F951, AHA-F952 and AHA-950Fi).
(f) Except as provided on Schedule 4.11(f), Seller has not
granted to any third party any right in the Fibre Channel Products inconsistent
with the rights granted to JNI hereunder. Seller has not granted any third party
any right to manufacture, reproduce, distribute, market or exploit any of the
Product Components or Technology Deliverables or any adaptations, translations,
or derivative works based on the Products Components or Technology Deliverables
or any portion thereof. Except with respect to the rights of third parties to
the Third Party Technology, no third party has any right to manufacture,
reproduce, distribute, market or create derivative works of the Product
Components or Technology Deliverables, including any existing or prior versions
thereof, where "derivative work" is defined in the United States Copyright Act,
Title 17, U.S.C. Section 101.
(g) All designs, drawings, specifications, source code,
object code, documentation, flow charts and diagrams incorporating, embodying or
reflecting any of the Fibre Channel Products at any stage of their development
(the "Fibre Channel Components") were written, developed and created solely and
exclusively by employees of Seller without the assistance of any third party, or
were created by third parties who assigned ownership of their rights to Seller
in valid and enforceable agreements, which are included in the Contracts to be
assigned and transferred to Purchaser hereunder. Seller has at all times used
commercially reasonable efforts to treat the Fibre Channel Components as
containing trade secrets and has not disclosed or otherwise dealt with such
items in such a manner as to cause the loss of such trade secrets by release
thereof into the public domain.
(h) To Seller's knowledge, none of the persons listed on
Schedule 4.11(h) hereto is in violation of any term of any employment contract,
patent disclosure agreement, confidentiality and/or proprietary rights
agreement, or any other contract or agreement relating to the relationship of
any such person with Seller or, to Seller's knowledge, any other party because
of the nature of the business conducted by Seller or proposed to be conducted by
Seller.
(i) To Seller's knowledge, each person currently or formerly
employed by Seller (including independent contractors, if any) that has or had
access to confidential information of Seller relating to the Fibre Channel
Products, Technology Deliverables, and Intangible Assets in Section 1.14(ii) and
(iii), has executed a confidentiality and non-disclosure agreement in the form
previously provided to counsel for Purchaser. Assuming due execution and
delivery by such person, such confidentiality and non-disclosure agreements
constitute valid and binding obligations of such person and enforceable in
accordance with their respective terms, except as enforceability may be limited
by general equitable principles or the exercise of judicial discretion in
accordance with such principles. To Seller's knowledge, neither the execution or
delivery of such agreements nor the manufacturing or marketing of the Completed
Fibre Channel Products by Purchaser nor the use by Purchaser of the Technology
Deliverables, or Intangible
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Assets in Sections 1.14 (ii) and (iii) from and after the Closing Date, will
conflict with or result in a breach of the terms, conditions or provisions of or
constitute a default under any contract, covenant or instrument under which any
of such persons is obligated.
(j) No product liability or warranty claim with respect to
any Fibre Channel Product has been communicated to or overtly threatened against
Seller nor, to Seller's knowledge, is there any specific situation, set of facts
or occurrence that provides a basis for any such claim.
(k) To Seller's knowledge, the Intangible Assets (to the
extent such Intangible Assets constitute intellectual property), Third Party
Technology, Adaptec Licensed Technology (as defined in the Cross-License
Agreement) and Adaptec Licensed Patents (as defined in the Cross-License
Agreement) constitute all of the intellectual property held by Seller that is
necessary to design, develop, manufacture, market and sell the Fibre Channel
Products.
4.12 Contracts.
(a) Except for the Contracts, Seller is not a party to or
otherwise bound by the terms of any written contract, agreement or obligation in
any material way affecting the Fibre Channel Products or the Purchased Assets.
Each of the Contracts is valid, binding and in full force and effect and
enforceable by Seller in accordance with its terms, except as enforcement may be
limited by general equitable principles and the exercise of judicial discretion
in accordance with such principles. Neither Seller nor, to Seller's knowledge,
any other party is in material default under any Contract, and there are no
existing disputes or claims of default relating thereto, or any facts or
conditions known to Seller which, if continued, will result in a default or
claim of default thereunder, which default could reasonably be expected to have
a material adverse effect on the development, manufacture or sale of the Fibre
Channel Products. There is no Contract which Seller can reasonably foresee will
result in any material loss upon the performance thereof by Purchaser from and
after the Closing Date. Seller has not received any written communications that
any party to any Contract intends to cancel, withdraw, modify or amend such
Contract.
(b) There are no unresolved claims or problems between
Seller and any of the principal vendors, suppliers, distributors,
representatives or customers of the Fibre Channel Products that could reasonably
be expected to have a material adverse effect on the Fibre Channel Products or
Purchased Assets.
(c) Seller has no debt obligation for borrowed money that
could now or hereafter give rise to a claim against the Purchased Assets.
4.13 Purchase for Own Account. The Preferred Shares and Warrant will
be acquired for investment for Seller's own account, not as a nominee or agent,
and not with a view to the public resale or distribution thereof within the
meaning of the Securities Act of 1933, as amended (the "1933 Act"), and Seller
has no present intention of selling, granting any participation in, or otherwise
distributing the same.
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4.14 Investment Experience. Seller understands that the purchase of
the Preferred Shares and Warrant involves substantial risk. Seller: (a) has
experience in securities of companies in the development stage and acknowledges
that Seller is able to fend for itself, can bear the economic risk of Seller's
investment in the Preferred Shares and Warrant and has such knowledge and
experience in financial or business matters that Seller is capable of evaluating
the merits and risks of this investment in the Preferred Shares and Warrant and
protecting its own interests in connection with this investment and/or (b) has a
preexisting personal or business relationship with Purchaser and certain of its
officers, directors or controlling persons of a nature and duration that enables
Seller to be aware of the character, business acumen and financial circumstances
of such persons.
4.15 Accredited Investor Status. Seller is an "accredited investor"
within the meaning of Regulation D promulgated under the 1933 Act.
4.16 Restricted Securities. Seller understands that the Preferred
Shares and Warrant are characterized as "restricted securities" under the 1933
Act inasmuch as they are being acquired from Purchaser in a transaction not
involving a public offering and that under the 1933 Act and applicable
regulations thereunder such securities may be resold without registration under
the 1933 Act only in certain limited circumstances. In this connection, Seller
represents that Seller is familiar with Rule 144 of the U.S. Securities and
Exchange Commission (the "SEC"), as presently in effect, and understands the
resale limitations imposed thereby and by the 1933 Act. Seller understands that
Purchaser is under no obligation to register any of the securities sold
hereunder except as provided in Investor's Rights Agreement (as defined in
Section 7.2). Seller understands that no public market now exists for any of the
Preferred Shares, Conversion Shares, Warrant and Warrant Shares (collectively,
the "Securities") and that it is uncertain whether a public market will ever
exist for the Securities.
4.17 Further Limitations on Disposition. Without in any way limiting
the representations set forth above, Seller further agrees not to make any
disposition of all or any portion of the Securities unless and until:
(a) there is then in effect a registration statement under
the 1933 Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) Seller shall have notified Purchaser of the proposed
disposition, shall have furnished Purchaser with a statement of the
circumstances surrounding the proposed disposition, and, at the expense of
Seller or its transferee, shall have furnished Purchaser with an opinion of
counsel, reasonably satisfactory to Purchaser, that such disposition will not
require registration of such securities under the 1933 Act.
Notwithstanding the provisions of paragraphs (a) and (b) above, no such
registration statement or opinion of counsel shall be required: (i) for any
transfer of any Securities in compliance with SEC Rule 144 or Rule 144A; or (ii)
for any transfer of any Securities by Seller to (A) a partner of such
partnership or a stockholder of Seller, or (B) the estate of any such
stockholder; provided that in each of the foregoing cases the transferee agrees
in writing to be
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subject to the terms of this Section 4 (other than 4.15) to the same extent as
if the transferee were an original Seller hereunder. Notwithstanding any
provisions of this Section 4.17, Seller shall not make any disposition of all or
any portion of the Securities to any direct competitor of Purchaser.
4.18 Legends. It is understood that the certificates evidencing the
Preferred Shares, Conversion Shares and Warrant Shares will bear the legends set
forth below:
(A) THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE
SECURITIES LAWS OF CERTAIN STATES. THESE SECURITIES ARE SUBJECT TO
RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR
RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE APPLICABLE STATE
SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM.
INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE
ISSUER OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND
SUBSTANCE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED
TRANSFER OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE
STATE SECURITIES LAWS.
Any legend required by the laws of the State of California, including
any legend required by the California Department of Corporations and Sections
417 and 418 if the California Corporations Code or any other state securities
laws, including a legend substantially in the form of the following on the
certificates evidencing the Preferred Shares:
THE PREFERRED SHARES EVIDENCED BY THIS CERTIFICATE: (1) ARE CONVERTIBLE
INTO SHARES OF COMMON STOCK OF PURCHASER AT THE OPTION OF THE HOLDER AT
ANY TIME PRIOR TO AUTOMATIC CONVERSION THEREOF; AND (2) AUTOMATICALLY
CONVERT INTO COMMON STOCK OF PURCHASER IN THE EVENT OF A PUBLIC OFFERING
MEETING CERTAIN REQUIREMENTS OR UPON CERTAIN CONSENTS OF THE HOLDERS OF
PURCHASER'S PREFERRED STOCK; ALL PURSUANT TO AND UPON THE TERMS AND
CONDITIONS SPECIFIED IN PURCHASER'S CERTIFICATE OF INCORPORATION. A COPY
OF SUCH CERTIFICATE OF INCORPORATION MAY BE OBTAINED, WITHOUT CHARGE, AT
PURCHASER'S PRINCIPAL OFFICE.
The legend set forth in (a) above shall be removed by Purchaser from any
certificate evidencing Preferred Shares, Conversion Shares or Warrant Shares
upon delivery to Purchaser of an opinion by counsel, reasonably satisfactory to
Purchaser, that a registration statement under the 1933 Act is at that time in
effect with respect to the legended security or that such security can be freely
transferred in a public sale without such a registration statement being in
effect and that such transfer will not jeopardize the exemption or exemptions
from registration pursuant to which Purchaser issued the Preferred Shares,
Conversion Shares or Warrant Shares.
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser hereby represents and warrants to Seller as follows:
5.1 Organization. Purchaser is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware.
5.2 Authorization. This Agreement and all of the Ancillary Documents
to which Purchaser is or will be a party have been, or upon their execution and
delivery hereunder will have been, duly and validly executed by Purchaser and
constitute, or will constitute, valid and binding agreements of Purchaser,
enforceable against Purchaser in accordance with their respective terms, except
as enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally or by general
equitable principles or the exercise of judicial discretion in accordance with
such principles. Purchaser has all requisite power and authority to execute and
deliver this Agreement and, at the time of the Closing, will have all requisite
power and authority to carry out the transactions contemplated by this Agreement
and the Ancillary Documents. All necessary corporate action on the part of
Purchaser has been taken to authorize the execution and delivery of the
Agreement and the Ancillary Documents, including the authorization, issuance,
reservation for issuance and delivery of the Warrant and all of the Preferred
Shares being sold under this Agreement, of the shares of Purchaser's Common
Stock issuable upon the conversion of the Preferred Shares and shares of Common
Stock issuable upon the exercise of the Warrant (the "Warrant Shares"), and the
filing of the Amended and Restated Certificate, has been taken or will be taken
prior to the Closing.
5.3 No Conflicts; Consents. The execution and delivery of this
Agreement and the Ancillary Documents by Purchaser do not, and the consummation
of the transactions contemplated hereby and compliance with the provisions
hereof will not, conflict with, result in a breach of, constitute a default
(with or without notice or lapse of time, or both) under or violation of, or
result in the creation of any lien, charge or encumbrance pursuant to, (i) any
provision of the Certificate of Incorporation or By-laws of Purchaser, (ii) any
judgment, order, rule, law or regulation of any court or governmental authority,
foreign or domestic, or (iii) any provision of any agreement, instrument or
understanding that is material to Purchaser's business and to which Purchaser is
a party or by which Purchaser is bound. No consent of any third party or any
governmental authority is required to be obtained on the part of Purchaser to
permit the consummation of the transactions contemplated by this Agreement or
the Ancillary Documents, except for such consents that have already been
obtained.
5.4 Capitalization. The capitalization of Purchaser immediately
prior to the Closing consists of the following:
(a) Preferred Stock. A total of 35,000,000 authorized shares
of preferred stock, $0.001 par value per share, consisting of 30,000,000 shares
designated as Series A Preferred Stock, 23,700,000 of which will be issued and
outstanding. Upon the Closing, the
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rights, preferences and privileges of the Series A Preferred Stock will be as
stated in the Amended and Restated Certificate and as provided by law.
(b) Common Stock. A total of 43,000,000 authorized shares of
common stock, $0.001 par value per share (the "Common Stock"), of which 600,000
shares will be issued and outstanding.
(c) Options, Warrants, Reserved Shares. Except for: (i) the
conversion privileges of the Series A Preferred Stock and (ii) the 6,450,000
shares of Common Stock reserved for issuance under Purchaser's JNI 1997 Stock
Option Plan (the "Stock Option Plan") under which options to purchase 4,999,632
shares are outstanding; there is no outstanding option, warrant, right
(including conversion or preemptive rights) or agreement for the purchase or
acquisition from Purchaser of any shares of its capital stock or any securities
convertible into or ultimately exchangeable or exercisable for any shares of
Purchaser's capital stock. Except for rights of first refusal held by Purchaser
to purchase shares of its stock issued under Purchaser's Stock Option Plan, no
shares of Purchaser's outstanding capital stock, or stock issuable upon exercise
or exchange of any outstanding options, warrants or rights, or other stock
issuable by Purchaser, are subject to any preemptive rights, rights of first
refusal or other rights to purchase such stock (whether in favor of Purchaser or
any other person), pursuant to any agreement or commitment of Purchaser.
(d) Outstanding Security Holders. Attached to this Agreement
as Schedule 5.4 is a complete list of all outstanding stockholders, option
holders, warrant holders and other security holders of Purchaser as of
immediately prior to the Closing.
5.5 Valid Issuance of Stock.
(a) The Preferred Shares, when issued and paid for as
provided in this Agreement will be duly authorized and validly issued, fully
paid and nonassessable. The Conversion Shares and the Warrant Shares have been
duly and validly reserved for issuance and, when issued upon conversion in
accordance with the Amended and Restated Certificate (assuming no change in the
Amended and Restated Certificate or in applicable law) and terms of the Warrant,
respectively, will be duly authorized and validly issued, fully paid and
nonassessable.
(b) Based in part on the representations made by the Seller
in Article IV hereof, the offer and sale of the Preferred Shares and Warrant
solely to the Seller in accordance with this Agreement and (assuming no change
in currently applicable law or the Amended and Restated Certificate, no transfer
of Preferred Shares by an holder thereof and no commission or other remuneration
is paid or given, directly or indirectly, for soliciting the issuance of
Conversion Shares upon conversion of the Preferred Shares) the Conversion Shares
and Warrant Shares are exempt from the registration and prospectus delivery
requirements of the Act and the securities registration and qualification
requirements of the currently effective provisions of the securities laws of the
State of California.
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(c) The outstanding shares of the capital stock of Purchaser
are duly authorized and validly issued, fully paid and nonassessable, and have
been approved by all requisite stockholder action. Such shares of such capital
stock, and all outstanding options, warrants, convertible notes and other
securities of Purchaser, have been issued in full compliance with the
registration and prospectus delivery requirements of the 1933 Act or in
compliance with applicable exemptions therefrom, the registration and
qualification requirements of all applicable securities laws of states of the
United States and all other provisions of applicable securities laws of States
of the United States, including, without limitation, antifraud provisions.
5.6 Litigation and Claims. There is no claim, action, suit,
proceeding or investigation in progress or pending before any court or
governmental agency, nor to Purchaser's knowledge is there any threat thereof
which might result, either individually or in the aggregate, in any material
adverse change in the assets, condition or affairs of the Purchaser, financially
or otherwise, nor is the Purchaser aware that there is any basis for the
foregoing. Purchaser is not a party to any decree, order or arbitration award
(or agreement entered into in any administrative, judicial or arbitration
proceeding with any governmental authority).
5.7 Proprietary Assets. Purchaser has full title and ownership of,
or is duly licensed under or otherwise authorized to use, all patents, patent
applications, trademarks, service marks, trade names, copyrights, mask works,
trade secrets, confidential and proprietary information, designs and proprietary
rights (all of the foregoing collectively hereinafter referred to as the
"Proprietary Assets"), necessary to enable it to carry on its business as now
conducted or as currently proposed to be conducted without, to Purchaser's
knowledge, any conflict with or infringement of the rights of others. Except
with respect to those arrangements listed on Schedule 5.7 hereto, (i) Purchaser
has not granted, and there are not outstanding, any options, licenses or
agreements of any kind relating to any Proprietary Asset of Purchaser, annual
payments under which individually exceed $1,000, and (ii) Purchaser is not
obligated to make any royalties or other payments to any third parties with
respect to the marketing, sale, distribution, manufacture, license or use of any
Proprietary Asset or any other property or rights that individually exceed
$5,000 per arrangement per year.
5.8 Registration Rights. Except as provided in the Investor's Rights
Agreement, Purchaser is not under any obligation to register under the 1933 Act
any of its currently outstanding securities or any securities issuable upon
exercise or conversion of its currently outstanding securities nor is Purchaser
obligated to register or qualify any such securities under an state securities
or blue sky laws.
5.9 Financial Statements. Schedule 5.9 lists certain documents
including an unaudited balance sheet of Purchaser dated September 30, 1998 (the
"Balance Sheet Date") and an unaudited income statement of Purchaser for the
period ended September 30, 1998 (all such financial statements being
collectively referred to herein as the "Financial Statements"). The Financial
Statements, (a) are in accordance with the books and records of Purchaser, (b)
are, in all material respects, true, correct and complete and present fairly the
financial condition of Purchaser at the date or dates therein indicated and the
results of operations for the period or periods therein specified, and (c) have
been prepared in accordance with generally accepted
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accounting principles applied on a consistent basis, except, as to the unaudited
financial statements, for the omission of notes thereto and normal year-end
audit adjustments. Since the Balance Sheet Date, there have been no events that
have had, or could reasonably have, a material adverse affect on the assets,
properties, financial condition, operating results or business of Purchaser.
5.10 Title to Property and Assets. Except as set forth on Schedule
5.10, Purchaser owns its properties and assets free and clear of all material
Encumbrances. With respect to the property and assets it leases, Purchaser is in
compliance with all terms of such leases and, to Purchaser's knowledge,
Purchaser holds valid leasehold interests in such assets free of any material
Encumbrances, except where the failure to comply with such leases will not have
a material adverse effect on the assets, properties, financial condition,
operating results or business of Purchaser.
5.11 Interested Party Transactions. To the knowledge of Purchaser, no
officer or director of Purchaser or any affiliated entity of Purchaser has a
material interest in: (a) any person or entity which purchases from or sells,
licenses or furnishes to Purchaser any goods, property, technology, intellectual
or other property rights or services which arrangements, if any, at the time
they were entered into, had terms that were not substantially similar to those
that would have existed had it been negotiated in a transaction with an
independent third party; or (b) any contract or agreement to which Purchaser is
a party or by which it may be bound or affected which contract or agreement, at
the time it was entered into, had terms that were not substantially similar to
those that would have existed had it been negotiated in a transaction with an
independent third party.
ARTICLE VI
MUTUAL COVENANTS
6.1 Publicity. Neither Purchaser nor Seller shall issue any press
release or other public announcement or communication regarding the transactions
contemplated by this Agreement without the prior written approval of the other
as to the content thereof, which approval shall not be unreasonably withheld or
delayed; provided, however, that the foregoing shall not be deemed to prohibit
any disclosure which, in the opinion of counsel to the disclosing party, is
required by any applicable law or by any governmental entity.
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ARTICLE VII
CONDITIONS TO CLOSING
7.1 Conditions to Each Party's Obligations. The respective
obligations of each party to effect the transactions to be performed by such
party at the Closing are, at the option of such party, subject to the
satisfaction at or prior to the Closing of the following conditions:
(a) No order shall have been entered, and not vacated, by a
court or administrative agency of competent jurisdiction, in any action or
proceeding which enjoins, restrains or prohibits the sale of the Purchased
Assets or consummation of any other transaction contemplated hereby.
(b) All permits, authorizations, approvals and orders
required to be obtained under all applicable statutes, codes, ordinances, rules
and regulations in connection with the transactions contemplated hereby shall
have been obtained and shall be in full force and effect at the Closing Date.
(c) There shall be no litigation pending or threatened by
any regulatory body or private party in which (i) an injunction is or may be
sought against the transactions contemplated hereby, or (ii) relief is or may be
sought against any party hereto as a result of this Agreement and in which, in
the good faith judgment of the Board of Directors of either Purchaser or Seller
(relying on the advice of their respective legal counsel), such regulatory body
or private party has the probability of prevailing and such relief would have a
material adverse affect upon such party.
(d) The Amended and Restated Certificate shall have been
duly adopted by Purchaser by all necessary corporate action of its Board of
Directors and stockholders, and shall have been duly filed with and accepted by
the Secretary of State of the State of Delaware.
7.2 Conditions to Obligations of Seller. The obligations of Seller
to effect the transactions to be performed by it at the Closing are, at the
option of Seller, subject to the satisfaction at or prior to the Closing of the
following additional conditions:
(a) All of the representations and warranties of Purchaser
set forth in Article V hereof shall be true on and as of the Closing Date and
Purchaser shall have delivered to Seller a certificate to such effect dated the
Closing Date and signed by the President or a Vice President of Purchaser.
(b) All of the terms, covenants and conditions of this
Agreement to be complied with and performed by Purchaser at or prior to the
Closing shall have been duly complied with and performed, and Purchaser shall
have delivered to Seller a certificate to such effect dated the Closing Date and
signed by the President or a Vice President of Purchaser.
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(c) Purchaser and Seller shall have entered into (i) the
Cross-License Agreement; (ii) that certain Occupancy License Agreement for space
in Seller's Milpitas facility in the form attached hereto as Exhibit E (the
"Milpitas License"); (iii) that certain Occupancy License Agreement for space in
Seller's Irvine facility in the form attached hereto as Exhibit F (the "Irvine
License"); (iv) that certain Volume Purchase Agreement in the form attached
hereto as Exhibit G (the "Volume Purchase Agreement"); (v) that certain Board
Manufacturing and Transition Agreement in the form attached hereto as Exhibit H
(the "Board Manufacturing Agreement"); (vi) that certain Chip Manufacturing
Agreement in the form attached hereto as Exhibit I (the "Chip Manufacturing
Agreement"); (vii) that certain Investor's Rights Agreement in the form attached
hereto as Exhibit J (the "Investor's Rights Agreement"); and (viii) that certain
Bill of Sale in the form attached hereto as Exhibit K (the "Bill of Sale").
(d) Seller shall have received from Gray Cary Ware &
Freidenrich LLP, counsel to Purchaser, an opinion dated as of the Closing Date
and substantially in the form of Exhibit L hereto.
(e) Seller shall have received a share certificate
representing 1,618,421 shares of Purchaser's Series A Preferred Stock and the
Warrants.
7.3 Conditions to Obligations of Purchaser. The obligations of
Purchaser to effect the transactions to be performed by it at the Closing are,
at the option of Purchaser, subject to the satisfaction at or prior to the
Closing of the following additional conditions:
(a) All the representations and warranties of Seller set
forth in Article IV hereof shall be true on and as of the Closing Date and
Seller shall have delivered to Purchaser a certificate to such effect dated the
Closing Date and signed by the President or a Vice President of Seller.
(b) All of the terms, covenants and conditions of this
Agreement to be complied with and performed by Seller at or prior to the Closing
shall have been duly complied with and performed, and Seller shall have
delivered to Purchaser a certificate to such effect dated the Closing Date and
signed by the President or a Vice President of Seller.
(c) Purchaser shall have received from Fenwick & West, LLP,
counsel to Seller, an opinion dated the Closing Date and substantially in the
form of Exhibit M hereto.
(d) Purchaser and Seller shall have entered into (i) the
Cross-License Agreement; (ii) the Milpitas License; (iii) the Irvine License;
(iv) the Volume Purchase Agreement; (v) the Board Manufacturing Agreement; (vi)
the Chip Manufacturing Agreement; (vii) the Investor's Rights Agreement; and
(viii) the Bill of Sale.
(e) Purchaser and Seller shall have entered into that
certain Consulting Services Agreement substantially in the form attached hereto
as Exhibit N.
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(f) Purchaser and a representative of Seller shall have
entered into that certain Board Observer Confidentiality Agreement substantially
in the form attached hereto as Exhibit O.
(g) Purchaser shall have completed its due diligence
investigation of the Fibre Channel Products and their related business to its
reasonable satisfaction.
ARTICLE VIII
POST-CLOSING MATTERS
8.1 New Purchaser Employees. Prior to the Closing Date, Purchaser
will make offers of employment (to be effective as of the Closing Date) to
certain current and former employees of Seller as it shall designate in its sole
discretion, such offers to be conditioned upon the consummation of the
transaction contemplated hereby at the Closing. All obligations of Seller to the
New Purchaser Employees (as defined below) and its current or former employees
that arose during the term of their employment with Seller, including
obligations for salary, sales commissions, bonus compensation, payroll taxes,
fringe benefits and severance pay, are and shall remain, the sole obligations of
Seller. All employment arrangements between Purchaser and such employees to be
hired by Purchaser (the "New Purchaser Employees") will be negotiated directly
between Purchaser and such employees. Purchaser shall have no liability to
Seller for any claims which may arise in connection with the termination by
Seller of any of its current or former employees or any representations or
warranties made by Seller to any such employees, and Seller agrees to defend,
indemnify and hold Purchaser harmless from such claims.
8.2 Further Assurances of Seller. Seller shall, from time to time,
at the request of Purchaser, and without further consideration, execute and
deliver such instruments of transfer, conveyance and assignment in addition to
those delivered pursuant to 7.3 hereof, and take such other actions, as may be
reasonably necessary to assign, transfer, convey and vest in Purchaser, and to
put Purchaser in possession of, the Purchased Assets.
8.3 Non-Compete. From and after the Closing Date, Seller will not
engage in any Fibre Channel Activity (as defined below) in competition with the
Fibre Channel Products (as defined in the Cross-License Agreement, which
definition shall apply to each use of the term Fibre Channel Products in this
Section 8.3) through use of the Purchased Assets or the JNI Licensed Technology
(as defined in the Cross-License Agreement), except as expressly permitted in
the Cross-License Agreement and the Volume Purchasing Agreement. In accordance
with the terms of such agreements, Seller agrees (a) that it will use and
distribute the JNI Licensed Technology solely in connection with the integration
and distribution of Fibre Channel Products supplied by Purchaser or its
licensees; and (b) that it will not resell the fibre channel chip-level products
purchased from Purchaser under the Volume Purchasing Agreement ("Chip
Products"), except to the extent each such Chip Product is incorporated in a
product which (i) is not substantially similar in functions, features and
performance characteristics to the Chip Product, and (ii) adds significant value
to the Chip Product. As used herein, the term
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"Fibre Channel Activity" shall mean all development, manufacturing, marketing
and other activities related to fibre channel technology.
8.4 Employee Intellectual Property Infringement. Seller shall
provide to Purchaser prompt written notice should Seller obtain information
which reasonably indicates that a current, former, or future employee of Seller
(including independent contractors, if any) (collectively "Employee") is in
breach of an executed confidentiality or non-disclosure agreement with Seller or
is in breach of any other obligation to protect the confidential information of
Seller, which could result in Employee disclosing any confidential or
proprietary information of Seller which has been transferred or licensed by
Seller to Purchaser under this Agreement, the Cross-License Agreement, or any
other agreement attached hereto (e.g., Acquired Confidential Information, as
defined below). In the event that Purchaser becomes aware of any such potential
breach, either as a result of notice from Seller or otherwise, Seller agrees at
Purchaser's request to reasonably assist Purchaser and to execute, take all
actions and deliver any and all documents, agreements, assignments, written
information, or other documents necessary to permit Purchaser (including in
Purchaser's name) to bring an action against such Employee to protect
Purchaser's proprietary rights and Purchaser's trade secret interests in such
confidential information. The expense of any such action on the part of
Purchaser and any reasonable costs incurred by Seller in providing the above
listed assistance, shall be borne solely by Purchaser.
8.5 Warranty Liability for Work in Progress. Seller covenants and
agrees that it shall assume all warranty liabilities for Fibre Channel Products
(i) which are in the process of being repaired or replaced as of the Closing
Date, and (ii) that Seller is aware are being shipped to Seller for repair as of
the Closing Date. A list of all such items described in (i) and (ii) above and
brief description of the required repair and status of such repair is attached
hereto as Schedule 8.5.
8.6 NEC-Related Obligations. Purchaser shall reasonably cooperate
with Seller in Seller's efforts to assign to Purchaser the NEC Purchase
Specifications described in Section 2.3(a)(i), such cooperation by way of
example might include, at the reasonable request of Seller, meeting with NEC,
providing information regarding Purchaser's technical capabilities to NEC and
similar activities. In addition, until such assignment occurs or in the event
such assignment does not occur, Purchaser agrees that it will use its
commercially reasonable efforts (i) to act as a subcontractor to Seller and
provide primary, "front-line" support to NEC under such NEC Purchase
Specifications and (ii) cooperate with Seller in Seller's efforts to limit any
damages or claims of NEC under such NEC Purchase Specifications. The parties
further agree that they will negotiate in good faith regarding the treatment of
any other pre-Closing obligations related to such NEC Purchase Specifications
that are discovered after the Closing.
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ARTICLE IX
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION
9.1 Survival of Representations and Warranties. All of the
representations and warranties contained in this Agreement shall survive the
Closing Date for a period of two (2) years. After the expiration of such
two-year period, such representations and warranties shall expire and be of no
further force and effect, except as follows: (i) representations and warranties
contained in Section 4.4 shall survive the Closing Date indefinitely; (ii)
representations and warranties contained in Section 4.11(e) shall survive the
Closing Date for a period of three years and (iii) unless a claim or claims with
respect thereto shall have been asserted under this Article IX.
9.2 Indemnification.
(a) Subject to the terms and conditions of this Article IX,
each of Purchaser and Seller agree to indemnify, defend and hold harmless the
other party, its stockholders, officers, directors, employees and consultants,
all subsidiaries and affiliates of such other party, and the respective
officers, directors and attorneys of such entities (all such persons and
entities being collectively referred to as an "Indemnified Group") from,
against, for and in respect of any and all loss, demand, action, cause of
action, assessment, damage, liability, cost or expense, including without
limitation, interest, penalties and reasonable attorneys' and other professional
fees and expenses incurred in the investigation, prosecution, defense or
settlement thereof ("Losses," or individually, "Loss") asserted against,
relating to, imposed upon or incurred by any member of an Indemnified Group by
reason of, resulting from, based upon or arising out of any of the following
(collectively, "Indemnifiable Losses"):
(i) the breach, inaccuracy, untruth or
incompleteness (such incompleteness only with respect to Sections 4.6 and 4.10)
of any representation or warranty contained in or made pursuant to this
Agreement or any certificate or Schedule delivered in connection herewith;
(ii) a material breach of any covenant or agreement
contained in or made pursuant to this Agreement;
(iii) any Excluded Liability; or
(iv) any breach of this Article IX.
(b) The obligation of each party to indemnify members of the
Indemnified Group for any Indemnifiable Losses is subject to the condition that
Seller shall have received an Indemnification Claim for all Indemnifiable Losses
for which indemnity is sought on or before the second anniversary of the Closing
Date or, with respect to the Sections identified in Section 9.1, such longer
periods as specified in Section 9.1.
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(c) The provisions of Section 9.2(b) above shall not limit,
in any manner, either party's obligation to indemnify members of an Indemnified
Group for any breach of any covenant or agreement to be performed following the
Closing, including, without limitation, Seller's obligation to perform and
discharge all Excluded Liabilities or each party's obligations of
confidentiality pursuant to Section 10.8 of this Agreement.
(d) Seller hereby agrees to defend, indemnify and hold
Purchaser, its stockholders, officers, directors, employees, consultants,
subsidiaries and affiliates, and the respective officers and directors of such
entities harm harmless from and against any and all claims, complaints, actions,
judgments, demands, losses, causes of action, damages, liabilities, costs or
expenses, including without limitation, interest, penalties and reasonable
attorneys' and other professional fees incurred in the investigation,
prosecution, defense or settlement thereof in connection with any claim that
Seller engaged in any unfair labor practice or that Seller has violated any
applicable laws or regulations respecting employment and employment practices or
terms and conditions of employment.
9.3 Procedures for Indemnification.
(a) As used in this Section 9.3, the term "Indemnitor" means
the party against whom indemnification hereunder is sought, and the term
"Indemnitee" means the party seeking indemnification hereunder.
(b) A claim for indemnification hereunder (an
"Indemnification Claim") shall be made by Indemnitee by delivery of a written
notice to Indemnitor requesting indemnification and specifying the basis on
which indemnification is sought in reasonable detail (and shall attach relevant
documentation related to the Indemnification Claim), the amount of the asserted
Indemnifiable Losses and, in the case of a Third Party Claim (as defined below),
containing (by attachment or otherwise) such other information as Indemnitee
shall have concerning such Third Party Claim.
(c) If the Indemnification Claim involves a Third Party
Claim, the procedures set forth in this Section 9.3 hereof shall be observed by
Indemnitee and Indemnitor.
(d) If the Indemnification Claim involves a matter other
than a Third Party Claim, Indemnitor shall have thirty (30) days to object to
such Indemnification Claim by delivery of a written notice of such objection to
Indemnitee specifying in reasonable detail the basis for such objection. Failure
to timely so object shall constitute a final and binding acceptance of the
Indemnification Claim by Indemnitor, and the Indemnification Claim shall
thereafter be paid by Indemnitor in accordance with Section 9.2 hereof. If an
objection is timely delivered by Indemnitor and the dispute is not resolved
within twenty (20) business days from the delivery of such objection (the
"Negotiation Period"), such dispute shall be resolved by arbitration in
accordance with the provisions of Section 10.12 hereof.
(e) Upon determination of the amount of an Indemnification
Claim, whether by (i) an agreement between Indemnitor and Indemnitee, (ii) an
arbitration award, or (iii) a final judgment (after expiration of all periods
for appeal of such judgment) or other final
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nonappealable order, Indemnitor shall pay the amount of such Indemnification
Claim by check within ten (10) days of the date such amount is determined.
9.4 Defense of Third Party Claims. Should any claim be made, or suit
or proceeding (including, without limitation, a binding arbitration or an audit
by any taxing authority) be instituted against Indemnitee which, if prosecuted
successfully, would be a matter for which Indemnitee is entitled to
indemnification under this Agreement (a "Third Party Claim"), the obligations
and liabilities of the parties hereunder with respect to such Third Party Claim
shall be subject to the following terms and conditions:
(a) Indemnitee shall give Indemnitor written notice of any
such claim promptly after receipt by Indemnitee of notice thereof, and
Indemnitor will undertake control of the defense thereof by counsel of its own
choosing reasonably acceptable to Indemnitee. Indemnitee may participate in the
defense through its own counsel at its own expense. The assumption of the
defense of any Third Party Claim by Indemnitor shall be an acknowledgment by
Indemnitor that such Third Party Claim is subject to indemnification under the
provisions of this Article IX and that such provisions are binding on
Indemnitor. If, however, Indemnitor fails or refuses to undertake the defense of
such Third Party Claim within ten (10) days after written notice of such claim
has been delivered to Indemnitor by Indemnitee, Indemnitee shall have the right
to undertake the defense, compromise and, subject to Section 9.5, settlement of
such Third Party Claim with counsel of its own choosing. In the circumstances
described in the preceding sentence, Indemnitee shall, promptly upon its
assumption of the defense of such Third Party Claim, make an Indemnification
Claim as specified in Section 9.3(a) which shall be deemed an Indemnification
Claim that is not a Third Party Claim for the purposes of the procedures set
forth herein. Failure of Indemnitee to furnish written notice to Indemnitor of a
Third Party Claim shall not release Indemnitor from Indemnitor's obligations
hereunder, except to the extent Indemnitor is prejudiced by such failure.
(b) Indemnitee and Indemnitor shall cooperate with each
other in all reasonable respects in connection with the defense of any Third
Party Claim, including making available records relating to such claim and
furnishing employees of Indemnitee as may be reasonably necessary for the
preparation of the defense of any such Third Party Claim or for testimony as
witness in any proceeding relating to such claim.
9.5 Settlement of Third Party Claims. Unless Indemnitor has failed
to fulfill its obligations under this Article IX, no settlement by Indemnitee of
a Third Party Claim shall be made without the prior written consent by or on
behalf of Indemnitor, which consent shall not be unreasonably withheld or
delayed. If Indemnitor has assumed the defense of a Third Party Claim as
contemplated by Section 9.4(a), no settlement of such Third Party Claim may be
made by Indemnitor without the prior written consent by or on behalf of
Indemnitee, which consent shall not be unreasonably withheld or delayed. In the
event of any dispute regarding the reasonableness of a proposed settlement, the
party that will bear the larger financial loss resulting from such settlement
shall make the final determination in respect thereto, which determination shall
be final and binding on all involved parties.
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9.6 Limits on Indemnification. The maximum aggregate Loss
recoverable by an Indemnified Group (considered together as a group) against an
Indemnitor under this Article IX shall not exceed $500,000, except (i) in the
case of any claim for indemnification under the provisions of this Article IX
which arises out of or results from fraud or willful misconduct of such
Indemnitor for which there shall be no limit to the maximum aggregate loss
recoverable; and (ii) in the event the claim arises from a breach of Seller's
warranties set forth in Section 4.11(e), for which the maximum aggregate Loss
recoverable shall be $1,000,000 plus the lesser of (the "Additional
Indemnification Funds") an additional $1,000,000 or twenty five percent (25%) of
the gross proceeds (payable in cash or securities, as appropriate) received by
Seller pursuant to an Event (as used in this Section 9.6 the term "Event" shall
have the meaning set forth in Section 2.5 or the Investor's Rights Agreement, as
appropriate) which Additional Indemnification Funds shall be payable upon or
after the occurrence of such Event (as more particularly described below) and,
provided further, that the combined maximum aggregate Loss recoverable under
this subsection 9.6(ii) and for a claim based upon any alleged breach by Seller
of an intellectual property warranty under the Cross-License Agreement shall be
$1,000,000 plus the Additional Indemnification Funds. For purposes of this
Section 9.6, the amount of gross proceeds received by Seller pursuant to an
Event shall, in the event of an initial public offering, be equal to the fair
market value of the shares held by Seller at the time the market stand-off
agreement expires and in the event of any other type of Event shall be equal to
the cash or the fair market value of the other consideration received by Seller
in connection with such Event, valued as of the date of receipt of such
consideration without discount for lack of liquidity. The Additional
Indemnification Funds are due and payable by Seller (i) immediately upon
consummation of the Event if the Indemnitor receives cash pursuant to thereto;
(ii) within 60 days after the expiration of the market stand-off agreement if
the Event is a public offering; (iii) within 60 days after the lapse of any
lock-up, pooling or other transfer restriction on the sale of shares of stock in
a publicly traded company received by Seller pursuant to an Event; or (iv) if
(i), (ii) and (iii) above are not applicable, then immediately upon the sale by
the Seller of the securities on other consideration received by the Seller
pursuant to the Event.
ARTICLE X
GENERAL
10.1 Governing Law. It is the intention of the parties hereto that
the internal laws of the State of California (irrespective of its choice of law
principles) shall govern the validity of this Agreement, the construction of its
terms, and the interpretation and enforcement of the rights and duties of the
parties hereto.
10.2 Assignment; Binding upon Successors and Assigns. Neither of the
parties hereto may assign any of its rights or obligations hereunder without the
prior written consent of the other party; provided, however, that either party
may assign its rights under this Agreement (i) to any majority-owned subsidiary
of such party, provided that such party guarantees the obligations of such
subsidiary hereunder, or (ii) to any successor of such party through any merger
or consolidation, or purchase of all or substantially all of such party's stock
or all or substantially all
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of such party's assets. This Agreement will be binding upon and inure to the
benefit of the parties hereto and their respective permitted successors and
assigns.
10.3 Severability. If any provision of this Agreement, or the
application thereof, shall for any reason and to any extent be held to be
invalid or unenforceable, the remainder of this Agreement and the application of
such provision to other persons or circumstances shall be interpreted so as best
to reasonably effect the intent of the parties hereto. The parties further agree
to replace such invalid or unenforceable provision of this Agreement with a
valid and enforceable provision which will achieve, to the extent possible, the
economic, business and other purposes of the invalid or unenforceable provision.
10.4 Entire Agreement. This Agreement, the Exhibits and Schedules
hereto, the documents referenced herein, and the exhibits thereto, constitute
the entire understanding and agreement of the parties hereto with respect to the
subject matter hereof and thereof and supersede all prior and contemporaneous
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties with respect hereto and thereto, including
without limitation that certain Term Sheet dated September 16, 1998 and the
Existing Confidentiality Agreement (as defined below), except as set forth in
Section 10.7(a).
10.5 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same instrument.
10.6 No Solicitation. From the Closing Date until the second
anniversary of the Closing Date, neither party hereto will actively solicit the
employment of, whether as an employee or consultant, any employee of the other
party without the prior written consent of the other party. For purposes of this
section 10.6, the term "actively solicit" shall not mean or include the
placement of advertisements, participation in career days or responding to
unsolicited inquiries, applications or resumes. Notwithstanding the foregoing,
Seller hereby consents to Purchaser soliciting the employees listed on Schedule
10.6 hereto.
10.7 Confidentiality.
(a) Existing Agreement. The terms of the Mutual
Non-Disclosure Agreement dated as of September 2, 1998 (the "Existing
Confidentiality Agreement") between Seller and Purchaser are hereby incorporated
herein by reference and shall continue in full force and effect until the
Closing Date, at which time the Existing Confidentiality Agreement shall
terminate. If this Agreement is terminated prior to the Closing for any reason
then the Existing Confidentiality Agreement shall continue in full force and
effect.
(b) Confidential Information. Excluding Acquired
Confidential Information (as defined below), all copies of financial
information, marketing and sales information, pricing, marketing plans, business
plans, financial and business projections, manufacturing processes and
procedures, formulae, methodologies, inventions, product designs, product
specifications and drawings, and other confidential and/or proprietary
information of a party (the "Disclosing Party") disclosed to the other party
(the "Non-Disclosing Party") in the course of negotiating the
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transaction contemplated by this Agreement ("Confidential Information") will be
held in confidence and not used or disclosed by Non-Disclosing Party or any of
its employees, affiliates or stockholders for a period of five (5) years from
the Closing Date and will be promptly destroyed by the Non-Disclosing Party or
returned to the Disclosing Party, upon the Disclosing Party's written request to
the Non-Disclosing Party. The Non-Disclosing Party's employees, affiliates and
stockholders will not be given access to Confidential Information except on a
"need to know" basis. It is agreed that Confidential Information will not
include information that: (a) is proven to have been known to the Non-Disclosing
Party prior to receipt of such information from the Disclosing Party; (b) is
disclosed by a third party having the legal right to disclose such information
and who owes no obligation of confidence to the Disclosing Party; (c) is now, or
later becomes part of the general public knowledge or literature in the art,
other than as a result of a breach of this Agreement by the Non-Disclosing
Party; or (d) is independently developed by the Disclosing Party without the use
of any Confidential Information.
(c) Acquired Confidential Information. Except for marketing
and sales information which has been publicly disseminated to Seller's
prospective customers of the Fibre Channel Products prior to the Closing Date,
all copies of financial information, pricing, financial projections, customer
lists, methodologies, inventions, software, know-how, product designs, product
specifications and drawings, and other confidential and/or proprietary
information which constitutes or is constituted in the Purchased Assets
(collectively, "Acquired Confidential Information") will be maintained by Seller
in confidence at all times after the Effective Date of this Agreement in the
same manner and to the same extent that Seller, acting reasonably, maintains
Seller's Confidential Information in confidence. At all times following the
Closing, Seller will: (i) continue to hold all Acquired Confidential Information
which constitutes or is constituted in Purchased Assets in strict confidence,
(ii) will not use for itself or third parties any of Acquired Confidential
Information which constitutes or is constituted in Purchased Assets, (iii) will
not disclose to third parties any of Acquired Confidential Information which
constitutes or is constituted in Purchased Assets, and (iv) upon Purchaser's
request, promptly destroy or deliver to Purchaser any Acquired Confidential
Information which constitutes or is constituted in Purchased Assets in Seller's
possession or control; except that Seller may internally use the original copies
of any business records containing Acquired Confidential Information solely to
prepare and file tax returns and prepare Seller's financial statements, and
Seller may disclose any Acquired Confidential Information (except trade secrets)
as may be required to comply with requests from all governmental agencies,
including without limitation the Securities and Exchange Commission. It is
agreed that Acquired Confidential Information will not include information that
is now, or later becomes, part of the general public knowledge or literature in
the art, other than as a result of a breach of this Agreement or the Existing
Confidentiality Agreement by Seller.
10.8 Expenses; No Brokers.
(a) The parties shall each pay their own legal, accounting
and financial advisory fees and other out-of-pocket expenses incurred incident
to the negotiation, preparation and carrying out of this Agreement and the
transactions herein contemplated.
31
<PAGE> 36
(b) Each party represents and warrants to the other that no
person has acted as a broker, finder or in any similar capacity in connection
with the transactions contemplated hereby. Each party shall indemnify the other
against, and agrees to hold the other harmless from, all liabilities and
expenses (including reasonable attorneys' fees) in connection with any claim by
any person for compensation as a broker, finder or in any similar capacity, by
reason of services allegedly rendered to the indemnifying party in connection
with the transactions contemplated hereby.
10.9 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party shall be deemed cumulative with
and not exclusive of any other remedy conferred hereby or by law on such party,
and the exercise of any one remedy shall not preclude the exercise of any other.
10.10 Amendment and Waivers. Any term or provision of this Agreement
may be amended, and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively) only by a writing signed by the party to be bound thereby. The
waiver by a party of any breach hereof for default in payment of any amount due
hereunder or default in the performance hereof shall not be deemed to constitute
a waiver of any other default or any succeeding breach or default.
10.11 Waiver. Each party hereto may, by written notice to the others:
(i) waive any of the conditions to its obligations hereunder or extend the time
for the performance of any of the obligations or actions of the others; (ii)
waive any inaccuracies in the representations of the others contained in this
Agreement or in any documents delivered pursuant to this Agreement; (iii) waive
compliance with any of the covenants of the others contained in this Agreement;
or (iv) waive or modify performance of any of the obligations of the others. No
action taken pursuant to this Agreement, including without limitation any
investigation by or on behalf of any party, shall be deemed to constitute a
waiver by the party taking such action of compliance with any representation,
warranty, condition or agreement contained herein. Waiver of the breach of any
one or more provisions of this Agreement shall not be deemed or construed to be
a waiver of other breaches or subsequent breaches of the same provisions.
10.12 Arbitration. Any disputes between Purchaser and Seller with
respect to this Agreement shall be settled by binding, final arbitration in
accordance with the commercial arbitration rules of the American Arbitration
Association then in effect (the "AAA Rules"). Any arbitration proceeding shall
be conducted in Santa Clara, California. The following arbitration provisions
shall govern over any conflicting rules which may now or hereafter be contained
in the AAA Rules. Any judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction over the subject matter thereof. The
arbitrator shall have the authority to grant any equitable and legal remedies
that would be available.
(a) Any such arbitration shall be conducted before a single
arbitrator who shall be compensated for his or her services at a rate to be
determined by the parties or by the American Arbitration Association, but based
upon reasonable hourly or daily consulting rates for the arbitrator in the event
the parties are not able to agree upon his or her rate of compensation.
32
<PAGE> 37
(b) The AAA Rules for the selection of the arbitrator shall
be followed.
(c) Purchaser and Seller shall each advance fifty percent
(50%) of the initial compensation to be paid to the arbitrator in any such
arbitration and fifty percent (50%) of the costs of transcripts and other normal
and regular expenses of the arbitration proceedings; provided, however, that the
arbitrator shall have the discretion to grant to the prevailing party in any
arbitration an award of attorneys' fees and costs, and all costs of arbitration.
(d) The parties shall be entitled to conduct discovery
proceedings in accordance with the provisions of the Federal Rules of Civil
Procedure, subject to any limitation imposed by the arbitrator.
(e) For any claim submitted to arbitration, the burden of
proof shall be as it would be if the claim were litigated in a judicial
proceedings.
(f) Upon the conclusion of any arbitration proceeding
hereunder, the arbitrator shall render findings of fact and conclusions of law
and a written opinion setting forth the basis and reasons for any decision
reached by him or her and shall deliver such documents to each party to this
Agreement along with a signed copy of the award.
(g) The arbitrator chosen in accordance with these
provisions shall not have the power to alter, amend or otherwise affect the
terms of these arbitration provisions or the provisions of this Agreement.
(h) The parties acknowledge that, except as specifically
provided in this Agreement, no other action need be taken by either party before
proceeding directly in accordance with the provisions of this Section.
(i) The arbitration provisions set forth in this Section
10.12 are intended by the parties to be exclusive for all purposes and
applicable to each and every controversy, dispute and/or claim in any manner
arising out of or relating to this Agreement, the meaning, application and/or
interpretation of this Agreement, any breach hereof and/or any voluntary or
involuntary termination of this Agreement with or without cause, including,
without limitation, any such controversy, dispute and/or claim which, if pursued
through any state or federal court or administrative agency, would arise at law,
in equity and/or pursuant to statutory, regulatory and/or common law rules,
regardless of whether any such dispute, controversy and/or claim would arise in
and/or from contract, tort or any other legal and/or equitable theory or basis.
Notwithstanding the foregoing, the parties shall at all times have and retain
the full, complete and unrestricted right to seek injunctive relief for any
breach or threatened breach of any term, provision or covenant of Section 10.7
of this Agreement. The prevailing party in any action instituted pursuant to
this Section 10.12(i), or in any appeal from any arbitration conducted pursuant
to this Section 10.12, shall be entitled to recover from the other party its
reasonable attorneys' fees and other expenses incurred in such litigation.
10.13 Notices. All notices and other communications hereunder will be
in writing and will be deemed given (i) upon receipt if delivered personally (or
if mailed by registered or
33
<PAGE> 38
certified mail), (ii) the day after dispatch if sent by overnight courier, (iii)
upon dispatch if transmitted by telecopier or other means of facsimile
transmission (and confirmed by a copy delivered in accordance with clause (i) or
(ii)), properly addressed to the parties at the following addresses:
Seller: Adaptec, Inc.
691 South Milpitas Boulevard
Milpitas, CA 95035
Attention: Mark E. Adams
Facsimile No. (408) 262-2533
With a copy to: Fenwick & West LLP
Two Palo Alto Square, Suite 800
Palo Alto, CA 94306
Attention: Dennis DeBroeck, Esq.
Facsimile No. (650) 494-1417
Purchaser: Jaycor Networks, Inc.
9775 Towne Centre Drive
San Diego, CA 92121
Attention: Randy Johnson
Facsimile No. (619) 452-0108
with a copy to: Gray Cary Ware & Freidenrich
4365 Executive Drive, Suite 1600
San Diego, California 92121-2189
Attention: Cameron Jay Rains, Esq.
Facsimile No. (619) 677-1477
Either party may change its address for such communications by giving notice
thereof to the other party in conformity with this Section.
10.14 Construction and Interpretation of Agreement.
(a) This Agreement has been negotiated by the parties hereto
and their respective attorneys, and the language hereof shall not be construed
for or against either party.
(b) The titles and headings herein are for reference
purposes only and shall not in any manner limit the construction of this
Agreement, which shall be considered as a whole.
(c) As used in this Agreement, any reference to any state of
facts, event, change or effect being "material" with respect to any entity means
a state of facts that is material to the current or expected condition
(financial or otherwise), properties, assets, liabilities, business, operations
or prospects of such entity.
34
<PAGE> 39
(d) Whenever the term "enforceable in accordance with its
terms" or like expression is used, it is understood that excepted therefrom are
any limitations on enforceability under applicable bankruptcy, insolvency,
reorganization, moratorium or other laws of general application affecting the
enforcement of creditor's rights.
10.15 No Joint Venture. Nothing contained in this Agreement shall be
deemed or construed as creating a joint venture or partnership between any of
the parties hereto. No party is by virtue of this Agreement authorized as an
agent, employee or legal representative of any other party. No party shall have
the power to control the activities and operations of any other and their status
is, and at all times, will continue to be, that of independent contractors with
respect to each other. No party shall have any power or authority to bind or
commit any other. No party shall hold itself out as having any authority or
relationship in contravention of this Section.
10.16 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor shall be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, employee, consultant, affiliate, shareholder, partner of any party
hereto or any other person or entity unless specifically provided otherwise
herein, and, except as so provided, all provisions hereof shall be personal
solely between the parties to this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
JAYCOR NETWORKS, INC.
By: /s/ TERRY M. FLANAGAN
-------------------------------------
Terry M. Flanagan, President
ADAPTEC, INC.
By: /s/ LARRY BOUCHER
-------------------------------------
-------------------------------------
(Please print name and title)
35
<PAGE> 40
EXHIBITS AND SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
A Fibre Channel Cross-License Agreement
B Second Amended and Restated Certificate of Incorporation
C Purchaser's Release Policies
D-1 Warrant (Rio)
D-2 Warrant (First Target)
D-3 Warrant (Second Target)
E Occupancy License Agreement for Milpitas Space
F Occupancy License Agreement for Irvine Space
G Volume Purchase Agreement
H Board Manufacturing and Transition Agreement
I Chip Manufacturing Agreement
J Investor's Rights Agreement
K Bill of Sale
L Form of Legal Opinion of Purchaser's Legal Counsel
M Form of Legal Opinion of Seller's Legal Counsel
N Consulting Services Agreement
O Board Observer Confidentiality Agreement
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE DESCRIPTION
- -------- -----------
<S> <C>
1.1 Ancillary Documents
1.8 Product Components
1.9 Fibre Channel Products
1.14 Patents, Trademarks, etc.
1.19 Tangible Assets
1.20 Technology Deliverables
2.3 Assumed Contracts
2.7 Allocation of Purchase Price
4.6 List of Financial Reports
4.11(b) Third Party Licenses
4.11(f) Inconsistent Rights
4.11(h) Potential New Purchaser Employees
5.4 Purchaser Security Holders
5.7 Purchaser's Arrangements
5.9 Purchaser Financial Statements
5.10 Title
8.5 Warranty Liability for Work in Progress
10.6 Employees That Can be Solicited
</TABLE>
<PAGE> 41
EXHIBIT A
Fibre Channel Cross-License Agreement
Filed as Exhibit 10.10 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 42
EXHIBIT B
Second Amended and Restated
Certificate of Incorporation
<PAGE> 43
EXHIBIT C
Purchaser's Release Policies
<PAGE> 44
EXHIBIT D-1
Warrant (Rio)
Filed as Exhibit 10.7 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 45
EXHIBIT D-2
Warrant (First Target)
Filed as Exhibit 10.8 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 46
EXHIBIT D-3
Warrant (Second Target)
Filed as Exhibit 10.9 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 47
EXHIBIT E
Occupancy License Agreement
for Milpitas Space
Filed as Exhibit 10.12 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 48
EXHIBIT F
Occupancy License Agreement
for Irvine Space
Filed as Exhibit 10.13 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 49
EXHIBIT G
Volume Purchase Agreement
Filed as Exhibit 10.18 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 50
EXHIBIT H
Board Manufacturing and Transition Agreement
Filed as Exhibit 10.17 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 51
EXHIBIT I
Chip Manufacturing Agreement
Filed as Exhibit 10.15 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 52
EXHIBIT J
Investor's Rights Agreement
Filed as Exhibit 4.2 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 53
EXHIBIT K
Bill of Sale
Filed as Exhibit 10.19 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 54
EXHIBIT L
Form of Legal Opinion
of Purchaser's Legal Counsel
<PAGE> 55
EXHIBIT M
Form of Legal Opinion
of Seller's Legal Counsel
<PAGE> 56
EXHIBIT N
Consulting Services Agreement
Filed as Exhibit 10.14 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 57
EXHIBIT O
Board Observer Confidentiality Agreement
Filed as Exhibit 10.20 to Registrant's Registration Statement on
Form S-1 filed with the Commission on September 3, 1999.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated October 8, 1999 relating to the financial statements and financial
statement schedule of JNI Corporation, which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
October 22, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BALANCE
SHEETS DATED DECEMBER 31, 1997 AND 1998 AND STATEMENTS OF OPERATIONS OF
STOCKHOLDERS' EQUITY (DEFICIT) AND OF CASH FLOWS FOR THE 3 YEARS ENDED DECEMBER
31, 1998; AND THE 6 MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH N/A.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 SEP-30-1999
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 3,300 5,830
<ALLOWANCES> 133 425
<INVENTORY> 1,175 2,436
<CURRENT-ASSETS> 4,711 10,267
<PP&E> 2,466 3,596
<DEPRECIATION> 371 1,263
<TOTAL-ASSETS> 7,814 25,553
<CURRENT-LIABILITIES> 6,541 10,499
<BONDS> 0 0
0 0
17 18
<COMMON> 0 0
<OTHER-SE> 1,156 14,919
<TOTAL-LIABILITY-AND-EQUITY> 7,814 25,553
<SALES> 12,189 25,764
<TOTAL-REVENUES> 12,189 25,764
<CGS> 5,361 9,695
<TOTAL-COSTS> 11,586 24,019
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 194 125
<INTEREST-EXPENSE> 265 394
<INCOME-PRETAX> 338 1,351
<INCOME-TAX> 27 (856)
<INCOME-CONTINUING> 311 2,207
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 311 2,207
<EPS-BASIC> .74 5.25
<EPS-DILUTED> .02 .10
</TABLE>
