<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 4, 1999
REGISTRATION NO. 333-86501
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JNI CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
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>
------------------------
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 4, 1999
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- --------------------------------------------------------------------------------
PROSPECTUS
, 1999
JNI CORPORATION
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.
<TABLE>
<CAPTION>
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Per Share Total
- -------------------------------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to JNI:
Proceeds to the selling stockholder:
- -------------------------------------------------------------------------------------
</TABLE>
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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<S> <C> <C> <C> <C>
[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>
<TABLE>
<CAPTION>
PAGE
<S> <C>
Management.......................... 52
Certain Transactions................ 59
Principal and Selling
Stockholders...................... 63
Description of Capital Stock........ 64
Shares Eligible for Future Sale..... 67
Underwriting........................ 69
Legal Matters....................... 71
Experts............................. 71
Where You Can Find More Information
About JNI......................... 72
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 Sun Microsystems' proprietary SBus
interface and the peripheral component interconnect, or PCI, interface and are
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 per second Fibre Channel
1
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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, British Airways, 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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<S> <C>
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
$7.0 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
</TABLE>
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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 a nominal exercise price. 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 5,109,741 shares are subject
to outstanding options as of September 30, 1999 at a weighted average exercise
price per share of $1.62.
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 June 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.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -----------------
1996 1997 1998 1998 1999
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................. $ 374 $ 2,903 $12,189 $ 3,826 $14,912
Gross margin.................. 26 1,651 6,828 2,096 9,659
Operating income (loss)....... (1,487) (1,054) 603 (166) 651
Net income (loss)............. (1,487) (1,184) 311 (284) 1,767
Earnings (loss) per common
share:
Basic...................... $ (3.54) $ (2.82) $ 0.74 $ (0.68) $ 4.21
Diluted.................... (3.54) (2.82) 0.02 (0.68) 0.09
Number of shares used in per
share computations:
Basic...................... 420 420 420 420 420
Diluted.................... 420 420 17,977 420 20,614
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------
AS
ACTUAL ADJUSTED
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ (379) $27,178
Total assets............................................. 12,765 40,322
Due to affiliate......................................... 5,220 --
Stockholders' equity..................................... 3,341 36,118
</TABLE>
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,
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and because we focus exclusively on Fibre Channel, our business would suffer as
a result of competition from such competing technologies.
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. 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. Any such failure
could adversely affect our business, financial condition or operating results.
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 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. 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 20% of our net revenues in the six months ended
June 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 $7.0 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.
TWO OF OUR DIRECTORS MAY HAVE CONFLICTS OF INTEREST BECAUSE THEY ARE ALSO
DIRECTORS AND EXECUTIVE OFFICERS OF JAYMARK AND JAYCOR.
Two members of our board of directors are also directors and executive
officers of Jaymark and Jaycor. These directors will have obligations to us as
well as to Jaymark and Jaycor. Delaware law imposes a duty of loyalty upon our
directors, however we cannot assure you that all conflicts will be resolved
fairly.
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
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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 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
$11.30 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 68.8%. As a result, Jaymark
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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;
- 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. 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 $7.0 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 (13.5% as of
June 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 June 30, 1999, we owed
Jaycor $5.2 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 June 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 4,762,891 shares of common stock issuable upon
exercise of outstanding options at June 30, 1999 at a weighted average exercise
price per share of $0.94 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 JUNE 30, 1999
----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS, EXCEPT
SHARE AND
PER SHARE AMOUNTS)
<S> <C> <C>
Short-term debt -- due to affiliate...................... $ 5,220 $ --
======= =======
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............................... 6,798 39,572
Unearned stock-based compensation........................ (1,940) (1,940)
Accumulated deficit...................................... (1,535) (1,535)
------- -------
Total stockholders' equity........................ 3,341 36,118
------- -------
Total capitalization.............................. $ 3,341 $36,118
======= =======
</TABLE>
19
<PAGE> 25
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$2,818,000, or $0.16 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 June 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 June 30, 1999 would
have been $35,595,000, or $1.70 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 $1.54 per share to existing stockholders and an immediate dilution in pro
forma net tangible book value of $11.30 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............................................... $0.16
Increase per share attributable to new investors.......... 1.54
As adjusted pro forma net tangible book value per share
after this offering....................................... 1.70
------
Dilution per share to new investors......................... $11.30
======
</TABLE>
As of June 30, 1999, assuming exercise of options to purchase 4,762,891
shares and warrants to purchase 840,000 shares that were outstanding at June 30,
1999, pro forma net tangible book value per share before this offering was
$0.12. The investment by new investors in this offering increases the as
adjusted pro forma net tangible book value per share by $1.22 per share to $1.34
per share after this offering resulting in dilution to new investors of $11.66
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% $ 4,440,000 11% $ 0.24
New investors............. 2,800,000 13 36,400,000 89 $13.00
---------- --- ----------- ---
Total..................... 20,942,895 100% $40,840,000 100%
========== === =========== ===
</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 six-month periods ended June 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 June 30, 1999
and for the years ended December 31, 1994 and 1995 and for the six-month periods
ended June 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>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 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 $3,826 $14,912
Cost of revenues...................... 32 53 348 1,252 5,361 1,730 5,453
------ ------ ------- ------- ------- ------ -------
Gross margin........................ 3 21 26 1,651 6,828 2,096 9,459
Operating expenses:
Research and development............ 150 381 510 1,202 2,919 1,069 4,938
Selling and marketing............... 57 161 532 681 1,526 668 2,073
General and administrative.......... 144 73 471 822 1,698 525 1,286
Amortization of intangible assets... -- -- -- -- 47 -- 110
Amortization of stock-based
compensation..................... -- -- -- -- 35 -- 401
------ ------ ------- ------- ------- ------ -------
Total operating expenses......... 351 615 1,513 2,705 6,225 2,262 8,808
------ ------ ------- ------- ------- ------ -------
Operating income (loss)............... (348) (594) (1,487) (1,054) 603 (166) 651
Interest expense...................... -- -- -- 130 265 118 289
------ ------ ------- ------- ------- ------ -------
Income (loss) before income taxes..... (348) (594) (1,487) (1,184) 338 (284) 362
Income tax provision (benefit)........ -- -- -- -- 27 -- (1,405)
------ ------ ------- ------- ------- ------ -------
Net income (loss)..................... $ (348) $ (594) $(1,487) $(1,184) $ 311 $ (284) $ 1,767
====== ====== ======= ======= ======= ====== =======
Earnings (loss) per common share:
Basic................................. $ (.83) $(1.41) $ (3.54) $ (2.82) $ 0.74 $(0.68) $ 4.21
====== ====== ======= ======= ======= ====== =======
Diluted............................... $ (.83) $(1.41) $ (3.54) $ (2.82) $ 0.02 $(0.68) $ 0.09
====== ====== ======= ======= ======= ====== =======
Pro forma basic(1).................... $ 0.74 $ 2.51
======= =======
Pro forma diluted(1).................. $ 0.03 $ 0.09
======= =======
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 20,614
Pro forma basic(1).................... 634 774
Pro forma diluted(1).................. 18,191 20,968
</TABLE>
21
<PAGE> 27
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
---------------------------------------- JUNE 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) $ (379)
Total assets............................... 22 259 446 1,900 7,814 12,765
Due to affiliate........................... -- -- -- 1,950 3,061 5,220
Stockholders' equity (deficit)............. (26) 196 362 (740) 1,173 3,341
</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, but 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 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
23
<PAGE> 29
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.
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 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. 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
24
<PAGE> 30
$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: $1.4 million during the remainder of 1999; $5.3 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 $2.4 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 June 30, 1999 is $1.9 million, and it
will be amortized as follows: $467,000 during the remainder of 1999; $723,000
during 2000; $485,000 during 2001; $247,000 during 2002; and $18,000 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.
The income tax benefit recognized during the quarter ended June 30, 1999
was due primarily to utilization of net operating loss carryforwards and the
release of a deferred tax valuation allowance in that period. Prior to June 30,
1999, due to our history of losses, we did not recognize any tax benefits for
net operating losses or 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.
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net
revenues for each of the periods shown.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 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 45.2 36.7
------ ----- ----- ----- -----
Gross margin.................... 7.0 56.9 56.0 54.8 63.3
Operating expenses:
Research and development........ 136.4 41.4 23.9 27.9 33.1
Selling and marketing........... 142.2 23.5 12.5 17.5 13.9
General and administrative...... 125.9 28.3 13.9 13.7 8.6
Amortization of intangible
assets........................ -- -- 0.4 -- 0.7
Amortization of stock-based
compensation.................. -- -- 0.3 -- 2.7
------ ----- ----- ----- -----
Total operating expenses... 404.5 93.2 51.0 59.1 59.0
------ ----- ----- ----- -----
Operating income (loss)............ (397.6) (36.3) 5.0 (4.3) 4.3
Interest expense................... -- 4.5 2.2 3.1 1.9
------ ----- ----- ----- -----
Income (loss) before income
taxes........................... (397.6) (40.8) 2.8 (7.4) 2.4
Income tax provision (benefit)..... -- -- 0.2 -- (9.4)
------ ----- ----- ----- -----
Net income (loss).................. (397.6)% (40.8)% 2.6% (7.4)% 11.8%
====== ===== ===== ===== =====
</TABLE>
25
<PAGE> 31
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1999
Net revenues. Net revenues increased $11.1 million, or 290%, to $14.9
million in the first six months of 1999 from $3.8 million in the first six
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 six months ended
June 30, 1999, our top five customers accounted for 66% of net revenues,
compared to 66% of net revenues for the top five customers in the six months
ended June 30, 1998. Sales to customers outside of the United States accounted
for 20% of net revenues in the first six months of 1999 compared to 5% of net
revenues in the first six months of 1998.
Gross margin. Gross margin increased $7.4 million, or 351%, to $9.5 million
in the first six months of 1999 from $2.1 million in the first six months of
1998. Gross margin as a percentage of net revenues increased to 63.3% in 1999
from 54.8% 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 $3.8
million, or 362%, to $4.9 million in the first six months of 1999 from $1.1
million in the first six months of 1998. The increase was due primarily to
higher personnel costs of $2,248,000 and contracted services of $341,000,
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 $149,000 and
prototyping expenses increased to complete development of products based 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 33.1% in the first six months of 1999 from 27.9% in the first six
months of 1998.
Selling and marketing. Selling and marketing expenses increased $1.4
million, or 210%, to $2.1 million in the first six months of 1999 from $668,000
in the first six months of 1998. The increase was primarily due to higher
personnel costs of $972,000, trade shows and promotional items of $308,000, and
travel expenses of $92,000 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 13.9% in the
first six months of 1999 from 17.5% in the first six 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 revenue to the extent that net revenues increase at a faster
rate.
General and administrative. General and administrative expenses increased
$761,000, or 145%, to $1.3 million in the first six months of 1999 from $525,000
in the first six months of 1998. The increase was primarily due to higher
personnel costs of $421,000, including $190,000 related to incentive bonuses,
and legal and accounting costs of $189,000 resulting from increased business
activity. General and administrative expenses as a percentage of net revenues
decreased to 8.6% in the first six months of 1999 from 13.7% due to the increase
in revenues.
26
<PAGE> 32
Amortization of intangible assets. We amortized $110,000 of intangible
assets during the six months ended June 30, 1999. There was no amortization of
intangible assets during the six months ended June 30, 1998.
Amortization of stock-based compensation. In connection with the grant of
stock options to employees during the six months ended June 30, 1999, we
recorded stock-based compensation within stockholders' equity (deficit) of $1.4
million and amortized stock-based compensation of $401,000. There was no
amortization of stock-based compensation during the six months ended June 30,
1998.
Interest expense. Interest expense increased by $171,000 to $289,000 in the
first six months of 1999 from $118,000 in the first six months of 1998. The
increase resulted from higher intercompany revolver borrowings from Jaycor to
finance increased inventory and accounts receivable, reflecting the rapid growth
in revenues during that period.
Income tax provision (benefit). We recognized an income tax benefit of $1.4
million during the six months ended June 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 period
based on management's determination that it became more likely than not that our
net deferred tax assets will be realized. This determination was based on JNI's
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. No income tax provision was recognized in
the six months ended June 30, 1998 due to our loss position.
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 $5.2 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 56.0% in 1998 from 56.9% in
1997. Gross margin increased in 1997 from 7.0% 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
27
<PAGE> 33
primarily due to the increase in revenues. Selling and marketing expenses
increased $149,000, or 28.0%, 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 8.6% in 1999 from 13.9% in 1998 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. There was no amortization of
intangible assets during the years ended December 31, 1997 or 1996.
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. There was no amortization of
stock-based compensation during the years ended December 31, 1997 or 1996.
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 inventory to support the increased level of sales. Prior to
January 30, 1997, we were a division of Jaycor and, as such, recorded no
separate interest expense.
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. No income tax provision was recognized in 1996 or 1997 due to
our loss position.
28
<PAGE> 34
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth unaudited quarterly operating information
for each of the six quarters ending with the quarter ended June 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,
1998 1998 1998 1998 1999 1999
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues....................................... $1,454 $2,372 $3,103 $5,260 $6,363 $ 8,549
Cost of revenues................................... 673 1,057 1,379 2,252 2,287 3,166
------ ------ ------ ------ ------ -------
Gross margin.................................... 781 1,315 1,724 3,008 4,076 5,383
Operating expenses:
Research and development........................ 438 631 751 1,099 2,182 2,756
Selling and marketing........................... 252 416 385 473 936 1,137
General and administrative...................... 251 274 396 777 674 612
Amortization of intangible assets............... -- -- -- 47 55 55
Amortization of stock-based compensation........ -- -- -- 35 163 238
------ ------ ------ ------ ------ -------
Total operating expenses................... 941 1,321 1,532 2,431 4,010 4,798
------ ------ ------ ------ ------ -------
Operating income (loss)............................ (160) (6) 192 577 66 585
Interest expense................................... 44 74 77 70 133 156
------ ------ ------ ------ ------ -------
Income (loss) before income taxes.................. (204) (80) 115 507 (67) 429
Income tax provision (benefit)..................... -- -- -- 27 8 (1,413)
------ ------ ------ ------ ------ -------
Net income (loss).................................. $ (204) $ (80) $ 115 $ 480 $ (75) $ 1,842
====== ====== ====== ====== ====== =======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1998 1998 1999 1999
(AS A PERCENTAGE OF NET REVENUES)
<S> <C> <C> <C> <C> <C> <C>
Net revenues....................................... 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
----- ----- ----- ----- ----- -----
Gross margin.................................... 53.7 55.4 55.6 57.2 64.1 63.0
Operating expenses:
Research and development........................ 30.1 26.6 24.2 20.9 34.3 32.2
Selling and marketing........................... 17.3 17.5 12.4 9.0 14.7 13.3
General and administrative...................... 17.3 11.6 12.8 14.7 10.6 7.2
Amortization of intangible assets............... -- -- -- 0.9 0.9 0.7
Amortization of stock-based compensation........ -- -- -- 0.7 2.6 2.8
----- ----- ----- ----- ----- -----
Total operating expenses................... 64.7 55.7 49.4 46.2 63.1 56.2
----- ----- ----- ----- ----- -----
Operating income (loss)............................ (11.0) (0.3) 6.2 11.0 1.0 6.8
Interest expense................................... 3.0 3.1 2.5 1.3 2.1 1.8
----- ----- ----- ----- ----- -----
Income (loss) before income taxes.................. (14.0) (3.4) 3.7 9.7 (1.1) 5.0
Income tax provision (benefit)..................... -- -- -- 0.6 0.1 (16.5)
----- ----- ----- ----- ----- -----
Net income (loss).................................. (14.0)% (3.4)% 3.7% 9.1% (1.2)% 21.6%
===== ===== ===== ===== ===== =====
</TABLE>
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<PAGE> 35
Quarterly revenues have steadily increased over the past six 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 gradually
increased due to lower component and manufacturing costs as well as the
allocation of fixed overhead over a greater revenue base which was partially
offset by slightly declining average selling prices. Gross margin as a
percentage of net revenues declined slightly in the quarter ended June 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. Research and
development expenses have generally increased as a result of our increased
investment in product development. Research and development expenses increased
significantly in the first half of 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 six months ended June 30, 1999, cash used in operating
activities was $458,000, compared to $42,000 in the first six months of 1998.
The increase in cash utilized reflects the increased working capital required to
fund expanding operations and increases in inventories and accounts receivable.
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 $1.4 million in the six months
ended June 30, 1999, $112,000 in the six months ended June 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 $1.9 million in the six
months ended June 30, 1999, $154,000 in the six months ended June 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.
We had no cash and cash equivalents at June 30, 1999. Working capital
increased to $(379,000) at June 30, 1999 from $(1.8) million at December 31,
1998.
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<PAGE> 36
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 (13.5% as of June 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 June 30, 1999, we owed Jaycor $5.2 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 status to management. The Year 2000 task force is charged
with raising awareness throughout JNI, identifying critical IT business
components that use date variables,
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<PAGE> 37
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.
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
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<PAGE> 38
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 network, the
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<PAGE> 41
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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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,
Linux, 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.
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- Scalability. Our ASIC and host bus adapter architectures provide high
performance in simple, cost-sensitive SAN configurations, but they are
capable of 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
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complement our distribution channels. To complement and support our domestic and
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
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included with the host bus adapter. In addition to communication, the device
driver 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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<PAGE> 48
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 June 30, 1999, our
engineering staff included 19 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 six months ended June 30, 1999, our top five customers accounted for
66% 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 six months
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<PAGE> 51
ended June 30, 1999, Polaris Service accounted for 16% of our net revenues, Data
General accounted for 15% of our net revenues, Info X, Inc. accounted for 14% of
our net revenues and ACAL Electronic accounted for 14% of our net revenues.
End-users of JNI products include the following:
<TABLE>
<S> <C>
Amazon.com GTE
Bear Stearns Lexis Nexis
Boeing Mobil
British Airways Morgan Stanley Dean Witter
Charles Schwab Safeway
Convergys (formerly Cincinnati US WEST Capital Funding
Bell
Information Systems)
DaimlerChrysler
Federal Express
</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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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 June 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 six months ended June 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 1998, our research and
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development 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 June 30, 1999, we have 46 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
our other competitive advantages include our early entry into fibre channel
technology, our workforce of highly experienced researchers and designers and
our intellectual property.
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<PAGE> 55
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 June 30, 1999, backlog for our products was approximately $2.7 million,
all of which is scheduled for delivery to customers during the quarter ending
September 30, 1999, compared to backlog of approximately $966,000 at June 30,
1998, substantially all of which was scheduled for delivery to customers during
the quarter ended September 30, 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 by the customers with
limited or no penalty. Therefore, our backlog is not necessarily indicative of
actual sales for any succeeding period.
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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 June 30, 1999, JNI had 91 employees, including nine in
administration, 21 in sales and marketing, 46 in engineering and 15 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 June 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
Eric P. Wenaas(1)(2)............... 57 Chairman of the Board of Directors
P. Randy Johnson(1)(2)............. 49 Director and Secretary
Edward Frymoyer(2)................. 62 Director
Key Employees
Roland Thibodeau................... 53 Executive Vice President, Sales
Scott Ruple........................ 39 Vice President, Marketing
Edward Tyburski.................... 40 Vice President, Engineering
Sassan Teymouri.................... 42 Vice President, ASIC Engineering
</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.
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
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<PAGE> 58
engineering from the University of Michigan and a Ph.D. in physics from the
University of Connecticut.
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.
Edward Frymoyer, Ph.D. has served as a director of JNI since its
organization in February 1997. Since May 1981, Dr. Frymoyer has owned and
operated emf Associates, a consulting firm.
Key Employees
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.
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 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.
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
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<PAGE> 59
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. The Compensation Committee, which consists of Dr. Wenaas, Dr.
Frymoyer 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.
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 have entered into a
consulting agreement with Dr. Frymoyer under which he provides services to JNI.
Dr. Frymoyer received approximately $70,000 in fees under this agreement in
1998.
COMPENSATION OF DIRECTORS
Our non-employee directors are reimbursed for expenses incurred in
connection with attending board and committee meetings but are not compensated
for their services as board or committee members. We anticipate that we will
grant non-employee directors options to purchase our common stock pursuant to
the terms of our 1999 Stock Option Plan. See "-- Stock Plans."
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
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<PAGE> 60
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 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 two 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..................... 131,919 94,483 3,696(2)
Chief Technology Officer
Thomas K. Gregory................... 137,061 99,185 5,655(3)
Chief Operating Officer
</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 and $549 paid for group term life insurance.
(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.
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.
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) $-- $2,457,402
Charles McKnett................ -- 508,620(2) -- 1,161,332
Thomas K. Gregory.............. -- 565,110(2) -- 1,290,316
</TABLE>
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<PAGE> 61
- ---------------
(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 market value of JNI's common stock as of December 31,
1998. The fair market 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 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 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.
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<PAGE> 62
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 June 30, 1999, there were outstanding options to purchase an
aggregate of 4,396,441 shares of common stock. No options to acquire shares have
been exercised. As of June 30, 1999, no 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,
(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.
The total number of shares reserved for issuance under the 1999 Plan, as
amended, is 2,312,800 shares of which, as of June 30, 1999, no shares have been
issued upon the
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exercise of options. As of June 30, 1999 options to purchase a total of 366,450
shares of common stock were outstanding and 1,946,350 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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<PAGE> 64
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 June 30, 1999 and December 31, 1998 and 1997, we owed Jaycor $5.2 million,
$3.1 million and $2.0 million, respectively, for advances made under this
agreement. During the six months ended June 30, 1999 and for the years ended
December 31, 1998 and 1997, we incurred interest expense on advances from Jaycor
of $289,000, $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 equal to or
less than the historical amounts set forth in our statements of operations in
the financial statements and will diminish to zero as we complete our transition
to operating as an independent company. 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. Jaycor maintains, and pays the
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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 payments due to Jaycor under this sublease were $225,000 for the
year ending December 31, 1999, $231,000 for the year ending December 31, 2000,
$237,000 for the year ending December 31, 2001, $242,000 for the year ending
December 31, 2002, $248,000 for the year ending December 31, 2003 and $211,000
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 number of shares issuable under
the second and third warrants was reduced by
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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
six-month period ended June 30, 1999, JNI did not incur or pay any fees to
Adaptec 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 six-month period ended June 30, 1999, JNI
paid $19,000 and $301,000, respectively, to Adaptec 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 inventory components from Adaptec
during the year ended December 31, 1998 and the six-month period ended June 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 six-month
period ended June 30, 1999 JNI paid $0 and $42,000, respectively, to Adaptec
pursuant 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 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
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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
six-month period ended June 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 paid to Adaptec under these
agreements totaled $35,000 during the year ended December 31, 1998 and $28,000
during the six-month period ended June 30, 1999.
Accounts payable to Adaptec totaled approximately $19,000 and $92,000 at
December 31, 1998 and June 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
1,132,894 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> 68
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 October
31, 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....................... 1,972,894 10.4 -- 1,972,894 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 *
DIRECTORS:
Edward Frymoyer.................. 12,600 * -- 12,600 *
P. Randy Johnson................. -- -- -- -- --
Eric P. Wenaas................... -- -- -- -- --
EXECUTIVE OFFICERS AND DIRECTORS AS
A GROUP (SEVEN PERSONS):......... 657,594 3.5 -- 657,594 3.0
</TABLE>
- ---------------
* Represents less than one percent of the total.
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<PAGE> 69
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 June 30, 1999 there were 18,142,894 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> 70
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> 71
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> 72
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
17,722,895 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 16,042,894 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 21,000
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> 73
conditions. On the date 180 days after the effective date of this offering,
options to purchase approximately 1,143,170 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> 74
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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<PAGE> 75
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> 76
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.
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<PAGE> 77
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.
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<PAGE> 78
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 June 30,
1999 (unaudited).......................................... F-3
Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998 and for the Six Months Ended June 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 Six
Months Ended June 30, 1999 (unaudited).................... F-5
Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998 and for the Six Months Ended June 30,
1998 and 1999 (unaudited)................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 79
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
September 1, 1999, except for the stock split
described in Notes 1 and 5 and the third paragraph
in Note 2 which are as of October 1, 1999
F-2
<PAGE> 80
JNI CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------- JUNE 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable, net.................................. $ 856 $ 3,300 $ 4,242
Inventories............................................... 736 1,175 3,044
Other current assets...................................... 59 236 152
Deferred income taxes..................................... -- -- 1,477
------- ------- -------
Total current assets.............................. 1,651 4,711 8,915
Property and equipment, net................................. 225 2,466 3,295
Intangible assets, net...................................... -- 633 523
Other assets................................................ 24 4 32
------- ------- -------
$ 1,900 $ 7,814 $12,765
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.......................................... $ 484 $ 2,541 $ 2,875
Accrued liabilities....................................... 140 939 1,199
Due to affiliate.......................................... 1,950 3,061 5,220
------- ------- -------
Total current liabilities......................... 2,574 6,541 9,294
Other liabilities........................................... 66 100 130
------- ------- -------
Total liabilities................................. $ 2,640 $ 6,641 $ 9,424
------- ------- -------
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 6,798
Unearned stock-based compensation......................... -- (970) (1,940)
Accumulated deficit....................................... (3,613) (3,302) (1,535)
------- ------- -------
Total stockholders' equity (deficit).............. (740) 1,173 3,341
------- ------- -------
$ 1,900 $ 7,814 $12,765
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 81
JNI CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues................. $ 374 $ 2,903 $ 12,189 $ 3,826 $ 14,912
Cost of revenues............. 348 1,252 5,361 1,730 5,453
------- ------- ---------- ------- ----------
Gross margin............... 26 1,651 6,828 2,096 9,459
------- ------- ---------- ------- ----------
Operating expenses:
Research and development... 510 1,202 2,919 1,069 4,938
Selling and marketing...... 532 681 1,526 668 2,073
General and
administrative.......... 471 822 1,698 525 1,286
Amortization of intangible
assets.................. -- -- 47 -- 110
Amortization of stock-based
compensation............ -- -- 35 -- 401
------- ------- ---------- ------- ----------
Total operating
expenses........ 1,513 2,705 6,225 2,262 8,808
------- ------- ---------- ------- ----------
Operating income (loss)...... (1,487) (1,054) 603 (166) 651
Interest
expense -- affiliate....... -- 130 265 118 289
------- ------- ---------- ------- ----------
Income (loss) before income
taxes...................... (1,487) (1,184) 338 (284) 362
Income tax provision
(benefit).................. -- -- 27 -- (1,405)
------- ------- ---------- ------- ----------
Net income (loss)............ $(1,487) $(1,184) $ 311 $ (284) $ 1,767
======= ======= ========== ======= ==========
Earnings (loss) per share:
Basic...................... $ (3.54) $ (2.82) $ 0.74 $ (0.68) $ 4.21
======= ======= ========== ======= ==========
Diluted.................... $ (3.54) $ (2.82) $ 0.02 $ (0.68) $ 0.09
======= ======= ========== ======= ==========
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 20,614,000
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 82
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)
Stock-based compensation
(unaudited)................. 1,371 (970)
Net income (unaudited)........ 1,767
---------- --- ------- -- ------ ------- ------ -------
BALANCE, JUNE 30, 1999
(unaudited)................... 17,722,895 $18 420,000 $-- $6,798 $(1,940) $ -- $(1,535)
========== === ======= == ====== ======= ====== =======
<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
Stock-based compensation
(unaudited)................. 401
Net income (unaudited)........ 1,767
-------
BALANCE, JUNE 30, 1999
(unaudited)................... $ 3,341
=======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 83
JNI CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 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 $(284) $1,767
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating
activities:
Deferred income taxes...................... -- -- -- -- (1,446)
Depreciation and amortization.............. 17 86 243 54 583
Amortization of intangible assets.......... -- -- 47 -- 110
Amortization of stock-based compensation... -- -- 35 -- 401
Accrued interest expense -- affiliate...... -- 130 265 118 289
Changes in assets and liabilities:
Accounts receivable, net................... (76) (769) (2,444) (682) (942)
Inventories................................ (101) (511) (439) 261 (1,869)
Other assets............................... 23 (41) (157) 29 56
Accounts payable........................... -- 484 2,057 294 334
Accrued liabilities........................ 7 111 799 150 260
Other liabilities.......................... 14 11 34 18 (1)
------- ------- ------- ----- ------
Net cash (used in) provided by operating
activities.................................... (1,603) (1,683) 751 (42) (458)
------- ------- ------- ----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (50) (219) (1,597) (112) (1,412)
------- ------- ------- ----- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from affiliate................... 1,653 1,902 846 154 1,870
------- ------- ------- ----- ------
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.............. $ -- $ -- $ 1,567 $ -- $ --
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 84
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 $206 and $429 for the six-month periods ended June 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.
UNAUDITED INTERIM FINANCIAL DATA
The unaudited interim financial statements for the six months ended June
30, 1998 and 1999 have been prepared on the same basis as the audited financial
statements and, in
F-7
<PAGE> 85
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)
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 is 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.
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 $157 at December 31, 1998 and at June 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
F-8
<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)
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.
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.
F-9
<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)
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 six-month period ended June
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 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
six-month period ended June 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 six-month period ended June 30, 1998
(unaudited) were 15,136,000 and 16,590,000, respectively.
F-10
<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)
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- ----------------------
1996 1997 1998 1998 1999
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss)............. $(1,487) $(1,184) $ 311 $ (284) $ 1,767
======= ======= =========== ======== ===========
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:
Contingently issuable
shares................... -- -- -- -- 540,000
Dilutive options
outstanding.............. -- -- 815,000 -- 1,931,000
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 20,614,000
======= ======= =========== ======== ===========
Basic earnings (loss) per
share......................... $ (3.54) $ (2.82) $ 0.74 $ (0.68) $ 4.21
Diluted earnings (loss) per
share......................... $ (3.54) $ (2.82) $ 0.02 $ (0.68) $ 0.09
</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.
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 $1.39 per share
for an aggregate purchase price of $1,567.
The total purchase price included additional consideration given in the
form of three warrants to purchase a maximum of 2,207,684 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
F-11
<PAGE> 89
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2. ACQUISITION (CONTINUED)
shares, dependent on sales of products based on the acquired technology
immediately prior to the change in control.
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, and the Company anticipates that as a result of
this reduction no additional shares will become issuable under these warrants.
As a result of the resolution of this contingency, additional purchase price
consideration of $10,920 will be recorded as of September 30, 1999. This
additional purchase price will be allocated to intangible assets and 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
------------- JUNE 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE:
Accounts receivable............................... $891 $3,433 $4,587
Less allowance for doubtful accounts and sales
returns........................................ (35) (133) (345)
---- ------ ------
Total..................................... $856 $3,300 $4,242
==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
-------------- JUNE 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
INVENTORIES:
Raw materials.................................... $ 306 $ 645 $1,440
Work in process.................................. 279 426 1,488
Finished goods................................... 151 104 116
----- ------ ------
Total.................................... $ 736 $1,175 $3,044
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
------------- JUNE 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Computer and test equipment........................ $308 $2,763 $3,963
Leasehold improvements............................. 7 10 92
Office furniture and other equipment............... 41 64 118
---- ------ ------
356 2,837 4,173
Less accumulated depreciation and amortization..... (131) (371) (878)
---- ------ ------
Total...................................... $225 $2,466 $3,295
==== ====== ======
</TABLE>
F-12
<PAGE> 90
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
------------- JUNE 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
ACCRUED LIABILITIES:
Accrued payroll and payroll related costs.......... $123 $836 $1,005
Other.............................................. 17 103 194
---- ---- ------
Total...................................... $140 $939 $1,199
==== ==== ======
</TABLE>
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 13.5% at December 31, 1997 and 1998 and June 30, 1999 (unaudited)). Advances
under the agreement are due on demand, 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 six-month period ended June 30, 1999 (unaudited), the Company
incurred interest expense on advances from Jaycor of $130, $265 and $289,
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 $225, $231, $237, $242, $248 and $211 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.
F-13
<PAGE> 91
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 six-month period ended June 30, 1999 (unaudited), the Company did not
incur or pay any fees to Adaptec 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 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 six-month period ended June 30, 1999
(unaudited), the Company paid $19 and $301, respectively, to Adaptec 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 inventory components from Adaptec
during the year ended December 31, 1998 and the six-month period ended June 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
six-month period ended June 30, 1999 (unaudited), the Company paid $0 and $42,
respectively, to Adaptec pursuant 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
F-14
<PAGE> 92
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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
six-month period ended June 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 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 paid to Adaptec under these
agreements totaled $35 during the year ended December 31, 1998 and $28 during
the six-month period ended June 30, 1999 (unaudited).
Accounts payable to Adaptec totaled approximately $19 and $92 at December
31, 1998 and June 30, 1999 (unaudited), respectively. There were no purchases
from Adaptec during the years ended December 31, 1996 or 1997.
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 $0.04 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
F-15
<PAGE> 93
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
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 six months ended June 30, 1999, the charge to operations for the
Match was $39 and $96, respectively.
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 June 30, 1999, there were no shares of the Company's common
stock available for future grant under the 1997 Plan.
F-16
<PAGE> 94
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6. BENEFIT PLANS (CONTINUED)
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. 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 June 30,
1999, there were 1,946,350 shares of the Company's common stock available for
future grant under the 1999 Plan, giving effect to the increase in the stock
option reserve approved by the Board on September 1, 1999.
A summary of the Company's stock option plans as of December 31, 1997 and
1998 and as of June 30, 1999 (unaudited) and changes during the periods is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------- SIX MONTHS ENDED
1997 1998 JUNE 30, 1999
-------------------- -------------------- -----------------------
WEIGHTED WEIGHTED (UNAUDITED)
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 0.17 726,950 5.26
Exercised................ -- -- -- -- -- --
Expired/surrendered...... -- -- (529,599) 0.17 (2,800) 0.17
--------- --------- ---------
Outstanding at end of
period................. 3,759,840 $0.17 4,038,741 $0.17 4,762,891 $0.94
========= ========= =========
Vested at end of
period................. -- 375,984 1,025,325
Exercisable at end of
period................. -- -- --
Weighted-average fair
value per option of
options granted during
the period............. $0.07 $1.33 $4.17
</TABLE>
The Company did not have a stock option plan at any time during the year
ended December 31, 1996.
F-17
<PAGE> 95
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6. BENEFIT PLANS (CONTINUED)
The following table summarizes information regarding employee stock options
outstanding at December 31, 1998 and June 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
========= ====
June 30, 1999 (unaudited):
$0.17..................... 4,217,941 8.3
$0.71..................... 178,500 9.7
$10.00.................... 366,450 10.0
--------- ----
4,762,891 8.5
========= ====
</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 $1,371 during the six-month period ended June 30,
1999 (unaudited), 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 was $35 for the year ended December 31, 1998 and $401
for the six-month period ended June 30, 1999 (unaudited), respectively.
At June 30, 1999 (unaudited), the remaining unearned stock-based
compensation of approximately $1,940 will be amortized as follows: $467 during
the six months ended December 31, 1999, $723 in 2000, $485 in 2001, $247 in 2002
and $18 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
DECEMBER 31, SIX MONTHS
------------------- ENDED
1997 1998 JUNE 30, 1999
(UNAUDITED)
<S> <C> <C> <C>
Net income (loss):
As reported........................ $(1,184) $ 311 $1,767
Pro forma.......................... $(1,242) $ 231 $1,680
Diluted earnings (loss) per common
share:
As reported........................ $ (2.82) $ 0.02 $ 0.09
Pro forma.......................... $ (2.96) $ 0.01 $ 0.08
</TABLE>
F-18
<PAGE> 96
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6. BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS
------------------- ENDED
1997 1998 JUNE 30, 1999
(UNAUDITED)
<S> <C> <C> <C>
Weighted average grant-date fair
value of options granted:
Exercise price equal to market
price of stock on the grant
date:
Aggregate value................. $ 275 $ 12 $1,599
Per share value................. $ 0.07 $ 0.07 $ 4.36
Exercise price less than the market
price of stock on the grant
date:
Aggregate value................. -- $1,068 $1,433
Per share value................. -- $ 1.67 $ 3.97
</TABLE>
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 six-month period ended June 30, 1999 (unaudited): no dividend yield;
risk-free interest rate of 6.00%, 4.83% and 5.42%; and expected terms of 9.9
years for all periods, 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 June 30, 1999.
NOTE 7. INCOME TAXES
The components of income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1998 1999
(UNAUDITED)
<S> <C> <C>
Current:
Federal............................ $22 $ 32
State.............................. 5 9
--- -------
27 41
--- -------
Deferred:
Federal............................ -- (1,026)
State.............................. -- (420)
--- -------
-- (1,446)
--- -------
$27 $(1,405)
=== =======
</TABLE>
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.
F-19
<PAGE> 97
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 7. INCOME TAXES (CONTINUED)
The following is a reconciliation of the statutory federal income tax rate
to the Company's effective tax rate:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, SIX MONTHS ENDED
------------------ JUNE 30,
1996 1997 1998 1999
(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 13
Research and development credits.......... (1) (4) (21) (92)
Stock-based compensation.................. -- -- 4 39
Permanent differences..................... -- 1 3 4
Utilization of net operating loss
carryforwards........................... -- -- (115) (140)
Net change in valuation allowance......... 40 40 96 (258)
--- --- ---- ----
--% --% 8% (400)%
=== === ==== ====
</TABLE>
The components of the Company's net deferred tax assets (liabilities) are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AS OF
----------------- JUNE 30,
1997 1998 1999
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 1,394 $ 1,006 $ 516
Research and development credit
carryforwards............................... 91 172 550
Allowances and reserves........................ 43 120 268
Accrued payroll and payroll related costs...... 44 163 167
Depreciation................................... 4 6 --
Alternative minimum tax credit carryforwards... -- 27 68
------- ------- ------
Total deferred tax assets.............. $ 1,576 $ 1,494 $1,569
Deferred tax liabilities:
Other.......................................... $ (113) $ (97) $ (92)
Depreciation................................... -- -- (31)
------- ------- ------
Net deferred tax assets..................... 1,463 1,397 1,446
Less valuation allowance.................... (1,463) (1,397) --
------- ------- ------
$ -- $ -- $1,446
======= ======= ======
</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 June 30,
1999 there was no 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
F-20
<PAGE> 98
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 7. INCOME TAXES (CONTINUED)
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. The net cumulative
operating loss and credit carryforwards will expire at various dates beginning
in the years 2001 through 2017, 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........................................................ $ 335
2000........................................................ 231
2001........................................................ 237
2002........................................................ 242
2003........................................................ 248
Thereafter.................................................. 211
------
Total minimum lease payments........................... $1,504
======
</TABLE>
Rent expense under operating leases for the years ended December 31, 1996,
1997 and 1998 was $16, $118 and $353 and rent expense for the six-month periods
ended June 30, 1998 and June 30, 1999 (unaudited) was $125 and $471,
respectively. Rent expense incurred from Jaycor (Note 4) was $0, $90 and $254
for the years ended December 31, 1996, 1997 and 1998 and $88 and $331 for the
six-month periods ended June 30, 1998 and 1999 (unaudited), respectively.
The Company has also guaranteed a $7.0 million credit line that Jaycor has
with a commercial lender.
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
F-21
<PAGE> 99
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 9. CONCENTRATIONS OF RISK (CONTINUED)
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 20% for the six-month period ended June 30, 1999 (unaudited),
respectively. Of this amount, 60%, 14%, 4% and 4% of the Company's net revenues
were to customers located in Japan, 0%, 0%, 9% and 14% 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>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- 1999
1996 1997 1998 (UNAUDITED)
<S> <C> <C> <C> <C>
Customer A.............................. -- 8% 19% 16%
Customer B.............................. 6% 11 16 15
Customer C.............................. -- -- 6 14
Customer D.............................. -- -- 9 14
Customer E.............................. -- 13 6 7
Customer F.............................. 60 14 -- --
</TABLE>
NOTE 10. SUBSEQUENT EVENTS
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.
The Board approved the establishment, upon the closing of the offering, of
the 1999 Employee Stock Purchase Plan (the "Purchase Plan"). A total of 175,000
shares on 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 the offering.
If the Offering 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-22
<PAGE> 100
[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> 101
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
JNI CORPORATION
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> 102
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.
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.
II-1
<PAGE> 103
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 June 30, 1999, the registrant issued options to
approximately 60 employees to purchase a total of 4,762,891 shares of common
stock at a weighted average exercise price of $0.94 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.
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
</TABLE>
II-2
<PAGE> 104
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
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.
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
</TABLE>
II-3
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
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)
24.1** Power of Attorney (see page II-6)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Filed with initial 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
II-4
<PAGE> 106
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> 107
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 4th 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 4, 1999
- ------------------------------------------ Officer and Director
Terry M. Flanagan (Principal Executive
Officer)
/s/ GLORIA PURDY Chief Financial Officer October 4, 1999
- ------------------------------------------ (Principal Financial and
Gloria Purdy Accounting Officer)
/s/ ERIC P. WENAAS* Chairman of the Board of October 4, 1999
- ------------------------------------------ Directors
Eric P. Wenaas
/s/ P. RANDY JOHNSON* Director October 4, 1999
- ------------------------------------------
P. Randy Johnson
/s/ EDWARD FRYMOYER* Director October 4, 1999
- ------------------------------------------
Edward Frymoyer
*By: /s/ GLORIA PURDY
- -----------------------------------------
Gloria Purdy
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 108
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 September
1, 1999, except for the stock split described in Notes 1 and 5 and the third
paragraph in Note 2 which are as of October 1, 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
September 1, 1999
II-7
<PAGE> 109
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 73 44 35
Year ended December 31, 1998:
Allowance for sales returns and
doubtful accounts................ 35 191 93 133
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> 110
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> 111
<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)
24.1** Power of Attorney (see page II-6)
27.1 Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by Amendment.
** Filed previously with the initial Registration Statement on Form S-1 (File
No. 333-86501).
+ Confidential treatment has been requested with respect to portions of this
exhibit.
<PAGE> 1
EXHIBIT 3.3
FOURTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
JNI CORP.
JNI Corp., a corporation organized and existing under the laws
of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is JNI Corp., the
corporation was originally incorporated under the name "Jaycor Networks, Inc.",
and the original Certificate of Incorporation of the Corporation was filed with
the Secretary of State of the State of Delaware on January 30, 1997.
2. Pursuant to Sections 242 and 245 of the General
Corporation Law of the State of Delaware, this Fourth Amended and Restated
Certificate of Incorporation restates and integrates and further amends the
provisions of the Certificate of Incorporation of this Corporation.
3. The text of the Certificate of Incorporation as
heretofore amended or supplemented is hereby restated and further amended to
read in its entirety as follows:
"FIRST: The name of the Corporation is JNI Corporation.
SECOND: The address of the registered office of the Corporation in the State of
Delaware is The Corporation Trust Company, 1209 Orange Street, Wilmington,
County of New Castle, Delaware 19801. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or activity
for which a corporation may be organized under the General Corporation Law of
Delaware.
FOURTH:
A. Classes of Stock. The Corporation is authorized to issue a total of one
hundred thirty-five million (135,000,000) shares of stock in two classes,
designated, respectively, "Preferred Stock" and "Common Stock." The total number
of shares of Preferred Stock that the Corporation shall have authority to issue
is thirty five million (35,000,000) par value one-tenth of one cent ($.001) per
share, and the total number of shares of Common Stock that the Corporation shall
have authority to issue is one hundred million (100,000,000), par value
one-tenth of one cent ($.001) per share.
B. Reverse Stock Split. At the effective time of this Certificate of
Incorporation and without further action on the part of the Corporation or the
holders of Common Stock, each one (1) share
1
<PAGE> 2
of Common Stock of the Corporation outstanding or held in treasury immediately
prior thereto shall be changed and converted into seven tenths (.70) of a share
of fully paid and nonasessable Common Stock of the Corporation, and at such time
each holder of record of Common Stock, shall, without further action, be and
become the holder of seven tenths (.70) of a share of Common Stock for each one
(1) share of Common Stock held of record immediately prior thereto.
C. Series of Preferred Stock. The Preferred Stock may be issued from time
to time in one or more series. The first series of Preferred Stock shall consist
of thirty million (30,000,000) shares and shall be designated and known as
"Series A Preferred Stock." The Board of Directors of this Corporation is
authorized to determine or alter the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of Preferred
Stock, and within the limitations or restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the number of shares
constituting any series, to increase or decrease (but not below the number of
shares of any such series then outstanding) the number of shares of any such
series subsequent to the issue of shares of that series, to determine the
designation of any series, and to fix the number of shares of any series.
D. Rights, Preferences, Privileges and Restrictions. The relative powers,
preferences, special rights, qualifications, limitations and restrictions
granted to or imposed on the respective classes of the shares of capital stock
or the holders thereof are as follows:
1. Dividends. The holders of record of the Series A Preferred Stock
shall be entitled to receive cash dividends at an annual rate of eleven cents
($0.11) per share, such dividends to be payable only when, as and if declared by
the Board of Directors out of funds legally available therefor. No dividends or
other distributions shall be made with respect to Common Stock, until all
dividends on the Series A Preferred Stock have been paid or set apart. The right
to such dividends on Series A Preferred Stock shall not be cumulative; and no
rights to such dividends shall accrue to holders of the Series A Preferred Stock
by reason of the fact that dividends on said shares are not declared in any
year. The holders of Series A Preferred Stock shall have no priority or
preference with respect to distributions made by the Corporation in connection
with the repurchase of shares of Common Stock issued to or held by employees,
directors, independent contractors or consultants upon termination of their
employment or services pursuant to agreements providing for the right of said
repurchase between the Corporation and such persons. After the holders of the
Series A Preferred Stock have received their dividend preference as set forth
above, any additional dividends or distributions declared by the Board of
Directors out of funds legally available thereto shall be distributed among all
holders of shares of Common Stock, together with holders of Series A Preferred
Stock, pari passu, in proportion to the number of shares of Common Stock which
would have been held by each such holder if all shares of Series A Preferred
Stock were converted into shares of Common Stock at the then effective
Conversion Price (as defined below).
2
<PAGE> 3
2. Preference on Liquidation.
a. Preference. In the event of any voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation, distributions to the
holders of shares of Common Stock and shares of Preferred Stock shall be made as
follows:
i) The holders of the Series A Preferred Stock then
outstanding shall be entitled to be paid, pro rata, out of the assets of the
Corporation available for distribution to its stockholders, whether from
capital, surplus, or earnings, before any payment shall be made in respect of
the Corporation's shares of Common Stock, an amount equal to $0.47 (the "Series
A Liquidation Preference") for each share of Series A Preferred Stock then held,
plus all declared and unpaid dividends thereon to the date fixed for
distribution, as adjusted to reflect any stock splits, stock dividends, or other
recapitalizations. If upon liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation available for distribution to its
stockholders shall be insufficient to pay the holders of the Series A Preferred
Stock the full amounts to which they shall be entitled as set forth above, the
holders of the Series A Preferred Stock shall receive a proportionate percentage
pro rata distribution of assets according to the amounts which would be payable
in respect of the shares held by them upon such distribution if all amounts
payable on or with respect to said shares were paid in full. After setting apart
or paying in full the preferential amounts due the holders of the Series A
Preferred Stock, the remaining assets of the Corporation available for
distribution to stockholders, if any, shall be distributed to the holders of
shares of Common Stock, together with the holders of Series A Preferred Stock,
pari passu, in proportion to the number of shares of Common Stock which would
have been held by each such holder if all shares of Series A Preferred Stock
were converted into shares of Common Stock at the then effective Conversion
Price.
b. Deemed Liquidations, Dissolutions. The merger or
consolidation of the Corporation into or with any other corporation or
corporations in which the stockholders of this Corporation shall own less than a
majority of the voting securities of the surviving corporation, or the sale,
transfer, or assignment of all or substantially all of the assets of the
Corporation, shall be deemed to be a liquidation, dissolution, or winding up of
the Corporation as those terms are used in this Section 2. Any securities to be
delivered to the holders of the Series A Preferred Stock and Common Stock upon a
merger, reorganization or sale of substantially all of the assets of the
Corporation shall be valued (for purposes of this Section 2 only) as follows:
i) If traded on a securities exchange, the value
shall be deemed to be the average of the closing prices of the securities on
such exchange over the 30-day period ending three (3) business days prior to the
closing;
ii) If actively traded over-the counter, the value
shall be deemed to be the average of the closing bid prices over the 30-day
period ending three (3) business days prior to the closing; and
iii) If there is no active public market, the value
shall be the fair market value thereof, as mutually determined by the
Corporation and all holders of outstanding
3
<PAGE> 4
shares of Series A Preferred Stock, provided that if the Corporation and the
holders of outstanding shares of Series A Preferred Stock are unable to reach
agreement, then the value shall be determined by an independent appraisal by an
investment banker hired and paid for by the Corporation.
3. Voting. Except as required by law or as otherwise set forth
herein, the Series A Preferred Stock shall be voted together, and not separately
as a class, with the Corporation's shares of Common Stock at any annual or
special meeting of the stockholders of the Corporation, or may act by written
consent in the same manner as the Corporation's shares of Common Stock, subject
to the following:
a. Number of Votes. Each holder of Series A Preferred Stock
shall be entitled to such number of votes equal to the whole number of shares of
Common Stock of the Corporation into which the holder's Series A Preferred Stock
are convertible immediately after the close of business on the record date fixed
for such meeting, or, if no record date is established, at the date such vote is
taken, or on the effective date of any such written consent.
b. Election of Directors. The holders of the outstanding
shares of Preferred Stock and shares of Common Stock, voting together as a
single class, shall elect all directors of the Board of Directors.
4. Conversion. The holders of Series A Preferred Stock shall have
the following conversion rights:
a. Right to Convert. Subject to Section 4(c), each share of
Series A Preferred Stock shall be convertible into fully paid and nonassessable
shares of Common Stock of the Corporation, at the option of the holder thereof
at any time after the date of issuance of such share, exercised by delivery of a
written notice to the Secretary of the Corporation. The number of shares of
Common Stock into which each share of Series A Preferred Stock may be converted
shall be determined by dividing $0.47 by the Conversion Price applicable to such
share, determined as hereafter provided, in effect on the date the certificate
is surrendered for conversion. Upon the filing of this Fourth Amended and
Restated Certificate of Incorporation with the Delaware Secretary of State, the
"Conversion Price" per share of Series A Preferred Stock shall be $0.47. The
Conversion Price per share shall be subject to adjustment as set forth in
Section 3(e).
b. Automatic Conversion.
i) Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
Conversion Price upon the closing of a public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, covering
the offer and sale of shares of Common Stock for the account of the Corporation
to the public and resulting in aggregate gross offering proceeds to the
Corporation (before expenses, discounts or commissions) of at least $7,500,000
and at a purchase price of not less than $1.00 per share (as adjusted to reflect
stock splits, stock dividends, or other
4
<PAGE> 5
recapitalizations). In the event of such an offering, the persons(s) entitled to
receive the shares of Common Stock issuable upon such conversion of Series A
Preferred Stock shall not be deemed to have converted until immediately prior to
the closing of such public offering.
ii) Each share of Series A Preferred Stock shall
automatically be converted into shares of Common Stock at the then effective
Conversion Price upon the vote or written consent of the holders of at least
fifty percent (50%) of the authorized shares of Series A Preferred Stock
outstanding.
c. Mechanics of Conversion. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed in blank or accompanied by proper instruments of transfer, at the
office of the Corporation's Secretary, and shall give written notice to the
Corporation at such office that such holder elects to convert the same (except
that no such written notice of election to convert shall be necessary in the
event of an automatic conversion pursuant to subsection 4(b)(i) above) and shall
state in writing therein the name or names in which such holder wishes the
certificate or certificates for shares of Common Stock to be issued. The
Corporation, as soon as practicable thereafter, shall issue and deliver at such
office to such holder or to the holder's nominee, certificates for the full
number of shares of Common Stock to which such holder shall be entitled. Such
conversion shall be deemed to have been made as of the date of such surrender of
the Series A Preferred Stock to be converted (except that in the case of an
automatic conversion pursuant to subsection 4(b) above, such conversion shall be
deemed to have been made immediately prior to the closing of the public
offering) and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on said date.
d. Fractional Shares. In lieu of any fractional shares of
Common Stock to which a holder of Series A Preferred Stock would otherwise be
entitled upon conversion, the Corporation shall pay cash equal to such fraction
multiplied by the fair market value of one Common Share as determined by the
Board.
e. Adjustment of Conversion Price. The Conversion Price of
Series A Preferred Stock shall be subject to adjustment from time to time as
follows:
i) Issuance of Additional Stock Below Purchase
Price. If the Corporation shall issue, after the date upon which any shares of
Series A Preferred were first issued (the "Purchase Date"), any Additional Stock
(as defined below) without consideration or for a consideration per share less
than the Conversion Price in effect immediately prior to the issuance of such
Additional Stock, the Conversion Price in effect immediately prior to each such
issuance shall automatically be adjusted as set forth in this Section 4(e)(i),
unless otherwise provided in this Section 4(e)(i).
(1) Adjustment Formula. Whenever the
Conversion Price is adjusted pursuant to this Section 4(e)(i), the new
Conversion Price shall be determined by
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<PAGE> 6
multiplying the Conversion Price then in effect by a fraction, (x) the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such issuance (the "Outstanding Common") plus the number of shares of
Common Stock that the aggregate consideration received by the Corporation for
such issuance would purchase at such Conversion Price; and (y) the denominator
of which shall be the number of shares of Outstanding Common plus the number of
shares of such Additional Stock. For purposes of the foregoing calculation, the
term "Outstanding Common" shall include shares of Common Stock deemed issued
pursuant to Section 4(e)(i)(5) below but shall not include shares owned or held
by or for the account of the Corporation.
(2) Definition of "Additional Stock." For
purposes of this Section 4(e)(i), "Additional Stock" shall mean any shares of
Common Stock issued (or deemed to have been issued pursuant to Section
4(e)(i)(5) by the Corporation after the Purchase Date) other than
(a) Common Stock issued pursuant to
a transaction described in Section 4(e)(ii) hereof.
(b) Shares of Common Stock issued to
employees, consultants or directors of the Corporation directly or pursuant to a
stock option plan or other employee incentive benefit plan approved by the Board
of Directors of the Corporation.
(c) Warrants to purchase shares of
Preferred Stock or Common Stock, issued or granted to financial institutions or
lessors in connection with commercial credit arrangements, equipment financings
or similar transactions approved in each case by the Board of Directors of the
Corporation.
(d) Shares of Common Stock issued or
issuable upon conversion of the Series A Preferred Stock, and
(e) Shares of Common Stock issued or
issuable in a public offering prior to or in connection with which all
outstanding shares of Preferred Stock will be converted to Common Stock.
(3) No Fractional Adjustments. No adjustment
of the Conversion Price for the Preferred Stock shall be made in an amount less
than one cent per share, provided that any adjustments which are not required to
be made by reason of this sentence shall be carried forward and shall be either
taken into account in any subsequent adjustment made prior to three years from
the date of the event giving rise to the adjustment being carried forward, or
shall be made at the end of three years from the date of the event giving rise
to the adjustment being carried forward.
(4) Determination of Consideration. In the
case of the issuance of Common Stock or other securities for cash, the
consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other
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<PAGE> 7
expenses allowed, paid or incurred by the Corporation for any underwriting or
otherwise in connection with the issuance and sale thereof. In the case of the
issuance of the Common Stock or other securities for a consideration in whole or
in part other than cash, the consideration other than cash shall be deemed to be
the fair market value thereof as determined in good faith by the Board of
Directors irrespective of any accounting treatment and without deduction of any
expenses incurred or commissions or concessions paid or allowed by the
Corporation in connection therewith.
(5) Deemed Issuance of Common Stock. In the
case of the issuance (whether before, on or after the Purchase Date) of options
to purchase or rights to subscribe for Common Stock, securities by their terms
convertible into or exchangeable for Common Stock or options to purchase or
rights to subscribe for such convertible or exchangeable securities, the
following provisions shall apply for all purposes of this Section 4(e)(i):
(a) The aggregate maximum number of
shares of Common Stock deliverable upon exercise (assuming the satisfaction of
any conditions to exercisability, including without limitation, the passage of
time, but without taking into account potential antidilution adjustments) of
such options to purchase or rights to subscribe for Common Stock shall be deemed
to have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
Section 4(e)(i)(4), if any, received by the Corporation upon the issuance of
such options or rights plus the minimum exercise price provided in such options
or rights (without taking into account potential antidilution adjustments) for
the Common Stock covered thereby.
(b) The aggregate maximum number of
shares of Common Stock deliverable upon conversion of or in exchange (assuming
the satisfaction of any conditions to convertibility or exchangeability,
including, without limitation, the passage of time, but without taking into
account potential antidilution adjustments) for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the Corporation
for any such securities and related options or rights (excluding any cash
received on account of accrued interest or accrued dividends), plus the minimum
additional consideration, if any, to be received by the Corporation (without
taking into account potential antidilution adjustments) upon the conversion or
exchange of such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner provided in
Section 4(e)(i)(4)).
(c) In the event of any change in
the number of shares of Common Stock deliverable or in the consideration payable
to the Corporation upon exercise of such options or rights or upon conversion of
or in exchange for such convertible or exchangeable securities, including, but
not limited to, a change resulting from the antidilution provisions thereof, the
Conversion Price of the Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities, shall be recomputed to
reflect such change, but
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<PAGE> 8
no further adjustment shall be made for the actual issuance of Common Stock or
any payment of such consideration upon the exercise of any such options or
rights or the conversion or exchange of such securities.
(d) Upon the expiration of any such options or rights, the
termination of any such rights to convert or exchange or the expiration of any
options or rights related to such convertible or exchangeable securities, the
Conversion Price of the Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities or options or rights related
to such securities, shall be recomputed to reflect the issuance of only the
number of shares of Common Stock (and convertible or exchangeable securities
which remain in effect) actually issued upon the exercise of such options or
rights, upon the conversion or exchange of such securities or upon the exercise
of the options or rights related to such securities.
(e) The number of shares of Common Stock deemed issued and
the consideration deemed paid therefor pursuant to Sections 4(e)(i)(5)(a) and
4(e)(i)(5)(b) shall be appropriately adjusted to reflect any change, termination
or expiration of the type described in either Section 4(e)(i)(5)(c) or
4(e)(i)(5)(d).
(6) No Increased Conversion Price.
Notwithstanding any other provisions of this Section 4(e)(i), except to the
limited extent provided for in Sections 4(e)(i)(5)(c) and 4(e)(i)(5)(d), no
adjustment of the Conversion Price pursuant to this Section 4(e)(i) shall have
the effect of increasing the Conversion Price above the Conversion Price in
effect immediately prior to such adjustment.
ii) Stock Split and Dividends. If the event the
Corporation should at any time or from time to time after the Purchase Date fix
a record date for the effectuation of a split or subdivision of the outstanding
shares of Common Stock or the determination of holders of Common Stock entitled
to receive a dividend or other distribution payable in additional shares of
Common Stock or other securities or rights convertible into, or entitling the
holder thereof to receive directly or indirectly, additional shares of Common
Stock (hereinafter referred to as "Common Stock Equivalents") without payment of
any consideration by such holder for the additional shares of Common Stock or
the Common Stock Equivalents (including the additional shares of Common Stock
issuable upon conversion or exercise thereof), then, as of such record date (or
the date of such dividend distribution, split or subdivision if no record date
is fixed), the Conversion Price of the Preferred Stock shall be appropriately
decreased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be increased in proportion to such increase of
the aggregate of shares of Common Stock outstanding and those issuable with
respect to such Common Stock Equivalents with the number of shares issuable with
respect to Common Stock Equivalents determined from time to time in the manner
provided for deemed issuances in Section 4(e)(i)(5).
iii) Reverse Stock Splits. If the number of shares of
Common Stock outstanding at any time after the Purchase Date is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date of such combination, the Conversion
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<PAGE> 9
Price for the Preferred Stock shall be appropriately increased so that the
number of shares of Common Stock issuable upon conversion of each share of such
series shall be decreased in proportion to such decrease in outstanding shares.
f. Other Distributions. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 4(e), then, in each
such case for the purpose of this Section 4(f), the holders of Preferred Stock
shall be entitled to a proportionate share of any such distribution as though
they were the holders of the number of shares of Common Stock of the Corporation
into which their shares of Preferred Stock are convertible as of the record date
fixed for the determination of the holders of Common Stock of the Corporation
entitled to receive such distribution.
g. Recapitalizations. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
this Section 4 or Section 2) provision shall be made so that the holders of the
Preferred Stock shall thereafter be entitled to receive upon conversion of such
Preferred Stock the number of shares of stock or other securities or property of
the Corporation or otherwise, to which a holder of Common Stock deliverable upon
conversion would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
this Section 4 with respect to the rights of the holders of such Preferred Stock
after the recapitalization to the end that the provisions of this Section 4
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of such Preferred Stock) shall be applicable
after that event and be as nearly equivalent as practicable.
h. No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of Preferred Stock against impairment.
i. Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available, out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the Series A Preferred Stock, the full number of shares of Common
Stock deliverable upon the conversion of all Series A Preferred Stock from time
to time outstanding. The Corporation shall from time to time (subject to
obtaining necessary director and stockholder action), in accordance with the
laws of the State of Delaware, increase the authorized amount of its shares of
Common Stock if at any time the authorized number of shares of Common Stock
remaining unissued shall not be sufficient to permit the conversion of all of
the Series A Preferred Stock at the time outstanding.
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<PAGE> 10
j. No Reissuance of Series A Preferred Stock. Upon
conversion of all outstanding shares of Series A Preferred Stock pursuant to
Section 4, no shares of Series A Preferred Stock acquired by the Corporation by
reason of conversion or otherwise shall be issued or reissued, and all
authorized shares of Series A Preferred Stock shall be canceled, retired and
eliminated from the shares that the Corporation is authorized to issue.
k. Notices. Any notices required by the provisions of this
Section 4 to be given to the holders of Series A Preferred Stock shall be deemed
given three (3) days after deposit in the United States mail, postage prepaid
and addressed to each holder of record at its address appearing on the books of
the Corporation; except that notices given to an address outside of the United
States and Canada shall be deemed given when sent by facsimile transmission with
a confirming copy sent by commercial express delivery service.
5. Protective Provisions. So long as any shares of Series A
Preferred Stock are issued and outstanding, the Corporation shall not, without
first obtaining the approval by vote or written consent of the holders of a
majority in interest of the outstanding shares of Series A Preferred Stock:
a. amend or repeal any provision of the Corporation's
Certificate of Incorporation that would adversely alter or change any of the
rights, preferences, privileges or restrictions of the Series A Preferred Stock
herein provided;
b. authorize or issue shares of any class of stock with a
preference or priority as to dividends or assets superior to or on a parity with
the Series A Preferred Stock;
c. pay or declare any dividend on any securities junior
(with respect to distributions on liquidation) to the Series A Preferred Stock
except for repurchases of securities pursuant to agreements providing for the
right of repurchase between the Corporation and its current and former
employees, directors, independent contractors or consultants; or
d. authorize a merger or consolidation of the Corporation
into or with any other corporation or corporations in which the stockholders of
this Corporation shall own less than a majority of the voting securities of the
surviving corporation, the sale of substantially all the assets of Corporation
or recapitalization or reorganization of the Corporation.
6. Residual Rights. All rights accruing to the outstanding shares
of the Corporation not expressly provided for to the contrary herein shall be
vested with the Common Stock.
FIFTH: The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. In addition to the powers and authority
expressly conferred upon them by Statute or by this Certificate of Incorporation
or the Bylaws of the Corporation, the directors are hereby empowered to exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation. Election of directors need not be by written ballot, unless the
Corporation's Bylaws so provide.
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SIXTH: The Board of Directors is authorized to make, adopt, amend, alter or
repeal the Bylaws of the Corporation. The stockholders shall also have power to
make, adopt, amend, alter or repeal the Bylaws of the Corporation.
SEVENTH: Subject to Section C.5 of Article FOURTH, this Corporation reserves the
right to amend or repeal any of the provisions contained in this Fourth Amended
and Restated Certificate of Incorporation in any manner now or hereafter
permitted by law, and the rights of the stockholders of this Corporation are
granted subject to this reservation.
EIGHTH: To the fullest extent permitted by the Delaware General Corporation Law,
a director of this Corporation shall not be liable to this Corporation or its
stockholders for monetary damages for any breach of fiduciary duties as a
director. If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability of a director,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by the Delaware General Corporation Law,
as so amended. Any repeal or modification of the foregoing provisions of this
Article EIGHTH by the stockholders of the Corporation shall not adversely affect
any right or protection of a director of the Corporation existing at the time of
such repeal or modification.
NINTH: The foregoing Fourth Amended and Restated Certificate of Incorporation
has been duly adopted by the Corporation's Board of Directors in accordance with
the applicable provisions of Sections 242 and 245 of the General Corporation Law
of the State of Delaware. In addition, said Fourth Amended and Restated
Certificate of Incorporation was duly adopted by written consent of the
stockholders of the Corporation in lieu of a meeting in accordance with the
provisions of Section 228 of the General Corporation Law of the State of
Delaware."
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IN WITNESS WHEREOF, this Fourth Amended and Restated Certificate
of Incorporation has been executed by the undersigned duly authorized officer of
the Corporation on this 1st day of October, 1999.
JNI Corp.
a Delaware corporation
By: /s/ Terry M. Flanagan
---------------------------------------
Terry M. Flanagan, President
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CERTIFICATE OF CORRECTION FILED TO CORRECT
A CERTAIN ERROR IN THE FOURTH AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF JNI CORPORATION
FILED IN THE OFFICE OF THE SECRETARY OF STATE OF DELAWARE
ON OCTOBER 1, 1999
JNI Corporation, a corporation organized and existing under and by the virtue of
the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
1. The name of the corporation is JNI Corporation.
2. That a Fourth Amended and Restated Certificate of Incorporation
was filed by the Secretary of State of Delaware on October 1, 1999 and that said
Certificate requires correction as permitted by Section 103 of the General
Corporation Law of the State of Delaware.
3. The inaccuracy or defect of said Certificate to be corrected is
as follows: The Certificate erroneously stated the annual cash dividend rate and
the liquidation preference on the Series A Preferred Stock.
4. Article Fourth, Section B, of the Certificate is corrected to
read as follows:
B. Reverse Stock Split. At the effective time of this
Certificate of Incorporation and without further action on the part of the
Corporation or the holders of Common Stock and/or Preferred Stock, each one (1)
share of Common Stock and/or Preferred Stock of the Corporation outstanding or
held in treasury immediately prior thereto shall be changed and converted into
seven tenths (.70) of a share of fully paid and nonassessable Common Stock
and/or Preferred Stock, as applicable, of the Corporation, and at such time each
holder of record of Common Stock and/or Preferred Stock, shall, without further
action, be and become the holder of seven tenths (.70) of a share of Common
Stock and/or Preferred Stock, as applicable, for each one (1) share of Common
Stock and/or Preferred Stock held of record immediately prior thereto.
5. Article FOURTH, Section D.1, of the Certificate is corrected to
read as follows:
A. Dividends. The holders of record of the Series A
Preferred Stock shall be entitled to receive cash dividends at an annual rate of
eleven cents ($0.11) per share, such dividends to be payable only when, as and
if declared by the Board of Directors out of funds legally available therefor.
No dividends or other distributions shall be made with respect to Common Stock,
until all dividends on the Series A Preferred Stock have been paid or set apart.
The right to such dividends on Series A Preferred Stock shall not be cumulative;
and no rights to such dividends shall accrue to holders of the Series A
Preferred Stock by reason of the fact that dividends on said shares are not
declared in any year. The holders of Series A Preferred Stock shall have no
priority or preference with respect to distributions made by the Corporation in
connection with the repurchase of shares of Common Stock issued to or held by
employees, directors, independent contractors or consultants upon termination of
their employment or services pursuant to agreements providing for the right of
said repurchase between the Corporation and such persons. After the holders of
the Series A Preferred Stock have received their dividend preference as set
forth above, any additional dividends or distributions declared by the Board of
Directors out of funds legally available thereto shall be distributed among all
holders of shares of Common Stock, together with holders of Series A Preferred
Stock, pari passu, in proportion to the number of shares of Common Stock which
would have been held by each such holder if all shares of Series A Preferred
Stock were converted into shares of Common Stock at the then effective
Conversion Price (as defined below).
6. Article FOURTH, Section D.2.a.i), of the Certificate is
corrected to read as
<PAGE> 14
follows:
i) The holders of the Series A Preferred Stock then
outstanding shall be entitled to be paid, pro rata, out of the assets of the
Corporation available for distribution to its stockholders, whether from
capital, surplus, or earnings, before any payment shall be made in respect of
the Corporation's shares of Common Stock, an amount equal to $0.47 (the "Series
A Liquidation Preference") for each share of Series A Preferred Stock then held,
plus all declared and unpaid dividends thereon to the date fixed for
distribution, as adjusted to reflect any stock splits, stock dividends, or other
recapitalizations. If upon liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation available for distribution to its
stockholders shall be insufficient to pay the holders of the Series A Preferred
Stock the full amounts to which they shall be entitled as set forth above, the
holders of the Series A Preferred Stock shall receive a proportionate percentage
pro rata distribution of assets according to the amounts which would be payable
in respect of the shares held by them upon such distribution if all amounts
payable on or with respect to said shares were paid in full. After setting apart
or paying in full the preferential amounts due the holders of the Series A
Preferred Stock, the remaining assets of the Corporation available for
distribution to stockholders, if any, shall be distributed to the holders of
shares of Common Stock, together with the holders of Series A Preferred Stock,
pari passu, in proportion to the number of shares of Common Stock which would
have been held by each such holder if all shares of Series A Preferred Stock
were converted into shares of Common Stock at the then effective Conversion
Price.
7. Article FOURTH, Section D.4.a., of the Certificate is corrected
to read as follows:
a. Right to Convert. Subject to Section 4(c), each share of
Series A Preferred Stock shall be convertible into fully paid and nonassessable
shares of Common Stock of the Corporation, at the option of the holder thereof
at any time after the date of issuance of such share, exercised by delivery of a
written notice to the Secretary of the Corporation. The number of shares of
Common Stock into which each share of Series A Preferred Stock may be converted
shall be determined by dividing $0.47 by the Conversion Price applicable to such
share, determined as hereafter provided, in effect on the date the certificate
is surrendered for conversion. Upon the filing of this Fourth Amended and
Restated Certificate of Incorporation with the Delaware Secretary of State, the
"Conversion Price" per share of Series A Preferred Stock shall be $0.47. The
Conversion Price per share shall be subject to adjustment as set forth in
Section 3(e).
IN WITNESS WHEREOF, JNI Corporation, a Delaware corporation, has caused
this Certificate to be signed by its duly authorized officer this 4th day of
October, 1999.
JNI Corporation
By: /s/ Terry M. Flanagan
------------------------------------
Terry M. Flanagan, President
-2-
<PAGE> 1
EXHIBIT 10.4
JNI CORP.
1999 EMPLOYEE STOCK PURCHASE PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
1.1 ESTABLISHMENT. This 1999 Employee Stock Purchase Plan (the
"PLAN") is hereby established effective as of the effective date of the initial
registration by the Company of its Stock under Section 12 of the Securities
Exchange Act of 1934, as amended (the "EFFECTIVE DATE").
1.2 PURPOSE. The purpose of the Plan is to advance the interests
of Company and its stockholders by providing an incentive to attract, retain and
reward Eligible Employees of the Participating Company Group and by motivating
such persons to contribute to the growth and profitability of the Participating
Company Group. The Plan provides such Eligible Employees with an opportunity to
acquire a proprietary interest in the Company through the purchase of Stock. The
Company intends that the Plan qualify as an "employee stock purchase plan" under
Section 423 of the Code.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued.
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. Any term not expressly defined in the Plan but
defined for purposes of Section 423 of the Code shall have the same definition
herein. Whenever used herein, the following terms shall have their respective
meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company.
If one or more Committees have been appointed by the Board to administer the
Plan, "Board" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means a committee of the Board duly
appointed to administer the Plan and having such powers as shall be specified by
the Board. Unless the powers of the Committee have been specifically limited,
the Committee shall have all of the powers of the Board granted herein,
including, without limitation, the power to amend or terminate the Plan at any
time, subject to the terms of the Plan and any applicable limitations imposed by
law.
(d) "COMPANY" means JNI Corp., a Delaware corporation,
or any successor corporation thereto.
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(e) "COMPENSATION" means, with respect to any Offering
Period, base wages or salary paid in cash during such Offering Period before
deduction for any contributions to any plan maintained by a Participating
Company and described in Section 401(k) or Section 125 of the Code. Compensation
shall not include commissions, overtime, bonuses, annual awards, other incentive
payments, shift premiums, reimbursements of expenses, allowances, long-term
disability, workers' compensation or any amount deemed received without the
actual transfer of cash or any amounts directly or indirectly paid pursuant to
the Plan or any other stock purchase or stock option plan, or any other
compensation not included above.
(f) "ELIGIBLE EMPLOYEE" means an Employee who meets the
requirements set forth in Section 5 for eligibility to participate in the Plan.
(g) "EMPLOYEE" means a person treated as an employee of
a Participating Company for purposes of Section 423 of the Code. A Participant
shall be deemed to have ceased to be an Employee either upon an actual
termination of employment or upon the corporation employing the Participant
ceasing to be a Participating Company. For purposes of the Plan, an individual
shall not be deemed to have ceased to be an Employee while such individual is on
any military leave, sick leave, or other bona fide leave of absence approved by
the Company of ninety (90) days or less. In the event an individual's leave of
absence exceeds ninety (90) days, the individual shall be deemed to have ceased
to be an Employee on the ninety-first (91st) day of such leave unless the
individual's right to reemployment with the Participating Company Group is
guaranteed either by statute or by contract. The Company shall determine in good
faith and in the exercise of its discretion whether an individual has become or
has ceased to be an Employee and the effective date of such individual's
employment or termination of employment, as the case may be. For purposes of an
individual's participation in or other rights, if any, under the Plan as of the
time of the Company's determination, all such determinations by the Company
shall be final, binding and conclusive, notwithstanding that the Company or any
governmental agency subsequently makes a contrary determination.
(h) "ENTRY DATE" means (i) the Offering Date of an
Offering Period, or (ii) with respect to persons who first become Eligible
Employees after the commencement of the Initial Offering Period (as defined in
Section 6.1 below) but prior to the commencement of the final Purchase Period of
the Initial Offering Period, the first day of the Purchase Period following the
date on which such person becomes an Eligible Employee. Notwithstanding the
foregoing, in the event that the Fair Market Value of a share of Stock on the
first, second or third Purchase Date of an Offering Period is less than the Fair
Market Value of a share of Stock on the Entry Date for a Participant who was
participating in the Offering as of such Purchase Date, the Entry Date for such
Participant for the remainder of the Offering shall be the first day of the next
Purchase Period immediately following such Purchase Date.
(i) "FAIR MARKET VALUE" means, as of any date, if there
is then a public market for the Stock, the closing price of a share of Stock (or
the mean of the closing bid and asked prices if the Stock is so quoted instead)
as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or such
other national or regional securities exchange or market system constituting the
primary market for the Stock, as reported in The Wall Street Journal or such
other source as the Company deems reliable. If the relevant date does not fall
on a day on which the Stock has traded on such securities exchange or market
system, the date on which the
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Fair Market Value shall be established shall be the last day on which the Stock
was so traded prior to the relevant date, or such other appropriate day as shall
be determined by the Board, in its discretion. If, as of any date, there is then
no public market for the Stock, the Fair Market Value on any relevant date shall
be as determined by the Board. Notwithstanding the foregoing, the Fair Market
Value per share of Stock on the Effective Date shall be deemed to be the public
offering price set forth in the final prospectus filed with the Securities and
Exchange Commission in connection with the initial public offering of the Stock.
(j) "OFFERING" means an offering of Stock as provided in
Section 6.
(k) "OFFERING DATE" means, for any Offering, the first
day of the Offering Period with respect to such Offering.
(l) "OFFERING PERIOD" means a period established in
accordance with Section 6.1.
(m) "PARENT CORPORATION" means any present or future
"parent corporation" of the Company, as defined in Section 424(e) of the Code.
(n) "PARTICIPANT" means an Eligible Employee who has
become a participant in an Offering Period in accordance with Section 7 and
remains a participant in accordance with the Plan.
(o) "PARTICIPATING COMPANY" means the Company or any
Parent Corporation or Subsidiary Corporation designated by the Board as a
corporation the Employees of which may, if Eligible Employees, participate in
the Plan. The Board shall have the sole and absolute discretion to determine
from time to time which Parent Corporations or Subsidiary Corporations shall be
Participating Companies.
(p) "PARTICIPATING COMPANY GROUP" means, at any point in
time, the Company and all other corporations collectively which are then
Participating Companies.
(q) "PURCHASE DATE" means the last day of any Purchase
Period.
(r) "PURCHASE PERIOD" means a period established in
accordance with Section 6.2.
(s) "PURCHASE PRICE" means the price at which a share of
Stock may be purchased under the Plan, as determined in accordance with Section
9.
(t) "PURCHASE RIGHT" means an option granted to a
Participant pursuant to the Plan to purchase such shares of Stock as provided in
Section 8, which the Participant may or may not exercise during the Offering
Period in which such option is outstanding. Such option arises from the right of
a Participant to withdraw any accumulated payroll deductions of the Participant
not previously applied to the purchase of Stock under the Plan and to terminate
participation in the Plan at any time during an Offering Period.
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(u) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(v) "SUBSCRIPTION AGREEMENT" means a written agreement
in such form as specified by the Company, stating an Employee's election to
participate in the Plan and authorizing payroll deductions under the Plan from
the Employee's Compensation.
(w) "SUBSCRIPTION DATE" means the last business day
prior to an Entry Date or such other date as the Company shall establish.
(x) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular. Use
of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered
by the Board. All questions of interpretation of the Plan, of any form of
agreement or other document employed by the Company in the administration of the
Plan, or of any Purchase Right shall be determined by the Board and shall be
final and binding upon all persons having an interest in the Plan or the
Purchase Right. Subject to the provisions of the Plan, the Board shall determine
all of the relevant terms and conditions of Purchase Rights granted pursuant to
the Plan; provided, however, that all Participants granted Purchase Rights
pursuant to the Plan shall have the same rights and privileges within the
meaning of Section 423(b)(5) of the Code. All expenses incurred in connection
with the administration of the Plan shall be paid by the Company.
3.2 AUTHORITY OF OFFICERS. Any officer of the Company shall have
the authority to act on behalf of the Company with respect to any matter, right,
obligation, determination or election that is the responsibility of or that is
allocated to the Company herein, provided that the officer has apparent
authority with respect to such matter, right, obligation, determination or
election.
3.3 POLICIES AND PROCEDURES ESTABLISHED BY THE COMPANY. The
Company may, from time to time, consistent with the Plan and the requirements of
Section 423 of the Code, establish, change or terminate such rules, guidelines,
policies, procedures, limitations, or adjustments as deemed advisable by the
Company, in its sole discretion, for the proper administration of the Plan,
including, without limitation, (a) a minimum payroll deduction amount required
for participation in an Offering, (b) a limitation on the frequency or number of
changes permitted in the rate of payroll deduction during an Offering, (c) an
exchange ratio applicable to amounts withheld in a currency other than United
States dollars, (d) a payroll deduction greater than or less than the amount
designated by a Participant in order to adjust for the Company's delay or
mistake in processing a Subscription Agreement or in otherwise effecting a
Participant's election under the Plan or as advisable to comply with the
requirements
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of Section 423 of the Code, and (e) determination of the date and manner by
which the Fair Market Value of a share of Stock is determined for purposes of
administration of the Plan.
4. SHARES SUBJECT TO PLAN.
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be two hundred fifty thousand (250,000),
cumulatively increased on January 1, 2001 and each January 1 thereafter until
and including January 1, 2009 by an amount equal to the lesser of (a) one
percent (1%) of the issued and outstanding shares of Stock as of the preceding
December 31, (b) one hundred twenty-five thousand (125,000) shares, or (c) a
lesser amount of shares determined by the Board, and shall consist of authorized
but unissued or reacquired shares of Stock, or any combination thereof. If an
outstanding Purchase Right for any reason expires or is terminated or canceled,
the shares of Stock allocable to the unexercised portion of such Purchase Right
shall again be available for issuance under the Plan.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event
of any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, or in the event of any merger (including a merger effected for the
purpose of changing the Company's domicile), sale of assets or other
reorganization in which the Company is a party, appropriate adjustments shall be
made in the number and class of shares subject to the Plan and each Purchase
Right and in the Purchase Price. If a majority of the shares which are of the
same class as the shares that are subject to outstanding Purchase Rights are
exchanged for, converted into, or otherwise become (whether or not pursuant to
an Ownership Change Event) shares of another corporation (the "NEW SHARES"), the
Board may unilaterally amend the outstanding Purchase Rights to provide that
such Purchase Rights are exercisable for New Shares. In the event of any such
amendment, the number of shares subject to, and the Purchase Price of, the
outstanding Purchase Rights shall be adjusted in a fair and equitable manner, as
determined by the Board, in its sole discretion. Notwithstanding the foregoing,
any fractional share resulting from an adjustment pursuant to this Section 4.2
shall be rounded down to the nearest whole number, and in no event may the
Purchase Price be decreased to an amount less than the par value, if any, of the
stock subject to the Purchase Right. The adjustments determined by the Board
pursuant to this Section 4.2 shall be final, binding and conclusive.
5. ELIGIBILITY.
5.1 EMPLOYEES ELIGIBLE TO PARTICIPATE. Each Employee of a
Participating Company is eligible to participate in the Plan and shall be deemed
an Eligible Employee, except the following:
(a) Any Employee who is customarily employed by the
Participating Company Group for less than twenty (20) hours per week; or
(b) Any Employee who is customarily employed by the
Participating Company Group for not more than five (5) months in any calendar
year.
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5.2 EXCLUSION OF CERTAIN STOCKHOLDERS. Notwithstanding any
provision of the Plan to the contrary, no Employee shall be granted a Purchase
Right under the Plan if, immediately after such grant, such Employee would own
or hold options to purchase stock of the Company or of any Parent Corporation or
Subsidiary Corporation possessing five percent (5%) or more of the total
combined voting power or value of all classes of stock of such corporation, as
determined in accordance with Section 423(b)(3) of the Code. For purposes of
this Section 5.2, the attribution rules of Section 424(d) of the Code shall
apply in determining the stock ownership of such Employee.
6. OFFERINGS.
6.1 OFFERING PERIODS. Except as otherwise set forth below, the
Plan shall be implemented by sequential Offerings of approximately twenty-four
(24) months duration (an "OFFERING PERIOD"); provided, however, that the first
Offering Period shall commence on the Effective Date and end on October 31, 2001
(the "INITIAL OFFERING PERIOD"). Subsequent Offerings shall commence on the
first day of every other November and end on the last day of the second October
occurring thereafter.
6.2 PURCHASE PERIODS. Each Offering Period shall generally
consist of four (4) consecutive Purchase Periods of approximately six (6) months
duration, or such other number or duration as the Board shall determine. The
Purchase Period commencing on the Offering Date of the Initial Offering Period
shall end on the last day of April 2000. A Purchase Period commencing on or
about May 1 shall end on or about the next October 31. A Purchase Period
commencing on or about November 1 shall end on or about the next April 30.
6.3 DISCRETION TO VARY DURATION. Notwithstanding the foregoing,
the Board may establish a different duration for one or more Offering Periods or
Purchase Periods or different commencing or ending dates for such periods;
provided, however, that no Offering Period may have a duration exceeding
twenty-seven (27) months. If the first or last day of an Offering Period or a
Purchase Period is not a day on which the national securities exchanges or
Nasdaq Stock Market are open for trading, the Company shall specify the trading
day that will be deemed the first or last day, as the case may be, of the
period.
7. PARTICIPATION IN THE PLAN.
7.1 INITIAL PARTICIPATION. An Eligible Employee may become a
Participant in an Offering Period by delivering a properly completed
Subscription Agreement to the Company not later than the close of business for
such office on the Subscription Date established by the Company for the
applicable Entry Date. An Eligible Employee who does not deliver a properly
completed Subscription Agreement to the Company's designated office on or before
the Subscription Date shall not participate in that Offering Period or any
subsequent Offering Period unless such Eligible Employee subsequently delivers a
properly completed Subscription Agreement to the appropriate office of the
Company on or before the Subscription Date for such subsequent Offering Period.
An Employee who becomes an Eligible Employee after the Offering Date of an
Offering Period (other than the Initial Offering Period) shall not be eligible
to participate in such Offering Period but may participate in any subsequent
Offering Period
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provided such Employee is still an Eligible Employee as of the Offering Date of
such subsequent Offering Period.
7.2 CONTINUED PARTICIPATION. A Participant shall automatically
participate in the next Offering Period commencing immediately after the final
Purchase Date of each Offering Period in which the Participant participates
provided that such Participant remains an Eligible Employee on the Offering Date
of the new Offering Period and has not either (a) withdrawn from the Plan
pursuant to Section 10.7 or (b) terminated employment as provided in Section 13.
A Participant who may automatically participate in a subsequent Offering Period,
as provided in this Section, is not required to deliver any additional
Subscription Agreement for the subsequent Offering Period in order to continue
participation in the Plan. However, a Participant may deliver a new Subscription
Agreement for a subsequent Offering Period in accordance with the procedures set
forth in Section 7.1 if the Participant desires to change any of the elections
contained in the Participant's then effective Subscription Agreement.
8. RIGHT TO PURCHASE SHARES.
8.1 GRANT OF PURCHASE RIGHT. Except as set forth below, on the
Offering Date of each Offering Period, each Participant in such Offering Period
shall be granted automatically, on his or her Entry Date, a Purchase Right
consisting of an option to purchase, on each Purchase Date within such Offering
Period, that number of whole shares of Stock determined by dividing the
aggregate payroll deductions collected from the Participant by the applicable
Purchase Price on such Purchase Date; provided, that no Participant may purchase
more than one thousand (1,000) shares of Stock on any Purchase Date.
8.2 CALENDAR YEAR PURCHASE LIMITATION. Notwithstanding any
provision of the Plan to the contrary, no Participant shall be granted a
Purchase Right which permits his or her right to purchase shares of Stock under
the Plan to accrue at a rate which, when aggregated with such Participant's
rights to purchase shares under all other employee stock purchase plans of a
Participating Company intended to meet the requirements of Section 423 of the
Code, exceeds Twenty-Five Thousand Dollars ($25,000) in Fair Market Value (or
such other limit, if any, as may be imposed by the Code) for each calendar year
in which such Purchase Right is outstanding at any time. For purposes of the
preceding sentence, the Fair Market Value of shares purchased during a given
Offering Period shall be determined as of the Entry Date for such Offering
Period. The limitation described in this Section shall be applied in conformance
with applicable regulations under Section 423(b)(8) of the Code.
9. PURCHASE PRICE.
The Purchase Price at which each share of Stock may be acquired
in an Offering Period upon the exercise of all or any portion of a Purchase
Right shall be established by the Board; provided, however, that the Purchase
Price shall not be less than eighty-five percent (85%) of the lesser of (a) the
Fair Market Value of a share of Stock on the Participant's Entry Date of the
Offering Period or (b) the Fair Market Value of a share of Stock on the Purchase
Date. Unless otherwise provided by the Board prior to the commencement of an
Offering Period, the Purchase Price for that Offering Period shall be
eighty-five percent (85%) of the
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lesser of (a) the Fair Market Value of a share of Stock on the Participant's
Entry Date of the Offering Period, or (b) the Fair Market Value of a share of
Stock on the Purchase Date.
10. ACCUMULATION OF PURCHASE PRICE THROUGH PAYROLL DEDUCTION.
Shares of Stock acquired pursuant to the exercise of all or any
portion of a Purchase Right may be paid for only by means of payroll deductions
from the Participant's Compensation accumulated during the Offering Period for
which such Purchase Right was granted, subject to the following:
10.1 AMOUNT OF PAYROLL DEDUCTIONS. Except as otherwise provided
herein, the amount to be deducted under the Plan from a Participant's
Compensation on each payday during an Offering Period (after the Participant's
Entry Date) shall be determined by the Participant's Subscription Agreement. The
Subscription Agreement shall set forth the percentage of the Participant's
Compensation to be deducted on each payday during an Offering Period (after the
Participant's Entry Date) in whole percentages of not less than one percent (1%)
(except as a result of an election pursuant to Section 10.3 to stop payroll
deductions made effective following the first payday during an Offering after
the Participant's Entry Date) or more than fifteen percent (15%).
Notwithstanding the foregoing, the Board may change the limits on payroll
deductions effective as of any future Offering Date.
10.2 COMMENCEMENT OF PAYROLL DEDUCTIONS. Payroll deductions
shall commence on the first payday following the Entry Date and shall continue
to the end of the Offering Period unless sooner altered or terminated as
provided herein.
10.3 ELECTION TO CHANGE OR STOP PAYROLL DEDUCTIONS. During an
Offering Period, a Participant may elect to increase or decrease the rate of or
to stop deductions from his or her Compensation by delivering to the Company an
amended Subscription Agreement authorizing such change on or before the "Change
Notice Date." The "CHANGE NOTICE DATE" shall be a date prior to the beginning of
the first pay period for which such election is to be effective as established
by the Company from time to time and announced to the Participants. A
Participant who elects to decrease the rate of his or her payroll deductions to
zero percent (0%) shall nevertheless remain a Participant in the current
Offering Period unless such Participant withdraws from the Plan as provided in
Section 12.1.
10.4 ADMINISTRATIVE SUSPENSION OF PAYROLL DEDUCTIONS. The
Company may, in its sole discretion, suspend a Participant's payroll deductions
under the Plan as the Company deems advisable to avoid accumulating payroll
deductions in excess of the amount that could reasonably be anticipated to
purchase the maximum number of shares of Stock permitted during a calendar year
under the limit set forth in Section 8.2. Payroll deductions shall be resumed at
the rate specified in the Participant's then effective Subscription Agreement at
the beginning of the next Purchase Period the Purchase Date of which falls in
the following calendar year.
10.5 PARTICIPANT ACCOUNTS. Individual bookkeeping accounts shall
be maintained for each Participant. All payroll deductions from a Participant's
Compensation shall be credited to such Participant's Plan account and shall be
deposited with the general funds of
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the Company. All payroll deductions received or held by the Company may be used
by the Company for any corporate purpose.
10.6 NO INTEREST PAID. Interest shall not be paid on sums
deducted from a Participant's Compensation pursuant to the Plan.
10.7 VOLUNTARY WITHDRAWAL FROM PLAN ACCOUNT. A Participant may
withdraw all or any portion of the payroll deductions credited to his or her
Plan account and not previously applied toward the purchase of Stock by
delivering to the Company a written notice on a form provided by the Company for
such purpose. A Participant who withdraws the entire remaining balance credited
to his or her Plan account shall be deemed to have withdrawn from the Plan in
accordance with Section 12.1. Amounts withdrawn shall be returned to the
Participant as soon as practicable after the withdrawal and may not be applied
to the purchase of shares in any Offering under the Plan. The Company may from
time to time establish or change limitations on the frequency of withdrawals
permitted under this Section, establish a minimum dollar amount that must be
retained in the Participant's Plan account, or terminate the withdrawal right
provided by this Section.
11. PURCHASE OF SHARES.
11.1 EXERCISE OF PURCHASE RIGHT. On each Purchase Date, each
Participant who has not withdrawn from the Plan and whose participation in the
Offering has not terminated before such Purchase Date shall automatically
acquire pursuant to the exercise of the Participant's Purchase Right the number
of whole shares of Stock determined by dividing (a) the total amount of the
Participant's payroll deductions accumulated in the Participant's Plan account
during the Purchase Period and not previously applied toward the purchase of
Stock by (b) the Purchase Price. No shares of Stock shall be purchased on a
Purchase Date on behalf of a Participant whose participation in the Offering or
the Plan has terminated before such Purchase Date.
11.2 PRO RATA ALLOCATION OF SHARES. In the event that the number
of shares of Stock which might be purchased by all Participants in the Plan on a
Purchase Date exceeds the number of shares of Stock available in the Plan as
provided in Section 4.1, the Company shall make a pro rata allocation of the
remaining shares in as uniform a manner as shall be practicable and as the
Company shall determine to be equitable. Any fractional share resulting from
such pro rata allocation to any Participant shall be disregarded.
11.3 DELIVERY OF CERTIFICATES. As soon as practicable after each
Purchase Date, the Company shall arrange the delivery to each Participant, as
appropriate, of a certificate representing the shares acquired by the
Participant on such Purchase Date; provided that the Company may deliver such
shares to a broker that holds such shares in street name for the benefit of the
Participant. Shares to be delivered to a Participant under the Plan shall be
registered in the name of the Participant, or, if requested by the Participant,
in the name of the Participant and his or her spouse, or, if applicable, in the
names of the heirs of the Participant.
11.4 RETURN OF CASH BALANCE. Any cash balance remaining in a
Participant's Plan account following any Purchase Date shall be refunded to the
Participant as soon as
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practicable after such Purchase Date. However, if the cash to be returned to a
Participant pursuant to the preceding sentence is an amount less than the amount
that would have been necessary to purchase an additional whole share of Stock on
such Purchase Date, the Company may retain such amount in the Participant's Plan
account to be applied toward the purchase of shares of Stock in the subsequent
Purchase Period or Offering Period, as the case may be.
11.5 TAX WITHHOLDING. At the time a Participant's Purchase Right
is exercised, in whole or in part, or at the time a Participant disposes of some
or all of the shares of Stock he or she acquires under the Plan, the Participant
shall make adequate provision for the foreign, federal, state and local tax
withholding obligations of the Participating Company Group, if any, which arise
upon exercise of the Purchase Right or upon such disposition of shares,
respectively. The Participating Company Group may, but shall not be obligated
to, withhold from the Participant's compensation the amount necessary to meet
such withholding obligations.
11.6 EXPIRATION OF PURCHASE RIGHT. Any portion of a
Participant's Purchase Right remaining unexercised after the end of the Offering
Period to which the Purchase Right relates shall expire immediately upon the end
of the Offering Period.
11.7 REPORTS TO PARTICIPANTS. Each Participant who has exercised
all or part of his or her Purchase Right shall receive, as soon as practicable
after the Purchase Date, a report of such Participant's Plan account setting
forth the total payroll deductions accumulated prior to such exercise, the
number of shares of Stock purchased, the Purchase Price for such shares, the
date of purchase and the cash balance, if any, remaining immediately after such
purchase that is to be refunded or retained in the Participant's Plan account
pursuant to Section 11.4. The report required by this Section may be delivered
in such form and by such means, including by electronic transmission, as the
Company may determine.
12. WITHDRAWAL FROM OFFERING OR PLAN.
12.1 VOLUNTARY WITHDRAWAL FROM THE PLAN. A Participant may
withdraw from the Plan by signing and delivering to the Company a written notice
of withdrawal on a form provided by the Company for such purpose. Such
withdrawal may be elected at any time prior to the end of an Offering Period;
provided, however, that if a Participant withdraws from the Plan after the
Purchase Date of a Purchase Period, the withdrawal shall not affect shares of
Stock acquired by the Participant on such Purchase Date. A Participant who
voluntarily withdraws from the Plan is prohibited from resuming participation in
the Plan in the same Offering from which he or she withdrew, but may participate
in any subsequent Offering by again satisfying the requirements of Sections 5
and 7.1. The Company may impose a requirement that the notice of withdrawal from
the Plan be on file with the Company for a reasonable period prior to the
effectiveness of the Participant's withdrawal.
12.2 RETURN OF PAYROLL DEDUCTIONS. Upon a Participant's
voluntary withdrawal from the Plan pursuant to Section 12.1, the Participant's
accumulated payroll deductions which have not been applied toward the purchase
of shares of Stock shall be refunded to the Participant as soon as practicable
after the withdrawal, without the payment of any interest, and the Participant's
interest in the Plan or the Offering, as applicable, shall terminate.
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Such accumulated payroll deductions to be refunded in accordance with this
Section may not be applied to any other Offering under the Plan.
13. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
Upon a Participant's ceasing, prior to a Purchase Date, to be an
Employee of the Participating Company Group for any reason, including
retirement, disability or death, or the failure of a Participant to remain an
Eligible Employee, the Participant's participation in the Plan shall terminate
immediately. In such event, the payroll deductions credited to the Participant's
Plan account since the last Purchase Date shall, as soon as practicable, be
returned to the Participant or, in the case of the Participant's death, to the
Participant's legal representative, and all of the Participant's rights under
the Plan shall terminate. Interest shall not be paid on sums returned pursuant
to this Section 13. A Participant whose participation has been so terminated may
again become eligible to participate in the Plan by again satisfying the
requirements of Sections 5 and 7.1.
14. CHANGE IN CONTROL.
14.1 DEFINITIONS.
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, the
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting stock of the Company or the corporation or corporations to
which the assets of the Company were transferred (the "TRANSFEREE
CORPORATION(S)"), as the case may be. For purposes of the preceding sentence,
indirect beneficial ownership shall include, without limitation, an interest
resulting from ownership of the voting stock of one or more corporations which,
as a result of the Transaction, own the Company or the Transferee
Corporation(s), as the case may be, either directly or through one or more
subsidiary corporations. The Board shall have the right to determine whether
multiple sales or exchanges of the voting stock of the Company or multiple
Ownership Change Events are related, and its determination shall be final,
binding and conclusive.
14.2 EFFECT OF CHANGE IN CONTROL ON PURCHASE RIGHTS. In the
event of a Change in Control, the surviving, continuing, successor, or
purchasing corporation or parent corporation thereof, as the case may be (the
"ACQUIRING CORPORATION"), may assume the Company's rights and obligations under
the Plan. If the Acquiring Corporation elects not to
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assume the Company's rights and obligations under outstanding Purchase Rights,
the Purchase Date of the then current Purchase Period shall be accelerated to a
date before the date of the Change in Control specified by the Board, but the
number of shares of Stock subject to outstanding Purchase Rights shall not be
adjusted. All Purchase Rights which are neither assumed by the Acquiring
Corporation in connection with the Change in Control nor exercised as of the
date of the Change in Control shall terminate and cease to be outstanding
effective as of the date of the Change in Control.
15. NONTRANSFERABILITY OF PURCHASE RIGHTS.
A Purchase Right may not be transferred in any manner otherwise
than by will or the laws of descent and distribution and shall be exercisable
during the lifetime of the Participant only by the Participant.
16. COMPLIANCE WITH SECURITIES LAW.
The issuance of shares under the Plan shall be subject to
compliance with all applicable requirements of federal, state and foreign law
with respect to such securities. A Purchase Right may not be exercised if the
issuance of shares upon such exercise would constitute a violation of any
applicable federal, state or foreign securities laws or other law or regulations
or the requirements of any securities exchange or market system upon which the
Stock may then be listed. In addition, no Purchase Right may be exercised unless
(a) a registration statement under the Securities Act of 1933, as amended, shall
at the time of exercise of the Purchase Right be in effect with respect to the
shares issuable upon exercise of the Purchase Right, or (b) in the opinion of
legal counsel to the Company, the shares issuable upon exercise of the Purchase
Right may be issued in accordance with the terms of an applicable exemption from
the registration requirements of said Act. The inability of the Company to
obtain from any regulatory body having jurisdiction the authority, if any,
deemed by the Company's legal counsel to be necessary to the lawful issuance and
sale of any shares under the Plan shall relieve the Company of any liability in
respect of the failure to issue or sell such shares as to which such requisite
authority shall not have been obtained. As a condition to the exercise of a
Purchase Right, the Company may require the Participant to satisfy any
qualifications that may be necessary or appropriate, to evidence compliance with
any applicable law or regulation, and to make any representation or warranty
with respect thereto as may be requested by the Company.
17. RIGHTS AS A STOCKHOLDER AND EMPLOYEE.
A Participant shall have no rights as a stockholder by virtue of
the Participant's participation in the Plan until the date of the issuance of a
certificate for the shares purchased pursuant to the exercise of the
Participant's Purchase Right (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company). No
adjustment shall be made for dividends, distributions or other rights for which
the record date is prior to the date such certificate is issued, except as
provided in Section 4.2. Nothing herein shall confer upon a Participant any
right to continue in the employ of the Participating Company Group or interfere
in any way with any right of the Participating Company Group to terminate the
Participant's employment at any time.
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18. LEGENDS.
The Company may at any time place legends or other identifying
symbols referencing any applicable federal, state or foreign securities law
restrictions or any provision convenient in the administration of the Plan on
some or all of the certificates representing shares of Stock issued under the
Plan. The Participant shall, at the request of the Company, promptly present to
the Company any and all certificates representing shares acquired pursuant to a
Purchase Right in the possession of the Participant in order to carry out the
provisions of this Section. Unless otherwise specified by the Company, legends
placed on such certificates may include but shall not be limited to the
following:
"THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION
TO THE REGISTERED HOLDER UPON THE PURCHASE OF SHARES UNDER AN EMPLOYEE STOCK
PURCHASE PLAN AS DEFINED IN SECTION 423 OF THE INTERNAL REVENUE CODE OF 1986, AS
AMENDED. THE TRANSFER AGENT FOR THE SHARES EVIDENCED HEREBY SHALL NOTIFY THE
CORPORATION IMMEDIATELY OF ANY TRANSFER OF THE SHARES BY THE REGISTERED HOLDER
HEREOF. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE PLAN IN
THE REGISTERED HOLDER'S NAME (AND NOT IN THE NAME OF ANY NOMINEE)."
19. NOTIFICATION OF SALE OF SHARES.
The Company may require the Participant to give the Company
prompt notice of any disposition of shares acquired by exercise of a Purchase
Right within two (2) years from the date of granting such Purchase Right or one
(1) year from the date of exercise of such Purchase Right. The Company may
require that until such time as a Participant disposes of shares acquired upon
exercise of a Purchase Right, the Participant shall hold all such shares in the
Participant's name (or, if elected by the Participant, in the name of the
Participant and his or her spouse but not in the name of any nominee) until the
lapse of the time periods with respect to such Purchase Right referred to in the
preceding sentence. The Company may direct that the certificates evidencing
shares acquired by exercise of a Purchase Right refer to such requirement to
give prompt notice of disposition.
20. NOTICES.
All notices or other communications by a Participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
21. INDEMNIFICATION.
In addition to such other rights of indemnification as they may
have as members of the Board or officers or employees of the Participating
Company Group, members of the Board and any officers or employees of the
Participating Company Group to whom authority to act for the Board or the
Company is delegated shall be indemnified by the Company against all reasonable
expenses, including attorneys' fees, actually and necessarily incurred in
connection
13
<PAGE> 14
with the defense of any action, suit or proceeding, or in connection with any
appeal therein, to which they or any of them may be a party by reason of any
action taken or failure to act under or in connection with the Plan, or any
right granted hereunder, and against all amounts paid by them in settlement
thereof (provided such settlement is approved by independent legal counsel
selected by the Company) or paid by them in satisfaction of a judgment in any
such action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in such action, suit or proceeding that such person is liable
for gross negligence, bad faith or intentional misconduct in duties; provided,
however, that within sixty (60) days after the institution of such action, suit
or proceeding, such person shall offer to the Company, in writing, the
opportunity at its own expense to handle and defend the same.
22. AMENDMENT OR TERMINATION OF THE PLAN.
The Board may at any time amend or terminate the Plan, except
that (a) such termination shall not affect Purchase Rights previously granted
under the Plan, provided that the Board may terminate the Plan (and any Offering
thereunder) on any Purchase Date if the Board determines that such termination
is in the best interests of the Company and its stockholders except as permitted
under the Plan, and (b) no amendment may adversely affect a Purchase Right
previously granted under the Plan (except to the extent permitted by the Plan or
as may be necessary to qualify the Plan as an employee stock purchase plan
pursuant to Section 423 of the Code or to obtain qualification or registration
of the shares of Stock under applicable federal, state or foreign securities
laws). In addition, an amendment to the Plan must be approved by the
stockholders of the Company within twelve (12) months of the adoption of such
amendment if such amendment would authorize the sale of more shares than are
authorized for issuance under the Plan or would change the definition of the
corporations that may be designated by the Board as Participating Companies.
14
<PAGE> 15
JNI CORP.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
NAME (Please print): ___________________________________________________________
(Last) (First) (Middle)
ADDRESS: _______________________________________________________________________
MY SOCIAL SECURITY NUMBER: _____________________________________________________
[ ] Original Application for the Offering Period beginning ____________________,
199__.
[ ] Change in Payroll Deduction rate effective with the pay period ending
___________________, 199__.
I hereby elect to participate in the 1999 Employee Stock Purchase Plan
(the "PLAN") of JNI Corp. (the "COMPANY") and subscribe to purchase shares of
the Company's Stock in accordance with this Subscription Agreement and the Plan.
I hereby authorize payroll deductions in the amount of ________ percent
(in whole percentages not less than 1% or more than 15%) of my "Compensation" on
each payday throughout the "OFFERING PERIOD" in accordance with the Plan. I
understand that these payroll deductions will be accumulated for the purchase of
shares of Stock at the applicable purchase price determined in accordance with
the Plan. I understand that, except as otherwise provided by the Plan, I will
automatically purchase shares on each Purchase Date under the Plan unless I
withdraw from the Plan by giving written notice on a form provided by the
Company or unless my employment terminates.
I understand that I will automatically participate in each subsequent
Offering that commences immediately after the last day of an Offering in which I
am participating until I withdraw from the Plan by giving written notice on a
form provided by the Company or my employment terminates.
Shares I purchase under the Plan should be issued in the name(s) set
forth below. (Shares may be issued in the participant's name alone or together
with the participant's spouse as community property or in joint tenancy.)
NAME(S): _______________________________________________________________
[ ] In my name alone [ ] Community Property [ ] Joint Tenancy
I agree to make adequate provision for the federal, state, local and
foreign tax withholding obligations, if any, which may arise upon my purchase of
shares under the Plan and/or my disposition of such shares. The Company may, but
will not be obligated to, withhold from my compensation the amount necessary to
meet such withholding obligations.
I agree that while I hold shares acquired under the Plan, unless
otherwise permitted by the Company, I will hold such shares in the name(s)
entered above (and not in the name of any nominee). This restriction only
applies to the name(s) in which shares are held and does not affect my ability
to dispose of Plan shares.
THE TAX TREATMENT OF A DISPOSITION OF PLAN SHARES (INCLUDING A GIFT)
DEPENDS ON WHEN THE DISPOSITION OCCURS. I AGREE THAT I WILL NOTIFY THE CHIEF
FINANCIAL OFFICER OF THE COMPANY IN WRITING WITHIN 30 DAYS AFTER ANY DISPOSITION
OF PLAN SHARES THAT OCCURS WITHIN 2 YEARS AFTER THE ENTRY DATE OR 1 YEAR AFTER
THE PURCHASE DATE (A "DISQUALIFYING DISPOSITION"). I FURTHER AGREE THAT IF I DO
NOT RESPOND WITHIN 30 DAYS TO A COMPANY SURVEY DELIVERED TO ME REQUESTING
INFORMATION ABOUT A POSSIBLE DISQUALIFYING DISPOSITION, THE COMPANY MAY (1)
TREAT MY NONRESPONSE AS MY NOTICE TO THE COMPANY THAT A DISQUALIFYING
DISPOSITION OCCURRED, AND (2) REPORT THE ORDINARY INCOME I MUST RECOGNIZE AS A
RESULT OF THE DISQUALIFYING DISPOSITION TO THE INTERNAL REVENUE SERVICE.
I am familiar with the provisions of the Plan and agree to participate
in the Plan subject to all of its provisions. I understand that the Board of
Directors of the Company reserves the right to terminate the Plan or to amend
the Plan and my right to purchase stock under the Plan to the extent provided by
the Plan. I understand that the effectiveness of this Subscription Agreement is
dependent upon my eligibility to participate in the Plan.
Date: __________________ Signature: _________________________________________
<PAGE> 16
JNI CORP.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
NAME (Please print): ___________________________________________________________
(Last) (First) (Middle)
I hereby elect to withdraw from the Offering under JNI Corp. 1999
Employee Stock Purchase Plan (the "PLAN") which began on
_________________________, 19____ and in which I am currently participating (the
"CURRENT OFFERING").
ELECT EITHER A OR B BELOW:
[ ] A. I elect to terminate immediately my participation in the Current
Offering and in the Plan.
I request that the Company cease all further payroll deductions from my
Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll deductions
credited to my account under the Plan (if any) not previously used to
purchase shares under the Plan shall not be used to purchase shares on
the next Purchase Date of the Current Offering. Instead, I request that
all such amounts be paid to me as soon as practicable. I understand that
this election immediately terminates my interest in the Current Offering
and in the Plan.
[ ] B. I elect to terminate my participation in the Current Offering and in
the Plan following my purchase of shares on next Purchase Date of the
Current Offering.
I request that the Company cease all further payroll deductions from my
Compensation under the Plan (provided that I have given sufficient
notice prior to the next payday). I request that all payroll deductions
credited to my account under the Plan (if any) not previously used to
purchase shares under the Plan shall be used to purchase shares on the
next Purchase Date of the Current Offering to the extent permitted by
the Plan. I understand that this election will terminate my interest in
the Current Offering and in the Plan immediately following such
purchase. I request that any cash balance remaining in my account under
the Plan after my purchase of shares be paid to me as soon as
practicable.
I understand that by making this election I am terminating my interest
in the Plan and that no further payroll deductions will be made (provided that I
have given sufficient notice prior to the next payday) unless I elect in
accordance with the Plan to become a participant in another Offering under the
Plan by filing a new Subscription Agreement with the Company.
Date: __________________ Signature: _________________________________________
<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
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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>
-ii-
<PAGE> 4
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
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>
-iii-
<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.
1
<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 *
, to the extent that Seller determines that such *
document is a binding contract with * 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 * or
other compensation claimed by * under Section 19 of such *
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
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<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:
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<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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<PAGE> 15
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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<PAGE> 16
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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<PAGE> 17
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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<PAGE> 18
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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<PAGE> 19
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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<PAGE> 20
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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<PAGE> 21
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 * -Related Obligations. Purchaser shall reasonably cooperate
with Seller in Seller's efforts to assign to Purchaser the *
described in Section 2.3(a)(i), such cooperation by way of
example might include, at the reasonable request of Seller, meeting with * ,
providing information regarding Purchaser's technical capabilities to * 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 * under such *
and (ii) cooperate with Seller in Seller's efforts to limit any
damages or claims of * under such * . The parties
further agree that they will negotiate in good faith regarding the treatment of
any other pre-Closing obligations related to such *
that are discovered after the Closing.
25
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 30
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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<PAGE> 33
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
29
<PAGE> 34
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
30
<PAGE> 35
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.
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<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
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<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.
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<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
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 10.10
FIBRE CHANNEL CROSS-LICENSE AGREEMENT
BETWEEN
JNI AND ADAPTEC
This Fibre Channel Cross-License Agreement (the "AGREEMENT") is made
effective as of November 12, 1998 (the "EFFECTIVE DATE"), by and between
Adaptec, Inc., having a place of business at 691 South Milpitas Boulevard,
Milpitas, California 95035 ("ADAPTEC"), and Jaycor Networks, Inc., having a
place of business at 9775 Towne Centre Drive, San Diego, California 92121
("JNI").
RECITALS
A. Adaptec and JNI are entering into that certain Asset Acquisition
Agreement of even date herewith (the "ASSET ACQUISITION AGREEMENT") under which
JNI is acquiring from Adaptec certain assets and rights with respect to
Adaptec's fibre channel host bus adapters and PCI to fibre channel controllers
products.
B. JNI desires that Adaptec grant to JNI a non-exclusive license to
certain fibre channel technology used by Adaptec in connection with its
non-fibre channel-related products.
C. Adaptec desires that JNI grant to Adaptec a non-exclusive license to
use any error corrections, updates and other future versions and releases of
such Adaptec fibre channel technology developed by JNI to enable Adaptec to
integrate JNI's chip-level fibre channel products in and with Adaptec products
and to distribute such integrated products, and to distribute such error
corrections, updates and future versions and releases with fibre channel
products supplied by JNI or its licensees.
NOW, THEREFORE, Adaptec and JNI agree as follows
1. DEFINITIONS.
1.1 "ADAPTEC LICENSED TECHNOLOGY" means the Adaptec fibre channel
firmware and software and blocks identified in Exhibit A hereto.
1.2 "ADAPTEC LICENSED PATENTS" means the issued patents, patent
applications and invention disclosures identified in Exhibit B hereto.
1.3 "ADAPTEC REMUS SOFTWARE" means the Adaptec software
identified in Exhibit A hereto and any error corrections and updates for such
software that Adaptec provides to JNI pursuant to Section 2.2(e).
1.4 "FIBRE CHANNEL PRODUCTS" means the fibre channel chip-level
and boardlevel products identified in Schedule 1.9 of the Asset Acquisition
Agreement and other fibre channel products based on such products. Fibre Channel
Products include without limitation the Completed Fibre Channel Products (as
defined in the Asset Acquisition Agreement) and Incomplete Fibre Channel
Products (as defined in the Asset Acquisition Agreement).
<PAGE> 2
1.5 "JNI LICENSED TECHNOLOGY" means any and all error
corrections, updates and future versions or releases of the fibre channel chip
firmware and software identified in Exhibit C hereto developed by or for JNI
during a five (5) year period commencing as of the Effective Date and which are
incorporated into Fibre Channel Products purchased by Adaptec from JNI or its
licensees.
1.6 "INTELLECTUAL PROPERTY RIGHTS" means patent rights (including
patent applications and disclosures), rights of priority, mask work rights,
industrial design rights, copyrights, trade secrets, know-how and any other
intellectual property rights recognized in any country or jurisdiction in the
world.
2. CROSS-LICENSES.
2.1 Adaptec Licensed Technology License.
(a) License Grant. Subject to the terms and conditions of
this Agreement, Adaptec grants JNI an irrevocable, perpetual, non-exclusive,
worldwide, fully paid and royalty-free license under all of Adaptec's
Intellectual Property Rights in the Adaptec Licensed Technology to use, copy and
modify such technology solely in connection with the design, development,
manufacture, licensing, distribution and sale of Fibre Channel Products.
(b) Sublicensable Rights. As to the "Fibre Channel SlimHIM
code" and "Fibre Channel CHIM code" components of the Adaptec Licensed
Technology identified in Exhibit A hereto, JNI will have the right to sublicense
the rights set forth in subsection (a) to JNI's customers of the Fibre Channel
Products. As to all other components of the Adaptec Licensed Technology
identified in Exhibit A hereto, JNI will have no right to sublicense the rights
set forth in subsection (a).
(c) Scope of License Expansion. JNI will have the right to
exercise the license rights granted under subsection (a) in connection with the
design, development, manufacture, licensing, distribution and sale of products
other than Fibre Channel Products, as approved in advance in writing by Adaptec,
which approval will not be unreasonably withheld.
2.2 Adaptec Remus Software License.
(a) License Grant. Subject to the terms and conditions of
this Agreement, Adaptec grants JNI an irrevocable, perpetual, non-exclusive,
non-sublicensable, worldwide, royaltybearing license under all of Adaptec's
Intellectual Property Rights in the Adaptec Remus Software to reproduce and
distribute the Adaptec Remus Software, in binary code form, solely in connection
with JNI's distribution and sale of Fibre Channel Products to Avid Technology,
Inc. ("AVID"). JNI's rights in the Adaptec Remus Software will be limited to
those expressly granted in this Section 2.2. Adaptec reserves all rights and
licenses in and to the Adaptec Remus Software not expressly granted to JNI
under this Agreement.
(b) Royalty Payment and Payment Terms. For each copy of
the Adaptec Remus Software distributed by JNI, JNI will pay Adaptec a
* . Within *
, JNI will deliver to
2
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 3
Adaptec a written report showing all information reasonably necessary for
Adaptec to compute the amount of royalties payable by JNI for the applicable
calendar quarter. JNI will pay any royalties due at the time such report is
provided to Adaptec. All payments made under this Agreement after their due date
will incur interest at a rate equal to one percent (1.0%) per month or the
highest rate permitted by applicable law, whichever is lower. JNI will pay to
Adaptec all amounts payable under this Agreement by check or, at Adaptec's
option, by bank-to-bank wire transfer to an account designated by Adaptec.
(c) Taxes. All amounts payable by JNI under this Section
2.2 are exclusive of all sales, use, and other taxes and duties. JNI will be
responsible for all such taxes and duties and will indemnify and hold Adaptec
harmless from and against any obligation liability or claim imposed on Adaptec
by any taxing authority to pay any such taxes and duties.
(d) JNI's Records and Audit. JNI will maintain complete
and accurate records regarding the Adaptec Remus Software for a period of one
(1) year after the distribution of such software. Adaptec will have the right,
upon reasonable notice and during normal business hours, to appoint an Adaptec
representative, mutually agreed to by both parties, to audit such records. If,
upon performing such audit, it is determined that JNI has underpaid Adaptec by
an amount greater than five percent (5%) of the payments due Adaptec under
subsection (b) in the period being audited, JNI will immediately reimburse
Adaptec for all reasonable expenses and costs incurred by Adaptec in connection
with such audit in addition to its obligation to make full payment under
subsection (b).
(e) Support. Adaptec; will provide JNI, at no additional
cost, with those error corrections and updates for the Adaptec Remus Software
that Adaptec provides generally to its other licensee of such software.
Adaptec's obligation under this subsection (e) will remain in effect until the
earlier of Adaptec's discontinuance of support for such software or the last
shipment by JNI to Avid of the Fibre Channel Product in connection with which
such software is used.
2.3 Adaptec Board Testing Software License Grant. Subject to the
terms and conditions of this Agreement, Adaptec grants JNI an irrevocable,
perpetual, non-exclusive, worldwide, fully paid and royalty-free license under
all of Adaptec's Intellectual Property Rights in the component of the Adaptec
Licensed Technology identified in Exhibit A hereto as "board testing software"
to use such software solely in connection with the design, development and
manufacture of board-level Fibre Channel Products.
2.4 Adaptec Licensed Patents License Grant. Subject to the
terms and conditions of this Agreement, Adaptec grants JNI a an irrevocable,
perpetual, non-exclusive, non-sublicensable, worldwide, fully paid and
royalty-free license to practice the Adaptec Licensed Patents solely to make,
have made, use, import and sell Fibre Channel Products.
2.5 JNI Licensed Technology License.
(a) License Grant. Subject to the terms and conditions of
this Agreement, JNI grants Adaptec an irrevocable, perpetual, non-exclusive,
non-sublicensable, worldwide, fully-
3
<PAGE> 4
paid and royalty-free license under all of JNI's Intellectual Property Rights in
the JNI Licensed Technology as follows:
(i) As to the "Fibre Channel sequencer code," Fibre
Channel SlimHIM code," and "Fibre Channel CHIM code" components of the JNI
Licensed Technology identified in Exhibit C hereto, Adaptec will have the right
to reproduce and modify such components, in source code form, to integrate
chip-level Fibre Channel Products supplied by JNI or its licensees in and with
Adaptec products and to distribute (directly and indirectly) such integrated
products;
(ii) As to the "OSMs" and "Fibre Channel BIOS"
components of the JNI Licensed Technology identified in Exhibit C hereto:
(A) Adaptec will have the right to reproduce
and modify such components, in source code form, solely in connection with
RAID-related applications (and any other non-competitive application type, as
approved in advance in writing by JNI, which approval will not be unreasonably
withheld); and
(B) Adaptec will have the right to
distribute (directly and indirectly) such components, unmodified or modified by
Adaptec, in binary code form, with any Fibre Channel Products supplied by JNI
or its licensees.
(b) Adaptec Affiliates. The rights granted to Adaptec
under subsection (a) above may be exercised by any Adaptec Affiliate. For
purposes of this Section, an "Adaptec Affiliate" means any entity (excluding a
direct competitor of JNI) which controls, is controlled by, or is under common
control with, Adaptec, where "control" means having the ability to elect a
majority of the board of directors or a similar governing body.
(c) Delivery of JNI Licensed Technology. JNI will promptly
provide Adaptec all JNI Licensed Technology, as soon as JNI furnishes or
otherwise makes available such JNI Licensed Technology to any other third-party.
3. OWNERSHIP.
3.1 Ownership Rights. Adaptec presently owns and, notwithstanding
this Agreement, will continue to own all worldwide right, title and interest in
and to the Adaptec Licensed Technology and Adaptec Remus Software, and all
worldwide Intellectual Property Rights therein and thereto, whether the Adaptec
Licensed Technology or Adaptec Remus Software is separate or combined with any
hardware, software, firmware, integrated circuits or devices of any kind. JNI
will own all worldwide right, title and interest in and to the JNI Licensed
Technology and all worldwide Intellectual Property Rights therein and thereto,
whether the JNI Licensed Technology is separate or combined with any hardware,
software, firmware, integrated circuits or devices of any kind.
4
<PAGE> 5
3.2 Protection of Ownership.
(a) JNI Obligations. JNI will use its reasonable efforts
to protect Adaptec's Intellectual Property Rights in the Adaptec Licensed
Technology, Adaptec Remus Software and Adaptec Licensed Patents and will use its
reasonable efforts to report promptly to Adaptec any infringement or
misappropriation of such rights of which JNI becomes aware. Adaptec reserves the
sole and exclusive right at its discretion to assert claims against third
parties for infringement or misappropriation of its Intellectual Property Rights
in the Adaptec Licensed Technology and Adaptec Remus Software and to enforce any
Adaptec Licensed Patents against any third parties. JNI expressly acknowledges
and affirms Adaptec's ownership of the Adaptec Licensed Technology and Adaptec
Remus Software as set forth in Section 3.1 above and Adaptec's ownership of the
Adaptec Licensed Patents.
(b) Adaptec Obligations. Adaptec will use its reasonable
efforts to protect JNI's Intellectual Property Rights in the JNI Licensed
Technology and will use its reasonable efforts to report promptly to JNI any
infringement or misappropriation of such rights of which Adaptec becomes aware.
JNI reserves the sole and exclusive right at its discretion to assert claims
against third parties for infringement or misappropriation of its Intellectual
Property Rights in the JNI Licensed Technology. Adaptec expressly acknowledges
and affirms JNI's ownership of the JNI Licensed Technology as set forth in
Section 3.1 above.
4. WARRANTIES.
4.1 General Warranties. Each party warrants that: (i) it has the
corporate power and authority to execute and deliver this Agreement and to
perform its obligations hereunder; (ii) the execution, delivery and performance
of this Agreement has been duly and validly authorized by such party; and (iii)
upon execution and delivery, this Agreement will constitute a valid and binding
agreement of such party, enforceable against it in accordance with these terms.
4.2 Other Warranties.
(a) Adaptec Warranties. Adaptec warrants that:
(i) the Adaptec Licensed Technology and Adaptec
Remus Software, as delivered to JNI by Adaptec as of the Effective Date (as
distinct from implementation of such technology and software in Fibre Channel
Products), does not infringe the Intellectual Property Rights of any third
party;
(ii) the Adaptec Licensed Technology and Adaptec
Remus Software, as implemented by Adaptec in any Completed Fibre Channel
Products as of the Effective Date, does not infringe the Intellectual Property
Rights of any third party; and
(iii) to the best of Adaptec's knowledge, the
Adaptec Licensed Technology and Adaptec Remus Software can be implemented in any
Incomplete Fibre Channel Products without infringing the Intellectual Property
Rights of any third party.
5
<PAGE> 6
(b) JNI Warranties. JNI warrants that the JNI Licensed
Technology delivered to Adaptec by JNI as implemented by JNI in any Fibre
Channel Product will not infringe the Intellectual Property Rights of any third
party.
4.3 Warranty Disclaimers. EXCEPT AS EXPRESSLY SET FORTH IN
SECTION 4.2, EACH PARTY HEREBY DISCLAIMS ALL WARRANTIES OF ANY KIND, EXPRESS AND
IMPLIED, WITH RESPECT TO THE ADAPTEC LICENSED TECHNOLOGY, ADAPTEC REMUS
SOFTWARE, AND THE JNI LICENSED TECHNOLOGY, AS APPLICABLE, INCLUDING WITHOUT
LIMITATION THE IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE,
MERCHANTABILITY AND NONINFRINGEMENT.
5. INDEMNITIES.
5.1 Indemnity Obligation. Each party (an "INDEMNIFYING PARTY")
agrees to indemnify, defend, and hold the other party (the "INDEMNIFIED PARTY")
harmless from and against all damages, liabilities, costs, charges and expenses,
including reasonable attorneys' fees resulting from any third party claim based
on a breach by the Indemnifying Party of any of its warranties set forth in
Section 4; provided that: (i) the Indemnified Party furnishes the Indemnifying
Party with prompt written notice of any such claim; (ii) the Indemnified Party
provides the Indemnifying Party with sole control of the defense and settlement
of any such claim; and (iii) the Indemnified Party provides the Indemnifying
Party, at the Indemnifying Party's expense, with all information and assistance
reasonably necessary for the defense and settlement of any such claim. The
Indemnified Party will have the right to retain counsel, at the Indemnified
Party's expense, to participate in the defense of any such claim. The
Indemnifying Party will not settle any such claim without first obtaining the
Indemnified Party's prior written consent, which consent will not be
unreasonably withheld, if the terms of such settlement would adversely affect
the Indemnified Party's rights under this Agreement.
5.2 Workaround Obligation. In the event an Indemnified Party is
enjoined from using the technology of the Indemnifying Party, as licensed
hereunder, the Indemnifying Party will, to the extent commercially practicable
use reasonable efforts to provide a workaround or other modification to enable
the Indemnified Party to continue to use the enjoined technology.
5.3 Sole Remedy and Indemnity Limitations. The provisions of this
Section 5 set forth the Indemnified Party's sole and exclusive remedies and the
Indemnifying Party's sole and exclusive obligations for any claim based on a
breach by the Indemnifying Party of any of its warranties set forth in Section
4. In addition, Adaptec and JNI expressly acknowledge and agree that,
notwithstanding anything in this Agreement to the contrary: (i) Adaptec's
obligations and aggregate liability under this Section 5 are subject to the
terms and conditions set forth in Section 9.1 and Section 9.6(ii), as set forth
in the Asset Acquisition Agreement; and (ii) JNI's aggregate liability under
this Section 5 shall not exceed the limit on Adaptec's liability set forth in
Section 9.6(ii) of the Asset Acquisition Agreement, and shall be determined and
be payable on the same terms as the terms applicable to Adaptec in Section
9.6(ii) of the Asset Acquisition Agreement.
6
<PAGE> 7
6. CONFIDENTIALITY.
6.1 Definition of Confidential Information. "CONFIDENTIAL
INFORMATION" means: (i) the Adaptec Licensed Technology and Adaptec Remus
Software; (ii) the JNI Licensed Technology; and (iii) any other non-public
technical or business information disclosed by a disclosing party to a receiving
party under this Agreement.
6.2 Exclusions. Confidential Information does not include any
information that: (i) is in or becomes part of the public domain through no
fault or breach of this Agreement by the receiving party; (ii) was rightfully in
the possession of the receiving party without an obligation of confidentiality
prior to its disclosure hereunder; (iii) is independently developed by the
receiving party without use of or reference to any of the disclosing party's
Confidential Information; or (iv) a receiving party rightfully obtains from a
third party without restriction on use or disclosure.
6.3 Obligations. Each party will not use any of the disclosing
party's Confidential Information except as expressly permitted under this
Agreement. Each party will maintain all of the disclosing party's Confidential
Information in strict confidence and not disclose any of the disclosing party's
Confidential Information to any third parties except to employees, contractors,
consultants, affiliates and sublicensees with a bona fide need to know for such
party's performance of this Agreement, provided that each of the foregoing is
subject to written nondisclosure and limited use restrictions at least as
protective as those set forth herein. Each party will use its best efforts to
prevent inadvertent disclosure, publication or dissemination of any of the
disclosing party's Confidential Information and will promptly notify the
disclosing party in writing of any actual or suspected unauthorized use or
disclosure of any of its Confidential Information.
7. LIMITATION OF LIABILITY. IN NO EVENT WILL EITHER PARTY BE LIABLE TO
THE OTHER PARTY OR TO ANY THIRD PARTY FOR ANY INDIRECT, INCIDENTAL, EXEMPLARY,
SPECIAL OR CONSEQUENTIAL DAMAGES, INCLUDING WITHOUT LIMITATION, LOSS OF USE,
LOSS OF PROFITS, OR LOSS OF DATA, ARISING OUT OF OR IN CONNECTION WITH THIS
AGREEMENT OR THE USE OF THE ADAPTEC LICENSED PATENTS OR THE USE OR PERFORMANCE
OF THE ADAPTEC LICENSED TECHNOLOGY OR THE ADAPTEC REMUS SOFTWARE OR THE JNI
LICENSED TECHNOLOGY, WHETHER SUCH LIABILITY ARISES FROM ANY CLAIM BASED UPON
CONTRACT, WARRANTY, TORT (INCLUDING NEGLIGENCE), PRODUCT LIABILITY OR OTHERWISE,
EVEN IF A PARTY HAS BEEN ADVISED IN ADVANCE OF THE POSSIBILITY OF SUCH DAMAGES.
8. TERM. This Agreement will commence as of the Effective Date and will
remain in force and effect thereafter.
9. GENERAL PROVISIONS.
9.1 Governing Law. This Agreement will be governed by and
construed in accordance with the laws of the State of California, excluding its
conflict of laws rules and principles.
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<PAGE> 8
9.2 Assignment. Neither party may assign this Agreement, in whole
or in part, without the other party's prior written consent, and any attempt to
assign this Agreement without such consent will be null and void. The foregoing
will not be deemed to prohibit either party from assigning this Agreement in
connection with a merger or consolidation of such party or sale of all or
substantially all of such party's assets with, into or to any entity. Subject to
the foregoing, this Agreement will bind and inure to the benefit of each party's
permitted successors and assigns.
9.3 Waiver. The failure by either party to enforce any provision
of this Agreement will not constitute a waiver of future enforcement of that or
any other provision. Neither party will be deemed to have waived any rights or
remedies hereunder unless such waiver is in writing and signed by a duly
authorized representative of the party against which such waiver is asserted.
9.4 Force Majeure. Neither party will be responsible for any
failure or delay in its performance due to causes beyond its reasonable control,
including, but not limited to, acts of God, war, riot, embargoes, acts of civil
or military authorities, fire, floods, earthquakes, accidents, strikes, or fuel
crises, provided that such party gives prompt written notice thereof to the
other party and uses its diligent efforts to resume performance.
9.5 Severability. If a court of competent jurisdiction finds any
provision of this Agreement invalid or unenforceable, that provision of the
Agreement will be amended to achieve as nearly as possible the intent of the
parties, and the remainder of this Agreement will remain in full force and
effect.
9.6 Entire Agreement. This Agreement, including all Exhibits
hereto, constitutes the entire agreement between the parties relating to its
subject matter and supersedes all prior or contemporaneous representations,
discussions, negotiations, and agreements, whether written or oral, relating to
its subject matter.
9.7 Amendment. Modification. This Agreement may be amended or
modified only by a writing that is signed by duly authorized representatives of
both parties.
9.8 Notices. All notices, approvals, consents and other
communications required or permitted under this Agreement will be in writing and
delivered by confirmed facsimile transmission, by courier or overnight delivery
service with written verification of receipt, or by registered or certified
mail, return receipt requested, postage prepaid, and in each instance will be
deemed given upon receipt. All such notices, approvals, consents and other
communications will be sent to the addresses set forth above or to such other
address as may be specified by either party to the other in accordance with this
Section.
9.9 Relationship of Parties. The parties to this Agreement are
independent contractors. There is no relationship of agency, partnership, joint
venture, employment or franchise between the parties. Neither party nor its
employees has the authority to bind or commit the other party in any way or to
incur any obligation on its behalf.
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<PAGE> 9
9.10 Compliance with Law. Each party will comply with all laws
and regulations applicable to the performance of its obligations under this
Agreement. Each party acknowledges that the other party's technology licensed
hereunder, including any technical data related thereto, may be subject to U.S.
export control laws and regulations and each party agrees not to export or
re-export (directly or indirectly) any of the other party's technology licensed
hereunder, or other technical data related thereto, without complying with all
applicable U.S. export control laws and regulations.
9.11 Counterparts. This Agreement may be executed in
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement by their
duly authorized officers or representatives and delivered as of the Effective
Date.
AGREED:
ADAPTEC, INC. JAYCOR NETWORKS, INC.
By: /s/ LARRY BOUCHER By: /s/ TERRY M. FLANAGAN
------------------------------ ---------------------------------
Printed Name: Printed Name:
-------------------- -----------------------
Title: Title:
--------------------------- ------------------------------
9
<PAGE> 10
11/12/98
SCHEDULES
TO
CROSS-LICENSE AGREEMENT
ADAPTEC, INC.
FIBRE CHANNEL PRODUCTS
<PAGE> 11
EXHIBIT A
Adaptec Licensed Technology
Adaptec Licensed Technology includes the following:
Discrete Circuits (as defined in the Asset Acquisition Agreement)
Fibre Channel sequencer code
Sequencer Assembly Code Compiler
Sequencer Object Code Convert Software
Fibre Channel SlimHIM code
Fibre Channel CHIM code ("portable" Fibre Channel drivers, common for
multiple O/S)
Fibre Channel BIOS
Remus Software (limited rights as described in Agreement)
Board Testing Software used with test equipment transferred to JNI
Blocks:
*
2
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 12
EXHIBIT B
Adaptec Licensed Patents
<TABLE>
<CAPTION>
ADPT CODE TITLE STATUS PAT. # FILED O/C
<S> <C> <C> <C> <C>
ECX-00l/A-1C Computer Bus to SCSI Bus Host Adapter Integrated Circuit issued 5,655,147 4/19/94 GUNN
ECX-002/A A Programmably Configurable Host Adapter Integrated Circuit
Including A RISC Process issued 5,659,690 10/15/92 GUNN
ECX-009/A-1C Method and Apparatus for Automatically Loading Configuration filed 10/21/97 SMMFF
Data on Reset into a Host Adapter Integrated Circuit
ECX-017/A Error Generation Circuit for Testing a Digital Bus issued 5,701,409 2/22/95 SMMFF
ECX-017/A-1C Error Generation Circuit for Testing a Digital Bus filed 2/7/97 SMMFF
ECX-033/A An Improved Hardware Command Block Delivery Queue for Host filed 3/13/97 GUNN
Adapters and Other Devices with Onboard Processors
ECX-034/A An Improved Command Block Delivery Queue for Host Adapters filed 3/13/97 GUNN
ESG-001/A HST Mon Auto Disconnect disclosure GUNN
ESG-002/A ***upcoming RIO disclosure from Stillman
MCS-014/A Improved Hardware Control Block Delivery Queues for Host filed 5/22/97 GUNN
Adapters and Other Devices with Onboard Processors
MCS-015/A Execution Suspension and Resumption in Multi-Tasking Host Adapters filed 6/2/98 GUNN
MCS-016/A Register Partitioning in Multi-Tasking Host Adapters filed 6/2/98 GUNN
MCS-027/A A Host Adapter Having a Snapshot Mechanism filed 6/2/98 SMMFF
MCS-028/A A Host Adapter Having Paged Payload Buffers for Simultaneously filed 6/2/98 SMMFF
Transferring Data Between a Computer Bus and a Peripheral Bus
MCS-029/A A Host Adapter Capable of Simultaneously Transferring Data of filed 6/2/98 SMMFF
Multiple Contexts Between a Computer Bus and a Peripheral Bus
MCS-031/A Multiple Access Memory Architecture filed 6/2/98 SMMFF
MCS-032/A Decouple Serial Memory Access with Passkey Protected Memory Areas filed 6/2/98 SMMFF
MCS-033/A Non-Invasive Processor Master Back Off filed 6/2/98 GUNN
MCS-034/A Monitor Port with Selectable Trace Support filed 6/2/98 SMMFF
MCS-035/A Data Stream Packer and Unpacker Integrated Circuit filed 6/2/98 SMMFF
MCS-036/A PROVISIONAL: Fast Stack Save and Restore System and Method provisional SMMFF
MCS-037/A Source-Destination Re-Timed Cooperative Communication Bus filed 6/2/98 GUNN
MCS-039/A Timer Using a Single Counter to Track Multiple Time-Outs filed 6/2/98 SMMFF
MCS-041/A Host Adapter Including Interrupt Posting Structure filed 6/2/98 SMMFF
STG-001/A High Speed Boundary Scan Design filed 10/16/97 H&M
STG-010/A A Low Power Scan Cell filed 6/30/98 GUNN
STG-018/A Fibre Channel Host Bus Adapter Having Multi-Frequency Clock Buffer filed 9/25/98 Christie
For Reduced Power Consumption
STG-019/A Electrostatic Discharge Protection Bus/Die Edge Seal and Method
for Making the Same filed 7/15/98 H&M
STG-021/A Boundary Scan Cells with Improved Timing Characteristics filed 9/15/98 H&M
</TABLE>
<PAGE> 13
EXHIBIT C
JNI Licensed Technology
JNI Licensed Technology includes the following:
Fibre Channel sequencer code
Sequencer Assembly Code Compiler
Sequencer Object Code Convert Software
Fibre Channel SlimHIM code
Fibre Channel CHIM code ("portable" Fibre Channel drivers, common for
multiple O/S)
Operation system modules (OSMs), including:
Fibre Channel Windows NT 4.0 drivers
Fibre Channel Windows NT 5.0 drivers
Fibre Channel Solaris drivers
Fibre Channel Unixware drivers
Fibre Channel Mac O/S drivers
Fibre Channel BIOS
<PAGE> 1
EXHIBIT 10.11
[ADAPTEC LETTERHEAD]
March 9, 1999
Jaycor Networks, Inc.,
9775 Towne Centre Drive
San Diego, CA 92121
Re: Fibre Channel Cross-License Agreement; definition of Adaptec Remus
Software
Gentlemen:
This letter is made with reference to the Fibre Channel Cross-License Agreement
between Jaycor Networks, Inc. and Adaptec, Inc., dated November l2, 1998 (the
"Agreement"). Section 1.3 and Exhibit A of the Agreement which define the
Adaptec Remus Software, are hereby clarified to define the Adaptec Remus
Software as:
ADU2 Extension, which is a MacOS extension which allows users to use Remus based
RAID volumes (RAID 0 and 1)
Except as so amended, the Agreement shall remain in full force and effect.
Regards,
/s/ ANDREW J. BROWN
Andrew J. Brown
Chief Financial Officer
Accepted and Agreed:
JAYCOR NETWORKS, INC.
By: /s/ RANDY JOHNSON
----------------------------------
Title: Chief Financial Officer
-------------------------------
Date: 3/31/99
--------------------------------
<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 10.15
CHIP MANUFACTURING AGREEMENT
This Chip Manufacturing Agreement ("Agreement") is entered into effective as of
November 12, 1998 (the "Effective Date"), by and between Jaycor Networks, Inc.,
a Delaware corporation, having a place of business at 9775 Towne Centre Drive,
San Diego, CA 92121 ("Purchaser"), and Adaptec, Inc., a Delaware corporation
having a place of business at 691 S. Milpitas Boulevard, Milpitas, CA 95035
("Adaptec").
RECITALS
A. On November 12, 1998, Purchaser and Adaptec are entering into a certain
Asset Acquisition Agreement under which Purchaser shall acquire certain assets
of Adaptec, including intellectual property and technology related to certain
fibre channel chip and board level products.
B. During a transition period not to exceed the lifetime of certain fibre
channel chip products transferred to Purchaser under the Asset Acquisition
Agreement and in no event not more than two years, Purchaser desires for Adaptec
to perform certain manufacturing services, including purchasing, assembly and
manufacture, testing, and packaging of such fibre channel chip products, and to
sell and ship such products to Purchaser, and Adaptec is willing to perform such
services.
C. The parties desire to define the general terms and conditions governing
Adaptec's manufacture of such products, and the purchase and sale of such
products, all as further set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants and agreements set forth in this Agreement, the parties agree as
follows:
AGREEMENT
1. DEFINITIONS
1.1 "Confidential Information" shall have the meaning set forth in
the Mutual Confidential Disclosure Agreement, dated September 2, 1998, executed
between the parties ("MNDA"), attached hereto as Exhibit C, and shall include
the terms and conditions of this Agreement, which shall constitute confidential
information of both parties.
1.2 "Deliver, Delivered or Delivery" means the delivery of the
Products ordered pursuant to a particular Purchase Order to the Delivery Point
for shipment in accordance with Purchaser's instructions.
<PAGE> 2
1.3 "Delivery Point" means the San Francisco Bay Area.
1.4 "Lead Time" means 1) the minimum amount of time prior to the
requested Delivery of each respective Product that Adaptec must receive a
Purchase Order for the Product, and 2) the maximum amount of time that Adaptec
has after receiving a Purchase Order before Adaptec must Deliver the ordered
Product, as specified in Exhibit A.
1.5 "Packaging Specification" means Adaptec's standard packaging
process and format for each respective Product as set forth in Adaptec's
applicable standard assembly specification as may be amended from time to time
by Adaptec, including without limitation the use and placement of Adaptec
stickers and logos on such packaging.
1.6 "Price" means the price for each respective Product, initially
as set forth in Exhibit A and Section 4, as may be adjusted from time to time in
accordance with Section 4.
1.7 "Product" means a fibre channel chip level product to be
manufactured and sold by Adaptec hereunder, as set forth in Exhibit A.
1.8 "Purchase Orders" means written or electronically transmitted
purchase orders to Adaptec for the Products, including the description of the
Product, quantity, Delivery Point, requested Delivery date, shipping destination
and other relevant information relating to the order and shipment.
1.9 "Purchaser Documentation" means the documentation to be
provided to Adaptec by Purchaser for each respective Product, including mask
sets and the items listed on Exhibit B.
1.10 "Purchaser Technology" means technical information specific to
the Products, including Product design documentation (including Purchaser
Documentation) and test data.
1.11 "Quarterly Review Meeting" shall mean a meeting scheduled by
Purchaser between Purchaser and Adaptec for the purpose of reviewing production,
forecasts, pricing, and related matters.
1.12 "Services" means the manufacturing services performed by
Adaptec hereunder, including purchasing, assembly and manufacture, testing,
packaging and shipping.
1.13 "Specifications" means the respective specifications for each
Product, as agreed in writing by the parties.
1.14 "Final Test Program" means the wafer sort and final testing
process and criteria, including the quality assurance program, with respect to
each Product to determine whether such Product meets the Specifications.
2
<PAGE> 3
1.15 "Inventory" means Adaptec's inventory of components for
Products, partially completed Products, and completed Products consistent with
Purchaser's outstanding Purchase Orders.
1.16 "Standard Cost" means the standard cost of a component or
Product, as set forth in Adaptec's SAP system, plus the cost of freight,
clearance and duties between Singapore and Milpitas.
1.17 "Minimum Lot Size" means the minimum quantity of each type of
Product that may be manufactured at one time, as specified in Exhibit A.
2. TERM OF AGREEMENT
The term of this Agreement ("Term") shall commence on the Effective Date
and shall continue until the end of life of the longest surviving Products,
subject to earlier termination as provided in Section 16.
3. MANUFACTURE OF PRODUCTS
3.1 Manufacture of Products. During the Term, Adaptec shall use
reasonable commercial efforts to manufacture the Products in accordance with the
terms of this Agreement. Adaptec will commence performance of the Services with
respect to a Product upon receipt of a Purchase Order therefor. Adaptec may, at
its sole discretion, allocate production and delivery among Adaptec's customers.
3.2 Provision of Purchaser Documentation and Purchaser Technology.
As soon as required after the Effective Date, Purchaser will deliver to Adaptec
the Purchaser Documentation. Subject to the terms and conditions of this
Agreement, Purchaser grants to Adaptec and its subcontractors, during the Term
of this Agreement, a non-exclusive, non-transferable license to use the
Purchaser Technology solely to perform the Services.
3.3 Packaging. Adaptec will package each Product substantially in
accordance with the applicable Packaging Specification.
3.4 Meetings. Purchaser shall be responsible for scheduling the
Quarterly Review Meeting and for preparing the agenda for discussion. Each party
shall use reasonable efforts to have appropriate personnel attend such meetings
in order to conduct a thorough operations review in accordance with the agenda.
3.5 Contractors. Adaptec may retain third parties ("Contractors")
and subsidiary companies ("Subsidiaries ") to furnish services to it in
connection with the performance of its obligations hereunder and permit such
Contractors and Subsidiaries to have
3
<PAGE> 4
access to Purchaser's Confidential Information, but only to the extent and
insofar as reasonably required in connection with the performance of Adaptec's
obligations under this Agreement; provided that all such Contractors and
Subsidiaries shall be required by Adaptec to execute a written agreement (a)
sufficient to secure compliance by such Contractors and Subsidiaries with
Adaptec's obligations of confidentiality concerning Confidential Information set
forth in Section 17; (b) acknowledging the Contractor's or Subsidiary's
obligation to assign all work product in connection with performance hereunder;
and (c) effecting assignments of all Intellectual Property Rights concerning any
Purchaser Technology to Purchaser. Purchaser, upon request, may review such
agreements at any time before or after execution by such Contractors and
Subsidiaries to ensure compliance with this Agreement.
4. PRICING
Subject to the terms and conditions of this Agreement, Adaptec agrees to
sell the Products at the respective Prices set forth on Exhibit A. Any Price
which is not set forth on Exhibit A initially will be set at the *
.
All Prices shall be reviewed at the Quarterly Review Meeting, and shall be
adjusted including for variations in the yield of each Product such that they
are approximately equivalent to *
. Unless otherwise agreed to in writing by Adaptec, all Prices are
exclusive of transportation and insurance costs, and all taxes, duties and
assessments (except taxes levied against Adaptec's income), including state and
local use, sales property and similar taxes. Purchaser agrees to pay such taxes
unless Purchaser has provided Adaptec with (i) an exemption resale certificate
in the appropriate form for the jurisdiction of Purchaser's place of business
and any jurisdiction to which Product is to be directly shipped hereunder, or
(ii) written evidence that such sale is otherwise exempt from such taxes. Where
applicable, transportation and taxes shall appear as separate items on Adaptec's
invoice.
5. FORECASTS, ORDERING & ADJUSTMENTS
5.1 Forecasts. Purchaser will provide Adaptec, on the Effective
Date, and thereafter on the first day of each calendar month, a forecast of
Purchaser's quantity requirements for each Product for each of the next twelve
(12) months. While such forecasts will not be regarded as a commitment to
purchase, they shall represent and reflect Purchaser's good faith expectations
of customer demand. Purchaser acknowledges that forecasts will be used by
Adaptec for material and manufacturing planning purposes.
5.2 Purchase Orders. On the first day of each calendar month,
Purchaser shall issue a Purchase Order to Adaptec to initiate the performance of
Services with respect to the Products. Each Purchase Order will be issued by
Purchaser in accordance with the applicable Lead Time(s) to allow Delivery
during the Term and, together with previously issued Purchase Orders, shall
cover the ordering of Products to be delivered during *
. Quantities specified in each Purchase Order shall be at least the
Minimum Lot Size for each Product ordered. Adaptec shall use reasonable efforts
to acknowledge the Purchase Order
4
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 5
and to confirm the scheduled Delivery Date within forty-eight (48) hours. No
Purchase Order shall be binding until accepted by Adaptec.
5.3 No Cancellation. Purchaser may not cancel any Products ordered
or on order for Delivery. Upon Purchaser's request, Adaptec will use reasonable
efforts to reschedule Products scheduled for Delivery within the three (3) month
window of Section 5.2, and to revise applicable shipping instructions. However,
such adjustment may be subject to additional costs or charges and may not be
feasible for short time frames.
5.4 Agreement Controls. Except for the Products, quantities and
other matters necessary to be specified by a Purchase Order, to the extent
accepted by Adaptec, the terms governing the manufacture, delivery, acceptance
and payment for the Products will be governed by the terms and conditions of
this Agreement. In the case of conflict between this Agreement and any Purchase
Order, invoice, acknowledgment or similar document, the terms of this Agreement
will prevail. Any remedies at law or equity not specifically disclaimed or
modified by this Agreement remain available to both parties.
5.5 End Of Life. In the event Purchaser forecasts purchases of
less than 3,000 units of Products during any six (6) month period occurring
after the first twelve (12) months of the Term, the parties will negotiate with
respect to appropriate procedures and timing to discontinue manufacture of the
Products and, absent special circumstances, will proceed to implement such end
of life procedures.
6. DELIVERY, CARRIER & RISK OF LOSS
6.1 Delivery of Product; Risk of Loss. All Products purchased
hereunder shall be Delivered F.O.B. Adaptec's dock or facility in the San
Francisco Bay Area, and title and risk of loss or damage to the Products will
pass to Purchaser at such Delivery Point. All quoted Delivery dates are
estimates only and Adaptec shall not be liable for any failure to meet a quoted
Delivery date. Notwithstanding the foregoing, Adaptec will make reasonable
commercial efforts to meet approved Delivery dates.
6.2 Shipment. Unless otherwise agreed by the parties, shipment
costs from San Francisco and Milpitas to destinations within the United States
shall be freight collect. The carrier will be selected by Adaptec. In no event
shall Adaptec be liable for any delay in delivery, or assume any liability in
connection with shipment, nor shall the carrier be deemed an agent of Adaptec.
All claims for damages must be filed with the carrier. Shipments may be made in
installments. Unless otherwise agreed in writing or as set forth in the
Packaging Specification, all Products will be packed and shipped in accordance
with Adaptec's normal practices.
7. PAYMENTS
Upon Delivery of the Products, Adaptec will send an invoice to Purchaser
identifying the Purchase Order and confirming the quantity and description of
all Products that have been
5
<PAGE> 6
shipped. Purchaser will pay invoices for Products, or such other invoices as are
issued under this Agreement, within thirty (30) days of receipt. Payment of
invoices shall be made to Adaptec as Adaptec may direct in its invoice (or
otherwise in writing). Payment does not constitute final acceptance of the
Products and is subject to adjustments for errors, shortages and defects.
Shipments, deliveries, and performance of the Services shall at all times be
subject to the approval of Adaptec's credit department and Adaptec may at any
time decline to make any shipments or deliveries or perform any Services except
upon receipt of payment, or upon terms and conditions or security satisfactory
to Adaptec. If shipments are delayed by Purchaser, payment shall become due, at
Adaptec's option, thirty (30) days after the date Adaptec is prepared to make
shipment.
8. QUALITY AND INSPECTION
8.1 Process and Quality. Adaptec will manufacture the Products in
accordance with its general process and quality procedures.
8.2 Yield Improvement. Adaptec will use reasonable commercial
efforts to improve Product yield, but shall not be liable for Product yield
except as provided in Sections 9 and 10.
8.3 Adaptec Testing. Adaptec shall fully test all Products
Delivered hereunder in accordance with the applicable Final Test Program. From
time to time, Purchaser may request that Adaptec supply modifications to the
Final Test Program in order to address the requirements of Purchaser's
customers. Adaptec shall develop such modifications as directed in writing by
Purchaser, but any additional efforts or costs to Adaptec resulting from the
development or use of such modifications shall be charged to Purchaser at
Adaptec's standard time and materials rates, and shall be paid for as provided
in Section 7.
8.4 Design Faults. In the event the Product does not pass the
Final Test Program due to a design-related error in the Product or an error in
the Final Test Program, Adaptec shall so notify Purchaser. Such Products shall
be deemed to conform to the Specifications and other requirements of this
Agreement, and may not be rejected by Purchaser.
8.5 Failure Analysis. Upon Purchaser's request, Adaptec shall
provide a time and materials estimate for the performance of failure analysis on
defective Products supplied by Purchaser. Upon Purchaser's acceptance of
Adaptec's estimate and Adaptec's completion of the failure analysis, Adaptec
shall provide to Purchaser appropriate failure analysis data indicating the
defect or failure mode of the defective Products. Adaptec shall invoice
Purchaser for the actual time and materials required for such failure analysis
in accordance with Section 7 unless the cause of failure constitutes a breach of
the warranty in Section 10.1, in which case Adaptec shall pay for the costs of
the failure analysis.
8.6 Reliability Analysis. Upon Purchaser's request, Adaptec shall
provide a time and materials estimate for the performance of reliability testing
on Products supplied by
6
<PAGE> 7
Purchaser. Upon Purchaser's acceptance of Adaptec's estimate and Adaptec's
completion of the reliability testing, Adaptec shall provide to Purchaser
appropriate reliability data indicating the reliability of the tested Products.
Adaptec shall invoice Purchaser for the actual time and materials required for
such reliability testing in accordance with Section 7.
8.7 Increased Capacity Requirements. In the event Purchaser's
Purchase Orders for Products exceed * , it may be
necessary for Adaptec to add additional test capacity. In such event, Adaptec
will invoice Purchaser for the actual time and materials required to provide
such additional test capacity in accordance with Section 7.
9. ACCEPTANCE AND REJECTION OF PRODUCTS
Any Product Delivered hereunder shall be deemed accepted by Purchaser
unless Adaptec receives written notice of a defect or non-conformity with
respect to such Product within thirty (30) days of shipment to Purchaser or its
Customer. In the event a Product appears not to conform to the Specifications,
Purchaser shall promptly notify Adaptec and afford Adaptec a reasonable
opportunity to inspect such Product. No Product shall be returned to Adaptec
without compliance with Adaptec's Return Material Authorization ("RMA")
procedures.
10. WARRANTY
10.1 Materials and Workmanship. Adaptec warrants that the Products
purchased and Delivered hereunder will, for a period of one (1) year ("Warranty
Period"), commencing on the date of Delivery, be free from defects in material
and workmanship and conform to the Specifications. Notwithstanding the
foregoing, the warranty in this Section 10.1 will not extend to defects
attributable to the Product design or defects arising from compliance with the
Specifications or defects in the Final Test Program.
10.2 Warranty Remedy. If any Product is found to breach the
warranty specified in Section 10.1 during the Warranty Period, Purchaser may
send a notice to Adaptec informing it of the breach of warranty. If the failure
occurs during the Term, the Products shall be returned to Adaptec and Adaptec
shall, at Adaptec's expense, (i) promptly replace such defective Products, and
return the replaced units to Purchaser, or (ii) if not commercially feasible to
replace such defective Products, then refund the actual purchase price paid by
Purchaser for such defective Products. If the failure occurs during the Warranty
Period, but after the Term, the defective Products shall be returned to Adaptec
and Adaptec shall reimburse Purchaser for the lesser of its actual cost of
replacement of such defective Product and the actual purchase price paid by
Purchaser for such defective Product. Subject to confirmation of a defect,
Adaptec will make payment of any refund or reimbursement within thirty (30) days
of receipt of the Product and, as applicable, documentation of Purchaser's
actual cost of replacement.
10.3 RMA Procedures. All returns of the Products made by Purchaser
shall comply with the RMA Specification then in effect, a current version of
which is attached hereto as Exhibit D.
7
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 8
10.4 No Liability. Adaptec shall have no liability or obligation to
Purchaser under this Section 10 with respect to any Products which have been
subjected to abuse, misuse, improper use, negligence, accident, alteration,
repair or rework performed by unauthorized parties.
10.5 Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN
SECTION 10.1, THE PRODUCTS ARE PROVIDED "AS IS" AND ADAPTEC MAKES NO
REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING
BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, AND NONINFRINGEMENT.
11. PRODUCT CHANGES
11.1 On Adaptec's Notice. In no event shall Adaptec make any
modification to the Products without Purchaser's prior written approval, which
shall not unreasonably be withheld or delayed.
11.2 At Purchaser's Request. Should Purchaser desire modifications
in the Product which do not affect form, fit or function of the Product,
Purchaser shall submit its request to Adaptec in writing, and Adaptec shall use
reasonable commercial efforts to respond to such request in writing within five
(5) business days, setting forth the impact of such proposed change on the
performance of the Services and the Price of the Products. Any change affecting
safety or necessary for proper functioning of the Products will be implemented
by Adaptec as soon as possible. Unless the parties agree otherwise, requested
changes will not affect the Products already scheduled or rescheduled for
Delivery as of the date such request is received by Adaptec. Purchaser shall be
responsible for payment for any inventory which is made obsolete, any yield loss
as a consequence of the implementation of the change, and all additional
services provided by Adaptec to implement such changes.
11.3 Change Management. All changes to a Product shall be subject
to Adaptec's standard change management procedure.
12. TRADEMARK LICENSE
12.1 Trademark License. Subject to the terms and conditions of this
Agreement, Adaptec hereby grants to Purchaser and Purchaser accepts a worldwide,
nontransferable, fully-paid and royalty-free right and license to use the
Adaptec PCI ID and the Adaptec: trademarks "AIC", "Adaptec" and the Adaptec
stylized "a" logotype (the "Adaptec Marks") solely as affixed or incorporated by
Adaptec into Products and on corresponding packaging supplied by Adaptec to
Purchaser hereunder. Purchaser acknowledges and agrees that Adaptec 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
8
<PAGE> 9
Adaptec Marks or otherwise. Purchaser hereby assigns and, if and as Adaptec may
request in the future, agrees to assign and affirm assignment to Adaptec of all
such right, title and interest in the Adaptec Marks and related goodwill. If
requested by Adaptec, Purchaser will cooperate with Adaptec 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 Adaptec.
12.2 Private Labeling. If Purchaser repackages Products received
from Adaptec, Purchaser agrees to repackage in packaging using Purchaser's
marks. Purchaser further agrees to use commercially reasonable efforts to cease
all use of the Adaptec Marks as soon as feasible.
13. OWNERSHIP OF PURCHASER TECHNOLOGY
Purchaser owns the Purchaser Technology. Notwithstanding the foregoing,
Purchaser is aware that Adaptec is in the business of developing and
manufacturing products similar to the Products, and intends to continue to
manufacture the same in the future. Nothing in this Agreement shall limit the
ability of Adaptec to produce products or portions of products which are similar
to the Products for customers other than Purchaser, either during the term of
this Agreement or after its termination, provided that in doing so., Adaptec
does not (a) infringe Purchaser's intellectual property rights, (b) use
Purchaser Technology or Purchaser Confidential Information, or (c) breach the
terms of the Asset Acquisition Agreement or Cross-License Agreement entered into
contemporaneously herewith.
14. PROPRIETARY RIGHTS INDEMNITY
14.1 Adaptec Indemnity. Adaptec shall, at its expense and at
Purchaser's request, defend any claim or action brought against Purchaser, and
Purchaser's subsidiaries, affiliates, directors, officers, employees, agents and
independent contractors, to the extent it is based on a claim that the
manufacturing process for the Products infringes any patent, copyright, mask
work right or other intellectual property right, or misappropriates any trade
secret, of a third party ("Claim"). Adaptec, shall pay all costs of defense and
settlement, together with any judgment which may be finally awarded; provided:
(a) Purchaser gives Adaptec reasonably prompt notice in writing of any such
Claim and permits Adaptec, through counsel of its choice, to defend and/or
settle such Claim; and (b) Purchaser provides Adaptec information, assistance
and authority, at Adaptec's expense, to enable Adaptec to defend such Claim.
Adaptec shall not be responsible for any settlement made by Purchaser without
Adaptec's written permission.
14.2 Exceptions. Adaptec will not have liability under this Section
14 to the extent that the Claim results from (a) the use of the Purchaser
Documentation or otherwise from
9
<PAGE> 10
the Product design or features; or (b) Purchaser's combination, operation, or
use of the Products with designs, devices, parts, or software not supplied by
Adaptec.
14.3 Purchaser Indemnity. Purchaser shall, at its expense and at
Adaptec's request, defend any claim or action brought against Adaptec, and
Adaptec's subsidiaries, affiliates, directors, officers, employees, agents and
independent contractors, to the extent it is based on a claim that the Purchaser
Documentation, the Product design or any third party intellectual property
incorporated in Product at the direction of Purchaser, infringes any patent,
copyright, mask work right or other intellectual property right, or
misappropriates any trade secret, of a third party ("Claim"). Purchaser shall
pay all costs of defense and settlement, together with any judgment which may be
finally awarded; provided: (a) Adaptec gives Purchaser reasonably prompt notice
in writing of any such suit and permits Purchaser, through counsel of its
choice, to defend and/or settle such Claim; and (b) Adaptec provides Purchaser
information, assistance and authority, at Purchaser's expense, to enable
Purchaser to defend such Claim. Purchaser shall not be responsible for any
settlement made by Adaptec without Purchaser's written permission.
14.4 Exceptions. Purchaser will not have liability under this
Section 14 to the extent that such Claim results from Adaptec's manufacturing
process.
15. GENERAL INDEMNITY
Each party hereto (the "Indemnifying Party") shall, at its own expense,
defend the other party, and its subsidiaries, affiliates, directors, officers,
employees, agents and independent contractors (collectively, the "Indemnified
Party"), from and against any and all loss, cost, liability or expense
(including costs and reasonable fees of attorneys and other professionals)
arising out of or in connection with the negligence of the Indemnifying Party's
agents and employees. Such indemnity shall include claims brought with respect
to the defective design of the Product for which Purchaser shall be the
indemnifying party. The Indemnifying Party shall pay all costs of defense and
settlement, together with any judgment which may be finally awarded; provided:
(a) the Indemnified Party gives the Indemnifying Party reasonably prompt notice
in writing of any such suit and permits the Indemnifying Party, through counsel
of its choice, to defend and/or settle such Claim; and (b) the Indemnified Party
provides the Indemnifying Party information, assistance and authority, at the
Indemnifying Party's expense, to enable the Indemnifying Party to defend such
Claim. The Indemnifying Party shall not be responsible for any settlement made
by the Indemnified Party without the Indemnifying Party's written permission.
16. TERMINATION
16.1 Termination Without Cause. Purchaser may, for any reason or
for no reason whatsoever, terminate this Agreement, in whole, or in part, upon
two (2) months advance notice to Adaptec.
10
<PAGE> 11
16.2 Effect Of Termination Without Cause. In the event Purchaser
terminates this Agreement pursuant to Section 16.1, Purchaser shall pay to
Adaptec all amounts due to Adaptec, including, for all Products ordered under
outstanding Purchase Orders not fulfilled due to such termination, the full
purchase price for all materials in finished goods and the proportionate price
(based on status of completion) of any work in process. Adaptec shall promptly
invoice such amounts after the effective date of termination, and payment shall
be made within thirty (30) days of the invoice date.
16.3 Termination For Default. Either party may suspend its
performance and/or terminate this Agreement immediately upon written notice at
any time if:
(a) The other party is in material breach of any warranty,
term, condition or covenant of this Agreement other than those contained in
Section 17 and fails to cure that breach within thirty (30) days after written
notice of that breach and of the first party's intention to suspend its
performance or terminate;
(b) The other party is in material breach of any warranty,
term, condition or covenant of Section 17; or
(c) The other party: (i) becomes insolvent; (ii) admits in
writing its insolvency or inability to pay its debts or perform its obligations
as they mature; or (iii) makes a general assignment for the benefit of
creditors.
16.4 Effect of Termination in General. The following terms apply to
any termination under this Agreement, including without limitation, termination
for convenience and for default:
(a) Immediately upon any termination of this Agreement,
Adaptec shall, to the extent and at times specified by Purchaser, stop all work
on outstanding Purchase Orders, incur no further direct cost, and protect all
property in which Purchaser has or may acquire an interest pursuant to this
Section 16.
(b) Immediately upon any termination of this Agreement, each
party will return to the other party or, pursuant to the other party's written
instructions, destroy all materials in its possession containing Confidential
Information of the other party. Returned Confidential Information materials
shall be shipped freight collect. In addition Adaptec shall immediately deliver
to Purchaser any and all Purchaser Technology, Inventory or other property of
the Purchaser within Adaptec's possession or control. Such items shall be
delivered FOB the Adaptec facility at which they are located (i.e., Singapore or
Milpitas). Notwithstanding the foregoing, Adaptec shall have no obligation to
deliver any Inventory until and unless Purchaser has paid in full all amounts
due to Adaptec.
11
<PAGE> 12
(d) If this Agreement is terminated by Adaptec pursuant to
Section 16.3, then Purchaser shall immediately pay to Adaptec all amounts due to
Adaptec, including the full purchase price for all outstanding Purchase Orders.
(e) Notwithstanding any termination of this Agreement, the
provisions of Section 7, 9, 10, 12, 13, 14, 15, 17, 18 and the relevant sections
of Sections 16 and 19 shall remain in effect.
17. CONFIDENTIALITY
Each party will protect the other's Confidential Information in accordance
with the terms of the MNDA. Notwithstanding the terms of the MNDA, Purchaser may
disclose the terms and conditions of this Agreement to investors and potential
investors, subject to such parties' agreement to maintain such terms and
conditions in confidence.
18. LIMITATION OF LIABILITY
EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, AND EXCEPT AS SET FORTH IN
SECTIONS 14 AND 15, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER OR ANY
OTHER PERSON FOR ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES OF
ANY KIND, INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS OR DAMAGES TO THE OTHER
PARTY'S BUSINESS REPUTATION HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY,
WHETHER IN AN ACTION FOR CONTRACT, STRICT LIABILITY OR TORT (INCLUDING
NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT THE FIRST PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGE AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE
OF ANY REMEDY.
19. GENERAL
19.1 Notice. Any notice shall be considered given if delivered
personally or if sent by either party to the other by prepaid Federal Express,
registered or certified mail, or by telefax (followed by a confirming hard copy)
addressed to the address specified below, or to such other address as the party
provides by written notice:
If to Adaptec:
Adaptec, Inc.
691 S. Milpitas Boulevard
Milpitas, California 95035
Attention: Vice President, Operations
cc: General Counsel
12
<PAGE> 13
If to Purchaser:
Jaycor Networks, Inc.
9775 Towne Centre Drive
San Diego, CA 92121
Attention: President
19.2 Assignment. Neither party shall assign any of its rights or
privileges hereunder without the prior written consent of the other party;
provided, however, that Adaptec may subcontract the performance of any or all of
the Services without Purchaser's consent, subject to provision of written notice
to Purchaser identifying such subcontractor. Any attempt at assignment in
derogation of the foregoing shall be null and void. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of the parties
hereto, their subsidiaries, and their respective successors and assigns.
19.3 Allocation of Risk. The parties acknowledge and affirm that
the sections on limitation of liability, warranties and disclaimer of warranties
and damage limitation in this Agreement allocate the risks between the parties.
This allocation is reflected in the pricing of the Products and is an essential
element of the basis of the bargain between the parties.
19.4 Export Control.
(a) Representation. Purchaser agrees to comply strictly and
fully with all export controls imposed on the Products by any country or
organization in whose jurisdiction Purchaser operates or does business.
Purchaser will not knowingly, export or reexport any Product to any country
prohibited under United States Export Administration Regulations, without first
obtaining a valid license to so export or reexport the Products.
(b) Responsibility. All export permits, import certificates,
insurance, duty, customs clearance charges and/or licenses and related costs
will be Purchaser's responsibility.
19.5 Waiver. No failure or delay on the part of either party in the
exercise of any right or privilege hereunder shall operate as a waiver thereof
or as a waiver of the exercise of any other right or privilege hereunder, nor
shall any single or partial exercise of any such right or privilege preclude
other or further exercise thereof or of any other right or privilege.
19.6 Governing Law; Attorneys' Fees. This Agreement shall be
governed by and enforced in accordance with California law as applied to
contracts entered into in California by California residents to be performed
entirely within the State of California. In the event either party is required
to seek legal recourse to enforce its rights hereunder, the prevailing party
shall be
13
<PAGE> 14
entitled to receive, in addition to any other award, all costs in connection
therewith, including reasonable attorneys' fees.
19.7 Titles. Any titles included herein are for convenience only
and are not to be used in the interpretation of this Agreement.
19.8 Severability. If any provision of this Agreement is held to be
ineffective, unenforceable or illegal for any reason, such provision partially
will be enforced to the maximum extent permitted by law, and the remainder of
this Agreement will remain in full force and effect.
19.9 Force Majeure. Neither of the parties shall be deemed to be in
default of this Agreement to the extent any failure to perform hereunder is a
result of conditions beyond the other party's reasonable control, including but
not limited to, acts of God, war, strikes, fires, floods, earthquakes, work
stoppages and embargoes, material shortages, subcontractor delays, equipment or
other facilities failures (which delays or failures are beyond the reasonable
control, without negligence, of the defaulting party), and neither party shall
have the right to terminate this Agreement for any such delay or default on the
part of the other party.
19.11 Integration. This Agreement and its Exhibits embodies the
entire understanding of the parties and supersedes any prior agreements,
representations or understandings between the parties as it relates to the
subject matter hereof. No amendment or modification of this Agreement shall be
valid or binding unless in writing and signed by duly authorized representatives
of each party.
19.12 Publicity. Except as required by law, neither party will
disclose the terms of this Agreement to any third party without the express
written consent of the other, which consent shall not unreasonably be withheld
or delayed.
19.13 Relationship. The parties are independent contractors. Nothing
contained herein and no action taken pursuant hereto shall constitute the
parties as joint ventures or the agents of the other party for any purpose or in
any sense whatsoever.
19.14 Counterparts. This Agreement may be executed in counterparts,
each of which constitutes an original, and together which constitute the
Agreement.
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<PAGE> 15
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the Effective Date.
JAYCOR NETWORKS, INC ADAPTEC, INC.
("Purchaser") ("Adaptec")
By: /s/ TERRY M. FLANAGAN By: /s/ LARRY BOUCHER
------------------------------- -----------------------------------
Name: Name:
----------------------------- ---------------------------------
Title: Title:
---------------------------- --------------------------------
15
<PAGE> 16
EXHIBIT A
Products, Prices, Lead Times & Minimum Lot Sizes
Lead Time: * .
Minimum Lot Size: *
<TABLE>
<CAPTION>
PRODUCT PART NUMBER PRICE
- ------- ----------- -----
<S> <C> <C>
INTEGRATED CIRCUITS:
* * *
* * *
</TABLE>
16
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 17
EXHIBIT B
Purchaser Documentation
Masks for the Product, embodying the following registered Mask Works:
Part number: 736711
Description: AIC-110AG (PT1) TSMC 2B
Mask Number: 7367001001111110
Effective Date of Registration: *
Part Number: 739911
Description: AIC-1160AG (PT2) TSMC 2B (G388)
Effective Date of Registration: *
Technology Deliverables:
-design database, simulation files, and test vectors located at
directories:
*
-layout database and bonding diagrams
(archived magnetic tape prepared at time tape was sent for mask
preparation)
17
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 18
EXHIBIT C
Master Mutual Non-Disclosure Agreement
18
<PAGE> 19
MUTUAL CONFIDENTIAL DISCLOSURE AGREEMENT
Agreement dated Sept 2, 1998, between Jaycor Networks, Inc. ("Jaycor")
and Adaptec, Inc., ("Adaptec")
1. Background. Jaycor and Adaptec intend to engage in discussions
and negotiations concerning a possible business transaction between the parties.
In the course of such discussions and negotiations, it is anticipated that each
party may disclose or deliver to the other certain trade secrets or confidential
or proprietary information for the purpose of enabling the parties, and their
respective employees, officers, directors, agents and advisors (collectively,
"Representatives"), to evaluate the feasibility of such business transaction.
Jaycor and Adaptec have entered into this Agreement in order to assure the
confidentiality of such trade secrets and confidential or proprietary
information in accordance with the terms of this Agreement.
2. Proprietary Information. As used in this Agreement, the term
"Proprietary Information" shall mean all trade secrets or confidential or
proprietary information designated as such in writing by a disclosing party,
whether by letter or by the use of an appropriate proprietary stamp or legend,
prior to or at the time any such trade secret or confidential or proprietary
information is disclosed to the receiving party. Notwithstanding the foregoing,
information which is orally or visually disclosed by one party to the other, or
is disclosed in writing without an appropriate letter, proprietary stamp or
legend, shall constitute Proprietary Information if (i) it would be apparent to
a reasonable person, familiar with the disclosing party's business and the
industry in which it operates, that such information is of a confidential or
proprietary nature the maintenance of which is important to the disclosing party
or if (ii) a disclosing party, within thirty (30) days after such disclosure,
delivers to the receiving party a written document or documents describing such
information and referencing the place and date of such oral, visual or written
disclosure and the names of the Representatives of the receiving party to whom
such disclosure was made.
3. Disclosure Of Proprietary Information, The receiving party shall
hold in confidence, and shall not disclose (or permit or suffer disclosure) to
any person other than its Representatives, any Proprietary Information of the
disclosing party. The receiving party and its Representatives shall use such
Proprietary Information only for the purpose for which it was disclosed and
shall not use or exploit such Proprietary Information for its own benefit or the
benefit of another without the prior written consent of the disclosing party.
Without limitation of the foregoing, each party shall not cause or permit
reverse engineering of the other party's Proprietary Information or
decompilation or disassembly of any software programs which are part of the
Proprietary Information. The receiving party shall disclose Proprietary
Information received by it under this Agreement only to Representatives who have
a need to know such Proprietary Information in the course of the performance of
their duties in connection with the transaction contemplated by this Agreement,
and who are bound to protect the confidentiality of such Proprietary
Information. The receiving party will promptly report to the disclosing party
any actual or suspected violation of the terms of this Agreement and will take
all reasonable further steps requested by the disclosing party to prevent,
control of remedy any such violation.
-1-
<PAGE> 20
4. Limitation on Obligations. The obligations of the receiving
party specified in Section 3 above shall not apply, and the receiving party
shall have no further obligations, with respect to any Proprietary Information
to the extent the receiving party can demonstrate that such Proprietary
Information:
(a) is generally known to the public at the time of
disclosure or becomes generally known through no wrongful act on the part of the
receiving party;
(b) is in the receiving party's possession at the time of
disclosure;
(c) becomes known to the receiving party through disclosure
by sources other than the disclosing party having the legal right to disclose
such Proprietary Information;
(d) is independently developed by the receiving party
without reference to or reliance upon the Proprietary Information; or
(e) is required to be disclosed by the receiving party to
comply with applicable laws or governmental regulations, provided that the
receiving party provides prior written notice of such disclosure to the
disclosing party and takes reasonable and lawful actions to avoid and/or
minimize the extent of such disclosure.
5. Ownership of Proprietary Information. The parties agree that the
disclosing party is and shall remain the exclusive owner of the Proprietary
Information and all patent, copyright, trade secret, trademark and other
intellectual property rights therein. No license or conveyance of any such
rights to the receiving party by the disclosing party is granted or implied
under this Agreement.
6. Return of Documents. The receiving party shall, upon the
termination of this Agreement or the request of the disclosing party, return to
the disclosing party all drawings, documents and other tangible manifestations
of Proprietary Information received by the receiving party pursuant to this
Agreement (and all copies and reproductions thereof).
7. Miscellaneous
(a) This Agreement supersedes all prior agreements, written
or oral, between Jaycor and Adaptec relating to the subject matter of this
Agreement. This Agreement may not be modified, amended or discharged, in whole
or in part, except by an agreement in writing signed by the parties.
(b) This Agreement will be binding upon and inure to the
benefit of the parties hereto and their respective heirs, successors and
assigns.
(c) This Agreement shall be construed and interpreted in
accordance with the laws of the State of California, without reference to any
conflicts of laws rules. In the event of
-2-
<PAGE> 21
any dispute arising out of this Agreement, the prevailing party shall be
entitled to an award of its costs and attorneys' fees.
(d) The parties agree that any breach of this Agreement will
cause substantial and irreparable damages and, therefore, in the event of any
such breach, in addition to other remedies which may be available, and the
injured party shall have the right to seek specific performance and other
injunctive and equitable relief.
EXECUTED as of the day and year first set forth above.
Jaycor Networks, Inc. Adaptec, Inc.
By: /s/ TERRY M. FLANAGAN By: /s/ THOMAS MARMEN
------------------------------- -------------------------------------
Title: President & CEO Title: VP Adaptec, Inc
------------------------- ----------------------------------
-3-
<PAGE> 22
EXHIBIT D
RMA Procedure
[ADAPTEC LOGO] FACSIMILE TRANSMISSION
- --------------------------------------------------------------------------------
TO:
COMPANY
FAX:
DATE: November 24, 1998
FROM: Elisa Walker
FAX# (408) 957-7955
SUBJECT: RETURN AUTHORIZATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FYI RESPONSE TO YOUR FAX CONTROL # RESPONSE RQRD
URGENT X RESPONSE TO YOUR REQUEST X RESPOND BY
- --------------------------------------------------------------------------------
19
Initials____
<PAGE> 23
[ADAPTEC LOGO]
OEM RMA REQUEST INFORMATION
THE FOLLOWING INFORMATION AND PROCEDURES ARE REQUIRED WHEN REQUESTING A RETURN
MATERIAL AUTHORIZATION (RMA) NUMBER.
A. Submit RMA requests via Fax to the following number:
Fax Number: 408-957-7955
RMA Customer Service Representatives:
Jessica Pelayo
Elisa Walker
B. Provide the following information with your request:
1. Full company name and ship to address.
2. Contact person with phone & Fax number.
3. Quantity returning, model number and Adaptec six digit part
number located component side up, on an white label affixed to a
surface mounted IC. The bar-coded serial number, is located on
the backside of the product.
EXAMPLE: QTY. 2
AHA-1542CF SINGLE = ADAPTEC MODEL NUMBER
571600 = ADAPTEC SIX DIGIT PART NUMBER
9352 = ADAPTEC FOUR DIGITAL DATE CODE
4. Your part number if applicable.
5. P.O. number or debit memo number if applicable.
6. Any special instructions or requirements.
20
Initials____
<PAGE> 24
7. MINIMUM RETURN QUANTITY OF 10 PRODUCTS PER RMA REQUEST ONCE A
MONTH. IF QUANTITY IS LESS THAN 10 PRODUCTS PER REQUEST, THAN A
RMA CAN BE ISSUED TWICE A MONTH.
C. UPON RECEIPT OF THE ABOVE INFORMATION, WARRANTY STATUS WILL BE
DETERMINED, AND A CONFIRMATION LETTER WITH THE RMA NUMBER WILL BE FAXED
TO YOU WITHIN 48 HOURS.
D. Place products in individual anti-static bags, and package utilizing
proper packing insulation. If shipping in multiple cartons, boxes should
be numbered; 1 of 3, 2 of 3, etc.
E. Return only products and quantities authorized on request confirmation.
All return shipments will be verified with original return request, and
customer notified of any discrepancies received. For international
customers, provide a pre-alert prior
NOTE: AU INTERNATIONAL CUSTOMERS TO PROVIDE A PRE-ALERT BEFORE
SHIPPING PRODUCTS.
F. ENCLOSE A PACKING SLIP, CLEARLY LABEL EACH BOX WITH THE RMA NUMBER AND
SHIP FREIGHT PRE-PAID. ANY PACKAGE RECEIVED WITHOUT A VALID RMA NUMBER
CLEARLY MARKED ON THE OUTSIDE OF THE BOX WILL BE RETURNED UNOPENED.
G. CUSTOMERS RETURN MATERIALS TO:
ADAPTEC, INC.
ATTN: RECEIVING - M/S 225
984 SOUTH MILPITAS BLVD.
MILPITAS, CA 95035
ATTN: RMA #RXXXXX
H. Repaired products will be returned freight pre-paid by Adaptec no later
than 15 working days from date of receipt of defective materials.
I. If products are deemed unrepairable due to obsolescence or
unavailability of replacement parts, Adaptec will at their option either
replace products with current equivalent products, or issue credit at
the last listed purchase price.
J. The RMA number will be valid for 30 days from date of issuance and will
be canceled if products are not received in that time frame, unless
customer requests an extension.
21
Initials____
<PAGE> 25
NOTE: COMPLIANCE TO ALL OF THE ABOVE INFORMATION WILL INSURE THAT AN RMA
REQUEST IS COMPLETED IN A TIMELY AND EFFICIENT MANNER WITHOUT ANY
UNNECESSARY DELAYS.
[ADAPTEC LOGO]
DEFECTIVE MATERIALS RMA REQUEST
TO: ADAPTEC RMA DEPT. DATE:
FAX #: 408-957-7955 COMPANY NAME:
------------------------------
ATTN: Elisa Walker CONTACT NAME:
------------------------------
Jessica Pelayo FAX # & TELEPHONE#:
------------------------------ CUSTOMER ID#:
------------------------------ SHIP TO ADDRESS:
------------------------------
------------------------------
------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
QTY ADAPTEC MODEL NUMBER ADAPTEC P/N CUSTOMER PIN DATE CODES
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
22
Initials___
<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 10.16
AMENDMENT NUMBER ONE
TO CHIP MANUFACTURING AGREEMENT
This Amendment to Chip Manufacturing Agreement ("Amendment") is entered into
effective as of March 9, 1999 (the "Effective date"), by and between Jaycor
Networks, inc., a Delaware corporation having a place of business at 9775 Towne
Centre Drive, San Diego, CA 92121 ("Purchaser") and Adaptec, Inc. a Delaware
corporation having a place of business at 691 South Milpitas Blvd., Milpitas, CA
95035 ("Adaptec") and amends the Chip Manufacturing Agreement, made by and
between the parties, entered into effective as of November 12, 1998 (the
"Agreement").
WHEREAS, the parties desire to amend the Agreement to provide for the
manufacture of an additional Product.
NOW, THEREFORE, the parties agree as follows:
1. Exhibit A of the Agreement is amended as set forth on Exhibit A-1
hereto.
2. Section 3.6 of the Agreement is added to provide as follows:
3.6 Engineering Wafers. In the event Purchaser seeks to have
Products manufactured using engineering wafers, and Adaptec agrees to
manufacture such Products, Purchaser shall be responsible for payment of all
additional costs incurred by Adaptec in connection with the manufacture of such
Products, including: (a) mask building charges; (b) expedite fees (including
those related to fabrication and assembly); and (c) cost differentials between
engineering wafers and production wafers. (Purchaser acknowledges that the
Prices set forth in Exhibit A are based upon production wafer cost.) Such costs
shall be invoiced and paid as provided in Section 7.
3. Section 5.1 of the Agreement is amended as follows:
5.1 Forecasts. Purchaser will provide Adaptec, on the first day of
each calendar month, a rolling forecast of Purchaser's quantity requirements for
each Product for the following twelve (12) months. While months 4 through 12 of
such forecast will not be regarded as a commitment to purchase, they shall
represent and reflect Purchaser's good faith expectations of customer demand.
Purchaser acknowledges that forecasts will be used by Adaptec for material and
manufacturing planning purposes.
4. Except as modified by this Amendment, the Agreement will remain in
full force and effect.
5. This Amendment may be executed in counterparts, each of which
constitutes an original, and together which constitute the Amendment.
1
<PAGE> 2
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the Effective Date.
JAYCOR NETWORKS, INC ADAPTEC, INC.
("Purchaser") ("Adaptec")
By: /s/ TERRY FLANAGAN By: /s/ GINA V. GLOSHI
----------------------------- -----------------------------
Name: Terry Flanagan Name: Gina V. Gloshi
--------------------------- ---------------------------
Title: President & CEO Title: VP Manufacturing Ops.
-------------------------- --------------------------
2
<PAGE> 3
EXHIBIT A-1
Products, Prices, Lead Times & Minimum Lot Sizes
Lead Time: * .
Minimum Lot Size: *
<TABLE>
<CAPTION>
PRODUCT PART NUMBER PRICE
<S> <C> <C>
INTEGRATED CIRCUITS:
* * *
</TABLE>
*
3
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<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 10.17
BOARD MANUFACTURING AND TRANSITION AGREEMENT
This Board Manufacturing and Transition Agreement ("Agreement") is entered into
effective as of November 12, 1998 (the "Effective Date"), by and between Jaycor
Networks, Inc., a Delaware corporation having a place of business at 9775 Towne
Centre Drive, San Diego, CA 92121 ("Purchaser"), and Adaptec, Inc., a Delaware
corporation having a place of business at 691 S. Milpitas Boulevard, Milpitas,
CA 95035 ("Adaptec").
RECITALS
A. On November 12, 1998, Purchaser and Adaptec are entering into a certain Asset
Acquisition Agreement under which Purchaser shall acquire certain assets of
Adaptec, including intellectual property and technology related to certain fibre
channel chip and board level products.
B. During a transition period not to exceed six months, Purchaser desires for
Adaptec to perform certain manufacturing services, including purchasing,
assembly and manufacture testing, and packaging of certain of the fibre channel
board level products transferred to Purchaser under the Asset Acquisition
Agreement, and to sell and ship such products to Purchaser, and Adaptec is
willing to perform such services.
C. The parties desire to define the general terms and conditions governing
Adaptec's manufacture of such products, and the purchase and sale of such
products, all as further set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the covenants and
agreements set forth in this Agreement, the parties agree as follows:
AGREEMENT
1. DEFINITIONS
1.1 "Confidential Information" shall have the meaning set forth
in the Mutual Confidential Disclosure Agreement, dated September 2, 1998,
executed between the parties ("MNDA"), attached hereto as Exhibit C, and shall
include the terms and conditions of this Agreement, which shall constitute
confidential information of both parties.
1.2 "Deliver, Delivered or Delivery" means the delivery of the
Products ordered pursuant to a particular Purchase Order to the Delivery Point
for shipment in accordance with Purchaser's instructions.
1.3 "Delivery Point" means the San Francisco Bay Area.
1
<PAGE> 2
1.4 "Lead Time" means 1) the minimum amount of time prior to the
requested Delivery of each respective Product that Adaptec must receive a
Purchase Order for the Product, and 2) the maximum amount of time that Adaptec
has after receiving a Purchase Order before Adaptec must Deliver the ordered
Product, as specified in Exhibit A.
1.5 "Packaging Specification" means Adaptec's standard packaging
process and format for each respective Product as set forth in Adaptec's
applicable standard assembly specification as may be amended from time to time
by Adaptec, including without limitation the use and placement of Adaptec
stickers and logos on such packaging.
1.6 "Price" means the price for each respective Product, as set
forth in Exhibit A.
1.7 "Product" means a fibre channel board level product to be
manufactured and sold by Adaptec hereunder, as set forth in Exhibit A.
1.8 "Purchase Orders" means written or electronically
transmitted purchase orders to Adaptec for the Products, including the
description of the Product, quantity, Delivery Point, requested Delivery date
and other relevant information relating to the order and shipment.
1.9 "Purchaser Documentation" means the documentation to be
provided to Adaptec by Purchaser for each respective Product, including the
items listed on Exhibit B.
1.10 "Purchaser Technology" means technical information specific
to the Products, including Product design documentation (including Purchaser
Documentation), test data, and Test Equipment.
1.11 "Services" means the manufacturing services performed by
Adaptec hereunder, including purchasing, assembly and manufacture, testing,
packaging and shipping.
1.12 "Specifications" means the respective specifications for
each Product, as agreed in writing by the parties.
1.13 "Test Equipment" means testers, fixtures, tooling, and
other test equipment used in manufacture, assembly, and production test of the
Products, as set forth on Exhibit B hereto.
1.14 "Functional Test Plan" means the testing process and
criteria with respect to each Product to determine whether such Product meets
the Specifications.
1.15 "Consigned Inventory" means the inventory of components for
Products and partially completed Products which are owned by Purchaser and
consigned to Adaptec for purposes of Adaptec's rendering the Services.
2
<PAGE> 3
1.16 "Inventory" means the Consigned Inventory; Risk-buy
Inventory, Unique Inventory and other Adaptec inventory of components for
Products, partially completed Products, and completed Products consistent with
Purchaser's outstanding Purchase Orders.
1.17 "ICT" means in circuit testing.
1.18 "Standard Cost" means the standard cost of a component or
Product, as set forth in Adaptec's SAP system, plus the cost of freight,
clearance and duties between Singapore and Milpitas, at the Effective Date.
1.19 "Minimum Lot Size" means the minimum quantity of each type
of Product that may be manufactured at one time, as specified in Exhibit A.
1.20 "Risk-buy Inventory" means the inventory of long lead time
components used in rendering the Services, as specified in Exhibit F, ("Long
Lead Time Components") which are purchased by Adaptec pursuant to Purchaser's
direction for purposes of Adaptec's rendering the Services.
1.21 "Unique Inventory" means the inventory of components which
are used by Adaptec solely for the purpose of rendering the Services, as
specified in Exhibit G. ("Unique Components"), which are purchased by Adaptec
for the purpose of rendering the Services.
2. TERM OF AGREEMENT
The term of this Agreement ("Term) shall commence on the Effective Date
and shall continue for a period of three (3) months, subject to earlier
termination as provided in Section 16. The Term may be renewed for an additional
period of up to three (3) months, subject to Purchaser's election to receive
transition assistance, as set forth in Section 16.5.
3. MANUFACTURE OF PRODUCTS
3.1 Manufacture of Products. During the Term, Adaptec shall use
reasonable commercial efforts to manufacture the Products in accordance with the
terms of this Agreement. Adaptec will commence performance of the Services with
respect to a Product upon receipt of a Purchase Order therefor, including
without limitation the procurement of any components required to render such
Services. Adaptec shall have no obligation to procure or stock in inventory any
such components prior to the receipt of a Purchase Order requiring such
components, except in response to an authorization to purchase Risk - buy
Inventory. Adaptec may, at its sole discretion, allocate production and delivery
among Adaptec's customers.
3.2 Provision of Purchaser Documentation and Purchaser
Technology. As soon as required after the Effective Date, Purchaser will deliver
to Adaptec the Purchaser Documentation. Subject to the terms and conditions of
this Agreement, Purchaser grants to
3
<PAGE> 4
Adaptec and its subcontractors, during the Term of this Agreement, a
non-exclusive, nontransferable license to use the Purchaser Technology solely to
perform the Services.
3.3 Provision of Test Equipment. As soon as required after the
Effective Date, and upon Adaptec's request from time to time, Purchaser will
deliver to Adaptec the Test Equipment necessary for Adaptec to test the Products
in accordance with the Functional Test Plan. Such Test Equipment shall remain
the property of Purchaser, and Adaptec agrees to use the Test Equipment solely
for the purpose of testing the Products. Adaptec shall use reasonable commercial
efforts to maintain the Test Equipment in good condition and repair, including
the provision of any necessary regular maintenance. However, Adaptec shall not
be responsible for any loss or damage to the Test Equipment unless it results
from the negligence or willful misconduct of Adaptec or its employees. Adaptec
will use reasonable efforts to monitor the capacity of existing Test Equipment
and to advise Purchaser when additional Test Equipment is necessary.
3.4 Purchase of Long Lead Time Components. Upon Purchaser's
written request, Adaptec shall purchase Long Lead Time Components. All such Long
Lead Time Components shall be deemed to be "Risk-buy Inventory" and Purchaser
shall assume all risk for non-use of such components.
3.5 Reconciliation of Unique Components. Adaptec shall purchase
Unique Components consistent with Purchaser's forecast and outstanding Purchase
Orders. All such Unique Components shall be deemed to be "Unique Inventory" and
Purchaser shall assume all risk for non-use of such components.
3.6 Packaging. Adaptec will package each Product substantially
in accordance with the applicable Packaging Specification.
3.7 Contractors. Adaptec may retain third parties
("Contractors") and subsidiary companies ("Subsidiaries") to furnish services to
it in connection with the performance of its obligations hereunder and permit
such Contractors and Subsidiaries to have access to Purchaser's Confidential
Information, but only to the extent and insofar as reasonably required in
connection with the performance of Adaptec's obligations under this Agreement;
provided that all such Contractors and Subsidiaries shall be required by Adaptec
to execute a written agreement (a) sufficient to secure compliance by such
Contractors and Subsidiaries with Adaptec's obligations of confidentiality
concerning Confidential Information set forth in Section 17; (b) acknowledging
the Contractor's or Subsidiary's obligation to assign all work product in
connection with performance hereunder; and (c) effecting assignments of all
Intellectual Property Rights concerning any Purchaser Technology to Purchaser.
Purchaser, upon request, may review such agreements at any time before or after
execution by such Contractors and Subsidiaries to ensure compliance with this
Agreement.
4
<PAGE> 5
4. PRICING
Subject to the terms and conditions of this Agreement, Adaptec agrees to
sell the Products at the respective Prices set forth on Exhibit A, which
represent approximately the *
. Unless otherwise agreed to in writing by
Adaptec, all Prices are exclusive of transportation and insurance costs, and all
taxes, duties and assessments (except taxes levied against Adaptec's income),
including state and local use, sales property and similar taxes. Purchaser
agrees to pay such taxes unless Purchaser has provided Adaptec with (i) an
exemption resale certificate in the appropriate form for the jurisdiction of
Purchaser's place of business and any jurisdiction to which Product is to be
directly shipped hereunder, or (ii) written evidence that such sale is otherwise
exempt from such taxes. Where applicable, transportation and taxes shall appear
as separate items on Adaptec's invoice.
5. FORECASTS, ORDERING & ADJUSTMENTS
5.1 Forecasts. Purchaser will provide Adaptec, on the Effective
Date, and thereafter on the first day of each calendar month, a forecast of
Purchaser's quantity requirements for each Product for each of the months
remaining in the Term. While such forecasts will not be regarded as a commitment
to purchase, they shall represent and reflect Purchaser's good faith
expectations of customer demand. Purchaser acknowledges that forecasts will be
used by Adaptec for material and manufacturing planning purposes.
5.2 Purchase Orders. On the first day of each calendar month,
Purchaser shall issue Purchase Orders to Adaptec to initiate the performance of
Services with respect to the Products. Each Purchase Order will be issued by
Purchaser in accordance with the applicable Lead Times to allow Delivery during
the Term and, together with previously issued Purchase Orders, shall cover the
ordering of Products to be delivered during * .
Quantities specified in each Purchase Order shall be at least the Minimum Lot
Size for each Product ordered. Adaptec shall use reasonable efforts to
acknowledge the Purchase Order and to confirm the scheduled Delivery Date within
forty-eight (48) hours. No Purchase Order shall be binding until accepted by
Adaptec.
5.3 No Cancellation. Purchaser may not cancel any Products
ordered or on order for Delivery. Upon Purchaser's request, Adaptec will use
reasonable efforts to reschedule Products scheduled for Delivery *
. However, such adjustment may be subject
to additional costs or charges and may not be feasible for short time frames.
5.4 Agreement Controls. Except for the Products, quantities and
other matters necessary to be specified by a Purchase Order, to the extent
accepted by Adaptec, the terms governing the manufacture, delivery, acceptance
and payment for the Products will be governed by the terms and conditions of
this Agreement. In the case of conflict between this Agreement and any Purchase
Order, invoice, acknowledgment or similar document, the terms of this
5
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 6
Agreement will prevail. Any remedies at law or equity not specifically
disclaimed or modified by this Agreement remain available to both parties.
6. DELIVERY, CARRIER & RISK OF LOSS
6.1 Delivery of Product; Risk of Loss. All Products purchased
hereunder shall be Delivered F.O.B. Adaptec's dock in the San Francisco Bay
Area, and title and risk of loss or damage to the Products will pass to
Purchaser at such Delivery Point. All quoted Delivery dates are estimates only
and Adaptec shall not be liable for any failure to meet a quoted Delivery date.
Notwithstanding the foregoing, Adaptec will make reasonable commercial efforts
to meet approved Delivery dates, subject to Purchaser's authorization to
purchase Long Lead Time Components.
6.2 Shipment. Unless otherwise agreed by the parties, shipment
costs from San Francisco and Milpitas to destinations within the United States
shall be freight collect. The carrier will be selected by Adaptec. In no event
shall Adaptec be liable for any delay in delivery, or assume any liability in
connection with shipment, nor shall the carrier be deemed an agent of Adaptec.
All claims for damages must be filed with the carrier. Shipments may be made in
installments. All shipments will be made directly to Purchaser; no drop
shipments shall be made under this Agreement. Unless otherwise agreed in writing
or as set forth in the Packaging Specification, all Products will be packed and
shipped in accordance with Adaptec's normal practices.
7. PAYMENTS
Upon Delivery of the Products, Adaptec will send an invoice to Purchaser
identifying the Purchase Order and confirming the quantity and description of
all Products that have been shipped. Purchaser will pay invoices for Products,
or such other invoices as are issued under this Agreement, within thirty (30)
days of receipt. Payment of invoices shall be made to Adaptec as Adaptec may
direct in its invoice (or otherwise in writing). Payment does not constitute
final acceptance of the Products and is subject to adjustments for errors,
shortages and defects. Shipments, deliveries, and performance of the Services
shall at all times be subject to the approval of Adaptec's credit department and
Adaptec may at any time decline to make any shipments or deliveries or perform
any Services except upon receipt of payment, or upon terms and conditions or
security satisfactory to Adaptec. If shipments are delayed by Purchaser, payment
shall become due, at Adaptec's option, thirty (30) days after the date Adaptec
is prepared to make shipment.
8. QUALITY AND INSPECTION
8.1 Process and Quality. Adaptec will manufacture the Products
in accordance with its general process and quality procedures.
6
<PAGE> 7
8.2 Yield Improvement. Adaptec will use reasonable commercial
efforts to improve Product yield, but shall not be liable for Product yield
except as provided in Sections 9 and 10.
8.3 Adaptec Testing. Purchaser shall supply a Functional Test
Plan and appropriate Test Equipment for each Product. Adaptec shall fully test
all Products Delivered hereunder in accordance with its ICT and with the
applicable Functional Test Plan.
8.4 Partially Passed Products. In the event the Product passes
the ICT, but does not pass the Functional Test Plan due to a design-related
error, Adaptec shall so notify Purchaser. Such Products shall be deemed to
conform to the Specifications and other requirements of this Agreement, and may
not be rejected by Purchaser.
8.5 Training on Functional Testers. Within one (1) month of the
Effective Date, Purchaser may request training on the maintenance, usage and
debug of functional testers which are relevant to the Products. Adaptec shall
provide up to forty (40) hours of such training at Adaptec's facility in
Milpitas according to a mutually agreed upon schedule, at no additional charge.
8.6 Manufacture of Tester. Within three (3) months of the
Effective date, Purchaser may request that Adaptec manufacture for Purchaser a
functional tester. In such event, Adaptec shall manufacture the functional
tester as provided in and for the price set forth on the quotation attached as
Exhibit H.
9. ACCEPTANCE AND REJECTION OF PRODUCTS
Any Product Delivered hereunder shall be deemed accepted by Purchaser
unless Adaptec receives written notice of a defect or non-conformity with
respect to such Product within thirty (30) days of shipment to Purchaser or its
Customer. In the event a Product appears not to conform to the Specifications,
Purchaser shall promptly notify Adaptec and afford Adaptec a reasonable
opportunity to inspect such Product. No Product shall be returned to Adaptec
without compliance with Adaptec's Return Material Authorization ("RMA")
procedures, a current version of which is attached hereto as Exhibit D.
10. WARRANTY
10.1 Materials and Workmanship. Adaptec warrants that the
Products purchased and Delivered hereunder will, for a period of one (1) year
("Win Period"), commencing on the date of Delivery, be free from defects in
material and workmanship and conform to the Specifications. Notwithstanding the
foregoing, the warranty in this Section 10.1 will not extend to defects
attributable to the Product design or defects arising from compliance with the
Specifications or defects in the Functional Test Plan.
7
<PAGE> 8
10.2 Warranty Remedy. If any Product is found to breach the
warranty specified in Section 10.1 during the Warranty Period, Purchaser may
send a notice to Adaptec informing it of the breach of warranty and shall
provide appropriate failure analysis data indicating the defect or failure mode.
Upon Adaptec's confirmation of such failure analysis data, Adaptec shall
reimburse Purchaser for the lesser of the actual cost of repair of such
defective Product and the actual purchase price paid by Purchaser for such
defective Product. Subject to confirmation of a defect, Adaptec will make
payment of any reimbursement within thirty (30) days of receipt of the failure
analysis data and documentation of Purchaser's actual cost of repair or, if
repair is not appropriate, an explanation of why repair is not appropriate.
10.3 No Liability. Adaptec shall have no liability or obligation
to Purchaser under this Section 10 with respect to any Products which have been
subjected to abuse, misuse, improper use, negligence, accident, alteration,
repair or rework performed by unauthorized parties.
10.4 Disclaimer of Warranties. EXCEPT AS EXPRESSLY SET FORTH IN
SECTION 10.1, THE PRODUCTS ARE PROVIDED "AS IS" AND ADAPTEC MAKES NO
REPRESENTATION OR WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING
BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, AND NONINFRINGEMENT.
11. PRODUCT CHANGES
11.1 On Adaptec's Notice. In no event shall Adaptec make any
modification to the Products without Purchaser's prior written approval, which
shall not unreasonably be withheld or delayed.
11.2 At Purchaser's Request. Should Purchaser desire
modifications in the Product which do not affect form, fit, or function,
Purchaser shall submit its request to Adaptec in writing, and Adaptec shall use
reasonable commercial efforts to respond to such request in writing within five
(5) business days, setting forth the impact of such proposed change on the
performance of the Services and the Price of the Products. Any change affecting
safety or necessary for proper functioning of the Products will be implemented
by Adaptec as soon a& possible. Unless the parties agree otherwise, requested
changes will not affect the Products already scheduled or rescheduled for
Delivery as of the date such request is received by Adaptec. Purchaser shall be
responsible for payment for any inventory which is made obsolete or any yield
loss as a consequence of the implementation of the change.
11.3 Change Management. All changes to a Product shall be
subject to Adaptec's standard change management procedure.
8
<PAGE> 9
12. TRADEMARK LICENSE
12.1 Trademark License. Subject to the terms and conditions of
this Agreement, Adaptec hereby grants to Purchaser and Purchaser accepts a
worldwide, nontransferable, fully-paid and royalty-free right and license to use
the Adaptec trademarks "AIC", "Adaptec" and the Adaptec stylized "a" logotype
(the "Adaptec Marks") solely as affixed by Adaptec to Products and corresponding
packaging supplied by Adaptec to Purchaser hereunder. Purchaser acknowledges and
agrees that Adaptec 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 Adaptec may request in the
future, agrees to assign and affirm assignment to Adaptec of all such right,
title and interest in the Adaptec Marks and related goodwill. If requested by
Adaptec, Purchaser will cooperate with Adaptec 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 Adaptec.
12.2 Private Labeling. If Purchaser repackages Products
received from Adaptec, Purchaser agrees to repackage in packaging using
Purchaser's marks. Purchaser further agrees to use commercially reasonable
efforts to cease all use of the Adaptec Marks as soon as feasible.
13. OWNERSHIP OF PURCHASER TECHNOLOGY
Purchaser owns the Purchaser Technology. Notwithstanding the foregoing,
Purchaser is aware that Adaptec is in the business of developing and
manufacturing products similar to the Products, and intends to continue
to manufacture the same in the future. Nothing in this Agreement shall
limit the ability of Adaptec to produce products or portions of products
which are similar to the Products for customers other than Purchaser,
either during the term of this Agreement or after its termination,
provided that in doing so, Adaptec does not (a) infringe Purchaser's
intellectual property rights, (b) use Purchaser Technology or Purchaser
Confidential Information, or (c) breach the terms of the Asset
Acquisition Agreement or Cross-License Agreement entered into
contemporaneously herewith.
14. PROPRIETARY RIGHTS INDEMNITY
14.1 Adaptec Indemnity. Adaptec shall, at its expense and at
Purchaser's request, defend any claim or action brought against Purchaser, and
Purchaser's subsidiaries, affiliates, directors, officers, employees, agents and
independent contractors, to the extent it is based on a claim that the
manufacturing process for the Products infringes any patent, copyright, mask
work right or other intellectual property right, or misappropriates any trade
secret, of a third party ("Claim"). Adaptec shall pay all costs of defense and
settlement, together with any judgment which may be finally awarded; provided:
(a) Purchaser gives Adaptec reasonably
9
<PAGE> 10
prompt notice in writing of any such Claim and permits Adaptec, through counsel
of its choice, to defend and/or settle such Claim; and (b) Purchaser provides
Adaptec information, assistance and authority, at Adaptec's expense, to enable
Adaptec to defend such Claim. Adaptec shall not be responsible for any
settlement made by Purchaser without Adaptec's written permission.
14.2 Exceptions. Adaptec will not have liability under this
Section 14 to the extent that the Claim results from (a) the use of the
Purchaser Documentation or otherwise from the Product design or features; or (b)
Purchaser's combination, operation, or use of the Products with designs,
devices, parts, or software not supplied by Adaptec.
14.3 Purchaser Indemnity. Purchaser shall, at its expense and at
Adaptec's request, defend any claim or action brought against Adaptec, and
Adaptec's subsidiaries, affiliates, directors, officers, employees, agents and
independent contractors, to the extent it is based on a claim that the Purchaser
Documentation, the Product design or any third party intellectual property
incorporated in Product at the direction of Purchaser, infringes any patent,
copyright, mask work right or other intellectual property right, or
misappropriates any trade secret, of a third party ("Claim"). Purchaser shall
pay all costs of defense and settlement, together with any judgment which may be
finally awarded; provided: (a) Adaptec gives Purchaser reasonably prompt notice
in writing of any such suit and permits Purchaser, through counsel of its
choice, to defend and/or settle such Claim; and (b) Adaptec provides Purchaser
information, assistance and authority, at Purchaser's expense, to enable
Purchaser to defend such Claim. Purchaser shall not be responsible for any
settlement made by Adaptec without Purchaser's written permission.
14.4 Exceptions. Purchaser will not have liability under this
Section 14 to the extent that such Claim results from Adaptec's manufacturing
process.
15. GENERAL INDEMNITY
Each party hereto (the "Indemnifying Party") shall, at its own expense,
defend the other party, and its subsidiaries, affiliates, directors, officers,
employees, agents and independent contractors (collectively, the "Indemnified
Party"), from and against any and all loss, cost, liability or expense
(including costs and reasonable fees of attorneys and other professionals)
arising out of or in connection with the negligence of the Indemnifying Party's
agents and employees. Such indemnity shall include claims brought with respect
to the defective design of the Product for which Purchaser shall be the
indemnifying party. The Indemnifying Party shall pay all costs of defense and
settlement, together with any judgment which may be finally awarded; provided:
(a) the Indemnified Party gives the Indemnifying Party reasonably prompt notice
in writing of any such suit and permits the Indemnifying Party, through counsel
of its choice, to defend and/or settle such Claim; and (b) the Indemnified Party
provides the Indemnifying Party information, assistance and authority, at the
Indemnifying Party's expense, to enable the Indemnifying Party to defend such
Claim. The Indemnifying Party shall not be responsible for any settlement made
by the Indemnified Party without the Indemnifying Party's written permission.
10
<PAGE> 11
16. TERMINATION
16.1 Termination Without Cause. Purchaser may, for any reason or
for no reason whatsoever, terminate this Agreement, in whole, or in part, upon
two (2) months advance notice to Adaptec.
16.2 Effect Of Termination Without Cause. In the event Purchaser
terminates this Agreement pursuant to Section 16. 1, Purchaser shall pay to
Adaptec all amounts due to Adaptec, including: (a) for all Products ordered
under outstanding Purchase Orders not fulfilled due to such termination, the
full purchase price for all materials in finished goods and the proportionate
price (based on status of completion) of any work in process, and (b) the full
purchase price of all Risk-buy Inventory and Unique Inventory including freight,
tax, and other costs paid by Adaptec, riot incorporated into Products sold to
Purchaser. Adaptec shall promptly invoice such amounts after the effective date
of termination, and payment shall be made within thirty (30) days of the invoice
date.
16.3 Termination For Default. Either party may suspend its
performance and/or terminate this Agreement immediately upon written notice at
any time if:
(a) The other party is in material breach of any
warranty, term, condition or covenant of this Agreement other than those
contained in Section 17 and fails to cure that breach within thirty (30) days
after written notice of that breach and of the first party's intention to
suspend its performance or terminate;
(b) The other party is in material breach of any
warranty, term, condition or covenant of Section 17; or
(c) The other party: (i) becomes insolvent; (ii) admits
in writing its insolvency or inability to pay its debts or perform its
obligations as they mature; or (iii) makes a general assignment for the benefit
of creditors.
16.4 Effect of Termination in General. The following terms apply
to any termination under this Agreement, including without limitation,
termination for convenience and for default:
(a) Immediately upon any termination of this Agreement,
Adaptec shall, to the extent and at times specified by Purchaser, stop all work
on outstanding Purchase Orders, incur no further direct cost, and protect all
property in which Purchaser has or may acquire an interest pursuant to this
Section 16.
(b) Immediately upon any termination of this Agreement,
each party will return to the other party or, pursuant to the other party's
written instructions, destroy all materials in its possession containing
Confidential Information of the other party. Returned
11
<PAGE> 12
Confidential Information materials shall be shipped freight collect. In
addition, Adaptec shall immediately deliver to Purchaser or to Purchaser's
designated third party manufacturer, as Purchaser directs, any and all Purchaser
Technology, Inventory or other property of the Purchaser within Adaptec's
possession or control. Such items shall be delivered FOB the Adaptec facility at
which they are located (i.e., Singapore or Milpitas). Notwithstanding the
foregoing, Adaptec shall have no obligation to deliver any Inventory until and
unless Purchaser has paid in full all amounts due to Adaptec.
(c) Unless this Agreement is terminated pursuant to
Section 16.1 or by Adaptec pursuant to Section 16.3, Purchaser shall reimburse
Adaptec for the full purchase price paid by Adaptec, including freight, tax, and
other costs paid by Adaptec, of all Risk-buy Inventory and Unique Inventory
which is not incorporated into Products sold to Purchaser. Such reimbursement
shall be paid for as provided in Section 7.
(d) If this Agreement is terminated by Adaptec pursuant
to Section 16.3, then Purchaser shall immediately pay to Adaptec all amounts due
to Adaptec, including the full purchase price for all outstanding Purchase
Orders, and the full purchase price of all Risk-buy Inventory and Unique
Inventory, including freight, tax, and other costs paid by Adaptec, not
incorporated into Products sold to Purchaser.
(e) Notwithstanding any termination of this Agreement,
the provisions of Section 7, 9, 10, 12, 13, 14, 15, 17, 18 and the relevant
sections of Sections 16 and 19 shall remain in effect.
16.5 Transition Assistance. Purchaser may elect to purchase the
transition assistance specified in Exhibit E for transitioning the Services
provided by Adaptec hereunder to SCI Systems, Inc. in Singapore. Purchaser shall
exercise its election by paying to Adaptec the fee specified in Exhibit E within
thirty (30) days of the Effective Date. If Purchaser has paid such fee and the
Agreement is not terminated by Adaptec pursuant to Section 16.3, then upon
termination of the Agreement Adaptec shall provide such transition assistance to
Purchaser. Notwithstanding the foregoing, if the Agreement is terminated by
Adaptec to pursuant to Section 16.3, Adaptec shall have no obligation to provide
any such technical assistance and any fees paid by Purchaser therefor shall be
applied to amounts owed to Adaptec, with any residual fees refunded to
Purchaser.
17. CONFIDENTIALITY
Each party will protect the other's Confidential Information in
accordance with the terms of the MNDA. Notwithstanding the terms of the
MNDA, Purchaser may disclose the terms and conditions of this Agreement
to investors and potential investors, subject to such parties' agreement
to maintain such terms and conditions in confidence.
12
<PAGE> 13
18. LIMITATION OF LIABILITY
EXCEPT AS EXPRESSLY PROVIDED IN THIS AGREEMENT, AND EXCEPT AS SET FORTH
IN SECTIONS 14 AND 15, IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER OR
ANY OTHER PERSON FOR ANY SPECIAL, INDIRECT, INCIDENTAL, OR CONSEQUENTIAL DAMAGES
OF ANY KIND, INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS OR DAMAGES TO THE
OTHER PARTY'S BUSINESS REPUTATION HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY,
WHETHER IN AN ACTION FOR CONTRACT, STRICT LIABILITY OR TORT (INCLUDING
NEGLIGENCE) OR OTHERWISE, WHETHER OR NOT THE FIRST PARTY HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGE AND NOTWITHSTANDING THE FAILURE OF ESSENTIAL PURPOSE
OF ANY REMEDY.
19. GENERAL
19.1 Notice. Any notice shall be considered given if delivered
personally or if sent by either party to the other by prepaid Federal Express,
registered or certified mail, or by telefax (followed by a confirming hard copy)
addressed to the address specified below, or to such other address as the party
provides by written notice:
If to Adaptec:
Adaptec, Inc.
691 S. Milpitas Boulevard
Milpitas, California 95035
Attention: Vice President, Operations
cc: General Counsel
If to Purchaser:
Jaycor Networks, Inc.
9775 Towne Centre Drive
San Diego, CA 92121
Attention: President
19.2 Assignment. Neither party shall assign any of its rights or
privileges hereunder without the prior written consent of the other party;
provided, however, that Adaptec may subcontract the performance of any or all of
the Services without Purchaser's consent, subject to provision of written notice
to Purchaser identifying such subcontractor. Any attempt at assignment in
derogation of the foregoing shall be null and void. Subject to the foregoing,
this Agreement shall be binding upon and inure to the benefit of the parties
hereto, their subsidiaries, and their respective successors and assigns.
13
<PAGE> 14
19.3 Allocation of Risk. The parties acknowledge and affirm that
the sections on limitation of liability, warranties and disclaimer of warranties
and damage limitation in this Agreement allocate the risks between the parties.
This allocation is reflected in the pricing of the Products and is an essential
element of the basis of the bargain between the parties.
19.4 Export Control.
(a) Representation. Purchaser agrees to comply strictly
and fully with all export controls imposed on the Products by any country or
organization in whose jurisdiction Purchaser operates or does business.
Purchaser will not knowingly, export or reexport any Product to any country
prohibited under United States Export Administration Regulations, without first
obtaining a valid license to so export or reexport the Products.
(b) Responsibility. All export permits, import
certificates, insurance, duty, customs clearance charges and/or licenses and
related costs will be Purchaser's responsibility.
19.5 Waiver. No failure or delay on the part of either party in
the exercise of any right or privilege hereunder shall operate as a waiver
thereof or as a waiver of the exercise of any other right or privilege
hereunder, nor shall any single or partial exercise of any such right or
privilege preclude other or further exercise thereof or of any other right or
privilege.
19.6 Governing Law: Attorneys' Fees. This Agreement shall be
governed by and enforced in accordance with California law as applied to
contracts entered into in California by California residents to be performed
entirely within the State of California. In the event either party is required
to seek legal recourse to enforce its rights hereunder, the prevailing party
shall be entitled to receive, in addition to any other award, all costs in
connection therewith, including reasonable attorneys' fees.
19.7 Titles . Any titles included herein are for convenience
only and are not to be used in the interpretation of this Agreement.
19.8 Severability. If any provision of this Agreement is held to
be ineffective, unenforceable or illegal for any reason, such provision
partially will be enforced to the maximum extent permitted by law, and the
remainder of this Agreement will remain in full force and effect.
19.9 Force Majeure. Neither of the parties shall be deemed to be
in default of this Agreement to the extent any failure to perform hereunder is a
result of conditions beyond the other party's reasonable control, including but
not limited to, acts of God, war, strikes, fires, floods, earthquakes, work
stoppages and embargoes, material shortages, subcontractor delays, equipment or
other facilities failures (which delays or failures are beyond the reasonable
control, without negligence, of the defaulting party), and neither party shall
have the right to terminate this Agreement for any such delay or default on the
part of the other party.
14
<PAGE> 15
19.10 Integration. This Agreement and its Exhibits embodies the
entire understanding of the parties and supersedes any prior agreements,
representations or understandings between the parties as it relates to the
subject matter hereof. No amendment or modification of this Agreement shall be
valid or binding unless in writing and signed by duly authorized representatives
of each party.
19.11 Publicity. Except as required by law, neither party will
disclose the terms of this Agreement to any third party without the express
written consent of the other, which consent shall not unreasonably be withheld
or delayed.
19.12 Relationship. The parties are independent contractors.
Nothing contained herein and no action taken pursuant hereto shall constitute
the parties as joint ventures or the agents of the other party for any purpose
or in any sense whatsoever.
19.13 Counterparts. This Agreement may be executed in
counterparts, each of which constitutes an original, and together which
constitute the Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives as of the Effective Date.
JAYCOR NETWORKS, INC. ADAPTEC, INC.
("Purchaser") ("Adaptec")
By: /s/ TERRY M. FLANAGAN By: /s/ Larry Boucher
------------------------------- -------------------------------
Name: Name:
----------------------------- -----------------------------
Title: Title:
---------------------------- ----------------------------
15
<PAGE> 16
EXHIBIT A
Products, Prices Lead Times & Minimum Lot Size
AHA-F940 32-bit PCI Fibre Channel Host Bus Adapter
AHA-F950 64-bit PCI Fibre Channel Host Bus Adapter
Lead Time for all Products *
Minimum Lot Sizes for all Products * .
STANDARD COST
<TABLE>
<CAPTION>
PRODUCT BOARDS: PART NUMBER PRICE
--------------- ----------- -----
<S> <C> <C>
AHA-F940 5 PACK 1699300 *
AHA-F940 BAG BULK 1668300 *
AHA-F940 DEV KIT 1697200 *
AHA-F940 HOST ADAPTER 1668200 *
AHA-F940 MAC 5-PACK 1749600 *
AHA-F940 SINGLE 1696900 *
AHA-F940/AVID ADAPTER 1752400 *
AHA-F940/AVID HOST ADAPTER 1750600 *
AHA-F940/AVID KIT 1752500 *
AHA-F940/AVID SINGLE 1750700 *
AHA-F940/JA SGL 1696900JA *
AHA-F950 5 PACK 1699400 *
AHA-F950 BAG BULK 1649100 *
AHA-950 DEV KIT 1697300 *
AHA-F950 HOST ADAPTER 1649000 *
AHA-F950 SINGLE 1697000 *
AHA-F950/Al BAG BK 1668500 *
AHA-F950/Al HOST ADAPTER 1668400 *
AHA-F950/JA SGL 1697000JA *
AHA-F950/SGI HOST ADAPTER 1687800 *
AHA-F950/SGI KIT 1687600 *
</TABLE>
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 17
EXHIBIT B
Purchaser Documentation and Test Equipment
PRODUCT: AHA-F940
-design: schematics
-layout: Gerber Files (located in directory:9945d3/pcb/mfg/994504d.00 at
apache:/export/proj/pcbcad/p1/pcbcad/fire_files/)
-building parameters:
bill of materials
assembly drawings (located in directory:9945d3/pcb/mfg/994504d.00 at
apache:/export/proj/pcbcad/p1/pcbcad/fire_files/)
fab drawings (located in directory:9945d3/pcb/mfg/994504d.00 at
apache:/export/proj/pcbcad/p1/pcbcad/fire_files/)
Programmable Array Logic equations
-verification and testing
test plans
test reports from Adaptec's Compatibility Test Laboratory and Product Test
Laboratory
certificates for FCC (US), UL (US), CE (Europe), VCCI (Japan),
and C-TICK (Australia)
related ECN/ECR/EDA
PRODUCT: AHA-F950
-design: schematics
-layout: Gerber Files (located in directory: 9946e3/pcb/mfg/994604e.00 at
apache:/export/proj/pcbcad/p/pcbcad/fire_files/)
-building parameters:
bill of materials
assembly drawings (located in directory: 9946e3/pcb/mfg/994604e.00 at
apache:/export/proj/pcbcad/pl/pcbcad/fire_files/)
fab drawings (located in directory: 9946e3/pcb/mfg/994604e.00 at
apache:/export/proj/pcbcad/pl/pcbcad/fire_files/)
Programmable Array Logic equations
-verification and testing
test plans
test reports from Adaptec's Compatibility Test Laboratory and Product Test
Laboratory
certificates for FCC (US), UL (US), CE (Europe), VCCI (Japan),
and C-TICK (Australia)
related ECN/ECR/ EDA
<PAGE> 18
Test Equipment
FUNCTIONAL TESTER * :
AHA-F951
AHA-F951
AHA-F950B (F952)
AHA-F950B (F952)
AHA-F940
AHA-F9x0
ICT TEST FIXTURE * :
AHA-F940
AHA-F950
ICT TEST FIXTURE * :
GenRad ICT Fixture AHA-F940
GenRad ICT Fixture AHA-F950
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 19
EXHIBIT C
Master Mutual Non-Disclosure Agreement
<PAGE> 20
MUTUAL CONFIDENTIAL DISCLOSURE AGREEMENT
Agreement dated Sept 2, 1998, between Jaycor Networks, Inc ("Jaycor") and
Adaptec, Inc., ("Adaptec")
1. Background. Jaycor and Adaptec intend to engage in discussions and
negotiations concerning a possible business transaction between the parties. In
the course of such discussions and negotiations, it is anticipated that each
party may disclose or deliver to the other certain trade secrets or confidential
or proprietary information for the purpose of enabling the parties, and their
respective employees, officers, directors, agents and advisors (collectively,
"Representatives"), to evaluate the feasibility of such business transaction.
Jaycor and Adaptec have entered into this Agreement in order to assure the
confidentiality of such trade secrets and confidential or proprietary
information in accordance with the terms of this Agreement.
2. Proprietary Information. As used in this Agreement, the term
"Proprietary Information" shall mean all trade secrets or confidential or
proprietary information designated as such in writing by a disclosing party,
whether by letter or by the use of an appropriate proprietary stamp or legend,
prior to or at the time any such trade secret or confidential or proprietary
information is disclosed to the receiving party. Notwithstanding the foregoing,
information which is orally or visually disclosed by one party to the other, or
is disclosed in writing without an appropriate letter, proprietary stamp or
legend, shall constitute Proprietary Information if (i) it would be apparent to
a reasonable person, familiar with the disclosing party's business and the
industry in which it operates, that such information is of a confidential or
proprietary nature the maintenance of which is important to the disclosing party
or if (ii) a disclosing party, within thirty (30) days after such disclosure,
delivers to the receiving party a written document or documents describing such
information and referencing the place and date of such oral, visual or written
disclosure and the names of the Representatives of the receiving party to whom
such disclosure was made.
3. Disclosure of Proprietary Information. The receiving party shall hold
in confidence, and shall not disclose (or permit or suffer disclosure) to any
person other than its Representatives, any Proprietary Information of the
disclosing party. The receiving party and its Representatives shall use such
Proprietary Information only for the purpose for which it was disclosed and
shall not use or exploit such Proprietary Information for its own benefit or the
benefit of another without the prior written consent of the disclosing party.
Without limitation of the foregoing, each party shall not cause or permit
reverse engineering of the other party's Proprietary Information or
decompilation or disassembly of any software programs which are part of the
Proprietary Information. The receiving party shall disclose Proprietary
Information received by it under this Agreement only to Representatives who have
a need to know such Proprietary Information in the course of the performance of
their duties in connection with the transaction contemplated by this Agreement,
and who are bound to protect the confidentiality of such Proprietary
Information. The receiving party will promptly report to the disclosing party
any actual or suspected violation of the terms of this Agreement and will take
all reasonable further steps requested by the disclosing party to prevent,
control or remedy any such violation.
-1-
<PAGE> 21
4. Limitation Obligations. The obligations of the receiving party
specified in Section 3 above shall not apply, and the receiving party shall have
no further obligations, with respect to any Proprietary Information to the
extent the receiving party can demonstrate that such Proprietary Information:
(a) is generally known to the public at the time of disclosure or
becomes generally known through no wrongful act on the part of the receiving
party;
(b) is in the receiving party's possession at the time of
disclosure;
(c) becomes known to the receiving party through disclosure by
sources other than the disclosing party having the legal right to disclose such
Proprietary Information;
(d) is independently developed by the receiving party without
reference to or reliance upon the Proprietary Information; or
(e) is required to be disclosed by the receiving party to comply
with applicable laws or governmental regulations, provided that the receiving
party provides prior written notice of such disclosure to the disclosing party
and takes reasonable and lawful actions to avoid and/or minimize the extent of
such disclosure.
5. Ownership of Proprietary Information. The parties agree that the
disclosing party is and shall remain the exclusive owner of the Proprietary
Information and all patent, copyright, trade secret, trademark and other
intellectual property rights therein. No license or conveyance of any such
rights to the receiving party by the disclosing party is granted or implied
under this Agreement.
6. Return of Documents. The receiving party shall, upon the termination of
this Agreement or the request of the disclosing party, return to the disclosing
party all drawings, documents and other tangible manifestations of Proprietary
Information received by the receiving party pursuant to this Agreement (and all
copies and reproductions thereof).
7. Miscellaneous
(a) This Agreement supersedes all prior agreements, written or
oral, between Jaycor and Adaptec relating to the subject matter of this
Agreement. This Agreement may not be modified, amended or discharged, in whole
or in part, except by an agreement in writing signed by the parties.
(b) This Agreement will be binding upon and inure to the benefit
of the parties hereto and their respective heirs, successors and assigns.
(c) This Agreement shall be construed and interpreted in
accordance with the laws of the State of California, without reference to any
Conflicts of laws rules. In the event of
-2-
<PAGE> 22
any dispute arising out of this Agreement, the prevailing party shall be
entitled to an award of its costs and attorneys' fees.
(d) The parties agree that any breach of this Agreement will
cause substantial and irreparable damages and, therefore, in the event of any
such breach, in addition to other remedies which may be available, and the
injured party shall have the right to seek specific performance and other
injunctive and equitable relief.
EXECUTED as of the day and year first set forth above.
Jaycor Networks, Inc. Adaptec, Inc.
By: /s/ TERRY M. FLANAGAN By: /s/ THOMAS MARMEN
------------------------- -------------------------------------
Title: President & CEO Title: V.P. Adaptec, Inc.
-3-
<PAGE> 23
EXHIBIT D
RMA Procedure
[ADAPTEC LOGO] FACSIMILE TRANSMISSION
TO:
COMPANY
FAX:
DATE: November 24, 1998
FROM: Elisa Walker
FAX (408) 957-7955
SUBJECT: RETURN AUTHORIZATION
FYI RESPONSE TO YOUR FAX CONTROL # RESPONSE RQRD
URGENT X RESPONSE TO YOUR REQUEST X RESPOND By
-4-
<PAGE> 24
[ADAPTEC LOGO]
OEM RMA REQUEST INFORMATION
THE FOLLOWING INFORMATION AND PROCEDURES ARE REQUIRED WHEN REQUESTING A RETURN
MATERIAL AUTHORIZATION (RMA) NUMBER.
A. Submit RMA requests via Fax to the following number:
Fax Number: 408-957-7955
RMA Customer Service Representatives:
Jessica Pelayo
Elisa Walker
B. Provide the following information with your request:
1. Full company name and ship to address.
2. Contact person with phone & Fax number.
3. Quantity returning, model number and Adaptec six digit part number
located component side up, on an white label affixed to a surface mounted
IC. The bar-coded serial number, is located on the backside of the
product.
EXAMPLE: QTY. 2
AHA-1542CF SINGLE = ADAPTEC MODEL NUMBER
571600 = ADAPTEC SIX DIGIT PART NUMBER
9352 = ADAPTEC FOUR DIGITAL DATE CODE
4. Your part number if applicable.
5. P.O. number or debit memo number if applicable.
6. Any special instructions or requirements.
<PAGE> 25
7. MINIMUM RETURN QUANTITY OF 10 PRODUCTS PER RMA REQUEST ONCE A MONTH. IF
QUANTITY IS LESS THAN 10 PRODUCTS PER REQUEST, THAN A RMA CAN BE ISSUED
TWICE A MONTH.
C. UPON RECEIPT OF THE ABOVE INFORMATION, WARRANTY STATUS WILL BE DETERMINED,
AND A CONFIRMATION LETTER WITH THE RMA NUMBER WILL BE FAXED TO YOU WITHIN
48 HOURS.
D. Place products in individual anti-static bags, and package utilizing
proper packing insulation. If shipping in multiple cartons, boxes should
be numbered; 1 of 3, 2 of 3, etc.
E. Return only products and quantities authorized on request confirmation.
All return shipments will be verified with original return request, and
customer notified of any discrepancies received. For international
customers, provide a pre-alert prior
NOTE: ALL INTERNATIONAL CUSTOMERS TO PROVIDE A PRE-ALERT BEFORE SHIPPING
PRODUCTS.
F. ENCLOSE A PACKING SLIP, CLEARLY LABEL EACH BOX WITH THE RMA NUMBER AND
SHIP FREIGHT PRE-PAID. ANY PACKAGE RECEIVED WITHOUT A VALID RMA NUMBER
CLEARLY MARKED ON THE OUTSIDE OF THE BOX WILL BE RETURNED UNOPENED.
G. CUSTOMERS RETURN MATERIALS TO:
ADAPTEC, INC.
ATTN: RECEIVING - M/S 225
984 SOUTH MILPITAS BLVD.
MILPITAS, CA 95035
ATTN: RMA #RXXXXX
H. Repaired products will be returned freight pre-paid by Adaptec no later
than 15 working days from date of receipt of defective materials.
I. If products are deemed unrepairable due to obsolescence or unavailability
of replacement parts, Adaptec will at their option either replace products
with current equivalent products, or issue credit at the last listed
purchase price.
J. The RMA number will be valid for 30 days from date of issuance and will be
canceled if products are not received in that time frame, unless customer
requests an extension.
NOTE: COMPLIANCE TO ALL OF THE ABOVE INFORMATION WILL INSURE THAT AN RMA REQUEST
IS COMPLETED IN A TIMELY AND EFFICIENT MANNER WITHOUT ANY UNNECESSARY
DELAYS.
<PAGE> 26
[ADAPTEC LOGO]
DEFECTIVE MATERIALS RMA REQUEST
TO: ADAPTEC RMA DEPT. DATE:__________
FAX #: 408-957-7955 COMPANY NAME:
______________________________________
ATTN: Elisa, Walker CONTACT NAME:
______________________________________
Jessica Pelayo FAX # & TELEPHONE #:
______________________________________
CUSTOMER ID #:
______________________________________
SHIP TO ADDRESS:
______________________________________
______________________________________
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
QTY ADAPTEC MODEL NUMBER ADAPTEC P/N CUSTOMER P/N DATE CODES
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 27
EXHIBIT E
Transition Assistance
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
MAN-HOURS/
ACTIVITIES RESOURCES PERSON REMARKS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SUB-CON'S QUALITY SYSTEM/PLANT IMPT: ON A PER SUB-CON BASIS
QUALIFICATION
- -------------------------------------------------------------------------------------------------------
>> FIRST AUDIT QA Engr (x1) *
- -------------------------------------------------------------------------------------------------------
QA Assistant Engr (x1) *
- -------------------------------------------------------------------------------------------------------
QA EA (x1) *
- -------------------------------------------------------------------------------------------------------
Snr Process Engr (x1) *
- -------------------------------------------------------------------------------------------------------
Test Engr (x2) *
- -------------------------------------------------------------------------------------------------------
Purchasing Sect Mgr (x1) *
- -------------------------------------------------------------------------------------------------------
*Packaging Engr (x1) * Packaging will only be involved
if sub-con has the
- -------------------------------------------------------------------------------------------------------
*Packaging EA (x1) * capability to assemble kits
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
>> FOLLOW-UP AUDIT QA Engr (x1) * Follow-up audit will be
performed if the First Audit
- -------------------------------------------------------------------------------------------------------
QA Assistant Engr (x1) * finds non-conformances which
requires corrective
- -------------------------------------------------------------------------------------------------------
QA EA (x1) * action
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
DOCUMENTATION PACKAGE IMPT: ON A PER PRODUCT BASIS
- -------------------------------------------------------------------------------------------------------
>> PACKAGE COMPILATION Doc Con Specialist (x1) *
- -------------------------------------------------------------------------------------------------------
> BOM (Product &
Functional Tester)
- -------------------------------------------------------------------------------------------------------
> Deliverables (ASW
masters, FT/ICT prgms,
- -------------------------------------------------------------------------------------------------------
Postscript files for
artworks, Films for
- -------------------------------------------------------------------------------------------------------
Sleeves/CD)
- -------------------------------------------------------------------------------------------------------
> Specs (AVL list, Prnt/Pkg/
Lbl instructions,
- -------------------------------------------------------------------------------------------------------
Schematic/Fab/Assy
drawings, others)
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
>> PACKAGE VERIFICATION Engr (x1) *
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
Initials __ __
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 28
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
MAN-HOURS/
ACTIVITIES RESOURCES PERSON REMARKS
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
>> COMPILATION OF NON-AVL Purchasing Sect Mgr (x1) *
SUPPLIERS
- ----------------------------------------------------------------------------------------------------------
> PCB, manuals, others Purchaser (x2) *
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
MFG/TESTING CAPABILITY TRANSFER
- ----------------------------------------------------------------------------------------------------------
>> IN-CIRCUIT TESTER IMPT: ON A PER FIXTURE BASIS
- ----------------------------------------------------------------------------------------------------------
> Fixture re-tool & Test Test Engr (x1) * According to Genrad Inc., SCI
program modification is using GR2286 ICT
- ----------------------------------------------------------------------------------------------------------
Testers which are different
from AMS. The worst case
- ----------------------------------------------------------------------------------------------------------
> Fixture transfer, set-up Test Engr (x1) * is the ICT Test Fixture needs
& training to be re-tooled and the
- ----------------------------------------------------------------------------------------------------------
> ICT qualification QA Engr (x1) * test program need to be modified
and re-qualified
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
>> FUNCTIONAL TESTER
- ----------------------------------------------------------------------------------------------------------
> Tester verification in AMS Test Engr (x1) * IMPT: ON A PER TESTER BASIS
(EXCEPT FOR
- ----------------------------------------------------------------------------------------------------------
> Tester transfer & set-up Test Engr (x1) * TRAINING, WHICH IS PER PRODUCT
sub-con BASIS)
- ----------------------------------------------------------------------------------------------------------
> FT qualification QA Engr (x1) *
- ----------------------------------------------------------------------------------------------------------
> Training & knowledge transfer Test Engr (x2) *
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
>> FIRMWARE PROGRAMMING
PROCESS IMPT: ON A PER PRODUCT BASIS
- ----------------------------------------------------------------------------------------------------------
> Training & knowledge transfer Test EA (x1) * Assuming that all sub-con
(including equipments are compatible
- ----------------------------------------------------------------------------------------------------------
MAC address) (Zebra 140xi printer, TEC
printer, AutoLabel 3000,
- ----------------------------------------------------------------------------------------------------------
> Programmer qualification QA EA (x1) * DATA I/O programmer Codesoft
software) and no
- ----------------------------------------------------------------------------------------------------------
hardware/software transfer
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
>> MANUFACTURING PROCESS IMPT: ON A PER SUB-CON BASIS
- ----------------------------------------------------------------------------------------------------------
> *BGA Process transfer Snr Process Engr (x1) * Applicable only if products
requires BGA processes
- ----------------------------------------------------------------------------------------------------------
Initials __ __
</TABLE>
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 29
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
MAN-HOURS/
ACTIVITIES RESOURCES PERSON REMARKS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
> *BGA Quality spec training QA EA (x1) * Sub-con must have BGA
capability (including
- ----------------------------------------------------------------------------------------------------
inspection). There will be
no hardware (including
- ----------------------------------------------------------------------------------------------------
stencils)/software transfer
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
>> PACKAGING PROCESS IMPT: ON A PER SUB-CON BASIS
- ----------------------------------------------------------------------------------------------------
> Training for creating Packaging EA (x1) *
diskette label
- ----------------------------------------------------------------------------------------------------
>*Training for Barcode Packaging EA (x1) * Applicable only if sub-con
Tracking System will perform BTS
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
FIRST BUILD SUPPORT IMPT: ON A PER PRODUCT BASIS
- ----------------------------------------------------------------------------------------------------
>> TECHNICAL COORDINATION QA Assistant Engr (x1) *
MEETING
- ----------------------------------------------------------------------------------------------------
QA EA (x1) *
- ----------------------------------------------------------------------------------------------------
QA Rel Snr Engr (x1) *
- ----------------------------------------------------------------------------------------------------
Snr Process Engr (x1) *
- ----------------------------------------------------------------------------------------------------
Test Engr (x2) *
- ----------------------------------------------------------------------------------------------------
Purchasing Sect Mgr (x1) *
- ----------------------------------------------------------------------------------------------------
Doc Con Snr Admin (x1) *
- ----------------------------------------------------------------------------------------------------
Planner (x1) *
- ----------------------------------------------------------------------------------------------------
Packaging EA (x1) *
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
>> FIRST BUILD ON-SITE SUPPORT QA EA (x1) *
- ----------------------------------------------------------------------------------------------------
QA AE (x1) *
- ----------------------------------------------------------------------------------------------------
Snr Process Engr (x1) *
- ----------------------------------------------------------------------------------------------------
Packaging EA (x1) *
- ----------------------------------------------------------------------------------------------------
Test Engr (x2) *
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
>> FIRST ARTICLE
- ----------------------------------------------------------------------------------------------------
> PCBA level QA Technician (x1) *
- ----------------------------------------------------------------------------------------------------
>*Diskette QA Technician (x1) * Applicable only if diskette
or single/kit level products
- ----------------------------------------------------------------------------------------------------
>*Kit level QA Technician (x1) * involved
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
>> FIRST 3 LOTS BUY-OFF QA Inspector (x5) * First 3 lost of 150 each
(ON SITE)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Initials __ __
</TABLE>
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 30
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
MAN-HOURS/
ACTIVITIES RESOURCES PERSON REMARKS
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
MISCELLANEOUS IMPT: ON A PER PRODUCT BASIS
- ----------------------------------------------------------------------------------------------------
>> TRANSFER COORDINATION Section Mgr (x1) *
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
>> POST TRANSFER TECHNICAL Engr (x1) *
SUPPORT
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Grand Total * (US$)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
REMARKS:
(1) Cost Estimate does not provide for quality monitoring beyond first 3 lots
(2) Cost Estimation does not provide for customer complaints support post
transfer
(3) Transfer coordination & post transfer technical support are provision for
activities beyond those itemised above
(4) This cost estimation is based on a typical Adaptec product. Products with
unique requirements will require reassessment of cost related to the unique
areas.
(5) Cost Estimate for ICT does not include supplier charges for fixture
and program modifications
(6) Exchange rate of S$1.7238 to US$1.000 used
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 31
EXHIBIT F
Long Lead Time Components
These are the Long Lead Time Components for the F950/1697000 and the
F940/1696900:
<TABLE>
<CAPTION>
ADAPTEC PART NUMBER DESCRIPTION LEAD-TIME
- ------------------- ----------- ---------
<S> <C> <C>
1. * * *
2. * * *
3. * * *
4. * * *
</TABLE>
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 32
EXHIBIT G
Unique Components
UNIQUE PARTS LIST (COMPONENTS) FOR F940/950
<TABLE>
<CAPTION>
Std
P/N Desc. OPA Cost
- --- ----- --- ----
<S> <C> <C> <C>
739911 aic 1160 x1 *
994507-00 pcb x1 *
994607-00 pcb x1 *
13470 ic x1 *
13473 ic x1 *
13961 ic x1 *
13555 res chip x1 *
14031 res chip x1 *
14417 res ntwk x1 *
13671 bracket x1 *
13784 screwlock x2 *
11916 cap x1 *
13304 conn x1 *
13474 osc xtal x1 *
13699 led x1 *
13783 plug x1 *
511450-00 install guide 1 *
497530-00 flyer 1 *
497429-00 cable 1 *
497528-00 label 1 *
497605-00 card 1 *
511703-00 card 1 *
511652-00 user guide 1 *
511703-00JA card 1 *
511450-00JA install guide 1 *
511652-00JA user guide 1 *
</TABLE>
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 33
EXHIBIT H
Quotation for Manufacture of Functional Tester
<TABLE>
<CAPTION>
Unit Total
S/N Item Description Cost Qty Cost
<S> <C> <C> <C> <C>
FIXTURE
- --------------------------------------------------------------------------------
1 Desktop fixture fabrication * 1 *
TOTAL *
- --------------------------------------------------------------------------------
SYSTEM
1 Intel Pentium System with 200 CPU & * 1 *
32 MB
Ram
ISA display card
Seagate 2.1GB IDE Harddisk
1.44MB Floppy Disk Drive
300W Power Supply
MS Dos TOTAL *
- --------------------------------------------------------------------------------
ACCESSORIES
1 Laser Handheld Scanner * 1 *
2 I/O Port Controller * 1 *
3 Universal Fault Board * 1 *
4 PCI Bus Isolation Board * 1 *
5 PCI Bus Extender * 1 *
6 Lambda Power Supply * 1 *
7 Solid state Relay * 1 *
8 PCI bridge Board * 1 *
9 Loop-back cable * 1 *
10 Miscellaneous * 1 *
TOTAL *
- --------------------------------------------------------------------------------
LABOUR COST
1 S/W & H/W development &
Troubleshooting Time:
(One Test Development Engr for
100 hrs) * 100 *
TOTAL *
- --------------------------------------------------------------------------------
GRAND
TOTAL *
- --------------------------------------------------------------------------------
</TABLE>
Remarks
(1) Fixture fabrication, System & Accessories are estimation and are based on
AHA-F950 product tester
* "Confidential portion has been omitted and filed separately with the
Securities and Exchange Commission."
<PAGE> 1
EXHIBIT 10.35
PROFESSIONAL SERVICES AGREEMENT 80005
THIS AGREEMENT is effective as of February 1, 1998 Mr. Edward Frymoyer,
EMF Associates (hereinafter called the "EMF Associates") and Jaycor Networks,
Inc., a Delaware corporation (hereinafter called "Jaycor Networks, Inc.").
WITNESSETH:
WHEREAS, Jaycor Networks, Inc. is conducting certain programs of study and
development pursuant to its business.
WHEREAS, EMF Associates desires to so aid Jaycor Networks, Inc. by
performing such services (hereinafter called the "work");
NOW, THEREFORE, in consideration of the mutual covenants and premises
herein contained, the parties hereto agree as follows:
EMF Associates shall perform all the services set forth in the attached
schedule, for the consideration set forth therein, and the rights and
obligations of the parties to this Agreement shall be subject to and governed
by said Schedule and the General Provisions attached hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date and year first above written.
Jaycor Networks, Inc.
BY: /s/ EDWARD FRYMOYER BY: /s/ FRANK C. ROBBINS
-------------------------- -----------------------------
Edward Frymoyer, EMF Associates Frank C. Robbins
EMF Associates JAYCOR Contracts Manager
Social Security No.: 95-3701733
DATE: 7/13/98 DATE: 7/13/98
----------------- -----------------
<PAGE> 2
SCHEDULE
ARTICLE I - TERM OF AGREEMENT
This Agreement shall commence on February 1, 1998 and shall continue in
effect until January 31, 1999, unless terminated earlier as hereinafter
provided.
ARTICLE II- STATEMENT OF WORK
A. During the above specified period of performance, EMF Associates
shall perform the work described below:
Consulting on Fibre Channel
B. EMF Associates agrees to perform such services as may be requested
by Jaycor Networks, Inc. to the best of his/her ability at such place or places
and during such hours as shall be mutually agreeable to the parties hereto.
C. EMF Associates will work under the technical direction of Dr. Terry
Flanagan.
ARTICLE III - PAYMENT
A. For performing the work, EMF Associates shall be paid $10,000 per
month during the term of this agreement.
B. For periods during which EMF Associates is in authorized travel
status, he/she will be reimbursed reasonable, actual expenses for transportation
and lodging. A receipt is required for any reimbursable expenditure of $10.00
or more.
C. Jaycor Networks, Inc. will reimburse EMF Associates for cost of
transportation by common carrier and/or automobile mileage when EMF
Associates's automobile is used as a means of transportation in connection with
work under this Agreement.
<PAGE> 3
ARTICLE IV - REQUIREMENTS
This Agreement is for services specified in ARTICLE II - STATEMENT OF
WORK, and for the period set forth therein. Performance of services shall be
made only as requested by Jaycor Networks, Inc.
GENERAL PROVISIONS
SECTION I - EQUIPMENT AND DATA
Jaycor Networks, Inc. shall furnish without cost to EMF Associates such
equipment and data as Jaycor Networks, Inc. in its discretion deems necessary
for the performance of the work. Upon completion of the work or termination of
the work, as provided in Section VII hereof, EMF Associates shall promptly
return such equipment and data to Jaycor Networks, Inc.
Jaycor Networks, Inc. shall have title to all software, designs,
processes, materials and or improvements thereof, developed under this
Agreement.
SECTION II - PATENT RIGHTS
EMF Associates shall (i) disclose promptly to Jaycor Networks, Inc. all
ideas, inventions, discoveries and improvements (whether or not patentable)
relative to the field of work set forth in the Schedule, conceived or first
reduced to practice by him/her in connection with his/her work under this
Agreement during the period it is in effect, or (ii) certify to Jaycor
Networks, Inc. that, to the best of EMF Associates's knowledge and belief, no
such ideas, inventions, discoveries or improvements have been conceived or
first reduced to practice during the term of this Agreement. EMF Associates
further agrees that all such ideas, inventions discoveries and improvement
shall be the sole and absolute property of Jaycor Networks, Inc. and that
he/she will, at any time, at the request and expense of Jaycor Networks, Inc.,
execute any and all papers, and do whatsoever is reasonably required to insure
that Jaycor Networks, Inc. shall obtain full title to such ideas, inventions,
discoveries and improvements.
SECTION III - COPYRIGHTS
EMF Associates agrees that all writings, sound recordings, pictorial
reproductions, drawings or other graphical representations, and works of any
similar nature, which he develops for Jaycor Networks, Inc. in connection with
this Agreement, shall be the property of Jaycor Networks, Inc., and that Jaycor
Networks, Inc. may duplicate, use, or disclose the same in any manner and for
any purpose whatsoever, and have others do so. EMF Associates shall not deliver
to Jaycor Networks, Inc. under this Agreement any copyrighted matter, without
the prior written approval of Jaycor Networks, Inc., and agrees that Jaycor
Networks, Inc. shall have the right to copyright anywhere any and all matter
delivered under this Agreement.
<PAGE> 4
SECTION IV - INDEPENDENT CONTRACTOR STATUS
A. EMF Associates is retained by Jaycor Networks, Inc. as an independent
contractor, pursuant to this Agreement and is not authorized to act as Jaycor
Networks, Inc.'s agent unless Jaycor Networks, Inc. shall expressly authorize
such agency in writing. EMF Associates shall not enter into any contract,
agreement or other obligation as an agent for Jaycor Networks, Inc. without
Jaycor Networks, Inc.'s prior written consent to entering the specific
agreement, contract or obligation under consideration.
B. EMF Associates shall not be deemed an employee of Jaycor Networks, Inc.
for the purpose of participation in any pension, bonus, insurance, medical plan
or other employee benefit program offered by Jaycor Networks, Inc. for its
employees, nor shall Jaycor Networks, Inc. be obligated to carry Workmen's
Compensation Insurance or pay for state disability compensation insurance for
EMF Associates. EMF Associates agrees to pay all State and Federal imposed
insurance costs and taxes while retained by Jaycor Networks, Inc.
C. EMF Associates will not subcontract or otherwise employ anyone to do any
of the services described in this Agreement without the prior written consent
of Jaycor Networks, Inc.
SECTION V - INDEMNIFICATION
EMF Associates shall indemnify, protect and save Jaycor Networks, Inc.
harmless from all loss, damage, cost and expense that Jaycor Networks, Inc. may
sustain or for which Jaycor Networks, Inc. shall become liable resulting from
death or injury to persons or loss or destruction of or damage to property
which may be caused by EMF Associates during the performance of services
rendered pursuant to this Agreement.
SECTION VI - COMPLIANCE WITH LAWS
EMF Associates shall comply with any applicable laws, statutes,
regulations or ordinances of the United States of America, or any Federal
Government agency or other State or local governmental agency, which is
applicable to the conduct of the consulting services which are the subject of
this Agreement. EMF Associates shall take all action, or refrain from any
action, which may be required for unconditional compliance with State and
Federal laws, statutes, regulations or ordinances.
SECTION VII - TERMINATION
This Agreement may be terminated by Jaycor Networks, Inc. at any time
within the period of its duration upon not less than fifteen (15) days written
notice by Jaycor Networks, Inc. to EMF Associates. EMF Associates, with the
written consent of Jaycor Networks, Inc. may terminate this Agreement upon not
less than fifteen (15) days written notice to Jaycor Networks, Inc., and the
consent of Jaycor Networks, Inc. shall not be unreasonably withheld.
<PAGE> 5
SECTION VIII - ASSIGNMENT
Neither this agreement nor any claim arising under this Agreement shall be
assigned by EMF Associates without first obtaining the written consent of
Jaycor Networks, Inc.
SECTION IX - ARBITRATION
A. Except as otherwise provided in this Agreement, any dispute concerning
a question of fact arising under this Agreement which is not disposed of by
agreement shall be submitted for arbitration in the City of San Diego, State of
California, or such other place as may be selected by mutual agreement of the
parties, in accordance with the rules then obtaining of the American
Arbitration Association, and judgment upon any award rendered in such
arbitration may be entered in any court having jurisdiction thereof.
B. Pending disposition of any dispute by agreement or by arbitration
award, as provided hereunder, EMF Associates shall proceed diligently with the
performance of this Agreement in accordance with the final written decision of
Jaycor Networks, Inc. regarding the matter in dispute.
SECTION X - DISCLOSURE OF INFORMATION
EMF Associates hereby agrees that all information received from Jaycor
Networks, Inc. is received in confidence and is the property of Jaycor
Networks, Inc. and that such information will not be duplicated, used or
disclosed to any third party without the prior written permission of Jaycor
Networks, Inc.
SECTION XI - GENERAL INFORMATION FOR EMF ASSOCIATES
The following information has been prepared to acquaint you with some of
Jaycor Networks, Inc.'s policies as they may pertain to you.
A. SECURITY CLEARANCE - When a security clearance is required, EMF
Associates will be provided with the appropriate Department of Defense forms
for completion and return to Jaycor Networks, Inc. These forms should be
completed and returned as soon as possible so that the processing of a security
clearance may be initiated. When required, EMF Associates must have an active
security clearance before providing any classified services to Jaycor Networks,
Inc.
B. TRAVEL - This Professional Service Agreement provides for reimbursement
of authorized travel expenses involving air, train, bus, personal automobile,
rental car or taxi. The individual (See Article II. C of Schedule) with which
EMF Associates is working must authorize each trip in advance.
1. Travel Status - EMF Associates residing at a location other than
one at which he will work requires Jaycor Networks, Inc.'s prior approval for
reimbursement of his initial travel to report for work. A per diem allowance of
$25/day will be paid while in authorized travel status for Jaycor Networks,
Inc., which is expected to cover reasonable actual expenses of meals and
incidentals. Time spent in travel will not be considered time worked for fee
purposes unless actual work is performed during such period of travel. Air
travel accommodations shall be less than first class except when other
accommodations are the only
<PAGE> 6
means that will ensure completion of urgent business. (Any exceptions must be
explained and documented in the request for reimbursement.)
2. Air Travel - EMF Associates may request a prepaid ticket from the
individual with whom he/she is consulting or may purchase a ticket and be
reimbursed on his/her expense report by attaching the ticket stub and making
the proper entry in his/her report.
3. Car Rental - Car rentals (not to exceed "Standard" car rates) must be
authorized in advance by the individual with whom EMF Associates in working.
4. Use of Personal Auto - With prior approval from the individual with
whom he/she is working, EMF Associates may use his/her personal automobile for
transportation to a work location, reimbursable at a rate of $.30/mile.
5. Expense Reports - EMF Associates must file an expense report with
appropriate receipts. When returning from a short trip, expenses should be
filed immediately and when on an extended trip, expenses should be filed on a
weekly basis. All expense reports are to be submitted to the individual with
whom EMF Associates is working.
C. ENGAGING IN OTHER EMF ASSOCIATES ACTIVITIES - When EMF Associates
divides his time between Jaycor Networks, Inc. and other clients, EMF
Associates shall prorate expenses proportional to time spent for each client.
D. MUTUAL CONSENT FOR CHANGE OF DUTIES - The duties of EMF Associates
may be changed from time to time by the mutual consent of Jaycor Networks, Inc.
and EMF Associates without resulting in a rescission of this Agreement.
Notwithstanding any such change, the agreement of EMF Associates to provide the
services which are the subject of this Agreement shall be construed as
continuing under this Agreement as modified.
This Agreement supersedes any and all other agreements, either oral or
written, between the parties hereto with respect to the retaining of EMF
Associates by Jaycor Networks, Inc. and contains all the covenants and
agreements between the parties with respect to such consulting services in any
manner whatsoever. Each party to this Agreement acknowledges that no
representations, inducements, promises or agreements, orally or otherwise, have
been made by any party, or anyone action on behalf of any party, which are not
embodied herein, and that no other agreement, statement or promise not contained
in this Agreement shall be valid or binding. Any modification of this Agreement
will be effective only if it is in writing signed by the parties to be charged.
If any provision in this Agreement is held by a court of competent
jurisdiction to be valid, void or unenforceable, the remaining provisions shall
nevertheless continue in full force without being impaired or invalidated in
any way.
<PAGE> 7
JAYCOR NETWORKS, INC.
AMENDMENT NO. 01
PROFESSIONAL SERVICES AGREEMENT No. 80005-01
The undersigned agrees to the following Amendment to the Professional Services
Agreement dated February 1, 1998.
This Amendment is for additional consulting services:
Period of Performance: February 1, 1998 to January 31, 2000
1. Article II - A. Statement of Work - by adding additional work "As Directed,"
charge number 7801-01 and C. "Consultant will work under the technical
direction of Dr. Terry Flanagan.
2. Article III - Payment - an additional not-to-exceed ONE HUNDRED TWENTY
THOUSAND DOLLARS AND ZERO CENTS ($120,000)) along with ZERO for Expenses
have been added to this work order. JNI is not obligated to
All other terms and conditions of the original Agreement and subsequent renewals
remain in effect.
By: Jaycor, Inc.:
/s/ EDWARD FRYMOYER /S/ FRANK C. ROBBINS
- ------------------------------ --------------------------------
(Consultant) Edward Frymoyer Frank C. Robbins
EMF Associates Contracts Manager
S.S.#: 95-3701733
DATE DATE
--------------------- --------------------
<PAGE> 8
EMF ASSOCIATES 2/11/99
EXHIBIT "A"
PROFESSIONAL SERVICES AGREEMENT NO. 80005-01
NOT-TO-EXCEED HOURS/FUNDS*
WORK ORDER: 7801-01
Period of Performance: 2/1/98 - 1/31/00
<TABLE>
<CAPTION>
PREVIOUS AMEND 01 TOTAL
-------- -------- -----
<S> <C> <C> <C>
Hours N/A N/A
Labor $ $120,000 $120,000 $240,000
Expense $ $30,000 $0.00 $30,000.00
</TABLE>
* It should be noted that the funds are the maximum available, by Work Order
Number. You will be provided guidance by the Program Manager with respect to
how to allocate your time.
<PAGE> 1
EXHIBIT 10.36
AMENDMENT TO
ASSET ACQUISITION AGREEMENT
BETWEEN
JAYCOR NETWORKS, INC.
AND
ADAPTEC, INC.
<PAGE> 2
AMENDMENT TO
ASSET ACQUISITION AGREEMENT
THIS AMENDMENT TO ASSET ACQUISITION AGREEMENT is entered into as of
September 30, 1999 by and between JNI Corp. (formerly JAYCOR NETWORKS, INC.), a
Delaware corporation ("Purchaser"), and ADAPTEC, INC., a Delaware corporation
("Seller").
RECITALS
A. Seller and Purchaser have entered into that certain Asset Acquisition
Agreement dated November 12, 1998 (the "Asset Acquisition Agreement") whereby,
among other things, Purchaser granted Seller certain warrants to obtain
Purchaser's Series A Preferred Stock (the "Original Warrants") in an aggregate
amount of up to approximately 3.15 million shares contingent upon the occurrence
of certain events.
B. The Asset Acquisition Agreement may be amended by the written consent of
the parties thereto.
C. Seller and Purchaser desire to amend the Asset Acquisition Agreement to
eliminate the uncertainties associated with the above referenced contingencies.
NOW, THEREFORE, for good and adequate consideration, the sufficiency and
receipt of which are hereby acknowledged, the parties agree as follows:
1. The parties hereto agree that the Warrant in the form attached to the
Asset Acquisition Agreement as Exhibit D-1 is immediately exercisable on an
after the date hereof with respect to 1,200,000 shares of Purchaser's Series A
Preferred Stock. The aggregate exercise price for such shares shall be $100. The
total number of shares of Purchaser's Series A Preferred Stock which may become
issuable pursuant to Section 2.5(b)(ii) of the Asset Acquisition Agreement is
hereby reduced to 667,574. The parties also agree that if an Event (as that term
is defined in the Asset Acquisition Agreement) occurs during the Measurement
Period (as that term is defined in the Asset Acquisition Agreement), then the
number of shares of Purchaser's Series A Preferred Stock which may become
issuable pursuant to Section 2.5(b)(iv) shall be reduced by 873,046, which
amount represents the difference between the 326,954 shares originally issuable
under Section 2.5(b)(i) of the Asset Acquisition Agreement and the 1,200,000
shares issuable in connection with this Amendment to Asset Acquisition
Agreement.
2. Seller agrees that if Purchaser completes an underwritten public
offering of its common stock on or before December 31, 1999, then Seller shall
complete any audit under Section 2.5(b)(v) of the Asset Acquisition Agreement
within 60 days and that if such audit is not complete by such date, then Seller
shall be deemed to have waived its rights under such provision. Further, if
Purchaser completes and underwritten public offering of its common stock on or
before December 31, 1999, then Purchaser shall only be required to
1
<PAGE> 3
maintain records pursuant to Section 2.5(b)(v) of the Asset Acquisition
Agreement for 60 days.
3. All other portions of the Asset Acquisition Agreement remain in full
force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
date first written above.
JNI CORP.
By: /s/ TERRY M. FLANAGAN
--------------------------------------------
Terry M. Flanagan, President
ADAPTEC, INC.
By: /s/ J. PETER COMPAGNA
--------------------------------------------
J. Peter Compagna, Vice President, Treasurer
--------------------------------------------
(Please print name and title)
2
<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 September 1, 1999, except for the stock split described in Notes 1
and 5 and the third paragraph in Note 2 which are as of October 1, 1999,
relating to the financial statements and September 1, 1999 relating to the
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 1, 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 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 JUN-30-1999
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 3,300 4,242
<ALLOWANCES> 133 345
<INVENTORY> 1,175 3,044
<CURRENT-ASSETS> 4,711 8,915
<PP&E> 2,466 3,295
<DEPRECIATION> 371 878
<TOTAL-ASSETS> 7,814 12,765
<CURRENT-LIABILITIES> 6,541 9,294
<BONDS> 0 0
0 0
17 17
<COMMON> 0 0
<OTHER-SE> 1,156 3,324
<TOTAL-LIABILITY-AND-EQUITY> 7,814 12,765
<SALES> 12,189 14,912
<TOTAL-REVENUES> 12,189 14,912
<CGS> 5,361 5,453
<TOTAL-COSTS> 11,586 14,261
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 191 270
<INTEREST-EXPENSE> 265 289
<INCOME-PRETAX> 338 362
<INCOME-TAX> 27 (1,405)
<INCOME-CONTINUING> 311 1,767
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 311 1,767
<EPS-BASIC> .74 4.21
<EPS-DILUTED> .02 .09
</TABLE>
