<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 12, 1999
REGISTRATION NO. 333-86501
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
JNI CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<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:
<TABLE>
<S> <C>
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 12, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Prospectus JNI LOGO
, 1999
</TABLE>
4,900,000 SHARES OF COMMON STOCK
- --------------------------------------------------------------------------------
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>
- -------------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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
<TABLE>
<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
<TABLE>
<CAPTION>
PAGE
<S> <C>
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................ 60
Principal and Selling
Stockholders...................... 64
Description of Capital Stock........ 65
Shares Eligible for Future Sale..... 68
Underwriting........................ 70
Legal Matters....................... 72
Experts............................. 72
Where You Can Find More Information
About JNI......................... 73
Index to Financial Statements....... F-1
</TABLE>
i
<PAGE> 6
PROSPECTUS SUMMARY
This summary highlights information appearing in other sections of this
prospectus. You should read this entire prospectus carefully. Unless otherwise
indicated, all information contained in this prospectus gives effect to the
conversion of all outstanding shares of our convertible preferred stock into
common stock upon the closing of this offering and assumes the underwriters'
over-allotment option is not exercised. All share and per share information in
this prospectus gives effect to a 0.7 for 1 reverse stock split effected in
October 1999.
JNI CORPORATION
We are a leading designer and supplier of Fibre Channel hardware and
software products that connect servers and data storage devices to form storage
area networks, or SANs. SANs were made possible by the emergence of Fibre
Channel technology, a new generation of server to storage communications
technology that improves data communication speeds, connectivity, distance
between connections, reliability and accessability. Our Fibre Channel
development efforts began in 1993, and we shipped some of the first commercially
available Fibre Channel products in 1995. Throughout our history, we have
designed Fibre Channel products for the most demanding enterprise-level systems
running applications that are integral to our customers' businesses. We
currently market high-performance application specific integrated circuits, or
ASICs, based on our proprietary technology, a broad range of Fibre Channel host
bus adapters and software that facilitates advanced SAN device integration and
management. Our products provide flexibility, scalability and availability, as
well as manageability and superior performance in network storage systems.
In recent years, the volume of electronic data generated, processed, stored
and manipulated has expanded significantly as a result of the growth of
data-intensive applications such as transaction processing, data mining, data
warehousing, multimedia and Internet applications. International Data
Corporation, or IDC, estimates that the amount of stored network data grew from
750 terabytes in 1994 to 10,500 terabytes in 1998, and that it will increase to
420,000 terabytes in 2002. With the dramatic increase in information storage and
data retrieval requirements, system performance has become increasingly
constrained by traditional input/output technologies, such as the currently
prevailing server to storage communications protocol small computer systems
interface, or SCSI. The lack of reliability of data delivery, the support for a
limited number of connections and the short transport distance that characterize
SCSI have limited the capabilities of traditional network storage architectures
and placed constraints on the size of the network. Fibre Channel overcomes the
limitations of traditional data communications technologies, because it offers
the connectivity, distance and access benefits of networking architectures
combined with the high performance and quick response needed for data storage
applications. IDC forecasts that the market for products based on fibre channel
technology will grow from approximately $2.0 billion in 1998 to approximately
$23.0 billion by 2002.
We offer a broad range of fibre channel host bus adapters for the SAN
market. Our products can be used both with the SBus interface developed by Sun
Microsystems and the peripheral component interconnect, or PCI, interface. Our
host bus adapters are also deployable across a wide variety of network
configurations and operating systems. We have designed our ASICs to work in the
most demanding, high-end enterprise applications and offer what we believe is
the lowest available latency in complex switched environments. We were the first
in the industry to demonstrate products capable of sustained 2 gigabit
1
<PAGE> 7
per second Fibre Channel transmissions. Our proprietary configuration and driver
software incorporates advanced features that significantly enhance and simplify
SAN device integration and management. We work closely with our customers to
tailor our products to their specific requirements by making software driver
modifications to optimize performance with our customers' products. Although our
Fibre Channel ASICs and host bus adapters find their primary application in
SANs, they have also been deployed for use with digital graphics, video networks
and non-linear digital editing systems in the advertising, broadcast and
entertainment industries as well as for high speed data processing applications
in a variety of industries including Internet service providers.
Our objective is to become the market leader in high-speed fibre channel
connectivity products for SANs and other applications by providing a family of
integrated ASIC, host bus adapter and software products that exceed competitive
offerings in features, flexibility and price/performance. Key elements of our
strategy include the following:
- focus exclusively on Fibre Channel;
- expand penetration of existing original equipment manufacturer, or OEM,
customers and leverage multiple distribution channels;
- leverage Fibre Channel technology and quality leadership;
- provide customer-driven product functionality and high-quality customer
service and support to meet end-user needs;
- promote the JNI brand; and
- establish and maintain strategic alliances and pursue acquisitions.
We sell our products domestically and internationally primarily through OEM
and distribution channel customers including distributors, system integrators
and value-added resellers who sell directly to end-users. We have long-term
relationships and strategic alliances with many of our customers, including
Amdahl, AVID, Chaparral, Data General, EDS, EMC, Hitachi, McData and StorageTek.
End-users of our products include Amazon.com, Boeing, Charles Schwab,
DaimlerChrysler, Federal Express, GTE, Lexis Nexis, Mobil, Morgan Stanley and US
WEST Capital Funding.
RECENT OPERATING RESULTS
We are in the process of completing our financial statements for the three
and nine months ended September 30, 1999. We expect to report revenues of
approximately $10.9 million for the three months ended September 30, 1999, as
compared to revenues of $3.1 million for the three months ended September 30,
1998. For the nine months ended September 30, 1999, we expect to report revenues
of approximately $25.8 million, as compared to revenues of $6.9 million for the
nine months ended September 30, 1998. These results are preliminary. When the
actual results of operations are finalized, it is possible that the results will
vary from the amounts set forth above. However, we do not believe that any such
variations will be material.
------------------------
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
<TABLE>
<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>
------------------------
The shares of common stock outstanding after this offering include 840,000
shares of common stock issuable upon exercise of a warrant held by Adaptec, Inc.
with an aggregate exercise price of $100. The shares of common stock outstanding
after this offering exclude 6,884,241 shares of common stock reserved for
issuance under our stock option and stock purchase plans, of which 5,109,741
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 9,459
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,
6
<PAGE> 12
our agreements with OEMs and distribution channel customers are typically
non-exclusive and often may be terminated by either party without cause.
Moreover, many of our OEM and distribution channel customers utilize or carry
competing product lines. If we were to suddenly lose one or more important OEM
or distribution channel customers to a competitor, our business, operating
results or financial condition could be materially adversely affected. Moreover,
some of our OEM customers could develop products internally that would replace
our products. The resulting reduction in sales of our products to any such OEM
customers, in addition to the increased competition presented by these
customers, could have a material adverse effect on our business, operating
results or financial condition.
CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE THAT WE INCUR
COSTS TO UPGRADE OUR INFRASTRUCTURE.
We have recently experienced a period of rapid growth and expansion which
has placed, and continues to place, a significant strain on our resources.
Unless we manage such growth effectively, we may make mistakes in operating our
business such as inaccurate sales forecasting, incorrect material planning or
inaccurate financial reporting, which may result in unanticipated fluctuations
in our operating results. Our management team has had limited experience
managing such rapidly growing companies on a public or private basis. We may not
be able to install adequate control systems in an efficient and timely manner,
and our current or planned personnel, systems, procedures and controls may not
be adequate to support our future operations.
OUR OPERATING RESULTS MAY SUFFER BECAUSE OF INCREASING COMPETITION IN THE FIBRE
CHANNEL MARKET, AS WELL AS ADDITIONAL COMPETITION FROM ALTERNATIVE DATA STORAGE
SOLUTIONS.
The market in which we compete is intensely competitive. As a result, we
will face a variety of significant challenges, including rapid technological
advances, price erosion, changing customer preferences and evolving industry
standards. Our competitors continue to introduce products with improved
price/performance characteristics, and we will have to do the same to remain
competitive. Increased competition could result in significant price
competition, reduced revenues, lower profit margins or loss of market share, any
of which would have a material adverse effect on our business, operating results
and financial condition. We cannot be certain that we will be able to compete
successfully against either current or potential competitors in the future.
Many of our current and potential competitors have substantially greater
financial, technical, marketing and distribution resources than we have. We face
the threat of potential competition from new entrants into the fibre channel
market, including large technology companies who may develop or acquire
differentiating technology and then apply their resources, including established
distribution channels and brand recognition, to obtain significant market share.
It is also possible that we will face increased competition due to mergers or
consolidations of existing or potential competitors. Emerging companies
attempting to obtain a share of the existing market act as potential competition
as well. Our products may also compete at the end-user level with other
technology alternatives, such as SCSI. Further, businesses that implement SANs
may select fully-integrated SAN systems that are offered by large technology
companies. Because such systems do not interoperate with products from
independent open system suppliers, like us, customers that invest in these
systems will be less likely to purchase our products. Other technologies
designed to address the applications served by Fibre Channel today are under
development, and because we focus exclusively on Fibre Channel, our business
would suffer as a result of competition from such competing technologies.
7
<PAGE> 13
BECAUSE WE HAVE OPERATED AS A SUBSIDIARY WITHIN A CONSOLIDATED GROUP, OUR
HISTORICAL RESULTS MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS A SEPARATE
COMPANY, AND WE MUST IMPLEMENT SYSTEMS AND HIRE PERSONNEL TO OPERATE AS AN
INDEPENDENT COMPANY. IF WE DO NOT EFFECTIVELY MANAGE THIS TRANSITION, OUR
BUSINESS MAY SUFFER.
JNI was formed as a subsidiary of Jaymark, Inc. in February 1997. Prior to
that time, our operations were conducted as a division of Jaycor, which is also
currently a subsidiary of Jaymark. We have recently taken steps to separate our
operations from those of Jaymark and its affiliates, including plans to
implement financial and accounting systems and the hiring of new management
personnel. Because we have limited experience in operating as an independent
company, we may fail to manage this transition effectively. Any such failure
could adversely affect our business, financial condition or operating results.
The financial information included in this prospectus may not necessarily
reflect our operating results, financial position and cash flows in the future
or what the operating results, financial position and cash flows would have been
had we been a separate, stand-alone entity during the periods presented. We have
historically relied upon Jaycor for many operational functions, such as
accounting, human resources, income tax reporting and purchasing, which we are
now transitioning to JNI personnel. Our financial and accounting systems will
continue to be integrated with and managed by Jaycor through the fiscal quarter
ending December 31, 1999, and it is possible that we will not complete the
transition to our own financial and accounting systems according to schedule. We
also currently rely on our revolving credit agreement with Jaycor for our
working capital, and our insurance coverage is integrated with Jaycor's. We
intend to establish our own credit and insurance arrangements in the near
future, but such arrangements may not be available to us on commercially
reasonable terms, or at all.
IN OUR INDUSTRY, TECHNOLOGY AND OTHER STANDARDS CHANGE RAPIDLY, AND WE MUST KEEP
PACE WITH THE CHANGES TO COMPETE SUCCESSFULLY.
The market for our products is characterized by rapidly changing
technology, evolving industry standards and the frequent introduction of new
products and enhancements. If we do not keep pace with these changes, we may
lose market share to our competitors and fail to meet our financial and
operational objectives. Because our products are designed to work with software
produced by third parties, our operating results could be adversely affected if
such third parties delay introduction of new versions of their software for
which we have designed new products or if they make unanticipated modifications
to such software. Our future success depends in a large part on our ability to
enhance our existing products and to introduce new products on a timely basis to
meet changes in customer preferences and evolving industry standards. We cannot
be certain that we will be successful in designing, supplying and marketing new
products or product enhancements that respond to such changes in a timely manner
and achieve market acceptance. We also cannot be certain that we will be able to
develop the underlying core technologies necessary to create new products and
enhancements, or that we will be able to license the core technologies from
third parties. Additionally, changes in technology and customer preferences
could potentially render our current products uncompetitive or obsolete. If we
are unable, for technological or other reasons, to develop new products or
enhance existing products in a timely manner in response to technological and
market changes, our business, operating results and financial condition would be
materially adversely affected.
8
<PAGE> 14
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
9
<PAGE> 15
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.
10
<PAGE> 16
BECAUSE WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR KEY
COMPONENTS, WE ARE SUSCEPTIBLE TO SUPPLY SHORTAGES THAT COULD ADVERSELY AFFECT
OUR OPERATING RESULTS.
We rely on third-party suppliers for components which are used in our
products, and we have experienced delays or difficulty in securing components in
the past. Key components that we use in our products may only be available from
single sources with which we do not have long-term contracts. In particular,
Hewlett-Packard is currently the sole supplier of certain components in certain
of our SBus host bus adapters. The components we use for our products are based
on an emerging technology and may not be available with the performance
characteristics or in the quantities that we require. Any inability to supply
products due to a lack of components or to redesign products to incorporate
alternative components in a timely manner could materially adversely affect our
business, operating results or financial condition.
BECAUSE A SIGNIFICANT PORTION OF OUR PRODUCTS IS DESIGNED TO WORK WITH HIGH-END
SERVERS FROM SUN MICROSYSTEMS AND STORAGE ARRAYS FROM EMC, OUR BUSINESS COULD
SUFFER IF SUN OR EMC DISCONTINUES PRODUCTION OF SUCH EQUIPMENT OR IF WE FAIL TO
DEVELOP PRODUCTS THAT WORK EFFECTIVELY WITH SUCH EQUIPMENT. SUN HAS ANNOUNCED
ITS INTENTION TO DISCONTINUE PRODUCTION OF SERVERS WITH THE SBUS INTERFACE, AND
THEREFORE, SALES OF OUR PRODUCTS DESIGNED FOR THE SBUS INTERFACE WILL DIMINISH
OVER TIME.
Our host bus adapters have achieved their greatest market acceptance in
computing environments built with servers from Sun Microsystems due to our
products' interoperability with the Sun Solaris operating system and the SBus
interface developed and promoted by Sun. A significant portion of our products
is currently used to connect high-end Sun servers that incorporate SBus
interfaces to SANs, and these products have accounted for the substantial
majority of our historical revenues. In particular, sales of our FibreStar host
bus adapters designed to work with the SBus interface accounted for
approximately 86% of our net revenues in 1998 and 83% of our net revenues in the
six months ended June 30, 1999. In addition, a significant portion of our host
bus adapters are used to form connections to storage arrays manufactured by EMC.
Accordingly, we depend to a certain extent upon the increased market penetration
of Sun and EMC systems and our ability to continue to develop products that
interoperate effectively in Sun and EMC environments. Sun has announced its
intention to phase out production of servers with the SBus interface in 2001.
Accordingly, we anticipate that the percentage of our revenues attributable to
sales of our SBus host bus adapters will decline over time. If Sun accelerates
its phase out of such workstations, our business would suffer due to decreased
sales of SBus host bus adapters.
BECAUSE OUR INTELLECTUAL PROPERTY IS CRITICAL TO THE SUCCESS OF OUR BUSINESS,
OUR OPERATING RESULTS WOULD SUFFER IF WE WERE UNABLE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY.
We currently rely on a combination of copyrights, trademarks, trade secret
laws and contractual provisions to establish and protect our intellectual
property rights in our products. We cannot be certain that the steps we take to
protect our intellectual property will adequately protect our proprietary
rights, that others will not independently develop or otherwise acquire
equivalent or superior technology or that we can maintain such technology as
trade secrets. In addition, the laws of some of the countries in which our
products are or may be developed, manufactured or sold may not protect our
products and intellectual property rights to the same extent as the laws of the
United States, or at all. Our failure to protect our intellectual property
rights could have a material adverse effect on our business, operating results
or financial condition.
11
<PAGE> 17
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.
12
<PAGE> 18
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.
13
<PAGE> 19
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.
RISKS RELATED TO SECURITIES MARKETS
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE TO FUND THE GROWTH OF OUR BUSINESS,
AND FINANCING MAY NOT BE AVAILABLE.
We currently anticipate that our available capital resources, combined with
the net proceeds from this offering and cash flows from operations, will be
sufficient to meet our expected working capital and capital expenditure
requirements for at least the next 12 months. However, we cannot assure you that
such resources will be sufficient to fund the growth of our business.
We may also raise additional funds through public or private debt or equity
financings if such financings become available on favorable terms, but such
financings would likely dilute our stockholders. We cannot assure you that any
additional financing we may need will be available on terms favorable to us, or
at all. If adequate funds are not available or are not available on acceptable
terms, we may not be able to take advantage of unanticipated opportunities,
develop new products or otherwise respond to competitive pressures. In any such
case, our business, operating results or financial condition could be materially
adversely affected.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS' EQUITY AND
CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.
We may pursue acquisitions that could provide new technologies or products.
Future acquisitions may involve the use of significant amounts of cash,
potentially dilutive
14
<PAGE> 20
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 67.7%. As a result, Jaymark will be able to determine the
outcome of all corporate actions requiring stockholder approval. Because Jaymark
has the ability to control us, it has the power to act without taking the best
interests of our company into consideration. For example, Jaymark will continue
to exercise significant influence over decisions with respect to the following:
- the direction and policies of our company, including the election and
removal of directors;
- mergers or other business combinations involving us;
15
<PAGE> 21
- amendments to our certificate of incorporation or bylaws; and
- future issuances of our common stock or other securities.
Any of these powers could be used by Jaymark for its own advantage to the
detriment of our other stockholders and our company. This in turn may have an
adverse effect on the price of our common stock.
WE DO NOT PLAN TO PAY CASH DIVIDENDS ON OUR COMMON STOCK.
We have never paid cash dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We intend to retain future
earnings, if any, to finance the growth and expansion of our business and for
general corporate purposes. Accordingly, unless the price of our common stock
increases above the initial public offering price, you will not have an
opportunity to profit from your investment in our common stock.
SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET BY EXISTING INVESTORS MAY BEGIN
180 DAYS AFTER COMPLETION OF THE OFFERING AND COULD CAUSE OUR STOCK PRICE TO
DECLINE.
Our current stockholders, Jaymark, Inc. and Adaptec, Inc., hold a
substantial number of shares, which they will be able to sell in the public
market in the near future. After giving effect to the offering, Jaymark will
continue to hold approximately 71.2% of our outstanding stock, or 67.7% if the
underwriters exercise their over-allotment option, and Adaptec will hold
approximately 9.1% of our outstanding stock, assuming exercise of the warrant
for 840,000 shares, regardless of the exercise of the underwriters'
over-allotment option. Subject to limitations on volume under Rule 144, which
are explained in detail in "Shares Eligible for Future Sale," Jaymark will be
able to sell all the shares of our common stock that it holds beginning, upon
the expiration of an agreement with the underwriters, 180 days after the date of
this prospectus. At the same time, and subject to the same limitations, Adaptec
will be able to sell 1,132,895 shares of our common stock that it holds. Jaymark
may also distribute the shares of our common stock that it holds to its
stockholders, who could then be eligible to sell such shares in the public
market. In addition, our employees hold options to purchase a large number of
shares, and they will also be able to sell the shares they may acquire upon
exercise of those options in the near future. Sales of a substantial number of
shares of our common stock after this offering could cause our stock price to
decline. In addition, the sale of these shares could impair our ability to raise
capital through the sale of additional stock. You should read "Shares Eligible
for Future Sale" for a full discussion of shares that may be sold in the public
market in the future.
16
<PAGE> 22
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.
17
<PAGE> 23
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 as of June 30, 1999 and for each of the three years in the period
ended December 31, 1998 and for the six-month period ended June 30, 1999 have
been audited and are included elsewhere in this prospectus. The selected
financial data as of December 31, 1994, 1995 and 1996 and for the years ended
December 31, 1994 and 1995 and for the six-month period ended June 30, 1998 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. Sun Microsystems manufactures and sells
substantially all of the servers that incorporate the SBus interface, and Sun
has announced its intention to phase out production of this equipment in 2001.
Accordingly, we expect that sales of our products designed to work with the SBus
interface will eventually decline. We expect our Emerald-based host bus adapters
designed for the PCI bus to account for an increasing proportion of revenues in
the future. We also derive revenues from sales of our proprietary Emerald ASICs.
All of our sales are denominated in U.S. dollars. Historically, a limited number
of OEMs and distributor customers has accounted for a significant majority of
our total net revenues in each fiscal period. The loss of any of our key
customers, or a significant reduction in sales to those customers, could
significantly reduce our net revenues. We anticipate that our operating results
in any given period will continue to depend to a significant extent upon
revenues from a small number of customers.
We generally recognize revenue from product sales upon shipment. We provide
allowances for estimated sales returns at the time of revenue recognition. We
sell to our distribution channel customers under volume purchase agreements.
Certain of our agreements with distribution channel customers provide for stock
rotation, where the customer may return product provided that it places a new
order for replacement products. We reserve for estimated stock rotation,
uncollectable accounts and warranty claims based on past history and expected
future returns related to product shipped. We ship to our OEM customers with no
right of return except for warranty, and warranty costs to date have not been
material.
As our Emerald-based host bus adapters designed for the PCI interface
become a greater percentage of our revenues, we expect that the average selling
price of our products
23
<PAGE> 29
will continue to decrease. Further, the average selling prices of our new and
existing products are likely to continue to decline in the future as we and our
competitors introduce new and more technologically advanced products and as
price-based competition intensifies. In addition, sales price reductions tied to
volume shipments are typically part of our volume purchase agreements with our
distribution channel customers.
Cost of revenues is comprised principally of payments to our contract
manufacturers, final assembly costs, manufacturing and quality functions,
inventory management costs and support costs. We expect our gross margin to be
affected by many factors, including declines in average unit selling price,
fluctuations in demand for our products, the mix of products sold, the mix of
sales channels through which our products are sold, the timing and size of
customer orders, fluctuations in manufacturing volumes, changes in costs of
components, new product introductions both by us and our competitors.
Research and development expenses consist primarily of salaries and related
expenses for engineering personnel, fees paid to consultants and outside service
providers, depreciation of development and test equipment, prototyping expenses
related to the design, development, testing and enhancements of our products and
the cost of computer support services. We expense all research and development
costs as incurred. From inception, we have incurred significant expenses to
develop our products. We believe that continued investment in research and
development is critical to our strategic product and cost reduction objectives.
Accordingly, we expect to continue to devote substantial resources to research
and development such that these expenses will increase in absolute dollars.
In connection with the purchase of products and technology from Adaptec in
November 1998, we acquired in-process research and development projects related
to certain PCI interface ASICs and host bus adapter products and recorded a
related charge to operations in the amount of $18,000. We incurred approximately
$850,000 of research and development costs related to these projects through
June 30, 1999 and expect to incur approximately $1.4 million of additional
research and development expenditures through the completion of these products,
which is anticipated to occur in the first quarter of 2000. We expect to
commence sales of these products during the fourth quarter of 1999 and the first
quarter of 2000.
Selling and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
support functions, public relations, advertising, promotional and trade show
costs and travel expenses. We believe that continued investment in selling and
marketing is critical to the success of our strategy to expand our relationships
with leading OEMs, to establish and maintain relationships with partners and to
expand our sales though resellers and distributors and to end-users. We expect
these expenses to increase in absolute dollars as we add personnel to implement
this strategy.
General and administrative expenses include salaries and related expenses
for personnel engaged in finance, human resources, information technology,
administrative and legal activities and professional fees. We expect that these
expenses will increase in future periods in absolute dollars as we incur
additional costs to implement the infrastructure necessary to operate
independently from Jaycor, as well as costs related to the anticipated growth of
our business and our operation as a public company. To assist our transition to
operating independently from Jaycor, we and Jaycor have entered into a
Transitional Services Agreement whereby Jaycor has agreed to continue to perform
certain administrative and accounting services on our behalf, and we have agreed
to reimburse Jaycor for
24
<PAGE> 30
such services in amounts consistent with Jaycor's historical practice and
consistent with the presentation in our audited financial statements.
Amortization of intangible assets arises from the amortization of
intangible assets acquired in connection with the purchase of products and
technology from Adaptec in November 1998. In that transaction, we issued Adaptec
1,132,895 shares of our Series A preferred stock which will convert into an
equal amount of shares of common stock upon completion of this offering, and we
granted Adaptec warrants to purchase shares of our stock. We originally recorded
the fair value of the intangible assets acquired in that transaction at
$662,000. Upon an amendment to the purchase agreement executed in September
1999, the number of shares issuable thereunder was fixed at 840,000 shares,
subject to upward adjustment under certain circumstances. See "Certain
Transactions." As a result of the amendment, the warrant became immediately
exercisable, and we recorded additional intangible assets related to the core
technology equal to the fair value of the 840,000 shares, or $10.9 million. We
are amortizing the intangible assets over the remainder of their useful life.
Future amortization charges related to these balances will be as follows: $1.4
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 recognized $0 of tax benefits for net
operating losses and $0 of research and development tax credits. In the quarter
ended June 30, 1999, we determined that it was more likely than not that we
would be able to use the tax benefits in future periods. As a result, we
realized a tax benefit of $1.4 million in the quarter ended June 30, 1999, which
created a corresponding increase in net income in that period.
25
<PAGE> 31
RESULTS OF OPERATIONS
The following table summarizes our operating results as a percentage of net
revenues for each of the periods shown.
<TABLE>
<CAPTION>
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>
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
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
26
<PAGE> 32
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 $398,000, 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.
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. Amortization of
stock-based compensation during the six months ended June 30, 1998 was $0.
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. An income tax provision of $0 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,
27
<PAGE> 33
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 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. Amortization of intangible
assets during the years ended December 31, 1997 and 1996 was $0.
Amortization of stock-based compensation. In connection with the grant of
stock options to employees during the year ended December 31, 1998, we recorded
stock-based compensation within stockholders' equity (deficit) of $1.0 million.
We amortized $35,000 of that amount during 1998. Amortization of stock-based
compensation during the years ended December 31, 1997 and 1996 was $0.
Interest expense. Interest expense increased by $135,000, or 104%, to
$265,000 in 1998 from $130,000 in 1997. The increase resulted from higher
intercompany revolver borrowings from Jaycor to finance increased accounts
receivable and inventory to support the increased level of sales. Prior to
January 30, 1997, we were a division of Jaycor and, as such, recorded $0 as a
separate interest expense.
Income tax provision (benefit). In 1998, we recorded an income tax
provision of $27,000 which represented a current tax liability for alternative
minimum taxes. Due to our history of losses, our regular tax liability was
offset by net operating loss carryforwards for which no benefit had previously
been recognized. An income tax provision of $0 was recognized in 1996 and 1997
due to our loss position.
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>
29
<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 $0 of 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.
30
<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,
31
<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
32
<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.
33
<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
34
<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
35
<PAGE> 41
network, the traditional architecture creates a bottleneck at the server
which degrades network performance and lengthens backup times.
- Manageability. Businesses that use traditional architectures must rely on
network servers to provide performance, configuration, accounting, fault
and security management of the SCSI connection and the stored data. This
decentralized management approach increases the costs of operating a
network and limits the ability to improve performance, ensure data
security and enable highly available data access.
As a result, the traditional architectures do not adequately support the
increasing requirements of today's data-intensive enterprises.
FIBRE CHANNEL TECHNOLOGY
In response to the demand for high-speed and high-reliability
storage-to-server and server-to-server connectivity, the Fibre Channel
interconnect protocol was developed in the early 1990s and received the American
National Standards Institute approval in 1994. Fibre Channel is an open,
efficient transport system supporting multiple protocols using Fibre Channel
guaranteed delivery services. Fibre Channel represents an integration of
channels and networks with active, intelligent communication among devices.
Fibre Channel technology has the following capabilities:
- Performance capability of over four gigabits/second;
- Support for distances up to 10 km without loss of speed;
- Serial transmission with small physical hardware;
- Scalable network configurations;
- Reliable data transmission capable of guarantee through multiple classes
of service;
- Interoperability with standard components;
- Support for multiple cost/performance levels, from small systems to
supercomputers; and
- Ability to carry multiple existing interface data protocols, including
Internet Protocol, SCSI and audio/video.
As a result of its broad range of features, many industry analysts consider
Fibre Channel to be the most reliable, scalable, gigabit communications
technology available today. Since its introduction, Fibre Channel has earned
increasing acceptance from industry and independent testing laboratories. IDC
forecasts that the market for products based on Fibre Channel technology will
exceed $23.0 billion within three years. Fibre Channel technology can be
implemented in a wide variety of applications, including computer clustering,
networking, digital video transmission and editing and storage access. To date,
the most widely accepted and deployed application for fibre channel technology
has been in SANs.
STORAGE AREA NETWORKS
A storage area network is a network of servers and data storage devices
which interconnects servers and storage devices at gigabit speeds. Fibre Channel
is the critical enabling technology that has made implementation of a SAN
possible. Businesses are investing in SANs because they have found that
establishing a separate network for storage takes data movement off the local
area network thereby freeing up network resources and reducing the impact on
network users. SANs provide an open, extensible platform for storage access in
data intensive environments like those used for data warehousing, storage
36
<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
37
<PAGE> 43
offer several levels of reliability which increases the security and
accessibility of stored data.
- Flexibility. SANs provide high-speed connectivity for data-intensive
applications across multiple operating systems, including UNIX, Mac OS
and Windows NT. SANs apply the distributed computing model to computer
storage systems and servers and take advantage of the inherent benefits
of a networked approach. SANs can be configured in multiple topologies,
and the various topologies contribute to the flexibility of the SAN to
solve storage management issues by offering enterprises alternatives in
cost and scale. The most commonly used topology in currently deployed
SANs is the arbitrated loop, or FC-AL, because it offers most of the
benefits of a SAN at a lower cost than the most complex topology. The
switched topology, or FC-SW, is the most complex and provides the most
aggregate throughput as it allows for multiple data transmissions to
occur simultaneously.
The SAN environment complements the ongoing advancements in local area network
technologies by extending the benefits of improved performance and capabilities
from the client local area network through to servers and storage.
COMPONENTS OF A SAN
Virtually all SANs use several basic components to make up the network,
including the following:
- servers and management software;
- storage devices and fibre channel disc controllers;
- switches, hubs and fibre channel to SCSI bridges;
- host bus adapters; and
- copper or fiber optic cables.
Regardless of topology, each server connects to a SAN through host bus
adapters, which are electronic circuit cards that fit standard sockets on
computer motherboards and enable high-speed data transfer. A host bus adapter
connects the server to other devices on a SAN via cables. The cables connect the
host bus adapter either directly to the Fibre Channel disc controller which is
installed in the storage device or to a hub or a switch.
A host bus adapter is one of the most critical and complex devices on the
SAN. A host bus adapter provides the necessary bridge between a SAN and a
computer bus, which is an internal communication pathway between the central
processing unit and internal memory or peripheral devices. By leveraging the
advantages of Fibre Channel, a single host bus adapter can handle a multitude of
tasks that previously required distinct host bus adapters for each protocol.
Host bus adapters are typically classified by (a) bus architecture, (b) computer
operating system and (c) topology. Each host bus adapter product is designed to
support a particular bus architecture, typically either the Sun Microsystems
SBus architecture or the Peripheral Component Interconnect, or PCI, bus
architecture. Because Fibre Channel host bus adapter functions are regulated by
software, each host bus adapter must include software designed to work with the
particular operating system being used by the server/storage solution. These
systems include all types of UNIX as well as Windows NT, Mac OS and mainframe
systems. Host bus adapters are therefore designed to work with one or more
operating systems and one or more Fibre Channel topologies. IDC projects that
the annual market for Fibre Channel host bus adapters will grow from $269
million in 1999 to over $1.6 billion by 2002.
38
<PAGE> 44
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.
39
<PAGE> 45
- 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
40
<PAGE> 46
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
41
<PAGE> 47
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>
42
<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
43
<PAGE> 49
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
44
<PAGE> 50
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
45
<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 Federal Express
Bear Stearns Fidelity Investments
Boeing GTE
Charles Schwab Lexis Nexis
Convergys (formerly Cincinnati Mobil
Bell Morgan Stanley Dean Witter
Information Systems) Safeway Stores
DaimlerChrysler US WEST Capital Funding
</TABLE>
For a discussion of the risks associated with our existing and potential
customer base, please see "Risk Factors -- Because we depend on a small number
of OEM and distribution channel customers for a significant portion of our
revenues in each period, the loss of any of these customers or any cancellation
or delay of a large purchase by any of these customers could significantly
reduce our net revenues."
CUSTOMER SERVICE AND SUPPORT
We offer a wide range of standard support programs that includes telephone
support 24 hours a day, seven days a week and advanced replacement of products.
In addition, we have designed our products to allow easy diagnostics and
administration. For example, users can access all of the configuration and
performance parameters of our host bus adapters from a single graphical user
interface for configuration, troubleshooting and maintenance. Our customer
service and support organization provides technical support to our OEM and
systems integrator customers, enabling them to provide technical support to
their end-users. We prepare our OEMs and systems integrator customers for
product launch through a comprehensive training program. In addition, we employ
systems engineers for pre- and post-sales support and technical support
engineers for field support. Our OEM and systems integrator customers provide
primary technical support to end-users of our products.
We have developed an extensive training course for our OEM and distribution
channel customers. The curriculum includes fibre channel configuration, SAN
implementation and JNI product training. Most of our OEM and channel customers
attend our training courses to learn fibre channel configuration and SAN
reliability design.
SALES AND MARKETING
We sell domestically and internationally to OEMs, distribution channel
customers, which include distributors, system integrators and value added
resellers, and directly to end users. We principally target OEMs and
distributors who resell our products as a part of complete SAN solutions to
end-users. Our sales and marketing strategy will continue to focus on the
development of the Fibre Channel market through these relationships. We intend
to continue expanding internationally by partnering with additional OEMs and
resellers who have a strong international presence and are capable of selling
and installing complex SAN solutions. In the future, as Fibre Channel becomes
targeted at end-users, we will evolve our strategy to include channel partners
who serve small- to medium-sized businesses.
46
<PAGE> 52
Our marketing efforts are focused on increasing awareness of our Fibre
Channel products and our JNI brand, promoting SAN-based solutions, and
advocating industry-wide standards and interoperability. Key components of our
marketing efforts include:
- extending our strategic alliances to promote standardization and enhance
interoperability;
- promoting our products under the JNI brand name to strengthen sales
through distribution channels;
- continuing our active participation in industry associations and
standards committees to promote and further enhance Fibre Channel
technology and increase our visibility as industry experts; and
- participating in major trade show events and SAN conferences to promote
our products and to continue our leading role in educating customers on
the value of SANs.
As of 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
47
<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
48
<PAGE> 54
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.
49
<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 $2.9 million,
substantially 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.
50
<PAGE> 56
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.
51
<PAGE> 57
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning executive officers,
directors and key employees of JNI as of September 30, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Executive Officers and Directors
Terry M. Flanagan.................. 61 President, Chief Executive Officer
and Director
Gloria Purdy....................... 51 Chief Financial Officer
Charles McKnett.................... 44 Chief Technology Officer
Thomas K. Gregory.................. 58 Chief Operating Officer
Roland Thibodeau................... 53 Executive Vice President, Sales
Eric P. Wenaas(1)(2)............... 57 Chairman of the Board of Directors
P. Randy Johnson(1)(2)............. 49 Director and Secretary
Thomas J. Bernard.................. 66 Director designate
John Bolger........................ 52 Director designate
Lawrence E. Fox.................... 56 Director designate
Key Employees
Scott Ruple........................ 39 Vice President, Marketing
Edward Tyburski.................... 40 Vice President, Engineering
Sassan Teymouri.................... 42 Vice President, ASIC Engineering
Paul Kim........................... 32 Vice President, Finance and
Corporate Controller
</TABLE>
- -------------------------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Executive Officers and Directors
Terry M. Flanagan, Ph.D. became President, Chief Executive Officer and a
director of JNI upon the organization of JNI in February 1997. From 1977 to
1997, he served in various capacities at Jaycor, Inc., an affiliate of JNI, most
recently as Senior Vice President of the Systems Development Group. Dr. Flanagan
received a B.S. in physics from the University of Santa Clara and an M.S. and a
Ph.D. from Purdue University in physics.
Gloria Purdy joined JNI as Chief Financial Officer in August 1999. Prior to
joining JNI, from April 1998 through April 1999, she served as Chief Financial
Officer and Chief Operating Officer of Eloquent, Inc., a Web-based media
company. Prior to that time, from February 1992 through January 1998, she served
as Chief Financial Officer of Interlink Computer Sciences, Inc., an enterprise
software company. Ms. Purdy received a B.S. in accounting from Golden Gate
University and has completed Masters studies at the University of Santa Clara
and Stanford University.
Charles McKnett became the Chief Technology Officer of JNI upon the
organization of JNI in February 1997. From January 1989 to February 1997, Mr.
McKnett managed a variety of technology and development efforts, including the
development of fibre channel products, at Jaycor, Inc., an affiliate of JNI. Mr.
McKnett received his B.S. in Physics from the California Institute of Technology
and an M.S. in electrical engineering from the University of Southern
California.
52
<PAGE> 58
Thomas K. Gregory, Ph.D. has served as Chief Operating Officer of JNI since
March, 1999. Beginning in February 1997 through March 1999, he served as Vice
President, Engineering and Operations of JNI. He has a B.S. with a dual major in
physics and engineering from the University of Michigan and a Ph.D. in physics
from the University of Connecticut.
Roland Thibodeau has served as Executive Vice President, Sales of JNI since
its organization in February 1997. Prior to that time, beginning in September
1995, Mr. Thibodeau served as Director of Marketing for Jaycor, an affiliate of
JNI. From May 1982 to February 1995, Mr. Thibodeau was with Datacomm Management
Sciences, Inc., a data communications company, in the capacity of Vice President
of Marketing and Sales.
Eric P. Wenaas, Ph.D. has served as Chairman of the Board of Directors of
JNI since its organization in February 1997. Dr. Wenaas currently serves as
Chief Executive Officer of Jaycor, Inc., an affiliate of JNI, a position he has
held since March 1991. Dr. Wenaas is also Chief Executive Officer of Jaymark,
Inc., JNI's principal stockholder, a position he has held since Jaymark's
formation in January 1997.
P. Randy Johnson has served as a director of JNI since its organization in
February 1997. Mr. Johnson currently serves as Chief Financial Officer of
Jaycor, Inc., an affiliate of JNI, a position he has held since 1990 and as
Chief Financial Officer of Jaymark, Inc., JNI's principal stockholder, a
position he has held since Jaymark's formation in January 1997. Mr. Johnson has
tendered his resignation from the JNI board effective immediately prior to the
effectiveness of this offering.
Thomas J. Bernard has agreed to become a director of JNI upon the
effectiveness of this offering. He has served as Executive Vice President and
Director of Leap Wireless International since its formation is September 1998.
Prior to that time, he served as a Senior Vice President of Qualcomm
Incorporated and General Manager of Qualcomm Incorporated's Infrastructure
Product Division from April 1996 through June 1998. Prior to joining Qualcomm
Incorporated, Mr. Bernard was Executive Vice President and General Manager of
M/S-COM Telecommunications Division, Western Operations. Mr. Bernard serves on
the Board of Directors of Leap Wireless International, Inc. and Boatracs, Inc.
John Bolger has agreed to become a director of JNI upon the effectiveness
of this offering. Mr. Bolger is a retired Vice President of Finance and
Administration of Cisco Systems, Inc., a manufacturer of computer networking
systems. Mr. Bolger is currently an independent business consultant and serves
as a director of Integrated Device Technology, Inc., Integrated Systems, Inc.,
TCSI, Inc., Mission West Properties, Inc. and Sanmina Corp.
Lawrence E. Fox has agreed to become a director of JNI upon the
effectiveness of this offering. Mr. Fox has been a senior Vice-President of
First Chicago Equity Corporation since 1979 and currently heads the equity unit
of the Capital Investments Department. Mr. Fox is a director of Lafayette
Pharmaceuticals Inc., Sovereign Specialty Chemicals Inc. and Alpha Technologies
Group, Inc. Mr. Fox received his undergraduate degree from the University of
Wisconsin and an M.B.A. from the University of Chicago.
Key Employees
Scott Ruple has served as Vice President, Marketing for JNI since November
1998. From January 1997 to November 1998, Mr. Ruple was with G2 Networks, Inc.,
a networking equipment company, where he served as Vice President of Engineering
as well as Vice President of Marketing. From June 1994 to December 1996, Mr.
Ruple was the Senior Director of Marketing for Emulex Corporation, a fibre
channel connectivity
53
<PAGE> 59
equipment manufacturer. Mr. Ruple has undergraduate degrees in accounting and
computer science from the University of Arizona and holds a Master's degree in
business administration from the University of Southern California.
Edward S. Tyburski has served as Vice President, Engineering of JNI since
June 1999. Prior to that time, beginning in November 1988 he served in a variety
of positions, most recently as Senior Director, SONET Products development, for
Applied Digital Access, Inc., a telecommunications equipment vendor.
Sassan Teymouri has served as Vice President, ASIC Engineering since
January 1999, and is responsible for JNI semiconductor operations in Fremont,
California. From September 1996 to October 1998, Mr. Teymouri was President and
CEO of Initio Corporation, a developer and marketer of commercial input/output
products based on proprietary ASICs. From May 1992 through September 1996, he
was the General Manager for the RAID group of Adaptec. Also, during his
employment at Adaptec, he served as an Engineering Director of Enterprise
Computing Networks. Mr. Teymouri received BSEE and MSEE degrees from the
University of Michigan.
Paul Kim has served as Vice President, Finance and Corporate Controller
since October 1999. Prior to joining JNI, he served as Vice President of Finance
and Administration for Datafusion Inc., a software development company, from
January 1998 until October 1999. From April 1996 to January 1998, he was the
Corporate Controller for Interlink Computer Sciences, Inc., an enterprise
software company. From January 1990 to April 1996, he worked for Coopers and
Lybrand L.L.P., leaving as an audit manager. Mr. Kim received a Bachelor of Arts
in economics from the University of California at Berkeley and is a Certified
Public Accountant.
Currently, all directors hold office until the next annual meeting of
stockholders and until their successors have been duly elected and qualified.
Officers are elected and serve at the discretion of the board of directors.
There are no family relationships among the directors and officers of JNI.
Pursuant to the Investor's Rights Agreement dated as of November 12, 1998
between Jaymark, JNI and Adaptec, we have granted Adaptec the right to have an
observer present during our board meetings. Adaptec has indicated that it does
not intend to exercise these rights. Adaptec has signed a confidentiality
agreement to keep confidential all information discussed at any board meetings,
and we have the right to exclude the observer from any board meetings if we
determine that the matters to be discussed are particularly sensitive. In
addition, pursuant to a warrant to purchase shares of Jaymark common stock,
Jaymark granted a third party lender board observer rights for all of its
corporate subsidiaries' board meetings, including those of JNI.
BOARD COMMITTEES
The board of directors has established an Audit Committee and a
Compensation Committee. The Audit Committee, which consists of Dr. Wenaas and
Mr. Johnson, reviews the results and scope of the annual audit and meets with
our independent accountants to review our internal accounting policies and
procedures. During 1998, the Compensation Committee consisted of Dr. Wenaas, Mr.
Johnson and Dr. Edward Frymoyer, a former director. The Compensation Committee,
which currently consists of Dr. Wenaas and Mr. Johnson, makes recommendations to
the board of directors with respect to our general and specific compensation
policies and practices and administers our 1997 Stock Option Plan, our 1999
Stock Option Plan and our 1999 Employee Stock Purchase Plan. Dr. Frymoyer was
also a member of the Compensation Committee for part of 1999.
54
<PAGE> 60
Immediately prior to the effectiveness of the this offering, Mr. Johnson
and Mr. Wenaas will resign as members of the Audit and Compensation Committees.
Immediately after the effectiveness of this offering, the Audit Committee will
consist of Mr. Fox and Mr. Bolger and the Compensation Committee will consist of
Mr. Fox and Mr. Bernard.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Other than Mr. Johnson, none of the members of the Compensation Committee
is currently, or has ever been at any time since our formation, one of our
officers or employees. Mr. Johnson served as chief financial officer of JNI
during 1998 and through July 1999. In addition, we entered into a consulting
agreement with Dr. Frymoyer pursuant to which he provides services to JNI. Dr.
Frymoyer received approximately $70,000 under this agreement in 1998.
COMPENSATION OF DIRECTORS
JNI reimburses member of its board of directors for out-of-pocket expenses
incurred in the performance of their duties as directors of JNI. No member of
our board of directors currently receives any additional cash compensation for
his services as a director of JNI. From time to time, directors who are not
employees of JNI may receive options under our stock option plans as
compensation for their services as directors. In October 1999, the board of
directors granted to each of Mr. Bernard, Mr. Bolger and Mr. Fox an option to
purchase 20,000 shares of common stock at an exercise price equal to the initial
public offering price per share of our common stock upon the effectiveness of
this offering, subject in each case to their commencement of services as a
director. Also, each Audit and Compensation Committee member was granted an
option to purchase 1,000 shares of our common stock at an exercise price equal
to the initial public offering price per share of our common stock upon the
effectiveness of this offering subject to their commencement of services as a
member of the committee.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION MATTERS
We have adopted provisions in our certificate of incorporation, permitted
by Delaware General Corporation Law, which provide that directors of JNI shall
not be liable for monetary damages to JNI or its stockholders for any breach of
fiduciary duties to the fullest extent permitted by Delaware General Corporation
Law.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our by-laws authorize us to indemnify our officers, directors, employees
and agents to the fullest extent permitted by the Delaware Law. Section 145 of
the Delaware General Corporation Law empowers us to enter into indemnification
agreements with our officers, directors, employees and agents. We have entered
into separate indemnification agreements with our directors and executive
officers which may, in some cases be broader than the specific indemnification
provisions contained in the Delaware Law. The indemnification agreements may
require us, among other things, to indemnify such executive officers and
directors against liabilities that may arise by reason of status or service as
directors or executive officers and to advance expenses they spend as a result
of any proceeding against them as to which they could be indemnified. We also
intend to enter into agreements with our future directors and executive
officers.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of JNI where indemnification will be
required or permitted and we are
55
<PAGE> 61
not aware of any threatened litigation or proceeding that may result in a claim
for such indemnification.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned by our
Chief Executive Officer and our other three most highly compensated executive
officers whose aggregate compensation during the year ended December 31, 1998
exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
FISCAL YEAR 1998
ANNUAL COMPENSATION
NAME AND -------------------
PRINCIPAL POSITION SALARY BONUS OTHER ANNUAL COMPENSATION
<S> <C> <C> <C>
Terry M. Flanagan................... $186,060 $139,428 $25,609(1)
President and Chief Executive
Officer
Charles McKnett..................... 131,919 94,483 3,696(2)
Chief Technology Officer
Thomas K. Gregory................... 137,061 99,185 5,655(3)
Chief Operating Officer
Roland Thibodeau.................... 198,083 25,000 4,888(4)
Executive Vice President, Sales
</TABLE>
- ---------------
(1) Includes $9,303 paid to Dr. Flanagan in lieu of a raise, $8,641 paid as an
auto allowance, $1,824 paid as a matching contribution to Dr. Flanagan's
401(k) account and $5,841 paid for group term life insurance.
(2) Includes $3,147 paid as a matching contribution to Mr. McKnett's 401(k)
account 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.
(4) Includes $3,281 paid as a matching contribution to Mr. Thibodeau's 401(k)
account and $1,607 paid for group term life insurance.
1998 OPTION GRANTS
There were no options granted to any of the individuals named in the
Summary Compensation Table in 1998. Accordingly, the table relating to option
grants in 1998 has been omitted.
YEAR-END VALUES
The table below provides information about the number and value of options
held by the executive officers described above at December 31, 1998.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Terry M. Flanagan.............. -- 1,076,250(2) $-- $3,510,620
Charles McKnett................ -- 508,620(2) -- 1,659,068
Thomas K. Gregory.............. -- 565,110(2) -- 1,843,332
Roland Thibodeau............... -- 452,130(2) -- 1,474,803
</TABLE>
56
<PAGE> 62
- ---------------
(1) The fiscal year-end value of "in-the-money" stock options represents the
difference or a portion of the difference between the exercise price of such
options, and the fair value of JNI's common stock as of December 31, 1998.
The fair value of JNI's common stock on December 31, 1998 determined for
financial reporting purposes on such date was $3.43 per share. The actual
value of "in-the-money" stock options will depend upon the trading price of
JNI's common stock on the date of sale of the underlying common stock and
may be higher or lower than the amount set forth in the table above.
(2) Options do not become exercisable until the effective date of this offering.
Options vest from the date of grant cumulatively 10% at the end of the first
year, 30% at the end of the second year, 60% at the end of the third year
and 100% after the fourth year. In the event that Jaymark no longer owns 50%
or greater of our outstanding shares of common stock, the vesting schedule
for the options will accelerate. Pursuant to the accelerated vesting
schedule, the options vest cumulatively 25% at the date of grant, 33% at the
end of the first year, 75% at the end of the second year and 100% at the end
of the third year.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
We have entered into Severance and Change of Control Agreements with Terry
M. Flanagan, Charles McKnett, Thomas Gregory, Roland Thibodeau and Gloria Purdy.
In the event that the employee is terminated without cause within one year after
a change in control of JNI, he or she will receive as a severance payment one
full-year of his or her then current total compensation, and all of his or her
unvested, outstanding options to purchase shares of stock in JNI will
immediately vest. Each of the employees who are parties to these agreements will
also receive these benefits if he or she resigns as a result of a reduction in
his or her total compensation within one year after a change in control of JNI.
STOCK OPTION PLANS
1997 Stock Option Plan
JNI's 1997 stock option plan (the "1997 Plan") allows for the issuance of
options to purchase up to 4,396,441 shares of common stock. Under the 1997 Plan,
all employees of JNI or any subsidiary, are eligible to receive nonstatutory
stock options or incentive stock options intended to qualify under Section 422
of the Internal Revenue Code of 1986. The 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
57
<PAGE> 63
accelerated in the event Jaymark's ownership percentage of JNI falls below 50%
of the total combined voting power of JNI.
The exercise price of incentive stock options and nonstatutory stock
options granted under the 1997 Plan cannot be lower than 100% of the fair market
value of the common stock on the date of grant and, in the case of options
granted to holders of more than 10% of the voting power of JNI, not less than
110% of such fair market value. The term of an option cannot exceed ten years,
and the term of an ISO given to a holder of more than 10% of the voting power of
JNI cannot exceed five years. Options generally expire not later than 90 days
following a termination of employment, 12 months following the optionee's
disability, or not later than 12 months following the optionee's death.
As of 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. If a JNI employee is terminated
58
<PAGE> 64
one month prior to, or within a year after, a change in control, then 50% of the
terminated employee's outstanding unvested options will immediately vest.
The total number of shares reserved for issuance under the 1999 Plan, as
amended, is 2,312,800 shares of which, as of June 30, 1999, no shares have been
issued upon the 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.
59
<PAGE> 65
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 approximately
$35,000 per month for the remainder of 1999, decreasing to approximately $15,000
per month in the first quarter of 2000. After the first quarter of 2000, amounts
payable under the Transitional Services Agreement are expected to be immaterial.
If Jaycor provides consulting services to us, we have agreed to reimburse Jaycor
on an hourly basis and at a billing rate consistent with Jaycor's billing
practices.
60
<PAGE> 66
Jaycor maintains, and pays the premiums on, certain umbrella insurance policies
which cover us. We reimburse Jaycor for the amount of the insurance premium
allocated to our coverage.
In October 1998, we entered into a sublease agreement with Jaycor, as
amended, whereby we subleased a certain portion of Jaycor's facilities on terms
consistent with Jaycor's primary lease. The sublease provides for a base monthly
rent and is subject to an annual increase based upon the consumer price index
percentage with a minimum increase of 2.5% and a maximum increase of 5%
annually. The term of the lease expires in October 2004. In addition, the
sublease requires the payment of a pro rata portion of the monthly operating
costs, taxes and utilities of the premises. As of June 30, 1999, our future
annual minimum lease payments due to Jaycor under this sublease were $273,000
for the six months ending December 31, 1999, $557,000 for the year ending
December 31, 2000, $567,000 for the year ending December 31, 2001, $577,000 for
the year ending December 31, 2002, $588,000 for the year ending December 31,
2003 and $497,000 for the year ending December 31, 2004.
Pursuant to a Registration Rights Agreement dated as of September 1, 1999,
we have granted registration rights to Jaymark for the shares of our stock held
by Jaymark. If we propose to register any of our securities under the Securities
Act, either for our own account or for the account of other security holders,
holders of shares entitled to registration rights are entitled to notice of such
registration and are entitled to include their shares in such registration, at
our expense. Jaymark is also entitled to specified demand registration rights
under which Jaymark may require us to file a registration statement under the
Securities Act at our expense with respect to our shares of common stock, and we
are required to use our best efforts to effect this registration. Further,
Jaymark may require us to file additional registration statements on Form S-3.
All of these registration rights are subject to conditions and limitations,
among them the right of the underwriters of an offering to limit the number of
shares included in the registration and our right not to effect a requested
registration within twelve months following the initial offering of our
securities, including this offering. All of these registration rights terminate
after we have effected two registration statements, or at the latest, four years
from the date of this offering.
Our historical results of operations have been included in Jaymark's
consolidated federal income tax return. We have entered into a Tax Sharing
Agreement with Jaymark dated September 1, 1999, under which the amount of
federal income tax allocated to us is generally determined as though we were
filing a separate federal income tax return. For periods during which Jaymark
and JNI are included in the same affiliated group for federal and state income
tax purposes, JNI and Jaymark have agreed that JNI's federal and state tax
obligations, if any, will be paid to Jaymark. At such time when we are no longer
included as a member of the Jaymark affiliated tax group, Jaymark will reimburse
us for the tax benefits associated with any net operating loss or credit
carryforwards previously utilized by Jaymark less any carryforwards utilized by
us.
AGREEMENTS WITH ADAPTEC
On November 12, 1998, we purchased certain products and technology of
Adaptec, Inc. relating to Adaptec's fibre channel products pursuant to an Asset
Acquisition Agreement. As payment for the Adaptec assets, we issued to Adaptec
1,132,895 shares of our Series A preferred stock (the "Series A Stock") and
warrants to purchase shares of our Series A Stock (the "Series A Warrants"). In
September 1999, we amended the first of the Series A Warrants to fix the number
of shares issuable thereunder at 840,000. The
61
<PAGE> 67
number of shares issuable under the second and third warrants was reduced by
approximately 611,000 shares, and JNI anticipates that as a result of this
reduction no additional shares will become issuable under these warrants. The
first Series A Warrant is immediately exercisable at an aggregate purchase price
of $100, and expires in November 2005. All shares of Series A Stock will convert
into an equal number of shares of common stock upon completion of this offering.
In November 1998, JNI purchased certain Fibre Channel technology, products
and property and equipment from Adaptec. In connection with the asset
acquisition, JNI entered into the following agreements with Adaptec: a Fibre
Channel Cross-License Agreement; a Chip Manufacturing Agreement; a Board
Manufacturing and Transition Agreement; a Consulting Services Agreement; a
Volume Purchase Agreement; and two Occupancy License Agreements.
Pursuant to the Fibre Channel Cross-License Agreement, Adaptec granted JNI
four irrevocable, perpetual and non-exclusive licenses to certain of Adaptec's
Fibre Channel technology. Three of the licenses granted to JNI under this
agreement are fully paid and royalty-free and the fourth license contains a $25
per unit royalty fee. During the year ended December 31, 1998 and during the
six-month period ended June 30, 1999, JNI incurred royalty obligations of $0 and
$23,000, respectively, pursuant to this agreement.
In addition and as part of the agreement, JNI granted Adaptec a
non-exclusive license to use and distribute any of JNI's error corrections,
updates and other future versions and releases of the licensed Fibre Channel
technology products. The license to Adaptec is royalty-free.
Pursuant to the Chip Manufacturing Agreement, Adaptec agreed to perform
manufacturing services with respect to Fibre Channel chip products for a
transition period not to exceed two years beginning in November 1998. The
agreement specifies that Adaptec will manufacture and package the products
according to specifications at a price initially equal to Adaptec's standard
cost plus 15 percent. The prices will be reviewed quarterly. During the year
ended December 31, 1998 and during the six-month period ended June 30, 1999, JNI
incurred costs of $19,000 and $261,000, respectively, for the manufacture of
these products.
Pursuant to the Board Manufacturing and Transition Agreement, Adaptec
agreed to perform manufacturing services with respect to Fibre Channel board
level products sold to JNI under the Asset Acquisition Agreement for a
transition period of six months beginning in November 1998. The agreement
specifies that Adaptec will manufacture and package the board level products
according to specifications at a price equal to Adaptec's standard cost plus 15
percent. JNI purchased $0 and $427,000 of board level products from Adaptec
during the year ended December 31, 1998 and the 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 incurred expenses of $0 and $42,000,
respectively, pursuant to this agreement.
Pursuant to the Volume Purchase Agreement, JNI agreed to sell to Adaptec
certain Fibre Channel products developed and manufactured by Adaptec for JNI
under the Chip Manufacturing Agreement and the Board Manufacturing and
Transition Agreement. Per
62
<PAGE> 68
the agreement, the prices charged to Adaptec will not exceed: (1) the prices
charged any of JNI's other customers during the 90 day period preceding the
price quote purchasing "substantially similar" products or (2) 115% of JNI's
actual manufacturing cost or the price paid by JNI if manufactured by Adaptec.
Adaptec has the right to resell the products without restriction of any kind,
except that under certain conditions, Adaptec may not sell products
incorporating certain chip-level products.
The Volume Purchase Agreement expires in November 2000 and will
automatically renew for an additional one-year term unless either party notifies
the other of its intention to terminate the agreement within ninety days of the
expiration of the term. During the year ended December 31, 1998 and during the
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 incurred 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
1,132,895 shares of our common stock acquired in November 1998 and with respect
to 840,000 shares issuable upon exercise of the warrants described above. If we
propose to register any of our securities under the Securities Act at any time
beginning two years after this offering, either for our own account or for the
account of other security holders, holders of shares entitled to registration
rights are entitled to notice of such registration and are entitled to include
their shares in such registration, at our expense. However, the underwriters of
any such offering have the right to limit the number of shares included in such
registration. These registration rights terminate after we have effected two
registration statements or, at the latest, four years from the date of this
offering.
We believe that all transactions with affiliates described above were made
on terms no less favorable to us than could have been obtained from unaffiliated
third parties. Our policy is to require that a majority of the independent and
disinterested outside directors on our board of directors approves all future
transactions between us and our officers, directors, principal stockholders and
their affiliates.
63
<PAGE> 69
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information concerning the
beneficial ownership of the shares of our common stock as of September 30, 1999,
and as adjusted to give effect to the sale of 2,800,000 shares of common stock
in this offering by JNI assuming (a) conversion of all of JNI's outstanding
shares of convertible preferred stock into common stock and (b) no exercise of
the underwriters' over-allotment option, by:
- each person known to be the beneficial owner of 5% or more of the
outstanding shares of common stock, including the selling stockholder;
- each executive officer listed in the Summary Compensation Table;
- each director of JNI; and
- all executive officers and directors of JNI as a group.
Except in cases where community property laws apply or as indicated in the
footnotes to this table, JNI believes that each stockholder identified in the
table possesses sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by such stockholder. Of the shares
indicated as beneficially owned by Adaptec, Inc., 840,000 are issuable upon
exercise of a warrant. All of the shares indicated as beneficially owned by
executive officers in the following table are issuable within 60 days of
September 30, 1999 upon exercise of outstanding options granted under the 1997
Plan. The address of the individuals listed below is the address of JNI set
forth in the "Prospectus Summary."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
THE OFFERING THE OFFERING
-------------------- SHARES BEING --------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
5% OR GREATER STOCKHOLDERS:
Jaymark, Inc....................... 17,010,000 93.8% 2,100,000 14,910,000 71.2%
Eric P. Wenaas, President and
Chief Executive Officer
9775 Towne Centre Drive
San Diego, CA 92121
Adaptec, Inc....................... 1,972,895 10.4 -- 1,972,895 9.1
691 South Milpitas Blvd.
Milpitas, CA 95035
EXECUTIVE OFFICERS:
Terry M. Flanagan................ 322,875 1.8 -- 322,875 *
Charles McKnett.................. 152,586 1.0 -- 152,586 *
Thomas K. Gregory................ 169,533 1.0 -- 169,533 *
Roland Thibodeau................. 135,639 * -- 135,639 *
DIRECTORS:
P. Randy Johnson................. -- -- -- -- --
Eric P. Wenaas................... -- -- -- -- --
DIRECTOR NOMINEES:
Thomas J. Bernard................ -- -- -- -- --
John Bolger...................... -- -- -- -- --
Lawrence E. Fox.................. -- -- -- -- --
EXECUTIVE OFFICERS AND DIRECTORS AS
A GROUP (SEVEN PERSONS):......... 780,633 4.1 -- 780,633 3.6
</TABLE>
- ---------------
* Represents less than one percent of the total.
64
<PAGE> 70
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of JNI will
consist of 100,000,000 shares of common stock, par value $0.001 per share, and
5,000,000 shares of preferred stock, par value $0.001 per share. Prior to this
offering, the authorized capital stock of JNI also includes 30,000,000 shares of
Series A preferred stock. Upon the closing of this offering, each outstanding
share of Series A preferred stock will be automatically converted into one share
of common stock. Upon the conversion, the Series A preferred stock will be
canceled and retired and removed from the authorized capital stock of JNI.
COMMON STOCK
Assuming conversion of the Series A preferred stock as described above, as
of June 30, 1999 there were 18,142,895 shares of common stock outstanding held
by 2 stockholders of record. The holders of common stock are entitled to one
vote for each share held of record on all matters submitted to a vote of the
stockholders. Subject to preferences that may be applicable to any then
outstanding holders of preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as may be declared by the board of
directors out of funds legally available therefor. See "Dividend Policy."
In the event of a liquidation, dissolution or winding up of JNI, subject to
preferences that may be applicable to any then outstanding holders of preferred
stock, holders of the common stock are entitled to share ratably in all assets.
The common stock has no preemptive or conversion rights or other subscription
rights, and there are no redemptive or sinking fund provisions applicable to the
common stock. JNI has received full payment for all outstanding shares of its
common stock and cannot require its stockholders to make further payments on the
stock. The common stock to be outstanding upon completion of this offering will
have the same status.
PREFERRED STOCK
The board of directors has the authority, without further action by the
stockholders, to issue from time to time the preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers, and
relative, participating, optional or other special rights and the qualifications
or restrictions thereof. The preferences, powers, rights and restrictions of
different series of preferred stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions, and purchase funds and other matters. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock, and
may have the effect of delaying, deferring or preventing a change in control of
JNI. See Note 5 to financial statements for a description of the currently
outstanding preferred stock.
WARRANTS
In connection with our acquisition of technology from Adaptec in November
1998, we granted Adaptec warrants to purchase shares of our stock. In September
1999, we amended the warrants to fix the number of shares issuable thereunder at
840,000, subject to adjustment. The warrant for 840,000 shares is immediately
exercisable at an exercise price of $100. See "Certain Transactions."
65
<PAGE> 71
REGISTRATION RIGHTS
Under an Investor's Rights Agreement dated as of November 12, 1998 Adaptec
or its permitted transferees will have registration rights with respect to the
1,132,895 shares of our common stock acquired in November 1998 and with respect
to any shares Adaptec acquires upon exercise of the warrants described above.
Jaymark, and its permitted transferees, also has registration rights under a
Registration Rights Agreement dated as of September 1, 1999 with respect to the
shares of our common stock that Jaymark currently holds. If we propose to
register any of our securities under the Securities Act at any time beginning
two years after this offering, either for our own account or for the account of
other security holders, holders of shares entitled to registration rights are
entitled to notice of such registration and are entitled to include their shares
in such registration, at our expense. Jaymark is also entitled to specified
demand registration rights under which Jaymark may require us to file a
registration statement under the Securities Act at our expense with respect to
our shares of common stock, and we are required to use our best efforts to
effect this registration. Further, Jaymark may require us to file additional
registration statements on Form S-3. All of these registration rights are
subject to conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares included in the registration and
our right not to effect a requested registration within twelve months following
the initial offering of our securities, including this offering. All of these
registration rights terminate after we have effected two registration statements
or at the latest, four years from the date of this offering.
DELAWARE ANTI-TAKEOVER LAW
We are required to follow Section 203 of the Delaware Law, an anti-takeover
law. In general, the statute prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. A "business combination" includes a merger, asset or stock
sale or other transaction resulting in financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's outstanding voting stock. This provision may have the effect of
delaying, deterring or preventing a change of control of JNI without further
actions by the stockholders.
APPLICATION OF THE CALIFORNIA GENERAL CORPORATION LAW TO JNI
If our equity securities are held by less than 800 stockholders and a
majority of our outstanding shares are held by persons with California addresses
and we have operational characteristics that indicate that we have significant
contacts to California, we may be subject to Section 2115 of the California
General Corporation Law. In such event, we would be subject to certain key
provisions of the California General Corporation Law, including, without
limitation, those provisions relating to the number of directors to be elected
each year (all directors would be required to be elected each year under
California law applicable to companies with less than 800 beneficial holders of
their equity securities), the stockholders' right to cumulate votes at elections
of directors (cumulative voting would be mandatory under California law
applicable to companies with less than 800 beneficial holders of their equity
securities), the stockholders' right to remove directors without cause (which
under California law is subject to the stockholders' right to cumulative
voting), our ability to indemnify our officers, directors and employees (which
generally is more limited in certain situations in California than in Delaware),
our ability
66
<PAGE> 72
to make distributions, dividends or repurchases (which generally is more
restrictive in California than in Delaware), inspection of corporate records
(which is generally more available in California than in Delaware), approval of
certain corporate transactions, and dissenters' rights. After consultation with
the underwriters of this offering, we anticipate that we will have more than 800
stockholders following the completion of this offering.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is U.S. Stock
Transfer Corporation.
67
<PAGE> 73
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering there has been no public market for the common stock
of JNI. Future sales of substantial amounts of common stock in the public market
could adversely affect market prices prevailing from time to time. As described
below, only a limited number of shares will be available for sale shortly after
this offering due to contractual and legal restrictions on resale. Nevertheless,
sales of substantial amounts of common stock of JNI in the public market after
the restrictions lapse could adversely affect the prevailing market price at
such time and the ability of JNI to raise equity capital in the future.
- Upon the closing of this offering, we will have outstanding an aggregate
of approximately 21,782,895 shares of common stock (including 840,000
shares issuable upon exercise of a warrant).
- Of these shares, the 4,900,000 shares of common stock to be sold in this
offering will be freely tradable without restriction or further
registration under the Securities Act, unless the shares are held by
"affiliates" of JNI as such term is defined in Rule 144 of the Securities
Act.
- All remaining shares held by our existing stockholders were issued and
sold by JNI in private transactions and are eligible for public sale if
registered under the Securities Act or sold in accordance with Rule 144
or Rule 701 thereunder, which rules are summarized below.
Jaymark and Adaptec will collectively hold an aggregate of approximately
16,882,895 shares of common stock after the offering after giving effect to
conversion of the convertible preferred stock and the exercise of the warrant
held by Adaptec. These stockholders have signed lock-up agreements which prevent
them from selling any common stock owned by them for a period of 180 days from
the date of this prospectus without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation. In addition, holders of all
outstanding options to acquire JNI common stock have entered into similar
lock-up agreements with the underwriters. When determining whether or not to
release shares from the lock-up agreements, DLJ will consider, among other
factors, the stockholder's reasons for requesting the release, the number of
shares for which the release is being requested and market conditions at the
time. As a result of lock-up agreements with the underwriters and the provisions
of Rule 144 and 701, approximately 16,042,895 additional outstanding shares of
common stock will be eligible for sale in the public market upon expiration of
the lock-up period.
In general, under Rule 144 as currently in effect, a person or persons
whose shares are aggregated, including an "affiliate," who has beneficially
owned shares for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of either 1% of the
then outstanding shares of common stock or the average weekly trading volume of
the common stock on the Nasdaq National Market during the four calendar weeks
preceding the filing of a notice on Form 144 with respect to such sale. One
percent of the outstanding shares of common stock would be approximately 217,830
shares immediately after the offering. Sales under Rule 144 are also subject to
prescribed requirements regarding the manner of sale, notice and availability of
current public information about JNI.
In general, under Rule 701 of the Securities Act as currently in effect,
any employee, consultant or advisor of JNI who purchased shares from us in
connection with a compensatory stock or option plan or written employment
agreement is eligible to resell such shares 90 days after the effective date of
the offering in reliance on Rule 144, by complying with the applicable
requirements of Rule 144 other than the holding period
68
<PAGE> 74
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."
69
<PAGE> 75
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement, dated
, 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Hambrecht & Quist LLC,
Bear, Stearns & Co. Inc. and DLJdirect Inc. have severally agreed to purchase
from the selling stockholder and us the respective number of shares of common
stock set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS: SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.......
Bear, Stearns & Co. Inc...................................
Hambrecht & Quist LLC.....................................
DLJdirect Inc.............................................
--------
Total.............................................
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock
included in this offering are subject to approval of legal matters by their
counsel and to customary conditions, including the effectiveness of the
registration statement, the continuing correctness of our representations and
those of the selling stockholder, the receipt of a "comfort letter" from our
accountants, the listing of the common stock for quotation on the Nasdaq
National Market and no occurrence of an event that would have a material adverse
effect on JNI. The underwriters are obligated to purchase and accept delivery of
all the shares of common stock, other than those covered by the over-allotment
option described below, if they purchase any of the shares of common stock.
The underwriters propose to initially offer some of the shares of common
stock directly to the public at the initial public offering price set forth on
the cover page of this prospectus and some of the shares of common stock to
certain dealers, including the underwriters, at the initial public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share to other dealers. After the initial offering of the common stock to the
public, the representatives of the underwriters may change the public offering
price and such concessions at any time without notice. The underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The following table shows the underwriting fees to be paid to the
underwriters by the selling stockholder and by us in connection with this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
NO FULL
EXERCISE EXERCISE
-------- --------
<S> <C> <C>
JNI:
Per share.................................. $ $
Total...................................... $ $
Selling Stockholder:
Per share.................................. $ $
Total...................................... $ $
</TABLE>
An electronic prospectus is available on the web site maintained by
DLJdirect Inc., one of the underwriters and an affiliate of Donaldson, Lufkin &
Jenrette Securities Corporation. Other than the prospectus in electronic format,
the information on this web
70
<PAGE> 76
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
71
<PAGE> 77
to the offering of the common stock and the distribution of this prospectus.
This prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any shares of common stock included in this offering in any
jurisdiction in which that would not be permitted or legal.
STABILIZATION
In connection with the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. The underwriters may bid for and purchase
shares of common stock in the open market to cover such syndicate short position
or to stabilize the price of the common stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if DLJ repurchases previously distributed common stock in syndicate
covering transactions, in stabilization transactions or otherwise or if DLJ
receives a report that indicates that the clients of such syndicate members have
"flipped" the common stock. These activities may stabilize or maintain the
market price of the common stock above independent market levels. The
underwriters are not required to engage in these activities, and may end any of
these activities at any time.
PRICING OF THIS OFFERING
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price for the shares of common stock
offered by this prospectus will be determined by negotiation among JNI,
representatives of the selling stockholder and the representatives of the
underwriters. The factors to be considered in determining the initial public
offering price include:
- the history of and the prospects for the industry in which we compete;
- our past and present operations;
- our historical results of operations;
- our prospects for future earnings;
- the recent market prices of securities of generally comparable companies;
and
- the general condition of the securities markets at the time of the
offering.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for JNI by Gray Cary Ware & Freidenrich LLP, San Diego, California. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by O'Melveny & Myers LLP, Newport Beach, California.
EXPERTS
The financial statements as of December 31, 1997 and 1998 and June 30, 1999
and for each of the three years in the period ended December 31, 1998 and the
six-month period ended June 30, 1999 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
72
<PAGE> 78
WHERE YOU CAN FIND MORE INFORMATION ABOUT JNI
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered by this prospectus. When used in this prospectus, the term "registration
statement" includes amendments to the registration statement as well as the
exhibits, schedules, financial statements and notes filed as part of the
registration statement. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information in the
registration statement. This prospectus omits information contained in the
registration statement as permitted by the rules and regulations of the SEC. For
further information with respect to us and the common stock offered by this
prospectus, reference is made to the registration statement. Statements herein
concerning the contents of any contract or other document are not necessarily
complete and in each instance reference is made to the copy of such contract or
other document filed with the SEC an exhibit to the registration statement, each
such statement being qualified by and subject to such reference in all respects.
With respect to each such document filed with the SEC as an exhibit to the
registration statement, reference is made to the exhibit for a more complete
description of the matter involved.
As a result of the offering hereunder, we will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended,
and in accordance with such laws, will file reports and other information with
the SEC. Reports, registration statements, proxy statements, and other
information filed by us with the SEC can be inspected and copied at the public
reference facilities maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549 and at the SEC's Regional Offices: 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade
Center, New York, New York 10048. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The SEC maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of the
site is http://www.sec.gov.
We intend to furnish holders of the common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing unaudited
condensed financial information for the first three quarters of each fiscal
year. We intend to furnish other reports as it may determine or as may be
required by law.
73
<PAGE> 79
JNI CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1997 and 1998 and June 30,
1999...................................................... F-3
Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998 and for the Six Months Ended June 30,
1998 (unaudited) and June 30, 1999........................ 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................................ 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 (unaudited) and June 30, 1999........................ F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 80
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of JNI Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations, of stockholders' equity (deficit) and of cash flows present fairly,
in all material respects, the financial position of JNI Corporation at December
31, 1997 and 1998 and June 30, 1999, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1998 and
the six month period ended June 30, 1999 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
October 8, 1999
F-2
<PAGE> 81
JNI CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
------------------- JUNE 30,
1997 1998 1999
<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> 82
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> 83
JNI CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK,
SERIES A COMMON STOCK ADDITIONAL UNEARNED PARENT
------------------- ---------------- PAID-IN STOCK-BASED CAPITAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION CONTRIBUTION DEFICIT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995...... -- $-- -- $-- $ -- $ -- $1,138 $ (942)
Net parent advances........... 1,653
Net loss...................... (1,487)
---------- --- ------- -- ------ ------- ------ -------
BALANCE, DECEMBER 31, 1996...... -- -- -- -- -- -- 2,791 (2,429)
Net parent advances........... 82
Investment by parent.......... 16,590,000 17 420,000 -- 2,856 (2,873)
Net loss...................... (1,184)
---------- --- ------- -- ------ ------- ------ -------
BALANCE, DECEMBER 31, 1997...... 16,590,000 17 420,000 -- 2,856 -- -- (3,613)
Issuance of convertible
preferred stock............. 1,132,895 1 1,566
Stock-based compensation...... 1,005 (970)
Net income.................... 311
---------- --- ------- -- ------ ------- ------ -------
BALANCE, DECEMBER 31, 1998...... 17,722,895 18 420,000 -- 5,427 (970) -- (3,302)
Stock-based compensation...... 1,371 (970)
Net income.................... 1,767
---------- --- ------- -- ------ ------- ------ -------
BALANCE, JUNE 30, 1999.......... 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...... 401
Net income.................... 1,767
-------
BALANCE, JUNE 30, 1999.......... $ 3,341
=======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 84
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> 85
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
JNI Corporation ("JNI" or the "Company") commenced operations in 1993 as a
division of Jaycor, Inc. ("Jaycor"). In February 1997, Jaycor effected a
corporate reorganization in which it formed two new corporations: Jaymark, Inc.
("Jaymark") and the Company. Jaymark became the parent of Jaycor and of the
Company in that reorganization transaction. Jaycor then transferred technology
and assets relating to its fibre channel division to Jaymark, which in turn
contributed these to the Company in exchange for shares of the Company's common
and preferred stock.
The Company is a leading designer and supplier of fibre channel hardware
and software products that connect servers and data storage devices to form
storage area networks. Storage area networks were made possible by the emergence
of fibre channel technology, a new generation of server to storage
communications technology that improves data communication speeds, connectivity,
distance between connections, reliability and access. The Company operates in
one business segment.
BASIS OF PRESENTATION
The accompanying financial statements reflect the financial position,
results of operations, changes in stockholders' equity and cash flows as if the
Company was a separate entity for all periods presented. The financial
statements have been prepared using the historical basis in the assets and
liabilities and historical results of operations related to the Company's
business. When the Company was a division of Jaycor, the cash used by the
Company was funded by Jaycor. Subsequent to incorporation, the Company's cash
receipts and disbursements continue to be processed by Jaycor. The net balances
of the Company's accounts with Jaycor are included in Due to Affiliate.
General corporate overhead related to Jaymark's corporate headquarters and
common support divisions have been allocated to the Company generally based on
the proportion of the Company's total labor costs to the total of all of
Jaymark's subsidiaries' total labor costs. Allocated charges included in
operating expenses totaled $365, $336 and $509 for the years ended December 31,
1996, 1997 and 1998 and $206 and $429 for the six-month periods ended June 30,
1998 (unaudited) and June 30, 1999, 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 have been prepared on the same basis as the audited financial
statements and, in the
F-7
<PAGE> 86
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 this interim period
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, 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> 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)
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> 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)
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.
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> 89
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1. THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $1.383 per share
for an aggregate purchase price of approximately $1,567.
The total purchase price included additional consideration given in the
form of three warrants to purchase a maximum of 2,436,551 additional shares of
Series A Convertible Preferred Stock which become exercisable based on product
introductions and revenues from products based on the acquired technology. Upon
a change in control of the Company, as defined, and which includes an initial
public offering of stock before January 31, 2001, the warrants become
exercisable to purchase a pro rata number of
F-11
<PAGE> 90
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. The pro rata calculation is based
upon the actual revenues earned by the Company on sales of products based on the
acquired technology during the period from February 1, 1999 to the date of the
change in control (the "Measurement Period") divided by a percentage of the
revenue targets, as stated, for sales of products based on the acquired
technology during the Measurement Period and based on the number of elapsed
months in the Measurement Period.
On September 30, 1999, the Company and Adaptec amended the first of the
Series A warrants to fix the number of shares issuable thereunder at 840,000.
The number of shares issuable under the second and third warrants was reduced by
approximately 611,000 shares to approximately 1,597,000 shares. Based upon the
Company's estimate of applicable revenues that it will generate prior to the
anticipated effective time of the initial public offering, the Company
anticipates that, as a result of this reduction in shares issuable under the
second and third warrants, no shares will become issuable under these warrants.
As a result of the resolution of this contingency, additional purchase price
consideration of $10,920 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
<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
<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>
F-12
<PAGE> 91
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 3. COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
------------- JUNE 30,
1997 1998 1999
<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>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
------------- JUNE 30,
1997 1998 1999
<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). 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, 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 June 30,
1999, the Company's future annual minimum payments due to Jaycor under this
F-13
<PAGE> 92
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4. TRANSACTIONS WITH AFFILIATES (CONTINUED)
sublease were $273, $557, $567, $577, $588 and $487 for the six months ending
December 31, 1999 and for the years ending December 31, 2000, 2001, 2002, 2003
and 2004, respectively.
AGREEMENTS WITH ADAPTEC
In November 1998, the Company purchased certain fibre channel technology,
products and property and equipment from Adaptec (Note 2). In connection with
the asset acquisition, the Company entered into the following agreements with
Adaptec: a Fibre Channel Cross-License Agreement; a Chip Manufacturing
Agreement; a Board Manufacturing and Transition Agreement; a Consulting Services
Agreement; a Volume Purchase Agreement; and two Occupancy License Agreements.
Pursuant to the Fibre Channel Cross-License Agreement, Adaptec granted the
Company four irrevocable, perpetual and non-exclusive licenses to certain of
Adaptec's fibre channel technology. Three of the licenses granted to the Company
under this agreement are fully paid and royalty-free and the fourth license
contains a $25 per unit royalty fee. During the year ended December 31, 1998 and
during the six-month period ended June 30, 1999, the Company incurred royalty
expense of $0 and $23, respectively, pursuant to this agreement.
In addition and as part of the agreement, the Company granted Adaptec a
non-exclusive license to use and distribute any of the Company's error
corrections, updates and other future versions and releases of the licensed
fibre channel technology products. The license to Adaptec is royalty-free.
Pursuant to the Chip Manufacturing Agreement, Adaptec agreed to perform
manufacturing services with respect to fibre channel chip products for a
transition period not to exceed two years beginning in November 1998. The
agreement specifies that Adaptec will manufacture and package the products
according to specifications at a price 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, the
Company incurred costs of $19 and $261, respectively, for the manufacture of
these products.
Pursuant to the Board Manufacturing and Transition Agreement, Adaptec
agreed to perform manufacturing services with respect to fibre channel board
level products sold to the Company under the Asset Acquisition Agreement for a
transition period of six months beginning in November 1998. The agreement
specifies that Adaptec will manufacture and package the board level products
according to specifications at a price equal to Adaptec's standard cost plus 15
percent. The Company purchased $0 and $427 of board level products from Adaptec
during the year ended December 31, 1998 and the 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 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
F-14
<PAGE> 93
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4. TRANSACTIONS WITH AFFILIATES (CONTINUED)
December 31, 1998 and during the six-month period ended June 30, 1999, the
Company incurred expenses of $0 and $42, respectively, pursuant to this
agreement.
Pursuant to the Volume Purchase Agreement, the Company agreed to sell to
Adaptec certain fibre channel products developed and manufactured by Adaptec for
the Company under the Chip Manufacturing Agreement and the Board Manufacturing
and Transition Agreement. Per the agreement, the prices charged to Adaptec will
not exceed: (1) the prices charged any of the Company's other customers during
the 90 day period preceding the price quote purchasing "substantially similar"
products or (2) 115% of the Company's actual manufacturing cost or the price
paid by the Company if manufactured by Adaptec. Adaptec has the right to resell
the products without restriction of any kind, except that under certain
conditions, Adaptec may not sell products incorporating certain chip-level
products.
The Volume Purchase Agreement expires in November 2000 and will
automatically renew for an additional one-year term unless either party notifies
the other of its intention to terminate the agreement within ninety days of the
expiration of the term. During the year ended December 31, 1998 and during the
six-month period ended June 30, 1999, 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 incurred under these
agreements totaled $35 during the year ended December 31, 1998 and $28 during
the six-month period ended June 30, 1999.
Accounts payable to Adaptec totaled approximately $19 and $92 at December
31, 1998 and June 30, 1999, respectively. There were no purchases from Adaptec
during the years ended December 31, 1996 or 1997.
REGISTRATION RIGHTS AGREEMENTS
Pursuant to a Registration Rights Agreement dated as of September 1, 1999,
the Company has granted registration rights to Jaymark for the shares of the
Company's stock held by Jaymark. If the Company proposes to register any of the
Company's securities under the Securities Act, either for its own account or for
the account of other security holders, holders of shares entitled to
registration rights are entitled to notice of such registration and are entitled
to include their shares in such registration, at the Company's expense. Jaymark
is also entitled to specified demand registration rights under which Jaymark may
require the Company to file a registration statement under the Securities Act at
the Company's expense with respect to the Company's shares of common stock, and
the Company is required to use its best efforts to effect this registration.
Further, Jaymark may
F-15
<PAGE> 94
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 4. TRANSACTIONS WITH AFFILIATES (CONTINUED)
require the Company to file additional registration statements on Form S-3. All
of these registration rights are subject to conditions and limitations, among
them the right of the underwriters of an offering to limit the number of shares
included in the registration and the Company's right not to effect a requested
registration within twelve months following the initial offering of the
Company's securities, including this offering. All of these registration rights
terminate after the Company has effected two registration statements, or at the
latest, four years from the date of this offering.
Under an Investor's Rights Agreement dated as of November 12, 1998, Adaptec
or its permitted transferees will have registration rights with respect to the
1,132,895 shares of the Company's common stock acquired in November 1998 and
with respect to 840,000 shares issuable upon exercise of the warrants described
above. If the Company proposes to register any of its securities under the
Securities Act at any time beginning two years after this offering, either for
the Company's own account or for the account of other security holders, holders
of shares entitled to registration rights are entitled to notice of such
registration and are entitled to include their shares in such registration, at
the Company's expense. However, the underwriters of any such offering have the
right to limit the number of shares included in such registration. These
registration rights terminate after the Company has effected two registration
statements or, at the latest, four years from the date of this offering.
NOTE 5. STOCKHOLDERS' EQUITY
REVERSE STOCK SPLIT
Effective October 1999, the Company declared a 0.7-for-1 reverse stock
split of Common, Preferred, and Series A Convertible Preferred Stock. All
references in these financial statements to the number of shares, per share
amounts and stock option data of the Company's Common Stock, Preferred Stock,
and Series A Convertible Preferred Stock have been restated to reflect this
stock split.
PREFERRED STOCK
The Board of Directors of the Company (the "Board") is authorized to issue
preferred stock or other senior securities and determine the series and number
of preferred shares to be issued and any related designations, powers,
preferences, rights, qualifications, limitations or restrictions. The total
number of shares authorized is 35,000,000. The Board has authorized and allotted
30,000,000 shares as Series A Convertible Preferred Stock. The remaining
5,000,000 shares are undesignated.
SERIES A CONVERTIBLE PREFERRED STOCK
The holders of Series A Convertible Preferred Stock are entitled to receive
annual dividends of $0.11 per share, such dividends to be payable only when and
if declared by the Board out of funds legally available therefor. The right to
such dividends shall not be cumulative and no rights to such dividends shall
accrue to holders of the Series A Convertible Preferred Stock if dividends on
said shares are not declared in any year. No dividends have been declared on the
Series A Convertible Preferred Stock. At December 31, 1998, the issued and
outstanding Series A Convertible Preferred Stock were
F-16
<PAGE> 95
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5. STOCKHOLDERS' EQUITY (CONTINUED)
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.
In April 1999, the Company adopted a second option plan (the "1999 Plan"),
as amended, which provides for the issuance of up to 2,312,800 shares of the
Company's common stock. A portion of this reserve has been approved by the board
and stockholders contingent upon the effectiveness of the initial public
offering. The 1999 Plan provides for
F-17
<PAGE> 96
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6. BENEFIT PLANS (CONTINUED)
the 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 contingent 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 and changes during the periods is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------- SIX MONTHS ENDED
1997 1998 JUNE 30, 1999
-------------------- -------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $ -- 3,759,840 $0.17 4,038,741 $0.17
Granted.................. 3,759,840 0.17 808,500 0.17 726,950 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 $1.34 $4.17
</TABLE>
The Company did not have a stock option plan at any time during the year
ended December 31, 1996.
F-18
<PAGE> 97
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, 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:
$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, 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, respectively.
At June 30, 1999, 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
<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-19
<PAGE> 98
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
<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: 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
<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-20
<PAGE> 99
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
<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
<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 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
F-21
<PAGE> 100
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 7. INCOME TAXES (CONTINUED)
approximately $22 and $5, respectively. As of June 30, 1999, the Company had
federal and state net operating loss carryforwards of approximately $1,332 and
$705 and research and development tax credit carryforwards of approximately $306
and $244, respectively. As of June 30, 1999, the Company also had federal and
state alternative minimum tax credit carryforwards of approximately $54 and $14,
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 June 30, 1999:
<TABLE>
<CAPTION>
OPERATING
YEARS ENDING DECEMBER 31, LEASES
<S> <C>
1999 (six months)........................................... $ 443
2000........................................................ 684
2001........................................................ 567
2002........................................................ 577
2003........................................................ 588
2004........................................................ 497
------
Total minimum lease payments........................... $3,356
======
</TABLE>
Rent expense under all operating leases for the years ended December 31,
1996, 1997 and 1998 was $16, $118 and $353 and rent expense for the six-month
periods ended June 30, 1998 (unaudited) and June 30, 1999 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 (unaudited) and June 30, 1999,
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
F-22
<PAGE> 101
JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS--CONTINUED
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 9. CONCENTRATIONS OF RISK (CONTINUED)
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses.
Sales to customers outside of the United States accounted for 60%, 14% and
14% of the Company's net revenues for the years ended December 31, 1996, 1997
and 1998 and 20% for the six-month period ended June 30, 1999, 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>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
-------------------- JUNE 30,
1996 1997 1998 1999
<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-23
<PAGE> 102
[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> 103
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
JNI LOGO
4,900,000 SHARES OF COMMON STOCK
-------------------------
PROSPECTUS
-------------------------
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
HAMBRECHT & QUIST
DLJDIRECT INC.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all
dealers that effect transactions in these shares of common stock may be required
to deliver a prospectus. This is in addition to the dealer's obligation to
deliver a prospectus when acting as an underwriter and with respect to their
unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE> 104
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> 105
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> 106
<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> 107
<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)
23.3 Consent of Director nominee: Thomas J. Bernard
23.4 Consent of Director nominee: John Bolger
23.5 Consent of Director nominee: Laurence E. Fox
24.1** Power of Attorney (see page II-6)
27.1** Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Filed previously with Registration Statement on Form S-1 (File No.
333-86501).
+ Confidential treatment has been requested with respect to portions of this
exhibit.
(B) FINANCIAL STATEMENT SCHEDULE.
Report of Independent Accountants on Financial Statement Schedule
Schedule II -- Valuation and Qualifying Accounts
II-4
<PAGE> 108
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> 109
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 12th 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 12, 1999
- ------------------------------------------ Officer and Director
Terry M. Flanagan (Principal Executive
Officer)
/s/ GLORIA PURDY Chief Financial Officer October 12, 1999
- ------------------------------------------ (Principal Financial and
Gloria Purdy Accounting Officer)
/s/ ERIC P. WENAAS* Chairman of the Board of October 12, 1999
- ------------------------------------------ Directors
Eric P. Wenaas
/s/ P. RANDY JOHNSON* Director October 12, 1999
- ------------------------------------------
P. Randy Johnson
*By: /s/ GLORIA PURDY
- -----------------------------------------
Gloria Purdy
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 110
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of JNI Corporation
Our audits of the financial statements referred to in our report dated October
8, 1999 appearing in the Registration Statement on Form S-1 of JNI Corporation
also included an audit of the financial statement schedule listed in Item 16(b)
of this Registration Statement on Form S-1. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related financial
statements.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
October 8, 1999
II-7
<PAGE> 111
JNI CORPORATION
SCHEDULE II -- VALUATION & QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND TAKEN AGAINST END
OF PERIOD EXPENSES ALLOWANCE OF PERIOD
---------- ---------- ------------- ----------
<S> <C> <C> <C> <C>
DESCRIPTION
Year ended December 31, 1996:
Allowance for sales returns and
doubtful accounts................ $ -- $ 6 $ -- $ 6
Year ended December 31, 1997:
Allowance for sales returns and
doubtful accounts................ 6 58 29 35
Year ended December 31, 1998:
Allowance for sales returns and
doubtful accounts................ 35 194 96 133
Year ended December 31, 1996:
Deferred income tax asset valuation
allowance........................ $ 388 $658 $ 57 $ 989
Year ended December 31, 1997:
Deferred income tax asset valuation
allowance........................ 989 509 35 1,463
Year ended December 31, 1998:
Deferred income tax asset valuation
allowance........................ 1,463 322 388 1,397
</TABLE>
II-8
<PAGE> 112
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> 113
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<C> <S>
10.19** Bill of Sale, dated November 12, 1998 between JNI
Corporation and Adaptec, Inc.
10.20** Board Observer Confidentiality Agreement, dated December
6, 1998 between JNI Corporation and Adaptec, Inc.
10.21** License Agreement, dated March 9, 1999 between JNI
Corporation and Adaptec, Inc.
10.22** Sublease, dated October 7, 1998 between Jaycor, Inc. and
JNI Corporation
10.23** First Amendment to Sublease, dated December 1, 1998
between Jaycor, Inc. and JNI Corporation
10.24** Second Amendment to Sublease, dated April 1, 1999 between
Jaycor, Inc. and JNI Corporation
10.25** Third Amendment to Sublease, dated May 15, 1999 between
Jaycor, Inc. and JNI Corporation
10.26** Fourth Amendment to Sublease, dated August 1, 1999 between
Jaycor, Inc. and JNI Corporation
10.27** Industrial Lease, dated January 7, 1999 between The Irvine
Company and JNI Corporation
10.28** Sublease, dated January 14, 1999 between Obsidian, Inc.
and JNI Corporation
10.29** Form of Severance and Change of Control Agreement, dated
September 1, 1999, entered into by JNI Corporation and
each of Terry M. Flanagan, Thomas K. Gregory, Charles
McKnett and Gloria Purdy
10.30** Revolving Loan Agreement, dated February 1, 1997 between
JNI Corporation and Jaycor, Inc.
10.31** Security Agreement, dated August 31, 1998 between JNI
Corporation and Jaycor, Inc.
10.32** Intellectual Property Security Agreement, dated August 31,
1998 between JNI Corporation and Jaycor, Inc.
10.33** Transitional Services Agreement, dated September 1, 1999
between JNI Corporation and Jaymark, Inc.
10.34** Tax Sharing Agreement, dated September 1, 1999 between JNI
Corporation and Jaymark, Inc.
10.35** Professional Services Agreement, dated February 1, 1998
between JNI Corporation and Edward Frymoyer, EMF
Associates
10.36** Amendment to Asset Acquisition Agreement, dated September
30, 1999 between JNI Corporation and Adaptec, Inc.
23.1 Consent of PricewaterhouseCoopers LLP, Independent
Accountants
23.2 Consent of Counsel (included in Exhibit 5.1)
23.3 Consent of Director nominee: Thomas J. Bernard
23.4 Consent of Director nominee: John Bolger
23.5 Consent of Director nominee: Lawrence E. Fox
24.1** Power of Attorney (see page II-6)
27.1** Financial Data Schedule
</TABLE>
- -------------------------
* To be filed by Amendment.
** Filed previously with the Registration Statement on Form S-1 (File No.
333-86501).
+ Confidential treatment has been requested with respect to portions of this
exhibit.
<PAGE> 1
EXHIBIT 1.1
__________ Shares
JNI CORPORATION
Common Stock
FORM OF UNDERWRITING AGREEMENT
__________, 1999
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HAMBRECHT & QUIST LLC
BEAR, STEARNS & CO. INC.
DLJDIRECT INC.
As representatives of the several Underwriters
named in Schedule I hereto
c/o Donaldson, Lufkin & Jenrette Securities Corporation
277 Park Avenue
New York, New York 10172
Dear Sirs:
JNI Corporation, a Delaware corporation (the "COMPANY"), proposes to
issue and sell to the several underwriters named in Schedule I hereto (the
"UNDERWRITERS"), and Jaymark, Inc., a Delaware corporation and stockholder of
the Company (the "SELLING STOCKHOLDER"), proposes to sell to the several
Underwriters, an aggregate of_______________ shares of the Common Stock, par
value $0.001 per share, of the Company (the "FIRM SHARES"), of which
_____________ shares are to be issued and sold by the Company and _____________
shares are to be sold by the Selling Stockholder. The Selling Stockholder also
proposes to sell to the several Underwriters not more than an additional _______
shares of the Common Stock, par value $0.001 per share, of the Company (the
"ADDITIONAL SHARES"), if requested by the Underwriters as provided in Section 2
hereof. The Firm Shares and the Additional Shares are hereinafter referred to
collectively as the "SHARES". The shares of common stock of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "COMMON STOCK". The Company and the Selling Stockholder are
hereinafter sometimes referred to collectively as the "SELLERS."
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") has agreed
to reserve out of the Firm Shares up to ___________ shares for sale to
individuals and entities identified by the Company to the extent they meet
applicable qualifications and comply with all applicable requirements
(collectively, the "PARTICIPANTS"), as set forth in the Prospectus (as defined
below) under the
<PAGE> 2
heading "Underwriting" (the "DIRECTED SHARE PROGRAM"). The Firm Shares to be
sold pursuant to the Directed Share Program (the "DIRECTED SHARES") will be sold
at the public offering price.
Section 1. Registration Statement and Prospectus. The Company has
prepared and filed with the Securities and Exchange Commission (the
"COMMISSION") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively, the "ACT"), a registration statement on Form S-1, including a
prospectus, relating to the Shares. The registration statement, as amended at
the time it became effective, including the information (if any) deemed to be
part of the registration statement at the time of effectiveness pursuant to Rule
430A under the Act, is hereinafter referred to as the "REGISTRATION STATEMENT";
and the prospectus in the form first used to confirm sales of Shares is
hereinafter referred to as the "PROSPECTUS". If the Company has filed or is
required pursuant to the terms hereof to file a registration statement pursuant
to Rule 462(b) under the Act registering additional shares of Common Stock (a
"RULE 462(b) REGISTRATION STATEMENT"), then, unless otherwise specified, any
reference herein to the term "Registration Statement" shall be deemed to include
such Rule 462(b) Registration Statement.
Section 2. Agreements to Sell and Purchase and Lock-Up Agreements. On
the basis of the representations and warranties contained in this Agreement, and
subject to its terms and conditions, (i) the Company agrees to issue and sell
______________ Firm Shares, (ii) the Selling Stockholder agrees to sell
_______________ Firm Shares and (iii) each Underwriter agrees, severally and not
jointly, to purchase from each Seller at a price per Share of $______ (the
"PURCHASE PRICE") the number of Firm Shares (subject to such adjustments to
eliminate fractional shares as you may determine) that bears the same proportion
to the total number of Firm Shares to be sold by such Seller as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto
bears to the total number of Firm Shares.
On the basis of the representations and warranties contained in this
Agreement, and subject to its terms and conditions, the Selling Stockholder
agrees to sell the Additional Shares and the Underwriters shall have the right
to purchase, severally and not jointly, up to _______ Additional Shares from the
Selling Stockholder at the Purchase Price. Additional Shares may be purchased
solely for the purpose of covering over-allotments made in connection with the
offering of the Firm Shares. The Underwriters may exercise their right to
purchase Additional Shares in whole or in part from time to time by giving
written notice thereof to the Selling Stockholder within 30 days after the date
of this Agreement. You shall give any such notice on behalf of the Underwriters
and such notice shall specify the aggregate number of Additional Shares to be
purchased pursuant to such exercise and the date for payment and delivery
thereof, which date shall be a business day (i) no earlier than two business
days after such notice has been given
2
<PAGE> 3
(and, in any event, no earlier than the Closing Date (as hereinafter defined))
and (ii) no later than ten business days after such notice has been given. If
any Additional Shares are to be purchased, each Underwriter, severally and not
jointly, agrees to purchase from the Selling Stockholder the number of
Additional Shares (subject to such adjustments to eliminate fractional shares as
you may determine) which bears the same proportion to the total number of
Additional Shares to be purchased from the Selling Stockholder as the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I bears
to the total number of Firm Shares.
Each Seller hereby agrees not to (i) 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
(ii) 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
(regardless of whether any of the transactions described in clause (i) or (ii)
is to be settled by the delivery of Common Stock, or such other securities, in
cash or otherwise), except to the Underwriters pursuant to this Agreement, for a
period of 180 days after the date of the Prospectus without the prior written
consent DLJ. Notwithstanding the foregoing, during such period (i) the Company
may grant stock options pursuant to the Company's existing stock option plan and
(ii) the Company may issue shares of Common Stock upon the exercise of an option
or warrant outstanding on the date hereof, the conversion of a security
outstanding on the date hereof or the exercise of a purchase right under the
Company's Employee Stock Purchase Plan as in effect on the date hereof. Other
than a registration statement on Form S-8 to be filed with respect to the
Company's 1997 Stock Option Plan, 1999 Stock Option Plan and 1999 Employee Stock
Purchase Plan, the Company also agrees not to file any registration statement
with respect to any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock for a period of 180 days after the
date of the Prospectus without the prior written consent of DLJ. In addition,
the Selling Stockholder agrees that, for a period of 180 days after the date of
the Prospectus without the prior written consent of DLJ, it will not 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. The Company shall, prior to or concurrently with
the execution of this Agreement, deliver an agreement executed by (i) the
Selling Stockholder, (ii) each of the directors and officers of the Company and
(iii) each other securityholder of the Company, including each holder of any
options to purchase shares of the Common Stock, par value $0.001 per share, of
the Company (such securityholders are listed on Annex I hereto), to the effect
that, subject to such exceptions as are agreed to by DLJ and set forth in such
agreement, such person will not, during the period commencing on the date such
person signs such agreement and ending 180 days after the date of the
Prospectus, without the prior
3
<PAGE> 4
written consent of DLJ, (A) engage in any of the transactions described in the
first sentence of this paragraph or (B) 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.
Section 3. Terms of Public Offering. The Sellers are advised by you that
the Underwriters propose (i) to make a public offering of their respective
portions of the Shares as soon after the execution and delivery of this
Agreement as in your judgment is advisable and (ii) initially to offer the
Shares upon the terms set forth in the Prospectus.
Section 4. Delivery and Payment. The Shares shall be represented by
definitive certificates and shall be issued in such authorized denominations and
registered in such names as DLJ shall request no later than two business days
prior to the Closing Date or the applicable Option Closing Date (as defined
below), as the case may be. The Shares shall be delivered by or on behalf of the
Sellers, with any transfer taxes thereon duly paid by the respective Sellers, to
DLJ through the facilities of The Depository Trust Company ("DTC"), for the
respective accounts of the several Underwriters, against payment to the Sellers
of the Purchase Price therefor by wire transfer of Federal or other funds
immediately available in New York City. The certificates representing the Shares
shall be made available for inspection not later than 9:30 A.M., New York City
time, on the business day prior to the Closing Date or the applicable Option
Closing Date, as the case may be, at the office of DTC or its designated
custodian (the "DESIGNATED OFFICE"). The time and date of delivery and payment
for the Firm Shares shall be 9:00 A.M., New York City time, on ________, 1999 or
such other time on the same or such other date as DLJ and the Company shall
agree in writing. The time and date of delivery and payment for the Firm Shares
are hereinafter referred to as the "CLOSING DATE". The time and date of delivery
and payment for any Additional Shares to be purchased by the Underwriters shall
be 9:00 A.M., New York City time, on the date specified in the applicable
exercise notice given by you pursuant to Section 2 or such other time on the
same or such other date as DLJ and the Selling Stockholder shall agree in
writing. The time and date of delivery and payment for any Additional Shares are
hereinafter referred to as the "OPTION CLOSING DATE".
The documents to be delivered on the Closing Date or any Option Closing
Date on behalf of the parties hereto pursuant to Section 9 of this Agreement
shall be delivered at the offices of Gray Cary Ware & Freidenrich LLP, 4365
Executive Drive, Suite 1600, San Diego, California 92121-2189 and the Shares
shall be delivered at the Designated Office, all on the Closing Date or such
Option Closing Date, as the case may be.
Section 5. Agreements of the Company. The Company agrees with you:
4
<PAGE> 5
(a) To advise you promptly and, if requested by you, to confirm such
advice in writing, (i) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus or for
additional information, (ii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of the suspension
of qualification of the Shares for offering or sale in any jurisdiction, or the
initiation of any proceeding for such purposes, (iii) when any amendment to the
Registration Statement becomes effective, (iv) if the Company is required to
file a Rule 462(b) Registration Statement after the effectiveness of this
Agreement, when the Rule 462(b) Registration Statement has become effective and
(v) of the happening of any event during the period referred to in Section 5(d)
below which makes any statement of a material fact made in the Registration
Statement or the Prospectus untrue or which requires any additions to or changes
in the Registration Statement or the Prospectus in order to make the statements
therein not misleading. If at any time the Commission shall issue any stop order
suspending the effectiveness of the Registration Statement, the Company will use
its best efforts to obtain the withdrawal or lifting of such order at the
earliest possible time.
(b) To furnish to you four (4) signed copies of the Registration
Statement as first filed with the Commission and of each amendment to it,
including all exhibits, and to furnish to you and each Underwriter designated by
you such number of conformed copies of the Registration Statement as so filed
and of each amendment to it, without exhibits, as you may reasonably request.
(c) To prepare the Prospectus, the form and substance of which shall be
satisfactory to you, and to file the Prospectus in such form with the Commission
within the applicable period specified in Rule 424(b) under the Act; during the
period specified in Section 5(d) below, not to file any further amendment to the
Registration Statement and not to make any amendment or supplement to the
Prospectus of which you shall not previously have been advised or to which you
shall reasonably object after being so advised; and, during such period, to
prepare and file with the Commission, promptly upon your reasonable request, any
amendment to the Registration Statement or amendment or supplement to the
Prospectus which may be necessary or advisable in connection with the
distribution of the Shares by you, and to use its best efforts to cause any such
amendment to the Registration Statement to become promptly effective.
(d) Prior to 10:00 A.M., New York City time, on the first business day
after the date of this Agreement and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus is
required by law to be delivered in connection with sales by an Underwriter or a
dealer, to furnish in New York City to each Underwriter and any dealer as many
copies of the Prospectus (and of any amendment or supplement to the Prospectus)
as such Underwriter or dealer may reasonably request.
5
<PAGE> 6
(e) If during the period specified in Section 5(d), any event shall
occur or condition shall exist as a result of which, in the opinion of counsel
for the Underwriters, it becomes necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the circumstances when
the Prospectus is delivered to a purchaser, not misleading, or if, in the
opinion of counsel for the Underwriters, it is necessary to amend or supplement
the Prospectus to comply with applicable law, forthwith to prepare and file with
the Commission an appropriate amendment or supplement to the Prospectus so that
the statements in the Prospectus, as so amended or supplemented, will not in the
light of the circumstances when it is so delivered, be misleading, or so that
the Prospectus will comply with applicable law, and to furnish to each
Underwriter and to any dealer as many copies thereof as such Underwriter or
dealer may reasonably request.
(f) Prior to any public offering of the Shares, to cooperate with you
and counsel for the Underwriters in connection with the registration or
qualification of the Shares for offer and sale by the several Underwriters and
by dealers under the state securities or Blue Sky laws of such jurisdictions as
you may request, to continue such registration or qualification in effect so
long as required for distribution of the Shares and to file such consents to
service of process or other documents as may be necessary in order to effect
such registration or qualification; provided, however, that the Company shall
not be required in connection therewith to qualify as a foreign corporation in
any jurisdiction in which it is not now so qualified or to take any action that
would subject it to general consent to service of process or taxation other than
as to matters and transactions relating to the Prospectus, the Registration
Statement, any preliminary prospectus or the offering or sale of the Shares, in
any jurisdiction in which it is not now so subject.
(g) To mail and make generally available to its stockholders as soon as
practicable an earnings statement covering the twelve-month period ending
__________ that shall satisfy the provisions of Section 11(a) of the Act, and to
advise you in writing when such statement has been so made available.
(h) During the period of three years after the date of this Agreement,
to furnish to you as soon as available copies of all reports or other
communications furnished to the record holders of Common Stock or furnished to
or filed with the Commission or any national securities exchange on which any
class of securities of the Company is listed and such other publicly available
information concerning the Company as you may reasonably request.
(i) Whether or not the transactions contemplated in this Agreement are
consummated or this Agreement is terminated, to pay or cause to be paid all
expenses incident to the performance of the Sellers' obligations under this
Agreement, including: (i) the fees, disbursements and expenses of the Company's
counsel, the Company's accountants and any Selling Stockholder's counsel (in
6
<PAGE> 7
addition to the Company's counsel) in connection with the registration and
delivery of the Shares under the Act and all other fees and expenses in
connection with the preparation, printing, filing and distribution of the
Registration Statement (including financial statements and exhibits), any
preliminary prospectus, the Prospectus and all amendments and supplements to any
of the foregoing, including the mailing and delivering of copies thereof to the
Underwriters and dealers in the quantities specified herein, (ii) all costs and
expenses related to the transfer and delivery of the Shares to the Underwriters,
including any transfer or other taxes payable thereon, (iii) all costs of
printing or producing this Agreement and any other agreements or documents in
connection with the offering, purchase, sale or delivery of the Shares, (iv) all
expenses in connection with the registration or qualification of the Shares for
offer and sale under the securities or Blue Sky laws of the several states and
all costs of printing or producing any Preliminary and Supplemental Blue Sky
Memoranda in connection therewith (including the filing fees and fees and
disbursements of counsel for the Underwriters in connection with such
registration or qualification and memoranda relating thereto), (v) the filing
fees and disbursements of counsel for the Underwriters in connection with the
review and clearance of the offering of the Shares by the National Association
of Securities Dealers, Inc. (the "NASD"), (vi) all fees and expenses in
connection with the preparation and filing of the registration statement on Form
8-A relating to the Common Stock and all costs and expenses incident to the
listing of the Shares on the Nasdaq National Market, (vii) the cost of printing
certificates representing the Shares, (viii) the costs and charges of any
transfer agent, registrar and/or depositary, and (ix) all other costs and
expenses incident to the performance of the obligations of the Company and the
Selling Stockholder hereunder for which provision is not otherwise made in this
Section. The provisions of this Section shall not supersede or otherwise affect
any agreement that the Company and the Selling Stockholder may otherwise have
for allocation of such expenses among themselves.
(j) To use its best efforts to list for quotation the Shares on the
Nasdaq National Market and to maintain the listing of the Shares on the Nasdaq
National Market for a period of three years after the date of this Agreement.
(k) To use its best efforts to do and perform all things required or
necessary to be done and performed under this Agreement by the Company prior to
the Closing Date or any Option Closing Date, as the case may be, and to satisfy
all conditions precedent to the delivery of the Shares.
(l) If the Registration Statement at the time of the effectiveness of
this Agreement does not cover all of the Shares, to file a Rule 462(b)
Registration Statement with the Commission registering the Shares not so covered
in compliance with Rule 462(b) by 10:00 P.M., New York City time, on the date of
this Agreement and to pay to the Commission the filing fee for such Rule 462(b)
Registration Statement at the time of the filing thereof or to give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
7
<PAGE> 8
(m) In connection with the Directed Share Program, to ensure that the
Directed Shares will be restricted to the extent required by the NASD or its
rules from sale, transfer, assignment, pledge or hypothecation for a period of
three months (or such longer period as may be required by the NASD or the
Commission) following the effective date of the Registration Statement (DLJ will
notify the Company as to which Participants will need to be so restricted) and
to direct the transfer agent to place stop transfer restrictions on the Directed
Shares during such time.
(n) To pay all fees and disbursements of counsel incurred by the
Underwriters in connection with the Directed Share Program and stamp duties,
similar taxes or duties or other taxes, if any, incurred by the Underwriters in
connection with the Directed Share Program.
Section 6. Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
(a) The Registration Statement has become effective (other than any Rule
462(b) Registration Statement to be filed by the Company after the effectiveness
of this Agreement); any Rule 462(b) Registration Statement filed after the
effectiveness of this Agreement will become effective no later than 5:00 A.M.,
New York City time, on the date following the date of this Agreement; and no
stop order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for such purpose are pending before or threatened by
the Commission.
(b) (i) The Registration Statement (other than any Rule 462(b)
Registration Statement to be filed by the Company after the effectiveness of
this Agreement), when it became effective, did not contain and, as amended, if
applicable, will not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, (ii) the Registration Statement (other than
any Rule 462(b) Registration Statement to be filed by the Company after the
effectiveness of this Agreement) and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with the Act,
(iii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective (A) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (B) will comply in all material respects with the Act and (iv)
the Prospectus does not contain and, as amended or supplemented, if applicable,
will not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that the
representations and warranties set forth in this paragraph do not apply to
statements or omissions in the Registration Statement
8
<PAGE> 9
or the Prospectus based upon information relating to any Underwriter furnished
to the Company in writing by such Underwriter through you expressly for use
therein.
(c) Each preliminary prospectus filed as part of the registration
statement as originally filed or as part of any amendment thereto, or filed
pursuant to Rule 424 under the Act, complied when so filed in all material
respects with the Act, and did not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and warranties
set forth in this paragraph do not apply to statements or omissions in any
preliminary prospectus based upon information relating to any Underwriter
furnished to the Company in writing by such Underwriter through you expressly
for use therein.
(d) The Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of its jurisdiction of incorporation
and has the corporate power and authority to carry on its business as described
in the Prospectus and to own, lease and operate its properties, and is duly
qualified and is in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on the
business, prospects, financial condition or results of operations of the
Company. The Company does not own, directly or indirectly, any interest in any
corporation, business trust, joint stock company, partnership, limited liability
company, joint venture or other business organization or association.
(e) There are no outstanding subscriptions, rights, warrants, options,
calls, convertible securities, commitments of sale or liens granted or issued by
the Company relating to or entitling any person to purchase or otherwise to
acquire any shares of the capital stock of the Company, except as otherwise
disclosed in the Registration Statement.
(f) All the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholder) have been duly
authorized and validly issued and are fully paid, non-assessable and not subject
to any preemptive or similar rights; all the shares of Common Stock of the
Company to be issued by the Company on or prior to the Closing Date upon
conversion of the Company's Series A Preferred Stock, par value $0.001 per
share, have been duly authorized and, upon issuance thereof in the manner
described in the Prospectus, will be validly issued, fully paid and
non-assessable and not subject to any preemptive or similar rights; and the
Shares to be issued and sold by the Company have been duly authorized and, when
issued and delivered to the Underwriters against payment therefor as provided by
this Agreement, will be
9
<PAGE> 10
validly issued, fully paid and non-assessable, and the issuance of such Shares
will not be subject to any preemptive or similar rights.
(g) The authorized capital stock of the Company conforms as to legal
matters to the description thereof contained in the Prospectus.
(h) The Company is not in violation of its charter or by-laws or in
default in the performance of any obligation, agreement, covenant or condition
contained in any indenture, loan agreement, mortgage, lease or other agreement
or instrument that is material to the Company to which the Company is a party or
by which the Company or its property is bound.
(i) The execution, delivery and performance of this Agreement by the
Company, the compliance by the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not (i) require any
consent, approval, authorization or other order of, or qualification with, any
court or governmental body or agency (except such as may be required under the
securities or Blue Sky laws of the various states), (ii) conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the charter or by-laws of the Company or any indenture, loan agreement,
mortgage, lease or other agreement or instrument that is material to the
Company, to which the Company is a party or by which the Company or its property
is bound, (iii) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental body or
agency having jurisdiction over the Company or its property or (iv) result in
the suspension, termination or revocation of any Authorization (as defined
below) of the Company or any other impairment of the rights of the holder of any
such Authorization.
(j) There are no legal or governmental proceedings pending or threatened
to which the Company is or could reasonably be expected to be a party or to
which any of its property is or could reasonably be expected to be subject that
are required to be described in the Registration Statement or the Prospectus and
are not so described; nor are there any statutes, regulations, contracts or
other documents that are required to be described in the Registration Statement
or the Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required.
(k) The Company has not violated any foreign, federal, state or local
law or regulation relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("ENVIRONMENTAL LAWS"), any provisions of the Employee Retirement
Income Security Act of 1974, as amended, or any provisions of the Foreign
Corrupt Practices Act or the rules and regulations promulgated thereunder,
except for such violations which, singly or in the aggregate, would not have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company.
10
<PAGE> 11
(l) The Company has such permits, licenses, consents, exemptions,
franchises, authorizations and other approvals (each, an "AUTHORIZATION") of,
and has made all filings with and notices to, all governmental or regulatory
authorities and self-regulatory organizations and all courts and other
tribunals, including, without limitation, under any applicable Environmental
Laws, as are necessary to own, lease, license and operate its properties and to
conduct its business, except where the failure to have any such Authorization or
to make any such filing or notice would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company. Each such Authorization is valid and in
full force and effect and the Company is in compliance in all material respects
with all the terms and conditions thereof and with the rules and regulations of
the authorities and governing bodies having jurisdiction with respect thereto;
and no event has occurred (including, without limitation, the receipt of any
notice from any authority or governing body) which allows or, after notice or
lapse of time or both, would allow, revocation, suspension or termination of any
such Authorization or results or, after notice or lapse of time or both, would
result in any other impairment of the rights of the holder of any such
Authorization; and such Authorizations contain no restrictions that are
burdensome in any material respect to the Company; except where such failure to
be valid and in full force and effect or to be in compliance, the occurrence of
any such event or the presence of any such restriction would not, singly or in
the aggregate, have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company.
(m) There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
Authorization, any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company.
(n) The Company has good and marketable title to all personal property
owned by it which is material to the business of the Company, free and clear of
all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such property by the
Company; and any real property and buildings held under lease by the Company is
held by it under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company, in each case except as
described in the Prospectus.
(o) The Company owns or possesses, or otherwise has sufficient rights to
use or can acquire on reasonable terms, all patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other unpatented
11
<PAGE> 12
and/or unpatentable proprietary or confidential information, systems or
procedures), trademarks, service marks and trade names ("INTELLECTUAL PROPERTY")
currently employed by the Company in connection with the business now operated
by it except where the failure to own or possess or otherwise be able to acquire
or use such Intellectual Property would not, singly or in the aggregate, have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company; and the Company has not received any
notice of infringement of or conflict with asserted rights of others with
respect to any of such Intellectual Property which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would have a
material adverse effect on the business, prospects, financial condition or
results of operations of the Company.
(p) The Company is insured by insurers of recognized financial
responsibility against such losses and risks and in such amounts as are prudent
and customary in the businesses in which it is engaged; and the Company (i) has
not received notice from any insurer or agent of such insurer that substantial
capital improvements or other material expenditures will have to be made in
order to continue such insurance or (ii) has no reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers at a cost that would
not have a material adverse effect on the business, prospects, financial
conditions or results of operations of the Company.
(q) No relationship, direct or indirect, exists between or among the
Company on the one hand, and the directors, officers, stockholders, customers or
suppliers of the Company on the other hand, which is required by the Act to be
described in the Registration Statement or the Prospectus which is not so
described.
(r) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with general accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only in
accordance with management's general or specific authorization; and (iv) the
recorded accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences.
(s) All material tax returns required to be filed by the Company in any
jurisdiction have been filed, other than those filings being contested in good
faith, and all material taxes, including withholding taxes, penalties and
interest, assessments, fees and other charges due pursuant to such returns or
pursuant to any assessment received by the Company have been paid, other than
those being contested in good faith and for which adequate reserves have been
provided.
12
<PAGE> 13
(t) This Agreement has been duly authorized, executed and delivered by
the Company.
(u) Pricewaterhouse Coopers LLP are independent public accountants with
respect to the Company as required by the Act.
(v) The financial statements included in the Registration Statement and
the Prospectus (and any amendment or supplement thereto), together with related
schedules and notes, present fairly the financial position, results of
operations and changes in financial position of the Company on the basis stated
therein at the respective dates or for the respective periods to which they
apply; such statements and related schedules and notes have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; the supporting
schedules, if any, included in the Registration Statement present fairly in
accordance with generally accepted accounting principles the information
required to be stated therein; and the other financial and statistical
information and data set forth in the Registration Statement and the Prospectus
(and any amendment or supplement thereto) are, in all material respects,
accurately presented and prepared on a basis consistent with such financial
statements and the books and records of the Company.
(w) The pro forma financial data of the Company and the related notes
thereto set forth in the Registration Statement and the Prospectus (and any
supplemental or amendment thereto) have been prepared on a basis consistent with
the historical financial statements of the Company, give effect to the
assumptions used in the preparation thereof on a reasonable basis and in good
faith and present fairly the historical and proposed transactions contemplated
by the Registration Statement and the Prospectus. Such pro forma financial data
have been prepared in accordance with the applicable requirements of Rule 11-02
of Regulation S-X promulgated by the Commission.
(x) The Company is not and, after giving effect to the offering and sale
of the Shares and the application of the proceeds thereof as described in the
Prospectus, will not be, an "investment company" as such term is defined in the
Investment Company Act of 1940, as amended.
(y) Except as otherwise disclosed in the Registration Statement with
respect to registration rights held by certain stockholders of the Company
(which registration rights either do not apply or have been waived with respect
to any obligation of the Company to include such securities with the Shares
registered pursuant to the Registration Statement), there are no contracts,
agreements or understandings between the Company and any person granting such
person the right to require the Company to file a registration statement under
the Act with respect to any securities of the Company or to require the Company
to include such securities with the Shares registered pursuant to the
Registration Statement.
13
<PAGE> 14
(z) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there has not occurred any material adverse change or any development involving
a prospective material adverse change in the condition, financial or otherwise,
or the earnings, business, management or operations of the Company, (ii) there
has not been any material adverse change or any development involving a
prospective material adverse change in the capital stock or in the long-term
debt of the Company and (iii) the Company has not incurred any material
liability or obligation, direct or contingent.
(aa) Each certificate signed by any officer of the Company and delivered
to the Underwriters or counsel for the Underwriters pursuant to this Agreement
shall be deemed to be a representation and warranty by the Company to the
Underwriters as to the matters covered thereby.
Section 7. Representations and Warranties of the Selling Stockholder.
The Selling Stockholder represents and warrants to each Underwriter that:
(a) The Selling Stockholder is the lawful owner of the Shares to be sold
by the Selling Stockholder pursuant to this Agreement and has, and on the
Closing Date and the Option Closing Date will have, good and clear title to such
Shares, free of all restrictions on transfer, liens, encumbrances, security
interests, equities and claims whatsoever.
(b) The Shares to be sold by the Selling Stockholder have been duly
authorized and are validly issued, fully paid and non-assessable.
(c) The Selling Stockholder has, and on the Closing Date and the Option
Closing Date will have, full legal right, power and authority, and all
authorization and approval required by law, to enter into this Agreement and the
Custody Agreement signed by the Selling Stockholder and _______________, as
Custodian, relating to the deposit of the Shares to be sold by the Selling
Stockholder (the "CUSTODY AGREEMENT") and to sell, assign, transfer and deliver
the Shares to be sold by the Selling Stockholder in the manner provided herein
and therein.
(d) This Agreement has been duly authorized, executed and delivered by
or on behalf of the Selling Stockholder.
(e) The Custody Agreement of the Selling Stockholder has been duly
authorized, executed and delivered by the Selling Stockholder and is a valid and
binding agreement of the Selling Stockholder, enforceable in accordance with its
terms.
(f) Upon delivery of and payment for the Shares to be sold by the
Selling Stockholder pursuant to this Agreement, good and clear title to such
14
<PAGE> 15
Shares will pass to the Underwriters, free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims whatsoever.
(g) The execution, delivery and performance of this Agreement and the
Custody Agreement of the Selling Stockholder by or on behalf of the Selling
Stockholder, the compliance by the Selling Stockholder with all the provisions
hereof and thereof and the consummation of the transactions contemplated hereby
and thereby will not (i) require any consent, approval, authorization or other
order of, or qualification with, any court or governmental body or agency
(except such as may be required under the securities or Blue Sky laws of the
various states), (ii) conflict with or constitute a breach of any of the terms
or provisions of, or a default under, the organizational documents of the
Selling Stockholder, if the Selling Stockholder is not an individual, or any
indenture, loan agreement, mortgage, lease or other agreement or instrument to
which the Selling Stockholder is a party or by which the Selling Stockholder or
any property of the Selling Stockholder is bound or (iii) violate or conflict
with any applicable law or any rule, regulation, judgment, order or decree of
any court or any governmental body or agency having jurisdiction over the
Selling Stockholder or any property of the Selling Stockholder.
(h) The information in the Registration Statement under the caption
"Principal and Selling Stockholders" which specifically relates to the Selling
Stockholder does not, and will not on the Closing Date and the Option Closing
Date, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
(i) At any time during the period described in Section 5(d), if there is
any change in the information referred to in Section 7(i), the Selling
Stockholder will immediately notify you of such change.
(j) To the best of the Selling Stockholder's knowledge, (i) the
Registration Statement (other than any Rule 462(b) Registration Statement to be
filed by the Company after the effectiveness of this Agreement), when it became
effective, did not contain and, as amended, if applicable, will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
(ii) if the Company is required to file a Rule 462(b) Registration Statement
after the effectiveness of this Agreement, such Rule 462(b) Registration
Statement and any amendments thereto, when they become effective will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (iii) the Prospectus does not contain and, as amended or
supplemented, if applicable, will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading,
except that the representations and
15
<PAGE> 16
warranties set forth in this paragraph do not apply to statements or omissions
in the Registration Statement or the Prospectus based upon information relating
to any Underwriter furnished to the Company in writing by such Underwriter
through you expressly for use therein.
(k) To the best of the Selling Stockholder's knowledge, each of the
representations and warranties of the Company contained in Section 6 hereof is
true and correct.
(l) Each certificate signed by or on behalf of the Selling Stockholder
and delivered to the Underwriters or counsel for the Underwriters pursuant to
this Agreement shall be deemed to be a representation and warranty by the
Selling Stockholder to the Underwriters as to the matters covered thereby.
Section 8. Indemnification. (a) The Sellers, jointly and severally,
agree to indemnify and hold harmless each Underwriter, its directors, its
officers and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "EXCHANGE ACT"), from and against any and all losses,
claims, damages, liabilities and judgments (including, without limitation, any
legal or other expenses incurred in connection with investigating or defending
any matter, including any action, that could give rise to any such losses,
claims, damages, liabilities or judgments) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto), the Prospectus (or any amendment or
supplement thereto), any preliminary prospectus or any material prepared by or
with the consent of the Company for distribution to participants in the Directed
Share Program, or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims, damages,
liabilities or judgments are caused by any such untrue statement or omission or
alleged untrue statement or omission based upon information relating to any
Underwriter furnished in writing to the Company by such Underwriter through you
expressly for use therein provided, however, that the foregoing indemnity
agreement with respect to any preliminary prospectus shall not inure to the
benefit of any Underwriter who failed to deliver a Prospectus, as then amended
or supplemented, (so long as the Prospectus and any amendment or supplement
thereto was provided by the Company to the several Underwriters in the requisite
quantity and on a timely basis to permit proper delivery on or prior to the
Closing Date) to the person asserting any losses, claims, damages, liabilities
or judgments caused by any untrue statement or alleged untrue statement of a
material fact contained in such preliminary prospectus, or caused by any
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, if
such material misstatement or omission or alleged material misstatement or
omission was cured in the Prospectus, as so amended or supplemented, and such
Prospectus was required by law to be delivered at or prior
16
<PAGE> 17
to the written confirmation of sale to such person. Notwithstanding the
foregoing, the aggregate liability of the Selling Stockholder pursuant to this
Section 8(a) shall be limited to an amount equal to the total proceeds (before
deducting underwriting discounts and commissions and expenses) received by the
Selling Stockholder from the Underwriters for the sale of the Shares sold by the
Selling Stockholder hereunder. In addition to the foregoing, in connection with
the Directed Share Program, the Company agrees, promptly upon a request in
writing, to indemnify and hold harmless the Underwriters from and against any
and all losses, liabilities, claims, damages and expenses incurred by them as a
result of (i) the failure of purchasers of the Directed Shares (including
eligible directors, officers, employees, and customers of, and persons having
business relationships with, the Company) to pay for and accept delivery of the
Directed Shares which, by the end of the first business day following the date
of this Agreement, were subject to properly confirmed application to purchase or
(ii) any violation or alleged violation of the Act or any other federal or state
law or any liability based on common law, in each case, arising out of or
relating to the manner in which the Directed Shares are sold and pertaining to
any actions or inactions by the Company (or by the Company jointly with any
other person), including without limitation any e-mails or other communications
by the Company (or by the Company jointly with any other person) with customers
or subscribers of the Company relating to the Directed Shares or possible
opportunities to purchase the Directed Shares.
(b) Each Underwriter agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors, its officers who sign the Registration
Statement, each person, if any, who controls the Company within the meaning of
Section 15 of the Act or Section 20 of the Exchange Act, the Selling Stockholder
and each person, if any, who controls the Selling Stockholder within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act to the same extent as
the foregoing indemnity from the Sellers to such Underwriter but only with
reference to information relating to such Underwriter furnished in writing to
the Company by such Underwriter through you expressly for use in the
Registration Statement (or any amendment thereto), the Prospectus (or any
amendment or supplement thereto) or any preliminary prospectus.
(c) In case any action shall be commenced involving any person in
respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the
"INDEMNIFIED PARTY"), the indemnified party shall promptly notify the person
against whom such indemnity may be sought (the "INDEMNIFYING PARTY") in writing
and the indemnifying party shall assume the defense of such action, including
the employment of counsel reasonably satisfactory to the indemnified party and
the payment of all fees and expenses of such counsel, as incurred (except that
in the case of any action in respect of which indemnity may be sought pursuant
to both Sections 8(a) and 8(b), the Underwriter shall not be required to assume
the defense of such action pursuant to this Section 8(c), but may employ
separate counsel and participate in the defense thereof, but the fees and
expenses
17
<PAGE> 18
of such counsel, except as provided below, shall be at the expense of such
Underwriter). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for (i) the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all Underwriters, their officers and
directors and all persons, if any, who control any Underwriter within the
meaning of either Section 15 of the Act or Section 20 of the Exchange Act, (ii)
the fees and expenses of more than one separate firm of attorneys (in addition
to any local counsel) for the Company, its directors, its officers who sign the
Registration Statement and all persons, if any, who control the Company within
the meaning of either such Section and (iii) the fees and expenses of more than
one separate firm of attorneys (in addition to any local counsel) for the
Selling Stockholder and all persons, if any, who control the Selling Stockholder
within the meaning of either such Section, and all such fees and expenses shall
be reimbursed as they are incurred. In the case of any such separate firm for
the Underwriters, their officers and directors and such control persons of any
Underwriters, such firm shall be designated in writing by DLJ. In the case of
any such separate firm for the Company and such directors, officers and control
persons of the Company, such firm shall be designated in writing by the Company.
In the case of any such separate firm for the Selling Stockholder and such
control persons of the Selling Stockholder, such firm shall be designated in
writing by the Chief Executive Officer of the Selling Stockholder. The
indemnifying party shall indemnify and hold harmless the indemnified party from
and against any and all losses, claims, damages, liabilities and judgments by
reason of any settlement of any action (i) effected with its written consent or
(ii) effected without its written consent if the settlement is entered into more
than twenty business days after the indemnifying party shall have received a
request from the indemnified party for reimbursement for the fees and expenses
of counsel (in any case where such fees and expenses are at the expense of the
indemnifying party) and, prior to the date of such settlement, the indemnifying
party shall have failed to comply with such reimbursement request. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement or compromise of, or consent to the entry of
18
<PAGE> 19
judgment with respect to, any pending or threatened action in respect of which
the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims that
are or could have been the subject matter of such action and (ii) does not
include a statement as to or an admission of fault, culpability or a failure to
act, by or on behalf of the indemnified party.
(d) To the extent the indemnification provided for in this Section 8 is
unavailable to an indemnified party or insufficient in respect of any losses,
claims, damages, liabilities or judgments referred to therein, then each
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities and judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Sellers on the one hand and the Underwriters on the other hand from the offering
of the Shares or (ii) if the allocation provided by clause 8(d)(i) above is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause 8(d)(i) above but also the
relative fault of the Sellers on the one hand and the Underwriters on the other
hand in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other relevant
equitable considerations. The relative benefits received by the Sellers on the
one hand and the Underwriters on the other hand shall be deemed to be in the
same proportion as the total net proceeds from the offering (after deducting
underwriting discounts and commissions, but before deducting expenses) received
by the Sellers, and the total underwriting discounts and commissions received by
the Underwriters, bear to the total price to the public of the Shares, in each
case as set forth in the table on the cover page of the Prospectus. The relative
fault of the Sellers on the one hand and the Underwriters on the other hand
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or the
Selling Stockholder on the one hand or the Underwriters on the other hand and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission.
The Sellers and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 8(d) were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to in the immediately preceding paragraph. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or judgments referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses incurred by such indemnified party in
connection with investigating or
19
<PAGE> 20
defending any matter, including any action, that could have given rise to such
losses, claims, damages, liabilities or judgments. Notwithstanding the
provisions of this Section 8, no Underwriter shall be required to contribute any
amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages which such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission, and the Selling Stockholder shall not be required to
contribute any amount in excess of the total proceeds (before deducting
underwriting discounts and commissions and expenses) received by the Selling
Stockholder from the Underwriters for the sale of the Shares sold by the Selling
Stockholder hereunder. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute pursuant to this Section 8(d) are
several in proportion to the respective number of Shares purchased by each of
the Underwriters hereunder and not joint.
(e) The remedies provided for in this Section 8 are not exclusive and
shall not limit any rights or remedies which may otherwise be available to any
indemnified party at law or in equity.
(f) The Selling Stockholder hereby designates JNI Corporation, 9775
Towne Centre Drive, San Diego, California 92121, as its authorized agent, upon
which process may be served in any action which may be instituted in any state
or federal court in the State of New York by any Underwriter, any director or
officer of any Underwriter or any person controlling any Underwriter asserting a
claim for indemnification or contribution under or pursuant to this Section 8,
and the Selling Stockholder will accept the jurisdiction of such court in such
action, and waives, to the fullest extent permitted by applicable law, any
defense based upon lack of personal jurisdiction or venue. A copy of any such
process shall be sent or given to the Selling Stockholder, at the address for
notices specified in Section 12 hereof.
Section 9. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this Agreement
are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the Company contained in
this Agreement shall be true and correct on the Closing Date with the same force
and effect as if made on and as of the Closing Date.
(b) If the Company is required to file a Rule 462(b) Registration
Statement after the effectiveness of this Agreement, such Rule 462(b)
Registration Statement shall have become effective by 5:00 A.M., New York City
time, on the date following the date of this Agreement; and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued
20
<PAGE> 21
and no proceedings for that purpose shall have been commenced or shall be
pending before or contemplated by the Commission.
(c) You shall have received on the Closing Date a certificate dated the
Closing Date, signed by Dr. Terry M. Flanagan and Gloria M. Purdy, in their
capacities as the President and Chief Executive Officer and Chief Financial
Officer, respectively, of the Company, confirming the matters set forth in
Sections 6(bb), 9(a) and 9(b) and that the Company has complied with all of the
agreements and satisfied all of the conditions herein contained and required to
be complied with or satisfied by the Company on or prior to the Closing Date.
(d) Since the respective dates as of which information is given in the
Prospectus other than as set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this Agreement), (i)
there shall not have occurred any change or any development involving a
prospective change in the condition, financial or otherwise, or the earnings,
business, management or operations of the Company, (ii) there shall not have
been any change or any development involving a prospective change in the capital
stock or in the long-term debt of the Company and (iii) the Company shall not
have incurred any liability or obligation, direct or contingent, the effect of
which, in any such case described in clause 9(d)(i), 9(d)(ii) or 9(d)(iii), in
your judgment, is material and adverse and, in your judgment, makes it
impracticable to market the Shares on the terms and in the manner contemplated
in the Prospectus.
(e) All the representations and warranties of the Selling Stockholder
contained in this Agreement shall be true and correct on the Closing Date with
the same force and effect as if made on and as of the Closing Date and you shall
have received on the Closing Date a certificate dated the Closing Date from the
Selling Stockholder to such effect and to the effect that the Selling
Stockholder has complied with all of the agreements and satisfied all of the
conditions herein contained and required to be complied with or satisfied by the
Selling Stockholder on or prior to the Closing Date.
(f) You shall have received on the Closing Date an opinion (satisfactory
to you and counsel for the Underwriters), dated the Closing Date, of Gray Cary
Ware & Freidenrich, LLP, counsel for the Company and the Selling Stockholder, to
the effect that:
(i) the Company has been duly incorporated, is validly existing
as a corporation in good standing under the laws of Delaware and has the
corporate power and authority to carry on its business as described in
the Prospectus and to own, lease and operate its properties;
(ii) the Company is duly qualified and is in good standing as a
foreign corporation authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of property
requires
21
<PAGE> 22
such qualification, except where the failure to be so qualified would
not have a material adverse effect on the business, prospects, financial
condition or results of operations of the Company;
(iii) all the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Stockholder) have been
duly authorized and validly issued and are fully paid, non-assessable
and not subject to any preemptive or similar rights;
(iv) the Shares to be issued and sold by the Company hereunder
have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement,
will be validly issued, fully paid and non-assessable, and the issuance
of such Shares will not be subject to any preemptive or similar rights;
(v) this Agreement has been duly authorized, executed and
delivered by the Company and the Selling Stockholder;
(vi) the authorized capital stock of the Company conforms as to
legal matters to the description thereof contained in the Prospectus;
(vii) the Registration Statement has become effective under the
Act, no stop order suspending its effectiveness has been issued and no
proceedings for that purpose are, to such counsel's knowledge, pending
before or contemplated by the Commission;
(viii) the statements under the captions "Management -
Limitations on Liability and Indemnification Matters", "Management -
Employment and Severance Agreements", "Management - Stock Option Plans",
"Management - 1999 Employee Stock Purchase Plan", "Certain
Transactions", "Description of Capital Stock", "Shares Eligible for
Future Sale" and "Underwriting" in the Prospectus and Items 14 and 15 of
Part II of the Registration Statement, insofar as such statements
constitute a summary of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with
respect to such legal matters, documents and proceedings;
(ix) to such counsel's knowledge, the Company is not in
violation of its charter or by-laws and, to such counsel's knowledge,
the Company is not in default in the performance of any obligation,
agreement, covenant or condition contained in any indenture, loan
agreement, mortgage, lease or other agreement or instrument that is
filed as an exhibit to the Registration Statement;
(x) the execution, delivery and performance of this Agreement by
the Company, the compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby will
22
<PAGE> 23
not (A) require any consent, approval, authorization or other order of,
or qualification with, any court or governmental body or agency (except
such as may be required under the securities or Blue Sky laws of the
various states), (B) conflict with or constitute a breach of any of the
terms or provisions of, or a default under, the charter or by-laws of
the Company or any indenture, loan agreement, mortgage, lease or other
agreement or instrument filed as an exhibit to the Registration
Statement, (C) violate or conflict with any applicable law or any rule,
regulation, judgment, order or decree of any court or any governmental
body or agency having jurisdiction over the Company, or its property or
(D) result in the suspension, termination or revocation of any
Authorization of the Company or any other impairment of the rights of
the holder of any such Authorization;
(xi) such counsel does not know of any legal or governmental
proceedings pending or threatened to which the Company is a party or to
which any of its property is subject that are required to be described
in the Registration Statement or the Prospectus and are not so
described, or of any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement that
are not so described or filed as required;
(xii) the Company has such Authorizations of, and has made all
filings with and notices to, all governmental or regulatory authorities
and self-regulatory organizations and all courts and other tribunals,
including, without limitation, under any applicable Environmental Laws,
as are necessary to own, lease, license and operate its properties and
to conduct its business, except where the failure to have any such
Authorization or to make any such filing or notice would not, singly or
in the aggregate, have a material adverse effect on the business,
prospects, financial condition or results of operations of the Company;
each such Authorization is valid and in full force and effect and the
Company is in compliance with all the terms and conditions thereof and
with the rules and regulations of the authorities and governing bodies
having jurisdiction with respect thereto; and no event has occurred
(including, without limitation, the receipt of any notice from any
authority or governing body) which allows or, after notice or lapse of
time or both, would allow, revocation, suspension or termination of any
such Authorization or results or, after notice or lapse of time or both,
would result in any other impairment of the rights of the holder of any
such Authorization; and such Authorizations contain no restrictions that
are burdensome to the Company; except where such failure to be valid and
in full force and effect or to be in compliance, the occurrence of any
such event or the presence of any such restriction would not, singly or
in the aggregate, have a material adverse effect on the
23
<PAGE> 24
business, prospects, financial condition or results of operations of the
Company;
(xiii) the Company is not and, after giving effect to the
offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be, an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended;
(xiv) except as otherwise disclosed in the Registration
Statement with respect to registration rights held by certain
stockholders of the Company (which registration rights either do not
apply or have been waived with respect to any obligation of the Company
to include such securities with the Shares registered pursuant to the
Registration Statement), to such counsel's knowledge, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company or to require the Company to include such securities with
the Shares registered pursuant to the Registration Statement;
(xv) (A) the Registration Statement and the Prospectus and any
supplement or amendment thereto (except for the financial statements and
other financial data included therein as to which no opinion need be
expressed) comply as to form with the Act, (B) such counsel has no
reason to believe that at the time the Registration Statement became
effective or on the date of this Agreement, the Registration Statement
as of the effective date thereof and the prospectus included therein
(except for the financial statements and other financial data as to
which such counsel need not express any belief) contained any untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading and (C) such counsel has no reason to believe
that the Prospectus, as amended or supplemented, if applicable (except
for the financial statements and other financial data, as aforesaid)
contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(xvi) the Selling Stockholder has full legal right, power and
authority, and all authorization and approval required by law, to enter
into this Agreement and the Custody Agreement and to sell, assign,
transfer and deliver the Shares to be sold by the Selling Stockholder in
the manner provided herein and therein;
(xvii) the Custody Agreement of the Selling Stockholder has been
duly authorized, executed and delivered by the Selling Stockholder and
is
24
<PAGE> 25
a valid and binding agreement of the Selling Stockholder, enforceable in
accordance with its terms;
(xviii) upon delivery of and payment for the Shares to be sold
by the Selling Stockholder pursuant to this Agreement, good and clear
title to such Shares will pass to the Underwriters, free of all
restrictions on transfer, liens, encumbrances, security interests,
equities and claims whatsoever; and
(xix) the execution, delivery and performance of this Agreement
and the Custody Agreement by the Selling Stockholder, the compliance by
the Selling Stockholder with all the provisions hereof and thereof and
the consummation of the transactions contemplated hereby and thereby
will not (A) require any consent, approval, authorization or other order
of, or qualification with, any court or governmental body or agency
(except such as may be required under the securities or Blue Sky laws of
the various states), (B) conflict with or constitute a breach of any of
the terms or provisions of, or a default under, the organizational
documents of the Selling Stockholder, if the Selling Stockholder is not
an individual, or any indenture, loan agreement, mortgage, lease or
other agreement or instrument to which the Selling Stockholder is a
party or by which any property of the Selling Stockholder is bound and
identified to such counsel in a certificate from the Selling Stockholder
listing all of the Selling Stockholder's material indentures, loan
agreements, mortgages, leases and other agreements and instruments, or
(C) violate or conflict with any applicable law or any rule, regulation,
judgment, order or decree of any court or any governmental body or
agency having jurisdiction over the Selling Stockholder or any property
of the Selling Stockholder.
(xx) to the best of such counsel's knowledge after due inquiry,
the Company has not received any notice of infringement of or conflict
with asserted rights of others with respect to any of such Intellectual
Property which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would have a material adverse
effect on the business, prospects, financial condition or results of
operations of the Company.
The opinion of Gray Cary Ware & Freidenrich, LLP described in Section
9(f) above shall be rendered to you at the request of the Company and the
Selling Stockholder and shall so state therein.
(g) You shall have received on the Closing Date an opinion, dated the
Closing Date, of O'Melveny & Myers LLP, counsel for the Underwriters, with
respect to the incorporation of the Company, the validity of the Shares
delivered on such Closing Date, the Registration Statement, the Prospectus and
other related matters as you may require, and the Company shall have furnished
to such
25
<PAGE> 26
counsel such documents as they reasonably request for the purpose of enabling
them to pass upon such matters.
In giving such opinions with respect to the matters covered by Section
9(f)(xvii), counsel for the Company and the Selling Stockholder and counsel for
the Underwriters may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and Prospectus
and any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification except as
specified.
(h) You shall have received, on each of the date hereof and the Closing
Date, a letter dated the date hereof or the Closing Date, as the case may be, in
form and substance satisfactory to you, from PricewaterhouseCoopers LLP,
independent public accountants, containing the information and statements of the
type ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectus.
(i) The Company shall have delivered to you the agreements specified in
Section 2 hereof which agreements shall be in full force and effect on the
Closing Date.
(j) The Shares shall have been duly listed for quotation on the Nasdaq
National Market.
(k) The Company and the Selling Stockholder shall not have failed on or
prior to the Closing Date to perform or comply with any of the agreements herein
contained and required to be performed or complied with by the Company or the
Selling Stockholder, as the case may be, on or prior to the Closing Date.
(l) You shall have received on the Closing Date, a certificate of each
Selling Stockholder who is not a U.S. Person (as defined under applicable U.S.
federal tax legislation) to the effect that such Selling Stockholder is not a
U.S. Person, which certificate may be in the form of a properly completed and
executed United States Treasury Department Form W-8 (or other applicable form or
statement specified by Treasury Department regulations in lieu thereof).
The several obligations of the Underwriters to purchase any Additional
Shares hereunder are subject to the delivery to you on the applicable Option
Closing Date of such documents as you may reasonably request with respect to the
good standing of the Company, the due authorization of the sale of such
Additional Shares and other matters related to the sale of such Additional
Shares.
Section 10. Effectiveness of Agreement and Termination. This Agreement
shall become effective upon the execution and delivery of this Agreement by the
parties hereto.
26
<PAGE> 27
This Agreement may be terminated at any time on or prior to the Closing
Date by you by written notice to the Sellers if any of the following has
occurred: (i) any outbreak or escalation of hostilities or other national or
international calamity or crisis or change in economic conditions or in the
financial markets of the United States or elsewhere that, in your judgment, is
material and adverse and, in your judgment, makes it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus, (ii) the
suspension or material limitation of trading in securities or other instruments
on the New York Stock Exchange, the American Stock Exchange, the Chicago Board
of Options Exchange, the Chicago Mercantile Exchange, the Chicago Board of Trade
or the Nasdaq National Market or limitation on prices for securities or other
instruments on any such exchange or the Nasdaq National Market, (iii) the
suspension of trading of any securities of the Company on the Nasdaq National
Market, (iv) the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of any court or other
governmental authority which in your opinion materially and adversely affects,
or will materially and adversely affect, the business, prospects, financial
condition or results of operations of the Company, (v) the declaration of a
banking moratorium by either federal or New York State authorities or (vi) the
taking of any action by any federal, state or local government or agency in
respect of its monetary or fiscal affairs which in your opinion has a material
adverse effect on the financial markets in the United States.
If on the Closing Date or on an Option Closing Date, as the case may be,
any one or more of the Underwriters shall fail or refuse to purchase the Firm
Shares or Additional Shares, as the case may be, which it has or they have
agreed to purchase hereunder on such date and the aggregate number of Firm
Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase is not more
than one-tenth of the total number of Firm Shares or Additional Shares, as the
case may be, to be purchased on such date by all Underwriters, each
non-defaulting Underwriter shall be obligated severally, in the proportion which
the number of Firm Shares set forth opposite its name in Schedule I bears to the
total number of Firm Shares which all the non-defaulting Underwriters have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase on such
date; provided that in no event shall the number of Firm Shares or Additional
Shares, as the case may be, which any Underwriter has agreed to purchase
pursuant to Section 2 hereof be increased pursuant to this Section 10 by an
amount in excess of one-ninth of such number of Firm Shares or Additional
Shares, as the case may be, without the written consent of such Underwriter. If
on the Closing Date any Underwriter or Underwriters shall fail or refuse to
purchase Firm Shares and the aggregate number of Firm Shares with respect to
which such default occurs is more than one-tenth of the aggregate number of Firm
Shares to be purchased by all Underwriters and arrangements satisfactory to you,
the Company and the Selling Stockholder for
27
<PAGE> 28
purchase of such Firm Shares are not made within 48 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter, the Company or the Selling Stockholder. In any such
case which does not result in termination of this Agreement, either you or the
Sellers shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or any other documents or arrangements
may be effected. If, on an Option Closing Date, any Underwriter or Underwriters
shall fail or refuse to purchase Additional Shares and the aggregate number of
Additional Shares with respect to which such default occurs is more than
one-tenth of the aggregate number of Additional Shares to be purchased on such
date, the non-defaulting Underwriters shall have the option to (i) terminate
their obligation hereunder to purchase such Additional Shares or (ii) purchase
not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase on such date in the absence
of such default. Any action taken under this paragraph shall not relieve any
defaulting Underwriter from liability in respect of any default of any such
Underwriter under this Agreement.
Section 11. Agreements of the Selling Stockholder. The Selling
Stockholder agrees with you and the Company:
(a) To pay or to cause to be paid all transfer taxes payable in
connection with the transfer of the Shares to be sold by the Selling Stockholder
to the Underwriters.
(b) To do and perform all things to be done and performed by the Selling
Stockholder under this Agreement prior to the Closing Date and to satisfy all
conditions precedent to the delivery of the Shares to be sold by the Selling
Stockholder pursuant to this Agreement.
Section 12. Miscellaneous. Notices given pursuant to any provision of
this Agreement shall be addressed as follows: (i) if to the Company, to JNI
Corporation, 9775 Towne Centre Drive, San Diego, California 92121, (ii) if to
the Selling Stockholder, to the Chief Executive Officer of the Selling
Shareholder c/o ____________ and (iii) if to any Underwriter or to you, to you
c/o DLJ, 277 Park Avenue, New York, New York 10172, Attention: Syndicate
Department, or in any case to such other address as the person to be notified
may have requested in writing.
The respective indemnities, contribution agreements, representations,
warranties and other statements of the Company, the Selling Stockholder and the
several Underwriters set forth in or made pursuant to this Agreement shall
remain operative and in full force and effect, and will survive delivery of and
payment for the Shares, regardless of (i) any investigation, or statement as to
the results thereof, made by or on behalf of any Underwriter, the officers or
directors of any Underwriter, any person controlling any Underwriter, the
Company, the officers
28
<PAGE> 29
or directors of the Company, any person controlling the Company, the Selling
Stockholder or any person controlling the Selling Stockholder, (ii) acceptance
of the Shares and payment for them hereunder and (iii) termination of this
Agreement.
If for any reason the Shares are not delivered by or on behalf of any
Seller as provided herein (other than as a result of any termination of this
Agreement pursuant to Section 10), the Sellers agree, jointly and severally, to
reimburse the several Underwriters for all out-of-pocket expenses (including the
fees and disbursements of counsel) incurred by them. Notwithstanding any
termination of this Agreement, the Company shall be liable for all expenses
which it has agreed to pay pursuant to Section 5(i) hereof. The Sellers also
agree, jointly and severally, to reimburse the several Underwriters, their
directors and officers and any persons controlling any of the Underwriters for
any and all fees and expenses (including, without limitation, the fees
disbursements of counsel) incurred by them in connection with enforcing their
rights hereunder (including, without limitation, pursuant to Section 8 hereof).
Except as otherwise provided, this Agreement has been and is made solely
for the benefit of and shall be binding upon the Company, the Selling
Stockholder, the Underwriters, the Underwriters' directors and officers, any
controlling persons referred to herein, the Company's directors and the
Company's officers who sign the Registration Statement and their respective
successors and assigns, all as and to the extent provided in this Agreement, and
no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
This Agreement shall be governed and construed in accordance with the
laws of the State of New York.
This Agreement may be signed in various counterparts which together
shall constitute one and the same instrument.
29
<PAGE> 30
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholder and the several Underwriters.
Very truly yours,
"THE COMPANY"
JNI CORPORATION,
a Delaware corporation
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
"THE SELLING STOCKHOLDER"
JAYMARK, INC.,
a Delaware corporation
By:
---------------------------------
Name:
-------------------------------
Title: Chief Executive Officer
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
HAMBRECHT & QUIST LLC
BEAR, STEARNS & CO. INC.
DLJDIRECT INC.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
30
<PAGE> 31
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
- ------------ ---------------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities
Corporation
Hambrecht & Quist LLC
Bear, Stearns & Co. Inc.
DLJdirect Inc.
-------------
Total
</TABLE>
<PAGE> 1
EXHIBIT 5.1
[GRAY CARY WARE & FREIDENRICH LLP LETTERHEAD]
October 12, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: JNI Corporation Registration Statement on Form S-1
Ladies and Gentlemen:
As counsel to JNI Corporation (the "Company") we are rendering this opinion in
connection with a proposed sale of those certain shares of the Company's
newly-issued Common Stock and those certain additional shares of the Company's
Common Stock held by one stockholder as set forth in the Registration
Statement on Form S-1 to which this opinion is being filed as Exhibit 5.1
(collectively, the "Shares"). We have examined all instruments, documents and
records which we deemed relevant and necessary for the basis of our opinion
hereinafter expressed. In such examination, we have assumed the genuineness of
all signatures and the authenticity of all documents submitted to us as
originals and the conformity to the originals of all documents submitted to us
as copies.
We express no opinion with respect to (i) the availability of equitable
remedies, including specific performance, or (ii) the effect of bankruptcy,
insolvency, reorganization, moratorium or equitable principles relating to or
limiting creditors' rights generally.
Based on such examination, we are of the opinion that the Shares identified in
the above-referenced Registration Statement will be, upon effectiveness of the
Registration Statement and receipt by the Company of payment therefor, validly
authorized, legally issued, fully paid, and nonassessable. We hereby consent to
the filing of this opinion as an exhibit to the above-referenced Registration
Statement, and to the use of our name wherever it appears in said Registration
Statement, including the Prospectus constituting a part thereof, as originally
filed or as subsequently amended.
Respectfully submitted,
/s/ Gray Cary Ware & Freidenrich LLP
GRAY CARY WARE & FREIDENRICH LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
reports dated October 8, 1999 relating to the financial statements and financial
statement schedule of JNI Corporation, which appear in such Registration
Statement. We also consent to the reference to us under the heading "Experts" in
such Registration Statement.
PRICEWATERHOUSECOOPERS LLP
San Diego, California
October 8, 1999
<PAGE> 1
EXHIBIT 23.3
To JNI Corporation:
I hereby consent to the use of my name as a director designate in the
Registration Statement on Form S-1 (File No. 333-86501) of JNI Corporation.
/s/ THOMAS J. BERNARD
- ----------------------------
Dated: October 5, 1999
----------------------
<PAGE> 1
EXHIBIT 23.4
To JNI Corporation:
I hereby consent to the use of my name as a director designate in the
Registration Statement on Form S-1 (File No. 333-86501) of JNI Corporation.
/s/ JOHN BOLGER
- ----------------------
Dated: October 17, 1999
<PAGE> 1
EXHIBIT 23.5
To JNI Corporation:
I hereby consent to the use of my name as a director designate in the
Registration Statement on Form S-1 (File No. 333-86501) of JNI Corporation.
/s/ Lawrence E. Fox
Dated: October 5, 1999
