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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______.
COMMISSION FILE NUMBER 0-27755
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JNI CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 33-0740004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9775 TOWNE CENTRE DRIVE
SAN DIEGO, CA 92121
(Address of principal executive offices, including zip code)
(858) 535-3121
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
As of April 30, 2000 there were 22,892,696 shares of the registrant's common
stock, $0.001 par value, outstanding.
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TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Balance Sheet at March 31, 2000 (unaudited) and December 31, 1999 2
Statement of Operations (unaudited) for the three months ended
March 31, 2000 and 1999 3
Statement of Cash Flows (unaudited) for the three months ended
March 31, 2000 and 1999 4
Notes to Financial Statements (unaudited) 5
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 10
PART II OTHER INFORMATION
Item 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 10
Item 5: OTHER INFORMATION 10
Item 6: EXHIBITS AND REPORT ON FORM 8-K 19
Signatures 20
Exhibit Index 21
1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
MARCH 31, DECEMBER 31,
2000 1999
----------------- -----------------
(unaudited)
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Current assets:
Cash and cash equivalents..................................... $ 3,390 $ 5,062
Marketable securities available for sale...................... 40,209 39,767
Accounts receivable, net...................................... 9,885 6,305
Inventories................................................... 5,305 4,046
Other current assets.......................................... 1,232 711
Deferred income taxes......................................... 866 946
----------------- -----------------
Total current assets.................................. 60,887 56,837
Property and equipment, net..................................... 5,002 4,632
Intangible assets, net.......................................... 8,707 10,047
Deferred income taxes........................................... 1,309 1,309
================= =================
$ 75,905 $ 72,825
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 4,210 $ 4,124
Accrued liabilities........................................... 5,062 3,367
----------------- -----------------
Total current liabilities............................. 9,272 7,491
Other liabilities............................................. 112
113
----------------- -----------------
Total liabilities.................................... 9,385 7,603
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Stockholders' equity:
Preferred stock, undesignated series, 5,000,000 shares
authorized; none issued.................................... - -
Common stock, par value $.001 per share; 100,000,000 shares
authorized; 22,840,696 and 21,838,679 shares issued and
outstanding................................................ 23 22
Additional paid-in capital.................................... 66,899 67,078
Unearned stock-based compensation............................. (1,137) (1,311)
Accumulated other comprehensive income (loss)................. (45) (23)
Retained earnings (deficit)................................... 780 (544)
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Total stockholders' equity ........................... 66,520 65,222
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$ 75,905 $ 72,825
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See accompanying notes to financial statements.
2
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STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
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2000 1999
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Net revenues.............................................. $ 18,477 $ 6,363
Cost of revenues.......................................... 7,347 2,287
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Gross margin.................................... 11,130 4,076
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Operating expenses:
Research and development................................ 4,022 2,182
Selling and marketing................................... 2,321 936
General and administrative.............................. 1,653 674
Amortization of intangible assets....................... 1,340 55
Amortization of stock-based compensation................ 174 163
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Total operating expenses........................ 9,510 4,010
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Operating income.......................................... 1,620 66
Interest income........................................... 516 -
Interest expense - affiliate.............................. - (133)
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Income (loss) before income taxes......................... 2,136 (67)
Income tax provision...................................... 812 8
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Net income (loss)............................... $ 1,324 $ (75)
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Earnings (loss) per share:
Basic................................................... $ 0.06 $ (0.18)
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Diluted................................................. $ 0.05 $ (0.18)
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Number of shares used in per share computations:
Basic................................................... 22,003,000 420,000
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Diluted................................................. 26,962,000 420,000
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See accompanying notes to financial statements.
3
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STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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THREE MONTHS ENDED MARCH 31,
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2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ 1,324 $ (75)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Deferred income taxes.................................... 80 -
Depreciation and amortization............................ 419 261
Amortization of intangible assets........................ 1,340 55
Amortization of stock-based compensation................. 174 163
Accrued interest expense - affiliate..................... - 133
Changes in assets and liabilities:
Accounts receivable, net................................. (3,580) (1,211)
Inventories.............................................. (1,259) (358)
Other assets............................................. (521) (114)
Accounts payable......................................... 86 (597)
Accrued liabilities...................................... 1,695 379
Other liabilities........................................ 1 (3)
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Net cash used in operating activities.......................... (241) (1,367)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities available for sale........ (464) -
Capital expenditures......................................... (789) (293)
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Net cash used in investing activities.......................... (1,253) (293)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from affiliate.................................. - 1,660
Net proceeds from exercise of stock options.................. 31 -
Payment of initial public offering costs..................... (209) -
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Net cash (used in) provided by financing activities............ (178) 1,660
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Net change in cash and cash equivalents (1,672) -
Cash and cash equivalents, beginning of period................. 5,062 -
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Cash and cash equivalents, end of period....................... $ 3,390 $ -
================ ===============
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See accompanying notes to financial statements.
4
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NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- GENERAL
In management's opinion, the accompanying unaudited financial
statements for JNI Corporation (the "Company") for the three month periods ended
March 31, 2000 and 1999 have been prepared in accordance with generally accepted
accounting principles for interim financial statements and include all
adjustments (consisting only of normal recurring accruals) that the Company
considers necessary for a fair presentation of its financial position, results
of operations, and cash flows for such periods. However, the accompanying
financial statements do not contain all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. All such financial statements are unaudited except the December 31,
1999 balance sheet. This Report and the accompanying unaudited and audited
financial statements should be read in conjunction with the Company's audited
financial statements and notes thereto presented in its Annual Report on Form
10-K for the fiscal year ended December 31, 1999 (the "1999 Annual Report").
Footnotes which would substantially duplicate the disclosures in the Company's
audited financial statements for the fiscal year ended December 31, 1999
contained in the 1999 Annual Report have been omitted. The interim financial
information contained in this Report is not necessarily indicative of the
results to be expected for any other interim period or for the full fiscal year
ending December 31, 2000.
NOTE 2 -- INVENTORY
Components of inventories are as follows:
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AS OF
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MARCH 31, DECEMBER 31,
2000 1999
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Inventories:
Raw materials.............................. $ 4,473 $ 3,027
Work in process............................ 274 299
Finished goods............................. 558 720
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Total.......................... $ 5,305 $ 4,046
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NOTE 3 -- COMPREHENSIVE INCOME
The Company presents unrealized gains and losses on the Company's
available-for-sale securities in its statement of stockholders' equity (deficit)
and comprehensive income on an annual basis and in a footnote in its quarterly
reports. During the three months ended March 31, 2000, total comprehensive
income was $1,302. During the three months ended March 31, 1999, the Company did
not have marketable securities and therefore had no unrealized gains or losses
on marketable securities.
NOTE 4 -- RECONCILIATION OF NET INCOME AND SHARES USED IN PER SHARE COMPUTATIONS
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 (loss) 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. The Company has excluded
all convertible preferred stock and outstanding stock options from the
calculation of diluted loss per share for the three months ended March 31, 1999
because all such securities are antidilutive for this period. The total number
of potential common shares excluded from the calculation of diluted loss per
common share for the three months ended March 31, 1999 was 22,162,000.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
5
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NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
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Three Months Ended
March 31,
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2000 1999
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Numerator:
Net income (loss)............................................. $ 1,324 $ (75)
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Denominator:
Denominator for basic earnings (loss) per share - weighted
average shares outstanding................................. 22,003,000 420,000
Effect of dilutive securities:
Dilutive warrants outstanding.............................. 812,000 -
Dilutive options outstanding............................... 4,124,000 -
Employee stock purchase plan shares........................ 23,000 -
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Denominator for diluted earnings (loss) per share - adjusted
weighted average shares.................................... 26,962,000 420,000
============ ========
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NOTE 5 -- EXERCISE OF WARRANT
During the first quarter of fiscal year 2000, Adaptec Inc. exercised a
warrant to purchase 840,000 shares of the Company's common stock that it
received pursuant to the September 30, 1999 amendment to the Asset Purchase
Agreement between the Company and Adaptec. Adaptec performed a net exercise of
the warrant, pursuant to which the Company issued a total of 839,998 common
shares to Adaptec after taking into consideration the one hundred dollar
exercise price.
NOTE 6 -- 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 JNI 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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The objective of this SAB is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. The guidance in the SAB is required
to be followed no later than the second fiscal quarter of the fiscal year
beginning after December 15, 1999. The adoption of the SAB is not expected to
have a material impact on the Company's financial position or results of
operations, but may impact the timing and pattern of revenue recognition in the
future.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Report (including the following section regarding Management's
Discussion and Analysis of Financial Condition and Results of Operations)
contains forward-looking statements regarding the Company and its business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements in this Report. Additionally, statements concerning
future matters such as the development of new products, enhancements or
technologies, international sales, expense levels, possible changes in
legislation and other statements regarding matters that are not historical are
forward-looking statements.
Although forward-looking statements in this Report reflect the good
faith judgment of the Company's management, such statements can only be based on
facts and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include without
limitation those discussed under the heading "Factors That May Affect Future
Performance" in Item 5 below, as well as those discussed elsewhere in this
Report and those discussed in the Company's 1999 Annual Report. Readers are
urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Report. The Company undertakes no obligation
to revise or update any forward-looking statements in order to reflect any event
or circumstance that may arise after the date of this Report. Readers are urged
to carefully review and consider the various disclosures made by the Company in
this Report, which attempt to advise interested parties of the risks and factors
that may affect the Company's business, financial condition, results of
operations and prospects.
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, Application Specific Integrated Circuits (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 completed our initial public offering in
October 1999.
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.
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 have 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.
7
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As our Emerald-based host bus adapters designed for the PCI interface
become a greater percentage of our revenues, we expect that the average selling
price of our products will continue to decrease. Further, the average selling
prices of our new and existing products are likely to continue to decline in the
future as we and our competitors introduce new and more technologically advanced
products and as price-based competition intensifies. In addition, sales price
reductions tied to volume shipments are typically part of our volume purchase
agreements with our distribution channel customers.
COMPARISON OF THREE MONTHS ENDED MARCH 31, 2000 AND 1999
NET REVENUES. Net revenues increased $12.1 million, or 190%, to $18.5
million in the three months ended March 31, 2000 from $6.4 million in the three
months ended March 31, 1999. 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 increased demand for our products and the
continued growth in the market for Fibre Channel products.
GROSS MARGIN. Gross margin increased $7.0 million, or 173%, to $11.1
million in the three months ended March 31, 2000 from $4.1 million in the three
months ended March 31, 1999. Gross margin as a percentage of net revenues
decreased to 60.2% during the three months ended March 31, 1999 from 64.1%
during the three months ended March 31, 1999. The decrease was primarily a
result of an increase in PCI sales, which have lower margins than Sbus sales,
relative to total sales in the three months ended March 31, 2000 compared to the
three months ended March 31, 1999. PCI sales represented approximately 15% of
total revenues in the three months ended March 31, 2000 compared to
approximately 12% of total revenues in the three months ended March 31, 1999.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$1.8 million, or 84%, to $4.0 million for the three months ended March 31, 2000
from $2.2 million for the three months ended March 31, 1999. The increase was
due primarily to higher personnel costs and contracted services, resulting from
an increase in the number of personnel needed in order to staff a higher level
of research and development. As a percentage of net revenues, research and
development expenses decreased to 21.8% for the three months ended March 31,
2000 from 34.3% for the three months ended March 31, 1999. This decrease was
primarily attributable to the increase in revenues. We anticipate that research
and development expenses will increase in absolute dollars in future periods as
we hire additional personnel and introduce enhanced versions of our products.
SELLING AND MARKETING. Selling and marketing expenses increased $1.4
million, or 148%, to $2.3 million for the three months ended March 31, 2000 from
$936,000 for the three months ended March 31, 1999. The increase in sales and
marketing expenses was due primarily to an increase in personnel costs resulting
from the Company's expansion of its sales and marketing staff, increased trade
show participation and the launch of an advertising and marketing program in the
first quarter to focus on the Company's premium branding and channel expansion.
Selling and marketing expenses as a percentage of net revenues decreased to
12.6% for the three months ended March 31, 2000 from 14.7% for the three months
ended March 31, 1999 primarily due to the increase in the Company's revenues. We
anticipate that selling and marketing expenses will increase in absolute dollars
in future periods and may increase as a percentage of net revenues as the
Company continues its efforts to increase brand awareness and expand its sales
channel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased $979,000, or 145%, to $1.7 million for the three months ended March
31, 2000 from $674,000 for the three months ended March 31, 1999. The increase
was primarily due to higher personnel costs arising from the addition of new
employees and higher legal, accounting and consulting costs resulting from
increased business activity. General and administrative expenses as a percentage
of net revenues decreased to 8.9% for the three months ended March 31, 2000 from
10.6% for the three months ended March 31, 1999 due to the increase in revenues.
We anticipate that general and administrative expenses will continue to decrease
as a percentage of net revenues in future periods.
AMORTIZATION OF INTANGIBLE ASSETS. We amortized $1.3 million of
intangible assets during the three months ended March 31, 2000 compared to
$55,000 during the three months ended March 31, 1999. The increase in
amortization expense is attributed to the significant increase in intangible
assets resulting from the additional consideration issued to Adaptec in the
third quarter of 1999 for the Fibre Channel technology we acquired from Adaptec
in November 1998.
8
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AMORTIZATION OF STOCK-BASED COMPENSATION. In connection with the grant
of stock options to employees, we recorded total stock-based compensation within
stockholders' equity (deficit) of $2.2 million and amortized stock-based
compensation of $174,000 and $163,000 during the three months ended March 31,
2000 and 1999, respectively.
INCOME TAX PROVISION. We recognized an income tax provision of $812,000
(effective tax rate of 38.0%) during the three months ended March 31, 2000 as a
result of the taxable income generated in the three months ended March 31, 2000.
An income tax provision of $8,000 was recognized in the three months ended March
31, 1999 which represented a current tax liability for alternative minimum
taxes. We did not recognize any tax benefit from the operating losses incurred
during the three months ended March 31, 1999 based on our determination at the
time that our ability to realize such a benefit was not considered to be more
likely than not.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering in October 1999, borrowings from
Jaycor, Inc., a wholly-owned subsidiary of our parent corporation Jaymark, Inc.,
were our principal source of working capital. Upon the completion of our initial
public offering, we raised approximately $49.5 million after the payment of
underwriters' commissions but before the deduction of offering expenses. The
proceeds from our initial public offering and cash flow generated from
operations are currently the primary source of funding for our operations.
Subsequent to the initial public offering, all amounts due to Jaycor were paid
in full, and we no longer borrow from Jaycor.
During the three months ended March 31, 2000, cash used in operating
activities was $241,000, compared to $1.4 million of cash used in operating
activities during the three months ended March 31, 1999. The cash used in
operations reflects net income before depreciation and amortization of
approximately $3.3 million, increased by an increase in accrued liabilities and
accounts payable of $1.8 million and offset by the increase in accounts
receivable, inventories and other assets of approximately $5.4 million.
Net cash used in investing activities was $1.3 million in three months
ended March 31, 2000 and consisted of capital expenditures and purchases of
marketable securities available for sale. Net cash used in investing activities
was $293,000 in the three months ended March 31, 1999 and consisted solely of
capital expenditures. The capital expenditures reflect our investment in
computer and lab equipment, software development tools and facilities, which are
required to support our business expansion.
Net cash used in financing activities was $178,000 in the three months
ended March 31, 2000, which consisted of $209,000 in final payments of costs
associated with our initial public offering in October 1999 and $31,000 in net
proceeds from the exercise of stock options. Net cash provided by financing
activities was $1.7 million in the three months ended March 31, 1999, all of
which was provided by advances from Jaycor.
We had $43.6 million of cash and cash equivalents and investments and
$51.6 million of working capital at March 31, 2000.
We believe that the proceeds from our initial public offering, together
with expected cash flows from operations, will be sufficient to meet 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 JNI 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.
9
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In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." The objective of this SAB is to provide further guidance on revenue
recognition issues in the absence of authoritative literature addressing a
specific arrangement or a specific industry. The guidance in the SAB is required
to be followed no later than the second fiscal quarter of the fiscal year
beginning after December 15, 1999. The adoption of the SAB is not expected to
have a material impact on the Company's financial position or results of
operations, but may impact the timing and pattern of revenue recognition in the
future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates
primarily to changes in the fair market value of our investments and the amount
of interest income earned on our investment portfolio. In the normal course of
business, we employ established policies and procedures to manage our exposure
to changes in the fair market value of our investments.
Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We ensure the safety
and preservation of our invested principal funds by limiting default risks,
market risk and reinvestment risk. We mitigate default risk by investing in
investment grade securities. A hypothetical 100 basis point adverse move in
interest rates along the entire interest rate yield curve would not materially
affect the fair value of our interest sensitive financial instruments at March
31, 2000.
Currently, all of our sales are denominated in U.S. dollars, so we are
not exposed to foreign currency related risks.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
In September 1999, we filed a registration statement under the
Securities Act of 1933 to sell up to 2.8 million newly issued shares of common
stock and 2.2 million shares held by our principal stockholder, Jaymark, Inc. in
our initial public offering ("IPO"). The effective date of the registration
statement was October 26, 1999, under Commission File No. 333-86501. The
offering was managed by Donaldson, Lufkin & Jenrette Securities Corporation,
Hambrecht & Quist LLC, Bear, Stearns & Co. Inc. and DLJdirect Inc. and closed on
October 29, 1999 after we sold an aggregate of 2.8 million shares of common
stock and Jaymark sold 2.1 million shares of common stock at an initial public
offering price per share of $19.00. Also on October 29, 1999, Jaymark sold an
additional 735,000 shares of common stock at an initial public offering price
per share of $19.00 upon the underwriters' exercise in full of their
over-allotment option. The IPO resulted in gross proceeds to us of $53.2
million, $3.7 million of which was applied toward the underwriting discount.
Other expenses related to the offering totaled approximately $1.4 million. Our
net proceeds totaled $48.1 million, all of which were deposited into our
accounts in October 1999. We did not receive any proceeds from Jaymark's sale of
shares in the offering and pursuant to the underwriters' over-allotment option.
As of December 31, 1999, the offering proceeds were applied as follows: $3.1
million to repay our indebtedness to Jaymark and $45.0 million for temporary
investments in marketable securities.
ITEM 5. OTHER INFORMATION
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
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
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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.
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. As a result, 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 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 Small Computer Systems
Interface (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 Storage Area Networks, or 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.
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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 is 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, 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 that 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 offered by large technology companies.
Because such systems do not interoperate with products from independent open
system suppliers, like us, customers that invest in these systems will be less
likely to purchase our products. Other technologies designed to address the
applications served by Fibre Channel today are under development, and because we
focus exclusively on Fibre Channel, our business would suffer as a result of
competition from such competing technologies.
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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.
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 that 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
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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 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, fabricates our
Emerald ASIC wafers, and various subcontractors, such as AMKOR Technology,
Caesar International Inc. and Siliconware USA Inc., perform assembly,
packaging and testing of our ASICs so that we purchase and receive only
finished product. We have no firm long-term obligations with TSMC, SCI
Systems, Inc. or SMS Technologies, Inc. Accordingly, our major suppliers 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.
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.
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. 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.
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 that 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, from time to time,
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
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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, 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 83% of our
net revenues in 1999 and 86% of our net revenues in 1998. In addition, a
significant portion of our host bus adapters are used to form connections to
storage arrays manufactured by EMC. Accordingly, we depend to a certain extent
upon the increased market penetration of Sun and EMC systems and our ability to
continue to develop products that interoperate effectively in Sun and EMC
environments. Sun has announced its intention to phase out production of servers
with the SBus interface. Accordingly, we anticipate that the percentage of our
revenues attributable to sales of our SBus host bus adapters will decline over
time. If Sun accelerates its phase out of such workstations, our business would
suffer due to decreased sales of SBus host bus adapters.
BECAUSE OUR INTELLECTUAL PROPERTY IS CRITICAL TO THE SUCCESS OF OUR BUSINESS,
OUR OPERATING RESULTS WOULD SUFFER IF WE WERE UNABLE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY.
We currently rely on a combination of copyrights, trademarks, trade
secret laws and contractual provisions to establish and protect our intellectual
property rights in our products. We cannot be certain that the steps we take to
protect our intellectual property will adequately protect our proprietary
rights, that others will not independently develop or otherwise acquire
equivalent or superior technology or that we can maintain such technology as
trade secrets. In addition, the laws of some of the countries in which our
products are or may be developed, manufactured or sold may not protect our
products and intellectual property rights to the same extent as the laws of the
United States, or at all. Our failure to protect our intellectual property
rights could have a material adverse effect on our business, operating results
or financial condition.
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, SALES AND MARKETING AND
MANAGERIAL PERSONNEL COULD ADVERSELY AFFECT OUR BUSINESS.
We depend 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. We also depend to a significant
degree upon the continued contributions of our key management, sales and
marketing and manufacturing personnel. Accordingly, our future success depends
upon our ability to attract, train and retain such technical, sales and
marketing and managerial personnel. 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.
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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 key employees
could have a material adverse effect on our business, operating results and
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.
OUR EXPORT SALES SUBJECT US TO RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
Export sales accounted for 17% of our net revenues in 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.
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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 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 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.
OUR STOCK PRICE MAY BE VOLATILE.
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. Changes
in analysts' estimates of our earnings as well as any of the factors described
under the heading "Factors That May Affect Future Performance" could have a
significant impact on the market price of our common stock. 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.
Jaymark beneficially owns approximately 62.1% of our outstanding common
stock as of March 31, 2000. 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:
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- the direction and policies of our company, including the election
and removal of directors;
- mergers or other business combinations involving us;
- amendments to our certificate of incorporation or bylaws; and
- future issuances of our common stock or other securities.
Any of these powers could be used by Jaymark for its own advantage to
the detriment of our other stockholders and our company. This in turn may have
an adverse effect on the price of our common stock.
WE DO NOT PLAN TO PAY CASH DIVIDENDS ON OUR COMMON STOCK.
We have never paid cash dividends on our common stock and do not
anticipate paying any cash dividends in the foreseeable future. We intend to
retain future earnings, if any, to finance the growth and expansion of our
business and for general corporate purposes.
RESTRICTIONS ON SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET BY INVESTORS WHO
HELD OUR STOCK PRIOR TO OUR INITIAL PUBLIC OFFERING LAPSED ON APRIL 24, 2000,
WHICH MAY LEAD TO INCREASED SALES OF OUR COMMON STOCK AND COULD CAUSE OUR STOCK
PRICE TO DECLINE.
Our current stockholders, Jaymark, Inc. and Adaptec, Inc., hold a
substantial number of shares, which they may currently sell in the public
market. Jaymark held approximately 62.1% of our outstanding stock as of March
31, 2000 and Adaptec held approximately 8.6% of our outstanding stock as of
March 31, 2000, which includes the exercise of their warrant for 840,000 shares
in the first quarter of fiscal year 2000. Subject to limitations on volume under
Rule 144, Jaymark may sell all the 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. Sales of a substantial number of shares of our common
stock 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
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10.1 Amended and Restated Sublease Agreement, dated February 17, 2000
between Jaycor, Inc. and JNI Corporation.
10.2 First Amendment to Lease and Consent to Sublease, dated April 4,
2000 between CarrAmerica Realty, L.P., Jaycor, Inc. and JNI
Corporation.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
-------------------
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
JNI CORPORATION
Date: May 12, 2000 By: /s/ Terry M. Flanagan
--------------------------------------
Terry M. Flanagan
President, Chief Executive Officer and
Director
Date: May 12, 2000 /s/ Gloria Purdy
--------------------------------------
Gloria Purdy
Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<PAGE>
EXHIBIT INDEX
Exhibits
- --------
10.1 Amended and Restated Sublease Agreement, dated February 17, 2000 between
Jaycor, Inc. and JNI Corporation.
10.2 First Amendment to Lease and Consent to Sublease, dated April 4, 2000
between CarrAmerica Realty, L.P., Jaycor, Inc. and JNI Corporation.
27.1 Financial Data Schedule.
21
<PAGE>
AMENDED AND RESTATED SUBLEASE AGREEMENT
THIS AMENDED AND RESTATED SUBLEASE AGREEMENT (the "SUBLEASE"), entered
into as of February 17, 2000, is made by and between Jaycor, Inc., a California
corporation ("SUBLANDLORD") and JNI Corporation, a Delaware corporation
("SUBTENANT").
RECITALS
A. Pursuant to that certain Lease dated July 9, 1998 (the "MASTER
LEASE") attached hereto as Exhibit A, Carramerica Realty Corporation, a Maryland
corporation (the "MASTER LANDLORD"), as landlord, leased to Sublandlord, as
tenant, that certain building (the "BUILDING") located at 9775 Towne Centre
Drive, San Diego, California consisting of approximately 105,358 square feet
(the "PREMISES").
B. Pursuant to that certain Sublease dated October 7, 1998 by
and between Sublandlord and Subtenant as amended by that certain First
Amendment to Sublease on December 1, 1998, that certain Second Amendment to
Sublease dated April 1, 1999, that certain Third Amendment to Sublease dated
May 15, 1999, that certain Fourth Amendment to Sublease dated August 1, 1999,
that certain Fifth Amendment to Sublease dated October 1, 1999, that certain
Sixth Amendment to Sublease dated November 1, 1999, and that certain Seventh
Amendment to Sublease dated February 1, 2000 (collectively, the "ORIGINAL
SUBLEASE"), Sublandlord sublet a certain portion of the Premises to Subtenant
(the "ORIGINAL SUBLET PREMISES").
C. Sublandlord and Subtenant desire to amend and restate the
Original Sublease in its entirety to increase the rentable square feet of the
Original Sublet Premises and amend other terms and provisions of the Original
Sublease as set forth below and all effective as of the Commencement Date (as
defined below).
NOW, THEREFORE, in consideration of the foregoing, and for other good
and valuable consideration, the receipt and adequacy of which are hereby
acknowledged by the parties, Sublandlord and Subtenant hereby agree as follows:
1. SUBLEASE. Sublandlord hereby subleases to Subtenant and
Subtenant hereby subleases from Sublandlord, upon all of the terms and
conditions set forth herein, that portion of the Premises consisting of
approximately 70,766 rentable square feet as more particularly described on
Exhibit A attached hereto and incorporated herein (the "SUBLET PREMISES").
Subject to the provisions of Sections 9.3 and 9.4 below, Sublandlord covenants
that Subtenant shall be entitled to quiet enjoyment of the Sublet Premises,
provided that Subtenant complies with the terms of this Sublease.
<PAGE>
2. TERM. The term of this Sublease ("TERM") shall commence on the
date on which Sublandlord has vacated the Sublet Premises which is estimated to
be on or about July 1, 2000 ("COMMENCEMENT DATE"), and shall end on October 31,
2004 (the "EXPIRATION DATE") unless sooner terminated pursuant to any provision
hereof. If Sublandlord, for any reason whatsoever, cannot deliver possession of
the Sublet Premises to Subtenant on the Commencement Date, this Sublease shall
not be void or voidable, nor shall Sublandlord be liable to Subtenant for any
loss or damage resulting from such failure to deliver. In that event, however,
Subtenant shall not be liable for any Rent (as defined in Section 4.1 below) and
the Term shall not commence until Sublandlord delivers possession to Subtenant.
3. CONDITION OF SUBLET PREMISES - DELIVERY AS IS. Sublandlord
shall deliver, and Subtenant shall accept, possession of the Sublet Premises in
their "as is" condition as the Sublet Premises exists on the date hereof.
Sublandlord shall have no obligation to furnish or supply any work, labor,
services, materials, furniture, fixtures, equipment, decorations or other items
to make the Sublet Premises ready or suitable for Subtenant's occupancy.
Sublandlord makes no representations or warranties to Subtenant regarding the
Sublet Premises, including the structural condition of the Sublet Premises and
the condition of any mechanical, electrical and other systems of the Sublet
Premises. Subtenant acknowledges that Sublandlord has afforded Subtenant the
opportunity for full and complete investigations, examinations and inspections
of the Sublet Premises and the common areas of the Building. In making and
executing this Sublease, Subtenant has relied solely on such investigations,
examinations and inspections as Subtenant has made and has not relied on any
representation or warranty from Sublandlord concerning the Sublet Premises or
the Building.
4. RENT
4.1 PAYMENT OF RENT. Subtenant shall pay Sublandlord
without demand, deduction or offset in lawful money of the United States, to
Sublandlord, at 9775 Towne Centre Drive, San Diego, California or to such other
address as Sublandlord may designate in writing, the monthly base rent ("Base
Rent") set forth in Section 4.2 in advance on or before the first day of each
month during the Term and any other additional payments due to Sublandlord under
this Sublease (together with Base Rent, the "Rent") when required under this
Sublease. Payments for any partial month at the beginning or end of the Term
shall be prorated to the appropriate calendar month.
4.2 BASE RENT. Subtenant shall pay to Sublandlord as Base
Rent for the Sublet Premises during the Term Subtenant's Prorata Share (as
defined below) of the Base Rent for the Premises set forth in Section 7 of the
Schedule in the Master Lease, which Base Rent shall be increased in accordance
with the provisions of such Section 7. As used herein, Subtenant's Prorata Share
is sixty-seven percent (67%) (which is based on 70,766 square feet for the
Sublet Premises and 105,358 for the Premises).
2
<PAGE>
4.3 ADJUSTMENT TO PRORATA SHARE. Sublandlord may elect to
store and maintain furniture and laboratory equipment in certain portions of the
Premises (the "Sublandlord Storage Areas"). If Sublandlord elects to maintain
the Sublandlord Storage Areas, then (i) Subtenant's Prorata Share shall be
recalculated by subtracting the number of rentable square feet of the
Sublandlord Storage Areas from the rentable square feet of the Sublet Premises,
and Sublandlord will be obligated to pay the Base Rent allocable to the
Sublandlord Storage Areas; and (ii) Sublandlord and Subtenant shall each execute
an amendment to this Sublease documenting the revised Subtenant's Prorata Share.
5. ADDITIONAL RENT. In addition to the Base Rent payable pursuant
to Section 4.2 above, Subtenant shall pay as additional rent Subtenant's Prorata
Share of the Operating Cost Rent, Tax Rent, and Additional Rent (including,
without limitation, utilities) required to be paid by Sublandlord in accordance
with Section 2 of the Master Lease. Sublandlord shall give Subtenant written
notice of Sublandlord's estimate of the amount of the Operating Cost Rent and
Tax Rent per month payable pursuant to this Section 5 for each calendar year
promptly following Sublandlord's receipt of Master Landlord's estimate or any
revised estimate of the Operating Cost Rent and Tax Rent payable under the
Master Lease. Within five (5) days after receiving Sublandlord's estimate,
Subtenant shall pay to Sublandlord one-twelfth (1/12th) of the estimate,
multiplied by the number of months that have elapsed in the applicable year to
tie date of such payment including the current month minus payments previously
made by Subtenant for the months elapsed. On the first day of each month
thereafter, Subtenant shall pay Sublandlord one-twelfth (1/12th) of this
estimate until a new estimate becomes applicable. The estimates of the
Operating Cost Rent and Tax Rent shall be reconciled with the actual Operating
Cost Rent and Tax Rent in accordance with Section 2.B. of the Master Lease.
6. SECURITY DEPOSIT. Concurrently with execution of this
Sublease, Subtenant shall deliver to Sublandlord as security for the faithful
performance of all its obligations hereunder a security deposit in the amount of
$98,364.74 for the benefit of Sublandlord and any successor in interest of
Sublandlord (the "Security Deposit"). If Subtenant is in default, Sublandlord
may, but without obligation to do so, use the Security Deposit, or any portion
thereof, to cure the default or to compensate Sublandlord for all damages
sustained by Sublandlord resulting from Subtenant's default. Subtenant shall
immediately on demand pay to Sublandlord a sum equal to the portion of the
Security Deposit so applied or used so as to replenish the amount of the
Security Deposit held to increase such deposit to the amount initially deposited
with Sublandlord. As soon as practical after the termination of this Sublease,
Sublandlord shall return the Security Deposit to Subtenant, less such amount as
is reasonably necessary, as reasonably determined by Sublandlord, to remedy
Subtenant's default(s) hereunder or to otherwise restore the Sublet Premises to
a clean and safe condition, reasonable wear and tear excepted. If the cost to
restore the Sublet Premises exceeds the amount of the Security Deposit,
Subtenant shall promptly deliver to Sublandlord such excess sum as is reasonably
determined by Sublandlord. Sublandlord shall not be required to keep the
Security Deposit separate from other funds and Subtenant shall not be entitled
to interest on the Security Deposit. In no event or circumstance shall Subtenant
have the right to any use of the Security
3
<PAGE>
Deposit and, specifically, Subtenant may not use the Security Deposit as a
credit or to otherwise offset any payments required hereunder, including, but
not limited to, Rent.
7. USE. The Sublet Premises shall be used and occupied only for
general office use and light assembly in the laboratory space and for no other
use or purpose without the prior written consent of Sublandlord. Subtenant shall
use the Sublet Premises in accordance with Section 6 of the Master Lease, as
incorporated herein.
8. PARKING. Subtenant shall be entitled to use one hundred
seventy (170) unreserved parking spaces for the Term of this Sublease at no
additional charge.
9. MASTER LEASE
9.1 COMPLIANCE WITH MASTER LEASE
(a) Subtenant acknowledges that Subtenant has
reviewed and is familiar with all of the terms, agreements, covenants and
conditions of the Master Lease.
(b) This Sublease is and shall be at all times
be subject and subordinate to the Master Lease. Subject to Section 9.3,
Sublandlord agrees to (i) maintain the Master Lease during the term of this
Sublease, (ii) pay all Rent required under the Master Lease in accordance with
its terms, and (iii) to perform all of its obligations under the Master Lease
that Subtenant has not assumed under this Sublease. Notwithstanding the
foregoing sentence, Sublandlord shall not be liable to Subtenant for any early
termination of the Master Lease unless such early termination is due to
Sublandlord's breach under the Master Lease.
(c) Under Section 17 of the Master Lease,
Sublandlord must obtain the consent of Master Landlord to this Sublease. This
Sublease shall not be effective unless, within fifteen (15) days after the
execution of this Sublease by Subtenant and Sublandlord, Master Landlord signs
and delivers to Sublandlord and Subtenant a consent to this Sublease. In the
event that Master Landlord does not deliver such consent, this Sublease shall
terminate, the Security Deposit shall be refunded to Subtenant, and neither
party shall have any liability to the other for anything arising out of or
connected with this Sublease.
(d) Subtenant agrees that it will occupy the
Sublet Premises in accordance with the terms of the Master Lease and perform
and comply with, for the benefit of Sublandlord and Master Landlord, the
obligations of Sublandlord under the Master Lease which pertain to the Sublet
Premises of this Sublease, other than the payment of Rent. Subtenant will not
suffer to be done or omit to do any act which may result in a violation of or
a default under any of the terms and conditions of the Master Lease,
including without limitation surrendering possession of the Sublet Premises
to Sublandlord no later than the expiration or termination date of the
Sublease, or render Sublandlord liable for any damage, charges or expenses
thereunder.
4
<PAGE>
(e) Subtenant further covenants and agrees to
indemnify Sublandlord against and hold Sublandlord harmless from any claim,
demand, action, proceeding, suit, liability, loss, judgement, expense
(including, but not limited to, reasonable attorney's fees) and damage
(collectively, "Loss") of any kind or nature whatsoever arising out of, by
reason of, or resulting from, Subtenant's failure to perform or observe any of
the terms and conditions of the Master Lease or this Sublease, unless such Loss
arises out of or results from the negligence or willful misconduct of
Sublandlord.
9.2 INCORPORATION OF PROVISIONS OF MASTER LEASE
(a) The terms, conditions and respective
obligations of Sublandlord and Subtenant to each other under this Sublease shall
be the terms and conditions of the Master Lease except for those provisions of
the Master Lease which are directly contradicted by this Sublease, in which
case, as between Sublandlord and Subtenant, the terms of this Sublease shall
control over the Master Lease. Therefore, wherever in the Master Lease the word
"Landlord" is used it shall be deemed to mean Sublandlord, wherever in the
Master Lease the word "Tenant" is used it shall be deemed to mean Subtenant, and
wherever in the Master Lease the word "Lease" is used it shall be deemed to mean
this Sublease.
(b) Except as otherwise expressly set forth
herein, the time limits contained in the Master Lease for the giving of notices,
making of demands or performing of any act, condition or covenant on the part of
the tenant thereunder, or for the exercise only the tenant thereunder of any
right, remedy or option, are changed for the purposes of incorporation herein by
reference by shortening the same in each instance by two (2) business days, so
that in each instance Subtenant shall have two (2) business days less time to
observe or perform hereunder that Sublandlord has as the tenant under the Master
Lease.
(c) Except as otherwise expressly set forth
herein, the time limits contained in the Master Lease for the giving of notices,
making of demands or performing of any act, condition or covenant to be
performed by Sublandlord on the part of Master Landlord, or for the exercise by
Sublandlord on behalf of Master Landlord of any right, remedy or option, are
changed for the purposes of incorporation herein by reference by adding two (2)
business days in each instance, so that in each instance Sublandlord shall have
two (2) additional business days to observe or perform hereunder than Master
Landlord has under the Master Lease.
(d) Any non-liability, release, indemnity or
hold harmless provision in the Master Lease for the benefit of Master Landlord
shall be deemed to inure to the benefit of Sublandlord, Master Landlord, or any
other person intended to be benefitted by said provision.
(e) Any right of Master Landlord under the
Master Lease of access or inspection and any right of Master Landlord under the
Master Lease to do work in the Sublet
5
<PAGE>
Premises or in the Building and any right of Master Landlord under the Master
Lease in respect of rules and regulations shall be deemed to inure to the
benefit of Sublandlord, Master Landlord, and any other person intended to be
benefitted by said provision.
(f) In all provisions of the Master Lease (under
the terms thereof and without regard to modifications thereof for purposes of
incorporation into this Sublease) requiring the approval or consent of Master
Landlord, Subtenant shall be required to obtain the approval or consent of both
Sublandlord and Master Landlord. Sublandlord shall not unreasonably withhold or
delay any approval or consent hereunder or under the Master Lease and shall use
its reasonable efforts to assist Subtenant in Obtaining any consent that
Subtenant desires to obtain from Master Landlord.
(g) In all provisions of the Master Lease (under
the terms thereof and without regard to modifications thereof for purposes of
incorporation into this Sublease) requiring the tenant to submit, exhibit,
supply or provide to Master Landlord evidence, certificates, or any other matter
or thing, Subtenant shall be required to submit, exhibit, supply or provide to,
as the case may be, the same to both Master Landlord and Sublandlord.
(h) In all provisions of the: Master Lease
(under the terms thereof and without regard to modifications thereof for
purposes of incorporation into this Sublease) requiring the tenant to designate
Master Landlord as an additional or named insured on its insurance policy,
Subtenant shall be required to so designate Master Landlord and Sublandlord on
its insurance policy and shall provide Master Landlord and Sublandlord with a
copy of such policy.
9.3 TERMINATION OF MASTER LEASE. Sublandlord is currently
negotiating with Master Landlord to terminate the Master Lease (the "Negotiated
Termination"). If the conditions to the Negotiated Termination are fulfilled and
the Master Lease is terminated in accordance therewith, Sublandlord shall be
obligated, among other things, to (i) pay to Master Landlord $450,000 as part of
a lease termination fee on January 1, 2001, and (ii) vacate the Premises on or
before April 30, 2001. Subtenant agrees that, if the Master Lease is terminated
in accordance with the Negotiated Termination, then: (x) on or before April 30,
2001, Subtenant shall pay $450,000 to Sublandlord as reimbursement for the lease
termination fee, and (y) this Sublease shall terminate effective as of and
Subtenant shall vacate the Premises on or before April 30, 2001. If Subtenant
does not vacate the Premises on or before April 30, 2001, then Subtenant shall
be obligated to pay holdover Rent in the amount of 200% of the Rent then due and
payable under this Sublease. If the Master Lease is not terminated pursuant to
the Negotiated Termination and Sublandlord elects to enter into a sublease for
the remainder of the Premises, then Subtenant shall have the right to approve
any such subtenant, which approval shall not be unreasonably withheld.
6
<PAGE>
9.4 MASTER LANDLORD'S OBLIGATIONS
(a) Subtenant agrees that Sublandlord shall not
be required to perform any of the covenants, agreements or obligations of Master
Landlord under the Master Lease and, insofar as any of the covenants, agreements
and obligations of Sublandlord hereunder are required to be performed under the
Master Lease by Master Landlord, Subtenant acknowledges and agrees that
Sublandlord shall be entitled to look to Master Landlord to perform such
covenants, agreements and obligations thereunder. Notwithstanding the foregoing,
Sublandlord shall, upon Subtenant's written request, use reasonable efforts to
obtain Master Landlord's performance of such covenants, agreements and
obligations thereunder.
(b) Sublandlord shall not be responsible for any
failure or interruption, for any reason whatsoever, of the services or
facilities that may be appurtenant to or supplied at the Building by Master
Landlord or otherwise, including, without limitation, heat, air conditioning,
ventilation, life-safety, water, electricity, elevator service and cleaning
service, if any; and no failure to furnish, or interruption of, any such
services of facilities shall give rise to any (i) abatement, diminution or
reduction of Subtenant's obligations under this Sublease, or (ii) liability on
the part of Sublandlord unless it is a direct result of negligence or willful
misconduct on the part of Sublandlord. Notwithstanding the foregoing,
Sublandlord shall take such action as may reasonably be indicated, under the
circumstances, to remedy such failure or interruption upon Subtenant's request
to Sublandlord to do so and shall thereafter diligently prosecute such
performance on the part of the Master Landlord.
10. ASSIGNMENT AND SUBLETTING. Subtenant shall not assign this
Sublease or sublet all or any portion of the Sublet Premises without the prior
written consent of Sublandlord and Master Landlord. Sublandlord shall not
unreasonably withhold or delay its consent and shall use reasonable efforts to
assist Subtenant in obtaining any such consents from Master Landlord. Subtenant
shall reimburse Sublandlord for all reasonable costs and expenses (including
without limitation attorney's fees) incurred by Sublandlord in connection with
Subtenant's assignment or subletting of this Sublease or any interest therein.
11. INDEMNIFICATION
11.1 INDEMNIFICATION. Subtenant shall indemnify, defend
and hold harmless Sublandlord from and against all Losses which Sublandlord may
incur or pay out (including, without limitation, to Master Landlord) by reason
of (a) any accidents, damages or injuries to persons or property occurring in,
on or about the Sublet Premises, (b) any breach or default hereunder on the
Subtenant's part, (c) the successful enforcement of Sublandlord's rights under
this Section or any other Section of this sublease, (d) any work done after the
date hereof in or to the Sublet Premises except if done by Sublandlord or Master
Landlord, or (e) any act, omission or negligence on the part of the Subtenant or
its officers, partners, employees, agents, customers and/or invitees, or any
person claiming through or under Subtenant. Notwithstanding the foregoing,
Subtenant shall not be
7
<PAGE>
obligated to indemnify Sublandlord against any Loss which has been caused by the
negligence or wrongful act of Sublandlord or Master Landlord.
11.2 LIMITATION OF SUBLANDLORD'S LIABILITY. Sublandlord
shall not be liable for personal injury or property damage to Subtenant, its
officers, agents employees, invitees, guests, licensees or any other person in
the Sublet Premises, except to the extent caused by the negligence or willful
misconduct of Sublandlord. Any property of Subtenant kept or stored in the
Sublet Premises shall be kept or stored at the sole risk of Subtenant.
12. NOTICES. Any notice by either party to the other required,
permitted or provided for herein shall be valid only if in writing and shall be
deemed to be duly given only if (a) delivered personally, or (b) sent by means
of Federal Express, UPS Next Day Air or other reputable express mail delivery
service guaranteeing next day delivery, or (c) sent by United States Certified
or registered mail, return receipt requested, addressed to the following
address:
If to Subtenant: Jaycor, Inc.
9775 Towne Centre Drive
San Diego, CA 92121
Attn: Randy Johnson
Telephone: (858) 535-3129
Facsimile: (858) 452-0108
If to Sublandlord: JNI Corporation
9775 Towne Centre Drive
San Diego, CA 92121
Attn: Gloria Purdy
Telephone: (858) 552-3588
Facsimile: (858) 552-1428
or at such other address for either party as that party may designate by notice
to the other. A notice shall be deemed given and effective, if delivered
personally upon hand delivery thereof (unless such delivery takes place after
hours or on a holiday or weekend, in which event the notice shall be deemed
given on the next succeeding business day), if sent via overnight courier, on
the business day next succeeding delivery to the courier, and if mailed by
United States certified or registered mail, three (3) business days following
such mailing in accordance with this Section.
13. ATTORNEY'S FEES. If Sublandlord or Subtenant brings action to
enforce the terms hereof or to declare rights hereunder, the prevailing party
who recovers substantially all of the damages, equitable relief or other remedy
sought in any such action on trial and appeal shall be entitled to its
reasonable attorney's fees to be paid by the losing party as fixed by the Court.
8
<PAGE>
14. BROKERS. Each party represents and warrants that it has dealt
with no brokers in connection with this Sublease, and each party shall
indemnify, protect, defend and hold the other party harmless from all costs and
expenses (including reasonable attorney's fees) arising from or relating to any
claims to the contrary.
15. COMPLETE AGREEMENT. There are no representations, warranties,
agreements, arrangements, or understandings, oral or written, between the
parties or their representatives relating to the subject matter of this
Sublease. This Sublease cannot be amended or terminated nor may any of its
provisions by waived orally or in any manner other than by a written agreement
executed by both parties.
16. COUNTERPARTS. This Sublease may be executed in separate
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same instrument. This Sublease shall be
fully executed when each party whose signature is required has signed and
delivered to each of the parties at least one counterpart, even though no
single counterpart contains the signatures of all parties hereto.
17. EFFECTIVE DATE. Subject to Section 9.1(c), this Sublease
shall be effective on the Commencement Date, at which time the Original Sublease
shall cease to be of any force or effect. Until this Sublease is effective, the
Original Sublease shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto hereby execute this Sublease as
of the day and year first above written
JAYCOR, INC., a California corporation JNI CORPORATION., a Delaware
corporation
By: /s/ Randy Johnson By: /s/ Thomas Gregory
----------------------------------- --------------------------------
Name: Randy Johnson Name: Thomas Gregory
--------------------------------- ------------------------------
Title: VP-Finance/CFO Title: Chief Operating Officer
-------------------------------- -----------------------------
By: By:
----------------------------------- --------------------------------
Name: Name:
--------------------------------- ------------------------------
Title: Title:
-------------------------------- -----------------------------
9
<PAGE>
FIRST AMENDMENT TO LEASE AND CONSENT TO SUBLEASE
THIS FIRST AMENDMENT TO LEASE AND CONSENT TO SUBLEASE (this "FIRST
AMENDMENT") is made as of this 4th day of April, 2000, by and among CARRAMERICA
REALTY, L.P., a Delaware limited partnership ("LANDLORD"), JAYCOR, INC., a
California corporation ("TENANT"), and JNI CORPORATION, a Delaware corporation
("SUBTENANT").
RECITALS
A. Landlord and Tenant are parties to that certain Lease dated as
of September __, 1998 (the "LEASE"), pursuant to the terms of which Landlord
leased to Tenant and Tenant leased from Landlord the Premises (as defined in the
Lease) located at 9775 Towne Centre Drive, San Diego, California. Except as
otherwise defined herein, all capitalized terms used herein shall have the
meanings ascribed to the same in the Lease. References to "THE LEASE" or "THIS
LEASE" in this First Amendment shall mean and refer to the Lease, as amended by
this First Amendment.
B. Tenant desires to sublease to Subtenant a portion of the
Premises (the "SUBLEASED PREMISES") more particularly described in and pursuant
to the provisions of that certain Amended and Restated Sublease Agreement dated
as of February 12, 2000 (the "SUBLEASE"), a copy of which is attached hereto as
EXHIBIT C.
C. Tenant has also requested that Landlord agree to terminate the
Lease.
D. Landlord has agreed to consent to the Sublease and to
terminate the Lease on the terms and conditions hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants hereinafter set
forth, and for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto for themselves, their
successors and assigns, hereby covenant and agree as follows:
1. SURRENDER OF NORTH WING. Subject to the provisions of SECTION
6 below, effective August 31, 2000 (the "NORTH WING EFFECTIVE DATE"), Tenant
shall surrender the three story, approximately 34,592 rentable square foot north
wing of the Premises as more particularly described on EXHIBIT A attached hereto
and incorporated herein (the "NORTH WING") to Landlord and give, grant and
surrender unto Landlord all of Tenant's right, title and interest in and to the
North Wing. Tenant shall surrender the North Wing in the condition required
pursuant to SECTION 3 of the Lease.
2. SURRENDER OF SOUTH WING. Subject to the provisions of
SECTION 6 below, effective April 30, 2001 (the "SOUTH WING EFFECTIVE DATE"),
Tenant and Subtenant shall surrender the balance of the Premises containing
approximately 70,766 rentable square feet as more particularly described on
EXHIBIT B attached hereto and incorporated herein (the "SOUTH WING") to
Landlord and give, grant and surrender unto Landlord all of Tenant's right,
title and interest in and to the South Wing. Landlord and Tenant hereby agree
that, effective on the South Wing Effective Date, the Lease shall terminate
and, except for terms thereof which survive the termination thereof and
hereof,
<PAGE>
the Lease shall be of no further force and effect. Tenant shall surrender the
South Wing in the condition required pursuant to SECTION 3 of the Lease.
3. RENT. Without limiting the provisions of SECTION 9 or any
of the terms of the Lease, commencing on the North Wing Effective Date (i)
the Base Rent due under the Lease shall be Base Rent for the South Wing in
the amount of $1.394 per rentable square foot per month until October 31,
2000; thereafter, and continuing until the South Wing Effective Date, Base
Rent shall increase to $1.429 per rentable square foot per month, and (ii)
Tenant shall thereafter be responsible for 67% (and not 100%) of Operating
Costs and Taxes under the Lease. Notwithstanding the foregoing and provided
Tenant's usage of utilities is substantially the same before and after the
North Wing Effective Date, in no event shall Tenant be obligated to pay
utility expenses for the South Wing, as calculated on a per square foot
basis, which exceed the utility expenses, as calculated on a per square foot
basis, that Tenant is obligated to pay before the North Wing Effective Date.
Notwithstanding anything to the contrary contained in the
Lease, Landlord shall have the right at any time, if Landlord so elects, to
remeasure the rentable square footage of the South Wing. The results of any such
remeasurement by Landlord shall be conclusively deemed to be the actual square
footage of the South Wing and Base Rent and Tenant's share of Operating Costs
and Taxes for the South Wing shall be adjusted based on the results of such
remeasurement.
4. ADDITIONAL RENT. In the event any Additional Rent due under
the Lease shall not have been determined as of the South Wing Effective Date,
Tenant shall remain liable for such amount and shall pay the same within
thirty (30) days after the rendition of a bill or statement therefor given by
Landlord. This covenant shall survive the termination of the Lease.
Notwithstanding the foregoing, on the date that is eighteen (18) months after
the termination of the Lease, Tenant's obligation to pay any Operating Cost
Rent and Tax Rent for which Landlord did not bill Tenant prior to the
expiration of such eighteen (18) month period shall terminate and Tenant
shall not be liable for any such Operating Cost Rent and Tax Rent.
5. TERMINATION FEE. In consideration of the agreements set
forth herein, Tenant shall pay to Landlord a nonrefundable fee in the sum of
One Million One Hundred Fifty Thousand Dollars ($1,150,000) in immediately
available funds as a "LEASE TERMINATION FEE." The Lease Termination Fee shall
be paid as follows: Seven Hundred Thousand Dollars ($700,000) on or before
May 1, 2000, and Four Hundred Fifty Thousand Dollars ($450,000) on or before
January 1, 2001. The Lease Termination Fee shall not be applied towards or
credited against any of Tenant's obligations under the Lease. The obligation
to pay the Lease Termination Fee shall survive the termination of the Lease.
6. NEW LEASE. Landlord and Tenant expressly acknowledge and
agree that this First Amendment, and the termination of the Lease
contemplated herein, shall be subject to the conditions precedent that (i) on
or before March 31, 2000, Landlord shall have entered into a new lease for
the entire Premises with Gateway, Inc., or any of its affiliates ("GATEWAY")
on terms and conditions acceptable to Landlord in its sole and absolute
discretion (the "REPLACEMENT LEASE"), and (ii) on or before April 30, 2000,
Gateway shall have received a duly executed Nondisturbance and
2
<PAGE>
Attornment Agreement from Union Bank of California in form and content
acceptable to Gateway (the "NONDISTURBANCE AGREEMENT"). In the event that
either (a) Landlord fails to enter into the Replacement Lease on or before
such date (as such date may be extended by Landlord in its sole and absolute
discretion upon written notice to Tenant to a date no later than April 30,
2000), or (b) Gateway fails to receive the Nondisturbance Agreement on or
before April 30, 2000, then the provisions of SECTIONS 1 through 5, 8 and 9
of this First Amendment shall be of no force or effect.
7. USE OF PREMISES. In addition to the uses set forth in SECTION
6 of the Lease, Tenant and Subtenant may conduct light assembly in the
laboratory space on the ground floor of the Premises. Notwithstanding anything
to the contrary contained in the Lease, Tenant shall be responsible for ensuring
that its use of the Premises complies with all Governmental Regulations
applicable to the Project including, without limitation, zoning and other laws,
rules and regulations.
8. CONSTRUCTION. Tenant acknowledges and agrees that, after the
North Wing Effective Date, Landlord intends to commence construction activities
at the Project. The construction activities may include, among other things,
construction of the North Wing, the parking lot, the footbridge and reskinning
the Building. Landlord shall keep Tenant reasonably informed of any such
activities which may impact Tenant including providing Tenant with at least ten
(10) days written notice of any anticipated power or utility interruptions as a
result of such construction. Any disturbance caused by such construction will be
considered part of the consideration for this First Amendment; provided that
Landlord shall use its best efforts, without any obligation to incur increased
construction costs or to cause the construction to be performed after normal
working hours, to minimize any disturbance to Tenant from such construction.
Landlord shall remove all construction debris on a daily basis and shall keep
the construction area in as clean and safe condition as possible given such
construction. Representatives from Landlord will be available to meet with
Tenant on a weekly basis to discuss the progress of the construction and any
concerns that Tenant may have regarding such construction.
9. HOLDOVER. Tenant acknowledges and agrees that time is of the
essence in connection with Tenant's compliance with its obligations under
SECTIONS 1 and 2 of this First Amendment. Notwithstanding anything to the
contrary contained in the Lease, if Tenant retains possession of any part of the
North Wing after the North Wing Effective Date or the South Wing after the South
Wing Effective Date, Tenant shall become a tenant at sufferance upon all the
terms of the Lease as might be applicable, except that Tenant shall pay all Base
Rent, Operating Cost Rent and Tax Rent at 200% of the rate in effect
immediately prior to such holdover (or the rate that would be in effect if the
Lease term were then in effect, whichever is greater), computed on a monthly
basis for each full or partial month Tenant remains in possession. Tenant shall
also pay Landlord all of Landlord's direct, indirect and consequential damages
incurred as a result of such holdover by Tenant, including, without limitation,
any damages, costs or amounts incurred by Landlord in connection with the
Replacement Lease.
10. ASSIGNMENT. Except for the Sublease, Tenant represents and
warrants that Tenant has not assigned, mortgaged, pledged, encumbered or
otherwise transferred any interest in the Lease.
3
<PAGE>
11. CONSENT. Landlord consents to the Sublease subject to the
following conditions:
(a) Landlord neither approves nor disapproves the terms,
conditions and agreements contained in the Sublease, all of which shall be
subordinate and at all times subject to (i) all of the covenants, agreements,
terms, provisions and conditions contained in the Lease, (ii) superior ground
leases, mortgages, deeds of trust, or any other hypothecation or security now
existing or hereafter placed upon the real property of which the Premises are a
part and to any and all advances secured thereby and to all renewals,
modifications, consolidations, replacements and extensions thereof, and (iii)
all matters of record affecting the Premises and all laws, ordinances and
regulations now or hereafter affecting the Premises.
(b) Except as otherwise provided in this First Amendment, nothing
contained herein or in the Sublease shall be construed to modify, waive, impair,
or affect any of the terms, covenants or conditions contained in the Lease
(including Tenant's obligation to obtain any required consents for any other or
future sublettings), or to waive any breach thereof, or any rights or remedies
of Landlord under the Lease against any person, firm, association or corporation
liable for the performance thereof, or to enlarge or increase Landlord's
obligations or liabilities under the Lease (including, without limitation, any
liability to Subtenant for any portion of the security deposit held by Tenant
under the Sublease), and all terms, covenants and conditions of the Lease are
hereby declared by each of Landlord and Tenant to be in full force and effect.
(c) Nothing contained herein or in the Sublease shall be construed
to require Landlord to accept any payments from Subtenant on behalf of Tenant.
(d) Nothing contained herein or in the Sublease shall be construed
to be Landlord's consent to any other subletting between Tenant and Subtenant,
or consent to any extension of the term of the Sublease.
(e) Tenant shall remain liable and responsible for the due
keeping, performance and observance of all the terms, covenants and conditions
set forth in the Lease on the part of the Tenant to be kept, performed and
observed and for the payment of the annual rent, additional rent and all other
sums now and hereafter becoming payable thereunder for all of the Premises,
including, without limitation, the Subleased Premises.
(f) Notwithstanding anything in the Sublease to the contrary,
Subtenant does hereby expressly assume and agree to be bound by and to perform
and comply with, for the benefit of Landlord, each and every obligation of
Tenant under the Lease to the extent applicable to the Subleased Premises. With
respect to property insurance, Landlord and Subtenant mutually waive all rights
of subrogation, and the respective "All-Risk" coverage property insurance
policies carried by Landlord and Subtenant shall contain enforceable waiver of
subrogation endorsements.
(g) Notwithstanding anything in the Sublease to the contrary,
Tenant and Subtenant agree to each of the terms and conditions of this First
Amendment, and upon any conflict between the terms of the Sublease and this
First Amendment, the terms of this First Amendment shall control.
4
<PAGE>
(h) Notwithstanding anything in the Sublease to the contrary, the
Sublease shall be deemed and agreed to be a sublease only and not an assignment
and there shall be no further subletting or assignment of all or any portion of
the Premises demised under the Lease (including the Subleased Premises demised
by the Sublease) except in accordance with the terms and conditions of the
Lease.
(i) Tenant and Subtenant acknowledge and agree that if Tenant or
Landlord elects to terminate the Lease pursuant to the terms thereof or this
First Amendment, Landlord shall have no responsibility, liability or obligation
to Subtenant, and the Sublease shall terminate.
(j) Any act or omission of Subtenant or anyone claiming under or
through Subtenant that violates any of the provisions of the Lease shall be
deemed a violation of the Lease by Tenant.
(k) Upon a default by Tenant under the Lease, Landlord may proceed
directly against Tenant, any guarantors or anyone else liable under the Lease or
Sublease without first exhausting Landlord's remedies against any other person
or entity liable thereon to Landlord. If Landlord gives Subtenant notice that
Tenant is in default under the Lease, Subtenant shall thereafter make directly
to Landlord all payments otherwise due Tenant, which payments will be received
by Landlord without any liability to Landlord except to credit such payments
against amounts due under the Lease. The mention in this First Amendment of any
particular remedy shall not preclude Landlord from any other remedy in law or in
equity.
(l) Tenant shall pay any broker commissions or fees that may be
payable as a result of the Sublease and Tenant hereby indemnifies and agrees to
hold Landlord harmless from and against any loss or liability arising therefrom
or from any other commissions or fees payable in connection with the Sublease
which result from the actions of Tenant. Subtenant hereby indemnifies and agrees
to hold Landlord harmless from and against any loss or liability arising from
any commissions or fees payable in connection with the Sublease which result
from the actions of Subtenant.
(m) Tenant and Subtenant agree that the Sublease will not be
modified or amended in any way without the prior written consent of Landlord,
which consent shall not be unreasonably withheld or delayed. Tenant and
Subtenant hereby agree that it shall be reasonable for Landlord to withhold its
consent to any modification or amendment of the Sublease which would change the
permitted use of the Subleased Premises. Any modification or amendment of the
Sublease without Landlord's prior written consent shall be void and of no force
or effect.
12. EFFECT OF THIS FIRST AMENDMENT. Except as amended and/or
modified by this First Amendment, the Lease is hereby ratified and confirmed
and all other terms of the Lease shall remain in full force and effect,
unaltered and unchanged by this First Amendment. In the event of any conflict
between the provisions of this First Amendment and the provisions of the
Lease, the provisions of this First Amendment shall prevail. Whether or not
specifically amended by this First Amendment, all of the terms and provisions
of the Lease are hereby amended to the extent necessary to give effect to the
purpose and intent of this First Amendment.
5
<PAGE>
13. MISCELLANEOUS. All obligations of Tenant under the Lease
which by the terms of the Lease survive the termination of the Lease and,
subject to the eighteen (18) month limitation contained in SECTION 4 of this
First Amendment with respect to Operating Cost Rent and Tax Rent, the
obligation to pay Additional Rent as set forth in SECTION 4 of this First
Amendment shall survive the North Wing Effective Date and South Wing
Effective Date until fully performed by Tenant in accordance with the terms
of the Lease and this First Amendment. Any notice given under this First
Amendment shall be delivered in accordance with the provisions for the giving
of notice in the Lease. This First Amendment contains all of the agreements
of the parties hereto with respect to termination of the Lease as provided
herein, and no prior agreement, arrangement or understanding pertaining to
termination of the Lease shall be effective for any purpose. This First
Amendment shall inure to the benefit of and shall be binding upon the parties
and their respective successors and assigns. The parties agree to execute
such other documents and perform such other acts as may be reasonably
necessary or desirable to effectuate the intent and purpose of this First
Amendment. This First Amendment shall be governed by and construed in
accordance with the laws of the State of California. Each of the parties to
this First Amendment represents and warrants that it is duly authorized to
execute and deliver this First Amendment and that this First Amendment does
not constitute a violation or breach of any agreement or instrument
heretofore executed by such party. This First Amendment may be executed in
counterparts, each of which shall constitute an original, but which taken
together shall constitute one and the same instrument.
[Signatures are on the next page.]
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this First
Amendment the date and year first above written.
Landlord:
CARRAMERICA REALTY, L.P.,
a Delaware limited partnership
By: CarrAmerica Realty GP Holdings, Inc.,
a Delaware corporation,
its general partner
By: /s/ Philip L. Hawkins
----------------------------------
Name: Philip L. Hawkins
--------------------------------
Title: Executive Vice President
-------------------------------
Tenant:
JAYCOR, INC.,
a California corporation
By: Eric P. Wenaas
--------------------------------------
Name: /s/ Eric P. Wenaas
------------------------------------
Title: President and CEO
-----------------------------------
Subtenant:
JNI CORPORATION,
a Delaware corporation
By: /s/ Thomas Gregory
--------------------------------------
Name: Thomas Gregory
------------------------------------
Title: COO
-----------------------------------
Guarantor acknowledges and agrees to the terms of this First Amendment and
reaffirms its obligations under that certain Guaranty of Lease dated September
29, 1998. Executed as of the date and year first above written.
JAYMARK, INC.,
a Delaware corporation
By: /s/ Randy Johnson
-----------------------------------
Name: Randy Johnson
---------------------------------
Title: Chief Financial Officer
--------------------------------
7
<PAGE>
EXHIBIT A
NORTH WING
[ATTACHED]
<PAGE>
[Floor Plan of North Wing]
<PAGE>
[Floor Plan of North Wing]
<PAGE>
[Floor Plan of North Wing]
<PAGE>
EXHIBIT B
SOUTH WING
[ATTACHED]
<PAGE>
[Floor Plan of South Wing]
<PAGE>
[Floor Plan of South Wing]
<PAGE>
[Floor Plan of South Wing]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,390
<SECURITIES> 40,209
<RECEIVABLES> 10,445
<ALLOWANCES> 560
<INVENTORY> 5,305
<CURRENT-ASSETS> 60,887
<PP&E> 6,940
<DEPRECIATION> 1,938
<TOTAL-ASSETS> 75,905
<CURRENT-LIABILITIES> 9,272
<BONDS> 0
0
0
<COMMON> 23
<OTHER-SE> 66,497
<TOTAL-LIABILITY-AND-EQUITY> 75,905
<SALES> 18,477
<TOTAL-REVENUES> 18,477
<CGS> 7,347
<TOTAL-COSTS> 7,347
<OTHER-EXPENSES> 5,536
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,136
<INCOME-TAX> 812
<INCOME-CONTINUING> 1,620
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,324
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.05
</TABLE>
