<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 2000
REGISTRATION NO. 333-48874
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SNAP APPLIANCES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 3572 77-0188708
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2001 LOGIC DRIVE
SAN JOSE, CALIFORNIA 95124
(408) 232-6831
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
JEANNE SEELEY
CHIEF FINANCIAL OFFICER
SNAP APPLIANCES, INC.
2001 LOGIC DRIVE
SAN JOSE, CALIFORNIA 95124
(408) 232-6831
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
STEVE BOCHNER, ESQ. SUZANNE SAWOCHKA HOOPER, ESQ.
WILSON SONSINI GOODRICH & ROSATI COOLEY GODWARD LLP
PROFESSIONAL CORPORATION FIVE PALO ALTO SQUARE
650 PAGE MILL ROAD 3000 EL CAMINO REAL
PALO ALTO, CA 94304 PALO ALTO, CA 94306
(650) 493-9300 (650) 843-5000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C>
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM
AGGREGATE OFFERING
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED PRICE(1) AMOUNT OF REGISTRATION FEE(2)
--------------------------------------------------------------------------------------------------------------
Common Stock $0.001 par value..................... $100,000,000 $26,400
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) promulgated under the Securities Act of 1933, as
amended.
(2)$26,400 previously paid estimated solely for the purpose of calculating the
amount of the registration pursuant to Rule 457(a)
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVENESS UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 2000
PROSPECTUS
SHARES
[SNAP APPLIANCES, INC. LOGO]
COMMON SHARES
----------------------
This is Snap Appliances, Inc.'s initial public offering of common shares.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for our shares. After pricing of this
offering, we expect that the shares will trade on the Nasdaq National Market
under the symbol "SNPA."
INVESTING IN THE COMMON SHARES INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 5 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Snap.......................... $ $
</TABLE>
The underwriters may also purchase up to an additional common
shares from Snap at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The common shares will be ready for delivery on or about ,
2000.
----------------------
MERRILL LYNCH & CO. SALOMON SMITH BARNEY
CHASE H&Q
----------------------
The date of this prospectus is , 2000
<PAGE> 3
Inside Front Cover
EDGAR DESCRIPTION OF INSIDE FRONT COVER ART
The page is divided into four quadrants. Appearing in the top left hand
quadrant is a picture of the Snap Server 1000. Appearing in the top right hand
quadrant is a picture of the Snap Server 2000. Appearing in the lower left hand
quadrant is a picture of the Snap Server 4100. In the lower right hand quadrant
appears the following text:
"Plug it in . . .
turn it on . . .
add storage
in a
Snap!"
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 1
Risk Factors................................................ 5
Forward-Looking Statements.................................. 17
Our Separation From Quantum................................. 18
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Financial Data..................................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 24
Business.................................................... 33
Management.................................................. 44
Related Party Transactions.................................. 55
Arrangements Between Snap and Quantum....................... 56
Principal Stockholder....................................... 65
Description of Capital Stock................................ 66
Shares Eligible for Future Sale............................. 68
Underwriting................................................ 69
Legal Matters............................................... 72
Change in Independent Accountants........................... 72
Experts..................................................... 72
Where You Can Find More Information......................... 72
Index to Financial Statements............................... F-1
</TABLE>
----------------------
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell, or seeking offers to buy, these
common shares in any jurisdiction where an offer or sale is not permitted. You
should assume that the information appearing in this prospectus is accurate only
as of the date on the front cover of this prospectus. Our business, financial
condition, results of operations and prospects may have changed since that date.
In this prospectus, "Snap," "we," "us" and "our" each refers to Snap
Appliances, Inc., and not the underwriters or Quantum Corporation. "Quantum"
refers to Quantum Corporation and its subsidiaries, excluding Snap.
Snap, our logo and other trademarks of Snap mentioned in this prospectus
are the property of Snap. All other brand names, logos, trademarks or tradenames
referred to in this prospectus are the property of their respective owners.
i
<PAGE> 5
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding our company and the common stock being sold in this
offering and our financial statements and notes thereto included elsewhere in
this prospectus.
SNAP APPLIANCES, INC.
We are the leading provider of network attached storage, or NAS,
solutions for workgroups. Our Snap Server appliances enable our customers to add
additional storage capacity to a network quickly, inexpensively and
conveniently. Unlike general-purpose servers, which are complex and designed to
be used for many types of applications, our Snap Server appliances are designed
and optimized for only one use -- storage.
We sell our Snap Server appliances through a multi-tier distribution
strategy focused on channel partners including distributors, value-added
resellers, or VARs, and catalog resellers. We also have an original equipment
manufacturer, or OEM, relationship with Dell Computer Corporation. Our target
end-users are workgroups within small to large organizations, application
service providers and Internet service providers. We are recognized by PC Data
as the leader in the workgroup NAS market, with an estimated 80% market share.
As of June 30, 2000, we had sold over 25,000 Snap Server appliances.
In the last decade, there has been a dramatic increase in the volume of
data created, processed and accessed throughout organizations. As a result, the
demand for storage capacity has grown exponentially. However, the growing demand
for storage capacity has exposed several limitations in existing storage
architectures, including the limited availability and accessibility of data,
high scalability costs, lack of manageability and interoperability constraints.
To address these limitations, network attached storage was developed. NAS
appliances attach directly to a network and are designed with the sole purpose
of adding storage capacity. Generally, the benefits of NAS include increased
availability, scalability and manageability of data, improved performance and a
low total cost of ownership as compared to existing storage architectures. Some
of the NAS solutions being offered are designed for enterprise level
applications and are not optimal for use at the entry and mid-range levels,
including workgroups. Additionally, many of the existing NAS solutions can
operate only with certain network operating systems, may be limited in the
number of users they can support or have reliability constraints. Accordingly,
we believe there is a considerable market opportunity for NAS appliances that
offer the full complement of NAS advantages, but are optimized for use in
workgroups.
Our solution offers a combination of interoperability, reliability, ease
of use and cost-effectiveness. Our operating system is optimized to simplify and
increase the speed of file management. The integration of our operating system
with our specially designed hardware architecture results in a reliable and
cost-effective appliance. Installation of a Snap Server can be completed in less
than five minutes, and our appliances are designed to minimize routine
maintenance costs. Additionally, our Snap Servers are compatible with multiple
operating systems. We believe these features and a low total cost of ownership
make our products the preferred solution for workgroups. Our objective is to
maintain our leadership position in the workgroup NAS market as well as to
expand into other market segments. We intend to achieve this objective by
continuing to offer innovative solutions that provide a compelling value to our
customers, by leveraging our distribution channels to expand our market reach
and by increasing the awareness of NAS solutions for workgroups and the Snap
Server brand.
1
<PAGE> 6
OUR RELATIONSHIP WITH QUANTUM CORPORATION
We are currently a wholly-owned subsidiary of Quantum. After the
completion of this offering, Quantum will own approximately % of the
outstanding shares of our common stock, or approximately % if the
underwriters exercise their over-allotment option in full. In August 1999,
Quantum's common stock was replaced by two classes of tracking stock, the DLT &
Storage Systems, or DSS, group common stock and the Hard Disk Drive, or HDD,
group common stock, which trade on the New York Stock Exchange under the symbols
"DSS" and "HDD," respectively. On October 4, 2000, Quantum announced that Maxtor
Corporation and Quantum had entered into a definitive agreement providing for
the acquisition by Maxtor of all of Quantum's HDD common stock and that, upon
consummation of its acquisition, the remaining DSS group would operate as
Quantum Corporation. Quantum currently intends to complete its divestiture of
Snap approximately six months after this offering by distributing all of the
shares of our common stock owned by Quantum to the holders of Quantum's DSS
common stock. Quantum will determine the timing, structure and all terms of its
distribution of our common stock at its sole discretion, subject to, among other
things, obtaining a private letter ruling from the Internal Revenue Service that
the distribution will be tax free to the holders of Quantum's DSS common stock.
We have entered into a Master Separation and Distribution Agreement with
Quantum that provides for the separation of our business operations from
Quantum. The related forms of ancillary agreements provide for, among other
things, the transfer from Quantum to us of assets and the assumption by us of
liabilities relating to our business and the transfer and licensing to us of
intellectual property related to our business. The assets and liabilities to be
transferred to us are described more fully in our financial statements and notes
to those statements that are included elsewhere in this prospectus. For more
information regarding our separation from Quantum, see "Risk Factors -- Risks
Related to Our Separation from Quantum" and "Arrangements Between Snap and
Quantum."
We were incorporated in California on July 21, 1988 and merged with
Meridian Data, Inc. on December 1, 1994. In April 1997, we reincorporated in
Delaware. We were acquired by Quantum in September 1999. On November 24, 1999,
Meridian changed its name to Quantum Snap Division Corporation. From September
1999 to the time of this offering, we have operated as a wholly-owned subsidiary
of Quantum. In connection with this offering and our separation from Quantum, we
changed our name to Snap Appliances, Inc.
Our principal executive offices are located at 2001 Logic Drive, San
Jose, CA 95124, and our telephone number is (408) 232-6831. Our website is
located at www.snapserver.com. Information contained on our website is not a
part of this prospectus.
2
<PAGE> 7
THE OFFERING
Common shares offered by Snap........... shares
Common shares outstanding after the
offering................................ shares
Common shares held by Quantum after the
offering................................ shares
Use of proceeds......................... We intend to use the net proceeds
from this offering for general
corporate purposes, including
working capital and capital
expenditures. See "Use of
Proceeds."
Risk factors............................ See "Risk Factors" and other
information included in this
prospectus for a discussion of
factors you should carefully
consider before deciding to invest
in our common shares.
Proposed Nasdaq National Market
symbol.................................. SNPA
The number of common shares outstanding after the offering is based on
the number of shares outstanding as of June 30, 2000 and excludes
common shares reserved for issuance under our stock option plans, of which
options to purchase common shares at an average option price of
$ had been issued as of , 2000, and common shares
reserved for issuance under our employee stock purchase plan.
Unless otherwise indicated, the information in this prospectus:
- assumes a 526,500-for-one share split completed on October 25, 2000;
- reflects the effectiveness of our amended and restated certificate of
incorporation upon the consummation of this offering; and
- assumes the underwriters will not exercise their over-allotment option.
3
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The following tables present our summary financial data. On September 9,
1999, we were acquired by Quantum. The summary historical financial data for the
years ended December 31, 1997 and 1998, the period from January 1, 1999 to
September 9, 1999 and the six-months ended June 30, 1999 reflect the operations
of our predecessor, Meridian, prior to our acquisition. The acquisition was
accounted for using the purchase method of accounting. As a result, our results
of operations for periods subsequent to the acquisition are not comparable to
the results of operations for periods prior to our acquisition. Subsequent to
September 9, 1999, our activities were conducted as part of Quantum's overall
operations. Accordingly, our financial statements contain various allocations
for costs and expenses attributable to services provided by Quantum. Therefore,
the statement of operations data may not be indicative of the results of
operations that would have resulted if we had operated on a stand-alone basis.
As adjusted amounts on the balance sheet give effect to our sale of
shares of common stock in this offering at an assumed initial public
offering price of $ per share and after deducting estimated underwriting
discounts and estimated offering expenses payable by us as though the sale had
taken place as of June 30, 2000.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 10,
YEAR ENDED THROUGH THROUGH SIX MONTHS ENDED
DECEMBER 31, SEPTEMBER 9, DECEMBER 31, JUNE 30,
------------------ ------------ ------------- ------------------
1997 1998 1999 1999 1999 2000
------- -------- ------------ ------------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Snap Server product.................................... $ -- $ 2,662 $ 4,043 $ 4,016 $ 2,882 $ 15,422
CD-ROM product......................................... 19,968 14,879 6,943 2,982 5,063 409
------- -------- -------- -------- ------- --------
Total revenue........................................ 19,968 17,541 10,986 6,998 7,945 15,831
------- -------- -------- -------- ------- --------
Cost of revenue:
Product sales.......................................... 9,570 10,090 6,977 4,746 5,187 12,655
Amortization of acquisition related intangibles........ -- -- -- 1,257 -- 2,114
------- -------- -------- -------- ------- --------
Total cost of revenue................................ 9,570 10,090 6,977 6,003 5,187 14,769
------- -------- -------- -------- ------- --------
Gross profit............................................. 10,398 7,451 4,009 995 2,758 1,062
Operating expenses:
Research and development............................... 6,340 5,931 3,425 1,860 2,169 4,823
Selling, general and administrative.................... 13,830 16,039 14,707 5,936 7,178 17,408
Amortization of goodwill and other acquisition-related
intangibles.......................................... -- -- -- 1,146 -- 2,136
Purchased in-process research and development.......... -- -- -- 37,000 -- --
------- -------- -------- -------- ------- --------
Total operating expenses............................. 20,170 21,970 18,132 45,942 9,347 24,367
------- -------- -------- -------- ------- --------
Operating income (loss).................................. (9,772) (14,519) (14,123) (44,947) (6,589) (23,305)
------- -------- -------- -------- ------- --------
Interest and other income................................ 1,994 1,358 441 153 349 40
------- -------- -------- -------- ------- --------
Net income (loss)........................................ $(7,778) $(13,161) $(13,682) $(44,794) $(6,240) $(23,265)
======= ======== ======== ======== ======= ========
Net loss per common share
Basic and diluted(1)................................... -- -- -- $ (0.85) -- $ (0.44)
Weighted average common shares outstanding
Basic and diluted(1)................................... -- -- -- 52,650 -- 52,650
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------
ACTUAL AS ADJUSTED
------- -----------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 2,905
Working capital............................................. 7,968
Total assets................................................ 82,960
Total stockholder's equity.................................. 69,367
</TABLE>
---------------
(1) Basic and diluted net loss per common share and weighted average common
shares outstanding for the periods prior to the date of acquisition of
September 9, 1999 is not presented for Meridian as this information is not
considered to be meaningful.
4
<PAGE> 9
RISK FACTORS
You should carefully consider the risks described below and all of the
information contained in this prospectus before deciding whether to purchase our
common shares. Our business, financial condition and results of operations could
be seriously harmed due to any of the following risks. The trading price of our
common shares could decline, and you may lose all or part of your investment in
our common shares.
RISKS RELATED TO OUR BUSINESS
WE ONLY BEGAN SELLING OUR SNAP SERVER APPLIANCES IN MARCH 1998 AND, AS A RESULT,
YOU MAY HAVE DIFFICULTY EVALUATING OUR BUSINESS AND OPERATING RESULTS.
Our Snap Server appliances are a relatively new line of products for us.
Our previous sales in NAS solutions utilized optical disk CD-ROM technologies.
We no longer sell CD-ROM based products utilizing this technology. In addition,
as a result of becoming an independent company, we may incur costs and other
liabilities that we did not incur as a subsidiary of Quantum.
An investor in our common shares must consider the risks and difficulties
we may encounter as an early stage company in the new and rapidly evolving NAS
market. Our limited historical financial performance associated with our Snap
Server appliances may make it difficult for you to evaluate the success of our
business to date and to assess its future viability. Our Snap Server revenues
grew rapidly in the last quarter of 1999 and have grown rapidly in 2000 to date.
We do not believe that we will maintain this rate of revenue growth, in part
because we started from a small base of Snap Server revenue and it is difficult
to maintain high percentage increases over a larger revenue base. In addition,
growing competition and the incremental manner in which customers implement NAS
appliances could also reduce our revenue growth.
WE HAVE RELIED, AND EXPECT TO CONTINUE TO RELY, ON SALES OF OUR SNAP SERVER
APPLIANCES FOR OUR REVENUE, AND A DECREASE IN SALES OF THESE PRODUCTS COULD
CAUSE OUR REVENUE TO DECLINE.
In the first six months of 2000, substantially all of our revenue was
from sales of our Snap Server appliances. We expect that these products will
continue to account for substantially all of our revenue. In particular, we
recently introduced the Snap Server 4100 and expect that revenue from this
product, together with any new products we introduce, will account for a
substantial portion of our total revenue for the foreseeable future. Any factors
adversely affecting the pricing of, or demand for, our Snap Server appliances,
including competition or technological change, could cause our revenue to
decline and our business to suffer. Factors that may affect the market
acceptance of our products, some of which are beyond our control, include the
following:
- the growth and changing requirements of the NAS appliance market;
- the performance, quality, price and total cost of ownership of our
products;
- the availability, price, quality and performance of competing products
and technologies; and
- the successful development of our relationships with existing and
potential channel partners.
OUR BUSINESS IS DEPENDENT ON THE ADOPTION OF NAS APPLIANCES AS AN ALTERNATIVE TO
ADD STORAGE TO COMPUTER NETWORKS, AND A DECREASE IN THE RATE OF ADOPTION OF NAS
APPLIANCES COULD CAUSE OUR REVENUES TO DECLINE.
We depend on the growing use of NAS appliances and expect that
substantially all of our revenues will continue to come from sales of our Snap
Server appliances. The market for NAS appliances has only recently begun to
develop and is evolving rapidly. Because this market is new, we cannot
accurately predict its potential size or future growth rate. As a result, if the
NAS appliance market does not grow rapidly over a number of years, or if it
decreases, our revenues may not continue to grow and our share price could
decline.
5
<PAGE> 10
In particular, it has been our experience that small to mid-sized
organizations are less likely to be early adopters of new technologies, and
therefore may not be quick to accept NAS appliances. As a result, we believe the
rates of adoption of NAS appliances for small to mid-sized organizations are
unpredictable. We also are depending on our sales channels to adequately
penetrate this market. Our success in generating net revenues in this emerging
market will depend on, among other things, our ability to:
- educate potential end-users, channel partners and OEMs about the
benefits of NAS appliances;
- maintain and enhance our relationships with other distribution channel
partners and our OEM partner; and
- base our products on technology that ultimately becomes the industry
standard.
WE OUTSOURCE ALL OF THE MANUFACTURING OF OUR SNAP SERVERS, AND OUR REPUTATION
AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY OUR INABILITY TO
CONTROL THE OPERATIONS OF OUR MANUFACTURERS.
We outsource all of our manufacturing to contract manufacturers
including, Force Computers (a Solectron company), Jabil Circuit, JMR Electronix,
Quantum and Wellex. We depend on these manufacturers to produce sufficient
volumes of our products in a timely fashion and at the high quality levels we
demand. If our manufacturers fail to produce quality products on time and in
sufficient quantities, our reputation and results of operations could suffer.
In the future, we may need to find new contract manufacturers that can
manufacture our products in higher volumes and at lower costs. We may not find
contract manufacturers that meet our needs. Additionally, qualifying new outside
manufacturers and commencing volume production is expensive and time consuming.
If we are required or choose to change outside manufacturers, we may lose sales
and our customer relationships may suffer.
We do not have any long term commitments with our contract manufacturers,
and our contract manufacturers are obligated to supply products only up to a
quantity based on our forecasts. If our contract manufacturers experience
delays, disruptions, capacity constraints or quality control problems in their
manufacturing operations, then product shipments to our customers could be
delayed, which could negatively impact our net revenues, competitive position
and reputation.
WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR KEY COMPONENTS AND AS
A RESULT WE ARE SUSCEPTIBLE TO SUPPLY SHORTAGES THAT COULD PREVENT US FROM
SHIPPING CUSTOMER ORDERS ON TIME, IF AT ALL, AND COULD RESULT IN LOST SALES.
We depend upon sole source and single source suppliers for certain
components of our products. The industry standard processors used in our Snap
Server appliances are available from sole sources and could not be purchased
from alternative suppliers. Other components used in our products are
potentially available from multiple suppliers, although we or our contract
manufacturers currently purchase them from a single supplier. We have in the
past experienced, and may in the future experience, shortages in allocations, or
difficulties in acquiring, these components. If we are unable to receive our
allocation of or buy these components, we will not be able to manufacture our
products on a timely basis or deliver our products to our customers. The
purchase of these components from outside suppliers on a sole source basis
subjects us to risks, including the continued availability of supplies, price
increases and potential quality assurance problems. While alternative suppliers
for some of our components may be available to us, we must first identify these
suppliers and qualify them. We cannot be certain that any such suppliers will
meet our required qualifications or that we will be able to identify alternative
suppliers in a timely fashion, if at all. We may not be able to obtain
sufficient quantities of these components on the same or substantially the same
terms. Consolidations involving suppliers could further reduce the number of
alternatives available to us and affect the cost of such components. An increase
in the cost of such components could make our products less competitive with
products that do not incorporate such components. As a result, we may experience
lower margins or less competitive product pricing which could negatively impact
our business, financial condition and results of operation.
6
<PAGE> 11
OUR DEPENDENCE ON ONLY A FEW MAJOR CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES EXPOSES US TO FINANCIAL RISKS.
We depend on a small number of customers for a substantial portion of our
revenues. As a result, a loss or a significant reduction or delay in sales to
any of our major customers could seriously harm our revenues. Two customers
represented more than 10% of sales in 1998, 1999 and the six months ended June
30, 2000, with Ingram Micro representing 41%, 38% and 41%, respectively, and
Tech Data representing 23%, 24% and 40%, respectively. Unless and until we
diversify and expand our customer base, our future success will depend
significantly upon certain factors which are not within our control, including:
- the timing and size of future purchase orders, if any, from our larger
customers;
- the product requirements of our customers; and
- the financial and operational success of our customers.
Diversification and expansion of our customer base is particularly
critical because of the highly competitive nature of our business. To expand our
customer base, we will need to increase market awareness of our products and
expand our sales operations, both domestically and internationally. If we are
not successful in this endeavor our growth will be limited. In addition, our
distributors buy on a purchase order basis and may stop purchasing from us or
purchase from our competitors at any time.
We recently entered into an OEM agreement with Dell, and Dell may account
for a significant portion of our revenue in the future. Dell is not obligated to
purchase any specified quantity of our products under the agreement.
Accordingly, our sales to Dell could be discontinued at any time.
WE HAVE A HISTORY OF LOSSES AND MAY EXPERIENCE LOSSES IN THE FUTURE, WHICH COULD
RESULT IN THE DECLINE OF OUR SHARE PRICE.
We have incurred significant net losses, including net losses of $58.5
million in 1999 and $23.3 million in the six months ended June 30, 2000.
As we grow our business and complete our separation from Quantum, we
anticipate that our expenses will increase substantially in the next 12 months
as we:
- increase our sales and marketing activities;
- develop our technology and expand our existing product lines;
- make additional investments to develop our brand and increase NAS
awareness;
- expand our distribution channels; and
- implement internal systems, develop infrastructure and hire additional
management.
As a result, we will need to generate significant revenues to achieve
profitability. We cannot be certain that we will achieve profitability in the
future or, if we achieve profitability, that we will be able to sustain it. Our
future operating results will depend on many factors, including the growth of
the NAS market, acceptance of NAS appliances in the entry and mid-range market,
demand for our products and levels of product and price competition. If we do
not achieve and maintain profitability, our stock price may decline.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO
FLUCTUATE.
Our quarterly and annual results of operations have fluctuated in the
past and are likely to fluctuate significantly in the future 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
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shares may decline. Factors that may cause our revenues, gross margins and
operating results to fluctuate include the following:
- the size, timing, terms and fluctuations of customer orders,
particularly large orders from our distributors;
- declining average selling prices of our products;
- the timing and pricing of new products by us or our competitors;
- the ability to obtain sufficient supplies of single or limited-source
components of our products;
- ability to maintain production volumes and quality levels;
- fluctuations in costs of goods sold and potential write-offs of
obsolete inventory as we transition to new products; and
- expected increases in our operating expenses, particularly in
connection with our strategies to increase brand awareness or to invest
in research and development.
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 we may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. As a result, our expenses may be
disproportionately large as compared to sales in a quarter with reduced orders.
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, operating results and financial condition.
WE CURRENTLY HAVE LIMITED PRODUCT OFFERINGS AND MUST SUCCESSFULLY INTRODUCE NEW
AND ENHANCED PRODUCTS THAT RESPOND TO RAPID TECHNOLOGICAL CHANGES AND EVOLVING
INDUSTRY STANDARDS.
The NAS appliance market is characterized by rapid technological change,
frequent new product introductions and enhancements, uncertain product life
cycles, changes in customer demands and evolving industry standards. Our
products could be rendered obsolete if products based on new technologies are
introduced or new industry standards emerge and seriously harm our market share,
revenue and gross margin. Factors such as performance, market positioning, the
availability and price of competing products, the introduction of new
technologies and the success of our distribution partners and original equipment
manufacturer will affect the market acceptance of our products.
OUR SALES CYCLE IS TYPICALLY LONG AND UNPREDICTABLE.
On average, our sales cycle ranges from three to nine months. Our sales
cycle may be slowed or affected by budgetary constraints and purchasing
requirements of our customers and by cancellation of orders by our customers,
all of which are beyond our control. We may expend significant resources
pursuing potential sales opportunities that will not be consummated, which could
have a negative impact on our revenues.
WE MUST INCREASE OUR SALES VOLUMES, REDUCE OUR COSTS OR INTRODUCE HIGHER MARGIN
PRODUCTS TO OFFSET POSSIBLE REDUCTIONS IN THE AVERAGE UNIT PRICE OF OUR
PRODUCTS, OR OUR OPERATING RESULTS MAY SUFFER.
We have not experienced significant pricing pressure as a result of
competition. However, as products in the NAS appliance market become more
competitive, the average unit price of our products may decrease. The average
unit price of our products may also decrease in response to changes in product
mix, competitive pricing pressures, new product introductions by us or our
competitors or other factors. Changes in the mix of our sales between higher
margin, higher-capacity Snap Server products and lower margin, lower-capacity
Snap Server products could adversely affect our operating results in the future.
To maintain our gross margins, we also must continue to reduce the manufacturing
cost of our products.
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WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY IN THE FUTURE AGAINST EXISTING OR
POTENTIAL COMPETITORS, AND AS A RESULT, OUR RESULTS OF OPERATION MAY SUFFER.
The storage market is highly competitive. If we are unable to compete
effectively in the market for our products, our revenue and future operating
results could be seriously harmed. We believe that competition may increase
substantially as the introduction of new technologies creates new opportunities
for established and emerging companies in the industry.
Many of our current and potential competitors are larger than we are and
have significantly greater financial, sales and marketing, technical,
manufacturing and other resources and more established channels of distribution.
As a result, these competitors may be able to respond more rapidly to new or
emerging technologies and changes in customer requirements, or to devote greater
resources to the development, promotion and sale of their products. Our
competitors may enter our existing or future markets with solutions that may be
less costly, provide higher performance or additional features or that may be
introduced earlier than our solutions.
In the market for NAS appliances, we face significant competition from
companies who market general-purpose servers or limited purpose servers. We
believe that Compaq, Dell, Gateway, Hewlett-Packard, IBM, Sun Microsystems and
other server manufacturers selling general-purpose servers or limited purpose
servers could also provide lower cost server appliances that perform comparable
functions to our products, coupled with the broader applications of their
existing product lines. Such products, if successful, could render our products
obsolete. In addition, we face a substantial risk that a significant number of
customers would rather purchase products from a more well-known vendor.
Currently, our direct competitors in the entry to mid-range segment of
the NAS appliance market include Connex (Western Digital), Intel, Linksys,
Maxtor and Procom Technology. In addition, we may face competition in the future
from established companies focused on the higher end of the NAS appliance
market, such as Network Appliance and EMC or from emerging NAS appliance
companies. Increased competition may negatively affect our business and future
operating results by leading to price reductions, higher selling expenses or a
reduction in our market share.
OUR REVENUES COULD BE REDUCED IF GENERAL-PURPOSE SERVER MANUFACTURERS MAKE
ACQUISITIONS IN ORDER TO JOIN THEIR EXTENSIVE DISTRIBUTION CAPABILITIES WITH OUR
COMPETITORS' PRODUCTS.
General-purpose server manufacturers may not only develop their own
server appliance solutions, but they may also acquire or establish cooperative
relationships with our other current competitors, including smaller private
companies. For example, Sun Microsystems recently agreed to acquire Cobalt
Networks, a company which sells NAS appliances to large organizations. Because
general-purpose server manufacturers have significant financial and
organizational resources available, they may be able to quickly penetrate the
NAS appliance market by leveraging the technology and expertise of smaller
companies and utilizing their own extensive distribution channels. It is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share.
WE MAY INCUR SIGNIFICANT COSTS TO PROMOTE OUR BRAND THAT MAY NOT RESULT IN THE
DESIRED BRAND RECOGNITION BY CUSTOMERS OR INCREASED SALES.
We believe that we need a strong brand to compete successfully. In order
to attract and retain customers, we believe that our brand must be recognized
and viewed favorably by end-user customers. Although we intend to advertise and
promote our brand, we cannot be certain that these strategies will be
successful. If we are unable to design and implement effective marketing
campaigns or otherwise fail to promote and maintain our brand, our sales could
decline. Our business may also suffer if we incur excessive expenses in an
attempt to promote and maintain our brand without a corresponding increase in
revenues.
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OUR STRATEGY TO EXPAND INTO INTERNATIONAL MARKETS IS SUBJECT TO UNCERTAINTIES,
WILL RESULT IN HIGHER PERSONNEL COSTS AND COULD REDUCE OUR OPERATING MARGINS DUE
TO THE HIGHER COSTS OF INTERNATIONAL SALES.
Our sales outside of the United States represented approximately 11% of
our total revenues in 1998, 12% of our total revenues in 1999 and 17% of our
total revenues in the six months ended June 30, 2000. We must increase the
number of channel partners who sell our products and expand our direct
international sales presence to significantly increase our international sales.
We will incur higher personnel costs by hiring sales staff, and a larger
international sales force may not result in an increase in our revenues. We may
not realize corresponding increases in operating margins from increases in
international sales, due to the higher costs of these sales. We have relied
primarily on international channel partners for our international sales. Even if
we are able to successfully expand our international selling efforts, we may not
be able to create or increase international market demand for our products.
We conduct sales activities in various countries in Europe, Asia and
South America. Our international operations are subject to other potential
risks, including:
- the impact of recessions in economies outside the United States;
- greater difficulty in accounts receivable collection and longer
collection periods;
- unexpected changes in regulatory requirements;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences; and
- political and economic instability.
WE MAY BE UNABLE TO EXPAND OUR CUSTOMER SERVICE AND SUPPORT ORGANIZATION, AND AS
A RESULT, WE MAY NOT BE ABLE TO RETAIN OUR EXISTING CUSTOMERS AND ATTRACT NEW
CUSTOMERS.
We currently have a small customer service and support organization and
will need to increase our staff, or outsource these services, to support new
customers and the expanding needs of our existing customers. Hiring customer
service and support personnel is very competitive in our industry due to the
limited number of people available with the necessary technical skills and
understanding of multi-platform network operating environments. If we are unable
to expand our customer service and support organization, we may not be able to
retain our existing customers and attract new customers. As a result, our
business and results of operation may suffer.
WE DO NOT HAVE A CONSULTING STAFF, AND OUR REVENUES MAY SUFFER IF CUSTOMERS
DEMAND EXTENSIVE CONSULTING SERVICES.
Our products are designed to require little or no support from us and to
be deployed quickly and easily by our customers. Our competitors may offer
extensive consulting services, however, in addition to NAS appliance products.
If we introduced a product that required extensive consulting services for
installation and use or if our customers wanted to purchase from a single vendor
a menu of items that included extensive consulting services, we would be
required to change our business model. We would be required to hire and train
consultants, outsource the consulting services or enter into a joint venture
with another company that could provide those services. If these events were to
occur, our future profits would likely suffer because customers would choose
another vendor, or we would incur the added expense of hiring and retaining
consulting personnel.
WE MAY NOT BE ABLE TO PRESERVE THE VALUE OF OUR PRODUCTS' INTELLECTUAL PROPERTY
BECAUSE OTHER VENDORS COULD CHALLENGE OUR INTELLECTUAL PROPERTY RIGHTS.
Our products are differentiated from those of our competitors by our
internally developed technology that is incorporated into our products. If we
fail to protect our intellectual property, other
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vendors could sell products with features similar to ours, and this could reduce
demand for our products. We protect our intellectual property through a
combination of patent, copyright, trade secret and trademark laws. To date, we
have no patents, and Quantum has filed two patent applications that we expect
will be transferred to us as part of our separation from Quantum. Quantum may be
unable to secure the patents for which it has filed applications, or competitors
may challenge the validity or scope of its patents.
We generally enter into confidentiality agreements with our employees,
consultants and corporate partners, and generally control access to our
intellectual property, integrated software, documentation and other proprietary
information. We believe that such measures afford only limited protection.
Others may develop technologies that are similar or superior to our technology
or design around the patents, copyrights and trade secrets we own. Despite our
efforts to protect our proprietary rights, unauthorized parties may attempt to
copy or otherwise obtain and use our products or technology. Policing
unauthorized use of our products is difficult, and we cannot be certain that the
steps we have taken will prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as those in the United States.
WE HAVE INVESTED SUBSTANTIAL RESOURCES IN DEVELOPING OUR PRODUCTS AND OUR BRAND,
AND OUR OPERATING RESULTS WOULD SUFFER IF WE WERE SUBJECT TO A PROTRACTED
INFRINGEMENT CLAIM OR A SIGNIFICANT DAMAGES AWARD.
Substantial litigation regarding intellectual property rights and brand
names exists in our industry. We expect that NAS appliance products may be
increasingly subject to third-party infringement claims as the number of
competitors in our industry segment grows and the functionality of products in
different industry segments overlaps. We are not aware that our products employ
technology that infringes any proprietary rights of third parties. However,
third parties may claim that we infringe their intellectual property rights. Any
claims, with or without merit, could:
- be time consuming to defend;
- result in costly litigation;
- divert our management's attention and resources;
- cause product shipment delays; or
- require us to enter into royalty or licensing agreements.
These royalty or licensing agreements may not be available on terms
acceptable to us, if at all. A successful claim of product infringement against
us or our failure or inability to license the infringed or similar technology
could adversely affect our business because we would not be able to sell the
impacted product without redeveloping it or incurring significant additional
expenses.
FAILURE TO MANAGE OUR GROWTH SUCCESSFULLY COULD LEAD TO INEFFICIENCIES IN
CONDUCTING OUR BUSINESS AND INCREASED EXPENSES.
Our future growth could place a significant strain on our management,
systems and resources. To manage the anticipated growth of our operations, we
may be required to:
- improve existing and implement new operational, financial and
management information controls, reporting systems and procedures;
- hire, train and manage additional qualified personnel; and
- establish relationships with additional suppliers and partners while
maintaining our existing relationships.
Furthermore, we expect that we will be required to manage multiple
relationships with various customers and other third parties. In particular,
after our separation from Quantum, we will have to
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implement a new administrative and managerial infrastructure. Our future success
depends on the implementation of this infrastructure.
WE RELY ON THE SERVICES OF OUR KEY PERSONNEL, AND THOSE PERSONS' KNOWLEDGE OF
OUR BUSINESS AND TECHNICAL EXPERTISE WOULD BE DIFFICULT TO REPLACE.
Our products and technologies are complex, and we are substantially
dependent upon the continued service of our existing engineering personnel. The
loss of any of our key employees could adversely affect our business and slow
our product development processes.
PRODUCT DEFECTS OR THE FAILURE OF OUR PRODUCTS TO CONFORM TO SPECIFICATIONS
COULD RESULT IN OUR CUSTOMERS DEMANDING REFUNDS FROM US OR ASSERTING CLAIMS FOR
DAMAGES AGAINST US.
Our Snap Server appliances could contain defects or bugs that may be
detected at any point in a product's life cycle. While we continually test our
products for defects and work with customers through our customer support
services to identify and correct bugs in our software and other product
problems, defects in our products may be found in the future. Although many of
these defects may prove to be immaterial, any of these defects could be
significant and may result in:
- the loss of or delay in market acceptance and sales of our products;
- diversion of development resources;
- injury to our reputation; or
- increased maintenance and warranty costs.
Moreover, because our products are used in connection with critical
distributed computing systems services, we may receive liability claims if our
products do not work properly. Liability claims could require us to spend time
and money in litigation or to pay significant damages. Any such claims, whether
or not successful, could seriously damage our reputation and our business.
FAILURE OF OUR SUPPLIERS TO MEET THEIR WARRANTY OBLIGATIONS MAY IN TURN RESULT
IN OUR BEING FORCED TO ASSUME WARRANTY RESPONSIBILITY AT SIGNIFICANT COST.
Our primary warranty obligations consist of accepting defective products
from customers and either repairing them or returning the defective component to
the original manufacturer, our supplier, for repair or replacement during the
applicable warranty period. If a supplier were to fail to meet its warranty
obligations, however, we would be forced to assume responsibility for warranties
on all components manufactured by that supplier. Furthermore, there are
occasions when we extend a customer a longer warranty coverage period than a
supplier provides to us. During this time where our supplier does not provide us
with warranty coverage, we become responsible for all components manufactured by
that supplier. Such events could seriously harm our business, financial
condition and results of operations.
RISKS RELATED TO OUR SEPARATION FROM QUANTUM
WE MAY INCUR ADDITIONAL LOSSES IN THE PROCESS OF TRANSITIONING FROM QUANTUM'S
ADMINISTRATIVE AND OPERATIONAL INFRASTRUCTURE.
We currently use Quantum's operational and administrative infrastructure,
and our ability to satisfy our customers and operate our business will suffer if
we do not develop our own infrastructure quickly and cost-effectively.
We currently use Quantum's systems to support our operations, including
systems to manage inventory, order processing, human resources, shipping,
accounting, payroll and internal computing operations. Many of these systems are
proprietary to Quantum and are very complex. These systems have been modified,
and are in the process of being further modified, to enable us to separately
track items
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related to our business. These modifications, however, may result in unexpected
system failures or the loss or corruption of data.
Any failure or significant downtime in Quantum's or our own information
systems could prevent us from taking customer orders, shipping products or
billing customers and could harm our business. In addition, Quantum's and our
information systems require the services of employees with extensive knowledge
of these information systems and the business environment in which we operate.
In order to successfully implement and operate our systems, we must be able to
attract and retain a significant number of highly skilled employees. If we fail
to attract and retain the highly skilled personnel required to implement,
maintain and operate our information systems, our business could suffer.
WE WILL NOT BE ABLE TO INDEPENDENTLY OPERATE OUR BUSINESS IF QUANTUM DOES NOT
COMPLETE ITS DISTRIBUTION OF OUR COMMON SHARES.
Quantum currently intends to distribute to the holders of Quantum's DSS
common stock all of our common shares that it owns approximately six months
after this offering, although it is not obligated to do so. This plan of
distribution is subject to, among other things, obtaining a private letter
ruling from the Internal Revenue Service that the distribution will be tax-free
to the holders of Quantum's DSS common stock and that our separation from
Quantum qualifies as a reorganization. This distribution may not occur within
the six months or at all. At the time of this offering, we will not know what
the ruling from the Internal Revenue Service regarding the tax treatment of the
separation and the distribution will be. If Quantum does not receive a favorable
tax ruling, it is not likely to make the distribution in the expected time
frame, or at all. In addition, until this distribution occurs, the risks
discussed below relating to Quantum's control of us and the potential business
conflicts of interest between Quantum and us will continue to be relevant to our
stockholders. If the distribution is delayed or not completed at all, the
liquidity of our shares in the market will be severely constrained unless and
until Quantum elects to sell some of its significant ownership. There are no
limits on these sales, and the sale or potential sale by Quantum could adversely
affect our stock price. In addition, because of the limited liquidity until the
distribution occurs, relatively small trades of our stock could have a
disproportionate effect on our stock price. Also, if Quantum does not distribute
its shares, we may face significant difficulty hiring and retaining key
personnel, many of whom are attracted by the potential of operating our business
as a fully independent entity.
WE WILL BE CONTROLLED BY QUANTUM AS LONG AS QUANTUM OWNS A MAJORITY OF OUR
COMMON STOCK, AND OUR OTHER STOCKHOLDERS WILL BE UNABLE TO AFFECT THE OUTCOME OF
STOCKHOLDER VOTING DURING SUCH TIME.
After the completion of this offering, Quantum will own approximately %
of our outstanding common stock, or approximately % if the underwriters
exercise in full their option to purchase additional shares. As long as Quantum
owns a majority of our outstanding common stock, Quantum will continue to be
able to elect our entire board of directors and to remove any director, with or
without cause, without calling a special meeting. Investors in this offering
will not be able to affect the outcome of any stockholder vote prior to the
planned distribution of our stock to the holders of Quantum's DSS common stock.
As a result, Quantum will control all matters affecting us, including:
- the composition of our board of directors and, through it, any
determination with respect to our business direction and policies,
including the appointment and removal of officers;
- the allocation of business opportunities that may be suitable for us
and Quantum;
- any determinations with respect to mergers or other business
combinations;
- our acquisition or disposition of assets;
- our financing;
- changes to the agreements providing for our separation from Quantum;
- the payment of dividends on our common stock;
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- determinations with respect to our tax returns; and
- the possible sale of a controlling interest in us to a third party.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS
A SEPARATE COMPANY.
Quantum did not account for us, and we were not operated as a separate,
stand-alone entity for the periods presented. Our costs and expenses include
allocations from Quantum for centralized corporate services and infrastructure
costs, including legal, accounting, treasury, information technology,
distribution, customer service and non-U.S. sales. These allocations have been
determined on bases that we and Quantum considered to be reasonable reflections
of the utilization of services provided to or the benefit received by us. The
historical financial information is not necessarily indicative of what our
results of operations, financial position and cash flows will be in the future.
We have not made adjustments to our historical financial information to reflect
many significant changes that will occur in our cost structure, funding and
operations as a result of our separation from Quantum, including increased costs
associated with reduced economies of scale, increased marketing expenses related
to building a company brand identity separate from Quantum and increased costs
associated with being a publicly traded, stand-alone company.
WE WILL NOT BE ABLE TO RELY ON QUANTUM TO FUND OUR FUTURE CAPITAL REQUIREMENTS,
AND FINANCING FROM OTHER SOURCES MAY NOT BE AVAILABLE TO US ON FAVORABLE TERMS
OR AT ALL.
Since September 1999, our capital needs have been satisfied by Quantum.
However, following our separation, Quantum will no longer provide funds to
finance our working capital or other cash requirements. Financing from other
sources, if needed, may not be available to us on favorable terms or at all.
We believe our capital requirements will vary greatly from quarter to
quarter, depending on, among other things, capital expenditures, fluctuations in
our operating results, financing activities, acquisitions and investments and
inventory and receivables management. We believe that the proceeds from this
offering, along with our future cash flow from operations, will be sufficient to
satisfy our working capital, capital expenditure and research and development
requirements for at least the next 12 months. However, we may require or choose
to obtain additional debt or equity financing in order to finance acquisitions
or other investments in our business. Future equity financings would be dilutive
to the existing holders of our common stock. Future debt financings could
involve restrictive covenants. We will likely not be able to obtain financing
with interest rates as favorable as those that Quantum could obtain.
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH QUANTUM WITH RESPECT
TO OUR PAST AND ONGOING RELATIONSHIPS AND, BECAUSE OF QUANTUM'S CONTROLLING
OWNERSHIP, WE MAY NOT BE ABLE TO RESOLVE THESE CONFLICTS ON THE MOST FAVORABLE
TERMS TO US.
Nothing restricts Quantum from competing with us. We may not be able to
resolve any potential conflicts, and even if we do, the resolution may be less
favorable than if we were dealing with an unaffiliated party. The agreements we
have entered into with Quantum may be amended upon agreement between the
parties. While we are controlled by Quantum, Quantum may be able to require us
to agree to amendments to these agreements that may be less favorable to us than
the current terms of the agreements.
Conflicts of interest may arise between Quantum and us in a number of
areas relating to our past and ongoing relationships, including:
- labor, tax, employee benefit, indemnification and other matters arising
from our separation from Quantum;
- intellectual property matters;
- employee retention and recruiting;
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- sales or distributions by Quantum of all or any portion of its
ownership interest in us;
- the nature, quality and pricing of transitional services Quantum has
agreed to provide us; and
- business opportunities that may be attractive to both Quantum and us.
CRITICAL INTELLECTUAL PROPERTY LICENSES MAY NOT BE AVAILABLE.
We often rely on licenses of intellectual property for use in our
business. Our position with respect to the negotiation of such licenses may
deteriorate after our separation from Quantum. As a result, these licenses may
not be available in the future on favorable terms or at all.
WE MAY BE UNABLE TO MANAGE CRITICAL OPERATIONAL FUNCTIONS OF OUR BUSINESS IF THE
TRANSITIONAL SERVICES BEING PROVIDED TO US BY QUANTUM ARE NOT SUFFICIENT TO MEET
OUR NEEDS, OR IF WE ARE NOT ABLE TO REPLACE THESE SERVICES AFTER OUR AGREEMENTS
WITH QUANTUM EXPIRE.
Quantum has agreed to provide transitional services to us, including
services related to:
- information technology systems;
- supply chain, including manufacturing and logistics;
- employee benefits and human resources administration; and
- customer service and support.
Although Quantum is contractually obligated to provide us with these
services, these services may not be provided at the same level as when we were
part of Quantum, and we may not be able to obtain the same benefits. These
transitional service arrangements generally have a term of one year following
the separation, and Quantum is only contractually obligated to provide these
services to the same extent and at the same locations as such services are being
provided by Quantum to us as of the separation date. These limitations may
hamper our ability to expand our business. After the expiration of these various
arrangements, we may not be able to replace the transitional services in a
timely manner or on terms and conditions, including cost, as favorable as those
we will receive from Quantum.
These agreements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
Quantum. The prices charged to us under these agreements may be lower than the
prices that we may be required to pay third parties for similar services or the
costs of similar services if we undertake them ourselves.
RISKS RELATED TO THIS OFFERING
SUBSTANTIAL SALES OF SHARES OF OUR COMMON STOCK MAY OCCUR IN CONNECTION WITH THE
DISTRIBUTION, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Quantum currently intends to distribute all of the shares of our common
stock it owns to holders of Quantum's DSS common stock approximately six months
after this offering. Substantially all of these shares will be eligible for
immediate resale in the public market. We are unable to predict whether
significant amounts of common stock will be sold in the open market in
anticipation of, or following, this distribution, or by Quantum if the
distribution does not occur. We are also unable to predict whether a sufficient
number of buyers will be in the market at that time. Any sales of substantial
amounts of our common stock in the public market, or the perception that such
sales might occur, whether as a result of this distribution or otherwise, could
cause our stock price to decline.
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THERE HAS BEEN NO MARKET FOR OUR COMMON STOCK SINCE OUR ACQUISITION BY QUANTUM,
AND WE CANNOT ASSURE YOU THAT OUR STOCK PRICE WILL NOT DECLINE AFTER THIS
OFFERING.
Before this offering, there has not been a public market for our common
stock since our acquisition by Quantum, and an active public market for our
common stock may not develop or be sustained after this offering. The price of
our stock could be subject to significant fluctuations after this offering.
Factors that could affect our stock price include:
- quarterly variations in our operating results;
- changes in revenue or earnings estimates or publication of research
reports by analysts;
- speculation in the press or investment community;
- strategic actions by us or our competitors, such as acquisitions or
restructurings;
- actions by institutional stockholders or by Quantum prior to its
distribution of our stock;
- general market conditions; and
- domestic and international economic factors unrelated to our
performance.
The stock markets in general, and the markets for high technology stocks
in particular, have experienced extreme volatility that has often been unrelated
to the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our common stock. In
particular, we cannot assure you that you will be able to resell your shares at
or above the initial public offering price, which will be determined by
negotiations between the representatives of the underwriters and us.
PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY OR PREVENT
ACQUISITION OF US, WHICH COULD DECREASE THE VALUE OF YOUR SHARES.
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it harder for a third party to acquire us without the
consent of our board of directors, although these provisions have little
significance while we are controlled by Quantum. These provisions include a
classified board of directors and limitations on actions by our stockholders by
written consent. In addition, our board of directors has the right to issue
preferred stock without stockholder approval, which could be used to dilute the
stock ownership of a potential hostile acquirer. Delaware law also imposes some
restrictions on mergers and other business combinations between us and any
holder of 15% or more of our outstanding common stock. Although we believe these
provisions provide for an opportunity to receive a higher bid by requiring
potential acquirers to negotiate with our board of directors, these provisions
apply even if the offer may be considered beneficial by some stockholders.
OUR MANAGEMENT MAY NOT USE THE PROCEEDS OF THIS OFFERING EFFECTIVELY.
Our management has broad discretion over the use of proceeds of this
offering. In addition, our management has not designated specific uses for the
proceeds of this offering. Accordingly, it is possible that our management may
allocate the proceeds differently than investors in this offering would have
preferred, or that we will fail to maximize our return on the proceeds.
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FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. We use words such as "anticipates," "believes," "plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify these
forward-looking statements. Our actual results could differ materially from the
results contemplated by these forward-looking statements due to a number of
factors, including those discussed in "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this prospectus. This prospectus also contains forward-looking statements
attributed to third parties relating to their estimates regarding the growth of
our markets. Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause our actual results, as well as
those of the markets we serve, levels of activity, performance, achievements and
prospects to be materially different from those expressed or implied by the
forward-looking statements. These risks, uncertainties and other factors
include, among others, those identified in "Risk Factors" and elsewhere in this
prospectus.
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OUR SEPARATION FROM QUANTUM
OVERVIEW
Until the completion of this offering, we will continue to be a
wholly-owned subsidiary of Quantum. We expect that the separation of our
business from Quantum, including the transfer of related assets, liabilities and
intellectual property rights, will be completed before the completion of this
offering.
BENEFITS OF THE SEPARATION
We believe that we will realize benefits from our complete separation
from Quantum, including the following:
Greater Strategic Focus. In addition to the Snap Server appliance
business, Quantum generates significant revenue from other lines of products,
including hard disk drives and tape drives. Our focus will be on developing
businesses and strategic opportunities for the NAS appliances market. This
effort will be supported by our own board of directors, management team and
employees.
Increased Speed and Responsiveness. As a smaller company than Quantum, we
expect to be able to make decisions more quickly, deploy resources more rapidly
and efficiently and operate with more agility than we could as a part of a
larger organization. In addition, we expect to enhance our responsiveness to
customers and partners.
Better Incentives for Employees and Greater Accountability. We expect the
motivation of our employees and the focus of our management will be strengthened
by incentive compensation programs tied to the market performance of our common
stock. The separation will enable us to offer our employees compensation
directly linked to the performance of the Snap business, which we expect to
enhance our ability to attract and retain qualified personnel.
More Direct Access to Capital Markets. As a separate company, we will
have more direct access to the capital markets to issue debt or equity
securities and to grow through acquisitions.
SEPARATION AND TRANSITIONAL ARRANGEMENTS
We and Quantum will enter into agreements providing for the separation of
our businesses from Quantum, including the Master Separation and Distribution
Agreement, which we executed on October 26, 2000. These agreements generally
provide for, among other things:
- the transfer from Quantum to us of assets and the assumption by us of
liabilities relating to our business;
- the allocation of intellectual property between us and Quantum; and
- various interim and ongoing relationships between us and Quantum.
THE DISTRIBUTION BY QUANTUM OF OUR COMMON STOCK
After completion of this offering, Quantum will own approximately % of
the outstanding shares of our common stock, or approximately % if the
underwriters fully exercise their option to purchase additional shares. Quantum
currently plans to complete its divestiture of Snap approximately six months
after this offering by distributing all of its shares of our common stock to the
holders of Quantum's DSS common stock. However, Quantum is not obligated to
complete the distribution, and we cannot assure you as to whether or when it
will occur.
Quantum has advised us that it would not complete the distribution if its
board of directors determines that the distribution is no longer in the best
interest of Quantum and its stockholders.
18
<PAGE> 23
Quantum has further advised us that it currently expects that the principal
factors that it would consider in determining whether and when to complete the
distribution include:
- the issuance by the Internal Revenue Service of a ruling that the
distribution will be tax-free to the holders of Quantum's DSS common
stock and that the transaction will qualify as a reorganization for
United States federal income tax purposes;
- the absence of any court orders or regulations prohibiting or
restricting the completion of the distribution; and
- other conditions affecting our business or Quantum's business.
TREATMENT OF OUTSTANDING STOCK OPTIONS AND RESTRICTED STOCK.
Treatment of DSS Options Held by Snap Employees
On the distribution date, any option to purchase Quantum's DSS common
stock held by an employee who has transferred from Quantum to Snap pursuant to
the Master Separation and Distribution Agreement shall be assumed by the Snap
2000 Stock Plan, and shall be converted into an option to purchase Snap common
stock.
Treatment of DSS Restricted Stock Held by Snap Employees
On the distribution date, any restricted shares of Quantum's DSS common
stock held by an employee who has transferred from Quantum to Snap pursuant to
the Master Separation and Distribution Agreement shall be assumed by the Snap
2000 Stock Plan, and shall be converted into restricted shares of Snap common
stock subject to the same vesting schedule applicable to the restricted shares
of Quantum's DSS common stock.
Treatment of DSS Options Held by Quantum Employees
On the distribution date, any outstanding option to purchase Quantum's
DSS common stock held by Quantum employees who do not transfer to Snap shall be
converted (using a conversion formula) into an option to purchase Quantum's DSS
common stock and an option to purchase Snap common stock. The option to purchase
Snap common stock shall be governed by the terms of the Snap 2000 Stock Plan.
Options to acquire a maximum of shares, or %, of the Snap common
stock available under our Snap 2000 Stock Plan will be issued to employees of
Quantum that are not employees of Snap.
Treatment of DSS Restricted Stock Held by Quantum Employees
On the distribution date, any Quantum employee who does not transfer to
Snap that holds restricted shares of Quantum's DSS common stock will receive a
dividend in the form of Snap common stock. To the extent that the restricted
shares of Quantum's DSS common stock are not vested, the shares of Snap common
stock issued as a dividend will be subject to the same vesting schedule
applicable to the restricted shares of Quantum's DSS common stock.
19
<PAGE> 24
USE OF PROCEEDS
We estimate that the net proceeds we will receive from the sale of the
shares of common stock to be sold in this offering will be approximately
$ million, assuming a public offering price of $ per share and
after deducting the estimated underwriting discount and offering expenses
payable by us. If the underwriters' over-allotment option is exercised in full,
we estimate that the net proceeds to us will be approximately $
million.
We intend to use the net proceeds of this offering for general corporate
purposes, including:
- expanding our sales and marketing channels;
- research and development activities;
- capital expenditures related to becoming an independent company; and
- working capital.
The amounts that we actually expend for working capital purposes will
vary significantly depending on a number of factors, including future revenue
growth, if any, and the amount of cash we generate from operations. As a result,
we will retain broad discretion in the allocation of the net proceeds of this
offering. In addition, we may use a portion of the net proceeds for further
development of our products through acquisitions of complementary businesses,
products and technologies. However, we have no present commitments or agreements
with respect to any acquisitions. We intend to invest the net proceeds primarily
in income producing, investment grade securities.
DIVIDEND POLICY
We currently intend to retain any future earnings to fund the development
and growth of our business. Therefore, we do not anticipate paying any cash
dividends in the foreseeable future.
20
<PAGE> 25
CAPITALIZATION
The following table sets forth our total capitalization as of June 30,
2000:
- on an actual basis; and
- on an as adjusted basis to reflect the sale by us of common shares
in this offering and to give effect to the receipt of the estimated net
proceeds from the sale of such shares at an assumed initial public
offering price of $ per share and the application of the estimated
net proceeds from such sale.
Please read the following information in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our financial statements and the notes thereto beginning on page F-1 of this
prospectus.
<TABLE>
<CAPTION>
JUNE 30, 2000
-------------------------
ACTUAL AS ADJUSTED
--------- ------------
(UNAUDITED)
(IN THOUSANDS EXCEPT FOR
SHARE DATA)
<S> <C> <C>
Stockholder's equity:
Intercompany equity....................................... $ 32,187 $
Preferred stock, par value $0.001; no shares authorized,
actual; 10,000,000 authorized, as adjusted; no shares
outstanding, actual or as adjusted.....................
Common stock, par value $0.001; 500,000,000 shares
authorized, actual; 52,650,000 shares issued and
outstanding, actual; 500,000,000 shares authorized, as
adjusted, shares issued and outstanding, as
adjusted............................................... 53
Additional paid-in capital................................ 105,186
Accumulated deficit....................................... (68,059)
--------
Totals stockholders' equity............................ 69,367
-------- --------
Total capitalization................................... $ 69,367 $
======== ========
</TABLE>
This table does not include:
- common shares reserved for issuance under our stock option
plans and employee stock purchase plan; and
- options to purchase Quantum's DSS common stock and
options to purchase Quantum's HDD common stock which will be converted
into options to purchase Snap common stock at the distribution date.
21
<PAGE> 26
DILUTION
Our net tangible book value at June 30, 2000 was approximately $8.1
million, or $ per share. Net tangible book value per share is determined by
dividing our tangible net worth, which is total tangible assets less total
liabilities, by the number of shares of common stock outstanding immediately
before this offering. Dilution in net tangible book value per share represents
the difference between the amount per share paid by purchasers of shares of our
common stock in this offering and the net tangible book value per share of our
common stock immediately afterwards. After giving effect to our sale of
shares of common stock in this offering at the initial public offering price of
$ per share and after deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by us, our pro forma net
tangible book value at June 30, 2000 would have been approximately $
million, or $ per share. This represents an immediate increase in pro forma
net tangible book value of $ per share to our existing stockholder and an
immediate dilution in pro forma net tangible book value of $ per share to
new investors purchasing shares of common stock in this offering. The following
table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Net tangible book value per share as of June 30, 2000..... $
Increase in book value per share attributable to new
investors..............................................
--------
Pro forma, net tangible book value per share after this
offering..................................................
--------
Dilution in pro forma net tangible book value per share to
new investors............................................. $
========
</TABLE>
The discussion and table above assume no exercise of options outstanding
under our 2000 Incentive Stock Option Plan, 2000 Stock Plan and 2000 Director
Option Plan and no issuance of shares reserved for future issuance under our
2000 Employee Stock Purchase Plan. As of June 30, 2000, there were no options
outstanding to purchase shares of our common stock. However, there were
outstanding options to acquire Quantum's DSS common stock and HDD common stock
that are anticipated to convert into options to acquire Snap common stock at the
distribution date. To the extent that these options are exercised or additional
options are granted and exercised, there will be further dilution to new
investors.
The following table sets forth, as of June 30, 2000 on the pro forma as
adjusted basis described above, the differences between the number of shares of
common stock purchased from us, the total price paid and average price per share
paid by our existing stockholder and by the new investors in this offering at
the initial public offering price of $ per share, before deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ---------------------------- AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- -------------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholder.......... % $ % $
New investors.................
---------- ------ -------- ------
Total....................... 100.0% $ 100.0%
========== ====== ======== ======
</TABLE>
If the underwriters' option to purchase additional shares is exercised in
full, the following will occur:
- the number of shares of common stock held by our existing stockholder
will decrease to approximately % of the total number of shares of
common stock outstanding, and
- the number of shares held by new investors will be increased to
shares or approximately % of the total number of shares
of our common stock outstanding after this offering.
22
<PAGE> 27
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
On September 9, 1999, Quantum Corporation acquired Meridian Data, Inc.
and later changed its name to Snap Appliances, Inc. Our financial statements
include the results of operations of Meridian, our predecessor, prior to the
acquisition.
The following table sets forth our selected historical financial data.
This information should be read in conjunction with the financial statements and
notes to those statements included elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The historical financial data as of December 31, 1999 and for the period
from September 10, 1999 to December 31, 1999 are derived from audited financial
statements included elsewhere in this prospectus, which have been audited by
Ernst & Young LLP, independent auditors. The historical financial data for the
period from January 1, 1999 to September 9, 1999 are derived from Meridian's
audited financial statements included elsewhere in this prospectus, which have
been audited by Ernst & Young LLP, independent auditors. The historical
financial data as of December 31, 1998 and the two years then ended are derived
from Meridian's audited financial statements included elsewhere in this
prospectus, which have been audited by PricewaterhouseCoopers LLP, independent
accountants. The historical financial data as of and for the years ended
December 31, 1995 and 1996, which are not included elsewhere in this prospectus,
are derived from Meridian's financial statements, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. The statement of operations
data for the six months ended June 30, 1999 and June 30, 2000, and the balance
sheet data as of June 30, 2000 are derived from unaudited financial statements
included elsewhere in this prospectus. We have prepared the unaudited
information on the same basis as the audited financial statements and have
included all adjustments, consisting only of normal recurring adjustments, that
we consider necessary for a fair presentation of our financial position and
operating results as of these dates and for those periods. These historical
results are not necessarily indicative of results to be expected in any future
period, and results for the six months ended June 30, 2000 are not necessarily
indicative of results to be expected for the full fiscal year.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JAN. 1, SEPT. 10,
THROUGH THROUGH SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPT. 9, DEC. 31, JUNE 30,
-------------------------------------- ----------- ------------- --------------------------
1995 1996 1997 1998 1999 1999 1999 2000
------- ------- ------- -------- ----------- ------------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Snap Server product......... $ -- $ -- $ -- $ 2,662 $ 4,043 $ 4,016 $ 2,882 $ 15,422
CD-ROM product.............. 23,426 26,116 19,968 14,879 6,943 2,982 5,063 409
Other....................... 1,869 -- -- -- -- -- -- --
------- ------- ------- -------- -------- -------- ------- --------
Total revenue............. 25,295 26,116 19,968 17,541 10,986 6,998 7,945 15,831
------- ------- ------- -------- -------- -------- ------- --------
Cost of Revenue:
Product sales............... 12,150 10,162 9,570 10,090 6,977 4,746 5,187 12,655
Amortization of acquisition
related intangibles....... -- -- -- -- -- 1,257 -- 2,114
------- ------- ------- -------- -------- -------- ------- --------
Total cost of revenue..... 12,150 10,162 9,570 10,090 6,977 6,003 5,187 14,769
------- ------- ------- -------- -------- -------- ------- --------
Gross profit.................. 13,145 15,954 10,398 7,451 4,009 995 2,758 1,062
Operating expenses:
Research and development.... 2,474 3,315 6,340 5,931 3,425 1,860 2,169 4,823
Selling, general and
administrative............ 8,408 9,730 13,830 16,039 14,707 5,936 7,178 17,408
Amortization of goodwill and
other acquisition-related
intangibles............... 455 -- -- -- -- 1,146 -- 2,136
Purchased in-process
research and
development............... -- -- -- -- -- 37,000 -- --
------- ------- ------- -------- -------- -------- ------- --------
Total operating
expenses................ 11,337 13,045 20,170 21,970 18,132 45,942 9,347 24,367
------- ------- ------- -------- -------- -------- ------- --------
Operating income (loss)....... 1,808 2,909 (9,772) (14,519) (14,123) (44,947) (6,589) (23,305)
Interest and other income..... 776 1,590 1,994 1,358 441 153 349 40
------- ------- ------- -------- -------- -------- ------- --------
Income (loss) before taxes.... 2,584 4,499 (7,778) (13,161) (13,682) (44,794) (6,240) (23,265)
Provision for income taxes.... (84) (225) -- -- -- -- -- --
------- ------- ------- -------- -------- -------- ------- --------
Net income (loss)............. $ 2,500 $ 4,274 $(7,778) $(13,161) $(13,682) $(44,794) $(6,240) $(23,265)
======= ======= ======= ======== ======== ======== ======= ========
Net income (loss) per common
share(1)
Basic....................... -- -- -- -- -- $ (0.85) -- $ (0.44)
Diluted..................... -- -- -- -- -- $ (0.85) -- $ (0.44)
Weighted average common shares
outstanding(1)
Basic....................... -- -- -- -- -- 52,650 -- 52,650
Diluted..................... -- -- -- -- -- 52,650 -- 52,650
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------ JUNE 30,
1995 1996 1997 1998 1999 2000
------- ------- ------- -------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents...................................... $11,752 $24,809 $15,167 $ 11,049 $ 2,650 $ 2,905
Working capital............................................. 15,788 39,760 29,355 15,647 5,234 7,968
Total assets................................................ 22,253 45,245 37,491 24,888 81,270 82,960
Total stockholders' equity.................................. 16,373 41,230 30,085 16,241 69,549 69,367
</TABLE>
---------------
(1) Basic and diluted net income (loss) per common share and weighted average
common shares outstanding for the periods prior to the acquisition date of
September 9, 1999 is not presented as this information is not considered to
be meaningful.
23
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Financial
Data" and our financial statements and related notes included elsewhere in this
prospectus. In addition to historical information, the discussion in this
prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
by these forward-looking statements due to factors including, but not limited
to, those factors set forth under "Risk Factors" and elsewhere in this
prospectus.
OVERVIEW
We are the leading provider of network attached storage, or NAS,
solutions for workgroups. We design, develop and market NAS appliances that
offer a combination of interoperability, reliability, ease of use and
cost-effectiveness that we believe is better suited to the storage needs of
workgroups than other storage alternatives. Our Snap Server appliances utilize
our optimized hardware and proprietary operating system, the Snap OS, to enable
our customers to add additional storage capacity to a network quickly,
inexpensively and conveniently. Unlike general-purpose servers, which are
complex and designed to support a broad range of applications, our Snap Server
appliances are designed and optimized for only one use -- storage. As of June
30, 2000, we have sold over 25,000 Snap Servers through a multi-tier
distribution strategy focused on channel partners including distributors,
value-added resellers, or VARs, and catalog resellers. We also have an OEM
relationship with Dell and a limited number of direct sales through our
web-based e-commerce site. Our target end-users are workgroups within small to
large organizations, application service providers and Internet service
providers. We are recognized by PC Data as the leader in the workgroup NAS
market, with an estimated 80% market share. Our goal is to maintain our
leadership position in this market and to expand into other market segments.
We were acquired by Quantum in September 1999, and since the acquisition
have operated as a wholly-owned subsidiary of Quantum. In October 2000, Quantum
announced its intention to separate the Snap Server appliance business from
Quantum's DSS group and make us an independent, publicly traded company focused
on NAS appliances.
Through 1997, our revenue was derived principally from the sale of our
CD-ROM based enterprise servers. Since March 2000, we have discontinued the sale
of our CD-ROM based products, expanded our Snap Server product line, which now
features three products, and transitioned our business to a workgroup-level,
hard drive based, NAS appliance business. We began to recognize revenue from the
sale of Snap Server appliances in the third quarter of 1998, with revenue of
$1.2 million, or 24% of sales in that quarter. Developing, expanding and
promoting the Snap Server product line has been key to our strategy, and, in the
second quarter of 2000, we began to derive all of our net revenue from the sale
of Snap Server appliances, with revenue of $9.4 million.
In connection with our separation from Quantum, we have entered into a
Master Separation and Distribution Agreement with Quantum. The related forms of
ancillary agreements provide for, among other things, transitional services and
support in the areas of manufacturing; logistics, repair and customer support;
accounting; insurance coverage; customer service, human resources and
information technology services. Specified charges for transitional services are
generally at cost plus a markup of 5%, but may increase if the services extend
beyond a one-year transition period. We believe that purchasing these services
from Quantum provides an efficient means of obtaining these services during the
anticipated one-year transition period. As part of Quantum, we benefited from
various economies of scale, including shared information systems, human resource
systems and administration and overseas sales, marketing and logistics. We
expect that our costs will increase as a result of becoming an independent
entity, although the amount of the cost increase is not determinable at this
time.
We sell our products worldwide through a multi-tier distribution system
that includes distributors and VARs. Indirect sales account for substantially
all of our sales. In 1999 and the six months ended June 30, 2000, sales to
Ingram Micro accounted for 38% and 41% of our net revenues, respectively, and
24
<PAGE> 29
sales to Tech Data accounted for 24% and 40% of our net revenues, respectively.
While we are seeking to diversify our distribution channels and customer base
and expand the portion of our net revenues that is derived from sales through
various channels, we anticipate that our operating results will continue to
depend on volume sales to a relatively small number of channel partners.
Although we enter into general sales contracts with our channel partners, we
rely on our channel partners to submit purchase orders for specific quantities
of our products, and none of our channel partners are contractually obligated to
purchase any amount of our products.
We generally recognize product revenue when products are shipped to
customers. We provide allowances for estimated sales returns, including in
connection with our customers' rights to return our products within 30 days of
purchase for a full refund, and warranty costs at the time of revenue
recognition based on our historical results. However, our past product return
and warranty experience may not be indicative of future product return rates and
warranty costs.
Our gross profit percentage rate may be impacted by many factors,
including:
- the mix of products sold;
- the mix of distribution channels through which our products are sold;
- the mix of sales within and outside North America;
- the timing and size of customer orders;
- new product introductions by us and our competitors;
- changes in our average unit selling prices due to competitive
pressures;
- changes in component costs; and
- the fluctuation in volume manufacturing prices we are able to obtain
from our contract manufacturers.
We currently outsource the manufacturing of our products to third or
related parties. A significant portion of our cost of revenue consists of
payments to these parties. Our agreements call for rolling purchase orders and
rolling six month forecasts of expected unit volumes.
Research and development expenses primarily consist of salaries and
related personnel charges, fees to consultants and other service providers,
design tools, prototype materials, equipment and computer support services. We
expense all research and development expenses as incurred. We believe that
continued investment in research and development is critical to the success of
our future operations.
Sales, general and administrative expenses consist of the following:
- sales expenses, including salaries, commissions and related personnel
expenses, expenses associated with advertising and public relations
activities, promotional and trade show expenses and expenses associated
with educating our end-user customers and channel partners on the
benefits of NAS appliances; and
- general and administrative expenses, including salaries and related
personnel expenses, fees paid for legal services, finance, human
resources and other corporate expenses.
We expect sales, general and administrative expenses to increase as we
add sales and marketing personnel and increase advertising designed to expand
market awareness and generate increased sales of our products, and more as we
add personnel and incur costs related to the anticipated growth of our business
as an independent public company. However, we cannot give any assurance that
these increased expenditures will result in higher net revenue.
Sales to customers outside of the United States and Canada accounted for
approximately 12% and 17% of our total revenues in 1999 and the six months ended
June 30, 2000, respectively. Historically, currency exchange rate fluctuations
have not had a material effect on our business, financial condition or
25
<PAGE> 30
results of operations since substantially all income derived from our
international sales are denominated in U.S. dollars. If our non-U.S. sales
expand, the effect of currency fluctuations may have a more significant impact
on our revenues and costs.
We have not been profitable on an annual basis since 1996. Since 1998, we
have incurred substantial costs to develop our Snap Server technology and
products, to recruit and train personnel for our engineering, sales and
marketing activities, and to advertise and promote the Snap Server brand. These
activities accelerated with our acquisition by Quantum in September 1999. As a
result, we have increased our level of operating losses since our acquisition by
Quantum. The amortization of intangible assets as a result of accounting for our
acquisition by Quantum using the purchase method of accounting have further
increased operating losses. We anticipate that our operating expenses will
increase substantially in the future as we, among other things, increase our
sales and marketing operations, develop new sales channels, fund greater levels
of research and development and expand our operational and financial systems.
Accordingly, we will need to generate significant revenues to achieve
profitability. Our limited operating history of selling hard drive based NAS
appliances makes it difficult for us to predict future operating results and,
accordingly, there can be no assurance that we will sustain revenue growth or
achieve profitability in future periods.
As of June 30, 2000, we had approximately $42 million of federal and $11
million of state net operating loss carryforwards for tax reporting purposes
available to offset future taxable income. These net operating loss
carryforwards expire between 2001 and 2019. We have not recognized any benefit
from the future use of loss carryforwards for these periods or for any other
period since inception because of uncertainty surrounding their realization. The
amount of net operating losses that we can utilize may be limited under tax
regulations in circumstances including a cumulative stock ownership change of
more than 50% over a three-year period. One such change in ownership occurred on
September 10, 1999 which resulted in limiting NOL utilization to approximately
$6 million per year. If prior changes occurred such limitations could further
reduce the availability of such tax attributes.
Under the provisions of the Tax Sharing Agreement with Quantum, Quantum
may utilize Snap's current operating losses while Snap is included in Quantum's
consolidated tax return. In addition, Quantum may utilize Snap's NOL
carryforwards up to the $6 million annual limitation. Quantum is not required to
pay Snap for the use of Snap's current losses or NOL carryforwards. After the
distribution, subject to limitation, any remaining NOL carryforwards would be
available to offset Snap's future taxable income.
RESULTS OF OPERATIONS
Quantum acquired all of the outstanding shares of our common stock on
September 9, 1999, and, since the acquisition, we have operated as a
wholly-owned subsidiary of Quantum. The acquisition was accounted for as a
purchase at a total cost of $115 million including assumed liabilities of $10
million. The purchase price was allocated based on the estimated fair market
value of net tangible and intangible assets acquired and assumed liabilities as
well as in-process research and development costs. As of the acquisition date,
technological feasibility of the in-process technology had not been established
and the technology had no alternative future use. Therefore, we expensed $37
million of the purchase price as in-process research and development in the
period from September 10, 1999 to December 31, 1999. The remaining intangible
assets are being amortized on a straight-line basis over periods ranging from
five to ten years. Accordingly, certain financial information for the periods
prior to September 9, 1999 is not comparable to subsequent periods. The
following discussion of Results of Operations for 1999 represents the combined
results of Meridian for the period from January 1, 1999 to September 9, 1999 and
Quantum Snap Division for the period from September 10, 1999 to December 31,
1999.
26
<PAGE> 31
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues.
<TABLE>
<CAPTION>
COMBINED
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, JUNE 30,
-------------- ------------ -------------------
1997 1998 1999 1999 2000
----- ----- ------------ -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Snap Server product............................. --% 15.2% 44.8% 36.3% 97.4%
CD-ROM product.................................. 100.0 84.8 55.2 63.7 2.6
----- ----- ------ ------ ------
Total revenue..................................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Product sales................................... 47.9 57.5 65.2 65.3 79.9
Amortization of acquisition-related
intangibles................................... -- -- 7.0 -- 13.4
----- ----- ------ ------ ------
Total cost of revenue............................. 47.9 57.5 72.2 65.3 93.3
----- ----- ------ ------ ------
Gross profit...................................... 52.1 42.5 27.8 34.7 6.7
Operating expenses:
Research and development........................ 31.8 33.8 29.4 27.3 30.5
Selling general and administrative.............. 69.3 91.5 114.8 90.3 110.0
Amortization of goodwill and other
acquisition-related intangibles............... -- -- 6.4 -- 13.5
Purchased in-process Research and Development... -- -- 205.7 -- --
----- ----- ------ ------ ------
Total operating expenses.......................... 101.1 125.3 356.3 117.6 154.0
Operating loss.................................... (49.0) (82.8) (328.5) (82.9) (147.3)
Interest and other income......................... 10.0 7.7 3.3 4.4 0.3
----- ----- ------ ------ ------
Net loss.......................................... (39.0)% (75.1)% (325.2)% (78.5)% (147.0)%
===== ===== ====== ====== ======
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 AND 1999
Revenue
Total revenue for the six months ended June 30, 2000 was $15.8 million,
compared to $7.9 million in the corresponding period in 1999, an increase of
99%. Snap Server product revenue in the six months ended June 30, 2000 was $15.4
million, compared to $2.9 million in the corresponding period in 1999, an
increase of 435%. The higher Snap Server revenue in the first half of 2000
reflected increased unit shipments and sales mix shifting toward higher capacity
Snap Servers that began shipment in the second quarter of 2000. The higher
capacity Snap Servers have a higher price than the lower capacity servers.
CD-ROM based product revenue for the six months ended June 30, 2000 was
$0.4 million, compared to $5.1 million in the corresponding period in 1999, a
decrease of 92%. The CD-ROM product line was effectively discontinued at the end
of 1999.
Two distributors, Ingram Micro and Tech Data, accounted for 41% and 40%,
respectively, of our total revenue for the six months ended June 30, 2000,
compared to 32% and 23%, respectively, of our total revenue for the comparable
period in 1999.
Gross Profit
Gross profit for the six months ended June 30, 2000 was 7%, compared to
35% in the corresponding period in 1999. The six months ended June 30, 2000
included $2.1 million of intangible assets amortization that resulted from the
purchase accounting for our September 1999 acquisition by Quantum Corporation.
Excluding the intangible asset amortization, our gross profit for the six months
ended June 30, 2000 was 20%. The additional 15 percentage point decrease
reflected a sales mix shift to Snap Servers at a lower gross profit than CD-ROM
products. The decrease also reflected our discontinuation of CD-ROM based
product sales, which earned a higher gross profit compared to Snap Servers. We
expect gross profit to increase in the second half of 2000 compared to the first
half, as
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volumes increase at a faster rate than the increase in cost of sales,
particularly for the relatively fixed components of cost of sales, and as the
sales mix shifts toward higher-margin higher-capacity Snap Servers.
Operating Expenses
Research and Development. Research and development expenses for the six
months ended June 30, 2000 were $4.8 million, or 30% of revenue, compared to
$2.2 million, or 27% of revenue, for the corresponding period in 1999. This
increase reflected increased staffing and investment in developing higher
capacity Snap Server appliances. Research and development expenses are expected
to increase in subsequent quarters.
Selling, General and Administrative. Selling, general and administrative
expenses for the six months ended June 30, 2000 were $17.4 million, or 110% of
revenue, compared to $7.2 million, or 90% of revenue, for the corresponding
period in 1999. This increase reflected an increase in advertising and marketing
programs to promote sales and brand awareness of Snap Server appliances,
staffing and costs for business systems. Selling, general and administrative
expenses are expected to increase in subsequent quarters.
Amortization of Goodwill and Other Acquisition-Related Intangible
Assets. Amortization of goodwill and other acquisition-related intangible assets
for the six months ended June 30, 2000 was $2.1 million, and there was no
amortization in the corresponding period in 1999. The goodwill and other
acquisition-related intangible assets being amortized resulted from the purchase
accounting related to the September 1999 acquisition by Quantum. For additional
information regarding the acquisition, refer to Note 3 of the Notes to Financial
Statements.
Interest and Other Income/Expenses. Net interest and other income and
expenses for the six months ended June 30, 2000 was less than $0.1 million,
compared to $0.3 million income in the corresponding period in 1999. The
decrease reflected lower interest income as a result of lower average cash
balances.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenue
Total revenue in 1999 was $18.0 million, compared to $17.5 million in
1998, an increase of 3%. Revenue in 1999 reflected a full year of Snap Server
product revenue of $8.1 million, compared to a half year of revenue in 1998 of
$2.7 million, an increase of 203%. Most of the Snap Server revenue in 1999 were
from sales in the second half of the year, with 43% of the sales occurring in
the fourth quarter and 64% of sales occurring in the second half of the year.
CD-ROM based product revenue in 1999 was $9.9 million, compared to $14.9
million in 1998, a decrease of 33%. The decrease reflected sales shifting to
workgroup-class CD-ROM NAS appliances from enterprise-class CD-ROM servers.
Workgroup-class CD-ROM NAS appliances have a lower unit price than
enterprise-class CD-ROM servers.
Two distributors, Ingram Micro and Tech Data, accounted for 38% and 24%,
respectively, of our 1999 revenue, compared to 41% and 23%, respectively, of our
1998 revenue.
Gross Profit
Gross profit in 1999 was 28%, compared to 42% in 1998. Included in 1999
gross profit was $1.3 million of intangible assets amortization. The intangible
assets resulted from the purchase accounting for our September 1999 acquisition
by Quantum. Excluding the intangible asset amortization, gross profit for 1999
was 35%. The remaining seven percentage point decrease reflected sales shifting
to workgroup-class CD-ROM NAS appliances from enterprise-class CD-ROM servers.
Workgroup-class CD-ROM NAS appliances had a lower gross profit than
enterprise-class CD-ROM servers. The decrease also
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reflected sales mix shifting to Snap Server products, which have a lower gross
profit than CD-ROM products.
Operating Expenses
Research and Development. Research and development expenses in 1999 were
$5.3 million, or 29% of revenue, compared to $5.9 million, or 34% of revenue, in
1998. This decrease reflected higher costs in the first half of 1998 related to
the development of the Snap Server product during that period.
Selling, General and Administrative. Selling, general and administrative
expenses in 1999 were $20.6 million, or 115% of revenue, compared to $16.0
million, or 91% of revenue, in 1998. This increase reflected an increase in
advertising and marketing programs to promote sales and brand awareness of Snap
Server appliances, legal and advisory costs associated with the evaluation and
negotiation of the acquisition by Quantum and increases in our infrastructure.
Amortization of Goodwill and Other Acquisition-Related Intangible
Assets. Amortization of goodwill and other acquisition-related intangible assets
in 1999 was $1.1 million, and there was no amortization in 1998. The goodwill
and other acquisition-related intangible assets being amortized resulted from
the purchase accounting for the September 1999 acquisition by Quantum. For
additional information regarding the acquisition, refer to Note 3 of the Notes
to Financial Statements.
Purchased In-process Research and Development Expenses. Purchased
in-process research and development costs of $37 million were expensed as a
result of the purchase accounting for the September 1999 acquisition by Quantum.
As of the acquisition date, the technological feasibility of the in-process
technology had not been established and the technology had no alternative future
use.
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each
in-process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenue generated from such
projects, and discounting the net cash flows back to their present value using a
discount rate of 21%, which represents a premium to Quantum's cost of capital.
The expected revenue assumes an average compound annual revenue growth rate of
64% during calendar years 1999 through 2007. Expected total revenue from the
purchased in-process projects peak in calendar year 2005 and then begin to
decline as other new products are expected to introduced. These projections are
based on management's estimates of market size and growth, expected trends in
technology and the expected timing of new product introductions.
Four in-process research and development projects were identified and
valued, including three Snap Server projects and one operating system project.
The Snap Server is a family of network attached storage appliances which
incorporate hard disk drives and an operating system designed to meet the
requirements of entry and workgroup level computing environments where multiple
computer users access shared data files over a local area network. Since the
operating system represents a significant technology component of the Snap
Server product, the operating system technology was valued as a separate
technology asset. These projects are intended to provide additional capacity and
enhanced functionality to current Snap Server products. Snap Server projects and
the operating system project represent 61% and 39%, respectively, of the total
in-process research and development value of $37 million. As of September 10,
1999, the Snap Server projects ranged from 24% to 82% complete and the operating
system technology project was 39% complete. The Snap Server and operating system
projects were completed on schedule in fiscal year 2000.
Interest and Other Income/Expenses. Net interest and other income and
expenses in 1999 were $0.6 million of income, compared to $1.4 million of income
in 1998. The decrease reflected lower interest income as a result of lower
average cash balances.
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YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenue
Total revenue in 1998 was $17.5 million, compared to $20.0 million in
1997, a decrease of 12%. The Snap Server was introduced in 1998, contributing
$2.7 million in revenue in the second half of the year. The decrease in overall
revenue reflected lower CD-ROM based product revenue as enterprise-class CD-ROM
server products sales mix shifted to workgroup-class CD-ROM NAS appliances that
achieved higher unit volume but at lower prices.
Two distributors, Ingram Micro and Tech Data, accounted for 41% and 23%,
respectively, of our 1998 revenue, compared to 21% and 19%, respectively, of our
1997 revenue.
Gross Profit
Gross profit in 1998 was 42%, compared to 52% in 1997. The decrease
reflected the sales mix shifting to workgroup-class Snap Servers and CD-ROM
products from enterprise-class CD-ROM products. The workgroup-class products
earned a lower gross margin compared to the enterprise-class products.
Operating Expenses
Research and Development. Research and development expenses in 1998 were
$5.9 million, or 34% of revenue, compared to $6.3 million, or 32% of revenue, in
1997. This decrease in expenses reflected the completion of the development of
the initial Snap Server. The increase in research and development expenses as a
percentage of revenues reflected a decline in revenues.
Selling, General and Administrative. Sales and marketing expenses in 1998
were $16.0 million, or 91% of revenue, compared to $13.8 million, or 69% of
revenue, in 1997. This increase reflected the advertising and marketing costs
related to the introduction of the Snap Server.
Interest and Other Income/Expenses. Net interest and other income and
expenses in 1998 were $1.4 million of income, compared to $2.0 million of income
in 1997. The decrease reflected lower interest income as a result of lower
average cash balances.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Quantum has managed cash on a centralized basis, and since
our acquisition by Quantum in September 1999, Quantum has managed Snap's cash.
Since the acquisition, we have used cash in our operations primarily as a result
of operating losses. Quantum has funded the cash used in our operations. The
cash reported at December 31, 1998 reflected us as an independent company with
no relationship with Quantum. The cash reported at December 31, 1999 and June
30, 2000 reflected Snap as a wholly-owned subsidiary of Quantum.
In accordance with our separation agreements, Quantum will transfer to us
the Quantum-owned assets and liabilities that relate to our business prior to
the separation date. We will also receive the net proceeds of this offering. We
anticipate that we will use some of the proceeds from this offering to expand
our sales and marketing channels, for research and development activities for
capital expenditures associated with becoming an independent company and for
general working capital purposes.
Cash used in operating activities was $14.6 million for the six months
ended June 30, 2000. Cash used in operating activities was $16.7 million in
1999. Cash used in operating activities was $11.9 million in 1998 and $3.4
million in 1997.
Cash used in operating activities in the six months ended June 30, 2000
and each of the years 1999, 1998 and 1997 resulted primarily from net losses
adjusted for non-cash charges for purchased in-process research and development,
depreciation and amortization and changes in working capital. In
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addition, for the six months ended June 30, 2000, cash used in operating
activities also resulted from an increase in inventory.
We have been advised that Quantum currently intends to provide sufficient
resources to fund our operations until at least the earlier of December 31, 2001
or our successful completion of an initial public offering.
Our future capital requirements will depend on a number of factors,
including the timing and rate of the expansion of our business. We anticipate a
substantial increase in our capital expenditures to support anticipated growth
in operations, general corporate infrastructure and software for our information
systems and staffing. We believe that our cash, cash equivalents and proceeds
from this offering will provide sufficient capital to fund our operations for at
least the next 12 months. We cannot assure you, however, that the underlying
assumed levels of revenues and expenses will prove to be accurate. We may need
to raise additional funds through public or private financings or other
arrangements in order to:
- support more rapid expansion of our business than we anticipate;
- develop and introduce new or enhanced products or services;
- respond to competitive pressures;
- invest in or acquire complementary businesses, products or
technologies; or
- respond to unanticipated requirements or developments.
We cannot be certain that financing will be available to us on favorable
terms or at all when we need it. If additional funds are raised through the
issuance of equity securities, dilution to existing stockholders may result. If
insufficient funds are available, we may not be able to introduce new products
and services, expand the development of our Snap Server product line or compete
effectively in any of our markets, any of which could materially harm our
business, financial condition and results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
As of June 30, 2000, we had cash and cash equivalents of $2.9 million,
which consisted of highly liquid money market instruments with maturities less
than 90 days. Because of the short maturities of these instruments, a sudden
change in market interest rates would not have a material impact on the fair
value of the portfolio. We would not expect our operating results or cash flows
to be affected to any significant degree by the effect of a sudden change in
market interest rates on our portfolio.
Foreign Currency Exchange Risk
Historically, currency exchange rate fluctuations have not had a material
effect on our business, financial condition or results of operations since
substantially all income derived from our international sales are denominated in
U.S. dollars. If our non-U.S. sales expand, the effect of currency fluctuations
may have a more significant impact on our revenues and costs. We do not
currently and do not intend in the future to utilize foreign currency derivative
financial instruments for trading purposes.
Effects of Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Investments and Hedging Activities." SFAS 133 establishes a new model
for accounting for derivative instruments and hedging activities and supercedes
several existing standards. It requires that an entity recognize all derivatives
as either assets or liabilities in the balance sheet and measure those
instruments at fair value. SFAS 133, as amended by SFAS 137 and SFAS 138, is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
We do not expect that the adoption of SFAS 133 will in fiscal year 2001 have a
material impact on our financial position or results of operations.
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In December 1999, the Securities and Exchange Commission staff issued
Staff Accounting Bulletin, or SAB, No. 101, "Revenue Recognition in Financial
Statements." SAB 101 explains how the SEC staff applies by analogy the existing
rules on revenue recognition to other transactions not covered by such rules. In
March 2000, the SEC issued SAB 101A that delayed the original effective date of
SAB 101 until the second quarter of 2000 for calendar year companies. In June
2000, the SEC issued SAB 101B that further delayed the effective date of SAB 101
until no later than the fourth fiscal quarter of fiscal years beginning after
December 15, 1999. We are reviewing the requirements of SAB 101 and currently we
believe that our revenue recognition policy is consistent with the guidance of
SAB 101.
In March 2000, FASB issued FASB Interpretation No. 44, or FIN 44,
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB Opinion No. 25." FIN 44 clarifies the following: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a noncompensatory plan; the
accounting consequence of various modifications to the terms of the previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. We do not expect the application
of FIN 44 to have a material impact on our financial position or results of
operations.
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BUSINESS
OVERVIEW
We are the leading provider of network attached storage, or NAS,
solutions for workgroups. We design, develop and market NAS appliances that
offer a combination of interoperability, reliability, ease of use and
cost-effectiveness that we believe is better suited to the storage needs of
workgroups than other storage alternatives. Our Snap Server appliances utilize
our optimized hardware and proprietary operating system, the Snap OS, to enable
our customers to add additional storage capacity to a network quickly,
inexpensively and conveniently. Unlike general-purpose servers, which are
complex and designed to support a broad range of applications, our Snap Server
appliances are designed and optimized for only one use -- storage. As of June
30, 2000, we have sold over 25,000 Snap Servers through a multi-tier
distribution strategy focused on our channel partners including distributors,
value-added resellers and catalog resellers. We also have an OEM relationship
with Dell and a limited number of direct sales through our web-based e-commerce
site. Our target end-users are workgroups within small to large organizations
and application service providers and Internet service providers. We are
recognized by PC Data as the leader in the workgroup NAS market, with an
estimated 80% market share. Our goal is to maintain our leadership position in
this market and to expand into other market segments.
INDUSTRY BACKGROUND
Growth and Changing Nature of Enterprise Data
In the last decade, there has been a dramatic increase in the volume of
data created, processed and accessed throughout organizations. As a result, the
demand for storage capacity has grown exponentially as enterprises increasingly
need to access, process and manipulate data that is critical to their business.
According to Dataquest, Inc., the number of terabytes, or trillions of bytes, of
storage capacity shipped is projected to grow from approximately 125,000 in 1999
to over 1.3 million in 2003, representing a compound annual growth rate of 79%.
We believe that the exponential growth in the volume of enterprise storage needs
has been fueled by a number of factors, including:
- the rapid expansion of data intensive applications such as e-mail and
database management;
- the increase of Internet and e-commerce based businesses;
- the rapid growth of digital video and other multimedia applications;
- the shift from mainframe to networked server computing; and
- the need for redundant copies of enterprise files and data.
In addition, organizations have recognized the importance and value of
enterprise data as mission-critical and as a strategic and competitive asset to
their employees, customers and suppliers. As a result, storage products and
services have accounted for a high percentage of information technology budgets
and management resources. Organizations evaluating alternatives for additional
storage capacity must consider a number of factors including manageability,
capacity, access time, security, reliability, interoperability and total cost of
ownership.
Limitations of Existing Storage Architectures
The traditional way to add storage has been to add additional
general-purpose servers to the network or to add higher-capacity disk drives to
existing servers. Adding an additional general-purpose server solely to gain
additional storage capacity is rarely the simplest or most cost-effective
solution, particularly in the workgroup environment. The rapidly changing
storage environment has exposed several limitations in the server-attached
storage architecture, including:
Limited Availability and Accessibility of Data. The loss of a
server causes data on connected storage devices to become inaccessible.
In addition, the critical data backup function in
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the server-attached storage architecture is a lengthy process and often
requires the server to be taken off-line.
High Scalability Costs. Businesses that wish to add storage
capacity generally must add either additional servers, which are
expensive and difficult to install, or disk drives, which require taking
a server off-line. The addition of a new, costly general-purpose server
creates unnecessary network complexity.
Lack of Manageability. The difficulty of connecting storage
devices using the traditional server-attached storage architecture often
results in isolated islands of information stored throughout the
enterprise, each of which must be administered and managed locally.
Interoperability Limitations. Server-attached storage is
designed to operate on a single operating system, such as UNIX or Windows
NT, which requires a network to maintain duplicate copies of files for
each operating system, increasing management complexity and the required
storage capacity.
Emergence of Alternative Storage Solutions
Today, two solutions, network attached storage and storage area networks
have emerged to solve many of the problems associated with server-attached
storage.
Network Attached Storage. NAS is designed with the sole purpose
of adding storage to a network and is implemented using a specially
designed storage appliance. NAS appliances are intelligent storage
systems that attach directly to an existing network. Similar to
general-purpose servers, NAS appliances include a central processing
unit, an operating system and internal hard disk drive storage. However,
unlike general-purpose servers, which are complex and designed to be used
for many types of applications, a NAS appliance's only function is to add
storage to a network.
Storage Area Networks. A storage area network, or SAN, is
designed to assume all storage functions from a host network. A SAN is an
architecture consisting of sophisticated hardware and management software
that directly connects multiple independent servers and storage
subsystems through a dedicated storage network. A SAN solution is
typically deployed in large and complex environments and is relatively
expensive. A SAN includes devices from multiple vendors, each of which
uses proprietary software, which complicates communications among devices
and often limits the flexibility of customers when adding additional
storage capacity.
Benefits of Network Attached Storage
Key benefits of NAS include:
Availability and Scalability. NAS appliances are attached
directly to a network and are not dedicated to a single server.
Therefore, if a server on a network goes down, users are still able to
access the data stored on a NAS appliance. The process of adding storage
capacity to a network is relatively simple and does not require taking a
server off-line.
Manageability. NAS appliances are typically compatible with
multiple operating platforms, enabling file sharing across various
platforms and simplifying data management.
Performance. NAS appliances generally have an operating system
designed solely for storage, which offers enhanced performance over a
general-purpose server. Additionally, a user can directly access data
over the network without going through a server, potentially improving
network performance.
Low Total Cost of Ownership. Total cost of ownership includes
not only the initial cost of a storage system, but also expenses
associated with the ongoing administration of the network.
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As compared to general-purpose servers, the focused, reliable design of
NAS appliances results in a less expensive device, a quicker and easier
installation process and virtually no on-going maintenance requirements.
The Strategic Research Institute estimates that the annual cost to manage
storage can be four times the cost to acquire it.
According to Dataquest, it is believed that 40 to 60% of all
general-purpose servers are being used solely for file sharing. NAS appliances
can replace many of these general-purpose servers and also represent a viable
alternative to upgrading or adding storage capacity on an existing
general-purpose server.
Dataquest expects the NAS market to grow from $686 million in 1999 to
approximately $8.3 billion in 2004, including $2.4 billion for the entry-level
to mid-range segment of the market. The NAS appliance market is generally
divided into three segments: entry-level, mid-range and high-end. As the devices
move up-market, they become more expensive and offer greater storage capacity.
Entry-level is the newest segment of the NAS market and is generally
characterized by NAS devices having one or two disk drives, no expandability and
an average sales price of approximately $1,200. Dataquest projects the
entry-level market to grow from approximately $94 million in 2000 to $1.1
billion in 2004, representing a compound annual growth rate of approximately
85%. The mid-range market is generally characterized by NAS devices having up to
seven disk drives, enhanced reliability, availability and serviceability
features and an average sales price of approximately $3,500. Dataquest projects
the mid-range market to grow from approximately $95 million in 2000 to $1.3
billion in 2004, representing a compound annual growth rate of approximately
92%.
Some of the NAS solutions being offered are designed for enterprise level
applications with very high unit costs, which are not optimal for use at the
entry and mid-range levels, including workgroups. Many of the existing NAS
solutions can operate only with certain network operating systems. Others are
limited in the number of users they can support, or have reliability
constraints, including a limited ability to support redundant array of
independent disks or RAID. RAID is a storage method in which data is distributed
among several disks to improve performance and reliability. Accordingly, we
believe there is considerable market opportunity at the workgroup level for NAS
appliances that deliver the full complement of NAS advantages, but are optimized
for use at the entry and mid-range levels.
THE SNAP SOLUTION
We are the leading provider of NAS solutions for workgroups. Our Snap
Server appliances offer a combination of interoperability, reliability, ease of
use and cost-effectiveness that we believe is better suited to the storage needs
of workgroups than other available storage alternatives. Our appliances are
designed to deliver specific storage functionality through the integration of
our optimized hardware and proprietary operating system. We believe that we are
well positioned to expand our leadership position by offering the following
advantages:
Integrated Storage Solution
Our NAS appliances provide users with a complete storage solution that
requires no additional hardware or software. Our Snap OS is a proprietary
operating system optimized to simplify and increase the speed of file
management. The integration of our operating system with our specially designed
hardware architecture results in a reliable and cost-effective appliance.
Additionally, we provide sophisticated system management, backup and security
tools that further enhance the functionality of our products.
Ease of Use
The design of our NAS appliances provides ease of installation,
management and maintenance. Installation can be completed in less than five
minutes and requires nothing more than plugging in a power cord and a network
cable. Our intuitive and proprietary user interface allows point-and-click
operation to manage users, file permissions, volume information, set-up
parameters and diagnostics and can be
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administered remotely via the web. Our products are designed to minimize routine
maintenance and user intervention.
Interoperability
Our cross-platform compatibility enables our customers to use a single
Snap Server to share the same file across multiple operating systems, including
Apple MacOS, Linux, Microsoft Windows, Novell Netware and UNIX. Our
interoperability further allows our customers to change operating systems
without encountering compatibility constraints. We believe we are the only
provider of workgroup NAS appliances with this level of interoperability.
Low Total Cost of Ownership
Our NAS appliances are designed to deliver superior performance at a
price significantly below the published list prices of general-purpose servers
equipped to perform the same storage functions. We achieve our low cost through
the use of our proprietary, integrated architecture that is optimized solely for
storage. Because our products are easy to install, they can be rapidly deployed
across an enterprise without costly IT services and once installed, require
virtually no maintenance.
Reliability
Reliability may generally be defined as a high probability of obtaining
access to data when it is needed. We are able to offer reliable functionality
due to our unique product design. In particular, our multiple disk products
include several levels of RAID functionality, including RAID 0, 1 and 5, in
addition to our other reliability features. We believe our products are the only
similarly priced NAS appliances that offer RAID 5 capabilities, providing our
customers enhanced data protection coupled with maximum utilization of available
disk capacity.
THE SNAP STRATEGY
Our objective is to maintain our leadership position in the workgroup NAS
market as well as to expand into other market segments. The key elements of our
strategy include:
Extend Technology Leadership
We intend to continue to provide innovative NAS appliance solutions that
provide a compelling value to our customers. In order to maintain and extend our
leadership position, we intend to:
Add new hardware designs. We intend to continue to develop
hardware designs to address the needs of our customers. We expect to
rapidly introduce innovative new products that incorporate customer
feedback. For example, we recently introduced the Snap Server 4100 model,
which added storage capacity while moving to a 1.75 inch high, or 1U,
form factor that fits into industry standard racks.
Add new functionality. We intend to continue to enhance the
functionality of our products by incorporating evolving protocol
standards. We will seek to continue to update our software to add storage
management tools, to enhance our security and backup features and to
incorporate improvements in our file system. We anticipate integrating a
Java Virtual Machine into our Snap OS, which would enable outside
developers to deploy existing, or create new, Java applications for our
products. These applications can increase the functionality of our
products without additional hardware. Examples of these applications may
include database management applications or intelligent data retrieval
engines.
Continue to offer a cost-effective solution. We intend to
continue to use standard industry components with our optimized Snap OS
to provide a cost-effective solution to our customers. This will also
include enhanced user interfaces and manageability features to reduce
ongoing maintenance and administration costs.
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Extend interoperability leadership. We believe we are the only
NAS vendor to offer a workgroup solution that is compatible with all
major operating systems. We will continue to seek to make all of our
products compatible with all major operating systems in order to maintain
the ease of use which is one of the key distinguishing features of our
products.
Expand Our Market Reach
We pursue a leveraged distribution strategy focused primarily on VAR and
distributor relationships. We expect to continue to expand our VAR and catalog
reseller base in order to reach new customers and vertical markets.
Additionally, we will seek to expand internationally by building local
infrastructure and adding international distribution channels. We also intend to
build our sales resources to work with our channel partners to increase direct
contact with significant end-user customers and broaden our existing customer
relationships to increase sales within their organizations. We will also seek to
leverage our OEM relationship with Dell to reach a broader customer base.
Drive Market Acceptance of NAS Solutions for Workgroups
We intend to use our sales force to increase the market acceptance of NAS
solutions through a focus on educating our end-user customers and channel
partners on the benefits of NAS versus other storage solutions. We believe our
OEM relationship with Dell will further serve to increase the market awareness
of NAS solutions through Dell's marketing efforts.
Increase Snap Server Brand Awareness
We intend to establish Snap as the premier NAS appliance brand for our
target customers. We intend to continue to create brand awareness by investing
in innovative, award-winning products, progressive product styling, aggressive
public relations activities and creative end-user and channel marketing
programs. Additionally, we believe a distinctive brand identity is an important
component of our efforts to increase market acceptance of NAS appliances and
encourage future development of applications by outside developers.
PRODUCTS
We began shipping our first generation NAS appliance in March 1998. As of
June 30, 2000, we had shipped over 25,000 NAS appliances. Our products are
currently available in storage capacities ranging from 15 gigabytes, or billions
of bytes, to 240 gigabytes. Our Snap Servers connect directly to a network and
can be easily and seamlessly integrated with other network devices. To install a
Snap Server, a user simply connects the appliance to a network and a power
source and then turns on the appliance. Our Snap Server utilizes security
information from Microsoft Windows or Novell Netware, thus eliminating the need
to re-enter user security information. The entire installation process should
take less than five minutes and does not require an information technology
professional.
We enhance the performance and cost-effectiveness of our products by
using hardware that is optimized for our target markets and applications. This
hardware includes motherboards with standard components, hard disk drives,
memory and processors. Our optimized design, which allows for a more efficient
use of components, reduces cost and power consumption and increases reliability.
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<PAGE> 42
The following table reflects our current product lines:
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT SNAP SERVER 1000 SNAP SERVER 2000 SNAP SERVER 4100
------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
DATE OF FIRST SALE: November 1999 March 1998 September 2000
--------------------
LIST PRICE: $499 to $799 $1,699 $2,999 to $4,499
--------------------
CURRENT FEATURES: 15/30 GB capacity 60 GB capacity 120/240 GB capacity
1 disk drive 2 disk drives 4 disk drives
3.5 pound desktop or Desktop form factor 1U rack form factor
portable form factor RAID 0, 1 RAID 0, 1, 5
--------------------
TARGET MARKETS: Individuals Small- to mid-size Mid- to large-size
Small office/home offices offices
office Mid-size workgroups Mid- to large-size
Small workgroups Remote offices workgroups
Internet, Application,
and Storage Service
Providers
--------------------
APPLICATIONS: Personal storage File sharing File sharing
File sharing Data backup Data hosting
Software distribution Software distribution Data backup
--------------------
</TABLE>
INDUSTRY RECOGNITION OF OUR PRODUCTS
Our Snap Server appliances have received recognition for their innovation
and quality, including the following industry awards:
"Best of Show," Gartner Group VAR Vision, Fall 2000;
"A-List Editor's Choice," Smart Business, June 2000;
"Blue Ribbon," Network World, April 2000;
"A-List Editor's Choice," PC Computing, March, April and May
2000;
"Editor's Choice," PC Magazine, February 2000;
"Editor's Choice," Cadence Magazine, December 1999;
"MVP," PC Computing, November 1999;
"Best Value," Network Computing, July 1999; and
"Best of Plug and Play Storage," PC Computing, May 1999.
TECHNOLOGY
We have invested in the development of proprietary technology that
includes our operating system, management tools and workstation backup software.
Operating System
Our products are based on our specialized Snap OS. The Snap OS is a
derivative of the Berkeley Software Distribution, or BSD, UNIX operating system
that has been optimized for our Snap Server appliances. Since NAS appliances
pass data to and from the clients on the networks, the data handling and
overhead associated with read and write operations have been drastically reduced
below what is available in a standard UNIX operating system. Our file system has
been modified to simultaneously function in a variety of operating environments,
including Apple MacOS, Linux, Microsoft Windows, Novell Netware and UNIX.
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<PAGE> 43
We have implemented an integrated RAID subsystem (patent pending) that
takes advantage of our hardware and software architecture to provide high
performance while not incurring the additional costs of a separate RAID
controller card. Additionally, we are the only workgroup NAS solution at this
price point to offer RAID 5 functionality. RAID 5 provides the user with
enhanced reliability while optimizing the amount of usable disk space.
Our Snap OS utilizes a sophisticated memory management scheme. Since user
applications are not competing for memory resources, we are able to dedicate the
majority of the subsystem memory as a cache buffer for data movements. In
addition, a fast content switch mechanism has been implemented. The operating
system and related files are stored in both Flash Memory and a protected area of
the disk, thus protecting the Snap Server from viruses and hacker attacks. The
file system has also been enhanced to reduce the time required for a file system
check.
Management Tools
Our system design allows Snap Servers to be plugged into a network and
used with little or no configuration. To further customize an installation, if
desired, a system administrator can use an intuitive web browser interface,
which operates directly with the Snap OS. The web-based tools allow
configuration from anywhere on the network remotely via the web.
To improve reliability and reduce cost of ownership of our Snap Servers,
the Snap OS monitors the state of the various software and hardware subsystems
and sends an e-mail to alert the system administrator of any issue that might
require corrective action. The proactive problem resolution enhances the overall
reliability of the NAS appliance while reducing management overhead.
Workstation Backup Software
Included with each Snap Server is a licensed copy of PowerQuest
DataKeeper Snap Edition workstation backup software for additional data
protection. DataKeeper allows companies or individuals to protect their desktop
or laptop data in a way that is completely transparent to the user. Simple
configuration from a client machine enables a user to save data to a Snap Server
each time a file is saved. Restoring files is seamless from any point on the
network.
SALES AND MARKETING
We sell our products to end-users through a multi-tier distribution
strategy focused on distributors, VARs and catalog resellers. We also have an
OEM relationship with Dell and a limited number of direct sales to end-user
customers via our web-based e-commerce site.
Distribution Channel
Distributors. Substantially all of our sales are to leading distributors
who then sell to VARs and catalog resellers. We expect that sales through
distributors will continue to represent the majority of our sales. Our top five
distribution partners based on net revenues in the six months ended June 30,
2000 were Ingram Micro, Tech Data, Raab Karcher Elektronik, Ideal Hardware and
Arrow Electronics.
Value Added Resellers and Catalog Resellers. Historically, our marketing
efforts have focused on creating demand among end-users, thereby driving sales
to the VAR and catalog reseller channels. We utilize our base of over 1,700
authorized VARs and five catalog resellers to cost-effectively reach a growing
number of small to large organizations. Our VARs and catalog resellers also help
us to promote market awareness of NAS as well as the Snap Server brand.
Additionally, VARs and catalog resellers enable us to more effectively pursue
other markets, including vertical markets such as retail, financial services,
transportation and professional services such as medical and legal, government,
education, media and publishing.
Original Equipment Manufacturer. In September 2000, we began selling our
products through our first OEM relationship with Dell. We believe this
relationship will be extremely helpful in establishing
39
<PAGE> 44
category awareness for NAS appliances, particularly in our target market. As
part of this relationship, we design and manufacture products that are sold
under the Dell PowerVault brand name.
E-Commerce Direct Sales. We also give end-users the option of purchasing
our products directly from us through our e-commerce functionality on our web
site. These orders are processed and fulfilled through one of our distribution
partners and do not represent a significant portion of our sales.
Sales Force
The primary function of our sales force is to generate demand for our
products that is fulfilled through our channel partners. In addition, they act
as a valuable partner with our distribution channel to educate our end-user
customers on the value of a NAS solution. We encourage our sales staff to work
with end-user customers to generate sales regardless of the distribution channel
partner ultimately chosen by the customer. We believe that this indirect model
enables us to expand our sales and drive demand for our products, while
maintaining a low cost of sales. We also work with Marketlink Technologies, a
manufacturers' representative with a sales force of more than 50 people.
Marketlink is used primarily to reach our smaller VARs and assist in the general
education of the market on the value of NAS appliances. As of June 30, 2000, we
had a sales organization of 18 persons located throughout the U.S., Europe and
Asia.
Marketing Programs
To support our multi-tier sales channels, we devote significant resources
to building and launching a series of marketing campaigns. Our marketing efforts
include seminars, industry trade shows, direct mail pieces, analyst and press
tours, print and on-line advertising and public relations. Additionally, we
focus on marketing programs at the VAR and catalog reseller community to build
loyalty and promote awareness of the Snap Server brand. These programs include
sales incentives, demonstration unit discounts as well as sales and technical
training. We believe that these marketing efforts result in better awareness of
our Snap Server brand and qualified sales leads.
Customer Service and Support
We believe that high quality customer service is critical to the
successful marketing and sale of our products. We have a comprehensive service
and support organization to manage customer accounts and expect to provide an
increasing level of support as our products are deployed across a wider range of
customers. We provide support for our products on a geographic basis through
contracted support services in California, Ireland and Singapore. We provide
second-level technical support primarily from our San Jose, California location.
We plan to establish additional service and support sites commensurate with
customer needs.
Our current products are designed to be deployed quickly and effectively
by our customers and require minimal support for us to configure and install. We
offer a three-year limited warranty on parts and labor and a 30-day
unconditional money-back guarantee. Toll-free technical support is available for
customers in North America, Europe and Asia.
40
<PAGE> 45
CUSTOMERS
Our target end-user customer organizations include workgroups within
small to large organizations in industry sectors such as retail, financial
services, transportation, professional services such as medical and legal,
government, education, media, publishing. In addition, our customers also
include application service providers and Internet service providers. The
following is a list of end-user customers in North America with which Snap has
had direct contact from January 1, 2000 to September 30, 2000:
<TABLE>
<S> <C> <C>
Adams Mark Hotel Command Technologies Nuskin
Allstate Insurance Disney Imagineering Oracle
American Cancer Society Epson Pfizer
Bancorp South Fenwick and West Shell Oil
Beverly Healthcare Hewlett-Packard Sprint PCS
Bristol Meyers Squibb Humana Insurance Sonoco
Bureau of Land Management Kmart Sony
California DMV Lucent Technologies Southwest Research
Canadian Micro Electronics Microsoft Texas Instruments
Cisco Systems Moore North America Total Training Network
Centerbeam Nationwide Insurance United Parcel Service
Clear Channel Communications Network Telephone US Internet
Coca Cola Enterprises Nikon 3Com
</TABLE>
Our direct customers are distributors who sell to VARs and catalog
resellers, representing approximately 45% and 55% of sales during the six months
ended June 30, 2000, respectively. Two customers represented more than 10% of
sales in 1998, 1999 and the six months ended June 30, 2000, with Ingram Micro
representing 41%, 38% and 41%, respectively, and Tech Data representing 23%, 24%
and 40%, respectively. In 1998, 1999 and the six months ended June 30, 2000, we
do not believe that any single end-user customer accounted for more than 10% of
our revenues.
MANUFACTURING
We currently engage a combination of contract manufacturers to build our
full range of product offerings. Our internal manufacturing expertise is
primarily focused on providing least total cost solutions, process and product
quality, test equipment process deployment, reliability, manufacturability and
the transfer of products from development to manufacturing. We also manage the
evaluation and selection of key components and strategic suppliers. We intend to
place all future volume production with contract manufacturers.
Our contract manufacturers perform tasks that include material
procurement, assembly, testing, packaging, warehousing and shipment and repair.
Using contract manufacturers enables us to reduce our need for working capital,
lower our inventory warehousing costs and reduce our cash requirements as we
grow our business. Our contract manufacturers include Force Computers (a
Solectron company), Jabil Circuit, JMR Electronics, Quantum and Wellex. All of
our contract manufacturers are ISO9000 certified. We also plan to add an
additional tier-1 contract manufacturer in 2001.
As our needs and the needs of our customers continue to evolve, we plan
to reassess our manufacturing requirements on a periodic basis and make changes
as we consider them necessary.
RESEARCH AND DEVELOPMENT
We believe research and development activities are critical to our
ability to maintain our technological advantage and to develop innovative
products that address the needs of our customers and help evolve the
capabilities of NAS appliances. Our research and development expenses were $5.9
million in 1998, $5.3 million in 1999 and $4.9 million in the six months ended
June 30, 2000. Our research and development activity is located in San Jose,
California.
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<PAGE> 46
As of June 30, 2000, our staff included 37 people involved in research
and development activities, of which 28 were engaged in software-related
activities. Our engineering team averages 12 years of experience with MS and PhD
level graduate degrees from leading universities with specific expertise in
networking protocols, file system architecture, UNIX kernels and RAID
functionality.
COMPETITION
We compete in markets that are new, intensely competitive, highly
fragmented and rapidly changing. Our primary competition can be grouped into two
major categories.
Manufacturers of general-purpose servers. We compete against companies
such as Compaq, Dell, Gateway, Hewlett-Packard, IBM, Sun Microsystems and other
server manufacturers selling general-purpose servers, some of which have
recently begun manufacturing dedicated versions of their general-purpose server
products for sale as NAS appliances. Most of these technologies are based on
"stripped down" versions of their full function servers, offering less capacity,
memory or processing power than their full function servers. In most cases, the
systems still include a costly per seat (or in some cases a site-wide) operating
system license and are based on hardware platforms that are more expensive than
the Snap Server appliance. Additionally, while most of these companies have
powerful brand names and extensive sales channels, their NAS products are not
the core focus of their business or their strategy. Competition in this segment
could also include hard drive suppliers, whose products would be used to upgrade
the capacity of existing general-purpose servers as a substitute for the
purchase of a new server.
Workgroup network attached storage vendors. We also compete against such
companies as Connex (Western Digital), Intel, Linksys, Maxtor and Procom
Technology in the entry and mid-range segment of the NAS appliance market. The
strength of our solution, particularly the robustness of our operating system,
gives us a substantial advantage over the current workgroup competitors. As
reflected in what we believe to be our current 80% share in the workgroup
market, the combination of software features and hardware platform provides a
comprehensive solution to the end-user.
We expect competition in the NAS appliance market to increase
significantly as new companies enter the market and current competitors expand
their product lines and services. Many of these potential competitors are likely
to enjoy substantial competitive advantages including:
- greater resources that can be devoted to the development, promotion and
sale of their products;
- more established sales channels;
- greater software development experience; and
- greater name recognition.
INTELLECTUAL PROPERTY
We have invested significantly in the development of proprietary
technology for NAS appliances. Key areas of intellectual property development
relate to graphical user interface design, advanced NAS operating system
features, NAS mechanical and electrical components, the tight integration of
embedded software with industry standard platforms and components and intuitive
user interfaces that provide easy-to-use appliance functionality. Additionally,
we have integrated third party intellectual property into our products. We may
occasionally reach agreements with third parties to provide additional
functionality for our products and we have offered third parties our technology
for integration into products on an original equipment manufacturer or other
basis. Our success depends significantly upon our proprietary technology.
We have also trademarked the Snap Server name as well as our individual
product names in the United States and will evaluate whether to register our
trademarks in international markets where we currently conduct or may in the
future do business.
On September 8, 1999, we entered into an agreement with Insignia
Solutions. According to this license agreement, Insignia will port their
Java-compatible virtual machine to the Snap OS. Insignia
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<PAGE> 47
completed the port and delivered to us both source code and object code.
Insignia also performed the Java virtual machine testing and certification in
collaboration with Sun Microsystems. Insignia granted Quantum a worldwide,
sublicenseable, transferable, irrevocable and perpetual license to the Java
virtual machine developed by Insignia. On September 8, 1999, Sun Microsystems
granted Quantum a license to the libraries of the code that were developed by
the Sun Java community under the Sun Community Source License Agreement.
We currently rely on a combination of copyright and trademark laws, trade
secrets, confidentiality procedures and contractual provisions to protect our
proprietary rights. We protect our software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. We do not currently hold any patents, and we expect to have two
patent applications pending after Quantum transfers them to us as part of our
separation. We have registered and applied for registration of some of the
service marks and trademarks we use with the appropriate state agencies and the
United States Patent and Trademark Office. We will continue to analyze whether
we should register additional service marks and trademarks.
We generally enter into confidentiality agreements with our employees,
consultants, business partners and major customers. Despite our efforts to
protect our proprietary rights and other intellectual property, unauthorized
parties may attempt to copy aspects of our products, obtain and use information
that we regard as proprietary or misappropriate our copyrights, trademarks,
trade dress and similar proprietary rights. In addition, the laws of some
foreign countries do not protect proprietary rights to as great an extent as do
the laws of the United States. Our means of protecting our proprietary rights
may not be adequate. In addition, our competitors might independently develop
similar technology or duplicate our products or circumvent any patents or our
other intellectual property rights.
EMPLOYEES
As of June 30, 2000, we had 120 full time employees, of whom 37 were
engaged in research and development, 36 in sales and marketing, 15 in finance
and administration and 32 in operations and support. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
FACILITIES
Our principal offices are located in a 72,000 square foot facility in San
Jose, California. Our sublease on the San Jose facility expires in September
2004.
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<PAGE> 48
MANAGEMENT
DIRECTORS AND OFFICERS
Set forth below is information concerning our directors, executive
officers and other officers and their ages as of October 1, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James T. Schraith.............. 43 Chairman of the Board and Chief Executive Officer
Anders B. Axelsson............. 40 President, Chief Operating Officer and Director
Jeanne Seeley.................. 48 Senior Vice President Finance, Chief Financial Officer and
Secretary
Shmuel Shottan................. 48 Senior Vice President, Chief Strategy Officer
Michael F. Falcon.............. 44 Vice President of Operations
Sara E. Spivey................. 39 Vice President of Marketing
Carlo Garbagnati............... 41 Vice President of Engineering
Luciano V. Dalle Ore........... 41 Vice President and Chief Technology Officer
Sandy O'Gorman................. 49 Vice President Human Resources
Clayton M. Christensen......... 48 Director
Gary Daichendt................. 49 Director
Gregory W. Slayton............. 41 Director
</TABLE>
JAMES T. SCHRAITH has served as our Chairman of the Board and Chief
Executive Officer since October 2000. From April 2000 to October 2000, Mr.
Schraith served as Managing Partner, Quantum Technology Ventures, Quantum's
venture capital fund, and from September 1999 to April 2000, Mr. Schraith was
Executive Vice President of Worldwide Sales and Corporate Marketing for Quantum.
Prior to joining Quantum, from February 1998 to September 1999, Mr. Schraith was
Chief Executive Officer of ShareWave, a developer of digital wireless home
networking solutions. From October 1996 to February 1998, Mr. Schraith was Vice
President and General Manager of the North America division of Compaq, a
computing systems company. From September 1995 to October 1996, Mr. Schraith was
President and Chief Executive Officer of The Cerplex Group, a supplier of
technology repair, assembly and logistics. From February 1987 to September 1995,
Mr. Schraith served in various positions at AST Research, a computing systems
company, including President and Chief Operating Officer. Mr. Schraith serves on
the Boards of Directors of Semtech, a supplier of semiconductors, and S3
Corporation, a digital media company.
ANDERS B. AXELSSON has served as our President, Chief Operating Officer
and one of our directors since October 2000. From December 1999 to October 2000,
Mr. Axelsson served as Vice President and General Manager of Quantum's Snap
Division. Prior to joining Quantum, from June 1998 to October 1999, Mr. Axelsson
was Vice President of Engineering and Marketing for the Measurex Division of
Honeywell, a diversified technology company. From December 1994 to June 1998, he
was President/ Managing Director of European operations and from August 1992 to
November 1994, he was Vice President of Marketing and Business Development for
Measurex, a process control company.
JEANNE SEELEY has served as our Senior Vice President Finance, Chief
Financial Officer and Secretary since October 2000. From August 1999 to October
2000, Ms. Seeley served as Vice President, Finance and Chief Financial Officer
of Quantum's DLT & Storage Systems Group. Prior to joining Quantum, from October
1992 to January 1997, Ms. Seeley was Vice President, Finance, Corporate
Controller and Chief Accounting Officer of Apple Computer, a personal computer
company. From February 1990 to October 1992, Ms. Seeley was Vice President of
Worldwide Financial Operations for Apple, and from April 1981 to February 1990,
Ms. Seeley held various financial management positions at Apple, including
Director of Finance and Controller for Peripheral Products.
SHMUEL SHOTTAN has served as our Senior Vice President and Chief Strategy
Officer since October 2000. From April 2000 to October 2000, Mr. Shottan was
Vice President and General Partner of
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<PAGE> 49
Quantum Technology Ventures, and from September 1999 to April 2000, he was
Senior Vice President of Engineering and Chief Technical Officer for Quantum's
Snap Division. From January 1994 to September 1999, Mr. Shottan served as Senior
Vice President of Engineering and Chief Technical Officer at Meridian Data. From
June 1993 to January 1994, Mr. Shottan served as the Vice President of
Engineering and Chief Technical Officer at Parallan Computer. From June 1989 to
June 1993, Mr. Shottan served as Director of the Server Group at AST Research.
MICHAEL F. FALCON has served as our Vice President of Operations since
October 2000. From September 1999 to October 2000, Mr. Falcon served as Vice
President of Operations for Quantum's Snap Division. Prior to joining Quantum,
from April 1999 to September 1999, Mr. Falcon served as Vice President of
Operations for Meridian Data. From January 1996 to April 1999, Mr. Falcon served
as Director of Operations, Strategic Planning and Supply Chain Management and
from February 1989 to January 1996 as Director of Materials and Manufacturing
for Silicon Valley Group, a semiconductor equipment manufacturer.
SARA E. SPIVEY has served as our Vice President of Marketing since
October 2000. From December 1999 to October 2000, Ms. Spivey was Vice President
of Marketing for Quantum's Snap Division. From October 1996 to December 1999,
Ms. Spivey was Director of Worldwide Channel Marketing for the High End Storage
Division of Quantum. From January 1993 to September 1996, Ms. Spivey was
Director of Worldwide Sales Operations of Quantum. From November 1990 to
December 1992, she held various marketing management positions in Quantum's hard
disk drive group.
CARLO GARBAGNATI has served as our Vice President of Engineering since
October 2000. From September 1999 to October 2000, Mr. Garbagnati was Vice
President of Engineering for Quantum's Snap Division. From December 1994 to
September 1999, Mr. Garbagnati served as Vice President of Software Engineering
at Meridian Data. From September 1988 to December 1994, Mr. Garbagnati served as
the Director, System Software Engineering and as Manager, Software Engineering
at Parallan Computer.
LUCIANO V. DALLE ORE has served as our Vice President and Chief
Technology Officer since October 2000. From May 2000 to October 2000, Mr. Dalle
Ore was Vice President and Chief Technology Officer for Quantum's Snap Division.
From September 1999 to May 2000, Mr. Dalle Ore was Vice President of Advanced
Development for Quantum's Snap Division. From June 1996 to September 1999, Mr.
Dalle Ore served as Vice President of Advanced Development at Meridian Data.
From March 1995 to June 1996, he was Vice President of Research and Development
and a Director at Sextant Corporation, a process manufacturing software
developer. Prior to Sextant, from September 1994 to March 1995, Mr. Dalle Ore
was Vice President of Research and Development at MAI Systems, an information
technology solution supplier.
SANDY O'GORMAN has served as our Vice President of Human Resources since
October 2000. From September 2000 to October 2000, Ms. O'Gorman was Vice
President of Human Resources for Quantum. From November 1997 to August 2000, Ms.
O'Gorman was Senior Director of Human Resources, Worldwide Sales and Corporate
Marketing for Quantum. Prior to joining Quantum, from May 1994 to August 1997,
Ms. O'Gorman was Vice President of Human Resources for Sybase, a data base
company.
CLAYTON M. CHRISTENSEN has served as one of our directors since October
2000. Since July 1992, Mr. Christensen has been a Professor of Business
Administration at the Harvard Business School. From 1989 to July 1992, Mr.
Christensen was a doctoral student at Harvard Business School. From 1984 to
1989, he served in various positions, including Chairman and President, of
Ceramics Process Systems, a materials and material process company, a firm which
he co-founded with several MIT professors.
GARY DAICHENDT has served as one of our directors since October 2000.
Since October 1994, Mr. Daichendt has held numerous senior management positions
at Cisco Systems, and is currently Executive Vice President of Worldwide
Operations. Prior to October 1994, Mr. Daichendt held various sales, marketing
and management positions with Wang Laboratories for eight years and IBM for
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<PAGE> 50
nine years. Mr. Daichendt is a director of ClickAction, an email management
company, and Azuza Pacific University.
GREGORY W. SLAYTON has served as one of our directors since October 2000.
Since December 1997, Mr. Slayton has been President and Chief Executive Officer
of ClickAction. From January 1995 to September 1997, he was President of
ParaGraph International, a software and communications company. Mr. Slayton also
is a director of Quantum, InTest, a hardware test device company, and
NetCreations, an email list services company.
BOARD STRUCTURE AND COMPENSATION
We currently have five directors. Our board of directors is divided into
three classes serving staggered three-year terms. Mr. Christensen's initial term
will expire in 2001. Messrs. Daichendt's and Slayton's initial terms will expire
in 2002. Messrs. Schraith's and Axelsson's initial terms will expire in 2003.
Under our 2000 Director Option Plan, each non-employee director will
automatically receive an option to acquire 40,000 shares of our common stock and
an additional option to purchase 10,000 shares of our common stock after each
annual meeting of our stockholders beginning in 2001. All of these options vest
over four years from the date of grant. We do not pay any cash compensation to
our directors for serving on the board of directors.
AUDIT COMMITTEE
Messrs. Christensen, Daichendt and Slayton are members of our audit
committee. Our audit committee reviews our auditing, accounting, financial
reporting and internal control functions and makes recommendations to the board
of directors for the selection of independent accountants. In addition, the
committee monitors the quality of our accounting principles and financial
reporting, our compliance with foreign trade regulations as well as the
independence of and the non-audit services provided by our independent
accountants. In discharging its duties, the audit committee:
- reviews and approves the scope of the annual audit and the independent
accountant's fees;
- meets independently with our internal accounting staff, our independent
accountants and our senior management; and
- reviews the general scope of our accounting, financial reporting,
annual audit and internal audit program, matters relating to internal
control systems as well as the results of the annual audit.
COMPENSATION COMMITTEE
Messrs. Christensen and Slayton are members of our compensation
committee. Our compensation committee determines, approves and reports to the
board on all elements of compensation for our elected officers including
targeted total cash compensation and long-term equity based incentives.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of our compensation committee has at any time been an
officer or employee of Snap. No interlocking relationship exists between our
board of directors or compensation committee and the board of directors or
compensation committee of any other company.
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<PAGE> 51
STOCK OWNERSHIP OF DIRECTORS AND OFFICERS
All of our common stock is currently owned by Quantum, and thus none of
our directors, executive officers or other officers owns any of our common
stock. To the extent that our directors, executive officers and other officers
own shares of Quantum's DSS common stock at the time of the distribution, they
will participate in the distribution on the same terms as other holders of
Quantum's DSS common stock.
The following table sets forth the number of shares of Quantum's DSS
common stock and Quantum's HDD common stock beneficially owned on October 9,
2000 by each director, executive officer and other officer and all of our
directors, executive officers and other officers as a group. Except as otherwise
noted, the individual director, executive officer or other officer or their
family members had sole voting and investment power with respect to such
securities. Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and includes shares of common stock
issuable upon exercise of options exercisable within 60 days of October 9, 2000.
As of October 9, 2000, the total number of shares of Quantum's DSS common stock
outstanding was 148,970,644, and the total number of shares of Quantum's HDD
common stock outstanding was 77,121,172.
<TABLE>
<CAPTION>
SHARES OF DSS SHARES OF HDD
COMMON STOCK COMMON STOCK
BENEFICIALLY OWNED BENEFICIALLY OWNED
--------------------- --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE
------------------------ ------- ---------- ------ ----------
<S> <C> <C> <C> <C>
James T. Schraith.................................. 104,165 * 52,082 *
Anders B. Axelsson................................. 5,555 * 2,777 *
Jeanne Seeley...................................... 37,497 * 18,750 *
Shmuel Shottan..................................... 58,126 * 28,040 *
Michael F. Falcon.................................. 19,729 * 9,865 *
Sara E. Spivey..................................... 48,064 * 16,480 *
Carlo Garbagnati................................... 34,496 * 22,649 *
Luciano V. Dalle Ore............................... 26,578 * 11,791 *
Sandy O'Gorman..................................... 15,274 * 7,637 *
Clayton M. Christensen............................. -- -- -- --
Gary Daichendt..................................... -- -- -- --
Gregory W. Slayton................................. -- -- -- --
Directors, executive officers and other officers as
a group.......................................... 349,484 * 170,071 *
</TABLE>
------------
* Represents holdings of less than one percent.
In October 2000, we adopted the 2000 Incentive Stock Option Plan. We
intend to issue options under this plan to our executive officers prior to the
effective date of the registration statement of which this prospectus is a part.
At such time we will amend the registration statement and set forth the number
of shares subject to options that have been granted to each of our executive
officers under this plan and the resulting ownership interest of each of our
executive officers in our fully diluted capitalization giving effect to all
options granted under the 2000 Incentive Stock Option Plan.
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<PAGE> 52
EXECUTIVE COMPENSATION
The following table sets forth the compensation information for our chief
executive officer or person acting in such capacity and to our four other most
highly compensated executive officers who, based on salary and bonus
compensation from our predecessor entity and Quantum and their subsidiaries,
earned more than $100,000 during the year ended December 31, 1999. All
information set forth in this table reflects compensation earned by these
individuals for service with our predecessor entity and Quantum and their
subsidiaries for the fiscal year ended December 31, 1999. This prospectus refers
to these executives as the "named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------- ------------
RESTRICTED
STOCK SECURITIES ALL OTHER
BONUS AWARD(S) UNDERLYING COMPENSATION
NAME AND CURRENT POSITION SALARY($) ($) ($) OPTIONS(#) ($)(1)
------------------------- --------- ------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Gianluca Rattazzi.................... 260,000 483,000 -- 17,700(6) 1,200
Chief Executive Officer of
Meridian(2) 35,400(7)
Anders B. Axelsson................... 7,342 -- -- -- --
President, Chief Operating Officer
and Director(3)
Shmuel Shottan....................... 187,472 67,000 37,450(6) 38,032(6) 1,200
Senior Vice President, 171,775(7) 76,063(7)
Chief Strategy Officer(4)
Carlo Garbagnati..................... 141,922 50,500 18,725(6) 14,766(6) 1,200
Vice President of Engineering 85,887.50(7) 29,532(7)
Luciano V. Dalle Ore................. 141,923 50,500 18,725(6) 14,766(6) 1,200
Vice President and 85,887.50(7) 29,532(7)
Chief Technology Officer
Michael F. Falcon.................... 90,424 25,500 -- 11,063(6) 1,200
Vice President of Operations(5) 22,125(7)
</TABLE>
------------
(1) Represents matching contributions to our predecessor entity's 401(k) plan.
(2) Mr. Rattazzi ceased serving as our Chief Executive Officer in September
1999.
(3) Mr. Axelsson joined Quantum on December 20, 1999.
(4) Mr. Shottan served as our acting General Manager from September 1999 to
December 1999.
(5) Mr. Falcon joined our predecessor entity on April 19, 1999.
(6) Represents shares of Quantum's HDD common stock and reflects conversion of
our predecessor entity's common stock and options in connection with our
acquisition by Quantum in September 1999.
(7) Represents shares of Quantum's DSS common stock and reflects conversion of
our predecessor entity's common stock and options in connection with our
acquisition by Quantum in September 1999.
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GRANTS OF STOCK OPTIONS IN LAST FISCAL YEAR
The following table shows all grants of options to acquire shares of
Quantum's DSS common stock or Quantum's HDD common stock (including upon
conversion of options granted by our predecessor entity that were converted in
connection with our acquisition by Quantum in September 1999) granted to the
named executive officers in the year ended December 31, 1999.
<TABLE>
<CAPTION>
% OF TOTAL POTENTIAL REALIZABLE VALUE
NUMBER OF OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO EXERCISE STOCK APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(2)
OPTIONS IN FISCAL PRICE EXPIRATION --------------------------
NAME GRANTED(#) YEAR(1) ($/SH.) DATE 5%($) 10%($)
---- ---------- ---------- -------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gianluca Rattazzi....... 17,700(2) * $ 2.873 4/21/09 $ 17,804 $ 33,423
35,400(3) * 5.908 4/21/09 582,835 1,039,018
Anders B. Axelsson...... -- -- -- -- -- --
Shmuel Shottan.......... 5,532(3) * 2.873 4/21/09 29,599 55,566
32,500(3) * 7.500 9/22/09 153,293 388,475
11,063(4) *(5) 5.908 4/21/09 182,167 324,758
65,000(4) *(5) 17.188 9/22/09 702,593 1,780,509
Carlo Garbagnati........ 2,766(3) * 2.873 4/21/09 16,520 31,012
12,000(3) * 7.500 9/22/09 56,601 143,437
5,532(4) * 5.908 4/21/09 101,669 181,251
24,000(4) * 17.188 9/22/09 259,419 657,419
Luciano V. Dalle Ore.... 2,766(3) * 2.873 4/21/09 15,146 28,436
12,000(3) * 7.500 9/22/09 56,601 143,437
5,532(4) * 5.908 4/21/09 93,197 166,147
24,000(4) * 17.188 9/22/09 259,419 657,419
Michael F. Falcon....... 11,063(3) * 2.873 4/21/09 66,073 124,038
22,125(4) * 5.908 4/21/09 406,622 724,906
</TABLE>
------------
* Represents holdings of less than one percent.
(1) Based on a total of 6,033,025 shares of Quantum's HDD common stock granted
to all Quantum employees in 1999 or a total of 7,435,851 shares of Quantum's
DSS common stock granted to all Quantum employees in 1999, as applicable,
and reflects conversion of our predecessor entity's options in connection
with our acquisition by Quantum in September 1999.
(2) Potential realizable values are net of exercise price, but before deduction
of taxes associated with exercise. These amounts represent certain assumed
rates of appreciation only, based on the Securities and Exchange Commission
rules, and do not represent our estimate of future stock prices. No gain to
an optionee is possible without an increase in stock price, which will
benefit all stockholders commensurately. A zero percent gain in stock price
will result in zero dollars for the optionee. Actual realizable values, if
any, on stock option exercises are dependent on the future performance of
our common stock, overall market conditions and the option holders'
continued employment through the vesting period.
(3) Represents shares of Quantum's HDD common stock and reflects conversion of
our predecessor entity's common stock and options in connection with our
acquisition by Quantum in September 1999.
(4) Represents shares of Quantum's DSS common stock and reflects conversion of
our predecessor entity's common stock and options in connection with our
acquisition by Quantum in September 1999.
(5) The aggregate of these two option grants equals 1.02% of the total DSS
options granted to employees (calculated as described in footnote one above)
in the year ended December 31, 1999.
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<PAGE> 54
EXERCISES OF STOCK OPTIONS
The following table shows aggregate exercises of options to purchase
Quantum's DSS common stock or Quantum's HDD common stock in the year ended
December 31, 1999 by the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES VALUE YEAR-END(#) FISCAL YEAR-END($)
ACQUIRED ON REALIZED ---------------------------- ----------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gianluca Rattazzi.... -- -- $ -- 35,347(1) $ -- $174,893
-- -- -- 70,689(2) -- 779,957
Anders B. Axelsson... -- -- -- -- -- --
Shmuel Shottan....... -- -- 3,512(1) 50,960(1) 19,347(3) 97,221
-- -- 7,026(2) 101,915(2) 85,625(4) 431,498
Carlo Garbagnati..... -- -- 7,640(1) 21,480(1) 41,762(3) 49,234
5,800 70,526 9,480(2) 42,960(2) 113,629(4) 218,774
Luciano V. Dalle
Ore................ -- -- 2,043(1) 20,935(1) 11,007(3) 46,206
-- -- 4,085(2) 41,869(2) 48,768(4) 205,371
Michael F. Falcon.... -- -- -- 11,063(1) -- 44,964
-- -- -- 22,125(2) -- 203,924
</TABLE>
------------
(1) Represents shares of Quantum's HDD common stock.
(2) Represents shares of Quantum's DSS common stock.
(3) Based on the fair market value of $6.9375 per share as of December 31, 1999,
the closing sale price of Quantum's HDD common stock on that date as
reported by the New York Stock Exchange.
(4) Based on the fair market value of $15.125 per share as of December 31, 1999,
the closing sale price of Quantum's DSS common stock on that date as
reported by the New York Stock Exchange.
TREATMENT OF DSS OPTIONS HELD BY SNAP EMPLOYEES
On the distribution date, any option to purchase Quantum's DSS common
stock held by an employee who has transferred from Quantum to Snap pursuant to
the Master Separation and Distribution Agreement shall be assumed by the Snap
2000 Stock Plan, and shall be converted into an option to purchase Snap common
stock.
TREATMENT OF DSS RESTRICTED STOCK HELD BY SNAP EMPLOYEES
On the distribution date, any restricted shares of Quantum's DSS common
stock held by an employee who has transferred from Quantum to Snap pursuant to
the Master Separation and Distribution Agreement shall be assumed by the Snap
2000 Stock Plan, and shall be converted into restricted shares of Snap common
stock, subject to the same vesting schedule applicable to the restricted shares
of Quantum's DSS common stock.
TREATMENT OF DSS OPTIONS HELD BY QUANTUM EMPLOYEES
On the distribution date, any outstanding option to purchase Quantum's
DSS common stock held by Quantum employees who do not transfer to Snap shall be
converted (using a conversion formula) into an option to purchase Quantum's DSS
common stock and an option to purchase Snap common stock. The option to purchase
Snap common stock shall be governed by the terms of the Snap 2000 Stock Plan.
Options to acquire a maximum of shares, or %, of the Snap common
stock available under our 2000 Stock Plan will be issued to employees of Quantum
that are not employees of Snap.
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<PAGE> 55
TREATMENT OF DSS RESTRICTED STOCK HELD BY QUANTUM EMPLOYEES
On the distribution date, any Quantum employee who does not transfer to
Snap that holds restricted shares of Quantum's DSS common stock will receive a
dividend in the form of Snap common stock. To the extent that the restricted
shares of Quantum's DSS common stock are not vested, the shares of Snap common
stock issued as a dividend will be subject to the same vesting schedule
applicable to the restricted shares of Quantum's DSS common stock.
INCENTIVE PLANS
2000 INCENTIVE STOCK OPTION PLAN
In October 2000, the board of directors adopted our 2000 Incentive Stock
Option Plan. The plan was approved by our stockholder in October 2000 and
provides for the grant of incentive stock options and non-statutory stock
options. There are 3,600,000 shares reserved for issuance under the plan. On the
effective date of this offering, the 2000 Incentive Stock Option Plan shall
terminate and any reserved but unissued shares under the 2000 Incentive Stock
Option Plan and any shares returned to the 2000 Incentive Stock Option Plan
shall be reserved for issuance under the 2000 Stock Plan.
2000 STOCK PLAN
Our 2000 Stock Plan was adopted by our board of directors in October
2000, and our stockholder approved the plan in October 2000. This plan provides
for the grant of incentive stock options to our employees and nonstatutory stock
options and stock purchase rights to our employees, directors and consultants.
In addition, the plan provides for the grant of stock appreciation rights, or
SARs, and long-term performance awards. A total of 12,900,000 shares of our
common stock are reserved for issuance under our 2000 Stock Plan.
The number of shares reserved for issuance under our 2000 Stock Plan will
increase annually on the first day of our fiscal year beginning in 2001 by an
amount equal to the lesser of (i) 5% of the outstanding shares of our common
stock on the first day of the fiscal year, (ii) 3,900,000 shares, or (iii) such
lesser amount as our board of directors may determine.
Our board of directors or a committee of our board administers the 2000
Stock Plan. The committee may consist of two or more "outside directors" to
satisfy certain tax and securities requirements. The administrator has the power
to determine the terms of the options, stock purchase rights, SARs and long-term
performance awards granted, including the exercise price, the number of shares
subject to each award, the exercisability of each award and the form of
consideration payable upon exercise. The administrator determines the exercise
price of awards granted under our stock plan, but with respect to incentive
stock options, the exercise price must at least be equal to the fair market
value of our common stock on the date of grant. Additionally, the term of an
incentive stock option may not exceed ten years. The administrator determines
the term of all other options. No optionee may be granted an option to purchase
more than 2,000,000 shares in any fiscal year. In connection with his or her
initial service, an optionee may be granted an additional option to purchase up
to 2,500,000 shares of our common stock. After termination of one of our
employees, directors or consultants, he or she may exercise his or her option
for the period of time stated in the option agreement. However, an option may
never be exercised later than the expiration of its term.
Our stock plan provides that in the event of our merger with or into
another corporation or a sale of substantially all of our assets, the successor
corporation will assume or substitute for each option, stock purchase right,
stock appreciation right, and long-term performance award under our 2000 Stock
Plan. If the outstanding options, stock purchase rights, stock appreciation
rights, or long-term performance awards are not assumed or substituted for, such
awards shall become fully vested and exercisable. Our stock option plan will
automatically terminate in 2010, unless we terminate it sooner. In addition, our
board of directors has the authority to amend, suspend or terminate the stock
option plan provided it does not adversely affect any award previously granted
under our stock option plan.
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<PAGE> 56
2000 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted the Employee Stock Purchase Plan in
October 2000, and the plan was approved by our stockholder in October 2000. The
plan shall become effective at a time determined by our board of directors, or a
committee thereof, in its sole discretion. A total of 1,500,000 shares of our
common stock will be made available for sale. In addition, our plan provides for
annual increases in the number of shares available for issuance under the
purchase plan on the first day of our fiscal year beginning in 2001 in an amount
equal to the lesser of 3% of the outstanding shares of our common stock on the
first day of the fiscal year, 2,600,000 shares, or such other lesser amount as
may be determined by our board of directors. Our board of directors or a
committee of our board administers the plan. Our board of directors or its
committee has full and exclusive authority to interpret the terms of the plan
and determine eligibility. When, and if, the plan becomes effective, all of our
employees are eligible to participate if they are customarily employed by us or
any participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, an employee may not be granted an option
to purchase stock under the plan if such employee:
- immediately after grant owns stock possessing 5% or more of the total
combined voting power or value of all classes of our capital stock; or
- whose rights to purchase stock under all of our employee stock purchase
plans accrues at a rate that exceeds $25,000 worth of stock for each
calendar year.
Our plan is intended to qualify for preferential tax treatment and
contains consecutive, overlapping 24-month offering periods. Each offering
period includes four six-month purchase periods.
The plan permits participants to purchase common stock through payroll
deductions of up to 10% of their eligible compensation which includes a
participant's base straight time gross earnings, overtime, shift premiums and
commissions but excluding all other compensation paid to our employees. A
participant may purchase no more than 10,000 shares during any six-month
purchase period.
Amounts deducted and accumulated by the participant are used to purchase
shares of our common stock at the end of each six-month purchase period. The
price is 85% of the lower of the fair market value of our common stock at the
beginning of an offering period or after a purchase period ends. If the fair
market value at the end of a purchase period is less than the fair market value
at the beginning of the offering period, participants will be withdrawn from the
current offering period following their purchase of shares on the purchase date
and will be automatically re-enrolled in a new offering period. Participants may
end their participation at any time during an offering period, and will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
A participant may not transfer rights granted under our employee stock
purchase plan other than by will, the laws of descent and distribution or as
otherwise provided under the plan.
In the event of our merger with or into another corporation or a sale of
all or substantially all of our assets, a successor corporation may assume or
substitute each outstanding option. If the successor corporation refuses to
assume or substitute for the outstanding options, the offering period then in
progress will be shortened, and a new exercise date will be set.
Our plan will terminate in 2010. However, our board of directors has the
authority to amend or terminate our plan, except that, subject to certain
exceptions described in the plan, no such action may adversely affect any
outstanding rights to purchase stock under our plan.
2000 DIRECTOR OPTION PLAN
Our board of directors adopted the 2000 Director Option Plan in October
2000 and our stockholder initially approved the director plan in October 2000.
The director plan provides for the periodic grant of nonstatutory stock options
to our non-employee directors. A total of 350,000 shares were reserved for
issuance under the director plan.
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<PAGE> 57
All grants of options to our non-employee directors under the director
plan are automatic. We will grant to each non-employee director an option to
purchase 40,000 shares, the First Option, on the latter of the effective date of
this director plan or the date such person first becomes a non-employee director
(except for those directors who became non-employee directors by ceasing to be
employee directors). Twenty five percent of the First Option shall vest on the
one year anniversary of the date of grant, and 1/48 of the First Option shall
vest each month thereafter, provided the individual remains a non-employee
director on such dates.
Each non-employee director shall automatically be granted an option to
purchase 10,000 shares, the Subsequent Option, after each annual meeting of our
stockholders beginning in 2001, if immediately after such meeting, he or she
shall continue to serve on the board and has been a director for at least six
months prior to the annual shareholders meeting. Twenty five percent of the
Subsequent Option shall vest on the one year anniversary of the date of grant,
and 1/48 of the Subsequent Option shall vest each month thereafter, provided the
individual remains a non-employee director on such dates.
All options granted under our director plan have a term of ten years and
an exercise price equal to fair market value on the date of grant. After
termination as a non-employee director with us, an optionee must exercise an
option at the time set forth in his or her option agreement. If termination is
due to death or disability, the option will remain exercisable for 12 months. In
all other cases, the option will remain exercisable for a period of three
months. However, an option may never be exercised later than the expiration of
its term. A non-employee director may not transfer options granted under our
director plan other than by will or the laws of descent and distribution. Only
the non-employee director may exercise the option during his or her lifetime.
In the event of a merger or asset sale, the acquiring corporation shall
assume or substitute for the options granted under this plan. If the acquiring
corporation does not assume or substitute for the options, such options shall
become fully vested and exercisable.
Unless terminated sooner, our director plan will automatically terminate
in 2010. Our board of directors has the authority to amend, alter, suspend, or
discontinue the director plan, but no such action may adversely affect any grant
made under the director plan.
CHANGE OF CONTROL AGREEMENTS
All of our executive officers and certain other officers will enter into
change of control agreements with us, providing for severance payments, and the
continuation of health care coverage, for a period of 12 months in the event
they are "Involuntarily Terminated," as defined in the agreements, on or within
18 months following a change of control. The agreements also provide that in the
event of a change of control and the executive's Involuntary Termination within
18 months following a change of control, the vesting of certain options and
restricted stock held by such executives will accelerate.
EMPLOYEE AGREEMENTS
All Quantum employee agreements of all former Quantum employees who are
transferred to Snap as part of the separation shall remain in full force and
effect according to their terms; provided, however, that certain use and/or
disclosure of confidential information and intellectual property of Quantum for
and on behalf of Snap shall not be considered to be a breach of such Quantum
employee agreements.
Quantum retains all rights under the Quantum employee agreements of all
former Quantum employees necessary for Quantum to protect its own rights and
interests.
Both parties may separately enforce the employee agreements to the extent
necessary to reasonably protect their respective interests; provided, however,
that the party bringing such action consult with the other party prior to such
action.
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<PAGE> 58
LIMITATION ON DIRECTOR'S LIABILITY AND INDEMNIFICATION
Our amended and restated certificate of incorporation limits the
liability of directors to the maximum extent permitted by Delaware law. Delaware
law provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
- breach of their duty of loyalty to the corporation or its stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
- any transaction from which the director derives an improper personal
benefit.
The limitation of liability in our amended and restated certificate of
incorporation does not apply to liabilities arising under the federal or state
securities laws and does not affect the availability of equitable remedies such
as injunctive relief or rescission.
Our amended and restated bylaws provide that we shall indemnify our
directors, officers, employees and agents to the maximum extent permitted by the
Delaware General Corporation Law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any current or former officer, director, employee or other agent of our company,
or of another enterprise if serving at our request, for any liability arising
out of his or her actions in that capacity, regardless of whether we would have
the power to indemnify him or her against liability under the provisions of the
Delaware General Corporation Law.
We have entered into agreements to indemnify our directors and officers,
in addition to the indemnification provided for in our bylaws. These agreements,
among other things, require us to indemnify our directors and officers for any
and all expenses (including attorneys fees), judgments, fines, penalties and
amounts paid in settlement (if such settlement is approved in advance by us,
which approval shall not be unreasonably withheld) in connection with any
action, suit or proceeding arising out of the individual's status as a director,
officer, employee, agent or fiduciary of ours, any subsidiary of ours or any
other company or enterprise to which the individual provides services at our
request, and any federal, state, local or foreign taxes imposed on the
individual as a result of the actual or deemed receipt of any payments under
these agreements. In addition, we are obligated to advance expenses incurred by
the individual in connection with any proceeding against the individual with
respect to which the individual may be entitled to indemnification by us. We
believe that the indemnity provided by our certificate of incorporation, bylaw
provisions and indemnification agreements is necessary to attract and retain
qualified persons as directors and officers. Upon completion of this offering,
we intend to maintain directors and officers liability insurance.
At present, we are not aware of any pending litigation or proceeding
involving a director or officer in which indemnification is required or
permitted, and we are not aware of any threatened litigation or proceeding that
may result in a claim for indemnification.
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<PAGE> 59
RELATED PARTY TRANSACTIONS
The following is a description of transactions in the last three fiscal
years to which we have been a party, in which the amount involved in the
transaction exceeds $60,000 and in which any director, executive officer or
holder of more than 5% of our capital stock had or will have a direct or
indirect material interest other than compensation arrangements which are
otherwise described under "Management."
TRANSACTIONS WITH QUANTUM
In June 2000, we entered into a supply agreement for disk drives with
Quantum that provides for assurance of supply and pre-negotiated prices for a
term of two years.
See Note 13 in the Financial Statements on Page F-22 of this prospectus
for a further description of transactions between Quantum and Snap during the
last three fiscal years.
We have entered into a Master Separation and Distribution agreement with
Quantum that together with the forms of ancillary agreements that form a part
thereof, provides for the separation of our business operations from Quantum.
For more information regarding our separation from Quantum, see "Risk
Factors -- Risks Related to our Separation From Quantum" and "Arrangements
Between Snap and Quantum."
RELATED PARTY LOANS
On November 1, 1999, Quantum entered into a promissory note with James T.
Schraith, our Chief Executive Officer and Chairman of the Board, for $250,000 at
an interest rate of 8% per annum. We expect that in connection with our
separation from Quantum this loan will be transferred from Quantum to us.
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<PAGE> 60
ARRANGEMENTS BETWEEN SNAP AND QUANTUM
We have provided below a summary description of the executed Master
Separation and Distribution Agreement, along with the key related agreements,
which we expect to be executed prior to the completion of this offering. This
description, which summarizes the material terms of the agreements, is not
complete. You should read the full text of these agreements, which have been
filed with the Securities and Exchange Commission as exhibits to the
registration statement of which this prospectus is a part.
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
The Master Separation and Distribution Agreement contains the key
provisions relating to our separation from Quantum, this offering and the
distribution of our shares to the holders of Quantum's DSS common stock.
The Separation. The separation is anticipated to occur within six months
from the completion of the offering. The separation agreement provides for the
transfer to us of assets and liabilities from Quantum related to our business as
described in this prospectus, effective on the separation date. The various
ancillary agreements that are exhibits to the separation agreement and which
detail the separation and various interim and ongoing relationships between
Quantum and us following the separation date include:
- a general assignment and assumption agreement;
- an intellectual property agreement;
- an employee matters agreement;
- a tax sharing agreement;
- a master transitional services agreement; and
- an indemnification and insurance matters agreement.
To the extent that the terms of any of these ancillary agreements
conflict with the separation agreement, the terms of these agreements will
govern. These agreements are described more fully below.
The Initial Public Offering. Under the terms of the separation agreement,
Quantum will own at least 80.1% of our outstanding common stock following this
offering. We are obligated to use our reasonable commercial efforts to satisfy
the following conditions to the consummation of this offering, any of which may
be waived by Quantum:
- the registration statement containing this prospectus must be
effective;
- United States securities and blue sky laws (as well as any comparable
laws under any foreign jurisdictions) must be satisfied;
- our common stock must be listed on the Nasdaq National Market;
- all conditions to our obligations and the obligations of the
underwriters under the underwriting agreement must be satisfied or
waived;
- Quantum shall be satisfied in its sole discretion that it will own at
least 80.1% of our stock after this offering and shall be satisfied
that the distribution will be tax-free to its United States
stockholders;
- no legal restraints must exist preventing the separation or this
offering;
- the separation must have occurred;
- we and Quantum must have taken all other actions that are necessary in
order to effect this offering; and
- the separation agreement must not have been terminated.
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<PAGE> 61
The Distribution. Quantum intends to, within six months following
consummation of this offering, distribute the shares of our common stock that
Quantum holds to holders of Quantum's DSS common stock on a pro rata basis. We
will prepare an information statement with Quantum and send it to the holders of
Quantum's DSS common stock before the distribution becomes effective. The
information statement will inform the stockholders of the distribution and such
other matters as Quantum may reasonably determine are necessary and as may be
required by law. Quantum, in its sole discretion, shall determine, and may
change, the distribution date and all terms of the distribution. Quantum intends
to consummate the distribution only if the following conditions are met, any of
which may be waived by Quantum:
- Quantum shall have obtained a private letter ruling from the Internal
Revenue Service in form and substance satisfactory to Quantum (in its
sole discretion), that (i) the transfer by Quantum to us of the
property related to our business held by Quantum and our assumption of
liabilities related to our business held by Quantum, followed by the
distribution by Quantum of all of its Snap stock to the stockholders of
Quantum, will qualify as a reorganization for United States Federal
income tax purposes; (ii) no gain or loss will be recognized by Quantum
on its transfer of property related to our business to us; (iii) we
will not recognize any gain or loss by Snap on our receipt of property
related to our business from Quantum; and (iv) no gain or loss will be
recognized by (and no amount will otherwise be included in the income
of) the holders of Quantum's DSS common stock upon their receipt of
Snap common stock pursuant to the distribution;
- all material government approvals and consents necessary to consummate
the distribution must be in effect;
- no legal restraints preventing the distribution must exist and no other
event outside the control of Quantum shall have occurred or failed to
occur that prevents the consummation of the distribution; and
- nothing must have happened in the intervening time between this
offering and the distribution that, in the judgment of the board of
directors of Quantum, would make the distribution harmful to Quantum or
the holders of Quantum's DSS common stock.
Covenants Between Quantum and Snap. In addition to signing documents that
transfer control and ownership of various assets and liabilities of Quantum
relating to our business, we have agreed with Quantum to enter into additional
transitional service agreements, exchange information, cooperate in auditing
practices and resolve disputes in particular ways.
Additional Transitional Service Agreements. We will enter into
transitional service agreements with Quantum covering the provision of various
transitional services, including manufacturing; logistics, repair and customer
support; accounting; insurance coverage; and customer service, human resources
and information technology services by Quantum to us. These services will
generally be provided for a fee equal to the direct and indirect costs of
providing the services plus a mark up of five percent. The transitional services
agreements will generally have a term of one year or less. However, in certain
instances, some transactional services agreements may be extended beyond the
initial one year term, in which case the fee for such services shall, generally,
be increased.
Information Exchange. Both Quantum and we have agreed to share
information with each other, for a variety of purposes, unless the sharing would
be commercially detrimental. In furtherance of this, both Quantum and we have
agreed as follows:
- Each party has agreed to maintain adequate internal accounting to allow
the other party to satisfy its own reporting, accounting, audit and
other obligations and prepare its own financial statements;
- Each party will use reasonable commercial efforts to retain records
beneficial to the other party for a specified period of time. If the
records are going to be destroyed, the destroying party will
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<PAGE> 62
use reasonable commercial efforts to notify the other party and give
the other party an opportunity to retrieve all relevant information
from the records, unless the records are destroyed in accordance with
adopted record retention policies; and
- Each party will use reasonable commercial efforts to provide the other
party with access to directors, officers, employees, other personnel
and agents who may be used as witnesses in, and books, records and
other documents which may reasonably be required in connection with,
legal, administrative or other proceedings.
Auditing Practices. So long as Quantum is required to consolidate our
results of operations and financial position, we have agreed to:
- not select a different independent accounting firm without Quantum's
consent; and
- use reasonable commercial efforts to enable Quantum's auditors to meet
their timetable for the printing, filing and public dissemination of
Quantum's annual and quarterly financial statements.
In addition, both Quantum and we have agreed to:
- exchange all relevant information needed to prepare our respective
financial statements;
- grant each other's internal auditors access to each other's records and
respective personnel who perform such audits; and
- notify each other of any change in accounting principles.
Dispute Resolution. If problems arise between us and Quantum relating to
the separation, we have agreed to the following procedures:
- the parties will make a good faith effort to first resolve the dispute
through negotiation;
- if negotiations fail after 30 days, the parties will attempt to resolve
the dispute through non-binding mediation; and
- if mediation fails after 60 days, the dispute will be submitted to
final and binding arbitration, and the prevailing party shall be
entitled to expenses, including costs and reasonable attorneys' fees.
However, nothing prevents either party from initiating litigation at any
time in the following circumstances: breach of any obligation of
confidentiality; infringement, misappropriation or misuse of any intellectual
property right; or any other claim where interim relief from the court is sought
to prevent serious and irreparable injury to one of the parties or to others. In
addition, unless otherwise agreed to in writing, the parties will continue to
provide services and honor all other commitments during the course of dispute
resolution with respect to all matters not subject to such dispute, controversy
or claim.
No Representations and Warranties. Quantum is not making any promises to
us regarding:
- the value of any asset that Quantum is transferring to us;
- whether there is a lien or encumbrance on any asset Quantum is
transferring to us;
- the absence of defenses or freedom from counterclaims with respect to
any claim that Quantum is transferring to us; or
- the legal sufficiency of any conveyance of title to any asset Quantum
is transferring to us.
Except where otherwise indicated, all assets transferred to us shall be
transferred "as is, where is," and we will bear all economic and legal risk with
respect to such conveyances.
No Solicitation. Each party has agreed not to directly solicit or recruit
employees of the other party without the other party's consent for two years
after the distribution date. However, this prohibition does not apply to general
recruitment efforts carried out through public or general solicitation or where
the solicitation is employee-initiated.
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Employee Agreements.
- All Quantum employee agreements of all former Quantum employees who are
transferred to Snap as part of the separation shall remain in full
force and effect according to their terms; provided, however, that
certain use and/or disclosure of confidential information and
intellectual property of Quantum for and on behalf of Snap shall not be
considered to be a breach of such Quantum employee agreements;
- Quantum retains all rights under the Quantum employee agreements of all
former Quantum employees necessary for Quantum to protect its own
rights and interests; and
- Both parties may separately enforce the employee agreements to the
extent necessary to reasonably protect their respective interests;
provided, however, that the party bringing such action consult with the
other party prior to such action.
Cooperation in Obtaining New Agreements. At the request of Snap, Quantum
has agreed to make introductions of appropriate Snap personnel to Quantum's
contacts at certain third parties and will provide reasonable assistance to Snap
so that Snap may enter into agreements or relationships with such third parties
under substantially equivalent terms and conditions. Quantum shall also assist
Snap in obtaining consents to the assignment of third party contracts from
Quantum to Snap.
Expenses. All of the costs and expenses related to this offering as well
as the costs and expenses related to the separation and distribution will be
allocated between us and Quantum. We will each bear our own internal costs
incurred in consummating these transactions.
Termination of the Agreement. Quantum in its sole discretion can
terminate the separation agreement and all ancillary agreements and abandon the
distribution at any time prior to the closing of this offering. Both Quantum and
Snap must agree to terminate the separation agreement and all ancillary
agreements at any time between the closing of this offering and the
distribution.
GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT
The General Assignment and Assumption Agreement identifies the assets
Quantum will transfer to us and the liabilities we will assume from Quantum in
the separation. The agreement also describes when and how these transfers and
assumptions will occur.
Asset Transfer. Effective on the separation date, Quantum will transfer
the following assets to us, to the extent that the assets were, immediately
prior to the separation date, Quantum assets and except as provided in an
ancillary agreement or other agreement:
- assets reflected on our balance sheet as of December 31, 1999, minus
any assets disposed of after December 31, 1999;
- written off, expensed or fully depreciated assets that would have
appeared on our balance sheet as of December 31, 1999, if we had not
written off, expensed or fully depreciated them;
- assets that Quantum acquired after December 31, 1999, that would have
appeared in our financial statements as of the separation date if we
prepared such financial statements using the same principles we used in
preparing our balance sheet dated December 31, 1999;
- assets that our business primarily uses as of the separation date but
are not reflected in our balance sheet as of December 31, 1999, due to
mistake or omission;
- contingent gains related primarily to our business;
- contracts that relate primarily to our business or that are entered
into in our name;
- specified rights under existing insurance policies; and
- other specified assets.
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Assumption of Liabilities. Effective on the separation date, we will
assume the following liabilities from Quantum, to the extent that the
liabilities were, immediately prior to the separation date, Quantum liabilities
and except as provided in an ancillary or other agreement:
- liabilities reflected as liabilities on our balance sheet as of
December 31, 1999, minus any liabilities that were discharged after
such date of the balance sheet;
- liabilities of Quantum that arise after December 31, 1999 that would
have appeared in our financial statements as of the separation date if
we prepared such financial statements using the same principles we used
in preparing our balance sheet dated December 31, 1999;
- liabilities that are primarily related primarily of our business at the
separation date but are not reflected in our balance sheet as of
December 31, 1999, due to mistake or omission;
- contingent liabilities primarily related to our business;
- liabilities other than taxes primarily resulting from the operation of
our business, or resulting from any asset that Quantum transferred to
us;
- liabilities arising out of specified terminated, divested or
discontinued businesses and operations; and
- other specified liabilities.
Delayed Transfers. If it is not practicable to transfer specified assets
and liabilities on the separation date, the agreement provides that these assets
and liabilities will be transferred after the separation date.
Terms of Other Ancillary Agreements Govern. If another ancillary
agreement expressly provides for the transfer of an asset or an assumption of a
liability, the terms of the other ancillary agreement will determine the manner
of the transfer and assumption.
Mistaken Assignments and Assumptions. The general assignment and
assumption agreement provides for the re-transfer and/or re-assumption of any
asset or liability that is mistakenly transferred to or assumed by one party.
Obtaining Approvals and Consents. The parties agree to use all reasonable
efforts to obtain any required consents, substitutions or amendments required to
novate or assign all rights and obligations under any contracts that will be
transferred in the separation.
Nonrecurring Costs and Expenses. Any nonrecurring costs and expenses that
are not allocated in the separation agreement or any other ancillary agreement
shall be the responsibility of the party that incurs the costs and expenses.
Novation of Assumed Snap Liabilities. Each party shall use reasonable
commercial efforts to obtain, or cause to be obtained, any consent,
substitution, approval or amendment required to novate or assign all rights and
obligations under all agreements with respect to liabilities, or to obtain in
writing the unconditional release of all parties to such arrangements other than
Snap so that Snap and its subsidiaries shall be solely responsible for such
liabilities; provided, however, that neither Snap nor Quantum will be obligated
to pay any consideration for such consents, approvals, substitutions and
amendments.
LITIGATION
- Management of the litigation identified in a litigation disclosure
letter, which Quantum will deliver to Snap at the separation date, will
be transferred in its entirety from Quantum to Snap and Snap's
subsidiaries, and, thereafter, Quantum must first obtain the consent
from Snap prior to taking any action in connection with such
litigation;
- All other matters relating to litigation which are not identified in
the litigation disclosure letter shall be governed by the
indemnification and insurance matters agreement; and
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- Each party shall cooperate with the other and afford the other
reasonable access upon reasonable advance notice to any materials or
individuals that are reasonably required to defend the litigation
identified in the litigation disclosure letter.
INTELLECTUAL PROPERTY AGREEMENT
We will enter into an intellectual property agreement with Quantum to
confirm that Snap, by virtue of operating as an entity separate from Quantum, is
the owner of all of the intellectual property created by Snap in connection with
its business. To the extent there has been any commingling of intellectual
property rights, the agreement allocates rights or grants cross-licenses between
Quantum and Snap.
Under this agreement, Quantum will grant a nonexclusive, perpetual,
royalty-free license to Snap to use the intellectual property of Quantum that
has been used by or is necessary to the Snap business as of the separation date
in connection with the Snap business. Snap will grant a nonexclusive, perpetual,
royalty-free license to Quantum to use the intellectual property of Snap that
has been used by or is necessary to the Quantum business as of the separation
date in connection with the Quantum business.
To the extent Quantum owns any intellectual property that is used
exclusively by the Snap business, Quantum will assign its rights in that
intellectual property to Snap. The agreement also assigns Quantum's rights in
certain enumerated patent applications to Snap.
To the extent the parties have access to any of confidential information
of the other party, the agreement will restrict each party from disclosing any
of the other party's confidential information, except in conjunction with the
disclosure of its own confidential information, and allows each party to use any
confidential information of the other party in the operation of its business.
EMPLOYEE MATTERS AGREEMENT
We will enter into an employee matters agreement with Quantum to allocate
assets, liabilities and responsibilities relating to current and former
employees of Snap and their participation in the benefits plans, including stock
plans, that Quantum currently sponsors and maintains.
All eligible Snap employees will continue to participate in the Quantum
benefits plans on comparable terms and conditions to those for Quantum employees
until the distribution date or until we establish benefit plans for our
employees, or elect not to establish comparable plans, if it is not legally or
financially practical. We intend to establish our own benefit program no later
than the time of the distribution.
Once we establish our own benefits plans, we may modify or terminate each
plan in accordance with the terms of that plan and our policies. No Snap benefit
plan will provide benefits that overlap benefits under the corresponding Quantum
benefit plan at the time of the distribution. Snap will use reasonable efforts
to cause each Snap benefit plan to provide that all service, compensation and
other benefit determinations that, as of the distribution, were recognized under
the corresponding Quantum benefits plan will be taken into account under that
Snap benefit plan.
Assets relating to the employee liabilities will be transferred to Snap
or the related Snap plans and trusts from trusts and other funding vehicles
associated with Quantum's benefits plans.
Options. We have established a replacement stock plan, the Snap 2000
Stock Plan, for eligible Snap employees effective as of the effective date of
our registration statement in connection with this offering. We will assume all
options to acquire Quantum's DSS common stock held by Snap employees on the
distribution date, and these options will convert at the distribution into
options to purchase our common stock. The number of shares and the exercise
price of options to acquire Quantum's DSS common stock that convert into Snap
options will be adjusted using a conversion formula. The resulting Snap options
will maintain the original vesting provisions and option period.
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On the distribution date, all outstanding options to acquire Quantum's
DSS common stock held by employees of Quantum who do not transfer to Snap will
be converted into options to purchase DSS common stock and Snap common stock.
The number of shares covered by the options and the exercise price of the
options will be determined using a "blended approach" in which a certain
percentage of the spread on a DSS option on the distribution date is moved to
Snap and the remaining portion of the spread is preserved in the DSS option. The
DSS option will be separately exercisable from the Snap option.
Snap options held by Quantum employees will be governed by the terms of
the Snap 2000 Stock Plan. Quantum employees who exercise Snap options will
receive stock from the Snap 2000 Stock Plan. After Snap's initial public
offering, but before the distribution date, Snap will register the stock
underlying the Snap options on Form S-8.
Restricted Stock. On the distribution date, restricted shares of
Quantum's DSS common stock held by Snap employees will be assumed by the terms
of the Snap 2000 Stock Plan and will be converted into restricted shares of Snap
common stock. On the distribution date, any Quantum employee who does not
transfer to Snap that holds restricted shares of Quantum's DSS common stock will
receive a dividend in the form of Snap common stock. To the extent that the
restricted shares of Quantum's DSS common stock are not vested, the shares of
Snap common stock issued as a dividend will be subject to the same vesting
schedule applicable to the restricted shares of Quantum's DSS common stock.
Stock Purchase Plan. We anticipate that Snap employees will continue to
participate in the Quantum stock purchase plan through the date of this
offering. At a time determined by Snap's board of directors, or a committee
thereof, in its sole discretion, Snap may sponsor the 2000 Employee Stock
Purchase Plan for the benefit of Snap employees.
TAX SHARING AGREEMENT
We will enter into a tax sharing agreement with Quantum that will assign
responsibilities for administrative matters such as the filing of returns,
payment of taxes due, retention of records and conduct of audits, examinations
or similar proceedings. The tax sharing agreement will also require us to
indemnify Quantum for the additional taxes, and any interest and penalties, that
would result if an acquisition of a controlling interest in our stock after the
distribution causes the distribution not to qualify for tax-free treatment to
Quantum.
Each member of a consolidated group for U.S. federal income tax purposes
is jointly and severally liable for the group's federal income tax liability.
Accordingly, we could be required to pay a deficiency in the group's federal
income tax liability for a period during which we were a member of the group
even if the tax were attributable to the operations of another member of the
group.
MASTER TRANSITIONAL SERVICES AGREEMENT
We will enter into a master transitional services agreement with Quantum
that will govern the provision of transitional services by Quantum and us to
each other, on an interim basis, until one year after the separation date,
unless extended for specific services or otherwise indicated in the agreement.
The services include manufacturing; logistics, repair and customer support;
accounting; insurance coverage; customer service, human resources and
information technology services. Services are generally at cost plus a 5%
mark-up. The master transitional services agreement also will cover the
provision of additional transitional services identified from time to time after
the separation date that were inadvertently or unintentionally omitted from the
specified services, or that are essential to effectuate an orderly transition
under the separation agreement, so long as the provision of such services would
not significantly disrupt Quantum's operations or significantly increase the
scope of its responsibility under the agreement. Quantum is only contractually
obligated to provide these services to the same extent and at the same locations
as such services are being provided by Quantum to us as of the separation date.
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INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
General Release of Pre-Separation Claims. Effective as of the separation
date, subject to specified exceptions, we will release Quantum and its
affiliates, agents, successors and assigns, and Quantum will release us, and our
affiliates, agents, successors and assigns, from any liabilities arising from
events occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation, this offering and
the distribution. This provision will not impair a party from enforcing the
separation agreement, any ancillary agreement or any arrangement specified in
any of these agreements.
Indemnification. The Indemnification and Insurance Matters Agreement will
also contain provisions governing indemnification. In general, we have agreed to
indemnify Quantum and its affiliates, agents, successors and assigns from all
liabilities arising from:
- our business, any of our liabilities or any of our contracts; and
- any breach by us of the separation agreement or any ancillary
agreement.
Quantum has agreed to indemnify us and our affiliates, agents, successors
and assigns from all liabilities arising from:
- Quantum's business other than the Snap business; and
- any breach by Quantum of the separation agreement or any ancillary
agreement.
These indemnification obligations do not apply to amounts collected from
insurance. The agreement also contains provisions governing notice and
indemnification procedures.
Liability Arising from This Prospectus. We will bear any liability
arising from any untrue statement of a material fact or any omission of a
material fact in this prospectus.
Insurance Matters. The agreement will also contain provisions governing
our insurance coverage from the separation date until the distribution date. In
general, Quantum shall, subject to insurance market conditions and other factors
beyond its control, maintain insurance policies for the benefit of Snap, its
subsidiaries, directors, officers, employees and other covered parties. We will
agree to reimburse Quantum for premium expenses related to such insurance
coverage during this period. We will work with Quantum to secure additional
insurance if desired and cost effective. After the distribution, we will be
responsible for obtaining and maintaining our insurance programs, and such
insurance arrangements shall be separate and apart from Quantum's insurance
programs.
Environmental Matters. Quantum will agree to indemnify us and our
affiliates, agents, successors and assigns from one-half of the total potential
liabilities arising from environmental conditions existing as of the separation
date at facilities transferred to us, or which arise out of operations occurring
before the separation date at these facilities. Further, Quantum will agree to
indemnify us and our affiliates, agents, successors and assigns from one-half of
the total potential liabilities arising from environmental conditions caused by
operations occurring at any time, whether before or after the separation date,
at any Quantum facility.
We will agree to indemnify Quantum and its affiliates, agents, successors
and assigns from all liabilities arising from environmental conditions caused by
operations after the separation date at any of the facilities transferred to us,
and from environmental conditions at our facilities arising from an event that
occurs on or after the separation date.
Each party will be responsible for all liabilities associated with any
environmental contamination caused by that party post-separation.
Assignment. The Indemnification and Insurance Matters Agreement is not
assignable by either party without prior written consent.
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Dispute Resolution. If any dispute arises between us and Quantum relating
to this agreement, we have agreed to the following:
- The parties will make a good faith effort to first resolve the dispute
through negotiation;
- If negotiations fail, the parties agree to attempt to resolve the
dispute through non-binding mediation; and
- If mediation fails, the parties can resort to binding arbitration. In
addition, nothing prevents either party acting in good faith from
initiating litigation at any time in the following circumstances:
breach of any obligation of confidentiality, infringement,
misappropriation or misuse of any intellectual property right or any
other claim where interim relief from the court is sought to prevent
serious and irreparable injury to one of the parties or to others.
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PRINCIPAL STOCKHOLDER
Prior to this offering, all of the outstanding shares of our common stock
are owned by Quantum. After this offering, Quantum will own approximately %,
or approximately % if the underwriters exercise their over-allotment option in
full, of our outstanding common stock. Except for Quantum, we are not aware of
any person or group that will beneficially own more than 5% of the outstanding
shares of our common stock following this offering. After this offering our
officers and directors as a group will collectively own approximately % of our
shares of common stock on a fully diluted basis.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 500,000,000 shares of common stock, $0.001 par
value, and 10,000,000 shares of undesignated preferred stock, $0.001 par value.
The following description of our capital stock does not purport to be complete
and is subject to and qualified in its entirety by our certificate of
incorporation and bylaws, which are included as exhibits to this registration
statement of which this prospectus forms a part, and by the applicable
provisions of Delaware law.
COMMON STOCK
Prior to this offering, there were shares of common stock
outstanding, all of which were held of record by Quantum.
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. In addition, our certificate
provides that until such time as Quantum distributes our shares we may not issue
securities, except pursuant to our stock plans, without first obtaining the
affirmative vote of a majority of the common stock. Subject to preferences that
may be applicable to any outstanding preferred stock, the holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available for
that purpose. See "Dividend Policy." In the event of our liquidation,
dissolution or the winding up of our affairs, the holders of our common stock
are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior distribution rights of the holders of preferred
stock, if any, then outstanding. The common stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are fully paid and nonassessable, and the shares of common stock
to be issued upon the closing of this offering will be fully paid and
nonassessable.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock upon
the rights of holders of the common stock until the board of directors
determines the specific rights of the holders of such preferred stock. However,
the effects might include, among other things, restricting dividends on the
common stock, diluting the voting power of the common stock, impairing the
liquidation rights of the common stock and delaying or preventing a change of
our control without further action by the stockholders. We have no present plans
to issue any shares of preferred stock.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE AND BYLAWS AND DELAWARE LAW
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years following the date the person became an
interested stockholder, unless the "business combination" or the transaction in
which the person became an interested stockholder is approved in a prescribed
manner. Generally, a "business combination" includes a merger, asset or stock
sale, or other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15% or more of a
corporation's voting stock. The existence of this provision may have an anti-
takeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
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TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar of our common stock is Computershare
Investor Services.
NATIONAL MARKET LISTING
We have applied to have our common stock listed on the Nasdaq National
Market under the symbol "SNPA."
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SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of our common stock sold in this offering will be
freely tradable without restriction under the Securities Act, except for any
shares which may be acquired by an affiliate of Snap, as that term is defined in
Rule 144 under the Securities Act. Persons who may be deemed to be affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with, Snap and may include directors and officers of
Snap as well as significant stockholders of Snap, if any.
Quantum currently plans to complete its divestiture of Snap approximately
six months following this offering by distributing all of the shares of Snap
common stock owned by Quantum to the holders of Quantum's DSS common stock.
Shares of our common stock distributed to the holders of Quantum's DSS common
stock in the distribution generally will be freely transferable, except for
shares of common stock received by persons who may be deemed to be affiliates.
Persons who are affiliates will be permitted to sell the shares of common stock
that are issued in this offering or that they receive in the distribution only
through registration under the Securities Act, or under an exemption from
registration, such as the one provided by Rule 144.
The shares of our common stock held by Quantum before the distribution
are deemed "restricted securities" as defined in Rule 144, and may not be sold
other than through registration under the Securities Act or under an exemption
from registration, such as the one provided by Rule 144. Quantum, our directors
and officers and we have agreed not to offer or sell any shares of our common
stock, subject to exceptions, for a period of 180 days after the date of this
prospectus, without the prior written consent of the underwriters.
We will grant shares of our common stock pursuant to the 2000 Stock Plan
subject to restrictions. See "Management -- Incentive Plans -- 2000 Stock Plan."
We currently expect to file a registration statement under the Securities Act to
register shares reserved for issuance under the 2000 Incentive Stock Option
Plan, 2000 Stock Plan, 2000 Director Option Plan and 2000 Employee Stock
Purchase Plan. Shares issued pursuant to awards after the effective date of the
registration statement, other than shares issued to affiliates, generally will
be freely tradable without further registration under the Securities Act. Shares
issued pursuant to any vested and exercisable options of Quantum converted into
our options will also be freely tradable without registration under the
Securities Act after the effective date of the registration statement. See
"Management -- Treatment of DSS Options Held by Snap Employees and -- Treatment
of DSS Options Held by Quantum Employees."
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney
Inc. and Chase Securities Inc. are acting as representatives of the underwriters
named below. Subject to the terms and conditions described in a purchase
agreement among us and the underwriters, we have agreed to sell to the
underwriters, and the underwriters severally have agreed to purchase from us the
number of shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
OF SHARES
UNDERWRITERS ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Salomon Smith Barney Inc....................................
Chase Securities Inc........................................
--------
Total..........................................
========
</TABLE>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of the shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, or to contribute to payments the
underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right to
withdraw, cancel or modify offers to the public and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The underwriters have advised us that they propose initially to offer the
common shares to the public at the initial public offering price on the cover
page of this prospectus and to dealers at that price less a concession not in
excess of $ per share. The underwriters may allow, and the dealers may
reallow, a discount not in excess of $ per share to certain other dealers.
After the initial public offering, the public offering price, concession and
discount may be changed.
The following table shows the public offering price, underwriting
discount and proceeds before expenses to us. This information assumes either no
exercise or full exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................... $ $ $
Underwriting discount.................... $ $ $
Proceeds, before expenses, to Snap....... $ $ $
</TABLE>
The expenses of this offering, not including the underwriting discount,
are estimated at $ and are payable by us.
OVER-ALLOTMENT OPTION
We have granted options to the underwriters to purchase up to
additional common shares at the public offering price, less the
underwriting discount. The underwriters may exercise these options for 30 days
from the date of this prospectus solely to cover any over-allotments. If the
underwriters
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exercise these options, each will be obligated, subject to conditions contained
in the purchase agreement, to purchase a number of additional shares
proportionate to each underwriter's initial amount reflected in the table above.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to shares, or % of the shares offered
by this prospectus for sale to our directors, employees, consultants and other
persons having business and other relationships with us. If any of these persons
purchase reserved shares, this will reduce the number of shares available for
sale to the general public. Any reserved shares that are not orally confirmed
for purchase within one day of the pricing of this offering will be offered by
the underwriters to the general public on the same terms as the other shares
offered by this prospectus.
NO SALES OF SIMILAR SECURITIES
We, our executive officers and directors and our existing stockholder
have agreed not to sell or transfer any common shares for 180 days after the
date of this prospectus without first obtaining the written consent of Merrill
Lynch. Specifically, we and these other individuals have agreed not to directly
or indirectly:
- offer, pledge, sell or contract to sell any common shares;
- sell any option or contract to purchase any common shares;
- purchase any option or contract to sell any common shares;
- grant any option, right or warrant for the sale of any common shares;
- pledge or otherwise dispose of or transfer any common shares;
- request or demand that we file a registration statement related to the
common shares; or
- enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of any common shares
whether any such swap or transaction is to be settled by delivery of
shares or other securities, in cash or otherwise.
This lockup provision applies to common shares and to securities
convertible into or exchangeable or exercisable for or repayable with common
shares. It also applies to common shares owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
NATIONAL MARKET LISTING
There has not been a public market for our common shares since our
acquisition by Quantum. The initial public offering price will be determined
through negotiations between us and the representatives of the underwriters. In
addition to prevailing market conditions, the factors to be considered in
determining the initial public offering price will include:
- the valuation multiples of publicly traded companies that the
representatives believe to be comparable to us;
- our financial information;
- the history of, and the prospects for, our company and the industry in
which we compete;
- an assessment of our management, its past and present operations, and
the prospects for, and timing of, our future revenues;
- the present state of our development;
70
<PAGE> 75
- the prospects for our future earnings; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also
possible that after this offering, the shares will not trade in the public
market at or above the initial public offering price.
We have applied to have our common shares approved for listing on the
Nasdaq National Market under the symbol "SNPA."
The underwriters do not expect to sell more than 5% of the shares in the
aggregate to accounts over which they exercise discretionary authority.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of our common shares is completed, SEC rules may
limit the underwriters and selling group members from bidding for and purchasing
our common shares. However, the representatives may engage in transactions that
stabilize the price of our common shares, such as bids or purchases that peg,
fix or maintain that price.
In connection with the offering, the underwriters may make short sales of
the common shares. Short sales involve the sale by the underwriters at the time
of the offering of a greater number of shares than they are required to purchase
in the offering. Covered short sales are sales made in an amount not greater
than the over-allotment option. The underwriters may also elect to reduce any
short position by exercising all or part of the over-allotment option described
above. Purchases of the common shares to stabilize its price or to reduce a
short position may cause the price of the common share to be higher than it
might be in the absence of such purchases.
The representatives may also impose a penalty bid on other underwriters
and selling group members. This means that if the representatives purchase
shares in the open market to reduce the underwriters short position or to
stabilize the price of our shares, they may reclaim the amount of the selling
concession from the underwriters and selling group members who sold those common
shares. The imposition of a penalty bid may also affect the price of the shares
in that it discourages resales of those shares.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common shares. In addition, neither
we nor any of the representatives make any representation that the
representatives will engage in these transactions or that these transactions,
once commenced, will not be discontinued without notice.
ELECTRONIC DISTRIBUTION
Merrill Lynch will be facilitating Internet distribution for this
offering to certain of its Internet subscription customers. Merrill Lynch
intends to allocate a limited number of shares for sale to its online brokerage
customers. An electronic prospectus is available on the website maintained by
Merrill Lynch. Other than the prospectus in electronic format, the information
on the Merrill Lynch website relating to this offering is not part of this
prospectus.
71
<PAGE> 76
LEGAL MATTERS
The validity of the common stock offered hereby and certain other legal
matters will be passed upon for us by Wilson Sonsini Goodrich & Rosati,
Professional Corporation, Palo Alto, California. Certain legal matters in
connection with this offering will be passed upon for the underwriters by Cooley
Godward LLP, Palo Alto, California.
CHANGE IN INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP was dismissed as Meridian's independent
accountants on September 9, 1999 when Meridian was acquired by Quantum
Corporation. Ernst & Young LLP are the independent auditors of Quantum
Corporation. In contemplation of this offering, Quantum, as sole stockholder,
engaged Ernst & Young LLP as independent auditors for Snap Appliances, Inc. for
periods subsequent to December 31, 1998. The audit reports of
PricewaterhouseCoopers LLP for the years ended December 31, 1998 and 1997
contained no adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principle. In connection
with its audits through December 31, 1998 and through September 9, 1999, there
were no disagreements with PricewaterhouseCoopers LLP on any matter of
accounting principles or practices, financial statements disclosure or auditing
scope or procedures, which disagreements, if not resolved to their satisfaction
would have caused them to make reference in connection with their opinion to the
subject matter of the disagreement. Prior to September 9, 1999, we had not
consulted with Ernst & Young LLP on items that involved our accounting
principles or the form of audit opinion to be issued on our financial
statements.
EXPERTS
The financial statements of Snap Appliances, Inc. at December 31, 1999,
and for the period from January 1, 1999 to September 9, 1999 and the period from
September 10, 1999 to December 31, 1999 appearing in this prospectus and
registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein, and
are included in reliance upon such report given on the authority of such firm as
experts in accounting and auditing.
The financial statements as of December 31, 1998 and for each of the two
years in the period ended December 31, 1998 included in this prospectus and
registration statement have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered in this offering. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules thereto. Certain items are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to Snap and its
common stock, we refer you to the registration statement and the exhibits and
any schedules filed therewith. Statements contained in this prospectus as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance, if such contract or document is filed as an
exhibit, reference is made to the copy of such contract or other documents filed
as an exhibit to the registration statement, each statement being qualified in
all respects by such reference.
You may inspect our registration statement, including the exhibits and
schedules thereto, without charge at the SEC's public reference room at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
SEC located at Seven World Trade Center, 13th Floor, New York, New York 10048
and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Information on the operation of the Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330.
72
<PAGE> 77
In addition, the SEC maintains an Internet site at www.sec.gov, from which
interested persons can electronically access the registration statement,
including the exhibits and any schedules thereto.
As a result of this offering, we will become subject to the full
informational reporting requirements of the Securities Exchange Act of 1934, as
amended. We will fulfill our obligations with respect to such requirements by
filing periodic reports, proxy statements and other information with the SEC. We
intend to furnish our stockholders with annual reports containing consolidated
financial statements certified by our independent public accountants. We also
maintain an Internet site at www.snapserver.com. Our website and the information
contained there is not a part of this prospectus. Our telephone number is (408)
232-6831.
73
<PAGE> 78
SNAP APPLIANCES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements:
Report of Ernst & Young LLP, Independent Auditors........... F-2
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-3
Balance Sheets.............................................. F-4
Statements of Operations.................................... F-5
Statements of Stockholders' Equity.......................... F-6
Statements of Cash Flows.................................... F-7
Notes to Financial Statements............................... F-9
Unaudited Pro Forma Condensed Combining Financial
Statements................................................ F-26
Unaudited Pro Forma Condensed Combining Statement of
Operations................................................ F-27
Notes to Unaudited Pro Forma Condensed Combining Financial
Statements................................................ F-29
</TABLE>
F-1
<PAGE> 79
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Snap Appliances, Inc.
We have audited the accompanying balance sheet of Snap Appliances, Inc.
as of December 31, 1999, and the related statements of operations, stockholders'
equity, and cash flows for the period from January 1, 1999 to September 9, 1999
(formerly Meridian Data, Inc.) and the period from September 10, 1999 to
December 31, 1999 (formerly Quantum Snap Division Corporation). These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Snap Appliances,
Inc. at December 31, 1999, and the results of its operations and its cash flows
for the period from January 1, 1999 to September 9, 1999 and the period from
September 10, 1999 to December 31, 1999, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Palo Alto, California
October 26, 2000
F-2
<PAGE> 80
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Meridian Data, Inc.
In our opinion, the accompanying balance sheet and the related statements
of operations, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Meridian Data, Inc. at December 31,
1998, and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1998 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
San Jose, California
January 27, 1999
F-3
<PAGE> 81
SNAP APPLIANCES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- JUNE 30,
1998 1999 2000
---------- -------- -----------
(UNAUDITED)
(MERIDIAN) (QUANTUM SNAP DIVISION)
---------- -----------------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 11,049 $ 2,650 $ 2,905
Marketable securities................................... 7,794 4,990 --
Accounts receivable, net of allowance for doubtful
accounts of $236, $181 and $191, respectively........ 2,632 2,299 2,967
Inventories............................................. 2,687 1,969 11,282
Deferred income taxes................................... -- 2,381 2,071
Other current assets.................................... 132 285 265
-------- -------- --------
Total current assets............................... 24,294 14,574 19,490
Property and equipment, net............................... 579 785 2,190
Intangible assets, net.................................... -- 65,888 61,221
Other assets.............................................. 15 23 59
-------- -------- --------
$ 24,888 $ 81,270 $ 82,960
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 2,895 $ 2,971 $ 4,201
Accrued compensation.................................... 1,675 1,544 2,011
Accrued advertising and promotion....................... 2,283 3,759 3,485
Other accrued liabilities............................... 1,794 1,066 1,825
-------- -------- --------
Total current liabilities.......................... 8,647 9,340 11,522
Deferred income taxes..................................... -- 2,381 2,071
Commitments
Stockholders' equity:
Intercompany equity..................................... -- 9,104 32,187
Meridian:
Preferred stock, $0.001 par value, 5,000,000 shares
authorized, none issued at December 31, 1998.......
Common stock, $0.001 par value, 35,000,000 shares
authorized at December 31, 1998, 8,134,000 shares
issued and outstanding at December 31, 1998........ 8 -- --
Quantum Snap Division:
Common stock, $0.001 par value, 500,000,000 shares
authorized at December 31, 1999 and June 30, 2000;
52,650,000 shares issued and outstanding at
December 31, 1999 and June 30, 2000................ -- 53 53
Additional paid-in capital.............................. 65,525 105,186 105,186
Accumulated deficit..................................... (49,292) (44,794) (68,059)
-------- -------- --------
Total stockholders' equity......................... 16,241 69,549 69,367
-------- -------- --------
$ 24,888 $ 81,270 $ 82,960
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 82
SNAP APPLIANCES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, SEPTEMBER 10, SIX MONTHS
DECEMBER 31, 1999 TO 1999 TO ENDED JUNE 30,
-------------------- SEPTEMBER 9, DECEMBER 31, ---------------------------
1997 1998 1999 1999 1999 2000
------- ---------- ------------ -------------- ---------- --------------
(UNAUDITED)
(QUANTUM (QUANTUM
(MERIDIAN) SNAP DIVISION) (MERIDIAN) SNAP DIVISION)
----------------------------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue............................. $19,968 $ 17,541 $ 10,986 $ 6,998 $ 7,945 $ 15,831
Cost of revenue:
Product sales..................... 9,570 10,090 6,977 4,746 5,187 12,655
Amortization of
acquisition-related
intangibles..................... -- -- -- 1,257 -- 2,114
------- -------- -------- -------- ------- --------
Total cost of revenue......... 9,570 10,090 6,977 6,003 5,187 14,769
------- -------- -------- -------- ------- --------
Gross profit........................ 10,398 7,451 4,009 995 2,758 1,062
Operating expenses:
Research and development.......... 6,340 5,931 3,425 1,860 2,169 4,823
Selling, general and
administrative.................. 13,830 16,039 14,707 5,936 7,178 17,408
Amortization of goodwill and other
acquisition-related
intangibles..................... -- -- -- 1,146 -- 2,136
Purchased in-process research and
development..................... -- -- -- 37,000
------- -------- -------- -------- ------- --------
Total operating expenses...... 20,170 21,970 18,132 45,942 9,347 24,367
------- -------- -------- -------- ------- --------
Loss from operations................ (9,772) (14,519) (14,123) (44,947) (6,589) (23,305)
Interest income and other, net...... 1,994 1,358 441 153 349 40
------- -------- -------- -------- ------- --------
Net loss............................ $(7,778) $(13,161) $(13,682) $(44,794) $(6,240) $(23,265)
======= ======== ======== ======== ======= ========
Net loss per share:
Basic and diluted............... $ (0.85) $ (0.44)
======== ========
Weighted-average common shares:
Basic and diluted............... 52,650 52,650
======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 83
SNAP APPLIANCES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
INTER- COMMON STOCK ADDITIONAL OTHER TOTAL
COMPANY ----------------- PAID-IN COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
EQUITY SHARES AMOUNT CAPITAL INCOME (LOSS) DEFICIT EQUITY
------- ------ -------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
MERIDIAN:
Balances at December 31, 1996...... $ -- 9,590 $ 69,578 $ -- $ 5 $(28,353) $ 41,230
Comprehensive loss:
Net loss......................... -- -- -- -- -- (7,778) (7,778)
Other comprehensive loss --
unrealized loss on
investments................... -- -- -- -- (5) -- (5)
------- ------ -------- -------- --- -------- --------
Comprehensive loss................. (7,783)
Reincorporation in Delaware........ -- -- (69,568) 69,568 -- -- --
Stock compensation expense......... -- -- -- 6 -- -- 6
Common stock issued under stock
plans............................ -- 223 -- 598 -- -- 598
Common stock repurchased........... -- (1,028) (1) (3,965) -- -- (3,966)
------- ------ -------- -------- --- -------- --------
Balances at December 31, 1997...... -- 8,785 9 66,207 -- (36,131) 30,085
Net loss........................... -- -- -- -- -- (13,161) (13,161)
Common stock issued under stock
plans............................ -- 153 -- 330 -- -- 330
Common stock repurchased........... -- (804) (1) (1,012) -- -- (1,013)
------- ------ -------- -------- --- -------- --------
Balances at December 31, 1998...... -- 8,134 8 65,525 -- (49,292) 16,241
Net loss for the period from
January 1, 1999 through September
9, 1999.......................... -- -- -- -- -- (13,682) (13,682)
Common stock issued under stock
plans............................ -- 1,044 1 1,462 -- -- 1,463
------- ------ -------- -------- --- -------- --------
Balances at September 9,
1999........................ $ -- 9,178 $ 9 $ 66,987 $-- $(62,974) $ 4,022
======= ====== ======== ======== === ======== ========
QUANTUM SNAP DIVISION:
Acquisition by Quantum
Corporation...................... $ 984 52,650 $ 53 $105,186 $-- $ -- $106,223
Net loss for the period from
September 10, 1999 through
December 31, 1999................ -- -- -- -- -- (44,794) (44,794)
Advances from Quantum.............. 8,120 -- -- -- -- -- 8,120
------- ------ -------- -------- --- -------- --------
Balances at December 31, 1999...... 9,104 52,650 53 105,186 -- (44,794) 69,549
Net loss (unaudited)............... -- -- -- -- -- (23,265) (23,265)
Advances from Quantum (unaudited).. 23,083 -- -- -- -- -- 23,083
------- ------ -------- -------- --- -------- --------
Balances at June 30, 2000
(unaudited)...................... $32,187 52,650 $ 53 $105,186 $-- $(68,059) $ 69,367
======= ====== ======== ======== === ======== ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 84
SNAP APPLIANCES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, SEPTEMBER 10, SIX MONTHS
DECEMBER 31, 1999 TO 1999 TO ENDED JUNE 30,
--------------------- SEPTEMBER 9, DECEMBER 31, ---------------------------
1997 1998 1999 1999 1999 2000
-------- ---------- ------------ -------------- ---------- --------------
(UNAUDITED)
(QUANTUM (QUANTUM
(MERIDIAN) SNAP DIVISION) (MERIDIAN) SNAP DIVISION)
------------------------------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $ (7,778) $(13,161) $(13,682) $(44,794) $ (6,240) $(23,265)
Adjustments to reconcile net loss to net
cash provided by (used in) operations:
Purchased in-process research and
development............................. -- -- -- 37,000 -- --
Compensation related to stock incentive
plans................................... 6 -- -- -- -- 223
Depreciation.............................. 474 579 349 92 242 460
Amortization.............................. -- -- -- 2,681 -- 4,667
Amortization of advance for research and
development arrangement................. 800 -- -- -- -- --
Non-cash charges from Quantum............. -- -- -- 1,066 -- 7,506
Changes in assets and liabilities:
Accounts receivable....................... 42 317 2,267 (1,934) 483 (668)
Inventories............................... (484) (892) (462) 316 (571) (5,483)
Accounts payable.......................... 739 524 (1,330) 1,406 (413) 1,230
Accrued compensation...................... 1,101 (112) 712 (843) (229) 467
Accrued advertising and promotion......... 847 930 2,301 (825) (375) (274)
Other assets and liabilities.............. 901 (104) (492) (534) (204) 545
-------- -------- -------- -------- -------- --------
Net cash used in operating activities... (3,352) (11,919) (10,337) (6,369) (7,307) (14,592)
-------- -------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment....... (535) (444) (128) (232) (90) (1,890)
Redemption of marketable securities....... 37,547 31,559 15,937 5,405 13,946 4,990
Purchases of marketable securities........ (39,934) (22,631) (13,605) (4,933) (10,811) --
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) investing
activities............................ (2,922) 8,484 2,204 240 3,045 3,100
Cash flows from financing activities:
Repurchase of common stock................ (3,966) (1,013) -- -- -- --
Net proceeds from common stock
issuances............................... 598 330 1,295 -- 438 --
Advances from Quantum..................... -- -- 984 3,584 -- 11,747
-------- -------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities............................ (3,368) (683) 2,279 3,584 438 11,747
Net increase (decrease) in cash and cash
equivalents............................... (9,642) (4,118) (5,854) (2,545) (3,824) 255
Cash and cash equivalents at beginning of
period.................................... 24,809 15,167 11,049 5,195 11,049 2,650
-------- -------- -------- -------- -------- --------
Cash and cash equivalents at end of
period.................................... $ 15,167 $ 11,049 $ 5,195 $ 2,650 $ 7,225 $ 2,905
======== ======== ======== ======== ======== ========
</TABLE>
F-7
<PAGE> 85
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
YEAR ENDED JANUARY 1, SEPTEMBER 10, SIX MONTHS
DECEMBER 31, 1999 TO 1999 TO ENDED JUNE 30,
--------------------- SEPTEMBER 9, DECEMBER 31, ---------------------------
1997 1998 1999 1999 1999 2000
-------- ---------- ------------ -------------- ---------- --------------
(UNAUDITED)
(QUANTUM (QUANTUM
(MERIDIAN) SNAP DIVISION) (MERIDIAN) SNAP DIVISION)
------------------------------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest................................ $ 8 $ 38 $ 15 $ -- $ 15 $ --
Income taxes............................ $ 32 $ 46 $ 28 $ 5 $ 12 $ --
Supplemental schedule of non-cash operating
activities:
Purchase of hard drives from Quantum...... -- -- -- $ 1,438 -- $ 9,190
Service fees and allocations from
Quantum................................. -- -- -- $ 298 -- $ 2,146
Hard drives purchased from Quantum that
remained in inventory at the end of the
period.................................. -- -- -- $ 670 -- $ 4,500
Supplemental schedule of non-cash investing
activities:
Transfer of intangible assets from
Quantum................................. -- -- -- $ 2,500 -- --
Transfer of property and equipment from
Quantum................................. -- -- -- $ 300 -- --
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE> 86
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Snap Appliances, Inc. (the "Company" or "Snap"), a wholly-owned
subsidiary of Quantum Corporation ("Quantum"), is currently engaged in the
development of network attached storage ("NAS") solutions for various networking
environments. Meridian Data, Inc. ("Meridian") was acquired by Quantum in a
purchase transaction on September 9, 1999 (see Note 3) and was renamed Quantum
Snap Division Corporation. In October 2000, Quantum Snap Division Corporation
was renamed Snap Appliances, Inc. As the Company is required to present
financial statements for the business as it existed prior to the acquisition,
predecessor company financial statements for Meridian are presented for periods
prior to September 9, 1999.
Through 1997, revenues were derived principally from the sale of CD-ROM
based enterprise servers. Since 1998, the Company began the discontinuance of
the CD-ROM technologies, expanded the Snap Server product line, which now
features three products, and transitioned the business to a workgroup-level hard
drive based NAS appliance business.
On October 24, 2000, Quantum announced its plans to make Snap an
independent publicly-traded company focused on NAS appliances. Quantum currently
intends to complete its divestiture of Snap approximately six months after the
anticipated offering by distributing all of its shares of the Company's common
stock to the holders of Quantum's DLT & Storage Systems group ("DSS") common
stock. (see Note 15). The accompanying financial statements do not include any
adjustments resulting from the anticipated offering.
The financial statements subsequent to September 9, 1999 include
allocations of certain Quantum expenses, including centralized legal,
accounting, treasury, real estate, information technology, distribution,
customer service, sales, marketing, engineering and other Quantum corporate
services and infrastructure costs. The expense allocations have been determined
on bases that Quantum and Snap considered to be reasonable reflections of the
utilization of services provided or the benefit received by Snap. Management
believes that the expenses allocated to Snap are representative of the operating
expenses it would have incurred had Snap been operating as a stand-alone entity.
Since the acquisition by Quantum in September 1999, the Company has
incurred operating losses. These losses and other cash requirements have been
funded by Quantum. Quantum has committed to provide sufficient resources to fund
operations until at least December 31, 2001 or until Snap successfully completes
an initial public offering.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
Interim Financial Information
The financial information as of June 30, 2000 and for the six months
ended June 30, 1999 and June 30, 2000 is unaudited and includes all adjustments,
consisting only of normal and recurring adjustments, that management considers
necessary for a fair presentation of its financial position, operating
F-9
<PAGE> 87
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
results and cash flows. Results for the six months ended June 30, 2000 are not
necessarily indicative of results to be expected for the full fiscal year or for
any future period.
Revenue Recognition
Revenue from sales of products, including those to distributors, is
generally recognized upon shipment, (a) when persuasive evidence of an
arrangement exists, (b) delivery has occurred or services have been rendered,
(c) the price to the buyer is fixed or determinable and (d) collectibility is
reasonably assured, with provision made for estimated returns, price adjustments
and other adjustments which may be required under the Company's agreements with
distributors.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid debt instruments with a maturity
of 90 days or less at the time of purchase to be cash equivalents. Cash
equivalents are carried at fair value, which approximates cost. The Company's
marketable securities have maturities of more than 90 days at the time of
purchase.
The Company has classified all cash equivalents and marketable securities
as available-for-sale. Securities classified as available-for-sale are carried
at fair value with unrealized gains and losses reported in stockholders' equity.
The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in interest
income. Realized gains and losses and declines in value judged to be
other-than-temporary are recorded in other income or expense. The cost of
securities sold is based on the specific identification method.
Concentration of Credit Risk and Significant Customers
The Company performs ongoing credit evaluations of its customers'
financial condition and generally requires no collateral from its customers. The
Company maintains reserves for potential credit losses and such losses have
historically been within management's expectations.
The following individual customers accounted for 10% or more of total
revenue:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM SIX MONTHS
YEAR ENDED JANUARY 1, SEPTEMBER 10, ENDED
DECEMBER 31, 1999 TO 1999 TO JUNE 30,
------------- SEPTEMBER 9, DECEMBER 31, -----------
1997 1998 1999 1999 1999 2000
----- ----- ------------ ------------- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ingram Micro, Inc............ 21% 41% 34% 46% 32% 41%
Tech Data Corporation........ 19% 23% 24% 25% 23% 40%
</TABLE>
The following individual customers accounted for 10% or more of total
accounts receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1998 1999 2000
---- ---- --------
<S> <C> <C> <C>
Ingram Micro, Inc..................................... 53% 60% 65%
Tech Data Corporation................................. 13% 20% 32%
</TABLE>
The Company invests its excess cash primarily in short-term debt
securities of companies with strong credit ratings from a variety of industries.
These securities generally mature within 365 days and, therefore, bear minimal
risk. The Company has not experienced any material losses on these investments.
The Company limits the amount of credit exposure to any one issuer.
F-10
<PAGE> 88
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
Inventories
Inventories are carried at the lower of cost or market. Cost is
determined on a first-in, first-out basis.
Property and Equipment
Property and equipment are carried at cost, less accumulated depreciation
and amortization computed on a straight-line basis over the lesser of the
estimated useful lives of the assets (generally two to five years for machinery,
equipment, furniture, and leasehold improvements) or the lease term.
Acquired Intangible Assets
Goodwill and other acquired intangible assets are amortized over their
estimated useful lives, which range from three to ten years. The accumulated
amortization at December 31, 1999 and June 30, 2000 was $2.7 million and $7.3
million, respectively. Intangible assets are reviewed for impairment whenever
events or circumstances indicate impairment might exist, or at least annually.
The Company assesses the recoverability of its assets, including goodwill, by
comparing projected undiscounted net cash flows associated with those assets
against their respective carrying amounts. Impairment, if any, is based on the
excess of the carrying amount over the fair value of those assets.
Research and Development
The Company charges research and development costs to operations as
incurred. Costs for the development of new software and substantial enhancements
to existing software are expensed as incurred until technological feasibility
has been established, at which time any additional development costs would be
capitalized in accordance with Statement of Financial Accounting Standards No.
86, Computer Software To Be Sold, Leased, or otherwise Marketed. Snap believes
its current process for developing software is essentially completed
concurrently with the establishment of technological feasibility; accordingly,
except for costs capitalized in purchase accounting, no costs have been
capitalized to date.
Income taxes
Income taxes are computed using the asset and liability method. Deferred
income tax assets or liabilities are established for the expected future
consequences resulting from the temporary differences between the financial
reporting and income tax bases of assets and liabilities and from net operating
loss and tax credit carryforwards. The Company records a valuation allowance
against deferred tax assets when it is more likely than not that such assets
will not be realized.
Advertising Expense
The Company accrues for co-operative advertising as the related revenue
is earned, and other advertising expense is recorded as incurred. Advertising
expense for the years ended December 31, 1997 and 1998, the period from January
1, 1999 to September 9, 1999, and the period from September 10, 1999 to December
31, 1999, was $4.9 million, $6.7 million, $5.2 million and $2.5 million,
respectively.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation plans in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related Interpretations.
F-11
<PAGE> 89
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
As a result of the acquisition by Quantum on September 9, 1999, benefits
under Meridian's stock option plans were assumed by Quantum and all outstanding
Meridian stock options were converted into options to purchase DSS and Quantum's
Hard Drive Disk Group ("HDD") common stock.
The accompanying financial statements include the stock option activity
for Snap employees who participate in Quantum stock-based employee compensation
plans.
Earnings Per Share
The Company computes net income (loss) per share in accordance with SFAS
No. 128, "Earnings per Share" and SEC Staff Accounting Bulletin No. 98 ("SAB
98"). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss)
per share is computed by dividing the net income (loss) available to holders of
common stock for the period by the weighted-average number of shares of common
stock outstanding during the period. Diluted net loss per share is computed by
dividing the net income (loss) available to holders of common stock for the
period by the weighted-average number of shares of common stock and potential
common stock outstanding during the period, if dilutive. Potential common stock
includes incremental shares of common stock issuable upon the exercise of stock
options.
The following table sets forth the computation of basic and diluted net
loss per share for the periods indicated (in thousands, except share and per
share data):
<TABLE>
<CAPTION>
PERIOD FROM SIX
SEPTEMBER 10, MONTHS
1999, TO ENDED
DECEMBER 31, JUNE 30,
1999 2000
------------- --------
QUANTUM SNAP DIVISION
------------------------
<S> <C> <C>
Numerator:
Numerator for basic and diluted net loss per share -- net
loss................................................... $(44,794) $(23,265)
Denominator:
Denominator for basic and diluted net loss per
share -- weighted-average shares....................... 52,650 52,650
Basic and diluted net loss per share...................... $ (0.85) $ (0.44)
======== ========
</TABLE>
Basic and diluted net loss per common share and weighted average common
shares outstanding is not presented for Meridian for periods prior to the
acquisition date of September 9, 1999, as this information is not considered to
be meaningful.
F-12
<PAGE> 90
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
Segment Information
The Company operates in one reportable segment, network attached storage
appliances. For the years ended December 31, 1997, 1998, the period from January
1, 1999 to September 9, 1999, the period from September 10, 1999 to December 31,
1999, and the six months ended June 30, 2000, approximately 91%, 89%, 88%, 88%
and 83% of sales, respectively, were made to customers in the United States and
Canada with the remainder of sales made to customers in various European, Asian
and Latin American countries.
Reclassifications
Certain 1998 amounts were reclassified to conform with the current
periods' presentation.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes a new
model for accounting for derivative instruments and hedging activities and
supercedes several existing standards. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. SFAS No. 133 as amended by SFAS No. 137 and
SFAS No. 138, is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Management does not expect adoption of these standards in
fiscal year 2001 to have a material effect on the Company's financial position
or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
SEC Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB 101 explains how the SEC staff applies by analogy the existing
rules on revenue recognition to other transactions not covered by such rules. In
March 2000, the SEC issued SAB 101A that delayed the original effective date of
SAB 101 until the second quarter of 2000 for calendar year companies. In June
2000 the SEC issued SAB 101B that further delayed the effective date of SAB 101
until no later than the fourth quarter of fiscal years beginning after December
15, 1999. The Company is reviewing the requirements of SAB 101 and currently
believes that its revenue recognition policy is consistent with the guidance of
SAB 101.
In March 2000, FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB Opinion No. 25." FIN 44 clarifies the following: the
definition of an employee for purposes of applying APB Opinion No. 25; the
criteria for determining whether a plan qualifies as a noncompensatory plan; the
accounting consequence of various modifications to the terms of the previously
fixed stock options or awards; and the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain conclusions in FIN 44 cover specific events that occurred after
either December 15, 1998 or January 12, 2000. Management does not expect the
application of FIN 44 to have a material impact on the Company's financial
position or results of operations.
NOTE 3. ACQUISITION
On September 9, 1999, Snap was acquired by Quantum. The acquisition was
accounted for as a purchase at a total cost of $115 million including assumed
liabilities of $10 million. Quantum completed the acquisition with the issuance
of 4.1 million shares of DSS common stock and 2 million shares of HDD common
stock valued at $74 million and $18 million, respectively, on the date of
acquisition in exchange
F-13
<PAGE> 91
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
for all outstanding shares of Meridian; the conversion of outstanding Meridian
stock options into options to purchase 630,000 shares of DSS common stock and
315,000 shares of HDD common stock valued at $8 million and $2 million,
respectively; and the assumption of Meridian liabilities and other acquisition
costs of approximately $13 million.
The purchase price was allocated based on the estimated fair market value
of net tangible and intangible assets acquired and assumed liabilities as well
as in-process research and development costs. As of the acquisition date,
technological feasibility of the in-process technology had not been established
and the technology had no alternative future use. Therefore, the Company
expensed $37 million of the purchase price as in-process research and
development at the date of acquisition. The purchased intangible assets are
being amortized on a straight-line basis over periods ranging from five to ten
years.
The following is a summary of the purchase price allocation (in
millions):
<TABLE>
<S> <C>
Tangible assets acquired.................................... $ 12
In-process research and development......................... 37
Completed technology........................................ 29
Trademark................................................... 4
Assembled workforce......................................... 3
Goodwill.................................................... 30
----
$115
====
</TABLE>
A deferred tax credit of approximately $15 million related to goodwill
was recorded at the acquisition date.
The amount of the purchase price allocated to in-process research and
development was determined by estimating the stage of development of each
in-process research and development project at the date of acquisition,
estimating cash flows resulting from the expected revenue generated from such
projects, and discounting the net cash flows back to their present value using a
discount rate of 21%, which represents a premium to Quantum's cost of capital.
The following unaudited pro forma information has been prepared assuming
that the acquisition had taken place at the beginning of each period. The pro
forma results of operations include historical operations of Meridian and Snap
adjusted to reflect certain pro forma adjustments, including amortization of
goodwill and other intangible assets arising from the acquisition and do not
include the charge for purchased in-process research and development of $37
million since it is a nonrecurring charge. The pro forma financial information
is not necessarily indicative of the combined results that would have occurred
had the acquisition taken place at the beginning of the periods.
<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM
DECEMBER 31, JANUARY 1, 1999,
-------------------- TO SEPTEMBER 9,
1997 1998 1999
-------- -------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenue.......................................... $ 19,968 $ 17,541 $ 10,986
Net loss......................................... $(16,123) $(21,506) $(19,624)
Net loss per share:
Basic and diluted.............................. $ (0.31) $ (0.41) $ (0.37)
Pro forma weighted average number of common
shares:
Basic and diluted.............................. 52,650 52,650 52,650
</TABLE>
F-14
<PAGE> 92
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
NOTE 4. FINANCIAL INSTRUMENTS
Available-For-Sale Securities
The following is a summary of the Company's available-for-sale
securities:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1998 1999 2000
-------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Corporate commercial paper............................. $ 18,551 $4,990 $--
Less amounts included in cash and cash equivalents..... (10,757) -- --
-------- ------ ---
Marketable securities.................................. $ 7,794 $4,990 $--
======== ====== ===
</TABLE>
The difference between the amortized cost of available-for-sale
securities and fair value was immaterial at December 31, 1998 and 1999. The
estimated fair value of available-for-sale securities is based on market
quotations.
Fair Value of Financial Instruments
The estimated fair value of the Company's cash and cash equivalents and
marketable securities approximate cost due to the short period of time until
maturity.
NOTE 5. INVENTORIES
Inventories consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1998 1999 2000
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Materials and purchased parts........................... $ 891 $ 774 $ 7,296
Work in process......................................... 797 1,160 2,329
Finished goods.......................................... 999 35 1,657
------ ------ -------
$2,687 $1,969 $11,282
====== ====== =======
</TABLE>
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- JUNE 30,
1998 1999 2000
------- ----- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Machinery and equipment................................. $ 1,975 $ 757 $1,514
Furniture and fixtures.................................. 259 217 492
Leasehold improvements.................................. 72 -- 1,071
------- ----- ------
2,306 974 3,077
Less accumulated depreciation and amortization.......... (1,727) (189) (887)
------- ----- ------
$ 579 $ 785 $2,190
======= ===== ======
</TABLE>
F-15
<PAGE> 93
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
NOTE 7. INTANGIBLE ASSETS
Intangible assets consisted of:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31, JUNE 30,
LIFE 1999 2000
---------- ------------ --------
(IN YEARS) (IN THOUSANDS)
<S> <C> <C> <C>
Completed technology.............................. 7 $29,300 $29,300
Trademark......................................... 7 3,800 3,800
Assembled workforce............................... 5 3,200 3,200
Goodwill.......................................... 10 29,769 29,769
Technology license................................ 3 2,500 2,500
------- -------
68,569 68,569
Less accumulated amortization..................... (2,681) (7,348)
------- -------
$65,888 $61,221
======= =======
</TABLE>
NOTE 8. CREDIT AGREEMENT
On October 14, 1998 Meridian signed a credit agreement (the "Facility")
with a bank (the "Bank") for a $7.5 million revolving credit line which expired
on July 30, 1999. Borrowing under the Facility was at the Bank's prime rate plus
0.25%, and subject to Meridian maintaining certain leverage ratios and net worth
requirements. At December 31, 1998, there was no outstanding balance drawn on
this line.
NOTE 9. STOCK INCENTIVE PLANS
Quantum Plans
Quantum has a Long-Term Incentive Plan (the "Plan") that provides for the
issuance of stock options, stock appreciation rights, stock purchase rights, and
long-term performance awards (collectively referred to as "options") to
employees, consultants, officers and affiliates of Quantum. Options under the
Plan expire no later than ten years from the grant date and generally vest over
four years. Restricted stock options granted under the Plan generally vest over
two to three years. During the six months ended June 30, 2000, 49,500 Quantum
restricted stock options were granted under the Plan to Snap employees at an
exercise price of $.01 per share, resulting in compensation expense of $103,000
for the six months ended June 30, 2000. Compensation expense, equal to the fair
market value of the Quantum DSS or HDD shares on the date of grant less the
exercise price, is recognized over the vesting period. At June 30, 2000,
deferred compensation expense related to Quantum restricted stock options
granted to Snap employees under the Plan was $640,000.
Quantum has a Supplemental Stock Plan (the "SSP") that provides for the
issuance of stock options and stock purchase rights (collectively referred to as
"options") to employees and consultants of Quantum. Restricted stock options
granted under the SSP generally vest over two to three years. During the six
months ended June 30, 2000, 56,750 of Quantum restricted stock options were
granted under the SSP to Snap employees at an exercise price of $.01 per share,
resulting in compensation expense of $120,000 for the six months ended June 30,
2000. Compensation expense, equal to the fair market value of the Quantum DSS or
HDD shares on the date of grant less the exercise price, is recognized over the
vesting period. At June 30, 2000, deferred compensation expense related to
Quantum restricted stock options granted to Snap employees under the SSP was
$360,000.
F-16
<PAGE> 94
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
Quantum has Stock Option Plans under which options are granted at prices
determined by the Board of Directors, but at not less than fair market value
and, accordingly, no compensation accounting has been required at the original
date of grant. Options currently expire no later than ten years from the grant
date and generally vest ratably over one to four years.
Quantum stock option activity related to employees of Snap for the period
from September 10, 1999 through December 31, 1999 is as follows:
<TABLE>
<CAPTION>
DSS HDD
-------------------------- -------------------------
WEIGHTED-AVG. WEIGHTED-AVG.
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- -------------- ------- --------------
<S> <C> <C> <C> <C>
Conversion of Meridian stock options
to Quantum stock options --
September 10, 1999................ 630,246 $ 4.82 315,123 $2.35
Granted............................. 274,333 14.60 137,167 6.37
Canceled............................ (42,016) 12.53 (22,121) 6.07
Exercised........................... (139,888) 4.92 (65,637) 2.39
-------- -------
Outstanding at December 31, 1999.... 722,675 8.12 364,532 3.64
======== =======
</TABLE>
The following tables summarize information about options outstanding and
exercisable at December 31, 1999:
DSS:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
RANGE OF EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE SHARES EXERCISE PRICE
------------------------ --------- -------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.10 - $ 2.61 155,226 6.78 $ 2.55 40,709 $ 2.50
$ 2.84 - $ 3.86 186,634 7.14 2.86 73,663 2.85
$ 5.91 - $ 6.70 141,580 9.28 5.91 10,750 5.91
$13.50 - $16.13 6,350 9.62 15.47 374 16.07
$17.19 - $17.98 232,885 9.72 17.19 395 17.98
------- -------
722,675 8.34 8.12 125,891 3.09
======= =======
</TABLE>
HDD:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
RANGE OF EXERCISE PRICES SHARES REMAINING LIFE EXERCISE PRICE SHARES EXERCISE PRICE
------------------------ --------- -------------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
$1.02 - $1.27 77,624 6.78 $1.24 20,105 $1.22
$1.38 - $1.88 96,482 7.06 1.39 39,977 1.39
$2.87 - $3.26 70,807 9.28 2.87 5,381 2.87
$5.85 - $6.88 2,790 9.42 6.23 384 3.36
$7.50 - $8.62 116,829 9.73 7.51 -- 0.00
------- ------
364,532 8.30 3.64 65,847 1.48
======= ======
</TABLE>
F-17
<PAGE> 95
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
Meridian Plans
Options granted under the Meridian Stock Option Plan were either
incentive stock options to employees or nonstatutory stock options to employees
or consultants, at the discretion of the Company's Board of Directors. The Board
also had the discretion to grant to employees and consultants stock purchase
rights for shares of stock reserved for issuance under the Plans. Stock options
granted generally vested ratably over four years.
Meridian also had a 1995 Director Stock Option Plan (the "1995 Plan").
The 1995 Plan provided for the automatic grant of a nonstatutory option to
purchase 12,500 shares of the Company's common stock to each outside Director
upon their initial election to the Board of Directors (the "First Option"). Upon
each subsequent re-election to the Board, the outside Director received an
additional grant to purchase 5,000 shares of the Company's common stock (the
"Subsequent Option"). All options were granted at fair market value of the
common stock on the date of grant. The 1995 Plan provided that the First Option
vested ratably over four years. Each Subsequent Option vested ratably over eight
months following the month of grant.
Meridian stock option activity for the period from January 1, 1997
through September 9, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVG.
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at December 31, 1996............................ 1,333,951 $5.45
Granted................................................... 1,260,584 3.51
Canceled.................................................. (471,703) 7.19
Exercised................................................. (115,522) 4.55
---------
Outstanding at December 31, 1997............................ 2,007,310 4.00
Granted................................................... 289,000 5.32
Canceled.................................................. (122,989) 3.68
Exercised................................................. (28,012) 1.31
---------
Outstanding at December 31, 1998............................ 2,145,309 1.90
Granted................................................... 374,100 3.31
Canceled.................................................. (169,436) 1.51
Exercised................................................. (925,689) 1.39
---------
Outstanding at September 9, 1999............................ 1,424,284 2.65
=========
</TABLE>
As a result of the acquisition by Quantum on September 9, 1999, each
outstanding Meridian option was converted into an option to purchase 0.4425
shares of DSS common stock and 0.22125 shares of HDD common stock. Subsequent to
the acquisition by Quantum, no additional grants were made from the Meridian
Plans.
On April 23, 1997, the Compensation Committee of Meridian's Board of
Directors approved an offer to all employees permitting an election to amend
options with exercise prices in excess of $3.38 to change the exercise price to
the fair market value of Meridian's common stock on that date, which was $3.38,
subject to a new vesting schedule. Options for the purchase of a total of
366,184 shares were amended. On October 27, 1998, the Board of Directors
approved an offer to all employees, except certain executives, permitting an
election to amend their options to change the exercise price to the fair market
value of Meridian's common stock on November 9, 1998, which was $1.56, subject
to a new vesting schedule. Options for the purchase of a total of 723,309 shares
were amended. At the same time, the
F-18
<PAGE> 96
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
Board of Directors approved an offer to certain executives permitting an
election to amend their options to change the exercise price to the fair market
value of Meridian's common stock on October 28, 1998, which was $1.44. Options
for the purchase of a total of 1,069,413 shares were amended.
Employee Stock Purchase Plan
Under the Quantum and Meridian employee stock purchase plans, eligible
employees have generally been able to contribute up to 10% of their eligible
compensation, as defined, to purchase shares of Quantum and Meridian common
stock at a price of 85% of the lower of fair market value at the date of grant
or the exercise date, whichever value is less. Through September 9, 1999,
462,325 shares of Meridian had been issued under the Meridian employee stock
purchase plans. No shares were issued to employees of Snap under the Quantum
employee stock purchase plans during the period from September 10, 1999 to
December 31, 1999.
Pro Forma Information
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board Opinion No. 25. In October 1995, the
Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation" which
established a fair value based method of accounting for employee stock option
plans. The Company elected to adopt the disclosure method of FAS 123. Had
compensation cost for the Company's option plans been determined based on the
fair value at the grant dates, as prescribed in FAS 123, the Company's pro forma
net loss and pro forma diluted net loss per share would have been as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 10,
YEAR ENDED DECEMBER 31, 1999 TO 1999 TO
----------------------- SEPTEMBER 9, DECEMBER 31,
1997 1998 1999 1999
--------- ---------- ------------ -------------
QUANTUM
SNAP
MERIDIAN DIVISION
-------------------------------------- -------------
<S> <C> <C> <C> <C>
Net loss (in thousands):
As reported............................ $(7,778) $(13,161) $(13,682) $(44,794)
======= ======== ======== ========
Pro forma.............................. $(9,210) $(15,532) $(15,205) $(46,432)
======= ======== ======== ========
Diluted net loss per share:
As reported............................ $ (0.85)
========
Pro forma.............................. $ (0.88)
========
</TABLE>
Pro forma diluted net loss per share and net loss per share as reported
is not presented for Meridian, as this information is not considered to be
meaningful.
F-19
<PAGE> 97
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
The fair value of stock options and stock purchase plan rights was
determined using the Black-Scholes option pricing model incorporating the
following range of assumptions in the calculations for 1997, 1998, the period
from January 1, 1999 to September 9, 1999, and the period from September 10,
1999 to December 31, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS STOCK PURCHASE PLAN
------------- -------------------
<S> <C> <C>
Expected life............................... 4.51 years 0.5 years
Interest rate at date of grant.............. 5.6% to 6.8% 4.4% to 5.2%
Volatility at date of grant................. 104% 151%
Dividend yield.............................. 0% 0%
</TABLE>
NOTE 10. SAVINGS AND INVESTMENT PLAN
Substantially all Snap employees are eligible to make contributions to
Quantum's 401(k) savings and investment plan. Quantum matches a percentage of
the employees' contributions and may also make additional discretionary
contributions to the plan.
Substantially all full-time Meridian employees were eligible to make
contributions to Meridian's 401(k) savings and investment plan. Beginning in
July 1998, Meridian matched employee contributions dollar-for-dollar, up to six
percent of gross salary, with an annual cap of $1,200 per employee. Quantum and
Meridian contributions were not material for any period presented.
NOTE 11. INCOME TAXES
The Company did not record a tax benefit for the years ended December 31,
1997, 1998, the period from January 1, 1999 to September 9, 1999, the period
from September 10, 1999 to December 31, 1999, and the six month period ended
June 30, 2000 because its operating losses generated no realizable tax benefits.
Deferred tax assets reflect the net tax effects of tax loss
carryforwards, credit carryforwards and temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
F-20
<PAGE> 98
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
Significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred tax assets:
Federal and state loss carryforwards............. $ 11,725 $ 15,803 $ 15,269
Tax credit carryforwards......................... 2,410 2,021 2,021
Inventory reserves and basis differences......... 396 1,071 355
Co-op advertising reserves....................... -- 1,478 1,394
Other............................................ 2,201 1,108 1,555
Valuation allowance.............................. (16,700) (7,498) (7,684)
-------- -------- --------
32 13,983 12,910
-------- -------- --------
Deferred tax liabilities:
Depreciation..................................... (32) -- --
Goodwill......................................... -- (13,983) (12,910)
-------- -------- --------
Net deferred tax assets............................ $ -- $ -- $ --
======== ======== ========
</TABLE>
At June 30, 2000, the Company had net operating loss ("NOL")
carryforwards for federal and state income tax purposes of approximately $42
million and $11 million respectively, which expire between 2001 and 2019. The
Company has federal and state research and development tax credit carryforwards
of approximately $2 million at June 30, 2000 that will expire in 2007 through
2019. The Company's net operating losses and credit carryforwards may be limited
by changes in ownership as defined under the Internal Revenue Code. One such
change in ownership occurred on September 10, 1999 which results in limiting NOL
utilization to approximately $6 million per year. If prior changes occurred,
such limitations could further reduce the availability of such tax attributes.
Based on the Company's evaluation of available evidence it cannot conclude that
it is more likely than not that deferred income tax assets will be realized and
therefore the Company has provided a full valuation allowance at December 31,
1998 and 1999, and June 30, 2000.
NOTE 12. COMMITMENTS
The Company leases its office facility under a non-cancelable operating
lease agreement that expires in September 2004. The lease agreement requires
that the Company pay certain other expenses such as property taxes, insurance,
and common area maintenance.
Rent expense was $0.5 million, $0.5 million, $0.4 million and $0.4
million for 1997, 1998, the period from January 1, 1999 to September 9, 1999 and
the period from September 10, 1999 to December 31, 1999, respectively.
F-21
<PAGE> 99
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
Future minimum lease payments under the operating lease are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Year ending December 31,
2000................................................. $1,482
2001................................................. 1,730
2002................................................. 1,952
2003................................................. 1,999
2004................................................. 1,999
------
Total future minimum lease payments............... $9,162
======
</TABLE>
The Company has a commitment to purchase a minimum quantity of hard
drives from a third party from September 1, 2000 to August 31, 2001 at a total
cost of approximately $24,475,000. Purchases of approximately $8,100,000 are
expected to occur in the period from September 1, 2000 to December 31, 2000.
Purchases of approximately $16,375,000 are expected to occur in the period from
January 1, 2001 to August 31, 2001.
NOTE 13. TRANSACTIONS WITH QUANTUM CORPORATION
For the periods presented, the following table includes transactions and
balances between Snap and Quantum. There were no transactions or balances
between Snap and Quantum for the years ending December 31, 1997 and 1998, or the
six months ended June 30, 1999.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 1, SEPTEMBER 10,
1999 TO 1999 TO
SEPTEMBER 9, DECEMBER 31, SIX MONTHS ENDED,
1999 1999 JUNE 30, 2000
------------ ------------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of period................ $ -- $ 984 $ 9,104
Purchase of hard drives....................... -- 1,438 9,190
General funding of operating Activity......... -- 584 2,647
Transfer of assets at cost.................... -- 2,800 --
Service fees and allocations from Quantum..... -- 298 2,146
Net cash transfer to Snap..................... 984 3,000 9,100
---- ------ -------
Balance at end of period...................... $984 $9,104 $32,187
==== ====== =======
</TABLE>
Snap's costs and expenses include allocations and service fees from
Quantum for centralized legal, accounting, treasury, real estate, information
technology, distribution, customer service, sales, marketing, engineering and
other Quantum corporate services and infrastructure costs. These allocations
have been determined on bases that Quantum and Snap considered to be reasonable
reflections of the utilization of services provided or the benefit received by
Snap. Methods for calculating service fees and allocations
F-22
<PAGE> 100
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
include relative revenue, headcount, square footage or estimated or actual cost.
Service fees and allocated costs included in the accompanying statements of
operations follow.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 10, 1999
TO SIX MONTHS ENDED,
DECEMBER 31, 1999 JUNE 30, 2000
------------------ -----------------
<S> <C> <C>
Cost of revenue........................................... $ -- $662
Sales and marketing....................................... 48 763
General and administrative................................ 250 721
</TABLE>
Historically, Snap has outsourced all of its product manufacturing to
Quantum and other third parties. Products manufactured by Quantum for Snap have
been recorded in the financial statements at Quantum's actual manufacturing
cost.
NOTE 14. SUBSEQUENT EVENTS
SEPARATION FROM QUANTUM CORPORATION
On October 24, 2000, Quantum announced its plans to make Snap an
independent publicly-traded company. For purposes of governing certain of the
ongoing relationships between Snap and Quantum at and after the separation date
and to provide for an orderly transition, Snap and Quantum have entered or will
enter into various agreements. A brief description of each of the agreements
follows.
Master Separation and Distribution Agreement
On October 26, 2000, the Company entered into a Master Separation and
Distribution Agreement with Quantum, for purposes of governing certain of the
ongoing relationships between Snap and Quantum at and after the separation date.
The separation will occur on December 31, 2000 (the "Separation Date").
Under the terms of the separation agreement Quantum will own at least
80.1% of our outstanding common stock following this offering. Quantum intends
to distribute the remaining shares of our common stock that Quantum holds to
holders of Quantum's DLT & Storage Systems group common stock on a pro rata
basis, within six months following consummation of this offering.
The following ancillary agreements, which will be executed by the
Separation Date, are exhibits to the Master Separation and Distribution
Agreement and contain key provisions relating the Company's separation from
Quantum:
General Assignment and Assumption Agreement
The general assignment and assumption agreement identifies the assets
Quantum will transfer to the Company and the liabilities the Company will assume
from Quantum in the separation. The agreement also describes when and how these
transfers and assumptions will occur.
Intellectual Property Agreement
The Company will enter into an intellectual property agreement with
Quantum to confirm that Snap, by virtue of operating as an entity separate from
Quantum, is the owner of all of the intellectual property related to its
business. To the extent that there has been any commingling of intellectual
property rights, the agreement allocates rights between Quantum and Snap.
F-23
<PAGE> 101
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
Employee Matters Agreement
The Company will enter into an employee matters agreement with Quantum to
allocate assets, liabilities and responsibilities relating to current and former
employees of Snap and their participation in the benefits plans, including stock
plans, that Quantum currently sponsors and maintains.
All eligible Snap employees will continue to participate in the Quantum
benefits plans on comparable terms and conditions to those for Quantum employees
until the distribution date or until the Company establishes benefit plans for
Snap employees, or elect not to establish comparable plans, if it is not legally
or financially practical.
Tax Sharing Agreement
The Company will enter into a tax sharing agreement with Quantum that
will assign responsibilities for administrative matters such as the filing of
returns, payment of taxes due, retention of records and conduct of audits,
examinations or similar proceedings. The tax sharing agreement will also require
the Company to indemnify Quantum for the additional taxes, and any interest and
penalties, that would result if an acquisition of a controlling interest in our
stock after the distribution causes the distribution not to qualify for tax-free
treatment to Quantum. Under the provisions of the agreement, Quantum is not
required to pay Snap for utilizing its current losses or net operating loss
carryforwards.
Master Transitional Services Agreement
The master transitional services agreement governs the provision of
transitional services by Quantum and us to each other, on an interim basis,
until one year after the separation date, unless extended for specific services
or otherwise indicated in the agreement. The services include data processing
and telecommunications services, such as voice telecommunications and data
transmission, and information technology support services for functions
including accounting, financial management, tax, payroll, stockholder and public
relations, legal, procurement, and other administrative functions. Services are
generally at cost plus a markup of 5%. The master transitional services
agreement also will cover the provision of additional transitional services
identified from time to time after the separation date that were inadvertently
or unintentionally omitted from the specified services, or that are essential to
effectuate an orderly transition under the separation agreement, so long as the
provision of such services would not significantly disrupt Quantum's operations
or significantly increase the scope of its responsibility under the agreement.
Indemnification and Insurance Matters Agreement
Effective as of the separation date, subject to specified exceptions, the
Company will release Quantum and its affiliates, agents, successors and assigns,
and Quantum will release us, and our affiliates, agents, successors and assigns,
from any liabilities arising from events occurring on or before the separation
date, including events occurring in connection with the activities to implement
the separation, this offering and the distribution.
The agreement also contains provisions governing the Company's insurance
coverage from the separation date until the distribution date. In general,
Quantum shall, subject to insurance market conditions and other factors beyond
its control, maintain insurance policies for the benefit of Snap, its
subsidiaries, directors, officers, employees and other covered parties. Snap
agrees to reimburse Quantum for premium expenses related to such insurance
coverage during this period.
F-24
<PAGE> 102
SNAP APPLIANCES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 2000 AND FOR THE SIX MONTH PERIODS ENDED JUNE 30,
1999 AND 2000 IS UNAUDITED)
Quantum has agreed to indemnify the Company and its affiliates from
one-half of the total potential liabilities arising from environmental
conditions existing as of the separation date at facilities transferred to the
Company.
The Company agreed to indemnify Quantum and its affiliates from all
liabilities arising from environmental conditions caused by operations after
separation date at any facilities transferred to the Company.
STOCK OPTION PLANS
On October 20, 2000, the Company adopted the following stock option
plans:
2000 Incentive Stock Option Plan.
The 2000 Incentive Stock Option Plan provides for the grant of Incentive
Stock Options and Non-Statutory Stock Options. There are 3,600,000 shares
reserved for issuance under the Plan. On the effective date of the Company's
registration statement on the Form S-1, the 2000 Incentive Stock Option Plan
shall terminate and any reserved but unissued shares under the Plan and any
shares returned to the Plan shall revert to the 2000 Stock Plan.
2000 Stock Plan.
The 2000 Stock Plan provides for the grant of incentive stock options to
our employees and nonstatutory stock options and stock purchase rights to our
employees, directors and consultants. In addition, the plan provides for the
grant of Stock Appreciation Rights, and Long-term Performance Awards. A total of
12,900,000 shares of our common stock were reserved for issuance pursuant to the
2000 Stock Plan.
2000 Employee Stock Purchase Plan.
The 2000 Employee Stock Purchase Plan permits participants to purchase
common stock through payroll deductions of up to 10% of their eligible
compensation. Amounts deducted and accumulated by the participant are used to
purchase shares of our common stock at the end of each six month purchase
period. The price is 85% of the lower of the fair market value of our common
stock at the beginning of an offering period or after a purchase period ends. A
total of 1,500,000 shares of common stock may be made available for sale.
2000 Director Option Plan.
The 2000 Director Option Plan provides for the periodic grant of
nonstatutory stock options to non-employee directors. A total of 350,000 shares
were reserved for issuance under the Director Plan.
STOCK SPLIT
Effective October 25, 2000, the Company underwent a 526,500-for-one stock
split of all outstanding shares of its common stock. Also on this date, the
Board of Directors authorized an increase in the number of authorized shares of
common stock to 500,000,000 and authorized 10,000,000 preferred shares with a
par value of $0.001 per share. All share and per share data for the periods
subsequent to the date of acquisition of September 9, 1999 have been restated to
reflected this split.
F-25
<PAGE> 103
SNAP APPLIANCES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
On September 10, 1999, Meridian Data, Inc. was acquired by Quantum
Corporation's DLT & Storage Systems (DSS) group. The acquisition was accounted
for as a purchase at a total cost of $115 million including assumed liabilities
of $10 million. Quantum completed the acquisition with the issuance of 4.1
million shares of DSS common stock and 2 million shares of Quantum Corporation's
Hard Drive Disk (HDD) group common stock valued at $74 million and $18 million,
respectively, on the date of acquisition in exchange for all outstanding shares
of Meridian; the conversion of outstanding Meridian stock options into options
to purchase 630,000 shares of DSS common stock and 315,000 shares of HDD common
stock valued at $8 million and $2 million, respectively; and the assumption of
Meridian liabilities and other acquisition costs of approximately $13 million.
The purchase price was allocated based on the estimated fair market value
of net tangible and intangible assets acquired and assumed liabilities as well
as in-process research and development costs. As of the acquisition date,
technological feasibility of the in-process technology had not been established
and the technology had no alternative future use. Therefore, the Company
expensed $37 million of the purchase price as in-process research and
development at the date of acquisition. The amount of the purchase price
allocated to in-process research and development was determined by estimating
the stage of development of each in-process research and development project at
the date of acquisition, estimating cash flows resulting from the expected
revenue generated from such projects, and discounting the net cash flows back to
their present value using a discount rate of 21%, which represents a premium to
Quantum's cost of capital. The purchased intangible assets are being amortized
on a straight-line basis over periods ranging from five to ten years.
The following is a summary of the purchase price allocation (in
millions):
<TABLE>
<S> <C>
Tangible assets acquired................................. $ 12
In-process research and development...................... 37
Completed technology..................................... 29
Trademark................................................ 4
Assembled workforce...................................... 3
Goodwill................................................. 30
----
$115
====
</TABLE>
The accompanying pro forma financial statements are presented in
accordance with Article 11 of Regulation S-X. The unaudited pro forma condensed
combining statements of operations were prepared as if the acquisition was
completed on January 1, 1999. To prepare the pro forma unaudited condensed
combining statements of operations, Meridian Data, Inc.'s operations for the
period from January 1, 1999 to September 9, 1999 has been combined with the
statement of operations of Quantum Snap Division for the period from September
10, 1999 to December 31, 1999. This method of combining the companies is only
for presentation of pro forma unaudited condensed combining financial
statements. The unaudited pro forma condensed combining financial statements are
subject to a number of estimates, assumptions and uncertainties and do not
purport to reflect the results of operations that would have occurred had this
acquisition taken place on the date indicated nor do they purport to reflect
results of operations that will occur in the future. The unaudited pro forma
condensed combining financial statements should be read in conjunction with the
historical financial statements of Snap Appliances, Inc. The unaudited pro forma
condensed combining statements of operations do not include the $37 million
charge for purchased in-process research and development arising from this
acquisition, as it is a non-recurring charge.
F-26
<PAGE> 104
SNAP APPLIANCES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM YEAR ENDED
JANUARY 1, SEPTEMBER 10, DECEMBER 31,
1999 TO 1999 TO 1999
SEPTEMBER 9, DECEMBER 31, PRO FORMA PRO FORMA
1999 1999 ADJUSTMENTS NOTES COMBINED
------------ ------------- ----------- ----- ------------
(MERIDIAN) (QUANTUM
SNAP
DIVISION)
<S> <C> <C> <C> <C> <C>
Revenue.................................. $ 10,986 $ 6,998 $ -- $ 17,984
Cost of revenue:
Product sales.......................... 6,977 4,746 -- 11,723
Amortization of acquisition-related
intangibles......................... -- 1,257 3,108 A 4,365
-------- -------- -------- --------
Total cost of revenue............... 6,977 6,003 3,108 16,088
-------- -------- -------- --------
Gross profit............................. 4,009 995 (3,108) 1,896
Operating expenses:
Research and development............... 3,425 1,860 -- 5,285
Selling, general and administrative.... 14,707 5,936 -- 20,643
Amortization of goodwill and other
acquisition-related intangibles..... -- 1,146 2,834 A 3,980
Purchased in-process research and
development......................... -- 37,000 (37,000) B --
-------- -------- -------- --------
Total operating expenses............ 18,132 45,942 (34,166) 29,908
-------- -------- -------- --------
Loss from operations..................... (14,123) (44,947) 31,058 (28,012)
Interest income and other, net........... 441 153 -- 594
-------- -------- -------- --------
Net loss................................. $(13,682) $(44,794) $ 31,058 $(27,418)
======== ======== ======== ========
Net loss per share:
Basic and diluted...................... $ (0.52)
========
Weighted-average common shares:
Basic and diluted...................... C 52,650
========
</TABLE>
See notes to unaudited pro forma condensed combining financial statements.
F-27
<PAGE> 105
SNAP APPLIANCES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
--------------------------------------------
PRO FORMA
ADJUSTMENTS NOTES PRO FORMA
----------- ----- ---------
<S> <C> <C> <C> <C>
Revenue............................................ $ 7,945 $ -- $ 7,945
Cost of revenue:
Product sales.................................... 5,187 -- 5,187
Amortization of acquisition-related
intangibles................................... -- 2,182 A 2,182
------- ------- --------
Total cost of revenue......................... 5,187 2,182 7,369
------- ------- --------
Gross profit....................................... 2,758 (2,182) 576
Operating expenses:
Research and development......................... 2,169 -- 2,169
Selling, general and administrative.............. 7,178 -- 7,178
Amortization of goodwill and other
acquisition-related intangibles............... -- 1,991 A 1,991
------- ------- --------
Total operating expenses...................... 9,347 1,991 11,338
------- ------- --------
Loss from operations............................... (6,589) (4,173) (10,762)
Interest income and other, net..................... 349 -- 349
------- ------- --------
Net loss........................................... $(6,240) $(4,173) $(10,413)
======= ======= ========
Net loss per share:
Basic and diluted................................ $ (0.20)
========
Weighted-average common shares:
Basic and diluted................................ C 52,650
========
</TABLE>
See notes to unaudited pro forma condensed combining financial statements.
F-28
<PAGE> 106
SNAP APPLIANCES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The following pro forma adjustments have been made to the pro forma
condensed combining financial statements:
A. To reflect pro forma amortization of the purchased intangibles over the
estimated useful lives as follows (in years):
<TABLE>
<S> <C>
Completed technology........................................ 7
Trademark................................................... 7
Assembled workforce......................................... 5
Goodwill.................................................... 10
</TABLE>
B. Adjustment to eliminate the $37 million charge for in-process research and
development, as it is a non-recurring charge.
C. Basic and diluted net loss per share has been calculated based on weighted
average number of shares outstanding after the acquisition.
F-29
<PAGE> 107
EDGAR DESCRIPTION OF INSIDE BACK COVER ART
The following text appears at the top of the page:
"Plug it in. Turn it on. Add storage in a Snap!"
The word "Snap!" in the preceding sentence appears in the form of the
Snap! Appliances logo, and the sentence "Add storage in a Snap!" is underlined.
Below this text and occupying the center of portion of the page are three
oval shaped pictures. The first picture is a rear view of multiple Snap Server
4100's, which are stacked on a rack mount; the picture is angled to show the
rear right side of the servers. Similarly, the second picture is a rear view of
multiple Snap Server 4100's, which are again shown stacked on a rack mount; the
picture is angled to show the rear left side of the servers. The third picture
is a front view of multiple, rack mounted Snap Server 4100's; the picture is
angled to show the right front side of the servers.
Below the three oval pictures is the Snap! Appliances logo. To the right
is a picture of a Snap Server 1000 and a Snap Server 2000 resting on a Snap
Server 4100.
<PAGE> 108
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Through and including , 2000 (the 25th day after the date of
this prospectus), all dealers effecting transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
SHARES
[SNAP LOGO]
COMMON SHARES
----------------
PROSPECTUS
----------------
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
CHASE H&Q
, 2000
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale and
distribution of the securities being registered. All amounts are estimated
except the SEC registration fee, the NASD registration fee and the Nasdaq
National Market listing fee. Quantum has generally agreed to pay these costs and
expenses.
<TABLE>
<CAPTION>
ITEM AMOUNT
---- -------
<S> <C>
SEC registration fee........................................ $26,400
NASD registration fee....................................... 10,500
Nasdaq National Market listing fees......................... *
Blue Sky qualification fees and expenses.................... *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Transfer agent and registrar fees........................... *
Printing and engraving expenses............................. *
Miscellaneous expenses...................................... *
-------
Total..................................................... $ *
=======
</TABLE>
------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Snap is incorporated under the laws of the State of Delaware. Section 145
("Section 145") of the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended (the "General Corporation Law"), inter
alia, provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation), by
reason of the fact that such person is or was an officer, director, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, provided such
person acted in good faith and in a manner he reasonably believed to be in or
not opposed to the corporation's best interests and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that his
conduct was illegal.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnify him under Section 145.
Snap's certificate of incorporation and bylaws provide for the
indemnification of officers and directors to the fullest extent permitted by the
General Corporation Law.
All of Snap's directors and officers will be covered by insurance
policies maintained by Snap against certain liabilities for actions taken in
their capacities as such, including liabilities under the Securities Act of
1933, as amended. In addition, the Company has entered into indemnity agreements
with its directors and executive officers (a form of which is filed as Exhibit
10.8 to this Registration Statement)
II-1
<PAGE> 110
that obligate the Company to indemnify such directors and executive officers to
the fullest extent permitted by the General Corporation Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The registrant has not made any sales of unregistered securities in the
last three years.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Master Separation and Distribution Agreement between Quantum
Corporation and the registrant effective as of October 26,
2000.
2.2** Form of General Assignment and Assumption Agreement between
Quantum Corporation and the registrant.
2.3** Form of Master Intellectual Property Agreement between
Quantum Corporation and the registrant.
2.4** Form of Employee Matters Agreement between Quantum
Corporation and the registrant.
2.5** Form of Tax Sharing Agreement between Quantum Corporation
and the registrant.
2.6** Form of Master Transitional Services Agreement between
Quantum Corporation and the registrant.
2.7** Form of Indemnification and Insurance Matters Agreement
between Quantum Corporation and the registrant.
3.1** Amended and Restated Certificate of Incorporation.
3.2** Bylaws.
3.3* Specimen Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** 2000 Stock Plan.
10.2** 2000 Incentive Stock Option Plan.
10.3** Form of 2000 Stock Plan Agreement.
10.4** 2000 Director Option Plan.
10.5** Form of 2000 Director Option Plan Agreement.
10.6** 2000 Employee Stock Purchase Plan.
10.7** Form of Restricted Stock Purchase Agreement.
10.8** Form of Indemnification Agreement entered into by the
registrant with each of its directors and executive
officers.
10.9** Form of Change of Control Agreement.
10.10** Form of Stock Appreciation Right Agreement.
10.11** Agreement and Plan of Merger and Reorganization dated as of
May 10, 1999 among Quantum Corporation, Inc., Defiant
Acquisition Sub, Inc., Meridian Data, Inc. and Meridian
Data, Inc.
10.12+ OEM Agreement dated as of September June 8, 2000, entered
into by the registrant and Dell Products L.P.
10.13+ Product Sales Agreement dated as of August 31, 2000, entered
into by the registrant and IBM Corporation.
10.14** Hard Disk Drive Supply Agreement dated as of June 30, 2000,
entered into by registrant and Quantum Corporation.
10.15** Sublease Agreement dated as of September 14, 2000, entered
into by Quantum Corporation and Xilinx, Inc.
16.1** Letter from PricewaterhouseCoopers LLP Re: Change in
Accountants.
23.1** Consent of Ernst & Young LLP, independent auditors.
</TABLE>
II-2
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2** Consent of PricewaterhouseCoopers LLP.
23.3* Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1).
24.1** Power of Attorney (contained on page II-5).
27.1** Financial Data Schedule.
27.2** Financial Data Schedule.
</TABLE>
------------
* To be filed by amendment.
**Previously filed.
+ Confidential treatment has been requested for portions of this exhibit.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because the information required to be
set forth therein is not applicable, is immaterial, or is shown in the financial
statements or notes thereto
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted as to directors, officers and
controlling persons of the Registrant pursuant to the provisions described in
Item 14, or otherwise, the Registrant has been advised that in the opinion of
the SEC, such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payments by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) for purposes of determining any liability under the
Securities Act, the information omitted from the form of prospectus filed
as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this registration statement as of the time it was declared
effective; and
(2) for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and this offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-3
<PAGE> 112
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in Santa Clara, State
of California, on the 13th day of November, 2000.
SNAP APPLIANCES, INC.
By: /s/ JAMES T. SCHRAITH
------------------------------------
James T. Schraith
Chairman of the Board, Chief
Executive
Officer and Director
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JAMES T. SCHRAITH Chairman of the Board, November 13, 2000
----------------------------------------------------- Chief Executive Officer
James T. Schraith and Director (Principal
Executive Officer)
* President, Chief Operating November 13, 2000
----------------------------------------------------- Officer and Director
Anders B. Axelsson
* Senior Vice President November 13, 2000
----------------------------------------------------- Finance, Chief Financial
Jeanne Seeley Officer and Secretary
(Principal Financial
Officer)
* Director November 13, 2000
-----------------------------------------------------
Clayton M. Christensen
* Director November 13, 2000
-----------------------------------------------------
Gregory W. Slayton
* Director November 13, 2000
-----------------------------------------------------
Gary Daichendt
*By: /s/ JAMES T. SCHRAITH
-------------------------------------------------
James T. Schraith
Attorney-in-fact
</TABLE>
II-4
<PAGE> 113
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULE
We have audited the financial statements of Snap Appliances, Inc. as of
December 31, 1999, and for the period from January 1, 1999 to September 9, 1999
and the period from September 10, 1999, and have issued our report thereon dated
October 26, 2000 included elsewhere in this Registration Statement. Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Palo Alto, California
October 26, 2000
S-1
<PAGE> 114
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Meridian Data, Inc.
Our audits of the financial statements of Meridian Data, Inc. referred to
in our report dated January 27, 1999, appearing in this registration statement
on Form S-1 also included an audit of the Financial Statement Schedule listed in
Item 16(b) of this registration statement. In our opinion, the Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related financial
statements.
PRICEWATERHOUSECOOPERS LLP
San Jose, California
January 27, 1999
S-2
<PAGE> 115
SNAP APPLIANCES, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Sales returns and allowances.................. 326 2,598 (2,617) 307
YEAR ENDED DECEMBER 31, 1998:
Sales returns and allowances.................. 307 1,269 (1,461) 115
PERIOD FROM JANUARY 1, 1999 TO SEPTEMBER 9,
1999:
Sales returns and allowances.................. 115 1,757 (832) 1,040
PERIOD FROM SEPTEMBER 10, 1999 TO DECEMBER 31,
1999:
Sales returns and allowances.................. 1,040 84 (267) 857
</TABLE>
S-3
<PAGE> 116
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1** Master Separation and Distribution Agreement between Quantum
Corporation and the registrant effective as of October 26,
2000.
2.2** Form of General Assignment and Assumption Agreement between
Quantum Corporation and the registrant.
2.3** Form of Master Intellectual Property Agreement between
Quantum Corporation and the registrant.
2.4** Form of Employee Matters Agreement between Quantum
Corporation and the registrant.
2.5** Form of Tax Sharing Agreement between Quantum Corporation
and the registrant.
2.6** Form of Master Transitional Services Agreement between
Quantum Corporation and the registrant.
2.7** Form of Indemnification and Insurance Matters Agreement
between Quantum Corporation and the registrant.
3.1** Amended and Restated Certificate of Incorporation.
3.2** Bylaws.
3.3* Specimen Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation.
10.1** 2000 Stock Plan.
10.2** 2000 Incentive Stock Option Plan.
10.3** Form of 2000 Stock Plan Agreement.
10.4** 2000 Director Option Plan.
10.5** Form of 2000 Director Option Plan Agreement.
10.6** 2000 Employee Stock Purchase Plan.
10.7** Form of Restricted Stock Purchase Agreement.
10.8** Form of Indemnification Agreement entered into by the
registrant with each of its directors and executive
officers.
10.9** Form of Change of Control Agreement.
10.10** Form of Stock Appreciation Right Agreement.
10.11** Agreement and Plan of Merger and Reorganization dated as of
May 10, 1999 among Quantum Corporation, Inc., Defiant
Acquisition Sub, Inc., Meridian Data, Inc. and Meridian
Data, Inc.
10.12+ OEM Agreement dated as of September June 8, 2000, entered
into by the registrant and Dell Products L.P.
10.13+ Product Sales Agreement dated as of August 31, 2000, entered
into by the registrant and IBM Corporation.
10.14** Hard Disk Drive Supply Agreement dated as of June 30, 2000,
entered into by registrant and Quantum Corporation.
10.15** Sublease Agreement dated as of September 14, 2000, entered
into by Quantum Corporation and Xilinx, Inc.
16.1** Letter from PricewaterhouseCoopers LLP Re: Change in
Accountants.
23.1** Consent of Ernst & Young LLP, independent auditors.
23.2** Consent of PricewaterhouseCoopers LLP.
23.3* Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1).
24.1** Power of Attorney (contained on page II-5).
27.1** Financial Data Schedule.
27.2** Financial Data Schedule.
</TABLE>
------------
* To be filed by amendment.
**Previously filed.
+ Confidential treatment has been requested for portions of this exhibit.
