<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1997.
REGISTRATION NO. 333-17529
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
QUALIX GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7372 94-24551156
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
---------------
1900 SOUTH NORFOLK, #224
SAN MATEO, CALIFORNIA 94403
(415) 572-0200
---------------
RICHARD G. THAU
PRESIDENT AND CHIEF EXECUTIVE OFFICER
QUALIX GROUP, INC.
1900 SOUTH NORFOLK, # 224
SAN MATEO, CALIFORNIA 94403
(415) 572-0200
---------------
COPIES TO:
JAY K. HACHIGIAN, ESQ. EDWARD M. LEONARD, ESQ.
BROOKS STOUGH, ESQ. JEFFREY P. HIGGINS, ESQ.
HOWARD L. CHABNER, ESQ. BROBECK, PHLEGER & HARRISON LLP
NANCY S. KIM, ESQ. TWO EMBARCADERO PLACE
JAMES R. MARKHAM, ESQ. 2200 GENG ROAD
GUNDERSON DETTMER STOUGH PALO ALTO, CALIFORNIA 94303
VILLENEUVE FRANKLIN & HACHIGIAN, LLP (415) 424-0160
155 CONSTITUTION DRIVE
MENLO PARK, CALIFORNIA 94025
(415) 321-2400
---------------
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, as amended, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration 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(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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
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PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
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<S> <C> <C> <C> <C>
Common Stock, $.001 par
value.................. 3,450,000 $11.00 $37,950,000 $12,524
</TABLE>
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(1) Includes 450,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a).
(3) Consists of $11,117 paid in connection with filing the original
Registration Statement and $1,407 paid in connection with this Amendment
No. 1 thereto.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SUCH SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 16, 1997
PROSPECTUS
3,000,000 SHARES
[LOGO OF QUALIX GROUP]
COMMON STOCK
Of the 3,000,000 shares of Common Stock offered hereby, 2,000,000 shares are
being sold by the Company and 1,000,000 shares are being sold by the Selling
Stockholders. The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. See "Principal and Selling Stockholders."
Prior to this offering, there has been no public market for the Common Stock
of the Company. It is currently estimated that the initial public offering
price will be between $9.00 and $11.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied to have the Common Stock approved for
quotation on the Nasdaq National Market under the symbol QLIX.
--------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 5.
--------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT (1) COMPANY (2) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share................ $ $ $ $
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Total (3)................ $ $ $ $
</TABLE>
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(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $900,000.
(3) The Company and certain Selling Stockholders have granted to the
Underwriters a 30-day option to purchase up to 450,000 additional shares of
Common Stock solely to cover over-allotments, if any. If all such shares
are purchased, the total Price to Public, Underwriting Discount, Proceeds
to Company and Proceeds to Selling Stockholders will be $ , $ , $
and $ , respectively. See "Underwriting."
--------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997 at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST SMITH BARNEY INC.
, 1997
<PAGE>
ENTERPRISE SERVERS
The company has three UNIX enterprise servers clustered using QualixHA+. This
ensures that all applications and data remain available to all users in the
event of a system failure.
DEPARTMENTAL SERVERS
This company has eight departmental servers, all running Windows NT. They use
Octopus Server for NT and Octopus HA+ to provide failover, recovery and real-
time data mirroring.
[DIAGRAM OF QUALIX RELIABILITY SOFTWARE]
REMOTE ENGINEERING SITE
Octopus Server for NT is used here to
create a remote copy of all critical
engineering data. In the event of a
failure or disaster, this data is
protected at a remote site.
REMOTE SALES OFFICES
Information is fed immediately from
remote sales offices to
headquarters using Octopus Server
for NT. Data is mirrored on the
sales server at headquarters,
keeping the headquarters
information constantly up-to-data
and protecting the data in the
event of a failure at the remote
site.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. The discussion in this Prospectus contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
may differ materially from those discussed in such forward-looking statements.
Factors that may cause or contribute to such differences include those
discussed in sections entitled "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business," as
well as those discussed elsewhere in this Prospectus.
THE COMPANY
Qualix is a leading provider of reliability software for UNIX and Windows NT
applications and servers in distributed computing environments. The Company's
reliability solutions are designed to minimize the impact of system failures on
business-critical applications. The Company offers software products for high
availability, security and storage management. Although a substantial majority
of the Company's historical revenue has come from products licensed from third
parties, the Company has recently increased its focus on internally developed
or acquired products. As of December 31, 1996, the Company had sold its
reliability software to over 900 customers, including over 5,000 server
licenses of its high availability software for Windows NT.
In recent years, enterprises have begun to deploy their business-critical
applications in distributed computing environments based on UNIX and Windows NT
operating systems. This has led to a need for a new generation of systems
management software for distributed systems, which are inherently more complex
and dynamic than host-based systems. Reliability software is a key category of
systems management software that is designed to ensure that distributed
computing systems are consistently available and secure. The Company believes
that the need for reliability software will grow as more business-critical
applications are deployed on distributed systems and as applications typically
found on UNIX and Windows NT servers, such as e-mail, intranet applications and
Internet access, are increasingly considered business-critical.
The Company's reliability solutions include high availability products that
ensure important applications are continuously available, security products to
protect against unauthorized access and storage management products for backing
up and quickly restoring data. In August 1996, Qualix merged with Octopus
Technologies, Inc., a leading provider of high availability and remote
mirroring software for Windows NT. In October 1996, the Company completed the
development and introduction of QualixHA+, its next-generation high
availability software product for UNIX. The Company currently offers a family
of eight owned or licensed reliability products and is developing several
additional reliability products. The Company's products are designed to be
scalable, easy to install and non-invasive and to work with multiple hardware
and software platforms.
The Company's strategy is to continue to increase substantially the
percentage of revenues derived from internally developed or acquired products
that typically have higher gross margins than licensed products. In addition, a
key objective of the Company is to expand joint development and marketing
relationships with systems management software vendors to provide complementary
solutions and to establish relationships with hardware and software OEMs to
incorporate reliability solutions in their products. A key component of the
Company's strategy is to work closely with customers to establish long-term
relationships.
The Company markets its software and services primarily through its field
sales organization complemented by its own telesales organization, systems
integrators, OEMs, resellers and international distributors. The Company plans
to sell its lower-priced reliability products for Windows NT through Qualix
Direct, its telesales organization for ancillary third party products. The
Company has co-marketing relationships with hardware vendors such as Hewlett-
Packard, IBM and Sun Microsystems and with major software vendors such as
Oracle, Sybase, Informix, CA-Ingres, Microsoft and Tivoli. The Company's
customers include AT&T, Dow Jones, Federal Express, Lehman Brothers, Lockheed
Martin, MCI and Netscape.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............ 2,000,000 shares
Common Stock offered by the Selling 1,000,000 shares
Stockholders..................................
Common Stock to be outstanding after the 10,071,768 shares (1)
offering......................................
Use of proceeds................................ For general corporate purposes,
including working capital and
potential acquisitions.
Proposed Nasdaq National Market symbol......... QLIX
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------- ----------------
1994 1995 1996 1995 1996
------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue.................... $ 6,053 $ 9,403 $16,535 $ 6,681 $ 15,049
Gross profit..................... 1,891 3,842 8,093 3,156 8,319
Non-recurring items(2)........... -- -- 23 763 (595)
Income (loss) from operations.... (2,546) (1,117) (288) 23 681
Net income (loss)(3)............. $(2,562) $(1,180) $ 558 $ 817 $ 711
Pro forma net income per
share(4)........................ $ .07 $ .08
Pro forma shares used in per
share computation(4)............ 8,177 8,370
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------
ACTUAL PRO FORMA(4) AS ADJUSTED(4)(5)
------- ------------ -----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................... $ 3,084 $3,259 $20,959
Total assets........................... 9,580 9,755 27,455
Long-term obligations, less current
portion............................... 303 303 303
Stockholders' equity................... 4,030 4,205 21,905
</TABLE>
- --------------------
(1) Based on the number of shares outstanding as of December 31, 1996. Excludes
886,855 shares of Common Stock issuable upon exercise of outstanding
options as of December 31, 1996 with a weighted average exercise price of
$2.43 per share. See "Capitalization," "Management--1997 Stock Option Plan"
and Note 8 of Notes to Consolidated Financial Statements.
(2) Represents a $763,000 gain on sale of stock in the quarter ended September
30, 1995; a $740,000 writeoff of purchased in-process technology in the
quarter ended June 30, 1996; and $595,000 of merger expenses in connection
with the merger with Octopus Technologies, Inc. in the quarter ended
September 30, 1996.
(3) Excluding non-recurring items, net income for the year ended June 30, 1996
was $535,000, and net income for the six months ended December 31, 1995 and
1996 was $54,000 and $1.3 million, respectively.
(4) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of pro forma information.
(5) Adjusted to reflect the sale of 2,000,000 shares of Common Stock by the
Company hereby at an assumed public offering price of $10.00 per share. See
"Use of Proceeds" and "Capitalization."
----------------
Except as otherwise specified, all information contained in this Prospectus
(i) reflects a 1 for 2.5 reverse split of the Common Stock and a change in the
par value per share of the Common Stock to $0.001 effected in January 1997,
(ii) except in the Consolidated Financial Statements, reflects the conversion
of all outstanding shares of Preferred Stock into shares of Common Stock upon
the closing of this offering, (iii) assumes the exercise of warrants to
purchase 231,988 shares of Common Stock on a cash basis at the closing of this
offering, and (iv) assumes no exercise of the Underwriters' over-allotment
option. See "Description of Capital Stock" and "Underwriting."
4
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus. The discussion in this
Prospectus contains forward-looking statements (as such term is defined in the
rules promulgated pursuant to the Securities Act of 1933, as amended (the
"Securities Act")), that involve risks and uncertainties. The Company's actual
results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to,
those discussed in "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business," as well as
those discussed elsewhere in this Prospectus.
Limited Operating History; No Assurance of Profitability. The Company was
incorporated in 1990 and accordingly has a very limited operating history,
which makes the prediction of future results difficult or impossible. The
Company has incurred significant net losses since its inception and had an
accumulated deficit of approximately $6.5 million as of December 31, 1996.
Although the Company has achieved seven consecutive quarters of operating
income before giving effect to nonrecurring gains and expenses, there can be
no assurance that the Company will be profitable on an annual or quarterly
basis in the future, and recent operating results should not be considered
indicative of future financial performance. The Company is subject to the
risks inherent in the operation of a new business enterprise, and there can be
no assurance that the Company will be able to successfully address these
risks. See "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Recent Transition to New Business Model. The Company originally began
operating primarily as a distributor, value-added reseller ("VAR") and
publisher of licensed third party client/server software products. In 1993,
the Company focused on the reliability market by introducing QualixHA, its
first high availability product for the UNIX operating environment. QualixHA
is based on a core software engine licensed from Veritas Software Corporation
("Veritas"). In August 1996, the Company merged with Octopus Technologies,
Inc. ("Octopus Technologies"), which had developed high availability and
remote data mirroring products for the Windows NT operating environment. More
recently, in October 1996, the Company introduced QualixHA+, which is based on
an internally developed core software engine. The Company's strategy is to
increase substantially the percentage of revenues derived from internally
developed or acquired products that typically have higher gross margins than
licensed products. There can be no assurance that the Company will
successfully implement this strategy. The Company's future profitability, if
any, will be heavily dependent on the successful development and/or
acquisition, introduction and enhancement of its own reliability products. See
"--Uncertainty of Success of Recently Introduced and Planned Products" and "--
Dependence on Qualix Direct."
Risk of Significant Fluctuations in Quarterly Operating Results. The Company
has experienced, and expects to continue to experience, significant
fluctuations in operating results, on an annual and a quarterly basis, as a
result of a number of factors, many of which are outside the Company's
control, including the size and timing of orders; lengthy sales cycles;
customer budget changes; introduction or enhancement of products by the
Company or its competitors; changes in pricing policy of the Company or its
competitors; the mix of products sold, including particularly the mix of
owned, licensed and resold products; increased competition; technological
changes in computer systems and environments; the ability of the Company to
timely develop or acquire, introduce and market new products; quality control
of products sold; market readiness to deploy reliability products for
distributed computing environments; market acceptance of new products and
product enhancements; seasonality of revenue; customer order deferrals in
anticipation of new products and product enhancements; the Company's success
in expanding its sales and marketing programs; personnel changes; foreign
currency exchange rates; mix of sales channels; acquisition costs or other
nonrecurring charges in connection with the acquisition of companies, products
or technologies; and general economic conditions. The Company's operating
results have historically fluctuated significantly as a result of nonrecurring
items, including a nonrecurring $763,000 gain on sale of stock in the quarter
ended September 30, 1995, a $740,000
5
<PAGE>
writeoff of purchased in-process technology in the quarter ended June 30, 1996
and $595,000 of merger expenses relating to the Octopus Technologies merger in
the quarter ended September 30, 1996.
The Company believes that operating results over at least the next few
quarters will be particularly dependent upon achieving significant market
acceptance of its OctopusHA+ and recently introduced QualixHA+ products, the
amount of any price reduction for such products, the timing of large orders
for such products, the level of revenues from lower margin products resold
through the Qualix Direct telesales organization and the level of research and
development expenses in connection with the Company's ongoing and planned
product development program. The Company's gross margin will be affected by a
number of factors, including the mix of owned, licensed and resold products,
the percentage of total revenue from service contracts, product pricing, the
percentage of total revenue from direct sales and indirect distribution
channels and the percentage of sales by the Qualix Direct telesales
organization. Internally developed or acquired products generally have higher
gross margins than licensed products because lower or no royalties must be
paid. Service revenues generally have lower margins than revenues from sales
of owned products because of the costs incurred to generate service revenues.
Revenues from products resold by the Qualix Direct telesales organization
generally have lower gross margins than revenues from owned and licensed
products sold by the Company's other direct and indirect distribution
channels.
Large sales of certain reliability products, including QualixHA+, often have
long cycles and are subject to a number of significant risks over which the
Company has little or no control. The timing of large sales can cause
significant fluctuations in the Company's operating results, and delivery
schedules may be cancelled or delayed. Because sales orders are typically
shipped shortly after receipt, order backlog at the beginning of any quarter
has represented only a small portion of that quarter's total revenue.
Accordingly, total revenue in any quarter are substantially dependent on
orders booked and shipped during that quarter. Historically, the Company has
often recognized a significant portion of its revenues in the last weeks, or
even days, of a quarter. As a result, the magnitude of quarterly fluctuations
may not become evident until late in, or after the close of, a particular
quarter. In addition, the Company's expense levels are based in significant
part on expectations as to future revenues and as a result are relatively
fixed in the short run. If revenues are below expectations in any given
quarter, net income is likely to be disproportionately affected, particularly
because the Company relies heavily on a relatively high cost direct sales
channel.
Based upon all of the foregoing, the Company believes that the Company's
annual and quarterly revenues, expenses and operating results are likely to
vary significantly in the future, that period-to-period comparisons of its
results of operations are not necessarily meaningful and that, in any event,
such comparisons should not be relied upon as indications of future
performance. In addition, it is likely that in future quarters the Company's
operating results will be below the expectations of public market analysts and
investors. In such event, the price of the Company's Common Stock would be
materially and adversely affected. See "Selected Consolidated Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Intense Competition. The market for reliability software for distributed
computing environments is intensely competitive, fragmented and characterized
by rapid technological developments, evolving standards and rapid changes in
customer requirements. To maintain and improve its position in this market,
the Company must continue to enhance current products and develop new products
in a timely fashion. Although the Company believes that the reliability
segment of the market is in the early stages of development, the Company
competes, or may compete, with four types of vendors: (i) independent vendors,
such as Veritas, that provide reliability products; (ii) host-based systems
management software companies migrating their products to the distributed
computing market; (iii) distributed computing systems management software
companies that incorporate reliability products as a part of integrated
systems management solutions; and (iv) hardware and operating system vendors
that incorporate reliability solutions into their products. See "Business--
Competition."
6
<PAGE>
Many of the Company's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base,
than the Company. The Company's current and future competitors could introduce
products with more features, higher scalability, greater functionality and
lower prices than the Company's products. These competitors could also bundle
existing or new products with other, more established products in order to
compete with the Company. The Company's focus on reliability software may be a
disadvantage in competing with vendors that offer a broader range of products.
Moreover, as the distributed systems management software market develops, a
number of companies with significantly greater resources than those of the
Company could attempt to increase their presence in this market by acquiring
or forming strategic alliances with competitors or business partners of the
Company. Because there are relatively low barriers to entry for the software
market, the Company expects additional competition from other established and
emerging companies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. Any material reduction in the price of the Company's
products would negatively affect gross margins and would require the Company
to increase software unit sales in order to maintain gross profits.
In addition, the distributed computing market is characterized by rapid
technological advances, changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards in computer
hardware and software technology. The introduction of products embodying new
technologies and the emergence of new industry standards may render the
Company's existing or planned products obsolete or unmarketable, particularly
because the market for reliability products is in an early stage of
development. There can be no assurance that the Company will be able to
compete successfully against current and future competitors, especially those
with significantly greater financial, marketing, service, support, technical
and other resources than the Company, and the failure to do so would have a
material adverse effect upon the Company's business, financial condition and
results of operations.
Dependence on Qualix Direct. Through its Qualix Direct telesales
organization, the Company has historically derived and expects to continue to
derive a significant portion of its total revenue from reselling ancillary
software and hardware products for distributed computing systems. Qualix
Direct accounted for 32% and 33% of total revenue in fiscal 1996 and for the
six months ended December 31, 1996, respectively. The Company's reliance on
Qualix Direct entails a number of risks. Qualix Direct's product line is
updated frequently in response to changes in vendor offerings. Qualix Direct
has no long-term supply contracts with its vendors and many resold products
are acquired pursuant to purchase orders or contracts that can be terminated
with little or no notice. In addition, Qualix Direct generally has little or
no control over the marketing, support and enhancement of its resold products
by its vendors and faces significant competition from distributors and other
distribution channels. Moreover, gross margins on products resold by Qualix
Direct are generally lower than gross margins on owned and licensed products
sold by the Company's field sales organization. In addition, the Company's net
revenues may be adversely impacted if sales by Qualix Direct decline or do not
grow at anticipated rates, even though the Company's gross margins may be less
significantly impacted. Although the Company has recently begun to sell its
lower priced reliability products through Qualix Direct, there can be no
assurance that it will be successful or that such activities will not create
conflicts with the Company's other direct or indirect distribution channels.
Any adverse development at Qualix Direct could have a material adverse impact
on the Company's business, financial condition and results of operations. See
"Business--Qualix Direct" and "--Sales and Marketing--Qualix Direct."
Uncertainty of Success of Recently Introduced and Planned Products. A key
element of the Company's strategy is to increase substantially the percentage
of revenues derived from higher margin owned reliability software products. In
August 1996, the Company acquired and introduced high availability and remote
data mirroring products for Windows NT based systems upon merging with Octopus
Technologies and in October 1996 introduced QualixHA+, its high availability
product for UNIX based systems, which is based on an internally developed core
software engine. In addition, the Company is developing additional reliability
7
<PAGE>
products. There are a number of risks associated with the successful
development or acquisition and introduction of the Company's existing and
planned products. The Company needs to significantly expand and enhance its
product development and engineering resources in order to successfully
implement its product development program. See "--Need to Expand Product
Development and Engineering Capability." The Company has in the past
experienced delays in the development of new products and enhancements to
existing products. There can be no assurance that the Company can successfully
develop any additional products or enhance existing products. Even if
developed or acquired, such products or enhancements may contain undetected
difficulties or defects that are not discovered before they are released. See
"--Risk of Software Defects." In addition, there can be no assurance that the
Company can successfully market and sell any such products or enhancements or
that they will achieve significant market acceptance. Failure of the Company
to successfully develop, market and sell existing and planned products or
enhancements would have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on Licensed Products. The Company has historically derived a
substantial majority, and expects to continue to derive a significant portion,
of its total revenue from the sale of products that are licensed or
incorporate a significant amount of technology that is licensed from third
parties (collectively, "licensed products"). There are a number of
disadvantages and risks associated with the sale of licensed products. The
Company is frequently unable to obtain exclusive rights to sell a licensed
product, in which case the Company competes against the licensor and
potentially other third party licensees. The licenses are typically for a
specified period. For example, the Company's right to sell QualixHA terminates
on February 28, 1997, unless extended. See "--Litigation." The Company's right
to sell FireWall-1 (and QualixHA/HA+ for Firewalls, which incorporates
FireWall-1) is subject to annual renewal. The Company must typically pay a
significant per copy royalty that reduces gross margins realized by the
Company from the sale of licensed products and may put the Company at a
competitive disadvantage against the licensor or other third parties licensees
paying lower royalty rates. In addition, the Company may have little or no
control over the timing, functionality and quality of enhancements and
upgrades to the product and may be restricted in the method and manner,
including distribution channels, by which the Company may sell the product.
The Company may from time to time need to enforce its rights under licenses
and is currently in litigation with Veritas concerning the Company's QualixHA
high availability product, which has historically represented a significant
portion of the Company's revenue. See "--Litigation." Notwithstanding these
factors, the Company anticipates it will derive a significant percentage of
its revenues from licensed products for the foreseeable future. Any loss in
the right to sell licensed products or any adverse change in the terms upon
which it sells licensed products could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business--Reliability Software Products," "--Product
Development" and "--Competition."
Product Concentration. The Company currently derives the majority of its
revenues from the sale of reliability products and related services for
distributing computing environments. Broad market acceptance of the Company's
reliability products is therefore critical to the Company's future success.
Demand for the Company's reliability products will depend in large part on
increasing market acceptance of distributed computing systems, particularly
for business-critical applications, and the need for reliability systems
management software products and services for these computing systems. There
can be no assurance that market acceptance of distributed computing systems
will increase for business-critical applications or that market acceptance of
reliability products and services will increase. If reliability products fail
to achieve broad market acceptance in distributed computing environments, the
Company's business, operating results and financial condition would be
materially and adversely affected. During recent years, segments of the
computer industry have experienced significant economic downturns
characterized by decreased product demand, production overcapacity, price
erosion, work slowdowns and layoffs. The Company's financial performance may
in the future experience substantial fluctuations as a consequence of such
industry patterns. There can be no assurance that such factors will not have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business--Industry Background."
8
<PAGE>
Need to Expand Product Development and Engineering Capability. The Company's
future success is critically dependent on expanding and integrating its
product development and engineering capability. In addition to recently
introducing QualixHA+, the Company is also developing storage management
products as a result of acquiring the technology of Anthill Incorporated
("Anthill") in May 1996. In order to maintain its market and technological
leadership, the Company must maintain and upgrade its products and develop new
products. To successfully implement its product development program, the
Company must, among other things, successfully integrate its recently hired
senior manager for product development, hire additional software engineers,
continue integrating its Octopus Technologies and Anthill development teams
with its QualixHA+ development team, enhance its product development policies
and procedures and substantially increase expenditures on product development
and engineering. There can be no assurance that the Company's product
development efforts will be successful or that future products will be
available on a timely basis or at all or achieve market acceptance. Moreover,
expansion of the Company's product development program will increase the
Company's operating expenses, and there can be no assurance that actual
spending increases will not exceed anticipated amounts or that such increases
will result in sufficient revenues to justify such increases. Failure to
successfully implement the Company's product development program would have a
material adverse effect on its business, financial condition and results of
operations.
Dependence on Indirect Distribution Channels. An important element of the
Company's sales and marketing strategy is to continue to sell its products and
services through indirect distribution channels, including distributors,
system integrators, VARs, systems management software vendors and OEMs.
Selling through indirect channels may limit the Company's contacts with its
customers. As a result, the Company's ability to accurately forecast sales,
evaluate customer satisfaction and recognize emerging customer requirements
may be hindered. Marketing products through the Company's field sales force
and through indirect distribution channels may result in distribution channel
conflicts. There can be no assurance that channel conflicts will not
materially adversely affect its field sales efforts as well as its
relationships with existing or future distributors, system integrators, VARs,
systems management software vendors and OEMs. The Company's reliance on
indirect distribution increases the risks associated with the introduction of
new products, including risks of delays in adoption and the risk that
resellers will evaluate and potentially adopt competitive products. In
particular, there can be no assurance that the Company's current resellers
will adopt or successfully market the Company's new QualixHA+ product. In
addition, these relationships are frequently terminable at any time without
cause. Therefore, there can be no assurance that any such party will continue
to represent the Company's products, which could have a material adverse
effect on the Company's business, financial condition and results of
operations. See "Business--Sales and Marketing."
Litigation. On October 25, 1996, the Company sued Veritas in the Santa Clara
County California Superior Court alleging breach of contract, unfair
competition and intentional interference with prospective economic advantage
in connection with a contract dated as of April 10, 1995 (the "Master
Agreement") between the Company and Veritas. The Master Agreement grants the
Company the right to market and support FirstWatch, a product which forms the
core software engine of QualixHA but which is not part of QualixHA+. The
Master Agreement, and therefore the Company's right to sell QualixHA,
terminates on February 28, 1997, unless the agreement is extended. The Company
is seeking unspecified compensatory and punitive damages. Veritas filed a
cross-complaint on October 29, 1996 alleging that the Company engaged in
unfair competition, false advertising, breach of contract, fraud and negligent
misrepresentation as a result of various alleged activities. Veritas seeks
unspecified compensatory and punitive damages and injunctive relief, including
requiring Qualix to divulge certain customer information.
On October 29, 1996, the court granted the Company a temporary restraining
order enjoining Veritas from stating that the Master Agreement has been
terminated. The court also granted Veritas an order enjoining the Company from
stating that QualixHA+ is an upgrade to FirstWatch or that QualixHA+ is the
FirstWatch product. On November 14, 1996, the court issued a preliminary
injunction against Veritas on substantially similar terms as the temporary
restraining order and indicated that it would, upon submission of an order by
Veritas, issue a preliminary injunction enjoining the Company from stating
that QualixHA+ is an upgrade to FirstWatch. Veritas has not yet submitted such
an order.
9
<PAGE>
The Master Agreement requires binding arbitration of contract disputes
through the American Arbitration Association ("AAA"). On November 27, 1996,
Veritas served the Company with a demand for arbitration of various issues
relating to the dispute, including fraud, negligent misrepresentation, breach
of contract, pricing below cost, unfair competition and false advertising.
Veritas is expected to seek substantially the same relief in the arbitration
as in the lawsuit. The Company received formal notification of the arbitration
from the AAA and has responded. That response included submission of certain
claims of the Company against Veritas into the arbitration, including the
claims raised by the Company in its lawsuit against Veritas. Arbitration is
expected to commence shortly. There can be no assurance that all of the claims
asserted by Veritas or the Company fall within the scope of the arbitration
provision, and therefore they may be resolved through litigation rather than
arbitration.
The Company believes that its claims against Veritas are meritorious and
that it has meritorious defenses to the claims brought by Veritas. The Company
intends to vigorously pursue its claims and defenses against Veritas. After
consideration of the nature of the claims and facts relating to the litigation
and after consultation with legal counsel, the Company believes that
resolution of its dispute with Veritas will not have a material adverse effect
on the Company's business, financial condition and results of operations.
However, due to the nature of litigation and arbitration and because discovery
has not commenced, the Company cannot determine the total expense or possible
loss or other harm that it may incur as a result of litigation, arbitration or
settlement of its dispute with Veritas. Among other things, the Master
Agreement may be terminated prior to February 28, 1997 or not extended
thereafter. Revenue from QualixHA was $4.8 million in fiscal 1996, $2.0
million in the quarter ended September 30, 1996 and negative $100,000 in the
quarter ended December 31, 1996 (in all cases, after giving effect to credits
for product returns). Although QualixHA+ was introduced and began generating
revenue in October 1996, there can be no assurance that loss of the right to
sell QualixHA would not have a material adverse effect on the Company's
business, financial condition and results of operations.
Previously, by letter dated November 19, 1996, Veritas had indicated that at
the arbitration it would also pursue "trade secret misappropriation claims
based upon Qualix's use of developers who had access to Veritas' trade
secrets." Veritas has not included that claim within its demand for
arbitration. The Company is unable to predict whether Veritas will assert that
or similar claims alleging misappropriation or infringement of Veritas'
proprietary rights or whether Veritas will attempt to assert such claims as
part of arbitration proceedings, as part of any counterclaim or in a separate
action in state or federal court. The Company has submitted into the
arbitration a request for declaratory relief that the development of QualixHA+
did not constitute misappropriation of Veritas' trade secrets. As is noted
above, there can be no assurance that this or other claims will be deemed to
fall within the scope of the arbitration provision. Based in part upon
procedures undertaken by the Company to ensure that the core software engine
to QualixHA+ was developed by employees and consultants who had no exposure to
Veritas' trade secrets, the Company believes that it would have meritorious
defenses to any such claims. Nevertheless, Veritas has advised the Company
orally that it may bring such claims, and there can be no assurance that
Veritas will not assert such claims and that, if asserted, Veritas will not be
successful in obtaining damages or other relief that would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "--Dependence on Proprietary Rights; Risk of Infringement."
Integration of Acquisitions. In May 1996, the Company acquired substantially
all of the assets and assumed certain liabilities of Anthill, including
technology relating to a hierarchical storage management product under
development. In August 1996, the Company merged with Octopus Technologies. The
Company may make acquisitions in the future. Acquisitions of companies,
products or technologies entail numerous risks, including an inability to
successfully assimilate acquired operations and products, diversion of
management's attention, loss of key employees of acquired companies and
substantial transaction costs. Some of the products acquired require
significant additional development before they can be marketed and may not
generate revenue at levels anticipated by the Company. There can be no
assurance that the Company will not incur these problems in the future for its
existing or future acquisitions. Moreover, future acquisitions by the Company
may result in dilutive issuances of equity securities, the incurrence of
additional debt, large one-time
10
<PAGE>
write-offs and the creation of goodwill or other intangible assets that could
result in amortization expense. Any such problems or factors could have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence On Key Personnel; Management of Growth. The Company's future
operating results depend significantly on the continued service of its key
technical and senior management personnel. The Company's future success also
depends on its continuing ability to attract and retain highly qualified
technical and managerial personnel. The Company's future success is
particularly dependent on increasing its product development personnel. See
"--Need to Expand Product Development and Engineering Capability." The Company
has relied in the past on consultants as well as employees for its product
development programs. Competition for such personnel is intense, and there can
be no assurance that the Company will retain its key managerial and technical
employees or that it will be successful in attracting or retaining other
highly qualified technical and managerial employees and consultants in the
future. The Company has at times experienced difficulty in recruiting
qualified personnel, and there can be no assurance that the Company will not
experience such difficulties in the future. If the Company were to experience
such difficulties in the future, it may have a material adverse effect on the
Company's business, financial condition and results of operations. In
addition, the growth in the Company's business has placed, and is expected to
continue to place, a significant strain on the Company's management and
operations. To manage its future growth, if any, effectively, the Company must
continue to strengthen its operational, financial and management information
systems and expand, train and manage its employee work force. Failure to do so
effectively and on a timely basis could have a material adverse effect upon
the Company's business, financial condition and results of operations. See
"Management."
Dependence on Proprietary Technology; Risks of Infringement. The Company's
success depends in part upon its proprietary technology. The Company has no
issued patents and relies on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and licensing arrangements to
establish and protect its proprietary rights relating to its licensed and
internally developed products. The Company's rights to market and sell
licensed products are generally governed by license agreements of specified
duration. See "--Dependence on Qualix Direct" and "--Dependence on Licensed
Products." Although the Company has applied for a United States patent
covering certain aspects of the technology included in its Octopus
Technologies data mirroring product, the claims in the patent application have
been rejected by the U.S. Patent and Trademark Office, and there can be no
assurance that a patent will be issued, that any issued patent will provide
meaningful protection for the Company's technology, that any issued patent
will provide the Company with any competitive advantages or will not be
challenged by third parties. Moreover, there can be no assurance that the
Company will develop additional proprietary products or technologies that are
patentable or that the patents of others will not have an adverse effect on
the Company's ability to do business. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate the
Company's products or, if patents are issued to the Company, design around the
patents issued to the Company. As part of its confidentiality procedures, the
Company generally enters into non-disclosure agreements with its employees,
distributors and corporate partners, and license agreements with respect to
its software, documentation and other proprietary information. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use the Company's products or technology without authorization, or to
develop similar technology independently. Policing unauthorized use of the
Company's products is difficult and although the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In selling its products,
the Company relies on "shrink wrap" licenses for sales of certain products
that are not signed by licensees and, therefore, may be unenforceable under
the laws of certain jurisdictions. In addition, effective protection of
intellectual property rights is unavailable or limited in certain foreign
countries. There can be no assurance that the Company's protection of its
proprietary rights, including any patent that may be issued, will be adequate
or that the Company's competitors will not independently develop similar
technology, duplicate the Company's products or design around any patents
issued to the Company or other intellectual property rights.
11
<PAGE>
There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. In October 1996, the
Company received correspondence from a French company asserting that it has
registered "Octopus" as a trademark in France and that the Company's use of
the mark "Octopus" infringes its trademark rights. Based upon its initial
investigation of this claim, the Company believes that it may be required to
obtain a license to use the Octopus mark in France, adopt a new trademark to
replace the Octopus mark in France or be subject to other liability. Although
there can be no assurance that Qualix can obtain a license to use the Octopus
mark in France on commercially reasonable terms or at all, Qualix does not
believe that resolution of this matter will have a material adverse effect on
the Company's business, financial condition or results of operations. In
addition, the Company expects that software product developers will
increasingly be subject to such claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in the industry segment overlaps. Any such claims, with or without
merit, could result in costly litigation that could absorb significant
management time, which could have a material adverse effect on the Company's
business, operating results and financial condition. Such claims might require
the Company to enter into royalty or license agreements. Such royalty or
license agreements, if required, may not be available on terms acceptable to
the Company or at all, which could have a material adverse effect upon the
Company's business, financial condition and operating results. See "--
Litigation" and "Business--Proprietary Rights."
International Sales. Net revenue from customers outside the United States
was 5%, 9%, 17% and 18% of total revenue for fiscal years 1994, 1995 and 1996
and the six months ended December 31, 1996, respectively. The Company intends
to continue to expand its operations outside of the United States and enter
additional international markets, which will require significant management
attention and financial resources. There can be no assurance, however, that
the Company will be able to maintain or increase international market demand
for the Company's products. The Company's international revenues are currently
entirely in U.S. dollars. An increase in the value of the U.S. dollar relative
to foreign currencies could make the Company's products more expensive and,
therefore, potentially less competitive in foreign markets. Additional risks
inherent in the Company's international business activities generally include
unexpected changes in regulatory requirements, tariffs and other trade
barriers, costs and risks of localizing products for foreign countries,
adverse tax consequences, restrictions on repatriating earnings and the
burdens of complying with a wide variety of foreign laws. There can be no
assurance that such factors will not have a material adverse effect upon the
Company's future export revenues and, consequently, the Company's business,
financial condition and results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business--
Sales and Marketing."
Risk of Software Defects. Software products as complex as those offered by
the Company frequently contain errors or defects, especially when first
introduced or when new versions or enhancements are released. Despite testing
by the Company and by current and potential customers, there can be no
assurance that defects and errors will not be found in existing products or in
new products, versions or enhancements after commencement of commercial
shipments. Any such defects and errors could result in adverse customer
reactions, particularly because the Company focuses on selling reliability
products, delays in market acceptance, expensive product changes or loss of
revenue, any of which could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Business--
Reliability Software Products."
Product Liability. The Company's license agreements with customers typically
contain provisions designed to limit the Company's exposure to potential
product liability claims. A significant portion of the Company's products are
licensed pursuant to "shrink wrap" licenses. To the extent the Company relies
on "shrink wrap" licenses that are not signed by licensees and, therefore, may
be unenforceable under the laws of certain jurisdictions, the limitation of
liability provisions contained in such license agreements may not be
effective. The Company's products generally provide systems management
software that is used for business-critical applications, and, as a result,
the sale and support of products by the Company may entail the risk of product
liability claims. Although the Company maintains errors and omissions product
liability insurance, a
12
<PAGE>
successful liability claim brought against the Company could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
No Prior Public Market; Potential Volatility of Stock Price. Prior to this
offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active trading market will develop or be
sustained after this offering. The public offering price will be determined
through negotiations among the Company, representatives of the Selling
Stockholders and the representatives of the Underwriters based on several
factors and may not be indicative of the market price of the Common Stock
after this offering. The market price of the shares of Common Stock is likely
to be highly volatile and may be significantly affected by factors such as
actual or anticipated fluctuations in the Company's results of operations,
announcements of technological innovations, new products by the Company or its
competitors, developments with respect to patents, copyrights or proprietary
rights, conditions and trends in the distributed computing environment and
other technology industries, general market conditions and other factors. In
addition, the stock market has from time to time experienced significant price
and volume fluctuations that have particularly affected the market prices for
the common stock of technology companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock. In the past,
following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against
that company. There can be no assurance that such litigation will not occur in
the future with respect to the Company. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which could have a material adverse effect upon the Company's business,
financial condition and results of operations. See "Underwriting."
Control by Directors, Executive Officers and Principal Stockholders. Upon
completion of this offering, the present directors, executive officers and
principal stockholders, and their affiliates and related persons, will
beneficially own approximately 56.7% of the outstanding shares of the
Company's Common Stock. As a result, these stockholders will be able to elect
all of the Company's directors, have the voting power to approve all matters
requiring stockholder approval, and continue to exert significant influence
over the affairs of the Company. Such concentration of ownership may have the
effect of delaying, deferring or preventing a change in control of the
Company. See "Management" and "Principal and Selling Stockholders."
Shares Eligible for Future Sale; Registration Rights. Sales of a substantial
number of shares of Common Stock in the public market following this offering
could adversely affect the market price for the Company's Common Stock. The
number of shares of Common Stock available for sale in the public market is
limited by restrictions under the Securities Act of 1933, as amended (the
"Securities Act"), and lock-up agreements under which the holders of such
shares have agreed not to sell or otherwise dispose of any of their shares for
a period of 180 days after the date of this Prospectus without the prior
written consent of Hambrecht & Quist LLC. However, Hambrecht & Quist LLC may,
in its sole discretion and at any time without notice, release all or any
portion of the securities subject to lockup agreements. Any such release could
have a material adverse effect upon the market price of the Company's Common
Stock. As a result of these restrictions, based on shares outstanding and
options granted as of December 31, 1996, the following shares of Common Stock
will be eligible for future sale. On the date of this Prospectus, no shares
other than the shares offered hereby will be eligible for sale. An additional
6,714,280 shares will be eligible for sale 180 days after the date of this
Prospectus upon the expiration of such lockup agreements, subject to
compliance with Rule 144 or Rule 701 under the Securities Act. In addition,
the Company intends to register on the effective date of this offering a total
of 1,271,009 shares of Common Stock subject to outstanding options or reserved
for issuance under its 1997 Stock Option Plan and 350,000 shares of Common
Stock reserved for issuance under its Employee Stock Purchase Plan. Further,
upon expiration of the lock-up agreements referred to above, holders of
approximately 4,422,455 shares of Common Stock will be entitled to certain
demand and piggyback registration rights with respect to such shares. If such
holders, by exercising their registration rights, cause a large number of
shares to be registered and sold in the public market, such sales could have a
material adverse effect on the market price for the Company's Common Stock.
See "Description of Capital Stock--Registration Rights" and "Shares Eligible
for Future Sale."
13
<PAGE>
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation and Delaware Law. Upon completion of this offering, the
Company's Board of Directors will have the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
privileges and restrictions, including voting rights of such shares, without
any further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing desirable flexibility
in connection with possible acquisitions and other corporate purposes, could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company. The Company has no
current plans to issue shares of Preferred Stock. Further, certain provisions
of the Company's Certificate of Incorporation and Bylaws and of Delaware law
could delay or make more difficult a merger, tender offer or proxy contest
involving the Company. See "Description of Capital Stock--Preferred Stock" and
"--Antitakeover Effects of Provisions of the Certificate of Incorporation and
Delaware Law."
Immediate and Substantial Dilution. Investors participating in this offering
will incur immediate and substantial dilution of $7.83 per share based on an
assumed public offering price of $10.00 per share and pro forma net book value
before this offering of $0.52 per share. To the extent outstanding options to
purchase Common Stock are exercised, there will be further dilution. See
"Dilution" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
Uncertainty as to Use of Proceeds. The primary purposes of this offering are
to create a public market for the Common Stock, to facilitate future access to
public markets and to obtain additional working capital. The Company plans to
use the net proceeds to the Company from this offering primarily for working
capital and general corporate purposes, as well as for possible acquisitions
of businesses, products and technologies that are complementary to those of
the Company. However, there are no current agreements or negotiations with
respect to any such transactions. Accordingly, the Company's management will
retain broad discretion as to the allocation of a substantial portion of the
net proceeds from this offering.
14
<PAGE>
THE COMPANY
As used in this Prospectus "Qualix" and the "Company" refer to Qualix Group,
Inc. and its subsidiary, unless the context otherwise indicates. The Company
was incorporated in Delaware on September 21, 1990. The Company's principal
executive offices are located at 1900 South Norfolk, #224, San Mateo,
California 94403. Its telephone number is (415) 572-0200.
Qualix and Octopus are registered trademarks of the Company. QualixHA,
QualixHA+, OctopusHA+, QualixSD and Octopus Server are trademarks of the
Company. All other trademarks or trade names referred to in this Prospectus
are the property of their respective owners.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered by the Company hereby at an assumed public offering price
of $10.00 per share are estimated to be $17.7 million after deducting
estimated underwriting discounts and commissions and offering expenses payable
by the Company ($18.9 million if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any proceeds from the sale of
Common Stock by the Selling Stockholders.
The primary purposes of this offering are to create a public market for the
Common Stock, to facilitate future access to public markets and to obtain
additional working capital. The Company plans to use the net proceeds to the
Company from this offering primarily for working capital and general corporate
purposes, as well as for possible acquisitions of businesses, products and
technologies that are complementary to those of the Company. Although there
are no current agreements or negotiations with respect to any such
transactions, the Company from time-to-time evaluates such opportunities.
Pending such uses, the Company plans to invest the net proceeds in investment
grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid any cash dividends on its capital stock and does
not expect to pay cash dividends in the foreseeable future. In addition, the
Company anticipates entering into a bank credit agreement that will prohibit
it from paying cash dividends without the bank's consent.
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 (i) on an actual basis, (ii) pro forma after giving effect
to the automatic conversion of all outstanding shares of Preferred Stock into
Common Stock, and the assumed exercise of warrants to purchase 231,988 shares
of Common Stock on a cash basis for an aggregate of $175,000, upon the closing
of this offering, and (iii) as adjusted to reflect the receipt of the
estimated net proceeds from the sale of 2,000,000 shares of Common Stock
pursuant to this offering at an assumed public offering price of $10.00 per
share after deducting estimated underwriting discounts and commissions and
offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long term obligations, less current portion (1). $ 303 $ 303 $ 303
Stockholders' equity:
Convertible Preferred Stock--par value $.001;
5,000,000 shares authorized; issued and
outstanding--2,322,192 shares actual, no
shares pro forma or as adjusted.............. 4,790 -- --
Common Stock--par value $.001; 20,000,000
shares authorized; issued and outstanding--
5,053,170 shares
actual, 8,071,768 shares pro forma and
10,071,768 shares
as adjusted (2).............................. 5,096 10,061 27,761
Notes receivable from sale of stock........... (179) (179) (179)
Net unrealized gain on investment............. 860 860 860
Accumulated deficit........................... (6,537) (6,537) (6,537)
------- ------- -------
Total stockholders' equity.................. 4,030 4,205 21,905
------- ------- -------
Total capitalization...................... $ 4,333 $ 4,508 $22,208
======= ======= =======
</TABLE>
- ---------------------
(1) See Note 7 of Notes to Consolidated Financial Statements.
(2) Excludes as of December 31, 1996 (i) 695,141 shares of Common Stock
issuable upon exercise of outstanding options to purchase Common Stock
with a weighted average exercise price of $2.95 per share, and (ii)
384,154 shares of Common Stock reserved for future options or direct stock
issuances under the Company's stock option plans. See "Management--1997
Stock Option Plan," "--Employee Stock Purchase Plan," and Note 8 of Notes
to Consolidated Financial Statements.
16
<PAGE>
DILUTION
As of December 31, 1996 the pro forma net tangible book value of the Company
was $4,205,000 or $0.52 per share of Common Stock. "Pro forma net tangible
book value per share" represents the amount of the Company's total tangible
assets less its total liabilities divided by the number of shares of Common
Stock outstanding, after giving effect to (i) a 1 for 2.5 reverse stock split
of Common Stock effected in January 1997, (ii) the conversion of all
outstanding shares of Preferred Stock into Common Stock upon the closing of
this offering, and (iii) the assumed exercise of warrants to purchase 231,988
shares of Common Stock on a cash basis at the closing of this offering.
Without taking into account any changes in net tangible book value after
December 31, 1996, other than to give effect to the sale by the Company of
2,000,000 shares offered hereby (at an assumed public offering price of $10.00
per share, after deducting estimated underwriting discounts and commissions
and offering expenses), the Company's pro forma net tangible book value at
December 31, 1996 would have been $21,905,000, or $2.17 per share. This
represents an immediate dilution in pro forma net tangible book value of $7.83
per share to investors purchasing shares in this offering and an immediate
increase in pro forma net tangible book value of $1.65 per share to existing
stockholders. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................ $10.00
Pro forma net tangible book value before offering............ $0.52
Increase in pro forma net tangible book value attributable to
new
investors................................................... 1.65
-----
As adjusted pro forma net tangible book value after the offer-
ing........................................................... 2.17
------
Dilution to new investors...................................... $ 7.83
======
</TABLE>
The following table sets forth on a pro forma basis as of December 31, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
stockholders and by new investors purchasing shares sold by the Company in
this offering (assuming the sale of 2,000,000 shares by the Company at an
assumed public offering price of $10.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1). 8,071,768 80% $10,124,000 34% $ 1.25
New investors (1)......... 2,000,000 20 20,000,000 66 $10.00
---------- --- ----------- ---
Totals.................. 10,071,768 100% $30,124,000 100%
========== === =========== ===
</TABLE>
The foregoing computations are based on the number of shares outstanding as
of December 31, 1996 and exclude 695,141 shares of Common Stock issuable upon
exercise of outstanding options with a weighted average exercise price of
$2.95 per share. To the extent options are exercised, there will be further
dilution to new investors. See "Management--1997 Stock Option Plan" and Note 8
of Notes to Consolidated Financial Statements.
- ---------------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 7,071,768, or approximately 70%
and will increase the number of shares to be purchased by new investors to
3,000,000, or approximately 30% of the total number of shares of Common
Stock outstanding after this offering.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The consolidated statement of operations data for the fiscal years ended
June 30, 1994, 1995 and 1996 and the consolidated balance sheet data as of
June 30, 1995 and 1996 are derived from the audited consolidated financial
statements of the Company that are included elsewhere in this Prospectus. The
consolidated statement of operations data for the fiscal years ended June 30,
1992 and 1993 and the consolidated balance sheet data as of June 30, 1992,
1993 and 1994 are derived from audited consolidated financial statements of
the Company that are not included in this Prospectus. The consolidated
statement of operations data for the six months ended December 31, 1995 and
1996 and the consolidated balance sheet data at December 31, 1996 are derived
from unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. The unaudited consolidated financial statements
have been prepared by the Company on a basis consistent with the Company's
audited consolidated financial statements and, in the opinion of management,
include all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the Company's operating results and
financial position for the periods to which such statements relate. The
operating results for the periods presented are not necessarily indicative of
the results to be expected for any other interim period or any other future
fiscal year. The following selected consolidated financial data should be read
in conjunction with the Company's consolidated financial statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------------------------- ------------------
1992 1993 1994 1995 1996(1) 1995(2) 1996(3)
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Reliability software... $ -- $ -- $ 536 $ 3,573 $8,965 $ 3,434 $ 7,858
Other products......... 1,448 3,694 4,868 4,723 5,360 2,331 4,948
Support, maintenance
and consulting........ 90 363 649 1,107 2,210 916 2,243
------- ------- ------- ------- ------ -------- --------
Total revenue......... 1,538 4,057 6,053 9,403 16,535 6,681 15,049
Cost of revenue:
Cost of reliability
software.............. -- -- 291 1,619 3,640 1,383 2,456
Cost of other products. 955 2,533 3,396 3,332 3,781 1,666 3,441
Cost of support, main-
tenance and consult-
ing................... -- 264 475 610 1,021 476 833
------- ------- ------- ------- ------ -------- --------
Total cost of revenue. 955 2,797 4,162 5,561 8,442 3,525 6,730
------- ------- ------- ------- ------ -------- --------
Gross profit........... 583 1,260 1,891 3,842 8,093 3,156 8,319
Operating expenses:
Sales and marketing.... 1,599 2,311 2,490 3,463 5,101 2,135 4,801
General and administra-
tive.................. 592 541 1,528 1,239 1,920 815 1,264
Research and develop-
ment.................. -- 103 419 257 620 183 978
Purchased in-process
technology............ -- -- -- -- 740 -- --
Merger expenses........ -- -- -- -- -- -- 595
------- ------- ------- ------- ------ -------- --------
Total operating ex-
penses............... 2,191 2,955 4,437 4,959 8,381 3,133 7,638
------- ------- ------- ------- ------ -------- --------
Income (loss) from
operations............ (1,608) (1,695) (2,546) (1,117) (288) 23 681
Gain on sale of stock.. -- -- -- -- 763 763 --
Other income (expense),
net................... 16 1 (16) (63) 83 31 31
------- ------- ------- ------- ------ -------- --------
Income (loss) before
income taxes.......... (1,592) (1,694) (2,562) (1,180) 558 817 712
Provision for income
taxes................. -- -- -- -- -- -- 1
------- ------- ------- ------- ------ -------- --------
Net income (loss)...... $(1,592) $(1,694) $(2,562) $(1,180) $ 558 $ 817 $ 711
======= ======= ======= ======= ====== ======== ========
Pro forma net income
(loss) per share (4).. $ .07 $ .08
====== ========
Pro forma shares used
in per share
computation (4)....... 8,177 8,370
====== ========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
---------------------------------
1992 1993 1994 1995 1996 DECEMBER 31, 1996
------ ----- ----- ------ ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash...................... $1,023 $ 671 $ 331 $1,611 $ 3,102 $3,084
Total assets.............. 1,804 2,008 1,851 4,455 6,903 9,580
Long-term obligations,
less current portion..... 107 58 10 153 290 303
Stockholders' equity...... 1,248 948 100 2,479 2,846 4,030
</TABLE>
- ---------------------
(1) Excluding the $740,000 write-off for purchased in-process technology and
the $763,000 gain on sale of stock, pro forma net income would have been
$535,000.
(2) Excluding the $763,000 gain on sale of stock, pro forma net income would
have been $54,000 for the six months ended December 31, 1995.
(3) Excluding $595,000 for merger expenses relating to the Octopus
Technologies merger, pro forma net income would have been $1,306,000 for
the six months ended December 31, 1996.
(4) See Note 1 to Consolidated Financial Statements for an explanation of the
number of shares used in computing pro forma net income (loss) per share.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data" and the Company's Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
This Management's Discussion and Analysis of Financial Condition and Results
of Operations and other parts of this Prospectus contain forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed herein. Factors that could
cause such differences include, but are not limited to, those discussed in
"Risk Factors" and "Business" as well as elsewhere in this Prospectus.
OVERVIEW
The Company began operating primarily as a distributor, value-added reseller
and publisher of licensed third party client/server software products. In
1993, the Company focused on the reliability market by introducing QualixHA,
its first high availability product for the UNIX operating environment.
QualixHA is based on a licensed core software engine. In August 1996, the
Company merged with Octopus Technologies, which had developed high
availability and remote data mirroring products for the Windows NT operating
environment. More recently, in October 1996, the Company introduced QualixHA+,
which is based on an internally developed core software engine. A key element
of the Company's strategy is to increase substantially the percentage of
revenues derived from internally developed or acquired products that typically
have higher gross margins than licensed products. The Company is developing
several additional systems management products. See "Risk Factors--Recent
Transition to New Business Model," "Uncertainty of Success of Recently
Introduced and Planned Products" and "--Dependence on Licensed Products."
Prior to the Octopus Technologies merger, and prior to developing QualixHA+,
the Company had minimal research and development expenditures and a
correspondingly high cost of product revenue. The Company expects its research
and development expenditures to increase substantially in the future as a
result of its increasing focus on internal development of products. See "Risk
Factors--Need to Expand Product Development and Engineering Capability."
The Company markets and sells reliability software through a combination of
its field sales organization and indirect distribution channels. In addition,
the Company sells other third party software and hardware products through its
Qualix Direct telesales organization, which has recently begun to sell the
Company's lower priced reliability products.
Anthill Acquisition. In May 1996, the Company acquired substantially all the
assets and assumed certain of the liabilities of Anthill, including its data
access management product. The Company acquired Anthill's technology in order
to develop QualixSD remote mirroring software. The Anthill acquisition
resulted in a $740,000 writeoff of in-process technology in the quarter ended
June 30, 1996.
Octopus Technologies Merger. In August 1996, Qualix merged with Octopus
Technologies, whose product line consisted of remote data mirroring and high
availability products for Windows NT. The merger was accounted for as a
pooling-of-interests. All financial statements contained herein have been
restated to reflect the Octopus Technologies transaction.
The Company generally recognizes revenue from license agreements upon
shipment of the software, if no significant future obligations remain and
collection of the resulting receivable is probable. Maintenance and technical
support revenue is recognized over the term of the agreement, typically 12
months. Consulting and training revenue is recognized as services are
provided. See Note 1 of Notes to Consolidated Financial Statements.
19
<PAGE>
The Company was incorporated in 1990 and accordingly has a very limited
operating history, which makes the prediction of future results difficult or
impossible. The Company has incurred significant net losses since its
inception and had an accumulated deficit of approximately $6.5 million as of
December 31, 1996. There can be no assurance that the Company will be
profitable on an annual or quarterly basis. See "Risk Factors--Limited
Operating History; No Assurance of Profitability."
RESULTS OF OPERATIONS
The following table sets forth certain items in the Company's Consolidated
Statements of Operations expressed as a percentage of total revenue for the
periods indicated:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
----------------------------------------
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------ --------------
1994 1995 1996 1995 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Reliability software................ 8.9% 38.0% 54.2% 51.4% 52.2%
Other products...................... 80.4 50.2 32.4 34.9 32.9
Support, maintenance and consulting. 10.7 11.8 13.4 13.7 14.9
------ ------ ------ ------ ------
Total revenue...................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of reliability software........ 4.8 17.2 22.0 20.7 16.3
Cost of other products.............. 56.2 35.4 22.9 25.0 22.9
Cost of support, maintenance and
consulting......................... 7.8 6.5 6.2 7.1 5.5
------ ------ ------ ------ ------
Total cost of revenue............... 68.8 59.1 51.1 52.8 44.7
------ ------ ------ ------ ------
Gross profit........................ 31.2 40.9 48.9 47.2 55.3
Operating expenses:
Sales and marketing................. 41.1 36.8 30.8 32.0 31.9
General and administrative.......... 25.2 13.3 11.6 12.2 8.4
Research and development............ 6.9 2.7 3.7 2.7 6.5
Purchased in-process technology..... -- -- 4.5 -- --
Merger expenses..................... -- -- -- -- 4.0
------ ------ ------ ------ ------
Total operating expenses........... 73.2 52.8 50.6 46.9 50.8
------ ------ ------ ------ ------
Income (loss) from operations....... (42.0) (11.9) (1.7) 0.3 4.5
Other income (expense), net......... (0.3) (0.7) 5.1 11.9 0.2
------ ------ ------ ------ ------
Income (loss) before income taxes... (42.3) (12.6) 3.4 12.2 4.7
Provision for income taxes.......... -- -- -- -- 0.0
------ ------ ------ ------ ------
Net income (loss)................... (42.3)% (12.6)% 3.4% 12.2% 4.7%
====== ====== ====== ====== ======
</TABLE>
COMPARISON OF SIX MONTHS ENDED DECEMBER 31, 1995 AND 1996
Total Revenue
Total revenue increased 125% from $6.7 million for the six months ended
December 31, 1995, to $15.0 million for the six months ended December 31,
1996. International revenue, which is billed in U.S. dollars, accounted for
18% and 18% of total revenue in the six months ended December 31, 1995 and
December 31, 1996, respectively.
Reliability Software. Revenue from the sale of reliability software
increased 129% from $3.4 million for the six months ended December 31, 1995 to
$7.9 million for the six months ended December 31, 1996. The increase between
these periods is primarily attributable to increasing market acceptance of the
Company's products and the increased number of field sales offices and
personnel. During this period, sales of the Company's Octopus products
increased as a result of growing market acceptance of Windows NT.
20
<PAGE>
Other Products. Revenue from the sale of other products increased 112% from
$2.3 million for the six months ended December 31, 1995 to $4.9 million for
the six months ended December 31, 1996. The increase in revenue between these
periods is primarily attributable to expansion of the Qualix Direct telesales
and telemarketing operations.
Support, Maintenance and Consulting. Support, maintenance and consulting
revenue increased from $916,000, or 13.7% of total revenue, for the six months
ended December 31, 1995 to $2.2 million, or 14.9% of total revenue, for the
six months ended December 31, 1996. The growth in support, maintenance and
consulting revenue has been primarily attributable to increased sales of
services and support contracts on new license sales and, to a lesser extent,
on increasing renewals of these contracts as the Company's installed base of
licenses has increased. Support, maintenance and consulting revenue increased
at a faster rate than product revenue for the same period because of the
support renewals and increased consulting services.
Cost of Revenue
Cost of products consists primarily of royalties and product costs or
license fees for third party software products. Cost of support, maintenance
and consulting revenue consists primarily of personnel-related costs in
providing maintenance, technical support, consulting and training to
customers. Gross margin on products developed or acquired by Qualix is
substantially higher than gross margin on products licensed or purchased from
third parties, which generally require significant royalty payments. Gross
margins will also be affected by a number of other factors, including the
percentage of net revenues from service contracts, which generally have lower
gross margins than revenues from owned products, the percentage of revenues
from products resold by the Qualix Direct telesales organizations, which
generally have lower gross margins than revenues from sales of owned and
licensed products, and product pricing.
Cost of Reliability Software. Cost of revenue from reliability software
increased from $1.4 million for the six months ended December 31, 1995 to $2.5
million for the six months ended December 31, 1996. Gross margin from
reliability software increased from 60% for the six months ended December 31,
1995 to 69% for the six months ended December 31, 1996, primarily due to a
greater percentage of revenue from higher margin owned products with
relatively lower or no royalty payments. The Company expects further
improvements in gross margin on revenue from reliability software to the
extent a greater percentage of its revenue is derived from internally
developed or acquired products and technologies rather than from licensed
products.
Cost of Other Products. Cost of revenue from the sale of other products
increased from $1.7 million for the six months ended December 31, 1995 to $3.4
million for the six months ended December 31, 1996. Gross margin increased
from 29% for the six months ended December 31, 1995 to 30% for the six months
ended December 31, 1996 primarily due to increased sales of higher priced and
higher margin products.
Cost of Support, Maintenance and Consulting. Cost of support, maintenance
and consulting revenue increased from $476,000 for the six months ended
December 31, 1995 to $833,000 for the six months ended December 31, 1996.
Gross margin on support, maintenance and consulting revenue increased from 48%
for the six months ended December 31, 1995 to 63% for the six months ended
December 31, 1996 primarily due to higher average selling prices, greater
utilization of consulting staff and less reliance on outside consultants.
Because the introduction of QualixHA+ requires extensive efforts from the
consulting organization, the level of consulting revenue and the gross margin
may decrease during the next two quarters.
Operating Expenses
Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other costs associated with the Company's sales and
marketing efforts. Sales and marketing expenses increased from $2.1 million
for the six months ended December 31, 1995 to $4.8 million for the six months
ended
21
<PAGE>
December 31, 1996. This increase in absolute dollars is primarily attributable
to growth in the Company's sales organization and the expansion of the
Company's domestic sales and marketing infrastructure to support greater sales
volumes. As a percentage of total revenue, sales and marketing expenses
remained constant at approximately 32%. The Company intends to continue
expanding its domestic and international sales and marketing infrastructure.
Accordingly, the Company expects its sales and marketing expenses to increase
in absolute dollars and as a percentage of total revenue in the future.
Research and Development. Research and development expenses consist
primarily of salaries, third party consultant fees and other costs. Research
and development expenses increased from $183,000 for the six months ended
December 31, 1995 to $978,000 for the six months ended December 31, 1996,
primarily reflecting the costs incurred to develop the new core software
engine for QualixHA+. Research and development expenses as a percentage of
revenue increased from 2.7% to 6.5% between these periods. As part of the
Company's strategy to rely increasingly on internally developed products and
to enhance existing products, the Company expects its research and development
expenses to increase in absolute dollars and as a percentage of total net
revenue in the future. In December 1996 the Company completed the major
product resulting from the in-process technology acquired from Anthill.
Development work from the remaining projects in-process with this technology
is not expected to be significant and consists primarily of employee-related
costs for design, prototype development and testing.
General and Administrative. General and administrative expenses consist
primarily of salaries and related and corporate facility costs. General and
administrative expenses increased from $815,000 for the six months ended
December 31, 1995 to $1.3 million for the six months ended December 31, 1996
primarily due to increased staffing. General and administrative expenses as a
percentage of total revenue decreased between these periods from 12.2% to 8.4%
due to the fixed nature of corporate facility costs. General and
administrative expenses are expected to increase in future periods to the
extent the Company expands its operations and as a result of costs associated
with being a public company.
Merger Expenses. Merger expenses of $595,000 were incurred in connection
with the acquisition of Octopus Technologies in the quarter ended September
30, 1996. Merger expenses consist primarily of investment banking, legal and
accounting fees.
Gain on Sale of Stock.
In May 1995, the Company received shares of Veritas common stock pursuant to
a merger agreement between Veritas and Tidalwave Technologies, Inc. In
September 1995, the Company sold 75% of the shares and realized a gain of
$763,000.
Income Taxes
The effective tax rate of zero for the six months ended December 31, 1995
and 1996 reflects the reversal of the valuation reserve against deferred
income taxes. The Company accounts for income taxes in accordance with the
Statement of Financial Accounting Standards No. 109 ("SFAS 109") for all
periods presented. Under SFAS 109, the Company recognizes deferred tax assets
and liabilities for the expected consequences of temporary differences between
the carrying amounts for financial statement purposes and the tax bases of
assets and liabilities. The Company has experienced losses in two of its most
recent three years of operations. As a result of this history of recent
operating losses, management believes that the recognition of the deferred tax
assets is considered less likely than not. The Company believes that the
success of recent product offerings and integration of newly acquired
businesses may represent a significant change in circumstances late in fiscal
1997 which would require the recognition of a significant portion of its
deferred tax assets (excluding those related to pre-acquisition activities of
Octopus Technologies, which have certain limitations imposed on their
realizability). If the Company achieves success from recent product offerings
and new business integration sufficient to indicate that the realization of
its deferred tax asset is more likely than not, this would most likely result
in a credit to the provision for income taxes in late fiscal 1997 to record
the expected future benefit related to these assets. The effective tax rate
for fiscal 1998 would be expected to more closely approximate the statutory
rates of the jurisdictions in which the Company operates.
22
<PAGE>
COMPARISON OF FISCAL YEARS ENDED JUNE 30, 1994, 1995 AND 1996
Total Revenue
Reliability Software. Revenue from the sale of reliability software
increased 566% from $536,000 in fiscal 1994 to $3.6 million in fiscal 1995 and
increased 151% to $9.0 million in fiscal 1996. The increase from fiscal 1994
to fiscal 1995 was primarily attributable to the increased market acceptance
of the Company's products and the introduction of new products. The increase
in fiscal 1996 was primarily attributable to the broad market acceptance of
high availability products for the UNIX and Windows NT operating environments,
the increase in field sales offices and personnel and the expansion of the
telesales and telemarketing organization.
Other Products. Revenue from the sale of other products decreased 3% from
$4.9 million in fiscal 1994 to $4.7 million in fiscal 1995 and increased 13%
to $5.4 million in fiscal 1996. The decrease from fiscal 1994 to fiscal 1995
is primarily attributable to decreased revenue in several products due to
competition. The increase from fiscal 1995 to fiscal 1996 is primarily
attributable to expansion of the Qualix Direct telesales and telemarketing
operation, including expanded product offerings and increased sales personnel.
Support, Maintenance and Consulting. Support, maintenance and consulting
revenue increased by 71% from $649,000 in fiscal 1994 to $1.1 million in
fiscal 1995 and increased 100% to $2.2 million in fiscal 1996. The increase
from fiscal 1994 to fiscal 1995 was primarily due to a significant increase in
maintenance, technical support, consulting and training services and a
significant increase in service and support contracts that grew at a faster
rate than the increase in license and product revenue. Support, maintenance
and consulting revenue increased in fiscal 1996 primarily due to increased
sales of service and support contracts to new customers and, to a lesser
extent, renewals of service and support contracts on existing licenses and
increased support staff.
Cost of Revenue
Cost of Reliability Software. Cost of revenue from the sale of reliability
software increased from $290,000 in fiscal 1994 to $1.6 million in fiscal 1995
and increased to $3.6 million in fiscal 1996. Gross margin was 46% in fiscal
1994, 55% in fiscal 1995 and 59% in fiscal 1996. The increase in gross margin
on product revenue in both fiscal 1995 and fiscal 1996 primarily resulted from
increasing percentages of revenue from higher margin reliability software,
including both QualixHA and OctopusHA+.
Cost of Other Products. Cost of revenue from the sale of other products
decreased from $3.4 million in fiscal 1994 to $3.3 million in fiscal 1995 and
increased to $3.8 million in fiscal 1996. Gross margin decreased from 30% in
fiscal 1994 to 29% in fiscal 1995 and remained constant at 29% in fiscal 1996.
The decrease in gross margin was primarily a result of increased competition
for some of the products.
Cost of Support, Maintenance and Consulting. Cost of support, maintenance
and consulting revenue increased from $475,000 in fiscal 1994 to $610,000 in
fiscal 1995 and increased to $1.0 million in fiscal 1996 as a result of
increased personnel-related costs, as the Company continued to build its
customer support and training organizations. Gross margin on support,
maintenance and consulting revenue was 27% in fiscal 1994, 45% in fiscal 1995
and 54% in fiscal 1996. The significant improvement in fiscal 1995 was the
result of a greater portion of support, maintenance and consulting revenue
attributable to higher margin support contracts. The increasing margin in both
fiscal 1995 and fiscal 1996 was also due to the higher average selling prices
and decreased reliance on outside consultants.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased from $2.5
million in fiscal 1994 to $3.5 million in fiscal 1995 and to $5.1 million in
fiscal 1996. Sales and marketing expenses decreased as a percentage of total
revenue from 41.1% in fiscal 1994 to 36.8% in fiscal 1995 and to 30.8% in
fiscal 1996. The increase in absolute dollars from fiscal 1994 to fiscal 1995
is primarily attributable to the expansion of the
23
<PAGE>
sales and marketing infrastructure, including the opening of field sales
offices. The increase in absolute dollars from fiscal 1995 to fiscal 1996 is
primarily related to growth in the Company's domestic sales and marketing
infrastructure through the increase in the number of employees and the opening
of seven sales offices throughout the United States.
Research and Development. Research and development expenses decreased from
$419,000 in fiscal 1994 to $257,000 in fiscal 1995 and increased to $620,000
in fiscal 1996. Research and development expenses decreased as a percentage of
total revenue from 6.9% in fiscal 1994 to 2.7% in fiscal 1995 and increased to
3.7% in fiscal 1996. Research and development expenses decreased in fiscal
1995 from fiscal 1994, primarily due to the significant decrease in
engineering headcount on the Octopus Technologies development effort. These
expenses increased in absolute dollars in fiscal 1996 primarily as a result of
the costs incurred to develop the new core software engine for QualixHA+.
General and Administrative. General and administrative expenses decreased
from $1.5 million in fiscal 1994 to $1.2 million in fiscal 1995 and increased
to $1.9 million in fiscal 1996. General and administrative expenses as a
percentage of revenue were 25.2%, 13.3% and 11.6% in fiscal 1994, 1995 and
1996, respectively. The decrease in fiscal 1995 was primarily attributable to
the reduction in personnel related costs of Octopus Technologies. The increase
in fiscal 1996 is attributable to the costs associated with additional
personnel in the general and administrative functions and the finance
organization and the associated expenses required to manage and support the
Company's growth.
Purchased In-Process Technology. Approximately $740,000 of the purchase
price of Anthill represented the value of in-process technology which was
charged to the Company's operations in the fourth quarter of fiscal 1996.
Income Taxes
There was no provision for income taxes in fiscal 1996 which reflects the
reversal of the valuation reserve against deferred income taxes to the extent
of current period earnings. In fiscal 1995 and 1994, the Company did not
provide for income taxes due to the Company's net losses. The Company has
certain net operating losses and expenses from acquisition of in-process
technology available to offset future taxes payable. See Note 6 to
Consolidated Financial Statements.
24
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited consolidated results of operations
data for each of the six quarters in the period ended December 31, 1996 and
the percentage of the Company's total revenue represented by certain line
items. This information has been derived from unaudited consolidated financial
statements of the Company that, in the opinion of management, reflect all
recurring adjustments necessary to fairly present this information when read
in conjunction with the Company's Consolidated Financial Statements and notes
thereto appearing elsewhere in this Prospectus. The results of operations for
any quarter are not necessarily indicative of the results to be expected for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1995 1995 1996 1996 1996 1996
--------- -------- --------- -------- --------- --------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Reliability software... $1,502 $1,931 $2,470 $3,062 $3,697 $4,161
Other products......... 1,129 1,203 1,331 1,698 2,288 2,659
Support, maintenance
and consulting........ 370 547 615 678 964 1,280
------ ------ ------ ------ ------ ------
Total revenue........ 3,001 3,681 4,416 5,438 6,949 8,100
Cost of revenue:
Cost of reliability
software.............. 620 764 1,027 1,229 1,541 916
Cost of other
products.............. 812 854 930 1,185 1,586 1,854
Cost of support,
maintenance and
consulting............ 192 284 267 279 341 492
------ ------ ------ ------ ------ ------
Total cost of
revenue............. 1,624 1,902 2,224 2,693 3,468 3,262
------ ------ ------ ------ ------ ------
Gross profit........... 1,377 1,779 2,192 2,745 3,481 4,838
Operating expenses:
Sales and marketing.... 918 1,217 1,370 1,596 2,142 2,659
General and
administrative........ 390 425 566 539 481 783
Research and
development........... 60 122 131 307 422 556
Purchased in-process
technology............ -- -- -- 740 -- --
Merger expenses........ -- -- -- -- 595 --
------ ------ ------ ------ ------ ------
Total operating
expenses............ 1,368 1,764 2,067 3,182 3,640 3,998
------ ------ ------ ------ ------ ------
Income (loss) from
operations............ 9 15 125 (437) (159) 840
Gain on sale of stock.. 763 -- -- -- -- --
Other income
(expense), net........ 12 19 22 30 21 10
------ ------ ------ ------ ------ ------
Income (loss) before
income taxes.......... 784 34 147 (407) (138) 850
Provision for income
taxes................. -- -- -- -- 1 --
------ ------ ------ ------ ------ ------
Net income (loss)...... $ 784 $ 34 $ 147 $ (407) $ (139) $ 850
====== ====== ====== ====== ====== ======
Pro forma net income
(loss) per share...... $ .10 $ -- $ .02 $ (.05) $ (.02) $ 0.10
====== ====== ====== ====== ====== ======
Pro forma shares used
in per share
computation........... 7,876 8,328 8,320 8,189 8,318 8,378
====== ====== ====== ====== ====== ======
<CAPTION>
PERCENTAGE OF TOTAL REVENUE
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Reliability software... 50.1% 52.4% 56.0% 56.3% 53.2% 51.4%
Other products......... 37.6 32.7 30.1 31.2 32.9 32.8
Support, maintenance
and consulting........ 12.3 14.9 13.9 12.5 13.9 15.8
------ ------ ------ ------ ------ ------
Total revenue........ 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Cost of reliability
software.............. 20.6 20.8 23.3 22.7 22.2 11.3
Cost of other
products.............. 27.1 23.2 21.1 21.8 22.8 22.9
Cost of support,
maintenance and
consulting............ 6.4 7.7 6.0 5.1 4.9 6.1
------ ------ ------ ------ ------ ------
Total cost of
revenue............. 54.1 51.7 50.4 49.6 49.9 40.3
------ ------ ------ ------ ------ ------
Gross profit........ 45.9 48.3 49.6 50.4 50.1 59.7
Operating expenses:
Sales and marketing.... 30.6 33.1 31.0 29.4 30.8 32.7
General and
administrative........ 13.0 11.5 12.8 9.9 6.9 9.7
Research and
development........... 2.0 3.3 3.0 5.6 6.1 6.9
Purchased in-process
technology............ -- -- -- 13.6 -- --
Merger expenses........ -- -- -- -- 8.6 --
------ ------ ------ ------ ------ ------
Total operating
expenses............ 45.6 47.9 46.8 58.5 52.4 49.3
------ ------ ------ ------ ------ ------
Income (loss) from
operations............ 0.3 0.4 2.8 (8.1) (2.3) 10.4
Gain on sale of stock.. 25.4 -- -- -- -- 0.1
Other income
(expense), net........ 0.4 0.5 0.5 0.6 0.3 --
------ ------ ------ ------ ------ ------
Income (loss) before
income taxes.......... 26.1 0.9 3.3 (7.5) (2.0) 10.5
Provision for income
taxes................. -- -- -- -- -- --
------ ------ ------ ------ ------ ------
Net income (loss)...... 26.1% 0.9% 3.3% (7.5)% (2.0)% 10.5%
====== ====== ====== ====== ====== ======
</TABLE>
25
<PAGE>
The Company has experienced, and expects to continue to experience,
significant fluctuations in operating results, on an annual and quarterly
basis, as a result of a number of factors, many of which are outside the
Company's control. See "Risk Factors--Risk of Significant Fluctuations in
Quarterly Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has financed its operations primarily through
private sales of capital stock totaling $9.7 million. As of December 31, 1996,
the Company had $3.1 million in cash and working capital of approximately $3.6
million. As of June 30, 1996, the Company had $3.1 million in cash and $2.8
million in working capital, as compared to $1.6 million in cash and $2.5
million in working capital at the end of fiscal 1995.
Net cash used in operating activities was $2.1 million and $903,000 in
fiscal 1994 and 1995, respectively. Net cash generated by operating activities
was $788,000 and $375,000 in fiscal 1996 and the six months ended December 31,
1996, respectively. Cash flows from operations improved from fiscal 1994 to
1996 primarily due to lower net losses in fiscal 1995 and net income in fiscal
1996 and increases in accounts payable (other than in fiscal 1994) and other
liabilities balances, which were partially offset by increases in accounts
receivable. Cash generated from operating activities for the six months ended
December 31, 1996 resulted primarily from net income and increases in accounts
payable and accrued liabilities offset by an increase in accounts receivable
and prepaid expenses. The increase in accrued liabilities includes increases
in deferred revenue and advances attributable to payments under support,
maintenance and consulting contracts for which revenue has not yet been
recognized.
Qualix's investing activities used cash of $98,000 in fiscal 1994 and 1995
and cash of $37,000 in fiscal 1996. Investing activities consisted primarily
of purchases of property and equipment in fiscal 1994, 1995 and 1996, and in
fiscal 1996 $847,000 from the sale of an investment offset by $617,000 for the
purchase of Anthill. Investing activities for the six months ended
December 31, 1996 consisted of $508,000 of purchases of property and
equipment.
Financing activities provided cash of $1.8 million in fiscal 1994, $2.3
million in fiscal 1995 and $740,000 in fiscal 1996 primarily from the
aggregate net proceeds from private sales of equity securities and, to a
lesser extent, the net proceeds from the issuance of convertible promissory
notes that were subsequently converted into equity. In fiscal 1996 the Company
issued notes with a present value of $405,000 in connection with the Anthill
acquisition. The Company used cash from financing activities to repay bank
borrowings of $200,000 in fiscal 1995 and to make equipment lease payments of
$54,000 and $62,000 in fiscal 1994 and 1995, respectively.
The Company believes that the net proceeds from this offering, together with
cash flow from operations, existing cash balances and available borrowings
under the Company's revolving line of credit, will be sufficient to meet its
working capital requirements for at least the next 12 months. However, if the
net proceeds of this offering, together with available funds and cash
generated from operations, are insufficient to satisfy the Company's cash
needs, the Company may be required to sell additional equity or convertible
debt securities. There can be no assurance that the Company will be able to
sell such securities. Moreover, the sale of additional equity or convertible
debt securities could result in dilution to the Company's stockholders.
26
<PAGE>
BUSINESS
Qualix is a leading provider of reliability software for UNIX and Windows NT
applications and servers in distributed computing environments. The Company's
reliability solutions are designed to minimize the impact of system failures
on business-critical applications. The Company offers software products for
high availability, security and storage management. Although a substantial
majority of the Company's historical revenue has come from products licensed
from third parties, the Company has recently increased its focus on internally
developed or acquired products. As of December 31, 1996, the Company had sold
its reliability software to over 900 customers, including over 5,000 server
licenses of its high availability software for Windows NT.
INDUSTRY BACKGROUND
Historically, large organizations depended on host-based computing utilizing
mainframes and mini computers for most business applications and for
centralized data storage. Given the importance of these applications, systems
management software evolved to ensure the availability, performance and
integrity of host-based computing systems. Functions addressed by systems
management software include reducing downtime in the event of system failure,
ensuring that the system is secure and protecting against data loss.
In recent years, distributed computing, also known as client/server
computing, has been increasingly adopted by many businesses for their
enterprise computing needs. Distributed computing solutions, based primarily
on UNIX and increasingly on Windows NT, are being used for a growing number of
business-critical applications. These include financial reporting, inventory
control, sales order processing, transaction processing, customer support,
intranet applications and Internet access. The adoption of distributed
computing for these business-critical applications has created a need for
systems management software that is both an extension of, and a significant
evolution beyond, systems management software for host-based computing. It
must perform many of the same functions required in the host-based
environment. Moreover, it must provide significantly enhanced functionality
because distributed computing systems are inherently more complex and dynamic
than host-based computing systems. In particular, distributed computing
systems are often widely distributed, with servers, databases, applications
and users spread over multiple locations, and heterogeneous, with hardware,
databases and software from multiple vendors.
The Company divides systems management software for distributed computing
systems into three categories: operations management, resource and
applications management, and reliability management. Operations management
software automates the day-to-day operating tasks previously performed by
system administrators. Resource and applications management software addresses
management of critical software and user resources. Reliability software
addresses the system's need to ensure that servers, data and applications are
consistently available and secure. These categories are illustrated below:
SYSTEMS MANAGEMENT SOFTWARE
--------------------------------------------------------
OPERATIONS RESOURCE/APPLICATIONS MANAGEMENT
MANAGEMENT RELIABILITY
. Monitor system components . Manage critical resources . Maintain
. Event management . Database administration availability
. User administration of servers, data
and applications
. Security
. Storage
management
27
<PAGE>
Qualix believes that companies are increasingly focused on the need for
reliability software as more and more business-critical applications are
deployed in distributed computing environments. By ensuring that systems are
highly available, reliability software provides users with access to the
computer power, data and applications they need. By ensuring that systems are
secure, reliability software protects against unauthorized use and corruption.
By managing storage requirements, reliability software provides backup, real-
time backup and data fault tolerance.
High Availability. As organizations migrate or consider migrating business-
critical applications to distributed computing environments, they frequently
need to ensure that such applications are fully operational around the clock.
In many cases, system failures result in lost revenues or damaged customer
relations when these applications are not available. Although large-scale,
fault tolerant hardware systems can be used to ensure systems operate
continuously, they are expensive and are not designed to work with
heterogeneous hardware and software components. As a result, there is a
significant need for high availability software that works with existing
systems to prevent systems and applications from going down due to
malfunction, human error, sabotage or natural disasters.
Security. Protecting against unauthorized use and corruption has become more
difficult as distributed computing systems become larger and more complex,
perform more computing functions and are linked to the Internet and corporate
intranets. As a result, there is an increased need for security products that
address a variety of security needs. These products include firewalls that
protect a company's data and systems from unauthorized use and/or sabotage,
and security management products that ensure users only access what they are
authorized to access.
Storage Management. Organizations have also increasingly focused on the
adequacy of their data protection and storage capabilities in distributed
computing systems, particularly as data-intensive applications and databases
with dramatically increased data storage requirements are deployed on these
systems. As a result, there is an increasing need for storage management
products that cost-effectively protect against data loss and improve data
management.
Given these trends, the Company believes that the need for reliability
software will grow as more business-critical applications are deployed on
distributed systems and as applications typically found on UNIX and Windows NT
servers, such as e-mail, intranet applications and Internet access, are
increasingly considered business-critical.
28
<PAGE>
QUALIX SOLUTION
Qualix is a leading provider of reliability software for distributed
computing systems. Qualix provides products that address each of the following
three segments of the reliability market:
High Availability. The Company recently introduced QualixHA+, its next
generation high availability product for UNIX that incorporates its
proprietary clustering technology. The Company believes that this product
is the only commercially available software-based solution that allows up
to eight servers working together in a variety of configurations to provide
failover and recovery in the event of system failures. The Company also
offers OctopusHA+, which the Company believes is the leading high
availability product for Windows NT, with over 5,000 copies sold to over
600 customers.
Security. The Company resells and supports a network firewall security
product licensed from CheckPoint Software Technologies Ltd. ("CheckPoint").
The Company also offers a combined product that integrates its licensed
firewall product with its high availability product to provide firewall
security with nearly continuous uptime. In addition, the Company is
developing a network security scanning and testing product.
Storage Management. The Company offers a remote real-time mirroring
product for data and applications on Windows NT. The Company is also
developing remote real-time mirroring and storage management products for
UNIX.
The Company's reliability solutions generally have a number of key
attributes. They are based on leading-edge technologies that are designed to
be used separately or integrated with other products developed by the Company
or its strategic partners, thereby allowing users to define integrated
solutions. They are designed to work with multiple hardware and software
platforms and related industry standards, to be adaptable as these platforms
change and to be scalable by providing the same functionality across a broad
range of network sizes. In addition, they are designed to be installed quickly
and easily (typically within hours) without affecting the operation of
business-critical applications. The Company supports its products with a high
level of maintenance, consulting services and training services. Based on the
breadth and functionality of its product line, the size and diversity of its
customer base and its name recognition within the reliability software market,
the Company believes that its reliability products have achieved a leading
market position which is critical for promoting brand awareness and customer
acceptance of its products.
29
<PAGE>
STRATEGY
The Company's objective is to be the leading provider of reliability
solutions for medium to large organizations with distributed computing
systems. To achieve this objective, the Company's strategy includes the
following key elements:
Focus on Reliability Solutions. The Company plans to focus on providing
leading-edge reliability solutions for distributed computing systems. Because
reliability products typically support business-critical applications, the
Company believes users generally want established products that have been
adopted at key reference accounts. Accordingly, the Company believes that
maintaining and enhancing a leading market position is critical for achieving
broad customer acceptance of its products. To date, the Company has sold
reliability products to over 900 customers.
Maintain and Enhance Direct Customer Relationships. Through its field sales
force, the Company has established a large customer base that includes a
number of important reference accounts. The Company's strategy is to be
market-oriented and to cultivate long-term customer relationships that foster
ongoing and additive purchases of its reliability products. A key element of
this strategy is to focus on satisfying customer needs. For example, its
products are designed to work alone or with other products, to work with
multiple hardware and software platforms, and to be scalable, easy to install
and non-invasive. In addition, the Company offers comprehensive maintenance,
support, consulting, integration and training services. Moreover, the Company
believes that its customers have great insight into future market needs and
product direction which it draws on in enhancing and expanding its product
line.
Focus on Internally Developed Products. Although Qualix has historically
derived a substantial portion of its revenues from licensed products, the
Company's strategy is to increase significantly the percentage of revenues
derived from internally developed or acquired products that typically have
higher gross margins. Accordingly, the Company plans to leverage its expertise
in reliability technology and its knowledge of user requirements by investing
substantial resources to increase its internal development efforts. In
addition to developing and/or enhancing reliability products internally, the
Company will continue to evaluate acquiring or licensing products and
technologies that support and expand its product offerings.
Expand Worldwide Distribution Capability. The Company intends to devote
significant resources to expanding its sales force, which currently consists
of 15 sales offices staffed by 26 field sales representatives, 11 sales
engineers and 4 telesales representatives. The Company has begun to sell its
lower-priced reliability products through its Qualix Direct telesales
organization, which has historically focused on selling third party products.
The Company also intends to expand its international sales and marketing
programs, which generated 17% and 18% of total revenue for fiscal 1996 and the
six months ended December 31, 1996, respectively. In addition, the Company
plans to expand sales of its products through indirect distribution channels,
including distributors, system integrators and VARs.
Maintain and Enhance Strategic Relationships. A key objective of the Company
is to expand joint development and marketing relationships with systems
management software vendors to provide complementary solutions and to
establish relationships with hardware and software OEMs to incorporate
reliability solutions in their products. The Company believes that it is
essential to form strategic relationships with other network computing vendors
to effectively market and sell reliability products. The Company works with
hardware providers such as Hewlett-Packard, IBM and Sun Microsystems to ensure
that its reliability products are fully integrated into their hardware
environments, and major software vendors such as Oracle, Sybase, Informix, CA-
Ingres, Microsoft and Tivoli to provide complementary solutions.
30
<PAGE>
RELIABILITY SOFTWARE PRODUCTS
The Company offers a broad range of products focused on the reliability
market for network computing environments. The Company's services, including
support, consulting and training, are priced separately. Prices vary according
to number and type of servers as well as other factors and exclude support and
consulting services. The Company's products can be categorized as follows:
<TABLE>
<CAPTION>
END USER
DATE OF PRODUCT
PRODUCT DESCRIPTION PLATFORM FIRST RELEASE PRICE
HIGH AVAILABILITY
<S> <C> <C> <C> <C> <C>
QualixHA+ High availability Sun Solaris October 1996 $7,000
software HP-UX 10.0** to
for UNIX environments. IBM AIX** $30,000
Clustering technology per server
provides scalability for
up to
eight servers.
- -----------------------------------------------------------------------------------------------
QualixHA* High availability SunOS December 1994 $10,000
software Sun Solaris to
for UNIX environments. HP-UX 9.0 $30,000
per server
pair
- -----------------------------------------------------------------------------------------------
OctopusHA+ Automatic switch-over Windows NT October 1995 $3,000
for to
Windows NT servers. $3,400
per server
pair
<CAPTION>
SECURITY
<S> <C> <C> <C> <C> <C>
FireWall-1* Network security Sun Solaris May 1994 $10,000
products HP-UX to
that enable connectivity Windows NT $20,000
to per server
the Internet with
security and
manageability.
- -----------------------------------------------------------------------------------------------
QualixHA for Firewalls* High availability Sun Solaris September 1995 $30,000
QualixHA+ for firewall HP-UX to
Firewalls product that enables October 1996 $50,000
security of a networked per server
environment with pair
continuous uptime.
<CAPTION>
STORAGE MANAGEMENT
<S> <C> <C> <C> <C> <C>
Octopus Server for NT Real-time, local or Windows NT April 1994 $2,400
remote per server
mirroring for NT data pair
and
applications.
- -----------------------------------------------------------------------------------------------
QualixSD** Real-time, remote Sun Solaris Under $20,000
mirroring development to
for UNIX data and $45,000
applications. per server
pair
(expected)
</TABLE>
* Includes a licensed product.
** Under development.
31
<PAGE>
High Availability
QualixHA+. QualixHA+ is a failover and recovery management product for UNIX
designed to minimize the impact of failures caused by system malfunction,
human error, sabotage or natural disasters. QualixHA+ is designed to monitor
and support a variety of UNIX-based operating systems, hardware platforms,
disk configurations, networks, applications and databases. QualixHA+ includes
the Company's proprietary clustering technology. The Company also continues to
offer QualixHA, which provides similar functionality to QualixHA+ but includes
a licensed core software engine rather than the Company's own technology. See
"--Litigation." The Company believes that its QualixHA family of products is
the leading high-availability solution for UNIX. To date, over 1,200 copies of
these products have been installed at over 225 companies.
The clustering technology that QualixHA+ uses is based on a multi-peer model
that allows up to eight servers to work together to provide failover and
recovery in the event of a system failure. If a server goes down, or for any
reason stops providing service to an application, QualixHA+ uses an
intelligent decision-making process to promptly "elect" another server to
carry on service. Using this transparent polling process, QualixHA+ can
determine which server has the highest priority and should therefore begin
providing the service in place of the primary server.
The following diagram illustrates how QualixHA+ operates in a three-server,
six-application environment.
This diagram shows three servers, each with two major applications. If
Server C should go down, Server A and Server B will assume
responsibility for Server C's applications, thereby keeping the
applications available to all users.
[DIAGRAM OF SERVERS]
QualixHA+ can be configured to provide the degree of availability that best
suits a user's enterprise needs. The software is easily installable and does
not modify the core operating system already installed. System administrators
simply map out possible failure scenarios and establish the desired failover
paths for individual services prior to configuration. This process creates a
form of pre-defined balancing that ensures only a single active server
provides specific services to the network at any one time.
32
<PAGE>
QualixHA+ consists of three components:
QualixHA+ Cluster Management Software provides services for maintaining
communications between servers as well as monitoring system resources and
application services. This clustering technology is scalable, providing the
enterprise the ability to start small and add on components or servers as
needs increase, without changing the core product.
QualixHA+ Environment is designed to facilitate easy installation,
flexible integration as well as monitoring for critical system-level
resources.
QualixHA+ modules allow QualixHA+ to provide failover and recovery
management for specific applications, such as databases, systems management
applications and customer support applications, rather than the entire
server. QualixHA+ modules allow the Company to tailor its solutions for
specific applications and engage in co-marketing programs with strategic
partners. The Company currently ships modules for databases from Oracle,
Sybase, Informix and CA-Ingres. The Company also ships modules that support
Tivoli's TME, SNMP and Netscape's server software. The Company is currently
working with other companies and products to create additional modules that
will allow QualixHA+ to be tailored to vertical market needs.
OctopusHA+. OctopusHA+ solutions consist of two components: Octopus Server
for NT and a high availability switchover package. This product, which was
awarded Byte Magazine's Best Utility award at Comdex 1996, provides high
availability for Windows NT servers. If a failure occurs at the source system,
the target system can automatically assume the role of the failed system, so
users can seamlessly continue to access their data and applications. Similar
to QualixHA+ for UNIX, the goal of OctopusHA+ is to provide continuous up-time
for Windows NT servers and data. OctopusHA+ supports multiple configurations,
including many-to-one.
33
<PAGE>
Security
FireWall-1. FireWall-1, which is licensed from CheckPoint, is the leading
Internet firewall product. FireWall-1 is designed to enable companies to
connect to the Internet while keeping their data and applications secure from
unauthorized users.
QualixHA+ for Firewalls. Once a company installs a firewall, it becomes a
critical part of the security for the company's network and data. Most
firewalls are set up so that if the firewall (or the server it is on) goes
down the connection to the Internet is terminated, and employees and customers
can no longer access the internal network. If Internet access is critical to a
business' strategy, it cannot afford any downtime in its firewall. To address
the needs of these companies, Qualix has created QualixHA+ for Firewalls. This
product has three components: FireWall-1, QualixHA+ and specific modules that
monitor and failover the FireWall-1 software. With QualixHA+ for Firewalls,
businesses have more reliable connections to the Internet.
[DIAGRAM OF COMPANY'S INTERNAL NETWORK]
This diagram shows a company's internal network connected to the
Internet with a firewall security product. All communications into the
network must go through the firewall. If Firewall A stops functioning,
QualixHA+ for Firewalls will automatically re-route all traffic to
Firewall B, thereby keeping all communications up and running.
34
<PAGE>
Storage Management Products
Qualix provides or is developing storage management products based on data
fault tolerance and data access technologies.
Octopus Server for NT. Octopus Server for NT is a real-time data mirroring
product for Windows NT. Octopus Server for NT automatically copies user-
specified files, rather than entire disks, from a source disk to a target
disk. These disks can either be on a local area network, or geographically
dispersed over a wide area network. In the event of data loss or hardware
failure at the source location, up-to-date copies of mirrored files are
available on a real-time basis on the target systems. Octopus Server for NT
can be configured to provide multiple backup sites anywhere in the world for
maximum protection of crucial business data. In addition to providing
immediate back-up data, Octopus Server for NT also provides for the
distribution of data for localized processing, the consolidation of data for
decision-based processing, and the physical relocation of data for disaster
recovery contingencies. The Company believes that its Octopus remote mirroring
product is the leading solution for data fault tolerance in the Windows NT
market. To date, over 5,000 copies of Octopus Server for NT have been sold.
[DIAGRAM OF NETWORK CONNECTING USING OCTOPUS SERVER FOR NT]
This diagram shows a company's network connecting several remote sales
offices to its headquarters through the Internet. Each of the remote
sales offices in this diagram is mirroring its data to the headquarters
sales server by using Octopus Server for NT. In this way, the
headquarters server has an up-to-the minute copy of all data.
35
<PAGE>
QualixSD. QualixSD is being developed to provide remote mirroring
capabilities for UNIX servers. Similar to the remote mirroring capability
provided by Octopus Server for NT, QualixSD is designed to copy data on a
real-time basis from a source location to a target location, in order to
provide continuous, up-to-the-minute back-up of data and applications at a
remote site, as Octopus Server for NT does. QualixSD is being designed to copy
disk segments, rather than the larger raw disk partitions that are the basic
unit in UNIX server computing. Like Octopus Server for NT, therefore, QualixSD
is being designed to have the advantage of copying segments of information
smaller than entire disks. The product went to beta testing in December 1996.
QUALIX DIRECT
Through its Qualix Direct telesales organization, the Company resells a
diverse product line of add-on hardware, software and accessories for
distributed computing systems. As of December 31, 1996, Qualix Direct resold
products from approximately 80 vendors. These products included Ethernet
adapters, printers, workstation add-ons and software applications. The product
line is updated frequently in response to customer demand, new product
introductions and specials. A significant portion of these products are resold
for use with Silicon Graphics' workstations. These products are typically
resold in low unit volumes and generally range in price from $1,000 to $3,000.
Qualix Direct has no long-term supply contracts with its vendors and many
resold products are acquired pursuant to purchase orders or contracts that can
be terminated with little or no notice. In addition, Qualix Direct has little
or no control over the marketing, support and enhancement of its resold
products by its vendors and faces significant competition from distributors
and other distribution channels. See "Risk Factors--Dependence on Qualix
Direct" and "--Sales and Marketing--Qualix Direct."
CUSTOMER SUPPORT
The Company believes that a high level of customer service is required to
successfully sell reliability products for distributed computing systems.
Accordingly, an essential part of the Company's business is providing
comprehensive maintenance, technical support, consulting and training services
for its customers. Most of the Company's customers have support and
maintenance agreements with the Company that are typically for 12 months.
The Qualix Technical Services Group ("QTSG") consists of 14 people which the
Company supplements with outside consultants for some support requirements.
These consultants are fully trained and authorized by the Company and provide
service on-site in the same capacity as a Qualix employee. QTSG provides the
following services:
Maintenance and Technical Support. The Company offers two levels of support
packages: (i) support during normal business hours and (ii) 24-hour, 7 day-a-
week support. Both levels include e-mail and fax customer support and new
software releases. Prices for maintenance and technical support, which is
mandatory for the first year for most of the Company's products, typically
range from 15% to 30% of the price of the product.
Consulting. QTSG includes the Qualix Professional Services Group which is
responsible for on-site consulting as well as development work done for
specific customers. Consulting services include implementation planning,
project management, project customization and upgrade management. For example,
this group develops QualixHA+ modules for the Company's products. Consulting
services are generally performed on a fee-basis by day or by project. These
consulting services are used to leverage the Company's products so they can be
better implemented at a customer site. A majority of the Company's new high
availability customers purchase the Company's consulting services.
Training. The Company offers comprehensive training classes to its
customers, distributors, systems integrators and VARs both on-site and at
Qualix headquarters. The training program includes instruction in the
installation, customization and optimization of the Company's products on
their specific environment.
36
<PAGE>
CUSTOMERS
The Company's target customers include both public and private sector
organizations that have deployed (or are deploying) distributed computing
systems for business-critical applications. As of December 31, 1996, Qualix
had sold its reliability products to over 900 customers.
The following table lists certain customers of Qualix and end users of their
products. Each of the entities has purchased at least $25,000 of the Company's
products and services since the beginning of fiscal year 1995.
TELECOMMUNICATIONS TECHNOLOGY HEALTH PRODUCTS AND
SERVICES
AT&T Applied Materials
Bell Atlantic OACIS Healthcare Systems
Bell South Argonne National Labs St. Louis Children's
Hospital
Cellular One Cray Research
Data General
GTE Fujitsu Vision Service Plan
Lucent Technologies Hitachi
MCI Microsoft UTILITIES/ENERGY
Motorola National Semiconductor
Enron
Netscape
FINANCIAL SERVICES NCR
Unocal Corp.
Storage Technology
Sun Microsystems SERVICES AND GOVERNMENT
Aetna
Credit Suisse Tandem
Deutsche Bank Teknekron Andersen Consulting
Federal Home Loan Texas Instruments Davis Polk & Wardwell
Mortgage Corporation Unisys Delta Airlines
Lehman Brothers VLSI Dow Jones
Morgan Guaranty Trust Xerox Corporation Department of the Air
Smith Barney Force
State Street Bank MANUFACTURING Federal Express
Princeton University
Harris Corporation State of Maryland
TRW
Intergraph
Lockheed Martin
McKesson Corp.
SALES AND MARKETING
The Company markets its software and services primarily through its field
sales organization complemented by other sales channels, including systems
integrators, OEMs, VARs and international distributors.
Field Sales. As of December 31, 1996, Qualix's field sales force consisted
of 39 personnel, including 26 sales representatives and 11 sales engineers
that provide technical sales assistance. The Company currently has 15 sales
offices, most of which are staffed with both sales and technical pre-sales
personnel. The Company uses a consultative sales approach for selling to major
accounts. This model entails the collaboration of technical and sales
personnel, typically in a one-to-one ratio, to formulate proposals that
address the specific requirements of the customer. The Company focuses its
initial sales efforts on senior MIS department personnel, and works closely
with system and network administrators for evaluation and deployment.
Qualix Direct. Qualix Direct is a separate telesales organization located in
San Mateo, California. Qualix Direct resells add-on software, hardware and
accessories for distributed computing systems. Qualix Direct uses direct
mailings, catalogs and Web promotions to market its products. As of December
31, 1996, Qualix Direct had nine sales and marketing personnel. Qualix Direct
has historically sold third party products that
37
<PAGE>
require a less consultative sales approach and are sold in smaller
transactions that typically generate lower gross margins. Qualix Direct
recently began selling the Company's lower-priced reliability products for
Windows NT.
Indirect Distribution Channels. As of December 31, 1996, Qualix had over 100
VARs, resellers and systems integrators of its reliability products. These
resellers are generally responsible for managing the sales and installation
process in each customer situation. In selected opportunities, the Company's
support personnel often work with the reseller to provide technical support.
This approach enables the Company to cost effectively achieve broader market
coverage, while maintaining close contact with customers in order to gauge
product direction and to monitor customer satisfaction.
International. Qualix has been expanding its international distributors, and
as of December 31, 1996 had approximately 40 distributors in Europe, Asia and
South America. International revenue from sales outside the United States
accounted for 5%, 9%, 17% and 18% of total revenue in fiscal 1994, 1995, 1996
and the six months ended December 31, 1996. The Company's sales and marketing
strategy includes expanding its international sales and marketing
infrastructure to generate an increasing percentage of revenue through
international sales. As a result, the Company is hiring both sales and
technical personnel for Europe and Asia.
Strategic Alliances and OEMs. A key objective of the Company is to expand
its joint development and marketing relationships with systems management
software vendors to provide complementary solutions and to establish
relationships with hardware and software OEMs to incorporate reliability
solutions in their products. The Company works with hardware providers such as
Hewlett-Packard, IBM and Sun Microsystems and software vendors such as Oracle,
Sybase, Informix, CA-Ingres, Microsoft and Tivoli. The Company is currently in
active discussions with several systems management software vendors and
software OEMs to form additional strategic relationships in which the
Company's reliability products would be marketed and sold as an added feature
to their client/server packages. There can be no assurance that the Company
will successfully consummate any of these arrangements.
Marketing Programs. In support of its domestic sales force and international
distributors, the Company conducts comprehensive marketing programs intended
to position, promote and market its family of reliability products. Marketing
personnel engage in a variety of activities in support of the sales force and
resellers, including public relations and product seminars, trade shows,
direct mailings, preparing marketing materials and coordinating the Company's
participation in industry programs and forums.
PRODUCT DEVELOPMENT
The Company has historically derived a substantial majority of its revenues
from the sale of products that are licensed or incorporate technology that is
licensed from third parties. In fiscal 1994, 1995, and 1996 and the six months
ended December 31, 1996, the Company's product development expenses were
$419,000, $257,000, $620,000 and $978,000, respectively. The Company has
increased substantially its commitment to product development and anticipates
that it will incur substantially higher product development expenses in
absolute dollars and as a percentage of total revenue in the future.
The Company believes that small, focused product development teams are the
most efficient method of developing new products, enhancing existing products
and supporting them. These teams are able to provide more focus on customer
requirements and work together with outside industry experts when necessary to
release quality products and enhancements. For example, the QualixHA+
development team, which started in January 1996, was lead by two Qualix
employees, but used an additional nine consultants as specific experts in
development, quality assurance and documentation to create the product.
QualixHA+ was released in October 1996. As of December 31, 1996, the Company
had ten employees and three consultants working on product development and
engineering.
38
<PAGE>
The Company currently has three internal development teams:
QualixHA+ Team. This team is based in San Mateo, California and focuses on
developing and enhancing UNIX-based high availability products. The team
relies primarily on Qualix employees for core development supplemented by
consultants for product development, specifications and documentation. It is
currently focused on enhancing the Company's proprietary QualixHA+ clustering
technology as well as porting QualixHA+ to Hewlett-Packard and IBM hardware
platforms and developing additional modules to support application-specific
failover and recovery management.
Data Availability Team. Based in Englewood, Colorado, the core portion of
this team is comprised of the key personnel from Anthill. This team has
significant expertise in data migration and storage management. The team is
currently focused on developing QualixSD, which is designed to provide remote
real-time mirroring for UNIX servers, and Anthill storage management products,
which are designed to provide storage management for UNIX servers. These
storage management products are designed to allow users to transfer data from
a primary server and disk drive/RAID array to a backup disk, tape or optical
drive and transparently access the data from the remote disk via normal
commands. This allows more expensive devices (e.g., RAID arrays) to be used
for data that is constantly accessed, and less expensive back-up storage
devices to be used to store data that is accessed less frequently.
Octopus Technologies Team. This team is based in Yardley, Pennsylvania and
is responsible for the Octopus family of NT reliability products. They have
significant expertise in remote data mirroring and failover in the Windows NT
operating environment. They are currently focused on adding features to
OctopusHA+, including features utilizing technology developed for QualixHA+.
These features include SNMP integration and application failover.
In addition to its own development teams, the Company works with outside
technology providers to create products for the Company to market and sell.
For example, the Company has contracted with consultants who are developing a
security scanning and testing product.
The Company believes that its future success will depend in large part on
its ability to enhance its current product line, develop new products,
maintain technological leadership and satisfy an evolving range of customer
requirements for reliability applications. The Company is continuing to
increase the size and depth of its own internal development organizations as
well as look for strategic acquisitions of technology or technology-based
companies. Among other things, the Company must successfully complete the
integration of its three internal development teams. There can be no assurance
that these development teams will be successfully integrated, that any product
development efforts will be successfully completed or that future products
will be available on a timely basis or at all or achieve market acceptance.
See "Risk Factors--Dependence on Key Personnel; Need to Expand Product
Development Capability."
COMPETITION
The market for reliability software for distributed computing environments
is intensely competitive, fragmented and characterized by rapid technological
developments, evolving standards and rapid changes in customer requirements.
To maintain and improve its position in this market, the Company must continue
to enhance current products and develop new products in a timely fashion.
Although the Company believes that the reliability segment of the market is in
the early stages of development, the Company competes, or may compete, with
four types of vendors:
Independent Vendors that Provide Reliability Products. These companies offer
standalone products that provide specific reliability solutions. These
companies include third parties that license their technology or products to
Qualix. For example, Veritas sells FirstWatch, a high availability product
that the Company licenses as the core software engine for QualixHA, and
CheckPoint sells FireWall-1, a security product that the Company resells and
incorporates into QualixHA+ for Firewalls, its high availability firewall
product.
39
<PAGE>
Host-Based Systems Management Software Companies Migrating Their Products to
the Distributed Computing Market. These vendors, such as BMC and Computer
Associates, have built large businesses based upon selling systems management
tools primarily into the mainframe market. These vendors may develop or
acquire reliability products that compete directly with the Company's
products.
Distributed Computing Systems Management Software Companies That Incorporate
Reliability Products as a Part of Integrated System Management Solutions. A
number of companies have introduced products addressing various segments of
the distributed computing systems management market. For example, Legato
Systems offers storage management products and may develop or acquire products
that enable it to move into the reliability area.
Hardware and Operating Systems Vendors That Incorporate Reliability
Solutions Into Their Products. Companies such as Sun Microsystems and
Microsoft continue to add features to their operating systems and thereby
reduce the need for their customers to purchase products providing these
features from independent vendors. For example, Sun Microsystems recently
introduced a version of its database clustering product that includes some
high availability features. A key element of the Company's strategy is to form
OEM relationships with hardware and software vendors to provide them with
reliability solutions for heterogeneous network computing environments.
The Company believes that the principal competitive factors affecting its
market include brand name recognition, product performance and functionality
(such as heterogeneity, scalability, performance and ease of installation and
use), quality, price, customer service and support and the effectiveness of
sales and marketing efforts. Although the Company believes that its products
currently compete favorably with respect to certain of these factors, there
can be no assurance that the Company can maintain its competitive position
against current and potential competitors, especially those with significantly
greater financial, marketing, service, support, technical and other resources
than the Company. The Company's future success will depend significantly on
its ability to continue to enhance its existing products and introduce new
products more rapidly and less expensively than its existing and potential
competitors and to persuade such competitors to license the Company's products
rather than to develop their own reliability products.
Many of the Company's competitors have longer operating histories and have
substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base,
than the Company. The Company's current and future competitors could introduce
products with more features, higher scalability, greater functionality and
lower prices than the Company's products. These competitors could also bundle
existing or new products with other, more established products in order to
compete with the Company. The Company's focus on reliability software may be a
disadvantage in competing with vendors that offer a broader range of products.
Moreover, as the distributed systems management software market develops, a
number of companies with significantly greater resources than those of the
Company could attempt to increase their presence in this market by acquiring
or forming strategic alliances with competitors or business partners of the
Company. Because there are relatively low barriers to entry for the software
market, the Company expects additional competition from other established and
emerging companies. Increased competition is likely to result in price
reductions, reduced gross margins and loss of market share, any of which could
materially and adversely affect the Company's business, operating results and
financial condition. Any material reduction in the price of the Company's
products would negatively affect gross margins and would require the Company
to increase software unit sales in order to maintain gross profits.
In addition, the distributed computing market is characterized by rapid
technological advances, changes in customer requirements, frequent new product
introductions and enhancements and evolving industry standards in computer
hardware and software technology. The introduction of products embodying new
technologies and the emergence of new industry standards may render the
Company's existing or planned products obsolete or unmarketable, particularly
because the market for reliability products is at an early state of
development. There can be no assurance that the Company will be able to
compete successfully against
40
<PAGE>
current and future competitors, and the failure to do so would have a material
adverse effect upon the Company's business, financial condition and results of
operations.
PROPRIETARY RIGHTS
The Company's success depends in part upon its proprietary technology. The
Company has no issued patents and relies on a combination of copyright,
trademark and trade secret laws, confidentiality procedures and licensing
arrangements to establish and protect its proprietary rights relating to its
licensed and internally developed products. The Company's rights to market and
sell licensed products are generally governed by license agreements of
specified duration. See "Risk Factors--Dependence on Qualix Direct" and "--
Dependence on Licensed Products." Although the Company has applied for a
United States patent covering certain aspects of the technology included in
its Octopus Technologies data mirroring product, the claims in the patent
application have been rejected by the U.S. Patent and Trademark Office, and
there can be no assurance that a patent will be issued, that any issued patent
will provide meaningful protection for the Company's technology, that any
issued patent will provide the Company with any competitive advantages or will
not be challenged by third parties. Moreover, there can be no assurance that
the Company will develop additional proprietary products or technologies that
are patentable or that the patents of others will not have an adverse effect
on the Company's ability to do business. Furthermore, there can be no
assurance that others will not independently develop similar products,
duplicate the Company's products or, if patents are issued to the Company,
design around the patents issued to the Company. As part of its
confidentiality procedures, the Company generally enters into non-disclosure
agreements with its employees, distributors and corporate partners, and
license agreements with respect to its software, documentation and other
proprietary information. Despite these precautions, it may be possible for a
third party to copy or otherwise obtain and use the Company's products or
technology without authorization, or to develop similar technology
independently. Policing unauthorized use of the Company's products is
difficult and although the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be
a persistent problem. In selling its products, the Company relies on "shrink
wrap" licenses for sales of certain products that are not signed by licensees
and, therefore, may be unenforceable under the laws of certain jurisdictions.
In addition, effective protection of intellectual property rights is
unavailable or limited in certain foreign countries. There can be no assurance
that the Company's protection of its proprietary rights, including any patent
that may be issued, will be adequate or that the Company's competitors will
not independently develop similar technology, duplicate the Company's products
or design around any patents issued to the Company or other intellectual
property rights.
There can be no assurance that third parties will not claim infringement by
the Company with respect to current or future products. In October 1996, the
Company received correspondence from a French company asserting that it has
registered "Octopus" as a trademark in France and that the Company's use of
the mark "Octopus" infringes its trademark rights. Based upon its initial
investigation of this claim, the Company believes that it may be required to
obtain a license to use the Octopus mark in France, adopt a new trademark to
replace the Octopus mark in France or be subject to other liability. Although
there can be no assurance that Qualix can obtain a license to use the Octopus
mark in France on commercially reasonable terms or at all, Qualix does not
believe that resolution of this matter will have a material adverse effect on
the Company's business, financial condition or results of operations. In
addition, the Company expects that software product developers will
increasingly be subject to such claims as the number of products and
competitors in the Company's industry segment grows and the functionality of
products in the industry segment overlaps. Any such claims, with or without
merit, could result in costly litigation that could absorb significant
management time, which could have a material adverse effect on the Company's
business, financial condition and results of operations. Such claims might
require the Company to enter into royalty or license agreements. Such royalty
or license agreements, if required, may not be available on terms acceptable
to the Company or at all, which could have a material adverse effect upon the
Company's business, financial condition and results of operations. See "--
Litigation".
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<PAGE>
LITIGATION
On October 25, 1996, the Company sued Veritas in the Santa Clara County
California Superior Court alleging breach of contract, unfair competition and
intentional interference with prospective economic advantage in connection
with a contract dated as of April 10, 1995 (the "Master Agreement") between
the Company and Veritas. The Master Agreement was entered into following
Veritas' acquisition of a Company whose high availability product the Company
previously had the right to sell. The Master Agreement grants the Company the
right to market and support FirstWatch, a product which forms the core
software engine of QualixHA but which is not part of QualixHA+. The Master
Agreement, and therefore the Company's right to sell QualixHA, terminates on
February 28, 1997, unless the agreement is extended. The Company is seeking
unspecified compensatory and punitive damages. Veritas filed a cross-complaint
on October 29, 1996 alleging that the Company engaged in unfair competition,
false advertising, breach of contract, fraud and negligent misrepresentation
as a result of various alleged activities. Veritas seeks unspecified
compensatory and punitive damages and injunctive relief including requiring
Qualix to divulge certain customer information.
On October 29, 1996, the court granted the Company a temporary restraining
order enjoining Veritas from stating that the Master Agreement has been
terminated. The court also granted Veritas an order enjoining the Company from
stating that QualixHA+ is an upgrade to FirstWatch or that QualixHA+ is the
FirstWatch product. On November 14, 1996, the court issued a preliminary
injunction against Veritas on substantially similar terms as the temporary
restraining order and indicated that it would, upon submission of an order by
Veritas, issue a preliminary injunction enjoining the Company from stating
that QualixHA+ is an upgrade to FirstWatch. Veritas has not yet submitted such
an order.
The Master Agreement requires binding arbitration of contract disputes
through the American Arbitration Association ("AAA"). On November 27, 1996,
Veritas served the Company with a demand for arbitration of various issues
relating to the dispute, including fraud, negligent misrepresentation, breach
of contract, pricing below cost, unfair competition and false advertising.
Veritas is expected to seek substantially the same relief in the arbitration
as in the lawsuit. The Company received formal notification of the arbitration
from the AAA and has responded. That response included submission of certain
claims of the Company against Veritas into the arbitration, including the
claims raised by the Company in its lawsuit against Veritas. Arbitration is
expected to commence shortly. There can be no assurance that all of the claims
asserted by Veritas or the Company fall within the scope of the arbitration
provision, and therefore they may be resolved through litigation rather than
arbitration.
The Company believes that its claims against Veritas are meritorious and
that it has meritorious defenses to the claims brought by Veritas. The Company
intends to vigorously pursue its claims and defenses against Veritas. After
consideration of the nature of the claims and facts relating to the litigation
and after consultation with legal counsel, the Company believes that
resolution of its dispute with Veritas will not have a material adverse effect
on the Company's business, financial condition and results of operations.
However, due to the nature of litigation and arbitration and because discovery
has not commenced, the Company cannot determine the total expense or possible
loss or other harm that it may incur as a result of litigation, arbitration or
settlement of its dispute with Veritas. Among other things, the Master
Agreement may be terminated prior to February 28, 1997 or not extended
thereafter. Revenue from QualixHA was $4.8 million in fiscal 1996, $2.0
million in the quarter ended September 30, 1996 and negative $100,000 in the
quarter ended December 31, 1996 (in all cases, after giving effect to credits
for product returns). Although QualixHA+ was introduced and began generating
revenue in October 1996, there can be no assurance that loss of the right to
sell QualixHA would not have a material adverse effect on the Company's
business, financial condition and results of operations.
Previously, by letter dated November 19, 1996, Veritas had indicated that at
the arbitration it would also pursue "trade secret misappropriation claims
based upon Qualix's use of developers who had access to Veritas' trade
secrets." Veritas has not included that claim within the demand for
arbitration. The Company is unable to predict whether Veritas will assert that
or similar claims alleging misappropriation or infringement of
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<PAGE>
Veritas' proprietary rights or whether Veritas will attempt to assert such
claims as part of arbitration proceedings, as part of any counterclaim or in a
separate action in state or federal court. The Company has submitted into the
arbitration a request for declaratory relief that the development of QualixHA+
did not constitute misappropriation of Veritas' trade secrets. As is noted
above, there can be no assurance that this or other claims will be deemed to
fall within the scope of the arbitration provision. Based in part upon
procedures undertaken by the Company to ensure that the core software engine
to QualixHA+ was developed by employees and consultants who had no exposure to
Veritas' trade secrets, the Company believes that it would have meritorious
defenses to any such claims. Nevertheless, Veritas has advised the Company
orally that it may bring such claims, and there can be no assurance that
Veritas will not assert such claims and that, if successfully asserted,
Veritas will not be successful in obtaining damages or other relief that would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors--Dependence on Proprietary
Rights; Risk of Infringement."
EMPLOYEES
As of December 31, 1996, the Company had 98 employees. Of the total, 57 were
engaged in sales and marketing (including the Qualix Direct telesales
organization), 10 in product development and engineering, 14 in customer
service and support and 17 in administration and finance. The Company's future
success depends in significant part upon the continued service of its key
technical and senior management personnel and its continuing ability to
attract and retain highly qualified technical and managerial personnel.
Competition for such personnel is intense and there can be no assurance that
the Company can retain its key managerial and technical employees or that it
can attract, assimilate or retain other highly qualified technical and
managerial personnel in the future. None of the Company's employees is
represented by a labor union. The Company has not experienced any work
stoppages and considers its relations with its employees to be good. See "Risk
Factors--Dependence Upon Key Personnel; "Management of Growth" and "--Need to
Expand Product Development and Engineering Capability."
FACILITIES
The Company's principal administrative sales, marketing and development
facility is located in a building providing approximately 8,535 square feet of
available space in San Mateo, California. This facility is leased through
2000. The Company occupies 14 other domestic regional sales offices throughout
the United States. The Company believes that it will need to expand its
headquarters facility in the near future. There can be no assurance that
sufficient additional space, or that a larger facility, will be available in
the area upon acceptable terms, or at all.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company as of December 31, 1996
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Richard G. Thau............ 50 Chairman of the Board, President and Chief
Executive Officer
Jean A. Kovacs............. 41 Executive Vice President, Secretary and Director
Bruce C. Felt.............. 38 Vice President, Finance and Chief Financial
Officer
Arlington C. Glaze......... 55 Vice President, Sales
George J. Symons........... 36 Vice President, Engineering/Technical Services
William Hart (1)........... 56 Director
William D. Jobe (1)........ 58 Director
Samuel D. Kingsland (2).... 27 Director
Charles L. Minter.......... 55 Director
Peter L. Wolken (2)........ 62 Director
</TABLE>
- ---------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Richard G. Thau, Chairman of the Board, President and Chief Executive
Officer, co-founded the Company in September 1990. From September 1985 to
January 1990, he was employed at MicroMRP, a company that develops
microcomputer-based manufacturing, planning and control software, where he
served as President and Chief Executive Officer from November 1985 to January
1990 and as Vice President, Sales and Marketing from September 1985 to
November 1985. From January 1984 to July 1985, he served as Vice President,
Sales and Marketing for General Parametrics, a hardware and software-based
business presentation systems company. Mr. Thau received a B.S. in Engineering
Sciences from State University of New York at Stony Brook in 1968 and attended
the M.B.A. program at the University of Santa Clara.
Jean A. Kovacs, Executive Vice President and a director, co-founded the
Company in September 1990. From July 1988 to February 1990, Ms. Kovacs was
Director of Market Development for Frame Technology Inc., a document
publishing software company. From August 1985 to July 1988, she was a Product
Manager and Sales Account Manager for Sun MicroSystems, Inc., a computer
hardware and software company. Before that, she spent ten years at
Compugraphic Corporation in a variety of sales, marketing and support roles.
Ms. Kovacs received a B.S. in Finance from Northeastern University in 1983 and
an M.B.A. from Harvard Business School in 1985.
Bruce C. Felt, Vice President, Finance and Chief Financial Officer, joined
the Company in March 1994. From July 1992 to March 1994, he was an independent
consultant. From June 1989 to July 1992, Mr. Felt was Chief Financial Officer
at Renaissance Software Inc., a trading systems software company that he co-
founded. Mr. Felt received a B.S. in Accounting from the University of South
Carolina in 1980 and an M.B.A. from Stanford University, Graduate School of
Business in 1989. Mr. Felt is a Certified Public Accountant.
Arlington C. Glaze, Vice President, Sales, joined the Company in January
1992. From October 1990 to December 1991, Mr. Glaze was director of telesales
at Clarity, Inc., a UNIX software developer. He received a B.S. in Business
Administration from San Jose State University in 1974 and an M.B.A. from the
University of Southern California in 1975.
George J. Symons, Vice President, Engineering/Technical Services, joined the
Company in April 1996. From May 1995 to April 1996, Mr. Symons was an
independent consultant. From April 1993 to April 1995, he was Vice President
of Marketing at Software Research, Inc., a software testing tools company.
From January 1993 to March 1993 he served as an independent consultant. From
September 1990 to December
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<PAGE>
1992, he was Vice President, Marketing at PROCASE Corp., a development
software manufacturer. From April 1986 to May 1990, he held various management
positions at Sun MicroSystems, Inc. Mr. Symons received a B.A. in Management
Science and a B.A. in Computer Science in 1981 from the University of
California, San Diego and an M.B.A. in 1983 from the University of California,
Los Angeles.
William Hart has served as a director of the Company since December 1991. He
is a Managing Partner of Technology Partners, a venture capital management
firm that he founded in 1980. Mr. Hart serves on the Boards of Directors of
Trimble Navigation Ltd., CellNet Data Systems, Inc., Silicon Gaming, Inc. and
several private technology companies. He received a B.S. in Engineering from
Rensselaer Polytechnic Institute in 1965 and an M.B.A. from the Amos Tuck
School at Dartmouth College in 1967.
William D. Jobe has served as a director of the Company since April 1995. He
has served as a private venture capitalist and computer industry advisor since
July 1991. From June 1990 to July 1991, Mr. Jobe was President of MIPS
Technology Development, a computer hardware company. From August 1987 to June
1990, he was Executive Vice President, Sales, Marketing and Service for MIPS.
Mr. Jobe received a B.S.M.E. and M.S.M.E. from Texas A&M University in 1962
and a P.M.D. from Harvard Business School in 1977.
Samuel D. Kingsland has served as a director of the Company since April
1995. Since September 1991, Mr. Kingsland has served in various capacities at
venture capital entities affiliated with Hambrecht & Quist LLC, serving as a
Principal of H&Q Venture Capital since September 1996. He serves on the Board
of Directors of Unisyn Technologies, Inc., a provider of hollow-fiber based
cell culture systems and services, DigitalThink, Inc., a publisher of on-line
training materials, and Listing Services Solutions, Inc., a telephone
directory assistance systems and data company. Mr. Kingsland received a B.A.
in Earth Sciences from Dartmouth College in 1991.
Charles L. Minter has served as a director of the Company since August 1996.
Since September 1996, Mr. Minter has served as Chairman of the Board of
Comstock Partners, Inc., a money management firm. From March 1994 to September
1996 he served as President of Comstock, from January 1987 to March 1994 he
served as Chief Operating Officer of Comstock, and since January 1987 he has
been a member of its Executive Committee and, until September 1996, was Vice
Chairman of its Board of Directors. He received a B.S. in Finance from Florida
State University in 1964 and an M.B.A. from the Graduate School of Business
Administration of New York University in 1978.
Peter L. Wolken has served as a director of the Company since 1990. Mr.
Wolken is a General Partner of AVI Management Partners I, II and III which
manage various private venture capital limited partnerships, having co-founded
AVI in 1981. He serves as a director of a number of private technology
companies in Silicon Valley. Mr Wolken received a B.S. in Mechanical
Engineering from the University of California, Berkeley in 1959 and a B.F.T.
in International Marketing from the American Graduate School for International
Management in 1960.
Except for grants of stock options, directors of the Company generally do
not receive compensation for services provided as a director. On October 31,
1996, the Company granted options to purchase Common Stock at $5.62 per share
to its non-employee directors, as follows: Mr. Jobe--4,000 shares; Messrs.
Hart, Kingsland, Minter and Wolken--2,400 shares. In addition, the Company
granted Mr. Jobe options to purchase Common Stock, as follows: 40,000 shares
at $.20 per share on April 18, 1995 and 30,000 shares at $.20 per share on
April 19, 1996. All directors hold office until the next annual meeting of
stockholders or until their successors have been elected and qualified.
Officers serve at the discretion of the Board of Directors. There are no
family relationships between any of the directors or executive officers of the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
On July 16, 1996, the Board of Directors established a Compensation
Committee and an Audit Committee. The Compensation Committee makes
recommendations concerning the salaries and incentive
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<PAGE>
compensation of employees of, and consultants to, the Company, administers the
1995 Stock Option Plan (the "1995 Plan"), and will administer the 1997 Stock
Option Plan (the "1997 Plan") upon its effectiveness. See "1997 Stock Option
Plan." The Audit Committee is responsible for reviewing the results and scope
of audits and other services provided by the Company's independent auditors.
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth certain information
concerning the compensation paid or earned for services rendered to the
Company in all capacities during fiscal year 1996 to (i) the Company's Chief
Executive Officer and (ii) the three other most highly compensated officers
who received total annual salary, bonus and other compensation in excess of
$100,000 (collectively, the "Named Officers") in that fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION
COMPENSATION AWARDS
------------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY(1) BONUS(2) OPTIONS(#) COMPENSATION
--------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Richard G. Thau................... $150,000 $62,206 70,000 --
President and Chief Executive
Officer
Jean A. Kovacs.................... 110,004 49,305 38,000 --
Executive Vice President
Bruce C. Felt..................... 90,834 17,777 20,000 --
Vice President, Finance and Chief
Financial Officer
Arlington C. Glaze................ 77,499 88,746 30,000 --
Vice President
</TABLE>
- ---------------------
(1) Salary includes amounts deferred under the Company's 401(k) Plan.
(2) Amounts represent bonuses earned in fiscal 1996 under the Senior Managers
Bonus Plan and commissions earned during fiscal 1996. See "Executive
Bonus Plan."
46
<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options made during
fiscal year 1996 pursuant to the 1995 Plan to each of the Named Officers. The
Company did not grant any stock appreciation rights to these individuals
during the fiscal year 1996.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
INDIVIDUAL GRANTS ANNUAL RATES OF
NUMBER OF ------------------------------------ STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS GRANTED EXERCISE OPTION TERM(4)
OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION --------------------
NAME GRANTED(1) 1996(2) SHARE(3) DATE 5%($) 10%($)
---- ---------- --------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard G. Thau......... 70,000 15% $0.20 10/16/05 $ 8,805 $ 22,312
Jean A. Kovacs.......... 38,000 9% 0.20 10/16/05 4,780 12,142
Bruce C. Felt........... 20,000 4% 0.20 10/16/05 2,516 6,375
Arlington C. Glaze...... 30,000 6% 0.20 10/16/05 3,773 9,562
</TABLE>
- ---------------------
(1) All options were granted at an exercise price equal to the fair market
value of the Common Stock as determined by the Board of Directors of the
Company on the date of grant. The Common Stock was not publicly traded at
the time of the option grants to the officers. Stock option grants are
subject to daily vesting over four years and have a 10-year term. No
options vest unless the optionee remains employed with the Company for 12
months following the grant date. Options granted under the 1995 Plan are
immediately exercisable subject to the Company's right to repurchase such
options at cost plus accrued interest, which repurchase right lapses per
the vesting schedule. Options granted under the Company's 1991 Stock
Option/Stock Issuance Plan (the "1991 Plan") may not be exercised until
vested.
(2) Based on an aggregate of 478,078 options granted in fiscal year 1996.
(3) The exercise price may be paid in cash, in shares of Common Stock valued
at fair market value on the exercise date or through a cashless exercise
procedure involving a same-day sale of the purchased shares. The Company
may also finance the option exercise by loaning the optionee sufficient
funds to pay the exercise price for the purchased shares, together with
any federal and state income tax liability incurred by the optionee in
connection with such exercise.
(4) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission. There can be no assurance provided to any executive officer
or any other holder of the Company's securities that the actual stock
price appreciation over the 10-year option term will be at the assumed 5%
and 10% levels or at any other defined level. Unless the market price of
the Common Stock appreciates over the option term, no value will be
realized from the option grants made to the executive officers.
In addition to the options listed in the table, stock options were granted
on October 15, 1996 at an exercise price of $5.62 to each of the Named
Executive Officers under the Company's 1995 Plan for the following number of
shares: Mr. Thau--50,000; Ms. Kovacs--40,000; Mr. Felt--16,000; and Mr.
Glaze--16,000. Each of the options is immediately exercisable. The shares
purchasable thereunder are subject to repurchase by the Company at the
original exercise price paid per share upon the optionee's cessation of
service prior to vesting in such shares. The repurchase right lapses as to 25%
of the shares upon completion of one year of service from the grant date and
the balance in a series of 36 monthly installments thereafter.
47
<PAGE>
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth, for each of the Named Officers, information
with respect to option exercises and option holdings for the year ended June
30, 1996. No stock appreciation rights were exercised by the Named Officers in
fiscal year 1996 or were outstanding at the end of that year.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
SHARES AT FY-END(#)(3) FY-END ($)(4)
ACQUIRED ON VALUE ---------------------- ----------------
NAME EXERCISE(#)(1) REALIZED($)(2) VESTED UNVESTED VESTED UNVESTED
---- -------------- -------------- ---------- ----------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Richard G. Thau......... -- -- 32,005 37,995 $19,203 $22,797
Jean A. Kovacs.......... -- -- 17,374 20,626 10,424 12,376
Bruce C. Felt........... 96,000 $28,800 0 20,000 0 12,000
Arlington C. Glaze...... -- -- 21,186 38,813 12,712 23,288
</TABLE>
- ---------------------
(1) Represents the exercise of an option to purchase 48,000 shares of Common
Stock at a price of $0.20 per share and 40,000 shares of Series D
Preferred Stock at a price of $2.40 per share.
(2) Based on the deemed fair market value of the Common Stock at fiscal year-
end (June 30, 1996) of $0.80 per share, as determined by the Company's
Board of Directors less the exercise price payable for such shares. Based
on the assumed public offering price ($10.00 per share), the value of the
shares acquired less the exercise price for such shares would be $854,400.
(3) The table indicates the number and value of shares no longer subject to
the Company's repurchase right (vested) and the number of shares subject
to the repurchase right (unvested) as of 1996 fiscal year end.
(4) Based on the deemed fair market value of the Common Stock at fiscal year-
end (June 30, 1996) of $0.80 per share, as determined by the Company's
Board of Directors less the exercise price payable for such shares. Based
on the assumed public offering price ($10.00 per share), the value of the
option shares at fiscal year-end less the exercised price for such shares
would be as follows: Mr. Thau, vested $313,649, unvested $372,351; Ms.
Kovacs, vested $170,265, unvested $202,135; Mr. Felt vested $0, unvested
$196,000; and Mr. Glaze vested $207,623, unvested $380,367.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation Committee are Messrs. Hart and Jobe. Neither
Mr. Hart nor Mr. Jobe was at any time during the fiscal year 1996, or at any
other time, an officer or employee of the Company. No member of the
Compensation Committee of the Company serves as a member of the board of
directors or compensation committee of any entity that has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.
EXECUTIVE BONUS PLAN
The Company has adopted the Senior Managers Bonus Plan pursuant to which
officers and selected full-time employees are eligible for annual cash bonuses
based upon a combination of the Company achieving specified objectives and the
employee meeting specified individual performance objectives.
1997 STOCK OPTION PLAN
The 1997 Plan was adopted by the Board of Directors and approved by the
Company's stockholders in December 1996 as the successor to the 1995 Plan. The
total number of shares of Common Stock authorized for issuance under the 1997
Plan consists of (i) the number of shares available for issuance under the
1995 Plan on the date of this offering, (ii) an additional 200,000 shares of
Common Stock and (iii) an additional number of shares of Common Stock each
year equal to the lesser of (a) 5% of the shares of Common Stock outstanding
on the first trading date after June 30 (beginning on June 30, 1997) or (b)
480,000 shares. As of December 31, 1996, no shares had been issued under the
1997 Plan, options to purchase 886,855 shares of Common Stock were outstanding
(including options incorporated from the 1995 Plan) and 384,154 shares of
Common Stock remained available for future grant (including 200,000 additional
shares authorized under clause (ii) above and excluding additional shares that
may be authorized under clause (iii) above). Shares of Common Stock subject to
outstanding options, including options granted under the 1995 Plan, which
expire or terminate prior to exercise will be available for future issuance
under the 1997 Plan.
48
<PAGE>
Under the 1997 Plan, employees, officers, directors and independent
consultants may, at the discretion of the plan administrator, be granted
options to purchase shares of Common Stock at an exercise price not less than
85% of the fair market value of such shares on the grant date. Non-employee
members of the Board of Directors will also be eligible for automatic option
grants under the 1997 Plan.
The 1997 Plan will be administered by the Board or the Compensation
Committee of the Board after this Offering. The plan administrator has
complete discretion to determine which eligible individuals are to receive
option grants, the number of shares subject to each such grant, the status of
any granted option as either an incentive option or a non-statutory option
under the Federal tax laws, the vesting schedule to be in effect for each
option grant and the maximum term for which each granted option is to remain
outstanding. In no event, however, may any one participant in the 1997 Plan
acquire shares of Common Stock under the 1997 Plan in excess of 200,000 shares
each calendar year over the term of the Plan.
The exercise price for options granted under the 1997 Plan may be paid in
cash or in outstanding shares of Common Stock. Options may also be exercised
on a cashless basis through the same-day sale of the purchased shares. The
plan administrator may also permit the optionee to pay the exercise price
through a promissory note payable in installments over a period of years. The
amount financed may include any Federal or state income and employment taxes
incurred by reason of the option exercise.
The plan administrator has the authority to effect, from time to time, the
cancellation of outstanding options under the 1997 Plan in return for the
grant of new options for the same or different number of option shares with an
exercise price per share based upon the fair market value of the Common Stock
on the new grant date.
In the event the Company is acquired by merger, consolidation or asset sale,
each option outstanding at the time under the 1997 Plan will accelerate to the
extent not assumed by the acquiring entity and the Company's repurchase rights
with respect to unvested shares shall lapse except to the extent to be
assigned to the acquiring entity. Should the acquiring entity assume an
outstanding option and the optionee be involuntarily terminated within twelve
(12) months following the date of the acquisition, the assumed options will
automatically accelerate, and the options will vest in full following the
involuntary termination. Similarly, if the Company's repurchase rights with
respect to option shares are assigned and the optionee involuntarily
terminated within twelve (12) months following the date of acquisition, the
repurchase rights shall automatically lapse and the optionee vest in full. In
addition, the Plan administrator has the discretion to accelerate the vesting
of options that are assumed by the acquiring entity.
Under the automatic grant program, each individual who first joins the Board
as a non-employee director on or after the effective date of the 1997 Plan and
after the date of this offering will receive at that time, an automatic option
grant for 10,000 shares of Common Stock. In addition at each annual
stockholders meeting, beginning with the first annual meeting after June 30,
1997, each individual who has served as a non-employee director for at least
six months prior to the date of such annual stockholders meeting whether or
not he or she is standing for re-election at that particular meeting, will be
granted a stock option to purchase 1,000 shares of Common Stock. The optionee
will vest in each automatic option grant in a series of four annual
installments over the optionee's period of Board service, beginning one year
from the grant date. Each option will have an exercise price equal to the fair
market value of the Common Stock on the automatic grant date and a maximum
term of ten years, subject to earlier termination following the optionee's
cessation of Board service. Vesting of the automatic option shares will
automatically accelerate and the options become fully exercisable upon (i) an
acquisition of the Company by merger, consolidation or asset sale or (iii) the
death or disability of the optionee while serving as a Board member.
The Board may amend or modify the 1997 Plan at any time. The 1997 Plan will
terminate on December 31, 2006, unless sooner terminated by the Board.
49
<PAGE>
EMPLOYEE STOCK PURCHASE PLAN
The Company expects to adopt before this offering an Employee Stock Purchase
Plan (the "Purchase Plan"), subject to approval by the stockholders. A total
of 350,000 shares of Common Stock will be reserved for issuance under the
Purchase Plan. The Purchase Plan, which is intended to qualify under Section
423 of the Internal Revenue Code, will be implemented by 24-month offerings
with purchases occurring at six-month intervals, commencing on the closing of
this Offering. The Purchase Plan will be administered by the Board or the
Compensation Committee of the Board. Employees will be eligible to participate
if they are employed by the Company for more than 20 hours per week and have
been employed by the Company on the beginning of the Purchase Plan's next
offering period, which will not be more than six months after an employee's
commencement date. The Purchase Plan permits eligible employees to purchase
Common Stock through payroll deductions, which may not exceed 15% of an
employee's cash compensation, nor more than 1,000 shares per participant on
any purchase date. The price of stock purchased under the Purchase Plan will
be 85% of the lower of the fair market value of the Common Stock at the
beginning of the 24-month offering period or on the applicable semi-annual
purchase date. Employees may end their participation in the offering at any
time during the offering period, and participation ends automatically on
termination of employment with the Company. Each outstanding purchase right
will be exercised immediately prior to a merger or consolidation. The Board
may amend or terminate the Purchase Plan immediately after the close of any
purchase date. However, the Board may not, without stockholder approval,
materially increase the number of shares of Common Stock available for
issuance, alter the purchase price formula so as to reduce the purchase price
payable for shares of Common Stock, or materially modify the eligibility
requirements for participation. The Purchase Plan will in all events terminate
in February 2007.
CHANGE OF CONTROL ARRANGEMENTS
The Compensation Committee of the Board of Directors, as Plan Administrator
of the 1997 Plan, has the authority to provide for accelerated vesting of the
shares of Common Stock subject to outstanding options held by the Named
Officers and any other executive officer or director in connection with
certain changes in control of the Company or the Company or the subsequent
termination of the officer's employment following the change in control event.
Except as follows, none of the Named Officers have employment agreements
with the Company, and their employment may be terminated at any time: The
Company has entered into agreements with Mr. Thau, Chairman of the Board,
President and Chief Executive Officer, Ms. Kovacs, Executive Vice President
and Secretary, and Mr. Felt, Vice President, Finance and Chief Financial
Officer. Mr. Thau's and Ms. Kovacs' employment agreements provide for
severance payments equal to 50% and 25% of such person's annual base
compensation, respectively, if they are terminated without cause or in certain
other circumstances. Mr. Felt's employment agreement provides that upon
termination without cause, he shall continue to be paid during the 90-day
period after the date of termination at his then current base salary rate and
receive 12 months' additional vesting (and lapse of the repurchase right) of
options granted (and shares of Common Stock purchased) pursuant to his
employment agreement.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Bylaws of the Company provide that (i) the Company is required to indemnify
its directors and officers to the fullest extent permitted by the Delaware
General Corporation Law, (ii) the Company may, in its discretion, indemnify
other persons as set forth in the Delaware General Corporation Law, (iii) to
the fullest extent permitted by the Delaware General Corporation Law, the
Company is required to advance expenses, as incurred, to its directors and
officers in connection with a legal proceeding (subject to certain
exceptions), (iv) the rights conferred in the Bylaws are not exclusive and (v)
the Company is authorized to enter into indemnification agreements with its
directors, officers, employees and agents.
50
<PAGE>
The Company has entered into Indemnity Agreements with each of its current
directors and executive officers to give such directors and officers
additional contractual assurances regarding the scope of the indemnification
set forth in the Company's Bylaws and to provide additional procedural
protections. At present, there is no pending litigation or proceeding
involving a director, officer or employee of the Company regarding which
indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.
As permitted by the Delaware General Corporation Law, the Company's
Certificate of Incorporation includes a provision that eliminates the personal
liability of its directors for monetary damages for breach of fiduciary duty
as a director except for liability (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or that involve intentional misconduct or a knowing
violation of the law, (iii) under Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit.
51
<PAGE>
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS
Since the Company's inception in September 1990, the Company has issued, in
private placement transactions, the following shares of Preferred Stock,
excluding shares of Series E Preferred Stock issued in connection with the
Octopus Merger (as defined below) described below (such numbers, other than
the number of shares into which such shares are convertible, do not give
effect to the 1 for 2.5 reverse stock split effected in January 1997):
1,225,001 shares of Series A Preferred Stock at $1.50 per share in November
and December 1990 (convertible into 1,470,000 shares of Common Stock at an
effective purchase price of $1.25 per share); 923,077 shares of Series B
Preferred Stock at $1.95 per share in December 1991 (convertible into
1,107,690 shares of Common Stock at an effective purchase price of $1.62 per
share); 729,196 shares of Series C Preferred Stock at $2.40 per share in
October and December 1992 and November 1993 (convertible into 875,034 shares
of Common Stock at an effective price of $2.00 per share); and 757,713 shares
of Series D Preferred Stock at $2.40 per share in April and May 1995
(convertible into 909,255 shares of Common Stock at an effective purchase
price of $2.00 per share). The following table summarizes shares of Series A,
Series B, Series C and Series D Preferred Stock purchased by five percent
stockholders of the Company and entities affiliated with them. This table and
the other information with respect to Preferred Stock in "Certain
Transactions" do not give effect to the conversion of certain shares of Series
A, Series B, Series C and Series D Preferred Stock into Common Stock at the
election of the holders thereof on August 15, 1996.
<TABLE>
<CAPTION>
NUMBER OF SHARES(2)
-----------------------------------
INVESTOR (1) SERIES A SERIES B SERIES C SERIES D
- ------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Associated Venture Investors II............ 500,000 179,487 172,611 93,515
Technology Partners West Fund IV, L.P...... -- 435,898 153,246 67,427
Aspen Venture Partners, L.P................ 500,000 179,487 153,176 54,166
Entities affiliated with Hambrecht & Quist
LLC....................................... -- -- 113,632 520,832
</TABLE>
- ---------------------
(1) Shares held by affiliated persons and entities have been aggregated. See
"Principal and Selling Stockholders."
(2) Each share of Preferred Stock is convertible into 1.2 shares of Common
Stock after giving effect to the 1 for 2.5 reverse stock split of the
Common Stock effected in January 1997.
In August and October 1994, the Company (i) borrowed $608,527 and issued
short term promissory notes (the "Bridge Notes") that were converted into
shares of Series D Preferred Stock in April 1995 and (ii) sold warrants to
purchase an aggregate of 18,255 shares of Common Stock at an exercise price of
$2.00 per share (the "Bridge Warrants") to, among others, the following five
percent stockholders of the Company and entities affiliated with them:
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT BRIDGE
INVESTOR OF NOTES WARRANTS(1)
- -------- ---------------- -----------
<S> <C> <C>
Associated Venture Investors II.................... $224,438 6,733
Technology Partners West Fund IV L.P............... 161,826 4,854
Aspen Venture Partners, L.P. ...................... 130,000 3,900
Entities affiliated with Hambrecht & Quist LLC..... 40,000 1,200
</TABLE>
- ---------------------
(1) Gives effect to the 1 for 2.5 reverse stock split of the Common Stock
effected in January 1997.
52
<PAGE>
In April and May 1995 in connection with the sale and issuance of its Series
D Preferred Stock, (i) the Company sold to entities affiliated with Hambrecht
& Quist LLC warrants to purchase an aggregate of 160,325 shares of Common
Stock at an exercise price of $0.20 per share, and (ii) in exchange for the
Bridge Warrants, issued warrants to purchase an aggregate of 121,167 shares of
Common Stock at an exercise price of $2.00 per share, including warrants to
purchase shares of Common Stock issued to the following five percent
stockholders of the Company and entities affiliated with them:
<TABLE>
<CAPTION>
WARRANT
HOLDER SHARES (1)
- ------ ----------
<S> <C>
Associated Venture Investors II...................................... 44,736
Technology Partners West Fund IV L.P................................. 32,167
Aspen Venture Partners, L.P. ........................................ 27,101
Entities affiliated with Hambrecht & Quist LLC....................... 7,440
</TABLE>
- ---------------------
(1) Gives effect to the 1 for 2.5 reverse stock split of the Common Stock
effected in January 1997.
The exercise price of the warrants and the number of shares for which they
may be exercised are subject to adjustment in certain circumstances. Warrants
issued to entities affiliated with Hambrecht & Quist LLC to purchase 160,325
shares of Common Stock are exercisable until and including April 11, 2002, and
are deemed to be automatically exercised on a net issue basis upon the
Company's initial public offering. The other warrants are exercisable until
the earlier of: (i) August 26, 1998 or October 5, 1998 or (ii) the closing of
this offering. In connection with the purchase of Series D Preferred Stock,
the investors, including the investors listed above, were granted certain
demand, piggyback and S-3 registration rights with respect to Common Stock
issuable upon conversion of the Series D Preferred Stock. See "Description of
Capital Stock--Registration Rights."
MERGER WITH OCTOPUS TECHNOLOGIES, INC.
On August 28, 1996, the Company consummated a merger (the "Octopus Merger")
with Octopus Technologies, Inc. ("Octopus Technologies") pursuant to which
Octopus Technologies became a wholly-owned subsidiary of the Company. Pursuant
to the Octopus Merger, (i) former Octopus Technologies shareholders were
issued a total of 1,597,173 shares of Common Stock and 280,673 shares of
Series E Preferred Stock (including Escrowed Shares, as defined below); (ii)
Mr. Minter became a director of the Company and (iii) the Company assumed
Octopus Technologies stock options that remained outstanding as of the
effective date of the Octopus Merger, which were converted into options to
purchase an aggregate of 149,590 shares of Qualix Common Stock with an average
exercise price of $2.60 per share. The shares issued to former Octopus
Technologies shareholders include shares issued to the following directors and
five percent stockholders of the Company:
<TABLE>
<CAPTION>
SHARES OF SERIES E
DIRECTORS AND 5% STOCKHOLDERS SHARES OF COMMON STOCK(1) PREFERRED STOCK(1)(2)
- ----------------------------- ------------------------- ---------------------
<S> <C> <C>
Charles L. Minter.............. 207,838 46,779
Samuel D. and Mary S. Allen.... 561,165 --
Comstock One Limited Partner-
ship.......................... 415,678 181,502
</TABLE>
- ---------------------
(1) Includes Escrowed Shares
(2) Each share of Series E Preferred Stock is convertible into 1.2 shares of
Common Stock after giving effect to the 1 for 2.5 reverse stock split of
Common Stock effected in January 1997.
Pursuant to the Octopus Merger, 7.5% of the shares of Common Stock,
Preferred Stock and, if options assumed in the Octopus Merger are exercised
during the term of the escrow, shares of Common Stock issuable upon exercise
of such options (collectively, the "Escrowed Shares"), were deposited into
escrow with Qualix, as escrow agent, as security for certain damages, losses
or liabilities sustained by Qualix by reason of breaches of certain
representations or warranties made by Octopus Technologies in connection with
the
53
<PAGE>
Octopus Merger. The Escrowed Shares are to remain in escrow until the earlier
of (i) August 28, 1997, (ii) the closing of the Company's initial public
offering or (iii) the issuance of an audit report by the Company's auditors
covering any reporting period ending after the closing of the Octopus Merger,
unless earlier released to the Company pursuant to the escrow agreement. Mr.
Minter is the representative of the holders of Escrowed Shares for purposes of
the escrow agreement.
TRANSACTIONS WITH FOUNDERS
In September and November 1990 the Company sold shares of Common Stock at a
price of $0.00833 per share to, among others, Richard G. Thau (690,000 shares
at an aggregate price of $5,750) and Jean A. Kovacs (372,000 shares at an
aggregate price of $3,100).
In July 1996 Mr. Thau and Ms. Kovacs exercised options to purchase, and the
Company issued and sold, 32,580 shares of Common Stock to Mr. Thau at a price
of $.20 per share (an aggregate price of $6,516) and 17,686 shares of Common
Stock to Ms. Kovacs at a price of $.20 per share (an aggregate price of
$3,537). The purchase prices were paid by promissory notes issued by Mr. Thau
and Ms. Kovacs, respectively, in favor of the Company. Principal and accrued
interest on each note is due in five years from such note's issue date. The
notes bear interest at 6.74% per annum and each note is secured by a pledge of
the shares purchased with it.
Mr. Thau and Ms. Kovacs entered employment agreements with the Company dated
as of November 15, 1990. See "Management--Change of Control Arrangements."
OTHER TRANSACTIONS
For legal services rendered, the Company paid the law firms of Brobeck,
Phleger & Harrison LLP ("Brobeck") $862, $38,375 and $26,721 during fiscal
years 1996, 1995 and 1994, respectively, and Gunderson Dettmer Stough
Villeneuve Franklin & Hachigian LLP ("GDSVFH") $26,654 during fiscal year 1996
and $192,361 during the current fiscal year through December 31, 1996. Ms.
Kovacs's husband, Brooks Stough, was a partner at Brobeck during the relevant
periods and has been a partner at GDSVFH since September 1995. Such
transactions were on arms-length, market terms.
In May 1996 Mr. Felt exercised an option to purchase 48,000 shares of Common
Stock at a price of $0.20 per share (an aggregate price of $9,600) and a
warrant to purchase 40,000 shares of Series D Preferred Stock at a price of
$2.40 per share (an aggregate price of $96,000). (The Series D Preferred Stock
is convertible into 48,000 shares of Common Stock at an effective purchase
price of $2.00 per share.) In each case, the purchase price was paid by a
promissory note made by Mr. Felt in favor of the Company. Principal and
accrued interest on such notes are due in 10 years from the notes' issue
dates. The notes bear interest at the rate of 6.83% per annum and each note is
secured by a pledge of the shares purchased with it.
Mr. Felt has entered into an employment agreement with the Company. See
"Management--Change of Control Arrangements."
54
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership as of December 1, 1996, and as adjusted to reflect the sale of the
Common Stock offered hereby, of the Common Stock by (i) each person known by
the Company to own beneficially more than five percent of the Company's Common
Stock, (ii) each director of the Company, (iii) each Named Executive Officer,
(iv) all executive officers and directors as a group and (v) each Selling
Stockholder, none of whom is an employee of the Company.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING (1)(2) SHARES OFFERING (1)(2)(3)
---------------------- BEING ----------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
----------- ----------------- ----------- ----------
NAME OF BENEFICIAL OWNER
- ------------------------
<S> <C> <C> <C> <C> <C>
Associated Venture
Investors, II (4)......... 1,179,472 14.61% 127,913 1,051,559 10.44%
One First Street No. 12
Los Altos, CA 94022
Aspen Venture Partners,
L.P. (5).................. 1,090,864 13.52 0 1,090,864 10.83
1000 Fremont Avenue, Suite
V
Los Altos, CA 94024
Entitites affiliated with
Hambrecht & Quist LLC (6). 929,122 11.51 0 929,122 9.23
One Bush Street
San Francisco, CA 94104
Comstock One Limited
Partnership (7)........... 897,454 11.11 403,456 493,998 4.90
10 Exchange Place, Suite
2010
Jersey City, New Jersey
07302-3913
Technology Partners West
Fund IV (8)............... 820,053 10.16 45,104 774,949 7.69
1550 Tiburon Blvd., Suite
A
Belvedere, CA 94920
Richard G. Thau (9)........ 709,999 8.70 0 709,999 6.99
Samuel D. and Mary S.
Allen..................... 561,165 6.95 94,125 467,040 4.64
741 Conestoga Road
Rosemont, PA 19020
Jean A. Kovacs (10)........ 449,999 5.53 0 449,999 4.44
1900 S. Norfolk Street,
Suite 224
San Mateo, CA 94403
Bruce C. Felt (11)......... 132,000 1.63 0 132,000 1.31
Arlington C. Glaze (12).... 98,623 1.22 0 98,623 *
George J. Symons (13)...... 60,381 * 0 60,381 *
Peter L. Wolken (14)....... 1,181,872 14.63 127,913 1,053,959 10.46
Samuel D. Kingsland (15)... 931,522 11.53 0 931,522 9.25
Charles L. Minter (16)..... 899,854 11.14 403,456 496,398 4.93
William Hart (17).......... 822,453 10.18 45,104 777,349 7.72
William D. Jobe (18)....... 44,000 * 0 44,000 *
All directors and officers
as a group (10 persons)
(19)...................... 5,330,703 63.72 576,473 4,754,230 45.86
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE OWNED AFTER THE
OFFERING (1)(2) SHARES OFFERING (1)(2)(3)
---------------------- BEING ----------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
----------- ---------- ------- ----------- ----------
OTHER SELLING
STOCKHOLDERS
- -------------
<S> <C> <C> <C> <C> <C>
Quest Ventures II (20)... 398,908 4.94 20,000 378,908 3.76
Stanley Salvigsen........ 125,414 1.55 74,115 51,299 *
Robert P. Tomasulo (21).. 85,051 * 42,000 43,051 *
Robert and S. Ann Morley. 74,475 * 3,724 70,751 *
Anthony Trepel........... 62,500 * 62,500 0 *
Winston Lee(22).......... 104,662 1.29 9,262 95,400 *
Douglas C. Shaker........ 39,003 * 38,800 203 *
Wayne Fluri.............. 14,618 * 14,618 0 *
Robert Gottfried......... 14,618 * 14,618 0 *
Edward Buchanan.......... 13,649 * 13,649 0 *
John Hime................ 12,000 * 12,000 0 *
Eugene McCabe (23)....... 11,641 * 11,470 171 *
Mark DeFranco............ 4,490 * 4,490 0 *
Troy Hottenstein......... 9,172 * 4,000 5,172 *
William Whitman.......... 1,731 * 1,731 0 *
John A. Edson (24)....... 1,037 * 867 170 *
Sheila Lee Trombadore.... 1,020 * 1,020 0 *
David Bernard............ 3,102 * 400 2,702 *
Brian McCabe............. 69 * 69 0 *
Nicole Riter............. 69 * 69 0 *
</TABLE>
- ---------------------
* Represents less than 1%.
(1) Except as indicated in the footnotes to this table and pursuant to
applicable community property laws, the persons named in the table have
sole voting and investment power with respect to all shares of Common
Stock.
(2) Percentage of beneficial ownership is calculated assuming 8,071,768
shares of Common Stock were outstanding on December 31, 1996. This
percentage also includes Common Stock of which such individual or entity
has the right to acquire beneficial ownership within sixty days of
December 31, 1996, including but not limited to the exercise of options
and warrants; however, such Common Stock shall not be deemed outstanding
for the purpose of computing the percentage owned by any other individual
or entity. Such calculation is required by General Rule 13d-3(1)(i) under
the Securities Exchange Act of 1934. The number of shares outstanding
after this offering includes the 2,000,000 shares of Common Stock being
offered for sale by the Company in this offering.
(3) Assumes no exercise of the Underwriter's over-allotment option. See
"Underwriting." If the underwriters exercise the over-allotment options,
the Company and certain Selling Stockholders will sell up to an aggregate
additional 450,000 shares in this offering.
(4) Mr. Wolken, a director of the Company, is a general partner of AVI
Management Partners II, the general partner of Associated Venture
Investors II, L.P. AVI Management Partners II exercises voting and
investment power with respect to the shares of Common Stock held by
Associated Venture Investors II, L.P. Mr. Wolken disclaims beneficial
ownership of all shares of Common Stock held by Associated Venture
Investors II, L.P., except to the extent of his pecuniary interest
therein. Excludes an option to purchase 2,400 shares of Common Stock
granted to Mr. Wolken on October 31, 1996 under the 1995 Plan.
(5) Includes warrants to purchase 27,101 shares of Common Stock. The general
partners of Aspen Venture Partners, L.P. are Alexander P. Cilento, E.
David Crockett, Michael J.F. Ducros, Allen R. Ferguson,
56
<PAGE>
Michael A. Henos and Nicholas A. Papantonis. Each general partner
disclaims beneficial ownership of the shares of Common Stock held by Aspen
Venture Partners, L.P., except to the extent of such general partner's
pecuniary interest therein. The sole limited partner is 3i PLC.
(6) Includes 499,999 shares of Common Stock and warrants to purchase 132,500
shares of Common Stock held by H&Q London Ventures ("H&Q London") and
261,357 shares of Common Stock and warrants to purchase 35,265 shares of
Common Stock held by H&Q Qualix Investors, L.P. ("H&Q Qualix"). Mr.
Kingsland, a director of the Company, is a Principal of H&Q Venture
Capital, an entity affiliated with Hambrecht & Quist LLC. Mr. Kingsland
disclaims beneficial ownership of the shares held by H&Q London and
H&Q Qualix, except to the extent of his pecuniary interests therein.
Excludes an option to purchase 2,400 shares of Common Stock granted to
Mr. Kingsland on October 31, 1996 under the 1995 Plan.
(7) Includes 263,974 shares owned by Mr. Minter, a director of the Company,
who is the Chairman of the Board and President of Comstock Partners,
Inc., the general partner of Comstock One Limited Partners ("Comstock").
Mr. Minter disclaims beneficial ownership of all shares of Common Stock
held by Comstock, except to the extent of his pecuniary interest therein.
Excludes an option to purchase 2,400 shares of Common Stock granted to
Mr. Minter on October 31, 1996 under the 1995 Plan. Shares being offered
consist of 325,552 shares offered by Comstock and 77,904 shares offered
by Mr. Minter.
(8) Includes warrants to purchase 32,167 shares of Common Stock. Mr. Hart, a
director of the Company, is a general partner of the general partner of
Technology Partners West Fund IV, L.P. and as such exercises voting and
investment power with respect to the shares of Common Stock held by
Technology Partners West Fund IV, L.P. Mr. Hart disclaims beneficial
ownership of all shares of Common Stock held by Technology Partners West
Fund IV, L.P., except to the extent of his beneficial interest therein.
Excludes an option to purchase 2,400 shares of Common Stock granted to
Mr. Hart on October 31, 1996 under the 1995 Plan.
(9) Mr. Thau is Chairman of the Board, President and Chief Executive Officer
of the Company. Includes options to purchase 87,419 shares of Common
Stock.
(10) Ms. Kovacs is Executive Vice President and Secretary of the Company.
Includes options to purchase 60,313 and 36,000 shares of Common Stock
held by a trust of which Ms. Kovacs is trustee.
(11) Mr. Felt is Vice President, Finance and Chief Financial Officer of the
Company. Includes options to purchase 36,000 shares of Common Stock.
(12) Mr. Glaze is Vice President, Sales of the Company. Includes option to
purchase 64,623 shares of Common Stock.
(13) Mr. Symons is Vice President, Engineering/Technical Services of the
Company. Includes options to purchase 32,382 shares of Common Stock.
(14) Includes 1,179,472 shares beneficially owned by Associated Venture
Investors, II. See note (4). Includes options to purchase 2,400 shares of
Common Stock. Shares being offered consist of 127,913 shares offered by
Associated Venture Investors, II.
(15) Includes 929,122 shares beneficially owned by entities affiliated with
Hambrecht & Quist LLC. See note (6). Includes options to purchase 2,400
shares of Common Stock.
(16) Includes 633,480 shares beneficially owned by Comstock One Limited
Partnership. See note (7). Includes options to purchase 2,400 shares of
Common Stock. Shares being offered consist of 325,552 shares offered by
Comstock and 77,904 shares offered by Mr. Minter.
(17) Includes 820,053 shares beneficially owned by Technology Partners West
Fund IV. See note (8). Includes options to purchase 2,400 shares of
Common Stock. Shares being offered consist of 45,104 shares offered by
Technology Partners West Fund IV.
(18) Mr. Jobe is a director of the Company. Includes options to purchase 4,000
shares of Common Stock.
(19) Includes warrants to purchase 199,932 shares of Common Stock and options
to purchase 294,337 shares of Common Stock.
57
<PAGE>
(20) Includes 234,189 shares of Common Stock and warrants to purchase 2,762
shares of Common Stock held by Quest Ventures II and 160,069 shares of
Common Stock and warrants to purchase 1,888 shares of Common Stock held
by Quest Ventures International.
(21) Includes options to purchase 1,154 shares of Common Stock.
(22) Includes 27,711 shares beneficially owned by Millstone Valley Consulting
Money Pension Plan and 24,247 shares beneficially owned by Millstone
Valley Consulting Profit Sharing Plan. Mr. Lee is the Trustee of both the
Millstone Valley Consulting Profit Sharing and Money Pension Plans.
Shares being offered consists of 4,704 shares offered by Mr. Lee, 2,511
shares offered by Millstone Valley Consulting Money Pension Plan, and
2,047 shares offered by Millstone Valley Consulting Profit Sharing Plan.
(23) Includes options to purchase 171 shares of Common Stock.
(24) Includes options to purchase 171 shares of Common Stock.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, $.001 par value, and 5,000,000 shares of Preferred Stock, $.001
par value, after giving effect to the amendment and restatement of the
Company's Amended and Restated Certificate of Incorporation upon the closing
of this offering to (i) delete references to Series A, Series B, Series C,
Series D and Series E Preferred Stock following conversion of such Preferred
Stock into Common Stock and (ii) authorize shares of undesignated Preferred
Stock, as described below.
COMMON STOCK
As of December 31, 1996, there were 8,071,768 shares of Common Stock
outstanding that were held of record by approximately 75 stockholders assuming
(i) no exercise after December 31, 1996 of outstanding stock options, (ii) a 1
for 2.5 reverse stock split of the Common Stock effected in January 1997,
(iii) the conversion of all outstanding shares of Preferred Stock into Common
Stock upon the closing of this offering and (iv) the assumed exercise of
warrants to purchase 231,988 shares of Common Stock on a cash basis at the
closing of this offering. There will be 10,071,768 shares of Common Stock
outstanding (assuming no exercise of the Underwriters' over-allotment option)
after giving effect to the sale of the shares of Common Stock to the public
offered hereby.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. 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
therefor. See "Dividend Policy." In the event of the liquidation, dissolution
or winding up of the Company, the holders of Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights 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 completion of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
The Company's Amended and Restated Certificate of Incorporation will be
amended and restated upon the closing of this Offering to authorize 5,000,000
shares of Preferred Stock. The Board of Directors has the authority to issue
the Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions thereof, including dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any
series or the designation of such series, without further vote or action by
the stockholders. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company without
further action by the stockholders and may adversely affect the voting and
other rights of the holders of Common Stock. The issuance of Preferred Stock
with voting and conversion rights may adversely affect the voting power of the
holders of Common Stock, including the loss of voting control to others. At
present, the Company has no plans to issue any of the Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
DELAWARE LAW
Certificate of Incorporation. Under the Company's Amended and Restated
Certificate of Incorporation as amended and restated upon the closing of this
offering, the Board of Directors will have the power to authorize the issuance
of up to 5,000,000 shares of Preferred Stock and to determine the price,
rights, preferences, privileges and restrictions, including voting rights, of
those shares without further vote or action by the stockholders. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, may have the effect of
delaying, deferring or preventing a
59
<PAGE>
change in control of the Company, may discourage bids for the Common Stock at
a premium over the market price of the Common stock and may adversely affect
the market price of and the voting and other rights of the holders of the
Common Stock. In addition, the Amended and Restated Certificate of
Incorporation provides that, effective upon the closing of this offering, all
stockholder actions must be effected at a duly called meeting and not by a
consent in writing. These provisions of the Amended and Restated Certificate
of Incorporation could discourage potential acquisition proposals and could
delay or prevent a change in control of the Company. These provisions are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and in the policies formulated by the
Board of Directors and to discourage certain types of transactions that may
involve an actual or threatened change of control of the Company. These
provisions are designed to reduce the vulnerability of the Company to an
unsolicited acquisition proposal and to discourage certain tactics that may be
used in proxy fights. Such provisions, however, could have the effect of
discouraging others from making tender offers for the Company's shares and, as
a consequence, they also may inhibit fluctuations in the market price of the
Company's shares that could result from actual or rumored takeover attempts.
Such provisions also may have the effect of preventing changes in the
management of the Company. See "Risk Factors--Effect of Certain Charter
Provisions; Antitakeover Effects of Certificate of Incorporation, Bylaws and
Delaware Law."
Delaware Takeover Statute. The Company is subject to Section 203 of the
Delaware General Corporation Law ("Section 203"), which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in any business
combination with any interested stockholder for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction that resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction that resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding those
shares owned (x) by persons who are directors and also officers and (y) by
employee stock plans in which employee participants do not have the right to
determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or (iii) on or subsequent to such
date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.
Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii)
any sale, transfer, pledge or other disposition of 10% or more of the assets
of the corporation involving the interested stockholder; (iii) subject to
certain exceptions, any transaction that results in the issuance or transfer
by the corporation of any stock of the corporation to the interested
stockholder; (iv) any transaction involving the corporation that has the
effect of increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested stockholder; or
(v) the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation. In general, Section 203 defines an interested
stockholder as any entity or person beneficially owning 15% or more of the
outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.
REGISTRATION RIGHTS
Pursuant to an agreement between the Company and the holders (or their
permitted transferees) ("Holders") of approximately 4,422,455 shares of Common
Stock, the Holders are entitled to certain rights with respect to the
registration of such shares under the Securities Act of 1933, as amended (the
"Securities Act"). If the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of
other security holders, the Holders are entitled to notice of the registration
and are entitled to include, at the Company's expense, such shares therein,
provided, among other conditions, that the underwriters have the right to
limit the number of such shares included in the registration. In addition,
certain of the Holders may require the Company at its expense on not more than
two occasions, to file a
60
<PAGE>
registration statement under the Securities Act with respect to their shares
of Common Stock, and the Company is required to use its best efforts to effect
the registration, subject to certain conditions and limitations. Further,
certain of the Holders may require the Company at its expense to register
their shares on Form S-3 when such form becomes available to the Company,
subject to certain conditions and limitations.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Chase Mellon
Shareholder Services.
61
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 10,071,768 shares of
Common Stock outstanding. See "Description of Capital Stock." Of these shares,
the 3,000,000 shares sold in this offering will be freely tradeable without
restriction or further registration under the Securities Act, except that any
shares purchased by "affiliates" of the Company, as that term is defined under
the Securities Act ("Affiliates"), may generally only be sold in compliance
with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 7,071,768 shares of Common Stock are deemed "Restricted
Shares" under Rule 144. Beginning after the 180-day period following the
effective date of the registration statement filed in connection with this
offering specified in preexisting agreements or in lock-up agreements with the
Representatives of the Underwriters, approximately 6,714,280 shares will be
eligible for sale in reliance upon Rule 144 or Rule 701 promulgated under the
Securities Act, some of which will be subject to the volume and other resale
limitations of Rule 144, other than the two year holding period.
In general, under Rule 144 of the Securities Act as currently in effect,
beginning 90 days after this offering, a person (or persons whose shares are
aggregated) who has beneficially owned "restricted" shares for at least two
years, including a person who may be deemed an Affiliate of the Company, is
entitled to sell within any three month period a number of shares that does
not exceed the greater of (i) 1% of the then outstanding shares of the
Company's Common Stock or (ii) the average weekly trading volume of the
Company's Common Stock in the over the counter market during the four calendar
weeks preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales under Rule 144 are also subject to
certain manner of sales provisions, notice requirements and the availability
of current public information about the Company. Any person (or persons whose
shares are aggregated) which is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who owns shares
within the definition of "restricted securities" under Rule 144 that were
purchased from the Company (or any Affiliate) at least three years previously,
will be entitled to sell such shares under Rule 144(k) without regard to the
volume limitations, manner of sale provision, public information requirements
or notice requirements. However, the transfer agent may require an opinion of
counsel that a proposed sale of shares comes within the terms of Rule 144 of
the Securities Act prior to effecting a transfer of such shares. Rule 701
under the Securities Act provides that shares of Common Stock acquired on the
exercise of outstanding options may be resold by persons other than
Affiliates, beginning 90 days after the date of this Prospectus, subject only
to the manner of sale provisions of Rule 144, and by Affiliates, beginning 90
days after the date of this Prospectus, subject to all provisions of Rule 144
except its two-year minimum holding period.
Prior to this offering, there has been no public market for the Common Stock
of the Company and no predictions can be made of the effect, if any, that the
sale or availability for sale of shares of additional Common Stock will have
on the market price of the Common Stock. Nevertheless, sales of substantial
amounts of such shares in the public market, or the perception that such sales
could occur, could adversely affect the market price of the Common Stock and
could impair the Company's future ability to raise capital through an offering
of its equity securities.
OPTIONS AND WARRANTS
On December 31, 1996, options to purchase a total of 886,855 shares of
Common Stock were outstanding and options to purchase 384,154 shares of Common
Stock were available for future grant (including 200,000 shares authorized
under the 1997 Plan). See "Management--1997 Stock Option Plan." All of the
shares subject to options are subject to lock-up agreements. See "--Lock-up
Agreements." In addition, the Company has reserved 350,000 shares for issuance
under the Purchase Plan. See "Management--1997 Stock Option Plan,"
"Management--Employee Stock Purchase Plan," "--Lock-up Agreements" and Note 8
of Notes to Consolidated Financial Statements.
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<PAGE>
The Company intends to file a registration statement on Form S-8 under the
Securities Act covering approximately 1,271,009 shares of Common Stock,
subject to outstanding stock options or reserved for issuance pursuant to the
Company's 1997 Plan and 350,000 shares of Common Stock issuable pursuant to
the Purchase Plan. Such registration statement on Form S-8 is expected to be
filed simultaneously with the effectiveness of the registration statement
covering the shares of Common Stock offered in this offering and will
automatically become effective upon filing. Accordingly, shares covered by
such registration statement will thereupon be eligible for sale in the public
markets, subject to the lapse of any repurchase rights the Company may have
with respect to such shares and to the Lock-up Agreements, if applicable.
On December 31, 1996, warrants to purchase 231,988 shares of Common Stock
were outstanding. The warrants terminate on the closing of this offering
unless exercised on or prior to such time. See "Certain Transactions--Private
Placement Transactions."
LOCK-UP AGREEMENTS
All officers and directors and certain holders of Common Stock and options
to purchase Common Stock have agreed pursuant to certain lock-up agreements
that they will not offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible or
exercisable or exchangeable for Common Stock, or enter into any swap or
similar agreement that transfers, in whole or in part, the economic risk of
ownership of the Common Stock for a period 180 days after the effective date
of this Registration Statement without the prior written consent of Hambrecht
& Quist LLC. All other holders of Common stock and options and warrants to
purchase common Stock have agreed pursuant to existing agreements with the
Company not to sell or otherwise transfer or dispose of any Common Stock for a
period of 180 days after the effective date of this offering.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Hambrecht & Quist LLC and Smith Barney Inc. have severally agreed to purchase
from the Company and the Selling Stockholders the following respective numbers
of shares of Common Stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this Prospectus.
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC.............................
Smith Barney Inc. ................................
---------
Total........................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters will
purchase all shares of the common Stock offered hereby if any of such shares
are purchased.
The Company has been advised by the Representatives of the Underwriters that
the Underwriters propose to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per share. The underwriters may allow, and such dealers may
re-allow a concession not in excess of $ per share to certain other
dealers. After the initial public offering, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
The Company and certain of the Selling Stockholders have granted to the
Underwriters an option, exercisable not later than 30 days after the date of
this Prospectus, to purchase up to 450,000 additional shares of Common Stock
at the public offering prices less the underwriting discounts and commissions
set forth on the cover page of this Prospectus. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof that the
number of shares of Common Stock to be purchased by it shown in the above
table bears to 3,000,000 and the Company will be obligated, pursuant to the
option, to sell such shares to the Underwriters. The Underwriters may exercise
such option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 3,000,000 shares are
being offered.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
In addition, the Company and certain stockholders of the Company have agreed
not to offer, sell or otherwise dispose of any shares of Common Stock for a
period of 180 days after the effective date of this offering without the prior
written consent of Hambrecht & Quist LLC except that the Company may issue,
and grant options to purchase, shares of Common Stock under its current stock
option and purchase plans and other currently outstanding options. In
addition, the Company may issue shares of Common Stock in connection with
corporate acquisitions. See "Shares Eligible for Future Sale."
64
<PAGE>
The Representative of the Underwriters have advised the Company and the
Selling Stockholders that the Underwriters will not confirm sales to any
account over which they exercise discretionary authority.
Prior to this offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price for the Common
Stock will be determined by negotiations between the Company, the Selling
Stockholders and the Representatives of the Underwriters. Among the factors to
be considered in such negotiations will be prevailing market conditions, the
results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies that the Company
and their Representatives of the Underwriters believe to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant.
Various investment entities affiliated with Hambrecht & Quist LLC, one of
the Representatives of the Underwriters, purchased from the Company (i) 45,452
shares of Series C Preferred Stock in December 1992, (ii) 208,332 shares of
Series D Preferred Stock in April and May 1995 and (iii) warrants exercisable
for 167,765 shares of Common Stock in April and May 1995. Samuel D. Kingsland
is a member of the Company's Board of Directors and is a Principal of H&Q
Venture Capital. See "Management." Pursuant to Section (b)(1) of Rule 2720 of
the Conduct Rules of the National Association of Securities Dealers, Inc.
("Rule 2720"), Hambrecht & Quist LLC may be deemed an "affiliate" of the
Company or pursuant to Section (b)(7) of Rule 2720 may have a "conflict of
interest" as such terms are defined in Rule 2720. The offering of Common Stock
hereby will be conducted in accordance with applicable provisions of Rule 2720
and consequently the offering price can be no higher than that recommended by
a "qualified independent underwriter" meeting certain standards. In accordance
with this requirement, Smith Barney Inc., which will serve in such role, is
conducting due diligence and will recommend a maximum offering price in
compliance with the requirements of Rule 2720.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian LLP, Menlo
Park, California. A spouse of a member of Gunderson Dettmer Stough Villeneuve
Franklin & Hachigian LLP is an officer and director of the Company and
beneficially owns 449,999 shares of the Company's Common Stock. Certain legal
matters in connection with the offering will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements as of June 30, 1995 and 1996 and for
each of the three years in the period ended June 30, 1996 included in this
Prospectus and the related financial statement schedule included elsewhere in
the Registration Statement have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein and
elsewhere in the Registration Statement, and are included in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
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<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the Registration
Statement. For further information with respect to the Company and such Common
Stock offered hereby, reference is made to the Registration Statement and the
exhibits and schedules filed as a part of the Registration Statement.
Statements contained in this Prospectus concerning the contents of any
contract or any other document referred to are not necessarily complete;
reference is made in each instance to the copy of such contract or document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in all respects by such reference to such exhibit. The Registration
Statement, including exhibits and schedules thereto, may be inspected without
charge at the Securities and Exchange Commission's principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from
such office after payment of fees prescribed by the Securities and Exchange
Commission. Prior to the effective date of this offering, the Company was not
a reporting company under the Securities Exchange Act of 1934, as amended. The
Company intends to furnish to its stockholders annual reports containing
audited consolidated financial statements examined by an independent
accounting firm and quarterly reports for the first three quarters of each
fiscal year containing interim unaudited consolidated financial information.
66
<PAGE>
QUALIX GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996 and December 31,
1996 (Unaudited)........................................................ F-3
Consolidated Statements of Operations for the Years Ended June 30, 1994,
1995 and 1996 and the Six Months Ended December 31, 1995 and 1996
(Unaudited)............................................................. F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June
30, 1994, 1995 and 1996 and the Six Months Ended December 31, 1996
(Unaudited)............................................................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 30, 1994,
1995 and 1996 and the Six Months Ended December 31, 1995 and 1996
(Unaudited)............................................................. F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Qualix Group, Inc.:
We have audited the accompanying consolidated balance sheets of Qualix Group,
Inc. and subsidiary (the Company) as of June 30, 1995 and 1996, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1996. 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 generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Qualix Group, Inc. and subsidiary
as of June 30, 1995 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended June 30, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
San Jose, California
August 13, 1996
(January 14, 1997 as to Note 10)
F-2
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, PRO FORMA
---------------- DECEMBER 31, DECEMBER 31,
1995 1996 1996 1996
------- ------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(NOTE 1)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash............................. $ 1,611 $ 3,102 $ 3,084 $ 3,259
Investment available for sale.... 1,018 485 860 860
Accounts receivable, less allow-
ance for doubtful accounts ($87
in 1995, $256 at June 1996 and
$206 at December 1996).......... 1,505 2,805 4,257 4,257
Inventories...................... 103 108 149 149
Prepaid expenses................. 69 60 464 464
------- ------- ------- -------
Total current assets........... 4,306 6,560 8,814 8,989
Property and equipment, net........ 147 343 766 766
Other assets....................... 2 -- -- --
------- ------- ------- -------
Total assets................... $ 4,455 $ 6,903 $ 9,580 $ 9,755
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable................. $ 747 $ 997 $ 1,512 $ 1,512
Accrued liabilities.............. 644 1,415 2,120 2,120
Deferred revenue and advances.... 352 1,087 1,441 1,441
Current portion of long-term ob-
ligations....................... 80 268 174 174
------- ------- ------- -------
Total current liabilities...... 1,823 3,767 5,247 5,247
------- ------- ------- -------
Long-term obligations (Note 7)..... 153 290 303 303
Commitments and contingencies (Note
7 and 10)
Stockholders' Equity:
Convertible preferred stock--par
value $0.001 (aggregate
liquidation preference of
$8,107); 5,000,000 shares
authorized; shares outstanding:
1995: 3,915,660; June 1996:
3,978,993; December 1996:
2,322,192; no shares outstanding
on a pro forma basis............ 7,879 8,031 4,790 --
Common stock--par value $0.001;
20,000,000 shares authorized;
shares outstanding: 1995:
2,324,324;
June 1996: 2,943,502; December
1996: 5,053,170 and 8,071,768 on
a pro forma basis............... 1,396 1,747 5,096 10,061
Notes receivable from sale of
stock........................... (8) (169) (179) (179)
Net unrealized gain on invest-
ment............................ 1,018 485 860 860
Accumulated deficit.............. (7,806) (7,248) (6,537) (6,537)
------- ------- ------- -------
Total stockholders' equity..... 2,479 2,846 4,030 4,205
------- ------- ------- -------
Total liabilities and
stockholders' equity.......... $ 4,455 $ 6,903 $ 9,580 $ 9,755
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------ --------------
1994 1995 1996 1995 1996
------- ------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Reliability software................ $ 536 $ 3,573 $8,965 $3,434 $7,858
Other products...................... 4,868 4,723 5,360 2,331 4,948
Support, maintenance and consulting. 649 1,107 2,210 916 2,243
------- ------- ------ ------ ------
Total revenue...................... 6,053 9,403 16,535 6,681 15,049
------- ------- ------ ------ ------
Cost of revenue:
Cost of reliability software........ 291 1,619 3,640 1,383 2,456
Cost of other products.............. 3,396 3,332 3,781 1,666 3,441
Cost of support, maintenance and
consulting......................... 475 610 1,021 476 833
------- ------- ------ ------ ------
Total cost of revenue.............. 4,162 5,561 8,442 3,525 6,730
------- ------- ------ ------ ------
Gross profit....................... 1,891 3,842 8,093 3,156 8,319
Operating expenses:
Sales and marketing................. 2,490 3,463 5,101 2,135 4,801
General and administrative.......... 1,528 1,239 1,920 815 1,264
Research and development............ 419 257 620 183 978
Purchased in-process technology..... -- -- 740 -- --
Merger expenses..................... -- -- -- -- 595
------- ------- ------ ------ ------
Total operating expenses........... 4,437 4,959 8,381 3,133 7,638
------- ------- ------ ------ ------
Income (loss) from operations........ (2,546) (1,117) (288) 23 681
Other income (expense):
Gain on sale of stock............... -- -- 763 763 --
Interest income..................... 16 20 88 32 49
Interest expense.................... (32) (83) (5) (1) (18)
------- ------- ------ ------ ------
Total other income (expense)....... (16) (63) 846 794 31
------- ------- ------ ------ ------
Income (loss) before income taxes.... (2,562) (1,180) 558 817 712
Provision for income taxes........... -- -- -- -- 1
------- ------- ------ ------ ------
Net income (loss).................. $(2,562) $(1,180) $ 558 $ 817 $ 711
======= ======= ====== ====== ======
Pro forma net income per share....... $ .07 $ .10 $ .08
====== ====== ======
Shares used in computing pro forma
net income per share................ 8,177 8,101 8,370
====== ====== ======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES NET
PREFERRED STOCK COMMON STOCK RECEIVABLE UNREALIZED
------------------- ----------------- FROM SALE GAIN ON ACCUMULATED
SHARES AMOUNT SHARES AMOUNT OF STOCK INVESTMENT DEFICIT TOTAL
---------- ------- --------- ------ ---------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, July 1, 1993.. 2,668,940 $ 4,843 1,217,436 $ 178 $ (7) $ -- $(4,064) $ 950
Issuance of Series C
preferred stock....... 208,334 500 -- -- -- -- -- 500
Issuance of Series E
preferred stock, net
of issuance costs of
$7.................... 280,673 743 -- -- -- -- -- 743
Issuance of common
stock................. -- -- 38,097 350 -- -- -- 350
Exercise of stock
options............... -- -- 4,113 120 -- -- -- 120
Issuance of common
stock for services
rendered.............. -- -- 260 -- -- -- -- --
Repurchase of common
stock................. -- -- (8,996) (1) 1 -- -- --
Net loss............... -- -- -- -- -- -- (2,562) (2,562)
---------- ------- --------- ------ ----- ------ ------- -------
Balances, June 30, 1994. 3,157,947 6,086 1,250,910 647 (6) -- (6,626) 101
Issuance of Series D
preferred stock, net
of issuance costs of
$16................... 504,160 1,193 -- -- -- -- -- 1,193
Conversion of
promissory notes for
Series D preferred
stock, net of issuance
costs of $8........... 253,553 600 -- -- -- -- -- 600
Issuance of common
stock, net of issuance
costs of $21.......... -- -- 1,042,659 731 -- -- -- 731
Exercise of stock
options............... -- -- 6,972 1 -- -- -- 1
Issuance of common
stock for services
rendered.............. -- -- 23,783 17 -- -- -- 17
Accrued interest....... -- -- -- -- (2) -- -- (2)
Net unrealized gain on
investment............ -- -- -- -- -- 1,018 -- 1,018
Net loss............... -- -- -- -- -- -- (1,180) (1,180)
---------- ------- --------- ------ ----- ------ ------- -------
Balances, June 30, 1995. 3,915,660 7,879 2,324,324 1,396 (8) 1,018 (7,806) 2,479
Exercise of Series C
preferred stock
options............... 23,333 56 -- -- (56) -- -- --
Exercise of Series D
preferred stock
options............... 40,000 96 -- -- (96) -- -- --
Conversion of short-
term notes for common
stock, net of issuance
costs of $11.......... -- -- 457,246 319 -- -- -- 319
Exercise of stock
options............... -- -- 99,172 20 (9) -- -- 11
Issuance of common
stock for services
rendered.............. -- -- 62,760 12 -- -- -- 12
Net unrealized gain on
investment............ -- -- -- -- -- (533) -- (533)
Net income............. -- -- -- -- -- -- 558 558
---------- ------- --------- ------ ----- ------ ------- -------
Balances, June 30, 1996. 3,978,993 8,031 2,943,502 1,747 (169) 485 (7,248) 2,846
Conversion of preferred
stock*................ (1,656,801) (3,241) 1,988,161 3,241 -- -- -- --
Exercise of stock
options*.............. -- -- 72,004 13 (10) -- -- 3
Exercise of stock
warrants*............. 49,503 95 -- -- -- 95
Net unrealized gain on
investment*........... -- -- -- -- -- 375 -- 375
Net income*............ -- -- -- -- -- -- 711 711
---------- ------- --------- ------ ----- ------ ------- -------
Balances, December 31,
1996*.................. 2,322,192 $ 4,790 5,053,170 $5,096 $(179) $ 860 $(6,537) $ 4,030
========== ======= ========= ====== ===== ====== ======= =======
</TABLE>
- -------------------
* Unaudited
See notes to consolidated financial statements.
F-5
<PAGE>
QUALIX GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30, DECEMBER 31,
------------------------- ------------------
1994 1995 1996 1995 1996
------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss).............. $(2,562) $(1,180) $ 558 $ 817 $ 711
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization. 116 125 85 77 85
Amortization of software
development costs............ 11 16 2 5 --
Interest income on notes
receivable from sale of
stock........................ -- (1) -- -- --
Gain on sale of investments... -- -- (763) (763) --
Purchased in-process
technology................... -- -- 740 -- --
Changes in:
Accounts receivable.......... (288) (469) (1,300) (723) (1,452)
Inventories.................. 53 120 (5) 38 (41)
Prepaid expenses............. 43 (2) (14) 30 (404)
Accounts payable............. (9) 110 250 (9) 515
Accrued liabilities.......... 219 255 572 173 705
Deferred revenue and
advances.................... 126 140 735 90 354
Liability under employment
termination agreement....... 240 (17) (72) (45) (98)
------- ------- ------- -------- --------
Net cash provided by (used
in) operating activities... (2,051) (903) 788 (310) 375
------- ------- ------- -------- --------
Cash flows from investing
activities:
Purchases of property and
equipment, net................ (99) (86) (267) (148) (508)
Sale (purchase) of investment.. -- -- 847 847 --
Business acquisition........... -- -- (617) -- --
Other assets, net.............. 1 (12) -- -- --
------- ------- ------- -------- --------
Net cash provided by (used
in) investing activities... (98) (98) (37) 699 (508)
------- ------- ------- -------- --------
Cash flows from financing
activities:
(Repayments) borrowings on bank
line of credit, net........... 150 (200) -- -- --
Issuance of convertible
promissory notes.............. -- 609 315 -- --
Repayments of capital lease
obligations, net.............. (54) (62) (7) (4) (1)
Issuance of long-term
obligations................... -- -- 405 -- 18
Proceeds from issuance of
preferred and common stock,
net........................... 1,713 1,934 27 312 98
------- ------- ------- -------- --------
Net cash provided by financ-
ing activities............. 1,809 2,281 740 308 115
------- ------- ------- -------- --------
Net increase (decrease) in cash. (340) 1,280 1,491 697 (18)
Cash, beginning of year......... 671 331 1,611 1,611 3,102
------- ------- ------- -------- --------
Cash, end of year............... $ 331 $ 1,611 $ 3,102 $ 2,308 $ 3,084
======= ======= ======= ======== ========
Noncash investing and financing
activities:
Net unrealized gain on
investment.................... $ -- $ 1,018 $ (533) $ 118 $ 375
======= ======= ======= ======== ========
Exercise of options for
stockholder notes receivable.. $ -- $ -- $ 161 $ -- $ --
======= ======= ======= ======== ========
Conversion of promissory notes
for stock, net of issuance
costs......................... $ -- $ 600 $ 315 $ -- $ --
======= ======= ======= ======== ========
Issuance of common stock for
services rendered............. $ -- $ 17 $ 13 $ -- $ --
======= ======= ======= ======== ========
Property acquired under capital
lease obligations............. $ 19 $ -- $ -- $ -- $ --
======= ======= ======= ======== ========
Supplemental disclosure of cash
flow information:
Cash paid during the period for
interest....................... $ 38 $ 114 $ 28 $ 1 $ --
======= ======= ======= ======== ========
Cash paid during the period for
income taxes.................. $ -- $ -- $ -- $ -- $ 54
======= ======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1994, 1995 AND 1996
(INFORMATION AS OF AND FOR THE SIX MONTHS ENDED
DECEMBER 31, 1995 AND 1996 IS UNAUDITED)
1. NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations--Qualix Group, Inc. (the Company) was incorporated in
Delaware in September 1990. The Company develops or acquires, markets and
supports reliability software for distributed computing systems based on Unix
and Windows NT operating systems. The Company markets its products through its
direct sales force, which is focused on organizations located in the United
States, Europe and the Far East.
Basis of Presentation--The Company acquired Octopus Technologies, Inc.
("Octopus") on August 27, 1996. The acquisition was accounted for as a
pooling-of-interests. All financial data of the Company has been restated to
include the historical financial information of Octopus.
Consolidation--The accompanying financial statements include the accounts of
Qualix Group, Inc. and its wholly-owned subsidiary. Intercompany accounts and
transactions are eliminated in consolidation.
Financial Statement Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Such management estimates include the
value of an investment available for sale, the allowance for potentially
uncollectible accounts receivable, certain accrued liabilities and a valuation
allowance for net deferred tax assets. Actual results could differ from those
estimates.
Investment Available for Sale--The Company's investment consists of
restricted, unregistered equity securities in a publicly traded company and
are recorded at estimated market value with a corresponding recognition of the
net unrealized holding gain as a separate component of stockholder's equity
until realized.
Inventories--Inventories consist of computer products, software and
component parts purchased for resale. Inventories are stated at the lower of
cost (first-in, first-out method) or market.
Property and Equipment--Property and equipment, including equipment under
capital lease and leasehold improvements, are stated at cost. Depreciation and
amortization are computed using the straight-line method over the shorter of
the estimated useful lives, generally three to seven years, or the lease term,
as appropriate.
Software Development Costs--Costs for the development of new software
products and substantial enhancements to existing software products are
expensed as incurred until technological feasibility has been established, at
which time any additional costs are capitalized. Such costs, which have not
been material to date, are amortized on a straight-line basis over the
estimated useful life of two years beginning with the initial licensing of
each new product.
Effects of Recent Accounting Pronouncements--In October 1995, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation." The new standard defines a
fair market value method of accounting for stock options and other equity
instruments. The new standard permits companies to continue to account for
equity transactions with employees under existing accounting rules but
requires disclosure in a note to the financial statements of the pro forma net
income as if the Company had applied the new method of accounting. Commencing
F-7
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
July 1, 1996, the Company intends to follow the disclosure alternative for its
employee stock compensation plans. Adoption of the new standard will have no
effect on the Company's financial position or results of operations.
The Financial Accounting Standards Board has issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of." This statement requires that the Company review for
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS 121
became effective for the Company's fiscal year beginning July 1, 1996.
Implementation of this statement did not have a material impact on the
Company's financial statements.
Revenue Recognition--Revenue from software licenses is generally recognized
upon shipment. Revenue is recognized only when no significant vendor or post-
contract support obligations remain. Product revenue is recognized upon
shipment. Revenue from separately priced software support, maintenance and
consulting contracts is deferred and recognized ratably over the term of the
agreement, which is typically one year.
Warranty--The Company generally warrants its products for 30 days. The
Company has no provision for warranty costs at June 30, 1996 as historically
costs have not been significant.
Income Taxes--Income taxes are provided under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
statement requires an asset and liability approach to account for income taxes
and requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities and net operating losses and purchased in-process-technology.
Certain Significant Risks and Uncertainties--Financial instruments which
potentially subject the Company to concentrations of credit risk consist
primarily of cash, investments and accounts receivable. Cash is held primarily
with four financial institutions. The Company sells its products primarily to
companies in diversified industries in North America, Europe and the Far East,
and generally does not require its customers to provide collateral or other
security to support accounts receivable. To reduce credit risk, management
performs ongoing credit evaluations of its customers' financial condition.
While the Company maintains allowances for potential bad debt losses, actual
losses to date have not been material. No customers accounted for greater than
10% of accounts receivable in 1995 or 1996. No customer accounted for greater
than 10% of total revenue in 1994, 1995 and 1996. In 1994 and 1995, export
sales did not account for more than 10% of total revenue. Export sales from
the United States represented 17% and 18% of total revenue in fiscal 1996 and
in the six months ended December 31, 1996, respectively.
The Company participates in a dynamic high technology industry and believes
that changes in any of the following areas could have a material adverse
effect on the Company's future financial position or results of operations:
advances and trends in new technologies; competitive pressures in the form of
new products or price reductions on current products; changes in product mix;
changes in the overall demand for products and services offered by the
Company; changes in certain strategic partnerships or customer relationships;
litigation or claims against the Company based on intellectual property,
patent, product, regulatory or other factors; risks associated with changes in
domestic and international economic and/or political conditions or
regulations; availability of necessary components; and the Company's ability
to attract and retain employees necessary to support its growth.
Pro Forma Net Income (Loss) Per Share--Pro forma net income (loss) per share
is computed using the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares include
preferred stock (using the "if converted" method) and stock options and
warrants
F-8
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(using the treasury stock method). Common equivalent shares are excluded from
the computation if their effect is anti-dilutive, except that, pursuant to the
Securities and Exchange Commission's Staff Accounting Bulletins and staff
policy, such computations include all common and common equivalent shares
issued within the 12 months preceding the initial filing date as if they were
outstanding for all periods presented (using an assumed initial public
offering price of $10.00 per share). In addition, all outstanding preferred
stock that converts and all warrants that are expected to be exercised in
connection with the proposed offering are included in the computation as
common equivalent shares even when the effect is anti-dilutive.
Unaudited Interim Financial Information--The unaudited interim financial
information as of December 31, 1996 and for the six months ended December 31,
1995 and 1996 has been prepared on the same basis as the audited financial
statements. In the opinion of management, such unaudited information includes
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of this interim information. Operating results for the six
months ended December 31, 1996 are not necessarily indicative of the results
that may be expected for the year ending June 30, 1997.
Unaudited Pro Forma Information--Unaudited pro forma information reflects
the conversion of each of the outstanding shares of convertible preferred
stock into 1.2 shares of common stock upon the closing of the initial public
offering and all warrants that are expected to be exercised in connection with
the proposed offering as contemplated by this Prospectus.
2. BUSINESS ACQUISITION
On May 1, 1996, the Company acquired substantially all of the assets and
assumed certain of the liabilities of Anthill Incorporated ("Anthill"). The
purchase price totaled approximately $675,000, of which $175,000 was paid at
the closing of the transaction and the remaining purchase price will be paid
in four annual installments of $125,000 each (see Note 7). Anthill is engaged
in the development of a hierarchical storage management product.
The acquisition was accounted for as a purchase, and, accordingly, the
acquired assets and liabilities were recorded at their estimated fair market
values at the date of acquisition. The aggregate purchase of $675,000, plus
$116,000 of costs directly attributable to the completion of the acquisition,
has been allocated to the assets and liabilities acquired. Approximately
$740,000 of the total purchase price represented the value of in-process
technology which had no future alternative use and was charged to the
Company's operations in the fourth quarter of fiscal 1996.
3. INVESTMENT AVAILABLE FOR SALE
At June 30, 1995, the Company held 46,121 unregistered shares of Veritas
Software Corporation (Veritas) common stock which was obtained in connection
with a warrant exercise for shares in another company which was subsequently
acquired by Veritas. During 1996, the Company sold 34,590 shares and realized
a gain of approximately $847,500. The gain on the stock sale was recorded, net
of legal costs of $85,000, in the first quarter of fiscal 1996. The remaining
11,531 shares held at June 30, 1996 are subject to certain holding
restrictions.
F-9
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT
Property and equipment consist of (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------ DECEMBER 31,
1995 1996 1996
----- ----- ------------
<S> <C> <C> <C>
Computer equipment and software................... $ 524 $ 777 $ 1,263
Furniture and fixtures............................ 15 41 48
Office equipment.................................. 7 8 12
Leasehold improvements............................ 9 10 20
----- ----- -------
555 836 1,343
Less accumulated depreciation and amortization.... (408) (493) (578)
----- ----- -------
Property and equipment--net....................... $ 147 $ 343 $ 765
===== ===== =======
</TABLE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
------------- DECEMBER 31,
1995 1996 1996
----- ------- ------------
<S> <C> <C> <C>
Compensation, bonuses and related benefits....... $ 192 $ 377 $ 667
Royalties payable and costs associated with
product acquisition............................. 260 547 746
Other accrued liabilities........................ 192 491 707
----- ------- -------
$ 644 $ 1,415 $ 2,120
===== ======= =======
</TABLE>
6. INCOME TAXES
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to the income (loss) before income taxes
as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED JUNE 30, ENDED
------------------------ DECEMBER 31,
1994 1995 1996 1996
------ ------ ------ ------------
<S> <C> <C> <C> <C>
Taxes computed at federal statutory
rate............................... (35.0)% (35.0)% 35.0% 35.0%
State income taxes, net of federal
effect............................. (2.3) (2.7) 6.1 6.0
Nondeductible merger and other
costs.............................. -- 1.7 6.6 29.2
Change in valuation allowance....... 38.7 37.0 (50.0) (68.7)
Other............................... (1.4) (1.0) 2.3 (1.5)
------ ------ ------ -----
Total provision................... -- % -- % -- % -- %
====== ====== ====== =====
</TABLE>
F-10
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to deferred taxes
were as follows (in thousands):
<TABLE>
<CAPTION>
JUNE 30,
---------------- DECEMBER 31,
1995 1996 1996
------- ------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Expenses not currently deductible for tax
purposes.................................. $ 90 $ 179 $ 141
Tax net operating loss carryforwards....... 2,883 2,174 1,283
Purchased in-process technology............ -- 300 290
------- ------- -------
Total deferred tax assets................ 2,973 2,653 1,715
Valuation allowance on deferred tax assets... (2,973) (2,653) (1,715)
------- ------- -------
Net deferred taxes....................... $ -- $ -- $ --
======= ======= =======
</TABLE>
At June 30, 1996, the Company had net operating loss carryforwards of
approximately $4,800,000 and $2,900,000 available to offset future federal and
California taxable income, respectively. Such federal and California
carryforwards expire through 2010 and 2000, respectively. The extent to which
the loss carryforwards can be used to offset future taxable income may be
limited, depending on the extent of ownership changes within any three-year
period as provided in the Tax Reform Act of 1986 and the California Conformity
Act of 1987.
As a result of the Company's history of recent operating losses, management
believes that the recognition of the deferred tax asset is considered less
likely than not. Accordingly, the Company has recorded a valuation allowance
of approximately $2,653,000 against its net deferred tax assets.
7. COMMITMENTS
Anthill Acquisition--In connection with the Anthill acquisition, the Company
has an obligation to pay four annual installments of $125,000 each (see Note
2). The present value of the obligation is discounted at 9% and the aggregate
of $405,000 is recorded in the balance sheet within long-term obligations. The
Company has granted a security interest in the software technology acquired
from Anthill in order to secure the obligation. The payments may be
accelerated to May 1, 1998 in the event the sellers, who have become employees
of the Company, are terminated for cause or voluntarily terminate and if
cumulative license revenues for certain products exceed specified levels as of
May 1, 1998.
Capital Lease Obligations--Computer equipment with a cost of $48,000 at June
30, 1996 and 1995 and $218,000 at June 30, 1994 (net book value of $8,000,
$9,000 and $64,000, respectively) has been leased under capital lease
agreements which expire through fiscal 1997. The total capital lease
obligation at June 30, 1996 is $2,000.
Employment Termination Agreement--At June 30, 1994, the Company had an
obligation to pay compensation totaling $240,000 to three Octopus employees
for services rendered. In exchange for $17,000 of the obligation, the
employees received 23,523 shares of common stock during fiscal 1995. As of
June 30, 1996, the Company has paid $72,000 in cash and the remaining
obligation of $151,000 will be paid in installments through March 1997.
F-11
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Operating Leases--The Company leases administrative facilities under a
noncancellable operating lease which expires in March 2000. Future minimum
annual rental payments under the operating lease are as follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING JUNE 30,
---------------------
<S> <C>
1997............................................................ $ 180
1998............................................................ 180
1999............................................................ 180
2000............................................................ 136
-----
Total......................................................... $ 676
=====
</TABLE>
Facilities rent expense was $118,000, $137,000, $243,000 and 155,000 for
1994, 1995, 1996, and for the six months ended December 31, 1996,
respectively.
8. STOCKHOLDERS' EQUITY
Convertible Preferred Stock--At June 30, 1996, convertible preferred stock
consists of (dollars in thousands):
<TABLE>
<CAPTION>
AMOUNT (NET
OF ISSUANCE LIQUIDATION
DESIGNATED OUTSTANDING COSTS) PREFERENCE
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Series A...................... 1,225,001 1,225,001 $ 1,823 $ 1,837
Series B...................... 923,077 923,077 1,787 1,800
Series C...................... 753,291 752,529 1,789 1,806
Series D...................... 1,400,000 797,713 1,889 1,915
Series E...................... 280,674 280,673 743 749
--------- --------- ------- -------
4,582,043 3,978,993 $ 8,031 $ 8,107
========= ========= ======= =======
</TABLE>
In August 1996, the Board increased the designation of Series C convertible
preferred stock to 792,529 shares and designated 280,674 shares of Series E
convertible preferred stock. Additionally, holders of 1,656,801 shares of
convertible preferred stock exercised their conversion rights and received
1,988,161 shares of common stock.
Significant terms of the convertible preferred stock are as follows:
. Each share is convertible, at the option of the holder, into 1.2 shares
of common stock (subject to adjustments for events of dilution and
certain other events). Shares of Series A, B, C and D will automatically
be converted into common stock upon the closing of a public offering in
excess of $7,500,000 and at a price equal to or greater than $2.40 per
share. Shares of Series E will automatically be converted into common
stock at the election of holders of more than two-thirds of the
outstanding Series E shares.
. Each share has the same voting rights as the number of shares of common
stock into which it is convertible.
. In the event of liquidation, dissolution or winding up of the Company,
the preferred shareholders of Series D and Series E shall receive an
amount equal to $2.40 and $2.67 per share, respectively, plus an amount
equal to all declared but unpaid dividends on each share. The preferred
shareholders of Series A, B and C shall then receive an amount equal to
$1.50, $1.95 and $2.40 per share, respectively, plus an amount equal to
all declared but unpaid dividends on each share. The common
F-12
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
shareholders will then receive an amount equal to $.025 per share
(subject to adjustments for events of dilution and certain other
events). Any remaining assets will be distributed among the holders of
Series A, B, C, D and E preferred stock and common stock, pro rata,
based on the number of shares of common stock held by each shareholder
on an as-converted basis. In total, the holders of Series A, B, C, D and
E preferred stock shall not be entitled to receive more than $4.50,
$5.85, $7.20, $7.20 and $2.67 per share, respectively.
. Holders of preferred stock are entitled to annual noncumulative
dividends of $.13 per share, as declared by the Board of Directors,
before any dividend is declared on common stock. No dividends were
declared in fiscal 1996, 1995 and 1994.
Common Stock--At June 30, 1996 and December 31, 1996, the Company had
reserved shares of common stock for issuance as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
--------- ------------
<S> <C> <C>
Conversion of preferred stock....................... 4,774,792 2,786,610
Issuance under stock option plans................... 1,143,060 1,271,009
Issuance under Employee Stock Purchase Plan......... -- 350,000
Issuance upon exercise of common stock warrants..... 281,492 231,988
--------- ---------
Total............................................. 6,199,344 4,639,607
========= =========
</TABLE>
Warrants--In connection with issuance of convertible promissory demand notes
and the issuance of Series D preferred stock during 1995, warrants were
granted to purchase 121,167 shares of common stock at $2.00 per share and
160,325 shares of common stock at $.20 per share. During December 1996,
warrants to purchase 49,503 shares at $2.00 per share were exercised. The
warrants expire at the earlier of three years and seven years, respectively,
from issuance date or upon the Company's initial public offering of its common
stock or upon the merger or sale of the Company.
Restricted Stock--During 1994, an officer of the Company was granted
nonstatutory stock options to purchase 48,000 shares of common stock at $.20
per share and 40,000 shares of Series D preferred stock at $2.40 per share. In
May 1996, the holder exercised the options in exchange for a full recourse
promissory note, bearing interest at 6.83% per annum, due May 2006 and secured
by the underlying stock. The related shares of common stock are subject to
repurchase by the Company at the original purchase price per share upon
termination of employment prior to vesting of such shares. These restricted
shares vest over four years in accordance with the terms of the original stock
options.
During 1996, an officer of the Company was granted a nonstatutory stock
option to purchase 23,333 shares of Series C preferred stock at $2.40 per
share. The option was exercised in exchange for a full recourse promissory
note which bears interest at 7.04% per annum, is due May 2006 and is secured
by the underlying stock. The related shares of common stock are subject to
repurchase by the Company at the original purchase price per share upon
termination of employment prior to vesting of such shares. These restricted
shares vest over four years in accordance with the terms of the original stock
options.
In July 1996, two officers exercised unvested stock options to purchase
50,266 shares of common stock at $0.20 per share with full recourse promissory
notes which bear interest at 6.74% per annum. The related shares of common
stock are subject to repurchase by the Company at the original purchase price
per share upon termination of employment prior to vesting of such shares.
These restricted shares vest over four years in accordance with the terms of
the original stock options.
F-13
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, 71,542 outstanding shares of such common and preferred
stock were subject to repurchase.
Stock Option Plans--The Company has stock option plans (the "Plans") under
which shares are reserved for issuance to employees, consultants and
directors. The Plans authorize the direct award or sale of common stock or the
grant of incentive and nonstatutory stock options. Incentive stock options are
granted at fair market value (as determined by the Board of Directors) at the
date of grant; nonstatutory options and stock sales may be offered at not less
than 85% of fair market value. Options become exercisable over four years and
expire ten years after the date of grant.
A summary of stock option activity under the Plans is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------
NUMBER OF SHARES PRICE PER SHARE
---------------- -------------------
<S> <C> <C> <C> <C>
Balances, July 1, 1993................. 115,403 $0.083 - $ 0.20
Granted.............................. 76,507 0.200 - 1,443.43
Exercised............................ (4,113) 0.200 - 36.08
Cancelled............................ (47,318) 0.083 - 1,443.43
------- ------ --------
Balances, June 30, 1994................ 140,479 0.083 - 21.65
Granted.............................. 128,281 0.200 - 1.80
Exercised............................ (6,972) 0.083 - 0.20
Cancelled............................ (28,948) 0.083 - 21.65
------- ------ --------
Balances, June 30, 1995................ 232,840 0.083 - 21.65
Granted.............................. 478,078 0.200 - 2.18
Exercised............................ (51,172) 0.163 - 0.20
Cancelled............................ (56,151) 0.083 - 0.20
------- ------ --------
Balances, June 30, 1996................ 603,595 0.083 - 21.65
Granted.............................. 371,200 0.800 - 8.50
Exercised............................ (72,004) 0.083 - 0.20
Cancelled............................ (15,936) 0.200 - --
------- ------ --------
Balances, December 31, 1996............ 886,855 $0.083 - $ 21.65
======= ====== ========
</TABLE>
At December 31, 1996, 384,154 shares were available under the Plans for
future grant and options for 695,141 shares were exercisable.
9. EMPLOYEE BENEFIT PLAN
The Company sponsors a 401(k) Profit-Sharing Plan (the Plan) for all
employees. Participants may contribute between 1% and 15% of their annual
compensation on a before-tax basis, but not to exceed the amount allowable as
a deduction for federal income tax purposes. Participants vest immediately in
their contributions. The Company is not required to contribute, nor has it
contributed, to the Plan for the fiscal years ended June 30, 1994, 1995 and
1996.
F-14
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
10. SUBSEQUENT EVENTS
Merger with Octopus Technologies, Inc.--On August 27, 1996, the Company
acquired Octopus by issuing 1,597,173 shares of its common stock and 280,673
shares of Series E preferred stock in exchange for all of the outstanding
common stock and preferred stock of Octopus. The Company also assumed and
exchanged all options to purchase Octopus stock for options to purchase an
aggregate of 149,590 shares of the Company's common stock with an average
exercise price of $2.60 per share. Qualix deposited 7.5% of the total shares
to be exchanged in the transaction in an escrow account as security for
damages or losses to Qualix as a result of breaches of general management
representations by Octopus. The escrow account expires at the earlier of
certain events or August 28, 1997. The merger was accounted for as a pooling-
of-interests. Octopus develops, markets and supports real time data protection
software throughout the United States and internationally. Approximately
$595,000 of costs directly attributable to the business combination, primarily
professional fees associated with investment bankers, attorneys and
accountants, were incurred by the Company.
The following table presents the results of consolidated operations as
restated for the periods prior to the combination of Qualix and Octopus. No
significant adjustments are required to conform the accounting policies of the
Company and Octopus.
<TABLE>
<CAPTION>
JUNE 30,
----------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Net revenue:
Qualix.................................................. $ 9,056 $14,610
Octopus................................................. 347 1,925
------- -------
Combined.................................................. $ 9,403 $16,535
======= =======
Net income (loss):
Qualix.................................................. $ (522) $ 481
Octopus................................................. (658) 77
------- -------
Combined.................................................. $(1,180) $ 558
======= =======
</TABLE>
Contingency--The Company has an exclusive right to certain technology of
Veritas which is used as a basis for one of the Company's products. On October
1, 1996, the Company introduced a new product which competes directly with
Veritas' product incorporating such technology. As a result, the related
distribution rights of the Company are no longer exclusive. On October 25,
1996, the Company sued Veritas to preserve the Company's contractual
distribution rights alleging breach of contract, unfair competition and
intentional interference with prospective economic advantage. On October 29,
1996, Veritas filed a cross-complaint alleging unfair competition, false
advertising, breach of contract, fraud and negligent misrepresentation. On
November 27, 1996, Veritas served the Company with a written demand for
arbitration of various issues relating to the dispute, including fraud,
negligent misrepresentation, breach of contract, pricing below cost, unfair
competition and false advertising. Previously, by letter dated November 19,
1996, Veritas had indicated that at the arbitration it would also pursue a
trade secret misappropriation claim but did not include that claim within the
demand for arbitration. The Company believes that its claims against Veritas
are meritorious and that it has meritorious defense to the claims brought by
Veritas. Although the ultimate outcome of this matter is not presently
determinable, management believes that its resolution will not have a material
adverse effect on the Company's financial position or results of operations.
The industry in which the Company operates is characterized by frequent
litigation regarding patent and other intellectual property rights. The
Company is party to a trademark claim. Although the ultimate outcome of this
matter is not presently determinable, management believes that its resolution
will not have a material effect on the Company's financial position or results
of operations.
F-15
<PAGE>
QUALIX GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock Split--Effective January 14, 1997, the Board of Directors approved a
one for two and one-half reverse split of all outstanding shares of common
stock. All shares and per-share amounts have been adjusted to reflect this
split. In addition, the par value of common stock was changed to $.001. The
Board of Directors also adopted another stock option plan and an employee
stock purchase plan.
F-16
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
STOCKHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................................................... 3
Risk Factors........................................................... 5
The Company............................................................ 15
Use of Proceeds........................................................ 15
Dividend Policy........................................................ 15
Capitalization......................................................... 16
Dilution............................................................... 17
Selected Consolidated Financial Data................................... 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 19
Business............................................................... 27
Management............................................................. 44
Certain Transactions................................................... 52
Principal and Selling Stockholders..................................... 55
Description of Capital Stock........................................... 59
Shares Eligible for Future Sale........................................ 62
Underwriting........................................................... 64
Legal Matters.......................................................... 65
Experts................................................................ 65
Additional Information................................................. 66
Index to Consolidated Financial
Statements............................................................ F-1
</TABLE>
------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
COMMON STOCK
------------
PROSPECTUS
------------
HAMBRECHT & QUIST
SMITH BARNEY INC.
[LOGO OF QUALIX GROUP]
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
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 by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
SEC registration fee............................................ $ 12,524
NASD fee........................................................ 4,295
Nasdaq National Market listing fee.............................. 46,757
Printing and engraving expenses................................. 80,000
Legal fees and expenses......................................... 225,000
Accounting fees and expenses.................................... 200,000
Officers' and directors' liability insurance.................... 235,000
Blue sky fees and expenses...................................... 5,000
Transfer agent fees............................................. 7,500
Miscellaneous fees and expenses................................. 83,924
--------
Total......................................................... $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VII, Section 6, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers
and permissible indemnification of employees and other agents to the maximum
extent permitted by the Delaware General Corporation Law. The Registrant's
Certificate of Incorporation provides that, pursuant to Delaware law, its
directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty as directors to the Company and its stockholders.
This provision in the Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company for acts
or omissions not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws. The Registrant has
entered into Indemnification Agreements with its officers and directors, a
form of which is attached as Exhibit 10.1 hereto and incorporated herein by
reference. The Indemnification Agreements provide the Registrant's officers
and directors with further indemnification to the maximum extent permitted by
the Delaware General Corporation Law." Reference is made to Section 8(b) of
the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying
officers and directors of the Registrant against certain liabilities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
(a) Since July 1, 1993, the Registrant has issued and sold the following
securities (as adjusted to reflect the 1 for 2.5 reverse split of Common
Stock to be effected in January 1997 but not giving effect to the
conversion of each share of Preferred Stock into Common Stock:
(i) The Registrant granted stock options to purchase 918,528 shares
of Common Stock at exercise prices ranging from $0.20 to $5.62 per
share to employees, consultants and directors, pursuant to its 1991 and
1995 Plans. In addition the Registrant assumed the stock option plan of
Octopus Technologies pursuant to the Octopus Technologies Merger and
issued 59,832 options to purchase its Common Stock to 13 former Octopus
Technologies option holders at exercises prices ranging from $0.725 to
$21.65 per share.
(ii) The Registrant issued and sold an aggregate of 129,483 shares of
its Common Stock to employees, consultants and directors for an
aggregate cash consideration of approximately $23,444 pursuant to
exercises of options granted under its 1991 and 1995 Plans.
(iii) On November 16, 1993 the Registrant issued 231,667 shares of
Series C Preferred Stock to a total of 10 accredited investors for
aggregate cash consideration of approximately $55,600.
(iv) On August 26, 1994 and October 5, 1994 the Registrant issued to
a total of 12 accredited investors (a) convertible promissory notes for
an aggregate value of $608,527, the outstanding principal balance of
which was converted into approximately 253,552 shares of Series D
Preferred Stock, and (b) warrants to purchase an aggregate of
approximately 18,255 shares of Common Stock.
(v) In April and May of 1995 the Registrant issued and sold 797,713
shares of Series D Preferred Stock to a total of 14 accredited
investors. In addition the Registrant (a) issued warrants to purchase
an aggregate of 400,813 shares of Common Stock to two of those
investors, and (b) issued warrants to purchase an aggregate of 302,918
shares of Common Stock to the other 12 investors in exchange for the
warrants issued in connection with the financing discussed in paragraph
(iv) hereof. The aggregate consideration for these issuances was
$1,318,741 of which $608,527 was paid by the cancellation of the
convertible promissory notes held by the investors, as discussed in
paragraph (iv) hereof.
(vi) In August 1996, the Registrant issued 4,970,193 shares of Common
Stock upon the conversion of an aggregate of 1,656,731 shares of Series
A, B, C & D Preferred Stock at a 3-to-1 conversion rate.
(vii) On August 28, 1996 in connection with the Octopus Merger, the
Registrant (a) issued to the 35 Octopus Technologies shareholders an
aggregate of 280,673 shares of its Series E Preferred Stock in exchange
for Octopus Technologies Preferred Stock at an approximate exchange
ratio of .1871163-to-1, and 1,597,173 shares of its Common Stock in
exchange for Octopus Technologies Common Stock at an exchange ratio of
.034639835-to-1 and (b) assumed the Octopus Technologies stock option
plan as discussed in paragraph (i) above.
(viii) In December 1996, the Registrant issued 49,502 shares of
Common Stock to seven stockholders upon the exercise of certain of the
warrants discussed under paragraph (v) above for an aggregate cash
consideration of $99,006.
The issuances described in Items 15(a)(i) and (ii) were deemed exempt from
registration under the Securities Act in reliance upon Rule 701. The issuances
described in Items 15(a)(iii), (iv), and (v) were deemed exempt from
registration under the Securities Act in reliance upon Rule 506 of Regulation
D. The issuances of Common Stock to the Registrant's Preferred Stockholders
described in Item 15(a)(vi) were deemed exempt from registration under the
Securities Act in reliance upon Section 3(a)(9) thereof. The issuances to
Octopus shareholders described in Item 15(a)(vii) were deemed exempt from
registration under the Securities Act in reliance upon Section 3(a)(10))
thereof. In addition, the recipients of securities in the transactions
described in Items 15(a)(iii)-(v) represented their intentions to acquire the
securities for investment only and not with a view to or for sale in
connection with any distribution thereof and appropriate legends were affixed
to the share certificates and warrants issued in such transactions. All
recipients had adequate access, through their relationships with the
Registrant, to information about the Registrant.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1# --Form of Underwriting Agreement.
2.1# --Agreement and Plan of Reorganization among the Registrant, Qualix
Subsidiary, Inc. and Octopus Technologies, Inc. dated July 14, 1996.
2.2# --Articles of Merger between and among the Registrant, Qualix
Subsidiary, Inc. and Octopus Technologies, Inc. filed August 30,
1996.
3.1# --Amended and Restated Certificate of Incorporation of Registrant,
previously in effect.
3.2 --Form of Amended and Restated Certificate of Incorporation of
Registrant filed in January 1997.
3.3# --Form of Amended and Restated Certificate of Incorporation of
Registrant (to be filed upon the closing of the offering made
pursuant to this Registration Statement).
3.4# --Bylaws of the Registrant, as currently in effect.
4.1# --Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2* --Specimen Common Stock certificate.
4.3# --Series D Preferred Stock and Warrant Purchase Agreement dated April
11, 1995.
5.1* --Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian
LLP.
10.1# --Form of Indemnification Agreement.
10.2# --1995 Stock Option Plan.
10.3# --1997 Stock Option Plan.
10.4# --Employee Stock Purchase Plan.
10.5# --Senior Managers Bonus Plan.
10.6# --Series A Preferred Stock Purchase Agreement dated November 15, 1990.
10.7# --Series B Preferred Stock Purchase Agreement dated December 27, 1991.
10.8# --Series C Preferred Stock Purchase Agreement dated October 20, 1992.
10.9# --Series C Preferred Stock Purchase Agreement dated November 16, 1993.
10.10# --Note and Warrant Purchase Agreement dated August 26, 1994.
10.11# --Asset Purchase Agreement between Anthill Incorporated and Registrant
dated May 1, 1996.
10.12# --Employment Agreement between Registrant and Richard G. Thau dated
November 15, 1990.
10.13# --Employment Agreement between Registrant and Jean A. Kovacs dated
November 15, 1990.
10.14# --Employment Agreement between Registrant and Bruce C. Felt dated
March 25, 1994.
10.15# --Promissory Notes of Bruce A. Felt dated May 17, 1996 and May 17,
1996 in the principal amounts of $96,000 and $9,600, respectively.
10.16#+ --Distributor Agreement between Registrant and StereoGraphics
Corporation dated March 27, 1996.
10.17#+ --Letter Agreement between Registrant and Silicon Graphics, Inc. dated
June 6, 1994.
10.18 --[Intentionally left blank.]
10.19#+ --Master Agreement between Registrant and Veritas Software Corporation
dated April 10, 1995.
10.20* --Reseller Agreement between Registrant and Check Point Software
Technologies Ltd. dated June 3, 1994.
10.21# --Lease Agreement between Registrant and Norfolk Atrium, a California
Limited Partnership dated April 1, 1995.
11.1 --Computation of Earnings Per Share.
21.1# --Subsidiary of the Registrant.
23.1 --Independent Auditors' Consent and Report on Schedule (see page II-
6).
23.2# --Consent of Counsel. Reference is made to Exhibit 5.1.
24.1# --Power of Attorney (see page II-4).
27# --Financial Data Schedule.
</TABLE>
II-3
<PAGE>
- ---------------------
# Previously filed.
* To be filed by amendment.
+ Confidential treatment requested.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule VIII--Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
consolidated financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the Delaware General Corporation Law, the Certificate
of Incorporation or the Bylaws of the Registrant, the Underwriting Agreement,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act, and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer, 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
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The 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.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of San Mateo, State of California, on this 15th day of January, 1997.
QUALIX GROUP, INC.
/s/ Richard G. Thau
By: _________________________________
Richard G. Thau
President and Chief Executive
Officer
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ Richard G. Thau President, Chief
- ------------------------------------ Executive Officer January 15, 1997
Richard G. Thau (Principal
Executive Officer)
and Chairman of
the Board of
Directors
Executive Vice
* Jean A. Kovacs President, January 15, 1997
- ------------------------------------ Secretary and
Jean A. Kovacs Director
/s/ Bruce C. Felt Vice President,
- ------------------------------------ Finance and Chief January 15, 1997
Bruce C. Felt Financial Officer
* William D. Jobe Director January 15, 1997
- ------------------------------------
William D. Jobe
* Samuel D. Kingsland Director January 15, 1997
- ------------------------------------
Samuel D. Kingsland
* Charles L. Minter Director January 15, 1997
- ------------------------------------
Charles L. Minter
* Peter L. Wolken Director January 15, 1997
- ------------------------------------
Peter L. Wolken
* William Hart Director January 15, 1997
- ------------------------------------
William Hart
* By: /s/ Richard G. Thau January 15, 1997
- ------------------------------------
Richard G. Thau
(Attorney-in-Fact)
</TABLE>
II-5
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND
REPORT ON SCHEDULE
QUALIX GROUP, INC.
We consent to the use in this Registration Statement of Qualix Group, Inc. on
Form S-1 of our report dated August 13, 1996 (January 14 , 1997 as to Note 10),
appearing in the Prospectus, which is a part of this Registration Statement,
and to the reference to us under the heading "Experts" in such Prospectus.
Our audits of the financial statements referred to in our aforementioned
report also included the financial statement schedule of Qualix Group, Inc.,
listed in Item 16. The financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Deloitte & Touche LLP
San Jose, California
January 14, 1997
II-6
<PAGE>
SCHEDULE II
QUALIX GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER DEDUCTION/ AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS WRITE-OFF OF PERIOD
----------- ---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
For the year ended June 30,
1994--
Accounts receivable
allowance................. $ 20 $ 103 $ -- $ 41 $ 164
For the year ended June 30,
1995--
Accounts receivable
allowance................. $ 164 $ 59 $ -- $ (136) $ 87
For the year ended June 30,
1996--
Accounts receivable
allowance................. $ 87 $ 191 $ -- $ (22) $ 256
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1# --Form of Underwriting Agreement.
2.1# --Agreement and Plan of Reorganization among the Registrant, Qualix
Subsidiary, Inc. and Octopus Technologies, Inc. dated July 14, 1996.
2.2# --Articles of Merger between and among the Registrant, Qualix
Subsidiary, Inc. and Octopus Technologies, Inc. filed August 30,
1996.
3.1# --Amended and Restated Certificate of Incorporation of Registrant, as
currently in effect.
3.2 --Form of Amended and Restated Certificate of Incorporation of
Registrant (to be filed prior to the closing of the offering made
pursuant to this Registration Statement).
3.3# --Form of Amended and Restated Certificate of Incorporation of
Registrant (to be filed upon the closing of the offering made
pursuant to this Registration Statement).
3.4# --Bylaws of the Registrant, as currently in effect.
4.1# --Reference is made to Exhibits 3.1, 3.2, 3.3 and 3.4.
4.2* --Specimen Common Stock certificate.
4.3# --Series D Preferred Stock and Warrant Purchase Agreement dated April
11, 1995.
5.1* --Opinion of Gunderson Dettmer Stough Villeneuve Franklin & Hachigian
LLP.
10.1# --Form of Indemnification Agreement.
10.2# --1995 Stock Option Plan.
10.3# --1997 Stock Option Plan.
10.4# --Employee Stock Purchase Plan.
10.5# --Senior Managers Bonus Plan.
10.6# --Series A Preferred Stock Purchase Agreement dated November 15, 1990.
10.7# --Series B Preferred Stock Purchase Agreement dated December 27, 1991.
10.8# --Series C Preferred Stock Purchase Agreement dated October 20, 1992.
10.9# --Series C Preferred Stock Purchase Agreement dated November 16, 1993.
10.10# --Note and Warrant Purchase Agreement dated August 26, 1994.
10.11# --Asset Purchase Agreement between Anthill Incorporated and Registrant
dated May 1, 1996.
10.12# --Employment Agreement between Registrant and Richard G. Thau dated
November 15, 1990.
10.13# --Employment Agreement between Registrant and Jean A. Kovacs dated
November 15, 1990.
10.14# --Employment Agreement between Registrant and Bruce C. Felt dated
March 25, 1994.
10.15# --Promissory Notes of Bruce A. Felt dated May 17, 1996 and May 17,
1996 in the principal amounts of $96,000 and $9,600, respectively.
10.16#+ --Distributor Agreement between Registrant and StereoGraphics
Corporation dated March 27, 1996.
10.17#+ --Letter Agreement between Registrant and Silicon Graphics, Inc. dated
June 6, 1994.
10.18 --[This item intentionally left blank.]
10.19#+ --Master Agreement between Registrant and Veritas Software Corporation
dated April 10, 1995.
10.20* --Reseller Agreement between Registrant and Check Point Software
Technologies Ltd. dated June 3, 1994.
10.21# --Lease Agreement between Registrant and Norfolk Atrium, a California
Limited Partnership dated April 1, 1995.
11.1 --Computation of Earnings Per Share.
21.1# --Subsidiary of the Registrant.
23.1 --Independent Auditors' Consent and Report on Schedule (see page II-
6).
23.2# --Consent of Counsel. Reference is made to Exhibit 5.1.
24.1# --Power of Attorney (see page II-4).
27# --Financial Data Schedule.
</TABLE>
- ---------------------
# Previously filed.
* To be filed by amendment
+ Confidential treatment requested.
<PAGE>
Exhibit 3.2
-----------
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF QUALIX GROUP, INC.
a Delaware Corporation
(Pursuant to Sections 242, 245 and 228 of
the Delaware General Corporation Law)
Qualix Group, Inc., a corporation organized and existing under the
-----------------
laws of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY:
FIRST: The name of the Corporation is Qualix Group, Inc. and that the
Corporation was originally incorporated on September 21, 1990, pursuant to the
General Corporation Law of Delaware.
SECOND: The following resolutions amending and restating the
Corporation's Amended and Restated Certificate of Incorporation were approved by
the Board of Directors of the Corporation by Unanimous Written Consent dated as
of December 2, 1996 and were duly adopted by the written consent of the
stockholders of the Corporation in accordance with the provisions of Sections
228:
NOW, THEREFORE, BE IT RESOLVED, that the Certificate of Incorporation
of the Corporation be amended and restated in its entirety as follows:
ARTICLE I
The name of this corporation is Qualix Group, Inc. (the
"Corporation").
ARTICLE II
The address of the registered office of the Corporation in the State
of Delaware is 1013 Center Road, Wilmington, Delaware 19901, County of New
Castle. The name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
ARTICLE III
The nature of the business or purposes to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
ARTICLE IV
A. Classes of Stock. The Corporation is authorized to issue
----------------
two classes of stock to be designated, respectively, "Common Stock" and
"Preferred Stock." The total number of shares which the Corporation is
authorized to issue is twenty-five million (25,000,000) shares. Twenty million
(20,000,000) shares shall be Common Stock, par value one-thousandth of a cent
($0.001) per share and five million (5,000,000) shares shall be Preferred Stock,
par value one-thousandth of a cent ($0.001) per share.
1
<PAGE>
B. Rights, Preferences and Restrictions of the Preferred Stock.
-----------------------------------------------------------
The Preferred Stock authorized by this Amended and Restated Certificate of
Incorporation may be issued from time to time in one or more series. The
rights, preferences, privileges, and restrictions granted to and imposed on the
Series A Preferred Stock, which series shall consist of 1,225,001 shares, the
Series B Preferred Stock, which series shall consist of 923,077 shares, the
Series C Preferred Stock, which series shall consist of 792,529 shares, the
Series D Preferred Stock, which series shall consist of 1,400,000 shares and the
Series E Preferred Stock which series shall consist of 280,674 shares are as set
forth below in this Article IV(B). The Board of Directors is hereby authorized
to fix or alter the rights, preferences, privileges and restrictions granted to
or imposed upon additional series of Preferred Stock, and the number of shares
constituting any such series and the designation thereof, or of any of them.
Subject to compliance with applicable protective voting rights which have been
or may be granted to the Preferred Stock or series thereof in Certificates of
Determination or the corporation's Certificate of Incorporation ("Protective
Provisions"), but notwithstanding any other rights of the Preferred Stock or any
series thereof, the rights, privileges, preferences and restrictions of any such
additional series may be subordinated to, pari passu with (including, without
---- -----
limitation, inclusion in provisions with respect to liquidation and acquisition
preferences, redemption and/or approval of matters by vote or written consent),
or senior to any of those of any present or future class or series of Preferred
or Common Stock. Subject to compliance with applicable Protective Provisions,
the Board of Directors is also authorized to increase or decrease the number of
shares of any series (other than the Series A, Series B, Series C, Series D or
Series E Preferred Stock), prior or subsequent to the issue of that series, but
not below the number of shares of such series then outstanding. In case the
number of shares of any series shall be so decreased, the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
1. Dividend Provisions.
-------------------
a. Subject to the rights of series of Preferred Stock
that may from time to time come into existence, each holder of Series A, Series
B, Series C, Series D and Series E Preferred Stock (collectively, the "Existing
Preferred Stock") shall be entitled to receive dividends, out of any assets
legally available therefore, prior and in preference to any declaration or
payment of any dividend on the Common Stock of the Corporation, at the annual
rate of $.13 per share of the Series A, Series B, Series C, Series D and Series
E Preferred Stock (as adjusted to reflect any stock splits, stock dividends or
other recapitalizations), payable quarterly when, as and if declared by the
Board of Directors.
After payment of the dividend preference referred to above,
outstanding shares of Existing Preferred Stock shall participate with shares of
Common Stock as to any additional declaration or payment of any dividend, with
the outstanding shares of Existing Preferred Stock participating as though they
had all been converted into Common Stock.
b. Dividends on Existing Preferred Stock shall not be
cumulative, and no rights shall accrue to the holders of Existing Preferred
Stock by reason of the fact that the Corporation may have failed to declare or
pay dividends on such series of Preferred Stock in any previous fiscal year of
the Corporation, whether or not the earnings of the Corporation were sufficient
to pay such dividends.
2
<PAGE>
c. Dividends, if declared, must be declared and paid
with respect to all series of Preferred Stock contemporaneously, and if less
than full dividends are declared with respect to the Existing Preferred Stock,
the same percentage of the dividend rate of each such series of Preferred Stock
will be payable to each such series of Preferred Stock.
d. The provisions of this subsection (B)(1) shall not
apply to any transaction described in subsections (B)(4)(e), (f) or (g) hereof.
2. Liquidation Preference.
----------------------
a. In the event of any liquidation, dissolution or
winding up of the Corporation, either voluntary or involuntary, subject to the
rights of series of Preferred Stock that may from time to time come into
existence, holders of Series D Preferred and Series E Stock shall be entitled to
receive, prior and in preference to any distribution of any of the assets of the
Corporation to the holders of Series A, Series B and Series C Preferred Stock
and Common Stock by reason of their ownership thereof, (A) for the Series E
Preferred Stock, an amount equal to the sum of (i) $2.67 for each outstanding
share of Series E Preferred Stock (the "Original Series E Issue Price") (as
adjusted to reflect any stock splits, stock dividends and other
recapitalizations) and (ii) an amount equal to the declared but unpaid dividends
on such share and (B) for the Series D Preferred Stock, (i) $2.40 for each
outstanding share of Series D Preferred Stock (the "Original Series D Issue
Price") (as adjusted to reflect any stock splits, stock dividends or other
recapitalizations) and (ii) an amount equal to declared but unpaid dividends on
such share. If upon the occurrence of such event, the assets and funds thus
distributed among the holders of the Series D and Series E Preferred Stock shall
be insufficient to permit payment to such holders of the full aforesaid
preferential amounts, then subject to the rights of series of Preferred Stock
that may from time to time come into existence, the entire assets and funds of
the Corporation legally available for distribution shall be distributed ratably
among the holders of the Series D and Series E Preferred Stock in proportion to
the number of such shares owned by each such holder. Upon completion of the
distribution required by the first sentence of this subsection (a) and any other
distribution that may be required with respect to series of Preferred Stock that
may from time to time come into existence of assets remaining in the
Corporation, holders of Series A, Series B and Series C Preferred Stock shall be
entitled to receive, prior and in preference to any distribution of any of the
assets of the Corporation to the holders of Common Stock by reason of their
ownership thereof (A) for the Series A Preferred Stock, an amount per share
equal to the sum of (i) $1.50 for each outstanding share of Series A Preferred
Stock (the "Original Series A Issue Price")(as adjusted to reflect any stock
splits, stock dividends or other recapitalizations) and (ii) an amount equal to
declared but unpaid dividends on such share; (B) for the Series B Preferred
Stock, an amount per share equal to the sum of (i) $1.95 for each outstanding
share of Series B Preferred Stock (the "Original Series B Issue Price") (as
adjusted to reflect any stock splits, stock dividends or other
recapitalizations) and (ii) an amount equal to declared but unpaid dividends on
such share; and (C) for the Series C Preferred Stock, an amount per share equal
to the sum of (i) $2.40 for each outstanding share of Series C Preferred Stock
(the "Original Series C Issue Price") (as adjusted to reflect any stock splits,
stock dividends or other recapitalizations) and (ii) an amount equal to declared
but unpaid dividends on such share (the Original Series A Issue Price, the
Original Series B Issue Price, the Original Series C Issue Price, and the
Original Series D Issue Price being the applicable "Original Issue Price" for
such series). If upon the occurrence of such event, the assets and funds thus
distributed among the holders of
3
<PAGE>
the Series A, Series B and Series C Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amounts,
then subject to the rights of series of Preferred Stock that may from time to
time come into existence, the entire assets and funds of the Corporation legally
available for distribution shall be distributed ratably among the holders of the
Series A, Series B and Series C Preferred Stock in proportion to the product of
the liquidation preference of each such share and the number of such shares
owned by each such holder.
b. Upon the completion of the distribution required
by subsection (a) above and any other distribution that may be required with
respect to series of Preferred Stock that may from time to time come into
existence if assets remain in the Corporation, the holders of Common Stock shall
receive an amount equal to $.01 per share (as adjusted to reflect any stock
splits, stock dividends or other recapitalizations).
c. After the distributions described in subsections
(B)(2)(a) and (b) above have been paid and any other distribution that may be
required with respect to series of Preferred Stock that may from time to time
come into existence, the remaining assets of the Corporation available for
distribution to stockholders shall be distributed among the holders of Series A,
Series B, Series C and Series D Preferred Stock and Common Stock pro rata based
on the number of shares of Common Stock held by each (assuming conversion of all
such shares of Series A, Series B, Series C and Series D Preferred Stock into
shares of Common Stock as of the record date fixed for determining the
stockholders of the Corporation entitled to receive such distribution of
assets).
d. Notwithstanding anything set forth above, holders
of Series A Preferred Stock shall not be entitled to receive more than $4.50 per
share (as adjusted to reflect any stock dividends, stock splits or
recapitalizations), holders of Series B Preferred Stock shall not be entitled to
receive more than $5.85 per share (as adjusted to reflect any stock dividends,
stock splits or recapitalizations) and holders of Series C and Series D
Preferred Stock shall not be entitled to receive more than $7.20 per share (as
adjusted to reflect any stock dividends, stock splits or recapitalizations) upon
any liquidation, dissolution or winding up of the Corporation.
e. (1) A consolidation or merger of the Corporation
with or into any other corporation or corporations (other than a wholly owned
corporation), any other corporate reorganization or any other transaction (or
series of related transactions) that results in the transfer of more than fifty
percent (50%) of the outstanding voting power of the Corporation or a sale,
conveyance or other disposition of all or substantially all of the Corporation's
assets, shall be deemed to be a liquidation, dissolution or winding up within
the meaning of this subsection (B)(2).
(2) Upon the occurrence of any of the events
specified in subsection (e)(1) above, if the consideration received by the
Corporation is other than cash or indebtedness, its value will be deemed to be
its fair market value. In the case of securities, said fair market value shall
be determined as follows:
(a) Securities not subject to investment
letter or other similar restrictions on free marketability:
4
<PAGE>
(i) If traded on a securities
exchange, the value shall be deemed to be the average of the closing prices of
the securities on such exchange over the 30-day period ending three days prior
to the closing;
(ii) If actively traded over-the-
counter, the value shall be deemed to be the average of the closing bid prices
over the 30-day period ending three days prior to the closing; and
(iii) If there is no active public
market, the value shall be the fair market value thereof, as mutually determined
by the Corporation and the holders of not less than a majority of the then
outstanding shares of Existing Preferred Stock voting together as a class.
(b) The method of valuation of securities
subject to investment letter or other restrictions on free marketability shall
be to make an appropriate discount from the market value determined as above in
a) i), ii) or iii) to reflect the approximate fair market value thereof, as
mutually determined by the Corporation and the holders of a majority of the then
outstanding shares of Existing Preferred Stock voting together as a class.
3. Redemption. Shares of Existing Preferred Stock are not
----------
redeemable.
4. Conversion. Holders of shares of Existing Preferred
----------
Stock shall have conversion rights as follows (the "Conversion Rights"):
a. Right to Convert; Automatic Conversion.
--------------------------------------
(1) Each share of Existing Preferred Stock shall
be convertible, at the option of the holder thereof, at any time after the date
of issuance of such share, at the office of the Corporation or any transfer
agent for the Existing Preferred Stock, into fully paid and nonassessable shares
of Common Stock, at the applicable Conversion Ratio (as defined below) for such
shares of Preferred Stock in effect at the time of conversion determined as
provided in this Section 4. Each share of Existing Preferred Stock shall be
convertible into the number of shares of Common Stock equal to the quotient
(herein called the "Conversion Ratio") determined by dividing the applicable
Original Issue Price by the applicable Conversion Prices (as defined below) for
such share in effect at the time of conversion.
(2) Each share of Series A, Series B, Series C and
Series D Preferred Stock shall automatically be converted into shares of Common
Stock at the applicable Conversion Ratio then in effect for such shares
immediately upon the consummation of the Corporation's sale of its Common Stock
in a bona fide underwriting pursuant to a registration statement on Form S-1
under the Securities Act of 1933, as amended, which results in gross proceeds to
the Corporation of at least $7,500,000, the public offering price of which was
not less than $2.40 per share (as appropriately adjusted to reflect stock
dividends, stock splits or recapitalizations).
5
<PAGE>
(3) Each share of Series A, Series B and Series C
Preferred Stock shall automatically be converted into shares of Common Stock at
the applicable Conversion Ratio then in effect for such shares at the earlier
of:
(a) the election of the holders of more than
two-thirds of the then outstanding Series A, Series B and Series C Preferred
Stock; or
(b) the time at which less than twenty percent
(20%) of the originally issued Series A, Series B and Series C Preferred Stock
remains outstanding.
(4) Each share of Series D Preferred Stock shall
automatically be converted into shares of Common Stock at the applicable
Conversion Ratio then in effect for such shares at the earlier of:
(a) the election of the holders of more than
two-thirds of the then outstanding Series D Preferred Stock; or
(b) the time at which less than twenty percent
(20%) of the originally issued Series D Preferred Stock remains outstanding.
(5) Each share of Series E Preferred Stock shall
automatically be converted into shares of Common Stock at the then applicable
Conversion Ratio then in effect for such shares at the election of the holders
of more than two-thirds of the outstanding Series E Preferred Stock.
b. Conversion Price. The initial Conversion Prices
----------------
per share for shares of Series A, Series B, Series C, Series D and Series E
Preferred Stock shall be $.50, $.65, $.80, $.80 and $.89, respectively;
provided, however, that the applicable Conversion Prices for the Existing
- -------- -------
Preferred Stock shall be subject to adjustment as set forth in this subsection
B(4).
c. Mechanics of Conversion.
-----------------------
(1) Exchange of Share Certificates. Before any
------------------------------
holder of shares of Existing Preferred Stock shall be entitled to convert such
shares into shares of Common Stock, such holder shall surrender the stock
certificate or certificates therefor, duly endorsed, at the office of the
Corporation or of any transfer agent for the respective series of Preferred
Stock or Common Stock, accompanied by a written notice of its election to
convert the same and of the number of shares of Existing Preferred Stock to be
so converted. Upon receipt of such stock certificates and notice, the
Corporation shall forthwith issue and deliver at such office to such holder of
shares of Existing Preferred Stock a stock certificate or certificates for the
number of shares of Common Stock to which such holder shall be entitled pursuant
to subsection (B)(4)(a) and subsection (B)(4)(b) hereof. The Corporation will
also, upon conversion and the issue and delivery of such stock certificate or
certificates representing shares of Common Stock, pay in shares of Common Stock
(valued at the Common Stock's fair market value at the time of conversion, as
determined on a reasonable basis and in good faith by the Board of Directors)
all declared and unpaid dividends, computed to the effective date of conversion
on the shares of Existing Preferred Stock converted into Common Stock.
6
<PAGE>
(2) Effective Date of Conversion. Each conversion
----------------------------
shall be deemed to have been made immediately prior to the close of business of
the Corporation on the date of the surrender to the Corporation of the
certificate representing the shares of Existing Preferred Stock to be converted,
and the person or persons entitled to receive the shares of Common Stock
issuable upon such conversion shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on such date.
d. Adjustment for Stock Splits and Combinations. If
--------------------------------------------
the Corporation shall, at any time or from time to time after the date upon
which the first share of Series A, Series B, Series C, Series D or Series E
Preferred Stock, as applicable, was issued by the Corporation (the "Effective
Date") effect a subdivision or combination of the outstanding shares of Common
Stock, the respective Conversion Prices for such shares of Preferred Stock in
effect immediately prior to such subdivision or combination shall be
proportionately decreased or increased by multiplying (W) such Conversion Price,
by (X) a fraction:
(1) the numerator of which shall be the total
number of shares of Common Stock issued and outstanding immediately prior to
such subdivision or combination; and
(2) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding immediately after such
subdivision or combination.
e. Adjustment for Certain Distributions of Common
----------------------------------------------
Stock. In the event the Corporation shall, at any time or from time to time
- -----
after the Effective Date, make, issue, or fix a record date for the
determination of holders of Common Stock entitled to receive any distribution
payable in additional shares of Common Stock, then, and in each such event, the
respective Conversion Prices for such shares of Existing Preferred Stock then in
effect shall be decreased as of the time of such issuance or, in the event such
a record date shall have been fixed, as of the close of business on such record
date, by multiplying (X) the respective Conversion Prices for such shares of
Existing Preferred Stock then in effect, by (Y) a fraction:
(1) the numerator of which shall be the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date; and
(2) the denominator of which shall be the sum of
(A) the total number of shares of Common Stock referred to in clause (1) above
plus (B) the total number of shares of Common Stock issuable in payment of such
distribution;
provided, however, that if such a record date shall have been fixed and such
- -------- -------
distribution is not fully made, on the date fixed therefor, then the Conversion
Prices shall be recomputed accordingly taking into account such distribution as
of the close of business on such record date. In the event that any holder of
shares of Existing Preferred Stock elects to convert any of such shares into
Common Stock pursuant to the provisions of this subsection (B)(4) after any
record date for determining holders of Common Stock entitled to receive any
distribution payable in shares of Common Stock but prior to the date on which
such distribution is paid, the Corporation
7
<PAGE>
may defer, until such distribution is paid, the issue to such holder of all of
the additional shares of Common Stock issuable to such holder upon such
conversion solely by reason of the adjustment made to the Conversion Price of
the Existing Preferred Stock pursuant to this subsection (B)(4)(e) on the record
date for such distribution; provided further, however, that the Corporation
shall, promptly upon the request of such holder, issue to such holder a written
certificate or other instrument evidencing such holder's right to receive such
additional shares of Common Stock.
f. Adjustment for Other Distributions. In the event
----------------------------------
the Corporation shall, at any time or from time to time after the Effective
Date, make or issue, or fix a record date for the determination of holders of
shares of Common Stock entitled to receive, any distribution payable in
securities of the Corporation other than shares of Common Stock, then, and in
each such event, provision shall be made by the Corporation so that the
respective holders of shares of Existing Preferred Stock shall receive, upon
conversion thereof, in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the Corporation which such
holders would have received had their shares of Preferred Stock been converted
into Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the conversion date,
retained such securities receivable by them as aforesaid during such period,
giving application to all adjustments called for during such period under this
Section 4 hereof with respect to the rights of the holders of shares of such
series of Preferred Stock.
g. Adjustment for Reclassification; Exchange and
---------------------------------------------
Substitution. If the shares of Common Stock issuable upon the conversion of
- ------------
shares of Existing Preferred Stock shall be changed into the same or any
different number of shares of any class or any series of any class of capital
stock, whether by capital reorganization, reclassification or otherwise (other
than a transaction described in subsection (B)(4)(d), (e), (f) or (h)), then,
and in each such event, the holder of shares of the respective series of
Preferred Stock shall have the right thereafter to convert such shares of
Preferred Stock into the kind and amount of shares of stock and other securities
and property receivable upon such reorganization, reclassification or other
change by holders of the number of shares of Common Stock into which such shares
of Preferred Stock would have been converted immediately prior to such
reorganization, reclassification or change, all subject to further adjustment as
provided for in this subsection (B)(4).
h. Reorganizations, Mergers, Consolidations or Sales
-------------------------------------------------
of Assets. If, at any time or from time to time there shall be a capital
- ---------
reorganization of Common Stock (other than a subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this subsection
(B)(4)), or a merger or consolidation of the Corporation with or into another
corporation, then, as a part of such reorganization, merger or consolidation,
provision shall be made by the Corporation so that the holders of shares of
Existing Preferred Stock shall thereafter be entitled to receive, upon
conversion of such shares of the respective series of Preferred Stock, the
number of shares of stock or other securities or property of the Corporation, or
of the successor corporation resulting from such merger or consolidation, to
which a holder of shares of Common Stock deliverable upon conversion of such
shares of Preferred Stock would have been entitled on such capital
reorganization, merger, consolidation or sale. In any such case, appropriate
adjustment shall be made in the application of the provisions of this subsection
(B)(4)(h) with respect to the rights of the holders of shares of Existing
Preferred Stock after the reorganization, merger, consolidation or sale to the
end that the provisions of this
8
<PAGE>
subsection (B)(4) (including adjustment of the respective Conversion Prices then
in effect for each share of Existing Preferred Stock, and the respective number
of shares issuable upon conversion of shares of Existing Preferred Stock) shall
be applicable after that event in a manner as nearly equivalent as may be
practicable.
i. Sale of Shares Below Conversion Price.
-------------------------------------
(1) Reduction of Conversion Price. If (and on
-----------------------------
each occasion that) the Corporation shall, at any time or from time to time
after the Effective Date, issue or sell (as provided by this sub-section
(B)(4)(i)) or be deemed to issue or sell Additional Shares (as defined in sub-
section (B)(4)(i)(7)), other than in a transaction described in subsections
(B)(4)(d) through (h), for (A) consideration per share less than the then
existing applicable Conversion Price for shares of Series E Preferred Stock or
for no consideration, then the Conversion Price of the Series E Preferred Stock
shall be reduced, as of the opening of business on the date of such issue or
sale, to a new Conversion Price which shall be equal to a price determined by
multiplying such Conversion Price by a fraction, the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issuance (not including shares excluded from the definition of Additional Shares
by Section 4(i)(7)) plus the number of shares of Common Stock that the aggregate
consideration received by the corporation for such issuance would purchase at
such Conversion Price; and the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issuance (not
including shares excluded from the definition of Additional Shares by subsection
4(d)(7)) plus the number of shares of such Additional Shares, or (B)
consideration per share less than the then existing applicable Conversion Prices
for shares of Series A, Series B, Series C or Series D Preferred Stock (as the
case may be) or for no consideration, then the Conversion Price of such series
of Series A, Series B, Series C or Series D Preferred Stock shall be reduced, as
of the opening of business on the date of such issue or sale, to a new
Conversion Price which shall be equal to the quotient obtained by dividing the
total computed under clause (a) below by the total computed under clause (b)
below as follows:
(a) an amount equal to the sum of
(w) the aggregate purchase price of all
shares of such series of Series A, Series B, Series C, Series D and Series E
Preferred Stock sold to date, plus
(x) the aggregate consideration, if any,
received by the Corporation for all Additional Shares issued since the Effective
Date, excluding, however, Additional Shares issued or issuable upon conversion
of such series of Series A, Series B, Series C, Series D and Series E Preferred
Stock ;
(b) an amount equal to the sum of
(y) the aggregate purchase price of all
shares of such series of Series A, Series B, Series C, Series D and
Series E
9
<PAGE>
Preferred Stock sold to date, divided by the Conversion Price for such
series of Preferred Stock on the Effective Date (or such higher or
lower Conversion Price as results from the application of subsections
(B)(4)(d) and (e) hereof), plus
(c) the number of Additional Shares issued
since the Effective Date excluding, however, Additional Shares issued or
issuable upon conversion of such series of Preferred Stock (increased or
decreased to the extent that the number of such Additional Shares shall have
been increased or decreased as the result of the application of subsections
(B)(4)(d) and (e) hereof);
(2) Determination of Consideration for
----------------------------------
Securities. For the purpose of making any adjustment in the Conversion Price for
- ----------
any series of Preferred Stock, the consideration received or deemed to be
received by the Corporation for any issue or sale of securities shall:
(a) to the extent it consists of cash, be
computed at the net amount of cash received by the Corporation after deduction
of any expenses payable by the Corporation and also after deduction of any
underwriting or similar commissions, compensations or concessions paid or
allowed by the Corporation in connection with such issue or sale;
(b) to the extent it consists of property
other than cash, be computed at the fair market value of that property as
determined in good faith and on a reasonable basis by the Board of Directors of
the Corporation; and
(c) if Convertible Securities (as defined in
subsection (B)(4)(i)(3) hereof) or rights, options or warrants to purchase
either Additional Shares or Convertible Securities are issued or sold, the
consideration therein shall, to the extent applicable, be determined under
subsection (B)(4)(i)(2) through subsection (B)(4)(i)(6).
(3) Common Stock Options and Warrants; Convertible
----------------------------------------------
Securities. For the purpose of making any adjustment to the applicable
Conversion Price for any series of Preferred Stock, as provided in subsection
(B)(4)(i)(1), if, at any time or from time to time after the Effective Date, the
Corporation shall issue any rights, options or warrants for the purchase of; or
stock or other securities convertible into or exchangeable for, Additional
Shares (such convertible or exchangeable stock or securities being hereinafter
referred to as "Convertible Securities"), then, in each case, if the Effective
Price (as hereinafter defined) of such rights, options, warrants or Convertible
Securities shall be less than the applicable Conversion Price in effect at the
time of such issuance for such series of Preferred Stock, the Corporation shall
be deemed (A) to have issued, at the time of the issuance of such rights,
options, warrants or Convertible Securities, the maximum number of Additional
Shares issuable upon exercise, conversion or exchange thereof, and (B) to have
received as consideration for the issuance of such Additional Shares an amount
equal to the sum of (1) the total amount of the consideration, if any, received
by the Corporation for the issuance of such rights, options, warrants or
Convertible Securities, plus (2) in the case of such rights, options or
----
warrants, the minimum amount of consideration, if any, payable to the
Corporation upon the exercise of such rights, options or warrants, or, in the
case of Convertible Securities, the minimum amount of
10
<PAGE>
consideration, if any, payable to the Corporation upon the conversion or
exchange of such Convertible Securities (other than by cancellation of
liabilities or obligations evidenced by such Convertible Securities). As used in
this subsection 4(i)(3), the term "Effective Price" shall mean the quotient
determined by dividing (X) the total of all of such consideration determined as
provided by clause (B) of the preceding sentence, by (Y) such maximum number of
Additional Shares determined as provided by clause (A) of the preceding
sentence. No further adjustment of the Conversion Price for such series of
Preferred Stock adjusted upon the issuance of such rights, options, warrants or
Convertible Securities shall be made as a result of the actual issuance of
Additional Shares on the exercise of any such rights, options, warrants or the
conversion or exchange of any such Convertible Securities.
(4) Expiration of Common Stock Options, Warrants
--------------------------------------------
and Conversion Rights. If any of the rights, options or warrants referred to in
- ---------------------
subsection (B)(4)(i)(3) or the conversion or exchange privilege represented by
any Convertible Securities shall expire without having been exercised, the
applicable Conversion Prices for Existing Preferred Stock adjusted upon the
issuance of such rights, options, warrants or Convertible Securities shall be
readjusted to the Conversion Prices which would have been in effect for such
series of Preferred Stock had an adjustment been made on the basis that the only
Additional Shares deemed issued pursuant to subsection (B)(4)(i)(3) were the
Additional Shares, if any, actually issued, sold or transferred on the exercise
of such rights, options, warrants or rights of conversion or exchange of such
Convertible Securities, and such Additional Shares, if any, were issued or sold
for an amount equal to the sum of (A) the consideration actually received by the
Corporation upon such exercise (other than by cancellation of liabilities or
obligations evidenced by any such Convertible Securities), plus (B) in the case
----
of such rights, options or warrants, the consideration, if any, actually
received by the Corporation for the granting of all such rights, options or
warrants, whether or not exercised, or, in the case of such Convertible
Securities, the consideration received for issuing or selling the Convertible
Securities, whether or not converted or exchanged.
(5) Options and Warrants to Purchase Convertible
--------------------------------------------
Securities. For the purpose of making any adjustment to the Conversion Prices
- ----------
for any shares of Existing Preferred Stock, as provided in subsection
(B)(4)(i)(1), if, at any time or from time to time after the Effective Date, the
Corporation shall issue any rights, options or warrants for the purchase of
Convertible Securities, then, in each case, if the Effective Price thereof (as
hereinafter defined) is less than the applicable Conversion Prices then in
effect for such shares of Preferred Stock, the Corporation shall be deemed (A)
to have issued at the time of the issuance of such rights, options or warrants
the maximum number of Additional Shares issuable upon conversion or exchange of
the total amount of Convertible Securities converted by such rights, options or
warrants, and (B) to have received as consideration for the issuance of such
Additional Shares an amount equal to the sum of (i) the amount of consideration,
if any, received by the Corporation for the issuance of such rights, options or
warrants, plus (ii) the minimum amounts of consideration, if any, payable to
----
the Corporation upon the exercise of such rights, options or warrants, plus
----
(iii) the minimum amount of consideration, if any, payable to the Corporation
(other than by cancellation of liabilities or obligations evidenced by such
Convertible Securities) upon the conversion or exchange of such Convertible
Securities. As used in this subsection 4(i)(5), the term "Effective Price" shall
mean the quotient determined by dividing (X) the total amount of such
consideration determined as provided by clause (B) of the preceding sentence by
11
<PAGE>
(Y) such maximum number of Additional Shares determined as provided by clause
(A) of the preceding sentence. No further adjustment of the Conversion Prices
for any shares of such series of Preferred Stock adjusted upon the issuance of
such rights, options or warrants shall be made as a result of the actual
issuance of the Convertible Securities upon the exercise of such rights, options
or warrants or upon the actual issuance of Additional Shares upon the conversion
or exchange of such Convertible Securities.
(6) Expiration of Options and Warrants to Purchase
----------------------------------------------
Convertible Securities. The provisions of subsection (B)(4)(i)(4) for the
- ----------------------
readjustment of the applicable Conversion Prices for any shares of Existing
Preferred Stock upon the expiration of rights, options or warrants or the rights
of conversion or exchange of Convertible Securities shall apply similarly to the
rights, options or warrants for the purchase of Convertible Securities referred
to in subsection (B)(4)(i)(5).
(7) Additional Shares. As used in this Section 4,
-----------------
the term "Additional Shares" shall mean all shares issued or deemed (as provided
by the terms and provisions of this subsection (B)(4)) to be issued by the
Corporation, whether or not subsequently reacquired or retired by the
Corporation, other than shares of Common Stock:
i) issued or deemed issued (as
provided by the terms and provisions of this subsection (B)(4)) as a result of
the issuance of any shares of Existing Preferred Stock;
ii) issued or deemed issued pursuant
to a transaction described in subsections (B)(4)(d) through (h) hereof;
iii) issued or deemed issued to
employees and directors of, and consultants and advisors to, the Corporation for
the primary purpose of soliciting or retaining their services, provided each
such issuance is approved by the Corporation's Board of Directors;
iv) issued or deemed issued to a
Corporation, partnership or other entity with which the Corporation has a
partnership, joint venture or other business relationship, provided that such
issuances are for other than primarily equity financing purposes;
v) issued or deemed issued in
connection with the acquisition by the Corporation of the stock or assets of
another corporation, partnership or other entity;
vi) issued or deemed issued in
connection with any equipment lease financing or the incurrence by the
Corporation of any indebtedness for money borrowed;
vii) issued or deemed issued (as
provided by the terms and provisions of this Subsection (B)(4)) upon the
exercise of Warrants to purchase Common Stock granted in connection with the
offer and sale of Series D Preferred Stock by the
12
<PAGE>
Company and the exercise of outstanding warrants to purchase Common Stock issued
in connection with the Company's bridge notes dated August 26 and October 5,
1994.
(8) No adjustment of the Conversion Price for
Existing Preferred Stock shall be made in an amount less than one cent ($.01)
per share, and (except to the limited extent provided for in subsection
(B)(4)(i)(4) and (i)(6)) no adjustment of such Conversion Price pursuant to this
subsection (B)(4)(i) shall have the effect of increasing the Conversion Price
above the Conversion Price in effect immediately prior to such adjustment.
j. Certificate of Chief Financial Officer. In each
--------------------------------------
case of an adjustment or readjustment of the respective Conversion Prices of
Existing Preferred Stock, or an adjustment or readjustment of the respective
number of shares of Common Stock or other securities issuable upon conversion or
exchange of shares of Existing Preferred Stock or at any time reasonably
requested by any holder(s) of more than five percent (5%) of the shares of
Existing Preferred Stock, respectively, the Corporation shall cause the chief
financial officer of the Corporation to compute such adjustment or readjustment
in accordance with the Corporation's Certificate of Incorporation as then in
effect, and to prepare a certificate showing such adjustment or readjustment for
the Conversion Prices of such series of Preferred Stock, and shall mail such
certificate, by first class mail, postage prepaid, to each record holder of
shares of such series of Preferred Stock at the holder's address as shown in the
Corporation's books. The certificate shall set forth such adjustment or
readjustment, showing in detail the facts upon which such adjustment or
readjustment is based, including a statement of: (A) the consideration received
or deemed received for any Additional Shares issued or sold or deemed to have
been issued or sold; (B) the Conversion Prices then in effect for shares of such
series of Preferred Stock; and (C) the number of shares of Common Stock into
which shares of such series of Preferred Stock could be converted at the
Conversion Prices at the time in effect for such shares of Preferred Stock.
k. Notices of Record Date. In the event of any
----------------------
taking by the Corporation of a record of the holders of any class of securities
for the purpose of determining the holders thereof entitled to receive any
dividend or other distribution, or the occurrence or intended or impending
occurrence of any event described in subsection 2(e) hereof, the Corporation
shall give to each holder of shares of Existing Preferred Stock; at least twenty
(20) days prior to the date of the taking of such record or such event, as the
case may be, a written notice specifying: (i) in the case of the taking by the
Corporation of a record for the purpose of making a dividend or distribution,
the date on which such record is to be taken and a description of such dividend
or distribution; or (ii) in the case of the occurrence or intended or impending
occurrence of any event, the date on which such event is to occur, and the time,
if any, that is to be fixed, as to when the holders of record of shares of
Common Stock (or other securities) shall be entitled to exchange their shares of
Common Stock (or other securities) for securities or other property deliverable
upon the occurrence of such event.
l. Fractional Shares. No fractional shares of Common
-----------------
Stock shall be issued upon conversion of shares of Existing Preferred Stock. In
lieu of any fractional shares to which any holder of shares of Existing
Preferred Stock would otherwise be entitled, the Corporation shall pay cash
equal to the product of such fraction multiplied by the fair market
13
<PAGE>
value of one share of the Corporation's Common Stock on the date of conversion,
as determined in good faith and on a reasonable basis by the Board of Directors
of the Corporation.
m. Reservation of Stock Issuable Upon Conversion.
---------------------------------------------
The Corporation shall at all times reserve and keep available out of its
authorized but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of shares of Existing Preferred Stock, such number of
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of Existing Preferred Stock, and, if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of all then outstanding shares of Existing
Preferred Stock, the Corporation will forthwith take such corporate action as
may be necessary or appropriate to increase its authorized but unissued shares
of Common Stock to such number of shares as shall be sufficient for such
purpose.
n. Payment of Taxes. The Corporation will pay all
----------------
taxes and other governmental charges that may be imposed in respect of the issue
or delivery of shares of Common Stock upon conversion of shares of Existing
Preferred Stock, including, without limitation, any tax or other charge imposed
in connection with any transfer involved in the issue and delivery of shares of
Common Stock in a name other than that in which the shares of Existing Preferred
Stock so converted were registered.
o. No Impairment. The Corporation shall not amend
-------------
its Restated Certificate of Incorporation or participate in any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, for the purpose of avoiding or seeking
to avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in carrying out all such action as may be reasonably necessary or
appropriate in order to protect the conversion rights of holders of shares of
Existing Preferred Stock against impairment.
5. Voting Rights.
-------------
a. The holder of each share of Existing Preferred
Stock shall have the right to one vote for each share of Common Stock into which
such shares of Preferred Stock could then be converted. In all cases any
fractional share, determined on an aggregate conversion basis, shall be rounded
to the nearest whole share. With respect to such vote, such holder shall have
full voting rights and powers equal to the voting rights and powers of the
holders of Common Stock, and shall be entitled, notwithstanding any provision
hereof, to notice of any stockholders' meeting in accordance with the bylaws of
the Corporation, and shall be entitled to vote, together with holders of Common
Stock, with respect to any question upon which holders of Common Stock have the
right to vote.
b. Except as otherwise provided herein, the holders
of the Series B Preferred Stock, voting separately as a class, shall be entitled
to elect one director at each annual meeting of stockholders of the Corporation
at which any director is elected or at the time of any written consent to action
in lieu of any such meeting. No director so elected by the holders of the
Series B Preferred Stock may be removed without the prior consent, given in
person or by proxy, either in writing or at a special meeting called for that
purpose, of the holders
14
<PAGE>
of the Series B Preferred Stock voting separately as a class. In case of the
death, resignation or other removal of the director elected by the holders of
the Series B Preferred Stock such holders may elect, voting separately as a
class, by written notification delivered to the Board of Directors of the
Corporation, a successor to hold office for the unexpired term of such removed
director.
c. Except as otherwise provided herein, the holders
of the Series D Preferred Stock, voting separately as a class, shall be entitled
to elect one director at each annual meeting of stockholders of the Corporation
at which any director is elected or at the time of any written consent to action
in lieu of any such meeting. No director so elected by the holders of the
Series D Preferred Stock may be removed without the prior consent, given in
person or by proxy, either in writing or at a special meeting called for that
purpose, of the holders of the Series D Preferred Stock voting separately as a
class. In case of the death, resignation or other removal of the director
elected by the holders of the Series D Preferred Stock such holders may elect,
voting separately as a class, by written notification delivered to the Board of
Directors of the Corporation, a successor to hold office for the unexpired term
of such removed director.
6. Protective Provisions.
---------------------
a. So long as shares of Series A Preferred Stock are
outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent as provided by law) of the holders of at least a
majority of the then outstanding shares of Series A Preferred Stock voting as
one class in accordance with subsection (B)(5):
(1) create any new class or series of stock having
a preference over, or being on a parity with, the Series A Preferred Stock with
respect to voting, dividends or upon liquidation; or
(2) declare, make or pay any distributions of any
kind on any shares of Common Stock, except for the declaration and payment of
stock dividends on Common Stock payable in the form of shares of Common Stock;
or
(3) redeem, purchase, acquire or retire any shares
of any Common Stock or any warrants, options or other rights to acquire any
Common Stock, except for repurchases of shares of Common Stock (or options to
acquire such shares) of, or consultants and advisors to, the Corporation upon
termination of their employment or services pursuant to agreements providing for
such repurchase; or
(4) increase the authorized number of shares of
Series A Preferred Stock; or
(5) alter or change the rights, preferences or
privileges of the shares of Series A Preferred Stock so as to affect adversely
the shares; or
(6) do any act or thing which would result in
taxation of the holders of shares of Series A Preferred Stock under section
305(b) of the Internal Revenue Code of 1986, as amended (or any comparable
provision of the internal Revenue Code as hereafter from time to time amended).
15
<PAGE>
b. So long as shares of Series B Preferred Stock are
outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent as provided by law) of the holders of at least a
majority of the then outstanding shares of Series B Preferred Stock voting as
one class in accordance with subsection (B)(5):
(1) create any new class or series of stock having
a preference over, or being on a parity with, the Series B Preferred Stock with
respect to voting, dividends or upon liquidation; or
(2) declare, make or pay any distributions of any
kind on any shares of Common Stock, except for the declaration and payment of
stock dividends on Common Stock payable in the form of shares of Common Stock;
or
(3) redeem, purchase, acquire or retire any shares
of any Common Stock or any warrants, options or other rights to acquire any
Common Stock, except for repurchases of shares of Common Stock (or options to
acquire such shares) of, or consultants and advisors to, the Corporation upon
termination of their employment or services pursuant to agreements providing for
such repurchase; or
(4) increase the authorized number of shares of
Series B Preferred Stock; or
(5) alter or change the rights, preferences or
privileges of the shares of Series B Preferred Stock so as to affect adversely
the shares; or
(6) do any act or thing which would result in
taxation of the holders of shares of Series B Preferred Stock under section
305(b) of the Internal Revenue Code of 1986, as amended (or any comparable
provision of the internal Revenue Code as hereafter from time to time amended).
c. So long as shares of Series C Preferred Stock are
outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent as provided by law) of the holders of at least a
majority of the then outstanding shares of Series C Preferred Stock voting as
one class in accordance with subsection (B)(5):
(1) create any new class or series of stock having
a preference over, or being on a parity with, the Series C Preferred Stock with
respect to voting, dividends or upon liquidation; or
(2) declare, make or pay any distributions of any
kind on any shares of Common Stock, except for the declaration and payment of
stock dividends on Common Stock payable in the form of shares of Common Stock;
or
(3) redeem, purchase, acquire or retire any shares
of any Common Stock or any warrants, options or other rights to acquire any
Common Stock, except for repurchases of shares of Common Stock (or options to
acquire such shares) of, or consultants and advisors to, the Corporation upon
termination of their employment or services pursuant to agreements providing for
such repurchase; or
16
<PAGE>
(4) increase the authorized number of shares of
Series C Preferred Stock; or
(5) alter or change the rights, preferences or
privileges of the shares of Series C Preferred Stock so as to affect adversely
the shares; or
(6) do any act or thing which would result in
taxation of the holders of shares of Series C Preferred Stock under section
305(b) of the Internal Revenue Code of 1986, as amended (or any comparable
provision of the internal Revenue Code as hereafter from time to time amended).
d. So long as shares of Series D Preferred Stock are
outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent as provided by law) of the holders of at least a
majority of the then outstanding shares of Series E Preferred Stock voting as
one class in accordance with subsection (B)(5):
(1) create any new class or series of stock having
a preference over, or being on a parity with, the Series D Preferred Stock with
respect to voting, dividends or upon liquidation; or
(2) declare, make or pay any distributions of any
kind on any shares of Common Stock, except for the declaration and payment of
stock dividends on Common Stock payable in the form of shares of Common Stock;
or
(3) redeem, purchase, acquire or retire any shares
of any Common Stock or any warrants, options or other rights to acquire any
Common Stock, except for repurchases of shares of Common Stock (or options to
acquire such shares) of, or consultants and advisors to, the Corporation upon
termination of their employment or services pursuant to agreements providing for
such repurchase; or
(4) increase the authorized number of shares of
Series D Preferred Stock; or
(5) alter or change the rights, preferences or
privileges of the shares of Series D Preferred Stock so as to affect adversely
the shares; or
(6) do any act or thing which would result in
taxation of the holders of shares of Series D Preferred Stock under section
305(b) of the Internal Revenue Code of 1986, as amended (or any comparable
provision of the internal Revenue Code as hereafter from time to time amended).
e. So long as shares of Series E Preferred Stock are
outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent as provided by law) of the holders of at least a
majority of the then outstanding shares of Series E Preferred Stock voting as
one class in accordance with subsection (B)(5):
17
<PAGE>
(1) create any new class or series of stock having
a preference over, or being on a parity with, the Series E Preferred Stock with
respect to voting, dividends or upon liquidation; or
(2) declare, make or pay any distributions of any
kind on any shares of Common Stock, except for the declaration and payment of
stock dividends on Common Stock payable in the form of shares of Common Stock;
or
(3) increase the authorized number of shares of
Series E Preferred Stock; or
(4) alter or change the rights, preferences or
privileges of the shares of Series E Preferred Stock so as to affect adversely
the shares.
f. So long as shares of Existing Preferred Stock are
outstanding, the Corporation shall not without first obtaining the approval (by
vote or written consent as provided by law) of the holders of at least a
majority of the then outstanding shares of Existing Preferred Stock voting as
one class in accordance with subsection (B)(5) effect any consolidation, merger,
other corporate reorganization, transaction, sale, conveyance or other
disposition described in subsection (B)(2)(e)(i) hereof.
7. Status of Converted Stock. In the event any shares of
-------------------------
Existing Preferred Stock shall be converted pursuant to subsection (B)(4)
hereof, the shares so converted shall be cancelled and shall not be issuable by
the Corporation, and the Restated Certificate of Incorporation of the
Corporation shall be appropriately amended to effect the corresponding reduction
in the Corporation's authorized capital stock.
8. Notices to Holders of Series E Preferred Stock of
-------------------------------------------------
Certain Corporation Actions. In the event that the Corporation shall propose
- ---------------------------
(or shall have knowledge of a proposal) to:
a. pay or make any dividend or other distribution on
the Common Stock;
b. effect a subdivision or combination of the Common
Stock;
c. effect a reorganization, reclassification of the
Common Stock or a merger, consolidation or disposition of all of or
substantially all of the assets of the corporation;
d. effect a voluntary or involuntary dissolution,
liquidation or winding-up of the Corporation; or
e. take any other action which would require an
adjustment pursuant to Section 4(d);
then the Corporation will deliver to each holder of Series E Preferred Stock a
notice specifying (i) the date or expected date on which any record is to be
taken (or the transfer books of the
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Corporation are to be closed) for the purpose of determining the shareholders of
the Corporation entitled to receive any such dividend or other distribution,
(ii) the date or expected date on which any record is to be taken (or the
transfer books of the Corporation are to be closed) for the purpose of
determining the shareholders of the corporation entitled to receive notice of
and to vote at any meeting of the shareholders of the Corporation at which any
of the other above-listed events is to be considered, (iii) the date or expected
date on which any such dividend or distribution or any of the other above-listed
events is expected to be paid, made or effected, and (iv) the date or expected
date as of which holders of Common Stock shall be entitled to participate in any
such dividend or other distribution, or to exchange their Common Stock for stock
or other securities, cash or other property or assets deliverable in connection
with any such other event. Such notice shall be delivered at least 20 days prior
to any such date or expected date specified therein. The holders of the Series E
Preferred Stock shall also be entitled to the same rights to receive notice of
corporate action as any holder of Common Stock.
C. Common Stock.
------------
1. Relative Rights of Preferred Stock and Common Stock.
---------------------------------------------------
All preferences, voting powers, relative, participating, optional or other
special rights and privileges, and qualifications, limitations or restrictions
of the Common Stock are expressly made subject and subordinate to those that may
be fixed with respect to any shares of the Preferred Stock.
2. Voting Right. Except as otherwise required by law or
------------
this Restated Certificate of Incorporation, each holder of Common Stock shall
have one vote in respect of each share of stock held by him of record on the
books of the Corporation for the election of directors and on all matters
submitted to a vote of stockholders of the Corporation.
3. Dividends. Subject to the preferential rights of the
---------
Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the board of directors, out of the assets of
the Corporation which are by law available therefore, dividends payable either
in cash, in property or in shares of capital stock.
4. Dissolution, Liquidation or Winding Up. In the event
--------------------------------------
of any dissolution, liquidation or winding up of the affairs of the Corporation,
after distribution in full of the preferential amount, if any, to be distributed
to the holders of shares of the Preferred Stock, holders of Common Stock shall
be entitled, unless otherwise provided by law or this Restated Certificate of
Incorporation, to receive all of the remaining assets of the Corporation of
whatever kind available for distribution to stockholders ratably in proportion
to the number of shares of Common Stock held by them respectively.
D. Reverse Stock Split. Effective immediately upon the filing
-------------------
of this Amended and Restated Certificate of Incorporation with the Secretary of
State of the State of Delaware, each outstanding 2.5 (two and one-half) shares
of Common Stock is converted into and reconstituted as one share of Common
Stock. All calculations set forth herein shall be appropriately adjusted to
reflect the foregoing reverse stock split based on the aggregate number of
shares of Common Stock owned by each stockholder. No fractional shares of
capital stock shall be issued in connection with the adjustments of outstanding
shares required by the foregoing reverse stock split, but in lieu thereof cash
in the amount of the fair market value
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thereof as determined by the Board of Directors will be paid to each Stockholder
of record as of the filing of this Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware.
ARTICLE V
Except as otherwise provided in this Restated Certificate of
Incorporation, in furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, repeal, alter,
amend and rescind any or all of the Bylaws of the Corporation.
ARTICLE VI
The number of directors of the Corporation shall be fixed from time to
time by a bylaw or amendment thereof duly adopted by the Board of Directors or
by the stockholders.
ARTICLE VII
Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
ARTICLE IX
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived any improper
personal benefit. If the Delaware General Corporation Law is hereafter amended
to authorize, with the approval of a corporation's stockholders, further
reductions in the liability of the corporation's directors for breach of
fiduciary duty, then a director of the Corporation shall not be liable for any
such breach to the fullest extent permitted by the Delaware General Corporation
Law as so amended. Any repeal or modification of the foregoing provisions of
this Article IX by the stockholders of the Corporation shall not adversely
affect any right or protection of a director of the corporation existing at the
time of such repeal or modification.
ARTICLE X
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed
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by statute, and all rights conferred upon stockholders herein are granted
subject to this reservation.
* * *
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IN WITNESS WHEREOF, said Qualix Group, Inc., has caused its corporate
seal to be hereunto affixed and this certificate to be signed by its President,
Richard G. Thau, and its Secretary, Jean A. Kovacs, this____ day of January,
1997.
QUALIX GROUP, INC.
By:_____________________________________
Richard G. Thau
President
Attest:
__________________________________
Jean A. Kovacs, Secretary
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EXHIBIT 11.1
QUALIX GROUP, INC.
COMPUTATION OF PRIMARY AND FULLY DILUTED EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS--UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------
1995 1996
-------- --------
<S> <C> <C>
Primary:
Earnings--
Net income............................................... $ 818 $ 711
======== ========
Shares:
Weighted average number of common shares outstanding..... 2,553 4,437
Number of common equivalent shares assuming exercise of
stock options........................................... 5,548 3,936
-------- --------
Total shares used in computation......................... 8,101 8,373
======== ========
Primary earnings per share................................. $ 0.10 $ 0.08
======== ========
Fully diluted:
Earnings--
Net income............................................... $ 818 $ 711
Shares:
Weighted average number of common shares outstanding..... 2,553 4,437
Number of common equivalent shares assuming conversion of
convertible securities.................................. 5,548 3,936
-------- --------
Total shares used in computation......................... 8,101 8,373
======== ========
Fully diluted earnings per share........................... $ 0.10 $ 0.08
======== ========
</TABLE>
