Mail Stop 4-6
March 7, 2005
Mr. Thomas K. Barton
Chief Executive Officer
Rackable Systems, Inc.
1933 Milmont Drive
Milpitas, California 95035
Re: Rackable Systems, Inc.
Registration Statement on Form S-1 filed February 4, 2005
File No. 333-122576
Dear Mr. Barton:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
supplemental information so we may better understand your
disclosure.
After reviewing this information, we may or may not raise
additional
comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
General
1. We will process your amendments without price ranges. Since
the
price range triggers a number of disclosure matters, we will need
sufficient time to process the amendment when it is included.
Please
understand that its effect on disclosure throughout the document
may
cause us to raise issues on areas not previously commented upon.
2. We note a number of blank spaces throughout your registration
statement for information that you are not entitled to omit under
Rule 430A. For example, provide neither the number of shares to
be
offered nor the number of shares to be sold by selling
stockholders
on the cover. Fill in all blanks throughout the registration
statement prior to effectiveness except for the specific
information
that you are allowed to omit. Please see Section II.A.7 of
Release
No. 33-6714. Also, confirm that you have not circulated copies of
the registration statement and will not circulate until you
include
an estimated price range and maximum number of shares, and all
other
information except information you may exclude in reliance upon
Rule
430A.
Inside Front Cover Page
3. We note that your graphic artwork contains narrative text which
includes phrases such as "high-density compute and storage
servers,"
"open architecture approach," "scale out datacenter deployments,"
and
"half-depth design." Please keep in mind our plain English
principles regarding the use of industry jargon and terms
unfamiliar
to the average investor. Please refer to Section VIII of our
March
31, 2001 update to our Current Issues and Rulemaking Projects
outline
for additional guidance. Please also provide us with support for
your statement that your high-capacity storage systems are "low
cost."
Prospectus Summary
4. Please supplementally provide us support for your statement, in
this summary and elsewhere in the prospectus, that you are "a
leading
global provider of high-density compute servers and high-capacity
storage systems." Additionally expand your disclosure to state
concisely the basis on which the leadership claim is made. In
your
response tell us how you compare to your competitors in
quantitative
or qualitative terms and consider appropriate disclosure in this
respect. We note your statement on page 3 that you are "subject
to
intense competition from some of the largest enterprise computing
and
storage companies in the world."
5. We note your list of customers in this section and your more
extensive listing of customers on page 63 of your filing. Please
disclose the criteria you used to determine which of your
customers
were to be disclosed in the prospectus. We note that on page 63
you
state that the customers identified represented "large deployments
in
those industries in the first nine months of 2004." Does "large"
signify the largest deployments for the period or are they samples
from a certain threshold in terms of revenue, servers or something
else? Further, please explain why the list of customers in your
registration statement is different to some degree from the list
of
customers on your Web site.
6. We note your statement that you are "substantially dependent on
a
small number of customers for a large portion of [y]our revenues"
as
well as your later disclosure suggesting that such customers
change
over time as their requirements become fulfilled. Please revise
your
statement in this summary to clarify that your dependency is not
on a
small number of recurring customers, but rather significant
customers
in a given period that may not be significant in subsequent
periods
as their needs are fulfilled.
The Offering
7. We note your statement regarding "the conversion and automatic
redemption of all of [y]our preferred stock" as well as your
disclosure on page 91 stating that the Series A preferred stock
will
be converted to Series B preferred stock which in turn will be
redeemed for $1.25 and .7 shares of common stock per one share of
Series B preferred stock. Please consider clarifying your initial
statement as it appears to suggest that all shares of a class of
preferred stock will be both converted and redeemed for cash and
shares of common stock.
Summary Financial Data
8. Revise your disclosure, under this section or elsewhere in your
filing, to include a presentation of pro forma earnings per share
that reflects the number of shares whose proceeds will be used to
redeem preferred shares or repay debt. You may present additional
earnings per share data if you consider such information
meaningful.
In either event, provide footnote disclosure that clearly explains
the nature and specific computations of the earnings per share
measures presented.
9. We note that your presentation of the non-GAAP measure,
"Adjusted
EBITDA," includes adjustments for the changes in fair value of
embedded derivatives in preferred stock and amortization of stock-
based compensation. In light of this disclosure please tell us
how
you have considered the requirements of Item 10(e)(1)(ii)(B) of
Regulation S-K.
10. Currently, your presentation of non-GAAP measures includes a
reconciliation to net income (loss). This suggests that you
consider
the non-GAAP measures to be performance measures. However, your
disclosure regarding your reasons for presenting the non-GAAP
measures indicates, in part, that the measures aid investors in
analyzing your ability to generate cash flows. Revise your
presentation to resolve this apparent inconsistency.
Alternatively,
tell us why you believe a revision is not necessary.
11. Revise the discussion of your non-GAAP measures to include, or
provide a cross-reference to, discussion of the limitations of
these
measures. See page 46 of your filing.
Risk Factors
12. We note that certain risk factors you have disclosed identify
potential risks resulting from the described uncertainty or cause.
For example, your risk factor on page 10 discusses the possible
risk
of pricing pressure by financially stronger competitors. Please
review your risk factors in light of this comment and disclose any
material incidence, if any, in which such an event has occurred
and
the actual material effects on your business as a result.
Our products incorporate open standard, commoditized components
and
materials..., pp. 10-11
13. Please consider elaborating on any material relationship with
your suppliers. Notwithstanding your lack of long-term supply
arrangements, do certain key suppliers provide a significant
volume
of your components and/or work effectively within your just-in-
time
production framework such that the loss of such a supplier would
materially affect your operations? Any agreements with such
suppliers may need to be filed as exhibits to the registration
statement. Please see Item 601(b)(10)(ii)(B) of Regulation S-K.
If we fail to maintain or expand our relationships with our
suppliers, we may not have adequate access to new or key
technology..., p. 14
14. We note your statement that you rely heavily on Intel and
Advanced Micro Devices as component suppliers. In light of the
importance of their components to your products, it appears that
any
agreement with such suppliers would need to be filed as exhibits
to
the registration statement. Does an agreement govern your
ownership
of the product innovations developed by them at your direction?
Does
your product or business materially depend on any such innovation
owned by you but developed by a supplier?
Our business depends on decisions by potential customers to adopt
our
modular, open standard-based products and to replace their legacy
server systems with our products..., pp. 11-12
15. We note that your servers run on Linux or Microsoft Windows
operating systems. Do you provide the installation of the
operating
system for your customers as well as the license for Microsoft
Windows? Provide your analysis as to whether any agreement with
Microsoft is material to your business and would need to be filed
as
an exhibit to your registration statement. If you believe this is
an
"ordinary course" arrangement, please explain the basis of that
belief in reasonable detail.
16. Please briefly elaborate on the litigation surrounding the
Linux
operating system and how such litigation has the effect of
impeding
adoption of Linux as well as its specific effect on your business.
Do Linux servers represent a significant share of the servers you
sell?
We depend on our Foundation Series computer servers for
substantially
all of our revenues...., p. 14
17. Please clarify here and in your business section whether you
intend the Scale Out Series compute servers to replace your
Foundation Series compute servers. We note that your first sale
of
the Foundation Series occurred five years ago. Has the Foundation
Series been superseded or is it being replaced as a product or do
you
plan the Scale Out Series to be another product in your product
line-
up? Please also specify here or elsewhere in your prospectus,
such
as your management`s discussion and analysis, the percentage of
revenue that the Foundation Series represented for the applicable
financial statement periods.
Maintaining and improving our financial controls and the
requirements
of being a public company may strain our resources, divery
management`s attention and affect our ability to attract and
retain
qualified board members, pp. 16-17
18. Please disclose the measures that you will or have already put
in
place to timely identify and accurately report complex accounting
issues other than those related to equity and derivative
transactions. Additionally disclose whether you will or already
have
implemented your auditors` suggestions or other measures regarding
the reportable material weakness.
Use of Proceeds
19. We note in your management`s discussion and analysis on page
32
that you intend to increase your research and development as well
as
your sales and marketing spending in order to "expand our product
portfolio and add new features to our existing products" and to
"hire
additional sales personnel." We also note your risk factors on
page
11 discussing your expansion plans. Further, your cash flow for
the
nine months ended September 30, 2004 is negative. As a result, it
appears your expansion plans require the use of your proceeds from
this offering. Do you have a business plan for your use of
proceeds
encompassing your plans for expansion and any other uses? Please
detail and describe the intended application of the proceeds from
this offering in light of your foregoing expansion plans as well
as
any existing business plan.
20. Please detail the interest rate and maturity date for the
promissory notes in which proceeds from the offering will be used
to
repay. Please see the Instructions to Item 504 of Regulation S-K.
Management`s Discussion and Analysis of Financial Condition and
Results of Operations
Overview, pp. 29-35
21. Please supplementally inform us and consider providing
disclosure
regarding the reason for the purchase of all of the assets and
assumption of all of the liabilities of Old LLC by GNJ, Inc.
Please
also inform us of the reason for the subsequent merger of Old LLC
into GNJ, Inc. in light of the prior asset and liability transfer.
22. We note your recent introduction of your Scale Out Series
products. This new product line appears to be a material trend
with
respect to your revenues. Please provide additional disclosure in
this section regarding the market conditions for the new product
and
management`s views as to the trend towards increasing reliance on
the
new product line and its prospective impact on your financial
condition. Do you plan to shift sales and marketing resources to
your Scale Out Series from your Foundation Series? Please note
our
prior comment regarding the Scale Out Series.
23. We note your risk factor discussion on page 12 regarding your
plan to adopt a channel strategy. This sales strategy appears to
be
a material divergence from your historical reliance on direct
sales.
Please provide additional disclosure regarding your plan to
develop
channel sales and its prospective impact on your business
operations,
capabilities and financial condition. How will establishing your
channel strategy affect your sales and marketing expenses going
forward and will resources be shifted from your current direct
sales
approach?
24. We note your disclosure on page 31 that your product warranty
is
for one year, but on page 37 you disclose that your product
warranty
period is one to three years. Please clarify and reconcile these
two
statements.
25. Please elaborate on the relationship with Hewlett-Packard in
which HP acted as a contractual intermediary for your sales to
Microsoft. Please explain the economic and business consequences
of
the change in your relationship with Microsoft on your operations,
if
any. Further, in light of the significant amount of revenue
Microsoft and Yahoo! accounted for in 2004, please file your
agreement with Microsoft and/or HP with respect to your sales to
Microsoft as well as your agreement with Yahoo!. We also note
your
disclosure on page 63 that you expect to contract directly with
Microsoft as well as on page F-22 of a September 2003 agreement
with
Yahoo! for a significant purchase arrangement. If material, such
agreement may also need to be filed as an exhibit to your
registration statement. Please see Item 601(b)(10)(ii) of
Regulation
S-K.
26. We note your disclosure that Sanmina-SCI, E-Cycle and Synnex
are
your current contract manufacturers. Please disclose how much
each
manufacturer contributes to the production of your products. In
this
regard, the extent of your reliance upon Sanmina`s supply of "the
majority of our finished products" and the extent of reliance on
the
other contractors is unclear. Given what appears to be
substantial
reliance upon Sanmina and the potential adverse impact of
interruption of supply from that contract manufacturer, it appears
that the contract manufacturing agreement with Sanmina should be
filed as an exhibit. The terms of the contractual relationship of
that principal supplier should be expanded in the prospectus that
describes your relationships with contract manufacturers.
Depending
on the extent of your reliance upon the other contract
manufacturers
and the potential consequences of interruption in your
relationships
with the other suppliers, it appears, the agreements with them may
need to be filed as exhibits to your registration statement.
Please
see Item 601(b)(10)(ii) of Regulation S-K.
27. The discounts and pricing pressure in your gross profit
discussion appear to be material trends that may benefit from
further
discussion in your management`s discussion and analysis. Are
discounts provided to all customers or are they negotiated
specifically with large volume customers? In addition, please
consider elaborating on any material trend related to current DRAM
pricing. Do prices appear to be moving up? What affects DRAM
pricing and causes its volatility? How much does DRAM contribute
to
your pricing?
Results of Operations, pp. 39-44
28. Please quantify the impact of each identified source for
significant changes from period to period in line items of your
financial statements. For example, you state that your increased
revenue for the nine months ended September 30, 2004 from the nine
months ended September 30, 2003 is attributable to follow-on sales
to
existing customers as well as sales to new customers. How much
did
each contribute to the increase in your revenues? Did the
increased
headcount in your sales and marketing department contribute to the
additional $3 million increase in your sales and marketing expense
in
your comparison of the same periods? Please review your
disclosure
in this section in light of this comment. Please refer to Section
III.D of Release No. 33-6835 for guidance.
29. If material, please disclose whether in connection with the
patent litigation, discussed on page 41, you incurred and recorded
any settlement amounts.
Comparison of the Years Ended December 31, 2003 and September 30,
2002, pp. 42-43
30. Please reconcile your statements in your general and
administrative expense discussion in which you attribute the $3.5
million increase in the expense primarily to increased headcount
with
your following statements that headcount increased by three
employees
and $1.4 million of the increase was due to the amortization of
patents. Please quantify the increase attributable to increased
headcount.
Comparison of the Years Ended September 30, 2002 and 2001, pp. 43-
44
31. In your cost of revenue and gross profit discussion, please
clarify how the decrease in gross profit is attributable to a
significant customer. Is this the customer who reduced their
order
from 2001 to 2002? If so, explain the business conditions that
led
to the reduction in their order? Did competitive market
conditions
play a role? Were significant discounts provided to this
customer?
Were its needs for your products satisfied in the prior period?
Selected Quarterly Financial Information, pp. 47-48
32. Please revise to provide for eight quarters of financial
information and disclose the per share loss data as required by
Item
302(a)(1) of Regulation S-K.
Liquidity and Capital Resources, pp. 49-52
33. We note that you anticipate that your "operating cash flow,
together with the net proceeds of this offering and available
borrowings," will be sufficient for your needs in the next 12 to
24
months. Please explain your reliance on operating cash flow to
fund
your needs in light of the fact that your cash flow from
operations
has been negative at times and in particular for the nine months
ended September 30, 2004. Further, please provide your estimated
cash needs for the next 12 to 24 months.
34. Regarding the line of credit discussed under Note 10 to your
financial statements, expand your disclosure under this section
to:
* Provide the material terms and covenants for the line of credit
in
quantitative terms, as well as whether you are currently in
compliance with the covenants;
* Explain the reasons in drawing down the full amount available
under
your line of credit and discuss the uses of such funds;
* Discuss your plans and your ability in renewing the credit line
before its maturity on March 31, 2005 and/or repaying the
borrowings
under the credit line;
* Discuss material implications and impact of such actions,
described
in the bullet above, or absence thereof, on your short- and long-
term
commitments and liquidity.
35. Please supplementally advise us why the agreement with
Parthenon
Capital LLC was terminated three years prior to its expiration in
spite of the fact that fees for the remaining term of the
agreement
appears to have been paid in full. Please also advise us of the
reason for the repurchase of the warrant obligation as well as the
shares held by your founders.
36. In your February 2005 agreement with Rackable Investment, we
note
that you agreed to, among other things, amend your current voting
agreement. However, it does not appear that the amendment has
been
filed as an exhibit to your registration statement nor mentioned
in
your discussion of the voting agreement under your certain
transactions and related party transactions section. Please file
the
amendment.
Business
37. With respect to any third-party statements in your prospectus
such as the market data by IDC presented in business, please
supplementally provide us with support for such statements. To
expedite our review, please clearly mark each source to highlight
the
applicable portion or section containing the statistic and cross-
reference it to the appropriate location in your prospectus.
Also,
supplementally tell us whether the source of each statistic is
publicly available without cost or at a nominal expense. If the
source is not publicly available at nominal or no cost, it appears
that consent of the third party to the use of the information in
the
prospectus and to the reference to that firm should be obtained
and
filed as an exhibit. Please see Rule 436 of Regulation C and Item
601(b)(23) of Regulation S-K for additional guidance.
Alternatively,
you may adopt these statements as your own.
We note your industry data discussion on page 73. Rather than
aggregating the industry data references in the location on page
73,
attribute the industry data to specific sources where the industry
data is presented. Additionally, eliminate the disclaimer to the
effect that you do not "guarantee the accuracy or completeness of
this data". If you do not reasonably believe that the information
is
accurate and is data on which investors may reasonably rely in
making
their investment decisions, you should eliminate the data from
your
filing. Revise the text as necessary so that you do not suggest
that
Rackable could lack a reasonable belief as to the completeness and
accuracy of the market data it elects to include in the filing
Industry Background, pp. 57-60
38. In your power management issues discussion on page 60 or
elsewhere in your business section, please discuss the issues with
respect to AC or DC power for servers and why it appears that DC
power is more favorable than AC power. We note your statement
that
AC-DC power conversion within a single server is not optimal.
Please
explain why the power conversion is taking place and why you have
a
solution for it.
The Rackable Systems Solution, pp. 60-62
39. Please explain your use of the terms "out-of-band and in-band
features."
40. We note your disclosure of an OEM license agreement with Sun
Microsystems for their Solaris operating system. Do Solaris-
installed servers represent a material portion of your revenues?
Your license agreement with Sun Microsystems may need to be filed
as
an exhibit to your registration statement.
Customers, pp. 63-64
41. Please confirm that Snapfish and Data393 have reviewed the
text
of the prospectus relating to them and concur with the statements
concerning product suitability, performance and achievement of
objectives or goals.
42. Please supplementally support the statements in the case
studies
that your products provide "superior power and heat management"
and
"superior thermal management."
Service and Support, pp. 70-71
43. Please clarify whether the "sparing" arrangements are part of
your standard warranty services or are part of your new additional
maintenance services. Do these "sparing" arrangements result in
additional revenue?
Management
Stock Option Grants in Last Fiscal Year, p. 79
44. We note that you have no existing trading market for your
shares.
With respect to calculating your potential realizable values,
please
see Instruction 7 to Item 402(c) of Regulation S-K. Please also
see
Release No. 33-7009 and Interpretations J.16 and 17 of our July
1997
Manual of Publicly Available Telephone Interpretations. Please
either use the midpoint of your offering price range until your
initial public offering price is determined or discuss in a
footnote
the valuation method and assumptions used in determining the fair
market value of the options.
Certain Relationships and Related Party Transactions
45. Please specify the outstanding units in Rackable Investments
LLC.
Your disclosure in footnote (3) on page 91 presently states the
units
held by Parthenon Capital as well as Messrs. Barton and Ford, but
does not provide a reference as to what such ownership stakes
represent. Please also specify whether Rackable Investments
engages
in any other business or holds assets other than its holdings in
your
preferred stock.
46. We note your statement on the top of page 92 that if the
offering
closed after March 2005, then the redemption amount of $1.25 per
share would be greater. Please confirm and provide us with a
detailed calculation of the redemption amount after March 2005.
Because the offering will not be effective prior to March 2005,
please also consider revising your disclosure throughout with
respect
to this increased redemption amount to emphasize the outcomes that
are currently possible, rather than a provision of the agreement
that
exists but is not operative under current conditions.
47. Please specify what services were provided by Messrs. Barton
and
Ford with respect to your December 2002 acquisition in light of
the
fact that they were also employed by Callero Partners. We note
that
you also paid Callero Partners for services rendered in connection
with your December 2002 acquisition.
48. Please specify the reason for the repurchase of shares from
your
founders in February 2005 and how the purchase price for such
shares
was determined.
Principal and Selling Stockholders
49. It appears that footnote (9) to your beneficial ownership
table
is also applicable to the entities affiliated with Parthenon
Capital
and Messrs. Barton and Ford.
50. Please disclose the individual or individuals who exercise the
voting and/or dispositive powers with respect to the securities to
be
offered for resale by your selling securityholders that are
entities.
Please see Interpretation I.60 of our July 1997 Manual of Publicly
Available Telephone Interpretations and Interpretation 4S of the
Regulation S-K portion of the March 1999 Supplement to our July
1997
Manual of Publicly Available Telephone Interpretations.
51. Please provide additional disclosure with respect to how each
selling stockholder acquired their shares.
Underwriting
52. Please disclose the circumstances under which Lehman Brothers
will either shorten or waive the lock-up arrangements with respect
to
(1) you and (2) your officers, directors and stockholders.
53. We note your disclosure on electronic distributions on page
104.
Please tell us specifically whether any member of the underwriting
syndicate will engage in any electronic offer, sale or
distribution
of the shares and describe their procedures to us supplementally.
If
you become aware of any additional members of the underwriting
syndicate that may engage in electronic offers, sales or
distributions after you respond to this comment, promptly
supplement
your response to identify those members and provide us with a
description of their procedures. Briefly describe any electronic
distribution in the filing, and confirm, if true, that the
procedures
you will follow with respect to any electronic distribution will
be
consistent with those previously described to the Office of Chief
Counsel.
54. Please tell us whether you or the underwriters have any
arrangements with a third party to host or access your preliminary
prospectus on the Internet. If so, identify the party and the Web
site, describe the material terms of your agreement, and provide
us
with a copy of any written agreement. Provide us also with copies
of
all information concerning you or your prospectus that has
appeared
on their Web site. Again, if you subsequently enter into any such
arrangements, promptly supplement your response.
55. Supplementally describe to us the mechanics of how and when
your
directed shares were or will be offered and sold to investors in
the
directed share program for this offering. For example, tell us
how
the prospective recipients and number of reserved shares is
determined. Tell us how and when you and the underwriters
notified
or will notify the directed share investors, including the types
of
communications used. Discuss the procedures these investors must
follow in order to purchase the offered securities, including how
and
when any communications are sent or received or funds are received
by
the underwriters or you. How do the procedures for the directed
share program differ from the procedures for the general offering
to
the public? Provide us with copies of all written communications
with prospective purchasers about the directed share program.
Change in Accountants
56. Please revise the disclosure appearing in the first paragraph
to
state whether Deloitte & Touche resigned, refused to stand for re-
election or was dismissed and the date thereof. Indicate whether
this change in accountants was recommended or approved by the
audit
committee or board of directors. See Items 304(a)(1)(i) and
304(a)(1)(iii) of Regulation S-K.
57. Currently, your disclosure regarding disagreements with
Deloitte
& Touche addresses the period through the date of the "Rackable
Purchase." Revise this disclosure to address the period through
the
date Deloitte & Touche resigned, refused to stand for re-election
or
was dismissed. See Item 304(a)(iv) of Regulation S-K.
58. Please revise the disclosure regarding disagreements to
indicate
the specific period during which Ernst & Young was engaged. In
this
regard, clarify whether the engagement began on January 23, 2003.
Financial Statements
59. Please tell us your proposed initial offering price as well as
when you first initiated discussions with underwriters and when
the
underwriters first communicated their estimated price range for
your
stock.
Note 2. Summary of Significant Accounting Policies
Intangible Assets, p. F-10
60. Please tell us why you believe that the trade names acquired
in
connection with the acquisition of your predecessor should be
deemed
intangible assets with indefinite useful lives. Tell us why you
believe that no legal, regulatory, contractual, competitive,
economic
or other factors could limit the useful life of these intangible
assets. We may have further comment.
Revenue Recognition, pp. F-10 to F-11
61. As currently presented, disclosures regarding your revenue
recognition policies are somewhat general in nature. For example,
while you discuss service revenue related to maintenance
contracts,
you do not indicate whether these services are provided on a
stand-
alone basis or as part of multiple element arrangements.
Similarly
you do not discuss how you determine the fair value of custom
maintenance contracts as part of multiple element arrangements.
To aid investor understanding, please revise your disclosure
to
provide the following:
* Describe the material terms of the arrangements under which you
provide your products or services. Include descriptions of terms
that you consider to be non-standard and/or non-routine and
distinguish between terms offered to different customers;
* Clarify the specific return rights you offer, including the
types
of customers to whom these rights are offered;
* Clarify the payment terms you offer;
* Identify the elements included in each material type of sales
transaction;
* Identify all criteria considered in determining when to
recognize
revenue, and explain how you determine when each of the identified
criteria have been met;
* For transactions with multiple elements, indicate how you
determine
the criteria have been met to be considered a separate unit of
accounting and how the timing and amount of revenue attributable
to
individual elements is determined; and
* Identify all authoritative literature that you have relied on in
developing your revenue recognition policies. Indicate your basis
for concluding that the identified literature is applicable, and
that
your policies comply with that literature.
Additionally, please discuss the revenue recognition policy under
your "sparing" arrangements disclosed on page 71 and clarify
whether
these parts related to "sparing" arrangements are owned by you or
the
customer.
62. For arrangements that include installation, implementation or
similar services, clearly indicate how you consider your
performance
obligation with respect to any undelivered services in determining
the amount of revenue to be recognized with respect to delivered
elements. See SAB Topic 13:A.3.c.
Note 16. Stock-Based Compensation, p. F-27 to F-29
63. Provide us, with a view towards additional disclosure, the
following information in chronological order for stock option
grants
and other equity-related transactions for the one-year period
preceding the filing of the registration statement:
* The type of security;
* The date of grant/issuance;
* Description/name of option or equity holder;
* The reason for the grant or equity related issue;
* The number of options or equity instruments granted or issued;
* The exercise price or conversion price;
* The fair value of underlying shares of common stock;
* The intrinsic, if any per option;
* The total amount of compensation deferred, beneficial conversion
feature and expense recognized and reconciled to your financial
statement disclosures and the magnitude and timing of the
amortization expense; and
* Reference the authoritative accounting guidance relied upon for
each non-option grant equity transaction.
Indicate whether the valuation used to determine the fair value of
your equity instruments was contemporaneous or retrospective. If
the
valuation specialist was a related party, indicate this.
Continue to provide us with updates to the requested information
for
all equity-related transactions subsequent to this request through
the effective date of the registration statement.
64. Please tell us and disclose the objective evidence that
supports
your determination of fair value of the underlying shares of
common
stock at each grant date. Where you have used valuation methods
to
determine common stock fair value, provide us with your
assumptions
and supporting analysis. Highlight any transactions with
unrelated
party parties believed by management to be particularly strong
evidence of an objective fair value per share determination.
Discuss
and quantify the impact on your fair value of any events, which
occurred between the date of equity-related issues were granted
and
the date the registration statement was filed. Your response
should
clarify the reasons for any difference between the fair value at
the
transaction date and the estimated IPO price range. Describe
significant intervening events within the company and the broader
market that explain the significant changes in fair value of your
common stock. To the extent that you did not obtain a
contemporaneous valuation by an unrelated valuation specialist,
indicate this and explain the reasons why.
Note 17. Income Taxes, pp. F-29 to F-30
65. Please provides us with an analysis of your future taxable
income
projections to substantiate your belief that based on the weight
of
available evidence, it is more likely than not that the full
amount
of the deferred tax asset is realizable at September 30, 2004. In
your analysis please address all positive and negative factors
considered and assumptions made in making such assessment and
arriving to such conclusion.
Note 22. Subsequent Events, p. F-34
66. Please disclose the methodology in valuing the approximately
1.2
million shares of common stock you purchased from your three
founders
and the resulting stock compensation expense, if any.
Item 15. Recent Sales of Unregistered Securities
67. With respect to paragraphs (1) and (3), please provide the
date
of the transactions. Additionally, please elaborate on the
services
that were provided with respect to the transaction described in
paragraph (3).
Item 16. Exhibits.
68. We note that there are a number of material exhibits to be
filed
by amendment. We will need sufficient time to process the
amendment
when the exhibits are included. Please understand that the filing
of
these exhibits may cause us to raise issues on areas not
previously
commented upon.
* * * *
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested supplemental information.
Detailed cover letters greatly facilitate our review. Please
understand that we may have additional comments after reviewing
your
amendment and responses to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts related to your disclosure, they are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert the staff comments and the
declaration
of effectiveness as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the
United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of your registration statement as a confirmation of
the fact that those requesting acceleration are aware of their
respective responsibilities under the Securities Act of 1933, as
amended, and the Securities Exchange Act of 1934, as amended, as
they
relate to the proposed public offering of the securities specified
in
the above registration statement. We will act on the request and,
pursuant to delegated authority, grant acceleration of the
effective
date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Stathis Kouninis at (202) 942-2883, or Brad
Skinner, Branch Chief - Accounting, at (202) 942-1922, if you have
questions or comments on the financial statements and related
matters. Please contact Daniel Lee at (202) 942-1871 with any
other
questions. If you need further assistance, you may contact me at
(202) 942-1818 or Barbara Jacobs, Assistant Director, at (202)
942-
1800.
Sincerely,
Mark P. Shuman
Branch Chief - Legal
cc: Via Facsimile
Timothy J. Moore, Esq.
Brett D. White, Esq.
Cooley Godward LLP
Five Palo Alto Square
3000 El Camino Real
Palo Alto, California 94306
Telephone: (650) 843-5000
Facsimile: (650) 843-5191