1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 1997.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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JAYMARK, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8748 33-0744824
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
------------------------
9775 TOWNE CENTRE DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 535-3100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
ERIC P. WENAAS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
JAYMARK, INC.
9775 TOWNE CENTRE DRIVE
SAN DIEGO, CALIFORNIA 92121
(619) 535-3100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
CAMERON JAY RAINS, ESQ. JAMES R. TANENBAUM, ESQ.
DOUGLAS J. REIN, ESQ. GLENN D. SMITH, ESQ.
DAVID R. YOUNG, ESQ. STROOCK & STROOCK & LAVAN LLP
GRAY CARY WARE & FREIDENRICH 2029 CENTURY PARK EAST,
A PROFESSIONAL CORPORATION SUITE 1800
4365 EXECUTIVE DRIVE, SUITE 1600 LOS ANGELES, CA 90067-3086
SAN DIEGO, CA 92121-2189 (310) 556-5800
(619) 677-1400
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, 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. [ ]
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CALCULATION OF REGISTRATION FEE
================================================================================================================
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
Class A Common Stock ($0.001 par 1,495,000 shares $14.00 $20,930,000 $6,342.42
value)................................
- ----------------------------------------------------------------------------------------------------------------
Representative's Warrants to Purchase 130,000 N/A $100 $0.03
Common Stock........................
- ----------------------------------------------------------------------------------------------------------------
TOTAL REGISTRATION FEE........... $6,343
================================================================================================================
(1) Includes 195,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant
to Rule 457.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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PROSPECTUS SUBJECT TO COMPLETION, DATED MARCH 7, 1997
1,300,000 SHARES
[JAYMARK LOGO]
CLASS A COMMON STOCK
------------------------
ALL OF THE 1,300,000 SHARES OF CLASS A COMMON STOCK, PAR VALUE $0.001 PER
SHARE, OFFERED HEREBY ARE BEING SOLD BY JAYMARK, INC. ("JAYMARK" OR THE
"COMPANY"). THE COMPANY'S COMMON STOCK CONSISTS OF CLASS A COMMON STOCK AND
CLASS B COMMON STOCK. OTHER THAN THE CONVERSION OF ALL SHARES OF CLASS B COMMON
STOCK INTO SHARES OF CLASS A COMMON STOCK OVER A FOUR-YEAR PERIOD COMMENCING
UPON THE CLOSING OF THIS OFFERING, THE RIGHTS, PREFERENCES AND PRIVILEGES OF
EACH CLASS OF COMMON STOCK ARE IDENTICAL IN ALL RESPECTS.
Prior to this offering, there has been no public market for the Class A
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $12.00 and $14.00 per share. See "Underwriting"
for a discussion of the factors to be considered in determining the initial
public offering price. The Company has applied for quotation of the Class A
Common Stock on the Nasdaq National Market under the symbol "JMRK."
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 6 HEREOF.
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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.
=================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS
PUBLIC COMMISSIONS(1) TO COMPANY(2)
- -------------------------------------------------------------------------------------------------
Per Share....................... $ $ $
- -------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $
=================================================================================================
(1) Excludes the value of warrants to be issued to the representative of the
Underwriters (the "Representative") to purchase up to 130,000 shares of
Class A Common Stock (the "Representative's Warrants"). The Company has
agreed to indemnify the several Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the offering payable by the Company estimated
to be $950,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 195,000 additional shares of Class A Common Stock on the
same terms and conditions as the Class A Common Stock offered hereby solely
to cover over-allotments, if any. If the Underwriters exercise this option
in full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The shares of Class A Common Stock offered hereby are offered by the
Underwriters, subject to prior sale when, as and if delivered to and accepted by
the Underwriters and subject to certain other conditions. The Underwriters
reserve the right to withdraw, cancel or modify such offer and to reject orders
in whole or in part. It is expected that delivery of the certificates
representing shares of Class A Common Stock will be made at the offices of Brean
Murray & Co., Inc. in New York, New York on or about , 1997.
------------------------
BREAN MURRAY & CO., INC.
------------------------
The date of this Prospectus is , 1997.
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.
3
FIBRESTAR(TM) FIBRE CHANNEL
GIGABIT SOLUTIONS FOR TODAY AND THE FUTURE
Up to 126 Users Per Loop
Simultaneous Network & Storage Products
Copper or Fiber-Optic Cables Depending Upon Distance
[Schematic diagram illustrating a computer network in three buildings of various
sizes using Fibre
Channel technology.]
Full Utilization of Link Speed (1063 Mbps), Even with Multiple Users
Network Attached Offsite Storage (Up to 6 Miles)
Expands Up to 16 Million Users
POTENTIAL APPLICATIONS
- - Airline Reservation Systems [Legend depicting figures used to represent
- - Stock Brokerage and Loan Processing the following items in the above schematic
- - Broadcast Video and Video Editing diagram: FibreStar adapters, Disk
- - Geographical and Thermal Mapping Array/RAID, Hub, Switch, Super Server,
- - Point of Sale Transaction Processing Server, Supercomputer and Workstation.]
- - Semiconductor Chip Design and Testing
- - Multi-Facility (Campus) Networks
- - Scientific Computing and Simulation
- - Medical Imaging FIBRESTAR PRODUCT FAMILY
- - Data Warehouses
- - Robotics Control [Picture of FibreStar adapter cards.]
4
TABLE OF CONTENTS
PAGE
-----
Prospectus Summary............................................................ 3
Risk Factors.................................................................. 6
Use of Proceeds............................................................... 13
Dividend Policy............................................................... 13
Capitalization................................................................ 14
Dilution...................................................................... 15
Selected Consolidated Financial Data.......................................... 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................. 17
Business...................................................................... 22
Management.................................................................... 39
Certain Transactions.......................................................... 47
Principal Stockholders........................................................ 48
Description of Capital Stock.................................................. 50
Shares Eligible for Future Sale............................................... 51
Underwriting.................................................................. 53
Legal Matters................................................................. 54
Experts....................................................................... 54
Additional Information........................................................ 54
Glossary...................................................................... 55
Index to Consolidated Financial Statements.................................... F-1
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No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this
offering 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 or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than in connection with the offer made by this Prospectus, nor does it
constitute an offer to sell or a solicitation of any offer to buy the shares of
Class A Common Stock offered hereby in any jurisdiction in which such an offer
or solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so, or to any person to whom it is unlawful
to make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information contained herein is correct as of any time subsequent to
its date.
Until , 1997 (25 days after the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
FibreStar and Auto-Arrestor are trademarks of the Company. This Prospectus
also contains trade names and trademarks of other companies that are the
property of their respective holders.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS A COMMON
STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements and Notes thereto appearing
elsewhere in this Prospectus, including information under "Risk Factors." The
shares of Class A Common Stock offered hereby involve a high degree of risk and
investors should carefully consider information set forth in "Risk Factors."
Unless otherwise indicated, all information in this Prospectus (i) gives effect
to a three-for-five reverse stock split to be consummated prior to the
effectiveness of this offering, (ii) gives effect to the Company's
reincorporation in Delaware to be completed prior to the effectiveness of this
offering, and (iii) assumes that the Underwriters' over-allotment option as
described in "Underwriting" is not exercised. See "Glossary" for the definition
of certain terms used herein.
THE COMPANY
Jaymark provides advanced technology products and services to the
Department of Defense (the "DoD") and other government agencies, and
commercializes selected government-funded technologies following a disciplined
evaluation of market size and profitability. The Company's first products
developed under this commercialization strategy are high-speed digital
communication adapters, which have been sold in production quantities since
December 1996. These products, marketed under the FibreStar brand, are designed
to the ANSI Fibre Channel standard. The Fibre Channel standard has become well
supported in the industry because of its high performance, which includes (i)
the highest commercially available speed (2125 megabits per second ("Mbps") in
full duplex), (ii) scalability (up to 126 nodes on a single loop), (iii)
simplicity of installation and maintenance, (iv) multiprotocol transport
(simultaneously within both storage and network environments), (v) long
connection distance (up to six miles), and (vi) high reliability of data
reception and absence of congestion with multiple users. FibreStar products
provide essential hardware and software to reduce network congestion, thereby
delivering substantial performance improvement to users requiring high-bandwidth
data transmission capabilities, including multimedia, in such applications as
(i) business and scientific computing, (ii) high volume database access for the
financial and retail industries, and (iii) multistream digital video
transmission and editing for the entertainment and broadcast industries.
With over twenty years of government-funded advanced technology
development, the Company has established several core competencies, including
(i) electronic and electro-optic system design, (ii) communications engineering,
(iii) electromagnetic effects, and (iv) nuclear and high-explosive weapon
effects (e.g., blast and shock effects on structures). In 1991, under the
leadership of new management, the Company began to target government contracts
involving the development of proprietary technologies with potential commercial
applications ("dual-use technologies").
The Company's objective is to increase profitability by leveraging its core
competencies and its advanced government-funded research through
commercialization of dual-use technologies. The key elements of the Company's
strategy are to:
- Establish FibreStar as a leading line of adapters in the emerging market
for networking and storage products utilizing the Fibre Channel standard.
- Selectively identify and commercialize additional dual-use technologies
and products with compelling market potential, and establish separate
business entities, when appropriate, to provide dedicated management and
focused business objectives.
- Maintain and expand core competencies to provide new proprietary
technologies, products and resources through the pursuit of
government-funded research and strategic acquisitions.
The Company has recently formed a wholly owned subsidiary, Jaycor Networks,
Inc. ("JNI" or "Jaycor Networks"), to which it contributed its FibreStar
products and technology in order to capitalize on the commercial potential of
these products. The efficient and rapid transfer of information throughout
networks has become increasingly critical to the daily operation of business.
The annual market for Fibre Channel adapters, such as the FibreStar products, is
projected to grow from $68 million in 1996 to over $200 million in 1997 and to
exceed $1 billion by the year 2000, according to an industry study by EMF
Associates, a networking consulting group. The Company believes that only a
small portion of this market is currently associated with independent suppliers
of Fibre Channel adapters. In the future, however, the Company believes that
independent suppliers, such as JNI, will supply a larger portion of the market.
As an example of how widely the Fibre Channel standard has been adopted, JNI and
35 other companies exhibited a variety of their Fibre Channel product lines at
the Comdex computer trade show meeting in November 1996, including Adaptec,
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Ancor Communications, Box Hill Systems, Digital Equipment Corporation, Emulex,
Gadzoox Microsystems, Hewlett-Packard, Intel, Interphase, LSI Logic, Philips,
QLogic, Quantum, Seagate Technology, Sun Microsystems, Texas Instruments,
Unisys, Vitesse Semiconductor, and XPoint Technology. In December 1996 and
January 1997, JNI shipped over $200,000 of FibreStar products.
The Company's government contract business is performed through Jaycor,
Inc. ("Jaycor"), its wholly owned subsidiary. Jaycor's objective is to maintain
and expand its advanced technology government research base, which will provide
both the technology and resources for further product commercialization. In
addition to FibreStar, Jaycor has developed other dual-use technologies that
have the potential for successful commercial applications, including: (i) a
bomb-resistant luggage container designed for aircraft safety, (ii) an
Auto-Arrestor to prevent or terminate dangerous high-speed chases, (iii) several
non-lethal weapon applications for military and domestic security purposes, and
(iv) several weapon detection systems. Jaycor intends to focus on areas in which
government funding is likely to remain stable or increase, while simultaneously
identifying problems and providing solutions to the government in areas in which
its core competencies provide a competitive advantage. Jaycor maintains active
relationships with the Departments of Defense, State, Justice, Transportation,
and Energy, and had approximately 200 contracts or subcontracts that generated
revenue during the fiscal year ended January 31, 1997, which were funded by
approximately 40 different government agencies, most of which are within the
DoD.
Unless the context otherwise requires, the "Company" or "Jaymark" refers to
Jaymark, Inc. and its consolidated subsidiaries. The Company's principal
executive offices are located at 9775 Towne Centre Drive, San Diego, California
92121, and its telephone number at that location is (619) 535-3100. The Company
is in the process of reincorporating in Delaware and will complete such
reincorporation prior to the effectiveness of this offering.
THE OFFERING
Common Stock Offered by the Company.......... 1,300,000 shares of Class A Common Stock
Common Stock Outstanding After the
Offering(1)................................ 1,648,309 shares of Class A Common Stock(2)
1,393,332 shares of Class B Common Stock(2)
Use of Proceeds.............................. For general corporate purposes, including product
development, working capital and potential acquisitions,
for repayment of indebtedness outstanding under the
Company's bank line of credit, and to finance the
Company's repurchase, subject to certain conditions, of
120,000 shares of Common Stock
Proposed Nasdaq National Market Symbol....... "JMRK"
- ---------------
(1) Unless the context otherwise requires, the term "Common Stock" collectively
refers to the Class A Common Stock and Class B Common Stock of the Company.
Other than the conversion of the Class B Common Stock into Class A Common
Stock over a four-year period commencing upon the closing of this offering,
the rights, preferences and privileges of each class of Common Stock are
identical in all respects. Approximately 95% of such outstanding shares of
Class B Common Stock are held directly or indirectly by executive officers
and directors of the Company, current and former employees of the Company
and the Company's Employee Stock Ownership Plan (the "ESOP"). See "Principal
Stockholders," "Management -- Benefit Plans" and "Description of Capital
Stock."
(2) Approximately 25% of such outstanding shares of Class B Common Stock will
convert into shares of Class A Common Stock upon each of the first four
anniversaries of the closing of this offering. Gives effect to the Company's
repurchase, subject to certain conditions, of 120,000 shares of Common Stock
to be consummated within 30 days of the closing of this offering. Excludes
1,270,875 shares of Class B Common Stock issuable upon the exercise of
outstanding options at January 31, 1997 at a weighted average exercise price
of $4.91 per share, 984,150 of which were exercisable as of such date. The
shares of Class B Common Stock issuable upon exercise of such options
convert into shares of Class A Common Stock over a four-year period
commencing on the closing of this offering. Also excludes (i) 130,000 shares
of Class A Common Stock issuable upon exercise of the Representative's
Warrants, (ii) 10,928 shares of Common Stock reserved for issuance pursuant
to the terms of an acquisition which was completed in October 1995, and
(iii) 8,596 shares of Common Stock potentially issuable pursuant to the
terms of an Employment Agreement. See "Use of Proceeds," "Capitalization,"
"Management -- Benefit Plans," "Underwriting" and Notes 5 and 8 of Notes to
Consolidated Financial Statements.
4
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED
OCTOBER 31, YEAR ENDED JANUARY 31,
--------------------- ---------------------------------------------
1996 1995 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues................................. $ 41,452 $ 38,733 $ 52,928 $ 57,656 $ 55,901 $ 57,695
Costs and expenses:
Cost of revenues....................... 34,233 32,095 43,803 47,846 46,656 48,684
Selling, general and administrative.... 4,797 4,555 5,977 7,363 6,592 6,733
Research and development(1)............ 310 400 560 228 206 365
--------- --------- --------- --------- --------- ---------
39,340 37,050 50,340 55,437 53,454 55,782
--------- --------- --------- --------- --------- ---------
Operating income......................... 2,112 1,683 2,588 2,219 2,447 1,913
Interest expense......................... 1,427 1,423 2,018 1,721 1,632 568
--------- --------- --------- --------- --------- ---------
Income before income taxes............... 685 260 570 498 815 1,345
Provision for income taxes(2)............ 249 98 234 176 95 562
--------- --------- --------- --------- --------- ---------
Net income............................... $ 436 $ 162 $ 336 $ 322 $ 720 $ 783
========= ========= ========= ========= ========= =========
Net earnings per share................... $ 0.21 $ 0.08 $ 0.16 $ 0.15 $ 0.30 $ 0.30
========= ========= ========= ========= ========= =========
Shares used in per share calculation..... 2,048,800 2,086,900 2,075,900 2,131,400 2,678,400 3,093,600
========= ========= ========= ========= ========= =========
OCTOBER 31, 1996
------------------------------
ACTUAL AS ADJUSTED(3)
----------- --------------
CONSOLIDATED BALANCE SHEET DATA:
Cash...................................................................... $ 47 $ 10,447
Working capital........................................................... 357 13,955
Total assets.............................................................. 32,715 43,115
Bank line of credit....................................................... 3,198 --
Mortgage debt, less current portion....................................... 13,356 13,356
Long-term liabilities, excluding mortgage debt............................ 1,877 1,877
Mandatorily redeemable ESOP shares(4)..................................... 3,159 --
Total stockholders' equity................................................ 2,877 19,634
- ---------------
(1) Most of the Company's research and development efforts are funded directly
under development contracts with the U.S. government and are included in
cost of revenues. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(2) Provision for income taxes in fiscal year 1994 includes a credit of $231
from a change in method of accounting for income taxes, as described in Note
1 of Notes to Consolidated Financial Statements.
(3) Adjusted to reflect the sale by the Company of 1,300,000 shares of Class A
Common Stock offered hereby at an assumed initial public offering price of
$13.00 per share, after deduction of underwriting discounts and commissions
and estimated offering expenses and the application of the estimated net
proceeds therefrom (including the potential repurchase of 120,000 shares).
See "Use of Proceeds" and "Capitalization."
(4) Represents the Company's potential obligation prior to the closing of this
offering to repurchase shares of Class B Common Stock upon distribution by
the ESOP of vested shares to retiring or terminated plan participants due to
the fact that such shares are not readily tradeable. Following the closing
of this offering, this potential obligation may, at the Company's option, be
satisfied by the distribution from the ESOP of shares of Class A Common
Stock which are readily tradeable, and therefore such amount will be
reclassified to stockholders' equity. See "Management -- Benefit Plans" and
Notes 5 and 8 of Notes to Consolidated Financial Statements.
5
8
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of the Securities Act of 1933. Actual results could differ materially
from those projected in the forward-looking statements as a result of certain
risks and uncertainties set forth below and elsewhere in this Prospectus. An
investment in the shares of Class A Common Stock offered hereby involves a high
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information set forth in this Prospectus,
in connection with an investment in the shares of Class A Common Stock offered
hereby.
RISKS ASSOCIATED WITH ENTERING COMMERCIAL MARKETS
Historically, the Company's business has been focused on providing advanced
technology products and services to the DoD and other government agencies. The
Company believes that its future growth and increased profitability are largely
dependent upon its success in commercial markets, especially in the computer
networking market, in which it has only recently begun to compete. The Company
believes that while the technologies used in its defense and commercial sectors
have similarities, the business aspects of operating in such sectors differ
significantly. As a result, the Company is subject to risks inherent in the
operation of a new business enterprise, including risks associated with
attracting and servicing a new customer base, developing and manufacturing
products in a cost-effective and profitable manner, managing the expansion of a
business operation, and attracting and retaining qualified engineering,
marketing and managerial personnel with industry experience. Any of such risks
could adversely affect the Company's business, operating results and financial
condition. See "-- Risks Associated with JNI."
DEPENDENCE ON GOVERNMENT MARKET
To date, nearly all of the Company's revenues have been derived from
contracts or subcontracts funded by agencies of the U.S. government, in
particular the DoD. Contracts or subcontracts with the DoD accounted for
approximately 90.5%, 89.4% and 86.5% of the Company's revenues during the years
ended January 31, 1995 and 1996, and during the nine months ended October 31,
1996, respectively. The Company expects, at least in the near term, to continue
to derive the majority of its revenues from its government contracts business.
As a result, the Company's revenues could be adversely impacted by a decrease in
defense spending by the U.S. government. Any failure by the Company to replace
revenues attributable to a significant defense program or contract at the end of
such program or contract, whether due to cancellation, spending cuts, budgetary
constraints or otherwise, could have an adverse effect upon the Company's
business, operating results and financial condition in future periods. See
"-- Risks Associated with Government Contracts."
RISKS ASSOCIATED WITH JNI
- Limited Operating History. Shipment of FibreStar adapters in limited
commercial quantities began in December 1996. Due in part to its lack of
operating history, JNI is unable to predict the level of demand for its
FibreStar adapters, or whether or not such products will be able to
achieve broad acceptance in the computer networking market. The likelihood
of success of JNI must be considered in light of the problems, expenses,
complications and delays frequently encountered by early-stage companies
and the competitive environment in which JNI intends to operate. Such
problems could have an adverse effect on JNI's business, operating results
and financial condition and, accordingly, on the Company's business and
future prospects.
- Dependence on Fibre Channel Standard. JNI's future financial performance
and, to a large extent, the Company's future prospects will depend on the
growth in the market for products designed to the Fibre Channel standard.
Because the market for Fibre Channel products is new and evolving, it is
difficult to assess or predict with any assurance its size or growth rate.
The development or emergence of standards which compete with or are
superior to Fibre Channel, whether on the basis of cost, speed,
flexibility or otherwise, could have an adverse effect on JNI's and,
accordingly, the Company's business, operating results and financial
condition. If the market for Fibre Channel products fails to develop as
rapidly as expected or if JNI's products fail to achieve market
acceptance, JNI's business,
6
9
operating results and financial condition and, accordingly, the Company's
business and future prospects would be adversely affected.
- Management of Growth. Growth and expansion will place a strain on JNI's
management, administrative, operational and financial resources and will
impose increased demands on its systems, controls and personnel. In
particular, there can be no assurance that the Company will be able to
retain or recruit in a timely manner qualified engineering and managerial
personnel. There can be no assurance that JNI will be able to effectively
manage any future growth, and any failure to do so would have an adverse
effect on JNI's business, operating results and financial condition and,
accordingly, on the Company's business and future prospects. See
"Business -- Company Strategy" and "Management."
- Competition. The computer networking industry is intensely competitive,
subject to rapid change, and significantly affected by new product
introductions and other market activities of industry participants. JNI
competes with companies offering products based on the Fibre Channel
standard, as well as companies offering products based on competing
standards. Many of JNI's current and potential competitors have
significantly greater financial, technical, marketing and other resources,
and possess a larger installed base of customers than JNI. The computer
networking industry has witnessed many acquisitions pursuant to which
several large companies have emerged with comprehensive networking
solutions. These acquisitions may permit JNI's competitors to devote
significantly greater resources to the development and marketing of new
competitive products and the marketing of existing products to their
larger installed bases of customers. The Company expects that competition
will increase, in particular as companies that are well established in the
computer networking industry increase their focus on the emerging market
for Fibre Channel adapters. There can be no assurance that JNI will be
able to compete successfully in the future with existing or new
competitors or that competitive pressures faced by JNI will not adversely
affect its business, operating results and financial condition and,
accordingly, the Company's business and future prospects. See
"Business -- Fibre Channel Network Products -- Competition."
- Limited Source Components. Certain key components used in JNI's
products, such as application-specific integrated circuits ("ASICs") and
controller chips, are currently available only from a single source or a
limited number of sources. In particular, JNI has designed into its
products a Fibre Channel controller chip available only from
Hewlett-Packard. Future difficulty in obtaining any of these key
components could result in delays or reductions in product shipments
which, in turn, could have an adverse effect on JNI's business, operating
results and financial condition and, accordingly, on the Company's
business and future prospects.
- Contract Manufacturing. JNI's use of third-party manufacturers to
assemble and test its products involves certain risks, including the lack
of adequate capacity, the unavailability of access to certain process
technologies, and reduced control over delivery schedules, manufacturing
yields, quality and costs. In the event that any significant contractor
were to become unable or unwilling to continue to manufacture or test
JNI's products in required volumes, JNI would have to identify and qualify
acceptable replacements. This process of qualifying manufacturing
contractors and other suppliers could be lengthy, and no assurance can be
given that any additional sources would become available to JNI on a
timely basis, if at all. Any delay or reduction in component shipments or
delay or increase in costs of the assembly and testing of products by
contractors could adversely affect JNI's business, operating results and
financial condition and, accordingly, the Company's business and future
prospects.
- Dependence on OEMs and Resellers. JNI has developed and is dependent on
sales and marketing channels consisting primarily of resellers and
original equipment manufacturers ("OEMs"). Any failure of such OEMs and
resellers to adequately market, promote and sell JNI's products, whether
due to competition, insolvency, lack of attention to or understanding of
JNI's products, or otherwise, would have an adverse effect on JNI's
business, operating results and financial condition and, accordingly, on
the Company's business and future prospects. See "Business -- Fibre
Channel Network Products -- Sales and Marketing."
7
10
- Rapid Technological Change. The computer networking industry is
characterized by rapidly changing technologies and frequent new product
introductions. The rapid development of new technologies increases the
risk that current or new competitors could develop products that would
reduce the competitiveness of JNI's products. JNI's success will depend
to a substantial degree upon its ability to respond to changes in
technology and customer requirements. This will require the timely
selection, development and marketing of new products and enhancements on
a cost-effective basis. There can be no assurance that JNI will be
successful in developing, introducing or managing the transition to new
or enhanced products, or that any such products will be responsive to
technological changes or will gain market acceptance. If JNI were to be
unsuccessful or to incur significant delays in developing and introducing
such new products or enhancements, JNI's business, operating results and
financial condition and, accordingly, the Company's business and future
prospects could be adversely affected. See "Business -- Fibre Channel
Network Products -- Research and Development."
RISKS ASSOCIATED WITH GOVERNMENT CONTRACTS
- Early Termination. Jaycor's contracts with the U.S. government and its
subcontracts with government prime contractors are subject to
modification or termination at the convenience of the government.
Moreover, while many of Jaycor's government contracts and subcontracts
extend over several years, such contracts are typically funded for no
more than one year at a time. There can be no assurance any such
modifications or terminations will not have an adverse effect on the
Company's business, operating results and financial condition in the
future.
- Competition. The advanced technology products and services market is
competitive and is characterized by rapid technological change,
developments and advancements, as well as the evolving budgetary
priorities of the U.S. government. Jaycor's competitors are diverse and
generally differ among each of its core competencies. Many of Jaycor's
competitors have substantially greater technical, financial, marketing
and other resources than the Company, as well as superior name
recognition. The Company believes that the critical success factors in
the advanced technology government solutions market include developing
proprietary technology, demonstrating technological superiority,
maintaining customer satisfaction, adapting to evolving governmental
budgetary priorities, identifying future government problems, providing
cost-effective solutions for such problems, and recruiting and retaining
highly skilled personnel. No assurance can be given that these
competitors will not develop new technologies or introduce new solutions
that will offer superior pricing or performance features or that new
solutions or technologies will not impair the competitiveness of Jaycor's
solutions. See "Business -- Advanced Technology Products and Services --
Competition."
- Contract Costs Subject to Government Audits; Government Compliance. All
contract costs, including indirect costs, for services under contracts or
subcontracts funded by agencies of the U.S. government are subject to
audit, and the acceptance of such costs as allowable and allocable is
subject to federal regulatory guidelines. Contract revenues have been
recorded in amounts which the Company expects to be realized upon final
audit settlement. There can be no assurance, however, that audits and
adjustments will not result in decreased revenues and net income for
those years, and any disallowance of costs by the government could have
an adverse effect on the Company's business, operating results and
financial condition. Because of its participation in government
contracts, Jaycor is subject to audit from time to time for its
compliance with government regulations by various agencies, including the
Defense Contract Audit Agency, the Defense Investigative Service and the
Office of Federal Control Compliance Programs. These and other
governmental agencies may also, from time to time, conduct inquiries or
investigations that may cover a broad range of Company activity.
Responding to any such audits, inquiries or investigations may involve
significant expense and divert management attention. In addition, an
adverse finding in any such audit, inquiry or investigation could involve
penalties that may have an adverse effect on the Company's business,
operating results and financial condition.
- At-Risk Contract Costs. Certain revenues associated with services
performed prior to execution of a government contract or a modification
of such a contract have been recorded in the Company's financial
statements based upon the expectation that the costs of these services
will be fully recovered.
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11
These costs are incurred at the Company's risk, and it is possible that
such costs will not be reimbursed by the U.S. government. As a result,
there can be no assurance that the underlying contracts or contract
modifications will be executed or that such costs will be recovered. Any
failure to recover such costs could have an adverse effect on the
Company's business, operating results and financial condition.
- Fixed-Price Contract Exposure. During the fiscal years ended January 31,
1995 and 1996, and during the nine-month period ended October 31, 1996,
17%, 11% and 13%, respectively, of the Company's revenues were derived
from fixed-price contracts. Because Jaycor assumes the risk of performing
such contracts at the stipulated price, any failure to accurately
estimate ultimate costs or to control costs during contract performance
could result in losses or reduced profits for particular fixed-price
contracts, which, in turn, could have an adverse effect on the Company's
business, operating results and financial condition. See "Business --
Advanced Technology Products and Services -- Procurement of Government
Contracts."
- Lengthy Sales Cycles. The decision-making process for government
agencies, which constitute the majority of Jaycor's customers, is often
complex and time-consuming. The period between initial discussions
concerning a particular project and the customer's purchase commitment
typically ranges from six to twelve months. In addition, follow-ons to
existing contracts are often subject to lengthy delays. These delays
could have an adverse effect on the Company's business, operating results
and financial condition and, in particular, could contribute to
significant fluctuations in its operating results on a quarterly basis.
See "Business -- Advanced Technology Products and Services -- Procurement
of Governmental Contracts."
- Dependence on Government Contract Coverage. To maintain competitive
overhead rates and historical levels of profitability, Jaycor typically
establishes budgets wherein 75% to 85% of the cost of its non-
administrative employees is anticipated to be directly billed to
customers through existing contracts, with the remaining amount allocated
to overhead. Given the lengthy government contract approval process and
associated uncertainty of the timing of contract modifications or awards,
Jaycor may be unable to meet such utilization goals. The long-term needs
of Jaycor may make it impractical to effect short-term work force
reductions when such under-utilization occurs. Accordingly, no assurance
can be given that Jaycor will meet its desired level of utilization, and
if any resulting increased overhead costs cannot be recovered within
Jaycor's overhead rates, the Company's business, operating results and
financial condition could be adversely affected.
RISK RELATED TO GROWTH THROUGH ACQUISITIONS
One of the Company's strategies is to increase its revenues and expand the
markets it serves through acquisitions. There can be no assurance, however, that
the Company will be able to identify, acquire or profitably manage suitable
acquisition candidates or successfully integrate such businesses, if acquired,
into its operations without substantial costs, delays or other problems. In
addition, there can be no assurance that any acquired businesses will be
profitable at the time of their acquisition or will achieve or maintain
profitability levels that justify the investment therein or that the Company
will be able to realize expected operating and economic efficiencies following
such acquisitions. Acquisitions may involve a number of special risks, including
adverse effects on the Company's reported operating results, diversion of
management's attention, increased burdens on the Company's management resources
and financial controls, dependence on the retention and hiring of key personnel,
risks associated with unanticipated problems or legal liabilities, and
amortization of acquired intangible assets. Any such risks could have an adverse
effect on the Company's business, operating results and financial condition. See
"Business -- Company Strategy."
DEPENDENCE ON CERTAIN CUSTOMERS
For the nine months ended October 31, 1996, approximately 30% of the
Company's revenues were derived from approximately 30 contracts or subcontracts
funded by the Defense Special Weapons Agency ("DSWA"), an agency of the DoD, and
approximately 12% of the Company's revenues were derived from contracts with the
Air Force Sacramento Air Logistics Command ("SM-ALC"). While no individual
9
12
contract with DSWA is material to the Company's business, the Company would be
materially affected if all or a substantial portion of the funding from DSWA or
SM-ALC were lost. There have been events in the past which have called into
question the continuation of government funding of DSWA. In November 1993,
Congress directed the Rand Corporation to evaluate alternative ways of
accomplishing the functions which were being performed by DSWA, which was then
called the Defense Nuclear Agency. Based in part on the recommendations in the
Rand Corporation's report, Congress elected to continue funding the agency at a
lower level. There can be no assurance that DSWA will continue to provide
funding to the Company at current levels, if at all, and a material decrease in
such funding could have an adverse effect on the Company's business, operating
results and financial condition. See "-- Risks Associated with Government
Contracts" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company has experienced, and expects to continue to experience,
significant fluctuations in its quarterly operating results. The Company's
future operating results are dependent upon a number of factors, including, but
not limited to, the demand for its products and services, the number of
government contracts it successfully obtains, the size and timing of specific
contracts, the level of price competition that it encounters in the government
contract bidding process, the length of its sales cycles, the timing and
development of new solution proposals by the Company and its competitors,
acquisitions by the Company and its competitors, the timing of new hires, the
Company's ability to develop and market new solutions, technological changes and
economic conditions, both generally and in specific industry segments. In
particular, JNI does not expect to have a material backlog of unfilled orders,
so any shortfall in demand for FibreStar products in relation to the Company's
expectations, or any material delay in customer orders, could have an almost
immediate impact on the Company's business, operating results and financial
condition. The Company believes that quarterly comparisons of its operating
results are not necessarily meaningful and should not be relied upon as
indications of future performance. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON KEY EMPLOYEES
The Company's success will depend in part on the continued services of its
key employees. The Company does not have employment agreements with any of its
key employees and does not maintain any key person life insurance, with the
exception of a $1.0 million policy on Eric P. Wenaas, the Company's Chairman,
President and Chief Executive Officer. The loss of one or more of the Company's
key employees could have an adverse effect on the Company's business, operating
results and financial condition. In particular, if any one or more of such key
employees were to join a competitor or form a competing company, any resulting
loss of existing or potential business to any such competitor would magnify the
adverse effect caused by the loss of such key employee or employees. In the
event of the loss of any such employee or employees, there can be no assurance
that the Company would be able to prevent the unauthorized disclosure or use of
the Company's or its customers' technical knowledge, practices or procedures by
such employee or employees, or that such disclosure or use would not have an
adverse effect on the Company's business, operating results and financial
condition. See "Management."
PROPRIETARY RIGHTS; RISKS OF INFRINGEMENT
The Company's success and ability to compete is dependent in part upon its
proprietary technology. The Company relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality procedures and certain
contractual provisions to establish and protect its proprietary rights. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy, design around or reverse engineer aspects of the Company's
products or to obtain and use information that the Company regards as
proprietary. Under certain standard provisions in government contracts, the
government may retain certain rights, which are often limited, in technology
developed under or arising out of work performed under such contracts. In
addition, the laws of certain foreign countries do not protect the Company's
proprietary rights to the same extent as the laws of the United States.
Accordingly, there can be no assurance that
10
13
unauthorized use of the Company's technology will not occur. In the future,
litigation may be necessary to protect trade secrets and other intellectual
property rights owned by the Company, to defend the Company against claimed
infringement of the rights of others, and to determine the scope and validity of
the proprietary rights of others. Any such litigation could be costly and result
in a diversion of management's attention and adverse determinations in any such
litigation could result in the loss of the Company's proprietary rights, subject
the Company to significant liabilities, require the Company to seek licenses
from third parties or prevent the Company from manufacturing or selling its
products, any of which could have an adverse effect on the Company's business,
operating results and financial condition.
ENVIRONMENTAL REGULATIONS AND RISKS
The Company is subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances. In
the conduct of the Company's business, certain solvents, cleaning agents,
paints, oils and chemicals, as well as certain other hazardous substances, are
handled on a regular basis. The failure to comply with current or future
regulations could result in the imposition of substantial fines on the Company,
suspension of production, alteration of its processes or cessation of
operations, which, in turn, could have an adverse effect on the Company's
business, financial condition and operating results.
BROAD DISCRETION IN ALLOCATION OF NET PROCEEDS
The Company intends to use the net proceeds of this offering primarily for
general corporate purposes, including product development and working capital.
The Company may use a portion of the net proceeds of the offering to acquire or
invest in businesses, technologies or products complementary to the Company's
business. As of January 31, 1997, the outstanding balance under the Company's
bank line of credit was approximately $4.3 million. Other than the repayment of
such outstanding balance and the anticipated use of $1.0 million to repurchase
shares of Common Stock held by a former executive of the Company, the Company
has no other specific plans to use the net proceeds of this offering.
Accordingly, management will retain broad discretion to allocate the net
proceeds of this offering. See "Use of Proceeds" and "Certain Transactions."
NO PRIOR PUBLIC MARKET; POSSIBLE STOCK PRICE VOLATILITY
Prior to this offering, there has been no public market for the Company's
Class A Common Stock, and there can be no assurance that an active trading
market will develop or be sustained after this offering. The initial public
offering price will be determined through negotiations among the Company and the
Representative and may not be indicative of the market price of the Class A
Common Stock after this offering. The trading price of the Class A Common Stock
is likely to be volatile and may be significantly affected by factors such as
actual or anticipated fluctuations in the Company's operating results;
announcements of technological innovations, new products or new contracts by the
Company or its competitors; developments with respect to patents, copyrights or
proprietary rights; conditions and trends in the Company's markets; changes in
financial estimates by securities analysts; general market conditions; and other
factors. In addition, the public equity markets have from time to time
experienced significant price and volume fluctuations that have particularly
affected the market prices for the stocks of technology companies. These broad
market fluctuations, as well as shortfalls in sales or earnings as compared with
public market analysts' expectations, changes in such analysts' recommendations
or projections and general economic and market conditions, may adversely affect
the market price of the Company's Class A Common Stock. See "Underwriting."
DILUTION
Purchasers of the Class A Common Stock offered hereby will incur immediate
substantial dilution in pro forma net tangible book value per share from the
initial offering price in the amount of $6.71. To the extent outstanding options
to purchase the Company's Common Stock are exercised, there will be further
dilution to such new investors. See "Dilution."
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14
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER EFFECTS
Immediately following this offering, the Company's executive officers and
directors will beneficially own approximately 34% of the outstanding shares of
the Company's Common Stock (including shares held by the ESOP), assuming no
exercise of the Underwriters' over-allotment option. As a result, such persons
will have the ability to exercise significant influence over matters regarding
the Company. Such influence may have a significant effect in delaying, deferring
or preventing a change in control of the Company. In addition, the Company is
subject to the anti-takeover provisions of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. In addition, certain provisions
of the Company's Certificate of Incorporation and Bylaws, as well as other
provisions of Delaware law, could have the effect of delaying, deferring or
preventing a change in control of the Company. See "Principal Stockholders" and
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Class A Common Stock in the public market
after this offering, or the possibility of such sales occurring, could adversely
affect prevailing market prices of the Class A Common Stock or the future
ability of the Company to raise capital through an offering of equity
securities. After this offering, the Company will have outstanding 1,648,309
shares of Class A Common Stock and 1,393,332 shares of Class B Common Stock,
after giving effect to the Company's repurchase, subject to certain conditions,
of 120,000 shares of Common Stock. Of such shares, the 1,300,000 shares of Class
A Common Stock offered hereby will be freely tradeable in the public market
without restriction under the Securities Act, unless such shares are held by
"affiliates" of the Company, as defined in Rule 144 under the Securities Act.
The remaining 348,309 shares of Class A Common Stock and the 1,393,332 shares of
Class B Common Stock outstanding upon completion of this offering will be
"restricted securities," as defined in Rule 144. All outstanding shares of the
Company's Class B Common Stock will convert into shares of the Company's Class A
Common Stock over a four-year period commencing upon the closing of this
offering at the rate of 348,309 shares on the closing of this offering and on
each of the first three anniversaries of such closing, and 348,405 shares on the
fourth anniversary of such closing. Subject to the lock-up agreements discussed
below, substantially all of the shares of Class A Common Stock issued upon
conversion of the Class B Common Stock will generally be freely tradeable,
subject in certain instances to the volume limitations imposed by Rule 144.
Pursuant to certain "lock-up" agreements, all of the executive officers and
directors of the Company, as well as certain other stockholders, who, following
the closing of this offering, will collectively hold an aggregate of
approximately shares of Class A Common Stock and shares of
Class B Common Stock, have agreed, subject to certain limited exceptions, not to
offer, sell, contract to sell, grant any option to purchase or otherwise dispose
of any such shares for a period of one year from the date of this Prospectus.
Certain additional stockholders and optionholders of the Company, who, following
the closing of this offering, will collectively hold an aggregate of
approximately shares of Class A Common Stock and shares of Class B
Common Stock, have entered into similar lock-up agreements covering a period of
180 days following the date of this Prospectus. Such agreements provide that
Brean Murray & Co., Inc. may, in its sole discretion and at any time without
notice, release all or a portion of the shares subject to these lock-up
agreements. As of January 31, 1997, options to purchase 1,270,875 shares of
Class B Common Stock were outstanding under the Company's stock option plans,
984,150 of which were exercisable as of such date. The shares of Class B Common
Stock issuable upon exercise of such options convert into shares of Class A
Common Stock over a four-year period commencing on the closing of this offering.
The Company intends to file after the effective date of this offering
Registration Statements on Form S-8 to register an aggregate of 2,443,765 shares
of Class A Common Stock reserved for issuance under its stock option and stock
purchase plans or upon conversion of shares of Class B Common Stock issued under
such plans. See "Shares Eligible for Future Sale" and "Underwriting."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 shares of
Class A Common Stock offered hereby by the Company are estimated to be
approximately $14,598,000 ($16,930,000 if the Underwriters' over-allotment
option is exercised in full), assuming an initial public offering price of
$13.00 per share (which is the mid-point of the filing range) and after
deducting underwriting discounts and commissions and estimated offering
expenses.
The Company intends to use the net proceeds of this offering primarily for
general corporate purposes, including product development and working capital.
The Company also intends to use a portion of the net proceeds of this offering
to repay indebtedness outstanding under the Company's bank line of credit,
which, as of January 31, 1997, was approximately $4,286,000 and accrued interest
at a rate of 9.125%. In addition, the Company has agreed to repurchase 120,000
shares of Class B Common Stock from Robert P. Sullivan, a retired Executive Vice
President of the Company, for $1,000,000 ($8.33 per share). Although the Company
is obligated to repurchase such shares within 30 days of the closing of this
offering, such obligation is postponed in the event that such repurchase would
impair the Company's ability to qualify for listing on the Nasdaq National
Market. The Company may also use a portion of the net proceeds to acquire or
invest in businesses, technologies or products complementary to the Company's
business. While from time to time the Company evaluates potential acquisitions
of such businesses, technologies or products, there are no present
understandings, commitments or agreements with respect to any such transaction.
Pending such uses, the Company intends to invest the net proceeds from the
offering in investment-grade, interest-bearing securities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" and "Certain Transactions."
DIVIDEND POLICY
The Company has never paid or declared any cash dividends. The Company
intends to retain future earnings, if any, to finance the development and
expansion of its business and, therefore, does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. In addition, the
Company's bank line of credit contains certain restrictions with respect to the
payment of dividends.
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CAPITALIZATION
The following table sets forth, as of October 31, 1996, the capitalization
of the Company on an actual basis and as adjusted to give effect to (i) the sale
and issuance of the 1,300,000 shares of Class A Common Stock offered by the
Company hereby (after deducting the estimated underwriting discounts and
commissions and estimated offering expenses) at an assumed public offering price
of $13.00 and the application of the net proceeds therefrom as described in "Use
of Proceeds," and (ii) the reclassification of the shares of Common Stock held
under the Company's ESOP to stockholders' equity. This table should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus.
OCTOBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
Bank line of credit.................................................... $ 3,198 $ --
======= =======
Long-term debt and capital lease obligations, less current portion..... $13,846 $13,846
------- -------
Mandatorily redeemable ESOP shares, at fair value; 487,241 shares
(actual) and no shares (as adjusted) issued and outstanding(1)....... 3,159 --
------- -------
Stockholders' equity:
Class A Common Stock, par value $0.001; 12,000,000 shares authorized,
no shares (actual) and 1,663,791 shares (as adjusted) issued and
outstanding(2).................................................... -- 2
Class B Common Stock, par value $0.001; 4,000,000 shares authorized,
1,451,808 shares (actual) and 1,455,258 shares (as adjusted)
issued and outstanding(2)......................................... 1 1
Additional paid-in capital........................................... 578 15,678
Retained earnings.................................................... 4,950 3,953
Adjustment for mandatorily redeemable ESOP shares(1)................. (2,652) --
------- -------
Total stockholders' equity........................................ 2,877 19,634
------- -------
Total capitalization......................................... $19,882 $33,480
======= =======
- ---------------
(1) Represents the Company's potential obligation prior to the closing of this
offering to repurchase shares of Class B Common Stock upon distribution by
the ESOP of vested shares to retiring or terminated plan participants due to
the fact that such shares are not readily tradeable. Following the closing
of this offering, this potential obligation may, at the Company's option, be
satisfied by the distribution from the ESOP of shares of Class A Common
Stock which are readily tradeable, and therefore such amount will be
reclassified to stockholders' equity. See "Management -- Benefit Plans" and
Notes 5 and 8 of Notes to Consolidated Financial Statements.
(2) Includes 79,557 shares of Common Stock which were repurchased by the Company
from its stockholders subsequent to October 31, 1996. As adjusted shares of
Common Stock gives effect to the repurchase and retirement of 120,000 shares
which the Company has agreed to repurchase, subject to certain conditions.
Excludes (i) 1,147,875 shares of Class B Common Stock issuable upon the
exercise of stock options outstanding as of October 31, 1996 at a weighted
average exercise price of $4.80 per share, (ii) 575,000 shares of Class A
Common Stock and 531,390 shares of Class B Common Stock reserved for
issuance under the Company's stock option plans, (iii) 200,000 shares of
Class A Common Stock reserved for issuance under the Company's 1997 Employee
Stock Purchase Plan, (iv) 130,000 shares of Class A Common Stock reserved
for issuance upon exercise of the Representative's Warrants, (v) 10,928
shares of Common Stock reserved for issuance pursuant to the terms of an
acquisition which was completed in October 1995, (vi) 8,596 shares of Common
Stock potentially issuable pursuant to the terms of an Employment Agreement,
and (vii) 2,149 shares issued subsequent to October 31, 1996. See
"Management -- Benefit Plans," "Certain Transactions," "Underwriting" and
Note 9 of Notes to Consolidated Financial Statements.
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DILUTION
The pro forma net tangible book value of the Company as of October 31, 1996
was $6,036,000 or $3.11 per share of Common Stock. Pro forma net tangible book
value per share represents the amount of net tangible assets, less total
liabilities, divided by the number of shares of Common Stock outstanding
assuming reclassification of all mandatorily redeemable ESOP shares to
stockholders' equity. After giving effect to (i) the sale by the Company of
1,300,000 shares of Class A Common Stock offered hereby at an assumed initial
public offering price of $13.00 per share, (ii) repayment in full of the
Company's bank line of credit with an outstanding balance of $3,198,000 at
October 31, 1996, and (iii) the repurchase of 120,000 shares of Common Stock for
$8.33 per share which, subject to certain conditions, will occur within 30 days
of the closing of this offering, the pro forma net pro forma tangible book value
of the Company as of October 31, 1996 would have been $19,634,000, or $6.29 per
share. This represents an immediate increase in such net tangible book value of
$3.18 per share to existing stockholders and an immediate dilution of $6.71 per
share to new investors. The following table illustrates this per share dilution:
Assumed initial public offering price per share............. $13.00
Pro forma net tangible book value per share at October 31,
1996................................................... $3.11
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 3.18
-----
Pro forma net tangible book value per share after this
offering.................................................. 6.29
------
Dilution per share to new investors......................... $ 6.71
======
The following table summarizes, as of October 31, 1996, the differences in
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price paid per share by
existing and new investors:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
Existing
stockholders(1)...... 1,819,049 58% $ 1,083,000 6% $ 0.60
New investors.......... 1,300,000 42 16,900,000 94 $ 13.00
--------- ---- ----------- ----
Total........ 3,119,049 100% $17,983,000 100%
========= ==== =========== ====
- ---------------
(1) All existing stockholders of the Company hold shares of Class B Common
Stock, which shares will convert into shares of Class A Common Stock over a
four-year period commencing upon the closing of this offering. Includes
487,241 mandatorily redeemable shares held by the ESOP. Excludes 120,000
shares which the Company will repurchase, subject to certain conditions,
within 30 days of the closing of this offering. See "Description of Capital
Stock."
The foregoing assumes no exercise of options after October 31, 1996. As of
October 31, 1996, there were outstanding options to purchase 1,147,875 shares of
Class B Common Stock at a weighted average exercise price of $4.80 per share. To
the extent outstanding options are exercised, there will be further dilution to
new investors. See "Capitalization," "Management -- Benefit Plans,"
"Compensation of Directors" and Note 5 of Notes to Consolidated Financial
Statements.
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SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below with respect to
the Company's consolidated statement of income for each of the years in the
three-year period ended January 31, 1996, and with respect to the consolidated
balance sheet at January 31, 1996 and 1995, are derived from the consolidated
financial statements audited by Price Waterhouse LLP, independent accountants,
which are included elsewhere in this Prospectus and are qualified by reference
to such consolidated financial statements. The consolidated statement of income
data for the year ended January 31, 1993 and the consolidated balance sheet data
at January 31, 1994 and 1993 are derived from audited consolidated financial
statements not included in this Prospectus. The consolidated statement of income
data for the nine months ended October 31, 1996 and 1995, and the consolidated
balance sheet data at October 31, 1996 are derived from unaudited consolidated
financial statements which are included elsewhere in this Prospectus. The
unaudited consolidated financial statement data includes all adjustments,
consisting only of normal recurring adjustments, which the Company considers
necessary for a fair presentation of the consolidated financial position and
results of operations for such periods. Consolidated operating results for the
nine months ended October 31, 1996 are not necessarily indicative of the results
that may be expected for the year ended January 31, 1997. The data set forth
below should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Result of Operations and the Consolidated Financial
Statements and related notes included herein.
NINE MONTHS ENDED
OCTOBER 31, YEAR ENDED JANUARY 31,
--------------------- ---------------------------------------------
1996 1995 1996 1995 1994 1993
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED STATEMENT OF INCOME DATA:
Revenues................................. $ 41,452 $ 38,733 $ 52,928 $ 57,656 $ 55,901 $ 57,695
Costs and expenses:
Cost of revenues....................... 34,233 32,095 43,803 47,846 46,656 48,684
Selling, general and administrative.... 4,797 4,555 5,977 7,363 6,592 6,733
Research and development............... 310 400 560 228 206 365
--------- --------- --------- --------- --------- ---------
39,340 37,050 50,340 55,437 53,454 55,782
--------- --------- --------- --------- --------- ---------
Operating income......................... 2,112 1,683 2,588 2,219 2,447 1,913
Interest expense......................... 1,427 1,423 2,018 1,721 1,632 568
--------- --------- --------- --------- --------- ---------
Income before income taxes............... 685 260 570 498 815 1,345
Provision for income taxes(1)............ 249 98 234 176 95 562
--------- --------- --------- --------- --------- ---------
Net income............................... $ 436 $ 162 $ 336 $ 322 $ 720 $ 783
========= ========= ========= ========= ========= =========
Net earnings per share................... $ 0.21 $ 0.08 $ 0.16 $ 0.15 $ 0.30 $ 0.30
========= ========= ========= ========= ========= =========
Shares used in per share calculation..... 2,048,800 2,086,900 2,075,900 2,131,400 2,678,400 3,093,600
========= ========= ========= ========= ========= =========
AT JANUARY 31,
AT OCTOBER 31, ----------------------------------------
1996 1996 1995 1994 1993
-------- ------- ------- ------- -------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash............................................... $ 47 $ 53 $ 134 $ 41 $ 8
Working capital (deficit).......................... 357 241 525 (56) (176)
Total assets....................................... 32,715 34,779 33,942 35,285 21,875
Bank line of credit................................ 3,198 4,953 2,552 3,411 2,928
Mortgage debt, less current portion................ 13,356 13,615 13,964 14,843 --
Long-term liabilities, excluding mortgage debt..... 1,877 2,137 2,027 2,462 3,765
Mandatorily redeemable ESOP shares(2).............. 3,159 2,579 2,149 2,108 2,310
Total stockholders' equity......................... 2,877 2,813 3,195 3,005 2,586
- ---------------
(1) Provision for income taxes in fiscal year 1994 includes a credit of $231,000
from a change in method of accounting for income taxes. See Note 1 of Notes
to Consolidated Financial Statements.
(2) Represents the Company's potential obligation prior to the closing of this
offering to repurchase shares of Class B Common Stock upon distribution by
the ESOP of vested shares to retiring or terminated plan participants due to
the fact that such shares are not readily tradeable. Following the closing
of this offering, this potential obligation may, at the Company's option, be
satisfied by the distribution from the ESOP of shares of Class A Common
Stock which are readily tradeable, and therefore such amount will be
reclassified to stockholders' equity. See "Management -- Benefit Plans" and
Notes 5 and 8 of Notes to Consolidated Financial Statements.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations includes forward-looking statements with respect to
the Company's future financial performance. These forward-looking statements are
subject to various risks and uncertainties, including the factors described
under "Risk Factors" and elsewhere in this Prospectus, that could cause actual
results to differ materially from historical results or those currently
anticipated.
OVERVIEW
Jaymark provides advanced technology products and services to the DoD and
other government agencies, and commercializes selected government-funded
technologies following a disciplined evaluation of market size and
profitability. The Company's government contract business is performed through
Jaycor, its wholly owned subsidiary. The Company has recently formed a wholly
owned subsidiary, Jaycor Networks, to which it contributed its FibreStar
products and technology in order to capitalize on the commercial potential of
these products.
The Company operates and reports its results of operations on the basis of
52 or 53 week periods ending on the Friday closest to January 31. The Company's
fiscal quarters generally end on the Friday closest to the last day of the month
of the fiscal quarter. For presentation purposes, the Company has indicated its
fiscal year as ending on January 31 and its fiscal quarters as ending on April
30, July 31, and October 31.
The Company has historically derived over 90% of its revenues from
contracts or subcontracts funded by agencies of the U.S. government. Contract
costs reimbursed under government contracts include allocated indirect costs
which are subject to audit and adjustment by the U.S. government. Contract
revenues have been recorded in amounts which are expected to be realized upon
final audit.
Government contracts generally are one of three types: (i) cost plus fixed
fee ("CPFF"), (ii) time and materials ("T&M"), and (iii) fixed-price. CPFF
contracts provide for reimbursement for all of Jaycor's allowable costs and a
fixed profit. T&M contracts require Jaycor to provide a certain number of labor
hours at a rate prescribed by the contract. Jaycor is reimbursed for the hours
spent on T&M contracts at the prescribed labor rate for each category and all
materials utilized. The fee in a T&M contract is generally slightly higher than
for CPFF contracts. Fixed-price contracts require Jaycor to deliver the work
product described in the work statement at a fixed price, which has the largest
risk to Jaycor, but also generally has the largest potential profit margin. In
the nine months ended October 31, 1996, approximately 77%, 9% and 14% of
Jaycor's government contract revenues were derived from CPFF, T&M and
fixed-price contracts, respectively. Government contract revenues are generally
recognized as costs are incurred and include a portion of the total estimated
earnings to be realized based upon the relationship between contract costs
incurred to date and total estimated contract costs at completion.
Since the Company's inception in 1975 until the early 1990s, a significant
portion of the Company's revenues were associated with nuclear-related
government programs. Since fiscal year 1991, however, the Company's base of
nuclear-related revenues has decreased substantially. In the nine months ended
October 31, 1996, approximately 7% of total revenues ($3.1 million) were derived
from nuclear-related programs, as compared to over 43% ($24.6 million) in fiscal
year 1993. Growth of revenues over the last four years in other programs has
substantially offset the nuclear-related revenue decrease.
The Company's cost of revenues is comprised primarily of direct contract
costs and overhead expenses. Since a majority of the cost of revenues is
reimbursed by the Company's customers under cost-reimbursable contracts, the
cost of revenues element remains relatively constant from year to year as a
percentage of total revenues. Direct contract costs consist of labor and
non-labor costs. Overhead expenses consist primarily of operating division
administration, business development and proposal activities, and
facility-related expenses. Selling, general and administrative ("SG&A") costs
generally consist of corporate management and administrative support costs.
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Research and development ("R&D") costs are those associated with the
Company's R&D efforts which are not funded under specific contracts. A majority
of the Company's R&D efforts are funded directly under contracts, resulting in
relatively low company-expended R&D costs. The Company believes that the
company-expended R&D costs will increase in the future as the Company increases
its efforts to commercialize products.
The Company's accounting policies with respect to JNI are consistent with
industry standards applicable to manufacturers of computer networking products.
In addition, the Company anticipates that various costs and expenses applicable
to the generation of JNI's revenues will differ significantly from those
reflected in the Company's historical results of operations, and JNI's results
of operations will be more comparable to other computer networking companies at
a similar stage of development.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of total revenues, certain
consolidated income statement data for the periods indicated.
NINE MONTHS
ENDED
OCTOBER 31, YEAR ENDED JANUARY 31,
-------------- --------------------------------
1996 1995 1996 1995 1994 1993
----- ----- ----- ----- ----- -----
Revenues........................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of revenues.............................. 82.6 82.9 82.8 83.0 83.4 84.4
Selling, general and administrative........... 11.6 11.8 11.3 12.8 11.8 11.7
Research and development...................... 0.7 1.0 1.1 0.4 0.4 0.6
----- ----- ----- ----- ----- -----
94.9 95.7 95.2 96.2 95.6 96.7
----- ----- ----- ----- ----- -----
Operating income................................ 5.1 4.3 4.8 3.8 4.4 3.3
Interest expense................................ 3.4 3.6 3.8 2.9 2.9 1.0
----- ----- ----- ----- ----- -----
Income before income taxes...................... 1.7 0.7 1.0 0.9 1.5 2.3
Provision for income taxes, net(1).............. 0.6 0.3 0.4 0.3 0.2 0.9
----- ----- ----- ----- ----- -----
Net income...................................... 1.1% 0.4% 0.6% 0.6% 1.3% 1.4%
===== ===== ===== ===== ===== =====
- ---------------
(1) Provision for income taxes in fiscal year 1994 includes a credit from a
change in method of accounting for income taxes. See Note 1 of Notes to
Consolidated Financial Statements.
NINE MONTHS ENDED OCTOBER 31, 1996 VS. NINE MONTHS ENDED OCTOBER 31, 1995
Revenues. Revenues increased by $2.8 million, or 7.0%, from $38.7 million
in the nine months ended October 31, 1995 to $41.5 million in the nine months
ended October 31, 1996. Approximately $2.0 million in increased revenue was
associated with scheduled hardware resales under communications engineering
contracts and $1.3 million in revenues was contributed by two additional
business lines which were added in the third quarter of the fiscal year ended
January 31, 1996 and the first quarter of the fiscal year ended January 31,
1997. These increases were partially offset by a $1.4 million decline in
revenues from decreased environmental remediation contract activity.
Cost of revenues. Cost of revenues increased from $32.1 million, or 82.9%
of revenues, in the nine months ended October 31, 1995 to $34.2 million, or
82.6% of revenues, in the nine months ended October 31, 1996. This increase in
cost of revenues of $2.1 million is associated primarily with scheduled hardware
resales under communications engineering contracts.
Selling, general and administrative expenses. SG&A remained relatively
constant at $4.6 million, or 11.8% of revenues, in the nine months ended October
31, 1995 compared to $4.8 million, or 11.6% of revenues, in the nine months
ended October 31, 1996.
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21
Research and development expenses. R&D expenses remained relatively
constant at $0.4 million, or 1.0% of revenues, in the nine months ended October
31, 1995 compared to $0.3 million, or 0.7% of revenues, in the nine months ended
October 31, 1996. Since most of the Company's research and development efforts
were funded directly under development contracts, company-expended R&D costs
represent a relatively minor portion of the Company's total costs.
Interest expense. Interest expense remained constant at $1.4 million in
the nine month periods ended October 31, 1995 and 1996. The Company's borrowing
levels and interest rates were generally constant over the two periods.
Provision for income taxes. The Company's effective tax rate was 37.7% for
the nine months ended October 31, 1995 and 36.4% for the nine months ended
October 31, 1996.
FISCAL YEAR ENDED JANUARY 31, 1996 VS. FISCAL YEAR ENDED JANUARY 31, 1995
Revenues. Revenues decreased by $4.8 million, or 8.2%, from $57.7 million
in the fiscal year ended January 31, 1995 to $52.9 million in the fiscal year
ended January 31, 1996. Revenues from nuclear-related programs declined by $2.0
million for the period, reflecting the continued decline in nuclear-related
defense spending in this area. Reduced scheduled hardware resales under the
Company's communications engineering contracts resulted in additional reductions
in revenues of $4.6 million. These reductions were partially offset by increased
revenues in other business areas within the Company.
Cost of revenues. Cost of revenues decreased from $47.8 million, or 83.0%
of revenues, in the fiscal year ended January 31, 1995, to $43.8 million, or
82.8% of revenues, in the fiscal year ended January 31, 1996. This reduction in
cost of revenues is consistent with the revenue decrease during the period.
Selling, general and administrative expenses. SG&A decreased from $7.4
million, or 12.8% of revenues, in the fiscal year ended January 31, 1995, to
$6.0 million, or 11.3% of revenues, in the fiscal year ended January 31, 1996.
This reduction is attributable in part to a one-time payment in the fiscal year
ended January 31, 1995 of $0.9 million relating to settlement of certain
contract disputes arising from events occurring prior to 1991. In addition, the
Company reduced the number of administrative support personnel during the fiscal
year ended January 31, 1996, resulting in a cost savings of approximately $0.5
million.
Research and development expenses. R&D expenses increased from $0.2
million, or 0.4% of revenues, in the fiscal year ended January 31, 1995 to $0.6
million, or 1.1% of revenues, in the fiscal year ended January 31, 1996. This
increase is due principally to increased development effort of the Company's
networking products.
Interest expense. Interest expense increased from $1.7 million in the
fiscal year ended January 31, 1995 to $2.0 million in the fiscal year ended
January 31, 1996. The increase of $0.3 million in interest expense reflects the
cost of higher working capital borrowings under the Company's bank line of
credit, partially due to the U.S. government's temporary shutdown.
Provision for income taxes. The Company's effective tax rate was 41.1% in
the fiscal year ended January 31, 1996, as compared to 35.3% for the fiscal year
ended January 31, 1995. The variation in the effective tax rate is primarily
attributable to a revision of prior years' tax estimates which reduced the
effective tax rate for the fiscal year ended January 31, 1995.
FISCAL YEAR ENDED JANUARY 31, 1995 VS. FISCAL YEAR ENDED JANUARY 31, 1994
Revenues. Revenues increased by $1.8 million, or 3.1%, from $55.9 million
in the fiscal year ended January 31, 1994 to $57.7 million in the fiscal year
ended January 31, 1995. The change in revenues includes an increase in revenues
associated with the Company's communications engineering and information systems
business areas, offset in part by reductions in revenues from nuclear-related
programs.
Cost of revenues. Cost of revenues increased from $46.7 million, or 83.4%
of revenues, in the fiscal year ended January 31, 1994 to $47.8 million, or
83.0% of revenues, primarily due to the increase in revenues.
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22
Selling, general and administrative expenses. SG&A expenses increased from
$6.6 million, or 11.8% of revenues, in the fiscal year ended January 31, 1994,
to $7.4 million, or 12.8% of revenues, in the fiscal year ended January 31,
1995. This increase was due entirely to a one-time payment of $0.9 million
relating to settlement of certain contract disputes arising from events
occurring prior to 1991.
Research and development expenses. R&D expenses were unchanged from the
fiscal year ended January 31, 1994 to the fiscal year ended January 31, 1995 at
$0.2 million, representing 0.4% of revenues in both years.
Interest expense. Interest expense was relatively unchanged at $1.7
million in the fiscal year ended January 31, 1995 as compared to $1.6 million in
the fiscal year ended January 31, 1994.
Provision for income taxes. The Company's effective tax rate was 35.3% in
the fiscal year ended January 31, 1995. During the fiscal year ended January 31,
1994, the Company adopted a change in method of accounting for income taxes as
required by Statement of Financial Accounting Standards ("SFAS") No. 109. The
adoption of this standard resulted in a credit to income of $0.2 million.
Without the effect of this one-time credit, the effective tax rate was 40.0% in
the fiscal year ended January 31, 1994. The variation in the effective tax rate
is primarily attributable to a revision of prior years' tax estimates which
reduced the effective tax rate for the fiscal year ended January 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 1996, the Company had $47,000 of cash and $357,000 of
working capital. The Company finances its operations and the purchase of
property and equipment through borrowings under a short-term line of credit and
term loans and from generation of cash from operations. The Company has a bank
line of credit under which the Company may borrow up to $6.0 million, limited to
specified percentages of eligible accounts receivable, at 7/8% over the bank's
prime rate. As of January 31, 1997, the Company had $4.3 million outstanding
under such line of credit, which accrued interest at an annual rate of 9.125%,
and an additional $1.3 million was available for borrowing. The credit line
matures in October 1997, at which time the Company intends to seek renewal.
While the Company believes that the line will be fully renewed, there can be no
assurance that such renewal will occur. The Company has a zero-balance bank
account arrangement whereby the Company makes daily borrowings under the credit
line as necessary and all cash collections received are applied against the
credit line balance on a daily basis. See Note 3 of Notes to Consolidated
Financial Statements.
In addition to the working capital credit line which the Company intends to
fully repay using proceeds of the offering, the Company borrows from secondary
lenders for the acquisition of property and equipment. Such term debt is secured
by purchased property and equipment and is payable in monthly principal and
interest installments over a three-year term.
The Company also has a mortgage loan secured by its owned facility in San
Diego, California. The mortgage requires monthly payments of principal,
amortized over a 17-year period, and interest, which was payable at an annual
rate of 8.96% as of January 31, 1997. See Note 4 of Notes to Consolidated
Financial Statements.
In the nine months ended October 31, 1996, net cash provided by operating
activities was $3.6 million, including cash generated from a reduction in
accounts receivable of $3.1 million. During the same period, $2.8 million in
cash was used to repay short-term and long-term debt and $0.6 million was
expended for property and equipment.
Traditionally, the Company's primary need for working capital has been
driven only by the need to finance government accounts receivable. Because
government contracts generally provide for reimbursement of costs as they are
incurred, and the Company's contracting efforts have not typically required
significant investment in capital equipment, research and development, or
extensive marketing activities, there has not been a need for significant
amounts of working capital in the past. As the Company's commercialization
efforts increase and the need for additional personnel, equipment, inventory,
research and development and marketing efforts grows, additional working capital
beyond traditional levels will be required. Additionally, the Company's strategy
of acquiring complementary companies may require additional capital.
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23
The Company believes that the net proceeds of the offering, together with
the Company's capacity to borrow under existing working capital loan
arrangements and secondary borrowings for property and equipment, will be
sufficient for its working capital and capital expenditure needs for at least
the twelve-month period following this offering. Thereafter, if the Company's
spending plans change, the Company may find it necessary to seek to obtain
additional sources of financing to support its capital needs, but there can be
no assurance that such financing will be available on commercially reasonable
terms, if at all.
NEW ACCOUNTING PRONOUNCEMENT
Stock-Based Compensation. In October 1995, the Financial Accounting
Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation,"
which establishes a fair value based method of accounting for compensation costs
related to stock option plans and other forms of stock based compensation plans
as an alternative to the intrinsic value based method of accounting defined
under Accounting Principles Board Opinion No. 25. Companies that do not elect
the new method of accounting will be required to provide pro forma disclosures
as if the fair value based method had been applied. The Company has not elected
the fair value based method of accounting and will provide pro forma disclosures
as required, beginning with its annual financial statements for the fiscal year
ended January 31, 1997.
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24
BUSINESS
OVERVIEW
Jaymark provides advanced technology products and services to the DoD and
other government agencies, and commercializes selected government-funded
technologies following a disciplined evaluation of market size and
profitability. The Company's first products developed under this
commercialization strategy are high-speed digital communication adapters which
have been sold in production quantities since December 1996. These products,
marketed under the FibreStar brand, are designed to the ANSI Fibre Channel
standard. The Fibre Channel standard has become well supported in the industry
because of its high performance, which includes (i) the highest
commercially-available speed (2125 Mbps in full duplex), (ii) scalability (up to
126 nodes on a single loop), (iii) simplicity of installation and maintenance,
(iv) multiprotocol transport (simultaneously within both storage and network
environments), (v) long connection distance (up to six miles), and (vi) high
reliability of data reception and absence of congestion with multiple users.
FibreStar products provide essential hardware and software to reduce network
congestion, thereby delivering substantial performance improvement to users
requiring high-bandwidth data transmission capabilities, including multimedia,
in such applications as (i) business and scientific computing, (ii) high volume
database access for the financial and retail industries, and (iii) multistream
digital video transmission and editing for the entertainment and broadcast
industries.
With over twenty years of government-funded advanced technology
development, the Company has established several core competencies, including
(i) electronic and electro-optic system design, (ii) communications engineering,
(iii) electromagnetic effects, and (iv) nuclear and high-explosive weapon
effects (e.g., blast and shock effects on structures). In 1991, under the
leadership of new management, the Company began to target government contracts
involving the development of proprietary technologies with potential commercial
applications ("dual-use technologies").
The Company's objective is to increase profitability by leveraging its core
competencies and its advanced government-funded research through
commercialization of dual-use technologies. The key elements of the Company's
strategy are to:
- Establish FibreStar as a leading line of adapters in the emerging market
for networking and storage products utilizing the Fibre Channel standard.
- Selectively identify and commercialize additional dual-use technologies
and products with compelling market potential, and establish separate
business entities, when appropriate, to provide dedicated management and
focused business objectives.
- Maintain and expand core competencies to provide new proprietary
technologies, products and resources through the pursuit of
government-funded research and strategic acquisitions.
The Company has recently formed a wholly owned subsidiary, Jaycor Networks,
to which it contributed its FibreStar products and technology in order to
capitalize on the commercial potential of these products. The efficient and
rapid transfer of information throughout networks has become increasingly
critical to the daily operation of business. The annual market for Fibre Channel
adapters, such as the FibreStar products, is projected to grow from $68 million
in 1996 to over $200 million in 1997 and to exceed $1 billion by the year 2000,
according to an industry study by EMF Associates, a networking consulting group.
The Company believes that only a small portion of this market is currently
associated with independent suppliers of Fibre Channel adapters. In the future,
however, the Company believes that independent suppliers, such as JNI, will
supply a larger portion of the market. As an example of how widely the Fibre
Channel standard has been adopted, JNI and 35 other companies exhibited a
variety of their Fibre Channel product lines at the Comdex computer trade show
meeting in November 1996, including Adaptec, Ancor Communications, Box Hill
Systems, Digital Equipment Corporation, Emulex, Gadzoox Microsystems,
Hewlett-Packard, Intel, Interphase, LSI Logic, Philips, QLogic, Quantum, Seagate
Technology, Sun Microsystems, Texas Instruments, Unisys, Vitesse Semiconductor,
and XPoint Technology. In December 1996 and January 1997, JNI shipped over
$200,000 of FibreStar products.
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25
The Company's government contract business is performed through Jaycor, its
wholly owned subsidiary. Jaycor's objective is to maintain and expand its
advanced technology government research base, which in turn will provide both
the technology and resources for further product commercialization. Jaycor
intends to focus on areas in which government funding is likely to remain stable
or increase, while simultaneously identifying problems and providing solutions
to the government in areas in which its core competencies provide a competitive
advantage. Jaycor maintains active relationships with the Departments of
Defense, State, Justice, Transportation, and Energy, and had approximately 200
contracts or subcontracts that generated revenue during the fiscal year ended
January 31, 1997, which were funded by approximately 40 different government
agencies, most of which are within the DoD.
COMPANY STRATEGY
The Company's strategy is to commercialize emerging technologies by
leveraging its government-funded development efforts, which provide a source of
dual-use technologies and the resources to develop such technologies. The key
elements of this strategy are as follows:
Establish FibreStar as a Leading Line of Adapters. FibreStar is the first
technology to be commercialized by the Company from its government-funded
research after both internal and independent analysis indicated significant
market potential. The Company intends to establish JNI as a leading independent
supplier of Fibre Channel adapters by (i) developing additional OEM and reseller
arrangements, (ii) expanding and enhancing its product line, (iii) leveraging
its existing relationships with resellers and OEMs with respect to SBus-to-Fibre
Channel products to promote and market PCI-to-Fibre Channel products, (iv)
developing timely responses to new market needs, and (v) continuing its
commitment to product quality and customer service. See "-- Fibre Channel
Network Products -- Strategy."
Selectively Identify and Commercialize Dual-Use Technologies and
Products. In 1991, under the leadership of new management, the Company adopted
a strategy of developing dual-use technologies. As a result, the Company began
to target government contracts involving development of proprietary technologies
with commercial applications, and began to apply for patents to protect its
proprietary position. Over the past six years, the Company has developed
additional dual-use technologies which it believes have the potential for
successful commercial applications, including: (i) a bomb-resistant luggage
container designed for aircraft safety, (ii) an Auto-Arrestor to prevent or
terminate dangerous high-speed chases, (iii) several non-lethal weapon
applications for military and domestic security purposes, and (iv) several
weapon detection systems. The Company intends to commercialize its technologies,
but only after a disciplined evaluation of market size and profitability by both
the Company and independent market consultants indicates a high probability of
success. The Company will establish separate subsidiaries, when appropriate, to
commercialize proprietary technologies in order to provide dedicated management
and focused business objectives.
Maintain and Expand Core Competencies. The Company focuses on government
contracting opportunities in areas in which the Company's core competencies can
provide unique solutions and in which the Company's reputation and experience
provide a competitive advantage. The maintenance of its government services
business is vital to the Company as a source of new proprietary technologies and
products for commercialization, and the resources needed to successfully
commercialize such technologies and products. In order to expand its advanced
technology products and services business, the Company's strategy is to (i)
target contracting opportunities in areas of increased funding, (ii) focus on
high-technology contracting opportunities, and (iii) pursue acquisitions. To
implement this strategy, the Company intends to foster key government
relationships, retain key management and technical personnel, and remain cost
competitive. See "-- Advanced Technology Products and Services -- Strategy."
ADVANCED TECHNOLOGY PRODUCTS AND SERVICES
OVERVIEW
The Company provides advanced technology products and services to the DoD
and other government agencies through its wholly owned subsidiary, Jaycor, which
was founded in 1975. In 1991, under the leadership of new management, Jaycor
refocused its technology base to pursue problems and solutions
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26
relevant to the post-Cold War era and to emphasize, where possible, the
development of dual-use technologies.
Over 90% of Jaycor's revenues are generated through contracts funded by the
DoD budget categories of research, development, test and evaluation ("RDT&E")
and, to a lesser extent, operations and maintenance ("O&M"). While the overall
defense budget declined following the Cold War by 17% in constant dollars from
1990 to 1997, the RDT&E budget category declined by only 5% over the same
period. The RDT&E budget has stabilized at approximately $35 billion in 1995,
and is now increasing in certain areas relevant to Jaycor's core competencies.
Such areas include intelligence and communications, systems research and
development, electronic warfare, information systems, security, chemical and
biological defense, and Advanced Concept Test Demonstrations, which include,
among others, countermine, counterproliferation and cruise missile defense.
STRATEGY
Jaycor's objective is to maintain and expand its core competencies, which
will provide both the technology and resources for further product
commercialization. The key elements of Jaycor's strategy include the following:
Target Contracting Opportunities in Areas of Increased Funding. Jaycor
focuses marketing resources on areas in which government funding is likely to
remain stable or increase, both within and outside of the DoD. Jaycor remains
current on existing and emerging problems of interest in various government
agencies and follows the budgeting and funding allocation process through
Congress down to the agencies. As a result of this approach, Jaycor believes
that increased funding opportunities will be available in its areas of interest,
including: communications installation and maintenance, land mine warfare and
countermine systems, electronic and information warfare, aviation safety and
counterterrorism, law enforcement, chemical/ biological defense and the
environment.
Focus on Advanced Technology Opportunities. Jaycor pursues contracts in
areas in which its proprietary technologies or hardware provide: (i) innovative
solutions to government problems, (ii) a competitive advantage, and (iii)
opportunities for developing dual-use technologies. To maximize this advantage,
Jaycor often demonstrates the viability of proposed technical solutions as a
part of government-reimbursable internal research and development ("IR&D")
efforts, leading to either unsolicited or solicited proposals. For example,
Jaycor developed the Auto-Arrestor to safely stop fleeing vehicles with IR&D
funds as a part of a preproposal effort for the Department of Justice.
Pursue Acquisitions. Jaycor plans to broaden its contracting base and
enter new markets by acquiring other contracting companies that augment Jaycor's
government contracting activities. For example, in 1996 Jaycor enhanced its
ability to deliver complete microwave systems by acquiring the Power Systems
Design Group, which designs and manufactures specialty power supplies.
CORE COMPETENCIES AND CUSTOMER SOLUTIONS
Jaycor pursues contracting opportunities in areas in its core competencies,
which are:
Electronic and Electro-Optic System Design. Jaycor has expertise in the
design and manufacture of electronic and electro-optic systems, including
communications, surveillance and weapon detection sensors, mine detection
radars, directed-energy systems and electronic warfare. Jaycor uses these
capabilities in a wide variety of government contracts such as the design and
fabrication of radiation-hardened space-borne computers for potential use on
military satellites, and the design and manufacture of electronic power supplies
for use with directed-energy weapon systems.
Communications Engineering. Jaycor has significant experience in fixed and
mobile communication systems design, installation, maintenance, logistics
support and related personnel training. These systems include telephone,
microwave, VHF/UHF and satellite systems. For example, Jaycor currently provides
engineering, provisioning, testing, training, upgrades, repair, security,
equipment configuration management,
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and operations support at a facility for an Air Force agency. Jaycor is also
designing and installing upgraded telecommunications systems at various military
facilities around the world.
Electromagnetic Effects. Jaycor applies its understanding of
electromagnetic effects on the operation of electronic systems to design weapon
system concepts to defeat adversaries' electronic systems, and to develop design
techniques to protect U.S. systems from adverse effects resulting from natural
and man-made sources of RF energy. Jaycor has contracts to design and
demonstrate electromagnetic and electronic warfare weapon concepts, and to
develop design techniques to prevent degradation of system performance in
hostile electromagnetic environments.
Weapon Effects. Through 20 years of contracting for the DoD, Jaycor has
developed an understanding of the effects of a broad range of military weapons
on electronic systems and mechanical structures such as satellites, missiles,
missile silos and other structures. Jaycor has contracts to design and test
techniques that allow electronic and electro-optic systems to operate in hostile
radiation environments characteristic of post-Cold War weapon threats. Jaycor is
using this technology to develop non-military products for post-Cold War
applications such as bomb containment and weapon detection systems.
Other Core Competencies. Jaycor also maintains a depth of experience in
information systems database management, large-scale interactive computing,
security and counterterrorism, biological/chemical defense and environmental
remediation. These core competencies have supported a wide variety of contracts,
such as the management of a database for military personnel medical histories,
large-scale interactive computer simulations for war gaming, the design of
security systems for U.S. embassies and simulation of chemical/biological agent
dispersion.
POTENTIAL COMMERCIAL OPPORTUNITIES
As part of its government-funded research, Jaycor develops innovative
dual-use technologies and products. The Company's first commercial products, its
FibreStar adapters, were developed from Jaycor's experience in developing and
delivering specialized high-speed data transmission systems for the DoD. See
"-- Fibre Channel Network Products." Jaycor currently is involved in several
additional government-funded product development efforts that the Company
believes may lead to commercial applications.
Hardened Luggage Container. Current airport security equipment cannot
detect certain smaller explosive devices that are capable of causing significant
damage. Under a contract with the Federal Aviation Agency ("FAA"), Jaycor has
developed and successfully tested prototype units of a hardened luggage
container which is capable of containing the detonation and suppressing the
fires caused by such devices. This container conforms to International Air
Transport Association specifications for luggage containers and is designed to
provide greater durability than existing containers used in ordinary commercial
service. Because this hardened luggage container will cost more to purchase and
to operate due to its increased weight over existing luggage containers, Jaycor
believes that commercial airlines will not readily purchase the containers until
FAA regulations require the mandatory use of such a hardened luggage container.
The FAA has ordered two additional prototype units from the Company. In
addition, the FAA has issued a Request for Proposal ("RFP"), which Jaycor is
actively pursuing, to acquire up to 60 units over the next 12 months for test
and evaluation by the airlines. The resulting information will be used to
determine cost and reliability data as part of the regulatory process.
Handheld Acoustic Weapon Detector. Jaycor has developed an ultrasonic
imaging device under DoD contract that can detect small objects, including
concealed weapons, on individuals at distances from three to ten feet. Currently
there is no low-cost product to image concealed weapons in a nonintrusive
manner. The objective of the current contract is to fabricate a pre-prototype
system for test and evaluation. The Company plans to continue development under
government contract.
Auto-Arrestor. Using IR&D funds, Jaycor designed and tested the
Auto-Arrestor as part of its pre-proposal effort to the Department of Justice to
develop technologies to stop fleeing motor vehicles quickly and safely. Law
enforcement officials estimate that each year there are over 40,000 high-speed
chases between police and motorists on the roadways, resulting in approximately
400 deaths, millions of dollars in property
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damages, and personal injuries. The Auto-Arrestor uses an electromagnetic pulse
to disrupt the ignition of a motor vehicle, causing it to come to a controlled
stop. The Auto-Arrestor has been successfully tested on highways in Colorado, at
the border crossing in San Diego, California, and in safety and effectiveness
tests at the Army Research Laboratory in Adelphi, Maryland.
Non-Lethal Projectiles. Pursuant to a contract with the Defense Advanced
Research Projects Agency, Jaycor has developed and demonstrated a low-velocity
blunt prototype electrical projectile which can be used by the military and
police with existing weapons to subdue suspects with non-lethal force. Under
government IR&D funding, Jaycor has developed and demonstrated the ability to
deliver pepper spray at distances up to 50 feet quickly and accurately by
encapsulating the pepper spray in small spherical gel balls. The Company has
applied for a patent, and the military is planning to test and evaluate this
weapon in the coming year.
Ground-Penetration Radar for Buried Land Mine Detection. In 1996, Jaycor
completed a contract for a proof-of-principle standoff mine detection system.
Pursuant to a new contract issued by the DoD in August 1996, Jaycor is now
developing a prototype system to be used in an advanced technology development
program. Approximately $8 million in additional funding has been earmarked for
this contract, which will last a minimum of 27 months. Jaycor's proprietary
system is the only system known by the Company that can detect mines at ranges
up to approximately 100 feet.
CUSTOMERS
Jaycor maintains active relationships with the Departments of Defense,
State, Justice, Transportation, and Energy, and had approximately 200 contracts
or subcontracts that generated revenue during the fiscal year ended January 31,
1997 which were funded by approximately 40 different government agencies, most
of which are within the DoD. In addition, for the nine months ended October 31,
1996, approximately 30% of Jaycor's revenues were derived from approximately 30
contracts with DSWA and approximately 12% of Jaycor's revenues were derived from
contracts with SM-ALC. In those instances where Jaycor teams with other
companies to bid for contracts, it may become either the prime contractor or a
subcontractor under the contract. Jaycor's relationship with the funding
government agency frequently does not differ substantially between a prime
contractor and a subcontractor.
COMPETITION
Jaycor's competitors generally fall into three broad classes, including (i)
smaller companies which have a high degree of specialization in one government
contract segment (e.g., Mission Research Corporation), (ii)
medium-to-large-sized companies that compete with Jaycor for a broad range of
government contracts (e.g., Science Applications International Corporation, EG&G
and Kaman Sciences), and (iii) extremely large aerospace and defense contractors
that rarely compete with Jaycor except for certain prototype development
contracts which involve large-scale sophisticated technology or large multi-year
contracts (e.g., Hughes, Lockheed-Martin, TRW and Raytheon). Many of Jaycor's
competitors have substantially greater technical, financial, marketing and other
resources than Jaycor. No assurance can be given that Jaycor's competitors will
not bid for or deliver their solutions in a more effective or efficient manner,
which would significantly adversely affect Jaycor's potential market share.
Jaycor believes that the critical success factors in its market are the ability
to (i) develop proprietary technology, (ii) maintain technological superiority,
(iii) maintain customer satisfaction, (iv) adapt to changing budget priorities,
(v) identify and provide cost-effective solutions for government applications,
and (vi) continue to recruit and retain highly-skilled personnel.
PROCUREMENT OF GOVERNMENT CONTRACTS
Jaycor competes for most of its contracts in an open bidding process. RFPs
are generally advertised in The Commerce Business Daily, a government
publication. Bids are generally due from 30 to 60 days after the release of the
RFP, and the ensuing proposal evaluation process generally requires three to six
months.
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Jaycor typically bids on three types of government contracts: (i) CPFF,
(ii) T&M, and (iii) fixed-price. CPFF contracts provide for reimbursement for
all of Jaycor's allowable costs and a fixed profit. T&M contracts require Jaycor
to provide a certain number of labor hours at a rate prescribed by the contract.
Jaycor is reimbursed for the hours spent on T&M contracts at the prescribed
labor rate for each category and for all materials utilized. The fee in a T&M
contract is generally slightly higher than for CPFF contracts. Fixed-price
contracts require Jaycor to deliver the work product described in the work
statement at a fixed price, which has the largest risk to Jaycor, but generally
also has the largest potential profit margin. In the nine months ended October
31, 1996, approximately 77%, 9% and 14% of Jaycor's government contract revenues
were derived from CPFF, T&M and fixed-price contracts, respectively.
The nature of Jaycor's government contracts requires ongoing interaction
between Jaycor's key management and technical personnel and the various
government agencies. These interactions provide Jaycor with useful insight with
respect to its customers needs, and lead to opportunities to submit solicited or
unsolicited proposals to address these needs.
BACKLOG
Jaycor's total contract backlog was $55.4 million and $69.4 million as of
January 31, 1997 and 1996, respectively. The amount of backlog which had been
funded as of January 31, 1997 and 1996, was $21.7 million and $24.1 million,
respectively. Additionally, certain contracts contain provisions which allow the
government, under terms specified in the contract, to extend the period of
performance or to add additional work beyond the current contract scope. The
backlog value of these unexercised options as of January 31, 1997 and 1996 which
has been included in the total contract backlog was $31.9 million and $34.3
million, respectively.
Although there can be no assurance that full contractual funding will be
received, the Company expects, based on previous history, that substantially all
contracts which are not yet fully funded, including unexercised contract
options, will ultimately be funded.
PROPRIETARY INFORMATION AND INTELLECTUAL PROPERTY
Since 1991, Jaycor's strategy shifted to pursuing contracts with dual-use
technologies. Simultaneously, Jaycor began to patent technologies and products
with commercial potential. Jaycor has nine patents that have issued or been
allowed, and seven additional patent applications have been filed. Under certain
standard provisions in government contracts, the government may retain certain
rights, which are often limited, in technology developed under or arising out of
work performed under such contracts.
FIBRE CHANNEL NETWORK PRODUCTS
OVERVIEW
The Company, through its wholly owned subsidiary, Jaycor Networks, designs,
develops and markets high-speed digital communications adapters based on the
Fibre Channel standard adopted by the ANSI in 1993. FibreStar products provide
essential hardware and software to reduce network congestion through (i) the
highest commercially available speed, (ii) scalability, (iii) simplicity, (iv)
multiprotocol transport, (v) increased connection distance, and (vi) high
reliability of data reception and absence of congestion with multiple users.
FibreStar products provide significant opportunities for business solutions in
such applications as (i) business and scientific computing, (ii) high volume
database access for the financial and retail industries, and (iii) multistream
digital video transmission and editing for the entertainment and broadcast
industries. The annual market for Fibre Channel adapters, such as the FibreStar
products, is projected to grow from $68 million in 1996 to over $200 million in
1997 and to exceed $1 billion by the year 2000, according to an industry study
by EMF Associates, a networking consulting group.
Building on the Company's core competence in electronic and electro-optic
system design, FibreStar products were developed using the experience Jaycor
gained from 1991 through 1993 in designing specialized high-speed data
transmission systems for the DoD. After Jaycor's evaluation of the commercial
potential of
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the technology was confirmed by a market study conducted by the UCLA Graduate
School of Management, Jaycor began designing its initial prototype, an
SBus-to-Fibre Channel adapter, in 1993. Subsequently, two independent studies by
two high-technology consulting firms, TS&A Inc. and Eminent Technologies,
confirmed the commercial potential for Fibre Channel products and outlined
product development and marketing options.
INDUSTRY BACKGROUND
The Fibre Channel standard is a computer and data storage interface
specification adopted by the ANSI in 1993. When compared to existing standards,
Fibre Channel provides increased bandwidth for data communication, increased
distance over which data can be transmitted at high speeds, guaranteed data
delivery, and scalability to large numbers of network connections. The Fibre
Channel standard builds on industry experience to combine attractive features of
both network and storage protocols, and is the only standard that can transport
both network and storage protocols simultaneously over the same interface. Fibre
Channel provides 1063 Mbps transmission capabilities in half duplex and 2125
Mbps in full duplex. Additionally, the Fibre Channel standard permits connection
of a data warehouse to a network without a storage server, resulting in lower
costs of ownership and increased reliability. It is being used to improve
performance of computer networks and data storage systems in a wide variety of
applications.
The demand for and resulting application of Fibre Channel products is being
driven by three compelling market needs:
Increasing Requirements for Timely Retrieval and Archiving of Massive
Amounts of Data. In the past decade, organizations have become increasingly
aware that the ability to collect, analyze and distribute information in a
timely and efficient manner through computer networks is a key determinant of
their business success. However, business requirements to transmit increasing
volumes of information have grown beyond the capability of commonly employed
computer networks (e.g., Ethernet networks) to deliver data in a timely fashion.
During the past ten years, the amount of computing power commonly available in
personal computers has increased 200 times. During that same period, the amount
of disk storage available in the desktop computer has increased approximately
180 times, while enterprise system storage has increased hundreds of times
beyond that at the desktop. The connections to storage arrays (e.g., SCSI and
IDE) have not kept pace, and the various storage interfaces do not meet current
and future requirements for speed, distance and scalability. With the
introduction of high-speed Fibre Channel disc drives by Seagate Technology in
1996, and the availability of SBus-to-Fibre Channel adapters and PCI
Bus-to-Fibre Channel adapters, such as the FibreStar products, Fibre Channel is
emerging as a preferred solution to network storage bottlenecks by providing a
substantial increase in data transfer rates (up to 2125 Mbps in storage
connections using full duplex).
Increasing Requirements for Bandwidth in Computer Networks. During the
past decade, new and more complex applications, such as desktop publishing,
distributed database management and the processing requirements of multimedia
information, have strained the ability of many networks to reliably handle the
vastly increased volume and density of traffic. These networks, particularly
those based on Ethernet, Fast Ethernet or Token Ring technologies are
increasingly subject to traffic bottlenecks at the servers and congestion
between clients, frequently resulting in long response times and reduced
productivity. Products based on ATM offer slightly higher bandwidth than Fast
Ethernet, but when an ATM network becomes congested, data packets are discarded.
A recent survey in Storage Management, an industry magazine, concluded that
network performance and response time were the most frequently cited worries of
information system managers. The data transfer rates, low latency, scalability
and distance capability of Fibre Channel provide cost-effective solutions for
these information management problems.
Fibre Channel is the only solution that eliminates the connection as the
bandwidth-limiting element in both computing and storage networks at a
reasonable cost. Additional technologies and advanced networking protocols, such
as Gigabit Ethernet, are under development, but are not yet standardized and
have not yet been widely deployed commercially. In addition, Ethernet networks,
including the proposed Gigabit Ethernet, are based upon a collision-domain
access method that limits the usable bandwidth to an estimated 30% to 40%
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of the maximum rated bandwidth. In Ethernet networks, data reliability also
decreases as the number of users are increased. In contrast, Fibre Channel is
able to utilize nearly 100% of the maximum available bandwidth while maintaining
high data reliability as users are added to the network.
The figure below compares both common networking and storage interface
protocols with Fibre Channel, which alone can transport either or both network
and storage protocols simultaneously over the same interface.
FIBRE CHANNEL IS FASTER THAN OTHER
COMMON COMMERCIAL INTERFACE PROTOCOLS
[Bar graph comparing Fibre Channel to other network and storage protocols,
illustrating the following protocols and megabits per second: Ethernet (10),
Fast Ethernet (100), Token Ring (40), FDDI (100), ATM OCI (155), ATM OC3 (622),
SCSI (80), SCSI 2 (160), Ultra SCSI (320) and Fibre Channel (1063).]
Increased Use of Clustered PCs and Workstations. The increased computing
power of PCs and workstations and high-bandwidth links make it possible for
clustered PCs and workstations to fulfill functions formerly performed by
mainframe computers and at a lower cost of ownership. Clustering also allows
scalability, since computing power can be added incrementally as needs grow.
Fibre Channel, combining features of networking and computing channel standards,
provides a high bandwidth bidirectional link for communication among
workstations at internal bus speeds. As an open standard, Fibre Channel operates
with widely used workstations and PCs, and creates market opportunities for
high-speed digital communication adapters, such as the FibreStar products, that
are well suited for clustering applications.
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The following diagrams illustrate a network implemented with two different
technologies. In the first diagram, multiple disk drives, represented as
cabinets of RAIDs, communicate with a file server over the commonly used SCSI
type connection. The file server communicates to workstations over an FDDI
protocol. Multiple SCSI connections and multiple FDDI connections to the bridge
are necessary to deliver 100 Mbps to individual users.
FILE STREAMING WITH A SCSI/FDDI NETWORK REQUIRES MULTIPLE STORAGE
CONNECTIONS WHILE DELIVERING ONLY 100 MBPS TO USERS
[Schematic diagram illustrating a file streaming SCSI/FDDI network. Cabinets of
RAIDs communicate with a file server over a SCSI type connection (2 x 160 Mbps),
and the file server communicates to workstations over multiple FDDI connections
(4 x 100 Mbps) to a bridge.]
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In the following diagram, the RAIDs are connected with workstations in a
Fibre Channel loop configuration. Additionally, Fibre Channel permits direct,
common access to the disk drives over large distances, eliminating the need for
a file server. Communication to individual workstations is accomplished through
a Fibre Channel adapter, such as a FibreStar adapter, located in each
workstation, or two Fibre Channel adapters in each workstation for redundant
loops. Distribution of connectivity to individual workstations can be provided
by a Fibre Channel hub or switch. Workstations communicate with each other
through the hub or switch by using a network protocol and with the RAID cabinet
by using a storage protocol.
FILE STREAMING WITH A FIBRESTAR NETWORK
CAN DELIVER 1063 MBPS TO USERS OVER A SINGLE STORAGE CONNECTION
[SCHEMATIC DIAGRAM ILLUSTRATING A FILE STREAMING FIBRE CHANNEL NETWORK.
COMMUNICATION TO WORKSTATIONS IS ACCOMPLISHED THROUGH FIBRESTAR ADAPTERS
(1063 MBPS), AND COMMUNICATE WITH EACH OTHER THROUGH A HUB OR
SWITCH AND WITH A RAID CABINET]
FIBRE CHANNEL REPLACES A STANDARD
SCSI/FDDI NETWORK WITH HIGHER PERFORMANCE
- ---------------------------------------------------------------------------------------------
SCSI/FDDI
----------------------------------
STORAGE NETWORK
FEATURE
FIBRE CHANNEL
-------------------------
STORAGE & NETWORK
- ---------------------------------------------------------------------------------------------
Bandwidth 400 Mbps 100 Mbps 1063 Mbps
- ---------------------------------------------------------------------------------------------
Simultaneous Storage/Network No No Yes
Protocol Support (server is not required)
- ---------------------------------------------------------------------------------------------
Connections 15 per bus 1,000 maximum 126 per loop
(16,000,000 maximum)
- ---------------------------------------------------------------------------------------------
Maximum Cable Length 98 feet 25 miles 6 miles
- ---------------------------------------------------------------------------------------------
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Fibre Channel networking devices, such as the FibreStar products, provide high
performance through:
- HIGHEST COMMERCIALLY AVAILABLE SPEED: Communication bandwidth of 1063
Mbps in half duplex and 2125 Mbps in full duplex is available today.
- HIGHEST RELIABILITY AND EFFECTIVE BANDWIDTH: Fibre Channel's
credit-based access method assures high data reliability and maximum
utilization of the network (as compared with a 30% to 40% utilization of
Ethernet's collision-based access method).
- SCALABILITY: Up to 126 nodes can be connected on a single loop;
approximately 16 million can be connected through cascaded switches.
- RELATIVE SIMPLICITY OF INSTALLATION AND MAINTENANCE: Fibre Channel uses
thin cables and connectors as opposed to SCSI, that requires cumbersome,
thick cables that operate over relatively short distances.
- MULTIPROTOCOL TRANSPORT: Storage and network protocols can be
transported over Fibre Channel simultaneously; SCSI, Ethernet, and FDDI
data frames are readily carried by Fibre Channel.
- CONNECTION DISTANCE: Connections at full bandwidth can extend up to 98
feet over copper wire and up to six miles over fiber optics without
repeaters.
- NETWORK ATTACHED STORAGE: As a consequence of multiprotocol transport
capability, arrays of disk drives can be connected directly to the
network.
- GROWTH PATH TO THE FUTURE: The Fibre Channel standard is designed to
allow data transmission bandwidths up to 4251 Mbps in half duplex and
8502 Mbps in full duplex, which is four times the capability of existing
Fibre Channel products.
Fibre Channel products are now being used in a number of industries for:
- Digital image processing in advertising, print and entertainment
industries
- Processing and sharing of medical images
- Storage and retrieval of imaged documents
- Financial and retail transaction processing
- Computer-aided design and design automation
- Scientific and engineering computing
The Fibre Channel standard is well supported in the data communications and
computer networking industry. Fibre Channel Association, an industry trade
group, has over 120 member companies, including: Sun Microsystems, Seagate
Technology, Digital Equipment Corporation, Hewlett-Packard, Unisys, Fujitsu,
Sony, EMC Corporation, Compaq Computer, NTT (Japan), Mitsubishi, Hitachi,
Matsushita, Amdahl Computer, Intel, LSI Logic, Motorola, Tektronix, Lucent
Technologies, Siemens Nixdorf, McDonnell Douglas, Panasonic and Electronic Data
Systems. Many companies have introduced Fibre Channel products for storage and
computing. At the Comdex computer trade show meeting in November 1996, Fibre
Channel products were exhibited by JNI and 35 other companies, including
Adaptec, Ancor Communications, Box Hill Systems, Digital Equipment Corporation,
Emulex, Gadzoox Microsystems, Hewlett-Packard, Intel, Interphase, LSI Logic,
Philips, QLogic, Quantum, Seagate Technology, Sun Microsystems, Texas
Instruments, Unisys, Vitesse Semiconductor, and XPoint Technology. JNI believes
that the introduction of additional Fibre Channel products in 1997 by OEMs, for
which JNI has been qualified as a supplier of adapters, should increase the
market for adapters in the near term.
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THE JNI SOLUTION
FibreStar products address the need for high-bandwidth communication
between networked computers, workstations and data storage units. Based upon the
following analysis of the market which was performed in 1993, JNI targeted its
initial product offerings for the SBus environment, before expanding to the PCI
bus environment:
- Fibre Channel will initially be used in high performance workstations and
servers and with large storage units. There will be many more
workstations sold than large storage units. Each Fibre Channel
workstation and server connection will require one or more Fibre Channel
adapters, resulting in a larger volume market for adapters.
- Unix-based SBus-compatible computers, principally from Sun Microsystems,
account for more than half of the servers and workstations sold
worldwide, dominating the high-end market.
- Computers using the PCI bus will provide a second market for FibreStar
adapters, and are expected to exceed the SBus market near the end of the
decade. By taking a position as a leading supplier of Fibre Channel
products for the SBus market and the Sun Solaris operating system, JNI
intends to integrate with an OEM customer base and then sell PCI bus
FibreStar adapters as those customers move their product to the PCI bus.
JNI believes that the OEM customer base can serve as a reference to
expand FibreStar product market share for PCI bus adapters.
JNI commenced designing and developing the FibreStar SBus-to-Fibre Channel
adapters in June 1993, resulting in a beta release in May 1995 to key OEMs
developing products that required a Fibre Channel interface. JNI has developed
FibreStar SBus-to-Fibre Channel adapters for installation in computers
compatible with the Sun Microsystems SBus specification, including some
manufactured by companies such as Hewlett-Packard, Fujitsu and Digital Equipment
Corporation. JNI first shipped commercial versions of these SBus-to-Fibre
Channel adapters in May 1995, and commenced volume production in December 1996.
JNI is currently a leading independent supplier of Fibre Channel adapters for
SBus platforms, supporting the Solaris operating system with software drivers
for networking and storage connections. Suppliers of SBus-compatible computers
running the Solaris operating system are expected to incorporate the PCI bus
into these computers in increasing numbers. JNI is developing enhancements to
the drivers for its FibreStar PCI Bus-to-Fibre Channel adapters to support the
migration to this platform.
For DEC Alpha, Power PC and Intel processor-based computers with the PCI
bus, JNI began supplying beta versions of its FibreStar PCI Bus-to-Fibre Channel
adapters in July 1996. JNI currently supports the Windows NT and Solaris X86
operating systems with networking and storage software drivers.
STRATEGY
JNI's objective is to continue to strengthen its position as a leading
independent supplier of Fibre Channel networking products. JNI seeks to achieve
this objective by implementing the following strategic elements:
Develop Additional OEM and Reseller Arrangements. JNI has developed
relationships with its resellers and several OEMs, and sells primarily through
those channels. JNI intends to capitalize on the increased demand for Fibre
Channel products by negotiating volume purchase agreements with other major
storage suppliers and integrators, as well as expanding relationships with
resellers and OEMs.
Expand and Enhance Product Line. JNI's plan for product development and
introduction is based on expected trends in the marketplace. For example, JNI
intends to extend the range of its hardware and software offerings to 64-bit
server systems and for the higher bandwidth Fibre Channel connections. JNI also
intends to capitalize on its understanding of the Fibre Channel technology to
enhance the competitive price and performance characteristics and the
functionality of its products.
Leverage OEM and Reseller Relationships for SBus Products to Promote PCI
Bus Products. OEM customers often prefer to purchase similar types of products
from a supplier with whom they have an established relationship because issues
associated with integration of OEM products and product plans,
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technical support, and reliability have already been successfully resolved.
Similarly, resellers tend to prefer selling products from companies with an
established product base backed by customer references. Since the architecture
and software for the FibreStar SBus and PCI bus products are similar, JNI seeks
to use its leverage as a leading supplier of FibreStar SBus-to-Fibre Channel
adapters to capitalize on these purchasing patterns in marketing PCI
Bus-to-Fibre Channel products.
Develop Timely Responses to New Market Needs. JNI intends to address
anticipated market demand for its products in the areas of clustered computers
and workstations, data storage and warehousing (including database storage and
digital video/multimedia applications), and in upgrades of existing networks.
JNI participates in special-interest working groups within the Fibre Channel
Association to keep abreast of developments in emerging and future markets.
Continue Commitment to Product Quality and Customer Service. JNI is
dedicated to ongoing quality improvement and intends to continue to provide the
high level of service and technical support that has distinguished JNI in the
current marketplace.
PRODUCTS
JNI products provide essential hardware and software to address existing
market needs for high-bandwidth network connections between computers and
between networked computers, workstations and data storage units. JNI designs,
develops and markets FibreStar adapters for installation in SBus and PCI bus
compatible computers. The current 32-bit adapters can be used in the common
switched and loop network architectures with copper cable connections of up to
98 feet and with fiber optic connections of up to six miles. The adapters are
offered in several versions to respond to various application needs.
FIBRESTAR SBUS-TO-FIBRE CHANNEL ADAPTERS
- Adapters are provided at bandwidths of either 266 Mbps or 1063 Mbps.
- The 266 Mbps version is provided with optical fiber input/output ports.
- The 1063 Mbps version is provided with input/output ports for connection
to either copper cables or to fiber optics.
- Communications software drivers for SCSI and TCP/IP protocols for the
Solaris operating system versions 2.4 and higher.
- FibreStar adapters have operated successfully in Sun Microsystems,
SparcStations 5, 10 and 20, UltraSparcs 1 and 2, and the Sun 1000E
Enterprise Server.
FIBRESTAR PCI BUS-TO-FIBRE CHANNEL ADAPTERS
- Adapters are provided at bandwidths of either 266 Mbps or 1063 Mbps.
- The 266 Mbps version is provided with optical fiber input/output ports.
- The 1063 Mbps version is provided with input/output ports for connection
through removable I/O modules to either copper cables or to fiber optics.
The 1063 Mbps versions with integrated I/O copper or optical connections
are also sold.
- Communications software drivers for SCSI and TCP/IP protocols for the
Windows NT operating system versions 3.51 and 4.0, and Solaris X86.
- FibreStar adapters have operated successfully in several PCI platforms
including Intel Pentium-based computers made by Dell, Micron, Packard
Bell, Compaq, Gateway and Digital Equipment Corporation (DEC Alpha).
The list prices for JNI's adapters range from approximately $1,500 to
$3,600 depending on configuration and volume. JNI also sells 266 Mbps Fibre
Channel switch products under an OEM agreement with Hewlett-
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Packard and 1063 Mbps eight-port stackable Fibre Channel hubs produced under an
OEM agreement with Gadzoox Microelectronics.
SALES AND MARKETING
JNI markets and sells its products primarily through resellers and OEMs.
JNI has developed and continues to develop its OEM relationships (frequently in
tandem with its resellers and sales representatives) by actively involving its
sales, marketing and engineering personnel, and senior management. In
particular, JNI has found that involving experienced engineers in the OEM sales
process enables close technical collaboration with the customer during the
evaluation and subsequent qualification of the product, often speeding the
process with timely problem solving, and establishing confidence in the
technical support that can be expected from JNI.
JNI has established strategic relationships with other Fibre Channel
product companies, including Hewlett-Packard and Gadzoox, pursuant to which such
companies provide switches and hubs under the FibreStar brand. These
relationships allow JNI to offer a suite of interoperable solutions.
In the United States, JNI sells FibreStar products primarily through direct
sales. To extend its geographic coverage, JNI has entered into reseller
agreements with Hucom to represent and sell FibreStar products in Japan, and
also with Computer Overseas Corporation for Western Europe. JNI supports both
its resellers and sales representatives through training seminars, direct sales
support and technical support.
CUSTOMERS
Through January 31, 1997, JNI has sold most of its adapters to Hucom for
resale to end users in Japan. JNI expects that its future customers will be
comprised primarily of OEMs and resellers. Since February 1996 JNI has also sold
adapters in initial evaluation orders to over 40 additional purchasers. Of those
purchasers, six have completed their evaluation phase and three have placed
orders in production quantities.
RESEARCH AND DEVELOPMENT
JNI plans to remain competitive through continued investment in product
enhancement and new product development. JNI intends to focus its product
development efforts on areas of perceived need as the Fibre Channel market
develops.
JNI believes that the near-term market demands will be driven by the need
for large storage arrays with maximum bandwidth, low latency and high
reliability, coupled with a desire to reduce the cost per connection.
Consequently, JNI is focusing on the requirement for increased bandwidth by
developing FibreStar Fibre Channel adapters and drivers for 64-bit PCI bus and
SBus platforms from Sun Microsystems, Inc., Digital Equipment Corporation,
Hewlett-Packard and others. To reduce cost, the proprietary designs will be
simplified with new ASICs.
JNI intends to evaluate future opportunities to develop products that will
address the needs of related markets for digital video transmission and video
conferencing. JNI also intends to develop additional products focused on
establishing its network products as a market leader in market segments where
the high bandwidth provided by Fibre Channel products offers compelling economic
advantages, such as high-volume data storage and transaction environments, video
on demand and multiple-user multimedia networking. These planned products are
intended to extend the range of applicability of JNI's hardware and software
offerings into high-end 64-bit server systems and into intranets. JNI also
intends to enhance the products for higher bandwidth (2125 and 4251 Mbps)
interconnects as standards and market needs develop.
COMPETITION
The computer networking industry is intensely competitive, subject to rapid
change, and significantly affected by new product introductions and other market
activities of industry participants. JNI competes with companies offering
products based on the Fibre Channel standard, as well as companies offering
products based on competing standards. JNI believes that the principal
competitive factors in the computer networking
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38
market include the completeness of product offerings, product quality, price and
performance, adherence to industry standards, the degree of interoperability
with other networking equipment, and time to market for new products. Many of
JNI's current and potential competitors have significantly greater financial,
technical, marketing and other resources and larger installed bases than JNI.
Increased competition could result in price reductions, reduced margins and loss
of market share, all of which would materially and adversely affect JNI's
business, operating results and financial condition. JNI's FibreStar adapters
compete with product offerings from other vendors. Ancor Communications and
Genroco currently provide SBus-to-Fibre Channel adapters and Emulex, Interphase,
Adaptec and QLogic provide, or have announced plans to introduce, PCI Bus-to-
Fibre Channel adapters. Additionally, the computer networking industry has
witnessed many acquisitions pursuant to which several large companies have
emerged with comprehensive networking solutions. These acquisitions may permit
JNI's competitors to devote significantly greater resources to the development
and marketing of new competitive products and the marketing of existing products
to their larger installed bases of customers. JNI expects that competition will
increase, in particular as companies that are well established in the computer
networking industry increase their focus on the emerging market for Fibre
Channel adapters. There can be no assurance that JNI will be able to compete
successfully in the future with existing or new competitors or that competitive
pressures faced by JNI will not adversely affect its business, operating results
and financial condition.
MANUFACTURING
JNI uses third-party manufacturers for assembly, test and quality control,
thereby avoiding the significant capital investment required to establish and
maintain manufacturing and assembly facilities and allowing JNI to concentrate
its resources on product design, development, and marketing. JNI qualifies
manufacturers using a selection program that assesses their capacity, quality
standards and manufacturing processes.
Certain key components used in JNI's products, such as ASICs and controller
chips, are currently available only from a single source or a limited number of
sources. In particular, JNI has designed into its adapters a Fibre Channel
controller chip available only from Hewlett-Packard. While JNI believes it would
be able to obtain alternative sources of supply for these components at its
election and has not experienced delays in the receipt of these items, any
future difficulty in obtaining any of these key components or ASICs could result
in delays or reductions in product shipments which, in turn, could have an
adverse effect on JNI's results of operations.
In the event that any significant manufacturers were to become unable or
unwilling to continue to manufacture or test JNI's products in required volumes,
JNI would have to identify and qualify acceptable replacements. This process of
qualifying manufacturers and other suppliers could be lengthy, and no assurances
can be given that any additional sources would become available to JNI on a
timely basis. A delay or reduction in component shipments or a delay or increase
in costs in the assembly and testing of products by manufacturers could
materially and adversely affect JNI's business, operating results and financial
condition.
PROPRIETARY RIGHTS AND LICENSES
JNI's ability to compete successfully depends to a considerable extent on
its proprietary firmware, software and circuit board design. The adapter cards
will not function without JNI proprietary firmware programmed into certain
parts. Each adapter card is furnished with a copy of compiled driver software
that functions only with the JNI hardware design. Thus, reverse engineering of
the hardware design does not result in a functioning product. While it is
possible that the software could be modified for use with products of other
companies, JNI believes that the amount of effort required to modify the source
code provides an economic barrier to such misuse. JNI also believes that because
of the rapid pace of technological change in this industry, patent protection is
less important than the knowledge, ability and experience of JNI's employees.
To date, JNI has relied principally upon copyrights and trade secrets to
protect its proprietary technology. JNI generally enters into confidentiality or
license agreements with its employees, distributors, customers, and potential
customers and limits access to and distribution of the source code to its
software and other proprietary information. There can be no assurance that the
steps taken by JNI in this regard will be adequate
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39
to prevent misappropriation of its technology or to provide adequate remedy in
the event of a breach by others. There can be no assurance that any intellectual
property rights held by JNI in the future will not be challenged, invalidated or
circumvented, or that any rights granted thereunder will provide competitive
advantages to JNI. The laws of some foreign countries may not permit the
protection of JNI's proprietary rights to the same extent as do the laws of the
United States.
There has been substantial litigation regarding patent and other
intellectual property rights involving technology companies. In the future,
litigation may be necessary to protect trade secrets and other intellectual
property rights owed by JNI, to defend JNI against claimed infringement of the
rights of others and to determine the scope and validity of the proprietary
rights of others. Any such litigation could be costly and a diversion of
management's attention, which by themselves could have adverse effects on JNI's
results of operations and financial condition. Adverse determinations in such
litigation could result in the loss of JNI's proprietary rights, subject JNI to
significant liabilities, require JNI to seek licenses from third parties or
prevent JNI from manufacturing or selling its products, any of which could have
an adverse effect on JNI's business, financial condition and results of
operations.
OTHER CORPORATE INFORMATION
EMPLOYEES
As of January 31, 1997, Jaymark had approximately 490 employees, of which
12 were employed by JNI. None of the Company's employees are represented by a
labor union or are subject to a collective bargaining agreement. The Company has
never experienced a work stoppage and believes its current relationship with its
employees to be good.
The success of the Company depends in large part upon its ability to
recruit and retain exceptional employees, particularly highly-skilled product
developers and system consultants. The Company will likely experience
significant competition but has not yet experienced difficulties in recruiting
qualified personnel. The Company is able to offer competitive salaries and
benefits, and offers equity positions to key employees.
FACILITIES
The Company's principal business headquarters are located in San Diego,
California in 104,000 square feet of office and laboratory space which is owned
by the Company. As of January 31, 1997, the Company leased office space in 17
other locations, the largest of which include: McLean, Virginia (approximately
31,700 square feet); Albuquerque, New Mexico (approximately 68,400 square feet);
Colorado Springs, Colorado (approximately 19,000 square feet); Dayton, Ohio
(approximately 13,700 square feet); Reston, Virginia (approximately 11,800
square feet); and Huntsville, Alabama (approximately 7,200 square feet). JNI
uses approximately 4,000 square feet of office and engineering laboratory space
at the Company's corporate headquarters. The Company believes that these
facilities are adequate to meet its requirements for the foreseeable future.
GOVERNMENT REGULATIONS
Because of its participation in government contracts, the Company is
subject to audit from time to time for its compliance with government
regulations by various agencies, including the Defense Contract Audit Agency,
the Defense Investigative Service and the Office of Federal Control Compliance
Programs. These and other governmental agencies may also, from time to time,
conduct inquiries or investigations that may cover a broad range of Company
activity. Responding to any such audits, inquiries or investigations may involve
significant expense and divert management attention. In addition, an adverse
finding in any such audit, inquiry or investigation could involve penalties that
may have an adverse effect on the Company's business, financial condition or
results of operations.
The Company is also subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future
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40
regulations could result in the imposition of substantial fines on the Company,
suspension of production, alteration of its manufacturing processes or cessation
of operations.
The Company believes that it operates its business in material compliance
with applicable government regulations.
COMPANY HISTORY
The Company was initially incorporated in California on January 27, 1975,
and will reincorporate in Delaware prior to the completion of this offering. The
Company recently reorganized into a holding company structure and conducts its
business through several wholly owned subsidiaries. Substantially all of the
Company's business efforts are conducted through its Jaycor, Inc. and Jaycor
Networks, Inc. subsidiaries. The Company's principal executive offices are
located at 9775 Towne Centre Drive, San Diego, California 92121, and its
telephone number at that location is (619) 535-3100.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company as of February 28, 1997
are as follows:
NAME AGE POSITION
- --------------------------------------- --- ----------------------------------------------------
Eric P. Wenaas, Ph.D.(1)............... 55 Chairman of the Board, Chief Executive Officer,
President and Director
James H. Stuhmiller, Ph.D.(1)(2)....... 53 Senior Vice President of Jaycor and Director
P. Randy Johnson....................... 46 Vice President, Finance and Chief Financial Officer
Terry M. Flanagan, Ph.D.(1)............ 59 President and Chief Executive Officer of JNI and
Director
John C. Stiska(3)...................... 55 Director
John S. Foster, Jr., Ph.D.(2)(3)....... 74 Director
David R. Heebner(2)(3)................. 69 Director
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
Eric P. Wenaas, Ph.D. Dr. Wenaas has been with the Company since 1976 and
has been a director of the Company since 1983. Dr. Wenaas became Chairman of the
Board, Chief Executive Officer and President of the Company in March 1991, and
was largely responsible for solving pressing fiscal problems and refocusing the
Company's technology base to emphasize the development of dual-use technologies.
Prior to 1991, Dr. Wenaas was a Senior Vice President of the Company, managing a
group of approximately 125 employees with approximately $30 million in annual
revenues. Dr. Wenaas received B.S. and M.S. degrees in electrical engineering
from Purdue University in 1963 and 1964, respectively, and received a Ph.D.
degree in engineering sciences from the State University of New York at Buffalo
in 1969.
James H. Stuhmiller, Ph.D. Dr. Stuhmiller has been with the Company since
its inception in 1975 and has been a director of the Company since June 1991.
Dr. Stuhmiller became a Senior Vice President of Jaycor in 1993. Dr. Stuhmiller
received a Ph.D. degree in theoretical physics from the University of Cincinnati
in 1973.
P. Randy Johnson. Mr. Johnson became Vice President, Finance and Chief
Financial Officer of the Company in December 1990. From 1989 to 1990, Mr.
Johnson served as Controller and a Vice President of the Company. Mr. Johnson
received a B.A. degree in economics in 1974 and an M.B.A. degree in finance from
Brigham Young University in 1976.
Terry M. Flanagan, Ph.D. Dr. Flanagan became President and Chief Executive
Officer of JNI and a director of the Company in February 1997. From 1993 to
1997, Dr. Flanagan was a Senior Vice President of the Company, where he managed
a group of approximately 40 employees with approximately $14 million in annual
revenues. He recognized the commercial potential for the Company's Fibre Channel
technology and assembled the team to develop and market the technology. Dr.
Flanagan also served as a Vice President of the Company from 1980 to 1992. Prior
to joining Jaycor in 1977, Dr. Flanagan was an Engineering Manager and Special
Projects Manager at Frequency and Time Systems, Inc., where he was responsible
for developing Global Positioning System standards for both commercial and
government applications. Dr. Flanagan served as a group leader at Gulf General
Atomic and IRT Corporation from 1969 to 1975. He received a B.S. degree in
physics from the University of Santa Clara in 1960 and M.S. and Ph.D. degrees
from Purdue University in 1963 and 1966, respectively.
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John C. Stiska. Mr. Stiska became a director of the Company in June 1991.
Mr. Stiska has been a Corporate Senior Vice President of Qualcomm Incorporated
since February 1996, and was given the additional responsibility of General
Manager of Qualcomm's Technology Applications Division in January 1997. From
1990 to January 1996, Mr. Stiska was with Triton Group Ltd., an
operating-holding company based in San Diego that emerged in 1993 from the
Chapter 11 bankruptcy proceedings of Triton Group Ltd. and Intermark, Inc., most
recently as its Chairman and CEO. Before that time he practiced law for 20
years, specializing in corporate law, mergers and acquisitions and securities
law. Mr. Stiska also serves as a director of several privately held companies.
He received his B.B.A. and J.D. degrees from the University of Wisconsin.
John S. Foster, Jr., Ph.D. Dr. Foster became a director of the Company in
June 1992. Dr. Foster is a consultant and former director of TRW Inc. He
previously served as Chairman of the Defense Science Board, a research and
engineering advisory board selected by the Secretary of Defense. Dr. Foster is
Chairman of the Board of Pilkington Aerospace and Technology Strategies and
Alliances and serves as a director of Arete Associates. Dr. Foster received a
B.S. degree from McGill University in Montreal, Quebec in 1948 and a Ph.D.
degree in physics from the University of California, Berkeley in 1952. In 1979,
he received an honorary Doctor of Science degree from the University of
Missouri.
David R. Heebner. Mr. Heebner became a director of the Company in
September 1994. Mr. Heebner is a member of the Defense Science Board and
Chairman of the National Academy of Sciences Naval Studies Board. During the
period from 1975 through 1993, Mr. Heebner was affiliated with Science
Applications International Corporation, serving as a director from July 1976
through June 1993, as Executive Vice President, as a General Manager, and as
Vice Chairman of the Board from 1980 until June 1993. Mr. Heebner received a
B.S. degree in electrical engineering from Newark College of Engineering in 1950
and a M.S. degree in electrical engineering from the University of Southern
California in 1955.
All directors hold office until the next annual meeting of the stockholders
of the Company and until their successors have been duly elected and qualified.
The Company's Bylaws provide that the Board of Directors will consist of between
five and nine members, and the number of directors is currently set at six.
Officers are elected by and serve at the discretion of the Board of Directors.
There are no family relationships among the directors or officers of the
Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Audit Committee of the Board of Directors is responsible for reviewing
with management the financial controls, accounting, credit and reporting
activities of the Company. The Audit Committee reviews the qualifications of the
Company's independent accountants, makes recommendations to the Board of
Directors regarding the selection of independent accountants, reviews the scope,
fees and results of any audit and reviews non-audit services and related fees
provided by the independent accountants. During the year ended January 31, 1997,
the members of the Audit Committee were initially Robert P. Sullivan, a retired
Executive Vice President of the Company, Dr. Stuhmiller and Mr. Stiska. In June
1996, Mr. Heebner replaced Mr. Stiska as a member of the Audit Committee. On
February 25, 1997, the Board of Directors appointed a new Audit Committee,
consisting of Dr. Stuhmiller, Dr. Foster and Mr. Heebner.
The Compensation Committee of the Board of Directors is responsible for the
administration of all salary and incentive compensation plans for the officers
and key employees of the Company, including bonuses. The Compensation Committee
also administers the Company's stock option and stock purchase plans. During the
year ended January 31, 1997, the members of the Compensation Committee were Dr.
Wenaas, Dr. Foster, Mr. Stiska and Mr. Heebner. On February 25, 1997, the Board
of Directors appointed a new Compensation Committee, consisting of Mr. Stiska,
Mr. Heebner and Dr. Foster.
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The Executive Committee of the Board of Directors consists of Dr. Wenaas,
Dr. Stuhmiller and Dr. Flanagan. The Board of Directors does not have a
nominating committee. The selection of nominees for the Board of Directors is
made by the entire Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended January 31, 1997, Eric P. Wenaas, the
Company's President and Chief Executive Officer, served on the Compensation
Committee of the Company's Board of Directors, but, as of February 25, 1997, Dr.
Wenaas no longer serves on such committee. No member of the Board of Directors
of the Company, its current Compensation Committee or the Compensation Committee
that served during the fiscal year ended January 31, 1997 serves as a member of
the board of directors or compensation committee of an entity that has one or
more executive officers serving as a member of the Company's Board of Directors
or Compensation Committee.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company receive a fee of $3,750 on a
quarterly basis for serving as a director and receive a fee of $1,000 for
attendance at meetings of the Board of Directors and any committees thereof, as
well as being reimbursed for out-of-pocket expenses incurred with respect to
attendance at such meetings. From time to time, the Company has granted stock
options to directors of the Company with exercise prices equal to the fair value
of the Common Stock on the date of grant. Following the effectiveness of the
Company's 1997 Outside Directors Stock Option Plan (the "Directors Plan"),
non-employee directors of the Company will receive annual grants of options to
purchase shares of Class A Common Stock under such plan. See "-- Benefit Plans."
LIMITATION OF LIABILITY AND INDEMNIFICATION
Pursuant to the provisions of the Delaware General Corporation Law, the
Company has adopted provisions in its Certificate of Incorporation which provide
that directors of the Company shall not be personally liable for monetary
damages to the Company or its stockholders for a breach of fiduciary duty as a
director, except for liability as a result of (i) a breach of the director's
duty of loyalty to the Company or its stockholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) an act related to the unlawful stock repurchase or payment of a
dividend under Section 174 of Delaware General Corporation Law, and (iv)
transactions from which the director derived an improper personal benefit. Such
limitation of liability does not affect the availability of equitable remedies
such as injunctive relief or rescission.
The Company's Certificate of Incorporation also authorizes the Company to
indemnify its officers, directors and other agents, by bylaws, agreements or
otherwise, to the full extent permitted under Delaware law. The Company intends
to enter into indemnification agreements with its directors and officers which
may, in some cases, be broader than the specific indemnification provisions
contained in the Delaware General Corporation Law. The indemnification
agreements may require the Company, among other things, to indemnify such
officers and directors against certain liabilities that may arise by reason of
their status or service as directors or officers (other than liabilities arising
from willful misconduct of a culpable nature), to advance their expenses
incurred as a result of any proceeding against them as to which they could be
indemnified, and to obtain directors' and officers' insurance if available on
reasonable terms.
At present, there is no pending litigation or proceeding involving a
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened litigation
or proceeding which may result in a claim for such indemnification.
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EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company during
the fiscal year ended January 31, 1997 to the Company's Chief Executive Officer
and each of the Company's four other most highly compensated executive officers
(the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------------
----------------------- SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION SALARY OTHER UNDERLYING OPTIONS COMPENSATION
- -------------------------------------- -------- ---------- ------------------ ------------
Eric P. Wenaas........................ $376,300 $51,480(1) 17,400 $ 2,520(2)
President and Chief Executive
Officer
Robert P. Sullivan(3)................. 337,822 45,452(4) 10,800 212,067(5)
Executive Vice President
James H. Stuhmiller................... 234,675 29,028(6) 3,600 2,112(2)
Senior Vice President
Terry M. Flanagan..................... 186,000 29,930(8) 10,200 672(2)
Senior Vice President(7)
P. Randy Johnson...................... 153,300 30,516(9) 22,200 552(2)
Vice President, Finance and Chief
Financial Officer
- ---------------
(1) Consists of an $18,800 payment in lieu of raise, a $3,094 housing allowance
for a residence in the Washington, D.C. area, $6,375 for use of a Company
automobile, $10,047 in contributions to the Company's Money Purchase Pension
Plan (the "Pension Plan"), $8,584 in deferred compensation, $1,131 in
contributions to the ESOP, $2,864 in premiums with respect to the Company's
executive medical insurance and $585 for personal tax planning.
(2) Consists of life insurance premiums.
(3) Dr. Sullivan retired from the Company effective January 31, 1997 and entered
into a Retirement Agreement with the Company on such date. See "Certain
Transactions."
(4) Consists of a $16,900 payment in lieu of raise, $1,950 for use of a Company
automobile, $11,865 in contributions to the Pension Plan, $8,584 in deferred
compensation, $1,289 in contributions to the ESOP, $2,864 in premiums with
respect to the Company's executive medical insurance and $2,000 for personal
tax planning.
(5) Consists of $16,000 for the transfer of ownership of an automobile, $155,225
in deferred compensation accrued over prior years, $38,322 in accrued
vacation pay and $2,520 in life insurance premiums. See "Certain
Transactions."
(6) Consists of an $8,400 automobile allowance, $8,729 in contributions to the
Pension Plan, $8,016 in deferred compensation, $1,019 in contributions to
the ESOP and $2,864 in premiums with respect to the Company's executive
medical insurance.
(7) Dr. Flanagan currently serves as President and Chief Executive Officer of
JNI.
(8) Consists of a $4,700 payment in lieu of raise, a $5,400 automobile
allowance, $11,865 in contributions to the Pension Plan, $3,712 in deferred
compensation, $1,289 in contributions to the ESOP, $2,864 in premiums with
respect to the Company's executive medical insurance and $100 for personal
tax planning.
(9) Consists of a $7,700 payment in lieu of raise, a $6,000 automobile
allowance, $11,865 in contributions to the Pension Plan, $798 in deferred
compensation, $1,289 in contributions to the ESOP and $2,864 in premiums
with respect to the Company's executive medical insurance.
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The following table provides information concerning grants of options to
purchase Class B Common Stock during the fiscal year ended January 31, 1997 to
the Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL
REALIZABLE
VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
NUMBER OF PERCENT OF APPRECIATION FOR
SECURITIES TOTAL EXERCISE OPTION TERM(1)
UNDERLYING OPTIONS GRANTED PRICE EXPIRATION ------------------
NAME OPTIONS GRANTED TO EMPLOYEES PER SHARE(2) DATE 5% 10%
- --------------------------- --------------- --------------- ------------ ---------- ------- --------
Eric P. Wenaas............. 17,400 6.6% $ 5.57 3/4/04 $46,274 $110,834
Robert P. Sullivan......... 10,800 4.1 5.57 3/4/04 28,722 68,794
James H. Stuhmiller........ 3,600 1.4 5.57 3/4/04 9,574 22,931
Terry M. Flanagan.......... 10,200 3.9 5.57 3/4/04 27,126 64,972
P. Randy Johnson........... 4,200 1.6 5.57 3/4/04 11,170 26,753
18,000 6.8 6.48 12/2/04 55,690 133,388
- ---------------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5% and
the 10% assumed annual compound rates of appreciation are mandated by the
rules of the Securities and Exchange Commission and do not represent the
Company's estimate or projection of the future Common Stock price.
(2) All such options were granted under the Company's 1996 Nonstatutory Stock
Option Plan and vest in full on the first anniversary of the date of grant.
All such options were granted at fair market value as determined on the date
of grant by the Board of Directors of the Company. The Company's Common
Stock was not traded publicly at the time of such option grants to the Named
Executive Officers. See "-- Benefit Plans."
The following table provides information concerning the number of shares
issued upon exercise of options by the Named Executive Officers during the
fiscal year ended January 31, 1997 and the value realized by the Named Executive
Officers. The table also provides information concerning unexercised options
held by the Named Executive Officers as of January 31, 1997:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 1/31/97 AT 1/31/97(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------- ----------- ------------- ----------- -------------
Eric P. Wenaas................................... 261,000 17,400 $ 750,750 $15,834
Robert P. Sullivan............................... 181,800 10,800 362,250 9,828
James H. Stuhmiller.............................. 5,850 5,550 2,399 4,076
Terry M. Flanagan................................ 72,000 10,200 58,320 9,282
P. Randy Johnson................................. 36,000 22,200 75,600 3,822
- ---------------
(1) "Value Realized" represents the fair value of the underlying securities on
the exercise date minus the aggregate exercise price of such options. For
purposes of this calculation, a fair value of $6.48 per share was used, the
fair value of the securities as determined by the Board of Directors of the
Company as of January 31, 1997.
No options to purchase shares of the Company's Common Stock were exercised
by the Named Executive Officers during the fiscal year ended January 31, 1997.
No compensation intended to serve as incentive for
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46
performance to occur over a period longer than one fiscal year was paid pursuant
to a long-term incentive plan during the last fiscal year to any of the Named
Executive Officers.
BENEFIT PLANS
1996 STOCK OPTION PLAN
The Board of Directors has reserved 435,000 shares of Class B Common Stock
and 500,000 shares of Class A Common Stock for issuance under the Company's 1996
Stock Option Plan (the "1996 Option Plan"). Originally adopted in 1996 as the
Company's 1996 Nonstatutory Stock Option Plan, the 1996 Option Plan was amended
on February 25, 1997 to provide for the grant of "incentive stock options"
intended to qualify for certain tax treatment and to provide for the grant of
options to purchase shares of Class A Common Stock following the effective date
of this offering. At January 31, 1997, 186,300 shares of Class B Common Stock
were subject to outstanding options, and 248,700 shares remained reserved for
issuance with respect to future grants under the 1996 Option Plan. The 1996
Option Plan, which is administered by the Compensation Committee of the Board of
Directors, provides for the grant of non-qualified stock options and incentive
stock options to employees, consultants and directors of the Company. Options
granted under the 1996 Option Plan generally terminate after eight years and are
subject to individual vesting schedules, but options previously granted under
such plan generally vest in full one year from the date of grant.
1997 OUTSIDE DIRECTORS STOCK OPTION PLAN
A total of 75,000 shares of Class A Common Stock has been reserved for
issuance under the Directors Plan. Prior to the effective date of this offering,
no options have been granted under the Directors Plan. The Directors Plan
provides for automatic grants of non-qualified stock options to certain
directors of the Company who are not employees of the Company ("Outside
Directors"). Under the Directors Plan, each Outside Director elected or
appointed as a director following the effective date of this offering will
automatically be granted an option to purchase 10,000 shares of Class A Common
Stock on the date of his or her initial election or appointment. In addition,
each Outside Director will thereafter automatically be granted an option to
purchase up to 3,000 shares of Class A Common Stock following each annual
meeting of the Company's stockholders at which such Outside Director is
re-elected. The exercise price of all such options will be equal to the fair
market value of the Class A Common Stock on the date of grant. Initial options
granted under the Directors Plan generally vest over a four-year period, and
annual options generally vest in full four years from the date of grant. All
such options must be exercised within ten years from the date of grant.
1997 EMPLOYEE STOCK PURCHASE PLAN
A total of 200,000 shares of the Company's Class A Common Stock has been
reserved for issuance under the Company's 1997 Employee Stock Purchase Plan (the
"Purchase Plan"), none of which have been issued. The Purchase Plan permits
eligible employees to purchase shares of Class A Common Stock at a discount
through payroll deductions during sequential 24-month offering periods. Each
such offering period is divided into four consecutive six-month purchase
periods. Unless otherwise provided by the Board of Directors prior to the
commencement of an offering period, the price at which shares are purchased
under the Purchase Plan for such offering period is equal to 85% of the lesser
of the fair market value of the Class A Common Stock on the first day of such
offering period or the last day of the purchase period of such offering period.
The initial offering period will commence on the effective date of this
offering.
JNI 1997 STOCK OPTION PLAN
JNI has adopted a subsidiary-level option plan known as the Jaycor
Networks, Inc. 1997 Stock Option Plan (the "JNI Plan"), which provides for the
grant to employees of JNI of incentive stock options and non-qualified stock
options to purchase shares of common stock of JNI. For a nine-year period
following the date of grant, such options are only exercisable in the event that
JNI undergoes a "change in control" (generally defined as a sale of assets,
merger or public offering of equity securities). Following such nine-year
period, but prior to the termination of such option (the options terminate ten
years from the date of grant), the option
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may be exercised, but, in such event, JNI has a right to repurchase such shares
at the greater of the exercise price or the fair market value of such shares.
All options are exercisable at the fair market value on the date of grant of the
common stock of JNI. In the event that an optionee under the JNI Plan exercises
an option to purchase shares of the Company's Common Stock granted subsequent to
the adoption of the JNI Plan to such optionee under one of the Company's stock
option plans, all options granted under the JNI Plan terminate immediately.
Similarly, in the event that an optionee under the JNI Plan exercises an option
granted under the JNI Plan, all options granted subsequent to the adoption of
the JNI Plan under the Company's existing stock option plans terminate
immediately. In the event of a change of control of JNI, the vesting of such
options accelerates as follows: (i) 25% if the change of control occurs within
one year of the date of grant, (ii) 33 1/3% if the change in control occurs
within two years of the date of grant, (iii) 75% if the change of control occurs
within three years of the date of grant, and (iv) 100% if the change of control
occurs more than three years following the date of grant.
PRIOR STOCK OPTION PLANS
The Board of Directors has reserved a total of 3,015,000 shares of Class B
Common Stock for issuance under the Company's 1980 Stock Option Plan (the "1980
Option Plan"), 1990 Incentive Stock Option Plan (the "1990 Option Plan") and
1991 Stock Option Plan (the "1991 Option Plan" and, collectively with the 1980
Option Plan and the 1990 Option Plan, the "Prior Option Plans"). At January 31,
1997, 430,612 shares of Class B Common Stock had been issued upon exercise of
options granted under the Prior Option Plans, an aggregate of 1,084,575 shares
remained reserved for issuance upon the exercise of outstanding options and
149,190 shares were available for future grant. The Prior Option Plans are
administered by the Compensation Committee of the Board of Directors and provide
in certain cases for the grant of incentive stock options as well as
non-qualified stock options. Options granted under the 1980 Option Plan and the
1990 Option Plan generally vest over a four-year period and generally terminate
after ten years. The options granted under the 1991 Option Plan are immediately
exercisable and terminate after ten years.
In accordance with the terms of the Class B Common Stock, 20% of the
aggregate number of shares of Class B Common Stock issuable upon exercise of
options granted under the Prior Option Plans and the 1996 Option Plan convert
into shares of Class A Common Stock upon the closing of this offering, and an
additional 20% of such shares of Class B Common Stock underlying the options
will convert into shares of Class A Common Stock upon each anniversary of such
closing, whether or not the options have been exercised. All shares underlying
outstanding options, as well as outstanding shares issued upon exercise of
options, will have fully converted into shares of Class A Common Stock upon the
fourth anniversary of the closing of this offering. Upon each exercise of such
options, the shares of Class A Common Stock and Class B Common Stock issuable
will be in proportion to the Class A Common Stock and each series of Class B
Common Stock that has not yet converted. See "Description of Capital Stock."
401(K) PLAN
The Company adopted its 401(k) Plan effective January 1, 1987 and
subsequently amended the 401(k) Plan on several occasions. Participation in the
401(k) Plan is restricted to employees of Jaycor and JNI who meet certain
service requirements. Under the 401(k) Plan, employees may contribute, as
pre-tax contributions, up to 15% of their compensation, subject to certain
discrimination rules and the Internal Revenue Service annual limit on employee
deductible contributions, which limit is currently $9,500 for 1997. No
contributions to the 401(k) Plan are made by the Company. Participants are
entitled to direct the investment of their accounts among various investment
funds. The 401(k) Plan is intended to qualify under Sections 401(a) and 401(k)
of the Internal Revenue Code so that salary deferral contributions to the 401(k)
Plan and income earned on such salary deferral contributions are not currently
taxable to participants until distributed and contributions made by participants
pursuant to the 401(k) Plan are non-taxable to participants. The Company's plan
committee, which consists of P. Randy Johnson, the Company's Vice President,
Finance and Chief Financial Officer, Dorothy K. Bidwell, the Company's
Secretary, and Carol McHenry, Jaycor's Vice President, Corporate Resources (the
"Plan Committee"), administers the 401(k) Plan and Fidelity Management Trust
Company serves as trustee of the 401(k) Plan.
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EMPLOYEE STOCK OWNERSHIP PLAN
The Company originally adopted the ESOP effective May 5, 1983 and
subsequently amended the ESOP on several occasions. Effective upon the closing
of this offering, the ESOP will convert into a stock bonus plan which, although
it retains substantially all of the features of an employee stock ownership
plan, does not require the ESOP to own publicly traded stock of the Company.
Participation in the ESOP is limited to employees of Jaycor who meet certain
service requirements. All contributions to the ESOP are made by the Company at
the discretion of the Board of Directors, and annual contributions are not
required. Employer contributions are allocated to the accounts of eligible
participants in accordance with relative compensation. The interests of
participants in the ESOP generally vest upon the completion of five years of
service. Substantially all contributions to the ESOP are invested in Class B
Common Stock of the Company. Shares of Common Stock held by the ESOP are
generally distributed to participants either (i) the end of the plan year
following the year of retirement, or (ii) the end of the fifth plan year
following the year of termination. Prior to the closing of this offering, the
Company may be required under certain circumstances to repurchase shares of
Common Stock distributed by the ESOP to retired and terminated participants.
Upon the closing of this offering, the Company may, at its option, satisfy
obligations for distributions of shares with Class A Common Stock. To the extent
that the ESOP does not hold sufficient shares of Class A Common Stock to meet
its obligations to distribute shares to participants following retirement or
termination, the Company has agreed to exchange shares of Class A Common Stock
for shares of Class B Common Stock held by the ESOP to distribute to such
participants. The ESOP is intended to qualify under Section 401(a) of the
Internal Revenue Code so that contributions to the ESOP and income earned on the
contributions are not currently taxable to participants until distributed and
contributions to the plan are currently deductible by the Company. The ESOP is
administered by the Plan Committee.
MONEY PURCHASE PENSION PLAN
The Company adopted the Pension Plan effective July 1, 1981 and
subsequently amended the Pension Plan on several occasions. Participation in the
Pension Plan is limited to employees of Jaycor who meet certain service
requirements. All contributions to the Pension Plan are made by the Company. In
order to receive an allocation of the Company's contribution to the Pension
Plan, an eligible employee must be employed on the last day of the calendar year
and have completed at least 1,000 hours of service during such year, except
during the first year of participation when participants automatically receive a
contribution. Employer contributions are allocated to eligible participants in
accordance with a formula that takes into account relative compensation of all
eligible participants and social security contributions by the Company. The
amounts allocated to the accounts of participants under the Pension Plan vest
upon completion of five years of service with the Company. The Pension Plan is
intended to qualify under Section 401(a) of the Internal Revenue Code so that
contributions to the Pension Plan and income earned on such contributions are
not currently taxable to participants until distributed and contributions to the
Pension Plan are currently deductible by the Company. The Plan Committee
administers the Pension Plan and Fidelity Management Trust Company serves as
trustee of the Pension Plan.
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CERTAIN TRANSACTIONS
In consideration for relinquishing stock options previously granted to Dr.
Wenaas, Jaymark has entered into an agreement, as amended, with Dr. Wenaas
whereby the Company will credit a total of $160,000 in deferred compensation for
the benefit of Dr. Wenaas in four equal annual installments commencing January
15, 1998. Each installment is subject to Dr. Wenaas' employment by the Company
on such date. Interest accrues on the amount credited at the prime rate
published by Wells Fargo Bank. In the event of Dr. Wenaas' death, disability or
termination other than for cause, Dr. Wenaas or his heirs will receive the full
amount.
Effective January 31, 1997, the Company entered into a Retirement Agreement
(the "Retirement Agreement") with Robert P. Sullivan, who served as a director
of the Company and as Executive Vice President of the Company until such date.
The Retirement Agreement provides that Dr. Sullivan will provide services to the
Company at a rate of $100 per hour, as directed from time to time by the
President or Board of Directors of the Company. Dr. Sullivan agreed to provide
such services until the earlier to occur of (i) one year after the closing of
this offering, or (ii) June 30, 1998. Pursuant to the Retirement Agreement, on
January 31, 1997, the Company repurchased 23,392 shares of Class B Common Stock
from Dr. Sullivan at a price of $6.48 per share. In addition, the Company agreed
to repurchase 120,000 shares of Class B Common Stock from Dr. Sullivan at a
price per share of $8.33 per share, which price is subject to adjustment if the
closing of this offering does not occur during 1997. The Company is obligated to
repurchase such shares within 30 days of the closing of this offering, but such
obligation is postponed as specified in the Retirement Agreement in the event
that such repurchase would impair the Company's ability to qualify for listing
of its Class A Common Stock on the Nasdaq National Market. Concurrent with Dr.
Sullivan's resignation as an officer and director of the Company, the Company
paid $38,322 owed to Dr. Sullivan for accrued vacation pay, paid $155,255 to Dr.
Sullivan pursuant to the terms of a Deferred Compensation Agreement between the
Company and Dr. Sullivan, dated June 14, 1991, and agreed to transfer an
automobile valued at $16,000 to Dr. Sullivan.
The spouses of Dr. Wenaas and Dr. Stuhmiller are employed by Jaycor on
terms that the Company believes are customary for individuals with similar
backgrounds and responsibilities.
The Company offers a deferred compensation arrangement to certain of its
employees, including its officers. The agreement allows the employee to defer up
to 100% of earnings with annual interest earned at a specified rate, currently
8% to 9%. Distributions commence upon retirement or termination for a period
which varies depending upon the number of years over which deferrals have
accrued.
The Company's Delaware Certificate of Incorporation provides for
indemnification of the Company's officers and directors in certain
circumstances. The Company intends to enter into Indemnification Agreements with
each of its directors and executive officers. See "Management -- Limitation of
Liability and Indemnification Matters."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of February 1, 1997, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by: (i) each
of the Named Executive Officers, (ii) each of the Company's directors, (iii) all
directors and executive officers of the Company as a group, and (iv) each other
person known by the Company to own beneficially more than 5% of the Company's
Common Stock. Except as otherwise noted, the person or entities in this table
have sole voting and investment power with respect to all shares of Common Stock
beneficially owned by them.
PERCENTAGE
BENEFICIALLY OWNED (1)
NUMBER OF SHARES OF ------------------------
COMMON STOCK BEFORE THE AFTER THE
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING(2)
- ----------------------------------------------------- --------------------- ---------- -----------
5% STOCKHOLDERS AND FORMER OFFICER:
PAUL I. NAKAYAMA..................................... 96,278 5.2% 3.0%
1425 Luneta Drive
Del Mar, California 92014
POLL FAMILY TRUST, DATED SEPTEMBER 14, 1990,
ROBERT POLL AND GAIL POLL, TRUSTEES.................. 135,096 7.3 4.3
1309 Georgina Avenue
Santa Monica, California 90402
LOUISE STUHMILLER(3)(4).............................. 126,104 6.7 4.0
WELLS FARGO BANK(5).................................. 487,241 26.2 15.4
707 Wilshire Boulevard
MAC 2818-101
Los Angeles, California 90017
ROBERT P. SULLIVAN(6)................................ 318,621 15.5 9.5
4202 Maple Tree Court
Alexandria, Virginia 22304
EXECUTIVE OFFICERS AND DIRECTORS:
ERIC P. WENAAS(4)(7)................................. 412,532 19.3 12.0
JAMES H. STUHMILLER(4)(8)............................ 126,104 6.7 4.0
P. RANDY JOHNSON(9).................................. 45,862 2.4 1.4
TERRY M. FLANAGAN(4)(10)............................. 116,203 6.0 3.6
JOHN C. STISKA(11)................................... 20,400 1.1 *
JOHN S. FOSTER, JR.(12).............................. 20,400 1.1 *
DAVID R. HEEBNER(13)................................. 20,400 1.1 *
ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (7
PERSONS)(14)....................................... 761,901 32.7 21.0
- ---------------
* Represents less than 1% of outstanding Common Stock or voting power.
(1) Shares beneficially owned and percentage of ownership are based on
1,859,492 shares of Class B Common Stock outstanding before this offering
and 3,159,492 shares of Common Stock to be outstanding after the closing of
this offering, as of February 1, 1997 and assuming no exercise of the
Underwriters' over-allotment option. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or disposition power with respect to such shares.
(2) The percentages indicated in the "Shares Beneficially Owned After the
Offering" column do not take into account the Company's agreement, subject
to certain conditions, to repurchase 120,000 shares of Common Stock from
Robert P. Sullivan within 30 days of the closing of this offering. See
"Certain Transactions" and footnote 6.
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(3) Ms. Stuhmiller is the wife of James H. Stuhmiller, Senior Vice President of
Jaycor and a director of the Company. Includes 11,400 shares issuable upon
exercise of options held by Dr. Stuhmiller that are exercisable within the
60-day period following January 31, 1997, approximately 6,158 shares held
by the ESOP on behalf of Dr. Stuhmiller, and approximately 546 shares held
by the ESOP on behalf of Ms. Stuhmiller. See footnote 8.
(4) The address of such stockholder is: c/o the Company, 9775 Towne Centre
Drive, San Diego, California 92121.
(5) Consists of 487,241 shares held as trustee of the ESOP. Wells Fargo Bank
disclaims beneficial ownership of all such shares. See
"Management -- Benefit Plans."
(6) Includes 192,600 shares issuable upon exercise of options held by Dr.
Sullivan that are exercisable within the 60-day period following January
31, 1997 and approximately 6,021 shares held by the ESOP on behalf of Dr.
Sullivan. Also includes 120,000 shares which the Company has agreed to
repurchase, subject to certain conditions, within 30 days of the closing of
this offering. Excludes 23,392 shares which were repurchased by the Company
on January 31, 1997. See "Certain Transactions."
(7) Includes 278,400 shares issuable upon exercise of options held by Dr.
Wenaas that are exercisable within the 60-day period following January 31,
1997, approximately 6,973 shares held by the ESOP on behalf of Dr. Wenaas,
and approximately 1,091 shares held by the ESOP on behalf of Karen M.
Wenaas, the wife of Dr. Wenaas. Also includes 126,068 held as co-trustee of
the Revocable Trust of Eric P. and Karen M. Wenaas.
(8) Includes 108,000 shares held by Louise Stuhmiller, the wife of Dr.
Stuhmiller. Also includes 11,400 shares issuable upon exercise of options
held by Dr. Stuhmiller that are exercisable within the 60-day period
following January 31, 1997, approximately 6,158 shares held by the ESOP on
behalf of Dr. Stuhmiller, and approximately 546 shares held by the ESOP on
behalf of Ms. Stuhmiller. See footnote 3.
(9) Includes 40,200 shares issuable upon exercise of options held by Mr.
Johnson that are exercisable within the 60-day period following January 31,
1997 and approximately 3,862 shares held by the ESOP on behalf of Mr.
Johnson. Excludes 18,000 shares issuable upon exercise of options held by
Mr. Johnson that are exercisable subsequent to April 1, 1997.
(10) Includes 82,200 shares issuable upon exercise of options held by Dr.
Flanagan that are exercisable within the 60-day period following January
31, 1997 and approximately 5,203 shares held by the ESOP on behalf of Dr.
Flanagan.
(11) Consists of 20,400 shares issuable upon exercise of options held by Mr.
Stiska that are exercisable within the 60-day period following January 31,
1997. Excludes 4,500 shares issuable upon exercise of options held by Mr.
Stiska that are exercisable subsequent to April 1, 1997.
(12) Consists of 20,400 shares issuable upon exercise of options held by Dr.
Foster that are exercisable within the 60-day period following January 31,
1997. Excludes 4,500 shares issuable upon exercise of options held by Dr.
Foster that are exercisable subsequent to April 1, 1997.
(13) Consists of 20,400 shares issuable upon exercise of options held by Mr.
Heebner that are exercisable within the 60-day period following January 31,
1997. Excludes 4,500 shares issuable upon exercise of options held by Mr.
Heebner that are exercisable subsequent to April 1, 1997.
(14) Includes 473,400 shares issuable upon exercise of options that are
exercisable within the 60-day period following January 31, 1997 and
approximately 23,833 shares owned by the ESOP on behalf of such
stockholders.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 12,000,000 shares
of Class A Common Stock, par value $0.001 per share, and 4,000,000 shares of
Class B Common Stock, par value $0.001 per share. The Class B Common Stock
consists of five series, and each such series consists of 800,000 shares. Other
than the conversion of all shares of Class B Common Stock into shares of Class A
Common Stock over a four-year period commencing upon the closing of this
offering, the rights, preferences and privileges of each class of Common Stock
are identical in all respects. The following summary of certain provisions of
the Common Stock of the Company does not purport to be complete and is subject
to, and qualified in its entirety by, the Certificate of Incorporation of the
Company to be in effect following the Company's reincorporation in Delaware and
the Bylaws of the Company that are included as exhibits to the Registration
Statement of which this Prospectus forms a part, as well as the provisions of
applicable law.
COMMON STOCK
As of January 31, 1997, there were no shares of Class A Common Stock
outstanding and 1,859,492 shares of Class B Common Stock outstanding, which
shares were held of record by approximately 63 stockholders. Upon the closing of
this offering, 20% of the outstanding shares of Class B Common Stock will
automatically convert into shares of Class A Common Stock. The holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the holders of Common Stock and are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of funds
legally available therefor. In the event of a 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. Holders of Common
Stock have no preemptive or subscription rights, and there are no redemption or
conversion rights with respect to such shares. All outstanding shares of Common
Stock are fully paid and non-assessable.
The Class B Common Stock consists of five series, which are designated and
known as Series B-1 Common Stock, Series B-2 Common Stock, Series B-3 Common
Stock, Series B-4 Common Stock and Series B-5 Common Stock. The outstanding
shares of Class B Common Stock are comprised of approximately 20% of each such
series. To the extent that the shares of Class B Common Stock held by a
stockholder do not divide evenly among the series of Class B Common Stock, such
stockholder may hold from one to four additional shares of Series B-5 Common
Stock. Accordingly, 371,972 shares of Series B-5 Common Stock were outstanding
as of January 31, 1997, as opposed to 371,880 shares of each of the other series
of Class B Common Stock. Upon the closing of this offering, all shares of Series
B-1 Common Stock will automatically convert into shares of Class A Common Stock.
Upon the first anniversary of the closing of this offering, all shares of Series
B-2 Common Stock will automatically convert into shares of Class A Common Stock.
Upon the second anniversary of the closing of this offering, all shares of
Series B-3 Common Stock will automatically convert into shares of Class A Common
Stock. Upon the third anniversary of the closing of this offering, all shares of
Series B-4 Common Stock will automatically convert into shares of Class A Common
Stock. Upon the fourth anniversary of the closing of this offering, all
outstanding shares of Series B-5 Common Stock will automatically convert into
shares of Class A Common Stock. Accordingly, on the fourth anniversary of the
closing of this offering, all shares of Class B Common Stock will have converted
into shares of Class A Common Stock.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Following its proposed reincorporation in Delaware, the Company will be a
Delaware corporation and will be subject to Section 203 of the Delaware General
Corporation Law (the "Delaware Law"), an anti-takeover law. In general, Section
203 of the Delaware Law prevents an "interested stockholder" (defined generally
as a person owning 15% or more of a corporation's outstanding voting stock) from
engaging in a "business combination" (as defined therein) with a Delaware
corporation for three years following the date such person became an interested
stockholder, subject to certain exceptions, such as the approval of the Board of
Directors and of the holders of at least two-thirds of the outstanding shares of
voting stock not owned by such interested stockholder. The existence of such
provision would be expected to have an anti-takeover effect, including with
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respect to attempts that might result in a premium over the market price for the
shares of Common Stock held by the stockholders.
The Company's Certificate of Incorporation does not provide for cumulative
voting in the election of directors. These and other provisions may have the
effect of deferring hostile takeovers or delaying changes in control or
management of the Company. The amendment of any of these provisions would
require approval by holders of at least two-thirds or more of the outstanding
shares of Common Stock.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock
Transfer Corporation. Its telephone number in Glendale, California is (818)
502-1404.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the Class
A Common Stock and there can be no assurance that a significant public market
for the Class A Common Stock will be developed or sustained after this offering.
Sales of substantial amounts of Class A Common Stock in the public market after
this offering, or the possibility of such sales occurring, could adversely
affect prevailing market prices of the Class A Common Stock or the future
ability of the Company to raise capital through an offering of equity
securities.
After this offering, the Company will have outstanding 1,648,309 shares of
Class A Common Stock and 1,393,332 shares of Class B Common Stock, after giving
effect to the Company's repurchase, subject to certain conditions, of 120,000
shares of Common Stock. Of such shares, the 1,300,000 shares of Class A Common
Stock offered hereby will be freely tradeable in the public market without
restriction under the Securities Act, unless such shares are held by
"affiliates" of the Company, as defined in Rule 144 under the Securities Act.
The remaining 348,309 shares of Class A Common Stock and the 1,393,332
shares of Class B Common Stock outstanding upon completion of this offering will
be "restricted securities," as defined in Rule 144 (the "Restricted Shares").
The Restricted Shares were issued and sold by the Company in private
transactions in reliance upon exemptions from registration under the Securities
Act. Restricted Shares may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rules 144
or 701 under the Securities Act, which are summarized below.
All shares of the Company's Class B Common Stock will convert into shares
of the Company's Class A Common Stock over a four-year period commencing upon
the closing of this offering at the rate of approximately 348,309 shares on the
closing of this offering and on each of the first three anniversaries of such
closing, and 348,405 shares on the fourth anniversary of such closing. Subject
to the lock-up agreements discussed below, substantially all of the shares of
Class A Common Stock issued upon conversion of the Class B Common Stock will
generally be freely tradeable, subject in certain instances to the volume
limitations imposed by Rule 144.
Pursuant to certain "lock-up" agreements, all of the executive officers and
directors of the Company, as well as certain other stockholders, who, following
the closing of this offering, will collectively hold an aggregate of
approximately shares of Class A Common Stock and shares of Class B
Common Stock, have agreed, subject to certain limited exceptions, not to offer,
sell, contract to sell, grant any option to purchase or otherwise dispose of any
such shares for a period of one year from the date of this Prospectus. Certain
additional stockholders and optionholders of the Company, who, following the
closing of this offering, will collectively hold an aggregate of approximately
shares of Class A Common Stock and shares of Class B Common
Stock, have entered into similar lock-up agreements covering a period of 180
days following the date of this Prospectus. Such agreements provide that Brean
Murray & Co., Inc. may, in its sole discretion and at any time without notice,
release all or a portion of the shares subject to these lock-up agreements. The
Company has also entered into an agreement with Brean Murray & Co., Inc. that it
will not
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offer, sell or otherwise dispose of shares of Common Stock for a period of 180
days from the date of this Prospectus, other than pursuant to its existing stock
option and stock purchase plans.
Following the expiration of such lock-up periods, certain shares issued
upon exercise of options granted by the Company prior to the date of this
Prospectus will also be available for sale in the public market pursuant to Rule
701 under the Securities Act as such shares convert into shares of Class A
Common Stock. Rule 701 permits resales of such shares in reliance upon Rule 144
but without compliance with certain restrictions, including the holding period
requirement, imposed under Rule 144. In general, under Rule 144, as amended,
beginning 90 days after the date of this Prospectus, a person (or persons whose
shares of the Company are aggregated) who has beneficially owned Restricted
Shares for at least one year (including the holding period of any prior owner
who is not an affiliate of the Company) would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of (i)
one percent of the then outstanding shares of Class A Common Stock
(approximately 16,483 shares following this offering), or (ii) the average
weekly trading volume of the Class A Common Stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale and notice requirements and to
the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an affiliate of the Company at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any prior owner who is not an affiliate or the Company) is entitled to sell
such shares without complying with the manner of sale, public information,
volume limitation or notice provisions of Rule 144.
The ESOP holds 487,241 of the Restricted Shares, which shares will only be
eligible for resale in the public market following distribution to ESOP
participants. In certain circumstances, the Company is obligated to exchange
shares of Class A Common Stock for shares of Class B Common Stock held by the
ESOP. See "Management -- Benefit Plans."
As of January 31, 1997, options to purchase 1,270,875 shares of Class B
Common Stock were outstanding under the Company's stock option plans, 984,150 of
which were exercisable as of such date. The shares of Class B Common Stock
issuable upon exercise of such options convert into shares of Class A Common
Stock over a four-year period commencing on the closing of this offering. The
Company intends to file after the effective date of this offering Registration
Statements on Form S-8 to register an aggregate of 2,443,765 shares of Class A
Common Stock reserved for issuance under its stock option and stock purchase
plans or upon conversion of shares of Class B Common Stock issued under such
plans. Such Registration Statements will become effective automatically upon
filing. Shares of Class A Common Stock issued under such plans or issued upon
conversion of shares of Class B Common Stock issued under such plans, after the
filing of such Registration Statements on Form S-8, may be sold in the open
market, subject, in the case of certain holders, to the Rule 144 limitations
applicable to affiliates, the above-referenced lock-up agreements and vesting
restrictions imposed by the Company. See "Management -- Benefit Plans."
52
55
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
underwriters named below (the "Underwriters"), for which Brean Murray & Co.,
Inc. is acting as representative (the "Representative"), and each of the
Underwriters severally has agreed to purchase from the Company the aggregate
number of shares of Class A Common Stock set forth opposite its name below.
UNDERWRITERS NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
Brean Murray & Co., Inc. ............................................
---------
Total........................................................... 1,300,000
=========
Upon the terms and subject to the conditions of the Underwriting Agreement,
the Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Class A Common Stock set forth in the above table
if any of the shares of Class A Common Stock are purchased.
The Underwriters propose to offer the shares of Class A Common Stock to the
public at the initial public offering price set forth on the cover page of this
Prospectus, and to selected dealers at such public offering price less a
concession not to exceed $ per share. The Underwriters or such dealers
may reallow a commission to certain other dealers not to exceed $ per
share. After the offering to the public, the offering price, the concessions to
selected dealers and the reallowance to other dealers may be changed by the
Representative.
The Company has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus, to purchase up to 195,000 additional
shares of Class A Common Stock to cover over-allotments, if any, at the initial
public offering price, less underwriting discounts and commissions, as set forth
on the cover page of this Prospectus. If the Underwriters exercise this option,
then each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriters' initial commitment as indicated in the table above. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the shares of Class A Common Stock offered hereby.
The Company, its officers, directors and certain of its stockholders (who
beneficially hold in the aggregate shares of Common Stock, including shares of
Common Stock issuable upon exercise of outstanding options beneficially owned by
them) have agreed not to sell, offer to sell, issue, distribute or otherwise
dispose of any shares of Common Stock of the Company for a period of 180 days
from the date of this Prospectus (subject to certain limited exceptions) without
the prior written consent of the Representative.
In connection with the offering made hereby, the Company has agreed to sell
to the Representative, for nominal consideration, the Representative's Warrants
to purchase 130,000 shares of Class A Common Stock from the Company (10% of the
number of shares issued in this offering). The Representative's Warrants are
exercisable, in whole or in part, at an exercise price equal to 120% of the
public offering price set forth on the cover page of this Prospectus at any time
during the four-year period commencing one year after the effective date of the
Registration Statement of which this Prospectus is a part. The warrant agreement
pursuant to which the Warrants will be issued will contain provisions providing
for adjustment of the exercise price and the number and type of securities
issuable upon exercise of the Representative's Warrants should any one or more
of certain specified events occur. The Representative's Warrants grant to the
holders thereof certain rights of registration for the securities issuable upon
exercise of the Representative's Warrants.
53
56
The Company, its officers and directors, and certain of its existing
stockholders and optionholders have agreed not to sell, offer to sell, issue,
distribute or otherwise dispose of any shares of Common Stock of the Company for
a period of 180 days from the date of this Prospectus, subject to certain
limited exceptions, without the prior written consent of the Representative.
The Company has agreed to reimburse the Underwriters for up to $250,000 of
the Underwriters' out-of-pocket expenses (including fees of their counsel) in
connection with the sale of the Class A Common Stock offered hereby. The Company
has also agreed to indemnify the Underwriters or contribute to losses arising
out of certain liabilities that may be incurred in connection with this
offering, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Class A Common Stock offered hereby will be passed upon
for the Company by Gray Cary Ware & Freidenrich, A Professional Corporation, San
Diego, California. Certain legal matters relating to the offering will be passed
upon for the Underwriters by Stroock & Stroock & Lavan LLP, Los Angeles,
California.
EXPERTS
The financial statements as of January 31, 1996 and 1995 and for each of
the three years in the period ended January 31, 1996 included in this Prospectus
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (which term shall include any amendments
thereto) on Form S-1 under the Securities Act with respect to the Class A Common
Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain items of which are contained in exhibits to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the Class A
Common Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, and the financial statements and notes filed as
a part thereof. Statements made in this Prospectus concerning the contents of
any document referred to herein are not necessarily complete. With respect to
each such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved. The Registration Statement, including the exhibits thereto
and the financial statements and notes filed as a part thereof, as well as such
reports and other information filed with the Commission, may be inspected
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at Seven World Trade Center, 13th Floor, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the Commission.
Such reports and other information may also be inspected without charge at a Web
site maintained by the Commission. The address of such site is
http://www.sec.gov.
The Company will furnish its stockholders with annual reports containing
financial statements audited by independent accountants and make available
quarterly reports for the first three quarters of each year containing unaudited
financial statements.
54
57
GLOSSARY
As used in this Prospectus, the following terms have the meanings set forth
below.
ANSI (AMERICAN NATIONAL STANDARDS INSTITUTE): The administrator and
coordinator of the U.S. private sector voluntary standardization system. ANSI
promotes the use of U.S. standards internationally, advocates U.S. policy and
technical positions in international and regional standards organizations, and
encourages the adoption of international standards as national standards where
these meet the needs of the user community.
ARBITRATED LOOP: A ring topology for connection of up to 126 Fibre Channel
nodes (e.g., computers and disk drives with Fibre Channel interfaces) without a
switch. A request for control of the loop can come from any node, and the Fibre
Channel protocol assures fair access to each node.
ASIC (APPLICATION SPECIFIC INTEGRATED CIRCUIT): An integrated circuit
designed for a specific, usually proprietary, purpose.
ATM (ASYNCHRONOUS TRANSFER MODE): A high-bandwidth, controlled-delay
fixed-size packet switching and transmission system that uses fixed-size packets
also known as "cells."
BRIDGE: A device or setup that connects and passes data, voice or video
between two network segments, based on the destination field in the packet
header.
COLLISION-DOMAIN ACCESS METHOD: A link-level access method sometimes
referred to as Carrier Sense Multiple Access with Collision Detection (CSMA/CD)
allowing multiple simultaneous data transmissions to collide with each other
requiring retransmissions after a variable quite-time period. Such methods
rarely exceed 30% to 40% of the available link-level bandwidth due to increasing
collisions as data traffic increases.
CPFF (COST PLUS FIXED FEE): A contract that provides for reimbursement of
allowable costs and a fixed profit.
CREDIT-BASED ACCESS METHOD: A link-level access method whereby the sender
and receiver have prearranged the available space for the incoming data
receptions. Credit-based methods can utilize nearly 100% of the available
link-level bandwidth.
ELECTRONIC AND ELECTROMAGNETIC WARFARE: Actions involving the use of
electromagnetic energy to determine, exploit, reduce or prevent hostile use of
the electromagnetic spectrum, and actions which retain the friendly use of the
electromagnetic spectrum.
ELECTRO-OPTIC SYSTEMS: A generic term for systems that involve both
optical and electronic components (e.g., video cameras, systems for enhanced
night vision and sensors using optical detectors).
ETHERNET: A local area network that connects devices such as computers,
printers and terminals based on IEEE standard 802.3. Standard Ethernet transmits
data in up to 1514 byte packets at bandwidths 10 Mbps (standard Ethernet or
10BaseT) and 100 Mbps (fast Ethernet or 100BaseT). Gigabit per second Ethernet
devices are in development.
FDDI (FIBER DISTRIBUTED DATA INTERFACE): An ANSI standard, fiber optic,
token-passing local area network with transport speeds up to 100 Mbps. A node
gains control of the network by removing a circulating packet called a "token"
from the network and releases control by putting the token back into
circulation.
FIBRE CHANNEL ADAPTER: A circuit card that plugs into a computer bus slot
and provides the hardware and software to allow the computer to send and receive
data over a Fibre Channel connection or network.
FIBRE CHANNEL STANDARD: An ANSI standard that defines a high-speed data
transfer interface that can be used to connect together workstations,
mainframes, supercomputers, storage devices and displays in frames up to 2148
bytes in length. The Fibre Channel standard defines the connections for
implementation of Fibre Channel connections, the data transmission protocol
including error control, data frame structure and sequences, a set of services
that are common across multiple ports of a node, and the mapping between Fibre
Channel and other protocols such as IP and SCSI command sets.
55
58
FIXED-PRICE CONTRACT: A contract that requires the contractor to deliver
the work product described in the work statement at a fixed price.
FULL DUPLEX: In full duplex communication, data streams can be transmitted
and received simultaneously (i.e., sent in both directions) without loss of
data.
HALF DUPLEX: In half duplex communication, data transmitted must be
alternated with data received.
HUB: A multi-port networking device that rebroadcasts data frames received
at any port to all other ports. A hub is often used to connect disk arrays and
computers in a Fibre Channel arbitrated loop topology.
IDE (INTEGRATED DRIVE ELECTRONICS): An inexpensive desktop storage
interface.
IEEE (INSTITUTE OF ELECTRICAL AND ELECTRONICS ENGINEERS): An international
professional engineering society that maintains certain communications
standards.
INFORMATION WARFARE: Actions involving methods to intercept, exploit or
prevent hostile use of information systems (e.g., communications and sensors),
and actions which protect the friendly use of information systems.
IP (INTERNET PROTOCOL): The network layer of the internet communications
protocol that specifies the rules by which blocks of information, called IP
packets, may be exchanged across the local or wide area networks.
LAN (LOCAL AREA NETWORK): A network that interconnects devices over a
geographically small area, typically within one building or part of a building.
LATENCY: The time delay between issuance of a request and the initiation
of the requested action.
NODE: Any device connected to a network.
PCI BUS (PERIPHERAL CONNECT INTERFACE BUS): The PCI local bus is a
high-performance 32-bit or 64-bit bus intended for use as an interconnect
mechanism between highly integrated peripheral controller components, boards and
processor/memory systems.
PCI BUS-TO-FIBRE CHANNEL ADAPTER: A Fibre Channel adapter that plugs into
a slot in a computer with a PCI bus to effect communication between the computer
bus and other devices, such as workstations and storage arrays that are equipped
with Fibre Channel interfaces.
RAID (REDUNDANT ARRAY OF INEXPENSIVE DISKS): A technology developed in
1987 to reduce the cost of mass storage by combining small inexpensive disks to
replace larger expensive disks. Bits of a data word are written on different
disks (data striping), so that data can be reconstructed in the event of a
single disk failure. RAID technology provides greater performance, data
integrity and data availability than standard disk storage.
SBUS: The common name for a computer bus specification (IEEE Standard
1496-1993) used in computers manufactured by Sun Microsystems and other
companies running a UNIX operating system.
SBUS-TO-FIBRE CHANNEL ADAPTER: A Fibre Channel adapter that plugs into a
slot in an SBus computer to effect communication between the computer bus and
other devices, such as workstations and storage arrays that are equipped with
Fibre Channel interfaces.
SCALABILITY: The capability to add larger numbers of devices connected to
a network.
SCSI (SMALL COMPUTER SYSTEMS INTERFACE): An ANSI standard input and output
interface primarily used for attachment of data storage devices to processors,
via a standard hardware interface, which uses standard SCSI commands.
SWITCH: A networking and telecommunication component that establishes an
exclusive connection between two network devices. Switches usually have many
ports and connect any two ports to establish communication, managing multiple
communications simultaneously.
56
59
TCP (TRANSMISSION CONTROL PROTOCOL): The transport layer of the internet
communications protocol that it defines the rules by which two data ports
establish a connection and how messages are exchanged between the two ports. It
provides reliable, full duplex connection service and allows arbitrarily long
streams of data to be transmitted, it typically using the IP protocol to
transmit data.
TCP/IP: A designation for a common networking protocol consisting of TCP
for connection-oriented transport and IP for messaging.
T&M (TIME AND MATERIALS): A contract that requires the contractor to
provide a certain number of labor hours at a prescribed rate and provides for
reimbursement for hours spent at such rate and for all materials utilized.
TOKEN RING: A 16 Mbps protocol for a ring topology LAN invented by IBM. A
data frame called a "token" circulates around the ring. Each device on the LAN
gains control of the network by removing and holding the token, releasing it
when transmission is completed.
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60
JAYMARK, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
REPORT OF INDEPENDENT ACCOUNTANTS..................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet as of October 31, 1996 (unaudited) and as of January
31, 1996 and 1995............................................................... F-3
Consolidated Statement of Income for the Nine Months Ended October 31, 1996 and
1995 (unaudited) and for the Years Ended January 31, 1996, 1995 and 1994........ F-4
Consolidated Statement of Stockholders' Equity for the Nine Months Ended October
31, 1996 (unaudited) and for the Years Ended January 31, 1996, 1995 and 1994.... F-5
Consolidated Statement of Cash Flows for the Nine Months Ended October 31, 1996
and 1995 (unaudited) and for the Years Ended January 31, 1996, 1995 and 1994.... F-6
Notes to Consolidated Financial Statements....................................... F-7
F-1
61
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Jaymark, Inc.
The reincorporation described in Note 1 to the consolidated financial statements
has not been consummated at March 6, 1997. When it has been consummated, we will
be in a position to furnish the following report:
"In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of income, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position
of Jaymark, Inc. and its subsidiaries at January 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the three
years in the period ended January 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in fiscal 1994."
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
San Diego, California
May 8, 1996
F-2
62
JAYMARK, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JANUARY 31,
OCTOBER 31, -------------------
1996 1996 1995
----------- ------- -------
(UNAUDITED)
ASSETS
Current assets:
Cash....................................................... $ 47 $ 53 $ 134
Accounts receivable........................................ 10,921 13,008 12,411
Inventories................................................ 255 131.... 26
Prepaid expenses and other current assets.................. 580 684 561
------- ------- -------
Total current assets.................................... 11,803 13,876 13,132
Property and equipment, net.................................. 19,548 19,874 20,030
Other assets................................................. 1,364 1,029 780
------- ------- -------
$32,715 $34,779 $33,942
======= ======= =======
LIABILITIES, MANDATORILY REDEEMABLE ESOP SHARES
AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities................... $ 6,410 $ 6,002 $ 6,501
Bank line of credit........................................ 3,198 4,953 2,552
Current portion of long-term debt and capital lease
obligations............................................. 1,117 1,380 2,102
Deferred income taxes...................................... 721 1,300 1,452
------- ------- -------
Total current liabilities............................... 11,446 13,635 12,607
------- ------- -------
Long-term debt and capital lease obligations, less current
portion.................................................... 13,846 14,457 14,861
Deferred compensation........................................ 1,024 917 805
Other liabilities............................................ 363 378 325
------- ------- -------
Total long-term liabilities............................. 15,233 15,752 15,991
------- ------- -------
Commitments (Note 7)
Mandatorily redeemable ESOP shares (Note 5), at fair value,
487,241, 463,380, and 413,280 shares issued and
outstanding................................................ 3,159 2,579 2,149
------- ------- -------
Stockholders' equity:
Class A Common Stock, par value $0.001, 12,000,000 shares
authorized; no shares issued or outstanding
Class B Common Stock, par value $0.001, 4,000,000 shares
authorized; 1,451,808, 1,425,721, and 1,527,624 shares
issued and outstanding.................................. 1 1 2
Additional paid-in capital................................. 578 378 448
Retained earnings.......................................... 4,950 4,516 4,418
Adjustment for mandatorily redeemable ESOP shares.......... (2,652) (2,082) (1,673)
------- ------- -------
Total stockholders' equity.............................. 2,877 2,813 3,195
------- ------- -------
$32,715 $34,779 $33,942
======= ======= =======
See accompanying Notes to Consolidated Financial Statements.
F-3
63
JAYMARK, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED
OCTOBER 31, YEAR ENDED JANUARY 31,
----------------------- ------------------------------------
1996 1995 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
Revenues............................. $ 41,452 $ 38,733 $ 52,928 $ 57,656 $ 55,901
---------- ---------- ---------- ---------- ----------
Costs and expenses:
Cost of revenues................... 34,233 32,095 43,803 47,846 46,656
Selling, general and
administrative.................. 4,797 4,555 5,977 7,363 6,592
Research and development........... 310 400 560 228 206
---------- ---------- ---------- ---------- ----------
39,340 37,050 50,340 55,437 53,454
---------- ---------- ---------- ---------- ----------
Operating income..................... 2,112 1,683 2,588 2,219 2,447
Interest expense..................... 1,427 1,423 2,018 1,721 1,632
---------- ---------- ---------- ---------- ----------
Income before income taxes and
cumulative effect of change in
accounting principle............... 685 260 570 498 815
Provision for income taxes........... 249 98 234 176 326
---------- ---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principle..... 436 162 336 322 489
Cumulative effect of change in method
of accounting for income taxes..... 231
---------- ---------- ---------- ---------- ----------
Net income........................... $ 436 $ 162 $ 336 $ 322 $ 720
========== ========== ========== ========== ==========
Net earnings per share:
Income before cumulative effect of
change in accounting
principle....................... $ 0.21 $ 0.08 $ 0.16 $ 0.15 $ 0.21
Cumulative effect of change in
method of accounting for income
taxes........................... 0.09
---------- ---------- ---------- ---------- ----------
Net earnings per share............. $ 0.21 $ 0.08 $ 0.16 $ 0.15 $ 0.30
========== ========== ========== ========== ==========
Shares used in per share
calculation........................ 2,048,800 2,086,900 2,075,900 2,131,400 2,678,400
========== ========== ========== ========== ==========
See accompanying Notes to Consolidated Financial Statements.
F-4
64
JAYMARK, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK
------------------ ADJUSTMENT
FOR MANDATORILY
CLASS B ADDITIONAL REDEEMABLE
------------------ PAID-IN RETAINED ESOP SHARES
SHARES AMOUNT CAPITAL EARNINGS (NOTE 5)
--------- ------ ---------- -------- ---------------
Balance at January 31, 1993................. 1,701,528 $ 2 $442 $3,989 $(1,847)
Exercise of stock options................. 3,375 16
Repurchases of common stock............... (105,232) (14) (505)
Mandatorily redeemable ESOP shares
adjustment............................. (13,333) (5) 207
Net income................................ 720
--------- --- ---- ------ -------
Balance at January 31, 1994................. 1,586,338 2 439 4,204 (1,640)
Exercise of stock options................. 4,410 18
Repurchases of common stock............... (43,905) (1) (108)
Mandatorily redeemable ESOP shares
adjustment............................. (19,219) (8) (33)
Net income................................ 322
--------- --- ---- ------ -------
Balance at January 31, 1995................. 1,527,624 2 448 4,418 (1,673)
Repurchases of common stock............... (51,803) (1) (49) (238)
Mandatorily redeemable ESOP shares
adjustment............................. (50,100) (21) (409)
Net income................................ 336
--------- --- ---- ------ -------
Balance at January 31, 1996................. 1,425,721 1 378 4,516 (2,082)
Issuances of common stock (unaudited)..... 50,443 211
Repurchase of common stock (unaudited).... (495) (1) (2)
Mandatorily redeemable ESOP shares
adjustment (unaudited)................. (23,861) (10) (570)
Net income (unaudited).................... 436
--------- --- ---- ------ -------
Balance at October 31, 1996 (unaudited)..... 1,451,808 $ 1 $578 $4,950 $(2,652)
========= === ==== ====== =======
See accompanying Notes to Consolidated Financial Statements.
F-5
65
JAYMARK, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
OCTOBER 31, YEAR ENDED JANUARY 31,
----------------- ----------------------------
1996 1995 1996 1995 1994
------- ------- ------- ------- --------
(UNAUDITED)
Cash flows from operating activities:
Net income............................................. $ 436 $ 162 $ 336 $ 322 $ 720
------- ------- ------- ------- --------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization........................ 1,268 1,388 1,837 2,054 2,184
Loss (gain) on disposal of assets.................... 1 (9) (14) 11 10
Increase (decrease) in cash, net of the effects of
acquisitions, due to changes in:
Accounts receivable................................ 2,192 (570) (481) (501) 245
Inventories........................................ (88) (102) (105) 57 118
Prepaid expenses and other current assets.......... 111 (37) (145) (51) 128
Other assets....................................... (226) 60 (195) (125) (367)
Accounts payable and accrued liabilities........... 391 218 (670) (191) (1,614)
Deferred income taxes.............................. (579) (1,115) (152) 149 279
Deferred compensation.............................. 107 62 108 114 53
Other liabilities.................................. 15 (12) (8) 33 49
------- ------- ------- ------- --------
Total adjustments............................... 3,192 (117) 175 1,550 1,085
------- ------- ------- ------- --------
Net cash provided by operating activities..... 3,628 45 511 1,872 1,805
------- ------- ------- ------- --------
Cash flows from investing activities:
Proceeds from sale of assets........................... 1 29 31 7 6
Expenditures for property and equipment................ (580) (437) (623) (676) (17,514)
Acquisition of certain business assets................. (246) (606)
Payments received on notes receivable.................. 4 22 782 229
------- ------- ------- ------- --------
Net cash (used in) provided by investing
activities.................................. (825) (404) (1,176) 113 (17,279)
------- ------- ------- ------- --------
Cash flows from financing activities:
Changes in net borrowings under bank line of credit.... (1,755) 1,859 2,401 (895) 517
Principal payments under capital lease obligations..... (264) (225) (376) (341) (422)
Repayment of long-term debt............................ (823) (1,451) (1,795) (1,207) (982)
Proceeds from issuance of long-term debt............... 328 642 642 16,897
Repurchases of Class B Common Stock.................... (3) (269) (288) (109) (519)
Proceeds from issuances of Class B Common Stock........ 36 18 16
------- ------- ------- ------- --------
Net cash (used in) provided by financing
activities.................................. (2,809) 242 584 (1,892) 15,507
------- ------- ------- ------- --------
Net (decrease) increase in cash.......................... (6) (117) (81) 93 33
Cash at beginning of period.............................. 53 134 134 41 8
------- ------- ------- ------- --------
Cash at end of period.................................... $ 47 $ 17 $ 53 $ 134 $ 41
======= ======= ======= ======= ========
Supplemental disclosure of cash paid during the year for:
Interest............................................... $ 1,289 $ 1,289 $ 2,016 $ 1,825 $ 1,532
Income taxes........................................... 395 1,073 1,075 225 639
Supplemental non-cash investing and financing activities:
Capital lease obligations originated................... $ 213 $ 403 $ 403 $ 87 $ 340
Issuance of Class B Common Stock....................... 175
Acquisition of certain business assets in exchange for
liability............................................ 91
Notes receivable exchanged for property and
equipment............................................ 1,300
Deposit exchanged for property and equipment........... 825
See accompanying Notes to Consolidated Financial Statements.
F-6
66
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 -- DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
The Company
Jaymark, Inc. provides advanced technology products and services to
government and commercial customers with primary business in the areas of
electronic and electro-optic system design, communications engineering,
electromagnetic effects, nuclear and high-explosive weapon effects, and
high-speed computer networking products.
Reincorporation
During March 1997, the Company will merge with and into a newly
incorporated Delaware corporation, Jaymark, Inc., a wholly owned subsidiary,
which will be the surviving corporation. In conjunction with the merger, each
outstanding share of the Company's common stock will be exchanged for
three-fifths of one share of the Class B Common Stock of Jaymark, Inc. In
addition, each outstanding option to purchase a share of the Company's common
stock will be exchanged for an option to purchase three-fifths of one share of
the Class B Common Stock of Jaymark, Inc. at five-thirds of its exercise price.
All references to share and per share amounts and other data in these
financial statements have been retroactively restated to reflect the
reincorporation.
Consolidation
The consolidated financial statements present the accounts of Jaymark, Inc.
and its wholly owned subsidiaries. All significant intercompany transactions and
accounts have been eliminated.
Acquisitions
The Company recorded at fair value certain immaterial business assets
purchased with cash and issuances of Class B Common Stock during the nine months
ended October 31, 1996 and fiscal year 1996.
Fiscal Year
The Company operates and reports its results of operations on the basis of
52 or 53 week periods ending on the Friday closest to January 31. Fiscal years
1996, 1995 and 1994 ended on February 2, 1996, February 3, 1995, and January 28,
1994, and consisted of 52, 53, and 52 weeks, respectively. For presentation
purposes, the Company has indicated its fiscal year as ending on January 31.
Interim Periods
The consolidated balance sheet as of October 25, 1996, the consolidated
statements of income and of cash flows for the nine months ended October 25,
1996 and October 27, 1995, and the consolidated statement of stockholders'
equity for the nine months ended October 25, 1996 are unaudited, but, in the
opinion of management of the Company, include all adjustments necessary to
present fairly, in all material respects, the financial position as of October
25, 1996 and the results of operations and cash flows for the Company for the
nine months ended October 25, 1996 and October 27, 1995. All data as of such
date and for such periods included herein is unaudited. Operating results for
the nine months ended October 25, 1996 are not necessarily indicative of the
results that may be expected for the year ended January 31, 1997. For
presentation purposes, the Company has indicated its fiscal third quarter as
ending on October 31.
F-7
67
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company's revenues are derived primarily from the performance of
services for various agencies of the U.S. government, through prime government
contracts or through subcontracts issued by U.S. government prime contractors.
Contracts generally are in the form of (i) reimbursement of costs under
cost-plus fixed fee, (ii) time and materials, or (iii) fixed price. Revenues are
generally recognized as costs are incurred and include a portion of the total
estimated earnings to be realized based upon the relationship between contract
costs incurred to date and total estimated contract costs at completion.
Provision is made for any expected losses on contracts by a charge to income
during the period in which the losses are first identified.
Inventories
Inventories, consisting primarily of raw materials and spare parts, are
stated at the lower of average cost (determined on a first-in, first-out basis)
or market.
Property and Equipment
Property and equipment are stated at cost and are depreciated over their
estimated useful lives, primarily using the straight-line method. Useful lives
range from three to five years for equipment, thirty-one to forty years for
buildings and the shorter of the useful lives or the terms of the leases (three
to nine years) for leased assets and leasehold improvements. Upon sale or
disposal, the cost and related accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in cost of revenues.
Maintenance and repair costs are charged to expense as incurred.
Research and Development Costs
Company-sponsored research and development costs to develop new concepts
and proprietary systems and products are charged to operations as incurred.
Income Taxes
Current income tax expense or benefit represents the amount of income taxes
expected to be payable or refundable for the current year. A deferred income tax
liability or asset is established for the expected future tax consequences of
temporary differences between the financial reporting and income tax bases of
assets and liabilities. Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be "more likely than not"
realized in future tax returns. Deferred income tax expense or benefit
represents the net change during the year in the deferred income tax liabilities
or assets.
The Company's previous method of accounting for income taxes did not permit
the anticipation of future income in determining the value of temporary
differences and carryforwards. The implementation of the Company's current
method of accounting for income taxes resulted in a credit to operations of $231
in fiscal year 1994.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
68
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The fair value of the Company's long-term debt, capital lease and deferred
compensation obligations approximate fair value as the nominal rates of interest
for these instruments approximate market rates of interest currently available
to the Company for similar instruments. The carrying amounts of the Company's
accrued and other liabilities and its bank line of credit approximate their fair
values due to their short-term maturities.
Concentrations of Credit Risk
Concentrations of credit risk with respect to receivables are limited
because the Company's primary customers are various agencies of the U.S.
government as well as commercial customers engaged in work for the U.S.
government. As of January 31, 1996, there were no significant concentrations of
receivables with these commercial customers. During fiscal years 1996, 1995, and
1994, approximately 97%, 98% and 98%, respectively, of the Company's revenues
were attributable to U.S. government prime contracts or subcontracts.
Long-Lived Assets
The Company investigates potential impairments of long-lived assets,
identifiable intangibles, and any associated goodwill when events or changes in
circumstances indicate that an asset's carrying value may not be recoverable. An
impairment loss is recognized when the sum of the expected future undiscounted
net cash flows is less than the carrying amount of the asset. No such losses
have been identified by the Company.
Stock Options
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
compensation costs related to stock option plans and other forms of stock based
compensation plans as an alternative to the intrinsic value based method of
accounting defined under Accounting Principles Board Opinion No. 25. Companies
that do not elect the new method of accounting will be required to provide pro
forma disclosures as if the fair value based method had been applied. The
Company has not elected the fair value based method of accounting and will
provide pro forma disclosures as required, beginning with its fiscal year 1997
financial statements.
Net Earnings Per Share
Net earnings per share is computed based on the weighted average number of
common shares and common stock equivalents, using the treasury stock method,
outstanding during the respective periods. All stock issued and stock options
granted since March 6, 1996 have been included as outstanding for all periods
using the treasury stock method, modified if necessary, and the $13.00 price per
share which is estimated to be the price of the Company's proposed initial
public offering (the "Offering"). Common stock equivalents include the dilutive
effect of stock options. Supplemental net earnings per share, retroactively
reflecting the impact of the repayment of the bank line of credit contemplated
in the Offering, is not presented as the impact is antidilutive.
F-9
69
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- COMPOSITION OF CERTAIN CONSOLIDATED FINANCIAL STATEMENT CAPTIONS
Accounts receivable:
JANUARY 31,
OCTOBER 31, -------------------
1996 1996 1995
----------- ------- -------
(UNAUDITED)
Contract receivables:
Billed............................................. $ 6,968 $ 7,391 $ 6,006
Unbilled, net of progress payments of $1,123,
$2,057 and $3,234............................... 3,743 4,743 6,084
------- ------- -------
10,711 12,134 12,090
Income taxes receivable.............................. 97 688 134
Other receivables.................................... 113 186 187
------- ------- -------
$10,921 $13,008 $12,411
======= ======= =======
Contract receivables are primarily derived from contracts and subcontracts
with various agencies of the U.S. government. Reimbursable costs incurred under
U.S. government contracts and subcontracts, including allocated indirect
expenses, are subject to audit and adjustment by negotiations between the
Company and U.S. government representatives. Contract revenues have been
recorded in amounts which are expected to be realized upon final audit. Unbilled
receivables are stated at their estimated realizable value and consist primarily
of amounts billed subsequent to the balance sheet date or which are billable
upon the occurrence of specified events, as well as contract retentions and
unreimbursed costs subject to contract execution or modification. Contract
retentions of $1,725 at January 31, 1996 are collectible upon contract
completion, final customer approval and final indirect rate settlement, and the
majority thereof is expected to be collected within one year. Unbilled contract
receivables at January 31, 1996 included $1,308 related to costs incurred on
projects in advance of receiving formal funding authorization from customers.
The Company anticipates receiving contracts or modifications to fully fund this
balance.
Property and equipment, net:
JANUARY 31,
OCTOBER 31, ---------------------
1996 1996 1995
----------- -------- --------
(UNAUDITED)
Land............................................... $ 3,300 $ 3,300 $ 3,300
Buildings.......................................... 14,816 14,816 14,529
Computer and test equipment........................ 10,406 10,533 9,426
Leasehold improvements............................. 1,699 2,673 2,646
Office furniture and equipment, vehicles and other
equipment........................................ 2,353 2,078 2,021
-------- -------- --------
32,574 33,400 31,922
Less accumulated depreciation and amortization..... (13,026) (13,526) (11,892)
-------- -------- --------
$ 19,548 $ 19,874 $ 20,030
======== ======== ========
Included in property and equipment above is $1,039, $1,117, and $1,291 of
assets under capital leases with $581, $493, and $448 of accumulated
amortization on October 31, 1996, January 31, 1996 and 1995, respectively.
Depreciation expense recorded during fiscal years 1996, 1995 and 1994 was
$1,417, $1,623, and $1,638, respectively.
F-10
70
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued liabilities:
JANUARY 31,
OCTOBER 31, -----------------
1996 1996 1995
----------- ------ ------
(UNAUDITED)
Accounts payable....................................... $ 2,942 $3,220 $3,112
Accrued salaries, benefits and payroll taxes........... 1,479 1,041 1,320
Accrued vacation....................................... 1,025 1,024 1,132
Accrued retirement plan................................ 207 207 342
Other.................................................. 757 510 595
------ ------ ------
$ 6,410 $6,002 $6,501
====== ====== ======
NOTE 3 -- BANK LINE OF CREDIT
The Company has a bank line of credit which is renegotiated on an annual
basis and expires on October 1, 1997. Under terms of the credit agreement, the
Company may borrow up to $6,000, limited to specified percentages of eligible
accounts receivable, at 7/8% over the bank's prime rate. The Company's interest
rate was 9.125% at January 31, 1996, and it had $1,047 of additional funds
available under the bank line of credit. In addition, the Company pays a
quarterly commitment fee of 5/8% per annum on the average daily unused amount of
the line of credit. Borrowings under the line of credit agreement are secured by
the Company's accounts receivable, inventories and unencumbered property and
equipment. The credit arrangement surrounding the line of credit and the primary
bank term loans described in Note 4 require the Company to maintain certain
financial ratios and among other things, limits the amount of dividends that the
Company may pay. At January 31, 1996, the Company was in compliance with all
covenants.
NOTE 4 -- LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
JANUARY 31,
OCTOBER 31, -------------------
1996 1996 1995
----------- ------- -------
(UNAUDITED)
Building mortgage.................................... $13,756 $14,015 $14,828
Term loans with secondary lenders.................... 672 1,222 1,395
Term loans with primary bank......................... 14 181
Capital lease obligations............................ 535 586 559
------- ------- -------
14,963 15,837 16,963
Less current portion................................. (1,117) (1,380) (2,102)
------- ------- -------
$13,846 $14,457 $14,861
======= ======= =======
The building mortgage is secured by a first deed of trust on the land and
building, and is amortized over a 17 year period. Interest under the mortgage,
which was fixed at 8.96%, 7.31% and 7.0% during fiscal years 1996, 1995 and
1994, respectively, varies according to options available to the Company.
Borrowings from secondary lenders are secured by the Company's property and
equipment and are payable in monthly principal and interest installments over a
three year term with fixed interest rates ranging from 6.89% to 9.45%.
Borrowings from the primary bank were secured by the Company's accounts
receivable, inventories and unencumbered property and equipment, and are payable
in monthly principal installments plus accrued interest at the bank's prime rate
plus 1 1/2% over a three year term. At October 31, 1996, there were no
borrowings outstanding under this facility.
F-11
71
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At January 31, 1996, scheduled maturities are as follows:
PRIMARY AND CAPITAL
BUILDING SECONDARY LEASE
FISCAL YEAR MORTGAGE LENDERS OBLIGATIONS TOTAL
-------------------------------------------- -------- ----------- ----------- -------
1997........................................ $ 400 $ 715 $ 298 $ 1,413
1998........................................ 438 355 201 994
1999........................................ 480 166 114 760
2000........................................ 525 41 566
2001........................................ 575 575
Thereafter.................................. 11,597 11,597
------- ------ ---- -------
$14,015 $ 1,236 654 15,905
======= ======
Less imputed interest....................... (68) (68)
---- -------
$ 586 $15,837
==== =======
NOTE 5 -- BENEFIT PLANS
The Company has a Money Purchase Pension Plan (the "Pension Plan") which
covers substantially all employees. Annual contributions, as defined in the
Pension Plan, are determined by specified percentages of each employee's annual
earnings. During fiscal years 1996, 1995 and 1994, the charges to operations
under this plan were $1,231, $1,115, and $1,413, respectively.
The Company has a defined contribution Employee Stock Ownership Plan (the
"ESOP") which covers substantially all employees to enable employees to acquire
stock ownership interests in the Company. At January 31, 1996 and 1995, all
shares of Class B Common Stock were allocated to participants. Plan
contributions are discretionary. During fiscal years 1996, 1995, and 1994,
charges to operations were $200, $350, and $250, respectively. The Company has
fully funded the contributions with $370, $270, and $160 being contributed
during fiscal years 1996, 1995, and 1994, respectively. Distribution of ESOP
shares to a retiring or terminated participant occurs within five years from
separation. Within 15 months from distribution, the participant may exercise a
put option, or the ESOP may exercise a call option, at fair value, for any
portion of the shares distributed. Accordingly, the shares of Class B Common
Stock held by the ESOP are reflected at their aggregate fair values, as
determined by an annual independent appraisal. At January 31, 1996 and 1995,
ESOP shares outstanding with aggregate fair values of $2,579 and $2,149,
respectively, are separately classified in the consolidated balance sheet. The
adjustment for mandatorily redeemable ESOP shares represents the difference
between the aggregate historical issuance price of such shares and their
aggregate fair value at year end. Following the closing of the Offering, the
Company may, at its option, satisfy obligations for distributions of shares with
Class A Common Stock, which will be readily tradeable. To the extent that the
ESOP does not hold a sufficient number of shares of Class A Common Stock to meet
its obligations to distribute shares to participants following retirement or
termination (Note 8), the Company has agreed to exchange shares of Class A
Common Stock for shares of Class B Common Stock held by the ESOP to distribute
to such participants. Consequently, these shares will be reported at their
aggregate historical issuance price as a component of stockholders' equity
subsequent to the Offering.
The Company offers deferred compensation arrangements to certain of its
employees. The agreements allow the employees to defer up to 100% of their
salaries, net of certain payroll withholdings, with interest accruing thereon at
specified rates, currently ranging from 8% to 9%. Distributions commence upon
retirement or termination and continue for a period as prescribed in the
respective agreements.
The Company has an Incentive Stock Option Plan (the "1990 Option Plan")
which provides for the issuance of up to 900,000 shares of the Company's Class B
Common Stock at prices not less than 100% of its
F-12
72
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value, as determined by the Company's Board of Directors, or 110% for
persons controlling more than 10% of the voting rights, at the date of grant.
Stock options are generally exercisable in four equal installments commencing
one year after the date of grant and expire in ten years. At January 31, 1996,
options for 183,090 shares were available for future grant.
The Company has a non-qualified stock option plan (the "1991 Option Plan"),
which provides for the issuance of up to 315,000 shares of the Company's Class B
Common Stock at prices not less than 100% of its fair value, as determined by
the Company's Board of Directors, at the date of grant and expire in ten years.
At January 31, 1996, options for 34,200 shares were available for future grant.
During fiscal year 1996, the Company adopted a non-qualified stock option
plan (the "1996 Option Plan") which provides for the issuance of up to 435,000
shares of the Company's Class B Common Stock at prices determined by the Board
of Directors (Note 9). The expiration date and the vesting schedule are also
determined by the Board of Directors. At January 31, 1996, options for 435,000
shares were available for future grant.
At January 31, 1996, options to purchase 995,085 shares of Class B Common
Stock were exercisable under various agreements. Transactions during each of the
three fiscal years ended January 31, 1996 and the nine months ended October 31,
1996 were as follows:
PRICE PER SHARE NUMBER OF SHARES
--------------- ----------------
Outstanding at January 31, 1993...................... $4.03 to $6.07 1,222,200
Granted............................................ $5.35 to $6.07 102,300
Exercised.......................................... $4.03 to $5.55 (3,375)
Cancelled.......................................... $4.03 to $6.07 (100,200)
---------
Outstanding at January 31, 1994...................... $4.03 to $6.07 1,220,925
Granted............................................ $5.20 to $5.35 39,000
Exercised.......................................... $4.03 to $4.74 (4,410)
Cancelled.......................................... $4.74 to $6.07 (172,800)
---------
Outstanding at January 31, 1995...................... $4.03 to $6.07 1,082,715
Granted............................................ $5.20 to $5.57 29,700
Cancelled.......................................... $4.03 to $4.74 (46,440)
---------
Outstanding at January 31, 1996...................... $4.03 to $6.07 1,065,975
Granted (unaudited)................................ $5.57 to $6.48 144,600
Exercised (unaudited).............................. $4.03 (45,000)
Cancelled (unaudited).............................. $4.03 to $6.07 (17,700)
---------
Outstanding at October 31, 1996 (unaudited).......... $4.03 to $6.48 1,147,875
=========
F-13
73
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- INCOME TAXES
The provision (benefit) for income taxes consists of the following:
NINE MONTHS ENDED
OCTOBER 31, YEAR ENDED JANUARY 31,
----------------- -----------------------
1996 1995 1996 1995 1994
----- ------- ----- ---- ----
(UNAUDITED)
Current:
Federal................................ $ 800 $ 919 $ 411 $147 $191
State.................................. 182 217 95 27 50
----- ------- ---- ---- ----
982 1,136 506 174 241
----- ------- ---- ---- ----
Deferred:
Federal................................ (611) (854) (223) 3 54
State.................................. (122) (184) (49) (1) 31
----- ------- ---- ---- ----
(733) (1,038) (272) 2 85
----- ------- ---- ---- ----
$ 249 $ 98 $ 234 $176 $326
===== ======= ==== ==== ====
The balance sheet classification of the net deferred tax asset (liability)
is as follows:
JANUARY 31,
OCTOBER 31, -------------------
1996 1996 1995
----------- ------- -------
(UNAUDITED)
Non-current deferred asset........................... $ 792 $ 638 $ 518
Current deferred liability........................... (721) (1,300) (1,452)
------- ------- -------
$ 71 $ (662) $ (934)
======= ======= =======
The deferred tax assets (liabilities) are comprised of the following:
JANUARY 31,
OCTOBER 31, -------------------
1996 1996 1995
----------- ------- -------
(UNAUDITED)
Unbilled receivables................................. $(1,169) $(1,645) $(1,913)
Accrued compensation and benefits.................... 418 301 392
Deferred compensation................................ 511 402 356
Depreciation......................................... 405 359 303
Retirement plan...................................... (159) (138) (175)
State income taxes................................... 30 60 69
Other................................................ 35 (1) 34
------- ------- -------
$ 71 $ (662) $ (934)
======= ======= =======
F-14
74
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the statutory federal income tax rate to the Company's
effective tax rate follows:
NINE MONTHS YEAR ENDED JANUARY
ENDED 31,
OCTOBER 31, -------------------
1996 1996 1995 1994
----------- --- --- ---
(UNAUDITED)
Amount computed at statutory rate........................... 34% 34% 34% 34%
State income taxes, net of federal tax benefit.............. 5 5 5 5
Non-deductible meals and entertainment...................... 4 5 7 1
Research and development tax credit......................... (2) (4) (5) (2)
Revision of prior years' tax estimates...................... (5) (1) (4)
Other....................................................... 2 (2) 2
--- --- --- ---
36% 41% 35% 40%
=== === === ===
NOTE 7 -- COMMITMENTS
The Company has committed to pay minimum rentals under leases for office
facilities and equipment at January 31, 1996, as follows:
OPERATING
FISCAL YEAR LEASES
--------------------------------------------------------- ---------
1997..................................................... $ 1,411
1998..................................................... 826
1999..................................................... 765
2000..................................................... 714
2001..................................................... 570
Thereafter............................................... 1,232
------
Total minimum payments................................... $ 5,518
======
Rental expense for nine months ended October 31, 1996 and October 31, 1995
was $1,549 and $2,145, respectively, and rental expense for fiscal years 1996,
1995, and 1994 was $2,875, $2,968, and $3,112, respectively.
NOTE 8 -- COMMON STOCK
The Company has two classes of Common Stock, Class A and Class B
(collectively, "Common Stock"). The holders of Common Stock are entitled to one
vote for each share held of record on all matters submitted to a vote of the
holders of Common Stock. Holders of Common Stock are entitled to receive ratably
such dividends as may be declared by the Board of Directors out of funds legally
available therefor.
As of October 31, 1996, there were no shares of Class A Common Stock
outstanding. Upon the closing of the Offering, 20% of the outstanding shares of
Class B Common Stock will automatically convert into shares of Class A Common
Stock.
The Class B Common Stock consists of five series, divided evenly among each
such series. Upon the closing of the Offering, all shares of the first series
will automatically convert into shares of Class A Common Stock. Upon the annual
anniversary of the closing of the Offering, the next series will automatically
convert into shares of Class A Common Stock. Accordingly, on the fourth
anniversary of the closing of the Offering, all shares of Class B Common Stock
will have converted into shares of Class A Common Stock.
F-15
75
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- SUBSEQUENT EVENTS (UNAUDITED)
During November 1996, 56,165 shares of Class B Common Stock were
repurchased from 19 stockholders at a purchase price of $6.48 per share.
Officers and directors of the Company and the company-directed ESOP were
ineligible to participate in such repurchase.
Effective January 31, 1997, the Company entered into a retirement agreement
with one of its officers and directors. Pursuant to the retirement agreement, on
January 31, 1997, the Company repurchased 23,392 shares of Class B Common Stock
from the former employee at a price of $6.48 per share. In addition, the Company
agreed to repurchase 120,000 shares of Common Stock from the former employee at
a price of $8.33 per share, subject to adjustment if the closing of the Offering
does not occur during 1997. The Company is obligated to repurchase such shares
within 30 days of the closing of the Offering, subject to certain conditions.
During February 1997, the Company's 1996 Option Plan was amended to provide
for the grant of incentive stock options and the issuance of up to 500,000
shares of Class A Common Stock following the effective date of the Offering.
During February 1997, the Company established the 1997 Outside Directors
Stock Option Plan (the "Directors Plan"), the 1997 Employee Stock Purchase Plan
(the "Purchase Plan"), and the Jaycor Networks, Inc. 1997 Stock Option Plan (the
"JNI Plan").
A total of 75,000 shares of Class A Common Stock have been reserved for
issuance under the Directors Plan. Prior to the effective date of this offering,
no options have been granted under the Directors Plan. The Directors Plan
provides for automatic grants of non-qualified stock options to certain
directors of the Company who are not employees of the Company ("Outside
Directors"). Under the Directors Plan, each Outside Director elected or
appointed as a director following the effective date of this offering will
automatically be granted an option to purchase 10,000 shares of Class A Common
Stock on the date of his or her initial election or appointment. In addition,
each Outside Director will thereafter automatically be granted an option to
purchase up to 3,000 shares of Class A Common Stock following each annual
meeting of the Company's stockholders at which such Outside Director is
re-elected. The exercise price of all such options will be equal to the fair
market value of the Class A Common Stock on the date of grant. Initial options
granted under the Directors Plan generally vest over a four year period, and
annual options generally vest in full four years from the date of grant. All
such options must be exercised within ten years from the date of grant.
A total of 200,000 shares of the Company's Class A Common Stock have been
reserved for issuance under the Purchase Plan. The Purchase Plan permits
eligible employees to purchase shares of Class A Common Stock at a fifteen
percent (15%) discount through payroll deductions during sequential 24-month
offering periods. Each such offering period is divided into four consecutive
six-month purchase periods. The price at which shares are purchased under the
Purchase Plan for such offering period is equal to 85% of the lesser of the fair
market value of the Class A Common Stock on the first day of such offering
period or the last day of the purchase period of such offering period. The
initial offering period will commence on the effective date of the Offering.
JNI, a wholly owned subsidiary of the Company, has adopted the JNI Plan
which provides for the grant to employees of JNI of non-qualified stock options
to purchase shares of common stock of JNI. For a nine-year period following the
date of grant, such options are only exercisable in the event that JNI undergoes
a "change in control" (generally defined as a sale of assets, merger or public
offering of equity securities). Following such nine-year period, but prior to
the termination of such option (the options terminate ten years from the date of
grant), the option may be exercised, but, in such event, JNI has a right to
repurchase such shares at the greater of the exercise price or the fair market
value of such shares. All options are exercisable at the fair market value on
the date of grant of the common stock of JNI. In the event that an optionee
under the JNI Plan exercises an option to purchase shares of the Company's
Common Stock granted subsequent to the
F-16
76
JAYMARK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
adoption of the JNI Plan under one of the Company's stock option plans, all
options granted under the JNI Plan terminate immediately. Similarly, in the
event that an optionee under the JNI Plan exercises an option granted under the
JNI Plan, all options granted subsequent to the adoption of the JNI Plan under
the Company's existing stock option plans terminate immediately. Options granted
under the JNI Plan are subject to individual vesting schedules, but must vest at
a rate of not less than 20% annually. In the event of a change of control of
JNI, the vesting of such options accelerates as follows: (i) 25% if the change
of control occurs within one year of the date of grant; (ii) 33 1/3% if the
change in control occurs within two years of the date of grant; (iii) 75% if the
change of control occurs within three years of the date of grant; and (iv) 100%
if the change of control occurs more than three years following the date of
grant.
F-17
77
JAYCOR DEVELOPS DUAL-USE TECHNOLOGIES WITH COMMERCIAL OPPORTUNITIES
[Picture of two individuals wearing hardhats standing and kneeling,
respectively, in front of two luggage containers. A box labelled "explosives"
sits between the two luggage containers, and an airplane flies overhead. The
luggage container in the left displays damage from an internal explosion, while
the luggage container on the right, labelled "Jaycor," appears undamaged.]
BOMB-RESISTANT LUGGAGE CONTAINER
[Picture of an automobile passing over the [Picture illustrating an artist's rendition of an
Company's Auto-Arrestor, which is spread across ultrasound image of a handgun.]
a highway. A spark appears underneath the ACOUSTIC IMAGING DEVICE
automobile.]
AUTO-ARRESTOR
[Picture of a pepper spray gun and three
spherical gel balls.]
[Picture of a Jeep equipped with horn antennas [Picture of an electrical projectile attached to
for the detection of buried land mines.] a piece of clothing.]
GROUND PENETRATING MINE RADAR NON-LETHAL PROJECTILES
78
[JAYMARK LOGO]
[Jaycor Logo] [Jaycor Networks, Inc. Logo]
79
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all costs and expenses payable by the
Registrant in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All amounts shown
are estimates except the Securities and Exchange Commission registration fee and
the NASD filing fee.
Securities and Exchange Commission registration fee....... $ 6,343
NASD filing fee........................................... 2,593
Nasdaq National Market fee................................ 20,800
Accounting fees and expenses.............................. 125,000
Legal fees and expenses................................... 250,000
Printing and engraving expenses........................... 120,000
Transfer agent and registrar fees......................... 6,000
Blue Sky fees and expenses................................ 15,000
Underwriter's expense allowance........................... 250,000
Directors' and Officers' Insurance........................ 100,000
Miscellaneous expenses.................................... 54,264
--------
Total................................................ $950,000
========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law permits indemnification
of officers, directors and other corporate agents under certain circumstances
and subject to certain limitations. The Registrant's Restated Certificate of
Incorporation and Bylaws provide that the Registrant shall indemnify its
directors, officers, employees and agents to the full extent permitted by
Delaware General Corporation Law, including the circumstances in which
indemnification is otherwise discretionary under Delaware law. In addition, the
Registrant intends to enter into separate indemnity agreements with its
directors and executive officers that require the Registrant, among other
things, to indemnify them against certain liabilities which may arise by reason
of their status or service (other than liabilities arising from willful
misconduct of a culpable nature) and to maintain directors' and officers'
liability insurance, if available on reasonable terms.
These indemnification provisions and the indemnity agreements to be entered
into between the Registrant and its directors and executive officers may be
sufficiently broad to permit indemnification of the Registrant's directors and
executive officers for liabilities (including reimbursement of expenses
incurred) arising under the Securities Act.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act, or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since January 31, 1994, the Registrant has issued and sold the following
unregistered securities:
(a) Issuances of Shares of Common Stock.
On October 24, 1996, pursuant to the terms of an Agreement for Purchase and
Sale of Assets by and among the Company, Long John Productions, Inc. ("LJPI")
and John Biffar ("Biffar"), the registrant issued and sold a total of 5,464
shares of Class B Common Stock to LJPI in Biffar's name, as partial
consideration for the acquisition of certain assets in October 1995.
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On February 28, 1997, pursuant to the terms of an Employment Agreement by
and between the Company and Robert M. Howell ("Howell"), the registrant issued
and sold a total of 2,149 shares of Class B Common Stock to Howell as partial
consideration for services rendered thereunder.
On January 31, 1997, the registrant reorganized into a holding company
structure under the name Jaycor Emerging Technologies, Inc., and issued
1,859,492 shares of Class B Common Stock in an exchange pursuant to an Agreement
and Plan of Merger.
(b) Option Issuances to, and Exercises by, Employees and Directors.
From January 31, 1994 to the present, the registrant issued options to
purchase a total of 578,000 shares of Class B Common Stock at exercise prices
ranging from $1.95 to $6.48 per share to 34 employees and three non-employee
directors. No consideration was paid to the registrant by any recipient of any
of the foregoing options for the grant of any such options. From January 31,
1994 to the present, the registrant issued a total of 75,000 shares of Class B
Common Stock to two employees upon exercise of stock options at an exercise
price of $4.03 per share.
There were no underwriters employed in connection with any of the
transactions set forth in Item 15.
The issuances described in Items 15(a) were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering. In
addition, the issuances described in Item 15(b) were deemed exempt from
registration under the Securities Act in reliance on Rule 701 promulgated
thereunder as transactions pursuant to compensatory benefit plans and contracts
relating to compensation. The recipients of securities in each such transaction
represented their intention to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof and
appropriate legends were affixed to the share certificates and other instruments
issued in such transactions. All recipients either received adequate information
about the Registrant or had access, through employment or other relationships,
to such information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement.
2.1+* Asset Purchase Agreement dated March 4, 1996 by and between the Company and
Howell Intelligence Service.
2.2+ Agreement for Purchase and Sale of Assets dated October 24, 1995 by and among the
Company, Long John Productions, Inc. and John Biffar.
2.3+ Agreement for Purchase and Sale of Assets dated March 22, 1996 by and between the
Company and Robert L. Ritter.
2.4 Agreement and Plan of Reorganization dated January 30, 1997 by and among Jaycor,
a California corporation, Jaycor Acquisition Company, a California corporation,
and Jaycor Emerging Technologies, Inc., a California corporation.
2.5* Form of Agreement and Plan of Merger by and between Jaycor Emerging Technologies,
Inc., a California corporation, and Jaymark, Inc., a Delaware corporation.
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1* Specimen Class A Common Stock Certificate.
4.2* Specimen Class B Common Stock Certificates.
5.1* Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1 Form of Indemnity Agreement.
10.2 1980 Stock Option Plan and forms of agreements thereunder.
10.3 1990 Incentive Stock Option Plan and form of agreement thereunder.
10.4 1991 Non-Qualified Stock Option Plan and form of agreement thereunder.
10.5 1996 Stock Option Plan, as amended, and forms of agreement thereunder.
II-2
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NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------
10.6 1997 Outside Directors Stock Option Plan and forms of agreement thereunder.
10.7* Jaycor Networks, Inc. 1997 Stock Option Plan and forms of agreement thereunder.
10.8 Employee Stock Ownership Plan, as amended.
10.9 1997 Employee Stock Purchase Plan and form of agreement thereunder.
10.10 401(k) Plan dated October 22, 1993, as amended.
10.11 Money Purchase Pension Plan, dated October 22, 1993, as amended.
10.12 Credit Agreement dated October 1, 1996 by and between the Company and Wells Fargo
Bank.
10.13 Assignment, Modification and Assumption Agreement and Consent dated February 3,
1993 by and among the Company, Union Bank and Westerra Pacific Associates, and
the underlying Building Loan Agreement, Note, Deed of Trust, Security Agreement
and related modification agreements.
10.14 Lease Agreement dated December 31, 1994 by and between the Company and Loup
Management Company (Colorado Springs, Colorado).
10.15 Lease Agreement dated April 17, 1996 by and between the Company and APA
Properties No. 6,
10.16 Deed of Lease dated December 6, 1995 by and between the Company and Advent Realty
Limited Partnership II (McLean, Virginia).
10.17 Retirement Agreement dated January 31, 1997 by and between the Company and Robert
P. Sullivan, as amended.
10.18 Form of Warrant Agreement by and between the Company and Brean Murray & Co., Inc.
10.19 Deferred Compensation Agreement dated February 25, 1997 by and between the
Company and Eric P. Wenaas.
10.20 Forms of Deferred Compensation Plan Agreement.
11.1 Computation of earnings per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP (See page II-6).
23.2* Consent of Gray Cary Ware & Freidenrich, a Professional Corporation (included in
Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
- ---------------
* To be filed by amendment.
+ Exhibits and schedules to this exhibit not filed herewith are identified
therein. Upon request, the registrant will furnish supplementally to the
Commission any such omitted exhibit or schedule.
(b) Financial Statement Schedules
All required information is set forth in the Consolidated Financial
Statements included in the Prospectus constituting part of this Registration
Statement.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referenced in Item 14 of this Registration
Statement, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of
II-3
82
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 whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Registrant pursuant to Rule 424 (b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each posteffective 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.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on the 7th day of March, 1997.
JAYMARK, INC.
By: /s/ ERIC P. WENAAS
------------------------------------
Eric P. Wenaas
President and Chief Executive
Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Eric P. Wenaas and P. Randy Johnson, or
either of them, as his attorney-in-fact, each with full power of substitution
for him in any and all capacities, to sign any and all amendments to this
Registration Statement, including post-effective amendments and any and all new
registration statements filed pursuant to Rule 462 under the Securities Act of
1933 in connection with or related to the offering contemplated by this
Registration Statement, as amended, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each said attorney-in-fact
or his substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------ -------------------
/s/ ERIC P. WENAAS President, Chief Executive March 7, 1997
- ------------------------------------------ Officer, Chairman of the Board
Eric P. Wenaas and Director (Principal
Executive Officer)
/s/ P. RANDY JOHNSON Vice President, Finance and March 7, 1997
- ------------------------------------------ Chief Financial Officer
P. Randy Johnson (Principal Financial and
Accounting Officer)
/s/ JAMES H. STUHMILLER Director March 7, 1997
- ------------------------------------------
James H. Stuhmiller
/s/ TERRY M. FLANAGAN Director March 7, 1997
- ------------------------------------------
Terry M. Flanagan
/s/ JOHN C. STISKA Director March 7, 1997
- ------------------------------------------
John C. Stiska
/s/ JOHN S. FOSTER, JR. Director March 7, 1997
- ------------------------------------------
John S. Foster, Jr.
/s/ DAVID R. HEEBNER Director March 7, 1997
- ------------------------------------------
David R. Heebner
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84
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 8, 1996, relating to
the financial statements of Jaymark, Inc., which appears in such Prospectus. We
also consent to the references to us under the headings "Experts" and "Selected
Consolidated Financial Data" in such Prospectus. However, it should be noted
that Price Waterhouse LLP has not prepared or certified such "Selected
Consolidated Financial Data."
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
San Diego, California
March 6, 1997
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85
EXHIBIT INDEX
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------
1.1 Form of Underwriting Agreement.
2.1+* Asset Purchase Agreement dated March 4, 1996 by and between the Company and
Howell Intelligence Service.
2.2+ Agreement for Purchase and Sale of Assets dated October 24, 1995 by and among the
Company, Long John Productions, Inc. and John Biffar.
2.3+ Agreement for Purchase and Sale of Assets dated March 22, 1996 by and between the
Company and Robert L. Ritter.
2.4 Agreement and Plan of Reorganization dated January 30, 1997 by and among Jaycor,
a California corporation, Jaycor Acquisition Company, a California corporation,
and Jaycor Emerging Technologies, Inc., a California corporation.
2.5* Form of Agreement and Plan of Merger by and between Jaycor Emerging Technologies,
Inc., a California corporation, and Jaymark, Inc., a Delaware corporation.
3.1 Certificate of Incorporation of the Company.
3.2 Bylaws of the Company.
4.1* Specimen Class A Common Stock Certificate.
4.2* Specimen Class B Common Stock Certificates.
5.1* Opinion of Gray Cary Ware & Freidenrich, A Professional Corporation.
10.1 Form of Indemnity Agreement.
10.2 1980 Stock Option Plan and forms of agreements thereunder.
10.3 1990 Incentive Stock Option Plan and form of agreement thereunder.
10.4 1991 Non-Qualified Stock Option Plan and form of agreement thereunder.
10.5 1996 Stock Option Plan, as amended, and forms of agreement thereunder.
10.6 1997 Outside Directors Stock Option Plan and forms of agreement thereunder.
10.7* Jaycor Networks, Inc. 1997 Stock Option Plan and forms of agreement thereunder.
10.8 Employee Stock Ownership Plan, as amended.
10.9 1997 Employee Stock Purchase Plan and form of agreement thereunder.
10.10 401(k) Plan dated October 22, 1993, as amended.
10.11 Money Purchase Pension Plan, dated October 22, 1993, as amended.
10.12 Credit Agreement dated October 1, 1996 by and between the Company and Wells Fargo
Bank.
10.13 Assignment, Modification and Assumption Agreement and Consent dated February 3,
1993 by and among the Company, Union Bank and Westerra Pacific Associates, and
the underlying Building Loan Agreement, Note, Deed of Trust, Security Agreement
and related modification agreements.
10.14 Lease Agreement dated December 31, 1994 by and between the Company and Loup
Management Company (Colorado Springs, Colorado).
10.15 Lease Agreement dated April 17, 1996 by and between the Company and APA
Properties No. 6,
10.16 Deed of Lease dated December 6, 1995 by and between the Company and Advent Realty
Limited Partnership II (McLean, Virginia).
10.17 Retirement Agreement dated January 31, 1997 by and between the Company and Robert
P. Sullivan, as amended.
10.18 Form of Warrant Agreement by and between the Company and Brean Murray & Co., Inc.
10.19 Deferred Compensation Agreement dated February 25, 1997 by and between the
Company and Eric P. Wenaas.
10.20 Forms of Deferred Compensation Plan Agreement.
11.1 Computation of earnings per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP (See page II-6).
86
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------------------
23.2* Consent of Gray Cary Ware & Freidenrich, a Professional Corporation (included in
Exhibit 5.1).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
- ---------------
* To be filed by amendment.
+ Exhibits and schedules to this exhibit not filed herewith are identified
therein. Upon request, the registrant will furnish supplementally to the
Commission any such omitted exhibit or schedule.