AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 2001
REGISTRATION NO. 333-69808
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
EXABYTE CORPORATION
(Exact name of Registrant as specified in its charter)
<Table>
DELAWARE 3573 84-0988566
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</Table>
1685 38th Street
Boulder, Colorado 80301
(303) 442-4333
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Stephen F. Smith, Esq.
Vice President, Chief Financial Officer, General Counsel and Secretary
1685 38th Street
Boulder, Colorado 80301
(303) 442-4333
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<Table>
Mark R. Levy James L. Palenchar
Nina Lopez Bartlit Beck Herman Palenchar & Scott
Holland & Hart LLP 1899 Wynkoop Street, Suite 800
555 17th Street, Suite 3200 Denver, CO 80202
Denver, CO 80202 (303) 592-3100
(303) 295-8000
</Table>
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective and certain
other conditions under the Merger Agreement are met or waived.
If the securities being registered on this form are been offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, 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(d) 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. [ ]
NOTICE OF SPECIAL MEETING OF EXABYTE STOCKHOLDERS
Exabyte Corporation
1685 38th Street
Boulder, CO 80301
Notice of Special Meeting of Stockholders
To Be Held on November 9, 2001
Dear Stockholders:
A special meeting of stockholders of Exabyte Corporation will be held on
November 9, 2001, at Exabyte's principal executive office, commencing at 9:00
a.m., for the following purposes:
(1) To consider and vote on a proposal to approve and adopt the Agreement
and Plan of Merger among Exabyte Corporation, Bronco Acquisition,
Inc., Ecrix Corporation, certain lenders and certain investors, dated
as of August 22, 2001, a copy of which is attached as Annex A to the
proxy statement/prospectus accompanying this notice, and to approve
the issuance of Exabyte common stock and preferred stock in
conjunction with the merger;
(2) To consider and vote separately on two proposals to increase the
authorized shares of Exabyte,
A. A proposal to amend Exabyte's Restated Certificate of
Incorporation to increase the authorized common stock to
100,000,000 shares; and
B. A proposal to amend Exabyte's Restated Certificate of
Incorporation to increase the authorized preferred stock to
30,000,000 shares.
(3) To consider and vote upon a proposal to amend Exabyte's Restated
Certificate of Incorporation to effect a reverse split of Exabyte's
outstanding common stock by a ratio of no change to up to one-for-ten
and authorize the Exabyte Board of Directors to determine the exact
ratio within that range; and
(4) To vote upon such other matters as may be properly presented at the
meeting.
After careful consideration, your board of directors has unanimously determined
that the merger, each of the transactions related to the merger and the other
proposals to be presented at the meeting is fair to and in the best interests of
Exabyte and its stockholders. The Exabyte board has unanimously approved and
adopted the merger agreement and related agreements and unanimously recommends
that you vote to approve and adopt all of the above proposals. We urge you to
read the accompanying proxy statement/ prospectus carefully for a description of
the merger agreement, the related agreements and each of the other proposals to
be presented at the special meeting.
Pursuant to Delaware law, holders of Exabyte common stock and preferred stock
are not entitled to appraisal rights in connection with the merger.
Only Exabyte stockholders of record on October 8, 2001 will be entitled to vote
at and receive notice of the special meeting.
By Order of the Board of Directors,
/s/ Stephen F. Smith
Stephen F. Smith
Secretary
Boulder, Colorado
October 12, 2001
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING,
PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE, OR AUTHORIZE THE INDIVIDUALS NAMED ON YOUR PROXY
CARDS TO VOTE YOUR SHARES BY CALLING THE TOLL-FREE TELEPHONE NUMBER OR USING THE
INTERNET AS DESCRIBED IN THE INSTRUCTIONS INCLUDED WITH YOUR PROXY CARD.
STOCKHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE THEIR PROXIES AND VOTE IN
PERSON IF THEY SO DESIRE.
Ecrix Corporation
5525 Central Avenue
Boulder, CO 80301
MERGER WITH EXABYTE CORPORATION
October 12, 2001
Dear Ecrix Corporation stockholder,
Your board of directors and that of Exabyte Corporation, also based in
Boulder, have approved, and our two companies have entered into, a merger
agreement. Subject to the approval of Ecrix and Exabyte stockholders, and the
satisfaction of other conditions, an Exabyte subsidiary will merge into Ecrix,
and Ecrix will become a wholly owned subsidiary of Exabyte.
The merger agreement provides that a total of up to 10 million shares of
Exabyte common stock will be issued to Ecrix stockholders. Additionally, certain
investors of Ecrix will invest $9.65 million in a new series H Exabyte preferred
stock at $1.00 per share at the time of closing. This preferred stock will be
convertible into Exabyte common stock on a share-for-share basis. The effect of
this will be that Ecrix stockholders will end up owning approximately 44.5% of
Exabyte's outstanding voting stock following the merger. In addition, two other
Ecrix directors and I will become part of a seven member Exabyte Board.
Here is how the Exabyte shares will be issued as a result of the merger,
assuming that an up to 1:10 reverse stock split is approved by Exabyte
stockholders and effected:
<Table>
<Caption>
NUMBER OF EXABYTE COMMON SHARES
YOU WILL GET AS A RESULT OF THE MERGER
-----------------------------------------------
FOR EACH SHARE YOU HOLD OF: WITHOUT A STOCK SPLIT WITH A 1:10 STOCK SPLIT
-----------------------------------------------
Ecrix common stock *0.16168 0.016168
Ecrix series A preferred stock 0.00952 0.000952
Ecrix series B preferred stock 0.02371 0.002371
Ecrix series C preferred stock 0.04048 0.004048
Ecrix series D preferred stock 0.04857 0.004857
Ecrix series D-1 preferred stock 0.82400 0.082400
</Table>
---------------
* On the assumption that only 6,185,127 shares of common stock are outstanding
at the effective time of the merger.
After careful consideration, your board of directors has unanimously
determined, with one director absent, that the merger is advisable and is fair
to, and in the best interests of, Ecrix and its stockholders and has approved
the merger agreement.
Approval of the merger by Ecrix stockholders requires the affirmative vote
of at least:
- a majority of the outstanding shares of Ecrix common stock and all
series of preferred stock voting together as a single class,
- two-thirds of all shares of all series of preferred stock voting
together as a single class, and
- two-thirds of the shares of Ecrix's series D-1 preferred stock, voting
as a separate class.
The votes necessary to approve the merger are held by persons and entities that
sit on or are represented on your board of directors or are board observers.
During the deliberations leading to the approval of the merger agreement by the
board, these persons indicated their intention to vote for the merger, although
no contract or arrangement obligates them to do so. We anticipate that they will
sign written consents to approve the merger upon the effectiveness of the
registration statement for Exabyte shares of which the accompanying prospectus
is a part. As a result, we have decided to dispense with the holding of a
stockholders' meeting. WE ARE NOT SOLICITING YOUR PROXIES, AND WE ASK THAT NO
ECRIX STOCKHOLDER SEND US A
PROXY. If for any reason, we do not get written consents for the merger as
described above, we will solicit some additional stockholders to give their
written consent.
The enclosed proxy statement/prospectus provides you with detailed
information about the proposed merger and about Exabyte. We encourage you to
read this entire document carefully. IN PARTICULAR, YOU SHOULD CONSIDER
CAREFULLY THE DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON
PAGE 1-24 OF THE PROXY STATEMENT/PROSPECTUS. You may also obtain information
about Exabyte from documents that they have filed with the Securities and
Exchange Commission.
Thank you for your attention. Please call me if you have any questions.
Sincerely,
Juan A. Rodriguez
Chief Executive Officer
and Chairman of the Board
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
PROSPECTUS
PROXY STATEMENT/PROSPECTUS
This proxy statement/prospectus includes the prospectus of Exabyte
Corporation with respect to the issuance by Exabyte of up to 10 million shares
of its common stock to stockholders of Ecrix Corporation in connection with the
agreement and plan of merger among Exabyte, Bronco Acquisition, Inc., a wholly-
owned subsidiary of Exabyte, Ecrix, certain investors and certain lenders. The
merger agreement provides for the merger of Bronco Acquisition, Inc. with and
into Ecrix. As a result of the merger, Ecrix will become a wholly-owned
subsidiary of Exabyte.
This proxy statement/prospectus also includes the proxy statement of
Exabyte and is being furnished to Exabyte stockholders in connection with the
special meeting of Exabyte stockholders to be held on November 9, 2001.
Exabyte's common stock is listed on the Nasdaq National Market under the
symbol "EXBT."
INVESTING IN EXABYTE'S SECURITIES INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 1-24.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities to be issued under this
prospectus or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this document is [________], 2001.
TABLE OF CONTENTS
<Table>
CHAPTER ONE -- SUMMARY...................................... 1-1
QUESTIONS AND ANSWERS ABOUT THE MERGER.................... 1-1
OVERVIEW OF THE TRANSACTIONS.............................. 1-8
The Companies.......................................... 1-8
The Merger............................................. 1-8
Bridge Loan............................................ 1-8
Sale of Series H Preferred Stock by Exabyte............ 1-9
Reasons for the Merger................................. 1-9
Recommendations of the Boards of Directors and Opinion
of Financial Advisors................................. 1-10
Dissenters' Rights..................................... 1-10
The Special Meeting of Exabyte Stockholders............ 1-10
Board of Directors and Management Following the
Merger................................................ 1-11
Treatment of Stock Options and Warrants................ 1-11
Tax Considerations..................................... 1-11
Accounting Treatment of the Merger..................... 1-11
No Solicitation of Ecrix Stockholders.................. 1-11
Conditions to the Merger............................... 1-12
Termination............................................ 1-12
Termination Fee........................................ 1-12
Nasdaq Listing......................................... 1-13
Regulatory Requirements................................ 1-13
Comparison of Rights Between Exabyte and Ecrix......... 1-13
Description of Exabyte Capital Stock................... 1-13
Market Prices for Exabyte Common Stock................. 1-13
Interests of Directors and Executive Officers in the
Merger................................................ 1-13
EXABYTE SELECTED CONSOLIDATED FINANCIAL DATA.............. 1-14
ECRIX SELECTED FINANCIAL DATA............................. 1-16
EXABYTE AND ECRIX UNAUDITED PRO FORMA COMBINED FINANCIAL
DATA................................................... 1-17
EXABYTE CORPORATION NOTES TO PRO FORMA UNAUDITED COMBINED
CONDENSED FINANCIAL INFORMATION........................ 1-21
COMPARATIVE PER SHARE DATA................................ 1-22
RISK FACTORS.............................................. 1-24
GENERAL INFORMATION ABOUT THESE RISK FACTORS AND OUR
COMBINED COMPANY...................................... 1-24
RISKS RELATED TO THE MERGER............................ 1-24
</Table>
i
<Table>
RISKS RELATED TO EXABYTE'S AND THE COMBINED COMPANY'S
BUSINESS............................................... 1-27
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS............ 1-46
CHAPTER TWO -- INFORMATION ABOUT THE STOCKHOLDER MEETING.... 2-1
ACTION BY ECRIX STOCKHOLDERS BY WRITTEN CONSENT IN LIEU OF
A MEETING.............................................. 2-1
THE EXABYTE SPECIAL MEETING............................... 2-1
Date, Time and Place of the Exabyte Special Meeting.... 2-1
Purpose of the Meeting................................. 2-1
Record Date............................................ 2-2
Voting Rights.......................................... 2-2
Quorum................................................. 2-2
Required Vote.......................................... 2-2
Solicitation of Proxies................................ 2-3
CHAPTER THREE -- THE MERGER TRANSACTIONS.................... 3-1
GENERAL................................................... 3-1
BACKGROUND OF THE MERGER.................................. 3-1
EXABYTE'S REASONS FOR THE MERGER.......................... 3-10
Improved Competitive Position.......................... 3-10
Enhanced Liquidity and Access to Capital............... 3-11
FACTORS CONSIDERED BY AND RECOMMENDATION OF EXABYTE'S
BOARD OF DIRECTORS..................................... 3-12
OPINION OF EXABYTE'S FINANCIAL ADVISOR, BROADVIEW
INTERNATIONAL, LLC..................................... 3-14
ECRIX'S REASONS FOR THE MERGER AND RECOMMENDATION OF
ECRIX'S BOARD OF DIRECTORS............................. 3-21
OPINION OF ECRIX'S FINANCIAL ADVISOR THE WALLACH COMPANY/
MCDONALD INVESTMENTS INC............................... 3-22
DIRECTORS AND EXECUTIVE OFFICERS OF EXABYTE AFTER THE
MERGER................................................. 3-26
Exabyte Board of Directors after the Merger............ 3-26
Executive Officers of Exabyte after the Merger......... 3-26
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE
MERGER................................................. 3-27
Board of Directors of Exabyte.......................... 3-27
Executive Officers of Exabyte.......................... 3-27
Board of Directors of Ecrix............................ 3-27
Executive Officers of Ecrix............................ 3-30
MATERIAL CONTACTS AMONG EXABYTE AND ECRIX................. 3-30
THE MERGER AGREEMENT...................................... 3-30
</Table>
ii
<Table>
Structure of the Merger............................................................................... 3-31
Timing of Closing..................................................................................... 3-31
Merger Consideration.................................................................................. 3-31
Treatment of Ecrix Stock Options and Warrants......................................................... 3-32
Exchange of Shares; Fractional Shares................................................................. 3-32
Exabyte Board and Related Matters..................................................................... 3-32
Bridge Loan........................................................................................... 3-33
Sale of Series H Convertible Preferred Stock.......................................................... 3-33
Representations and Warranties........................................................................ 3-33
Conditions to Completion of the Merger................................................................ 3-34
Certain Covenants..................................................................................... 3-35
Termination, Amendment and Waiver..................................................................... 3-37
General Provisions.................................................................................... 3-38
Amendment to Shareholder Rights Plan.................................................................. 3-38
RESALE OF EXABYTE SHARES AFTER THE MERGER................................................................ 3-39
THE BRIDGE LOAN.......................................................................................... 3-39
Initial Loan Amounts and Lenders...................................................................... 3-39
Contingent Loans...................................................................................... 3-40
Security.............................................................................................. 3-40
Notes................................................................................................. 3-40
Representations and Warranties........................................................................ 3-41
Covenants............................................................................................. 3-41
Events of Default..................................................................................... 3-42
Subordination and Intercreditor Agreement............................................................. 3-42
Third Amendment to Loan and Security Agreement, Waiver and Consent.................................... 3-43
SALE OF EXABYTE SERIES H PREFERRED STOCK................................................................. 3-43
General............................................................................................... 3-43
Description of Series H Preferred Stock............................................................... 3-44
Registration Rights of Series H Investors............................................................. 3-45
ACCOUNTING TREATMENT OF THE MERGER....................................................................... 3-46
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES................................................... 3-46
APPRAISAL RIGHTS FOR STOCKHOLDERS........................................................................ 3-48
DESCRIPTION OF EXABYTE CAPITAL STOCK..................................................................... 3-50
MARKET PRICE AND DIVIDEND INFORMATION.................................................................... 3-53
</Table>
iii
<Table>
CHAPTER FOUR -- DESCRIPTION OF ECRIX........................ 4-1
DESCRIPTION OF ECRIX'S BUSINESS........................... 4-1
DESCRIPTION OF ECRIX CAPITAL STOCK........................ 4-7
ECRIX MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 4-9
Overview............................................... 4-9
Quarterly Results of Operations........................ 4-11
Results of Operations.................................. 4-13
Comparison of the Three Months Ended May 31, 2000 and
2001.................................................. 4-13
Comparison of the Years Ended February 28, 1999,
February 29, 2000 and February 28, 2001............... 4-14
Income Taxes........................................... 4-15
Liquidity and Capital Resources........................ 4-15
Quantitative and Qualitative Disclosures about Market
Risk.................................................. 4-16
Recent Accounting Pronouncements....................... 4-17
ECRIX OFFICERS AND DIRECTORS.............................. 4-18
COMPENSATION OF ECRIX OFFICERS AND DIRECTORS.............. 4-19
CHAPTER FIVE -- DESCRIPTION OF EXABYTE...................... 5-1
INFORMATION REGARDING EXABYTE'S BUSINESS.................. 5-1
Description of Exabyte................................. 5-1
Recent Developments.................................... 5-1
Information Regarding Our Products And Services........ 5-2
Information Regarding Our Customers and How We Market
Our Products.......................................... 5-7
Information Regarding Our Competition.................. 5-9
Information Regarding Our Manufacturing Processes and
Partners.............................................. 5-10
Information Regarding Exabyte's Research And
Development Efforts................................... 5-11
Information Regarding Our Patents and Proprietary
Information........................................... 5-12
Information Regarding the Status of Our Backlog........ 5-12
Information Regarding Foreign Exchange And Import
Restrictions.......................................... 5-12
Employees.............................................. 5-13
Properties............................................. 5-14
Legal Proceedings...................................... 5-14
EXABYTE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................... 5-15
Overview and Recent Developments....................... 5-15
Quarterly Results of Operations (Unaudited)............ 5-16
Results of Operations.................................. 5-20
</Table>
iv
<Table>
Six Months Ended June 30, 2001, Compared to Six Months
Ended July 1, 2000.................................... 5-22
Fiscal Year 2000 Compared to 1999...................... 5-23
Fiscal Year 1999 Compared to 1998...................... 5-26
Liquidity and Capital Resources........................ 5-27
Restructuring Charges.................................. 5-29
Quantitative and Qualitative Disclosures about Market
Risk.................................................. 5-30
EXABYTE OFFICERS AND DIRECTORS............................ 5-32
COMPENSATION OF EXABYTE OFFICERS AND DIRECTORS............ 5-34
Compensation of Directors.............................. 5-34
Summary of Compensation................................ 5-35
Officer Severance Program.............................. 5-35
Incentive Stock Plan................................... 5-36
Stock Option Grants.................................... 5-36
Option Exercises and Year-End Holdings................. 5-37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT............................................. 5-38
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 5-41
CHAPTER SIX -- COMPARISON OF RIGHTS BETWEEN ECRIX AND
EXABYTE................................................ 6-1
CHAPTER SEVEN -- ADDITIONAL EXABYTE MEETING PROPOSALS....... 7-1
EXABYTE'S AMENDMENTS TO RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE AUTHORIZED CAPITAL........... 7-1
Amendments to Increase Authorized Stock................ 7-1
Outstanding and Reserved Common Stock.................. 7-1
Outstanding and Reserved Preferred Stock............... 7-2
Reasons for Increase in Authorized Stock............... 7-2
REVERSE SPLIT OF EXABYTE'S OUTSTANDING COMMON STOCK....... 7-3
CHAPTER EIGHT -- CERTAIN ADDITIONAL INFORMATION............. 8-1
STOCKHOLDER PROPOSALS..................................... 8-1
EXPERTS................................................... 8-1
LEGAL MATTERS............................................. 8-1
WHERE YOU CAN FIND MORE INFORMATION....................... 8-1
HISTORICAL FINANCIAL INFORMATION............................ F-1
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................ F-1
Exabyte Financial Statements........................... F-2
Report of Independent Accountants for Exabyte.......... F-2
Ecrix Financial Statements............................. F-26
Report of Independent Accountants for Ecrix............ F-26
</Table>
v
APPENDICES
<Table>
A. Agreement and Plan of Merger by and among Exabyte Corporation, Bronco
Acquisition, Inc., Ecrix Corporation, certain Investors and certain Lenders,
dated as of August 22, 2001
Exhibit 7.10 Affiliate Letter
Exhibit 7.16 Lock Up Agreement
B. Fairness Opinion of Broadview International, LLC
C. Fairness Opinion of The Wallach Company/McDonald Investments, Inc.
D. Form of Amendment to Restated Certificate of Incorporation (Increase in
Authorized Capital)
E. Form of Amendment to Restated Certificate of Incorporation (Reverse Split)
F. Section 262 of the Delaware General Corporation Law (Delaware Appraisal Rights
Statute)
</Table>
This prospectus incorporates important business and financial information
about Exabyte that is not included in or delivered with this prospectus. This
information is available without charge to Exabyte and Ecrix stockholders upon
written or oral request. Exabyte and Ecrix stockholders should direct such
requests to:
Chief Financial Officer and Corporate Secretary
Exabyte Corporation
1685 38th Street
Boulder, CO 80301
(303) 442-4333
To obtain timely delivery, Exabyte and Ecrix stockholders must request the
information no later than five business days before November 9, 2001.
vi
CHAPTER ONE
CHAPTER ONE -- SUMMARY
Unless otherwise expressly stated, all references to the number of shares
of Exabyte common stock do not give effect to an up to 1:10 reverse split of
outstanding Exabyte common stock proposed for approval by Exabyte stockholders
at the special meeting. In addition, unless the context indicates otherwise, use
of the terms "we" or "us" in this document are intended to refer to Exabyte
Corporation and its consolidated subsidiaries.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: Why are Exabyte and Ecrix proposing the merger?
A: The board of directors of Exabyte believe that the merger will improve
Exabyte's ability to compete in the data storage industry and enhance Exabyte's
liquidity and access to capital. The long-term survival of Exabyte without the
merger or a similar transaction is uncertain.
Ecrix's board of directors believes that the merger will:
- enhance the prospects for Ecrix's long-term viability;
- permit Ecrix stockholders to maximize the value of their investment;
- allow Ecrix stockholders to receive freely-tradable common stock, a
medium of investment that is considerably more liquid than their current
investment in Ecrix;
- put Ecrix in a position to benefit from the broader marketing and
distribution system that Exabyte has, thus giving Ecrix a greater
potential for growth;
- enable Ecrix to obtain more favorable manufacturing and supply
arrangements and will enable the combined entity to realize significant
cost savings and
- put Ecrix in a position to benefit from Exabyte's planned growth
strategy.
The Exabyte and Ecrix boards believe that the combined company will be more
competitive than either company could be independently and that the merger will
enhance stockholder value in the future. For more information see "Background of
the Merger," "Exabyte's Reasons for the Merger," "Factors Considered by and
Recommendation of Exabyte's Board of Directors," and "Ecrix's Reasons for the
Merger and Recommendation of Ecrix's Board of Directors" in Chapter Three of
this document.
Q: Does the Exabyte board of directors recommend that Exabyte stockholders vote
in favor of the merger and in favor of the issuance of Exabyte common stock and
preferred stock in conjunction with the merger?
A: Yes, after careful consideration, the Exabyte board of directors recommends
that Exabyte stockholders vote in favor of the merger and in favor of the
issuance of Exabyte common stock and preferred stock in conjunction with the
merger, as well as each of the other proposals to be presented at the special
meeting.
Q: Does the Ecrix board of directors recommend that Ecrix stockholders vote in
favor of the merger?
A: Yes, after careful consideration, the Ecrix board of directors recommends
that Ecrix stockholders vote in favor of the merger.
1-1
CHAPTER ONE
Q: Are there risks that Exabyte stockholders should consider in deciding
whether to vote in favor of the merger and in favor of the issuance of Exabyte
common stock and preferred stock in conjunction with the merger?
A: Yes. In evaluating the merger and the concurrent issuance of common stock
and preferred stock, Exabyte stockholders should carefully consider the factors
discussed in the section of this Chapter entitled "Risk Factors" beginning on
page 1-24.
Q: Are there risks that Ecrix stockholders should consider in deciding whether
to accept shares of Exabyte stock issuable in the merger?
A: Yes. There are certain risks associated with holding shares of Exabyte common
stock following the merger. Ecrix stockholders should carefully consider the
factors discussed in the section of this Chapter entitled "Risk Factors"
beginning on page 1-24.
Q: What are the effects of the merger on the outstanding shares of Exabyte
common stock?
A: Exabyte stockholders will continue to own shares of Exabyte common stock
after the merger. As a result, following the merger, current Exabyte
stockholders will continue to enjoy all of their current rights as Exabyte
stockholders, but they will own a smaller percentage of a larger company.
Exabyte will issue up to 10 million shares (or if a maximum one-for-ten reverse
stock split is effected prior to the merger, 1 million shares) of its common
stock to Ecrix stockholders in the merger plus 9.65 million shares of Series H
preferred stock (or 965,000 Series H shares if the one-for-ten reverse stock
split is effected prior to the merger) to certain Ecrix stockholders purchasing
shares of Series H preferred stock. Each share of Series H preferred stock will
be convertible into one share of common stock of Exabyte. Shares of common stock
and Series H preferred stock issuable in connection with the merger and the
Series H preferred stock purchase will represent approximately 44.5% of the
voting power and approximately 30% of the common stock to be outstanding after
the merger.
In addition to the merger, at the special meeting, Exabyte stockholders are
being asked to approve an up to 1:10 reverse stock split which would decrease
the number of shares held by each Exabyte stockholder in proportion to the
decrease in the total number of outstanding Exabyte shares. Approval of the
reverse stock split is not a condition of the merger.
Exabyte stockholders are also being asked at the special meeting to approve an
increase in the authorized capital stock of Exabyte. Unless a reverse split or
an increase in the authorized capital stock of Exabyte is effected, we will not
have sufficient authorized capital stock to effect the merger. Even if the
reverse split is effected, the Board may effect the increase in authorized
capital stock, giving Exabyte the ability to issue additional shares of capital
stock in the future.
Q: Why are Exabyte stockholders being asked to approve a reverse split of
outstanding Exabyte common stock?
A: Exabyte believes that the reverse split will enable it to maintain inclusion
of Exabyte common stock on the Nasdaq National Market System. The benefits of
maintaining inclusion on Nasdaq are further described in Chapter Seven of this
document. In addition, it is a condition to Ecrix's obligation to consummate the
merger that Exabyte common stock be listed on the Nasdaq National Market.
Although approval of the reverse split is not a condition to the merger, we
believe that implementing the reverse split, to the extent that the reverse
split enables Exabyte common stock to maintain its Nasdaq National Market
listing, will increase the likelihood that the merger will be completed.
1-2
CHAPTER ONE
Q: What are the effects of the merger on the outstanding shares of Ecrix common
stock and preferred stock?
A: As a result of the merger, all outstanding shares of Ecrix capital stock
will be converted into Exabyte common stock. Ecrix stockholders will receive
shares of Exabyte common stock in exchange for their shares of Ecrix common
stock and Ecrix preferred stock as follows:
<Table>
<Caption>
NUMBER OF EXABYTE COMMON SHARES
YOU WILL GET AS A RESULT OF THE MERGER --
-------------------------------------------
FOR EACH SHARE YOU HOLD OF: WITHOUT STOCK SPLIT WITH 1:10 STOCK SPLIT
-------------------------------------------
Ecrix common stock *0.16168 *0.016168
Ecrix series A preferred stock 0.00952 0.000952
Ecrix series B preferred stock 0.02371 0.002371
Ecrix series C preferred stock 0.04048 0.004048
Ecrix series D preferred stock 0.04857 0.004857
Ecrix series D-1 preferred stock 0.82400 0.082400
-----------------------------------------------------------------------------------------------
</Table>
* On the assumption that only 6,185,127 shares of common stock are outstanding
at the effective time of the merger. Under certain circumstances, these ratios
are subject to change.
For a complete description of how these ratios are calculated and may be subject
to adjustment, you are encouraged to read Section 1.8 of the agreement and plan
of merger attached to this document as Appendix A. Under the merger agreement
holders of Ecrix common stock are to receive, in the aggregate, up to 1 million
shares of Exabyte common stock, and holders of Ecrix preferred stock will
receive, in the aggregate, up to 9 million shares of Exabyte common stock. Each
share of Ecrix common stock shall be converted into the right to receive the
number of shares of Exabyte common stock equal to 1 million divided by the total
number of shares of Ecrix common stock outstanding on the effective time of the
merger.
Q: What will holders of Ecrix options and warrants receive in the merger?
A: Options to purchase Ecrix common stock granted under the Ecrix 1999 Equity
Incentive Plan and each warrant to purchase shares of Ecrix Series B preferred
stock or Series D-2 preferred stock, whether or not vested or exercisable, will
terminate when the merger closes. Options granted under the Ecrix 1998 Incentive
Stock Option Plan will be assumed by Exabyte at the effective time of the merger
if not terminated pursuant to an agreement with the respective option holders.
To the extent that any option or warrant is exercised prior to the closing of
the merger, the stock issued upon such exercise will be converted into Exabyte
common stock pursuant to the appropriate ratio described above, but the ratio
will be adjusted downward to reflect the issuance of the additional Ecrix stock.
No more than 10 million shares of Exabyte common stock will be issued in the
merger.
Q: What Exabyte stockholder approvals are needed for the merger and the
issuance of Exabyte common stock and preferred stock in conjunction with the
merger?
A: Approval of the merger and the issuance of Exabyte common stock and
preferred stock in conjunction with the merger will require the affirmative vote
of the holders of a majority of the shares of Exabyte common stock and Series G
preferred stock, voting together as a single class, entitled to vote that are
present in person or by proxy at the special meeting. Each holder of Exabyte
common stock is entitled to one vote per share. Holders of Exabyte Series G
preferred stock are entitled to one vote per share of common stock issuable upon
conversion of the Series G preferred stock. As of September 15, 2001, the Series
G preferred stock was convertible into 1,250,000 shares of common stock. As of
August 31, 2001, Exabyte directors and officers and their affiliates
beneficially owned approximately 1.5% of the outstanding voting power.
1-3
CHAPTER ONE
Q: What Exabyte stockholder approvals are required to amend the Exabyte
restated certificate of incorporation to increase the authorized capital of
Exabyte, and to authorize a reverse stock split.
A: The authorization of an amendment to our restated certificate of
incorporation to increase our authorized common stock will require the
affirmative vote of both (1) the holders of a majority of the outstanding shares
of common and Series G preferred stock entitled to vote thereon, voting together
as a single class, and (2) the holders of a majority of the outstanding shares
of common stock entitled to vote thereon, voting separately as a class. The
authorization of the amendment to our restated certificate of incorporation to
increase our authorized preferred stock will require the affirmative vote of
both (1) the holders of majority of the outstanding shares of common stock and
Series G preferred stock entitled to vote thereon, voting together as a single
class, and (2) the holders of a majority of the outstanding Series G preferred
stock entitled to vote thereon, voting separately as a class. The authorization
of an amendment to our restated certificate of incorporation to effect a reverse
stock split will require the affirmative vote of the holders of a majority of
the outstanding shares of common stock and Series G preferred stock, voting
together as a single class, entitled to vote thereon.
Q: What constitutes a quorum at the Exabyte special meeting of stockholders and
why is a quorum necessary?
A: A quorum is required for the Exabyte stockholders to conduct business at the
special meeting. The presence at the special meeting, in person or by proxy, of
the holders of a majority of the shares entitled to vote on the record date will
constitute a quorum, permitting the meeting to conduct its business. Proxies
received but marked as abstentions and broker non-votes will be included in the
calculation of the number of shares present at the meeting for quorum purposes.
Q: When and where is the Exabyte stockholders meeting going to be held?
A: The special meeting of Exabyte stockholders will take place on November 9,
2001, in Boulder, Colorado. The address for the meeting is on page 2-1.
Q: Do Exabyte stockholders need to attend the special meeting?
A: No. An Exabyte stockholder can vote by completing, signing and dating the
proxy card and returning it in the enclosed postage-paid envelope, or by
authorizing the individuals named on the proxy card to vote that stockholder's
shares by calling the toll-free telephone number or using the internet as
described in the instructions included with the proxy card. Exabyte anticipates
that few stockholders of Exabyte will attend the special meeting in person.
Q: What if an Exabyte stockholder does not vote?
A: If an Exabyte stockholder returns its proxy card but does not indicate how
it wants to vote, that proxy will be voted in favor of the merger, the issuance
of Exabyte common stock and preferred stock in conjunction with the merger and
the other proposals presented at the meeting. If an Exabyte stockholder returns
its proxy card and indicates that it abstains from voting, the proxy will be
counted towards the quorum at the special meeting and will have the same effect
as a negative vote. If an Exabyte stockholder does not return its proxy card or
attend the meeting, that stockholder's vote will not be counted towards the
quorum at the special meeting, will not affect the outcome of the votes on the
merger and will have the same effect as a negative vote with respect to the
other proposals.
Q: Can an Exabyte stockholder change its vote after delivering its proxy?
A: Yes. An Exabyte stockholder can change its vote at any time before the proxy
is voted at the special meeting. This change may be effected in one of three
ways. First, an Exabyte stockholder can revoke its proxy by sending written
notice to the Secretary of Exabyte before the special meeting. Second, an
Exabyte stockholder can timely deliver a later dated proxy (including an
internet or telephone vote). Third, if an Exabyte stockholder is a holder of
record, that stockholder can attend the special meeting in
1-4
CHAPTER ONE
person and vote. If your Exabyte shares are held in an account at a brokerage
firm or bank, you should contact the brokerage firm or bank at which your shares
are held to change your vote.
Q: If an Exabyte stockholder's shares are held in "street name" by a broker,
will the broker vote that stockholder's shares?
A: The broker will vote the stockholder's shares only if the stockholder
directs the broker to vote by following the instructions provided by the broker.
Q: What do Exabyte stockholders need to do now?
A: Please carefully consider the information contained in this proxy statement
and respond by completing, signing and dating your proxy card and returning it
in the enclosed postage-paid envelope as soon as possible so that your shares
will be counted at the special meeting of Exabyte stockholders. In order to
ensure that your vote is obtained, please provide your proxy as instructed on
the proxy card, or by authorizing the individuals listed on your proxy card to
vote your shares by calling the toll-free telephone number or using the internet
as described in the instructions included with the proxy card, even if you plan
to attend the special meeting in person.
Q: What Ecrix stockholder consents are needed for the merger?
A: Approval of the merger by Ecrix stockholders requires the affirmative vote
of at least:
- a majority of the outstanding shares of Ecrix common stock and all
series of preferred stock voting together as a single class,
- two-thirds of all shares of all series of preferred stock voting
together as a single class, and
- two-thirds of the shares of Ecrix's series D-1 preferred stock, voting
as a separate class.
As of September 1, 2001, Ecrix directors and officers and their affiliates
beneficially owned 73.8% of combined outstanding shares of Ecrix common stock
and, Ecrix preferred stock, and 77.5% of the outstanding Ecrix preferred stock
and 84.45% of the shares of series D-1 preferred stock. These holders of
outstanding Ecrix capital stock, have indicated their support for the merger.
Ecrix will only seek the written consent of those directors, officers and
affiliates who have voting power sufficient to approve the merger unless
additional votes prove necessary.
Q: Will the Ecrix stockholders have a meeting to vote on the merger?
A: No. Ecrix will seek the approval of its stockholders to conduct the merger
through a written consent in lieu of a meeting.
Q: Should I exercise my Ecrix options or warrants prior to the merger?
A: Each stockholder of Ecrix needs to make this decision individually. If you
exercise any options or warrants to acquire Ecrix capital stock, you may
increase the number of shares of Exabyte common stock issuable to you in the
merger. However, any increase in the number of shares of Ecrix outstanding prior
to the merger will not have any impact on the total number of shares of Exabyte
common stock issuable in the merger. It will only decrease the exchange ratio
for Ecrix common stock.
Q: Am I free to immediately resell shares of Exabyte common stock that I
receive in the merger?
A: Certain Ecrix stockholders must enter into contractual agreements limiting
their ability to resell shares. Unless you have executed such an agreement or
you are an affiliate of Ecrix that is asked to sign an affiliate letter, the
shares of Exabyte common stock that you receive will be freely transferable. The
issuance of Exabyte common stock pursuant to the merger will have been
authorized by the Exabyte board and stockholders and registered under the
Securities Act.
1-5
CHAPTER ONE
Q: May dissenting Ecrix stockholders seek appraisal rights in the merger?
A: Yes. Pursuant to Delaware law, dissenting Ecrix stockholders may seek
appraisal rights in the merger. To perfect their appraisal rights, Ecrix
stockholders must strictly comply with the procedures in section 262 of the
Delaware General Corporation Law. We have attached a copy of these provisions as
Appendix F. Failure to strictly comply with these procedures will result in the
loss of appraisal rights. A summary description of these rights are also at
"Appraisal Rights for Stockholders" in Chapter Three of this document.
Q: Will my rights as an Exabyte stockholder be different from my rights as an
Ecrix stockholder?
A: Yes. At the time of the merger, each Ecrix stockholder (other than those
that have properly exercised appraisal rights) will become an Exabyte
stockholder. There are important differences between the rights of the
stockholders of Exabyte and Ecrix. Please carefully review the description of
these differences in Chapter Six -- "Comparison of Rights Between Ecrix and
Exabyte" of this document.
Q: What do Ecrix stockholders need to do now?
A: Please carefully consider the information contained in this document. You do
not need to give a proxy, and Ecrix's Board of Directors asks you not to send
one.
Q: Where will my shares of Exabyte be listed?
A: Exabyte common stock is currently listed on the Nasdaq National Market under
the symbol "EXBT."
Q: Will I receive dividends on my Exabyte stock?
A: Exabyte has not paid and does not currently intend to pay dividends on
Exabyte common stock.
Q: Should Ecrix stockholders send in their stock certificates?
A: No. Ecrix stockholders should not send in their certificates at this time.
Ecrix stockholders will exchange their certificates representing Ecrix capital
stock for Exabyte common stock certificates after we complete the merger.
Instructions for the exchange will be sent to Ecrix stockholders promptly after
the merger is completed.
Q: When do Exabyte and Ecrix expect the merger to be completed?
A: Exabyte and Ecrix plan to complete the merger promptly following the special
meeting of Exabyte stockholders, assuming all other conditions to the merger are
satisfied or waived. Other than the contractual conditions in the merger
agreement that remain to be satisfied or waived, only Exabyte stockholder
approval and Ecrix stockholder consent remain as closing conditions to the
merger. Exabyte and Ecrix hope to complete the merger as soon as practicable
after obtaining Exabyte stockholder approval and Ecrix stockholder consent.
Q: What are the U.S. federal income tax consequences of the merger?
A: Ecrix's Board expects the merger to qualify as a tax-free reorganization for
U.S. federal income tax purposes. If you are an Ecrix stockholder, your exchange
of Ecrix shares for shares of Exabyte common stock generally will not cause you
to recognize any taxable gain or loss. An Ecrix stockholder will, however,
recognize taxable gain or loss on any cash received in lieu of a fractional
share of Exabyte common stock. In addition, any Ecrix stockholder that exercises
dissenters' rights, will incur a tax liability to the extent that you recognize
a gain as a result. Please carefully review the information under the caption
"Certain Federal Income Tax Consequences" in Chapter Three of this document for
a description of the material U.S. federal income tax consequences of the
merger. Neither Exabyte nor Ecrix is seeking any ruling from the IRS or opinions
of tax counsel that the merger in fact qualifies as a tax-free reorganization.
The tax consequences to you will depend upon your own situation. Please consult
with your tax advisor to obtain a full understanding of the tax consequences of
the merger to you.
1-6
CHAPTER ONE
Exabyte's Board believes that the merger and related transactions will not be a
taxable event for Exabyte stockholders.
We expect the merger to result in limitations upon the ability to offset the net
operating losses of Exabyte and Ecrix against future taxable income, if any, of
the combined company.
Q: Where can I find more information about Exabyte?
A: Exabyte files reports and other information with the Securities and Exchange
Commission, the SEC. You may read and copy this information at the SEC's public
reference facilities. Please call the SEC at 1-800-SEC-0330 for information
about these facilities. This information is also available at the web site that
the SEC maintains at www.sec.gov. You can also request copies of these documents
from Exabyte. Please see "Where You Can Find More Information" in Chapter Eight
of this document.
Q: Whom should I call with questions?
A: If you have additional questions about the merger or the shares to be issued
pursuant to the merger or would like additional copies of this document, you
should contact:
<Table>
Exabyte Corporation Ecrix Corporation
1685 38th St. 5525 Central Avenue
Boulder, CO 80301 Boulder, CO 80301
Telephone: 303-442-4333 Telephone: 303-402-9262
Attn: Chief Financial Officer and Secretary Attn: Secretary
</Table>
1-7
CHAPTER ONE
OVERVIEW OF THE TRANSACTIONS
THE COMPANIES
Exabyte Corporation. Exabyte designs, manufactures and markets a full
range of 8mm and MammothTape(TM) technology data storage tape drives and
automated libraries as well as DLTtape(TM), LTO(TM) Ultrium(TM), and AIT(TM),
automated tape libraries. Exabyte also provides its own brand of recording media
and provides worldwide services and customer support to its customers and end
users. Exabyte was incorporated in 1985 under the laws of Delaware. Exabyte's
principal executive office is located at 1685 38th Street, Boulder, Colorado
80301 (303) 442-4333.
Ecrix Corporation. Ecrix is a Boulder, Colorado-based provider of
high-capacity, high-performance tape storage products for data storage and
retrieval. Ecrix's customers use the company's tape data storage products for
their computer systems, networks and workstations, primarily for data backup and
archival applications. Ecrix is a Delaware corporation that was originally
incorporated in 1996. Ecrix's principal executive office is located at 5525
Central Avenue, Boulder, Colorado 80301 (303) 402-9262.
THE MERGER
To accomplish the combination of the two businesses, Exabyte formed Bronco
Acquisition, Inc. ("Merger Sub"), a new wholly-owned subsidiary of Exabyte. At
the time the merger is completed, Merger Sub will merge with and into Ecrix and
Ecrix will continue as the surviving corporation in the merger and will become a
wholly owned subsidiary of Exabyte. Ecrix stockholders will receive shares of
Exabyte common stock in exchange for their shares of Ecrix common stock and
Ecrix preferred stock as follows:
<Table>
<Caption>
NUMBER OF EXABYTE COMMON SHARES YOU WILL
GET AS A RESULT OF THE MERGER --
-------------------------------------------
WITHOUT STOCK SPLIT WITH 1:10 STOCK SPLIT
FOR EACH SHARE YOU HOLD OF: -------------------------------------------
Ecrix common stock *0.16168 *0.016168
Ecrix series A preferred stock 0.00952 0.000952
Ecrix series B preferred stock 0.02371 0.002371
Ecrix series C preferred stock 0.04048 0.004048
Ecrix series D preferred stock 0.04857 0.004857
Ecrix series D-1 preferred stock 0.82400 0.082400
</Table>
* On the assumption that only 6,185,127 shares of common stock are outstanding
on the effective time of the merger.
Under the merger agreement holders of Ecrix common stock are to receive, in
the aggregate, up to 1 million shares of Exabyte common stock, and holders of
Ecrix preferred stock will receive, in the aggregate, up to 9 million shares of
Exabyte common stock. Each share of Ecrix common stock will be converted into
the right to receive the number of shares of Exabyte common stock equal to 1
million divided by the total number of shares of Ecrix common stock outstanding
at the effective time of the merger.
We have attached the merger agreement as Appendix A to this proxy
statement/prospectus. We encourage you to read the merger agreement because it
is the legal document that governs the merger. (see page 3-30)
BRIDGE LOAN
Pursuant to a loan and security agreement, dated as of August 22, 2001,
among Exabyte and certain stockholders of Ecrix (the "bridge lenders") the
bridge lenders agreed to lend to Exabyte the aggregate amount of $2 million in
exchange for promissory notes issued by Exabyte to each such bridge lender.
1-8
CHAPTER ONE
These bridge lenders loaned Exabyte an aggregate of $1.5 million at the time of
the signing of the merger agreement and an additional $500,000 on October 9,
2001.
In the event the merger closes, the amounts that the bridge lenders loaned
Exabyte (plus any unpaid and accrued interest) will be credited against the
purchase price such lenders will pay to Exabyte to purchase shares of Exabyte's
Series H preferred stock described below. In the event the merger does not
close, each lender will have the option to require Ecrix to repurchase his or
its note issued by Exabyte in exchange for shares of as yet unauthorized Ecrix
Series D-3 Preferred stock. The terms of the proposed Series D-3 Preferred stock
are summarized in the section of Chapter Three titled "Interests of Directors
and Executive Officers in the Merger -- Bridge Loan." (see page 3-27)
SALE OF SERIES H PREFERRED STOCK BY EXABYTE
Pursuant to the merger agreement, certain Ecrix stockholders agreed to
purchase a total of 9.65 million shares of Exabyte's Series H preferred stock
for $1.00 per share upon the effectiveness of the merger. The sale of Exabyte
Series H preferred stock and certain rights to be held by investors in that
class of stock are further described in Chapter Three under "Sale of Exabyte
Series H Preferred Stock." In addition, the terms of the Series H preferred
stock are summarized in the section titled "Description of Exabyte Capital
Stock" in Chapter Three. (see page 3-50)
REASONS FOR THE MERGER
Exabyte. The Exabyte Board believes that the merger and other related
transactions will:
- improve Exabyte's competitive position in a number of ways, including;
- expanding the range of data storage needs that Exabyte products
satisfy;
- potentially increasing revenues through increased sales of products;
- enhancing the combined company's ability to attract and secure a
broader base of customers and OEM relationships;
- increasing sales through Exabyte's existing reseller channels; and
- expanding the technologies used in products and enhancing its research
and development talent;
and
- enhance Exabyte's liquidity and access to capital.
Ecrix. The Ecrix Board of Directors has unanimously determined that the
terms of the merger agreement and the merger are fair to, and in the best
interests of, Ecrix stockholders. The Ecrix Board of Directors believes that
accomplishing the merger will:
- enhance the prospects for Ecrix's long-term viability;
- permit Ecrix stockholders to maximize the value of their investment;
- allow Ecrix stockholders to receive freely-tradable common stock, a
medium of investment that is considerably more liquid than their current
investment in Ecrix;
- put Ecrix in a position to benefit from the broader marketing and
distribution system that Exabyte has, thus giving Ecrix a greater
potential for growth;
- enable Ecrix to obtain more favorable manufacturing and supply
arrangements and will enable the combined entity to realize significant
cost savings; and
1-9
CHAPTER ONE
- put Ecrix in a position to benefit from Exabyte's planned growth
strategy. See "Ecrix's Reasons for the Merger and Recommendation of
Ecrix's Board of Directors" in Chapter Three. (see page 3-21)
RECOMMENDATIONS OF THE BOARDS OF DIRECTORS AND OPINIONS OF FINANCIAL ADVISORS
EXABYTE'S BOARD OF DIRECTORS. The Exabyte Board of Directors has
unanimously determined that the merger, the bridge loan, the issuance of common
stock pursuant to the merger and the issuance of Series H preferred stock, and
the related transactions are fair to and in the best interests of Exabyte and
its stockholders, and achieve the highest value reasonably available to Exabyte
stockholders.
EXABYTE'S FINANCIAL ADVISOR. In reaching its decision to approve the
merger and related transactions, Exabyte's Board considered the opinion of its
financial advisor, Broadview International, LLC. Based upon and subject to the
considerations and assumptions set forth in its written opinion, Broadview
determined that the consideration to be received by Exabyte's stockholders as a
result of the merger is, from a financial point of view, fair. A copy of
Broadview's opinion is attached as Appendix B to this proxy
statement/prospectus.
ECRIX'S BOARD OF DIRECTORS. The Ecrix Board of Directors has unanimously
determined that the terms of the merger agreement and the merger are fair to,
and in the best interests of, Ecrix stockholders. Accordingly, the Ecrix Board
of Directors has unanimously approved the merger agreement (with one director
absent) and unanimously recommended the merger to Ecrix's stockholders for
approval by written consent.
ECRIX'S FINANCIAL ADVISOR. In deciding to approve the merger, the Ecrix
Board of Directors considered the opinion of its financial advisor, The Wallach
Company/McDonald Investments Inc., that, as of the date of its opinion, and
subject to assumptions, qualifications and limitations set forth in its written
opinion, the proposed merger was fair, from a financial point of view, to Ecrix.
The full text of this opinion is attached as Appendix C to this proxy
statement/prospectus. Ecrix urges its stockholders to read the opinion of
McDonald in its entirety.
See pages 3-12, 3-14, 3-21 and 3-22.
DISSENTERS' RIGHTS
Each holder of shares of Ecrix common stock or Ecrix preferred stock who
does not vote in favor of or consent to the merger and who follows the
procedures set forth in Section 262 of the Delaware General Corporation Law, a
copy of which is attached as Appendix F to this proxy statement/prospectus, will
be entitled to have their shares of Ecrix common stock or Ecrix preferred stock,
as the case may be, purchased by Exabyte for cash at their appraised value plus
interest as agreed upon by Exabyte and such stockholder, or as determined by the
Court of Chancery in Delaware. The failure of a dissenting Ecrix stockholder to
comply timely and properly with such procedures will result in the termination
or waiver of such rights. However, it is a condition to the merger that the
shares of Ecrix common stock that exercise appraisal rights not exceed 20% of
the outstanding shares of Ecrix common stock. See "Appraisal Rights for
Stockholders" in Chapter Three. (see page 3-48)
THE SPECIAL MEETING OF EXABYTE STOCKHOLDERS
There will be a special meeting of Exabyte stockholders at 9:00 a.m. on
November 9, 2001 at Exabyte's principal executive office. At the meeting,
Exabyte stockholders will be asked to vote on proposals:
- to approve the merger, including the issuance of common stock pursuant
to the merger and the issuance of Series H preferred stock in connection
with the merger;
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CHAPTER ONE
- to amend Exabyte's restated certificate of incorporation to increase the
authorized capital; and
- to amend Exabyte's restated certificate of incorporation to effect an up
to 1:10 reverse split of outstanding shares of Exabyte common stock, and
to authorize the Board to determine the actual reverse split ratio.
The Exabyte Board unanimously recommends a vote FOR each of the proposals.
You are encouraged to read this entire document carefully and then return your
proxy. (see page 2-3)
BOARD OF DIRECTORS AND MANAGEMENT FOLLOWING THE MERGER
We have agreed that, as of the effective time of the merger two current
members of Exabyte's Board will resign or be removed and the size of the Board
of Directors will be increased to seven members. The vacancies created by these
actions will then be filled by G. Jackson Tankersley, William J. Almon, Sr., and
Juan A. Rodriguez, each of whom will serve until the next annual meeting of
Exabyte stockholders at which directors in the class to which they are appointed
are elected. Each of these three persons designated to serve as members of
Exabyte's Board of Directors currently serves as an Ecrix director. In addition,
Juan A. Rodriguez, Kelly Beavers and Craig G. Lamborn, each of whom is currently
an executive officer of Ecrix, shall be employed by Exabyte following the
merger. (see page 3-26)
TREATMENT OF STOCK OPTIONS AND WARRANTS
Each option to purchase Ecrix common stock granted under the 1999 Equity
Incentive Plan and each warrant to purchase shares of Ecrix Series B or Series
D-2 preferred stock, whether or not vested or exercisable, will terminate when
the merger closes. Options granted under the Ecrix 1998 Incentive Stock Option
Plan will be assumed by Exabyte at the effective time of the merger unless
terminated pursuant to an agreement with the respective option holders. To the
extent that any option or warrant is exercised prior to the closing of the
merger, the stock issued upon such exercise will be converted into Exabyte
common stock pursuant to the appropriate ratio described above in the section
titled "Summary -- Questions and Answers About the Merger," but the ratio will
be adjusted downward to reflect the issuance of the additional Ecrix stock. No
more than 10 million shares of Exabyte common stock will be issued in the merger
(1 million shares if a maximum 1:10 reverse split is effected). (see page 3-31)
TAX CONSIDERATIONS
Ecrix and Exabyte expect that the merger will be treated for federal income
tax purposes as a "reorganization" within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code"), that Exabyte, Merger Sub
and Ecrix will each be "a party to a reorganization" within the meaning of
Section 368(b) of the Code and that no gain or loss will be recognized by a
stockholder of Ecrix as a result of the merger with respect to the shares of
Ecrix common stock and preferred stock that are converted into Exabyte common
stock. Neither Ecrix nor Exabyte have requested a ruling from the Internal
Revenue Service with respect to these tax consequences, nor will counsel to
either Ecrix or Exabyte deliver an opinion to this effect at the closing. See
"The Merger -- Certain Federal Income Tax Consequences." (see page 3-46)
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for by Exabyte using the purchase method of
accounting for a business combination. (see page 3-46)
NO SOLICITATION OF ECRIX STOCKHOLDERS
There will not be a meeting of Ecrix stockholders to approve the merger.
Instead, holders of Ecrix common stock and preferred stock representing a number
of votes sufficient to approve the merger will be
1-11
CHAPTER ONE
asked to approve the merger by written consent. Ecrix stockholders that do not
consent in writing to the merger will be promptly notified if and when the
merger is approved by written consent. (see page 2-1)
CONDITIONS TO THE MERGER
We will complete the merger only if specific conditions are satisfied or,
in some cases, waived, including, among others, the following:
- approval of the merger by the stockholders of Exabyte and Ecrix;
- performance in all material respects by the other party of the
obligations required to be performed by it at or prior to the closing of
the merger;
- all approvals necessary for the consummation of the transactions
contemplated by the merger agreement will have been obtained;
- absence of a material adverse effect on Exabyte or Ecrix during the
period from the date of execution of the merger agreement until the
closing of the merger;
- holders of no more than 20% of the outstanding shares of Ecrix common
stock will have exercised dissenter's rights;
- shares of Exabyte's common stock issuable pursuant to the merger will be
authorized for listing on the Nasdaq National Market; and
- consent of Congress Financial Corporation shall not have been revoked or
modified. (see page 3-34)
TERMINATION
Exabyte and Ecrix can jointly agree to terminate the merger agreement at
any time before completing the merger. In addition either Exabyte or Ecrix can
terminate the merger agreement if:
- if the merger has not been consummated by December 31, 2001;
- if the merger is illegal or prohibited by law;
- the other party to the merger agreement breaches any representation or
warranty and the breach results in a material adverse effect, subject to
a 30 day cure period;
- the merger is not approved by the other party's stockholders; or
- the board of directors of the terminating party has authorized an
alternative acquisition proposal involving the acquisition of the
terminating party on terms that the board has determined to be more
favorable to the terminating party than the merger and the terminating
party has paid the termination fee described below under "-- Termination
Fee."
If the merger agreement is validly terminated, the agreement will become void
without any liability on the part of Exabyte or Ecrix, except that the
confidentiality, best efforts, termination and general provisions of the merger
agreement will continue to apply following such termination. (see page 3-37)
TERMINATION FEE
If either party terminates the merger agreement because the board of the
terminating party authorized the alternative acquisition proposal described
above, the terminating party will pay the non-terminating party a $1 million
fee. In addition, Exabyte will be required to immediately repay the bridge loan
if Exabyte terminates the merger agreement for certain reasons. (see page 3-37)
1-12
CHAPTER ONE
NASDAQ LISTING
Exabyte's common stock is currently quoted on the Nasdaq National Market
under the symbol "EXBT." It is a condition to closing of the merger that Exabyte
common stock to be issued to Ecrix stockholders in the merger be approved for
listing on the Nasdaq National Market and Exabyte's common stock shall not have
been delisted from the Nasdaq National Market. Exabyte has previously received a
notice from Nasdaq that if the closing bid price of its common stock is not at
or above $1 for at least 10 consecutive trading days prior to December 3, 2001,
it will be subject to delisting. Subsequently, Nasdaq announced it had declared
a temporary moratorium on delisting for failure to satisfy the minimum bid price
requirement. Exabyte's Board has proposed that its stockholders approve an up to
1:10 reverse split of its outstanding common stock in order, among other
reasons, to increase the trading price of its common stock and maintain its
Nasdaq listing. (see page 3-53)
REGULATORY REQUIREMENTS
The parties do not believe any material regulatory approvals from
applicable U.S. regulatory authorities are required to permit consummation of
the merger.
COMPARISON OF RIGHTS BETWEEN EXABYTE AND ECRIX
Upon consummation of the merger, the stockholders of Ecrix will become
stockholders of Exabyte and their rights as such will be governed by Delaware
law, as well as the Exabyte restated certificate of incorporation and the
Exabyte bylaws. At the time the merger becomes effective, the rights of Ecrix
stockholders will change as a result of the differences between the Exabyte
restated certificate and the Exabyte bylaws and the Ecrix certificate of
incorporation and the Ecrix bylaws. These differences are summarized in Chapter
Six. (see page 6-1)
DESCRIPTION OF EXABYTE CAPITAL STOCK
As a result of the merger, Ecrix stockholders will own Exabyte common
stock. A description of Exabyte's capital stock, including the common stock, is
included in Chapter Three of this document under "Description of Exabyte Capital
Stock." (see page 3-50)
MARKET PRICES FOR EXABYTE COMMON STOCK
On August 22, 2001, the last full trading day before the public
announcement of the proposed merger, the last reported sale price of Exabyte
common stock on the Nasdaq National Market was $0.73. On October 5, 2001, the
most recent practicable date prior to the date of this proxy
statement/prospectus, the last reported sale price for Exabyte common stock was
$0.55 per share. (see page 3-53)
We are unable to provide information with respect to the market prices of
Ecrix common stock, and the equivalent per share market prices of Exabyte common
stock have been omitted, because there is no established trading market for
shares of Ecrix common stock.
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
In considering the recommendations of the Boards of Directors of Exabyte
and Ecrix with respect to the merger, stockholders should be aware that certain
members of each of such Boards of Directors have interests in the merger that
may be different from Ecrix or Exabyte stockholders generally. See "Interests of
Directors and Executive Officers in the Merger" in Chapter Three. (see page
3-27)
1-13
CHAPTER ONE
EXABYTE SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below with respect to our
consolidated statements of operations for fiscal years ended December 28, 1996,
January 3, 1998, January 2, 1999, January 1, 2000 and December 30, 2000 and with
respect to the consolidated balance sheets as of those dates are derived from
our audited consolidated financial statements. The consolidated financial
statements as of January 1, 2000 and December 30, 2000 and for the three years
ended December 30, 2000 are included elsewhere in this proxy
statement/prospectus and the selected financial data shown below are qualified
by reference to such financial statements. The consolidated financial statements
as of December 28, 1996, January 3, 1998 and January 2, 1999 and for the fiscal
years ended December 28, 1996 and January 3, 1998 are not included in this proxy
statement/prospectus. The selected consolidated statements of operations data
for the six months ended July 1, 2000 and June 30, 2001 and the consolidated
balance sheet data as of June 30, 2001 have been derived from unaudited
consolidated financial statements included elsewhere in this proxy
statement/prospectus. Exabyte management believes the unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our financial position and the
results of operations for the interim periods. The financial data for the six
month period ended June 30, 2001 are not necessarily indicative of the results
that may be expected for the entire year. There were 52 weeks in 1996, 1998,
1999 and 2000. There were 53 weeks in 1997.
<Table>
<Caption>
(IN THOUSANDS, EXCEPT PER SIX MONTHS ENDED
SHARE DATA) FISCAL YEARS ENDED (UNAUDITED)
------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF DEC. 28, JAN. 3, JAN. 2, JAN. 1, DEC. 30, JULY 1, JUNE 30,
OPERATIONS DATA: 1996 1998 1999 2000 2000 2000 2001
------------------------------------------------------------------------------------------------------------
Net sales....................... $362,891 $335,684 $286,505 $222,827 $221,742 $100,890 $ 88,464
Cost of goods sold.............. 265,002 288,053 207,604 182,875 172,085 77,391 76,721
--------------------------------------------------------------------------
Gross profit.................... 97,889 47,631 78,901 39,952 49,657 23,499 11,743
Operating expenses:
Selling, general and
administrative.............. 47,929 59,211 56,978 56,650 54,709 27,237 20,846
Research and development...... 38,391 40,909 29,888 35,725 36,530 19,726 14,192
--------------------------------------------------------------------------
Income (loss) from operations... 11,569 (52,489) (7,965) (52,423) (41,582) (23,464) (23,295)
Other income (expense):
Gain from sale of
investment.................. -- -- -- -- -- -- 1,719
Interest income............... 2,783 2,164 2,394 2,647 1,057 561 56
Interest expense.............. (530) (637) (607) (478) (686) (196) (914)
Other......................... (1,139) (2,161) 29 (934) (1,213) 73 16
--------------------------------------------------------------------------
Income (loss) before income
taxes(1)...................... 12,683 (53,123) (6,149) (51,188) (42,424) (23,026) (22,418)
(Provision for) benefit from
income taxes(2)............... (4,058) 22,312 3,382 (37,219) 1,570 (191) (48)
Equity in loss of investee...... -- -- -- -- (414) -- (343)
--------------------------------------------------------------------------
Net income (loss)............... $ 8,625 $(30,811) $ (2,767) $(88,407) $(41,268) $(23,217) $(22,809)
==========================================================================
Basic net income (loss) per
share......................... $ 0.39 $ (1.38) $ (0.12) $ (3.97) $ (1.83) $ (1.03) $ (1.00)
==========================================================================
Common shares used in the
calculation of basic net
income (loss) per share(3).... 22,003 22,326 22,285 22,256 22,560 22,480 22,783
==========================================================================
Diluted net income (loss) per
share......................... $ 0.39 $ (1.38) $ (0.12) $ (3.97) $ (1.83) $ (1.03) $ (1.00)
==========================================================================
Common and potential common
shares used in the calculation
of diluted net income (loss)
per share(3).................. 22,307 22,326 22,285 22,256 22,560 22,480 22,783
==========================================================================
</Table>
1-14
CHAPTER ONE
<Table>
<Caption>
CONSOLIDATED BALANCE DEC. 28, JAN. 3, JAN. 2, JAN. 1, DEC. 30, JUNE 30,
SHEET DATA: 1996 1998 1999 2000 2000 2001
------------------------------------------------------------------------------------------------
Working capital................ $150,713 $134,357 $116,953 $ 59,594 $ 27,023 $ 12,326
Total assets................... 256,126 221,346 207,836 127,276 103,792 79,901
Long-term obligations,
excluding current portion.... 10,441 9,049 7,461 6,570 8,146 9,397
Stockholders' equity........... 200,013 170,796 166,272 78,756 39,058 19,294
</Table>
---------------
(1) Exabyte recorded restructuring charges in 2001, 2000, 1999 and 1997 totaling
$498,000, $3,899,000, $2,446,000 and $34,947,000, respectively. See Notes to
Consolidated Financial Statements.
(2) Exabyte recorded a full valuation allowance on all existing deferred tax
assets in 1999. See Notes to Consolidated Financial Statements.
(3) See Notes to Consolidated Financial Statements for an explanation of the
determination of shares used in computing net income (loss) per share.
1-15
CHAPTER ONE
ECRIX SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to our financial
statements of operations for the period from April 25, 1996 (inception) through
February 28, 1997, and for the fiscal years ended February 28, 1998, February
28, 1999, February 29, 2000 and February 28, 2001 and with respect to the
balance sheets as of those dates are derived from audited consolidated financial
statements. The statements of operations data for the three-months ended May 31,
2000 and 2001 and the balance sheet data as of May 31, 2001 have been derived
from unaudited financial statements. Ecrix management believes this information
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the interim periods.
<Table>
<Caption>
PERIOD FROM
APR. 25,
1996 THREE-MONTHS
(IN THOUSANDS) (INCEPTION) FISCAL YEARS ENDED ENDED
----------------------- THROUGH ----------------------------------------------------------------
STATEMENT OF FEB. 28, FEB. 28, FEB. 28, FEB. 29, FEB. 28, MAY 31, MAY 31,
OPERATIONS DATA: 1997 1998 1999 2000 2001 2000 2001
-------------------------------------------------------------------------------------------------------
(UNAUDITED)
Revenues............... $ -- $ -- $ -- $ 1,571 $ 10,678 $ 1,565 $ 3,335
Cost of revenues....... -- -- -- 2,415 9,096 1,410 2,634
----------------------------------------------------------------------------
Gross profit (loss).... -- -- -- (844) 1,582 155 701
Operating expenses:
Selling, general and
administrative.... 264 906 3,362 10,021 14,300 3,518 2,939
Research and
development....... 770 1,726 3,437 4,564 5,500 1,314 1,913
Litigation expense..... -- -- -- -- 1,566 -- --
----------------------------------------------------------------------------
Loss from operations... 1,034 (2,632) (6,799) (15,429) (19,784) (4,677) (4,151)
Other income (expense):
Interest income...... 23 50 284 694 704 175 153
Interest expense..... (7) (58) (90) (206) (285) (69) (56)
----------------------------------------------------------------------------
Net loss............... $(1,018) $(2,640) $ (6,605) $(14,941) $(19,365) $ (4,571) $ (4,056)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BALANCE SHEET DATA:
-------------------------------------------------------------------------------------------------------
Working capital........ $ 2,399 $ 7,765 $ 362 $ 14,851 $ 16,292 $ 10,462 $ 12,494
Total assets........... 2,778 8,632 3,340 21,561 23,418 18,580 18,420
Long-term obligations,
excluding current
portion.............. 444 106 557 1,139 656 1,205 507
Mandatorily redeemable
convertible preferred
stock................ 3,147 11,417 11,426 41,520 49,111 41,595 49,651
Stockholders'
deficit.............. (895) (3,505) (10,112) (25,055) (31,183) (29,638) (35,621)
</Table>
1-16
CHAPTER ONE
EXABYTE AND ECRIX UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
As a result of the August 22, 2001 merger agreement between Exabyte and
Ecrix, Exabyte will acquire Ecrix and all the outstanding common and preferred
stock of Ecrix will be converted into Exabyte common stock. The acquisition will
be accounted for using the purchase method of accounting, and accordingly, the
purchase price will be allocated to the tangible and intangible assets of Ecrix
acquired and liabilities of Ecrix assumed on the basis of their fair values on
the acquisition date.
The estimated total purchase price of approximately $8.6 million is based
upon the issuance of 10 million shares of Exabyte's common stock with an
estimated value of $7.2 million, based upon the average of Exabyte's closing
stock price for the period from August 20-24, 2001, plus acquisition related
expenses of approximately $1.4 million. Included in acquisition related expense
are cash payments of approximately $1.2 million and 150,000 warrants to purchase
Exabyte common stock which were issued to Exabyte's investment advisor. The
warrants were valued at approximately $190,000, using a Black-Scholes valuation
model.
In our preliminary purchase price allocation, the fair values of the
tangible assets acquired and liabilities assumed exceeded the purchase price of
Ecrix. The purchase price of $8.6 million was allocated to Ecrix's total
tangible assets of $18.4 million and liabilities assumed of $4.4 million,
resulting in negative goodwill of $5.4 million. In accordance with FAS 141,
negative goodwill was allocated first to reduce remaining noncurrent assets of
$2.0 million, resulting in negative goodwill of $3.4 million, which will be
reflected as an extraordinary gain.
It is possible that the purchase price allocation to be performed at the
closing of the merger transaction will not result in negative goodwill due to
potential reduction in Ecrix's working capital to fund operations between May
28, 2001 and the closing of the merger. Final amounts to be recorded will depend
upon results of operations between the date of the pro forma combined balance
sheet and the closing of the merger, finalization of the integration plan,
independent appraisals of the assets acquired on the closing date and other
factors. The pro forma adjustments may differ materially from those presented in
this pro forma financial data.
The following unaudited pro forma combined balance sheet is based on the
individual balance sheets of Exabyte as of June 30, 2001 and Ecrix as of May 31,
2001, appearing elsewhere in this proxy statement/prospectus, and has been
prepared as if the merger had occurred on June 30, 2001. The unaudited pro forma
combined statement of operations is based on the individual statements of
operations of Exabyte for the year ended December 30, 2000 and six months ended
June 30, 2001 and Ecrix for the year ended February 28, 2001 and six months
ended May 31, 2001, appearing elsewhere in this prospectus, and has been
prepared as if the merger had occurred on January 2, 2000. The results of
operations of Ecrix for the three month period ended February 28, 2001, which
included revenue of $3,125,000 and a net loss of $3,940,000, has been included
in the results of operations for the six months ended May 28, 2001 as well as
the year ended February 28, 2001.
The unaudited pro forma combined information is presented for illustrative
purposes only and is not necessarily indicative of the financial position or
operating results that would have occurred if the acquisition had been
consummated on the dates indicated, nor is it necessarily indicative of future
financial position or operating results. The pro forma adjustments are based on
the information currently available at the date of this proxy
statement/prospectus and are subject to change based upon completion of the
transaction and final purchase price allocation. The unaudited pro forma
combined financial statements presented herein should be read in conjunction
with the historical audited and unaudited financial statements of Exabyte and
Ecrix included elsewhere in this proxy statement/prospectus.
1-17
CHAPTER ONE
PRO FORMA UNAUDITED COMBINED CONDENSED BALANCE SHEET
(In thousands)
<Table>
<Caption>
JUNE 30, 2001 MAY 31, 2001 PRO FORMA
EXABYTE ECRIX ADJUSTMENTS PRO FORMA
------------------------------------------------
------------
ASSETS
Current assets:
Cash and cash equivalents............. $ 2,069
$ 6 $ 9,650(d) $ 11,725
Short-term investments................ 90
10,357 10,447
Accounts receivable, net.............. 26,504
1,120 27,624
Inventories, net...................... 31,769
4,825 36,594
Other current assets.................. 3,104
69 3,173
------------------------------------------- --------
Total current assets.................... 63,536 16,377 9,650 89,563
------------------------------------------- --------
Property and equipment, net............. 15,244 1,955 (1,955)(a) 15,244
Other long-term assets.................. 1,121 88 (88)(a)
(320)(b) 801
------------------------------------------- --------
$ 79,901 $ 18,420 $ 7,287 $105,608
------------------------------------------- --------
------------------------------------------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................... $ 23,889 $ 82 $ 1,210(a) $ 25,181
Accrued liabilities................... 10,914 2,207 13,121
Line of credit........................ 14,337 1,215 15,552
Current portion of long-term
obligations........................ 2,070 379 (62)(b) 2,387
------------------------------------------- --------
Total current liabilities............... 51,210 3,883 1,148 56,241
------------------------------------------- --------
Long-term liabilities................... 9,397 507 (491)(b) 9,413
Mandatorily redeemable preferred
stock................................. -- 49,651 (49,651)(c) --
Stockholders' equity:
Preferred stock....................... 2 -- 10(d) 12
Common stock.......................... 23 6 10(a)
(6)(c) 33
Capital in excess of par value........ 72,197 12,996 7,190(a)
190(a)
(12,996)(c)
9,640(d) 89,217
Treasury stock........................ (2,742) -- -- (2,742)
Accumulated deficit................... (50,186) (48,623) 3,387(a)
233(b)
48,623(c) (46,566)
------------------------------------------- --------
Total stockholders' equity
(deficit).......................... 19,294 (35,621) 56,281 39,954
------------------------------------------- --------
$ 79,901 $ 18,420 $ 7,287 $105,608
------------------------------------------- --------
------------------------------------------- --------
</Table>
1-18
CHAPTER ONE
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<Table>
<Caption>
YEAR ENDED YEAR ENDED
DEC. 31, 2000 FEB. 28, 2001 PRO FORMA PRO FORMA
EXABYTE ECRIX ADJUSTMENTS ---------
-------------------------------------------
Net sales............................ $221,742 $ 10,678 $232,420
Cost of goods sold................... 172,085 9,096 $ (86)(e) 181,095
------------------------------------------- ---------
Gross profit......................... 49,657 1,582 86 51,325
Operating expenses:
Selling, general and
administrative.................. 54,709 15,866 (1,116)(f)
(513)(e) 68,946
Research and development........... 36,530 5,500 (647)(e) 41,383
------------------------------------------- ---------
Income (loss) from operations........ (41,582) (19,784) 2,362 (59,004)
Other income (expense)............... (842) 419 36(f) (387)
------------------------------------------- ---------
Income (loss) before income taxes.... (42,424) (19,365) 2,398 (59,391)
Benefit from income taxes............ 1,570 -- 1,570
Equity in loss of investee........... (414) -- (414)
------------------------------------------- ---------
Net income (loss).................... $(41,268) $(19,365) $ 2,398 $(58,235)
=========================================== =========
Basic and diluted net loss per
share.............................. $ (1.83) $ (1.79)
======== ========
Common shares used in the calculation
of basic and diluted net income
loss per share..................... 22,560 32,560
======== ========
</Table>
1-19
CHAPTER ONE
PRO FORMA UNAUDITED COMBINED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
<Table>
<Caption>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUN. 30, 2001 MAY 31, 2001 PRO FORMA
EXABYTE ECRIX ADJUSTMENTS PRO FORMA
------------------------------------------- ---------
Net sales............................ $ 88,464 $ 6,460 $ 94,924
Cost of goods sold................... 76,721 5,030 $ (53)(e) 81,698
------------------------------------------- --------
Gross profit......................... 11,743 1,430 53 13,226
Operating expenses:
Selling, general and
administrative.................. 20,846 6,439 (291)(e) 26,994
Research and development........... 14,192 3,292 (344)(e) 17,140
-------------------------------------------- --------
Income (loss) from operations........ (23,295) (8,301) 688 (30,908)
Other income (expense), net.......... 877 307 31(f) 1,215
-------------------------------------------- --------
Income (loss) before income taxes.... (22,418) (7,994) 719 (29,693)
Provision for income taxes........... (48) -- (48)
Equity in loss of investee........... (343) -- (343)
-------------------------------------------- --------
Net income (loss).................... $(22,809) $(7,994) $ 719 $(30,084)
-------------------------------------------- --------
-------------------------------------------- --------
Basic and diluted net loss per
share.............................. $ (1.00) $ (0.92)
======== ========
Common shares used in the calculation
of basic and diluted net loss per
share.............................. 22,783 32,783
======== ========
</Table>
1-20
CHAPTER ONE
EXABYTE CORPORATION
NOTES TO PRO FORMA UNAUDITED COMBINED
CONDENSED FINANCIAL INFORMATION
NOTE 1 -- Under the terms of the proposed merger, Exabyte will issue 10 million
shares of its common stock in exchange for all the outstanding common and
preferred shares of Ecrix. The total estimated purchase price is $8.6 million,
including $1.4 million of direct acquisition expenses. In connection with the
merger, Exabyte has agreed to issue 9.65 million shares of Series H Preferred
Stock to certain Ecrix investors at a price of $1.00 per share upon closing of
the merger.
The adjustments to the pro forma consolidated balance sheet as of June 30, 2001
are as follows:
(a) To reflect the acquisition of Ecrix and to reflect the purchase price paid
as follows: issuance of 10 million shares of common shares of Exabyte
valued at approximately $7.2 million and direct acquisition expenses of
approximately $1.4 million. The purchase price of $8.6 million was
allocated to total tangible assets of $18.4 million and liabilities assumed
of $4.4 million, resulting in negative goodwill of $5.4 million. In
accordance with FAS 141, negative goodwill was allocated first to reduce
noncurrent assets of $2.0 million, resulting in remaining negative goodwill
of $3.4 million which will be reflected as an extraordinary gain and has
been presented in the pro forma balance sheet as an adjustment to retained
earnings.
(b) To eliminate Exabyte's current investment in Ecrix and effects of the
settlement of litigation between Exabyte and Ecrix during 2000. In June
2000, Exabyte and Ecrix settled a patent dispute resulting in a
cross-license agreement and Ecrix agreeing to pay Exabyte the following:
(a) reimbursement of $450,000 of legal expenses incurred by Exabyte; (b)
issuance of a note payable in the amount of $300,000 which was paid in
December 2000; and (c) issuance of 400,000 shares of Series D-1 Preferred
Stock, which were valued at $320,000 by Exabyte. The amount attributed to
the cross-license agreement, $620,000, is being amortized to income by
Exabyte over a period of ten years. At June 30, 2001 the remaining deferred
revenue attributed to the cross-license agreement was $553,000, of which
$62,000 was included in current liabilities and $491,000 was included in
long-term liabilities.
(c) To eliminate the historical equity of Ecrix.
(d) To reflect the issuance of 9.65 million shares of Series H Preferred Stock
of Exabyte to investors at a price of $1.00 per share at the closing as a
condition of the merger.
The adjustments to the pro forma combined statements of operations for the year
ended December 30, 2000 and six months ended June 30, 2001 assume the
acquisition occurred as of January 2, 2000 and are as follows:
(e) To eliminate the depreciation and amortization recorded in the historical
results of Ecrix due to the effects of purchase price accounting, which
resulted in the elimination of Ecrix's property and equipment.
(f) To eliminate the effects of litigation between Exabyte and Ecrix, including
the reversal of deferred income, Exabyte's investment in Ecrix, and legal
expenses, which was settled during June 2000.
NOTE 2 -- Basic and diluted pro forma loss per common share was calculated based
on the issuance of 10 million shares of Exabyte common stock in exchange for all
the outstanding common and preferred shares of Ecrix.
1-21
CHAPTER ONE
COMPARATIVE PER SHARE DATA
We have summarized below the per share information for Exabyte and Ecrix on
a historical basis, for Exabyte on a pro forma basis and for Ecrix on a pro
forma equivalent basis.
The unaudited "Pro Forma Exabyte" and the unaudited "Pro Forma
Equivalent -- Ecrix" information assumes that the merger of Exabyte and Ecrix
will be accounted for as a purchase. The unaudited "Pro Forma Exabyte"
information is derived from the historical financial information of Exabyte for
the fiscal year ended December 30, 2000 and six months ended June 30, 2001, and
the historical financial information of Ecrix for the fiscal year ended February
28, 2001 and six months ended May 31, 2001, and assumes that the merger of
Exabyte and Ecrix occurred on January 2, 2000 for net loss per common share
purposes and June 30, 2001 for purposes of calculating book value per common
share.
"Pro Forma Exabyte" net loss per common share -- basic and diluted was
calculated by dividing pro forma Exabyte net loss, which is Exabyte historical
net loss combined with Ecrix historical net loss including pro forma
adjustments, by the pro forma weighted average number of Exabyte common shares
outstanding.
"Pro Forma Exabyte" book value per common share was calculated by dividing
total pro forma stockholders' equity by the pro forma number of Exabyte common
shares outstanding at the end of the period.
The unaudited "Pro Forma Equivalent -- Ecrix" information was calculated by
multiplying the corresponding "Pro Forma Exabyte" data by the initial minimum
exchange ratios described in the footnotes.
This information shows how each share of Ecrix common stock would have
participated in the net loss and book value of Exabyte if the merger had been
completed on January 2, 2000. However, these amounts do not necessarily reflect
future per share results of operations or book value of Exabyte.
Stockholders should read the information in this section along with
Exabyte's and Ecrix's historical financial statements and accompanying notes
included elsewhere in this prospectus and the unaudited pro forma condensed
financial statements and accompanying notes included elsewhere in this
prospectus.
<Table>
<Caption>
AT OR FOR THE
FOR THE SIX MONTHS
YEAR ENDED ENDED
DECEMBER 30, 2000 JUNE 30, 2001
------------------------------------
EXABYTE -- HISTORICAL
Net loss per common share -- basic and diluted $(1.83) $(1.00)
====================================
Book value per common share(1) $ 0.80
======
PRO FORMA EXABYTE
Net loss per common share -- basic and diluted $(1.79) $(0.92)
====================================
Book value per common share(2) $ 0.91
======
</Table>
1-22
CHAPTER ONE
<Table>
<Caption>
FOR THE AT OR FOR THE
YEAR ENDED SIX MONTHS ENDED
FEBRUARY 28, 2001 MAY 31, 2001
------------------------------------
ECRIX -- HISTORICAL
Net loss per common share -- basic and diluted $(5.48) $(2.09)
====================================
Book value per common share(3) $(0.89)
======
PRO FORMA EQUIVALENT -- ECRIX
Net loss per common share -- basic and diluted(4) $(0.29) $(0.15)
====================================
Book value per common share(5) $ 0.23
======
</Table>
---------------
(1) Includes Exabyte common shares outstanding as of June 30, 2001 of 22,834,000
and Exabyte preferred shares outstanding on an as converted basis of
1,250,000.
(2) Includes Exabyte common shares outstanding as of June 30, 2001 of
22,834,000, Exabyte preferred shares outstanding on an as converted basis of
1,250,000, common shares assumed issued to Ecrix shareholders upon closing
of 10,000,000 and preferred shares assumed issued to investors upon closing
on an as converted basis of 9,650,000.
(3) Includes Ecrix common shares outstanding as of June 30, 2001 of 6,185,000
and Ecrix preferred shares outstanding on an as converted basis of
33,969,000.
(4) Based on the rate at which Ecrix common shares convert to Exabyte common
shares upon closing of .16168.
(5) Based on the rate at which Ecrix common shares and preferred shares in total
convert to Exabyte common shares upon closing of 0.25.
1-23
CHAPTER ONE
RISK FACTORS
GENERAL INFORMATION ABOUT THESE RISK FACTORS
AND OUR COMBINED COMPANY
THESE RISK FACTORS CONTAIN IMPORTANT INFORMATION ABOUT OUR BUSINESS AND YOU
SHOULD READ THEM CAREFULLY.
You should carefully consider the risks described below. If any of the
following risks should actually occur, our business, prospects, financial
condition or results of operations would likely suffer. In such case, the
trading price of Exabyte common stock or other securities could fall, and you
may lose all or part of your investment. We furnish you these risk factors to
describe how you may be financially hurt by owning Exabyte securities rather
than how you may be financially benefited by taking a short position in our
securities or by taking any other position which results in profits upon a drop
in the securities price. If you are in a short position you face different risks
that are not contemplated in this document.
YOU SHOULD READ THESE RISK FACTORS TOGETHER.
You should look at all of the risk factors in total. Some risk factors may
stand on their own. Some risk factors may affect (or be affected by) other risk
factors. For example, the risk factor relating to our possible inability to
properly forecast our customer demand would likely result in excess inventory,
which is another risk factor. You should not assume we have identified these
connections.
WE MAY NOT UPDATE THESE RISK FACTORS IN A TIMELY MANNER.
Exabyte and the combined company intend to periodically update and describe
these and future risk factors in reports filed with the Securities and Exchange
Commission. However, you should not assume that we will always update these and
future risk factors in a timely manner. We are not undertaking any obligation to
update these risk factors to reflect events or circumstances after the date of
this report or to reflect the occurrence of unanticipated events.
THE RISKS OF OUR COMBINED COMPANY MAY BE DIFFERENT THAN THOSE OF ECRIX OR
EXABYTE INDEPENDENTLY.
The discussion below under "Risks Related to Exabyte's and the Combined
Company's Business" is of risks associated with Exabyte's current business,
except for the section of that discussion "Risks Related to Ecrix's Business".
We expect that the risks associated with the business of the combined company
will include all of the risks currently associated with Ecrix's business and
those associated with Exabyte's business, as well as those associated under the
merger that are described below under "Risks Related to the Merger."
RISKS RELATED TO THE MERGER
EXABYTE AND ECRIX MAY NOT REALIZE ANY BENEFITS FROM THE MERGER.
Exabyte intends to integrate Ecrix's technology into its own products and
services as well as offer Ecrix's products and services separately. If Exabyte
does not integrate the technology effectively or if management spends too much
time on integration issues, it could harm the combined company's business,
financial condition and results of operations. The difficulties, costs and
delays involved in integrating the companies, which could be substantial,
include the following:
- distraction of management and other key personnel from the business of
the combined company;
- integrating complex technology, product lines, services and development
plans;
- inability to demonstrate to customers and suppliers that the merger will
not result in adverse changes in client service standards or business
focus;
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- inability to retain and integrate key personnel;
- disruptions in the combined sales forces that may result in a loss of
current customers or the inability to close sales with potential
customers;
- expending time, money and attention on integration that would otherwise
be spent on developing either company's own products and services.;
- additional financial resources that may be needed to fund the combined
operations; and
- impairment of relationships with employees and customers as a result of
changes in management.
Neither Exabyte nor Ecrix has experience in integrating operations on the
scale represented by the merger, and we are not certain that Exabyte and Ecrix
can be successfully integrated in a timely or efficient manner or at all or that
any of the anticipated benefits of the merger will be realized. Failure to do so
could have a material adverse effect on the business, financial condition and
operating results of the combined company.
IF THE COSTS OF THE PROPOSED MERGER EXCEED THE BENEFITS REALIZED, THE COMBINED
COMPANY MAY EXPERIENCE CONTINUED AND INCREASED LOSSES.
If the benefits of the proposed merger do not exceed the associated costs,
the combined company could be adversely affected by incurring additional or even
increased losses from its operations. The survival of Exabyte after the merger
depends on making the operations of Exabyte and Ecrix profitable through
increased revenues and reduced expenses for the combined company.
THE MARKET PRICE OF EXABYTE COMMON STOCK MAY DECLINE AS A RESULT OF THE MERGER.
The market price of Exabyte common stock may decline as a result of the
merger if:
- the integration of Exabyte and Ecrix is unsuccessful or takes longer
than expected;
- the perceived benefits of the merger are not achieved as rapidly or to
the extent anticipated by financial analysts or investors; or
- the effect of the merger on the combined company's financial results is
not consistent with the expectations of financial analysts or investors.
THE PRICE OF EXABYTE COMMON STOCK IS VOLATILE AND THE VALUE OF EXABYTE COMMON
STOCK TO BE ISSUED IN THE MERGER WILL DEPEND UPON THE MARKET PRICE AT THE TIME
THE MERGER IS CLOSED.
At the closing of the merger, all outstanding shares of common stock and
preferred stock of Ecrix will be exchanged for shares of Exabyte common stock.
Exabyte has agreed to issue a total of up to 10 million shares of its common
stock. Neither Exabyte nor Ecrix may terminate or renegotiate the merger
agreement solely because the market price of Exabyte common stock has increased
or decreased significantly from the time that the merger agreement was entered
into. If the market price of Exabyte's common stock declines significantly,
Exabyte will not be obligated to issue any additional shares and the value of
the shares that Ecrix's stockholders actually receive in the merger may be less
than the value was at the time that they approved the merger or the price at
which they could otherwise sell their Ecrix shares. Similarly, the number of
shares of Exabyte common stock will not be reduced if the market price at the
time of closing increases after the date of the merger agreement or its approval
by Exabyte stockholders.
THE PROPOSED MERGER WILL SUBSTANTIALLY DECREASE THE OWNERSHIP OF CURRENT EXABYTE
STOCKHOLDERS.
Based upon the number of shares of Exabyte common stock outstanding as of
August 31, 2001, shares of Exabyte common stock and Series H preferred stock to
be issued in connection with the merger
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will represent approximately 30% of the total shares of common stock and 44.5%
of the total voting power to be outstanding after the merger. This represents a
substantial dilution to the ownership interests of the current Exabyte
stockholders. In addition, the exercise of options to purchase Exabyte common
stock that we expect to grant to Ecrix employees after the merger may further
dilute the ownership interests of current Exabyte stockholders.
SALES OF SUBSTANTIAL AMOUNTS OF EXABYTE COMMON STOCK AFTER THE MERGER COULD
MATERIALLY ADVERSELY AFFECT THE MARKET PRICE OF EXABYTE COMMON STOCK.
The investors in Exabyte Series H preferred stock have agreed to enter into
contractual arrangements that limit the amount of shares of Exabyte common stock
that they may sell into the public market after closing of the proposed merger.
Based on the number of shares of Exabyte common stock outstanding as of August
31, 2001, approximately 89% of the shares of Exabyte to be outstanding following
the merger will be immediately eligible for resale, a total of approximately 92%
will be eligible 90 days after the merger, a total of approximately 96% will be
eligible 180 days after the merger and the balance of the shares will be
eligible for resale 270 days after the merger, subject to certain limitations
that will apply to affiliates of Exabyte. Many of the Ecrix stockholders that
will receive shares of Exabyte as a result of the proposed merger have held
restricted shares in Ecrix for several years. These persons, as well as others,
may use the proposed merger as a means to liquidate their investment in Ecrix.
The sale of substantial amounts of Exabyte common stock following the proposed
merger may cause substantial fluctuations in the price of Exabyte common stock.
THE MERGER MAY RESULT IN A LOSS OF ECRIX EMPLOYEES.
Exabyte and Ecrix have different corporate cultures, and Ecrix employees
may not want to work for a larger, publicly-traded company instead of a smaller,
privately-held company. Most of the unvested options held by employees of Ecrix
will fully vest as a result of the merger and if not exercised prior to the
closing will terminate at the time of merger. Although Exabyte intends to grant
new options to Ecrix employees who remain employed by the combined company, the
loss of Ecrix options as well as other factors may affect Exabyte's ability to
retain these employees.
UNCERTAINTY CREATED BY THE MERGER MAY MAKE IT MORE DIFFICULT TO ATTRACT AND
RETAIN EXABYTE AND ECRIX EMPLOYEES.
Current and prospective Exabyte and Ecrix employees may experience
uncertainty about their future roles with the combined company. This uncertainty
may adversely affect Exabyte's ability to attract new employees as well as the
ability of Exabyte and Ecrix to retain key management, sales, marketing,
engineering or other personnel. Competitors may attempt to take advantage of
this uncertainty and recruit employees prior to the merger and during
integration, as is common in mergers of high technology companies. As a result,
employees of Ecrix or Exabyte could leave with little or no prior notice. We
cannot assure you that the combined company will be able to attract, retain and
integrate employees following the merger.
THE MERGER MAY RESULT IN A LOSS OF CUSTOMERS.
As a result of the merger some customers or potential customers may not
continue to do business with Exabyte or Ecrix. In this case, the combined
company may lose significant revenue that Exabyte or Ecrix might have otherwise
received had the merger not occurred.
IF THE CONDITIONS TO THE MERGER ARE NOT MET OR WAIVED, THE MERGER WILL NOT OCCUR
AND THE INTENDED BENEFITS OF THE MERGER WILL NOT BE REALIZED.
Several conditions must be satisfied or waived to complete the merger.
These conditions are described in Chapter Three under the "The Merger
Agreement -- Conditions to the Merger" and in detail in the
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merger agreement. Exabyte and Ecrix cannot assure you that each of the
conditions will be satisfied. If the conditions are not satisfied or waived, the
merger will not occur or will be delayed, and Exabyte and Ecrix each may lose
some or all of the intended benefits of the merger. For example, if Exabyte's
common stock is not quoted on the Nasdaq National Market at the time of the
merger, Ecrix will not be obligated to close. As discussed below under "Risks
Related to Exabyte's and the Combined Company's Business," Exabyte has received
a notice from Nasdaq that it is currently out of compliance with the minimum bid
price requirement.
If the merger is not completed, Exabyte may require substantial additional
capital resources to continue its business, which resources may not be available
on favorable terms, or at all.
FAILURE TO COMPLETE THE MERGER WOULD HARM EXABYTE'S FUTURE BUSINESS AND
OPERATIONS.
If the merger is not completed for any reason, Exabyte may be subject to a
number of material risks, including the following:
- if Exabyte continues to incur substantial operating losses, it will need
to immediately and successfully establish new sources of equity or debt
financing, the availability of which is uncertain;
- potential customers may defer purchases of Exabyte's products or
services; and
- employee turnover may increase.
The occurrence of any of these factors would likely result in serious harm
to Exabyte's business prospects, operating results and financial condition.
THE MERGER MAY DEPRIVE ECRIX STOCKHOLDERS OF OPPORTUNITIES.
As a consequence of the merger, Ecrix stockholders will lose the chance to
receive the benefits of their investment in the development and exploitation of
Ecrix's technologies and products on a stand-alone basis. The management of the
combined company may make strategic and operational decisions that differ from
those that would be made by Ecrix as an independent company. Consequently,
stockholders of Ecrix may not achieve a greater return on their investment in
the combined company than if Ecrix were to remain an independent company.
RISKS RELATED TO EXABYTE'S AND THE COMBINED COMPANY'S BUSINESS
Following is a discussion of certain risks that may impact our combined
business. Unless otherwise expressly stated, each of these risks relates to
Exabyte's current business. We expect that all of them will continue to be risks
of the combined company following the merger. If any of the following risks
actually occurs, our combined business could be harmed. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties not presently known to us, or that we currently see as
immaterial, may also harm our business.
1. RISKS RELATED TO ECRIX'S BUSINESS
1.1 ECRIX RELIES ON RELATIONSHIPS WITH A FEW LARGE CUSTOMERS.
Ecrix's three main customers, Tech Data Corporation, Bell MicroProducts and
CMS Peripherals Ltd., purchased tape drives from Ecrix that accounted for 37% of
Ecrix's revenue last year. In August 2001, Ecrix reached an understanding with
Compaq Computer Corporation to sell our VXA(R)-1 tape drives for Compaq's
commercial desktop computers and workstations. Ecrix is currently negotiating
the terms of a definitive agreement with Compaq including the number of units to
be shipped. Although it has received one purchase order from Compaq to ship 518
tape drives in September 2001, Compaq is not currently
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under any obligation to purchase any minimum quantity of products or services
from Ecrix. In addition, Compaq has recently announced a proposed merger with
Hewlett-Packard Company. The proposed merger between Compaq and Hewlett-Packard
may cause Compaq to reassess some of its supplier relationships and could cause
Compaq to stop or reduce its purchases from suppliers, including proposed
purchases of Ecrix products. If Ecrix lost one key customer or if sales to any
of its customers were reduced it would have a materially adverse effect on our
results of operations, financial condition and business prospects.
1.2 ECRIX IS IN THE PROCESS OF TERMINATING ITS MAIN SUPPLY CONTRACT AND
SETTLING CLAIMS ASSOCIATED WITH THE SUPPLY CONTRACT.
Substantially all of Ecrix's manufacturing activity has been conducted
through arrangements with Aiwa Co., Ltd. and a large media supplier. Currently,
Aiwa has the exclusive right to manufacture our VXA(R)-1 tape drive. We
anticipate that we will be terminating our relationship with Aiwa and entering
into a new manufacturing relationship with another Japanese manufacturer. We
have entered into a Memorandum of Understanding with Aiwa regarding termination
and settlement of these issues and we are currently negotiating the terms of a
definitive technology transfer and license with Aiwa.
Pursuant to the terms of the MOU, we agreed to purchase 8,000 tape drives
from Aiwa for approximately $370 per drive. Under the MOU, we also agreed to
purchase 9,000 VXA(R) parts kits (which parts could be used to build 9,000
VXA(R) drives). We believe that we have negotiated a settlement with Aiwa
whereby we will purchase these parts kits for a total cost of $2 million.
Additionally, we agreed to purchase Aiwa's remaining VXA(R) parts and components
(other than the "kits") and we expect that the total cost of these additional
parts and components will be approximately $1.7 million. We will also purchase
all production jigs, equipment and toolings from Aiwa and expect the cost of
this purchase to be approximately $1.1 million. We believe that Aiwa will grant
us a non-exclusive license to utilize certain Aiwa related VXA(R) technologies.
We expect our final agreement with Aiwa will require us to pay Aiwa a royalty of
between 1% and 4% of the invoice price to us of each VXA(R)-1 and VXA(R)-2 drive
we purchase from another manufacturer. We may be unable to reach a final
settlement with Aiwa of certain matters on favorable terms, and any final
settlement with Aiwa may require us to pay Aiwa a material amount, which could
have a material adverse effect on our financial condition and our business
prospects. Discussions with the new manufacturer are in the early stages and
there is no assurance that an arrangement will ultimately result or, if entered
into, will be beneficial to Ecrix. Our failure to enter into a new manufacturing
arrangement with a new supplier would have a material adverse effect on our
financial condition, results of operations and our business prospects. In
addition, if the transition from Aiwa to a new supplier is not done in a timely
manner or on terms favorable to us, our sales, revenue and customer acceptance
could be adversely effected.
1.3 ECRIX MAY BE UNABLE TO OBTAIN KEY PARTS ON A TIMELY BASIS IF SUPPLIERS
CEASE MANUFACTURING REQUIRED PARTS.
Ecrix relies on a limited number of outside companies to supply components
and manufacture our products which results in reduced control over the timing of
deliveries, quality control and costs. Ecrix's reliance on outside suppliers and
manufacturers for parts can result in potential shortages of key parts.
Specifically, Ecrix has received information from Texas Instruments that Texas
Instruments intends to discontinue production of several piece parts currently
used in the production of the VXA(R)-1 tape drive. In addition, Ecrix has
received notice that IBM, a supplier of a data compression chip, was
discontinuing its production. There are often long lead times associated with
the availability of many components that make obtaining these components
sometimes difficult. There are currently a number of parts that Ecrix can
purchase from only one supplier, such as the parts from Texas Instruments and
IBM. Although Ecrix is exploring the possibility of using alternative suppliers
to manufacture the Texas Instruments and IBM parts or modify existing
alternative parts as substitutes, Ecrix may not have time to find alternative
suppliers. If it is unable to find alternative suppliers or modify existing
parts in a timely manner or if other key suppliers are unable to meet our
requirements on a timely and cost-effective basis it could have a material
adverse effect on our results of operations. In addition, Ecrix uses other parts
that can currently
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be purchased from only one supplier and, although Ecrix has not been notified by
these manufacturers that they are discontinuing production of these parts, if
any of these other manufacturers decides to discontinue manufacturing a key
part, Ecrix's inability to replace these parts could have a material adverse
effect on our results of operations.
1.4 ECRIX HAS INCURRED SUBSTANTIAL LOSSES AND WILL NEED TO EITHER GENERATE
SUFFICIENT REVENUES OR OBTAIN FINANCING.
Ecrix has completed several rounds of private equity financing with its
last round, which closed in September 2000, totaling $19.9 million (net of
expenses). Ecrix, however, has incurred substantial losses and negative cash
flows from operations in each fiscal period since inception. For the year ended
February 28, 2001, Ecrix incurred a loss from operations of $19.4 million and
negative cash flows from operations of $19.6 million. As of February 28, 2001,
Ecrix has an accumulated deficit of $44.6 million. Management expects operating
losses and negative cash flows to continue over the short term and anticipates
that losses will continue due to additional costs and expenses related to
product development and sales and marketing activities and capital expenditures.
While Ecrix has a borrowing facility with a bank, the borrowing facility
requires Ecrix to comply with certain financial and non-financial covenants. The
inability of Ecrix to generate additional revenue and comply with its financial
covenants could prevent Ecrix from obtaining adequate financing from the bank to
fund our operations. While the consummation of the merger may enhance our
ability to raise capital, the failure to consummate the merger or obtain the
anticipated benefits of the merger could have a material adverse impact on
Ecrix's ability to continue as a going concern and to meet its intended business
objectives. Likewise, the failure to generate sufficient revenues, raise
additional capital or borrowings, or reduce certain discretionary spending could
have a material adverse impact on Ecrix's ability to continue as a going concern
and to meet its intended business objectives.
2. CURRENTLY, OUR REVENUES ARE INADEQUATE TO SUPPORT OUR OPERATIONS.
2.1 WE NEED ADDITIONAL FUNDING TO SUPPORT OUR OPERATIONS. OUR INABILITY TO
OBTAIN ADDITIONAL FUNDING MAY HARM OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Exabyte's cash balance has declined over the last few years primarily
because of:
- losses in the first half of 2001 of $22,809,000; in 2000 of $41,268,000;
in 1999 of $88,407,000; and an accumulated deficit at June 30, 2001 of
$50,186,000;
- expenditures for new products and products under development; and
- other capital expenditures.
Due to ongoing operating losses and resulting liquidity restraints, we
reassessed our business and investigated various strategic alternatives that
would result in increased liquidity. These alternatives included one or more of
the following:
- sale of all or part of our operating assets and off-balance sheet
assets;
- restructuring of current operations;
- additional equity infusions; or
- strategic alliance, acquisition or merger.
Broadview was engaged to assist us in this process. As a result, we issued
shares of Series G preferred stock as described below and have additionally
entered into the merger agreement with Ecrix.
If Exabyte were not to consummate the merger or a similar transaction and
did not raise additional capital through debt or equity, it is possible that we
would be unable to achieve our currently contemplated business objectives or
have enough funds to support our operations, which could affect our
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ability to continue as a going concern. The report of Exabyte's independent
accountants on its consolidated financial statements for the 2000 fiscal year
contained an explanatory paragraph related to our ability to continue as a going
concern.
Such an opinion by our independent accountants may impact our dealings with
third parties, such as customers, suppliers and creditors, because of concerns
about our financial condition. Any such impact could have a material adverse
effect on our business and results of operations.
As discussed in Chapter Three under "Exabyte's Reasons for the Merger," we
believe that our merger with Ecrix will improve our liquidity and enhance our
access to capital. However, there can be no assurance that we will realize these
benefits from the merger or that, even if realized, they will be sufficient to
resolve our liquidity concerns. If Exabyte completes the merger with Ecrix,
Exabyte expects that its cash from operations and the cash infusion to be made
at the time of the merger will be sufficient for the cash needs of Exabyte after
the merger through at least June 30, 2002. Exabyte's cash needs beyond that date
depend on a number of factors, including whether Exabyte achieves significant
sales growth of Ecrix's VXA drives, revenue growth of Exabyte's existing
products, the successful introduction and sales of Exabyte's M3(TM) tape drive,
and cost containment. In any event, in order to provide some cushion and to take
into account the possibility of less favorable operating results than are
projected by the management of Exabyte and Ecrix, Exabyte will continue to seek
external financing through debt or equity.
2.2 THE DATA STORAGE INDUSTRY IN WHICH WE COMPETE IS CURRENTLY
EXPERIENCING A SLOWDOWN.
Recently, the data storage industry has experienced reduced sales as a
result of general economic conditions and other factors. This slowdown has
impacted our net sales. Even if we reduce our costs as planned, we may be unable
to generate sufficient revenue because of industry conditions in order to become
profitable.
2.3 COMPLIANCE WITH FINANCIAL LOAN COVENANTS UNDER EXABYTE'S LOAN
AGREEMENT WITH CONGRESS FINANCIAL CORPORATION OR ECRIX'S LOAN AGREEMENT WITH
SILICON VALLEY BANK MAY AFFECT OUR ABILITY TO BORROW UNDER THOSE LINES OF CREDIT
AND OUR OWN LIQUIDITY.
In May 2000, Exabyte entered into a new bank line of credit agreement with
Congress Financial Corporation, which was subsequently amended. Currently,
Exabyte can borrow up to the lesser of 80% of eligible accounts receivable plus
25% of eligible finished goods inventory (as defined in the agreement and
amendment) or $25.0 million. As of June 30, 2001, the overall amount available
to borrow was $16,325,000, Exabyte had $14,337,000 in borrowings outstanding,
and a remaining borrowing capacity of $1,988,000. This loan is secured by our
accounts receivable and inventory, as well as certain off balance sheet assets.
The agreement contains a number of covenants that, among other things:
- restrict certain financial and other activities;
- requires us to maintain a minimum net worth; and
- eliminates the borrowing line if we experience any material adverse
change.
As of March 31 and June 30, 2001, Exabyte was in default of the net worth
covenant contained in the loan agreement. In connection with the execution of
the merger agreement with Ecrix, Congress Financial agreed to waive these past
events of default and amend the minimum net worth covenants. Because of the
covenants and conditions to borrowing, our line of credit may not always be
available to us. See "Liquidity and Capital Resources" under "Exabyte
Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Chapter Five.
In addition, Ecrix currently has a bank loan and security line of credit in
place with Silicon Valley Bank. At August 29, 2001, Ecrix could borrow the
lesser of $9 million or an amount determined by a formula applied to eligible
inventory, accounts receivable and existing borrowings. The revolving line of
credit expires on June 29, 2002. Amounts borrowed under the line of credit are
secured by substantially all
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of Ecrix's assets. The line of credit requires Ecrix to meet certain financial
ratios, including a requirement to maintain a minimum stockholders equity
balance (as defined) of $12 million. As of July and August 2001, Ecrix was in
default of this net worth covenant.
Ecrix received a waiver of this default and subsequently re-negotiated the
minimum shareholder equity balance covenant. Upon effectiveness of the merger,
Ecrix anticipates that the line of credit will be cancelled and it will be
obligated to repay all outstanding amounts due. However, if the merger was not
consummated, this line of credit may not always be available because of the
covenants and conditions to borrowing. For more information about this line of
credit, see "Liquidity and Capital Resources" under "Ecrix Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Chapter Four.
3. RISKS ASSOCIATED WITH OUR OPERATIONS AND FINANCIAL RESULTS.
3.1 NASDAQ COULD DELIST EXABYTE COMMON STOCK IF WE DO NOT REESTABLISH
COMPLIANCE WITH NASDAQ'S MINIMUM BID PRICE OR CONTINUE TO COMPLY WITH FINANCIAL,
CORPORATE GOVERNANCE, AND OTHER STANDARDS FOR CONTINUED LISTING.
Our common stock is listed on the Nasdaq National Market. In order to
maintain our listing on the Nasdaq National Market we must meet minimum
financial and other requirements. Recently we received a notice from Nasdaq that
we had failed to meet the $1 minimum bid price requirement for continued
listing. Although Nasdaq has declared a temporary moratorium on delisting for
failure to meet the $1 minimum bid price requirement, if the minimum bid price
of our common stock is below $1 for 30 consecutive trading days after the
moratorium is lifted, our common stock may be delisted. Although we intend to
request an appeal of any potential delisting notice and undertake measures, such
as the proposed reverse split, intended to maintain our listing, there can be no
assurance that our common stock will remain listed on the Nasdaq National
Market. Additional reasons for delisting include failure to maintain a minimum
amount of net tangible assets, and failure to timely file various reports with
the SEC, as well as other requirements. There are also circumstances where
Nasdaq may exercise broad discretionary authority for continued inclusion. If
our common stock were delisted from Nasdaq for any reason, it could seriously
reduce the value of our common stock and its liquidity. In addition, it is a
condition to Ecrix's obligation to close the merger that our common stock be
quoted on the Nasdaq National Market.
3.2 OUR SUCCESS DEPENDS ON MANY FACTORS, THE MOST SIGNIFICANT OF WHICH IS
OUR ABILITY TO SUCCESSFULLY TRANSITION OURSELVES INTO A STRONG AUTOMATION
COMPANY.
We believe that our future success depends largely upon the success of our
library products. We are currently transitioning into a more significant
participant in the growing tape library market. However, our ability to be
successful in this market will depend upon a number of factors, including:
- our ability to successfully sell libraries independent of our
MammothTape(TM) tape drives;
- availability of media;
- introduction of competitive products;
- acquiring sufficient market share;
- customer acceptance and original equipment manufacturer ("OEM")
adoptions;
- compatibility with tape drives used by our customers; and
- ability to service and support our library products.
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3.3 MEDIA SALES REPRESENTED 36% OF OUR REVENUES IN THE FIRST SIX MONTHS OF
2001. ANY SHORTFALL IN MEDIA SALES COULD HARM OUR RESULTS OF OPERATIONS.
Sales of media accounted for approximately 36% of our net revenue during
the first half of 2001. A significant portion of these sales were the result of
backlog accrued during the end of 2000 and the beginning of 2001 due to media
supply constraints. To the extent media sales decline and are not replaced with
additional revenue from our other products or services, our financial results,
including our gross margin and revenues, may be adversely affected.
3.4 WE HAVE ENCOUNTERED DIFFICULTIES MANUFACTURING OUR M2(TM) TAPE DRIVE
BECAUSE OF ITS COMPLEX DESIGN, WHICH HAS HARMED OUR ABILITY TO PRODUCE AND SELL
THE PRODUCT. OUR INABILITY TO SUCCESSFULLY RESOLVE THESE ISSUES MAY HARM OUR
OPERATING RESULTS.
The MammothTape(TM) platform designs are extremely complex, which may
result in lower than anticipated manufacturing yields, field reliability issues
and increased inventory levels. We experienced these issues with the
introduction of M2(TM). We experienced similar issues with the introduction of
our original MammothTape(TM) drive and were able to successfully address them.
Although we have made significant progress in addressing these issues as they
relate to M2(TM), we cannot assure that we will completely resolve any of these
issues or, if resolved, they will be done in a timely manner. In addition, when
we encounter these kinds of manufacturing problems, we must make changes to the
product design. Implementing these changes can be troublesome and costly and
could cause additional design or manufacturing flaws. Any difficulties
manufacturing our products or designing our products for manufacturing could
harm our results of operations.
3.5 OUR INABILITY TO OBTAIN ENOUGH MEDIA FROM THREE SUPPLIERS HAS IN THE
PAST AND COULD IN THE FUTURE INHIBIT OUR PRODUCTION AND SALES OF OUR TAPE DRIVES
AND ASSOCIATED LIBRARIES.
We depend on a continuous supply of Advanced Metal Evaporative ("AME")
media to use with our MammothTape(TM) products. We cannot sell our products, or
grow our product lines without a sufficient supply of AME media. Currently, we
obtain AME media from three suppliers:
- Matsushita Electric Industrial Co. Ltd. ("MEI");
- TDK Corporation ("TDK"); and
- Sony Corporation ("Sony").
If these suppliers cannot provide us with enough high-quality,
competitively priced media, we may have to delay or cancel product shipments
and/or orders. We may also have to delay future product introductions. We have
recently encountered difficulties obtaining enough media from our suppliers to
fill orders. This inability to fill orders for media cartridges adversely
affected our results of operations during 2000. Should we again experience
problems with our media suppliers, our future results of operations, as well as
our ability to sell or introduce products, could be harmed. Any inability to
sell or introduce our products would materially and adversely affect our
competitive position as well as our results of operations.
Our M2(TM) tape drives and associated libraries specifically depend on AME
media with SmartClean(TM) technology. Even with multiple media suppliers, we may
not receive enough AME media with SmartClean(TM) to fill current or backlog
orders for products and media. Should this happen, we may have to delay or
cancel M2(TM) tape drive and/or library shipments and orders. This would
materially and adversely affect our results of operations.
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3.6 IN ADDITION TO OUR ABILITY TO SUCCESSFULLY TRANSITION TO AN AUTOMATION
COMPANY, WE ALSO BELIEVE THAT OUR SUCCESS DEPENDS ON OUR ABILITY TO PRODUCE AND
SELL OUR M2(TM) TAPE DRIVE AND ECRIX'S VXA(R)-2 DRIVES.
We believe that our success currently depends in part on our M2(TM) and
VXA(R)-2 tape drive. In turn, the success of these drives depends, among other
things, on:
- increasing the throughput of our manufacturing;
- satisfactorily addressing design issues;
- customer acceptance of our tape drive formats;
- supply capacity sufficient to meet customers' expectations;
- customers transitioning from our earlier products to M2(TM) and VXA(R)-2
- OEM qualification and adoption; and
- media availability.
3.7 WE PREVIOUSLY EXPERIENCED PROBLEMS INTRODUCING OUR MAMMOTH DRIVE ON
TIME. IF WE EXPERIENCE SIMILAR PROBLEMS WITH INTRODUCING FUTURE PRODUCTS, WE
COULD EXPERIENCE LOSSES IN MARKET SHARE AND CREDIBILITY, WHICH WOULD HARM OUR
OPERATING RESULTS.
As previously stated, we brought our original Mammoth tape drive to market
late and as a result lost market share and credibility with our customers. We
may experience development and/or manufacturing problems with our future
MammothTape(TM) products that would delay their introduction. A late
introduction for any future tape drive may again affect our market share
position and/or credibility, which would negatively impact sales.
We are currently addressing issues regarding our ability to manufacture our
M2(TM) tape drive. We must adequately address these issues before we can produce
our next generation M3(TM) tape drive. Our inability to address these issues in
a timely manner may delay the introduction of our M3(TM) tape drive.
3.8 MANAGING OUR INVENTORY LEVELS IS IMPORTANT TO US BECAUSE EXCESS
INVENTORY REDUCES CASH AVAILABLE TO US FOR FUNDING OUR OPERATIONS, OR MAY CAUSE
US TO WRITE OFF EXCESS INVENTORY WHICH NEGATIVELY IMPACTS OUR OPERATING RESULTS.
It is important for us to maintain appropriate levels of inventory.
Excessive amounts of inventory reduces our cash available for operations and may
cause us to write-off a significant amount as excess or obsolete. Inadequate
inventory levels may make it difficult for us to meet customer product demand,
resulting in lost revenues.
We face many challenges in effectively managing our inventory, which may
materially affect our results of operations if we do not manage them properly.
These challenges include:
- keeping inventory levels low;
- managing unexpected increases in inventory due to stock rotation
obligations or cancelled orders;
- meeting changing product demands;
- transitioning our product lines effectively; and
- successfully introducing new products.
Particularly, introducing new products may negatively affect our product
inventory value by requiring us to write down or make allowances for inventory
devaluation, which may materially affect our results of operations. We have
experienced increased inventory levels in connection with the introduction of
our M2(TM) tape drives. In the past we have experienced special charges and
write downs which harmed our
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results of operations. In the future we may again incur special charges or make
allowances for an inventory devaluation that will materially affect our results
of operations.
3.9 IF COMPANIES INTRODUCE NEW TECHNOLOGIES, SUCH AS OPTICAL DISK, OPTICAL
TAPE OR DVD, INTO THE DATA STORAGE MARKET, OUR TAPE PRODUCTS MAY BECOME
OBSOLETE.
Technology usually changes and advances quickly in the high technology
industry. In order to successfully compete in this industry, our future products
must apply and extend our current technology, as well as keep pace with new
technology developments.
Although tape has historically been the preferred medium for data storage
backup, companies are developing new technologies for this market. Some of the
new technologies are:
- Optical Disk (including three dimensional Optical Disk)
- Optical Tape
- DVD
- Holographic Storage
- Magnetic Optics
We may also experience competition from new storage architectures, such as
SANs, network attached storage and virtual storage.
If any new technology offers users the same or greater benefits than tape,
tape technology could become obsolete. In order to compete under market
pressures, we must be able to adapt our technologies to changes in an efficient,
cost-effective manner. Our inability to adapt would severely harm our
competitive position and our results of operations.
3.10 IF WE DO NOT CONTINUALLY ENHANCE OUR TAPE TECHNOLOGY TO KEEP PACE
WITH OUR COMPETITORS, OUR PRODUCTS WILL NOT REMAIN COMPETITIVE.
Our ability to compete with other tape drive manufacturers is directly
impacted by the rapid development of tape drive technologies. Our ability to
compete with other tape drive technologies is impacted by, among other things:
- customer and OEM adoption of MammothTape(TM) and VXA(R) technology;
- compatibility of tape drives to other data storage products;
- data storage density;
- data transfer rate;
- customer confidence and familiarity;
- product reliability; and
- price.
3.11 WE MUST ACCURATELY TIME THE INTRODUCTION AND WITHDRAWAL OF OUR
PRODUCTS INTO AND OUT OF THE DATA STORAGE MARKET BECAUSE IT AFFECTS OUR REVENUE
AND INVENTORY LEVELS.
Accurately timing the release of new products is important to the sales of
existing products. Likewise, prematurely withdrawing an existing product could
result in revenue loss from that product, and delaying the withdrawal of a
product could result in excess product inventory. We continually evaluate our
product life cycles. Any timing mistakes or inability to successfully introduce
a new product could adversely affect our results of operations.
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3.12 WE MUST CONTINUE TO DEVELOP AND INTRODUCE TECHNOLOGICALLY COMPELLING
AUTOMATED LIBRARY PRODUCTS WHICH AUTOMATE COMPETITIVE STORAGE TECHNOLOGIES, SUCH
AS AIT(TM), LTO(TM) ULTRIUM(TM), OR DLTTAPE(TM), OR OTHER FUTURE NON-TAPE
TECHNOLOGIES, IN ORDER FOR US TO MAINTAIN OR IMPROVE OUR SALES AND REVENUES.
We believe our future success depends on future library and other products
and services. The success of these future products depends, among other things,
on:
- timely development;
- customer acceptance;
- supply capacity;
- customer transition to these future products; and
- OEM qualification and adoption; and media availability.
3.13 WE EXPERIENCE MANY RISKS REGARDING OUR EFFORTS TO OUTSOURCE TAPE
DRIVE MANUFACTURING TO HITACHI DIGITAL MEDIA PRODUCTS DIVISION OF HITACHI, LTD.
AND LIBRARY MANUFACTURING TO SHINEI INTERNATIONAL, INCLUDING OUR INABILITY TO
OBTAIN ENOUGH PRODUCT FROM THESE SOLE SOURCE SUPPLIERS, MAINTAINING A DUPLICATE
MANUFACTURING INFRASTRUCTURE DURING THE TRANSITION PHASE, AND TIMELY
IMPLEMENTING ENGINEERING PRODUCT CHANGES.
We currently outsource the manufacturing of some of our library products to
Shinei and portions of our M2(TM) manufacturing process to Hitachi and we may
transfer the manufacture of some of our other products to Hitachi in the future.
We plan to complete the outsourcing of all our low-end libraries and the
remaining portion of our M2(TM) tape drive manufacturing to the respective
manufacturers by the first quarter of 2002.
Exabyte successfully outsourced the manufacturing of our first tape drive
products to Sony. While we were successful with that outsourcing effort, we may
be unsuccessful with our current outsourcing effort. For example, we were
unsuccessful previously when we outsourced our worldwide repair services to
Magnetic Data Technologies, LLC and have now brought that service function back
in-house.
Hitachi or Shinei may be unable to timely implement product engineering changes.
Outsourcing our manufacturing to a third party takes many months and
involves, among other details, extensive employee training. Due to the time and
expenses involved, and the inability to easily move the manufacturing to another
party, we heavily depend on our existing third party manufacturers for our
products. If Hitachi or Shinei cannot meet our product demand, our results of
operations would be harmed. If Hitachi or Shinei cannot or will not implement
product changes on a timely basis, we would be unable to fill customer orders.
This would materially and adversely affect our results of operations. Our
dependence on third party manufacturers can also adversely affect our ability to
negotiate the terms of our future business relationships with these parties.
Hitachi recently announced that it is implementing emergency management
measures aimed at bringing about a prompt improvement in its business results.
We do not know what impact these measures will have upon our relationship with
Hitachi, and our ability to receive products from Hitachi on a timely manner, in
sufficient quantities, of an adequate quality and on favorable terms.
We may be unable to obtain enough product.
When we complete the outsourcing of tape drive manufacturing to Hitachi,
they will be our sole source manufacturer for our M2(TM) tape drives. Their
inability to successfully manufacture the tape drives or manufacture enough tape
drives to meet our customer demand would adversely affect our results of
operations.
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If Hitachi cannot successfully manufacture our tape drives, bringing the
manufacturing process back to Exabyte or outsourcing to another third party
manufacturer would negatively impact our ability to fill customer orders and
would harm our results of operations.
When we complete the manufacturing outsourcing to Shinei, they will
manufacture some of our tape libraries, making them our sole source manufacturer
for these libraries. The same risks we incur with Hitachi (set out above) apply
to our sole-source manufacturing relationship with Shinei.
We may need to maintain a duplicate manufacturing infrastructure during the
transition period.
During the transition period, we must maintain redundant manufacturing
capability at our Boulder, Colorado facilities, the Hitachi facilities in Japan
and the Shinei facilities in Singapore. There are several factors that would
increase our expenses during the transition period, including:
- maintaining a double infrastructure;
- creating additional tooling;
- adding additional technical personnel; and
- creating additional inventory; and training Hitachi and Shinei technical
and manufacturing personnel.
Expense increases for these or any other reasons could harm our results of
operations. Upon completion of the outsourcing to these third parties, we may be
unsuccessful in reducing our infrastructure costs at our facilities, which would
cause us to incur higher total operation costs.
Our proprietary information may not be adequately protected.
We highly value our proprietary information, including trade secrets,
patents and manufacturing processes. We make substantial efforts to protect
these assets. Outsourcing our manufacturing to a third party requires us to
share some of this proprietary information with our third party manufacturer.
Although these parties would generally enter into agreements intended to protect
our proprietary information, we can not assure that these agreements will
provide adequate protection. This would weaken our protection of our proprietary
information and could harm our future results of operations.
3.14 WE AUTOMATED COMPETITIVE DLT TECHNOLOGY LATE AND MAY EXPERIENCE
MARKET SHARE LOSS IF WE CANNOT AUTOMATE IN A TIMELY MANNER NEW COMPETITIVE
TECHNOLOGY DEVELOPED IN THE FUTURE.
We lost market share in the library market because we delayed our decision
to automate competitive DLT technology. Our inability to successfully automate
future technologies could again negatively affect our library market share
position, as well as our results of operations.
3.15 OUR LIMITED AVAILABLE CASH MAY IMPEDE OUR ABILITY TO OBTAIN KEY
COMPONENTS IN A TIMELY MANNER, WHICH COULD HARM OUR SALES.
We are currently experiencing liquidity constraints which effect the amount
of cash available to pay our vendors and suppliers pursuant to our contractual
obligations. This constraint has in the past and will likely in the future cause
our vendors to restrict shipments of key components necessary to build and sell
our products. Any inability to obtain key components in a timely manner will
restrict our ability to ship products and, as a result, harm our revenues and
results of operations.
3.16 ANY INABILITY TO OBTAIN COMPONENTS, SUCH AS SCANNERS OR RECORDING
HEADS, FROM OUR SUPPLIERS WOULD AFFECT OUR ABILITY TO MANUFACTURE OUR PRODUCTS.
We obtain all the components to make our products from third parties. A
shortage of any component would directly affect our ability to manufacture the
product. Some key components, such as scanners and recording heads, are
developed and manufactured to our specifications, which limits our ability to
quickly
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find another supplier for these components if we experience a supply shortage.
There are long lead-times associated with the availability of many components
that make obtaining these components sometimes difficult. For example, the ASIC
chips we use in our MammothTape(TM) products are produced from several
suppliers. However, because it takes many months to qualify suppliers to produce
ASIC chips for us, any shortfall or inability to obtain an adequate supply of
ASIC chips from any of our current suppliers would adversely affect our results
of operations.
3.17 OUR DEPENDENCIES ON SOLE-SOURCE SUPPLIERS MAY CAUSE A REDUCTION IN
OUR LEVEL OF CONTROL OVER DELIVERY, QUANTITY, QUALITY AND COST OF THE PRODUCT.
We rely heavily on sole-source suppliers (one supplier providing us with
one or more components) to develop and/or manufacture critical components to use
in our tape drives or libraries. If a sole-source supplier is unable to provide
us with a sufficient supply of their components we may be unable to manufacture
the drive or library. This could cause us to delay or cancel shipments, which
would adversely affect our results of operations.
In addition, by relying on sole-source suppliers, we may see a reduction in
our level of control over many component items, including:
- delivering components on schedule;
- manufacturing a high number of components for delivery;
- maintaining the highest possible quality when manufacturing the
components; and
- managing the costs of manufacturing the components.
Hitachi is one of our primary sole source suppliers. They supply us with
many key components for our M2(TM) and Eliant(TM)820 tape drives. We have
contracts with Hitachi to develop, manufacture and supply these components.
However, the contracts do not necessarily guarantee that the components will be
continuously supplied to us at a reasonable cost. Additionally, if Hitachi makes
an error in manufacturing a component, we may be unable to incorporate the
components into our drives. If any of these or other problems arise, we may
experience difficulties manufacturing our M2(TM) or Eliant(TM)820 tape drives,
or developing and successfully introducing our future MammothTape(TM) tape
drives. Any material issues that may arise with Hitachi could adversely affect
our sales and therefore our results of operations.
3.18 WE RELY ON THIRD PARTY MANUFACTURERS, WHICH MAY WEAKEN OUR
INTELLECTUAL PROPERTY PROTECTION, CREATE A RELIANCE ON THE MANUFACTURERS TO
PRODUCE OUR PRODUCTS, OR EXPOSE US TO MARKET RISKS ASSOCIATED WITH FOREIGN
MANUFACTURERS.
We rely on a number of third party manufacturers for various stages of our
manufacturing process, particularly the early stages. This practice may impair
our ability to establish, maintain or achieve adequate product design standards
or product quality levels.
Much of our third party manufacturing utilizes proprietary technology. To
protect our proprietary information, we may extend licenses to our third party
manufacturers. However, we cannot assure that our third party manufacturers will
adhere to the limitations or confidentiality restrictions of their license.
Our third party manufacturers may develop processes related to
manufacturing our products independently or jointly with us. This would increase
our reliance on these manufacturers or may require us to obtain a license from
them. We may be unable to obtain a license on terms acceptable to us, if at all.
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Many of our third party contracts are with manufacturers outside the United
States. In addition to typical market risks associated with utilizing third
party manufacturers, contracting with foreign manufacturers subjects us to
additional exposures, including:
- political instability;
- currency controls and fluctuations;
- tariffs, customs and other duties;
- reduced intellectual property protections; and
- import controls, trade barriers and other trade restrictions and
regulations.
Additionally, U.S. federal and state agency restrictions imposed by the Buy
American Act or the Trade Agreement Act may apply to our products manufactured
outside the United States.
3.19 WE MAY BE UNABLE TO INCREASE OUR PRODUCTION TO MEET SUDDEN,
UNEXPECTED DEMANDS BY OEM CUSTOMERS.
OEM demand for our M2(TM) or Ecrix's VXA(R)-1 tape drives could increase
suddenly. We, our suppliers, and our third party manufacturers may be limited in
our ability to meet a sudden significant increase in demand due to limitations
in manufacturing capacity and long lead times to acquire certain parts. If our
suppliers and third party manufacturers are not able to meet the increased
demand, our inability to fulfill our customers' orders could adversely affect
our results of operations.
3.20 THE STORAGE BACKUP MARKET IS VERY COMPETITIVE AND MAY CAUSE US TO
DECREASE OUR PRODUCT PRICING OR AFFECT OUR PRODUCT SALES.
The tape storage market is highly competitive and subject to rapid
technological changes. We currently expect competition to increase. The tape
storage market has experienced a number of consolidations, thereby increasing
our competitive pressures. Competitive pressures impact us in many ways,
including:
Price Erosion. Price erosion of our products has occurred in the past and
is likely to occur again in the future.
Loss of Market Share. We have lost market share to competitors in the
past. We may lose additional market share in the future.
Additionally, some of our competitors have financial, technical,
manufacturing and marketing resources that are much greater than our own. These
competitors may devote their superior resources to aggressively developing and
marketing their own storage technologies. These technologies may be equivalent
or superior to our own technologies, or may render some of our products
non-competitive or obsolete. In order to compete under these pressures, we must
adapt our technologies to these changes in an efficient, cost-effective manner.
Our M2(TM) and Ecrix's VXA(R)-1 tape drive faces significant competition
from current and announced tape drive products offered by Quantum, Tandberg,
Sony and the LTO(TM) Consortium (IBM, Hewlett Packard and Seagate). The
specifications of some of the announced drives show greater data capacities and
transfer rates than M2(TM), VXA(R)-1 & VXA(R)-2.
Our other tape drives and automated tape libraries face competition from
companies offering 8mm, half-inch, 4mm and mini-cartridge products. Significant
competition may also develop from companies offering erasable and non-erasable
optical disks, as well as other technologies.
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3.21 WE RELY ON THE SALES TO A SMALL NUMBER OF CUSTOMERS FOR A LARGE
PORTION OF OUR OVERALL SALES.
The following chart expresses the sales percentages of Exabyte's three
largest customers for the six months ended June 30, 2001:
<Table>
Ingram Micro 16%
IBM 11%
Tech Data 10%
---
37%
</Table>
We have customers who are also competitors, including IBM with their
LTO(TM) Ultrium(TM) tape drive.
We do not require minimum purchase obligations from our customers. They may
also cancel or reschedule orders at any time, prior to shipment, without
significant penalty. Losing one or more key customers would adversely affect our
results of operations. A key customer canceling orders or decreasing the volume
in orders would adversely affect our results of operations. Contractually, our
reseller customers may return a portion of their Exabyte product inventory as
part of their stock rotation rights, but must issue a simultaneous offsetting
purchase order.
In the past, we have experienced delays in receiving purchase orders and,
on occasion, anticipated orders have either not materialized or been rescheduled
because of changes in customer requirements. These types of changes from our key
customers may cause our revenue to change significantly from quarter to quarter.
If the change involves higher-margin products, then the impact is greater on the
results of operations.
Our product sales depend heavily on OEM qualification, adoption and
integration. Many reseller and smaller OEM customers delay their orders until
key OEMs adopt and integrate our products. Our competitive position and results
of operations may be significantly harmed if a key OEM failed to adopt and
integrate our products.
We have announced adoption of M2(TM) by several OEM customers, but our
success depends on additional OEMs adopting M2(TM).
3.22 WE RELY ON THE INFORMATION TECHNOLOGY MARKETS FOR WORKSTATIONS,
MID-RANGE COMPUTER SYSTEMS AND NETWORK SYSTEMS TO CREATE DEMAND FOR OUR
PRODUCTS. ANY SLOWING OF THESE MARKETS WOULD ADVERSELY AFFECT SALES OF OUR
PRODUCTS.
Our product demand depends substantially on the purchases and use of work
stations, mid-range computer systems and network servers. These markets tend to
be volatile and subject to market shifts, which we may be unable to determine in
advance. A slowdown in the demand for these types of products has in the past
and could continue to materially affect our business. Any demand weakness
affecting sales in the reseller channel, which generally represents higher
margin sales, could have a greater impact on our results of operations.
Rapid business and product transitions could create a strain on our
resources. We are experiencing a period of rapid business and product
transition. We must address the complexities of developing, manufacturing and
servicing multiple products. Our products incorporate several different
technologies and are sold through multiple marketing channels.
Dealing with this transition has placed a significant strain on our
management, operational and financial resources. We will probably continue to
see a strain on our management, operational and financial resources because of
these transitional issues. We must continually implement and improve our
operational, financial and information systems to manage our business
transition. We must also effectively and efficiently train and manage our
employees.
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We sometimes base our market demand decisions on market demand forecast
reports, which may or may not be accurate. This may create insufficient or
excessive inventories and disproportionate overhead expenses. Particularly,
short order lead-times of reseller sales limit our ability to forecast.
3.23 THIRD PARTIES MAY BRING CLAIMS AGAINST US FOR MONETARY DAMAGES
SUFFERED AS A RESULT OF OUR PRODUCTS FAILING TO BACKUP OR RESTORE DATA. THESE
MONETARY DAMAGES COULD BE SIGNIFICANT.
Our products provide end users the ability to backup their data. If the
tape backup fails, the end user could suffer a significant loss of operations.
We carry error and omission liability insurance coverage to protect us from the
financial risks of this type of claim by our end users. However, if a claim
exceeded our insurance coverage, it could adversely impact our operating
results. The failure of our products to properly back up an end user's data
could also create a loss of confidence in our products and adversely impact the
sale of current and future products.
3.24 WE MAY LOSE OUR ENTIRE INVESTMENT IN CREEKPATH SHOULD THEY FAIL TO
SUCCEED OR IF THE MARKET IN WHICH CREEKPATH PARTICIPATES CANNOT SUSTAIN
CREEKPATH'S GROWTH.
In December 1999, we formed a wholly-owned subsidiary, CreekPath Systems,
Inc., to leverage our investments and expertise in SANs, Fibre Channel and
Java-based software for storage resource management. In December 2000 and
January 2001, in order for CreekPath to utilize outside financing, rather than
our own capital, CreekPath completed a $17 million convertible preferred stock
financing. As a result of that financing, as of June 30, 2001, we held
approximately 33% of the voting capital stock. See Notes to Consolidated
Financial Statements.
To date, we have invested approximately $5.4 million in CreekPath. Because
of losses in CreekPath's financial results, we expensed our remaining $343,000
of carrying value during the first quarter of 2001, and at June 30, 2001 the
carrying value on our books was $0.
Our shares of CreekPath capital stock are not registered under the
Securities Act of 1933. Furthermore, we are contractually limited in our ability
to sell them to a third party. As a result, even if CreekPath is successful, we
may be unable to liquidate our investment. Furthermore, the value of our
interest in CreekPath depends on its success, which in turn is subject to a
number of risks, including, the following:
- CreekPath has limited operating and financial history;
- CreekPath may require additional outside financing, which it may not be
able to obtain;
- the storage service provider (SSP) market in which CreekPath competes is
new and may not grow or be sustainable;
- CreekPath has never been profitable and may never become profitable;
- CreekPath has fixed expenses, and expects to continue incurring
significant expenses;
- CreekPath may suffer damage from disasters or other unanticipated
problems at its data center partners;
- a breach of security would cause harm to CreekPath's reputation and
results of operations;
- CreekPath's services can be affected by errors or defects in the
infrastructure and technology for the services;
- CreekPath faces direct and indirect competition;
- CreekPath's success depends in part on developing strategic alliances
with key Internet data centers and others;
- Changing or new standards or technology may render CreekPath's services
obsolete;
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- CreekPath's success depends on hiring qualified employees in sales and
other areas; and
- CreekPath anticipates consolidations of the SSP market which may cause a
decline in fees.
When CreekPath began operating as a wholly-owned subsidiary, we provided
them with certain intellectual property pertaining specifically to its
operations. The valuation of CreekPath depends, in part, on its ownership of
this intellectual property. See Risk Factor 3.30 below.
3.25 THE LABOR MARKET IN THE HIGH TECHNOLOGY INDUSTRY AND BOULDER,
COLORADO IS COMPETITIVE AND WE MAY HAVE DIFFICULTY RECRUITING OR KEEPING KEY,
QUALIFIED EMPLOYEES.
We compete for qualified employees with other high technology companies and
other employers in Colorado. Competition for employees is based upon, among
other factors, base salary, stock-based compensation, ownership investment and
high turnover rates in technology and other companies generally. As a result, we
may lose or fail to recruit needed employees.
Losing or failing to recruit a key employee could:
- delay product development schedules;
- interrupt team continuity;
- result in losing proprietary information to competitors or other third
parties;
- increase our administrative costs; and
- adversely affect our results of operations.
We have lost key employees and applicants for key positions to our
competitors (including to local start-up companies) and other companies. We
expect to lose key employees in the future, despite implementing incentive
programs designed to retain and recruit employees.
3.26 FACTORS SUCH AS VARIATIONS IN OUR QUARTERLY RESULTS OF OPERATIONS,
PROGRESS IN ADDRESSING ISSUES WITH PRODUCING OUR M2(TM) TAPE DRIVES AND
COMPETITIVE PRESS ANNOUNCEMENTS MAY CAUSE OUR STOCK PRICE TO FLUCTUATE.
The price and value of high technology stock fluctuates greatly. Many high
technology companies experience drastic changes in market price and volume,
often unrelated or disproportionate to the company's operating performances. Our
stock has experienced these wide fluctuations, and they will likely continue in
the future. We believe the reasons for fluctuations include:
- overall economic and market conditions;
- quarterly variations in operating results;
- progress or lack of progress in developing our M2(TM) and follow-on tape
drives;
- announcements of technological innovations or new products by us or our
competitors; and
- CreekPath's performance and perceived valuation.
The market value of our stock has dramatically fluctuated in the past and
is likely to fluctuate in the future, particularly when the expectations of
investors and market analysts fall below or above their outlook. Our results of
operations in the past have been both below and above investor's and market
analyst's expectations. Any deviation had and could again have an immediate and
significant negative impact on the market price of our stock.
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Factors that could have an immediate and significant negative impact on the
market price of our common stock include:
- fluctuating conditions in the computer market;
- liquidity issues;
- disclosing our business prospects assessment; and
- our competitors announcing new products.
3.27 FACTORS SUCH AS ECONOMIC CONDITIONS, INDUSTRY OR MARKET SHIFTS, OR
PRODUCT PRICE EROSION MAY CAUSE OUR QUARTERLY RESULTS OF OPERATIONS TO
FLUCTUATE.
Our future operating results may fluctuate from quarter to quarter for
various reasons. For example, the markets we serve are subject to substantial
market shifts. We may be unable to determine these market shifts in advance, or
adequately respond to them.
In addition, our operations and revenues experience substantial
fluctuations from period to period because of a number of factors, including:
- general economic conditions affecting our customers' orders
- delays in product or service introductions;
- industry shifts; and
- product price erosion.
3.28 SEC AND FASB INTERPRETATIONS MAY CAUSE US TO RESTATE HOW WE REPORT
OUR EARNINGS.
During the last several years the Securities and Exchange Commission and
Financial Accounting Standards Board, have issued a number of new accounting
rule interpretations. These interpretations have addressed such topics as:
- revenue recognition;
- accounting for stock options and stock-based compensation; and
- accounting for derivatives or hedging instruments.
These interpretations have dramatically impacted some companies which were
forced to restate previously reported results of operations because the
interpretations required changes in their previous accounting practices. In some
cases, the company's stock price decreased significantly as a result.
We continually review new interpretations as they are introduced. We
believe our current accounting practices are unaffected by recent
interpretations. However, if our current accounting practices conflict with any
new or future interpretations we may have to restate our earnings. Exabyte
recently restated its financial statements for 1999 in order to reflect a full
valuation reserve for certain deferred tax assets in the second quarter of that
year.
3.29 FOREIGN TAXING AUTHORITIES MAY ASSERT THAT INTERCOMPANY TRANSACTIONS
BETWEEN US AND OUR SUBSIDIARIES WERE NOT IN ACCORDANCE WITH THEIR TAX LAWS, AND
THEY MAY TRY TO ASSESS MATERIAL PENALTIES AGAINST US FOR THESE ALLEGED
VIOLATIONS.
We have subsidiaries located in Scotland, The Netherlands, Germany,
Singapore, Japan and Canada. Tax regulations in the United States and these
foreign countries require transactions between us and our subsidiaries to take
place in an arm's-length manner. The IRS and its foreign counterparts have
increased their focus on this issue in recent years. Penalties arising from
misapplying these laws are material. Consequently, we have performed numerous
formal transfer pricing studies to ensure the documentation supporting our
intercompany dealings is adequate. The IRS has audited our tax records through
1997 and
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had not proposed any adjustments in the way we structure our arm's-length
transactions. However, foreign taxing authorities could examine these same
transactions and assert that we have not complied with their tax laws relating
to intercompany transfer pricing. As a result, we could be required to pay
potentially significant taxes and penalties.
3.30 EVEN THOUGH WE TAKE MANY STEPS TO PROTECT OUR PROPRIETARY RIGHTS,
SUCH AS FILING PATENTS AND EXECUTING NON-DISCLOSURE AGREEMENTS, OUR PROPRIETARY
RIGHTS MAY NOT BE FULLY PROTECTED. ADDITIONALLY, SOMEONE MAY INFRINGE ON OUR
PROPRIETARY RIGHTS, OR WE MAY INFRINGE ON SOMEONE ELSE'S PROPRIETARY RIGHTS,
WHICH COULD LEAD TO COSTLY AND POTENTIALLY DAMAGING LITIGATION.
We rely on a combination of methods to protect our proprietary rights,
including:
- patents;
- trademarks;
- trade secret protections;
- non-disclosure agreements; and
- license agreements.
Although we file patent applications for our products when appropriate,
patents may not result from these applications, or they may not be broad enough
to protect our technology. Someone may also challenge, invalidate or circumvent
our patents. Sometimes other companies and individuals assert that our patents
infringe their proprietary rights. Occasionally, third parties ask us to
indemnify them from infringement claims. Defending these infringement claims may
result in long and costly litigation, and potentially invalidate a patent.
Although we may try to secure a license from third parties to protect our
technology, we may not succeed. This may adversely affect our results of
operations.
We implement measures to protect our proprietary rights. We intend to
defend ourselves against infringement claims. However, protecting these rights
is sometimes difficult. Some foreign laws may not fully protect these rights.
We design our own mechanized deck assembly incorporated in our
MammothTape(TM) products. Because we did not obtain the design of this deck from
a third party, we do not benefit from supplier indemnification should an
infringement claim arise. Manufacturing and/or selling our MammothTape(TM)
drives may infringe on someone else's proprietary rights, even though we believe
we have taken appropriate measures to avoid it.
3.31 ANY LAWSUITS BY STOCKHOLDERS, WHICH MAY ALLEGE CLAIMS SUCH AS WE
FAILED TO ADEQUATELY DISCLOSE MATERIAL FACTS ASSOCIATED WITH OUR BUSINESS, COULD
LEAD TO COSTLY LITIGATION OR UNFAVORABLE SETTLEMENT TERMS.
Many companies, directors, and officers in our industry have been subjected
to class action and stockholder derivative suits filed in federal and state
courts. These suits generally allege that the defendants failed to adequately
disclose certain risks associated with their business. Our involvement in a
class action or stockholder derivative suit could materially affect our results
of operations, specifically because of large legal costs incurred defending such
actions. Other factors affecting our results of operations include diverting
management's attention from the business to the suit, or paying a judgment or
settlement arising from the suit.
In 1993, we successfully defended a series of class action lawsuits at an
immaterial cost. We believe there are no pending or threatened securities
related actions against Exabyte at this time.
1-43
CHAPTER ONE
3.32 OBTAINING SOME OF OUR PRODUCT COMPONENTS FROM FOREIGN BUSINESS, SUCH
AS HITACHI AND SHINEI, EXPOSES US TO RISKS ON THE IMPORT OF OUR COMPONENTS, SUCH
AS FLUCTUATING CURRENCY EXCHANGE RATES, PARTICULARLY AN ADVERSE EXCHANGE
MOVEMENT OF THE U.S. DOLLAR VERSUS THE JAPANESE YEN, FOREIGN GOVERNMENT EXCHANGE
CONTROL REGULATIONS OR U.S. TARIFFS AND TRADE RESTRICTION.
Our future operating results depend on key components, products and
subassemblies that are or may be manufactured in Japan, Germany, The
Netherlands, China, Singapore, Indonesia, or Malaysia. Because we depend on
foreign sourcing for our key components, products and subassemblies, our results
of operations may be materially affected by:
- fluctuating currency exchange rates;
- Europe's conversion to the euro;
- foreign government regulations;
- foreign exchange control regulations;
- import/export restrictions;
- foreign economic instability;
- political instability;
- adverse exchange movement of the U.S. dollar versus the Japanese yen or
other currency; and
- tariffs, trade barriers and other trade restrictions by the U.S.
government on products or components shipped from foreign sources.
We sometimes enter into contractual arrangements which may expose us to
foreign exchange rate risks.
3.33 FOREIGN EXCHANGE RATE FLUCTUATIONS MAY HARM OUR INTERNATIONAL SALES,
WHICH REPRESENT ALMOST ONE-THIRD OF OUR TOTAL REVENUE.
Our international sales accounted for approximately 30% of our total
revenue for the first six months of 2001. Additionally, Ecrix's international
sales accounted for approximately 27% of its total revenue for the first six
months of fiscal year 2002. Direct international sales will probably continue to
represent a significant portion of our revenue after the merger. In addition,
many of our domestic customers ship a significant portion of our products to
their customers in foreign countries.
Although a very small percentage of these sales are denominated in foreign
currencies, they are subject to foreign exchange rate fluctuations. This could
impact our results of operations. Currency fluctuations may also affect the
volume of sales denominated in U.S. dollars to overseas foreign customers
because the exchange rates affect the costs of our products to foreign
customers.
3.34 REGULATIONS BY THE U.S. AND OTHER GOVERNMENTS MAY IMPACT OUR ABILITY
TO TRADE WITH CERTAIN PARTIES AND/OR EXPORT OR IMPORT GOODS AND SERVICES.
Regulations by the U.S. or foreign governments may obligate us to obtain
licenses, pay fees and/or taxes, or otherwise delay or increase the costs of
international transactions. These regulations may include without limitation:
- U.S. government sanctions that prohibit trade with certain parties that
may include our customers and suppliers;
- U.S. and other government restrictions on the export or import of
certain technologies (including our products and materials necessary for
our products), for reasons that may include national security, foreign
policy, short supply, environmental or other national or international
concerns;
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CHAPTER ONE
- U.S. and other government tariffs (e.g., duties) or non-tariff barriers
(e.g., quotas or other restrictions) that may restrict or prohibit cross
border transactions, including fund transfers and commodity exports and
imports; and
- U.S. and other government restrictions or taxes on currency transfers
and currency conversion that may impact our ability to receive or make
payments, make investments, etc.
3.35 SOME OF OUR SUBSIDIARIES OPERATE IN FOREIGN COUNTRIES. THIS COULD
EXPOSE US TO RISKS, SUCH AS ADVERSE FOREIGN EXCHANGE RATE FLUCTUATIONS OR AN
INABILITY TO ENFORCE OUR LEGAL RIGHTS IN THOSE COUNTRIES.
Our subsidiaries in The Netherlands, Germany, Japan, Canada and Singapore
operate under their respective local currencies. Consequently, foreign exchange
rates between the U.S. dollar and the local currency affect any amounts paid or
owed to a subsidiary. These subsidiaries also operate under their respective
local law. This may complicate enforcing our legal rights in these countries.
Several factors may increase our subsidiary costs and affect our results of
operations, including:
- fluctuating currency exchange rates;
- foreign government regulations;
- difficulties in collecting international accounts receivable; and
- difficulties in enforcing intellectual property rights.
3.36 WE HAVE TAKEN MEASURES TO DETER A HOSTILE TAKEOVER OR ADVERSE CHANGE
IN CONTROL, INCLUDING ADOPTING A SHAREHOLDER RIGHTS PLAN.
We have taken a number of actions which may deter a hostile takeover or
delay or prevent a change in control, even one that could result in a premium
payment to the stockholders for their shares or that might otherwise benefit the
stockholders.
We have adopted a stockholder rights plan that may substantially dilute the
stock ownership position of a person attempting to acquire Exabyte on terms our
Board of Directors does not approve. In addition, our restated certificate of
incorporation and by-laws contain provisions which may delay or prevent a change
in control. These provisions include:
- classifying the Board into three classes;
- authorizing the Board to issue preferred stock without stockholder
approval,
- authorizing the Board to determine voting rights and other provisions of
the preferred stock;
- requiring stockholders actions take place at a meeting of stockholders
and not by written consent;
- requiring advance notice of stockholder proposals and director
nominations;
- providing that only the Board may increase the authorized number of
directors; and
- requiring that special stockholder meetings may be called only by the
Chairman of the Board, President or majority of directors.
On January 26, 1996, the Compensation Committee approved, and the Board
adopted, a severance compensation program ("Severance Program") giving officers
and other key employees severance payments if they are dismissed within eighteen
months after certain changes in control occurred. The Severance Program provides
for a severance payment in varying amounts, not to exceed 12 months of
compensation, depending upon the time of the change in control and the position
level of the terminated officer or employee.
The Severance Program further allows, in certain circumstances,
accelerating the vesting of outstanding and unexercised stock options held by
the officer or employee.
1-45
CHAPTER ONE
3.37 WE RELY ON OUR IT SYSTEMS TO OPERATE OUR BUSINESSES. THERE ARE
SIGNIFICANT COSTS ASSOCIATED WITH UPGRADING AND MAINTAINING OUR IT SYSTEMS.
We rely on certain information technology (IT) systems and resources to
operate our critical business processes, including:
- engineering design process;
- manufacturing and services;
- sales orders, shipping, customer information, technical support and
other sales related processes;
- financial activities, including general ledger and budget reporting; and
- general day-to-day activities.
We are currently transitioning most of our IT functions to newer generation
IT systems. To date Exabyte has spent approximately $1.5 million in license and
service fees related to the acquisition and implementation of new systems. We
currently expect to invest significant financial and other resources to upgrade
certain existing IT functions that will not be addressed by our new systems. We
may not be able to successfully implement new IT systems. If the new systems can
not be properly implemented, we expect to incur significant additional expenses
to upgrade and improve all of our existing IT functions. The failure or
interruption in service of any of the IT systems supporting these functions
could significantly impact our business operations.
CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission encourages companies to disclose
forward-looking information so that investors can better understand a company's
future prospects when making an investment decision. Such forward-looking
information is provided a safe harbor from liability under the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. This document
includes statements within the meaning of these safe harbor provisions. Words
such as "believes," "anticipates," "expects," "intends," "plans," "may," "could"
and similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying such statements. Forward-looking
statements made in this document include, for example, those regarding:
- improved liquidity
- operating efficiencies
- enhanced product offerings
- likelihood of closing the merger
- increased revenues
The actual results that Exabyte achieves independently or as a result of
the merger may differ materially from such forward-looking statements due to
risks and uncertainties related to liquidity, equity and financing arrangements,
media dependence, product development, market demand, management of business and
product transitions and other such risks as noted under "Risk Factors." Many of
these risks cannot be controlled by us or Ecrix. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. In light of these risks,
uncertainties and assumptions, the forward-looking events and circumstances
discussed in this document might not occur.
1-46
CHAPTER TWO
CHAPTER TWO -- INFORMATION ABOUT THE STOCKHOLDER MEETING
ACTION BY ECRIX STOCKHOLDERS BY WRITTEN CONSENT IN LIEU OF A MEETING
Approval of the merger by Ecrix stockholders requires the affirmative vote
of at least:
- a majority of the outstanding shares of Ecrix common stock and all
series of preferred stock voting together as a single class,
- two-thirds of all shares of all series of preferred stock voting
together as a single class, and
- two-thirds of the shares of Ecrix's series D-1 preferred stock, voting
as a separate class.
As of August 31, 2001, Ecrix's executive officers, directors and their
affiliates had the power to vote approximately 73.9% of the outstanding shares
of Ecrix common stock and the outstanding shares of Ecrix preferred stock, as a
single class, 77.5% of the shares of Ecrix preferred stock, voting together as a
single class, and 84.45% of the shares of Ecrix's series D-1 preferred stock,
voting as a separate class. During the deliberations leading to the approval of
the merger agreement by the Board, these persons indicated their intention to
vote for the merger, although no contract or arrangement obligates them to do
so. Effective as of the date that the registration statement of which this proxy
statement/prospectus is a part is declared effective by the Securities and
Exchange Commission and based on the foregoing, Ecrix expects that holders of an
amount of its capital stock sufficient to approve the merger and waive the
series D-1 preferred stock liquidation rights, will sign written consents
approving and adopting the merger agreement, approving the merger and granting
that waiver. The waiver by the holders of Series D-1 preferred stock is
necessary because Ecrix's certificate of incorporation provides that any action
adversely affecting the rights, preferences and privileges of any series of
Ecrix preferred stock requires the consent of two-thirds of such series. Ecrix
expects that holders of its Series D-1 preferred stock will waive their right to
receive their full liquidation preference as a result of the merger. If for any
reason, Ecrix does not obtain written consents as described above, Ecrix will
solicit the written consents of certain additional stockholders. As a result, we
are not asking any Ecrix stockholder for a proxy and we ask that no Ecrix
stockholder send us a proxy.
THE EXABYTE SPECIAL MEETING
DATE, TIME AND PLACE OF THE EXABYTE SPECIAL MEETING
The Exabyte special meeting of stockholders will be held at our corporate
headquarters at 1685 38th St., Boulder, CO 80301 at 9:00 a.m., Mountain Time on
November 9, 2001.
PURPOSE OF THE MEETING
The purpose of the meeting is to vote on the following items:
- Proposal 1: approval of the merger, including the related issuance of
Exabyte common stock and Exabyte preferred stock, described under the
General section of Chapter Three "The Merger Transactions" beginning on
page 3-1;
- Proposals 2A and 2B: approval of two separate amendments of Exabyte's
restated certificate of incorporation, one to increase the authorized
common stock and the second to increase the authorized preferred stock,
described in Chapter Seven "Additional Exabyte Meeting Proposals"
beginning on page 7-1; and
- Proposal 3: approval of the amendment of Exabyte's restated certificate
of incorporation to effect a reverse split of Exabyte's outstanding
common stock, described in Chapter Seven "Additional Exabyte Meeting
Proposals" beginning on page 7-1.
2-1
CHAPTER TWO
Approval of Proposal 2A regarding the authorized common stock or Proposal 3
is necessary for completion of the merger because the number of outstanding
shares of Exabyte, shares of common stock issuable in the merger and shares
reserved for issuance upon the conversion rights and for use in employee plans
will exceed the currently authorized shares. Proposal 3 may also be necessary
for the merger because the shares of Exabyte common stock are currently traded
below the minimum bid requirement for continued listing on Nasdaq National
Market ($1.00 per share) and because the merger agreement contains a condition
that the common stock be listed on the Nasdaq National Market. Approval of
Proposal 2B regarding the authorized preferred stock is not necessary for
Exabyte to complete the merger. Approval of the merger under Proposal 1 is not a
condition for the approval of Proposals 2A or 2B or Proposal 3.
RECORD DATE
The Exabyte board of directors has fixed the close of business on October
8, 2001 as the record date for the purpose of determining stockholders entitled
to notice of and to vote at the special meeting.
VOTING RIGHTS
Only holders of record of Exabyte common stock and Exabyte Series G
preferred stock at the close of business on the record date are entitled to
notice of and to vote at the meeting. As of the close of business on the record
date, there were 23,287,184 shares of Exabyte common stock outstanding and
entitled to vote, held of record by approximately 507 stockholders. Our Series G
preferred stock votes together with the common stock on an as-converted basis.
As of the date of this document, the outstanding shares of Series G preferred
stock were convertible into 1,250,000 shares of common stock, representing 5.1%
of the total voting power at the special meeting. All of the Series G preferred
stock are held by one holder.
QUORUM
The presence in person or by proxy at the meeting of the holders of a
majority of the shares entitled to vote will constitute a quorum, permitting the
meeting to conduct its business. Proxies received but marked as abstentions and
broker non-votes will be included in the calculation of the number of shares
considered to be present at the meeting for quorum purposes, but not for
purposes of determining approval of the proposals.
REQUIRED VOTE
Approval of Proposal 1 will require the affirmative vote of the holders of
a majority of the shares of Exabyte common stock and Exabyte Series G preferred
stock, voting together as a single class, that are entitled to vote and that are
present in person or by proxy at the special meeting.
Approval of Proposal 2A regarding the authorized common stock will require
the affirmative vote of (1) the holders of a majority of the shares of
outstanding common stock and Series G preferred stock, voting together as a
single class, entitled to vote and (2) the holders of a majority of the shares
of outstanding common stock, voting separately as a single class, entitled to
vote.
Approval of Proposal 2B regarding the authorized preferred stock will
require the affirmative vote of (1) the holders of a majority of the shares of
outstanding common stock and Series G preferred stock, voting together as a
single class, entitled to vote, and (2) the holders of a majority of shares of
outstanding Series G preferred stock, voting separately as a class, entitled to
vote.
Approval of Proposal 3 will require the affirmative vote of the holders of
a majority of the shares of outstanding common stock and Series G preferred
stock, voting together as a single class, entitled to vote. Abstentions and
broker non-votes will be counted toward a quorum for the meeting.
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CHAPTER TWO
Abstentions will have the same effect as a negative vote with respect to
each of the proposals. Broker non-votes will not be counted in determining
whether Proposal 1 is approved and will have the same effect as a negative vote
with respect to the other proposals. As of August 31, 2001, Exabyte directors
and officers and their affiliates beneficially owned approximately 1.5% of the
outstanding voting power of Exabyte.
A "broker non-vote" occurs when a broker submits a proxy but does not vote
for or against a matter. This will occur when the beneficial owner has not
instructed the broker how to vote and the broker does not have the discretionary
authority to vote in the absence of instructions.
SOLICITATION OF PROXIES
Exabyte will pay the expenses of soliciting proxies for the meeting.
Following the original mailing of the proxies and other soliciting materials,
Exabyte or its agents may also solicit proxies in person, by telephone or by
other electronic means of communication. We will ask banks, brokers and other
institutions, nominees and fiduciaries to forward the proxy materials to their
principals. We may reimburse them for expenses. Exabyte has retained Georgeson
Shareholder Communication Inc. to assist in the distribution of proxy materials
for the special meeting of the Exabyte stockholders, the solicitation of votes
at that meeting and the verification of records relating to the solicitation.
Georgeson Shareholder has been paid a fee of approximately $8,000 for mailing
proxy materials. Georgeson Shareholder will also receive customary fees for
proxy solicitation services plus payment for additional services as requested by
Exabyte and reimbursement of its out-of-pocket expenses. Following the original
mailing of the proxies or other soliciting materials, Exabyte will request that
brokers, custodians, nominees and other record holders of Exabyte shares forward
copies of the proxy and other soliciting materials to persons for whom they hold
shares. In these cases, Exabyte will reimburse the record holders for their
reasonable expenses if they so request.
The proxy accompanying this proxy statement is solicited on behalf of
Exabyte's board of directors for use at the special meeting. Please complete,
date and sign the accompanying proxy and promptly return it in the enclosed
envelope or otherwise mail it to us. All properly signed proxies that we receive
prior to the vote at the meeting that are not revoked will be voted at the
meeting according to the instructions indicated on the proxies, or, if no
direction is indicated, to approve all four proposals.
A proxy may be revoked by any of the following methods:
- a written instrument delivered to Exabyte stating that the proxy is
revoked;
- timely delivery of a later dated proxy (including an Internet or
telephone vote); or
- attendance at the special meeting and voting in person.
Please note that if a stockholder's shares are held of record by a broker,
bank or other nominee and that stockholder wishes to vote at the Exabyte
meeting, the stockholder must bring to the special meeting a letter from the
broker, bank or other nominee confirming that stockholder's beneficial ownership
of the shares.
Exabyte's board of directors does not know of any matter other than
Proposals 1, 2A, 2B and 3 to be presented for action at the meeting. If any
other matters are properly brought before the meeting, the persons named in the
proxies will have the discretion to vote on those matters in accordance with
their best judgment.
Holders of Exabyte common stock are not entitled to dissenter's rights or
appraisal rights with respect to the merger or other proposals for consideration
at the Exabyte special meeting.
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CHAPTER TWO
After careful consideration, the Exabyte board of directors has determined
that the terms of the merger agreement and the merger are fair to, and in the
best interests of, the stockholders of Exabyte and has approved the merger
agreement and the merger. THE EXABYTE BOARD OF DIRECTORS RECOMMENDS THAT THE
STOCKHOLDERS OF EXABYTE VOTE "FOR" THE MERGER AND THE ISSUANCE OF EXABYTE COMMON
STOCK AND PREFERRED STOCK IN CONJUNCTION WITH THE MERGER; "FOR" THE AMENDMENTS
OF EXABYTE'S RESTATED CERTIFICATE OF INCORPORATION TO INCREASE AUTHORIZED
CAPITAL STOCK; AND "FOR" THE AMENDMENT OF EXABYTE'S RESTATED CERTIFICATE OF
INCORPORATION TO EFFECT A REVERSE SPLIT OF EXABYTE'S OUTSTANDING COMMON STOCK.
All of the Exabyte directors who considered the merger and the issuance of
Exabyte common stock and preferred stock in conjunction with the merger, and
these other matters, agreed with this determination and recommendation.
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CHAPTER THREE
CHAPTER THREE -- THE MERGER TRANSACTIONS
GENERAL
The merger agreement between Exabyte and Ecrix provides for the combination
of the two companies. The combination will be accomplished by having Ecrix merge
with a wholly owned subsidiary of Exabyte. All outstanding shares of Ecrix will
be converted into common stock of Exabyte. The exchange ratio for common stock
and each series of preferred stock of Ecrix is described in Chapter
One -- Summary as well as Section 1.8 of the merger agreement. As a result of
these transactions, Ecrix will become a wholly-owned subsidiary of Exabyte and
Ecrix's stockholders will become stockholders in Exabyte. Exabyte stockholders
will continue to own their existing shares after the merger.
In conjunction with the execution of the merger agreement, certain
stockholders of Ecrix made a $2 million bridge loan to Exabyte of which $1.5
million was advanced upon execution of the agreement and an additional $500,000
of which was advanced on October 9, 2001. Also, at the closing of the merger,
certain stockholders of Ecrix will purchase shares of Series H preferred stock
of Exabyte for $9.65 million. When the merger is consummated, the outstanding
principal amount of the bridge loan plus accrued interest will be applied to pay
part of the purchase price for the Series H preferred stock.
Exabyte will issue up to 10 million shares of its common stock to Ecrix
stockholders in the merger (1 million shares if a maximum 1:10 reverse stock
split proposed by Exabyte is effected) plus 9.65 million shares of Series H
preferred stock (965,000 shares of Series H preferred stock if such maximum
stock split is effected). Each share of Series H preferred stock will be
convertible into one share of common stock of Exabyte. These shares of common
stock issuable in the merger, together with the shares of Series H preferred
stock to be purchased at the closing of the merger, will represent approximately
44.5% of the outstanding voting power of Exabyte after the merger and
approximately 44.5% of Exabyte's common stock if both Series G and Series H
preferred stock were converted into Exabyte common stock.
The Boards of Directors of Exabyte and Ecrix have approved the merger
agreement. You are urged to vote in favor of the merger and, in the case of
Exabyte stockholders, also the issuance of common and preferred stock of Exabyte
in conjunction with the merger.
BACKGROUND OF THE MERGER
BACKGROUND OF THE MERGER -- EXABYTE
In 2000, Exabyte took steps to improve its operations and to return to
profitability after several years of losses. These steps included outsourcing
manufacturing of Exabyte's M2(TM) tape drive and a joint venture for the
development of Exabyte's future generation M3(TM) tape drive. Exabyte's Board of
Directors and management believed that these steps would lead to profitability
in the fourth quarter of 2000, but the losses continued throughout the fiscal
2000 year. These losses together with development expenditures for new products
resulted in substantial decreases in cash and in liquidity restraints. Exabyte
has taken additional steps in 2001 to continue the outsourcing of manufacturing
its products and to reduce expenses.
At a regular meeting of the Board of Directors held on January 19, 2001,
management presented to the Board a review of Exabyte's financial situation.
This presentation included a review of historical financial performance, reasons
for Exabyte's then current market position and future prospects. Management
presented a number of alternative scenarios, including continuing to operate as
an independent entity, restructuring its existing operations and the possibility
of a sale of all or part of the operating assets of Exabyte or a business
combination with an unrelated party. Management reviewed the status of
liabilities and financing opportunities, including a sale of specific assets,
changes to its debt financing relationships and equity financing. Management
introduced Broadview International LLC, a financial advisor specializing in the
technology industry. Broadview provided an overview of its experience
3-1
CHAPTER THREE
and expertise, as well as a proposal for services to be provided to Exabyte.
After discussion among the Board, management and outside legal counsel to
Exabyte, Holland & Hart LLP, the Board engaged Broadview for the purpose of
advising and assisting in the investigation of strategic alternatives available
to Exabyte.
Exabyte then publicly announced that it was reassessing its business and
investigating various strategic alternatives that could increase Exabyte's
liquidity. As announced, these alternatives included one or more of the
following:
- sale of all or part of Exabyte's operating and off-balance sheet assets;
- restructuring of current operations;
- additional equity infusion; or
- strategic alliance, acquisition or merger.
Exabyte also stated that Exabyte had engaged an investment banker to assist
in this process and that Exabyte would continue to explore these and other
options that would provide additional capital for Exabyte's objectives and
operating needs. Exabyte further announced that the report of its independent
accountants on Exabyte's consolidated financial statements would contain an
explanatory paragraph that, if Exabyte is unable to achieve these objectives or
establish enough funds to support is operations, it could affect Exabyte's
ability to continue as a going concern.
From January 19 through August 21, 2001, the Board met frequently to review
the ongoing status of Exabyte's operations (including sales activity, cost
reduction plans and its liquidity situation), Exabyte's prospects as an
independent entity, alternative means of improving liquidity and the possible
sale of Exabyte or a business combination with another company. Parts of those
meetings that directly relate to considerations undertaken by the Board in
contemplation of the proposed merger with Ecrix are discussed below.
Representatives of Broadview and Holland & Hart were present at these meetings
(except that Broadview representatives were not present at the Board meeting on
April 12, 2001).
On January 25, 2001, the Board held a special telephone meeting to review
the status of potential strategic alternatives. Management reported on its
efforts to reduce certain fixed operating costs and to liquidate certain
off-balance sheet assets. Representatives of Broadview reported on responses
received to its initial contacts with potential acquisition or business
combination parties. Of those contacted, at least five indicated some interest.
Broadview then reported on its plans to contact additional parties and follow up
with initial indications of interest.
On February 1, 2001, the Board reviewed a proposal by management to
restructure the organization in order to maximize value of its automation
operations. Broadview reviewed results of its initial contacts with additional
potential acquisition or business combination parties. In addition, discussions
continued with the five parties that indicated potential interest. Broadview
reported on upcoming meetings with other potentially interested parties. The
Board discussed potential means of raising capital, including the potential sale
of 400,000 shares of Series D preferred stock of Ecrix held by Exabyte.
On February 8, 2001, the Board held a special telephone meeting. At that
meeting, Broadview reported on the status of ongoing preliminary meetings with
potential acquisition or business combination parties identified by Broadview.
Among other actions taken at that time, the Board adopted an amendment to its
shareholder rights plan to extend the expiration date of that plan to February
15, 2002 as well as certain additional amendments. The Board determined that
retention of the plan was an effective means of providing the Board an
opportunity to negotiate the best value for its stockholders with respect to any
potential takeover proposal.
At a Board meeting held on February 15, 2001, Broadview reported on the
status of its ongoing discussions with potential acquisition or business
combination parties identified to date. Of those parties,
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CHAPTER THREE
four indicated they were not interested in continuing discussions, at least one
indicated that it was not interested at that time but might be at some future
point, and four others expressed some interest in engaging in discussions. Of
those four interested parties, Broadview reported that discussions to date had
been preliminary with all except one party, which was prepared to commence
preliminary due diligence. In response to an invitation from that party, several
members of Exabyte management were in the process of visiting the offices of
that party.
On March 1, 8, 15 and 22, 2001, the Board held special telephone meetings,
reviewed management's steps to reduce costs and management's and Broadview's
efforts, regarding the possible sale of Exabyte or, a business combination. The
discussion included the status of the one party that continued to be interested
in acquiring Exabyte. At some of these meetings, the Board discussed the
possibility of seeking a buyer for shares of Ecrix series D preferred stock as a
means to raise additional capital and other possible alternatives for cash
infusions to Exabyte.
The Board held a special meeting by telephone on April 5, 2001, at which it
received an update of Exabyte's operations, including current sales activity,
status of accounts payable and employee retention. At that meeting, Broadview
presented a report on the results of its efforts to date. Broadview reported
that only one party remained seriously interested in pursuing an acquisition of
Exabyte or a business combination. The management described meetings with that
party. Management also reviewed and the Board approved the issuance of preferred
stock to State of Wisconsin Investment Board as a means to raise additional
working capital for the company.
A special meeting of the Exabyte Board was held by telephone on April 12,
2001. The Board discussed the first quarter results, financial projections for
the year, the sale of preferred stock to the State of Wisconsin Investment Board
and the status of efforts to sell Exabyte or enter into a business combination,
particularly the status of the possible transaction with the one interested
party.
On May 10, 2001, the Board held a special meeting by telephone. The Board
discussed the status of seeking a sale or business combination. The Board
reviewed with Broadview a pending visit by William L. Marriner, President and
Chief Executive Officer of Exabyte, and Stephen F. Smith, Chief Financial
Officer and General Counsel of Exabyte, to the headquarters of the one party
interested in a possible transaction and the materials that would be presented
by these officers and Broadview to that party. The Board discussed the valuation
which they anticipated to receive from that party and factors relevant to
negotiations with the party. The Board also considered Exabyte's current
financial situation, anticipated results of operations for the second fiscal
quarter, possible financing sources, and the possibility of continuing as an
independent company with the current financial liquidity restrictions.
The Board held a special telephone meeting on May 17, 2001. The status of
discussions and negotiations with the party interested in acquiring Exabyte were
described. These matters included the valuation of Exabyte, the viability of a
combined enterprise and the timing of any transaction.
BACKGROUND OF THE MERGER -- ECRIX
Ecrix began operations in May 1996, when it was co-founded by Juan A.
Rodriguez and Kelly J. Beavers. Ecrix was organized to develop and commercialize
a new variable speed architecture (named "VXA(R)") tape drive technology. From
inception through June 1999, Ecrix raised a total of approximately $42 million
of equity capital from various private investors. Ecrix experienced delays in
the introduction of its initial VXA(R)-1 tape drive product, and was unable to
secure a major OEM customer relationship. As a result, by September 2000, Ecrix
had failed to meet its internal revenue projections and had exhausted its
available capital. Ecrix nevertheless perceived a significant market opportunity
for its products due to the end of the product development cycle for its primary
competing tape drive technology, and recognized that its success would be
dependent upon securing one or more major OEM customers.
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On September 22, 2000, Ecrix raised an additional $20 million of equity
capital through an offering of its Series D-1 preferred stock. This financing
was intended to carry Ecrix through the process of securing a major OEM
relationship. During the winter and spring of 2001, Ecrix focused its efforts on
securing an OEM relationship with Compaq. Ecrix was advised in late April of
2001 that Compaq had determined to postpone a decision regarding the use of
VXA(R)-1 drives. At that time, Ecrix had expended nearly half of the proceeds of
the Series D-1 offering.
In light of Ecrix's diminished prospects for securing a major OEM
relationship and its need for additional funding, the Board on April 30, 2001
engaged William J. Almon, Sr., as the newly-appointed Chairman of the Board's
Executive Committee, to review Ecrix's prospects and advise the Board regarding
Ecrix's strategic alternatives, including the possible sale or liquidation of
Ecrix. As compensation for this engagement, Mr. Almon subsequently received
options to purchase 300,000 shares of Ecrix common stock at an exercise price of
$.20 per share. In order to conserve cash, Ecrix effected a 21% headcount
reduction in May 2001.
At its April 30, 2001 meeting and at a subsequent meeting of the Board of
Directors held on June 15, 2001, under the direction of Mr. Almon, the Board
reviewed the possibilities of the sale of Ecrix or the licensing of its core
technology to larger, more established companies in the computer peripheral
business and considered the engagement of an investment banker to seek an
industry partner in an acquisition or strategic relationship. Management of
Ecrix was excused from portions of both of these Board meetings when the Board
discussed management issues. The Board also considered the possibility of
raising additional funding from new or existing investors in order to enable
Ecrix to continue operating as a stand-alone entity. Mr. Almon and other members
of Ecrix's management reported to the Board that their preliminary discussions
with investment banks indicated that additional financing for Ecrix would be
difficult to obtain and that, because a sale of Ecrix would most likely be
considered dilutive to the acquiring company, it was unlikely that such a
transaction could be consummated. It was also reported that a major computer
manufacturer and a major drive supplier that had been contacted concerning a
possible license of the VXA(R) technology had indicated little or no interest in
such an arrangement. The Board also considered the possibility of a combination
with another company in order to remain viable.
EVENTS LEADING TO THE SIGNING OF THE MERGER AGREEMENT
On approximately May 28, 2001, Mr. Smith contacted by telephone Craig G.
Lamborn, Chief Financial Officer of Ecrix, to initiate discussions regarding a
possible transaction between the companies.
A regular meeting of the Exabyte Board of Directors was held on June 1,
2001. The Board reviewed the status of discussions with the party interested in
acquiring Exabyte and what the financial condition of the acquiring company
would be after such a transaction. This meeting occurred after the annual
meeting of stockholders and included many other items, including reports by
officers and employees on engineering, manufacturing, service, sales and
marketing and other operating matters.
At a meeting on June 4, 2001, Mr. Smith made a presentation to Juan
Rodriguez, Ecrix's Chief Executive Officer, Kelly Beavers, its President, and
Messrs. Almon and Lamborn. Mr. Smith's presentation focused on the possible
benefits to both companies of a business combination transaction, including
Exabyte's need for a low-end product, backward read compatibility from Exabyte's
products to Ecrix's products, and various other synergies, including
administration, sales and marketing, technical support, elimination of
overlapping offices in the United States and Europe, and future opportunities to
synthesize the product development efforts and plans of each company. No terms
of a possible combination of the companies were proposed or discussed.
On June 6, 2001, Mr. Smith held a conference call with representatives of
Broadview, counsel to Exabyte and other employees of Exabyte regarding financial
and legal due diligence on the party interested in acquiring Exabyte and steps
to be taken in the possible transaction. Further, from this date through August
16, 2001, the Board in its meetings in person or by conference call discussed
the proposed
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transaction with the party interested in acquiring Exabyte; and Exabyte
conducted due diligence regarding that party, provided materials to that party
to complete its due diligence of Exabyte and negotiated a near-final merger
agreement with that party.
A conference call was held on June 13, 2001, between Mr. Smith,
representatives of Broadview, Exabyte employees and Holland & Hart, to review
outstanding due diligence and positive and negative factors of a potential
transaction with Ecrix, including Ecrix's cash position and its reliable low-end
products.
On June 15, 2001, at Mr. Almon's suggestion, Mr. Marriner and Mr. Smith
attended a meeting of Ecrix's Board of Directors, at which they presented
information about Exabyte and its business prospects, including its fibre
channel drives, library products, and product roadmap projections, as well as
its current product positions in the marketplace and sales focus. No terms of a
possible combination were proposed or discussed.
Mr. Almon and Mr. Marriner met on June 21, 2001, to explore various
potential structures of a business combination transaction between the companies
and Exabyte's cash needs. Also on June 21, Ecrix and Exabyte signed a mutual
confidentiality agreement relating to their discussions and ongoing due
diligence.
During the weeks following Mr. Marriner's presentation to the Board, Mr.
Marriner contacted Mr. Almon on several occasions to reaffirm Exabyte's interest
in a possible combination and to request due diligence materials. Mr. Almon
provided Mr. Marriner with a summary of Ecrix's internal financial projections
and stated that Ecrix would not permit further due diligence unless and until
Exabyte provided Ecrix with a proposal regarding the terms of a possible
combination.
On July 3, 2001, Mr. Rodriguez met with Mr. Marriner to discuss the merits
of a merger. They also discussed possible structures of the transaction.
On July 11, 2001, Exabyte's Board of Directors held a special meeting by
telephone. The Board was informed about meetings with the management of the
company interested in acquiring Exabyte and discussed matters relating to timing
and valuation for such a transaction. At this meeting, management reported to
the Board on its discussions with Ecrix, as well as the results of due diligence
on Ecrix conducted by management and Broadview.
Mr. Marriner and a representative of Centennial Ventures ("Centennial"),
Ecrix's largest stockholder, met on July 19, 2001, to further discuss the
matters previously presented to the Ecrix Board of Directors on June 15, 2001.
On July 23, 2001, Mr. Marriner provided Mr. Almon with a "combination
analysis" prepared by Broadview. This analysis, which Mr. Marriner stated had
not been presented to Exabyte's Board of Directors, reflected a consideration
for Ecrix of 11.0 million shares of Exabyte common stock, of which 50% would be
subject to an "earn-out" arrangement based on Ecrix's revenues during the
12-month period following the proposed combination, and an incremental
investment by the existing Ecrix stockholders of $2.5 million for no additional
consideration. Mr. Almon indicated to Mr. Marriner that the terms reflected in
the Broadview combination analysis were unacceptable to Ecrix.
On July 27, 2001, Mr. Almon updated the Ecrix Board of Directors regarding
the status of his discussions with Mr. Marriner, and the Board directed Mr.
Almon, assisted by the staff of Meritage Private Equity Funds ("Meritage"), a
significant investor in Ecrix, to continue discussions with Broadview to get a
better understanding of the assumptions and rationale behind Broadview's
analysis. The Board also discussed how the relative equity interests in Ecrix
would be converted in any possible merger with Exabyte given that the implied
value of the consideration to be issued by Exabyte was less than the liquidation
preference of Ecrix's series D-1 preferred stock. If this liquidation preference
were given effect in accordance with its terms, no holders of Ecrix stock other
than the holders of the series D-1 preferred
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stock would be entitled to any consideration for their shares in connection with
the merger. The Board considered a suggestion from Meritage, the holder of 50%
of the series D-1 preferred stock, that any merger consideration be allocated
80% to the series D-1 preferred stock, 10% to the junior series of preferred
stock and 10% to Ecrix's common stock. No agreements or understandings on this
matter were reached at this time.
On August 1, 2001, Mr. Almon met with Mr. Marriner and a representative of
Broadview to discuss valuation issues. Also attending this meeting at Mr.
Almon's invitation was a representative of The Wallach Company/McDonald
Investments Inc. ("McDonald"), which had been engaged by Centennial to advise
Centennial regarding Ecrix's possible valuation in a business combination
transaction. At this meeting, Mr. Marriner indicated that Exabyte's Board of
Directors would be meeting on August 3, 2001 to consider a proposal for another
business combination transaction with a third party as well as a possible equity
investment transaction. Mr. Marriner stated that he would like to present a
proposal for a business combination with Ecrix at the August 3 meeting, and
suggested a merger transaction in which Ecrix stockholders would receive 10.0
million Exabyte common shares (with no earn-out but assuming a specified minimum
net cash position for Ecrix at closing) and in which Ecrix stockholders would
invest between $5.0 and $10.0 million in a newly-authorized convertible
preferred stock of Exabyte. Mr. Marriner also stated that, in order for a
proposed combination with Ecrix to be viewed favorably by the Exabyte Board, it
would be necessary for Ecrix to extend a $2.0 million bridge loan to Exabyte
upon execution of a definitive merger agreement.
On August 2, 2001, representatives from Exabyte met in Denver with the
other company to negotiate the principal terms of a merger in which Exabyte
would be acquired by that company.
Later on August 2, 2001, Mr. Almon and representatives of Meritage and
Centennial met again with Mr. Marriner and a representative of Broadview. At
this meeting, Mr. Almon proposed a merger of Exabyte and Ecrix on the following
terms:
- Ecrix stockholders would receive a total of 10.0 million Exabyte common
shares in exchange for the outstanding preferred and common stock of
Ecrix, assuming a net cash balance of $3.7 million on September 30, 2001;
- certain Ecrix stockholders would purchase between $5.0 and $10.0 million
of newly-authorized Exabyte preferred stock priced at the lesser of $1.00
per share or 120% of the average trading price of Exabyte common stock
over the 30-day period prior to announcement of the transaction, which
shares would rank pari passu with Exabyte's Series G preferred stock and
would be convertible into Exabyte common stock on a share-for-share
basis;
- Ecrix would extend a $2.0 million bridge loan to Exabyte with $1.0
million available upon signing of the definitive merger agreement and the
balance available 45 days thereafter; and
- Ecrix stockholders would be entitled to designate three members of
Exabyte's seven-member Board of Directors.
Mr. Marriner indicated that he would present Ecrix's proposal to the
Exabyte Board of Directors the following day, but that he believed that this
proposal would not be viewed as superior to the alternative business combination
transaction under consideration.
On August 3, 2001, Exabyte held a regularly scheduled Board of Directors
meeting. The Board received reports from members of Exabyte management
concerning then current operations. Broadview then presented to the Board
financial information relating to the possible merger with the other company and
draft terms of a merger with Ecrix. The Board considered factors in favor of and
risks associated with the other possible merger and the Ecrix proposal,
including the financial viability, product development, market position and
other anticipated characteristics of the entity to survive in the transaction.
The Board discussed the proposed terms of the other possible merger. Officers of
the other company presented its
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plans to the Exabyte board. Broadview presented to the Board results of its due
diligence review of Ecrix. The Board discussed both proposals and weighed the
advantages and disadvantages of both proposals, as well as the possibility of
Exabyte continuing as an independent company. The Board approved of continuing
efforts toward reaching a final agreement for a merger involving the other
company.
Over the weekend of August 4-5, 2001, Mr. Marriner and Broadview's
representative contacted Mr. Almon and McDonald's representative, respectively,
to report that the Exabyte board had determined to proceed with negotiations
regarding an alternative transaction. Mr. Marriner indicated that this
alternative transaction offered more cash resources than a combination with
Ecrix. Mr. Marriner requested that Ecrix stockholders invest $12.0 million in
new Exabyte preferred stock at $1.20 per share, of which $5.0 million would be
invested upon execution of a definitive merger agreement. In addition, Mr.
Marriner proposed that 3.0 million of the 10.0 million Exabyte common shares to
be issued in the combination would be subject to an earn-out.
Mr. Almon informed the Ecrix Board of Directors of Exabyte's
counter-proposal at a special telephonic meeting of the Board held on August 6,
2001. The Board instructed Mr. Almon to inform Exabyte that Ecrix was not
interested in pursuing Exabyte's counter-proposal; however, the Board requested
that Mr. Almon be prepared to continue discussions with Exabyte based on the
substance of Ecrix's original August 2nd proposal, with the modification that
the amount of incremental investment in the combined Exabyte/Ecrix entity be
increased to $10.0 million from the $5.0 to $10.0 million originally proposed.
Also at this meeting, Mr. Rodriguez informed the Board that Compaq had
apparently reversed its earlier decision regarding the use of VXA(R)-1 tape
drives and was expected to place its first order in September. The Board
discussed this favorable development and its possible impact on any ongoing
discussions with Exabyte.
Immediately following the August 6th meeting, Mr. Almon relayed Ecrix's
response to Mr. Marriner. Later that day Mr. Marriner contacted McDonald to
schedule a meeting with Mr. Almon and representatives of Ecrix's principal
stockholders to further discuss the benefits of a potential merger between the
companies.
On August 8, 2001, Mr. Marriner and Mr. Smith made a presentation to Mr.
Almon and representatives of Meritage and Centennial that outlined Exabyte's
business, its historical and projected financial performance, and potential
operating synergies with Ecrix. Following this presentation, Mr. Marriner stated
that Exabyte expected to be in a position to conclude negotiations regarding its
alternative transaction by the end of the following week, and indicated a desire
to reach agreement on the principal terms of a combination with Ecrix to present
to Exabyte's Board of Directors prior to that time. The parties discussed the
terms of a possible combination, and Mr. Almon advanced the substance of Ecrix's
original proposal with an increase in the amount of incremental investment in
Exabyte preferred stock to $10.0 million. The parties also discussed several
refinements to Ecrix's original proposal to address concerns raised by Exabyte
regarding a proposed reduction in the merger consideration in the event that
Ecrix's cash balance were to fall below $3.7 million prior to closing, the
requirement of "lock-up" arrangements with Ecrix stockholders following the
merger, the effect of a termination of the merger agreement on the $2.0 million
bridge loan and the requested security for the bridge loan. Mr. Marriner
indicated that he wished to reflect on Ecrix's revised proposal.
On August 9, 2001, Mr. Marriner contacted members of the Exabyte Board of
Directors to update the Board on each of the merger proposals presented to
Exabyte and discuss the outstanding issues, disadvantages and advantages of
each.
On August 10, 2001, Mr. Marriner contacted Mr. Almon to advise him that
Exabyte believed that the parties were sufficiently close to an agreement to
justify further negotiations. Representatives of the parties continued to
discuss and refine the principal terms of the proposed combination over the next
several days, including changing the bridge loan terms to make $1.5 million
available at contract execution
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and $500,000 available 45 days thereafter, and counsel for Exabyte was
instructed to prepare a draft merger agreement.
Mr. Marriner and Mr. Rodriguez met on August 13, 2001 to discuss the
potential synergies in combining the two organizations and the strengths and
weaknesses of each from a human resources perspective.
On August 14, 2001, Mr. Almon contacted Mr. Marriner to request, among
other things, removal of any adjustment to the merger consideration based on
Ecrix's cash levels in light of Ecrix's need to build inventories in
anticipation of the new Compaq business.
On August 15, 2001, at Ecrix's invitation, Mr. Marriner and Mr. Smith made
a presentation to a larger group of Ecrix's institutional stockholders similar
to the presentation given to Meritage and Centennial the previous week. Ecrix
management also made a brief presentation of Ecrix's projected financial results
that had been revised to reflect the Compaq business. The purpose of these
presentations was to assist Ecrix in obtaining indications of interest for the
required $10.0 million investment in the combined Exabyte/Ecrix entity.
Following the investor presentations, a meeting of the Ecrix Board of
Directors was convened on the afternoon of August 15, 2001 to consider the
proposed merger terms that had been negotiated by the parties' representatives.
The Board discussed the recent developments related to Compaq and reviewed the
status of Ecrix's efforts to transition its outsourced product manufacturing
relationship to a new manufacturing partner. Management was excused from the
meeting and the Board then considered at length whether the positive effects of
the Compaq relationship were sufficient to justify rejecting the proposed
combination with Exabyte and continuing as a stand-alone entity. The Board
reviewed Ecrix's projected cash position and concluded that Ecrix would be
required to raise additional financing in order to service the Compaq business
and aggressively pursue other OEM relationships on a stand-alone basis.
Meritage's representative on the Board advised the other directors that no
external financing was likely to be available to Ecrix on reasonable terms given
current market conditions, and that any additional financing would therefore
have to be provided by Ecrix's existing investor base. Centennial's
representative advised the Board that it would not commit any additional funding
to Ecrix as a stand-alone entity and indicated his belief that other
long-standing investors had similar views. The Board acknowledged that Ecrix's
financial and operating position was further complicated by its need to secure a
new manufacturing partner for its tape drives due to the closure of the
manufacturing facility utilized by its existing manufacturing partner.
When management returned to the Ecrix Board meeting, Mr. Rodriguez
expressed concern about the $2.0 million bridge loan required by Exabyte in
light of Ecrix's cash position, the length of time required to close the merger
and the need to obtain the consent of Ecrix's bank lender. The Board
acknowledged the risk to Ecrix resulting from such a substantial cash outflow.
As an alternative to this proposed loan by Ecrix, Meritage's representative on
the Board advised that Meritage, Centennial and Mr. Almon were prepared to
extend the required bridge loan to Exabyte in lieu of Ecrix on the condition
that, in the event that the merger agreement were terminated, the lenders would
have the ability to put the bridge loan to Ecrix in exchange for shares of
newly-authorized preferred stock of Ecrix convertible into common stock at $.20
per share. The members of the Board determined that the benefit to Ecrix from a
cash conservation standpoint outweighed the potential dilution associated with
the put arrangement, and accepted this proposal. The Board determined to adjourn
the meeting until the following morning in order to get a more accurate
assessment of investor interest in the proposed $10.0 million incremental
investment in the combined entity.
When the Ecrix Board of Directors meeting reconvened on the morning of
August 16, Mr. Almon reported to the Board that, based on preliminary
indications of interest received to date, Ecrix stockholders were prepared to
commit an aggregate of $9.2 million to the combined Exabyte/Ecrix entity. On a
5-to-2 vote (with Messrs. Rodriguez and Beavers dissenting), but with one other
director absent, the Board then
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approved the terms of the proposed combination with Exabyte, subject to
modification of the bridge loan arrangement and reduction of the commitment for
incremental investment to $9.2 million and further subject to negotiation of
satisfactory definitive documentation. The Board concluded (with Messrs.
Rodriguez and Beavers dissenting) that, in light of the substantial operating
and financial challenges facing Ecrix, a combination with Exabyte was preferable
to continuing as a stand-alone entity.
Mr. Rodriguez then communicated the Board's approval to Mr. Marriner, and
indicated that the Ecrix Board expected Exabyte's acceptance of the revised
proposal within 24 hours.
On August 16, 2001, Exabyte's Board of Directors held a telephone
conference call to discuss the terms of the merger proposed by Ecrix, as well as
the merger with another party which would acquire Exabyte. The Board agreed that
the merger terms proposed by Ecrix were in line with their expectations and
unanimously approved proceeding forward with the proposed merger with Ecrix,
including the negotiation of definitive agreements for the transaction. The
Board also discussed informing the other party of the Board's decision, which
Mr. Marriner and Mr. Smith did that evening.
Mr. Marriner thereafter communicated Exabyte's concurrence on the revised
proposal the following day and indicated that Exabyte had deferred the execution
of an agreement regarding its alternative combination transaction until the
following week in order to enable a definitive merger agreement with Ecrix to be
completed.
From August 16 to August 22, 2001, representatives of Exabyte and Ecrix
management, as well as representatives of the bridge lenders and investors,
together with Holland & Hart and Bartlit Beck Herman Palenchar & Scott, counsel
to Ecrix, drafted and negotiated a definitive agreement and plan of merger, as
well as documents related to the bridge loan and proposed sale of Exabyte Series
H preferred stock. At the same time, management, as well as legal counsel and
financial advisors for each of the companies, completed their due diligence
review of the other party.
On August 17, 2001, McDonald was retained by Ecrix to render an opinion on
the fairness of the consideration to be received by stockholders of Ecrix in the
proposed merger from a financial point of view. McDonald previously acted as
Ecrix's financial advisor in connection with a private placement in 1999 and had
advised Centennial regarding strategic alternatives for its equity position in
Ecrix.
The Ecrix Board of Directors met on August 20, 2001 to discuss the status
of the proposed transaction with Exabyte. The directors reviewed with
management, representatives of Meritage and Bartlit Beck Herman Palenchar &
Scott the merger documentation and the progress of the negotiations with
Exabyte, including open issues related to the scope of representations to be
made by Exabyte, the definition of events that would give either party the right
to terminate the merger, the sharing of merger expenses and the payment of
certain transaction costs by Exabyte. The Board authorized Ecrix's management
and counsel to resolve the remaining issues and report back to the Board.
On August 21, 2001 the Ecrix Board reconvened to consider the progress of
the negotiations since the adjournment of the prior day's meeting. The directors
reviewed with management, representatives of Meritage and counsel the resolution
of the remaining open issues in the merger documentation, and the Board gave
directions for the completion of the agreements. In the course of reviewing the
merger documentation with Bartlit Beck Herman Palenchar & Scott, the Board
reviewed again Ecrix's strategic alternatives and the due diligence
investigation of Exabyte that had been undertaken at the Board's direction. The
Board also received the oral opinion of McDonald, which was subsequently
confirmed in writing, that, as of the date of its opinion and subject to the
assumptions, qualifications and limitations set forth in its written opinion,
the proposed merger was fair, from a financial point of view, to Ecrix. By a
unanimous vote, including Messrs. Rodriguez and Beavers, but with one other
director absent, the Board thereafter approved the merger agreement with
Exabyte.
At a special meeting held on August 21, 2001, the Board of Directors of
Exabyte considered the proposed merger with Ecrix. Broadview presented to the
Board its analyses of the transaction and delivered
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to the Board its oral opinion, which was later confirmed in writing, that, as of
August 21, 2001, the consideration to be received by Exabyte in the merger
(including the bridge loan and proceeds from the sale of 9.4 million shares of
the Series H preferred stock at $1.00 per share as required by the merger
agreement) was fair, from a financial point of view, to Exabyte. Counsel then
reviewed the terms of the near-final drafts of merger agreement and related
documents. The Board reviewed the factors which it had previously considered
with respect to the transaction with Ecrix, the competing transaction and the
alternative of continuing without the merger. After discussion, the Board
unanimously approved the merger, the bridge loan, the sale of the Series H
preferred stock and authorized the execution of each of the definitive
agreements related to these transactions.
Based on the closing price of Exabyte's shares on the Nasdaq National
Market on August 22, 2001, the total consideration to be issued to Ecrix
stockholders in exchange for their shares of Ecrix capital stock as a result of
the merger had a value of approximately $7.3 million.
Early on August 23, 2001, Ecrix and Exabyte executed the Agreement and Plan
of Merger and bridge loan documents. On August 23, 2001, the bridge lenders
advanced the initial amount of the bridge loan, and Exabyte and Ecrix issued a
press release publicly announcing the merger.
On September 18, 2001, after discussions earlier in that month, Juan A.
Rodriguez expressed interest in purchasing 250,000 shares of Series H preferred
stock at $1.00 per share on the same terms as investors specified in the merger
agreement. On September 19, 2001, the Board of Directors of Exabyte met and
approved the sale of these shares to Mr. Rodriguez. At that meeting, the Exabyte
Board also determined that a revised fairness opinion to take into account the
sale of these additional shares of Series H Preferred Stock was unnecessary
because the proposed sale of shares to Mr. Rodriguez involves a new transaction
after Exabyte's having entered into the merger agreement, the number of shares
is not significant overall, and the addition of cash through the sale of these
shares is a positive development. On September 20, 2001, Exabyte and Mr.
Rodriguez entered into a letter agreement stating that he would purchase
$250,000 of shares of Series H preferred stock on generally the same terms as
stated for investors in the merger agreement.
EXABYTE'S REASONS FOR THE MERGER
As discussed above, the Exabyte Board spent a considerable amount of time
identifying and analyzing Exabyte's prospects and alternatives for improving its
market position and providing cash to operate and grow Exabyte's business,
including a sale of Exabyte. Without capital from outside sources, Exabyte may
not survive as a going business. During the course of deliberations on these
matters, the Exabyte Board considered a number of factors, many of which are
discussed in the next section. As a result of these actions, the Exabyte Board
ultimately determined that the merger with Ecrix was the best means available to
maximize the value of Exabyte's stock.
Exabyte's reasons for entering into the merger agreement, which includes a
sale of Exabyte's Series H preferred stock, can be generally categorized as
improving Exabyte's competitive position and enhancing liquidity and access to
capital. Exabyte's Board believes that its ability to achieve either of these
objectives without the merger would be significantly diminished.
IMPROVED COMPETITIVE POSITION.
Exabyte and Ecrix's current product offerings, customer relationships and
distribution channels are highly complementary. Ecrix's VXA(R) tape drive
technology is a reliable, low-cost product, while Exabyte's MammothTape(TM)
technology tape drive is designed for mid-range to high-end applications.
Exabyte's automation products use tape drives of Exabyte and other manufacturers
and generally have higher margins than its tape drive products. The combination
of these technologies and product offerings is anticipated to result in a
combined company with a broader range of products and technologies. As a
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result, Exabyte's Board believes that Exabyte will be able to more effectively
compete in the data storage industry as a result of the merger than it could do
independently. Specifically, Exabyte's management and Board believes its
competitive position will directly benefit from the merger with Ecrix as
follows:
- combining Ecrix's VXA(R) products with Exabyte's MammothTape(TM)
products will enable the combined company to offer end users a broader
line of tape drive products, thereby enabling the combined company to
continue offering data storage products to end users as their data
storage needs increase or otherwise change without increasing the number
of technology formats;
- for the reasons discussed above as well as others, the combined
company's increased product base has the potential to expand the number
and variety of size of end users interested in the combined company's
product offerings. The combined company will have products that appeal
to end users with smaller data storage needs than Exabyte's products
currently address, and, similarly, Ecrix's products should appeal to
customers who may not currently need the capacity or other features
offered by Exabyte products, including those who expect to develop such
needs in the future;
- Exabyte's management believes that Exabyte's and Ecrix's products will
together make Exabyte more attractive to existing and potential OEM
customers than either companies' individual offerings, and that the
increased size and financial strength of the combined company will
improve the likelihood that OEMs attracted by their products will commit
to enter into a relationship with the combined company. Recently, Compaq
selected Ecrix's VXA(R)-1 for their commercial desktop and workstation
product lines, and other OEMs have informally expressed interest in the
combined company's products;
- Exabyte expects that its existing reseller channels will distribute
Ecrix's products, thereby resulting in increased revenues to the
combined company;
- Ecrix's VXA(R)-1 may provide an alternative to Exabyte's Mammoth tape
drive, thereby accelerating Exabyte's ability to end-of-life that
product and reduce associated manufacturing costs of Exabyte's German
subsidiary while continuing to offer a solution to existing
MammothTape(TM) users;
- Exabyte will have the opportunity to increase sales of its library
products by making available Exabyte libraries that integrate Ecrix's
VXA(R) tape drive products;
- Ecrix's engineering and management talent will enhance the operation of
the combined business's operations as well as its ability to anticipate
future industry trends; and
- the combination of Exabyte's and Ecrix's existing technology together
with their research and development capabilities is expected to enable
the combined company to produce next-generation products more quickly
than Exabyte would be able to do on its own because it can integrate
functionalities of Ecrix's technology that it would otherwise have to
independently develop.
ENHANCED LIQUIDITY AND ACCESS TO CAPITAL.
Exabyte's Board believes that the merger with Ecrix and the related
purchase of Series H preferred stock by certain Ecrix stockholders will provide
immediate access to capital resources as well as provide opportunities to secure
additional financings that the Board believes would not be available to Exabyte
on its own. Specifically, Exabyte's management and Board believes its access to
capital will be directly enhanced from the merger with Ecrix as follows:
- certain investors in Ecrix have extended a bridge loan of up to $2
million to Exabyte to help fund its operations pending the closing of
the merger;
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- the bridge loan lenders, together with other investors in Ecrix and
parties related to them, have committed to invest $9.65 million in
Exabyte at the closing of the merger to help finance the operations of
the combined entity;
- at closing, it is anticipated that Ecrix will have available some cash
that can be used by the combined company;
- Exabyte and Ecrix are negotiating with lenders regarding lines of credit
for the combined company,
- Exabyte has held discussions regarding, and will seek additional
strategic or financial investors in equity or debt of Exabyte prior to
or after the merger. Exabyte's Board believes that interest in such an
investment would be absent or dramatically reduced without the proposed
merger;
- combining the administrative and overhead costs of Exabyte and Ecrix
will eliminate duplicate facilities and redundant operations, and as a
result enable the combined company to operate more efficiently with less
cost than either could do independently; and
- the opportunity to reduce manufacturing costs for tape drives by
integrating the manufacture of Ecrix's products into Exabyte's existing
manufacturing relationships, thereby resulting in economics of scale.
FACTORS CONSIDERED BY AND RECOMMENDATION OF EXABYTE'S BOARD OF DIRECTORS
At a meeting of the Exabyte Board of Directors held on August 21, 2001,
after due consideration, the Exabyte Board unanimously:
- determined that the merger agreement, the merger, the bridge loan, the
sale of Series H preferred stock, the amendment to the shareholder
rights plan, the amendment to Exabyte's certificate of incorporation and
the related transactions are fair to and in the best interests of
Exabyte and its stockholders, and achieve the highest value reasonably
available to Exabyte stockholders;
- approved the merger, the bridge loan, the sale of Series H preferred
stock, the amendment to the shareholder rights plan, the amendment to
Exabyte's certificate of incorporation and the related transactions; and
- determined to recommend that the Exabyte stockholders approve the
merger, including the issuance of Exabyte common stock in the merger,
the issuance of Series H preferred stock and the shares of common stock
underlying the preferred stock, and the amendment to Exabyte's
certificate of incorporation. Accordingly, the Exabyte Board of
Directors recommends that the Exabyte stockholders vote "FOR" the
approval of each of the following proposals:
(a) the merger;
(b) the issuance of Exabyte common stock in the merger;
(c) the issuance of Series H preferred stock and the issuance of
Exabyte common stock underlying the preferred stock;
(d) the amendment to the Exabyte certificate of incorporation to
increase Exabyte's authorized shares; and
(e) the adoption of a reverse stock split.
Before approving the merger and other related transactions, the Exabyte
Board consulted with Exabyte's management as well as its outside legal counsel
and financial advisor, and considered a number
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of factors, both negative and positive. The following is a list of certain
material factors considered by the Exabyte Board:
- the reasons discussed under "Exabyte's Reasons for the Merger" above;
- the lack of interest in a business combination with Exabyte by the 18
companies contacted by Exabyte or on its behalf except for the interest
of Ecrix and one other company also engaged in the manufacture and sale
of data storage tape drives;
- the possibility, as alternatives to the merger, of pursuing a business
combination with the one interested entity other than Ecrix, or
continuing to operate as an independent entity;
- the likelihood of consummating the merger with Ecrix;
- the likelihood of the successful integration of Ecrix and Exabyte which
have similar corporate cultures, operating models and corporate
governance matters and have principal offices in the same city;
- geographic location of the combined company, which will have access to a
pool of data storage talent;
- geographic proximity of Ecrix and Exabyte, which is expected to
positively impact the ability to integrate the operations, eliminate
redundancies and retain employees;
- considerable time, expense and other resources anticipated to be
expended in consummating the merger and subsequently combining the
operations of both companies, and the negative impact of having these
resources be diverted from Exabyte's ongoing operations;
- other, less favorable alternatives for financing Exabyte's operations,
whether through the incurrence of additional debt or the issuance of
additional equity;
- capital needs of Exabyte and of Ecrix;
- historical financial statements of Exabyte, including financial
statements for the last three fiscal years and Exabyte's financial
statements for the quarter and six months ended June 30, 2001;
- historical financial statements of Ecrix for its last three fiscal years
and for the quarter ended May 31, 2001;
- quarterly financial projections through December 31, 2002 for Exabyte
prepared by Exabyte's management;
- quarterly financial projections for Ecrix through December 31, 2002
prepared by Ecrix's management, with and without adjustments by
Exabyte's management;
- the recent market prices of Exabyte common stock;
- the terms of the Series H preferred stock to be issued concurrently with
consummation of the merger;
- the addition of Ecrix investors to Exabyte's stockholder base;
- the votes in Exabyte to be held by Ecrix stockholders;
- the addition of Juan A. Rodriguez, G. Jackson Tankersley and William
Almon, Sr. to the Board of Directors of Exabyte following the merger;
- the analyses and presentations of its financial advisor, Broadview, and
the written opinion of Broadview that, as of August 21, 2001, and based
upon and subject to the various considerations and assumptions set forth
in its opinion, the consideration to be received by Exabyte's
stockholders as a result of the merger is, from a financial point of
view, fair;
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- the terms and conditions of the merger agreement, including without
limitation the termination provisions;
- the tax and accounting results of the merger, including that the merger
will result in limitations on the ability to offset future taxable
income of the combined company with Exabyte's and Ecrix's net operating
losses and to use other tax carryforwards;
- sales opportunities and marketing efforts of Exabyte;
- declining sales experienced in the data storage industry generally;
- similarities in the product development and administrative functions of
the two companies,
- absence of a broad installed customer base for Ecrix's products;
- uncertainty resulting from Ecrix's current shift in the manufacturer of
its tape drives;
- the potential impact of the merger on Exabyte's customers, suppliers and
employees;
- the likelihood that certain executive officers of Exabyte may continue
to serve after the merger;
- liabilities to be assumed by Exabyte following the merger, including
those that may not be known prior to the merger;
- risks associated with the long-term prospects for success of the
combined companies; and
- other risks discussed above under "Risk Factors" in Chapter One.
The foregoing discussion is not exhaustive of all the factors considered by
the Exabyte Board. Each member of the Board may have considered different
factors, or may have assigned different weight to any of the factors considered.
The Exabyte Board evaluated these factors taken together and did not attempt to
quantify or assign relative value to the factors considered, nor did it reach
any specific conclusion with respect to each of the factors considered. The
Exabyte Board conducted an overall analysis of the factors described above,
after taking into account the results of extensive discussions with its legal
and financial advisors, as well as Exabyte management. The Exabyte Board relied
upon the expertise of its financial advisor, Broadview, for quantitative
analysis of the financial terms of the merger. After consideration of all of the
factors as a whole, the Exabyte Board considered them to be in favor of and to
support its determination to approve the merger and the related transactions.
OPINION OF EXABYTE'S FINANCIAL ADVISOR, BROADVIEW INTERNATIONAL, LLC
Broadview's opinion, which describes the assumptions made, matters
considered and limitations on the review undertaken by Broadview, is attached in
its entirety as Appendix B to this proxy statement/ prospectus. Exabyte
stockholders are urged to, and should, read the Broadview opinion carefully and
in its entirety. The Broadview opinion is directed to the Exabyte board of
directors and addresses only the fairness of the aggregate consideration from a
financial point of view to holders of Exabyte common stock as of the date of the
opinion. The Broadview opinion does not address any other aspect of the merger
and other related transactions and does not constitute a recommendation to any
Exabyte stockholder as to how to vote at the Exabyte special meeting. The
summary of the Broadview opinion set forth in this proxy statement/prospectus,
although materially complete, is qualified in its entirety by reference to the
full text of such opinion.
In connection with rendering its opinion, Broadview, among other things:
- reviewed the terms of the Agreement and Plan of Merger in the form of
the draft furnished to Broadview by Exabyte's legal counsel on August
20, 2001;
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- reviewed certain internal historical financial and operating data
concerning Ecrix prepared and provided to Broadview by Ecrix management;
- reviewed quarterly financial projections for Ecrix through December 31,
2002 prepared and provided to Broadview by Ecrix management as well as
quarterly financial projections for Ecrix through December 31, 2002
revised by Broadview and approved by Exabyte management;
- participated in discussions with Ecrix management and certain key
stockholders concerning the operations, business strategy, financial
performance and prospects for Ecrix;
- discussed with Ecrix management its view of the strategic rationale for
the merger and other related transactions;
- compared certain aspects of the financial performance of Ecrix with
public companies Broadview deemed comparable;
- analyzed available information, both public and private, concerning
other transactions Broadview believed to be comparable in whole or in
part to the merger and other related transactions;
- reviewed Exabyte's annual report on Form 10-K for the fiscal year ended
December 30, 2000, including the audited financial statements included
therein, and Exabyte's quarterly reports on Form 10-Q for the periods
ended March 31, 2001 and June 30, 2001;
- reviewed certain internal historical financial and operating data
concerning Exabyte prepared and provided to Broadview by Exabyte
management;
- reviewed quarterly financial projections through December 31, 2002 for
Exabyte prepared and provided to Broadview by Exabyte management;
- participated in discussions with Exabyte management concerning the
operations, business strategy, financial performance and prospects for
Exabyte;
- discussed with Exabyte management its view of the strategic rationale
for the merger and other related transactions;
- reviewed recent equity analyst reports covering Exabyte;
- reviewed the recent reported closing prices and trading activity for
Exabyte Common Stock;
- compared certain aspects of the financial performance of Exabyte with
public companies Broadview deemed comparable from both a business and
financial perspective;
- analyzed the anticipated effect of the merger and other related
transactions on the future financial performance of the consolidated
entity;
- assisted in negotiations and discussions related to the merger and other
related transactions among Exabyte, Ecrix and their respective financial
and legal advisors; and
- conducted other financial studies, analyses and investigations, as
Broadview deemed appropriate for purposes of its opinion.
In rendering its opinion, Broadview relied, without independent
verification, on the accuracy and completeness of all the financial and other
information, including without limitation the representations and warranties
contained in the merger agreement that was publicly available or furnished to
Broadview by Ecrix or Exabyte or their respective advisors. With respect to the
financial projections examined by Broadview, Broadview assumed that they were
reasonably prepared and reflected the best available estimates and good faith
judgments of the management of Ecrix and Exabyte, respectively, as to the future
performance of Ecrix and Exabyte, respectively. Broadview also assumed that
neither Exabyte nor Ecrix was currently involved in any material transaction as
of the date of Broadview's opinion other than the
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merger and other related transactions, other publicly announced transactions and
those activities undertaken in the ordinary course of conducting their
respective businesses.
Broadview did not make or obtain any independent appraisal or valuation of
any of Ecrix's assets. Broadview's opinion is necessarily based upon market,
economic, financial and other conditions as they existed and could be evaluated
as of August 21, 2001, and any changes in such conditions since that date would
require a reevaluation of Broadview's opinion. Broadview did not express an
opinion as to the price at which Exabyte common stock will trade at any time or
as to the viability of, or prospects for, Exabyte or the combined company
subsequent to the merger and other related transactions.
The following is a brief summary of some of the sources of information and
valuation methodologies employed by Broadview in rendering its opinion. These
analyses were presented to the Exabyte board of directors at its meeting on
August 21, 2001. This summary includes the financial analyses used by Broadview
and deemed to be material, but does not purport to be a complete description of
analyses performed by Broadview in arriving at its opinion. Broadview did not
explicitly assign any relative weights to the various factors of analyses
considered. This summary of financial analyses includes information presented in
tabular format. In order to fully understand the financial analyses used by
Broadview, the tables must be read together with the text of each summary. The
tables alone do not constitute a complete description of the financial analyses.
PUBLIC COMPANY COMPARABLES ANALYSIS
Broadview considered ratios of share price and market capitalization,
adjusted for cash and debt when necessary, to selected historical and projected
operating metrics in order to derive multiples placed on a company in a
particular market segment. In order to perform this analysis, Broadview compared
financial information of Ecrix with publicly available information for the
companies comprising the Ecrix Public Company Comparable Index. For this
analysis, as well as other analyses, Broadview examined publicly available
information.
The following table presents, as of August 21, 2001, the median multiples
and the range of multiples for the Ecrix Public Company Comparable Index of
total market capitalization (defined as equity market capitalization plus total
debt minus cash and cash equivalents) divided by selected operating metrics:
<Table>
<Caption>
Median Multiple Range of Multiples
TTM TMC/R 0.33x 0.03x - 1.04x
Projected 2001 TMC/R 0.39x 0.03x - 1.17x
Projected 2002 TMC/R 0.31x 0.12x - 1.17x
Projected 2002 P/E 8.21x 2.64x - 22.26x
</Table>
The following table presents, as of August 21, 2001, the median implied
values and the range of implied values of Ecrix equity, calculated by using the
multiples shown above and the appropriate Ecrix operating metric:
<Table>
<Caption>
Median Implied Value Range of Implied Values
TTM TMC/R $ 2,824 $ 86 - $9,225
Projected 2001 TMC/R $ 4,820 $ 151 - $14,976
Projected 2002 TMC/R $19,790 $7,804 - $74,916
Projected 2002 P/E $49,916 $16,022 - $135,306
</Table>
No company utilized in the public company comparables analysis as a
comparison is identical to Ecrix. In evaluating the comparables, Broadview made
numerous assumptions with respect to the storage systems and device
manufacturing industry performance and general economic conditions, many of
which are beyond the control of Ecrix. Mathematical analysis, such as
determining the median, average or range, is not in itself a meaningful method
of using comparable company data.
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TRANSACTION COMPARABLES ANALYSIS
Broadview considered ratios of equity purchase price, adjusted for the
seller's cash and debt when appropriate, to selected historical operating
results in order to indicate multiples strategic and financial acquirers have
been willing to pay for companies in a particular market segment. In order to
perform this analysis, Broadview reviewed a number of transactions that it
considered similar to the merger. Broadview selected these transactions by
choosing recent transactions involving sellers in the fixed and removable
storage systems and device manufacturing industry, excluding equity investments,
with revenues between $5 million and $100 million from January 1, 1999 to August
21, 2001. For this analysis, as well as other analyses, Broadview examined
publicly available information, as well as information from Broadview's
proprietary database of published and confidential merger and acquisition
transactions in the information technology, communication and media industries.
These transactions consisted of the acquisition of:
- Meridian Data by Quantum;
- Centennial Technologies by Solectron;
- Artecon by Box Hill Systems;
- Intel (Flash Memory Card Business) by Centennial Technologies;
- Breece Hill Technologies by Global Maintech;
- Excel/Meridian Data by Alanco Technologies; and
- Tecmar Technologies International by Overland Data.
The following table presents, as of August 21, 2001, the median multiple
and the range of multiples of adjusted price (defined as equity price plus total
debt minus cash and cash equivalents) divided by the seller's revenue in the
last reported 12 months prior to acquisition for the transactions listed above:
<Table>
<Caption>
Median Multiple Range of Multiples
Price/Revenue 0.52x 0.22x - 3.41x
</Table>
The following table presents, as of August 21, 2001, the median implied
value and the range of implied values of Ecrix equity, calculated by multiplying
the multiples shown above by the appropriate Ecrix operating metric:
<Table>
<Caption>
Median Implied Value Range of Implied Values
P/R $6,579 $2,697 - $43,907
</Table>
No transaction utilized as a comparable in the transaction comparables
analysis is identical to the merger. In evaluating the comparables, Broadview
made numerous assumptions with respect to the data storage industry's
performance and general economic conditions, many of which are beyond the
control of Exabyte or Ecrix. Mathematical analysis, such as determining the
average, median or range, is not in itself a meaningful method of using
comparable transaction data.
PIPE PREMIUMS PAID ANALYSIS
Broadview considered the premiums paid above an issuer's stock price for
private investments in public equity in order to determine the value that
strategic or financial investors would be willing to pay to invest in companies
in a particular market segment. In order to perform this analysis, Broadview
reviewed the ten zero-coupon convertible preferred stock issuances with no
dividend rights from July 1, 2001 to
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August 21, 2001. These transactions consisted of the issuance of convertible
preferred stock by the following public companies:
- Introgen Therapeutics;
- Antex Biologics;
- LaserSight;
- Microcide Pharmaceuticals;
- Gasco Energy;
- Storage Computer Corporation;
- Synaptic Pharmaceuticals;
- Paradigm Medical Industries;
- Notify Technology; and
- Artisoft.
The following table presents, as of August 21, 2001, the median premium and
the range of premiums for these transactions calculated by dividing:
(1) the offer price per share minus the closing share price of the seller's
common stock twenty trading days or one trading day prior to the public
announcement of the transaction, by
(2) the closing share price of the seller's common stock twenty trading
days or one trading day prior to the public announcement of the transaction:
<Table>
<Caption>
Median Premium
(Discount) Range of Premiums
Premium (Discount) Paid to Issuers
Share Price 20 Trading Days Prior
to Announcement (3.7)% (38.0%) - 113.4%
Premium (Discount) Paid to Issuer's
Share Price 1 Trading Day Prior to
Announcement (4.3)% (28.4%) - 113.4%
</Table>
RELATIVE CONTRIBUTION ANALYSIS
Broadview measured the contribution to selected historical and projected
operating metrics of Exabyte and Ecrix on a percentage basis in order to measure
the relative contribution of each of the companies to the combined entity. All
projected figures were derived from management projections covering Exabyte and
Ecrix, adjusted for the December 30 fiscal year-end of Exabyte.
The following table presents, as of August 21, 2001, the relative
contributions of Exabyte and Ecrix to the combined entity:
<Table>
<Caption>
Ecrix Exabyte
TTM Revenue 5.7% 94.3%
Projected FY2001 Revenue 9.6% 90.4%
Projected FY2001 Gross Profit 10.2% 89.8%
Projected FY2002 Revenue 30.5% 69.5%
Projected FY2002 Gross Profit 31.1% 68.9%
</Table>
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RELATIVE OWNERSHIP ANALYSIS
Broadview measured the relative equity and entity ownership of Exabyte and
Ecrix of the combined entity; where equity ownership compares the relative
entity values of Exabyte and Ecrix, and entity value equals the equity value
plus debt minus cash. The following table presents, as of August 21, 2001, the
relative ownership of Exabyte and Ecrix for equity and entity value:
<Table>
<Caption>
Ecrix Exabyte
Equity Value 45.5% 54.5%
Entity Value 0.5% 99.5%
</Table>
EXABYTE STOCK PERFORMANCE ANALYSIS
Broadview examined the weekly trading history of:
- Exabyte common stock from August 18, 2000 through August 17, 2001;
- An index of the public company comparables vs. Exabyte and the NASDAQ
Composite from August 18, 2000 through August 17, 2001; and
- An index of the distressed public company comparables vs. Exabyte and
the NASDAQ Composite from August 18, 2000 through August 17, 2001.
EVALUATION OF EXABYTE EQUITY FROM AN INDUSTRY PERSPECTIVE
Broadview considered ratios of share price and market capitalization,
adjusted for cash and debt when necessary, to selected historical and projected
operating metrics in order to derive multiples placed on a company in a
particular market segment. In order to perform this analysis, Broadview compared
financial information of Exabyte with thirteen public companies in the fixed and
removable storage systems and device manufacturing industry. For this analysis,
as well as other analyses, Broadview examined publicly available information.
EVALUATION OF EXABYTE EQUITY FROM A FINANCIAL PERSPECTIVE
Broadview considered ratios of share price and market capitalization,
adjusted for cash and debt when necessary, to selected historical and projected
operating metrics in order to derive multiples placed on a company comparable to
Exabyte based on financial condition. In order to perform this analysis,
Broadview compared financial information of Exabyte with publicly available
information for eight domestic public companies in the technology hardware
manufacturing industry with specific financial criteria similar to that of
Exabyte. For this analysis, as well as other analyses, Broadview examined
publicly available information.
PRO FORMA COMBINATION ANALYSES
Broadview calculated the EPS accretion or dilution of the pro forma
combined entity taking into consideration various financial effects, which will
result from a consummation of the merger and other related transactions. This
analysis relied upon certain financial and operating assumptions provided by
Exabyte and Ecrix management, publicly available data about Exabyte, and certain
financial assumptions for Ecrix prepared by Broadview and reviewed by Exabyte
management. Broadview examined a purchase scenario under the assumption that no
opportunities for cost savings or revenue enhancements exist.
CONSIDERATION OF THE DISCOUNTED CASH FLOW METHODOLOGY
While discounted cash flow is a commonly used valuation methodology,
Broadview did not employ such an analysis for the purposes of this opinion.
Discounted cash flow analysis is most appropriate for companies which exhibit
relatively steady or somewhat predictable streams of future cash flow. Given the
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uncertainty in estimating both the future cash flows and a sustainable long-term
growth rate for Ecrix, Broadview considered a discounted cash flow analysis
inappropriate for valuing Ecrix.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. In arriving
at its opinion, Broadview considered the results of all of its analyses as a
whole and did not attribute any particular weight to any analysis or factor
considered by it. Furthermore, Broadview believes that selecting any portion of
its analyses, without considering all analyses, would create an incomplete view
of the process underlying its opinion.
In performing its analyses, Broadview made numerous assumptions with
respect to industry performance and general business and economic conditions and
other matters, many of which are beyond the control of Exabyte or Ecrix. The
analyses performed by Broadview are not necessarily indicative of actual values
or actual future results, which may be significantly more or less favorable than
suggested by such analyses. The consideration to be received by holders of
Exabyte and Ecrix equity pursuant to the merger agreement were determined
through arm's length negotiations between Exabyte and Ecrix management, and were
adopted by both the Exabyte and Ecrix board of directors. Broadview participated
in discussions with the Exabyte board of directors during such negotiations.
However, Broadview did not recommend any specific consideration to the Exabyte
board of directors or that any specific consideration constituted the only
appropriate consideration for the merger and other related transactions. In
addition, Broadview's opinion and presentation to the Exabyte board of directors
was one of many factors taken into consideration by the Exabyte board of
directors in making its decision to adopt the merger. Consequently, the
Broadview analyses as described above should not be viewed as determinative of
the opinion of the Exabyte board of directors with respect to the value of
Exabyte or Ecrix or of whether the Exabyte board of directors would have been
willing to agree to a different consideration.
ENGAGEMENT OF BROADVIEW
Pursuant to a letter agreement, dated January 26, 2001, as amended, Exabyte
engaged Broadview to assist in analyzing, structuring, negotiating and effecting
a business combination, including rendering an opinion with respect to the
fairness from a financial point of view to the stockholders of the consideration
to be received in any such transaction. Broadview regularly provides clients in
the information technology, communications and media industries with advice on
merger and acquisition transactions, restructuring and strategic private
placements. Members of Exabyte management contacted several financial advisors
and based upon those discussions, as well at least one personal reference,
determined to engage Broadview.
In connection with its engagement, Exabyte paid Broadview a fee of $50,000
cash and issued warrants to purchase 150,000 shares of Exabyte common stock at
$1.50 per share until January 29, 2002. Exabyte is obligated to pay Broadview a
transaction fee of $1 million in connection with the merger and other related
transactions. Exabyte has already paid Broadview $250,000 of this fee at the
time it delivered its fairness opinion. The remainder of the transaction fee is
due at closing and will be paid $650,000 in cash and $100,000 by issuance of a
promissory note due on the earlier of June 30, 2002 or 6 months after the
closing of the merger. Principal under the note will accrue interest at a rate
of 10% per annum. All unpaid and accrued interest under the note is convertible
at Broadview's option into shares of Series H preferred stock at $1.00 per
share. The balance of the fee will be due and payable upon completion of the
merger. In addition, Exabyte has agreed to indemnify Broadview and its
affiliates against certain liabilities and expenses related to its engagement,
including liabilities under the federal securities laws. The terms of the fee
arrangement with Broadview, which Exabyte and Broadview believe are customary in
transactions of this nature, were negotiated at arm's length between Exabyte and
Broadview, and the Exabyte board of directors was aware of the nature of the fee
arrangement, including the fact that a significant portion of the fees payable
to Broadview is contingent upon completion of the merger.
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ECRIX'S REASONS FOR THE MERGER AND RECOMMENDATION OF
ECRIX'S BOARD OF DIRECTORS
The Ecrix Board of Directors has unanimously determined that the terms of
the merger agreement and the merger are fair to, and in the best interests of,
Ecrix stockholders. Accordingly, the Ecrix Board of Directors has unanimously
approved the merger agreement (with one director absent) and unanimously
recommended the merger to Ecrix's stockholders for approval by written consent.
In reaching its decision to approve the merger agreement and the merger and
to recommend adoption of the merger agreement by Ecrix stockholders, the Ecrix
Board of Directors consulted with its management team and advisors and
considered the following considerations important:
- accomplishing the merger will enhance the prospects for Ecrix's
long-term viability;
- accomplishing the merger will provide Ecrix stockholders an opportunity
to maximize the value of their investment;
- accomplishing the merger will allow Ecrix stockholders ultimately to
receive freely-tradable common stock, a medium of investment that is
considerably more liquid than their current investment in Ecrix;
- accomplishing the merger will put Ecrix in a position to benefit from
the broader marketing and distribution system that Exabyte has, thus
giving Ecrix a greater potential for growth;
- accomplishing the merger will likely enable Ecrix to obtain more
favorable manufacturing and supply arrangements and will enable the
combined entity to realize significant cost savings; and
- accomplishing the merger will put Ecrix in a position to benefit from
Exabyte's planned growth strategy.
In the course of deliberations, Ecrix's Board of Directors also considered
a number of additional factors relevant to the merger, including:
- information relating to the business, assets, management, competitive
position, operating performance, trading performance and prospects of
each of Ecrix and Exabyte, including the prospects of Ecrix if it were
to continue as an independent company;
- current industry, market and economic conditions;
- the possibility of strategic alternatives to the merger for enhancing
long-term stockholder value;
- the impact of the merger on Ecrix's and Exabyte's customers, suppliers
and employees;
- the terms and conditions of the merger agreement, including the closing
conditions, increase the likelihood that the merger will close on the
contemplated schedule, and the fact that the Board of Directors remains
free to consider a superior acquisition proposal if one is made;
- the expected qualification of the merger as a tax-free reorganization
under Section 368(a) of the Internal Revenue Code; and
- the opinion of McDonald that, as of the date of the merger agreement and
subject to the considerations set forth in the opinion, the aggregate
consideration to be issued in the merger is fair to the stockholders of
Ecrix from a financial point of view.
The Ecrix Board of Directors also identified and considered a number of
potentially negative factors in its deliberations concerning the merger,
including:
- a recognition that Exabyte common stock has traded at historic lows and
may be subject to delisting from the Nasdaq National Market in the near
term;
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- the risk factors that are identified by Exabyte in its public filings
(which are summarized under the caption "Risk Factors -- Risks Related
to Exabyte's and the Combined Company's Business");
- the risk that, despite the efforts of Ecrix and Exabyte after the
merger, key personnel might leave Ecrix;
- the risk that some of Ecrix's customers and suppliers might cease doing
business with Ecrix;
- the difficulty of integrating the operations of Ecrix and Exabyte; and
- the risk that the potential benefits of the merger might not be fully
realized.
The Ecrix Board of Directors believed that certain of these risks were
unlikely to occur, that Ecrix could avoid or mitigate others, and that, overall,
these risks were outweighed by the potential benefits of the merger.
In view of the variety of factors considered in connection with its
evaluation of the merger agreement and the merger, the Ecrix Board of Directors
did not find it practicable to and did not quantify or otherwise assign relative
weight to the specific factors considered in reaching its determination. In
addition, individual members of the Ecrix Board of Directors may have given
different weight to different factors.
OPINION OF ECRIX'S FINANCIAL ADVISOR
THE WALLACH COMPANY/MCDONALD INVESTMENTS INC.
Ecrix retained McDonald to render an opinion as to the fairness, from a
financial point of view, of the consideration received by Ecrix in connection
with the merger. The Board of Directors selected McDonald based on McDonald's
experience and expertise in valuations, merger and acquisition transactions, and
private placement transactions, and because of McDonald's familiarity with Ecrix
and its business. McDonald acted as Ecrix's financial advisor in connection
with, among other things, a private placement in 1999 and, at the request of
Centennial in 2001, in connection with the exploration by Centennial of its
strategic alternatives for its equity position in Ecrix.
On August 21, 2001, McDonald rendered its oral opinion to the Board of
Directors of Ecrix that, as of such date, and based upon and subject to the
factors and assumptions set forth in the opinion, the consideration to be paid
by Exabyte in the merger was fair, from a financial point of view, to Ecrix.
A copy of McDonald's written opinion dated August 21, 2001, which sets
forth the factors considered, assumptions made, and certain limitations on the
scope of the review conducted by McDonald, is included as Appendix C to this
prospectus. Stockholders are urged to read this opinion in its entirety. The
McDonald opinion was intended for the use and benefit of the Board of Directors
of Ecrix and was directed only to the fairness of the merger from a financial
point of view to Ecrix. The opinion does not constitute a recommendation to any
stockholder of Ecrix as to how a stockholder should vote on the proposed merger.
In arriving at its opinion, McDonald has, among other things:
(i) reviewed the merger agreement, including the exhibits and schedules
thereto;
(ii) reviewed Ecrix's audited financial statements for the fiscal years ended
February 29, 2000 and February 28, 2001 and year-to-date unaudited
financial statements;
(iii) reviewed financial projections provided by Ecrix's management;
(iv) interviewed members of Ecrix's management who are familiar with the
operations and capabilities of Ecrix and Exabyte;
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(v) interviewed members of Exabyte's management who are familiar with the
operations and capabilities of Ecrix and Exabyte;
(vi) reviewed certain terms and conditions of the contemplated transaction,
including but not limited to the purchase price and terms of the offer;
(vii) reviewed publicly available data on companies deemed comparable to Ecrix;
(viii) compared the business profile, financial strength, financial performance,
potential growth, size and risk of Ecrix to that of comparable companies;
(ix) reviewed publicly available data on precedent merger transactions, where
Ecrix was deemed to be comparable to the targets by size or industry;
(x) compared the business profile, financial strength, financial performance,
potential growth and risk of Ecrix to that of precedent merger
transaction target companies;
(xi) reviewed certain financial projections of Ecrix, as provided by Ecrix's
management for fiscal years 2002-2003;
(xii) reviewed certain financial projections of Exabyte, as provided by Exabyte
management for fiscal years 2001-2002;
(xiii) based on Ecrix management's estimates for Ecrix and Exabyte management's
estimates for Exabyte, modeled the potential accretion/dilution on the
projected earnings per share of Exabyte;
(xiv) examined the current equity market valuation of Exabyte and the implied
relative valuation of Exabyte;
(xv) examined certain publicly available information concerning the trading
of, and the trading market for, Exabyte's common stock;
(xvi) reviewed independent studies on equity market size discounts and control
premiums; and
(xvii) performed such additional review and analysis as McDonald deemed
appropriate.
In preparing its opinion, McDonald relied upon the accuracy and
completeness of all information supplied or made available to McDonald. McDonald
did not assume any responsibility for independently reviewing or verifying such
information. With respect to information involving financial forecasts for
Ecrix, McDonald assumed that such forecasts were the best current estimates of
management and were reasonably prepared based on the judgment of management to
reflect the expected future financial performance of Ecrix. In preparing its
opinion, McDonald based its analysis on the economic and market conditions and
on Ecrix's financial condition as they existed and could be evaluated on the
date of the opinion.
Following is a brief summary of the material analyses utilized by McDonald
in arriving at its fairness opinion. This summary does not purport to be a
complete description of the analyses performed by McDonald.
Implied Transaction Value. The consideration to be received by Ecrix
stockholders in the merger is in the form of Exabyte's common stock. Ecrix
stockholders will receive 10 million shares of Exabyte common stock at closing.
The implied transaction value of this consideration is $7.3 million. The
valuation is based on the closing price of Exabyte's shares on the Nasdaq
National Market on August 22, 2001. The implied multiple of trailing 12-month
revenue of Ecrix for the twelve months ended July 31, 2001, was 0.59.
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Ecrix's Financial Condition. McDonald analyzed the current financial
condition of Ecrix. Specifically, McDonald focused on the prospects for Ecrix to
be able to continue operating in the normal course given that
(i) Ecrix has incurred significant operating losses;
(ii) Ecrix has had a difficult time achieving unit or financial projections;
(iii) limited attempts to sell Ecrix yielded little interest, as did
discussions with investment bankers;
(iv) if Ecrix stayed independent, there was limited interest from existing
investors to provide additional equity financing; and
(v) current market conditions have made it more difficult for technology
companies, especially data storage hardware companies, to raise either
private equity or debt.
McDonald concluded that there is a significant risk that Ecrix would not be able
to continue normal operations of the business in the future due to its weak
current financial condition.
Comparable Company Analysis. McDonald compared financial information
relating to Ecrix to corresponding data from publicly traded companies deemed
comparable to Ecrix. The comparable companies include Exabyte and Quantum-DLT &
Storage. The comparable group of companies was chosen because they participate
in the tape drive data storage industry. These companies are much larger than
Ecrix, and Quantum-DLT & Storage is a profitable company and a recognized
industry leader, whereas Ecrix has never recorded a profit and is viewed as a
start-up company, despite its five year history.
McDonald calculated the comparable company valuation statistics including
price to earnings ratios, enterprise to operating income, enterprise value to
EBITDA, and enterprise value to revenue. The comparable company valuation
statistics were adjusted by reducing valuations to reflect a 16.1% size
discount, reflecting an average reduction in prices paid for small companies
like Ecrix from prices paid for companies the size of those in the comparable
group, and increasing valuations to reflect the 37.5% average control premium
determined from data collected from MergerStat, L.P.
Ecrix's lack of positive trailing net income, EBIT, or EBITDA restricts the
analysis to a multiples of sales, a generally less reliable valuation standard
than earnings based ratios. Taking the comparable company group average,
adjusting for size discounts and control premiums results in an average implied
enterprise value of $9.8 million for Ecrix, which is higher than the $7.3
million implied transaction value.
Relative Valuation. In its analysis of Ecrix, McDonald determined that
despite the existence of other comparable companies, the most comparable public
company to Ecrix was in fact Exabyte. Characteristics common to both companies
include: industry in which they compete, relative size, and lack of operating
profits. Based on this analysis, McDonald reviewed the valuation of Exabyte in
the public markets and applied these multiples to Ecrix and then adjusted for a
control premium. Exabyte is trading at a multiple of 0.14 times enterprise value
to trailing twelve-month revenues, which adjusted for a control premium implies
a multiple of 0.19 times trailing twelve-month revenues for Ecrix. This would
imply a value of $2.5 million, which is lower than the implied transaction value
of $7.3 million for Ecrix.
Precedent Transactions. McDonald reviewed recent merger and acquisition
transactions for which public information was publicly available for companies
with similar lines of business to those of Ecrix. This comparable group included
only four transactions with relevant data.
As with the comparable public company group, McDonald calculated relevant
valuation multiples for each of the precedent transactions, including price to
earnings, enterprise value to operating income, enterprise value to EBITDA, and
enterprise value to revenue. Once again, Ecrix's weak current operating results
prevented meaningful comparison to the comparable groups in terms of earnings,
operating income or EBITDA. The precedent transaction group valuation multiples
were adjusted for size and compared
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with the proposed merger valuation. This analysis yielded an average enterprise
valuation of $2.9 million for Ecrix, which compares favorably with the $7.3
million implied transaction value.
Liquidation Analysis. Based on historical and projected monthly financials
provided by Ecrix, McDonald estimated the forced liquidation value for all of
the assets of Ecrix. Taking into consideration estimated shutdown costs and the
liquidation value of the assets, Ecrix could generate approximately $4.9 million
of proceeds net of debt from the forced liquidation of the business for the
projected month ending August 31, 2001. The $7.3 million implied transaction
value compares favorably to the $4.9 million liquidation value of Ecrix.
Discounted Cash Flow Analysis. McDonald reviewed and analyzed management's
cash flow projections for the fiscal years 2002 through 2003. In analyzing these
projections for the purpose of a discounted cash flow analysis, McDonald
considered, among other things:
(i) the aggressive nature of Ecrix's projections;
(ii) the significant operating changes necessary for Ecrix to reach its
projections;
(iii) management's past projections in relation to Ecrix's actual results;
(iv) the difficulty of achieving the projections without an additional
infusion of capital;
(v) current lack of contracted product orders from one or more OEMs which
are necessary for Ecrix to reach its short term and long term
projections; and
(vi) the projections produce negative cash flows which create an inherent
flaw in an analysis that requires positive free cash flows for valuation
purposes.
Based on these and other factors, McDonald analyzed Ecrix's discounted cash flow
analysis and arrived at a value of approximately $18.4 million. However,
McDonald determined that, for the reasons discussed, this analysis had limited
usefulness in the valuation for Ecrix.
Conclusion. In reaching its conclusion as to the fairness of the merger
and in its presentation to the Board of Directors, McDonald did not rely on any
single analysis or factor described above or make any conclusion as to how the
results of any given analysis, taken alone, supported its opinion.
The preparation of a fairness opinion is a complex process and not
necessarily susceptible to partial analysis or summary description. McDonald
believes that its analyses must be considered as a whole and that selection of
portions of its analyses and of the factors considered by it, without
considering all of the factors and analyses, would create a misleading view of
the processes underlying the opinion.
The analysis of McDonald is not necessarily indicative of actual values or
future results, which may be significantly different than those suggested by the
analyses. Analyses relating to the value of companies are not intended to be
appraisals or valuations or to necessarily reflect the price at which companies
may actually be sold. No company or transaction used in any analysis for
purposes of comparison is identical to Ecrix or the merger. Accordingly, an
analysis of the results of the comparisons is not mathematical; rather, it
involves complex considerations and judgments about differences in the companies
to which Ecrix was compared and other factors that could affect the public
trading values of the companies. In this regard, McDonald noted substantially
lower profitability and smaller revenues for Ecrix when compared to comparable
companies or precedent merger transactions.
For purposes of its opinion, McDonald relied upon and assumed the accuracy,
completeness and fairness of the financial statements and other information
provided to it by Ecrix or otherwise made available to McDonald and did not
assume responsibility for the independent verification of such information.
McDonald relied upon the assurances of the management of Ecrix that (i) the
information provided to it by Ecrix was prepared on a reasonable basis, (ii) the
financial forecasts reflected the best currently available estimates of
management, (iii) management was not aware of any information or facts
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that would make the information provided to McDonald incomplete or misleading
and (iv) there were no material changes in Ecrix's assets, financial condition,
results of operations, business or prospects since the date of the last
financial statements or information made available to McDonald.
Pursuant to the terms of an engagement letter dated August 20, 2001, Ecrix
agreed to pay McDonald a total fee of $100,000 for the delivery of a fairness
opinion. McDonald is not receiving any fees based on the successful completion
of the merger. In addition, Ecrix has agreed to indemnify McDonald against
certain liabilities, including liabilities under federal securities laws, in
connection with such engagement.
DIRECTORS AND EXECUTIVE OFFICERS OF EXABYTE AFTER THE MERGER
EXABYTE BOARD OF DIRECTORS AFTER THE MERGER
After the effective time of the merger, the size of Exabyte's Board of
Directors will be increased to seven, and two of its current members will resign
or be removed. We have agreed that three persons designated by Ecrix, the Ecrix
designees, will then be appointed to Exabyte's Board to fill these vacancies. As
a result of these actions, the Board of Directors of Exabyte following the
merger will include the three Ecrix designees named below and four of the
current members of Exabyte's Board, all of whom are named below although two of
them will cease to be members of Exabyte's Board following the merger. Exabyte's
Board of Directors has not yet determined who of the current directors will
continue to serve after the merger.
Ecrix Designees to the Exabyte Board of Directors after the Merger:
Juan A. Rodriguez
G. Jackson Tankersley
William J. Almon, Sr.
Current Members of the Exabyte Board of Directors
William L. Marriner
Peter D. Behrendt
A. Laurence Jones
Stephen C. Johnson
Ralph Z. Sorenson
Thomas E. Pardun
Certain information concerning the age, business experience and
compensation of the Ecrix designees is included in Chapter Four of this
document. Similar information concerning the current members of Exabyte's Board
of Directors is described in Chapter Five of this document.
EXECUTIVE OFFICERS OF EXABYTE AFTER THE MERGER
Following the merger, the following persons will be executive officers of
Exabyte, and shall serve in the capacities indicated:
William L. Marriner, Chairman of the Board, President and Chief Executive
Officer
Craig G. Lamborn, Vice President and Chief Financial Officer
Stephen F. Smith, Vice President, Corporate Secretary and General Counsel
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Certain information concerning the age, business experience and
compensation of Mr. Lamborn is included in Chapter Four of this document.
Similar information concerning Messrs. Marriner and Smith is included in Chapter
Five of this document.
INTERESTS OF DIRECTORS AND EXECUTIVE OFFICERS IN THE MERGER
In considering the recommendation of the Boards of Directors of Exabyte and
Ecrix with respect to the merger agreement, stockholders should be aware that
certain members of the Boards of Directors of these two companies and their
executive officers have interests in the merger as described below that may be
different from, or in addition to, the interests of other stockholders of
Exabyte and Ecrix generally. Each of Exabyte's Boards of Directors and Ecrix's
Board of Directors was aware of the interests of its directors and executive
officers and considered them, among other matters, in approving the merger.
BOARD OF DIRECTORS OF EXABYTE.
Exabyte and Ecrix have agreed that, as of the closing of the merger,
Exabyte will cause its Board of Directors to include four of the six current
directors of Exabyte. Three of these continuing directors are not employees of
Exabyte and will continue to receive compensation for serving on the Board of
Directors. Each director who is not an employee of Exabyte receives $15,000 as
an annual retainer, plus $1,500 for each Board meeting they attend in person and
$250 for each committee meeting they attend in person as well as for each
telephone Board meeting in which they participate. Non-employee directors also
have received options in the past and can expect to receive options in the
future under an Exabyte stock plan.
EXECUTIVE OFFICERS OF EXABYTE.
Exabyte's Board of Directors expect to retain the current executive
officers of Exabyte after the merger with Ecrix. These executive officers
include William L. Marriner, Chairman of the Board, Chief Executive Officer and
President; and Stephen F. Smith, currently Vice President, Chief Financial
Officer, General Counsel and Secretary. Exabyte's Board expects that Mr. Smith
will resign from his role as Chief Financial Officer and retain his other
positions. The Board of Directors has also discussed the possibility of issuing
new options to both employees of Exabyte and Ecrix in order to assist Exabyte in
retaining these employees and to provide incentives.
Exabyte has announced the proposed executive officers after consummation of
the merger. Those persons and their positions are shown in "Directors and
Executive Officers of Exabyte After the Merger."
BOARD OF DIRECTORS OF ECRIX.
Board of Directors. In accordance with the merger agreement, three members
of the Board of Directors of Ecrix will join the Board of Exabyte. These
directors are G. Jackson Tankersley, Jr., William J. Almon, Sr. and Juan A.
Rodriguez. Subject to certain limitations, these designees will be nominated as
directors until their death, resignation or removal. Mr. Tankersley and Mr.
Almon, as non-employee directors of Exabyte, will receive the same compensation
for their services as other non-employee directors of Exabyte. For additional
information about Exabyte directors, see the "The Merger Transactions -- The
Merger Agreement -- Exabyte Board and Related Matters" in this Chapter. Upon the
election of such three directors, Exabyte's board will consist of seven
directors.
Bridge Loans. At the time of executing the merger agreement, the following
parties have entered into a loan agreement with Exabyte providing for loans up
to $2,000,000, as described in "The Merger Transactions -- The Bridge Loan and
Convertible Note": Meritage Private Equity Fund, L.P.; Centennial Fund V, L.P.;
Centennial Entrepreneurs Fund V, L.P.; Centennial Fund VI, L.P.; Centennial
Entrepreneurs Fund VI, L.P.; Centennial Holdings I, LLC; and William J. Almon,
Sr. These lenders are stockholders of Ecrix. Meritage Private Equity Fund, L.P.
agreed to loan Exabyte $1,139,847, the
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Centennial funds listed agreed to loan Exabyte an aggregate of $608,688 and Mr.
Almon agreed to loan Exabyte $256,465. Mr. Tankersley, an Ecrix director who
will serve as a director of Exabyte upon effectiveness of the merger, is a
member of Meritage Investment Partners, LLC, which is the sole general partner
of Meritage Private Equity Fund, L.P., one of the bridge lenders. Jeffrey
Schutz, who is a director of Ecrix, is (a) a General Partner of Centennial
Holdings V, L.P., which is the General Partner of Centennial Fund V, L.P. (a
bridge lender) and Centennial Entrepreneurs Fund V, L.P. (another bridge
lender), (b) a Managing Principal of Centennial Holdings VI, LLC, which is the
General Partner of Centennial Fund VI, L.P. (a bridge lender) and Centennial
Entrepreneurs Fund VI, L.P. (a bridge lender), and (c) a Managing Director of
Centennial Holdings I, LLC (a bridge lender). Mr. Almon is an Ecrix director who
will also serve as a director of Exabyte upon the effectiveness of the merger.
Exabyte required such a loan as part of entering into the merger agreement, and
Exabyte originally contemplated that Ecrix would provide those loans. Ecrix was
unable to provide the loans because of covenants in a line of credit of Ecrix,
and the Ecrix Board was also concerned about the effects of such a loan on
Ecrix's cash position. These bridge lenders may receive benefits from repayment
of the loans. If the merger transaction were not completed, there would be a
greater chance that Exabyte might not repay the loans because of its financial
condition.
Upon signing of the merger agreement, these lenders loaned Exabyte an
aggregate of $1.5 million, and the additional $500,000 was loaned on October 9,
2001, upon the satisfaction of certain conditions. These conditions included (i)
the representations and warranties of Exabyte contained in the Loan Agreement
being true in all respects in the case of those representations that are
expressly qualified by reference to materiality, and being true and correct in
all material respects in the case of representations that are not so qualified,
(ii) Exabyte having performed in all material respects all obligations and
agreements and complied in all material respects with all covenants contained in
the Loan Agreement and the merger agreement that are to be performed or complied
with by it at or prior to the funding of the additional loans, (iii) no event of
default having occurred under the Loan Agreement, (iv) Exabyte having prepared
and filed with the SEC the registration statement of which this proxy
statement/prospectus is a part, (v) since the date of the Loan Agreement through
the date on which the additional loans are made, there having not occurred any
"Parent Material Adverse Effect" (as defined in the merger agreement), and (vi)
no judgment, order, decree, law, rule or regulation having been enacted or
enforced preventing the making of the additional loans or the transactions
contemplated by the Loan Agreement or the merger agreement and no litigation or
proceeding pending or threatened that would enjoin, restrain, prevent or
condition the consummation of the transactions contemplated by the Loan
Agreement or the merger agreement.
In the event the merger closes, the amounts that the lenders loaned Exabyte
(plus any unpaid and accrued interest) will be credited against the purchase
price such lenders will pay to Exabyte to purchase shares of Exabyte's series H
preferred stock described above. In the event the merger does not close, each
lender will have the option to require Ecrix to repurchase his or its note
issued by Exabyte in exchange for shares of Ecrix series D-3 preferred stock.
The series D-3 preferred stock would have a pro rata liquidation preference with
holders of Ecrix's series D-1 and D-2 preferred stock equal to the greater of
(i) the original purchase price plus declared and unpaid dividends or (ii) the
amount such holders would have received if they had converted to Ecrix common
stock prior to liquidation. In addition, shares of series D-3 preferred stock
would convert into Ecrix common stock, vote with the Ecrix common stock as a
single class with other Ecrix preferred and have preferential dividend rights to
shares of junior stock of Ecrix (including Ecrix common stock). In addition to
voting with Ecrix common stock on most matters, the series D-3 preferred would
vote with the other Ecrix preferred stock as a single class on creation of new
Ecrix preferred stock, amending the Ecrix Certificate or Bylaws or other
significant corporate transactions. The series D-3 preferred stock would also
vote with Ecrix's series D-1 and D-2 preferred stock to create or designate any
class or series as senior to series D-1, D-2 or D-3 preferred stock or amend the
Ecrix Certificate regarding such separate voting group right. Any amendment of
any terms of Ecrix preferred stock requires the written consent of 66 2/3% of
the outstanding shares of Ecrix preferred stock and any
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action adversely affecting the rights, preferences and privileges or any series
of Ecrix preferred stock requires the consent of holders of two-thirds of such
series. In addition, the holders of Ecrix preferred stock (including the series
D-3 preferred stock, if in effect) vote separately as a single class (with each
shares entitled to one vote) in the election of three directors and in certain
circumstances such preferred directors have the right to vote as a majority on
Ecrix's board. One-third of the shares of series D-3 preferred stock originally
issued to such lenders would be subject to mandatory redemption on February 27,
2004, 2005 and 2006.
Series H Preferred Stock Purchase. The parties named above as lenders to
Exabyte and other stockholders of Ecrix have agreed at the closing of the merger
to purchase series H preferred stock of Exabyte for $1.00 per share as described
in "The Merger Transactions -- Sale of Exabyte Series H preferred stock." G.
Jackson Tankersley, Jr., who is a director of Ecrix and who will serve as a
director of Exabyte upon the effectiveness of the merger, is (a) a member of
Meritage Investment Partners, LLC, which is the sole general partner of Meritage
Private Equity Fund, L.P., Meritage Private Equity Parallel Fund, L.P. and
Meritage Entrepreneurs Fund, L.P., (b) the sole general partner of Tankersley
Family Limited Partnership and (c) the managing member of Millennial Holdings
LLC. These entities that have agreed to purchase the following shares of Exabyte
series H preferred stock pursuant to the merger agreement: Meritage Private
Equity Fund, L.P., (3,896,890 shares); Meritage Private Equity Parallel Fund,
L.P. (476,444 shares), Meritage Entrepreneurs Fund, L.P. (71,111 shares);
Tankersley Family Limited Partnership (32,884 shares); and Millennial Holdings
LLC (76,881 shares). In addition, The Millennial Fund agreed to purchase 21,773
shares of Exabyte series H preferred stock. Mr. Tankersley is the direct
beneficial owner of all Ecrix shares held in the name "The Millennial Fund."
William J. Almon, Sr., who is a director of Ecrix, has agreed to purchase
1,000,000 shares of Exabyte series H preferred stock and will also serve as a
director of Exabyte upon the effectiveness of the merger. Mr. Almon, Sr. also
currently owns 100,000 shares of Exabyte common stock. Mr. Rodriguez, a director
and executive officer of Ecrix, who will also serve as a director of Exabyte
following the merger, has agreed to purchase 250,000 shares of Exabyte series H
preferred stock for $250,000.
Jeffrey Schutz, who is a director of Ecrix, is (a) a General Partner of
Centennial Holdings V, L.P., which is the General Partner of Centennial Fund V,
L.P. and Centennial Entrepreneurs Fund V, L.P., (b) a Managing Principal of
Centennial Holdings VI, LLC, which is the General Partner of Centennial Fund VI,
L.P. and Centennial Entrepreneurs Fund VI, L.P., and (c) a Managing Director of
Centennial Holdings I, LLC. These entities have agreed to purchase the following
shares of Exabyte series H preferred stock pursuant to the merger agreement:
Centennial Fund V, L.P. (1,326,514 shares); Centennial Entrepreneurs Fund V,
L.P. (41,026 shares); Centennial Fund VI, L.P. (943,864 shares); Centennial
Entrepreneurs Fund VI, L.P. (23,597 shares); and Centennial Holdings I, LLC
(18,877 shares). Allen A. Builder, who is a director of Ecrix, is the general
partner of Big Partners V, L.P. Big Partners V, L.P. has agreed to purchase
350,000 shares of series H preferred stock pursuant to the merger agreement.
Exabyte and Ecrix negotiated these investments as part of the merger transaction
because of the importance of additional capital for the combined companies. To
the extent that series H preferred stock may be reviewed as an attractive
investment, these parties will benefit from consummation of the merger.
Indemnification. The merger agreement also provides that Exabyte will
honor and assume the indemnification obligations of Ecrix under the Certificate
of Incorporation and Bylaws of Ecrix to each officer, director, agent or
employee of Ecrix for acts and omissions prior to the closing of the merger. In
addition, the director designees described above shall be covered by any
directors' and officers' liability insurance maintained from time to time on the
same terms as the other members of the Exabyte Board of Directors and will be
entitled to the benefit of any indemnification arrangements applicable to other
members of Exabyte's Board.
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EXECUTIVE OFFICERS OF ECRIX.
Juan A. Rodriguez, currently Ecrix's Chief Executive Officer, will also
become Exabyte's Chief Technologist. Kelly Beavers and Craig G. Lamborn,
currently President; and Vice President, Finance and Chief Financial Officer,
respectively, of Ecrix will be employed by Exabyte after the merger as Vice
President, Marketing; and Vice President and Chief Financial Officer,
respectively. Exabyte may also employ current executive officers of Ecrix to the
extent it believes necessary and subject to business conditions. In addition,
the merger agreement provides that all employees of Ecrix will be eligible to
participate in the employee plans of Exabyte in which similarly situated
employees of Exabyte generally participate; however, the merger agreement does
not prevent Exabyte from terminating any employment of any employee or modifying
or terminating these plans from time to time. For purposes of length of service
requirements, waiting periods, vesting periods or differential benefits, length
of service will be deemed to include service with Ecrix. In the merger
agreement, Exabyte also states its intention to provide salary, stock options
and other benefits to employees of Ecrix, including officers, who continue to be
employed by Exabyte and its subsidiaries which in the aggregate will be
substantially equivalent to those currently provided by Exabyte to similarly
situated employees. Specifically, Exabyte has agreed to evaluate outstanding
stock option grants to purchase shares of Ecrix capital stock that have been
awarded to Ecrix employees. Exabyte will grant new stock options to former
employees of Ecrix hired by Exabyte upon consummation of the merger. Exabyte and
Ecrix will evaluate such option grants on a case by case basis.
Although Ecrix customarily grants severance pay when we terminate
employees, Ecrix does not generally have severance agreements with its
employees. However, Ecrix has one employee, William J. Almon, Jr., that has a
severance arrangement in his offer letter. This severance arrangement exists in
the event of an involuntary separation and stipulates that Ecrix will pay six
months' pay to Mr. Almon, Jr. and will allow an extra 90 days to exercise
options. Mr. Almon, Jr. has recently entered into a new short-term employment
agreement with Ecrix pursuant to which Mr. Almon, Jr. will focus on a particular
project and will receive a lump sum payment of amounts due under his severance
arrangement in October 2001.
MATERIAL CONTACTS AMONG EXABYTE AND ECRIX
On June 18, 1999, Ecrix filed a complaint in the United States District
Court for the District of Colorado, seeking judgment declaring seven patents
owned by Exabyte to be invalid or not infringed by certain tape drive products
manufactured by Ecrix. Although Exabyte engaged in settlement discussions both
before and after June 18, 1999, Ecrix rejected Exabyte's settlement offers.
Therefore on October 7, 1999, Exabyte filed an answer and counterclaim asserting
infringement by Ecrix of eight patents. In response, Ecrix filed an amended
complaint asserting additional antitrust claims under the Sherman Act and
Colorado Antitrust Act, as well as claims of patent misuse, estoppel, unfair
competition under Section 43(a) of the Lanham Act and common law, violation of
Colorado Consumer Protection Act, and tortious interference. In June, 2000, the
parties entered into a settlement agreement and both parties agreed to dismiss
all claims and enter into a cross-license agreement. Ecrix reimbursed Exabyte
for $450,000 of legal costs incurred. In addition, Ecrix issued to Exabyte a
$300,000 note payable which was paid in December 2000 and 400,000 shares of
Series D preferred stock of Ecrix. All of the shares of Series D preferred stock
of Ecrix will be cancelled at the effective time of the merger and the aggregate
number of shares of Exabyte common stock to be issued in exchange for
outstanding Ecrix capital stock will be reduced accordingly. See "The Merger
Agreement" below.
THE MERGER AGREEMENT
The following information summarizes certain material aspects of the merger
agreement and related agreements. This summary does not provide a complete
description of all the terms and conditions of the merger agreement and related
agreement. The following summary is qualified in its entirety by reference to
the complete text of the merger agreement and related agreements attached hereto
as annexes. You are
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urged to read the annexes in their entirety in order to obtain a complete
understanding of the merger, the transactions related to the merger and the
agreements that govern them.
STRUCTURE OF THE MERGER
Bronco Acquisition, Inc., the Merger Sub, which is a wholly owned
subsidiary of Exabyte, will merge into Ecrix, with Ecrix being the surviving
entity and a wholly owned subsidiary of Exabyte.
TIMING OF CLOSING
The closing of the merger will occur within five business days after the
day on which the last of the conditions set forth in the merger agreement has
been satisfied or waived, unless Exabyte and Ecrix agree to a different date.
Exabyte and Ecrix expect that, immediately upon the closing of the merger,
Exabyte and Ecrix will file a Certificate of Merger with the Secretary of State
of Delaware, at which time the merger will be effective, called the effective
time.
MERGER CONSIDERATION
At the effective time, all shares of any class of Ecrix's outstanding
capital stock held by Exabyte, Merger Sub or any other subsidiary of Exabyte or
held by Ecrix as treasury shares, collectively referred to as the canceled
shares, shall be canceled. All shares of Ecrix's capital stock, other than the
canceled shares, outstanding immediately prior to the effective time, shall be
converted into the right to receive up to 10 million shares of Exabyte common
stock at the effective time.
The outstanding shares of preferred stock of Ecrix at the Effective Time,
other than shares of Ecrix preferred stock for which dissenters' rights are
perfected or shares canceled, shall be converted into the right to receive up to
9 million shares of Exabyte Common Stock with the exchange ratio for each series
of Ecrix preferred stock to be as follows:
<Table>
<Caption>
NUMBER OF EXABYTE COMMON SHARES
YOU WILL GET AS A RESULT OF THE MERGER --
-------------------------------------------
WITHOUT STOCK SPLIT WITH 1:10 STOCK SPLIT
FOR EACH SHARE YOU HOLD OF: -------------------------------------------
Ecrix common stock *0.16168 *0.016168
Ecrix series A preferred stock 0.00952 0.000952
Ecrix series B preferred stock 0.02371 0.002371
Ecrix series C preferred stock 0.04048 0.004048
Ecrix series D preferred stock 0.04857 0.004857
Ecrix series D-1 preferred stock 0.82400 0.082400
---------------------------------------------------------------------------------
</Table>
* Based on 6,185,127 shares of Ecrix common stock outstanding as of August 31,
2001.
The applicable exchange ratios will be adjusted appropriately to maintain
the relative proportionate interests of the shares if Exabyte effects prior to
the merger a reverse stock split as planned or other subdivision or combination
of its outstanding shares, or reorganizes, reclassifies or otherwise changes its
outstanding shares into the same or a different number of shares or other
classes.
The outstanding shares of Ecrix common stock at the effective time, other
than shares for which dissenter's rights are perfected or shares canceled, shall
be converted into the right to receive up to 1 million shares of Exabyte common
stock. Each share of Ecrix common stock shall be converted into the right to
receive the number of shares of Exabyte common stock equal to 1 million divided
by the total number of shares of Ecrix common stock outstanding immediately
prior to the effective time.
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TREATMENT OF ECRIX STOCK OPTIONS AND WARRANTS
Each option to purchase shares of Ecrix common stock issued pursuant to the
Ecrix 1999 Equity Incentive Plan and each warrant to purchase shares of Ecrix
series B preferred stock and each warrant to purchase shares of Ecrix series D-2
preferred stock, whether or not vested or exercisable, shall, unless such option
or warrant shall have been exercised prior to consummation of the merger,
terminate upon the effective time. Ecrix's 1998 Incentive Stock Option Plan, the
"1998 Plan," provides that upon a sale of all or substantially all of the assets
of Ecrix or the merger or consolidation of Ecrix into another corporation or a
transaction in which there is a change of more than 50% of the voting control of
Ecrix, all options under the plan will immediately vest and may be fully
exercised if an individual's employment is involuntarily terminated without
cause in connection with the transaction or within one year of closing. Unless
previously terminated by an agreement with the respective option holders,
Exabyte will assume options granted under the 1998 Plan and outstanding at the
effective time of the merger. The 1999 Equity Incentive Plan provides that if an
acquiring corporation does not assume a stock option or substitute a similar
stock awards, that stock option will immediately vest in full and terminate at
the time of the acquisition.
To the extent any options to purchase Ecrix common stock or warrants to
purchase shares of Ecrix common stock, series B preferred stock or series D-2
preferred stock are exercised prior to the effective time, the shares of Ecrix
common stock Ecrix series B preferred stock or series D-2 preferred stock issued
upon such exercise shall be converted into shares of Exabyte common stock in
accordance with the applicable exchange ratio for such series; provided,
however, that such exchange ratios shall be adjusted by multiplying the exchange
ratio by a fraction, the numerator of which is the number or shares of the
applicable series outstanding as of the time the merger agreement was executed
and the denominator of which is the number of shares of the applicable series
outstanding at the effective time. In the event the warrant to purchase Ecrix
series D-2 preferred stock is exercised, it will be converted into Exabyte
common stock in accordance with the exchange ratio for the Ecrix series D-1
preferred stock and such ratio will be appropriately adjusted.
EXCHANGE OF SHARES; FRACTIONAL SHARES
We intend to appoint EquiServe Trust Company, N.A. as the exchange agent to
handle the exchange of Ecrix capital stock certificates for Exabyte common stock
and the payment of cash for fractional shares of Ecrix capital stock. Prior to
the closing of the merger, the exchange agent will mail to each holder of record
of Ecrix shares (other than those being canceled) a letter of transmittal for
use in the exchange and instructions explaining how to surrender Ecrix stock
certificates to the exchange agent. Holders of Ecrix stock that surrender their
certificates to the exchange agent, together with a properly completed letter of
transmittal, will receive the appropriate merger consideration. Holders of
unexchanged shares of Ecrix stock after the closing of the merger will not be
entitled to receive any dividends or other distributions payable by Exabyte
after the closing until their certificates are surrendered.
Exabyte will not issue any fractional shares in the merger. Instead, the
exchange agent will aggregate all fractional shares and sell them in the market.
Holders of Ecrix capital stock entitled to receive a fractional share will
instead receive a cash payment equal to their pro rata portion of the proceeds
from combining and selling their fractional shares in the market.
EXABYTE BOARD AND RELATED MATTERS
Exabyte has agreed to take the necessary corporate action so that as of the
closing of the merger:
- the size of the Exabyte Board of Directors will be increased to 7
members;.
- two members of the current Exabyte Board of Directors will resign or be
removed; and
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CHAPTER THREE
- the three resulting vacancies will be filled by the election of G.
Jackson Tankersley, Jr., William J. Almon, Sr. and Juan A Rodriguez, the
Ecrix designees.
Certain information concerning the Ecrix designees is included under
"Directors and Executive Officers of Exabyte after the Merger" in Chapter 3 of
this document. The Ecrix designees have agreed to serve until their successors
are duly elected and qualify. The successors to the Ecrix designees shall be
chosen by the Ecrix designees; provided, however, that the total number of
directors that may be designated by the Ecrix designees is determined as
follows:
- If at any time, the Exabyte Series H investors beneficially own less
than 30% of the voting power of all classes of the Exabyte's voting
securities, the number of directors that Exabyte is obligated to include
on the Board of Directors will be reduced so that the number of these
designees expressed as a percentage of the entire Board of Directors is
approximately equal to the percentage of the outstanding voting power
then beneficially owned by the Series H investors rounded to the nearest
whole directorship but in any event not a majority; provided, that if
the Series H investors beneficially own less than 10% of the outstanding
voting power of all classes of the Parent's voting securities, the
number of Series H investor designees is zero.
BRIDGE LOAN
In connection with the merger agreement, an affiliate of Meritage,
Centennial and certain of its affiliates and William J. Almon, Sr. agreed to
extend a bridge loan to Exabyte in the aggregate amount of $2 million, $1.5
million of which was delivered to Exabyte upon the execution of the merger
agreement and $500,000 of which was delivered to Exabyte on October 9, 2001,
upon the satisfaction of certain requirements set forth in the Loan and Security
Agreement. As security for the repayment of the bridge loan, the lenders were
granted a security interest in certain of our tangible and intangible assets. At
the closing of the merger, the outstanding principal and accrued and unpaid
interest under the promissory notes will be converted into shares of Exabyte
Series H preferred stock. For additional information about this bridge loan, see
"Interests of Directors and Executive Officers in the Merger -- Board of
Directors of Ecrix" and "The Merger Agreement -- Bridge Loan," both in Chapter 3
of this document.
SALE OF SERIES H CONVERTIBLE PREFERRED STOCK
Pursuant to the merger agreement, certain stockholders of Ecrix have agreed
to purchase 9.4 million shares of Exabyte Series H preferred stock from Exabyte
for a purchase price of $1.00 per share. The closing of the purchase will be at
the effective time of the merger. The rights, preferences, privileges and
restrictions of the Series H preferred stock will be similar to those of Exabyte
Series G preferred stock except that holders of the shares of Series H preferred
stock will not be entitled to dividends. The investors purchasing Series H
preferred stock will also be given registration rights pursuant to a
registration rights agreement with Exabyte. For additional information about the
proposed sale of Series H preferred stock, see "Interests of Directors and
Executive Officers in the Merger -- Series H Preferred Stock Purchase." In a
separate letter agreement, Juan A. Rodriguez has agreed to purchase 250,000
shares of Series H preferred stock on the same terms.
REPRESENTATIONS AND WARRANTIES
Exabyte and Ecrix have made coextensive, detailed representations and
warranties to one another in the merger agreement. These representations and
warranties will not survive past the closing of the merger. The most significant
of these representations and warranties relate to:
- corporate authorization to enter into the contemplated transactions;
- enforceability;
- capitalization;
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CHAPTER THREE
- governmental and third-party approvals required in connection with the
contemplated transactions;
- no conflict with organizational documents, law or certain agreements as
a result of the contemplated transactions;
- consents necessary to consummate the contemplated transactions;
- the accuracy and completeness of financial statements and books and
records;
- absence of certain changes or events since a specified balance sheet
date;
- tax matters;
- ownership and other matters related to real and personal property;
- material contracts;
- customers and suppliers;
- absence of litigation;
- labor and employment matters;
- employee benefit plans;
- personnel;
- ownership and other matters related to intellectual property;
- licenses and permits;
- compliance with laws;
- insurance;
- brokers or finders fees;
- insider interests;
- compliance with environmental laws;
- absence of undisclosed liabilities;
- full disclosure; and
- the accuracy and completeness of information provided for inclusion in
this document.
In addition, Exabyte represents and warrants as to certain other matters,
including filings with the SEC and certain matters related to the issuance of
common stock in the merger and the sale of Series H preferred stock.
CONDITIONS TO COMPLETION OF THE MERGER
Mutual Closing Conditions. The obligations of Exabyte, Merger Sub and
Ecrix to complete the merger are subject to the satisfaction or, to the extent
legally permissible, waiver of the following conditions:
- approval of the merger and related transactions by the stockholders of
Exabyte and Ecrix;
- accuracy as of the closing of the merger of the representations and
warranties made by the other party to the extent specified in the merger
agreement;
- performance in all material respects by the other party of the
obligations required to be performed by it at or prior to the closing of
the merger;
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CHAPTER THREE
- all approvals necessary for the consummation of the transactions
contemplated by the merger agreement will have been obtained;
- absence of legal prohibition on the completion of the merger;
- absence of court order or litigation pending that would prevent the
consummation of the transactions contemplated by the merger agreement;
- absence of a material adverse effect on Exabyte or Ecrix during the
period from the date of execution of the merger agreement until the
closing of the merger; and
- the SEC will have declared effective the registration statement of which
this proxy statement/ prospectus forms a part.
Additional Closing Conditions for Exabyte's Benefit. Exabyte's obligation
to complete the merger is subject to the following additional conditions:
- Ecrix shall have delivered to Exabyte executed affiliate letters;
- all rights of first refusal, co-sale rights and registration rights will
have terminated;
- holders of no more than 20% of the outstanding shares of Ecrix common
stock will have exercised dissenter's rights;
- Ecrix will have received any required consents to the merger;
- Exabyte will have received the initial $1,500,000 bridge loan
contemplated by the merger agreement;
- the certificate of designation with respect to the Series H preferred
stock will have been properly filed with the Delaware Secretary of
State;
- the Series H investors will have executed and delivered lock-up
agreements restricting their ability to resell shares of Exabyte
received in the merger; and
- the investors and Mr. Rodriguez will have purchased at least $9.4
million of the Series H preferred stock as contemplated by the merger
agreement.
Additional Closing Conditions for Ecrix's Benefit. Ecrix's obligation to
complete the merger is subject to the following additional conditions:
- shares of Exabyte's common stock issuable pursuant to the merger will be
authorized for listing on the Nasdaq National Market; and
- consent of Congress Financial Corporation obtained in the Third
Amendment to Loan and Security Agreement, Waiver and Consent entered
into among Exabyte and Congress shall not have been revoked or modified.
CERTAIN COVENANTS
Each of Exabyte and Ecrix has undertaken certain covenants in the merger
agreement. The following summarizes the more significant of these covenants.
Certain Mutual Covenants. The merger agreement contains certain mutual
covenants, the more significant of which obligate each of Exabyte and Ecrix to
do the following:
- operate business in the ordinary course of business and not take certain
actions described below under "Interim Operations of Exabyte and Ecrix;"
- grant access to each other's properties, books and records for due
diligence review purposes;
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CHAPTER THREE
- prepare and file with the SEC the registration statement on Form S-4 of
which this proxy statement/prospectus is a part;
- comply with their obligations under a mutual confidentiality agreement;
- promptly notify one another of certain material events;
- use best efforts to close the merger and the transactions contemplated
by the merger agreement;
- refrain from issuing any press release regarding the merger agreement
without the other's prior consent;
- refrain from soliciting, entering into or engaging in discussions with
others regarding any alternative takeover proposal; provided, however,
these actions are permitted in response to unsolicited offers so long as
prior to doing so the applicable Board of Directors determines in good
faith that such actions are necessary to comply with its fiduciary
duties to stockholders (see "Termination, Amendment and Waiver" below);
- notify one another regarding the existence of any takeover proposal and
the terms and status of any such proposal;
- use commercially reasonable efforts to acquire all regulatory and other
approvals necessary in order to consummate the merger and the
transactions contemplated pursuant to the merger agreement; and
- seek the approval by their stockholders of the merger and the related
transactions, to the extent required, and to recommend their approval.
Certain Covenants of Exabyte. In addition to the mutual covenants
described above, Exabyte has undertaken to perform the following covenants
pursuant to the merger agreement:
- prepare and file a proxy statement to be used in connection with a
meeting of its stockholders held for the purpose of approving the merger
and the related transactions;
- apply for listing on the Nasdaq National Market the shares of Exabyte
common stock to be issued in connection with the merger;
- from and after the closing of the merger, Exabyte will assume all Ecrix
indemnification obligations set forth in Ecrix's governing documents and
cause all employees of the surviving corporation to be eligible for
participation in all Exabyte benefit plans available to similarly
situated Exabyte employees. Exabyte is not prohibited from terminating
any employee or modifying or terminating any benefit plan; and
- refrain from revoking or amending the amendment to its Rights Agreement
adopted in connection with the merger. See "Amendment to Shareholder
Rights Plan" below.
Certain Covenants of Ecrix. In addition to the mutual covenants described
above, Ecrix has undertaken pursuant to the merger agreement to furnish Exabyte
with a list prior to the closing of the merger that identifies those
stockholders that have requested appraisal rights under Delaware law.
Interim Operations of Exabyte and Ecrix. Each of Exabyte and Ecrix has
undertaken a separate covenant that places restrictions on it until either the
effective time of the merger or the merger agreement is terminated. In general,
Exabyte and Ecrix are required to conduct their business in the ordinary course
consistent with past practice and to use their reasonable best efforts to
preserve intact their business organizations and relationships with third
parties. Each company is restricted from doing any of the following:
- amending its Certificate of Incorporation or Bylaws, except in the case
of limiting dividends payable on preferred stock or satisfying existing
dividend obligations;
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CHAPTER THREE
- issuing or disposing of equity securities, options or other securities
convertible into or exercisable for equity securities and any assets of
the company except to a limited extent to employees or directors and
except in the ordinary course of business;
- declaring dividends with respect to any capital stock;
- reclassifying, combining, splitting, subdividing, redeeming or
purchasing its capital stock, except to a limited extent to employees or
directors;
- acquiring any other entity or assets (except in the ordinary course),
incurring any debt in excess of specified amounts or lease financings in
excess of specified amounts, making any capital expenditures other than
as contemplated by a mutually agreed upon budget, entering into any
contract in excess of a specified amount, entering into any agreement
pursuant to which the cash obligation exceeds a specified amount or
which is not terminable upon 60 days' or less notice, or licensing any
intellectual property;
- increasing employee, director or officer compensation or benefits
(except for certain limited amounts for the purpose of retaining key
employees) or creating or amending any benefit plan;
- changing its accounting policies, except as required by GAAP;
- making tax elections or settling any tax liability except in certain
circumstances;
- paying, discharging or satisfying material claims, liabilities or
obligations, or prepaying obligations with certain fixed maturities,
except in the ordinary course;
- loaning or advancing any amount, transferring or leasing any properties
or assets or entering into any agreement with any company officers,
directors or employees, subject to certain exceptions;
- taking any action resulting in loss of or contract cancellation by any
customer, supplier or licenser, subject to certain monetary limits;
- forgiving or canceling any indebtedness or waiving any claims or rights
of material value including indebtedness of any company stockholder,
officers, director, employee or affiliate, except in the ordinary
course; and
- knowingly taking any action that would make any representation or
warranty by it inaccurate in any material respect.
In addition to the mutual restrictions listed above, Ecrix is restricted
from selling, transferring or disposing of material assets in excess of certain
monetary thresholds, except in the ordinary course of business.
TERMINATION, AMENDMENT AND WAIVER
Right to Terminate. The merger agreement may be terminated at any time
prior to the closing in any of the following ways:
(a) By mutual written consent of Exabyte and Ecrix;
(b) By either Exabyte or Ecrix if the merger has not been consummated by
December 31, 2001; provided that neither party can terminate the merger
agreement if the failure to consummate the merger is caused by the
party attempting to terminate;
(c) By either Exabyte or Ecrix if the merger is illegal or prohibited by
law;
(d) By Ecrix if Exabyte breaches any representation or warranty and does
not cure such breach within 30 days of notice thereof and such breach
has resulted in a Parent Material Adverse Effect (as defined in the
merger agreement);
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CHAPTER THREE
(e) By Ecrix if the votes required of holders of Exabyte capital stock
necessary to approve the merger are not received;
(f) By Exabyte if the votes required of holders of Ecrix capital stock
necessary to approve the merger are not received;
(g) By Exabyte if Ecrix breaches any representation or warranty and does
not cure such breach within 30 days of notice thereof and such breach
has resulted in a Company Material Adverse Effect (as defined in the
merger agreement); or
(h) By Exabyte or Ecrix if:
- the board of directors of the terminating party has authorized entering
into a definitive agreement to acquire the terminating party on terms
that a majority of the members of such board have determined in good
faith, after taking into account the advice of its independent
financial advisors, to be more favorable to the terminating party and
its stockholders than the merger and the related transactions (and any
revised proposal made by the non-terminating party), and such superior
proposal has, to the extent required, financing fully committed, or the
board of directors of the terminating party has determined that such
financing is reasonably likely to be available; and
- the terminating party has paid the termination fee described below
under "Termination Fee."
Effect of Termination. If the merger agreement is validly terminated, the
agreement will become void without any liability on the part of Exabyte or
Ecrix, except that the confidentiality, best efforts, termination and general
provisions of the merger agreement shall continue to apply following such
termination.
Termination Fee. If either party terminates the merger agreement as
described in paragraph (h) under "Right to Terminate" above, the terminating
party shall pay the non-terminating party a termination fee of $1 million. In
addition, Exabyte shall immediately repay the promissory notes issued on the
date of execution of the merger agreement if it terminates the merger agreement
for any of the reasons described in paragraphs (a) through (d), (f) or (h) under
"Right to Terminate" above.
GENERAL PROVISIONS
The representations and warranties contained in the merger agreement will
not survive past the closing of the merger.
Each party will pay its own fees and expenses relating to the merger and
the transactions contemplated by the merger agreement.
The merger agreement may be amended with the consent of the parties;
provided, however, that no such amendment will be made if such amendment
requires further stockholder approval until such approval is received.
Ecrix employees are intended to be third party beneficiaries of Exabyte's
obligations concerning the provision of employee compensation benefits,
severance and indemnification following the merger to the extent applicable to
such employees.
AMENDMENT TO SHAREHOLDER RIGHTS PLAN
Exabyte currently has a shareholder rights plan intended to deter a hostile
takeover. A description of this plan is included in this Chapter under
"Description of Exabyte Capital Stock." In connection with the merger, the
Exabyte Board adopted an amendment to the rights agreement that governs the
shareholder rights plan. This amendment excludes from the definition of
acquiring person the investors in Exabyte Series H preferred stock so long as in
the aggregate they hold no more than 49.999% of the total common
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CHAPTER THREE
shares (as defined in the plan) outstanding or 20 million shares, whichever is
greater; except that each investor is deemed an acquiring person if they hold,
together with their affiliates and associates, 25% of the outstanding common
shares in the case of Meritage, and 20% of the outstanding common shares in the
case of any investor other than Meritage.
RESALE OF EXABYTE SHARES AFTER THE MERGER
This document does not cover any resales of the Exabyte common stock to be
received by Ecrix stockholders upon completion of the merger, and no person is
authorized to make any use of this document in connection with any such sale.
All shares of Exabyte common stock received by Ecrix stockholders in the
merger will be freely transferable, except that shares of Exabyte common stock
received by persons who are deemed to be "affiliates" of Ecrix under the
Securities Act of 1933, as amended, at the time that Ecrix has received
sufficient stockholder consents to consummate the merger transaction may be
resold by them only in transactions permitted by Rule 145 under the 1933 Act or
as otherwise permitted under the 1933 Act. Persons who may be deemed to be
affiliates of Ecrix for such purposes generally include individuals or entities
that control, are controlled by or are under common control with Ecrix and
include directors and executive officers of Ecrix. The merger agreement requires
Ecrix to deliver to Exabyte before closing a written agreement from each of its
affiliates to the effect that such persons will not offer, sell or otherwise
dispose of any of the shares of Exabyte common stock issued to them in the
merger in violation of the 1933 Act or the related SEC rules. The merger
agreement also requires that the investors in Exabyte Series H preferred stock
deliver before closing a written agreement that such persons will not sell any
of the Series H preferred stock, nor any of the underlying common stock into
which it is convertible, for 90 days following the merger, not more than
one-third within 180 days following the merger and not more than two-thirds
within 270 days following the merger.
THE BRIDGE LOAN
This following information summarizes certain material aspects of the Loan
and Security Agreement among Exabyte and certain investors in Ecrix and related
agreements. This summary does not provide a complete description of all the
terms and conditions of the Loan and Security Agreement and related agreements.
The following summary is qualified in its entirety by reference to the complete
text of the Loan and Security Agreement and related agreements which are
exhibits to the registration statement of which this proxy statement/prospectus
is a part.
INITIAL LOAN AMOUNTS AND LENDERS
Pursuant to the Loan and Security Agreement, on August 23, 2001, the
lenders loaned Exabyte an aggregate amount of $1.5 million. Specifically, the
lenders and the amount of their respective initial loans to Exabyte are as
follows:
<Table>
<Caption>
LENDER AMOUNT OF INITIAL LOAN
Meritage Private Equity Fund, L.P. $854,885.24
Centennial Fund V, L.P. $56,023.97
Centennial Entrepreneurs Fund V, L.P. $1,680.72
Centennial Fund VI, L.P. $376,248.87
Centennial Entrepreneurs Fund VI, L.P. $11,287.47
Centennial Holdings I, LLC $7,524.98
William J. Almon, Sr. $192,348.75
</Table>
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CHAPTER THREE
CONTINGENT LOANS
The lenders made additional loans in the aggregate amount of $500,000 to
Exabyte on October 9, 2001, two days after Exabyte certified to the lenders that
certain conditions had been met. These conditions are enumerated in the section
titled "Interests of Directors and Executive Officers in the Merger -- Bridge
Loans" on page 3-27.
The lenders made additional loans in the following amounts:
<Table>
<Caption>
LENDER AMOUNT OF CONTINGENT LOAN
Meritage Private Equity Fund, L.P. $284,961.74
Centennial Fund V, L.P. $18,674.66
Centennial Entrepreneurs Fund V,
L.P. $560.24
Centennial Fund VI, L.P. $125,416.29
Centennial Entrepreneurs Fund VI,
L.P. $3,762.49
Centennial Holdings I, LLC $2,508.33
William J. Almon, Sr. $64,116.25
</Table>
SECURITY
As security for the payment by Exabyte of the amounts due pursuant to the
Loan and Security Agreement, Exabyte granted a security interest to the lenders
in its accounts, general intangibles, monies, securities, intellectual property,
inventory, records and products and proceeds of the foregoing. The security
interest is subordinated to the first priority lien of Congress Financial
Corporation granted by Exabyte pursuant to a loan agreement for a line of credit
with Congress.
NOTES
To evidence the amounts of the initial loans, Exabyte issued to each lender
a 12% subordinated secured convertible note in the principal amount of each
lender's initial loan. If the lenders make the contingent loans described above,
Exabyte will issue to each lender notes identical to those for the initial
loans. Interest accrues on the notes at the rate of 12% per annum, compounded
quarterly, subject to adjustment as described below. Interest is payable on the
date the principal of the note becomes due and payable; provided that, if the
stated maturity date of the note is extended upon termination of the merger
agreement as described below, interest will be payable quarterly and at
maturity. The stated maturity date of the notes is December 31, 2001. On the
closing of the merger, the then outstanding principal amount of the notes and
all accrued and unpaid interest will be credited against each lender's total
purchase price for the shares of Exabyte's Series H preferred stock which the
lender will be purchasing under the merger agreement.
If an event of default under the Loan and Security Agreement has occurred
and is continuing, or if Exabyte defaults on its obligations under the notes,
the interest rate will be increased by 6% per annum until the default has been
cured. The interest rate will be further increased by 1% per annum for each
90-day period that the default continues without cure.
The outstanding principal amount of the note and accrued interest will be
convertible at the option of the lender into shares of Exabyte common stock for
30 days following any termination of the merger agreement (a) by Ecrix for any
reason other than the intentional breach of the merger agreement by Exabyte or
(b) by Exabyte as a result of the intentional breach of the merger agreement by
Ecrix. The notes contain certain anti-dilution provisions providing that upon
certain actions of Exabyte, the number of shares into which the notes will be
converted will be adjusted. Upon conversion of the notes, the number of shares
of common stock to be issued will be equal to one share of common stock for each
$.80 (or $8.00 if the maximum 1:10 proposed reverse stock split is effected) in
principal amount of the note and accrued interest being converted. If a lender
does not elect to convert its note within the 30-day time
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period, then the stated maturity date of the note will be automatically extended
to August 22, 2002 and the interest rate on the note will increase to 15% as of
the termination date of the merger agreement, and will continue to increase by
an additional 1% per annum for each 90-day period until the stated maturity
date. If both (x) the merger has not been consummated by December 31, 2001 and
(y) the merger agreement has not been terminated on or prior to that date, then
the stated maturity date will be extended to the earlier to occur of (i) the
date the merger is consummated or (ii) the date the merger agreement is
terminated.
REPRESENTATIONS AND WARRANTIES
Exabyte has made representations and warranties to the lenders in the Loan
and Security Agreement. The most significant of these representations and
warranties relate to:
- the locations of the offices of Exabyte;
- perfection and priority of liens;
- title to collateral;
- organization and qualification;
- corporate authorization to enter into the contemplated transactions;
- enforceability;
- no conflict with organizational documents, law or certain agreements as
a result of the contemplated transactions;
- governmental and third-party approvals required in connection with the
contemplated transactions;
- the accuracy and completeness of financial statements and books and
records;
- absence of certain changes or events since a specified balance sheet
date;
- absence of litigation;
- ownership of accounts;
- solvency; and
- the accuracy in all material respects of the representations and
warranties contained in the merger agreement.
COVENANTS
The Loan and Security Agreement contains certain covenants with which
Exabyte is obligated to comply, the more significant of which obligate Exabyte
to do the following:
- refrain from creating or permitting to exist liens on the collateral,
other than certain liens permitted by the Loan and Security Agreement;
- refrain from incurring debt, other than certain debt permitted by the
Loan and Security Agreement;
- refrain from (a) merging with other persons (other than the merger
contemplated by the merger agreement with Ecrix) or (b) selling or
transferring stock (other than its own), indebtedness or assets, except
as permitted under the Loan and Security Agreement;
- refrain from making loans or guaranteeing indebtedness, except as
permitted under the Loan and Security Agreement;
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- refrain from declaring or paying dividends or redeeming stock;
- keep accurate books and records and deliver periodic financial
statements to the lenders;
- notify the lenders of material litigation or events of default;
- maintain its offices where currently located, except as permitted under
the Loan and Security Agreement;
- maintain insurance;
- maintain and pay taxes on its equipment and inventory; and
- upon an event of default which is continuing, at the request of the
lenders, notify its account debtors to make payments to the lenders.
EVENTS OF DEFAULT
Events of default under the Loan and Security Agreement include the
following:
- Exabyte's failure to pay any installment of principal when due or any
installment of interest within 5 days after it is due;
- Exabyte's failure or refusal to perform any covenant (other than as
described immediately above) within 15 days after notice by a lender to
Exabyte of such default;
- Any judgment for the payment of money is rendered against Exabyte in
excess of $165,000 in any one case or in excess of $220,000 in the
aggregate and remains undischarged for a period in excess of 30 days, or
execution is not stayed, or any judgment other than for the payment of
money in excess of the above amounts is rendered against Exabyte or its
assets;
- Any representations or warranties prove to have been untrue in any
material respect;
- Other than with respect to accounts payable of Exabyte which were
overdue on the date of the Loan and Security Agreement, the default by
Exabyte under any instrument under which indebtedness for borrowed money
(other than the loans) having an aggregate principal amount of $330,000
or more has been issued, and the default has continued for a period of
time sufficient to permit the acceleration of the maturity of such
indebtedness;
- Exabyte commences a voluntary case in bankruptcy or makes an assignment
for the benefit of creditors or fails to pay debts as they come due; or
- An involuntary case in bankruptcy is filed against Exabyte and remains
undismissed for 60 days.
SUBORDINATION AND INTERCREDITOR AGREEMENT
Under the Congress loan agreement, Exabyte is prohibited from incurring
additional indebtedness of the type provided by the bridge lenders. As
consideration for Congress' consent to the bridge loans, Congress required that
the bridge lenders and Exabyte enter into a subordination and intercreditor
agreement, dated August 22, 2001.
The subordination and intercreditor agreement provides that the obligations
of Exabyte to the bridge lenders (the "junior obligations") and the liens
granted by Exabyte to the bridge lenders (the "junior liens") are subordinate
and junior to the right of payment and priority of the obligations of Exabyte to
Congress (the "senior obligations") and the liens granted by Exabyte to Congress
(the "senior liens"). Exabyte is prohibited from making any payments to the
bridge lenders other than the conversion of the
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junior obligations to equity of Exabyte, and regularly scheduled payment
obligations to the bridge lenders, so long as on the date of, and after giving
effect to the payment to the bridge lenders:
- Exabyte's Excess Availability (as defined in the Congress loan agreement
under its line of credit) is greater than or equal to $500,000; and
- No default or event of default would have occurred under the Congress
loan agreement.
Exabyte may, however, make any payments that would not cause the Excess
Availability to be less than $500,000 and would not cause the occurrence of a
default or event of default under the Congress loan agreement. In addition,
Exabyte may make payments of interest to the bridge lenders so long as no
payment default under the Congress loan agreement has occurred and is
continuing.
If Exabyte defaults under the Loan and Security Agreement, the bridge
lenders are to send a copy of their default notice to Congress. The bridge
lenders are not to exercise any of their rights or remedies under the Loan and
Security Agreement or take any action against the collateral until the earliest
of (a) twenty days after Congress receives the notice of default, (b) September
30, 2003, (c) the exercise by Congress of any acceleration or foreclosure
available to it, (d) the occurrence of a bankruptcy or insolvency proceeding, or
(e) all of the obligations to Congress have been paid in full. If there has been
a default under the Congress loan agreement, Congress has the right to block the
bridge lenders from exercising their remedies or taking any action against the
collateral until September 30, 2003.
THIRD AMENDMENT TO LOAN AND SECURITY AGREEMENT, WAIVER AND CONSENT
In connection with the Loan and Security Agreement, Congress and Exabyte
entered into a Third Amendment to Loan and Security Agreement, Waiver and
Consent dated August 22, 2001 (the "third amendment"). Pursuant to the third
amendment, Congress waived any defaults or events of default arising under the
Congress loan agreement as a result of Exabyte's failure to maintain its
Tangible Net Worth at levels required under the Congress loan agreement for each
of the quarters ended March 31, 2001 and June 30, 2001. In addition, the parties
amended the Tangible Net Worth requirements of Exabyte on a going-forward basis.
In addition, Congress waived any covenants in the Congress loan agreement
to the extent they would be deemed violated solely due to the execution,
delivery and performance by Exabyte of the Loan and Security Agreement and the
merger agreement, and the consummation of the merger and the issuance of
Exabyte's Series H preferred stock to the bridge lenders and the other proposed
investors. The waiver of Congress in regard to the merger is subject to several
conditions, including that: the representations and warranties in the Congress
loan agreement, the merger agreement and related documents are true and correct
as of the date of the waiver; no default occurs under the merger agreement
unless the default has been waived; each of the conditions to the merger
agreement have been met to the reasonable satisfaction of the parties and
Congress; Exabyte will have made the changes to the agreements with Congress as
may be reasonably required to reflect the consummation of the merger; and
Congress is provided a certificate regarding the solvency of Exabyte after
giving effect to the merger in form and substance satisfactory to Congress,
executed by Exabyte's Chief Financial Officer. The third amendment also provides
that Exabyte is not to borrow funds under the Congress loan agreement to pay the
termination fee or any similar fee required by the merger agreement.
SALE OF EXABYTE SERIES H PREFERRED STOCK
GENERAL
Certain stockholders in Ecrix have agreed to purchase 9.65 million shares
of Exabyte's Series H Convertible Preferred Stock for $1.00 per share (or
965,000 shares for $10 per share if a maximum 1:10 reverse stock split is
approved and effected) for an aggregate price of $9.65 million. Of that amount,
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9.4 million shares of Series H preferred stock are being purchased under the
merger agreement, and the remaining 250,000 shares of Series H preferred stock
are the subject of a separate purchase agreement between Exabyte and Mr.
Rodriguez. All unpaid principal plus any unpaid accrued interest on the bridge
loan, which were made by some of the Series H investors, will be credited
against such investors' aggregate total purchase price for the Series H shares
being purchased by them. The number of Series H shares, the purchase price for
Series H shares and the Series H conversion price shall be proportionately
increased or decreased in the event of any stock split, stock dividend, issuance
of convertible securities or other similar events including the proposed reverse
stock split described in Chapter Seven. Exabyte is issuing these shares in a
non-public offering. Each Series H investor has represented to Exabyte that it
is an accredited investor, as that term is defined in Regulation D under the
Securities Act of 1933.
DESCRIPTION OF SERIES H PREFERRED STOCK
Voting Rights. Holders of the Series H shares will vote with the holders
of outstanding shares of the common stock of Exabyte (and not as a separate
class) at any annual or special meeting of the stockholders of Exabyte. Each
holder of Series H shares will be entitled to a number of votes equal to the
whole number of shares of common stock into which the holder's aggregate number
of Series H shares are convertible into immediately after the close of business
on the record date fixed for any meeting of stockholders.
Liquidation Preference. Upon any liquidation, dissolution or winding up of
Exabyte, before any distribution or payment is made to holders of common stock
of Exabyte and any other stock of Exabyte that is not expressly senior to in any
right of payment to the Series H preferred stock, the Series H preferred stock
will be entitled to be paid as a preferential payment an amount equal to the
product of each then outstanding Series H share times $1.00 (or $10.00 if the
maximum 1:10 proposed reverse split is effected). The Series H shares are pari
passu to the outstanding Series G Preferred stock. After payment in full of the
liquidation preference of the Series H preferred and any other outstanding
series of preferred stock, any remaining assets shall be distributed pro rata,
among the holders of the common stock and any convertible preferred stock on an
as-converted basis.
No Dividends. No dividends are payable on the Series H shares.
Redemption Rights. Commencing on the second anniversary of the date on
which the Series H shares are issued, Exabyte will have the option to redeem
some or all of the then outstanding Series H shares at a price per share equal
to $3.00 ($30.00 if a maximum 1:10 reverse stock split is effected), if the
closing price of Exabyte's common stock on each of the 30 consecutive trading
days prior to the date that Exabyte seeks to redeem Series H shares is greater
than $3.00 per share ($30.00 if a maximum 1:10 reverse stock split is effected).
Any redemption of less than all of the Series H shares must be on a
proportionate basis.
Conversion Rights. At the option of the holders, the Series H shares may
be converted at any time into fully paid and nonassessable shares of Exabyte
common stock. The number of shares of common stock into which Series H shares
are converted will be determined by multiplying the Series H conversion rate
then in effect by the number of Series H shares being converted. The Series H
conversion rate will initially be the original issuance price of the Series H
preferred stock (which is $1.00 per share or up to $10.00 if the reverse stock
split is approved and effected) divided by the initial conversion price (which
is the same amount), resulting in a conversion ratio of 1:1, subject to
adjustment for future stock splits, stock combinations, stock dividends, or
similar transactions affecting the Series H shares.
Rights of Holders of Series H Shares. Exabyte may not, without first
obtaining the affirmative vote or written consent of the holders of not less
than a majority of the outstanding shares of the Series H
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shares, which consent in each case shall not be unreasonably withheld or
delayed, take any of the following actions:
(a) any amendment or change of the rights, preferences, privileges or
powers of, or the restrictions provided for the benefit of, the Series H
shares that adversely affects the rights, preferences, privileges or powers
of the Series H shares;
(b) any creation or issuance of shares of any class of stock having
preferences superior to the Series H shares;
(c) a reclassification of outstanding shares into shares having
preferences or priorities as to dividends or assets senior to the
preference of the Series H shares;
(d) any amendment of Exabyte's restated certificate of incorporation
that adversely affects the right of the Series H shares; or
(e) any Acquisition or Asset Transfer. For this purpose,
"Acquisition" means any merger, consolidation, business combination,
reorganization or recapitalization of Exabyte in any single transaction or
series of related transactions in which the stockholders of Exabyte
immediately prior to such transaction own less than 50% of the voting power
of Exabyte immediately after such transaction or any transaction or series
of related transactions in which capital stock representing in excess of
50% of Exabyte's voting power is transferred. An "Asset Transfer" means any
sale, lease or other disposition of all or substantially all of Exabyte.
REGISTRATION RIGHTS OF SERIES H INVESTORS
In connection with the purchase of the series H preferred stock, Exabyte
and the investors will enter into a registration rights agreement pursuant to
which Exabyte will agree to register the investors' Exabyte common stock
(including the Exabyte common stock underlying the series H preferred stock).
Exabyte and Mr. Rodriguez intend to obtain the concurrence of the investors so
that Mr. Rodriguez will be added as a party to the registration rights
agreement. This Exabyte common stock is also called the "registrable
securities." Under this agreement, holders of not less than a majority of the
outstanding registrable securities, at any time commencing 90 days after the
issuance of the Series H preferred stock, may demand that Exabyte effect a
registration under the Securities Act on Form S-1 or any similar form covering
the sale of at least 33% of the registrable securities then outstanding, called
a "long-form" registration. In addition, if Form S-3 or any similar form is then
available, holders of at least 25% of the outstanding registrable securities may
demand such a registration covering the sale of at least 10% of the registrable
securities then outstanding with an anticipated offering price of $2,500,000 or
more, called a "short-form" registration. However, Exabyte is not required to
effect a demand registration, among other exceptions, during the period starting
with the date of filing and ending on 90 days following the effective date of a
registration statement filed by Exabyte relating to a public offering, or if in
the good faith judgment of Exabyte's board of directors, such demand
registration would interfere with a proposed primary registration of securities
by Exabyte or any other material corporate transaction. In each such case,
Exabyte may defer the filing of the demand registration statement for a period
of up to 180 days and not more than once in any 12-month period. The holders of
the registrable securities also have piggyback rights to include registrable
securities held by them in any registration statement filed by Exabyte offering
securities for its own account or the account of any other security holder.
Exabyte shall pay all registration expenses, including all registration,
qualification or filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for Exabyte, Blue Sky fees and expenses, expenses of
any regular or special audits incident to or required by such registration and
fees and expense of counsel for holders of registrable securities for up to two
long-form demand registrations and all short-form demand or piggyback
registrations effected on behalf of such holders of registrable securities.
Exabyte
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is not required to pay underwriting discounts and selling commissions applicable
to the sale of registrable securities.
Exabyte has agreed to indemnify each holder of registrable securities
included in any demand registration or pursuant to the exercise of their
piggyback rights against all claims based on any untrue statement or alleged
untrue statement of material fact contained in such registration statement
except to the extent that such claim is based on or arises out of any untrue
statement or omission based upon written information furnished to Exabyte by
such a holder of registrable securities. The rights of any holder of registrable
securities to have shares registered pursuant to demand or piggyback
registration rights terminates at such time as common stock held by the holder
or issuable to the holder upon the conversion of Series H preferred stock or
other rights may immediately be sold under Rule 144(k) promulgated under the
Securities Act and Exabyte's common stock is either listed on a national
securities exchange or traded in the Nasdaq National Market System, except that
this termination provision does not apply to any holder of such common stock
representing more than 5% of the outstanding common stock.
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for by Exabyte using the purchase method of
accounting for a business combination.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
We anticipate that the merger will qualify for United States federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. The discussion below summarizes certain material United
States federal income tax consequences of the merger to Ecrix stock for Exabyte
stock and, as applicable, cash in lieu of fractional shares of Exabyte stock
pursuant to the merger agreement.
The discussion below is based upon current provisions of the Internal
Revenue Code, currently applicable U.S. Treasury regulations promulgated
thereunder, and judicial and administrative decisions and rulings. The following
discussion is based on certain facts, representations, and assumptions known by
Exabyte and Ecrix management as of the date of this document. The discussion is
not binding on the Internal Revenue Service or the courts, and there can be no
assurance that the Internal Revenue Service or the courts will not take a
contrary view. No ruling from the Internal Revenue Service has been or will be
sought. Future legislative, judicial or administrative changes or
interpretations could alter or modify the statements and conclusions set forth
herein, and any such changes or interpretations could be retroactive and could
affect the tax consequences of the merger to stockholders of Exabyte and Ecrix.
The discussion below does not purport to deal with all aspects of federal
income taxation that may be relevant to particular stockholders in light of
their individual circumstances, and it is not intended for stockholders subject
to special tax treatment under federal income tax laws. Stockholders that may be
subject to special treatment include, without limitation, financial
institutions, tax-exempt organizations, insurance companies, dealers in
securities or foreign currencies, foreign holders, persons who hold their Ecrix
stock as a hedge against currency risk, a constructive sale, or conversion
transaction, stockholders who do not hold their stock as a capital asset, and
holders who acquired their shares pursuant to the exercise of employee stock
options or otherwise as compensation. The discussion below does not consider the
effect of any applicable state, local, or foreign tax laws. In addition, this
discussion does not address the tax consequences, if any, of transactions
effectuated prior or subsequent to, or concurrently with, the merger (whether or
not such transactions are undertaken in connection with the merger).
The following discussion is not intended to be a complete analysis or
description of all potential United States federal income tax consequences or
any other tax consequences of the merger. In addition, the discussion does not
address the tax consequences which may vary with, or are contingent upon, your
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individual circumstances. ECRIX STOCKHOLDERS ARE STRONGLY URGED TO CONSULT THEIR
OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER,
INCLUDING THE APPLICABILITY AND EFFECT, IF ANY, OF FEDERAL, STATE, LOCAL AND
FOREIGN INCOME AND OTHER TAX LAWS ON THEIR PARTICULAR CIRCUMSTANCES.
Assuming that the merger qualifies as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code, then, subject to the
assumptions, limitations, and qualifications referred to herein, the merger
should result in the following federal income tax consequences:
- an Ecrix stockholder who exchanges its Ecrix stock for Exabyte common
stock will not recognize gain or loss for United States federal income
tax purposes, except with respect to cash, if any, received in lieu of a
fractional share of Exabyte stock;
- the aggregate tax basis of a Ecrix stockholder in the Exabyte common
stock received in exchange for Ecrix stock pursuant to the merger will
be the same as such holder's aggregate tax basis in the Ecrix stock
surrendered in the merger, decreased by the amount of any tax basis
allocable to any fractional share interest for which cash is received;
- the holding period for the Exabyte common stock received in the merger
by a Ecrix stockholder will include the holding period of the Ecrix
stock surrendered in the merger; and
- an Ecrix stockholder who receives cash in lieu of a fractional share of
Exabyte common stock in the merger generally will recognize gain or loss
equal to the difference between the amount of cash received and its tax
basis in the Ecrix stock that is allocable to the fractional share. The
gain or loss generally will be capital gain or loss. In the case of an
individual stockholder, capital gain is subject to a maximum tax rate of
20% if the individual has held his or her Ecrix shares for more than 12
months at the effective time of the merger. The deductibility of capital
losses is subject to limitations for both individuals and corporations.
Each Ecrix stockholder will be required to attach a statement to its tax
return for the year of the merger that contains the information listed in
Treasury Regulation Section 1.368-3(b). Such statement must include the
stockholder's tax basis in the Ecrix stock and a description of the Exabyte
common stock received therefor, and any other property or money received in the
exchange. Each Ecrix stockholder is urged to consult its tax advisor regarding
this statement and any other tax reporting obligations.
The description above does not apply to stockholders who exercise
dissenters' rights under Delaware law and who receive payment of the value of
such holder's shares of Ecrix stock. An Ecrix stockholder who exercises
dissenters' rights with respect to the merger and receives cash for shares of
Ecrix stock will generally recognize capital gain (or loss) measured by the
difference between the amount of cash received and the stockholder's basis in
those shares. The capital gain or loss will be long-term capital gain or loss if
the holder's holding period for the shares is more than 12 months.
If the merger is not a reorganization within the meaning of Section 368(a)
of the Internal Revenue Code, each Ecrix stockholder would recognize taxable
gain (or loss) with respect to the Ecrix stock surrendered, measured by the
difference between:
- the fair market value as of the time of the merger, of the Exabyte stock
received in the merger; and
- the stockholder's tax basis in the Ecrix stock surrendered in exchange
therefor in the merger.
In such event, a stockholder's aggregate tax basis in the Exabyte common
stock so received would equal its fair market value as of the time of the merger
and the holding period for such stock would begin the day after the merger.
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A noncorporate Ecrix stockholder may be subject to backup withholding at a
rate of 30.5% on cash payments received in lieu of a fractional share of Exabyte
common stock or upon the exercise of appraisal rights. Backup withholding will
not apply, however, to a stockholder who:
- furnishes a correct taxpayer identification number and certifies that it
is not subject to backup withholding on the substitute W-9 or successor
form included in the letter of transmittal to be delivered to Ecrix
stockholders following the completion of the merger;
- provides a certification of foreign status on Form W-8BEN or successor
form (or satisfies certain certification and documentation evidence
requirements for establishing that the stockholder is a non-United
States person under U.S. Treasury regulations); or
- is otherwise exempt from backup withholding.
Backup withholding is not an additional tax. Rather, the U.S. Federal
income tax liability of persons subject to backup withholding will be reduced by
the amount withheld. If backup withholding results in any overpayment of taxes,
a refund may be obtained from the Internal Revenue Service.
This discussion is only a general summary of the material federal income
tax consequences of the merger. The tax consequences of the merger to you may be
different from those summarized above, based on your individual situation. You
are strongly urged to consult your own tax advisor as to the specific tax
consequences of the merger, including tax return reporting requirements, the
applicability and effect of federal, state, local and other applicable tax laws,
and the effect of any proposed changes in the tax laws.
APPRAISAL RIGHTS FOR STOCKHOLDERS
Exabyte Stockholders. Holders of Exabyte common stock or preferred stock
will not be entitled to appraisal rights in the event that they dissent from the
approval of the issuance of the shares of Exabyte common stock and Series H
preferred stock in connection with the merger.
Ecrix Stockholders. If the merger is consummated, subject to certain
limitations, any holder of shares of Ecrix common stock or Ecrix preferred stock
may, by complying with Section 262 of the Delaware General Corporation Law,
require Exabyte upon the merger to purchase such holders' shares of Ecrix stock
for cash at their "appraised value," as agreed upon by Exabyte and such
stockholder or as determined by the Delaware Court of Chancery together with a
fair rate of interest, if any, to be paid.
To exercise dissenters' appraisal rights under Delaware law, an Ecrix
stockholder must be the stockholder of record of the shares of Ecrix stock as to
which appraisal rights are to be exercised on the date that the written demand
for appraisal described below is made, and the stockholder must continuously
hold these shares through the effective time of the merger.
AN ECRIX STOCKHOLDER WHO WISHES TO DEMAND THAT EXABYTE PURCHASE ALL OR A PORTION
OF HIS OR HER SHARES OF ECRIX STOCK THAT WERE OUTSTANDING ON THE RECORD DATE FOR
CASH AT SUCH VALUE MUST DO THE FOLLOWING WITH RESPECT TO SUCH SHARES:
1. The stockholder must neither (a) vote in favor of approval of the
merger nor (b) consent to the merger in writing pursuant to Section 228 of the
Delaware General Corporation Law.
2. The stockholder must also deliver a written demand for appraisal to
Ecrix within twenty days after the date on which a supplement to this prospectus
stating that Ecrix stockholders have approved the merger is mailed to the
stockholder. This written demand must be separate from any written consent or
voting against approval of the merger. Voting against approval of the merger or
failing to vote with respect to approval of the merger will not constitute a
demand for appraisal within the meaning of Section 262. A stockholder's failure
to make the written demand within this 20-day period under Delaware law as
described above, will constitute an irrevocable waiver of appraisal rights.
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An Ecrix stockholder who elects to exercise appraisal rights must mail or
deliver the written demand for appraisal to:
Ecrix Corporation
5525 Central Avenue
Boulder, Colorado 80301
Attn: Craig G. Lamborn
The written demand for appraisal must specify the stockholder's name and
mailing address and the number of shares of Ecrix common stock and Ecrix
preferred stock covered by the demand, and must state that the stockholder is
demanding appraisal of its Ecrix shares in accordance with Section 262.
Within 10 days after the effective time of the merger, the surviving
corporation must provide notice of the date of effectiveness of the merger to
all Ecrix stockholders who have timely delivered written demands for appraisal
and not voted for approval of the merger agreement. Each Ecrix stockholder of
record who is eligible to exercise appraisal rights under Delaware law and who
has timely delivered a written demand for appraisal to Ecrix and not voted for
approval of the merger will be referred to in this section as a dissenting
stockholder.
Within 120 days after the effective time of the merger, any dissenting
stockholder will be entitled, upon written request, to receive from the
surviving corporation a statement of the aggregate number of Ecrix shares not
voted in favor of approval of the merger and with respect to which demands for
appraisal have been received by Ecrix, and the aggregate number of holders of
those shares. This statement must be mailed to the dissenting stockholder within
10 days after Ecrix receives the dissenting stockholder's written request or
within 10 days after expiration of the period for delivery of demands for
appraisal, whichever is later.
Within 120 days after the effective time of the merger, either the
surviving corporation or any dissenting stockholder may file a petition in the
Delaware Court of Chancery demanding a determination of the value of each share
of Ecrix common stock and Ecrix preferred stock of all dissenting stockholders.
If a petition for an appraisal is timely filed, then after a hearing on the
petition, the Delaware Court of Chancery will determine which of the Ecrix
stockholders are entitled to appraisal rights and will then appraise the shares
of Ecrix common stock and Ecrix preferred stock owned by those stockholders, by
determining the fair value of the shares, exclusive of any element of value
arising from the accomplishment or expectation of the merger, together with the
fair rate of interest to be paid, if any, on the amount determined to be the
fair value. If no petition for appraisal is filed with the Delaware Court of
Chancery by the surviving corporation or any dissenting stockholder within 120
days after the effective time of the merger, then dissenting stockholders'
rights to appraisal will cease and they will be entitled only to receive shares
of Exabyte common stock in the merger. Any Ecrix stockholder who desires a
petition to be filed is advised to file it on a timely basis. No petition timely
filed in the Delaware Court of Chancery demanding appraisal will be dismissed as
to any Ecrix stockholder without the approval of the Delaware Court of Chancery,
and this approval may be conditioned on any terms the Delaware Court of Chancery
deems just.
The cost of the appraisal proceeding may be determined by the Delaware
Court of Chancery and charged against the parties as the court deems equitable
in the circumstances. Upon application of a dissenting stockholder, the court
may order that all or a portion of the expenses incurred by any dissenting
stockholder in connection with the appraisal proceeding, including reasonable
attorney's fees, and the fees and expenses of experts, be charged pro rata
against the value of all shares entitled to appraisal. A dissenting stockholder
who has timely demanded appraisal in compliance with Section 262 will not, after
the effective time of the merger, be entitled to vote the Ecrix stock that is
subject to the demand for any purpose or to receive dividends or other
distributions on the Ecrix stock, except for dividends or other distributions
payable to stockholders of record at a date before the effective time of the
merger.
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At any time within 60 days after the effective time of the merger, any
dissenting stockholder will have the right to withdraw the stockholder's demand
for appraisal and to accept the right to receive shares of Exabyte common stock
in the merger on the same basis as other Ecrix stockholders. After this 60-day
period, a dissenting stockholder may withdraw his or her demand for appraisal
only with the consent of the surviving corporation.
In the event that the aggregate number of shares held by Ecrix stockholders
for which appraisal rights may be exercised exceeds 20% of the outstanding
shares of Ecrix common stock, Exabyte has the right to terminate the merger
agreement. See "The Merger Transactions -- The Merger Agreement -- Conditions to
Completion of the Merger" above in this Chapter.
THE FOREGOING IS MERELY A SUMMARY AND DOES NOT PURPORT TO BE A COMPLETE
STATEMENT OF THE APPRAISAL RIGHTS OF STOCKHOLDERS. IT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE APPLICABLE STATUTORY PROVISIONS OF SECTION 262 OF
THE DELAWARE GENERAL CORPORATION LAW WHICH ARE SET FORTH IN FULL IN APPENDIX F
ATTACHED TO THIS PROXY STATEMENT/PROSPECTUS.
DESCRIPTION OF EXABYTE CAPITAL STOCK
Our restated certificate of incorporation provides for authorized capital
stock of 50 million shares of common stock, $.001 par value per share, and 14
million shares of preferred stock, $.001 par value per share.
We have a staggered board of directors that is divided into three classes.
Directors serve for a term of three years each. A director may be removed with
cause by a majority of all of the outstanding shares of capital stock entitled
to vote generally in the election of directors. A director may only be removed
without cause by holders of at least 66 2/3% of all of the outstanding shares of
capital stock entitled to vote generally in the election of directors.
COMMON STOCK
The voting, dividend and liquidation rights of the holders of the common
stock are subject to and qualified by the rights of the holders of the preferred
stock of any series as may be designated by the Board of Directors upon any
issuances of the preferred stock of any series.
The holders of the common stock are entitled to one vote for each share
held at all meetings of stockholders, including the election of directors. There
is no cumulative voting, and holders of the common stock do not have preemptive
rights.
Dividends may be declared and paid on the common stock from funds lawfully
available therefore as and when determined by the board of directors and subject
to any preferential dividend rights of any then outstanding preferred stock.
Upon dissolution or liquidation of the Company, whether voluntary or
involuntary, holders of common stock will be entitled to receive all assets of
the Company available for distribution, subject to any preferential rights of
any then outstanding preferred stock.
PREFERRED SHARE PURCHASE RIGHTS
On January 24, 1991, our Board of Directors declared a dividend of one
preferred share purchase right for each outstanding share of common stock. The
dividend was paid on February 1, 1991 to the stockholders of record on that
date, and a right accompanies each common share (as defined in the agreement)
issued after that date. Each right entitles the registered holder to purchase
from Exabyte one-hundredth of a share of Series A Junior Participating preferred
stock of the Company, at a price of
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$75 per one one-hundredth of a share, subject to adjustment for certain events
occurring after January 24, 1991. Upon exercise of a Right, the holder is
entitled to purchase a number of shares of common stock having a current fair
market value equal to two times the purchase price of the Right (currently $75).
The purchase price to be paid by the holder for such shares is equal to the
purchase price of the Right. The description and terms of the Rights are set
forth in a Rights Agreement, dated as of January 24, 1991, between the Company
and Fleet National Bank (f/k/a First National Bank of Boston), as Rights Agent,
as amended by the First Amendment to Rights Agreement, dated as of August 23,
1995, further amended by the Second Amendment to Rights Agreement, dated as of
February 1, 2001, and further amended by the Third Amendment to Rights
Agreement, dated as of August 21, 2001. Currently, Exabyte does not have a
number of shares of authorized common stock sufficient to permit the full
exercise of the Rights. Additional information about this limitation is included
in Chapter Seven of this proxy statement/ prospectus.
PREFERRED STOCK
Our Board of Directors is authorized to provide for the issuance of
preferred stock in one or more series and to fix the designation, preferences,
powers and relative, participating, optional and other rights, qualifications,
limitations and restrictions thereof, including the dividend rate, conversion
rights, voting rights, redemption price and liquidation preference and to fix
the number of shares to be included in any such series. Any preferred stock so
issued may rank senior to the common stock with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up, or both. In
addition, any such shares of preferred stock may have class or series voting
rights.
We have designated 1,500,000 shares of our authorized capital stock as
Series G convertible preferred stock. Our preferred stock ranks senior to our
common stock. The terms of the preferred prohibit us from creating a class of
securities having preferences senior to the Series G without the prior unanimous
consent of the holders of the Series G preferred stock. Holders of the Series G
preferred stock, in preference to the holders of Exabyte common stock and any
other stock of Exabyte that is not by its terms expressly senior to in right of
payment to the Series G preferred stock, collectively referred to as junior
stock, shall be entitled to receive dividends, when and as declared by the board
of directors, but only out of funds that are legally available therefore. Shares
of Series G preferred stock accrue dividends at a rate of 9% per annum and are
compounded if not paid on each annual anniversary of the original issue date,
April 16, 2001. Dividends must be paid in cash unless prohibited by any
agreement in existence on the original issue date, in which case they are
payable in a number of shares of common stock calculated by dividing the
dividend amount by $2.00 per share.
In addition to the preferential dividend, holders of the Series G preferred
stock are entitled to receive any dividends declared by the board of directors
upon shares of common stock or any other junior stock, whether in cash or other
property, on an as converted basis.
Upon any liquidation, dissolution or winding up of Exabyte, holders of
Series G preferred stock are entitled to receive, before any distribution or
payment made to the holders of any junior stock, an amount equal to the original
per share purchase price plus all accrued but unpaid dividends thereon. After
payment of the full liquidation preference, the remaining funds and other assets
of Exabyte legally available for distribution, if any, shall be distributed pro
rata among the holders of the common stock and the Series G preferred stock on
an as converted basis.
Holders of Series G preferred stock vote with the common stock in all
matters submitted to a vote of the stockholders, including the election of
directors, and may cast a number of votes equal to the number of shares of
common stock into which such shares of Series G preferred stock may then be
converted. As of the date of this proxy statement/prospectus, the Series G
preferred stock may be converted into an aggregate of 1,250,000 shares of common
stock. Without the prior approval of all of the shares of Series G
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preferred stock, we are prohibited from taking certain actions, including an
asset transfer or acquisition, as those terms are defined in the certificate.
Each share of Series G preferred stock may be converted, at the option of
the holder, into a number of shares of common stock equal to the original issue
price of the preferred $2.00, divided by $2.40 per share. The Series G
conversion price is subject to adjustment to give effect to any stock split,
common stock dividend, reclassification, reorganization or other similar changes
in Exabyte capital stock.
Beginning on April 16, 2003, we can redeem the preferred stock if the
closing price of our common stock for the preceding 30 day period is at least
equal to the liquidation value of the preferred stock. Initially, the
liquidation value is $2.00 per share, subject to adjustment.
In connection with the proposed merger with Ecrix, we will designate 9.76
million shares of our authorized but unissued capital stock as Series H
preferred stock (including 110,000 shares reserved for issuance upon conversion
of the promissory note to be issued to Broadview at closing). The rights,
preferences and privileges of the Series H preferred stock are described above
in this Chapter Three under "Sale of Exabyte Series H Preferred Stock".
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Our restated certificate of incorporation expressly states that we have
elected to be governed by Section 203 of the Delaware General Corporation Law,
which prohibits a publicly held Delaware corporation from engaging in a
"business combination", as defined in clause (c)(3) of that section, with an
"interested stockholder", as defined in clause (c)(5) of that section, for a
period of three years after the date of the transaction in which the stockholder
became an interested stockholder.
STOCKHOLDERS MEETINGS
Special meetings of our stockholders may only be called by the Chairman of
the Board, the President, or a majority of our Board of Directors.
NO ACTION BY WRITTEN CONSENT
Our restated certificate prohibits our stockholders from taking any action
by written consent in lieu of a meeting of stockholders.
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
Our restated certificate of incorporation limits the liability of directors
to the fullest extent permitted by the Delaware General Corporation Law.
Article 5 of our by-laws provides that to the fullest extent permitted
under the DGCL, Exabyte will indemnify its directors and executive officers,
including the advancement of expenses. The by-laws provide, however, that we are
not required to indemnify any director or executive officer in connection with
any proceeding initiated by such person against Exabyte or its directors,
officers, employees or agent, unless such indemnification is expressly required
by law, the proceeding was authorized by the Board of Directors or such
indemnification is provided by Exabyte in its sole discretion.
We have also obtained insurance policies that provide coverage for our
directors and officers in certain situations, including claims or actions
arising under the Securities Act and some situations where we cannot directly
indemnify the directors or officers.
In addition, we have entered into contractual agreements with its directors
and executive officers whereby we have agreed to indemnify them against any
expenses, amounts paid in settlement or other amounts incurred by such directors
or officers by reason of the fact that he was a director or officer,
respectively, of Exabyte.
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CHAPTER THREE
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
NASDAQ TRADING
The common stock is listed over-the-counter on the Nasdaq Stock Market's
National Market under the trading symbol "EXBT." See "Market Price and Dividend
Information" below.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is EquiServe Trust
Company, N.A.
MARKET PRICE AND DIVIDEND INFORMATION
Exabyte's common stock has been traded in the over-the-counter market and
has been quoted in the National Market System of the Nasdaq Stock Market under
the symbol EXBT since Exabyte's initial public offering on October 19, 1989. For
the calendar quarters indicated, the following table shows the high and low
trading prices of Exabyte's common stock as reported on Nasdaq.
<Table>
<Caption>
CALENDAR YEAR HIGH LOW
---------------------------------------------------------------------
2001
Fourth Quarter through October 5, 2001......... $ 0.61 $0.50
Third Quarter.................................. 1.10 0.30
Second Quarter................................. 2.00 0.75
First Quarter.................................. 4.375 1.281
2000
Fourth Quarter................................. $12.625 $2.4375
Third Quarter.................................. 12.625 4.25
Second Quarter................................. 7.5625 3.125
First Quarter.................................. 10.875 7.00
1999
Fourth Quarter................................. $ 9.125 $4.250
Third Quarter.................................. 5.09375 3.375
Second Quarter................................. 6.09375 3.6875
First Quarter.................................. 6.625 4.04375
</Table>
On August 22, 2001, the last full trading day prior to the public announcement
of the proposed merger, the last reported sale price of Exabyte common stock on
the Nasdaq National Market was $0.73 per share.
We are unable to provide information with respect to the market prices of Ecrix
common stock, and the equivalent per share market prices of Exabyte common stock
have been omitted, because there is no established trading market for shares of
Ecrix common stock.
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CHAPTER FOUR -- DESCRIPTION OF ECRIX
Use in this Chapter Four to "we", "our" or other similar terms is intended
to refer to Ecrix Corporation.
DESCRIPTION OF ECRIX'S BUSINESS
OVERVIEW
Ecrix Corporation was founded in April 1996 in Boulder, Colorado to
commercialize a new family of high-capacity, high-performance data storage tape
drive products. We began shipping products in May 1999, with general
availability in September 1999. Ecrix's tape storage products are based on a
technology called VXA(R) which incorporates variable speed, overscanning
technology and discrete packet formats. This VXA(R) architecture incorporates
new, patentable technologies that result in improvements in tape drive
reliability and permit Ecrix to build cost-effective products.
In addition to tape drives, we also sell media tape for use in our tape
drives, and tape autoloaders and libraries. Our customers use our tape data
storage products for their computer systems, networks and workstations,
primarily for data backup and archival applications.
PRODUCTS
Tape Drives.
Our VXA(R)-1 tape drive, is an 8mm helical scan tape drive that offers up
to 66 Gigabytes ("GB") of compressed capacity (assuming a 2:1 compression ratio)
(33 GB uncompressed) and a data transfer rate of 6 Megabytes per second ("MB/s")
compressed (3 MB/s uncompressed). The VXA(R)-1 drive has three different
interfaces including, SCSI, ATAPI and Firewire. These different interfaces allow
our tape drive to communicate to different host computers.
We plan to introduce our second generation product, the VXA(R)-2 in the
first quarter of 2002. The VXA(R)-2 will deliver 160 GB of compressed capacity
(80 GB uncompressed) and a transfer rate of 12 MB/s (6 MB/s uncompressed). The
third generation VXA(R)-3 will offer 320 GB of compressed capacity (160 GB
uncompressed) at 20 MB/s compressed (10 MB/s uncompressed). The VXA(R)-3 is
currently scheduled for introduction approximately 18 months after VXA(R)-2.
We have also introduced a VXA(R) RakPak(TM), a rack-mountable tape
subsystem that packages two VXA(R)-1 tape drives in a single rack unit. The
RakPak(TM) stores up to 132 GB of data at a transfer rate of 12MB/s (2 drives
assuming 2:1 compression ratio).
Streaming Technology. Our VXA(R) technology is best understood by
contrasting VXA(R) technology with other existing tape drive technology. The
technology used in all other tape drives currently commercially available
incorporates a technique known as "streaming." In streaming drives, data is
recorded on tape in "tracks", thousands of bytes long, which must be read from
end-to-end in a single pass of a read head. Tape passes over a read head and the
read head reads data from the tape. Streaming tape technologies require
track-following to maintain proper head-to-track alignment while the tape track
is read in its entirety at a fixed tape speed. The drive mechanism and media
tolerances must be tightly controlled to maintain a precise alignment between
the path of the head and the data tracks written on the tape. If the track is
distorted (curved or tilted), or if the angle of the track differs from the
angle of the path of the read head, the tracking control is not effective in
managing the head-to-track placement and a data error occurs.
While streaming tape drives are designed to operate efficiently at a
constant tape speed and data transfer rate, the host system seldom sends or
receives at the specific fixed rate the tape drive expects.
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This is because data is transmitted in "bursts," resulting in fluctuating
transfer rates. Whenever the flow of data is interrupted, the drive stops the
tape, backs up, accelerates to the appropriate speed, and then continues the
data transfer in the same orientation as before. This process, known as
"backhitching," consumes job time, reducing effective data throughput and
increasing back-up or restore job times. Backhitching also introduces
high-tension forces which accelerate media wear and distort the tape. Over time,
this continual wear on the media can lead to degradation in data reliability.
In addition to the impaired performance caused by backhitching, streaming
devices have become more expensive. To achieve higher drive speeds, conventional
tape drive manufacturers have relied on increasingly complex designs. The
architecture of streaming tape drives grows more and more complex as capacity
(track density) and data transfer rates are increased, requiring costly,
high-precision mechanical and state-of-the-art electrical components.
VXA(R) Technology. VXA(R) incorporates three innovations in tape drive
data storage: discrete packet format, variable speed operation and OverScan(TM)
operation.
Discrete packet format. Discrete packet format organizes each track of the
VXA(R) tape into small digital data packets with each packet containing 64 bytes
of information. Rather than read a track from end-to-end in one pass, discrete
packet format allows each packet to be read independently and at different times
and reassembled later in a data buffer. This data arrangement allows tapes to be
read backwards as well as forwards.
Variable speed operation. Variable speed operation is a real-time speed
adjustment to match the tape drive speed to the host computer's data throughput,
eliminating backhitching and associated delays and wear on media caused by
data-rate-matching problems. Variable speed operation optimizes backup and
restore times without compromising data integrity or tape drive reliability.
OverScan(TM) operation. OverScan(TM) operation eliminates the drive's
dependence on critical alignment geometry between the tape path and the
recording head. The area scanned by the heads is greater than the recorded area
ensuring that all data packets are read at least once even when the track is not
aligned or distorted. This results in a reduction in the number of errors during
data retrieval and interchange. OverScan(TM) operation also makes the drive and
alignment systems simpler and easier to manufacture.
Because the VXA(R) architecture does not rely on the precise alignment of
heads and data tracks to write and read data reliably, the need for expensive,
state-of-the-art components and the precision mechanical parts used by other
devices is eliminated. VXA(R) products incorporate many less expensive
components which reduces the product's cost. We believe that the VXA(R) design
is a low cost, competitive alternative to competing products when compared on
the bases of performance, functionality and reliability.
Media Products.
The recording media used in our VXA(R) products is 8mm Advanced Metal
Evaporated tape, the same media used in many data storage applications and
consumer digital video products. The tape is encased in a proprietary package
that allows recognition by VXA(R) tape drives. We have developed three VXA(R)
media products, the V-6, V-10 and V-17 with data capacities ranging from 24GB to
66GB, assuming a 2:1 compression ratio. In addition, we sell a cleaning
cartridge. We will also sell a longer length cartridge, the V-23, in connection
with VXA(R)-2.
Tape Autoloaders and Libraries.
We cooperate with third party manufacturers and suppliers of tape libraries
and autoloaders that are developing VXA(R) compatible automation products. In
April 2000, we introduced our AutoPak(TM) entry-level VXA(R)-1 based library.
The initial AutoPak(TM) offering featured one VXA(R)-1 tape drive (expandable to
two drives) holding 15 tape cartridges for up to 990 GB of data storage capacity
(at 2:1 compression). In March 2001, we began offering our own VXA(R)
AutoPak(TM) 2x30, a library for data storage tape
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products. The newest VXA(R) AutoPak(TM) can store nearly two terabytes of data
in a compact enclosure. The VXA(R) AutoPak(TM) 2x30 is a fully automated library
for workgroups, small to medium enterprise networks and midrange servers. The
VXA(R) AutoPak(TM) allows users to automate system backup, spend time on other
tasks and allocate their savings to other system components.
CUSTOMER SUPPORT
We believe that by providing our customers with direct access to
responsive, knowledgeable Ecrix personnel, we will promote a strong, positive
image for our company and our products.
Technical Support. Technical support provides a single, technically
knowledgeable contact for customers. Technical support activities are organized
into four stages: pre-sales, evaluation, integration and post-sales. During
pre-sales, support representatives assist our sales force by addressing and
answering customers' technical questions. During the evaluation stage, support
representatives work closely with the customer's engineering department to
evaluate the customer's needs and later, during the integration stage, to
integrate our products in the customer's system. Post-sales activities involve
phone support, customer visits and problem discovery and resolution. We also
offer technical support through our website, including a "VXA(R) Knowledge Base"
that allows customers to quickly troubleshoot problems.
Account Management. Account managers provide support on all other
day-to-day business matters other than technical support. Account managers are
assigned to individual customers and supply customers with sales and marketing
materials and provide training and tools designed to help customers increase
performance.
Quality Assurance. Quality assurance focuses on customer quality
requirements including measuring our on-time delivery performance and collecting
information about our customer's perceptions of product quality. When problems
are identified, quality assurance resolves the problem and takes corrective
action. Ecrix is also ISO 9001:2000 certified. ISO sets general standards for
suppliers regarding quality management and quality assurance systems and audits
a company's compliance with these standards.
MARKETING
Ecrix's products are sold primarily through three sales channels: OEMs'
distributors and directly to end users. For our last fiscal year we sold 4% of
our product to OEMs, 81% to distributors and 15% direct to end users. For the
last quarter ended May 31, 2001, we sold 2% to OEMs, 85% to distributors and 13%
to end users.
OEMs. OEMs manufacture personal computers, workstations and servers and
integrate our tape drives into the OEMs' own products. The OEMs then sell this
package to customers under their own brand name. Our major OEMs include Fujitsu
and Apple. In addition, in August 2001 we announced that Compaq, an OEM, would
begin selling our VXA(R)-1 tape drives for its commercial desktops and
workstations. We are currently negotiating the terms of a definitive agreement
with Compaq including the number of units to be shipped. Although we have no
binding commitments from Compaq to make future purchases, to date we have
received one purchase order from Compaq to ship 518 tape drives in September
2001.
Distributors. Distributors ensure product availability by carrying
inventory. These distributors offer limited product and technical support.
Distributors sell primarily to value added resellers, OEMs and end users. We
categorize value added resellers as "distributors" in this section.
End User Sales. We sell our tape drives and media products directly to
users over the internet.
We are currently engaged in discussions with other OEMs and value added
resellers. We have agreements with OEMs, distributors and end users in the
United States to whom we sell our products. In
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addition, we have agreements with distributors through which we sell our
products to customers in other countries, primarily concentrated in Europe,
Japan and Australia.
CUSTOMERS
Our main customers include Tech Data, a distributor, which purchased
products accounting for approximately 24% of our total revenue last year, Bell
MicroProducts, a distributor, which purchased products that accounted for 8% of
total revenue last year and CMS Peripherals Ltd., a value added reseller, which
accounted for 5% of total revenue last year. In addition, we reached an
understanding with Compaq in August 2001 to sell our VXA(R)-1 tape drives for
Compaq's commercial desktop computers and workstations. We are currently
negotiating the terms of our agreement with Compaq including the number of units
to be shipped and we have received one purchase order from Compaq to ship 518
tape drives in September 2001. If we lost one of these key customers or if sales
to any key customer were reduced it would have a materially adverse effect on
our results of operations, our financial condition and our business prospects.
SUPPLIERS
We do not manufacture our products internally. Substantially all of our
manufacturing activity to date has been conducted through arrangements with Aiwa
and a large media supplier. Under our agreements with Aiwa, Aiwa manufactures
the VXA(R)-1 tape drives for us and we develop the product specifications, media
specifications and electronics assembly. Currently, Aiwa has the exclusive right
to manufacture our VXA(R)-1. Under our relationship with Aiwa, we identify and
correct production and quality control problems and modify product designs and
manufacturing procedures to improve performance, reliability, quality and cost.
We anticipate that we will be terminating our relationship with Aiwa and
entering into a new manufacturing relationship with another Japanese
manufacturer. We have entered into a Memorandum of Understanding with Aiwa
regarding termination and settlement of these issues and we are currently
negotiating the terms of a definitive technology transfer and license agreement
with Aiwa.
Pursuant to the terms of the MOU, we agreed to purchase 8,000 tape drives
from Aiwa for approximately $370 per drive and Aiwa agreed to ship these drives
no later than August 2001. We have purchased all 8,000 of these drives. Under
the MOU, we also agreed to purchase 9,000 VXA parts kits (which parts could be
used to build 9,000 VXA drives). The price for these kits would have been
approximately $370 if these kits had been built into drives. Instead, we believe
that we have negotiated a settlement with Aiwa whereby we will purchase these
parts kits for a total cost of $2 million and the parts kits will be assembled
by another manufacturer. Additionally, we agreed to purchase Aiwa's remaining
VXA parts and components (other than the "kits") and we expect that the total
cost of these additional parts and components will be approximately $1.7
million. We will also purchase all production jigs, equipment and toolings from
Aiwa and expect the cost of this purchase to be approximately $1.1 million.
Finally, we believe that Aiwa will grant us a non-exclusive license to utilize
certain Aiwa related VXA technologies related to design and production of the
VXA-1 and VXA-2 tape drives. We expect our final agreement with Aiwa will
require us to pay Aiwa a royalty of between 1 and 4% of the invoice price to us
of each VXA-1 and VXA-2 drive we purchase from another manufacturer. We also
expect Aiwa will sell certain data compression chips to us, that would replace
the IBM data compression chips we currently use, for a royalty of $2 per chip.
The final settlement with Aiwa may require us to pay Aiwa a material amount
of money, which could have a material adverse effect on our financial condition
and our business prospects. Discussions with the new manufacturer are in the
early stages and there is no assurance that an arrangement will be beneficial to
us. Our failure to enter into a new manufacturing arrangement would have a
material adverse effect on our financial condition, results of operations and
our business prospects
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The VXA(R)-1 products are currently manufactured by Aiwa at its Iwate
factory in northern Japan and are shipped to our Boulder facility where they are
configured, tested, packaged and shipped to customers. In some instances, we
have the VXA(R)-1 products shipped directly to our customers. We also have a
department at our headquarters to diagnose and make minor repairs to defective
tape drive units returned by customers.
Our media products are developed and manufactured by a large media
supplier. This company produces 8mm media products based on our proprietary
VXA(R) format. We have recently arranged for a second source for some of our
media products. This will lessen our dependence on just one media supplier.
We believe that these partnerships decrease time-to-market, product cost
and capital requirements. We also believe that our manufacturing relationships
accelerate our ability to market our products over what we could achieve
independently.
Texas Instruments recently informed us that Texas Instruments intends to
discontinue production of several piece parts currently used in the production
of the VXA(R)-1 tape drive. These parts include a pre-amplifier chip (which
preamplifies the head signals from the tape head) and channel parts. We believe
that we have sufficient parts to fill our delivery obligations for at least six
months depending on the volume of product shipments. In addition, we are
exploring the possibility of using alternative suppliers to manufacture the
parts or modifying existing alternative parts as substitutes. We believe we will
have an adequate supply of these parts until we find an alternative solution.
Previously we received notice that IBM, a supplier of a data compression
chip, was discontinuing its production. We worked together with ADT, a
subsidiary of Aiwa, to produce our own data compression chip. We currently have
samples for testing to ensure that this new chip will be an adequate replacement
for the IBM chip. In the meantime, we believe that we purchased enough IBM chips
before production was stopped to fill forecasted delivery obligations for at
least the next six months. We believe we have an adequate supply of the IBM part
to meet our delivery obligations pending the development of the replacement
part. Because of our desire to terminate the Aiwa supply contract, we must also
separately contract with Aiwa for future supply of this newly developed
replacement part after termination of the supply contract.
We rely on a limited number of outside companies to supply components and
manufacture our products. This results in reduced control over the timing of
deliveries, quality control and costs. This reliance can result in potential
shortages of key parts. If our key suppliers are unable to meet our requirements
on a timely and cost-effective basis it could have a material adverse effect on
our results of operations. There are a number of parts that we can purchase from
only one supplier, such as the Texas Instruments parts. Generally, companies
announce end of life plans on these parts, giving us adequate time to find
alternative solutions. There is no guarantee that we will continue to be able to
purchase these parts. Our failure to obtain an alternative supplier for any of
these parts could have a material adverse effect on our operations.
INTELLECTUAL PROPERTY
We have filed for 12 patents on eight key elements of the VXA(R) design and
an additional provisional patent for the format. Patent applications cover
critical areas of variable speed operation, discrete packet format and
OverScan(TM) operation. To date, only one patent has been awarded for head
positioning. We cannot predict the likelihood that any of our other filings will
ultimately result in patents being awarded.
In addition to our patent filings, we have implemented a trade secret
program to insure the confidentiality of our scientific discoveries. We have
also applied for or registered the "VXA(R)" and "VXA(R) Tape" trademarks in a
number of countries in which we do business. Additionally we purchased a German
trademark which was similar to our AutoPak(TM) brand to avoid customer
confusion. We have also
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applied for copyrights on 36 versions of firmware that are used in our tape
drives. We have received notification of 3 copyrights granted to date.
All of our employees have signed invention disclosure agreements and
proprietary information agreements. The invention disclosure agreement requires
our employees to disclose and assign to us all of their inventions conceived
during and after their employment. The agreement also requires our employees to
cooperate with us and assist in obtaining and enforcing patents, copyrights and
other forms of legal protection for inventions worldwide. The proprietary
information agreement requires our employees to protect our confidential
information during and after employment with Ecrix.
RESEARCH AND DEVELOPMENT
The market for data storage devices is competitive. We believe that this
competition will increase as new technology increases speed and reliability of
storage products while at the same time reduces the cost of those products. With
this in mind, we have concentrated our research and development on enhancing
existing products and developing new products that will improve the performance
and cost of current tape drives we offer. During the last three fiscal years we
have spent the following on research and development: $5.5 million in fiscal
year 2001, approximately $4.6 million in fiscal year 2000 and approximately $3.4
million in fiscal year 1999.
COMPETITION
The market for data storage is very competitive and improvements are
occurring rapidly. Data storage manufacturers competing in our market include
other tape drive manufacturers, such as Hewlett Packard, Seagate, Sony and
others. We believe our customers focus on storage capacity, data transfer speed,
a product's price in comparison to its performance, reliability, the extent to
which a company's data storage products are readily available and commitment to
customer service.
Many companies engage in researching, developing and
commercially-organizing data storage products (including computer manufacturers,
such as IBM and Hewlett-Packard, which incorporate their own storage products
into their systems). Many of our current and potential competitors have
significantly greater financial, technical, and marketing resources than us. We
cannot be certain that they will not devote those resources to the aggressive
marketing of helical scan, mini cartridge, half-inch cartridge, optical or other
storage product technologies. Future developments of tape and optical
technologies, as well as new forms of storage technologies, could create
additional, significant competition. Other risks include loss of market share,
time to market, price erosion and pricing pressure.
There are several companies that offer competitive library and media
products. Our customer service programs compete with those offered by
independent service providers.
FOREIGN EXCHANGE AND IMPORT RESTRICTIONS
Our products and some components are manufactured in other countries.
Currently, our revenues and expenses are denominated in U.S. dollars, however,
our products may in the future be purchased in yen or another foreign currency.
In addition, the payments due in U.S. dollars under certain contracts may
increase if currency exchange rates fluctuate outside of a specified range. If
applicable currency exchange rates fluctuate it may have a material adverse
effect on our results of operations.
Our international activity is also subject to government regulation,
foreign exchange or import restrictions or tariffs imposed by the U.S.
Government on products or components shipped from other countries.
4-6
CHAPTER FOUR
EMPLOYEES
As of October 1, 2001, we had approximately 85 employees. We believe that
our labor relations are satisfactory.
PROPERTIES
Our headquarters are located in Boulder, Colorado. All of our properties
are leased, and rent expense for operating leases for the year ended February
28, 2001 was $889,000.
DESCRIPTION OF ECRIX CAPITAL STOCK
The following summary description of Ecrix's capital stock does not purport
to be complete and is subject to and qualified by the description of Ecrix's
capital stock contained in Ecrix's restated certificate of incorporation, which
is available upon request from Ecrix.
GENERAL
The authorized capital stock of Ecrix consists of 125,000,000 shares,
consisting of 70,000,000 shares of Ecrix common stock, par value $.001 per
share, and 55,000,000 shares of Ecrix preferred stock, par value $.01 per share,
consisting of (i) 1,420,875 shares designated as series A preferred stock, (ii)
2,612,275 shares designated as series B preferred stock, (iii) 4,894,118 shares
designated as series C preferred stock, (iv) 16,000,000 shares designated as
series D preferred stock, (v) 10,000,000 shares designated as series D-1
preferred stock and (vi) 20,000,000 shares designated as series D-2 preferred
stock. In addition, the stockholders of Ecrix have approved an amendment to
Ecrix's certificate of incorporation that authorizes the issuance of up to
36,000,000 shares designated as series D-3 preferred stock. This amendment will
become effective only if the merger is terminated and will also provide that the
number of shares of capital stock that Ecrix is authorized to issue will be
increased to 200,000,000 shares, with 105,000,000 shares of authorized Ecrix
common stock and 95,000,000 shares of authorized Ecrix preferred stock. See
"Interests of Directors and Executive Officers in the Merger." As of August 31,
2001, there were 6,185,127 outstanding shares of Ecrix common stock held of
record by 46 stockholders; 1,420,875 outstanding shares of series A preferred
stock held of record by six stockholders, 2,591,650 outstanding shares of series
B preferred stock held of record by four stockholders, 4,879,412 outstanding
shares of series C preferred stock held of record by eight stockholders,
15,368,224 outstanding shares of series D preferred stock held of record by 25
stockholders, and 9,708,737 outstanding shares of series D-1 preferred stock
held of record by 34 stockholders. None of the series D-3 preferred stock has
been authorized or issued. All outstanding shares of Ecrix's capital stock are
validly issued, fully paid and nonassessable.
In addition, as of October 1, 2001 Ecrix had outstanding (i) options to
purchase up to 5,260,700 shares of Ecrix's common stock, granted under Ecrix's
1998 Incentive Stock Plan and 1999 Equity Incentive Plan, (ii) warrants to
purchase up to 19,417,474 shares of series D-2 preferred stock, and (iii)
warrants to purchase 20,625 shares of series B preferred stock.
ECRIX COMMON STOCK
Each holder of Ecrix common stock is entitled to one vote for each duly
authorized, issued, and outstanding share of Ecrix common stock held by such
holder upon each question or matter with respect to which such holders are
entitled to vote, except as otherwise provided in the section titled "-- Ecrix
Preferred Stock" below. The rights, preferences and privileges of holders of
Ecrix common stock are subject to the rights, preferences and privileges of
Ecrix preferred stock as provided in the Ecrix certificate of incorporation,
including with respect to priority upon liquidation.
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CHAPTER FOUR
ECRIX PREFERRED STOCK
The Ecrix certificate of incorporation authorizes the issuance of 55
million shares of Ecrix preferred stock. The designations and material terms of
each series of Ecrix preferred stock is summarized below. Of the 55 million
authorized shares of Ecrix preferred stock, the Ecrix Board of Directors has the
power to issue up to 72,732 shares of Ecrix preferred stock that have not been
designated, but no such shares have been designated or issued by the Ecrix Board
of Directors.
Dividend Rights
Holders of the Ecrix preferred stock, in preference to the holders of any
other stock of Ecrix not expressly senior to in right of payment to the Ecrix
preferred stock ("Ecrix Junior Stock"), are entitled to receive dividends when
and as declared by the Ecrix Board of Directors. If Ecrix declares a dividend
(other than a stock dividend) on the Ecrix common stock, Ecrix shall also
declare and pay dividends to each share of outstanding Ecrix preferred stock on
an "as-converted" basis. In the event Ecrix declares a dividend on any series of
Ecrix preferred stock, Ecrix must pay the dividend on all shares of Ecrix
preferred stock (based on the relative liquidation preference of each series of
Ecrix preferred stock).
Redemption
Except in limited circumstances, Ecrix may not redeem, purchase or
otherwise acquire shares of Ecrix Junior Stock or pay or declare any dividend on
Ecrix Junior Stock without the written consent of 66 2/3% of the outstanding
shares of Ecrix preferred stock. Ecrix is required to redeem 33 1/3% of each
series of Ecrix preferred stock (other than Series A preferred stock) on
February 27, 2004, 2005 and 2006 at a price per share equal to the liquidation
value of each such share.
Voting Rights
Holders of the Ecrix preferred stock vote with the holders of Ecrix common
stock on an "as converted" basis, except as otherwise required by law or by the
terms of the Ecrix certificate of incorporation. In addition, the holders of
Ecrix preferred stock vote separately as a single class (with each shares
entitled to one vote) in the election of three directors. In certain events of
noncompliance, described in the Ecrix certificate of incorporation, and for two
months after such event of noncompliance has been cured or waived, the directors
elected by the Ecrix preferred stock will be deemed to constitute a separate
class of directors together entitled to cast votes equal to the sum of the votes
entitled to be cast by all other directors plus one. In addition, without the
approval of 66 2/3% of the outstanding shares of Ecrix preferred stock, Ecrix
may not (i) create, issue or authorize the issuance of any additional Ecrix
preferred stock or create or authorize any new class or series of Ecrix capital
stock, (ii) amend the Ecrix certificate of incorporation or bylaws, (iii) engage
in a merger, consolidation, recapitalization, liquidation or sale of substantial
assets outside the ordinary course of business, (iv) engage in an acquisition of
substantial assets outside the ordinary course of business or change the
business of Ecrix, (v) increase the amount of reserved employee stock or (vi)
engage in an affiliate transaction not approved by a majority of the
disinterested directors. A separate vote or written consent of a majority of
series D-1 preferred stock is required to (x) effect or validate any designation
of a new class or series of Ecrix capital stock ranking senior to the series D-1
preferred stock in redemption, liquidation preference, voting or dividends or
(y) amend the section of the Ecrix Certificate providing for such separate group
voting right for the series D-1 preferred stock. Any amendment of any terms of
Ecrix preferred stock requires the written consent of 66 2/3% of the outstanding
shares of Ecrix preferred stock and any action adversely affecting the rights,
preferences and privileges or any series of Ecrix preferred stock requires the
consent of holders of two-thirds of such series.
4-8
CHAPTER FOUR
Liquidation
The holders of the series D-1 preferred stock and series D-2 preferred
stock are entitled to a pro rata liquidation preference over any other series of
Ecrix preferred stock or Junior Stock equal to the original purchase price for
such series D-1 preferred stock or series D-2 preferred stock plus any declared
but unpaid dividends. After such liquidation preference, the holders of the
other series of Ecrix preferred stock are entitled to a pro rata liquidation
preference over any Junior Stock equal to the original purchase price for such
Ecrix preferred stock plus any declared but unpaid dividends. The remaining
assets will be distributed to any Junior Stock ranking senior to common stock
and then to the shares of common stock. Holders of Ecrix preferred stock may
participate in the distribution to Ecrix common stock such that the holders of
Ecrix preferred stock will receive the greater of (i) the preferential
liquidation distribution described above or (ii) the amount such holders would
have received had they converted their shares of Ecrix preferred stock into
Ecrix common stock.
Conversion
Shares of Ecrix preferred stock may be converted into Ecrix common stock at
the option of the holder at the applicable conversion rate set forth in the
Ecrix certificate of incorporation. The conversion rate for each share of Ecrix
preferred stock (other than the series A preferred stock) is subject to certain
anti-dilution adjustments whenever Ecrix issues or sells, or is deemed to issue
or sell, any shares of Ecrix common stock for a consideration less than the
original issue price of such share of Ecrix preferred stock (or as previously
adjusted under the anti-dilution provision). All conversion rates for Ecrix
preferred stock are proportionately adjusted upon a subdivision or combination
of or stock dividend on the Ecrix common stock. In the case of any other
dividend or distribution on the Ecrix common stock, appropriate provision will
be made so that the holders of Ecrix preferred stock will receive such dividend
or distribution upon conversion. The shares of Ecrix preferred stock
automatically convert upon a qualified initial public offering of Ecrix.
ECRIX MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
We sell a new family of high-capacity, high-performance tape drive data
storage products. Our tape storage products are based on a technology called
VXA(Registered Mark) which incorporates variable speed, overscanning technology
and discrete packet formats. This VXA(Registered Mark) architecture incorporates
new, patentable technologies that result in improvements in tape drive
reliability and permit Ecrix to build cost-effective products. Our customers use
our tape data storage products for their computer systems, networks and
workstations, primarily for data backup and archival applications. We design,
market, and sell and support our data storage tape devices and related media. We
distribute our products through OEMs, distributors and direct users.
Growth in our storage tape products is dependent upon an increasing number
of customers purchasing our products for their storage needs, as well as OEMs
incorporating our storage tape devices in their product offerings. We commenced
commercial volume shipments of our VXA(Registered Mark)-1 drive in September
1999. In April 2000, we commenced shipment of our VXA(Registered Mark)
AutoPak(TM) tape drives. In August 2001, we announced that Compaq would commence
selling our VXA(Registered Mark)-1 tape drives for its commercial desktops and
workstations. Compaq is not obligated to purchase any minimum quantities of our
products. We cannot assure you that the Compaq arrangement will result in future
product revenue or that such revenue will be derived in a predictable manner.
The loss of our relationship with Compaq would have a material adverse effect on
our financial condition, results of operations and business prospects.
4-9
CHAPTER FOUR
Sales to OEMs and distributors (collectively the "indirect channel") are
generally subject to arrangements allowing certain rights of return with respect
to unsold product and price protection. Revenue and associated cost of sales for
sales to the indirect channel is deferred and recognized when our product is
sold to the end-user. Sales to direct end-users are recognized at time of
shipment, net of reserves for sales returns and allowances. Actual return
activity to-date, has not been significant and within management's estimates.
We market and sell our products to customers in the U.S., Europe, Japan and
Australia, primarily through a direct sales force and distributors. All of our
sales to-date have been denominated in U.S. dollars. Sales to one customer, Tech
Data accounted for 24% of total revenue during the year ended February 28, 2001
and 32% of total revenue during the three-month period ended May 31, 2001.
Cost of revenues includes product costs, salaries and related manufacturing
overhead. Research and development expenses consist primarily of salaries and
related overhead costs associated with employees engaged in research, design and
development activities and other materials and related services used in the
development process. Selling, general and administrative expenses consist of
salaries, commissions paid to internal and external sales representatives, and
legal and accounting services. Litigation settlement expense consists of the
direct costs of the settlement of a legal dispute with Exabyte.
We currently use an independent supplier, Aiwa, to manufacture our tape
storage disk drives, the key component of our product. This model allows us to
focus all of our resources on the design, development and marketing of our
products, rather than on building expensive state-of-the-art manufacturing
facilities and managing a large-scale manufacturing workforce. Because we must
often place orders for our tape drives with our supplier prior to entering into
sales contracts with respect to such products, we are exposed from time to time
to the risks associated with obsolete or excess inventory. At February 28, 2001,
we had committed to purchase 19,500 tape storage drives, valued at approximately
$6 million. We anticipate that we will be terminating our relationship with Aiwa
and entering into a new manufacturing relationship with another Japanese
manufacturer. We have entered into a Memorandum of Understanding with Aiwa
regarding termination and settlement of these issues and we are currently
negotiating the terms of a definitive technology transfer and license agreement
with Aiwa.
Pursuant to the terms of the MOU, we agreed to purchase 8,000 tape drives
from Aiwa for approximately $370 per drive and Aiwa agreed to ship these drives
no later than August 2001. We have purchased all 8,000 of these drives. Under
the MOU, we also agreed to purchase 9,000 VXA parts kits (which parts could be
used to build 9,000 VXA drives). The price for these kits would have been
approximately $370 if these kits had been built into drives. Instead, we believe
that we have negotiated a settlement with Aiwa whereby we will purchase these
parts kits for a total cost of $2 million and the parts kits will be assembled
by another manufacturer. Additionally, we agreed to purchase Aiwa's remaining
VXA parts and components (other than the "kits") and we expect that the total
cost of these additional parts and components will be approximately $1.7
million. We will also purchase all production jigs, equipment and toolings from
Aiwa and expect the cost of this purchase to be approximately $1.1 million.
Finally, we believe that Aiwa will grant us a non-exclusive license to utilize
certain Aiwa related VXA technologies related to design and production of the
VXA-1 and VXA-2 tape drives. We expect our final agreement with Aiwa will
require us to pay Aiwa a royalty of between 1 and 4% of the invoice price to us
on each VXA-1 and VXA-2 drive we purchase from another manufacturer. We also
expect Aiwa will sell certain data compression chips to us, that would replace
the IBM data compression chips we currently use, for a royalty of $2 per chip.
We are in discussions with Aiwa regarding termination and a settlement of
all matters between Ecrix and Aiwa. The final settlement with Aiwa may require
us to pay Aiwa a material amount of money, which could have a material adverse
effect on our financial condition. Discussions with the new manufacturer are in
the early stages and there is no assurance that an arrangement will be
beneficial to Ecrix. Our failure to
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CHAPTER FOUR
enter into a new manufacturing arrangement would have a material adverse affect
on our financial condition, results of operations and our business prospects.
QUARTERLY RESULTS OF OPERATIONS
The following table presents selected unaudited quarterly financial
information for each of the nine quarters through May 31, 2001. This information
has been presented on the same basis as the audited financial statements for the
three years ended February 28, 2001 appearing elsewhere in this document and, in
the opinion of management, reflects all adjustments that we consider necessary
for a fair presentation of this information in accordance with generally
accepted accounting principles. Given the recent growth in our business, we
regard the following quarterly results of operations as more meaningful than the
year-over-year discussion that follows. These quarterly results are not
necessarily indicative of results for any future period.
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
MAY 31, AUG. 31, NOV. 30, FEB. 29, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31,
1999 1999 1999 2000 2000 2000 2000 2001 2001
------- -------- -------- -------- ------- -------- -------- -------- -------
(IN THOUSANDS, UNAUDITED)
Revenues $ 26 $ 385 $ 577 $ 583 $1,565 $ 2,811 $ 3,177 $ 3,125 $ 3,335
Cost of revenues (226) (502) (648) (1,039) (1,410) (2,673) (2,617) (2,396) (2,634)
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit
(loss) (200) (117) (71) (456) 155 138 560 729 701
Operating expenses:
Selling, general and
administrative 1,617 2,220 2,836 3,348 3,518 3,874 3,408 3,500 2,939
Research and
development 1,062 1,038 1,120 1,344 1,314 1,457 1,350 1,379 1,913
Litigation settlement -- -- -- -- -- 1,566 -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses 2,679 3,258 3,956 4,692 4,832 6,897 4,758 4,879 4,852
Loss from operations (2,879) (3,375) (4,027) (5,148) (4,677) (6,759) (4,198) (4,150) (4,151)
Interest income 11 157 253 273 175 80 184 265 153
Interest expense (68) (44) (35) (59) (69) (92) (69) (55) (56)
------- ------- ------- ------- ------- ------- ------- ------- -------
Net loss $(2,936) $(3,262) $(3,809) $(4,934) $(4,571) $(6,771) $(4,083) $(3,940) $(4,054)
======= ======= ======= ======= ======= ======= ======= ======= =======
</Table>
Product mix table:
<Table>
<Caption>
THREE MONTHS ENDED
---------------------------------------------------------------------------------------------
MAY 31, AUG. 31, NOV. 30, FEB. 29, MAY 31, AUG. 31, NOV. 30, FEB. 28, MAY 31,
1999 1999 1999 2000 2000 2000 2000 2001 2001
------- -------- -------- -------- ------- -------- -------- -------- -------
(IN THOUSANDS, UNAUDITED)
Storage tape drives $ 24 $ 286 383 401 $ 852 $ 1,636 $ 1,698 $ 1,459 $ 1,562
Storage tape libraries -- -- -- -- 112 221 336 410 475
Media products 2 99 194 182 601 954 1,143 1,256 1,298
------- ------- ------- ------- ------- ------- ------- ------- -------
Total revenues $ 26 $ 385 $ 577 $ 583 $1,565 $ 2,811 $ 3,177 $ 3,125 $ 3,335
======= ======= ======= ======= ======= ======= ======= ======= =======
</Table>
Revenues. Storage tape drives quarterly product revenue has steadily
increased since we first began shipping our products. We commenced commercial
volume shipment of our VXA(Registered Mark)-1 storage tape drive product in the
three month period ended November 30, 1999. In April 2000, we commenced shipping
our VXA(Registered Mark) AutoPak(TM) tape library product and in the second
quarter of 2000, we commenced recognizing revenue on these products.
Additionally, we have increased the number of indirect channel customers
purchasing our products. Media products revenue, which relate to products such
as tape cartridges, cables and switches purchased from other vendors, is
dependent upon the volume of storage tape drive and libraries, and has increased
quarterly.
Gross profit. Quarterly gross profits for fiscal 2000 fluctuated due to
the absorption a relatively fixed level of manufacturing overhead over growing
quarterly sales volumes. Additionally, the mix of products in any one quarter
will also affect our gross margins. Generally, the VXA(R) AutoPak(TM) generates
a higher
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CHAPTER FOUR
margin than the VXA(R)-1 product, which contributed to our higher quarterly
gross margins after the introduction of the VXA(R) AutoPak(TM). Additionally,
our margins are impacted, positively and negatively, on a quarterly basis by
fluctuations in the purchase price of our data storage tape drives, which is our
main product and also the main component of our storage tape drive and library
products. The purchase price of drives from our supplier fluctuates due to
anticipated purchase volumes, changes in product specifications, among other
factors. Additionally, the position of the products in their respective life
cycles, manufacturing cost efficiencies and competitive pricing strategies may
affect gross profits on a quarterly basis.
Selling, general and administrative. Selling, general and administrative
expenses have generally increased over the nine quarters ended May 31, 2001 in
response to the growth in revenue and our overall growth. The number of our
employees has increased on a quarterly basis during this period, as have our
related overhead expenses. In addition, some of the fluctuations and quarterly
selling, general and administrative expenses in the table above are related to
legal expenses incurred as a result of patent and litigation activity and
product marketing activity.
Research and development. Research and development expenses have
fluctuated on a quarterly basis due to timing of product development activities,
however have generally trended upward since the quarter ended May 31, 1999, as
we have had additional revenues available to spend on these activities as a
result of our overall growth. The number of our employees has increased on a
quarterly basis during this period, as have related overhead expenses.
Litigation settlement. Litigation settlement expense relates to the
settlement of certain litigation between us and Exabyte based upon claims
alleging patent infringement and certain other charges. In June 2000, Ecrix
entered into a cross licensing agreement with Exabyte (regarding a cross license
for all drive patents issued or to be issued through June 30, 2005, excluding
any recording formats). In addition, Ecrix entered into a settlement agreement
with Exabyte, paying Exabyte cash and issuing shares of Ecrix's Series D
Preferred Stock to Exabyte.
Our quarterly results of operations have fluctuated significantly in the
past and may continue to fluctuate in the future based on a number of factors,
not all of which are in our control. If revenue declines in a quarter, our
operating results will be adversely affected because many of our expenses are
relatively fixed. As a result, we believe period to period comparisons are not
necessarily meaningful and should not be relied upon as indicative of future
results.
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CHAPTER FOUR
RESULTS OF OPERATIONS
The following tables set forth certain operating data and certain operating
data as a percentage of total revenue for the periods indicated:
<Table>
<Caption>
THREE MONTHS
YEAR ENDED ENDED
------------------------------ -----------------
FEB. 28, FEB. 29, FEB. 28, MAY 31, MAY 31,
1999 2000 2001 2000 2001
-------- -------- -------- ------- -------
(IN THOUSANDS) (IN THOUSANDS,
UNAUDITED)
Revenues $ -- $ 1,571 $ 10,678 $1,565 $ 3,335
Cost of revenues -- (2,415) (9,096) (1,410) (2,634)
------- -------- -------- ------- -------
Gross profit (loss) -- (844) 1,582 155 701
Operating expenses:
Selling, general and administrative 3,361 10,021 14,300 3,518 2,939
Research and development 3,437 4,564 5,500 1,314 1,913
Litigation settlement -- -- 1,566 -- --
------- -------- -------- ------- -------
Total operating expenses 6,798 14,585 21,366 4,832 4,852
Loss from operations (6,798) (15,429) (19,784) (4,677) (4,151)
Interest income 284 694 704 175 153
Interest expense (90) (206) (285) (69) (56)
------- -------- -------- ------- -------
Net loss $(6,604) $(14,941) $(19,365) $(4,571) $(4,054)
======= ======== ======== ======= =======
</Table>
Product mix table:
<Table>
<Caption>
THREE MONTHS
YEAR ENDED ENDED
------------------------------ -----------------
FEB. 28, FEB. 29, FEB. 28, MAY 31, MAY 31,
1999 2000 2001 2000 2001
-------- -------- -------- ------- -------
(IN THOUSANDS) (IN THOUSANDS,
UNAUDITED)
Storage tape drives $ -- $ 1,094 $ 5,645 $ 852 $ 1,562
Storage tape libraries -- 1,079 112 475
Media products -- 477 3,954 601 1,298
------- -------- -------- ------- -------
Total revenues $ -- $ 1,571 $ 10,678 $1,565 $ 3,335
======= ======== ======== ======= =======
</Table>
COMPARISON OF THE THREE MONTHS ENDED MAY 31, 2000 AND 2001
Revenue. Revenue increased from $1.6 million to $3.3 million for the three
month periods ended May 31, 2000 and May 31, 2001, respectively. The increase in
revenue in the three month period ended May 31, 2001 was due to increases in
sales of our tape storage library product, the VXA(R) AutoPak(TM), of 324%.
Additionally, sales of our storage tape drives and media products, increased 83%
and 116%, respectively, over the quarter ended May 31, 2000.
Gross profit. Overall gross profit as a percent of revenue increased from
10% to 21% in the three month periods ended May 31, 2000 and May 31, 2001,
respectively. The increase in gross profit percentage in the three month period
ended May 31, 2001 largely reflects a decrease in manufacturing and production
variances as a percentage of revenue, including the amortization of fixed costs
such as manufacturing overhead, over a larger unit volume, and the impact of the
introduction of the VXA(R) AutoPak(TM) tape library, which generates a higher
gross margin.
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CHAPTER FOUR
Selling, general and administrative. Selling, general and administrative
expenses decreased from $3.5 million to $2.9 million from the three month period
ended May 31, 2000 compared to the three month period ended May 31, 2001. This
reduction is due to increased marketing and promotions expenses during the three
month period ended May 31, 2000 resulting from the introduction of the VXA(R)
AutoPak(TM) as well as expenses incurred from tradeshow events, as well as to
increases in commissions paid by Ecrix resulting from the increases in our
product revenue. Additionally, professional services fees and occupancy costs
have increased in each period due to our overall growth.
Research and development. Research and development expenses increased from
$1.3 million to $1.9 million for the three month periods ended May 31, 2000 and
May 31, 2001, respectively. The increase in spending on research and development
in the three month period ended May 31, 2001 reflects additional expenditures on
research and development equipment and supplies for our next generation
products, including the VXA(R)-1 modified product and ATAPI versions.
Additionally, the cost of related services has grown significantly over these
periods.
Interest income and expense. Interest income for the three month periods
ended May 31, 2000 and May 31, 2001 was $175,000, and $153,000, respectively.
The fluctuations in interest income resulted from changes in our average cash
and investment balances during these respective periods, resulting from the
timing of our equity and debt financing. Interest expense decreased from $69,000
to $56,000 in the three month periods ended May 31, 2000 and May 31, 2001,
respectively. Interest payments are related to our equipment lease lines and
borrowings entered into and drawn down during these periods.
COMPARISON OF THE YEARS ENDED FEBRUARY 28, 1999, FEBRUARY 29, 2000 AND FEBRUARY
28, 2001
Revenue. Revenue increased from $0 to $1.6 million to $10.7 million for
the years ended February 28, 1999, February 29, 2000 and February 28, 2001,
respectively. The increase in revenue in the years ended February 29, 2000 and
February 28, 2001 was due to the introduction of our VXA(R)-1 storage tape drive
in September 1999 and our VXA(R) AutoPak(TM) library product, which was
introduced in April 2000. Additionally, media products revenues have grown each
period as tape drive and library sales have increased.
Gross profit. Overall gross profit as a percent of revenue increased from
(53.7)% to 14.8% in the years ended February 29, 2000 and February 28, 2001,
respectively. There were no sales in the year ended February 28, 1999. The
increase in gross profit percentage in the year ended February 28, 2001 largely
reflects a decrease in manufacturing and production variances as a percentage of
revenue, including the allocation of fixed manufacturing overhead, over a larger
unit volume. The introduction of our VXA(R) AutoPak(TM) product in April 2000,
which generates higher margins than our VXA(R)-1 product, contributed to higher
margins in fiscal 2001.
Selling, general and administrative. Selling, general and administrative
expenses increased from $3.4 million to $10.0 million to $14.3 million for the
years ended February 28, 1999, February 29, 2000 and February 28, 2001,
respectively. These yearly increases are due to an increase in personnel and
related expenses, as well as to increases in commissions paid by us
corresponding to the increases in our product revenue. Additionally, marketing
expenses, professional services fees and occupancy costs have increased in each
period due to our overall growth.
Research and development. Research and development expenses increased from
$3.4 million to $4.6 million to $5.5 million for the years ended February 28,
1999, February 29, 2000 and February 28, 2001, respectively. The increase in
spending on research and development during these periods reflects the increase
in hiring of experienced engineers and consultants to enhance the design of
existing products. The increase also reflects our increasing investment in
hardware and software tools used to develop and test new products. Additionally,
the cost of materials and related services has grown significantly over these
periods.
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CHAPTER FOUR
Litigation settlement. Litigation settlement expense was $1.6 million for
the year ended February 28, 2001. This relates to the settlement of certain
litigation between Ecrix and Exabyte based upon claims alleging patent
infringement and certain other charges. In June 2000, we entered into a cross
licensing agreement with Exabyte (regarding a cross license for all drive
patents issued or to be issued through June 30, 2005, excluding any recording
formats). In addition, Ecrix entered into a settlement agreement with Exabyte,
paying Exabyte $750,000 and granting to Exabyte 400,000 shares of series D
preferred stock, which were recorded at the fair value of the stock, totaling
$816,000.
Interest income and expense. Interest income for the years ended February
28, 1999, February 29, 2000 and February 28, 2001 was $284,000, $694,000 and
$704,000, respectively. The fluctuations in interest income resulted from
changes in our average cash and investment balances during these respective
years, resulting from the timing of our equity and debt financing. Interest
expense increased from $90,000 to $206,000 to $285,000 in the years ended
February 28, 1999, February 29, 2000 and February 28, 2001, respectively.
Interest payments are related to our equipment lease lines and borrowings
entered into and drawn down during these periods.
INCOME TAXES
Federal and state income taxes were $0 in the years ended February 28,
1999, February 29, 2000 and February 28, 2001 as a result of our net operating
losses. As of February 28, 2001, we had available net operating loss
carryforwards of approximately $42 million. We also had research and development
tax credit carryforwards of approximately $494,000. The net operating loss and
credit carryforwards will expire at various times from 2011 through 2021. As of
February 28, 2001, we had deferred tax assets of approximately $17 million, for
which no benefit has been recorded in our financial statements, and which
consist primarily of net operating loss and research and development tax credit
carryforwards. This deferred tax asset will be recognized in future periods as
taxable income is realized and consistent profits are reported. As a result of
the proposed merger with Exabyte, our ability to offset future taxable income,
if any, by our net operating losses will be limited.
LIQUIDITY AND CAPITAL RESOURCES
Our capital needs arise from working capital required to fund our
operations, capital expenditures related to expansions and improvements to our
infrastructure and funds required in connection with the acquisitions of new
businesses and our anticipated future growth. These capital requirements depend
on numerous factors, including the rate of market acceptance of our products,
the ability to expand our customer base, the cost of research and development to
improve our products, expenditures for sales and marketing, investment in
distribution and other factors. The timing and amount of these capital
requirements cannot be accurately predicted. Additionally, we may, from time to
time, invest in or acquire complementary businesses, products or technologies.
Since inception, we have financed our operations through a combination of
sales of equity securities, cash generated by operations during our early years,
and borrowings. At February 28, 2001, we had $15.1 million in cash and cash
equivalents and short-term investments. Net cash used by operating activities in
the years ended February 28, 1999, February 29, 2000 and February 28, 2001 and
the three months ended May 31, 2001 was $5.8 million, $15.9 million, $19.6
million and $4.2 million, respectively. During these periods, cash used by
operating activities consisted primarily of cash utilized to fund operating
losses and for working capital. In the year ended February 28, 2001 and the
three month period ended May 31, 2001, the items that significantly impacted
cash balances were accounts receivable and inventories which both increased
during the respective periods as the volume of sales increased.
Net cash (used) provided by investing activities in the years ended
February 28, 1999, February 29, 2000 and February 28, 2001 and the three months
ended May 31, 2001 was $(743,000), $(14.1 million), $(64,000), and $1.4 million,
respectively. Net cash used in operating activities was related to the
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CHAPTER FOUR
acquisition of property and equipment and the purchase and sale of short-term
investments. Cash used to purchase property and equipment in the years ended
February 28, 1999, February 29, 2000 and February 28, 2001 and the three months
ended May 31, 2001 were $712,000, $1.7 million, $789,000, and $114,000
respectively. Additionally, equipment acquired under capital lease arrangements
was $937,000 in the year ended February 28, 1999 and $108,000 in the year ended
February 29, 2000. Overall capital spending during these periods related to
computer equipment and tooling for our manufacturing facility. Net short-term
investments of $12.4 million were purchased during the year ended February 29,
2000 and $725,000 was received during the year ended February 28, 2001 from the
maturity of short-term investments.
Net cash provided by (used in) financing activities in the years ended
February 28, 1999, February 29, 2000 and February 28, 2001 and for the three
month period ended May 31, 2001 were $19,000, $30.7 million, $20.3 million and
$(396,000), respectively. The net cash provided by financing activities in the
years ended February 29, 2000 and February 28, 2001 related to the sale of
shares of our preferred stock. Net cash provided by financing activities also
related to proceeds from the issuance of common stock, and proceeds from
borrowings. Net cash used in financing activities related to principle payments
under capital leases and repayment of borrowings. During the year ended February
28, 1999, we received $541,000 from the sale and lease-back of certain
equipment.
Under the terms of a bank loan and security line of credit (the "line of
credit") in place at August 29, 2001, we could borrow the lesser of $9.0 million
or an amount determined by a formula applied to eligible inventory, accounts
receivable and existing borrowings. The line of credit bears interest at a
variable rate equal to the bank's prime lending rate plus 1.5% (8.0% at August
29, 2001). The revolving line of credit expires on June 29, 2002. Amounts
borrowed under the line of credit are secured by substantially all of our
assets. The line of credit requires us to meet certain financial ratios,
including a requirement to maintain a minimum stockholders equity balance (as
defined) of $12 million. As of July and August 2001, we were in default of this
net worth covenant.
We received a waiver of this default and subsequently re-negotiated the
minimum stockholders equity balance covenant to be $8.0 million for the months
July through October 2001, and $5.5 million beginning November 2001 until the
expiration of the loan agreement in June 2002. The line of credit agreement
prohibits certain transactions (including, but not limited to, changes in
ownership, dispositions of property, mergers, and the payment of dividends).
Upon effectiveness of the merger, we anticipate that the line of credit will be
cancelled and we will be obligated to repay all outstanding amounts due.
We believe that cash and cash equivalents and income from operations will
be sufficient to satisfy our working capital requirements for the next 12
months. However, our projected cash needs may change as a result of
acquisitions, unforeseen operational difficulties or other factors. We believe
that success in our industry requires substantial capital in order to maintain
the flexibility to take advantage of opportunities as they may arise. We may,
from time to time, invest in or acquire complementary businesses, products or
technologies. We may effect additional equity or debt financing to fund such
activities. The sale of additional equity or convertible debt could result in
additional dilution to our stockholders, and the imposition of negative
covenants upon our operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use derivative financial instruments in our investment portfolio.
We only invest in instruments that meet the highest credit and quality
standards, as specified in our investment policy guidelines. At May 31, 2001, we
had an investment portfolio of money market funds, commercial securities and
U.S. Government bonds including those classified as short-term investments of
$10.4 million. These instruments, like all fixed income instruments, are subject
to interest rate risk. The fixed income portfolio will fall in value if there
were an increase in interest rates. If market interest rates were to increase
immediately and uniformly by 10% from levels as of May 31, 2001, the decline of
the fair
4-16
CHAPTER FOUR
value of the fixed income portfolio would not be material. All of our revenues
and expenses are denominated in U.S. dollars, and we do not currently engage in
any currency hedging transactions.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Delivering Instruments and Hedging Activities." SFAS
No. 133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at fair market value. SFAS No. 133, as recently amended, is
effective for fiscal years beginning after June 15, 2000. Management believes
the adoption of SFAS No. 133 will not have a material effect or Ecrix's
financial position or results of operations.
In March 2000, the Emerging Issues Task Force (EITF) issued EITF 00-02,
"Accounting for Web Site Development Costs." EITF 00-02 provides guidance on
accounting for web site development costs and is effective for fiscal quarters
beginning after June 30, 2000. The adoption of EITF 00-02 did not have a
material effect on Ecrix's financial position or the results of operations.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting
for Certain Transactions involving Stock Compensation -- an Interpretation of
APB Opinion 25." FIN 44 is effective July 1, 2000 and clarifies the application
of APB 25 for certain matters, specifically (a) the definition of an employee
for purposes of applying APB 25, (b) the criteria for determining whether a plan
qualifies as a non compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The adoption of FIN 44 did not have a material impact on Ecrix's
financial position or the results of operations.
In June of 2001, the FASB issued Statement of Financial Accounting Standard
No. 141, "Business Combinations" ("FAS 141") and Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("FAS 142").
FAS 141 requires that all purchase business combinations must be accounted
for using the purchase method. Under this method, the purchase price of an
acquired business is allocated to the individual tangible and intangible assets
acquired and liabilities assumed based upon the estimated fair values at the
date of acquisition. If the purchase price exceeds the amounts assigned to
assets acquired and liabilities assumed, the excess is recognized as goodwill.
After initial recognition, goodwill and intangible assets acquired in the
business combination must be accounted for under FAS 142. FAS 141 is effective
for Ecrix for all business combinations initiated after June 30, 2001. Ecrix
believes this bulletin will not have a material impact on its results of
operations.
FAS 142 requires that after a company allocates the purchase price in
accordance with FAS 141, the assets acquired, liabilities assumed, and goodwill
must be assigned to one or more reporting units based upon certain criteria
outlined in FAS 142. In addition, goodwill will no longer be amortized. Instead,
companies are required to test goodwill for impairment at the reporting unit
level by (1) determining the fair values of the reporting units and comparing
them with their carrying values and (2) if the fair value of a reporting unit is
less than its carrying amount, measure the amount of impairment loss, if any, by
comparing the implied fair value of reporting unit goodwill with the carrying
amount of that goodwill. If the carrying amount of reporting unit goodwill
exceeds its implied fair value, that excess should be recognized as an
impairment loss. FAS 142 is effective for Ecrix for any goodwill acquired in a
business combination entered into after June 30, 2001. The remaining provisions
of the Statement are effective for the year ending December 31, 2002. Ecrix
believes that, once effective, this bulletin will not have a material impact on
its results of operations.
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CHAPTER FOUR
ECRIX OFFICERS AND DIRECTORS
The following persons who currently serve as an executive officer and/or
director of Ecrix will become an officer or director of Exabyte following the
merger. See "Directors and Executive Officers of Exabyte After the Merger" in
Chapter Three above.
<Table>
<Caption>
NAME AGE POSITION
---- --- --------
Juan A. Rodriguez 60 Chairman of the Board and Chief
Executive Officer
Craig G. Lamborn 48 Chief Financial Officer
G. Jackson Tankersley 52 Director
William J. Almon, Sr. 68 Director
</Table>
JUAN A. RODRIGUEZ (60) co-founded Ecrix Corporation in 1996 and has been its
Chairman of the Board and Chief Executive Officer since 1996. In his fourth
decade with the computer industry, Mr. Rodriguez has focused almost entirely on
data storage technology and has founded and built companies that have achieved
worldwide prominence in the data storage industry. Mr. Rodriguez co-founded
Storage Technology Corporation in 1969 after several years as an IBM tape
technology engineer. As StorageTek grew to a billion in revenue, he served in
vice presidential and general manager roles over Engineering, Hard Disk
Operations and Optical Disk Operations. In 1985, Mr. Rodriguez co-founded
Exabyte Corporation, where he held the positions of chairman, president and CEO.
Mr. Rodriguez also serves on the Board of Directors for Colorlink and previously
held Board positions at Iomega Corporation, Maxtor Corporation and Vixel
Corporation. Mr. Rodriguez is a professor for the University of Colorado College
of Engineering and has received numerous awards. He holds a Bachelor degree in
Electrical Engineering from The City College of New York and a Master's degree
in Electrical Engineering from New York University.
CRAIG G. LAMBORN (48) has served as Ecrix's Vice President of Finance and CFO
since 1998. Previously, Mr. Lamborn spent seven years as CFO of Kentek
Information Systems, a manufacturer of high speed printers. Prior to Kentek, Mr.
Lamborn held financial positions with McData Corporation and Union Pacific
Corporation. He received a B.B.A. in accounting from Boise State University. Mr.
Lamborn is a certified public accountant.
G. JACKSON TANKERSLEY, JR. (52) has served on Ecrix's Board of Directors since
1996. He is a co-founder and principal of Meritage Private Equity Funds, a
Denver-based firm with more than $440 million of committed capital under
management that invests exclusively in the communications industry. Previously,
Mr. Tankersley co-founded The Centennial Funds in 1981 and served as either its
chief executive officer or chief investment officer until 1997. He began his
career at Continental Illinois Bank in 1974 and joined its venture capital
subsidiary in 1978. Mr. Tankersley also serves on the boards of directors of
InFlow, Inc. and Masergy Communications, both Meritage portfolio companies. He
received a B.A. in Economics with high honors from Denison University and an
M.B.A. from the Amos Tuck School of Business Administration at Dartmouth
College.
WILLIAM J. ALMON, SR. (68) has served on Ecrix's Board of Directors since 1999.
Mr. Almon has 40 years experience in the technology industry having spent 30
years with IBM holding Executive Positions in both software and hardware
management. After IBM, he served as President of Conner Peripherals, Inc. from
1989 to 1993 and founded StorMedia Inc. in 1994. StorMedia filed for bankruptcy
protection in 1998. Most recently, he was Managing Director of Netfish
Technologies from 1999 to May 2001, when it was acquired by Iona Technologies
PLC. He has served as a director of Read Rite Corporation (an independent
supplier of magnetic recording heads for the hard disk drive market) since 1994,
and Sigma Designs (a digital video decoding company marketing digital video
decoding products for use with personal computers and other consumer information
appliances) since 1994. Mr. Almon received his B.S. degree
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CHAPTER FOUR
from the United States Military Academy at West Point.
COMPENSATION OF ECRIX OFFICERS AND DIRECTORS
DIRECTOR COMPENSATION
Non-employee directors are generally granted a one-time stock option to purchase
Ecrix common stock in order to compensate for their services as directors. The
following options have been granted to non-employee directors who will serve on
Exabyte's board:
<Table>
<Caption>
NUMBER OF EXERCISE
DIRECTOR OPTIONS PRICE
-------- ----------------- --------------
William J. Almon, Sr................................... 80,000 $1.00
300,000 0.20
G. Jackson Tankersley.................................. 50,000(1) 1.20
</Table>
---------------
(1) These options were cancelled and Ecrix regranted shares to Mr. Tankersley on
March 14, 2001. Pursuant to the regrant, Mr. Tankersley purchased 50,000
shares of Ecrix common stock for $.20 per share. The shares vest on the
original vesting schedule of the cancelled options (1/48 of the total shares
vesting per month). Prior to vesting, when Mr. Tankersley leaves the Ecrix
Board, Ecrix may repurchase unvested shares from Mr. Tankersley for the
lower of the original purchase price or the fair market value at such time.
All of these options to purchase Ecrix stock will terminate at the effective
time of the merger if not previously exercised.
STOCKHOLDER AGREEMENT
Pursuant to a third amended and restated stockholders agreement by and
among Ecrix, holders of Ecrix preferred stock and certain members of Ecrix's
management, the stockholders of Ecrix who are party to the agreement have agreed
to vote their Ecrix voting securities for representatives designated by
management and other Ecrix stockholders. The parties to the stockholders
agreement have agreed to vote for individuals who currently serve on the Ecrix
board and who will, in some cases, serve on the Exabyte board upon effectiveness
of the merger. Included among the designees the parties have agreed to vote for
are two representatives designated by the management, one of whom, Juan A.
Rodriguez will become a director of Exabyte upon the effectiveness of the
merger. In addition, the parties agreed to vote their Ecrix shares for G.
Jackson Tankersley, the designee of Meritage Private Equity Fund, L.P. Mr.
Tankersley will also become a director of Exabyte upon effectiveness of the
merger. Finally, the parties agreed to vote for four additional directors that
are designated by the two management directors provided that these designees are
not members of the company's management. Among these four designees, William J.
Almon, Sr. will serve on the Exabyte board upon effectiveness of the merger.
4-19
CHAPTER FOUR
EXECUTIVE COMPENSATION
The following table sets forth the compensation, for the year ended
February 28, 2001 of certain persons who currently serve as executive officers
of Ecrix and will serve as an executive officer or director of Exabyte after the
merger:
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION ---------------------
---------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS
--------------------------- ---- -------- ----- ---------------------
Juan A. Rodriguez,
Chairman and Chief Executive Officer 2001 $170,000 $0
Craig G. Lamborn, V.P. Finance and CFO 2001 $196,575 $0 80,000
</Table>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information, with respect to the named
executive officers, concerning the value of unexercised stock options
exercisable for Ecrix common stock held as of February 28, 2001. In 2001, the
named executive officers did not exercise any stock options.
<Table>
<Caption>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FEBRUARY 28, 2001(#)(1) AT FEBRUARY 28, 2001(2)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
Juan A. Rodriguez 0 500,000 $0 $0
Craig G. Lamborn 108,800 216,200 0 0
</Table>
---------------
(1) As of February 28, 2001, Mr. Rodriguez had options to purchase 500,000
shares of Ecrix common stock. Half of such options would vest upon an event
of liquidity (which includes the merger) and half would vest upon
achievement of certain shipment levels of Ecrix tape drives. These options
were cancelled and Ecrix regranted shares to Mr. Rodriguez on March 14,
2001. Pursuant to the regrant, Mr. Rodriguez purchased 500,000 shares of
Ecrix common stock for $.20 per share. The shares vest on the original
vesting schedule of the cancelled options.
(2) The options to purchase Ecrix common stock held by such persons as of
February 28, 2001 were not in-the-money as of such date.
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CHAPTER FOUR
STOCK OPTION GRANTS
The following table contains information for fiscal 2001 concerning the
grant of stock options under the 1999 Equity Incentive Plan to the named
executive officers:
OPTION GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
NUMBER OF % OF TOTAL PRICE APPRECIATION
SECURITIES OPTIONS FOR OPTION
UNDERLYING GRANTED TO TERM(3)
OPTIONS EMPLOYEES IN EXERCISE PRICE EXPIRATION 5% 10%
NAME GRANTED(#)(1) FISCAL YEAR(2) ($/SH) DATE ($) ($)
Juan A. Rodriguez 0 0 -- -- -- --
Craig G. Lamborn 80,000 3.3 $1.20 12/7/10 $156,374 $248,999
</Table>
---------------
(1) Options are generally granted under the Ecrix 1999 Equity Incentive Plan
with exercise prices equal to the fair market value of Ecrix's common stock
as of the date of the grant, and typically vest over a four-year period. The
terms of the options granted may not exceed 10 years.
(2) Based on options granted to Ecrix employees during fiscal 2001 to purchase
2,435,000 shares.
(3) The potential realizable value is based on the term of the option at the
date of grant (10 years in each case). It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated rate,
compounded annually for the entire term, and that the option is exercised
and sold on the last day of the option term for the appreciated stock price.
These amounts represent certain assumed rates of appreciation only, in
accordance with SEC rules, and do not reflect its estimate or projection of
future stock price performance. Actual gains, if any, are dependent on the
actual future performance of Ecrix's common stock. The amounts reflected in
this table may never be achieved.
EMPLOYMENT AGREEMENTS
Ecrix does not have any employment agreements with any of its executive
officers and does not typically enter into written employment agreements with
any employees. Ecrix employees all have offer letters, which among other things,
specify compensation, vacation time and other benefits. In the case of one
officer, William J. Almon, Jr., the offer letter contains a clause relating to
severance pay in the event of involuntary termination. Pursuant to Mr. Almon,
Jr.'s revised employment arrangement with Ecrix, Ecrix will pay Mr. Almon, Jr.
this severance amount in October 2001.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended February 28, 2001, Messrs. G. Jackson
Tankersley, Derek Thompson and William J. Almon, Sr. served on our Compensation
Committee of the Ecrix Board of Directors. None of the members of the
compensation committee is currently, or has ever been, one of our officers or
employees or an officer or employee of any of our subsidiaries. During the
fiscal year ended February 28, 2001, no executive officer served as a member of
the board of directors or compensation committee of any entity that had one or
more executive officers serving as a member of our board of directors or
compensation committee.
ECRIX SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Ecrix common stock on October 1, 2001 with respect to each
person who is a beneficial owner of more than 5%
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CHAPTER FOUR
of any class of our capital stock and beneficial ownership of Ecrix common stock
by each director and each executive officer and all directors and executive
officers as a group.
To calculate a stockholder's percentage of beneficial ownership in the
column titled "Percentage of Class," we follow the rules of the Securities and
Exchange Commission and must include in the numerator and denominator those
shares of convertible Ecrix preferred stock and those shares underlying certain
of the warrants and options beneficially owned by that stockholder. Ecrix
preferred stock, warrants and options held by other stockholders, however, are
disregarded in this calculation. Therefore, the denominator used in calculating
beneficial ownership among our shareholders may differ. The column titled
"Percentage of Voting Power" shows the voting percentage of each shareholder and
is calculated by including in the numerator all outstanding shares of Ecrix
common stock and Ecrix preferred stock held by such stockholder and including in
the denominator all issued and outstanding shares of Ecrix common stock and
Ecrix preferred stock.
<Table>
<Caption>
SHARE AMOUNT
NAME AND ADDRESS OF AND NATURE OF PERCENTAGE PERCENTAGE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP* OF CLASS* VOTING POWER
------------------- --------------------- ---------- -------------
Centennial Holdings V, L.P. 12,133,247(1) 66.3% 24.5%
1428 Fifteenth St.
Denver, CO 80202-1318
Centennial Holdings VI, L.P. 7,743,267(2) 55.7% 15.6%
1428 Fifteenth St.
Denver, CO 80202-1318
Meritage Investment Partners, LLC 14,563,107(3) 70.4% 12.1%
(G. Jackson Tankersley)
1600 Wynkoop Street, Suite 300
Denver, CO 80202
G. Jackson Tankersley 14,961,142(4) 70.9% 12.8%
751 International Isle Dr.
Castle Rock, CO 80104
August Capital Management II, LLC 5,357,639(5) 46.4% 8.4%
(Andrew Anker, Andrew S. Rappaport
John Johnston and David F. Marquardt)
2480 Sand Hill Road, Suite 101
Menlo Park, CA 94025
J.P. Morgan Partners (SBIC), LLC 5,203,500(6) 45.7% 10.5%
1221 Avenue of the Americas
39(th) Floor
New York, NY 10020-1080
Hexagon Investments, Inc. 1,758,292(7) 22.1% 3.1%
(Roy Reiman, Scott J. Reiman, Michael J.
Hipp, and Brian F. Fleischmann)
1407 Larimer Street, Suite 300
Denver, Colorado 80202
Sama Partnership 1,000,000(8) 16.2% 2.5%
2100 Gulf Blvd., #1201
South Padre Island, TX 78597
Exabyte Corporation 400,000(9) 6.2% **
1685 38(th) Street
Boulder, Colorado 80301
William J. Almon, Sr. 55,400(10) ** **
10570 Blandor Way
Los Altos, CA 94024
</Table>
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CHAPTER FOUR
<Table>
<Caption>
SHARE AMOUNT
NAME AND ADDRESS OF AND NATURE OF PERCENTAGE PERCENTAGE OF
BENEFICIAL OWNER BENEFICIAL OWNERSHIP* OF CLASS* VOTING POWER
------------------- --------------------- ---------- -------------
Allen A. Builder 2,042,317(11) 24.8% 3.3%
Builder Investment Group, Inc.
5 Piedmont Center, Suite 700
Atlanta, GA 30305
Valley Ventures II, L.P. 1,456,311(12) 20.4% 1.2%
6720 N. Scottsdale Road, Suite 280
Scottsdale, AZ 85253
James Monroe, III Grantor Trust 683,418(13) 9.9% 1.2%
c/o Thermo Companies
644 Governor Nichols Street
New Orleans, LA 70116-2511
Philip S. Dauber 157,270(14) 2.5% **
27930 Roble Alto
Los Altos, CA 94022
Derek Thompson 60,800(15) ** **
7302 Island Circle
Boulder, Colorado 80301
Jeffrey Schutz 0(16) ** **
1428 Fifteenth St.
Denver, CO 80202-1318
Juan A. Rodriguez 1,975,239(17) 26.4% 4.0%
5525 Central Avenue
Boulder, Colorado 80301
Kelly Beavers 1,812,522(18) 29.2.% 4.5%
5525 Central Avenue
Boulder, Colorado 80301
Craig G. Lamborn 240,467(19) 3.7% **
5525 Central Avenue
Boulder, Colorado 80301
William J. Almon, Jr. 215,757(20) 3.5% **
5525 Central Avenue
Boulder, Colorado 80301
Albert R. Miller 198,667(21) 3.0% **
5525 Central Avenue
Boulder, Colorado 80301
Dennis Iler 83,467(22) 1.3% **
5525 Central Avenue
Boulder, Colorado 80301
All directors and executive officers as a
group (12 persons) 21,803,048 88.2% 25.2%
</Table>
---------------
* The amounts and percentages indicated as beneficially owned were calculated
pursuant to Rule 13d-3(d)(1) under the Exchange Act which provides that
beneficial ownership of a security is acquired by a person if that person
has the right to acquire beneficial ownership of such security within 60
days through the exercise of a right such as the exercise of an option or
the conversion of a convertible security into Ecrix common stock. Any
securities not outstanding which are subject to options or conversion
privileges are deemed outstanding for the purpose of computing the
percentage of outstanding securities of the class owned by the person who
owns the option or conversion privilege but are not deemed outstanding for
the purpose of computing the percentage of the class owned by any other
person. Each share of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series D-1 Preferred and Series D-2
Preferred converts into shares of Ecrix common stock at the rate of 1:1.
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CHAPTER FOUR
Names of natural persons appearing in parentheses after the names of
stockholders in the table above denote information supplied to us by or on
behalf of the stockholders as to the natural persons with voting or
investment control over Ecrix common stock and/or Ecrix preferred stock.
** Less than one percent of such class of stock.
(1) Includes the shares held by Centennial Fund V, L.P., Centennial
Entrepreneurs Fund V, L.P. Centennial Holdings V, L.P. is the general
partner of Centennial Fund V, L.P. and Centennial Entrepreneurs Fund V,
L.P. and as such has voting and dispositive power over such shares. The
following shares of Ecrix capital stock are held by such entities: (a)
Centennial Fund V, L.P. holds 1,212,500 shares of Series A Preferred,
2,425,000 shares of Series B Preferred, 2,852,941 shares of Series C
Preferred, 1,917,520 shares of Series D Preferred, 1,111,894 shares of
Series D-1 Preferred and a warrant to purchase 2,223,788 shares of Series
D-2 Preferred; (b) Centennial Entrepreneurs Fund V, L.P. holds 37,500
shares of Series A Preferred, 75,000 shares of Series B Preferred, 88,235
shares of Series C Preferred, 59,305 shares of Series D Preferred, 34,388
shares of Series D-1 Preferred and a warrant to purchase 68,776 shares of
Series D-2 Preferred; (c) Centennial Holdings V, L.P. 26,400 shares of
Ecrix common stock.
(2) Includes the shares held by Centennial Fund VI, L.P. and Centennial
Entrepreneurs Fund VI, L.P. Centennial Holdings VI, L.P. is the general
partner of Centennial Fund VI, L.P. and Centennial Entrepreneurs Fund VI,
L.P. and as such has voting and dispositive power over such shares. The
following shares of Ecrix capital stock are held by such entities: (a)
Centennial Fund VI, L.P. holds 5,392,157 shares of Series D Preferred,
713,075 shares of Series D-1 Preferred and a warrant to purchase 1,426,150
shares of Series D-2 Preferred; (b) Centennial Entrepreneurs Fund VI, L.P.
holds 134,804 shares of Series D Preferred, 17,827 shares of Series D-1
Preferred and a warrant to purchase 35,654 shares of Series D-2 Preferred;
and (c) Centennial Holdings VI, L.P. holds 23,600 shares of Ecrix common
stock.
(3) Includes the shares held by Meritage Private Equity Fund, L.P., Meritage
Private Equity Parallel Fund, L.P. and Meritage Entrepreneurs Fund, L.P.
Meritage Investment Partners, LLC is the sole general partner of Meritage
Private Equity Fund, L.P., Meritage Private Equity Parallel Fund, L.P. and
Meritage Entrepreneurs Fund, L.P. and as such has voting and dispositive
power over such shares. The following shares of Ecrix capital stock are
held by such entities: (a) Meritage Private Equity Fund, L.P. holds
4,256,311 shares of Series D-1 Preferred and a warrant to purchase
8,512,622 shares of Series D-2 Preferred; (b) Meritage Private Equity
Parallel Fund, L.P. holds 520,388 shares of Series D-1 Preferred and a
warrant to purchase 1,040,776 shares of Series D-2 Preferred and (c)
Meritage Entrepreneurs Fund, L.P. holds 77,670 shares of Series D-1
Preferred and a warrant to purchase 155,340 shares of Series D-2 Preferred.
(4) Includes the shares listed in footnote (3) as to which Mr. Tankersley has
voting and dispositive power by virtue of being a managing member of
Meritage Investment Partners, LLC which is the sole general partner of
Meritage Private Equity Fund, L.P., Meritage Private Equity Parallel Fund,
L.P. and Meritage Entrepreneurs Fund, L.P. Mr. Tankersley disclaims
beneficial ownership of such shares. Also includes the following shares
held by the following entities: Millennial Holdings LLC holds 35,000 shares
of Ecrix common stock, 14,706 shares of Series C Preferred, 74,058 shares
of Series D Preferred, 24,272 shares of Series D-1 Preferred and a warrant
to purchase 48,544 shares of Series D-2 Preferred; The Millennial Fund
holds 10,000 shares of Ecrix common stock, 62,525 shares of Series A
Preferred, 12,136 shares of Series D-1 Preferred and a warrant to purchase
24,272 shares of Series D-2 Preferred and Tankersley Family Limited
Partnership holds 5,000 shares of Ecrix common stock, 14,706 shares of
Series C Preferred, 24,272 shares of Series D-1 Preferred and a warrant to
purchase 48,544 shares of Series D-2 Preferred. Mr. Tankersley is the
managing member of Millennial Holdings LLC and sole general partner of
Tankersley Family Limited Partnership and may be deemed to possess voting
and dispositive power over shares held by such entities. Mr. Tankersley
disclaims beneficial ownership of all such shares. The Millennial Fund is
not a legal entity and Mr. Tankersley is the direct beneficial owner of all
Ecrix shares held in that name.
(5) Includes shares held by August Capital II, L.P. and August Capital
Strategic Partners II, L.P. August Capital Management II, LLC is the
general partner of August Capital II, L.P. and August Capital Strategic
Partners II, L.P. August Capital Management II, LLC has four members,
Andrew Anker, Andrew S. Rappaport, John Johnston and David F. Marquardt,
each of whom may be deemed to have shared power to vote and to dispose of
these shares. The following shares of Ecrix capital stock are held by such
entities: (a) August Capital II, L.P. holds 2,281,863 shares of Series D
Preferred, 935,965 shares of Series D-1 Preferred and a warrant to purchase
1,871,930 shares of Series D-2 Preferred and (b) August Capital Strategic
Partners II, L.P. holds 120,098 shares of Series D Preferred, 49,261 shares
of Series D-1 Preferred and a warrant to purchase 98,522 shares of Series
D-2 Preferred.
(6) Includes 1,764,706 shares of Series C Preferred, 1,960,784 shares of Series
D Preferred, 492,670 shares of Series D-1 Preferred and a warrant to
purchase 985,340 shares of Series D-2 Preferred.
(7) Includes the shares held by Grandhaven LLC, Hexagon Investments, LLC,
Labyrinth Enterprises, LLC and Legacy Enterprises, LLC. Hexagon
Investments, Inc. serves as the Manager for Grandhaven, LLC, Hexagon
Investments, LLC, Labyrinth Enterprises, LLC, and Legacy Enterprises, LLC.
Hexagon Investments, Inc. has four individuals with the authority to vote
and dispose of shares held by Hexagon Investments, Inc. and the its related
entities; Roy J. Reiman, Executive Vice President, Scott J. Reiman,
President, Michael J. Hipp, Executive Vice President and Brian F.
Fleischmann, Vice President. The following shares of Ecrix capital stock
are held by such entities: (a) Hexagon Investments LLC holds 245,098 shares
of Series D Preferred, 64,825 shares of Series D-1 Preferred and a warrant
to purchase 129,650 shares of Series D-2 Preferred;
4-24
CHAPTER FOUR
(b) Grandhaven LLC holds 490,196 shares of Series D Preferred, 129,650
shares of Series D-1 Preferred and a warrant to purchase 259,300 shares of
Series D-2 Preferred, (c) Legacy Enterprises LLC holds 147,059 shares of
Series D Preferred, 38,895 shares of Series D-1 Preferred and a warrant to
purchase 77,790 shares of Series D-2 Preferred, and (d) Labyrinth
Enterprises LLC holds 98,039 shares of Series D Preferred, 25,930 shares of
Series D-1 Preferred and a warrant to purchase 51,860 shares of Series D-2
Preferred.
(8) Includes 1,000,000 shares of Ecrix common stock. Alicia S. Rodriguez, the
spouse of Juan A. Rodriguez, is the general partner of Sama Partnership.
(9) Includes 400,000 shares of Series D preferred stock.
(10) Includes options to purchase 55,400 shares of Ecrix common stock held by
William J. Almon, Sr., which are currently exercisable or exercisable in
the next 60 days.
(11) Includes 1,004,902 shares of Series D Preferred, 339,805 shares of Series
D-1 Preferred and a warrant to purchase 679,610 shares of Series D-2
Preferred held by Big Partners V, L.P. Mr. Builder is the general partner
of Big Partners V, L.P. and has sole voting and dispositive power over such
shares. Mr. Builder disclaims beneficial ownership of such shares held by
Big Partners V, L.P. Also includes options to purchase 18,000 shares of
Ecrix common stock held by Mr. Builder, which are currently exercisable or
exercisable in the next 60 days.
(12) Includes 485,437 shares of Series D-1 Preferred and a warrant to purchase
970,874 shares of Series D-2 Preferred.
(13) Includes 392,157 shares of Series D Preferred, 97,087 shares of Series D-1
Preferred and a warrant to purchase 194,174 shares of Series D-2 Preferred.
(14) Includes 49,019 shares of Series D Preferred, 19,417 shares of Series D-1
Preferred and a warrant to purchase 38,834 shares of Series D-2 Preferred
held by Philip S. Dauber and Elayne R. Dauber Trustees PSERD Trust dated
March 11, 1986. As a trustee of such trust, either Mr. Dauber or Ms. Dauber
may vote or dispose of such shares. Also includes 50,000 shares of Ecrix
common stock held by Mr. Dauber.
(15) Includes options to acquire 60,600 shares of Ecrix common stock pursuant to
stock options currently exercisable or exercisable within the next 60 days.
(16) Jeffrey Schutz is one of four general partners of Centennial Holdings V,
L.P. which in turn is the general partner of Centennial Fund V, L.P. and
Centennial Entrepreneurs Fund V, L.P. Mr. Schutz is also one of five
managing directors of Centennial Holdings VI, LLC which is the sole general
partner of Centennial Fund VI, L.P. and Centennial Entrepreneurs Fund VI,
L.P. Finally, Mr. Schutz is also one of five managing principals of
Centennial Holdings I, LLC which owns 107,843 shares of Ecrix Series D
Preferred, 14,261 shares of Ecrix Series D-1 Preferred and a warrant to
purchase 28,522 shares of Ecrix Series D-2 Preferred. Mr. Schutz, acting
alone, does not have voting or investment power with respect to the
securities owned by these entities and, as a result, Mr. Schutz disclaims
beneficial ownership of the securities directly beneficially owned by these
entities.
(17) Includes 1,375,020 shares of Ecrix Common Stock, 62,475 shares of Series A
Preferred, 29,412 shares of Series C Preferred, 112,700 shares of Series D
Preferred, 48,544 shares of Series D-1 Preferred and a warrant to purchase
97,088 shares of Series D-2 Preferred. Also includes options to purchase
250,000 shares of Ecrix common stock which will vest and be exercisable
prior to effectiveness of the merger. Excludes 1,000,000 shares of Ecrix
common stock owned by Sama Partnership. Alicia S. Rodriguez, the spouse of
Juan A. Rodriguez, is the general partner of Sama Partnership.
(18) Includes 1,600,000 shares of Ecrix common stock owned by Mr. Beavers and
100,000 shares of Ecrix common stock owned beneficially by each of Mr.
Beavers' two children. Also includes 12,522 shares of Series D Preferred.
(19) Includes options to purchase 240,467 shares of Ecrix common stock held by
Mr. Lamborn, which are currently exercisable or exercisable in the next 60
days. Of these options, options to purchase 85,000 shares of Ecrix common
stock will vest and be exercisable prior to effectiveness of the merger.
(20) Includes 49,020 shares of Series D Preferred, 19,417 shares of Series D-1
Preferred and a warrant to purchase 38,834 shares of Series D-2 Preferred
held by William J. Almon, Jr., Trustee of the Almon 1992 Irrevocable Trust
U/T/A dated December 30, 1992. In addition, such number includes 4,854
shares of Series D-1 Preferred and a warrant to purchase 9,708 shares of
Series D-2 Preferred held by each of the following: Holly Almon, Custodian
for Sara Jan Almon; William J. Almon, Jr., Custodian for Kathleen Almon;
and William J. Almon, Jr., Custodian for William J. Almon, III. Holly Almon
is Mr. Almon, Jr.'s spouse. Also includes options to purchase 64,800 shares
of Ecrix common stock held by Mr. Almon, Jr., which are currently
exercisable or exercisable in the next 60 days. Mr. Almon, Jr. was formerly
Vice President -- Sales and Marketing until September 30, 2001.
(21) Includes options to purchase 198,667 shares of Ecrix common stock held by
Mr. Miller, which are currently exercisable or exercisable in the next 60
days.
(22) Includes options to purchase 83,467 shares of Ecrix common stock held by
Mr. Iler, which are currently exercisable or exercisable in the next 60
days.
4-25
CHAPTER FIVE
CHAPTER FIVE -- DESCRIPTION OF EXABYTE
INFORMATION REGARDING EXABYTE'S BUSINESS
DESCRIPTION OF EXABYTE
Exabyte Corporation designs, manufactures and markets a full range of 8mm
and MammothTape(TM) tape drives and automated tape libraries as well as
DLTtape(TM), LTO(TM) Ultrium(TM) and AIT(TM) automated tape libraries. We also
provide our own brand of recording media and provide worldwide service and
customer support to our customers and end users. We were incorporated in June
1985 under the laws of the State of Delaware.
We focus on the information storage and retrieval tape drive and library
market for workstations, midrange computer systems and networks, primarily for
data backup and archival applications. Computer manufacturers and resellers
require a variety of storage products which vary in price, performance, capacity
and form-factor characteristics as their needs for data backup and archival
storage increase. Additionally, end users require reliable data backup and
archival applications. Our strategy is to offer a number of products to address
a broad range of these requirements.
Historically, we focused our business on our tape drive products. During
2000, the sale of automated tape libraries became an increasingly significant
portion of our business. As a result, our growth strategy is currently focused
upon us becoming a more significant participant in the growing tape library
market. We believe that our future success is dependent upon our ability to
successfully develop and sell library products that incorporate not only our own
tape drives but also tape drives supplied by others.
RECENT DEVELOPMENTS
Due to ongoing operating losses and resulting liquidity restraints, in
January, 2001, we reassessed our business and commenced an investigation of
various strategic alternatives that would result in increased liquidity. These
alternatives included one or more of the following:
- sale of all or part of our operating and off-balance sheet assets;
- restructuring of current operations;
- additional equity infusions; or
- strategic alliance, acquisition or merger.
Broadview was engaged to assist us in this process. As a result, we issued
shares of Series G preferred stock as described below and have entered into the
merger agreement with Ecrix.
If we do not consummate the merger or a similar transaction and did not
raise additional capital through debt or equity, it is possible that we would be
unable to achieve our currently contemplated business objectives or have enough
funds to support our operations, which could affect our ability to continue as a
going concern. The report of our independent accountants on our consolidated
financial statements for the 2000 fiscal year contained an explanatory paragraph
related to our ability to continue as a going concern.
As discussed in Chapter Three under "Exabyte's Reasons for the Merger," we
believe that our merger with Ecrix will improve our liquidity and enhance our
access to capital. However, there can be no assurance that we will realize these
benefits from the merger or that, even if realized, they will be sufficient to
resolve our liquidity concerns. See "Risk Factors -- 2.1 We Need Additional
Funding to Support Our Operations. Our Inability to Obtain Additional Funding
May Harm Our Ability to Continue as a Going Concern."
5-1
CHAPTER FIVE
On April 16, 2001, the Company issued 1,500,000 shares of Series G
preferred stock to a private investor for total proceeds of $3,000,000. The
dividends accrue at a rate of 9% per annum on the original Series G issue price
and are compounded if not paid. The original Series G issue price of the Series
G preferred stock is $2.00 per share, subject to adjustment for stock splits,
stock dividends and other similar changes to our capital stock. Dividends must
be paid in cash, except that they may be paid in shares of common stock, at a
price of $2.00 per share, if the Company is prohibited from paying cash
dividends under any agreement in place as of April 16, 2001. The Company's bank
line of credit agreement with Congress Financial Corporation currently prohibits
the payment of cash dividends. Series G preferred stock has a liquidation
preference over common stock and conversion rights, at the option of the holder,
into shares of common stock at a conversion price of $2.40 per share, subject to
adjustment. The holder of the Series G preferred stock is entitled to vote with
shares of common stock (and not as a separate class) on an as-converted basis at
any annual or special meeting of the Company's stockholders; provided, however,
that without the prior written unanimous consent of the Series G preferred
stock, the Company may not take certain actions, including asset transfer or
acquisition (which terms are defined in the Certificate of Designation). The
Company has registered the shares of Series G preferred stock as well as the
underlying shares of common stock issuable upon conversion, or payment of
dividends when, as and if, declared by the board of directors on the Series G
preferred stock. At June 30, 2001, $56,000 of preferred stock dividends related
to this issuance had accumulated but had not been declared or paid.
INFORMATION REGARDING OUR PRODUCTS AND SERVICES
We market our products exclusively through resellers and OEM partners
around the world. Our products address the need for reliable, high-performance
data storage in the fastest growing segments of the computer industry -- NT,
UNIX and Linux application and database servers.
We concentrate on the midrange application and database server market,
manufacturing tape backup and network storage solutions for small, medium and
large businesses. We provide cost-effective solutions incorporating a range of
technologies, including MammothTape(TM), 8mm, DLTtape(TM), AIT(TM) and LTO(TM)
Ultrium(TM).
Throughout the past decade, our products have found widespread use in
attended and unattended network backup, automated storage management,
near-online storage, archiving, data collection, software distribution and
interchange.
We cannot assure that any of the current or announced products or services
listed below will be successfully developed, made commercially available on a
timely basis or achieve market acceptance. We encounter a number of risks in
producing and selling our products and services. See Risk Factor sections 3.4,
3.5, 3.6, 3.7 and 3.16 above.
Automated Tape Library Products
GENERAL INFORMATION REGARDING OUR TAPE DRIVE LIBRARIES.
We design, develop, manufacture, sell and support automated data storage
libraries. These libraries incorporate one or more tape drives and multiple
media cartridges to provide much higher data capacities than using a single
drive and, with more than one drive, higher data transfer rates. For example, we
offer one library that holds up to ten of our tape drives and two hundred media
cartridges, which offers a compressed transfer rate of 1 terabyte per hour and a
compressed data capacity of 30 terabytes.
We began the library part of our business in the early 1990's when we
introduced library products incorporating our own tape drives. We later produced
libraries incorporating competitors' tape drives, primarily Quantum's DLT tape
drives. We now offer library products also incorporating DLTtape(TM), LTO(TM)
Ultrium(TM) and AIT(TM) tape drives. See Risk Factor section 3.2.
5-2
CHAPTER FIVE
We believe that one of our competitive advantages lies with the physical
dimensions of our tape drives and media cartridges. They are smaller than some
of our competitors' drives. This smaller size means we can place more drives and
media cartridges in the same library size. For example, the same library
described above which holds ten of our drives and two hundred media cartridges
is also offered in a DLTtape(TM) version, which holds only six DLTtape(TM)
drives and ninety media cartridges.
We are engaging a third party manufacturer, Shinei, to manufacture part or
all of our library products. There are risks associated with outsourcing the
development and manufacture of products or components. See Risk Factor sections
3.13, 3.17, 3.18, 3.19 and 3.32 above.
AUTOMATED LIBRARY SPECIFICATIONS
We engineer our libraries to work with multiple tape drive technologies.
This flexibility allows us to quickly address changing market conditions and
respond to requests from our customers for automation solutions involving
different tape technologies. The current Exabyte library family includes
MammothTape(TM), DLTtape(TM), LTO(TM) Ultrium(TM) and AIT(TM) technologies.
We design our libraries to be scalable, allowing us to develop different
sized libraries based on the same model, with room inside each box for
expansion. This capability enables our designs to accommodate increases in
customers' data storage needs and allows our end users to protect their library
investment.
We engineer our library products to satisfy the reliability,
service-ability and management requirements of storage networking. They combine
the reliability of our robotics with features such as optional Ethernet ports,
hot-pluggable tape drive carriers designed to be serviced during library
operation, optional bar code scanners and removable magazines.
Sales of library products, including end-of-life, represented the following
percentages of net revenues, excluding sales allowances:
<Table>
<Caption>
PERIOD % OF REVENUE
---------------------------------------------
Six Months Ended June 30, 2001 24%
Fiscal Year 2000 33%
Fiscal Year 1999 21%
Fiscal Year 1998 20%
</Table>
All data capacities and transfer rates indicated for the products listed
below are compressed and assume a compression ratio of two-to-one unless stated
otherwise. Actual compression will vary depending on the nature of the data and
the drive and media quality.
The following table sets forth specific information about our automated
tape library products. Capacity and transfer rates reported assume each library
is running at full capacity, as indicated in the column heading, "Full
Capacity."
MAMMOTHTAPE(TM) LIBRARIES:
<Table>
<Caption>
LIBRARY FULL CAPACITY CAPACITY* TRANSFER RATE*
--------------------------------------------------------------------------
10 M2(TM) drives and 200 media
X200 cartridges 30TB 1TB/hour
8 M2(TM) drives and 80 media
X80 cartridges 12TB 864GB/hour
4 M2(TM) drives and 30 media
430M cartridges 4TB 432GB/hour
2 M2(TM) drives and 15 media
215M cartridges 2TB 216GB/hour
1 M2(TM) drive and 7 media
EZ17 cartridges 1TB 108GB/hour
</Table>
5-3
CHAPTER FIVE
DLTTAPE(TM) LIBRARIES:
<Table>
<Caption>
LIBRARY FULL CAPACITY CAPACITY* TRANSFER RATE*
--------------------------------------------------------------------------
6 DLT7000 drives and 90 media
690D cartridges 6TB 216GB/hour
2 DLT7000 drives and 30 media
230D cartridges 2TB 72GB/hour
1 DLT7000 drive and 7 media
17D cartridges 490GB 36GB/hour
</Table>
LTO(TM) ULTRIUM(TM) LIBRARIES:
<Table>
<Caption>
LIBRARY FULL CAPACITY CAPACITY* TRANSFER RATE*
--------------------------------------------------------------------------
2 LTO(TM) drives and 21 media
221L cartridges 4.2TB 216GB/hour
1 LTO(TM) drive and 10 media
110L cartridges 2.5TB 144GB/hour
</Table>
AIT(TM) LIBRARIES:
<Table>
<Caption>
LIBRARY FULL CAPACITY CAPACITY* TRANSFER RATE*
--------------------------------------------------------------------------
4 AIT-2 drives and 30 media
430A cartridges 3TB 172GB/hour
2 AIT-2 drives and 15 media
215A cartridges 1.5GB 86GB/hour
EZ17-A 1 AIT-2 drive and 7 media cartridges 750GB 43GB/hour
</Table>
---------------
* Data capacities and transfer rates for M2(TM) assume a compression ratio of
two-and-a-half-to-one, while data capacity and transfer rate compression for
the other technologies assume compression ratios consistent with those
technologies. All data capacities and transfer rates are subject to change.
IMPORTANT LIBRARY FEATURES
NetStorM(TM), our network storage management initiative provides reliable,
high-performance data solutions for our library products. Our library monitor
provides Fibre Channel connectivity and Internet-enabled, Java-based out-of-band
device management. The library monitor offers certified interoperability and
end-to-end storage management capabilities, relying on compatibility with
leading Internet and storage service providers including CreekPath Systems,
Inc., Computer Associates, Veritas, and Hewlett-Packard to deliver management
functions.
Tape Drive Products
GENERAL INFORMATION REGARDING OUR TAPE DRIVES.
We originally focused our business on producing tape drives to back up or
archive computer data. Our tape drives were modified versions of the video
camcorder mechanisms produced by Sony Corporation. We produced the electronics
that allowed these devices to store data rather than video pictures. Our
manufacturing process was simple. We would install our electronic boards into
the modified consumer tape decks and test the product. We succeeded because we
modified and enhanced a mass-produced video deck and engaged in little
manufacturing. This allowed us to produce a lower-cost product with ten times
more data capacity than any other data storage technology available at that
time.
In the early 1990's, we determined that our market required a more rugged
deck mechanism that was designed for heavy commercial use rather than occasional
consumer use. As a result, we began designing our own tape deck mechanism,
anticipating that we would manufacture the mechanism itself. We offered this
drive (called Mammoth) for sale in 1995. We invested heavily in designing,
developing and manufacturing the drives. This investment included acquiring our
German subsidiary, Exabyte Magnetics GmbH ("EMG") to supply a key component of
our product. During this time we became much more vertically integrated and
developed a more expensive infrastructure.
5-4
CHAPTER FIVE
During this research and development stage, our business was hurt by two
factors: Quantum Corporation's competitive technological developments and a late
introduction of our Mammoth tape drive. Quantum introduced a competitive tape
drive using different tape technology, referred to as DLT. The DLT tape drive
provided data capacities and data transfer rates that exceeded those of its
original tape drive products. We also introduced our Mammoth tape drive in late
1995, over a year later than its anticipated introduction. At the time of
introduction, Mammoth was only marginally competitive against the DLT products.
As a result, we lost a significant amount of market share and felt significant
pricing pressure at the same time as we funded our manufacturing and other
infrastructures. This combination of decreasing revenues and increasing fixed
costs resulted in significant operating losses.
Despite the competitive factors faced by our original Mammoth tape drive,
we continued in the tape drive business believing that our Mammoth technology
represented an entire platform of products, called MammothTape(TM), rather than
a single product. We began developing the first follow-on product for the
MammothTape(TM) platform. This product, known as M2(TM), was introduced in late
1999. See Risk Factor sections 3.4, 3.6 and 3.7 above.
In an effort to reduce our fixed operating costs we have engaged third
party partners to assist us in designing, developing and manufacturing some of
our products. The most significant partner is Hitachi Digital Media Products
Division of Hitachi, Ltd. Our history with Hitachi goes back many years. They
have supplied us with the drive mechanism for our Eliant(TM)820 tape drive since
1996. More recently we engaged Hitachi to jointly develop our M3(TM) tape drive,
the follow-on product to our M2(TM) tape drive. Hitachi is also beginning to
manufacture ours current tape drives and some of the components, such as the
scanner mechanism for our M2(TM) drive. Previously, EMG exclusively produced the
scanner for us, but we are phasing out that operation because of Hitachi's new
scanner supplier role. We further expect that Hitachi will jointly develop and
manufacture most, if not all, of our future tape drive products. There are many
risks associated with outsourcing the development and manufacture of products or
product components. Many of these risks are highlighted in the Risk Factor
sections 3.13, 3.17, 3.18, 3.19 and 3.32 above.
TAPE DRIVE SPECIFICATIONS
The primary factors distinguishing our tape drive products from one another
are data capacity and transfer rate. Data capacity refers to the total amount of
data that can be stored on a single media cartridge. Transfer rate refers to the
speed at which data may be transferred to or from the tape drive.
Our tape drives offer data capacities ranging from 14GB to 150GB and
transfer rates ranging from 2MB per second to 30MB per second. All data
capacities and transfer rates indicated for the products listed below are
compressed and assume a compression ratio of two-to-one unless stated otherwise.
Actual compression will vary depending on the nature of the data and the drive
and media quality.
Sales of tape drive products, including end-of-life, represented the
following percentages of net revenue, excluding sales allowances:
<Table>
<Caption>
PERIOD % OF REVENUE
----------------------------------------------
Six Months Ended June 30, 2001 31%
Fiscal Year 2000 38%
Fiscal Year 1999 45%
Fiscal Year 1998 54%
</Table>
5-5
CHAPTER FIVE
The following table sets forth specific information about each of our tape
drives:
<Table>
<Caption>
DRIVE CAPACITY* TRANSFER RATE*
--------------------------------------------------------------------
MAMMOTHTAPE(TM) TECHNOLOGY:
M2(TM) 150GB 30MB/sec
Mammoth 40GB 6MB/sec
Mammoth-LT 28GB 4MB/sec
8MM TECHNOLOGY:
Eliant(TM)820 14GB 2MB/sec
</Table>
---------------
* Data capacities and transfer rates for the Mammoth, Mammoth-LT and
Eliant(TM)820 tape drives assume a compression ratio of two-to-one, while
M2(TM) assumes a compression ratio of two-and-a-half-to-one.
FUTURE TAPE DRIVE PRODUCTS
We are currently developing our Mammoth-3 ("M3(TM)") tape drive in
conjunction with Hitachi. We anticipate that this drive will feature a
compressed data capacity of approximately 250GB and a compressed transfer rate
of 45MB per second (assuming a compression ratio of two-and-a-half-to-one,
although actual compression may vary depending on the nature of the data and the
drive and media quality). M3(TM) is designed to be backward compatible with the
Mammoth Tape(TM) product line. See Risk Factor section 3.7 above. Worldwide
shipment of M3(TM) to customers is currently expected to begin in 2002.
We cannot assure that this or any other announced product or unannounced
product in development will be successfully developed, made commercially
available on a timely basis or achieve market acceptance. See Risk Factor
sections 3.10, 3.11, and 3.12 above.
Media Products
We provide various types of media cartridges, as well as cleaning
cartridges and data cartridge holders, for our tape drive products. The
high-quality media, produced by multiple third parties, is available in
different lengths to handle various data storage requirements.
Sales of media and media related products represented the following
percentages of net revenue, excluding sales allowances:
<Table>
<Caption>
PERIOD % OF REVENUE
----------------------------------------------
Six Months Ended June 30, 2001 36%
Fiscal Year 2000 25%
Fiscal Year 1999 30%
Fiscal Year 1998 23%
</Table>
To the extent our media sales decline and are not replaced with additional
revenue from our other products or services, our financial results, including
our gross margin and revenues, may be adversely affected.
We depend on a continuous supply of Advanced Metal Evaporative ("AME")
media in order to grow sales of our current and future MammothTape(TM) drives.
There are several risks associated with dependence on this type of media,
including having to delay or cancel product shipments if the media is not
received on a timely basis or at an acceptable quality level. See Risk Factor
sections 3.3 and 3.5 above.
AME WITH SMARTCLEAN(TM)
AME media with SmartClean(TM) technology is only available for use with
M2(TM) tape drives and includes a section of cleaning tape at the beginning of
each data cartridge. We specifically designed this cleaning tape to remove
chemical films that can build up on recording heads. These films are caused by
5-6
CHAPTER FIVE
organic compounds and cannot be removed by other cleaning methods. The M2(TM)
drive keeps statistics on its own operation and activates the SmartClean(TM)
technology only when the drive needs cleaning. With normal use, extra cleaning
cartridges are not needed.
AME MEDIA
Formulated specifically for our MammothTape(TM) tape drives, AME tape
offers expanded recording capacity and low abrasivity, which reduces mechanical
wear. AME magnetic material is vertically aligned. This unique orientation and
the absence of binder components on the media gives AME higher capacity and
superior signal strength. AME's specially formulated back coating dramatically
reduces the buildup of static electricity and debris, greatly reducing the
chance of read/write errors.
MP MEDIA
Exatape(TM) 8mm data-grade metal particle, or MP, media is designed to
optimize drive performance and increase data integrity. Exatape(TM) is
laboratory certified and is the only media recommended for use in Exabyte
Eliant(TM)820 tape drives and libraries.
Service, Spares and Support Offerings
We offer a full range of warranty and post-warranty support services for
our library, tape drive, and media products. We deliver these services through a
worldwide network of service centers and authorized service providers and
support our OEM and reseller customers, as well as end users, in the deployment,
operation and maintenance of our products. We also sell spare parts to OEMs and
end users.
Revenue from services, spares and support programs represented 7% of net
revenue during each of our fiscal years 1998, 1999 and 2000 and the six months
ended June 30, 2001.
CreekPath Systems, Inc.
In December 1999, we formed a wholly-owned subsidiary, CreekPath Systems,
Inc. to leverage our investments and expertise in SANs, Fibre Channel and
Java-based software for storage resource management. CreekPath's operations
throughout 2000 were limited to development of a business plan, obtaining
third-party funding and development of products and services designed to create
a data storage business to serve the needs of third-party internet companies. In
December 2000 and January 2001, CreekPath completed a $17 million convertible
preferred stock financing. As a result of that financing, we no longer
consolidated Creek Path's financial results into ours financial statements.
Notes to Consolidated Financial Statements. In addition, we maintain a
representative on CreekPath's board of directors. Please refer to Risk Factor
section 3.24 above for a discussion of certain risks associated with our
investment in CreekPath.
INFORMATION REGARDING OUR CUSTOMERS AND HOW WE MARKET OUR PRODUCTS
We market our products worldwide through OEMs and resellers, and provide
services directly to OEMs and to our reseller customers' consumers. We usually
sell our new products initially to resellers who are quicker to evaluate,
integrate, and adopt new technology. OEM sales generally increase (relative to
reseller sales) as the new product successfully completes the necessary
qualification process. For a description of the risks associated with our
customers and customer dependence, see Risk Factor sections 3.6, 3.10, 3.12,
3.19 and 3.21 above.
OEM Customers
OEM customers incorporate our products as part of their own systems, which
they then sell to their customers under their own brand name. We work closely
with our OEM customers during early product development stages to help ensure
our products will readily integrate into the OEM's systems.
5-7
CHAPTER FIVE
The sales cycle for an OEM typically covers many months. During this time,
the OEM may:
- evaluate the technology;
- qualify the product specifications;
- verify its compliance with product specifications;
- integrate the product into its system; and
- publicly announce the integration. This step typically occurs toward the
end of the sales cycle before volume shipments of its products are made
to the OEM.
Product sales to OEMs represented the following percentages of net revenue:
<Table>
<Caption>
PERIOD % OF REVENUE
------------------------------------------------
Six Months Ended June 30, 2001 28%
Fiscal Year 2000 28%
Fiscal Year 1999 38%
Fiscal Year 1998 46%
</Table>
Reseller Customers
Our reseller channel customers purchase products for resale and they may
provide services to their customers, such as:
- distribution;
- financial terms and conditions;
- pre-sales, sales and/or post-sales system upgrades; or
- other value-added products and/or services.
Even though we have no obligation, we support some reseller channel
customers by providing marketing and technical support directly to them or their
consumers. As a result, we may incur certain additional costs for these sales.
Other costs and risks associated with our reseller channel customers may
include:
- inventory price protections;
- stock rotation obligations;
- short term marketing promotions; and
- customer and consumer rebates.
The reseller business is also characterized by relatively short order lead
times which limit our ability to forecast sales to these customers. See Risk
Factor section 3.21 above.
Sales to resellers represented the following percentages of net revenue:
<Table>
<Caption>
PERIOD % OF REVENUE
------------------------------------------------
Six Months Ended June 30, 2001 67%
Fiscal Year 2000 67%
Fiscal Year 1999 58%
Fiscal Year 1998 50%
</Table>
5-8
CHAPTER FIVE
International Customers
We market our products overseas directly to international OEMs and
resellers. We also serve OEMs and end users through our international resellers.
International resellers, which have rights to sell our products in a country or
group of countries, serve each of our international markets. In addition, many
of our domestic customers ship a significant portion of our products purchased
by them to their overseas customers.
Direct international sales accounted for the following percentages of net
revenue:
<Table>
<Caption>
PERIOD % OF REVENUE
------------------------------------------------
Six Months Ended June 30, 2001 30%
Fiscal Year 2000 29%
Fiscal Year 1999 34%
Fiscal Year 1998 30%
</Table>
Currently, a very small percentage of our international sales are
denominated in foreign currencies and are affected by foreign exchange rate
fluctuations. In addition, changes in the foreign exchange rates or the euro
conversion may adversely affect the volume of sales denominated in U.S. dollars
to overseas customers. Our sales are also subject to risks common to export
activities, including government regulation or seizure of property, tariffs, and
import restrictions. For a description of these and other risks associated with
international sales, see Risk Factor section 3.33 above.
Principal Customers
A partial list of our OEM and reseller customers includes Arrow North
American Computer Products, Bull S.A., Fujitsu Siemens Computers, IBM, Ingram
Micro, NCR, Sun Microsystems and Tech Data. We have several customers whose
sales account for 10% or more of our net revenue. The chart below sets forth the
percentages of sales for customers that exceeded 10% of annual sales during any
of the past three years or the six months ended June 30, 2001:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30, 2001 2000 1999 1998
-------------------------------------------------------------------
Ingram Micro................ 16% 19% 14% 13%
Tech Data................... 10% 13% 9% 7%
IBM......................... 11% 11% 15% 15%
Sun Microsystems............ 5% 8% 11% 11%
</Table>
Losing a key customer, or a reduction in sales to a key customer would
materially and adversely affect our results of operations. For a description of
these and other risks associated with our customers and customer dependence. See
Risk Factor section 3.21 above.
INFORMATION REGARDING OUR COMPETITION
The data storage market is extremely competitive and subject to rapid
technological change. We believe that competition in the data storage market
will continue to increase, particularly because manufacturers of all types of
storage technologies compete for a limited number of customers. We also believe
that our customers consider the following main competitive factors:
- storage capacity;
- data transfer rate;
- price/performance;
- innovation;
5-9
CHAPTER FIVE
- product quality and reliability;
- timing of new product introductions;
- volume availability;
- customer support; and
- the company's financial strength.
Many companies engage in researching, developing and
commercially-organizing data storage products (including computer manufacturers,
such as IBM and Hewlett-Packard, which incorporate their own storage products
into their systems). Many of our current and potential competitors have
significantly greater financial, technical, and marketing resources than us. We
cannot assure that they will not devote those resources to the aggressive
marketing of helical scan, mini cartridge, half-inch cartridge, optical or other
storage product technologies. Future developments of tape and optical
technologies, as well as new forms of storage technologies, could create
additional, significant competition. Other risks include loss of market share,
timing to market, price erosion and pricing pressure. For a description of these
and other risks associated with our competition, see Risk Factor sections 3.9,
3.10, 3.12, 3.14 and 3.20, above.
Our library products face competition from companies such as Advanced
Digital Information Corporation ("ADIC"), Quantum Corporation/ATL, Overland
Data, and QualStar. Further, our M2(TM) tape drive faces significant competition
from current and announced tape drive products manufactured by Quantum, Sony and
the LTO(TM) Consortium.
There are several companies which offer competitive media products. Our
service programs compete with those offered by independent service providers.
INFORMATION REGARDING OUR MANUFACTURING PROCESSES AND PARTNERS
As stated above, we are currently attempting to outsource much of our
manufacturing process. However, until our outsourcing efforts are complete, we
continue to manufacture part or complete units of our tape drive and library
products in our Boulder, Colorado headquarters. We currently employ just-in-
time manufacturing techniques emphasizing flexibility and continuous product
flow. These techniques depend on uninterrupted access to high-quality,
competitively priced components in required volumes.
We manufacture a mechanical deck mechanism for our MammothTape(TM) tape
drive products. Production of these deck assemblies requires a more complex
manufacturing process than we had previously undertaken. Difficulties in
manufacturing this deck assembly caused production constraints in the past.
There can be no assurance that such problems will not occur again in the future.
For a description of the risks associated with the production of our
MammothTape(TM) product line, see Risk Factors 3.4, 3.5, 3.6, 3.7, 3.13 and 3.16
above.
Sole-source Suppliers
We have a large number of sole-source suppliers of components necessary for
manufacturing our products. We have executed master purchase agreements with
some of our sole-source suppliers and conduct business with the rest of our
suppliers on a purchase order basis. Reliance on sole-source suppliers can
result in possible shortages of key components and reduced control over delivery
schedules, manufacturing yields, quality and costs. Any inability of our
sole-source suppliers to meet our supply requirements, would effect our ability
to fill orders and would harm our results of operations. See Risk Factors
sections 3.15, 3.16, 3.17 and 3.18 above.
Further, we obtain many components from suppliers located outside the U.S.
See Risk Factor section 3.32 above. We obtain key materials and components
necessary for manufacturing our products
5-10
CHAPTER FIVE
from a number of third-party suppliers, including Hitachi. Many of these key
components are made to our specifications and are acquired from sole-sources.
See Risk Factor sections 3.15, 3.16, 3.17 and 3.18 above.
The following table identifies some of the key components for our products
and the sole-source supplier supplying the components:
<Table>
<Caption>
COMPONENT SUPPLIER
---------------------------------------
8mm tape decks............... Hitachi
Reel Motor................... Kumagaya
Cartridge Loader............. Yano
Misc. Deck Components........ Kenseisha
</Table>
For a description of the risks associated with manufacturing, see Risk
Factor sections 3.4, 3.13 and 3.18 above. For a description of these and other
risks associated with our suppliers, see Risk Factor sections 3.5, 3.15, 3.16,
3.17, 3.18 and 3.32 above.
Hitachi
We recently entered into a joint development agreement with Hitachi for the
development of our future M3(TM) tape drive. The development and introduction of
M3(TM) depends heavily upon the success of this joint development relationship.
In 1999 Exabyte entered into a joint development agreement with Hitachi for the
development of a scanner for our M2(TM) tape drive.
Both agreements provide that we retain ownership rights to any jointly
developed product under the agreements. However, the agreements further provide
that Hitachi has the right to license the technology, royalty-free, from us for
any non-data storage purpose. Additionally, both agreements provide that either
party may terminate the agreement for any reason upon written notice.
We cannot assure that the joint development agreements will be successful
or that any component developed under these agreements will meet our
specifications or be developed at a cost acceptable to us. This may cause the
production of our tape drives to be significantly delayed or even terminated,
which would materially and adversely harm our competitive position and our
results of operations. See Risk Factor sections 3.4, 3.13, 3.15, 3.16, 3.17,
3.18 and 3.32 above.
Hitachi also supplies the tape deck components for our Eliant(TM)820 tape
drives under an agreement entered into in 1996. This agreement will expire on
December 11, 2001. While the purchase agreement contains certain restrictions
regarding Hitachi's ability to sell these tape decks or customized parts to
third parties, such limitations do not prevent Hitachi from individually
developing and selling similar components to third parties or incorporating such
components into their own competitive products.
We cannot assure that Hitachi will continue to supply decks or other
components, or that they will continue to be available at current supply levels
or prices. Our inability to obtain decks or components at a commercially
reasonable cost would cause a significant delay or even termination of the
production of some of our tape drive products, and would materially and
adversely harm our competitive position and our results of operations.
For a description of these and other risks associated with Hitachi or its
other suppliers, see Risk Factor sections 3.4, 3.13, 3.15, 3.16, 3.17, 3.18 and
3.32 above.
INFORMATION REGARDING EXABYTE'S RESEARCH AND DEVELOPMENT EFFORTS
The tape storage market is highly competitive and subject to rapid
technological changes. We currently expect competition to increase. We focus our
research and development efforts primarily on developing new products with
improved price performance and enhancing our current products. Exabyte
experiences numerous risks associated with our research and development efforts.
Our research and
5-11
CHAPTER FIVE
development expenses were approximately $36.5 million, $35.7 million, and $29.9
million in 2000, 1999 and 1998, respectively.
INFORMATION REGARDING OUR PATENTS AND PROPRIETARY INFORMATION
We rely on a combination of patents, copyright and trade secret
protections, non-disclosure agreements, and licensing arrangements to establish
and protect our proprietary rights. As of August 31, 2001, we held a total of 89
patents in the United States, of which nine (9) were issued in 2001, all
relating to technologies and other aspects of our tape drive and automated tape
library products. However, we believe that, because of the rapid pace of
technological change in the tape storage industry, factors such as knowledge,
ability and experience of our employees, new product introductions and frequent
product enhancements are often more significant than patent and trade secret
protection.
We license our technology to third party manufacturers to allow them to
manufacture our products. Additionally, we have granted manufacturing licenses
to certain customers which allow them to manufacture and sell our products
should specific events occur, such as our inability to perform our supply
obligations. We also enter into joint development agreements with third parties
for the development of product components. Under these agreements, the third
parties generally have joint ownership of certain technologies related to the
component being developed. The dissolution of these agreements could result in
significant costs and other risks to us. See Risk Factors section 3.18 above.
Effective October, 2001, Exabyte is terminating an agreement under which
Exabyte supplied data storage library products to Plasmon LMS, Inc. In
connection with termination of that agreement, Exabyte granted a non-exclusive
license to Plasmon to use certain, existing library technologies to manufacture
and sell versions of the library products which Exabyte previously sold to
Plasmon. In return, Exabyte received a certain dollar amount in September, 2001
and will receive additional cash amounts upon Exabyte's furnishing design and
manufacturing process documentation to Plasmon.
There are a number of risks associated with our proprietary rights. For a
description of these risks, see Risk Factor sections 3.30 above.
INFORMATION REGARDING THE STATUS OF OUR BACKLOG
Backlog consists of purchase orders for which a delivery schedule within
six months has been specified by the customer. Our total backlog as of December
30, 2000 and January 1, 2000 totaled approximately $11.8 million, and $15.5
million respectively. Our customers typically are not obligated to purchase
minimum quantities of our products. Lead times for the release of purchase
orders depend upon the scheduling practices of each customer. We believe that,
based upon past order histories, the rate of new orders will vary significantly
from month to month. Customers may cancel or reschedule orders without
significant penalty. In addition, our actual shipments depend upon our
production capacity and component availability. For these reasons, our backlog
as of any particular date may not be indicative of our actual sales for any
succeeding fiscal period.
For a description of these and other risks associated with our backlog
management, see Risk Factor sections 3.8 and 3.11 above.
INFORMATION REGARDING FOREIGN EXCHANGE AND IMPORT RESTRICTIONS
We manufacture, or may in the future manufacture, many of our key
components and products overseas in countries such as Japan, Germany, China,
Singapore, Indonesia and Malaysia. Additionally, a substantial portion of our
products incorporate subassemblies and components purchased from Japanese or
other overseas suppliers in yen or another foreign currency. Fluctuations in
currency exchange rates may materially affect our results of operations. See
Risk Factor sections 3.32 and 3.33 above.
5-12
CHAPTER FIVE
Our international involvement is also subject to other risks common to
foreign operations, including government regulations, foreign exchange or import
restrictions or tariffs imposed by the U.S. Government on products or components
shipped from another country. Additionally, the sale of our products to domestic
federal or state agencies may be limited by the Buy America Act or the Trade
Agreement Act to the extent that we incorporate components produced overseas
into our products.
Our functional currency and the functional currency of our subsidiaries is
the U.S. dollar. However, our subsidiaries located in The Netherlands, Germany,
Japan, Canada and Singapore also enter into transactions in their respective
local currencies. As a result, any amounts payable to a subsidiary or owed by a
subsidiary are subject to the foreign exchange rate applicable between the U.S.
dollar and the local currency and could materially and adversely affect our
results of operations. In addition, our foreign operations are subject to the
risks generally applicable to the conduct of business in such countries. For a
description of these and other risks associated with our foreign involvement,
see Risk Factor sections 3.29, 3.32, 3.33, 3.34 and 3.35 above.
EMPLOYEES
As of August 16, 2001, we had 652 full-time and part-time employees
worldwide, including:
<Table>
<Caption>
DEPARTMENT EMPLOYEES
-----------------------------------------
Engineering/Operations........ 74
Manufacturing/Operations
(includes German and
Japanese subsidiaries)...... 155
General and Administrative.... 50
Sales and Marketing........... 97
Services and Information
Technology (includes
Scotland subsidiary)........ 174
Quality....................... 43
Technical Support............. 61
</Table>
Our employees are not represented by a labor union, although our German
subsidiary is subject to an organized Works Council.
We reduced our workforce in March 2001 in order to reduce expenses and cash
consumption, as well as to simplify our management structure. All areas of the
Company were impacted by the workforce reduction. These reductions resulted in
the involuntary terminations of approximately 235 persons (211 domestically and
24 in Europe), comprised of regular fulltime employees and temporary or contract
workers. We cannot assure that we will not again reduce our workforce. There are
factors which could cause us to reduce our workforce again, including
successfully outsourcing our manufacturing processes. See Risk Factor section
3.13 above.
With a slight slowdown in the labor market, the extreme competition for key
employees is somewhat lessened. Despite this slowdown, our success continues to
depend to a significant extent upon our ability to attract, retain and motivate
key engineering, marketing, sales, manufacturing, support and executive
personnel. For a description of the risks associated with retaining key
employees, see Risk Factor section 3.25 above.
5-13
CHAPTER FIVE
PROPERTIES
Our corporate offices as well as our primary research and development, and
manufacturing facilities are located in Boulder, Colorado, in leased buildings
aggregating approximately 358,898 square feet. The lease terms on these
facilities expire on various dates ranging from February 2002 to September 2004.
We believe that additional space will be available if needed for further
expansion. The following chart identifies the location and type of each Exabyte
property:
LOCATION
<Table>
<Caption>
OFFICE TYPE DOMESTIC INTERNATIONAL
-------------------------------------------------------------------------------------
R&D & Mfg........................ Boulder, CO Nuremberg, Germany (Mfg. only)
San Diego, CA Falkirk, Scotland (Mfg. only)
Procurement...................... Boulder, CO Tokyo, Japan
Service.......................... Boulder, CO Falkirk, Scotland
Mississauga, Ontario, Canada
Artarmon, Australia
Singapore
Sales & Support.................. Boulder, CO Utrecht, The Netherlands
Campbell, CA Mississauga, Ontario, Canada
Mission Viejo, CA Paris, France
Atlanta, GA Gwynedd, United Kingdom
Oakbrook, IL Frankfurt, Germany
Annapolis, MD Shanghai, China
Walpole, MA Beijing, China
St. Louis, MO Hong Kong, China
Houston, TX Singapore
Dallas, TX
</Table>
LEGAL PROCEEDINGS
We are subject to incidental litigation risks in the ordinary course of our
business. We are not currently the subject of any material pending legal
proceeding.
5-14
CHAPTER FIVE
EXABYTE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW AND RECENT DEVELOPMENTS
We are a leading provider of information storage products, including tape
drive products, automated tape libraries and recording media. Our strategic
focus is data backup and archival applications for workstations, midrange
computer systems and networks. Computer manufacturers and resellers require a
variety of storage products which vary in price, performance, capacity and
form-factor characteristics as their needs for reliable data backup and archival
storage increase. Our strategy is to offer a number of products to address a
broad range of these requirements.
Our tape drive products are based on 8mm and MammothTape(TM) technologies
and our tape library products are based upon 8mm, MammothTape(TM), AIT(TM),
DLTtape(TM) and LTO(TM) Ultrium(TM) technologies.
We market our products worldwide to resellers and OEMs. We also provide
repair services directly to OEMs and to our resellers' customers.
Our reseller channel customers purchase products for resale and they may
provide services to their customers, such as:
- distribution;
- financial terms and conditions;
- pre-sales, sales and/or post-sales system upgrades; or
- other value-added products and/or services.
Even though we have no obligation to do so, we support some reseller
channel customers by providing marketing and technical support directly to them
or their consumers. As a result, we may incur certain additional costs for these
sales. Other costs and risks associated with our reseller channel customers may
include:
- inventory price protections;
- stock rotation obligations;
- short term marketing promotions; and
- customer and consumer rebates.
OEM customers incorporate our products as part of their own systems, which
they then sell to their customers under their own brand name. We work closely
with our OEM customers during early product development stages to help ensure
our products will readily integrate into the OEM's systems.
The sales cycle for an OEM typically covers many months. During this time,
the OEM may:
- evaluate the technology;
- qualify the product specifications;
- verify our compliance with product specifications;
- integrate the product into its system; and
- publicly announce the integration. This step typically occurs toward the
end of the sales cycle before volume shipments of our products are made
to the OEM.
In March 2001, we entered into a development agreement with Hitachi. Under
this agreement, we have a maximum obligation of approximately $2,500,000 for
development activities, $700,000 for prototype
5-15
CHAPTER FIVE
parts and $2,800,000 for tooling costs. Expenses of $800,000 have been incurred
under this agreement through June 30, 2001.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following tables set forth unaudited operating results for each quarter
of fiscal 2001, 2000 and 1999. This information has been prepared on the same
basis as the audited financial statements and, in the opinion of management,
contains all adjustments consisting only of normal recurring adjustments,
necessary for a fair presentation thereof. These unaudited quarterly results
should be read in conjunction with the consolidated financial statements and
notes thereto appearing elsewhere in this prospectus. The operating results for
any quarter are not necessarily indicative of results for any future period.
(Unaudited)
(In thousands, except per share data)
<Table>
<Caption>
QUARTERS ENDED
--------------------------------------------------------------
APR. 1, JUL. 1, SEP. 30, DEC. 30, MAR. 31, JUN. 30,
2000 2000 2000 2000 2001 2001
--------------------------------------------------------------
Net sales...................... $ 49,576 $51,314 $ 60,100 $60,752 $ 49,052 $39,412
Cost of goods sold............. 39,363 38,028 48,892 45,802 45,558 31,163
--------------------------------------------------------------
Gross profit................... 10,213 13,286 11,208 14,950 3,494 8,249
Selling, general and
administrative............... 13,436 13,801 12,995 14,477 11,333 9,513
Research and development....... 10,360 9,366 9,244 7,560 8,901 5,291
--------------------------------------------------------------
Loss from operations(1)........ (13,583) (9,881) (11,031) (7,087) (16,740) (6,555)
Other income (expense):
Gain on sale of investment... -- -- -- -- -- 1,719
Interest income.............. 355 206 425 71 11 45
Interest expense............. (87) (109) (86) (404) (502) (412)
Other........................ (223) 296 (662) (624) 31 (15)
--------------------------------------------------------------
Loss before income taxes....... (13,538) (9,488) (11,354) (8,044) (17,200) (5,218)
(Provision for) benefit from
income taxes................. (42) (149) 49 1,712 (7) (41)
Equity in loss of investee..... -- -- -- (414) (343) --
--------------------------------------------------------------
Net loss....................... (13,580) $(9,637) $(11,305) $(6,746) $(17,550) $(5,259)
==============================================================
Basic and diluted net loss per
share........................ $ (0.60) $ (0.43) $ (0.50) $ (0.30) $ (0.77) $ (0.23)
==============================================================
</Table>
5-16
CHAPTER FIVE
<Table>
<Caption>
AS A PERCENTAGE OF NET SALES
--------------------------------------------------------------
Net sales....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............. 79.4 74.1 81.4 75.4 92.9 79.1
--------------------------------------------------------------
Gross margin.................... 20.6 25.9 18.6 24.6 7.1 20.9
Selling, general and
administrative................ 27.1 26.9 21.6 23.8 23.1 24.1
Research and development........ 20.9 18.3 15.4 12.4 18.1 13.4
--------------------------------------------------------------
Loss from operations(1)......... (27.4) (19.3) (18.4) (11.6) (34.1) (16.6)
Other income (expense):
Gain on sale of investment.... -- -- -- -- -- 4.4
Interest income............... 0.7 0.4 0.7 0.1 -- 0.1
Interest expense.............. (0.2) (0.2) (0.1) (0.7) (1.0) (1.1)
Other......................... (0.4) 0.6 (1.1) (1.0) -- --
--------------------------------------------------------------
Loss before income taxes........ (27.3) (18.5) (18.9) (13.2) (35.1) (13.2)
(Provision for) benefit from
income taxes.................. (0.1) (0.3) 0.1 2.8 -- (0.1)
Equity in loss of investee...... -- -- -- (0.7) (0.7) --
--------------------------------------------------------------
Net loss........................ (27.4)% (18.8)% (18.8)% (11.1)% (35.8)% (13.3)%
==============================================================
</Table>
---------------
(1) In the quarters ended March 31, 2001 and September 30, 2000, the Company
recorded restructuring charges of $498,000 and $3,899,000, respectively. See
Notes to Consolidated Financial Statements.
(Unaudited)
(In thousands, except per share data)
<Table>
<Caption>
QUARTERS ENDED
----------------------------------------
APR. 3, JUL. 3, OCT. 2, JAN. 1,
1999 1999 1999 2000
----------------------------------------
Net sales........................................... $62,650 $ 48,519 $ 53,041 $ 58,617
Cost of goods sold.................................. 47,111 42,200 45,755 47,809
----------------------------------------
Gross profit........................................ 15,539 6,319 7,286 10,808
Selling, general and administrative................. 13,250 14,478 15,973 12,949
Research and development............................ 7,784 8,690 9,658 9,593
----------------------------------------
Loss from operations(1)............................. (5,495) (16,849) (18,345) (11,734)
Other income (expense), net......................... 192 172 900 (29)
----------------------------------------
Loss before income taxes............................ (5,303) (16,677) (17,445) (11,763)
(Provision for) benefit from income taxes(2)........ 1,803 (38,814) (58) (150)
----------------------------------------
Net loss............................................ $(3,500) $(55,491) $(17,503) $(11,913)
========================================
Basic and diluted net loss per share................ $ (0.16) $ (2.50) $ (0.78) $ (0.53)
========================================
</Table>
5-17
CHAPTER FIVE
<Table>
<Caption>
AS A PERCENTAGE OF NET SALES
----------------------------------------
Net sales........................................... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................. 75.2 87.0 86.3 81.6
----------------------------------------
Gross margin........................................ 24.8 13.0 13.7 18.4
Selling, general and administrative................. 21.2 29.8 30.1 22.1
Research and development............................ 12.4 17.9 18.2 16.3
----------------------------------------
Loss from operations(1)............................. (8.8) (34.7) (34.6) (20.0)
Other income (expense), net......................... 0.3 0.3 1.7 (0.1)
----------------------------------------
Loss before income taxes............................ (8.5) (34.4) (32.9) (20.1)
(Provision for) benefit from income taxes(2)........ 2.9 (80.0) (0.1) (0.2)
----------------------------------------
Net loss............................................ (5.6)% (114.4)% (33.0)% (20.3)%
========================================
</Table>
---------------
(1) In the quarter ended October 2, 1999, the Company recorded restructuring
charges of $2,446,000 related to the consolidation of its operating
structure. See Notes to Consolidated Financial Statements.
(2) In the quarter ended July 3, 1999, the Company recorded a full valuation
allowance on all existing deferred tax assets. See Notes to Consolidated
Financial Statements.
Our revenue has fluctuated between $39.4 million and $62.7 million per
quarter over the last ten quarters. Generally, our revenue is impacted by OEM
demand and end-user demand fulfilled through our reseller customers. The first
quarter of 1999, the fourth quarter of 1999 and the first quarter of 2001 were
positively impacted by strong media sales. In the first quarters of 1999 and
2001, this was the result of fulfilling media backlog once media supply
constraints from our media vendors ended. The fourth quarter of 1999 was
positively impacted by higher than anticipated sales of media by our customers
in connection with the Year 2000 problem. Over the last ten quarters, sales of
tape drive products have decreased as a percentage of total sales and sales of
library products have increased. In addition, OEM sales have decreased as a
percentage of total sales over the last ten quarters, and reseller sales have
increased, due to slower than expected OEM adoption of our M2(TM) product.
Gross margins as a percentage of revenue have varied from quarter to
quarter due to fluctuations in some or all of the following:
- total revenue
- product mix
- our products' life cycle status; and
- our ability to absorb our relatively fixed manufacturing costs over
varying revenue levels.
Gross margins in the second and third quarters of 1999 were impacted by a
higher fixed manufacturing cost structure which, in part, resulted in a
reduction in workforce at the end of the third quarter of 1999. The third
quarter of 2000 was negatively impacted by the costs associated with our
decision to phase out production at our EMG subsidiary. Our gross margins
throughout 2000 benefited from the introduction of our M2(TM) tape drive and
tape libraries which incorporate this drive. Our gross margins in the first
quarter of 2001 were negatively impacted by manufacturing difficulties related
to our M2(TM) tape drive.
Selling, general and administrative expenses include salaries, sales
commissions, advertising expenses and marketing programs. The second and third
quarters of 1999 were impacted by increased marketing expenditures directed at
generating demand for the M2(TM) tape drive, which was introduced in December
1999. The third quarter of 1999 was also impacted by severance costs of
approximately $1.5 million related to a workforce reduction. The fourth quarter
of 2000 was negatively impacted by higher sales commissions
5-18
CHAPTER FIVE
and marketing programs directed at the introduction of several new tape library
products. Cost containment efforts as well as reductions in our workforce
resulted in significantly lower levels of spending in the first and second
quarters of 2001.
Research and development expenses include salaries, third party development
costs and prototype expenses. From the second quarter of 1999 through the third
quarter of 2000, we incurred approximately $1.0 million per quarter in
development and prototype expenses in connection with our decision to jointly
develop future generations of MammothTape(TM) products with Hitachi. In
addition, we incurred restructuring charges of $1.2 million in the third quarter
of 2000 in connection with our decision to phase out development of future drive
components at our EMG subsidiary. Cost containment efforts as well as reductions
in our workforce resulted in significantly lower levels of spending in the first
and second quarters of 2001.
Other income (expense), net consists primarily of interest income and
expense, foreign currency remeasurement and transaction gains and losses and
other miscellaneous items. Interest income decreased as a result of declining
invested cash balances.
As of December 30, 2000, we owned 80,000 shares of Series B Preferred Stock
and 83,000 shares of Series C preferred Stock in HighGround Systems Inc. These
shares had a net book value $0 at December 30, 2000. In April 2001, Sun
Microsystems purchased High Ground Systems Inc., and as a result, we received
96,000 shares of Sun Microsystems common stock. We sold 85,000 of these shares
during the second quarter of 2001 and received cash proceeds and recorded a gain
of $1,719,000.
During the second quarter of 1999, we recorded income tax expense of $38.6
million in order to reserve 100% of total gross deferred tax assets as we
concluded that it was more likely than not that the deferred tax assets would
not be realized.
5-19
CHAPTER FIVE
RESULTS OF OPERATIONS
The following table sets forth our operating results as a percentage of sales
for each period presented.
<Table>
<Caption>
SIX MONTHS
ENDED
FISCAL YEARS ENDED (UNAUDITED)
-------------------------------------------------
---------------------------- ------------------
JAN. 2, JAN. 1, DEC. 30, JUL. 1, JUN. 30,
1999 2000 2000 2000 2001
-------------------------------------------------
Net sales...................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................. 72.5 82.1 77.6 76.7 86.7
-------------------------------------------------
Gross profit................................... 27.5 17.9 22.4 23.3 13.3
Operating expenses:
Selling, general and administrative.......... 19.9 25.4 24.7 27.0 23.6
Research and development..................... 10.4 16.0 16.4 19.6 16.0
-------------------------------------------------
Loss from operations........................... (2.8) (23.5) (18.7) (23.3) (26.3)
Other income (expense)
Gain from sale of investment................. -- -- -- -- 1.9
Interest income.............................. 0.8 1.1 0.4 0.6 0.1
Interest expense............................. (0.2) (0.2) (0.3) (0.2) (1.0)
Other........................................ -- (0.4) (0.5) -- --
-------------------------------------------------
Loss before income taxes....................... (2.2) (23.0) (19.1) (22.9) (25.3)
(Provision) benefit for income taxes........... 1.2 (16.7) 0.7 (0.1) (0.1)
Equity in loss of investee..................... -- -- (0.2) -- (0.4)
-------------------------------------------------
Net loss....................................... (1.0)% (39.7)% (18.6)% (23.0)% (25.8)%
=================================================
</Table>
The following tables present our revenue by product in absolute dollars and as a
percentage of sales for each period presented.
PRODUCT MIX TABLES
Dollars in thousands:
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEARS ENDED (UNAUDITED)
----------------------------------------------------
JAN. 2, JAN. 1, DEC. 30, JUL. 1, JUN. 30,
1999 2000 2000 2000 2001
----------------------------------------------------
8mm drives:
Eliant(TM)820, Mammoth-LT, Mammoth and
M2(TM).............................. $122,048 $ 99,939 $ 83,336 $ 41,955 $27,546
8mm libraries:
EZ17(TM), 215M, 430M, X80 and X200..... 19,201 19,801 60,844 11,937 14,852
DLTtape(TM) libraries:
17D, 230D and 690D..................... 6,067 12,733 9,099 4,185 1,676
LTO(TM) libraries:
110L and 221L.......................... -- -- 742 -- 1,549
Media.................................... 67,113 67,668 55,874 25,012 31,946
Service, spares and other................ 19,091 15,450 14,811 7,705 6,449
End-of-life drives and libraries(x)...... 64,495 14,816 4,194 12,254 3,290
Sales allowances......................... (11,510) (7,580) (7,158) (2,158) 1,156
----------------------------------------------------
$286,505 $222,827 $221,742 $100,890 $88,464
====================================================
</Table>
5-20
CHAPTER FIVE
As a percentage of net sales:
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEARS ENDED (UNAUDITED)
----------------------------------------------------
JAN. 2, JAN. 1, DEC. 30, JUL. 1, JUN. 30,
1999 2000 2000 2000 2001
----------------------------------------------------
8mm drives:
Eliant(TM)820, Mammoth-LT, Mammoth and
M2(TM).............................. 42.6% 44.9% 37.6% 41.6% 31.2%
8mm libraries:
EZ17(TM), 215M, 430M, X80 and X200..... 6.7 8.9 27.4 11.8 16.8
DLTtape(TM) libraries:
17D, 230D and 690D..................... 2.1 5.7 4.1 4.1 1.9
LTO(TM) libraries:
110L and 221L.......................... -- -- 0.3 -- 1.7
Media.................................... 23.4 30.4 25.2 24.8 36.1
Service, spares and other................ 6.7 6.9 6.7 7.6 7.3
End-of-life drives and libraries(x)...... 22.5 6.6 1.9 12.2 3.7
Sales allowances......................... (4.0) (3.4) (3.2) (2.1) 1.3
----------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
====================================================
</Table>
---------------
(x) For fiscal years, percentages reflect classifications of end-of-life
products as of December 30, 2000. For the quarterly periods, percentages
reflect classifications of end-of-life products as of June 30, 2000.
The following table details our sales to different customer types as a
percentage of total net sales for the periods presented:
CUSTOMER MIX TABLE
(As a percentage of net sales)
<Table>
<Caption>
% OF TOTAL NET SALES
----------------------------------------------------
SIX MONTHS ENDED
FISCAL YEARS (UNAUDITED)
----------------------------------------------------
1998 1999 2000 JULY 1, 2000 JUNE 30, 2001
----------------------------------------------------
Reseller.................................. 49.5% 57.7% 66.6% 64.8% 67.2%
OEM....................................... 46.3 38.1 28.0 30.5 27.6
End-user and other........................ 4.2 4.2 5.4 4.7 5.2
----------------------------------------------------
100.0% 100.0% 100.0% 100.0% 100.0%
====================================================
</Table>
The following table summarizes customers who accounted for 10% or more of
our sales in the periods presented:
SALES TO MAJOR CUSTOMERS
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEARS (UNAUDITED)
----------------------------------------------------
1998 1999 2000 JULY 1, 2000 JUNE 30, 2001
----------------------------------------------------
Ingram Micro.............................. 12.6% 13.5% 18.5% 16.0% 16.4%
Tech Data................................. 7.5 9.3 13.0 12.5 9.9
IBM....................................... 15.2 15.2 11.3 11.1 10.9
Sun Microsystems.......................... 11.0 11.0 7.6 9.6 5.1
</Table>
5-21
CHAPTER FIVE
No other customers accounted for 10% or more of sales in any of these
periods. We cannot guarantee that sales to these or any other customers will
continue to represent the same percentage of our revenues in future periods. Our
customers also sell competing products and continually review new technologies,
which causes our sales volumes to vary from period to period.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JULY 1, 2000
Net Sales. Our net sales decreased by 12.3% to $88,464,000 in the first
six months of 2001 from $100,890,000 for the first six months of 2000. We
believe this decrease is primarily due to a general economic slowdown in the
technology industry. In addition, we believe that our current financial
condition has negatively impacted sales. In comparing net sales from the first
six months of 2001 to the first six months of 2000, there were several
significant differences:
- Sales of older generation 8mm tape drives (Eliant(TM)820, Mammoth-LT and
Mammoth) decreased by $11,095,000 due to product life cycles. Decreases
were primarily in the OEM channel.
- Sales of M2(TM) tape drives decreased by $3,315,000. We believe this
decrease resulted from a combination of (1) initial stocking orders for
the M2(TM) tape drives which occurred early in 2000 as well as (2) media
supply constraints in the first quarter of 2001 which limited
availability to sell tape drives.
- Sales of certain 8mm tape libraries (EZ17, X80 and X200) decreased by
$2,734,000. We believe this decrease is due to the general slowdown in
the economy.
- Sales of newer generation 8mm tape libraries (215 and 430) increased by
$5,649,000. This increase is due to the fact that these products did not
begin shipping until late in 2000, thus there were no sales in the first
two quarters of 2000.
- Sales of DLT libraries decreased by $2,509,000. We believe this is
because these libraries incorporate older generation DLT 4000 and DLT
7000 tape drives.
- Sales of end-of-life drives and libraries decreased by $8,964,000. The
majority of this decrease is due to our 220 library, which entered
end-of-life status in the first quarter of 2001.
- Sales of media increased by $6,934,000 as a result of our ability to
resolve media supply constraints and fill the backlog of outstanding
orders which we existed at December 30, 2000.
- Sales allowances decreased by $3,314,000, which had a positive impact on
net sales. The decrease is a result of decreased exposure to inventory
stock rotation related to decreased sales volumes to qualifying reseller
customers, a decrease in certain marketing related programs, and a
decrease in rebate incentives.
Sales to reseller and end-user customers increased as a percentage of net
sales for the first six months of 2001 over the same period in 2000, while sales
to OEM customers decreased. We believe this shift is a result of wider
acceptance of our newer generation products through the reseller channel and
slower acceptance of M2(TM) technology in the OEM channels. Sales in Europe
decreased by approximately $3,646,000 or 16.5% from the first six months of 2000
to the first six months of 2001, while North America sales decreased by
$8,197,000 million or 11.6% in the same period.
Cost of Sales/Gross Profit. Our cost of sales includes the actual cost of
all materials, labor and overhead incurred in the manufacturing and service
processes, as well as certain other related costs. Other related costs include
primarily warranty accruals and inventory reserves. Our cost of sales for the
first six months of 2001 decreased to $76,721,000 from $77,391,000 for the first
six months in 2000. Excluding restructuring charges for the first six months of
2001, our cost of sales was $76,498,000. Our gross margin percentage decreased
to 13.3% in the first six months of 2001 from 23.3% for the same period in 2000.
Excluding restructuring charges for the first six months of 2001, our gross
margin was 13.5%. Gross profit
5-22
CHAPTER FIVE
for the first six months of 2001 was negatively impacted by inventory reserves
and rework charges related to our efforts to improve the quality and
manufacturing yields of the M2(TM) drive product and high fixed costs relative
to the level of net sales. During the second quarter of 2001, manufacturing
yields have steadily increased as a result of these efforts.
Selling, general and administrative. Selling, general and administrative
expenses include salaries, sales commissions, advertising expenses and marketing
programs. These expenses decreased to $20,846,000 during the first six months of
2001 from $27,237,000 for the same period in 2000. Without restructuring charges
for the first six months of 2001, these expenses were $20,667,000. The decrease
in these costs is the result of our restructuring in the first quarter of 2001,
as well as other general cost control efforts. Additionally, advertising
expenses were higher in 2000 over 2001 as a result of the introduction of the
M2(TM) drive and related automation products in 2000. During 2001, our product
introductions were smaller in scale.
Research and development. Research and development expenses decreased
$14,192,000 in the first six months of 2001 from $19,726,000 for the same period
in 2000. Excluding restructuring charges for the first six months of 2001, these
expenses were $14,096,000. This decrease is the result of our restructuring in
the first quarter of 2001, as well as lower costs in 2001 over 2000 for ongoing
engineering in 2000 of the M2(TM) product, which was released in late 1999.
Other income (expense), net. Other income (expense), net consists
primarily of interest income and expenses, foreign currency remeasurement and
transaction gains and losses and other miscellaneous items. Other expense for
the first six months of 2001 was $842,000 compared to income of $438,000 for the
same period in 2000. These changes are primarily the result of liquidity
constraints which have resulted in borrowings under our line of credit and the
resulting interest expense during the first six months of 2001. During the first
six months of 2000 we had no such interest expense, and had interest income due
to invested cash balances.
As of December 30, 2000, we owned 80,000 shares of Series B Preferred Stock
and 83,000 shares of Series C Preferred Stock in HighGround Systems Inc. These
shares had a net book value of $0 at December 30, 2000. In April 2001, Sun
Microsystems purchased HighGround Systems Inc., and as a result, we received
96,000 shares of Sun Microsystems common stock. We sold 85,000 of these shares
during the second quarter of 2001 and received cash proceeds and recorded a gain
of $1,719,000.
Taxes. The provision for income taxes for the first six months of 2001 was
(0.2)% of loss before taxes compared to (0.8)% for the same period in 2000. As
of the second quarter of 1999 we recorded a deferred tax valuation allowance
equal to 100% of total deferred tax assets. Management considered a number of
factors, including our cumulative operating losses over the prior three years,
short-term projected losses due to the impact of delays in the release of the
M2(TM) product as well as certain offsetting positive factors. Management
believes a 100% valuation allowance will be required until the Company returns
to a consistent and predictable level of profitability.
FISCAL YEAR 2000 COMPARED TO 1999
Net Sales. Our net sales decreased by 0.4% to $221.7 million in 2000 from
$222.8 million in 1999. In comparing net sales from 1999 to 2000, there were
several significant differences:
- Sales of M2(TM) tape drives increased by $20.4 million. We sold our
first M2(TM) drives in the fourth quarter of 1999, whereas in 2000, we
had a full year of M2(TM) sales.
- Sales of current 8mm library products increased by $41.0 million. During
2000, both unit sales and average unit prices increased as sales shifted
to libraries containing M2(TM) drives from older generation Mammoth and
Eliant(TM)820 tape drives. Included in 2000 sales are our first
shipments of the 215 and 430 libraries.
5-23
CHAPTER FIVE
- Sales of older generation 8mm tape drives (Eliant(TM)820, Mammoth-LT and
Mammoth) decreased by $37.0 million, primarily in the OEM channel.
- Sales of media decreased by $11.8 million. This decrease is due to
larger than normal media shipments in the first quarter of 1999 as we
resolved media supply constraints and were able to fill our backlog of
outstanding orders, compounded by media supply constraints during the
fourth quarter of 2000. The 2000 media supply constraints also
negatively impacted our sales of M2(TM) drive and library products.
- We sold our first LTO(TM) Ultrium(TM) libraries. LTO(TM) library sales
were $742,000 in 2000 with no comparable amount in 1999.
- Sales of DLTtape(TM) libraries decreased by $3.6 million. We believe
this decrease was due in part to the fact that our DLTtape(TM) libraries
utilize older-generation DLT7000 tape drives.
- Sales of end-of-life drive and library products decreased by $10.6
million.
Sales to OEM customers decreased in 2000 over 1999 due to reduced sales of
older generation tape drive products, without a corresponding increase in sales
of new generation products. OEM customers have a long qualification, adoption
and integration time before purchasing new products. As a result, volume sales
of our M2(TM) products to OEMs did not begin until late in the third quarter of
2000.
Sales to domestic customers increased to 70.7% of net sales in 2000 from
66.0% in 1999. Sales to international customers decreased to 29.3% of net sales
in 2000 from 34.0% in 1999. Comparing 2000 to 1999, sales to European/Middle
East customers decreased by $9.1 million and sales to Pacific Rim customers
decreased by $1.6 million. We believe these decreases resulted from worsening
economic conditions in those regions and a resulting weakening of their local
currencies.
Cost of Sales/Gross Profit. Our cost of sales includes the actual cost of
all materials, labor and overhead incurred in the manufacturing and service
processes, as well as certain other related costs. Other related costs include
primarily provisions for warranty repairs and inventory obsolescence. Our cost
of sales for 2000 decreased to $172.1 million from $182.9 million in 1999 and
our gross margin percentage increased to 22.4% in 2000 from 17.9% in 1999.
Excluding restructuring charges for both periods, our cost of goods sold
decreased to $169.4 million in 2000 from $182.2 million in 1999 and our gross
margin percentage increased to 23.6% from 18.2%. Included in 2000 restructuring
charges was a provision for excess and obsolete inventory of $879,000. This
amount related to excess M2(TM) scanner and recording head inventories held by
our EMG subsidiary as a result of the decision to outsource this manufacturing
to Hitachi. See "Restructuring" discussion later in this section. A primary
factor positively impacting gross margins was the margin contribution of certain
recently released M2(TM) drives and libraries which have higher gross margins
than the older technology products they replaced. In addition, the increase in
sales of library products, which typically carry higher gross margins than drive
products, also resulted in higher gross margins. Another factor which increased
gross margins was the shift to more reseller and less OEM sales. We estimate
that 1999 gross margins were negatively impacted by approximately $2.3 million
due to differences in the dollar/yen exchange rate while there was no
significant impact in 2000, as a result of these exchange rate differences.
Selling, general and administrative. Selling, general and administrative
expenses decreased to $54.7 million and 24.7% of sales in 2000 from $56.7
million and 25.4% of sales in 1999. Without restructuring charges, these
expenses for 1999 were $55.2 million and 24.8% of net sales. The decrease is
mainly the result of employment reductions related to the third quarter 1999
restructuring, which impacted salaries and travel related expenses. Also
impacting these expenses for the year, was the settlement of patent litigation
with Ecrix Corporation. We had claimed that they infringed on a number of our
patents, and were involved in litigation throughout the latter part of 1999 and
first six months of 2000. The settlement included $450,000 for reimbursement of
legal expenses that had been incurred mainly in the first and second quarters of
2000.
5-24
CHAPTER FIVE
Research and development. Research and development expenses increased to
$36.5 million and 16.4% of sales in 2000 from $35.7 million and 16.0% of sales
in 1999. Excluding restructuring charges for both periods, these expenses
decreased to $35.3 million and 15.9% of sales in 2000 from $35.4 million and
15.9% of sales in 1999. This decrease is the net result of the third quarter
2000 restructuring, which outsourced scanner research and development activities
of EMG to Hitachi, and increased spending to support engineering efforts related
to MammothTape(TM) drives and investments in new automation products.
During 1999, we contracted with Hitachi for the development of technology
related to future generations of MammothTape(TM) drives and manufacturing of the
M2(TM) drive. During 2000 and 1999, we incurred $3.5 million and $2.2 million,
respectively, of engineering expenses under these contracts. Investments in
automation products included the integration of M2(TM) drives, as well as the
development of a new family of mid-sized libraries that incorporates
MammothTape(TM), DLTtape(TM), LTO(TM) Ultrium(TM) and AIT technologies. We
shipped new MammothTape(TM) and LTO(TM) Ultrium(TM)products from this family
during the second half of 2000. Other automation products from this family are
expected to begin shipping in 2001.
Other income(expense), net. Other income (expense), net consists primarily
of interest income and expenses, foreign currency remeasurement and transaction
gains and losses and other miscellaneous items. Other expense for 2000 was
$842,000 compared to income of $1.2 million in 1999. The increase in expenses is
due primarily to unfavorable changes in remeasurement and transaction gains and
losses, and decreased interest income due to lower cash and investment balances.
Net foreign exchange losses related to remeasurements of foreign subsidiary
accounts to U.S. dollars were $860,000 in 2000, compared to $207,000 in 1999.
Net foreign exchange losses related to foreign currency transactions were $1.2
million in 2000 compared to $686,000 in 1999.
Taxes. The benefit (provision) for income taxes for 2000 was 3.7% of loss
before taxes compared to (72.7)% of loss before taxes in 1999. As of the second
quarter of 1999, we recorded a deferred tax valuation reserve for 100% of total
gross deferred tax assets. Management considered a number of factors, including
cumulative operating losses over the prior three years, short-term projected
losses due to the impact of delays in the release of the M2(TM) product as well
as certain offsetting positive factors. Management believes a 100% valuation
allowance will be required until the Company returns to a consistent and
predictable level of profitability.
At December 30, 2000, we had domestic net operating loss carryforwards of
$112.1 million, which expire between 2018 and 2020, available to offset future
taxable income. Our use of $6.0 million of the carryforwards is subject to an
annual limitation of $670,000 through 2005. We can carry forward foreign net
operating losses indefinitely. In addition, we have unused tax credits related
to our research and development activities of $4.4 million which expire between
2012 and 2020. We also have alternative minimum tax credits of $1.1 million,
which we can carry forward indefinitely.
Net loss per share. Basic and diluted net loss per share for 2000 was
$1.83 per share compared to basic and diluted net loss per share of $3.97 for
1999. Excluding restructuring charges for both years, the basic and diluted net
loss per share for 2000 was $1.66 compared to $3.86 for 1999. Our decreased net
loss in 2000 over 1999 was due to the increase in the deferred tax valuation
reserve during 1999. Excluding restructuring charges, our pretax loss decreased
$10.2 million to $38.5 million in 2000 from $48.7 million in 1999. This decrease
was a result of improved margins.
5-25
CHAPTER FIVE
FISCAL YEAR 1999 COMPARED TO 1998
Net Sales. Our net sales decreased by 22.2% to $222.8 million in 1999 from
$286.5 million in 1998. In comparing net sales from 1999 to 1998, there were
several significant differences:
- Sales of end-of-life products (primarily the 8505XL, 8700, 10h and 18D)
decreased to $5.2 million in 1999 from $43.5 million in 1998 as we
concluded the build-out and sale of these products late in 1998 and
early 1999.
- Sales of current 8mm drive products decreased to $99.9 million in 1999
from $122.0 million in 1998 as sales to our two largest OEM customers
decreased by $17 million from 1998 to 1999.
- Sales of current 8mm library products decreased to $29.4 million in 1999
from $40.0 million in 1998. This decrease was in proportion to our
overall sales decrease.
- Sales of services, spare parts and other decreased to $15.4 million in
1999 from $19.3 million in 1998 as we lost a major service customer in
1999.
- Sales of current DLTtape(TM) libraries increased to $12.7 million in
1999 from $6.1 million in 1998. We introduced our first DLTtape(TM)
library in 1997 and increased our DLTtape(TM) offerings during 1998 and
1999.
- Sales allowances decreased to $7.6 million in 1999 from $11.5 million in
1998, having a positive impact on net sales. The decrease resulted from
a lower emphasis placed on the use of sales rebates, as well as the
final sell-off of desktop products in early 1998, which required a high
level of sales incentives.
During 1999, our sales shifted to reseller customers from OEM customers.
Our sales to reseller customers in 1999 decreased by 9.5% in absolute dollars
over 1998. Our sales to OEM customers decreased by 36% in 1999 over 1998. We
undertook a number of initiatives in 1999 to position ourselves in the reseller
channel in anticipation of the introduction of the M2(TM) drive late in the
year.
Sales to domestic customers decreased to 66.0% of net sales in 1999 from
70.5% in 1998. Sales to international customers increased to 34.0% of net sales
in 1999 from 29.5% in 1998. Sales decreased to all geographic regions; however
domestic sales decreased at a higher rate.
Cost of Sales/Gross Profit. Our cost of sales includes the actual cost of
all materials, labor and overhead incurred in the manufacturing and service
processes, as well as certain other related costs. Other related costs include
primarily provisions for warranty repairs and inventory obsolescence. Our costs
of sales for 1999 decreased to $182.9 million from $207.6 million in 1998 and
our gross margin percentage decreased to 17.9% in 1999 from 27.5% in 1998.
Excluding restructuring charges for 1999 (see "Restructuring" discussion later
in this section), our cost of goods sold decreased to $182.2 million in 1999 and
our gross margin percentage decreased to 18.2%. Our gross margin percentage
decreased to 17.9% in 1999 compared to 27.5% in 1998. Excluding restructuring
charges, the 1999 gross margin was 18.2%. Gross margins were negatively impacted
by lower net sales, which were tied to a relatively fixed manufacturing cost
structure. During 1999, we had more plant capacity than we were using to support
current manufacturing volumes. Additionally, lower pricing on products
approaching end-of-life status negatively impacted product margins. Gross
margins in 1999 were negatively impacted by approximately $2.3 million due to
difference in the dollar/yen exchange rate whereas 1998 gross margins were
positively impacted by approximately $2.5 million as a result of these exchange
rate differences.
Selling, general and administrative. Selling, general and administrative
expenses decreased to $56.7 million and 25.4% of sales in 1999 from $57.0
million and 19.9% of sales in 1998. Without restructuring charges, these
expenses for 1999 were $55.2 million and 24.8% of net sales. The decrease was
due to higher advertising spending in 1998 to reintroduce our Mammoth tape drive
as well as introduce several new library products. In 1999, there were fewer and
smaller-scale product introductions.
5-26
CHAPTER FIVE
Research and development. Research and development expenses increased to
$35.7 million and 16.0% of sales in 1999 from $29.9 million and 10.4% of sales
in 1998. Without restructuring charges, 1999 expenses were $35.4 million and
15.9% of net sales. Spending increased in 1999 to support the development and
release of the M2(TM) tape drive, which we first sold in the fourth quarter. In
addition, we contracted with Hitachi for the development of technology related
to future generations of MammothTape(TM) drives and manufacturing of the M2(TM)
drive. During 1999, we incurred $2.2 million of engineering expenses under these
contracts.
Other income (expense), net. Other income (expense), net consists
primarily of interest income and expenses, foreign currency re-measurement and
transaction gains and losses, state franchise taxes and other miscellaneous
items. Other income was $1.2 million in 1999 compared to $1.8 million in 1998.
This decrease was the result of unfavorable changes in foreign currency
transaction gains and losses in 1999, offset by increased interest income. Net
foreign exchange (gains)/losses related to foreign currency transactions were
$686,000 and $(36,000) in 1999 and 1998, respectively.
Taxes. The income tax provision for 1999 of $37.2 million compared to a
$3.4 million tax benefit in 1998. As of the second quarter of 1999, the Company
recorded a deferred tax valuation allowance equal to 100% of total deferred tax
assets. Management considered a number of factors, including the Company's
cumulative operating losses over the prior three years, short-term projected
losses due to the impact of delays in the release of the M2(TM) product, as well
as certain offsetting positive factors. Management believes a 100% valuation
allowance will be required until the Company returns to a consistent and
predictable level of profitability.
Net loss per share. Basic and diluted net loss per share for 1999 was
$3.97 compared to basic and diluted net loss per share of $0.12 per share for
1998. Excluding restructuring charges in 1999, basic and diluted net loss per
share was $3.86. The increased loss in 1999 was due to lower revenue, lower
gross margin percentage and increased research and development expenses.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of 2001, we expended $4,911,000 of cash for
operating activities, borrowed a net amount of $2,030,000 against our line of
credit, received $3,045,000 from the sale of stock, received $1,719,000 from the
sale of an investment, expended $1,226,000 for capital equipment, expended
$500,000 on long-term obligations, received $11,000 from the sale of fixed
assets and had a decrease in cash overdrafts of $1,258,000. Together, these
activities decreased our cash and short-term investments by $1,090,000 to a
quarter-ending balance of $2,069,000. Our working capital decreased to
$12,326,000 at June 30, 2001 from $27,023,000 at December 31, 2000.
As of December 30, 2000, we owned 80,000 shares of Series B Preferred Stock
and 83,000 shares of Series C Preferred Stock in HighGround Systems Inc. These
shares had a net book value of $0 at December 30, 2000. In April 2001, Sun
Microsystems purchased HighGround Systems Inc., and as a result, we received
96,000 shares of Sun Microsystems common stock. We sold 85,000 of these shares
during the second quarter of 2001 and received cash proceeds and recorded a gain
of $1,719,000.
In May 2000, we entered into a bank line of credit agreement with Congress
Financial Corporation, a subsidiary of First Union Bank Corporation. This
agreement expires in May 2003. Originally, this agreement allowed borrowings up
to the lesser of 80% of eligible accounts receivable or $20.0 million. In
February 2001, this agreement was amended to increase the borrowing limit to
$25.0 million. This amendment also added 25% of eligible finished goods
inventory to the borrowing base. Eligible accounts receivable excludes invoices
greater than 60 days past due, some foreign receivables and other items
identified in the agreement. Eligible finished goods inventory excludes slow
moving inventory and other items identified in the agreement. Collateral for
this agreement includes accounts receivable and inventory, as well as certain
off balance sheet assets.
5-27
CHAPTER FIVE
The line of credit prohibits the payment of dividends without prior bank
approval and has a minimum tangible net worth covenant, and certain other
covenants. The agreement contains certain acceleration clauses that may cause
any outstanding balance to become immediately due in the event of default. The
amount available to borrow under the line of credit varies each day based upon
the levels of the underlying accounts receivable and inventories. As of June 30,
2001, the overall amount available to borrow was $16,325,000 and we had
$14,337,000 in borrowings outstanding and a remaining borrowing capacity of
$1,988,000. As of March 31 and June 30, 2001, we were in violation of the
tangible net worth covenant of the line of credit agreement. In connection with
the execution of the merger agreement with Ecrix, Congress Financial agreed to
waive these past events of default and amend our minimum net worth covenants.
Borrowings under the line of credit bear interest at the lower of the
bank's prime rate + 1% or "LIBOR" + 3%. AS A RESULT, ANY SIGNIFICANT
FLUCTUATIONS IN THE PRIME RATE OR LIBOR WOULD IMPACT OUR INTEREST EXPENSE
RELATED TO BORROWINGS UNDER THIS LINE OF CREDIT. Offsetting the amount available
under the line of credit is a letter of credit, which collateralizes certain
leasehold improvements made by our subsidiary in Germany. This letter is
currently for DM 900,000 and decreases by DM 100,000 in August of each year
until it is fully depleted.
We have incurred operating losses over the last four years. Additionally,
as of June 30, 2001, we had only $2,159,000 in cash, cash equivalents and
short-term investments, and $1,938,000 of remaining borrowing capacity under our
line of credit. As a result, we have been and are continuing to investigate
various strategic alternatives that could increase our liquidity. These
alternatives may include one or more of the following:
- sale of all or part of our operating and off-balance sheet assets;
- restructuring of current operations;
- additional equity infusions; or
- strategic alliance, acquisition or merger.
Broadview was engaged to assist us in this process. As a result, we issued
shares of Series G preferred stock as described below and have entered into the
merger agreement with Ecrix.
If we do not consummate the merger or a similar transaction and do not
raise additional capital through debt or equity, it is possible that we would be
unable to achieve our currently contemplated business objectives or have enough
funds to support our operations, which could affect our ability to continue as a
going concern. The report of our independent accountants on our consolidated
financial statements for the 2000 fiscal year contained an explanatory paragraph
related to our ability to continue as a going concern.
As discussed in Chapter Three under "Exabyte's Reasons for the Merger," we
believe that our merger with Ecrix will improve our liquidity and enhance our
access to capital. However, there can be no assurance that we will realize these
benefits from the merger or that, even if realized, they will be sufficient to
resolve our liquidity concerns. If Exabyte completes the merger with Ecrix,
Exabyte expects that its cash from operations and the cash infusion to be made
at the time of the merger will be sufficient for the cash needs of Exabyte after
the merger through at least June 30, 2002. Exabyte's cash needs beyond that date
depend on a number of factors, including whether Exabyte achieves significant
sales growth of Ecrix's VXA drives, revenue growth of Exabyte's existing
products, the successful introduction and sales of Exabyte's M3(TM) tape drive,
and cost containment. In any event, in order to provide some cushion and to take
into account the possibility of less favorable operating results than are
projected by the management of Exabyte and Ecrix, Exabyte will continue to seek
external financing through debt or equity.
5-28
CHAPTER FIVE
On April 16, 2001, we issued 1,500,000 shares of Series G preferred stock
to State of Wisconsin Investment Board for total proceeds of $3,000,000. See
"Note 14 -- Subsequent Events" to our audited financial statements included in
this proxy statement/prospectus.
Certain Ecrix shareholders have made bridge loans to us for $2 million as a
result of our agreement and plan of merger. The bridge loans will be credited
against the bridge lenders' purchase of Series H preferred stock at closing of
the Merger.
RESTRUCTURING CHARGES
In March 2001, we completed a reduction in our workforce in order to reduce
expenses, minimize ongoing cash consumption and to simplify our management
structure. All areas of Exabyte were impacted by the workforce reduction. These
reductions reduced the workforce by approximately 235 persons (211 domestically
and 24 in Europe) and resulted in a severance charge to operations in the first
quarter of 2001 of approximately $498,000. Of these costs, $223,000 were
included in cost of sales, $179,000 were included in selling, general and
administrative costs and $96,000 were included in research and development
costs. All severance was paid during the first quarter of 2001, and no accruals
remain.
During the third quarter of 2000, we incurred $3,899,000 in charges related
to a restructuring, which will ultimately result in the closure of our wholly
owned subsidiary, EMG. This restructuring was part of a plan adopted by our
Board of Directors on July 24, 2000, which outsourced a number of manufacturing
operations to Hitachi in order to reduce our cost structure. The restructuring
decision resulted in: (1) an immediate end to the manufacture of M2(TM)
recording heads by EMG; (2) the termination of M2(TM) scanner manufacturing by
EMG during April 2001; and (3) the planned shut down of the remaining Mammoth
scanner manufacturing by the end of 2003. No assets were transferred as a result
of the decision to outsource M2(TM) scanner manufacturing to Hitachi and no
technology was transferred. In addition, there were no write-offs taken or
restructuring charges incurred in connection with the M2(TM) scanner outsourcing
to Hitachi. There has been no change in the method of accounting for
transactions between EMG and the Company and all assets not impacted by the
restructuring continue to be depreciated in a consistent manner.
These third quarter restructuring charges include employee severance and
related costs of $1,613,000, excess facilities costs of $718,000, the write-off
of excess inventories of $879,000, the write-off of capital equipment of
$389,000 and other costs of $300,000. Workforce reductions involved 93
employees, constituting all employees of EMG. All severance payments for these
employees were contractually defined, fixed and communicated during the third
quarter of 2000.
Of these restructuring costs during 2000, $2,713,000 are included in cost
of sales and $1,186,000 are included in research and development costs.
Approximately $1,268,000 of the total restructuring costs, which relate to the
write-off of excess inventories and capital equipment, do not involve future
cash payments.
Approximately $637,000 in restructuring costs were paid during the first
six months of 2001. Employment at EMG was reduced by 24 employees during the
first six months to 29 employees at June 30, 2001. Excess facilities exposure
and other related costs were reduced by $235,000 with the signing of a new
lease. Approximately $1,320,000 of accruals related to this restructuring remain
at June 30, 2001.
5-29
CHAPTER FIVE
The following table summarizes the activity to date related to the
restructuring which occurred in the third quarter of 2000:
<Table>
<Caption>
FIXED
SEVERANCE INVENTORY ASSET
AND EXCESS WRITE- WRITE
RELATED FACILITIES DOWN DOWN OTHER TOTAL
-----------------------------------------------------------
(In thousands)
Restructuring charges.............. $1,613 $ 718 $ 879 $ 389 $ 300 $3,899
Asset write downs.................. -- -- (879) -- -- (879)
Loss on sale of assets............. -- -- -- (56) -- (56)
Cash payments...................... (360) -- -- -- (139) (499)
Additional charges/adjustments..... 74 41 -- (333) (55) (273)
-----------------------------------------------------------
Balance, December 30, 2000......... $1,327 $ 759 -- -- $ 106 $2,192
-----------------------------------------------------------
-----------------------------------------------------------
(Unaudited)
Cash payments...................... (547) (33) -- -- (57) (637)
Additional charges/adjustments..... -- (186) -- -- (49) (235)
-----------------------------------------------------------
Balance, June 30, 2001............. $ 780 $ 540 $ -- $ -- $ -- $1,320
-----------------------------------------------------------
-----------------------------------------------------------
</Table>
During the third quarter of 1999, management determined that the division
of Exabyte into three operating segments was no longer appropriate due to the
amount of overhead required to maintain this structure. We incurred $2,446,000
in pretax restructuring charges to combine our three operating segments under
common management. These costs included severance, outplacement and benefits for
the resulting workforce reduction of approximately 143 employees. All areas of
Exabyte were impacted by the workforce reduction. Approximately $664,000 of
these costs were included in cost of sales, $1,453,000 were included in selling,
general and administrative costs and $328,000 were included in research and
development costs.
Severance and related costs of $2,154,000 were paid in cash during 1999.
The remaining severance and related cost accruals were paid during the first
half of 2000.
The following table summarizes the activity related to the 1999
restructuring reserve for 1999 and 2000:
<Table>
<Caption>
SEVERANCE AND
RELATED
-------------
(In thousands)
Restructuring charges.......... $ 2,446
Cash payments.................. (2,154)
-------
Balance, January 1, 2000....... 292
Cash payments.................. (292)
-------
Balance, December 30, 2000..... $ --
=======
</Table>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of our operations, we are exposed to certain market
risks, primarily changes in foreign currency exchange rates and interest rates.
Uncertainties that are either nonfinancial or nonquantifiable, such as
political, economic, tax, other regulatory or credit risks are not included in
the following assessment of our market risks. Our exposure to fluctuations in
the dollar/yen exchange rate is expected to increase as a result of outsourcing
certain manufacturing to Hitachi. Our borrowings under our line of credit
agreement expose us to changes in interest rates.
5-30
CHAPTER FIVE
Foreign Currency Exchange Rates
We have foreign subsidiaries whose operations expose us to foreign currency
exchange rate changes (See Note 1 of Notes to Consolidated Financial Statements
for the three years ended December 30, 2000). Changes in foreign currency
exchange rates could impact remeasurement of our foreign denominated assets and
liabilities into U.S. dollars and our future earnings and cash flows from
transactions denominated in different currencies. At December 30, 2000, 5.3% of
our total assets were denominated in foreign currencies. During 2000, 0.7% of
revenue and 11.1% of operating expenses were denominated in foreign currencies.
Our exposure to currency exchange rate changes is diversified due to the number
of different countries in which we conduct business. We have subsidiaries in
Germany, The Netherlands, Japan, Singapore and Canada whose books of record are
maintained in their local currency. Foreign currency gains and losses will
continue to result from fluctuations in the exchange rates of these
subsidiaries' operations compared to the U.S. dollar thereby impacting future
operating results.
We purchase certain inventory components and services, denominated in yen,
from Japanese manufacturers. We settle such payments at the prevailing spot
rate. We prepared sensitivity analyses of our exposures from foreign assets as
of December 30, 2000, and of exposure from anticipated foreign revenue, and
operating expenses in 2001 using historical data and anticipated future activity
to assess the impact of hypothetical changes in foreign currency exchange rates.
Based upon the results of these analyses, we estimate that a hypothetical 10%
unfavorable change in foreign currency exchange rates from the 2000 year end
rates could have a $550,000 impact on net assets, a $160,000 impact on net sales
and a $1.0 million impact on operating expenses. These risks are materially
similar to the risks presented in the prior year, and could have a material
effect on our results of operations, cash flows or financial condition for the
next year.
We have also prepared sensitivity analyses of our exposure related to yen
denominated purchases. Using a hypothetical 10% unfavorable change in the
dollar/yen exchange rate from the year end rate, and projected 2001 purchases
denominated in yen, we estimate a potential $2.9 million impact on 2001
purchases. The impact could affect a combination of net income and inventory,
and could have a material effect on our results of operations, cash flows or
financial condition for the next year.
Interest Rates
At December 30, 2000, we had $12.3 million outstanding against our line of
credit. We pay interest on this line of credit at the lower of the bank's prime
rate +1% or "LIBOR" + 3%. As a result, fluctuations in interest rates could
impact our interest expense related to this line of credit. In 2000, our
interest rate exposure was related to interest income on our investments and
cash equivalents, which included held-to-maturity debt securities with maturity
dates of ten months or less.
We prepared sensitivity analyses of our exposure to interest rate
fluctuations to assess the impact of a hypothetical change in interest rates.
Based on the results of these analyses, we estimate that a hypothetical 10%
unfavorable change in interest rates from the 2000 year end rates could have a
$250,000 impact on results of operations. This risk is materially similar to the
interest risk presented in the prior year, and could have a material effect on
our results of operations, cash flows or financial condition for the next year.
5-31
CHAPTER FIVE
EXABYTE OFFICERS AND DIRECTORS
The executive officers and directors of Exabyte and their ages as of August 31,
2001, are as follows:
<Table>
William L. Marriner 48 Chairman of the Board President and Chief Executive
Officer
Stephen F. Smith 51 Vice President, Chief Financial Officer, Corporate
Secretary and General Counsel
Peter D. Behrendt 62 Director
A. Laurence Jones 48 Director
Stephen C. Johnson 59 Director
Thomas E. Pardun 57 Director
Ralph Z. Sorenson 67 Director
</Table>
MR. WILLIAM L. MARRINER, age 48, joined Exabyte in March 1987 as Vice
President of finance and administration and Chief Financial Officer. He was
subsequently promoted to Senior Vice President in July 1991 and Executive Vice
President in December 1994 and continued to serve as Chief Financial Officer
until December 1997. Mr. Marriner was elected acting President and Chief
Executive Officer in January 1997, President, Chief Executive Officer and
director in July 1997 and Chairman of the Board in January 1998. Prior to
joining the Company, Mr. Marriner held various positions at Storage Technology
Corporation from 1978 to 1987, including Vice President of Pacific and Latin
American operations, manager of business planning and administration for
international operations and Assistant to the President.
MR. STEPHEN F. SMITH, age 51, joined the Company in June 1989 as Exabyte's
General Counsel, and currently holds this position. Mr. Smith was appointed Vice
President and Chief Financial Officer in December 1997. Mr. Smith has also
served as Secretary since February 1995. Prior to joining Exabyte, Mr. Smith
held various positions at Storage Technology Corporation from 1977 to 1989,
including General Counsel, Senior Counsel and Director of International
Financial Operations.
MR. PETER D. BEHRENDT, age 62, joined Exabyte in July 1987 as President and
director. Mr. Behrendt was the Company's Chairman of the Board from January 1992
until January 1998. He served as President until January 1997, and Chief
Executive Officer from July 1990 until January 1997. Prior to joining the
Company, Mr. Behrendt held various executive positions during 26 years with IBM,
including director of quality and product assurance for the information systems
and communications group and product manager of the electronic typewriter
business. Mr. Behrendt was also responsible for product and business planning
for IBM's tape and disk offerings. Mr. Behrendt currently serves as Chairman of
Troika Networks, a position he has held since September 2000. Troika Networks
produces hardware and software for network management. He also serves as a
director of Western Digital Corporation and Infocus Systems Corporation, as well
as several private companies.
MR. A. LAURENCE JONES, age 48, has served as a director of Exabyte since
May 1998. Mr. Jones has served as President of Messagemedia, Inc., a provider of
advanced messaging systems for Internet commerce, since March, 1999. Previously,
Mr. Jones was an Operating Affiliate of McCown DeLeeuw and Co., a private equity
firm, from January 1998 to February 1999. Mr. Jones served as President and
Chief Executive Officer of Neonatal Service, Inc., a direct marketing company,
from 1993 to 1998. Mr. Jones also served as President and Chief Executive
Officer of GovPX, Inc. from 1991 to 1993 and Senior Vice President and Corporate
Officer of Automatic Data Processing from 1987 to 1991. Prior to 1987, Mr. Jones
spent 10 years at Wang Laboratories, where he held various technical and
managerial positions, including that of Chief Executive Officer of a financial
information services division. Mr. Jones also serves as a director of CHI/Triad,
a private computer services company.
5-32
CHAPTER FIVE
MR. STEPHEN C. JOHNSON, age 59, has served as a director of Exabyte since
May 1998. Mr. Johnson has served as Managing Partner of The Slingshot Group, a
venture investment firm, since August 1999. Prior to that, Mr. Johnson was a
founder of Komag, Incorporated, a manufacturer of media for hard disk drives,
and served as our President and Chief Executive Officer from September 1983
until August 1999. Previously, Mr. Johnson was President and Chief Executive
Officer of Boschert, Incorporated, a manufacturer of switching power supplies.
Mr. Johnson also serves as a director of Arroyo Optics, Inc. and
Smartbasket.com.
MR. THOMAS E. PARDUN, age 57, has served as a director of Exabyte since
April 1995. Mr. Pardun currently serves as Chairman of the Board and Chief
Executive Officer of edge2net, Inc., a position he has held since November 2000.
edge2net is a leading provider of voice, data and video services on its own
high-quality global communications network, focusing on the Asian market.
Previously, Mr. Pardun was President of MediaOne International (previously U.S.
West International, Asia-Pacific, a subsidiary of U.S. West, Inc.), an
owner/operator of international properties in cable television, telephone
services, and wireless communications companies, from May 1996 until his
retirement in July 2000. Before joining U.S. West, Mr. Pardun was President of
the Central Group for Sprint, as well as President of Sprint's West Division and
Senior Vice President of Business Development for United Telecom, a predecessor
company to Sprint. Mr. Pardun also held a variety of management positions during
a 19-year tenure with IBM, concluding as Director of product line evaluation.
Mr. Pardun also serves as a director of Western Digital Corporation and it
subsidiary companies.
DR. RALPH Z. SORENSON, age 67, has served as a director of Exabyte since
January 1993. Dr. Sorenson is currently a managing partner of the Sorenson
Limited Partnership, a venture investment firm, as well as Professor Emeritus at
the College of Business and Administration at the University of Colorado at
Boulder. From July 1992 to June 1993, he was Dean of the College of Business and
Administration. Dr. Sorenson served as Adjunct Professor of Management at the
Harvard Business School from 1989 to 1992, teaching management policy and
practice. From 1981 to 1989, Dr. Sorenson was Chairman, President and Chief
Executive Officer of Barry Wright Corporation, a diversified industrial company
engaged in the design and manufacture of industrial products for improving
productivity and integrating filing systems for the office. Prior to 1981, he
was President of Babson College in Wellesley, Massachusetts. Dr. Sorenson also
serves as a director of Eaton Vance Corporation, Houghton Mifflin Company,
Polaroid Corporation and Whole Foods Market Incorporated.
Executive officers serve at the discretion of the Board of Directors. There
are no family relationships among any of the directors and officers.
BOARD COMMITTEES AND MEETINGS
During fiscal 2000 (ended December 30, 2000), Exabyte's Board held five
regular meetings (including telephone board meetings). The Board has two
standing committees: an Audit Committee and a Compensation Committee. The Board
has no standing Nominating Committee. Nominations to the Board are made by the
entire Board. Each director attended at least 75% of the Board meetings and
committee meetings (of those committees on which he served) that were held
during his term in fiscal 2000.
The Audit Committee meets with Exabyte's independent auditors at least once
a year to review the results of the annual audit and discuss the financial
statements. The Audit Committee functions include:
- reviewing and reassessing the adequacy of the Audit Committee's Charter;
- recommending to the Company's Board of Directors the appointment of
independent auditors;
- reviewing the scope of audits and other services to be performed by the
independent auditors;
5-33
CHAPTER FIVE
- reviewing the results of the accounting principles applied in financial
reporting and the adequacy of financial and operational controls;
- reviewing auditor independence; and
- acting as liaison between Exabyte's management, Exabyte's Board of
Directors and Exabyte's independent auditors.
The Audit Committee, which is currently composed of Messrs. Jones, Johnson
and Sorenson, met four times during fiscal 2000.
The Compensation Committee determines officer and director compensation
(including salaries, incentive compensation and stock options) as well as
compensation levels for other employees when necessary, and performs other
functions related to compensation that the Board assigns to it. The Compensation
Committee, currently composed of Messrs. Johnson, Jones, Pardun, and Sorenson,
met once during fiscal 2000.
BENEFICIAL OWNERSHIP COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Exabyte's directors and executive officers, as well as persons who own more than
10% of Exabyte's common stock, to file initial reports of ownership and reports
of changes in ownership with the Securities and Exchange Commission. Officers,
directors and greater than 10% stockholders are required by SEC regulations to
furnish Exabyte with copies of all Section 16(a) forms they file.
To Exabyte's knowledge, all such Section 16(a) filing requirements were
complied with during fiscal 2000. This statement is based solely on a review of
reports furnished to Exabyte and written representations that no other reports
were required during fiscal 2000.
COMPENSATION OF EXABYTE OFFICERS AND DIRECTORS
COMPENSATION OF DIRECTORS
Each director who is not an employee of Exabyte receives $15,000 as an
annual retainer for his services as a director. In addition, non-employee
directors receive $1,500 for each Board meeting they attend in person and $250
for each committee meeting they attend in person, as well as for each telephone
Board meeting in which they participate. Non-employee directors received an
aggregate of $110,750 for their services rendered to Exabyte during fiscal 2000.
Non-employee directors are also reimbursed for out-of-pocket travel expenses in
connection with their attendance at Board meetings. These fees have remained
unchanged from the previous year.
Non-employee directors also receive options under the Incentive Stock Plan.
On January 27th of each fiscal year, each non-employee director who has been a
non-employee director for at least three months is automatically granted an
option to purchase 5,000 shares of common stock. Each newly elected non-
employee director, upon initial election to the Board, receives an option to
purchase 10,000 shares. The exercise price of these options equals the fair
market value of the stock on the date of grant. The options vest at the rate of
2% per month beginning one month following the date of grant. Directors are also
eligible to receive discretionary grants of options under the Incentive Stock
Plan. During fiscal 2000, options covering an aggregate of 90,000 shares were
granted to non-employee directors as a group with a weighted average exercise
price per share of $8.00. Of the options granted to directors, grants covering
an aggregate of 60,000 shares were discretionary grants.
5-34
CHAPTER FIVE
SUMMARY OF COMPENSATION
The following table provides, for fiscal 2000 (ended December 30, 2000),
fiscal 1999 (ended January 1, 2000) and fiscal 1998 (ended January 2, 1999),
certain summary information concerning compensation paid to or earned by
Exabyte's Chief Executive Officer, each of the other executive officers at the
end of fiscal 2000, and one former executive officer who ceased employment with
Exabyte during fiscal 2000, the Named Executive Officers:
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-----------------------------------
SECURITIES
UNDERLYING ALL OTHER
SALARY($) OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR (1) BONUS($) (#)(2) ($)(4)(5)
------------------------------------------------------------------------------------------------
William L. Marriner 2000 357,115 0 90,000 1,084
Chairman of the Board, Chief 50,000(3)
Executive Officer & President 1999 333,461 0 50,000 5,325
1998 325,384 0 50,000 5,376
Stephen F. Smith 2000 217,692 0 45,000 1,518
Vice President, Chief Financial 10,000(3)
Officer, General Counsel & 1999 199,230 0 30,000 6,142
Secretary 1998 198,923 0 40,000 5,081
</Table>
---------------
(1) Includes amounts earned but deferred at the election of the Named Executive
Officers under the 401(k) plan.
(2) Exabyte has not granted any SARs or restricted stock awards.
(3) Represents stock options granted pursuant to the CreekPath Systems, Inc.
2000 Stock Option Plan as follows: Mr. Marriner, 50,000 shares; and Mr.
Smith, 10,000 shares.
(4) As permitted by SEC rules, Exabyte has not shown amounts for certain
perquisites where the amounts do not exceed the lesser of 10% of bonus plus
salary or $50,000.
(5) Includes the dollar value of executive life insurance premiums paid by
Exabyte in 2000 for the benefit of the Named Executive Officers as follows:
Mr. Marriner, $1,804; and Mr. Smith, $1,518. There were no matching payments
by Exabyte under the 401(k) plan for 2000. 1999 compensation includes
matching payments by Exabyte under the 401(k) plan for 1999 as follows: Mr.
Marriner, $4,000; and Mr. Smith, $4,000; as well as the dollar value of
executive life insurance premiums paid by Exabyte in 1999 for the benefit of
the Named Executive Officers as follows: Mr. Marriner, $1,325; and Mr.
Smith, $2,142. 1998 compensation includes matching payments by Exabyte under
the 401(k) plan for 1998 as follows: Mr. Marriner, $4,000; and Mr. Smith,
$3,679. Also includes the dollar value of executive life insurance premiums
paid by Exabyte in 1998 for the benefit of the Named Executive Officers as
follows: Mr. Marriner, $1,376; and Mr. Smith, $1,402.
OFFICER SEVERANCE PROGRAM
Exabyte has a severance program under which officers and other specified
employees are eligible to receive severance payments in the event their
employment is terminated within eighteen months after certain changes in control
of Exabyte. The amounts payable under the severance program vary depending upon
the position of the terminated officer or employee. The severance program limits
the amount payable
5-35
CHAPTER FIVE
to up to 12 months of compensation and further provides for the accelerated
vesting of outstanding stock options held by the terminated officer or employee.
INCENTIVE STOCK PLAN
The Board adopted the Incentive Stock Plan in January 1987. As a result of
a series of amendments, as of August 31, 2001 there were 9,500,000 shares of
common stock authorized for issuance under the Incentive Stock Plan. The
Incentive Stock Plan provides for the grant of both incentive stock options
(which generally have a favorable tax treatment for the optionee) and
non-statutory stock options to employees, directors and consultants. These
grants are made at the discretion of the Board. The Incentive Stock Plan also
provides for the non-discretionary grant of non-statutory stock options to its
non-employee directors. In connection with the sale of Series G preferred stock
on April 16, 2001, Exabyte amended the Incentive Stock Plan to provide that,
unless approved by the holders of a majority of the shares present and entitled
to vote at a duly convened meeting of stockholders, Exabyte shall not (i) grant
any stock options with an exercise price that is less than 100% of the fair
market value of the underlying stock on the date of grant; (ii) reduce the
exercise price of any stock option granted under the Incentive Stock Plan.
As of August 31, 2001, options to purchase 2,227,111 shares were
outstanding under the Incentive Stock Plan and 3,508,141 shares were available
for future grant.
STOCK OPTION GRANTS
The following table contains information for fiscal 2000 concerning the
grant of stock options under the Incentive Stock Plan, except as noted, to the
Named Executive Officers:
OPTION GRANTS IN LAST FISCAL YEAR
<Table>
<Caption>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF STOCK
PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(4)
----------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO
OPTIONS EMPLOYEES
GRANTED IN FISCAL EXERCISE EXPIRATION
NAME (#)(1) YEAR(3) PRICE($/SH) DATE 5%($) 10%($)
-----------------------------------------------------------------------------------------------------
William L. Marriner 90,000 4.86 7.8125 1/17/10 442,191 1,120,599
50,000(2) 2.85 0.10 1/17/10 3,144 7,968
Stephen F. Smith 45,000 2.43 7.8125 1/17/10 221,095 560,299
10,000(2) 0.57 0.10 1/17/10 625 1,593
</Table>
---------------
(1) Exabyte does not have a plan that provides for the issuance of SARs. Options
under the Incentive Stock Plan generally vest at the rate of 2% of the total
grant per month, beginning one month from the date of grant, for a period of
50 months. Options may be either non-statutory or incentive stock options.
The exercise price of options granted under the Incentive Stock Plan must be
at least equal to the fair market value of the common stock on the date of
grant. Options granted to executive officers and certain members of
management are subject to an agreement with Exabyte which
5-36
CHAPTER FIVE
provides that, upon a change of control, options will fully vest unless the
Board directs otherwise. The Board may not reprice options granted under the
Incentive Stock Plan.
(2) These options were granted under the CreekPath Systems, Inc. 2000 Stock
Option Plan ("CreekPath Plan"). Options granted under the CreekPath Plan
generally vest at the rate of 2% of the total grant per month, beginning one
month from the date of grant, for a period of 50 months. Options are non-
statutory stock options. The exercise price of options granted under the
CreekPath Plan must be at least equal to the fair market value of the common
stock on the date of grant.
(3) Based on options granted to Exabyte employees during fiscal 2000 to purchase
1,849,625 shares, and options granted to CreekPath employees during fiscal
2000 to purchase 1,752,000 shares.
(4) The potential realizable value is based on the term of the option at the
date of grant (10 years in each case). It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term, and that the option is exercised
and sold on the last day of the option term for the appreciated stock price.
These amounts represent certain assumed rates of appreciation only, in
accordance with SEC rules, and do not reflect its estimate or projection of
future stock price performance. Actual gains, if any, are dependent on the
actual future performance of Exabyte's common stock. The amounts reflected
in this table may never be achieved.
OPTION EXERCISES AND YEAR-END HOLDINGS
The following table provides information concerning the exercise of options
during fiscal 2000 and unexercised options held as of the end of fiscal 2000 for
the named executive officers:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES
<Table>
<Caption>
NUMBER OF SECURITIES
SHARES VALUE UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
OPTIONS AT FY-END(#)(1) MONEY OPTIONS AT FY-END
($)(2)
ACQUIRED REALIZED --------------------------------------------------------
NAME ON EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
-----------------------------------------------------------------------------------------------------------
William L. Marriner 0 0 364,200/126,000 0/0
0(3) 0 11,000/39,000 0/0
Stephen F. Smith 0 0 75,600/63,700 0/0
0(3) 0 2,200/7,800 0/0
</Table>
---------------
(1) Includes both "in-the-money" and "out-of-the-money" options. "In-the-money"
options are options with exercise prices below the market price of Exabyte's
or CreekPath's common stock (as noted) on December 30, 2000.
(2) Fair market value of Exabyte's common stock on December 30, 2000 ($3.4375,
based on the closing sales price reported on the Nasdaq National Market)
less the exercise price of the option, or fair market value of CreekPath's
common stock on December 30, 2000 ($0.10, based on a determination by the
CreekPath Board of Directors less the exercise price of the option, as
noted.
(3) Represents shares of CreekPath common stock acquired upon exercise of
options granted under the CreekPath Systems, Inc. 2000 Stock Option Plan.
5-37
CHAPTER FIVE
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides certain information regarding the ownership of
Exabyte's common stock before and after the issuance of shares of common stock
pursuant to the merger and the sale of Series H preferred stock, based on the
number of shares held as of August 31, 2001 by:
- each current director;
- each current executive officer named in the Summary Compensation Table;
- all of Exabyte's current directors and the Named executive officers as a
group;
- all those known to be beneficial owners of more than five percent of
Exabyte's common stock; and
- each person who will become a director, executive officer or beneficial
owner of more than five percent of Exabyte's common stock after the
merger.
<Table>
<Caption>
BENEFICIAL OWNERSHIP(1) BENEFICIAL OWNERSHIP(1)
BEFORE THE MERGER AFTER THE MERGER
---------------------------- ------------------------------
NUMBER OF PERCENT OF TOTAL NUMBER OF PERCENT OF TOTAL
BENEFICIAL OWNER SHARES(2) VOTING POWER SHARES(2) VOTING POWER
---------------------------------------------------------------------------------------------------
State of Wisconsin Investment
Board(3) 4,495,900 18.3% 4,495,900 10.2%
P.O. Box 7842
Madison, WI 53707
First Pacific Advisors, Inc.(4) 3,098,300 13.3% 3,098,300 7.1%
11400 West Olympic Boulevard
Suite 1200
Los Angeles, CA 90064
Dimensional Fund Advisors Inc.(5) 1,574,300 6.8% 1,574,300 3.6%
1299 Ocean Avenue
11th Floor
Santa Monica, CA 90401
William L. Marriner(6)(7) 580,715 2.4% 580,715 1.3%
Peter D. Behrendt(6)(8) 464,140 2.0% 464,140 1.1%
Stephen C. Johnson(6) 18,700 * 18,700 *
A. Laurence Jones(6) 18,700 * 18,700 *
Thomas E. Pardun(6) 36,000 * 36,000 *
Ralph Z. Sorenson(6) 45,000 * 45,000 *
Stephen F. Smith(6) 149,964 * 149,964 *
All directors and Named executive
officers as a group (8 persons
before the merger; 12 persons
after the merger)(9)(10) 1,313,219 5.4% 11,912,924 26.4%
Centennial Holdings V, L.P. 0 0% 2,709,673(11) 6.1%
1428 Fifteenth St.
Denver, CO 80202-1318
Centennial Holdings VI, L.P. 0 0% 1,909,167(12) 4.3%
1428 Fifteenth St.
Denver, CO 80202-1318
</Table>
5-38
CHAPTER FIVE
<Table>
<Caption>
BENEFICIAL OWNERSHIP(1) BENEFICIAL OWNERSHIP(1)
BEFORE THE MERGER AFTER THE MERGER
---------------------------- ------------------------------
NUMBER OF PERCENT OF TOTAL NUMBER OF PERCENT OF TOTAL
BENEFICIAL OWNER SHARES(2) VOTING POWER SHARES(2) VOTING POWER
---------------------------------------------------------------------------------------------------
Meritage Investment Partners, LLC 0 0% 8,915,997(13) 20.2%
(G. Jackson Tankersley)
1600 Wynkoop St., Suite 300
Denver, CO 80202
G. Jackson Tankersley 0 0% 200,898(14) *
751 International Isle Dr.
Castle Rock, CO 80104
William J. Almon, Sr. 100,000 0% 1,100,000(15) 2.5%
10570 Blandor Way
Los Altos, CA 94024
Juan A. Rodriguez 0 0% 382,815(16) *
5525 Central Avenue
Boulder, CO 80301
Craig G. Lamborn 0 0% 0 0%
5525 Central Avenue
Boulder, CO 80301
</Table>
---------------
* Less than one percent.
(1) This table is based upon information supplied by officers, directors and
principal stockholders and by Schedules 13D and 13G, if any, filed with the
SEC. Unless otherwise indicated in the footnotes to this table and subject
to community property laws where applicable, each of the stockholders named
in this table has sole power to vote and dispose of the shares indicated as
beneficially owned. As required by Rule 13d-3(d), each beneficial owner
named in the table is deemed to be the beneficial owner of shares that
person has the right to acquire beneficial ownership of within 60 days of
August 31, 2001. Applicable percentages are based on 23,287,184 shares
outstanding on August 31, 2001, adjusted as required by Rule 13d-3(d)(1).
(2) Does not give effect to a proposed maximum 1:10 reverse split of the
outstanding common stock.
(3) This information is based on a Schedule 13G, dated June 11, 2001, filed
with the SEC by State of Wisconsin Investment Board ("Wisconsin"), a
government agency which manages public pension funds. Wisconsin is shown to
have sole voting and dispositive power over all shares. Also includes
1,250,000 shares issuable upon the conversion of 1,500,000 shares of Series
G preferred stock held by this stockholder.
(4) This information is based on a Schedule 13F for the second quarterly period
of 2001 filed by First Pacific Advisors, Inc. ("First Pacific") with the
SEC. Based on a Schedule 13G, dated February 9, 2001, filed with the SEC by
First Pacific and a Schedule 13G, dated February 9, 2001, filed with the
SEC by FPA Capital Fund, Inc. ("FPA"), an investment fund managed by First
Pacific, First Pacific is shown to have shared voting power over 1,697,200
shares, sole voting power over no shares and shared dispositive power over
all shares. FPA is shown to have sole voting and shared dispositive power
over 1,176,600 shares, representing 5% of the common stock. There is no
information publicly available that provides more current information
concerning voting or dispositive power over the shares currently held by
First Pacific.
(5) This information is based on a Schedule 13F for the second quarterly period
of 2001 filed by Dimensional Fund Advisors, Inc. ("Dimensional"), an
investment advisor registered under Section 203 of the Investment Advisors
Act of 1940. Based on a Schedule 13G, dated February 2,
5-39
CHAPTER FIVE
2001, and filed with the SEC by Dimensional, Dimensional is shown to have sole
voting and dispositive power over all shares. Dimensional disclaims beneficial
ownership of all shares reported.
(6) Includes shares issuable upon the exercise of outstanding stock options
that are exercisable within 60 days of August 31, 2001, as follows: Mr.
Marriner, 470,800 shares; Mr. Behrendt, 212,800 shares; Mr. Johnson, 18,700
shares; Mr. Jones, 18,700 shares; Mr. Pardun, 35,000 shares; Dr. Sorenson,
45,000 shares; and Mr. Smith, 134,400 shares.
(7) Includes 25,000 shares held by Mr. Marriner's spouse.
(8) Includes 4,420 shares held by Mr. Behrendt's spouse as custodian for the
benefit of his children.
(9) Includes shares described in the notes above, as applicable.
(10) The calculation of beneficial ownership before and after the merger
includes all of the current directors of Exabyte, although two will resign
or be removed following the merger. Calculation of beneficial ownership
after the merger includes shares held, or to be held by, G. Jackson
Tankersley, William J. Almon, Sr., Juan A. Rodriguez and Craig G. Lamborn,
as described in the notes applicable to each of these persons.
(11) Includes the shares held by Centennial Fund V, L.P., and Centennial
Entrepreneurs Fund V, L.P. Centennial Holdings V, L.P. is the general
partner of Centennial Fund V, L.P. and Centennial Entrepreneurs Fund V,
L.P. and as such has voting and dispositive power over such shares.
Includes 1,367,540 shares underlying shares of Series H preferred stock to
be acquired at the closing of the merger.
(12) Includes the shares held by Centennial Fund VI, L.P. and Centennial
Entrepreneurs Fund VI, L.P. Centennial Holdings VI, L.P. is the general
partner of Centennial Fund VI, L.P. and Centennial Entrepreneurs Fund VI,
L.P. and as such has voting and dispositive power over such shares.
Includes 967,461 shares underlying shares of Series H preferred stock to be
acquired at closing of the merger.
(13) Includes the shares held by Meritage Private Equity Fund, L.P., Meritage
Private Equity Parallel Fund, L.P. and Meritage Entrepreneurs Fund, L.P.
Meritage Investment Partners, LLC is the sole general partner of Meritage
Private Equity Fund, L.P., Meritage Private Equity Parallel Fund, L.P. and
Meritage Entrepreneurs Fund, L.P. and as such has voting and dispositive
power over such shares. Includes 4,444,445 shares underlying shares of
Series H preferred stock to be acquired at closing of the merger.
(14) Includes the shares listed in footnote (12) as to which Mr. Tankersley has
voting and dispositive power by virtue of being the a managing member of
Meritage Investment Partners, LLC which is the sole general partner of
Meritage Private Equity Fund, L.P., Meritage Private Equity Parallel Fund,
L.P. and Meritage Entrepreneurs Fund, L.P. Mr. Tankersley disclaims
beneficial ownership of such shares. Also includes the following shares
held by the following entities: Millennial Holdings LLC, The Millennial
Fund, and Tankersley Family Limited Partnership. Mr. Tankersley is the
managing member of Millennial Holdings LLC and sole general partner of
Tankersley Family Limited Partnership and may be deemed to possess voting
and dispositive power over shares held by such entities. Mr. Tankersley
disclaims beneficial ownership of all such shares. The Millennial Fund is
not a separate legal entity and Mr. Tankersley is the direct beneficial
owner of all shares held in that name. Includes 131,538 shares underlying
shares of Series H preferred stock to be acquired at the closing of the
merger.
(15) Includes 1,000,000 shares underlying shares of Series H preferred stock to
be acquired at the closing of the merger.
(16) Includes 250,000 shares underlying shares of Series H preferred stock to be
acquired at the closing of the merger.
5-40
CHAPTER FIVE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 16, 2001, the Company issued 1,500,000 shares of Series G
preferred stock to State of Wisconsin Investment Board for total proceeds of
$3,000,000. See "Note 14 -- Subsequent Events" to our audited financial
statements included in this proxy statement/prospectus for information on this
transaction.
During 1999 and 2000, Exabyte and Ecrix were adverse to each other in
litigation related to the alleged infringement of certain intellectual property
rights. Additional information about this litigation is included in Chapter
Three of this proxy statement/prospectus under "Material Contacts Among Exabyte
and Ecrix."
5-41
CHAPTER SIX
CHAPTER SIX -- COMPARISON OF RIGHTS BETWEEN ECRIX AND EXABYTE
INTRODUCTION
The following is a summary of the material differences between the rights
of Exabyte stockholders and the rights of Ecrix stockholders. The following does
not purport to be a complete description of the differences between the rights
of Exabyte and Ecrix stockholders. Such differences may be determined in full by
reference to the Exabyte restated certificate of incorporation and bylaws and
the Ecrix certificate of incorporation and bylaws.
<Table>
<Caption>
------------------------------------------------------------------------------------------------
ECRIX STOCKHOLDER RIGHTS EXABYTE STOCKHOLDER RIGHTS
------------------------------------------------------------------------------------------------
Corporate The rights of Ecrix stockholders The rights of Exabyte stockholders
Governance are currently governed by Delaware are currently governed by Delaware
law, the certificate of law and the certificate of
incorporation and bylaws of Ecrix, incorporation and bylaws of
and the Third Amended and Restated Exabyte.
Stockholders Agreement dated
September 28, 2000.
Upon completion of the merger, the
rights of Ecrix stockholders who
become Exabyte stockholders will
be governed by Delaware law and
the certificate of incorporation
and bylaws of Exabyte.
------------------------------------------------------------------------------------------------
Authorized Capital The authorized capital stock of The authorized capital stock of
Stock Ecrix consists of 70 million Exabyte is 50 million shares of
shares of common stock and 55 common stock and 14 million shares
million shares of preferred stock. of preferred stock.
In connection with the merger,
Exabyte proposes to amend its
certificate of incorporation to
authorize an additional 50 million
shares of common stock and an
additional 16 million shares of
preferred stock.
------------------------------------------------------------------------------------------------
</Table>
6-1
CHAPTER SIX
<Table>
<Caption>
------------------------------------------------------------------------------------------------
ECRIX STOCKHOLDER RIGHTS EXABYTE STOCKHOLDER RIGHTS
------------------------------------------------------------------------------------------------
Number of Ecrix's bylaws provide that the Exabyte's bylaws provide that the
Directors; Staggered number of directors will be as number of directors will be as
Board determined by resolution of the determined by resolution of the
stockholders or of the board of stockholders or of the board of
directors but shall not be less directors but shall not be less
than one. The Stockholders than one. The Exabyte board of
Agreement provides that the board directors currently consists of
shall be composed of no more than six directors.
nine members. The Ecrix board of
directors currently consists of Pursuant to the merger agreement,
eight directors. following the merger, two current
members of the Exabyte board will
Ecrix does not have a staggered resign or be removed, the size of
board. the board will be increased to
seven, and the three resulting
vacancies will be filled by
persons designated by Ecrix.
Exabyte has a staggered board of
directors that is divided into
three classes as nearly equal in
number as possible. Each class
serves for a term of three years
each.
------------------------------------------------------------------------------------------------
Election of the The Ecrix Preferred, voting Exabyte's bylaws provide that
Board of Directors separately as a single class and holders of common stock have the
with each share of Ecrix Preferred authority to elect the directors.
entitled to one vote, are entitled
to elect three directors to serve Holders of Exabyte Series G
on Ecrix's Board of Directors preferred stock are entitled to
until such persons' successors are vote on an as converted basis with
duly elected by the holders of the holders of common stock in the
Ecrix Preferred or removed from election of directors. Holders of
office by the holders of the Ecrix Series H preferred stock, when
Preferred. In addition, upon issued, will be entitled to vote
certain events the directors on an as converted basis with the
elected by the holders of Ecrix common stock and Series G stock in
Preferred will constitute a the election of directors.
separate class of directors and be
entitled to cast a majority of
votes on each matter considered by
the Board of Directors.
The Ecrix Common, voting
separately as a single class and
with each share of Ecrix Common
entitled to one vote, are entitled
to elect six directors to serve on
Ecrix's Board of Directors until
such persons' successors are duly
elected by the holders of the
Ecrix Common or removed from
office by the holders of the Ecrix
Common.
The Ecrix bylaws provide that all
directors shall be elected at each
annual meeting of stockholders for
a term of one year.
------------------------------------------------------------------------------------------------
</Table>
6-2
CHAPTER SIX
<Table>
<Caption>
------------------------------------------------------------------------------------------------
ECRIX STOCKHOLDER RIGHTS EXABYTE STOCKHOLDER RIGHTS
------------------------------------------------------------------------------------------------
Removal of Ecrix's bylaws provide for the Delaware law provides that a
Directors removal of any director by the company with a classified board
affirmative vote of a majority of may remove a director only for
the same class of stock as the cause, unless its charter provides
stockholders that elected that otherwise. The Exabyte certificate
director. of incorporation and bylaws
provide that any director may be
removed from office at any time
for cause by the affirmative vote
of at least a majority of the
voting power of the then
outstanding shares entitled to
vote generally in the election of
directors, voting as a single
class. The Exabyte certificate of
incorporation and bylaws provide
that any director may be removed
from office at any time without
cause by the affirmative vote of
at least 66 2/3% of the voting
power of the then outstanding
shares entitled to vote generally
in the election of directors,
voting as a single class.
------------------------------------------------------------------------------------------------
Vacancies on the Ecrix's certificate of Exabyte's certificate of
Board of Directors incorporation provides that an incorporation provides that the
unfilled directorship shall remain board shall apportion vacancies on
vacant until such time as the the board resulting from an
holders of the class of stock increase or decrease in the number
entitled to vote for that of directors among the three
directorship shall elect a classes of directors so as to
director to that directorship and maintain those classes as nearly
the unfilled directorship shall equal as possible. Exabyte's
not be filled by resolution or certificate of incorporation
vote of the board or of any other provides that vacancies shall be
class. Ecrix's bylaws provide that filled by the affirmative vote of
vacancies resulting from an the holders of a majority of the
increase in the authorized number voting power of the then
of director may be filled by a outstanding shares entitled to
majority of the directors then in vote generally in the election of
office. directors, or by the affirmative
vote of a majority of the
remaining directors.
------------------------------------------------------------------------------------------------
Indemnification of Ecrix's bylaws provide that Exabyte's bylaws provide that
Directors and directors shall be indemnified to directors shall be indemnified to
Officers the fullest extent permissible the fullest extent permissible
under Delaware Law. under Delaware Law.
------------------------------------------------------------------------------------------------
Special Meetings of Ecrix's bylaws provide that Exabyte's bylaws provide that
the Stockholders special meetings may be called at special meetings may be called,
any time by the President or by for any purpose, by the Chairman
the board of directors or by the of the Board, by the President, or
holders of not less than one-tenth by the board pursuant to a
of all shares entitled to vote on resolution adopted by a majority
the subject matter for which the of the board.
meeting is called.
------------------------------------------------------------------------------------------------
</Table>
6-3
CHAPTER SIX
<Table>
<Caption>
------------------------------------------------------------------------------------------------
ECRIX STOCKHOLDER RIGHTS EXABYTE STOCKHOLDER RIGHTS
------------------------------------------------------------------------------------------------
Annual Meeting of Ecrix's bylaws provide that the Exabyte's bylaws provide that the
Stockholders annual meeting of stockholders annual meeting of stockholders
shall be held on the first Tuesday shall be held on such date as
of March each year. shall be designated by the board.
------------------------------------------------------------------------------------------------
Annual Meeting Ecrix's bylaws do not provide for Exabyte's bylaws provide that a
Proposals stockholder proposals. stockholder must give timely
notice of a stockholder proposal
to the Secretary of Exabyte in
order for that proposal to be
brought before an annual meeting
of stockholders. Timely notice
means delivery at the principal
executive offices not less than
120 days in advance of the release
date in the previous year of the
proxy statement for the annual
meeting. Exabyte stockholders must
also comply with the proxy rules
governing such matters.
------------------------------------------------------------------------------------------------
Quorum Ecrix's bylaws provide that the Exabyte's bylaws provide that the
holders of a majority of the holders of a majority of the
shares entitled to vote at the shares entitled to vote at the
meeting, present in person or meeting, present in person or
represented by proxy, shall represented by proxy, shall
constitute a quorum. constitute a quorum.
------------------------------------------------------------------------------------------------
Stockholder Action Ecrix's bylaws provide that action Exabyte's certificate of
Without a Meeting may be taken without a meeting, incorporation provides that,
without prior notice and without a following registration of a class
vote, if consent in writing is of securities under the Securities
signed by holders of outstanding Exchange Act of 1934 as Exabyte
stock having not less than the has done because it is publicly
minimum number of votes necessary held, stockholders may not act by
to approve the action at a meeting written consent.
at which all stockholders eligible
to vote on that action were in
attendance.
------------------------------------------------------------------------------------------------
</Table>
6-4
CHAPTER SIX
<Table>
<Caption>
------------------------------------------------------------------------------------------------
ECRIX STOCKHOLDER RIGHTS EXABYTE STOCKHOLDER RIGHTS
------------------------------------------------------------------------------------------------
Stockholder Delaware law provides that a Delaware law provides that a
Inspection Rights; stockholder shall, upon written stockholder shall, upon written
Stockholder List demand under oath, have the right, demand under oath, have the right,
during regular business hours and during regular business hours and
for a proper purpose, to inspect for a proper purpose, to inspect
Ecrix's stock ledger, a list of Exabyte's stock ledger, a list of
Ecrix's stockholders, and Ecrix's Exabyte's stockholders, and
other books and records. Exabyte's other books and records.
Under Colorado law, a foreign Under Colorado law, a foreign
corporation with its principal corporation with its principal
place of business in Colorado is place of business in Colorado is
subject to Colorado law with subject to Colorado law with
regard to stockholder inspection regard to stockholder inspection
rights. Colorado law provides that rights. Colorado law provides that
a stockholder shall, upon written a stockholder shall, upon written
demand, during regular business demand, during regular business
hours and for a proper purpose, hours and for a proper purpose,
have the right to inspect have the right to inspect
corporate records including corporate records including
certain minutes of stockholder and certain minutes of stockholder and
director meetings, the list of director meetings, the list of
stockholders, and other corporate stockholders, and other corporate
records. records.
------------------------------------------------------------------------------------------------
Amendment to Under Delaware law, the Ecrix Under Delaware law, the Exabyte
Certificate of certificate of incorporation may certificate of incorporation may
Incorporation be amended by the affirmative vote be amended by the affirmative vote
of a majority of the outstanding of a majority of the outstanding
stock entitled to vote thereon at stock entitled to vote thereon at
the shareholders meeting and a the shareholders meeting and a
majority of each class entitled to majority of each class entitled to
vote thereon as a class. vote thereon as a class.
The Ecrix certificate provides
that the certificate may not be
amended without the affirmative
vote of at least 66 2/3% of the
outstanding shares of the Ecrix
preferred stock.
------------------------------------------------------------------------------------------------
Amendment to The Ecrix bylaws provide that the The Exabyte bylaws provide that
Bylaws Ecrix bylaws may be amended by the the Exabyte bylaws may be amended
vote of stockholders holding a by the affirmative vote of a
majority of votes present in majority of outstanding shares. A
person or by proxy at a meeting. A majority of the board of directors
majority of the board may also present at a board meeting may
amend the bylaws. The Ecrix also amend the bylaws, except that
certificate provides that the the board may not amend the bylaw
bylaws may not be amended without provision dealing with the
the affirmative vote of at least exercise price of stock options
66 2/3% of the outstanding shares and downward adjustments to
of the Ecrix preferred stock. conversion prices.
------------------------------------------------------------------------------------------------
</Table>
6-5
CHAPTER SIX
<Table>
<Caption>
------------------------------------------------------------------------------------------------
ECRIX STOCKHOLDER RIGHTS EXABYTE STOCKHOLDER RIGHTS
------------------------------------------------------------------------------------------------
Merger or Business Section 203 of the Delaware Section 203 of the Delaware
Combinations General Corporation Law is General Corporation Law provides
inapplicable to Ecrix. that, if a person acquires 15% or
more of the voting stock of a
Ecrix's certificate provides that Delaware corporation, thereby
Ecrix may not engage in any becoming an "interested
merger, consolidation, stockholder," that corporation
recapitalization, liquidation or shall not engage in certain
sell or acquire substantial assets transactions, referred to as
outside the ordinary course of business combinations, with the
business without the affirmative interested stockholder for a
vote of at least 66 2/3% of the period of three years unless one
outstanding shares of the Ecrix of the following three exceptions
Preferred Stock. applies:
The Ecrix certificate of - the board of directors approved
incorporation provides that a the acquisition of stock or the
merger is a liquidation event for business combination prior to
all holders of each series of the time that the person became
Ecrix preferred stock. All holders an interested stockholder;
of each series of Ecrix preferred
stock have waived their - the person became an 85% owner
liquidation rights in connection of the voting stock of the
with the merger corporation in the transaction
which resulted in the person
becoming an interested
stockholder, excluding voting
stock owned by directors who
are also officers and certain
employee stock plans; or
- the business combination is
approved by the board of
directors and by the affirming
vote of two-thirds of the
outstanding voting stock which
is not owned by the interested
stockholder.
A Delaware corporation may elect
not to be governed by Section 203.
The Exabyte certificate of
incorporation provides that
Exabyte shall be governed by
Section 203.
Under Delaware law, Exabyte may
engage in a merger, consolidation,
liquidation or sale of
substantially all assets when
approved by a majority of the
outstanding stock entitled to vote
thereon. A recapitalization
requires the same vote of
stockholders and may also require
for approval the affirmative vote
of a majority of the outstanding
shares of a class of stock if the
recapitalization increases the
authorized shares of that class,
changes preferences of that class
or has certain other effects.
------------------------------------------------------------------------------------------------
</Table>
6-6
CHAPTER SIX
<Table>
<Caption>
------------------------------------------------------------------------------------------------
ECRIX STOCKHOLDER RIGHTS EXABYTE STOCKHOLDER RIGHTS
------------------------------------------------------------------------------------------------
Dissenters' Rights/ Under Delaware law, the rights of Under Delaware law, the rights of
Appraisal Rights dissenting stockholders to obtain dissenting stockholders to obtain
the fair value for their shares the fair value for their shares
(so-called "appraisal rights") may (so-called "appraisal rights") may
be available in connection with a be available in connection with a
statutory merger or consolidation statutory merger or consolidation
in certain specific situations. in certain specific situations.
Appraisal rights are not available Appraisal rights are not available
to a corporation's stockholders to a corporation's stockholders
under Delaware law when the under Delaware law when the
corporation is to be the surviving corporation is to be the surviving
corporation and no vote of its corporation and no vote of its
stockholders is required under stockholders is required under
Delaware law to approve the Delaware law to approve the
merger. merger.
Ecrix stockholders that dissent No appraisal rights are available
from the merger will be entitled to Exabyte stockholders in
to appraisal rights as a result of connection with the merger.
the merger with Exabyte.
In addition, unless otherwise
In addition, unless otherwise provided in the charter, no
provided in the charter, no appraisal rights are available
appraisal rights are available under Delaware law to holders of
under Delaware law to holders of shares of any class of stock which
shares of any class of stock which is either: (i) listed on a
is either: (i) listed on a national securities exchange or
national securities exchange or designated as a national market
designated as a national market system security on an interdealer
system security on an interdealer quotation system by the NASD; or
quotation system by the NASD; or (ii) held of record by more than
(ii) held of record by more than 2,000 stockholders unless such
2,000 stockholders unless such stockholders are required by the
stockholders are required by the terms of the merger to accept
terms of the merger to accept anything other than:
anything other than:
- shares of stock of the
- shares of stock of the surviving corporation;
surviving corporation;
- shares of stock of another
- shares of stock of another corporation which, as of the
corporation which, as of the effective date of the merger or
effective date of the merger or consolidation, are of the kind
consolidation, are of the kind described in items (i) or (ii)
described in items (i) or (ii) above;
above;
- cash instead of fractional
- cash instead of fractional shares of such stock; or
shares of such stock; or
- any combination of the above
- any combination of the above three bullets
three bullets
Appraisal rights are not available
Appraisal rights are not available under Delaware law in the event of
under Delaware law in the event of the sale of all or substantially
the sale of all or substantially all of a corporation's assets or
all of a corporation's assets or the adoption of an amendment to
the adoption of an amendment to its charter, unless such rights
its charter, unless such rights are granted in the corporation's
are granted in the corporation's charter. The Exabyte certificate
charter. The Ecrix certificate of of incorporation does not grant
incorporation does not grant such such rights.
rights.
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</Table>
6-7
CHAPTER SIX
<Table>
<Caption>
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ECRIX STOCKHOLDER RIGHTS EXABYTE STOCKHOLDER RIGHTS
------------------------------------------------------------------------------------------------
Limitation on The Ecrix certificate of The Exabyte certificate of
Personal Liability incorporation provides that a incorporation provides that a
of Directors director shall not be personally director shall not be personally
liable to the corporation or its liable to the corporation or its
stockholders for monetary damages stockholders for monetary damages
for any breach of fiduciary duty, for any breach of fiduciary duty,
except for liability: (i) for any except for liability: (i) for any
breach of the duty of loyalty; breach of the duty of loyalty;
(ii) for acts or omissions not in (ii) for acts or omissions not in
good faith or involving good faith or involving
intentional misconduct or illegal intentional misconduct or illegal
activity; (iii) for unlawful activity; (iii) for unlawful
payment of dividends or stock payment of dividends or stock
purchases or redemptions; or (iv) purchases or redemptions; or (iv)
for any transaction from which the for any transaction from which the
director received an improper director received an improper
personal benefit. In the event personal benefit.
that Delaware law is amended to
allow for further limitation on
potential personal liability of
directors, then liability of Ecrix
directors shall be further limited
in the same way.
------------------------------------------------------------------------------------------------
Stockholder Rights Ecrix does not have a stockholders Exabyte has implemented a
Plan rights plan. shareholder rights plan that may
be deemed to have an anti-takeover
effect and that may delay, defer
or prevent a change in control of
Exabyte or other transaction that
an Exabyte stockholder might
consider to be in its best
interest, including a transaction
that might result in a premium
over the market price for the
shares held by Exabyte
stockholders.
The preferred stock purchase
rights were distributed as a
dividend at the rate of one right
for each share of Exabyte common
stock held as of February 15,
1991. The Rights Plan is designed
to deter coercive or unfair
takeover tactics and to prevent an
acquiring entity from gaining
control of Exabyte without
offering a fair price to all of
Exabyte's stockholders. Each right
will entitle the holders of
Exabyte's common stock to purchase
one one-hundredth of a share of
preferred stock at an exercise
price of $75, subject to
adjustment in certain
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</Table>
6-8
CHAPTER SIX
<Table>
<Caption>
------------------------------------------------------------------------------------------------
ECRIX STOCKHOLDER RIGHTS EXABYTE STOCKHOLDER RIGHTS
------------------------------------------------------------------------------------------------
cases to prevent dilution. The
rights are not exercisable or
transferable apart from the common
stock until the earlier of ten
days after the date on which a
person or group has acquired
beneficial ownership of 20% or
more of the common stock (an
"Acquiring Person") or ten
business days after the public
announcement of the commencement
of a tender or exchange offer that
would result in the Acquiring
Person owning 20% or more of the
common stock. Further, when
exercisable, the rights generally
entitle each right holder (except
the Acquiring Person) to purchase,
at one-half of the then current
market price, that number of
shares of Exabyte's common stock
which equals the exercise price of
the right divided by one-half of
the then current market price of
the common stock if any person
becomes the beneficial owner of
20% or more of the common stock.
Currently, this right could result
in the right of stockholders to
purchase a number of shares of
Exabyte common stock far in excess
of Exabyte's authorized common
stock. If an Acquiring Person
purchases at least 20% of
Exabyte's common stock, but has
not acquired 50%, the Board of
Directors may exchange the rights
(except those of the Acquiring
Person) for one share of common
stock per right. In addition,
under certain circumstances, if
Exabyte is involved in a merger or
other business combination in
which Exabyte is not the surviving
corporation, the rights entitle
the holder to buy common stock of
the Acquiring Person with a market
value of twice the exercise price
of each right.
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</Table>
6-9
CHAPTER SIX
<Table>
<Caption>
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ECRIX STOCKHOLDER RIGHTS EXABYTE STOCKHOLDER RIGHTS
------------------------------------------------------------------------------------------------
Exabyte is generally entitled to
redeem the rights for $.01 per
right at any time until ten days
following a public announcement
that a 20% stock position has been
acquired and in certain other
circumstances. The rights, which
do not have voting rights, will
expire on February 15, 2002,
unless redeemed or exchanged
earlier by Exabyte pursuant to the
Rights Plan.
In connection with the merger, the
Exabyte Board adopted an amendment
to the rights agreement that
governs the shareholder rights
plan. This amendment excludes the
investors in Exabyte Series H
preferred stock so long as in the
aggregate they hold no more than
49.999% of the total common shares
(as defined in the plan)
outstanding or 20,000,000 shares
of Exabyte common stock, whichever
is greater; except that each
investor is deemed an acquiring
person if they hold, together with
their affiliates and associates,
25% of the outstanding common
shares in the case of Meritage,
and 20% of the outstanding common
shares in the case of any investor
other than Meritage.
For more detail on the Rights
Agreement, please see Chapter
Three -- Description of Exabyte
Stock beginning on page .
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</Table>
6-10
CHAPTER SEVEN
CHAPTER SEVEN -- ADDITIONAL EXABYTE MEETING PROPOSALS
EXABYTE'S AMENDMENTS TO RESTATED CERTIFICATE OF INCORPORATION
TO INCREASE AUTHORIZED CAPITAL
AMENDMENTS TO INCREASE AUTHORIZED STOCK
The proposal to increase the authorized stock of Exabyte consists of two
parts, each of which will be voted on separately by Exabyte's stockholders. The
first proposed amendment to Exabyte's Restated Certificate of Incorporation
would increase the number of authorized shares of common stock from 50 million
shares, $0.001 par value per share to 100 million shares. The second proposed
amendment to Exabyte's Restated Certificate of Incorporation would increase the
number of authorized shares of preferred stock from 14 million shares to 30
million shares. The additional shares of common stock would have rights
identical to the currently outstanding common stock. The additional shares of
preferred stock would be authorized but undesignated capital stock. The rights,
preferences and privileges of any series of such preferred stock would be
determined by the Board. The authorized common or preferred stock of Exabyte
would be available for issuance by the Board of Directors of Exabyte without
further stockholder action, unless the shares proposed to be issued are of any
class having a preference superior to the Series G and Series H preferred stock,
in which case approval of each of those series is required, or unless
stockholder action is required by Delaware law or the rules of any stock market
on which the common stock may then be listed or quoted. A copy of the proposed
amendment is attached to this document as Appendix D.
OUTSTANDING AND RESERVED COMMON STOCK
On August 31, 2001, 23,287,184 shares of common stock were issued and
outstanding, 7,051,360 shares were reserved for issuance upon exercise of
outstanding options, 5,033,353 shares were reserved for future grants under
existing stock option plans, 150,000 shares were reserved for issuance upon
exercise of outstanding warrants, 808,000 shares were reserved for issuance as
dividends on the Series G preferred stock when and as declared thereon, and 1.25
million shares were reserved for issuance upon conversion of the Series G
preferred stock. In addition, if the merger is consummated, approximately 10
million shares of common stock would be issued to the stockholders of Ecrix,
9.65 million shares of Series H preferred stock would be issued to the Series H
investors, 110,000 additional shares of Series H preferred stock would be
reserved for issuance to Broadview should they elect to convert principal and
interest under a promissory note, and 9.76 million shares of common stock would
be reserved for issuance upon the conversion of such Series H preferred stock.
(If the merger is not consummated, the lenders of the bridge loan can elect to
convert the principal and accrued interest of the bridge into common stock at
$.80 per share.) If the merger is consummated and the Series H preferred stock
is issued concurrently as contemplated by the merger agreement, without
effecting the reverse stock split proposed by Exabyte, Exabyte will have
outstanding 33,287,184 shares of its common stock and 24,052,714 shares of its
common stock reserved for future issuance, for a total of 57,339,898 shares.
This amount is in excess of the currently authorized shares, without taking into
account the proposed reverse stock split.
If the merger is consummated, the Series H stock is issued concurrently and
the maximum one-for-ten reverse stock split proposed by Exabyte is effected,
then Exabyte would have outstanding 3,328,718 shares of common stock and
2,405,271 shares of common stock reserved for future issuance for a total of
5,733,989 shares. This number is less than the currently authorized number of
shares because of the possible one-for-ten stock split. This total number of
outstanding and reserved shares would consist of the following, based on the
number of shares outstanding and reserved for future issuance as of August 31,
2001, 2,328,718 shares outstanding; 705,136 shares reserved for issuance upon
the exercise of outstanding options; 503,335 shares reserved for future grants
under existing stock option plans; 15,000 shares reserved for issuance upon the
exercise of outstanding warrants; 125,000 shares reserved for issuance upon the
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CHAPTER SEVEN
conversion of Series G preferred stock; 80,800 shares reserved for issuance as
dividends on the Series G preferred, 976,000 shares reserved for issuance upon
the conversion of Series H preferred stock (including 11,000 shares issuable in
the event up to 11,000 shares of Series H preferred stock are issued upon
conversion of a note to be issued to Broadview); and 1 million shares issued in
the merger.
OUTSTANDING AND RESERVED PREFERRED STOCK
In regard to the preferred stock of Exabyte, as of August 31, 2001, Exabyte
had outstanding 1.5 million shares of Series G preferred stock and had reserved
9.65 million shares of preferred stock to be issued in conjunction with the
merger, for a total of 11.15 million shares of preferred stock. Thus, Exabyte
has only approximately 2.85 million shares of preferred stock available for
future issuances. If the maximum one-for-ten reverse stock split is effected
prior to the merger, the number of shares of preferred stock to be issued
concurrently with the merger would be reduced from 9.65 million shares to
965,000 shares, and as a result Exabyte would have after the merger 2.465
million shares of preferred stock outstanding and 11.535 million shares of
preferred stock authorized and available for future issuances. (The reverse
stock split of the common stock does not change the number of outstanding shares
of preferred stock, but the merger agreement provides for an adjustment to the
number of shares of Series H preferred stock to be issued if the Exabyte stock
is combined or subdivided prior to the merger.)
REASONS FOR INCREASE IN AUTHORIZED STOCK
The Board believes that, if an up to 1:10 reverse stock split is not
effected, authorizing additional shares of common stock is essential to provide
sufficient authorized but unissued shares of common stock to meet Exabyte's
obligations to issue additional shares upon consummation of the merger and to
reserve sufficient shares for outstanding convertible preferred stock, options
and warrants. If the proposed reverse stock split is effected, then, depending
on the level of the reverse stock split, Exabyte would have sufficient
authorized shares of common stock for these purposes.
In any event, the Board of Directors of Exabyte believes that the
amendments to increase the authorized shares of common and preferred stock is
important because it provides Exabyte with the flexibility it needs to meet
business needs in the future and to take advantage of opportunities as they
arise. The proposed increase in the number of authorized shares would result in
additional shares being available for stock splits and stock dividends, stock
issuances for other corporate purposes, such as acquisitions of businesses or
assets, increases in shares reserved for issuance pursuant to employee benefit
plans, sales of stock or convertible securities for capital raising purposes,
and shares issuable under the current or any replacement shareholder rights
plan.
In addition to these purposes, the proposed amendment could have an
anti-takeover effect, although that is not our intention. For example, it may be
possible for the Board to delay or impede a takeover or transfer of control of
Exabyte by causing additional authorized shares to be issued to holders who
might side with the Board in opposing a takeover bid. The amendment, therefore,
may have the effect of discouraging unsolicited takeover attempts. By
potentially discouraging the initiation of takeover attempts, the proposed
amendment may limit the opportunity of our stockholders to dispose of their
shares at the higher price generally available in takeover attempts or that may
be available under a merger proposal. However, the Board is not aware of any
attempt or proposal to takeover or transfer control of Exabyte, and we are not
proposing this amendment with the intent that it be used as a type of
anti-takeover device.
Exabyte has adopted a stockholder rights agreement which is designed to
protect stockholders from takeovers at an inadequate price and other takeover
tactics by establishing specified rights to acquire shares of capital stock upon
the occurrence of certain events. Under that agreement, each outstanding common
stock has the potential right to purchase 1/100(th) of a share of preferred
stock. After the merger, this potential right will cover 332,872 shares of
preferred stock or, if the maximum one-for-ten reverse stock split is effected,
33,287 shares of preferred stock. If the rights under the plan are triggered by
a
7-2
CHAPTER SEVEN
stockholder becoming an acquiring person, Exabyte currently would be required to
issue a very large number of shares of common stock beyond the amount currently
authorized, primarily because of decreases in the market price of Exabyte's
common stock. The current stockholders rights agreement expires on February 15,
2002. The Board could consider at that time or earlier the extension of that
stockholders rights agreement or the replacement of it with a new stockholders
rights agreement. An increase in the authorized common stock as proposed by the
amendment, together with a reverse stock split, would not result in a sufficient
number of authorized shares of common stock for the current stockholders rights
agreement but would provide a significant number of authorized shares that could
be used if an amendment were made to the current stockholders rights agreement
or if a replacement stockholders rights agreement were adopted in the future by
the Board of Directors. Having an insufficient number of shares available could
result in a delay or failure of implementation of the rights agreement, while
increasing the authorized number of shares of common stock could make a change
of control of Exabyte more difficult by facilitating the operation of the
existing rights agreement, if it were to be amended, or a replacement rights
agreement. The Board of Directors of Exabyte has taken no action to amend the
existing stockholders rights agreement or to adopt a new stockholders rights
agreement. The Board could take these actions in the future without future
stockholder action.
Other than the merger transactions, Exabyte currently has no specific
plans, arrangements or understandings with respect to the issuance of the
additional shares, and no other change in the rights of stockholders is
proposed.
Approval of Proposal No. 2A and approval of approval of Proposal No. 2B
regarding the authorized capital stock of Exabyte are not a condition to the
approval of any other proposal. The approval of Proposal No. 2A is necessary to
have a sufficient number of shares of common stock for consummation of the
merger. If Proposal No. 3 regarding the reverse stock split is approved by the
stockholders and is implemented by the Board of Directors, then Proposal No. 2A
may or may not be necessary to have a sufficient number of shares of common
stock for the merger, depending upon what the ratio of any final reverse stock
split.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENTS TO THE RESTATED
CERTIFICATE OF INCORPORATION TO EFFECT TO INCREASE THE NUMBER OF SHARES OF
COMMON AND PREFERRED STOCK AUTHORIZED TO BE ISSUED BY EXABYTE.
REVERSE SPLIT OF EXABYTE'S OUTSTANDING COMMON STOCK
The Board has unanimously adopted a resolution approving and recommending
to the stockholders for their approval an amendment to Article 4 of our restated
certificate of incorporation effecting a reverse split of the outstanding shares
of our common stock on the basis of one post split share for up to each
presently outstanding ten shares. This means that if the reverse split is
effected you will be deemed to hold one share of Exabyte common stock for up to
every ten shares that you currently hold. A copy of the proposed amendment is
attached to this proxy statement as Appendix E.
Whether to actually effect the reverse stock split and the exact ratio of
the reverse stock split will be determined by Exabyte's Board of Directors at
its discretion based on the prevailing market conditions, what is believed by
the Board to be beneficial for Exabyte, and whether Exabyte's common stock has
maintained a minimum bid of $1.00 per share for ten consecutive trading days for
the reason explained below. The stockholders of Exabyte are being asked to
approve an amendment to the restated certificate of incorporation with the ratio
for the reverse stock split to be in the range from no change to one share for
more than one and up to 10 shares, and with the Board having the authority to
give its final approval to a specific ratio.
7-3
CHAPTER SEVEN
By approving the proposed reverse stock split, the stockholders will be
authorizing the Board of Directors to:
- determine the exact ratio of the reverse split so long as it is between
no change and up to one-for-ten;
and
- implement the reverse stock split at any time before May 15, 2002; or
- abandon the reverse stock split at any time prior to that date.
If the amendment to effect the reverse stock split has not been filed with the
Delaware Secretary of State by the close of business on May 15, 2002, the Board
of Directors will either resolicit stockholder approval or abandon the reverse
stock split.
REASONS FOR THE REVERSE STOCK SPLIT
Our primary purpose in recommending a reverse stock split is to increase
the trading price of our common stock to facilitate the continued listing of our
common stock for quotation on the Nasdaq National Market. In September 2001, we
received a notice form the Nasdaq National Market that our common stock would be
subject to delisting as a result of our failure to satisfy the $1.00 per share
minimum bid price requirement for 30 consecutive trading days, unless our common
stock has a bid price of at least $1.00 for at least 10 consecutive trading days
prior to December 3, 2001. Subsequent to that notice, Nasdaq announced it had
declared a temporary moratorium on delistings for failure to satisfy the minimum
bid price requirement. The Nasdaq moratorium ends on January 2, 2002. When
adopting the moratorium, Nasdaq stated that it would consider whether further
and more permanent action is appropriate. Nasdaq also stated that companies
currently under review would be taken out of the process, indicating that
Nasdaq's review of whether Exabyte has failed to meet the existing or any new
minimum bid requirements would start anew at the end of the moratorium.
Continued listing of our common stock on the Nasdaq National Market is a
condition to Ecrix's obligation to consummate the merger. If the reverse stock
split is not made effective in time to meet the Nasdaq National Market's
requirement of having a minimum bid of at least ten consecutive trading days,
Exabyte would plan to request a hearing regarding the possible delisting from
the Nasdaq National Market and present the reverse stock split as one of the
reasons for continued listing.
Since July 23, 2001, the closing price per share of our common stock on the
Nasdaq National Market has been less than $1.00 per share. The Board believes
that if the proposed amendment is approved and a reverse stock split is
effected, our stock price should increase to over the $1.00 per share minimum
bid price required currently to remain listed on Nasdaq National Market.
However, we cannot guarantee that even with the reverse stock split, we will
meet or maintain all of Nasdaq's continued listing criteria in the future, or
that the price for shares of our common stock after the reverse stock split will
increase in proportion to the ratio of the reverse stock split.
Delisting from the Nasdaq National Market would likely significantly
decrease the liquidity of Exabyte common stock, which could reduce the trading
price and increase the transaction costs of trading shares of our common stock.
If our common stock were delisted prior to consummation of the merger, Ecrix
would have the right to terminate the merger agreement.
POTENTIAL EFFECTS OF THE REVERSE STOCK SPLIT
The immediate effect of a reverse stock split would be to reduce the number
of shares of common stock outstanding and should be to increase the trading
price of our common stock. However, the effect of any reverse stock split upon
the market price of our common stock cannot be predicted, and the history of
reverse stock splits for companies in similar circumstances is varied. We cannot
assure you that the trading
7-4
CHAPTER SEVEN
price of our common stock after the reverse stock split will rise in exact
proportion to the reduction in the number of shares of our common stock
outstanding as a result of the reverse stock split. Also, as stated above, we
cannot assure you that a reverse stock split would lead to a sustained increase
in the trading price of our common stock, that the trading price would remain
above the thresholds required by Nasdaq, or that we will be able to continue to
meet the other continued listing requirements of Nasdaq. The trading price of
our common stock may change due to a variety of other factors, including our
operating results, other factors related to our business and general market
conditions.
The approximate number of shares of common stock that would be outstanding
as a result of the proposed reverse stock split, based on 23,287,184 shares of
common stock outstanding at August 31, 2001, would be as low as 2,328,718 if a
1:10 split were effected. If the merger is consummated as well as the reverse
stock split, the approximate number of common shares that would be outstanding
immediately after the merger, based on outstanding shares as of August 31, 2001,
and assuming the maximum 1:10 reverse stock split, would be 3,328,718 shares of
common stock. The resulting decrease in the number of shares of our common stock
outstanding could potentially impact the liquidity of our common stock on
Nasdaq, especially in the case of larger block trades.
The reverse stock split, if implemented, would not change the number of
authorized shares of common stock as designated by Exabyte's restated
certificate of incorporation. Therefore, because the number of issued and
outstanding shares of common stock would decrease, the number of shares
remaining available for issuance under Exabyte's authorized pool of common stock
would increase.
EFFECTS ON OWNERSHIP BY INDIVIDUAL STOCKHOLDERS. If we implement a reverse
stock split, the number of shares of common stock held by each stockholder would
be reduced by dividing the number of shares held immediately before the reverse
split by the number fixed for the reverse split by the Board of Directors, and
then rounding down to the nearest whole share. We will pay cash to each
stockholder in lieu of any fractional interest in a share to which such
stockholder would otherwise be entitled as a result of the reverse split, as
described in further detail below. The reverse stock split would affect our
common stock uniformly and would not affect any stockholder's percentage
ownership interests in Exabyte or proportionate voting power, except to the
extent that interests in fractional shares would be paid in cash.
EFFECT ON PREFERRED STOCK, OPTIONS, WARRANTS, CONVERTIBLE NOTES AND OTHER
SECURITIES. In addition, all the terms of outstanding shares of preferred
stock, options, warrants, convertible notes, and other securities of Exabyte
entitling their holders to purchase or convert into shares of our common stock
would be adjusted as a result of the reverse stock split, as required by the
terms of these securities. In particular, the conversion ratio for each security
would be reduced, and the exercise price for each security, as applicable, would
be increased, in accordance with the terms of such security. None of the other
rights currently accruing to holders of the common stock, preferred stock,
options, warrants, notes, or other securities convertible into common stock,
would be affected by the reverse stock split.
OTHER EFFECTS ON OUTSTANDING SHARES. If a reverse stock split is
implemented, the rights and preferences of the outstanding shares of common
stock would remain the same after the reverse stock split. Each share of common
stock issued pursuant to the reverse stock split would be fully paid and
nonassessable.
The reverse stock split would result in some stockholders owning "odd-lots"
of less than 100 shares of common stock. Brokerage commissions and other costs
of transactions in odd-lots may be higher than the costs of transactions in
"round-lots" of even multiples of 100 shares.
Our common stock is currently registered under Section 12(g) of the
Securities Exchange Act of 1934, as amended. As a result, we are subject to the
periodic reporting and other requirements of the Exchange Act. The proposed
reverse stock split would not affect the registration of the common stock under
the Exchange Act.
7-5
CHAPTER SEVEN
PROCEDURE FOR EFFECTING THE REVERSE STOCK SPLIT AND EXCHANGE OF STOCK
CERTIFICATES
If our stockholders approve the proposed amendment to our certificate of
incorporation, the reverse stock split would be implemented by a decision of the
Board of Directors to implement the reverse stock split, by a determination of
the Board of Directors regarding the exact ratio of the reverse split and by
filing the amendment to our certificate of incorporation with the Delaware
Secretary of State. The reverse stock split would become effective on the date
specified in the amendment.
As of the effective date of the reverse stock split, each certificate
representing shares of our common stock before the reverse stock split would be
deemed, for all corporate purposes, to evidence ownership of the reduced number
of shares of common stock resulting from the reverse stock split. All shares of
preferred stock, options, warrants, convertible debt instruments and other
securities also would be automatically adjusted on the effective date.
We expect that our transfer agent would act as the exchange agent for
purposes of implementing the exchange of stock certificates. As soon as
practicable after the effective date, stockholders and holders of securities
convertible into our common stock would be notified of the effectiveness of the
reverse split. Stockholders of record would receive a letter of transmittal
requesting them to surrender their stock certificates for stock certificates
reflecting the adjusted number of shares as a result of the reverse stock split.
Stockholders who hold their shares in brokerage accounts or "street name" would
not be required to take any further actions to effect the exchange of their
certificates. No new certificates would be issued to a stockholder until the
stockholder has surrendered the stockholder's outstanding certificate(s)
together with the properly completed and executed letter of transmittal to the
exchange agent. Until surrender, each certificate representing shares before the
reverse stock split would continue to be valid and would represent the adjusted
number of shares based on the exchange ratio of the reverse stock split, rounded
down to the nearest whole share. Stockholders should not destroy any stock
certificate and should not submit any certificates until they receive a letter
of transmittal.
FRACTIONAL SHARES
We would not issue fractional shares in connection with the reverse stock
split. Stockholders who otherwise would be entitled to receive fractional shares
because they hold a number of shares not evenly divisible by the exchange ratio
would instead receive cash upon surrender to the exchange agent of the
certificates and a properly completed and executed letter of transmittal. The
cash amount to be paid to each stockholder would be equal to the resulting
fractional interest in one share of our common stock to which the stockholder
would otherwise be entitled, multiplied by the closing trading price of our
common stock on the effective date of the reverse stock split.
ACCOUNTING CONSEQUENCES
The reverse stock split will not affect the par value of our common stock.
As a result, on the effective date of the reverse stock split, the common stock
account on our balance sheet will be reduced to 20% of its present amount, and
the capital in excess of par value account will be credited with the amount by
which the common stock account is reduced. The per share net income or loss and
net book value of our common stock will be increased because there will be fewer
shares of our common stock outstanding.
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material U.S. federal income tax consequences
of the reverse stock split to the shareholders of Exabyte and does not purport
to be complete. It does not discuss any state, local, foreign or minimum income
or other tax consequences, if any. Also, it does not address the tax
consequences to holders that are subject to special tax rules, including but not
limited to banks, insurance companies, regulated investment companies, personal
holding companies, foreign entities, nonresident alien individuals,
broker-dealers and tax-exempt entities. The discussion is based on the
provisions of the United
7-6
CHAPTER SEVEN
States federal income tax law as of the date hereof, which is subject to change
retroactively as well as prospectively. This summary also assumes that the
shares are held as a "capital asset," as defined in the Internal Revenue Code of
1986, as amended (generally, property held for investment is regarded as a
capital asset). The tax treatment of a stockholder may vary depending upon the
particular facts and circumstances of the stockholder. Each stockholder is urged
to consult with the stockholder's own tax advisor with respect to the
consequences of the reverse stock split.
Other than the cash payments made in exchange for fractional shares
discussed below, no gain or loss should be recognized by a stockholder upon the
stockholder's exchange of shares pursuant to the reverse stock split. The
aggregate tax basis of the shares received in the reverse stock split, including
any fraction of a share deemed to have been received, would be the same as the
stockholder's aggregate tax basis in the shares exchanged. Stockholders who
receive cash upon redemption of their fractional share interests in the shares
as a result of the reverse stock split should recognize gain or loss equal to
the difference, if any, between the amount of cash received and the
stockholder's adjusted basis in the fractional share interests redeemed. The
U.S. federal income tax liabilities generated by the receipt of cash in lieu of
a fractional interest should not be material in amount in view of the low value
of the fractional interest. The stockholder's holding period for the shares
received pursuant to the reverse stock split would include the period during
which the stockholder held the shares surrendered in the stock split.
Our beliefs regarding the tax consequence of the reverse stock split are
not binding upon the Internal Revenue Service or the courts, and there can be no
assurance that the Internal Revenue Service or the courts will accept the
positions expressed above. The state and local tax consequences of the reverse
stock split may vary significantly as to each stockholder, depending upon the
state in which he or she resides.
Approval of the other proposals presented to Exabyte stockholders is not a
condition to approval of this reverse split proposal. In addition, even if the
reverse split proposal is approved by our stockholders, the Board of Directors
may decide not to effect the reverse split if it determines that doing so is in
the best interests of Exabyte and its stockholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENT TO THE RESTATED
CERTIFICATE OF INCORPORATION TO EFFECT AN UP TO ONE-FOR-TEN REVERSE SPLIT OF THE
OUTSTANDING SHARES OF OUR COMMON STOCK.
7-7
CHAPTER EIGHT
CHAPTER EIGHT -- CERTAIN ADDITIONAL INFORMATION
STOCKHOLDER PROPOSALS
If you would like to present a proposal for possible inclusion in Exabyte's
proxy statement for the 2002 Annual Meeting of Stockholders, you must comply
with the requirements of Rule 14a-8 under the Securities Exchange Act of 1934,
as amended, including the requirement that we must receive it no later than
December 26, 2001. Similarly, to present director nominations or stockholder
proposals at the meeting, you must provide Exabyte with advance written notice,
as indicated in Exabyte's Bylaws, by December 26, 2001. Proposals or nominations
received after December 26, 2001 will be treated as untimely for purposes of
inclusion in our 2002 proxy statement. A copy of Exabyte's Bylaws is available
from the Corporate Secretary upon request.
EXPERTS
The Exabyte consolidated financial statements as of December 30, 2000 and
January 1, 2000 and for each of the three years in the period ended December 30,
2000 included in this proxy statement/ prospectus have been so included in
reliance on the report (which contains an explanatory paragraph relating to
Exabyte's ability to continue as a going concern as described in Note 1 to the
consolidated financial statements) of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The Ecrix financial statements as of February 28, 2001 and for each of the
two years in the period ended February 28, 2001 included in this proxy
statement/prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
Holland & Hart LLP will issue a legal opinion concerning the legality of
the Exabyte common stock to be issued to Ecrix stockholders. A copy of this
opinion has been filed as an exhibit to the proxy statement/registration
statement filed by Exabyte.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's website at http://www.sec.gov. You may also read and copy
any document we file with the SEC at the SEC's following public reference
facilities:
<Table>
Public Reference Room Chicago Regional Office
450 Fifth Street, N.W. Citicorp Center
Room 1024 500 West Madison Street
Washington, D.C. 20549 Suite 1400
Chicago, IL 60661-2511
</Table>
You may also obtain copies of the documents at prescribed rates by writing
to the Public Reference Room of the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on
the operations of the public reference facilities. Our SEC filings are also
available at the offices of the Nasdaq Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006.
8-1
CHAPTER EIGHT
Exabyte common stock is quoted on the Nasdaq Stock Market's National
Market, and, accordingly, reports, proxy statements and other information
regarding Exabyte may be inspected at:
The Nasdaq Stock Market
Nasdaq Regulatory Filings
9801 Washington Boulevard
5(th) Floor
Gaithersburg, MD 20878
Exabyte has filed a registration statement on Form S-4 under the Securities
Act with the SEC with respect to the Exabyte common stock to be issued in the
merger. This proxy statement/prospectus constitutes the prospectus of Exabyte
filed as part of the registration statement. Statements contained in this proxy
statement/prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference.
YOU SHOULD RELY ON THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS TO VOTE ON THE MERGER, THE MERGER AGREEMENT, AND THE
TRANSACTIONS CONTEMPLATED THEREIN. NEITHER EXABYTE NOR ECRIX HAS AUTHORIZED
ANYONE TO PROVIDE INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS. THIS PROXY STATEMENT/PROSPECTUS IS DATED OCTOBER 9,
2001. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY OTHER DATE, AND NEITHER THE MAILING
OF THIS PROXY STATEMENT/PROSPECTUS TO STOCKHOLDERS NOR THE ISSUANCE OF EXABYTE
COMMON STOCK SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
8-2
HISTORICAL FINANCIAL INFORMATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
EXABYTE FINANCIAL STATEMENTS................................ F-2
REPORT OF INDEPENDENT ACCOUNTANTS FOR EXABYTE............... F-2
Exabyte Corporation and Subsidiaries Consolidated Balance
Sheets.................................................... F-3
Exabyte Corporation and Subsidiaries Consolidated Statements
of Operations............................................. F-4
Exabyte Corporation and Subsidiaries Consolidated Statements
of Changes In Stockholders' Equity........................ F-5
Exabyte Corporation and Subsidiaries Consolidated Statements
of Cash Flows............................................. F-6
Exabyte Corporation and Subsidiaries Consolidated Statements
of Cash Flows............................................. F-7
Exabyte Corporation and Subsidiaries Notes to Consolidated
Financial Statements...................................... F-8
ECRIX CORPORATION FINANCIAL STATEMENTS...................... F-26
REPORT OF INDEPENDENT ACCOUNTANTS FOR ECRIX................. F-26
Ecrix Balance Sheets........................................ F-27
Ecrix Statements of Operations.............................. F-28
Ecrix Statements of Stockholders' Deficit................... F-29
Ecrix Statements of Cash Flows.............................. F-30
Ecrix Notes to Financial Statements......................... F-31
</Table>
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Exabyte Corporation
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Exabyte Corporation and its subsidiaries at January 1, 2000 and December 30,
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 30, 2000, in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule appearing under Item 21(b) on page
II-4 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and the financial statement schedule are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements and the financial statement schedule
based on our audits. We conducted our audits of these statements in accordance
with auditing standards generally accepted in the United States of America,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the financial statements, the Company has suffered recurring losses and
negative cash flows from operations and has an accumulated deficit of
$27,377,000 at December 30, 2000. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
------------------------------------------------------
PricewaterhouseCoopers LLP
Denver, Colorado
April 16, 2001
F-2
EXABYTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
JUNE 30,
JANUARY 1, DECEMBER 30, 2001
2000 2000 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA) ---------------------------------------
ASSETS
Current assets:
Cash and cash equivalents........................... $ 25,610 $ 3,159 $ 2,069
Short-term investments.............................. 7,039 90 90
Accounts receivable, net............................ 37,163 37,412 26,504
Inventories, net.................................... 26,805 40,143 31,769
Other current assets................................ 4,927 2,807 3,104
---------------------------------------
Total current assets.................................. 101,544 83,611 63,536
Property and equipment, net........................... 24,708 18,754 15,244
Other long-term assets................................ 1,024 1,427 1,121
---------------------------------------
$127,276 $103,792 $ 79,901
---------------------------------------
---------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, including book overdrafts of $0,
$2,343 and $1,085 (unaudited), respectively...... $ 23,327 $ 26,944 $ 23,889
Accrued liabilities................................. 13,815 14,557 10,297
Accrued income taxes................................ 1,877 633 617
Line of credit...................................... -- 12,307 14,337
Current portion of long-term obligations............ 2,931 2,147 2,070
---------------------------------------
Total current liabilities............................. 41,950 56,588 51,210
Long-term liabilities:
Warranties.......................................... 5,658 6,679 8,182
Other long-term obligations......................... 912 1,467 1,215
Commitments and contingencies (Notes 7, 11 and 12)
Stockholders' equity:
Preferred stock, No Series; $.001 par value;
12,000 shares authorized; no shares issued and
outstanding.................................... -- -- --
Preferred Stock; Series A; $0.001 par value; 500
shares authorized; no shares issued and
outstanding.................................... -- -- --
Convertible Preferred Stock; Series G; $0.001 par
value; 1,500 shares authorized; no and no and
1,500 shares issued, respectively; $3,056,000
aggregate liquidation preference (unaudited)... -- -- 2
Common stock, $.001 par value; 50,000 shares
authorized; 22,886, 23,234 and 23,289 (unaudited)
shares issued.................................... 23 23 23
Capital in excess of par value...................... 67,584 69,154 72,197
Treasury stock, at cost, 455 shares................. (2,742) (2,742) (2,742)
Retained earnings (accumulated deficit)............. 13,891 (27,377) (50,186)
---------------------------------------
Total stockholders' equity............................ 78,756 39,058 19,294
---------------------------------------
$127,276 $103,792 $ 79,901
---------------------------------------
---------------------------------------
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
EXABYTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEARS ENDED (UNAUDITED)
----------------------------------------------------
------------------------------ -------------------
JAN. 2, JAN. 1, DEC. 30, JUL. 1, JUN. 30,
1999 2000 2000 2000 2001
----------------------------------------------------
Net sales................................... $286,505 $222,827 $221,742 $100,890 $ 88,464
Cost of goods sold.......................... 207,604 182,875 172,085 77,391 76,721
----------------------------------------------------
Gross profit................................ 78,901 39,952 49,657 23,499 11,743
Operating expenses:
Selling, general and administrative......... 56,978 56,650 54,709 27,237 20,846
Research and development.................... 29,888 35,725 36,530 19,726 14,192
----------------------------------------------------
Loss from operations........................ (7,965) (52,423) (41,582) (23,464) (23,295)
Other income (expense):
Gain from sale of investment.............. -- -- -- -- 1,719
Interest income........................... 2,393 2,646 1,056 561 56
Interest expense.......................... (607) (477) (686) (196) (914)
Other..................................... 30 (934) (1,212) 73 16
----------------------------------------------------
Loss before income taxes.................... (6,149) (51,188) (42,424) (23,026) (22,418)
(Provision for) benefit from income taxes... 3,382 (37,219) 1,570 (191) (48)
Equity interest in net loss of investee..... -- -- (414) -- (343)
----------------------------------------------------
Net loss.................................... $ (2,767) $(88,407) $(41,268) $(23,217) $(22,809)
====================================================
Basic and diluted net loss per share........ $ (0.12) $ (3.97) $ (1.83) $ (1.03) $ (1.00)
====================================================
Common shares used in the calculation of
basic and diluted net loss per share...... 22,285 22,256 22,560 22,480 22,783
====================================================
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
EXABYTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except per share data)
<Table>
<Caption>
PREFERRED COMMON RETAINED
STOCK STOCK CAPITAL IN TREASURY STOCK EARNINGS
------------------------------ EXCESS OF ---------------- (ACCUM.
SHARES AMT. SHARES AMT. PAR VALUE SHARES AMT. DEFICIT)
-------------------------------------------------------------------------
Balance, January 3, 1998..... -- $ -- 22,466 $22 $65,718 (15) $ (9) $105,065
Common stock options
exercised ($.50 to $9.00
per share)................. -- -- 19 -- 94 -- -- --
Common stock issued pursuant
to the Employee Stock
Purchase Plan ($4.68 and
$5.95 per share)........... -- -- 162 1 853 -- -- --
Tax effect of disqualifying
dispositions of common
stock...................... -- -- -- -- 28 -- -- --
Purchases of treasury
stock...................... -- -- -- -- -- (440) (2,733) --
Net loss..................... -- -- -- -- -- -- -- (2,767)
-------------------------------------------------------------------------
Balance, January 2, 1999..... -- -- 22,647 23 66,693 (455) (2,742) 102,298
Common stock options
exercised ($1.00 to $6.81
per share)................. -- -- 33 -- 202 -- -- --
Common stock issued pursuant
to the Employee Stock
Purchase Plan ($3.30 and
$3.40 per share)........... -- -- 206 -- 689 -- -- --
Net loss..................... -- -- -- -- -- -- -- (88,407)
-------------------------------------------------------------------------
Balance, January 1, 2000..... -- -- 22,886 23 67,584 (455) (2,742) 13,891
Common stock options
exercised ($3.97 to $9.00
per share)................. -- -- 143 -- 880 -- -- --
Common stock issued pursuant
to the Employee Stock
Purchase Plan ($2.92 to
$3.83 per share)........... -- -- 205 -- 690 -- -- --
Net loss..................... -- -- -- -- -- -- -- (41,268)
-------------------------------------------------------------------------
Balance, December 30, 2000... -- -- 23,234 23 69,154 (455) (2,742) (27,377)
Common stock issued pursuant
to the Employee Stock
Purchase Plan ($0.82 per
share) (unaudited)......... -- -- 55 -- 44 -- -- --
Preferred stock issued ($2.00
per share) (unaudited)..... 1,500 2 -- -- 2,999 -- -- --
Net loss (unaudited)......... -- -- -- -- -- -- -- (22,809)
-------------------------------------------------------------------------
Balance, June 30, 2001
(unaudited)................ 1,500 $ 2 23,289 $23 $72,197 (455) $(2,742) $(50,186)
=========================================================================
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
EXABYTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEARS ENDED (UNAUDITED)
---------------------------------------------------------
JAN. 2, JAN. 1, DEC. 30, JUL. 1, JUN. 30,
1999 2000 2000 2000 2001
---------------------------------------------------------
Cash flows from operating activities:
Cash received from customers......... $ 291,422 $ 223,624 $ 221,550 $ 112,434 $ 99,588
Cash paid to suppliers and
employees......................... (269,301) (249,910) (258,653) (127,906) (103,583)
Interest received.................... 2,314 2,628 1,223 718 59
Interest paid........................ (607) (477) (686) (196) (913)
Income taxes paid.................... (1,093) (297) (111) (106) (62)
Income tax refund received........... 11,771 663 1,865 149 --
---------------------------------------------------------
Net cash (used) provided by
operating activities............ 34,506 (23,769) (34,812) (14,907) (4,911)
---------------------------------------------------------
Cash flows from investing activities:
Purchase of short-term investments... (69,275) (41,000) (2,051) (2,051) --
Proceeds from the sale of short-term
investments....................... 56,600 48,106 9,000 9,000 1,719
Capital expenditures................. (9,414) (11,002) (9,456) (5,006) (1,226)
Proceeds from the sale of fixed
assets............................ -- -- 734 -- 11
---------------------------------------------------------
Net cash provided (used) by
investing activities............ (22,089) (3,896) (1,773) 1,943 504
---------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of
stock............................. 948 891 1,570 753 --
Purchase of treasury stock........... (2,733) -- -- -- 3,045
Cash overdraft....................... -- -- 2,343 -- (1,258)
Borrowings under line of credit...... -- -- 87,345 -- 104,787
Payments under line of credit........ -- -- (75,038) -- (102,757)
Principal payments on long-term
obligations....................... (1,075) (4,187) (2,086) (952) (500)
---------------------------------------------------------
Net cash provided (used) by
financing activities............ (2,860) (3,296) 14,134 (199) 3,317
---------------------------------------------------------
Net (decrease) increase in cash and
cash equivalents..................... 9,557 (30,961) (22,451) (13,163) (1,090)
---------------------------------------------------------
Cash and cash equivalents at beginning
of year.............................. 47,014 56,571 25,610 25,610 3,159
---------------------------------------------------------
Cash and cash equivalents at end of
year................................. $ 56,571 $ 25,610 $ 3,159 $ 12,447 $ 2,069
---------------------------------------------------------
---------------------------------------------------------
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
EXABYTE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<Table>
<Caption>
SIX MONTHS ENDED
FISCAL YEARS ENDED (UNAUDITED)
----------------------------------------------------
JAN. 2, JAN. 1, DEC. 30, JUL. 1, JUN. 30,
1999 2000 2000 2000 2001
----------------------------------------------------
Reconciliation of net loss to net cash
(used) provided by operating activities:
Net loss.................................. $ (2,767) $(88,407) $(41,268) $(23,217) $(22,809)
Adjustments to reconcile net loss to net
cash (used) provided by operating
activities:
Depreciation, amortization and other... 16,619 15,648 14,281 6,734 4,727
Net liabilities assumed by equity
investee............................. -- -- 1,715 -- --
Write-down of assets................... 1,961 -- 1,459 -- --
Deferred income tax provision
(benefit)............................ (7,367) 36,945 -- -- --
Provision for losses and reserves on
accounts receivable.................. 8,521 6,666 6,429 1,925 468
Equity in loss of investee............. -- -- 414 -- 343
Gain on sale of investment investee.... -- -- -- -- (1,719)
Change in assets and liabilities:
Accounts receivable....................... (4,958) (5,815) (6,679) 9,695 10,439
Inventories, net.......................... 17,554 192 (14,592) (4,113) 8,374
Income tax receivable..................... 13,310 1,132 1,428 -- --
Other current assets...................... 1,566 804 691 257 (297)
Other assets.............................. (43) 15 (60) (564) (37)
Accounts payable.......................... 2,040 7,295 1,274 (7,824) (1,797)
Accrued liabilities....................... (11,944) (187) 742 (223) (4,260)
Accrued income taxes...................... 1,353 (493) (2,661) 422 (16)
Other long-term obligations............... (1,339) 2,436 2,015 2,001 1,673
----------------------------------------------------
Net cash (used) provided by operating
activities............................. $ 34,506 $(23,769) $(34,812) $(14,907) $ (4,911)
====================================================
Supplemental schedule of non-cash
Investing and financing activities:
Notes payable issued to purchase property
and equipment and services............. $ 1,102 $ 2,092 $ -- $ -- $ --
Income tax benefit of disqualifying
dispositions of common stock........... 28 -- -- -- --
Capital lease obligations................. 904 -- 929 599 --
</Table>
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
EXABYTE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Exabyte Corporation ("Exabyte" or the "Company") was incorporated on June
5, 1985 under the laws of the state of Delaware. Exabyte designs, manufactures
and markets a full range of 8mm and MammothTape(TM) tape drives as well as 8mm,
MammothTape(TM), DLTtape(TM), AIT, and LTO(TM) Ultrium(TM) automated tape
libraries. Exabyte also provides its own brand of recording media and provides
worldwide service and customer support to its customers and end users. The
Company reports its results of operations on the basis of a fiscal year of 52 or
53 weeks ending on the Saturday closest to December 31. There were 52 weeks in
all years presented.
The interim financial data as of June 30, 2001 and for the six months ended
July 1, 2000 and June 30, 2001 is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results for the
interim periods.
Financial Condition
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has incurred losses of
$2.8 million, $88.4 million and $41.3 million in fiscal 1998, 1999, and 2000,
respectively, and $22.8 million for the six months ended June 30, 2001; negative
cash flows from operations of $23.8 million and $34.8 million in fiscal 1999 and
2000, respectively, and $4.9 million for the six months ended June 30, 2001; and
has an accumulated deficit of $50.2 million as of June 30, 2001. The losses
incurred in 2000 and 2001 are attributed to continued revenue shortfalls from
the Company's business operating plan, primarily in drives and media, resulting
in a build up of inventories and creating liquidity constraints. Additionally,
as of June 30, 2001, the Company had only $1.9 million of remaining borrowing
capacity under its line of credit. This amount changes daily based upon the
levels of the underlying inventory and receivables.
Subsequent to December 30, 2000, the Company was in violation of the
tangible net worth covenant of the line of credit agreement. See Note 15.
The above factors raise substantial doubt about whether the Company can
continue as a going concern. Therefore, the Company is currently reassessing its
business and investigating various strategic alternatives that would result in
increased liquidity. These alternatives may include one or more of the
following:
- sale of all or part of our operating and off-balance sheet assets;
- restructuring of current operations;
- additional equity infusions
The Company will continue to explore these and other options that would
provide additional capital for longer-term objectives and operating needs. It
will be necessary for the Company to take one or more of these actions in order
to have sufficient funds to support its operations. Should the Company not be
successful in achieving one or more of these actions, it is possible that the
Company may not be able to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. See Notes 14 and 15.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated.
F-8
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sales price is fixed or determinable, and
collectibility is probable. Generally, these criteria are met upon shipment of
products and transfer of title to customers. Revenue from sales to certain
resellers is subject to agreements allowing certain rights of return and price
protection on unsold merchandise held by those resellers. Accordingly, reserves
for estimated future returns and for price protection are provided in the period
of the sale. Revenue for out-of-warranty service repairs is recorded when the
service has been performed and the product has been shipped back to the
customer. Revenue for on-site warranty contracts is deferred and amortized on a
straight-line basis over the contract period. Certain original equipment
manufacturers ("OEM's") require that we maintain inventory at third party
warehouses. Revenue for these sales are recorded when title passes, upon the OEM
taking possession of the inventory from the warehouse.
Foreign Currency Transactions and Remeasurement
The U.S. dollar is the functional currency of the consolidated corporation
including its subsidiaries. For the Company's foreign subsidiaries, monetary
assets and liabilities are remeasured into U.S. dollars using the exchange rates
in effect at the balance sheet date and non-monetary assets are remeasured at
historical rates. Results of operations are remeasured using the average
exchange rates during the period. The Company recorded net foreign exchange
losses related to these remeasurements of $230,000, $207,000 and $860,000 in
1998, 1999 and 2000, respectively. From time to time, the Company enters into
transactions that are denominated in foreign currencies. These transactions are
translated at the prevailing spot rate upon payment and recorded in the
operating account to which the payment relates. Accounts receivable and payable
from subsidiaries denominated in foreign currencies are translated at each
period end using period end rates and transaction gains and losses are recorded.
The Company recorded net foreign exchange (gains) losses related to these
transactions of $(36,000), $686,000 and $1,164,000 in 1998, 1999 and 2000,
respectively.
Foreign Currency Forward Contracts
Through 1998, the Company entered into foreign currency forward contracts
in anticipation of movements in the dollar/yen exchange rate, which it used to
hedge the purchase of certain inventory components from Japanese manufacturers.
The Company did not enter into these contracts for trading purposes. Contracts
were generally established with a maturity date within six months of the
purchase date. Hedged inventory transactions were included in the Statement of
Cash Flows as operating activities. Transaction gains or losses due to exchange
rate movements were recorded upon settlement of the transaction, deferred into
inventory, and recognized in income as the underlying inventory was sold.
Since 1998, the Company has not entered into any foreign currency forward
contracts or other derivative instruments to hedge inventory transactions.
Accordingly, there were no such instruments outstanding at December 30, 2000 and
January 1, 2000.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, short-term investments,
accounts receivable, accounts payable, accrued liabilities, borrowings under the
Company's line of credit and the current portion of long-term obligations in the
consolidated financial statements approximate fair value because of the
short-term maturity of these instruments. The fair value of long-term
obligations for notes payable and capital leases was estimated by discounting
the future cash flows using market interest rates and does not differ
significantly from the amounts reflected in the consolidated financial
statements.
F-9
Comprehensive Income
The Company has no items of comprehensive income.
Concentration of Credit Risk
The Company's customers include OEMs, resellers and end users. Financial
instruments which potentially subject the Company to concentrations of credit
risk are primarily accounts receivable, cash equivalents and short-term
investments. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
At January 1, 2000 and December 30, 2000, one customer accounted for
approximately 21% and 27%, respectively, of net accounts receivable. Another
customer accounted for 15% and 18%, respectively, of net accounts receivable at
January 1, 2000 and December 30, 2000. At December 30, 2000, a third customer
accounted for 11% of net accounts receivable. At January 1, 2000, a fourth
customer accounted for 10% of net accounts receivable. No other customers
accounted for 10% or more of net accounts receivable at year-end for the two
years presented. Accounts receivable are summarized as follows:
<Table>
<Caption>
JANUARY 1, DECEMBER 30, JUNE 30,
2000 2000 2001
---------------------------------------
(UNAUDITED)
(In thousands)
Accounts receivable..................... $45,018 $44,825 $31,170
Less: reserves and allowance for
non-collection........................ (7,855) (7,413) (4,666)
---------------------------------------
$37,163 $37,412 $26,504
=======================================
</Table>
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Such cash
equivalents aggregated $18,797,000 at January 1, 2000. There were no such cash
equivalents at December 30, 2000.
The Company periodically invests in held-to-maturity debt securities, which
are recorded at amortized cost. These include corporate bonds, government bonds
and certificates of deposit. At January 1, 2000 and December 30, 2000, these
investments had maturity dates of ten months or less. There were no unrealized
gains or losses on such investments for the three years ended December 30, 2000.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined by the first-in, first-out method, and include material, labor and
manufacturing overhead. Inventories are presented net of reserves for excess
quantities and obsolescence of $9,569,000 and $7,301,000 at January 1, 2000 and
December 30, 2000, respectively, and consist of the following:
<Table>
<Caption>
JANUARY 1, DECEMBER 30, JUNE 30,
2000 2000 2001
---------------------------------------
(UNAUDITED)
(In thousands)
Raw materials and component parts....... $15,694 $23,361 $21,258
Work-in-process......................... 1,874 1,817 1,170
Finished goods.......................... 9,237 14,965 9,341
---------------------------------------
$26,805 $40,143 $31,769
=======================================
</Table>
F-10
Depreciation and Amortization
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the respective
depreciable assets. Software, computers, furniture and machinery/equipment are
depreciated over three years. Leasehold improvements are amortized on a
straight-line basis over the useful life of the asset or the lease term (three
to twelve years). Maintenance and repairs are expensed as incurred and
improvements are capitalized.
The Company continually evaluates long-lived assets, based on the net
future cash flow expected to be generated from the asset on an undiscounted cash
flow basis, whenever significant events or changes in circumstances occur which
indicate the carrying amount may not be recoverable. If that analysis indicates
that an impairment has occurred, we measure the impairment based on a comparison
of discounted cash flows or fair values, whichever is more readily determinable,
to the carrying value of the related asset.
Warranty Costs
A provision for estimated future costs which may be incurred under the
Company's various product warranties is recorded when products are shipped.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense was
$7,626,000, $4,243,000 and $4,830,000 in 1998, 1999 and 2000, respectively.
Research and Development Costs
All research and development costs are expensed as incurred.
Net Income (Loss) Per Share
Basic net income (loss) per common share is based on the weighted-average
number of shares of common stock outstanding during each respective period.
Diluted net income (loss) per common share adds to basic weighted shares the
weighted-average number of shares of potential common shares (dilutive stock
options) outstanding during each respective period. Proceeds from the exercise
of the potential common shares are assumed to be used to repurchase outstanding
shares of the Company's common stock at the average fair market value during the
period. In a period in which a loss is incurred, only the weighted-average
number of common shares is used to compute the diluted loss per share, as the
inclusion of potential common shares would be anti-dilutive. In all years
presented, basic shares equal diluted shares because inclusion of potential
common shares would be anti-dilutive.
Options to purchase 2,742,000, 2,941,000 and 3,371,000 shares of common
stock were excluded from dilutive stock option calculations for 1998, 1999 and
2000, respectively, because their exercise prices were greater than the average
fair market value of the Company's stock for the period, and as such they would
be anti-dilutive.
In addition, for 1998, 1999 and 2000, options to purchase 1,102,000,
1,099,000, and 1,249,000 shares of common stock, respectively, were excluded
from the diluted computation above because of their anti-dilutive effect on net
loss per share. Inclusion of these shares would have resulted in additional
dilutive stock options outstanding of 117,000, 45,000, and 300,000,
respectively.
The assumed conversion of Series G preferred stock into 1,250,000 shares of
common stock and accumulated preferred stock dividends of 28,000 shares of
common stock through June 30, 2001 have been excluded from the calculation of
diluted earnings per share for the first six months of 2001, as inclusion would
be antidilutive.
Since December 30, 2000, the Company has issued 5,341,000 stock options
with exercise prices between $0.74 and $2.59, which could have a dilutive effect
on future diluted net income per common share.
F-11
Use of Estimates
The Company has prepared these financial statements in conformity with
generally accepted accounting principles which require the use of management's
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities, as well as the reported
amounts of revenue and expenses. Accordingly, actual results could differ from
the estimates used.
Reclassifications
Certain reclassifications have been made to historical information to
correspond to the 2000 financial statement presentation.
New Accounting Pronouncements
In June of 1998 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and for Hedging Activities" ("SFAS 133"). SFAS 133, as amended,
requires the Company to recognize all derivatives on the balance sheet at fair
value. The gains or losses resulting from changes in the fair value of
derivative instruments will either be recognized in current earnings or in other
comprehensive income, depending on the use of the derivative and whether the
hedging instrument is effective or ineffective when the hedging instrument
changes in fair value. The Company will adopt SFAS No. 133 effective for the
first quarter 2001. Management anticipates that the adoption of SFAS No. 133, as
amended, will not have a future material impact on its consolidated financial
position, results of operations, or cash flows as it does not currently
anticipate entering into derivative instruments.
In June of 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141, "Business Combinations"
("FAS 141") and Statement of Financial Accounting Standard No. 142, "Goodwill
and Other Intangible Assets" ("FAS 142").
FAS 141 requires that all purchase business combinations must be accounted
for using the purchase method. Under this method, the purchase price of an
acquired business is allocated to the individual tangible and intangible assets
acquired and liabilities assumed based upon the estimated fair values at the
date of acquisition. If the purchase price exceeds the amounts assigned to
assets acquired and liabilities assumed, the excess is recognized as goodwill.
After initial recognition, goodwill and intangible assets acquired in the
business combination must be accounted for under FAS 142. FAS 141 is effective
for the Company for all business combinations initiated after June 30, 2001. The
Company believes that, once effective, this bulletin will not have a material
impact on the Company's consolidated results of operations.
FAS 142 requires that after a company allocates the purchase price in
accordance with FAS 141, the assets acquired, liabilities assumed, and goodwill
must be assigned to one or more reporting units based upon certain criteria
outlined in FAS 142. In addition, goodwill will no longer be amortized. Instead,
companies are required to test goodwill for impairment at the reporting unit
level by (1) determining the fair values of the reporting units and comparing
them with their carrying values and (2) if the fair value of a reporting unit is
less than its carrying amount, measure the amount of impairment loss, if any, by
comparing the implied fair value of reporting unit goodwill with the carrying
amount of that goodwill. If the carrying amount of reporting unit goodwill
exceeds its implied fair value, that excess should be recognized as an
impairment loss. FAS 142 is effective for the Company for any goodwill acquired
in a business combination entered into after June 30, 2001. The remaining
provisions of the Statement are effective for the year ending December 31, 2002.
The Company believes that, once effective, this bulletin will not have a
material impact on the Company's consolidated results of operations.
F-12
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<Table>
<Caption>
JANUARY 1, DECEMBER 30, JUNE 30,
2000 2000 2001
---------------------------------------
(In thousands) (UNAUDITED)
$ 108,056 $ 69,880
Equipment and furniture................. $ 69,904
1,826 2,599
Equipment under capital leases.......... 2,599
17,572 20,869
Leasehold improvements.................. 20,863
Less: accumulated depreciation and (102,746) (74,594)
amortization.......................... (78,122)
---------------------------------------
$ 24,708 $ 18,754 $ 15,244
=======================================
</Table>
Depreciation expense was $16,619,000, $15,583,000 and $12,834,000 in 1998,
1999 and 2000, respectively. Accumulated amortization of equipment under capital
leases was $1,446,000 and $1,799,000 at January 1, 2000 and December 30, 2000,
respectively. Amortization of equipment under capital leases is included in
depreciation expense. In 2000, the Company incurred restructuring charges, which
included fixed asset write-downs (see Note 11).
NOTE 3 -- ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<Table>
<Caption>
JANUARY 1, DECEMBER 30, JUNE 30,
2000 2000 2001
---------------------------------------
(In thousands) (UNAUDITED)
$ 6,083 $ 7,610
Wages and employee benefits................ $ 4,815
3,536 2,676
Warranty costs, current portion............ 3,416
4,196 4,271
Other...................................... 2,066
---------------------------------------
$13,815 $14,557 $10,297
=======================================
</Table>
NOTE 4 -- DEBT
Line of Credit
In May 2000, the Company entered into a new bank line of credit agreement
with Congress Financial Corporation ("Congress"), a subsidiary of First Union
Bank Corporation which expires May 16, 2003. Originally, this agreement allowed
borrowings up to the lesser of 80% of eligible accounts receivable or $20.0
million. In February 2001, this agreement was amended to increase the borrowing
limit to $25.0 million. This amendment also added 25% of eligible finished goods
inventory to the borrowing base. On the date of the amendment of the line, the
overall amount available to borrow was $19.6 million. This amount changes daily
based upon the levels of the underlying inventories and accounts receivable.
Eligible accounts receivable excludes invoices greater than 60 days past due,
some foreign receivables and other items identified in the agreement. Eligible
finished goods inventory excludes slow moving inventory and other items
identified in the agreement. Collateral for this agreement includes accounts
receivable and inventory, as well as certain off balance sheet assets.
Borrowings under the line of credit bear interest at the lower of the
bank's prime rate +1% or "LIBOR" + 3%. Offsetting the amount available under the
line of credit is a letter of credit, which collateralizes certain leasehold
improvements made by the Company's subsidiary in Germany. This letter is
currently for DM 900,000 and decreases by DM 100,000 in August of each year
until it is fully depleted.
The line of credit prohibits the payment of dividends without prior bank
approval, has a minimum net worth covenant, and contains certain other
covenants. The agreement contains certain acceleration clauses
F-13
that may cause all outstanding amounts to become immediately due in the event of
default. As of December 30, 2000, $12,307,000 in borrowings were outstanding and
the Company had $7,693,000 of remaining borrowing capacity. As of June 30, 2001,
the Company was in violation of the tangible net worth covenant of the line of
credit agreement. The lender subsequently agreed to waive this past event of
default and amend the tangible net worth covenants. See Note 14.
Long-Term Obligations
In 1999 and 1998, the Company entered into notes payable for $2,092,000 and
$1,102,000, respectively to finance the purchase of certain equipment, computer
software and services. The 1999 note payable requires quarterly installments of
interest (7.2%) and principal through April 2001. The 1998 note payable requires
monthly installments of interest (7.7%) and principal through January 2001 and
is collateralized by the respective equipment. The Company has also entered into
capital lease obligations related to the acquisition of certain equipment. Other
long-term obligations also include the long-term portion of estimated warranty
obligations and deferred revenue on on-site warranty contracts.
The following represents future payments pursuant to these obligations as
of December 30, 2000:
<Table>
<Caption>
CAPITAL
NOTES LEASE DEFERRED
WARRANTY PAYABLE OBLIGATIONS REVENUE OTHER TOTAL
(In thousands) ---------------------------------------------------------------
2001......................... $ -- $ 297 $ 397 $ 1,505 $-- $ 2,199
2002......................... 2,056 -- 297 416 40 2,809
2003......................... 4,623 -- 118 133 -- 4,874
2004......................... -- -- 84 63 -- 147
2005......................... -- -- 42 62 -- 104
Thereafter................... -- -- -- 273 -- 273
--------------------------------------------------------------
6,679 297 938 2,452 40 10,406
Less: amount representing
interest................... -- (5) (108) -- -- (113)
--------------------------------------------------------------
Present value of payments.... 6,679 292 830 2,452 40 10,293
Less: current portion........ -- (292) (350) (1,505) -- (2,147)
--------------------------------------------------------------
$6,679 $ -- $ 480 $ 947 $40 $ 8,146
==============================================================
</Table>
Interest expense aggregated $607,000, $477,000 and $686,000 in 1998, 1999
and 2000, respectively.
NOTE 5 -- CAPITAL STOCK AND STOCK COMPENSATION PLANS
At December 30, 2000, the Company had three stock-based compensation plans.
The Company applies APB Opinion 25 and related interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized for options
granted at fair market value under its fixed stock option plans and its stock
purchase plan. Had compensation cost for the Company's three stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those
F-14
plans consistent with the method of FASB Statement 123, the Company's pro forma
results of operations and pro forma net loss per share would have been as
follows:
<Table>
<Caption>
1998 1999 2000
-----------------------------
(In thousands, except per share data)
Net loss:
As reported............................................... $(2,767) $(88,407) $(41,268)
Pro forma................................................. $(5,929) $(90,558) $(44,634)
Basic and diluted net loss per share:
As reported............................................... $ (0.12) $ (3.97) $ (1.83)
Pro forma................................................. $ (0.27) $ (4.07) $ (1.98)
</Table>
In all years presented, basic loss per share equals diluted loss per share
because inclusion of potential common shares would be anti-dilutive due to the
Company's net losses.
FIXED STOCK OPTION PLANS
Under the Incentive Stock Plan, the Company may grant options to its
employees and directors for up to 9,500,000 shares of common stock. Under the
1997 Non-Officer Stock Option Plan, the Company may grant options to its
employees (who are not officers or directors) for up to 5,000,000 shares of
common stock. Under both plans, options are granted at an exercise price not
less than the fair market value of the stock on the date of grant. The options
vest over periods up to 50 months and expire 10 years after the date of grant,
except in the event of the termination or death of the employee, whereupon
vested shares must be exercised within 90 days or six months, respectively, or
they are canceled.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<Table>
<Caption>
1998 1999 2000
---------------------------------
Estimated dividends...................................... none none none
Expected volatility...................................... 57% 57% 76%
Risk-free interest rate.................................. 4.4%-5.9% 4.7%-6.6% 5.6%-6.8%
Expected life from vest date (years)..................... 0.29 0.28 0.32
</Table>
A summary of the status of the Company's fixed stock option plans as of
January 2, 1999, January 1, 2000, and December 30, 2000, and changes during the
years then ended is presented as follows:
<Table>
<Caption>
1998 1999 2000
------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVG. AVG. AVG.
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000S) PRICE (000S) PRICE (000S) PRICE
------------------------------------------------------------
Outstanding at beginning of
year.......................... 3,698 $15.98 3,844 $13.32 4,040 $11.26
Granted......................... 1,326 7.09 1,462 5.30 1,940 7.32
Exercised....................... (19) 5.07 (33) 6.16 (143) 6.15
Forfeited....................... (1,161) 14.82 (1,233) 10.76 (1,217) 10.06
-----------------------------------------------------------
Outstanding at end of year...... 3,844 $13.32 4,040 $11.26 4,620 $10.08
-----------------------------------------------------------
-----------------------------------------------------------
Options exercisable at year
end........................... 2,215 $15.97 2,394 $14.29 2,643 $12.51
Weighted-average fair value of
options granted during the
year.......................... $ 2.86 $ 2.12 $ 3.73
</Table>
F-15
The following table summarizes information about fixed stock options
outstanding at December 30, 2000:
<Table>
<Caption>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------------------------------
NUMBER WEIGHTED-AVG. WEIGHTED-AVG. NUMBER WEIGHTED-AVG.
RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES (000'S) CONTRACTUAL LIFE PRICE (000'S) PRICE
--------------------------------------------------------------------------------------------
$ 3.97 - 6.19 1,205 8.7 years $ 5.32 378 $ 5.29
6.44 - 7.81 1,709 8.4 years 7.44 682 7.17
8.00 - 17.13 1,159 5.1 years 13.14 1,037 13.47
17.50 - 35.63 547 3.2 years 22.35 546 22.35
---------------------------------------------------------------------------
4,620 7.0 years $10.08 2,643 $12.51
===========================================================================
</Table>
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, the Company is authorized to issue
up to 1,500,000 shares of common stock to its full-time employees, nearly all of
whom are eligible to participate. Under the terms of the plan, employees may
elect to have up to 15% of their gross salaries withheld by payroll deduction to
purchase the Company's common stock. The purchase price of the stock is 85% of
the lower of market price at the beginning or end of each six-month
participation period. Under the plan, employees purchased 162,000, 206,000 and
205,000 shares in 1998, 1999 and 2000, respectively.
The fair value of each stock purchase plan grant is estimated on the date
of grant using the Black-Scholes model with the following assumptions:
<Table>
<Caption>
1998 1999 2000
------------------------------------
Estimated dividends................................... none none none
Expected volatility................................... 57% 57% 76%
Risk-free interest rate............................... 4.7%-5.4% 4.7%-4.9% 5.4%-6.2%
Expected life (years)................................. 0.5 0.5 0.5
Weighted-average fair value of purchase rights
granted............................................. $2.34 $1.49 $2.18
</Table>
Stockholder Rights Plan
The Board of Directors adopted on January 24, 1991 and amended on August
23, 1995 and February 1, 2001, a Stockholder Rights Plan ("Rights Plan") in
which preferred stock purchase rights were distributed as a dividend at the rate
of one right for each share of Exabyte common stock held as of February 15,
1991. The Rights Plan is designed to deter coercive or unfair takeover tactics
and to prevent an acquiring entity from gaining control of the Company without
offering a fair price to all of the Company's stockholders. Each right will
entitle the holders of the Company's common stock to purchase one one-hundredth
of a share of preferred stock at an exercise price of $75, subject to adjustment
in certain cases to prevent dilution. The rights are evidenced by the common
stock certificates and are not exercisable or transferable apart from the common
stock until the earlier of ten days after the date on which a person or group
has acquired beneficial ownership of 20% or more of the common stock (an
"Acquiring Entity") or ten business days after the public announcement of the
commencement of a tender or exchange offer that would result in the Acquiring
Entity owning 20% or more of the common stock. Further, the rights generally
entitle each right holder (except the Acquiring Entity) to purchase that number
of shares of the Company's common stock which equals the exercise price of the
right divided by one-half of the current market price of the common stock if any
person becomes the beneficial owner of 20% or more of the common stock. If an
Acquiring Entity purchases at least 20% of the Company's common stock, but has
not acquired 50%, the Board of Directors may exchange the rights (except those
of the Acquiring Entity) for one share of common stock per right. In addition,
under certain circumstances, if the Company is involved in a merger or other
business combination in which the Company is not the
F-16
surviving corporation, the rights entitle the holder to buy common stock of the
Acquiring Entity with a market value of twice the exercise price of each right.
The Company is generally entitled to redeem the rights for $.01 per right
at any time until ten days following a public announcement that a 20% stock
position has been acquired and in certain other circumstances. The rights, which
do not have voting rights, will expire on February 15, 2002, unless redeemed or
exchanged earlier by the Company pursuant to the Rights Plan.
NOTE 6 -- INCOME TAXES
Pretax loss is subject to tax in the following jurisdictions:
<Table>
<Caption>
1998 1999 2000
-----------------------------
(In thousands)
Domestic.......................................... $(5,374) $(48,681) $(40,251)
Foreign........................................... (775) (2,507) (2,173)
-----------------------------
$(6,149) $(51,188) $(42,424)
=============================
</Table>
The provision (benefit) for income taxes consists of the following:
<Table>
<Caption>
1998 1999 2000
---------------------------
(In thousands)
Current:
Federal........................................... $ 2,443 $ -- $(1,417)
State............................................. 1,428 -- --
Foreign........................................... 114 274 (153)
Deferred:
Federal........................................... (6,180) 31,588 --
State............................................. (1,187) 3,182 --
Foreign........................................... -- 2,175 --
---------------------------
$(3,382) $37,219 $(1,570)
===========================
</Table>
Total income tax provision (benefit) differs from the amount computed by
applying the U.S. federal income tax rate of 35% to loss before income taxes for
the following reasons:
<Table>
<Caption>
1998 1999 2000
-----------------------------
(In thousands)
U.S. federal income tax at statutory rate......... $(2,152) $(17,916) $(14,848)
State income taxes, net of federal benefit........ (63) (1,084) (807)
Valuation allowance............................... -- 56,149 14,599
Research and development credits.................. (1,500) (1,000) (1,000)
Tax reserves...................................... -- -- (1,417)
Foreign taxes in excess of 35%.................... 376 1,396 608
Other............................................. (43) (326) 1,295
-----------------------------
$(3,382) $ 37,219 $ (1,570)
=============================
</Table>
F-17
Deferred tax assets are attributable to the following:
<Table>
<Caption>
JANUARY 1, DECEMBER 30,
2000 2000
-------------------------
(In thousands)
Current assets:
Warranty reserve.................................... $ 2,681 $ 2,857
Accounts receivable reserves........................ 2,772 2,632
Inventory reserves.................................. 4,009 3,740
Other............................................... 2,367 2,552
-------------------------
11,829 11,781
Less: valuation allowance............................. (11,829) (11,781)
-------------------------
$ -- $ --
=========================
Noncurrent assets:
Property and equipment.............................. $ 4,375 $ 4,936
Net operating loss carryforwards:
Domestic......................................... 31,672 45,332
Foreign.......................................... 2,000 --
Credit carryforwards................................ 4,517 5,464
CreekPath investment................................ -- 1,757
Goodwill............................................ 928 814
Other............................................... 828 664
-------------------------
44,320 58,967
Less: valuation allowance............................. (44,320) (58,967)
-------------------------
$ -- $ --
=========================
</Table>
During 2000, the Internal Revenue Service concluded the examination of
federal income tax returns for the years 1994 through 1997 which resulted in
refunds to the Company of $1,716,000. Of this amount, $1,417,000 pertained to
issues for which tax reserves had been recorded in prior years and was recorded
as a reduction of this provision for income taxes in the consolidated results of
operations for the year ended December 30, 2000.
As of the second quarter of 1999, the Company recorded a deferred tax
valuation allowance equal to 100% of total deferred tax assets. Management
considered a number of factors, including the Company's cumulative operating
losses over the prior three years, short-term projected losses due to the impact
of delays in the release of the M2(TM) product, as well as certain offsetting
positive factors. Management concluded that a valuation allowance was required
for 100% of the total deferred tax assets as it is more likely than not that the
deferred tax assets will not be realized.
At December 30, 2000, domestic net operating loss carryforwards of
$112,144,000, which expire between 2018 and 2020, are available to offset future
taxable income. Utilization of $6,025,000 of the carryforwards is subject to an
annual limitation of $670,000 through 2005. Foreign net operating loss
carryforwards may be carried forward indefinitely. In addition, the Company has
unused research and development credits of $4,383,000 which expire between 2012
and 2020 and alternative minimum tax credits of $1,080,000 which may be carried
forward indefinitely. Limitations on the annual amount of carryforwards which
can be utilized could occur should a change in control take place.
NOTE 7 -- LEASE COMMITMENTS
The Company leases its office, production and sales facilities under
various operating lease arrangements. Most of the leases contain various
provisions for rental adjustments including, in certain cases, a provision based
on increases in the Consumer Price Index. In addition, most of the leases
require the Company to pay property taxes, insurance and normal maintenance
costs. The Company has sublet
F-18
certain of these leased spaces to third parties. The Company also leases certain
equipment under operating leases. Future minimum lease payments under
non-cancelable operating lease arrangements are as follows:
<Table>
<Caption>
GROSS AMOUNT SUBLEASE NET AMOUNT
------------------------------------
(In thousands)
2001................................................. $ 5,520 $115 $ 5,405
2002................................................. 4,986 14 4,972
2003................................................. 3,890 -- 3,890
2004................................................. 2,803 -- 2,803
2005................................................. 1,053 -- 1,053
Thereafter........................................... -- -- --
------------------------------------
$18,252 $129 $18,123
------------------------------------
------------------------------------
</Table>
Rent expense aggregated $5,971,000, $5,917,000 and $5,770,000 in 1998, 1999
and 2000, respectively.
NOTE 8 -- EMPLOYEE BENEFIT PLAN
The Company maintains a qualified Section 401(k) Savings Plan which allows
eligible employees to contribute up to 15% of their salaries on a pre-tax basis.
As of January 1, 2001, Company contributions to the plan are made in conjunction
with the bi-weekly payroll and are not discretionary. The Company recorded as
expense matching contributions totaling $761,000, and $917,000 in 1999 and 1998,
respectively. There were no matching contributions by the Company in 2000.
Company contributions are fully vested after four years of employment.
NOTE 9 -- SEGMENT, GEOGRAPHIC AND SALES INFORMATION
Since 1998 all operations of the Company are considered one operating
segment. Therefore, no segment disclosures have been presented. The Company will
continue to review the internal reporting structure for future changes that
could result in disclosure of additional segments.
The following table details revenues from external customers by geographic
area:
<Table>
<Caption>
REVENUES FROM EXTERNAL CUSTOMERS
-------------------------------------------------------------
SIX MONTHS ENDED
FISCAL YEARS (UNAUDITED)
-------------------------------------------------------------
1998 1999 2000 JULY 1, 2000 JUNE 30, 2001
-------------------------------------------------------------
(In thousands)
United States.................... $201,973 $147,149 $156,755 $ 70,431 $62,233
Europe/Middle East............... 63,797 56,435 47,370 22,027 18,382
Pacific Rim...................... 17,020 14,715 13,130 5,991 6,210
Other............................ 3,715 4,528 4,487 2,441 1,639
-------------------------------------------------------------
$286,505 $222,827 $221,742 $100,890 $88,464
=============================================================
</Table>
Foreign revenue is based on the country in which the customer is located.
F-19
The following table details long-lived asset information by geographic
area:
<Table>
<Caption>
LONG-LIVED ASSETS
----------------------------------------------------
JANUARY 2, JANUARY 1, DECEMBER 30, JUNE 30,
1999 2000 2000 2001
----------------------------------------------------
(UNAUDITED)
(In thousands)
United States........................... $22,021 $18,281 $15,982 $12,814
Scotland................................ 3,429 3,703 3,060 2,638
Germany................................. 3,313 3,132 576 483
Pacific Rim............................. 430 331 331 282
Other................................... 279 285 232 148
----------------------------------------------------
$29,472 $25,732 $20,181 $16,365
====================================================
</Table>
The following table details revenue by product line:
<Table>
<Caption>
REVENUE BY PRODUCT LINE
-------------------------------------------------------------
SIX MONTHS ENDED
FISCAL YEARS (UNAUDITED)
-------------------------------------------------------------
1998 1999 2000 JULY 1, 2000 JUNE 30, 2001
-------------------------------------------------------------
(In thousands)
Drives........................... $155,325 $100,714 $ 83,907 $ 42,218 $27,591
Libraries........................ 56,486 46,575 74,308 28,113 21,322
Media............................ 67,113 67,668 55,874 25,011 31,946
Service, spares and other........ 19,091 15,450 14,811 7,706 6,449
Sales allowances................. (11,510) (7,580) (7,158) (2,158) 1,156
-------------------------------------------------------------
$286,505 $222,827 $221,742 $100,890 $88,464
=============================================================
</Table>
The following tables summarize sales to major customers:
<Table>
<Caption>
NET SALES (IN THOUSANDS)
----------------------------------------------------------
SIX MONTHS ENDED
FISCAL YEARS (UNAUDITED)
----------------------------------------------------------
1998 1999 2000 JULY 1, 2000 JUNE 30, 2001
----------------------------------------------------------
Ingram Micro........................ $36,138 $29,967 $41,028 $16,105 $14,482
Tech Data........................... 21,399 20,729 28,965 12,599 8,779
IBM................................. 43,405 33,790 24,985 11,154 9,649
Sun Microsystems.................... 31,505 24,400 16,780 9,640 4,483
</Table>
<Table>
<Caption>
% OF TOTAL NET SALES
-------------------------------------------------
SIX MONTHS ENDED
FISCAL YEARS (UNAUDITED)
-------------------------------------------------
1998 1999 2000 JULY 1, 2000 JUNE 30, 2001
-------------------------------------------------
Ingram Micro............................... 12.6% 13.5% 18.5% 16.0% 16.4%
Tech Data.................................. 7.5 9.3 13.0 12.5 9.9
IBM........................................ 15.2 15.2 11.3 11.1 10.9
Sun Microsystems........................... 11.0 11.0 7.6 9.6 5.1
</Table>
No other customers accounted for 10% or more of sales in any of these
periods.
F-20
NOTE 10 -- QUARTERLY INFORMATION (UNAUDITED)
(In thousands, except per share data)
<Table>
<Caption>
2000 2001
------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2
------------------------------------------------------------
Net sales........................ $ 49,576 $51,314 $ 60,100 $60,752 $ 49,052 $39,412
Gross profit..................... 10,213 13,286 11,208 14,950 45,558 31,163
Net loss......................... (13,580) (9,637) (11,305) (6,746) (17,550) (5,259)
Basic and diluted net loss per
share.......................... (0.60) (0.43) (0.50) (0.30) (0.77) (0.23)
</Table>
(In thousands except per share data)
<Table>
<Caption>
1999
----------------------------------------
Q1 Q2 Q3 Q4
----------------------------------------
Net sales............................... $62,650 $ 48,519 $ 53,041 $ 58,617
Gross profit............................ 15,539 6,319 7,286 10,808
Net loss................................ (3,500) (55,491) (17,503) (11,913)
Basic and diluted net loss per share.... (0.16) (2.50) (0.78) (0.53)
</Table>
NOTE 11 -- RESTRUCTURING
In March 2001, the Company completed a reduction in its workforce in order
to reduce expenses, minimize ongoing cash consumption and to simplify management
structure. All areas of the Company were impacted by the workforce reduction.
These reductions reduced the workforce by approximately 235 persons (211
domestically and 24 in Europe) and resulted in a severance charge to operations
in the first quarter of 2001 of approximately $498,000. Of these costs, $223,000
were included in cost of sales, $179,000 were included in selling, general and
administrative costs and $96,000 were included in research and development
costs. All severance was paid during the first quarter of 2001 and no accruals
remain.
During the third quarter of 2000, the Company incurred $3,899,000 in
charges related to a restructuring, which will result in the closure of EMG.
This restructuring was part of a plan adopted by the Board of Directors on July
24, 2000, which outsourced a number of manufacturing operations to Hitachi. The
restructuring decision resulted in: (1) an immediate end to the manufacture of
M2(TM) recording heads by EMG; (2) the planned termination of M2(TM) scanner
manufacturing by EMG by approximately the first quarter of 2001; and (3) the
planned shut down of the remaining M1 scanner manufacturing by the middle of
2002. No assets were transferred as a result of the decision to outsource M2(TM)
scanner manufacturing to Hitachi and no technology was transferred. In addition,
no write-offs were taken or restructuring charges were incurred in connection
with the M2(TM) scanner outsourcing to Hitachi. There has been no change in the
method of accounting from transactions between EMG and the Company and all
assets not impacted by the restructuring continue to be depreciated in a
consistent manner.
These restructuring charges include employee severance and related costs of
$1,613,000, excess facilities costs of $718,000, the write-off of excess
inventories of $879,000, the write-off of capital equipment of $389,000 and
other costs of $300,000. Workforce reductions involve 93 employees, constituting
all employees of EMG. All severance payments for these employees were
contractually defined, fixed and communicated during the third quarter of 2000.
Of these restructuring costs, $2,713,000 are included in cost of sales and
$1,186,000 are included in research and development costs. Approximately
$1,268,000 of the total restructuring costs, which relate to the write-off of
excess inventories and capital equipment, do not involve future cash payments.
Approximately $360,000 in severance and related costs and $139,000 of other
costs were paid during 2000. Employment at EMG was reduced by 40 employees as of
December 30, 2000. The fixed asset write
F-21
down resulted from a decision to immediately terminate the manufacture of M2(TM)
recording heads, take the underlying assets out of service and hold those assets
for sale. Actual losses on sales of fixed assets were $333,000 lower than
expected. Approximately $2,192,000 in accrued liabilities remained at December
30, 2000 for lease payments due on excess facilities, severance and related
costs.
Approximately $637,000 in restructuring costs were paid during the first
six months of 2001. Employment at EMG was reduced by 24 employees during the
first six months to 29 employees at June 30, 2001. Excess facilities exposure
and other related costs were reduced by $235,000 with the signing of a new
lease. Approximately $1,320,000 of accruals related to this restructuring remain
at June 30, 2001.
The following table summarizes the activity to date related to the
restructuring which occurred in the third quarter of 2000:
<Table>
<Caption>
FIXED
SEVERANCE INVENTORY ASSET
AND EXCESS WRITE- WRITE
RELATED FACILITIES DOWN DOWN OTHER TOTAL
-----------------------------------------------------------
(In thousands)
Restructuring charges.............. $1,613 $ 718 $ 879 $ 389 $ 300 $3,899
Asset write downs.................. -- -- (879) -- -- (879)
Loss on sale of assets............. -- -- -- (56) -- (56)
Cash payments...................... (360) -- -- -- (139) (499)
Additional charges/adjustments..... 74 41 -- (333) (55) (273)
-----------------------------------------------------------
Balance, December 30, 2000......... $1,327 $ 759 -- -- $ 106 $2,192
===========================================================
Cash payments (unaudited).......... (547) (33) -- -- (57) (637)
Additional charges/adjustments
(unaudited)...................... -- (186) -- -- (49) (235)
-----------------------------------------------------------
Balance, June 30, 2001
(unaudited)...................... $ 780 $ 540 $ -- $ -- $ -- $1,320
===========================================================
</Table>
During the third quarter of 1999, management determined that the division
of the Company into three operating segments was no longer appropriate due to
the amount of overhead required to maintain this structure. The Company incurred
$2,446,000 in pretax restructuring charges to combine its three operating
segments under common management. These costs included severance, outplacement
and benefits for the resulting workforce reduction of approximately 143
employees. All areas of the Company were impacted by the workforce reduction.
Approximately $664,000 of these costs were included in cost of sales, $1,453,000
were included in selling, general and administrative costs and $328,000 were
included in research and development costs.
Severance and related costs of $2,154,000 were paid in cash during 1999.
The remaining severance and related cost accruals were paid during the first
half of 2000.
F-22
The following table summarizes the activity related to the 1999
restructuring reserve for 1999 and 2000:
<Table>
<Caption>
SEVERANCE
AND
RELATED
---------
(In thousands)
Restructuring charges........................ $ 2,446
Cash payments................................ (2,154)
-------
Balance, January 1, 2000..................... 292
Cash payments................................ (292)
-------
Balance, December 30, 2000................... $ --
=======
</Table>
NOTE 12 -- CONTINGENCIES
The Company is, from time to time, subjected to certain claims, assertions
or litigation by outside parties as part of its ongoing business operations. The
outcomes of any such contingencies are not expected to have a material adverse
impact on the financial condition or results of the operations of the Company.
During 1999 the Company was engaged in a patent dispute with Ecrix
Corporation, whereby the Company alleged unauthorized use of Exabyte patents by
Ecrix. When negotiations failed, a series of Complaints and Cross-Complaints
were filed by both parties. In June 2000 the parties entered into a settlement
agreement. Ecrix agreed to reimburse the Company for $450,000 of legal fees
associated with the dispute. In addition, Ecrix issued a $300,000 note payable,
which was paid in December 2000, to the Company as well as 400,000 shares of
Ecrix Series D preferred stock, with an estimated fair value of $0.80 per share.
The Company is accounting for the investment in Series D preferred stock using
the cost method. The investment is included in other long-term assets in the
accompanying balance sheet.
The Company has entered a development agreement with Hitachi Ltd. for the
development of certain M3(TM) components and manufacture of engineering
prototypes. Under this agreement, the Company has a maximum obligation of
approximately $2,500,000 for development activities, $700,000 for prototype
parts and $2,800,000 for tooling costs. Expenses of $800,000 have been incurred
under this agreement through June 30, 2001. Under this agreement, which is
cancelable by either party by giving notice and, without cost or penalty, the
Company will retain all technology rights for data storage applications. Neither
party is obligated to pay royalties. Amounts are expensed based upon the
performance of services by Hitachi or receipt of engineering prototypes.
NOTE 13 -- INVESTMENT IN CREEKPATH SYSTEMS, INC.
In December 1999, the Company formed a wholly owned subsidiary, CreekPath
Systems Inc. ("CreekPath"), and received 10,000 shares of CreekPath common stock
in exchange for $1,000. CreekPath is a developer of solutions, which enable the
economical delivery of managed storage services. CreekPath had no operations
during 1999.
During 2000, the Company received 8,500,000 shares of CreekPath Series A
Convertible preferred stock in exchange for the contribution of certain
intellectual property and $3,312,000 which includes cash, payment of operating
expenses on behalf of CreekPath and fixed assets. Until December 20, 2000,
Exabyte owned 100% of the outstanding common and preferred stock of CreekPath.
Accordingly, the Company consolidated the results of CreekPath into the
Company's financial statements.
On December 20, 2000, CreekPath sold 16,550,000 shares of Series B
Convertible preferred stock in exchange for (1) the conversion of approximately
$2,100,000 in convertible bridge loans with Exabyte, whereby Exabyte received
1,500,000 shares of Series B convertible preferred stock; and (2) $15,500,000 in
cash proceeds from outside investors. Of the total offering, 5,000,000 shares
were issued to outside investors in January 2001 and the related proceeds of
$5,000,000 were received subsequent to year end. As
F-23
a result of this transaction, Exabyte no longer controlled CreekPath as the
Company held less than a majority of the outstanding voting stock. Accordingly,
the Company's investment was accounted for on the equity method as of December
20, 2000, on a prospective basis.
Series A and B preferred stock have essentially identical rights which
include (1) voting rights identical to common stock; (2) a liquidation
preference over common stock; and (3) conversion rights, at the option of the
holder, into an equal number of common shares. All of the outstanding common and
preferred shares of CreekPath are not registered with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and have
further contractual restrictions on subsequent sales.
As of December 30, 2000 and for the fiscal year then ended, CreekPath had
the following balance sheet and results of operations:
<Table>
(In thousands)
Balance Sheet:
Current assets, including cash of
$9,547.......................... $ 9,688
Non-current assets................ 2,427
-------
$12,115
=======
Current liabilities............... $ 1,743
Stockholders' equity.............. 10,372
$12,115
=======
Results of operations:
Revenue......................... $ 230
Costs and expenses.............. 5,188
-------
Net loss........................ $(4,958)
=======
</Table>
During 2000, the majority of CreekPath's revenue related to contracted
services. Exabyte reflected losses of $4,607,000 through consolidation and
$414,000 of losses under the equity method. As of December 30, 2000, the
Company's carrying amount of its investment in CreekPath was $343,000, which is
recorded in other long-term assets. The remaining investment was written off
under the equity method during the first quarter of 2001.
NOTE 14 -- SUBSEQUENT EVENTS
On January 29, 2001, the Company issued a warrant to purchase up to 150,000
shares of common stock at a price of $1.50 per share to its investment advisor.
The warrants have a term of one year.
On April 12, 2001, the Company entered into an agreement with a private
investor, whereby the Company agreed to issue 1,500,000 shares of Series G
preferred stock to the investor for total proceeds of $3,000,000. The dividends
accrue at a rate of 9% per annum and are compounded if not paid. Dividends must
be paid in cash, except that they may be paid in shares of common stock, at a
price of $2.00 per share, if we are prohibited from paying cash dividends under
any agreement in place as of April 16, 2001. Our bank line of credit agreement
with Congress Financial Corporation currently prohibits the payment of cash
dividends. Series G preferred stock also participates in any dividends on the
common stock, when and if declared, on an as-converted basis. Series G preferred
stock has a liquidation preference over common stock and conversion rights, at
the option of the holder, into shares of common stock at a conversion price of
$2.40 per share, subject to adjustment. The holder of the Series G preferred
stock is entitled to vote with shares of common stock (and not as a separate
class) on an as-converted basis at any annual or special meeting of the
Company's stockholders; provided, however, that without the prior written
unanimous consent of the Series G preferred stock, the Company may not take
certain actions, including asset transfer or acquisition (which terms are
defined in the Certificate of Designation). The Company has agreed to register
for resale the shares of Series G preferred stock as well as the underlying
shares of common stock issuable upon conversion, or payment of dividends when,
as and if, declared by the board of
F-24
directors on the Series G preferred stock. The terms of the Series G share
purchase agreement prohibit the Company, except for certain permitted issuances,
from selling common stock, or securities convertible or exercisable into common
stock during the period ended June 15, 2001 for a price per share, or having an
exercise or conversion price per share, of less than $2.40. In that case, the
Company is required to pay an amount in cash equal to the difference between the
sale price and $2.40 multiplied by the number of shares of common stock into
which the Series G preferred stock is then convertible. The Company is also
prohibited from taking certain actions, such as an asset transfer or
acquisition, without the unanimous prior written consent of the Series G
preferred stock holders.
As of December 30, 2000, the Company owned 80,000 shares of Series B
Preferred Stock and 83,000 shares of Series C Preferred Stock in HighGround
Systems Inc. These shares had a net book value $0 at December 30, 2000. In April
2001, Sun Microsystems purchased HighGround Systems Inc., and as a result, the
Company received 96,000 shares of Sun Microsystems common stock. The Company
sold 85,000 of these shares during the second quarter of 2001 and received cash
proceeds and recorded a gain of $1,719,000.
NOTE 15 -- SUBSEQUENT EVENTS (UNAUDITED)
As of June 30, 2001, the Company was in violation of the tangible net worth
covenant of its line of credit agreement with Congress Financial Corporation.
The lender subsequently agreed to waive this past event of default and amend the
tangible net worth covenant.
On August 22, 2001 the Company, Ecrix Corporation, certain lenders and
certain investors entered into an Agreement and Plan of Merger. Under this
agreement, Exabyte will issue 10,000,000 shares of its common stock in exchange
for all the outstanding common and preferred shares of Ecrix. In addition, as a
part of the merger, certain Ecrix shareholders have agreed to purchase 9,650,000
shares of Series H preferred stock of Exabyte at a price of $1.00 per share and
make bridge loans to the Company for up to $2,000,000. The bridge loans convert
to Series H preferred stock at closing of the Merger. This merger will be
accounted for by Exabyte using the purchase method of accounting for a business
combination. If either party terminates the agreement under certain
circumstances described in the agreement, it is required to pay a termination
fee of $1,000,000. In addition, if the Company terminates the agreement, it has
agreed to repay the promissory notes issued on the date of execution of the
Merger Agreement. As of September 17, 2001, the promissory notes total
$1,500,000.
F-25
ECRIX CORPORATION FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Ecrix Corporation
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of Ecrix Corporation at February 29,
2000 and February 28, 2001, and the results of its operations and its cash flows
for each of the three years in the period ended February 28, 2001 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
------------------------------------------------------
PricewaterhouseCoopers LLP
Denver, Colorado
September 20, 2001
F-26
ECRIX CORPORATION
BALANCE SHEETS
<Table>
<Caption>
FEBRUARY 29, FEBRUARY 28, MAY 31,
2000 2001 2001
------------ ------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,529,000 $ 3,188,000 $ 6,000
Short-term investments 12,600,000 11,875,000 10,357,000
Accounts receivable, net 643,000 1,264,000 1,120,000
Inventories, net 2,891,000 4,706,000 4,825,000
Other current assets 145,000 93,000 69,000
------------ ------------ ------------
Total current assets 18,808,000 21,126,000 16,377,000
Property and equipment, net 2,660,000 2,203,000 1,955,000
Other assets 93,000 89,000 88,000
------------ ------------ ------------
Total assets $ 21,561,000 $ 23,418,000 $ 18,420,000
============ ============ ============
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,348,000 $ 834,000 $ 82,000
Accrued expenses and other 1,403,000 2,004,000 2,207,000
Current portion of capital lease obligations 569,000 411,000 330,000
Current portion of line of credit and promissory
note 637,000 1,585,000 1,264,000
------------ ------------ ------------
Total current liabilities 3,957,000 4,834,000 3,883,000
Long-term portion of capital lease obligations 542,000 131,000 75,000
Long-term portion of line of credit and promissory
note 597,000 525,000 432,000
------------ ------------ ------------
Total liabilities 5,096,000 5,490,000 4,390,000
------------ ------------ ------------
Commitments and contingencies (Notes 2 and 9)
Mandatorily redeemable convertible preferred stock 41,520,000 49,111,000 49,651,000
STOCKHOLDERS' DEFICIT
Common stock, $0.001 par value, 70,000,000 shares
authorized; 5,326,287, 5,412,627 and 6,185,127
shares issued and outstanding 5,000 5,000 6,000
Additional paid-in capital 144,000 13,381,000 12,996,000
Accumulated deficit (25,204,000) (44,569,000) (48,623,000)
------------ ------------ ------------
Total stockholders' deficit (25,055,000) (31,183,000) (35,621,000)
------------ ------------ ------------
Total liabilities, mandatorily redeemable
convertible preferred stock and stockholders'
deficit $ 21,561,000 $ 23,418,000 $ 18,420,000
============ ============ ============
</Table>
The accompanying notes are an integral part of these financial statements
F-27
ECRIX CORPORATION
STATEMENTS OF OPERATIONS
<Table>
<Caption>
YEAR ENDED THREE-MONTHS ENDED
----------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31, MAY 31,
1999 2000 2001 2000 2001
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
Revenues $ -- $ 1,571,000 $ 10,678,000 $ 1,565,000 $ 3,335,000
Cost of revenues -- 2,415,000 9,096,000 1,410,000 2,634,000
----------- ------------ ------------ ----------- -----------
Gross profit (loss) -- (844,000) 1,582,000 155,000 701,000
----------- ------------ ------------ ----------- -----------
Operating expenses:
Selling, general and
administrative 3,361,000 10,021,000 14,300,000 3,518,000 2,939,000
Research and development 3,437,000 4,564,000 5,500,000 1,314,000 1,913,000
Litigation settlement -- -- 1,566,000 -- --
----------- ------------ ------------ ----------- -----------
Total operating
expenses 6,798,000 14,585,000 21,366,000 4,832,000 4,852,000
----------- ------------ ------------ ----------- -----------
Loss from operations (6,798,000) (15,429,000) (19,784,000) (4,677,000) (4,151,000)
----------- ------------ ------------ ----------- -----------
Other income (expense):
Interest income 284,000 694,000 704,000 175,000 153,000
Interest expense (90,000) (206,000) (285,000) (69,000) (56,000)
----------- ------------ ------------ ----------- -----------
Net loss (6,604,000) (14,941,000) (19,365,000) (4,571,000) (4,054,000)
----------- ------------ ------------ ----------- -----------
Less accretion of
preferred stock -- -- (900,000) -- (540,000)
----------- ------------ ------------ ----------- -----------
Net loss available to
common stockholders $(6,604,000) $(14,941,000) $(20,265,000) $(4,571,000) $(4,594,000)
=========== ============ ============ =========== ===========
</Table>
The accompanying notes are an integral part of the financial statements
F-28
ECRIX CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
<Table>
<Caption>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ----------- ------------ ------------
Balance, February 28, 1998 5,437,000 $5,000 $ 148,000 $(3,659,000) $ (3,506,000)
Repurchase and cancellation of
restricted common stock (96,000) -- (4,000) -- (4,000)
Issuance of stock upon exercise
of stock options 12,000 -- 2,000 -- 2,000
Net loss -- -- -- (6,604,000) (6,604,000)
--------- ------ ----------- ------------ ------------
Balance, February 28, 1999 5,353,000 5,000 146,000 (10,263,000) (10,112,000)
Repurchase and cancellation of
restricted common stock (27,000) -- (2,000) -- (2,000)
Net loss -- -- -- (14,941,000) (14,941,000)
--------- ------ ----------- ------------ ------------
Balance, February 29, 2000 5,326,000 5,000 144,000 (25,204,000) (25,055,000)
Issuance of Series D2 preferred
stock warrants for cash -- -- 195,000 -- 195,000
Warrant valuation and beneficial
conversion feature (see Note
5) -- -- 13,861,000 -- 13,862,000
Repurchase and cancellation of
restricted common stock (20,000) -- (2,000) -- (2,000)
Issuance of stock upon exercise
of stock options 106,000 -- 83,000 -- 83,000
Accretion of preferred stock -- -- (900,000) -- (900,000)
Net loss -- -- -- (19,365,000) (19,365,000)
--------- ------ ----------- ------------ ------------
Balance, February 28, 2001 5,412,000 5,000 13,381,000 (44,569,000) (31,183,000)
Issuance of stock upon exercise
of stock options (unaudited) 773,000 1,000 155,000 -- 156,000
Accretion of preferred stock
(unaudited) -- -- (540,000) -- (540,000)
Net loss (unaudited) -- -- -- (4,054,000) (4,054,000)
--------- ------ ----------- ------------ ------------
Balance, May 31, 2001 (unaudited) 6,185,000 $6,000 $12,996,000 $(48,623,000) $(35,621,000)
========= ====== =========== ============ ============
</Table>
The accompanying notes are an integral part of these financial statements
F-29
ECRIX CORPORATION
STATEMENTS OF CASH FLOWS
<Table>
<Caption>
YEAR ENDED THREE MONTHS ENDED
----------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31, MAY 31,
1999 2000 2001 2000 2001
----------------------------------------------------------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss available to common
stockholders........................... $(6,604,000) $(14,941,000) $(20,265,000) $(4,571,000) $(4,594,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation........................... 298,000 855,000 1,246,000 269,000 364,000
Noncash charge for accretion of
mandatorily redeemable convertible
preferred stock...................... -- -- 900,000 -- 540,000
Noncash investment income.............. -- (239,000) -- -- --
Inventory reserves..................... -- 146,000 130,000 (43,000) (161,000)
Allowance for doubtful accounts........ -- 105,000 29,000 (13,000) (42,000)
Issuance of preferred stock upon
settlement of lawsuit................ -- -- 816,000 -- --
Changes in operating assets and
liabilities:
Accounts receivable.................... 28,000 (712,000) (650,000) (322,000) 186,000
Inventories............................ (36,000) (3,037,000) (1,945,000) (2,518,000) 42,000
Other assets........................... (54,000) (91,000) 56,000 (258,000) 25,000
Accounts payable....................... 252,000 1,071,000 (514,000) 465,000 (752,000)
Accrued expenses and other............. 292,000 988,000 601,000 106,000 203,000
----------------------------------------------------------------------
Net cash used in operating
activities...................... (5,824,000) (15,855,000) (19,596,000) (6,885,000) (4,189,000)
----------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of short-term investments...... -- (223,729,000) -- -- --
Proceeds from maturity of short-term
investments............................ -- 211,368,000 725,000 3,711,000 1,518,000
Payments for other assets................ (31,000) (43,000) -- -- --
Acquisition of property and equipment.... (712,000) (1,745,000) (789,000) 16,000 (114,000)
----------------------------------------------------------------------
Net cash provided by (used in)
investing activities............ (743,000) (14,149,000) (64,000) 3,727,000 1,404,000
----------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease
obligations............................ (203,000) (473,000) (569,000) (143,000) (137,000)
Proceeds from sale-leaseback of assets... 215,000 541,000 -- -- --
Repurchase and cancellation of common
stock.................................. (4,000) (2,000) (2,000) -- --
Proceeds from issuance of preferred stock
and warrants, net...................... 9,000 27,594,000 19,931,000 -- --
Proceeds from issuance of common stock... 2,000 -- 83,000 63,000 156,000
Proceeds from issuance of notes
payable................................ -- 3,728,000 916,000 1,099,000 --
Repayments of notes payable.............. -- (686,000) (40,000) -- (414,000)
----------------------------------------------------------------------
Net cash provided by (used in)
financing activities............ 19,000 30,702,000 20,319,000 1,019,000 (395,000)
----------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents............................ (6,548,000) 698,000 659,000 (2,139,000) (3,182,000)
Cash and cash equivalents, beginning of
period................................. 8,379,000 1,831,000 2,529,000 2,529,000 3,188,000
----------------------------------------------------------------------
Cash and cash equivalents, end of
period................................. $ 1,831,000 $ 2,529,000 $ 3,188,000 $ 390,000 $ 6,000
======================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash payments for interest............. $ 85,000 $ 199,000 $ 285,000 $ 69,000 $ 55,000
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Equipment acquired pursuant to capital
lease obligations.................... $ 937,000 $ 108,000 $ 41,000 $ -- $ --
Leasehold improvements financed with
note payable......................... -- 292,000 -- -- --
Exchange of note payable for
mandatorily redeemable Series D
convertible preferred stock.......... -- 2,500,000 -- -- --
</Table>
F-30
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION OF THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING
POLICIES
THE COMPANY
Ecrix Corporation ("Ecrix" or the "Company") was incorporated under the laws of
Delaware on April 25, 1996. Ecrix Corporation designs, manufactures, markets and
sells a new family of high-capacity, high-performance tape storage products.
Ecrix's tape storage products are based on a technology called VXA(R) which
incorporates variable speed, overscanning technology and discrete packet
formats. This VXA(R) architecture incorporates new, patentable technologies that
result in improvements in tape drive reliability and permit Ecrix to build
cost-effective products. Our customers use our tape data storage products for
their computer systems, networks and workstations, primarily for data backup and
archival applications.
MERGER WITH EXABYTE CORPORATION
On August 22, 2001 the Company, Exabyte Corporation, certain lenders and
certain investors entered into an Agreement and Plan of Merger. Under this
agreement, Exabyte will issue 10,000,000 shares of its common stock in exchange
for all the outstanding common and preferred shares of Ecrix. In addition, as a
condition of the merger, certain Ecrix shareholders have agreed to purchase
9,650,000 shares of Series H preferred stock of Exabyte at a price of $1.00 per
share. If either party terminates the agreement under certain circumstances
described in the agreement, it is required to pay a termination fee of
$1,000,000. In addition, certain Ecrix stockholders agreed to lend to Exabyte up
to $2,000,000 in exchange for promissory notes issued by Exabyte. In the event
the merger closes, the loans and accrued interest will be credited against the
purchase price of the Exabyte Series H preferred stock. In the event the merger
does not close, the lenders will have the option to require Ecrix to issue
shares of, as yet unauthorized, Series D-3 preferred stock.
RISKS AND UNCERTAINTIES
The Company has completed several rounds of private equity financing with its
last round, which closed in September 2000, totaling $19.9 million (net). The
Company, however, has incurred substantial losses and negative cash flows from
operations in each fiscal period since inception. For the year ended February
28, 2001, the Company incurred a loss from operations of $19.4 million and
negative cash flows from operations of $19.6 million. As of February 28, 2001,
the Company has an accumulated deficit of $44.6 million. Management expects
operating losses and negative cash flows to continue over the short term and
anticipates that losses will continue due to additional costs and expenses
related to product development and sales and marketing activities. Certain of
these costs could be reduced if working capital decreased significantly. The
Company has a borrowing facility with a bank (see Note 4) under which the
Company may borrow up to $9,300,000, or a lesser amount based on a certain
formula contained in the agreement. The borrowing facility requires the Company
to comply with certain financial and non-financial covenants. The ability of the
Company to maintain compliance with the financial covenants is contingent upon
the Company generating additional revenue and maintaining a minimum
stockholders' equity balance.
In the event of a shortfall in revenues and cash flows, management believes the
Company has the ability to significantly reduce operating expenses such that
current working capital and currently available financing alternatives are
adequate to meet cash needs and to satisfy the financial covenants of the
borrowing facility. Failure to generate sufficient revenues, raise additional
capital or borrowings, or reduce certain discretionary spending could have a
material adverse impact on the Company's ability to continue as a going concern
and to meet its intended business objectives.
F-31
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
USE OF ESTIMATES
The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in these financial statements and
accompanying notes. Actual results could differ materially from these estimates.
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited interim financial statements as of May 31, 2001 and for the three
months ended May 31, 2000 and 2001 have been prepared on the same basis as the
audited financial statements and, in the opinion of management, reflect all
normal recurring adjustments necessary to present fairly the financial
information set forth therein, in accordance with generally accepted accounting
principles. The results of operations for the interim periods are not
necessarily indicative of the results to be expected for future periods.
REVENUE RECOGNITION
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB"), "Revenue Recognition in Financial
Statements", as amended. SAB 101 provides guidance regarding the recognition,
presentation and disclosure of revenue in financial statements filed with the
SEC. The Company adopted SAB 101 in 2000; however, the adoption did not have a
material impact on the Company's financial position or results of operations for
any period.
The revenue recognition policy for product sales depends on the sales channel
utilized by the Company. Revenue for product sales to end-user customers is
recognized when all of the following criteria have been met: (a) evidence of an
arrangement exists, (b) delivery to the customer has occurred, (c) the price to
the customer is fixed and determinable, and (d) collectibility is reasonably
assured. Sales to OEMs, value-added distributors (VADs), value-added resellers
(VARs) and other distributors (collectively, the "Indirect Channel") are
generally subject to agreements allowing certain rights of return with respect
to unsold products and price protection. Revenue and associated costs of sales
for product sales to the Indirect Channel is deferred and then recognized upon
final sell-through to the final end-user.
The Company provides service warranty rights to customers, which are accounted
for under SFAS No. 5, "Accounting for Contingencies". To date, the estimated
warranty obligations have not been significant.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents at February 28, 2001 and February 29, 2000 consisted principally of
cash in checking accounts and money market funds, the fair value of which
approximates cost.
SHORT-TERM INVESTMENTS
The Company classifies all short-term investments as available-for-sale
securities. Accordingly, these investments are carried at cost which
approximates fair value. Short-term investments generally have maturities of
less than one year from the date of purchase. At February 28, 2001, short-term
investments consisted of corporate bonds and government securities.
INVENTORIES
Inventories consist mainly of finished goods. Inventories are stated at the
lower of cost or market, cost being determined by the first-in, first-out
method. Appropriate consideration has been given to obsolescence, excessive
levels, deterioration and other factors in evaluating net realizable value.
F-32
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of three years for computer
equipment, three to five years for furniture and equipment and three to five
years for machinery and tooling. Equipment acquired pursuant to capital lease
obligations and leasehold improvements are amortized over the shorter of the
useful life or the term of the related lease, which is included within
depreciation expense. Maintenance and repairs are charged to expense when
incurred.
Assets under capital lease were $3,023,000, $3,064,000 and $3,052,000 as of
February 29, 2000, February 28, 2001 and May 31, 2001 respectively. Related
accumulated depreciation was $1,881,000, $2,304,000 and $2,544,000 at February
29, 2000, February 28, 2001 and May 31, 2001 respectively.
The Company periodically evaluates the recoverability of property and equipment
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. SFAS 121 requires recognition of impairment of long-lived assets
in the event the net book value of such assets exceeds the future undiscounted
cash flows attributable to such assets.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that potentially subject the Company to concentrations of
credit risk primarily consist of cash and cash equivalents, short-term
investments and accounts receivable. Substantially all of the Company's cash and
cash equivalents are invested in highly liquid money market funds with financial
institutions. Short-term investments consist of corporate bonds and government
securities. The Company sells its products principally to the indirect channel,
including OEMs and distributors. The Company performs ongoing credit evaluations
of its customers and maintains an allowance for potential credit losses. Credit
losses to date have been consistent with management's estimates.
One customer accounted for 24% of total revenue during the year ended February
28, 2001.
The Company's accounts receivable were concentrated with one customer at
February 28, 2001 (representing 10% of aggregate receivables).
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising costs were $85,000,
$1,596,000 and $2,511,000 for the years ended February 28, 1999, February 29,
2000 and February 28, 2001, respectively.
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable earnings. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount more likely than not to be realized.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS No. 123") permits the use of either a fair value based
method or the method defined in Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees ("APB No. 25") to account for
stock-based compensation arrangements. The Company has elected to recognize the
costs of
F-33
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
stock-based compensation arrangements with employees under the provisions of APB
No. 25, and has included the pro forma disclosures required under SFAS No. 123.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
RECLASSIFICATIONS
Certain amounts in the prior year financial statements have been reclassified to
be consistent with the current year presentation.
SEGMENT INFORMATION
The Company has adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 also establishes standards
reporting information regarding operating segments and related disclosures about
products and services, geographic areas and major customers. Currently, all
operations of the Company are considered one operating segment. The Company will
continue to review the internal reporting structure for future changes that
could result in disclosures of segments under SFAS 131.
The following table details revenues from external customers by geographic area:
<Table>
<Caption>
YEAR ENDED THREE MONTHS ENDED
------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, MAY 31, MAY 31,
1999 2000 2001 2000 2001
------------ ------------ ------------ ---------- ----------
United States $ -- $ 907,000 $ 6,863,000 $ 942,000 $2,273,000
Other -- 664,000 3,815,000 623,000 1,062,000
------- ---------- ----------- ---------- ----------
$ -- $1,571,000 $10,678,000 $1,565,000 $3,335,000
======= ========== =========== ========== ==========
</Table>
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued, SFAS No
133, "Accounting for Delivering Instruments and Hedging Activities." SFAS No 133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at fair market value. SFAS No 133, as recently amended, is effective
for fiscal years beginning after June 15, 2000. Management believes the adoption
of SFAS No 133 will not have a material effect or the Company's financial
position or results of operations.
In March 2000, the Emerging Issues Task Force (EITF) issued EITF 00-02,
"Accounting for Web Site Development Costs." EITF 00-02 provides guidance on
accounting for web site development costs and is effective fiscal quarters
beginning after June 30, 2000. The adoption of EITF 00-02 did not have a
material effect on the Company's financial position or the results of
operations.
In March 2000, the FASB issued Interpretation No. 44 (FIN 44), "Accounting for
Certain Transactions involving Stock Compensation -- an Interpretation of APB
Opinion 25." FIN 44 is effective July 1, 2000 and clarifies the application of
APB 25 for certain matters, specifically (a) the definition of an employee for
purposes of applying APB 25, (b) the criteria for determining whether a plan
qualifies as a non compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The adoption of FIN 44 did not have a material impact on the
Company's financial position or the results of operations.
F-34
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
In June of 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 141, "Business Combinations"
("FAS 141") and Statement of Financial Accounting Standard No. 142, "Goodwill
and Other Intangible Assets" ("FAS 142").
FAS 141 requires that all purchase business combinations must be accounted for
using the purchase method. Under this method, the purchase price of an acquired
business is allocated to the individual tangible and intangible assets acquired
and liabilities assumed based upon the estimated fair values at the date of
acquisition. If the purchase price exceeds the amounts assigned to assets
acquired and liabilities assumed, the excess is recognized as goodwill. After
initial recognition, goodwill and intangible assets acquired in the business
combination must be accounted for under FAS 142. FAS 141 is effective for the
Company for all business combinations initiated after June 30, 2001. The Company
believes that, once effective, this bulletin will not have a material impact on
the Company's results of operations.
FAS 142 requires that after a company allocates the purchase price in accordance
with FAS 141, the assets acquired, liabilities assumed, and goodwill must be
assigned to one or more reporting units based upon certain criteria outlined in
FAS 142. In addition, goodwill will no longer be amortized. Instead, companies
are required to test goodwill for impairment at the reporting unit level by (1)
determining the fair values of the reporting units and comparing them with their
carrying values and (2) if the fair value of a reporting unit is less than its
carrying amount, measure the amount of impairment loss, if any, by comparing the
implied fair value of reporting unit goodwill with the carrying amount of that
goodwill. If the carrying amount of reporting unit goodwill exceeds its implied
fair value, that excess should be recognized as an impairment loss. FAS 142 is
effective for the Company for any goodwill acquired in a business combination
entered into after June 30, 2001. The remaining provisions of the Statement are
effective for the year ending December 31, 2002. The Company believes that, once
effective, this bulletin will not have a material impact on the Company's
results of operations.
2. PURCHASE COMMITMENT
At February 28, 2001, the Company had committed to purchase 19,500 tape storage
drives valued at approximately $7,700,000 from Aiwa Co. Ltd. ("Aiwa"), located
in Japan. Under the terms of the agreement with Aiwa, the Company was committed
to take delivery of the drives through August 31, 2001. However, approximately
5,700 of these drives were delivered through September 20, 2001.
In August 2001, the terms of the agreement with Aiwa were renegotiated, and a
Memorandum of Understanding ("MOU") was signed which outlines the basis for an
amendment to the formal supply agreement. The MOU establishes a process for the
termination of the Company's manufacturing agreement with Aiwa and the transfer
of the manufacturing of our tape drives to another Japanese drive manufacturer.
The Company is in discussions with Aiwa regarding the formal termination of the
supply agreement and certain other matters.
F-35
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
3. BALANCE SHEET COMPONENTS
<Table>
<Caption>
FEBRUARY 29, FEBRUARY 28, MAY 31,
2000 2001 2001
-----------------------------------------
(UNAUDITED)
ACCOUNTS RECEIVABLE, NET:
Accounts receivable $ 748,000 $ 1,398,000 $ 1,212,000
Less allowance for doubtful accounts (105,000) (134,000) (92,000)
-----------------------------------------
$ 643,000 $ 1,264,000 $ 1,120,000
=========================================
INVENTORIES, NET:
Finished goods $ 3,037,000 $ 4,982,000 $ 4,940,000
Less inventory reserves (146,000) (276,000) (115,000)
-----------------------------------------
$ 2,891,000 $ 4,706,000 $ 4,825,000
=========================================
PROPERTY AND EQUIPMENT, NET:
Computer equipment $ 1,582,000 $ 1,953,000 $ 2,052,000
Office furniture and equipment 699,000 797,000 796,000
Machinery and tooling 785,000 1,087,000 1,095,000
Leasehold improvements 797,000 815,000 815,000
-----------------------------------------
3,863,000 4,652,000 4,758,000
Less accumulated depreciation (1,203,000) (2,449,000) (2,803,000)
-----------------------------------------
$ 2,660,000 $ 2,203,000 $ 1,955,000
=========================================
ACCRUED EXPENSES AND OTHER:
Accrued payroll and employee benefits $ 677,000 $ 837,000 $ 798,000
Accrued liabilities 526,000 665,000 950,000
Deferred distributor income 200,000 502,000 459,000
-----------------------------------------
$ 1,403,000 $ 2,004,000 $ 2,207,000
=========================================
</Table>
4. DEBT AND OTHER BORROWING ARRANGEMENTS
LINE OF CREDIT
Under the terms of a bank loan and security line of credit (the "line of
credit") in place at February 28, 2001, the Company could borrow the lesser of
$9.3 million or a lesser amount determined by a formula applied to eligible
inventory, accounts receivable and existing borrowings. The line of credit bears
interest at a variable rate equal to the bank's prime lending rate plus 1.5%
(10.0% at February 28, 2001). The revolving line of credit expires on June 29,
2002. Amounts borrowed under the line of credit are secured by substantially all
of the assets of the Company. The line of credit requires the Company to meet
certain financial ratios, including a requirement to maintain a minimum
stockholders equity balance (as defined) of $12,000,000 and prohibits certain
transactions (including, but not limited to, changes in ownership, dispositions
of property, mergers, and the payment of dividends). The Company was in
compliance with these financial covenants as of February 28, 2001.
In July and August 2001, the Company was in default of the minimum stockholders'
equity balance covenant and received a waiver from the financial institution and
subsequently re-negotiated the minimum stockholders' equity balance covenant to
be $8.0 million for the months July through October 2001, and $5.5 million
beginning November 2001 until the expiration of the loan agreement in June 2002.
F-36
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
PROMISSORY NOTE
In connection with the Company's lease for additional facilities entered into
during fiscal year 2000, the Company entered into an unsecured promissory note
payable for a total of $292,000 with the lessor. The note is payable in monthly
installments of $5,000 beginning in January 2000 and bears interest at 8.5%
annually.
Debt outstanding under the line of credit and promissory note was as follows:
<Table>
<Caption>
FEBRUARY 29, FEBRUARY 28,
2000 2001
------------ ------------
Amount due under line of credit $ 952,000 $ 1,861,000
Amount due under promissory note 282,000 249,000
---------- -----------
1,234,000 2,110,000
Less current portion (637,000) (1,585,000)
---------- -----------
Long-term debt $ 597,000 $ 525,000
========== ===========
</Table>
Maturities of long-term debt are as follows:
<Table>
2002 $ 1,585,000
2003 350,000
2004 42,000
2005 46,000
2006 50,000
Thereafter 37,000
-----------
2,110,000
Less current portion $(1,585,000)
-----------
$ 525,000
===========
</Table>
CAPITAL LEASE OBLIGATIONS
The Company has entered into various capital lease agreements covering office
equipment, computer hardware and software, and other equipment.
Future minimum lease payments at February 28, 2001 for these leases are as
follows:
<Table>
2002 $ 446,000
2003 135,000
---------
Total minimum lease payments 581,000
Less amount representing interest (39,000)
---------
Present value of lease payments 542,000
Less current portion (411,000)
---------
$ 131,000
=========
</Table>
F-37
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
5. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 55,000,000 shares of mandatorily redeemable
convertible preferred stock ($0.01 par value), which is designated as follows at
February 28, 2001:
<Table>
<Caption>
SHARES ISSUED AND
NUMBER OF OUTSTANDING
SHARES -------------------------- LIQUIDATION
AUTHORIZED NUMBER NET PROCEEDS AMOUNT
---------- ----------- ------------ -----------
Series A 1,420,875 1,420,875 $ 560,000 $ 568,000
Series B 2,612,275 2,591,650 2,587,000 2,592,000
Series C 4,894,118 4,879,412 8,279,000 8,295,000
Series D 16,000,000 15,368,224 30,910,000 31,351,000
Series D1 10,000,000 9,708,737 19,737,000 19,806,000
Series D2 20,000,000 -- -- --
Undesignated 72,732 -- -- --
---------- ---------- ----------- -----------
55,000,000 33,968,898 $62,073,000 $62,612,000
========== ========== =========== ===========
</Table>
Net proceeds disclosed in the table above are net of stock issuance costs.
Series D proceeds includes $816,000 related to the issuance of shares pursuant
to a litigation settlement (see Note 9). Holders of mandatorily redeemable
convertible preferred stock have certain rights, preferences and restrictions as
follows:
DIVIDENDS
Holders of Series A, Series B, Series C, Series D, Series D1 and D2 Preferred
Stock shall be entitled to receive dividends, when and if declared by the Board
of Directors, but only out of funds that are legally available. No cash
dividends have been declared as of February 28, 2001.
VOTING RIGHTS
Shares of all preferred stock generally have the same voting rights as common
stock. The holders of the preferred stock, voting separately as a single class,
shall be entitled to elect three directors to serve on the Corporation's Board
of Directors. The remaining six directors shall be elected by the common
stockholders, voting together as a class.
LIQUIDATION
In the event of liquidation, dissolution or winding up of the Corporation,
including a merger or consolidation of the Company, or the sale, lease or other
disposition of all or substantially all of the assets of the Corporation, the
holders of Series D1 and D2 Preferred shall be entitled to be paid out of the
assets of the Corporation an amount with respect to each share of Series
Preferred equal to the sum of (A) the Original Series issue price of $2.04 plus
(B) all declared but unpaid dividends. If, upon any such liquidation,
distribution, or winding up, the assets shall be insufficient to make payment in
full to all holders of Series D1 Preferred and Series D2 Preferred, then such
assets shall be distributed among the holders of Series D1 Preferred and Series
D2 Preferred at the time outstanding, ratably in proportion to the full amounts
to which they would otherwise be respectively entitled.
After payment of the full liquidation preference of the Series D1 Preferred and
Series D2 Preferred, the holders of Series A, Series B, Series C and Series D
Preferred shall be entitled to be paid out of the assets of the Corporation an
amount with respect to each share of Series Preferred equal to the sum of (A)
the Original Series issue price of $.40, $1.00, $1.70 and $2.04, respectively,
plus (B) all declared but unpaid
F-38
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
dividends. If, upon any such liquidation, distribution, or winding up, the
assets shall be insufficient to make payment in full to all holders of Series A,
Series B, Series C and Series D Preferred, then such assets shall be distributed
among the holders of Series A, Series B, Series C and Series D Preferred at the
time outstanding, ratably in proportion to the full amounts to which they would
otherwise be respectively entitled.
REDEMPTION
The Company shall redeem one third of the Series B, Series C, Series D, Series
D1 and Series D2 shares issued and outstanding at February 28, 2001 on February
27, 2004, 2005 and 2006. The redemption value per share is equal to $1.00 and
$1.70 for Series B and Series C, respectively, and $2.04 for Series D, Series D1
and Series D2 stock.
CONVERSION
Each share of Series A, Series B, Series C, Series D, Series D1 and Series D2
stock was, as of February 28, 2001, convertible into one share of common stock
at the option of the holder, subject to adjustments for any future stock splits,
stock combinations, stock dividends or other similar transactions.
Each share of Series Preferred shall automatically convert into shares of Common
Stock immediately upon the closing of an effective registration statement under
the Securities Act of 1933 with an offering price per share of at least $10.00
which results in aggregate cash proceeds of at least $20,000,000.
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK WARRANTS
In connection with the issuance of mandatorily redeemable Series D1 convertible
preferred stock, the Company issued 19,417,474 warrants for the purchase of
Series D2 stock. The warrants were issued with an exercise price of $2.04 per
share. As of February 28, 2001, the warrants had not been exercised. These
warrants expire in fiscal 2006.
The Company determined the value of the warrants to be $11,046,000, based on the
Black-Scholes option pricing model. This amount was recorded as an offset to
mandatorily redeemable convertible preferred stock. Additionally, in connection
with the issuance of these warrants, the Company recognized a beneficial
conversion charge of $2,815,000. These amounts are being accreted to additional
paid-in capital from the date of issuance of the warrants until February 27,
2006, being the final redemption date of the mandatorily redeemable convertible
preferred stock.
6. COMMON STOCK
RESTRICTED COMMON STOCK
As of February 28, 2001 and February 29, 2000, 44,250 and 549,514 shares,
respectively, of the Company's common stock are subject to a reverse vesting
schedule involving a repurchase right by the Company at a price equal to the
value of the shares as of the date of issuance and 11,250 and 108,600 shares,
respectively, of the Company's common stock are subject to forfeiture upon
termination prior to vesting. Vesting generally occurs over four years from the
date of employment. In accordance with the terms of the Stock Restriction
Agreements, all nonvested shares are nontransferable.
7. EMPLOYEE BENEFITS
STOCK OPTION PLAN
Effective March 1, 1998, the Company established the 1998 Incentive Stock Option
Plan ("1998 Plan"), which provides for the granting of incentive and
nonincentive options to employees, directors, and
F-39
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
consultants of the Company. This plan was terminated during fiscal year 2000 and
the 1999 Incentive Stock Option Plan ("1999 Plan") was then established. In
September 2000, the Company amended the Plan to increase the number of shares
authorized by an additional 2,000,000 shares. The terms of the options granted
may not exceed 10 years.
Options are generally granted with exercise prices equal to the fair market
value of the Company's common stock as of the date of the grant, and typically
vest over a four-year period. The weighted-average grant-date fair value of
options granted during the years ended February 28, 1999, February 29, 2000 and
February 28, 2001 was $0.15, $0.33 and $0.07, respectively.
Stock option activity was as follows:
<Table>
<Caption>
OPTIONS OUTSTANDING
--------------------------
WEIGHTED-
OPTIONS AVERAGE
AVAILABLE FOR NUMBER OF EXERCISE PRICE
GRANT SHARES PER SHARE
------------- --------- --------------
Balance, February 28, 1998 4,734,000 -- $ --
Granted (1,326,000) 1,326,000 0.33
Exercised -- (12,000) 0.17
Forfeited 63,000 (63,000) 0.17
---------- ---------
Balance, February 28, 1999 3,471,000 1,251,000 0.34
Granted (3,258,000) 3,258,000 1.17
Forfeited 264,000 (264,000) 0.96
---------- ---------
Balance, February 29, 2000 477,000 4,245,000 0.94
Additional options authorized 2,000,000 --
Granted (2,435,000) 2,435,000 0.36
Exercised -- (106,000) 0.78
Forfeited 277,000 (277,000) 0.87
---------- ---------
Balance, February 28, 2001 319,000 6,297,000 0.76
Granted (unaudited) (68,000) 68,000 0.20
Exercised (unaudited) -- (773,000) 0.20
Forfeited (unaudited) 488,000 (488,000) 0.62
---------- ---------
Balance, May 31, 2001 (unaudited) 739,000 5,104,000 0.80
========== =========
</Table>
F-40
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Information regarding options outstanding and exercisable by a range of exercise
prices as of February 28, 2001 is as follows:
<Table>
<Caption>
STOCK OPTIONS VESTED
STOCK OPTIONS OUTSTANDING AND EXERCISABLE
------------------------------------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
REMAINING EXERCISE EXERCISE
EXERCISE NUMBER OF CONTRACTUAL PRICE PER NUMBER OF PRICE PER
PRICE SHARES LIFE (YEARS) SHARE SHARES SHARE
-------- --------- ------------ --------- --------- ---------
$0.10-0.17 732,000 7.73 $0.17 334,000 $0.17
$0.20 2,052,000 9.79 0.20 68,000 0.20
$0.53 340,000 7.63 0.53 129,000 0.53
$1.00-1.20 3,173,000 8.76 1.17 269,000 1.17
--------- -------
6,297,000 800,000
========= =======
</Table>
STOCK-BASED COMPENSATION
The Company applies APB 25 and related interpretations in accounting for stock
option grants to employees under its stock option plans. Because the exercise
prices of the options are equal to the estimated market price of the underlying
common stock on the date of the grant, no compensation cost has been recognized
in the Company's financial statements. Pro forma disclosures assuming
compensation cost had been determined based on the fair value of stock options
at the grant dates in accordance with SFAS 123 is as follows:
<Table>
<Caption>
YEAR ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
------------ ------------ ------------
Net loss available to common
stockholders:
As reported $(6,604,000) $(14,941,000) $(20,265,000)
Pro forma $(6,625,000) $(15,091,000) $(20,461,000)
</Table>
The estimates of weighted-average grant-date fair values of options granted and
option compensation for fiscal 2001 and 2000 have been estimated using the
minimum value method with the following weighted-average assumptions:
<Table>
<Caption>
YEAR ENDED
------------------------------------------
FEBRUARY 28, FEBRUARY 29, FEBRUARY 28,
1999 2000 2001
------------ ------------ ------------
Volatility 0% 0% 0%
Risk-free interest rate 5.1% 6.7% 5.6%
Expected option life 4 years 4-6 years 4-6 years
Dividend yield None None None
</Table>
8. INCOME TAXES
At February 28, 2001, the Company has net operating loss carryforwards and
research tax credits of approximately $42 million and $24 million, respectively,
which may be used to offset future taxable income. These carryforwards expire
beginning in fiscal 2011 through 2021. The Internal Revenue Code
F-41
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
places certain limitations on the annual amount of net operating loss
carryforwards which can be utilized if certain changes in the Company's
ownership occur. Future changes in the Company's ownership may, therefore, limit
the use of such carryforward benefits.
Components of the Company's deferred tax assets are as follows:
<Table>
<Caption>
FEBRUARY 29, FEBRUARY 28,
2000 2001
------------ ------------
Current deferred tax assets:
Accrued benefits $ 104,000 $ 145,000
Reserves and allowances 147,000 304,000
----------- ------------
251,000 449,000
----------- ------------
Noncurrent deferred tax assets:
Inventory 141,000 282,000
Other 14,000 10,000
Fixed assets -- 108,000
Net operating loss carryforwards 8,912,000 15,667,000
Research credit carryforward 494,000 494,000
----------- ------------
9,561,000 16,561,000
----------- ------------
Total gross deferred tax assets, net 9,812,000 17,010,000
Valuation allowance (9,812,000) (17,010,000)
----------- ------------
Net deferred tax assets $ -- $ --
=========== ============
</Table>
The gross deferred tax assets have been reduced by a valuation allowance because
it is currently more likely than not that such benefits will not be realized.
The income tax benefit differs from the amount computed by applying the U.S.
federal income tax rate to loss before income taxes for the following reasons:
<Table>
<Caption>
FEBRUARY 29, FEBRUARY 28,
2000 2001
------------ ------------
U.S. federal income tax benefit at statutory rate $(5,080,000) $(6,584,000)
Unrecognized benefit due to valuation allowance 5,732,000 7,198,000
State income tax benefit, net of federal expense (491,000) (637,000)
Other nondeductible items (160,000) 23,000
----------- -----------
Income tax benefit $ -- $ --
=========== ===========
</Table>
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS
In the prior year, the Company entered into two noncancelable operating leases
for facilities, which expire in 2006 and 2007. The Company also leases certain
office equipment under noncancelable operating leases.
F-42
ECRIX CORPORATION
NOTES TO FINANCIAL STATEMENTS
Future minimum lease payments for all noncancelable operating leases having
remaining terms in excess of one year at February 28, 2001 are as follows:
<Table>
2002 $ 920,000
2003 965,000
2004 1,011,000
2005 1,061,000
2006 1,014,000
Thereafter 487,000
----------
Total minimum lease obligations $5,458,000
==========
</Table>
Rent expense totaled $251,000, $649,000 and $889,000 for the years ended
February 28, 1999, February 29, 2000 and February 28, 2001, respectively.
LITIGATION SETTLEMENT AGREEMENT
On June 23, 2000, the Company entered into a Settlement Agreement with a
competitor based on claims alleging patent infringement and certain other
charges. The Settlement Agreement represents the full and final resolution of
all claims that were raised between the parties as well as any and all other
claims, known or unknown. Per the terms of the Settlement Agreement, the Company
paid the competitor $750,000 and 400,000 shares of Series D Preferred Stock. The
Company recorded these shares at the fair value of the stock, totaling $816,000.
F-43
INDEX TO APPENDICES
A. Agreement and Plan of Merger by and among Exabyte Corporation, Bronco
Acquisition, Inc., Ecrix Corporation, certain Investors and Certain
Lenders, dated as of August 22, 2001
<Table>
Exhibit 7.10 Affiliate Letter
Exhibit 7.16 Lock Up Agreement
</Table>
B. Fairness Opinion of Broadview International, LLC
C. Fairness Opinion of The Wallach Company/McDonald Investments, Inc.
D. Form of Amendment to Restated Certificate of Incorporation (Increase in
Authorized Capital)
E. Form of Amendment to Restated Certificate of Incorporation (Reverse Split)
F. Section 262 of the Delaware General Corporation Law (Delaware Appraisal
Rights Statute)
APPENDIX A
EXECUTION COPY
AGREEMENT AND PLAN OF MERGER
AMONG
EXABYTE CORPORATION,
BRONCO ACQUISITION, INC.,
ECRIX CORPORATION,
CERTAIN LENDERS,
AND
CERTAIN INVESTORS
DATED AS OF AUGUST 22, 2001
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
ARTICLE I THE MERGER................................................. 1
1.1 The Merger.................................................. 1
1.2 The Closing................................................. 1
1.3 Effective Date and Time..................................... 1
1.4 Certificate of Incorporation of the Surviving Corporation... 2
1.5 Bylaws of the Surviving Corporation......................... 2
1.6 Effects of Merger........................................... 2
1.7 Directors and Officers...................................... 2
1.8 Conversion of Shares........................................ 3
1.9 Tax-Free Reorganization..................................... 6
ARTICLE II PURCHASE OF CONVERTIBLE SECURED PROMISSORY NOTES.......... 6
2.1 The Loan.................................................... 6
2.2 Delivery.................................................... 7
ARTICLE III PURCHASE OF SERIES H CONVERTIBLE PREFERRED STOCK......... 7
3.1 Authorization; Agreement To Sell And Purchase............... 7
3.2 Closing, Delivery and Payment............................... 8
3.3 Rights and Preferences of Series H Shares................... 8
3.4 Registration Agreement...................................... 8
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY............. 8
4.1 Organization................................................ 8
4.2 Enforceability.............................................. 8
4.3 Capitalization.............................................. 9
4.4 Subsidiaries and Affiliates................................. 10
4.5 No Approvals; No Conflicts.................................. 10
4.6 Financial Statements........................................ 11
4.7 Absence of Certain Changes or Events........................ 11
4.8 Taxes....................................................... 12
4.9 Property.................................................... 14
4.10 Contracts................................................... 16
4.11 Customers and Suppliers..................................... 17
4.12 Warranties and Returns...................................... 17
4.13 Claims and Legal Proceedings................................ 17
4.14 Labor and Employment Matters................................ 17
4.15 Employee Benefit Plans...................................... 18
4.16 Personnel................................................... 21
4.17 Intellectual Property....................................... 21
4.18 Accounts Receivable......................................... 23
4.19 Inventory................................................... 23
4.20 Corporate Books and Records................................. 24
4.21 Licenses, Permits, Authorizations, etc...................... 24
4.22 Compliance With Laws........................................ 24
4.23 Insurance................................................... 24
</Table>
i
<Table>
<Caption>
PAGE
----
4.24 Brokers or Finders.......................................... 25
4.25 Bank Accounts............................................... 25
4.26 Insider Interests........................................... 25
4.27 Compliance with Environmental Laws.......................... 25
4.28 Information Supplied by the Company......................... 26
4.29 Full Disclosure............................................. 26
4.30 Absence of Undisclosed Liabilities.......................... 26
4.31 Government Contracts........................................ 27
ARTICLE V REPRESENTATIONS AND WARRANTIES OF INVESTORS AND LENDERS
REGARDING SECURITIES MATTERS....................................... 27
5.1 Requisite Power and Authority............................... 27
5.2 Investment Representations.................................. 27
5.3 Investor Bears Economic Risk................................ 27
5.4 Acquisition for Own Account................................. 28
5.5 Investor and Lender Can Protect Its Interest................ 28
5.6 Accredited Investor......................................... 28
5.7 Parent Information.......................................... 28
5.8 Rule 144.................................................... 28
5.9 Information Furnished by Investors and Lenders.............. 28
ARTICLE VI REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB...
29
6.1 Organization................................................ 29
6.2 Enforceability.............................................. 29
6.3 Capitalization.............................................. 30
6.4 Subsidiaries and Affiliates................................. 31
6.5 No Approvals; No Conflicts.................................. 31
6.6 Financial Statements........................................ 31
6.7 Absence of Certain Changes or Events........................ 32
6.8 Taxes....................................................... 33
6.9 Property.................................................... 35
6.10 Contracts................................................... 36
6.11 Customers and Suppliers..................................... 37
6.12 Warranties and Returns...................................... 37
6.13 Claims and Legal Proceedings................................ 38
6.14 Labor and Employment Matters................................ 38
6.15 Employee Benefit Plans...................................... 38
6.16 Personnel................................................... 41
6.17 Intellectual Property....................................... 41
6.18 Accounts Receivable......................................... 44
6.19 Inventory................................................... 44
6.20 Corporate Books and Records................................. 44
6.21 Licenses, Permits, Authorizations, etc...................... 44
6.22 Compliance With Laws........................................ 44
</Table>
ii
<Table>
<Caption>
PAGE
----
6.23 Insurance................................................... 45
6.24 Brokers or Finders.......................................... 45
6.25 Insider Interests........................................... 45
6.26 Compliance with Environmental Laws.......................... 45
6.27 Information Supplied by Parent.............................. 46
6.28 Full Disclosure............................................. 46
6.29 Absence of Undisclosed Liabilities.......................... 46
6.30 Government Contracts........................................ 46
6.31 Securities -- Parent Common Stock........................... 47
6.32 Securities -- H Shares and Notes............................ 47
6.33 SEC Documents; Parent Financial Statements.................. 47
ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER
SUB................................................................ 48
7.1 Accuracy of Representations and Warranties.................. 48
7.2 Performance of Agreements................................... 48
7.3 Compliance Certificate...................................... 48
7.4 No Material Adverse Change.................................. 48
7.5 Approvals................................................... 48
7.6 Secretary's Certificate..................................... 48
7.7 Compliance With Laws........................................ 49
7.8 Stockholder Approval........................................ 49
7.9 Legal Proceedings........................................... 49
7.10 Affiliate Letters........................................... 49
7.11 Termination of Certain Agreements........................... 49
7.12 Dissenter Rights Exercised Greater Than 20% of Stock........ 49
7.13 Consents to Merger.......................................... 49
7.14 Receipt of Loan from Company................................ 50
7.15 Amendment to Certificate.................................... 50
7.16 Lock-Up Agreements.......................................... 50
7.17 SEC Effectiveness........................................... 50
7.18 Series H Purchase........................................... 50
ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY...... 50
8.1 Accuracy of Representations and Warranties.................. 50
8.2 Performance of Agreements................................... 50
8.3 Compliance Certificate...................................... 51
8.4 No Material Adverse Change.................................. 51
8.5 Approvals and Consents...................................... 51
8.6 Secretary's Certificate..................................... 51
8.7 Compliance With Laws........................................ 51
8.8 Legal Proceeding............................................ 51
8.9 Stockholder Approval........................................ 51
8.10 Parent's Trading Market Listing............................. 52
8.11 S-4 Effectiveness........................................... 52
</Table>
iii
<Table>
<Caption>
PAGE
----
8.12 Congress Consent............................................ 52
ARTICLE IX CONDITIONS PRECEDENT TO OBLIGATIONS OF THE INVESTORS...... 52
9.1 Closing of the Merger....................................... 52
9.2 Compliance With Laws........................................ 52
9.3 Registration Rights Agreement............................... 52
ARTICLE X COVENANTS.................................................. 52
10.1 Conduct of Business by the Company Pending the Merger....... 52
10.2 Conduct of Business by Parent Pending the Merger............ 54
10.3 Access to Information; Confidentiality...................... 56
10.4 Notification of Certain Matters............................. 57
10.5 Further Action; Best Efforts................................ 57
10.6 Approval of Parent Stockholders; Preparation of Proxy
Statement................................................... 57
10.7 Company Stockholder Approval................................ 58
10.8 Preparation of S-4.......................................... 58
10.9 Parent Common Stock......................................... 59
10.10 Dissenting Shares........................................... 59
10.11 Publicity................................................... 59
10.12 No Solicitation, etc........................................ 59
10.13 Regulatory and Other Approvals.............................. 60
10.14 Company Employees........................................... 61
10.15 Rights Agreement............................................ 61
ARTICLE XI TERMINATION, AMENDMENT AND WAIVER......................... 62
11.1 Termination................................................. 62
11.2 Effect Of Termination....................................... 63
11.3 Amendment................................................... 63
11.4 Waiver...................................................... 63
ARTICLE XII GENERAL.................................................. 64
12.1 No Survival of Representations and Warranties............... 64
12.2 Expenses.................................................... 64
12.3 Notices..................................................... 64
12.4 Severability................................................ 65
12.5 Entire Agreement............................................ 65
12.6 Assignment.................................................. 65
12.7 Parties in Interest......................................... 65
12.8 Governing Law; Jurisdiction; Venue.......................... 65
12.9 No Third-Party Beneficiary.................................. 66
12.10 Counterparts................................................ 66
</Table>
iv
EXHIBITS
<Table>
Exhibit 7.10................................. Affiliate Letter
Exhibit 7.16................................. Lock Up Agreement
</Table>
v
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and entered
into as of August 22, 2001, by and among Exabyte Corporation, a Delaware
corporation ("Parent"), Bronco Acquisition, Inc., a Delaware corporation and a
wholly owned subsidiary of Parent ("Merger Sub"), Ecrix Corporation, a Delaware
corporation (the "Company"), the investors listed on the signature page of this
Agreement (the "Investors") and the lenders listed on the signature pages of
this Agreement (the "Lenders").
RECITALS
A. The Company, Parent and Merger Sub believe it advisable and in their
respective best interests to effect a merger of the Company and Merger Sub
pursuant to this Agreement (the "Merger").
B. The Board of Directors of the Company has approved this Agreement and
the Merger as required by applicable law, and will submit this Agreement to the
Company's stockholders for their approval.
C. The Boards of Directors of Parent and Merger Sub and the sole
stockholder of Merger Sub have approved this Agreement and the Merger as
required by applicable law.
AGREEMENT
In consideration of the terms of this Agreement, the parties hereto agree
as follows:
ARTICLE I
THE MERGER
1.1 The Merger
Upon the terms and subject to the conditions of this Agreement, at the
Effective Time (as defined in Section 1.3) the separate existence of Merger Sub
shall cease and Merger Sub shall be merged with and into the Company, and the
Company shall continue as the surviving corporation in the Merger and a wholly
owned subsidiary of Parent (the Company as the surviving corporation after the
Merger is sometimes referred to herein as the "Surviving Corporation").
1.2 The Closing
Upon the terms and subject to the conditions of this Agreement, the closing
of the Merger (the "Closing") shall take place on the earliest practicable
business day (the "Closing Date"), but not later than the fifth business day,
after the satisfaction or waiver of the conditions set forth in Articles VII and
VIII at 10 a.m. local time at the offices of Holland & Hart LLP, Suite 500, 1050
Walnut Street, Boulder, CO 80302, or such other date, time or location as Parent
and the Company shall agree.
1.3 Effective Date and Time
On the Closing Date and upon the terms and subject to the conditions of
this Agreement, the Company and Merger Sub shall cause the appropriate
certificate (the "Certificate of Merger") substantially in the form attached as
Exhibit 1.3 complying with the applicable provisions of the Delaware General
Corporate Law ("DGCL") to be properly executed and filed with the Secretary of
State of the State of Delaware (the "Delaware Secretary of State"). The Merger
shall become effective on the date (the "Effective Date") and at the time (the
"Effective Time") of filing of the Certificate of Merger or at such other time
as may be specified in the Certificate of Merger as filed. If the Delaware
Secretary of State requires any changes in the Certificate of Merger as a
condition to filing or to issuing its certificate to the effect that the Merger
is effective, Parent, Merger Sub and the Company will execute any necessary
revisions incorporating such changes, provided such changes are not materially
inconsistent with and do not result in any material change in the terms of this
Agreement.
1
1.4 Certificate of Incorporation of the Surviving Corporation
At the Effective Time, the Certificate of Incorporation of Merger Sub as in
effect immediately prior to the Effective Time shall become the Certificate of
Incorporation of the Surviving Corporation, except that the name of the
corporation shall set forth therein shall be changed to the name of the Company.
Thereafter, the Certificate of Incorporation of the Surviving Corporation may be
amended in accordance with its terms and as provided by law.
1.5 Bylaws of the Surviving Corporation
At the Effective Time, the Bylaws of Merger Sub as in effect immediately
prior to the Effective Time shall become the Bylaws of the Surviving
Corporation, except that the name of the corporation set forth therein shall be
changed to the name of the Company. Thereafter, the Bylaws may be amended or
repealed in accordance with their terms and the Certificate of Incorporation of
the Surviving Corporation and as provided by law.
1.6 Effects of Merger
The Surviving Corporation shall, by virtue of the Merger and in accordance
with the DGCL, possess all the properties and rights and be subject to all the
liabilities of the Company and Merger Sub. From and after the Effective Time,
the Merger shall have all effects provided by applicable law.
1.7 Directors and Officers
At the Effective Time, the directors of Merger Sub shall continue in office
as the directors of the Surviving Corporation and the officers of the Merger Sub
shall continue in office as the officers of the Surviving Corporation, and such
directors and officers shall hold office in accordance with and subject to the
Certificate of Incorporation and Bylaws of the Surviving Corporation. At the
Effective Time,(i) the number of members of the Board of Directors of Parent
(the "Board") shall be increased to seven (7), (ii) Parent shall remove or
accept the resignations of two members of the Board, and (iii) the resulting
vacancies on the Board shall be filled by the election of G. Jackson Tankersley,
Jr., William J. Almon, Sr. and Juan A. Rodriguez ("Company Designees") as
directors of Parent, each to serve until the next annual meeting of stockholders
of Parent at which such directorship is up for reelection and until their
successors are elected and qualified. These directors shall be placed in one or
more classes of directors whose staggered terms expire at the 2002, 2003 and
2004 Annual Meetings of stockholders of Parent, respectively. Except as provided
in the last sentence of this Section 1.7 the Parent agrees to take all action
necessary such that the Parent's Board of Directors shall at all times include
three directors (or such greater number of directors as shall constitute the
maximum number of members that represent a numerical minority of the Board) who
are nominated by the Company Designees and included in the slate of proposed
directors put forth by the Parent to its stockholders and recommended for
election in the proxy solicitation materials disseminated by the Parent. Upon
the death, resignation or removal of any Company Designee, Parent will cause the
vacancy to be filled by a subsequent designee recommended by the remaining
Company Designees then serving on the Board. The Company Designees shall be
covered by any directors' and officers' liability insurance maintained from time
to time on the same terms as the other members of the Board and shall be
entitled to the benefit of any indemnification arrangements applicable to other
members of the Board. The Company Designees shall have the right to receive all
fees paid and options and other awards granted and expenses reimbursed to
non-employee directors generally, except that in the event that any Company
Designee shall also be an employee of Parent, such Company Designee shall only
be entitled to receive compensation for his service on the Board of Directors
consistent with the policies of Parent's Board of Directors governing the
compensation of employee directors generally. If at any time, the Investors
shall beneficially own (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as currently in effect) less than 30% of the then
outstanding voting power of all classes of the Parent's voting securities, the
number of directors that Parent shall be obligated to include on the Board of
Directors pursuant to the fourth sentence of this Section 1.7 shall be reduced
so that the number of Company Designees expressed as a percentage of the entire
Board of Directors is
2
approximately equal to the percentage of the outstanding voting power then
beneficially owned by the Investors rounded to the nearest whole directorship
but in any event not a majority; provided, however that if the Investors shall
beneficially own less than 10% of the outstanding voting power of all classes of
the Parent's voting securities, the number of Company Designees shall be zero.
1.8 Conversion of Shares
1.8.1 Exchange Ratios
As of the Effective Time, by virtue of the Merger and without any action on
the part of the Company, Merger Sub, Parent or any of their respective
stockholders:
(a) All shares of any class of capital stock of the Company held by
the Parent, Merger Sub or any other subsidiary of the Parent or held by the
Company as treasury shares shall be canceled.
(b) The outstanding shares of preferred stock of the Company (the
"Company Preferred Stock"), other than shares of Company Preferred Stock
for which dissenters' rights are perfected and shares canceled pursuant to
paragraph (a) above, shall be converted into the right to receive up to
9,000,000 shares of Parent's common stock, $0.001 par value per share
("Parent Common Stock"), with the exchange ratio for each series of Company
Preferred Stock to be as follows (each, a "Company Preferred Stock Exchange
Ratio"):
(i) Each issued and outstanding share of the Company's Series D-1
Preferred Stock (other than dissenters shares) shall be converted into
the right to receive .82400 shares of Parent Common Stock (the "Series
D-1 Preferred Stock Exchange Ratio").
(ii) Each issued and outstanding share of the Company's Series D
Preferred Stock (other than dissenters shares) shall be converted into
the right to receive .04857 shares of Parent Common Stock.
(iii) Each issued and outstanding share of the Company's Series C
Preferred Stock (other than dissenters shares) shall be converted into
the right to receive .04048 shares of Parent Common Stock.
(iv) Each issued and outstanding share of the Company's Series B
Preferred Stock (other than dissenters shares) shall be converted into
the right to receive .02371 shares of Parent Common Stock.
(v) Each issued and outstanding share of the Company's Series A
Preferred Stock (other than dissenters shares) shall be converted into
the right to receive .00952 shares of Parent Common Stock.
(c) The outstanding shares of common stock of the Company (the
"Company Common Stock" and together with the Company Preferred Stock, the
"Company Capital Stock"), other than shares of Company Common Stock for
which dissenters' rights are perfected and shares that are canceled
pursuant to paragraph 1.8.1(a) above, shall be converted into the right to
receive a total of 1,000,000 shares of Parent Common Stock, with each
outstanding share of Company Common Stock converted into the right to
receive a number of shares of Parent Common Stock equal to (i) 1,000,000
divided by (ii) the total number of shares of Company Common Stock
outstanding immediately prior to the Effective Time (the "Company Common
Stock Exchange Ratio") provided that the 1,000,000 shares of Parent Common
Stock issuable to holders of the Company Common Stock shall be reduced by
the number of shares of Parent Common Stock attributable to shares of
Company Common Stock for which dissenters' rights have been properly
exercised under the DGCL.
(d) In the event there is any change after the date of this Agreement
to the number of shares of Company Preferred Stock to be exchanged as a
result of the Merger, the applicable Company Preferred Stock Exchange Ratio
shall be appropriately adjusted so that the aggregate number of shares of
Parent Common Stock issuable as a result of the Merger upon conversion of
the Company
3
Preferred Stock shall not exceed 9,000,000 shares (less any shares
otherwise issuable to holders of Company Preferred Stock that have properly
exercised dissenters' rights under the DGCL). The number of shares of
Parent Common Stock shall be appropriately adjusted in the event of a stock
split, stock combination or other similar change in the Parent's Capital
Stock effected prior to Closing.
(e) Each issued and outstanding share of capital stock of Merger Sub
shall be converted into one share of common stock of the Surviving
Corporation.
(f) Each outstanding Option to purchase shares of Company Common Stock
(the "Options") issued pursuant to the Company's 1998 Incentive Stock
Option Plan and Equity Incentive Plan (the "Company Option Plans"), each
warrant to purchase shares of the Company's Series B Preferred Stock (the
"B Warrants") and each warrant to purchase shares of the Company's Series
D-2 Preferred Stock (the "D-2 Warrants"), whether or not vested or
exercisable, shall, unless such Option, B Warrant or D-2 Warrant shall have
been exercised prior to consummation of the Merger, terminate by its terms
in connection with the Merger. The Board of Directors of the Company shall
take such action or make such determinations as necessary to terminate the
Options, B Warrants and D-2 Warrants at the Effective Time of the Merger.
Notwithstanding the foregoing, to the extent any B Warrants are exercised
prior to the Effective Time, the shares of the Company's Series B Preferred
Stock issued upon such exercise shall be converted into shares of Parent
Common Stock in accordance with the applicable Company Preferred Stock
Exchange Ratio; provided, however, that such Company Preferred Stock
Exchange Ratio shall be adjusted to the product of the applicable Company
Preferred Stock Exchange Ratio multiplied by a fraction, (i) the numerator
of which shall be the aggregate number of shares of the Company's Series B
Preferred Stock outstanding as of the date of this Agreement and (ii) the
denominator of which shall be the aggregate number of shares of the
Company's Series B Preferred Stock outstanding immediately prior to the
Effective Time. Notwithstanding the foregoing, to the extent any D-2
Warrants are exercised prior to the Effective Time, the shares of the
Company's Series D-2 Preferred Stock issued upon such exercise shall be
converted into shares of Parent Common Stock in accordance with the Series
D-1 Preferred Stock Exchange Ratio; provided, however, that such Series D-1
Preferred Stock Exchange Ratio shall be adjusted to the product of the
Series D-1 Preferred Stock Exchange Ratio multiplied by a fraction, (i) the
numerator of which shall be the aggregate number of shares of the Company's
Series D-1 Preferred Stock outstanding as of the date of this Agreement and
(ii) the denominator of which shall be the aggregate number of shares of
the Company's Series D-1 Preferred Stock and Series D-2 Preferred Stock
outstanding immediately prior to the Effective Time.
(g) Holders of shares of Company Capital Stock who have complied with
all the requirements for perfecting dissenters' rights, as required under
the DGCL, shall be entitled to their rights under the DGCL with respect to
such shares (the "Dissenting Shares"). Notwithstanding the foregoing, if
any holder of Dissenting Shares shall effectively withdraw or lose (through
failure to perfect or otherwise) the right to dissent, then, as of the
later of the Effective Time and the occurrence of such event, such holder's
shares shall automatically be converted into and represent only the right
to receive the shares of Parent Common Stock to which such holder is then
entitled under this Agreement and the DGCL, without interest thereon and
upon surrender of the certificate or certificates representing such shares.
Notwithstanding any provision of this Agreement to the contrary, any
Dissenting Shares held by a stockholder who has perfected dissenter's
rights for such shares in accordance with the DGCL shall not be converted
into Parent Common Stock pursuant to this Section 1.8.1.
(h) If, prior to the Effective Time, Parent or the Company effects a
subdivision of its outstanding shares into a greater number of shares, or a
combination of its outstanding shares into a lesser number of shares, or
reorganizes, reclassifies or otherwise changes its outstanding shares into
the same or a different number of shares or other classes, or declares a
dividend on its outstanding shares payable in shares of its capital stock
or securities convertible into shares of its capital stock, then the
Company Common Stock Exchange Ratio and the Company Preferred Stock
Exchange
4
Ratios will be adjusted appropriately so as to maintain the relative
proportionate interests of the holders of shares of Company Capital Stock
and the holders of shares of Parent Common Stock.
1.8.2 Exchange of Certificates
(a) As promptly as practicable after the Effective Time, Parent shall make
available to BankBoston, N.A., the "Exchange Agent," the certificates
representing the whole shares of Parent Common Stock issued pursuant to Section
1.8.1 in exchange for outstanding shares of Company Capital Stock.
(b) The Exchange Agent shall mail on or prior to the Closing Date to each
holder of record as of the date 10 business days prior to the Closing Date of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Company Capital Stock (and as soon as
practicable to stockholders that became holders of Company Capital Stock
subsequent to such date), other than shares to be canceled in accordance with
Section 1.8.1(a), (i) a letter of transmittal (the "Letter of Transmittal") in
customary form and (ii) instructions for effecting the surrender of the
certificates in exchange for certificates representing Parent Common Stock. Upon
surrender of a certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by Parent, together with such Letter
of Transmittal, duly executed, and such other documents as may reasonably be
required by the Exchange Agent, the holder of such certificate shall be entitled
to receive in exchange therefor, by the later of (a) ten business days following
the Effective Time and (b) ten business days following the surrender of such
certificate, a certificate representing that number of whole shares of Parent
Common Stock which such holder has the right to receive pursuant to the
provisions of Section 1.8.1, and the certificate so surrendered shall forthwith
be canceled.
(c) In the event that any certificates representing shares of Company
Capital Stock shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the stockholder claiming such certificate to be lost,
stolen or destroyed, Parent shall issue in exchange for such lost, stolen or
destroyed certificate the shares of Parent Common Stock that such stockholder is
entitled to receive pursuant to Section 1.8.1; provided, however, that Parent
may, in its discretion and as a condition precedent to the issuance thereof,
require such stockholder to provide Parent with a reasonable and customary
indemnity agreement against any claim that may be made against Parent with
respect to the certificate alleged to have been lost, stolen or destroyed.
(d) The shares of Parent Common Stock that each stockholder of the Company
shall be entitled to receive pursuant to the Merger shall be deemed to have been
issued at the Effective Time. If the Merger Consideration (or any portion
thereof) is to be delivered to any person other than the person in whose name
the certificate or certificates representing shares of Company Capital Stock
surrendered in exchange therefor are registered, it shall be a condition to such
exchange that the person requesting such exchange pay to Parent any transfer or
other taxes required by reason of the payment of the Merger Consideration to a
person other than the registered holder of the certificate or certificates so
surrendered, or shall establish to the satisfaction of Parent that such tax has
been paid or is not applicable. Notwithstanding anything to the contrary,
neither Parent nor any other party hereto shall be liable to a holder of shares
of Company Capital Stock for any Merger Consideration delivered to a public
official pursuant to applicable law, including abandoned property, escheat and
similar laws to the extent required under law to be so delivered.
(e) Parent or the Exchange Agent will be entitled to deduct and withhold
from the Merger Consideration such amounts as Parent or the Exchange Agent are
required to deduct and withhold with respect to the making of such payment under
the Code, or any provision of state, local or foreign tax law. To the extent
that amounts are so withheld, such amounts will be treated for all purposes of
this Agreement as having been paid to the former holder of the Company Capital
Stock in respect of whom such deduction and withholding were made by Parent or
the Exchange Agent.
1.8.3 Fractional Shares
No Parent Common Stock representing a fraction of Parent Common Stock or
book-entry credit of the same will be issued pursuant to the Merger, but in lieu
thereof each former holder of Company
5
Capital Stock otherwise entitled to receive a fractional interest in Parent
Common Stock will be entitled to receive in accordance with the provisions of
this Section 1.8.3 a cash payment in lieu of that fractional interest
representing the holder's proportionate interest in the net proceeds from the
sale by the Exchange Agent on behalf of all holders otherwise entitled to
fractional interests in shares of Parent Common Stock (the "Excess Shares"). The
sale of the Excess Shares by the Exchange Agent shall be executed through the
Parent's Trading Market. Until the net proceeds of the sale of the Excess Shares
have been distributed to the former holders of Company Capital Stock, the
Exchange Agent will hold the proceeds in trust for those former holders (the
"Excess Shares Trust"). Commissions, transfer taxes and other out-of-pocket
transaction costs, including the expenses and compensation, of the Exchange
Agent incurred in connection with the sale of the Excess Shares shall be paid
from cash held in the Excess Shares Trust. The Exchange Agent shall determine
the portion of the Excess Shares Trust to which each former holder of Common
Stock shall be entitled, if any, by multiplying the amount of the aggregate net
proceeds comprising the Excess Shares Trust by a fraction the numerator of which
shall be the fractional interest of Parent Common Stock to which such former
holder would otherwise be entitled and the denominator of which is the aggregate
amount of fractional interests in Parent Common Stock to which all former
holders of Company Capital Stock would otherwise be entitled. As soon as
practicable after the determination of the amount of cash, if any, to be paid to
former holders of Company Capital Stock in lieu of fractional interests in
Parent Common Stock, the Exchange Agent shall make available those amounts to
the former holders without interest.
1.8.4 No Further Transfers; No Further Ownership Rights in Company Capital
Stock; No Dividends or Other Distributions
All shares of Parent Common Stock issued upon the surrender for exchange of
shares of Company Capital Stock in accordance with the terms hereof shall be
deemed to have been issued in full satisfaction of all rights pertaining to such
shares of Company Capital Stock, and there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of Company
Capital Stock that were outstanding immediately prior to the Effective Time. If,
after the Effective Time, certificates formerly representing shares of Company
Capital Stock are presented to the Surviving Corporation, they shall be
forwarded to Parent and shall be canceled and exchanged in accordance with this
Section 1.8, unless such certificates for Parent Common Stock have already been
issued in respect of such shares in reliance upon an affidavit of loss or
otherwise, in any case subject to applicable law in the case of Dissenting
Shares. No dividends or other distributions payable with respect to Parent
Common Stock shall be paid to the holder of any unsurrendered certificates
evidencing Company Capital Stock until such certificates are surrendered and
exchanged for shares of Parent Common Stock in accordance with this Agreement.
1.9 Tax-Free Reorganization
It is intended that the Merger shall constitute a "reorganization" within
the meaning of Section 368(a) of the Code, and that this Agreement shall
constitute a "plan of reorganization" for purposes of the Code.
ARTICLE II
PURCHASE OF CONVERTIBLE SECURED PROMISSORY NOTES
2.1 The Loan
At the time of full execution of this Agreement (the "Execution Time"),
pursuant to a Loan and Security Agreement of even date herewith (the "Loan
Agreement") Meritage, Centennial and Almon or their respective affiliates (the
"Lenders") severally and not jointly agree to lend to Parent the aggregate
amount of Two Million Dollars ($2,000,000) (the "Loan Amount"), of which the
Lenders' respective participation amounts shall be $1,139,847 for Meritage,
$603,688 for Centennial and $256,465 for Almon, against the issuance and
delivery by the Parent of convertible secured promissory notes in substantially
the form attached hereto as Exhibit 2.1 (the "Notes"); provided, however, that
the Loan Amount shall be
6
advanced in two separate installments, the first of which shall be in the amount
of One Million Five Hundred Thousand Dollars ($1,500,000) and the second of
which shall be subject to the satisfaction of certain conditions contained in
the Loan Agreement and shall be in the amount of Five Hundred Thousand Dollars
($500,000), each of which installments shall be advanced by the Lenders on a pro
rata basis. In the event of termination of this Agreement, the Notes shall be
subject to acceleration, extension or conversion in accordance with the
provisions set forth therein.
2.2 Delivery
At the Execution Time (i) the Lenders shall deliver to Parent certified
checks or wire transfer funds in the aggregate amount of One Million Five
Hundred Thousand Dollars ($1,500,000) (the "Initial Loan Amount") and (ii)
Parent shall issue and deliver to the Lenders (i) Convertible Secured Promissory
Notes in favor of the Lenders in their respective participation amounts
substantially in the form attached hereto as Exhibit 2.1 and (ii) UCC-1
financing statements or other security documents reasonably satisfactory to the
Lenders evidencing a second priority security interest in substantially all the
assets of Parent. Upon the satisfaction of the requirements set forth in the
Loan Agreement, the Lenders shall deliver to Parent certified checks or wire
transfer funds in the aggregate amount of Five Hundred Thousand Dollars
($500,000) (the "Remaining Loan Amount").
ARTICLE III
PURCHASE OF SERIES H CONVERTIBLE PREFERRED STOCK
3.1 Authorization; Agreement To Sell And Purchase
3.1.1 On or prior to the Closing, Parent shall authorize the sale and
issuance of shares of its Series H Convertible Preferred Stock (the "H Shares")
having the rights, preferences, privileges and restrictions set forth in the
Certificate of Designations of Powers, Preferences, Qualifications, Limitations
and Restrictions of Series H Convertible Preferred Stock of Parent, attached
hereto as Exhibit 3.1.1(a) (the "Parent H Certificate").
3.1.2 At the Closing, Parent hereby agrees to issue and sell to those
persons and entities identified as Investors, and each Investor severally agrees
to purchase from Parent, the number of H Shares set forth opposite such
Investor's name on Exhibit 3.1.2, at a purchase price of One Dollar ($1.00) per
Share.
3.1.3 Notwithstanding the preceding sentence, any amounts that an Investor
has advanced to Parent as a loan pursuant to Article II of this Agreement and
any unpaid accrued interest on such amounts shall, unless earlier repaid, be
credited to such Investor and such Investor's total purchase price for the H
Shares under this Article III shall be reduced by the sum of the unpaid
principal amount plus any unpaid accrued interest.
3.1.4 Any amounts to be paid to Parent hereunder shall be paid by
certified check or wire transfer of funds to a designated account of Parent,
provided that in the event of a wire transfer, wire transfer instructions are
delivered to the Investors at least one business day prior to the Closing.
3.1.5 If prior to the Effective Time, Parent effects a subdivision of its
outstanding shares into a greater number of shares, or a combination of its
outstanding shares into a lesser number of shares, or reorganizes, reclassifies
or otherwise changes its outstanding shares into the same or a different number
of shares or other classes, or declares a dividend on its outstanding shares
payable in shares of its capital stock or securities convertible into shares of
its capital stock, then (i) the number of H Shares, (ii) the purchase price per
H Share and (iii) the Series H Conversion Price (as defined in the Parent H
Certificate), shall each be proportionately increased or decreased so that the
aggregate purchase price of the H Shares shall equal $9,400,000.
7
3.2 Closing, Delivery and Payment
At the Closing, Parent will deliver to the Investors certificates
representing the number of H Shares to be purchased at the Closing by each
Investor, against payment of the purchase price therefor by certified check or
wire transfer of immediately available funds.
3.3 Rights and Preferences of Series H Shares
The rights, preferences, privileges and restrictions of the H Shares shall
be as set forth in the Parent H Certificate.
3.4 Registration Agreement
At Closing, the Parent and the Investors shall execute and deliver a
Registration Rights Agreement for the benefit of the Investors in the form set
forth hereto as Exhibit 3.4.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as is otherwise set forth in the Company Disclosure Memorandum
attached hereto as Exhibit 4 (the "Disclosure Memorandum") under a reference to
the appropriate Section to which such disclosure relates (unless the
applicability of such disclosure to any other Section is reasonably apparent in
light of the nature of the disclosure), and in order to induce Parent, Merger
Sub, each Lender and each Investor to enter into and perform this Agreement and
the other agreements and certificates that are required to be executed pursuant
to this Agreement (collectively, the "Operative Documents"), the Company
represents and warrants to Parent, Merger Sub, each Lender and each Investor as
of the date of this Agreement as follows in this ARTICLE IV. The Company shall
be deemed to have "knowledge" of a fact or circumstance, if any executive
officer or director of the Company has actual knowledge of any such fact or
circumstance, including, without limitation, any fact or circumstance brought to
the attention of an executive officer or director of the Company by Parent
subsequent to the date of this Agreement.
4.1 Organization
The Company is a corporation duly organized, validly existing and in good
standing (to the extent such terms exist) under the laws of the State of
Delaware. The Company has all requisite corporate power and authority to own,
operate and lease its properties and assets and to carry on its business as now
conducted and as currently proposed to be conducted. The Company is duly
qualified and licensed as a foreign corporation to do business and is in good
standing (to the extent "qualified to do business" and "good standing" exist) in
each jurisdiction in which the character of the Company's properties occupied,
owned or held under lease or the nature of the business conducted by the Company
makes such qualification or licensing necessary, except where the failure to be
so qualified or in good standing would not have a Company Material Adverse
Effect. For purposes of this Agreement, the term "Company Material Adverse
Effect" shall mean any material adverse effect on the business, operations,
assets, financial condition or results of operations of the Company; provided,
however, that Company Material Adverse Effect shall not include any change,
circumstance, event or effect that relates to or results from the announcement
or other disclosure or consummation of the transactions contemplated by this
Agreement or general economic conditions.
4.2 Enforceability
The Company has all requisite corporate power and authority to execute,
deliver and perform its obligations under this Agreement and each of the other
Operative Documents to which it is a party and each of the certificates,
instruments and documents executed or delivered by it pursuant to the terms of
this Agreement. All corporate action on the part of the Company and its
officers, directors and stockholders necessary for (i) the authorization,
execution, delivery and performance of this Agreement
8
and the other Operative Documents to which the Company is a party, (ii) the
consummation of the Merger, and (iii) the performance of all the Company's
obligations under this Agreement and the other Operative Documents to which the
Company is a party, required to be taken as of the Closing, has been taken, or
will as of the Closing have been taken. The affirmative vote of (x) a majority
of the shares of the Company Capital Stock voting on an as-converted basis, (y)
two-thirds of the shares of all classes of Company Preferred Stock voting as a
single class, and (z) two-thirds of the shares of the Series D-1 Preferred Stock
in favor of a waiver of certain rights under the Company's Restated Certificate
of Incorporation is required to duly approve this Agreement and the Merger in
accordance with its terms. This Agreement has been, and each of the other
Operative Documents to which the Company is a party at the Closing will have
been, duly executed and delivered by the Company, and this Agreement is, and
each of the other Operative Documents to which the Company is a party will be at
the Closing, assuming due authorization, execution and delivery of this
Agreement and the other Operative Documents by Parent and Merger Sub, a legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms, except as to the effect, if any, of (i) applicable
bankruptcy, insolvency, reorganization, moratorium and other similar federal and
state laws affecting the rights or remedies of creditors generally and (ii)
rules of law governing specific performance, injunctive relief and other
equitable remedies.
4.3 Capitalization
(a) The authorized capital stock of the Company consists of 125,000,000
shares, consisting of 70,000,000 shares of Company Common Stock, par value $.001
per share, and 55,000,000 shares of Company Preferred Stock, par value $.01 per
share. Of the authorized Company Preferred Stock, 1,420,875 shares are
designated as Series A Preferred Stock, 2,612,275 shares are designated as
Series B Preferred Stock, 4,894,118 shares are designated as Series C Preferred
Stock, 16,000,000 shares are designated as Series D Preferred Stock, 10,000,000
shares are designated as Series D-1 Preferred Stock and 20,000,000 shares are
designated as Series D-2 Preferred Stock.
(b) As of the date of this Agreement, the issued and outstanding capital
stock of the Company consists solely of 6,185,127 shares of Company Common
Stock; 1,420,875 shares of Series A Preferred Stock, 2,612,275 shares of Series
B Preferred Stock, 4,879,412 shares of Series C Preferred Stock, 15,368,224
shares of Series D Preferred Stock, and 9,708,737 shares of Series D-1 Preferred
Stock, which are held of record by the stockholders of the Company as set forth
on Schedule 4.3(b) to the Disclosure Memorandum. Such outstanding shares are,
and immediately prior to the Closing will be, duly authorized and validly
issued, fully paid and nonassessable. True and correct copies of the stock
records of the Company, showing all issuances and transfers of shares of capital
stock of the Company since inception, have been provided to Parent or its
counsel.
(c) As of the date of this Agreement, other than (i) Options to purchase up
to 5,830,260 shares of Company Common Stock that have been granted under the
Company Option Plan, (ii) Warrants to purchase up to 19,417,474 shares of Series
D-2 Preferred Stock (the "D-2 Warrants"), (iii) Warrants to purchase 20,625
shares of Series B Preferred Stock, and (iv) the rights created pursuant to the
Company's Third Amended and Restated Stockholders Agreement and this Agreement,
there are no outstanding rights of first refusal or offer, preemptive rights,
options, warrants, conversion rights or other agreements (or obligations to
issue such options, warrants or conversion rights), either directly or
indirectly, for the purchase or acquisition from the Company or, to the
Company's knowledge, any stockholder of any shares of Company Capital Stock or
any securities convertible into or exchangeable for shares of Company Capital
Stock (all such Options, Warrants and other rights are sometimes referred to
herein as "Stock Purchase Rights"). The Company has provided to Parent a
spreadsheet referencing this representation that accurately reflects the number
of such Options, any Warrants and Stock Purchase Rights outstanding, the grant
or issue dates, vesting schedules and exercise or conversion prices thereof and,
in each case, the identities of the holders and an indication of their
relationships to the Company (if any exist other than a security holder). The
Company has delivered to Parent true and correct copies of the Company Option
9
Plan, the form of stock option agreements relating to Options granted
thereunder, and all Warrants and the Third Amended and Restated Stockholders
Agreement.
(d) The Company is not a party to any agreement and, to the Company's
knowledge, there is no agreement between any person, that affects or relates to
the voting or giving of written consents with respect to any securities of the
Company or the voting by any director of the Company, other than the Third
Amended and Restated Stockholders Agreement. No stockholder of the Company or
any affiliate thereof is indebted to the Company, and the Company is not
indebted to any stockholder of the Company or any affiliate thereof, except (i)
directors' fees and compensation paid to officers and employees at rates not
exceeding the rates of compensation disclosed on Schedule 4.16 to the Disclosure
Memorandum, and (ii) travel or similar expenses advanced to employees in
connection with their employment duties in the ordinary course of business. The
Company is not under any contractual or other obligation to register any of its
presently outstanding securities or any of its securities that may hereafter be
issued other than pursuant to the Third Amended and Restated Stockholders
Agreement, which Agreement shall terminate as of the Closing.
(e) All rights of refusal, preemptive, co-sale rights and registration
rights granted by the Company with respect to the Company Capital Stock or Stock
Purchase Rights of the Company are described on Schedule 4.3(e) to the
Disclosure Memorandum.
(f) All Options have been granted at the price determined by the Board of
Directors of the Company in good faith to be equal to the fair market value of
the Company Common Stock at the date of grant.
4.4 Subsidiaries and Affiliates
The Company does not own or control, and has not since its inception owned
or controlled, directly or indirectly, any corporation, partnership, limited
liability company or other business entity. The Company does not own, directly
or indirectly, any ownership, equity or voting interest in any corporation,
partnership, joint venture or other entity, and has no agreement or commitment
to purchase any such interest.
4.5 No Approvals; No Conflicts
The execution, delivery and performance by the Company of this Agreement
and the other Operative Documents to which the Company is a party, the
effectiveness of the Merger and the performance by the Company of its
obligations pursuant to this Agreement and the other Operative Documents to
which it is a party, will not (a) constitute a material violation (with or
without the giving of notice or lapse of time, or both) of any provision of law
or any judgment, decree, order, regulation or rule of any court or other
governmental authority applicable to the Company; (b) require any consent,
approval or authorization of, or declaration, filing or registration with, any
person, corporation, partnership, joint venture, association, organization,
other entity or governmental or regulatory authority (a "Person"), except for
(i) compliance with applicable securities laws, (ii) the filing of all documents
necessary to consummate the Merger with the Delaware Secretary of State, (iii)
the approval by the stockholders of the Company of the transactions contemplated
hereby, as provided under the DGCL and the Certificate of Incorporation and
Bylaws of the Company, and (iv) if applicable, the notification requirements of
the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("Hart-Scott-Rodino
Act"); (c) result in a material default (with or without the giving of notice or
lapse of time, or both) under, or acceleration or termination of, or the
creation in any party of the right to accelerate, terminate, modify or cancel,
any material agreement, lease, note or other restriction, encumbrance,
obligation or liability to which the Company is a party or by which it is bound
or to which any assets of the Company are subject; (d) result in the creation of
any Encumbrance (as defined in Section 4.9(d) other than a Permitted
Encumbrance) upon any material assets of the Company; (e) conflict with or
result in a breach of or constitute a default under any provision of the
Certificate of Incorporation or Bylaws of the Company; or (f) invalidate or
materially adversely affect any permit, license or authorization currently
material to the conduct of the business of the Company.
10
4.6 Financial Statements
The Company has delivered to Parent (a) a balance sheet and statements of
operations, stockholders' equity and cash flows of the Company at and for each
of the fiscal years ended February 28, 2001, February 29, 2000 and February 28,
1999, and accompanying notes, audited by PricewaterhouseCoopers LLP, independent
auditors and certified public accountants, and (b) the unaudited balance sheet
and unaudited statement of operations, stockholders' equity and cash flows of
the Company at and for the three month period ended May 31, 2001 (the "Unaudited
Financial Statements"). All the foregoing financial statements are herein
referred to as the "Financial Statements." The balance sheet of the Company as
of February 28, 2001 is herein referred to as the "Company Balance Sheet." The
Financial Statements have been prepared in conformity with generally accepted
accounting principles in the United States ("GAAP") (except in the case of the
Unaudited Financial Statements with respect to the absence of footnotes and
subject to normal year-end audit adjustments) on a basis consistent with prior
accounting periods and fairly present the financial position, results of
operations and changes in financial position of the Company as of the dates and
for the periods indicated. Schedule 4.6 to the Disclosure Memorandum sets forth
all promissory notes, loans, lines of credits or similar obligations pursuant to
which the Company is an obligor, together with all the amounts owed by the
Company under such obligations, as of February 28, 2001, and all liabilities
under equipment leases of the Company (the "Operating Lease Liabilities") as of
February 28, 2001. Schedule 4.6 sets forth all indebtedness or other amounts
owed by stockholders to the Company, as of the date hereof.
4.7 Absence of Certain Changes or Events
From the date of the Company Balance Sheet through and including the date
hereof, the Company has conducted its business in the ordinary course and has
not entered into or agreed to enter into any transactions, agreements or
commitments, suffered the occurrence of any event or events or experienced any
change in business, operations, assets, financial condition or results of
operations that, in the aggregate, has resulted in a Company Material Adverse
Effect. Without limiting the generality of the foregoing, except for
transactions specifically contemplated in this Agreement or the other Operative
Documents, from the date of the Company Balance Sheet through and including the
date hereof, the Company has not:
(a) received written notice or, to the knowledge of the Company, oral
notice that there has been or will be a loss of, or contract cancellation
by, any current customer, supplier or licenser of the Company, which loss
or cancellation would result in lost annual revenues to the Company of at
least $1,000,000;
(b) forgiven or canceled any indebtedness or waived any claims or
rights of material value (including, without limitation, any indebtedness
owing by any stockholder, officer, director, employee or affiliate of the
Company);
(c) granted, other than in the ordinary course of business and
consistent with past practice or as would otherwise not be material, any
increase in the compensation of directors, officers, employees or
consultants;
(d) borrowed or agreed to borrow any funds, assumed or become subject
to, whether directly or by way of guarantee or otherwise, any material
liabilities or obligations (absolute, accrued or contingent), or incurred
any material liabilities or obligations (absolute, accrued or contingent),
except liabilities and obligations incurred in the ordinary course of
business and consistent with past practice not in excess of $50,000
individually;
(e) paid, discharged or satisfied any material claims, liabilities or
obligations (absolute, accrued or contingent) other than the payment,
discharge or satisfaction in the ordinary course of business and consistent
with past practice of claims, liabilities and obligations reflected or
reserved against in the Company Balance Sheet or incurred in the ordinary
course of business and consistent with past
11
practice since the date of the Company Balance Sheet, or prepaid any
obligation having a fixed maturity of more than 90 days from the date such
obligation was issued or incurred;
(f) permitted or allowed any of its material property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any
Encumbrance, except conditional sales or similar security interests granted
in connection with the purchase of equipment or supplies in the ordinary
course of business;
(g) written down the value of any inventory (including write-downs by
reason of shrinkage or markdown) or written off as uncollectible any notes
or accounts receivable, except for write-downs and write-offs that are in
the aggregate less than $250,000, incurred in the ordinary course of
business and consistent with past practice;
(h) sold, transferred or otherwise disposed of any of its properties
or assets (real, personal or mixed, tangible or intangible) with an
aggregate net book value in excess of $100,000, except the sale of
inventory in the ordinary course of business and consistent with past
practice;
(i) made any single capital expenditure or commitment in excess of
$100,000 for additions to property, plant, equipment or intangible capital
assets or made aggregate capital expenditures in excess of $500,000 for
additions to property, plant, equipment or intangible capital assets;
(j) made any change in any method of accounting or accounting practice
or internal control procedure, except for any change which is required by
reason of U.S. GAAP or Regulation S-X under the Exchange Act;
(k) issued any capital stock, other securities or options or other
rights to acquire capital stock or other securities, or declared, paid or
set aside for payment any dividend or other distribution in respect of its
capital stock, or redeemed, purchased or otherwise acquired, directly or
indirectly, any shares of capital stock or other securities of the Company
except for the issuance of shares of Company Capital Stock upon exercise or
conversion of outstanding Options or Stock Purchase Rights;
(l) except for transactions that are not material in the aggregate,
loaned or advanced any amount to, or sold, transferred or leased any
properties or assets (real, personal or mixed, tangible or intangible) to,
or entered into any agreement or arrangement with, any of the Company's
officers, directors or employees or any affiliate of the Company's
officers, directors or employees, except (i) directors' fees and
compensation paid to officers and employees at rates not exceeding the
rates of compensation disclosed on Schedule 4.16 of the Disclosure
Memorandum, and (ii) travel or similar expenses advanced to employees in
connection with their employment duties in the ordinary course of business;
(m) entered into or agreed to any sale, assignment, transfer or
license of any patents, trademarks, copyrights, trade secrets or other
intangible assets of the Company to a third party or any amendment or
change to any existing license or other agreement relating to intellectual
property, except in the ordinary course of business;
(n) incurred, assumed or guaranteed any indebtedness for borrowed
money other than in the ordinary and usual course of business, consistent
with past practice, and in amounts and on terms consistent with past
practice; or
(o) agreed, whether in writing or otherwise, to take any action
described in this Section 4.7.
4.8 Taxes
(a) (i) All Tax Returns (as defined below) required to be filed by or on
behalf of the Company have been filed on a timely basis with the appropriate
governmental authority in all jurisdictions in which such Tax Returns are
required to be filed, and all such Tax Returns were at the time they were filed
true, correct and complete in all material aspects; (ii) all Taxes (as defined
below) of the Company (whether or not reflected on any Tax Return) have been
fully and timely paid or properly accrued; (iii) no waivers
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of statutes of limitation have been given by the Company that remain in effect
or requested from the Company in connection with any Tax Returns covering the
Company with respect to any Taxes payable by it; (iv) no taxing authority in a
jurisdiction where the Company does not file Tax Returns has made in writing or
otherwise a claim, assertion or threat to the Company that the Company is or may
be subject to taxation by such jurisdiction; (v) the Company has duly and timely
withheld from employee salaries, wages, compensation and other payments and paid
over to the appropriate governmental authority all amounts required to be so
withheld and paid over for all periods under all applicable laws; (vi) there are
no liens with respect to Taxes on any of the Company's property or assets other
than liens for current Taxes not yet payable; (vii) there are no Tax rulings,
requests for rulings or closing agreements relating to the Company that could
affect the liability for Taxes or the amount of taxable income of the Company
for any period (or portion of a period) after the date hereof; and (viii) any
adjustment of Taxes of the Company made by the IRS (as defined in Section
4.15.1(f)) in any examination that is required to be reported to the appropriate
state, local or foreign taxing authorities has been reported, and any additional
Taxes due with respect thereto have been paid.
(b) There is no dispute or claim concerning any Tax liability of the
Company either (i) claimed or raised by any governmental authority in writing or
(ii) as to which any of the directors and officers (and employees responsible
for Tax matters) of the Company have knowledge based on contact or
correspondence with any agent of such authority. Schedule 4.8 to the Disclosure
Memorandum lists all Tax Returns filed with respect to the Company for taxable
periods ended on or after the Company's 1997 fiscal year that have been audited,
and indicates those Tax Returns that currently are the subject of audit. The
Company has made available to Parent correct and complete copies of all Tax
Returns, examination reports and statements of deficiencies assessed against or
agreed to by the Company since the Company's inception.
(c) The Company has not made any payment or payments, is not obligated to
make any payment or payments and is not a party to (or a participating employer
in) any agreement or Employee Benefit Plan (as defined in Section 4.15.1(c))
that could obligate it, the Surviving Corporation or Parent to make any payment
or payments that would constitute an "excess parachute payment," as defined in
Section 280G of the Code (or any similar provision of state, local or foreign
law) or that would otherwise not be deductible under Section 162 or Section 404
of the Code.
(d) The Company has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(ii) of the Code.
(e) The Company is not a party to any Tax allocation or sharing agreement.
The Company (i) has not been a member of a Tax Group filing a consolidated
income Tax Return under Section 1501 of the Code (or any similar provision of
state, local or foreign law) and (ii) does not have any liability for Taxes of
any person under Treasury Regulations Section 1.1502-6 (or any similar provision
of state, local or foreign law) as a transferee or successor by contract or
otherwise.
(f) The unpaid Taxes of the Company (i) did not, as of February 28, 2001,
exceed the reserve for Tax liability set forth on the face (rather than any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) of the Company Balance Sheet and (ii) do not exceed that
reserve as adjusted for the passage of time and operations in the ordinary
course of business through the Closing Date.
(g) All Options that the Company has treated as incentive stock options
under Section 421 of the Code meet the requirements of Section 422 of the Code.
(h) None of the assets of the Company (i) is "tax exempt use property"
within the meaning of Section 168(h) of the Code; (ii) is property that the
Company is required to treat as being owned by any other person pursuant to the
"safe harbor lease" provisions of former Section 168(f)(8) of the Internal
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Revenue Code of 1954; or (iii) directly or indirectly secures any debt the
interest on which is tax-exempt under Section 103(a) of the Code.
(i) The Company has not taken or agreed to take any action, or failed to
take any action, that would prevent the Merger from qualifying as a
reorganization within the meaning of the Code.
(j) The Company has not been a party to a distribution to which Section
355(d) or (e) of the Code applies.
(k) The Company has not filed a consent under Section 341(f) of the Code
concerning collapsible corporations.
(l) The Company has disclosed on its federal Tax Returns all positions
taken therein that could give rise to a substantial understatement of federal
income Tax within the meaning of Section 6662 of the Code.
As used in this Agreement, the following terms shall have the following
meanings:
"Taxes" means (i) all foreign, federal, state, county or local taxes,
charges, fees, levies, imposts, duties and other assessments, including,
but not limited to, any income, alternative minimum or add-on, estimated,
gross income, gross receipts, sales, use, transfer, transactions,
intangibles, ad valorem, value-added, franchise, registration, title,
license, capital, paid-up capital, profits, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, real property,
recording, personal property, federal highway use, commercial rent,
environmental (including, but not limited to, taxes under Section 59A of
the Code) or windfall profit tax, custom, duty or other fee or other like
assessment or charge of any kind whatsoever imposed by any tax authority,
together with any interest, penalties or additions to tax; (ii) any
liability for payment of amounts described in clause (i) whether as a
result of transferee liability, of being a member of an affiliated,
consolidated, combined or unitary group for any period, or otherwise
through operation of law; and (iii) any liability for the payment of
amounts described in clause (i) or (ii) as a result of any tax sharing, tax
indemnity or tax allocation agreement, or any other express or implied
agreement to indemnify any other person; and "Tax" means any of the
foregoing Taxes.
"Tax Group" means any federal, state, local or foreign consolidated,
affiliated, combined, unitary or other similar group of which the Company
is now or was formerly a member.
"Tax Returns" means any return, declaration, report, claim for refund,
information return, statement or other similar document relating to Taxes,
including any schedule or attachment thereto, and including any amendment
thereof.
4.9 Property
(a) Schedule 4.9(a) to the Disclosure Memorandum contains a complete and
accurate list of all real property owned, leased or currently being used by the
Company (the "Real Property"). The Company has delivered to Parent or its
counsel true and complete copies of all written leases, subleases, rental
agreements, contracts of sale, tenancies or licenses relating to the Real
Property.
(b) Schedule 4.9(b) to the Disclosure Memorandum contains a complete and
accurate list of each item of personal property having a book value in excess of
$1,000 that is owned, leased, rented or used by the Company (the "Personal
Property"); provided that such list need not describe the Company Intellectual
Property (as defined in Section 4.17 below), listed on Schedule 4.17 to the
Disclosure Memorandum or Inventory. The Company has delivered or made available
to Parent true and complete copies of all leases, subleases, rental agreements,
contracts of sale, tenancies or licenses to which the Personal Property is
subject.
(c) The Real Property and the Personal Property include all the properties
and assets (whether real, personal or mixed, tangible or intangible) (other
than, in the case of the Personal Property, property rights with an individual
book value of less than $1,000 and the Company Intellectual Property) reflected
in the
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Company Balance Sheet (except for such properties or assets sold since the date
of the Company Balance Sheet in the ordinary course of business and consistent
with past practice) and all the properties and assets purchased by the Company
since the date of the Company Balance Sheet (other than, in the case of the
Personal Property, property rights with an individual book value of less than
$1,000 and the Company Intellectual Property). The Real Property and the
Personal Property include all material property used in the business of the
Company, other than the Company Intellectual Property. The Company's offices and
other structures and its Personal Property are in good operating condition and
repair, normal wear and tear excepted, and are adequate for the uses to which
they are being put.
(d) The Company's title to or leasehold interest in each parcel of the Real
Property is free and clear of all liens, mortgages, pledges, deeds of trust,
security interests, charges, encumbrances and other adverse claims or interests
of any kind, except for Permitted Encumbrances (as defined below) (each, an
"Encumbrance"). Each lease of any portion of the Real Property is valid, binding
and enforceable in accordance with its terms against the Company and, to
Company's knowledge, the parties thereto, the Company has performed in all
material respects all obligations imposed on it thereunder, and neither the
Company nor, to the Company's knowledge, any other party thereto is in default
thereunder, nor is there any event that with notice or lapse of time, or both,
would constitute a default thereunder by the Company or, to the Company's
knowledge, by any other party. The Company has not granted any lease, sublease,
tenancy or license of, or entered into any rental agreement or contract of sale
with respect to, any portion of the Real Property.
(e) For the purposes of this Agreement, "Permitted Encumbrances" shall mean
(i) liens for Taxes or governmental charges or claims (A) not yet due and
payable or (B) being contested in good faith, if a reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made therefor,
(ii) statutory liens of landlords, liens of carriers, warehouse persons,
mechanics and material persons and other liens imposed by law incurred in the
ordinary course of business for sums (A) not yet due and payable or (B) being
contested in good faith, if a reserve or other appropriate provision, if any, as
shall be required by GAAP shall have been made therefor, (iii) liens incurred or
deposits made in connection with workers' compensation, unemployment insurance
and other similar types of social security programs or to secure the performance
of tenders, statutory obligations, surety and appeal bonds, bids, leases,
government contracts, performance and return of money bonds and similar
obligations, in each case in the ordinary course of business, consistent with
past practice, (iv) easements, rights-of-way, restrictions and other similar
charges or encumbrances, in each case, which do not interfere with the ordinary
conduct of business of the Company and do not materially detract from the value
of the property upon which such encumbrance exists, and (v) and liens granted as
of the date of this Agreement to Silicon Valley Bank pursuant to a Loan and
Security Agreement with Silicon Valley Bank dated June 29, 2000, as amended
October 31, 2000.
(f) The Personal Property is free and clear of all Encumbrances except
Permitted Encumbrances, and, other than leased Personal Property that is so
noted on the list supplied pursuant to Section 4.9(b), the Company owns such
Personal Property. Each lease, license, rental agreement, contract of sale or
other agreement to which the Personal Property is subject is valid, binding and
enforceable in accordance with its terms against the Company and, to Company's
knowledge, parties thereto, the Company has performed in all material respects
all obligations imposed on it thereunder, and neither the Company nor, to the
Company's knowledge, any other party thereto is in default thereunder, nor is
there any event that with notice or lapse of time, or both, would constitute a
default by the Company or, to the Company's knowledge, any other party
thereunder. The Company has not granted any lease, sublease, tenancy or license
of any portion of the Personal Property, except in the ordinary course of
business.
(g) To the Company's knowledge, there are no applicable adverse zoning,
building or land use codes or rules, ordinances, regulations or other
restrictions relating to zoning or land use that currently or could reasonably
be expected to prevent, or cause the imposition of material fines or penalties
as the result of, the use of all or any portion of the Real Property for the
conduct of the business as presently conducted. The Company has received all
necessary material approvals with regard to occupancy and maintenance of the
Real Property.
15
4.10 Contracts
4.10.1 Material Contracts
Schedule 4.10.1 to the Disclosure Memorandum contains a complete and
accurate list (other than the IP Rights listed on Schedule 4.17 to the
Disclosure Memorandum) of all written and, to the knowledge of the Company, oral
contracts, agreements and understandings to which the Company is currently a
party or by which the Company is currently bound, providing for potential
payments by or to the Company in excess of $500,000, including, without
limitation, security agreements, license agreements, software development
agreements, distribution agreements, joint venture agreements, reseller
agreements, credit agreements and instruments relating to the borrowing of money
(each, a "Material Contract"). All contracts set forth on Schedule 4.10.1 are
valid, binding and enforceable in accordance with their terms against Company
and, to the Company's knowledge, the other parties thereto, except as to the
effect, if any, of (a) applicable bankruptcy, insolvency, reorganization,
moratorium and other similar federal and state laws affecting the rights or
remedies of creditors generally, (b) rules of law governing specific
performance, injunctive relief and other equitable remedies, and (c) the
enforceability of provisions requiring indemnification in connection with the
offering, issuance or sale of securities, and are in full force and effect, the
Company has performed in all material respects all material obligations imposed
on it thereunder, and neither the Company nor, to the Company's knowledge, any
other party thereto is in material default thereunder, nor, to the Company's
knowledge, is there any event that with notice or lapse of time, or both, would
constitute a default by the Company or, to the Company's knowledge, any other
party thereunder. True and complete copies of each such written Material
Contract have been delivered to Parent by the Company. Except as set forth on
Schedule 4.10.1 to the Disclosure Memorandum, the Company has no:
(a) contracts, agreements or arrangements (i) with distributors or
dealers that cannot be canceled by the Company within 60 days' notice
without liability, penalty or premium, (ii) with directors, officers,
stockholders, employees, agents, consultants, advisors, salespeople, or
sales representatives providing for the payment of any bonus or commission
based on sales or earnings, or (iii) affecting or relating to former
employees of the Company;
(b) employment agreement, or any other agreement for services that
contains severance or termination pay liabilities or obligations;
(c) noncompetition agreement or other arrangement that would prevent
the Company from carrying on its business anywhere in the world;
(d) written or, to the knowledge of the Company, oral notice that any
party to a contract listed on Schedule 4.10.1 to the Disclosure Memorandum
intends to cancel, terminate or refuse to renew such contract (if such
contract is renewable);
(e) material dispute with any of its suppliers, customers,
distributors, OEM resellers, licensors or licensees;
(f) product distribution agreement, development agreement or license
agreement as licensor or licensee (except for agreements relating to
"Off-The-Shelf Software" as defined below in Section 4.17.3);
(g) joint venture contract or arrangement or any other agreement that
involves a sharing of profits with other persons;
(h) instrument evidencing indebtedness for borrowed money by way of a
direct loan, sale of debt securities, purchase money obligation,
conditional sale or guarantee, or otherwise, except for trade indebtedness
incurred in the ordinary course of business, and except as disclosed in the
Financial Statements; or
(i) agreements or commitments to provide indemnification, other than
those entered into in the ordinary course of business.
16
4.10.2 Required Consents
The execution and delivery of this Agreement and the performance of the
obligations of the Company hereunder will not constitute a material default
under any Material Contract and do not require the consent of any other party to
any Material Contract, except for those consents listed on Schedule 4.10.2 to
the Disclosure Memorandum.
4.11 Customers and Suppliers
Schedule 4.11 to the Disclosure Memorandum sets forth (a) a complete and
accurate list of the customers of the Company accounting for 5% or more of the
Company's revenues during the fiscal year ended February 28, 2001 and (b) a
complete and accurate list of the suppliers of the Company from whom the Company
has purchased 5% or more of the goods or services purchased by the Company in
the fiscal year ended February 28, 2001. As of the date hereof, the Company has
not received any written, or to the knowledge of the Company, oral notice from
its customers or suppliers that would cause it, in its reasonable judgment, to
expect any material reduction in the business activity between the Company and
any customers or suppliers named on such Schedule 4.11.
4.12 Warranties and Returns
Schedule 4.12 to the Disclosure Memorandum sets forth the Company's
warranties currently made with respect to its business, products and services,
and current policies with respect to returns of products in the course of the
Company's conduct of the business. Except as set forth on the Disclosure
Schedule, the Company has not made any express warranties in connection with the
sale of its products and services. Claims against the Company for warranty costs
(individually or in the aggregate, but net of warranties passed through to
vendors) with respect to products and services during each of the last three
fiscal years did not exceed $350,000, and there are no outstanding or, to the
Company's knowledge, threatened claims for any such warranty costs that would
exceed $300,000 (individually or in the aggregate, but net of warranties passed
through to vendors). As used above, the term "warranty cost" shall mean costs
and expenses associated with correcting, returning or replacing defective or
allegedly defective products or services, whether such costs and expenses arise
out of claims sounding in warranty, contract, tort or otherwise.
4.13 Claims and Legal Proceedings
Except as disclosed on Schedule 4.13 to the Disclosure Memorandum, there
are no claims, actions, suits, arbitrations, investigations or proceedings
("Proceedings") pending or, to the Company's knowledge, threatened against the
Company or any of its assets before or by any court or governmental entity
except for such Proceedings as would not be material. To the Company's
knowledge, there is no valid basis for any claim, action, suit, arbitration,
proceeding or investigation before or by any person that would have a Company
Material Adverse Effect. There are no outstanding or unsatisfied judgments,
orders, decrees or stipulations to which the Company is a party.
4.14 Labor and Employment Matters
There are no material labor disputes, employee grievances or disciplinary
actions pending or, to the Company's knowledge, threatened against the Company
or any of its present or former employees. The Company has complied in all
material respects with all material provisions of law relating to employment and
employment practices, terms and conditions of employment, wages and hours. The
Company is not engaged in any unfair labor practice, and there is no labor
strike, dispute, slowdown or stoppage pending or, to the Company's knowledge,
threatened against or affecting the Company. The Company is not a party to any
collective bargaining agreement. The Company has no knowledge of any
organizational efforts presently being made or threatened by or on behalf of any
labor union with respect to employees of the Company. Each current employee,
officer and consultant of the Company has executed a Company Employment
Proprietary Information Agreement in the form provided to Parent. To the
Company's
17
knowledge, no employee (or person performing similar functions) of the Company
is in violation of any such agreement or any employment agreement,
noncompetition agreement, patent disclosure agreement, invention assignment
agreement, proprietary information agreement or other contract or agreement
relating to the relationship of such employee with the Company or any other
party. Except for the employees identified on Schedule 4.14 to the Disclosure
Memorandum, all employees of the Company are employed on an "at will" basis,
and, to the Company's knowledge, are eligible to work and are lawfully employed
in the United States.
4.15 Employee Benefit Plans
4.15.1 Definitions
As used in this Agreement, the following terms shall have the following
meanings:
(a) "COBRA" means the health care continuation provisions of the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (as set
forth in Part 6 of Subtitle B of Title I of ERISA and Section 4980B of the
Code).
(b) "DOL" means the United States Department of Labor.
(c) "Employee Benefit Plan" means any retirement, pension, profit
sharing, deferred compensation, stock bonus, savings, bonus, incentive,
cafeteria, medical, dental, vision, hospitalization, life insurance,
accidental death and dismemberment, medical expense reimbursement,
dependent care assistance, tuition reimbursement, disability, sick pay,
holiday, vacation, severance, change of control, stock purchase, stock
option, restricted stock, phantom stock, stock appreciation rights, fringe
benefit or other employee benefit plan, fund, policy, program, contract,
arrangement or payroll practice of any kind (including any "employee
benefit plan," as defined in Section 3(3) of ERISA) or any employment,
consulting or personal services contract, whether written or oral,
qualified or nonqualified, funded or unfunded, or domestic or foreign, (i)
sponsored, maintained or contributed to by the Company or, if an
employment, consulting or personal services contract, to which the Company
is a party, (ii) covering or benefiting any current or former officer,
employee, agent, director or independent contractor of the Company (or any
dependent or beneficiary of any such individual), or (iii) with respect to
which the Company has (or could have) any obligation or liability.
(d) "ERISA" means the Employee Retirement Income Security Act of 1974,
as amended.
(e) "HIPAA" means the Health Insurance Portability and Accountability
Act of 1997, as amended.
(f) "IRS" means the United States Internal Revenue Service.
4.15.2 Employee Benefit Plan Listing
Schedule 4.15.2 contains a complete and accurate list of all material
written, and to the knowledge of the Company, oral Employee Benefit Plans. The
Company does not have any agreement, arrangement, commitment or obligation,
whether formal or informal, whether written or unwritten and whether legally
binding or not, to create, enter into or contribute to any additional Employee
Benefit Plan, or to modify or amend any existing Employee Benefit Plan, except
for amendments required by statute, regulation or administrative pronouncement.
There has been no amendment, interpretation or other announcement (written or
oral) by the Company or any other Person relating to, or change in participation
or coverage under, any Employee Benefit Plan that, either alone or together with
other such items or events, could materially increase the expense of maintaining
such Employee Benefit Plan (or the Employee Benefit Plans taken as a whole)
above the level of expense incurred with respect thereto for the most recent
fiscal year included in the Financial Statements. The terms of each Employee
Benefit Plan permit the Company to amend or terminate such Employee Benefit Plan
at any time and for any reason (except to the extent prohibited by law) without
penalty and without material liability or expense. None of the rights of the
Company under any Employee Benefit Plan will be impaired in any way by this
Agreement or the consummation of the transactions contemplated by this
Agreement.
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4.15.3 Documents Provided
The Company has made available to Parent true, correct and complete copies
(or, in the case of unwritten Employee Benefit Plans, descriptions) of all
Employee Benefit Plans (and all amendments thereto), along with, to the extent
applicable to the particular Employee Benefit Plan, copies of the following: (a)
the last three annual reports (Form 5500 series) filed with respect to such
Employee Benefit Plan; (b) the most recent summary plan descriptions (and all
summaries of material modifications related thereto) and employee manuals
distributed with respect to such Employee Benefit Plan; (c) all material
communications filed or distributed with respect to such Employee Benefit Plan
during the last year; (d) all contracts and agreements (and any amendments
thereto) relating to such Employee Benefit Plan, including, without limitation,
trust agreements, investment management agreements, annuity contracts, insurance
contracts, bonds, indemnification agreements and service provider agreements;
(e) the most recent determination letter issued by the IRS with respect to such
Employee Benefit Plan; (f) all written communications relating to the amendment,
creation or termination of such Employee Benefit Plan, or an increase or
decrease in benefits, acceleration of payments or vesting or other events that
could result in a material liability to the Company since the date of the most
recently completed and filed annual report (Form 5500 series); (g) all
correspondence to or from any governmental entity or agency relating to such
Employee Benefit Plan; (h) samples of all administrative forms currently in use,
including, without limitation, all COBRA and HIPAA forms and notices; (i) all
coverage, nondiscrimination, top heavy and Code Section 415 tests performed with
respect to such Employee Benefit Plan for the last three years; and (j) the most
recent Joint Proxy and Registration Statement, annual report (Form 11-K) and
prospectus prepared in connection with such Employee Benefit Plan.
4.15.4 Compliance
With respect to each Employee Benefit Plan: (a) such Employee Benefit Plan
is, and at all times since inception has been, maintained, administered,
operated and funded in all material respects in accordance with its terms and in
compliance with all applicable requirements of all applicable laws, statutes,
orders, rules and regulations, including, without limitation, ERISA, COBRA,
HIPAA and the Code; (b) the Company and all other Persons (including, without
limitation, all fiduciaries) have, at all times, properly performed in all
material respects all of their duties and obligations (whether arising by
operation of law or by contract) under or with respect to such Employee Benefit
Plan, including, without limitation, all reporting, disclosure and notification
obligations; (c) all returns, reports and other information (including, without
limitation, all Form 5500 series annual reports, together with all schedules and
audit reports required with respect thereto) relating to such Employee Benefit
Plan required to be filed with any governmental entity or agency have been
accurately completed and timely and properly filed; (d) all notices, statements,
reports and other disclosure (including, without limitation, all summary plan
descriptions) required to be given or made to participants in such Employee
Benefit Plan or their beneficiaries have been accurately completed and timely
and properly disclosed or provided; (e) neither the Company nor any fiduciary of
such Employee Benefit Plan has engaged in any transaction or acted or failed to
act in a manner that violates the fiduciary requirements of ERISA or any other
applicable law; (f) no transaction or event has occurred or is threatened or
about to occur (including any of the transactions contemplated in or by this
Agreement) that constitutes or could constitute a prohibited transaction under
Section 406 or 407 of ERISA or under Section 4975 of the Code for which an
exemption is not available; and (g) the Company has not incurred, and there
exists no condition or set of circumstances in connection with which the
Company, the Surviving Corporation or Parent could incur, directly or
indirectly, any material liability or expense (except for routine contributions,
benefit payments and administrative expenses) under ERISA, the Code or any other
applicable law, statute, order, rule or regulation, or pursuant to any
indemnification or similar agreement, with respect to such Employee Benefit
Plan.
4.15.5 Qualification
Each Employee Benefit Plan that is intended to be qualified under Section
401(a) of the Code is, and at all times since inception has been, so qualified
and its related trust is, and at all times since inception
19
has been, exempt from taxation under Section 501(a) of the Code. Each such
Employee Benefit Plan either (a) is the subject of an unrevoked favorable
determination letter from the IRS with respect to such Employee Benefit Plan's
qualified status under the Code, as amended by the Tax Reform Act of 1986 and
all subsequent legislation, or (b) has remaining a period of time under the Code
or applicable Treasury regulations or IRS pronouncements in which to apply to
the IRS for such a letter and to make any amendments necessary to obtain such a
letter from the IRS which shall apply retroactively to the inception of such
Employee Benefit Plan. No fact exists or is reasonably expected by the Company
to arise, that could adversely affect the qualification or exemption of any such
Employee Benefit Plan or its related trust. No such Employee Benefit Plan is a
"top-heavy plan," as defined in Section 416 of the Code.
4.15.6 Contributions, Premiums and Other Payments
All contributions, premiums and other payments due or required to be paid
to (or with respect to) each Employee Benefit Plan have been timely paid, or, if
not yet due but due on or before the Closing Date, or if to become due with
respect to any period before or ending on the Closing Date, have been accrued as
a liability on the Company Balance Sheet. All income taxes and wage taxes that
are required by law to be withheld from benefits derived under the Employee
Benefit Plans have been properly withheld and remitted to the proper depository.
4.15.7 Related Employers
The Company is not, and has never been, a member of (i) a controlled group
of corporations, within the meaning of Section 414(b) of the Code, (ii) a group
of trades or businesses under common control, within the meaning of Section
414(c) of the Code, (iii) an affiliated service group, within the meaning of
Section 414(m) of the Code, or (iv) any other group of Persons treated as a
single employer under Section 414(o) of the Code.
4.15.8 Multiemployer, Defined Benefit and Money Purchase Pension Plans and
Multiple Employer Welfare Arrangements
The Company does not maintain or contribute to, and has never maintained or
contributed to (or been obligated to contribute to), (a) a multiemployer plan as
defined in Section 3(37) or Section 4001(a)(3) of ERISA or 414(f) of the Code,
(b) a multiple employer plan within the meaning of Section 4063 or 4064 of ERISA
or Section 413(c) of the Code, (c) an employee benefit plan, fund, program,
contract or arrangement that is subject to Section 412 of the Code, Section 302
of ERISA or Title IV of ERISA, or (d) a multiple employer welfare arrangement as
defined in Section 3(40) of ERISA.
4.15.9 Post-Termination Benefits
Neither the Company nor any Employee Benefit Plan provides or has any
obligation to provide (or contribute toward the cost of) post-employment or
post-termination benefits of any kind, including, without limitation, death and
medical benefits, with respect to any current or former officer, employee,
agent, director or independent contractor of the Company, other than (a)
continuation coverage mandated by Sections 601 through 608 of ERISA and Section
4980B(f) of the Code, (b) retirement benefits under any Employee Benefit Plan
that is qualified under Section 401(a) of the Code, and (c) deferred
compensation that is accrued as a current liability on the Company Balance
Sheet.
4.15.10 Suits, Claims and Investigations
There are no actions, suits or claims (other than routine claims for
benefits and qualified domestic relations orders) pending or, to the knowledge
of the Company, threatened with respect to (or against the assets of) any
Employee Benefit Plan, nor, to the knowledge of the Company, is there a basis
for any such action, suit or claim. No Employee Benefit Plan is currently under
investigation, audit or review, directly or indirectly, by the IRS, the DOL or
any other governmental entity or agency, and, to the knowledge of the Company,
no such action is contemplated or under consideration by the IRS, the DOL or any
other governmental entity or agency.
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4.15.11 Effect of Transaction
Neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated by this Agreement, will (a) entitle any
individual to severance pay, unemployment compensation or any other payment from
the Company, the Surviving Corporation, Parent or any Employee Benefit Plan, (b)
otherwise increase the amount of compensation due to any individual or forgive
indebtedness owed by any individual, (c) result in any benefit or right becoming
established or increased, or accelerate the time of payment or vesting of any
benefit, under any Employee Benefit Plan, or (d) require the Company, the
Surviving Corporation or Parent to transfer or set aside any assets to fund or
otherwise provide for any benefits for any individual.
4.16 Personnel
Schedule 4.16 to the Disclosure Memorandum lists (a) the names, titles and
current compensation amounts of all employees of the Company with annual base
salaries or wages in excess of $50,000, (b) compensation amounts of all
directors of the Company, and (c) the names and current compensation packages of
all independent contractors and consultants of the Company with annual
compensation in excess of $50,000. The Company is not in default with respect to
any of its obligations relating to payment of wages and has no, and will not
incur any, material obligation or liability for severance or back pay owed
through or by virtue of the Merger.
4.17 Intellectual Property
4.17.1 Definitions
For purposes of this SECTION 4.17, the following terms shall have the
following meanings:
(a) "Intellectual Property Rights" means all industrial and
intellectual property rights, including, without limitation, patents,
patent applications, patent rights, trademarks, trademark applications,
trade names, service marks, service mark applications, Internet domain
names, Internet domain name applications, copyrights, copyright
applications, moral rights, know-how, trade secrets, proprietary processes
and formulae, confidential information, franchises, licenses, inventions,
instructions, marketing materials, trade dress, logos and designs and all
documentation and media constituting, describing or relating to the
foregoing, including, without limitation, manuals, memoranda and records.
(b) "Company Intellectual Property" means all Intellectual Property
Rights owned by, licensed to or otherwise available to the Company.
4.17.2 General
The Company owns or has sufficient rights to use, including the right to
bring actions for the infringement of, and the Company Intellectual Property
represents, all Intellectual Property Rights necessary or required for the
conduct of the Company's business as currently conducted and as currently
proposed to be conducted. The Company is not a party to any agreement that
contains any restriction on the Company's ability to use or practice any Company
Intellectual Property that is material to the business of the Company as
presently conducted or as currently proposed to be conducted.
4.17.3 Listing of Company Intellectual Property
SECTION 4.17.3 contains a true and complete list of all of the Company's
patents, patent applications, trademarks, trademark applications, trade names,
service marks, service mark applications, Internet domain names, Internet domain
name applications, copyrights, copyright registrations and applications, and any
other filings and formal actions made or taken pursuant to Federal, state, local
and foreign laws by the Company to protect its interests in the Company
Intellectual Property.
4.17.4 Inbound License Agreements
Schedule 4.17.4 sets forth a complete and accurate list of each agreement
(the "Inbound License Agreements") granting to the Company any right to use or
practice any Intellectual Property Rights other
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than rights in software commercially available on reasonable terms to any person
for a license fee of no more than fifty thousand dollars ($50,000) or shrink
wrap licenses to commercially available software sold at retail, indicating for
each agreement the title, the parties thereto, the term thereof and the amount
of any future royalty or license fee payable thereunder. To the Company's
knowledge, all Inbound License Agreements are valid, binding and in full force
and effect. The Company has performed in all material respects its obligations
under the Inbound License Agreements, the Company is not in default thereunder,
and to the Company's knowledge no event or circumstance has occurred under any
Inbound License Agreement that with notice or lapse of time or both would
constitute a default or event of default on the part of the Company or give to
any other party the right to terminate or modify any of the Company's rights
under such Inbound License Agreement. There is no material outstanding or, to
the knowledge of the Company, threatened dispute or disagreement with respect to
any Inbound License Agreement. The Company has not received written notice that
any party to any Inbound License Agreement intends to cancel, terminate or
refuse to renew (if renewable) any of the Company's rights under such Inbound
License Agreement or to exercise or decline to exercise any option or right
thereunder.
4.17.5 Outbound License Agreements
Schedule 4.17.5 sets forth a complete and accurate list of each agreement
(the "Outbound License Agreements") under which the Company has granted any
right to use or practice any Intellectual Property Rights other than
nonexclusive rights in software granted in the ordinary course of the Company's
business for which the total payments to the Company did not exceed fifty
thousand dollars ($50,000) and that are not otherwise material to the Company,
indicating for each agreement the title, the parties thereto and the term
thereof. To the Company's knowledge, all Outbound License Agreements are valid,
binding and in full force and effect. The Company has performed in all material
respects its obligations under the Outbound License Agreements, the Company is
not in default thereunder, and to the Company's knowledge no event or
circumstance has occurred under any Outbound License Agreement that with notice
or lapse of time or both would constitute a default or event of default on the
part of the Company or give to any other party the right to terminate or modify
any of the Company's rights under such Outbound License Agreement. There is no
material outstanding or, to the knowledge of the Company, threatened dispute or
disagreement with respect to any Outbound License Agreement. The Company has not
received written notice that any party to any Outbound License Agreement intends
to cancel, terminate or refuse to renew (if renewable) such Outbound License
Agreement or to exercise or decline to exercise any option or right thereunder.
4.17.6 No Infringement by the Company
The Company Intellectual Property and the conduct of the Company's business
as currently conducted and as currently proposed to be conducted do not
infringe, violate, misappropriate or otherwise misuse any third party
Intellectual Property Rights, and the Company has not received any complaint,
claim or notice alleging any such infringement, violation, misappropriation or
misuse or any act of unfair competition by the Company. To the best knowledge of
the Company, no goods, services, or other products which are sold, licensed or
otherwise supplied, used or employed by the Company infringe, violate,
misappropriate or otherwise misuse any third party Intellectual Property Rights,
and the Company has not received any complaint, claim or notice alleging any
such infringement, violation, misappropriation or misuse. Nothing has come to
the attention of the Company to the effect that the name of the Company or any
business name, trade mark, service mark or domain name used or owned by the
Company is the same as, or is confusingly or deceptively similar to, the name of
any other company or business, trade name or domain name or to the trade mark or
service mark owned or used by any other person. No litigation is now or, within
the five (5) years prior to the date of this Agreement, was pending and, to the
knowledge of the Company, no notice or other claim in writing has been received
by the Company (i) alleging that the Company has engaged in any activity or
conduct that infringes, violates, misappropriates or otherwise misuses the
Intellectual Property Rights of any third party or (ii) challenging the
ownership, use, validity or enforceability of any Company Intellectual Property.
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4.17.7 No Infringement by Third Parties
To the Company's knowledge, no third party is infringing, violating,
misappropriating or misusing any Company Intellectual Property that is owned or
exclusively licensed to the Company, or committing any act of unfair competition
with respect to the Company, and no such claims have been brought against any
third party by the Company. The Company has not entered into any agreement
granting any Person the right to bring any action with respect to, or otherwise
to enforce, any Company Intellectual Property.
4.17.8 Protection of Intellectual Property Rights
The Company has taken reasonable steps to protect the Company Intellectual
Property. Without limiting the generality of the foregoing, the Company enforces
a policy of requiring each employee, consultant and contractor of the Company to
execute agreements that contain provisions designed to prevent unauthorized
disclosure of the Company Intellectual Property. With respect to employees, such
agreements are substantially in the Company's standard forms and also assign to
the Company all Intellectual Property Rights relating to the Company's business
that are developed by the employee in the course of his or her activities for
the Company or are developed during working hours using the resources of the
Company. With respect to contractors and consultants, the agreements either
assign all Intellectual Property Rights developed pursuant to the agreement or
license such rights on agreed-upon terms. Except under confidentiality
obligations, to the knowledge of the Company, there has been no disclosure by
the Company of material confidential information or trade secrets. The Company
has not disclosed any source code to any software to any person or entity other
than an employee of the Company who is under a written nondisclosure agreement;
and, except as described in Schedule 4.17.8, neither the Company nor any escrow
agent is under any contractual or other obligation to disclose any source code
or other Company Intellectual Property. If, as disclosed on Schedule 4.17.8, the
Company has deposited any source code or other Company Intellectual Property
into source code escrows or similar arrangements, no event has occurred that has
or could reasonably form the basis for a release of such source code or other
Company Intellectual Property from such escrows or arrangements.
4.17.9 Indemnification for Use of Intellectual Property Rights
Other than pursuant to standard agreements with customers or suppliers of
the Company entered into in the ordinary course of business (accurate and
complete copies of which have been made available to Parent by the Company), the
Company has not entered into any agreement or offered to indemnify any Person
against any charge of infringement, violation, misappropriation or misuse of
Intellectual Property Rights.
4.17.10 Assignment; Change of Control
The execution, delivery and performance by the Company of this Agreement,
and the consummation of the transactions contemplated hereby, will not result in
the loss or impairment of, or give rise to any right of any third party to
terminate or alter, any of the Company Intellectual Property or the Company's
rights under any Inbound License Agreement or Outbound License Agreement, nor
require any consent in respect of any Company Intellectual Property, nor require
any disclosure or release of any source code or other Company Intellectual
Property from any escrows or other arrangements.
4.18 Accounts Receivable
All accounts receivable of the Company reflected in the Company Balance
Sheet ("Accounts") represent amounts due for services performed or sales
actually made in the ordinary course of business and are carried at values
determined in accordance with GAAP. To the Company's knowledge, the bad debt
reserves and allowances reflected in the Company Balance Sheet are adequate.
4.19 Inventory
(a) All items in the inventory reflected in the Company Balance Sheet or as
currently owned by the Company for use in the operation of the business (i) have
been valued consistent with the inventory
23
valuation policy of the Company in accordance with GAAP consistently applied and
(ii) are of a quality and quantity usable and salable in the ordinary course of
business.
(b) The Company's inventories of finished products and evaluation units as
of August 17, 2001, the approximate quantities thereof, and their locations are
set forth in Schedule 4.19 to the Disclosure Memorandum. In addition, Schedule
4.19 sets forth the value of all raw materials and work in progress as of August
17, 2001.
(c) The Company is not aware of any adverse condition, other than shortages
of parts, raw materials and supplies common to the industry generally, affecting
the quality or supply of raw materials, intermediates, supplies, parts and other
materials available to the Company that are necessary to manufacture, package or
label the products or are otherwise used in the business.
4.20 Corporate Books and Records
The Company has furnished to Parent or its representatives for their
examination true and complete copies of (a) the Certificate of Incorporation and
Bylaws of the Company as currently in effect, including all amendments thereto
and (b) the minute books of the Company. Such minutes reflect all meetings of
the Company's stockholders, Board of Directors and any committees thereof since
the Company's inception, and such minutes accurately reflect in all material
respects the events of and actions taken at such meetings.
4.21 Licenses, Permits, Authorizations, etc.
The Company has received all required material governmental approvals,
authorizations, consents, licenses, orders, registrations and permits of all
agencies, whether federal, state, local or foreign (the "Permits"), except where
the failure to receive any Permit would not have a Company Material Adverse
Effect. Schedule 4.21 to the Disclosure Memorandum contains a list of all
Permits with expiration dates, if any. The Company is in material compliance
with the terms of all Permits, and all Permits are valid and in full force and
effect, and no proceeding is pending or, to the Company's knowledge, threatened,
the object of which is to revoke, limit or otherwise affect any Permit. The
Company has not received any notifications of any asserted failure to obtain any
Permit or any past and unremedied failure to obtain any Permit.
4.22 Compliance With Laws
The Company is and has been in material compliance with all federal, state,
local and foreign laws, rules, regulations, ordinances, decrees and orders
applicable to the operation of its business, to its employees, or to its
property, including, without limitation, all such laws, rules, ordinances,
decrees and orders relating to antitrust, consumer protection, currency
exchange, environmental protection, equal opportunity, prevention of domestic
and foreign corrupt practices, health, occupational safety, good laboratory
practices, pension, securities and trading-with-the-enemy matters. The Company
has not received any written notification of any asserted present or past
unremedied failure by the Company to comply with any of such laws, rules,
ordinances, decrees or orders.
4.23 Insurance
The Disclosure Memorandum sets forth a true and correct list of all
insurance policies maintained by the Company. The Company maintains commercially
reasonable levels of (a) insurance on its property (including leased premises)
that insures against loss or damage by fire or other casualty and (b) insurance
against liabilities, claims and risks, in each case, of a nature and in such
amounts as are normal and customary in the Company's industry for companies of
similar size and financial condition. All insurance policies of the Company are
in full force and effect, all premiums with respect thereto due as of the date
hereof have been paid, and no written notice of cancellation or termination has
been received with respect to any such policy or binder. Such policies or
binders are sufficient for compliance with all requirements of
24
law currently applicable to the Company and of all agreements to which the
Company is a party. Such policies will not terminate or lapse by reason of the
transactions contemplated by this Agreement.
4.24 Brokers or Finders
The Company has not incurred, and will not incur, directly or indirectly,
as a result of any action taken by or on behalf of the Company, any liability
for investment banking, brokerage or finders' fees or agents' commissions or any
similar charges in connection with the Merger, this Agreement or any
transactions contemplated hereby.
4.25 Bank Accounts
Schedule 4.25 to the Disclosure Memorandum sets forth the names and
locations of all banks, trust companies, savings and loan associations and other
financial institutions at which the Company maintains safe deposit boxes or
accounts of any nature and the names of all Persons authorized to draw thereon,
make withdrawals therefrom or have access thereto.
4.26 Insider Interests
No stockholder or officer, director, employee, or consultant of the Company
has any interest (other than as a stockholder of the Company) (a) in any Real
Property, Personal Property, Technology or IP Rights used in or directly
pertaining to the business of the Company, including, without limitation,
inventions, patents, trademarks or trade names, or (b) to the Company's
knowledge, in any agreement, contract, arrangement or obligation relating to the
Company, its business or its operations. There are no agreements, understandings
or proposed transactions between the Company and any of its officers, directors,
stockholders or affiliates other than with respect to officers, employees or
directors, agreements and arrangements relating to their employment or
directorship. To the Company's knowledge, except for beneficial or record
ownership of not more than one percent of the outstanding securities of an
entity whose shares are registered under the Exchange Act (as defined in Section
6.26), the Company and its officers and directors have no interest, either
directly or indirectly, in any entity, including, without limitation, any
corporation, partnership, joint venture, proprietorship, firm, licensee,
business or association (whether as an employee, officer, director, stockholder,
agent, independent contractor, security holder, creditor, consultant or
otherwise) that presently (i) provides any services, produces and/or sells any
products or product lines, or engages in any activity that is the same, similar
to or competitive with any activity or business in which the Company is now
engaged or proposes to engage; (ii) is a supplier, customer or creditor; or
(iii) has any direct or indirect interest in any material asset or property,
real or personal, tangible or intangible, of the Company or any property, real
or personal, tangible or intangible, that is necessary for the conduct of the
Company's business.
4.27 Compliance with Environmental Laws
4.27.1 For purposes of this Section 4.27,
(a) "Environmental, Health, and Safety Requirements" shall mean all
federal, state, local and foreign statutes, regulations, ordinances and other
provisions having the force or effect of law, all judicial and administrative
orders and determinations, all contractual obligations and all common law
concerning public health and safety, worker health and safety, and pollution or
protection of the environment, including without limitation all those relating
to the presence, use, production, generation, handling, transportation,
treatment, storage, disposal, distribution, labeling, testing, processing,
discharge, release, threatened release, control, or cleanup of any Hazardous
Materials, substances or wastes, chemical substances or mixtures, pesticides,
pollutants, contaminants, toxic chemicals, petroleum products or byproducts,
asbestos, polychlorinated biphenyls, noise or radiation, each as amended, now in
effect. This includes, but is not limited to, the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, as amended, and the Solid
Waste Disposal Act, as amended; and
25
(b) "Hazardous Materials" shall mean all substances designated, regulated,
defined or addressed by Environmental, Health and Safety Requirements.
4.27.2 The Company is, and at all times has been, in full compliance with,
and has not been and is not in violation of or liable under, any Environmental,
Health, and Safety Requirements except where such violation or failure to be in
compliance with such Environmental, Health, and Safety Requirements would not
have a Company Material Adverse Effect.
4.27.3 The Company has no basis to expect, nor has it received any written
or oral notice, report, order, summons, inquiry or other communication from any
governmental authority or any person regarding any actual or alleged violation
of or failure to comply with Environmental, Health, and Safety Requirements, or
any liabilities or potential liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise) arising under Environmental, Health, and Safety
Requirements, including any investigatory, remedial or corrective obligations,
relating to the Company, its properties, facilities or operations or any other
properties, facilities or assets in which the Company has had an interest, or
with respect to any property at or to which Hazardous Materials generated,
transferred, or used by the Company or any other person for whose conduct it is
or may be held responsible, have been transported, stored, handled, received or
disposed.
4.27.4 To the Company's knowledge, there has been no release or threat of
release of any Hazardous Materials, whether by the Company or any other person,
at or from the Company's properties, facilities or operations, any other
locations where Hazardous Materials were generated, used or transferred from or
by the Company's properties, facilities or operations or any other properties,
facilities or operations in which the Company had an interest.
4.27.5 The Company has delivered to Parent true and complete copies of any
and all environmental assessments and reports relating to the Company's
properties, facilities or operations.
4.28 Information Supplied by the Company
None of the information supplied or to be supplied by the Company for
inclusion in the S-4 or contained in any other material to be delivered to its
stockholders in connection with any written consent by or meeting of such
stockholders (collectively, "Stockholder Materials"), at the date on which the
S-4 is declared effective by the SEC (as defined in SECTION 6.28) or on the date
of such approval, contains or will contain any untrue statement of a material
fact or omits or will omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not materially misleading; provided,
however, that the Company makes no representations or warranties regarding
information furnished by or related to any party other than the Company.
4.29 Full Disclosure
None of the representations and warranties made by the Company herein (as
modified by the Disclosure Memorandum), nor any statement made in any schedule
or the Compliance Certificate and Secretary's Certificate furnished by the
Company pursuant to SECTIONS 7.3 and 7.6, respectively, of this Agreement,
contains any untrue statement of material fact, or omits to state any material
fact necessary in order to make the statements contained herein or therein, in
light of the circumstances under which they were made, not misleading.
4.30 Absence of Undisclosed Liabilities
The Company and its consolidated subsidiaries have no material liabilities
or obligations of any nature (absolute, contingent or otherwise) that are not
fully reflected or reserved against in the Company Balance Sheet and that would
be required under GAAP to be reflected or reserved in order for the Company
Balance Sheet to fairly represent the consolidated financial condition of the
Company as of such date,
26
except liabilities or obligations incurred since the date of the Company Balance
Sheet in the ordinary course of business and consistent with past practices.
4.31 Government Contracts
The Company has not, during the past five years, attempted to sell to or
bid on any contract or subcontract with or for any agency of the U.S. government
or any foreign government and had any such attempt denied as a result of any
prohibition against the Company's dealing with or for or any such agency or
government, and the Company has no knowledge of any such prohibition. The
Company has not been, nor to its knowledge is it currently being, audited or
investigated by the United States Government Accounting Office, the United
States Department of Justice, the United States Department of Defense or any of
its agencies, the Defense Contract Audit Agency or the inspector general or
other authorities of any agency of the U.S. government, or any foreign
government, nor, to the Company's knowledge, has such audit or investigation
been threatened.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF INVESTORS AND LENDERS REGARDING SECURITIES
MATTERS
Each Investor and Lender, severally and not jointly, hereby represents and
warrants to Parent as follows:
5.1 Requisite Power and Authority
Such Investor and Lender has all necessary power and authority under all
applicable provisions of law to execute and deliver this Agreement and to carry
out its provisions. All actions on such Investor's and Lender's part required
for the lawful execution and delivery of this Agreement have been or will be
effectively taken prior to the Closing
5.2 Investment Representations
Such Investor and Lender understands that neither the H Shares, the Notes
nor the shares of Parent Common Stock into which such H Shares and Notes are
convertible (the "Conversion Shares") have been registered under the Securities
Act of 1933, as amended (the "Securities Act"). Such Investor and Lender also
understands that the H Shares and Notes, respectively, are being offered and
sold pursuant to an exemption from registration contained in the Securities Act
based in part upon the Investor's representations contained in this Agreement.
5.3 Investor Bears Economic Risk
Such Investor and Lender has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to Parent so that it is capable of evaluating the merits and risks of its
investment in Parent and has the capacity to protect its own interests. Such
Investor and Lender must bear the economic risk of this investment indefinitely
unless the H Shares or the Notes, respectively (or, in the case of each, the
Conversion Shares) are registered pursuant to the Securities Act, or an
exemption from registration is available. Such Investor and Lender understands
that until the H Shares or the Notes, as the case may be, or the Conversion
Shares are registered, there is no assurance that any exemption from
registration under the Securities Act will be available and that, even if
available, such exemption may not allow such Investor to transfer all or any
portion of the H Shares or Notes, as the case may be, or the Conversion Shares
under the circumstances, in the amounts or at the times such Investor might
propose.
27
5.4 Acquisition for Own Account
Such Investor and Lender is acquiring the H Shares and Notes, respectively,
and will acquire the Conversion Shares for its own account for investment only,
and not with a view towards their distribution in violation of applicable
securities laws.
5.5 Investor and Lender Can Protect Its Interest
Such Investor and Lender represents that, by reason of its or of its
management's business or financial experience, such Investor and Lender has the
capacity to protect its own interests in connection with the transactions
contemplated in this Agreement. Further, such Investor and Lender is aware of no
publication of any advertisement in connection with the transactions
contemplated by the Agreement.
5.6 Accredited Investor
Such Investor and Lender represents that it is an accredited investor
within the meaning of Regulation D under the Securities Act.
5.7 Parent Information
Such Investor and Lender has had an opportunity to discuss Parent's
business, management and financial affairs with directors, officers and
management of Parent. Such Investor and Lender has also had the opportunity to
ask questions of, and receive answers from, Parent and its management regarding
the terms and conditions of this investment.
5.8 Rule 144
Such Investor and Lender acknowledges and agrees that the H Shares and
Notes, respectively, and the Conversion Shares must be held indefinitely unless
they are subsequently registered under the Securities Act or an exemption from
such registration is available. Such Investor and Lender has been advised or is
aware of the provisions of Rule 144 promulgated under the Securities Act, which
permits limited resale of shares purchased in a private placement subject to the
satisfaction of certain conditions, including, among other things: the
availability of certain current public information about Parent, the resale
occurring not less than one year after a party has purchased and paid for the
security to be sold, the sale being through an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934, as amended) and the number of
shares being sold during any three-month period not exceeding specified
limitations.
5.9 Information Furnished by Investors and Lenders
Each Investor and each Lender, as to itself or himself only, represents and
warrants the matters set forth in this Section 5.9. None of the information
supplied or to be supplied by the Investor or the Lender in connection with the
transactions contemplated by this Agreement, at the date on which such
information is given or on the Closing Date, contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not materially
misleading; provided, however, that the Investor or the Lender make no
representations or warranties regarding information furnished by or related to
any party other than the Investors or the Lenders. None of the information
supplied or to be supplied by the Investor or the Lender for inclusion in the
Stockholder Materials, at the date on which the S-4 is declared effective by the
SEC or on the date of approval of any of the transactions contemplated hereby by
the stockholders of the Company, contains or will contain any untrue statement
of a material fact or omit or will omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in light
of the circumstances under which they are made, not materially misleading;
provided, however, that the Investor or the Lender makes no representations or
warranties regarding information furnished by or related to any party other than
the Investor or the Lender.
28
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
In order to induce the Company, the Lenders and the Investors to enter into
and perform this Agreement and the other Operative Documents, Parent and Merger
Sub jointly and severally represent and warrant (except where such
representation or warranty specifically related to only one of the Parent or
Merger Sub, in which case only that party makes such representation or
warranty), and except as otherwise set forth in the Parent Disclosure Memorandum
attached hereto as Exhibit 6 (the "Parent Disclosure Memorandum"), to the
Company, the Lenders and the Investors as of the date of this Agreement as
follows in this Article VI: The Parent shall be deemed to have "knowledge"of a
fact or circumstance if any executive officer or director of Parent has actual
knowledge of any such fact or circumstance, including without limitation any
fact or circumstance brought to the attention of an officer or director of
Parent by the Company.
6.1 Organization
Parent and Merger Sub are corporations duly organized, validly existing and
in good standing (to the extent such terms exist) under the laws of the State of
Delaware. Parent and Merger Sub have all requisite corporate power and authority
to own, operate and lease their respective properties and assets and to carry on
their respective businesses as now conducted and as currently proposed to be
conducted. Parent and Merger Sub are duly qualified and licensed as foreign
corporations to do business and are in good standing (to the extent "qualified
to do business" and "good standing" exist) in each jurisdiction in which the
character of Parent and Merger Sub's properties occupied, owned or held under
lease or the nature of the business conducted by Parent and Merger Sub makes
such qualification or licensing necessary, except where the failure to be so
qualified or in good standing would not have a Parent Material Adverse Effect.
For purposes of this Agreement, the term "Parent Material Adverse Effect" shall
mean any material adverse effect on the business, operations, assets, financial
condition or results of operations of the Parent; provided, however, that Parent
Material Adverse Effect shall not include any change, circumstance, event or
effect that relates to or results from the announcement or other disclosure or
consummation of the transactions contemplated by this Agreement or general
economic conditions.
6.2 Enforceability
6.2.1 Parent and Merger Sub have all requisite corporate power and
authority to execute, deliver and perform their obligations under this Agreement
and each of the other Operative Documents to which they are a party and each of
the certificates, instruments and documents executed or delivered by them
pursuant to the terms of this Agreement. All corporate action on the part of
Parent and Merger Sub and their officers, directors and stockholders necessary
for (i) the authorization, execution, delivery and performance of this Agreement
and the other Operative Documents to which Parent and Merger Sub are a party,
(ii) the consummation of the Merger, and (iii) the performance of all Parent and
Merger Sub obligations under this Agreement and the other Operative Documents to
which Parent and Merger Sub are a party, required to be taken as of the Closing,
has been taken, or will as of the Closing have been taken. Due to the
requirements of the Nasdaq National Market System (the "Parent's Trading
Market"), the stockholders of Parent shall consider this Agreement and the
Merger and the following vote of the holders of Parent Capital Stock is
sufficient for the Parent's stockholders to duly approve this Agreement and the
Merger: the affirmative vote of a majority of the shares of Parent Common Stock
and Series G Preferred Stock, voting together as a single class, present or
represented and voting on the matter at a meeting at which a quorum is present.
With respect to any related amendments to Parent's Restated Certificate of
Incorporation, the following vote of Parent's Capital Stock shall be required:
the affirmative vote of a majority of the outstanding shares of Parent Common
Stock and Series G Preferred Stock voting together as a single class.
6.2.2 This Agreement has been, and each of the other Operative Documents
to which the Parent and Merger Sub are a party at the Closing will have been,
duly executed and delivered by the Parent and
29
Merger Sub, and this Agreement is, and each of the other Operative Documents to
which Parent and Merger Sub are a party will be at the Closing, assuming due
authorization, execution and delivery of this Agreement and the other Operative
Documents by the Company, the Investors and the Lenders, a legal, valid and
binding obligation of the Parent and Merger Sub, enforceable against Parent and
Merger Sub in accordance with its terms, except as to the effect, if any, of (i)
applicable bankruptcy, insolvency, reorganization, moratorium and other similar
federal and state laws affecting the rights or remedies of creditors generally
and (ii) rules of law governing specific performance, injunctive relief and
other equitable remedies.
6.3 Capitalization
(a) The authorized capital stock of Parent consists of 64,000,000 shares,
consisting of 50,000,000 shares of Parent Common Stock, par value $.001 per
share, and 14,000,000 shares of preferred stock, par value $.001 per share. Of
the authorized preferred stock, 1,500,000 shares are designated as Series G
Preferred Stock, par value $.001 per share (the "Series G Preferred"), and
500,000 shares are designated as Series A Preferred Junior Participating
Preferred, and 10,000,000 shares will be designated as Series H Preferred Stock,
par value $.001 per share.
(b) As of the date of this Agreement, the issued and outstanding capital
stock of the Company consists solely of 23,287,184 shares of Parent Common
Stock; and 1,500,000 shares of Series G Preferred Stock. Such outstanding shares
are, and immediately prior to the Closing will be, duly authorized and validly
issued, fully paid and nonassessable.
(c) As of the date of this Agreement, other than (i) Options to purchase up
to 7,167,247 shares of Parent Common Stock that have been granted under the
Parent Option Plans, (ii) Warrants to purchase up to 150,000 shares of Parent
Common Stock, (iii) the rights created pursuant to the Rights Agreement dated as
of January 24, 1991 by and between the Parent and Fleet National Bank (f/k/a/
The First National Bank of Boston) as amended (the "Rights Agreement") and
249,529 shares reserved under the Parent's Stock Purchase Plan, this Agreement,
(iv) and the Series G Preferred, there are no outstanding rights of first
refusal or offer, preemptive rights, options, warrants, conversion rights or
other agreements (or obligations to issue such options, warrants or conversion
rights), either directly or indirectly, for the purchase or acquisition from
Parent or, to the Parent's knowledge, any stockholder of any shares of Capital
Stock or any securities convertible into or exchangeable for shares of any
Capital Stock of Parent ("Parent Capital Stock") (all such Options, Warrants and
other rights are sometimes referred to herein as "Parent Stock Purchase
Rights"). Parent has provided to the Company a spreadsheet referencing this
representation that accurately reflects the number of such Options, any Warrants
and Parent Stock Purchase Rights outstanding, the grant or issue dates, vesting
schedules and exercise or conversion prices thereof and, in each case, the
identities of the holders and an indication of their relationships to Parent (if
any exist other than a security holder). Parent has delivered to the Company
true and correct copies of the Parent Option Plans, the form of stock option
agreements relating to Options granted thereunder, and all warrants to purchase
Parent Common Stock.
(d) Parent is not a party to any agreement and, to Parent's knowledge
(other than agreements entered into in connection with this Agreement), there is
no agreement between any person, that affects or relates to the voting or giving
of written consents with respect to any securities of Parent or the voting by
any director of Parent. Based upon a review of the filings made with the SEC, no
stockholder of Parent owning beneficially 5% or more of any class of Parent
Capital Stock ("5% Parent Stockholder")or any affiliate thereof is indebted to
Parent, and Parent is not indebted to any 5% Parent Stockholder or any affiliate
thereof. Parent is not under any contractual or other obligation to register any
of its presently outstanding securities or any of its securities that may
hereafter be issued other than pursuant to the agreements shown in the Parent
Disclosure Memorandum or as contemplated by this Agreement.
(e) All rights of refusal, preemptive, co-sale rights and registration
rights granted by Parent with respect to Parent Capital Stock or Parent Stock
Purchase Rights are described on Schedule 6.3(e) to the Parent Disclosure
Memorandum.
30
6.4 Subsidiaries and Affiliates
Except as disclosed in the Parent Disclosure Memorandum, neither Parent or
Merger Sub owns or controls, directly or indirectly, any corporation,
partnership, limited liability company or other business entity.
6.5 No Approvals; No Conflicts
(a) The execution, delivery and performance by Parent of this Agreement and
the other Operative Documents to which Parent and Merger Sub are a party, the
effectiveness of the Merger and the performance by Parent and Merger Sub of
their obligations pursuant to this Agreement and the other Operative Documents
to which they are a party, will not (a) constitute a material violation (with or
without the giving of notice or lapse of time, or both) of any provision of law
or any judgment, decree, order, regulation or rule of any court or other
governmental authority applicable to Parent or Merger Sub; (b) require any
consent, approval or authorization of, or declaration, filing or registration
with, any Person, except for (i) compliance with applicable securities laws,
(ii) the filing of all documents necessary to consummate the Merger with the
Delaware Secretary of State, (iii) the approval by the stockholders of Parent
and Merger Sub of the transactions contemplated hereby, as provided under the
rules of Parent's Trading Market and the Certificate of Incorporation and Bylaws
of Parent and Merger Sub, respectively, and (iv) if applicable, the notification
requirements of the Hart-Scott-Rodino Act; (c) result in a material default
(with or without the giving of notice or lapse of time, or both) under, or
acceleration or termination of, or the creation in any party of the right to
accelerate, terminate, modify or cancel, any material agreement, lease, note or
other restriction, encumbrance, obligation or liability to which Parent or
Merger Sub is a party or by which either is bound or to which any assets of
Parent or Merger Sub are subject; (d) result in the creation of any Encumbrance
upon any material assets of Parent or Merger Sub; (e) conflict with or result in
a breach of or constitute a default under any provision of the Certificate of
Incorporation or Bylaws of Parent or Merger Sub; or (f) invalidate or materially
adversely affect any permit, license or authorization currently material to the
conduct of the business of Parent.
(b) Parent has adopted an amendment to the Rights Agreement, a true and
correct copy of which has been delivered to the Company and its counsel and
attached to this Agreement as Exhibit 6.5(b), pursuant to which the Investors
will not be deemed to be Acquiring Persons (as defined in the Rights Agreement)
as a result of the execution or consummation of the transactions provided for by
this Agreement including without limitation, the consummation of the Merger, and
the Investors will be permitted to purchase such additional shares of Parent as
set forth in the amendment to the Rights Agreement without being deemed to be
Acquiring Persons.
6.6 Financial Statements
Parent has delivered to the Company (a) a consolidated balance sheet and
consolidated statements of operations, stockholders' equity and cash flows of
Parent at and for each of the fiscal years ended December 30, 2000, January 1,
2000, and January 2, 1999, and accompanying notes, audited by
PriceWaterhouseCoopers LLP, independent auditors and certified public
accountants, and (b) the unaudited balance sheet and unaudited statement of
operations, stockholders' equity and cash flows of parent at and for each of the
three month periods ended March 31, 2001 and June 30, 2001 (the "Parent
Unaudited Financial Statements"). All the foregoing financial statements are
herein referred to as the "Parent Financial Statements." The balance sheet of
Parent as of December 30, 2000 is herein referred to as the "Parent Balance
Sheet." The Parent Financial Statements have been prepared in conformity with
GAAP (except in the case of the Parent Unaudited Financial Statements with
respect to the absence of footnotes and subject to normal year-end audit
adjustments) on a basis consistent with prior accounting periods and fairly
present the consolidated financial position, results of operations and changes
in financial position of Parent as of the dates and for the periods indicated.
Schedule 6.6 to the Disclosure Memorandum sets forth all promissory notes,
loans, lines of credits or similar obligations pursuant to which Parent is an
obligor, together with all the amounts owed by Parent under such obligations, as
of December 30, 2000, and all liabilities under equipment leases of Parent (the
"Parent Operating Lease
31
Liabilities") as of December 30, 2000. Schedule 6.6 sets forth all indebtedness
or other amounts owed by any 5% Parent Stockholders to the Parent, as of the
date hereof.
6.7 Absence of Certain Changes or Events
From the date of Parent Balance Sheet through and including the date
hereof, Parent has conducted its business in the ordinary course and has not
entered into or agreed to enter into any transactions, agreements or
commitments, suffered the occurrence of any event or events or experienced any
change in business, operations, assets, financial condition or results of
operations that, in the aggregate, has resulted in a Parent Material Adverse
Effect. Without limiting the generality of the foregoing, except for
transactions specifically contemplated in this Agreement or the other Operative
Documents, from the date of the Balance Sheet through and including the date
hereof, Parent has not:
(a) received written notice or, to the knowledge of Parent, oral
notice that there has been or will be a loss of, or contract cancellation
by, any current customer, supplier or licenser of Parent, which loss or
cancellation would result in lost annual revenues to Parent of at least
$1,000,000;
(b) forgiven or canceled any indebtedness or waived any claims or
rights of material value (including, without limitation, any indebtedness
owing by any stockholder, officer, director, employee or affiliate of
Parent);
(c) granted, other than in the ordinary course of business and
consistent with past practice or as would otherwise not be material, any
increase in the compensation of directors, officers, employees or
consultants;
(d) borrowed or agreed to borrow any funds, assumed or become subject
to, whether directly or by way of guarantee or otherwise, any material
liabilities or obligations (absolute, accrued or contingent), or incurred
any material liabilities or obligations (absolute, accrued or contingent),
except liabilities and obligations incurred in the ordinary course of
business and consistent with past practice not in excess of $250,000
individually;
(e) paid, discharged or satisfied any material claims, liabilities or
obligations (absolute, accrued or contingent) other than the payment,
discharge or satisfaction in the ordinary course of business and consistent
with past practice of claims, liabilities and obligations reflected or
reserved against in the Parent Balance Sheet or incurred in the ordinary
course of business and consistent with past practice since the date of the
Parent Balance Sheet, or prepaid any obligation having a fixed maturity of
more than 90 days from the date such obligation was issued or incurred;
(f) permitted or allowed any of its material property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any
Encumbrance, except conditional sales or similar security interests granted
in connection with the purchase of equipment or supplies in the ordinary
course of business;
(g) written down the value of any inventory (including write-downs by
reason of shrinkage or markdown) or written off as uncollectible any notes
or accounts receivable, except for write-downs and write-offs that are in
the aggregate less than $500,000, incurred in the ordinary course of
business and consistent with past practice;
(h) sold, transferred or otherwise disposed of any of its properties
or assets (real, personal or mixed, tangible or intangible) with an
aggregate net book value in excess of $250,000, except the sale of
inventory in the ordinary course of business and consistent with past
practice;
(i) made any single capital expenditure or commitment in excess of
$250,000 for additions to property, plant, equipment or intangible capital
assets or made aggregate capital expenditures in excess of $2,000,000 for
additions to property, plant, equipment or intangible capital assets;
32
(j) made any change in any method of accounting or accounting practice
or internal control procedure, except for any change which is required by
reason of U.S. GAAP or Regulation S-X under the Exchange Act;
(k) issued any capital stock, other securities or options or other
rights to acquire capital stock or other securities, or declared, paid or
set aside for payment any dividend or other distribution in respect of its
capital stock, or redeemed, purchased or otherwise acquired, directly or
indirectly, any shares of capital stock or other securities of Parent
except for the issuance of shares of Parent Capital Stock upon exercise or
conversion of outstanding Options or Parent Stock Purchase Rights;
(l) except for transactions that are not material in the aggregate,
loaned or advanced any amount to, or sold, transferred or leased any
properties or assets (real, personal or mixed, tangible or intangible) to,
or entered into any agreement or arrangement with, any of Parent's
officers, directors or employees or any affiliate of Parent's officers,
directors or employees, except (i) directors' fees and compensation paid to
officers and employees at rates not exceeding the rates of compensation
disclosed on Schedule 6.16 of the Parent Disclosure Memorandum, and (ii)
travel or similar expenses advanced to employees in connection with their
employment duties in the ordinary course of business;
(m) entered into or agreed to any sale, assignment, transfer or
license of any patents, trademarks, copyrights, trade secrets or other
intangible assets of Parent to a third party or any amendment or change to
any existing license or other agreement relating to intellectual property,
except in the ordinary course of business;
(n) incurred, assumed or guaranteed any indebtedness for borrowed
money other than in the ordinary and usual course of business, consistent
with past practice, and in amounts and on terms consistent with past
practice; or
(o) agreed, whether in writing or otherwise, to take any action
described in this Section 6.7.
6.8 Taxes
(a) (i) All Parent Tax Returns (as defined below), with respect to each of
the tax years subsequent to fiscal year 1997, required to be filed by or on
behalf of Parent have been filed on a timely basis with the appropriate
governmental authority in all jurisdictions in which such Parent Tax Returns are
required to be filed, and all such Parent Tax Returns were at the time they were
filed true, correct and complete in all material aspects; (ii) all Taxes of
Parent (whether or not reflected on any Parent Tax Return) have been fully and
timely paid or properly accrued; (iii) no waivers of statutes of limitation have
been given by Parent that remain in effect or requested from Parent in
connection with any Parent Tax Returns covering Parent with respect to any Taxes
payable by it; (iv) no taxing authority in a jurisdiction where Parent does not
file Parent Tax Returns has made in writing or otherwise a claim, assertion or
threat to Parent that Parent is or may be subject to taxation by such
jurisdiction; (v) Parent has duly and timely withheld from employee salaries,
wages, compensation and other payments and paid over to the appropriate
governmental authority all amounts required to be so withheld and paid over for
all periods under all applicable laws; (vi) there are no liens with respect to
Taxes on any of Parent's property or assets other than liens for current Taxes
not yet payable; (vii) there are no Tax rulings, requests for rulings or closing
agreements relating to Parent that could affect the liability for Taxes or the
amount of taxable income of Parent for any period (or portion of a period) after
the date hereof; and (viii) any adjustment of Taxes of Parent made by the IRS in
any examination that is required to be reported to the appropriate state, local
or foreign taxing authorities has been reported, and any additional Taxes due
with respect thereto have been paid.
(b) There is no dispute or claim concerning any Tax liability of Parent
either (i) claimed or raised by any governmental authority in writing or (ii) as
to which any of the directors and officers (and employees responsible for Tax
matters) of Parent have knowledge based on contact or correspondence with any
agent of such authority. Schedule 6.8 to the Parent Disclosure Memorandum lists
all Parent Federal Income Tax Returns filed with respect to Parent for taxable
periods ended on or after Parent's 1999 fiscal
33
year that have been audited, and indicates those Parent Federal Income Tax
Returns that currently are the subject of audit. Parent has made available to
the Company correct and complete copies of all Parent Federal Income Tax
Returns, examination reports and statements of deficiencies assessed against or
agreed to by Parent since Parent's 1999 fiscal year.
(c) Parent has not made any payment or payments, is not obligated to make
any payment or payments and is not a party to (or a participating employer in)
any agreement or Employee Benefit Plan that could obligate it, the Surviving
Corporation or the Company to make any payment or payments that would constitute
an "excess parachute payment," as defined in Section 280G of the Code (or any
similar provision of state, local or foreign law) or that would otherwise not be
deductible under Section 162 or Section 404 of the Code.
(d) Parent has not been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code.
(e) Parent is not a party to any Tax allocation or sharing agreement.
Parent (i) has not been a member of a Parent Tax Group filing a consolidated
income tax return under Section 1501 of the Code (or any similar provision of
state, local or foreign law) and (ii) does not have any liability for Taxes of
any person under Treasury Regulations Section 1.1502-6 (or any similar provision
of state, local or foreign law) as a transferee or successor by contract or
otherwise.
(f) The unpaid Taxes of Parent (i) did not, as of December 30, 2000, exceed
the reserve for Tax liability set forth on the face (rather than any reserve for
deferred Taxes established to reflect timing differences between book and Tax
income) of the Parent Balance Sheet and (ii) do not exceed that reserve as
adjusted for the passage of time and operations in the ordinary course of
business through the Closing Date.
(g) All Options that Parent has treated as incentive stock options under
Section 421 of the Code meet the requirements of Section 422 of the Code.
(h) None of the assets of Parent (i) is "tax exempt use property" within
the meaning of Section 168(h) of the Code; (ii) is property that Parent is
required to treat as being owned by any other person pursuant to the "safe
harbor lease" provisions of former Section 168(f)(8) of the Internal Revenue
Code of 1954; or (iii) directly or indirectly secures any debt the interest on
which is tax-exempt under Section 103(a) of the Code.
(i) Parent has not taken or agreed to take any action, or failed to take
any action, that would prevent the Merger from qualifying as a reorganization
within the meaning of the Code.
(j) Parent has not been a party to a distribution to which Section 355(d)
or (e) of the Code applies.
(k) Parent has not filed a consent under Section 341(f) of the Code
concerning collapsible corporations.
(l) Parent has disclosed on its federal Parent Tax Returns all positions
taken therein that could give rise to a substantial understatement of federal
income Tax within the meaning of Section 6662 of the Code.
As used in this Agreement, the following terms shall have the following
meanings:
"Taxes" means (i) all foreign, federal, state, county or local taxes,
charges, fees, levies, imposts, duties and other assessments, including,
but not limited to, any income, alternative minimum or add-on, estimated,
gross income, gross receipts, sales, use, transfer, transactions,
intangibles, ad valorem, value-added, franchise, registration, title,
license, capital, paid-up capital, profits, withholding, payroll,
employment, excise, severance, stamp, occupation, premium, real property,
recording, personal property, federal highway use, commercial rent,
environmental (including, but not limited to, taxes under Section 59A of
the Code) or windfall profit tax, custom, duty or other fee or other like
assessment or charge of any kind whatsoever imposed by any tax authority,
together with any interest,
34
penalties or additions to tax; (ii) any liability for payment of amounts
described in clause (i) whether as a result of transferee liability, of
being a member of an affiliated, consolidated, combined or unitary group
for any period, or otherwise through operation of law; and (iii) any
liability for the payment of amounts described in clause (i) or (ii) as a
result of any tax sharing, tax indemnity or tax allocation agreement, or
any other express or implied agreement to indemnify any other person; and
"Tax" means any of the foregoing Taxes.
"Parent Tax Group" means any federal, state, local or foreign
consolidated, affiliated, combined, unitary or other similar group of which
Parent is now or was formerly a member.
"Parent Tax Returns" means any Parent return, declaration, report,
claim for refund, information return, statement or other similar document
relating to Taxes, including any schedule or attachment thereto, and
including any amendment thereof.
6.9 Property
(a) Schedule 6.9(a) to the Parent Disclosure Memorandum contains a complete
and accurate list of all real property owned, leased or currently being used by
Parent (the "Parent Real Property"). Parent has delivered to the Company or its
counsel true and complete copies of all written leases, subleases, rental
agreements, contracts of sale, tenancies or licenses relating to the Parent Real
Property.
(b) Schedule 6.9(b) to the Parent Disclosure Memorandum contains a complete
and accurate list of each item of personal property having a book value in
excess of $100,000 that is owned, leased, rented or used by Parent (the "Parent
Personal Property"); provided that such list need not describe Parent
Intellectual Property (as defined in Section 6.17 below), listed on Schedule
6.17 to the Disclosure Memorandum, or Inventory. Parent has delivered or made
available to the Company true and complete copies of all leases, subleases,
rental agreements, contracts of sale, tenancies or licenses to which the Parent
Personal Property is subject.
(c) The Parent Real Property and the Parent Personal Property include all
the properties and assets (whether real, personal or mixed, tangible or
intangible) (other than, in the case of the Parent Personal Property, property
rights with an individual book value of less than $100,000 and the Parent
Intellectual Property) reflected in the Parent Balance Sheet (except for such
properties or assets sold since the date of Parent Balance Sheet in the ordinary
course of business and consistent with past practice) and all the properties and
assets purchased by Parent since the date of the Parent Balance Sheet (other
than, in the case of the Parent Personal Property, property rights with an
individual book value of less than $100,000 and the Parent Intellectual
Property). The Parent Real Property and the Parent Personal Property include all
material property used in the business of Parent, other than the Parent
Intellectual Property. Parent's offices and other structures and the Parent
Personal Property are in good operating condition and repair, normal wear and
tear excepted, and are adequate for the uses to which they are being put.
(d) Parent's title to or leasehold interest in each parcel of the Parent
Real Property is free and clear of all Encumbrances except for Parent Permitted
Encumbrances as defined below. Each lease of any portion of the Parent Real
Property is valid, binding and enforceable in accordance with its terms against
Parent and to Parent's knowledge the parties thereto, Parent has performed in
all material respects all obligations imposed on it thereunder, and neither
Parent nor, to Parent's knowledge, any other party thereto is in default
thereunder, nor is there any event that with notice or lapse of time, or both,
would constitute a default thereunder by Parent or, to Parent's knowledge, by
any other party. Parent has not granted any lease, sublease, tenancy or license
of, or entered into any rental agreement or contract of sale with respect to,
any portion of the Parent Real Property, except for any subleases or assignments
that Parent contemplates and has disclosed to the Company regarding Parent's
Boulder facilities, which sublease or assignment is disclosed in the Parent
Disclosure Memorandum.
(e) For the purposes of this Agreement, "Parent Permitted Encumbrances"
shall mean (i) liens for Taxes or governmental charges or claims (A) not yet due
and payable or (B) being contested in good faith, if a reserve or other
appropriate provision, if any, as shall be required by GAAP shall have been
35
made therefor, (ii) statutory liens of landlords, liens of carriers, warehouse
persons, mechanics and material persons and other liens imposed by law incurred
in the ordinary course of business for sums (A) not yet due and payable or (B)
being contested in good faith, if a reserve or other appropriate provision, if
any, as shall be required by GAAP shall have been made therefor, (iii) liens
incurred or deposits made in connection with workers' compensation, unemployment
insurance and other similar types of social security programs or to secure the
performance of tenders, statutory obligations, surety and appeal bonds, bids,
leases, government contracts, performance and return of money bonds and similar
obligations, in each case in the ordinary course of business, consistent with
past practice, (iv) security interests incurred under Parent's line of credit
with Congress Financial Corporation and any other security interests or liens
existing at the date of this Agreement as disclosed in the SEC Documents, and
(v) easements, rights-of-way, restrictions and other similar charges or
encumbrances, in each case, which do not interfere with the ordinary conduct of
business of the Parent and do not materially detract from the value of the
property upon which such encumbrance exists.
(f) The Parent Personal Property is free and clear of all Encumbrances,
except Parent Permitted Encumbrances, and other than leased Parent Personal
Property that is so noted on the list supplied pursuant to Section 6.9(b),
Parent owns such Parent Personal Property. Each lease, license, rental
agreement, contract of sale or other agreement to which the Parent Personal
Property is subject is valid, binding and enforceable in accordance with its
terms against Parent and, to Parent's knowledge, the parties thereto, Parent has
performed in all material respects all obligations imposed on it thereunder, and
neither Parent nor, to Parent's knowledge, any other party thereto is in default
thereunder, nor is there any event that with notice or lapse of time, or both,
would constitute a default by Parent or, to Parent's knowledge, any other party
thereunder. Parent has not granted any lease, sublease, tenancy or license of
any portion of the Parent Personal Property, except in the ordinary course of
business.
(g) To Parent's knowledge, there are no applicable adverse zoning, building
or land use codes or rules, ordinances, regulations or other restrictions
relating to zoning or land use that currently or could reasonably be expected to
prevent, or cause the imposition of material fines or penalties as the result
of, the use of all or any portion of the Parent Real Property for the conduct of
the business as presently conducted. Parent has received all necessary material
approvals with regard to occupancy and maintenance of the Parent Real Property.
6.10 Contracts
6.10.1 Material Contracts
Schedule 6.10.1 to the Parent Disclosure Memorandum contains a complete and
accurate list (other than the Intellectual Property Rights listed on Schedule
6.17 to the Parent Disclosure Memorandum) of all written and, to the knowledge
of Parent, oral contracts, agreements and understandings to which Parent is
currently a party or by which Parent is currently bound, providing for potential
payments by or to Parent in excess of $2,000,000, including, without limitation,
security agreements, license agreements, software development agreements,
distribution agreements, joint venture agreements, reseller agreements, credit
agreements and instruments relating to the borrowing of money (each, a "Parent
Material Contract"). All contracts set forth on Schedule 6.10.1 are valid,
binding and enforceable in accordance with their terms against Parent and, to
the Parent's knowledge, the other parties thereto, except as to the effect, if
any, of (a) applicable bankruptcy, insolvency, reorganization, moratorium and
other similar federal and state laws affecting the rights or remedies of
creditors generally, (b) rules of law governing specific performance, injunctive
relief and other equitable remedies, and (c) the enforceability of provisions
requiring indemnification in connection with the offering, issuance or sale of
securities, and are in full force and effect, Parent has performed in all
material respects all material obligations imposed on it thereunder, and neither
Parent nor, to Parent's knowledge, any other party thereto is in material
default thereunder, nor, to Parent's knowledge, is there any event that with
notice or lapse of time, or both, would constitute a default by Parent or, to
Parent's knowledge, any other party thereunder. True and complete copies of each
such
36
written Parent Material Contract have been delivered to the Company by Parent.
Except as set forth on Schedule 6.10.1 to the Parent Disclosure Memorandum,
Parent has no:
(a) contracts, agreements or arrangements (i) with distributors or
dealers that cannot be canceled by Parent within 60 days' notice without
liability, penalty or premium, (ii) with directors, officers, stockholders,
employees, agents, consultants, advisors, salespeople, or sales
representatives providing for the payment of any bonus or commission based
on sales or earnings, or (iii) affecting or relating to former employees of
Parent;
(b) employment agreement, or any other agreement for services that
contains severance or termination pay liabilities or obligations;
(c) noncompetition agreement or other arrangement that would prevent
Parent from carrying on its business anywhere in the world;
(d) written or, to the knowledge of Parent, oral notice that any party
to a contract listed on Schedule 6.10.1 to the Parent Disclosure Memorandum
intends to cancel, terminate or refuse to renew such contract (if such
contract is renewable);
(e) material dispute with any of its suppliers, customers,
distributors, OEM resellers, licensors or licensees;
(f) product distribution agreement, development agreement or license
agreement as licensor or licensee (except for agreements relating to
"Off-The-Shelf Software") or otherwise disclosed in Section 6.17 to the
Parent Disclosure Memorandum;
(g) joint venture contract or arrangement or any other agreement that
involves a sharing of profits with other persons;
(h) instrument evidencing indebtedness for borrowed money by way of a
direct loan, sale of debt securities, purchase money obligation,
conditional sale or guarantee, or otherwise, except for trade indebtedness
incurred in the ordinary course of business, and except as disclosed in the
Parent Financial Statements; or
(i) agreements or commitments to provide indemnification, other than
those entered into in the ordinary course of business.
6.10.2 Required Consents
>The execution and delivery of this Agreement and the performance of the
obligations of Parent hereunder will not constitute a material default under any
Parent Material Contract and do not require the consent of any other party to
any Parent Material Contract, except for those consents listed on Schedule
6.10.2 to the Parent Disclosure Memorandum.
6.11 Customers and Suppliers
Schedule 6.11 to the Parent Disclosure Memorandum sets forth (a) a complete
and accurate list of the customers of Parent accounting for 5% or more of
Parent's revenues during the fiscal year ended December 30, 2000, and (b) a
complete and accurate list of the suppliers of Parent from whom Parent has
purchased 5% or more of the goods or services purchased by Parent in the fiscal
year ended December 30, 2000. As of the date hereof, Parent has not received any
written, or to the knowledge of Parent, oral notice from its customers or
suppliers that would cause it, in its reasonable judgment, to expect any
material reduction in the business activity between Parent and any customers or
suppliers named on such Schedule 6.11.
6.12 Warranties and Returns
Schedule 6.12 to the Parent Disclosure Memorandum sets forth Parent's
warranties currently made with respect to its business, products and services,
and current policies with respect to returns of products
37
in the course of Parent's conduct of the business. Except as set forth on the
Parent Disclosure Memorandum, Parent has not made any express warranties in
connection with the sale of its products and services. Claims against Parent for
warranty costs (individually or in the aggregate, but net of warranties passed
through to vendors) with respect to products and services during each of the
last three fiscal years did not exceed $8,600,000, and there are no outstanding
or, to Parent's knowledge, threatened claims for any such warranty costs that
would exceed $10,200,000 (individually or in the aggregate, but net of
warranties passed through to vendors). As used above, the term "warranty cost"
shall mean costs and expenses associated with correcting, returning or replacing
defective or allegedly defective products or services, whether such costs and
expenses arise out of claims sounding in warranty, contract, tort or otherwise.
6.13 Claims and Legal Proceedings
Except as disclosed on Schedule 6.13 to the Parent Disclosure Memorandum,
there are no Proceedings pending or, to Parent's knowledge, threatened against
Parent or any of its assets before or by any court or governmental entity except
such Proceedings as would not be material. To Parent's knowledge, there is no
valid basis for any claim, action, suit, arbitration, proceeding or
investigation before or by any person that would have a Parent Material Adverse
Effect. There are no outstanding or unsatisfied judgments, orders, decrees or
stipulations to which Parent is a party.
6.14 Labor and Employment Matters
There are no material labor disputes, employee grievances or disciplinary
actions pending or, to Parent's knowledge, threatened against Parent or any of
its present or former employees. Parent has complied in all material respects
with all material provisions of law relating to employment and employment
practices, terms and conditions of employment, wages and hours. Parent is not
engaged in any unfair labor practice, and there is no labor strike, dispute,
slowdown or stoppage pending or, to Parent's knowledge, threatened against or
affecting Parent. Parent is not a party to any collective bargaining agreement.
Parent has no knowledge of any organizational efforts presently being made or
threatened by or on behalf of any labor union with respect to employees of
Parent. Except as disclosed in the Parent Disclosure Memorandum, each current
employee, officer and consultant of Parent has executed a Parent Employment
Proprietary Information Agreement in the form provided to the Company. To
Parent's knowledge, no employee (or person performing similar functions) of
Parent is in violation of any such agreement or any employment agreement,
noncompetition agreement, patent disclosure agreement, invention assignment
agreement, proprietary information agreement or other contract or agreement
relating to the relationship of such employee with Parent or any other party.
All employees of Parent are employed on an "at will" basis, and, to Parent's
knowledge, are eligible to work and are lawfully employed in the United States.
6.15 Employee Benefit Plans
6.15.1 Definitions
As used in this Agreement, "Parent Employee Benefit Plan" means any
retirement, pension, profit sharing, deferred compensation, stock bonus,
savings, bonus, incentive, cafeteria, medical, dental, vision, hospitalization,
life insurance, accidental death and dismemberment, medical expense
reimbursement, dependent care assistance, tuition reimbursement, disability,
sick pay, holiday, vacation, severance, change of control, stock purchase, stock
option, restricted stock, phantom stock, stock appreciation rights, fringe
benefit or other employee benefit plan, fund, policy, program, contract,
arrangement or payroll practice of any kind (including any "employee benefit
plan," as defined in Section 3(3) of ERISA) or any employment, consulting or
personal services contract, whether written or oral, qualified or nonqualified,
funded or unfunded, or domestic or foreign, (i) sponsored, maintained or
contributed to by Parent or, if an employment, consulting or personal services
contract, to which Parent is a party, (ii) covering or benefiting any current or
former officer, employee, agent, director or independent contractor of Parent
(or any
38
dependent or beneficiary of any such individual), or (iii) with respect to which
Parent has (or could have) any obligation or liability.
6.15.2 Employee Benefit Plan Listing
Schedule 6.15.2 contains a complete and accurate list of all material
written, and to the knowledge of Parent, oral Parent Employee Benefit Plans.
Except as disclosed in the Parent Disclosure Memorandum, Parent does not have
any agreement, arrangement, commitment or obligation, whether formal or
informal, whether written or unwritten and whether legally binding or not, to
create, enter into or contribute to any additional Parent Employee Benefit Plan,
or to modify or amend any existing Parent Employee Benefit Plan, except for
amendments required by statute, regulation or administrative pronouncement.
There has been no amendment, interpretation or other announcement (written or
oral) by Parent or any other Person relating to, or change in participation or
coverage under, any Parent Employee Benefit Plan that, either alone or together
with other such items or events, could materially increase the expense of
maintaining such Parent Employee Benefit Plan (or the Parent Employee Benefit
Plans taken as a whole) above the level of expense incurred with respect thereto
for the most recent fiscal year included in the Parent Financial Statements. The
terms of each Parent Employee Benefit Plan permit Parent to amend or terminate
such Parent Employee Benefit Plan at any time and for any reason (except to the
extent prohibited by law) without penalty and without material liability or
expense. None of the rights of the Company under any Parent Employee Benefit
Plan will be impaired in any way by this Agreement or the consummation of the
transactions contemplated by this Agreement.
6.15.3 Documents Provided
Parent has made available to the Company true, correct and complete copies
(or, in the case of unwritten Parent Employee Benefit Plans, descriptions) of
all Parent Employee Benefit Plans (and all amendments thereto), along with, to
the extent applicable to the particular Parent Employee Benefit Plan, copies of
the following: (a) the last three annual reports (Form 5500 series) filed with
respect to such Parent Employee Benefit Plan; (b) the most recent summary plan
descriptions (and all summaries of material modifications related thereto) and
employee manuals distributed with respect to such Parent Employee Benefit Plan;
(c) all material communications filed or distributed with respect to such Parent
Employee Benefit Plan during the last year; (d) all contracts and agreements
(and any amendments thereto) relating to such Parent Employee Benefit Plan,
including, without limitation, trust agreements, investment management
agreements, annuity contracts, insurance contracts, bonds, indemnification
agreements and service provider agreements; (e) the most recent determination
letter issued by the IRS with respect to such Parent Employee Benefit Plan; (f)
all written communications relating to the amendment, creation or termination of
such Parent Employee Benefit Plan, or an increase or decrease in benefits,
acceleration of payments or vesting or other events that could result in a
material liability to Parent since the date of the most recently completed and
filed annual report (Form 5500 series); (g) all correspondence to or from any
governmental entity or agency relating to such Parent Employee Benefit Plan; (h)
samples of all administrative forms currently in use, including, without
limitation, all COBRA and HIPAA forms and notices; (i) all coverage,
nondiscrimination, top heavy and Code Section 415 tests performed with respect
to such Parent Employee Benefit Plan for the last three years; and (j) the most
recent Joint Proxy and Registration Statement, annual report (Form 11-K) and
prospectus prepared in connection with such Parent Employee Benefit Plan.
6.15.4 Compliance
With respect to each Parent Employee Benefit Plan: (a) such Parent Employee
Benefit Plan is, and at all times since 1997 has been, maintained, administered,
operated and funded in all material respects in accordance with its terms and in
compliance with all applicable requirements of all applicable laws, statutes,
orders, rules and regulations, including, without limitation, ERISA, COBRA,
HIPAA and the Code; (b) Parent and all other Persons (including, without
limitation, all fiduciaries) have, at all times, properly performed in all
material respects all of their duties and obligations (whether arising by
operation of law or by contract) under or with respect to such Parent Employee
Benefit Plan, including, without limitation, all reporting, disclosure and
notification obligations; (c) all returns, reports and other
39
information (including, without limitation, all Form 5500 series annual reports,
together with all schedules and audit reports required with respect thereto)
relating to such Parent Employee Benefit Plan required to be filed with any
governmental entity or agency have been accurately completed and timely and
properly filed; (d) all notices, statements, reports and other disclosure
(including, without limitation, all summary plan descriptions) required to be
given or made to participants in such Parent Employee Benefit Plan or their
beneficiaries have been accurately completed and timely and properly disclosed
or provided; (e) neither Parent nor any fiduciary of such Parent Employee
Benefit Plan has engaged in any transaction or acted or failed to act in a
manner that violates the fiduciary requirements of ERISA or any other applicable
law; (f) no transaction or event has occurred or is threatened or about to occur
(including any of the transactions contemplated in or by this Agreement) that
constitutes or could constitute a prohibited transaction under Section 406 or
407 of ERISA or under Section 4975 of the Code for which an exemption is not
available; and (g) Parent has not incurred, and there exists no condition or set
of circumstances in connection with which Parent, the Surviving Corporation or
the Company could incur, directly or indirectly, any material liability or
expense (except for routine contributions, benefit payments and administrative
expenses) under ERISA, the Code or any other applicable law, statute, order,
rule or regulation, or pursuant to any indemnification or similar agreement,
with respect to such Parent Employee Benefit Plan.
6.15.5 Qualification
Each Parent Employee Benefit Plan that is intended to be qualified under
Section 401(a) of the Code is, and at all times since 1997 has been, so
qualified and its related trust is, and at all times since inception has been,
exempt from taxation under Section 501(a) of the Code. Each such Parent Employee
Benefit Plan either (a) is the subject of an unrevoked favorable determination
letter from the IRS with respect to such Parent Employee Benefit Plan's
qualified status under the Code, as amended by the Tax Reform Act of 1986 and
all subsequent legislation, or (b) has remaining a period of time under the Code
or applicable Treasury regulations or IRS pronouncements in which to apply to
the IRS for such a letter and to make any amendments necessary to obtain such a
letter from the IRS which shall apply retroactively to the inception of such
Parent Employee Benefit Plan. No fact exists or is reasonably expected by the
Company to arise, that could adversely affect the qualification or exemption of
any such Parent Employee Benefit Plan or its related trust. No such Parent
Employee Benefit Plan is a "top-heavy plan," as defined in Section 416 of the
Code.
6.15.6 Contributions, Premiums and Other Payments
All contributions, premiums and other payments due or required to be paid
to (or with respect to) each Parent Employee Benefit Plan have been timely paid,
or, if not yet due but due on or before the Closing Date, or if to become due
with respect to any period before or ending on the Closing Date, have been
accrued as a liability on the Parent Balance Sheet. All income taxes and wage
taxes that are required by law to be withheld from benefits derived under the
Parent Employee Benefit Plans have been properly withheld and remitted to the
proper depository.
6.15.7 Related Employers
Parent is not, and has never been, a member of (i) a controlled group of
corporations, within the meaning of Section 414(b) of the Code, (ii) a group of
trades or businesses under common control, within the meaning of Section 414(c)
of the Code, (iii) an affiliated service group, within the meaning of Section
414(m) of the Code, or (iv) any other group of Persons treated as a single
employer under Section 414(o) of the Code.
6.15.8 Multiemployer, Defined Benefit and Money Purchase Pension Plans and
Multiple Employer Welfare Arrangements
Parent does not maintain or contribute to, and has never maintained or
contributed to (or been obligated to contribute to), (a) a multiemployer plan as
defined in Section 3(37) or Section 4001(a)(3) of ERISA or 414(f) of the Code,
(b) a multiple employer plan within the meaning of Section 4063 or 4064 of ERISA
or Section 413(c) of the Code, (c) an employee benefit plan, fund, program,
contract or
40
arrangement that is subject to Section 412 of the Code, Section 302 of ERISA or
Title IV of ERISA, or (d) a multiple employer welfare arrangement as defined in
Section 3(40) of ERISA.
6.15.9 Post-Termination Benefits
Neither Parent nor any Parent Employee Benefit Plan provides or has any
obligation to provide (or contribute toward the cost of) post-employment or
post-termination benefits of any kind, including, without limitation, death and
medical benefits, with respect to any current or former officer, employee,
agent, director or independent contractor of Parent, other than (a) continuation
coverage mandated by Sections 601 through 608 of ERISA and Section 4980B(f) of
the Code, (b) retirement benefits under any Parent Employee Benefit Plan that is
qualified under Section 401(a) of the Code, and (c) deferred compensation that
is accrued as a current liability on the Parent Balance Sheet.
6.15.10 Suits, Claims and Investigations
There are no actions, suits or claims (other than routine claims for
benefits and qualified domestic relations orders) pending or, to the knowledge
of Parent, threatened with respect to (or against the assets of) any Parent
Employee Benefit Plan, nor, to the knowledge of Parent, is there a basis for any
such action, suit or claim. No Parent Employee Benefit Plan is currently under
investigation, audit or review, directly or indirectly, by the IRS, the DOL or
any other governmental entity or agency, and, to the knowledge of Parent, no
such action is contemplated or under consideration by the IRS, the DOL or any
other governmental entity or agency.
6.15.11 Effect of Transaction
Neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated by this Agreement, will (a) entitle any
individual to severance pay, unemployment compensation or any other payment from
Parent, the Surviving Corporation, the Company or any Parent Employee Benefit
Plan, (b) otherwise increase the amount of compensation due to any individual or
forgive indebtedness owed by any individual, (c) result in any benefit or right
becoming established or increased, or accelerate the time of payment or vesting
of any benefit, under any Parent Employee Benefit Plan, or (d) require Parent,
the Surviving Corporation or the Company to transfer or set aside any assets to
fund or otherwise provide for any benefits for any individual.
6.16 Personnel
Schedule 6.16 to the Parent Disclosure Memorandum lists (a) the names,
titles and current compensation amounts of all employees of Parent with annual
base salaries or wages in excess of $50,000, (b) compensation amounts of all
directors of Parent, and (c) the names and current compensation packages of all
independent contractors and consultants of Parent with annual compensation in
excess of $50,000. Parent is not in default with respect to any of its
obligations relating to payment of wages and has no, and will not incur any,
material obligation or liability for severance or back pay owed through or by
virtue of the Merger.
6.17 Intellectual Property
6.17.1 Definitions
For purposes of this SECTION 6.17, the following terms shall have the
following meanings:
"Parent Intellectual Property" means all Intellectual Property Rights owned
by, licensed to or otherwise available to Parent.
6.17.2 General
The Parent owns or has sufficient rights to use, including the right to
bring actions for the infringement of, and the Parent Intellectual Property
represents, all Intellectual Property Rights necessary or required for the
conduct of the Parent's business as currently conducted and as currently
proposed to be conducted. Parent is not a party to any agreement that contains
any restriction on Parent's ability to use or
41
practice any Parent Intellectual Property that is material to the business of
Parent as presently conducted or as currently proposed to be conducted.
6.17.3 Listing of Parent Intellectual Property
Section 6.17.3 contains a true and complete list of all of Parent's
patents, patent applications, trademarks, trademark applications, trade names,
service marks, service mark applications, Internet domain names, Internet domain
name applications, copyrights, copyright registrations and applications, and any
other filings and formal actions made or taken pursuant to Federal, state, local
and foreign laws by Parent to protect its interests in Parent Intellectual
Property.
6.17.4 Inbound License Agreements
Schedule 16.17.4 sets forth a complete and accurate list of each agreement
(the "Parent Inbound License Agreements") granting to Parent any right to use or
practice any Intellectual Property Rights other than rights in software
commercially available on reasonable terms to any person for a license fee of no
more than fifty thousand dollars ($50,000) or shrink wrap licenses to
commercially available software sold at retail, indicating for each agreement
the title, the parties thereto, the term thereof and the amount of any future
royalty or license fee payable thereunder. To Parent's knowledge, all Parent
Inbound License Agreements are valid, binding and in full force and effect.
Parent has performed in all material respects its obligations under the Parent
Inbound License Agreements, Parent is not in default thereunder, and to Parent's
knowledge no event or circumstance has occurred under any Parent Inbound License
Agreement that with notice or lapse of time or both would constitute a default
or event of default on the part of Parent or give to any other party the right
to terminate or modify any of Parent's rights under such Parent Inbound License
Agreement. There is no material outstanding or, to the knowledge of Parent,
threatened dispute or disagreement with respect to any Parent Inbound License
Agreement. Parent has not received written notice that any party to any Parent
Inbound License Agreement intends to cancel, terminate or refuse to renew (if
renewable) any of Parent's rights under such Parent Inbound License Agreement or
to exercise or decline to exercise any option or right thereunder.
6.17.5 Outbound License Agreements
Schedule 16.17.5 sets forth a complete and accurate list of each agreement
(the "Parent Outbound License Agreements") under which Parent has granted any
right to use or practice any Intellectual Property Rights other than
nonexclusive rights in software granted in the ordinary course of Parent's
business for which the total payments to Parent did not exceed fifty thousand
dollars ($50,000) and that are not otherwise material to Parent, indicating for
each agreement the title, the parties thereto and the term thereof. To Parent's
knowledge, all Parent Outbound License Agreements are valid, binding and in full
force and effect. Parent has performed in all material respects its obligations
under the Parent Outbound License Agreements, Parent is not in default
thereunder, and to Parent's knowledge no event or circumstance has occurred
under any Parent Outbound License Agreement that with notice or lapse of time or
both would constitute a default or event of default on the part of Parent or
give to any other party the right to terminate or modify any of Parent's rights
under such Parent Outbound License Agreement. There is no material outstanding
or, to the knowledge of Parent, threatened dispute or disagreement with respect
to any Parent Outbound License Agreement. Parent has not received written notice
that any party to any Parent Outbound License Agreement intends to cancel,
terminate or refuse to renew (if renewable) such Parent Outbound License
Agreement or to exercise or decline to exercise any option or right thereunder.
6.17.6 No Infringement by Parent
Parent Intellectual Property and the conduct of Parent's business as
currently conducted and as currently proposed to be conducted do not infringe,
violate, misappropriate or otherwise misuse any third party Intellectual
Property Rights, and Parent has not received any complaint, claim or notice
alleging any such infringement, violation, misappropriation or misuse or any act
of unfair competition by Parent. To the best knowledge of Parent, no goods,
services, or other products which are sold, licensed or otherwise supplied, used
or employed by Parent infringe, violate, misappropriate or otherwise misuse any
third party
42
Intellectual Property Rights, and Parent has not received any complaint, claim
or notice alleging any such infringement, violation, misappropriation or misuse.
Nothing has come to the attention of Parent to the effect that the name of
Parent or any business name, trade mark, service mark or domain name used or
owned by Parent is the same as, or is confusingly or deceptively similar to, the
name of any other company or business, trade name or domain name or to the trade
mark or service mark owned or used by any other person. No litigation is now or,
within the five (5) years prior to the date of this Agreement, was pending and,
to the knowledge of Parent, no notice or other claim in writing has been
received by Parent (i) alleging that Parent has engaged in any activity or
conduct that infringes, violates, misappropriates or otherwise misuses the
Intellectual Property Rights of any third party or (ii) challenging the
ownership, use, validity or enforceability of any Parent Intellectual Property.
6.17.7 No Infringement by Third Parties
To Parent's knowledge, no third party is infringing, violating,
misappropriating or misusing any Parent Intellectual Property that is owned or
exclusively licensed to Parent, or committing any act of unfair competition with
respect to Parent, and no such claims have been brought against any third party
by Parent. Parent has not entered into any agreement granting any Person the
right to bring any action with respect to, or otherwise to enforce, any Parent
Intellectual Property.
6.17.8 Protection of Intellectual Property Rights
Parent has taken reasonable steps to protect Parent Intellectual Property.
Without limiting the generality of the foregoing, Parent enforces a policy of
requiring each employee, consultant and contractor of Parent to execute
agreements that contain provisions designed to prevent unauthorized disclosure
of Parent Intellectual Property. With respect to employees, such agreements are
substantially in Parent's standard forms and also assign to Parent all
Intellectual Property Rights relating to Parent's business that are developed by
the employee in the course of his or her activities for Parent or are developed
during working hours using the resources of Parent. With respect to contractors
and consultants, the agreements either assign all Intellectual Property Rights
developed pursuant to the agreement or license such rights on agreed-upon terms.
Except under confidentiality obligations, to the knowledge of Parent, there has
been no disclosure by Parent of material confidential information or trade
secrets. Parent has not disclosed any source code to any software to any person
or entity other than an employee of Parent who is under a written nondisclosure
agreement; and, except as described in Schedule 6.17.8, neither Parent nor any
escrow agent is under any contractual or other obligation to disclose any source
code or other Parent Intellectual Property. If, as disclosed on Schedule 6.17.8,
Parent has deposited any source code or other Parent Intellectual Property into
source code escrows or similar arrangements, no event has occurred that has or
could reasonably form the basis for a release of such source code or other
Parent Intellectual Property from such escrows or arrangements.
6.17.9 Indemnification for Use of Intellectual Property Rights
Other than pursuant to standard agreements with customers or suppliers of
Parent entered into in the ordinary course of business (accurate and complete
copies of which have been made available to the Company by Parent), Parent has
not entered into any agreement or offered to indemnify any Person against any
charge of infringement, violation, misappropriation or misuse of Intellectual
Property Rights.
6.17.10 Assignment; Change of Control
The execution, delivery and performance by Parent of this Agreement, and
the consummation of the transactions contemplated hereby, will not result in the
loss or impairment of, or give rise to any right of any third party to terminate
or alter, any of the Parent Intellectual Property or Parent's rights under any
Parent Inbound License Agreement or Parent Outbound License Agreement, nor
require any consent in respect of any Parent Intellectual Property, nor require
any disclosure or release of any source code or other Parent Intellectual
Property from any escrows or other arrangements.
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6.18 Accounts Receivable
All accounts receivable of Parent reflected in the Parent Balance Sheet
("Parent Accounts") represent amounts due for services performed or sales
actually made in the ordinary course of business and are carried at values
determined in accordance with GAAP. To Parent's knowledge, the bad debt reserves
and allowances reflected in the Parent Balance Sheet are adequate.
6.19 Inventory
(a) All items in the inventory reflected in the Parent Balance Sheet or as
currently owned by Parent for use in the operation of the business (i) have been
valued consistent with the inventory valuation policy of Parent in accordance
with GAAP consistently applied and (ii) are of a quality and quantity usable and
salable in the ordinary course of business.
(b) Parent's inventories of finished products and evaluation units as of
July 31, 2001, the approximate quantities thereof, and their locations are set
forth in Schedule 6.19(b) to the Disclosure Memorandum. In addition, Schedule
6.19(b) sets forth the value of all raw materials and work in progress as of
July 31, 2001.
(c) Parent is not aware of any adverse condition, other than shortages of
parts, raw materials and supplies common to the industry generally, affecting
the quality or supply of raw materials, intermediates, supplies, parts and other
materials available to Parent that are necessary to manufacture, package or
label the products or are otherwise used in the business.
6.20 Corporate Books and Records
Parent and Merger Sub have furnished to the Company or its representatives
for their examination true and complete copies of (a) the Certificate of
Incorporation and Bylaws of Parent and Merger Sub as currently in effect,
including all amendments thereto and (b) the minute books of Parent. Such
minutes reflect all meetings of Parent's stockholders, Board of Directors and
any committees thereof since Parent's inception, and such minutes accurately
reflect in all material respects the events of and actions taken at such
meetings.
6.21 Licenses, Permits, Authorizations, etc.
Parent has received all required Permits, except where the failure to
receive any Permit would not have a Parent Material Adverse Effect. Schedule
6.21 to the Parent Disclosure Memorandum contains a list of all Permits with
expiration dates, if any. Parent is in material compliance with the terms of all
Permits, and all Permits are valid and in full force and effect, and no
proceeding is pending or, to Parent's knowledge, threatened, the object of which
is to revoke, limit or otherwise affect any Permit. Parent has not received any
notifications of any asserted failure to obtain any Permit or any past and
unremedied failure to obtain any Permit.
6.22 Compliance With Laws
Parent is and has been in material compliance with all federal, state,
local and foreign laws, rules, regulations, ordinances, decrees and orders
applicable to the operation of its business, to its employees, or to its
property, including, without limitation, all such laws, rules, ordinances,
decrees and orders relating to antitrust, consumer protection, currency
exchange, environmental protection, equal opportunity, prevention of domestic
and foreign corrupt practices, health, occupational safety, good laboratory
practices, pension, securities and trading-with-the-enemy matters. Parent has
not received any written notification of any asserted present or past unremedied
failure by Parent to comply with any of such laws, rules, ordinances, decrees or
orders.
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6.23 Insurance
The Parent Disclosure Memorandum sets forth a true and correct list of all
insurance policies maintained by Parent at the date of this Agreement. Parent
maintains commercially reasonable levels of (a) insurance on its property
(including leased premises) that insures against loss or damage by fire or other
casualty and (b) insurance against liabilities, claims and risks, in each case,
of a nature and in such amounts as are normal and customary in Parent's industry
for companies of similar size and financial condition. All insurance policies of
Parent are in full force and effect, all premiums with respect thereto due as of
the date hereof have been paid, and no written notice of cancellation or
termination has been received with respect to any such policy or binder. Such
policies or binders are sufficient for compliance with all requirements of law
currently applicable to Parent and of all agreements to which Parent is a party.
Such policies will not terminate or lapse by reason of the transactions
contemplated by this Agreement.
6.24 Brokers or Finders
Except for Broadview International, LLC, whose fees shall be the sole
responsibility of Parent, Parent has not incurred, and will not incur, directly
or indirectly, as a result of any action taken by or on behalf of Parent, any
liability for investment banking, brokerage or finders' fees or agents'
commissions or any similar charges in connection with the Merger, this Agreement
or any transactions contemplated hereby.
6.25 Insider Interests
Based solely upon a review of publicly available filings with the
Securities and Exchange Commission (the "SEC"), no 5% Parent Stockholder,
officer or director of Parent has any interest (other than as a stockholder of
Parent) (a) in any Parent Real Property, Parent Personal Property, Parent
Intellectual Property used in or directly pertaining to the business of Parent,
including, without limitation, inventions, patents, trademarks or trade names,
or (b) to Parent's knowledge, in any agreement, contract, arrangement or
obligation relating to Parent, its business or its operations. There are no
agreements, understandings or proposed transactions between Parent and any of
its officers, directors, 5% Parent Stockholders or affiliates other than with
respect to officers, employees or directors, agreements and arrangements
relating to their employment or directorship. To Parent's knowledge, except for
beneficial or record ownership of not more than one percent of the outstanding
securities of an entity whose shares are registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), Parent and its officers and directors
have no interest, either directly or indirectly, in any entity, including,
without limitation, any corporation, partnership, joint venture, proprietorship,
firm, licensee, business or association (whether as an employee, officer,
director, stockholder, agent, independent contractor, security holder, creditor,
consultant or otherwise) that presently (i) provides any services, produces
and/or sells any products or product lines, or engages in any activity that is
the same, similar to or competitive with any activity or business in which
Parent is now engaged or proposes to engage; (ii) is a supplier, customer or
creditor; or (iii) has any direct or indirect interest in any material asset or
property, real or personal, tangible or intangible, of Parent or any property,
real or personal, tangible or intangible, that is necessary for the conduct of
Parent's business.
6.26 Compliance with Environmental Laws
6.26.1 Parent is, and at all times has been, in full compliance with, and
has not been and is not in violation of or liable under, any Environmental,
Health, and Safety Requirements except where such violation or failure to be in
compliance with such Environmental, Health, and Safety Requirements would not
have a Parent Material Adverse Effect.
6.26.2 Parent has no basis to expect, nor has it received any written or
oral notice, report, order, summons, inquiry or other communication from any
governmental authority or any person regarding any actual or alleged violation
of or failure to comply with Environmental, Health, and Safety Requirements, or
any liabilities or potential liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise) arising under Environmental, Health, and Safety
Requirements, including any investigatory, remedial or
45
corrective obligations, relating to Parent, its properties, facilities or
operations or any other properties, facilities or assets in which Parent has had
an interest, or with respect to any property at or to which Hazardous Materials
generated, transferred, or used by Parent or any other person for whose conduct
it is or may be held responsible, have been transported, stored, handled,
received or disposed.
6.26.3 To Parent's knowledge, there has been no release or threat of
release of any Hazardous Materials, whether by Parent or any other person, at or
from Parent's properties, facilities or operations, any other locations where
Hazardous Materials were generated, used or transferred from or by Parent's
properties, facilities or operations or any other properties, facilities or
operations in which Parent had an interest.
6.26.4 Parent has delivered to the Company true and complete copies of any
and all environmental assessments and reports relating to Parent's properties,
facilities or operations.
6.27 Information Supplied by Parent
None of the information supplied or to be supplied by Parent for inclusion
in the S-4 or contained in any other material to be delivered to its
stockholders in connection with any written consent by or meeting of such
stockholders (collectively, "Parent Stockholder Materials"), at the date on
which the S-4 is declared effective by the Securities and Exchange Commission
(the "SEC") or on the date of such approval, contains or will contain any untrue
statement of a material fact or omits or will omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not materially
misleading; provided, however, that Parent makes no representations or
warranties regarding information furnished by or related to any party other than
Parent.
6.28 Full Disclosure
None of the representations and warranties made by Parent herein (as
modified by the Parent Disclosure Memorandum), nor any statement made in any
schedule or the Compliance Certificate and Secretary's Certificate furnished by
Parent pursuant to this Agreement, contains any untrue statement of material
fact, or omits to state any material fact necessary in order to make the
statements contained herein or therein, in light of the circumstances under
which they were made, not misleading.
6.29 Absence of Undisclosed Liabilities
The Parent and its consolidated subsidiaries have no material liabilities
or obligations of any nature (absolute, contingent or otherwise) that are not
fully reflected or reserved against in the Parent Balance Sheet and that would
be required under GAAP to be reflected or reserved in order for the Parent
Balance Sheet to fairly represent the consolidated financial condition of the
Parent as of such date, except liabilities or obligations incurred since the
date of the Parent Balance Sheet in the ordinary course of business and
consistent with past practices.
6.30 Government Contracts
Parent has not, during the past five years, attempted to sell to or bid on
any contract or subcontract with or for any agency of the U.S. government or any
foreign government and had any such attempt denied as a result of any
prohibition against Parent's dealing with or for or any such agency or
government, and Parent has no knowledge of any such prohibition. Parent has not
been, nor to its knowledge is it currently being, audited or investigated by the
United States Government Accounting Office, the United States Department of
Justice, the United States Department of Defense or any of its agencies, the
Defense Contract Audit Agency or the inspector general or other authorities of
any agency of the U.S. government, or any foreign government, nor, to Parent's
knowledge, has such audit or investigation been threatened.
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6.31 Securities -- Parent Common Stock
The Parent Common Stock to be issued in the Merger pursuant to this
Agreement has been duly authorized for issuance, and such Parent Common Stock,
when issued and delivered to the Company's stockholders pursuant to this
Agreement, (a) will be validly issued, fully paid and nonassessable, free of
preemptive rights and (b) will be registered under the Securities Act of 1933,
as amended (the "Securities Act"), and the Exchange Act and registered or exempt
from registration under applicable blue sky laws.
6.32 Securities -- H Shares and Notes
The H Shares to be issued pursuant to this Agreement have been duly
authorized for issuance, and such H Shares, when issued and delivered to the
Investors pursuant to this Agreement, will be validly issued, fully paid and
nonassessable and free of preemptive rights. The Notes to be issued pursuant to
this Agreement has been duly authorized for issuance.
6.33 SEC Documents; Parent Financial Statements
True and complete copies of all reports or Registration Statements filed by
Parent with the SEC since December 30, 2000, are available to the Company on the
SEC's web site at www.sec.gov, and Parent has made available to the stockholders
true and complete copies of its Annual Report on Form 10-K for the fiscal year
ended December 30, 2000, all Forms 8-K and Forms 10-Q, filed after the date of
the last of the Form 10-K and its Proxy Statement relating to its 2001 Annual
Meeting of Shareholders, (collectively, the "SEC Documents"). Parent has filed
all required forms, reports and documents with the SEC since January 1, 1998,
including, in the form filed with the SEC, together with any amendments thereto,
(i) Annual Reports on Form 10-K, (ii) proxy statements relating to the Company's
meetings of stockholders (whether annual or special), (iii) Quarterly Reports on
Form 10-Q, and (iv) any required other reports or registration statements, all
of which complied when filed in all material respects with all applicable
requirements of the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (the "Securities Act") and the Exchange Act.
As of their respective filing dates, each of the SEC Documents complied in all
material respects with the requirements of the Securities Act and the Exchange
Act, and the rules and regulations of the SEC promulgated thereunder. Except to
the extent that information contained in any Parent SEC form, report or other
document was revised or superseded by a later filed form, report or other
document filed by Parent, none of Parent's forms, reports or other documents
filed with the SEC contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The Parent financial statements, included in the SEC
Documents comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP consistently applied
(except as may be indicated in the notes thereto or, in the case of unaudited
statements, as permitted by Form 10-Q of the SEC), were true and correct in all
material respects as of their respective dates and present fairly, in accordance
with GAAP, the consolidated financial condition of Parent at the dates thereof
and the consolidated results of its operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
adjustments and any other adjustments described therein). There has been no
material change in Parent accounting policies except as described in the notes
to the Parent Financial Statements.
47
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT AND MERGER SUB
The obligations of Parent and Merger Sub to perform and observe the
covenants, agreements and conditions hereof to be performed and observed by them
at or before the Closing shall be subject to the satisfaction of the following
conditions, which may be expressly waived only in writing signed by Parent:
7.1 Accuracy of Representations and Warranties
The representations and warranties of the Company contained herein (as
modified by the Disclosure Memorandum) (a) that are expressly qualified by a
reference to materiality shall be true in all respects as so qualified when made
and at and as of the Effective Time and (b) that are not so qualified shall have
been true and correct in all material respects when made and at and as of the
Effective Time and, except (i) for changes contemplated by this Agreement and
the other Operative Documents, and (ii) to the extent that such representations
and warranties speak as of an earlier date, shall be true and correct in all
material respects as of such date. Notwithstanding the foregoing, the condition
set forth in this Section 7.1 shall be deemed to be satisfied if such breaches
of the Company's representations and warranties (if any) do not have a Company
Material Adverse Effect or a material diminution of benefits expected to be
realized by the Parent as a result of the Merger.
7.2 Performance of Agreements
The Company shall have performed in all material respects all obligations
and agreements and complied in all material respects with all covenants
contained in this Agreement or any other Operative Document to be performed and
complied with by it at or prior to the Closing. Notwithstanding the foregoing,
the condition set forth in this Section 7.2 shall be deemed to be satisfied if
such nonperformance or noncompliance (if any) do not have a Company Material
Adverse Effect or a material diminution of benefits expected to be realized by
the Parent as a result of the Merger.
7.3 Compliance Certificate
Parent shall have received a certificate of the President and the Chief
Financial Officer of the Company, dated the Closing Date, in form and substance
satisfactory to Parent, certifying that the conditions to the obligations of
Parent and Merger Sub in Sections 7.1, 7.2, 7.4, and 7.5 have been fulfilled.
7.4 No Material Adverse Change
Since the date of this Agreement and at the Effective Time, there shall not
have occurred any Company Material Adverse Effect.
7.5 Approvals
All transfers of permits or licenses and all approvals of or notices to
public agencies, federal, state, local or foreign, the granting or delivery of
which is necessary for the consummation of the transactions contemplated hereby,
or for the continued operation of the Company, shall have been obtained (except
for such of the foregoing as, if not obtained, would not have a Company Material
Adverse Effect)and all waiting periods specified by law (including that required
by the Hart-Scott-Rodino Act) shall have passed.
7.6 Secretary's Certificate
Parent shall have received a certificate of the Secretary of the Company,
in form and substance satisfactory to Parent, as to the authenticity and
effectiveness of the actions of the Board of Directors and stockholders of the
Company authorizing the Merger and the transactions contemplated by this
Agreement and the other Operative Documents. Copies of the Company's Certificate
of Incorporation, certified by the
48
Delaware Secretary of State, and Bylaws, certified by the Secretary of the
Company, shall be attached to such certificate.
7.7 Compliance With Laws
The effectiveness of the Merger and the performance by Parent and the
Company of their respective obligations pursuant to this Agreement and the other
Operative Documents shall be legally permitted by all laws and regulations to
which Parent or the Company is subject.
7.8 Stockholder Approval
This Agreement and the Merger (and, in the case of Parent, the amendment of
its Certificate of Incorporation to increase the authorized shares of Parent
Common Stock and Parent's Preferred Stock to amounts at least sufficient to
permit consummation of the transactions contemplated in this Agreement) shall
have been approved by (i) the Company's stockholders as required by the
Company's Certificate of Incorporation and applicable law and (ii) Parent's
stockholders are required by Parent's Certificate of Incorporation and
applicable law and any requirements of Parent's Trading Market.
7.9 Legal Proceedings
No order of any court or administrative agency shall be in effect enjoins,
restrains, conditions or prohibits consummation of this Agreement or any other
Operative Document, and no litigation, investigation or administrative
proceeding shall be pending that would enjoin, restrain, condition or prevent
consummation of this Agreement or any other Operative Document.
7.10 Affiliate Letters
The Company shall have delivered or caused to be delivered to Parent an
Affiliate Letter substantially in the form of Exhibit 7.10 from all of those
Persons who were, on the date on which the requisite number of consents or votes
had been obtained to approve the Merger, "affiliates" of the Company within the
meaning of Rule 145 of the rules and regulations promulgated under the
Securities Act.
7.11 Termination of Certain Agreements
Any and all rights of refusal, co-sale rights and registration rights
(other than pursuant to the Registration Rights Agreement) for the benefit of
the holders of Company Capital Stock, or Stock Purchase Rights, all as set forth
in the Disclosure Memorandum, shall have terminated.
7.12 Dissenter Rights Exercised Greater Than 20% of Stock
Holders of not more than 20% of the outstanding shares of Company Common
Stock shall have not voted in favor of the Merger or not consented thereto in
writing and shall have delivered before the Effective Time timely written notice
of such holders' intent to demand payment as dissenting stockholders for such
shares in accordance with the DGCL.
7.13 Consents to Merger
Schedules 4.5, 4.9, 4.10.2 and 4.14 to the Disclosure Memorandum that treat
the Merger as an assignment or otherwise by their terms require consent. The
Company shall have received and shall have delivered to Parent or its counsel
written consents to the Merger from each of the parties (other than the Company)
to such agreements, leases, notes or other documents, which consents shall be
reasonably satisfactory in all respects to Parent, provided however that the
Company shall not be required to obtain any consents required from Silicon
Valley Bank; and provided, further that the Company shall not be required to
deliver any consent if the failure to obtain such consent would not have a
Company Material Adverse Effect. Without limiting the foregoing, the Company
agrees to cooperate with Parent in negotiations with Silicon Valley Bank
regarding financing arrangements of the Surviving Corporation.
49
7.14 Receipt of Loan from Company
The Lenders shall have loaned Parent the Initial Loan Amount in accordance
with Article II hereof.
7.15 Amendment to Certificate
The Parent H Certificate shall have been duly adopted by Parent by all
necessary corporate action of its Board of Directors and stockholders and shall
have been properly filed with and accepted by the Secretary of State of the
State of Delaware.
7.16 Lock-Up Agreements
The Investors shall have executed and delivered a lock-up agreement in
substantially the form attached hereto as Exhibit 7.16.
7.17 SEC Effectiveness
The SEC shall have declared the Proxy/Registration Statement on Form S-4
prepared pursuant to Section 10.6.2 and 10.8 effective and no stop order
suspending the effectiveness of such Proxy/Registration Statement on Form S-4 or
any part thereof shall have been issued and no proceeding for that purpose shall
have been initiated or threatened in writing by the SEC. Such Proxy/Registration
Statement on Form S-4 shall register all shares of Parent Common Stock issuable
at the Closing of the Merger pursuant to Section 1.8.1.
7.18 Series H Purchase
The Investors shall upon the Closing purchase Series H Shares in accordance
with Article III of this Agreement.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to perform and observe the covenants,
agreements and conditions hereof to be performed and observed by it at or before
the Closing shall be subject to the satisfaction of the following conditions,
which may be expressly waived only in writing signed by the Company.
8.1 Accuracy of Representations and Warranties
The representations and warranties of Parent and Merger Sub contained
herein (a) that are expressly qualified by a reference to materiality shall be
true in all respects as so qualified when made and at and as of the Effective
Time and (b) that are not so qualified shall have been true and correct in all
material respects when made and at and as of the Effective Time and, except (i)
for changes contemplated by this Agreement and the other Operative Documents and
(ii) to the extent that such representations and warranties speak as of an
earlier date, shall be true and correct in all material respects as of such
date. Notwithstanding the foregoing, the condition set forth in this Section 8.1
shall be deemed to be satisfied if such breaches of the Parent's representations
and warranties (if any) do not have a Parent Material Adverse Effect or a
material diminution of benefits expected to be realized by the Company's
stockholders as a result of the Merger.
8.2 Performance of Agreements
Parent and Merger Sub shall have performed in all material respects all
obligations and agreements and complied in all material respects with all
covenants contained in this Agreement or any other Operative Document to be
performed and complied with by them at or prior to the Closing. Notwithstanding
the foregoing, the condition set forth in this Section 8.2 shall be deemed to be
satisfied if such nonperformance or noncompliance (if any) do not have a Parent
Material Adverse Effect or a
50
material diminution of benefits expected to be realized by the Company's
stockholders as a result of the Merger.
8.3 Compliance Certificate
The Company shall have received a certificate of an officer of each of
Parent and the Merger Sub, dated the Closing Date, substantially in form and
substance reasonably satisfactory to the Company, certifying that the conditions
to the obligations of the Company in Sections 8.1, 8.2, 8.4 and 8.5 have been
fulfilled.
8.4 No Material Adverse Change
Since the date of this Agreement and at the Effective Time, there shall not
have occurred any Parent Material Adverse Effect.
8.5 Approvals and Consents
All transfers of permits or licenses and all approvals of or notices to
public agencies, federal, state, local or foreign, the granting or delivery of
which is necessary for the consummation of the transactions contemplated hereby,
or for the continued operation of Parent, shall have been obtained(except for
such of the foregoing as, if not obtained, would not have a Company Material
Adverse Effect), and all waiting periods specified by law (including that
required by the Hart-Scott-Rodino Act) shall have passed. All other consents,
approvals and notices referred to in this Agreement required to be obtained or
delivered by Parent or Merger Sub shall have been so obtained or delivered;
provided, however, that Parent shall not be required to deliver any consent if
the failure to obtain such consent would not have a Parent Material Adverse
Effect.
8.6 Secretary's Certificate
The Company shall have received the certificate of the Secretary of Parent
and Merger Sub, in form and substance satisfactory to Company, as to the
authenticity and effectiveness of the actions of the Board of Directors and
stockholders of Parent authorizing the Merger and the transactions contemplated
by this Agreement and the other Operative Documents. Copies of Parent's
Certificate of Incorporation, certified by the Delaware Secretary of State, and
of Parent's Bylaws, certified by the Secretary of the Parent, shall be attached
to such certificate.
8.7 Compliance With Laws
The effectiveness of the Merger and the performance by Parent and the
Company of the obligations hereunder and under the other Operative Documents
shall be legally permitted by all laws and regulations to which Parent or the
Company is subject.
8.8 Legal Proceeding
No order of any court or administrative agency shall be in effect that
enjoins, restrains, conditions or prohibits consummation of this Agreement or
any other Operative Document, and no litigation, investigation or administrative
proceeding shall be pending which would enjoin, restrain, condition or prevent
consummation of this Agreement or any other Operative Document.
8.9 Stockholder Approval
This Agreement and the Merger (and, in the case of Parent, the amendment of
its Certificate of Incorporation) shall have been approved by (i) the Company's
stockholders as required by the Company's Certificate of Incorporation and
applicable law and (ii) Parent's stockholders as required by Parent's
Certificate of Incorporation and applicable law and any requirements of Parent's
Trading Market.
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8.10 Parent's Trading Market Listing
The shares of Parent Common Stock issuable to stockholders of the Company
pursuant to this Agreement shall have been authorized for inclusion on the
Parent's Trading Market, subject to issuance and Parent's Common Stock shall not
have been delisted from trading on Parent's Trading Market.
8.11 S-4 Effectiveness
The SEC shall have declared the Proxy/Registration Statement on Form S-4
prepared pursuant to Section 10.8 effective and no stop order suspending the
effectiveness of such Proxy/Registration Statement on Form S-4 or any part
thereof shall have been issued and no proceeding for that purpose shall have
been initiated or threatened in writing by the SEC. Such Proxy/Registration
Statement on Form S-4 shall register all shares of Parent Common Stock issuable
at the Closing of the Merger pursuant to Section 1.8.1(b).
8.12 Congress Consent
The consent of Congress to the Merger and the other transactions
contemplated by this Agreement and the other Operative Documents obtained in the
Third Amendment to Loan and Security Agreement, Waiver and Consent shall not
have been revoked, amended or nullified.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE INVESTORS
The obligation of each Investor to perform and observe the covenants,
agreements and conditions hereof to be performed and observed by such Investor
at or before the Closing shall be subject to the satisfaction of the following
conditions, which, as to such Investor, may be expressly waived only in writing
signed by such Investor:
9.1 Closing of the Merger
The Merger shall Close as contemplated by this Agreement.
9.2 Compliance With Laws
The purchase of the H Shares by the Investors pursuant to Article III and
the performance by Parent and the Company of their respective obligations
pursuant to this Agreement and the other Operative Documents shall be legally
permitted by all laws and regulations to which Parent or the Company is subject.
9.3 Registration Rights Agreement
The Parent shall have executed and delivered the Registration Rights
Agreement.
ARTICLE X
COVENANTS
Between the date of this Agreement and the Effective Time, or such later
period as set forth in these covenants, the parties covenant and agree as set
forth in this Article IX.
10.1 Conduct of Business by the Company Pending the Merger
Unless Parent shall otherwise agree in writing, the business of the Company
shall be conducted in, and the Company shall not take any action except in, the
ordinary course of business and in a manner consistent with past practice and in
accordance with applicable law; and the Company shall use
52
commercially reasonable efforts to preserve intact the business organization of
the Company, to keep available the services of the current officers, employees
and consultants of the Company and to preserve the current relationships of the
Company with, and the goodwill of, customers, suppliers and other Persons with
which the Company has significant business relations. By way of amplification
and not limitation, except as otherwise contemplated by this Agreement, the
Company shall not, between the date of this Agreement and the Effective Time,
directly or indirectly do any of the following without the prior written consent
of Parent, except as set forth in Schedule 10.1(a) through (o) to the Company
Disclosure Memorandum, which consent shall not be unreasonably withheld or
delayed:
(a) amend or otherwise change its Certificate of Incorporation or
Bylaws, except for an amendment to its Certificate of Incorporation
limiting dividends payable on Company Preferred Stock or an amendment to
increase the authorized capital of the Company solely to satisfy existing
dividend obligations;
(b) except for the issuance of shares of Company Capital Stock (x)
upon the exercise or conversion of currently outstanding Options or Stock
Purchase Rights, or (y) grants of Company Common Stock to existing or new
employees or options to purchase Company Common Stock to existing or new
employees with an exercise price equal to the then current fair market
value determined in good faith by the Board of Directors of the Company,
issue, sell, contract to issue or sell, pledge, dispose of, grant, encumber
or authorize the issuance, sale, pledge, disposition, grant or Encumbrance
of (i) any shares of capital stock of any class of the Company, (ii) any
options, warrants, convertible securities or other rights of any kind to
acquire any shares of such capital stock, or any other ownership interest
(including, without limitation, any phantom interest) of the Company, or
(iii) except in the ordinary course of business, any assets of the Company;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock or other securities, property or
otherwise, with respect to any Company Capital Stock;
(d) reclassify, combine, split, subdivide, redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock or
other securities, except pursuant to rights of repurchase or refusal with
respect to employees or directors pursuant to currently outstanding
agreements identified on the Disclosure Schedule;
(e) (i) acquire (including, without limitation, by merger,
consolidation or acquisition of stock or assets) any corporation,
partnership, other business organization or division thereof or, except in
the ordinary course of business, any material amount of assets; (ii) incur
or modify any indebtedness for borrowed money or issue any debt securities
or assume, guarantee or endorse, or otherwise as an accommodation become
responsible for, the obligations of any Person, or make any loans or
advances, except in the ordinary course of business and consistent with
past practice not in excess of $100,000 and except for equipment lease
financings not to exceed $250,000 in the aggregate and capital expenditures
made in accordance with a written budget agreed to by Parent that
references this section of this Agreement; (iii) enter into any contract or
agreement other than in the ordinary course of business, consistent with
past practice and the value of which does not exceed $100,000; (iv)
authorize any capital expenditure, except in the ordinary course of
business consistent with past practice, in excess of $50,000 or make
aggregate capital expenditures in excess of $100,000; (v) enter into any
purchasing or other similar agreement in which the cash obligation of the
Company exceeds $250,000 or which shall not terminate or be subject to
termination for convenience upon 60 days' or less notice; (vi) license any
Company Intellectual Property, except in the ordinary course of business
consistent with past practice; or (vii) enter into or amend any contract,
agreement, commitment or arrangement with respect to any matter set forth
in this Section 10.1(e);
(f) except for "stay bonuses" arrangements with employees not to
exceed an aggregate of $300,000, increase the compensation payable or to
become payable to its officers, employees, agents or consultants, or grant
any severance or termination pay to, or enter into or amend any employment
or severance agreement with, any director, officer or other employee of the
Company, or establish, adopt, enter into or amend any Employee Benefit
Plan, compensation, stock option, employment, severance,
53
benefit or other plan, agreement, trust, fund, policy or arrangement for
the benefit of any director, officer or employee;
(g) except for any change which is required by reason of U.S. GAAP or
Regulation S-X under the Exchange Act make any material change with respect
to accounting methods or policies or procedures (including, without
limitation, procedures with respect to the payment of accounts payable and
collection of accounts receivable);
(h) make any Tax election or settle or compromise any Tax liability;
(i) pay, discharge or satisfy any material claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business and consistent with past practice of claims,
liabilities and obligations reflected or reserved against in the Company
Balance Sheet or incurred in the ordinary course of business and consistent
with past practice since the date of the Company Balance Sheet, or prepay
any obligation having a fixed maturity of more than 90 days from the date
such obligation was issued or incurred;
(j) sell, transfer or otherwise dispose of any of its properties or
assets (real, personal or mixed, tangible or intangible) with an aggregate
net book value in excess of $50,000, except the sale of inventory in the
ordinary course of business and consistent with past practice;
(k) except for transactions that are not material in the aggregate,
loan or advance any amount to, or sell, transfer or lease any properties or
assets (real, personal or mixed, tangible or intangible) to, or enter into
any agreement or arrangement with, any of the Company's officers, directors
or employees or any affiliate of the Company's officers, directors or
employees, except (i) directors' fees and compensation paid to officers and
employees at rates not exceeding the rates of compensation disclosed on
Schedule 4.16 of the Disclosure Memorandum, (ii) travel or similar expenses
advanced to employees in connection with their employment duties in the
ordinary course of business, and (iii) agreements and arrangements that are
expressly provided to be entered into with such persons under the terms of
this Agreement;
(l) other than in the ordinary course of business, take any action,
other than the execution of this Agreement or consummation of the
transactions contemplated hereby, that would result in loss of or contract
cancellation by any current customer, supplier or licenser of the Company,
which loss or contract cancellation would result in lost annual revenues to
the Company of at least $100,000;
(m) other than in the ordinary course of business, forgive or cancel
any indebtedness or waive any claims or rights in each case of material
value (including, without limitation, any indebtedness owing by any
stockholder, officer, director, employee or affiliate of the Company);
(n) knowingly take any action that would or is reasonably likely to
result in any of the representations or warranties of the Company set forth
in this Agreement being untrue in any material respect, or in any covenant
of the Company set forth in this Agreement being breached, or in any of the
conditions to the Merger specified in Article VII not being satisfied; or
(o) agree, whether in writing or otherwise, to do any of the
foregoing.
10.2 Conduct of Business by Parent Pending the Merger
Unless the Company shall otherwise agree in writing, the business of the
Company shall be conducted in, and Parent shall not take any action except in,
the ordinary course of business and in a manner consistent with past practice
and in accordance with applicable law; and Parent shall use commercially
reasonable efforts to preserve intact the business organization of Parent, to
keep available the services of the current officers, employees and consultants
of Parent and to preserve the current relationships of Parent with, and the
goodwill of, customers, suppliers and other Persons with which Parent has
significant business relations. By way of amplification and not limitation,
except as otherwise contemplated by this Agreement, Parent shall not, between
the date of this Agreement and the Effective Time, directly or
54
indirectly do any of the following without the prior written consent of the
Company, except as set forth in Section 10.2 to the Parent Disclosure
Memorandum, which consent shall not be unreasonably withheld or delayed:
(a) amend or otherwise change its Certificate of Incorporation or
Bylaws, except for an amendment to its Certificate of Incorporation
limiting dividends payable on Preferred Stock of the Parent or an amendment
to increase the authorized capital of the Company solely to satisfy
existing dividend obligations;
(b) except for the issuance of shares of the capital stock of the
Parent upon the exercise or conversion of currently outstanding Options or
Stock Purchase Rights and except for (i) grants of options to purchase in
the aggregate 150,000 shares of Parent Common Stock to existing employees
and (ii) grants to new employees with an exercise price equal to the then
current fair market value determined in good faith by the Board of
Directors of Parent, in a manner consistent with past practice issue, sell,
contract to issue or sell, pledge, dispose of, grant, encumber or authorize
the issuance, sale, pledge, disposition, grant or Encumbrance of (i) any
shares of capital stock of any class of Parent, (ii) any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
such capital stock, or any other ownership interest (including, without
limitation, any phantom interest) of Parent, or (iii) except in the
ordinary course of business or as contemplated by Schedule 10.2(b), any
assets of Parent;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock or other securities, property or
otherwise, with respect to any capital stock of the Parent, except pursuant
to the Certificate of Incorporation as a result of the transactions
contemplated hereby;
(d) reclassify, combine, split, subdivide, redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock or
other securities, except pursuant to rights of repurchase or refusal with
respect to employees or directors pursuant to currently outstanding
agreements identified on the Disclosure Schedule;
(e) (i) acquire (including, without limitation, by merger,
consolidation or acquisition of stock or assets) any corporation,
partnership, other business organization or division thereof or, except in
the ordinary course of business, any material amount of assets; (ii) incur
or modify any indebtedness for borrowed money or issue any debt securities
or assume, guarantee or endorse, or otherwise as an accommodation become
responsible for, the obligations of any Person, or make any loans or
advances, except in the ordinary course of business and consistent with
past practice not in excess of $50,000 and except for equipment lease
financings not to exceed $250,000 in the aggregate and capital expenditures
made in accordance with a written budget agreed to by the Company that
references this section of this Agreement; (iii) enter into any contract or
agreement other than in the ordinary course of business, consistent with
past practice and the value of which does not exceed $1,000,000; (iv)
authorize any capital expenditure, except as included in the forecast as of
August 3, 2001 and operational plans as of the date of this Agreement,
which is described in Schedule 10.2(e), or in the ordinary course of
business consistent with past practice, in excess of $500,000 or make
aggregate capital expenditures in excess of $1,500,000; (v) enter into any
purchasing or other similar agreement in which the cash obligation of
Parent exceeds $2,000,000 or which shall not terminate or be subject to
termination for convenience upon 60 days' or less notice; (vi) license any
Parent Intellectual Property, except in the ordinary course of business
consistent with past practice; or (vii) enter into or amend any contract,
agreement, commitment or arrangement with respect to any matter set forth
in this Section 10.2(e);
(f) increase the compensation payable or to become payable to its
officers, employees, agents or consultants, or grant any severance or
termination pay to, or enter into or amend any employment or severance
agreement with, any director, officer or other employee of Parent, or
establish, adopt, enter into or amend any Employee Benefit Plan,
compensation, stock option, employment, severance, benefit or other plan,
agreement, trust, fund, policy or arrangement for the benefit of any
director, officer or employee;
55
(g) except for any change which is required by reason of U.S. GAAP or
Regulation S-X under the Exchange Act, make any material change with
respect to accounting methods or policies or procedures (including, without
limitation, procedures with respect to the payment of accounts payable and
collection of accounts receivable);
(h) make any Tax election or settle or compromise any Tax liability;
(i) pay, discharge or satisfy any material claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the
ordinary course of business and consistent with past practice of claims,
liabilities and obligations reflected or reserved against in the Parent
Balance Sheet or incurred in the ordinary course of business and consistent
with past practice since the date of the Parent Balance Sheet, or prepay
any obligation having a fixed maturity of more than 90 days from the date
such obligation was issued or incurred;
(j) except for transactions that are not material in the aggregate,
loan or advance any amount to, or sell, transfer or lease any properties or
assets (real, personal or mixed, tangible or intangible) to, or enter into
any agreement or arrangement with, any of Parent's officers, directors or
employees or any affiliate of Parent's officers, directors or employees,
except (i) directors' fees and compensation paid to officers and employees
at rates not exceeding the rates of compensation disclosed on Schedule 6.19
of the Disclosure Memorandum, (ii) travel or similar expenses advanced to
employees in connection with their employment duties in the ordinary course
of business, and (iii) agreements and arrangements that are expressly
provided to be entered into with such persons under the terms of this
Agreement;
(k) other than in the ordinary course of business, take any action,
other than the execution of this Agreement or consummation of the
transactions contemplated hereby, that would result in loss of or contract
cancellation by any current customer, supplier or licenser of Parent, which
loss or contract cancellation would result in lost annual revenues to
Parent of at least $1,000,000;
(l) other than in the ordinary course of business, forgive or cancel
any indebtedness or waive any claims or rights in each case of material
value (including, without limitation, any indebtedness owing by any
stockholder, officer, director, employee or affiliate of Parent);
(m) knowingly take any action that would or is reasonably likely to
result in any of the representations or warranties of Parent set forth in
this Agreement being untrue in any material respect, or in any covenant of
Parent set forth in this Agreement being breached, or in any of the
conditions to the Merger specified in Article VIII and IX not being
satisfied; or
(n) agree, whether in writing or otherwise, to do any of the
foregoing.
10.3 Access to Information; Confidentiality
10.3.1 From the date hereof to the Effective Time, the Company shall, and
shall cause the officers, directors, employees and agents of the Company to,
afford the officers, employees and agents of Parent access at all reasonable
times to the officers, employees, agents, properties, offices, plants and other
facilities, books and records of the Company and shall furnish Parent with all
financial, operating and other data and information as Parent, through its
officers, employees or agents, may reasonably request so as to conduct a full
due diligence investigation of the Company's prospects, business, assets,
contracts, rights, liabilities and obligations, including, without limitation,
its intellectual property, financial, marketing, employee, legal, regulatory and
environmental matters. From the date hereof until the Effective Time, the
Company shall provide Parent with monthly and other financial statements of the
Company as they become available internally at the Company, all of which
financial statements will be prepared in good faith and consistent with past
practice.
10.3.2 From the date hereof to the Effective Time, Parent shall, and shall
cause the officers, directors, employees and agents of Parent to, afford the
officers, employees and agents of the Company
56
access at all reasonable times to the officers, employees, agents, properties,
offices, plants and other facilities, books and records of Parent and shall
furnish the Company with all financial, operating and other data and information
as the Company, through its officers, employees or agents, may reasonably
request so as to conduct a full due diligence investigation of Parent's
prospects, business, assets, contracts, rights, liabilities and obligations,
including, without limitation, its intellectual property, financial, marketing,
employee, legal, regulatory and environmental matters. From the date hereof
until the Effective Time, Parent shall provide the Company with monthly and
other financial statements of Parent as they become available internally at
Parent, all of which financial statements will be prepared in good faith and
consistent with past practice.
10.3.3 The parties shall continue to comply with and to perform their
respective obligations under the Mutual Confidentiality Agreement between Parent
and the Company entered into as of June 21, 2001 (the "Confidentiality
Agreement").
10.4 Notification of Certain Matters
Each party shall give prompt notice to the other parties of (a) the
occurrence or nonoccurrence of any event that would be likely to cause any
representation or warranty made by such party contained in this Agreement to be
untrue or inaccurate in any material respect and (b) any material failure by
such party to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder; provided, however, that the delivery
of any notice pursuant to this SECTION 10.4 shall not limit or otherwise affect
the remedies available to the parties hereunder.
10.5 Further Action; Best Efforts
Upon the terms and subject to the conditions hereof, each of the parties
hereto shall use its best efforts to take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make effective
the transactions contemplated hereby, including, without limitation, using its
best efforts to (i) obtain all waivers, licenses, permits, consents, approvals,
authorizations, qualifications and orders of governmental authorities and
parties to contracts with the Company as are necessary for the consummation of
the transactions contemplated hereby, (ii) defend all lawsuits or other legal
proceedings challenging this Agreement or the consummation of the transactions
contemplated hereby, (iii) lift or rescind any injunction or restraining order
or other order adversely affecting the ability of the parties to consummate the
transactions contemplated hereby, (iv) effect all necessary registrations and
filings, including, but not limited to, if applicable, filings under the HSR Act
and submissions of information requested by governmental authorities, (v)
provide all necessary information for the Registration Statement and (vi)
fulfill the conditions to the Merger. Without limiting the generality of the
foregoing, the parties hereto agree that they will seek to close the transaction
no later than December 31, 2001. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement or the other Operative Documents, each party to this Agreement shall
use its best efforts to promptly take all such action. After the Closing, each
party hereto, at the request of the other party, and at the sole cost and
expense of Parent, will take any further actions reasonably necessary or
desirable to carry out the purposes of this Agreement or any other Operative
Document, to vest in the Surviving Corporation full title to all properties,
assets and rights of the Company and to effect the issuance of the Parent Common
Stock and the H Shares to the stockholders of the Company pursuant to the terms
and conditions hereof.
10.6 Approval of Parent Stockholders; Preparation of Proxy Statement.
10.6.1 Approval of Parent Stockholders
As soon as reasonably practicable after the public announcement of this
Agreement, Parent shall, through its Board of Directors, duly call, give notice
of, convene and hold a meeting of its stockholders (the "Parent Stockholders
Meeting") for the purpose of obtaining such approvals as are required by the
57
applicable rules and regulations of the Parent's Trading Market and, if
applicable, Delaware law, to consummate the transactions contemplated by this
Agreement and the amendment to increase Parent's authorized shares as described
above in SECTION 7.9 (the "Parent Stockholders' Approval"). Subject to its
rights to terminate this Agreement pursuant to Section 11.1, Parent shall,
through its Board of Directors, include in the Proxy Statement (defined in
Section 10.7.2 below) the recommendation of the Board of Directors that the
Parent stockholders grant such approval, and shall use its reasonable best
efforts to obtain such approval.
10.6.2 Preparation of Proxy Statement
As soon as reasonably practicable after the public announcement of this
Agreement, Parent shall in consultation with the Company prepare and file with
the SEC a preliminary proxy statement (the "Proxy Statement"), and all other
required materials, to be used in connection with the solicitation of proxies by
Parent for the Parent Stockholders Meeting. Parent shall use commercially
reasonable efforts to respond to any SEC comments regarding its Proxy Statement
and to have such comments cleared as promptly as practicable, and shall promptly
mail the Proxy Statement in its definitive form to its shareholders. The Company
agrees to provide as promptly as practicable to Parent such information
concerning its stockholders and its business and financial statements and
affairs as may reasonably be required or appropriate for inclusion in the
Proxy/Registration Statement (as defined below) or in any amendments or
supplements thereto, and to cause its counsel and auditors to cooperate with
Parent's counsel and auditors in the preparation of the Proxy/Registration
Statement, including responses to SEC comments, as appropriate.
10.7 Company Stockholder Approval
The Company will seek the approval at a special meeting of stockholders or
the written consent of the stockholders at the earliest practicable date
approving this Agreement, the Merger and related matters, which approval will be
recommended by the Board of Directors of the Company, provided however, that
such recommendation is subject to Section 10.13 hereof.
10.8 Preparation of S-4
As promptly as practicable after the date hereof, Parent and the Company
will prepare and Parent will file with the SEC a Registration Statement on Form
S-4 (containing Parent's Proxy Statement (the "Proxy/Registration Statement")to
register all shares of Parent Common Stock issuable at the Closing of the
Merger. Parent will use its reasonable best efforts to have the
Proxy/Registration Statement declared effective under the Securities Act as
promptly as practicable after such filing. Parent shall make all necessary
filings with respect to the Merger and the transactions contemplated thereby
under the Securities Act and the Exchange Act and applicable state blue sky laws
and the rules and regulations thereunder. Parent shall also take any action
required to be taken under any applicable state securities laws in connection
with the issuance of Parent Common Stock in the Merger and issuance of the H
Shares and the Notes. No filing of, or amendment or supplement to, the
Proxy/Registration Statement will be made by Parent without providing the
Company and its counsel the opportunity to review and comment thereon. The
Parent will advise the Company, promptly after it receives notice thereof, of
the time when the Proxy/Registration Statement has become effective or any
supplement or amendment has been filed, the issuance of any stop order, the
suspension of the qualification of the Parent Common Stock issuable in
connection with the Merger for offering or sale in any jurisdiction, or any
request by the SEC for amendment of the Proxy/Registration Statement or comments
thereon and responses thereto or requests by the SEC for additional information.
If at any time prior to the Effective Time any information relating to the
Company or Parent, or any of their respective affiliates, officers or directors,
should be discovered by the Company or Parent which should be set forth in an
amendment or supplement to any of the Proxy/ Registration Statement, so that any
of such documents would not include any misstatement of a material fact or omit
to state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, the party which
discovers such information shall promptly notify the other parties hereto and an
appropriate amendment or supplement describing
58
such information shall be promptly filed with the SEC and, to the extent
required by law, disseminated to the stockholders of the Company and Parent.
10.9 Parent Common Stock
Parent agrees to apply for listing on the Parent's Trading Market the
shares of Parent Common Stock comprising the Merger Consideration, and those
shares required to be reserved for issuance upon exercise of Options assumed in
connection with the Merger by filing with the Parent's Trading Market a
Notification of Listing of Additional Shares (or such other form as may be
required by the Parent's Trading Market) from and after the Closing and
otherwise in accordance with the rules and regulations of the Parent's Trading
Market.
10.10 Dissenting Shares
Prior to the Closing Date, the Company shall furnish Parent with the name
and address of each stockholder of the Company who, prior to the Closing, has
requested appraisal rights pursuant to the DGCL and the number of Dissenting
Shares owned by such stockholder.
10.11 Publicity
No party hereto shall issue any press release or otherwise make any
statements to any third party with respect to this Agreement or the transactions
contemplated hereby, other than press releases mutually acceptable to the
parties hereto to be issued as soon as practicable after the date hereof and
after the Closing, and the filing of a Current Report on Form 8-K, the Proxy
Statement and the S-4 by Parent; provided, however, that communications by the
Company to its investors shall not be deemed to be statements to a third party.
Notwithstanding the foregoing, Parent shall be permitted to make any public
statement without obtaining the approval of any other party hereto if (a) Parent
shall have been advised by counsel that disclosure is required under applicable
securities laws, and (b) Parent has first used reasonable efforts to obtain the
approval of the Company, which approval shall not be unreasonably withheld or
delayed; and provided, further, that Parent shall be permitted to make
additional public statements so long as such public statements are consistent
with the statements contained in the mutually approved press releases, the Form
8-K or the S-4.
10.12 No Solicitation, etc.
(a) Each of the Company and Parent (the "Agreeing Party") agrees that it
shall not, nor shall it permit any of its subsidiaries to, nor shall it
authorize any officer, director or employee or any investment banker, attorney,
accountant, agent or other advisor or representative or any of its subsidiaries
to (i) solicit, initiate or knowingly encourage the submission of any Takeover
Proposal (as hereinafter defined), (ii) enter into any agreement with respect to
a Takeover Proposal or (iii) participate in any discussions or negotiations
regarding, or furnish to any person any information with respect to, any
inquiries or the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Takeover Proposal; provided, however, that to the
extent required by the fiduciary obligations of the Board of Directors of the
Agreeing Party, as determined in good faith by a majority of the members thereof
(after consultation with outside legal counsel), the Agreeing Party may, in
response to unsolicited requests therefor, participate in discussions or
negotiations with, or furnish information pursuant to a confidentiality
agreement no less favorable to such party in all material respects than the
Confidentiality Agreement to, any person who indicates a willingness to make a
Superior Proposal (as hereinafter defined). For all purposes of this Agreement,
"Takeover Proposal" means any proposal for a merger, consolidation, share
exchange, business combination or other similar transaction involving the
Agreeing Party or any of its Significant Subsidiaries (as hereinafter defined),
or any proposal or offer to acquire, directly or indirectly, 25% or more of any
class of equity securities in, 25% or more of any voting securities of, or 25%
or more of the assets of, the Agreeing Party or any of its Significant
Subsidiaries, as the case may be. The Agreeing Party shall cease and cause to be
terminated all existing discussions or negotiations with any persons conducted
heretofore with respect to, or that could reasonably be expected to lead to, any
59
Takeover Proposal. As used herein, a "Significant Subsidiary"means any
subsidiary of the Agreeing Party that would constitute a "significant
subsidiary" within the meaning of Rule 1-02 of Regulation S-X of the SEC.
(b) Except to the extent permitted below, neither the Board of Directors of
the Agreeing Party nor any committee thereof shall (i) withdraw or modify, in a
manner adverse to the other party (either the Company or Parent), the approval
or recommendation by the Board of Directors of the Agreeing Party or any such
committee of this Agreement or the Merger or (ii) approve or recommend, or
propose to approve or recommend, any Takeover Proposal. Notwithstanding the
foregoing, (i) the Board of Directors of the Agreeing Party, to the extent
required by its fiduciary obligations and subject to Section 11.2 hereof, as
determined in good faith by a majority of the members thereof (after
consultation with outside legal counsel), may approve or recommend a Superior
Proposal (and, in connection therewith, withdraw or modify its approval or
recommendation of this Agreement or the Merger) and (ii) nothing contained in
this Agreement shall prevent the Board of Directors of the Agreeing Party from
complying with Rule 14d-9 and Rule 14e-2 promulgated under the Exchange Act with
regard to a Takeover Proposal, if applicable. For all purposes of this
Agreement, "Superior Proposal" means a bona fide written proposal made by a
third party to acquire the Agreeing Party pursuant to a tender or exchange
offer, a merger or other business combination, a share exchange, a sale of all
or substantially all its assets or otherwise on terms which a majority of the
members of the Board of Directors of the Agreeing Party determines in good faith
(taking into account the advice of any independent financial advisors) to be
more favorable to the Agreeing Party and its stockholders than the Merger (and
any revised proposal made by the other party) and for which financing, to the
extent required, is then fully committed or reasonably determined to be likely
to be available by the Board of Directors of the Agreeing Party.
(c) The Agreeing Party shall notify the other party (either the Company or
Parent) promptly (but in no event later than the next business day) after
receipt by the Agreeing Party (or its advisors) of any Takeover Proposal or any
request for nonpublic information in connection with a Takeover Proposal or for
access to the properties, books or records of the Company by any person or
entity that informs the Company or its advisors that it is considering making,
or has made, a Takeover Proposal. Such notice shall indicate the identity of the
person making the Takeover Proposal, inquiry or contact, and the material terms
and conditions of the Takeover Proposal, inquiry or contact and shall include
copies of any written materials received by the Agreeing Party or its
representatives in connection with such proposal, discussion, negotiation or
inquiry.
10.13 Regulatory and Other Approvals.
10.13.1 Subject to the terms and conditions of this Agreement and the
other Operative Documents, each of the Company and Parent will use commercially
reasonable efforts to do, or cause to be done, all things necessary, proper or
advisable to, as promptly as practicable, obtain all consents, approvals or
actions of, make all filings with and give all notices to any court, tribunal or
administrative, governmental or regulatory body, agency, commission, division,
department, public body or other authority, whether federal, state, local or
foreign (each a "Governmental Entity") or any other public or private third
parties required of the Company, Parent or the Merger Sub to consummate the
Merger and provide such other information and communications to such
Governmental Entities or other public or private third parties as the other
party hereto or such Governmental Entities or other public or private third
parties may reasonably request. In addition to and not in limitation of the
foregoing, each of the parties will (x) take promptly all actions necessary to
make the filings required of Parent and the Company or their affiliates under
the Hart-Scott-Rodino Act and under comparable merger notification or
competition laws of non-U.S. jurisdictions, (y) comply at the earliest
practicable date with any request for additional information received by such
party or its affiliates from the Federal Trade Commission (the "FTC") or the
Antitrust Division of the Department of Justice (the "Antitrust Division")
pursuant to the Hart-Scott-Rodino Act or the authorities of such other
jurisdictions, and (z) cooperate with the other party in connection with such
party's filings under the Hart-Scott-Rodino Act and in connection with resolving
any
60
investigation or other inquiry concerning the Merger or the other matters
contemplated by this Agreement commenced by the FTC, the Antitrust Division,
state attorneys general or any other Governmental Entity.
10.13.2 In furtherance and not in limitation of the covenants in Section
10.5, Parent and the Company shall each use all reasonable efforts to resolve
such objections, if any, as may be asserted with respect to any transactions
contemplated by this Agreement by any Governmental Entity. If any
administrative, judicial or legislative action or proceeding is threatened to be
instituted by any such authority challenging any of the transactions
contemplated by this Agreement, Parent and the Company will each cooperate to
contest and resist the institution of any such action or proceeding.
10.14 Company Employees
10.14.1 From and after the Effective Time, Parent and the Surviving
Corporation will honor and assume (and Parent guarantees the obligations of
Surviving Corporation hereunder), in accordance with their terms, all
indemnification obligations of the Company under the Company's Certificate of
Incorporation and Bylaws, each as in effect as of the date of this Agreement to
any officer, director, agent or employee of the Company for acts and omissions
prior to the Closing. Parent shall cause all employees of the Surviving
Corporation immediately after the Effective Time to be eligible to participate
in the "employee welfare benefit plans" and "employee pension plans" (within the
meaning of Section 3(1) and Section 3(2) of ERISA, respectively) of Parent in
which similarly situated employees of Parent are generally eligible to
participate (or, alternatively, may choose in their discretion to continue
certain or all of the benefit plans currently provided by Company to its
employees or otherwise to provide benefits comparable to some or all of such
plans); provided that nothing herein shall prevent Merger Sub or Parent from
terminating the employment of any such employee or modifying or terminating such
plans from time to time. For purposes of any length of service requirements,
waiting periods, vesting periods or differential benefits based on length of
service in any such plan for which an employee may be eligible after the
Effective Time, Merger Sub or Parent shall ensure that service by such employee
with the Company shall be deemed to have been service with Merger Sub or Parent,
as applicable, including with respect to existing options held by employees of
the Company: provided that options granted by Parent to employees of the
Surviving Corporation immediately following the Effective Time to effect the
intent of this paragraph shall be vested no more than to the same extent that
they would have been vested had they been granted pursuant to the customary
terms of Parent's stock option grants (which currently vest in equal monthly
increments over a four year period) as though such employee had been hired by
Parent upon the later of (i) two years prior to such date of grant, or (ii) the
date that such employee commenced full-time employment at the Company as though
such grant had been made on such deemed date of hire, and in no event shall such
options be vested on the date of grant by Parent as to more than 50% of the
shares subject to such option and the Company and Parent agree to cooperate
reasonably to implement this provision on a case by case basis.
10.14.2 Parent confirms that it is Parent's intention that, subject to
applicable law, Parent and the Surviving Corporation will provide salary and
benefits to employees of the Company who continue to be employed by the
Surviving Corporation after the Effective Time, including participation in the
stock option and other compensatory plans of Parent, which will, in the
aggregate, be substantially equivalent, to those currently provided by Parent to
its similarly situated employees. Notwithstanding the foregoing, nothing in this
Agreement shall otherwise limit the Surviving Corporation's right to amend,
modify or terminate any employee benefit plan or arrangement. Parent agrees that
any person employed by the Company at the Effective Time whose employment is
terminated by the Surviving Corporation on or prior to the first anniversary of
the Effective Time shall be provided severance benefits pursuant to any written
severance agreement, substantially as described on the Company's Disclosure
Memorandum or substantially similar to that provided to similarly situated
employees of Parent at the time of termination.
10.15 Rights Agreement.
Parent will not take any action to revoke, amend or nullify the amendment
to the Rights Agreement referred to in Section 6.5(b) (the "Rights Amendment");
provided, however that Parent may amend the
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Rights Amendment (i) solely for the purpose of including in the definition of
"Acquiring Person" Meritage and its Affiliates and Associates in the event that
they beneficially hold 20% or more of the Common Shares then outstanding and
(ii) only with the prior written consent of Meritage.
ARTICLE XI
TERMINATION, AMENDMENT AND WAIVER
11.1 Termination
This Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time (notwithstanding any approval of this Agreement
by the stockholders of the Company):
(a) by mutual written consent of the Company and Parent;
(b) by either the Company or Parent, if the Merger has not been
consummated by December 31, 2001; provided, however, that (x) the right to
terminate this Agreement under this subsection (b) shall not be available
to any party whose failure to fulfill any obligation under this Agreement
has been the cause of, or resulted in, the failure of the Effective Time to
occur on or before such date and (y) such date shall be extended by one day
for each day following 14 days after the execution of this Agreement that
the Company has not provided to Parent the information referred to in the
last sentence of Section 10.6.2 in the form for inclusion in the
Proxy/Registration Statement;
(c) by either the Company or Parent, if there shall be any law or
regulation that makes consummation of the Merger illegal or if any
judgment, injunction, order or decree enjoining Parent, Merger Sub or the
Company from consummating the Merger is entered and such judgment,
injunction, order or decree shall become final, binding and nonappealable;
provided, however, that the party seeking to terminate this Agreement
pursuant to this subsection (c) shall have used all reasonable efforts to
remove such judgment, injunction, order or decree;
(d) by the Company, in the event of a breach by Parent of any
representation, warranty or agreement contained herein that has not been
cured, or as to which best efforts are not being employed to cure within 30
days after notice thereof is given to Parent and such breach has resulted
in a Parent Material Adverse Effect or if the conditions to the Company's
obligations in Article VIII become incapable of satisfaction through no
fault of the Company;
(e) by Parent, in the event of a breach by the Company of any
representation, warranty or agreement contained herein that has not been
cured or as to which best efforts are not being employed to cure within 30
days after notice thereof is given to the Company and such breach has
resulted in a Company Material Adverse Effect or if the conditions to
Parent's obligations in Article VII become incapable of satisfaction
through no fault of Parent;
(f) by Parent or the Company in connection with entering into a
definitive agreement permitted by Section 10.12; provided that the
terminating party has complied with all provisions thereof, including the
notice provisions therein and the payment of amounts pursuant to Section
11.2;
(g) by Parent if the votes required by the holders of the Company
Capital Stock in order to approve the Merger and the transactions
contemplated by this Agreement and the other Operative Documents are not
received on or before the Closing Date by written consent or at a duly held
meeting of the holders of the Company Capital Stock after such a meeting
has been held; or
(h) by the Company if the votes required by the holders of the Parent
Capital Stock in order to approve the Merger and the transactions
contemplated by this Agreement and the other Operative Documents are not
received on or before the Closing Date at a duly held meeting of the
holders of the Parent Capital Stock after such a meeting has been held.
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11.2 Effect Of Termination.
11.2.1 In the event of termination of this Agreement by either the Company
or Parent as provided in Section 11.1, written notice thereof shall be given as
promptly as possible to the other party hereto, and this Agreement shall
forthwith become null and void and there shall be no liability or obligation on
the part of either the Company or Parent (or any of their respective
Representatives or affiliates), except (i) that the provisions of Sections 10.3
and 10.5, this Section 11.2 and Article XII will continue to apply following any
such termination, (ii) that nothing contained herein shall relieve any party
hereto from liability for breach of its representations, warranties, covenants
or agreements contained in this Agreement, and (iii) as provided in Section
11.2.2 below.
11.2.2 If either party terminates this Agreement pursuant to Section
11.1(f), the terminating party shall pay to the non-terminating party by wire
transfer in immediately available funds to an account specified in writing by
the non-terminating party immediately upon notice of such termination, a
termination fee of One Million US Dollars (US$1,000,000) and, if the Parent is
the non-terminating party, the Parent shall immediately repay the Notes in full
in accordance with their terms.
11.2.3 The parties acknowledge that the agreements in Section 11.2.2 are
an integral part of the transactions contemplated by this Agreement, and that,
without these agreements, they each would not enter into this Agreement;
accordingly, if either party fails to pay in a timely manner the amounts due
pursuant to Section 11.2.2 and, in order to obtain such payment, the
non-terminating party makes a claim that results in a judgment against the other
party for the amounts set forth in Section 11.2.2, the terminating party shall
pay to the non-terminating party its reasonable costs and expenses (including
reasonable attorneys' fees and expenses) in connection with such suit, together
with interest on the amounts set forth in Section 11.2.2 from the date of demand
to the date of payment at the rate published as the "prime rate" daily in The
Wall Street Journal in effect on the date such payment was required to be made.
11.2.4 If any provision of this Section 11.2 shall be void under
applicable law, or if the performance by any party of its obligations hereunder
is prohibited by applicable law, but such provision or action would be
permissible if some part or all of Section 11.2 were deleted, then such
modification as may be necessary to make such provision or action permissible
shall be deemed to have taken place.
11.3 Amendment
This Agreement may be amended by the parties hereto at any time before or
after approval of Parent's or Company's stockholders; after such approval,
however, no amendment will be made that by applicable law requires the further
approval of Parent's or Company's stockholders without obtaining such further
approval.
11.4 Waiver
At any time prior to the Effective Time, any party hereto may (a) extend
the time for the performance of any obligation or other act of any other party
hereto, (b) waive any inaccuracy in the representations and warranties contained
herein or in any document delivered pursuant hereto, or (c) waive compliance
with any agreement or condition contained herein. Any such extension or waiver
shall be valid only if set forth in an instrument in writing signed by the party
or parties to be bound thereby.
63
ARTICLE XII
GENERAL
12.1 No Survival of Representations and Warranties
None of the representations and warranties in this Agreement or in any
instrument or document delivered pursuant to this Agreement shall survive the
Effective Time. This Section 12.1 shall not limit any covenant or agreement of
the parties which by its terms contemplates performance after the Effective
Time.
12.2 Expenses
Regardless of whether the transactions contemplated by this Agreement are
consummated, each party shall pay its own fees and expenses incident to the
negotiation, preparation and execution of this Agreement and the other Operative
Documents (including investment banking, legal and accounting fees and
expenses),
12.3 Notices
Any notice, request or demand desired or required to be given hereunder
shall be in writing given by personal delivery, confirmed facsimile transmission
or overnight courier service, in each case addressed as respectively set forth
below or to such other address as any party shall have previously designated by
such a notice. The effective date of any notice, request or demand shall be the
date of personal delivery, the date on which successful facsimile transmission
is confirmed or the date actually delivered by a reputable overnight courier
service, as the case may be, in each case properly addressed as provided herein
and with all charges prepaid.
To Parent or Merger Sub:
Exabyte Corporation
1685 38th Street
Boulder, Colorado 80301
Fax: (303) 417-7900
Attention: President
with a copy to:
Holland & Hart LLP
1050 Walnut Street
Suite 500
Boulder, CO 80302
Fax: (303) 473-2720
Attention: Nina Lopez
To the Company:
Ecrix Corporation
5525 Central Avenue
Boulder, CO 80301
Fax: (303) 402-9266
Attention: Juan Rodriguez
64
with a copy to:
Bartlit Beck Herman Palenchar & Scott
1899 Wynkoop Street, Suite 800
Denver, CO 80202
Fax: (303) 592-3140
Attention: James L. Palenchar
12.4 Severability
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner adverse to any party. Upon
such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in a mutually acceptable manner in order that the
transactions contemplated hereby may be consummated as originally contemplated
to the fullest extent possible.
12.5 Entire Agreement
This Agreement, the Confidentiality Agreement and the other Operative
Documents constitute the entire agreement among the parties with respect to the
subject matter hereof and thereof and supersede all prior agreements and
undertakings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof and thereof.
12.6 Assignment
This Agreement shall not be assigned by operation of law or otherwise;
provided, however, that Merger Sub's rights and obligations may be assigned to
and assumed by Parent or any other corporation wholly owned (directly or through
intermediate wholly owned subsidiaries) by Parent, provided that in such event
Parent shall unconditionally guarantee the full payment and performance of all
obligations of such assignee.
12.7 Parties in Interest
This Agreement shall be binding on and inure solely to the benefit of the
parties hereto and their respective successors, heirs, legal representatives and
permitted assigns.
12.8 Governing Law; Jurisdiction; Venue
This Agreement and the transactions contemplated hereby, including the
Merger, shall be governed by and construed in accordance with the laws of the
State of Delaware.
Any request for relief related to any dispute that arises out of or is
related to this Agreement or any of the transactions contemplated by this
Agreement or the other Operative Documents, shall be brought in any federal
court located in the State of Colorado or any federal or state court located in
the State of Delaware. Each of the parties hereto (a) consents to submit itself
to the personal jurisdiction of any such court located in the State of Colorado
or the State of Delaware, as the case may be, in the event any dispute arises
out of or relates to this Agreement or any of the transactions contemplated by
this Agreement, (b) agrees that it will not attempt to deny or defeat such
personal jurisdiction by motion or other request for leave from any such court,
including, without limitation, a motion to dismiss on the grounds of forum non
conveniens, (c) agrees that it will not bring any action arising out of or
relating to this Agreement or any of the transactions contemplated by this
Agreement in any court other than a federal court sitting in the State of
Delaware or the State of Colorado or a Delaware state court, (d) agrees that a
final judgment in any such action or proceeding shall be conclusive and may be
enforced
65
in other jurisdictions by suit on the judgment or in any other manner specified
by law, and (e) waives any right to a trial by jury with respect to any claim,
counterclaim or action arising out of or in connection with this Agreement or
the transactions contemplated hereby.
12.9 No Third-Party Beneficiary
The terms and provisions of this Agreement are intended solely for the
benefit of each party hereto and their respective successors or permitted
assigns, and, except as provided in Sections 10.14.1 and 10.14.2, it is not the
intention of the parties to confer third-party beneficiary rights under any
other person.
12.10 Counterparts
This Agreement may be executed and delivered (including by facsimile
transmission) in one or more counterparts, and by the different parties hereto
in separate counterparts, each of which when executed and delivered shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement. To expedite the process of entering into this Agreement,
the parties acknowledge that Transmitted Copies of this Agreement will be
equivalent to original documents until such time as original documents are
completely executed and delivered. "Transmitted Copies" will mean copies that
are reproduced or transmitted via photocopy, facsimile or other process of
complete and accurate reproduction and transmission.
[Remainder of this page intentionally left blank]
66
IN WITNESS WHEREOF, the parties hereto have entered into and signed this
Agreement and Plan of Merger as of the date and year first above written.
EXABYTE CORPORATION
By: /s/ WILLIAM L. MARRINER
----------------------------------
Name: William L. Marriner
Title: President & CEO
BRONCO ACQUISITION, INC.
By: /s/ STEPHEN F. SMITH
----------------------------------
Name: Stephen F. Smith
Title: President
ECRIX CORPORATION
By: /s/ JUAN A. RODRIGUEZ
----------------------------------
Juan A. Rodriguez
Chairman and CEO
INVESTORS:
MERITAGE PRIVATE EQUITY FUND, L.P.
By: Meritage Investment Partners,
LLC
Its: General Partner
By: /s/ G. JACKSON TANKERSLEY, JR.
----------------------------------
G. Jackson Tankersley, Jr.
Member
MERITAGE PRIVATE EQUITY PARALLEL
FUND, L.P.
By: Meritage Investment Partners,
LLC
Its: General Partner
By: /s/ G. JACKSON TANKERSLEY, JR.
----------------------------------
G. Jackson Tankersley, Jr.
Member
67
MERITAGE ENTREPRENEURS FUND, L.P.
By: Meritage Investment Partners,
LLC
Its: General Partner
By: /s/ G. JACKSON TANKERSLEY, JR.
----------------------------------
G. Jackson Tankersley, Jr.
Member
MILLENNIAL HOLDINGS LLC
By: /s/ G. JACKSON TANKERSLEY, JR.
----------------------------------
G. Jackson Tankersley, Jr.
Managing Member
THE MILLENNIAL FUND
By: /s/ G. JACKSON TANKERSLEY, JR.
----------------------------------
Name: G. Jackson Tankersley, Jr.
TANKERSLEY FAMILY LIMITED
PARTNERSHIP
By: /s/ G. JACKSON TANKERSLEY, JR.
----------------------------------
G. Jackson Tankersley, Jr.
General Partner
CENTENNIAL FUND V, L.P.
By: Centennial Holdings V, L.P.
Its: General Partner
By: /s/ JEFFREY H. SCHUTZ
----------------------------------
Jeffrey H. Schutz
General Partner
CENTENNIAL ENTREPRENEURS FUND V,
L.P.
By: Centennial Holdings V, L.P.
Its: General Partner
By: /s/ JEFFREY H. SCHUTZ
----------------------------------
Jeffrey H. Schutz
General Partner
68
CENTENNIAL FUND VI, L.P.
By: Centennial Holdings VI, LLC
Its: General Partner
By: /s/ JEFFREY H. SCHUTZ
----------------------------------
Jeffrey H. Schutz
Managing Principal
CENTENNIAL ENTREPRENEURS FUND VI,
L.P.
By: Centennial Holdings VI, LLC
Its: General Partner
By: /s/ JEFFREY H. SCHUTZ
----------------------------------
Jeffrey H. Schutz
Managing Principal
CENTENNIAL HOLDINGS I, LLC
By: /s/ JEFFREY H. SCHUTZ
----------------------------------
Jeffrey H. Schutz
Managing Director
BIG PARTNERS V, L.P.
By: /s/ ALLEN A. BUILDER
----------------------------------
Allen A. Builder
General Partner
HEXAGON INVESTMENTS LLC
By: Hexagon Investments, Inc.
Its: Manager
By: /s/ BRIAN FLEISCHMANN
----------------------------------
Brian Fleischmann
Vice President
69
GRANDHAVEN LLC
By: Hexagon Investments, Inc.
Its: Manager
By: /s/ BRIAN FLEISCHMANN
----------------------------------
Brian Fleischmann
Vice President
LEGACY ENTERPRISES LLC
By: Hexagon Investments, Inc.
Its: Manager
By: /s/ BRIAN FLEISCHMANN
----------------------------------
Brian Fleischmann
Vice President
LABYRINTH ENTERPRISES LLC
By: Hexagon Investments, Inc.
Its: Manager
By: /s/ BRIAN FLEISCHMANN
----------------------------------
Brian Fleischmann
Vice President
JAMES MONROE III, GRANTOR TRUST
By: /s/ JAMES MONROE III
----------------------------------
James Monroe III
Trustee
VALLEY VENTURES II, L.P.
By: Valley Ventures II, Management
LLC
General Partner
By: /s/ JOHN M. HOLLIMAN III
----------------------------------
John M. Holliman III
Managing Member
/s/ CURTIS R. JENSEN
------------------------------------
Curtis R. Jensen
70
/s/ WILLIAM J. ALMON, SR.
------------------------------------
William J. Almon, Sr.
/s/ MARK ROSSI
------------------------------------
Mark Rossi
LENDERS:
/s/ WILLIAM J. ALMON, SR.
------------------------------------
William J. Almon, Sr.
MERITAGE PRIVATE EQUITY FUND, L.P.
By: Meritage Investment Partners,
LLC,
Its: General Partner
By: /s/ JOHN GARRETT
----------------------------------
John Garrett
Principal
CENTENNIAL FUND V, L.P.
By: Centennial Holdings V, L.P.
Its: General Partner
By: /s/ JEFFREY H. SCHUTZ
----------------------------------
Jeffrey H. Schutz
General Partner
CENTENNIAL ENTREPRENEURS FUND V,
L.P.
By: Centennial Holdings V, L.P.
Its: General Partner
By: /s/ JEFFREY H. SCHUTZ
----------------------------------
Jeffrey H. Schutz
General Partner
71
CENTENNIAL FUND VI, L.P.
By: Centennial Holdings VI, LLC
Its: General Partner
By: /s/ JEFFREY H. SCHUTZ
----------------------------------
Jeffrey H. Schutz
Managing Principal
CENTENNIAL ENTREPRENEURS FUND VI,
L.P.
By: Centennial Holdings VI, LLC
Its: General Partner
By: /s/ JEFFREY H. SCHUTZ
----------------------------------
Jeffrey H. Schutz
Managing Principal
CENTENNIAL HOLDINGS I, LLC
By: /s/ JEFFREY H. SCHUTZ
----------------------------------
Jeffrey H. Schutz
Managing Director
72
EXHIBIT 7.10
EXABYTE CORPORATION
Attn:
Ladies and Gentlemen:
I have been advised that I might be considered to be an "affiliate," as
that term is defined for purposes of paragraphs (c) and (d) of Rule 145 ("Rule
145") promulgated by the Securities and Exchange Commission (the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act") of Ecrix
Corporation, a Delaware corporation (the "Company").
Pursuant to an Agreement and Plan of Merger, dated as of August 22, 2001
(the "Merger Agreement"), among Exabyte Corporation ("Exabyte"), the Company and
Bronco Acquisition, Inc., it is contemplated that Bronco Acquisition, Inc. will
merge with and into the Company (the "Merger") and as a result, I will receive
in exchange for each share of common or preferred stock of the Company owned by
me immediately prior to the Effective Time of the Merger (as defined in the
Merger Agreement), a number of shares of Common Stock of Exabyte ("Exabyte
Common Stock"), as more specifically set forth in the Merger Agreement.
I hereby agree as follows:
I will not offer to sell, transfer or otherwise dispose of any of the
shares of Exabyte Common Stock issued to me pursuant to the Merger (the
"Stock") except (a) in compliance with the applicable provisions of Rule
145, (b) in a transaction that is otherwise exempt from the registration
requirements of the Securities Act, or (c) in an offering registered under
the Securities Act.
I consent to the endorsement of the Stock issued to me pursuant to the
Merger with a restrictive legend which will read substantially as follows:
"The shares represented by this certificate were issued in a
transaction to which Rule 145 promulgated under the Securities Act of
1933, as amended (the "Act"), applies, and may be sold or otherwise
transferred only in compliance with the limitations of such Rule 145, or
upon receipt by Exabyte Corporation of an opinion of counsel reasonably
satisfactory to it that some other exemption from registration under the
Act is available, or pursuant to a registration statement under the
Act."
Exabyte's transfer agent shall be given an appropriate stop transfer order
and shall not be required to register any attempted transfer of the shares of
the Stock, unless the transfer has been effected in compliance with the terms of
this letter agreement.
It is understood and agreed that this letter agreement shall terminate and
be of no further force and effect and the restrictive legend set forth above
shall be removed by delivery of substitute certificates without such legend, and
the related stop transfer restrictions shall be lifted forthwith, if (i) any
such shares of Stock shall have been registered under the Securities Act for
sale, transfer or other disposition by me or on my behalf and are sold,
transferred or otherwise disposed of, or (ii) any such shares of Stock are sold
in accordance with the provisions of paragraphs (c), (e), (f) and (g) of Rule
144 promulgated under the Securities Act, or (iii) I am not at the time an
affiliate of Exabyte and have been the beneficial owner of the Stock for at
least one year (or such other period as may be prescribed thereunder) and
Exabyte has filed with the Commission all of the reports it is required to file
under the Securities Exchange Act of 1934, as amended, during the preceding
twelve months, or (iv) I am not and have not been for at least three months an
affiliate of Exabyte and have been the beneficial owner of the Stock for at
least two years (or such other period as may be prescribed by the Securities
Act, and the rules and regulations promulgated thereunder), or (v) Exabyte shall
have received an opinion of counsel acceptable to Exabyte to the effect that the
stock transfer restrictions and the legend are not required.
1
I have carefully read this letter agreement and the Merger Agreement and
have discussed their requirements and other applicable limitations upon my
ability to offer to sell, transfer or otherwise dispose of shares of the Stock,
to the extent I felt necessary, with my counsel or counsel for the Company.
Sincerely,
------------------------------------
2
EXHIBIT 7.16
[Form of Series H Holders Lock-up]
Exabyte Corporation
1685 38th Street
Boulder, CO 80301
, 2001
Dear Sirs:
The undersigned understands that Exabyte Corporation ("the Company") and
Ecrix Corporation ("Ecrix") have entered into an Agreement and Plan of Merger,
dated as of August 22, 2001 (the "Merger Agreement") providing for the merger of
Bronco Acquisition Inc. with and into Ecrix, as a result of which Ecrix shall
become a wholly-owned subsidiary of the Company. Capitalized terms not defined
herein shall have the meanings ascribed to them in the Merger Agreement.
In consideration of the execution of the Merger Agreement by Bronco and the
performance of its obligations thereunder, and for other good and valuable
consideration, the undersigned hereby irrevocably agrees that without the prior
written consent of Bronco the undersigned will not offer, sell, offer to sell,
contract to sell, assign, pledge, grant any option to purchase or otherwise
dispose of or transfer (each a "Transfer") any shares of Bronco's Series H
Convertible Preferred Stock, $0.01 par value per share (the "Preferred Stock")
acquired by the undersigned pursuant to the Merger Agreement or any other
security of Bronco issuable upon exercise of the Preferred Stock(the
"Convertible Securities") for a period of 180 days after the Effective Time and
thereafter may not Transfer more than one-third of the aggregate amount of the
Preferred Stock and Convertible Securities (collectively, "Acquired Securities")
for a period of 270 days after the Effective Time and not more than two-thirds
of the aggregate amount of Acquired Securities for a period of 360 days after
the Effective Time and thereafter may transfer all of the Acquired Securities
subject to compliance with applicable law. This agreement shall not prohibit the
undersigned from transferring Acquired Securities to affiliates, as a bona fide
gift, or to a trust for the benefit of the transferor or immediate family
members of the transferor.
In furtherance of the foregoing, the Company and Fleet National Bank, its
Transfer Agent, are hereby authorized to decline to make any transfer of
securities if such transfer would constitute a violation or breach of this
letter agreement.
Very truly yours,
By:
------------------------------------
Name:
Title:
1
[Form of Common Stock Holders Lock-up]
, 2001
Exabyte Corporation
1685 38th Street
Boulder, CO 80301
Dear Sirs:
The undersigned understands that Exabyte Corporation ("the Company") and
Ecrix Corporation ("Ecrix") have entered into an Agreement and Plan of Merger,
dated as of August 22, 2001 (the "Merger Agreement") providing for the merger of
Bronco Acquisition Inc. with and into Ecrix, as a result of which Ecrix shall
become a wholly-owned subsidiary of the Company. Capitalized terms not defined
herein shall have the meanings ascribed to them in the Merger Agreement.
In consideration of the execution of the Merger Agreement by the Company
and the performance of its obligations thereunder, and for other good and
valuable consideration, the undersigned hereby irrevocably agrees that without
the prior written consent of the Company the undersigned will not offer, sell,
offer to sell, contract to sell, assign, pledge, grant any option to purchase or
otherwise dispose of or transfer (each a "Transfer") any shares of the Company's
Common Stock, $0.01 par value per share acquired, directly or indirectly, by the
undersigned pursuant to the Merger Agreement (collectively, the "Acquired
Securities") for a period of 90 days after the Effective Time and thereafter may
not Transfer more than one-third of the aggregate amount of Acquired Securities
for a period of 180 days after the Effective Time and not more than two-thirds
of the aggregate amount of Acquired Securities for a period of 270 days after
the Effective Time and thereafter may transfer all of the Acquired Securities
subject to compliance with applicable law. This agreement shall not prohibit the
undersigned from transferring Acquired Securities to affiliates, as a bona fide
gift, or to a trust for the benefit of the transferor or immediately family
members of the transferor.
In furtherance of the foregoing, the Company and Fleet National Bank, its
Transfer Agent, are hereby authorized to decline to make any transfer of
securities if such transfer would constitute a violation or breach of this
letter agreement.
Very truly yours,
By:
----------------------------------
Name:
Title:
APPENDIX B
August 21, 2001
Board of Directors
Exabyte Corporation
1685 38th Street
Boulder, CO 80301
Dear Members of the Board:
We understand that Exabyte Corporation ("Parent" or "Exabyte"), Ecrix
Acquisition, Inc., a wholly-owned subsidiary of Parent ("Merger Subsidiary"),
and Ecrix Corporation (the "Company" or "Ecrix"), propose to enter into an
Agreement and Plan of Merger (the "Agreement"), pursuant to which (i) Merger Sub
will merge with and into the Company, (ii) the outstanding shares of preferred
stock and common stock of the Company will be converted into the right to
receive an aggregate of 10,000,000 shares of Parent Common Stock, (iii) the
outstanding warrants to purchase shares of Series D-2 Preferred Stock of the
Company will be assumed by Parent, and (iv) Parent will sell to certain
stockholders of the Company shares of Parent's Series H Preferred Stock at a
purchase price of $1.00 per share. The shares of Parent Common Stock, warrants,
options, and shares of Series H Preferred Stock issuable by Parent in the
transaction described in the preceding sentence (the "Transaction") is
collectively referred to herein as the "Aggregate Consideration." We understand
that Parent will issue 9,400,000 shares of Series H Preferred Stock pursuant to
the transaction. We also understand that pursuant to the Agreement the Company
will lend to Parent an aggregate of $2,000,000 in exchange for the issuance to
the Company of a convertible secured promissory note. The merger of Merger Sub
into the Company is intended to be a tax-free reorganization within the meaning
of Section 368 of the United States Internal Revenue Code of 1986, as amended.
You have requested our opinion as to whether the Aggregate Consideration is
fair, from a financial point of view, to holders of Parent Common Stock.
Broadview International LLC ("Broadview") focuses on providing merger and
acquisition advisory services to information technology ("IT"), communications
and media companies. In this capacity, we are continually engaged in valuing
such businesses, and we maintain an extensive database of IT, communications and
media mergers and acquisitions for comparative purposes. We are currently acting
as financial advisory to Exabyte's Board of Directors and will receive a fee
from Exabyte upon the successful conclusion of the Transaction.
In rendering our opinion, we have, among other things:
(1) reviewed the terms of the Agreement in the form of the draft
dated August 20, 2001 furnished to us by legal counsel to Exabyte, which,
for the purposes of this opinion, we have assumed, with your permission, to
be identical in all material respects to the agreement to be executed;
(2) reviewed certain internal historical financial and operating data
concerning Ecrix prepared and provided to us by Ecrix management;
(3) reviewed quarterly financial projections for Ecrix through
December 31, 2002 prepared and provided to us by Ecrix management as well
as quarterly financial projections for Ecrix through December 31, 2002
revised by Broadview and approved by Exabyte management;
(4) participated in discussions with Ecrix management and certain key
shareholders concerning the operations, business strategy, financial
performance and prospects for Ecrix;
(5) discussed with Ecrix management its view of the strategic
rationale for the Transaction;
(6) compared certain aspects of the financial performance of Ecrix
with public companies we deemed comparable;
(7) analyzed available information, both public and private,
concerning other transactions we believe to be comparable in whole or in
part to the Transaction;
(8) reviewed Exabyte's annual report on Form 10-K for the fiscal year
ended December 31, 2000, including the audited financial statements
included therein, and Exabyte's quarterly report on Form 10-Q for the
period ended June 30, 2001;
(9) reviewed certain internal historical financial and operating data
concerning Exabyte prepared and provided to us by Exabyte management;
(10) reviewed quarterly financial projections through December 31,
2002 for Exabyte prepared and provided to us by Exabyte management;
(11) participated in discussions with Exabyte management concerning
the operations, business strategy, financial performance and prospects for
Exabyte;
(12) discussed with Exabyte management its view of the strategic
rationale for the Transaction;
(13) reviewed the most recent equity analyst reports covering Exabyte;
(14) reviewed the recent reported closing prices and trading activity
for Exabyte Common Stock;
(15) compared certain aspects of the financial performance of Exabyte
with public companies we deemed comparable from both a business and
financial perspective;
(16) analyzed the anticipated effect of the Transaction on the future
financial performance of the consolidated entity;
(17) assisted in negotiations and discussions related to the
Transaction among Exabyte, Ecrix and their respective financial and legal
advisors; and
(18) conducted other financial studies, analyses and investigations,
as we deemed appropriate for purposes of this opinion.
In rendering our opinion, we have relied, without independent verification,
on the accuracy and completeness of all the financial and other information
(including without limitation the representations and warranties contained in
the Agreement) that was publicly available or furnished to us by Ecrix or
Exabyte or their respective advisors. With respect to the financial projections
examined by us, we have assumed that they were reasonably prepared and reflected
the best available estimates and good faith judgments of the management of Ecrix
and Exabyte, respectively, as to the future performance of Ecrix and Exabyte,
respectively. We have neither made nor obtained an independent valuation of
Ecrix's assets.
For purposes of this opinion, we have assumed that neither Ecrix nor
Exabyte is currently involved in any material transaction other than the
Transaction and those activities undertaken in the ordinary course of conducting
their respective businesses. Our opinion is necessarily based upon market,
economic, financial and other conditions as they exist and can be evaluated as
of the date of this opinion, and any change in such conditions may impact this
opinion. We express no opinion as to the price at which Parent Common Stock will
trade at any time or as to the viability of, or prospects for, Exabyte or the
combined company subsequent to the transaction.
Based upon and subject to the foregoing, we are of the opinion that the
Aggregate Consideration is fair, from a financial point of view, to holders of
Parent Common Stock.
This opinion speaks only as of the date hereof. It is understood that this
opinion is for the information of the Board of Directors of Exabyte in
connection with its consideration of the Transaction and does not constitute a
recommendation to any Exabyte shareholder as to how such shareholder should vote
on the Transaction. This opinion may not be published or referred to, in whole
or part, without our prior written permission, which shall not be unreasonably
withheld. Broadview hereby consents to references to and the inclusion of this
opinion in its entirety in the Proxy Statement to be distributed to Exabyte
shareholders in connection with the Transaction.
Sincerely,
BROADVIEW INTERNATIONAL LLC
APPENDIX C
August 21, 2001
PERSONAL AND CONFIDENTIAL
The Board of Directors
Ecrix Corporation
5525 Central Ave.
Boulder, CO 80301
Gentlemen:
You have requested our opinion as to the fairness, from a financial point
of view, to Ecrix Corporation (the "Company") of the consideration to be
received by the Company in connection with a proposed merger (the "Transaction")
with Exabyte Corporation ("Exabyte"), pursuant to the Agreement and Plan of
Merger (the "Agreement") dated as of August 21, 2001. Under the terms and
conditions of the Agreement, holders of the capital stock of the Company will
receive merger consideration of 10,000,000 shares of Exabyte common stock at the
date of closing registered under the Securities Act of 1933, as amended. The
common stock to be paid in the Transaction and pursuant to the Agreement is
herein referred to as the "Merger Consideration."
The Wallach Company, a division of McDonald Investments, Inc., as part of
its investment banking business, is customarily engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. McDonald Investments will not receive compensation related to the
successful completion of the Transaction.
In connection with rendering this opinion, we have reviewed and analyzed,
among other things, the following:
(i) the Agreement, including the exhibits and schedules thereto;
(ii) reviewed the Company's FY 2000 & FY 2001 audited financial
statements, year-to-date unaudited financial statements;
(iii) reviewed financial projections provided by the Company's
management;
(iv) interviewed members of the Company's management who are familiar
with the operations and capabilities of the Company and Exabyte;
(v) interviewed members of Exabyte's management who are familiar with
the operations and capabilities of the Company and Exabyte;
(vi) reviewed certain terms and conditions of the contemplated
transaction, including but not limited to the purchase price and terms of
the offer;
(vii) reviewed publicly available data on companies deemed comparable
to the Company;
(viii) compared the business profile, financial strength, financial
performance, potential growth, size and risk of the Company to that of
comparable companies;
(ix) reviewed publicly available data on precedent merger
transactions, where the Company was deemed to be comparable to the
subsidiaries by size or industry;
(x) compared the business profile, financial strength, financial
performance, potential growth and risk of the Company to that of precedent
merger transaction target companies;
(xi) reviewed certain financial projections of the Company, as
provided by the Company management for fiscal years 2002-2003;
(xii) reviewed certain financial projections of Exabyte, as provided
by Exabyte management for fiscal years 2001-2002;
Ecrix Corporation
August 21, 2001
Page 2
(xiii) based on the Company management's estimates for the Company and
Exabyte management's estimates for Exabyte, modeled the potential
accretion/dilution on the projected earnings per share of Exabyte;
(xiv) examined the current equity market valuation of Exabyte and the
implied relative valuation of Exabyte;
(xv) certain publicly available information concerning the trading of,
and the trading market for, the Exabyte's Common Stock;
(xvi) reviewed independent studies on equity market size discounts and
control premiums; and,
(xvii) performed such additional review and analysis as TWC deemed
appropriate.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided us or publicly available and have assumed and relied upon
the representations and warranties of the Company in the Agreement. We have not
been engaged to, and have not independently attempted to, verify any of such
information. We have also relied upon the management of the Company as to the
reasonableness and achievability of the financial and operating projections (and
the assumptions and bases therefor) provided to us and, with your consent, we
have assumed that such projections, reflect the best currently available
estimates and judgments of management of the Company. We have not been engaged
to assess the reasonableness or achievability of such projections or the
assumptions on which they were based. In addition, we have not conducted a
physical inspection or appraisal of any of the assets, properties or facilities
of either the Company or Exabyte, nor have we been furnished with any such
evaluation or appraisal. Furthermore, we have assumed that the Transaction will
be completed on a timely in accordance with its terms and pursuant to the
Agreement.
It should be noted that this opinion is based on economic and market
conditions and other circumstances existing on, and information made available
as of, the date hereof and does not address any matters subsequent to such date.
In addition, our opinion is, in any event, limited to the fairness, as of the
date hereof, from a financial point of view, of the consideration to be received
by the Company pursuant to the Transaction and does not address the Company's
underlying business decision to effect the Transaction. It should be noted that
although subsequent developments may affect this opinion, we do not have any
obligation to update, revise or reaffirm our opinion.
In the ordinary course of our business, we may actively trade securities of
Exabyte for our own account and for the accounts of customers and, accordingly,
may at any time hold a long or short position in such securities.
It is understood that this opinion was prepared solely for the confidential
use of the Company and may not be disclosed, summarized, excerpted from or
otherwise publicly referred to without our prior written consent.
Based on our analysis of the foregoing, the assumptions described above and
upon such other factors we deem relevant, it is our opinion that, as of the date
hereof, the Merger Consideration is fair to the Company from a financial point
of view.
Very truly yours,
The Wallach Company,
a Division of McDonald Investments
Inc.
APPENDIX D
FORM OF AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION
CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION
OF EXABYTE CORPORATION
(A DELAWARE CORPORATION)
Exabyte Corporation, a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), hereby certifies as follows:
FIRST: The name of the Corporation is Exabyte Corporation. The
original Certificate of Incorporation of the Corporation was filed on July
29, 1987, and amended by the Certificates of Amendment filed on December
10, 1987, April 22, 1988, and amended and restated in its entirety on
September 6, 1989.
SECOND: Pursuant to Section 242(b) of the Delaware General Corporation
Law (the "DGCL") the Board of Directors of the Corporation has duly
adopted, and a majority of the outstanding stock entitled to vote thereon
and a majority of the outstanding stock of each class entitled to vote as a
class has approved, the amendments to the Restated Certificate of
Incorporation of the Corporation set forth in this Certificate of
Amendment.
THIRD: Pursuant to Section 242 of the DGCL, the first paragraph of
Article Fourth of the Restated Certificate of Incorporation is hereby
amended to read as follows:
The total number of shares of all classes of stock which the Corporation
shall have authority to issue is (i) 100,000,000* shares of Common
Stock, $0.001 par value per share ("Common Stock") and (ii) 30,000,000*
shares of Preferred Stock, $0.001 par value per share ("Preferred
Stock").
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its duly authorized officer this day of
, 2001, and the foregoing facts stated herein are true and correct.
EXABYTE CORPORATION
By:
------------------------------------
Name: William L. Marriner
Title: President and Chief
Executive Officer
---------------
* The Exabyte stockholders will consider separately whether to increase the
authorized common stock and whether to increase the authorized preferred stock.
The authorized common stock will be 50,000,000 shares unless the increase is
approved by stockholders. The authorized preferred stock will be 14,000,000
unless the increase is approved by stockholders.
D-1
APPENDIX E
FORM OF AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION
RESOLVED, that the stockholders of Exabyte Corporation hereby approve the
amendment to the Restated Certificate of Incorporation stated below, that by
approving this amendment the stockholders approve the combination of any number
of shares of common stock in the range of no change to up to one-for-ten shares
of Exabyte common stock, that the Certificate of Amendment filed with the
Delaware Secretary of State only include that ratio for the combination
determined by the Exabyte Board of Directors within that range, and that the
Board of Directors is authorized so to implement the combination at any time
before May 15, 2002;
FURTHER RESOLVED, that any time prior to effectiveness of the amendment,
without further action by the stockholders, the Board of Directors may abandon
the amendment or any part thereof authorizing a combination of shares of common
stock on the basis which the Board of Directors determines is in the best
interest of Exabyte and its stockholders.
CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE
OF INCORPORATION OF EXABYTE CORPORATION
(A DELAWARE CORPORATION)
Exabyte Corporation, a corporation organized and existing under the laws of
the State of Delaware (the "Corporation"), hereby certifies as follows:
FIRST: The name of the Corporation is Exabyte Corporation. The
original Certificate of Incorporation of the Corporation was filed on July
29, 1987, and amended by the Certificates of Amendment filed on December
10, 1987, April 22, 1988, and amended and restated in its entirety on
September 6, 1989.
SECOND: Pursuant to Section 242(b) of the Delaware General Corporation
Law (the "DGCL") the Board of Directors of the Corporation has duly
adopted, and a majority of the outstanding stock entitled to vote thereon
and a majority of the outstanding stock of each class entitled to vote as a
class has approved, the amendments to the Restated Certificate of
Incorporation of the Corporation set forth in this Certificate of
Amendment.
THIRD: Pursuant to Section 242 of the DGCL, the first paragraph of
Article Fourth of the Restated Certificate of Incorporation is hereby
amended by adding the following sentences at the end of such paragraph:
Effective at 4:30 p.m. Eastern Time on the date of filing the
Certificate of Amendment containing this provision with the Delaware
Secretary of State, every ( ) outstanding shares of
Common Stock of the Corporation will be combined into and automatically
become one (1) outstanding share of Common Stock of the Corporation (the
"Reverse Split") and the authorized shares of the Corporation shall
remain as set forth in the preceding sentences. No fractional share
shall be issued in connection with the Reverse Split; all shares of
Common Stock that are held by a stock holder will be aggregated
subsequent to the Reverse Split and each fractional share resulting from
such aggregation held by a stockholder shall be cancelled. In lieu of
any interest in a fractional share to which a stockholder would
otherwise be entitled as a result of the Reverse Split, such holder
shall be entitled to receive a cash amount equal to the value of such
fractional share based on the closing trading price of the Common Stock
as of the effective date of the Reverse Split.
E-1
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its duly authorized officer this day of
, 2001, and the foregoing facts stated herein are true and correct.
EXABYTE CORPORATION
By:
------------------------------------
Name: William L. Marriner
Title: President and Chief
Executive Officer
E-2
APPENDIX F
DELAWARE APPRAISAL RIGHTS STATUTE
SEC. 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to sec. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec. 251 (other than a merger effected pursuant to
sec. 251(g) of this title), sec. 252, sec. 254, sec. 257, sec. 258, sec. 263 or
sec. 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec. 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
F-1
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228
or sec. 253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated
F-2
therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day
next preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has
F-3
submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
F-4
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 5 of the restated certificate of incorporation of Exabyte provides
that to the fullest extent permitted under the Delaware General Corporation Law
(the "DGCL"), a director of Exabyte shall not be personally liable to Exabyte or
its stockholders for monetary damages for breach of fiduciary duty as a
director.
Section 102(b)(7) of the DGCL provides that a corporation may eliminate or
limit the personal liability of a director (or certain persons who, pursuant to
the provisions of the certificate of incorporation, exercise or perform duties
conferred or imposed upon directors by the DGCL) to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
provided that such provision shall not eliminate or limit the liability of a
director:
- for any breach of the director's duty of loyalty to the corporation or
its stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the DGCL (providing for liability of directors for
unlawful payment of dividends or unlawful stock purchases or redemptions);
or
- for any transaction from which the director derived an improper personal
benefit.
Article 5 of the By-laws of Exabyte provides that to the fullest extent
permitted under the DGCL, Exabyte will indemnify its directors and executive
officers, including the advancement of expenses. The By-laws provide, however,
that Exabyte is not required to indemnify any director or executive officer in
connection with any proceeding initiated by such person against Exabyte or its
directors, officers, employees or agent, unless such indemnification is
expressly required by law, the proceeding was authorized by the Board of
Directors or such indemnification is provided by Exabyte in its sole discretion.
Article 5 of the By-laws further authorizes Exabyte to indemnify its other
officers, employees and other agents as set forth in the DGCL.
Section 145 of the DGCL provides that a corporation may indemnify directors
and officers as well as other employees and individuals against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement in
connection with specified actions, suits or proceedings, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the corporation -- a "derivative action"), if they acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation and, with respect to any criminal action or
proceedings, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) actually
and reasonably incurred in connection with the defense or settlement of such
action, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification has been found liable
to the corporation. The statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, by-laws,
disinterested director vote, stockholder vote, agreement or otherwise.
Exabyte also has obtained insurance policies which provide coverage for
Exabyte's directors and officers in certain situations, including some
situations where Exabyte cannot directly indemnify the directors or officers.
In addition, Exabyte has entered into contractual agreements with its
directors and executive officers whereby it has agreed to indemnify them against
any expenses, amounts paid in settlement or other amounts incurred by such
directors or officers by reason of the fact that he was a director or officer,
respectively, of Exabyte.
II-1
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibit Index
<Table>
<Caption>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
2.1 Agreement and Plan of Merger among Exabyte Corporation,
Bronco Acquisition, Inc., Ecrix Corporation, Certain
Lenders, and Certain Investors, Dated as of August 22, 2001
(13)
3.1 Restated Certificate of Incorporation of Exabyte. (1)
3.2 Certificate of Designation of Series G Convertible Preferred
Stock. (12)
3.3 By-laws of Exabyte, as amended (2)
3.4 Amendment Number 1 to Amended By-laws (12)
3.5 Form of Certificate of Designation of Series H Convertible
Preferred Stock (13)
4.1 Article 4 of the Restated Certificate of Incorporation
(included in Exhibit 3.1)
4.2 Article 1 of the By-laws of Exabyte, as amended (included in
Exhibit 3.3)
4.3 Specimen stock certificate of Exabyte (13)
4.4 Form of Right Certificate (9)
5 Opinion of Holland & Hart LLP re legality of securities
being registered (13)
**10.1 Incentive Stock Plan, as amended and restated on January 16,
1997 (5)
**10.2 Form of Stock Option Agreement used in connection with the
Incentive Stock Plan (8)
**10.3 1990 Employee Stock Purchase Plan (4)
**10.4 Employee Stock Purchase Plan Offering used in connection
with the 1990 Employee Stock Purchase Plan (3)
**10.5 Form of participation agreement used in connection with the
1990 Employee Stock Purchase Plan (3)
**10.6 1997 Non-officer Stock Option Plan, as amended and restated
on January 19, 2001 (10)
**10.7 Form of Stock Option Agreement used in connection with the
1997 Non-Officer Stock Option Plan (7)
**10.8 Form of Indemnification Agreement entered into by Exabyte
with each director and executive officer of Exabyte (12)
**10.9 2001 Officer Bonus Plan (12)
10.10 Rights Agreement, dated January 24, 1991, between Exabyte
and The First National Bank of Boston, as Rights Agent (9)
10.11 Amendment to the Rights Agreement, dated August 4, 1995,
between Exabyte and The First National Bank of Boston as
Rights Agent (9)
10.12 Second Amendment to the Rights Agreement, dated February 1,
2001, between Exabyte and Fleet National Bank N.A. (f/k/a
The First National Bank of Boston), as Rights Agent (9)
10.13 Third Amendment to the Rights Agreement, dated August 22,
2001, between Exabyte and Fleet National Bank (f/k/a The
First National Bank of Boston), as Rights Agent (13)
*10.14 Development Agreement, dated March 1, 2001, among Hitachi
Digital Media Products Division of Hitachi, Ltd. and Exabyte
Corporation (12)
*10.15 Manufacturing and Purchase Agreement, dated March 1, 2001,
among Nihon Exabyte Corporation and Exabyte Corporation (12)
</Table>
II-2
<Table>
<Caption>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.16 8mm Mechanical Components Purchase Agreement, dated December
11, 1996, among Hitachi Ltd. Electronic Sales Office,
Exabyte Corporation and Nihon Exabyte Corporation. (6)
10.17 Loan and Security Agreement, dated as of May 16, 2000 ("Line
of Credit"), between Exabyte and Congress Financial
Corporation (Southwest), a subsidiary of First Union
National Bank ("Congress Financial") (11)
10.18 First Amendment to Loan and Security Agreement between
Exabyte and Congress Financial, dated as of September 29,
2000 (13)
10.19 Second Amendment to Loan and Security Agreement between
Exabyte and Congress Financial dated as of February 7, 2001
(12)
10.20 Third Amendment to Loan and Security Agreement, Waiver and
Consent, between Exabyte and Congress Financial dated August
22, 2001 (13)
10.21 Loan and Security Agreement between Exabyte and certain
lenders, dated August 22, 2001 (13)
10.22 Form of Notes (13)
10.23 Subordination and Intercreditor Agreement between Exabyte,
Congress Financial, and other investors, dated August 22,
2001 (13)
10.24 Exabyte Purchase Agreement between the Company and Singapore
Shinei Sangyo PTE, Ltd., dated February 3, 1999 (13)
10.25 Amendment #A01 to Purchase Agreement between the Company and
Singapore Shinei Sangyo, dated January 24, 2001 (13)
10.26 Supplier Managed Inventory Agreement between the Company and
Singapore Shinei Sangyo, dated January 24, 2001 (13)
10.27 Letter Agreement, dated as of September 20, 2001, among the
Company and Juan A. Rodriguez regarding investment in the
Company's Series H Convertible Preferred Stock (13)
**10.28 Form of Severance Agreement entered into among the Company
and its executive officers (13)
*10.29 Joint Development Agreement between Aiwa Co. Ltd. ("Aiwa")
and Ecrix Corporation ("Ecrix") dated December 4, 1997 (13)
*10.30 Manufacturing & Supply Agreement between Aiwa and Ecrix,
dated March 31, 1999 (13)
*10.31 Letter Agreement regarding Defiant Chips between Aiwa and
Ecrix, dated September 21, 2000 (13)
*10.32 Memorandum of Understanding between Aiwa and Ecrix, dated
August 9, 2001 (13)
10.33 Lease Agreement between Industrial Housing Company LLC and
Ecrix, dated December 14, 1998, as amended (13)
10.34 Lease Agreement between Cottonwood Farms Ltd. and Ecrix,
dated September 7, 1999, as amended (13)
10.35 Lease between Boulder Walnut LLC and Exabyte Corporation,
dated October 1, 1999 (13)
10.36 Lease between Eastpark Associates, Ltd. and Exabyte
Corporation, dated May 8, 1992 (13)
10.37 Lease between Boulder 38(th) LLC and Exabyte Corporation,
dated October 1, 1999 (13)
</Table>
II-3
<Table>
<Caption>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.38 Lease Agreement between Eastpark Technology Center, Ltd. and
Exabyte Corporation, dated December 9, 1991 (13)
*10.39 Aiwa's Response between Aiwa and Ecrix, dated December 9,
1998 (13)
10.40 Clarification of Aiwa's Response between Aiwa and Ecrix,
dated December 28, 1998 (13)
10.41 Letter Agreement regarding Modification of Defiant Chips
between Aiwa and Ecrix, dated September 21, 2000 (13)
*10.42 Aiwa-Ecrix Summary of Agreed Points between Aiwa and Ecrix,
dated December 20, 2000 (13)
10.43 Amendment to Lease between Cottonwood Land and Farms, Ltd.
and Ecrix Corporation, dated April 15, 2000 (13)
10.44 Form of Registration Rights Agreement among the Company and
holders of Series H Convertible Preferred Stock (13)
21.1 List of Subsidiaries (13)
23.1 Consent of PricewaterhouseCoopers LLP for Exabyte
23.2 Consent of Holland & Hart LLP (contained in Exhibit 5)
23.3 Consent of Broadview International, LLC (13)
23.4 Consent of The Wallach Company/McDonald Investments, Inc.
(13)
23.5 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (13)
99.1 Consent of Juan A. Rodriguez (13)
99.2 Consent of G. Jackson Tankersley, Jr. (13)
99.3 Consent of William J. Almon, Sr. (13)
99.4 Form of Proxy Card (13)
</Table>
---------------
* Certain portions of this exhibit have been omitted pursuant to a request
for confidential treatment thereof by the Company.
** Indicates management contracts or compensation plans or arrangements filed
pursuant to Item 601(b)(10) of Regulation S-K.
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-30941) filed with the Securities and Exchange
Commission (the "SEC") on September 8, 1989 or Amendments Nos. 1 and 2
thereto (filed on October 12, 1989 and October 16, 1989 respectively), and
incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Annual Report on Form 10-K, filed with
SEC on March 17, 1995 and amended on March 24, 1995, and incorporated
herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-8
(Registration No. 33-33414), as filed with the SEC on February 9, 1990 and
incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Report on Form S-8 (Registration No.
333-09279), as filed with the SEC on July 31, 1996 and incorporated herein
by reference.
(5) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q, filed
with the SEC on November 12, 1997 and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K, filed with
the SEC on March 20, 1997, and incorporated herein by reference.
(7) Filed as an Exhibit to the Company's Report on Form S-8 (Registration No.
333-31384), as filed with the SEC on March 1, 2000 and incorporated herein
by reference.
II-4
(8) Filed as an Exhibit to the Company's Annual Report on Form 10-K, filed with
the SEC on March 25, 1998, and incorporated herein by reference.
(9) Filed as an Exhibit to Amendment Number 2 to the Company's Form 8A, filed
as of February 15, 2001 and incorporated herein by reference.
(10) Filed as an Exhibit to the Company's Report on Form S-8 (Registration No.
333-67464), filed with the SEC on August 14, 2001 and incorporated herein
by reference.
(11) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q, filed
with the SEC on May 16, 2000 and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Annual Report on Form 10-K, filed with
the SEC on April 27, 2001 and incorporated herein by reference.
(13) Previously filed.
II-5
(b) Financial Statement Schedules
EXABYTE CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(In thousands)
<Table>
<Caption>
COL. A COL. B COL. C(A) COL. D COL. E
BALANCE CHARGED COL. C(B) BALANCE
AT TO COSTS CHARGED AT END
BEGINNING AND TO OTHER OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTION PERIOD
---------------------------------------------------------
Description
Year Ended January 2, 1999:
Allowance for doubtful accounts $ 1,016 $ (713) $ -- $ 330(1) $ 633
Reserves for sales programs 6,730 -- 11,510 (11,043)(2) 7,197
Inventory valuation reserves 18,868 (1,752) -- (8,690)(3) 8,426
---------------------------------------------------------
$26,614 $(2,465) $11,510 $(19,403) $16,256
=========================================================
Year Ended January 1, 2000:
Allowance for doubtful accounts $ 633 $ (430) $ -- $ 442(1) $ 645
Reserves for sales programs 7,197 -- 7,580 (7,567)(2) 7,210
Inventory valuation reserves 8,426 3,612 -- (2,469)(3) 9,569
Deferred tax asset valuation
reserve -- 17,529 -- -- 17,529
---------------------------------------------------------
$16,256 $20,711 $ 7,580 $ (9,594) $34,953
=========================================================
Year Ended December 30, 2000:
Allowance for doubtful accounts $ 645 $ (228) $ -- $ 253(1) $ 670
Reserves for sales programs 7,210 -- 7,158 (7,625)(2) 6,743
Inventory valuation reserves 9,569 (225) -- (2,043)(3) 7,301
Deferred tax asset valuation
reserve 17,529 53,219 -- -- 70,748
---------------------------------------------------------
$34,953 $52,766 $ 7,158 $ (9,415) $85,462
=========================================================
</Table>
---------------
(1) Accounts written off, net of recoveries.
(2) Net credits issued to customers for sales programs.
(3) Use of inventory reserves against inventory.
(c) Reports, Opinions and Appraisals
The opinion of Broadview International LLC has been filed as Appendix B to
the prospectus which forms a part of this Registration Statement on Form S-4.
The opinion of The Wallach Company/McDonald Investments, Inc. has been
filed as Appendix B to the prospectus which forms a part of this Registration
Statement on Form S-4.
ITEM 22. UNDERTAKINGS
1. The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
II-6
2. The registration undertakes that every prospectus (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment 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.
3. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
4. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-4 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boulder, State of Colorado, on this 9th day of
October, 2001.
EXABYTE CORPORATION
By: /s/ Stephen F. Smith
------------------------------------
Name: Stephen F. Smith
Title: Vice President, Chief Financial
Officer, General Counsel &
Secretary (Principal Financial
and Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
/s/ William L. Marriner Chairman, President and Chief October 9, 2001
----------------------------------------------------- Executive Officer (Principal
William L. Marriner Executive Officer)
/s/ Stephen F. Smith Vice President, Chief October 9, 2001
----------------------------------------------------- Financial Officer, General
Stephen F. Smith Counsel
* Director October 9, 2001
-----------------------------------------------------
Peter D. Behrendt
* Director October 9, 2001
-----------------------------------------------------
Stephen C. Johnson
* Director October 9, 2001
-----------------------------------------------------
A. Laurence Jones
* Director October 9, 2001
-----------------------------------------------------
Thomas E. Pardun
* Director October 9, 2001
-----------------------------------------------------
Ralph Z. Sorenson
*By /s/ William L. Marriner
-----------------------------------------------------
By Power of Attorney
</Table>
II-8
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
2.1 Agreement and Plan of Merger among Exabyte Corporation,
Bronco Acquisition, Inc., Ecrix Corporation, Certain
Lenders, and Certain Investors, Dated as of August 22, 2001
(13)
3.1 Restated Certificate of Incorporation of Exabyte. (1)
3.2 Certificate of Designation of Series G Convertible Preferred
Stock. (12)
3.3 By-laws of Exabyte, as amended (2)
3.4 Amendment Number 1 to Amended By-laws (12)
3.5 Form of Certificate of Designation of Series H Convertible
Preferred Stock (13)
4.1 Article 4 of the Restated Certificate of Incorporation
(included in Exhibit 3.1)
4.2 Article 1 of the By-laws of Exabyte, as amended (included in
Exhibit 3.3)
4.3 Specimen stock certificate of Exabyte (13)
4.4 Form of Right Certificate (9)
5 Opinion of Holland & Hart LLP re legality of securities
being registered (13)
**10.1 Incentive Stock Plan, as amended and restated on January 16,
1997 (5)
**10.2 Form of Stock Option Agreement used in connection with the
Incentive Stock Plan (8)
**10.3 1990 Employee Stock Purchase Plan (4)
**10.4 Employee Stock Purchase Plan Offering used in connection
with the 1990 Employee Stock Purchase Plan (3)
**10.5 Form of participation agreement used in connection with the
1990 Employee Stock Purchase Plan (3)
**10.6 1997 Non-officer Stock Option Plan, as amended and restated
on January 19, 2001 (10)
**10.7 Form of Stock Option Agreement used in connection with the
1997 Non-Officer Stock Option Plan (7)
**10.8 Form of Indemnification Agreement entered into by Exabyte
with each director and executive officer of Exabyte (12)
**10.9 2001 Officer Bonus Plan (12)
10.10 Rights Agreement, dated January 24, 1991, between Exabyte
and The First National Bank of Boston, as Rights Agent (9)
10.11 Amendment to the Rights Agreement, dated August 4, 1995,
between Exabyte and The First National Bank of Boston as
Rights Agent (9)
10.12 Second Amendment to the Rights Agreement, dated February 1,
2001, between Exabyte and Fleet National Bank N.A. (f/k/a
The First National Bank of Boston), as Rights Agent (9)
10.13 Third Amendment to the Rights Agreement, dated August 22,
2001, between Exabyte and Fleet National Bank (f/k/a The
First National Bank of Boston), as Rights Agent (13)
*10.14 Development Agreement, dated March 1, 2001, among Hitachi
Digital Media Products Division of Hitachi, Ltd. and Exabyte
Corporation (12)
*10.15 Manufacturing and Purchase Agreement, dated March 1, 2001,
among Nihon Exabyte Corporation and Exabyte Corporation (12)
10.16 8mm Mechanical Components Purchase Agreement, dated December
11, 1996, among Hitachi Ltd. Electronic Sales Office,
Exabyte Corporation and Nihon Exabyte Corporation. (6)
</Table>
<Table>
<Caption>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.17 Loan and Security Agreement, dated as of May 16, 2000 ("Line
of Credit"), between Exabyte and Congress Financial
Corporation (Southwest), a subsidiary of First Union
National Bank ("Congress Financial") (11)
10.18 First Amendment to Loan and Security Agreement between
Exabyte and Congress Financial, dated as of September 29,
2000 (13)
10.19 Second Amendment to Loan and Security Agreement between
Exabyte and Congress Financial dated as of February 7, 2001
(12)
10.20 Third Amendment to Loan and Security Agreement, Waiver and
Consent, between Exabyte and Congress Financial dated August
22, 2001 (13)
10.21 Loan and Security Agreement between Exabyte and certain
lenders, dated August 22, 2001 (13)
10.22 Form of Notes (13)
10.23 Subordination and Intercreditor Agreement between Exabyte,
Congress Financial, and other investors, dated August 22,
2001 (13)
10.24 Exabyte Purchase Agreement between the Company and Singapore
Shinei Sangyo PTE, Ltd., dated February 3, 1999 (13)
10.25 Amendment #A01 to Purchase Agreement between the Company and
Singapore Shinei Sangyo, dated January 24, 2001 (13)
10.26 Supplier Managed Inventory Agreement between the Company and
Singapore Shinei Sangyo, dated January 24, 2001 (13)
10.27 Letter Agreement, dated as of September 20, 2001, among the
Company and Juan A. Rodriguez regarding investment in the
Company's Series H Convertible Preferred Stock (13)
**10.28 Form of Severance Agreement entered into among the Company
and its executive officers (13)
*10.29 Joint Development Agreement between Aiwa Co. Ltd. ("Aiwa")
and Ecrix Corporation ("Ecrix") dated December 4, 1997 (13)
*10.30 Manufacturing & Supply Agreement between Aiwa and Ecrix,
dated March 31, 1999 (13)
*10.31 Letter Agreement regarding Defiant Chips between Aiwa and
Ecrix, dated September 21, 2000 (13)
*10.32 Memorandum of Understanding between Aiwa and Ecrix, dated
August 9, 2001 (13)
10.33 Lease Agreement between Industrial Housing Company LLC and
Ecrix, dated December 14, 1998, as amended (13)
10.34 Lease Agreement between Cottonwood Farms Ltd. and Ecrix,
dated September 7, 1999, as amended (13)
10.35 Lease between Boulder Walnut LLC and Exabyte Corporation,
dated October 1, 1999 (13)
10.36 Lease between Eastpark Associates, Ltd. and Exabyte
Corporation, dated May 8, 1992 (13)
10.37 Lease between Boulder 38(th) LLC and Exabyte Corporation,
dated October 1, 1999 (13)
10.38 Lease Agreement between Eastpark Technology Center, Ltd. and
Exabyte Corporation, dated December 9, 1991 (13)
*10.39 Aiwa's Response between Aiwa and Ecrix, dated December 9,
1998 (13)
10.40 Clarification of Aiwa's Response between Aiwa and Ecrix,
dated December 28, 1998 (13)
10.41 Letter Agreement regarding Modification of Defiant Chips
between Aiwa and Ecrix, dated September 21, 2000 (13)
</Table>
<Table>
<Caption>
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
*10.42 Aiwa-Ecrix Summary of Agreed Points between Aiwa and Ecrix,
dated December 20, 2000 (13)
10.43 Amendment to Lease between Cottonwood Land and Farms, Ltd.
and Ecrix Corporation, dated April 15, 2000 (13)
10.44 Form of Registration Rights Agreement among the Company and
holders of Series H Convertible Preferred Stock (13)
21.1 List of Subsidiaries (13)
23.1 Consent of PricewaterhouseCoopers LLP for Exabyte
23.2 Consent of Holland & Hart LLP (contained in Exhibit 5)
23.3 Consent of Broadview International, LLC (13)
23.4 Consent of The Wallach Company/McDonald Investments, Inc.
(13)
23.5 Consent of PricewaterhouseCoopers LLP
24.1 Power of Attorney (13)
99.1 Consent of Juan A. Rodriguez (13)
99.2 Consent of G. Jackson Tankersley, Jr. (13)
99.3 Consent of William J. Almon, Sr. (13)
99.4 Form of Proxy Card (13)
</Table>
---------------
* Certain portions of this exhibit have been omitted pursuant to a request
for confidential treatment thereof by the Company.
** Indicates management contracts or compensation plans or arrangements filed
pursuant to Item 601(b)(10) of Regulation S-K.
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1
(Registration No. 33-30941) filed with the Securities and Exchange
Commission (the "SEC") on September 8, 1989 or Amendments Nos. 1 and 2
thereto (filed on October 12, 1989 and October 16, 1989 respectively), and
incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Annual Report on Form 10-K, filed with
SEC on March 17, 1995 and amended on March 24, 1995, and incorporated
herein by reference.
(3) Filed as an Exhibit to the Company's Registration Statement on Form S-8
(Registration No. 33-33414), as filed with the SEC on February 9, 1990 and
incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Report on Form S-8 (Registration No.
333-09279), as filed with the SEC on July 31, 1996 and incorporated herein
by reference.
(5) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q, filed
with the SEC on November 12, 1997 and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Annual Report on Form 10-K, filed with
the SEC on March 20, 1997, and incorporated herein by reference.
(7) Filed as an Exhibit to the Company's Report on Form S-8 (Registration No.
333-31384), as filed with the SEC on March 1, 2000 and incorporated herein
by reference.
(8) Filed as an Exhibit to the Company's Annual Report on Form 10-K, filed with
the SEC on March 25, 1998, and incorporated herein by reference.
(9) Filed as an Exhibit to Amendment Number 2 to the Company's Form 8A, filed
as of February 15, 2001 and incorporated herein by reference.
(10) Filed as an Exhibit to the Company's Report on Form S-8 (Registration No.
333-67464), filed with the SEC on August 14, 2001 and incorporated herein
by reference.
(11) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q, filed
with the SEC on May 16, 2000 and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Annual Report on Form 10-K, filed with
the SEC on April 27, 2001 and incorporated herein by reference.
(13) Previously filed.