1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 26, 2001
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
PROCOM TECHNOLOGY, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 33-0268063
- --------------------------------- -------------------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
58 DISCOVERY
IRVINE, CALIFORNIA 92618
(949) 852-1000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------------
FREDERICK L. JUDD
VICE PRESIDENT, FINANCE AND GENERAL COUNSEL
PROCOM TECHNOLOGY, INC.
58 DISCOVERY
IRVINE, CALIFORNIA 92618
(949) 852-1000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
J. JAY HERRON LAIRD H. SIMONS III
TERRENCE R. ALLEN KATHERINE TALLMAN SCHUDA
O'MELVENY & MYERS LLP R. GREGORY ROUSSEL
610 NEWPORT CENTER DRIVE, SUITE 1700 FENWICK & WEST LLP
NEWPORT BEACH, CALIFORNIA 92660 TWO PALO ALTO SQUARE
(949) 760-9600 PALO ALTO, CALIFORNIA 94306
(650) 494-0600
--------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]____________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If 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. [ ]____________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
PROPOSED MAXIMUM
TITLE OF SHARES TO AGGREGATE OFFERING AMOUNT OF
BE REGISTERED PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------
Common Stock, $.01 par value.... $35,000,000 $8,750
================================================================================
(1) Estimated solely for the purpose of determining the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN
OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 26, 2001.
PROSPECTUS
2,000,000 SHARES
[PROCOM TECHNOLOGY LOGO]
COMMON STOCK
----------------
We are offering for sale up to 2,000,000 shares of our common stock;
however, we intend to sell only that number of our shares as is necessary to
raise gross proceeds of $35,000,000.
Our common stock trades on the Nasdaq National Market under the symbol
"PRCM." The last reported sale price of our common stock on January 25, 2001 was
$18.38 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------
================================================================================
PLACEMENT PROCEEDS TO
PRICE TO PUBLIC AGENT'S FEE(1) COMPANY(2)
- --------------------------------------------------------------------------------
PER SHARE
- --------------------------------------------------------------------------------
TOTAL
================================================================================
(1) We have agreed to pay to Merrill Lynch & Co., as placement agent, a fee in
connection with the arrangement of this offering, to reimburse them for
certain expenses and to indemnify them against certain liabilities,
including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $_______ payable by us.
WE ARE OFFERING THESE SHARES OF COMMON STOCK ON A BEST EFFORTS BASIS
PRINCIPALLY TO SELECTED INSTITUTIONAL INVESTORS AND STRATEGIC INVESTORS. WE HAVE
RETAINED MERRILL LYNCH & CO. TO ACT AS THE EXCLUSIVE PLACEMENT AGENT IN
CONNECTION WITH THE ARRANGEMENT OF THIS OFFERING. THE PLACEMENT AGENT IS NOT
REQUIRED TO SELL A SPECIFIC NUMBER OR DOLLAR AMOUNT OF SHARES BUT WILL USE ITS
BEST EFFORTS TO SELL ALL OF THE SHARES BEING OFFERED.
We reserve the right to withdraw, cancel, modify or reject any order
for the purchase of these shares in whole or in part for any reason. We reserve
the right to terminate this offering at any time.
MERRILL LYNCH & CO.
The date of this prospectus is , 2001.
3
TABLE OF CONTENTS
PAGE
----
Prospectus Summary..........................................
Risk Factors................................................
Forward-Looking Statements..................................
Use of Proceeds.............................................
Business....................................................
Management..................................................
Plan of Distribution........................................
Description of Capital Stock ...............................
Validity of the Shares......................................
Experts.....................................................
Where You Can Find More Information.........................
----------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED AND INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. NEITHER WE NOR THE PLACEMENT AGENT HAVE AUTHORIZED
ANY OTHER PERSON TO PROVIDE YOU WITH ANY DIFFERENT OR ADDITIONAL INFORMATION. WE
ARE OFFERING TO SELL, AND SEEKING OFFERS TO BUY, SHARES OF OUR COMMON STOCK ONLY
IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THIS PROSPECTUS MAY ONLY
BE USED WHERE IT IS LEGAL TO SELL THESE SECURITIES. THE INFORMATION IN THIS
DOCUMENT IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE
TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.
INFORMATION CONTAINED IN OUR WEB SITE DOES NOT CONSTITUTE PART OF THIS
PROSPECTUS.
This preliminary prospectus is subject to completion prior to this
offering. Among other things, this preliminary prospectus describes our company
as we currently expect it to exist at the time of this offering.
We have filed for federal trademark registration for Procom Technology,
Inc., and many of our product names. All trademarks and trade names appearing in
this prospectus are the property of their respective holders.
2
4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere, or
incorporated by reference, in this prospectus. This summary does not contain all
of the information you should consider before buying shares in this offering.
You should read the entire prospectus carefully.
OUR BUSINESS
We are a designer and provider of network data storage and access
appliances. Appliances are specialized devices that perform a specific function
within a computer network. Data storage appliances are emerging as the solution
of choice to manage the rapidly growing data storage requirements of computer
networks. These appliances provide superior performance at a lower cost than
general-purpose computers used as file servers. We have developed network
attached storage, or NAS, appliances that we believe are faster, more reliable
and easier to install and operate than similarly configured and comparably
priced appliances. We achieve these advantages by integrating into our
appliances proprietary, specialized operating system software optimized for data
storage and retrieval.
We were formed in 1987 to develop and market computer storage-related
products. We began developing NAS appliances in 1997 as a natural evolution of
our market-leading position in CD/DVD-ROM server and array appliances.
RECENT DEVELOPMENTS IN OUR BUSINESS
Since the beginning of our current fiscal year on August 1, 2000,
we have:
o Reached our goal of becoming a predominantly NAS provider. The
quarter ended October 31, 2000 was the first quarter in which a
majority of our revenues were derived from NAS products.
o Introduced our NetFORCE 3000 series of NAS appliances for
enterprises. These products combine traditional NAS benefits such as
ease of use and installation and true file sharing with other
advantages, including interoperability and high availability. The
storage capacity of this product can reach 4.3 terabytes per
rack-mount enclosure, and prices range, based on capacity and
features, from $42,000 to as high as $370,000 for a fully loaded
system.
o Focused our research and development efforts on developing product
features such as server and storage clustering and remote mirroring.
In addition, we have continued our efforts to incorporate into our
NAS products key customer preferences, including compatibility with
widely used enterprise software from providers such as Oracle and
widely used data storage management software from providers such as
Legato Systems and Veritas Software.
o Issued 480,000 shares of our common stock to acquire Scofima
Software. This acquisition provides us with content delivery
capabilities that will enable us to offer integrated solutions for
content adaptation and distribution of streaming media, as well as
optimization of Web site performance.
o Expanded our domestic sales force to include sales representatives
in a number of additional states throughout the United States. These
sales representatives will focus on developing indirect channel
sales and promoting direct end-user contact.
o Entered into an agreement with Hyundai Information Technology that
provides for Hyundai to resell our products to customers throughout
the world.
o Replaced our Finova line of credit facility with a $10.0 million
term loan/working capital facility with CIT Business Credit, closed
a $2.5 million flooring loan arrangement with IBM Credit to finance
purchases of raw materials from our vendors, and sold $15.0 million
of convertible debentures to a private investor.
CORPORATE INFORMATION
Our executive offices are located at 58 Discovery, Irvine, California
92618, and the telephone number at that address is (949) 852-1000. Our Web site
address is procom.com. The information on our Web site does not constitute part
of this prospectus.
3
5
THE OFFERING
Common stock offered by Procom Technology, Inc.......... Up to 2,000,000 shares*
Common stock to be outstanding after this offering...... 14,131,703 shares*
Use of proceeds......................................... Expand sales and
marketing organization;
increase research and
development; repay a
portion of our
outstanding debt; and
other general corporate
purposes including
working capital
Nasdaq National Market symbol........................... "PRCM"
The number of shares of our common stock to be outstanding after this
offering is based on the number of shares outstanding as of January 25, 2001. It
does not include shares issuable under our employee benefit plans or upon
exercise of our outstanding warrants or conversion of our outstanding
convertible debentures.
- ------------------
* We intend to sell only that number of our shares as is necessary to raise
gross proceeds of $35,000,000.
4
6
RISK FACTORS
Before investing in our common stock, you should be aware that there
are risks inherent in our business, including those indicated below. Additional
risks and uncertainties not presently known to us or that we currently deem
immaterial may also impair our business operations. If any of the following
risks actually occurs, our business could be harmed. In that case, the trading
price of our common stock could decline, and you might lose part or all of your
investment. You should carefully consider the following risk factors as well as
the other information in this prospectus.
COMPETING DATA STORAGE TECHNOLOGIES MAY EMERGE AS A STANDARD FOR DATA STORAGE
SOLUTIONS, WHICH COULD CAUSE GROWTH IN THE NAS MARKET NOT TO MEET OUR
EXPECTATIONS AND DEPRESS OUR STOCK PRICE.
The market for data storage is rapidly evolving. There are other
storage technologies in use, including storage area network technology, which
provide an alternative to network attached storage. We are not able to predict
how the data storage market will evolve. For example, it is not clear whether
usage of a number of different solutions will grow and co-exist in the
marketplace or whether one or a small number of solutions will be dominant and
displace the others. It is also not clear whether network attached storage
technology will emerge as a dominant or even prevalent solution. Whether NAS
becomes an accepted standard will be due to factors outside our control. If a
solution other than network attached storage emerges as the standard in the data
storage market, growth in the network attached storage market may not meet our
expectations. In such event, our growth and the price of our stock would suffer.
IF GROWTH IN THE NAS MARKET DOES NOT MEET OUR EXPECTATIONS, OUR FUTURE FINANCIAL
PERFORMANCE COULD SUFFER.
We believe our future financial performance will depend in large part
upon the continued growth in the NAS market and on emerging standards in this
market. We intend for NAS products to be our primary business. The market for
NAS products, however, may not continue to grow. Long-term trends in storage
technology remain unclear and some analysts have questioned whether competing
technologies, such as storage area networks, may emerge as the preferred storage
solution. If the NAS market grows more slowly than anticipated, or if NAS
products based on emerging standards other than those adopted by us become
increasingly accepted by the market, our operating results could be harmed.
THE REVENUE AND PROFIT POTENTIAL OF NAS PRODUCTS IS UNPROVEN, AND WE MAY BE
UNABLE TO ATTAIN REVENUE GROWTH OR PROFITABILITY FOR OUR NAS PRODUCT LINES.
NAS technology is relatively recent, and our ability to be successful
in the NAS market may be negatively affected by not only a lack of growth of the
NAS market but also the lack of market acceptance of our NAS products.
Additionally, we may be unable to achieve profitability as we transition to a
greater emphasis on NAS products.
IF WE FAIL TO SUCCESSFULLY MANAGE OUR TRANSITION TO A FOCUS ON NAS PRODUCTS, OUR
BUSINESS AND PROSPECTS WOULD BE HARMED.
We began developing NAS products in 1997. Since then, we have focused
our efforts and resources on our NAS business, and we intend to continue to do
so. We expect to continue to wind down our non-NAS product development and
marketing efforts. Net sales of our non-NAS products have been declining in
amount and as a percentage of our overall net sales, and we expect these
declines to continue. If the decline in net sales of our non-NAS products varies
significantly from our expectations, or the decline in net sales of our non-NAS
products is not substantially offset by increases in sales of our NAS products,
we may not be able to generate sufficient cash flow to fund our operations or to
develop our NAS business.
We also expect our transition to a NAS-focused business to require us
to continue:
o engaging in significant marketing and sales efforts to achieve
market awareness as a NAS vendor;
o reallocating resources in product development and service and
support of our NAS appliances;
o modifying existing and entering into new channel partner
relationships to include sales of our NAS appliances; and
o expanding and reconfiguring manufacturing operations.
5
7
In addition, we may face unanticipated challenges in implementing our
transition to a NAS-focused company. We may not be successful in managing any
anticipated or unanticipated challenges associated with this transition.
Moreover, we expect to continue to incur costs in addressing these challenges,
and there is no assurance that we will be able to generate sufficient revenues
to cover these costs. If we fail to successfully implement our transition to a
NAS-focused company, our business and prospects would be harmed.
OUR AGREEMENT WITH HEWLETT-PACKARD COMPANY MAY NOT GENERATE SIGNIFICANT NET
SALES.
We believe our relationship with Hewlett-Packard Company is an
important element of our strategy to increase penetration in the NAS market.
However, Hewlett-Packard has not currently made significant purchase commitments
for our products, and there is no minimum purchase commitment under our
agreement with Hewlett-Packard. We do not currently, and may never, generate
significant net sales under this agreement. The Hewlett-Packard agreement has a
five-year term, and there is no assurance that the agreement can or will be
renewed.
IF WE FAIL TO INCREASE THE NUMBER OF DIRECT AND INDIRECT SALES CHANNELS FOR OUR
NAS PRODUCTS, OUR ABILITY TO INCREASE NET SALES MAY BE LIMITED.
In order to grow our business, we will need to increase market
awareness and sales of our NAS appliances. To achieve these objectives, we
believe it will be necessary to increase the number of our direct and indirect
sales channels. We plan to significantly increase the number of our direct sales
personnel. However, there is intense competition for these professionals, and we
may not be able to attract and retain sufficient new sales personnel.
We also plan to expand revenues from our indirect sales channels,
including distributors, VARs, OEMs and systems integrators. To do this, we will
need to modify and expand our existing relationships with these indirect channel
partners, as well as enter into new indirect sales channel relationships. We may
not be successful in accomplishing these objectives. If we are unable to expand
our direct or indirect sales channels, our ability to increase revenues may be
limited.
BECAUSE WE DO NOT HAVE EXCLUSIVE RELATIONSHIPS WITH OUR DISTRIBUTORS OR
RESELLERS, THESE CUSTOMERS MAY GIVE HIGHER PRIORITY TO PRODUCTS OF COMPETITORS,
WHICH COULD HARM OUR OPERATING RESULTS.
Our distributors and resellers generally offer products of several
different companies, including products of our competitors. Accordingly, these
distributors and resellers may give higher priority to products of our
competitors, which could harm our operating results. In addition, our
distributors and resellers often demand additional significant selling
concessions and inventory rights, such as limited return rights and price
protection. We cannot assure you that sales to our distributors or resellers
will continue, or that these sales will be profitable.
BECAUSE OF OUR LIMITED OPERATING HISTORY IN THE NAS MARKET, WHICH IS NEW AND
RAPIDLY EVOLVING, OUR HISTORICAL FINANCIAL INFORMATION IS OF LIMITED VALUE IN
PROJECTING OUR FUTURE OPERATING RESULTS OR PROSPECTS.
We have been manufacturing and selling our NAS products for only
approximately three years. For the year ended July 31, 2000 and the quarter
ended October 31, 2000, these products accounted for less than 41% and 59%,
respectively, of our total net sales. We expect sales of our NAS products to
represent an increasing percentage of our net sales in the future. Because of
our limited operating history in the NAS product market, as well as the rapidly
evolving nature of the NAS market, it is difficult to evaluate our business or
our prospects. In particular, our historical financial information is of limited
value in projecting our future operating results.
OUR MARKETS ARE INTENSELY COMPETITIVE, AND IF WE ARE UNABLE TO COMPETE
EFFECTIVELY, WE MAY LOSE MARKET SHARE OR BE REQUIRED TO REDUCE PRICES.
The markets in which we operate are intensely competitive and
characterized by rapidly changing technology. Increased competition could result
in price reductions, reduced gross margins or loss of market share, any of which
could harm our operating results. We compete with other NAS companies,
direct-selling storage providers and smaller vendors that provide storage
solutions to end-users. In our non-NAS markets, we compete with computer
manufacturers that provide storage upgrades for their own products, as well as
with manufacturers of hard drives, CD servers and arrays and storage upgrade
products. Many of our current and potential competitors have longer operating
histories, greater name recognition, larger customer bases and greater
financial, technical, marketing and other resources than we do. As a result,
they may be
6
8
able to respond more quickly to new or emerging technologies and changes in
customer requirements, devote greater resources to the development, promotion,
sale and support of their products, and reduce prices to increase market share.
In addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties. Accordingly,
it is possible that new competitors or alliances among competitors may emerge
and rapidly acquire significant market share. We may not be able to compete
successfully against current or future competitors. In addition, new
technologies may increase competitive pressures.
WE DEPEND ON A FEW CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR NET SALES AND
ACCOUNTS RECEIVABLE, AND CHANGES IN THE TIMING AND SIZE OF THESE CUSTOMERS'
ORDERS MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE.
Three customers accounted for approximately 42% and 45% of our total
accounts receivable at July 31, 1999 and July 31, 2000, respectively, and one
individual customer accounted for approximately 9% and 7% of our net sales for
fiscal 1999 and 2000, respectively. One customer accounted for approximately 25%
of our net sales for the quarter ended October 31, 2000, and three customers
accounted for approximately 61% of our total accounts receivable at October 31,
2000. In fiscal 1999 and 2000, we sold our non-NAS products principally to
distributors and master resellers such as Ingram Micro, Tech Data, Custom Edge
(previously Inacom) and Compucom. Unless and until we diversify and expand our
customer base for NAS products, our future success will depend to a large extent
on the timing and size of future purchase orders, if any, from these customers.
If we lose a major customer, or if one of our customers significantly reduces
its purchasing volume or experiences financial difficulties and is unable to pay
its debts, our results of operations could be harmed. We cannot be certain that
customers that have accounted for significant revenues in past periods will
continue to purchase our products in future periods or that we will be able to
develop new customers to replace any revenues not obtained from sales to these
major customers.
OUR GROSS MARGINS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST AND MAY CONTINUE TO
FLUCTUATE SIGNIFICANTLY, THEREBY HARMING OUR RESULTS OF OPERATIONS.
Historically, our gross margins have fluctuated significantly. Our
gross margins vary significantly by product line and distribution channel, and,
therefore, our overall gross margin varies with the mix of products we sell. Our
markets are characterized by intense competition and declining average unit
selling prices over the course of the relatively short life cycles of individual
products. For example, we derive a significant portion of our sales from disk
drives, CD servers and arrays, and storage upgrade products. The market for
these products is highly competitive and subject to intense pricing pressures.
Sales of disk drive upgrade systems generally generate lower gross margins than
those of our NAS products. If we fail to increase sales of our NAS appliances,
we believe our overall gross margins will continue to decline.
Our gross margins have been and may continue to be affected by a
variety of other factors, including:
o new product introductions and enhancements;
o competition;
o changes in the distribution channels we use;
o the mix and average selling prices of products; and
o the cost and availability of components and manufacturing labor.
IF WE ARE UNABLE TO INTRODUCE NEW PRODUCTS, OR IF OUR PRODUCTS FAIL TO KEEP PACE
WITH TECHNOLOGICAL CHANGES IN THE MARKETS WE SERVE, OUR OPERATING RESULTS COULD
BE MATERIALLY ADVERSELY AFFECTED.
Our future growth will depend in large part upon our ability to
successfully develop and introduce new hardware and software for the NAS market.
Due to the complexity of products such as ours, and the difficulty in estimating
the engineering effort required to produce new products, we face significant
challenges in developing and introducing new products. We may be unable to
introduce new products on a timely basis or at all. If we are unable to
introduce new products in a timely manner, our operating results could be
harmed.
7
9
Even if we are successful in introducing new products, we may be unable
to keep pace with technological changes in our markets and our products may not
gain any meaningful market acceptance. The markets we serve are characterized by
rapid technological change, evolving industry standards, and frequent new
product introductions and enhancements that could render our products obsolete
and less competitive. As a result, our position in these markets could erode
rapidly due to changes in features and functions of competing products or price
reductions by our competitors. In order to avoid product obsolescence, we will
have to keep pace with rapid technological developments and emerging industry
standards. We may not be successful in doing so, and if we fail in this regard,
our operating results could be harmed.
WE RELY UPON A LIMITED NUMBER OF SUPPLIERS FOR SOME OF THE COMPONENTS USED IN
OUR PRODUCTS, AND ANY DISRUPTION OR TERMINATION OF THESE SUPPLY ARRANGEMENTS
COULD DELAY SHIPMENT OF OUR PRODUCTS AND HARM OUR OPERATING RESULTS.
We rely upon a limited number of suppliers of several key components
used in our products, including disk drives, computer boards, power supplies and
microprocessors. In the past, we have experienced periodic shortages, selective
supply allocations and increased prices for these and other components. We may
experience similar supply issues in the future. Even if we are able to obtain
component supplies, the quality of these components may not meet our
requirements. For example, in order to meet our product performance
requirements, we must obtain disk drives of extremely high quality and capacity.
Even a small deviation from our requirements could render any of the disk drives
we receive unusable by us. In the event of a reduction or interruption in the
supply or a degradation in quality of any of our components, we may not be able
to complete the assembly of our products on a timely basis or at all, which
could force us to delay or reduce shipments of our products. If we were forced
to delay or reduce product shipments, our operating results could be harmed. In
addition, product shipment delays could adversely affect our relationships with
our channel partners and current or future end-users.
UNDETECTED DEFECTS OR ERRORS FOUND IN OUR PRODUCTS, OR THE FAILURE OF OUR
PRODUCTS TO PROPERLY INTERFACE WITH THE PRODUCTS OF OTHER VENDORS, MAY RESULT IN
DELAYS, INCREASED COSTS OR FAILURE TO ACHIEVE MARKET ACCEPTANCE, WHICH COULD
MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.
Complex products such as those we develop and offer may contain defects
or errors, or may fail to properly interface with the products of other vendors,
when first introduced or as new versions are released. Despite internal testing
and testing by our customers or potential customers, we do, from time to time,
and may in the future encounter these problems in our existing or future
products. Any of these problems may:
o cause delays in product introductions and shipments;
o result in increased costs and diversion of development resources;
o cause us to incur increased charges due to obsolete or unusable
inventory;
o require design modifications; or
o decrease market acceptance or customer satisfaction with these
products, which could result in product returns.
In addition, we may not find errors or failures in our products until
after commencement of commercial shipments, resulting in loss of or delay in
market acceptance, which could significantly harm our operating results. Our
current or potential customers might seek or succeed in recovering from us any
losses resulting from errors or failures in our products.
IF WE ARE UNABLE TO MANAGE OUR INTERNATIONAL OPERATIONS EFFECTIVELY, OUR
OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED.
Net sales to our international customers, including export sales from
the United States, accounted for approximately 58% of our net sales for the
quarter ended October 31, 2000 as compared to 41% of our net sales for the
quarter ended October 31, 1999, 41% of our net sales for the year ended July 31,
2000 and approximately 33% of our net sales for the fiscal year ended July 31,
1999. We believe that our growth and profitability will require successful
expansion of our international operations to which we have committed significant
resources. Our international operations will expose us to operational challenges
8
10
that we would not otherwise face if we conducted our operations only in the
United States. These include:
o currency exchange rate fluctuations, particularly when we sell our
products in denominations other than U.S. dollars;
o difficulties in collecting accounts receivable and longer accounts
receivable payment cycles;
o reduced protection for intellectual property rights in some
countries, particularly in Asia;
o legal uncertainties regarding tariffs, export controls and other
trade barriers;
o the burdens of complying with a wide variety of foreign laws and
regulations; and
o seasonal fluctuations in purchasing patterns in other countries,
particularly in Europe.
Any of these factors could have an adverse impact on our existing
international operations and business or impair our ability to continue
expanding into international markets. For example, our reported sales can be
affected by changes in the currency rates in effect during any particular
period. The effects of currency fluctuations were evident in our results of
operations for the quarter ended October 31, 2000. During this quarter, the Euro
and two currencies whose values are pegged to the Euro, declined in value
significantly. Not only did this cause a foreign currency loss of approximately
$161,000, but it also caused us to report $240,000 less in sales than we would
have reported had the Euro remained constant over the quarter ended October 31,
2000.
In order to successfully expand our international sales, we must
strengthen foreign operations, hire additional personnel and recruit additional
international distributors and resellers. Expanding internationally and managing
the financial and business operations of our foreign subsidiaries will also
require significant management attention and financial resources. For example,
our foreign subsidiaries in Europe have incurred operational losses. To the
extent that we are unable to address these concerns in a timely manner, our
growth, if any, in international sales will be limited, and our operating
results could be materially adversely affected. In addition, we may not be able
to maintain or increase international market demand for our products.
OUR PROPRIETARY SOFTWARE RELIES ON OUR INTELLECTUAL PROPERTY, AND ANY FAILURE BY
US TO PROTECT OUR INTELLECTUAL PROPERTY COULD ENABLE OUR COMPETITORS TO MARKET
PRODUCTS WITH SIMILAR FEATURES THAT MAY REDUCE DEMAND FOR OUR PRODUCTS, WHICH
WOULD ADVERSELY AFFECT OUR NET SALES.
Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our proprietary software
or technology. We believe the protection of our proprietary technology is
important to our business. If we are unable to protect our intellectual property
rights, our business could be materially adversely affected. We currently rely
on a combination of copyright and trademark laws, trade secrets and a patent to
protect our proprietary rights. In addition, we generally enter into
confidentiality agreements with our employees and license agreements with
end-users and control access to our source code and other intellectual property.
We have applied for the registration of some, but not all, of our trademarks. We
have applied for several U.S. patents with respect to the design of our NetFORCE
product, and we anticipate that we will apply for additional patents. It is
possible that no patents will issue from our currently pending applications. New
patent applications may not result in issued patents and may not provide us with
any competitive advantages over, or may be challenged by, third parties. Despite
our efforts to protect our proprietary rights, unauthorized parties may attempt
to copy aspects of our products or to obtain and use information that we regard
as proprietary. In addition, the laws of some foreign countries, and the
enforcement of those laws, do not protect proprietary rights to as great an
extent as do the laws of the United States. We cannot assure you that our means
of protecting our proprietary rights will be adequate or that our competitors
will not independently develop similar technology, duplicate our products or
design around any patent issued to us or other intellectual property rights of
ours.
In addition, we may initiate claims or litigation against third parties
for infringement of our proprietary rights to establish the validity of our
proprietary rights. This litigation, whether or not it is resolved in our favor,
could result in significant expense to us and divert the efforts of our
technical and management personnel.
9
11
WE MAY FROM TIME TO TIME BE SUBJECT TO CLAIMS OF INFRINGEMENT OF OTHER PARTIES'
PROPRIETARY RIGHTS OR CLAIMS THAT OUR OWN TRADEMARKS, PATENTS OR OTHER
INTELLECTUAL PROPERTY RIGHTS ARE INVALID, AND IF WE WERE TO SUBSEQUENTLY LOSE
OUR INTELLECTUAL PROPERTY RIGHTS, OUR BUSINESS WOULD BE MATERIALLY ADVERSELY
AFFECTED.
We may from time to time receive claims that we are infringing third
parties' intellectual property rights or claims that our own trademarks, patents
or other intellectual property rights are invalid. We expect that companies in
our markets will increasingly be subject to infringement claims as the number of
products and competitors in our industry segment grows and the functionality of
products in different industry segments overlaps. The resolution of any claims
of this nature, with or without merit, could be time-consuming, result in costly
litigation, cause product shipment delays, require us to redesign our products
or require us to enter into royalty or licensing agreements, any of which could
harm our operating results. Royalty or licensing agreements, if required, might
not be available on terms acceptable to us or at all. The loss of access to any
key intellectual property right could harm our business.
OUR NET SALES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND ANY
FLUCTUATIONS COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DECLINE.
In recent periods, we have experienced significant declines in net
sales and gross profit and incurred operating losses, causing our quarterly
operating results to vary significantly. If we fail to meet the expectations of
investors or securities analysts, as well as our internal operating goals, as a
result of any future fluctuations in our quarterly operating results, the market
price of our common stock could decline significantly. Our net sales and
quarterly operating results are likely to fluctuate significantly in the future
due to a number of factors. These factors include:
o market acceptance of our new products and product enhancements or
those of our competitors;
o the level of competition in our target product markets;
o delays in our introduction of new products;
o changes in sales volumes through our distribution channels, which
have varying commission and sales discount structures;
o changing technological needs within our target product markets;
o the impact of price competition on the selling prices for our
non-NAS products, which continue to represent a majority of our net
sales;
o the availability and pricing of our product components;
o our expenditures on research and development and the cost to expand
our sales and marketing programs; and
o the volume, mix and timing of orders received.
Due to these factors, we believe that period-to-period comparisons of
our results of operations are not necessarily meaningful and should not be
relied upon as indicators of future performance. In addition, it is difficult
for us to forecast accurately our future net sales. This difficulty results from
our limited operating history in the emerging NAS market, as well as the fact
that product sales in any quarter are generally booked and shipped in that
quarter. Because we incur expenses, many of which are fixed, based in part on
our expectations of future sales, our operating results may be
disproportionately affected if sales levels are below our expectations.
Our revenues in any quarter may also be affected by product returns and
any warranty obligations in that quarter. Many of our distribution and reseller
customers have limited return rights. In addition, we generally extend
warranties to our customers that correspond to the warranties provided by our
suppliers. If returns exceed applicable reserves or if a supplier were to fail
to meet its warranty obligations, we could incur significant losses. In fiscal
2000, we experienced a 14% product return rate. This rate may vary significantly
in the future, and we cannot assure you that our reserves for product returns
will be adequate in any future period.
10
12
IF WE ARE UNABLE TO ATTRACT QUALIFIED PERSONNEL OR RETAIN OUR EXECUTIVE OFFICERS
AND OTHER KEY PERSONNEL, WE MAY NOT BE ABLE TO COMPETE SUCCESSFULLY.
Our continued success depends, in part, on our ability to identify,
attract, motivate and retain qualified technical and sales personnel.
Competition for qualified engineers and sales personnel, particularly in Orange
County, California, is intense, and we may not be able to compete effectively to
retain and attract qualified, experienced employees. Should we lose the services
of a significant number of our engineers or sales people, we may not be able to
compete successfully in our targeted markets and our business would be harmed.
We believe that our success will depend on the continued services of
our executive officers and other key employees. In particular, we rely on the
services of our four founders, Messrs. Razmjoo, Alaghband, Aydin and
Shahrestany. We maintain employment agreements with each of our founders. We do
not maintain key-person life insurance policies on these individuals. The loss
of any of these executive officers or other key employees could harm our
business.
WE MAY NOT BE ABLE TO ACHIEVE OR SUSTAIN PROFITABILITY, AND OUR FAILURE TO DO SO
COULD REQUIRE US TO SEEK ADDITIONAL FINANCING, WHICH MAY NOT BE AVAILABLE TO US
ON FAVORABLE OR ANY TERMS.
In recent periods, we have experienced significant declines in net
sales and gross profit, and we have incurred operating losses. We incurred
operating losses of $5.2 million for fiscal 1999, $12.1 million for fiscal 2000
and $1.6 million for the quarter ended October 31, 2000. We expect to continue
to incur operating losses through at least fiscal 2001. As part of our strategy
to focus on the NAS market, we plan to significantly increase our direct sales
force and to increase our investment in research and development and marketing
efforts. We will need to significantly increase our revenues from our NAS
products to achieve and maintain profitability. The revenue and profit potential
of these products is unproven. We may not be able to generate significant or any
revenues from our NAS products or achieve or sustain profitability in the
future. In addition, we have invested substantial cash in our new corporate
headquarters. If we are unable to achieve or sustain profitability in the
future, we will have to seek additional financing in the future, which may not
be available to us on favorable or any terms.
CONTROL BY OUR EXISTING SHAREHOLDERS COULD DISCOURAGE POTENTIAL ACQUISITIONS OF
OUR BUSINESS THAT OTHER SHAREHOLDERS MAY CONSIDER FAVORABLE.
Our executive officers, directors and 5% or greater shareholders and
their affiliates own 6,300,000 shares, or approximately 52% of the outstanding
shares of common stock. Assuming we sell 2,000,000 shares in this offering,
these shareholders will collectively own approximately 45% of our outstanding
shares of common stock. Acting together, these shareholders would be able to
exert substantial influence on matters requiring approval by shareholders,
including the election of directors. This concentration of ownership could have
the effect of delaying or preventing a change in our control or otherwise
discouraging a potential acquiror from attempting to obtain control of us, which
could in turn have an adverse effect on the market price of our common stock or
prevent our shareholders from realizing a premium over the market price for
their shares of common stock.
OUR MANAGEMENT HAS BROAD DISCRETION IN USING THE PROCEEDS OF THIS OFFERING, AND
THE NET PROCEEDS FROM THIS OFFERING MAY BE APPLIED TO USES THAT DO NOT INCREASE
OUR OPERATING RESULTS OR MARKET VALUE.
We expect our management to use the net proceeds from this offering to
expand our sales and marketing organization, increase research and development,
repay a portion of our outstanding debt and for other general corporate purposes
including working capital. Our management will have broad discretion in applying
most of the net proceeds of this offering, and you will not have the
opportunity, as part of your investment in our common stock, to assess whether
the proceeds are being used appropriately. The net proceeds may be used for
corporate purposes that do not increase our operating results or market value.
THE MARKET PRICE FOR OUR COMMON STOCK HAS FLUCTUATED SIGNIFICANTLY IN THE PAST
AND WILL LIKELY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD RESULT IN A DECLINE
IN YOUR INVESTMENT'S VALUE.
The market price for our common stock has been volatile in the past,
and particularly volatile in the last twelve months, and may continue to
fluctuate substantially in the future. The value of your investment in our
11
13
common stock could decline due to the impact of any of the above or of the
following factors upon the market price of our common stock:
o fluctuations in our operating results;
o fluctuations in the valuation of companies perceived by investors to
be comparable to us;
o a shortfall in net sales or operating results compared to securities
analysts' expectations;
o changes in analysts' recommendations or projections;
o announcements of new products, applications or product enhancements
by us or our competitors; and
o changes in our relationships with our suppliers or customers.
WE HAVE ISSUED CONVERTIBLE DEBENTURES, AND THE OBLIGATIONS OF THE DEBENTURES
POSE RISKS TO THE PRICE OF OUR COMMON STOCK AND OUR OPERATIONS.
On October 31, 2000, we issued $15.0 million of our three-year
convertible debentures to a private investor. See "Description of Capital Stock
- - Debentures." The debentures provide that in certain circumstances the holder
of the debentures may convert its position into our stock, or demand that we
repay amounts outstanding with cash or by issuing shares of our common stock.
The terms and conditions of the debentures pose unique and special risks to our
operations and the price of our common stock. Some of those risks are discussed
in more detail below.
OUR ISSUANCE OF STOCK UPON THE CONVERSION OR "PUT" OF THE DEBENTURES AND THE
EXERCISE OF THE WARRANTS, AS WELL AS SALES OF OUR COMMON STOCK BY THE HOLDER
OF THE DEBENTURES, MAY DEPRESS THE PRICE OF OUR COMMON STOCK AND SUBSTANTIALLY
DILUTE YOUR SHARES.
We have agreed to register for potential resale by the purchaser of our
debentures and warrants a total of 1,586,228 shares of our common stock issuable
upon exercise of those debentures and warrants. This number represents 200% of
the number of shares of our common stock issuable if the investor's warrant is
exercised in full and our debentures were to remain outstanding until their
stated maturity on October 31, 2003 and all interest on the debentures is paid
in shares of our stock. As is noted in the risk factor immediately below, if the
investor were to exercise its "put" right and we were to satisfy this right by
issuing shares of our common stock, we could be required to issue a
substantially greater number of our shares to the investor. The issuance of all
or any significant portion of these shares could result in substantial dilution
to the interests of our other shareholders and a decrease in the price of our
stock. Sales by the investor of our common stock received upon the exercise or
"put" of the debentures or upon exercise of the investor's warrant could also
cause our stock price to decline due to the additional supply of shares relative
to demand in the market. A decline in the price of our common stock could
encourage short sales of our stock, which could place further downward pressure
on the price of our stock.
THE INVESTOR HAS A RIGHT TO DEMAND REPAYMENT OF PART OR ALL OF THE DEBENTURES AT
SPECIFIED TIMES, AND IF A DEMAND FOR REPAYMENT IS MADE, AND WE ARE UNABLE OR
UNWILLING TO REPAY THE DEBENTURES IN CASH, WE MAY HAVE TO ISSUE SHARES
SUBSTANTIALLY IN EXCESS OF THOSE ORIGINALLY CONTEMPLATED, AND THOSE ADDITIONAL
SHARES WILL DILUTE YOUR SHARES.
The debentures provide the investor with a "put" right, which is the
right to demand at specified times that we repay the debentures in cash or issue
shares at 90% of the then market price for shares of our common stock, but not
more than $22.79 per share. Accordingly, if an investor exercises its "put"
right, and we are either unwilling or unable to repay the cash, and the market
price of our shares is lower than $22.79, we will have to issue shares to
satisfy the "put" right of the investor. The number of shares that we may be
required to issue to satisfy the investor's exercise of the "put" right could be
substantial. For example, if the market price of our common stock were to
decline by 75% from the market price of $11.25 per share on December 20, 2000,
which represents the lowest closing price reached by our shares since the date
the debentures were issued, we would be required to issue the investor
approximately 5,926,000 shares, which would result in the investor owning nearly
33% of our outstanding stock. See "Description of Capital Stock - Debentures."
12
14
IF OUR SHARES ARE ISSUED TO THE INVESTOR, THOSE SHARES MAY BE SOLD INTO THE
MARKET, WHICH COULD DEPRESS THE PRICE OF OUR STOCK AND ENCOURAGE SHORT SALES OF
OUR STOCK.
To the extent the debentures are converted or interest on the
debentures is paid in shares of our common stock rather than cash, a significant
number of these shares of our common stock may be sold into the market, which
could decrease the price of our common stock and encourage short sales. Short
sales could place further downward pressure on the price of our common stock. In
that case, we could be required to issue an increasingly greater number of
shares of our common stock upon future conversions of the debentures as a result
of the adjustments described above, sales of which could further depress the
price of our common stock.
THE DEBENTURES PROVIDE FOR VARIOUS EVENTS OF DEFAULT THAT WOULD ENTITLE THE
INVESTORS TO REQUIRE THE COMPANY TO REPAY THE ENTIRE AMOUNT OWED IN CASH WITHIN
THREE DAYS. IF AN EVENT OF DEFAULT OCCURS, WE MAY BE UNABLE TO IMMEDIATELY REPAY
THE AMOUNT OWED, AND ANY REPAYMENT MAY LEAVE US WITH LITTLE OR NO WORKING
CAPITAL IN OUR BUSINESS.
The debentures provide for various events of default, including the
following:
o the occurrence of an event of default under our loan agreements with
CIT Business Credit;
o our failure to pay the principal, interest or any liquidated damages
due under the debentures;
o our failure to make any payment on any indebtedness of $1 million or
more to any third party if that failure results in the acceleration
of the maturity of that indebtedness;
o an acquisition after October 31, 2000 by any individual or entity,
other than the investor and its affiliates, of more than 40% of our
voting or equity securities;
o the replacement of more than 50% of the persons serving as our
directors as of October 31, 2000, unless the replacement director or
directors are approved by our directors as of October 31, 2000 or by
successors whose nominations they have approved;
o a merger or consolidation of our company or a sale of more than 50%
of its assets unless the holders of our securities immediately prior
to such transaction continue to hold at least a majority of the
voting rights and equity interests of the surviving entity or the
acquirer of our assets;
o our entry into bankruptcy;
o our common stock fails to be listed or quoted for trading on the New
York Stock Exchange, the American Stock Exchange, the Nasdaq
National Market or the Nasdaq SmallCap Market;
o our completion of a "going private" transaction under Commission
Rule 13e-3;
o a holder of shares issuable under the debentures or the warrant is
not permitted to sell those securities under our registration
statement covering those shares for a period of five or more trading
days;
o our registration statement covering the shares of our common stock
underlying the debentures and the warrant is not declared effective
by the Commission by February 28, 2001;
o our failure to deliver certificates evidencing shares of our common
stock underlying the debentures or the warrant within five days
after the deadline specified in our transaction documents with the
investor;
o our failure to have a sufficient number of authorized but unissued
and otherwise unreserved shares of our common stock available to
issue such stock upon any exercise or conversion of the warrant and
the debentures;
o the exercise or conversion rights of the investor under the warrant
or the debentures are suspended for any reason, except as provided
in the applicable transaction documents;
13
15
o we default on specified obligations under our registration rights
agreement with the investor and fail to cure any such default within
60 days; and
o other than the specified defaults under the registration rights
agreement referred to above, we default in the timely performance of
any obligation under the transaction documents with the investor and
fail to cure any of these defaults for 20 days after we are notified
of the default.
If an event of default occurs, the investor can require us to
repurchase all or any portion of the principal amount of any outstanding
debentures at a repurchase price equal to the greater of 110% of such
outstanding principal amount, plus all accrued but unpaid interest on such
outstanding debentures through the date of payment, or the total value of all of
our shares issuable upon conversion of such outstanding debentures, valued based
on the average closing price of our common stock for the preceding five trading
days, plus any accrued but unpaid interest on such outstanding debentures. In
addition, upon an event of default under the debentures, the investor could also
require us to repurchase from the investor any of our shares of common stock
issued to the investor upon conversion of the debentures within the preceding 30
days, which would be valued at the average closing price of our common stock
over the preceding five trading days. We would be required to complete these
repurchases no later than the third trading day following the date an event of
default notice is delivered to us.
If we were required to make a default payment at a time when all of the
debentures were outstanding, the payment required would be a minimum of $16.5
million and could be substantially greater depending upon the market price of
our common stock at the time. In addition, if we default in the timely
performance of specified obligations under our registration rights agreement
with the investor, we would also be obligated to pay as liquidated damages to
the investor an amount equal to $300,000 per month until any such default is
cured.
Some of the events of default include matters over which we may have
some, little or no control, such as various corporate transactions in which the
control of our company changes, or if our common stock ceases to be listed on a
trading market. If an event of default occurs, we may be unable to repay any
part or all of the entire amount in cash. Any such repayment could leave us with
little or no working capital for our business.
THE DEBENTURES RESTRICT OUR ABILITY TO RAISE ADDITIONAL EQUITY, WITHOUT THE
CONSENT OF THE INVESTOR, WHICH COULD HINDER OUR EFFORTS TO OBTAIN ADDITIONAL
NECESSARY FINANCING TO OPERATE OUR BUSINESS, OR TO REPAY THE DEBENTURE HOLDERS.
The agreements we executed when we issued these debentures prohibit us
from obtaining additional equity or equity equivalent financing for a period of
90 trading days after the effective date of the registration statement covering
the resale of the shares issuable upon conversion of the debentures. We also
agreed that for a period of 180 trading days after the effective date of the
registration statement covering the resale of the shares issuable upon
conversion of the debentures, we would not, without the investor's consent,
obtain additional equity or equity equivalent financing unless we first offer
the investor the opportunity to provide such financing upon the terms and
conditions proposed. These restrictions have several exceptions, such as
issuances of options to employees and directors, strategic transactions and
acquisitions and bona fide public offerings with proceeds exceeding $20 million
in gross proceeds. If we are unable to raise at least $20 million in gross
proceeds from this offering, we would not be permitted to complete this offering
without the consent of the investor that purchased the debentures. We cannot
assure you that we would be able to obtain that consent. The above restrictions
may make it extremely difficult to raise additional equity capital during the
periods in which the restrictions apply. We may need to raise such additional
capital, and if we are unable to do so, we may have little or no working capital
for our business, and the market price of our stock may decline.
WE MAY BE REQUIRED TO PAY LIQUIDATED DAMAGES IF WE DO NOT OBTAIN SHAREHOLDER
APPROVAL FOR ISSUANCE OF OUR COMMON STOCK, OR IF WE ARE UNABLE TO TIMELY
REGISTER THESE SHARES.
We are subject to National Association of Securities Dealers Rule 4460,
which generally requires shareholder approval of any transaction that would
result in the issuance of securities representing 20% or more of an issuer's
outstanding listed securities. Therefore, upon conversion or the payment of
interest on debentures, we are not able to issue more than 2,322,150 shares, or
19.99% of our outstanding common stock on October 30, 2000, the day prior to the
date of issuance of the debentures. The terms of the convertible debentures
purchase agreement also provide that the investor desiring to convert has the
option of requiring us either to seek shareholder approval within 75 days of the
request or to pay the converting holder the monetary value of the debentures
that cannot be converted, at a premium to the converting holder. If the
shareholder chooses that we convert the debentures into shares and we have not
obtained the requisite shareholder approval within 75 days, we would be
obligated to pay the monetary value to the purchaser as liquidated damages.
Also, under the
14
16
terms of the Registration Rights Agreement, we will incur liquidated damages of
approximately $300,000 per month if we are unable to register the shares on or
before February 28, 2001, or maintain the registration of the shares, of common
stock issuable upon the conversion of the debentures and the exercise of those
warrants.
EVEN IF WE NEVER ISSUE OUR STOCK UPON EXERCISE OR PUT OF THE DEBENTURES OR UPON
EXERCISE OF THE INVESTOR'S WARRANTS, WE MAY ISSUE ADDITIONAL SHARES, WHICH WOULD
REDUCE YOUR OWNERSHIP PERCENTAGE AND DILUTE THE VALUE OF YOUR SHARES.
Events over which you have no control could result in the issuance of
additional shares of our common stock, which would dilute your ownership
percentage in Procom. We may issue additional shares of common stock or
preferred stock: to raise additional capital or finance acquisitions, upon the
exercise or conversion of outstanding options, warrants and shares of
convertible preferred stock, or in lieu of cash payment of dividends. For
example, on December 28, 2000, we issued 480,000 shares of our common stock to
acquire Scofima Software S.r.l. Our issuance of additional shares would dilute
your shares.
FORWARD-LOOKING STATEMENTS
Certain forward-looking statements, including statements regarding our
expected financial position, business and financing plans are contained in this
prospectus or in documents incorporated by reference in this prospectus. These
forward-looking statements reflect our views with respect to future events and
financial performance. The words "believe," "expect," "plans" and "anticipate"
and similar expressions identify forward-looking statements. Although we believe
that the expectations reflected in such forward-looking statements are
reasonable, we can give no assurance that such expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from such expectations are disclosed in this prospectus, including,
without limitation, under "Risk Factors" and in reports filed by us with the
Securities and Exchange Commission and incorporated by reference in this
prospectus, and all subsequent written and oral forward-looking statements
attributable to us are expressly qualified in their entirety by the cautionary
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of their dates. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
15
17
USE OF PROCEEDS
We estimate that our net proceeds from the sale of shares of common
stock by us in this offering will be approximately $ , after deducting
the placement agent's fee and offering expenses payable by us.
We intend to use the net proceeds from this offering as follows:
o at least $ for expanding our sales and marketing
organization;
o at least $ for research and development;
o approximately $4.1 million to repay outstanding principal and
accrued interest on our one-year term loan with CIT Business Credit,
which bears interest at the lender's prime rate plus 0.5% (9.0% at
October 31, 2000) and was used to finance the completion of our
corporate headquarters; and
o any remaining proceeds for other general corporate purposes,
including working capital and the potential repayment of additional
debt.
We may use a portion of the net proceeds to acquire or make investments
in businesses, products or technologies that we believe will complement our
current or future business. While we are currently evaluating potential
transactions and transaction prospects, we do not currently have agreements or
commitments with respect to any acquisition or investment. We will retain broad
discretion in the allocation of the net proceeds of this offering. Pending such
uses, we plan to invest the net proceeds in short-term, investment grade,
interest-bearing securities.
16
18
BUSINESS
The information presented in this section is taken from our Form 10-K
for our fiscal year ended July 31, 2000. See "Prospectus Summary -- Recent
Developments" for a brief discussion of material changes in our affairs since
the end of that fiscal year.
GENERAL
We are a designer and provider of network data storage and access
appliances. Appliances are specialized devices that perform a specific function
within the computer network. Data storage appliances are emerging as the
solution of choice to manage the rapidly growing data storage requirements of
computer networks. These appliances provide superior performance at a lower cost
than general-purpose computers used as file servers. We have developed network
attached storage, or NAS, appliances that we believe are faster, more reliable
and easier to install and operate than similarly configured and comparably
priced appliances. We achieve these advantages by integrating into our
appliances proprietary, specialized operating system software optimized for data
storage and retrieval.
We were formed in 1987 to develop and market computer storage-related
products. We began developing NAS appliances in 1997 as a natural evolution of
our market-leading position in CD/DVD-ROM server and array appliances. We
continue to sell these products, as well as storage upgrade products, such as
higher capacity disk drive upgrade kits for notebook computers. Sales of these
non-NAS products accounted for $37.8 million, or 59.8%, of net sales for fiscal
2000 and $74.4 million, or 73.4%, of our net sales for fiscal 1999. The demand
for our CD servers and arrays has declined and we have experienced increased
pricing pressures on our disk drive storage upgrade systems, resulting in lower
overall revenue in fiscal 2000. We provide a line of high-performance NAS
appliances that allows us to address the price and performance needs of our
customers. In the future, we expect NAS and related technologies to be the
principal focus of our business.
INDUSTRY OVERVIEW
Large and Growing Need for Data Storage
Companies increasingly view data as a strategic asset that creates a
competitive advantage. Continuous and rapid access to this data is critical to
managing a business effectively. The volume of data produced and stored by
businesses is growing rapidly. EMC has estimated that data storage doubles every
90 days for dot com companies, and every six months for Fortune 2000 companies.
The factors contributing to the growth in network storage requirements include:
o proliferation of e-commerce;
o new communication media such as e-mail, digital imaging and video
storage;
o widespread use of enterprise applications, including enterprise
resource planning, sales force automation, supply chain and customer
relationship management systems; and
o increasing personalization of consumer marketing and product
development.
As a result of these factors, expenditures for data storage are growing
rapidly and consuming an increasing percentage of total information technology
expenditures. IDC estimates that the worldwide storage market will grow from $29
billion in 1999 to $46 billion in 2003, a compound annual growth rate of 12.2%.
Common Solutions to Network Storage Requirements
There are several approaches to providing network data storage
capacity. These approaches include:
o General Purpose Servers. Companies can increase their data storage
capacity by adding general purpose computers as data file servers or
by attaching external storage devices directly to existing servers.
General purpose servers are designed to execute computer
applications and perform a wide variety of functions, including
providing database, electronic mail, network management, file
management and application services. They are not specifically
designed to store and retrieve files. As a result, general purpose
computers used as file servers often provide unsatisfactory file
input/output, or I/O, performance, do not support computing
platforms other than that of the server itself, and require
significant maintenance and support. Moreover, because of their
complexity, general purpose servers often cost more to purchase and
operate than other alternatives and therefore represent a poor
long-term value when used principally as storage devices.
17
19
o Storage Area Networks. A storage area network, or SAN, is a
self-contained fiber-optic network of high-speed storage devices.
While SANs may be the preferred storage solution in very large
computing environments with particular data access characteristics,
they also have a number of disadvantages. SAN installations require
significant upfront costs, and SAN systems are expensive to
maintain. Moreover, they require the implementation and maintenance
of a separate and proprietary fibre channel network, which is not
compatible with the fibre channel networks of other SAN vendors.
o Network Attached Storage. NAS appliances have been developed to
offload basic file I/O tasks from general purpose servers. NAS
appliances are designed to store and retrieve larger amounts of data
more quickly than general purpose servers. Freed of all hardware and
operating system elements unrelated to file I/O tasks, NAS
appliances provide greater file throughput, usually for less cost.
Unlike SAN devices, NAS appliances can be easily connected to an
existing computer network, with additional appliances added over
time as storage needs grow. NAS appliances can also complement a SAN
deployment. These characteristics make NAS appliances a scalable,
versatile and cost-effective data storage solution.
The advantages of NAS have been acknowledged in the marketplace. The
Gartner Group predicts that the NAS market will grow from approximately $1
billion in 1999 to $10 billion in 2003, representing a 77.8% compound annual
growth rate. Because storage appliances are designed to perform a few dedicated
functions, NAS appliances are ideal for companies seeking a storage solution
that:
o is easy to install, use and administer;
o is easy to integrate with existing infrastructure components;
o has a low acquisition price and low total cost of ownership; and
o provides high speed data access, high capacity and scalability.
SPECIFIC CHALLENGES IN DATA MANAGEMENT
In general, enterprises using networked computing environments face
challenges in managing rapidly growing volumes of distributed data. These
challenges include:
o Poor Data Access Performance. Data access performance across
networks has historically been improved by increasing processor
performance or by increasing network bandwidth. However, this
approach has its limits. The remaining bottleneck in data access
performance is caused by the file server's operating system, which
must also perform many additional tasks unrelated to data access.
These unrelated tasks slow the server's ability to respond to file
I/O requests.
o Difficulties Accessing Shared Data. Organizations require solutions
that provide access to shared data. These organizations often
install applications that run on differing and incompatible
computing operating systems. However, many of these operating
systems are incapable of accessing or sharing data created or stored
on other systems without the assistance of additional software.
o Unavailable Data. Unavailable data can result in costly business
interruptions. Data availability is critical to worker productivity,
making it imperative that network data storage devices have low
failure rates, rapid recovery times and the ability to provide
uninterrupted data service. Data unavailability can be caused by
hardware and/or software failure.
o Data Administration Challenges. Network data administration,
including the backup and expansion of data storage capacity,
requires the management of both hardware and software systems. This
becomes more complex with large volumes of data, increasing numbers
of users accessing data and wide distribution of data stored across
the network. Storage devices that cannot be managed remotely place
an added burden on technical personnel and resources.
18
20
o Solutions That Are Not Easily Scalable. Given the continuing
increase in data storage needs, effective storage solutions will
provide a simple and economical means to increase capacity over
time. Preferred solutions allow enterprises to modify their existing
infrastructure and incur only incremental costs as they grow rather
than to make extensive and expensive modifications to their
computing networks.
o High Total Cost of Ownership. The total cost of ownership for a
storage solution includes not only the initial system purchase
price, but also the costs associated with ongoing maintenance and
support. Systems that require frequent service can have total
ownership costs significantly greater than their initial purchase
price.
THE PROCOM SOLUTION
Our NAS appliances are well suited to address the growth in data
storage as well as the specific challenges of data management. A key element of
our solution is our proprietary operating system software, which we integrate
with high-performance, industry-standard hardware components to provide our
customers with the following benefits:
o Fast File Service Response Times. Our NAS appliances are designed to
achieve rapid I/O response times. We have developed proprietary
operating system software optimized for data access and storage.
This software enables our NAS appliances to execute user read and
write requests significantly faster than general purpose computers
used as file servers.
o Cross-Platform Compatibility. Our NAS appliances provide native
support and enable simultaneous shared file services for
environments using UNIX, including Linux, and Windows NT operating
systems. As a result, users can share data across multiple operating
systems, eliminating the need to duplicate data or have separate
storage devices for each computing environment. This functionality
allows organizations to consolidate their data storage onto fewer
devices, providing performance efficiencies and lower total cost of
ownership.
o High Levels of Data Availability and Product Reliability. Our
appliances are designed to provide high levels of data availability
with minimal incremental cost. Data journaling and hardware
redundancies help ensure the protection and availability of data in
the event of hardware component failure. Moving basic storage
functions from a server to a NAS appliance improves the server's
reliability and its ability to process non-storage functions.
o Ease of Installation, Administration and Maintenance. Our appliances
are easier to install and operate than both general purpose
computers and NAS appliances from other vendors. Our NAS appliances
are specifically designed to be installed easily and quickly, some
in just minutes. Moreover, our appliances' management software is
accessible via a Web browser, making remote initiation of diagnosis
and management utilities possible. In general, our appliances
simplify system administration and permit more efficient use of
technical personnel.
o Scalable Solution. Our appliances are designed so that storage
capacity can grow on an incremental and cost-effective basis while
maintaining high throughput levels. A system administrator can
incrementally increase storage capacity by adding disk drives to an
existing appliance, or by adding additional NAS appliances to the
existing network infrastructure without an interruption in access to
stored data. Adding one of our NAS appliances to a network takes
less time than adding a general purpose file server. This capability
allows customers to expand their storage capacity incrementally
without significant changes to their network infrastructure.
o Low Total Cost of Ownership. We reduce the initial cost of ownership
by taking advantage of the price and performance of commercial
off-the-shelf hardware components. Our products are easy to install,
which also helps to reduce the initial cost of ownership. We reduce
the ongoing cost of ownership by providing products with exceptional
reliability and low maintenance costs.
19
21
STRATEGY
Our objective is to become the leading provider of network attached
data storage and access appliances by employing the following strategies:
o Seek NAS Market Leadership by Building On Our Storage Experience.
Over the past several years, we have designed, developed and
distributed NAS appliances. We plan to expand our NAS market
presence by continuing to develop our NAS technology and expanding
our NetFORCE product line. As part of this strategy, we will seek to
build on our data storage experience and existing customer
relationships.
o Expand our Direct Sales Force and Target Data-Intensive Markets. We
intend to increase the size of our direct sales force over the next
12 months. We believe that a strong direct sales presence is
important in penetrating data-intensive markets, including
e-business, networking, and enterprises using applications such as
Web and e-mail hosting, data warehousing, imaging, multimedia and
digital video production. We intend to use our direct sales force to
complement and support our channel partners through joint sales
calls, market education and development and post-sales support.
o Increase Indirect Sales. We plan to expand our relationships with
our existing channel partners, especially UNIX resellers and other
resellers with access to our targeted markets. We also intend to
engage new channel partners to enhance our ability to penetrate
targeted markets. For example, we recently signed a national
distribution agreement with Merisel Open Computing Alliance, or
MOCA, a large master reseller of Sun Microsystems' products, to
distribute our NAS appliances to UNIX resellers throughout the
United States. We intend to continue the expansion of our
distribution capabilities by entering into additional agreements
with selected OEMs, distributors, VARs and system integrators.
o Focus on Software Differentiation. We will continue to differentiate
our appliances by developing additional features and functionality
within our proprietary operating system software. We believe this
approach provides us with a competitive advantage and allows us to
design systems with advanced features that provide an exceptional
level of system speed, availability and reliability. We also intend
to work closely with industry leading software providers to enable
our NAS appliances to be integrated with their software
architectures. To complete these efforts, we intend to continue to
expand our software engineering staff.
o Expand Business Alliances. We intend to seek OEM, joint development
and joint marketing and other agreements with hardware and software
vendors and other companies that sell complementary appliances. For
example, we have entered into an agreement with Hewlett-Packard to
provide a hardware platform and software for incorporation into
Hewlett-Packard NAS appliances. We believe this kind of arrangement
provides us with access to complementary sales channels, as well as
early insight into technological developments and future product
release information. We believe these benefits will assist us in
anticipating and responding to market opportunities.
PRODUCTS
We currently offer two broad categories of products: NAS appliances and
other data storage products. We began offering our NAS appliances in 1997. In
the future, we expect NAS and related technologies to be the principal focus of
our business. Our NAS appliances represented 40.2% of our net sales in fiscal
2000 and 26.6% for fiscal 1999.
Network Attached Storage Products
NetFORCE. Our NetFORCE appliances are disk-based, read and write NAS
storage appliances with optimized software providing faster I/O performance than
stand-alone file servers and direct attached storage products. Our NetFORCE
product line ranges from an entry level, plug and play, 75 gigabyte device
designed for remote offices and small-sized computer workgroups to our highest
performance, fault tolerant network data server that provides up to 2.5
terabytes of storage capacity. We were named "Finalist" by Federal Office
Systems Exposition, in 1999 for our NetFORCE 100 product. In 2000,
Hewlett-Packard received the same award for its version of our NetFORCE 1500
product. The list prices for our NetFORCE product line range from approximately
$5,000 to $200,000, depending primarily on the model purchased and the product
configuration specified by the customer. The table below describes the key
features and target markets for each of these appliances.
20
22
DataFORCE.
Our DataForce appliances are CD/DVD-ROM-based, read only NAS storage
devices. Our product line consists of devices that provide a high-speed
economical means to distribute data to user workstations from as many as 250
CD-ROM disks. In 1999, DataFORCE was awarded "Editor's Choice Award" by Network
Computing magazine and "Product of the Year" by Imaging and Documents Solutions
magazine. The table below also describes the key features and target markets for
each of these appliances.
Product Key Features Target Markets
- ------- ------------ --------------
NetFORCE 2500SFT o Hardware redundancies eliminate Businesses requiring the highest level
Symmetric Fault Tolerant any single point of failure and of data availability and integrity,
built in backup/restore software including storage intensive enterprises
using Window NT, UNIX and Linux-based
o Files accessed and shared by systems.
both Windows NT and UNIX-based
systems
o Web-based remote device management
o Easy stand-alone installation
NetFORCE 2200HA o Hardware redundancies Storage intensive e-businesses using
High Availability Windows NT, UNIX and Linux-based
o Files accessed and shared by systems, including ISPs, Web and e-mail
both Windows NT and UNIX-based hosts and engineering environments
systems
o Extensive backup, re-store and
recovery capabilities and web-based
remote device management
o Easy stand-alone configuration
NetFORCE 1500 o Hardware redundancies ensure data Workgroups using Windows NT,
integrity UNIX and Linux-based systems,
especially mid-sized e-businesses
o Allows files to be accessed and and engineering intensive environments
shared by both Windows NT and
UNIX-based systems
DataFORCE 1000R o 250 CD-ROM capacity Organizations that use document
Rack-mountable imaging and firms with extensive data
o Web-based remote device access needs, including libraries, law
management and modular fault firms, accounting firms, educational
tolerant design and other institutions
o Supports Windows NT, UNIX,
Novell and Macintosh environments
DataFORCE 100 / 200 / 300 o Up to 115 CD-ROM capacity with Organizations that use document
web-based remote device management imaging technologies. Also, libraries,
law firms, public accounting firms,
o Easy to install educational and other institutions
o Supports Windows NT, UNIX,
Novell and Macintosh environments
21
23
We are currently in the process of developing our next generation
NetFORCE appliances. These new appliances are expected to have internal fibre
channel hardware, enhanced backup and restore capabilities, increased storage
capacity and greater data access speeds. In addition, we intend to continue
development of our proprietary software to further improve system performance.
Other Data Storage Products
We also develop and market a number of other data storage products,
including disk drive upgrades, standalone and networked CD/DVD-ROM servers and
arrays, as well as tape backup products. Our disk drive upgrades allow users to
increase the storage capacity of their laptop and desktop computers, which
extends the life of their initial hardware investment. Our CD/DVD-ROM servers
and arrays allow users to access software and data stored on these media. Our
tape backup products provide reliable backup storage for large amounts of data.
We offer these products in a variety of configurations depending on the price
and performance requirements of our customers.
Together, these products constituted 59.8% of our total net sales in
fiscal 2000, and 73.4% for fiscal 1999. We anticipate our sales of these
products to decline over time, especially as a percent of total net sales, as we
continue to transition to the growth opportunity presented by the NAS market. We
plan to provide continued technical and customer support for these products to
our customers and channel partners.
TECHNOLOGY
Our NAS operating system and the associated software and hardware
components are designed to achieve the following objectives:
o providing high-speed access to data by optimizing network, computer
processor and hard drive features and interfaces;
o allowing files created in both the UNIX and Windows NT environments
to be shared simultaneously and across multiple operating systems,
while protecting the integrity of the underlying data;
o supporting the native security features of both UNIX and Windows NT;
o supporting remote management and monitoring of the NAS device via
Web-based software;
o supporting the backup and restoring functionality of commonly used
storage management software applications; and
o enabling ease of installation by the user.
Although our core technical competence is in the development of
software, we also possess hardware engineering expertise. We use this expertise
to integrate our software with best-of-breed hardware components. A key element
of our design philosophy is to utilize hardware components from third-party
vendors to the extent possible. This approach allows us to benefit from the
technological advances of numerous competing hardware vendors, while benefiting
from the constant price erosion in several hardware sectors. Moreover, this
philosophy reduces our dependence on any one supplier. We intend to improve the
performance of our software, incorporate anticipated advances in disk drive and
computer processor hardware, and support the complementary storage technologies
and software applications of other vendors.
CUSTOMERS
The customers that use our NAS appliances and our other data storage
products represent a broad array of enterprises within diverse industry sectors,
including e-businesses, financial services, communications, healthcare and
governmental agencies. Generally, NAS customers are organizations that require
highly reliable, readily accessible, and easily managed storage. These
organizations are typically in highly competitive markets and rely on
data-intensive applications, such as Web servers, search engines, data
warehousing and data mining, multimedia, engineering, digital video production,
and ERP. Our NAS appliances and other data storage products are currently sold
primarily through distributors, VARs and system integrators under the Procom
brand, and OEMs under their brands.
22
24
SALES AND MARKETING
We have an international marketing and distribution strategy. We
distribute our products through a number of channels including distributors,
VARs, system integrators and, increasingly, a direct sales force. We also seek
OEM and distribution arrangements to increase the worldwide distribution of our
NAS appliances. For example, we recently entered into an agreement with
Hewlett-Packard as part of this strategy. As of July 31, 2000, we employed a
total of 98 individuals in sales and marketing, composed of 49 in direct sales,
35 in customer service and technical support, and 14 in marketing.
Sales
We use a variety of selling channels, which are selected based on the
needs and characteristics of our markets and products. For example, we sell our
entry-level NAS and non-NAS products principally through VARs and distributors.
We sell our high-end NAS appliances through OEMs, VARs and system integrators
supported by our own direct sales force. We believe this hybrid approach is the
most efficient and cost-effective strategy for distributing these high-end
appliances, which often require custom configuration and typically involve
significant customer contact and a long sales cycle.
Direct Sales. As of July 31, 2000, our direct sales force consisted of
31 domestic and 18 international sales professionals and technical sales support
specialists. Most of these employees are based at our headquarters office. We
also have direct sales employees based elsewhere in the U.S. and abroad. Our
direct sales force focuses on generating sales opportunities for our channel
partners, which helps to avert competition between our channel partners and our
direct sales force. We expect to increase significantly the number of sales
professionals and technical sales support specialists, both domestically and
internationally, to support the transition of our business toward our NAS
appliances.
Indirect Sales. Our indirect channel partners consist of system
integrators, VARs, OEMs and distributors. Our indirect channel partners market,
sell, implement and support our products. We intend to enhance our existing
relationships with these partners and develop relationships with additional
indirect channel partners; especially those that we expect to enhance our
ability to penetrate target markets. For example, in April 2000, we entered into
a relationship with MOCA, a large master reseller of Sun Microsystems' products,
to distribute our NAS appliances to UNIX resellers throughout the United States.
As of July 31, 2000 our indirect channel partners included:
System Integrators VARs
o CSC o Compucom
o EDS o Custom Edge
o Cope AG o CDW
o Southern Computer Supplies o Sarcom
o Insight
Distributors/Other o Enpointe
o Merisel and MOCA o Comark
o Ingram Micro o IKON
o Tech Data o Online Connecting Point
o Hewlett-Packard
Marketing
Our marketing organization consists of a product marketing group and
marketing communications group. Our product marketing group is responsible for
product direction, market opportunity identification and strategic positioning,
as well as industry research education. Our product marketing activities also
include development of relationships with indirect channel partners,
participation in tradeshows to promote and launch our products and coordination
of our involvement in various industry standards organizations. One of our
employees currently chairs the NAS committee of the Storage Networking Industry
Association (SNIA), a committee whose purpose is to define and promote NAS
standardization.
Our marketing communications group is responsible for increasing
awareness of our company and our products. These efforts include brand
promotion, public relations, advertising, industry trade show participation,
speaking engagements, seminars, direct mail and Web site content development.
Our marketing communications professionals also produce data sheets,
presentations, and product demonstrations.
23
25
BUSINESS ALLIANCES
We have entered into business alliances with OEMs, resellers, software
vendors and channel partners. These business alliances have often accelerated
our development of NAS technology and have helped us improve the performance,
features and functionality of our products. Examples of these alliances include
the following:
Hewlett-Packard
In December 1999, we entered into an agreement with Hewlett-Packard
under which we supply a customized version of our mid-range NAS hardware and
software for incorporation in a Hewlett-Packard NAS solution for the Windows NT
and UNIX markets. The agreement has a five-year term and has no minimum quantity
commitments. We expect that Hewlett-Packard will market and support the NAS
appliances developed with our technology through its network of computer
resellers. We began shipments under this agreement in April 2000. We believe
that HP may introduce other NAS appliances based on other non-Procom proprietary
technology that can be either complementary or competitive to our product
offering.
Novell
We began working with Novell in 1996 to facilitate incorporation of
Novell services in NAS technology. We entered into this relationship in
recognition of strong customer demand for support of Novell networks with our
DataFORCE appliances. In July 1999, Novell certified our DataFORCE line of
CD/DVD-ROM servers for operation under NetWare, including client versions for
Windows and Novell Directory Services.
CUSTOMER SERVICE AND SUPPORT
We are committed to providing our customers with timely and effective
service and support. Our engineers and technicians work closely with our sales
personnel to provide system integrators, VARs, OEMs and distributors with
pre-and post-sales support, technical support, education, training and
consulting services. We provide these services by telephone and facsimile, as
well as through online bulletin board services and Web sites. As of July 31,
2000, our customer service and support team consisted of 35 people, including 14
in our headquarters in California and 12 in the field. We also rely on our
system integrators, VARs, OEMs and distributors to provide technical support and
service.
RESEARCH AND DEVELOPMENT
We believe that a substantial commitment to research and development is
essential to our ability to introduce new and enhanced products that address
emerging market opportunities. As of July 31, 2000, our engineering and product
development staff consisted of 54 employees, which includes 21 software
engineers, 25 hardware engineers and 8 software quality assurance technicians.
Before we develop a new product, our research and development engineers work
with marketing managers and customers to develop specifications for product
requirements. Our engineers then design the new product around those
specifications. After we commercially release a new product, our engineers
continue to work with customers to refine the specifications for future
generations and upgrades of our products.
In order to respond to the short product life cycle inherent in the
industry, our research and development team monitors industry trends to aid in
selecting new technologies and features for potential development and
incorporation into our appliances. We have devoted substantial resources to the
development of our proprietary operating system software
Our total expenses for research and development were $4.8 million in
fiscal 1998, $5.5 million for fiscal 1999 and $7.2 million for fiscal 2000. We
anticipate that the dollar amount of our research and development expenses will
continue to increase in support of our NAS business. We intend to devote a
decreasing amount of resources toward the support and further development of our
other data storage products.
MANUFACTURING AND ASSEMBLY
We conduct our primary manufacturing and assembly activities at our
headquarters in Irvine, California. These activities consist of testing,
assembly and component integration. We have historically operated without a
significant backlog and generally purchase the major components of our products
based on historical requirements and forecast needs. Some of our products
require printed circuit boards, special metal or plastic housings, software,
manuals, additional hardware components and certain custom components
manufactured to our specifications. We subcontract with third-party vendors for
the manufacture of these items. Our strategy has been to develop cooperative
relationships with our most important
24
26
suppliers, which involves exchanging critical information and implementing joint
quality training programs. This strategy helps to minimize supply disruptions
and maintain component quality. We test and evaluate the components used in our
products. In addition, we perform quality assurance testing on our completed
products. We use just-in-time manufacturing techniques and believe we have
sufficient manufacturing capacity to meet foreseeable production needs. In
December 1999 we were awarded ISO 9001 certification.
COMPETITION
The market for NAS appliances is rapidly evolving and competitive. We
believe we compete with the following companies:
o other NAS companies, such as Network Appliance, Cobalt Networks and
Auspex;
o companies which provide entry level NAS filers such as Quantum,
Maxtor, and Connex;
o computer manufacturers which also provide NAS solutions along with
other data storage products, such as Compaq, Sun Microsystems and
Dell;
o direct-selling storage providers targeting enterprises requiring
high capacity storage solutions, such as EMC and Storage Technology;
and
o smaller enterprises that provide and sell unique solutions to
various computer users.
Our overall success depends to a great extent on our ability to
continue to develop appliances that incorporate new and rapidly evolving
technologies to provide users with cost-effective data storage and information
access solutions. In our NAS business, we compete principally on the basis of:
o product features and performance;
o ease of installation, administration and maintenance;
o cross-platform compatibility and scalability;
o total cost of ownership;
o engineering, technical expertise and development of proprietary
software;
o time to market with new features and appliances; and
o technical support and customer service.
We believe that we compete effectively in each of these areas.
Additionally, we believe that our accumulated expertise in developing operating
system software differentiates our NAS appliances from those of our competitors
and poses a barrier to entry for current and potential competitors. We believe
that our channel relationships with system integrators, computer resellers, VARs
and distributors as well as the price and performance characteristics of our NAS
appliances provide us with a competitive advantage.
The market for our other data storage appliances is mature and
intensely competitive. Within our non-NAS product businesses, we believe we
compete with the following companies in the following categories:
o computer manufacturers which provide storage upgrades for their
appliances, such as IBM, Compaq and Dell; and
o hard drive, CD server/array and tape backup manufacturers, such as
Maxtor and Quantum.
We believe we compete effectively with these competitors by offering a
broad range of reasonably priced appliances, by maintaining relationships with
computer resellers and VARs that possess key relationships with decision makers
at end users, and at the same time developing brand name identity through
marketing and advertisements.
25
27
EMPLOYEES
As of July 31, 2000, we had 235 full-time employees plus 8 full-time
contractors. Of the total, 98 are in sales and marketing (including 49 in direct
sales and 35 in customer service and technical support), 51 in manufacturing
(including testing, quality assurance, warehousing and materials functions), 54
in engineering and product development, including 21 in software development
(plus 8 contractors) and 32 in finance and administration. We have 186 employees
in the United States, 35 in Germany, 9 in Italy and 5 in other countries in
Europe. None of our employees is represented by any collective bargaining
agreement. We have never experienced a work stoppage and consider relations with
our employees to be good.
FACILITIES
Our principal administrative, sales, marketing, manufacturing and
research and development facility had been located in approximately 62,000
square feet of leased office space in Santa Ana, California. The lease for this
office space expired on August 31, 2000. In late August 2000, we moved to our
new corporate headquarters in Irvine, California (see below).
In March 1999, we purchased an 8.3 acre parcel of land in Irvine,
California for $7.3 million for use as our corporate headquarters. Construction
commenced in late 1999 and was completed in late August 2000 when we took
possession of the facility. The construction company engaged to build our
facility is partially owned by a brother of Frank Alaghband, one of our
directors and executive officers. The new facilities will be approximately
127,000 square feet, of which we plan to occupy approximately 80,000 square
feet. We anticipate leasing the remaining 47,000 square feet of our new
facilities and have initiated discussions with interested parties. However, no
assurance can be given that we will be successful in completing such a lease.
Construction costs were approximately $16.6 million, including $2.0 million in
costs incurred subsequent to July 31, 2000 and approximately $0.7 million in
capitalized interest costs.
We also lease space aggregating 33,000 square feet to house operations
of our subsidiaries located outside the United States in Germany, Italy,
Switzerland and Great Britain. In addition, we lease 1,600 square feet for a
sales and support office in Toronto, Canada.
26
28
MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to our
executive officers and directors, as of January 25, 2001:
NAME AGE POSITION(S)
---- --- -----------
Alex Razmjoo................. 37 Chairman of the Board, President and Chief
Executive Officer
Alex Aydin................... 37 Executive Vice President, Finance and
Administration, Chief Financial Officer,
and Director
Frank Alaghband.............. 37 Executive Vice President, Engineering and
Operations, and Director
Nick Shahrestany............. 36 Executive Vice President, Sales and
Marketing, and Director
Frederick Judd............... 42 Vice President, Finance and General Counsel
Dom Genovese................. 58 Director
David Blake.................. 59 Director
Mr. Alex Razmjoo is one of our founders and has served as our Chairman
of the Board, President and Chief Executive Officer since October 1987.
Previously, Mr. Razmjoo served as Director of Engineering of CMS Enhancements,
Inc. He received a B.S. degree in Electrical Engineering from the University of
California, Irvine. Mr. Razmjoo has served on the board of directors of the
Graduate School of Management at the University of California, Irvine since
November 1999.
Mr. Alex Aydin is one of our founders and has served as our Executive
Vice President, Finance and Administration, Chief Financial Officer, and a
director since August 1987. Previously, Mr. Aydin served as a Product
Development Engineer for Toshiba America, Inc. He received dual B.S. degrees in
Electrical Engineering and Biological Sciences from the University of
California, Irvine and a M.S. degree in Biomedical Engineering from California
State University, Long Beach.
Mr. Frank Alaghband is one of our founders and has served as our
Executive Vice President, Engineering and Operations and a director since August
1987. Previously, Mr. Alaghband served as a Hardware and Systems Engineer for
McDonnell Douglas Computer Systems Company. He received a B.S. degree in
Electrical Engineering from the University of California, Irvine.
Mr. Nick Shahrestany is one of our founders and has served as our
Executive Vice President, Sales and Marketing and a director since August 1987.
Previously, Mr. Shahrestany served as Regional Sales Manager of CMS
Enhancements, Inc. He received a B.S. degree in Biological Sciences with a minor
in Electrical Engineering from the University of California, Irvine.
Mr. Frederick Judd has served as our Vice President, Finance and
General Counsel since joining our company in November 1993. Previously, Mr. Judd
was General Counsel for CMS Enhancements, Inc. and, before that, Chief Financial
Officer and Treasurer of CMS Enhancements, Inc. Mr. Judd received a B.S. degree
in Accounting from Arizona State University and a J.D. degree from Brigham Young
University. Mr. Judd is a Certified Public Accountant and is licensed to
practice law in California and Arizona.
Mr. Dom Genovese has been a director since August 1997. Mr. Genovese is
a private investor. From April 1996 to October 1997, Mr. Genovese served as Vice
President Sales for Sync Research, Inc. Prior to that, he served as Regional
Sales Manager at Cisco Systems, Inc., from January 1992 to April 1996. Mr.
Genovese received a B.S. degree in Electrical Engineering from the University of
Maryland. Mr. Genovese is a member of the Audit and Compensation Committees of
our board of directors.
Mr. David Blake has been a director since October 1997. Mr. Blake has
served as the Dean of the Graduate School of Management at the University of
California, Irvine, since October 1997. Prior to that date, Mr. Blake served as
the Dean of the Edwin L. Cox School of Business at Southern Methodist University
from 1990 to 1996, serving as the President of the American Assembly of
Collegiate Schools of Business in 1996. Mr. Blake received an A.B. in History
from Dartmouth College, an MBA from the University of Pittsburgh, and a Ph.D. in
Political Science and International Politics from Rutgers University. Mr. Blake
is a director of Global Industrial Technology, Inc. Mr. Blake serves on the
Audit and Compensation Committees of our board of directors.
27
29
PLAN OF DISTRIBUTION
We are offering the shares of common stock principally to selected
institutional investors and strategic investors. We have retained Merrill
Lynch, Pierce, Fenner & Smith Incorporated as our placement agent in connection
with the arrangement of offers and sales on a best efforts basis. The placement
agent is not obligated and does not intend to purchase any of the shares
offered by this prospectus. We anticipate that the placement agent will seek
indications of interest from potential investors for up to the number of shares
required to achieve gross proceeds of $35.0 million. We will not seek
effectiveness of the registration statement of which this prospectus forms a
part and we will not accept any investor funds until indications of interest
have been received for a number of shares acceptable to us and, if required
under the terms of our debentures, the holder of those debentures. Confirmation
and definitive prospectuses will be distributed to all investors at the time of
pricing, informing investors of the closing date, which will be scheduled for
three business days after pricing. We will not accept any investor funds before
the effectiveness of the registration statement.
The placement agent is a member in good standing of the National
Association of Securities Dealers, Inc. and is registered as a broker/dealer
with the Securities and Exchange Commission. We have agreed to pay the
placement agent, as the placement fee, an aggregate of seven percent of the
gross proceeds of this offering and to reimburse the placement agent for its
accountable expenses on this offering. We have also granted the placement agent
a right of first refusal to provide investment banking or advisory services
with respect to certain future financings and business combinations. We have
also agreed to indemnify the placement agent against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the placement agent may be required to make in respect of those liabilities.
In addition to the compensation paid to the placement agent, we also
expect to incur expenses of approximately $_________.
There can be no assurance that the placement agent will be successful
in placing any or all of the shares offered by this prospectus. The placement
agent does not intend to place any shares to any account over which it may
exercise discretionary authority. The above is a brief summary of the material
provisions of the placement agent agreement between us and the placement agent
and does not purport to be a complete statement of the respective terms and
conditions of the agreement. A copy of the placement agent has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
28
30
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 65,000,000 shares of $0.01 par
value common stock and 10,000,000 shares of $0.01 par value preferred stock. As
of January 25, 2001, there were 12,131,703 shares of our common stock
outstanding. Upon completion of this offering, and assuming the sale of all
2,000,000 shares of common stock offered by this prospectus, and we will have
outstanding 14,131,703 shares of common stock.
COMMON STOCK
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of our common stock
are entitled to receive ratably the dividends, if any, as may be declared from
time to time by our board of directors out of legally available funds. In the
event of the liquidation, dissolution or winding up of our business, the holders
of our common stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to prior distribution rights of preferred stock,
if any, then outstanding. The common stock has no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to the common stock. All outstanding shares of common
stock are fully paid and nonassessable, and the shares of common stock to be
issued upon completion of this offering will be fully paid and nonassessable.
PREFERRED STOCK
Our articles of incorporation, as amended and restated, authorize
10,000,000 shares of preferred stock. Our board of directors has the authority
to issue the preferred stock in one or more series and to fix the rights,
preferences, privileges and restrictions of each series, including dividend
rights, dividend rates, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of each series, without further vote or action by
the shareholders. Issuance of preferred stock could have the effect of making it
more difficult for a third party to acquire, or could discourage a third party
from acquiring, a majority of our outstanding stock. The issuance of preferred
stock with voting and conversion rights may adversely affect the voting power of
the holders of common stock, including the loss of voting control to others. At
present, we have no plans to issue any of the preferred stock.
DEBENTURES
General. On October 31, 2000 we issued to a private investor a total of
$15.0 million of our convertible debentures due October 31, 2003. The net
proceeds to us from this private placement were approximately $14.4 million.
Interest. The debentures bear interest at the rate of 6% per annum,
payable quarterly. We have the option of paying this interest in cash or in
shares of our common stock. If we pay interest in common stock, that stock will
be valued at the average of the closing prices of our common stock as reported
by Nasdaq for the five trading days preceding the date that interest payment is
due or the first trading day after that date if the interest payment date is not
a trading day.
Conversion. The debentures are convertible at the option of the
investor at any time after issuance at a conversion price of $22.79, subject to
anti-dilution adjustment as a result of such events as stock dividends,
distributions, subdivisions, combinations or reclassifications of our common
stock. The conversion price is also subject to a weighted average adjustment if,
subject to certain exceptions, we issue our common stock (other than to the
investor) at a price below the conversion price then in effect for the
debentures. The weighted average adjustment means that, if we issue our stock at
a per share price less than the debenture conversion price then in effect, the
conversion price will be reduced on a weighted average basis, which will allow
the investor to convert the debentures into a greater number of shares of our
common stock. Under the weighted average adjustment provisions of the
debentures, the more shares we issue (other than to the investor), and the
greater the discount at which these shares are issued to the conversion price
then in effect, the greater the resulting reduction in the conversion price.
If the market price of our common stock exceeds $27.04 per share for at
least 20 trading days in any period of 30 consecutive trading days after the
effective date of the registration statement of which this prospectus is a part,
we can require the investor to convert the outstanding debentures into shares of
our common stock at the conversion price then in effect. At the initial
conversion price of $22.79 per share, the full amount of the debentures would
convert into 658,183 shares of our common stock, or approximately 5.1% of our
outstanding shares of common stock as of January 25, 2001.
29
31
Repurchase Right. We have the right, upon 20 trading days' notice to
the investor, to repurchase for cash all or any portion of the outstanding
debentures at a price equal to 110% of the outstanding principal amount of the
debentures plus all accrued but unpaid interest through the date of our
repurchase.
Put Right. The investor has a "put" right, which allows the investor to
require us either to repay in cash the face amount of the portion of the
debentures put by the investor, plus any accrued but unpaid interest through
such time, or pay such amount by issuing shares of our common stock. In order to
pay any portion of the debentures put to us in shares of our common stock, we
are required to deliver a written notice to the investor not less than 20
trading days prior to each put date specifying the maximum amount of cash that
we would pay if the put right is exercised. If we elect to satisfy any part or
all of the investor's put in shares of our common stock, those shares would be
valued at 90% of the average closing price of our common stock for the five
trading day period preceding the applicable put date. The investor may put up to
$5.0 million of the debentures to us on the six-month anniversary of October 31,
2000, $10.0 million (less any amount previously put) on the 12-month anniversary
of that date, and $15.0 million (less any amount previously put) on each of the
18-month, 24-month and 30-month anniversaries of October 31, 2000.
If the investor exercises its put right and we are unable or unwilling
to pay the cash required to satisfy the put, we will have to issue shares of our
common stock to the investor at a discount to the average market price of our
stock during the five days preceding the put date. If the market price of our
stock drops, the number of shares issuable to the investor, and the percentage
of our total outstanding common stock that the investor would have the right to
acquire, would increase significantly. Sales of our common stock by the investor
received from any put or conversion of the debentures or from the exercise of
the investor's warrants could depress the price of our common stock, which would
in turn require us to issue a greater number of our shares upon any subsequent
puts or conversions of the debentures by the investor.
The following table sets forth the number of shares of our common stock
that we would be required to issue to the investor in lieu of cash if the put
right is exercised at assumed five-day average market prices for our common
stock, and the resulting percentage of our outstanding stock that would then be
owned by the investor.
Assumed 5-trading-day Price of Shares Number of Shares Percentage of
Average Market Prices Issuable On Put(1) Issuable on Put(2) Outstanding Stock(3)
- --------------------- ------------------ ------------------ ---------------------
$25.32(4) $22.79 658,183 5.1%
11.25(5) 10.13 1,481,481 10.9%
8.44 (-25%)(6) 7.59 1,975,309 14.0%
5.63 (-50%)(7) 5.60 2,962,963 19.6%
2.81 (-75%)(8) 2.53 5,925,926 32.8%
- ------------------
(1) Represents a 10% discount to the average closing price of our common stock
as reported by Nasdaq over the five trading days preceding the put.
(2) The number of shares of common stock issuable to satisfy a put by the
investor assumes that 100% of the principal amount of the debentures is
paid in shares of our common stock but does not include any shares that may
be issuable to pay interest on the debentures. The share figure also does
not include any shares issuable upon exercise of any part or all of the
investor's warrant.
(3) Calculated based on 12,131,703 shares of our common stock issued and
outstanding as of January 25, 2001.
(4) Represents the five-trading-day average closing price of our common stock
preceding the closing of the private placement transaction with the
investor on October 31, 2000.
(5) Represents the closing price of our common stock on December 20, 2000,
which was the lowest closing price of our common stock for any trading day
since the closing of the sale of the debentures and warrants to the
investor on October 31, 2000.
(6) Represents a 25% decline from the lowest recent closing price of our common
stock specified in footnote (5).
(7) Represents a 50% decline from the lowest recent closing price of our common
stock specified in footnote (5).
(8) Represents a 75% decline from the lowest recent closing price of our common
stock specified in footnote (5).
30
32
WARRANTS
General. At the same time we issued the debentures, we also issued to
the investor five-year warrants to purchase our common stock at an exercise
price equal to $32.55 per share. At the current exercise price, we would receive
an additional $1.1 million if the warrants were exercised in full.
Anti-Dilution Adjustments. The exercise price and the number of shares
of our common stock issuable upon exercise of the warrant are subject to
anti-dilution adjustments that are similar to those described above for the
debentures. For example, the exercise price is subject to adjustment as a result
of such events as stock dividends, distributions, subdivisions, combinations or
reclassifications of our common stock. The exercise price is also subject to a
weighted average adjustment if we issue our common stock at a price below the
exercise price then in effect for the warrants. The weighted average adjustment
means that if we issue our stock at a per share price less than the warrant
exercise price then in effect, the exercise price will be reduced on a weighted
average basis, which will allow the holder of the warrants to receive a greater
number of shares of our common stock upon exercise of the warrants. Under the
weighted average adjustment provisions of the warrants, the more shares we issue
in the future (other than to the warrant holder), and the greater the discount
at which these shares are issued to the warrant exercise price then in effect,
the greater the resulting reduction in the exercise price of the warrants.
ANTI-TAKEOVER PROVISIONS
Some provisions of our articles of incorporation and bylaws may have
the effect of delaying or preventing changes in our control or our management.
These provisions include those:
o authorizing the issuance of preferred stock without shareholder
approval;
o providing for a classified board of directors;
o prohibiting cumulative voting in the election of directors;
o requiring the approval of our shareholders and our board of
directors to amend some provisions of our articles and bylaws;
o limiting the persons who may call special meetings of shareholders;
and
o establishing advance notice requirements for nomination for election
to the board of directors or for proposing matters that can be acted
on by shareholders at shareholder meetings.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is U.S. Stock
Transfer Company, located in Glendale, California.
31
33
VALIDITY OF THE SHARES
O'Melveny & Myers LLP will pass upon the validity of the shares of
common stock on our behalf. Fenwick & West LLP, Palo Alto, California, will pass
upon legal matters for the placement agent.
EXPERTS
The consolidated financial statements of operations, shareholders'
equity and cash flows, and schedule for the year ended July 31, 1998 have been
incorporated by reference herein and in the registration statement in reliance
upon the report of Arthur Andersen LLP, independent public accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The consolidated financial statements and schedule as of July 31, 1999
and 2000 and for the years then ended have been incorporated by reference herein
and in the registration statement in reliance upon the report of KPMG LLP,
independent certified public accountants, incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy any document we
file at the public reference facilities of the Commission located at 450 Fifth
Street N.W., Washington D.C. 20549. You may obtain information on the operation
of the Commission's public reference facilities by calling the Commission at
1-800-SEC-0330. You can also access copies of this material electronically on
the Commission's home page on the World Wide Web at http://www.sec.gov.
This prospectus is part of a registration statement (Registration No.
333- ) we filed with the Commission. The Commission permits us to
"incorporate by reference" the information we file with them, which means that
we can disclose important information to you by referring you to those
documents. The information incorporated by reference is considered to be part of
this prospectus, and information we file with the Commission after the date of
this prospectus will automatically update and supersede this information. Any
statement contained in a document incorporated by reference in this prospectus
will be deemed to be modified or replaced by any statement contained in this
prospectus or in any document incorporated by reference in this prospectus that
modifies or replaces that statement. Any such statement modified or replaced in
that manner will not be deemed a part of this prospectus except as modified or
replaced. We incorporate by reference the following documents filed by us with
the Commission. Our file number with the Commission is 0-21053. We also
incorporate by reference any future filings made with the Commission under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, after the date of this prospectus until the termination of this
offering.
1. Our Annual Report on Form 10-K for the fiscal year ended July 31,
2000;
2. Our Quarterly Report on Form 10-Q for the fiscal quarter ended
October 31, 2000;
3. Our Current Report on Form 8-K filed on November 3, 2000;
4. Our Current Report on Form 8-K filed on January 12, 2001; and
5. The description of our common stock contained in our Form S-1
registration statement dated October 30, 1996, including any amendments of
reports filed for the purpose of updating such descriptions.
If you request a copy of any or all of the documents incorporated by
reference, then we will send to you the copies you requested at no charge.
However, we will not send exhibits to these documents, unless the exhibits are
specifically incorporated by reference in these documents. You should direct any
request for copies to Fredrick Judd, Vice President, Finance and General
Counsel, 58 Discovery, Irvine, California, 92618, (949) 852-1000.
32
34
2,000,000 SHARES
[PROCOM TECH LOGO]
COMMON STOCK
---------------
PROSPECTUS
, 2001
---------------
MERRILL LYNCH & CO.
35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee, and the Nasdaq National Market additional
listing fee.
SEC registration fee..........................................
NASD filing fee...............................................
Nasdaq National Market listing fee............................
Printing and engraving........................................
Legal fees and expenses.......................................
Accounting fees and expenses..................................
Blue sky fees and expenses....................................
Transfer agent fees...........................................
Miscellaneous.................................................
----------
Total.......................................................
==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
We have adopted provisions in our Amended and Restated Articles of
Incorporation that limit the liability of our directors in certain instances. As
permitted by the California General Corporation Law, directors will not be
liable to us for monetary damages arising from a breach of their fiduciary duty
as directors in certain circumstances. See Item 17 of this registration
statement regarding the opinion of the Securities and Exchange Commission as to
indemnification of liabilities arising under the Securities Act. Such limitation
does not affect liability for any breach of a director's duty to us or our
shareholders (i) with respect to approval by the director of any transaction
from which he derives an improper personal benefit, (ii) with respect to acts or
omissions involving an absence of good faith, that he believes to be contrary to
our best interests or the best interest of our shareholders, that involve
intentional misconduct or a knowing and culpable violation of law, that
constitute an unexcused pattern of inattention that amounts to an abdication of
his duty to us or our shareholders, or that show a reckless disregard for his
duty to us or our shareholders in circumstances in which he was, or should have
been, aware, in the ordinary course of performing his duties, of a risk of
serious injury to us or our shareholders or (iii) based on transactions between
us and our directors or another corporation with interrelated directors or on
improper distributions, loans, or guarantees under applicable sections of the
California General Corporation Law. Such limitation of liability also does not
affect the availability of equitable remedies such as injunctive relief or
rescission, although in certain circumstances equitable relief may not be
available as a practical matter. The limitation may relieve the directors of
monetary liability to us for grossly negligent conduct, including conduct in
situations involving attempted takeovers. No claim or litigation is currently
pending against our directors that would be affected by the limitation of
liability.
Our Amended and Restated Articles of Incorporation and Amended and
Restated Bylaws provide that we shall indemnify our directors and may indemnify
our officers to the fullest extent permitted by California law, including
circumstances in which indemnification is otherwise discretionary under
California law.
ITEM 16. EXHIBITS
Exhibit
Number Description
- ------- -----------
1.1* Form of Placement Agent Agreement
5.1* Opinion of O'Melveny & Myers LLP
10.1 Agreement for Wholesale Financing (Security Agreement) between
Procom Technology, Inc. and IBM Credit Corporation (incorporated
by reference to Exhibit 10.1 in Amendment No. 1 to Registration
Statement on Form S-3 of Procom filed on January 16, 2001)
23.1 Consent of KPMG LLP
23.2 Consent of Arthur Andersen LLP, independent public accountants
23.3* Consent of O'Melveny & Myers LLP (contained in Exhibit 5.1)
24.1 Power of Attorney (see signature page)
- ----------------------------
* To be filed by amendment.
II-1
36
ITEM 17. UNDERTAKINGS
We hereby undertake that, for purposes of determining any liability
under the Securities Act, each filing of our annual report pursuant to Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement 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.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons pursuant to
the California Corporations Code, our Articles of Incorporation or the Bylaws,
indemnification agreements entered into between us and our officers and
directors, the Underwriting Agreement, or otherwise, we have been advised that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by any of
our directors, officers or controlling persons in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered hereunder, we will,
unless in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by us is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
37
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Procom Technology, Inc. certifies that it has reasonable ground to believe that
it meets all of the requirements for filing on Form S-3 and has duly caused this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Irvine, State of California, on this 26th day of
January, 2001.
PROCOM TECHNOLOGY, INC.
By: /s/ ALEX RAZMJOO
----------------------------------
Alex Razmjoo
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below does hereby constitute and appoint, jointly and severally, Alex
Aydin and Frederick Judd, or either of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the registration statement filed herewith and any and all
amendments to said registration statement (including post-effective amendments
and registration statements filed pursuant to Rule 462 and otherwise), and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ALEX RAZMJOO Chairman of the Board January 26, 2001
- -------------------------------- President and Chief
Alex Razmjoo Executive Officer
(Principal Executive Officer
/s/ ALEX AYDIN Executive Vice President, January 26, 2001
- -------------------------------- [Chief Financial Officer]
Alex Aydin (Principal Financial Officer)
and Director
/s/ FREDERICK JUDD Vice President, Finance and January 26, 2001
- -------------------------------- General Counsel
Frederick Judd (Principal Accounting Officer
/s/ FRANK ALAGHBAND Director January 26, 2001
- --------------------------------
Frank Alaghband
/s/ NICK SHAHRESTANY Director January 26, 2001
- --------------------------------
Nick Shahrestany
Director January __, 2001
- --------------------------------
Dom Genovese
Director January __, 2001
- --------------------------------
David Blake
II-3
38
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1* Form of Placement Agent Agreement
5.1* Opinion of O'Melveny & Myers LLP
10.1 Agreement for Wholesale Financing (Security Agreement) between
Procom Technology, Inc. and IBM Credit Corporation (incorporated
by reference to Exhibit 10.1 in Amendment No. 1 to Registration
Statement on Form S-3 of Procom filed on January 16, 2001)
23.1 Consent of KPMG LLP
23.2 Consent of Arthur Andersen LLP, independent public accountants
23.3* Consent of O'Melveny & Myers LLP (contained in Exhibit 5.1)
24.1 Power of Attorney (see signature page)
- ----------------------------
* To be filed by amendment.