-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JCWBFiA6lxEhRh0Iz3MZvZ0u6P3OHFTZ7+S7So83Cx93SbNQACpIQeUCNwq3SPct Wjvlh8fkmfIuHnxYy5YO4Q== 0000891020-99-001511.txt : 19990902 0000891020-99-001511.hdr.sgml : 19990902 ACCESSION NUMBER: 0000891020-99-001511 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19990901 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VIXEL CORP CENTRAL INDEX KEY: 0001087955 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 841176506 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-81347 FILM NUMBER: 99704747 BUSINESS ADDRESS: STREET 1: 11911 NORTHCROCK PARKWAY SOUTH CITY: BOTHELL STATE: WA ZIP: 98011 BUSINESS PHONE: 4248065509 MAIL ADDRESS: STREET 1: 11911 NORTHCROCK PARKWAY SOUTH CITY: BOTHELL STATE: WA ZIP: 98011 S-1/A 1 AMENDMENT NO.2 TO FORM S-1 REGISTRATION STATEMENT 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 1, 1999 REGISTRATION NO. 333-81347 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 VIXEL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 3669 84-1176506 (STATE OF OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
11911 NORTHCREEK PARKWAY SOUTH BOTHELL, WASHINGTON 98011 (425) 806-5509 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) JAMES M. MCCLUNEY PRESIDENT AND CHIEF EXECUTIVE OFFICER VIXEL CORPORATION 11911 NORTHCREEK PARKWAY SOUTH BOTHELL, WASHINGTON 98011 (425) 806-5509 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES TO: JAMES C. T. LINFIELD, ESQ. GREGORY M. GALLO, ESQ. GREGORY B. ABBOTT, ESQ. GRAY CARY WARE & FREIDENRICH LLP COOLEY GODWARD LLP 400 HAMILTON AVENUE 5200 CARILLON POINT PALO ALTO, CA 94301 KIRKLAND, WA 98033-7355 (650) 833-2000 (425) 893-7700
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, 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, 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 number 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 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 PROPOSED MAXIMUM TITLE OF EACH CLASS OF SECURITIES TO BE AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE(3) - ------------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.0015 par value........ 4,255,000 $12.00 $51,060,000 $14,195 - ------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------
(1) Includes 555,000 shares which the underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(c) under the Securities Act of 1933, as amended. (3) Previously paid. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 EXPLANATORY NOTE This registration statement contains two forms of prospectus: (1) one prospectus to be used in connection with an offering in the United States and Canada and (2) one prospectus to be used in connection with a concurrent offering outside of the United States and Canada. The U.S. prospectus and the international prospectus are identical in all respects except for the front cover page and the "Underwriting" section. The front cover page and the "Underwriting" section of the international prospectus are included immediately before Part II of this registration statement. 3 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 1999 VIXEL LOGO 3,700,000 SHARES COMMON STOCK Vixel Corporation is offering 3,700,000 shares of our common stock. This is our initial public offering. We anticipate that the initial public offering price will be between $10.00 and $12.00 per share. We have applied for approval for quotation of our common stock on the Nasdaq National Market under the symbol "VIXL." ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 3. -------------------------
PER SHARE TOTAL --------- ------- Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Vixel........................................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We have granted the underwriters a 30-day option to purchase up to an additional 555,000 shares of our common stock to cover over-allotments. BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on , 1999. ------------------------- BANCBOSTON ROBERTSON STEPHENS BEAR, STEARNS & CO. INC. NEEDHAM & COMPANY, INC. THE DATE OF THIS PROSPECTUS IS , 1999 4 [EDGAR ARTWORK DESCRIPTIONS] Location: inside front cover Title: "Bringing connectivity and management to Storage Area Networks" is centered at the top and is in white lettering against a black background. The image of a purple Fibre Channel borders the left edge of the page. The remainder of the words are in black lettering against white background. Below the title, flush right, are the words "Vixel Corporation", in bold font. Beneath our name are the words in bold font "Designing and producing the essential building blocks for connecting high-speed storage area networks or SANs:" followed by the words "management software, switches, managed hubs, entry-level hubs and transceivers." In the lower half of the page is another caption, "Optimizing the benefits of storage networking:", in bold font, followed by these stacked phrases: "Scaling from basic to complex SANs", "SAN interconnect management from a single software application", "Interoperability across the product suite", and "Facilitates SANs for both Unix and NT environments." In the lower right corner of the page is our logo, which is the word "Vixel", with a black background and white lettering, and a green slanted oval over the letter "x". Below the logo flush right on the page are the words "Making the Fibre Channel Connection," with a purple background and white lettering. Location: top of cover bi-fold Title: The words "Vixel Overview" at the upper flush left position of the bi-fold. Following the title are the words "Building Storage Area Networks". Image: The image consists of three graphical components, all of which are connected to one another. The top component consists of a local area network, labeled "LAN", represented by a green and blue straight line running across the top of the page, approximately 85% up from the bottom of the page. Above the LAN are five clusters of images, each connected by a line to the LAN, four consisting of an image of computer monitors and computers, the first and fourth of which are labeled "End-Users", and the fifth consisting of an image labeled "Router", which connects by a bent line to a blue and green cloud image containing the acronym "WAN", or wide area network. The computers and monitors are colored green, blue, gray or black, and one monitor contains the letters "NT" in white, one contains the Apple Computer logo and one has the words "Sun Microsystems" in white letters. There are seven lines intersecting below the LAN at 90 degree angles. The first line connects to an image entitled "Traditional Storage Connectivity", consisting of a purple device labeled a "Server", which connects to a blue device labeled a "Storage Device". The second line connects an image entitled "Vixel 1000 Entry-Level Hub". The image consists of a device labeled "Server", which connects by another line to a hub, which connects by three lines to three objects, labeled "Storage Devices". The third and fourth lines connect to an image entitled "Vixel 2006 Managed Hub". The image consists of two devices, labeled "Servers", which connect to a hub, which connects by four lines to devices labeled "Storage Devices", and by one line to an image of a transceiver. To the right of the transceiver are the words "Vixel Transceivers in Ports of Switches and Hubs". The fifth, sixth and seventh lines connect to one device each. The devices, labeled "Servers" in two places, connect by separate lines to a switch labeled the "Vixel 8100 Switch". Five additional lines connect the Vixel 8100 Switch to different devices. The Vixel 8100 Switch and these devices are depicted in a cloud labeled "SAN", or Storage Area Network, on the right side of the cloud. The first two lines from the Vixel 8100 Switch connect to two devices each labeled "Storage Device", 5 and the third, fourth and fifth lines connect to three separate switches, each labeled a "Vixel 8100 Switch". Each of the Vixel 8100 Switches within the cloud are connected to one another by lines. Of the three additional Vixel 8100 Switches, the first connects by two additional lines to two devices, labeled "Storage Devices", and by three additional lines to three of the other Vixel 8100 Switches within the cloud. Three additional lines run from the second additional Vixel 8100 Switch. The first line, the distance of which is labeled "10 kilometers", connects to an additional switch labeled a "Vixel 8100 Switch", which in turn connects by two lines to the image of two storage devices, labeled "Storage Devices". The second and third lines connect to two images entitled "Storage Devices". The third Vixel 8100 Switch is connected by two lines to two devices labeled "Storage Devices" and by a third line to an image entitled "Vixel 2000 Managed Hub", which in turn is connected by three lines each connecting to images entitled "Storage Devices". In the lower center of the bi-fold is the SAN InSite logo, which consists of the words "SAN InSite(TM)" placed against a double oval to the left side of the logo. Computer and Monitor Image: The image is located in the lower middle portion of the bi-fold, partly in the left side of the cloud image. It consists of a computer monitor and a computer. The words "Managed SAN Interconnect Software" appear above the image. Location: Bottom left of cover bi-fold Title: "Vixel's Total SAN Solution" Stacked phrases: Proactive Management with SAN InSite Software Fibre Channel Switches Managed Fibre Channel Hubs Entry-level Fibre Channel Hubs Transceivers In the lower right corner of the right-hand page is our logo, which is the word "Vixel", with a black background and white lettering, and a green slanted oval over the letter 'x". Below the logo flush right on the page are the words "Making the Fibre Channel Connection", with a purple background and white lettering. 6 You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus 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. Until , 1999, 25 days after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ------------------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 1 Risk Factors................................................ 3 You Should Not Rely on Forward-Looking Statements Because They are Inherently Uncertain............................. 14 Use of Proceeds............................................. 15 Dividend Policy............................................. 15 Capitalization.............................................. 16 Dilution.................................................... 17 Selected Financial Data..................................... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 19 Business.................................................... 30 Management.................................................. 43 Certain Transactions........................................ 54 Principal Stockholders...................................... 56 Description of Capital Stock................................ 58 Shares Eligible for Future Sale............................. 61 Underwriting................................................ 63 Legal Matters............................................... 65 Experts..................................................... 65 Where You Can Find Additional Information................... 65 Index to Financial Statements............................... F-1
------------------------- All share information contained in this prospectus gives effect to a two-for-three reverse stock split in our common stock which occurred on August 27, 1999. Unless otherwise indicated, this prospectus assumes that the underwriters have not exercised their option to purchase additional shares. It also assumes the conversion of 19,889,331 shares of preferred stock, which includes 894,333 shares of preferred stock issuable upon exercise of warrants, into 13,259,554 shares of common stock. We own or have rights to the trademarks or tradenames that we use in conjunction with the sale of our products and services. Vixel(R) and SAN InSite(TM) are trademarks owned by us. This prospectus also makes reference to trademarks of other companies which are the property of their respective owners. We were incorporated in Colorado in June 1991 as Photonics Research Incorporated and reincorporated in Delaware in February 1995 as Vixel Corporation. Our corporate headquarters are located at 11911 Northcreek Parkway South, Bothell, Washington 98011 and our telephone number is (425) 806-5509. Our website address is www.vixel.com. Information contained on our website is not part of this prospectus. i 7 PROSPECTUS SUMMARY You should read this summary together with the more detailed information and our financial statements and notes appearing elsewhere in this prospectus. THE COMPANY We are a leading provider, based on revenue and number of ports shipped, of comprehensive solutions used in storage area networks, or SANs. SANs are networks that are specifically designed to interconnect computer systems and data storage devices. Our comprehensive SAN interconnect solutions consist of a variety of products that connect computers to data storage devices in a network configuration. Our products utilize the Fibre Channel protocol, which is an industry standard for the transfer of information between computers and storage devices. Our Fibre Channel product portfolio consists of our SAN systems, which include our SAN management software and switches and hubs, and other components, which include our transceivers. Our products enable data storage devices to connect to one or more computer systems and facilitate the reliable exchange of large amounts of data at high speeds. Our products are fully interoperable and designed to perform in concert so that customers can easily deploy a range of SAN configurations, from simple point-to-point connections to more complex high-performance networks. We believe our unique SAN InSite management software optimizes the performance of our switches, hubs and transceivers, supports network stability, and reduces enterprise information technology staffing, training and support requirements. In recent years there has been a significant increase in the volume of data created, processed and accessed throughout the enterprise. This growth has been fueled by the rapid expansion of the Internet, measured both by the number of users as well as the number of web-based corporate initiatives which require continuous access to critical business information 24 hours a day, seven days a week. Enterprises traditionally have attempted to support and manage storage requirements by linking single servers to dedicated storage devices. Fibre Channel technology addresses the limitations of traditional server-to-storage connections and enables data to be transferred from one network device to another, allowing any server to access any storage device on the network. When utilized in SANs, Fibre Channel technology combines the connectivity and distance features of networking with the simplicity and reliability benefits of the channel, or the dedicated circuit that carries information to and from data storage devices. We believe, based on an International Data Corporation report that was published in January 1999, that worldwide revenue from SAN products should grow from approximately $2.5 billion in 1998 to over $13.3 billion in 2002, representing a compound annual growth rate of over 50%. Our objective is to expand our position as a leading developer and supplier of comprehensive SAN interconnect solutions. Key elements of our strategy include the following: - Offer new and existing customers a full Fibre Channel interconnect product portfolio; - Leverage our technology platforms and expertise to address rapidly evolving SAN market demands; - Extend our leadership in SAN interconnect management software; - Partner with major storage solutions providers to promote interoperability and enhance functionality; - Expand our distribution channels; and - Promote the Vixel brand in order to position ourselves as the leading provider of high-performance, cost-effective SAN interconnect solutions. We primarily market and sell our products to original equipment manufacturers, or OEMs, which are companies that combine our products with their own products and sell the combined products under their own brands. We also sell to resellers. To date we have shipped to more than 30 OEMs and resellers products representing over 500,000 Fibre Channel ports, which we believe are more ports than any other Fibre Channel interconnect vendor has shipped. 1 8 THE OFFERING COMMON STOCK OFFERED BY VIXEL................... 3,700,000 shares COMMON STOCK TO BE OUTSTANDING AFTER THIS OFFERING........................................ 21,629,003 shares USE OF PROCEEDS................................. Repayment of a promissory note and accrued interest, totaling $2.0 million, working capital, general corporate purposes and repayment of other corporate indebtedness. PROPOSED NASDAQ NATIONAL MARKET SYMBOL.......... VIXL All share information contained in this prospectus reflects a two-for-three reverse stock split in our common stock which occurred on August 27, 1999. The number of shares outstanding after the offering is based on shares outstanding as of July 4, 1999 and does not include 2,217,179 shares of common stock subject to outstanding options under our equity incentive plans or 419,865 shares of common stock issuable upon exercise of warrants. It also assumes the conversion of 19,889,331 shares of preferred stock, which includes 894,333 shares of preferred stock issuable upon exercise of warrants, into 13,259,554 shares of common stock. The as adjusted balance sheet data summarized below reflects the conversion of our preferred stock into 13,259,554 shares of common stock upon the completion of this offering and the application of the net proceeds from the sale of 3,700,000 shares of common stock offered by us at an assumed initial public offering price of $11.00 per share, after deducting underwriting discounts and commissions and our $900,000 estimated offering expenses. See note 1 to our financial statements for an explanation of the determination of the number of shares used in calculating per share data. SUMMARY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL YEAR ENDED SIX MONTHS ENDED ------------------------------ ------------------ DEC. 29, DEC. 28, JAN. 3, JUNE 28, JULY 4, 1996 1997 1999 1998 1999 -------- -------- -------- -------- ------- (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenue: SAN systems................................ $ 163 $ 3,282 $ 13,389 $ 6,557 $10,806 Components and other....................... 6,778 19,501 26,056 14,677 11,253 -------- -------- -------- -------- ------- Total revenue................................ 6,941 22,783 39,445 21,234 22,059 Gross profit (loss).......................... (401) 3,736 3,246 4,502 6,386 Loss from operations......................... (17,260) (13,525) (29,560) (12,713) (8,974) Net loss..................................... (17,652) (13,759) (21,233) (3,930) (9,856) Basic and diluted net loss per share (unaudited)................................ $ (8.77) $ (2.83) Pro forma basic and diluted net loss per share (unaudited).......................... $ (1.42) $ (.61) Weighted-average shares outstanding.......... 2,444 3,518 Pro forma weighted-average shares outstanding (unaudited)................................ 14,921 16,181
JULY 4, 1999 ----------------------- ACTUAL AS ADJUSTED -------- ----------- (UNAUDITED) BALANCE SHEET DATA: Cash and cash equivalents................................... $ 595 $ 36,664 Investments................................................. 2,563 2,563 Working (deficit) capital................................... (8,037) 28,032 Total assets................................................ 25,169 61,238 Long-term obligations and noncurrent portion of capital leases.................................................... 12,223 10,223 Mandatorily redeemable preferred stock...................... 20,101 -- Total stockholders' (deficit) equity........................ (27,929) 30,241
2 9 RISK FACTORS You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. WE HAVE INCURRED SIGNIFICANT LOSSES SINCE OUR INCEPTION, WE EXPECT FUTURE LOSSES, AND WE MAY NOT BECOME PROFITABLE. We have incurred significant losses since inception and expect to incur losses in the future. As of July 4, 1999, we had an accumulated deficit of $66.1 million. We cannot be certain that we ever will realize sufficient revenue to achieve profitability. We expect to incur significant product development, sales and marketing and administrative expenses, and we will need to generate significant revenue to achieve and maintain profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability. OUR OPERATING RESULTS ARE DIFFICULT TO FORECAST, MAY FLUCTUATE ON A QUARTERLY BASIS AND MAY BE ADVERSELY AFFECTED BY MANY FACTORS, WHICH MAY RESULT IN VOLATILITY IN OUR STOCK PRICE. Our revenue and results of operations have varied on a quarterly basis in the past and may vary significantly in the future due to a number of factors, many of which may cause our stock price to fluctuate. Some of the factors that could affect our operating results include: - the size, timing, terms and fluctuations of customer orders, particularly large orders from a limited number of OEMs; - our ability to attain and maintain sufficient reliability levels for our SAN interconnect products; - the timing of the introduction or enhancement of products by us, our OEMs and our competitors; - decreases in the prices at which we can sell our products; - the mix of products sold, as our switches and hubs typically have higher margins than our transceivers, and the mix of distribution channels through which our products are sold; - the ability of our contract manufacturers to produce and distribute our products in a timely fashion; As a result of these and other factors, we believe that period to period comparisons of our operating results should not be relied upon as an indicator of our future performance. It is likely that in some future period our operating results will be below your expectations or those of public market analysts. A COMPONENT USED IN OUR TRANSCEIVERS HAS EXPERIENCED AN ABNORMALLY HIGH FAILURE RATE WHICH HAS ADVERSELY AFFECTED AND COULD IN THE FUTURE AFFECT OUR SALES. Our gigabit interface converter transceivers, or GBICs, and our gigabaud link module transceivers, or GLMs, manufactured prior to March 1999 incorporate a compact disk, or CD, laser manufactured by a third party. GBICs are removable and GLMs are non-removable devices that convert optical and electrical signals. We have observed, and some customers have confirmed, that in certain applications our GBIC and GLM transceivers that incorporate this CD laser have experienced an abnormally high failure rate. Although we recorded a warranty reserve of $3.6 million in the fourth quarter of fiscal 1998 as a result of these problems, there is a risk that this reserve will be inadequate to implement a remedy that is satisfactory to our customers. In addition, we cannot assure you that, over time, failure rates for products that incorporate these CD lasers will not increase or that the lasers which we began using in our GBIC transceiver products in March 1999 will not experience problems. Claims against us in excess of the amount of our reserve could have a material adverse effect on our business and financial condition. As a result of this problem, Sun Microsystems has reduced its purchases of GBIC transceivers and in August 3 10 1999, we issued to Sun Microsystems a warrant for 150,000 shares of our common stock. In addition, if we are unable to resolve this matter to our customers' satisfaction, or if failure rates in transceiver products increase, our reputation and relationships with current and prospective customers could be damaged and adversely affect the sales of all of our products. OUR OEMS HAVE UNPREDICTABLE ORDER PATTERNS WHICH MAY CAUSE OUR REVENUE TO VARY SIGNIFICANTLY FROM PERIOD TO PERIOD. Our OEMs tend to order sporadically, and their purchases can vary significantly from quarter to quarter. Our OEMs generally forecast expected purchases in advance, but frequently do not order as expected and tend to place purchase orders only shortly before the scheduled delivery date. For example, during the quarter ended September 27, 1998, our SAN systems revenue declined to $2.5 million, primarily as a result of decreases in purchases of our entry-level hubs by two OEMs during that quarter. We plan our operating expenses based on revenue projections derived from our OEMs' forecasts. Because most of our expenses are fixed in the short term or incurred in advance of anticipated revenue, we may not be able to decrease our expenses in a timely manner to offset any unexpected shortfall in revenue. These order habits cause our backlog to fluctuate significantly. Moreover, our backlog is not necessarily indicative of actual sales for any succeeding period, as orders are subject to cancellation or delay by our OEMs with limited or no penalty. Also, we typically generate a large percentage of our quarterly revenue in the last month of the quarter. THE LOSS OF ONE OR MORE KEY CUSTOMERS COULD SIGNIFICANTLY REDUCE OUR REVENUE. Our success will depend on our continued ability to develop and manage relationships with significant OEMs and resellers, as well as on the sales efforts and success of these customers. Sun Microsystems, Compaq, Hewlett-Packard and Interphase represented 34.4%, 19.8%, 11.8% and 10.4% of our total revenue, respectively, for the six months ended July 4, 1999. In fiscal 1998, sales to our top two customers, Sun Microsystems and Hewlett-Packard, represented 54.4% and 12.3% of our total revenue, respectively. Although we are attempting to expand our base of OEMs, most of our future revenue may come from a small number of OEMs. Our agreements with our customers do not provide any assurance of future sales to those customers. For example: - our OEMs and resellers can stop purchasing and marketing our products at any time; - our OEM and reseller agreements are not exclusive and contain no renewal obligation; and - our OEM and reseller agreements do not require minimum purchases. We cannot be certain that we will retain our current OEMs and resellers or that we will be able to recruit additional or replacement customers. Many of our OEMs and resellers carry or utilize competing product lines. If we were to lose one or more important OEMs or resellers to a competitor, our business, results of operations and financial condition could be significantly harmed. OUR SUCCESS IS DEPENDENT UPON ACCEPTANCE OF FIBRE CHANNEL TECHNOLOGY AND THE GROWTH OF THE EMERGING SAN MARKET. Our SAN InSite management software, switches, hubs and transceivers are used exclusively in SANs. Accordingly, widespread adoption of SANs is critical to our future success. The market for SANs and related software, switches, hubs and transceivers has begun to develop only recently and is evolving rapidly. Because this market is new, it is difficult to predict its potential size or future growth rate. SANs are often implemented in connection with deployment of new storage systems and servers. Potential end-user customers that have invested substantial resources in their existing data storage and management systems 4 11 may be reluctant or slow to adopt a new approach, such as SANs. Our success in generating revenue in this emerging SAN market will depend on, among other things, our ability to: - demonstrate the benefits of SANs and our SAN InSite management software, switch, hub and transceiver products to OEMs, resellers and end-users; - develop, maintain and build relationships with leading OEMs and resellers; and - accurately predict the direction of industry standards and base our products on those industry standards. Our failure to do any of these activities would adversely affect our ability to successfully compete in the emerging SAN market. BECAUSE A SIGNIFICANT PORTION OF OUR REVENUE IS DERIVED FROM SALES OF ENTRY-LEVEL HUBS AND TRANSCEIVERS, WE ARE DEPENDENT ON CONTINUED WIDESPREAD MARKET ACCEPTANCE OF THESE PRODUCTS. We currently derive substantially all our revenue from sales of our entry-level hubs and transceivers. We derived approximately 89.9% and 93.8% of our total revenue from sales of these products for the six months ended July 4, 1999 and fiscal 1998, respectively. We expect that revenue from these products will continue to account for a substantial portion of our total revenue for the foreseeable future. If the market does not continue to accept our entry-level hubs and transceivers, our revenue will decline significantly. Some of these products have been introduced and shipped in volume only recently. Accordingly, the demand for and market acceptance of these products are uncertain. Factors that may affect the market acceptance of our products include the continued growth of the market for SAN interconnect products, the performance, price and total cost of ownership of our products, the availability, functionality and price of competing products and technologies, and the success and development of our OEMs and resellers. Many of these factors are beyond our control. WE EXPECT THAT A GROWING PERCENTAGE OF OUR FUTURE REVENUE WILL BE DERIVED FROM OUR SWITCH AND MANAGED HUB PRODUCTS, AND OUR SUCCESS WILL DEPEND ON WIDESPREAD ACCEPTANCE OF THESE PRODUCTS. Our future success depends upon our ability to address the rapidly changing needs of our customers by developing and introducing high-quality, cost-effective products as well as product enhancements and services on a timely basis and by keeping pace with technological developments and emerging industry standards. If we do not successfully develop, introduce and market new products, especially our switch and managed hub products, our revenue may decline. In particular, our future revenue growth will depend on the success of new product launches of our switch and managed hub products and success of our current switch and managed hub products. In addition, as we introduce new or enhanced products, we will have to manage successfully the transition from older products in order to minimize disruption in our customers' ordering patterns, avoid excessive levels of older product inventories and ensure that enough supplies of new products can be delivered to meet our customers' demands. To the extent customers defer or cancel orders in expectation of new product releases, any delay in development or introduction of new products could cause our operating results to suffer. COMPETITION IN OUR MARKETS MAY LEAD TO REDUCED PRICES AND SALES OF OUR PRODUCTS, INCREASED LOSSES AND REDUCED MARKET SHARE. The markets for SAN interconnect products are highly competitive. Our current competitors include a number of domestic and international companies, many of which have substantially greater financial, technical, marketing and distribution resources than we have. We expect that more companies, including our customers, may enter the market for SAN interconnect products. We may not be able to compete successfully against either current or future competitors. Increased competition could result in significant price erosion, reduced revenue, lower margins or loss of market share, any of which would have a material adverse effect on our business, results of operations and financial condition. 5 12 For fabric switch sales, we compete primarily with Ancor Communications, Brocade Communications and McDATA. For hub sales, we compete primarily with Emulex Corporation and Gadzoox Networks. For transceiver sales, we compete primarily with Cielo Communications, Finisar, Hewlett-Packard and IBM. Although we do not believe that any other vendor offers comprehensive SAN interconnect management software that directly competes with ours, other vendors, such as Brocade and Gadzoox, provide single point-device managers for either fabric switch or hub products, but not across multiple interconnect devices, including fabric switches, hubs and transceivers. Our competitors continue to introduce improved products with lower prices, and we will have to do the same to remain competitive. Furthermore, larger companies in other related industries or our customers may develop or acquire technologies and apply their significant resources, including their distribution channels and brand recognition, to capture significant SAN market share. Therefore, we may not be able to compete successfully in the SAN market. OUR FAILURE TO ENHANCE OUR EXISTING PRODUCTS AND INTRODUCE NEW PRODUCTS ON A TIMELY BASIS COULD CAUSE OUR REVENUE TO FALL. Given the product life cycles in the markets for our products, any delay or unanticipated difficulty associated with new product introductions or product enhancements could significantly harm our business, results of operations and financial condition. Product development delays may cause our revenue to decrease and the price of our stock to fall. We may not be able to develop, manufacture and market new products or product enhancements in a timely manner that achieve market acceptance. We also may not be able to develop the underlying core technologies necessary to create new products and enhancements, or to license these technologies from third parties. Product development delays may result from numerous factors, including: - changing OEM product specifications; - difficulties in hiring and retaining necessary personnel; - difficulties in reallocating engineering resources and overcoming resource limitations; - difficulties with independent contractors; - changing market or competitive product requirements; and - unanticipated engineering complexities. THE SALES CYCLE FOR OUR PRODUCTS IS LONG AND WE MAY INCUR SUBSTANTIAL NON-RECOVERABLE EXPENSES AND DEVOTE SIGNIFICANT RESOURCES TO SALES THAT DO NOT OCCUR WHEN ANTICIPATED OR AT ALL. OEMs and resellers typically conduct significant evaluation, testing, implementation and acceptance procedures before they begin to market and sell new solutions that include our products. This evaluation process is lengthy and may range from six months to one year or more. This process is complex and may require significant sales, marketing and management efforts on our part. This process becomes more complex as we simultaneously qualify our products with multiple customers. As a result, we may expend significant resources to develop customer relationships before we recognize any revenue from these relationships. FAILURE TO MANAGE OUR OEM AND RESELLER RELATIONSHIPS AND EXPAND OUR DISTRIBUTION CHANNELS COULD SIGNIFICANTLY REDUCE OUR REVENUE. We rely on OEMs and resellers to distribute and sell our products. Our success depends substantially on our ability to initiate, manage and expand our relationships with OEMs, our ability to attract additional resellers and the sales efforts of these OEMs and resellers. Our failure to manage and expand our relationships with OEMs and resellers, or their failure to market our products effectively, could substantially reduce our revenue and seriously harm our business. 6 13 ANY FAILURE BY US TO SUCCESSFULLY EXECUTE OUR DISTRIBUTION STRATEGY WILL NEGATIVELY IMPACT OUR REVENUE. Our distribution strategy focuses primarily on developing and expanding indirect distribution channels through OEMs and resellers, as well as expanding our field sales organization. Our failure to execute this strategy successfully could limit our ability to grow or sustain revenue. Furthermore, as we expand our sales to resellers, we may increase our selling costs as these parties generally require a higher level of customer support than our OEMs. If we fail to develop and cultivate relationships with significant resellers, or if these resellers are not successful in their sales efforts, sales of our products may decrease and our operating results would suffer. Many of our resellers also sell products that compete with our products. We cannot assure you that our resellers will market our products effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support. Our failure to successfully manage our reseller relationships or their failure to sell our products could reduce our revenue. In order to support and develop opportunities for our indirect distribution channels, we plan to expand our field sales and support staff significantly. We cannot assure you that this expansion will be successfully completed, that the cost of this expansion will not exceed the incremental revenue generated or that our expanded field sales and support staff will be able to compete successfully against the significantly more extensive and well-funded sales and marketing operations of many of our current or potential competitors. Our inability to effectively establish our distribution channels or manage the expansion of our field sales and support staff would have a material adverse effect on our ability to grow and increase revenue. IF WE DO NOT SUCCESSFULLY COMPLETE THE TRANSITION OF OUR PRODUCT MANUFACTURING TO K*TEC ELECTRONICS, OUR BUSINESS MAY SUFFER. We rely on outside contract manufacturing firms, K*TEC Electronics, a division of Kent Electronics, and Solectron Corporation, to manufacture our products. Currently K*TEC manufactures our switches, hubs and GBIC transceivers, and Solectron manufactures our GLM transceivers. We are in the process of transitioning all GLM manufacturing to K*TEC. Our failure to manage this transition effectively may disrupt the manufacture of our products. Any difficulties or disruptions in the manufacture of our products could prevent us from making timely customer deliveries and result in lost opportunities and reduced revenue. THE LOSS OF K*TEC, THE FAILURE TO FORECAST ACCURATELY DEMAND FOR OUR PRODUCTS OR TO MANAGE SUCCESSFULLY OUR RELATIONSHIP WITH K*TEC WOULD NEGATIVELY AFFECT OUR BUSINESS. Once the transition to K*TEC is complete, as we expect it to be in the second half of 1999, we will rely exclusively on K*TEC to manufacture, store and ship our products. We share K*TEC's manufacturing capacity with numerous companies whose manufacturing needs may conflict with ours. If K*TEC is unable or unwilling to complete production runs for us in the future, or experiences any significant delays in completing production runs or shipping our products, the manufacturing and sale of our products would be temporarily suspended. We have in the past experienced delivery problems based on capacity constraints for production test and material supply. As our product volume requirements increase, we may find it necessary to augment our manufacturing capacity by exploring new subcontract manufacturers. We may not be successful in finding qualified manufacturers that meet our needs. An interruption in supply of our products, or additional costs incurred to qualify and shift production to an alternative manufacturing facility, would significantly harm our business, results of operations and financial condition. K*TEC is not obligated to supply products for us, except as may be provided in a particular purchase order that K*TEC has accepted. We place purchase orders with K*TEC based on periodic forecasts. While most of the materials used in our products are standard products, some are proprietary and/or sole-source and require extended lead times. Our business will be adversely affected if we are unable to accurately forecast demand for our products and manufacturing capacity or if materials are not available at K*TEC to meet the demand. Lead times for materials and components vary significantly and depend on 7 14 the specific supplier, contract terms and demand for a component at a given time. We also may experience shortages of components from time to time, which could delay the manufacture of our products. We plan to regularly introduce new products and product enhancements, which will require that we coordinate our efforts with K*TEC to rapidly achieve volume production. If we do not effectively manage our relationship with K*TEC, or if K*TEC experiences delays, disruptions, capacity constraints or quality control problems in its manufacturing operations, our ability to ship products to our customers could be delayed and our competitive position and reputation could be harmed. Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming. If we are required to or choose to change contract manufacturers, we may lose revenue and damage our customer relationships. WE MAY LOSE SALES IF OUR SOLE SOURCE SUPPLIERS FAIL TO MEET OUR NEEDS. We currently purchase several key components from single sources. We depend on single sources for our vertical cavity surface emitting lasers, or VCSELs, our application specific integrated circuits, or ASICs, and our microprocessors. VCSELs are laser components that maintain a high quality signal and consume a low amount of power. ASICs are custom designed computer chips that perform specific functions very efficiently. In addition, we license from a third party software that is incorporated into our switches and hubs. If we cannot supply products due to a lack of components, or are unable to redesign products with other components in a timely manner, our business, results of operations and financial condition would be materially adversely affected. For a more complete discussion of our supplier arrangements, see "Business -- Manufacturing" on page 40. We use rolling forecasts based on anticipated product orders to determine our component requirements. Lead times for materials and components that we order vary significantly and depend on factors such as specific supplier requirements, contract terms and current market demand for particular components. As a result, our component requirement forecasts may not be accurate. If we overestimate our component requirements, we may have excess inventory, which would increase our costs. If we underestimate our component requirements, we may have inadequate inventory, which could interrupt our manufacturing and delay delivery of our products to our customers. Any of these occurrences would negatively impact our business and operating results. A DECREASE IN THE SELLING PRICES OF PRODUCTS WOULD REDUCE OUR REVENUE AND GROSS MARGINS. As the markets for SAN interconnect products mature, it is likely that the average unit prices of our products will decrease in response to competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors or other factors. If our efforts to reduce the cost of our products through manufacturing efficiencies, design improvements and cost reductions, as well as through increased sales of higher margin products are not successful, our revenue and gross margins will decline, significantly harming our operating results and financial condition which may cause our stock price to drop. UNDETECTED SOFTWARE OR HARDWARE DEFECTS COULD INCREASE OUR COSTS AND REDUCE OUR REVENUE. SAN interconnect products frequently contain undetected software or hardware defects when first introduced or as new versions are released. Our products are complex and problems may be found from time to time in our existing, new or enhanced products. Our products incorporate components manufactured by third parties. We have in the past experienced difficulties with quality and reliability of components obtained from third parties and we could experience similar problems in the future. In addition, our products are integrated with products from other vendors. As a result, when problems occur, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause significant customer relations problems. 8 15 IF WE FAIL TO SUCCESSFULLY DEVELOP THE VIXEL BRAND, OUR REVENUE MAY NOT GROW AND OUR STOCK PRICE MAY FALL. We believe that establishing and maintaining the Vixel brand is a critical aspect of our efforts to maintain and develop strategic OEM and reseller relationships, and that the importance of brand recognition will increase due to the growing number of vendors of SAN interconnect products. Our failure to successfully develop our brand may prevent us from growing our revenue, which could cause the price of our stock to fall. We intend to increase our spending on programs, including advertising campaigns and marketing events, to create and maintain brand loyalty among our customers. If we do not generate a corresponding increase in our revenue as a result of our branding efforts or otherwise fail to promote our brand successfully, or if we incur excessive expenses in an attempt to promote and maintain the Vixel brand, our business, results of operations and financial condition may be materially adversely affected. In addition, if our OEMs, resellers and end users of our SAN interconnect products do not perceive our products to be of high quality, or if we introduce new products or technologies that are not accepted by the market, the value of the Vixel brand will decline and our business will suffer. OUR MANAGEMENT TEAM IS NEW AND MAY NOT BE ABLE TO WORK TOGETHER SUCCESSFULLY WHICH COULD HARM OUR BUSINESS. Our success depends to a significant degree upon the continued joint contributions of our key management, many of whom we only recently hired. In April 1999, we hired a new president and chief executive officer, James M. McCluney, and in September 1998, we hired a chief financial officer, Kurtis L. Adams. Other members of our management team also joined us only recently. Because of the limited time in which our management team has been working together, we cannot assure you that management will be able to work effectively as a team. IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL, WE MAY NOT BE SUCCESSFUL. We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, technical, sales and marketing, finance and operations personnel. In particular, we will need to increase the number of technical staff members with experience in high-speed networking applications as we further develop our product line. Competition for these highly skilled employees in our industry is intense. Our failure to attract and retain these key employees could have a material adverse effect on our business, results of operations and financial condition. We are seeking additional sales and marketing personnel. Competition for qualified sales and marketing personnel is intense and we might not be able to hire the kind and number of sales and marketing personnel we are targeting. Unless we expand our sales and marketing force, we may not be able to increase our revenue or extend our brand awareness. We also have a small customer service and support organization and will need to increase our staff to support new OEMs and resellers and the expanding needs of our existing customers. Hiring customer service and support personnel is very competitive in our industry due to the limited number of people available with the necessary technical skills and understanding of SAN interconnect products. The loss of the services of any of our key employees, the inability to attract or retain qualified personnel in the future or delays in hiring required personnel could hinder the development and introduction of and negatively impact our ability to sell our products. In addition, employees may leave our company and subsequently compete against us. Moreover, companies in our industry whose employees accept positions with competitors frequently claim that their competitors have engaged in unfair hiring practices. We may be subject to claims of this type in the future as we seek to hire qualified personnel and some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. 9 16 WE HAVE EXPERIENCED A PERIOD OF RAPID GROWTH, AND IF WE ARE NOT ABLE TO SUCCESSFULLY MANAGE THIS AND FUTURE GROWTH, OUR BUSINESS MAY SUFFER. We have experienced a period of rapid growth, which has placed and continues to place a significant strain on our resources. Unless we manage our growth effectively, we may make mistakes in operating our business, such as inaccurate sales forecasting, material planning and financial reporting, which may result in fluctuations in our operating results and cause the price of our stock to decline. We plan to continue to expand our operations significantly. This growth will place a significant demand on our management and operational resources. In order to manage growth effectively, we must implement and improve our operational systems, procedures and controls on a timely basis. Our key personnel have limited experience managing this type of growth. If we cannot manage growth effectively, our business could suffer. OUR PRODUCTS MUST COMPLY WITH EVOLVING INDUSTRY STANDARDS AND GOVERNMENT REGULATIONS, AND IF WE CANNOT DEVELOP PRODUCTS THAT ARE COMPATIBLE WITH THESE EVOLVING STANDARDS, OUR BUSINESS WILL SUFFER. The market for SAN products is characterized by the need to support industry standards as they emerge, evolve and achieve acceptance. To remain competitive, we must continue to introduce new products and product enhancements that meet these industry standards. All components of a SAN must utilize the same standards in order to operate together. Our products comprise only a part of an entire SAN and we depend on the companies that provide other components, many of which are significantly larger than we are, to support industry standards as they evolve. The failure of these providers to support these industry standards could negatively impact market acceptance of our products. In addition, in the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Internationally, products that we develop also will be required to comply with standards established by authorities in various countries. Failure to comply with existing or evolving industry standards or to obtain timely domestic or foreign regulatory approvals or certificates could materially harm our business. WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL SUBJECT US TO ADDITIONAL BUSINESS RISKS. Our revenue from international sales represented 17.9% and 17.3% of our total revenue for the six months ended July 4, 1999 and fiscal 1998, respectively. Prior to 1998, we derived less than 5% of our total annual revenue from international sales. We plan to expand our international sales activities significantly. In 1999 and 2000, we intend to expand our sales activities in Europe and Asia. Our international sales growth will be limited if we are unable to establish relationships with international distributors, establish foreign operations, effectively manage international sales channels, hire additional personnel and develop relationships with service organizations. We cannot be certain that we will be able to establish, generate and build market demand for our products internationally. Our international operations will be subject to a number of risks, including: - increased complexity and costs of managing international operations; - multiple protectionist, conflicting and changing governmental laws and regulations; - reduced or limited protections of intellectual property rights; and - political and economic instability. These factors and others could harm future sales of our products to international customers which would negatively impact our business and operating results. To date, none of our international revenue and costs has been denominated in foreign currencies. As a result, an increase in the value of the U.S. dollar relative to foreign currencies could make our products more expensive and thus less competitive in foreign markets. In the future, a portion of our international revenue may be denominated in foreign currencies, including the Euro, which would subject us to risks associated with foreign currency fluctuations. 10 17 Our SAN interconnect products are subject to U.S. Department of Commerce export control restrictions. Neither we nor our customers may export those products without obtaining an export license. These U.S. export laws also prohibit the export of our SAN interconnect products to a number of countries deemed by the United States to be hostile. These restrictions may make foreign competitors facing less stringent controls on their products more competitive in the global market than are we or our customers. The U.S. government may not approve any pending or future export license requests. In addition, the list of products and countries for which export approval is required, and the regulatory policies with respect thereto, could be revised. The sale of our SAN interconnect products could be harmed by our failure or the failure of our customers to obtain the required government licenses or by the costs of compliance. OUR INTELLECTUAL PROPERTY PROTECTION MAY PROVE TO BE INADEQUATE WHICH COULD NEGATIVELY AFFECT OUR ABILITY TO COMPETE. We believe that our continued success depends on protecting our proprietary technology. We currently rely on a combination of patents, copyrights, trademarks, trade secrets and contractual provisions to establish and protect our intellectual property rights. In addition, we also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our software, documentation and other proprietary information. Our failure to protect our intellectual property rights could have a material adverse effect on our business, results of operations and financial condition. We cannot be certain that the steps we take to protect our intellectual property will adequately protect our proprietary rights, that others will not independently develop or otherwise acquire equivalent or superior technology or that we can maintain any of our technology as trade secrets. In addition, the laws of some of the countries in which our products are or may be sold may not protect our products and intellectual property rights to the same extent as the laws of the United States or at all. THIRD-PARTY CLAIMS OF INFRINGEMENT OF THEIR INTELLECTUAL PROPERTY RIGHTS COULD ADVERSELY AFFECT OUR BUSINESS. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We occasionally receive communications from third parties alleging patent infringement, and there always is the chance that third parties may assert infringement claims against us. For example, we recently settled claims of patent infringement related to our transceivers, which require us to make future payments. We established a reserve for these payments in the fourth quarter of fiscal 1998. Future patent infringement disputes, with or without merit, could result in costly litigation, cause product shipment delays or require us to enter into royalty or licensing agreements. We cannot be certain that the necessary licenses would be available or that they could be obtained on commercially reasonable terms. If we fail to obtain these royalty or licensing agreements in a timely manner and on reasonable terms, our business, results of operations and financial condition would be materially adversely affected. WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS AND CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES. We expect to review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities, or that may otherwise offer growth opportunities. While we have no current agreements or negotiations underway, we may buy businesses, products or technologies in the future. If we make any future purchases, we could issue stock that would dilute existing stockholders' percentage ownership, incur substantial debt or assume contingent liabilities. These purchases also involve numerous risks, including: - problems assimilating the purchased operations, technologies or products; - unanticipated costs associated with the acquisition; 11 18 - diversion of management's attention from our core business; - adverse effects on existing business relationships with suppliers and customers; - incorrect estimates made in the accounting for acquisitions; - risks associated with entering markets in which we have no or limited prior experience; and - potential loss of key employees of purchased organizations. OUR FAILURE AND THE FAILURE OF OUR SUPPLIERS AND CUSTOMERS TO BE YEAR 2000 COMPLIANT COULD HARM OUR BUSINESS. The year 2000 computer issue creates risks for us. Failure of our products to recognize date information correctly when the year changes to 2000 could result in significant decreases in market acceptance of our products, increases in warranty claims and legal liability for defective software. We have not tested our products in every possible computer environment, and therefore our products may not be fully year 2000 compliant. Our internal year 2000 compliance review is focused on reviewing our internal computer information and security systems for year 2000 compliance, and developing and implementing remedial programs to resolve year 2000 issues in a timely manner. Additionally, we are contacting our third party suppliers and requesting their assurances that their systems are year 2000 compliant. If our suppliers, vendors, major distributors and partners fail to correct their year 2000 problems, these failures could result in an interruption in, or a failure of, our normal business activities or operations. If a year 2000 problem occurs, it may be difficult to determine which vendor's products have caused the problem. These failures could interrupt our operations and damage our relationships with our customers. Due to the general uncertainty inherent in the year 2000 problem resulting from the readiness of third-party suppliers and vendors, we are unable to determine at this time whether any year 2000 failures will harm us. We believe our year 2000 worst case scenario would be the failure of a sole or limited source supplier to be year 2000 compliant. The failure of one of these suppliers to be year 2000 compliant could seriously interrupt our manufacturing process, which could substantially reduce our revenue. As we have not yet completed our year 2000 assessment, we have not developed a contingency plan. We anticipate that our full year 2000 review, necessary remedial actions and contingency plan will be substantially complete by the end of November 1999. To date our year 2000 costs primarily have been driven by the cost of our personnel conducting the year 2000 compliance review. We estimate that the costs of completing any required modifications, upgrades or replacements of our internal systems will not exceed $280,000, almost all of which we believe will be or has been incurred during fiscal 1999. However, this amount may increase as we identify and address remaining issues. Additionally, our customers' purchasing plans could be affected by year 2000 issues if they need to expend significant resources to fix their existing systems. This situation may reduce funds available to purchase our products. Therefore, some customers may wait to purchase our products until after the year 2000, which may reduce our revenue. MANAGEMENT CAN SPEND THE PROCEEDS OF THIS OFFERING IN WAYS WITH WHICH OUR STOCKHOLDERS MAY NOT AGREE. Except for the promissory note and accrued interest totaling $2.0 million which we are required to pay to Western Digital upon completion of this offering, our management will be able to spend the remaining net proceeds from this offering in ways with which our stockholders may not agree. We cannot assure you that our investments and use of the net proceeds of this offering will yield favorable returns or results. OUR PRINCIPAL STOCKHOLDERS WILL EXERCISE SIGNIFICANT CONTROL OVER VIXEL AND MAY TAKE ACTIONS THAT MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS. Upon completion of this offering, our executive officers and directors and their affiliates will beneficially own, in the aggregate, approximately 38.4% of our outstanding common stock. As a result, 12 19 these stockholders will be able to exercise significant control over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, which could delay or prevent someone from acquiring or merging with us. PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN CONTROL OF VIXEL AND MAY REDUCE THE MARKET PRICE OF OUR COMMON STOCK. Provisions in our certificate of incorporation and bylaws may discourage, delay or prevent a merger or acquisition that a stockholder may consider favorable. These provisions include: - authorizing the issuance of preferred stock without stockholder approval; - providing for a classified board of directors with staggered, three-year terms; - prohibiting cumulative voting in the election of directors; - requiring super-majority voting to effect certain amendments to our certificate of incorporation and bylaws; - limiting the persons who may call special meetings of stockholders; and - prohibiting stockholder actions by written consent. Other provisions of Delaware law also may discourage, delay or prevent someone from acquiring or merging with us. OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE. There has been no public market for our common stock prior to this offering. The initial public offering price for our common stock will be determined through negotiations between the underwriters and us. The market price of our common stock after the offering may vary from the initial public offering price. If you purchase shares of our common stock, you may not be able to resell those shares at or above the initial public offering price. The market price of our common stock may fluctuate significantly in response to the following factors, some of which are beyond our control: - actual or anticipated fluctuations in our operating results; - losses of our key OEMs; - changes in financial estimates by securities analysts; - changes in market valuations of other technology companies; - announcements by us or our competitors of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; - additions or departures of key personnel; and - sales of common stock in the future. In addition, the stock market has experienced extreme volatility that often has been unrelated to the performance of particular companies. These market fluctuations may cause our stock price to fall regardless of our performance. You should read the "Underwriting" section on page 64 for a more complete discussion of the factors to be considered in determining the initial public offering price of our common stock. WE MAY NOT BE ABLE TO MEET OUR FUTURE CAPITAL REQUIREMENTS, LIMITING OUR ABILITY TO GROW. We believe that the net proceeds of this offering, after repayment to Western Digital of a promissory note and accrued interest totaling $2.0 million, together with our existing cash balances, credit facilities and the cash flow we expect to generate from future operations, will be sufficient to meet our capital 13 20 requirements at least through the next 12 months. However, we may need, or could elect, to seek additional funding prior to that time. If we need to raise additional funds, we may not be able to do so on favorable terms, or at all. Further, if we issue equity securities, existing stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders. If we cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated funding requirements. SUBSTANTIAL FUTURE SALES OF OUR COMMON STOCK IN THE PUBLIC MARKET MAY DEPRESS OUR STOCK PRICE. Our current stockholders hold a substantial number of shares, which they will be able to sell in the public market in the near future. The 3,700,000 shares sold in this offering will be freely tradable. The other 17,929,003 shares outstanding will be restricted securities as defined in Rule 144 of the Securities Act. Approximately 17,912,307 of those shares will be freely tradable beginning 180 days after the effective date of this offering, and the remainder of these will become freely tradable at various later times. Sales of a substantial number of shares of our common stock after this offering could cause our stock price to fall. In addition, the sale of these shares could impair our ability to raise capital through the sale of additional stock. YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION. The initial public offering price is substantially higher than the book value per share of our outstanding common stock. Accordingly, if you purchase common stock in the offering, you will incur immediate dilution of approximately $9.82 in the book value per share of our common stock from the price you pay for our common stock. YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY UNCERTAIN This prospectus contains forward-looking statements that involve risks and uncertainties. We use words such as "anticipates," "believes," "expects," "future," "intends," "plans" and similar expressions to identify forward-looking statements. These statements are only predictions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements, which apply only as of the date of this prospectus. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described on the preceding pages and elsewhere in this prospectus. We believe it is important to communicate our expectations to our investors. However, there may be events in the future that we are not able to predict accurately or over which we have no control. The risk factors listed above, as well as any cautionary language in this prospectus, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Before you invest in our common stock, you should be aware that the occurrence of the events described in these risk factors and elsewhere in this prospectus could have a material adverse effect on our business, operating results, financial condition and stock price. 14 21 USE OF PROCEEDS Our net proceeds from the sale of the 3,700,000 shares of common stock we are offering are estimated to be $37.0 million, or $42.6 million if the underwriters' option to purchase additional shares is exercised in full, assuming an offering price of $11.00 per share and after deducting underwriting discounts and commissions and estimated offering expenses. We will use $2.0 million of the net proceeds to repay a 8.69% promissory note and accrued interest due Western Digital. We currently expect to use the remaining net proceeds for working capital and general corporate purposes. We currently intend to use the remaining net proceeds for working capital and general corporate purposes, including to continue expanding and enhancing our sales and marketing operations, to continue expanding our product offerings and for capital expenditures made in the ordinary course of business. We have not yet determined our expected use of these proceeds but we currently anticipate that we will incur at least $12.0 million in research and development expenses and $14.0 million in selling, general and administrative expenses over the next twelve months. Actual expenditures may vary substantially from these estimates. The amounts and timing of our actual expenditures will depend upon numerous factors, including the status of our product development efforts, marketing and sales activities and the amount of cash generated by our operations. We may find it necessary or advisable to use portions of the proceeds for other purposes. We may also use the net proceeds for the repayment of corporate indebtedness which might include the early repayment of a $7.5 million promissory note due to Greyrock Capital on September 30, 2000. The promissory note bears interest at the London inter-bank offer rate, or LIBOR, plus 4.75% and represents the entire amount due Greyrock Capital under our term loan agreement. In addition, we may use a portion of the net proceeds for further development of our product lines through acquisitions of products, technologies and businesses. However, we have no present commitments or agreements to make any such acquisitions. Our management will have broad discretion concerning the allocation and use of the net proceeds of the offering to be received by us. Pending such uses, we will invest the net proceeds in short-term, investment grade, interest-bearing securities. DIVIDEND POLICY We have never declared or paid cash dividends on our capital stock. We currently intend to retain any future earnings to fund the development and growth of our business and do not currently anticipate paying any cash dividends in the foreseeable future. Future dividends, if any, will be determined by our board of directors. In addition, we have entered into agreements with creditors which restrict our ability to pay dividends. 15 22 CAPITALIZATION The following table sets forth our capitalization as of July 4, 1999: - on an actual basis; - on a pro forma basis to reflect the conversion of all outstanding shares of preferred stock, which includes 894,333 shares of preferred stock issuable upon exercise of warrants, into 13,259,554 shares of common stock; and - on a pro forma as adjusted basis to reflect the sale of the common stock in this offering at an assumed initial public offering price of $11.00 per share and the application of the net proceeds, after deducting estimated underwriting discounts and commissions and our estimated offering expenses. The pro forma and pro forma as adjusted information set forth below is unaudited and should be read in conjunction with our financial statements and notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
AS OF JULY 4, 1999 ----------------------------------------------- PRO FORMA ACTUAL PRO FORMA AS ADJUSTED ----------- ------------ -------------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) Long-term obligations and noncurrent portion of capital leases................................................ $ 12,223 $ 12,223 $ 10,223 Redeemable preferred stock, $.001 par value; 4,623,482 shares authorized, 4,529,221 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted...... 20,101 -- -- -------- -------- -------- Stockholders' (deficit) equity.......................... Preferred stock, $.001 par value, 15,536,522 shares authorized, 14,465,777 shares issued and outstanding, actual; no shares issued or outstanding, pro forma and pro forma as adjusted... 14 -- -- Common stock, $.0015 par value, 30,000,000 shares authorized, 4,669,449 shares issued and outstanding, actual; 17,929,003 shares issued and outstanding, pro forma; 21,629,003 shares issued and outstanding, pro forma as adjusted............. 7 27 32 Additional paid-in capital............................ 51,231 72,444 109,390 Deferred compensation................................. (7,787) (7,787) (7,787) Notes receivable from stockholders.................... (5,246) (5,246) (5,246) Treasury stock, at cost; 66,666 shares................ (50) (50) (50) Accumulated deficit................................... (66,098) (66,098) (66,098) -------- -------- -------- Total stockholders' (deficit) equity............... (27,929) (6,710) 30,241 -------- -------- -------- Total capitalization............................. $ 4,395 $ 5,513 40,464 ======== ======== ========
The outstanding share information in the table above is as of July 4, 1999 and excludes: - 2,217,179 shares issuable upon exercise of outstanding options at a weighted average exercise price of $2.55 per share; - 419,865 shares of common stock issuable upon exercise of outstanding warrants at a weighted average exercise price of $9.76 per share; and - 1,973,230 shares available for future issuance under our equity incentive plans. 16 23 DILUTION If you invest in our common stock, your interest will be diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after this offering. In the table below, we have calculated net tangible book value per share by dividing the net tangible book value, total assets less intangible assets and total liabilities, by the number of outstanding shares of common stock. If you elect to participate in this offering, you could pay $11.00 per share, the assumed initial public offering price, which substantially exceeds $1.18 per share, which is the per share value of our tangible assets after subtracting our liabilities. Additionally as detailed below, new investors purchasing shares in this offering at the assumed initial public offering price will contribute 44.4% of the total consideration paid to us but will own only 17.1% of our shares. As of July 4, 1999, our pro forma net tangible book value was approximately $(11.3) million, or $(.63) per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities divided by the pro forma number of shares of common stock outstanding. Without taking into account any other changes in net tangible book value after July 4, 1999, other than to give effect to the receipt by us of the net proceeds from the sale of the 3,700,000 shares of common stock offered by us at an assumed initial public offering price of $11.00 per share, our pro forma net tangible book value at July 4, 1999 would have been approximately $25.6 million, or $1.18 per share. This represents an immediate increase in net tangible book value of $1.81 per share to existing stockholders and an immediate dilution of $9.82 per share to new investors purchasing shares at the assumed initial public offering price. The following table illustrates this per share dilution. Assumed initial public offering price per share............. $11.00 Pro forma net tangible book value per share as of July 4, 1999................................................... $(.63) Increase per share attributable to new investors.......... 1.81 ----- Pro forma net tangible book value per share after the offering.................................................. 1.18 ------ Dilution per share to new investors......................... $ 9.82 ======
The following table summarizes on a pro forma basis, as of July 4, 1999, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid to us by existing stockholders and by new investors purchasing shares of common stock in this offering. The information presented is based upon an assumed initial public offering price of $11.00 per share, before deducting estimated underwriting discounts and commissions and estimated offering expenses of this offering.
SHARES PURCHASED TOTAL CONSIDERATION --------------------- ---------------------- AVERAGE PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ---------- ------- ----------- ------- ------------- Existing stockholders.............. 17,929,003 82.9% $51,017,000 55.6% $ 2.85 New investors...................... 3,700,000 17.1 40,700,000 44.4 11.00 ---------- ----- ----------- ----- Total.............................. 21,629,003 100.0% $91,717,000 100.0% ========== ===== =========== =====
The information presented above with respect to existing stockholders assumes the conversion of 19,889,331 shares of preferred stock, which includes 894,333 shares of preferred stock issuable upon exercise of warrants, into 13,259,554 shares of common stock, . This information is as of July 4, 1999 and excludes: - 2,217,179 shares of common stock issuable upon exercise of options outstanding at a weighted average exercise price of $2.55 per share; - 419,865 shares of common stock issuable upon exercise of warrants outstanding at a weighted average exercise price of $9.76 per share; and - 1,973,230 shares of common stock available for future issuance under our equity incentive plans. The issuance of common stock in connection with the exercise of these options and warrants will result in further dilution to new investors. For a complete discussion of these options and warrants, see "Management -- Employee Benefit Plans" on page 48 and note 1 to our financial statements. 17 24 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with our financial statements and related notes, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial information appearing elsewhere in this prospectus. We derived the statement of operations data for the fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999, and balance sheet data as of December 28, 1997 and January 3, 1999, from the audited financial statements in this prospectus. The statement of operations data for the fiscal years ended December 31, 1994 and 1995 and the selected balanced sheet data set forth below for us as of December 31, 1994, December 31, 1995 and December 29, 1996 is derived from our audited financial statements not included in this prospectus. Those financial statements were audited by PricewaterhouseCoopers, LLP, independent accountants. We derived the statement of operations data for the six months ended June 28, 1998 and July 4, 1999 and balance sheet data as of July 4, 1999 from the unaudited financial statements included in this prospectus. The historical unaudited financial statements include, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information contained in them. The results of operations for the six months ended July 4, 1999 are not necessarily indicative of results expected for the full fiscal year 1999 or future results. Net loss available to common stockholders shown below includes our net loss, as well as the accretion related to our redeemable preferred stock.
FISCAL YEAR ENDED SIX MONTHS ENDED ---------------------------------------------------- ------------------- DEC. 31, DEC. 31, DEC. 29, DEC. 28, JAN. 3, JUNE 28, JULY 4, 1994 1995 1996 1997 1999 1998 1999 -------- -------- -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) STATEMENT OF OPERATIONS: Revenue: SAN systems........................................ $ -- $ -- $ 163 $ 3,282 $ 13,389 $ 6,557 $ 10,806 Components and other............................... 1,713 399 6,778 19,501 26,056 14,677 11,253 ------ ------- -------- -------- -------- -------- -------- Total revenue................................ 1,713 399 6,941 22,783 39,445 21,234 22,059 Cost of revenue...................................... 448 521 7,342 19,047 36,199 16,732 15,673 ------ ------- -------- -------- -------- -------- -------- Gross profit (loss).................................. 1,265 (122) (401) 3,736 3,246 4,502 6,386 ------ ------- -------- -------- -------- -------- -------- Operating expenses: Research and development........................... 537 1,678 4,474 9,360 11,110 5,249 6,233 Acquired in-process technology..................... -- -- 8,633 -- 5,118 5,118 -- Selling, general and administrative................ 961 967 3,549 7,629 14,521 6,237 6,664 Amortization and writedown of goodwill and intangibles...................................... -- -- 167 222 2,057 611 680 Amortization of deferred compensation.............. 38 38 36 50 -- -- 1,783 ------ ------- -------- -------- -------- -------- -------- Total operating expenses..................... 1,536 2,683 16,859 17,261 32,806 17,215 15,360 ------ ------- -------- -------- -------- -------- -------- Loss from operations................................. (271) (2,805) (17,260) (13,525) (29,560) (12,713) (8,974) Other (expense) income............................... (135) (154) (392) (234) 8,327 8,783 (882) ------ ------- -------- -------- -------- -------- -------- Net loss............................................. $ (406) $(2,959) $(17,652) $(13,759) $(21,233) $ (3,930) $ (9,856) ====== ======= ======== ======== ======== ======== ======== Net loss available to common stockholders............ $ (406) $(2,959) $(17,693) $(13,955) $(21,424) $ (4,029) $ (9,954) ====== ======= ======== ======== ======== ======== ======== Basic and diluted net loss per share................. $(0.12) $(26.47) $ (56.87) $ (18.90) $ (8.77) $ (1.99) $ (2.83) ====== ======= ======== ======== ======== ======== ======== Weighted-average shares outstanding.................. 3,389 112 311 738 2,444 2,020 3,518 ====== ======= ======== ======== ======== ======== ======== Pro forma net loss available to common stockholders (unaudited)........................................ $(21,233) $ (9,856) ======== ======== Pro forma basic and diluted net loss per share (unaudited)........................................ $ (1.42) $ (.61) ======== ======== Pro forma weighted-average shares outstanding (unaudited)........................................ 14,921 16,181 ======== ========
DEC. 31, DEC. 31, DEC. 29, DEC. 28, JAN. 3, JULY 4, 1994 1995 1996 1997 1999 1999 -------- -------- -------- -------- -------- -------- BALANCE SHEET DATA: Cash and cash equivalents...................................... $ 202 $ 7,883 $ 19,883 $ 3,776 $ 3,841 $ 595 Investments.................................................... -- -- -- -- 2,490 2,563 Working capital (deficit)...................................... 746 7,959 18,477 2,352 285 (8,037) Total assets................................................... 4,923 12,318 29,374 19,934 28,165 25,169 Long-term obligations and noncurrent portion of capital leases....................................................... 3,149 2,056 6,012 6,057 13,856 12,223 Mandatorily redeemable preferred stock......................... -- -- 19,327 19,523 19,993 20,101 Total stockholders' equity (deficit)........................... 818 8,980 (18,937) (14,030) (19,924) (27,929)
18 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and the related notes included elsewhere in this prospectus. OVERVIEW We are a leading provider of comprehensive interconnect solutions for use in SANs. Our portfolio of Fibre Channel products, including our SAN management software, fabric switches, arbitrated loop hubs and transceivers, is fully interoperable and designed to perform in concert to address a wide variety of data and storage needs. We incorporated in Colorado in June 1991 under the name Photonics Research Incorporated and initially developed fiber optic components for data communications and related applications. In February 1995, we reincorporated in Delaware and changed our name to Vixel Corporation. In the first quarter of 1996, we acquired the Fibre Channel hub and transceiver product lines from Western Digital Corporation. In 1997 we began developing our SAN InSite software to manage our SAN interconnect solutions. In the first quarter of 1998, we acquired Arcxel Technologies, Inc., a developer of Fibre Channel switches. In early 1998, we sold our laser diode fabrication facility and gigabit Ethernet transceiver product line to Cielo Communications, Inc., and have since been focused exclusively on designing, developing and marketing our Fibre Channel SAN interconnect solutions. We derive substantially all of our revenue from the sale of SAN interconnect products, including switches, hubs and transceivers. We currently include our SAN InSite software with our switches and managed hubs, and we do not sell this software separately from our other products. We sell our products primarily to a limited number of OEMs. Sun Microsystems, Compaq Computer, Hewlett-Packard and Interphase represented 34.4%, 19.8%, 11.8% and 10.4% of our total revenue, respectively, for the six months ended July 4, 1999. In fiscal 1998, five OEMs accounted for 81.6% of our total revenue, with sales to Sun Microsystems and Hewlett-Packard accounting for 54.4% and 12.3% of our total revenue, respectively. No other individual customer represented more than 10.0% of our total revenue in either period. While we are seeking to diversify our customer base and expand the portion of our revenue which is derived from sales through various distribution channels, we anticipate that our operating results will continue to depend on volume sales to a relatively small number of OEMs. For the six months ended July 4, 1999 and fiscal 1998, only 3.1% and 4.6%, respectively, of our total revenue was derived from sales to distribution channel customers. We may not be successful in our efforts to diversify our customer base and the loss of one of our key customers could significantly reduce our total revenue. We currently have one distributor in North America and one in Japan. These distributors which sell our products to VARs and end users currently represent only a small percentage of our total revenue. We plan to expand our sales channels to include systems integrators, VARs and additional distributors in North America and Europe. We generally recognize revenue at the time of product shipment, unless we have future obligations for installation or when we ship product demonstration units. Revenue from products shipped with future installation obligations is recognized when we meet our future obligation. Revenue is not recognized on demonstration units unless the customer ultimately purchases the unit, and the related revenue is recognized at that time. Our agreement with our North American distributor provides for price protection and for stock rotation based on a percentage of shipments for the preceding quarter when an offsetting order is requested. Revenue for the percentage of shipments subject to these stock rotation rights is deferred until the stock rotation period has passed. We provide an allowance for price protection rights. We also maintain a reserve for product warranty costs based on a combination of historical experience and specifically identified potential warranty liabilities. Our gross profit as a percentage of total revenue is affected by the mix of products sold, sales channels and customers to which our products are sold. Our gross profit as a percentage of total revenue 19 26 also is affected by fluctuations in manufacturing volumes and component costs, manufacturing costs charged by our contract manufacturers, new product introductions, changes in our product pricing and estimated warranty costs. We expect that average unit selling prices for our products will decline over time in response to competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors and other factors. We seek to maintain gross profit as a percentage of total revenue by selling a higher percentage of higher margin products and reducing the cost of our products through manufacturing efficiencies, design improvements and cost reductions for components. We currently outsource our product manufacturing to two contract manufacturers, K*TEC Electronics, a division of Kent Electronics, and Solectron Corporation. We are in the process of moving all our product manufacturing to K*TEC, and we expect to complete this process in the second half of 1999. Our strategy with this transition is to reduce indirect costs associated with supplier management and performance tracking and to leverage the efficiencies of K*TEC's consolidated purchasing power and materials management capabilities to reduce average cost of goods sold. Our contract manufacturers also provide distribution and repair operations and most of our materials management. We purchase certain components directly from suppliers and resell them to our contract manufacturers at our cost and recognize no revenue from these transactions. We also outsource the manufacturing of our ASICs to third-party manufacturers that ship these components to K*TEC for assembly. In connection with the grant of stock options to employees during the first six months of fiscal 1999, we recorded deferred compensation of $9.6 million. Deferred compensation is presented as a reduction of stockholders' equity. The balance is expensed on a graded vesting method over the vesting period of the options. During the first six months of fiscal 1999, we recognized $1.8 million of the deferred compensation as compensation expense. Since our inception, we have incurred significant losses. As of January 3, 1999, we had operating loss carryforwards of $31.1 million for federal income tax purposes. These operating loss carryforwards expire on various dates through 2017. We have recorded a valuation allowance equal to the gross deferred tax asset balance because our accumulated deficit, history of recurring net losses and possible limitations on the use of carryforwards give rise to uncertainty as to whether the deferred tax assets are realizable. Further, these operating loss carryforwards could be subject to usage limitations due to changes in our ownership resulting from equity financings. As of July 4, 1999, we had an accumulated deficit of $66.1 million and we expect to continue to incur significant losses for the foreseeable future. We also expect to incur significant product development, sales and marketing and administrative expenses. We cannot be certain that we will ever realize sufficient revenue to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability. ACQUISITIONS AND DIVESTITURES In March 1996, we acquired the ModuLink business of Western Digital Corporation for a total purchase price of $11.3 million. This acquisition represented the start of our Fibre Channel business. At the time of the acquisition, ModuLink had one commercial transceiver product, a low-speed GLM, which represented a significant portion of our total revenue in 1996. Also at the time of this acquisition, in-process development projects included a full-speed GLM, a GBIC transceiver and an entry-level hub. Acquired in-process technology related to these projects was valued at $8.6 million, 76% of the total purchase price, and was expensed immediately. Of the total value of in-process technology approximately 30% was associated with the GLM project which was estimated to be 74% complete at the time of acquisition, approximately 46% with the GBIC project which was estimated to be 83% complete and approximately 24% with the entry-level hub which was estimated to be 75% complete. The value of the in-process technology related to each of these projects was determined by estimating the future net cash flows resulting from products anticipated to result from these projects and discounting the net cash flows to the date of acquisition using a discount rate of 25%. All of these projects subsequently resulted in commercialized products, including the Vixel 1000 entry-level hub. Combined 20 27 with the low-speed GLM, these products have represented a significant portion of our total revenue through July 4, 1999. Since this acquisition, we have also developed our managed hub products, the Vixel 2000 and Vixel 2006, and our SAN InSite management software to manage these products. In February 1998, we acquired Arcxel Technologies, Inc. for a total purchase price of $14.8 million. Arcxel Technologies was a developer of Fibre Channel switches for the SAN market. We acquired this switch company to obtain products and technology to expand our total SAN interconnect portfolio of products to include management software, switches, managed hubs, entry-level hubs and transceiver products. At the time of the acquisition, Arcxel had just introduced its first product, a Fibre Channel switch. This product became our Vixel 4000 switch. Also at the time of the Arcxel acquisition, in-process development projects included an ASIC, a fabric switch and a switching hub. Both the fabric switch and the switching hub were being designed to use the in-process ASIC, which was the key technology being developed by Arcxel. Of the total value of the acquired in-process technology, approximately 74% was associated with the ASIC which was estimated to be 70% complete at the time of the acquisition, approximately 22% with the fabric switch which was estimated to be 27% complete and approximately 4% with the switching hub which was estimated to be 8% complete. The value of the in-process technology related to each of these projects was determined by estimating the future net cash flows resulting from products anticipated to result from these projects and discounting the net cash flows to the date of acquisition using a discount rate of 35%. Since this acquisition, we completed the development of the ASIC and the fabric switch, which became our Vixel 8100 product. The Vixel 8100 began generating revenue in the quarter ended July 4, 1999. Also, subsequent to the acquisition, we decided not to complete the development of the switching hub that was in process, rather we are devoting our resources to developing other fabric switches that will use the ASIC that was in development at the time of the acquisition. RESULTS OF OPERATIONS The following table sets forth, as a percentage of revenue, statement of operations data for the periods indicated:
FISCAL YEAR ENDED SIX MONTHS ENDED ----------------------------- ------------------- DEC. 29, DEC. 28, JAN. 3, JUNE 28, JULY 4, 1996 1997 1999 1998 1999 -------- -------- ------- -------- ------- (UNAUDITED) Revenue: SAN systems........................................ 2.3% 14.4% 33.9% 30.9% 49.0% Component and other................................ 97.7 85.6 66.1 69.1 51.0 ------ ----- ----- ----- ----- Total revenue.............................. 100.0 100.0 100.0 100.0 100.0 Cost of revenue...................................... 105.8 83.6 91.8 78.8 71.1 ------ ----- ----- ----- ----- Gross profit (loss).................................. (5.8) 16.4 8.2 21.2 28.9 ------ ----- ----- ----- ----- Operating expenses: Research and development........................... 64.4 41.1 28.1 24.7 28.3 Acquired in-process technology..................... 124.4 -- 13.0 24.1 -- Selling, general and administrative................ 51.1 33.5 36.8 29.4 30.2 Amortization and writedown of goodwill and intangibles..................................... 2.4 1.0 5.2 2.9 3.1 Amortization of deferred compensation.............. 0.5 0.2 -- -- 8.1 ------ ----- ----- ----- ----- Total operating expenses................... 242.8 75.8 83.1 81.1 69.7 ------ ----- ----- ----- ----- Loss from operations................................. (248.6) (59.4) (74.9) (59.9) (40.8) Other (expense) income, net........................ (5.7) (1.0) 21.1 41.4 (4.0) ------ ----- ----- ----- ----- Net loss............................................. (254.3)% (60.4)% (53.8)% (18.5)% (44.8)% ====== ===== ===== ===== =====
21 28 SIX MONTHS ENDED JULY 4, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 28, 1998 Revenue. Total revenue for the six months ended July 4, 1999 was $22.1 million, an increase of $825,000 compared with $21.2 million in the six months ended June 28, 1998. Total revenue includes SAN systems revenue as well as component and other revenue. SAN systems revenue consists of revenue generated from our SAN switches and hubs. SAN systems revenue for the six months ended July 4, 1999 was $10.8 million, an increase of $4.2 million compared with $6.6 million in the six months ended June 28, 1998. This 64.8% increase was the result of an increase in sales of each of our switch and hub products. Component and other revenue consists of revenue generated from the sale of our GBIC and GLM transceivers, service revenue and other miscellaneous revenue. Component and other revenue in the six months ended July 4, 1999 was $11.3 million, a decrease of $3.4 million compared with $14.7 million in the six months ended June 28, 1998. Performance issues with our CD based transceiver products sold primarily in 1997 were identified in late 1998 and early 1999 and resulted in decreased purchases of our transceiver products in the six months ended July 4, 1999. We anticipate that our component revenue will continue to decrease as a result of our decision to focus our resources on our SAN systems as well as a result of our customers' perceptions of our transceiver performance problems. For a more complete discussion of the performance problems with our transceivers, see "Risk Factors -- A component used in our transceivers has experienced an abnormally high failure rate which has adversely affected and could in the future affect our sales" on page 3. Gross Profit. Cost of revenue includes the cost to acquire finished products from third party manufacturers of our products, expenses we incur related to inventory management, product quality testing and customer order fulfillment, and provisions for warranty expenses and inventory obsolescence. Gross profit in the six months ended July 4, 1999 was $6.4 million, an increase of $1.9 million, compared with $4.5 million in the six months ended June 28, 1998. Gross profit as a percentage of total revenue was 28.9% in the six months ended July 4, 1999 and was 21.2% in the six months ended June 28, 1998. The increases in both absolute dollars and percentage of total revenue reflect a change in our product mix, as sales of switch and hub products increased while sales of transceivers declined. Our switch and hub products generally have higher gross margins than our transceiver products. Our provisions for warranty expenses as a percentage of total revenue were 8.1% and 2.4% for the six month periods ended July 4, 1999 and June 28, 1998, respectively. Research and development expenses. Research and development expenses consist primarily of salaries and related expenses for personnel engaged in the design, development and sustaining engineering of our products, consulting and outside service fees, costs for prototype and test units and other expenses related to the design, development, testing and enhancements of our products. Research and development expenses in the six months ended July 4, 1999 were $6.2 million, an increase of $1.0 million compared with $5.2 million in the six months ended June 28, 1998. This increase was primarily the result of adding personnel to our ASIC and switch development teams. Acquired in-process technology. Acquired in-process technology in the six months ended June 28, 1998 related to our acquisition of Arcxel Technologies in February 1998. This acquired in-process technology was identified and valued at $5.1 million, 34.5% of the total purchase price, and was expensed immediately. The value of the acquired in-process technology was determined by estimating the stage of development of each in-process research and development project at the date of acquisition and estimating future net cash flows resulting from anticipated revenue generated from those projects, and then discounting the projected net cash flows to the date of acquisition. Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales, finance and information technology support functions, as well as professional fees, allowance for doubtful accounts receivable, trade shows and other marketing activities. Selling, general and administrative expenses in the six months ended July 4, 1999 were $6.7 million, an increase of $427,000, compared with $6.2 million in 22 29 the six months ended June 28, 1998. This increase was primarily the result of hiring additional personnel during fiscal 1998 and the first six months of 1999. Amortization and writedown of goodwill and intangibles. Amortization of goodwill and intangibles in the six months ended July 4, 1999 was $680,000, an increase of $69,000, compared with $611,000 in the six months ended June 28, 1998. This increase was the result of amortization of goodwill and intangibles resulting from our acquisition of Arcxel Technologies in February 1998. Amortization of deferred compensation. Amortization of deferred compensation in the six months ended July 4, 1999 was $1.8 million as a result of stock options granted in that period for which we recorded deferred compensation of $9.6 million. We incurred no amortization of deferred compensation in the six months ended June 28, 1998. Other (expense) income, net. Other (expense) income, net, consists of the gain or loss on the sale of business divisions or product lines, interest income, interest expense and other miscellaneous income or expense. Other expense, net, in the six months ended July 4, 1999 was $882,000, compared with other income, net, of $8.8 million in the six months ended June 28, 1998. Other income, net, in the six months ended June 28, 1998, included a one-time $9.1 million gain on the sale of our laser diode fabrication laboratory and gigabit Ethernet transceiver product line to Cielo Communications. FISCAL YEARS ENDED JANUARY 3, 1999, DECEMBER 28, 1997 AND DECEMBER 29, 1996 Revenue. Total revenue was $39.4 million, $22.8 million and $6.9 million in fiscal 1998, 1997 and 1996, respectively. Our SAN systems revenue was $13.4 million, $3.3 million and $163,000 in fiscal 1998, 1997 and 1996, respectively. The 308.0% increase in SAN systems revenue in fiscal 1998 compared with fiscal 1997 was the result of increased sales of our entry-level hubs as well as revenue generated by our switch and managed hub products that were introduced during fiscal 1998. The 1,913.5% increase in revenue in fiscal 1997 compared with fiscal 1996 was the result of an increase in sales of our entry-level hub that was introduced in the second half of fiscal 1996. Component and other revenue was $26.1 million, $19.5 million and $6.8 million in fiscal 1998, 1997 and 1996, respectively. The 33.6% increase in fiscal 1998 compared with fiscal 1997 was primarily the result of an increase in sales of our transceiver products. The 187.7% increase in fiscal 1997 compared with fiscal 1996 was primarily the result of an increase in revenue from our transceiver products that were introduced in late fiscal 1996 and during fiscal 1997. Gross profit. Gross profit (loss) was $3.2 million, $3.7 million and $(401,000) in fiscal 1998, 1997 and 1996, respectively, representing 8.2%, 16.4% and (5.8)% of total revenue, respectively. The lower gross profit percentage in fiscal 1998 compared with fiscal 1997 was the result of recording an increase in our warranty provisions of $3.6 million during fiscal 1998 for our GBIC transceivers and a writedown in the fourth quarter of fiscal 1998 of developed technologies capitalized as part of our purchase of Arcxel Technologies. The increase in our warranty provisions in fiscal 1998 related to the estimated costs to repair or replace those transceiver products that contain lasers that are showing signs of faster deterioration than we historically have experienced. Indications of this problem were first noticed in late fiscal 1998 to early fiscal 1999. The improvement in gross profit as a percentage of revenue in fiscal 1997 compared with fiscal 1996 was primarily due to efficiencies achieved from an increased volume of product shipped. Our provisions for total warranty expenses as a percentage of total revenue were 11.0% and 1.3% in fiscal 1998 and 1997, respectively. There was no provision for warranty cost or warranty expenses in fiscal 1996. Research and development expenses. Research and development expenses were $11.1 million, $9.4 million and $4.5 million in fiscal 1998, 1997 and 1996, respectively, representing 28.1%, 41.1% and 64.4% of total revenue, respectively. The increase in research and development expenses in fiscal 1998 compared with fiscal 1997 primarily was due to increased development costs relating to our management software, switch and managed hub products. This increase partially was offset by a $4.9 million reduction in research and development expenses as a result of the sale of our laser diode fabrication facility and gigabit Ethernet transceiver product line to Cielo Communications in February 1998. The increase from 23 30 fiscal 1996 to 1997 primarily was the result of increased costs relating to the development of our management software and hub products. Acquired in-process technology. Acquired in-process technology expenses in fiscal 1998 related to our acquisition of Arcxel Technologies in February 1998. This acquired in-process technology was identified and valued by an independent third party at $5.1 million, 34.5% of the total purchase price, and was expensed immediately. Acquired in-process technology expenses in fiscal 1996 related to our acquisition of the ModuLink operations of Western Digital in March 1996. This acquired in-process technology was valued by an independent third party at $8.6 million, 76.4% of the total purchase price, and was expensed immediately. The value of acquired in-process technology was determined by estimating future net cash flows resulting from products anticipated to result from the in-process projects and discounting the net cash flows to the date of acquisition. Selling, general and administrative expenses. Selling, general and administrative expenses were $14.5 million, $7.6 million and $3.5 million in fiscal 1998, 1997 and 1996, respectively, representing 36.8%, 33.5% and 51.1% of total revenue, respectively. The increases in absolute dollars in fiscal 1998 compared with fiscal 1997 and fiscal 1997 compared with fiscal 1996 were primarily related to increases in sales, marketing and administrative personnel to support our revenue growth. In addition, fiscal 1998 expenses increased in absolute dollars and as a percentage of revenue as compared with fiscal 1997 as a result of expenses we recognized in fiscal 1998 in connection with our defense and settlement of certain patent lawsuits. Amortization and writedown of goodwill and intangibles. Amortization and writedown of goodwill and intangibles in fiscal 1998, 1997 and 1996 were $2.1 million, $222,000 and $167,000, respectively, representing 5.2%, 1.0% and 2.4% of total revenue, respectively. The increase in fiscal 1998 compared with fiscal 1997 primarily was the result of amortization of goodwill and intangibles resulting from our acquisition of Arcxel Technologies in February 1998. In addition, the increase in fiscal 1998 compared with fiscal 1997 was the result of the write-off of goodwill associated with capitalized developed technology written down in fiscal 1998. The amounts amortized in fiscal 1997 and 1996 related to goodwill and intangibles resulting from our acquisition of the Fibre Channel hub and transceiver product lines from Western Digital in the first quarter of fiscal 1996. Amortization of deferred compensation. Amortization of deferred compensation in fiscal 1997 and 1996 was $50,000 and $36,000, respectively, which we recognized as a result of stock option grants to nonemployees. There was no amortization of deferred compensation recognized in fiscal 1998. Other (expense) income, net. Other income, net, was $8.3 million in fiscal 1998. Other expense, net, was $234,000 and $392,000 in fiscal 1997 and 1996, respectively. Other income, net, in fiscal 1998 included a one-time $9.1 million gain on the sale of our laser diode fabrication laboratory and gigabit Ethernet transceiver product line to Cielo Communications. 24 31 QUARTERLY RESULTS OF OPERATIONS The following tables set forth statement of operations data for the ten quarters ended July 4, 1999, as well as the percentage of our total revenue represented by each item. This information has been derived from our unaudited financial statements. The unaudited quarterly information has been prepared on the same basis as our audited financial statements and includes all adjustments, consisting only of normal recurring accruals, that our management considers necessary for a fair presentation of such information when read in conjunction with our annual audited financial statements and notes thereto appearing elsewhere in this prospectus. Operating results for any quarter are not necessarily indicative of results for any future period.
QUARTER ENDED ------------------------------------------------------------------------------ MARCH 30, JUNE 29, SEPT. 28, DEC. 28, MARCH 29, JUNE 28, SEPT. 27, 1997 1997 1997 1997 1998 1998 1998 --------- -------- --------- -------- --------- -------- --------- (IN THOUSANDS, UNAUDITED) Revenue: SAN systems................... $ 24 $ 317 $ 1,186 $ 1,755 $ 2,753 $ 3,804 $ 2,475 Components and others......... 3,036 4,698 5,362 6,405 7,870 6,807 5,393 ------- ------- ------- ------- ------- ------- ------- Total revenue........... 3,060 5,015 6,548 8,160 10,623 10,611 7,868 Cost of revenue................. 3,006 4,119 5,320 6,602 8,365 8,367 6,487 ------- ------- ------- ------- ------- ------- ------- Gross profit (loss)............. 54 896 1,228 1,558 2,258 2,244 1,381 ------- ------- ------- ------- ------- ------- ------- Operating expenses: Research and development...... 2,078 2,371 2,015 2,896 2,460 2,789 2,813 Acquired in-process technology.................. -- -- -- -- 5,118 -- -- Selling, general and administrative.............. 1,488 1,796 1,959 2,386 2,874 3,363 2,942 Amortization and writedown of goodwill and intangibles.... 56 55 57 54 230 381 369 Amortization of deferred compensation................ 12 12 13 13 -- -- -- ------- ------- ------- ------- ------- ------- ------- Total operating expenses.............. 3,634 4,234 4,044 5,349 10,682 6,533 6,124 ------- ------- ------- ------- ------- ------- ------- Operating loss.................. (3,580) (3,338) (2,816) (3,791) (8,424) (4,289) (4,743) Other income (expense), net..... 130 68 7 (439) 8,926 (143) (158) ------- ------- ------- ------- ------- ------- ------- Net (loss) income............... $(3,450) $(3,270) $(2,809) $(4,230) $ 502 $(4,432) $(4,901) ======= ======= ======= ======= ======= ======= ======= QUARTER ENDED ----------------------------- JAN. 3, APRIL 4, JULY 4, 1999 1999 1999 -------- -------- ------- (IN THOUSANDS, UNAUDITED) Revenue: SAN systems................... $ 4,357 $ 4,306 $ 6,500 Components and others......... 5,986 6,216 5,037 -------- ------- ------- Total revenue........... 10,343 10,522 11,537 Cost of revenue................. 12,980 7,529 8,144 -------- ------- ------- Gross profit (loss)............. (2,637) 2,993 3,393 -------- ------- ------- Operating expenses: Research and development...... 3,048 3,101 3,132 Acquired in-process technology.................. -- -- -- Selling, general and administrative.............. 5,342 3,045 3,619 Amortization and writedown of goodwill and intangibles.... 1,077 340 340 Amortization of deferred compensation................ -- 112 1,671 -------- ------- ------- Total operating expenses.............. 9,467 6,598 8,762 -------- ------- ------- Operating loss.................. (12,104) (3,605) (5,369) Other income (expense), net..... (298) (443) (439) -------- ------- ------- Net (loss) income............... $(12,402) $(4,048) $(5,808) ======== ======= =======
AS A PERCENTAGE OF TOTAL REVENUE ------------------------------------------------------------------ MARCH 30, JUNE 29, SEPT. 28, DEC. 28, MARCH 29, JUNE 28, 1997 1997 1997 1997 1998 1998 --------- -------- --------- -------- --------- -------- Revenue: SAN systems.................... 0.8% 6.3% 18.1% 21.5% 25.9% 35.8% Components and others.......... 99.2 93.7 81.9 78.5 74.1 64.2 ------ ----- ----- ----- ----- ----- Total revenue............ 100.0 100.0 100.0 100.0 100.0 100.0 Cost of revenue.................. 98.2 82.1 81.2 80.9 78.7 78.9 ------ ----- ----- ----- ----- ----- Gross profit (loss).............. 1.8 17.9 18.8 19.1 21.3 21.1 ------ ----- ----- ----- ----- ----- Operating expenses: Research and development....... 67.9 47.3 30.8 35.5 23.1 26.3 Acquired in-process technology................... -- -- -- -- 48.2 -- Selling, general and administrative............... 48.6 35.8 29.9 29.2 27.1 31.7 Amortization and writedown of goodwill and intangibles..... 1.8 1.1 0.9 0.7 2.2 3.6 Amortization of deferred compensation................. 0.4 0.2 0.2 0.2 -- -- ------ ----- ----- ----- ----- ----- Total operating expenses............... 118.7 84.4 61.8 65.6 100.6 61.6 ------ ----- ----- ----- ----- ----- Operating loss................... (116.9) (66.5) (43.0) (46.5) (79.3) (40.5) Other income (expense), net...... 4.2 1.4 0.1 (5.4) 84.0 (1.3) ------ ----- ----- ----- ----- ----- Net (loss) income................ (112.7)% (65.1)% (42.9)% (51.9)% 4.7% (41.8)% ====== ===== ===== ===== ===== ===== AS A PERCENTAGE OF TOTAL REVENUE ---------------------------------------- SEPT. 27, JAN. 3, APRIL 4, JULY 4, 1998 1999 1999 1999 --------- ------- -------- ------- Revenue: SAN systems.................... 31.5% 42.1% 40.9% 56.3% Components and others.......... 68.5 57.9 59.1 43.7 ----- ------ ----- ----- Total revenue............ 100.0 100.0 100.0 100.0 Cost of revenue.................. 82.4 125.5 71.6 70.6 ----- ------ ----- ----- Gross profit (loss).............. 17.6 (25.5) 28.4 29.4 ----- ------ ----- ----- Operating expenses: Research and development....... 35.8 29.5 29.5 27.1 Acquired in-process technology................... -- -- -- -- Selling, general and administrative............... 37.4 51.6 28.9 31.4 Amortization and writedown of goodwill and intangibles..... 4.7 10.4 3.2 2.9 Amortization of deferred compensation................. -- -- 1.0 14.5 ----- ------ ----- ----- Total operating expenses............... 77.9 91.5 62.6 75.9 ----- ------ ----- ----- Operating loss................... (60.3) (117.0) (34.2) (46.5) Other income (expense), net...... (2.0) (2.9) (4.2) (3.8) ----- ------ ----- ----- Net (loss) income................ (62.3)% (119.9)% (38.4)% (50.3)% ===== ====== ===== =====
25 32 Our total revenue increased each quarter from the quarter ended March 30, 1997 through the quarter ended March 29, 1998, when our total revenue reached $10.6 million. Our SAN systems revenue increased in each quarter from the quarter ended March 30, 1997 through the quarter ended June 28, 1998. These increases were primarily the result of increased sales of our entry-level hub that was introduced in the second half of fiscal 1996. During the quarter ended September 27, 1998, our SAN systems revenue declined to $2.5 million, primarily as a result of decreases in purchases of our entry-level hub by Compaq and Sun during that quarter. In the quarter ended June 28, 1998, these two OEMs purchased larger volumes of products that filled some of their demand in the quarter ended September 27, 1998. The increase in SAN systems revenue in the quarter ended July 4, 1999 compared with the quarter ended April 4, 1999 was primarily the result of increases in sales of our switch and entry-level hub products. Our component and other revenue increased in each quarter from the quarter ended March 30, 1997 through the quarter ended March 29, 1998. These increases were primarily the result of increased sales to existing and new customers. Component and other revenue declined to $6.8 million in the quarter ended June 28, 1998, primarily as a result of a reduction in purchases by Hewlett-Packard. Component and other revenue continued to decline to $5.4 million in the quarter ended September 27, 1998, primarily as a result of Sun reducing its purchases of transceiver products. Component and other revenue in each of the next two quarters increased, but declined to $5.0 million in the quarter ended July 4, 1999, primarily as a result of some of our customers' perceptions regarding the reliability of our CD based transceivers. For a more complete discussion of the performance problems with our transceivers, see "Risk Factors -- A component used in our transceivers has experienced an abnormally high failure rate which has adversely affected and could in the future affect our sales" on page 3. Gross profit dollars and gross profit as a percentage of total revenue increased each quarter from the quarter ended March 30, 1997 to the quarter ended March 29, 1998, primarily as a result of volume efficiencies associated with increased revenue during these periods. Our gross profit was negative in the quarter ended January 3, 1999 as a result of recording a warranty provision of $3.6 million during the quarter for transceiver products shipped in prior quarters and the write-down of developed technology during the quarter. The increase in our warranty provision was for anticipated costs to repair or replace those transceivers that contain lasers that are showing signs of faster deterioration than expected. Research and development expenses generally have increased during the ten quarters presented as a result of increases in the number of personnel devoted to these activities. Quarterly fluctuations in research and development expenses have occurred primarily as a result of the timing of prototype purchases and outside contracting fees related to the development and testing of new products at various times. Selling, general and administrative expenses increased in each quarter from the quarter ended March 30, 1997 through the quarter ended June 28, 1998, primarily due to higher levels of staffing for sales, marketing and administrative functions to support our revenue growth. These expenses decreased in the quarter ending September 27, 1998, primarily as a result of decreased sales in that period. The substantial increase in selling, general and administrative expenses in the quarter ended January 3, 1999 reflects the cost of settling patent lawsuits and the cost related to the recruitment, relocation and termination of executive management personnel. Other income, net, in the quarters ended March 30, 1997, June 29, 1997 and September 28, 1997 resulted primarily from interest income on invested cash received from the sale of series E preferred stock in the fourth quarter of 1996. Other income, net, in the quarter ended March 29, 1998, included a one- time $9.1 million gain on the sale of our laser diode fabrication facility and gigabit Ethernet transceiver product line. Other expenses, net, in each of the other quarters of fiscal 1998 and 1999 primarily consisted of interest expense. Amortization and writedown of goodwill and intangibles increased in the quarter ended January 3, 1999 as a result of the writedown of goodwill associated with our decision to discontinue manufacturing a product using developed technology acquired through our purchase of Arcxel Technologies. 26 33 LIQUIDITY AND CAPITAL RESOURCES Our principal sources of liquidity at July 4, 1999 consisted of $3.2 million in cash and cash equivalents, a $2.5 million capital equipment lease line of credit and a working capital credit facility with a borrowing limit of the lesser of $7.5 million or 80.0% of eligible accounts receivable. As of July 4, 1999, we had utilized $723,000 under the capital equipment lease line. Borrowings under the capital equipment lease line of credit bear interest at 8.25% per annum, are payable ratably over a 36 month term and are secured by the fixed assets that we lease under the line of credit. As of July 4, 1999, $2.8 million borrowings were outstanding under the working capital credit facility. This working capital credit facility expires on September 30, 2000. At July 4, 1999, we had outstanding a $7.5 million note payable to a bank. This note is due on September 30, 2000. Both the working capital credit facility and the note payable bear interest at LIBOR, plus 4.75% (9.97% as of July 4, 1999). Since inception, we have financed our operations primarily through the sale of common stock and preferred stock with aggregate proceeds of approximately $29.8 million. Additionally, we have financed our operations through capital equipment lease lines, working capital credit facilities, notes payable and $6.9 million in net cash received from the sale of our laser diode fabrication facility and gigabit Ethernet product line. Cash utilized by operating activities was $5.3 million in the six months ended July 4, 1999, $9.2 million in fiscal 1998, $13.6 million in fiscal 1997 and $7.3 million in fiscal 1996. The cash utilized in each of these periods was due to net losses, as well as working capital required to fund our increased operations. Cash used in investing activities primarily consisted of capital expenditures of $1.7 million, $1.0 million and $535,000 in fiscal 1998, 1997 and 1996, respectively, and $1.3 million paid as part of the acquisition of Western Digital assets in fiscal 1996. We will use $2.0 million of the net proceeds to repay a promissory note and accrued interest due to Western Digital. We believe that after the repayment of this amount, the remaining net proceeds of this offering, together with our existing cash balances and available lines of credit, will be sufficient to meet our cash requirements at least through the next twelve months. However, we may be required, or could elect, to seek additional funding prior to that time. Our future capital requirements will depend on many factors, including our future revenue, the timing and extent of spending to support product development efforts and expansion of sales, general and administrative activities, the timing of introductions of new products, and market acceptance of our products. We cannot assure you that additional equity or debt financing, if required, will be available on acceptable terms or at all. YEAR 2000 READINESS DISCLOSURE The year 2000 problem refers to the potential disruption of business activities caused by failures or miscalculations by computers, software and other equipment which are triggered by advancement of date records past the year 1999. For example, if software that uses the calendar year in computations is not ready for the millennium calendar change, it may recognize a date represented as "00" as the year 1900 rather than the year 2000. Products. Our products were designed so as not to affect date sensitive data, and we expect them to be year 2000 compliant when configured and used in accordance with the related documentation, provided that the host machine's underlying operating system and any other software used with or in the host machine or our products are also year 2000 compliant. We continue to respond to customer questions about our products on a case-by-case basis. We have tested our products and their third-party components for year 2000 compliance, but do not warrant the overall installation of our solutions because we cannot guarantee the compliance of other vendors' products. Our general purchase terms and conditions require that products and components supplied to us are year 2000 compliant. We have obtained and continue to seek written assurances from developers of products incorporated into our products that their products are year 2000 compliant. If we identify a material year 2000 compliance issue with a third party supplier, we will work with that supplier 27 34 to resolve the issue or source the parts or services from a supplier that is year 2000 compliant. We believe all critical components of our products obtained from third-party suppliers are year 2000 compliant, and expect that we will be able to resolve any significant year 2000 problems in these components with them. We cannot be certain, however, that these suppliers will resolve any or all year 2000 problems before the occurrence of a material disruption to the operation of our business. Any failure of these third parties to timely resolve year 2000 problems with their systems could harm our business. Internal information technology systems. We expect to complete testing, modifying, upgrading and replacing existent critical internal information technology systems, including our own software products and third-party software and hardware technology, by November 1999. To the extent that we are not able to test the technology provided by third-party vendors, we have obtained and continue to seek written assurances from these vendors that their systems are year 2000 compliant. To date, we have identified one of our enterprise systems that utilizes a database system that will require an upgrade to be year 2000 compliant. This upgrade is currently available and anticipated to be installed in the early fall of 1999. Given the short time period between the completion of our compliance efforts and the end of the year, we may not have the time to implement solutions or such solutions may be costly or unavailable. Systems other than information technology systems. We are assessing the potential effect and costs of remediating the year 2000 problem on our office equipment and facilities, but are not aware of any significant operational year 2000 issues or costs associated with our non-information technology systems. The majority of the infrastructure of our offices has been constructed within the last three years. However, we may experience significant unanticipated problems and costs caused by undetected errors or defects in the technology used in these systems. Most likely consequences of the year 2000 problem. A business disruption caused by the year 2000 problem could interrupt our operations and damage our relationships with our customers. An internal disruption or product failure unique to us could give our competitors a comparative advantage. Failure of our internal systems to be year 2000 ready could delay order processing, invoicing and developing products and could require us to devote significant resources to correcting such problems. Further, our customers' purchasing plans could be affected by year 2000 preparation and remediation of the need to expend significant resources to fix their existing systems. In addition, some customers may wait to purchase our products until after the year 2000, which may reduce our revenue in the near future. Cost. We have funded our year 2000 plan from cash balances and separately have accounted for these costs. We estimate that the total cost to us of completing any required modifications, upgrades or replacements of our internal systems will not exceed $280,000, almost all of which we believe will be or has been incurred during fiscal 1999. Contingency Plans. We are developing contingency plans to be implemented if our efforts to identify and correct year 2000 problems affecting our internal systems are not effective. We expect to complete our contingency plans by November 1999. Depending on the systems affected and because of the short time period before the year 2000, these plans could be costly and might include: - accelerated replacement of affected equipment or software; - short to medium-term use of backup equipment and software; - increased work hours for our personnel; and - use of contract personnel to correct, on an accelerated schedule, any year 2000 problems that arise or to provide manual workarounds for information systems. The need to or cost of implementing any of these contingency plans could adversely affect our business. 28 35 RECENTLY ISSUED ACCOUNTING STANDARDS In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1 (SOP 98-1), "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which establishes guidelines for the accounting for the costs of all computer software developed or obtained for internal use. We are required to adopt SOP 98-1 for the fiscal year beginning on January 4, 1999. Our adoption of SOP 98-1 is not expected to have a material impact on our financial statements. As of December 29, 1997, we adopted Financial Accounting Standards Board Statement No. 130, "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose financial statements. We had no material components of comprehensive income. The adoption of this statement has had no impact on our financial position, stockholders' equity (deficit), results of operations or cash flows. Accordingly, our comprehensive loss for fiscal 1998 is equal to our reported loss. The Financial Accounting Standards Board issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way business enterprises report information in annual statements and interim financial reports regarding operating segments, products and services, geographic areas and major customers. This statement is effective for financial statements for fiscal years beginning after December 15, 1997. The adoption of this statement did not have a material impact on the way we report information in our financial statements. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. Due to the nature of our short-term investments, we have concluded that there is no material interest rate risk exposure. Therefore, no quantitative tabular disclosures are required. 29 36 BUSINESS OVERVIEW We are a leading provider, based on revenue and number of ports shipped, of comprehensive solutions in storage area networks, or SANs. SANs are networks that are specifically designed to interconnect computer systems and data storage devices. Our comprehensive SAN interconnect solutions consist of a variety of products that connect computers to data storage devices in a network configuration. Our products utilize the Fibre Channel protocol, which is an American National Standards Institute, or ANSI, defined standard for the transfer of information between computers and storage devices. Our Fibre Channel product portfolio consists of our SAN systems, which include our SAN management software and our switches and hubs, and other components, which include our transceivers. Our products enable data storage devices to connect to one or more computer systems and facilitate the reliable exchange of large amounts of data at high speeds. Our products are fully interoperable and designed to perform in concert so that customers can easily deploy a range of SAN configurations, from simple point-to-point connections to more complex high-performance networks. By offering and supporting the key components necessary to connect servers and storage, we enable our customers to turn to one vendor for their SAN interconnect needs. To date, we have shipped products representing over 500,000 ports to more than 30 OEMs and resellers, including Compaq Computer, Hewlett-Packard, IBM and Sun Microsystems. INDUSTRY BACKGROUND Significant growth in enterprise data requirements In recent years there has been a significant increase in the volume of data created, processed and accessed throughout the enterprise. This growth has been fueled by the rapid expansion of the Internet, measured both by the number of users as well as the number of web-based corporate initiatives which require continuous access to critical business information 24 hours a day, seven days a week. Rapid growth of data-intensive applications, such as online transaction processing, e-commerce, Web hosting, data warehousing, data mining, enterprise resource management and the sharing of multimedia-based information, has dramatically increased the need for high-capacity, high-performance storage devices and systems. This demand is compounded when organizations create redundant sources of data to enable continuous error-free access to data. The growth in stored data has been facilitated by the continued decline in the cost per unit of storage capacity. We believe, based on a report that International Data Corporation, or IDC, an independent research firm, published in September 1998, that the worldwide volume of stored data should grow from approximately 116,000 terabytes in 1998 to approximately 1.4 million terabytes in 2002, representing a compound annual growth rate of over 85%. The need to support ever-increasing storage requirements presents enterprises with a number of significant challenges. As employees, customers and suppliers depend increasingly on data for fundamental business processes, storage systems and servers must handle greater volumes of input and output transactions, or I/Os. Additionally, many of the mission-critical applications utilized in the enterprise today require rapid access to massive amounts of data. These requirements have placed significant stress on current storage technology and software applications, many of which were not designed to handle large volumes of dispersed data. Also, as the number of storage devices increases, management of data becomes more complex. Organizations have attempted to address these storage challenges by devoting additional financial and personnel resources. Traditional server-to-storage connection solutions are inadequate and expensive Enterprises traditionally have attempted to support and manage storage requirements by linking single servers to dedicated storage devices through storage interfaces such as the small computer system interface, or SCSI, a technology that facilitates this captive connection. However, the most commonly- used SCSI-based storage architecture has significant constraints: it can connect a single server with only 15 devices; it supports transmission distances of only 25 meters; and it typically permits data transmission 30 37 speeds of only 40 or 80 megabytes per second, or MBps. Furthermore, SCSI-based storage devices are dependent on the servers to which they are attached, creating captive pockets of storage behind each server. This architecture increases the stress on the server through which all data must pass and results in loss of access to data if the server goes down. Some enterprises have responded to the limitations of SCSI by deploying more servers and more storage devices, but this response increases the complexity and cost of maintaining such storage systems. Development of Fibre Channel technology and storage area networks To address the limitations of traditional server-to-storage connections, a family of Fibre Channel standards was developed in the early 1990s to facilitate high-performance storage connectivity solutions. Fibre Channel technology enables data to be transferred from one network device to another, allowing any server to access any storage device on the network. The technology combines the connectivity and distance features of networking with the simplicity and reliability benefits of the channel, or the dedicated circuit that carries information to and from data storage devices. Merging network and channel technologies, Fibre Channel can carry storage as well as network traffic over the same physical connection. Furthermore, Fibre Channel is capable of supporting up to 15.5 million devices and transferring data across distances of 10 kilometers at speeds of 200 MBps. Fibre Channel also supports multiple protocols, including SCSI and Internet Protocol, or IP. The family of Fibre Channel standards has acquired broad industry support and has been implemented in network configurations known as storage area networks, or SANs. In a SAN, one or more storage devices are attached through connection points, known as ports, to an interconnecting device, commonly referred to as an interconnect. These interconnect devices include switches, hubs and transceivers. As shown below, typical Fibre Channel SAN configurations include point-to-point connections between two devices, an arbitrated loop for up to 126 devices or a switched network, or fabric, which can enable the connection of millions of devices. Image: The image consists of three components. Component 1: Title: The "Switched Fabric" title is in the top right corner of the image. Description: Beneath the title is an image of a switch, to which run lines connecting the switch to a device labeled "Disks", two devices labeled "Storage Array", one device labeled a "Tape Library" and one device labeled a "Server". The Server is connected by a line to a local area network, labeled a "LAN". Component 2: Title: The "Arbitrated Loop" title is located in approximately the middle of the image. Description: Beneath the title is a hub. The hub is connected by three lines to three devices labeled "Storage Arrays", by one line to a device labeled "Tape Library" and by one line to a server labeled "Server", which is connected by a line to a local area network, labeled a "LAN." Component 3: Title: The "Point to Point" title is located in the lower left corner of the image. Description: The image depicts one device labeled a "Storage Array" and one device labeled a "Server", which are connected by a line. Connecting the Storage Array to the line is a GLM transceiver, which is labeled as such. Connecting the Server to the line is a GLM transceiver, which is labeled as such. Above the line are the words "Optical Fiber". 31 38 FIBREC #1 FIBREC #2 FIBREC #2 These configurations allow SANs to meet a wide variety of storage and network requirements, from the smallest server-to-storage configuration to complex enterprise networks. By bringing networking capabilities into the storage environment, a SAN offers storage flexibility, fault tolerance, ease of 32 39 management and a lower cost of ownership. We believe, based on an IDC report that was published in January 1999, that worldwide revenue from SAN products should grow from approximately $2.5 billion in 1998 to over $13.3 billion in 2002, representing a compound annual growth rate of over 50%. Need for a comprehensive SAN solution Fibre Channel standards have been in place for over five years and the technology has been adopted by a broad customer base. However, the deployment of Fibre Channel-based SANs is still at an early stage. In order to meet exploding data requirements, enterprises typically have turned to multiple Fibre Channel vendors with point, or single, products. Furthermore, enterprises commonly have installed multiple SAN configurations provided by different solutions providers in different areas of their network. These mixed solutions and point products typically are managed by multiple, disparate software applications. These partial solutions offer some but not all of the benefits associated with Fibre Channel. They are often difficult to deploy and manage as a complete system and may not interoperate with other Fibre Channel devices. Also, the additional time needed to test and qualify these fragmented solutions results in delayed implementation. Furthermore, it may be difficult to integrate these systems with other enterprise management software and applications. As a result, enterprises that implement fragmented solutions may not be able to realize the full benefits of SANs. To handle increased data and performance requirements as well as growing network complexity, organizations are seeking comprehensive, integrated SAN management solutions that address a wide variety of data and storage needs. SAN solutions must accommodate a range of interconnect products that can interoperate with other products, be deployed easily and scale as the SAN grows, be managed under one management software solution and be robust enough to support mission-critical networks. OUR FIBRE CHANNEL SAN SOLUTION We are a leading provider of comprehensive SAN interconnect solutions that utilize a variety of devices to connect computers to storage devices in a network configuration. We offer a broad portfolio, which includes our: - SAN management software; - fabric switches, devices that provide high-speed connections between multiple computers and storage devices; - managed hubs, devices that connect multiple computers and devices in a shared environment and can be controlled remotely; - entry-level hubs, devices that connect computers and devices without remote management functionality; and - transceivers, devices that are typically embedded in other Fibre Channel products to convert optical and electrical signals. Our comprehensive SAN interconnect solutions address the difficulties customers may encounter when they assemble SAN components from multiple suppliers. Further, we offer customers the convenience of dealing with a single full-service vendor, allowing them to avoid the time-consuming and costly process of qualifying and certifying multiple SAN interconnect vendors. 33 40 LOGO Image: The image consists of four components. The first two components are placed completely within a line forming the shape of an oval, the third component intersects the line forming the shape of an oval, and the fourth component falls outside the line forming the shape of an oval. Component 1: Title: The "Switched Fabric" title and the component are in approximately the 1:00 position within the oval. Description: Beneath the title is a device labeled "Vixel Switch", which is at the center of a hub and spoke configuration. The Vixel switch connects by one line to a device labeled "Disks", by a second line to a device labeled "Storage Array", by a third line to a device depicting a storage array, by a fourth line to a device labeled "Tape Library" and by a fifth line to a device labeled "Server." The Server connects by a line to three additional lines intersecting at ninety degree angles, depicting a local area network, labeled a "LAN." Additionally, the Vixel switch connects by a line to an oval-shaped image labeled "Vixel Hubs." This image consists of a hub, which connects by four lines to four devices labeled "Storage Arrays", and by one line to a device labeled a "Server." Component 2: Title: The "Arbitrated Loop" title and the component are in approximately the 7:00 position within the oval. Description: Beneath the title is an oval-shaped image labeled "Vixel Hubs." This image consists of a hub which connects by three lines to three devices labeled "Storage Arrays", by one line to a device labeled "Tape Library" and by one line to a server. The server connects by a line to three additional lines intersecting at ninety degree angles, depicting a local area network, labeled a "LAN." Component 3: Title: The "Vixel SAN Management" title and the component are in approximately the 5:00 position, partially inside and partially outside the oval.Description: The image is of a computer monitor sitting on top of a desktop computer. Within the computer monitor is the SAN InSite logo, which consists of the words "SAN InSite" placed within an oval. Component 4: Title: The "Point to Point" title and the component are in approximately the 7:00 position, placed completely outside the oval. Description: Beneath the title is an image labeled "Vixel Transceivers", and beneath those words, in smaller font, are the words "Fiber Optical." The image depicts two devices, set opposite one another, labeled a "Storage Array" and "Server", respectively. The Storage Array and Server are connected by a line. At the point of intersection of the Storage Array and the line is a gigabit link module, labeled "GLM." At the point of intersection of the Server and the line is a gigabit link module, labeled "GLM." Our SAN interconnect solutions provide customers with the following key benefits: Our broad product portfolio addresses a wide spectrum of storage requirements. We offer a wide range of high-performance Fibre Channel interconnect products, including fabric switches that support scalable Fibre Channel device connections, managed and entry-level hubs that support arbitrated loop SAN configurations and transceivers that enhance data transport and device connectivity throughout the SAN. Our switches, managed hubs and transceivers are proactively managed from a single platform by our SAN InSite interconnect management software and support a wide range of SAN configurations. Because we design our own ASICs that drive the performance capabilities of our products, we are able to rapidly develop solutions that meet varying data storage requirements. Our software provides comprehensive SAN management. Our SAN InSite software is a unified platform that offers a single system view from one computer screen down to the port level of our fabric switches, managed hubs and transceivers. Our SAN InSite software provides comprehensive status, control and diagnostics for fabric switches, arbitrated loop hubs and transceivers under a single management software umbrella. It is also designed to seamlessly integrate with other enterprise software applications, such as storage management and network management platforms. As a result, storage network management functions, such as proactive monitoring, reporting, policy management, security and fault tolerance, can be integrated and optimized across our devices in the SAN. We believe this comprehensive network management solution enhances SAN performance, offers high rates of data availability, promotes network stability and reduces enterprise information technology staffing, training and support requirements. Interoperability of our products optimizes SAN deployment and functionality. We design standards-based interoperability into our products from the beginning of the design cycle. Our fabric switches, hubs, transceivers and SAN management software are engineered to perform in concert to handle the rigorous requirements of enterprise networks and enable highly-available, scalable and manageable SANs. Furthermore, because our products adhere to Fibre Channel ANSI standards, they are compatible with other Fibre Channel standards-based products. Also, our SAN InSite software has been designed to interoperate with other enterprise management applications. We believe our enhanced interoperability 34 41 allows our OEMs and resellers to streamline the testing and qualification process and increase their time to market. We also believe the interoperability of our products reduces end users' deployment time and enhances the functionality and performance of their SANs. Our range of solutions support cost-effective scaling. Because we offer the essential building blocks for SAN interconnects, our solutions can be efficiently scaled as users' data and storage requirements expand. Our solutions enable seamless additions of devices and ports to the SAN, regardless of the installed Fibre Channel configuration. Our advanced fabric switch design allows our switches to be easily installed and to immediately interact with existing equipment, enabling legacy arbitrated loop configurations to scale to full fabric switched SANs. Furthermore, our single management software platform can support the management of our products that are part of or added to SAN configurations. We believe our interoperable products supported by our SAN InSite software reduce personnel and financial resource requirements, providing our end users with a more cost-effective storage solution. STRATEGY Our objective is to expand our position as a leading developer and supplier of comprehensive SAN interconnect solutions. Key elements of our strategy include the following: Offer customers a full Fibre Channel interconnect product portfolio. We are committed to offering a complete, high-performance SAN interconnect solution consisting of a full portfolio of switches, hubs, transceivers and management software. We are focused on selling our SAN solutions to new customers as well as extending our full product portfolio to existing customers who may be using only some of our products. To date we have shipped products representing over 500,000 Fibre Channel ports to more than 30 OEMs and resellers which we believe is more ports than any other Fibre Channel interconnect vendor has shipped. We plan to leverage our existing customer base and spectrum of hardware and software products to move beyond single product sales and aggressively offer and market complete SAN interconnect solutions. With the adoption of our full portfolio of products, a customer realizes the increased performance and cost benefits of our interoperable, integrated SAN solution. Leverage our technology platforms and expertise to address rapidly evolving market demands. We seek to leverage our proven Fibre Channel expertise to continually develop an expanding range of products in key areas of the SAN interconnect, including fabric switches, hubs, transceivers and the software that manages SAN interconnects. As a comprehensive SAN interconnect solutions provider, we have accumulated extensive Fibre Channel expertise in all SAN configurations, including point-to-point, arbitrated loop and fabric. Furthermore, we have taken an active leadership role in Fibre Channel standards boards that drive the development of Fibre Channel standards. We believe our extensive Fibre Channel expertise, our internally-developed ASICs, and our experienced engineering teams enable us to rapidly develop and market products that address evolving market demands. To enhance our technological advantage, we plan to continue to invest significant engineering resources in product development. Extend our SAN interconnect management software leadership. We believe we offer the most comprehensive and best performing SAN interconnect management software solution. We intend to extend our leadership position by developing new management tools, offering additional functionality and enabling further interoperability with other storage and systems management platforms. We believe these enhanced SAN interconnect management solutions will increase SAN reliability and functionality while decreasing total costs of ownership. Partner with major storage solutions providers. We intend to continue to expand our relationships with key storage system and server OEMs, resellers, and other leading Fibre Channel component and device vendors. To date we have established strategic relationships with leading storage solutions providers, including EMC, Legato and Veritas, to enhance multi-vendor interoperability. We plan to leverage existing and establish new strategic relationships to promote Fibre Channel solutions and interoperability, and to enhance the functionality of our products. We will also continue to seek opportunities to participate in joint technology development with key strategic partners in order to offer our customers robust, interoperable solutions. We seek to accelerate time to market and simplify deployment of our solutions by 35 42 continuing to expand our test and verification lab, the Vixel Verification Lab, or the V(2) Lab, and by initiating pre-certification programs with additional storage solutions providers. Expand our distribution channels. We plan to extend our comprehensive portfolio of product offerings to existing OEMs as well as sell to new OEMs. Currently, our major OEMs include Amdahl, Avid Sports, Compaq, Emulex, Hewlett-Packard, IBM, Interphase and Sun Microsystems. As we expand our OEM base, we plan to introduce new products, develop new markets and leverage the systems and service capabilities of industry-leading OEMs. As end-user awareness of Fibre Channel benefits increases, we believe that resellers, including distributors and VARs, have the potential to become significant sources of revenue. We intend to establish relationships with, and increase sales to, resellers in order to increase our market presence. We also are actively working to expand our breadth of internationally-based resellers, particularly those in Europe and Asia. Promote the Vixel brand. We plan to continue building awareness of the Vixel brand in order to position ourselves as the leading provider of high-performance, cost-effective SAN interconnect solutions. We believe an established brand will become increasingly important as our distribution channels expand to include resellers. To promote our brand, we plan to increase our investments in a range of marketing programs, including trade show participation, advertising in print publications, direct marketing, public relations and web-based marketing. OUR PRODUCTS We offer a comprehensive portfolio of SAN interconnect products, including SAN management software, high-performance fabric switches, managed and entry-level hubs, and transceivers including gigabaud link modules, or GLMs, and gigabit interface converters, or GBICs. Our broad family of interoperable products enables customers to easily deploy a wide variety of SAN configurations, from simple point-to-point connections to more complex high-performance networks built with a combination of managed arbitrated loop hubs and fabric switches. Furthermore, by offering and supporting the key components necessary to connect servers and storage, we enable our customers to turn to one vendor for their SAN interconnect needs. We began commercial shipments of our SAN products in 1996, and as of July 4, 1999, we had shipped switches, hubs and transceivers representing over 500,000 Fibre Channel ports. SAN InSite Interconnect Management Software Our SAN InSite interconnect management software provides comprehensive management functionality across our Fibre Channel fabric switches, managed hubs and transceivers. SAN InSite provides status and control of the devices that transport data in a SAN interconnect, and it includes management tools that proactively detect, isolate and recover from storage networking and data access problems. We believe our SAN InSite solution is the only management application in the industry that provides proactive management of fabric switches, arbitrated loop hubs and transceivers from a single management workstation. The first version of our interconnect management software was available to customers in early 1998. Our current version, SAN InSite, is installed in mission-critical accounts which require a high level of visibility and control over the storage area network. Key features of our SAN InSite interconnect management software solution include the following: - Single system view. Utilizing a simple graphical user interface and a single computer screen, SAN InSite offers a complete view of all managed devices in one or more SAN clusters. - Built-in fault management. Leveraging the unique architecture and embedded software of our fabric switches and managed hubs, SAN InSite is able to recognize when a port is bypassed due to a malfunctioning storage or server device. When these problems occur, SAN InSite either reports that the problem has been automatically corrected or notifies the administrator of the need to take corrective action. 36 43 - Monitoring and reporting. SAN InSite automatically monitors the status of each SAN interconnect device and keeps track of its activity in an electronic record. With a suite of color-coded icons and legends displayed on a single computer screen, users can easily monitor and quickly identify any changes to the SAN environment. SAN InSite also provides special traffic performance monitoring for our Vixel 8100 fabric switch. This feature facilitates capacity planning and is displayed through on-screen traffic meters. - Advanced device configuration management and diagnostics. A rich set of advanced diagnostic tools allows support personnel to test and verify communications with new server or storage devices. Using SAN InSite's intuitive graphical user interfaces, the user can quickly configure our switches and hubs for specific application requirements. We believe this simplified interface minimizes training and staffing requirements, presents a consistent look and feel across our product set and gives customers cost-effective, flexible options for configuring a variety of SAN applications. - Integrated with other leading functional storage software. We actively partner with storage management software vendors in order to facilitate the integration of SAN InSite's powerful tools into other enterprise management applications. For example, SAN InSite can be launched by Veritas' Storage Manager and Hewlett-Packard's HP OpenView, and our switches and managed hubs can be configured to send notifications to other management platforms. We currently include our SAN InSite software with our switches and managed hubs, and we do not sell this software separately from our other products at this time. Vixel 4000 and Vixel 8100 Fibre Channel Switches Fibre Channel switches connect a wide range of server and storage devices and provide a high level of performance and flexibility in building large configurations in a SAN. We began commercial shipment of our first switch product, the Vixel 4000, in February 1998. The eight port Vixel 4000 offered distinct advantages over other switches available at that time, including support for non-fabric arbitrated loop devices. Our next generation eight port Vixel 8100 Fibre Channel switch was made commercially available in June 1999, and extends our technology leadership in the switch arena. We believe our Vixel 8100, with its patent-pending architecture, is one of the highest performing, most cost-effective fabric switches in the industry. In addition to supporting fabric switch functionality, our Vixel 8100 has the following significant features: - High speed and high bandwidth. Our Vixel 8100 supports full speed, which is 1.0625 gigabits per second, or Gbps, in transmit and receive directions per port. In addition, our Vixel 8100 architecture supports wire-speed full bandwidth, which is 100 MBps, in both directions per port. Unlike other commercially available switch products, our Vixel 8100 provides consistent 100 MBps bandwidth between any two ports, which enables reliable high-speed traffic in any configuration. - Support for non-fabric arbitrated loop devices in a fabric switch. A large number of devices currently deployed in SANs cannot communicate with fabric configurations. Our patent-pending capability of our Vixel 8100 enables these devices to benefit from their attachment to a fabric SAN. - Support for arbitrated loop or fabric-attached topologies by the same fabric port hardware. The flexible port architecture of the Vixel 8100 supports both arbitrated loop and fabric configurations and offers significant flexibility and interoperability when building SANs. - Hardware-based zoning. With hardware-based zoning capabilities, our Vixel 8100 allows potentially conflicting operating systems, such as Unix and Windows NT, to co-exist in a single SAN environment. - Full fabric software support services. Our Vixel 8100 supports ANSI-defined fabric services such as the simple name server and state change notification. Devices attached to a fabric configuration use these services in order to create a full-functioning switched SAN. 37 44 - Scalable architecture. Multiple Vixel 8100 fabric switches can be interconnected without sacrificing performance, enabling the creation of large, complex SANs. - Extensive port buffering. Because of the extensive port buffering capabilities designed into our Vixel 8100, data can be efficiently transported through our switch. Vixel 2000 and Vixel 2006 Managed Hubs Our managed hubs connect devices in a SAN arbitrated loop configuration and monitor the status of loop and port activity through auto-recovery functionality and advanced diagnostic capabilities. Our managed hubs were available in November 1997 and are designed to enhance customer uptime by proactively responding to conditions that otherwise would disrupt system availability. Key features of our managed hubs include: - Six and 12 port configurations using removable GBICs. Our managed hubs give customers the flexibility to deploy small or large arbitrated loop installations. Because our managed hubs include full GBIC support, customers can mix different transceiver types on the same hub and install additional GBICs if needed. - Loop status indicators. An indicator light on the front of our hub products continuously reports to the operator whether the SAN arbitrated loop is operating properly. Loop status also is reported through SAN InSite's graphical user interface on a management workstation. These loop status information features accelerate problem detection and resolution. - Loop integrity and auto-recovery. Our managed hubs automatically detect and bypass malfunctioning ports. An alert is posted to the operator via SAN InSite, or another management application, so that further corrective action can be taken. In addition, our managed hubs have a recovery routine that can correct problems without disrupting ongoing loop operations. Without this feature, the network would be down until an administrator could manually reset each device. - Full console interface and event logging. In addition to the SAN InSite graphical user interface, our managed hubs support the full command line interface favored by some Unix users. This interface facilitates remote support of our product by OEMs, resellers or third-party support organizations. Our hubs also support time-stamped event logging, a useful tool for monitoring SAN status during unattended operation. Vixel 1000 Entry-Level Hub Our Vixel 1000 entry-level hub provides a cost-effective solution that addresses SAN interconnect requirements, linking low and middle range servers with storage devices. By enhancing functionality and reducing costs for entry-level products, we are well positioned to address a broad segment of the SAN interconnect market. Introduced in October 1996, our Vixel 1000 has been tested and proven in a wide range of demanding, mission-critical networks and continues to be a popular choice for cost-conscious, entry-level SAN installations. Our Vixel 1000 hub supports full gigabit data transfer speeds and automatically bypasses failed or unused ports in a SAN. Its GBIC-based design allows customers to add, move or delete storage capacity and Fibre Channel devices on the SAN as needed. The flexible design of our entry-level hub also enables different combinations of copper, short-wave optical and long-wave optical transceiver types in a single SAN solution. Transceivers Our transceivers provide fiber optic connectivity between devices installed in a SAN. Our fiber optic transceivers include GLMs, which are attachable modular interfaces for Fibre Channel host bus adapters and disk controllers, and GBICs, which are removable transceivers for switches, hubs, host bus adapters and disk controllers. We have been shipping gigabit GLMs since September 1996 and we are supplying full-speed GLMs to a variety of customers for use in host bus adapters and disk controllers. 38 45 As one of the original authors of the GBIC Specification, we have played a strategic role in enabling modular, high-speed transceivers for Fibre Channel environments. We have been shipping GBICs to customers since September 1996. Our current optical GBIC employs state-of-the-art vertical cavity surface emitting laser, or VCSEL, technology specifically designed for high-speed data transport among disk controllers, arbitrated loop hubs and fabric switches. Our GBICs support Serial ID, allowing host enclosures to solicit asset information, including manufacturer, date of manufacture, serial number and batch number directly from the GBIC. With our integrated product portfolio, this GBIC Serial ID information can be read by our managed hubs and fabric switches and reported to the user via SAN InSite. This feature allows a network administrator to track inventory information from a single management platform, regardless of where the GBIC is installed in a fabric switch or managed hub. OUR TECHNOLOGY We believe that our Fibre Channel expertise across a wide range of Fibre Channel products and SAN configurations has enabled us to develop and ship in volume leading high-performance SAN interconnect solutions. Key components of our technology platform include the following: Leadership in SAN interconnect management software. We have a core competency in the development of SAN interconnect management software which, we believe, provides us with a significant competitive advantage. We have leveraged our knowledge of SAN interconnect components such as fabric switches, managed and entry-level hubs, and transceivers to develop software that enables a comprehensive solution to SAN interconnect management. Fabric switch architecture. We have developed a full-featured and high-performance architecture for our fabric switches. Our fabric switches incorporate advanced features, such as extensive port buffering, to offer high performance in a low-cost architecture. In addition, our switch architecture is scalable, facilitating development of new generations of switches, including our Vixel 8100 switch, that support more ports and faster transmission speeds. We have several patents pending covering our switch architecture. ASIC design expertise. We employ state-of-the-art ASIC design methodologies and have demonstrated a successful track record of achieving short design cycles for high-performance, complex ASICs. We use our own internally developed ASICs in our Fibre Channel products which enables us to maximize our products' reliability, functionality and interoperability while minimizing time to market. Fabric switch and managed hub embedded software. Our embedded software expertise covers a wide range of SAN interconnect devices, including our fabric switches and managed hubs. We believe we are the only company that designs, develops and markets a full range of SAN interconnect components. As a result, we believe we are uniquely positioned to further develop embedded software that maximizes interoperability and functionality of all of these SAN components while supporting ANSI and Internet standards. Designed-in interoperability. We design standards-based interoperability into our products from the beginning of the design cycle and thoroughly validate interoperability throughout the product release process. Our products also are extensively tested with other vendors' products to ensure cross-vendor interoperability. In January 1998, we launched our V(2) Lab to facilitate robust interoperability testing and analysis of our products within a multi-vendor system environment. We believe that our investment of personnel and capital equipment in this facility has enhanced interoperability and time to market for our OEMs and resellers. We also use this lab to certify specific SAN configurations and reduce the need for our distribution partners to undergo costly and timely testing processes. 39 46 CUSTOMERS Our primary customers are OEMs and resellers who sell to end users and VARs. Following is a list of our customers who have purchased more than $500,000 of our products since the beginning of fiscal 1998: Amdahl Hewlett-Packard Avid Sports IBM Avid Technologies Interphase Bell Microproducts Nissho Electronics Compaq Computer Sun Microsystems Emulex
In some cases, we sell our products to our customers' contract manufacturers who in turn sell them to our customers. Sun Microsystems, Compaq Computer, Hewlett-Packard and Interphase represented 34.4%, 19.8%, 11.8% and 10.4% of our total revenue, respectively, for the six months ended July 4, 1999. In fiscal 1998, Sun Microsystems and Hewlett-Packard represented 54.4% and 12.3% of our total revenue, respectively. CUSTOMER SERVICE AND SUPPORT We emphasize customer service and support in order to provide our customers and their end users with the knowledge and resources necessary to successfully implement and integrate comprehensive, high-performance Fibre Channel solutions. We offer a variety of support options for our products, including 24 hours a day, seven days a week support and immediate parts replacement that enables continuous customer response and rapid replacement of products at end-user locations. Our customer service and systems engineering teams provide extensive pre- and post-sale customer support, including consultation, network design and in-depth training on SAN technology and product implementation. In October 1998, we launched our Vixel Care Services program to further enhance the support we provide to our OEMs and resellers. This program includes comprehensive education and training for our products and Fibre Channel SANs, telephone support, customized remote support contracts and onsite installation consulting services. We also have an initiative with our OEMs and resellers to extend train-the-trainer techniques so they may quickly develop their own service organizations to support SAN installations that include our products and SAN InSite management software. We intend to continue providing a high level of education and service to further support and optimize SANs deployed at end-user sites. SALES AND MARKETING We sell our SAN solutions, including SAN interconnect management software, fabric switches, hubs and transceivers, to OEMs and select resellers. We primarily sell to OEMs of specific operating systems-based servers including Unix and Windows NT, as well as to OEMs of high-end disk and tape storage subsystems. Our OEMs utilize our products to deliver to end users complete factory-configured solutions, which are installed and field-serviced by OEMs' technical support organizations. As the markets for Fibre Channel products and SAN solutions evolve and as end-user awareness of the benefits of Fibre Channel increases, we believe an increasing volume of sales will occur through alternative distribution channels, including resellers and systems integrators. To support our reseller channel, we recently introduced our Premier Value Added Reseller program that provides select resellers with the advanced technical training and sales support necessary to successfully begin designing, installing and supporting complete, integrated SAN solutions. As the SAN market continues to develop, we plan to establish additional relationships with select domestic and international resellers to reach additional markets and increase our geographic coverage. By serving the needs of both OEMs and resellers, we can leverage the strengths of our range of customers to further develop the Fibre Channel market and enhance our ability to address a large end-user base. 40 47 We currently distribute our products in Japan though our relationship with Nissho Electronics Corporation. We intend to continue expanding internationally by partnering with additional OEMs and resellers who have a strong international presence and are capable of selling and installing complex SAN solutions. Our marketing efforts are focused on increasing awareness of our Fibre Channel products and our Vixel brand, promoting SAN-based solutions in general, and advocating industry-wide standards and interoperability. Key components of our marketing efforts include: - extending our strategic alliances with other Fibre Channel, SAN storage management and enterprise vendors to promote standardization and enhance interoperability; - promoting our SAN solutions under the Vixel brand name to strengthen sales through distribution and VAR channels; - continuing our active participation in industry associations and standards committees to promote and further enhance Fibre Channel technology and increase our visibility as industry experts; - leveraging major trade show events and SAN conferences to promote our comprehensive solution and to continue our leading role in educating customers on the value of SANs; - expanding our web-based marketing program to provide both product and sales information; and - in cooperation with other vendors, certifying and packaging complete SAN solutions with proven interoperability between SAN interconnects, devices and applications. MANUFACTURING We outsource our manufacturing which reduces our need to make costly investments in capital equipment and manufacturing facilities. K*TEC Electronics, a division of Kent Electronics, and Solectron Corporation currently manufacture our products. They are responsible for nearly all material procurement, assembly and testing, packaging and shipment of our products. Our switches, hubs and GBIC transceiver products are manufactured at K*TEC, and our GLM transceivers are manufactured at Solectron; however, we are in the process of transitioning our GLM manufacturing to K*TEC. We currently do not have a long-term supply contract with K*TEC or Solectron. Therefore, they are not obligated to manufacture products for us, except as may be provided in particular purchase orders that they have accepted. We place purchase orders with our manufacturers based on periodic forecasts. In the future, we may need to add new manufacturing partners to achieve higher production volumes and/or lower costs. While our manufacturing partners are responsible for all facets of the manufacturing process, we are directly involved in qualifying our vendors and the key components that are used in our products. Most of our product components can be obtained from multiple qualified manufacturers. While most of the materials used in our products are standard, some are proprietary or sole sourced and require extended lead times. Although we design our own ASICs, they are manufactured by LSI Logic and VLSI. Motolora and Intel are currently our sole suppliers for microprocessors. Honeywell is our sole supplier of the VCSEL used in our transceivers. In addition, we license software for our hubs from Wind River Systems. Our supply management team works closely with strategically important suppliers who offer proprietary or sole-sourced products. In addition, our operations team is focused on production test equipment development, manufacturability, effective transfer of products from development to production, and monitoring of supplier performance and quality. RESEARCH AND DEVELOPMENT We focus our research and development efforts on developing products that meet the evolving needs of the SAN market. We are developing our SAN interconnect management software to provide higher levels of management capabilities for our products and others, including the ability of SAN InSite to manage other vendors' devices. We also are developing interfaces that interact with leading systems management software in order to more effectively manage data transport and data storage throughout the 41 48 enterprise. Our switch and hub development efforts are focused on enhancing functionality through the development of higher-level ASICs, increasing the number of ports and transmission speed capabilities, and enhancing interoperability with other vendors' devices. In addition to the development of our core technologies, we plan to continue to partner with other leading providers of SAN technologies, products and services to jointly develop high performance SAN products and support industry standards. Our research and development expenses were $6.2 million in the six months ended July 4, 1999 and $11.1 million in fiscal 1998. We believe that our research and development efforts are key to our ability to maintain technical competitiveness and to deliver innovative products that address the needs of the market. However, our product development efforts may not result in commercially viable products, and our products may be made obsolete by changing technology or new product announcements by us or our competitors. COMPETITION The SAN interconnect market has become increasingly competitive. New SAN-enabled products are being offered by a growing number of server, storage, tape and storage management vendors. Because we offer a broad product portfolio, each of our products competes with a different set of competitors. For fabric switch sales, we compete primarily with Ancor, Brocade and McDATA. For hub sales, we compete primarily with Emulex and Gadzoox. For transceiver sales, we compete primarily with Cielo, Finisar, Hewlett-Packard and IBM. Although we do not believe that any other vendor offers comprehensive SAN interconnect management software that directly competes with ours, other vendors, such as Brocade and Gadzoox, provide single point-device managers for either hub or fabric switch products, but not across multiple devices, including fabric switches, hubs and transceivers. As the market for SAN interconnect products grows, we may face competition from traditional networking companies and other manufacturers of networking equipment. These networking companies may enter the SAN interconnect market by introducing their own products or by acquiring or entering into an alliance with an existing SAN interconnect provider. It also is possible that our OEMs could develop and introduce products competitive with our product offerings. We believe the primary competitive factors in the SAN interconnect market are the following: - product performance and features; - product reliability and interoperability; - the size of installed customer base; - price; - strength of distribution channel; - ability to meet delivery schedules; and - customer service and technical support. We believe we compete favorably with our competitors based on these factors. However, because many of our existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and substantially greater financial, technical, sales and marketing resources, they may have larger distribution channels, access to more customers and a larger installed customer base than we do. These competitors may be able to undertake more extensive marketing campaigns and adopt more aggressive pricing policies than we can. To remain competitive, we believe we must, among other things, invest significant resources in expanding our distribution channels, developing new products and enhancing our current products. If we fail to do so, our products will not compete favorably with those of our competitors which will significantly harm our business. 42 49 INTELLECTUAL PROPERTY Our success depends on our proprietary technology. We attempt to protect our technology through a combination of patents, copyrights, trade secret laws, trademarks, as well as confidentiality agreements and other contractual restrictions. There can be no assurance that our intellectual property protection measures will be sufficient to prevent misappropriation of our technology or that our competitors will not independently develop technologies that are substantially equivalent or superior to our technology. In addition, the laws of many foreign countries do not protect our intellectual property rights to the same extent as the laws of the United States. Our failure to protect our proprietary information could have a material adverse effect on our business, financial condition and results of operations. We have been awarded one patent with respect to our GBIC transceivers. We also have four pending patent applications in the United States and selected countries abroad with respect to a broad scope of SAN technology including our SAN management capabilities and switch and hub architecture. However, it is possible that patents may not be issued for the pending applications and that our issued patent may not adequately protect our technology from infringement or prevent others from claiming our technology infringes that of third parties. All our software products have copyright notices. We own several trademarks including Vixel and SAN InSite. We also rely on trade secret law and contractual provisions to protect our intellectual property, including technology development which we have determined not to patent or copyright, or which is not capable of more formal protection. We may need to initiate litigation in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of our resources and could materially harm our business. From time to time we have received, and may receive in the future, notice of infringement claims of other parties' proprietary rights. For instance, a competing supplier of transceivers sued us, claiming that features of our GBIC products infringed its patents. This lawsuit was settled in May 1999. We incurred significant costs in defending and settling such claims. Infringement or other claims could be asserted or prosecuted against us in the future, and it is possible that past or future assertions or prosecutions could harm our business. Any such claims, with or without merit, could be time-consuming, result in costly litigation and diversion of technical and management personnel, cause delays in the development and release of our products, or require us to develop non-infringing technology or enter into royalty or licensing arrangements. Such royalty or licensing arrangements, if required, may not be available on terms acceptable to us, or at all. For these reasons, infringement claims could materially harm our business. EMPLOYEES As of July 31, 1999, we had 181 employees, 178 of who were full-time. Of our employees, 80 were engaged in research and development, 39 in sales and marketing, 34 in operations and 28 in finance, administration and information services. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. LEGAL PROCEEDINGS We are not a party to any material legal proceedings. FACILITIES Our corporate headquarters are located in Bothell, Washington and occupy approximately 43,000 square feet. Our lease for this facility expires in January 2002. In addition, we have a research and development and sales facility located in Irvine, California that occupies approximately 13,000 square feet. Our lease for this facility expires in November 2002. We believe these existing facilities will be adequate to meet our needs for the next 12 months. If our growth continues, we will need larger facilities after that time. We cannot assure you that suitable additional facilities will be available as needed on commercially reasonable terms. We also lease five domestic sales offices in San Jose, California, Columbia, Maryland, Gloucester, Massachusetts, Nashua, New Hampshire and Houston, Texas. 43 50 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND OTHER OFFICERS Our executive officers, directors and other officers and their ages as of July 31, 1999 are as follows:
NAME AGE POSITION ---- --- -------- James M. McCluney......................... 48 President, Chief Executive Officer and Director Kurtis L. Adams........................... 44 Chief Financial Officer, Vice President of Finance, Secretary and Treasurer Stuart B. Berman.......................... 42 Chief Technology Officer Richard G. Helgeson....................... 47 Vice President of Sales Robert R. Lux............................. 55 Vice President of Customer Satisfaction and Corporate Quality Jay R. O'Donald........................... 56 Vice President of Operations Stanley H. Reese.......................... 58 Vice President of Product Development Arun K. Taneja............................ 52 Vice President of Marketing Ronald G. von Trapp....................... 51 Vice President of Worldwide Sales Donald P. Wenninger....................... 49 Vice President of Information Technology Gregory R. Olbright....................... 43 Chairman of the Board of Directors Kevin A. Fong(1).......................... 45 Director Charles A. Haggerty(2).................... 57 Director Juan A. Rodriguez......................... 58 Director Timothy M. Spicer(1)...................... 49 Director Werner F. Wolfen(2)....................... 69 Director
- ------------------------- (1) Member of the audit committee. (2) Member of the compensation committee. James M. McCluney has served as our president, chief executive officer and director since April 1999. From October 1997 to January 1999, he served as president and chief executive officer of Crag Technologies, formerly Ridge Technologies, a storage system manufacturer. From October 1994 to September 1997, Mr. McCluney served in various positions at Apple Computer, including senior vice president of worldwide operations and vice president of European operations. Kurtis L. Adams has served as our chief financial officer and vice president of finance since September 1998. From December 1995 to September 1998, he was chief financial officer and vice president of finance of Health Systems Technologies, Inc., a software company. Mr. Adams was the corporate controller from November 1989 to February 1991 and the corporate controller and chief accounting officer from March 1991 to October 1995 for Chipcom Corporation, a networking company. Stuart B. Berman has served as our chief technology officer since February 1998. In July 1996, he co-founded Arcxel Technologies, Inc., a networking company, and through February 1998 served as its chairman and chief technology officer. From February 1993 to June 1996, Mr. Berman was a Fibre Channel architect for Emulex Corporation, a networking company. Richard G. Helgeson has served as our vice president of sales since January 1998. From May 1997 to January 1998, he served as vice president of sales for Atreiva Corporation, an Internet services company. From June 1995 to May 1997, Mr. Helgeson was vice president of sales at CNT Corporation, a networking company. From June 1990 to May 1995, Mr. Helgeson held various senior sales positions at Wellfleet Communications, Inc., a networking company. Robert R. Lux has served as our vice president of customer satisfaction and corporate quality since June 1999. From January 1999 to June 1999, he served as a sales, marketing and corporate quality consultant to us. From November 1998 to May 1999, he served as general partner of Lux & Associates, a consulting firm. In April 1995, Mr. Lux founded Bay Stone Software, a software company, and through 44 51 Werner F. Wolfen has served as one of our directors since July 1994. He is a retired partner of the law firm of Irell & Manella where he was co-chairman of the firm's executive committee from 1982 to 1992. Mr. Wolfen is a member of the board of directors of Broadcom Corporation, a publicly held networking company. BOARD COMPOSITION We currently have authorized seven directors. Upon the closing of this offering, the terms of office of our directors will be divided into three classes: Class I, whose term will expire at the annual meeting of stockholders to be held in 2000 or special meeting held in lieu thereof, Class II, whose term will expire at the annual meeting of stockholders to be held in 2001 or special meeting held in lieu thereof and Class III, whose term will expire at the annual meeting of stockholders to be held in 2002 or special meeting held in lieu thereof. The Class I directors are Messrs. Fong, Olbright and Rodriguez, the Class II directors are Messrs. Haggerty and Wolfen and the Class III directors are Messrs. McCluney and Spicer. At each annual meeting of stockholders after the initial classification or special meeting in lieu thereof, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election or special meeting held in lieu thereof. In addition, our certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of Vixel, although our directors may be removed for cause by the affirmative vote of the holders of a majority of our common stock. BOARD COMPENSATION The chairman of our board of directors, Gregory Olbright, receives $50,000 per year for serving in this capacity. We do not currently provide our other directors with cash compensation for their services as members of the board of directors, although we reimburse our directors for reasonable expenses they incur in connection with attendance at board and committee meetings. Directors are eligible to participate in our equity incentive plans. See "-- Employee benefit plans" on page 49. In May 1999, the board of directors granted each director who was not an employee, a fully vested option to purchase 16,667 shares of common stock at a price of $6.00 per share. Each director immediately exercised the option to purchase 16,667 shares of common stock and delivered to us a $100,000 full-recourse promissory note. In April 1999, the board of directors granted a special option to purchase 26,667 shares of common stock at a price of $3.08 per share to Timothy Spicer, one of our directors, and paid Mr. Spicer $40,000 for his service as our interim chief executive officer from February through April 1999. BOARD COMMITTEES The board of directors has an audit committee and a compensation committee. The audit committee meets with our independent auditors at least annually to review the results of the annual audit. The audit committee also recommends to the board the independent accountants to be retained and reviews the accountants' comments as to controls, adequacy of staff and management performance and procedures in connection with our audit and financial controls. The audit committee is composed of two non-employee directors, Messrs. Fong and Spicer. The compensation committee makes recommendations to the board concerning salaries and incentive compensation, awards stock options to employees and consultants under our stock option plans and performs other functions regarding compensation as delegated by the board. The compensation committee is composed of two non-employee directors, Messrs. Haggerty and Wolfen. 45 52 Werner F. Wolfen has served as one of our directors since July 1994. He is a retired partner of the law firm of Irell & Manella where he was co-chairman of the firm's executive committee from 1982 to 1992. Mr. Wolfen is a member of the board of directors of Broadcom Corporation, a publicly held networking company. BOARD COMPOSITION We currently have authorized seven directors. Upon the closing of this offering, the terms of office of our directors will be divided into three classes: Class I, whose term will expire at the annual meeting of stockholders to be held in 2000 or special meeting held in lieu thereof, Class II, whose term will expire at the annual meeting of stockholders to be held in 2001 or special meeting held in lieu thereof and Class III, whose term will expire at the annual meeting of stockholders to be held in 2002 or special meeting held in lieu thereof. The Class I directors are Messrs. Fong and Rodriguez, the Class II directors are Messrs. Olbright and Wolfen and the Class III directors are Messrs. Haggerty, McCluney and Spicer. At each annual meeting of stockholders after the initial classification or special meeting in lieu thereof, the successors to directors whose terms will then expire will be elected to serve from the time of election and qualification until the third annual meeting following election or special meeting held in lieu thereof. In addition, our certificate of incorporation will provide that the authorized number of directors may be changed only by resolution of the board of directors. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. This classification of the board of directors may have the effect of delaying or preventing changes in control or management of Vixel, although our directors may be removed for cause by the affirmative vote of the holders of a majority of our common stock. BOARD COMPENSATION The chairman of our board of directors, Gregory Olbright, receives $50,000 per year for serving in this capacity. We do not currently provide our other directors with cash compensation for their services as members of the board of directors, although we reimburse our directors for reasonable expenses they incur in connection with attendance at board and committee meetings. Directors are eligible to participate in our equity incentive plans. See "-- Employee benefit plans" on page 49. In May 1999, the board of directors granted each director who was not an employee, a fully vested option to purchase 16,667 shares of common stock at a price of $6.00 per share. Each director immediately exercised the option to purchase 16,667 shares of common stock and delivered to us a $100,000 full-recourse promissory note. In April 1999, the board of directors granted a special option to purchase 26,667 shares of common stock at a price of $3.08 per share to Timothy Spicer, one of our directors, and paid Mr. Spicer $40,000 for his service as our interim chief executive officer from February through April 1999. BOARD COMMITTEES The board of directors has an audit committee and a compensation committee. The audit committee meets with our independent auditors at least annually to review the results of the annual audit. The audit committee also recommends to the board the independent accountants to be retained and reviews the accountants' comments as to controls, adequacy of staff and management performance and procedures in connection with our audit and financial controls. The audit committee is composed of two non-employee directors, Messrs. Fong and Spicer. The compensation committee makes recommendations to the board concerning salaries and incentive compensation, awards stock options to employees and consultants under our stock option plans and performs other functions regarding compensation as delegated by the board. The compensation committee is composed of two non-employee directors, Messrs. Haggerty and Wolfen. 46 53 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of our compensation committee is or has been, at any time since our formation, an officer or employee of Vixel. No member of our compensation committee and none of our executive officers serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. EXECUTIVE COMPENSATION The following table sets forth all compensation awarded to, earned by, or paid by us during the fiscal year ended January 3, 1999 to (A) our current chief executive officer and president, (B) our president and chief executive officer during the fiscal year ended January 3, 1999, and (C) our five most highly compensated executive officers, other than the chief executive officer, whose salary and bonus for the fiscal year exceeded $100,000 and who served as an executive officer of Vixel during such year collectively, these individuals are referred to as "Named Executive Officers". SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ANNUAL COMPENSATION AWARDS --------------------------------- --------------------- ALL OTHER SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION OPTIONS(#) --------------------------- -------- ------- ------------ --------------------- James M. McCluney(1)......................... -- -- -- -- President and Chief Executive Officer Stuart B. Berman............................. $128,082 -- -- 60,534 Chief Technology Officer Richard G. Helgeson(2)....................... 127,212 $80,000 $ 2,181 160,000 Vice President of Sales Jay R. O'Donald(3)........................... 130,481 -- 50,686 82,836 Vice President of Operations Former Executive Officers Gregory R. Olbright.......................... 249,039 -- 823,577 1,400,000 President and Chief Executive Officer(4) Marlu E. Allan............................... 133,923 -- 25,535 -- Vice President of Business Development(5) Karen L. Howard.............................. 129,808 -- 50,491 -- Vice President of Human Resources(6)
- ------------------------- (1) Mr. McCluney joined Vixel in April 1999. (2) Bonus consists of commissions and bonuses related to sales activities. Other compensation consists of 401(k) plan matching contributions. (3) Other compensation includes $42,857 in relocation payments and $7,829 in 401(k) plan matching contributions. (4) Mr. Olbright resigned as president and chief executive officer of Vixel in February 1999. Other compensation includes $473,643 in relocation expenses, $250,000 in accrued severance, $90,334 in interest forgiveness and $9,600 in 401(k) matching contributions. With respect to securities underlying options, an option to purchase 700,000 shares of common stock was exercised in April 1998, and the shares acquired upon exercise were repurchased by us at cost in October 1998. (5) Ms. Allan resigned as an executive officer of Vixel in November 1998. Other compensation includes $17,500 in accrued severance and $8,035 in 401(k) matching contributions. (6) Ms. Howard resigned as an executive officer of Vixel in January 1999. Other compensation includes $42,703 in accrued severance and $7,788 in 401(k) matching contributions. 47 54 The following table shows certain information regarding stock options granted to the Named Executive Officers during fiscal 1998. No stock appreciation rights were granted in fiscal 1998. All options granted to these executive officers in the last fiscal year were granted under our 1995 stock option plan. Unless otherwise noted, options vest 25% on the anniversary of the vesting commencement date and monthly thereafter in 36 equal installments. The percentage of total options set forth below is based on options for 3,426,073 shares granted to employees in fiscal 1998. All options are granted at the fair market value as determined by the board of directors on the date of grant. Potential realizable values are net of exercise price, but before associated taxes based on the term of the option at the time of grant. The 5% and 10% assumed annual rates of compounded stock price appreciation are mandated by the SEC and do not represent our estimate or projection of the future common stock price. Unless the market price of the common stock appreciates over the option term, no value will be realized from the option grants made to the executive officers. The assumed 5% and 10% rates of stock appreciation are based on the assumed offering price of $11.00 per share. OPTION GRANTS IN LAST FISCAL YEAR
PERCENT OF POTENTIAL REALIZABLE VALUE AT TOTAL ASSUMED ANNUAL RATES OF OPTIONS EXERCISE STOCK PRICE APPRECIATION NUMBER OF SHARES GRANTED PRICE FOR OPTION TERM UNDERLYING TO PER EXPIRATION ------------------------------ NAME OPTIONS GRANTED EMPLOYEES SHARE DATE 5% 10% ---- ---------------- ---------- --------- ---------- ------------- ------------- James M. McCluney....... -- -- -- -- -- -- Stuart B. Berman(1)..... 60,534 1.8% $0.11 9/21/07 $ 1,077,977 $ 1,720,449 Richard G. Helgeson..... 160,000 4.7 4.59 01/26/08 2,132,448 3,830,592 Jay R. O'Donald(2)...... 82,836 2.4 0.11 09/29/07 1,475,127 2,354,299 Gregory R. Olbright(3)........... 700,000 20.4 5.00 03/03/08 13,563,690 24,707,760 700,000 20.4 3.08 12/08/08 15,584,940 26,729,010 Marlu E. Allan.......... -- -- -- -- -- -- Karen L. Howard......... -- -- -- -- -- --
- ------------------------- (1) This option was substituted for an option originally granted by Arcxel, with the exception of 2,088 shares which vested at the time of substitution, the option vests at the rate of 2,088 shares per month for 28 months. (2) This option was substituted for an option originally granted by Arcxel. Except for 2,857 shares which had vested at the time of substitution, the option vests at the rate of 2,857 shares per month for 28 months. (3) The March 3, 1998 option was exercised for a promissory note in April 1998. The shares acquired upon exercise were repurchased by us at cost in October 1998 in exchange for cancellation of the note. A new option was issued in December 1998. With respect to the December 1998 option, 158,337 shares were immediately vested, 208,340 shares vest monthly ratably over the first 15 months, 58,336 shares vest ratably over the next 12 months, 252,083 shares vest ratably over the next 11 months and 22,903 shares vest in the last month. In connection with Mr. Olbright's resignation as our president and chief executive officer, options for 284,709 shares were cancelled in April 1999. At that time, Mr. Olbright exercised his option in full for the remaining 415,290 shares. These shares are subject to a right of repurchase in favor of Vixel which lapses according to the schedule above. 48 55 OPTION EXERCISES AND HOLDINGS The following table sets forth the number of shares of common stock acquired upon the exercise of stock options by the Named Executive Officers during fiscal 1998, and the number and value of the shares of common stock underlying unexercised options held by the Named Executive Officers as of January 3, 1999. The value of unexercised in-the-money options is based on the fair market value of our common stock as of January 3, 1999, which was $3.08 per share, as determined by our board of directors, less the exercise price, multiplied by the number of shares underlying the option. All options were granted under our 1995 stock option plan. These options generally vest 25% on the anniversary of the vesting commencement date and monthly thereafter in 36 equal installments. FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT SHARES OPTIONS AT JANUARY 3, 1999 JANUARY 3, 1999 ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- -------- ----------- ------------- ----------- ------------- James M. McCluney............ -- -- -- -- -- -- Stuart B. Berman............. 22,968 37,566 $68,150 $111,464 Richard G. Helgeson.......... -- -- -- 160,000 -- -- Jay R. O'Donald.............. -- -- 31,423 51,413 93,238 152,549 Gregory R. Olbright.......... 900,000 $810,000 172,227 527,773 -- -- Marlu E. Allan............... 50,013 241,933 12,274 71,046 32,219 186,496 Karen L. Howard.............. 36,477 221,596 9,737 70,453 23,368 169,088
EMPLOYEE BENEFIT PLANS 1995 Stock Option Plan The 1995 Stock Option Plan was adopted by our board of directors and approved by our stockholders in February 1995 and later amended by the board of directors with stockholder approval in March 1998 (the "1995 Plan"). The 1995 Plan authorizes the grant of incentive and nonstatutory stock options, stock appreciation rights and stock bonuses. A total of 6,133,333 shares of common stock of the Company were reserved for issuance under the 1995 Plan. As of July 31, 1999, there were 2,442,460 shares reserved for option grants to Company employees, officers and directors. As of July 31, 1999, there were options to purchase 2,424,193 shares of common stock issued under the 1995 Plan, held by employees at a weighted average exercise price of $3.26 per share. In December 1998, the board authorized the exchange of all outstanding options under the 1995 Plan with an exercise price of $3.38 for new stock options. As a result, optionees were given the opportunity to receive repriced options at $3.08 per share. The repriced options had a new vesting schedule, under which electing optionees received credit toward the vesting of their option equal to one-half of the time elapsed under their old option. Options for 568,137 shares of common stock were repriced and exchanged for new options issued in December 1998. The 1995 Plan will terminate in July 2005, unless terminated sooner by the board of directors. Outstanding options under the 1995 Plan will continue to be governed by their existing terms which are discussed below. 1999 Equity Incentive Plan The Company's 1999 Equity Incentive Plan (the "1999 Plan") was adopted by our board of directors and approved by our shareholders in August 1999. The 1999 Plan is intended to serve as the successor 49 56 equity incentive program to the 1995 Plan. The 1999 Plan authorizes the grant of incentive and nonstatutory stock options, stock appreciation rights, and the right to receive or purchase restricted stock. Effective upon the completion of this offering, we will have a total of 1,700,000 shares of common stock reserved for issuance under the 1999 Plan following a two-for-three reverse stock split anticipated to be completed before the closing of this offering. In addition, the number of shares of common stock reserved for issuance under the 1999 Plan will automatically increase on the first day of each calendar year, beginning in calendar year 2001, by an amount equal to the lesser of 1,700,000 shares or 4% percent of the total number of shares of common stock outstanding on the first day of the calendar year. Under the 1999 Plan, the board of directors has the authority to designate a smaller number of shares by which the reserve will increase for a particular year. In no event, however, may any one participant in the 1999 Plan receive option grants or direct stock issuances for more than 1,200,000 shares of common stock in the aggregate per calendar year. The 1999 Plan will terminate in August 2009, unless terminated sooner by the board of directors. Provisions Common to Both the 1995 Plan and the 1999 Plan The terms of the stock options, stock appreciation rights and stock bonuses and restricted stock under both our 1995 Plan and our 1999 Plan are substantially similar. Both plans provide for grants of incentive stock options that qualify under Section 422 of the Internal Revenue Code of 1986, to our employees, including officers and employee directors or the employees of our affiliates. Both plans provide for the grant of nonstatutory stock options, stock bonuses and stock appreciation rights to employees, officers, non- employee directors and consultants to the Company. The 1995 Plan and the 1999 Plan are each administered by the board of directors or a committee appointed by the board of directors; references herein to the board of directors shall include any such committee. The 1995 Plan and the 1999 Plan have been administered by the board's compensation committee which is comprised of Messrs. Haggerty and Wolfen, who are "non-employee directors" under applicable securities laws and outside directors, as defined under the Internal Revenue Code. After this offering, it is anticipated that both plans will continue to be administered by the compensation committee. The board of directors has the authority to determine to whom awards are granted, the terms of such awards, including the type of awards to be granted, the exercise price, the number of shares subject to the awards and the vesting and exercisability of the awards under both plans. The term of a stock option granted under the 1995 Plan and the 1999 Plan generally may not exceed 10 years. The exercise price of options granted under each plan is determined by the board of directors, but, in the case of an incentive stock option, cannot be less than 100% of the fair market value of the common stock on that date of grant, and in the case of a nonstatutory stock option, the exercise price generally cannot be less than 85% of the fair market value of the common stock on the date of grant except for an assumption or substitution of an existing stock option. Options granted under the 1995 Plan and 1999 Plan vest at the rate specified in the option agreement. Except as expressly provided by the terms of a nonstatutory stock option agreement, no option under each plan may be transferred by the optionee other than by will or the laws of descent and distribution or, in certain limited instances, pursuant to a qualified domestic relations order, provided that an optionee under each plan may designate a beneficiary who may exercise the option following the optionee's death. An optionee under each plan whose relationship with us or any of our affiliates ceases for any reason, other than due to death or permanent and total disability, may generally exercise vested options in the three month period following such cessation, unless such options terminate or expire sooner by their terms or in such longer or shorter period as may be determined by the board and set forth in the option agreement. Vested options under each plan may generally be exercised during the period ending on the earlier of the end of the original term of the options or the 12-month period after an optionee's relationship with us or any of our affiliates ceases due to disability and the 18-month period after an optionee's relationship with us or any of our affiliates ceases due to death. 50 57 Under both plans no incentive stock option may be granted to any person who, at the time of the grant, owns or is deemed to own common stock possessing more than 10% of our total combined voting power or any of our affiliates, unless the option exercise price is at least 110% of the fair market value of the stock subject to the option on the date of grant and the term of the option does not exceed five years from the date of grant. In addition, the aggregate fair market value, determined at the time of grant, of the shares of common stock with respect to options, which become exercisable by an optionee during any calendar year, may not exceed $100,000. Any options, or portions thereof, which exceed this limit are treated as nonstatutory options. Shares subject to stock awards that have lapsed or terminated, without having been exercised in full, and any shares repurchased by us pursuant to a repurchase option provided under the plans may again become available for the grant of awards under the respective plan. Rights to acquire restricted stock granted under the plans may be granted subject to a repurchase option in favor of us that will expire pursuant to a vesting schedule. The purchase price of these awards will be at least 85% of the fair market value of the common stock on the date of grant. Stock bonuses may be awarded in consideration for past services without the payment of a purchase price. Rights under a stock bonus or restricted stock bonus agreement may not be transferred other than by will, the laws of descent and distribution or a qualified domestic relations order while the stock awarded pursuant to an agreement remains subject to the agreement, provided that a holder of these rights may designate a beneficiary who may exercise the right following the holder's death. Upon a change in control of Vixel, all outstanding stock awards under the plans may be assumed by the surviving entity or replaced with similar stock awards granted by the surviving entity. If the surviving entity does not assume these awards or provide substitute awards, then with respect to persons whose service with us or an affiliate has not terminated prior to the change in control, the awards shall become fully vested and will terminate if not exercised prior to the change in control. Non-Employee Director Stock Option Grants Under the 1995 Plan and the 1999 Plan Non-employee members of the board of directors are eligible to receive nondiscretionary stock options under the 1995 Plan and the 1999 Plan. Under the 1999 Plan, an initial grant of nonstatutory options of 16,500 shares (following a two-for-three reverse stock split in August 1999) of the common stock will be made after the effective date of this Offering to each newly-elected non-employee director on the date such individual is first elected to the board. Beginning with the annual meeting of the stockholders of the Company (the "Annual Meeting") in the year 2000, annual nonstatutory option grants will be made to each non-employee director of five thousand (5,000) shares of common stock as of the date of each Annual Meeting. The term of the stock options will generally be ten years. The exercise price of the stock options shall be not less than 100% of the fair market value of the stock. The stock options of a director will vest annually over a three year period from the date of grant. Employee Stock Purchase Plan Effective upon the completion of this offering, we will implement an employee stock purchase plan ("Purchase Plan"). A total of 300,000 shares of common stock have been reserved for issuance under this purchase plan. Each year, the number of shares reserved for issuance under the Purchase Plan will automatically be increased by 1% of the total number of shares of common stock then outstanding or, if less, by 300,000 shares. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of section 423 of the Internal Revenue Code. Under the Purchase Plan, the board of directors or a committee comprised of at least two members of the board of directors may authorize participation by eligible employees, including officers, in periodic offerings following the commencement of the Purchase Plan. The initial offering under the purchase plan will commence on the effective date of this offering and terminate on April 30, 2000. Unless otherwise determined by the board of directors, employees are eligible to participate in the purchase plan only if they are customarily employed by us or one of our subsidiaries designated by the 51 58 board of directors for at least 20 hours per week and five months per calendar year and have completed at least ninety (90) days of continued employment. Otherwise eligible employees who are employed on the effective date of this offering with less than ninety (90) days of continued employment will be immediately eligible to participate in the Purchase Plan with respect to the first offering period provided that they remain in continued employment through the end of the first offering period (April 30, 2000). Employees who participate in an offering may have up to 15% of their eligible earnings withheld pursuant to the Purchase Plan. The amount withheld is then used to purchase shares of the common stock on specified dates determined by the board of directors. The price of common stock purchased under the Purchase Plan will be equal to 85% of the lower of the fair market value of the common stock at the commencement date of each offering period or the relevant purchase date. Employees may end their participation in an offering at any time during that offering, and their participation will end automatically on termination of their employment with us or one of our affiliates. In the event of a merger, reorganization, consolidation or liquidation that involves us, the board of directors has discretion to provide that each right to purchase common stock will be assumed or an equivalent right substituted by the successor corporation or the board of directors may provide for all sums collected by payroll deductions to be applied to purchase stock immediately prior to a merger or other transaction. The board of directors has the authority to amend or terminate the Purchase Plan, provided, however, that no action may adversely affect any outstanding rights to purchase common stock. 401(k) Plan In January 1997, the board of directors adopted the Vixel Corporation 401(k) plan, which is intended to be a tax qualified employee savings retirement plan, covering our employees who are at least 21 years of age, have at least six months of service with us and work a minimum of 1,000 hours during the plan year. Eligible employees may make pre-tax contributions to the 401(k) plan of up to 15% of their eligible earnings, subject to a statutorily determined annual limit. In addition, eligible employees may make roll-over contributions to the 401(k) plan from a tax-qualified retirement plan. The 401(k) plan allows us to make discretionary matching and additional profit sharing contributions to an employee's account. EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS In April 1999, we entered into an employment agreement with James M. McCluney, our president and chief executive officer. Mr. McCluney is paid an annual base salary of $300,000 during his first year of employment, after which time his base salary will be reviewed, and potentially adjusted, by the compensation committee. The agreement also requires us to pay Mr. McCluney an annual incentive bonus of up to 100% of his base salary rate then in effect, with a target payout rate of 50%, subject to his satisfaction of performance criteria to be determined by the compensation committee and so long as he serves as our president and chief executive officer for the year and during the first quarter of the following calendar year. Mr. McCluney may defer all or any portion of his annual incentive bonus. We also agreed to reimburse Mr. McCluney for his relocation expenses associated with moving his family to Washington. In the event that Mr. McCluney is terminated without cause, he will be entitled to severance in the amount of one year's base salary at the rate then in effect, any deferred incentive bonuses and continued vesting of his stock options for one year. We also granted Mr. McCluney an option to purchase up to 1,000,000 shares of our common stock at an exercise price of $3.08 per share. This option vests with respect to 250,000 shares on April 26, 2000, and then monthly thereafter in 36 equal installments. Under the terms of the option agreement, Mr. McCluney may exercise unvested options; however, Vixel has a right to repurchase any of his unvested shares. If there is a change in control of Vixel, Mr. McCluney's options will accelerate and vest immediately on the occurrences and in the amounts as follows: (1) 500,000 shares if there is a change of control before April 26, 2000 and his options are not assumed or replaced by substantially equivalent options; 52 59 (2) the greater of 250,000 or half the unvested shares if there is a change of control on or after April 26, 2000; and (3) if his employment is terminated involuntarily, other than for cause, by a successor company then as set forth above in (1) or (2) depending on the date. In December 1998, we entered into an employment agreement with Stanley H. Reese, our vice president of product development. Mr. Reese is paid an annual base salary of $150,000. He is also eligible to receive additional compensation including a bonus linked to performance of up to $65,000 and additionally any amounts that the compensation committee, in its sole discretion, may determine. We granted Mr. Reese an option to purchase up to 216,667 shares of our common stock at an exercise price of $3.08 per share. This option vests with respect to 54,167 shares on January 20, 2000, and then monthly thereafter in 36 equal installments. If we terminate Mr. Reese prior to May 31, 2000 without cause, he is entitled to receive $150,000 plus all accrued bonus that he has earned as of the termination date. In the fall of 1998 our then chief executive officer and the board of directors agreed we would commence a search for a new chief executive officer and that Mr. Olbright would continue as chief executive officer during the course of the search and after selection of the new chief executive officer would remain as chairman of the board. In November 1998, we entered into an employment agreement with Mr. Olbright, in connection with his transition to chairman of the board. Under the terms of his employment agreement, Mr. Olbright receives an annual base salary of $50,000 while serving as our chairman. We granted Mr. Olbright an option for 700,000 shares of common stock at an exercise price of $3.08 per share. Under the terms of the option agreement, Mr. Olbright may exercise unvested options; however, we have a right to repurchase any of his unvested shares. This agreement also provides that Mr. Olbright will act as a part-time employee, for which he will receive an annual salary of $25,000. In September 1998, we entered into an employment agreement with Kurtis L. Adams, our chief financial officer and vice president of finance. He is paid an annual base salary of $140,000. Mr. Adams also is eligible to receive additional compensation, bonus and benefits, in the sole discretion of the compensation committee of our board of directors. We also granted Mr. Adams an option to purchase up to 133,333 shares of our common stock at an exercise price of $6.75 per share. On the first anniversary of the grant, options for 29,167 shares will vest. The remainder vest in monthly increments of 2,431 over the next 24 months and then 3,819 per month until fully vested. Under the terms of the option agreement, Mr. Adams may exercise unvested options; however, we have a right to repurchase any of his unvested shares. As of May 31, 1999, Mr. Adams had exercised options for 96,068 shares, all of which are subject to a right to repurchase in our favor. If there is a change in control at any time prior to September 21, 1999 and Mr. Adams is terminated without cause or there is a significant change in his responsibilities, vesting of his options will accelerate by 12 months. In addition, following a change in control subsequent to September 21, 1999, if Mr. Adams is terminated without cause or there is a significant change in his responsibilities, all his options immediately will vest the greater of one half of any unvested shares or 12 months of accelerated vesting. In February 1998, we entered into employment agreements with Stuart B. Berman, our chief technology officer, and Jay R. O'Donald, our vice president of operations, in connection with our acquisition of Arcxel Technologies. These employment agreements set the annual base salary for Mr. O'Donald at $147,500 and for Mr. Berman at $145,000. Their employment agreements provide, that if either employee voluntarily terminates his employment with Vixel, is terminated for cause, or in the event of a merger of Vixel in which his options are not assumed or substituted by the acquiring entity with new options, we have the right to repurchase any unvested shares then held by the employee. Mr. O'Donald's agreement allows Vixel to repurchase up to 189,903 shares. This number is reduced by 7,098 shares for each month of his employment from February 28, 1998 until January 31, 2000, after which the number is reduced at a rate of 3,912 shares per month. Mr. Berman's agreement allows Vixel to repurchase up to 318,661 shares. This number is reduced by 12,683 shares for each month of his employment from February 28, 1998 until January 31, 2000, after which the remaining balance is reduced at a rate of 2,859 shares per month. Both employment agreements may be terminated at any time by either party. 53 60 LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS Our certificate of incorporation limits the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that a director of a corporation will not be personally liable for monetary damages for breach of that individual's fiduciary duties as a director except for liability (A) for any breach of the director's duty of loyalty to the company or to its stockholders, (B) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, (C) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in section 174 of the Delaware General Corporation Law or (D) for any transaction from which a director derives an improper personal benefit. Our bylaws provide that we indemnify our directors and executive officers and may indemnify our officers, employees and other agents to the fullest extent not prohibited by law. We believe that indemnification under our bylaws covers at least negligence on the part of an indemnified party. Our bylaws also permit us to advance expenses incurred by an indemnified party in connection with the defense of any action or proceeding arising out of his or her status or service as a director, officer, employee or other agent of Vixel upon an undertaking by him or her to repay any advances if it is ultimately determined that he or she is not entitled to indemnification. We intend to enter into separate indemnification agreements with our directors and officers. These agreements will require us to, among other things, indemnify the director or officer against expenses, including attorney's fees, judgements, fines and settlements paid by the individual in connection with any action, suit or proceeding arising out of the individual's status or service as a director or officer of Vixel, other than liabilities arising from willful misconduct or conduct that is knowingly fraudulent or deliberately dishonest, and to advance expenses incurred by the individual in connection with any proceeding against him or her individual with respect to which he or she individual may be entitled to indemnification by us. We believe that our certificate of incorporation and bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and executive officers. We also maintain directors' and officers' liability insurance. At present we are not aware of any pending litigation or proceeding involving any director, officer, employee or agent of Vixel where indemnification will be required or permitted. Furthermore, we are not aware of any threatened litigation or proceeding that might result in a claim for indemnification. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, executive officers or persons controlling Vixel, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. 54 61 CERTAIN TRANSACTIONS Certain stock option grants to our directors and executive officers are described in this prospectus under the caption "Management -- Board Compensation" and "-- Executive Compensation." WESTERN DIGITAL In March 1996, we issued 2,000,000 shares of series D preferred stock and a secured promissory note in the amount of $2.0 million to Western Digital Corporation in connection with our purchase of certain assets. In March 1999, we issued to Western Digital Corporation a warrant to purchase 16,490 shares of series E preferred stock at an exercise price of $10.00 a share in connection with an extension of the secured promissory note. Within two days of the closing of this offering, we must pay off all outstanding principal and accrued interest on the note, which currently totals $2.0 million. In connection with our purchase of assets from Western Digital, Charles A. Haggerty, the chairman, president and chief executive officer of Western Digital, joined our board of directors. SERIES E PREFERRED STOCK FINANCING In October 1996, we issued, in a private placement transaction, 4,529,221 shares of series E preferred stock at a price of $4.50 per share. The following table summarizes the shares of preferred stock purchased by Named Executive Officers, directors and 5% stockholders, and persons and entities associated with them:
SERIES E INVESTOR PREFERRED STOCK -------- --------------- Kevin A. Fong/Entities affiliated with Mayfield Fund........ 202,222 Entities affiliated with Menlo Ventures..................... 202,222 Werner F. Wolfen............................................ 38,889
CIELO COMMUNICATIONS In February 1998, we sold our laser diode fabrication facility and gigabit Ethernet transceiver product line to Cielo Communications for $6.9 million in cash. In connection with this sale, Cielo assumed a portion of our liabilities. Immediately prior to the asset purchase, Cielo sold $10.0 million of stock in a private placement to investors including Herb Alpert and investment entities managed by Mayfield Fund and Menlo Ventures, each a beneficial owner of more than 5% of our capital stock. Gregory R. Olbright received, for strategic advice given to the board of directors and executive officers of Cielo regarding Cielo's strategy, structure and formation, 500,000 shares of Cielo and an option to purchase 500,000 shares of Cielo at an exercise price of $0.20 per share. Mr. Olbright is our chairman of the board of directors and, at the time of this transaction, was our president and chief executive officer. ARCXEL TECHNOLOGIES In February 1998, we acquired Arcxel Technologies in exchange for 1,026,525 shares of common stock and 1,759,303 shares of series F preferred stock with an aggregate value of approximately $5.1 million for the common stock and $7.0 million for the preferred stock. In connection with this acquisition, Timothy M. Spicer, a director of Arcxel, joined our board of directors and Stuart B. Berman and Jay R. O'Donald, the co-founders of Arcxel, became executive officers of Vixel. The following table summarizes the shares of series F preferred stock and common stock issued to our Named Executive Officers, directors and 5% stockholders, and persons and entities associated with them in connection with the Arcxel acquisition:
SERIES F COMMON INVESTOR PREFERRED STOCK STOCK -------- --------------- ------- Stuart B. Berman............................................ 653,128 Jay R. O'Donald............................................. 363,202 Entities affiliated with Timothy M. Spicer.................. 1,744,011
55 62 DIRECTOR AND OFFICER PROMISSORY NOTES Between April 1998 and May 1999, Messrs. Olbright, McCluney and Adams delivered promissory notes to us to finance their purchase of common stock upon exercise of stock options. All of the notes are full-recourse, secured by the shares purchased, bear interest at a rate of 5.75% and are due and payable upon the earlier of four years from issuance or six months after the termination of the officer's employment. In April 1998, Gregory R. Olbright, the chairman of our board of directors, delivered to us a $3.5 million full-recourse promissory note to purchase 700,000 shares of common stock. We repurchased these shares in exchange for cancellation of the note in October 1998. In April 1999, in connection with the exercise of a stock option for 415,290 shares of our common stock, Mr. Olbright delivered to us a $1.3 million full-recourse promissory note. In April 1999, in connection with the exercise of a stock option for 1,000,000 shares of our common stock, James M. McCluney, our president and chief executive officer, delivered to us a $3.1 million full-recourse promissory note. In May 1999, in connection with the exercise of stock options to purchase 121,068 shares of our common stock, Kurtis L. Adams, our chief financial officer, delivered to us a $372,000 full-recourse promissory note. In May 1999, in connection with the exercise of stock options by each of our non-employee directors to purchase 16,666 shares of our common stock, these directors delivered to us a $100,000 promissory note. All of the notes are full-recourse, secured by the shares purchased, bear interest at a rate of 5.75% and are due and payable the earlier of the date which is four years from issuance or six months after the termination of the director's service to us. In April 1999, we loaned $62,000 to Stuart B. Berman, our chief technology officer. This loan is secured by the pledge of 653,128 shares of our common stock held by Mr. Berman. This loan has similar terms as the other director and officer notes except that it is due and payable on April 15, 2000. INDEMNIFICATION AGREEMENTS We intend to enter into separate indemnification agreements with our executive officers and directors. These agreements will require us to, among other things, indemnify the officer or director against liabilities that may arise by reason of their status or service as an officer or director, other than liabilities arising from willful misconduct of a culpable nature, and to advance his or her expenses incurred as a result of any proceeding against them as to which they could be indemnified. REGISTRATION RIGHTS AGREEMENTS A number of holders of common stock and warrants have registration rights with respect to their shares of common stock and common stock issuable upon exercise or conversion of their warrants. CONFLICT OF INTEREST POLICY All transactions with affiliates described above were approved by a majority of disinterested directors and we believe were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. Our policy is to require that a majority of the independent and disinterested outside directors on our board of directors approve all future transactions between us and our officers, directors, principal stockholders and their affiliates. These transactions will continue to be on terms no less favorable to us than we could obtain from unaffiliated third parties. 56 63 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to beneficial ownership of our common stock as of July 31, 1999, and as adjusted to reflect the sale of common stock offered hereby, as to (A) each person (or group of affiliated persons) known by us to own beneficially more than 5% of our outstanding common stock, (B) each of our directors, (C) each of the Named Executive Officers and (D) all directors and executive officers of Vixel as a group. Unless otherwise indicated, the address for each of the named individuals is c/o Vixel Corporation, 11911 Northcreek Parkway South, Bothell, Washington 98011. Except as otherwise indicated, and subject to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock held by them. Beneficial ownership is determined in accordance with the rules of the SEC. Shares of common stock subject to options or warrants that are exercisable or will become exercisable within 60 days of July 31, 1999, are deemed outstanding for the purpose of computing the percentage of ownership of the person or entity holding options or warrants but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or entity. Percentage of shares beneficially owned is based on 17,976,656 shares of common stock outstanding as of July 31, 1999 and shares of common stock to be outstanding upon the consummation of this offering.
PERCENTAGE BENEFICIALLY OWNED SHARES ------------------------ BENEFICALLY BEFORE AFTER NAME AND ADDRESS OWNED OFFERING OFFERING ---------------- ----------- ---------- ---------- NAMED EXECUTIVE OFFICERS AND DIRECTORS James M. McCluney................................... 1,000,000 5.6% 4.6% Stuart B. Berman(1)................................. 694,888 3.9 3.2 Richard G. Helgeson(2).............................. 66,665 * * Jay R. O'Donald(3).................................. 420,335 2.3 1.9 Marlu E. Allan(4)................................... 66,679 * * Karen L. Howard(5).................................. 48,626 * * Gregory R. Olbright(6).............................. 1,638,750 9.1 7.6 Kevin A. Fong(7).................................... 1,512,631 8.4 7.0 Charles A. Haggerty(8).............................. 1,410,993 7.8 6.5 Juan A. Rodriguez(9)................................ 114,419 * * Timothy M. Spicer(10)............................... 1,206,007 6.7 5.6 Werner F. Wolfen(11)................................ 155,888 * * 5% STOCKHOLDERS Herb Alpert......................................... 2,070,424 11.5 9.6 360 N. La Cienega Boulevard Los Angeles, CA 90048-1925 Mayfield Fund(12)................................... 1,495,964 8.3 6.9 2800 Sand Hill Road, Suite 250 Menlo Park, CA 94025-7076 Menlo Ventures(13).................................. 1,495,964 8.3 6.9 3000 Sand Hill Road, Building Four, Suite 100 Menlo Park, CA 94025-7116 Western Digital Corporation(14)..................... 1,344,326 7.5 6.2 8105 Irvine Center Drive Irvine, CA 92718 AVI/Arcxel Investors L.P.(15)....................... 1,162,674 6.5 5.4 100 Pine Street, Suite 2700 San Francisco, CA 94111-5213 ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP(16)......................................... 8,423,382 46.2 38.4
57 64 DESCRIPTION OF CAPITAL STOCK On the closing of this offering, our authorized capital stock will consist of 60,000,000 shares of common stock, $.0015 par value, and 5,000,000 shares of preferred stock, $.001 par value, after giving effect to the amendment and restatement of our certificate of incorporation to delete references to series A, series B, series C, series D, series E and series F preferred stock, which will occur upon conversion of the preferred stock into common stock upon the closing of this offering, and the subsequent authorization of shares of undesignated preferred stock, as described below. COMMON STOCK As of July 4, 1999, there were 17,929,003 shares of common stock outstanding that were held of record by approximately 210 stockholders after giving effect to the exercise of warrants to purchase up to 894,333 shares of series A preferred stock and the conversion of all of our outstanding preferred stock into common stock. There will be 21,629,003 shares of common stock outstanding after giving effect to the sale of the shares of common stock to the public offered hereby. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably all dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. In the event of the liquidation, dissolution or winding up of Vixel, 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 On the closing of this offering, our certificate of incorporation will authorize 5,000,000 shares of preferred stock. The board of directors has the authority to issue the preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of any series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of Vixel without further action by the stockholders. For example, the board of directors could issue preferred stock that has the power to prevent a change of control transaction. 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. We currently have no plans to issue any of the preferred stock. WARRANTS Upon completion of this offering, we will have outstanding warrants to purchase up to 419,865 shares of common stock. Some of these warrants were originally to purchase preferred stock, but upon the closing of the offering, they will automatically become warrants to purchase shares of our common stock. The numbers of shares, exercise prices and dates of these warrants are summarized below:
NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE - ---------------- -------------- --------------- 117,142 $ 5.25 Five years after the closing of this offering 46,174 8.45 October 16, 2001 16,667 8.43 One year after the closing of this offering 150,000 11.00 September 30, 2002 Up to 12,222 11.25 December 18, 2003 77,660 15.00 November 25, 2003 to March 31, 2004
58 65 DESCRIPTION OF CAPITAL STOCK On the closing of this offering, our authorized capital stock will consist of 60,000,000 shares of common stock, $.0015 par value, and 5,000,000 shares of preferred stock, $.001 par value, after giving effect to the amendment and restatement of our certificate of incorporation to delete references to series A, series B, series C, series D, series E and series F preferred stock, which will occur upon conversion of the preferred stock into common stock upon the closing of this offering, and the subsequent authorization of shares of undesignated preferred stock, as described below. COMMON STOCK As of July 4, 1999, there were 17,929,003 shares of common stock outstanding that were held of record by approximately 210 stockholders after giving effect to the exercise of warrants to purchase up to 894,333 shares of series A preferred stock and the conversion of all of our outstanding preferred stock into common stock. There will be 21,629,003 shares of common stock outstanding after giving effect to the sale of the shares of common stock to the public offered hereby. The holders of common stock are entitled to one vote per share on all matters to be voted upon by the stockholders. Subject to preferences that may be applicable to any outstanding preferred stock, the holders of common stock are entitled to receive ratably all dividends, if any, as may be declared from time to time by the board of directors out of funds legally available therefor. In the event of the liquidation, dissolution or winding up of Vixel, 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 On the closing of this offering, our certificate of incorporation will authorize 5,000,000 shares of preferred stock. The board of directors has the authority to issue the preferred stock in one or more series and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences and the number of shares constituting any series or the designation of any series, without further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of Vixel without further action by the stockholders. For example, the board of directors could issue preferred stock that has the power to prevent a change of control transaction. 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. We currently have no plans to issue any of the preferred stock. WARRANTS Upon completion of this offering, we will have outstanding warrants to purchase up to 419,865 shares of common stock. Some of these warrants were originally to purchase preferred stock, but upon the closing of the offering, they will automatically become warrants to purchase shares of our common stock. The numbers of shares, exercise prices and dates of these warrants are summarized below:
NUMBER OF SHARES EXERCISE PRICE EXPIRATION DATE - ---------------- -------------- --------------- 117,142 $ 5.25 Five years after the closing of this offering 46,174 8.45 October 16, 2001 16,667 8.43 One year after the closing of this offering 150,000 11.00 August 27, 2002 Up to 12,222 11.25 December 18, 2003 77,660 15.00 November 25, 2003 to March 31, 2004
59 66 REGISTRATION RIGHTS OF CERTAIN HOLDERS After this offering, the holders of 10,120,213 shares of common stock and warrants to purchase up to 269,865 shares of common stock will be entitled to rights with respect to the registration of such shares under the Securities Act of 1933. The holders of registration rights are those investors, including some former officers and a founder that hold shares of our preferred stock and warrants to purchase shares of our series C preferred stock and series E preferred stock. Under the terms of the agreements between us and the holders of these securities, the holders of 50% of these securities may require, on two occasions at any time after October 1, 1999, that Vixel use its best efforts to register these securities for public resale, provided the proposed aggregate offering price is at least $15.0 million and the offering is for at least 20% of the shares entitled to be registered then outstanding. Further, if we propose to register any of our securities under the Securities Act, either for our own account or for the account of other security holders exercising registration rights, these holders are entitled to notice of the registration and are entitled to include shares of common stock in these registration, subject to the ability of the underwriters to limit the number of shares included in the offering. Further, holders may require us to file additional registration statements on Form S-3 subject to certain limitations. All fees and expenses of these registrations, other than underwriting discounts and commissions, will be borne by us. ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND DELAWARE LAW CERTIFICATE OF INCORPORATION On the closing of this offering, our certificate of incorporation will provide that all stockholder actions must be effected at a duly called meeting and not by a consent in writing. This provision could discourage potential acquisition proposals and could delay or prevent a change of control of Vixel. ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW We are subject to Section 203 of the Delaware General Corporation Law, which, subject to various exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: - prior to that date, the board of directors approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; - upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or - on or subsequent to that date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. Section 203 defines business combination to include: - any merger or consolidation involving the corporation and the interested stockholder; - any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; - subject to various exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; 60 67 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. We cannot provide any assurances that a significant public market for our common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock in the public market, or the possibility of such sales occurring, could adversely affect prevailing market prices for the common stock or our future ability to raise capital through an offering of equity securities. After this offering, we will have outstanding 21,682,251 shares of common stock based on shares outstanding as of August 26, 1999. Of these shares, the 3,700,000 shares to be sold in this offering, 4,255,000 shares if the underwriters' over-allotment option is exercised in full, will be freely tradable in the public market without restriction under the Securities Act, unless those shares are held by "Affiliates" of Vixel, as that term is defined in Rule 144 under the Securities Act. The remaining 17,982,251 shares of common stock held by existing stockholders will, upon completion of this offering, be "restricted securities" as that term is defined under Rule 144. We issued and sold these restricted securities in private transactions in reliance on exemptions from registration under the Securities Act. These restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, as summarized below. Pursuant to certain "lock-up" agreements, all executive officers, directors and substantially all stockholders of Vixel, who collectively hold approximately 17,830,492 shares or securities convertible into shares as of August 26, 1999, have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any of these shares for a period of 180 days from the date of this prospectus. Upon expiration of the lock-up agreements, 180 days after the effective date of the prospectus, approximately 16,225,486 shares that will not then be subject to any repurchase option will be eligible for immediate sale subject in some instances to restrictions under Rule 144. Following the completion of this offering, warrants to purchase up to 269,865 shares will be outstanding, which, if exercised pursuant to net-exercise provisions, would be immediately salable without restriction upon the expiration of the 180 day lock-up period. If those warrants were to be otherwise exercised, they would be salable upon the expiration of various one-year holding periods, subject to certain volume, manner of sale, and other limitations under Rule 144. In general, under Rule 144 as in effect at the closing of this offering, beginning 90 days after the date of this prospectus, a person who has beneficially owned those shares for at least one year would be entitled to sell, within any three month period, a number of shares that does not exceed the greater of; - 1% of the then-outstanding shares of common stock; or - the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to those sale. Sales under Rule 144 are also subject to manner of sale and notice requirements and to the availability of current public information about Vixel. Under Rule 144(k), a person who is not deemed to have been an Affiliate of Vixel at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner who is not an Affiliate of Vixel, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. Subject to various limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from us by our employees, directors, officers, consultants or advisors prior to the completion of this offering, pursuant to written compensatory benefit plans or written contracts relating to the compensation of these persons. In addition, the Securities and Exchange Commission has indicated that Rule 701 will apply to stock options 61 68 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. We cannot provide any assurances that a significant public market for our common stock will develop or be sustained after this offering. Future sales of substantial amounts of common stock in the public market, or the possibility of such sales occurring, could adversely affect prevailing market prices for the common stock or our future ability to raise capital through an offering of equity securities. After this offering, we will have outstanding 21,682,251 shares of common stock based on shares outstanding as of August 26, 1999. Of these shares, the 3,700,000 shares to be sold in this offering, 4,255,000 shares if the underwriters' over-allotment option is exercised in full, will be freely tradable in the public market without restriction under the Securities Act, unless those shares are held by "Affiliates" of Vixel, as that term is defined in Rule 144 under the Securities Act. The remaining 17,982,251 shares of common stock held by existing stockholders will, upon completion of this offering, be "restricted securities" as that term is defined under Rule 144. We issued and sold these restricted securities in private transactions in reliance on exemptions from registration under the Securities Act. These restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act, as summarized below. Pursuant to certain "lock-up" agreements, all executive officers, directors and substantially all stockholders of Vixel, who collectively hold approximately 18,008,270 shares or securities convertible into shares as of August 26, 1999, have agreed not to offer, sell, contract to sell, grant any option to purchase or otherwise dispose of any of these shares for a period of 180 days from the date of this prospectus. Upon expiration of the lock-up agreements, 180 days after the effective date of the prospectus, approximately 16,225,486 shares that will not then be subject to any repurchase option will be eligible for immediate sale subject in some instances to restrictions under Rule 144. Following the completion of this offering, warrants to purchase up to 269,865 shares will be outstanding, which, if exercised pursuant to net-exercise provisions, would be immediately salable without restriction upon the expiration of the 180 day lock-up period. If those warrants were to be otherwise exercised, they would be salable upon the expiration of various one-year holding periods, subject to certain volume, manner of sale, and other limitations under Rule 144. In general, under Rule 144 as in effect at the closing of this offering, beginning 90 days after the date of this prospectus, a person who has beneficially owned those shares for at least one year would be entitled to sell, within any three month period, a number of shares that does not exceed the greater of; - 1% of the then-outstanding shares of common stock; or - the average weekly trading volume of the common stock during the four calendar weeks preceding the filing of a Form 144 with respect to those sale. Sales under Rule 144 are also subject to manner of sale and notice requirements and to the availability of current public information about Vixel. Under Rule 144(k), a person who is not deemed to have been an Affiliate of Vixel at any time during the three months preceding a sale and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner who is not an Affiliate of Vixel, is entitled to sell those shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. Subject to various limitations on the aggregate offering price of a transaction and other conditions, Rule 701 may be relied upon with respect to the resale of securities originally purchased from us by our employees, directors, officers, consultants or advisors prior to the completion of this offering, pursuant to written compensatory benefit plans or written contracts relating to the compensation of these persons. In addition, the Securities and Exchange Commission has indicated that Rule 701 will apply to stock options 62 69 granted by us before this offering, along with the shares acquired upon exercise of such options. Securities issued in reliance on Rule 701 are deemed to be restricted shares and, beginning 90 days after the date of this prospectus, unless subject to the contractual restrictions described above, may be sold by persons other than affiliates, subject only to the manner of sale provisions of Rule 144 and by affiliates under Rule 144 without compliance with its one-year minimum holding period requirement. Of the options to purchase 2,424,193 shares of common stock outstanding as of July 31, on the date 180 days following the assumed effective date of this offering, options to purchase 1,088,324 shares of common stock will be fully exercisable and saleable pursuant to Rule 701 or registration on Form S-8. We intend to file, within 180 days of effective date of this offering, a registration statement on Form S-8 to register approximately 4,442,460 shares of common stock reserved for issuance under our 1995 Stock Option Plan, 1999 Equity Incentive Plan and 1999 Employee Stock Purchase Plan. The registration statement will become effective automatically upon filing. Shares issued under these plans, after the filing of the registration statement on Form S-8, may be sold in the open market, subject, in the case of certain holders, to the Rule 144 limitations applicable to Affiliates, the above-referenced lock-up agreements and vesting restrictions imposed by us. In addition, following this offering, the holders of 10,120,213 shares of common stock and warrants to purchase up to 269,865 shares of common stock, or their transferees, will have rights to require us to register their shares for future sale. 63 70 UNDERWRITING The underwriters named below, acting through their representatives, BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc. and Needham & Company, Inc., have severally agreed with us, subject to the terms and conditions set forth in the underwriting agreement, to purchase from us the numbers of shares of common stock set forth opposite their names below. The underwriters are committed to purchase and pay for all these shares if any are purchased.
NUMBER OF UNDERWRITER SHARES ----------- --------- BancBoston Robertson Stephens Inc........................... Bear, Stearns & Co. Inc..................................... Needham & Company, Inc...................................... --------- Total.................................................. 3,700,000 =========
We have been advised by the representatives that the underwriters propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Over-allotment option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 555,000 additional shares of common stock at the same price per share as we will receive for the 3,700,000 shares that the underwriters have agreed to purchase from us. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of the additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 3,700,000 shares offered by this prospectus. If purchased, the additional shares will be sold by the underwriters on the same terms as those on which the 3,700,000 shares are being sold. We will be obligated, pursuant to the option, to sell shares to the extent the option is exercised. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of the shares of common stock offered hereby. If the option is exercised in full, the total public offering price and proceeds to us will be $46,805,000 and $42,629,000, respectively. The following table summarizes the compensation to be paid to the underwriters by us:
TOTAL ---------------------- WITHOUT WITH PER OVER- OVER- SHARE ALLOTMENT ALLOTMENT -------- --------- --------- Underwriting discounts and commissions payable by us....... $ $ $
We estimate that expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $900,000. The public offering price, underwriting discount and other terms set forth in the underwriting agreement are subject to approval by the pricing committee of our board of directors. Indemnity. The underwriting agreement contains covenants of indemnity between the underwriters and us against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. 64 71 Lock-up agreements. All our executive officers, directors, and substantially all our stockholders of record, optionholders and warrantholders have agreed with BancBoston Robertson Stephens, for a period of 180 days after the date of this prospectus and subject to certain exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock, any option or warrant to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or, with certain exceptions, thereafter acquired directly by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of BancBoston Robertson Stephens. However, BancBoston Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the lock-up agreements. There are no agreements between the representatives and any of our stockholders providing consent by the representatives to the sale of shares prior to the expiration of the period of 180 days after this prospectus. Future sales. In addition, we have agreed that during the period of 180 days after this prospectus, we will not, subject to certain exceptions and without the prior written consent of BancBoston Robertson Stephens: - Consent to the disposition of any shares held by stockholders prior to the expiration of the period of 180 days after this prospectus; or - Issue, sell, contract to sell or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock, other than (1) the sale of shares in this offering, (2) the issuance of common stock upon the exercise or conversion of outstanding options, warrants or convertible securities, and (3) our issuance of stock options under our existing equity incentive and stock purchase plans. For a more complete discussion of the shares subject to a lock-up agreement, see "Shares Eligible for Future Sale," at page 62. Listing. We have filed an application to have the common stock approved for quotation on the Nasdaq National Market under the symbol "VIXL." No prior public market. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock offered hereby will be determined through negotiations between us and the representatives. Among the factors to be considered in these negotiations are prevailing market conditions, certain of our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. Stabilization. The representatives have advised us that, pursuant to Regulation M under the Securities Act, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for the purchase of the common stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or the purchase of the common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by that underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by the underwriter or syndicate member. The representatives have advised us that these transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discounted at any time. Directed share program. At our request, the underwriters have reserved up to five percent of common stock offered by us for sale, at the initial public offering price, to our directors, officers, employees, business associates and related persons. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase the reserved shares. Any reserved 65 72 INDEX TO FINANCIAL STATEMENTS VIXEL CORPORATION
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheet as of December 28, 1997, January 3, 1999, and July 4, 1999 (unaudited).................................. F-3 Statement of Operations for the fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999, and for the six months ended June 28, 1998 and July 4, 1999 (unaudited)............................................... F-4 Statement of Changes in Stockholders' Equity (Deficit) for the fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999 and for the six months ended July 4, 1999 (unaudited)....................................... F-5 Statement of Cash Flows for the fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999 and for the six months ended June 28, 1998 and July 4, 1999 (unaudited)............................................... F-6 Notes to Financial Statements............................... F-7
ARCXEL TECHNOLOGIES, INC. Reports of Independent Accountants.......................... F-25 Balance Sheet as of December 31, 1996 and 1997.............. F-27 Statement of Operations for the periods from June 18, 1996 (inception) to December 31, 1996, the year ended December 31, 1997 and the period from June 18, 1996 (inception) to December 31, 1997......................................... F-28 Statement of Changes in Stockholders' Equity (Deficit) for the period from June 18, 1996 (inception) to December 31, 1996 and the year ended December 31, 1997................. F-29 Statement of Cash Flows for the period from June 18, 1996 (inception) to December 31, 1996, the year ended December 31, 1997 and the period from June 18, 1996 (inception) to December 31, 1997......................................... F-30 Notes to Financial Statements............................... F-31 Unaudited Pro Forma Condensed Financial Statements.......... F-38
F-1 73 INDEX TO FINANCIAL STATEMENTS VIXEL CORPORATION
PAGE ---- Report of Independent Accountants........................... F-2 Balance Sheet as of December 28, 1997, January 3, 1999, and July 4, 1999 (unaudited).................................. F-3 Statement of Operations for the fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999, and for the six months ended June 28, 1998 and July 4, 1999 (unaudited)............................................... F-4 Statement of Changes in Stockholders' Equity (Deficit) for the fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999 and for the six months ended July 4, 1999 (unaudited)....................................... F-5 Statement of Cash Flows for the fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999 and for the six months ended June 28, 1998 and July 4, 1999 (unaudited)............................................... F-6 Notes to Financial Statements............................... F-7
ARCXEL TECHNOLOGIES, INC. Reports of Independent Accountants.......................... F-25 Balance Sheet as of December 31, 1996 and 1997.............. F-27 Statement of Operations for the periods from June 18, 1996 (inception) to December 31, 1996, the year ended December 31, 1997 and the period from June 18, 1996 (inception) to December 31, 1997......................................... F-28 Statement of Changes in Stockholders' Equity (Deficit) for the period from June 18, 1996 (inception) to December 31, 1996 and the year ended December 31, 1997................. F-29 Statement of Cash Flows for the period from June 18, 1996 (inception) to December 31, 1996, the year ended December 31, 1997 and the period from June 18, 1996 (inception) to December 31, 1997......................................... F-30 Notes to Financial Statements............................... F-31 Unaudited Pro Forma Combined Statement of Operations........ F-38
F-1 74 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Vixel Corporation In our opinion, the accompanying balance sheet and the related statements of operations, of changes in stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Vixel Corporation at December 28, 1997 and January 3, 1999, and the results of its operations and its cash flows for each of the three years in the period ended January 3, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Seattle, Washington May 19, 1999, except for paragraph 3 of Note 8 which is as of June 22, 1999 and paragraph 1 of Note 12 which is as of August 27, 1999 F-2 75 VIXEL CORPORATION STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FISCAL YEAR ENDED SIX MONTHS ENDED ----------------------------------------- ------------------------- DECEMBER 29, DECEMBER 28, JANUARY 3, JUNE 28, JULY 4, 1996 1997 1999 1998 1999 ------------ ------------ ----------- ----------- ----------- (UNAUDITED) Revenue: SAN systems.................... $ 163 $ 3,282 $ 13,389 $ 6,557 $ 10,806 Components and other........... 6,778 19,501 26,056 14,677 11,253 -------- ---------- ----------- ----------- ----------- Total revenue.................. 6,941 22,783 39,445 21,234 22,059 Cost of revenue.................. 7,342 19,047 36,199 16,732 15,673 -------- ---------- ----------- ----------- ----------- Gross profit (loss).............. (401) 3,736 3,246 4,502 6,386 -------- ---------- ----------- ----------- ----------- Research and development......... 4,474 9,360 11,110 5,249 6,233 Acquired in-process technology... 8,633 -- 5,118 5,118 -- Selling, general and administrative................. 3,549 7,629 14,521 6,237 6,664 Amortization and writedown of goodwill and intangibles....... 167 222 2,057 611 680 Amortization of deferred compensation................... 36 50 -- -- 1,783 -------- ---------- ----------- ----------- ----------- Total operating expenses....... 16,859 17,261 32,806 17,215 15,360 -------- ---------- ----------- ----------- ----------- Loss from operations............. (17,260) (13,525) (29,560) (12,713) (8,974) Interest expense................. (610) (920) (1,256) (521) (1,048) Interest income.................. 461 620 414 155 163 Gain on sale of division......... -- -- 9,061 9,061 -- Other (expense) income, net...... (243) 66 108 88 3 -------- ---------- ----------- ----------- ----------- Net loss......................... $(17,652) $ (13,759) $ (21,233) $ (3,930) $ (9,856) ======== ========== =========== =========== =========== Net loss available to common stockholders................... $(17,693) $ (13,955) $ (21,424) $ (4,029) $ (9,954) ======== ========== =========== =========== =========== Basic and diluted net loss per share.......................... $ (56.87) $ (18.90) $ (8.77) $ (1.99) $ (2.83) ======== ========== =========== =========== =========== Weighted-average shares outstanding.................... 311,109 738,318 2,443,769 2,019,730 3,517,655 ======== ========== =========== =========== =========== Pro forma net loss available to common stockholders (unaudited).................... $ (21,233) $ (9,856) =========== =========== Pro forma basic and diluted net loss per share (unaudited)..... $ (1.42) $ (0.61) =========== =========== Pro forma weighted-average shares outstanding (unaudited)........ 14,920,725 16,180,984 =========== ===========
See accompanying notes to the financial statements. F-4 76 VIXEL CORPORATION STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
FISCAL YEAR ENDED SIX MONTHS ENDED ----------------------------------------- ------------------------- DECEMBER 29, DECEMBER 28, JANUARY 3, JUNE 28, JULY 4, 1996 1997 1999 1998 1999 ------------ ------------ ----------- ----------- ----------- (UNAUDITED) Revenue: SAN systems.................... $ 163 $ 3,282 $ 13,389 $ 6,557 $ 10,806 Components and other........... 6,778 19,501 26,056 14,677 11,253 -------- ---------- ----------- ----------- ----------- Total revenue.................. 6,941 22,783 39,445 21,234 22,059 Cost of revenue.................. 7,342 19,047 36,199 16,732 15,673 -------- ---------- ----------- ----------- ----------- Gross profit (loss).............. (401) 3,736 3,246 4,502 6,386 -------- ---------- ----------- ----------- ----------- Research and development......... 4,474 9,360 11,110 5,249 6,233 Acquired in-process technology... 8,633 -- 5,118 5,118 -- Selling, general and administrative................. 3,549 7,629 14,521 6,237 6,664 Amortization and writedown of goodwill and intangibles....... 167 222 2,057 611 680 Amortization of deferred compensation................... 36 50 -- -- 1,783 -------- ---------- ----------- ----------- ----------- Total operating expenses....... 16,859 17,261 32,806 17,215 15,360 -------- ---------- ----------- ----------- ----------- Loss from operations............. (17,260) (13,525) (29,560) (12,713) (8,974) Interest expense................. (610) (920) (1,256) (521) (1,048) Interest income.................. 461 620 414 155 163 Gain on sale of division......... -- -- 9,061 9,061 -- Other (expense) income, net...... (243) 66 108 88 3 -------- ---------- ----------- ----------- ----------- Net loss......................... $(17,652) $ (13,759) $ (21,233) $ (3,930) $ (9,856) ======== ========== =========== =========== =========== Net loss available to common stockholders................... $(17,693) $ (13,955) $ (21,424) $ (4,029) $ (9,954) ======== ========== =========== =========== =========== Basic and diluted net loss per share.......................... $ (56.87) $ (18.90) $ (10.32) $ (2.64) $ (2.42) ======== ========== =========== =========== =========== Weighted-average shares outstanding.................... 311,109 738,318 2,075,344 1,528,348 4,112,912 ======== ========== =========== =========== =========== Pro forma net loss available to common stockholders (unaudited).................... $ (21,233) $ (9,856) =========== =========== Pro forma basic and diluted net loss per share (unaudited)..... $ (1.46) $ (0.59) =========== =========== Pro forma weighted-average shares outstanding (unaudited)........ 14,552,300 16,776,241 =========== ===========
See accompanying notes to the financial statements. F-4 77 VIXEL CORPORATION STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK ------------------- ------------------ PAID-IN ---------------- DEFERRED SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AMOUNT COMPENSATION ---------- ------ --------- ------ ---------- ------- ------ ------------ Balance, December 31, 1995........ 10,706,474 $10 223,586 $ 1 $12,702 66,666 $(50) $ (86) Stock issued upon acquisition of Western Digital assets.......... 2,000,000 2 7,998 Detachable stock warrants issued with note and capital lease agreements...................... 319 Stock options exercised........... 153,766 58 Amortization of deferred compensation.................... 36 Accretion of mandatorily redeemable convertible preferred stock........................... (41) Net loss.......................... ---------- --- --------- --- ------- ------- ---- ------- Balance, December 29, 1996........ 12,706,474 12 377,352 1 21,036 66,666 (50) (50) Stock options exercised........... 634,100 1 136 Stock options granted to third parties......................... 39 Amortization of deferred compensation.................... 50 Accretion of mandatorily redeemable convertible preferred stock........................... (196) Net loss.......................... ---------- --- --------- --- ------- ------- ---- ------- Balance, December 28, 1997........ 12,706,474 12 1,011,452 2 21,015 66,666 (50) -- Stock issued upon acquisition of Arcxel Technologies, Inc........ 1,759,303 2 1,026,525 2 12,115 Stock options assumed upon acquisition of Arcxel Technologies, Inc............... 2,566 Shares repurchased above fair value........................... 251 Stock options exercised........... 860,402 1 378 Stock options granted to third parties......................... 215 Accretion of mandatorily redeemable convertible preferred stock........................... (191) Net loss.......................... ---------- --- --------- --- ------- ------- ---- ------- Balance, January 3, 1999.......... 14,465,777 14 2,898,379 5 36,349 66,666 (50) -- Stock options exercised (unaudited)..................... 1,771,070 2 5,346 Stock options granted to third parties (unaudited)............. 64 Deferred compensation (unaudited)..................... 9,570 (9,570) Amortization of deferred compensation (unaudited)........ 1,783 Accretion of mandatorily redeemable convertible preferred stock (unaudited)............... (98) Net loss (unaudited).............. ---------- --- --------- --- ------- ------- ---- ------- Balance, July 4, 1999 (unaudited)..................... 14,465,777 $14 4,669,449 $ 7 $51,231 66,666 $(50) $(7,787) ========== === ========= === ======= ======= ==== ======= NOTES RECEIVABLE TOTAL FROM ACCUMULATED STOCKHOLDERS' STOCKHOLDERS DEFICIT EQUITY (DEFICIT) ------------ ----------- ---------------- Balance, December 31, 1995........ $ -- $ (3,598) $ 8,979 Stock issued upon acquisition of Western Digital assets.......... 8,000 Detachable stock warrants issued with note and capital lease agreements...................... 319 Stock options exercised........... 58 Amortization of deferred compensation.................... 36 Accretion of mandatorily redeemable convertible preferred stock........................... (41) Net loss.......................... (17,652) (17,652) ------- -------- -------- Balance, December 29, 1996........ -- (21,250) (301) Stock options exercised........... 137 Stock options granted to third parties......................... 39 Amortization of deferred compensation.................... 50 Accretion of mandatorily redeemable convertible preferred stock........................... (196) Net loss.......................... (13,759) (13,759) ------- -------- -------- Balance, December 28, 1997........ -- (35,009) (14,030) Stock issued upon acquisition of Arcxel Technologies, Inc........ 12,119 Stock options assumed upon acquisition of Arcxel Technologies, Inc............... 2,566 Shares repurchased above fair value........................... 251 Stock options exercised........... 379 Stock options granted to third parties......................... 215 Accretion of mandatorily redeemable convertible preferred stock........................... (191) Net loss.......................... (21,233) (21,233) ------- -------- -------- Balance, January 3, 1999.......... -- (56,242) (19,924) Stock options exercised (unaudited)..................... (5,246) 102 Stock options granted to third parties (unaudited)............. 64 Deferred compensation (unaudited)..................... Amortization of deferred compensation (unaudited)........ 1,783 Accretion of mandatorily redeemable convertible preferred stock (unaudited)............... (98) Net loss (unaudited).............. (9,856) (9,856) ------- -------- -------- Balance, July 4, 1999 (unaudited)..................... $(5,246) $(66,098) $(27,929) ======= ======== ========
See accompanying notes to the financial statements. F-5 78 VIXEL CORPORATION STATEMENT OF CASH FLOWS (IN THOUSANDS)
FOR THE FISCAL YEAR ENDED SIX MONTHS ENDED ---------------------------------------- ------------------- DECEMBER 29, DECEMBER 28, JANUARY 3, JUNE 28, JULY 4, 1996 1997 1999 1998 1999 ------------ ------------ ---------- -------- -------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net (loss) income..................................... $(17,652) $(13,759) $(21,233) $ (3,930) $ (9,856) Adjustments to reconcile net (loss) income to net cash used in operating activities: Depreciation........................................ 1,094 1,962 2,334 990 1,161 Acquired in-process technology...................... 8,633 -- 5,118 5,118 -- Amortization of goodwill and intangibles............ 337 449 3,061 1,030 952 Writedown of impaired assets........................ -- -- 1,564 -- -- Amortization of debt discount....................... 216 77 192 -- 115 Stock-based compensation............................ 36 89 303 -- 1,847 Loss (gain) on disposal of property and equipment... 32 (264) -- -- 7 Gain on sale of division............................ -- -- (9,061) (9,061) -- Changes in: Accounts receivable, net.......................... (1,431) (3,069) (857) 1 (731) Inventory......................................... (110) (470) (667) (1,246) 865 Prepaid expenses and other assets................. (77) (752) (82) 133 (1,388) Accounts payable and accrued liabilities.......... 1,610 2,156 10,100 2,847 1,701 -------- -------- -------- -------- -------- Net cash used in operating activities........... (7,312) (13,581) (9,228) (4,118) (5,327) -------- -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of short term investments.................... -- -- (2,490) (4,442) (73) Purchase of property and equipment.................... (535) (1,022) (1,663) (406) (372) Proceeds from disposal of property and equipment...... -- 92 -- -- -- Cash paid for acquisition of Arcxel Technologies, Inc................................................. -- -- (16) (16) -- Cash paid for acquisition of Western Digital Corporation assets.................................. (1,302) -- -- -- -- Proceeds from sale of division........................ -- -- 6,865 6,865 -- -------- -------- -------- -------- -------- Net cash (used in) provided by investing activities.................................... (1,837) (930) 2,696 2,001 (445) -------- -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from line of credit, net..................... -- -- -- -- 2,825 Proceeds from issuance of long-term note payable...... -- -- 7,500 -- -- Proceeds from issuance of long term debt.............. 3,500 -- -- -- -- Principal payments on long-term debt and capital leases.............................................. (1,605) (1,743) (1,308) (300) (411) Amortization of debt issuance costs................... -- 10 27 13 10 Proceeds from issuance of preferred stock, net........ 19,210 -- -- -- -- Proceeds from issuance of common stock, net........... 44 137 378 123 102 -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities.................................... 21,149 (1,596) 6,597 (164) 2,526 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents.... 12,000 (16,107) 65 (2,281) (3,246) Cash and cash equivalents, beginning of period.......... 7,883 19,883 3,776 3,776 3,841 -------- -------- -------- -------- -------- Cash and cash equivalents, end of period................ $ 19,883 $ 3,776 $ 3,841 $ 1,495 $ 595 ======== ======== ======== ======== ======== Cash paid for interest.................................. $ 319 $ 397 $ 922 $ 507 $ 1,049 Equipment purchased under capital leases................ $ 1,233 $ 3,513 $ 3,187 $ 2,176 662 Issuance of detachable stock warrants................... $ 319 $ 89 $ 279 $ -- $ 9 Accretion of mandatorily redeemable stock............... $ 41 $ 196 $ 191 $ 99 $ 98 Acquisitions (Note 2) Sale of division (Note 3)
See accompanying notes to the financial statements. F-6 79 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Vixel Corporation (the "Company") is a leading provider of comprehensive interconnect solutions for use in storage area networks, or SANS. Its products include SAN management software, fabric switches, arbitrated loop hubs and transceivers. The Company currently sells its products primarily to manufacturers as well as resellers in the United States. FISCAL YEAR The Company has a 52 or 53-week fiscal year ending on the Sunday closest to December 31. The fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999 were 52, 52 and 53 weeks, respectively. REVENUE RECOGNITION Revenue is generally recognized at the time of product shipment, unless we have future obligations for installation, or we ship product demonstration units. Revenue from products shipped with future installation obligations is recognized when the future obligation is met by the Company. Revenue is not recognized on demonstration units unless the customer ultimately purchases the unit, and the related revenue is recognized at that time. A portion of products sold to a distributor is subject to stock rotation rights, and this portion of revenue is deferred until the stock rotation period has passed. An allowance is provided for estimated future warranty costs and sales returns. In addition to a product warranty, the Company offers post-sale telephone customer support and consulting and installation services. Consulting and most installation services are billed to customers separately, and revenue for these services is recognized when the service is provided. Telephone support is included in the sales price of the Company's products and is not sold separately. The cost of providing this telephone support is not material. During the fiscal years ended December 29, 1996 and December 28, 1997, revenue from government funded research and development arrangements was recognized and recorded as an offset to the related research and development expenses at the time specified milestones were met. The Company did not perform any government funded research and development during fiscal 1998. The Company performed government funded research and development of $2,250,000 and $993,000 during fiscal 1996 and 1997, respectively. CONCENTRATION OF MANUFACTURING AND CREDIT RISK AND SALES TO MAJOR CUSTOMERS Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable and cash equivalents. The Company performs ongoing credit evaluations of its commercial customers' financial condition and requires no collateral from these customers. The Company maintains an allowance for doubtful accounts receivable based upon its historical experience and the expected collectibility of all accounts receivable. Credit losses to date have been within the Company's estimates. The Company has a cash investment policy which generally restricts investments to ensure preservation of principal and maintenance of liquidity. Two customers represented 46% and 35% of revenue for the year ended December 29, 1996. Four customers represented 50%, 13%, 13% and 10% of revenue for the year ended December 28, 1997. Two customers represented 54% and 12% of revenue for the year ended January 3, 1999. The Company's inventory is produced by two contract manufacturers. The Company believes that alternative manufacturing sources could be obtained and qualified to supply its products. F-7 80 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, investments, accounts receivable, accounts payable, accrued liabilities, short-term notes payable, long-term debt and capital leases and mandatorily redeemable convertible preferred stock. Except for long-term debt, capital leases and mandatorily redeemable convertible preferred stock, the carrying amounts of financial instruments approximate fair value due to their short maturities. The fair value of long-term debt and capital leases at December 28, 1997 and January 3, 1999 is not materially different from the carrying amount, based on interest rates available to the Company for similar types of arrangements. The Company considers the fair value of the mandatorily redeemable convertible preferred stock to be the liquidation value plus unpaid dividends. CASH AND CASH EQUIVALENTS Highly liquid investments purchased with original maturities of three months or less are considered to be cash equivalents. INVESTMENTS Investments consist of highly rated commercial paper and corporate bonds which have original maturities between three and six months. These investments are classified as available-for-sale and are recorded at market value, which approximates cost. There were no material unrealized gains or losses at January 3, 1999. INVENTORY Inventory is stated at the lower of cost or market, cost being determined by the first-in, first-out cost flow assumption. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost and depreciated using the straight-line method over the estimated useful lives of the respective assets as follows: 1 - 3 Test equipment.............................................. years Furniture and office equipment.............................. 5 years Computer equipment and software............................. 3 years
Leasehold improvements are amortized over the shorter of their useful lives or the term of the related lease. Maintenance and repairs, which neither materially add to the value of the asset nor prolong its life, are charged to expense as incurred. Gains or losses on dispositions of property and equipment are included in operations. GOODWILL AND INTANGIBLES Intangibles include goodwill, which represents costs in excess of net assets of businesses acquired, acquired technology and other intangible assets (Note 6). Goodwill and intangibles are being amortized over periods ranging from three to five years, using the straight-line method. Amortization of developed technology is recorded as cost of sales. All other amortization is recorded as amortization of goodwill and intangibles in the statement of operations. F-8 81 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 IMPAIRMENT OF LONG-LIVED ASSETS The Company continually reviews the carrying value of long-lived assets including, but not limited to, property and equipment and goodwill and intangibles to determine whether impairment has occurred. The carrying value of long-lived assets is considered impaired when the anticipated undiscounted cash flow from such asset is less than its carrying value. In that event, a loss is recognized for the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. In December 1998, the Company identified an impairment in the value of developed technology acquired in the purchase of Arcxel Technologies, Inc. (Note 2). The impairment arose as a result of the development of a next-generation switch product which had better functionality and a lower cost than Arcxel's existing switch product at the time of the acquisition. At the time of the Arcxel acquisition, the Company believed that both the existing switch product and the next-generation product which was under development could co-exist, each serving different customer needs. However, the functionality and cost- effectiveness of the next-generation switch exceeded the Company's original expectations, which led to a much shorter product life than originally anticipated for the existing switch product when the value of developed technology was determined. Accordingly, the carrying values of both the developed technology and the portion of goodwill allocated to the developed technology have been written down to their fair value in accordance with Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." Impairment losses of $1,564,000 and $691,000 have been recorded in cost of sales and amortization expense, respectively, in the statement of operations. PRO FORMA STOCKHOLDERS' EQUITY (UNAUDITED) Effective upon the closing of this offering, the outstanding shares of the Company's convertible preferred stock will automatically convert into 13,259,554 shares of common stock. The number of preferred shares converted includes 894,333 shares of preferred stock issuable upon exercise of warrants. These preferred shares will convert into 596,222 shares of common stock. The pro forma effects of these transactions are unaudited and have been reflected in the accompanying pro forma stockholders' equity at July 4, 1999. INCOME TAXES The Company accounts for income taxes under the liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. If it is more likely than not that some portion of a deferred tax asset will not be realized, a valuation allowance is recorded. WARRANTY The Company offers product warranties of one to five years. Estimated future warranty obligations related to certain products are provided by charges to operations in the period in which the related revenue is recognized. These estimates are based on historical warranty experience and other relevant information of which the Company is aware. During the years ended December 28, 1997 and January 3, 1999 warranty expense was $298,000 and $4,333,000, respectively. The Company did not record any warranty expense during the year ended December 29, 1996. F-9 82 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 The following table sets forth the computation of the numerators and denominators in the basic, diluted and pro forma net loss per share calculations for the periods indicated (dollars in thousands):
FISCAL YEAR ENDED SIX MONTHS ENDED ----------------------------------------- ------------------------- DECEMBER 29, DECEMBER 28, JANUARY 3, JUNE 28, JULY 4, 1996 1997 1999 1998 1999 ------------ ------------ ----------- ----------- ----------- (UNAUDITED) Numerator: Net loss................... $(17,652) $(13,759) $ (21,233) $ (3,930) $ (9,856) Accretion of mandatorily redeemable Convertible preferred stock......... (41) (196) (191) (99) (98) -------- -------- ----------- ----------- ----------- Net loss available to common stockholders..... $(17,693) $(13,955) (21,424) $ (4,029) (9,954) ======== ======== =========== Effect of pro forma conversion of securities: Accretion of mandatorily redeemable convertible preferred stock......... 191 98 ----------- ----------- Pro forma net loss available to common stockholders............ $ (21,233) $ (9,856) =========== =========== Denominator: Weighted-average shares outstanding............. 311,109 738,318 2,443,769 2,019,730 3,517,655 ======== ======== =========== Dilutive effect of pro forma securities: Preferred stock -- Series A....................... 3,260,826 3,260,826 Preferred stock -- Series B....................... 3,495,870 3,495,870 Preferred stock -- Series C....................... 380,952 380,952 Preferred stock -- Series D....................... 1,333,333 1,333,333 Preferred stock -- Series E....................... 3,019,480 3,019,480 Preferred stock -- Series F....................... 986,495 1,172,868 ----------- ----------- Pro forma weighted average shares outstanding (unaudited)................ 14,920,725 16,180,984 =========== ===========
STOCK OPTIONS The Company's stock option plan is subject to the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Under the provisions of this statement, employee stock-based compensation expense is measured using either the intrinsic-value method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), or the fair value method described in FAS 123. Companies choosing the intrinsic-value method are required to disclose the pro forma impact of the fair value method on net income. The Company has elected to continue accounting for its employee and director stock-based awards under the provisions of APB 25. The Company is required to implement FAS 123 for stock-based awards to other than employees and directors. F-11 83 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 The following table sets forth the computation of the numerators and denominators in the basic, diluted and pro forma net loss per share calculations for the periods indicated (dollars in thousands):
FISCAL YEAR ENDED SIX MONTHS ENDED ----------------------------------------- ------------------------- DECEMBER 29, DECEMBER 28, JANUARY 3, JUNE 28, JULY 4, 1996 1997 1999 1998 1999 ------------ ------------ ----------- ----------- ----------- (UNAUDITED) Numerator: Net loss................... $(17,652) $(13,759) $ (21,233) $ (3,930) $ (9,856) Accretion of mandatorily redeemable Convertible preferred stock......... (41) (196) (191) (99) (98) -------- -------- ----------- ----------- ----------- Net loss available to common stockholders..... $(17,693) $(13,955) (21,424) $ (4,029) (9,954) ======== ======== =========== Effect of pro forma conversion of securities: Accretion of mandatorily redeemable convertible preferred stock......... 191 98 ----------- ----------- Pro forma net loss available to common stockholders............ $ (21,233) $ (9,856) =========== =========== Denominator: Weighted-average shares outstanding............. 311,109 738,318 2,075,344 1,528,348 4,112,912 ======== ======== =========== Dilutive effect of pro forma securities: Preferred stock -- Series A....................... 3,260,826 3,260,826 Preferred stock -- Series B....................... 3,495,870 3,495,870 Preferred stock -- Series C....................... 380,952 380,952 Preferred stock -- Series D....................... 1,333,333 1,333,333 Preferred stock -- Series E....................... 3,019,480 3,019,480 Preferred stock -- Series F....................... 986,495 1,172,868 ----------- ----------- Pro forma weighted average shares outstanding (unaudited)................ 14,552,300 16,776,241 =========== ===========
STOCK OPTIONS The Company's stock option plan is subject to the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (FAS 123). Under the provisions of this statement, employee stock-based compensation expense is measured using either the intrinsic-value method as prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25), or the fair value method described in FAS 123. Companies choosing the intrinsic-value method are required to disclose the pro forma impact of the fair value method on net income. The Company has elected to continue accounting for its employee and director stock-based awards under the provisions of APB 25. The Company is required to implement FAS 123 for stock-based awards to other than employees and directors. F-11 84 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Amounts in the financial statements which are particularly susceptible to changes in estimates include the allowance for doubtful accounts receivable and product warranty costs. NEW ACCOUNTING PRONOUNCEMENTS In March 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement is effective for the Company beginning January 4, 1999 and establishes accounting standards for costs incurred in the acquisition or development and implementation of computer software. These new standards require capitalization of certain software implementation costs relating to software acquired or developed and implemented for the Company's use. This statement is not expected to have a significant effect on the Company's financial position or results of operations. The Financial Accounting Standards Board (FASB) recently issued FAS No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity during a period from non-owner sources. The Company adopted FAS 130 on December 29, 1997. To date, the Company has not had any significant transactions that are required to be reported as other comprehensive income other than its net (loss) income. The FASB recently issued FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 supersedes FAS No. 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management approach." The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. FAS 131 also requires disclosures about products and services, geographic areas and major customers. The Company adopted FAS 131 on January 3, 1999. The Company has determined that it does not have any separately reportable business or geographic segments. UNAUDITED INTERIM FINANCIAL STATEMENTS The interim financial data as of July 4, 1999 and for the six months ended June 28, 1998 and July 4, 1999 is unaudited; however, in the opinion of management, the interim data includes all adjustments consisting only of normal recurring adjustments necessary to present fairly the Company's financial position as of July 4, 1999 and the results of its operations and cash flows for the six months ended June 28, 1998 and July 4, 1999. RECLASSIFICATIONS Certain items in the December 29, 1996 and December 28, 1997 financial statements have been reclassified to conform to the January 3, 1999 presentation. F-12 85 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 Company compared to a public company. The common stock was valued as the residual of the total value of the Company less the value of all classes of preferred stock outstanding. The fair value of the Arcxel stock options assumed by the Company was determined using the Black-Scholes model with the following weighted average assumptions: exercise price of $0.45 per share, fair value of common stock of $4.95 per share, expected life of 3.48 years, risk-free interest rate of 5.55% and no volatility or dividend yield factors. A summary of assets acquired and liabilities assumed at the date of the acquisition, as determined in accordance with APB 16, is presented below (in thousands): Cash........................................................ $ 141 Accounts receivable......................................... 53 Inventory................................................... 216 Prepaid expenses and other current assets................... 63 Property and equipment...................................... 404 Acquired in-process technology.............................. 5,118 Goodwill and intangibles.................................... 9,198 Other assets................................................ 161 Accounts payable............................................ (170) Accrued liabilities......................................... (87) Capital leases.............................................. (256) ------- $14,841 =======
The acquired in-process technology of WDC and Arcxel had not yet reached technological feasibility and had no alternative future use. The acquired in-process technology was recorded as expense at the time of acquisitions. The valuations of the acquired in-process technology was based upon estimates by the Company and a valuation by a third-party appraiser. The valuation of the in-process technology related to these acquisitions was determined by estimating the future net cash flows resulting from products anticipated to result from these acquisitions and discounting the net cash flows to the date of acquisition using a discount rate of 25% for WDC and 35% for Arxcel. The discount rates used to value the acquired in-process technologies are based on the inherent risk surrounding the development of the acquired technologies. All projects acquired from WDC resulted in commercialized products and represent a significant portion of the Company's fiscal 1996, 1997 and 1998 revenues. Given that the valuations of the acquired in-process technology were an estimate, actual results may change. If the estimate of the in-process technology were to decrease, the value assigned to goodwill and intangibles would increase. Included in intangibles are developed technology (products), core technology and other intangible assets. The results of operations of WDC and Arcxel are included in the financial statements from the dates of acquisition. Unaudited pro forma results as if WDC and Arcxel had been included in the financial results since the beginning of the year prior to their acquisition are as follows (dollars in thousands):
FOR THE FISCAL YEAR ENDED ------------------------------------------ DECEMBER 29, DECEMBER 28, JANUARY 3, 1996 1997 1999 ------------ ------------ ---------- (UNAUDITED) Revenue......................................... $ 8,924 $ 22,783 $ 39,497 Net loss........................................ (18,052) (17,836) (21,875) Basic and diluted net loss per share............ (58.16) (24.42) (9.03)
F-14 86 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 Company compared to a public company. The common stock was valued as the residual of the total value of the Company less the value of all classes of preferred stock outstanding. The fair value of the Arcxel stock options assumed by the Company was determined using the Black-Scholes model with the following weighted average assumptions: exercise price of $0.45 per share, fair value of common stock of $4.95 per share, expected life of 3.48 years, risk-free interest rate of 5.55% and no volatility or dividend yield factors. A summary of assets acquired and liabilities assumed at the date of the acquisition, as determined in accordance with APB 16, is presented below (in thousands): Cash........................................................ $ 141 Accounts receivable......................................... 53 Inventory................................................... 216 Prepaid expenses and other current assets................... 63 Property and equipment...................................... 404 Acquired in-process technology.............................. 5,118 Goodwill and intangibles.................................... 9,198 Other assets................................................ 161 Accounts payable............................................ (170) Accrued liabilities......................................... (87) Capital leases.............................................. (256) ------- $14,841 =======
The acquired in-process technology of WDC and Arcxel had not yet reached technological feasibility and had no alternative future use. The acquired in-process technology was recorded as expense at the time of acquisitions. The valuations of the acquired in-process technology was based upon estimates by the Company and a valuation by a third-party appraiser. The valuation of the in-process technology related to these acquisitions was determined by estimating the future net cash flows resulting from products anticipated to result from these acquisitions and discounting the net cash flows to the date of acquisition using a discount rate of 25% for WDC and 35% for Arxcel. The discount rates used to value the acquired in-process technologies are based on the inherent risk surrounding the development of the acquired technologies. All projects acquired from WDC resulted in commercialized products and represent a significant portion of the Company's fiscal 1996, 1997 and 1998 revenues. Given that the valuations of the acquired in-process technology were an estimate, actual results may change. If the estimate of the in-process technology were to decrease, the value assigned to goodwill and intangibles would increase. Included in intangibles are developed technology (products), core technology and other intangible assets. The results of operations of WDC and Arcxel are included in the financial statements from the dates of acquisition. Unaudited pro forma results as if WDC and Arcxel had been included in the financial results since the beginning of the year prior to their acquisition are as follows (dollars in thousands):
FOR THE FISCAL YEAR ENDED ------------------------------------------ DECEMBER 29, DECEMBER 28, JANUARY 3, 1996 1997 1999 ------------ ------------ ---------- (UNAUDITED) Revenue......................................... $ 8,924 $ 22,783 $ 39,497 Net loss........................................ (18,052) (17,836) (21,875) Basic and diluted net loss per share............ (58.16) (24.42) (10.63)
F-14 87 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 The unaudited pro forma results are not necessarily indicative of the results of operations that would have been reported had the acquisitions occurred prior to the beginning of the periods presented. In addition, they are not intended to be indicative of future results. 3. SALE OF DIVISION On February 13, 1998, the Company sold substantially all of the laser diode fabrication facility and gigabit Ethernet transceiver product line of its Colorado division for cash proceeds of $7,250,000 and the assumption of net liabilities of the Colorado division. The Company recorded a gain of approximately $9,061,000 related to the sale. In connection with the sale, certain employees of the division elected to receive accelerated vesting of their stock options. The Company recorded an expense of $163,000 related to this accelerated vesting. The Company also recorded cash expenses of $385,000 in connection with this sale. Revenue and net loss of the Colorado division were $133,000 and $7,530,000, respectively, for the fiscal year ended December 28, 1997. For the period from December 29, 1997 through February 13, 1998, revenue and net loss of the division were $120,000 and $1,047,000, respectively. These amounts are included in the Company's statement of operations. 4. INVENTORY Inventory consists of the following (in thousands):
DECEMBER 28, JANUARY 3, JULY 4, 1997 1999 1999 ------------ ---------- ----------- (UNAUDITED) Raw materials.................................... $ 301 $ 606 $ 300 Work in process.................................. 211 -- 9 Finished goods................................... 642 1,423 715 Less: Writedown to expected realizable value..... (293) (483) (343) ----- ------ ----- $ 861 $1,546 $ 681 ===== ====== =====
5. PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands):
DECEMBER 28, JANUARY 3, JULY 4, 1997 1999 1999 ------------ ---------- ----------- (UNAUDITED) Test equipment................................... $ 7,467 $ 5,034 $ 5,371 Furniture and office and computer equipment...... 2,669 3,414 3,842 Software......................................... 1,034 1,763 1,766 Leasehold improvements........................... 459 233 239 ------- ------- ------- 11,629 10,444 11,218 Less: Accumulated depreciation................... (4,060) (3,066) (3,974) ------- ------- ------- $ 7,569 $ 7,378 $ 7,244 ======= ======= =======
Assets underlying capital leases included above are $5,384,000, $7,408,000 and $8,086,000 (unaudited) at December 28, 1997, January 3, 1999 and July 4, 1999, respectively, and accumulated amortization thereon aggregates $800,000, $2,038,000 and $2,676,000 (unaudited) at December 28, 1997, January 3, 1999 and July 4, 1999, respectively. F-15 88 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 6. GOODWILL AND INTANGIBLES Goodwill and intangibles consist of the following (in thousands):
DECEMBER 28, JANUARY 3, JULY 4, 1997 1999 1999 ------------ ---------- ----------- (UNAUDITED) Goodwill......................................... $ 946 $ 4,917 $ 4,917 Developed technology............................. 681 3,344 3,344 Core technology.................................. -- 2,183 2,183 Covenants not to compete......................... 166 166 166 Workforce........................................ -- 381 381 ------ ------- ------- 1,793 10,991 10,991 Less: Accumulated amortization................... (786) (3,156) (4,108) Less: Impairment write-down...................... -- (2,256) (2,256) ------ ------- ------- $1,007 $ 5,579 $ 4,627 ====== ======= =======
7. ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
DECEMBER 28, JANUARY 3, JULY 4, 1997 1999 1999 ------------ ---------- ----------- (UNAUDITED) Accrued warranty costs........................... $ 306 $4,390 $3,887 Accrued payroll and related benefits............. 819 1,152 1,404 Accrued business taxes........................... 115 301 689 Accrued interest................................. 121 334 354 Accrued professional fees........................ 300 272 138 Accrued legal costs.............................. 153 600 600 Other............................................ 542 806 846 ------ ------ ------ $2,356 $7,855 $7,918 ====== ====== ======
8. LINE OF CREDIT AND NOTE PAYABLE In October 1998, the Company renewed its $5,000,000 line of credit facility with a bank which matures on September 30, 1999 and bears interest at LIBOR (5.108% at January 3, 1999) plus 4.75%. The outstanding principal balance cannot exceed 80% of the Company's eligible accounts receivable. At January 3, 1999, no borrowings were outstanding under this facility. Concurrent with the renewal of the line of credit facility, the Company entered into a $7,500,000 note payable to the bank due September 30, 1999. The note bears interest at LIBOR (5.108% at January 3, 1999) plus 4.75% and is collateralized by inventory, equipment, receivables, intangibles and deposit accounts of the Company. The Company increased its line of credit facility to $7,500,000 and on June 22, 1999 extended both the line of credit and the $7,500,000 note payable to September 30, 2000. F-16 89 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 9. LONG-TERM DEBT AND CAPITAL LEASES Long-term debt and capital leases consist of the following (in thousands):
DECEMBER 28, JANUARY 3, 1997 1999 ------------ ---------- Note payable, interest rate of 8.69%, due the earlier of March 31, 2000 or the occurrence of certain corporate events; collateralized by certain assets acquired from Western Digital Corporation............................... $ 1,649 $ 1,649 Note payable, interest rate of 9.86%, due September 30, 2000; net of unamortized discount of $172,000............. -- 7,328 Note payable, interest rate of 8.09%, monthly payments of $60,000 through September 1999; net of unamortized discount of $74,000; collateralized by certain manufacturing and research and development equipment...... 1,233 -- Capital lease obligations, net of unamortized discount of $106,000 and $34,000, respectively........................ 4,829 5,443 ------- ------- 7,711 14,420 Less: Current portion....................................... (3,457) (1,564) ------- ------- $ 4,254 $12,856 ======= =======
On February 17, 1998, the 8.09% note payable was assumed by the purchaser of the Colorado division. Maturities of long-term debt and capital leases at January 3, 1999 are as follows (in thousands):
FISCAL YEAR ENDED ----------------- 1999......................................... $ 1,564 2000......................................... 10,901 2001......................................... 1,576 2002......................................... 585 ------- 14,626 Less: Unamortized discount................... (206) ------- $14,420 =======
10. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company has commitments under long-term operating leases, principally for building space and office equipment. These leases require payment of property taxes and include escalation clauses and options to extend the lease terms for three to five years. The following table summarizes the future F-17 90 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 minimum lease payments under all noncancelable operating lease obligations at January 3, 1999 (in thousands).
FISCAL YEAR ENDED ----------------- 1999.............................................. $ 632 2000.............................................. 639 2001.............................................. 658 2002.............................................. 220 ------ $2,149 ======
Total rent expense was approximately $446,000, $897,000 and $1,235,000 during the fiscal years ended December 29, 1996, December 28, 1997 and January 3, 1999, respectively, and $615,000 and $591,000 (unaudited) during the six months ended June 28, 1998 and July 4, 1999, respectively. CAPITAL LEASES The Company also leases certain equipment under capital lease agreements. Future minimum lease payments under capital leases at January 3, 1999 are as follows (in thousands):
FISCAL YEAR ENDED ----------------- 1999............................................. $ 2,224 2000............................................. 2,191 2001............................................. 1,766 2002............................................. 612 ------- Total minimum lease payments..................... 6,793 Less: Portion representing interest.............. (1,316) Less: Unamortized discount....................... (34) ------- Present value of capital lease obligations....... 5,443 Less: Current portion............................ (1,564) ------- Capital leases, net of current portion........... $ 3,879 =======
LEGAL PROCEEDINGS During the fiscal year ended December 28, 1997, the Company was named as the defendant in two patent infringement actions and was conducting the defense of another patent infringement action brought against one of its contract manufacturers, for which the Company was an indemnitor. Two of the patent infringement actions, including the action brought against the contract manufacturer, were dismissed without prejudice during the fiscal year ended January 3, 1999. During the fiscal year ended January 3, 1999, the Company was named as defendant in another patent infringement action filed by the plaintiff in the remaining action. In May 1999, the Company entered into a settlement agreement with the plaintiff in these remaining patent infringement actions. Under the settlement agreement, the Company is obligated to make certain future payments which have been included in accrued liabilities and long-term liabilities at January 3, 1999. F-18 91 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 11. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK The Company's Series E convertible preferred stock includes a provision whereby, beginning in October 2001, holders of a majority of such stock have the right to require the Company to repurchase the shares at a redemption price of $4.50 per share plus any declared and unpaid dividends. The Company shall redeem up to one-third of the Series E stock outstanding in October 2001, up to an additional one-third in October 2002 and up to the remaining one-third in October 2003. The following is a summary of the number of shares, redemption price and earliest redemption dates:
EARLIEST REDEMPTION REDEMPTION SHARES PRICE DATE ------ ---------- ------------ 1,509,741......................... $ 6,794 October 2001 1,509,740......................... 6,794 October 2002 1,509,740......................... 6,794 October 2003 ------- $20,382 =======
The redemption value of the mandatorily redeemable convertible preferred stock is being accreted over the period from issuance to the applicable earliest redemption date using the effective interest method. The Series E preferred stock is convertible, on a one-for-one basis, into common stock at any time at the option of the holders. In the event of a liquidation of the Company, the holders of Series E preferred stock will be entitled to be paid out of the assets, prior and in preference to any payment of Series A, Series B, Series C, Series D and Series F convertible preferred stock (Note 12). The payment shall be an amount per share equal to the sum of $4.50 for each outstanding share of Series E preferred stock plus an amount per share equal to all declared but unpaid dividends on each such share. 12. STOCKHOLDERS' EQUITY STOCK SPLIT On August 12, 1999, the Company's Board of Directors declared a two-for-three reverse stock split of the Company's common stock which was effective on August 27, 1999. All common share and per share amounts have been restated to reflect this stock split. F-19 92 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 CONVERTIBLE PREFERRED STOCK Convertible Preferred Stock consists of the following (in thousands):
DECEMBER 29, DECEMBER 28, JANUARY 3, JULY 4, 1996 1997 1999 1999 ------------ ------------ ---------- ----------- (UNAUDITED) Series A, $.001 par value, $1.25 liquidation value; 5,785,573 shares authorized, 4,891,239 shares issued and outstanding................... $ 4 $ 4 $ 4 $ 4 Series B, $.001 par value, $1.75 liquidation value; 5,243,806 shares authorized, issued and outstanding..................................... 5 5 5 5 Series C, $.001 par value, $1.75 liquidation value; 747,143 shares authorized, 571,429 shares issued and outstanding.......................... 1 1 1 1 Series D, $.001 par value, $4.00 liquidation value; 2,000,000 shares authorized, issued and outstanding..................................... 2 2 2 2 Series F, $.001 par value, $4.00 liquidation value; 1,760,000 shares authorized, 1,759,303 shares issued and outstanding................... 2 2 --- --- --- --- $12 $12 $14 $14 === === === ===
Shares of Convertible Preferred Stock have dividend rights, voting rights and liquidation preferences, and are convertible, on a two-for-three basis, into common stock at any time at the option of the holders. The holders of Convertible Preferred Stock are entitled to receive cash dividends when and if declared by the Company's Board of Directors. There have been no declared but unpaid dividends to date. The holders of the Series A and Series B preferred stock, each voting separately as a class, are entitled to elect two members of the Board of Directors of the Company, and the holders of the Series D and Series F preferred stock, each voting separately as a class, are entitled to elect one member of the Board of Directors of the Company. Additional members of the Board of Directors, if any, will be elected by the holders of shares of common stock, Series E convertible preferred stock and Convertible Preferred Stock, voting together as a single class. Upon liquidation, the preferred shareholders are entitled to distributions in order of their liquidation preferences. The holders of the Convertible Preferred Stock will be entitled to be paid out of the assets of the Company an amount per share equal to the sum of the per share liquidation amounts shown above plus an amount equal to all declared but unpaid dividends on each outstanding share. The Series A, Series B, Series C, Series D, and Series F preferred stock will rank on a parity as to the receipt of the respective preferential amounts for each such series. STOCK OPTIONS The Company has a stock option plan which provides for the grant of incentive and non-qualified stock options to directors, employees and consultants to purchase common stock of the Company. At January 3, 1999, 5,133,332 shares of common stock have been reserved for issuance to plan participants and 397,420 shares remained reserved and available for grant under the Plan. In April 1999, an additional 1,000,002 shares were reserved for issuance under the plan to plan participants. Incentive stock options are granted at an exercise price not less than the fair market value of the common stock on the date of grant, as determined by the Board of Directors. Incentive stock options and F-20 93 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 The following summarizes information about stock options outstanding and exercisable at January 3, 1999:
WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- RANGE OF REMAINING AVERAGE AVERAGE EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ------------- ----------- ----------- --------- ----------- --------- $0.11 - $0.30.. 453,808 8.19 $0.17 201,995 $0.20 $0.45 - $0.98.. 692,889 8.44 $0.74 203,812 $0.75 $3.08 - $4.35.. 1,477,294 9.57 $3.21 232,409 $3.42 $4.59 - $6.75.. 240,064 9.08 $4.77 7,731 $6.75 --------- ------- 2,864,055 645,947 ========= =======
During the fiscal years ended December 28, 1997 and January 3, 1999, the Company recorded $39,000 and $52,000, respectively, of compensation expense related to the issuance of stock options for services provided by consultants. The value of these stock options was recorded using the Black-Scholes valuation model. The Company did not issue any stock options to consultants during the fiscal year ended December 29, 1996. Had the Company determined compensation expense based on the fair value of the option at the grant date for all stock options issued to employees, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below (dollars in thousands):
FISCAL YEAR ENDED ------------------------------------------ DECEMBER 29, DECEMBER 28, JANUARY 3, 1996 1997 1999 ------------ ------------ ---------- Net loss As reported........................... $(17,652) $(13,759) $(21,233) Pro forma............................. (17,690) (13,837) (21,487) Basic and diluted net loss per share As reported........................... (56.87) (18.90) (8.77) Pro forma............................. (56.99) (19.01) (8.87)
In accordance with the guidance provided under FAS 123, fair values are based on minimum values. The fair value of each employee option grant is estimated on the date of grant using the minimum value option-pricing model using the following weighted-average assumptions.
FISCAL YEAR ENDED ---------------------------------------------- DECEMBER 29, DECEMBER 28 JANUARY 3, 1996 1997 1999 -------------- -------------- -------------- Expected term...................... 5 years 5 years 5 years Risk-free interest rate............ 6.07% - 7.76% 5.71% - 6.75% 4.22% - 5.64% Dividend yield..................... 0% 0% 0% Volatility......................... 0% 0% 0%
Pro forma net loss amounts reported above reflect only options granted in 1995 through 1998. The full impact of calculating compensation expense for stock options based on fair value at the grant date is not reflected in the pro forma net loss amounts because compensation expense is reflected over the options' vesting period. In addition, because the determination of the fair value of all options granted after such time as the Company may become a public entity will include an expected volatility factor in addition to the factors described above, the above results may not be representative of future periods. F-22 94 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 The following summarizes information about stock options outstanding and exercisable at January 3, 1999:
WEIGHTED- AVERAGE WEIGHTED- WEIGHTED- RANGE OF REMAINING AVERAGE AVERAGE EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ------------- ----------- ----------- --------- ----------- --------- $0.11 - $0.30.. 453,808 8.19 $0.17 201,995 $0.20 $0.45 - $0.98.. 692,889 8.44 $0.74 203,812 $0.75 $3.08 - $4.35.. 1,477,294 9.57 $3.21 232,409 $3.42 $4.59 - $6.75.. 240,064 9.08 $4.77 7,731 $6.75 --------- ------- 2,864,055 645,947 ========= =======
During the fiscal years ended December 28, 1997 and January 3, 1999, the Company recorded $39,000 and $52,000, respectively, of compensation expense related to the issuance of stock options for services provided by consultants. The value of these stock options was recorded using the Black-Scholes valuation model. The Company did not issue any stock options to consultants during the fiscal year ended December 29, 1996. Had the Company determined compensation expense based on the fair value of the option at the grant date for all stock options issued to employees, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below (dollars in thousands):
FISCAL YEAR ENDED ------------------------------------------ DECEMBER 29, DECEMBER 28, JANUARY 3, 1996 1997 1999 ------------ ------------ ---------- Net loss As reported........................... $(17,652) $(13,759) $(21,233) Pro forma............................. (17,690) (13,837) (21,487) Basic and diluted net loss per share As reported........................... (56.87) (18.90) (10.32) Pro forma............................. (56.99) (19.01) (10.45)
In accordance with the guidance provided under FAS 123, fair values are based on minimum values. The fair value of each employee option grant is estimated on the date of grant using the minimum value option-pricing model using the following weighted-average assumptions.
FISCAL YEAR ENDED ---------------------------------------------- DECEMBER 29, DECEMBER 28 JANUARY 3, 1996 1997 1999 -------------- -------------- -------------- Expected term...................... 5 years 5 years 5 years Risk-free interest rate............ 6.07% - 7.76% 5.71% - 6.75% 4.22% - 5.64% Dividend yield..................... 0% 0% 0% Volatility......................... 0% 0% 0%
Pro forma net loss amounts reported above reflect only options granted in 1995 through 1998. The full impact of calculating compensation expense for stock options based on fair value at the grant date is not reflected in the pro forma net loss amounts because compensation expense is reflected over the options' vesting period. In addition, because the determination of the fair value of all options granted after such time as the Company may become a public entity will include an expected volatility factor in addition to the factors described above, the above results may not be representative of future periods. F-22 95 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 The December 14, 1998 option-repricing event is considered a modification of an existing option. For determination of the pro forma amounts, this modification is treated as if a new option had been issued and any additional incremental value recorded in the year of repricing is immediately recognized for unvested options and amortized over the remaining vesting period for nonvested options. STOCK WARRANTS All stock warrants have been valued using the Black-Scholes valuation model. In conjunction with the Series B preferred stock offering, the Company issued warrants to purchase 654,333 shares of Series A preferred stock. The warrants have an exercise price of $1.25 per share and expire on October 6, 2000. In conjunction with the Series E preferred stock offering in October 1996, the Company issued warrants to purchase 69,261 shares of Series E preferred stock. The warrants have an exercise price of $5.63 per share and expire on October 16, 2001. As of January 3, 1999, the Company also had outstanding a warrant to purchase 240,000 shares of Series A preferred stock at an exercise price of $1.25 per share which expires on July 6, 2000. During January and February 1996, the Company issued warrants to purchase 175,714 shares of Series C preferred stock at an exercise price of $3.50 per share and terms ranging from eight to ten years. These warrants were issued in conjunction with the Company's 8.09% note payable and a capital lease obligation described in Note 9. These warrants were recorded at their fair value of $319,000, which was recorded as an original issue discount and is being amortized over the term of the note payable and a capital lease obligation. The 8.09% note and related debt discount was transferred to the acquirer of the Colorado division (see Note 3). During May 1997, the Company issued warrants to purchase 25,000 shares of Series E preferred stock with an exercise price of $5.62 per share. These warrants are exercisable through the earlier of (i) May 31, 2002, (ii) the one-year anniversary of the effective date of an initial public offering of the Company's common stock or (iii) the effective date of a merger of the Company or sale of substantially all of the Company's assets. These warrants were issued in conjunction with obtaining a capital lease line. The warrants were recorded at their fair value of $89,000, which was recorded as a debt issue cost and is being amortized over the terms of the lease line. During December 1998, the Company issued warrants to purchase shares of Series E preferred stock with a value of $137,500 at an exercise price equal to the lesser of i) $10 per share or ii) the greater of $7.50 or the average of $4.50 per share and the share value of the next round of financing. These warrants are exercisable at any time after issuance for a period of five years. These warrants were issued in conjunction with obtaining a capital lease line. The warrants were recorded at their fair value of $48,766, which was recorded as a debt issue cost and is being amortized over the term of the lease line. An additional 100,000 shares of Series E preferred stock were also issued in November 1998, in conjunction with obtaining a term loan as described in Note 9. These warrants have an exercise price of $10 per share and are exercisable through November 23, 2003. The warrants have been recorded at their fair value of $230,000 as an original issue discount which is being amortized over the life of the term loan. 13. INCOME TAXES At January 3, 1999, the Company has net operating loss carryforwards of approximately $31,100,000 which may be used to offset future taxable income. These carryforwards expire beginning in 2010. The Internal Revenue Code places certain limitations on the annual amount of net operating loss carryforwards that can be utilized if certain changes in the Company's ownership occur. The Company believes that, pursuant to Section 382 of the Internal Revenue Code, there was a change in ownership of the Company F-23 96 VIXEL CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 29, 1996, DECEMBER 28, 1997 AND JANUARY 3, 1999 in 1995 and that a substantial portion of the net operating loss carryforwards generated in or prior to 1995 (approximately $2,700,000) are significantly limited and potentially unusable. Future changes in the Company's ownership may further limit the use of such carryforward benefits. A reconciliation of taxes on net loss at the federal statutory rate to actual tax expense is as follows (in thousands):
FISCAL YEAR ENDED ------------------------------------------ DECEMBER 29, DECEMBER 28, JANUARY 3, 1996 1997 1999 ------------ ------------ ---------- Tax at statutory rate........................... $(6,002) $(4,678) $(7,219) Non deductible items............................ 15 57 2,236 Effect of state taxes........................... (618) (688) (734) Change in tax credits........................... (243) (50) (990) Change in valuation allowance................... 7,006 5,466 6,718 Other........................................... (158) (107) (11) ------- ------- ------- $ -- $ -- $ -- ======= ======= =======
The Company's net deferred tax assets consist of the following (in thousands):
DECEMBER 28, JANUARY 3, 1997 1999 ------------ ---------- Net operating loss carryforwards............................ $ 9,600 $ 12,144 Goodwill and intangibles.................................... 3,176 2,263 Credit carryforwards........................................ 350 1,340 Accrued warranty costs...................................... 119 1,712 Other accruals.............................................. 222 1,213 Other....................................................... 84 508 -------- -------- Gross deferred tax assets................................... 13,551 19,180 Less: Valuation allowance................................... (13,551) (19,180) -------- -------- Net deferred tax asset...................................... $ -- $ -- ======== ========
The Company has recorded a valuation allowance equal to the gross deferred tax asset balance because the Company's accumulated deficit, history of recurring net losses and possible limitations on the use of carryforwards give rise to uncertainty as to whether the deferred tax assets are realizable. 14. RETIREMENT SAVINGS PLAN The Company sponsors a retirement savings plan that qualifies under Internal Revenue Code Section 401(k). The plan covers all qualified employees. The Company matches a percentage of an employee's contribution as determined by the Board of Directors. The Company contributed $252 and $398 to the plan in fiscal years 1997 and 1998, respectively. The Company did not make contributions to the plan in fiscal year 1996. F-24 97 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Vixel Corporation In our opinion, based upon our audit and the report of other auditors, the accompanying balance sheet and the related statements of operations, of changes in stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Arcxel Technologies, Inc. (the Company), a development stage enterprise, at December 31, 1997, and the results of its operations and its cash flows for the year then ended and for the period from inception (June 18, 1996) through December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We did not audit the financial statements for the period from inception (June 18, 1996) through December 31, 1996, which statements reflect 14% of the cumulative net loss and 12%, 31% and 38% of the cumulative net cash flows from operating, investing and financing activities, respectively, from inception (June 18, 1996) through December 31, 1997. These statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts for the period from inception (June 18, 1996) through December 31, 1996 is based solely on the report of the other auditors. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit and the report of other auditors provide a reasonable basis for the opinion expressed above. As described in Note 9, on February 12, 1998 the stockholders approved and authorized the acquisition of the Company by Vixel Corporation. The acquisition was effective on February 17, 1998. PricewaterhouseCoopers LLP Seattle, Washington April 24, 1998, except for paragraph 1 of Note 9 which is as of August 27, 1999 F-25 98 INDEPENDENT AUDITORS' REPORT The Board of Directors Arcxel Technologies, Inc.: We have audited the accompanying balance sheet of Arcxel Technologies, Inc. (a development stage enterprise) as of December 31, 1996 and the related statements of operations, stockholders' equity and cash flows for the period from June 18, 1996 (inception) through December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Arcxel Technologies, Inc. as of December 31, 1996, and the results of its operations and its cash flows for the period from June 18, 1996 (inception) through December 31, 1996 in conformity with generally accepted accounting principles. KPMG LLP Orange County, California May 1, 1997 F-26 99 ARCXEL TECHNOLOGIES, INC. BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
DECEMBER 31, ----------------- 1996 1997 ------ ------- Current assets Cash and cash equivalents................................. $ 789 $ 582 Inventories, net.......................................... -- 166 Prepaid expenses.......................................... 5 101 ------ ------- Total current assets.............................. 794 849 Property and equipment, net of accumulated depreciation... 53 366 Other assets.............................................. 3 161 ------ ------- Total assets...................................... $ 850 $ 1,376 ------ ------- LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities Accounts payable.......................................... $ 12 $ 175 Accrued payroll and related benefits...................... 32 118 Other accrued liabilities................................. -- 16 Convertible notes payable to shareholder.................. -- 1,000 Current portion of capital lease obligations.............. -- 162 ------ ------- Total current liabilities......................... 44 1,471 Long-term capital lease obligations......................... 55 ------ ------- Total liabilities................................. 44 1,526 ------ ------- Shareholders' equity (deficit) Series A convertible preferred stock, $.01 par value; authorized 5,000,000 shares; issued and outstanding 1,111,000 and 2,020,000 shares, respectively; liquidation value $1.00 per share...................... 11 20 Common stock, $.01 par value; authorized 10,000,000 shares; issued and outstanding 1,170,000 and 1,495,000 shares, respectively................................... 1 4 Additional paid-in capital................................ 1,105 2,020 Deficit accumulated during the development stage.......... (311) (2,194) ------ ------- Total shareholders' equity (deficit).............. 806 (150) Commitments and contingencies (Note 8)...................... Total liabilities and shareholders' equity (deficit)........................................ $ 850 $ 1,376 ====== =======
See accompanying notes to the financial statements. F-27 100 ARCXEL TECHNOLOGIES, INC. STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
INCEPTION INCEPTION (JUNE 18, 1996) YEAR ENDED (JUNE 18, 1996) TO DECEMBER 31, DECEMBER 31 TO DECEMBER 31, 1996 1997 1997 --------------- ----------- --------------- Operating expense Research and development........................ $ 204 $ 1,225 $ 1,429 General and administrative...................... 130 415 545 Sales and marketing............................. -- 255 255 ---------- ---------- ---------- Total operating expenses................ 334 1,895 2,229 ---------- ---------- ---------- Other (income) expense Interest income................................. (23) (35) (58) Interest expense................................ -- 26 26 Other........................................... -- (3) (3) ---------- ---------- ---------- (23) (12) (35) ---------- ---------- ---------- Net loss.......................................... $ (311) $ (1,883) $ (2,194) ========== ========== ========== Basic and diluted net loss per share.............. $ (0.27) $ (1.49) $ (1.80) ========== ========== ========== Weighted-average shares outstanding............... 1,134,184 1,264,384 1,218,895 ========== ========== ==========
See accompanying notes to the financial statements. F-28 101 ARCXEL TECHNOLOGIES, INC. STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DEFICIT SERIES A ACCUMULATED TOTAL PREFERRED STOCK COMMON STOCK ADDITIONAL DURING THE SHAREHOLDERS ------------------ ------------------ PAID-IN DEVELOPMENT EQUITY SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE (DEFICIT) --------- ------ --------- ------ ---------- ----------- ------------ Balance at inception, June 18, 1996..... -- $-- -- $-- $ -- $ -- $ -- Issuance of common stock for contributed technology............................ -- -- 1,050,000 -- -- -- -- Issuance of common stock for cash....... -- -- 120,000 1 5 -- 6 Issuance of Series A convertible preferred stock for cash.............. 1,111,000 11 -- -- 1,100 -- 1,111 Net loss................................ -- -- -- -- -- (311) (311) --------- --- --------- --- ------ ------- ------- Balance at December 31, 1996............ 1,111,000 11 1,170,000 1 1,105 (311) 806 Issuance of Series A convertible preferred stock for cash.............. 909,000 9 -- -- 900 -- 909 Exercise of stock options............... -- -- 325,000 3 15 -- 18 Net loss................................ -- -- -- -- -- (1,883) (1,883) --------- --- --------- --- ------ ------- ------- Balance at December 31, 1997............ 2,020,000 $20 1,495,000 $ 4 $2,020 $(2,194) $ (150) ========= === ========= === ====== ======= =======
See accompanying notes to the financial statements. F-29 102 ARCXEL TECHNOLOGIES, INC. STATEMENT OF CASH FLOWS (IN THOUSANDS)
INCEPTION INCEPTION (JUNE 18, 1996) YEAR ENDED (JUNE 18, 1996) TO DECEMBER 31, DECEMBER 31, TO DECEMBER 31, 1996 1997 1997 --------------- ------------ --------------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss........................................ $ (311) $(1,882) $(2,193) Adjustments to reconcile net loss to net cash used in operating activities Depreciation................................. 9 148 157 Change in assets and liabilities: Inventories................................ -- (166) (166) Prepaid expenses........................... (5) (96) (101) Other assets............................... (3) (159) (162) Accounts payable........................... 12 163 175 Accrued payroll and related benefits....... 32 86 118 Other accrued liabilities.................. -- 16 16 ------ ------- ------- Net cash used in operating activities...... (266) (1,890) (2,156) ------ ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment............. (62) (137) (199) ------ ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of convertible preferred stock........................................ 1,111 909 2,020 Proceeds from issuance of common stock.......... 6 18 24 Proceeds from issuance of convertible notes payable to shareholder....................... -- 1,000 1,000 Principal payments of capital lease obligations.................................. -- (107) (107) ------ ------- ------- Net cash provided by financing activities......... 1,117 1,820 2,937 ------ ------- ------- Net increase (decrease) in cash and cash equivalents..................................... 789 (207) 582 Cash and cash equivalents, beginning of period.... -- 789 ------ ------- ------- Cash and cash equivalents end of period........... $ 789 $ 582 $ 582 ====== ======= ======= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Purchase of property and equipment under capital lease obligations............................... $ -- $ 324 $ 324 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest........................................ $ -- $ 21 $ 21 Income taxes.................................... $ -- $ -- $ --
See accompanying notes to the financial statements. F-30 103 ARCXEL TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Arcxel Technologies, Inc. (the Company) was formed on June 18, 1996 for the purpose of developing and distributing fibre channel switches. During the period from June 18, 1996 (inception) through December 31, 1997, the Company devoted most of its efforts to activities such as financial planning, research and development, acquiring property and equipment, and beginning production. At December 31, 1997, the Company is a development stage enterprise, as it has not yet generated revenue from its principal operations. CASH AND CASH EQUIVALENTS Cash equivalents are highly liquid investments readily convertible into known amounts of cash and have original maturities of three months or less. The Company maintains its cash accounts with two financial institutions that are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company has cash equivalents potentially subject the Company to concentrations of credit risk. The company has a cash investment policy which restricts investments to ensure preservation of principal and maintenance of liquidity. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's financial instruments consist of cash and cash equivalents, accounts payable, accrued liabilities, convertible notes payable to shareholder and capital lease obligations. Except for capital lease obligations, the carrying amounts of financial instruments approximate fair value due to their short maturities. The fair value of capital lease obligations at December 31, 1997 is not materially different from the carrying amount, based on interest rates available to the Company for similar types of arrangements. INVENTORIES Inventories are stated at the lower of cost or market, cost being determined by the first-in, first-out cost flow assumption. PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets which range from two to four years. The cost of additions is capitalized while maintenance and repairs are expensed as incurred. IMPAIRMENT OF LONG-LIVED ASSETS The Company periodically evaluates the carrying value of long-lived assets to be held and used, including but not limited to, property and equipment, when events and circumstances warrant such a review. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset. Fair value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets to be disposed of are determined in a similar manner, except that fair values are reduced by the cost to dispose. No losses from impairment have been recognized in the financial statements. F-31 104 ARCXEL TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 INCOME TAXES The Company provides for income taxes under the principles of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires that provision be made for taxes currently due and for the expected future tax effects of temporary differences between the book and tax bases of assets and liabilities. RESEARCH AND DEVELOPMENT Research and development costs are expensed as incurred. STOCK COMPENSATION In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation". SFAS 123 permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS 123 allows entities to continue to apply the provisions of Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees", and provide pro forma net loss disclosures for employee stock option grants as if the fair-value-based method defined by SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB 25. The provisions of SFAS 123 do not have a material impact on the Company's financial statements (Note 7). NET LOSS PER SHARE Basic net loss per share represents net loss available to common shareholders divided by the weighted-average number of shares outstanding during the period. Diluted loss per share represents net loss available to common shareholders divided by the weighted-average number of shares outstanding including the potentially dilutive impact of common stock options, convertible notes payable and convertible preferred stock. Common stock options are converted using the treasury stock method. Convertible notes payable and convertible preferred stock are converted using the if-converted method. Basic and diluted net loss per share are equal for the periods presented because the impact of common stock equivalents is anti-dilutive. Potentially dilutive securities totaling 2,506,000 and 3,902,809 shares at December 31, 1996 and 1997, respectively, were excluded from diluted net loss per share due to their anti-dilutive effect. ESTIMATES The financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the periods. Actual results could differ from those estimates. F-32 105 ARCXEL TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 2. INVENTORIES Inventories consist of the following at December 31, 1997 (in thousands): Raw materials......................................... $119 Work in process....................................... 23 Finished goods........................................ 48 ---- 190 Less: Inventory allowance............................. (24) ---- $166 ----
3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, --------------- 1996 1997 ----- ------ (IN THOUSANDS) Computer software and equipment.............. $52 $ 484 Furniture and fixtures....................... 10 39 --- ----- 62 523 Accumulated depreciation..................... (9) (157) --- ----- $53 $ 366 --- -----
4. CONVERTIBLE NOTES PAYABLE TO SHAREHOLDER In both November and December 1997, the Company issued $500,000 of 8% convertible notes payable to a shareholder (the Notes) due June 30, 1998 for a total of $1,000,000. The Notes are automatically converted into preferred stock upon (i) closing of the sale at least $3,000,000 of shares of preferred stock (Preferred Stock Offering) or (ii) closing of a merger with Vixel Corporation. The conversion price of an automatic conversion is equal to the lower of the selling price of the Preferred Stock Offering or $3.6126 principal and accrued interest amount at the Company's option, per share. The Notes are convertible into Series A preferred stock at the option of the holder upon (i) receiving notice from the Company of its intent to prepay any outstanding principal of the Notes; (ii) receiving notice of the Company's intention to merge with a company other than Vixel Corporation, liquidate or otherwise change the organization of the Company as it currently exists; or (iii) receiving less than full repayment of the Notes' principal and accrued interest as of June 30, 1998. The conversion price of a voluntary conversion is $3.6126 principal and accrued interest amount per share. 5. SHAREHOLDERS' EQUITY (DEFICIT) COMMON STOCK On June 18, 1996, the Company authorized 10,000,000 shares of $.01 par value common stock. On June 24, 1996, the Company issued 120,000 shares of common stock for cash to two shareholders at $.05 per share and 1,050,000 shares of common stock to two officers for their contribution of technology to the Company. The technology contributed by the shareholders had minimal basis for financial statement purposes and therefore the shares issued for this contributed technology were assigned no value. F-33 106 ARCXEL TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 In September 1997, the Company issued 325,000 shares of common stock to an employee who exercised stock options with an exercise price of $0.055 per share. PREFERRED STOCK On June 18, 1996, the Company authorized 5,000,000 shares of convertible preferred stock with a par value of $.01 per share, 2,020,000 shares of which are designated Series A preferred stock. On June 25, 1996 and March 24, 1997, the Company issued 1,111,000 and 909,000 shares, respectively, of $1.00 Series A convertible preferred stock to a venture capital firm and one private investor, respectively. The preferred stock has liquidation preferences over common stock and the holders of outstanding shares of preferred stock are entitled to receive one noncumulative dividend at a rate of $.10 per share when and if declared by the Board of Directors. Each share of preferred stock can be converted, at the option of the holder, into one share of common stock. Each share of preferred stock shall automatically be converted into shares of common stock upon (i) the closing of a firmly underwritten public offering, provided that the price per share is not less than $5.00 and the aggregate gross proceeds to the Company are not less than $7,500,000 or (ii) upon the election of the holders of a majority of the shares of preferred stock then outstanding. Holders of preferred stock are entitled to one vote for each share held and on all matters which the common stockholders are entitled to vote. 6. INCOME TAXES A current provision for income taxes has not been recorded for the periods from June 18, 1996 (inception) through December 31, 1996 and the year ended December 31, 1997 due to taxable losses incurred during such periods. A valuation allowance has been recorded for deferred tax assets because realization is primarily dependent on generating sufficient taxable income prior to expiration of net operating loss carry-forwards. A reconciliation of taxes on income at the Federal Statutory rate to actual tax expense is as follows:
DECEMBER 31, -------------- 1996 1997 ----- ----- (IN THOUSANDS) Tax at statutory rate....................... $(106) $(640) State taxes................................. (20) (89) Non-deductible items........................ 1 2 Tax credits................................. -- (56) Change in valuation allowance............... 125 783 ----- ----- $ -- $ -- ----- -----
F-34 107 ARCXEL TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 Deferred tax assets (liabilities) are summarized as follows:
DECEMBER 31, -------------- 1996 1997 ----- ----- (IN THOUSANDS) Net operating loss carry-forward............ $ 136 $ 805 Research and development credit carry-forward............................. 56 Depreciation and amortization............... 8 20 Accrued employee benefits................... 4 16 Other....................................... (3) 11 Gross deferred tax assets................. 145 908 Less: Valuation allowance................... (145) (908) ----- ----- $ -- $ -- ----- -----
At December 31, 1997, the Company has net operating loss carry-forwards for federal and state income tax reporting purposes of $2,065,000. These net operating losses will expire beginning in 2011 and 2004, respectively, if not previously utilized. In certain circumstances, as specified in the Internal Revenue Code, a 50% or more ownership change by certain combinations of the Company's shareholders during any three-year period would result in limitations on the Company's ability to utilize net operating loss carry-forwards. The Company has determined that such a change occurred in February 1998 (Note 9) and the utilization of loss carry forwards generated through that period will be limited. 7. STOCK OPTION PLAN In June 1996, the Company adopted a stock option plan (the Plan) pursuant to which the Company's Board of Directors may grant stock options to officers and key employees. Options to purchase up to 2,330,000 shares of authorized but unissued common stock are authorized under the Plan. Stock options have up to ten-year terms and vest and become fully exercisable between two to four years from the date of grant. Stock options granted to officers and key employees during the periods from June 18, 1996 (inception) through December 31, 1996 and the year ended December 31, 1997 were granted at no less than their estimated fair value as determined by the Company's Board of Directors. Accordingly, no compensation expense has been recorded under APB 25. If stock option grants in 1996 and 1997 had been recorded using the fair value method defined in SFAS 123, pro forma net loss for both periods would not have been materially different from the net loss as reported. The following summarizes stock option activity from June 18, 1996 (inception) through December 31, 1997:
WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ---------------- Granted............................. 1,395,000 $0.05 Outstanding at December 31, 1996.... 1,395,000 $0.05 Granted............................. 536,000 $0.42 Exercised........................... (325,000) $0.06 Outstanding at December 31, 1997.... 1,606,000 $0.17
F-35 108 ARCXEL TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 The following summarizes information about stock options outstanding and exercisable at December 31, 1997:
WEIGHTED AVERAGE WEIGHTED RANGE OF REMAINING AVERAGE WEIGHTED EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE - ------------ ----------- ----------- -------- ----------- -------- $0.05 - $0.06 1,170,000 5.13 $0.05 608,439 $0.05 $0.50 436,000 9.32 $0.50 -- --------- ------- 1,606,000 608,439 ========= =======
At December 31, 1996, 281,500 stock options were exercisable at a weighted average exercise price of $0.05 per share. 8. LEASE COMMITMENTS The Company leases certain facilities under noncancelable operating lease agreements which include escalation clauses. Future minimum operating lease payments under all noncancelable operating leases as of December 31, 1997 are as follows (in thousands): YEAR ENDING DECEMBER 31, 1998............................................. $169 1999............................................. 176 2000............................................. 183 2001............................................. 190 2002............................................. 181 ---- Total minimum lease payments.......................... $899 ====
Rent expense was $13,000 and $45,000 for the period from June 18, 1996 (inception) through December 31, 1996 and 1997, respectively. The Company also leases certain equipment under capital lease agreements. Future minimum lease payments under capital leases as of December 31, 1997 are as follows (in thousands): YEAR ENDING DECEMBER 31, 1998............................................ $ 182 1999............................................ 57 ----- 239 Less: Interest....................................... (22) ----- Principal payments................................... 217 Less: Current portion................................ (162) ----- Long-term capital lease obligations.................. $ 55 =====
At December 31, 1997, the cost and accumulated depreciation of equipment under capital leases was $324,000 and $104,000, respectively. No equipment was under capital lease at December 31 1996. F-36 109 ARCXEL TECHNOLOGIES, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1996 AND 1997 9. SUBSEQUENT EVENTS On February 12, 1998, the Company's shareholders approved and authorized the acquisition of the Company by Vixel Corporation (Vixel), a leading provider of comprehensive storage area networks. The acquisition was effective on February 17, 1998. Vixel acquired all outstanding shares of the Company's common stock and Series A preferred stock in exchange for 0.51 shares of Vixel common stock for each share of the Company's common stock and 0.765 shares of Vixel Series F preferred stock for each share of the Company's Series A preferred stock as adjusted for a two-for-three reverse stock split of the common stock of Vixel, which was effective on August 27, 1999. The Company's outstanding stock options were converted into stock options for Vixel common stock at the same exchange rate. The acquisition will be accounted for using the purchase method of accounting. Immediately prior to the acquisition, the convertible notes payable to shareholder were converted into the Company's Series A preferred stock (Note 4). F-37 110 VIXEL CORPORATION UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED JANUARY 3, 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ADD: DEDUCT: ARCXEL CIELO PRO FORMA VIXEL TECHNOLOGIES, COMMUNICATIONS, ADJUSTMENTS CORPORATION INC. INC. (NOTE 1) TOTAL ----------- ------------- --------------- ----------- ---------- Revenue......................... $ 39,445 $ 52 $ 120 $ 39,377 Cost of revenue................. 36,199 34 313 35,920 ---------- ----- ------- ------- ---------- Gross profit.................... 3,246 18 (193) 3,457 ---------- ----- ------- ------- ---------- Operating expenses Research and development...... 11,110 264 394 10,980 Acquired in-process technology.................. 5,118 (5,118)(b) -- Selling, general and administrative.............. 14,521 108 517 14,112 Amortization and writedown of goodwill and intangibles.... 2,057 -- -- $ 274(a) 2,331 ---------- ----- ------- ------- ---------- Total operating expenses.... 32,806 372 911 (4,844) 27,423 ---------- ----- ------- ------- ---------- Loss from operations.......... (29,560) (354) (1,104) 4,844 (23,966) Other expense, net............ 8,327 (14) 57 8,256 ---------- ----- ------- ------- ---------- Net loss...................... $ (21,233) $(368) $(1,047) $ 4,844 $ (15,710) ========== ===== ======= ======= ========== Net loss available to common stockholders................ $ (21,424) $(368) $(1,047) $ 4,844 $ (15,901) ========== ===== ======= ======= ========== Basic and diluted net loss per share....................... $ (8.77) $ (6.51) ========== ========== Weighted average shares of common stock outstanding used in computing basic and diluted net loss per share....................... 2,443,769 2,443,769 ========== ==========
Note 1 -- Pro forma adjustments The pro forma combined statement of operations gives effect to the following pro forma adjustments necessary to reflect the Arcxel acquisition and Colorado division disposition described in Notes 2 and 3, respectively, of the Vixel Corporation Financial Statements: (a) Adjustment to reflect the amortization expense of goodwill acquired developed technology, core technology and workforce. The acquisition values of these intangible assets (in thousands) and the related amortization periods are summarized as follows:
VALUE LIFE ------ ------- Goodwill......................................... $3,971 5 years Developed technology............................. 2,663 3 years Core technology.................................. 2,183 5 years Workforce........................................ 381 5 years
(b) Adjustment to remove the expense for acquired in-process technology. This amount is removed from the pro forma combined statement of operations due to its non-recurring nature. F-39 111 (Inside Back Cover) Title: The title consists of the Vixel logo, and the words "Vixel's Total SAN Solution." Image: The image consists of an arch labeled "SAN InSite Management Software". At the lower left corner of the arch is an image of a device labeled the "Vixel 1000 Hub", which connects by a line to a device labeled "Vixel Transceiver". Moving up the arch, from left to right, is an image of a device labeled "Vixel 2000 Hub," which connects by a line to a device labeled "Vixel Transceiver". Next is a device labeled "Vixel 8100 Switch", which connects by a line to a device labeled "Vixel Transceiver". Next is a device labeled "Vixel 2006 Hub", which connects by a line to a device labeled "Vixel Transceiver". The last image is a device labeled "Vixel 1000 Hub", which connects by a line to a device labeled "Vixel Transceiver". Beneath these images are the following additional images: Image: SAN InSite logo with TM superscript Text: Comprehensive SAN Management Software for Switches, Hubs and Transceivers Image: Vixel Switch Text: Switches with Advanced Features to Support Multiple SAN Configurations Image: Vixel Managed Hub Text: Managed Hubs with Automatic Monitoring and Recovery Capabilities Image: Vixel Entry-level hub Text: Entry-level Hubs for Low and Mid-Range Applications Image: Two Vixel Transceivers Text: Transceivers Based on Leading Technology that Facilitate Storage Connectivity 112 (Inside Back Cover) Title: The title consists of the Vixel logo, and the words "Vixel's Total SAN Solution." Image: The image consists of an arch labeled "SAN InSite Management Software". At the lower left corner of the arch is an image of a device labeled the "Vixel 1000 Hub", which connects by a line to a device labeled "Vixel Transceiver". Moving up the arch, from left to right, is an image of a device labeled "Vixel 2000 Hub," which connects by a line to a device labeled "Vixel Transceiver". Next is a device labeled "Vixel 8100 Switch", which connects by a line to a device labeled "Vixel Transceiver". Next is a device labeled "Vixel 2006 Hub", which connects by a line to a device labeled "Vixel Transceiver". The last image is a device labeled "Vixel 1000 Hub", which connects by a line to a device labeled "Vixel Transceiver". Beneath these images are the following additional images: Image: SAN InSite logo with TM superscript Text: Comprehensive SAN Management Software for Switches, Hubs and Transceivers Image: Vixel Switch Text: Switches with Advanced Features to Support Multiple SAN Configurations Image: Vixel Managed Hub Text: Managed Hubs with Automatic Monitoring and Recovery Capabilities Image: Vixel Entry-level hub Text: Entry-level Hubs for Low and Mid-Range Applications Image: Two Vixel Transceivers Text: Transceivers Based on Leading Technology that Facilitate Storage Connectivity VIXEL LOGO 113 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND WE ARE NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED SEPTEMBER 1, 1999 VIXEL LOGO 3,700,000 SHARES COMMON STOCK Vixel Corporation is offering 3,700,000 shares of our common stock. This is our initial public offering. We anticipate that the initial public offering price will be between $10.00 and $12.00 per share. We have applied for approval for quotation of our common stock on the Nasdaq National Market under the symbol "VIXL." ------------------------- INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 3. -------------------------
PER SHARE TOTAL --------- ------- Public offering price....................................... $ $ Underwriting discounts and commissions...................... $ $ Proceeds to Vixel........................................... $ $
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We have granted the underwriters a 30-day option to purchase up to an additional 555,000 shares of our common stock to cover over-allotments. BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on , 1999. ------------------------- BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED BEAR, STEARNS INTERNATIONAL LIMITED NEEDHAM & COMPANY, INC. THE DATE OF THIS PROSPECTUS IS , 1999 114 UNDERWRITING The underwriters named below, acting through their representatives, BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc. and Needham & Company, Inc., have severally agreed with us, subject to the terms and conditions set forth in the underwriting agreement, to purchase from us the numbers of shares of common stock set forth opposite their names below. The underwriters are committed to purchase and pay for all these shares if any are purchased.
NUMBER OF U.S. UNDERWRITERS SHARES ----------------- --------- BancBoston Robertson Stephens Inc........................... Bear, Stearns & Co. Inc..................................... Needham & Company, Inc......................................
INTERNATIONAL UNDERWRITERS -------------------------- BancBoston Robertson Stephens International Limited......... Bear, Stearns International Limited......................... Needham & Company, Inc...................................... --------- Total.................................................. 3,700,000 =========
We have been advised by the representatives that the underwriters propose to offer the shares of common stock to the public at the initial public offering price set forth on the cover page of this prospectus and to certain dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to other dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No such reduction shall change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The common stock is offered by the underwriters as stated herein, subject to receipt and acceptance by them and subject to their right to reject any order in whole or in part. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Over-allotment option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 555,000 additional shares of common stock at the same price per share as we will receive for the 3,700,000 shares that the underwriters have agreed to purchase from us. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of the additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 3,700,000 shares offered by this prospectus. If purchased, the additional shares will be sold by the underwriters on the same terms as those on which the 3,700,000 shares are being sold. We will be obligated, pursuant to the option, to sell shares to the extent the option is exercised. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of the shares of common stock offered hereby. If the option is exercised in full, the total public offering price and proceeds to us will be $46,805,000 and $42,629,000, respectively. 115 The following table summarizes the compensation to be paid to the underwriters by us:
TOTAL ---------------------- WITHOUT WITH PER OVER- OVER- SHARE ALLOTMENT ALLOTMENT -------- --------- --------- Underwriting discounts and commissions payable by us....... $ $ $
We estimate that expenses payable by us in connection with this offering, other than the underwriting discounts and commissions referred to above, will be approximately $900,000. The public offering price, underwriting discount and other terms set forth in the underwriting agreement are subject to approval by the pricing committee of our board of directors. Indemnity. The underwriting agreement contains covenants of indemnity between the underwriters and us against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-up agreements. All our executive officers, directors, and substantially all our stockholders of record, optionholders and warrantholders have agreed with BancBoston Robertson Stephens, for a period of 180 days after the date of this prospectus and subject to certain exceptions, not to offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to any shares of common stock, any option or warrant to purchase any shares of common stock, or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or, with certain exceptions, thereafter acquired directly by such holders or with respect to which they have or hereafter acquire the power of disposition, without the prior written consent of BancBoston Robertson Stephens. However, BancBoston Robertson Stephens may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to the lock-up agreements. There are no agreements between the representatives and any of our stockholders providing consent by the representatives to the sale of shares prior to the expiration of the period of 180 days after this prospectus. Future sales. In addition, we have agreed that during the period of 180 days after this prospectus, we will not, subject to certain exceptions and without the prior written consent of BancBoston Robertson Stephens: - Consent to the disposition of any shares held by stockholders prior to the expiration of the period of 180 days after this prospectus; or - Issue, sell, contract to sell or otherwise dispose of, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock, other than (1) the sale of shares in this offering, (2) the issuance of common stock upon the exercise or conversion of outstanding options, warrants or convertible securities, and (3) our issuance of stock options under our existing equity incentive and stock purchase plans. For a more complete discussion of the shares subject to a lock-up agreement, see "Shares Eligible for Future Sale," at page 62. Listing. We have filed an application to have the common stock approved for quotation on the Nasdaq National Market under the symbol "VIXL." No prior public market. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock offered hereby will be determined through negotiations between us and the representatives. Among the factors to be considered in these negotiations are prevailing market conditions, certain of our financial information, market valuations of other companies that we and the underwriters believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. Stabilization. The representatives have advised us that, pursuant to Regulation M under the Securities Act, certain persons participating in this offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for the purchase of the common stock on 116 behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is the bid for or the purchase of the common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by that underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by the underwriter or syndicate member. The representatives have advised us that these transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discounted at any time. Directed share program. At our request, the underwriters have reserved up to five percent of common stock offered by us for sale, at the initial public offering price, to our directors, officers, employees, business associates and related persons. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase the reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. LEGAL MATTERS The validity of the issuance of the common stock offered hereby will be passed upon for us by Cooley Godward LLP, Kirkland, Washington. Certain legal matters in connection with this offering will be passed upon for the underwriters by Gray Cary Ware & Freidenrich LLP, Palo Alto, California. EXPERTS The financial statements of Vixel Corporation as of December 28, 1997 and January 3, 1999 and for each of the three-years in the period ended January 3, 1999 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Arcxel Technologies, Inc. as of December 31, 1997 and for the year then ended included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements of Arcxel Technologies, Inc. as of December 31, 1996 and for the period from June 18, 1996 (inception) to December 31, 1996 have been included herein and in the Registration Statement in reliance upon the report of KPMG LLP, independent certified public accountants, and upon the authority of said firm as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1 under the Securities Act that registers the shares of our common stock to be sold in this offering. The registration statement, including the attached exhibits and schedules, contain additional relevant information about us and our capital stock. The rules and regulations of the SEC allow us to omit certain information included in the registration statement from this document. In addition, upon completion of this offer, we will become subject to the reporting and information requirements of the Securities Exchange Act and, accordingly, will file periodic reports, proxy statements and other information with the SEC. You may read and copy this information at the following public reference rooms of the SEC: Washington, D.C. New York, New York Chicago, Illinois 450 Fifth Street, N.W., 7 World Trade Center 500 West Madison Street Room 1024 Suite 1300 Suite 1400 Washington, D.C. 20549 New York, NY 10048 Chicago, IL 60661-2511
117 You may also obtain copies of this information by mail from the Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an internet website that contains reports, proxy statements and other information about issuers, like Vixel, who file electronically with the SEC. The address of that website is http://www.sec.gov. We intend to furnish our stockholders with annual reports containing audited financial statements, and make available to our stockholders quarterly reports for the first three quarters of each fiscal year containing unaudited interim financial information. 118 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the costs and expenses, other than underwriting discounts and commissions, payable by the Company in connection with the sale of common stock being registered. All amounts are estimates except the SEC registration and the NASD filing fees. SEC Registration fee........................................ $ 14,195 NASD fee.................................................... 5,606 Nasdaq National Market initial listing fee.................. 95,000 Printing and engraving...................................... 150,000 Legal fees and expenses of the Company...................... 350,000 Accounting fees and expenses................................ 200,000 Blue sky fees and expenses.................................. 5,000 Transfer agent fees......................................... 10,000 Miscellaneous............................................... 70,199 -------- Total............................................. $900,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 145 of the Delaware General Corporation Law authorizes a court to award or a corporation's board of directors to grant indemnification to directors and officers in terms sufficiently broad to permit such indemnification under certain circumstances for liabilities (including reimbursement for expenses incurred) arising under the Securities Act of 1933 (the "Act"). The Company's bylaws provides for mandatory indemnification of its directors and officers and permissible indemnification of employees and other agents to the maximum extent not prohibited by the Delaware General Corporation Law. The Company's certificate of incorporation provides that, pursuant to Delaware law, its directors shall not be liable for monetary damages for breach of the directors' fiduciary duty as directors to the Company and its stockholders. This provision in the certificate of incorporation does not eliminate the directors' fiduciary duty, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to the Company for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. The Company has entered into indemnification agreements with its officers and directors, a form of which is attached as Exhibit 10.1 hereto and incorporated herein by reference. The indemnification agreements provide the Company's officers and directors with further indemnification to the maximum extent permitted by the Delaware General Corporation Law. We maintain liability insurance for its directors and officers. Reference is also made to Section 7 of the Underwriting Agreement contained in Exhibit 1.1 hereto, indemnifying officers and directors of the Company against certain liabilities, and Section 3.10 of the Amended and Restated Investor Rights Agreement contained in Exhibit 4.2 hereto, indemnifying certain of the Company's stockholders, including controlling stockholders, against certain liabilities. II-1 119 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (a) During the past three years, we have issued unregistered securities to a limited number of persons as described below: - an aggregate of 4,529,221 shares of series E preferred stock at $4.50 per share in October 1996 to 37 investors; - an aggregate of 1,759,303 shares of series F preferred stock and 1,026,525 shares of common stock with an aggregate value of approximately $12,100,000 in connection with the acquisition of Arcxel Technologies, Inc. in February 1998; - warrants to purchase 229,084 shares of series E preferred stock in December 1996, May 1997, October 1998, December 1998 and March 1999 to five investors at a weighted average exercise price of $12.03; - options to purchase 10,627,871 shares of common stock at an average exercise price of $2.43 per share to our officers, directors, employees and consultants; and - a warrant to purchase 150,000 shares of our common stock at $11.00 per share in August 1999 to one investor. All share information in this Item 15 reflects a two-for-three stock split that occurred on August 27, 1999. (b) There were no underwritten offerings employed in connection with any of the transactions set forth in Item 15(a). The issuances described in Items 15(a) were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(2) thereof as transactions by an issuer not involving any public offering and in the case of issuances to our founders, executives, employees and consultants are also exempt from registration pursuant to Rule 701 promulgated under the Act. The recipients of securities in each such transaction represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends where affixed to the securities issued in such transactions. All recipients had adequate access, through their relationships with us, to information about us. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement 3.1* Restated Certificate of Incorporation, as amended 3.2* Form of Amended and Restated Certificate of Incorporation to be effective on the closing of the offering made pursuant to this Registration Statement 3.3+ Bylaws of the Registrant 3.4+ Bylaws of the Registrant to be effective upon the closing of the offering made pursuant to this Registration Statement 4.1 Form of Registrant's Common Stock Certificate 4.2+ Amended and Restated Investors' Rights Agreement dated February 17, 1998 4.3+ First Amendment to Amended and Restated Investors' Rights Agreement dated February 17, 1998 4.4+ Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Comdisco, Inc. 4.5+ Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to MMC/GATX Partnership No. 1 4.6+ Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Silicon Valley Bank
II-2 120
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4.7+ Warrant to purchase shares of Series E Preferred Stock of the Registrant issued to Montgomery Securities 4.8+ Warrant to purchase shares of Series E Preferred Stock of the Registrant issued to Transamerica Business Credit Corporation 4.9+ Warrant to purchase shares of Series E Preferred Stock of the Registrant issued to Greyrock Capital 4.10+ Warrant to purchase shares of Series E Preferred Stock of the Registrant issued to Comdisco, Inc. 4.12 Warrant to purchase Common Stock issued to Sun Microsystems 4.11+ Warrant to purchase shares of Series E Preferred Stock of the Registrant issued to Western Digital Corporation 5.1 Opinion of Cooley Godward LLP 10.1+ Form of Indemnity Agreement to be entered into by the Registrant and each of its directors and executive officers 10.2* Amended and Restated 1995 Stock Option Plan and forms of agreements thereunder 10.3+ Secured Promissory Note between the Registrant and Western Digital Corporation dated March 29, 1996, as amended March 30, 1999 10.4+ Master Lease Agreement between Registrant and Transamerica Business Credit Corporation dated May 23, 1997 10.5+ Master Lease Agreement between Registrant and Comdisco, Inc. dated January 18, 1996, together with addendum dated January 18, 1996 10.6+ Term Loan and Security Agreement with Greyrock Capital, a division of Nations Credit Corporation, with Registrant dated November 26, 1997, as amended October 2, 1998 10.7+ Turnkey Manufacturing Agreement with K*TEC Electronics, a division of Kent Electronics Company, dated May 5, 1997 10.8+ Employment Agreement between Registrant and Jay R. O'Donald dated February 17, 1998 10.9+ Employment Agreement between Registrant and Stuart B. Berman dated February 17, 1998 10.10+ Employment Agreement between Registrant and Gregory R. Olbright dated November 30, 1998 10.11+ Employment Agreement between Registrant and Stanley Reese dated December 29, 1998 10.12+ Employment Agreement between Registrant and James McCluney dated April 26, 1999 10.13+ Restricted Stock Purchase Agreement between Registrant and James M. McCluney dated April 16, 1999 10.14+ Restricted Stock Purchase Agreement between Registrant and Gregory R. Olbright dated April 30, 1999 10.15 Restricted Stock Purchase Agreement between Registrant and Kurtis L. Adams dated May 20, 1999 10.16+ Full Recourse Promissory Note between Registrant and Stuart B. Berman dated April 16, 1999 10.17+ Form of Full Recourse Promissory Note between Registrant and its executive officers 10.18+ Form of Full Recourse Promissory Note between Registrant and its directors 10.19+ Lease Agreement between Registrant and Sun Life Assurance Company of Canada (U.S.) dated December 5, 1996, as amended January 22, 1997 10.20+ Lease Agreement between Arcxel Technologies, Inc. and Aetna Life Insurance Company, dated November 1, 1997, assigned to Registrant August 24, 1998 10.21+ Amendment to Term Loan and Security Agreement with Greyrock Capital, dated June 21, 1999 10.22+ Vixel Corporation 1999 Employee Stock Purchase Plan and forms of agreements thereunder 10.23* Vixel Corporation 1999 Equity Incentive Plan and forms of agreements thereunder 10.24 Form of Stock Pledge Agreement between the Registrant and its directors 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.2 Consent of KPMG LLP, Independent Accounts 23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants
II-3 121
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 23.4 Consent of Counsel (see Exhibit 5.1) 24.1+ Power of Attorney (see Page II-5 of the Registration Statement) 27.1+ Financial Data Schedule
- ------------------------- * Previously filed and filed herewith. + Previously filed. (b) FINANCIAL STATEMENT SCHEDULES REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors of Vixel Corporation Our audits of the financial statements referred to in our report dated May 19, 1999 appearing in the Registration Statement on Form S-1 also included an audit of the financial statement schedules listed in Item 16 (b) of this Form S-1. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. PricewaterhouseCoopers LLP Seattle, Washington June 22, 1999 Schedule II -- Valuation and qualifying accounts For the Years Ended December 29, 1996, December 28, 1997 and January 3, 1999 (in thousands):
BALANCE AT CHARGED TO BALANCE AT BEGINNING COSTS AND END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD ----------- ------------ ---------- ---------- ------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS Year ended December 29, 1996....................... -- -- -- -- Year ended December 28, 1997....................... -- $ 36 -- $ 36 Year ended January 3, 1999......................... $ 36 400 $ 205 231 ALLOWANCE FOR WARRANTIES Year ended December 29, 1996....................... 100 -- -- 100 Year ended December 28, 1997....................... 100 298 104 294 Year ended January 3, 1999......................... 294 4,333 237 4,390 ALLOWANCE FOR INVENTORY OBSOLENCE Year ended December 29, 1996....................... -- -- -- -- Year ended December 28, 1997....................... -- 414 -- 414 Year ended January 3, 1999......................... 414 994 145 1,263
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. II-4 122 ITEM 17. UNDERTAKINGS The Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Act may be permitted to directors, officers and controlling persons of the Company pursuant to the Delaware General Corporation Law, the Amended and Restated Certificate of Incorporation or the Bylaws of the Company, Indemnification Agreements entered into between the Company and its officers and directors, the Underwriting Agreement, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer, or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For purposes of determining any liability under the Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the 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 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-5 123 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Vixel Corporation certifies that it has reasonable grounds to believe that it meets all of the requirements for filing this Amendment No. 2 to the registration statement and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Bothell, King County, State of Washington, on this 1st day of September, 1999. VIXEL CORPORATION By: * ------------------------------------ James M. McCluney President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 2 to the registration statement has been signed by the following persons in the capacities and on the dates indicated:
SIGNATURE TITLE DATE --------- ----- ---- * President, Chief Executive September 1, 1999 - ----------------------------------------------------- Officer and Director James M. McCluney /s/ KURTIS L. ADAMS Chief Financial Officer September 1, 1999 - ----------------------------------------------------- Kurtis L. Adams * Chairman of the Board of September 1, 1999 - ----------------------------------------------------- Directors Gregory R. Olbright * Director September 1, 1999 - ----------------------------------------------------- Kevin A. Fong * Director September 1, 1999 - ----------------------------------------------------- Charles A. Haggerty * Director September 1, 1999 - ----------------------------------------------------- Juan A. Rodriguez * Director September 1, 1999 - ----------------------------------------------------- Timothy M. Spicer * Director September 1, 1999 - ----------------------------------------------------- Werner F. Wolfen *By /s/ KURTIS L. ADAMS ------------------------------------------------ Kurtis L. Adams (Attorney-in-fact)
II-6 124 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- ----------- ------------ 1.1 Form of Underwriting Agreement 3.1* Restated Certificate of Incorporation, as amended 3.2* Form of Amended and Restated Certificate of Incorporation to be effective on the closing of the offering made pursuant to this Registration Statement 3.3+ Bylaws of the Registrant 3.4+ Bylaws of the Registrant to be effective upon the closing of the offering made pursuant to this Registration Statement 4.1 Form of Registrant's Common Stock Certificate 4.2+ Amended and Restated Investors' Rights Agreement dated February 17, 1998 4.3+ First Amendment to Amended and Restated Investors' Rights Agreement dated February 17, 1998 4.4+ Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Comdisco, Inc. 4.5+ Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to MMC/GATX Partnership No. 1 4.6+ Warrant to purchase shares of Series C Preferred Stock of the Registrant issued to Silicon Valley Bank 4.7+ Warrant to purchase shares of Series E Preferred Stock of the Registrant issued to Montgomery Securities 4.8+ Warrant to purchase shares of Series E Preferred Stock of the Registrant issued to Transamerica Business Credit Corporation 4.9+ Warrant to purchase shares of Series E Preferred Stock of the Registrant issued to Greyrock Capital 4.10+ Warrant to purchase shares of Series E Preferred Stock of the Registrant issued to Comdisco, Inc. 4.11+ Warrant to purchase shares of Series E Preferred Stock of the Registrant issued to Western Digital Corporation 4.12 Warrant to purchase Common Stock issued to Sun Microsystems 5.1 Opinion of Cooley Godward LLP 10.1+ Form of Indemnity Agreement to be entered into by the Registrant and each of its directors and executive officers 10.2* Amended and Restated 1995 Stock Option Plan and forms of agreements thereunder 10.3+ Secured Promissory Note between the Registrant and Western Digital Corporation dated March 29, 1996, as amended March 30, 1999 10.4+ Master Lease Agreement between Registrant and Transamerica Business Credit Corporation dated May 23, 1997 10.5+ Master Lease Agreement between Registrant and Comdisco, Inc. dated January 18, 1996, together with addendum dated January 18, 1996 10.6+ Term Loan and Security Agreement with Greyrock Capital, a division of Nations Credit Corporation, with Registrant dated November 26, 1997, as amended October 2, 1998 10.7+ Turnkey Manufacturing Agreement with K*TEC Electronics, a division of Kent Electronics Company, dated May 5, 1997 10.8+ Employment Agreement between Registrant and Jay R. O'Donald dated February 17, 1998 10.9+ Employment Agreement between Registrant and Stuart B. Berman dated February 17, 1998
125
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - ------- ----------- ------------ 10.10+ Employment Agreement between Registrant and Gregory R. Olbright dated November 30, 1998 10.11+ Employment Agreement between Registrant and Stanley Reese dated December 29, 1998 10.12+ Employment Agreement between Registrant and James McCluney dated April 26, 1999 10.13+ Restricted Stock Purchase Agreement between Registrant and James M. McCluney dated April 16, 1999 10.14+ Restricted Stock Purchase Agreement between Registrant and Gregory R. Olbright dated April 30, 1999 10.15 Restricted Stock Purchase Agreement between Registrant and Kurtis L. Adams dated May 20, 1999 10.16+ Full Recourse Promissory Note between Registrant and Stuart B. Berman dated April 16, 1999 10.17+ Form of Full Recourse Promissory Note between Registrant and its executive officers 10.18+ Form of Full Recourse Promissory Note between Registrant and its directors 10.19+ Lease Agreement between Registrant and Sun Life Assurance Company of Canada (U.S.) dated December 5, 1996, as amended January 22, 1997 10.20+ Lease Agreement between Arcxel Technologies, Inc. and Aetna Life Insurance Company, dated November 1, 1997, assigned to Registrant August 24, 1998 10.21+ Amendment to Term Loan and Security Agreement with Greyrock Capital, dated June 21, 1999 10.22+ Vixel Corporation 1999 Employee Stock Purchase Plan and forms of agreements thereunder 10.23* Vixel Corporation 1999 Equity Incentive Plan and forms of agreements thereunder 10.24 Form of Stock Pledge Agreement between the Registrant and its directors 23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.2 Consent of KPMG LLP, Independent Accountants 23.3 Consent of PricewaterhouseCoopers LLP, Independent Accountants 23.4 Consent of Counsel (see Exhibit 5.1) 24.1+ Power of Attorney (see Page II-5 of the Registration Statement) 27.1+ Financial Data Schedule
- ------------------------- * Previously filed and filed herewith. + Previously filed. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 UNDERWRITING AGREEMENT August __, 1999 BancBoston Robertson Stephens Inc. Bear, Stearns & Co. Inc. Needham & Company, Inc. As Representatives of the several Underwriters c/o BancBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, CA 94104 Ladies and Gentlemen: INTRODUCTORY. Vixel Corporation, a Delaware corporation (the "Company"), proposes to issue and sell to the several underwriters named in Schedule A (the "Underwriters") an aggregate of [___] shares (the "Firm Shares") of its Common Stock, par value $.001 per share (the "Common Shares"). In addition, the Company has granted to the Underwriters an option to purchase up to an additional [___] Common Shares (the "Option Shares") as provided in Section 2. The Firm Shares and, if and to the extent such option is exercised, the Option Shares are collectively called the "Shares". BancBoston Robertson Stephens Inc., Bear, Stearns & Co. Inc. and Needham & Company, Inc. have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-[___]), which contains a form of prospectus to be used in connection with the public offering and sale of the Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 as amended and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the "Registration Statement". Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement", and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Shares, is called the "Prospectus"; provided, however, if the Company has, with the consent of BancBoston Robertson Stephens Inc., elected to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean the Company's prospectus subject to 1 2 completion (each, a "preliminary prospectus") dated [___] (such preliminary prospectus is called the "Rule 434 preliminary prospectus"), together with the applicable term sheet (the "Term Sheet") prepared and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company hereby confirms its agreements with the Underwriters as follows: SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. A. Representations and Warranties of the Company. The Company hereby represents, warrants and covenants to each Underwriter as follows: (a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. 2 3 (b) Offering Materials Furnished to Underwriters. The Company has delivered to each of the Representatives one complete conformed copy of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) Authorization of the Shares To Be Sold by the Company. The Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived. (g) No Material Adverse Change. Subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change or effect, where the context so requires, is called a "Material Adverse Change" or a "Material Adverse Effect"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (h) Independent Accountants. PriceWaterhouseCoopers LLP and KPMG Peat Marwick LLP, who have expressed their respective opinions with respect to the financial statements (which term as used in this Agreement includes the related notes 3 4 thereto) and supporting schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act. (i) Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates indicated and the results of operations and cash flows for the periods specified. The supporting schedules included in the Registration Statement present fairly the information required to be stated therein. Such financial statements and supporting schedules have been prepared in conformity with generally accepted accounting principles as applied in the United States applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Financial Data", "Selected Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (j) Company's Accounting System. The Company and each of its subsidiaries maintain a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles as applied in the United States and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (k) [Subsidiaries of the Company. The Company's subsidiaries, when considered in the aggregate as a single subsidiary, would not constitute a "significant subsidiary," as defined in Rule 1-02(w) of Regulation S-X under the Securities Act.] [The Company will need to provide a representation that Arcxel is a significant subsidiary.] (l) Incorporation and Good Standing of the Company. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is organized with full corporate power and authority to own its properties and conduct its business as described in the prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification. (m) [Capitalization of the Subsidiaries. All the outstanding shares of capital stock of each subsidiary have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectus, all outstanding shares of capital stock of the subsidiaries are owned by the Company either directly or through wholly owned subsidiaries free and clear of any security interests, claims, liens or encumbrances.] 4 5 (n) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options or warrants described in the Prospectus). The Common Shares (including the Shares) conform in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding Common Shares have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding Common Shares were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (o) Stock Exchange Listing. The Shares have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. (p) No Consents, Approvals or Authorizations Required. No consent, approval, authorization, filing with or order of any court or governmental agency or regulatory body is required in connection with the transactions contemplated herein, except such as have been obtained or made under the Securities Act and such as may be required (i) under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters in the manner contemplated here and in the Prospectus, (ii) by the National Association of Securities Dealers, LLC and (iii) by the federal and provincial laws of Canada. (q) Non-Contravention of Existing Instruments Agreements. Neither the issue and sale of the Shares nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its significant subsidiaries pursuant to, (i) the charter or by-laws of the Company or any of its significant subsidiaries, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company or any of its significant subsidiaries is a party or bound or to which its or their property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company or any of its significant subsidiaries of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its significant subsidiaries or any of its or their properties, except any such conflict, breach, violation, liens, charge or encumbrance which would not singly or in the aggregate result in a Material Adverse Change and except as may be disclosed in the Prospectus. (r) No Defaults or Violations. Neither the Company nor any subsidiary is in violation or default of (i) any provision of its charter or by-laws, (ii) the terms of any 5 6 indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or bound or to which its property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or such subsidiary or any of its properties, as applicable, except any such violation or default which would not, singly or in the aggregate, result in a Material Adverse Change and except as otherwise disclosed in the Prospectus. (s) No Actions, Suits or Proceedings. No action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any of its significant subsidiaries or its or their property is pending or, to the best knowledge of the Company, threatened that (i) could reasonably be expected to have a Material Adverse Effect on the performance of this Agreement or the consummation of any of the transactions contemplated hereby or (ii) could reasonably be expected to result in a Material Adverse Effect. (t) All Necessary Permits, Etc. The Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (u) Title to Properties. The Company and each of its significant subsidiaries has good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(A)(i) above, in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. (v) Tax Law Compliance. The Company and its significant subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns or have properly requested extensions thereof and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them except as may be being contested in good faith and by appropriate proceedings, and as disclosed in the Prospectus. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(A)(i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its significant subsidiaries has not been finally determined. The Company is not aware of any tax deficiency that has been or is likely to be asserted or threatened against the Company that could result in a Material Adverse Change. 6 7 (w) Intellectual Property Rights. Each of the Company and its significant subsidiaries owns or possesses adequate rights to use all patents, patent rights or licenses, inventions, collaborative research agreements, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not result in a Material Adverse Change that is not otherwise disclosed in the Prospectus; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Material Adverse Change. There is no claim being made against the Company regarding patents, patent rights or licenses, inventions, collaborative research, trade secrets, know-how, trademarks, service marks, trade names or copyrights. The Company and its significant subsidiaries do not in the conduct of their business as now or proposed to be conducted as described in the Prospectus infringe or conflict with any right or patent of any third party, or any discovery, invention, product or process which is the subject of a patent application filed by any third party, known to the Company or any of its significant subsidiaries, which such infringement or conflict is reasonably likely to result in a Material Adverse Change. (x) Year 2000 Preparedness. There are no issues related to the Company's, or any of its significant subsidiaries, preparedness for the Year 2000 that (i) are of a character required to be described or referred to in the Registration Statement or Prospectus by the Securities Act or the rules and regulations of the Commission thereunder which have not been accurately described in the Registration Statement or Prospectus or (ii) might reasonably be expected to result in any Material Adverse Change or that might materially affect their properties, assets or rights. All internal computer systems and each Constituent Component (as defined below) of those systems and all computer-related products and each Constituent Component (as defined below) of those products of the Company and each of its significant subsidiaries fully comply with Year 2000 Qualification Requirements. "Year 2000 Qualifications Requirements" means that the internal computer systems and each Constituent Component (as defined below) of those systems and all computer-related products and each Constituent Component (as defined below) of those products of the Company and each of its significant subsidiaries (i) have been reviewed to confirm that they store, process (including sorting and performing mathematical operations, calculations and computations), input and output data containing date and information correctly regardless of whether the date contains dates and times before, on or after January 1, 2000, (ii) have been designated to ensure date and time entry recognition and calculations, and date data interface values that reflect the century, (iii) accurately manage and manipulate data involving dates and times, including single century formulas and multi-century formulas, and will not cause an abnormal ending scenario within the application or generate incorrect values or invalid results involving such dates, (iv) accurately process any date rollover, and (v) accept and respond to two-digit year date input in a manner that resolves any ambiguities as to the century. "Constituent Component" means all software (including operating systems, programs, packages and 7 8 utilities), firmware, hardware, networking components, and peripherals provided as part of the configuration. Except as otherwise disclosed in the Prospectus, the Company has inquired of material vendors as to their preparedness for the Year 2000 and has disclosed in the Registration Statement or Prospectus any issues that might reasonably be expected to result in any Material Adverse Change. (y) No Transfer Taxes or Other Fees. There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance and sale by the Company of the shares. (z) Company Not an "Investment Company". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Shares will not be, an "investment company" or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (aa) Insurance. Each of the Company and its significant subsidiaries are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (bb) Labor Matters. To the Company's knowledge, no labor disturbance by the employees of the Company or any of its significant subsidiaries exists or is imminent that could reasonably be expected to result in a Material Adverse Change and the Company is not aware of any existing labor disturbance by the employees of any of its principal suppliers, that reasonably could be expected to result in a Material Adverse Change. (cc) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (dd) Lock-Up Agreements. Each officer and director of the Company, each beneficial owner of the Company's capital stock and each holder of an option, warrant or other rights to purchase or acquire capital stock of the Company has agreed to sign an agreement substantially in the form attached hereto as Exhibit A (the "Lock-up Agreements"). The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the Lock-up Agreements presently in effect or effected hereby. The Company hereby represents and warrants 8 9 that it will not release any of its officers, directors or any security holders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of BancBoston Robertson Stephens Inc. (ee) Related Party Transactions. There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Prospectus which have not been described as required. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. (ff) Environmental Laws. (i) The Company is in compliance with all rules, laws and regulations relating to the use, treatment, storage and disposal of toxic substances and protection of health or the environment ("Environmental Laws") which are applicable to its business, except where the failure to comply would not result in a Material Adverse Change; (ii) the Company has received no notice from any governmental authority or third party of an asserted claim under Environmental Laws, which claim is required to be disclosed in the Registration Statement and the Prospectus; (iii) to the best of its knowledge, the Company will not be required to make future material capital expenditures to comply with Environmental Laws and (iv) no property which is owned, leased or occupied by the Company has been designated as a Superfund site pursuant to the Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a contaminated site under applicable state or local law. (gg) ERISA Compliance. The Company and its significant subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, its significant subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, its significant subsidiaries or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, its significant subsidiaries or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfounded benefit liabilities" (as defined under ERISA). Neither the Company, its significant subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, its significant subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. 9 10 SECTION 2. PURCHASE, SALE AND DELIVERY OF THE SHARES. (a) The Firm Shares. The Company agrees to issue and sell to the several Underwriters the Firm Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Shares set forth opposite their names on Schedule A. The purchase price per Firm Share to be paid by the several Underwriters to the Company shall be $[___] per share. (b) The First Closing Date. Delivery of the Firm Shares to be purchased by the Underwriters and payment therefor shall be made by the Company and the Representatives at 6:00 a.m. San Francisco time, at the offices of Cooley Godward LLP, 5200 Carillon Point, Kirkland, WA 98033-7356 (or at such other place as may be agreed upon among the Representatives and the Company), (i) on the third (3rd) full business day following the first day that Shares are traded, (ii) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (iii) at such other time and date not later that seven (7) full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 8 hereof), such time and date of payment and delivery being herein called the "Closing Date;" provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Sections 2(g) and 3(e) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later than two (2) full business days following delivery of copies of the Prospectus to the Representatives. (c) The Option Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of [___] Option Shares from the Company at the purchase price per share to be paid by the Underwriters for the Firm Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time upon notice by the Representatives to the Company, which notice may be given at any time within 30 days from the date of this Agreement. The time and date of delivery of the Option Shares, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Option Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be purchased as the number of Firm Shares set forth on Schedule A opposite the name of such Underwriter bears to the total number of Firm Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. (d) Public Offering of the Shares. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the 10 11 Prospectus, their respective portions of the Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable. (e) Payment for the Shares. Payment for the Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer in immediately available-funds to the order of the Company. It is understood that the Representatives have been authorized, for their own accounts and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Shares and any Option Shares the Underwriters have agreed to purchase. BancBoston Robertson Stephens Inc., individually and not as a Representative of the Underwriters, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. (f) Delivery of the Shares. The Company shall deliver, or cause to be delivered, a credit representing the Firm Shares to an account or accounts at The Depository Trust Company, as designated by the Representatives for the accounts of the Representatives and the several Underwriters at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered a credit representing the Option Shares the Underwriters have agreed to purchase at the First Closing Date (or the Second Closing Date, as the case may be), to an account or accounts at The Depository Trust Company as designated by the Representatives for the accounts of the Representatives and the several Underwriters, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. (g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon on the second business day following the date the Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. SECTION 3. COVENANTS OF THE COMPANY. A. COVENANTS OF THE COMPANY. The Company further covenants and agrees with each Underwriter as follows: (a) Registration Statement Matters. The Company will (i) use its best efforts to cause a registration statement on Form 8-A (the "Form 8-A Registration Statement") as required by the Securities Exchange Act of 1934 (the "Exchange Act") to become effective simultaneously with the Registration Statement, (ii) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Securities Act is followed, to prepare and timely file with the Commission under Rule 424(b) under the Securities Act a Prospectus in a form approved by the 11 12 Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Securities Act and (iii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Securities Act. If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act prior to the time confirmations are sent or given, as specified by Rule 462(b)(2) under the Securities Act, and shall pay the applicable fees in accordance with Rule 111 under the Securities Act. (b) Securities Act Compliance. The Company will advise the Representatives promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (c) Blue Sky Compliance. The Company will cooperate with the Representatives and counsel for the Underwriters in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions (both national and foreign) as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) Amendments and Supplements to the Prospectus and Other Securities Act Matters. The Company will comply with the Securities Act and the Exchange Act, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Representatives or counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission, and furnish at its own expense to the Underwriters and to dealers, an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. 12 13 (e) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Representatives, without charge, during the period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the Prospectus and any amendments and supplements thereto (including any documents incorporated or deemed incorporated by reference therein) as the Representatives may request. (f) Insurance. The Company shall (i) obtain Directors and Officers liability insurance in the minimum amount of $10 million which shall apply to the offering contemplated hereby and (ii) shall cause BancBoston Robertson Stephens Inc. to be added as an additional insured to such policy in respect of the offering contemplated hereby. (g) Notice of Subsequent Events. If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Company Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (h) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (i) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Company Shares. (j) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period ending [October ___, 2000] that satisfies the provisions of Section 11(a) of the Securities Act. (k) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. (l) Agreement Not to Offer or Sell Additional Securities. The Company will not, without the prior written consent of BancBoston Robertson Stephens Inc., for a period of 180 days following the date of the Prospectus, offer, sell or contract to sell, or otherwise dispose of or enter into any transaction which is designed to, or could be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or announce the offering of, any other Common Shares or any securities convertible into, or exchangeable for, Common Shares; provided, however, that the Company may (i) issue and sell Common Shares pursuant to any director or 13 14 employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company in effect at the date of the Prospectus and described in the Prospectus so long as none of those shares may be transferred on during the period of 180 days from the date that the Registration Statement is declared effective (the "Lock-Up Period") and the Company shall enter stop transfer instructions with its transfer agent and registrar against the transfer of any such Common Shares and (ii) the Company may issue Common Shares issuable upon the conversion of securities or the exercise of warrants outstanding at the date of the Prospectus and described in the Prospectus. (m) Future Reports to the Representatives. During the period of four years hereafter the Company will furnish to the Representatives (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the National Association of Securities Dealers, LLC or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. (n) Exchange Act Compliance. During the Prospectus Delivery Period, the Company will file all documents required to be filed with the Commission pursuant to Section 13, 14 or 15 of the Exchange Act in the manner and within the time periods required by the Exchange Act. SECTION 4. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein on the First Closing Date and, with respect to the Option Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1(A) hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Option Shares, as of the Second Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions: (a) Compliance with Registration Requirements; No Stop Order; No Objection from the National Association of Securities Dealers, LLC. The Registration Statement shall have become effective prior to the execution of this Agreement, or at such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel; and the National Association of Securities Dealers, LLC shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (b) Corporate Proceedings. All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, 14 15 shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) No Material Adverse Change. Subsequent to the execution and delivery of this Agreement and prior to the First Closing Date, or the Second Closing Date, as the case may be, there shall not have been any Material Adverse Change from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) Opinion of Counsel for the Company. You shall have received on the First Closing Date, or the Second Closing Date, as the case may be, an opinion of Cooley Godward LLP, counsel for the Company, substantially in the form of Exhibit B attached hereto, with such exceptions and qualifications as are customary in opinions of the type contemplated by Exhibit B, dated the First Closing Date or the Second Closing Date, as appropriate, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters. Counsel rendering the opinion contained in Exhibit B may rely as to questions of law not involving the laws of the United States or the State of Washington and Delaware upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. In addition, for purposes of rendering any opinion regarding this Underwriting Agreement, such counsel may assume that the laws of the State of Washington are substantially the same as the laws of the State of New York. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. (e) Opinion of Counsel for the Underwriters. You shall have received on the First Closing Date or the Second Closing Date, as the case may be, an opinion of Gray Cary Ware & Freidenrich LLP, substantially in the form of Exhibit C hereto with such exceptions and qualifications as are customary in opinions of the type contemplated by Exhibit C. The Company shall have furnished to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (f) Accountants' Comfort Letter. You shall have received on the First Closing Date and on the Second Closing Date, as the case may be, a letter from PricewaterhouseCoopers LLP addressed to the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than four (4) business days prior to the First Closing Date or the Second Closing Date, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the First Closing Date or the Second Closing Date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are 15 16 necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company and its significant subsidiaries considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from PricewaterhouseCoopers LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Securities Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the balance sheet of the Company as of December 28, 1997 and January 3, 1999 and related statements of operations, stockholders' equity, and cash flows for the three-year period ended January 3, 1999, (iii) set forth their opinion with respect to their examination of the balance sheet of Arcxel Technologies, Inc. as of December 31, 1997 and related statements of operations, shareholders' equity and cash flows for the year then ended, (iv) state that PricewaterhouseCoopers LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of PricewaterhouseCoopers LLP as described in SAS 71 on the financial statements for each of the quarters in the two-quarter period ended July ___, 1999 (the "Quarterly Financial Statements"), (v) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Quarterly Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented, and address other matters agreed upon by PricewaterhouseCoopers LLP and you. In addition, you shall have received from PricewaterhouseCoopers LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as of January 3, 1999, did not disclose any weaknesses in internal controls that they considered to be material weaknesses. (g) Officers' Certificate. You shall have received on the First Closing Date and the Second Closing Date, as the case may be, a certificate of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the First Closing Date or the Second Closing Date, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; 16 17 (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto contained all material information required to be included therein by the Securities Act and the applicable rules and regulations of the Commission thereunder, as the case may be, and in all material respects conformed to the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder, as the case may be; the Registration Statement and the Prospectus, and any amendments or supplements thereto, did not and does not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any Material Adverse Change, (b) any transaction that is material to the Company and its significant subsidiaries considered as one enterprise, except transactions entered into in the ordinary course of business and which did not and are reasonably not expected to result in a Material Adverse Change, (c) any obligation, direct or contingent, that is material to the Company and its significant subsidiaries considered as one enterprise, incurred by the Company or its significant subsidiaries, except obligations incurred in the ordinary course of business and which did not and are reasonably not expected to result in a Material Adverse Change, (d) any change in the capital stock or outstanding indebtedness of the Company or any of its significant subsidiaries that is material to the Company and its significant subsidiaries considered as one enterprise, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any of its significant subsidiaries, or (f) any loss or damage (whether or not insured) to the property of the Company or any of its significant subsidiaries which has been sustained or will have been sustained which has resulted or is reasonably expected to result in a Material Adverse Change. (h) Lock-up Agreement from Certain Security Holders of the Company. The Company shall have obtained and delivered to you an agreement substantially in the form of Exhibit A attached hereto from each officer and director of the Company, each beneficial owner of the outstanding issued share capital of the Company and each holder of options, warrants or other rights to purchase or acquire shares of capital stock of the Company. (i) Stock Exchange Listing. The Shares shall have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. (j) Compliance with Prospectus Delivery Requirements. The Company shall have complied with the provisions of Sections 2(g) and 3(e) hereof with respect to the furnishing of Prospectuses. (k) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, as the case may be, the Representatives and counsel for the 17 18 Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the legality of the issuance and sale of the Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 4 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Option Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 5 (Payment of Expenses), Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification and Contribution) and Section 10 (Representations and Indemnities to Survive Delivery) shall at all times be effective and shall survive such termination. SECTION 5. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada or any other country, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey" or other memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the National Association of Securities Dealers, LLC review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with listing the Common Shares on the Nasdaq National Market, (ix) all costs and expenses incident to the preparation and undertaking of "road show" preparations to be made to prospective investors, and (x) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is terminated by the Representatives pursuant to Section 4, Section 8 or Section 9, or if the sale to the Underwriters of the Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as 18 19 have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. SECTION 7. INDEMNIFICATION AND CONTRIBUTION. (a) Indemnification of the Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, which consent shall not be unreasonably withheld), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iv) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i), (ii), (iii) or (iv) above, provided that the Company shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any 19 20 Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 7(a) shall be in addition to any liabilities that the Company may otherwise have. (b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The indemnity agreement set forth in this Section 7(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) Information Provided by the Underwriters. The Company hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth in the table in the first paragraph and the second paragraph under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. (d) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not 20 21 relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 7 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (BancBoston Robertson Stephens Inc. in the case of Section 7(b) and Section 8), representing the indemnified parties who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (e) Settlements. The indemnifying party under this Section 7 shall not be liable for any settlement of any proceeding effected without its written consent, which consent shall not be unreasonably withheld, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by 21 22 such indemnified party, unless such settlement, compromise or consent includes (i) an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (f) Contribution. If the indemnification provided for in this Section 7 is unavailable to or insufficient to hold harmless an indemnified party under Section 7(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriter on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(f) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7(f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 7(f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f) to contribute are several in proportion to their respective underwriting obligations and not joint. (g) Timing of Any Payments of Indemnification. Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying 22 23 party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred, but in all cases, no later than thirty (30) days of invoice to the indemnifying party. (h) Survival. The indemnity and contribution agreements contained in this Section 7 and the representation and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. (i) Acknowledgements of Parties. The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 7, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 7 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Securities Act and the Exchange Act. SECTION 8. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A bears to the aggregate number of Firm Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares and the aggregate number of Shares with respect to which such default occurs exceeds 10% of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, and Section 7 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. 23 24 As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 8. Any action taken under this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. SECTION 9. TERMINATION OF THIS AGREEMENT. Prior to the First Closing Date, this Agreement may be terminated by the Representatives by notice given to the Company if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the National Association of Securities Dealers, LLC; (ii) a general banking moratorium shall have been declared by any of federal, New York, Delaware or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable or inadvisable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 9 shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 5 and 6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 7 shall at all times be effective and shall survive such termination. SECTION 10. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder and any termination of this Agreement. SECTION 11. NOTICES. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: BANCBOSTON ROBERTSON STEPHENS INC. 555 California Street San Francisco, California 94104 24 25 Facsimile: (415) 676-2696 Attention: General Counsel If to the Company: Vixel Corporation 11911 Northcreek Parkway South Bothell, Washington 98011 Facsimile: Attention: James M. McCluney Any party hereto may change the address for receipt of communications by giving written notice to the others. SECTION 12. SUCCESSORS. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 9 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7, and to their respective successors, [and personal representatives], and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. SECTION 13. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. SECTION 14. GOVERNING LAW PROVISIONS. (a) Governing Law. This agreement shall be governed by and construed in accordance with the internal laws of the state of New York applicable to agreements made and to be performed in such state. (b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. Each party not located in the United States irrevocably appoints CT Corporation System, which 25 26 currently maintains a San Francisco office at 49 Stevenson Street, San Francisco, California 94105, United States of America, as its agent to receive service of process or other legal summons for purposes of any such suit, action or proceeding that may be instituted in any state or federal court in the City and County of San Francisco. (c) Waiver of Immunity. With respect to any Related Proceeding, each party irrevocably waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution to which it might otherwise be entitled in the Specified Courts, and with respect to any Related Judgment, each party waives any such immunity in the Specified Courts or any other court of competent jurisdiction, and will not raise or claim or cause to be pleaded any such immunity at or in respect of any such Related Proceeding or Related Judgment, including, without limitation, any immunity pursuant to the United States Foreign Sovereign Immunities Act of 1976, as amended. SECTION 15. GENERAL PROVISIONS. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. [The remainder of this page has been intentionally left blank.] 26 27 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, VIXEL CORPORATION By:__________________________ [Title] The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives as of the date first above written. BANCBOSTON ROBERTSON STEPHENS INC. BEAR, STEARNS & CO. INC. NEEDHAM & COMPANY, INC. On their behalf and on behalf of each of the several underwriters named in Schedule A hereto. BY BANCBOSTON ROBERTSON STEPHENS INC. By:_________________________________ Authorized Signatory 27 28 SCHEDULE A
Number of Firm Common Shares Underwriters To be Purchased BANCBOSTON ROBERTSON STEPHENS INC. [AND [___] BANCBOSTON ROBERTSON STEPHENS INTERNATIONAL LIMITED] ....................................... BEAR, STEARNS & CO. INC. ....................... [___] NEEDHAM & COMPANY, INC. ........................ [___] [___] .......................................... [___] [___] .......................................... [___] Total................................... [___]
S-A 29 EXHIBIT A LOCK-UP AGREEMENT BancBoston Robertson Stephens Inc. Bear, Stearns & Co. Inc. Needham & Company c/o BancBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, California 94104 RE: Vixel Corporation (the "Company") Ladies & Gentlemen: The undersigned is an owner of record or beneficially of certain shares of Common Stock of the Company ("Common Stock") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the representatives (the "Representatives") of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, for a period commencing on the date hereof and continuing to a date which is 180 days after the registration statement relating to the Offering (the "Registration Statement") is declared effective by the Securities and Exchange Commission (the "Lock-up Period"). This restriction will not apply to (i) a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) a distribution to partners or shareholders of the undersigned, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, (iii) dispositions of Securities acquired on the open market or (iv) dispositions made with the prior written consent of BancBoston Robertson Stephens Inc. The undersigned agrees that the foregoing restriction precludes the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a Disposition of Securities during the Lock-up period, even if such Securities would be A-1 30 disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of Securities held by the undersigned except in compliance with the foregoing restrictions. Notwithstanding anything herein to the contrary, the foregoing restrictions do not prohibit the sale of shares of Common Stock by the undersigned to the underwriters in the Offering, if the Representatives, in their sole discretion, agree to the inclusion of shares of Common Stock in the Offering. BancBoston Robertson Stephens Inc., acting alone and in its sole discretion, may waive any provisions of this Lock-Up Agreement without notice to any third party. This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives and assigns of the undersigned. In the event that the Registration Statement shall not have been declared effective on or before October 31, 1999, this Lock-Up Agreement shall be of no further force or effect. Dated: ------------------------------ ------------------------------------ Printed Name of Holder By: --------------------------------- Signature ------------------------------------ Printed Name of Person Signing (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity) A-2 31 EXHIBIT B MATTERS TO BE COVERED IN THE OPINION OF COMPANY COUNSEL (i) The Company and each of its significant subsidiaries (as that term is defined in Regulation S-X of the Securities Act) has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (ii) The Company and each of its significant subsidiaries has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus; (iii) The Company and each of its significant subsidiaries is duly qualified to do business as a foreign corporation and is in good standing in each state of the United States, if any, in which the ownership or leasing of its properties or the conduct of its business requires such qualification, except where the failure to be so qualified or be in good standing would not have a Material Adverse Effect. To such counsel's knowledge, the Company does not own or control, directly or indirectly, any corporation, association or other entity other than [list significant subsidiaries] [which are significant subsidiaries as that term is defined in Regulation S-X of the Security Act]; (iv) The authorized capital stock of the Company consists of 5,000,000 shares of Preferred Stock, of which no shares are outstanding, and 65,000,000 shares of Common Stock, of which there are outstanding ____ shares. The capital stock of the Company has been duly and validly issued and is fully paid and nonassessable, and, to such counsel's knowledge, will not have been issued in violation of any preemptive right, co-sale right, registration right, right of first refusal or other similar right; (v) All issued and outstanding shares of capital stock of each of significant subsidiaries of the Company have been duly authorized and validly issued and are fully paid and nonassessable, and, to such counsel's knowledge, have not been issued in violation of or subject to any preemptive right, co-sale right, registration right, right of first refusal or other similar right and are owned by the Company free and clear of any pledge, lien, security interest or encumbrance, claim or equitable interest. (vi) The Firm Shares or the Option Shares, as the case may be, to be issued by the Company pursuant to the terms of this Agreement have been duly authorized and, upon issuance and delivery against payment therefor in accordance with the terms hereof, will be duly and validly issued and fully paid and nonassessable, and will not have been issued in violation of any preemptive right, co-sale right, registration right, right of first refusal or other similar right. B-1 32 (vii) The Company has the corporate power and authority to enter into this Agreement and to issue, sell and deliver to the Underwriters the Shares to be issued and sold by it hereunder; (viii) This Agreement has been duly authorized by all necessary corporate action on the part of the Company and has been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by you, is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditors' rights generally or by general equitable principles; (ix) The Registration Statement has become effective under the Securities Act and, to such counsel's knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Securities Act; (x) The 8-A Registration Statement complied as to form in all material respects with the requirements of the Exchange Act; the 8-A Registration Statement has become effective under the Exchange Act; and the Firm Shares or the Option Shares have been validly registered under the Securities Act and the Rules and Regulations of the Exchange Act and the applicable rules and regulations of the Commission thereunder; (xi) The Registration Statement and the Prospectus, and each amendment or supplement thereto (other than the financial statements, including supporting schedules, and financial data derived therefrom as to which such counsel need express no opinion), as of the effective date of the Registration Statement, complied as to form in all material respects with the requirements of the Securities Act and the applicable Rules and Regulations; (xii) The information in the Prospectus under the caption "Description of Capital Stock," to the extent that it constitutes matters of law or legal conclusions, has been reviewed by such counsel and is a fair summary of such matters and conclusions; and the forms of certificates evidencing the Common Stock and filed as exhibits to the Registration Statement comply with Delaware law; (xiii) The description in the Registration Statement and the Prospectus of the charter and bylaws of the Company and of statutes are accurate and fairly present the information required to be presented by the Securities Act; (xiv) To such counsel's knowledge, there are no agreements, contracts, leases or documents to which the Company is a party of a character required to be described or referred to in the Registration Statement or Prospectus or to be filed as an exhibit to the Registration Statement which are not described or referred to therein or filed as required; B-2 33 (xv) The issuance and sale by the Company of the Shares as contemplated by this Agreement will not result (a) in any violation of the Company's charter or bylaws, (b) to such counsel's knowledge, result in a material breach or violation of any of the terms and provisions of, or constitute a default under, any bond, debenture, note or other evidence of indebtedness, or any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument known to such counsel to which the Company is a party or by which its properties are bound, or any applicable statute, rule or regulation known to such counsel or, (c) to such counsel's knowledge, any order, writ or decree of any court, government or governmental agency or body having jurisdiction over the Company or any of its significant subsidiaries, or over any of their properties or operations; (xvi) No consent, approval, authorization or order of or qualification with any court, government or governmental agency or body having jurisdiction over the Company or any of its significant subsidiaries, or over any of their properties or operations is necessary in connection with the consummation by the Company of the transactions herein contemplated, except (i) such as have been obtained under the Securities Act, (ii) such as may be required under state or other securities or Blue Sky laws in connection with the purchase and the distribution of the Shares by the Underwriters, (iii) such as may be required by the National Association of Securities Dealers, LLC and (iv) such as may be required under the federal or provincial laws of Canada; (xvii) To such counsel's knowledge, there are no legal or governmental proceedings pending or threatened against the Company or any of its significant subsidiaries of a character required to be disclosed in the Registration Statement or the Prospectus by the Securities Act or the applicable rules and regulations of the Commission thereunder, other than those described therein; (xviii) To such counsel's knowledge, neither the Company nor any of its significant subsidiaries is presently (a) in material violation of its respective charter or bylaws, or (b) in material breach of any applicable statute, rule or regulation known to such counsel or, to such counsel's knowledge, any order, writ or decree of any court or governmental agency or body having jurisdiction over the Company or any of its significant subsidiaries, or over any of their properties or operations; and (xix) To such counsel's knowledge, except as set forth in the Registration Statement and Prospectus, no holders of Company Shares or other securities of the Company have registration rights with respect to securities of the Company and, except as set forth in the Registration Statement and Prospectus, all holders of securities of the Company having rights known to such counsel to registration of such shares of Company Shares or other securities, because of the filing of the Registration Statement by the Company have, with respect to the offering contemplated thereby, waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement or have included securities in the Registration Statement pursuant to the exercise of and in full satisfaction of such rights. B-3 34 (xx) The Company is not and, after giving effect to the offering and the sale of the Shares and the application of the proceeds thereof as described in the Prospectus, will not be, an "investment company" as such term is defined in the Investment Company Act of 1940, as amended. (xxi) To such counsel's knowledge, the Company owns or possesses sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their business as now conducted; and the expected expiration of any such Intellectual Property Rights would not result in a Material Adverse Effect. The Company has not received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Effect. To such counsel's knowledge, the Company's discoveries, inventions, products, or processes referred to in the Registration Statement or Prospectus do not infringe or conflict with any right or patent which is the subject of a patent application known to the Company. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified and are not passing upon the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto, when such documents became effective or were filed with the Commission (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. B-4 35 EXHIBIT C MATTERS TO BE COVERED IN THE OPINION OF UNDERWRITERS' COUNSEL (i) The Shares to be issued by the Company have been duly authorized and, upon issuance and delivery and payment therefor in accordance with the terms of the Underwriting Agreement, will be validly issued, fully paid and non-assessable. (ii) The Registration Statement complied as to form in all material respects with the requirements of the Securities Act; the Registration Statement has become effective under the Act and, to such counsel's knowledge, no stop order proceedings with respect thereto have been instituted or threatened or are pending under the Securities Act. (iii) The 8-A Registration Statement complied as to form in all material respects with the requirements of the Exchange Act; the 8-A Registration Statement has become effective under the Exchange Act; and the Firm Shares or the Option Shares have been validly registered under the Securities Act and the Rules and Regulations of the Exchange Act and the applicable rules and regulations of the Commission thereunder; (iv) The Underwriting Agreement has been duly authorized, executed and delivered by the Company. Such counsel shall state that such counsel has reviewed the opinions addressed to the Representatives from Cooley Godward LLP, dated the date hereof, and furnished to you in accordance with the provisions of the Underwriting Agreement. Such opinions appear on their face to be appropriately responsive to the requirements of the Underwriting Agreement. In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, Underwriters' Counsel and the independent certified public accountants of the Company, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the First Closing Date or Second Closing Date, as the case may be, the Registration Statement and any amendment or supplement thereto, when such documents became effective or were filed with the Commission (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the First Closing Date or the Second Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement C-1 36 of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. C-2 EX-3.1 3 RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED 1 EXHIBIT 3.1 RESTATED CERTIFICATE OF INCORPORATION OF VIXEL CORPORATION VIXEL CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the corporation is Vixel Corporation. The date of filing of its original Certificate of Incorporation with the Secretary of State was February 13, 1995. 2. This Restated Certificate of Incorporation has been duly adopted in accordance with Sections 228, 242 and 245 of the Delaware General Corporation Law, the Board of Directors of the corporation having adopted resolutions setting forth the proposed Restated Certificate of Incorporation, declaring its advisability, and directing that it be submitted to the stockholders of the corporation for their approval; the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted having consented in writing to the adoption thereof; and written notice of such adoption by the stockholders without a meeting by less than unanimous written consent having been given to those stockholders from whom such written consent was not received. 3. This Restated Certificate of Incorporation restates and integrates and further amends the Certificate of Incorporation of this corporation by restating the text of the original Certificate of Incorporation in full to read as follows: I. The name of this corporation is Vixel Corporation (the "Corporation"). II. The address of the registered office of the Corporation in the State of Delaware is: The Corporation Trust Company 1209 Orange Street Wilmington, DE 19801 County of New Castle The name of the Corporation's registered agent at such address is The Corporation Trust Company. III. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. 1. 2 IV. A. This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares the corporation is authorized to issue is fifty million one hundred sixty thousand four (50,160,004) shares, (i) thirty million (30,000,000) shares of which shall be Common Stock (the "Common Stock") and (ii) twenty million one hundred sixty thousand four (20,160,004) shares of which shall be Preferred Stock (the "Preferred Stock"). The Common Stock and the Preferred Stock shall have a par value of one-tenth of one cent ($.001) per share. B. The number of authorized shares of Common Stock may be increased or decreased (but not below the number of shares of such stock then outstanding) by the affirmative vote of the holders of a majority of the voting stock of the Corporation (voting together on an as-converted basis). C. DESIGNATION OF SERIES AND NUMBER OF AUTHORIZED SHARES. Five series of Preferred Stock are created hereby: (i) five million seven hundred eighty-five thousand five hundred seventy-three (5,785,573) of the authorized shares of Preferred Stock are designated as "Series A Preferred Stock" (the "Series A Preferred"); (ii) five million two hundred forty-three thousand eight hundred and six (5,243,806) of the authorized shares of Preferred Stock are designated as "Series B Preferred Stock" (the "Series B Preferred"); (iii) seven hundred forty-seven thousand one hundred and forty-three (747,143) of the authorized shares of Preferred Stock are designated as "Series C Preferred Stock" (the "Series C Preferred"); (iv) two million (2,000,000) of the authorized shares of Preferred Stock are designated as "Series D Preferred Stock" (the "Series D Preferred"); (v) four million six hundred twenty-three thousand four hundred eighty-two (4,623,482) of the authorized shares of Preferred Stock are designated as "Series E Preferred Stock" ("the Series E Preferred"); and (vi) one million seven hundred sixty thousand (1,760,000) shares of the authorized shares of Preferred Stock are designated as "Series F Preferred Stock" ("the Series F Preferred"). The Series A Preferred, the Series B Preferred, the Series C Preferred, the Series D Preferred, the Series E Preferred and the Series F Preferred may be collectively referred to herein as the "Convertible Preferred Stock." D. RIGHTS, PREFERENCES AND RESTRICTIONS OF CONVERTIBLE PREFERRED STOCK. The Convertible Preferred Stock shall have the rights, preferences, privileges, and the qualifications, limitations and restrictions thereof, as follows: 1. DIVIDEND RIGHTS. Holders of Convertible Preferred Stock shall be entitled to receive cash dividends when, as and if declared by the Board of Directors, out of any assets that are legally available therefor, prior and in preference to any declaration or payment of any dividend (payable other than in Common Stock or other securities and rights convertible into or entitling the holder thereof to receive, directly or indirectly, additional shares of Common Stock of the Corporation) on the Common Stock of the Corporation, at the rate per share declared by the Board of Directors or, if greater (as determined on an as-converted basis), an amount equal to 2. 3 that paid on the Common Stock. Such dividends shall not be cumulative. After payment of such dividends, any additional dividends declared shall be distributed among all holders of Convertible Preferred Stock and all holders of Common Stock in proportion to the number of shares of Common Stock that would be held by each such holder if all shares of Convertible Preferred Stock were converted into Common Stock at the then effective Conversion Rate for each series of Convertible Preferred Stock. 2. VOTING RIGHTS. a. Except as otherwise required by law or pursuant to any other provision hereof, each holder of shares of Convertible Preferred Stock shall have the right to one vote for each share of Common Stock into which such shares of Convertible Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share) at the record date for determination of stockholders entitled to vote on such matters. With respect to such vote, such holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled, notwithstanding any provision hereof, to notice of any stockholders' meeting in accordance with the by-laws of this Corporation, and shall be entitled to vote, except as otherwise provided herein, together with holders of Common Stock, and not separately as a class, with respect to any question upon which holders of Common Stock have the right to vote. b. The holders of shares of Series A Preferred Stock, voting separately as a class, shall be entitled to elect two members of the Board of Directors of the Corporation (the "Series A Directors"), the holders of shares of Series B Preferred Stock, voting separately as a class, shall be entitled to elect two members of the Board of Directors of the Corporation (the "Series B Directors"), the holders of shares of Series D Preferred Stock, voting separately as a class, shall be entitled to elect one member of the Board of Directors of the Corporation (the "Series D Director"), and the holders of shares of Series F Preferred Stock, voting separately as a class, shall be entitled to elect one member of the Board of Directors of the Corporation (the "Series F Director"). Additional members of the Board of Directors, if any, (collectively, the "Other Directors") shall be elected by the holders of shares of Common Stock and Convertible Preferred Stock, voting together as a single class. Any Series A, Series B, Series D or Series F Director, as the case may be, may be removed from the Board of Directors only by the affirmative vote of the holders of a majority of the Series A, Series B, Series D or Series F Preferred Stock, as the case may be, voting separately as a class, and the Other Directors may be removed from the Board of Directors only by the affirmative vote of the holders of a majority of the Common Stock and Convertible Preferred Stock, voting together with as a single class. If a vacancy on the Board of Directors is to be filled by the Board of Directors, only a director or directors elected by the same class of stockholders as those who would be entitled to vote to fill such vacancy, if any, shall vote to fill such vacancy. 3. LIQUIDATION RIGHTS. In the event of any liquidation, dissolution, or winding up of the Corporation, either voluntary or involuntary, distributions to the shareholders of the Corporation shall be made in the following manner: 3. 4 a. The holders of Series E Preferred shall be entitled to be paid out of the assets of the Corporation, prior and in preference to any payment or distribution out of the assets of the Corporation to holders of the Series A, Series B, Series C, Series D or Series F Preferred or the Common Stock or any other class or series of capital stock of the Corporation, an amount per share equal to the sum of four dollars fifty cents ($4.50) (the "Series E Original Issue Price") (subject to adjustment for stock splits, stock dividends and recapitalizations) for each outstanding share of Series E Preferred plus an amount equal to all declared but unpaid dividends on such share to the date fixed for distribution (the "Series E Liquidation Preference"). If the assets and funds thus distributed to the holders of the Series E Preferred shall be insufficient to permit payment to such holders of the full aforesaid preferential amount, then the entire assets of the Corporation legally available for distribution shall be distributed ratably to the holders of the Series E Preferred in proportion to the aggregate Series E Liquidation Preference of the shares of Series E Preferred then held by them. b. Thereafter, the holders of Series A Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share equal to the sum of one dollar twenty-five cents ($1.25) (the "Series A Original Issue Price") (subject to adjustment for stock splits, stock dividends and recapitalizations) for each outstanding share of Series A Preferred plus an amount equal to all declared but unpaid dividends on each such share to the date fixed for distribution (the "Series A Liquidation Preference"). The holders of Series B Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share equal to one dollar and seventy-five cents ($1.75) (the "Series B Original Issue Price") (subject to adjustment for stock splits, stock dividends and recapitalizations) for each outstanding share of Series B Preferred plus an amount equal to all declared but unpaid dividends on share to the date fixed for distribution (the "Series B Liquidation Preference"). The holders of Series C Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share equal to one dollar and seventy-five cents ($1.75) (subject to adjustment for stock splits, stock dividends and recapitalizations) for each outstanding share of Series C Preferred plus an amount equal to all declared but unpaid dividends on each share to the date fixed for distribution (the "Series C Liquidation Preference"). The holders of Series D Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share equal to the sum of four dollars ($4.00) (the "Series D Original Issue Price") (subject to adjustment for stock splits, stock dividends and recapitalizations) for each outstanding share of Series D Preferred plus an amount equal to all declared but unpaid dividends on such share to the date fixed for distribution (the "Series D Liquidation Preference"). The holders of Series F Preferred shall be entitled to be paid out of the assets of the Corporation an amount per share equal to the sum of four dollars ($4.00) (the "Series F Original Issue Price") (subject to adjustment for stock splits, stock dividends and recapitalizations) for each outstanding share of Series F Preferred plus an amount equal to all declared but unpaid dividends on such share to the date fixed for distribution (the "Series F Liquidation Preference"). The Series A, Series B, Series C, Series D and Series F Preferred shall rank on a parity as to the receipt of the respective preferential amounts for each such series. If the assets and funds thus available for distribution to the holders of the Series A, Series B, Series C, Series D and Series F Preferred shall be insufficient to permit payment to such holders of the full aforesaid preferential amounts, then the entire assets of the Corporation legally available for distribution (after payment of the Series E Liquidation Preference) shall be distributed ratably to 4. 5 the holders of the Series A, Series B, Series C, Series D and Series F Preferred holders in proportion to the aggregate Series A Liquidation Preference, Series B Liquidation Preference, Series C Liquidation Preference, Series D Liquidation Preference and Series F Liquidation Preference of the shares of the Series A, Series B, Series C, Series D and Series F Preferred then held by them. c. Thereafter, any remaining assets of the Corporation legally available for distribution, if any, shall be distributed ratably among the holders of Common Stock and the holders of the Convertible Preferred Stock on an as-converted basis. d. An Acquisition or an Asset Transfer, as defined in subparagraph 4(i)(ii) below, shall be considered a liquidation for purposes of this section. Notwithstanding the foregoing, additional purchases of the Corporation's stock in connection with any transaction that might otherwise be considered an Acquisition by persons who were, immediately prior to such transaction, holders of the capital stock of the Corporation, shall not be included in such definition. 4. CONVERSION TO COMMON STOCK. The holders of the Convertible Preferred Stock shall have the following rights with respect to the conversion of the Convertible Preferred Stock into shares of Common Stock: a. OPTIONAL CONVERSION. Subject to and in compliance with the provisions of this Section 4, any shares of Convertible Preferred Stock may, at the option of the holder, be converted at any time into fully-paid and nonassessable shares of Common Stock. The number of shares of Common Stock to which a holder of a particular series of Convertible Preferred Stock shall be entitled upon conversion shall be the product obtained by multiplying the applicable "Conversion Rate" then in effect (determined as provided in paragraph 4(b)) by the number of shares of Convertible Preferred Stock of the applicable series being converted. b. CONVERTIBLE PREFERRED STOCK CONVERSION RATE. The conversion rate in effect at any time for conversion of a particular series of Convertible Preferred Stock (the applicable "Conversion Rate") shall be the quotient obtained by dividing the "Original Issue Price" (as adjusted for any stock combinations, splits or stock dividends with respect to such series of Convertible Preferred Stock) with respect to such series (as provided in the table below) by the applicable "Conversion Price" for such series (calculated as provided in paragraph 4(c)). 5. 6
CONVERTIBLE PREFERRED STOCK ORIGINAL ISSUE PRICE BY SERIES PER SHARE -------------------------------------------------------------------- Series A Preferred $1.25 Series B Preferred $1.75 Series C Preferred $3.50 Series D Preferred $4.00 Series E Preferred $4.50 Series F Preferred $4.00
c. CONVERSION PRICE. The applicable conversion price ("Conversion Price") for a particular series of Convertible Preferred Stock initially shall be the applicable Original Issue Price for such series as set forth in paragraph 4(b). Such initial Conversion Price for each series of Convertible Preferred Stock shall be adjusted from time to time in accordance with this Section 4. All references to the Conversion Price for a particular series of Convertible Preferred Stock shall mean the applicable Conversion Price for such series as so adjusted. d. MECHANICS OF CONVERSION. Each holder of Convertible Preferred Stock who desires to convert the same into shares of Common Stock pursuant to this Section 4 shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Corporation or any transfer agent for the Convertible Preferred Stock, and shall give written notice to the Corporation at such office that such holder elects to convert the same. Such notice shall state the number of shares of Convertible Preferred Stock being converted. Thereupon, the Corporation promptly shall issue and deliver at such office to such holder a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and promptly shall pay in cash or, to the extent sufficient funds are not then legally available therefor, in Common Stock (at the fair market value of the Common Stock determined by the Board of Directors as of the date of such conversion), any declared and unpaid dividends on the shares of Convertible Preferred Stock being converted. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Convertible Preferred Stock to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. e. ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Corporation shall at any time or from time to time after the date the first share of Series E Preferred is issued (the "Original Issue Date") effect a subdivision of the outstanding Common Stock, the Conversion Price for each series of Convertible Preferred Stock in effect immediately before such subdivision shall be decreased proportionately. Conversely, if the Corporation shall at any time or from time to time after the Original Issue Date combine the outstanding shares of Common Stock into a smaller number of shares, the Conversion Price for each series of 6. 7 Convertible Preferred Stock in effect immediately before such combination shall be increased proportionately. Any adjustment under this paragraph 4(e) shall become effective at the close of business on the date the subdivision or combination becomes effective. f. ADJUSTMENT FOR COMMON STOCK DIVIDENDS AND DISTRIBUTIONS. If the Corporation at any time or from time to time after the Original Issue Date makes or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock, in each such event the Conversion Price then in effect for each series of Convertible Preferred Stock shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect for each series of Convertible Preferred Stock by a fraction (A) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (B) the denominator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, such Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter such Conversion Price shall be adjusted pursuant to this paragraph 4(f) to reflect the actual payment of such dividend or distribution. g. ADJUSTMENTS FOR OTHER DIVIDENDS AND DISTRIBUTIONS. If the Corporation at any time or from time to time after the Original Issue Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, in each such event provision shall be made so that the holders of each series of Convertible Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of other securities of the Corporation they would have received had their shares of such series of Convertible Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 4 with respect to the rights of the holders of such series of Convertible Preferred Stock or with respect to such other securities by their terms. h. ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. If at any time or from time to time after the Original Issue Date, the Common Stock issuable upon the conversion of each series of Convertible Preferred Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than an Acquisition or Asset Transfer or a subdivision or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 4), in any such event each holder of such series of Convertible Preferred Stock shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock 7. 8 into which the shares of such series of Convertible Preferred Stock could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. i. REORGANIZATIONS, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. (i) If at any time or from time to time after the Original Issue Date, there is a capital reorganization of the Common Stock (other than an Acquisition or Asset Transfer or a recapitalization, subdivision, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section 4), as a part of such capital reorganization, provision shall be made so that the holders of any series of Convertible Preferred Stock thereafter shall be entitled to receive upon conversion of such series of Convertible Preferred Stock the number of shares of stock or other securities or property of the Corporation to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 4 with respect to the rights of the holders of such series of Convertible Preferred Stock after the capital reorganization to the end that the provisions of this Section 4 (including adjustment of the Conversion Price with respect to such series of Convertible Preferred Stock, as applicable, then in effect and the number of shares issuable upon conversion of such series of Convertible Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. (ii) For the purposes of this Certificate of Incorporation: (A) "Acquisition" shall mean any consolidation or merger of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization, in which the stockholders of the Corporation immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the voting power of the surviving corporation or other entity or person immediately after such consolidation, merger or reorganization, or any transaction or series of related transactions in which in excess of fifty percent (50%) of the Corporation's voting power is transferred; and (B) "Asset Transfer" shall mean a sale, lease or other disposition of all or substantially all of the assets of the Corporation. j. ADJUSTMENT OF CONVERSION PRICE OF SERIES A, SERIES B, SERIES D, SERIES E AND SERIES F PREFERRED FOR DILUTIVE ISSUANCES. The Conversion Price of the Series A, Series B, Series D, Series E and Series F Preferred shall be subject to adjustment from time to time as follows: (i) If at any time or from time to time after the Original Issue Date, the Corporation issues or sells, or is deemed by the express provisions of this paragraph 4(j) to have issued or sold, Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution on any class of stock as provided in paragraph 4(f) above, and other than a subdivision or combination of shares of Common Stock as provided in paragraph 4(e) above, for an Effective Price (as hereinafter defined) (A) in the case of each such series of Series A, Series B and Series E Preferred Stock, less than the Conversion Price then in 8. 9 effect for such series of Series A, Series B and Series E Preferred Stock, or (B) in the case of the series of Series D and Series F Preferred Stock, less than $1.75 per share (as adjusted in accordance with Article IV, Sections D(4)(e) through D(4)(i) hereof), then and in each such case the Conversion Price then in effect for such series of Series A, Series B, Series D, Series E and Series F Preferred Stock shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying the then existing Conversion Price for such Series A, Series B, Series D, Series E or Series F Preferred Stock by a fraction (A) the numerator of which shall be the sum of (1) the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale, plus (2) the number of shares of Common Stock which the aggregate consideration received (as defined in subparagraph 4(j)(ii)) by the Corporation for the total number of Additional Shares of Common Stock so issued would purchase at the Conversion Price then in effect for such Series A, Series B or Series E Preferred Stock or, in the case of Series D or Series F Preferred Stock, $1.75 per share (as adjusted in accordance with Article IV, Sections D4(e) through D4(i) hereof), and (B) the denominator of which shall be the sum of (1) the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale, plus (2) the total number of Additional Shares of Common Stock so issued. For the purposes of the preceding sentence, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of (A) the number of shares of Common Stock actually outstanding, (B) the number of shares of Common Stock into which the then outstanding shares of Convertible Preferred Stock could be converted if fully converted on the day immediately preceding the given date, and (C) the number of shares of Common Stock which could be obtained through the exercise or conversion of all other rights, options and convertible securities outstanding on the day immediately preceding the given date. (ii) For the purpose of making any adjustment required under this paragraph 4(j), the consideration received by the Corporation for any issue or sale of securities shall (A) to the extent it consists of cash, be computed at the gross cash proceeds (before underwriters' commission, expenses and fees) received by the Corporation, (B) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board of Directors, and (C) if Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Corporation for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. (iii) For the purpose of the adjustment required under this paragraph 4(j), if the Corporation issues or sells any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being herein referred to as "Convertible Securities") and if the Effective Price of such Additional Shares of Common Stock is (A) in the case of the series of Series A, Series B and Series E Preferred Stock, less than the Conversion Price then in effect for such Series A, Series B or Series E Preferred Stock, as the case may be, or (B) in the case of the Series D or Series F 9. 10 Preferred Stock, less than $1.75 per share (as adjusted in accordance with Article IV, Sections D4(e) through D4(i) hereof), in each such case the Corporation shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Corporation for the issuance of such rights or options or Convertible Securities, plus, in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Corporation upon the exercise of such rights or options, plus, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion thereof; provided that if in the case of Convertible Securities the minimum amounts of such consideration cannot be ascertained, but are a function of antidilution or similar protective clauses, the Corporation shall be deemed to have received the minimum amounts of consideration without reference to such clauses; provided further that if the minimum amount of consideration payable to the Corporation upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; provided further that if the minimum amount of consideration payable to the Corporation upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the increased minimum amount of consideration payable to the Corporation upon the exercise or conversion of such rights, options or Convertible Securities. No further adjustment of the Conversion Price for such series of Series A, Series B, Series D, Series E or Series F Preferred Stock, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Price for such series of Convertible Preferred Stock, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be readjusted to the Conversion Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Corporation upon such exercise, plus the consideration, if any, actually received by the Corporation for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Corporation (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities, provided that such readjustment shall not apply to prior conversions of Series A, Series B, Series D, Series E or Series F Preferred Stock. (iv) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Corporation or deemed to be issued pursuant to this paragraph 10. 11 4(j), whether or not subsequently reacquired or retired by the Corporation other than (A) shares of Common Stock issued upon conversion of the Convertible Preferred Stock; (B) shares of Common Stock and/or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Corporation or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board; and (C) shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the Original Issue Date. The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Corporation under this paragraph 4(j), into the aggregate consideration received, or deemed to have been received by the Corporation for such issue under this paragraph 4(j), for such Additional Shares of Common Stock. (v) There shall be no adjustment to the Series C Conversion Price pursuant to this Section 4(j). k. NOTICES OF RECORD DATE. Upon (i) any taking by the Corporation of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend or other distribution, or (ii) any Acquisition or other capital reorganization of the Corporation, any reclassification or recapitalization of the capital stock of the Corporation, any merger or consolidation of the Corporation with or into any other corporation, or any Asset Transfer, or any voluntary or involuntary dissolution, liquidation or winding up of the Corporation, the Corporation shall mail to each holder of Convertible Preferred Stock (A) at least twenty (20) days prior written notice of the record date for the purpose of such dividend or distribution and a description of such dividend or distribution, (and specifying the date on which holders of stock shall be entitled thereto) or for determining rights to vote, if any, in respect to the matters referred to in (ii) above; and (B) in the case of matters referred to in (ii) above, at least twenty (20) days prior written notice of the date on which any such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up is expected to become effective, and the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such Acquisition, reorganization, reclassification, transfer, consolidation, merger, Asset Transfer, dissolution, liquidation or winding up. l. AUTOMATIC CONVERSION. (i) Each share of any series of Convertible Preferred Stock automatically shall be converted into shares of Common Stock, based on the Conversion Rate then in effect with respect to such series of Convertible Preferred Stock, immediately upon: (A) the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation where (1)(x) the per share price (before underwriters' commissions, expenses and fees) is at least $8.50 per share and (y) the gross cash proceeds to the 11. 12 Corporation (before underwriting discounts, commissions and fees) are at least twenty million dollars ($20,000,000) or (2)(x) with respect to the Series A, Series B, Series C, Series D Preferred and Series F, the holders of at least two-thirds of the outstanding shares of the Series A, Series B, Series C, Series D and Series F Preferred (voting together as a single class on an as-converted basis) vote in favor of conversion in connection with such underwritten public offering and (y) in the case of the Series E Preferred, the holders of a majority of the Series E Preferred vote in favor of conversion in connection with such underwritten public offering. Upon any such conversion, any declared and unpaid dividends shall be paid in accordance with the provisions of Section 1. (ii) Upon the occurrence of an event specified in subparagraph 4(1)(i) above, the outstanding shares of Convertible Preferred Stock shall be converted without any further action by the holders of such shares and whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent; provided, however, that the Corporation shall not be obligated to issue certificates evidencing the shares of Common Stock issuable upon such conversion unless the certificates evidencing such shares of Convertible Preferred Stock, either are delivered to the Corporation or its transfer agent as provided below, or the holder notifies the Corporation or its transfer agent that such certificates have been lost, stolen or destroyed and executes an agreement satisfactory to the Corporation to indemnify the Corporation from any loss incurred by it in connection with such certificates. Upon the occurrence of such conversion of the Convertible Preferred Stock, the holders of Convertible Preferred Stock shall surrender the certificates representing such shares at the office of the Corporation or any transfer agent for the Convertible Preferred Stock. Thereupon, there shall be issued and delivered to such holder promptly at such office and in its name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Convertible Preferred Stock surrendered were convertible on the date on which such conversion occurred, and the Corporation promptly shall pay in cash or, at the option of the Corporation, Common Stock (at the fair market value of the Common Stock determined by the Board as of the date of such conversion), or both, together with all declared and unpaid dividends on the shares of such Convertible Preferred Stock being converted, to and including the date of such conversion. m. FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of any series of Convertible Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of a series of Convertible Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Corporation shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Common Stock's fair market value (as determined by the Board) on the date of conversion. n. RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Convertible Preferred Stock, such number of its shares of Common Stock as shall from time to 12. 13 time be sufficient to effect the conversion of all outstanding shares of the Convertible Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Convertible Preferred Stock, the Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purpose. o. NOTICES. Any notice required by the provisions of this Article IV shall be in writing and shall be deemed effectively given: (i) upon personal delivery to the party to be notified, (ii) when sent by confirmed telex or facsimile if sent during normal business hours of the recipient; if not, then on the next business day, (iii) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (iv) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Corporation. p. PAYMENT OF TAXES. The Corporation will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of any series of Convertible Preferred Stock, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of such Convertible Preferred Stock so converted were registered. q. NO DILUTION OR IMPAIRMENT. The Corporation shall not amend its Certificate of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Corporation, but shall at all times in good faith assist in carrying out all such action as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Convertible Preferred Stock against dilution or other impairment. 5. PROTECTIVE PROVISIONS. a. So long as there remain outstanding at least an aggregate of 3,750,000 shares of Series A, Series B, Series D, Series E and Series F Preferred Stock, the Corporation shall not, without first obtaining the separate approval (by vote or written consent, as provided by law) of the holders of at least a majority of the Series A, Series B, Series D, Series E and Series F Preferred Stock, voting together as a class, take any of the following actions: (i) amend or repeal any provision of the Corporation's Certificate of Incorporation if such action would alter or change the rights, preferences or privileges provided for the Series A, Series B, Series D, Series E or Series F Preferred so as to adversely affect the holders thereof; (ii) redeem or repurchase or otherwise acquire any shares of Common Stock other than (A) pursuant to the exercise of any preexisting contractual or legal 13. 14 rights of first refusal or repurchase or any repurchase of any outstanding securities of the Corporation that is unanimously approved by the Corporation's Board of Directors; (iii) pay or declare any dividend on shares of Common Stock if dividends on the Convertible Preferred Stock payable pursuant to Section 1 remain unpaid, except dividends payable solely in Common Stock; (iv) authorize or issue shares of any class of stock having a preference over, or being on a parity with, the Series A, Series B, Series D, Series E or Series F Preferred with respect to dividends or assets; (v) voluntarily dissolve or liquidate the Corporation; (vi) enter into a consolidation, merger or reorganization of the Corporation with or into any other corporation or other entity or person, or any other corporate reorganization, in which (A) the Corporation is not the surviving entity or (B) the stockholders of the Corporation immediately prior to such consolidation, merger or reorganization, own less than fifty percent (50%) of the voting power of the surviving entity immediately after such consolidation, merger or reorganization; or (vii) enter into any transaction or series of related transactions in which in excess of fifty percent (50%) of the Corporation's voting power is transferred. b. So long as there remain outstanding at least 750,000 shares of Series E Preferred, the corporation shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the Series E Preferred, voting or consenting as a separate class, take any of the following actions: (i) amend or repeal Sections D(3) or D(6) of this Article IV or this Section 5(b), amend or repeal any other provision of the Corporation's Certificate of Incorporation if such action would alter or change the rights, preferences or privileges provided for the Series E Preferred so as to adversely affect the holders of the Series E Preferred in a manner different than the other shares of Convertible Preferred Stock ; (ii) increase the Conversion Price of the Series E Preferred Stock (except as otherwise currently contemplated by Section D(4) of this Article IV), or amend the Corporation's Certificate of Incorporation to require conversion of the Series E Preferred Stock (except as currently contemplated by Section D(4)(1) of this Article IV); or (iii) exchange or reclassify any outstanding shares of Convertible Preferred Stock or Common Stock for any class or series of capital stock of the Corporation with preference over the Series E Preferred with respect to dividends or assets. 14. 15 6. REDEMPTION a. The Corporation shall be obligated to redeem the Series E Preferred as follows: (i) At any time after October 21, 2001, the holders of at least a majority of the then outstanding shares of Series E Preferred, voting as a separate class, may require the Corporation, to the extent it may lawfully do so, to redeem the Series E Preferred in three (3) equal annual installments beginning on the first calendar quarter commencing at least thirty (30) days after the Corporation's receipt of such redemption notice from such holders (each a "Redemption Date"). The Corporation shall effect such redemptions on the applicable Redemption Date by paying in cash in exchange for the shares of Series E Preferred to be redeemed a sum equal to the Original Issue Price per share of Series E Preferred (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares) plus declared and unpaid dividends with respect to such shares. The total amount to be paid for the Series E Preferred is hereinafter referred to as the "Redemption Price." The number of shares of Series E Preferred that the Corporation shall be required to redeem on any one Redemption Date shall be equal to the amount determined by dividing (i) the aggregate number of shares of Series E Preferred outstanding immediately prior to the Redemption Date by (ii) the number of remaining Redemption Dates (including the Redemption Date to which such calculation applies). Shares subject to redemption pursuant to this Section 6(a) shall be redeemed from each holder of Series E Preferred on a pro rata basis. (ii) At least thirty (30) days but no more than sixty (60) days prior to the first Redemption Date, the Corporation shall send a notice (a "Redemption Notice") to all holders of Series E Preferred to be redeemed setting forth (a) the Redemption Price for the shares to be redeemed; and (b) the place at which such holders may obtain payment of the redemption Price upon surrender of their share certificates. If the Corporation does not have sufficient funds legally available to redeem all shares to be redeemed at the Redemption Date (including, if available, those to be redeemed at the option of the corporation), then it shall redeem such shares pro rata (based on the portion of the aggregate Redemption Price payable to them) to the extent possible and shall redeem the remaining shares to be redeemed as soon as sufficient funds are legally available. b. On or prior to the Redemption Date, the Corporation shall deposit the Redemption Price of all shares to be redeemed with a bank or trust corporation having aggregate capital and surplus in excess of $100,000,000, as trust fund, with irrevocable instructions and authority to the bank or trust corporation to pay, on and after such Redemption Date, the Redemption Price of the shares to their respective holders upon the surrender of their share certificates. Any moneys deposited by the Corporation pursuant to this paragraph 6(b) for the redemption of shares thereafter converted into shares of Common Stock pursuant to Section 4 hereof no later than the fifth (5th) day preceding the Redemption Date shall be returned to the Corporation forthwith upon such conversion. The balance of any funds deposited by the corporation pursuant to this Section 6(b) remaining unclaimed at the expiration of one (1) year following such Redemption Date shall be returned to the Corporation promptly upon its written request. 15. 16 c. On or after such Redemption Date, each holder of shares of Series E Preferred to be redeemed shall surrender such holder's certificates representing such shares to the Corporation in the manner and at the place designated in the Redemption Notice, and thereupon the Redemption Price of such shares shall be payable to the order of the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be canceled. In the event less than all the shares represented by such certificates are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after such Redemption Date, unless there shall have been a default in payment of the Redemption Price or the Corporation is unable to pay the Redemption Price due to not having sufficient legally available funds, all rights of the holders of such shares as holders of Series E Preferred (except the right to receive the Redemption Price without interest upon surrender of their certificates), shall cease and terminate with respect to such shares, provided that in the event that shares of Series E Preferred are not redeemed due to a default in payment by the Corporation or because the corporation does not have sufficient legally available funds, such shares of Series E Preferred shall remain outstanding and shall be entitled to all of the rights and preferences provided herein. d. In the event of a call for redemption if any shares of Series E Preferred, any conversion rights for such Series E Preferred shall terminate as to the shares designated for redemption at the close of business on the fifth (5th) day preceding the Redemption Date, unless default is made in payment of the Redemption Price. 7. NO REISSUANCE OF CONVERTIBLE PREFERRED STOCK. No share or shares of the Convertible Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued. 8. NO PREEMPTIVE RIGHTS. Stockholders shall have no preemptive rights except as granted by the Corporation pursuant to written agreements. V. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Any repeal or modification of this Article V shall be prospective and shall not affect the rights under this Article V in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. 16. 17 VI. For the management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: a. The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by the Board of Directors in the manner provided in the Bylaws. b. The Board of Directors may from time to time make, amend, supplement or repeal the Bylaws; provided, however, that the stockholders may change or repeal any Bylaw adopted by the Board of Directors by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the Common Stock and Convertible Preferred Stock voting together as a single class; and, provided further, that no amendment or supplement to the Bylaws adopted by the Board of Directors shall vary or conflict with any amendment or supplement thus adopted by the stockholders. c. The directors of the Corporation need not be elected by written ballot unless the Bylaws so provide. VII. Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the statutes) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. VIII. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon the stockholders herein are granted subject to this right. IN WITNESS WHEREOF, said Vixel Corporation has caused this Certificate to be signed by Stephen Smith, its Vice President, Finance, this 17th day of February, 1998. VIXEL CORPORATION, a Delaware corporation By: /s/ Stephen Smith -------------------------------- Stephen Smith Vice President, Finance 18 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF VIXEL CORPORATION Vixel Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies as follows: FIRST: The name of the Corporation is Vixel Corporation. SECOND: Paragraphs A and C of Article IV of the Restated Certificate of Incorporation of the Corporation are hereby amended in their entirety to read as follows: A. This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares the corporation is authorized to issue is fifty million three hundred sixty thousand four (50,360,004) shares, (i) thirty million (30,000,000) shares of which shall be Common Stock (the "Common Stock") and (ii) twenty million three hundred sixty thousand four (20,360,004) shares of which shall be Preferred Stock (the "Preferred Stock"). The Common Stock and the Preferred Stock shall have a par value of One-Tenth of One Cent ($.001) per share. C. DESIGNATION OF SERIES AND NUMBER OF AUTHORIZED SHARES. Six series of Preferred Stock are created hereby: (i) five million seven hundred eighty-five thousand five hundred seventy-three (5,785,573) of the authorized shares of Preferred Stock are designated as "Series A Preferred Stock" (the "Series A Preferred"); (ii) five million two hundred forty-three thousand eight hundred and six (5,243,806) of the authorized shares of Preferred Stock are designated as "Series B Preferred Stock" (the "Series B Preferred"); (iii) seven hundred forty-seven thousand one hundred and forty-three (747,143) of the authorized shares of Preferred Stock are designated as "Series C Preferred Stock" (the "Series C Preferred"); (iv) two million (2,000,000) of the authorized shares of Preferred Stock are designated as "Series D Preferred Stock" (the "Series D Preferred"); (v) four million eight hundred twenty-three thousand four hundred eighty-two (4,823,482) of the authorized shares of Preferred Stock are designated as "Series E Preferred Stock" (the "Series E Preferred"); and (vi) one million seven hundred sixty thousand (1,760,000) shares of the authorized shares of Preferred Stock are designated as "Series F Preferred Stock" (the "Series F Preferred"). The Series A Preferred, the Series B Preferred, the Series C Preferred, the Series D Preferred, the Series E Preferred and the Series F Preferred may be collectively referred to herein as the "Convertible Preferred Stock." THIRD: The foregoing amendment of the Restated Certificate of Incorporation of the Corporation has been duly adopted by the directors and stockholders of the Corporation in 19. 19 accordance with the provisions of Sections 141, 228 and 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has executed this Certificate of Amendment on the 20th day of November, 1998. VIXEL CORPORATION By: /s/ James C. T. Linfield -------------------------------- James C. T. Linfield, Assistant Secretary 20. 20 CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF VIXEL CORPORATION Vixel Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), hereby certifies as follows: FIRST: The name of the Corporation is Vixel Corporation. SECOND: Paragraph A of Article IV of the Restated Certificate of Incorporation of the Corporation is hereby amended in its entirety to read as follows: "A. This Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares the corporation is authorized to issue is fifty million three hundred sixty thousand four (50,360,004) shares, (i) thirty million (30,000,000) shares of which shall be Common Stock (the "Common Stock") and (ii) twenty million three hundred sixty thousand four (20,360,004) shares of which shall be Preferred Stock (the "Preferred Stock"). The Common Stock shall have a par value of Fifteen One-Hundredths of One Cent ($.0015) per share and the Preferred Stock shall have a par value of One-Tenth of One Cent ($.001) per share. Upon the filing of this Amendment to the Restated Certificate of Incorporation, every three (3) outstanding shares of Common Stock shall be combined into two (2) shares of Common Stock." THIRD: Paragraph D(4)(j)(iv) of Article IV of the Restated Certificate of Incorporation of the Corporation is hereby amended in its entirety to read as follows: "(iv) "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Corporation or deemed to be issued pursuant to this paragraph 4(j), whether or not subsequently reacquired or retired by the Corporation other than (A) shares of Common Stock issued upon conversion of the Convertible Preferred Stock; (B) shares of Common Stock and/or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) issued or to be issued to employees, officers or directors of, or consultants or advisors to the Corporation or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board; (C) shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the Original Issue Date; and (D) shares of Common Stock, Convertible Preferred Stock, Convertible Securities or other securities of the Corporation issued in connection with the Corporation's merger with Arxcel Technologies, Inc. pursuant to the terms of that certain Agreement and Plan of Merger and Reorganization, dated January 26, 1998, among the Corporation, 21. 21 ARC Acquisition Corp., Arxcel Technologies, Inc. and certain shareholders of Arxcel Technologies, Inc. The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Corporation under this paragraph 4(j), into the aggregate consideration received, or deemed to have been received by the Corporation for such issue under this paragraph 4(j), for such Additional Shares of Common Stock." FOURTH: Paragraph D(4)(l)(i) of Article IV of the Restated Certificate of Incorporation of the Corporation is hereby amended in its entirety to read as follows: "(i) Each share of any series of Convertible Preferred Stock automatically shall be converted into shares of Common Stock, based on the Conversion Rate then in effect with respect to such series of Convertible Preferred Stock, immediately upon: (A) the closing of a firmly underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of Common Stock for the account of the Corporation where (1)(x) the per share price (before underwriters' commissions, expenses and fees) is at least $9.00 per share (after giving effect to the amendment of Article IV, Section A upon the filing of this Amendment to the Restated Certificate of Incorporation) and (y) the gross cash proceeds to the Corporation (before underwriting discounts, commissions and fees) are at least twenty million dollars ($20,000,000) or (2)(x) with respect to the Series A, Series B, Series C, Series D Preferred and Series F, the holders of at least two-thirds of the outstanding shares of the Series A, Series B, Series C, Series D and Series F Preferred (voting together as a single class on an as-converted basis) vote in favor of conversion in connection with such underwritten public offering and (y) in the case of the Series E Preferred, the holders of a majority of the Series E Preferred vote in favor of conversion in connection with such underwritten public offering. Upon any such conversion, any declared and unpaid dividends shall be paid in accordance with the provisions of Section 1." FIFTH: The foregoing amendments to the Restated Certificate of Incorporation of the Corporation have been duly adopted by the directors and stockholders of the Corporation in accordance with the provisions of Sections 141, 228 and 242 of the General Corporation Law of the State of Delaware. 22. 22 IN WITNESS WHEREOF, the Corporation has executed this Certificate of Amendment on the 27th day of August, 1999. VIXEL CORPORATION By: /s/ Kurtis L. Adams ---------------------------- Kurtis L. Adams, Secretary 23. EX-3.2 4 FORM OF CERTIFICATE OF INCORPORATION 1 RESTATED CERTIFICATE OF INCORPORATION OF VIXEL CORPORATION VIXEL CORPORATION, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: 1. The name of the corporation is Vixel Corporation. The date of filing of its original Certificate of Incorporation with the Secretary of State was February 13, 1995. 2. This Restated Certificate of Incorporation has been duly adopted in accordance with Sections 228, 242 and 245 of the Delaware General Corporation Law, the Board of Directors of the corporation having adopted resolutions setting forth the proposed Restated Certificate of Incorporation, declaring its advisability and directing that it be submitted to the stockholders of the corporation for their approval; the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted having consented in writing to the adoption thereof; and written notice of such adoption by the stockholders without a meeting by less than unanimous written consent having been given to those stockholders from whom such written consent was not received. 3. This Restated Certificate of Incorporation restates and integrates and further amends the Certificate of Incorporation of this corporation by restating the text of the original Certificate of Incorporation in full to read as follows: I. The name of this corporation is Vixel Corporation. II. The address of the registered office of the corporation in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and the name of the registered agent of the corporation in the State of Delaware at such address is the Corporation Trust Company. III. The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware. 1. 2 IV. A. This corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the corporation is authorized to issue is sixty-five million (65,000,000) shares. Sixty million (60,000,000) shares shall be Common Stock, each having a par value of fifteen one-hundredths of one cent ($.0015). Five million (5,000,000) shares shall be Preferred Stock, each having a par value of one-tenth of one cent ($.001). B. The Preferred Stock may be issued from time to time in one or more series. The Board of Directors is hereby authorized, by filing a certificate (a "Preferred Stock Designation") pursuant to the Delaware General Corporation Law ("DGCL"), to fix or alter from time to time the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions of any wholly unissued series of Preferred Stock, and to establish from time to time the number of shares constituting any such series or any of them; and to increase or decrease the number of shares of any series subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be decreased in accordance with the foregoing sentence, the shares constituting such decrease shall resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. For the management of the business and for the conduct of the affairs of the corporation, and in further definition, limitation and regulation of the powers of the corporation, of its directors and of its stockholders or any class thereof, as the case may be, it is further provided that: A. 1. BOARD OF DIRECTORS. The management of the business and the conduct of the affairs of the corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed exclusively by one or more resolutions adopted by the Board of Directors. 2. Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, following the closing of the initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "1933 Act"), covering the offer and sale of Common Stock to the public (the "Initial Public Offering"), the directors shall be divided into three classes designated as Class I, Class II and Class III, respectively. Directors shall be assigned to each class in accordance with a resolution or resolutions adopted by the Board of Directors. At the first annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class I directors shall expire and Class I directors shall be elected for a full term of three years. At the second annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class II directors shall expire and Class II directors shall be elected for a full 2. 3 term of three years. At the third annual meeting of stockholders following the closing of the Initial Public Offering, the term of office of the Class III directors shall expire and Class III directors shall be elected for a full term of three years. At each succeeding annual meeting of stockholders, directors shall be elected for a full term of three years to succeed the directors of the class whose terms expire at such annual meeting. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Notwithstanding the foregoing provisions of this section, each director shall serve until his successor is duly elected and qualified or until his death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3. REMOVAL OF DIRECTORS. a. Neither the Board of Directors nor any individual director may be removed without cause. b. Subject to any limitation imposed by law, any individual director or directors may be removed with cause by the holders of a majority of the voting power of the corporation entitled to vote at an election of directors. 4. VACANCIES. a. Subject to the rights of the holders of any series of Preferred Stock, any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other causes and any newly created directorships resulting from any increase in the number of directors, shall, unless the Board of Directors determines by resolution that any such vacancies or newly created directorships shall be filled by the stockholders, except as otherwise provided by law, be filled only by the affirmative vote of a majority of the directors then in office, even though less than a quorum of the Board of Directors, and not by the stockholders. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the director for which the vacancy was created or occurred and until such director's successor shall have been elected and qualified. b. If at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole board (as constituted immediately prior to any such increase), the Delaware Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent (10%) of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in offices as aforesaid, which election shall be governed by Section 211 of the DGCL. 3. 4 B. 1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the affirmative vote of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock of the corporation entitled to vote. The Board of Directors shall also have the power to adopt, amend or repeal Bylaws. 2. The directors of the corporation need not be elected by written ballot unless the Bylaws so provide. 3. No action shall be taken by the stockholders of the corporation except at an annual or special meeting of stockholders called in accordance with the Bylaws or by written consent of stockholders in accordance with the Bylaws prior to the closing of the Initial Public Offering and following the closing of the Initial Public Offering no action shall be taken by the stockholders by written consent. 4. Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the corporation shall be given in the manner provided in the Bylaws of the corporation. VI. A. The liability of the directors for monetary damages shall be eliminated to the fullest extent under applicable law. B. Any repeal or modification of this Article VI shall be prospective and shall not affect the rights under this Article VI in effect at the time of the alleged occurrence of any act or omission to act giving rise to liability or indemnification. VII. A. The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, except as provided in paragraph B. of this Article VII, and all rights conferred upon the stockholders herein are granted subject to this reservation. B. Notwithstanding any other provision of this Certificate of Incorporation or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any particular class or series of the voting stock required by law, this Certificate of Incorporation or any Preferred Stock Designation, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then-outstanding shares of the voting stock, voting together as a single class, shall be required to alter, amend or repeal Articles V, VI and VII. 4. 5 IN WITNESS WHEREOF, this Certificate has been subscribed this ____ day of __________, 1999 by the undersigned who affirms that the statements made herein are true and correct. By: ------------------------------- Name: ------------------------------ Title: ---------------------------- 5. EX-4.1 5 FORM OF REGISTRANT'S COMMON STOCK CERTIFICATE 1 EXHIBIT 4.1 LOGO TO COME VIXEL CORPORATION INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE CUSIP 928552 10 8 SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT is the owner of FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $.0015 PAR VALUE, OF VIXEL CORPORATION (the "Corporation") transferable on the books of the Corporation by the holder hereof in person or by duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate and the shares represented hereby are subject to all of the terms and conditions contained in the Amended and Restated Articles of Incorporation and the Amended and Restated Bylaws of the Corporation and all amendments thereto to all of which the holder hereof assents. This Certificate is not valid unless countersigned and registered by the Transfer Agent and Registrar. Dated: President and Chief Executive Officer Chief Financial Officer, Vice President of Finance, Secretary and Treasurer COUNTERSIGNED AND REGISTERED: AMERICAN STOCK TRANSFER & TRUST COMPANY (NEW YORK, NY) TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE 2 VIXEL CORPORATION The Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Any such request should be directed to the corporation, attention of its Secretary at the Corporation's principal executive office. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - TEN ENT - JT TEN - as tenants in common as tenants by the entireties as joint tenants with right of survivorship and not as tenants in common UNIF GIFT MIN ACT- Custodian (Minor) (Cust) under Uniform Gifts to Minors Act (State) For Value Received, hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE) Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said stock on the books of the within named Company with full power of substitution in the premises. Dated NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH 3 MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. KEEP THIS CERTIFICATE IN A SAFE PLACE. IF IT IS LOST, STOLEN, MUTILATED OR DESTROYED, THE CORPORATION WILL REQUIRE A BOND OF INDEMNITY AS A CONDITION TO THE ISSUANCE OF A REPLACEMENT CERTIFICATE. EX-4.12 6 WARRANT TO PURCHASE COMMON STOCK 1 EXHIBIT 4.12 NO. CW-1 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS. WARRANT TO PURCHASE COMMON STOCK OF VIXEL CORPORATION (VOID AFTER SEPTEMBER 30, 2002) This certifies that SUN MICROSYSTEMS, INC. or its assigns (the "Holder"), for value received, is entitled to purchase from VIXEL CORPORATION, a Delaware corporation (the "Company"), having a place of business at 11911 North Creek Parkway S., Bothell, Washington 98011, a maximum of 150,000 fully paid and nonassessable shares of the Company's Common Stock ("Common Stock") for cash at a price of Eleven Dollars ($11.00) per share (the "Stock Purchase Price") at any time or from time to time up to and including 5:00 p.m. (Pacific time) on September 30, 2002 (the "Expiration Date"), upon surrender to the Company at its principal office (or at such other location as the Company may advise the Holder in writing) of this Warrant properly endorsed with the Form of Subscription attached hereto duly filled in and signed and, if applicable, upon payment in cash or by check of the aggregate Stock Purchase Price for the number of shares for which this Warrant is being exercised determined in accordance with the provisions hereof. The Stock Purchase Price and the number of shares purchasable hereunder are subject to adjustment as provided in Section 3 of this Warrant. This Warrant is subject to the following terms and conditions: 1. EXERCISE; ISSUANCE OF CERTIFICATES; PAYMENT FOR SHARES. 1.1 GENERAL. This Warrant is exercisable at the option of the holder of record hereof, at any time or from time to time, up to the Expiration Date for all or any part of the shares of Common Stock (but not for a fraction of a share) which may be purchased hereunder. The Company agrees that the shares of Common Stock purchased under this Warrant shall be and are deemed to be issued to the Holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered, properly endorsed, the completed, executed Form of Subscription delivered and payment made for such shares. Certificates for the shares of Common Stock so purchased, together with any other securities or property to which the Holder hereof is entitled upon such exercise, shall be delivered to the Holder hereof by the Company at the Company's expense within three (3) business days after the rights represented by this Warrant have been so exercised. In case of a purchase of less than all the shares which may be purchased under this Warrant, the Company shall cancel this Warrant and execute and deliver a new Warrant or Warrants of like tenor for the balance of the shares purchasable under the Warrant surrendered upon such purchase to the Holder hereof 2 within a reasonable time. Each stock certificate so delivered shall be in such denominations of Common Stock as may be requested by the Holder hereof and shall be registered in the name of such Holder. 1.2 NET ISSUE EXERCISE. Notwithstanding any provisions herein to the contrary, if the fair market value of one share of the Company's Common Stock is greater than the Stock Purchase Price (at the date of calculation as set forth below), in lieu of exercising this Warrant for cash, the Holder may elect to receive shares equal to the value (as determined below) of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company together with the properly endorsed Form of Subscription and notice of such election in which event the Company shall issue to the Holder a number of shares of Common Stock computed using the following formula: X = Y (A-B) ------ A Where X = the number of shares of Common Stock to be issued to the Holder Y = the number of shares of Common Stock purchasable under the Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being canceled (at the date of such calculation) A = the fair market value of one share of the Company's Common Stock (at the date of such calculation) B = Stock Purchase Price (as adjusted to the date of such calculation) For purposes of the above calculation, the fair market value of one share of Common Stock shall be determined by the Company's Board of Directors in good faith; provided, however, that in the event the Company makes an initial public offering of its Common Stock the fair market value per share shall be: (i) if the Warrant is being converted in connection with and contingent upon a public offering of the Company's securities, and if the Company's registration statement relating to such public offering has been declared effective by the U.S. Securities and Exchange Commission, then the fair market value of the Common Stock shall be the initial "Price to Public" specified in the final prospectus with respect to such offering; or (ii) if the Warrant is not being converted in connection with and contingent upon a public offering of the Company's securities, then as follows: (x) if traded on a securities exchange or the Nasdaq National Market, the fair market value of the Common Stock shall be deemed to be the average of the closing or last reported sale prices of the Common Stock on such exchange or market over the 30-day period ending five business days prior to the date of calculation, or (y) if otherwise traded in an over-the-counter market, the fair market value of the Common Stock shall be deemed to be the average of the reported closing bid and ask prices of the Common Stock over the 30-day period ending five business days prior to the date of calculation. 2. SHARES TO BE FULLY PAID; RESERVATION OF SHARES. The Company covenants and agrees that all shares of Common Stock which may be issued upon the exercise of the rights 2. 3 represented by this Warrant will, upon issuance, be duly authorized, validly issued, fully paid and nonassessable and free from all preemptive rights of any shareholder and free of all taxes, liens and charges with respect to the issue thereof. The Company further covenants and agrees that, during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved, for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of authorized but unissued Common Stock, or other securities and property, when and as required to provide for the exercise of the rights represented by this Warrant. The Company will take all such action as may be necessary to assure that such shares of Common Stock may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of any domestic securities exchange upon which the Common Stock may be listed; provided, however, that the Company shall not be required to effect a registration under Federal or State securities laws with respect to such exercise. The Company will not take any action which would result in any adjustment of the Stock Purchase Price (as set forth in Section 3 hereof) if the total number of shares of Common Stock issuable after such action upon exercise of all outstanding warrants, together with all shares of Common Stock then outstanding and all shares of Common Stock then issuable upon exercise of all options and upon the conversion of all convertible securities then outstanding, would exceed the total number of shares of Common Stock then authorized by the Company's Restated Certificate of Incorporation. 3. ADJUSTMENT OF STOCK PURCHASE PRICE AND NUMBER OF SHARES. The Stock Purchase Price and the number of shares purchasable upon the exercise of this Warrant shall be subject to adjustment from time to time upon the occurrence of certain events described in this Section 3. Upon each adjustment of the Stock Purchase Price, the Holder of this Warrant shall thereafter be entitled to purchase, at the Stock Purchase Price resulting from such adjustment, the number of shares obtained by multiplying the Stock Purchase Price in effect immediately prior to such adjustment by the number of shares purchasable pursuant hereto immediately prior to such adjustment, and dividing the product thereof by the Stock Purchase Price resulting from such adjustment. 3.1 SUBDIVISION OR COMBINATION OF STOCK. In case the Company shall at any time subdivide its outstanding shares of Common Stock into a greater number of shares, the Stock Purchase Price in effect immediately prior to such subdivision shall be proportionately reduced, and conversely, in case the outstanding shares of Common Stock of the Company shall be combined into a smaller number of shares, the Stock Purchase Price in effect immediately prior to such combination shall be proportionately increased. 3.2 DIVIDENDS IN COMMON STOCK, OTHER STOCK, PROPERTY, RECLASSIFICATION. If at any time or from time to time the Holders of Common Stock (or any shares of stock or other securities at the time receivable upon the exercise of this Warrant) shall have received or become entitled to receive, without payment therefor, (a) Common Stock or any shares of stock or other securities which are at any time directly or indirectly convertible into or exchangeable for Common Stock, or any rights or options to subscribe for, purchase or otherwise acquire any of the foregoing by way of dividend or other distribution, 3. 4 (b) any cash paid or payable otherwise than as a cash dividend, or (c) Common Stock or additional stock or other securities or property (including cash) by way of spinoff, split-up, reclassification, combination of shares or similar corporate rearrangement, (other than shares of Common Stock issued as a stock split or adjustments in respect of which shall be covered by the terms of Section 3.1 above), then and in each such case, the Holder hereof shall, upon the exercise of this Warrant, be entitled to receive, in addition to the number of shares of Common Stock receivable thereupon, and without payment of any additional consideration therefor, the amount of stock and other securities and property (including cash in the cases referred to in clause (b) above and this clause (c)) which such Holder would hold on the date of such exercise had he been the holder of record of such Common Stock as of the date on which holders of Common Stock received or became entitled to receive such shares or all other additional stock and other securities and property. 3.3 REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If any recapitalization, reclassification or reorganization of the capital stock of the Company, or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets or other transaction shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, or other assets or property (an "Organic Change"), then, as a condition of such Organic Change, lawful and adequate provisions shall be made by the Company whereby the Holder hereof shall thereafter have the right to purchase and receive (in lieu of the shares of the Common Stock of the Company immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby) such shares of stock, securities or other assets or property as may be issued or payable with respect to or in exchange for a number of outstanding shares of such Common Stock equal to the number of shares of such stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby. In the event of any Organic Change, appropriate provision shall be made by the Company with respect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof (including, without limitation, provisions for adjustments of the Stock Purchase Price and of the number of shares purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. 3.4 CERTAIN EVENTS. If any change in the outstanding Common Stock of the Company or any other event occurs as to which the other provisions of this Section 3 are not strictly applicable or if strictly applicable would not fairly protect the purchase rights of the Holder of the Warrant in accordance with such provisions, then the Board of Directors of the Company shall make an adjustment in the number and class of shares available under the Warrant, the Stock Purchase Price or the application of such provisions, so as to protect such purchase rights as aforesaid. The adjustment shall be such as will give the Holder of the Warrant upon exercise for the same aggregate Stock Purchase Price the total number, class and kind of shares as the Holder would have owned had the Warrant been exercised prior to the event and had the Holder continued to hold such shares until after the event requiring adjustment. 3.5 NOTICES OF CHANGE. 4. 5 (a) Immediately upon any adjustment in the number or class of shares subject to this Warrant and of the Stock Purchase Price, the Company shall give written notice thereof to the Holder, setting forth in reasonable detail and certifying the calculation of such adjustment. (b) The Company shall give written notice to the Holder at least 10 business days prior to the date on which the Company closes its books or takes a record for determining rights to receive any dividends or distributions. (c) The Company shall also give written notice to the Holder at least 10 days prior to the date on which an Organic Change or an initial public offering shall take place. (d) The Company shall give written notice to the Holder at least 10 days prior to the date it closes its books or takes a record with respect to stockholders entitled to vote at any annual or special meeting of stockholders. 4. PRICE-BASED ANTI-DILUTION ADJUSTMENTS. 4.1 If at any time or from time to time after the date hereof, the Company issues or sells, or is deemed by the express provisions of this Section 4 to have issued or sold, Additional Shares of Common Stock (as hereinafter defined), other than as a dividend or other distribution or combination on any class of stock as provided in Section 3 of this Warrant, for an Effective Price (as hereinafter defined) less than the then-effective Stock Purchase Price, then and in each such case the then-existing Stock Purchase Price shall be reduced, as of the opening of business on the date of such issue or sale, to a price determined by multiplying such Stock Purchase Price by a fraction (i) the numerator of which shall be (A) the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale plus (B) the number of shares of Common Stock which the aggregate consideration received (as defined below) by the Company for the total number of Additional Shares of Common Stock so issued would purchase at such Stock Purchase Price and (ii) the denominator of which shall be the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale plus the total number of Additional Shares of Common Stock so issued. For the purposes of the preceding sentence, the number of shares of Common Stock deemed to be outstanding as of a given date shall be the sum of (A) the number of shares of Common Stock actually outstanding and (B) the number of shares of Common Stock which could be obtained through the exercise or conversion of all other rights, options, warrants and convertible securities on the day immediately preceding the given date. 4.2 For the purpose of making any adjustment required under this Section 4, the consideration received by the Company for any issue or sale of securities shall (i) to the extent it consists of cash, be computed at the net amount of cash received by the Company after deduction of any underwriting or similar commissions, compensation or concessions paid or allowed by the Company in connection with such issue or sale but without deduction of any expenses payable by the Company, (ii) to the extent it consists of property other than cash, be computed at the fair value of that property as determined in good faith by the Board 5. 6 of Directors and (iii) if Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Company for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board of Directors to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. 4.3 For the purpose of the adjustment required under this Section 4, if the Company issues or sells any rights or options for the purchase of, or stock or other securities convertible into, Additional Shares of Common Stock (such convertible stock or securities being herein referred to as "Convertible Securities") and if the Effective Price of such Additional Shares of Common Stock is less than the Stock Purchase Price, in each case the Company shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Company for the issuance of such rights or options or Convertible Securities, plus, in the case of such rights or options, the minimum amounts of consideration, if any, payable to the Company upon the exercise of such rights or options, plus, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion thereof; provided, however, that if in the case of Convertible Securities the minimum amounts of such consideration cannot be ascertained, but are a function of antidilution or similar protective clauses, the Company shall be deemed to have received the minimum amounts of consideration without reference to such clauses; provided, further, that if the minimum amount of consideration payable to the Company upon the exercise or conversion of rights, options or Convertible Securities is reduced over time or on the occurrence or non-occurrence of specified events other than by reason of antidilution adjustments, the Effective Price shall be recalculated using the figure to which such minimum amount of consideration is reduced; provided, further, that if the minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities is subsequently increased, the Effective Price shall be again recalculated using the increased minimum amount of consideration payable to the Company upon the exercise or conversion of such rights, options or Convertible Securities. No further adjustment of any Conversion Price, as adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights or options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, any Conversion Price as adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the Conversion Price which would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration 6. 7 actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Company (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities. 4.4 "Additional Shares of Common Stock" shall mean all shares of Common Stock or any obligation, any shares of stock or other security of the Company convertible into or exchangeable for Common Stock issued by the Company or deemed to be issued pursuant to this Section 4, whether or not subsequently reacquired or retired by the Company other than (a) shares of Common Stock and/or options, warrants or other Common Stock purchase rights, and the Common Stock issued pursuant to such options, warrants or other rights (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like) after the date hereof to employees, officers or directors of, or consultants or advisors to, the Company or any subsidiary pursuant to stock purchase or stock option plans or other arrangements that are approved by the Board of Directors of the Company; and (b) shares of Common Stock issued pursuant to the exercise of options, warrants or convertible securities outstanding as of the date hereof, including shares of Common Stock issued upon exercise of this Warrant. The "Effective Price" of Additional Shares of Common Stock shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Company under this Section 4, into the aggregate consideration received, or deemed to have been received by the Company 5. REPRESENTATIONS AND WARRANTIES OF THE HOLDER. 5.1 PURCHASE FOR OWN ACCOUNT. The Holder represents that it is acquiring the Warrant and the equity securities issuable upon exercise of the Warrant (collectively, the "Securities") solely for its own account and beneficial interest for investment and not for sale or with a view to distribution of the Securities or any part thereof, has no present intention of selling (in connection with a distribution or otherwise), granting any participation in, or otherwise distributing the same, and does not presently have reason to anticipate a change in such intention. 5.2 INVESTOR STATUS. The Holder is a "qualified institutional buyer" as defined in Rule 144A under the Securities Act and an "accredited investor" as defined in Rule 501 under the Securities Act. 6. ISSUE TAX. The issuance of certificates for shares of Common Stock upon the exercise of the Warrant shall be made without charge to the Holder of the Warrant for any issue tax (other than any applicable income taxes) in respect thereof; provided, however, that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any certificate in a name other than that of the then Holder of the Warrant being exercised. 7. CLOSING OF BOOKS. The Company will at no time close its transfer books against the transfer of any warrant or of any shares of Common Stock issued or issuable upon the 7. 8 exercise of any warrant in any manner which interferes with the timely exercise of this Warrant. 8. NO VOTING OR DIVIDEND RIGHTS; LIMITATION OF LIABILITY. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a shareholder of the Company or any other matters or any rights whatsoever as a shareholder of the Company. No dividends or interest shall be payable or accrued in respect of this Warrant or the interest represented hereby or the shares purchasable hereunder until, and only to the extent that, this Warrant shall have been exercised. No provisions hereof, in the absence of affirmative action by the holder to purchase shares of Common Stock, and no mere enumeration herein of the rights or privileges of the holder hereof, shall give rise to any liability of such Holder for the Stock Purchase Price or as a shareholder of the Company, whether such liability is asserted by the Company or by its creditors. 9. WARRANTS TRANSFERABLE. Subject to compliance with applicable federal and state securities laws, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the holder hereof (except for transfer taxes), upon surrender of this Warrant properly endorsed. Each taker and holder of this Warrant, by taking or holding the same, consents and agrees that this Warrant, when endorsed in blank, shall be deemed negotiable, and that the holder hereof, when this Warrant shall have been so endorsed, may be treated by the Company, at the Company's option, and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to the transfer hereof on the books of the Company any notice to the contrary notwithstanding; but until such transfer on such books, the Company may treat the registered owner hereof as the owner for all purposes. Notwithstanding the foregoing, prior to completion of the Company's initial public offering of Common Stock registered under the Securities Act ("IPO"), the Company shall have the right to refuse to transfer any portion of this Warrant to any person who directly competes with the Company. 10. RIGHTS AND OBLIGATIONS SURVIVE EXERCISE OF WARRANT. The rights and obligations of the Company, of the holder of this Warrant and of the holder of shares of Common Stock issued upon exercise of this Warrant, shall survive the exercise of this Warrant. 11. MODIFICATION AND WAIVER. This Warrant and any provision hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of the same is sought. 12. NOTICES. Any notice, request or other document required or permitted to be given or delivered to the holder hereof or the Company shall be delivered or shall be sent by certified mail, postage prepaid, to each such holder at its address as shown on the books of the Company or to the Company at the address indicated therefor in the first paragraph of this Warrant or such other address as either may from time to time provide to the other. 13. BINDING EFFECT ON SUCCESSORS. This Warrant shall be binding upon any corporation succeeding the Company by merger, consolidation or acquisition of all or substantially all of the Company's assets. All of the obligations of the Company relating to the Common Stock issuable upon the exercise of this Warrant shall survive the exercise and 8. 9 termination of this Warrant. All of the covenants and agreements of the Company shall inure to the benefit of the successors and assigns of the holder hereof. 14. DESCRIPTIVE HEADINGS AND GOVERNING LAW. The description headings of the several sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. This Warrant shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the laws of the State of Washington. 15. LOST WARRANTS. The Company represents and warrants to the Holder hereof that upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction, or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt of an indemnity reasonably satisfactory to the Company, or in the case of any such mutilation upon surrender and cancellation of such Warrant, the Company, at its expense, will make and deliver a new Warrant, of like tenor, in lieu of the lost, stolen, destroyed or mutilated Warrant. 16. FRACTIONAL SHARES. No fractional shares shall be issued upon exercise of this Warrant. The Company shall, in lieu of issuing any fractional share, pay the holder entitled to such fraction a sum in cash equal to such fraction multiplied by the then effective Stock Purchase Price. 17. INVESTOR RIGHTS AGREEMENT. The Company hereby agrees to use its best efforts to obtain the agreement of the holders of a majority of its Registrable Securities (as defined below) under the Company's Amended and Restated Investors' Rights Agreement, dated February 17, 1998, as amended, that the shares of Common Stock issuable upon exercise of this Warrant shall be deemed "Registrable Securities" thereunder, and the Holder shall be deemed to be a "Holder" under such agreement, entitled to the rights and benefits and subject to the duties and obligations of a "Holder" thereunder. Holder shall execute a counterpart signature page to such agreement at the request of the Company. 18. FINANCIAL INFORMATION. Prior to completion of the Company's IPO, the Company agrees to provide quarterly unaudited and annual audited financial statements to the Holder, at the same time it provides such information to the other investors that are entitled to receive such information. 19. LOCK-UP AGREEMENT. Holder agrees to sign a "lock-up" agreement in the form attached as Exhibit B. The Company represents and warrants that each of its officers, directors and 5% or greater stockholders have signed lock-up agreements in the same form. The Company agrees that if the underwriters in its IPO release any of the shares covered by such lock-up agreements, it will release Holder's shares from the lock-up agreement proportionately. 20. COMPANY REPRESENTATION. The Company acknowledges that it has provided the Holder with the Company's Registration Statement on Form S-1, dated June 23, 1999, as amended on August 16, 1999, and represents that such Registration Statement, as amended, does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. 9. 10 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its officers, thereunto duly authorized this 31st day of August, 1999. VIXEL CORPORATION a Delaware corporation /s/ Kurtis L. Adams -------------------------------- By: Kurtis L. Adams Title: Chief Financial Officer 11 EXHIBIT A SUBSCRIPTION FORM Date: _______________, ____ VIXEL CORPORATION 11911 NORTH CREEK PARKWAY S. BOTHELL, WASHINGTON 98011 Attn: Chief Financial Officer Ladies and Gentlemen: [ ] The undersigned hereby elects to exercise the warrant issued to it by Vixel Corporation (the "Company") and dated August 31, 1999 Warrant No. CW-___ (the "Warrant") and to purchase thereunder _____________ shares of the Common Stock of the Company (the "Shares") at a purchase price of Eleven Dollars ($11.00) per Share or an aggregate purchase price of ___________________ Dollars ($__________) (the "Purchase Price"). Pursuant to the terms of the Warrant the undersigned has delivered the Purchase Price herewith in full in cash or by certified check or wire transfer. [ ] The undersigned hereby elects to convert _____________ percent (____%) of the value of the Warrant pursuant to the provisions of Section 1.2 of the Warrant. Very truly yours, By: Title: 12 EXHIBIT B LOCK-UP AGREEMENT BancBoston Robertson Stephens Inc. Bear, Stearns & Co. Inc. Needham & Company c/o BancBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, California 94104 RE: Vixel Corporation (the "Company") Ladies & Gentlemen: The undersigned is an owner of record or beneficially of certain shares of Common Stock of the Company ("Common Stock") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the representatives (the "Representatives") of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or grant any rights with respect to (collectively, a "Disposition") any shares of Common Stock, any options or warrants to purchase any shares of Common Stock or any securities convertible into or exchangeable for shares of Common Stock (collectively, "Securities") now owned or hereafter acquired directly by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, for a period commencing on the date hereof and continuing to a date which is 180 days after the registration statement relating to the Offering (the "Registration Statement") is declared effective by the Securities and Exchange Commission (the "Lock-up Period"). This restriction will not apply to (i) a bona fide gift or gifts, provided the donee or donees thereof agree in writing to be bound by this restriction, (ii) a distribution to partners or shareholders of the undersigned, provided that the distributees thereof agree in writing to be bound by the terms of this restriction, (iii) dispositions of Securities acquired on the open market or (iv) dispositions made with the prior written consent of BancBoston Robertson Stephens Inc. The undersigned agrees that the foregoing restriction precludes the holder of the Securities from engaging in any hedging or other transaction which is designed to or reasonably expected to lead 13 to or result in a Disposition of Securities during the Lock-up Period, even if such Securities would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include, without limitation, any short sale (whether or not against the box) or any purchase, sale or grant of any right (including, without limitation, any put or call option) with respect to any Securities or with respect to any security (other than a broad-based market basket or index) that includes, relates to or derives any significant part of its value from Securities. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of Securities held by the undersigned except in compliance with the foregoing restrictions. Notwithstanding anything herein to the contrary, the foregoing restrictions do not prohibit the sale of shares of Common Stock by the undersigned to the underwriters in the Offering, if the Representatives, in their sole discretion, agree to the inclusion of shares of Common Stock in the Offering. BancBoston Robertson Stephens Inc., acting alone and in its sole discretion, may waive any provisions of this Lock-Up Agreement without notice to any third party. This agreement is subject to the following: (i) the Company has represented to the undersigned that each of the Company's officers, directors and 5% or greater stockholders have signed lock-up agreements in the same form as this agreement, and (ii) if the Representatives release any of the shares covered by such lock-up agreements, a proportionate amount of the Common Stock beneficially owned by the undersigned will be released from this lock-up agreement.. This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives and assigns of the undersigned. In the event that the Registration Statement shall not have been declared effective on or before October 31, 1999, this Lock-Up Agreement shall be of no further force or effect. Dated: Printed Name of Holder By: Signature Printed Name of Person Signing (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity) 13. EX-5.1 7 OPINION OF COOLEY GODWARD LLP 1 EXHIBIT 5.1 [COOLEY GODWARD LLP LETTERHEAD] August 30, 1999 Vixel Corporation 11911 Northcreek Parkway South Bothell, Washington 98011 Ladies and Gentlemen: You have requested our opinion with respect to certain matters in connection with the filing by Vixel Corporation (the "Company") of a Registration Statement on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission (the "Commission") covering an underwritten public offering of up to four million two hundred fifty five thousand (4,255,000) shares of Common Stock, including five hundred fifty five thousand (555,000) shares of Common Stock which the underwriters have the option to purchase to cover over-allotments (collectively the "Common Stock"). In connection with this opinion, we have (i) examined and relied upon the Registration Statement and related Prospectus, the Company's Restated Certificate of Incorporation and Bylaws, as currently in effect, and the originals or copies certified to our satisfaction of such records, documents, certificates, memoranda and other instruments as in our judgment are necessary or appropriate to enable us to render the opinion expressed below; and (ii) assumed that the Restated Certificate of Incorporation, as set forth in Exhibit 3.2 of the Registration Statement, shall have been duly approved and filed with the office of the Delaware Secretary of State. On the basis of the foregoing, and in reliance thereon, we are of the opinion that the Common Stock, when sold and issued in accordance with the Registration Statement and related Prospectus, will be validly issued, fully paid and non-assessable. We consent to the reference to our firm under the caption "Legal Matters" in the Prospectus included on the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement. Very truly yours, COOLEY GODWARD LLP By: /s/ Gregory B. Abbott --------------------------- Gregory B. Abbott EX-10.2 8 AMENDED AND RESTATED 1995 STOCK OPTION PLAN 1 EXHIBIT 10.2__ VIXEL CORPORATION 1995 STOCK OPTION PLAN ADOPTED FEBRUARY 13, 1995 AS AMENDED THROUGH APRIL 21, 1999 1. PURPOSES. (a) The purpose of the Plan is to provide a means by which selected Employees and Directors and Consultants to the Company, and its Affiliates, may be given an opportunity to benefit from increases in value of the stock of the Company through the granting of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options and (iii) stock bonuses. (b) The Company, by means of the Plan, seeks to retain the services of persons who are now Employees or Directors or Consultants to the Company or its Affiliates, to secure and retain the services of new Employees, Directors and Consultants, and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. (c) The Company intends that the Stock Awards issued under the Plan shall, in the discretion of the Board or any Committee to which responsibility for administration of the Plan has been delegated pursuant to subsection 3(c), be either (i) Options granted pursuant to Section 6 hereof, including Incentive Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses granted pursuant to Section 7 hereof. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and in such form as issued pursuant to Section 6, and a separate certificate or certificates will be issued for shares purchased on exercise of each type of Option. 2. DEFINITIONS. (a) "AFFILIATE" means any parent corporation or subsidiary corporation, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f) respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a Committee appointed by the Board in accordance with subsection 3(c) of the Plan. (e) "COMPANY" means Vixel Corporation, a Delaware corporation. (f) "CONSULTANT" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting services and who is compensated for such services, provided 1. 2 that the term "Consultant" shall not include Directors who are paid only a director's fee by the Company or who are not compensated by the Company for their services as Directors. (g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the employment or relationship as a Director or Consultant is not interrupted or terminated. The Board, in its sole discretion, may determine whether Continuous Status as an Employee, Director or Consultant shall be considered interrupted in the case of: (i) any leave of absence approved by the Board, including sick leave, military leave, or any other personal leave; or (ii) transfers between locations of the Company or between the Company, Affiliates or their successors. (h) "COVERED EMPLOYEE" means the Chief Executive Officer and the four (4) other highest compensated officers of the Company. (i) "DIRECTOR" means a member of the Board. (j) "DISINTERESTED PERSON" means a Director: who either (i) was not during the one year prior to service as an administrator of the Plan granted or awarded equity securities pursuant to the Plan or any other plan of the Company or any of its affiliates entitling the participants therein to acquire equity securities of the Company or any of its affiliates except as permitted by Rule 16b-3(c)(2)(i); or (ii) is otherwise considered to be a "disinterested person" in accordance with Rule 16b-3(c)(2)(i), or any other applicable rules, regulations or interpretations of the Securities and Exchange Commission. (k) "EMPLOYEE" means any person, including Officers and Directors, employed by the Company or any Affiliate of the Company. Neither service as a Director nor payment of a director's fee by the Company shall be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means the value of the Common Stock of the Company as determined in good faith by the Board. (n) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. (o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (p) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (q) "OPTION" means a stock option granted pursuant to the Plan. (r) "OPTION AGREEMENT" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. 2. 3 (s) "OPTIONEE" means an Employee, Director or Consultant who holds an outstanding Option. (t) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (as defined in the Treasury regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an affiliated corporation receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an affiliated corporation at any time, and is not currently receiving compensation for personal services in any capacity other than as a Director, or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (u) "PLAN" means this 1995 Stock Option Plan. (v) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (w) "STOCK AWARD" means any right granted under the Plan, including any Option and any stock bonus. (x) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. 3. ADMINISTRATION. (a) The Plan shall be administered by the Board unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). (b) The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; whether a Stock Award will be an Incentive Stock Option, a Nonstatutory Stock Option, a stock bonus, a Stock Appreciation Right, or a combination of the foregoing; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive stock pursuant to a Stock Award. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan as provided in Section 14. 3. 4 (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company. (c) The Board may delegate administration of the Plan to a committee composed of not fewer than two (2) members (the "Committee"), all of the members of which Committee shall be Disinterested Persons and may also be, in the discretion of the Board, Outside Directors. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board (and references in this Plan to the Board shall thereafter be to the Committee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. Additionally, prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, and notwithstanding anything to the contrary contained herein, the Board may delegate administration of the Plan to any person or persons and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. Notwithstanding anything in this Section 3 to the contrary, the Board or the Committee may delegate to a committee of one or more members of the Board the authority to grant Stock Awards to eligible persons who (1) are not then subject to Section 16 of the Exchange Act and/or (2) are either (i) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award, or (ii) not persons with respect to whom the Company wishes to avoid the application of Section 162(m) of the Code. (d) Any requirement that an administrator of the Plan be a Disinterested Person shall not apply (i) prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, or (ii) if the Board or the Committee expressly declares that such requirement shall not apply. Any Disinterested Person shall otherwise comply with the requirements of Rule 16b-3. 4. SHARES SUBJECT TO THE PLAN. (a) Subject to the provisions of Section 13 relating to adjustments upon changes in stock, the stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate 9,200,000 shares of the Company's Common Stock. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. Shares subject to Stock Appreciation Rights exercised in accordance with Section 8 of the Plan shall not be available for subsequent issuance under the Plan. (b) The stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. ELIGIBILITY. (a) Incentive Stock Options and Stock Appreciation Rights appurtenant thereto may be granted only to Employees. Stock Awards other than Incentive Stock Options and Stock 4. 5 Appreciation Rights appurtenant thereto may be granted only to Employees, Directors or Consultants. (b) A Director shall in no event be eligible for the benefits of the Plan unless at the time discretion is exercised in the selection of the Director as a person to whom Stock Awards may be granted, or in the determination of the number of shares which may be covered by Stock Awards granted to the Director: (i) the Board has delegated its discretionary authority over the Plan to a Committee which consists solely of Disinterested Persons; or (ii) the Plan otherwise complies with the requirements of Rule 16b-3. The Board shall otherwise comply with the requirements of Rule 16b-3. This subsection 5(b) shall not apply (i) prior to the date of the first registration of an equity security of the Company under Section 12 of the Exchange Act, or (ii) if the Board or Committee expressly declares that it shall not apply. (c) No person shall be eligible for the grant of an Option if, at the time of grant, such person owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of such stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. 6. OPTION PROVISIONS. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. No Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) PRICE. The exercise price of each Incentive Stock Option shall be not less than on hundred percent (100%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. The exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the stock subject to the Option on the date the Option is granted. (c) CONSIDERATION. The purchase price of stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised, or (ii) at the discretion of the Board or the Committee, either at the time of the grant or exercise of the Option, (A) by delivery to the Company of other Common Stock of the Company, (B) according to a deferred payment or other arrangement (which may include, without limiting the generality of the foregoing, the use of other Common Stock of the Company) with the person to whom the Option is granted or to whom the Option is transferred pursuant to subsection 6(d), or (C) in any other form of legal consideration that may be acceptable to the Board. 5. 6 In the case of any deferred payment arrangement, interest shall be payable at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (d) TRANSFERABILITY. An Option shall not be transferable except by will or by the laws of descent and distribution, and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person. A Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 and any administrative interpretations or pronouncements thereunder (a "QDRO"), and shall be exercisable during the lifetime of the person to whom the Option is granted only by such person or any transferee pursuant to a QDRO. Notwithstanding the foregoing, the person to whom the Option is granted may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionee, shall thereafter be entitled to exercise the Option. (e) VESTING. The total number of shares of stock subject to an Option may, but need not, be allotted in periodic installments (which may, but need not, be equal). The Option Agreement may provide that from time to time during each of such installment periods, the Option may become exercisable ("vest") with respect to some or all of the shares allotted to that period, and may be exercised with respect to some or all of the shares allotted to such period and/or any prior period as to which the Option became vested but was not fully exercised. The Option may be subject to such other terms and conditions on the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary but in each case will provide for vesting of at least twenty percent (20%) per year of the total number of shares subject to the Option. The provisions of this subsection 6(e) are subject to any Option provisions governing the minimum number of shares as to which an Option may be exercised. (f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates (other than upon the Optionee's death or disability), the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months after the termination of the Optionee's Continuous Status as an Employee, Director or Consultant (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionee does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status as an Employee, Director or Consultant terminates as a result of the Optionee's disability, the Optionee may exercise his or her Option (to the extent that the Optionee was entitled to exercise it at the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in 6. 7 the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, at the date of termination, the Optionee is not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after termination, the Optionee does not exercise his or her Option within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (h) DEATH OF OPTIONEE. In the event of the death of an Optionee during, or within a period specified in the Option after the termination of, the Optionee's Continuous Status as an Employee, Director or Consultant, the Option may be exercised (to the extent the Optionee was entitled to exercise the Option at the date of death) by the Optionee's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionee's death pursuant to subsection 6(d), but only within the period ending on the earlier of (i) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of such Option as set forth in the Option Agreement. If, at the time of death, the Optionee was not entitled to exercise his or her entire Option, the shares covered by the unexercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option shall revert to and again become available for issuance under the Plan. (i) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionee may elect at any time while an Employee, Director or Consultant to exercise the Option as to any part or all of the shares subject to the Option prior to the full vesting of the Option. Any unvested shares so purchased may be subject to a repurchase right in favor of the Company or to any other restriction the Board determines to be appropriate. 7. TERMS OF STOCK BONUSES. Each stock bonus shall be in such form and shall contain such terms and conditions as the Board or the Committee shall deem appropriate. The terms and conditions of stock bonus may change from time to time, and the terms and conditions of separate agreements need not be identical, but each stock bonus shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions as appropriate: (a) PURCHASE PRICE. The purchase price shall be such amount as the Board or Committee shall determine and designate. Notwithstanding the foregoing, the Board or the Committee may determine that eligible participants in the Plan may be awarded stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (b) TRANSFERABILITY. No rights under a stock bonus shall be transferable except by will or the laws of descent and distribution or pursuant to a qualified domestic relations order satisfying the requirements of Rule 16b-3 and any administrative interpretations or 7. 8 pronouncements thereunder, so long as stock awarded under such agreement remains subject to the terms of the agreement. (c) CONSIDERATION. The purchase price of stock acquired pursuant to a stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board or the Committee, according to a deferred payment or other arrangement with the person to whom the stock is sold; or (iii) in any other form of legal consideration that may be acceptable to the Board or the Committee in their discretion. Notwithstanding the foregoing, the Board or the Committee to which administration of the Plan has been delegated may award stock pursuant to a stock bonus agreement in consideration for past services actually rendered to the Company or for its benefit. (d) VESTING. Shares of stock sold or awarded under the Plan may, but need not, be subject to a repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board or the Committee. (e) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR CONSULTANT. In the event a Participant's Continuous Status as an Employee, Director or Consultant terminates, the Company may repurchase or otherwise reacquire any or all of the shares of stock held by that person which have not vested as of the date of termination under the terms of the stock bonus or restricted stock purchase agreement between the Company and such person. 8. CANCELLATION AND RE-GRANT OF OPTIONS. The Board or the Committee shall have the authority to effect, at any time and from time to time, (i) the repricing of any outstanding Options under the Plan and/or (ii) with the consent of the affected holders of Options, the cancellation of any outstanding Options under the Plan and the grant in substitution therefor of new Options under the Plan covering the same or different numbers of shares of stock, but having an exercise price per share not less than fifty percent (50%) of the Fair Market Value (one hundred percent (100%) of the Fair Market Value in the case of an Incentive Stock Option or, in the case of a 10% stockholder (as described in subsection 5(c)), not less than one hundred ten percent (110%) of the Fair Market Value) per share of stock on the new grant date. 9. COVENANTS OF THE COMPANY. (a) During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of stock required to satisfy such Stock Awards. (b) The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to issue and sell shares of stock upon exercise of the Stock Award; provided, however, that this undertaking shall not require the Company to register under the Securities Act either the Plan, any Stock Award or any stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of stock under 8. 9 the Plan, the Company shall be relieved from any liability for failure to issue and sell stock upon exercise of such Stock Awards unless and until such authority is obtained. 10. USE OF PROCEEDS FROM STOCK. Proceeds from the sale of stock pursuant to Stock Awards shall constitute general funds of the Company. 11. MISCELLANEOUS. (a) The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest pursuant to subsection 6(e) or 7(d), notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) Neither an Employee, Director or Consultant nor any person to whom a Stock Award is transferred under subsection 6(d), or 7(b) shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Stock Award unless and until such person has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Employee, Director, Consultant or other holder of Stock Awards any right to continue in the employ of the Company or any Affiliate (or to continue acting as a Director or Consultant) or shall affect the right of the Company or any Affiliate to terminate the employment or relationship as a Director or Consultant of any Employee, Director, Consultant or other holder of Stock Awards with or without cause. (d) To the extent that the aggregate Fair Market Value (determined at the time of grant) of stock with respect to which Incentive Stock Options granted after 1986 are exercisable for the first time by any Optionee during any calendar year under all plans of the Company and its Affiliates exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) The Company may require any person to whom a Stock Award is granted, or any person to whom a Stock Award is transferred pursuant to subsection 6(d) or 7(b), as a condition of exercising or acquiring stock under any Stock Award, (1) to give written assurances satisfactory to the Company as to such person's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters, and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (2) to give written assurances satisfactory to the Company stating that such person is acquiring the stock subject to the Stock Award for such person's own account and not with any present intention of selling or otherwise distributing the stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (i) the issuance of the shares upon the exercise or acquisition of stock 9. 10 under the Stock Award has been registered under a then currently effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the stock. (f) To the extent provided by the terms of a Stock Award Agreement, the person to whom a Stock Award is granted may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of stock under a Stock Award by any of the following means or by a combination of such means: (1) tendering a cash payment; (2) authorizing the Company to withhold shares from the shares of the Common Stock otherwise issuable to the participant as a result of the exercise or acquisition of stock under the Stock Award; or (3) delivering to the Company owned and unencumbered shares of the Common Stock of the Company. 12. ADJUSTMENTS UPON CHANGES IN STOCK. (a) If any change is made in the stock subject to the Plan, or subject to any Stock Award (through merger, consolidation, reorganization, recapitalization, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or otherwise), the Plan will be appropriately adjusted in the class(es) and maximum number of shares subject to the Plan pursuant to subsection 4(a) and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of shares and price per share of stock subject to such outstanding Stock Awards. (b) In the event of: (1) a dissolution, liquidation or sale of substantially all of the assets of the Company; (2) a merger or consolidation in which the Company is not the surviving corporation; or (3) a reverse merger in which the Company is the surviving corporation but the shares of the Company's Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then to the extent permitted by applicable law: (i) any surviving corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar Stock Awards for those outstanding under the Plan, or (ii) such Stock Awards shall continue in full force and effect. In the event any surviving corporation refuses to assume or continue such Stock Awards, or to substitute similar options for those outstanding under the Plan, then, with respect to Stock Awards held by persons then performing services as Employees, Directors or Consultants, the time during which such Stock Awards may be exercised shall be accelerated and the Stock Awards terminated if not exercised prior to such event. 13. AMENDMENT OF THE PLAN. (a) The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 12 relating to adjustments upon changes in stock, no amendment shall be effective unless approved by the stockholders of the Company within twelve (12) months before or after the adoption of the amendment, where the amendment will: 10. 11 (i) Increase the number of shares reserved for Stock Awards under the Plan; (ii) Modify the requirements as to eligibility for participation in the Plan (to the extent such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code); or (iii) Modify the Plan in any other way if such modification requires stockholder approval in order for the Plan to satisfy the requirements of Section 422 of the Code or to comply with the requirements of Rule 16b-3. (b) The Board may in its sole discretion submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations promulgated thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. (c) It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees, Directors or Consultants with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) Rights and obligations under any Stock Award granted before amendment of the Plan shall not be altered or impaired by any amendment of the Plan unless (i) the Company requests the consent of the person to whom the Stock Award was granted and (ii) such person consents in writing. 14. TERMINATION OR SUSPENSION OF THE PLAN. (a) The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on February 13, 2005 which shall be within ten (10) years from the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) Rights and obligations under any Stock Award granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except with the consent of the person to whom the Stock Award was granted. 15. EFFECTIVE DATE OF PLAN. The Plan shall become effective as determined by the Board, but no Stock Awards granted under the Plan shall be exercised unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 11. 12 STOCK OPTION AGREEMENT Pursuant to the Grant Notice and this Stock Option Agreement, the Company has granted you an option to purchase the number of shares of Common Stock indicated in the Grant Notice at the exercise price indicated in the Grant Notice. Your option is granted in connection with and in furtherance of the Company's compensatory benefit plan for the Company's employees (including officers), directors or consultants, and is intended to comply with the provisions of Rule 701 promulgated by the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"). Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. 1. VESTING. Subject to the limitations contained herein, your option will vest as provided in the Grant Notice, provided that vesting will cease upon the termination of your Continuous Status as an Employee, Director or Consultant. 2. METHOD OF PAYMENT. (a) PAYMENT OPTIONS. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect, to the extent permitted by applicable law and the Grant Notice, to make payment of the exercise price under one of the following alternatives: (i) By cash or check; (ii) Payment pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or a check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds; or (iii) Payment by a combination of the above methods. 3. WHOLE SHARES. Your option may only be exercised for whole shares. 4. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, your option may not be exercised unless the shares issuable upon exercise of your option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. 5. TERM. The term of your option commences on the date of grant and expires upon the earliest of: (i) the Expiration Date indicated in the Grant Notice; (ii) ten (10) years after the Date of Grant; or 1. 13 (iii) three (3) months after the termination of your Continuous Status as an Employee, Director or Consultant for any reason other than death or total and permanent disability (as determined by the Company in its sole discretion), unless: (a) during any part of such three (3) month period, the option is not exercisable solely because of the condition set forth in Section 5 above, in which event the option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of Continuous Status as an Employee, Director or Consultant; (b) exercise of the option within three (3) months after termination of your Continuous Status as an Employee, Director or Consultant would result in liability under Section 16(b) of the Securities Exchange Act of 1934, in which event the option will expire on the earliest of (i) the Expiration Date, (ii) the tenth (10th) day after the last date upon which exercise would result in such liability or (iii) six (6) months and ten (10) days after the termination of your Continuous Status as an Employee, Director or Consultant; or (c) such termination of employment is due to your disability or death, in which event the option shall terminate on the earlier of the termination date set forth above or twelve (12) months following such termination of employment. To obtain the federal income tax advantages associated with an "incentive stock option," the Code requires that at all times beginning on the date of grant of the option and ending on the day three (3) months before the date of the option's exercise, you must be an employee of the Company or an affiliate of the Company, except in the event of your death or permanent and total disability. The Company cannot guarantee that your option will be treated as an "incentive stock option" if you exercise your option more than three (3) months after the date your employment with the Company terminates. 6. EXERCISE. (a) You may exercise the vested portion of your option during its term (and the unvested portion of your option if the Grant Notice so permits) by delivering a notice of exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising your option you agree that: (i) as a condition to any exercise of your option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option; (2) the lapse of any substantial risk of forfeiture to which the shares are subject at the time of exercise; or (3) the disposition of shares acquired upon such exercise; (ii) you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of Common Stock issued upon exercise of your option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option; (iii) the Company (or a representative of the underwriters) may, in connection with the first underwritten registration of the offering of any securities of the Company under the 2. 14 Securities Act, require that you not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Securities Act as may be requested by the Company or the representative(s) of the underwriters. You further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period; and 7. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 8. RIGHT OF FIRST REFUSAL. Before any shares of Common Stock (the "Shares") issued upon exercise of an option to you or any transferee (either being sometimes referred to herein as the "Holder") may be sold or otherwise transferred (including transfer by gift or operation of law), the Company shall have an assignable right of first refusal to purchase the Shares on the terms and conditions set forth in this Section 8 (the "Right of First Refusal"). (a) NOTICE OF PROPOSED TRANSFER. The Holder of the Shares shall deliver to the Company a written notice (the "Notice") stating: (i) the Holder's bona fide intention to sell or otherwise transfer the Shares; (ii) the name of each proposed purchaser or other transferee (the "Proposed Transferee"); (iii) the number of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide cash price or other consideration for which the Holder proposed to transfer the Shares (the "Offered Price"); and the Holder shall offer to sell the Shares at the Offered Price to the Company. (b) EXERCISE OF RIGHT OF FIRST REFUSAL. At any time within thirty (30) days after receipt of the Notice, the Company or its assignee may, by giving written notice to the Holder, elect to purchase all (but not less than all) of the Shares proposed to be transferred to any one or more of the Proposed Transferees, at the Offered Price. (c) PAYMENT. Payment of the purchase price shall be made, at the option of the Company or its assignee, either (i) in cash (by check) or (ii) in the manner and at the time(s) set forth in the Notice. (d) HOLDER'S RIGHT TO TRANSFER. If all the Shares proposed in the Notice to be transferred to a given Proposed Transferee are not purchased by the Company and/or its assignee as provided in this Section 10, then the Holder may sell or otherwise transfer such Shares to that Proposed Transferee at the Offered Price or at a higher price, provided that such sale or other transfer is consummated within thirty (30) days after the date of the Notice and provided further that any such sale or other transfer is effected in accordance with any applicable securities laws. If the Shares described in the Notice are not transferred to the Proposed Transferee within such period, a new Notice shall be given to the Company, and the Company shall again be offered the Right of First Refusal, before any Shares held by the Holder may be sold or otherwise transferred. 3. 15 (e) EXCEPTION FOR CERTAIN FAMILY TRANSFERS. Anything to the contrary contained in this Section 8 notwithstanding, the transfer of any or all of the Shares during the Optionee's lifetime or on the Optionee's death by will or intestacy to Optionee's immediate family or to a trust for the benefit of Optionee or Optionee's immediate family shall be exempt from the provisions of this Section 8; provided that, as a condition to receiving the Shares, the transferee or other recipient shall agree in writing to receive and hold the Shares so transferred subject to the provisions of the Plan, and to transfer such Shares no further except in accordance with the terms of the Plan. As used herein, "immediate family" shall mean spouse, lineal descendant or antecedent, father, mother, brother or sister. (f) TERMINATION OF RIGHT OF FIRST REFUSAL. The Right of First Refusal shall terminate as to any Shares upon the first sale of Common Stock of the Company to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission (other than a registration statement solely covering an employee benefit plan or corporate reorganization). 9. OPTION NOT A SERVICE CONTRACT. Your option is not an employment contract and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company, or of the Company to continue your employment with the Company. In addition, nothing in your option shall obligate the Company or its stockholders, board of directors, officers or employees to continue any relationship which you might have as a director or consultant for the Company. 10. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 11. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, including without limitation the provisions of the Plan relating to option provisions, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 4. 16 IN WITNESS WHEREOF, the parties hereto have executed this Stock Option Agreement as of the ____ day of _______________, 199___. VIXEL CORPORATION PURCHASER By: ------------------------------------- ---------------------------- Name: Title: ------------------------------------- [Print Name] Address: -------------------------------------- -------------------------------------- 5. 17 VIXEL CORPORATION STOCK OPTION GRANT NOTICE (1995 STOCK OPTION PLAN) Vixel Corporation (the "Company"), pursuant to its 1995 Stock Option Plan (the "Plan"), hereby grants to Optionholder an option to purchase the number of shares of the Company's Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Stock Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Optionholder: _________________________________________ Date of Grant: _________________________________________ Vesting Commencement Date: _________________________________________ Number of Shares Subject to Option: _________________________________________ Exercise Price (Per Share): _________________________________________ Total Exercise Price: _________________________________________ Expiration Date: _________________________________________ TYPE OF GRANT: [ ] Incentive Stock Option [ ] Nonstatutory Stock Option EXERCISE SCHEDULE: [ ] Same as Vesting Schedule [ ] Early Exercise Permitted VESTING SCHEDULE: [1/4th of the shares vest one year after the Vesting Commencement Date. 1/48th of the shares vest monthly thereafter over the next three years.] PAYMENT: By one or a combination of the following items (described in the Stock Option Agreement): By cash or check Pursuant to a Regulation T Program if the Shares are publicly traded By delivery of already-owned shares if the Shares are publicly traded
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Grant Notice, the Stock Option Agreement and the Plan. Optionholder further acknowledges that as of the Date of Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) options previously granted and delivered to Optionholder under the Plan, and (ii) the following agreements only: OTHER AGREEMENTS: _____________________________________________ _____________________________________________ VIXEL CORPORATION OPTIONHOLDER: By: -------------------------------- -------------------------------------- Signature Signature Title: Date: ----------------------------- --------------------------------- Date: ----------------------------- ATTACHMENTS: Stock Option Agreement, 1995 Stock Option Plan and Notice of Exercise 1. 18 NOTICE OF EXERCISE Vixel Corporation 11911 Northcreek Parkway Bothell, Washington 98011 Date of Exercise: Ladies and Gentlemen: This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below. Type of option (check one): Incentive [ ] Nonstatutory [ ] Stock option dated: _______________________ Number of shares as to which option is exercised: _______________________ Certificates to be issued in name of: _______________________ Total exercise price: $_______________________ Cash payment delivered herewith: $_______________________ By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the 1995 Stock Option Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option, and (iii) if this exercise relates to an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any shares of Common Stock issued upon exercise of this option that occurs within two (2) years after the date of grant of this option or within one (1) year after such shares of Common Stock are issued upon exercise of this option. I hereby make the following certifications and representations with respect to the number of shares of Common Stock of the Company listed above (the "Shares"), which are being acquired by me for my own account upon exercise of the Option as set forth above: I acknowledge that the Shares have not been registered under the Securities Act of 1933, as amended (the "Act"), and are deemed to constitute "restricted securities" under Rule 701 and "control securities" under Rule 144 promulgated under the Act. I warrant and represent to the 1. 19 Company that I have no present intention of distributing or selling said Shares, except as permitted under the Act and any applicable state securities laws. I further acknowledge that I will not be able to resell the Shares for at least ninety days after the stock of the Company becomes publicly traded (i.e., subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934) under Rule 701 and that more restrictive conditions apply to affiliates of the Company under Rule 144. I further acknowledge that all certificates representing any of the Shares subject to the provisions of the Option shall have endorsed thereon appropriate legends reflecting the foregoing limitations, as well as any legends reflecting restrictions pursuant to the Company's Certificate of Incorporation, Bylaws and/or applicable securities laws. I further agree that, if requested by the Company (or a representative of the underwriters) in connection with the first underwritten registration of the offering of any securities of the Company under the Act, I will not sell or otherwise transfer or dispose of any shares of Common Stock or other securities of the Company during such period (not to exceed one hundred eighty (180) days) following the effective date of the registration statement of the Company filed under the Act (the "Effective Date") as may be requested by the Company or the representative of the underwriters. For purposes of this restriction I will be deemed to own securities that (i) are owned directly or indirectly by me, including securities held for my benefit by nominees, custodians, brokers or pledgees; (ii) may be acquired by me within sixty (60) days of the Effective Date; (iii) are owned directly or indirectly, by or for my brothers or sisters (whether by whole or half blood), spouse, ancestors and lineal descendants; or (iv) are owned, directly or indirectly, by or for a corporation, partnership, estate or trust of which I am a shareholder, partner or beneficiary, but only to the extent of my proportionate interest therein as a shareholder, partner or beneficiary thereof. I further agree that the Company may impose stop-transfer instructions with respect to securities subject to the foregoing restrictions until the end of such period. Very truly yours, ------------------------------------ 2. 20 EX-10.15 9 RESTRICTED STOCK PURCHASE AGREEMENT DATED 05/20/99 1 EXHIBIT 10.15 EARLY EXERCISE STOCK PURCHASE AGREEMENT (INCLUDING RIGHT OF FIRST REFUSAL) THIS AGREEMENT is made by and between Vixel Corporation, a Delaware corporation (the "Corporation"), and Kurtis L. Adams ("Purchaser"). NOW, THEREFORE, IT IS AGREED between the parties as follows: 1. Purchaser hereby agrees to purchase from the Corporation, and the Corporation hereby agrees to sell to Purchaser, an aggregate of one hundred eighty-one thousand six hundred two (181,602) shares of the common stock (the "Stock") of the Corporation, for an exercise price of $2.05 per share. The closing hereunder shall occur at the offices of the Corporation on the date of this Agreement or at such other time and place as the parties may mutually agree upon in writing. At the closing, Purchaser shall deliver three (3) stock assignments in the form of Exhibit B, duly endorsed (with date and number of shares left blank), joint escrow instructions (the "Joint Escrow Instructions") in the form of Exhibit C, duly executed by Purchaser, and the total exercise price (including endorsed certificates representing the appropriate number of shares of the Corporation's common stock if a portion of the total exercise price is to be paid by common stock). At the closing or as soon thereafter as practicable, the Corporation shall deliver to the Escrow Agent (as defined in paragraph 10 below) share certificates for all of the Stock that is to be subject to the Purchase Option (as defined in paragraph 2 below), and shall deliver share certificates to Purchaser for all of the Stock, if any, that is not to be subject to the Purchase Option. Upon the request of Purchaser during the term of the escrow, certificates for shares that are no longer subject to the Purchase Option shall be delivered to Purchaser. 2. The Stock to be purchased by Purchaser pursuant to this Agreement shall be subject to the following option ("Purchase Option"): (a) In the event that Purchaser shall cease to be an employee of the Corporation for any reason (including his death), or no reason, with or without cause, the Purchase Option may be exercised. The Corporation shall have the right at any time within ninety (90) days after such cessation of employment to purchase from Purchaser or his personal representative, as the case may be, at the price per share paid by Purchaser pursuant to this Agreement ("Option Price"), up to but not exceeding the number of unvested shares of the Stock set forth on Exhibit A hereto which is incorporated herein by this reference. (b) In addition, and without limiting the foregoing Purchase Option, if at any time during the term of the Purchase Option, there is a change of control of the Company or a change in responsibilities (as set forth in the offer letter dated August 20, 1998) (the "Employment Agreement"), then the Purchase Option shall be terminated as to the number of shares subject to accelerated vesting pursuant to such agreement. (c) The Corporation shall be entitled to pay for any shares purchased pursuant to its Purchase Option, at the Corporation's option, in cash, by offset against any indebtedness owing to the Corporation by Purchaser, including, without limitation, any note given in payment for the Stock, or a combination of both. 3. The Purchase Option may be exercised by giving written notice of exercise delivered or mailed as provided in paragraph 15 below. Upon providing of such notice and 2 payment or tender of the purchase price, the Corporation shall become the legal and beneficial owner of the Stock being purchased and all rights and interests therein or related thereto. 4. If from time to time during the term of the Purchase Option there is any stock dividend or liquidating dividend or distribution of cash and/or property, stock split or other change in the character or amount of any of the outstanding securities of the Corporation, then, in such event, any and all new, substituted or additional securities or other property to which Purchaser is entitled by reason of his ownership of Stock will be immediately subject to the Purchase Option and be included in the word "Stock" for all purposes of the Purchase Option with the same force and effect as the shares of Stock then subject to the Purchase Option. While the total Option Price shall remain the same after each such event, the Option Price per share of Stock upon exercise of the Purchase Option shall be appropriately adjusted. 5. [INTENTIONALLY DELETED.] 6. CORPORATION'S RIGHT OF FIRST REFUSAL. (a) Subject to the limitations of subparagraph 6(b), in the event that, prior to the date of the first registration of an equity security of the Corporation under Section 12 of the Securities Exchange Act of 1934, Purchaser desires to sell, encumber or otherwise transfer all or any portion of the Stock received upon the exercise of Purchaser's Option, or any interest therein, Purchaser will be required to first give written notice of the intent to transfer to the Secretary of the Corporation. The notice will name the proposed transferee and state the number of shares of Stock to be transferred, the proposed consideration, and all other terms and conditions of the proposed transfer. The Corporation and/or its assignee(s) will have the right (the "Right of First Refusal") at any time within thirty (30) days after receipt of such notice to purchase any portion of the Stock specified in the notice at the price and upon the terms set forth in such notice (the "Notice Price"). In the case of a gift, property settlement or other transfer in which the proposed transferee is not paying the full price for the shares, the price will be deemed to be the fair market value of the Stock at such time as determined in good faith by the Board of Directors. In the event the Corporation and/or its assignee(s) elects to purchase all or any portion of the Stock, it will provide Purchaser with written notice of its election and cash payment at the Notice Price within thirty (30) days after receipt of the transfer notice. If, however, the terms of payment set forth in the transfer notice were other than cash against delivery, the Corporation and/or its assignee(s) will pay for the Stock on the same terms and conditions as set forth in the transfer notice. In the event the Corporation and/or its assignee(s) do not elect to acquire all of the shares specified in the transfer notice, Purchaser may, within the sixty (60)-day period following the expiration of the Corporation's Right of First Refusal, transfer any portion of the Stock specified in the notice which was not acquired by the Corporation and/or its assignee(s) on the terms specified in the original notice. All shares so sold by Purchaser will continue to be subject to the same restrictions as before the transfer. (b) The following transactions shall be exempt from the provisions of subparagraph 6(a): (i) Purchaser's transfer of any or all shares held either during such Purchaser's lifetime or on death by will or intestacy to such Purchaser's immediate family or to any custodian or trustee for the account of such Purchaser or such Purchaser's immediate family and (ii) Purchaser's bona fide pledge or mortgage of any shares with a commercial lending institution, provided that any subsequent transfer of said shares to said institution shall be conducted in the manner set forth in 3 this Agreement. "Immediate family" as used herein shall mean spouse, lineal descendant, father, mother, brother, or sister of the Purchaser making such transfer; In any case, the transferee, assignee, or other recipient shall receive and hold such Stock subject to the provisions of this Agreement, and there shall be no further transfer of such Stock except in accord with this Agreement. 7. All certificates representing any shares of Stock of the Corporation subject to the provisions of this Agreement shall have endorsed thereon legends in substantially the following form: (i) "The shares represented by this certificate are subject to an option and a right of first refusal set forth in an agreement between the corporation and the registered holder, or his predecessor in interest, a copy of which is on file at the principal office of this corporation. Any transfer or attempted transfer of any shares subject to such option is void without the prior express written consent of the issuer of these shares." (ii) "These securities have not been registered under the Securities Act of 1933. They may not be sold, offered for sale, pledged or hypothecated in the absence of an effective registration statement as to the securities under said Act or an opinion of counsel satisfactory to the corporation that such registration is not required." 8. Purchaser acknowledges that he is aware that the Stock to be issued to him by the Corporation pursuant to this Agreement has not been registered under the Securities Act of 1933, as amended (the "Act"), on the basis that no distribution or public offering of the Stock is to be effected, and in this connection acknowledges that the Corporation is relying on the following representations. In this connection, Purchaser warrants and represents to the Corporation that he is acquiring the Stock for investment and not with a view to or for sale in connection with any distribution of the Stock or with any present intention of distributing or selling the Stock and he does not presently have reason to anticipate any change in circumstances or any particular occasion or event which would cause him to sell the Stock. Purchaser recognizes that the Stock must be held indefinitely unless it is subsequently registered under the Act or an exemption from such registration is available and, further, recognizes that the Corporation is under no obligation to register the Stock or to comply with any exemption from such registration. 9. Purchaser is aware that the Stock may not be sold pursuant to Rule 144 adopted under the Act unless certain conditions are met and until Purchaser has held the Stock for at least one (1) year. Among the conditions for use of Rule 144 is the availability of specified current public information about the Corporation. Purchaser recognizes that the Corporation presently has no plans to make such information available to the public. Whether or not the Purchase Option is exercised or has lapsed, Purchaser further agrees not to make any disposition of any of the Stock in any event unless and until: (a) There is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (b) (i) Purchaser shall have notified the Corporation of the proposed disposition and shall have furnished the Corporation with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) Purchaser shall have given the Corporation an opinion of counsel, which opinion and counsel shall be satisfactory to the Corporation, to the effect that such disposition will not require registration of the Stock under the Act. 4 10. As security for his faithful performance of the terms of this Agreement and to insure the availability for delivery of Purchaser's Stock upon exercise of the Purchase Option herein provided for, Purchaser agrees, at the closing hereunder (or as soon thereafter as practicable), to deliver (or have the Corporation deliver on the Purchaser's behalf) to and deposit with the Secretary of the Corporation ("Escrow Agent"), as Escrow Agent in this transaction, three (3) stock assignments duly endorsed (with date and number of shares left blank) in the form attached hereto as Exhibit B, together with a certificate or certificates evidencing all of the Stock subject to the Purchase Option; said documents are to be held by the Escrow Agent and delivered by said Escrow Agent pursuant to the Joint Escrow Instructions of the Corporation and Purchaser set forth in Exhibit C attached hereto and incorporated herein by this reference, which instructions shall also be delivered to the Escrow Agent at the closing hereunder (or as soon thereafter as practicable). 11. Except for transfers permitted pursuant to Section 9 of the Option Agreement, purchaser shall not sell or transfer any of the Stock subject to the Purchase Option or any interest therein so long as such Stock is subject to the Purchase Option. 12. The Corporation shall not be required (i) to transfer on its books any shares of Stock of the Corporation which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement or (ii) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred. 13. Subject to the provisions of paragraphs 11 and 12 above, Purchaser (but not any unapproved transferee) shall, during the term of this Agreement, exercise all rights and privileges of a stockholder of the Corporation with respect to the Stock. 14. The parties agree to execute such further instruments and to take such further action as reasonably may be necessary to carry out the intent of this Agreement. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Office Box, by registered or certified mail with postage and fees prepaid, addressed to the other party hereto at his address hereinafter shown below his signature or at such other address as such party may designate by ten (10) days' advance written notice to the other party hereto. 16. This Agreement shall bind and inure to the benefit of the successors and assigns of the Corporation and, subject to the restrictions on transfer herein set forth, inure to the benefit of and be binding upon Purchaser, his heirs, executors, administrators, successors, and assigns. Without limiting the generality of the foregoing, the Purchase Option of the Corporation hereunder shall be assignable by the Corporation at any time or from time to time, in whole or in part. 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the 20th day of May, 1999. VIXEL CORPORATION By: /s/ Kurtis L. Adams ------------------------------------- Title: Chief Financial Officer 11911 Northcreek Parkway South Suite 100 Bothell, WA 98011 PURCHASER /s/ Kurtis L. Adams ----------------------------------------- Name: Kurtis L. Adams 6 EXHIBIT A TO NONSTATUTORY OPTION AGREEMENT VESTING
Number of Number of Number of Number of Total Number Vested Shares Vested Shares Vested Shares Vested Shares of Vested Date of Vesting Option #482 Option #483 Option #498 Option #499 Shares 11/2/99 43,750 43,750 12/2/99 3,646 47,396 1/2/00 3,646 51,042 2/2/00 3,646 54,688 3/2/00 3,646 58,334 4/2/00 3,646 61,980 4/21/00 3352 9148 74,480 5/2/00 3,646 78,126 6/2/00 3,646 81,772 7/2/00 3,646 85,418 7/21/00 838 2287 88,543 8/2/00 3,646 92,189 9/2/00 3,646 95,835 10/2/00 3,646 99,481 10/21/00 838 2287 102,606 11/2/00 3,646 106,252 12/2/00 3,646 109,898 1/2/01 3,646 113,544 1/21/01 736 2388 116,668 2/2/01 3,646 120,314 3/2/01 3,646 123,960 4/2/01 3,646 127,606 4/21/01 736 2389 130,731 5/2/01 3,646 134,377 6/2/01 3,646 138,023 7/2/01 3,646 141,669 7/21/01 736 2389 144,794 8/2/01 3,646 148,440 9/2/01 3,646 152,086 10/2/01 3,646 155,732 10/21/01 737 2389 158,858 11/2/01 3,646 162,504 12/2/01 5,729 168,233 1/2/02 1294 169,527 1/21/02 3124 172,651 2/2/02 1294 173,945 3/2/02 1295 175,240
7
Number of Number of Number of Number of Total Number Vested Shares Vested Shares Vested Shares Vested Shares of Vested Date of Vesting Option #482 Option #483 Option #498 Option #499 Shares 4/2/02 1294 176,534 4/21/02 3125 179,659 5/2/02 1294 180,953 6/2/02 648 181,601 7/2/02 181,601 7/21/02 1 181,602
8 EXHIBIT B ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED and pursuant to that certain Early Exercise Stock Purchase Agreement (the "Agreement") dated as of May 20, 1999, Kurtis L. Adams hereby sells, assigns and transfers unto Vixel Corporation, a Delaware corporation (the "Corporation") _________________ (__________) shares of Common Stock of the Corporation standing in the undersigned's name on the books of the Corporation represented by Certificate No. _____ herewith, and does hereby irrevocably constitute and appoint the Secretary of the Corporation attorney to transfer the said stock on the books of the Corporation with full power of substitution in the premises. This Assignment may be used only in accordance with and subject to the terms and conditions of the Agreement, in connection with the repurchase of shares of Common Stock issued to the undersigned pursuant to the Agreement, and only to the extent that such shares remain subject to the Company's Purchase Option under the Agreement. Dated: May 20, 1999 /s/ Kurtis L. Adams ------------------------------------ [Signature] Kurtis L. Adams 9 EXHIBIT C JOINT ESCROW INSTRUCTIONS Vixel Corporation Attention: Secretary Dear Sir: As Escrow Agent for both Vixel Corporation, a Delaware corporation (the "Company"), and the undersigned purchaser of stock of the Company ("Purchaser"), you are hereby authorized and directed to hold the documents delivered to you pursuant to the terms of that certain Early Exercise Stock Purchase Agreement (the "Agreement"), dated May 20, 1999, to which a copy of these Joint Escrow Instructions is attached as Exhibit B, in accordance with the following instructions: 1. In the event the Company or an assignee shall elect to exercise the Purchase Option set forth in the Agreement, the Company or its assignee will give to Purchaser and you a written notice specifying the number of shares of stock to be purchased, the purchase price, and the time for a closing hereunder at the principal office of the Company. Purchaser and the Company hereby irrevocably authorize and direct you to close the transaction contemplated by such notice in accordance with the terms of said notice. 2. At the closing you are directed (a) to date any stock assignments necessary for the transfer in question, (b) to fill in the number of shares being transferred, and (c) to deliver same, together with the certificate evidencing the shares of stock to be transferred, to the Company against the simultaneous delivery to you of the purchase price (which may include suitable acknowledgment of cancellation of indebtedness) of the number of shares of stock being purchased pursuant to the exercise of the Purchase Option. 3. Purchaser irrevocably authorizes the Company to deposit with you any certificates evidencing shares of stock to be held by you hereunder and any additions and substitutions to said shares as specified in the Agreement. Purchaser hereby irrevocably constitutes and appoints you as his attorney-in-fact and agent for the term of this escrow to execute with respect to such securities and other property all documents of assignment and/or transfer and all stock certificates necessary or appropriate to make all securities negotiable and complete any transaction herein contemplated. 4. This escrow shall terminate upon expiration or closing of the exercise of the Purchase Option, whichever occurs first. 5. If at the time of termination of this escrow you should have in your possession any documents, securities, or other property belonging to Purchaser, you shall deliver all of same to Purchaser and shall be discharged of all further obligations hereunder; provided, however, that if at the time of termination of this escrow you are advised by the Company that the property 10 subject to this escrow is the subject of a pledge or other security agreement, you shall deliver all such property to the pledgeholder or other person designated by the Company. 6. Except as otherwise provided in these Joint Escrow Instructions, your duties hereunder may be altered, amended, modified or revoked only by a writing signed by all of the parties hereto. 7. You shall be obligated only for the performance of such duties as are specifically set forth herein and may rely and shall be protected in relying or refraining from acting on any instrument reasonably believed by you to be genuine and to have been signed or presented by the proper party or parties or their assignees. You shall not be personally liable for any act you may do or omit to do hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith, and any act done or omitted by you pursuant to the advice of your own attorneys shall be conclusive evidence of such good faith. 8. You are hereby expressly authorized to disregard any and all warnings given by any of the parties hereto or by any other person or corporation, excepting only orders or process of courts of law, and are hereby expressly authorized to comply with and obey orders, judgments or decrees of any court. In case you obey or comply with any such order, judgment or decree of any court, you shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, notwithstanding any such order, judgment or decree being subsequently reversed, modified, annulled, set aside, vacated or found to have been entered without jurisdiction. 9. You shall not be liable in any respect on account of the identity, authority or rights of the parties executing or delivering or purporting to execute or deliver the Agreement or any documents or papers deposited or called for hereunder. 10. You shall not be liable for the outlawing of any rights under any statute of limitations with respect to these Joint Escrow Instructions or any documents deposited with you. 11. You shall be entitled to employ such legal counsel (including, without limitation, the firm of Cooley Godward LLP) and other experts as you may deem necessary properly to advise you in connection with your obligations hereunder, may rely upon the advice of such counsel, and may pay such counsel reasonable compensation therefor. 12. Your responsibilities as Escrow Agent hereunder shall terminate if you shall cease to be Secretary of the Company or if you shall resign by written notice to each party. In the event of any such termination, the Company may appoint any officer or assistant officer of the Company as successor Escrow Agent and Purchaser hereby confirms the appointment of such successor or successors as his attorney-in-fact and agent to the full extent of your appointment. 13. If you reasonably require other or further instruments in connection with these Joint Escrow Instructions or obligations in respect hereto, the necessary parties hereto shall join in furnishing such instruments. 11 14. It is understood and agreed that should any dispute arise with respect to the delivery and/or ownership or right of possession of the securities, you may (but are not obligated to) retain in your possession without liability to anyone all or any part of said securities until such dispute shall have been settled either by mutual written agreement of the parties concerned or by a final order, decree or judgment of a court of competent jurisdiction after the time for appeal has expired and no appeal has been perfected, but you shall be under no duty whatsoever to institute or defend any such proceedings. 15. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon deposit in any United States Post Office Box, by registered or certified mail with postage and fees prepaid, addressed to each of the other parties hereunto entitled at the following addresses specified below, or at such other addresses as a party may designate by ten days' written notice to each of the other parties hereto: 16. By signing these Joint Escrow Instructions you become a party hereto only for the purpose of said Joint Escrow Instructions; you do not become a party to the Agreement. 17. This agreement will be governed by, and construed in accordance with, the internal laws (excluding the law of conflicts) of the State of Delaware. 12 18. This instrument shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. It is understood and agreed that references to "you" or "your" herein refer to the original Escrow Agent and to any and all successor Escrow Agents. It is understood and agreed that the Company may at any time or from time to time assign its rights under the Agreement and these Joint Escrow Instructions in whole or in part. Very truly yours, VIXEL CORPORATION By: /s/ Kurtis L. Adams ------------------------------------- Name: Kurtis L. Adams Title: Chief Financial Officer PURCHASER: /s/ Kurtis L. Adams ---------------------------------------- KURTIS L. ADAMS ESCROW AGENT: Secretary Address: 11911 Northcreek Parkway South Bothell, Washington 98011 EX-10.23 10 VIXEL CORPORATION 1999 EQUITY INCENTIVE PLAN 1 EXHIBIT 10.23 VIXEL CORPORATION 1999 EQUITY INCENTIVE PLAN ADOPTED AUGUST 12, 1999 APPROVED BY STOCKHOLDERS AUGUST 27, 1999 TERMINATION DATE: AUGUST 27, 2009 1. Purposes. (a) ELIGIBLE STOCK AWARD RECIPIENTS. The persons eligible to receive Stock Awards are the Employees, Directors and Consultants of the Company and its Affiliates. (b) AVAILABLE STOCK AWARDS. The purpose of the Plan is to provide a means by which eligible recipients of Stock Awards may be given an opportunity to benefit from increases in value of the Common Stock through the granting of the following Stock Awards: (i) Incentive Stock Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to acquire restricted stock. The Plan also provides for non-discretionary grants of Nonstatutory Stock Options to Non-Employee Directors of the Company. (c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to retain the services of the group of persons eligible to receive Stock Awards, to secure and retain the services of new members of this group and to provide incentives for such persons to exert maximum efforts for the success of the Company and its Affiliates. 2. Definitions. (a) "AFFILIATE" means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined in Sections 424(e) and (f), respectively, of the Code. (b) "BOARD" means the Board of Directors of the Company. (c) "CODE" means the Internal Revenue Code of 1986, as amended. (d) "COMMITTEE" means a committee of one or more members of the Board appointed by the Board in accordance with subsection 3(c). (e) "COMMON STOCK" means the common stock of the Company. (f) "COMPANY" means Vixel Corporation, a Delaware corporation. (g) "CONSULTANT" means any person, including an advisor, (i) engaged by the Company or an Affiliate to render consulting or advisory services and who is compensated for such services or (ii) who is a member of the Board of Directors of an Affiliate. However, the term "Consultant" shall not include either Directors who are not compensated by the Company 2 for their services as Directors or Directors who are merely paid a director's fee by the Company for their services as Directors. (h) "CONTINUOUS SERVICE" means that the Participant's service with the Company or an Affiliate, whether as an Employee, Director or Consultant, is not interrupted or terminated. The Participant's Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate as an Employee, Consultant or Director or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant's Continuous Service. For example, a change in status from an Employee of the Company to a Consultant of an Affiliate or a Director will not constitute an interruption of Continuous Service. The Board or the chief executive officer of the Company, in that party's sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal leave. (i) "COVERED EMPLOYEE" means the chief executive officer and the four (4) other highest compensated officers of the Company for whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section 162(m) of the Code. (j) "DIRECTOR" means a member of the Board of Directors of the Company. (k) "DISABILITY" means the permanent and total disability of a person within the meaning of Section 22(e)(3) of the Code. (l) "EMPLOYEE" means any person employed by the Company or an Affiliate. Mere service as a Director or payment of a director's fee by the Company or an Affiliate shall not be sufficient to constitute "employment" by the Company or an Affiliate. (m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (n) "FAIR MARKET VALUE" means, as of any date, the value of the Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap Market, the Fair Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in the Common Stock) on the day of determination, as reported in The Wall Street Journal or such other source as the Board deems reliable. (ii) In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good faith by the Board. (o) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and the regulations promulgated thereunder. 3 (p) "IPO DATE" means the effective date of the initial public offering of the Company's Common Stock. (q) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a current Employee or Officer of the Company or its parent or a subsidiary, does not receive compensation (directly or indirectly) from the Company or its parent or a subsidiary for services rendered as a consultant or in any capacity other than as a Director (except for an amount as to which disclosure would not be required under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act ("Regulation S-K")), does not possess an interest in any other transaction as to which disclosure would be required under Item 404(a) of Regulation S-K and is not engaged in a business relationship as to which disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is otherwise considered a "non-employee director" for purposes of Rule 16b-3. (r) "NON-EMPLOYEE DIRECTOR OPTION" means a Non-Statutory Stock Option granted pursuant to Section 7 hereof. (s) "NON-EMPLOYEE DIRECTOR OPTION AGREEMENT" means a written agreement between the Company and a Non-Employee Director evidencing the terms and conditions of a Non-Employee Director Option grant. Each Non-Employee Director Option Agreement shall be subject to the terms and conditions of the Plan. (t) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify as an Incentive Stock Option. (u) "OFFICER" means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (v) "OPTION" means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan. (w) "OPTION AGREEMENT" means a written agreement between the Company and an Optionholder evidencing the terms and conditions of an individual Option grant. Each Option Agreement shall be subject to the terms and conditions of the Plan. (x) "OPTIONHOLDER" means a person to whom an Option is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Option. (y) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current employee of the Company or an "affiliated corporation" (within the meaning of Treasury Regulations promulgated under Section 162(m) of the Code), is not a former employee of the Company or an "affiliated corporation" receiving compensation for prior services (other than benefits under a tax qualified pension plan), was not an officer of the Company or an "affiliated corporation" at any time and is not currently receiving direct or indirect remuneration from the Company or an "affiliated corporation" for services in any capacity other than as a Director or (ii) is otherwise considered an "outside director" for purposes of Section 162(m) of the Code. (z) "PARTICIPANT" means a person to whom a Stock Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Stock Award. 4 (aa) "PLAN" means this Vixel Corporation 1999 Equity Incentive Plan. (bb) "RULE 16b-3" means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. (cc) "SECURITIES ACT" means the Securities Act of 1933, as amended. (dd) "STOCK AWARD" means any right granted under the Plan, including an Option, a stock bonus and a right to acquire restricted stock. (ee) "STOCK AWARD AGREEMENT" means a written agreement between the Company and a holder of a Stock Award evidencing the terms and conditions of an individual Stock Award grant. Each Stock Award Agreement shall be subject to the terms and conditions of the Plan. (ff) "TEN PERCENT STOCKHOLDER" means a person who owns (or is deemed to own pursuant to Section 424(d) of the Code) stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of any of its Affiliates. 3. Administration. (a) ADMINISTRATION BY BOARD. The Board shall administer the Plan unless and until the Board delegates administration to a Committee, as provided in subsection 3(c). Any interpretation of the Plan by the Board and any decision by the Board under the Plan shall be final and binding on all persons. (b) POWERS OF BOARD. The Board shall have the power, subject to, and within the limitations of, the express provisions of the Plan: (i) To determine from time to time which of the persons eligible under the Plan shall be granted Stock Awards; when and how each Stock Award shall be granted; what type or combination of types of Stock Award shall be granted; the provisions of each Stock Award granted (which need not be identical), including the time or times when a person shall be permitted to receive Common Stock pursuant to a Stock Award; and the number of shares of Common Stock with respect to which a Stock Award shall be granted to each such person. (ii) To construe and interpret the Plan and Stock Awards granted under it, and to establish, amend and revoke rules and regulations for its administration. The Board, in the exercise of this power, may correct any defect, omission or inconsistency in the Plan or in any Stock Award Agreement, in a manner and to the extent it shall deem necessary or expedient to make the Plan fully effective. (iii) To amend the Plan or a Stock Award as provided in Section 13. (iv) Generally, to exercise such powers and to perform such acts as the Board deems necessary or expedient to promote the best interests of the Company which are not in conflict with the provisions of the Plan. 5 (c) DELEGATION TO COMMITTEE. (i) GENERAL. The Board may delegate administration of the Plan to a Committee or Committees of one (1) or more members of the Board, and the term "Committee" shall apply to any person or persons to whom such authority has been delegated. If administration is delegated to a Committee, the Committee shall have, in connection with the administration of the Plan, the powers theretofore possessed by the Board, including the power to delegate to a subcommittee any of the administrative powers the Committee is authorized to exercise (and references in this Plan to the Board shall thereafter be to the Committee or subcommittee), subject, however, to such resolutions, not inconsistent with the provisions of the Plan, as may be adopted from time to time by the Board. The Board may abolish the Committee at any time and revest in the Board the administration of the Plan. (ii) COMMITTEE COMPOSITION WHEN COMMON STOCK IS PUBLICLY TRADED. At such time as the Common Stock is publicly traded, in the discretion of the Board, a Committee may consist solely of two or more Outside Directors, in accordance with Section 162(m) of the Code, and/or solely of two or more Non-Employee Directors, in accordance with Rule 16b-3. Within the scope of such authority, the Board or the Committee may (1) delegate to a committee of one or more members of the Board who are not Outside Directors, the authority to grant Stock Awards to eligible persons who are either (a) not then Covered Employees and are not expected to be Covered Employees at the time of recognition of income resulting from such Stock Award or (b) not persons with respect to whom the Company wishes to comply with Section 162(m) of the Code and/or (2) delegate to a committee of one or more members of the Board who are not Non-Employee Directors the authority to grant Stock Awards to eligible persons who are not then subject to Section 16 of the Exchange Act. 4. Shares Subject to the Plan. (a) SHARE RESERVE. Subject to the provisions of Section 12 relating to adjustments upon changes in Common Stock, the Common Stock that may be issued pursuant to Stock Awards shall not exceed in the aggregate one million seven hundred thousand (1,700,000) shares of Common Stock, plus an annual increase to be added each January 1, beginning with January 1, 2001, equal to the lesser of (i) four percent (4%) of the total number of shares of Common Stock outstanding on such January 1 or (ii) one million seven hundred thousand (1,700,000) shares of Common Stock. Notwithstanding the foregoing, the Board may designate a smaller number of shares of Common Stock to be added to the share reserve as of a particular January 1. (b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Stock Award shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such Stock Award shall revert to and again become available for issuance under the Plan. In addition, if any stock award issued under the Company's 1995 Stock Option plan shall for any reason expire or otherwise terminate, in whole or in part, without having been exercised in full, the shares of Common Stock not acquired under such stock award shall revert to and again become available for issuance under this Plan. 6 (c) SOURCE OF SHARES. The shares of Common Stock subject to the Plan may be unissued shares or reacquired shares, bought on the market or otherwise. 5. Eligibility. (a) ELIGIBILITY FOR SPECIFIC STOCK AWARDS. Incentive Stock Options may be granted only to Employees. Stock Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. (b) TEN PERCENT STOCKHOLDERS. A Ten Percent Stockholder shall not be granted an Incentive Stock Option unless the exercise price of such Option is at least one hundred ten percent (110%) of the Fair Market Value of the Common Stock at the date of grant and the Option is not exercisable after the expiration of five (5) years from the date of grant. (c) SECTION 162(m) LIMITATION. Subject to the provisions of Section 12 relating to adjustments upon changes in the shares of Common Stock, no Employee shall be eligible to be granted Options covering more than one million two hundred thousand(1,200,000) shares of the Common Stock during any calendar year. (d) CONSULTANTS. A Consultant shall not be eligible for the grant of a Stock Award if, at the time of grant, a Form S-8 Registration Statement under the Securities Act ("Form S-8") is not available to register either the offer or the sale of the Company's securities to such Consultant because of the nature of the services that the Consultant is providing to the Company, or because the Consultant is not a natural person, or as otherwise provided by the rules governing the use of Form S-8, unless the Company determines both (i) that such grant (a) shall be registered in another manner under the Securities Act (e.g., on a Form S-3 Registration Statement) or (b) does not require registration under the Securities Act in order to comply with the requirements of the Securities Act, if applicable, and (ii) that such grant complies with the securities laws of all other relevant jurisdictions. 6. Option Provisions. Each Option shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. All Options shall be separately designated Incentive Stock Options or Nonstatutory Stock Options at the time of grant, and, if certificates are issued, a separate certificate or certificates will be issued for shares of Common Stock purchased on exercise of each type of Option. The provisions of separate Options need not be identical, but each Option shall include (through incorporation of provisions hereof by reference in the Option or otherwise) the substance of each of the following provisions: (a) TERM. Subject to the provisions of subsection 5(b) regarding Ten Percent Stockholders, no Incentive Stock Option shall be exercisable after the expiration of ten (10) years from the date it was granted. (b) EXERCISE PRICE OF AN INCENTIVE STOCK OPTION. Subject to the provisions of subsection 5(b) regarding Ten Percent Stockholders, the exercise price of each Incentive Stock Option shall be not less than one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the 7 foregoing, an Incentive Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (c) EXERCISE PRICE OF A NONSTATUTORY STOCK OPTION. The exercise price of each Nonstatutory Stock Option shall be not less than eighty-five percent (85%) of the Fair Market Value of the Common Stock subject to the Option on the date the Option is granted. Notwithstanding the foregoing, a Nonstatutory Stock Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (d) CONSIDERATION. The purchase price of Common Stock acquired pursuant to an Option shall be paid, to the extent permitted by applicable statutes and regulations, either (i) in cash at the time the Option is exercised or (ii) at the discretion of the Board at the time of the grant of the Option (or subsequently in the case of a Nonstatutory Stock Option) (1) by delivery to the Company of other Common Stock, (2) according to a deferred payment or other similar arrangement with the Optionholder or (3) in any other form of legal consideration that may be acceptable to the Board; provided, however, that at any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (e) TRANSFERABILITY OF AN INCENTIVE STOCK OPTION. An Incentive Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (f) TRANSFERABILITY OF A NONSTATUTORY STOCK OPTION. A Nonstatutory Stock Option shall be transferable to the extent provided in the Option Agreement. If the Nonstatutory Stock Option does not provide for transferability, then the Nonstatutory Stock Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Optionholder only by the Optionholder. Notwithstanding the foregoing, the Optionholder may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Optionholder, shall thereafter be entitled to exercise the Option. (g) VESTING GENERALLY. The total number of shares of Common Stock subject to an Option may, but need not, vest and therefore become exercisable in periodic installments that may, but need not, be equal. The Option may be subject to such other terms and conditions on 8 the time or times when it may be exercised (which may be based on performance or other criteria) as the Board may deem appropriate. The vesting provisions of individual Options may vary. The provisions of this subsection 6(g) are subject to any Option provisions governing the minimum number of shares of Common Stock as to which an Option may be exercised. (h) TERMINATION OF CONTINUOUS SERVICE. In the event an Optionholder's Continuous Service terminates (other than upon the Optionholder's death or Disability), the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Optionholder's Continuous Service (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified in the Option Agreement, the Option shall terminate. (i) EXTENSION OF TERMINATION DATE. An Optionholder's Option Agreement may also provide that if the exercise of the Option following the termination of the Optionholder's Continuous Service (other than upon the Optionholder's death or Disability) would be prohibited at any time solely because the issuance of shares of Common Stock would violate the registration requirements under the Securities Act, then the Option shall terminate on the earlier of (i) the expiration of the term of the Option set forth in subsection 6(a) or (ii) the expiration of a period of three (3) months after the termination of the Optionholder's Continuous Service during which the exercise of the Option would not be in violation of such registration requirements. (j) DISABILITY OF OPTIONHOLDER. In the event that an Optionholder's Continuous Service terminates as a result of the Optionholder's Disability, the Optionholder may exercise his or her Option (to the extent that the Optionholder was entitled to exercise such Option as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination (or such longer or shorter period specified in the Option Agreement) or (ii) the expiration of the term of the Option as set forth in the Option Agreement. If, after termination, the Optionholder does not exercise his or her Option within the time specified herein, the Option shall terminate. (k) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's Continuous Service terminates as a result of the Optionholder's death or (ii) the Optionholder dies within the period (if any) specified in the Option Agreement after the termination of the Optionholder's Continuous Service for a reason other than death, then the Option may be exercised (to the extent the Optionholder was entitled to exercise such Option as of the date of death) by the Optionholder's estate, by a person who acquired the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Optionholder's death pursuant to subsection 6(e) or 6(f), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death (or such longer or shorter period specified in the Option Agreement) or (2) the expiration of the term of such Option as set forth in the Option Agreement. If, after death, the Option is not exercised within the time specified herein, the Option shall terminate. 9 (l) EARLY EXERCISE. The Option may, but need not, include a provision whereby the Optionholder may elect at any time before the Optionholder's Continuous Service terminates to exercise the Option as to any part or all of the shares of Common Stock subject to the Option prior to the full vesting of the Option. Any unvested shares of Common Stock so purchased may be subject to a repurchase option in favor of the Company or to any other restriction the Board determines to be appropriate. (m) RE-LOAD OPTIONS. Without in any way limiting the authority of the Board to make or not to make grants of Options hereunder, the Board shall have the authority (but not an obligation) to include as part of any Option Agreement a provision entitling the Optionholder to a further Option (a "Re-Load Option") in the event the Optionholder exercises the Option evidenced by the Option Agreement, in whole or in part, by surrendering other shares of Common Stock in accordance with this Plan and the terms and conditions of the Option Agreement. Any such Re-Load Option shall (i) provide for a number of shares of Common Stock equal to the number of shares of Common Stock surrendered as part or all of the exercise price of such Option; (ii) have an expiration date which is the same as the expiration date of the Option the exercise of which gave rise to such Re-Load Option; and (iii) have an exercise price which is equal to one hundred percent (100%) of the Fair Market Value of the Common Stock subject to the Re-Load Option on the date of exercise of the original Option. Notwithstanding the foregoing, a Re-Load Option shall be subject to the same exercise price and term provisions heretofore described for Options under the Plan. Any such Re-Load Option may be an Incentive Stock Option or a Nonstatutory Stock Option, as the Board may designate at the time of the grant of the original Option; provided, however, that the designation of any Re-Load Option as an Incentive Stock Option shall be subject to the one hundred thousand dollar ($100,000) annual limitation on the exercisability of Incentive Stock Options described in subsection 11(d) and in Section 422(d) of the Code. There shall be no Re-Load Options on a Re-Load Option. Any such Re-Load Option shall be subject to the availability of sufficient shares of Common Stock under subsection 4(a) and the "Section 162(m) Limitation" on the grants of Options under subsection 5(c) and shall be subject to such other terms and conditions as the Board may determine which are not inconsistent with the express provisions of the Plan regarding the terms of Options. 7. Non-Employee Director Stock Options. Without any further action of the Board, each Non-Employee Director shall be granted Nonstatutory Stock Options as described in subsections 7(a) and 7(b) (collectively, "Non-Employee Director Options"). Each Non-Employee Director Option shall include the substance of the terms set forth in subsections 7(c) through 7(k). (a) INITIAL GRANTS. After the IPO Date, each person who is elected or appointed for the first time to be a Non-Employee Director automatically shall, upon the date of his or her initial election or appointment to be a Non-Employee Director by the Board or stockholders of the Company, be granted an Initial Grant to purchase sixteen thousand five hundred (16,500) shares of Common Stock on the terms and conditions set forth herein. 10 (b) ANNUAL GRANTS. On the day following each Annual Meeting commencing with the Annual Meeting in 2000, each person who is then a Non-Employee Director automatically shall be granted an Annual Grant to purchase five thousand (5,000) shares of Common Stock on the terms and conditions set forth herein; and further provided, however, that if the person has not been serving as a Non-Employee Director for the entire period since the preceding Annual Meeting, then the number of shares subject to the Annual Grant shall be reduced pro rata for each full quarter prior to the date of grant during which such person did not serve as a Non-Employee Director. (c) TERM. Each Non-Employee Director Option shall have a term of ten (10) years from the date it is granted. (d) EXERCISE PRICE. The exercise price of each Non-Employee Director Option shall be one hundred percent (100%) of the Fair Market Value of the stock subject to the Non-Employee Director Option on the date of grant. Notwithstanding the foregoing, a Non-Employee Director Option may be granted with an exercise price lower than that set forth in the preceding sentence if such Non-Employee Director Option is granted pursuant to an assumption or substitution for another option in a manner satisfying the provisions of Section 424(a) of the Code. (e) VESTING. Each Non-Employee Director Option shall vest one third per year from the date on which it is granted. (f) CONSIDERATION. The purchase price of stock acquired pursuant to a Non-Employee Director Option may be paid, to the extent permitted by applicable statutes and regulations, in any combination of (i) cash or check, (ii) delivery to the Company of other Common Stock, (ii) deferred payment or (iv) any other form of legal consideration that may be acceptable to the Board and provided in the Non-Employee Director Option Agreement; provided, however, that at any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. In the case of any deferred payment arrangement, interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (g) TRANSFERABILITY. A Non-Employee Director Option shall not be transferable except by will or by the laws of descent and distribution and shall be exercisable during the lifetime of the Non-Employee Director only by the Non-Employee Director. Notwithstanding the foregoing, the Non-Employee Director may, by delivering written notice to the Company, in a form satisfactory to the Company, designate a third party who, in the event of the death of the Non-Employee Director, shall thereafter be entitled to exercise the Non-Employee Director Option. (h) TERMINATION OF CONTINUOUS SERVICE. In the event a Non-Employee Director's Continuous Service terminates (other than upon the Non-Employee Director's death or Disability), the Non-Employee Director may exercise his or her Non-Employee Director Option (to the extent that the Non-Employee Director was entitled to exercise it as of the date of 11 termination) but only within such period of time ending on the earlier of (i) the date three (3) months following the termination of the Non-Employee Director's Continuous Service, or (ii) the expiration of the term of the Non-Employee Director Option as set forth in the Non-Employee Director Option Agreement. If, after termination, the Non-Employee Director does not exercise his or her Non-Employee Director Option within the time specified in the Non-Employee Director Option Agreement, the Non-Employee Director Option shall terminate. (i) EXTENSION OF TERMINATION DATE. If the exercise of the Non-Employee Director Option following the termination of the Non-Employee Director's Continuous Service (other than upon the Non-Employee Director's death or Disability) would be prohibited at any time solely because the issuance of shares would violate the registration requirements under the Securities Act, then the Non-Employee Director Option shall terminate on the earlier of (i) the expiration of the term of the Non-Employee Director Option set forth in subsection 7(c) or (ii) the expiration of a period of three (3) months after the termination of the Non-Employee Director's Continuous Service during which the exercise of the Non-Employee Director Option would not violate such registration requirements. (j) DISABILITY OF NON-EMPLOYEE DIRECTOR. In the event a Non-Employee Director's Continuous Service terminates as a result of the Non-Employee Director's Disability, the Non-Employee Director may exercise his or her Non-Employee Director Option (to the extent that the Non-Employee Director was entitled to exercise it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following such termination or (ii) the expiration of the term of the Non-Employee Director Option as set forth in the Non-Employee Director Option Agreement. If, after termination, the Non-Employee Director does not exercise his or her Non-Employee Director Option within the time specified herein, the Non-Employee Director Option shall terminate. (k) DEATH OF NON-EMPLOYEE DIRECTOR. In the event (i) a Non-Employee Director's Continuous Service terminates as a result of the Non-Employee Director's death or (ii) the Non-Employee Director dies within the three-month period after the termination of the Non-Employee Director's Continuous Service for a reason other than death, then the Non-Employee Director Option may be exercised (to the extent the Non-Employee Director was entitled to exercise the Non-Employee Director Option as of the date of death) by the Non-Employee Director's estate, by a person who acquired the right to exercise the Non-Employee Director Option by bequest or inheritance or by a person designated to exercise the Non-Employee Director Option upon the Non-Employee Director's death, but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of death or (2) the expiration of the term of such Non-Employee Director Option as set forth in the Non-Employee Director Option Agreement. If, after death, the Non-Employee Director Option is not exercised within the time specified herein, the Non-Employee Director Option shall terminate. 8. Provisions of Stock Awards other than Options. (a) STOCK BONUS AWARDS. Each stock bonus agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of stock bonus agreements may change from time to time, and the terms and conditions of separate stock bonus agreements need not be identical, but each stock bonus 12 agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) CONSIDERATION. A stock bonus may be awarded in consideration for past services actually rendered to the Company or an Affiliate for its benefit. (ii) VESTING. Shares of Common Stock awarded under the stock bonus agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. (iii) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a Participant's Continuous Service terminates, the Company may reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the stock bonus agreement. (iv) TRANSFERABILITY. Rights to acquire shares under the stock bonus agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the stock bonus agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the stock bonus agreement remains subject to the terms of the stock bonus agreement. (b) RESTRICTED STOCK AWARDS. Each restricted stock purchase agreement shall be in such form and shall contain such terms and conditions as the Board shall deem appropriate. The terms and conditions of the restricted stock purchase agreements may change from time to time, and the terms and conditions of separate restricted stock purchase agreements need not be identical, but each restricted stock purchase agreement shall include (through incorporation of provisions hereof by reference in the agreement or otherwise) the substance of each of the following provisions: (i) PURCHASE PRICE. The purchase price under each restricted stock purchase agreement shall be such amount as the Board shall determine and designate in such restricted stock purchase agreement. The purchase price shall not be less than eighty-five percent (85%) of the Common Stock's Fair Market Value on the date such award is made or at the time the purchase is consummated. (ii) CONSIDERATION. The purchase price of Common Stock acquired pursuant to the restricted stock purchase agreement shall be paid either: (i) in cash at the time of purchase; (ii) at the discretion of the Board, according to a deferred payment or other similar arrangement with the Participant; or (iii) in any other form of legal consideration that may be acceptable to the Board in its discretion; provided, however, that at any time that the Company is incorporated in Delaware, then payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall not be made by deferred payment. (iii) VESTING. Shares of Common Stock acquired under the restricted stock purchase agreement may, but need not, be subject to a share repurchase option in favor of the Company in accordance with a vesting schedule to be determined by the Board. 13 (iv) TERMINATION OF PARTICIPANT'S CONTINUOUS SERVICE. In the event a Participant's Continuous Service terminates, the Company may repurchase or otherwise reacquire any or all of the shares of Common Stock held by the Participant which have not vested as of the date of termination under the terms of the restricted stock purchase agreement. (v) TRANSFERABILITY. Rights to acquire shares under the restricted stock purchase agreement shall be transferable by the Participant only upon such terms and conditions as are set forth in the restricted stock purchase agreement, as the Board shall determine in its discretion, so long as Common Stock awarded under the restricted stock purchase agreement remains subject to the terms of the restricted stock purchase agreement. 9. Covenants of the Company. (a) AVAILABILITY OF SHARES. During the terms of the Stock Awards, the Company shall keep available at all times the number of shares of Common Stock required to satisfy such Stock Awards. (b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Stock Awards and to issue and sell shares of Common Stock upon exercise of the Stock Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Stock Award or any Common Stock issued or issuable pursuant to any such Stock Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon exercise of such Stock Awards unless and until such authority is obtained. 10. Use of Proceeds from Stock. Proceeds from the sale of Common Stock pursuant to Stock Awards shall constitute general funds of the Company. 11. Miscellaneous. (a) ACCELERATION OF EXERCISABILITY AND VESTING. The Board shall have the power to accelerate the time at which a Stock Award may first be exercised or the time during which a Stock Award or any part thereof will vest in accordance with the Plan, notwithstanding the provisions in the Stock Award stating the time at which it may first be exercised or the time during which it will vest. (b) STOCKHOLDER RIGHTS. No Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Stock Award unless and until such Participant has satisfied all requirements for exercise of the Stock Award pursuant to its terms. (c) NO EMPLOYMENT OR OTHER SERVICE RIGHTS. Nothing in the Plan or any instrument executed or Stock Award granted pursuant thereto shall confer upon any Participant any right to 14 continue to serve the Company or an Affiliate in the capacity in effect at the time the Stock Award was granted or shall affect the right of the Company or an Affiliate to terminate (i) the employment of an Employee with or without notice and with or without cause, (ii) the service of a Consultant pursuant to the terms of such Consultant's agreement with the Company or an Affiliate or (iii) the service of a Director pursuant to the Bylaws of the Company or an Affiliate, and any applicable provisions of the corporate law of the state in which the Company or the Affiliate is incorporated, as the case may be. (d) INCENTIVE STOCK OPTION $100,000 LIMITATION. To the extent that the aggregate Fair Market Value (determined at the time of grant) of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by any Non-Employee Director during any calendar year (under all plans of the Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), the Options or portions thereof which exceed such limit (according to the order in which they were granted) shall be treated as Nonstatutory Stock Options. (e) INVESTMENT ASSURANCES. The Company may require a Participant, as a condition of exercising or acquiring Common Stock under any Stock Award, (i) to give written assurances satisfactory to the Company as to the Participant's knowledge and experience in financial and business matters and/or to employ a purchaser representative reasonably satisfactory to the Company who is knowledgeable and experienced in financial and business matters and that he or she is capable of evaluating, alone or together with the purchaser representative, the merits and risks of exercising the Stock Award; and (ii) to give written assurances satisfactory to the Company stating that the Participant is acquiring Common Stock subject to the Stock Award for the Participant's own account and not with any present intention of selling or otherwise distributing the Common Stock. The foregoing requirements, and any assurances given pursuant to such requirements, shall be inoperative if (iii) the issuance of the shares of Common Stock upon the exercise or acquisition of Common Stock under the Stock Award has been registered under a then currently effective registration statement under the Securities Act or (iv) as to any particular requirement, a determination is made by counsel for the Company that such requirement need not be met in the circumstances under the then applicable securities laws. The Company may, upon advice of counsel to the Company, place legends on stock certificates issued under the Plan as such counsel deems necessary or appropriate in order to comply with applicable securities laws, including, but not limited to, legends restricting the transfer of the Common Stock. (f) WITHHOLDING OBLIGATIONS. To the extent provided by the terms of a Stock Award Agreement, the Participant may satisfy any federal, state or local tax withholding obligation relating to the exercise or acquisition of Common Stock under a Stock Award by any of the following means (in addition to the Company's right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (i) tendering a cash payment; (ii) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant as a result of the exercise or acquisition of Common Stock under the Stock Award; or (iii) delivering to the Company owned and unencumbered shares of the Common Stock. Notwithstanding the foregoing, the Company shall not be authorized to withhold shares of Common Stock at rates in excess of the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes. 15 12. Adjustments upon Changes in Stock. (a) CAPITALIZATION ADJUSTMENTS. If any change is made in the Common Stock subject to the Plan, or subject to any Stock Award, without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation, stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares, change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be appropriately adjusted in the class(es) and maximum number of securities subject to the Plan pursuant to subsection 4(a) and the maximum number of securities subject to award to any person pursuant to subsection 5(c), and the outstanding Stock Awards will be appropriately adjusted in the class(es) and number of securities and price per share of Common Stock subject to such outstanding Stock Awards. The Board shall make such adjustments, and its determination shall be final, binding and conclusive. (The conversion of any convertible securities of the Company shall not be treated as a transaction "without receipt of consideration" by the Company.) (b) CHANGE IN CONTROL. In the event of (i) a dissolution, liquidation or sale of substantially all of the assets of the Company, (ii) a merger or consolidation in which the Company is not the surviving corporation or (iii) a reverse merger in which the Company is the surviving corporation but the shares of Common Stock outstanding immediately preceding the merger are converted by virtue of the merger into other property, whether in the form of securities, cash or otherwise, then, to the extent permitted by applicable law: (i) any surviving corporation shall assume any Stock Awards outstanding under the Plan or shall substitute similar stock awards (including an award to acquire the same consideration paid to the stockholders in the transaction described in this subsection 12(c)) for those outstanding under the Plan, or (ii) such Stock Awards shall continue in full force and effect. In the event any surviving corporation refuses to assume or continue such Stock Awards, or to substitute similar stock awards for those outstanding under the Plan, then with respect to Stock Awards held by Participants whose Continuous Service has not terminated, the time during which such Stock Awards may be exercised shall be accelerated, and the Stock Awards terminated if not exercised prior to such event. 13. Amendment of the Plan and Stock Awards. (a) AMENDMENT OF PLAN. The Board at any time, and from time to time, may amend the Plan. However, except as provided in Section 12 relating to adjustments upon changes in Common Stock, no amendment shall be effective unless approved by the stockholders of the Company to the extent stockholder approval is necessary to satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or securities exchange listing requirements. (b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion, submit any other amendment to the Plan for stockholder approval, including, but not limited to, amendments to the Plan intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder regarding the exclusion of performance-based compensation from the limit on corporate deductibility of compensation paid to certain executive officers. 16 (c) CONTEMPLATED AMENDMENTS. It is expressly contemplated that the Board may amend the Plan in any respect the Board deems necessary or advisable to provide eligible Employees with the maximum benefits provided or to be provided under the provisions of the Code and the regulations promulgated thereunder relating to Incentive Stock Options and/or to bring the Plan and/or Incentive Stock Options granted under it into compliance therewith. (d) NO IMPAIRMENT OF RIGHTS. Rights under any Stock Award granted before amendment of the Plan shall not be impaired by any amendment of the Plan unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. (e) AMENDMENT OF STOCK AWARDS. The Board at any time, and from time to time, may amend the terms of any one or more Stock Awards; provided, however, that the rights under any Stock Award shall not be impaired by any such amendment unless (i) the Company requests the consent of the Participant and (ii) the Participant consents in writing. 14. Termination or Suspension of the Plan. (a) PLAN TERM. The Board may suspend or terminate the Plan at any time. Unless sooner terminated, the Plan shall terminate on the day before the tenth (10th) anniversary of the date the Plan is adopted by the Board or approved by the stockholders of the Company, whichever is earlier. No Stock Awards may be granted under the Plan while the Plan is suspended or after it is terminated. (b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan shall not impair rights and obligations under any Stock Award granted while the Plan is in effect, except with the written consent of the Participant. 15. Effective Date of Plan. The Plan shall become effective on the date on which it is adopted by the Board, but no Stock Award shall be exercised (or, in the case of a stock bonus, shall be granted) unless and until the Plan has been approved by the stockholders of the Company, which approval shall be within twelve (12) months before or after the date the Plan is adopted by the Board. 16. Choice of Law. The law of the State of Delaware shall govern all questions concerning the construction, validity and interpretation of this Plan, without regard to such state's conflict of laws rules. 17 VIXEL CORPORATION 1999 EQUITY INCENTIVE PLAN STOCK OPTION AGREEMENT (INCENTIVE AND NONSTATUTORY STOCK OPTIONS) Pursuant to your Stock Option Grant Notice ("Grant Notice") and this Stock Option Agreement, Vixel Corporation (the "Company") has granted you an option under its 1999 Equity Incentive Plan (the "Plan") to purchase the number of shares of the Company's Common Stock indicated in your Grant Notice at the exercise price indicated in your Grant Notice. Defined terms not explicitly defined in this Stock Option Agreement but defined in the Plan shall have the same definitions as in the Plan. The details of your option are as follows: 1. VESTING. Subject to the limitations contained herein, your option will vest as provided in your Grant Notice, provided that vesting will cease upon the termination of your Continuous Service. 2. NUMBER OF SHARES AND EXERCISE PRICE. The number of shares of Common Stock subject to your option and your exercise price per share referenced in your Grant Notice may be adjusted from time to time for Capitalization Adjustments, as provided in the Plan. 3. EXERCISE PRIOR TO VESTING ("EARLY EXERCISE"). If permitted in your Grant Notice (i.e., the "Exercise Schedule" indicates that "Early Exercise" of your option is permitted) and subject to the provisions of your option, you may elect at any time that is both (i) during the period of your Continuous Service and (ii) during the term of your option, to exercise all or part of your option, including the nonvested portion of your option; provided, however, that: (a) a partial exercise of your option shall be deemed to cover first vested shares of Common Stock and then the earliest vesting installment of unvested shares of Common Stock; (b) any shares of Common Stock so purchased from installments that have not vested as of the date of exercise shall be subject to the purchase option in favor of the Company as described in the Company's form of Early Exercise Stock Purchase Agreement; (c) you shall enter into the Company's form of Early Exercise Stock Purchase Agreement with a vesting schedule that will result in the same vesting as if no early exercise had occurred; and (d) if your option is an incentive stock option, then, as provided in the Plan, to the extent that the aggregate Fair Market Value (determined at the time of grant) of the shares of Common Stock with respect to which your option plus all other incentive stock options you hold are exercisable for the first time by you during any calendar year (under all plans of the 18 Company and its Affiliates) exceeds one hundred thousand dollars ($100,000), your option(s) or portions thereof that exceed such limit (according to the order in which they were granted) shall be treated as nonstatutory stock options. 4. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or in any other manner PERMITTED BY YOUR GRANT NOTICE, which may include one or more of the following: (a) In the Company's sole discretion at the time your option is exercised and provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board that, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds. (b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, by delivery of already-owned shares of Common Stock either that you have held for the period required to avoid a charge to the Company's reported earnings (generally six months) or that you did not acquire, directly or indirectly from the Company, that are owned free and clear of any liens, claims, encumbrances or security interests, and that are valued at Fair Market Value on the date of exercise. "Delivery" for these purposes, in the sole discretion of the Company at the time you exercise your option, shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, you may not exercise your option by tender to the Company of Common Stock to the extent such tender would violate the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. (c) Pursuant to the following deferred payment alternative: (i) Not less than one hundred percent (100%) of the aggregate exercise price, plus accrued interest, shall be due four (4) years from date of exercise or, at the Company's election, upon termination of your Continuous Service. (ii) Interest shall be compounded at least annually and shall be charged at the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any portion of any amounts other than amounts stated to be interest under the deferred payment arrangement. (iii) At any time that the Company is incorporated in Delaware, payment of the Common Stock's "par value," as defined in the Delaware General Corporation Law, shall be made in cash and not by deferred payment. (iv) In order to elect the deferred payment alternative, you must, as a part of your written notice of exercise, give notice of the election of this payment alternative and, in order to secure the payment of the deferred exercise price to the Company hereunder, if the Company so requests, you must tender to the Company a promissory note and a security 19 agreement covering the purchased shares of Common Stock, both in form and substance satisfactory to the Company, or such other or additional documentation as the Company may request. 5. WHOLE SHARES. You may exercise your option only for whole shares of Common Stock. 6. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, you may not exercise your option unless the shares of Common Stock issuable upon such exercise are then registered under the Securities Act or, if such shares of Common Stock are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing your option, and you may not exercise your option if the Company determines that such exercise would not be in material compliance with such laws and regulations. 7. TERM. The term of your option commences on the Date of Grant and expires upon the EARLIEST of the following: (a) three (3) months after the termination of your Continuous Service for any reason other than your Disability or death, provided that if during any part of such three- (3-) month period your option is not exercisable solely because of the condition set forth in the preceding paragraph relating to "Securities Law Compliance," your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; (b) twelve (12) months after the termination of your Continuous Service due to your Disability; (c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates; (d) the Expiration Date indicated in your Grant Notice; or (e) the tenth (10th) anniversary of the Date of Grant. If your option is an incentive stock option, note that, to obtain the federal income tax advantages associated with an "incentive stock option," the Code requires that at all times beginning on the date of grant of your option and ending on the day three (3) months before the date of your option's exercise, you must be an employee of the Company or an Affiliate, except in the event of your death or Disability. The Company has provided for extended exercisability of your option under certain circumstances for your benefit but cannot guarantee that your option will necessarily be treated as an "incentive stock option" if you continue to provide services to the Company or an Affiliate as a Consultant or Director after your employment terminates or if you otherwise exercise your option more than three (3) months after the date your employment terminates. 20 8. EXERCISE. (a) You may exercise the vested portion of your option (and the unvested portion of your option if your Grant Notice so permits) during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter into an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option, (2) the lapse of any substantial risk of forfeiture to which the shares of Common Stock are subject at the time of exercise, or (3) the disposition of shares of Common Stock acquired upon such exercise. (c) If your option is an incentive stock option, by exercising your option you agree that you will notify the Company in writing within fifteen (15) days after the date of any disposition of any of the shares of the Common Stock issued upon exercise of your option that occurs within two (2) years after the date of your option grant or within one (1) year after such shares of Common Stock are transferred upon exercise of your option. 9. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 10. RIGHT OF REPURCHASE. To the extent provided in the Company's bylaws as amended from time to time, the Company shall have the right to repurchase all or any part of the shares of Common Stock you acquire pursuant to the exercise of your option. 11. OPTION NOT A SERVICE CONTRACT. Your option is not an employment or service contract, and nothing in your option shall be deemed to create in any way whatsoever any obligation on your part to continue in the employ of the Company or an Affiliate, or of the Company or an Affiliate to continue your employment. In addition, nothing in your option shall obligate the Company or an Affiliate, their respective shareholders, Boards of Directors, Officers or Employees to continue any relationship that you might have as a Director or Consultant for the Company or an Affiliate. 12. WITHHOLDING OBLIGATIONS. (a) At the time you exercise your option, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your option. Notwithstanding 21 the foregoing, the Company shall not be authorized to withhold shares of Common Stock at rates in excess of the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes. (b) Upon your request and subject to approval by the Company, in its sole discretion, and compliance with any applicable conditions or restrictions of law, the Company may withhold from fully vested shares of Common Stock otherwise issuable to you upon the exercise of your option a number of whole shares of Common Stock having a Fair Market Value, determined by the Company as of the date of exercise, not in excess of the minimum amount of tax required to be withheld by law. If the date of determination of any tax withholding obligation is deferred to a date later than the date of exercise of your option, share withholding pursuant to the preceding sentence shall not be permitted unless you make a proper and timely election under Section 83(b) of the Code, covering the aggregate number of shares of Common Stock acquired upon such exercise with respect to which such determination is otherwise deferred, to accelerate the determination of such tax withholding obligation to the date of exercise of your option. Notwithstanding the filing of such election, shares of Common Stock shall be withheld solely from fully vested shares of Common Stock determined as of the date of exercise of your option that are otherwise issuable to you upon such exercise. Any adverse consequences to you arising in connection with such share withholding procedure shall be your sole responsibility. (c) You may not exercise your option unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested, and the Company shall have no obligation to issue a certificate for such shares of Common Stock or release such shares of Common Stock from any escrow provided for herein. 13. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by mail by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 14. GOVERNING PLAN DOCUMENT. Your option is subject to all the provisions of the Plan, the provisions of which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 22 VIXEL CORPORATION 1999 EQUITY INCENTIVE PLAN NON-EMPLOYEE DIRECTOR STOCK OPTION AGREEMENT Pursuant to the 1999 Equity Incentive Plan (the "Plan") and this Non-Employee Director Stock Option Agreement, Vixel Corporation (the "Company") has granted you a Nonstatutory Stock Option under the Plan to purchase __________________________ (________) shares of the Company's Common Stock at an exercise price of $___________ per share. Capitalized terms not defined in this Stock Option Agreement are defined in the Plan. The details of your option are as follows: 15. NUMBER OF SHARES AND EXERCISE PRICE. Pursuant to your option, you may purchase __________________________ (________) shares of the Company's Common Stock at an exercise price of $___________ per share subject to the terms and conditions set forth in this Stock Option Agreement and the Plan. The number of shares and exercise price subject to your option may be adjusted from time to time to reflect Capitalization Adjustments, as provided in the Plan. 16. VESTING. Your option is fully vested. 17. DATE OF GRANT. Your option has been granted effective __________________ (the "Date of Grant"). 18. METHOD OF PAYMENT. Payment of the exercise price is due in full upon exercise of all or any part of your option. You may elect to make payment of the exercise price in cash or by check or by one or more of the following: (a) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, then pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board which, prior to the issuance of Common Stock, results in either the receipt of cash (or check) by the Company or the receipt of irrevocable instructions to pay the aggregate exercise price to the Company from the sales proceeds (a "cashless exercise"). (b) Provided that at the time of exercise the Common Stock is publicly traded and quoted regularly in The Wall Street Journal, then by delivery of already-owned shares of Common Stock (valued at their Fair Market Value on the date of exercise) if (i) either you have held the already-owned shares for the period required to avoid a charge to the Company's reported earnings (generally six months) or you did not acquire the already-owned shares, directly or indirectly from the Company, and (ii) you own the already-owned shares free and clear of any liens, claims, encumbrances or security interests. "Delivery" for these purposes shall include delivery to the Company of your attestation of ownership of such shares of Common Stock in a form approved by the Company. Notwithstanding the foregoing, your option may not be exercised by tender to the Company of Common Stock to the extent such 23 tender would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company's stock. 19. WHOLE SHARES. Your option may only be exercised for whole shares. 20. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary contained herein, your option may not be exercised unless the shares issuable upon exercise of your option are then registered under the Securities Act or, if such shares are not then so registered, the Company has determined that such exercise and issuance would be exempt from the registration requirements of the Securities Act. The exercise of your option must also comply with other applicable laws and regulations governing the option, and the option may not be exercised if the Company determines that the exercise would not be in material compliance with such laws and regulations. 21. TERM. The term of your option commences on the Date of Grant and expires upon the EARLIEST of the following: (a) three (3) months after the termination of your Continuous Service for any reason other than death or Disability, provided that if during any part of such three- (3-) month period your option is not exercisable solely because of the condition set forth in the preceding paragraph relating to "Securities Law Compliance," your option shall not expire until the earlier of the Expiration Date or until it shall have been exercisable for an aggregate period of three (3) months after the termination of your Continuous Service; (b) twelve (12) months after the termination of your Continuous Service due to Disability; (c) eighteen (18) months after your death if you die either during your Continuous Service or within three (3) months after your Continuous Service terminates for any reason; or (d) the tenth (10th) anniversary of the Date of Grant. 22. EXERCISE. (a) You may exercise your option during its term by delivering a Notice of Exercise (in a form designated by the Company) together with the exercise price to the Secretary of the Company, or to such other person as the Company may designate, during regular business hours, together with such additional documents as the Company may then require. (b) By exercising your option you agree that, as a condition to any exercise of your option, the Company may require you to enter an arrangement providing for the payment by you to the Company of any tax withholding obligation of the Company arising by reason of (1) the exercise of your option or (2) the disposition of shares acquired upon such exercise. 23. TRANSFERABILITY. Your option is not transferable, except by will or by the laws of descent and distribution, and is exercisable during your life only by you. Notwithstanding the foregoing, by delivering written notice to the Company, in a form satisfactory to the Company, 24 you may designate a third party who, in the event of your death, shall thereafter be entitled to exercise your option. 24. OPTION NOT A SERVICE CONTRACT. Your option is not a service contract, and nothing in your option shall obligate the Company or an Affiliate, their respective shareholders, Boards of Directors, officers or employees to continue any relationship that you might have as a Director. 25. WITHHOLDING OBLIGATIONS. (a) At the time your option is exercised, in whole or in part, or at any time thereafter as requested by the Company, you hereby authorize withholding from payroll and any other amounts payable to you, and otherwise agree to make adequate provision for (including by means of a "cashless exercise" pursuant to a program developed under Regulation T as promulgated by the Federal Reserve Board to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Company or an Affiliate, if any, which arise in connection with your option. Notwithstanding the foregoing, the Company shall not be authorized to withhold shares of Common Stock at rates in excess of the minimum statutory withholding rates for federal and state tax purposes, including payroll taxes. (b) Your option is not exercisable unless the tax withholding obligations of the Company and/or any Affiliate are satisfied. Accordingly, you may not be able to exercise your option when desired even though your option is vested. 26. NOTICES. Any notices provided for in your option or the Plan shall be given in writing and shall be deemed effectively given upon receipt or, in the case of notices delivered by the Company to you, five (5) days after deposit in the United States mail, postage prepaid, addressed to you at the last address you provided to the Company. 27. GOVERNING PLAN DOCUMENT. Your option is subject to all applicable provisions of the Plan, which are hereby made a part of your option, and is further subject to all interpretations, amendments, rules and regulations which may from time to time be promulgated and adopted pursuant to the Plan. In the event of any conflict between the provisions of your option and those of the Plan, the provisions of the Plan shall control. 25 NOTICE OF EXERCISE Vixel Corporation - ------------------------ - ------------------------ - ------------------------ Date of Exercise: ------------ Ladies and Gentlemen: This constitutes notice under my stock option that I elect to purchase the number of shares for the price set forth below. Type of option (check one): Incentive [ ] Nonstatutory [ ] Stock option dated: _______________ Number of shares as to which option is exercised: _______________ Certificates to be issued in name of: _______________ Total exercise price: $______________ Cash payment delivered herewith: $______________ Value of ________ shares of Vixel Corporation common stock delivered herewith(1): $______________ By this exercise, I agree (i) to provide such additional documents as you may require pursuant to the terms of the 1999 Equity Incentive Plan, (ii) to provide for the payment by me to you (in the manner designated by you) of your withholding obligation, if any, relating to the exercise of this option, and (iii) if this exercise relates to an incentive stock option, to notify you in writing within fifteen (15) days after the date of any disposition of any of the shares of Common Stock issued upon exercise of this option that occurs within two (2) years after the date of grant of this option or within one (1) year after such shares of Common Stock are issued upon exercise of this option. - -------- (1) Shares must meet the public trading requirements set forth in the option. Shares must be valued in accordance with the terms of the option being exercised, must have been owned for the minimum period required in the option, and must be owned free and clear of any liens, claims, encumbrances or security interests. Certificates must be endorsed or accompanied by an executed assignment separate from certificate. 26 Very truly yours, ----------------------------- 27 VIXEL CORPORATION STOCK OPTION GRANT NOTICE (1999 EQUITY INCENTIVE PLAN) Vixel Corporation (the "Company"), pursuant to its 1999 Equity Incentive Plan (the "Plan"), hereby grants to Optionholder an option to purchase the number of shares of the Company's Common Stock set forth below. This option is subject to all of the terms and conditions as set forth herein and in the Stock Option Agreement, the Plan and the Notice of Exercise, all of which are attached hereto and incorporated herein in their entirety. Optionholder: _____________________________________ Date of Grant: _____________________________________ Vesting Commencement Date: _____________________________________ Number of Shares Subject to Option: _____________________________________ Exercise Price (Per Share): _____________________________________ Total Exercise Price: _____________________________________ Expiration Date: _____________________________________ TYPE OF GRANT: [ ] Incentive Stock Option [ ] Nonstatutory Stock Option EXERCISE SCHEDULE: [ ] Same as Vesting Schedule [ ] Early Exercise Permitted VESTING SCHEDULE: [1/4th of the shares vest one year after the Vesting Commencement Date. 1/16th of the shares vest monthly thereafter over the next three years.] PAYMENT: By one or a combination of the following items (described in the Stock Option Agreement): By cash or check Pursuant to a Regulation T Program if the Shares are publicly traded By delivery of already-owned shares if the Shares are publicly traded
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionholder acknowledges receipt of, and understands and agrees to, this Grant Notice, the Stock Option Agreement and the Plan. Optionholder further acknowledges that as of the Date of Grant, this Grant Notice, the Stock Option Agreement and the Plan set forth the entire understanding between Optionholder and the Company regarding the acquisition of stock in the Company and supersede all prior oral and written agreements on that subject with the exception of (i) options previously granted and delivered to Optionholder under the Plan, and (ii) the following agreements only: OTHER AGREEMENTS: _____________________________________ _____________________________________ VIXEL CORPORATION OPTIONHOLDER: By: -------------------------------- ------------------------------ Signature Signature Title: Date: ------------------------------ ------------------------- Date: ------------------------------ ATTACHMENTS: Stock Option Agreement, 1999 Equity Incentive Plan and Notice of Exercise EX-10.24 11 FORM OF STOCK PLEDGE AGREEMENT 1 EXHIBIT 10.24 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT ("Pledge Agreement") is made by the undersigned ("Pledgor"), in favor of Vixel Corporation, a Delaware corporation ("Pledgee"). WHEREAS, Pledgor has concurrently herewith executed that certain Promissory Note (the "Note") in favor of Pledgee in the amount of One Hundred Thousand Dollars ($100,000) in payment of the purchase price of Twenty-Five Thousand (25,000) shares of the Common Stock of Pledgee; and WHEREAS, Pledgee is willing to accept the Note from Pledgor, but only upon the condition, among others, that Pledgor shall have executed and delivered to Pledgee this Pledge Agreement and the Collateral (as defined below): NOW, THEREFORE, in consideration of the foregoing recitals and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, and intending to be legally bound, Pledgor hereby agrees as follows: 1. As security for the full, prompt and complete payment and performance when due (whether by stated maturity, by acceleration or otherwise) of all indebtedness of Pledgor to Pledgee created under the Note (all such indebtedness being the "Liabilities"), together with, without limitation, the prompt payment of all expenses, including, without limitation, reasonable attorneys' fees and legal expenses, incidental to the collection of the Liabilities and the enforcement or protection of Pledgee's lien in and to the collateral pledged hereunder, Pledgor hereby pledges to Pledgee, and grants to Pledgee, a first priority security interest in Twenty-Five Thousand (25,000) shares of Common Stock of Pledgee (the "Pledged Shares"), and all dividends, cash, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of the Pledged Shares (collectively, the "Pledged Collateral"). 2. At any time, without notice, and at the expense of Pledgor, Pledgee in its name or in the name of its nominee or of Pledgor may, but shall not be obligated to: (1) collect by legal proceedings or otherwise all dividends (except cash dividends other than liquidating dividends), interest, principal payments and other sums now or hereafter payable upon or on account of said Pledged Collateral; (2) enter into any extension, reorganization, deposit, merger or consolidation agreement, or any agreement in any way relating to or affecting the Pledged Collateral, and in connection therewith may deposit or surrender control of such Pledged Collateral thereunder, accept other property in exchange for such Pledged Collateral and do and perform such acts and things as it may deem proper, and any money or property received in exchange for such Pledged Collateral shall be applied to the indebtedness or thereafter held by it pursuant to the provisions hereof; (3) insure, process and preserve the Pledged Collateral; (4) cause the Pledged Collateral to be transferred to its name or to the name of its nominee; (5) exercise as to such Pledged Collateral all the rights, powers and remedies of an owner, except that so long as no default exists under the Note or hereunder Pledgor shall retain all voting rights as to the Pledged Shares. 2 3. Pledgor agrees to pay prior to delinquency all taxes, charges, liens and assessments against the Pledged Collateral, and upon the failure of Pledgor to do so, Pledgee at its option may pay any of them and shall be the sole judge of the legality or validity thereof and the amount necessary to discharge the same. 4. At the option of Pledgee and without necessity of demand or notice, all or any part of the indebtedness of Pledgor shall immediately become due and payable irrespective of any agreed maturity, upon the happening of any of the following events: (1) failure to keep or perform any of the terms or provisions of this Pledge Agreement; (2) failure to pay any installment of principal or interest on the Note when due; (3) the levy of any attachment, execution or other process against the Pledged Collateral; or (4) the insolvency, commission of an act of bankruptcy, general assignment for the benefit of creditors, filing of any petition in bankruptcy or for relief under the provisions of Title 11 of the United States Code of, by, or against Pledgor. 5. In the event of the nonpayment of any indebtedness when due, whether by acceleration or otherwise, or upon the happening of any of the events specified in the last preceding paragraph, Pledgee may then, or at any time thereafter, at its election, apply, set off, collect or sell in one or more sales, or take such steps as may be necessary to liquidate and reduce to cash in the hands of Pledgee in whole or in part, with or without any previous demands or demand of performance or notice or advertisement, the whole or any part of the Pledged Collateral in such order as Pledgee may elect, and any such sale may be made either at public or private sale at its place of business or elsewhere, or at any broker's board or securities exchange, either for cash or upon credit or for future delivery; provided, however, that if such disposition is at private sale, then the purchase price of the Pledged Collateral shall be equal to the public market price then in effect, or, if at the time of sale no public market for the Pledged Collateral exists, then, in recognition of the fact that the sale of the Pledged Collateral would have to be registered under the Securities Act of 1933 and that the expenses of such registration are commercially unreasonable for the type and amount of collateral pledged hereunder, Pledgee and Pledgor hereby agree that such private sale shall be at a purchase price mutually agreed to by Pledgee and Pledgor or, if the parties cannot agree upon a purchase price, then at a purchase price established by a majority of three independent appraisers knowledgeable of the value of such collateral, one named by Pledgor within 10 days after written request by the Pledgee to do so, one named by Pledgee within such 10 day period, and the third named by the two appraisers so selected, with the appraisal to be rendered by such body within 30 days of the appointment of the third appraiser. The cost of such appraisal, including all appraiser's fees, shall be charged against the proceeds of sale as an expense of such sale. Pledgee may be the purchaser of any or all Pledged Collateral so sold and hold the same thereafter in its own right free from any claim of Pledgor or right of redemption. Demands of performance, notices of sale, advertisements and presence of property at sale are hereby waived, and Pledgee is hereby authorized to sell hereunder any evidence of debt pledged to it. Any sale hereunder may be conducted by any officer or agent of Pledgee. 6. The proceeds of the sale of any of the Pledged Collateral and all sums received or collected by Pledgee from or on account of such Pledged Collateral shall be applied by Pledgee to the payment of expenses incurred or paid by Pledgee in connection with any sale, transfer or 2 3 delivery of the Pledged Collateral, to the payment of any other costs, charges, attorneys' fees or expenses mentioned herein, and to the payment of the indebtedness or any part hereof, all in such order and manner as Pledgee in its discretion may determine. Pledgee shall then pay any balance to Pledgor. 7. Upon the transfer of all or any part of the indebtedness Pledgee may transfer all or any part of the Pledged Collateral and shall be fully discharged thereafter from all liability and responsibility with respect to such Pledged Collateral so transferred, and the transferee shall be vested with all the rights and powers of Pledgee hereunder with respect to such Pledged Collateral so transferred; but with respect to any Pledged Collateral not so transferred Pledgee shall retain all rights and powers hereby given. 8. Until all indebtedness shall have been paid in full the power of sale and all other rights, powers and remedies granted to Pledgee hereunder shall continue to exist and may be exercised by Pledgee at any time and from time to time irrespective of the fact that the indebtedness or any part thereof may have become barred by any statute of limitations, or that the personal liability of Pledgor may have ceased. 9. Pledgee agrees that so long as no default exists under the Note or hereunder, the Pledged Shares shall, upon the request of Pledgor, be released from pledge as the indebtedness is paid. Such releases shall be at the rate of one share for each Four Dollars ($4.00) of principal amount of indebtedness paid. 10. Pledgee may at any time deliver the Pledged Collateral or any part thereof to Pledgor and the receipt of Pledgor shall be a complete and full acquittance for the Pledged Collateral so delivered, and Pledgee shall thereafter be discharged from any liability or responsibility therefor. 11. The rights, powers and remedies given to Pledgee by this Pledge Agreement shall be in addition to all rights, powers and remedies given to Pledgee by virtue of any statute or rule of law. Any forbearance or failure or delay by Pledgee in exercising any right, power or remedy hereunder shall not be deemed to be a waiver of such right, power or remedy, and any single or partial exercise of any right, power or remedy hereunder shall not preclude the further exercise thereof; and every right, power and remedy of Pledgee shall continue in full force and effect until such right, power or remedy is specifically waived by an instrument in writing executed by Pledgee. 12. If any provision of this Pledge Agreement is held to be unenforceable for any reason, it shall be adjusted, if possible, rather than voided in order to achieve the intent of the parties to the extent possible. In any event, all other provisions of this Pledge Agreement shall be deemed valid and enforceable to the full extent possible. 13. This Pledge Agreement shall be governed by, and construed in accordance with, the laws of the State of Washington as applied to contracts made and performed entirely within the State of Washington by residents of such State. 3 4 Dated: May 28, 1999 PLEDGOR - --------------------------------- Printed Name: -------------------- 4 EX-23.1 12 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1/A of our reports dated May 19, 1999, except for the last paragraph of Note 8 which is as of June 22, 1999 and the first paragraph of Note 12 which is as of August 27, 1999, relating to the financial statements and financial statement schedule of Vixel Corporation which appear in such Registration Statement. We also consent to the reference to us under the heading "Experts" and "Selected Financial Data" in such Prospectus. PricewaterhouseCoopers LLP Seattle, Washington August 27, 1999 EX-23.2 13 CONSENT OF KMPG LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Vixel Corporation We consent to the use in this Amendment No. 2 to the Registration Statement on Form S-1 of our report included herein dated May 1, 1997 relating to the balance sheet of Arcxel Technologies, Inc. as of December 31, 1996 and the related statements of operations, stockholders' equity and cash flows for the period from June 18, 1996 (inception) to December 31, 1996, and to the reference to our firm under the heading "Experts" in the prospectus. KPMG LLP Orange County, California August 27, 1999 EX-23.3 14 CONSENT OF PRICEWATERHOUSECOOPERS, LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in this Registration Statement on Form S-1/A of our report dated April 24, 1998, except for the first paragraph of Note 9 which is as of August 27, 1999, relating to the financial statements of Arcxel Technologies, Inc., which appears in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. PricewaterhouseCoopers LLP Seattle, Washington August 27, 1999 -----END PRIVACY-ENHANCED MESSAGE-----