-----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, Od1weIU1OOZeP67ZQ3tLJ0FApTg11+rr7BT9LIj7L3GJJets05sIj/J/vHgxvJv7 /H9XX8w1Ml/uK+GqOMv5gQ== 0000944209-00-000132.txt : 20000203 0000944209-00-000132.hdr.sgml : 20000203 ACCESSION NUMBER: 0000944209-00-000132 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20000202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUALSTAR CORP CENTRAL INDEX KEY: 0000758938 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 953927330 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-96009 FILM NUMBER: 520583 BUSINESS ADDRESS: STREET 1: 6709 INDEPENDENCE AVE CITY: CANOGA PARK STATE: CA ZIP: 91303 BUSINESS PHONE: 8185920061 MAIL ADDRESS: STREET 1: 6709 INDEPENDENCE AVE CITY: CANOGA PARK STATE: CA ZIP: 91303 S-1 1 FORM S-1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- As filed with the Securities and Exchange Commission on February 2, 2000 Registration No. 333- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- QUALSTAR CORPORATION (Exact name of registrant as specified in its charter)
California 3577 95-3927330 State(or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification No.)
6709 Independence Avenue, Canoga Park, CA 91303 (818) 592-0061 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) --------------- William J. Gervais, President 6709 Independence Avenue, Canoga Park, CA 91303 (818) 592-0061 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copies to:
Robert E. Rich, Esq. C.N. Franklin Reddick III, Esq. Daniel P. Murphy, Esq. Amir Ohebsion, Esq. Stradling Yocca Carlson & Rauth, P.C. Troop Steuber Pasich Reddick & Tobey LLP 660 Newport Center Drive, Suite 1600 2029 Century Park East, 24th Floor Newport Beach, California 92660-6441 Los Angeles, California 90067-3010 (949) 725-4000 (310) 728-3000
--------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] --------------- CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Aggregate Amount of Securities to be Registered Offering Price(1)(2) Registration Fee - --------------------------------------------------------------------------------------------- Common Stock, no par value..................... $51,750,000.00 $13,662.00 - ---------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- (1) Includes shares of common stock which may be purchased by the Underwriters to cover over-allotments, if any. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. --------------- The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this preliminary 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 + +preliminary prospectus is not an offer to sell these securities and it is not + +soliciting an offer to buy these securities in any state where the offer or + +sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ Subject to Completion, Dated , 2000 Shares [LOGO OF QUALSTAR] Common Stock ----------- We are offering shares of our common stock. The selling shareholders identified in this prospectus are offering an additional shares. This is our initial public offering and no public market currently exists for our common stock. We anticipate that the initial public offering price will be between $ and $ per share. We have applied to list our common stock on the Nasdaq National Market under the symbol "QBAK." Investing in our shares involves risks. See "Risk Factors" beginning on page 7.
Per Share Total --------- ----- Public offering price.......................................... $ $ Underwriting discount.......................................... $ $ Proceeds, before expenses, to us............................... $ $ Proceeds to selling shareholders............................... $ $
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of 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 the right to purchase up to an additional shares to cover over-allotments. First Security Van Kasper expects to deliver the shares on behalf of the underwriters on or about , 2000. ----------- Joint Lead and Book-Running Managers FIRST SECURITY VAN KASPER________________________________NEEDHAM & COMPANY, INC. ----------- WEDBUSH MORGAN SECURITIES , 2000 Inside Front Cover of Prospectus will include pictures of Qualstar's products with captions describing the pictures. PROSPECTUS SUMMARY To fully understand this offering and its consequences to you, you should read the following summary together with the more detailed information and financial statements and notes thereto appearing elsewhere in this prospectus. Qualstar Corporation We design, develop, manufacture and sell high quality automated magnetic tape libraries used to store, retrieve and manage electronic data primarily in network computing environments. Tape libraries consist of high-performance cartridge tape drives, storage arrays of tape cartridges and robotics to move the tape cartridges from their storage locations to the tape drives under software control. Our tape libraries provide high-performance, reliable and cost-effective storage solutions for organizations requiring backup, recovery and archival storage of critical electronic information. Our tape libraries are compatible with commonly used network operating systems, including UNIX, Windows NT, NetWare and Linux, and a wide range of storage management software. We offer tape libraries for multiple tape drive technologies, including those using Advanced Intelligent Tape, or AIT, Digital Linear Tape, or DLT, and quarter inch cartridge, or QIC, tape media. We recently announced tape libraries for the Linear Tape Open, or LTO, Ultrium tape drives and media. The amount of electronic data and information has been growing due to the emergence of new applications such as image processing, e-commerce, Internet information and email, video and motion picture image storage and other multimedia applications. Storing, managing and protecting this data is increasingly important to the success and operations of many organizations. Consequently, the data storage industry is growing rapidly. Tape libraries are a critical part of a data storage solution and are substantially less expensive per-megabyte than any other data storage method. The growth in data and the need for complex storage solutions have spurred the evolution of new storage and data management technologies. These new technologies, which are gaining wide market acceptance, include: . Fibre Channel, an interface technology which allows users to share storage information with other storage devices and servers over longer distances with faster data transfer speeds. We recently invested $1.1 million in Chaparral Network Storage, Inc., a company that makes the intelligent routers we incorporate into our tape libraries to provide Fibre Channel connectivity; . Storage Area Networks, or SAN, a networking architecture which allows data to move efficiently and reliably between multiple storage devices and servers; . Advanced storage management software, which has increased the ability of businesses to store, retrieve and manage important data, which in turn allows businesses to operate more efficiently; and . Internet-based storage backup, which allows individuals and enterprises to outsource their storage of data on a cost-efficient basis through services provided by Internet-based storage backup companies. We have designed and developed our products to work with these emerging technologies. We have focused our business primarily on supporting value added resellers, or VARs, and original equipment manufacturers, or OEMs, as the most effective and profitable distribution channels for our tape libraries. VARs develop and install storage solutions for enterprises that face complex storage needs but lack the in-house capability to design and implement their own solution. OEMs generally resell our products under their own brand names and generally provide end users with complete turnkey solutions. We custom configure our library products based on our customer's requirements, with a standard delivery time of one to three working days. We support our VARs with a wide array of marketing programs and offer all of our customers around-the-clock technical support. 3 Our six senior operations executives have worked in the computer and data storage industries for an average of more than 30 years each. We believe that our experience provides us the ability to bring new products to market rapidly at a relatively low development cost, while maintaining our reputation for producing high quality and reliable products. This ability allows us to respond to changing market conditions and new opportunities as they arise. From July 1, 1996 through December 31, 1999, our revenues have grown at a compound annual growth rate of 31.0% and our net income has grown at a compound annual growth rate of 75.1%. We believe that we are well-positioned to become a key provider of automated tape libraries to the storage solutions market. To achieve our goals, we intend to focus on the following key strategies: . Offer libraries for multiple tape drive technologies in order to target the specific preferences of our VAR and OEM customers; . Focus distribution on the VAR channel, which we believe is the most effective market channel for our products; . Maintain and strengthen our OEM relationships, which allow us to reach end users not served by our VAR customers; . Develop libraries for new tape technologies as they come to market; and . Increase our rate of innovation in order to exploit emerging technologies and product opportunities. Corporate Information We were incorporated in California in August 1984. Our executive offices are located at 6709 Independence Avenue, Canoga Park, CA 91303. Our telephone number is (818) 592-0061. Our website address is www.qualstar.com. Information contained in our website does not constitute part of this prospectus. "Qualstar(R)," "Inventory Sentry(TM)" and our logo are trademarks of Qualstar. This prospectus also contains product names, trade names and trademarks that belong to other companies. 4 The Offering Common stock offered: By Qualstar...................................... shares By the selling shareholders...................... shares Total........................................ shares Common stock to be outstanding after this offering.. shares Use of proceeds..................................... We intend to use the net proceeds from this offering for working capital and other general corporate purposes. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.............. QBAK
The number of shares of common stock outstanding after this offering is based on shares outstanding as of January 31, 2000, and excludes: . 427,000 shares of common stock reserved for issuance under our stock incentive plans, of which options to purchase 157,000 shares were outstanding as of January 31, 2000, at a weighted average exercise price of $3.15 per share. Unless otherwise indicated, all information in this prospectus: . has been adjusted to give effect to a -for-1 stock split to be completed prior to this offering; . reflects the automatic conversion of all outstanding shares of our preferred stock into a total of shares of common stock upon the closing of this offering; . assumes no exercise of the underwriters' over-allotment option; and . assumes no exercise of outstanding options to purchase shares of our common stock after January 31, 2000. 5 Summary Financial Data (in thousands, except per share amounts)
Six Months Ended Years Ended June 30, December 31, -------------------------------------- ----------------- 1995 1996 1997 1998 1999 1998 1999 ------ ------- ------- ------- ------- -------- -------- (unaudited) Statements of Income Data: Net revenues............ $8,432 $10,974 $15,333 $19,155 $29,698 $ 12,739 $ 22,522 Gross profit............ 2,934 3,834 4,565 6,263 10,640 4,507 8,542 Income from operations.. 37 793 1,451 3,030 6,507 2,595 5,969 Net income applicable to common shareholders.... 82 526 848 1,786 3,986 1,546 3,590 Earnings per share: Basic................. $ 0.04 $ 0.23 $ 0.36 $ 0.75 $ 1.62 $ 0.63 $ 1.42 Diluted............... $ 0.02 $ 0.15 $ 0.25 $ 0.52 $ 1.14 $ 0.45 $ 1.01 Shares used to compute earnings per share: Basic................. 2,304 2,329 2,345 2,372 2,455 2,449 2,532 Diluted............... 3,419 3,406 3,357 3,441 3,506 3,465 3,543
The as adjusted column contained in the balance sheet data summarized below gives effect to our receipt of the net proceeds from this offering, which are estimated to be $ , as described under "Use of Proceeds."
December 31, 1999 ------------------- Actual As Adjusted ------- ----------- (unaudited) Balance Sheet Data: Cash and cash equivalents................................... $ 3,765 $ Working capital............................................. 13,701 Total assets................................................ 16,744 Total debt.................................................. -- Shareholders' equity........................................ 15,310
6 RISK FACTORS An investment in our common stock involves a high degree of risk. You should carefully consider the following risks and the other information contained in this prospectus before you decide to purchase our common stock. If any of the following risks actually occur, it is likely that our business, financial condition and operating results would be harmed. As a result, the trading price of our common stock could decline, and you could lose part or all of your investment. Our principal competitors devote greater financial and marketing resources to developing and selling automated tape libraries. Consequently, we may be unable to maintain or increase our market share. We face significant competition in developing and selling automated tape libraries. Rapid and ongoing changes in technology and product standards could quickly render our products less competitive, or even obsolete. We have significantly fewer financial, technical, manufacturing, marketing and other resources than many of our competitors and these limited resources may harm our business in many ways. For example, in recent years several of our competitors have: . acquired other tape library companies; . increased the geographic scope of their market; . offered a wider range of tape library products; and . acquired proprietary software products that operate in conjunction with their products and the products of their competitors. In the future, our competitors may leverage their greater resources to: . develop, manufacture and market products that are less expensive or technologically superior to our products; . attend more trade shows and spend more on advertising and marketing; . reach a wider array of potential customers through a broader range of distribution channels; . respond more quickly to new or changing technologies, customer requirements and standards; or . reduce prices in order to preserve or gain market share. We believe competitive pressures are likely to continue. We cannot guarantee that our resources will be sufficient to address this competition or that we will manage costs and adopt strategies capable of effectively utilizing our resources. If we are unable to respond to competitive pressures successfully, our prices and profit margins may fall and our market share may decrease. We have a limited number of executives. The loss of any single executive or the failure to hire and integrate capable new executives could harm our business. The success of our business is tied closely to the managerial, engineering and business acumen of our existing executives. William J. Gervais, our President, and Richard A. Nelson, our Vice President of Engineering, conceived and developed most of our tape libraries, have overseen our operations and growth, and have established and maintained our strategic relationships. We expect that they will continue these efforts for the foreseeable future. Our success as a public company will also depend on the contributions of our operations, marketing and financial personnel. However, our current dependence on a limited number of executives, for whom replacements may be difficult to find, entails a risk that we may not be able to supervise and manage our ongoing operations. 7 Our suppliers could reduce shipments of tape drives and tape media. If this occurs, we would be forced to curtail production, our revenues could fall and our market share could decline. Most of our revenues are derived from the sale of automated tape libraries. We depend on a limited number of third-party manufacturers to supply us with the tape drives and tape media that we incorporate into our automated tape libraries. In some cases, these manufacturers are sole-source providers of these components. One manufacturer, Quantum Corporation, also competes with us by selling its own tape libraries. Historically, some of these suppliers have been unable to meet demand for their products and have allocated their limited supply among customers. If suppliers limit our supply of tape drives or tape media, we may be forced to delay or cancel shipments of our tape libraries. The major supplier risks we face include the following: . Sony Electronics, Inc. supplies us with 8 millimeter Advanced Intelligent Tape, or AIT, tape drives and tape media. Sony has allocated AIT tape drives and tape media in the past, and may allocate these products in the future. In the fiscal year ended June 30, 1999, we derived $9.9 million in revenues, or 33.3% of our revenues, and in the six months ended December 31, 1999, we derived $7.1 million in revenues, or 31.6% of our revenues, from the sale of tape libraries and tape media based on Sony AIT drives. If Sony reduces its sales to us or raises its prices, we could lose revenues and our margins could decline. . Quantum is our primary supplier of Digital Linear Tape, or DLT, tape drives and competes with us as a manufacturer of automated tape libraries. In the past, Quantum has allocated quantities of tape drives among its customers. It is possible that Quantum will allocate again, and as a result, we may be unable to meet our future DLT tape drive requirements. This risk is heightened by Quantum's 1998 acquisition of ATL Products, a manufacturer, marketer and servicer of automated tape libraries that utilize DLT tape drives and compete with our products. Even if we receive an adequate allocation, it may be at a price that renders our products uncompetitive. . The Linear Tape Open standard, or LTO, is a new tape standard being developed by an industry consortium that is intended to compete with DLT tape drives. Manufacturers of tape drives and tape media for new tape formats historically have been unable to meet initial demand and may allocate their supply. Our supplier of LTO tape drives recently announced that their tape drives, originally scheduled to begin delivery in our second quarter of fiscal 2000, may not begin shipping until our first quarter of fiscal 2001. Any allocation of LTO products could limit our growth. Our other suppliers have in the past been, and may in the future be, unable to meet our demand, including our needs for timely delivery, adequate quantity and high quality. We do not have long-term supply contracts with any of our significant suppliers. The partial or complete loss of any of our suppliers could result in significant lost revenue, added costs and production delays or could otherwise harm our business and customer relationships. Revenues in the last two quarters of fiscal 2000 may be less than revenues in the first two quarters of fiscal 2000. We believe the fear of problems resulting from the anticipated year 2000 computer bug may have spurred businesses, nonprofit organizations and public entities to accelerate their investments in information storage technologies, including greater use of automated tape libraries, during the first two quarters of fiscal 2000. With the passing of the new year, the level of investment in automated tape libraries and other storage technologies may decline, either because many companies already have purchased these technologies or because the perceived need for such technologies may diminish. If this decrease in expenditures occurs, it may result in lower revenues to us in the third and fourth quarters of fiscal 2000 compared to revenues during the first and second quarters of fiscal 2000. 8 Our revenues could decline if we fail to execute our distribution strategy successfully. We distribute and sell most of our automated tape libraries through value added resellers, or VARs, and original equipment manufacturers, or OEMs, and intend to continue this strategy for the foreseeable future. We currently devote, and intend to continue to devote, significant resources to develop these relationships. A failure to initiate, manage and expand our relationships with VARs or OEMs could limit our ability to grow or sustain our current level of revenues. Our focus on the distribution of our products through VARs poses the following risks: . we may reach fewer customers because we depend on VARs to market to end users and these VARs may fail to market effectively or fail to devote sufficient or effective sales, marketing and technical support to the sales of our products; . we may lose sales because many of our VARs sell products that compete with our products. These VARs may reduce their marketing efforts for our products in favor of products manufactured by our competitors; and . our costs may increase as VARs generally require a higher level of customer support than do OEMs. We depend upon our OEMs' ability to develop new products, applications and product enhancements that incorporate our products in a timely, cost-effective and customer-friendly manner. We cannot guarantee that our OEM customers will meet these challenges effectively. OEMs typically conduct substantial and lengthy evaluation programs before certifying a new product for inclusion in their product line. We may be required to devote significant financial and human resources to these evaluation programs with no assurance that our products will ever be selected. In addition, even if selected by the OEM, there generally is no requirement that the OEM purchase any particular amount of product or that it refrain from purchasing competing products. We do not have any exclusive or long-term agreements with our VARs or OEMs, who purchase our products on an individual purchase order basis. If we lose important VARs or OEMs, if they reduce their focus on our products or if we are unable to obtain additional VARs or OEMs, our business could suffer significant harm. We rely on tape technology for substantially all of our revenues. Our business will be harmed if demand for storage solutions using tape technology declines or fails to grow as rapidly as we expect. We derive substantially all of our revenues from products that incorporate some form of tape technology. We expect to derive a significant amount of revenues from these products for the foreseeable future. As a result, we will continue to be subject to the risk of a dramatic decrease in net revenues if demand for these products declines or if rising prices make it more difficult to obtain them. If storage products incorporating technologies other than tape gain comparable or superior market acceptance, our business could be harmed. Two customers account for a significant portion of our sales and they have no minimum or long-term purchase commitments. Our revenues and earnings may decrease if we lose their business. Our two largest customers accounted for an aggregate of approximately 25.7% of our revenues during fiscal 1999, and 30.7% of our revenues during the six months ended December 31, 1999. Loronix Information Systems, our largest customer, accounted for 17.0% of our revenues during fiscal 1999 and 23.4% of revenues during the six months ended December 31, 1999. We cannot assure you that these customers will continue to purchase our products in the quantities they have purchased in the past, or at all. Our revenues and earnings may decrease if any of the following factors were to occur relating to either or both of these significant customers: . the loss of either of these customers due to competition from other vendors or consolidation; . substantial cancellations of orders by either customer, or the receipt of orders significantly below historical or anticipated amounts; or . any financial difficulties of either of these customers that result in their inability to pay amounts owed to us. 9 Our revenues and operating results may fluctuate unexpectedly from quarter to quarter, which may cause our stock price to decline. Our quarterly revenues and operating results have fluctuated in the past, and may fluctuate in the future due to several factors, including: . reductions in the size, delays in the timing, or cancellation of significant customer orders; . the timing of the introduction or enhancement of products by us, our OEM customers or our competitors; . expansions or reductions in our relationships with VARs and OEMs; . financial difficulties affecting our VAR or OEM customers that render them unable to pay amounts owed to us; . the rate of growth in the data storage market and the various segments within it; and . timing and levels of our operating expenses. In addition, our revenues historically have been lower in our second fiscal quarter than in our first fiscal quarter because we typically close for one week during the December holidays. We believe that period to period comparisons of our operating results may not necessarily be reliable indicators of our future performance. It is likely that in some future period our operating results will not meet your expectations or those of public market analysts. Any unanticipated change in revenues or operating results is likely to cause our stock price to fluctuate since such changes reflect new information available to investors and analysts. New information may cause investors and analysts to revalue our stock and this, in the aggregate, may cause fluctuations in our stock price. Our lack of significant order backlog makes it difficult to forecast future revenues and operating results. We normally ship products within a few days after orders are received. Consequently, we do not have significant order backlog and a large portion of our revenues in each quarter results from orders placed during that quarter. Because backlog can be an important indicator of future sales, our lack of backlog makes it more difficult to forecast our future revenues. Since our operating expenses are relatively fixed in the short term, unexpected fluctuations in revenues could negatively impact our quarterly operating results. Our planned move to a new facility will be time-consuming and disruptive to our business and personnel. Our lease on our facility expires in January 2001, but we can terminate it on 90 days' notice. We currently are looking for a larger facility in Southern California and plan to relocate during the next 12 months. We may fail to locate a suitable facility or begin operations in a new facility either on time or within budget. If we fail to execute this move successfully, sales may be delayed and our operational efficiencies and product quality could suffer. We are a small company experiencing rapid growth and have not had to meet the responsibilities of being a public company. Rapid growth may strain the capabilities of our managers, operations and facilities, and consequently, could harm our business. We are experiencing rapid growth. This growth has resulted in, and may possibly create in the future, additional capacity requirements, new and increased responsibilities for management personnel, and added pressures on our operating and financial systems. For example, the disclosure and reporting obligations of a public company will further strain our limited financial staff and financial systems. Our facilities, personnel and operating and financial systems may be unable to manage and sustain our current or future growth, and additional growth may detract from our ability to respond to new opportunities and challenges quickly. Our 10 ability to manage any future growth effectively and timely comply with our public company obligations will also depend on our ability to hire and retain qualified management, financial, sales and technical personnel. In particular, we recently hired a new Chief Financial Officer and currently are searching for a corporate controller with public company experience. If we are unable to manage growth effectively or hire and retain qualified personnel, our business could be harmed. In addition, to the extent expected revenue growth does not materialize, increases in our selling and administrative costs that are based on anticipated revenue growth could harm our operating results. If we fail to develop and introduce new tape libraries on a timely and cost- effective basis, we will eventually lose market share and sales to more innovative competitors. The market for our products is characterized by rapidly changing technology and evolving industry standards and is highly competitive with respect to timely innovation. At this time, the data storage market is particularly subject to change with the emergence of two new technologies: . Fibre Channel, a new method of connecting storage devices to networks, allows users to share information with other storage devices and servers over longer distances and at higher rates of data transfer. Although we currently offer a Fibre Channel interface for our tape libraries, tape drives are not yet available with native Fibre Channel interfaces. . Network attached storage, or NAS, devices allow users to plug storage libraries directly into a network without increasing demands on the file server or requiring a separate file server. We have not yet developed products based on NAS. The introduction of new products utilizing Fibre Channel, NAS or other new or alternative technologies or the emergence of new industry standards could render our existing products obsolete or unmarketable. Our future success will depend in part on our ability to anticipate changes in technology and to incorporate this technology to develop new and enhanced products on a timely and cost-effective basis. Risks inherent in the development and introduction of new products include: . the failure of tape drive manufacturers to promote their tape drives adequately, resulting in fewer sales of our libraries which incorporate those tape drives; . the difficulty in forecasting customer demand accurately; . our inability to expand production capacity fast enough to meet customer demand; . the possibility that new products may reduce demand for our current products; . delays in our initial shipments of new products; . being placed on supply allocation if our sole-source suppliers underestimate demand for their products or face technical difficulties producing a new product; . competitors' responses to our introduction of new products; . the desire by OEM customers to evaluate new products for longer periods of time before making a purchase decision; . difficulties associated with forecasting customer returns of new products and the associated warranty expenses we incur for product returns; and . the possibility that the market may reject a new technology and products based on that technology. In addition, we must maintain the compatibility of our products with significant future storage technologies, and rely on producers of new storage technologies to achieve and sustain market acceptance of those technologies. Development schedules for automated data storage products are subject to uncertainty, and we may not meet our product development schedules. 11 If we are unable, for technological or other reasons, to develop products in a timely manner or if the products or product enhancements that we develop are not accepted by the marketplace, our revenues could decline. We depend upon independent software developers to provide software that integrates our libraries with computer operating systems. The utility of an automated tape library depends partly upon the storage management software which supports the library and integrates it into the user's computing environment to provide a complete storage solution. We do not develop and have no control over the development of this storage management software. Instead we rely on independent software developers to develop and support this software. Accordingly, the continued development and future growth of the market for our products will depend partly upon the success of software developers to meet the overall data storage and management needs of tape library purchasers and our ability to maintain strong relationships with these firms. Our customers have the right to return our products in certain circumstances. An excessive number of returns may reduce our revenues. Our customers have 30 days from the date of purchase to return our products to us for any reason. We may otherwise allow product returns if we think that doing so maximizes the effectiveness of our sales channels and promotes our reputation for quality and service. Although we estimate and reserve for potential returns in our reported financial results, actual returns could exceed our estimates. If the number of returns exceeds our estimates, our financial results could be harmed for the periods during which returns are made. We may spend money pursuing sales that do not occur when anticipated or at all. Many of our OEM customers typically conduct significant evaluation, testing, implementation and acceptance procedures before they begin to market and sell new models of tape libraries. 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, engineering and management efforts on our part. The process becomes more complex as we simultaneously qualify our products with multiple customers or pursue large orders with a single customer. As a result, we may expend significant resources to develop customer relationships before we recognize any revenue from these relationships, if at all. We sell a significant portion of our products to customers located outside the United States. Currency fluctuations and increased costs associated with international sales could make our products unaffordable in foreign markets, which would reduce our profitability. Sales to customers located outside the United States accounted for approximately 26.4% of our revenues in fiscal 1998, 24.0% in fiscal 1999, and 22.2% in the six months ended December 31, 1999. We believe that international sales will continue to represent a significant portion of our revenues. Our foreign sales subject us to a number of risks, including: . although we denominate our international sales in U.S. dollars, currency fluctuations could make our products unaffordable to foreign purchasers or more expensive compared to those of foreign manufacturers; . greater difficulty of administering business overseas may increase the costs of foreign sales and support; . foreign governments may impose tariffs, quotas and taxes on our products; . longer payment cycles typically associated with international sales and potential difficulties in collecting accounts receivable may reduce the profitability of foreign sales; 12 . political and economic instability may reduce demand for our products or our ability to market our products in foreign countries; . restrictions on the export or import of technology may reduce or eliminate our ability to sell in certain markets; and . our current determination not to seek ISO-9000 certification, a widely accepted method of establishing and certifying the quality of a manufacturer's products, may reduce sales. These risks may increase our costs of doing business internationally and reduce our sales or profitability. Our customers may sue us for product liability claims arising from failures of our tape libraries. Because our tape library customers use our products to store and backup their important data, we face potential liability for performance problems of our products. Although we maintain general liability insurance, our insurance may not cover potential claims of this type or may not be adequate to indemnify us for all liability that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of our insurance coverage could reduce our profitability or cause us to discontinue operations. If we are unable to protect or enforce our intellectual property rights adequately, we may lose the advantages of our research, manufacturing and distribution systems. Our ability to compete effectively depends in part on our ability to develop and maintain proprietary aspects of our technology. We currently hold one patent on certain design elements of our automated tape libraries. We also rely on a combination of trademark, trade secret, copyright and other intellectual property laws and various contract rights to protect our proprietary rights. These rights, however, may not preclude competitors from developing products that are substantially equivalent or superior to our products. In addition, many aspects of our products are not subject to intellectual property protection and therefore can be reproduced by our competitors. Intellectual property infringement claims brought against us could be time consuming and expensive to defend. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. While we currently are not engaged in any material intellectual property litigation or proceedings, we may become involved in these proceedings in the future. In the future we may be subject to claims or inquiries regarding our alleged unauthorized use of a third party's intellectual property. An adverse outcome in litigation could force us to do one or more of the following: . stop selling, incorporating or using our products or services that use the challenged intellectual property; . subject us to significant liabilities to third parties; . obtain from the owners of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or . redesign those products or services that use the infringed technology, which redesign may be either economically or technologically infeasible. Whether or not an intellectual property litigation claim is valid, the cost of responding to it, in terms of legal fees and expenses and the diversion of management resources, could harm our business. 13 Undetected software or hardware flaws could increase our costs, reduce our revenues and divert our resources from our core business needs. Our tape libraries are complex. Despite our efforts to revise and update our manufacturing and test processes to address engineering and component changes, we may not be able to control and eliminate manufacturing flaws adequately. These flaws may include undetected software or hardware defects associated with: . a newly introduced product; . a new version of an existing product; or . a product that has been integrated into a network storage solution with the products of other vendors. The variety of contexts in which errors may arise may make it difficult to identify the source of a problem. These problems may: . cause us to incur significant warranty, repair and replacement costs; . divert the attention of our engineering personnel from our product development efforts; . cause significant customer relations problems; or . damage our reputation. To address these problems, we frequently revise and update manufacturing and test procedures to address engineering and component changes to our products. If we fail to adequately monitor, develop and implement appropriate test and manufacturing processes we could experience a rate of product failure that results in substantial shipment delays, repair or replacement costs or damage to our reputation. Product flaws may also consume our limited engineering resources and interrupt our development efforts. Significant product failures would increase our costs and result in the loss of future sales and be harmful to our business. Our officers and directors could implement corporate actions that are not in the best interests of the shareholders as a whole. Upon completion of this offering, our executive officers and directors will own beneficially, in the aggregate, approximately % of our outstanding common stock. As a result, these shareholders will be able to exercise significant control over all matters requiring shareholder 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 may make takeover attempts difficult or impossible. Our board of directors has the authority, without any action by the shareholders, to issue up to 5,000,000 shares of preferred stock and to fix the rights and preferences of such shares. In addition, our articles of incorporation and bylaws contain provisions that eliminate cumulative voting in the election of directors and require shareholders to give advance notice if they wish to nominate directors or submit proposals for shareholder approval. These provisions may have the effect of delaying, deferring or preventing a change in control, may discourage bids for our common stock at a premium over its market price and may adversely affect the market price, and the voting and other rights of the holders, of our common stock. Our management and board of directors will have broad discretion to allocate the proceeds of this offering and may do so ineffectively. The estimated net proceeds of this offering have not been allocated to a particular purpose. Accordingly, management and the board of directors will have broad discretion to allocate the proceeds of this offering and no shareholder approval will be required for such allocations. There is no assurance that the proceeds will be allocated in a manner acceptable to our shareholders or advantageous to our business. See "Use of Proceeds." 14 New investors will experience immediate and substantial dilution in the book value of their shares. The initial public offering price for a share of our common stock is substantially higher than the net tangible book value per share immediately after this offering. If you purchase shares of our common stock in the offering, you will incur immediate dilution of approximately $ in the book value per share from the price you pay for the common stock. Additional dilution in your shares will occur upon exercise of outstanding stock options. We do not intend to pay dividends and therefore you will only be able to recover your investment in our common stock, if at all, by selling the shares of our stock that you hold. We historically have pursued a policy of reinvesting our earnings in research and development, expanding our VAR and OEM relationships and expanding our manufacturing capabilities. Consequently, we have never paid dividends on our shares of capital stock. We intend to continue this strategy for the foreseeable future to strengthen our financial and competitive position in the tape library markets. The absence of a prior public market for our common stock makes it difficult to set an initial public offering price that reflects its true market value. You may be unable to resell your shares at or above the initial public offering price. There was no public market for our common stock prior to this offering. The initial public offering price of the common stock will be determined through our negotiations with the underwriters and does not necessarily relate to our book value, assets, past operating results, financial condition or other established criteria of value. Since the market price after the offering may be less than the initial public offering price, you may be unable to resell those shares at or above the initial public offering price. In addition to errors in the initial valuation of our publicly offered common stock, the market price of this stock may fall significantly in response to the following factors, some of which are beyond our control: . announcements by us or by our competitors regarding significant technological innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; . the introduction of new technology or products or changes in product pricing policies by us or our competitors; . changes in stock market analyst recommendations regarding our common stock, the stock of comparable companies, or the technology industry generally; . comments regarding us and the data storage market made on Internet bulletin boards; . changes in accounting policies; . our expected rate of growth of revenues and operations; and . regulatory actions. In addition, stock markets have experienced extreme price and volume volatility in recent years. This volatility has had a substantial effect on the market prices of securities of many smaller public companies for reasons unrelated or disproportionate to the operating performance of the specific companies. These broad market fluctuations may adversely affect the market price of our common stock. Substantial future sales of our common stock in the public market may depress our stock price and make it difficult for you to recover the full value of your investment in our shares. 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 sale of substantial numbers of these shares or the market's perception that such sales may occur after this offering could cause our stock price to decline. In addition, the sales of these shares could impair our ability to raise capital through the sale of additional stock. 15 YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY UNCERTAIN. This prospectus contains forward-looking statements that involve risks and uncertainties that address: . business strategies; . expectations regarding our distribution strategy, including international distribution; . use of proceeds; . our financial condition and results of operations; . trends, including growth in the automated data storage market; . new products; . our expected rate of growth of revenues and operations; and . the impact of the year 2000 computer bug on sales of our tape libraries. The above list is not inclusive. You can identify forward-looking statements generally by the use of forward- looking terminology such as "believes," "expects," "may," "will," "intends," "plans," "should," "could," "seeks," "pro forma," "anticipates," "estimates," "continues," or other variations thereof, including their use in the negative, or by discussions of strategies, opportunities, plans or intentions. You may find these forward-looking statements under the captions "Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and "Business," as well as captions elsewhere in this prospectus. A number of factors could cause results to differ materially from those anticipated by such forward-looking statements, including those discussed under "Risk Factors" and "Business." These forward-looking statements necessarily depend upon assumptions and estimates that may prove to be incorrect. Although we believe that the assumptions and estimates reflected in the forward-looking statements are reasonable, we cannot guarantee that we will achieve our plans, intentions or expectations. The forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ in significant ways from any future results expressed or implied by the forward- looking statements. The cautionary statements made in this prospectus are intended to apply to all related forward-looking statements wherever they appear in this prospectus. We assume no obligation to update such forward-looking statements or to update the reasons why actual results could differ materially from those anticipated in such forward-looking statements. 16 USE OF PROCEEDS We expect to receive approximately $ million from the sale of the shares offered by us in this offering, or $ million if the underwriters exercise their over-allotment option in full, assuming an offering price of $ per share and after deducting the underwriting discount and offering expenses that we are to pay. We will not receive any proceeds from the sale of shares by the selling shareholders. We intend to use the net proceeds of this offering to support our continued growth including increased sales and marketing expenditures, research and development, capital expenditures in the ordinary course of business, working capital and general corporate purposes. In addition, we may use a portion of the net proceeds of this offering to acquire or invest in businesses, products, services or technologies complementary to our current business, through mergers, acquisitions, joint ventures or otherwise. However, we have no specific agreements or commitments and are not currently engaged in any negotiations with respect to these transactions. Accordingly, our management will retain broad discretion as to the allocation of the net proceeds of this offering. Prior to their use we intend to invest the net proceeds of this offering in short-term, high-grade interest-bearing securities, certificates of deposit or direct or guaranteed obligations of the U.S. Government. DIVIDEND POLICY We have never declared or paid dividends on our capital stock. Any future decision to pay dividends remains within the discretion of our board of directors. We currently intend to retain any future earnings to support operations and to finance the growth and development of our business and do not anticipate paying dividends in the foreseeable future. 17 CAPITALIZATION The following table shows our capitalization as of December 31, 1999 on an actual basis, and on a pro forma as adjusted basis to reflect: . the sale of shares offered by us at an assumed initial public offering price of $ per share, after deducting the underwriting discounts and commissions and estimated offering expenses payable by us; and . the automatic conversion of all outstanding shares of preferred stock into shares of common stock effective upon the closing of this offering. The table excludes: . 109,000 shares of common stock issuable upon exercise of options outstanding as of December 31, 1999, at a weighted average exercise price of $0.93 per share. You should read this information in conjunction with our financial statements and the notes relating to those statements appearing elsewhere in this prospectus.
December 31, 1999 -------------------- Pro Forma Actual As Adjusted ------- ----------- (in thousands, except share data) (unaudited) Short term debt........................................... $ -- $-- ======= ==== Long term debt............................................ $ -- $-- Shareholders' equity: Preferred stock, no par value: 3,866,800 shares authorized, 880,800 shares outstanding, actual; 5,000,000 shares authorized, no shares outstanding, pro forma as adjusted.................................. 431 -- Common stock, no par value: 10,000,000 shares authorized, 2,564,333 shares issued and outstanding, actual; 50,000,000 shares authorized, shares issued and outstanding, pro forma as adjusted.......... 352 Deferred compensation..................................... (50) Retained earnings......................................... 14,577 ------- ---- Total shareholders' equity............................ 15,310 ------- ---- Total capitalization.................................. $15,310 $ ======= ====
18 DILUTION Our pro forma net tangible book value as of December 31, 1999 was $15.3 million or $ per share of common stock. Pro forma net tangible book value per share, after giving effect to the conversion of all outstanding shares of preferred stock, is equal to our total tangible assets less total liabilities, divided by the pro forma number of shares of common stock outstanding on December 31, 1999. Assuming the sale by us of shares of common stock at an initial public offering price of $ per share and after deducting the underwriting discounts and the estimated offering expenses payable, our pro forma net tangible book value at December 31, 1999 would have been $ , or $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share to existing shareholders and an immediate dilution of $ per share to new investors purchasing shares in this offering. That is, after this offering, the excess of our tangible assets over our liabilities on a per share basis will be less than the purchase price paid for those shares by investors in this offering. The following table illustrates this per share dilution: Assumed initial public offering price per share................ $ Pro forma net tangible book value per share as of December 31, 1999.................................................... $ Increase in pro forma net tangible book value attributable to new investors............................................... ----- Pro forma net tangible book value per share after this offering...................................................... ----- Dilution per share to new investors............................ $ =====
The following table summarizes, as of December 31, 1999, the total number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by existing shareholders and by new investors purchasing shares in this offering and includes the effect of the conversion of all outstanding shares of preferred stock.
Total Shares Purchased(1) Consideration ---------------------- -------------- Average Price Number Percent Amount Percent Per Share --------- ---------- ------ ------- ------------- Existing shareholders...... % $ % $ New investors.............. --------- --------- ---- --- ----- Total(2)................... 100% $ 100% $ ========= ========= ==== === =====
- -------- (1) Sales by the selling shareholders in this offering will reduce the number of shares held by existing shareholders to shares or % of the total number of shares to be outstanding after this offering ( shares or % if the Underwriters' over-allotment option is exercised in full), and will increase the number of shares held by new investors to , or % of the total shares of common stock outstanding after this offering ( shares, or % if the Underwriters' over- allotment option is exercised in full). See "Principal and Selling Shareholders." (2) The foregoing table and calculations are based on shares outstanding on December 31, 1999 and excludes 109,000 shares of common stock issuable upon exercise of options outstanding as of December 31, 1999, at a weighted average exercise price of $0.93 per share. To the extent outstanding options are exercised, there will be further dilution to new investors. See "Management--Stock Option Plans" and note 7 to our financial statements. 19 SELECTED FINANCIAL DATA The statements of income data for the years ended June 30, 1997, 1998 and 1999 and the balance sheet data as of June 30, 1998 and 1999 are derived from our audited financial statements included elsewhere in this prospectus. The statements of income data for the years ended June 30, 1995 and 1996 and the balance sheet data as of June 30, 1995, 1996 and 1997 are derived from our audited financial statements not included in this prospectus. The statements of income data for the six months ended December 31, 1998 and 1999 and the balance sheet data as of December 31, 1999, are unaudited but have been prepared on the same basis as our audited financial statements and, in the opinion of management, contain all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of our operating results for these periods and our financial condition as of that date. The historical results are not necessarily indicative of results to be expected for any future period. The following data is qualified in its entirety by and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements and notes thereto included elsewhere in this prospectus.
Six Months Ended Years Ended June 30, December 31, ---------------------------------------- ----------------- 1995 1996 1997 1998 1999 1998 1999 ------ ------- ------- ------- ------- -------- -------- (in thousands, except per share amounts) Statements of Income Data: Net revenues............ $8,432 $10,974 $15,333 $19,155 $29,698 $ 12,739 $ 22,522 Cost of goods sold...... 5,498 7,140 10,768 12,892 19,058 8,232 13,980 ------ ------- ------- ------- ------- -------- -------- Gross profit............ 2,934 3,834 4,565 6,263 10,640 4,507 8,542 Operating expenses: Research and development.......... 895 918 916 894 925 439 507 Sales and marketing... 973 1,016 1,146 1,277 1,941 881 1,275 General and administrative....... 1,029 1,107 1,052 1,062 1,267 592 791 ------ ------- ------- ------- ------- -------- -------- Total operating expenses........... 2,897 3,041 3,114 3,233 4,133 1,912 2,573 ------ ------- ------- ------- ------- -------- -------- Income from operations.. 37 793 1,451 3,030 6,507 2,595 5,969 Interest income......... 46 23 21 35 41 18 24 ------ ------- ------- ------- ------- -------- -------- Income before income taxes.................. 83 816 1,472 3,065 6,548 2,613 5,993 Provision for income taxes.................. 1 290 518 1,132 2,562 1,067 2,403 ------ ------- ------- ------- ------- -------- -------- Net income.............. 82 526 954 1,933 3,986 1,546 3,590 ------ ------- ------- ------- ------- -------- -------- Premium paid on redemption of preferred stock.................. -- -- (106) (147) -- -- -- ------ ------- ------- ------- ------- -------- -------- Net income applicable to common shareholders.... $ 82 $ 526 $ 848 $ 1,786 $ 3,986 $ 1,546 $ 3,590 ====== ======= ======= ======= ======= ======== ======== Earnings per share: Basic................. $ 0.04 $ 0.23 $ 0.36 $ 0.75 $ 1.62 $ 0.63 $ 1.42 Diluted............... $ 0.02 $ 0.15 $ 0.25 $ 0.52 $ 1.14 $ 0.45 $ 1.01 Shares used to compute earnings per share: Basic................. 2,304 2,329 2,345 2,372 2,455 2,449 2,532 Diluted............... 3,419 3,406 3,357 3,441 3,506 3,465 3,543
June 30, ----------------------------------- December 31, 1995 1996 1997 1998 1999 1999 ------ ------ ------ ------ ------- ------------ (in thousands) Balance Sheet Data: Cash and cash equivalents..... $ 518 $ 444 $ 912 $ 798 $ 2,134 $3,765 Working capital............... 4,204 4,731 5,549 7,213 11,205 13,701 Total assets.................. 4,983 5,856 6,967 8,461 12,950 16,744 Total debt.................... -- -- -- -- -- -- Shareholders' equity.......... 4,482 5,031 5,850 7,614 11,640 15,310
20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with our financial statements and notes and the information included under the caption "Risk Factors" included elsewhere in this prospectus. Overview We design, develop, manufacture and sell high quality automated magnetic tape libraries used to store, retrieve and manage electronic data primarily in network computing environments. We offer tape libraries for multiple tape drive technologies, including those using Advanced Intelligent Tape, or AIT, Digital Linear Tape, or DLT, and quarter inch cartridge, or QIC, tape media. We recently announced tape libraries for the Linear Tape Open, or LTO, Ultrium tape media and we will commence shipments of our LTO tape libraries once the tape drives become available from the manufacturers and have been qualified in our libraries. Many enterprises now routinely manage very large databases, in addition to desktop-based local user storage. This, coupled with the growth in the amount of data from new sources and applications, is increasing the need for managing and storing data efficiently. Anticipating the increased demand for large libraries, we developed a family of tape libraries over the last five years spanning a broad range of tape formats, prices, capacity and performance. Our product mix has changed over the last three fiscal years as we introduced new products to address additional tape formats and changing customer preferences. For example, we have increased the capacity of our tape libraries as our customers' needs for increased data storage have grown, and we have introduced tape libraries incorporating AIT and DLT tape drive technologies. We expect our product mix to continue to change in the future in response to emerging tape technologies and changing customer preferences. We have developed a network of value added resellers who specialize in delivering complete turnkey storage solutions to end users. End users of our products range from small businesses requiring simple automated backup solutions to large organizations needing complex storage management solutions. We also sell our products to original equipment manufacturers. We assist our customers with marketing and technical support. During the first six months of fiscal 2000, we experienced revenue growth of 76.8% compared to the first six months of fiscal 1999. We believe the fear of problems resulting from the anticipated year 2000 computer bug may have spurred businesses, nonprofit organizations and public entities to accelerate their investments in information storage technologies, including greater use of automated tape libraries, during the first two quarters of fiscal 2000. With the passing of the new year, the level of investment in automated tape libraries and other storage technologies may decline, either because many companies already have purchased these technologies or because the perceived need for such technologies may diminish. If this decrease in expenditures occurs, it may result in lower revenues to us in the third and fourth quarters of fiscal 2000 compared to revenues during the first and second quarters of fiscal 2000. All of our international sales efforts currently are directed from our offices in Canoga Park, California. We intend to continue to develop our international markets and create additional outlets for our products. All of our international sales are denominated in U.S. dollars. Revenues from sales to customers located outside the United States were $3.8 million, or 24.9% of revenues, in fiscal 1997, $5.1 million, or 26.4% of revenues, in fiscal 1998, $7.1 million, or 24.0% of revenues, in fiscal 1999, and $5.0 million, or 22.2% of revenues, in the six months ended December 31, 1999. Net revenues include revenues from the sale of tape libraries, library tape drives, storage media, 9-track tape drives, and ancillary products. Ancillary revenues include service and repair, warranty revenues net of the cost of any third party warranty contracts, and the resale of 18- and 36-track tape drives manufactured by a third party, which we discontinued selling in June 1999. Automated tape libraries and related products, such as tape drives and tape media, represented approximately 76.9% of revenues in fiscal 1999, and approximately 21 85.2% of revenues for the six months ended December 31, 1999. Sales of 9-track tape drives, services and other products accounted for the balance of our revenues. Gross margins depend on several factors, including the cost of manufacturing, product mix, customer demand and the level of competition. Larger tape libraries provide higher gross margins than do smaller tape libraries primarily because of strong customer demand and less competition. Our gross margins have benefitted from a shift in demand towards our larger tape libraries. We expect that our growth in revenues and attractive gross margins will encourage new competitors to enter our marketplace, which may affect our gross margins. Operating expenses are comprised primarily of expenditures for research and development, executive, sales and marketing salaries, sales commissions, rent and employee benefits. We expect that our selling, general and administrative expenses will increase due to higher rent associated with a larger facility, the opening of a European sales office and related staffing, increased costs associated with the responsibilities of being a public company, higher marketing, advertising and selling costs necessary to enter new markets, expenditures to further develop our brand identity, increased costs to attract and retain personnel, and deferred compensation related to equity incentives. Results of Operations The following table reflects, as a percentage of net revenues, statements of income data for the periods indicated:
Years Ended Six Months Ended June 30, December 31, ------------------- ------------------ 1997 1998 1999 1998 1999 ----- ----- ----- -------- -------- Net revenues........................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold................... 70.2 67.3 64.2 64.6 62.1 ----- ----- ----- -------- -------- Gross margin......................... 29.8 32.7 35.8 35.4 37.9 Operating expenses: Research and development............. 6.0 4.7 3.1 3.4 2.3 Sales and marketing.................. 7.5 6.7 6.5 6.9 5.7 General and administrative........... 6.8 5.5 4.3 4.6 3.5 ----- ----- ----- -------- -------- Income from operations................. 9.5 15.8 21.9 20.5 26.4 Interest income........................ 0.1 0.2 0.1 0.1 0.1 ----- ----- ----- -------- -------- Income before income taxes............. 9.6 16.0 22.0 20.6 26.5 ----- ----- ----- -------- -------- Provision for income taxes............. 3.4 5.9 8.6 8.4 10.7 ----- ----- ----- -------- -------- Net income............................. 6.2% 10.1% 13.4% 12.2% 15.8% ===== ===== ===== ======== ========
Six Months Ended December 31, 1999 Compared to Six Months Ended December 31, 1998 Net Revenues. Revenues for the six months ended December 31, 1999 were $22.5 million, an increase of 77.2% compared to net revenues of $12.7 million for the six months ended December 31, 1998. This increase in revenues was due primarily to increasing demand for our existing tape library models, and was offset partially by our lack of revenues associated with the discontinuation of our reselling of 18- and 36-track tape drives in June 1999. We experienced an increase in revenues from sales of tape media reflecting an overall increase in demand for our tape libraries and increased demand for our larger tape libraries that hold between 180 and 360 tape cartridges. Selling prices of our products remained relatively stable during both periods. While we believe that sales of 9-track tape drives will decline over time, we experienced an increase in revenues from these products in the first six months of fiscal 2000 as a result of a competitor exiting the 9-track tape drive marketplace. These revenues were $2.0 million in the six months ended December 31, 1999 compared to $1.2 million in the six months ended December 31, 1998. Gross Profit. Gross profit was $8.5 million, or 37.9% of revenues, for the first six months of fiscal 2000, compared to $4.5 million, or 35.4% of revenues, for the same period in fiscal 1999, representing an increase of 22 88.9%. Increased gross margins were due primarily to a shift in product mix toward higher margin larger tape libraries and operating efficiencies resulting from spreading a larger volume of sales over relatively fixed direct and indirect expenses. Operating Expenses. Operating expenses were $2.6 million, or 11.4% of revenues, for the first six months of fiscal 2000, compared to $1.9 million, or 15.0% of revenues, for the same period in fiscal 1999. The increase in these expenses was the result primarily of an increase in sales and support staff that were added to create and support a higher level of demand for our libraries. Our historical operating expenses as a percentage of revenues may not be indicative of the relative level of these expenses in the future. As discussed under the caption "Overview" above, we expect operating expenses to increase in future periods. Provision for Income Taxes. The provision for income taxes was $2.4 million, or 40.0% of pre-tax income, in the first six months of fiscal 2000, compared to $1.1 million, or 40.8% of pre-tax income, in the same period of fiscal 1999. Fiscal 1999 compared to Fiscal 1998 Net Revenues. Revenues in fiscal 1999 were $29.7 million, an increase of 55.0% compared to revenues of $19.2 million in fiscal 1998. The increase in revenues resulted primarily from the sales of our large capacity tape libraries that were introduced in fiscal 1999 and increasing demand for our existing libraries. Selling prices of our products remained relatively stable during both periods. Gross Profit. Gross profit was $10.6 million, or 35.8% of revenues, in fiscal 1999 compared with $6.3 million, or 32.7% of revenues, in fiscal 1998, representing an increase of 68.3%. Increased gross profit margins resulted from a shift in our product mix toward higher-margin larger tape libraries and operating efficiencies resulting from spreading a larger volume of sales over relatively fixed direct and indirect expenses. Operating Expenses. Operating expenses were $4.1 million, or 13.9% of revenues, for fiscal 1999 compared to $3.2 million, or 16.9% of revenues, in fiscal 1998. The increase in operating expenses resulted from an increase in sales and support staff that were hired to create and support an increased level of demand for our tape libraries. Provision for Income Taxes. The provision for income taxes was $2.6 million, or 39.1% of pre-tax income, in fiscal 1999 compared to $1.1 million, or 36.9% of pre-tax income, in fiscal 1998. The increase in the effective tax rate in fiscal 1999 was due to the decreasing effect of research and development tax credits. Fiscal 1998 compared to Fiscal 1997 Net Revenues. Revenues in fiscal 1998 were $19.2 million, an increase of 24.9% compared to revenues of $15.3 million in fiscal 1997. This increase in revenues was the result of the introduction of our DLT tape libraries and the development of complementary library products including media and connecting devices. These increases in revenues were offset by declining sales of our older storage products, primarily 9-,18- and 36-track tape drives. Selling prices of our products remained relatively stable during both periods. Gross Profit. Gross profit was $6.3 million, or 32.7% of revenues, in fiscal 1998, compared to $4.6 million, or 29.8% of revenues, in fiscal 1997. The increase in the gross profit margin resulted from a shift in our product mix away from the lower margin tape drives to the higher margin tape libraries. Additionally, our gross profit margins benefited from spreading a larger volume of sales over relatively fixed direct and indirect expenses. Operating Expenses. Operating expenses were $3.2 million, or 16.9% of revenues, for fiscal 1998 compared to $3.1 million, or 20.3% of revenues, in fiscal 1997. Operating expenses declined as a percentage of revenues as a result of our ability to leverage our infrastructure to support a higher volume of revenues. Provision for Income Taxes. The provision for income taxes was $1.1 million, or 36.9% of pre-tax income, in fiscal 1998, compared to $518,000, or 35.2% of pre-tax income, in fiscal 1997. 23 Quarterly Results of Operations The following table presents our unaudited quarterly results of operations for the eight quarters ended December 31, 1999. You should read the following table in conjunction with our financial statements and the notes included elsewhere in this prospectus. We have prepared this unaudited information on the same basis as the audited financial statements. This table includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of our financial position and operating results for the quarters presented. You should not draw any conclusion about our future results from the results of operations for any quarter.
Three Months Ended --------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, 1998 1998 1998 1998 1999 1999 1999 1999 --------- -------- --------- -------- --------- -------- --------- -------- (in thousands) Statements of Income Data: Net revenues............ $4,608 $5,506 $6,588 $6,151 $7,904 $9,055 $11,430 $11,092 Cost of goods sold...... 3,116 3,653 4,193 4,039 4,787 6,039 7,102 6,878 ------ ------ ------ ------ ------ ------ ------- ------- Gross profit............ 1,492 1,853 2,395 2,112 3,117 3,016 4,328 4,214 Operating expenses: Research and development.......... 235 203 243 196 228 258 270 237 Sales and marketing... 265 392 375 506 471 589 580 695 General and administrative....... 314 278 332 260 343 332 401 390 ------ ------ ------ ------ ------ ------ ------- ------- Total operating expenses............... 814 873 950 962 1,042 1,179 1,251 1,322 ------ ------ ------ ------ ------ ------ ------- ------- Income from operations.. 678 980 1,445 1,150 2,075 1,837 3,077 2,892 Interest income......... 9 11 7 11 14 9 12 12 ------ ------ ------ ------ ------ ------ ------- ------- Income before income taxes.................. 687 991 1,452 1,161 2,089 1,846 3,089 2,904 Provision for income taxes.................. 239 302 578 489 807 688 1,210 1,193 ------ ------ ------ ------ ------ ------ ------- ------- Net income.............. $ 448 $ 689 $ 874 $ 672 $1,282 $1,158 $ 1,879 $ 1,711 ====== ====== ====== ====== ====== ====== ======= =======
The following table reflects, as a percentage of net revenues, statements of income data for the eight quarters ended December 31, 1999.
Three Months Ended --------------------------------------------------------------------------- March 31, June 30, Sept. 30, Dec. 31, March 31, June 30, Sept. 30, Dec. 31, 1998 1998 1998 1998 1999 1999 1999 1999 --------- -------- --------- -------- --------- -------- --------- -------- Statements of Income Data: Net revenues............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Cost of goods sold...... 67.6 66.3 63.6 65.7 60.6 66.7 62.1 62.0 ----- ----- ----- ----- ----- ----- ----- ----- Gross margin............ 32.4 33.7 36.4 34.3 39.4 33.3 37.9 38.0 Operating expenses: Research and development.......... 5.1 3.7 3.7 3.2 2.9 2.8 2.4 2.1 Sales and marketing... 5.8 7.1 5.7 8.2 6.0 6.5 5.1 6.3 General and administrative....... 6.8 5.0 5.0 4.2 4.3 3.7 3.5 3.5 ----- ----- ----- ----- ----- ----- ----- ----- Total operating expenses............... 17.7 15.8 14.4 15.6 13.2 13.0 11.0 11.9 ----- ----- ----- ----- ----- ----- ----- ----- Income from operations.. 14.7 17.9 22.0 18.7 26.2 20.3 26.9 26.1 Interest income......... 0.2 0.2 0.1 0.2 0.2 0.1 0.1 0.1 ----- ----- ----- ----- ----- ----- ----- ----- Income before income taxes.................. 14.9 18.1 22.1 18.9 26.4 20.4 27.0 26.2 Provision for income taxes.................. 5.2 5.5 8.8 7.9 10.2 7.6 10.6 10.8 ----- ----- ----- ----- ----- ----- ----- ----- Net income.............. 9.7% 12.6% 13.3% 11.0% 16.2% 12.8% 16.4% 15.4% ===== ===== ===== ===== ===== ===== ===== =====
We typically experience lower revenues in our second fiscal quarter compared to our first fiscal quarter due to our practice of closing down our operations between Christmas and New Years. The lower gross margin in the quarter ended June 30, 1999 reflects the sale of our remaining inventory of 18- and 36-track tape drives at little or no margin due to our decision to discontinue reselling these products. 24 Operating expenses are generally higher in our second fiscal quarter compared to our first fiscal quarter due to costs associated with our attendance at an industry trade show each November. Liquidity and Capital Resources Historically, we have funded our capital requirements with cash flows from operations. Cash flows provided by operating activities were $340,000 in fiscal 1998, $1.6 million in fiscal 1999, and $2.7 million in the first six months of fiscal 2000. In each of these periods, operating cash was provided primarily by net income and increases in accounts payable. These increases in cash flows were used primarily to fund increases in accounts receivable and inventories. Cash flows used in investing activities were $287,000 in fiscal 1998, $274,000 in fiscal 1999 and $1.1 million in the first six months of fiscal 2000. Cash flows used in investing activities in the first six months of fiscal 2000 related to our investment in Chaparral Network Storage, Inc., a provider of Fibre Channel interfaces. We expect to incur capital expenditures for equipment and leasehold improvements associated with our move to a larger facility during the next 12 months. Cash used in financing activities in fiscal 1998 resulted from our repurchase of $219,000 of capital stock. We have a $750,000 bank line of credit that expires November 1, 2000, all of which was available as of December 31, 1999. Borrowings under this line of credit bear interest at the bank's reference rate plus 1.25%. Our bank's reference rate, a variable rate, was 8.5% at December 31, 1999. We had no material commitments as of December 31, 1999 other than rental commitments. We believe that our existing cash and cash equivalents, net proceeds from this offering, and anticipated cash flows from our operating activities, will be sufficient to fund our working capital and capital expenditure needs for at least the next 12 months. We may utilize cash to invest in businesses, products or technologies that we believe are strategic. We regularly evaluate other companies and technologies for possible investment by us. In addition, we have made and expect to make investments in companies with whom we have identified potential synergies. However, we have no present commitments or agreements with respect to any material acquisition of other businesses or technologies. Quantitative and Qualitative Disclosures About Market Risk We develop products in the United States and sell them worldwide. As a result, our financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in foreign markets. As all sales are currently made in U.S. dollars, a strengthening of the dollar could make our products less competitive in foreign markets. 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. We have no outstanding debt nor do we utilize derivative financial instruments. Therefore, no quantitative tabular disclosures are required. 25 BUSINESS Introduction We design, develop, manufacture and sell high quality automated magnetic tape libraries used to store, retrieve and manage electronic data primarily in network computing environments. Tape libraries consist of high-performance cartridge tape drives, storage arrays of tape cartridges and robotics to move the tape cartridges from their storage locations to the tape drives under software control. Our tape libraries provide high-performance, reliable and cost-effective storage solutions for organizations requiring backup, recovery and archival storage of critical electronic information. Our tape libraries also can provide near-online storage as an alternative to disk drives. Our products are compatible with commonly used network operating systems, including UNIX, Windows NT, NetWare and Linux. Our tape libraries also are compatible with a wide range of storage management software packages, such as those supplied by Computer Associates, Hewlett-Packard, Legato, Tivioli and Veritas. We offer tape libraries for multiple tape drive technologies, including those using Advanced Intelligent Tape, or AIT, Digital Linear Tape, or DLT, and quarter inch cartridge, or QIC, tape media. We recently announced tape libraries for the Linear Tape Open, or LTO, Ultrium tape drives and media. We will commence shipments of our LTO tape libraries once the tape drives become available from our supplier and have been qualified in our libraries. We sell our tape libraries worldwide, primarily to value added resellers, or VARs, and original equipment manufacturers, or OEMs. Our VAR and OEM customers integrate our products with software from third party vendors to provide complete turnkey storage solutions, which they in turn resell to end users. We custom configure each of our libraries based on each customer's individual requirements, with a normal delivery time of one to three working days. This rapid fulfillment of customer orders allows us to minimize our inventory levels and compete effectively with the industrial distribution channels used by our competitors. Our six senior operations executives have worked in the computer and data storage industries for an average of more than 30 years each. Based on this experience, we have the ability to bring new products to market rapidly at a relatively low development cost, while maintaining our reputation for producing high quality and reliable products. This ability allows us to respond to changing market conditions and new opportunities as they arise. For example, we offer Fibre Channel, a new interface technology, as an option on most of our tape library models. We recently invested $1.1 million in Chaparral Network Storage, Inc., a company that makes the intelligent routers we incorporate into our tape libraries to provide Fibre Channel connectivity. Qualstar was incorporated in California in 1984 to develop and manufacture IBM compatible 9-track reel-to-reel tape drives for the personal computer and workstation marketplace. In 1995, we entered the tape automation market with a series of tape libraries incorporating 8mm tape drives. Since that time, we have introduced a succession of tape library models designed to work with other tape drive technologies and tape media formats. Automated tape libraries and related products, such as tape drives and tape media, represented approximately 76.9% of revenues in fiscal 1999, and approximately 85.2% of revenues for the six months ended December 31, 1999. Sales of 9-track tape drives, services and other products accounted for the balance of our revenues. Industry Background Storing, managing and protecting data has become critical to the operation of many enterprises as the world economy becomes increasingly information dependent. The data storage industry continues to grow rapidly due to the significant increase in the amount of data that is generated and must be preserved. The amount of data has been increasing due to the growth in the number of computers, the number, size and complexity of computer networks and software applications, and the emergence of new applications such as image processing, e-commerce, Internet services, medical, video and motion picture image storage, and other multi-media applications. In addition, businesses continue to generate increasing amounts of traditional business information with respect to their products, customers and financial information. This increase in the amount of data that is generated stimulates increases in the demand for data storage and the management of this data. 26 Factors Driving Growth in Data The following factors are contributing to the growth in data storage: . Increased demand from Internet and e-commerce businesses. The growth in the Internet and e-commerce has created businesses that depend on the creation, access and archival storage of data. As individuals and businesses increase their reliance on the Internet for communications, commerce and data retrieval, the need to utilize large databases will continue to grow rapidly. . Growth in new types of data. The growth in data is being fueled not only by the increase in information but also in the types of stored data. For example, storage of graphics, audio and MP3, video, medical and security images, and multi-media uses such as video on demand, require far greater storage capacity than text and financial data. Organizations increasingly depend on their ability to collect, access, use and transfer these new types of stored data to tape libraries for central automated storage, backup and retrieval. . Growth in the critical importance of data. Corporate databases contain useful information about customer records, order patterns and other factors that can be analyzed and transformed into a valuable asset and a competitive advantage. Efficiently storing, managing and protecting this information have become increasingly important to the value and success of many businesses. The usefulness of past and present data is further enhanced by new sophisticated data mining software applications that can access and analyze large databases. . Growth in network server computing applications and data. Enterprises have continued to expand the use of server-based personal computer networks and workstations. This development has shifted critical information and applications to network servers in order to allow more people to gain access to stored data as well as to create new data. As the speed of network computing has increased, numerous new applications have become feasible such as computer fax, e-mail and voicemail, all of which generate progressively more data. Organizations increasingly are aware of the need to protect this data as networks become a mission- critical element of many operations. . Decrease in the cost of storing data. The cost of storage on magnetic disk, optical disk and tape continues to decrease with advances in technology and improved manufacturing processes. The decrease in cost not only encourages the storage of more data, but also makes the cost of removing obsolete data less cost effective than adding more storage capacity, contributing to greater storage demand for data which in the past may have been purged manually. Advances in Storage Management Technologies The growth in data and need for storage is contributing to an evolution in traditional storage solutions. New open standard technologies are designed to provide high-speed connectivity for data-intensive applications across multiple operating systems, including UNIX, Windows NT, NetWare and Linux. These new methods of storage and data management technologies include the following: . Fibre Channel. Fibre Channel is a new generation of interface technology based on industry standards for the connection of storage devices to networks. Interface is the term used to describe the electronics, cabling and software used to facilitate communications between devices. With Fibre Channel, users are better able to share stored information with other storage devices and servers over longer distances, with far greater data transfer speeds, thereby increasing the use of storage area networks, or SANs. . Storage Area Networks. SAN-based architecture applies the inherent benefits of a networked approach to data storage applications, which allows data to move efficiently and reliably between multiple storage devices and servers. The benefits of SAN architecture also include increasing the expandability of existing storage solutions and providing a higher level of connectivity than currently exists with traditional technologies. Additionally, SANs are able to provide these benefits across multiple operating systems. 27 . Advanced storage management software. The development of hierarchical storage management, or HSM, software has led to the use of tape as a lower-cost alternative to disk drives for on-line storage. HSM software automatically migrates infrequently accessed data to the lower cost storage medium. A user's request for this data at some later date will recall the data automatically from the tape library and put it back on the disk file for the user. This sometimes is referred to as near-online storage. This process reduces the overall storage cost by using the least expensive storage medium to save data that is not expected to be needed on a frequent basis. Advances in storage management software have increased the ability of businesses to store, manage and retrieve important data, which in turn allows businesses to operate more efficiently. . Network Attached Storage. Current storage devices are dependent on a file server for all commands and control. NAS devices give storage devices file server functionality, which allow users to plug a storage library directly into a network without increasing demands on the file server or requiring a separate file server. This allows users to maintain, or even enhance, system performance while saving on both time and cost. . Internet-based storage backup. This solution allows individuals and enterprises to outsource their storage or backup of data on a cost- efficient basis through the services provided by Internet-based storage backup companies. Increased availability of high bandwidth Internet connections is a key enabler of this approach. Types of Data Storage Current non-volatile storage solutions are based primarily on three technologies: magnetic disk, optical disk and magnetic tape. Each of these solutions represents a compromise among a variety of competing factors including capacity, cost, speed, portability and data reliability. Magnetic tape remains the lowest cost storage medium of the three on a cost per megabyte basis, and the tapes are removable, which allows them to be transported easily to an off-site location for additional security. Magnetic and optical disks provide quicker access to stored data and generally are used when speed is paramount, thus justifying their higher cost. Less frequently used data often is migrated from high-cost magnetic or optical disks to lower-cost tape storage. Tape libraries provide a near-online solution, where less frequently used data files are stored on tapes instead of on disks. The storage of large amounts of data in an automated tape library is substantially less expensive than using redundant arrays of independent disks, or RAID, although access time to data on tape is typically tens of seconds as compared to milliseconds for data on disk. Tape Libraries and Applications Automated tape libraries speed the tape loading process, eliminate errors induced by human operators, and enhance security compared to tapes that must be retrieved and loaded manually. Tape libraries also are capable of being operated from a remote location or during off-hours when no attendant is on duty. Automated tape libraries are a key component of a network administrator's overall storage solution. Two key components of tape libraries, tape drives and tape media, continue to decrease in cost on a per megabyte basis. As prices decline, new applications for automated storage become justified, further increasing the number of applications that can benefit from the use of tape libraries. We believe that continued technological improvements in tape drives and tape media will further reduce overall storage costs in the future. Current and emerging applications for tape libraries include: . Automated backup. Backup is the creation of a duplicate copy of current data for the purpose of recovery in the event the original data is lost or damaged. An automated tape library, in conjunction with storage management software, can backup network data at any time without human intervention. A library with multiple tape drives can backup data using all of its drives simultaneously, thus significantly speeding up the recording process. Backup tapes can be removed from the library and stored in an off-site location for additional protection. 28 . Archiving. Archiving is the storage of data for historical purposes. When important information is stored on tape, automated tape libraries, in conjunction with storage management software, can catalog tapes for future retrieval and prevent unauthorized removal or corruption of data by using password or key lock protection. Archival tapes provide a historic record for use in fraud detection, audit, legal and for other purposes. Tape libraries also are used for archiving because of the benefits offered by the tape medium, such as long-term data integrity, resistance to environmental contamination, ease of relocation and low storage cost. . Digital video. Digital recording of camera images for surveillance and security purposes is beginning to replace traditional analog VHS recording in mid-size to large installations such as airports, retail stores, government facilities and gaming operations. This is a growing and increasingly important market opportunity because tape libraries eliminate the need for operators to load, unload, store and retrieve the vast number of tapes created in these facilities. Library based systems index, store and play back the video images on demand, thereby reducing the recall time and cost of operation significantly when compared to traditional analog VHS recording and playback devices. Digital recording technology provides enhanced resolution and accommodates the recording of transactional data such as cash register receipts and credit card vouchers alongside the video image, which is not possible with VHS technology. . Image management. Storage-intensive applications such as satellite mapping and medical image management systems are turning to tape libraries because of the cost advantage over traditional storage methods. X-ray images or MRI results, for instance, must be kept on file for years. Tape library storage of a digitized image costs considerably less than storing a film copy, and can be recalled years later with considerably less effort. Distribution of Tape Library Products The requirements for storage solutions vary depending on the size of an enterprise, the type of data generated and the amount of data to be stored. With the increased dependence on stored data, most organizations, regardless of their size, have a heightened need for storage solutions that integrate devices such as tape drives, tape libraries and storage management software. Those organizations with sufficient in-house information technology resources can rely on their internal infrastructure and expertise to design, purchase and implement their own storage solutions. These organizations may elect to purchase equipment from distributors or directly from OEMs. Many organizations, however, do not have sufficient in-house resources but often have the same need for data storage solutions. These organizations often look to VARs to design and supply their storage solutions. VARs develop and install storage solutions for enterprises that face complex storage needs but lack the in-house capability of designing and implementing the proper solution or have chosen to outsource these functions. Typically, the VAR will select among a variety of different hardware technologies and storage management software options, as well as provide installation and other services, to deliver a complete storage solution for the end user. VARs require rapid turnaround of orders, custom configuration of tape libraries, drop shipment to their customer's site, compatibility with multiple tape formats and storage management software, and marketing and technical support. We expect the market segment served by VARs to increase as the cost of tape library storage continues to decline and as more organizations choose to outsource their information technology functions. OEMs generally resell products made by others under their own brand name and typically assume responsibility for product sales, service and support. OEMs enable manufacturers to reach end users not served by other reseller distribution channels and to serve select vertical markets where specific OEMs have exceptional strength. OEMs require special services such as product configuration control, extensive qualification testing, custom colors and private labeling. 29 Our Solution We offer cost-effective and reliable storage solutions that respond to the growing data management challenges facing businesses today, while addressing the unique needs of VARs and OEMs. We believe that high product reliability is essential to the end users of our products due to the critical nature of the data that is being stored and the frequent operation of backup systems during hours when personnel may not be available to respond to problems. To address these concerns, we emphasize quality and reliability in the design, assembly and testing of our products. Our tape libraries use a minimum number of moving parts. This approach reduces product failures, results in products that require little maintenance and simplifies the incorporation of new tape drive technologies. We have designed our libraries to be used primarily in a table-top or freestanding office environment. We believe that this approach provides the lowest cost solution for the largest segment of our customer base. We have the ability to bring new products to market rapidly at a relatively low development cost. This ability allows us to respond to changing market conditions and new opportunities as they arise. Our tape libraries are compatible with over 30 third-party storage management software packages, such as those supplied by Computer Associates, Hewlet-Packard, Legato, Tivoli and Veritas. Storage management software enables network administrators to allocate the use of storage technologies among user groups or tasks, to manage data from a central location, and to retrieve, transfer and backup data between multiple workstations. We believe that storage management software is a crucial component of any automated storage installation, and the lack of compatibility is a significant barrier to entry for new tape library competitors. To ensure compatibility, our engineers work closely with the application software vendors during product development cycles. We have focused our business primarily on supporting VARs and OEMs as the most effective and profitable distribution channels for our tape libraries. Our solution is to offer the VARs reliable tape libraries, multiple tape format choices, and more attractive profit opportunities than do other tape library manufacturers. We custom configure each of our libraries based on the VARs' requirements, with a normal delivery time of one to three working days. Our solution for OEMs is to offer them control over product design changes, qualification testing, custom colors and private labeling. We believe these factors enhance the VARs' and OEMs' ability to sell our products and encourage them to remain loyal to Qualstar. Strategy Our goals are to enhance our position as a supplier of automated tape libraries and to increase our market share in each of the tape formats in which we compete. To achieve these goals, we intend to: . Offer libraries for multiple tape drive technologies. We offer tape libraries for a range of tape drive technologies, including Advanced Intelligent Tape, or AIT, Digital Linear Tape, or DLT, and quarter inch cartridge, or QIC. We also have developed tape libraries based on the Linear Tape Open, or LTO, Ultrium tape media format and will offer these libraries when LTO tape drives become available. By offering products based on multiple tape drive technologies, we reduce our dependence on the success of any single technology and can offer products that target the specific preferences of VARs and their end-user customers. . Focus distribution on VAR channels. We sell our products primarily through selected value added resellers who have a strong market presence, have demonstrated the ability to work directly with end users, and who maintain relationships with major vendors of storage management software. Because we market our products primarily through this channel, we have implemented a variety of programs to support and enhance our relationships with our VAR partners. These programs are designed to increase the likelihood of closing a sale and to increase the VAR's profit margins. We intend to increase our marketing resources in support of this distribution channel. 30 . Maintain and strengthen OEM relationships. We sell our products to numerous companies under private label or OEM relationships. OEM sales enable us to reach end users not served by our VARs. The same product characteristics that make our tape libraries attractive to VARs also are important to OEMs. We will continue to pursue and develop opportunities with OEMs. . Develop libraries for new tape technologies. The tape drive industry continuously is developing new technologies. We will continue to monitor new product releases and design new libraries for those technologies that appear promising and meet our standards for capacity, quality and reliability. . Increase our rate of innovation. We plan to increase research and development resources in order to exploit emerging technologies and product opportunities. We intend to continue the expansion of our product lines to incorporate higher capacities and new technologies, such as network attached storage, or NAS. We believe that our experience, efficiency and strict control over the development and manufacturing of new products are key factors in the successful execution of our strategy. We design our tape libraries with a high percentage of common parts, use high quality components and minimize the number of moving parts. We utilize proprietary techniques in the design, production and testing of our libraries in order to simplify the manufacturing process and reduce our costs. We produce all of our products at a single facility and control our inventory closely to provide rapid delivery to our customers. These steps allow us to design and bring to market new products rapidly in response to changing technology, as well as increase our profitability. In addition to our emphasis on developing high quality tape libraries and continual improvement of our products through our research and development, we recently made an investment in a supplier of emerging and high technology components. In November 1999, we invested $1.1 million in Chaparral Network Storage, Inc. Chaparral was founded in 1998 to design and manufacture RAID controllers and intelligent storage routers for tape library applications. We recently incorporated the Chaparral router into our tape libraries for high end applications that require Fibre Channel connectivity. We believe that Fibre Channel will replace the Small Computer Systems Interface, or SCSI, as the primary interface for our larger tape libraries. Products Tape Libraries We offer a number of tape library families, each capable of incorporating one or more tape drive technologies, as summarized in the following table:
Models in Maximum Product Product Range of Tape Capacity in Family Family Type Tape Drive Technology Cartridges Terabytes(1) ------------------------------------------------------------------------------------- TDS-1000(2) 3 QIC Tandberg SLR32, SLR50, SLR100 11 to 44 2.2 ------------------------------------------------------------------------------------- TLS-4000 12 8MM Sony AIT1, AIT2 12 to 360 18.0 -------------------------------------------------------- Ecrix VXA-1 12 to 360 11.8 -------------------------------------------------------- Exabyte Mammoth 12 to 126 2.5 ------------------------------------------------------------------------------------- TLS-6000 7 DLT Quantum DLT-4000, 7/8000 10 to 240 9.6 -------------------------------------------------------- Benchmark DLT-1 10 to 240 9.6 ------------------------------------------------------------------------------------- TLS-8000(3) 7 LTO Ultrium 11 to 264 26.4
(1) A terabyte is one million megabytes, or one thousand gigabytes. The table shows native capacity and excludes gains from data compression, which can increase capacity by more than 100%. (2) This is an OEM product and is not sold under the Qualstar brand name. (3) We have announced libraries for LTO Ultrium tape drives but will not begin production until tape drives are available and have been qualified in our libraries. 31 Each tape library product family includes a number of models that differ in size, storage capacity, price and features. Our libraries are installed in open systems environments ranging from small departmental networks to enterprise- wide networks supporting hundreds of users. We believe that selling products for multiple tape drive technologies insulates us somewhat from the dynamics of the marketplace as various tape standards compete for market share. This helps our products appeal to the broadest possible range of end-user market segments. This wide range of products makes us a one-stop supplier for our VAR and OEM customers, enabling them to meet almost any end-user requirements for a specific tape format. Our wide range of products for competing tape drive technologies also helps to insulate us from the occasional supply shortages from tape drive manufacturers. Tape libraries generally contain two or more tape drives and from seven to thousands of tapes. We concentrate our product offerings in the middle segment range of 10 to 360 tapes. We design our tape libraries for continuous, unattended operation. Multiple tape drives allow simultaneous access to different data files by different users on the network, and increase throughput. A library with multiple tape drives can back up data using all drives simultaneously, significantly speeding up the recording process. Within the library, tape cartridges typically are stored in removable magazines, allowing for bulk removal of the tapes. Most of our libraries also offer key features such as barcode readers to scan cartridge labels, and an input/output port for importing and exporting individual tapes under system control. Many of our library models are expandable after installation by increasing the number of tape storage positions. This feature provides the end user with the ability to increase data capacity as storage needs grow. We offer automated tape libraries with different data storage capacities and data transfer rates. We continue to develop and release new libraries to expand our product offerings in the direction of higher capacity and higher performance units. We believe this strategy has contributed to our increasing profit margins. Our tape libraries incorporate a number of specialized features that we believe improve reliability, serviceability and performance, including: . Rapid tape drive replacement. We design our libraries so that a tape drive can be replaced in a few moments without special tools. This feature minimizes the off-line time required when a tape drive must be replaced, and frequently avoids the high cost and delays of a service call. . Inventory Sentry. This feature allows the library to be opened to inspect the tape cartridges visually without forcing the unit off-line for an unnecessary inventory cycle of all cartridges. . Fibre Channel connectivity. We offer a Fibre Channel option on most of our models to meet the needs of data-intensive applications requiring a high performance interface. . Partitioning options. Partitioning is the segmentation of a single library into multiple units to make several servers operate as though each has exclusive use of a dedicated library. We offer a wide selection of partitioning options for our tape libraries. Partitioning often saves the customer the cost of purchasing multiple small libraries when one larger one is sufficient. . Closed-loop servo control. Our tape libraries use closed-loop servo control for robotic motion to provide precise tape handling. By combining this with an all lead-screw construction, tape motion is smooth, repeatable and highly reliable. . Brushless DC motors. We use only brushless direct current, or DC, motors to increase product life and eliminate a source of electrical noise. Motors are the key component in any robotic system. We build our own motors in order to obtain the optimum in performance, reliability and efficiency. . Filtered, positive-pressure air systems. Our libraries use a filtered, positive-pressure air system to reduce dust substantially and maintain a high level of media integrity. Because the smallest dust particles are capable of causing data errors, maintaining a clean environment extends the life and reliability of our libraries. 32 We design our tape libraries to be used primarily in a table-top or free- standing office environment. If requested, we provide our customers with an adapter kit for rack-mounting of our tape libraries. Other manufacturers design libraries primarily for rack-mounting, and supply an adapter for table-top use. We have chosen our approach to distinguish ourselves from many of our competitors. We believe that this approach provides the most convenient and lowest cost solution for the largest segment of our customer base. Other Products We have manufactured 9-track auto-loading reel-to-reel tape drives since 1990. These units are compatible with IBM tape format standards and have served over the years as a data interchange medium. Demand for 9-track tape drives has been declining over many years, and we expect overall demand for 9-track tape drives to continue to decline in the future. In addition to our tape libraries and 9-track tape drives, we sell ancillary products such as tape media, tape magazines, host interface adapters, cables, bar code labels and adapters for rack mounting our products. Sales and Marketing Sales We sell our tape library products primarily through value added resellers. Our direct sales force usually will initiate contact with VARs who might be likely candidates to sell our tape libraries. We strive to develop relationships with VARs who have expertise in storage management applications, established relationships with end users and the experience to understand and respond to their customers' needs. We believe that by selling directly to VARs, we have an advantage over competitors who force VARs to purchase through an industrial distributor and who sometimes sell directly to end users, thereby competing with the VARs. Some of the advantages of this strategy include the following: . Higher profit margins. By avoiding the extra distribution markup, higher profit margins are available to be shared by both us and the VAR. . Custom configurations. By circumventing the distribution step, we are able to offer custom configurations of our products, such as special paint, private branding and non-standard interface options, on very short notice. . Channel conflicts avoided. We refer all end-user inquiries to our VAR partners. Because they know that we will not sell directly to the end user, there is an attitude of cooperation between the VAR and us. Frequently, our sales representatives make end-user visits with the VAR to answer questions or help close the sale. . Credit. We typically extend credit to VARs if they meet our credit requirements. This is a service not easily obtained from industrial distributors. . Rapid delivery. We generally ship a product to the VAR within one to three working days of confirming an order, rivaling the delivery time of many distributors. We have relationships with over 100 VARs, and approximately 30 independent storage management software vendors. Most of our sales are made on an individual purchase order basis. Although we sell our tape libraries primarily to VARs, we believe that OEMs are important to our business. We strive to work with OEMs early in the product development cycle so that we can obtain valuable product development feedback. The sales cycle for OEMs generally encompasses six months to one year and involves extensive product and system qualification testing, evaluation, integration and verification. Most of our sales of automated tape libraries to OEMs are in the surveillance industry, primarily to Loronix Information Systems. OEMs account for the majority of sales of our 9-track tape drives. OEMs typically assume responsibility for product sales, service and support. 33 Because we rely heavily on the success of our VAR and OEM customers, we depend on their ability to market, sell and distribute our products effectively. Our revenues could decline if we fail to execute our distribution strategy successfully or if our VAR and OEM customers do not implement their own strategies successfully. Our sales are spread across a broad customer base, with our two largest customers accounting for approximately 25.7% of revenues during fiscal 1999 and approximately 30.7% of revenues during the six months ended December 31, 1999. Loronix Information Systems, our largest customer, accounted for 17.0% of revenues in fiscal 1999, and 23.4% of revenues in the six months ended December 31, 1999. All of our international sales efforts currently are directed from our offices in Canoga Park, California. We intend to continue to develop our international markets and create additional outlets for our products. We plan to hire sales personnel in foreign markets and open a sales office in Europe. All of our international sales are denominated in U.S. dollars. Sales to customers located outside the United States were $3.8 million, or 24.9% of revenues in fiscal 1997, $5.1 million, or 26.4% of revenues in fiscal 1998, $7.1 million, or 24.0% of revenues in fiscal 1999, and $5.0 million, or 22.2% of revenues in the six months ended December 31, 1999. Marketing We support our sales efforts with a broad array of marketing programs designed to generate brand awareness, attract and retain qualified resellers and inform end users about the advantages of our products. We provide our VARs with a full range of marketing materials, including product specifications, sales literature, software connectivity information and product application notes. We train our resellers how to sell our products and how to answer customers' questions. We advertise in key network systems publications such as SYS Admin, Infostor, Windows NT and others, and participate in trade shows. We display our products under the Qualstar brand name at the fall COMDEX trade show, and participate in other trade shows in partnership with our principal suppliers and VARs. We support our marketing and customer service with a website that features comprehensive marketing and product information. Another element of our marketing plan is our lead registration program. This program awards resellers that uncover sales opportunities and promote our products to the end user. In exchange for this effort, the VAR is rewarded with a higher profit margin on that particular sale. The lead registration program gives our VAR partners an advantage over their competitors who purchase from industrial distribution channels. Our direct sales force conducts seminars targeting end users, often with a sales representative from one of the storage management software vendors. In addition, we conduct sales and technical training classes for our VARs. We also conduct various promotional activities for resellers and end users, including product-specific rebates, and certificates for free merchandise. We intend to enhance and enlarge our marketing program following completion of this offering. Customer Service and Support We believe that strong customer service and support is an essential aspect of our business. Our customer service and support efforts consist of the following components: . Technical support. Our technical support personnel are available Monday through Friday during normal business hours. Technical support personnel are available to all customers at no charge by telephone, facsimile and e-mail to answer questions and solve problems relating to our products. Our technical support personnel are trained in all aspects of our products. Our support staff is located at our headquarters in Canoga Park, California. In addition to our in-house support staff, we offer a third-party technical support help desk to provide assistance outside of normal business hours. We sell service contracts for on-site service of our tape libraries installed within the United States, which are fulfilled by IBM. . Sales engineering. Our engineers provide both pre- and post-sales support to our VARs. Systems engineers typically become involved in more complex problem-solving situations involving interactions between our products, third-party software, network server hardware and the network operating systems. 34 Systems engineers work with resellers and end users over the telephone and, in certain situations, visit the customer's site. . Training. We offer a product maintenance training program for both our VAR and OEM maintenance personnel. We conduct our training classes at our headquarters, as well as on-site at the locations of our VARs or OEMs. We also provide videotape of the training classes when it is more practical. . Warranty. The standard warranty period on our tape libraries is three years. During the first year we offer immediate replacement of defective products at no charge, subject to availability and credit approval of the end user. The customer is responsible for returning the defective product to us in a timely manner without damage. After the first year, the customer must first ship the tape library to our factory, where we will service the product during the warranty period at no charge. We offer out-of-warranty factory service at a flat fee plus applicable taxes, duties and transportation costs. On library tape drives, we pass the manufacturer-provided warranty on to our reseller. Our 9-track tape drives are warranted for a period of one year. On-site service for library products is available within the United States for an extra charge. We contract with outside service providers to supply on-site service. Revenues from the sale of on-site service contracts and out-of-warranty repair have not been significant. Manufacturing and Suppliers We manufacture all of our products at our facility in Canoga Park, California. We currently operate three assembly lines during one daily eight- hour shift. As needs require, we have the ability to add a second or third shift to increase our manufacturing capacity. In order to respond rapidly to sales orders, we build our tape libraries to a semi-finished state in advance of receipt of an order, perform full testing and then place the tape libraries in a holding area until an order is received. Once an order is confirmed, we remove the unit from the holding area, install tape drives and configure the unit to meet the specific requirements of the order, retest and then ship. The manufacturing cycle to bring the tape libraries to a semi-finished state is approximately five working days. We believe that this capability represents an effective way to minimize our inventory levels while maintaining the ability to fill specific customer orders in short lead times. We coordinate inventory planning and management with suppliers and customers to match our production to market demand. Once we confirm a product order, we generally ship the product to the customer within one to three working days. We believe this response time is among the fastest in the industry, and gives us a competitive edge. Because we fill the majority of our orders as they are received, our backlog generally is small and is not indicative of future sales. Our suppliers are selected carefully based on their ability to provide quality parts that consistently meet our specifications and volume requirements. A number of our component parts are not available off the shelf, but are designed to our specifications for integration into our products. Tape drives and tape recording media are available only from a limited number of suppliers, some of which are sole-source providers. One of our suppliers competes with us by selling its own tape libraries. The risk of allocation is greater upon the introduction of a new tape drive technology. Any disruption in supplies of tape drives or tape media could delay shipments of our products. However, most of the components assembled into our libraries are standard off-the-shelf parts, which reduces the risk of part shortages and allows us to maintain inventory of these parts at a minimum. Inventory planning and management is coordinated closely with suppliers to match our production needs. Competition The market for automated tape libraries is intensely competitive, highly fragmented and characterized by rapidly changing technology and evolving standards. Because we offer a broad range of libraries for different tape drive technologies, we tend to have a large number of competitors that differ depending on the particular format and performance level. In addition, because of growth in our marketplace, we anticipate increased competition from other sources, ranging from emerging to established companies, including large OEMs, to 35 foreign competition. Our competitors include Advanced Digital Information Corporation, or ADIC, Spectra Logic, Breece Hill Technologies, Overland Data, Quantum/ATL, which is also a supplier to us of DLT tape drives, Exabyte and Storage Technology Corp. Our primary competitors are Exabyte, Spectra Logic and ADIC in the 8mm tape recording media, Overland Data, ADIC, Breece Hill Technologies and Quantum/ATL in the DLT tape recording media and Overland Data in the QIC recording media, and we anticipate that most of our competitors will offer products for the LTO tape recording media. Many of our competitors have substantially greater financial and other resources, better name recognition, larger research and development staffs, and more experience and capabilities in manufacturing, marketing and distributing products than we do. Our competitors may develop new technologies and products that are more effective than our products. We are not ISO-9000 certified, unlike some of our competitors, which may limit some customers' ability to purchase our products. However, we do not believe that our current determination not to seek ISO-9000 certification has affected our sales to date. As a greater number of competitors introduce products in a particular tape drive technology, the increased competition normally results in price erosion, a reduction in gross margins and a loss of market share for all competitors. We cannot assure you that we will be able to compete successfully against either current or potential competitors or that competition will not cause a reduction in our sales or profit margins. We believe that our ability to compete depends on a number of factors, including the success and timing of new product developments by us and by our competitors, compatibility of our products with a broad range of computing systems, product performance, reliability, price, and customer support. Specifically, we believe that the principal competitive factors in the selection of a tape library include: . reliability of the robotic assembly that handles the tape cartridges; . initial purchase price; . storage capacity; . speed of data transfer; . compatibility with existing network operating systems and storage management software; . after-sale expandability of a tape library to meet increasing storage requirements; . expected product life and cost of maintenance between failures; and . physical configuration and power requirements of the library. We believe our tape libraries compete favorably overall with respect to these factors. Research and Development Our research and development team consists of seven people who average over 25 years of data storage and related industry experience. This team has developed 36 separate tape library models for five different tape formats over the last five years. Our research and development efforts rely on the integration of multiple engineering disciplines to generate products that meet market needs in a competitive and timely fashion. Successful development of automated tape libraries requires the integration of firmware design, which is the embedded systems software that controls the robotic movement within the library, mechanical design, electronic design and engineering packaging into a single product. Product success also relies on the engineering team's thorough knowledge of each of the different tape drive technologies, as well as SCSI and Fibre Channel interface technologies. Our new product development often is stimulated by the availability of an enhanced or new tape drive technology. As tape drive manufacturers compete in the marketplace, they continually invest in research and development to gain performance leadership either by offering increasingly enhanced versions of their current tape drive products or by introducing an entirely new tape drive technology. We benefit from these industry developments by utilizing the new technology in our products. Our engineers work closely with various tape drive manufacturers through the drive development cycle to assure that reliable tape library and tape drive combinations are brought to market. 36 The engineering of our tape libraries to utilize common parts across product families gives us the ability to develop and introduce new products quickly. If a new tape drive is an advanced version of one already incorporated in one or more of our products, our time and dollar investment to incorporate the new drive can be relatively small, with the focus being on verification testing. When the form factors differ, the time and investment requirements can grow substantially, and may require development of a new product altogether. We develop new products as we identify emerging market needs. Our sales and marketing, product development and engineering teams identify products to fulfill customer and marketplace needs. Our research and development team concentrates on leveraging previous engineering investments into new products. For example, our firmware is based on successive generations of the operating system developed for our first library. We also use common parts in our different library series, and leverage our electro-mechanical and electronic hardware technology from previous products into next generation designs. In some cases, entire subassemblies are transferable, leveraging not only engineering time but also materials purchasing, inventory stocking and manufacturing efforts. Our research and development expenses were $916,000 in fiscal 1997, $894,000 in fiscal 1998, $925,000 in fiscal 1999, and $507,000 in the first six months of fiscal 2000. We anticipate increasing our spending on research and development in the future. Intellectual Property We rely on copyright protection of our firmware, as well as patent and trademark protection for certain designs and products. However, we do not believe our intellectual property provides significant protection from competition. We believe that, because of the rapid pace of technological change in the tape storage industry, patent, copyright, trademark and trade secret protection are less significant than factors such as the knowledge, ability and experience of our personnel, new product introductions and product enhancements. In addition, we believe that establishing and maintaining good relationships with VARs and OEM customers, and the compatibility of many storage management software applications with our products, are the most significant factors protecting us from new competitors. In addition, we enter into nondisclosure agreements with our development engineers to protect our technology and designs. However, we do not believe that such protection can preclude competitors from developing substantially equivalent or superior products. Employees As of January 31, 2000, we had 81 full-time employees, including 52 in manufacturing, 7 in research and development, 2 in customer service, 13 in sales and marketing, and 7 in finance and administration. We also employ a small number of temporary employees and consultants as needed. We are not a party to any collective bargaining agreement or other similar agreement. We believe that our relationship with our employees is good. Facilities All of our operations are housed in a single building containing approximately 28,000 square feet located in Canoga Park, California. Our lease on this facility expires in January 2001, but we have the right to terminate our lease on 90 days' notice. We currently are seeking a larger facility to occupy upon the termination of this lease. We may fail to locate a suitable facility or begin operations in a new facility either on time or within budget. If we fail to execute this move successfully, sales may be delayed and our operational efficiencies and product quality could suffer. Legal Proceedings We may be involved in legal proceedings from time to time in the ordinary course of business. However, there currently are no material legal proceedings pending or, to our knowledge, threatened against us. 37 MANAGEMENT Executive Officers and Directors The following table sets forth certain information as of January 21, 2000 with respect to each person who is an executive officer or director of Qualstar:
Name Age Position ---- --- -------- William J. Gervais............. 57 Chief Executive Officer, President and Director Richard A. Nelson.............. 56 Vice President of Engineering, Secretary and Director Matthew Natalizio.............. 44 Vice President and Chief Financial Officer Daniel O. Thorlakson........... 57 Vice President of Operations Robert K. Covey................ 52 Vice President of Marketing Bruce E. Gladstone(1)(2)....... 64 Director Robert E. Rich................. 49 Director Trude C. Taylor(1)(2).......... 78 Director Robert T. Webber(1)(2)......... 58 Director
- -------- (1) Member of the audit committee (2) Member of the compensation committee William J. Gervais is a founder of Qualstar and has been our President and a director since our inception in 1984, and was elected Chief Executive Officer in January 2000. From 1984 until January 2000, Mr. Gervais also served as our Chief Financial Officer. From 1981 until 1984, Mr. Gervais was President of Northridge Design Associates, Inc., an engineering consulting firm. Mr. Gervais was a co-founder, and served as Engineering Manager from 1976 until 1981, of Micropolis Corporation, a former manufacturer of hard disk drives. Mr. Gervais earned a B.S. degree in Mechanical Engineering from California State Polytechnic University in 1967. Richard A. Nelson is a founder of Qualstar and has been our Vice President of Engineering, Secretary and a director since our inception in 1984. From 1974 to 1984, Mr. Nelson was self employed as an engineering consultant specializing in microprocessor technology. Mr. Nelson earned a B.S. in Electrical Engineering from California State Polytechnic University in 1966. Matthew Natalizio was hired as our Vice President and Chief Financial Officer in January 2000. Prior to joining Qualstar, Mr. Natalizio served as Vice President of Finance and Treasurer from 1994 until 1998, and as Vice President, Operations Support from 1998 through 1999, of Superior National Insurance Group, Inc. From 1988 until 1994, Mr. Natalizio was a Senior Audit Manager for KPMG Peat Marwick LLP. From 1983 through 1988, Mr. Natalizio was an Audit Manager for Ernst & Whinney. Mr. Natalizio received a B.A. degree in Economics from the University of California, Los Angeles in 1977 and became a C.P.A. in 1983. Daniel O. Thorlakson has been our Vice President of Operations since 1988. From 1983 to 1987, Mr. Thorlakson was President of Qualitech Business Systems, a value added reseller of computer systems, networks and software. Mr. Thorlakson earned a B.S. degree in Mechanical Engineering from the University of Detroit in 1966. Robert K. Covey has been our Vice President of Marketing since 1994. From 1986 to 1993 Mr. Covey was regional manager of ATG Cygnet, an optical disk library firm. From 1982 to 1985, Mr. Covey served as national sales manager at Micropolis Corporation, a disk drive manufacturer. Mr. Covey attended Butler University from 1965 to 1968. 38 Bruce E. Gladstone has been a director of Qualstar since 1994. In 1997, Mr. Gladstone was founder of ComCore Semiconductor, a manufacturer of fabless semiconductors, and served as its Vice President and a director from 1997 until 1998. From 1996 until 1997, Mr. Gladstone was a consultant in the area of high technology startup companies. In 1990, Mr. Gladstone co-founded Chronology Corporation and served as an executive officer and director from 1990 until 1995. During the period 1974 through 1990, Mr. Gladstone founded and served as chief executive officer or president of three companies providing electronic engineering and software development tools. Mr. Gladstone began his career in electrical engineering and received B.S. and M.S. degrees in Engineering from the University of California, Los Angeles in 1957 and 1962. Robert E. Rich has served as a director of Qualstar since January 2000. Mr. Rich has been engaged in the private practice of law since 1975 and has been a shareholder of Stradling Yocca Carlson & Rauth, legal counsel to Qualstar, since 1984. Mr. Rich received a B.A. degree in Economics from the University of California, Los Angeles in 1972 and his J.D. degree from the University of California, Los Angeles in 1975. Trude C. Taylor served as a director of Qualstar from October 1989 until December 1995, and rejoined our board in January 2000. Since 1984, Mr. Taylor has been a principal of TC Associates, a private investment firm. Mr. Taylor served as Chairman of the Board, Chief Executive Officer and a director of Zehntel Corporation, an automatic electronic test equipment manufacturer, from 1984 until 1988. Mr. Taylor was a founder and served as Chief Executive Officer, President and a director of EM&M Corporation, a computer components and memory products company, from 1961 until 1984, and served as its Chairman of the Board from 1984 until 1986. Mr. Taylor served on the board of directors of Xylan Corporation until it was acquired by Alcatel S.A. in 1999, and currently serves on the boards of directors of Plantronics, Inc. and DensePac Microsystems, Inc. Mr. Taylor also serves as a trustee of Harvey Mudd College, and as an arbitrator for the New York Stock Exchange and the National Association of Securities Dealers, Inc. Mr. Taylor received a B.S. degree in Mechanical Engineering from the University of California, Los Angeles in 1949, and an M.B.A. degree from Harvard University in 1951. Robert T. Webber has served as a director of Qualstar since January 2000. Prior to his retirement in 1999, Mr. Webber was employed for 32 years by Lockheed-Martin Skunk Works and its predecessors, where he served in various positions, most recently as Chief Engineer and Division Manager for the Systems Requirements & Analysis Division. Mr. Webber currently serves on the executive board of the National Defense Industrial Association's Combat Survivability Division, a professional trade association. Mr. Webber received a B.S. degree in Engineering from the University of California, Los Angeles in 1963 and an M.B.A. degree from Pepperdine University in 1971. Board Composition Our board of directors currently consists of six directors. Each director serves a term of one year. Each director serves the term for which he is elected until the election and qualification of his successor or until his resignation or removal, whichever comes earlier. Our board of directors currently has two committees, a compensation committee and an audit committee. The compensation committee consists of Bruce E. Gladstone, Trude C. Taylor and Robert T. Webber. The compensation committee reviews and recommends the salaries and bonuses of our officers, establishes compensation and incentive plans, and determines other fringe benefits. The audit committee consists of Trude C. Taylor, Bruce E. Gladstone and Robert T. Webber. The audit committee recommends engagement of our independent public accountants and is primarily responsible for approving the services performed by our independent accountants and for reviewing and evaluating our accounting principles and our system of internal controls. Director Compensation Non-employee directors receive $1,500 per quarter as compensation for their services on the board, and are reimbursed for expenses incurred in connection with attendance at board meetings. We have in the past 39 granted non-employee directors options to purchase shares of our common stock pursuant to our 1985 Stock Option Plan. Directors are eligible to receive options and rights to purchase restricted stock under our 1998 Stock Incentive Plan. In January 2000, we granted to each of our four non-employee directors the right to purchase 20,000 shares of restricted stock at a price of $7.50 per share, which each director purchased with a full-recourse promissory note. We have the right to repurchase a director's restricted shares at the original purchase price upon termination of his service for any reason. Our repurchase right lapses and the director's shares vest at the rate of 25% per year of service following the date of grant. See "Certain Relationships and Related Transactions." Compensation Committee Interlocks and Insider Participation in Compensation Decisions Our board of directors established the compensation committee in January 2000. Prior to establishing the compensation committee, our board of directors as a whole performed the functions delegated to the compensation committee. No executive officer serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors. Executive Compensation The following table summarizes all compensation earned by our Chief Executive Officer and the three other most highly compensated executive officers whose total salary and bonus exceeded $100,000 for services rendered in all capacities to us during the fiscal year ended June 30, 1999. These individuals are referred to as our named executive officers in other parts of this prospectus. The amounts shown below under "All Other Compensation" represent matching contributions under our 401(k) plan. Summary Compensation Table
Long Term Compensation Awards ------------------- Annual Compensation Securities -------------------- Underlying All Other Name and Principal Position Salary Bonus Options (#) Compensation - --------------------------- ---------- --------- ------------------- ------------ William J. Gervais...... $ 138,400 $ 25,000 -- -- Chief Executive Officer and President Richard A. Nelson....... 126,720 15,000 -- $1,354 Vice President of Engineering Daniel O. Thorlakson.... 155,600 20,000 -- 1,434 Vice President of Operations Robert K. Covey......... 152,540 10,000 -- 1,483 Vice President of Marketing
Option Grants We did not grant any stock options to our named executive officers during the fiscal year ended June 30, 1999. On January 14, 2000, we granted options to four of our employees to purchase a total of 51,000 shares of our common stock at an exercise price of $7.50 per share. This figure includes an option to purchase 36,000 shares granted to our newly-hired Chief Financial Officer, Matthew Natalizio. These options were granted under our 1998 Stock Incentive Plan, have a term of ten years and vest at a rate of 25% per year over four years following the date of grant. 40 Options Exercised and Fiscal Year-End Values The following table sets forth the number and value of unexercised options held by our named executive officers as of June 30, 1999. The value of unexercised in-the-money options at June 30, 1999 represents an amount equal to the difference between the assumed initial public offering price of $ per share and the option exercise price, multiplied by the number of unexercised in-the-money options. None of our named executive officers exercised any options during the fiscal year ended June 30, 1999. Aggregated Option Exercises In Last Fiscal Year And Fiscal Year-End Option Values
Number of Securities Underlying Value of Unexercised Unexercised Options at June 30, in-the-money Options at 1999 June 30, 1999 ------------------------------------ ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ---- ---------------- ---------------- ----------- ------------- William J. Gervais...... - - - - Richard A. Nelson....... - - - - Daniel O. Thorlakson.... - - - - Robert K. Covey......... 72,000 - $ -
Stock Option Plans 1985 Stock Option Plan Our 1985 Stock Option Plan was adopted by our board of directors in March 1985, approved by our shareholders in October 1985, and amended several times thereafter. The 1985 plan provided for the grant of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code as well as nonqualified options, to purchase up to 500,000 shares of our common stock. The 1985 plan expired on March 27, 1995. As of January 31, 2000, options to purchase 72,000 shares of our common stock remained outstanding under the 1985 plan. 1998 Stock Incentive Plan Our 1998 Stock Incentive Plan was adopted by our board of directors in February 1998, approved by our shareholders in March 1998, and was amended in January 2000. The 1998 plan provides for the grant to employees of "incentive stock options" within the meaning of Section 422 of the Internal Revenue Code, and for the grant of nonqualified stock options and stock purchase rights to employees, directors, consultants and other service providers. A total of 450,000 shares of common stock have been authorized for issuance under the amended 1998 plan. As of January 31, 2000, options to purchase 85,000 shares were issued and outstanding, 80,000 shares of restricted stock had been sold, and 270,000 shares remained available for the grant of additional options and stock purchase rights under the 1998 plan. Our board of directors or a committee of the board administers the 1998 plan. In the case of options intended to qualify as "performance-based compensation" within the meaning of Section 162(m) of the Internal Revenue Code, the committee will consist of two or more "outside directors" within the meaning of Section 162(m) of the Internal Revenue Code. The administrator has the power to determine the terms of the options or share purchase rights granted, including the exercise price, the number of shares subject to each option or share purchase right, the exercisability of the options and the form of consideration payable upon exercise. The exercise price of stock options, and the purchase price of restricted stock, must be not less than the fair market value of a share of our common stock on the date of grant, or 110% with respect to incentive stock options granted to optionees who own more than 10% of our outstanding common stock. Options expire no 41 later than ten years from the date of grant, or five years with respect to incentive stock options granted to optionees who own more than 10% of our outstanding common stock. Options generally are nontransferable, other than upon death by will and the laws of descent and distribution. In the case of stock purchase rights, the restricted stock purchase agreement entered into in connection with the exercise of the stock purchase rights generally grants us a repurchase option that we may exercise upon the voluntary or involuntary termination of the purchaser's service with us for any reason, including death or disability. The purchase price for shares we repurchase pursuant to restricted stock purchase agreements generally is the original price paid by the purchaser and may be paid by cancellation of any indebtedness owed by the purchaser to us. The repurchase option lapses at a rate that the administrator determines. In the event a "change in control" of Qualstar occurs, all outstanding options immediately will become exercisable in full, and our right to repurchase shares of restricted stock will expire, immediately prior to the change in control. However, if the company acquiring us assumes outstanding options, vesting of options will not accelerate and our repurchase right with respect to restricted stock will not expire unless the person holding an option or restricted stock thereafter is terminated involuntarily. For purposes of the 1998 Plan, a "change in control" of Qualstar will be deemed to have occurred, among other things, upon: . the sale or other disposition of substantially all of our assets; . the approval by our shareholders of a plan or proposal for the liquidation or dissolution of Qualstar; . a merger or consolidation to which we are a party if our shareholders immediately prior to the merger or consolidation beneficially own, immediately after the merger or consolidation, securities of the surviving corporation representing 50% or less of the combined voting power of the surviving corporation's then outstanding securities; or . any person becoming the beneficial owner of more than 50% of the voting power of our outstanding securities. Unless terminated sooner, the 1998 plan will terminate automatically in 2008. In addition, we have the authority to amend, suspend or terminate the 1998 plan, provided that no such action may affect any share of common stock previously issued and sold or any option previously granted under the 1998 plan without the optionee's written consent. 401(k) Plan We maintain a 401(k) plan to provide eligible employees with a tax preferential savings and investment program. Contributions by participants or by us to the 401(k) plan, and income earned on plan contributions, generally are not taxable to the participants until withdrawn, and we may deduct our contributions when we make them. Employees that are 21 years or older become eligible to participate in the 401(k) plan on the first anniversary of their employment with us. Eligible participants may elect to reduce their current compensation up to the lesser of 15% of eligible compensation or the statutorily prescribed annual limit, currently $10,500, and have such reduction contributed to the 401(k) plan. We may make matching contributions to the 401(k) plan on behalf of eligible participants at a rate of 25% of up to 6% of the amount contributed by eligible participants. The amount of our contribution on behalf of an eligible participant vests at the rate of 20% per year. The trustees of the 401(k) plan invest the assets of the 401(k) plan in the various investment options as directed by the participants. Limitations of Liability and Indemnification Matters Our Restated Articles of Incorporation limit the personal liability of our directors for monetary damages to the fullest extent permitted by the California General Corporation Law. Under the California General Corporation Law, a director's liability to a company or its shareholders may not be limited: . for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; 42 . for acts or omissions that a director believes to be contrary to our best interests or the best interests of our shareholders or that involve the absence of good faith on the part of the director; . for any transaction from which a director derived an improper personal benefit; . for acts or omissions that show a reckless disregard for the director's duty to us or our shareholders; . for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to us or our shareholders; . under Section 310 of the California General Corporation Law concerning contracts or transactions between us and a director; or . under Section 316 of the California General Corporation Law concerning directors' liability for approving improper dividends, loans and guarantees. The limitation of liability does not affect the availability of injunctions and other equitable remedies available to our shareholders for any violation by a director of the director's fiduciary duty to us or our shareholders. Our Restated Articles of Incorporation also authorize us to indemnify our "agents," as defined in Section 317 of the California General Corporation Law, through bylaw provisions, by agreement or otherwise, to the fullest extent permitted by law. Pursuant to this provision, our Bylaws provide for indemnification of our directors, officers and employees. In addition, we may, at our discretion, indemnify persons whom we are not obligated to indemnify. Our Bylaws also allow us to enter into indemnity agreements with individual directors, officers, employees and other agents. We have entered into indemnity agreements with all of our directors and executive officers that provide the maximum indemnification permitted by law. These agreements, together with our Bylaws and Restated Articles of Incorporation, may require us, among other things, to indemnify our directors or executive officers, other than for liability resulting from willful misconduct of a culpable nature, to advance expenses to them as they are incurred, provided that they undertake to repay the amount advanced if it is ultimately determined by a court that they are not entitled to indemnification, and to obtain directors' and officers' insurance if available on reasonable terms. Section 317 of the California General Corporation Law and our Bylaws provide for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons, under certain circumstances, for liabilities, including reimbursement of expense incurred, arising under the Securities Act. We are not aware of any pending litigation or proceeding involving our directors, officers, employees or agents in which indemnification will be required or permitted. Moreover, we are not aware of any threatened litigation or proceeding that might result in a claim for such indemnification. We believe that the foregoing indemnification provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. We intend to obtain directors' and officers' liability insurance prior to the effectiveness of this offering. 43 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In January 2000 each of our four non-employee directors purchased 20,000 shares of restricted stock pursuant to our 1998 Stock Incentive Plan at a price of $7.50 per share, which was the fair market value of our stock on the date of grant as determined by our board of directors. Each director paid for his shares with a full-recourse promissory note in the amount of $150,000, secured by a pledge of the purchased shares. Payments of principal on the notes are due in four equal annual installments commencing on the second anniversary of the date of the note. Interest on the notes accrues at the rate of 6.21%, and is payable annually. 44 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information with respect to the beneficial ownership of our common stock as of January 31, 2000, and as adjusted to reflect the sale of common stock offered in this offering for: . each person (or group of affiliated persons) who we know beneficially owns more than 5% of our common stock; . each of our directors; . each of the named executive officers; . each shareholder who is selling shares of common stock in this offering; and . all of our directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to shares. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options held by that person that currently are exercisable or exercisable within 60 days of January 31, 2000 are deemed outstanding. Such shares, however, are not deemed outstanding for the purposes of computing the percentage ownership of each other person. Unless otherwise indicated, the persons named in the table have sole voting and sole investment control with respect to all shares beneficially owned, subject to community property laws where applicable. The number and percentage of shares beneficially owned are based on 3,528,133 shares of common stock outstanding as of January 31, 2000. The address for those individuals for which an address is not otherwise indicated is: c/o Qualstar Corporation, 6709 Independence Avenue, Canoga Park, California 91303. The following table assumes no exercise of the underwriters' over-allotment option.
Shares Beneficially Owned Prior to Shares Beneficially Offering Number of Owned After Offering ----------------- Shares Being ---------------------- Name of Beneficial Owners Number Percent Offered Number Percent - ------------------------- --------- ------- ------------ --------- ---------- William J. Gervais...... 1,155,500 32.8% Richard A. Nelson....... 832,500 23.6 Daniel O. Thorlakson.... 203,000 5.8 Robert K. Covey(1)...... 72,000 2.0 -- Bruce E. Gladstone(2)... 20,000 0.6 -- Robert E. Rich(2)....... 48,667 1.4 -- Trude C. Taylor(2)...... 59,600 1.7 -- Robert T. Webber(2)..... 40,000 1.1 -- All directors and officers as a group (9 persons)(3)............ 2,431,267 68.2
- -------- (1) Includes 36,000 shares issuable upon exercise of an option held by Mr. Covey which is exercisable within 60 days of January 31, 2000. (2) Includes 20,000 shares that we have the right to repurchase if the shareholder's service on our board of directors terminates. Our repurchase right lapses in four equal annual installments commencing January 14, 2001. (3) Includes an aggregate of 36,000 shares issuable upon exercise of options held by these individuals which are exercisable within 60 days of January 31, 2000, and 80,000 shares subject to a right of repurchase in favor of Qualstar which lapses over time. 45 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, our authorized capital stock will consist of 50,000,000 shares of common stock, no par value, and 5,000,000 shares of preferred stock, no par value. Common Stock Upon completion of this offering, we will have shares of common stock outstanding. All outstanding shares of common stock are, and the common stock to be issued in this offering will be, fully paid and nonassessable. The following summarizes the rights of holders of our common stock: . each holder of common stock is entitled to one vote per share on all matters to be voted upon by the shareholders; . subject to preferences that may apply to shares of preferred stock that we may issue in the future, the holders of common stock are entitled to receive such lawful dividends as may be declared by the board of directors; . upon our liquidation, dissolution or winding up, the holders of shares of common stock are entitled to receive a pro rata portion of all of our assets remaining for distribution after satisfaction of all our liabilities and the payment of any liquidation preference of any outstanding preferred stock; . there are no redemption or sinking fund provisions applicable to our common stock; and . there are no preemptive or conversion rights applicable to our common stock. Preferred Stock We will not have any shares of preferred stock outstanding at the completion of this offering. However, our restated articles of incorporation authorize our board of directors, without shareholder approval, to issue our preferred stock in one or more series and to fix the rights, preferences and privileges thereof. Among other rights, the board of directors may determine, without further vote or action by our shareholders: . the number of shares and the designation of any series; . the dividend rate on the shares of the series, whether dividends will be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of the series; . whether the series will have voting rights in addition to the voting rights provided by law and, if so, the terms of the voting rights; . whether the series will have conversion privileges and if so, the terms and conditions of conversion; . whether or not the shares of the series will be redeemable or exchangeable and if so, the dates, terms and conditions of redemption or exchange, as the case may be; . whether the series will have a sinking fund for the redemption or purchase of shares of that series and if so, the terms and amount of the sinking fund; and . the rights of the shares of the series in the event of our voluntary or involuntary liquidation, dissolution or winding up and the relative rights or priority, if any, of payment of shares of the series. Although we presently do not have plans to issue any shares of preferred stock, any future issuance of shares of preferred stock, or the issuance of rights to purchase preferred shares, may delay, defer or prevent a change of control in our company or an unsolicited acquisition proposal. The issuance of preferred stock also 46 could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of the common stock. Anti-Takeover Effects of Provisions of Our Restated Articles of Incorporation and Bylaws Some provisions of our restated articles of incorporation and bylaws may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our shareholders. These provisions include: . Authorized But Unissued Shares. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock without shareholder approval. Our board of directors also has the authority to issue approximately million shares of common stock without shareholder approval, subject to certain limitations imposed by the Nasdaq National Market. These additional shares may be issued for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved capital stock could discourage or make more difficult an attempt to obtain control of our company by means of a proxy contest, tender offer, merger or otherwise. . Limitation of Liability. Our restated articles of incorporation eliminate the personal liability of our directors to us and our shareholders to the fullest extent permitted by the California General Corporation law. Our bylaws authorize us to provide indemnification to our directors and officers if they are made party to litigation by reason that such person was acting on our behalf and in good faith. These provisions may reduce the likelihood of derivative litigation against directors and may discourage or deter shareholders or management from bringing a lawsuit against directors for breach of their duty of care. . Advance Notice Provisions. Our bylaws contain advance notice provisions for nominations for election to our board of directors and for proposals to be acted on by our shareholders at shareholder meetings. Any nomination or proposal that does not comply with these provisions will not be allowed. This may make it more difficult to change the composition of our board of directors or to propose a transaction which could result in a change in control. . Elimination of Cumulative Voting. Our restated articles of incorporation and our bylaws eliminate cumulative voting in the election of directors as long as our shares are listed for trading on Nasdaq, or on the New York Stock Exchange or the American Stock Exchange. This provision ensures that the holder or holders of a majority of our common shares entitled to vote in an election of directors are able to elect all of the directors. This provision could deter investors from acquiring a minority of our shares of our common stock in order to obtain a board seat and influence corporate policy. California law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's articles of incorporation or bylaws, unless a corporation's articles of incorporation or bylaws, as the case may be, requires a greater percentage. Our articles and bylaws require the vote of a majority of the holders of the outstanding common stock to amend, revise or repeal anti-takeover provisions. Transfer Agent and Registrar The transfer agent and registrar for our common stock is . 47 SHARES ELIGIBLE FOR FUTURE SALE Prior to this offering, there has been no public market for our common stock. Future sales of substantial amounts of our common stock in the public market could adversely affect the market price of our common stock and could adversely affect our ability to raise equity capital at a time and price favorable to us. Upon completion of this offering, assuming no exercise of outstanding options after January 31, 2000 and no exercise of the underwriters' overallotment option, we will have shares of common stock outstanding. Of these shares, approximately shares of common stock, including all of the shares of common stock sold in this offering, plus any shares sold as a result of the underwriters' exercise of the over-allotment option, will be freely tradable without restriction under the Securities Act. The remaining approximately shares of outstanding common stock held by existing shareholders are "restricted securities" under the Securities Act or are subject to "lock-up" agreements. Of this amount, shares will be eligible for resale pursuant to Rule 144 as of , and shares will be subject to "lock-up" agreements as described below. "Restricted securities" as defined under Rule 144 were issued and sold by Qualstar in reliance on exemptions from the registration requirements of the Securities Act. These shares may be sold in the public market only if registered or pursuant to an exemption from registration, such as Rule 144, Rule 144(k) or Rule 701 under the Securities Act. Lock-Up Agreements All of our officers, directors and selling shareholders, and all of our other shareholders, have agreed, pursuant to "lock-up" agreements, that they will not offer, sell, contract to sell or grant any option to purchase or otherwise dispose of the shares of common stock owned by them or that could be purchased by them through the exercise of options, for a period of 180 days after the date of this prospectus, without the prior written consent of First Security Van Kasper and Needham & Company, Inc. Upon the expiration of the lock-up period, approximately shares of common stock will be eligible for resale immediately pursuant to Rule 144. Rule 144 Under Rule 144 as currently in effect, beginning 90 days after the date of this prospectus, a person who beneficially has owned restricted securities for at least one year, including persons who may be deemed affiliates of Qualstar, are entitled to sell within any three-month period a number of shares that does not exceed the greater of: . one percent of the number of shares of common stock then outstanding, which will equal approximately shares upon completion of this offering; 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 such sale. Sales of restricted securities under Rule 144 also are subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us. These limitations apply to both restricted and unrestricted shares held by persons who are our affiliates. Rule 144(k) Under Rule 144(k), a person who is not deemed to have been an affiliate of Qualstar at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner except an affiliate, 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 subject to the contractual lock-up restrictions described above or otherwise restricted, "144(k) shares" may be sold immediately upon the completion of this offering. 48 Rule 701 Under Rule 701 as currently in effect, persons who purchase shares upon exercise of options granted prior to the effective date of this initial public offering may sell such shares in reliance on Rule 144, beginning 90 days after the date of this prospectus. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Non-affiliates may sell their Rule 701 shares without complying with the holding period, public information, volume limitation or notice provisions of Rule 144. Stock Options Following this offering, we intend to file a registration statement on Form S-8 under the Securities Act to register all of our shares of common stock subject to outstanding stock options. Based on the number of shares subject to outstanding options on , 2000 and the number of shares currently reserved for issuance under all of our stock option plans and agreements, the registration statement would cover approximately shares of our common stock. Accordingly, shares issuable upon exercise of these options may be resold in the public market by non-affiliates without restriction, and by affiliates subject to Rule 144 volume limitations, except to the extent that such shares are subject to the contractual lock-up restrictions described above. See "Management -- Stock Option Plans." 49 UNDERWRITING Under the terms and subject to conditions of an underwriting agreement, the underwriters named below, acting through their representatives, First Security Van Kasper, Needham & Company, Inc. and Wedbush Morgan Securities, each severally has agreed to purchase from us the number of shares of common stock shown opposite their names below at the public offering price less the underwriting discount set forth on the cover page of this prospectus. Other than the shares covered by the over-allotment option, the underwriters are obligated to purchase and accept delivery of all the shares of common stock if any are purchased.
Number of Underwriters Shares ------------ -------- First Security Van Kasper........................................... Needham & Company, Inc. ............................................ Wedbush Morgan Securities........................................... -------- Total............................................................. ========
The underwriters propose initially to offer the shares of common stock in part directly to the public at the initial public offering price shown on the cover page of this prospectus and in part to dealers, including the underwriters, at this price less a discount not in excess of $ per share. The underwriters may allow, and these dealers may re-allow other dealers, a discount not in excess of $ per share. The following table summarizes the compensation to be paid to the underwriters by us and the selling shareholders, and the expenses payable by us. These amounts are shown assuming both no exercise, and full exercise, of the underwriters' option to purchase additional shares of common stock.
Per Share Total ------------------- ------------------- Without With Without With Over- Over- Over- Over- Allotment Allotment Allotment Allotment --------- --------- --------- --------- Underwriting discounts and commissions payable by us........................ $ $ $ $ Underwriting discounts and commissions payable by the selling shareholders.. Expenses payable by us................
Over-Allotment. We have granted the underwriters an option, exercisable within 45 days after the date of this prospectus, to purchase up to an aggregate of additional shares of common stock at the public offering price less the underwriting discounts and commissions. The underwriters may exercise this option solely to cover over-allotments, if any, made in this offering. If the underwriters exercise this option, each underwriter will purchase shares in approximately the same proportion as indicated in the table above. Indemnity. We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act. Sales To Discretionary Accounts. The underwriters have informed us that they do not intend to confirm sales to accounts over which they exercise discretionary authority. Future Sales. Qualstar, its executive officers, directors and existing shareholders, have agreed not to offer, pledge, sell, hedge or otherwise transfer or dispose of, directly or indirectly, any shares of common stock 50 or any securities convertible into or exercisable or exchangeable for common stock for a period of 180 days from the date of this prospectus. Transfers or dispositions can be made sooner, however, with the prior written consent of First Security Van Kasper and Needham & Company, Inc., the joint lead managers. Their consent may be given at any time without public notice. In making such a determination, the joint lead managers would consider prevailing market factors and conditions at the time of receipt of a request for release from the 180-day restriction period. Specifically, the joint lead managers would consider in evaluating such a request factors such as average trading volume, recent price trends, and the need for additional public float in the market for our common stock. Offers In Other Jurisdictions. Neither we nor the underwriters have taken any action that would permit a public offering of the shares of common stock offered by this prospectus in any jurisdiction where action for that purpose is required, other than the United States. The shares of common stock offered by this prospectus may not be offered or sold, directly or indirectly, nor may this prospectus or any other offering material or advertisements related to the offer and sale of these shares of common stock be distributed or published, in any jurisdiction, except under circumstances that will result in compliance with the applicable rules and regulations of these jurisdictions. This prospectus is not an offer to sell or a solicitation of an offer to buy any shares of common stock offered hereby in any jurisdiction in which such an offer or solicitation is unlawful. Stabilization. During this offering, the underwriters may engage in transactions on the Nasdaq National Market or the over-the-counter market or otherwise that stabilize, maintain or otherwise affect the price of the common stock. Specifically, the underwriters may overallot this offering, creating a syndicate short position. In addition, the underwriters may bid for and purchase shares of common stock in the open market to cover syndicate short positions or to stabilize the price of the common stock. In addition, the joint lead managers, on behalf of the underwriters, may reclaim selling concessions allowed to an underwriter or dealer if the underwriting syndicate repurchases shares distributed by that underwriter or dealer. These activities may stabilize or maintain the market price of the common stock above independent market levels. The underwriters are not required to engage in these activities and may discontinue any of these activities at any time. No Prior Public Market. Prior to this offering, there has been no public market for our common stock. As a result, the initial public offering price for the common stock has been determined by negotiations between us and the underwriters. Among the factors considered in determining the public offering price were: . prevailing market conditions; . our results of operations in recent periods; . the present stage of our development; . the market capitalizations and development stages of other companies that we and the underwriters believe to be comparable to us; and . estimates of our growth potential. Directed Share Program. At our request, the underwriters have reserved up to shares of common stock to be issued by us and offered for sale by this prospectus, at the initial public offering price, for sale to directors, officers, employees, business associates and related persons of Qualstar. The number of shares of common stock available for sale to the general public will be reduced to the extent these individuals purchase these reserved shares. Any reserved shares which are not purchased will be offered by the underwriters to the general public on the same basis as the other shares offered by this prospectus. 51 LEGAL MATTERS The validity of the shares of common stock offered hereby will be passed upon for us by Stradling Yocca Carlson & Rauth, a professional corporation, Newport Beach, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Troop Steuber Pasich Reddick & Tobey, LLP, Los Angeles, California. An investment partnership composed of certain current and former shareholders of Stradling Yocca Carlson & Rauth, as well as a current individual shareholder of Stradling Yocca Carlson & Rauth, beneficially own an aggregate of 82,000 shares of our common stock. Robert E. Rich, a director of Qualstar, is a shareholder of Stradling Yocca Carlson & Rauth. EXPERTS Ernst & Young LLP, independent auditors, have audited our financial statements at June 30, 1998 and 1999, and for each of the three years in the period ended June 30, 1999, as set forth in their report. We have included our financial statements in this prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given on their authority as experts in accounting and auditing. WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules which are part of the registration statement. Statements contained in this prospectus relating to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to the registration statement, reference is made to the exhibit for a more complete description of the matter involved, and each such statement shall be deemed qualified by such reference. For further information with respect to Qualstar and the common stock, reference is made to the registration statement and the exhibits and schedules thereto. A copy of the registration statement may be inspected without charge at the public reference facilities of the SEC located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at Seven World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the registration statement may be obtained at the prescribed rates from the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and its public reference facilities in New York, New York and Chicago, Illinois, upon the payment of the fees prescribed by the SEC. The registration statement also is available through the SEC's web site on the world wide web at http://www.sec.gov. Upon completion of this offering, we will become subject to the information and periodic reporting requirements of the Securities Exchange Act and, in accordance therewith, will file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information will be available for inspection and copying at the SEC's public reference rooms, our web site and the web site of the SEC referred to above. Information on our web site does not constitute a part of this prospectus. 52 QUALSTAR CORPORATION INDEX TO FINANCIAL STATEMENTS Report of Ernst & Young LLP, Independent Auditors........................... F-2 Balance Sheets.............................................................. F-3 Statements of Income........................................................ F-4 Statements of Shareholders' Equity.......................................... F-5 Statements of Cash Flows.................................................... F-6 Notes to Financial Statements............................................... F-7
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Shareholders of Qualstar Corporation We have audited the accompanying balance sheets of Qualstar Corporation as of June 30, 1998 and 1999, and the related statements of income, shareholders' equity, and cash flows for each of the three years in the period ended June 30, 1999. 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 in accordance with auditing standards generally accepted in the United States. 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 audits provide 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 Qualstar Corporation at June 30, 1998 and 1999, and the results of its operations and its cash flows for the three years in the period ended June 30, 1999, in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Woodland Hills, California August 4, 1999 F-2 QUALSTAR CORPORATION BALANCE SHEETS (in thousands, except per share amounts)
Pro Forma Shareholders' Equity at June 30, December 31, December 31, -------------- ------------ ------------- 1998 1999 1999 1999 ------ ------- ------------ ------------- (unaudited) (unaudited) ASSETS Current assets: Cash and cash equivalents.......... $ 798 $ 2,134 $ 3,765 Receivables, less allowances of $165 in 1998, $420 in 1999 and $470 at December 31, 1999......... 2,844 4,915 4,997 Inventories........................ 4,161 4,651 5,279 Prepaid expenses................... 23 31 15 Prepaid income taxes............... 8 345 640 Deferred income taxes.............. 198 398 398 ------ ------- ------- Total current assets.............. 8,032 12,474 15,094 Property and equipment, net......... 373 436 416 Investment in common stock.......... -- -- 1,050 Other assets........................ 56 40 184 ------ ------- ------- Total assets...................... $8,461 $12,950 $16,744 ====== ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................... $ 561 $ 747 $ 1,091 Accrued payroll and related liabilities....................... 227 367 230 Other accrued liabilities.......... 31 155 72 ------ ------- ------- Total current liabilities......... 819 1,269 1,393 Deferred income taxes............... 28 41 41 Commitments and contingencies Shareholders' equity: Series A preferred stock, convertible, no par value, liquidation preference of $0.50 per share; 881 shares authorized, issued and outstanding in 1998, 1999 and December 31, 1999, and no shares authorized or outstanding pro forma......................... 431 431 431 $ -- Common stock, no par value; 10,000 shares authorized, 2,406 and 2,465 shares issued and outstanding in 1998 and 1999, respectively, 2,564 shares outstanding at December 31, 1999, and 3,445 shares issued and outstanding pro forma............. 182 280 352 783 Deferred compensation.............. -- (58) (50) (50) Retained earnings.................. 7,001 10,987 14,577 14,577 ------ ------- ------- ------- Total shareholders' equity........ 7,614 11,640 15,310 $15,310 ------ ------- ------- ======= Total liabilities and shareholders' equity............. $8,461 $12,950 $16,744 ====== ======= =======
See accompanying notes. F-3 QUALSTAR CORPORATION STATEMENTS OF INCOME (in thousands, except per share amounts)
Six Months Ended Years Ended June 30, December 31, ------------------------- ----------------- 1997 1998 1999 1998 1999 ------- ------- ------- -------- -------- (unaudited) Net revenues...................... $15,333 $19,155 $29,698 $ 12,739 $ 22,522 Cost of goods sold................ 10,768 12,892 19,058 8,232 13,980 ------- ------- ------- -------- -------- Gross profit...................... 4,565 6,263 10,640 4,507 8,542 Operating expenses: Research and development......... 916 894 925 439 507 Sales and marketing.............. 1,146 1,277 1,941 881 1,275 General and administrative....... 1,052 1,062 1,267 592 791 ------- ------- ------- -------- -------- Total operating expenses....... 3,114 3,233 4,133 1,912 2,573 ------- ------- ------- -------- -------- Income from operations............ 1,451 3,030 6,507 2,595 5,969 Interest income................... 21 35 41 18 24 ------- ------- ------- -------- -------- Income before income taxes........ 1,472 3,065 6,548 2,613 5,993 Provision for income taxes........ 518 1,132 2,562 1,067 2,403 ------- ------- ------- -------- -------- Net income........................ 954 1,933 3,986 1,546 3,590 Premium paid on redemption of preferred stock.................. (106) (147) -- -- -- ------- ------- ------- -------- -------- Net income applicable to common shareholders..................... $ 848 $ 1,786 $ 3,986 $ 1,546 $ 3,590 ======= ======= ======= ======== ======== Earnings per share: Basic............................ $ 0.36 $ 0.75 $ 1.62 $ 0.63 $ 1.42 ======= ======= ======= ======== ======== Diluted.......................... $ 0.25 $ 0.52 $ 1.14 $ 0.45 $ 1.01 ======= ======= ======= ======== ======== Shares used to compute earnings per share: Basic............................ 2,345 2,372 2,455 2,449 2,532 ======= ======= ======= ======== ======== Diluted.......................... 3,357 3,441 3,506 3,465 3,543 ======= ======= ======= ======== ========
See accompanying notes. F-4 QUALSTAR CORPORATION STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands)
Series A Nonredeemable Preferred Stock Common Stock -------------- -------------- Deferred Retained Shares Amount Shares Amount Compensation Earnings Total ------ ------ ------ ------ ------------ -------- ------- Balances at July 1, 1996.. 1,014 $496 2,345 $132 $ $ 4,402 $ 5,030 Retirement of preferred stock................... (60) (29) -- -- -- (106) (135) Net income............... -- -- -- -- -- 954 954 ----- ---- ----- ---- ---- ------- ------- Balances at June 30, 1997..................... 954 467 2,345 132 -- 5,250 5,849 Repurchase of common stock................... -- -- (24) (1) -- (35) (36) Retirement of preferred stock................... (73) (36) -- -- -- (147) (183) Exercise of stock options................. -- -- 85 51 -- -- 51 Net income............... -- -- -- -- -- 1,933 1,933 ----- ---- ----- ---- ---- ------- ------- Balances at June 30, 1998..................... 881 431 2,406 182 -- 7,001 7,614 Exercise of stock options................. -- 59 40 -- -- 40 Deferred compensation related to stock options................. -- -- -- 58 (58) -- -- Net income............... -- -- -- -- -- 3,986 3,986 ----- ---- ----- ---- ---- ------- ------- Balances at June 30, 1999..................... 881 431 2,465 280 (58) 10,987 11,640 Exercise of stock options (unaudited)............. -- -- 99 72 -- -- 72 Amortization of deferred compensation (unaudited)... -- -- -- -- 8 -- 8 Net income (unaudited)... -- -- -- -- -- 3,590 3,590 ----- ---- ----- ---- ---- ------- ------- Balances at December 31, 1999 (unaudited)......... 881 $431 2,564 $352 $(50) $14,577 $15,310 ===== ==== ===== ==== ==== ======= =======
See accompanying notes. F-5 QUALSTAR CORPORATION STATEMENTS OF CASH FLOWS (in thousands)
Six months ended Year ended June 30, December 31, ---------------------- --------------- 1997 1998 1999 1998 1999 ----- ------ ------- ------ ------- (unaudited) OPERATING ACTIVITIES Net income........................... $ 954 $1,933 $ 3,986 $1,546 $ 3,590 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....... 179 166 205 95 118 Deferred income taxes............... (46) (40) (187) -- -- Provisions for bad debts and returns............................ 129 53 259 81 86 Deferred compensation............... -- -- -- -- 8 Loss on disposal of property and equipment.......................... 6 3 6 2 -- Changes in operating assets and liabilities: Receivables........................ (352) (787) (2,330) (354) (168) Inventories........................ (667) (740) (490) (251) (628) Prepaids and other assets.......... (26) 14 8 (19) (128) Prepaid income taxes............... 162 (356) (337) (121) (295) Accounts payable................... 122 44 186 403 344 Accrued payroll and related liabilities....................... 23 35 140 (72) (137) Other accrued liabilities.......... (6) 15 124 (14) (83) ----- ------ ------- ------ ------- Net cash provided by operating activities....................... 478 340 1,570 1,296 2,707 INVESTING ACTIVITIES Investment in common stock........... -- -- -- -- (1,050) Purchases of property and equipment.. (119) (287) (274) (82) (98) ----- ------ ------- ------ ------- Net cash used in investing activities....................... (119) (287) (274) (82) (1,148) FINANCING ACTIVITIES Repurchase of common stock........... -- (36) -- -- -- Purchase of preferred stock for retirement.......................... (135) (183) -- -- -- Proceeds from exercise of stock options............................. -- 51 40 30 72 ----- ------ ------- ------ ------- Net cash provided by used in financing activities............. (135) (168) 40 30 72 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 224 (115) 1,336 1,244 1,631 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............................. 689 913 798 798 2,134 ----- ------ ------- ------ ------- CASH AND CASH EQUIVALENTS AT END OF YEAR................................. $ 913 $ 798 $ 2,134 $2,042 $ 3,765 ===== ====== ======= ====== ======= SUPPLEMENTAL CASH FLOW DISCLOSURES: Income taxes paid.................... $ 402 $1,557 $ 3,088 $1,188 $ 2,700
See accompanying notes. F-6 QUALSTAR CORPORATION NOTES TO FINANCIAL STATEMENTS (Information at December 31, 1999 and for the Six Months Ended December 31, 1998 and 1999 is Unaudited) 1. Summary of Significant Accounting Policies Business Qualstar Corporation (the "Company") designs, develops, manufactures and sells high quality automated magnetic tape libraries used to store, retrieve and manage electronic data primarily in network computing environments. Tape libraries consist of high-performance cartridge tape drives, storage arrays of tapes and robotics to move the tape cartridges from their storage locations to the tape drives under software control. The Company offers tape libraries for multiple tape drive technologies, including those using Advanced Intelligent Tape, Digital Linear Tape, and quarter inch cartridge tape media. The Company was incorporated in California in 1984 to develop and manufacture IBM compatible 9-track reel-to-reel tape drives for the personal computer and workstation marketplaces. In 1995, the Company entered the tape automation business with a series of 8mm tape libraries. Since that time, the Company has introduced a succession of automated tape libraries designed to work with other tape drive technologies and tape media formats. Unaudited Interim Financial Statements The accompanying balance sheet as of December 31, 1999 and the statements of income and cash flows for the six months ended December 31, 1998 and 1999 and the statement of shareholders' equity for the six months ended December 31, 1999 are unaudited. In the opinion of management, the unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods. The results of operations for the six months ended December 31, 1999 are not necessarily indicative of operating results to be expected for the full fiscal year. Cash and Cash Equivalents The Company considers as cash equivalents only those investments that are short term, highly liquid, readily convertible to cash, and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. The Company classifies as cash equivalents only those investments with initial maturities of three months or less. Concentration of Credit Risk, Other Risks and Significant Customers The Company sells its products primarily through a variety of market channels including original equipment manufacturers (OEM), value added resellers (VAR), dealers and end users located worldwide. Ongoing credit evaluations of customers' financial condition are performed by the Company and generally collateral is not required. Credit losses have been within management's expectations and potential uncollectable accounts have been provided for in the financial statements. Sales to customers located outside of the United States represented 24.9% of net revenues in 1997, 26.4% of net revenues in 1998 and 24.0% of net revenues in 1999. Revenues from the Company's two largest customers in each of the years ended June 30, 1997, 1998 and 1999, accounted for 4.8% and 4.0%, 4.4% and 4.3% and 17.0% and 8.7% of net revenues, respectively. At June 30, 1998 and 1999, the two largest customer receivable balances totaled 15.1% and 25.1% of total accounts receivable, respectively. Inventories Inventories are stated at the lower of cost (first-in, first-out basis) or market. F-7 QUALSTAR CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Information at December 31, 1999 and for the Six Months Ended December 31, 1998 and 1999 is Unaudited) Suppliers Sales and costs of goods sold related to products purchased from one large supplier totaled approximately 28.0% and 36.0%, respectively, of total sales and cost of goods sold for the year ended June 30, 1997. Sales and cost of goods related to products purchased from the two largest suppliers totaled approximately 38.0% and 47.0%, respectively, for the year ended June 30, 1998. Sales and costs of goods sold related to products purchased from one large supplier totaled approximately 33.0% and 41.0%, respectively, of total sales and cost of goods sold for the year ended June 30, 1999. Property and Equipment Property and equipment is depreciated using the straight-line method over the estimated useful lives (3 to 7 years) of the individual assets. Leasehold improvements are amortized over the estimated useful lives, or the term of the related leases, whichever is shorter, using the straight-line method. Investment in Common Stock (unaudited) In November 1999, the Company purchased an approximately 1% interest in Chaparral Network Storage, Inc. (Chaparral) for an aggregate purchase price of $1,050,000. This investment is accounted for under the cost method. Chaparral designs and manufactures RAID controllers and intelligent storage routers for tape library applications. Long-Lived Assets The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of any asset may not be recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount. If an impairment is indicated, the amount of the loss to be recorded is based upon an estimate of the difference between the carrying amount and the fair value of the asset. Fair value is based upon discounted cash flows expected to result from the use of the asset and its eventual disposition and other valuation methods. No such impairment losses have been identified by the Company. Revenue Recognition Revenues are recognized upon shipment of the product to the customer and when collectibility is reasonably assured, less estimated returns for which provisions are made at the time of sale. Warranty Costs The Company generally provides warranties for its products ranging from one to five years. With respect to drives and tapes used in the Company's products but manufactured by a third party, the Company passes on to the customer the warranty on such drives and tapes provided by the manufacturer. A provision for costs related to warranty expense is recorded when revenue is recognized. Research and Development All research and development costs are charged to expense as incurred. These costs consist primarily of salaries, outside consultant fees, prototype materials and applicable overhead expenses of personnel directly involved in the design and development of new products. F-8 QUALSTAR CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Information at December 31, 1999 and for the Six Months Ended December 31, 1998 and 1999 is Unaudited) Advertising The Company expenses all costs of advertising and promotion as incurred. Advertising and promotion expenses for the years ended June 30, 1997, 1998 and 1999, were $391,000, $415,000 and $390,000, respectively. Accounting for Stock Based Compensation Employee stock options are accounted for under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," which requires the recognition of expense when the option price is less than the fair value of the stock at the date of grant. The Company generally awards options for a fixed number of shares at an option price equal to the fair value at the date of grant. The Company has adopted the disclosure-only provisions of the Financial Accounting Standards Board's (FASB) Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). Income Taxes Income taxes are accounted for using the liability method in accordance with SFAS 109, "Accounting for Income Taxes." Under this method, deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Earnings Per Share The Company calculates earnings per share in accordance with SFAS No. 128, "Earnings per Share." Basic earnings per share has been computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share has been computed by dividing net income by the weighted average common shares outstanding plus dilutive securities or other contracts to issue common stock as if these securities were exercised or converted to common stock. The following table sets forth the calculation for basic and diluted earnings per share for the periods indicated:
Six Months Ended Year Ended June 30, December 31, --------------------- ------------- 1997 1998 1999 1998 1999 ----- ------ ------ ------ ------ (in thousands) (unaudited) Earnings: Net income........................... $ 954 $1,933 $3,986 $1,546 $3,590 Premium paid on redemption of preferred stock..................... (106) (147) -- -- -- ----- ------ ------ ------ ------ Net income applicable to common shareholders........................ $ 848 $1,786 $3,986 $1,546 $3,590 ===== ====== ====== ====== ====== Shares: Weighted average shares for basic earnings per share.................. 2,345 2,372 2,455 2,449 2,532 Conversion of Series A Preferred Stock............................... 984 917 881 881 881 Stock options........................ 28 152 170 135 130 ----- ------ ------ ------ ------ Weighted average shares for diluted earnings per share.................. 3,357 3,441 3,506 3,465 3,543 ===== ====== ====== ====== ======
F-9 QUALSTAR CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Information at December 31, 1999 and for the Six Months Ended December 31, 1998 and 1999 is Unaudited) In 1997 and 1998, the Company repurchased shares of preferred stock at a premium over its carrying value of $106,000 and $147,000, respectively. Pro Forma Shareholders' Equity and Net Loss Per Share (unaudited) If the offering contemplated by this prospectus is consummated, the outstanding shares of Series A convertible preferred stock will automatically be converted into common stock. Pro forma shareholders' equity at December 31, 1999, as adjusted for the assumed conversion is disclosed on the balance sheet. Comprehensive Income In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements and is effective for fiscal years beginning after December 15, 1997. To date, the Company has not had any transactions that are required to be reported as Comprehensive Income. Segment Information In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS 131). This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Based on the provisions of SFAS 131 and the manner in which the Chief Operating Decision Maker analyzes the business, the Company has determined that it does not have separately reportable operating segments. Fair Value of Financial Instruments The carrying amounts reported in the balance sheets for cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to the short term nature of these financial instruments. Estimates and Assumptions The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ materially from those estimates. Reclassification Certain prior year amounts have been reclassified to conform to the current year presentation. F-10 QUALSTAR CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Information at December 31, 1999 and for the Six Months Ended December 31, 1998 and 1999 is Unaudited) 2. Inventories Inventories consist of the following (in thousands):
June 30, December 31, ------------- ------------ 1998 1999 1999 ------ ------ ------------ (unaudited) Raw materials..................................... $3,704 $4,103 $4,420 Finished goods.................................... 457 548 859 ------ ------ ------ $4,161 $4,651 $5,279 ====== ====== ======
3. Property and Equipment The major components of property and equipment are as follows (in thousands):
June 30, ------------- 1998 1999 ------ ------ Leasehold improvements......................................... $ 23 $ 23 Furniture and fixtures......................................... 544 561 Machinery and equipment........................................ 1,226 1,406 ------ ------ 1,793 1,990 Less accumulated depreciation and amortization............... 1,420 1,554 ------ ------ $ 373 $ 436 ====== ======
4. Credit Facility The Company has a line of credit with a bank which allows for borrowings of up to $750,000 at the bank's reference rate (7.75% as of June 30, 1999), plus 1.25%. The line of credit agreement was amended to extend the expiration date to November 1, 2000. As of June 30, 1999 and December 31, 1999, the Company had not borrowed against the line of credit. 5. Income Taxes The provision for income taxes for the years ended June 30, 1997, 1998 and 1999, is comprised of the following (in thousands):
1997 1998 1999 ---- ------ ------ Current: Federal.............................................. $467 $ 967 $2,222 State................................................ 98 205 527 ---- ------ ------ 565 1,172 2,749 Deferred: Federal.............................................. (45) (38) (173) State................................................ (2) (2) (14) ---- ------ ------ (47) (40) (187) ---- ------ ------ $518 $1,132 $2,562 ==== ====== ======
F-11 QUALSTAR CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Information at December 31, 1999 and for the Six Months Ended December 31, 1998 and 1999 is Unaudited) The provision for income taxes was reduced by the utilization of approximately $84,000, $65,000 and $16,000 of research and development tax credits in 1997, 1998 and 1999, respectively. The following is a reconciliation of the statutory federal income tax rate to the Company's effective income tax rate:
Years Ended June 30, ---------------- 1997 1998 1999 ---- ---- ---- Statutory federal income tax expense....................... 34.0% 34.0% 34.0% State income taxes, net of federal income tax benefit...... 4.3 4.4 5.1 Other...................................................... (3.1) (1.5) -- ---- ---- ---- 35.2% 36.9% 39.1% ==== ==== ====
The tax effect of temporary differences resulted in deferred income tax assets (liabilities) at June 30, 1998 and 1999, as follows (in thousands):
1998 1999 ---- ---- Deferred tax assets: Allowance for bad debts and returns............................ $ 67 $180 Capitalized inventory costs.................................... 22 20 State income taxes............................................. 76 152 Other accruals................................................. 33 46 ---- ---- Total deferred tax assets...................................... 198 398 Deferred tax liabilities: Depreciation................................................... (28) (41) ---- ---- Net deferred tax asset......................................... $170 $357 ==== ====
No valuation reserve was established at June 30, 1998 and 1999, based on the Company's expectations to realize the deferred tax asset. 6. Shareholders' Equity Preferred Stock At June 30, 1998 and 1999, 3,866,800 shares of preferred stock have been authorized for issuance. Of this amount, 880,800 shares have been issued as Series A Preferred Stock. The remaining 2,986,000 shares are not designated at June 30, 1998 and 1999. During 1998, the Company paid $183,000 for the retirement of 73,200 shares of Series A Preferred Stock. Each share of Series A Preferred Stock is convertible into one share of common stock. The conversion ratio is subject to adjustment based on the occurrence of certain events. At June 30, 1998 and 1999, the Company has reserved 880,800 authorized and unissued common shares for the purpose of effecting the conversion of preferred stock. Shares of Series A Preferred Stock are subject to automatic conversion into shares of common stock in the event of, among other things, an underwritten public offering of shares of common stock for which the Company receives not less than $5,000,000 and per share consideration of $4.00. F-12 QUALSTAR CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Information at December 31, 1999 and for the Six Months Ended December 31, 1998 and 1999 is Unaudited) Preferred shareholders are entitled to vote at shareholder meetings as though they had converted their preferred shares into common shares. Dividends are payable on preferred stock only when declared by the board of directors and are not cumulative. However, dividends are only payable on preferred stock when similar dividends are simultaneously declared or paid on all shares of common stock then outstanding. In the event of liquidation, preferred shareholders shall be entitled to receive, out of the remaining net assets of the Company, $.50 per share for Series A Preferred Stock (a total of $440,400 at June 30, 1998 and 1999), on a pro rata basis before any distribution can be paid to holders of common stock. 7. Stock Option Plans The Company adopted a stock option plan in 1985 under which incentive stock options and nonqualified stock options could be granted for an aggregate of no more than 500,000 shares of common stock. Under the terms of the plan, incentive stock options and nonqualified options could be issued at an exercise price of not less than 100% and 85%, respectively, of the fair market value of common stock as determined by the board of directors on the date of grant. Options are exercisable in annual installments as specified in each stock option agreement. Incentive stock options and nonqualified stock options terminate as specified in each option agreement, but no later than ten years after the date of grant unless an extension is granted by the board of directors. The stock option plan expired on March 27, 1995. No new shares may be granted under the plan after that date; however, outstanding stock options may be exercised in accordance with their terms. The Company adopted a new stock option plan in 1998 (1998 Stock Incentive Plan) under which incentive and nonqualified stock options could be granted for an aggregate of no more than 100,000 shares of common stock. During fiscal 2000, the Company amended and restated the 1998 stock option plan to increase the pool of options and shares of restricted stock that could be granted for an aggregate of no more than 450,000 shares of common stock. Under the terms of the plan, options could be issued at an exercise price of not less than 100% of the fair market value of common stock as determined by the board of directors (or board appointed administrator) on the date of grant. If an incentive stock option is granted to an individual owning more than 10% of the total combined voting power of all stock, the exercise price of the option may not be less than 110% of the fair market value of the underlying shares on the date of grant. Options are exercisable in annual installments and terminate as specified in each option agreement, but terminate no later than ten years after the date of grant. F-13 QUALSTAR CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Information at December 31, 1999 and for the Six Months Ended December 31, 1998 and 1999 is Unaudited) The following table summarizes all stock option activity (in thousands, except per share amounts):
Exercise Weighted Stock Price Average Options Per Share Exercise Price ------- ------------ -------------- Outstanding at July 1, 1996............ 303 $0.40 - 0.70 $0.63 Outstanding at June 30, 1997........... 303 0.40 - 0.70 0.63 Granted.............................. 45 1.50 1.50 Exercised............................ (85) 0.40 - 0.70 0.60 --- ------------ ----- Outstanding at June 30, 1998........... 263 0.40 - 1.50 0.79 Granted.............................. 10 3.00 3.00 Cancelled............................ (6) 1.50 1.50 Exercised............................ (59) 0.60 - 1.50 0.68 --- ------------ ----- Outstanding at June 30, 1999........... 208 $0.60 - 3.00 $0.91 Exercised (unaudited)................ (99) 0.60 - 1.50 1.37 --- ------------ ----- Outstanding at December 31, 1999 (unaudited)........................... 109 $0.60 - 3.00 $0.93 === ============ =====
Options Exercisable Options Outstanding at June 30, 1999 at June 30, 1999 ------------------------------------- -------------------- Weighted Weighted Number of Weighted Average Average Number of Average Exercise Shares Remaining Exercise Shares Exercise Price Range Outstanding Contractual Life Price Exercisable Price ----------- ----------- ---------------- -------- ----------- -------- .60 - .70 162 3.43 0.65 162 0.65 1.50 - 3.00 46 9.04 1.83 12 1.50 Options Exercisable Options Outstanding at December 31, at December 31. 1999 1999 (Unaudited) (Unaudited) ------------------------------------- -------------------- Weighted Weighted Number of Weighted Average Average Number of Average Exercise Shares Remaining Exercise Shares Exercise Price Range Outstanding Contractual Life Price Exercisable Price ----------- ----------- ---------------- -------- ----------- -------- .60 - .70 72 3.18 0.65 72 0.65 1.50 - 3.00 34 8.63 1.94 -- --
If the Company recognized employee stock option-related compensation expense in accordance with SFAS 123 and used the minimum value method for determining the weighted average fair value of options granted during 1997, 1998 and 1999, its pro forma net income applicable to common shareholders would have been $838,000, $1,785,000 and $3,980,000, respectively. The pro forma basic income per share would have been $0.36, $0.75 and $1.62 for 1997, 1998 and 1999, respectively. The pro forma diluted income per share would have been $0.25, $0.52 and $1.14 for 1997, 1998 and 1999, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting periods. The pro forma effect on net income for 1997, 1998 and 1999 is not representative of the pro forma effect on net income or loss in future years because compensation expense in future years will reflect the amortization of a larger number of stock options granted in several succeeding years. F-14 QUALSTAR CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Information at December 31, 1999 and for the Six Months Ended December 31, 1998 and 1999 is Unaudited) In computing the pro forma compensation expense under SFAS 123, a weighted- average fair value of $0.39 for 1998 and $2.53 for 1999 stock option grants was estimated at the date of grant using the minimum value option pricing model with the following assumptions for 1998 and 1999: risk-free interest rate of approximately 6.0%, a weighted average expected life of the options of 5 years, and no assumed dividend yield. 8. Commitments The Company leases its facility under a lease arrangement expiring January 31, 2000, at an annual rent of $168,000. In October 1999, the Company exercised an option to extend the lease through January 31, 2001, which includes the right to terminate the lease on 90 days' notice. Future minimum rental payments under this lease and other operating leases is $153,900 for the year ending June 30, 2000. Rent expense (including equipment rental) for the years ended June 30, 1997, 1998 and 1999, was $160,000, $184,000 and $202,000, respectively. The Company may be involved in litigation and other legal matters from time to time in the normal course of business. However, there currently are no material proceedings pending or, to the knowledge of management, threatened against the Company. 9. Geographic Information Information regarding revenues attributable to the Company's primary geographic operating regions is as follows (in thousands):
Years Ended December 31, -------------------------- 1997 1998 1999 -------- -------- -------- Revenues: North America................................... $ 12,002 $ 14,428 $ 23,032 Europe.......................................... 1,422 2,751 4,504 Asia............................................ 1,291 1,041 1,380 Other........................................... 618 935 782 -------- -------- -------- $ 15,333 $ 19,155 $ 29,698 ======== ======== ========
The geographic classification of revenues is based upon the location of the customer. The Company does not have any significant long-lived assets outside of the United States. 10. Benefit Plans The Company has a voluntary deferred compensation plan (the Plan) qualifying for treatment under Internal Revenue Code Section 401(k). All employees are eligible to participate in the Plan following one year of employment and may contribute up to 15% of their compensation. The Company may make matching contributions at a rate of 25% up to 6% of the amount contributed by eligible participants at the discretion of the Company. Company contributions under the Plan totaled $25,000, $27,000 and $27,000 for the years ended June 30, 1997, 1998 and 1999, respectively. F-15 QUALSTAR CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (Information at December 31, 1999 and for the Six Months Ended December 31, 1998 and 1999 is Unaudited) 11. Subsequent Events (Unaudited) Subsequent to December 31, 1999 each of the Company's four non-employee directors were granted and purchased 20,000 shares of restricted stock pursuant to the 1998 Stock Incentive Plan at a price of $7.50 per share. Each director paid for the shares with a promissory note in the amount of $150,000 secured by the purchased shares. Interest on the notes accrues at the rate of 6.21% and is payable annually. Payments of principal on the notes are due in four equal annual installments beginning in January 2002. The Company has the right to repurchase each director's restricted shares at the original purchase price upon termination of service for any reason. The Company's repurchase right lapses and the shares vest over a four year period based upon each year of service as a director. Subsequent to December 31, 1999, the Company granted stock options to purchase a total of 51,000 shares under the 1998 Stock Incentive Plan at an exercise price of $7.50 per share. These stock options vest over a four year period. The Company anticipates recording a deferred compensation charge related to both the option and restricted stock awards for the difference between the exercise price and the fair market value on the date of grant. F-16 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 to the date of this prospectus, regardless of the time of delivery of the prospectus or of any sale of the common stock. Until , 2000, 25 days after commencement of the offering, all dealers that buy, sell or trade shares, 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....................................................... 3 Risk Factors............................................................. 7 You Should Not Rely on Forward-Looking Statements Because They Are Inherently Uncertain.................................................... 16 Use of Proceeds.......................................................... 17 Dividend Policy.......................................................... 17 Capitalization........................................................... 18 Dilution................................................................. 19 Selected Financial Data.................................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 21 Business................................................................. 26 Management............................................................... 38 Certain Relationships and Related Transactions........................... 44 Principal and Selling Shareholders....................................... 45 Description of Capital Stock............................................. 46 Shares Eligible for Future Sale.......................................... 48 Underwriting............................................................. 50 Legal Matters............................................................ 52 Experts.................................................................. 52 Where You Can Find Additional Information................................ 52 Index to Financial Statements............................................ F-1
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [LOGO OF QUALSTAR] Shares Common Stock -------------------- PROSPECTUS -------------------- FIRST SECURITY VAN KASPER NEEDHAM & COMPANY, INC. WEDBUSH MORGAN SECURITIES , 2000 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth all costs and expenses, other than underwriting discounts and commissions, payable by us in connection with the sale of the common stock being registered hereunder, all of which will be paid by Qualstar. All of the amounts shown are estimates except for the SEC registration fee, the Nasdaq National Market application fee and the NASD filing fee. SEC registration fee................................................ $13,662 NASD filing fee..................................................... 5,675 Nasdaq application fee.............................................. * Printing and engraving expenses..................................... * Legal fees and expenses (other than Blue Sky)....................... * Accounting fees and expenses........................................ * Transfer agent fees................................................. * Blue sky fees and expenses.......................................... * Miscellaneous....................................................... * ------- Total........................................................... $ * =======
- -------- * To be filed by amendment. Item 14. Indemnification of Directors and Officers (a) Our restated articles of incorporation eliminate the liability of directors to us or our shareholders for monetary damages for breach of fiduciary duty as directors to the fullest extent permitted under California law. (b) Our bylaws authorize us to indemnify each person who was or is made a party to any proceeding by reason of the fact that such person is or was acting on behalf of the company and in good faith against all expense, liability and loss reasonably incurred or suffered by such person in connection therewith. (c) We maintain liability insurance upon our officers and directors. (d) Our restated articles of incorporation authorize to enter into indemnification agreements with each of our directors and officers for breach of duty to the corporation and its shareholders. We have entered into indemnification agreements with each of our directors and officers to indemnify them against any and all expenses, judgments, fines, penalties and amounts paid in settlement, to the fullest extent permitted by law. II-1 Item 15. Recent Sales of Unregistered Securities The following is a summary of transactions by us during the past three years involving sales of our securities that were not registered under the Securities Act: 1. On April 15, 1998 we granted options to purchase an aggregate of 36,000 shares of our common stock at an exercise price of $1.50 to four employees pursuant to our 1998 Stock Incentive Plan. 2. On June 1, 1999 we granted options to purchase 10,000 shares of our common stock at an exercisable price of $3.00 per share to one of our employees pursuant to our 1998 Stock Incentive Plan. 3. On January 14, 2000 we granted options to purchase an aggregate of 51,000 shares of our common stock at an exercisable price of $7.50 per share to four of our employees pursuant to our 1998 Stock Incentive Plan. 4. On January 14, 2000, we granted rights to purchase an aggregate of 80,000 shares of our common stock at a price of $7.50 per share to our four non-employee directors pursuant to our 1998 Stock Incentive Plan. The sales of the securities listed above were claimed to be exempt from registration under the Securities Act in reliance on Rule 701 promulgated under Section 3(b) of the Securities Act as transactions pursuant to compensatory benefit plans and contracts relating to compensation. 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 were affixed to the instruments representing such 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 Schedule (a) Exhibits
Exhibit No. Description ----------- ----------- 1.1 Form of Underwriting Agreement. 3.1* Form of Restated Articles of Incorporation, to be effective upon the closing of this offering. 3.2 Amended and Restated Bylaws. 4.1* Specimen common stock certificate. 5.1* Opinion of Stradling Yocca Carlson & Rauth, a professional corporation. 10.1* 1998 Stock Incentive Plan, as amended and restated. 10.2 Form of Indemnification Agreement. 23.1* Consent of Stradling Yocca Carlson & Rauth, a professional corporation (included in exhibit 5.1). 23.2 Consent of Ernst & Young LLP, independent auditors. 24.1 Power of Attorney (included on the signature page to this Registration Statement--see page II-4). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. II-2 (b) Financial Statement Schedule Schedule II--Valuation and Qualifying Accounts; Allowance for Doubtful Accounts Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. The undersigned registrant hereby undertakes: (1) That, for purposes of determining any liability under the Securities Act of 1933, 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 registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) That, for the purpose of determining any liability under the Securities Act of 1933, 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-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Los Angeles, State of California, on the 2nd day of February 2000. QUALSTAR CORPORATION /s/ William J. Gervais By: _________________________________ William J. Gervais Chief Executive Officer and President POWER OF ATTORNEY We, the undersigned directors and officers of Qualstar Corporation, do hereby constitute and appoint William J. Gervais and Richard A. Nelson or either of them, our true and lawful attorneys-in-fact and agents, each with full power to sign for us or any of us in our names and in any and all capacities, any and all amendments (including post-effective amendments) to this registration statement, or any related registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto and other documents required in connection therewith, and each of them with full power to do any and all acts and things in our names and in any and all capacities, which such attorneys-in-fact and agents, or either of them, may deem necessary or advisable to enable Qualstar Corporation to comply with the Securities Act of 1933, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with this Registration Statement; and we hereby do ratify and confirm all that the such attorneys-in- fact and agents, or either of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ William J. Gervais Chief Executive Officer, February 2, 2000 ____________________________________ President and Director William J. Gervais (principal executive officer) /s/ Richard A. Nelson Vice President, Engineering, February 2, 2000 ____________________________________ Secretary and Director Richard A. Nelson /s/ Matthew Natalizio Vice President and Chief February 2, 2000 ____________________________________ Financial Officer Matthew Natalizio (principal financial and accounting officer) /s/ Bruce E. Gladstone Director February 2, 2000 ____________________________________ Bruce E. Gladstone /s/ Trude C. Taylor Director February 2, 2000 ____________________________________ Trude C. Taylor
II-4
Signature Title Date --------- ----- ---- /s/ Robert E. Rich Director February 2, 2000 ____________________________________ Robert E. Rich /s/ Robert T. Webber Director February 2, 2000 ____________________________________ Robert T. Webber
II-5 SCHEDULE II QUALSTAR CORPORATION VALUATION AND QUALIFYING ACCOUNTS ALLOWANCE FOR DOUBTFUL ACCOUNTS For the Years Ended June 30, 1997, 1998 and 1999 and for the Six Month Period Ended December 31, 1999
Column A Column B Column C Column D Column E - ------------------------- --------- ------------------- ------------- -------- Balance Charged Balance at to Costs Charged to at End Beginning and Other of Description of Period Expenses Accounts Deductions(1) Period - ------------------------- --------- -------- ---------- ------------- -------- Year Ended June 30, 1997.................... $140,000 $129,000 $-- $119,000 $150,000 Year Ended June 30, 1998.................... 150,000 53,000 -- 38,000 165,000 Year Ended June 30, 1999.................... 165,000 259,000 -- 4,000 420,000 Six Month Period Ended December 31, 1999 (unaudited)............. 420,000 86,000 -- 36,000 470,000
- -------- (1) Uncollectible accounts written off, net of recoveries. EXHIBIT INDEX
Exhibit No. Description ----------- ----------- 1.1 Form of Underwriting Agreement. 3.1* Form of Restated Articles of Incorporation, to be effective upon the closing of this offering. 3.2 Amended and Restated Bylaws. 4.1* Specimen common stock certificate. 5.1* Opinion of Stradling Yocca Carlson & Rauth, a professional corporation. 10.1* 1998 Stock Incentive Plan, as amended and restated. 10.2 Form of Indemnification Agreement. 23.1* Consent of Stradling Yocca Carlson & Rauth, a professional corporation (included in exhibit 5.1). 23.2 Consent of Ernst & Young LLP, independent auditors. 24.1 Power of Attorney (included on the signature page to this Registration Statement--see page II-4). 27.1 Financial Data Schedule.
- -------- * To be filed by amendment. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 QUALSTAR CORPORATION UNDERWRITING AGREEMENT __________________, 2000 FIRST SECURITY VAN KASPER NEEDHAM & COMPANY, INC. WEDBUSH MORGAN SECURITIES As Representatives of the Several Underwriters c/o First Security Van Kasper 10877 Wilshire Boulevard, Suite 1700 Los Angeles, California 90024 Ladies and Gentlemen: Qualstar Corporation, a Delaware corporation (the "Company"), proposes, subject to the terms and conditions stated herein, to issue and sell to the several Underwriters named in Schedule I hereto (each, an "Underwriter" and collectively, the "Underwriters") an aggregate of [__________________] shares (the "Company Firm Shares") of its authorized but unissued Common Stock, no par value per share (the "Common Stock"). Certain shareholders of the Company listed on Schedule II hereto (the "Selling Shareholders") propose, subject to the terms and conditions stated herein, to sell to the Underwriters an aggregate of ____________ shares of the Common Stock (the "Selling Shareholder Firm Shares" and, together with the Company Firm Shares, the "Firm Shares"). The Company also proposes to grant to the Underwriters an option to purchase up to [________] additional shares of Common Stock (the "Option Shares") for the sole purpose of covering over-allotments, if any, in connection with the sale of the Firm Shares. The Firm Shares and any Option Shares purchased pursuant to this Agreement are collectively referred to below as the "Shares." First Security Van Kasper ("FSVK"), Needham & Company, Inc. and Wedbush Morgan Securities are acting as Representatives of the several Underwriters and in that capacity are referred to in this Agreement as the "Representatives." The Company hereby confirms its agreement with the several Underwriters as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby represents and warrants to and agrees with each Underwriter as follows: (a) A registration statement (Registration No. 333-________) on Form S-1 under the Securities Act of 1933, as amended (the "Securities Act"), relating to the Shares, including such amendments to such registration statement as may have been required as of the date of this Agreement, has been prepared by the Company under and in conformity 1 with the provisions of the Securities Act and the rules and regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. After the execution of this Agreement, the Company will file with the Commission either (i) if such registration statement, as it may have been amended, has been declared by the Commission to be effective under the Securities Act, either (A) if the Company relies on Rule 434 under the Securities Act, a Term Sheet (defined below) relating to the Shares, that identifies the Preliminary Prospectus (defined below) that it supplements and contains such information as is required or permitted by Rules 434, 430A and 424(b) of the Rules and Regulations or (B) if the Company does not rely on Rule 434 under the Securities Act, a prospectus in the form most recently included in an amendment to such registration statement (or, if no such amendment has been filed, in such registration statement), with such changes or insertions as are required by Rule 430A of the Rules and Regulations or permitted by Rule 424(b) of the Rules and Regulations, and in the case of either (i)(A) or (i)(B) of this sentence, as has been provided to and approved by the Representatives prior to the execution of this Agreement, or (ii) if such registration statement, as it may have been amended, has not been declared by the Commission to be effective under the Securities Act, an amendment to such registration statement, including a form of prospectus, a copy of which amendment has been furnished to and approved by the Representatives prior to the execution of this Agreement. As used in this Agreement, the term "Registration Statement" means such registration statement, as amended at the time when it was or is declared effective, including all financial schedules and exhibits thereto, any information omitted therefrom pursuant to Rule 430A of the Rules and Regulations and included in the Prospectus (defined below) and further including all filings or other documents incorporated therein, as well as any additional registration statement filed in connection with the offering of the Shares pursuant to Rule 462(b) under the Securities Act; the term "Preliminary Prospectus" means each prospectus subject to completion filed with such registration statement or any amendment thereto (including the prospectus subject to completion, if any, included in the Registration Statement or any amendment thereto at the time it was or is declared effective and further including all filings or documents incorporated therein); and the term "Prospectus" means the following, including any filings or documents incorporated therein: (A) if the Company relies on Rule 434 under the Securities Act, the Term Sheet relating to the Securities that is first filed pursuant to Rule 424(b)(7) under the Securities Act, together with the Preliminary Prospectus identified therein that such Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the Securities Act, the prospectus first filed with the Commission pursuant to Rule 424(b) under the Securities Act; or (C) if the Company does not rely on Rule 434 under the Securities Act and if no prospectus is required to be filed pursuant to Rule 424(b) under the Securities Act, the prospectus included in the Registration Statement; provided that if any revised prospectus that is provided to the Underwriters by the Company for use in connection with the 2 offering of the Shares differs from the prospectus on file with the Commission at the time the Registration Statement became or becomes, as the case may be, effective, whether or not the revised prospectus is required to be filed with the Commission pursuant to Rule 424(b)(3) of the Rules and Regulations, the term "Prospectus" shall mean such revised prospectus (including all filings and documents incorporated therein) from and after the time it is first provided to the Underwriters for such use. The term "Term Sheet" as used in this Agreement means any term sheet that satisfies the requirements of Rule 434 under the Securities Act. Any reference in this Agreement to the "date" of a Prospectus that includes a Term Sheet means the date of such Term Sheet. (b) No order suspending the effectiveness of the Registration Statement or preventing or suspending the use of any Preliminary Prospectus or the Prospectus has been issued and no proceedings for that purpose are pending or, to the best knowledge of the Company, threatened or contemplated by the Commission; no stop order suspending the sale of the Shares in any jurisdiction has been issued and no proceedings for that purpose are pending or, to the best knowledge of the Company, threatened or contemplated, and any request of the Commission for additional information (to be included in the Registration Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been complied with. (c) As used in this Agreement, the word "subsidiary" means any corporation, partnership, limited liability company or other entity of which the Company directly or indirectly owns 50% or more of the equity or that the Company directly or indirectly controls. The subsidiaries of the Company (the "Subsidiaries") and the jurisdiction of incorporation of each Subsidiary are listed on Exhibit A hereto. The Company has no subsidiaries other than the Subsidiaries listed on Exhibit A hereto; except as set forth on Exhibit A, the Company owns 100 percent of the issued and outstanding stock of each of the Subsidiaries free and clear of any material pledge, lien, security interest, encumbrance, claim or equitable interest of any type, kind or nature. Exhibit B hereto lists each entity in which the Company or any Subsidiary holds an equity interest, whether as shareholder, partner, member, joint venturer or otherwise. Except as set forth on Exhibit B, neither the Company nor any Subsidiary has any equity interest in any person. The Company and each of its Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its organization, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as is currently being conducted by it and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its Subsidiaries, taken as a whole (a "Consolidated Material Adverse Effect")). The Company and each of its Subsidiaries is in possession of and operating in compliance with all authorizations, licenses, certificates, 3 consents, orders and permits from federal, state, local and other governmental or regulatory authorities that are necessary to the conduct of its or their business, all of which are valid and in full force and effect, except for authorizations, licenses, certificates, consents, orders and permits which would not have a Consolidated Material Adverse Effect. Each contractual joint venture in which the Company or any Subsidiary is involved and, to the Company's best knowledge, each participant therein is operating in compliance with the terms of its joint venture agreement except for any non-compliance that would not have a Consolidated Material Adverse Effect. (d) When any Preliminary Prospectus was filed with the commission it (i) contained all statements required to be contained therein and complied in all respects with the requirements of the Securities Act, the Rules and Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange Act") and the rules and regulations of the Commission thereunder (the "Exchange Act Rules and Regulations") and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. When the Registration Statement or any amendment thereto was or is declared effective (the "Effective Date") and at all times subsequent thereto up to and including the Closing Date and any date on which the Option Shares are to be purchased, it (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading. When the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on the Closing Date (defined below) and any date on which Option Shares are to be purchased, the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (d) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives specifically and expressly for use therein. (e) Since the respective dates as of which information is given in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there has not been (i) any material loss or interference with the business of the Company or any of its Subsidiaries (A) from fire, explosion, flood or other calamity, whether or not covered by insurance, or (B) from any court or governmental 4 action, order or decree, or (ii) any material changes in the capital stock or, except in the ordinary course of its business, long-term debt of the Company or any of its Subsidiaries, or (iii) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (iv) any development known to the Company that might cause or result in a Consolidated Material Adverse Effect, whether or not arising from transactions in the ordinary course of business, in each case of (i)-(iv) above other than as may be set forth in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). Since such dates, except in the ordinary course of business, neither the Company or any of its Subsidiaries has entered into any material transaction not described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) that might cause or result in a Consolidated Material Adverse Effect. (f) There is no agreement, contract, license, lease or other document required to be described in the Registration Statement or the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) or to be filed as an exhibit to the Registration Statement which is not described or filed as required. All contracts described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), if any, are in full force and effect on the date hereof, and neither the Company nor any of its direct or indirect subsidiaries nor, to the best knowledge of the Company, any other party, is in breach of or default under any such contract, which breach or default would have a Consolidated Material Adverse Effect. (g) The authorized, issued and outstanding capital stock of the Company is set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), and the description of the capital stock therein conforms with and accurately describes the rights set forth in the instruments defining the same. The Company Firm Shares are duly authorized and will, when issued in accordance with the terms of this Agreement and against payment therefor, be validly issued, fully paid and non-assessable, and the issuance of the Shares is not subject to any preemptive or similar rights. (h) All of the outstanding shares of capital stock of the Company (including the Selling Shareholder Firm Shares to be purchased by the Underwriters from the Selling Shareholders) have been duly authorized and validly issued and are fully paid and nonassessable, have been issued in compliance with all applicable federal and state securities laws and were not issued in violation of or subject to any preemptive rights or other rights to subscribe for or purchase securities that were not satisfied or waived. All of the issued shares of capital stock or other equity interests of each Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable, have been issued in compliance with all applicable laws, including securities laws, were not issued in violation of or subject to any preemptive or other rights to subscribe for or purchase such securities that were not satisfied or waived and are directly or indirectly owned by the Company, except as otherwise set forth on Exhibit A hereto. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted or exercised thereunder, set forth in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), accurately and fairly present the information required to be 5 shown with respect to such plans, arrangements, options and rights in all material respects. Other than this Agreement and the options and warrants to purchase Common Stock described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no options, warrants or other rights outstanding to subscribe for or purchase any shares of the Company's capital stock from the Company. There are no preemptive rights applicable to any shares of capital stock of the Company. There are no options, warrants or other rights outstanding to subscribe for or purchase any shares of the capital stock or registered capital of any Subsidiary from such Subsidiary and no Subsidiary is subject to any obligation, commitment, plan, arrangement or court or administrative orders with respect to the same. There are no preemptive rights applicable to any shares of capital stock or registered capital of the Subsidiaries. There are no restrictions upon the voting or transfer of any of the Firm Shares or Option Shares pursuant to the Company's certificate of incorporation, as amended to date ("Certificate of Incorporation"), bylaws or other governing documents or any agreement to which the Company is a party or by which it may be bound other than as described in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived, for or relating to the registration of any securities of the Company. (i) The Company has full corporate power and authority to enter into and perform its obligations under this Agreement and to issue, sell and deliver the Shares. This Agreement has been duly authorized, executed and delivered by the Company and constitutes the valid and binding agreement of the Company, and is enforceable against the Company in accordance with its terms except insofar as enforceability may be affected by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting creditors' rights generally and except insofar as the indemnification and contribution provisions of Section 9 of this Agreement may be affected by public policy concerns. (j) Neither the Company nor any of its Subsidiaries is, nor with the giving of notice or lapse of time or both would be, in violation of or in default under, nor will the execution or delivery of this Agreement or the consummation of the transactions contemplated by this Agreement result in a violation of or constitute a breach of or a default (including without limitation with the giving of notice, the passage of time or otherwise) of any obligation, agreement, covenant or condition contained in any material bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, deed of trust, loan agreement, lease, license, joint venture or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which any of its or their properties may be bound or affected or that would result in a Consolidated Material Adverse Effect under the Articles of Incorporation, bylaws or other charter documents of the Company or any of its Subsidiaries. The Company has not incurred any liability, direct or indirect, for any finders' or similar fees payable on behalf of the Company or the Underwriters in connection with the transactions contemplated by this Agreement. The performance by the Company of its obligations under this Agreement will not violate any law, ordinance, Rule or regulation or any order, writ, injunction, judgment or decree of any governmental agency or body or of any court having jurisdiction over the Company or any of its Subsidiaries or any of its or 6 their properties that would result in a Consolidated Material Adverse Effect, or result in the creation or imposition of any lien, charge, claim or encumbrance upon any property or asset of the Company or any of its Subsidiaries that would result in a Consolidated Material Adverse Effect. Except for permits and similar authorizations required under the Securities Act, the Exchange Act or under state securities or Blue Sky laws of certain jurisdictions and for such permits and authorizations that have been obtained, no consent, approval, authorization or order of any court, governmental agency or body, financial institution or any other person is required in connection with the consummation of the transactions contemplated by this Agreement (except such additional steps as may be required by the National Association of Securities Dealers, Inc. (the "NASD")). (k) Each of the Company and its Subsidiaries has good and marketable title, or has valid rights to use, all items of real and personal property which are material to the business of the Company and its Subsidiaries, taken as a whole, free and clear, except as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), of all liens, encumbrances and claims that when taken as a whole would result in a Consolidated Material Adverse Effect and subject to such exceptions that do not adversely affect the present or prospective business of the Company or its Subsidiaries. (l) Each of the Company and its Subsidiaries holds adequate rights to use all patents, patent rights, inventions, licenses, trade secrets, know-how (including all unpatented and /or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, tradenames and copyrights ("Intellectual Property") described or referred to in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) currently employed by them in connection with its or their business as described in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) except where the failure to own or possess such Intellectual Property would not, singly or in the aggregate, have a Consolidated Material Adverse Effect; and the Company has not received any notice of and is not aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Consolidated Material Adverse Effect. (m) There is no action, suit, proceeding, inquiry, investigation, litigation or governmental proceeding brought by any court or governmental agency or body, domestic or foreign, to which the Company or any of its Subsidiaries is a party or to which any property of the Company or any of its Subsidiaries is subject which is pending or, to the best knowledge of the Company, is threatened or contemplated against the Company or any of its Subsidiaries that might have a Consolidated Material Adverse Effect, that might prevent consummation of the transactions contemplated by this Agreement or that is required to be disclosed in the Registration Statement or Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus); the aggregate of all pending legal or governmental proceedings to which the Company or any Subsidiary is a party or of which any of their respective property or assets is subject which are not described in the 7 Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (n) Except as disclosed in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), neither the Company nor any of its Subsidiaries is in violation of any law, order, ordinance, Rule or Regulation of which it is aware, or any order, writ, injunction, judgment or decree of any governmental agency or body or of any court, to which it or its properties (whether owned or leased) may be subject, which violation would have a Consolidated Material Adverse Effect. (o) Neither the Company nor, to the Company's knowledge, any of the Selling Shareholders have taken, directly or indirectly, any action designed to cause or result in, or which has constituted or will cause or result in, under the Exchange Act, the Exchange Act Rules and Regulations or otherwise, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares other than any actions which may have been taken or may be taken by the Underwriters. No bid or purchase by the Company and, to the best knowledge of the Company, no bid or purchase of any Selling Shareholder or, to the best knowledge of the Company, any bid or purchase that could be attributed to the Company (as a result of bids or purchases by an "affiliated purchaser" within the meaning of Regulation M under the Exchange Act) for or of the Common Stock, any securities of the same class or series as the Common Stock or any securities convertible into or exchangeable for or that represent any right to acquire the Common Stock is now pending or in progress or will have commenced at any time prior to the completion of the distribution of the Shares. (p) Ernst & Young LLP, whose reports appear in the Registration Statement and the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus) are, and during the periods covered by their reports in the Registration Statement were, independent accountants as required by the Securities Act and the Rules and Regulations. The historical and pro forma financial statements, together with related notes and schedules, and other financial information included in the Registration Statement, each Preliminary Prospectus and the Prospectus present fairly (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will present fairly) the financial position, results of operations, cash flows and changes in shareholders' equity of the Company and its Subsidiaries, taken as a whole, at the dates and for the periods indicated, and the historical and pro forma financial statements, together with relates notes, schedules and other financial information included in the Registration Statement present fairly the information required to be stated therein in all material respects. Such financial statements, notes, schedules and other financial information have been prepared in accordance with U.S. generally accepted accounting principles applied on a consistent basis throughout the periods presented and all adjustments necessary for a fair presentation of results for such periods have been made, except as may be stated therein. The selected and summary financial and statistical data included in the Registration Statement and the Prospectus present fairly (or, if the Prospectus has not been filed with the Commission, as to the Prospectus, will present fairly) the information shown therein and have been compiled 8 on a basis consistent with the audited financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (q) The books, records and accounts of the Company and its Subsidiaries accurately and fairly reflect, in reasonable detail in all material respects, the transactions in and dispositions of the assets of the Company and its Subsidiaries. The systems of internal accounting controls maintained by the Company and its Subsidiaries are 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 (x) to permit preparation of financial statements in conformity with U.S. generally accepted accounting principles and (y) 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 the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (r) The Company has delivered to FSVK the written agreement of each of the Company's officers and directors and each holder of shares of the Company's outstanding capital stock (collectively, the "Holders") to the effect that each of the Holders will not, without the prior written consent of FSVK, for a period of 180 days following the date of this Agreement, directly or indirectly offer, sell, grant any option to purchase, 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 or exchangeable for shares of Common Stock owned by the Holder or with respect to which the Holder has the power of disposition, or announce any offer to do so. (s) No labor disturbance by the employees of the Company or any of its Subsidiaries exists, or, to the knowledge of the Company, is imminent, contemplated or threatened; and the Company is not aware of an existing, imminent or threatened labor disturbance by the employees of any principal suppliers, manufacturers, contractors or others which such disturbance might be expected to result in any Consolidated Material Adverse Effect. No collective bargaining agreement exists with any of the Company's employees or those of its Subsidiaries and, to the best knowledge of the Company, no such agreement is imminent. (t) Each of the Company and its Subsidiaries has filed all federal, state, local and foreign tax returns which are required to be filed or has requested extensions thereof and has paid all taxes, including withholding taxes, penalties and interest, assessments, fees and other charges to the extent that the same have become due and payable. To the best of the Company's knowledge, no tax assessment or deficiency has been made or proposed against the Company or any of its Subsidiaries nor has the Company or any of its Subsidiaries received any notice of any proposed tax assessment or deficiency. (u) Except as set forth in the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus), there are no outstanding contracts, loans, advances or guaranties of indebtedness by the Company or any of its Subsidiaries to or for the benefit of any of (i) its "affiliates," as such term is defined in the Rules and Regulations, 9 (ii) except for immaterial advances in the ordinary course of business, any of the officers or directors of any of its Subsidiaries, or (iii) any of the members of the families of any of them, in each case, required to be set forth in the Prospectus (or, if the Prospectus is not in existence, in the most recent Preliminary Prospectus), under the Securities Act or Rules and Regulations. (v) Neither the Company nor any of its Subsidiaries has at any time within the last five years: (i) made any contributions to any candidate for political office, or failed to disclose fully any such contribution, in violation of applicable law; (ii) made any payment to any local, state, federal or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or allowed by all applicable laws; or (iii) violated any applicable provision of the Foreign Corrupt Practices Act of 1977, as amended. (w) Neither the Company nor any of its Subsidiaries has any liability, absolute or contingent, relating to: (i) public health or safety; (ii) worker health or safety; or (iii) product defect or warranty (all except as would not reasonably be expected to have a Consolidated Material Adverse Effect or as are disclosed in the Registration Statement and Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus)). (x) The Company has not distributed and will not distribute prior to the Closing Date or on or prior to any date on which the Option Shares are to be purchased, as the case may be, any prospectus or other offering material in connection with the offering and sale of the Shares other than the Preliminary Prospectus(es), the Prospectus, the Registration Statement and any other material which may be permitted by the Securities Act and the Rules and Regulations. (y) Subject to official notice of issuance, the Shares have been approved for inclusion for listing on the Nasdaq National Market. (z) The Company is not now, and intends to conduct its affairs in the future in such a manner so that it will not become, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (aa) The Company and each of its Subsidiaries is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) for which the Company or any of its Subsidiaries would have any liability has occurred; neither the Company nor any of its Subsidiaries has incurred or expects to incur liability under (1) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (2) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company or any of its Subsidiaries would have any liability that is intended to 10 be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification (all of the above except as would not reasonably be expected to have a Consolidated Material Adverse Effect). (bb) Except as set forth in the Prospectus (or if the Prospectus is not in existence, the most recent Preliminary Prospectus), there has, to the best knowledge of the Company, been no storage, disposal, generation, manufacture, refinement, transportation, handling or treatment of toxic wastes, hazardous wastes or hazardous substances by the Company or any of its Subsidiaries (or any of their predecessors in interest) at, upon or from any of the property now or previously owned or leased by the Company or its Subsidiaries in violation of any applicable law, ordinance, rule, regulation, order, judgment, decree or permit or which would require remedial action under any applicable law, ordinance, rule, regulation, order, judgment, decree or permit; there has to the best knowledge of the Company been no material spill, discharge, leak, emission, injection, escape, dumping or release of any kind onto such property or into the environment surrounding such property of any toxic wastes, medical wastes, solid wastes, hazardous wastes or hazardous substances due to or caused by the Company or any of its Subsidiaries or with respect to which the Company or any of its Subsidiaries have knowledge; and the terms "hazardous wastes," "toxic wastes" and "hazardous substances" shall have the meanings specified in any applicable local, state, federal and foreign laws or regulations with respect to environmental protection (all of the above except as would not reasonably be expected to have a Consolidated Material Adverse Effect). (cc) The Company and each of its Subsidiaries are insured against such losses and risks and in such amounts as are customary in the businesses in which they are engaged; neither the Company nor any such Subsidiary has been refused any insurance coverage sought or applied for; and neither the Company nor any such Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not cause a Consolidated Material Adverse Effect. (dd) Each certificate signed by any officer of the Company, as amended in writing from time to time, and delivered to the Representatives or Underwriters' counsel pursuant to Section 7 of this Agreement shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters covered thereby. (ee) None of the Company or any of its subsidiaries does business with the government of Cuba within the meaning of Florida statutes Section 517.075. 11 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING SHAREHOLDERS. Each Selling Shareholder, severally and not jointly, represents and warrants to and agrees with each Underwriter and the Company that: (a) Such Selling Shareholder now has and on the Closing Date will have good and marketable title to the Shares to be sold by such Selling Shareholder, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than pursuant to this Agreement; and upon delivery of such Shares hereunder and payment of the purchase price as herein contemplated, each of the Underwriters who acquire such Shares without knowledge of any adverse claim, will obtain good and marketable title to the Shares purchased by it from such Selling Shareholder, free and clear of any pledge, lien, security interest pertaining to such Selling Shareholder or such Selling Shareholder's property, encumbrance, claim or equitable interest, or any liability to or claims of any creditor, devisee, legatee or beneficiary of such Selling Shareholder. (b) Such Selling Shareholder has duly authorized (if applicable), executed and delivered, in the form heretofore furnished to the Representatives, an irrevocable Power of Attorney (the "Power of Attorney") appointing {____________________] as attorneys-in-fact (collectively, the "Attorneys" and individually, an "Attorney") and a Letter of Transmittal and Custody Agreement (the "Custody Agreement") with [_________________________], as custodian (the "Custodian"); each of the Power of Attorney and the Custody Agreement constitutes a valid and binding agreement on the part of such Selling Shareholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles and except insofar as the indemnification and contribution provisions of Section 9 of this Agreement may be affected by public policy concerns; and each of such Selling Shareholder's Attorneys, acting alone, is authorized to execute and deliver this Agreement and the certificate referred to in Section 7(f) hereof on behalf of such Selling Shareholder, to determine the purchase price to be paid by the several Underwriters to such Selling Shareholder as provided in Section 3 hereof, to authorize the delivery of the Firm Shares to be sold by such Selling Shareholder under this Agreement and to duly endorse (in blank or otherwise) the certificate or certificates representing such Shares or a stock power or powers with respect thereto, to accept payment therefor, and otherwise to act on behalf of such Selling Shareholder in connection with this Agreement. (c) All consents, approvals, authorizations and orders required for the execution and delivery by such Selling Shareholder of the Power of Attorney and the Custody Agreement, the execution and delivery by or on behalf of such Selling Shareholder of this Agreement and the sale and delivery of the Firm Shares to be sold by such Selling Shareholder under this Agreement (other than, at the time of the execution hereof (if the Registration Statement has not yet been declared effective by the Commission), the issuance of the order of the Commission declaring the Registration Statement effective and such consents, approvals, authorizations or orders as may be necessary under state or other securities or Blue Sky laws) have been obtained and are in full force and effect; such Selling Shareholder, if other than a natural person, has been duly organized and is validly existing in 12 good standing under the laws of the jurisdiction of its organization as the type of entity that it purports to be; and such Selling Shareholder has full legal right, power and authority to enter into and perform its obligations under this Agreement and such Power of Attorney and Custody Agreement, and to sell, assign, transfer and deliver the Shares to be sold by such Selling Shareholder under this Agreement. (d) Certificates in negotiable form for all Firm Shares to be sold by such Selling Shareholder under this Agreement, together with a stock power or powers duly endorsed in blank by such Selling Shareholder, have been placed in custody with the Custodian for the purpose of effecting delivery hereunder. (e) This Agreement has been duly authorized by each Selling Shareholder that is not a natural person and has been duly executed and delivered by or on behalf of such Selling Shareholder and is a valid and binding agreement of such Selling Shareholder, 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 creditors' rights generally or by general equitable principles and except insofar as the indemnification and contribution provisions of Section 9 of this Agreement may be affected by public policy concerns; and the performance of this Agreement and the consummation of the transactions herein contemplated will not result in a breach or violation of any of the terms and provisions of or constitute a material default under any bond, debenture, note or other evidence of indebtedness, or under any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint venture or other agreement or instrument to which such Selling Shareholder is a party or to the best of such Selling Shareholder's knowledge by which such Selling Shareholder, or any Firm Shares to be sold by such Selling Shareholder hereunder, may be bound or, to the best of such Selling Shareholders' knowledge, result in any violation of any law, order, rule, regulation, writ, injunction, judgment or decree of any court, government or governmental agency or body, domestic or foreign, having jurisdiction over such Selling Shareholder or over the properties of such Selling Shareholder, or, if such Selling Shareholder is other than a natural person, result in any violation of any provisions of the charter, bylaws or other organizational documents of such Selling Shareholder. (f) Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to or that might reasonably be expected to cause or result in stabilization or manipulation of the price of the Common Stock. (g) Such Selling Shareholder has not distributed to the public and will not distribute to the public any prospectus or other offering material in connection with the offering and sale of the Shares. (h) All information furnished by or on behalf of such Selling Shareholder relating to such Selling Shareholder and the Firm Shares that is contained in the representations and warranties of such Selling Shareholder in such Selling Shareholder's Power of Attorney or set forth in the Registration Statement or the Prospectus is, and at the 13 time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date was or will be, true, correct and complete in all material respects, and such information furnished by or on behalf such Selling Shareholder does not, and at the time the Registration Statement became or becomes, as the case may be, effective and at all times subsequent thereto up to and on the Closing Date 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, in light of the circumstances in which they are made, not misleading. (i) Such Selling Shareholder will review the Prospectus and will comply with all agreements and satisfy all conditions on its part to be complied with or satisfied pursuant to this Agreement on or prior to the Closing Date and will advise one of its Attorneys and FSVK prior to the Closing Date if any statement to be made on behalf of such Selling Shareholder in the certificate contemplated by Section 7(f) would be inaccurate if made as of such date. (j) Such Selling Shareholder does not have, or has waived prior to the date hereof, any preemptive right, co-sale right or right of first refusal or other similar right to purchase any of the Shares that are to be sold by the Company or any of the other Selling Shareholders to the Underwriters pursuant to this Agreement; such Selling Shareholder does not have, or has waived prior to the date hereof, any registration right or other similar right to participate in the offering made by the Prospectus, other than such rights of participation as have been satisfied by the participation of such Selling Shareholder in the transactions to which this Agreement relates in accordance with the terms of this Agreement; and such Selling Shareholder does not own any warrants, options or similar rights to acquire, and does not have any right or arrangement to acquire, any capital stock, rights, warrants, options or other securities from the Company, other than those described in the Registration Statement and the Prospectus or those which are not required to be described in the Registration Statement and the Prospectus. (k) Such Selling Shareholder is not aware that any of the representations and warranties of the Company set forth in Section 1 above is untrue or inaccurate. (l) To the best of such Selling Shareholder's knowledge, when any Preliminary Prospectus was filed with the Commission it (i) contained all statements required to be contained therein and complied in all respects with the requirements of the Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations and (ii) did not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. To the best of such Selling Shareholder's knowledge, on the Effective Date, the Registration Statement (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations, the Exchange Act and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not 14 misleading. To the best of such Selling Shareholder's knowledge, when the Prospectus or any Term Sheet that is a part thereof or any amendment or supplement to the Prospectus is filed with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part thereof or such amendment or supplement is not required to be so filed, when the Registration Statement or the amendment thereto containing such amendment or supplement to the Prospectus was or is declared effective) and on any date on which Option Shares are to be purchased by the Underwriters pursuant to this Agreement, the Prospectus, as amended or supplemented at any such time, (i) contained or will contain all statements required to be contained therein and complied or will comply in all respects with the requirements of the Securities Act, the Rules and Regulations and the Exchange Act Rules and Regulations and (ii) did not or will not include any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The foregoing provisions of this paragraph (l) do not apply to statements or omissions made in any Preliminary Prospectus, the Registration Statement or any amendment thereto or the Prospectus or any amendment or supplement thereto in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives specifically and expressly for use therein. (m) At the time of delivery to the Custodian of Firm Shares to be sold by the Selling Shareholders, all stock transfer or other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of such Firm Shares to be sold by the Selling Shareholders to the several Underwriters hereunder will have been fully paid or provided for by the Selling Shareholder and all laws imposing such taxes will have been fully complied with. 3. PURCHASE, SALE AND DELIVERY OF SHARES (a) On the basis of the representations, warranties, covenants and agreements of the Company, the Selling Shareholders and the Underwriters contained in this Agreement and subject to the terms and conditions set forth in this Agreement, the Company and the Selling Shareholders agree to sell to the several Underwriters, and each of the Underwriters agrees, severally and not jointly, to purchase from the Company and the Selling Shareholders, at a purchase price of $______ per share, the respective number of Firm Shares set forth opposite the name of such Underwriter on Schedule I to this Agreement (subject to adjustment as provided in Section 10 of this Agreement). (b) On the basis of the several (and not joint) covenants and agreements of the Underwriters contained in this Agreement and subject to the terms and conditions set forth in this Agreement, the Company grants an option to the several Underwriters to purchase from the Company all or any portion of the Option Shares at the same price per share as the Underwriters are to pay for the Firm Shares. This option may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters and may be exercised in whole or in part at any time (but not more than once) on or before the 45th day after the date of the Prospectus first filed pursuant to Rule 424(b) under the Securities Act upon written or telecopied notice by the Representatives to the Company setting forth the 15 aggregate number of Option Shares as to which the several Underwriters are exercising the option and the settlement date; notwithstanding the foregoing, if the 45th day after the date of the Prospectus first filed pursuant to Rule 424(b) under the Securities Act is not a business day, then the time period for delivery of the notice of the exercise of the over-allotment option shall automatically be extended until the first business day following the 45th day after the date of the Prospectus. The Option Shares shall be purchased severally, and not jointly, by each Underwriter, if purchased at all, in the same proportion that the number of Firm Shares set forth opposite the name of the Underwriter in Schedule I to this Agreement bears to the total number of Firm Shares to be purchased by the Underwriters under Section 3(a) above, subject to such adjustments as the representatives in their absolute discretion shall make to eliminate any fractional shares. Delivery of certificates for the Option Shares, and payment therefor, shall be made as provided in Section 3(c) and Section 3(d) below. Nothing contained in this Section 3 shall relieve any defaulting Underwriter of its liability, if any, to the Company or to the remaining Underwriters for damages occasioned by its default hereunder. (c) Delivery of the Firm Shares and payment therefor, shall be made at the office of Troop Steuber Pasich Reddick & Tobey, LLP, 2029 Century Park East, 24th Floor, Los Angeles, California 90067-3010 (or at such other location as is agreed by the parties), at 6:30 a.m., Los Angeles time, on the fourth business day after the date of this Agreement, or at such time on such other day as shall be agreed upon in writing by the Company and the Representatives, or as provided in Section 10 of this Agreement. The date and hour of delivery and payment for the Firm Shares are referred to in this Agreement as the "Closing Date." As used in this Agreement, "business day" means a day on which the Nasdaq National Market is open for trading and on which banks in New York and California are open for business and not permitted by law or executive order to be closed. (d) Delivery of the Option Shares and payment therefor, shall be made at the office of Troop, Steuber, Pasich, Reddick & Tobey, LLP, 2029 Century Park East, 24th Floor, Los Angeles, California 90067-3010 (or at such other location as is agreed by the parties), at 6:30 a.m., Los Angeles time, on the date specified by the Representatives (which shall be three business days after the exercise of the option, but not in excess of the period of time specified in the Rules and Regulations). (e) Payment of the purchase price for the Firm Shares by the several Underwriters shall be made at the election of the Representatives by (i) certified or official bank check or checks drawn in next-day funds, payable to the order of the Company and to the Custodian on behalf of the Selling Shareholders, or (ii) wire transfer of immediately available funds to such account of the Company and of the Custodian as the Company and the Custodian shall advise the Representatives in writing at least three business days prior to the Closing Date. Such payment shall be made upon delivery of certificates for the Firm Shares to the Representatives for the respective accounts of the several Underwriters. Certificates for the Firm Shares to be delivered to the Representatives shall be registered in such name or names and shall be in such denominations as the Representatives may request at least two business days before the Closing Date. Such certificates will be made available 16 to the Underwriters for inspection, checking and packaging at the offices of Troop, Steuber, Pasich, Reddick & Tobey, LLP, 2029 Century Park East, 24th Floor, Los Angeles, California 90067-3010, not less than one full business day prior to the Closing Date. It is understood that the Representatives, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company and the Custodian on behalf of the Selling Shareholders for Firm Shares to be purchased by any Underwriter whose check shall not have been received by the Representatives on the Closing Date for the account of such Underwriter. Any such payment shall not relieve such Underwriter from any of its obligations hereunder. (f) Payment of the purchase price for the Option Shares by the several Underwriters shall be made at the election of the Representatives by (i) certified or official bank check or checks drawn in next-day funds, payable to the order of the Company, or (ii) wire transfer of immediately available funds to an account specified by the Company in writing at least three business days prior to the date on which any such Option Shares are purchased. Such payment shall be made upon delivery of certificates for the Option Shares to the Representatives for the respective accounts of the several Underwriters. Certificates for the Option Shares to be delivered to the Representatives shall be registered in such name or names and shall be in such denominations as the Representatives may request at least two business days before the date on which any Option Shares are purchased by the Underwriters pursuant to this Agreement. Such certificates will be made available to the Underwriters for inspection, checking and packaging at the offices not less than one full business day prior to the Closing Date. It is understood that the Representatives, individually and not on behalf of the Underwriters, may (but shall not be obligated to) make payment to the Company for Option Shares to be purchased by any Underwriter whose check shall not have been received by the Representatives on any date on which Option Shares are purchased for the account of such Underwriter. Any such payment shall not relieve such Underwriter from any of its obligations hereunder. (g) It is understood that the several Underwriters propose to offer the Shares for sale to the public as soon as the Representatives deems it advisable to do so. The Firm Shares are to be initially offered to the public at the public offering price set forth (or to be set forth) in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. (h) The information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), the legends respecting passive market making and stabilization set forth on the inside front cover page and the statements set forth under the caption "Underwriting" in any Preliminary Prospectus, the Registration Statement and the Prospectus filed pursuant to Rule 424(b) constitute the only information furnished by the Underwriters to the Company for inclusion in any Preliminary Prospectus, the Prospectus or the Registration Statement. 4. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees with the several Underwriters as follows: 17 (a) The Company will use its best efforts to cause the Registration Statement, and any amendment thereof, if not effective at the time of execution of this Agreement, to become effective as promptly as possible. If the Registration Statement has become or becomes effective pursuant to Rule 430A, or filing of the Prospectus is otherwise required under Rule 424(b), the Company will file the Prospectus, properly completed (and in form and substance reasonably satisfactory to the Underwriters) pursuant to Rule 424(b) within the time period prescribed and will provide evidence satisfactory to the Representatives of such timely filing. The Company will not file the Prospectus, any amended Prospectus, any amendment (including post-effective amendments) to the Registration Statement or any supplement to the Prospectus without (i) advising the Representatives of and, a reasonable time prior to the proposed filing of such amendment or supplement, furnishing the Representatives with copies thereof and (ii) obtaining the prior consent of the Representatives to such filing. The Company will prepare and file with the Commission, promptly upon the request of the Representatives, any amendment to the Registration Statement or supplement to the Prospectus that may be necessary or advisable in connection with the distribution of the Shares by the Underwriters and use its best efforts to cause the same to become effective as promptly as possible. (b) The Company will promptly advise the Representatives (i) when the Registration Statement becomes effective, (ii) when any post-effective amendment thereof becomes effective, (iii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening of any proceeding for that purpose and (v) of the receipt by the Company of any notification with respect to the suspension of the registration, qualification or exemption from registration or qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose. The Company will use its best efforts to prevent the issuance of any such stop order or suspension and, if issued, to obtain as soon as possible the withdrawal thereof. (c) The Company will (i) on or before the Closing Date, deliver to the Representatives and to Underwriters' counsel a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless and to the extent previously furnished to the Representatives) and all documents filed by the Company with the Commission under the Exchange Act and deemed to be incorporated by reference into any Preliminary Prospectus or the Prospectus and will also deliver to the Representatives, for distribution to the several Underwriters, a sufficient number of additional conformed copies of each of the foregoing (excluding exhibits) so that one copy of each may be distributed to each Underwriter, (ii) as promptly as possible deliver to each of the Representatives and send to the several Underwriters, at such office or offices as the Representatives may designate, as many copies of the Prospectus as the Representatives may reasonably request and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter, likewise 18 send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended Prospectus, filed by the Company with the Commission, as the Representatives may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by an Underwriter any event shall occur as a result of which, in the opinion of counsel of the Representatives, it is necessary to supplement or amend the Prospectus in order to make the Prospectus not misleading or so that the Prospectus will not omit to state a material fact necessary to be stated therein, in each case at the time the Prospectus is delivered to a purchaser of the Shares, or if it shall be necessary to amend or to supplement the Prospectus to comply with the Securities Act or the Rules and Regulations, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein not misleading and so that it then will otherwise comply with the Securities Act and the Rules and Regulations. If, after the public offering of the Shares by the Underwriters commences and during such period, the Underwriters propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, the Representatives will advise the Company in writing of the proposed variation and if, in the opinion either of counsel for the Company or counsel for the Underwriters, such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus setting forth such variation. The Company authorizes the Underwriters and all dealers to whom any of the Shares may be sold by the Underwriters to use the Prospectus, as from time to time so amended or supplemented, in connection with the sale of the Shares in accordance with the applicable provisions of the Securities Act and the Rules and Regulations for such period. (e) The Company will cooperate with the Representatives and Underwriters' counsel in the qualification or registration of the Shares for offer and sale under the securities or blue sky laws of such jurisdictions as the Representatives may designate and, if applicable, in connection with exemptions from such qualification or registration and, during the period in which a Prospectus is required by law to be delivered by an Underwriter or a dealer, in keeping such qualifications, registrations and exemptions in effect; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction in which it is not so qualified. 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, registrations and exemptions in effect for so long a period as the Representatives may reasonably request for the distribution of the Shares. (f) During a period of five years commencing with the date of this Agreement, the Company will promptly furnish to the Representatives and to each Underwriter who may so request in writing copies of (i) all periodic and special reports furnished by it to Shareholders of the Company, (ii) all information, documents and reports 19 filed by it with the Commission, the Nasdaq National Market, any securities exchange or the NASD, (iii) all material press releases and material news items or articles in respect of the Company, its products or affairs released or prepared by the Company (other than promotional and marketing materials disseminated solely to customers and potential customers of the Company in the ordinary course of business) and (iv) any additional information concerning the Company or its business which the Representatives may reasonably request. (g) As soon as practicable, but not later than the 45th day following the end of the fiscal quarter first ending after the first anniversary of the Effective Date, the Company will make generally available to its securities holders and furnish to the Representatives an earnings statement or statements in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (h) The Company agrees that, without FSVK's prior written consent, the Company will not, and will not allow the Holders to, in each case directly or indirectly, offer, sell, grant any option to purchase, contract to sell, or otherwise sell or dispose of any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock for a period of 180 days following the date of this Agreement, excluding only (i) the sale of the Shares to be sold to the Underwriters pursuant to this Agreement and (ii) the grant by the Company of options to purchase Common Stock (provided that none of such options are or become exercisable during such 180-day period) or the issuance by the Company of shares of Common Stock upon the exercise in accordance with options previously granted under the Company's presently authorized stock option plans as described in the Prospectus or in documents incorporated therein, or upon the exercise in accordance with their terms of previously granted warrants which are described in the Prospectus or in documents incorporated therein. (i) The Company will establish and maintain all financial control and financial reporting systems customary for well-established public companies, including but not limited to adequate management information and reporting systems, and will employ and maintain, with adequate staffing levels at headquarters and at each significant Subsidiary or significant functional division, and at each level of responsibility, an employee staff of well trained and highly qualified financial professionals. (j) The Company will apply the net proceeds from the offering received by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (k) The Company will, and at all times for a period of at least five years after the date of this Agreement, unless such securities are then listed on a national securities exchange, use its best efforts to cause the Common Stock (including the Shares) to be included for listing on the Nasdaq National Market, and the Company will comply with all registration, filing, reporting and other requirements within its control of the Exchange Act and the Nasdaq National Market which may from time to time be applicable to the Company. 20 (l) The Company will use commercially reasonable efforts to maintain insurance of the types and in the amounts which it deems adequate for its business consistent with insurance coverage maintained by companies of similar size and engaged in similar businesses including, but not limited to, general liability insurance covering all real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against. (m) The Company will issue no press release prior to the purchase by the Underwriters of all of the Option Shares or within 45 days after the Closing Date, whichever is earlier, without prior consultation with Van Kasper with respect to the contents thereof. 5. FURTHER AGREEMENT OF SELLING SHAREHOLDERS. The Selling Shareholders, severally and not jointly, covenant and agree with the several Underwriters that, without FSVK's prior written consent, such Selling Shareholder will not, directly or indirectly, offer, sell, grant any option to purchase, contract to sell, or otherwise dispose of any shares of Common Stock, or any securities convertible into or exchangeable for shares of Common Stock for a period of 180 days following the date of this Agreement, excluding only the sale of the Firm Shares to be sold to the Underwriters pursuant to this Agreement. 6. FEES AND EXPENSES. (a) The Company and the Selling Shareholders agree with each Underwriter that: (i) The Company will pay and bear all costs and expenses in connection with or incident to: the preparation, printing and filing of the Registration Statement (including financial statements, schedules and exhibits), Preliminary Prospectuses and the Prospectus, any drafts of each of them and any amendments or supplements to any of them; the duplication or, if applicable, printing (including all drafts thereof) and distribution, by mail, telex or other means of communication of this Agreement, the Agreement Among Underwriters, any Selected Dealer Agreements, the Underwriters' Questionnaire and the Power of Attorney and the duplication and printing (including of drafts thereof) of any other underwriting documents and material (including but not limited to marketing memoranda and other marketing material) in connection with the offering, purchase, sale and delivery of the Shares; the issuance, transfer and delivery of the Shares under this Agreement to the several Underwriters, including all expenses, taxes, duties, fees and commissions on the purchase and sale of the Shares and Nasdaq National Market brokerage and transaction levies with respect to the purchase and, if applicable, the sale of the Shares incident to the sale and delivery of the Shares by the Company and the Selling Shareholders to the Underwriters; the cost of printing all stock certificates; the Transfer Agent's and Registrar's fees; the Custodian's fees; the fees and disbursements of counsel for the Company; all fees and other charges of the Company's independent public accountants and any other experts named in the Prospectus; the cost of furnishing to the several Underwriters copies of the Registration Statement (including appropriate exhibits), Preliminary Prospectus(es) and the Prospectus, the agreements and other documents and 21 instruments referred to above and any amendments or supplements to any of the foregoing; NASD filing fees and reasonable fees and disbursements of Underwriters' counsel incurred in connection with the review by the NASD of the terms of the Offering of the Shares; the cost of qualifying or registering the Shares (or obtaining exemptions from qualification or registration) under the laws of such jurisdictions as the Representatives may designate (including filing fees in connection with such state securities or blue sky qualifications, registrations and exemptions) and preparing any preliminary and any final Blue Sky Memorandum (including reasonable fees and disbursements of Underwriters' counsel in connection therewith); all fees and expenses in connection with qualification of the Shares for inclusion for listing on the Nasdaq National Market; the Company's share of roadshow expenses; and all other expenses incurred by the Company in connection with the performance of its obligations hereunder. The Selling Shareholders will pay and bear all costs associated with the Custodian and Custodian's fees. Except as provided in this Section 6, the Underwriters, including the Representatives, shall bear all expenses incurred by it in connection with the offering, including (but not limited to) the expenses of its own counsel. The provisions of this Section 7(a)(i) are intended to relieve the Underwriters from the payment of the expenses and costs which the Selling Shareholders and the Company hereby agree to pay, but shall not affect any agreement which the Selling Shareholders and the Company may make, or may have made, for the sharing of any of such expenses and costs. Such agreements shall not impair the obligations of the Company and the Selling Shareholders hereunder to the several Underwriters. (ii) In addition to its obligations under Section 9(a) of this Agreement, the Company agrees that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage or liability described in Section 9(a) of this Agreement, it will reimburse or advance to or for the benefit of the Underwriters, and each of them, on a monthly basis (or more often, if requested) for all legal and other expenses incurred in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the Company's obligation to reimburse or advance for the benefit of the Underwriters for such expenses or the possibility that such payments might later be held to have been improper by a court of competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments or advances are so held to have been improper, the Underwriters receiving the same shall promptly return such amounts to the Company together with interest, compounded daily, at the prime rate (or other commercial lending rate for borrowers of the highest credit standing) announced from time to time by Bank of America, NT&SA, San Francisco, California (the "Prime Rate"), but not in excess of the maximum rate permitted by applicable law. Any such interim reimbursement payments or advances that are not made to or for the Underwriters within 30 days of a request for reimbursement or for an advance shall bear interest at the Prime Rate, but not in excess of the maximum rate permitted by applicable law, from the date of such request until the date paid. (b) In addition to their obligations under Section 9(c) of this Agreement, the Underwriters severally and in proportion to their obligation to purchase Firm Shares as 22 set forth on Schedule I hereto, agree that, as an interim measure during the pendency of any claim, action, investigation, inquiry or other proceeding arising out of or based upon any loss, claim, damage or liability described in Section 9(c) of this Agreement, they will reimburse or advance to (for the benefit of the Company on a monthly basis (or more often, if requested) for all legal and other expenses incurred by the Company in connection with investigating or defending any such claim, action, investigation, inquiry or other proceeding, notwithstanding the absence of a judicial determination as to the propriety or enforceability of the Underwriters' obligation to reimburse or advance for the benefit of the Company for such expenses and the possibility that such payments or advances might later be held to have been improper by a court of competent jurisdiction. To the extent that any portion, or all, of any such interim reimbursement payments or advances are so held to have been improper, the Company shall promptly return such amounts to the Underwriters together with interest, compounded daily, at the Prime Rate, but not in excess of the maximum rate permitted by applicable law. Any such interim reimbursement payments or advances that are not made to the Company within 30 days of a request for reimbursement or for an advance shall bear interest at the Prime Rate, but not in excess of the maximum rate permitted by applicable law, from the date of such request until the date paid. (c) Any controversy arising out of the operation of the interim reimbursement and advance arrangements set forth in Sections 6(a)(ii) and 6(b) above, including the amounts of any requested reimbursement payments or advance, the method of determining such amounts and the basis on which such amounts shall be apportioned among the indemnifying parties, shall be settled by arbitration conducted under the provisions of the Constitution and Rules of the Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code of Arbitration Procedure of the NASD. Any such arbitration must be commenced by service of a written demand for arbitration or a written notice of intention to arbitrate, therein electing the arbitration tribunal. If the party demanding arbitration does not make such designation of an arbitration tribunal in such demand or notice, then the party responding to the demand or notice is authorized to do so. Any such arbitration will be limited to the interpretation and obligations of the parties under the interim reimbursement and advance provisions contained in Sections 6(a)(ii) and 6(b) above and will not resolve the ultimate propriety or enforceability of the obligation to indemnify for or contribute to expenses that is created by the provisions of Section 9 of this Agreement. (d) If the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth in Section 7 of this Agreement is not satisfied, or because of any termination pursuant to Section 11(b) of this Agreement, or because of any refusal, inability or failure on the part of the Company to perform any material covenant or agreement set forth in this Agreement or to comply with any material provision of this Agreement other than by reason of a default by any of the Underwriters, the Company agrees to reimburse the Representatives upon demand for, or pay directly, all reasonable out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by the Representatives in connection with investigating, preparing to market or marketing the Shares or otherwise in connection with this Agreement or the offering of the Shares. 23 7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the Underwriters to purchase and pay for the Shares shall be subject, to the reasonable satisfaction of the Representatives, to the accuracy as of the date of execution of this Agreement, the Closing Date and the date on which the Option Shares are to be purchased, as the case may be, of the representations and warranties of the Company and the Selling Shareholders set forth in this Agreement, to the accuracy of the statements of the Company, its officers and the Selling Shareholders made in any certificate delivered pursuant to this Agreement, to the performance by the Company and the Selling Shareholders of all of their obligations to be performed under this Agreement at or prior to the Closing Date or any later date on which Option Shares are to be purchased, as the case may be, to the satisfaction of all conditions to be satisfied or performed by the Company at or prior to that date and to the following additional conditions: (a) The Registration Statement shall have become effective (or, if a post-effective amendment is required to be filed pursuant to Rule 462(b) under the Act, such post-effective amendment shall become effective and the Company shall have provided evidence satisfactory to the Representatives of such filing and effectiveness) not later than 5:00 p.m., New York time, on the date of this Agreement or at such later date and time as the Representatives may approve in writing and, at the Closing Date or, with respect to the Option Shares, the date on which such Option Shares are to be purchased; no stop order suspending the effectiveness of the Registration Statement or any qualification, registration or exemption from qualification or registration for the sale of the Shares in any jurisdiction shall have been issued and no proceedings for that purpose shall have been instituted or threatened; and any request for additional information on the part of the Commission shall have been complied with to the reasonable satisfaction of the Representatives and Underwriters' counsel. (b) The Representatives shall have received from Troop, Steuber, Pasich, Reddick & Tobey, LLP, 2029 Century Park East, 24th Floor, Los Angeles, California 90067, counsel for the Underwriters, an opinion, dated as of the Closing Date or, if applicable, the date on which the Option Shares are to be purchased, and the Company shall have furnished such counsel with all documents which they may reasonably request for the purpose of enabling them to pass upon such matters. (c) The Representatives shall have received on the Closing Date and on any later date on which Option Shares are purchased, as the case may be, the opinion of Stradling, Yocca, Carlson & Rauth, counsel for the Company and the Selling Shareholders, addressed to the Underwriters and dated as of the Closing Date or such later date, with reproduced copies or signed counterparts thereof for each of the Underwriters, covering the matters set forth in Annex A to this Agreement and in form and substance reasonably satisfactory to the Representatives. (d) The Representatives shall be satisfied that there has not been any material change in the market for securities in general or in political, financial or economic conditions as to render it impracticable in the Representatives' sole judgment to make a 24 public offering of the Shares, or a material adverse change in market levels for securities in general or financial or economic conditions which render it inadvisable to proceed. (e) The Representatives shall have received on or before the Closing Date and on any later date on which Option Shares are purchased a certificate, dated as of the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company stating that: (i) the representations and warranties of the Company set forth in Section 1 of this Agreement are true and correct with the same force and effect as if expressly made at and as of the Closing Date or such later date, 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 Closing Date or such later date; (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 are threatened under the Securities Act; and (iii) (A) the respective signers of the certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus and any supplements or amendments to any of them and, as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct in all material respects and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, (B) since the Effective Date, no event has occurred that should have been set forth in an amendment to the Registration Statement or a supplement or amendment to the Prospectus that has not been set forth in such an amendment or supplement, (c) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any Consolidated Material Adverse Effect or any development involving a prospective Consolidated Material Adverse Effect, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, neither the Company nor any of its Subsidiaries has entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (D) there are not any pending or known threatened legal proceedings to which the Company or any of its Subsidiaries is a party or of which property of the Company or any of its Subsidiaries is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus and (E) there are not any license agreements, contracts, leases or other documents that are required to be filed or incorporated by reference as exhibits to the Registration Statement that have not been filed or incorporated by reference as required. (f) The Representatives shall be satisfied that, and shall have received a certificate, dated the Closing Date from the Attorneys for each Selling Shareholder to the effect that, as of the date on which Option Shares are to be purchased, they have not been informed that: 25 (i) The representations and warranties made by such Selling Shareholder herein are not true or correct in any material respect on the Closing Date; or (ii) Such Selling Shareholder has not complied with any obligation or satisfied any condition which is required to be performed or satisfied on the part of such Selling Shareholder at or prior to the Closing Date. (g) The Representatives shall have received from Ernst & Young a letter or letters, addressed to the Underwriters and dated as of the Closing Date and any later date on which Option Shares are purchased, confirming that they are independent accountants with respect to the Company within the meaning of the Securities Act and the applicable Rules and Regulations thereunder and, based upon the procedures described in their letter, referred to below, delivered to the Representatives concurrently with the execution of this Agreement (the "Original Letter"), but carried out to a date not more than five business days prior to the Closing Date or such later date on which Option Shares are purchased, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later 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 that are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. Such letters shall not disclose any change, or any development involving a prospective change, in or affecting the business, properties or condition (financial or otherwise), results of operations or prospects of the Company or any of its Subsidiaries which, in the Representatives' sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Shares or the purchase of the Option Shares as contemplated by the Prospectus (or, if the Prospectus is not in existence, the most recent Preliminary Prospectus). In addition, the Representatives shall have received from Ernst & Young, on or prior to the Closing Date, a letter addressed to the Company and made available to the Representatives for the use of the Underwriters stating that their review of the Company's system of internal controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of June 30, 1999, or in delivering their Original Letter, did not disclose any weaknesses in internal controls that they considered to be a material weaknesses. (h) Prior to the Closing Date, the Shares shall have been designated national market system securities, duly authorized for listing on the Nasdaq National Market upon official notice of issuance. (i) On or prior to the Closing Date, the Representative shall have received from all Holders executed agreements covering the matters described in Section 1(r) of this Agreement. (j) The Company shall have furnished to the Representatives such further certificates and documents as the Representatives shall reasonably request (including certificates of officers of the Company), as to the accuracy of the representations and 26 warranties of the Company set forth in this Agreement, the performance by the Company of its obligations under this Agreement and the other conditions concurrent and precedent to the obligations of the Underwriters under this Agreement. Counsel to the Representatives shall provide a written memorandum to the Company identifying closing documents which such counsel deems necessary for the Underwriters' review, not less than two business days before the Closing Date. All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement will be in compliance with the provisions of this Agreement only if they are reasonably satisfactory to the Representatives. The Company will furnish the Representatives with such number of conformed copies of such opinions, certificates, letters and documents as the Representatives shall reasonably request. If any of the conditions specified in this Section 7 shall not have been fulfilled in all material respects when and as provided in this Agreement, time being of the essence, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to the Representatives and Underwriters' counsel, this Agreement and all obligations of the Underwriters hereunder may be canceled by the Representatives at, or at any time prior to, the Closing Date or (with respect to the Option Shares) prior to the date upon which the Option Shares are to be purchased, as the case may be. Notice of such cancellation shall be given to the Company in writing or by telephone or telecopy confirmed in writing. Any such termination shall be without liability of the Company to the Underwriters (except as provided in Section 6 or Section 9 of this Agreement) and without liability of the Underwriters to the Company (except to the extent provided in Section 9 of this Agreement). 8. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY AND THE SELLING SHAREHOLDERS. The respective obligations of the Company and the Selling Shareholders to sell and deliver the Shares required to be delivered as and when specified in this Agreement shall be subject to the condition that, at the Closing Date or (with respect to the Option Shares) the date upon which the Option Shares are to be purchased by the Underwriters pursuant to this Agreement, no stop order suspending the effectiveness of the Registration Statement shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. 9. INDEMNIFICATION AND CONTRIBUTION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statute, law or regulation, at common law or otherwise, specifically including but not limited to losses, claims, damages or liabilities (or actions in respect thereof) related to negligence on the part of any Underwriter, and the Company agrees to reimburse each such 27 Underwriter and controlling person for any legal or other expenses (including, except as otherwise provided below, settlement expenses and fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective indemnified parties, in each case insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon, in whole or in part, (i) any breach of any representation, warranty, covenant or agreement of the Company in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement in the form originally filed or in any amendment thereto (including the Prospectus as part thereof) or any post-effective amendment thereto, or the omission or alleged omission to state therein 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 (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iv) any untrue statement or alleged untrue statement of a material fact contained in any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify or register the Shares under the securities or Blue Sky laws thereof or to obtain an exemption from such qualification or registration or filed with the Commission or any securities association, the Nasdaq National Market, or any securities exchange, or the omission or alleged omission to state therein 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, provided, however, that (1) the indemnity agreements of the Company contained in this Section 9(a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically and expressly for use in the Registration Statement, any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto and (2) the indemnity agreement contained in this Section 9(a) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares that are the subject thereof (or to the benefit of any person controlling such Underwriter) if the Company can demonstrate that at or prior to the written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented), unless the failure is the result of noncompliance by the Company with Section 4 of this Agreement. The indemnity agreements of the Company contained in this Section 9(a) and the representations and warranties of the Company contained in Section 1 of this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall 28 survive the delivery of and payment for the Shares. This indemnity agreement shall be in addition to any liabilities which the Company may have pursuant to this Agreement or otherwise. (b) Each Selling Shareholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls any Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act or other federal or state statute, law or regulation, at common law or otherwise, specifically including but not limited to losses, claims, damages or liabilities (or actions in respect thereof) related to negligence on the part of any Underwriter, and each Selling Shareholder, severally and not jointly, agrees to reimburse each such Underwriter and controlling person for any legal or other expenses (including, except as otherwise provided below, settlement expenses and fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective indemnified parties, in each case insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon, in whole or in part, (i) any breach of any representation, warranty, covenant or agreement of such Selling Shareholder in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement in the form originally filed or in any amendment thereto (including the Prospectus as part thereof) or any post-effective amendment thereto, or the omission or alleged omission to state therein 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 (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading or (iv) any untrue statement or alleged untrue statement of a material fact contained in any application or other document, or any amendment or supplement thereto, executed by the Company or based upon written information furnished by or on behalf of the Company filed in any jurisdiction in order to qualify or register the Shares under the securities or Blue Sky laws thereof or to obtain an exemption from such qualification or registration or filed with the Commission or any securities association, the Nasdaq National Market, or any securities exchange, or the omission or alleged omission to state therein 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, provided, however, that (1) the indemnity agreements of the Selling Shareholders contained in this Section 9(b) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives specifically and expressly for use in the Registration Statement, any Preliminary Prospectus or the Prospectus or any such 29 amendment thereof or supplement thereto, (2) the indemnity agreement contained in this Section 9(b) with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Shares that are the subject thereof (or to the benefit of any person controlling such Underwriter) if the Selling Shareholder can demonstrate that at or prior to the written confirmation of the sale of such Shares a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented), unless the failure is the result of noncompliance by the Company with Section 4 of this Agreement and (3) the indemnity agreements of the Selling Shareholders contained in this Section 9(b) shall apply in the case of subparagraphs (ii), (iii) and (iv) of this Section 9(b) to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or such Underwriter by such Selling Shareholder, directly or through such Selling Shareholder's representatives, specifically for use in the preparation thereof. The indemnity agreements of the Selling Shareholders contained in this Section 9(b) and the representations and warranties of the Selling Shareholders contained in Section 2 of this Agreement shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. This indemnity agreement shall be in addition to any liabilities which the Selling Shareholders may have pursuant to this Agreement or otherwise. Notwithstanding anything to the contrary in this Section 9, no Selling Shareholder shall be required to make any payments in respect of any indemnity obligation arising under this Section 9(b) in excess of the net proceeds from the Firm Shares sold by that Selling Shareholder. (c) Each Underwriter, severally and not jointly, agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement, each of its directors, each other Underwriter, each Selling Shareholder and each person (including each partner or officer thereof) who controls the Company or any such other Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, or other federal or state statute, law or regulation or at common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, settlement expenses and fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding that may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any breach of any representation, warranty, covenant or agreement of the indemnifying Underwriter in this Agreement, (ii) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof) or any post- effective amendment thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were 30 made, not misleading or (iii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, but in each case under clauses (ii) and (iii) above, as the case may be, only if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of such indemnifying Underwriter through the Representatives specifically and expressly for use in the Registration Statement, in any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto. The Company and the Selling Shareholders acknowledge and agree that the matters described in Section 3(h) of this Agreement constitute the only information furnished in writing by or on behalf of the several Underwriters for inclusion in the Registration Statement, any preliminary Prospectus or the Prospectus. The indemnity agreement of each Underwriter contained in this Section 9(c) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Shares. This indemnity agreement shall be in addition to any liabilities which each Underwriter may have pursuant to this Agreement or otherwise. Notwithstanding anything to the contrary in this Section 9, no Underwriter shall be required to make any payments in respect of any claim arising under this Section 9(c) in excess of the underwriting discount applicable to the Shares purchased by that Underwriter. (d) Each person or entity indemnified under the provisions of Sections 9(a), 9(b) and 9(c) above agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such Sections, it will, if a claim in respect thereunder is to be made against the indemnifying party or parties under this Section 9, and give written notice (the "Notice") of such service or notification to the party or parties from whom indemnification may be sought hereunder within ten (10) calendar days after receipt by them of written notice of the commencement of any actions against them. No indemnification provided for in Sections 9(a), 9(b) and 9(c) above shall be available to any person who fails to so give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related, but only to the extent such party was materially prejudiced by the failure to receive the Notice, and the omission to so notify such indemnifying party or parties shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of Sections 8(a), 9(b) and 9(c). Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (the "Notice of Defense") to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at 31 the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; provided, however, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses or rights available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then separate counsel for and selected by the indemnified party or parties shall be entitled to conduct, at the expense of the indemnifying parties, the defense of the indemnified parties to the extent determined by such counsel to be necessary to protect the interests of the indemnified party or parties, and (ii) provided, further, that the indemnifying party shall not be liable for the fees and expenses of more than one separate counsel, reasonably approved by the indemnifying party, for all of the indemnified parties, plus, if applicable, one local counsel in each jurisdiction. In addition, in any event, the indemnified party or parties shall be entitled to have counsel selected by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and, unless separate counsel is to be chosen by the indemnified party or parties as provided above, the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under Sections 9(a), 9(b) and 9(c) for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear and pay the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear and pay such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (e) In order to provide for just and equitable contribution in any action in which a claim for indemnification is made pursuant to this Section 9 but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right to appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 9 provides for indemnification in such case, each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages, liabilities and expenses referred to in Section 9(a), 9(b) and 9(c) above (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company, the Selling Shareholders and the 32 Underwriters shall be deemed to be in the same respective proportions as the total proceeds from the offering of the Shares, net of the underwriting discounts, received by the Company and the Selling Shareholders and the total underwriting discount retained by the Underwriters bear to the aggregate public offering price of the Shares. 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 a party and the party's relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contribution pursuant to this Section 9(e) were to be 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 into account the equitable considerations referred to in the first sentence of the first paragraph of this Section 9(e) and to the considerations referred to in the third sentence of the first paragraph of this Section 9(e). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of the first paragraph of this Section 9(e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against any action or claim which is the subject of this Section 9(e). Notwithstanding the provisions of this Section 9(e), no Underwriter shall be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by that Underwriter and no Selling Shareholder shall be required to contribute any amount in excess of the net proceeds from the Firm Shares sold by that Selling Shareholder. For purposes of this Section 9(e), each person who controls an Underwriter within the meaning of the Securities Act shall have the same rights to contribution as such Underwriter, and each person who controls the Company within the meaning of the Securities Act, each officer of the Company who signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the immediately preceding and immediately following sentences. No person guilty of fraudulent misrepresentation (within the meaning of Section 1l(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute in this Section 9(e) are several and not joint in proportion to their respective underwriting obligations. Each party or other entity entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in Section 9(d) above). This Section 9(e) shall not be operative as to any Underwriter to the extent that the Company is entitled to receive or has received indemnity under this Section 9. 33 (f) The Company shall not, without the prior written consent of each Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not such Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Securities Act is a party to such claim, action, suit or proceeding), which consent shall not be unreasonably withheld, unless such settlement, compromise or consent includes an unconditional release of each such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. (g) No Underwriter shall, without the consent of the Company, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the Company is a party to such claim, action, suit or proceeding), which consent shall not be unreasonably withheld, unless such settlement, compromise or consent includes an unconditional release of the Company, each of its officers who signed the Registration Statement, each of its directors, each Selling Shareholder and each person who controls the Company within the meaning of Section 15 of the Securities Act, from all liability arising out of such claim, action, suit or proceeding. (h) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions of this Agreement, including, without limitation, the provisions of Sections 6(a)(ii), 6(b) and 6(c) and this Section 9 of this Agreement and that they are fully informed regarding all such provisions. They further acknowledge that the provisions of Sections 6(a)(ii), 6(b) and 6(c) and this Section 9 of this Agreement 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, each Preliminary Prospectus and the Prospectus as required by the Securities Act, the Rules and Regulations, the Exchange Act and the rules and regulations of the Commission under the Exchange Act. The parties are advised that federal or state policy, as interpreted by the courts in certain jurisdictions, may be contrary to certain provisions of Sections 6(a)(ii), 6(b) and 8(c) and this Section 9 of this Agreement and, to the extent permitted by law, the parties hereto hereby expressly waive and relinquish any right or ability to assert such public policy as a defense to a claim under Sections 6(a)(ii), 6(b) or 6(c) or this Section 9 of this Agreement and further agree not to attempt to assert any such defense. 10. SUBSTITUTION OF UNDERWRITERS. If for any reason one or more of the Underwriters fails or refuses (otherwise than for a reason sufficient to justify the termination of this Agreement under the provisions of Section 7 or Section 11 of this Agreement) to purchase and pay for the number of Firm Shares agreed to be purchased by such Underwriter or Underwriters, the Company shall immediately give notice thereof to the Representatives and the non-defaulting Underwriters shall have the right within 24 hours after the receipt by the Representatives of such notice to purchase, or procure one or more other Underwriters to purchase, in such proportions as may be agreed upon among the Representatives and such purchasing Underwriter or Underwriters and upon the terms set 34 forth herein, all or any part of the Firm Shares that such defaulting Underwriter or Underwriters agreed to purchase. If the non-defaulting Underwriters fail to make such arrangements with respect to all such Shares, the number of Firm Shares that each non-defaulting Underwriter is otherwise obligated to purchase under this Agreement shall be automatically increased on a pro rata basis to absorb the remaining Shares that the defaulting Underwriter or Underwriters agreed to purchase, provided, however, that the non-defaulting Underwriters shall not be obligated to purchase the Shares that the defaulting Underwriter or Underwriters agreed to purchase if the aggregate number of such Shares exceeds 10% of the total number of Firm Shares that all Underwriters agreed to purchase under this Agreement. If the total number of Firm Shares that the defaulting Underwriter or Underwriters agreed to purchase shall not be purchased or absorbed in accordance with the two preceding sentences, the Company shall have the right, within 24 hours next succeeding the first 24-hour period above referred to, to make arrangements with other underwriters or purchasers satisfactory to the Representatives for purchase of such Shares on the terms set forth in this Agreement. In any such case, either the Representatives or the Company shall have the right to postpone the Closing Date determined as provided in Section 3(c) of this Agreement for not more than seven business days after the date originally fixed as the Closing Date pursuant to said Section 3(c) in order that any necessary changes in the Registration Statement, the Prospectus or any other documents or arrangements may be made. If neither the non-defaulting Underwriters nor the Company makes arrangements within the time periods provided in the first three sentences of the first paragraph of this Section 10 for the purchase of all the Firm Shares that the defaulting Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall be terminated without further act or deed and without any liability on the part of the Company to any non-defaulting Underwriter (except as provided in Section 6 or Section 9 of this Agreement) and without anyliability on the part of any non-defaulting Underwriter to the Company (except to the extent provided in Section 9 of this Agreement). Nothing in this Section 10, and no action taken hereunder, shall relieve any defaulting Underwriter from liability, if any, to the Company, the Selling Shareholders or any non-defaulting Underwriter for damages occasioned by its default under this Agreement. The term "Underwriter" in this Agreement shall include any persons substituted for an Underwriter under this Section 10. 11. EFFECTIVE DATE OF AGREEMENT AND TERMINATION. (a) If the Registration Statement has not been declared effective prior to the date of this Agreement, this Agreement shall become effective at such time, after notification of the effectiveness of the Registration Statement has been released by the Commission, as the Representatives and the Company shall agree upon the public offering price and the purchase price of the Shares. If the public offering price and the purchase price of the Shares shall not have been determined prior to 5:00 p.m., New York time, on the fifth full business day after the Registration Statement has become effective, this Agreement shall thereupon terminate without liability on the part of the Company or the Selling Shareholders to the Underwriters (except as provided in Section 6 or Section 9 of this Agreement) or the Underwriters to the Company or the Selling Shareholders (except as set 35 forth in Section 9 of this Agreement). By giving notice before the time this Agreement becomes effective, the Representatives may prevent this Agreement from becoming effective without liability of any party to the other party, except that the Company shall remain obligated to pay costs and expenses to the extent provided in Section 6 and Section 9 of this Agreement. If the Registration Statement has been declared effective prior to the date of this Agreement, this Agreement shall become effective upon execution and delivery by the Representatives, the Company and the Attorneys. (b) This Agreement may be terminated by the Representatives in their absolute discretion by giving written notice to the Company at any time on or prior to the Closing Date or, with respect to the purchase of the Option Shares, on or prior to any later date on which the Option Shares are to be purchased, as the case may be, if prior to such time any of the following has occurred or, in the Representatives' reasonable opinion, is likely to occur: (i) after the respective dates as of which information is given in the Registration Statement and the Prospectus, any Consolidated Material Adverse Effect or development involving a prospective Consolidated Material Adverse Effect in or affecting particularly the business, properties, condition (financial or otherwise), results of operations or prospects of the Company and its direct and indirect subsidiaries, taken as a whole, whether or not arising in the ordinary course of business, occurs which would, in the Representatives' reasonable judgment, make the offering or the delivery of the Shares impracticable or inadvisable; or (ii) if there shall have been the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, or any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions, if the effect of such outbreak, calamity, crisis or change in economic or political conditions on the financial markets of the United States would, in the Representatives' reasonable judgment, make the offering or delivery of the Shares impracticable or inadvisable; or (iii) if there shall have been suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system; or (iv) if there shall have been the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority which in the Representatives' reasonable judgment has or may have a Consolidated Material Adverse Effect; or (v) if there shall have been the declaration of a banking moratorium by federal, New York or California state authorities; or (vi) if there shall have been the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the Representatives' reasonable judgment has a material adverse effect on the securities markets in the United States; or (vii) existing international monetary conditions shall have undergone a material adverse change which, in the Representatives reasonable judgment, makes the offering or delivery of the Shares impracticable or inadvisable. If this Agreement shall be terminated pursuant to this Section 11, there shall be no liability of the Company or the Selling Shareholders to the Underwriters (except pursuant to Section 6 and Section 9 of this Agreement) and no liability of the Underwriters to the 36 Company or the Selling Shareholders (except to the extent provided in Section 9 of this Agreement). 12. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing and, if to the Underwriters, shall be mailed, faxed or delivered to First Security Van Kasper , 10877 Wilshire Boulevard, Suite 1700, Los Angeles, California 90024, Attention: David Horwich (facsimile: (310) 443- 3400) with a copy to Troop Steuber Pasich Reddick & Tobey, LLP, 2029 Century Park East, 24th Floor, Los Angeles, CA, 90067-3010, Attention: Linda Michaelson, Esq. (facsimile: (310) 728-2316); and if to the Company or the Selling Shareholders, shall be mailed, faxed or delivered to 6709 Independence Avenue, Canoga Park, California 91303 (facsimile: (818) 592-6937) Attention: President, with a copy to Stradling Yocca Carlson & Rauth, 600 Newport Center Drive, Suite 1600, Newport Beach, California 92660-6441, Attention: Robert E. Rich, Esq. (facsimile: (929) 725-4100). All notices given by facsimile shall be promptly confirmed by letter. 13. PERSONS ENTITLED TO THE BENEFIT OF THIS AGREEMENT. This Agreement shall inure to the benefit of the Company, the Selling Shareholders and the several Underwriters and, with respect to the provisions of Section 6 and Section 9 of this Agreement, the several parties (in addition to the Company, the Selling Shareholders and the several Underwriters) indemnified under the provisions of Section 6 and Section 9, and their respective personal Representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement or any provision contained herein. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Shares from the several Underwriters. 14. GENERAL. Notwithstanding any provision of this Agreement to the contrary, the reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties, covenants and agreements in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof or by or on behalf of the Company or any Selling Shareholder or their respective directors or officers and (c) delivery and payment for the Shares under this Agreement; provided, however, that if this Agreement is terminated prior to the Closing Date, the provisions of Sections 4(f)-4(m) of this Agreement shall be of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which together shall constitute one and the same instrument, and may be delivered by facsimile transmission. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE STATE OF CALIFORNIA. 15. AUTHORITY OF THE REPRESENTATIVES. In connection with this Agreement, the Representatives will act for and on behalf of the several Underwriters, and any action taken under this Agreement by the Representatives, as Representatives of the several Underwriters, will be binding on all the Underwriters. 37 If the foregoing correctly sets forth your understanding, please so indicate by signing in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the Company, the Selling Shareholders and the several Underwriters. Very truly yours, QUALSTAR CORPORATION, INC. By:________________________________________ William J. Gervais President and Chief Executive Officer SELLING SHAREHOLDERS By:_______________________________________________ Attorney-in-Fact for the Selling Shareholders named in Schedule II hereto The foregoing Agreement is hereby confirmed and accepted as of the date first above written. On their own behalf and on behalf of each of the several Underwriters named in Schedule I hereto. FIRST SECURITY VAN KASPER NEEDHAM & COMPANY, INC. WEDBUSH MORGAN SECURITIES As Representatives of the Several Underwriters By: First Security Van Kasper By:________________________________ David H. Horwich Senior Vice President 38 SCHEDULE I UNDERWRITERS
Number of Firm Shares Underwriters to be Purchased: - ------------------------------------------- --------------------- First Security Van Kasper.................. Needham & Company, Inc..................... Wedbush Morgan Securities.................. Total....................................
39 SCHEDULE II
Number of Firm Shares Selling Shareholder to be Sold: - ------------------------------------------- ---------------------
40 EX-3.2 3 AMENDED AND RESTATED BYLAWS EXHIBIT 3.2 BYLAWS OF QUALSTAR CORPORATION a California corporation As Amended and Restated as of January 14, 2000 ARTICLE I Offices Section 1. Principal Executive Office. The principal executive office of -------------------------- the Corporation shall be located at such place as the Board of Directors may from time to time authorize. If the principal executive office is located outside this state, and the Corporation has one or more business offices in this state, the Board of Directors shall fix and designate a principal business office in the State of California. Section 2. Other Offices. Additional offices of the Corporation shall be ------------- located at such place or places, within or outside the State of California, as the Board of Directors may from time to time authorize. ARTICLE II Meetings of Shareholders Section 1. Place of Meetings. All annual or other meetings of ----------------- shareholders shall be held at the principal executive office of the Corporation, or at any other place within or without the State of California which may be designated from time to time by the Board of Directors. Section 2. Annual Meetings. Annual meetings of shareholders shall be held --------------- on such date and at such time as may be designated from time to time by the Board of Directors. At such meetings, directors shall be elected, reports of the affairs of the Corporation shall be considered, and any other business may be transacted which is within the powers of the shareholders. Written notice of each annual meeting shall be given to each shareholder entitled to vote, either personally or by mail or other means of written communication, charges prepaid, addressed to such shareholder at his address appearing on the books of the Corporation or given by him to the Corporation for the purpose of notice. If any notice or report addressed to the shareholder at the address of such shareholder appearing on the books of the Corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice or report to the shareholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available for the shareholder upon written demand of the shareholder at the principal executive office of the Corporation for a period of one year from the date of the giving of the notice or report to all other shareholders. If a shareholder gives no address, notice shall be deemed to have been given him if sent by mail or other means of written communication addressed to the place where the principal executive office of the Corporation is situated, or if published at least once in some newspaper of general circulation in the county in which said principal executive office is located. All such notices shall be given to each shareholder entitled thereto not less than ten (10) days nor more than sixty (60) days before each annual meeting. Any such notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by other means of written communication. An affidavit of mailing of any such notice in accordance with the foregoing provisions, executed by the secretary, assistant secretary or any transfer agent of the Corporation, shall be prima facie evidence of the giving of the notice. Such notices shall specify: (a) the place, the date, and the hour of such meeting; (b) those matters which the Board, at the time of the mailing of the notice, intends to present for action by the shareholders; (c) if directors are to be elected, the names of nominees intended at the time of the notice to be presented by management for election; (d) the general nature of a proposal, if any, to take action with respect to approval of (i) a contract or other transaction with an interested director, (ii) amendment of the Articles of Incorporation, (iii) a reorganization of the Corporation as defined in Section 181 of the General Corporation Law, (iv) voluntary dissolution of the Corporation, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any; and (e) such other matters, if any, as may be expressly required by statute. Section 3. Special Meetings. Special meetings of the shareholders, for ---------------- the purpose of taking any action permitted by the shareholders under the General Corporation Law and the Articles of Incorporation of this Corporation, may be called at any time by the chairman of the Board or the president, or by the Board of Directors, or by one or more shareholders holding not less than ten percent (10%) of the votes at the meeting. Upon request in writing that a special meeting of shareholders be called for any proper purpose, directed to the chairman of the Board, president, vice president or secretary by any person (other than the Board) entitled to call a special meeting of shareholders, the officer forthwith shall cause notice to be given to shareholders entitled to vote that a meeting will be held at a time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after receipt of the request. Except in special cases where other express provision is made by statute, notice of such special meetings shall be given in the same manner as for the annual meetings of shareholders. In addition to the matters required by items (a) and, if applicable, (c) of the preceding Section, notice of any special meeting shall specify the general nature of the business to be transacted, and no other business may be transacted at such meeting. Section 4. Quorum. The presence in person or by proxy of the persons ------ entitled to vote a majority of the voting shares at any meeting shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. 2 Section 5. Adjourned Meeting and Notice Thereof. Any shareholders' ------------------------------------ meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but in the absence of a quorum no other business may be transacted at such meeting, except as provided in Section 4 above. When any shareholders' meeting, either annual or special, is adjourned for forty-five days or more, or if after adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of an original meeting. Except as provided above, it shall not be necessary to give any notice of the time and place of the adjourned meeting or of the business to be transacted thereat, other than by announcement of the time and place of the adjourned meeting or of the business to be transacted thereat, at the meeting at which such adjournment is taken. Section 6. Nomination of Directors. Subject to the rights of holders of ----------------------- any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, dissolution or winding up of the Corporation, nominations for the election of directors shall be made by a nominating committee of the Board of Directors if then constituted pursuant to these Bylaws, or if no nominating committee has been constituted, by the Board of Directors. In addition, any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at an annual meeting of shareholders, but only if written notice of such shareholder's intent to make such nomination or nominations has been received by the secretary of the Corporation not less than sixty (60) nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting of shareholders. In the event that the date of the annual meeting of shareholders is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary, notice by the shareholder to be timely must be received by the secretary of the Corporation not earlier than the ninetieth (90th) day prior to such annual meeting and not later than the close of business on the later of (a) the sixtieth (60th) day prior to such annual meeting or (b) the tenth (10th) day following the day on which notice of the date of the annual meeting was mailed or public disclosure thereof was made by the Corporation, whichever first occurs. Each such notice by a shareholder shall set forth: (a) the name and address of the shareholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at a meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the shareholder or any person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such shareholder (an "Affiliate" of such shareholder) and each nominee and any other person or persons (naming such person or persons) relating to the nomination or nominations; (d) the class and number of shares of the Corporation that are beneficially owned by such shareholder and the person to be nominated as of the date of such shareholder's notice and by any other shareholders known by such shareholder to be supporting such nominees as of the date of such shareholder's notice; (e) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (f) the written consent of each nominee to serve as a director of the Corporation if so elected. The shareholder also shall comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder, with respect to the matters set forth in this Section 6. 3 In addition, in the event the Corporation calls a special meeting of shareholders for the purpose of electing one or more directors, any shareholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a special meeting only if written notice of such shareholder's intent to make such nomination or nominations, setting forth the information and complying with the form described in the immediately preceding paragraph, has been received by the secretary of the Corporation not earlier than the ninetieth (90th) day prior to such special meeting and not later than the close of business on the later of (i) the sixtieth (60th) day prior to such special meeting or (ii) the tenth (10th) day following the day on which notice of the date of the special meeting was mailed or public disclosure thereof was made by the Corporation, whichever comes first. The shareholder also shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 6. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 6. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by this Section 6, and if he or she should so determine, the defective nomination shall be disregarded. Section 7. Proposals of Shareholders. At any meeting of the shareholders, ------------------------- only such business shall be conducted as shall have been properly brought before such meeting. To be brought properly before an annual meeting of shareholders, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or the chairman of the meeting, or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, the shareholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a shareholder's notice must be received no less than sixty (60) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting of shareholders; provided, however, that in the event that the date of the annual meeting is advanced by more than thirty (30) days or delayed by more than sixty (60) days from such anniversary, notice by the shareholder, to be timely, must be received not earlier than the ninetieth (90th) day prior to such annual meeting of shareholders and not later than the close of business on the later of (a) the sixtieth (60th) day prior to such annual meeting or (b) the tenth (10th) day following the date on which notice of the date of the annual meeting was mailed or public disclosure thereof was made, whichever first occurs. Each such notice shall set forth as to each matter the shareholder proposes to bring before the annual meeting of shareholders: (a) a brief description of the business desired to be brought before the annual meeting of shareholders and the reasons for conducting such business at such meeting, (b) the name and address of the shareholder proposing such business, (c) the class, series, and number of shares of the Corporation that are beneficially owned by the shareholder, and (d) any material interest of the shareholder or any Affiliate of the shareholder in such business. The shareholder also shall comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 7. To be properly brought before a special meeting, business must be specified in the notice of meeting (or any supplement thereto) given in accordance with the provisions of Section 3 or Section 6 of this Article. No other business may be brought before a special meeting. 4 No business shall be conducted at any meeting of the shareholders except in accordance with the procedures set forth in this Section 7. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section 7, and if he or she should so determine, any such business not properly brought before the meeting shall not be transacted. Nothing herein shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or any successor provision. Section 8. Voting. Unless a record date for voting purposes be fixed as ------ provided in Section 1 of Article V of these bylaws, then, subject to the provisions of Sections 702 and 704, inclusive, of the Corporations Code of California (relating to voting of shares held by a fiduciary, in the name of a Corporation, or in joint ownership), only persons in whose names shares entitled to vote stand on the stock records of the Corporation at the close of business on the business day next preceding the day on which notice of the meeting is given or if such notice is waived, at the close of business on the business day next preceding the day on which the meeting of shareholders is held, shall be entitled to vote at such meeting, and such day shall be the record date for such meeting. Such vote may be via voice or by ballot; provided, however, that all elections for directors must be by ballot upon demand made by a shareholder at any election and before the voting begins. If a quorum is present, except with respect to election of directors, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by the General Corporation Law or the Articles of Incorporation. This Corporation eliminates cumulative voting with respect to the election of directors. If a quorum is present, the candidates receiving the highest number of affirmative votes of the shares represented at the meeting and entitled to be voted for them, up to the number of directors to be elected by such shares, shall be elected. The elimination of cumulative voting shall become effective only when the Corporation becomes a "listed corporation" within the meaning of Section 301.5 of the Corporations Code of California, and shall apply for so long as this Corporation is a listed corporation. If the Corporation ceases to be a listed corporation, the shareholders shall be entitled to cumulate their votes pursuant to Section 708 of the Corporations Code of California at any election of directors occurring while the Corporation is not a listed corporation. Section 9. Validation of Defectively Called or Noticed Meetings. The ---------------------------------------------------- transactions of any meeting of shareholders, either annual or special, however called and noticed, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, or who, though present, has, at the beginning of the meeting, properly objected to the transaction of any business because the meeting was not lawfully called or convened, or to particular matters of business legally required to be included in the notice, but not so included, signs a written waiver of notice, or a consent to the holding of such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 10. Action Without Meeting. Directors may be elected without a ---------------------- meeting by a consent in writing, setting forth the action so taken, signed by all of the persons who would be entitled to vote for the election of directors, provided that, without notice except as hereinafter set forth, a director may be elected at any time to fill a vacancy not filled by the directors by the written 5 consent of persons holding a majority of the outstanding shares entitled to vote for the election of directors. Any other action which, under any provision of the California General Corporation Law, may be taken at a meeting of the shareholders, may be taken without a meeting, and without notice except as hereinafter set forth, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares 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. Unless the consents of all shareholders entitled to vote have been solicited in writing, (a) Notice of any proposed shareholder approval of (i) a contract or other transaction with an interested director, (ii) indemnification of an agent of the Corporation as authorized by Section 15 of Article III of these bylaws, (iii) a reorganization of the Corporation as defined in Section 181 of the General Corporation Law, or (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, if any, without a meeting by less than unanimous written consent, shall be given at least ten (10) days before the consummation of the action authorized by such approval; and (b) Prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written consent to those shareholders entitled to vote who have not consented in writing. Such notices shall be given in the manner and shall be deemed to have been given as provided in Section 2 of Article II of these bylaws. Unless, as provided in Section 1 of Article V of these bylaws, the Board of Directors has fixed a record date for the determination of shareholders entitled to notice of and to give such written consent, the record date for such determination shall be the day on which the first written consent is given. All such written consents shall be filed with the secretary of the Corporation. Any shareholder giving a written consent, or the shareholder's proxyholders, or a transferee of the shares or a personal representative of the shareholder or their respective proxyholders, may revoke the consent by a writing received by the secretary of the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the secretary of the Corporation, but may not do so thereafter. Such revocation is effective upon its receipt by the secretary of the Corporation. Section 11. Proxies. Every person entitled to vote or execute consents ------- shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by such person or his duly authorized agent and filed with the secretary of the Corporation. Any proxy duly executed is not revoked and continues in full force and effect until (i) an instrument revoking it or a duly executed proxy bearing a later date is filed with the secretary of the Corporation prior to the vote pursuant thereto, (ii) the person executing the proxy attends the meeting and votes in person, or (iii) written notice of the death or incapacity of the maker of such proxy is received by the Corporation before the vote pursuant thereto is counted; provided that no such proxy shall be valid after the expiration of eleven (11) months from the date of its execution, unless the person executing it specifies therein the length of time for which such proxy is to continue in force. 6 Section 12. Inspectors of Election. In advance of any meeting of ---------------------- shareholders, the Board of Directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment thereof. If inspectors of election be not so appointed, the chairman of any such meeting may, and on the request of any shareholder or his proxy shall, make such appointment at the meeting. The number of inspectors shall be either one or three. If appointed at a meeting on the request of one or more shareholders or proxies, the majority of shares represented in person or by proxy shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may, and on the request of any shareholder or a shareholder's proxy shall, be filled by appointment by the Board of Directors in advance of the meeting, or at the meeting by the chairman of the meeting. The duties of such inspectors shall be as prescribed by Section 707 of the General Corporation Law and shall include determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining when the polls shall close; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. In the determination of the validity and effect of proxies, the dates contained on the forms of proxy shall presumptively determine the order of execution of the proxies, regardless of the postmark dates on the envelopes in which they are mailed. The inspectors of election shall perform their duties impartially, in good faith, to the best of their ability and as expeditiously as is practical. If there are three inspectors of election, the decision, act or certificate of a majority is effective in all respects as the decision, act or certificate of all. Any report or certificate made by the inspectors of election is prima facie evidence of the facts stated therein. ARTICLE III Directors Section 1. Powers. Subject to limitations of the Articles of ------ Incorporation and of the California General Corporation Law as to action to be authorized or approved by the shareholders, and subject to the duties of directors as prescribed by the bylaws, all corporate powers shall be exercised by or under the authority of, and the business and affairs of the Corporation shall be controlled by, the Board of Directors. Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the directors shall have the following powers, to wit: First - To select and remove all the officers, agents and employees of the ----- Corporation, prescribe such powers and duties for them as may not be inconsistent with law, with the Articles of Incorporation or the bylaws, fix their compensation and require from them security for faithful service. Second - To conduct, manage and control the affairs and business of the ------ Corporation, and to make such rules and regulations therefor not inconsistent with law, or with the Articles of Incorporation or the bylaws, as they may deem best. 7 Third - To change the principal executive office and principal office for ----- the transaction of the business of the Corporation from one location to another as provided in Article I, Section 1, hereof; to fix and locate from time to time one or more subsidiary offices of the Corporation within or without the State of California, as provided in Article I, Section 2, hereof; to designate any place within or without the State of California for the holding of any shareholders' meeting or meetings; and to adopt, make and use a corporate seal, and to prescribe the forms of certificates of stock, and to alter the form of such seal and of such certificates from time to time, as in their judgment they may deem best, provided such seal and such certificates shall at all times comply with the provisions of law. Fourth - To authorize the issue of shares of stock of the Corporation from ------ time to time, upon such terms as may be lawful. Fifth - To borrow money and incur indebtedness for the purposes of the ----- Corporation, and to cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations or other evidences of debt and securities therefor. Sixth - By resolution adopted by a majority of the authorized number of ----- directors, to designate an executive and other committees, each consisting of two or more directors, to serve at the pleasure of the Board, and to prescribe the manner in which proceedings of such committee shall be conducted. The Board may also designate, by resolution adopted by a majority of the authorized number of directors, one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. Unless the Board of Directors shall otherwise prescribe the manner of proceedings of any such committee, meetings of such committee may be regularly scheduled in advance and may be called at any time by any two members thereof; otherwise, the provisions of these bylaws with respect to notice and conduct of meetings of the Board shall govern. Any such committee, to the extent provided in a resolution of the Board, shall have all of the authority of the Board, except with respect to: (i) the approval of any action for which the General Corporation Law or the Articles of Incorporation also require shareholder approval; (ii) the filling of vacancies on the Board or in any committee; (iii) the fixing of compensation of the directors for serving on the Board or on any committee; (iv) the adoption, amendment or repeal of bylaws; (v) the amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable; (vi) any distribution to the shareholders, except at a rate or in a periodic amount or within a price range determined by the Board; and (vii) the appointment of other committees of the Board or the members thereof. 8 Section 2. Number and Qualification of Directors. The authorized number ------------------------------------- of directors shall be not less than four (4) nor more than seven (7). The exact number of authorized directors shall be six (6) until changed, within the limits specified above, by an amendment to this bylaw or by a resolution duly adopted by the Board of Directors or the shareholders. The limits specified above may be changed, or a definite number fixed without provision for a variable number, by a duly adopted amendment to the Articles of Incorporation or by an amendment to this bylaw adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that a proposal to reduce a fixed number or the minimum number of directors to a number less than five cannot be adopted if the votes cast against its adoption at a meeting, or the shares not consenting in the case of action by written consent, are equal to more than 16-2/3 percent of the outstanding shares entitled to vote. Section 3. Election and Term of Office. The directors shall be elected at --------------------------- each annual meeting of shareholders but, if any such annual meeting is not held or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held for that purpose. All directors shall hold office until their respective successors are elected, subject to the General Corporation Law and the provisions of these bylaws with respect to vacancies on the Board. Section 4. Vacancies. A vacancy in the Board of Directors shall be deemed --------- to exist in case of the (i) death of a director, (ii) resignation or removal of any director with or without cause, (iii) pursuant to Section 302 of the California Corporations Code if a director has been declared of unsound mind by order of court or convicted of a felony, (iv) if the authorized number of directors be increased, or (v) if the shareholders fail, at any annual or special meeting of shareholders at which any director or directors are elected, to elect the full authorized number of directors to be voted for at that meeting. Vacancies in the Board of Directors, except for a vacancy created by the removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual or a special meeting of the shareholders. A vacancy in the Board of Directors created by the removal of a director may only be filled by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of a majority of the outstanding shares. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent shall require the consent of holders of a majority of the outstanding shares entitled to vote. Any director may resign effective upon giving written notice to the chairman of the Board, the president, the secretary or the Board of Directors of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If the Board of Directors accepts the resignation of a director tendered to take effect at a future time, the Board or the shareholders shall have power to elect a successor to take office when the resignation is to become effective. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office. 9 Section 5. Place of Meeting. Regular meetings of the Board of Directors ---------------- shall be held at any place within or without the State which has been designated from time to time by resolution of the Board or by written consent of all members of the Board. In the absence of such designation, regular meetings shall be held at the principal executive office of the Corporation. Special meetings of the Board may be held either at a place so designated or at the principal executive office. Section 6. Organization Meeting. Immediately following each annual -------------------- meeting of shareholders, the Board of Directors shall hold a regular meeting at the place of said annual meeting or at such other place as shall be fixed by the Board of Directors, for the purpose of organization, election of officers, and the transaction of other business. Call and notice of such meetings are hereby dispensed with. Section 7. Other Regular Meetings. Other regular meetings of the Board of ---------------------- Directors shall be held without call as provided in a resolution adopted by the Board of Directors from time to time; provided, however, should said day fall upon a legal holiday, then said meeting shall be held at the same time on the next day thereafter ensuing which is a full business day. Notice of all such regular meetings of the Board of Directors is hereby dispensed with. Section 8. Special Meetings. Special meetings of the Board of Directors ---------------- for any purpose or purposes shall be called at any time by the chairman of the Board, the president, any vice president, the secretary or by any two directors. Written notice of the time and place of special meetings shall be delivered personally to each director or communicated to each director by telephone or by telegraph or mail, charges prepaid, addressed to him at his address as it is shown upon the records of the Corporation or, if it is not so shown on such records or is not readily ascertainable, at the place at which the meetings of the directors are regularly held. In case such notice is mailed, it shall be deposited in the United States mail in the place in which the principal executive office of the Corporation is located at least four days' prior to the time of holding the meeting. In case such notice is delivered, personally or by telephone or telegraph, as above provided, it shall be so delivered at least forty-eight hours prior to the time of the holding of the meeting. Such mailing, telegraphing or delivery, personally or by telephone, as above provided, shall be due, legal and personal notice to such director. Section 9. Action Without Meeting. Any action by the Board of Directors ---------------------- may be taken without a meeting if all members of the Board shall individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board and shall have the same force and effect as a unanimous vote of such directors. Section 10. Action at a Meeting: Quorum and Required Vote. Presence of a ---------------------------------------------- majority of the authorized number of directors at a meeting of the Board of Directors constitutes a quorum for the transaction of business, except as hereinafter provided. Members of the Board may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another. Participation in a meeting as permitted in the preceding sentence constitutes presence in person at such meeting. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors, unless a greater number, or the same number after disqualifying one or more directors from voting, is required by law, by the Articles of Incorporation, or by these bylaws. A meeting at which a quorum is initially present may continue to 10 transact business notwithstanding the withdrawal of directors, provided that any action taken is approved by at least a majority of the required quorum for such meeting. Section 11. Validation of Defectively Called or Noticed Meetings. The ---------------------------------------------------- transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum is present and if, either before or after the meeting, each of the directors not present or who, though present, has, prior to the meeting or at its commencement, protested the lack of proper notice to him, signs a written waiver of notice or a consent to holding such meeting or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 12. Adjournment. A quorum of the directors may adjourn any ----------- directors' meeting to meet again at a stated day and hour; provided, however, that in the absence of a quorum a majority of the directors present at any directors' meeting, either regular or special, may adjourn from time to time until the time fixed for the next regular meeting of the Board. Section 13. Notice of Adjournment. If the meeting is adjourned for more --------------------- than twenty-four hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors who were not present at the time of adjournment. Otherwise notice of the time and place of holding an adjourned meeting need not be given to absent directors if the time and place be fixed at the meeting adjourned. Section 14. Fees and Compensation. Directors and members of committees --------------------- may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board. Section 15. Indemnification of Agents of the Corporation; Purchase of --------------------------------------------------------- Liability Insurance. - ------------------- (a) For the purposes of this Section, "agent" means any person who is or was a director, officer, employee or other agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation; "executive officer" means any person who is or was a director or an officer serving a chief policy making function, or is or was serving at the request of the Corporation as a director or officer of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director or officer serving a chief policy making function of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another enterprise at the request of the corporation; "proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "expenses" includes, without limitation, attorneys' fees and any expenses of establishing a right to indemnification under subsection (d) or paragraph (3) of subsection (e) of this section. (b) This Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this Corporation) by 11 reason of the fact that such person is or was an officer or director of the Corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Corporation and, in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such person was unlawful. This Corporation may indemnify any person who was or is a party, or is threatened to be made a party, to any proceeding (other than an action by or in the right of this Corporation) by reason of the fact that such person is or was an agent of the Corporation by a majority vote of a quorum consisting of directors who are not a party to such proceeding, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding if such person acted in good faith and in a manner such person reasonably believed to be in the best interests of the Corporation and, in the case of a criminal proceeding, had no reason to believe the conduct of such person was unlawful. The termination of any proceeding by judgment, order, settlement, conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in the best interests of this Corporation or that the person had reasonable cause to believe that the person's conduct was unlawful. (c) This Corporation shall indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed action by or in the right of this Corporation to procure a judgment in its favor by reason of the fact that such person is or was an officer or director of this Corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such action if such person acted in good faith, in a manner such person believed to be in the best interests of this Corporation and its shareholders. No indemnification shall be made under subsection (b) and/or (c): (1) in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to this Corporation in the performance of such person's duty to this Corporation and its shareholders, unless and only to the extent that the court in which such proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for expenses and then only to the extent that the court shall determine; (2) Of amounts paid in settling or otherwise disposing of a pending action without court approval; or (3) Of expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. (d) To the extent that an officer, director or other agent of this Corporation has been successful on the merits in defense of any proceeding referred to in subsection (b) or (c) or in defense of any claim, issue or matter therein, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith. (e) Except as provided in subsection (d), any indemnification under this section shall be made by this Corporation only if authorized in the specific case, upon a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in subsection (b) or (c), by: 12 (1) A majority vote of a quorum consisting of directors who are not a party to such proceeding; (2) If such a quorum of directors is not obtainable, by independent legal counsel in a written opinion; (3) Approval or ratification by the affirmative vote of a majority of the shares of this Corporation entitled to vote represented at a duly held meeting at which a quorum is present or by the written consent of holders of a majority of the outstanding shares entitled to vote. For such purpose, the shares owned by the person to be indemnified shall not be considered outstanding or entitled to vote thereon; or (4) The court in which such proceeding is or was pending upon application made by this Corporation or the agent or the attorney or other person rendering services in connection with the defense, whether or not such application by the agent, attorney or other person is opposed by this Corporation. (f) Expenses incurred in defending any proceeding may be advanced by the Corporation prior to the final disposition of such proceeding upon receipt of an undertaking by or on behalf of the agent to repay such amount if it shall be determined ultimately that the agent is not entitled to be indemnified as authorized in this section. (g) The indemnification provided by this section shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent such additional rights to indemnification are authorized in the articles of this Corporation. The rights to indemnity hereunder shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors, and administrators of the person. Nothing contained in this section shall affect any right to indemnification to which persons other than such directors and officers may be entitled by contract or otherwise. (h) No indemnification or advance shall be made under this section, except as provided in subsection (d) or paragraph (3) of subsection (e), in any circumstance where it appears: (1) That it would be inconsistent with a provision of the articles, bylaws, a resolution of the shareholders or an agreement in effect at the time the accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. (i) This Corporation may purchase and maintain insurance on behalf of any agent of this Corporation against any liability asserted against or incurred by the agent in such capacity or arising out of the agent's status as such, whether or not this Corporation would have the power to indemnify the agent against such liability under the provisions of this section. The fact that this Corporation 13 owns all or a portion of the shares of the company issuing a policy of insurance shall not render this subsection inapplicable if either of the following conditions are satisfied: (1) If authorized in the Articles of Incorporation of this Corporation, any policy issued is limited to the extent provided by subdivision (d) of Section 204 of the California Corporations Code; or (2) (A) The company issuing the insurance policy is organized, licensed, and operated in a manner that complies with the insurance laws and regulations applicable to its jurisdiction of organization, (B) The company issuing the policy provides procedures for processing claims that do not permit that company to be subject to the direct control of the Corporation that purchased that policy, and (C) The policy issued provides for some manner of risk sharing between the issuer and purchaser of the policy, on one hand, and some unaffiliated person or persons, on the other, such as by providing for more than one unaffiliated owner of the company issuing the policy or by providing that a portion of the coverage furnished will be obtained from some unaffiliated insurer or re-insurer. (j) This Section 15 does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in such person's capacity as such, even though such person may also be an agent of the Corporation as defined in subsection (a) of this Section. This Corporation shall have power to indemnify such a trustee, investment manager or other fiduciary to the extent permitted by subdivision (f) of Section 207 of the California General Corporation Law. ARTICLE IV Officers Section 1. Officers. The officers of the Corporation shall be a -------- President, a Secretary and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board of Directors, a Chairman of the Board, a Chief Executive Officer, one or more Vice Presidents, one or more Assistant Secretaries, one or more assistant financial officers and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. Section 2. Election. The officers of the Corporation, except such -------- officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article, shall be chosen annually by the Board of Directors, and each shall hold his office at the pleasure of the Board or until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. Section 3. Subordinate Officers, Etc. The Board of Directors may appoint, -------------------------- and may empower the Chief Executive Officer or the President to appoint, such other officers as the business of the Corporation may require, each of whom shall hold office, for such period, have such authority 14 and perform such duties as are provided in the bylaws or as the Board of Directors may from time to time determine. Section 4. Removal and Resignation. Any officer may be removed, either ----------------------- with or without cause, by the Board of Directors, at any regular or special meeting thereof, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors (subject, in each case, to the rights, if any, of an officer under any contract of employment). Any officer may resign at any time by giving written notice to the Board of Directors, without prejudice, however, to the rights, if any, of the Corporation under any contract to which such officer is a party. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. Vacancies. A vacancy in any office because of death, --------- resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the bylaws for regular appointments to such office. Section 6. Chairman of the Board. The Chairman of the Board, if there --------------------- shall be such an officer, shall, if present, preside at all meetings of the Board of Directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the bylaws. Section 7. Chief Executive Officer. The Chief Executive Officer of the ----------------------- Corporation, if there shall be such an officer, shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business of the Corporation. He shall exercise the duties usually vested in the chief executive officer of a corporation and perform such other powers and duties as may be assigned to him from time to time by the Board of Directors or prescribed by the bylaws. In the absence of the Chairman of the Board, the Chief Executive Officer shall preside at meetings of the Board of Directors. Section 8. President. Subject to such supervisory powers, if any, as may --------- be given by the Board of Directors to the Chief Executive Officer, if there shall be such an officer, the President shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business of the Corporation. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the bylaws. In the absence of the Chairman of the Board and the Chief Executive Officer, the President shall preside at meetings of the Board of Directors. Section 9. Vice President. In the absence or disability of the President, -------------- the Vice Presidents in order of their rank as fixed by the Board of Directors or, if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors, the Chief Executive Officer, the President or the bylaws. 15 Section 10. Secretary. The Secretary shall record or cause to be --------- recorded, and shall keep or cause to be kept, at the principal executive office and such other place as the Board of Directors may order, a book of minutes of actions taken at all meetings of directors and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at shareholders' meetings, and a summary of the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the Corporation's transfer agent, a share register, or a duplicate share register, showing the names of the shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the Board of Directors required by the bylaws or by law to be given, and he shall keep the seal of the Corporation, if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the bylaws. Section 11. Chief Financial Officer. The Chief Financial Officer of the ----------------------- Corporation shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the Corporation. The Chief Financial Officer shall deposit all monies and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board of Directors. He shall make such disbursements of the funds of the Corporation as may be authorized by the Board of Directors, shall render to the Chief Executive Officer, the President and the directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the bylaws. Section 12. Officer Loans and Guarantees. If the Corporation has ---------------------------- outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the California General Corporation Law) on the date of approval by the Board of Directors, the Corporation may make loans of money or property to, or guarantee the obligation of, any officer of the Corporation or its parent or any subsidiary, whether or not the officer is a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties, upon the approval of the Board of Directors alone, by a vote sufficient without counting the vote of any interested director or directors, if the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the Corporation. ARTICLE V Miscellaneous Section 1. Record Date. The Board of Directors may fix a time in the ----------- future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to give consent to corporate action in writing without a meeting, to receive any report, to receive any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any change, conversion or exchange of shares. The record date so fixed shall be not more 16 than sixty (60) days nor less than ten (10) days prior to the date of any meeting, nor more than sixty (60) days prior to any other event for the purposes of which it is fixed. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at any such meeting, to give consent without a meeting, to receive any report, to receive a dividend, distribution or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date, except as otherwise provided in the Articles of Incorporation or bylaws. Section 2. Inspection of Corporate Records. The accounting books and ------------------------------- records, the record of shareholders, and minutes of proceedings of the shareholders and the Board and committees of the Board of this Corporation and any subsidiary of this Corporation shall be open to inspection upon the written demand on the Corporation of any shareholder or holder of a voting trust certificate at any reasonable time during usual business hours, for a purpose reasonably related to such holder's interests as a shareholder or as the holder of such voting trust certificate. Such inspection by a shareholder or holder of a voting trust certificate may be made in person or by agent or attorney, and the right of inspection includes the right to copy and make extracts. A shareholder or shareholders holding at least 5 percent in the aggregate of the outstanding voting shares of the Corporation or who hold at least 1 percent of such voting shares and have filed a Schedule 14B with the United States Securities and Exchange Commission relating to the election of directors of the Corporation shall have (in person, or by agent or attorney) the right to inspect and copy the record of shareholders' names and addresses and shareholdings during usual business hours upon five business days' prior written demand upon the Corporation and to obtain from the transfer agent for the Corporation, upon written demand and upon the tender of its usual charges, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which it has been compiled or as of a date specified by the shareholder subsequent to the date of demand. The list shall be made available on or before the later of five business days after the demand is received or the date specified therein as the date as of which the list is to be compiled. Every director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of the Corporation. Such inspection by a director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for -------------------- payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board of Directors. Section 4. Annual Report to Shareholders. The annual report to ----------------------------- shareholders referred to in Section 1501 of the California General Corporation Law is expressly waived so long as the Corporation has fewer than 100 shareholders, but nothing herein shall be interpreted as prohibiting the Board from issuing annual or other periodic reports to shareholders. A shareholder or shareholders holding at least five percent of the outstanding shares of any class of the Corporation may make a written request to the Corporation for an income statement of the Corporation for the three-month, six-month or nine-month period of the current fiscal year ended 17 more than 30 days prior to the date of the request and a balance sheet of the Corporation as of the end of such period and, in addition, if no annual report for the last fiscal year has been sent to shareholders, the annual report for the last fiscal year. The Corporation shall use its best efforts to deliver on the statement to the person making the request within 30 days thereafter. A copy of any such statements shall be kept on file in the principal executive office of the Corporation for 12 months and they shall be exhibited at all reasonable times to any shareholder demanding an examination of them or a copy shall be mailed to such shareholder. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report thereon, if any, of any independent accountants engaged by the Corporation or the certificate of an authorized officer of the Corporation that such financial statements were prepared without audit from the books and records of the Corporation. Section 5. Contracts, Etc., How Executed. The Board of Directors, except ----------------------------- as in the bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and, unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount. Section 6. Certificate for Shares. Every holder of shares in the ---------------------- Corporation shall be entitled to have a certificate signed in the name of the Corporation by the Chairman or vice chairman of the Board or the president or vice president and by the chief financial officer or an assistant financial officer or the secretary or any assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any of the signatures on the certificate may be facsimile, provided that in such event at least one signature, including that of either officer or the Corporation's registrar or transfer agent, if any, shall be manually signed. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. Any such certificate shall also contain such legend or other statement as may be required by Section 418 of the General Corporation Law, the Corporate Securities Law of 1968, the federal securities laws, and any agreement between the Corporation and the issuer thereof. Certificates for shares may be issued prior to full payment under such restrictions and for such purposes as the Board of Directors or the bylaws may provide; provided, however, that any such certificate so issued prior to full payment shall state on the face thereof the amount remaining unpaid and the terms of payment thereof. No new certificate for shares shall be issued in lieu of an old certificate unless the latter is surrendered and cancelled at the same time; provided, however, that a new certificate will be issued without the surrender and cancellation of the old certificate if (1) the old certificate is lost, apparently destroyed or wrongfully taken; (2) the request for the issuance of the new certificate is made within a reasonable time after the owner of the old certificate has notice of its loss, destruction or theft; (3) the request for the issuance of a new certificate is made prior to the receipt of notice by the Corporation 18 that the old certificate has been acquired by a bona fide purchaser; (4) the owner of the old certificate files a sufficient indemnity bond with or provides other adequate security to the Corporation; and (5) the owner satisfies any other reasonable requirements imposed by the Corporation. In the event of the issuance of a new certificate, the rights and liabilities of the Corporation, and of the holders of the old and new certificates, shall be governed by the provisions of Section 8104 and 8405 of the California Uniform Commercial Code. Section 7. Representation of Shares of Other Corporations. The president ---------------------------------------------- or any vice president and the secretary or any assistant secretary of this Corporation are authorized to vote, represent and exercise on behalf of this Corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this Corporation. The authority herein granted to said officers to vote or represent on behalf of this Corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers. Section 8. Inspection of Bylaws. The Corporation shall keep in its -------------------- principal executive office in California, or, if its principal executive office is not in California, then at its principal business office in California (or otherwise provide upon written request of any shareholder) the original or a copy of the bylaws as amended or otherwise altered to date, certified by the secretary, which shall be open to inspection by the shareholders at all reasonable times during office hours. Section 9. Construction and Definitions. Unless the context otherwise ---------------------------- requires, the general provisions, rules of construction and definitions contained in the California General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of the foregoing, the masculine gender includes the feminine and neuter, the singular number includes the plural and the plural number includes the singular, and the term "person" includes a corporation as well as a natural person. ARTICLE VI Amendments Section 1. Power of Shareholders. New bylaws may be adopted or these --------------------- bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, or by the written assent of shareholders entitled to vote such shares, except as otherwise provided by law or by the Articles of Incorporation. Section 2. Power of Directors. Subject to the right of shareholders as ------------------ provided in Section 1 of this Article VI to adopt, amend or repeal bylaws, bylaws may be adopted, amended or repealed by the Board of Directors; provided, however, after issuance of shares, a bylaw specifying or changing a fixed number of directors or the maximum or minimum number or changing from a fixed to a variable board or vice versa may only be adopted by approval of the outstanding shares as provided herein. 19 EX-10.2 4 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.2 INDEMNIFICATION AGREEMENT THIS INDEMNIFICATION AGREEMENT (the "Agreement") is made as of __________, 2000, by and between QUALSTAR CORPORATION, a California corporation (the "Company") and ______________________________ ("Indemnitee"). RECITALS A. Indemnitee is now serving, or is considering serving, the Company, or a subsidiary of the Company, in the capacity of an executive officer and/or a member of the Board of Directors. B. The parties hereto acknowledge that Indemnitee's service to the Company in the capacity indicated above may expose Indemnitee to claims, lawsuits and risk of liability; C. The parties further recognize that the compensation or fees payable to Indemnitee for the performance of such services may not be commensurate with the potential risk involved and that the Company is now, or may in the future be, unable adequately to provide insurance at a reasonable cost to cover such risk; and D. Accordingly, as an inducement to Indemnitee to serve or to continue to serve the Company in the capacity indicated above, the Company and Indemnitee desire to enter into this Agreement pursuant to which the Company undertakes to indemnify Indemnitee against such risks, to the extent that it is permitted to do so under the laws of the State of California. NOW, THEREFORE, the Company and Indemnitee hereby agree as follows: 1. DEFINITIONS 1.1 Agent. The term "Agent" shall mean any person who is or was a director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation. 1.2 Derivative Action. The term "Derivative Action" shall mean a Proceeding brought by or in the right of the Company to procure a judgment in favor of the Company. 1.3 Expenses. The term "Expenses" includes without limitation attorneys' fees and all other costs, costs of investigation and cost of legal actions, claims or proceedings and appeals therefrom, and costs of attachment or similar bonds. 1.4 Proceedings. The Term "Proceeding" shall mean any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative, and whether arising out of a related actions of Indemnitee prior to or after the date of this Agreement. 2. INDEMNIFICATION 2.1 Direct Actions. Subject to the provisions of Section 2.3 hereof, if Indemnitee was or is a party or is threatened to be made a party of any Proceeding, other than a Derivative Action, by reason of the fact that Indemnitee is or was an Agent of the Company, the Company shall indemnify and hold harmless Indemnitee against Expenses, judgments, fines, settlements and other amounts and reasonably incurred in connection with such Proceeding. 2.2 Derivative Actions. Subject to the provisions of Section 2.3 hereof, if Indemnitee was or is a party is threatened to be made a party to any threatened, pending or completed Derivative Action by reason of the fact that Indemnitee is or was an Agent of the Company, the Company shall indemnify and hold harmless Indemnitee against Expenses, settlements and other amounts actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action; provided, however, no indemnification shall be made under this Section 2.2 for any of the following: (a) In respect to any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company in the performance of his or her duty to the Company and its shareholders, unless and only to the extent that the court in which such Proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses and then only to the extent that such court shall determine; (b) Amounts paid in settling or otherwise disposing of a pending action without court approval; and (c) Expenses incurred in defending a pending action which is settled or otherwise disposed of without court approval. 2.3 Limitation on Indemnification. Notwithstanding the provisions of Section 2.1 and 2.2 above, Indemnitee shall not be entitled to indemnification as provided therein under any of the following circumstances: (a) For acts or omissions that involve intentional misconduct or a knowing and culpable violation of law; (b) For acts or omissions that Indemnitee believes to be contrary to the best interest of the Company or its shareholders or that involve the absence of good faith on the part of Indemnitee; (c) For any transaction from which Indemnitee derived an improper personal benefit; (d) For acts or omissions that show a reckless disregard for Indemnitee's duty to the Company or its shareholders in circumstances in which Indemnitee was aware, or should have been aware, in the ordinary course of performing Indemnitee's duties, of a risk of serious injury to the Company or its shareholders; (e) For acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of Indemnitee's duty to the Company or its shareholders; (f) Involving liability of a director under Section 310 or Section 316 of the California Corporations Code; 2 (g) For any act or omission occurring prior to the date that the Company amended its Articles of Incorporation to incorporate provisions permitted by Section 204(a)(11) of the California Corporations Code; provided, however, nothing herein shall be construed to limit the Company's ability to indemnify Indemnitee pursuant to the Company's Articles of Incorporation, Bylaws or the law of the State of California as in effect prior to such amendment; (h) Under other circumstances, if any, in which indemnity is expressly prohibited by Section 317 of the California Corporation Code; and (i) Under circumstances where it is determined by a final judgment or other final adjudication that such indemnity is in violation of law. 3. ADVANCEMENT OF EXPENSES 3.1 The Company shall pay for and on behalf of Indemnitee all Expenses which Indemnitee actually and reasonably incurs in defending any Proceeding prior to the final disposition of such Proceeding; provided that, in connection with each such Proceeding, Indemnitee shall provide the Company with an undertaking, in form and substance reasonably satisfactory to the Company, to repay any such advances if it shall be ultimately determined that Indemnitee is not entitled to be indemnified hereunder or as otherwise authorized under California law. The Company shall perform its obligation under this Section 3.1 until such time as it may be determined that Indemnitee is not entitled to Indemnification by virtue of one or more of the exclusions set forth in Section 2.2 or Section 2.3 hereof. 3.2 Notwithstanding the provisions of Section 3.1 or any other provision of this Agreement, no advance shall be made by the Company if a determination is reasonably and promptly made by the Board of Directors by a majority vote of a quorum of disinterested directors, or (if such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs) by independent legal counsel, that, based upon the facts known to the Board or counsel at the time such determination is made, (i) Indemnitee acted in bad faith or deliberately breached his or her duty to the Company or its shareholders, and (ii) as a result of such actions by Indemnitee it is more likely than not that it will ultimately be determined that Indemnitee is not entitled to indemnification under the terms of this Agreement. 4. AGREEMENT - NOT EXCLUSIVE This Agreement and the indemnification provided herein is not exclusive of and shall not diminish any other rights to which Indemnitee may be entitled under any provision of the Articles of Incorporation or Bylaws of the Company, any other indemnification agreement or insurance provided by persons or entities other than the Company, or under applicable law. Notwithstanding the foregoing, the Company shall not be liable to Indemnitee to make any payment with respect to any claim made against Indemnitee for which payment is actually made to Indemnitee under a valid and collectible insurance policy, except with respect to any excess beyond the amount of the payment under such policy. 5. AGREEMENT TO BE LIBERALLY CONSTRUED The purpose of this Agreement is to induce Indemnitee either to serve the Company, or to continue to serve the Company, in the capacity indicated in Recital A, above. The Company 3 acknowledges that, but for this Agreement and the expectation by Indemnitee that the Company will perform each of its obligations hereunder, Indemnitee may not consent to serve or to continue to serve the Company in such capacity. Therefore, it is the intention of the Company and Indemnitee that this Agreement be liberally construed so as to achieve its purpose of protecting Indemnitee to the maximum extent permitted under California law. In the case of any amendments to or change in California law permitting the Company to indemnity Indemnitee in those situations where indemnification is currently prohibited by law as outlined in Sections 2.2 and 2.3, it is in the intention of the parties hereto that the Company provide Indemnitee such broader or greater rights of indemnification than permitted to the Company prior to such amendment or change and that this Agreement be construed accordingly. The Company agrees that it will not do or fail to do any act which would or might prevent or hinder the performance by the Company of its obligations under this Agreement. 6. NOTICE AND OTHER INDEMNIFICATION PROCEDURES 6.1 Notice to Company. Promptly after receipt by Indemnitee of notice of the commencement of or the threat of commencement of any Proceeding, Indemnitee shall, if Indemnitee believes that Indemnification with respect thereto may be sought from the Company under this Agreement, notify the Company in writing of the commencement or threat of commencement thereof (but the failure to so notify the Company shall not relieve the Company from any liability which it may have under this Agreement, except to the extent that the Company has been prejudiced in any material respect by such failure). 6.2 Choice of Counsel; Conduct of Defense. In the event the Company shall be obligated to pay the Expenses of any Proceeding against Indemnitee, the Company, unless otherwise provided below, shall be entitled to participate therein, or, upon the delivery to Indemnitee of written notice of its election to do so, to assume the defense of such Proceeding, with counsel approved by Indemnitee (which approval shall not be unreasonably withheld). After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding, provided that; (i) Indemnitee shall have the right to employ his or her own counsel in any Proceeding at Indemnitee's expense; and (ii) if (a) the employment of counsel by Indemnitee has been previously authorized by the Company, (b) Indemnitee shall have reasonably concluded that there may be conflict of interest between the Company and the Indemnitee in the conduct of any such defense, or (c) the Company shall not, within reasonable period of time, in fact have employed counsel to assume the defense of such Proceeding, Indemnitee may employ its own counsel (subject the Company's approval thereof which shall not unreasonably withheld) and the fees and expenses of such counsel shall be paid by the Company. Notwithstanding any the provisions of this Agreement, the Company shall not liable for any settlement of any claim or action effected without its written consent shall not be unreasonably withheld. 7. SEVERABILITY This Agreement is intended to comply in all respects with California law. In the event any provision of this Agreement is finally determined by a court of competent jurisdiction to require the Company to do or fail to do any act in violation of applicable law, such provision shall be limited or modified in its application to the extent necessary to avoid a violation of law, and as so 4 limited or modified such provision and the balance of this Agreement shall be enforceable in accordance with their terms. 8. GOVERNING LAW This Agreement shall be governed by and construed in accordance with California law. 9. SUCCESSORS AND ASSIGNS This terms of this Agreement shall be binding upon and inure to the benefit of the parties hereto and the successors and the assigns of the Company and Indemnitee's estate, heir and personal representatives. 10. MODIFICATION AND WAIVER No supplement modifications or amendment of this Agreement shall be binding unless executed in writing by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any provisions hereof nor shall such waiver constitute a continuing waiver. 11. ATTORNEYS' FEES In the event that any action is instituted by Indemnitee under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorney's fees, incurred by Indemnitee with respect to such action, unless as part of such action the court determines that each of the material assertions made by Indemnitee as a part of such action was not made in good faith or was frivolous. In the event any action is instituted by or in the name of the Company under this Agreement or to enforce or interpret any term of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorney's fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action was made in bad faith or was frivolous. 5 IN WITNESS WHEREOF, the parties have executed this Indemnification Agreement as of the date first above written. QUALSTAR CORPORATION By: --------------------------------------------- Name (Print) ------------------------------------ Title: ------------------------------------------ "INDEMNITEE" By: _____________________________________________ 6 EX-23.2 5 CONSENT OF ERNST & YOUNG LLP EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated August 4, 1999 in the Registration Statement (Form S-1) and related Prospectus of Qualstar Corporation for the registration of shares of its common stock. Our audit also included the financial statement schedule of Qualstar Corporation listed in Item 16(b). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Ernst & Young LLP Woodland Hills, California February 1, 2000 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL STATEMENTS OF INCOME AND BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR 6-MOS JUN-30-1999 JUN-30-2000 JUL-01-1998 JUL-01-1999 JUN-30-1999 DEC-31-1999 2,134 3,765 0 0 5,335 5,467 420 470 4,651 5,279 12,474 15,094 1,990 2,082 1,554 1,666 12,950 16,744 1,269 1,393 0 0 0 0 431 431 280 352 10,929 14,527 12,950 16,744 29,698 22,522 29,698 22,522 19,058 13,980 4,133 2,573 0 0 0 0 0 0 6,548 5,993 2,562 2,403 3,986 3,590 0 0 0 0 0 0 3,986 3,590 1.62 1.42 1.14 1.01
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