Exhibit 13.1
FINANCIAL HIGHLIGHTS
2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended March 31,
Net revenues $ 811,161 $ 692,441 $ 1,007,293 $ 933,868 $ 659,347
Income (loss) from operations 213,077 (33,490) 224,832 161,228 126,135
Net income (loss) 170,789 (13,293) 172,877 107,561 103,375
Net income (loss) per share:
Basic 1.65 (0.12) 1.53 0.99 0.99
Diluted 1.56 (0.12) 1.46 0.93 0.95
As of March 31,
Working capital 668,360 857,651 850,610 693,629 334,989
Total assets 1,346,284 1,173,068 1,275,229 1,043,494 646,486
Long-term liabilities, net of current
portion 244,200 230,000 230,000 230,850 4,250
Stockholders' equity 874,858 790,702 904,745 688,325 511,945
PRO FORMA FINANCIAL HIGHLIGHTS
The following pro forma results of operations of Adaptec, Inc. (the
"Company") do not represent the Company's results of operations or earnings
per share information in accordance with accounting principles generally
accepted in the United States. Pro forma results of operations have been
presented, in addition to the actual results, to provide period to period
comparability of the Company's underlying operating results excluding the
following: amortization of goodwill and other intangibles, write-off of
acquired in-process technology, restructuring charges, other charges, gain on
the sale of Peripheral Technology Solutions ("PTS"), revenue and expenses
related to PTS, gain on the sale of land, gain on the receipt of warrants to
purchase JNI Corporation (formerly known as Jaycor Networks, Inc.) common
stock and Chaparral Network Storage, Inc. (formerly known as Chaparral
Technologies, Inc.) common stock, accrued guaranteed royalty payments to
Agilent Technologies, Inc. included in cost of revenues, the related income
tax effect associated with each of these items, and the cumulative effect of
a change in accounting principle. The information presented below is not
necessarily indicative of future operating results and should be read in
conjunction with the historical financial statements and related notes.
Years Ended March 31, 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenues $ 811,161 $ 601,639 $ 757,507 $ 688,488 $ 530,885
Income from operations 271,059 101,229 181,111 200,399 156,308
Net income 210,016 89,015 151,205 158,214 126,121
Net income per share:
Basic 2.03 0.81 1.34 1.46 1.21
Diluted 1.91 0.79 1.28 1.38 1.16
1
RESULTS OF OPERATIONS
The following table sets forth the items in the Consolidated Statements of
Operations as a percentage of net revenues:
YEARS ENDED MARCH 31, 2000 1999 1998
- --------------------- ---- ---- ----
Net revenues 100% 100% 100%
Cost of revenues 35 41 39
Patent settlement fee 1 -- --
- --------------------------------------------------------------------------------------------------------
Gross margin 64 59 61
- --------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 13 21 17
Selling, marketing and administrative 20 25 20
Amortization of goodwill and other intangibles 3 1 1
Write-off of acquired in-process technology 2 7 --
Restructuring charges -- 6 --
Other charges -- 4 1
- --------------------------------------------------------------------------------------------------------
Total operating expenses 38 64 39
- --------------------------------------------------------------------------------------------------------
Income (loss) from operations 26 (5) 22
Interest and other income 6 5 3
Interest expense (1) (2) (1)
Gain on sale of PTS -- 5 --
- --------------------------------------------------------------------------------------------------------
Income from operations before provision for income taxes and
cumulative effect of a change in accounting principle 31 3 24
Provision for income taxes 10 5 6
- --------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a change in
accounting principle 21 (2) 18
Cumulative effect of a change in accounting principle, net
of tax benefit -- -- (1)
- --------------------------------------------------------------------------------------------------------
Net income (loss) 21% (2)% 17%
===== ====== =====
2
ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED MARCH 31,
---------------------
2000 1999 1998
----------- ---------- -------------
Net revenues $ 811,161 $ 692,441 $ 1,007,293
Cost of revenues 282,672 284,503 391,100
Patent settlement fee 9,599 -- --
------------ ------------- -------------
Gross profit 518,890 407,938 616,193
------------ ------------- -------------
Operating expenses:
Research and development 103,076 146,172 169,022
Selling, marketing, and administrative 159,354 170,666 207,936
Amortization of goodwill and other intangibles 23,251 10,320 7,688
Write-off of acquired in-process technology 20,132 45,482 --
Restructuring charges -- 39,931 --
Other charges -- 28,857 6,715
------------ ------------- -------------
Total operating expenses 305,813 441,428 391,361
------------ ------------- -------------
Income (loss) from operations 213,077 (33,490) 224,832
Interest and other income 47,080 35,059 32,899
Interest expense (11,577) (12,103) (12,402)
Gain on sale of PTS -- 31,476 --
------------ ------------- -------------
Income from operations before provision for
income taxes and cumulative effect of a
change in accounting principle 248,580 20,942 245,329
Provision for income taxes 77,791 34,235 63,452
------------ ------------- -------------
Income (loss) before cumulative effect of a
change in accounting principle 170,789 (13,293) 181,877
Cumulative effect of a change in accounting
principle, net of tax benefit -- -- (9,000)
------------ ------------- -------------
Net income (loss) $ 170,789 $ (13,293) $ 172,877
============ ============== =============
NET INCOME (LOSS) PER SHARE:
Basic
Income (loss) before cumulative effect of a .
change in accounting principle $ 1.65 $ (0.12) $ 1.61
Cumulative effect of a change in accounting
principle -- -- (0.08)
--------- ----------- -------------
Net income (loss) $ 1.65 $ (0.12) $ 1.53
========= ========== =============
Diluted
Income (loss) before cumulative effect of a
change in accounting principle $ 1.56 $ (0.12) $ 1.54
Cumulative effect of a change in accounting
principle -- -- (0.08)
--------- ----------- -------------
Net income (loss) $ 1.56 $ (0.12) $ 1.46
========= ========== =============
Shares used in computing net income (loss) per
share:
Basic 103,427 110,127 113,172
Diluted 109,711 110,127 118,432
See accompanying notes.
3
ADAPTEC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
AS OF MARCH 31,
---------------
2000 1999
----------- -------------
Current assets:
Cash and cash equivalents $ 180,519 $ 317,580
Marketable securities 482,172 426,332
Accounts receivable, net of allowance for doubtful
accounts of $1,282 in 2000 and $1,895 in 1999 90,165 67,158
Inventories 68,378 50,838
Deferred income taxes 29,134 61,345
Prepaid expenses 20,385 11,312
Other current assets 24,833 75,452
------------ -------------
Total current assets 895,586 1,010,017
Property and equipment, net 135,222 126,734
Goodwill and other intangibles 275,108 2,238
Other long-term assets 40,368 34,079
------------ -------------
$ 1,346,284 $ 1,173,068
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,009 $ 39,487
Accrued liabilities 193,217 112,879
----------- ------------
Total current liabilities 227,226 152,366
----------- ------------
4 3/4% Convertible Subordinated Notes 229,800 230,000
Other long-term liability 14,400 --
Commitments and contingencies (Note 16)
Stockholders' equity:
Preferred stock; $0.001 par value
Authorized shares, 1,000; Series A shares, 250 designated;
outstanding shares, none -- --
Common stock; $0.001 par value
Authorized shares, 400,000; outstanding shares, 102,699 in
2000 and 105,507 in 1999 103 106
Additional paid-in capital 58,535 194,521
Deferred stock-based compensation (2,444) --
Accumulated other comprehensive income 51,800 --
Retained earnings 766,864 596,075
------------ -------------
Total stockholders' equity 874,858 790,702
----------- ------------
$ 1,346,284 $ 1,173,068
============ =============
See accompanying notes.
4
ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED MARCH 31,
---------------------
2000 1999 1998
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 170,789 $ (13,293) $ 172,877
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of a change in accounting principle, -- -- 9,000
net of tax benefit
Write-off of acquired in-process technology 20,132 45,482 --
Non-cash charges associated with restructuring and other charges -- 22,920 6,715
Gain on sale of PTS -- (31,476) --
Gain on sale of land (3,513) -- --
Gain on receipt of warrants (11,360) -- --
Depreciation and amortization 56,469 50,166 42,896
Provision for doubtful accounts 1,185 1,258 4,000
Deferred income taxes (2,321) (14,866) (14,497)
Income tax benefit of employees' stock transactions 28,266 18,157 12,390
Changes in assets and liabilities:
Accounts receivable (18,747) 68,060 (17,173)
Inventories (10,663) 16,836 (18,113)
Other assets 19,039 18,996 42,917
Accounts payable (8,449) (10,753) (4,353)
Other liabilities 38,088 36,193 8,428
----------- ---------- -----------
Net Cash Provided by Operating Activities 278,915 207,680 245,087
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of certain net assets in connection with acquisitions,
net of cash acquired (194,984) (34,126) --
Purchases of property and equipment (15,456) (30,347) (97,699)
Net proceeds from the sale of PTS -- 75,999 --
Net proceeds from the sale of property and equipment 18,518 -- --
Purchases of marketable securities (1,075,512) (816,262) (922,177)
Sales of marketable securities 759,079 403,358 369,039
Maturities of marketable securities 358,313 456,771 313,305
Purchases of minority investments (4,429) -- (8,560)
----------- ---------- -----------
Net Cash Provided by (Used for) Investing Activities (154,471) 55,393 (346,092)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 114,126 33,098 38,921
Net proceeds from sales/purchases of derivative financial
instruments 7,391 -- --
Repurchases of common stock (377,518) (200,224) (7,768)
Principal payments on debt (5,504) (5,550) (21,040)
----------- ---------- -----------
Net Cash Provided by (Used for) Financing Activities (261,505) (172,676) 10,113
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents (137,061) 90,397 (90,892)
Cash and Cash Equivalents at Beginning of Year 317,580 227,183 318,075
----------- ----------- -----------
Cash and Cash Equivalents at End of Year $ 180,519 $ 317,580 $ 227,183
=========== =========== ===========
See accompanying notes.
5
ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED OTHER
------------------ PAID-IN STOCK-BASED COMPREHENSIVE RETAINED
SHARES AMOUNT CAPITAL COMPENSATION INCOME EARNINGS TOTAL
------- ------ ---------- ------------ ------ --------- ----------
BALANCE, MARCH 31, 1997 111,540 $ 112 $ 251,722 $ -- $ -- $ 436,491 $ 688,325
Net income -- -- -- -- -- 172,877 172,877
Sale of common stock under employee
purchase and option plans 2,791 3 38,918 -- -- -- 38,921
Income tax benefit of employees' stock
transactions -- -- 12,390 -- -- -- 12,390
Repurchases of common stock (350) (1) (7,767) -- -- -- (7,768)
-------- ------- ----------- ------------ ---------- ---------- ----------
BALANCE, MARCH 31, 1998 113,981 114 295,263 -- -- 609,368 904,745
Net loss -- -- -- -- -- (13,293) (13,293)
Sale of common stock under employee
purchase and option plans 3,250 3 33,095 -- -- -- 33,098
Income tax benefit of employees' stock
transactions -- -- 18,157 -- -- -- 18,157
Stock-based compensation -- -- 13,878 -- -- -- 13,878
Issuance of common stock in
connection with acquisition 1,207 2 34,339 -- -- -- 34,341
Repurchases of common stock (12,931) (13) (200,211) -- -- -- (200,224)
-------- ------- ----------- ------------- ---------- --------- ----------
BALANCE, MARCH 31, 1999 105,507 106 194,521 -- -- 596,075 790,702
Components of comprehensive income:
Net income -- -- -- -- -- 170,789 170,789
Change in unrealized gain on
available-for-sale investments -- -- -- -- 51,800 -- 51,800
-------
Total comprehensive income 222,589
-------
Sale of common stock under employee
purchase and option plans 8,238 8 114,118 -- -- -- 114,126
Income tax benefit of employees' stock
transactions -- -- 28,266 -- -- -- 28,266
Deferred stock-based compensation -- -- 2,593 (2,593) -- -- --
Amortization of deferred stock-based
compensation -- -- -- 149 -- -- 149
Issuance of common stock in
connection with acquisitions 392 1 67,138 -- -- -- 67,139
Issuance of warrants to Agilent
Technologies, Inc. -- -- 37,100 -- -- -- 37,100
Net premiums from sales/purchases of
derivative financial instruments -- -- 11,240 -- -- -- 11,240
Conversion of 4 3/4% Subordinated
Convertible Notes 4 -- 200 -- -- -- 200
Repurchases of common stock (11,442) (12) (396,641) -- -- -- (396,653)
------- ------ ---------- ------------ --------- --------- ----------
BALANCE, MARCH 31, 2000 102,699 $ 103 $ 58,535 $ (2,444) $ 51,800 $ 766,864 $ 874,858
======= ====== ========== ============ ========= ========= ==========
See accompanying notes.
6
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Adaptec,
Inc. (the "Company") and all of its wholly-owned subsidiaries after
elimination of intercompany transactions and balances. The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
During fiscal 2000, the Company purchased Wild File, Inc. ("Wild File"),
Distributed Processing Technology, Corp. ("DPT"), and CeQuadrat GmbH
("CeQuadrat"). These acquisitions were accounted for under the purchase method.
Accordingly, the results of operations of these companies and the estimated fair
value of assets acquired and liabilities assumed were included in the Company's
consolidated financial statements as of the respective purchase dates through
the end of the period. There were no significant differences between the
accounting policies of the Company and these acquired companies (Note 8).
In March 1998, the Company was reincorporated in the State of Delaware. The
accompanying consolidated financial statements have been retroactively restated
to give effect to the reincorporation.
Certain items previously reported in specific financial statement captions
have been reclassified to conform with current presentation.
FOREIGN CURRENCY TRANSLATION
For foreign subsidiaries whose functional currency is the local currency,
the Company translates assets and liabilities to U.S. dollars using year end
exchange rates and translates revenues and expenses using average exchange rates
during the year. Exchange gains and losses arising from translation of foreign
entity financial statements have not been material to the Company's operating
results in the periods presented.
For foreign subsidiaries whose functional currency is the U.S. dollar,
certain assets and liabilities are remeasured at the year end or historical
rates as appropriate. Revenues and expenses are remeasured at the average rates
during the year. Currency transaction gains and losses are recognized in current
operations and have not been material to the Company's operating results in the
periods presented.
DERIVATIVE FINANCIAL INSTRUMENTS
As a means of enhancing the execution of the Company's board-approved
stock repurchase programs, the Company enters into certain equity contracts
from time to time with independent third parties. The Company does not hold
or issue equity instruments for trading or speculative purposes. Premiums
received upon the sale of equity instruments and premiums paid upon the
purchase of equity instruments are recorded in additional paid-in capital.
The settlement terms of the equity instruments include physical settlement,
cash settlement or net-share settlement at the option of the Company and do
not result in an asset or liability on the Company's Consolidated Balance
Sheets. Additionally, subsequent changes in the fair value of the equity
instruments are not recognized (Note 14).
7
The Company enters into foreign currency contracts from time to time in
order to reduce the impact of certain foreign currency fluctuations. Certain
firmly committed transactions denominated in foreign currencies are occasionally
hedged with forward exchange contracts. Gains and losses related to hedges of
firmly committed transactions are deferred and recognized as income when the
hedged transaction occurs and have been less than $1.0 million for all periods
presented. The Company does not hold or issue foreign exchange contracts for
trading or speculative purposes. The amounts potentially subject to credit risk
relating to forward exchange contracts, arising from the possible inability of
counterparties to meet the terms of their contracts, are generally limited to
the amounts, if any, by which the counterparties' obligations exceed the
obligations of the Company.
The Company controls credit and market risk associated with derivative
instruments it holds by monitoring its position and quality of its
counterparties, consisting primarily of major financial institutions. There were
no forward exchange contracts outstanding as of March 31, 2000 and 1999.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation in accordance with
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees", and complies with the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation". Under APB No. 25, compensation expense is
recognized based on the difference, if any, on the measurement date between
the fair value of the Company's common stock and the amount an employee must
pay to acquire the common stock. The compensation expense is recognized over
the periods the employee performs the related services, generally the vesting
period of four years. The Company's policy is to grant options with an
exercise price equal to the quoted market price of the Company's common stock
on the grant date. Accordingly, no compensation expense has been recognized
in the Company's Consolidated Statements of Operations, except as described
in Note 14 relating to restructuring charges, other charges and acquisitions.
The Company accounts for equity instruments issued to non-employees in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services", which requires that such equity instruments are recorded at their
fair value on the measurement date, which is typically the date of grant. The
Company has provided additional pro forma disclosures as required under SFAS
No. 123 in Note 14.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including accounts
receivable, notes payable and accounts payable, the carrying amounts
approximate fair market value due to their short maturities. The estimated
fair value of the Company's 4 3/4% Convertible Subordinated Notes was $214.1
million and $190.4 million as of March 31, 2000 and 1999, respectively, and
was based on quoted market prices.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid investments with original
maturities of three months or less at the date of purchase. Marketable
securities are classified as available-for-sale and are reported at fair
market value with unrealized gains and losses, net of income tax, recorded in
"Accumulated other comprehensive income" as a separate component of
stockholders' equity on the Consolidated Balance Sheets until realized. Gains
and losses on securities sold are determined based on the average cost method
and are included in "Interest and other income" in the Consolidated
Statements of Operations. Unrealized losses that are other
8
than temporary are recognized in net income. The Company does not hold its
securities for trading or speculative purposes.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents,
marketable securities and trade accounts receivable. The Company invests in
marketable securities including municipal bonds, corporate bonds, government
securities, all of which are of high investment grade. Additionally, the
Company has investments in corporate equity securities, specifically, JNI
Corporation ("JNI", formerly known as Jaycor Networks, Inc.), BroadLogic,
Inc. ("BroadLogic"), Chaparral Network Storage, Inc. ("Chaparral", formerly
known as Chaparral Technologies, Inc.) and Alacritech, Inc. ("Alacritech")
(Notes 8 and 9). Cash, cash equivalents and marketable securities are
maintained with high-quality institutions. The Company, by policy, limits the
amount of credit exposure through diversification and management regularly
monitors the composition of its investment portfolio for compliance with the
Company's investment policies.
The Company sells its products to original equipment manufacturers ("OEMs")
and distributors throughout the world. Sales to customers are predominantly
denominated in U.S. dollars and, as a result, the Company believes its foreign
currency risk is minimal. The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts based upon
the expected collectibility of all accounts receivable. During fiscal 1998, the
Company increased its allowance for bad debt due to adverse business conditions
in the disk drive market. Otherwise, the Company has historically not
experienced significant losses from its accounts receivable.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated or amortized
using the straight-line method over the estimated useful lives of the assets.
The Company capitalizes substantially all costs related to the purchase and
implementation of software projects used for internal business operations,
excluding business process reengineering costs as defined by EITF No. 97-13,
"Accounting for Costs Incurred in Connection with a Consulting Contract or an
Internal Project That Combines Process Reengineering and Information
Technology Transformation." Capitalized internal-use software costs primarily
include licenses fees, consulting fees and any associated direct labor and
are amortized over the estimated useful life of the project, typically a
three to five year period. In fiscal 1997 and 1998, the Company implemented
Enterprise Resource Planning ("ERP") software. Subsequently, costs related to
the purchase and implementation of software projects has been immaterial to
the Company's financial position.
GOODWILL AND OTHER INTANGIBLES
Amortization expense totaling $24.5 million, $11.5 million and $8.9
million was included in the Company's Consolidated Statements of Operations
during fiscal 2000, 1999 and 1998, respectively. Of the total amortization
expense, $23.3 million, $10.3 million and $7.7 million were included in
operating expenses during fiscal 2000, 1999 and 1998, respectively, and $1.2
million was included in cost of revenues in each of fiscal 2000, 1999 and
1998, respectively. During fiscal 1999, the Company wrote off unamortized
goodwill of $0.6 million and an intangible asset of $1.2 million associated
with restructuring activities (Notes 8 and 10), and relieved unamortized
goodwill of $22.5 million and an intangible asset of $1.7 million associated
with the sale of the Peripheral Technology Solutions ("PTS") business lines
(Note 9). Goodwill and other intangible assets are evaluated periodically for
potential impairment based on the future estimated cash flows of the
9
acquired assets and technology. During fiscal 1998, the Company wrote off
$3.2 million of goodwill due to identified impairments (Note 11). No
impairments have been identified or recorded in fiscal 2000 and 1999.
OTHER LONG-TERM ASSETS
The Company's other long-term assets include minority investments, patent
license fee due to a third party and advance payments to Taiwan Semiconductor
Manufacturing Co., Ltd. ("TSMC"). Minority investments are evaluated
periodically for potential impairment based on the future estimated cash
flows of the investments. The patent license fee represents a license fee for
the use of certain of the third party's patents through June 30, 2004 (Note
16). The Company classifies only the patent license fee that will be
amortized within one year as a current asset and the remaining patent license
fee is classified in "Other long-term assets". The advance payments to TSMC
were made in exchange for guaranteed wafer fabrication capacity through
December 31, 2002 (Note 6). A portion of the advance payments is offset
against purchases from TSMC during each period. The Company classifies only
those payments expected to be converted into inventory within one year as
current assets and the remaining payments are classified as "Other long-term
assets." The patent license fee and TSMC balances are evaluated periodically
for potential impairment based on future production requirements. No
impairments have been identified or recorded in any period presented.
REVENUE RECOGNITION
The Company recognizes revenue from hardware product sales upon satisfaction
of its contractual obligations, which is generally at the time of shipment.
The Company's software revenue recognition policy is in accordance with
the AICPA Statement of Position No. 97-2, "Software Revenue Recognition". The
Company sells its software products through two channels: OEMs and
distributors. For software product sales to distributors, revenue is
recognized upon product shipment to the distributors provided that all fees
are fixed or determinable, evidence of an arrangement exists and
collectibility is probable. For software product sales to OEMs, revenue is
recognized upon product shipment and based on royalty reports from the OEMs
provided that all fees are fixed and determinable, evidence of an arrangement
exists and collectibility is probable. Costs related to post-contract support
obligations, which primarily include telephone support for certain products,
are accrued and have been insignificant to date.
The Company's distributor arrangements provide distributors with certain
product rotation rights. Additionally, the Company permits its distributors to
return products in certain circumstances, generally during periods of product
transition. The Company establishes allowances for expected product returns in
accordance with SFAS No. 48, "Revenue Recognition When Right of Return Exists".
These allowances are recorded as direct reductions of revenue and accounts
receivable.
PRODUCT DEVELOPMENT COSTS
The Company's policy is to capitalize internal software development costs
incurred after technological feasibility has been demonstrated, which is
determined to be the time a working model has been completed. Such internal
software development costs have not been material to date.
COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". SFAS No. 130 requires components of comprehensive income
to be reported in the financial
10
statements or notes thereto. The adoption does not impact net income. The
Company's comprehensive income consists of net income and the unrealized gain
on the available-for-sale securities, net of income taxes, primarily related
to the Company's investment in JNI common stock (Note 9).
Accumulated other comprehensive income presented in the accompanying
Consolidated Balance Sheets and Consolidated Statements of Stockholders'
Equity represents the accumulated net unrealized gain on the
available-for-sale securities, net of income taxes. The realization of these
gains is dependent on the market value of the securities, which is subject to
fluctuation, and the Company's ability to sell the securities under its
current limitations. There can be no assurance if and when these gains will
be realized.
CHANGE IN ACCOUNTING POLICY FOR BUSINESS PROCESS REENGINEERING COSTS
On November 20, 1997, the EITF of the Financial Accounting Standards Board
issued EITF No. 97-13, "Accounting for Costs Incurred in Connection with a
Consulting Contract that Combines Business Process Reengineering and Information
Technology Transformation." EITF No. 97-13 requires that business process
reengineering costs incurred in connection with an overall information
technology transformation project be expensed as incurred. The transition
provisions of EITF No. 97-13 require that companies that had previously
capitalized such business process reengineering costs charge off any unamortized
amounts as a cumulative effect of a change in accounting principle. In fiscal
1998, the cumulative effect of the change to the Company was to decrease net
income by $9.0 million (net of tax benefit of $3.0 million).
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and requires recognition of all derivatives as assets or
liabilities and measurement of those instruments at fair value. In June 1999,
the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective Date of
FASB Statement No. 133," which deferred the required date of adoption of SFAS
No. 133 for one year, to fiscal years beginning after June 15, 2000. The Company
will adopt this statement in its first quarter of fiscal 2002, and is in the
process of determining the impact that adoption will have on its consolidated
financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements. The impact of SAB No. 101 was not material to the Company's
operating results.
In March 2000, the EITF of the Financial Accounting Standards Board
issued EITF No. 00-7, "Application of EITF Issue No. 96-13, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock, to Equity Derivative Transactions That Contain Certain
Provisions That Require Cash Settlement If Certain Events Occur." EITF No.
96-13 established the accounting standards for equity derivative contracts
indexed to and potentially settled in a company's own stock. It did not
address embedded settlement features which are contingent on events which are
unlikely to occur. EITF No. 00-7 addresses embedded settlement features and
states that contracts which could require cash payment cannot be accounted
for as equity of the issuer. EITF No. 00-7 is effective for new contracts
entered into on or after March 17, 2000. For contracts executed prior to
March 17, 2000, EITF No. 00-7 takes effect on December 31, 2000. The Company
is currently assessing the impact of EITF No. 00-7 on its consolidated
financial statements.
In March 2000, the Financial Accounting Standards Board issued Interpretation
No. 44 ("FIN No. 44") "Accounting for Certain Transactions involving Stock
Compensation," an interpretation of APB No. 25. FIN No.
11
44 clarifies the application of APB No. 25 for (a) the definition of employee
for purposes of applying APB No. 25, (b) the criteria for determining whether
a plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards in
a business combination. FIN No. 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998,
or January 12, 2000. The Company believes the impact of FIN No. 44 will not
have a material effect on its financial position or results of operations.
NOTE 2. MARKETABLE SECURITIES
The Company's portfolio of marketable securities as of March 31, 2000,
was as follows:
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
---- ---- ---- -----
(IN THOUSANDS)
Debt securities:
Municipal bonds $ 71,699 $ 139 $ (249) $ 71,589
Corporate bonds 219,213 153 (1,338) 218,028
U.S. government securities 122,412 11 (1,318) 121,105
----------- ----------- ------------ -----------
Total debt securities 413,324 303 (2,905) 410,722
Equity securities (Note 9) 11,388 88,983 -- 100,371
----------- ----------- ----------- -----------
Total available-for-sale securities 424,712 89,286 (2,905) 511,093
Less amounts classified as cash
equivalents 28,872 49 -- 28,921
----------- ----------- ----------- -----------
$ 395,840 $ 89,237 $ (2,905) $ 482,172
=========== =========== ============ ===========
The gross realized gains and losses on the sales of marketable securities
were immaterial in fiscal 2000, 1999 and 1998.
The amortized cost and estimated fair value of investments in debt
securities as of March 31, 2000, by contractual maturity, were as follows:
ESTIMATED
FAIR
COST VALUE
---- -----
(IN THOUSANDS)
Mature in one year or less $ 175,673 $ 175,200
Mature after one year through three years 237,651 235,522
------------ ------------
$ 413,324 $ 410,722
============ ============
At March 31, 1999, the gross unrealized gains and losses on securities
were immaterial. The Company's investments in marketable securities as of
March 31, 1999, were as follows:
COST
--------------
(IN THOUSANDS)
Municipal bonds $ 151,448
Corporate bonds 125,878
U.S. government securities 338,687
----------------
Total available-for-sale securities 616,013
Less amounts classified as cash equivalents 189,681
----------------
$ 426,332
================
12
NOTE 3. BALANCE SHEET DETAIL
INVENTORIES
2000 1999
---- ----
(IN THOUSANDS)
Raw materials $ 21,806 $ 16,354
Work-in-process 11,685 8,202
Finished goods 34,887 26,282
---------- -----------
$ 68,378 $ 50,838
========== ===========
PROPERTY AND EQUIPMENT
LIFE 2000 1999
----------- ---------- -----------
(IN THOUSANDS)
Land -- $ 17,004 $ 13,240
Buildings and improvements 5 - 40 years 71,768 51,706
Machinery and equipment 3 - 5 years 75,892 86,591
Furniture and fixtures 3 - 7 years 70,151 67,771
Leasehold improvements Life of lease 3,962 3,300
Construction in progress -- 3,125 1,070
----------- -----------
241,902 223,678
Accumulated depreciation and amortization (106,680) (96,944)
------------ -----------
$ 135,222 $ 126,734
=========== ===========
OTHER LONG-TERM ASSETS
2000 1999
------------ -----------
(IN THOUSANDS)
TSMC advance payments (Note 6) $ 16,800 $ 21,148
Patent license fee (Note 16) 6,067 --
Minority investments 11,358 6,629
Other 6,143 6,302
------------ -----------
$ 40,368 $ 34,079
============ ===========
ACCRUED LIABILITIES
2000 1999
------------- -------------
(IN THOUSANDS)
Tax related $ 100,689 $ 65,754
Accrued compensation and related taxes 25,430 22,137
Stock repurchase related (Note 14) 19,135 1,163
Acquisition related 19,097 491
Sales and marketing related 13,477 7,708
Other 15,389 15,626
------------- -------------
$ 193,217 $ 112,879
============= =============
NOTE 4. LINES OF CREDIT
In March 1999, the Company obtained an unsecured $60.0 million revolving
line of credit which expired in March 2000. In March 2000, the Company amended
the line of credit to extend the term through March 2001 and to increase the
maximum borrowing capacity to $80.0 million. No borrowings were outstanding
under the line of credit as of March 31, 2000. The interest rate and commitment
fee are based on a pricing matrix, which correlates with the Company's credit
rating and market interest rates. Under the arrangement, the Company is
13
required to maintain certain financial ratios among other restrictive
covenants. The Company was in compliance with all such covenants as of March
31, 2000.
In December 1999, the Company assumed a $10.0 million revolving line of
credit, of which $5.5 million was outstanding, in conjunction with the purchase
of DPT (Note 8). The line of credit was paid in full in December 1999 and the
Company terminated this line of credit in January 2000.
In May 1998, the Company assumed a $6.8 million unsecured revolving line of
credit, of which $4.7 million was outstanding, in conjunction with the purchase
of Ridge Technologies, Inc. ("Ridge") (Note 8). In August 1998, the Company paid
in full and terminated this line of credit.
NOTE 5. LONG-TERM DEBT
In February 1997, the Company issued $230.0 million of 4 3/4% Convertible
Subordinated Notes due on February 1, 2004. The Company received net proceeds of
$223.9 million. The notes provide for semi-annual interest payments each
February 1 and August 1, commencing on August 1, 1997. The holders of the notes
are entitled to convert the notes into common stock at a conversion price of
$51.66 per share through February 1, 2004. The notes are redeemable, in whole or
in part, at the option of the Company, at any time at declining premiums to par.
Debt issuance costs are amortized ratably over the term of the notes. During
fiscal 2000, a noteholder converted $0.2 million of 4 3/4% Convertible
Subordinated Notes into 3,871 shares of the Company's common stock.
In June 1992, the Company entered into a $17.0 million term loan agreement
bearing interest at 7.65%, with principal and interest payable in quarterly
installments of $850,000. In the first quarter of fiscal 1999, the Company paid
the remaining outstanding principal and interest due on the loan.
NOTE 6. TAIWAN SEMICONDUCTOR MANUFACTURING AGREEMENTS
In each of fiscal years 1996 through 1998, the Company entered into
agreements with TSMC, including Option I, Option II and Option III
Agreements, which provide the Company with guaranteed capacity for wafer
fabrication in exchange for advance payments by the Company. The Company
records the prepayments as either "Prepaid expenses" or "Other long-term
assets" based upon the amount expected to be utilized in the next year. As
wafers are received from TSMC, the prepayments are capitalized into
inventory. The Company utilized $8.4 million and $18.2 million of the
prepayments in fiscal 2000 and 1999, respectively, which were capitalized
into inventory. The advance payments expected to be realized in the next year
of $8.4 million are classified in "Prepaid expenses". The remaining advance
payments or $16.8 million are classified in "Other long-term assets" as of
March 31, 2000, and are expected to be realized by the Company during the
term of the agreements.
In fiscal 1998, the Company entered into the Option III Agreement, which
provided the Company with increased wafer fabrication capacity in return for
advance payments totaling $35.3 million. The Company signed a non-interest
bearing promissory note for the $35.3 million, which was originally due in
two equal installments of approximately $17.6 million and $17.7 million in
January 1998 and June 1998, respectively. The first installment was paid in
January 1998. In the first quarter of fiscal 1999, the Company and TSMC
mutually agreed to extend, indefinitely, the second installment originally
due in June 1998. In December 1998, the Company and TSMC mutually agreed to
terminate the Option III Agreement, including the second installment of the
related promissory note. The Company's decision to terminate the agreement
was based on analyses that anticipated manufacturing requirements would not
fully utilize the prepaid capacity. TSMC agreed to refund the Company the
$17.6 million previously paid, in four equal quarterly installments beginning
in December 1998. The Company reversed the $35.3 million of payments
classified in "Other long-term assets" as well as the $17.7 million of
long-term debt, and recorded a
14
$17.6 million receivable due from TSMC, which was classified in "Other
current assets". At no time did the Company determine that the prepaid
balance was impaired.
In January 1999, in response to declining demand for its products, the
Company and TSMC amended the Option I and Option II Agreements to extend the
term of the agreements by two years through December 31, 2002. Additionally,
TSMC agreed to refund the Company $5.4 million of advanced payments, payable in
four equal quarterly installments beginning in January 1999. No other terms or
conditions were amended. The amount due from TSMC was also reclassified from
"Other long-term assets" to "Other current assets".
In June 2000, the Company and TSMC amended the Option II Agreement. In
accordance with the amendment, the Company paid TSMC an additional $20
million in advance payments to secure guaranteed capacity for wafer
fabrication through December 31, 2004. No other terms or conditions were
amended (unaudited).
There can be no assurance that the Company will be able to satisfy its
future wafer needs from current or alternative manufacturing sources. This could
result in possible loss of sales or reduced margins.
NOTE 7. STATEMENTS OF OPERATIONS
Other charges include (Note 11):
2000 1999 1998
---------- ---------- ---------
(IN THOUSANDS)
Acquisition-related charges $ -- $ 21,463 $ --
Asset impairment charges -- 3,989 6,715
Other charges -- 3,405 --
---------- ---------- ---------
$ -- $ 28,857 $ 6,715
========== ========== =========
Interest and other income include:
2000 1999 1998
---------- ---------- ---------
(IN THOUSANDS)
Interest income $ 32,207 $ 33,459 $ 32,899
Gain on sale of land (Note 12) 3,513 1,600 --
Gain on warrants received (Note 9) 11,360 -- --
---------- ---------- ---------
$ 47,080 $ 35,059 $ 32,899
========== ========== =========
NOTE 8. BUSINESS COMBINATIONS AND RELATED PARTY TRANSACTIONS
WILD FILE: In March 2000, the Company purchased Wild File, a supplier of
continuous backup and system recovery software. In consideration, the Company
paid $13.2 million in cash, issued 392,000 shares of the Company's common
stock valued at $17.1 million and assumed stock options valued at $0.8
million. The options assumed were valued using the Black-Scholes valuation
model. Due to restrictions placed on the disposal of certain shares, $2.6
million of the common stock was accounted for as "Deferred stock-based
compensation", a contra equity account on the Consolidated Balance Sheet as
of March 31, 2000 (Note 14). The deferred stock-based compensation was not
included in the purchase price. As part of the purchase agreement, $4.4
million of the purchase price was held back for unknown liabilities that may
have existed as of the acquisition date. The holdback was funded to an escrow
account and therefore does not represent cash or a liability of the Company
as of March 31, 2000. The holdback will be paid for such unknown liabilities
or to the seller within one year from the acquisition date and was included
as part of the purchase price. Additionally, the Company incurred $0.4
million in professional fees, including legal, valuation and accounting fees,
related to the acquisition, which were included as part of the purchase price
of the transaction.
The Company accounted for the acquisition of Wild File using the purchase
method of accounting and the impact of the acquisition was not material to
the Company's consolidated financial results of operations as of the
acquisition date. The allocation of the
15
Company's purchase price to the tangible and identifiable intangible assets
acquired and liabilities assumed is summarized below. The allocation was
based on an independent appraisal and estimate of fair value.
(IN THOUSANDS)
Net tangible assets $ 6,770
In-process technology 377
Goodwill and other intangible assets:
Goodwill 13,348
Patents 5,260
Covenant not to compete 1,650
Acquired employees 887
Trade name 526
Purchased technology 118
-------------
21,789
-------------
Net assets acquired $ 28,936
=============
The net tangible assets acquired were comprised primarily of cash and
receivables offset by accrued liabilities. The acquired in-process technology
was written off in the fourth quarter of fiscal 2000. The estimated weighted
average useful life of the goodwill and other intangible assets, created as a
result of the acquisition of Wild File, is approximately three years.
DPT: In December 1999, the Company purchased DPT, a supplier of
high-performance storage solutions, including RAID controllers and storage
subsystems, for $185.2 million in cash and assumed stock options valued at $51.8
million using the Black-Scholes valuation model. As part of the purchase
agreement, $18.5 million of the purchase price was held back for unknown
liabilities that may have existed as of the acquisition date. The holdback
remains outstanding and was included in "Accrued liabilities" in the
Consolidated Balance Sheet as of March 31, 2000. The holdback will be paid for
such unknown liabilities or to the seller within 12 months from the acquisition
date and was included as part of the purchase price. Additionally, the Company
incurred $1.1 million in professional fees, including legal, valuation and
accounting fees, related to the acquisition, which were included as part of the
purchase price of the transaction.
The Company accounted for the acquisition of DPT using the purchase
method of accounting. The allocation of the Company's purchase price to the
tangible and identifiable intangible assets acquired and liabilities assumed
is summarized below. The allocation was based on an independent appraisal and
estimate of fair value.
(IN THOUSANDS)
Net tangible assets $ 4,090
In-process technology 16,739
Goodwill and other intangible assets:
Goodwill 147,997
Purchased technology 38,621
Covenant not to compete 9,332
Distributed network 9,292
Acquired employees 6,832
OEM relationships 5,190
-------------
217,264
-------------
Net assets acquired $ 238,093
=============
16
The net tangible assets acquired were comprised primarily of inventory,
property and equipment and receivables offset by accrued liabilities, including
amounts due under a line of credit (Note 4). The acquired in-process technology
was written off in the third quarter of fiscal 2000. The estimated weighted
average useful life of the goodwill and other intangible assets, created as a
result of the acquisition of DPT, is approximately four years.
If the Company had acquired DPT at the beginning of the periods presented,
the Company's unaudited pro forma net revenues, net income (loss) and net income
(loss) per share would have been as follows (in thousands, except per share
amounts):
Year Ended Year Ended
March 31, 2000 March 31, 1999
-------------- --------------
Net revenues $840,173 $719,850
Net income (loss) $144,989 ($74,978)
Net income (loss) per share:
Basic $ 1.40 $ (0.68)
Diluted $ 1.32 $ (0.68)
The Company rents one of its facilities in Florida at "arms-length"
prices from a former stockholder of DPT, who is also a relative of a former
officer and stockholder of DPT. This former officer and stockholder of DPT is
also a former officer of the Company. The Company paid $27,000 for rent
expense to the related party from the acquisition date through March 31, 2000.
CEQUADRAT: In July 1999, the Company purchased CeQuadrat, a developer of
CD-R software products, for $24.0 million in cash. As part of the purchase
agreement, $4.8 million of the purchase price was held back for unknown
liabilities that may have existed as of the acquisition date. In the third
quarter of fiscal 2000, the Company paid the holdback to an escrow account,
therefore the amount does not represent cash or a liability of the Company as of
March 31, 2000. The holdback will be paid for such unknown liabilities or to the
seller within 12 months from the acquisition date and was included as part of
the purchase price. Additionally, the Company incurred $0.3 million in
professional fees, including legal, valuation and accounting fees, related to
the acquisition, which were included as part of the purchase price of the
transaction.
The Company accounted for the acquisition of CeQuadrat using the purchase
method of accounting and, excluding the write-off of acquired in-process
technology, the impact of the acquisition was not material to the Company's
consolidated financial results of operations as of the acquisition date. The
allocation of the Company's purchase price to the tangible and identifiable
intangible assets acquired and liabilities assumed is summarized below. The
allocation was based on an independent appraisal and estimate of fair value.
(IN THOUSANDS)
Net tangible assets $ 123
In-process technology 3,016
Goodwill and other intangible assets:
Goodwill 10,341
Covenant not to compete 4,360
Purchased technology 3,140
OEM relationships 1,186
Acquired employees 1,173
Trade name 953
-------------
21,153
-------------
Net assets acquired $ 24,292
=============
The net tangible assets acquired were comprised primarily of cash and
receivables offset by accrued liabilities. The acquired in-process technology
was written off in the second quarter of fiscal 2000. The
17
estimated weighted average useful life of the goodwill and other intangible
assets, created as a result of the acquisition of CeQuadrat, is approximately
three years.
RIDGE: During fiscal 1998, the Company invested an aggregate $5.0 million
in Series A Preferred Stock, representing a then 19.9% interest in Ridge. In
conjunction with this investment, Grant Saviers, former Chairman and CEO of
the Company, became a director of Ridge. In December 1997, the Company wrote
down its minority investment by $3.5 million to $1.5 million based on an
identified impairment (Note 11). In February 1998, the Company guaranteed a
$6.8 million line of credit on behalf of Ridge in exchange for a warrant to
purchase up to 200,000 shares of Ridge common stock. During fiscal 1998, the
Company incurred $0.9 million in research and development expenditures
related to consulting services provided by Ridge. In May 1998, the Company
purchased Ridge for 1,241,538 shares of the Company's common stock valued at
$21.2 million and assumed stock options valued at $13.1 million. The options
assumed were valued using the Black-Scholes valuation model. Additionally,
the Company incurred $0.8 million in professional fees, including finance,
accounting, legal and appraisal fees, related to the acquisition, which were
included as part of the purchase price of the transaction. In-process
technology was valued at $39.4 million and was written off in the first
quarter of fiscal 1999. In August 1998, the Company exited the storage
subsystems business line (Note 10), abandoned the in-process technology
projects (these projects remained incomplete from the date of acquisition
through abandonment) and wrote off the remaining unamortized goodwill of $0.6
million and an intangible asset of $1.2 million associated with Ridge. The
intangible asset related to workforce in place.
ADI: In April 1998, the Company purchased read channel and preamplifier
ASIC technologies ("ASIC technologies") from Analog Devices, Inc. ("ADI") for
$34.4 million in cash. The ASIC technologies purchased from ADI were to be
incorporated into the mainstream removable PTS business line upon completion.
Grant Saviers, former Chairman and CEO of the Company, is a director of ADI.
The Company incurred $0.4 million in professional fees, including finance,
accounting, legal and appraisal fees, related to the acquisition, which were
included as part of the purchase price of the transaction. The in-process
technology was valued at $6.1 million and was written off in the first
quarter of fiscal 1999. In January 1999, the Company sold the mainstream
removable PTS business line (Note 9), including the in-process technologies
purchased from ADI (these projects remained incomplete from the date of
acquisition through their disposition) and relieved the remaining unamortized
goodwill of $18.3 million and an intangible asset of $1.7 million associated
with the ASIC technologies purchased from ADI. The intangible asset related
to the covenant not to compete.
ALACRITECH: During fiscal 1998, the Company purchased $1.0 million in
preferred stock, and entered into a development and license agreement with
Alacritech, a venture-stage company whose founder and CEO, Larry Boucher, is
also a founder and Chairman of the Board of Directors of the Company. During
fiscal 1999, the Company and Alacritech agreed to terminate the development and
license agreement. Two other directors of the Company are also directors of
Alacritech.
NOTE 9. BUSINESS DIVESTITURES AND RELATED PARTY TRANSACTIONS
JNI: In November 1998, the Company entered into a definitive agreement
with JNI whereby the Company agreed to contribute certain fibre channel
technology, products and property and equipment to JNI related to the fibre
channel business line. As consideration for the assets received, JNI issued
to the Company 1,132,895 shares of JNI Series A Convertible Preferred Stock,
which represented a then 6.2% ownership, and three warrants to purchase up to
2,436,551 shares of JNI Series A Convertible Preferred Stock for an aggregate
price of $300. (The share amounts contained in this fiscal 2000 Annual Report
reflect a 70% reverse stock split effected by JNI in October 1999). If the
warrants were fully exercised, the added shares would have represented a then
additional 11.1% ownership of JNI by the Company. Exercisability of the
warrants was contingent upon JNI attaining certain milestones such as net
revenue levels from products based on the acquired technology, new product
introductions, or a change in majority control including an initial public
offering of JNI's stock before January 31, 2001.
18
In September 1999, pursuant to an offer from JNI, the Company exchanged an
existing contingent warrant to purchase shares of JNI Series A Convertible
Preferred Stock for an immediately exercisable warrant to purchase 840,000
shares of JNI Series A Convertible Preferred Stock. The two remaining contingent
warrants expired unexercisable on October 27, 1999, the effective date of JNI's
initial public offering. Upon the closing of the public offering, the Series A
Convertible Preferred Stock automatically converted into shares of common stock.
As a result of the exchange of warrants described above, the Company
recorded a gain of $10.9 million ($6.6 million net of income taxes) in the
second quarter of fiscal 2000, reflecting the excess of fair value of the
warrant received over the carrying amount of the warrant surrendered. The
Company valued the JNI warrant received using the Black-Scholes valuation model.
The gain is included in "Interest and other income" in the Consolidated
Statement of Operations for the year ended March 31, 2000.
In March 2000, the Company exercised the warrant on a net-share
settlement basis, and received 839,998 additional shares of JNI common stock,
resulting in a total ownership of 1,972,893 shares as of March 31, 2000. The
Company's investment in JNI common stock is accounted for under the cost
method and is considered available-for-sale and included in "Marketable
securities" in the Consolidated Balance Sheet as of March 31, 2000 (Note 2).
As of March 31, 2000, the fair market value of the Company's investment in
JNI common stock was $100.4 million.
The Company possesses certain limited registration rights beginning two
years following the date of JNI's initial public offering with respect to the
JNI common stock. However, the Company may sell the unregistered common
shares, subject to certain restrictions related to the average trading volume
or total outstanding shares of JNI. As of March 31, 2000, the Company owned
8.6% of the outstanding shares of JNI.
In addition to the investment in JNI, the Company agreed to provide JNI
with certain manufacturing services and lease space to JNI in one of the
Company's facilities at "arms-length" prices. During fiscal 2000 and 1999,
the Company billed JNI for manufacturing services and lease costs totaling
$2.0 million and $0.3 million, respectively. The Company and JNI also entered
into a cross-license agreement whereby JNI would pay royalties on certain
products and the Company would license certain technologies from JNI
royalty-free. The Company did not recognize any royalty income from JNI
during fiscal 2000 and 1999. As of March 31, 2000 and 1999, JNI owed the
Company approximately $44,000 and $90,000, respectively, which were included
in "Accounts receivable" in the Consolidated Balance Sheets as of March 31,
2000 and 1999, respectively.
CHAPARRAL: In November 1998, the Company entered into a definitive
agreement with Chaparral whereby the Company agreed to contribute certain
tangible and intangible assets related to the external storage business line. In
exchange, Chaparral issued to the Company 5,540,200 shares of Series B
Convertible Preferred Stock. The investment represented a then 19.9% ownership
interest.
In addition to the investment in Chaparral, the Company agreed to
provide certain manufacturing services and lease space to Chaparral in one of
the Company's facilities at "arms-length" prices. The Company and Chaparral
also entered into a cross-license agreement whereby Chaparral would pay
royalties on certain products. The Company also licensed certain technologies
from Chaparral royalty-free in order to manufacture product for Chaparral.
During fiscal 2000 and 1999, the Company billed Chaparral for manufacturing
services and lease costs totaling $1.4 million and $0.5 million,
respectively, and recorded royalty and product revenue of $1.5 million and
$0, respectively. As of March 31, 2000 and 1999, Chaparral owed the Company
approximately $0.4 million and $64,000, respectively, which were included in
"Accounts receivable" in the Consolidated Balance Sheets as of March 31, 2000
and 1999, respectively.
19
In March 2000, the Company entered in an integrated circuit ("IC") supply
agreement (the "Agreement") with Chaparral, whereby the Company will sell IC's
to Chaparral. Upon execution of the Agreement, the Company received a warrant to
purchase 300,000 shares of common stock at $20 per share. The warrant is
exercisable from December 1, 2000 to May 31, 2001. The warrant was valued at
$0.4 million using the Black-Scholes valuation method. The gain is included in
"Interest and other income" in the Consolidated Statement of Operations for the
year ended March 31, 2000.
The Company's investment in Chaparral of $1.0 million approximates fair
value and is included in "Other long-term assets" in the Consolidated Balance
Sheet as of March 31, 2000. As of March 31, 2000, the Company owned 11.6% of
the outstanding shares of Chaparral and accounts for its investment under the
cost method.
BROADLOGIC: In December 1998, the Company entered into a definitive
agreement with BroadLogic whereby the Company agreed to contribute certain
tangible and intangible assets related to the satellite networking business
line. In exchange for the assets, BroadLogic issued the Company 989,430
shares of Series A Convertible Preferred Stock, representing a then 19.9%
ownership interest. In addition, the Company received a warrant to purchase
up to 982,357 shares of common stock at $4 per share. The warrant is
immediately exercisable and expires upon the earlier of December 2003 or
immediately prior to an initial public offering.
In addition to the investment in BroadLogic, the Company agreed to
provide certain manufacturing services and lease space to BroadLogic in one
of the Company's facilities. The Company and BroadLogic also entered into a
royalty-free cross-license agreement. During fiscal 2000 and 1999, the
Company billed BroadLogic for manufacturing services and lease costs totaling
$2.9 million and $0.8 million, respectively. As of March 31, 2000 and 1999,
BroadLogic owed the Company $60,000 and $0, respectively, which were included
in "Accounts receivable" in the Consolidated Balance Sheets as of March 31,
2000 and 1999, respectively.
In November 1999, in connection with BroadLogic's second round of equity
financing, the Company purchased 390,774 shares of BroadLogic Series B
Preferred Stock for $2.4 million, representing approximately 12.0% of the
Series B Preferred Stock issued.
The Company's investment in BroadLogic of $3.1 million approximates fair
value and is included in "Other long-term assets" in the Consolidated Balance
Sheet as of March 31, 2000. As of March 31, 2000, the Company owned 10.9% of
the outstanding shares of BroadLogic and accounts for its investment under
the cost method.
TI: In November 1998, the Company entered into a definitive agreement with
Texas Instruments, Inc. ("TI") under which certain assets of the Company's
high-end PTS business line were sold to TI for approximately $8.5 million in
cash proceeds. These assets included manufacturing and test equipment with a net
book value of $3.8 million and inventory with a carrying value of $0.3 million.
The unamortized goodwill of $4.2 million associated with the acquisition of
Western Digital's Connectivity Solutions Group was written off against the sale
proceeds. Additionally, the Company incurred legal, accounting and consulting
costs of $0.2 million. The Company received cash proceeds of $4.5 million upon
consummation of the asset purchase agreement. The outstanding balance of $4.0
million was paid in two equal installments in February and May of 1999. The
Company did not recognized a gain or loss on this transaction. The Company
agreed to license certain technologies to TI for $3.7 million. The license
payments were paid during the second quarter through the fourth quarter of
fiscal 2000. In addition, TI agreed to pay royalties ranging from 2 - 5% on
certain products for up to five years.
ST: In January 1999, the Company consummated an agreement with
STMicroelectronics, Inc. ("ST") under which ST acquired certain assets and
obtained certain intellectual property rights of the Company's mainstream
removable PTS business line for an aggregate purchase price of $72.1 million in
cash and $3.3 million in cost reimbursements. The assets included manufacturing
and test equipment with a net book value of
20
$5.5 million and inventory with a carrying value of $2.3 million. The
unamortized goodwill of $18.3 million and other intangible asset of $1.7
million associated with the purchase of ASIC technologies from ADI and
certain other intangible assets of $1.6 million were written off against the
sale proceeds. Additionally, the Company incurred severance and benefit costs
of $12.0 million and legal, accounting and consulting costs of $2.5 million.
The Company received all of the cash proceeds in January 1999 and recorded a
gain of $10.0 million (net of taxes of $21.5 million) in the fourth quarter
of fiscal 1999. In addition, the Company agreed to provide certain other
manufacturing services and lease space to ST in one of the Company's
facilities for a transitionary period of time. The Company and ST also
entered into a royalty-free cross-license agreement.
If the Company had sold the PTS business lines at the beginning of the
periods presented, the Company's unaudited pro forma net revenues and net
income would have been as follows (in thousands):
Year Ended Year Ended
March 31, 1999 March 31, 1998
-------------- --------------
Net revenues $601,639 $757,507
Net income $ 479 $134,412
NOTE 10. RESTRUCTURING CHARGES
During fiscal 1999, the Company recorded $39.9 million in restructuring
charges, including $21.6 million of severance and benefits ($3.9 million in
non-cash stock-based compensation charges -- Note 14), $13.5 million of asset
write-offs, and $4.8 million in other charges.
FIRST QUARTER RESTRUCTURING PLAN
In the first quarter of fiscal 1999, in connection with management's
plan to reduce costs, improve operating efficiencies and divest the satellite
networking business line, the Company recorded a restructuring charge of $8.8
million. The Company continues to hold a minority interest in BroadLogic, the
Company that acquired the satellite networking business line (Note 9). The
restructuring charge was comprised primarily of severance and benefits of
$6.8 million related to the involuntary termination of approximately 550
employees, primarily in manufacturing and engineering functions, of which
approximately 36% were based in the U.S. and the remainder were based in
Singapore. Additionally, the Company wrote off machinery and equipment,
primarily consisting of production and test equipment, with a net book value
of $1.0 million that was deemed unnecessary due to the reduction in
workforce. The machinery and equipment was taken out of service and disposed
of during the second quarter of fiscal 1999. The Company incurred $1.0
million in legal, consulting and accounting charges, related to this
restructuring.
The Company recorded a net reduction to the fiscal 1999 first quarter
restructuring provision of $1.4 million in the second quarter of fiscal 1999
and a net increase of $0.2 million in the fourth quarter of fiscal 1999. The
adjustments reflect changes to the anticipated expenses as actual costs
became known. As a result, severance and benefits costs were reduced by $0.6
million, and legal, accounting and consulting costs were reduced by $0.9
million. Additionally, the Company identified an additional $0.3 million of
assets deemed unnecessary due to the first quarter restructuring activities.
The following table sets forth an analysis of the components of the
restructuring charge recorded in the first quarter of fiscal 1999 and subsequent
adjustments and payments made against the reserve:
21
SEVERANCE
AND ASSET OTHER
FIRST QUARTER RESTRUCTURING PLAN BENEFITS WRITE-OFFS CHARGES TOTAL
- -------------------------------- -------- ---------- ------- -----
(IN THOUSANDS)
RESTRUCTURING PROVISION:
Severance and benefits $ 6,800 $ -- $ -- $ 6,800
Property and equipment write-offs -- 950 -- 950
Other charges -- -- 1,050 1,050
-------- ----------- --------- -----------
TOTAL RESTRUCTURING PROVISION 6,800 950 1,050 8,800
Cash paid (3,244) -- -- (3,244)
Non-cash charges (296) (950) -- (1,246)
--------- ----------- ---------- -----------
RESERVE BALANCE AT JUNE 30, 1998 3,260 -- 1,050 4,310
PROVISION ADJUSTMENT (934) 280 (794) (1,448)
Cash paid (2,133) -- (8) (2,141)
Non-cash charges (53) (280) -- (333)
----------- ---------- ---------- -----------
RESERVE BALANCE AT SEPTEMBER 30, 1998 140 -- 248 388
Cash paid (140) -- (60) (200)
---------- ----------- ---------- -----------
RESERVE BALANCE AT DECEMBER 31, 1998 -- -- 188 188
PROVISION ADJUSTMENT 291 -- (55) 236
Cash paid (69) -- (133) (202)
Non-cash charges (222) -- -- (222)
---------- ----------- ---------- ----------
RESERVE BALANCE AT MARCH 31, 1999 $ -- $ -- $ -- $ --
========== =========== ========== ===========
SECOND QUARTER RESTRUCTURING PLAN
In the second quarter of fiscal 1999, the Company recorded a
restructuring charge of $26.0 million. This charge was a direct result of
management's decision to refocus the business and divest certain unprofitable
business activities including storage subsystems (primarily those business
activities purchased in connection with the Ridge transaction -- Note 8),
fibre channel, external storage and high-end peripheral technology solutions.
The Company continues to hold a minority interest in JNI and Chaparral, the
companies which acquired the fibre channel and external storage business
lines, respectively (Note 9).
The second quarter restructuring charge was comprised primarily of
severance and benefits of $9.2 million related to the involuntary termination
of approximately 300 U.S. employees, primarily in engineering functions. The
Company wrote off machinery and equipment (primarily design and development
equipment), furniture and fixtures, and leasehold improvements with a net
book value of $4.4 million, $1.7 million and $1.5 million, respectively. The
assets were taken out of service and disposed of during the second quarter of
fiscal 1999. These assets were deemed unnecessary due to business line
divestitures and related reductions in workforce. Additionally, the Company
wrote down test equipment by $0.9 million to its estimated realizable value
of $2.1 million, based on its estimated sales value, and subsequently sold it
in the third quarter of fiscal 1999. Also during the second quarter, the
Company wrote off and scrapped inventory and other assets, including goodwill
associated with the storage subsystems business line, with a net book value
of $1.0 million and $2.0 million, respectively. The Company accrued for
contractual obligations of $3.7 million, lease costs of $0.9 million, and
legal, consulting and accounting costs of $0.6 million related to the
restructuring. The contractual obligations primarily related to
non-cancelable purchase commitments including approximately $1.6 million of
equipment (e.g., development equipment and computer equipment) and $2.1
million of prototype products. The lease costs include lease termination
costs and estimated future obligations for non-cancelable lease payments for
excess facilities in Northern and Southern California that were vacated due
to the reduction in workforce.
The Company recorded adjustments to the fiscal 1999 second quarter
restructuring provision of $1.4 million in the fourth quarter of fiscal 1999.
The adjustment relates primarily to favorable negotiations with vendors
surrounding contractual obligations where the Company successfully canceled
outstanding purchase orders and reduced cancellation fees for a total of $1.8
million, offset in part by additional legal, consulting and accounting charges
of $0.2 million and additional lease costs of $0.4 million. Additionally, the
adjustments include an increase in severance and benefits costs of $0.2 million
as actual costs were higher per person than
22
anticipated, and a $0.4 million decrease related to proceeds from the sale of
previously written-off furniture and fixtures and leasehold improvements.
The following table sets forth an analysis of the components of the
restructuring charge recorded in the second quarter of fiscal 1999 and
subsequent adjustment and payments made against the reserve:
SEVERANCE
AND ASSET OTHER
SECOND QUARTER RESTRUCTURING PLAN BENEFITS WRITE-OFFS CHARGES TOTAL
- --------------------------------- -------- ---------- ------- -----
(IN THOUSANDS)
RESTRUCTURING PROVISION:
Severance and benefits $ 9,231 $ -- $ -- $ 9,231
Inventory write-offs -- 984 -- 984
Property and equipment write-offs -- 8,484 -- 8,484
Contractual obligations -- -- 3,742 3,742
Accrued lease costs -- -- 927 927
Goodwill and other assets write-offs -- 2,005 -- 2,005
Other charges -- -- 605 605
----------- ----------- ----------- -----------
TOTAL RESTRUCTURING PROVISION 9,231 11,473 5,274 25,978
Cash paid (4,585) -- (264) (4,849)
Non-cash charges (285) (11,473) -- (11,758)
------------ ------------ ----------- ------------
RESERVE BALANCE AT SEPTEMBER 30, 1998 4,361 -- 5,010 9,371
Cash paid (3,602) -- (1,734) (5,336)
------------ ----------- ------------ ------------
RESERVE BALANCE AT DECEMBER 31, 1998 759 -- 3,276 4,035
PROVISION ADJUSTMENT 243 (459) (1,190) (1,406)
Cash paid (430) -- (1,604) (2,034)
Non-cash charges (475) 459 -- (16)
------------ ----------- ----------- ------------
RESERVE BALANCE AT MARCH 31, 1999 97 -- 482 579
Cash paid (54) -- (241) (295)
------------ ----------- ------------ ------------
RESERVE BALANCE AT JUNE 30, 1999 43 -- 241 284
Cash paid (43) -- (121) (164)
------------ ----------- ------------ ------------
RESERVE BALANCE AT SEPTEMBER 30, 1999 -- -- 120 120
Cash paid -- -- (21) (21)
----------- ----------- ------------ ------------
RESERVE BALANCE AT DECEMBER 31, 1999 -- -- 99 99
Cash paid -- -- (21) (21)
----------- ----------- ------------ ------------
RESERVE BALANCE AT MARCH 31, 2000 $ -- $ -- $ 78 $ 78
=========== =========== =========== ===========
FOURTH QUARTER RESTRUCTURING PLAN
In the fourth quarter of fiscal 1999, the Company recorded a
restructuring charge of $7.8 million. This charge resulted from a reduction
in the infrastructure that supported business lines divested during fiscal
1999 (Note 9). The restructuring charge was comprised primarily of severance
and benefits of $6.0 million related to the involuntary termination of
approximately 125 employees in various functions, including manufacturing,
sales and administration. Most of these jobs were based in the United States.
The Company wrote off and disposed of equipment (primarily office equipment),
with a net book value of $1.2 million deemed unnecessary due to the reduction
in workforce during the fourth quarter of fiscal 1999. Additionally, the
Company accrued for lease costs and legal, consulting and accounting charges
related to the restructuring of $0.2 million and $0.4 million, respectively.
The lease costs pertain to lease termination costs for excess facilities in
Washington state that were vacated due to the reduction in workforce.
The following table sets forth an analysis of the components of the
restructuring charge recorded in the fourth quarter of fiscal 1999 and payments
made against the reserve:
23
SEVERANCE
AND ASSET OTHER
FOURTH QUARTER RESTRUCTURING PLAN BENEFITS WRITE-OFFS CHARGES TOTAL
- --------------------------------- -------- ---------- ------- -----
(IN THOUSANDS)
RESTRUCTURING PROVISION:
Severance and benefits $ 5,982 $ -- $ -- $ 5,982
Property and equipment write-offs -- 1,245 -- 1,245
Accrued lease costs -- -- 190 190
Other charges -- -- 354 354
----------- ----------- ----------- ---------
TOTAL RESTRUCTURING PROVISION 5,982 1,245 544 7,771
Cash paid (2,051) -- -- (2,051)
Non-cash charges (2,561) (1,245) -- (3,806)
------------ ------------ ----------- ------------
RESERVE BALANCE AT MARCH 31, 1999 1,370 -- 544 1,914
Cash paid (648) -- (285) (933)
------------ ----------- ------------ ------------
RESERVE BALANCE AT JUNE 30, 1999 722 -- 259 981
Cash paid (279) -- (194) (473)
------------ ----------- ------------ ------------
RESERVE BALANCE AT SEPTEMBER 30, 1999 443 -- 65 508
Cash paid (131) -- (65) (196)
------------ ----------- ------------ ------------
RESERVE BALANCE AT DECEMBER 31, 1999 312 -- -- 312
Cash paid (131) -- -- (131)
------------ ----------- ----------- ------------
RESERVE BALANCE AT MARCH 31, 2000 $ 181 $ -- $ -- $ 181
=========== =========== =========== ============
The Company anticipates that the remaining restructuring reserve balance of
$0.3 million relating to the second and fourth quarter restructuring plans will
be substantially paid out by the second quarter of fiscal 2001.
NOTE 11. OTHER CHARGES
ACQUISITION-RELATED CHARGES: In fiscal 1998, the Company entered into an
agreement to purchase all of the outstanding stock of Symbios, Inc., a
wholly-owned subsidiary of Hyundai Electronics America ("HEA"). In fiscal 1999,
the Company and HEA mutually agreed to terminate the agreement. The Company paid
a $7.0 million termination fee and approximately $6.7 million in nonconsummation
fees to HEA. Additionally, the Company incurred approximately $7.8 million in
other acquisition-related charges, including legal, consulting and other costs.
ASSET IMPAIRMENT CHARGES: The Company regularly evaluates the
recoverability of long-lived assets by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows are not sufficient to recover the carrying value of such assets, the
assets are adjusted to their fair values. Based on these evaluations, the
Company recorded non-cash impairment charges of $4.0 million and $6.7 in
fiscal 1999 and 1998, respectively. The fiscal 1999 impairment charges
related to approximately $1.4 million of manufacturing test equipment located
in Singapore, deemed unnecessary due to non-temporary declines in production
volume and the write-off of approximately $2.6 million of non-trade related
receivables. As of the second quarter of fiscal 1999, net revenues had been
declining over the previous four quarters. Further, the Company was divesting
business lines and did not believe that production volumes would return to
levels necessary to fully utilize the manufacturing equipment. Accordingly,
the testing equipment was taken out of service, written down to zero, and
disposed in the second quarter of fiscal 1999.
The fiscal 1998 impairment consisted of impairments of the remaining
balances of goodwill for the acquisitions of Sigmax Technology, Inc. ("Sigmax")
and Skipstone, Inc. ("Skipstone") of $1.5 million and $1.7 million,
respectively, and the write-down of the Company's minority investment in Ridge
of $3.5 million. The remaining goodwill for Sigmax was written off when the
Company decided to abandon this business after the R&D project fell behind
and the critical market window was missed, the engineers acquired in the
purchase had left the Company and the intellectual property was deemed to
have no alternative use. The remaining goodwill from the acquisition of
Skipstone was written off when the Company decided to abandon this business
24
as the market for this technology was not developing at the rate required to
earn a reasonable return on its investment, most of the engineers acquired in
the purchase had left the Company and the intellectual property had no
alternative use. The impairment and write down of the Ridge minority
investment was a result of delays in the Ridge product. Ridge was not able to
bring its product under development to market in a timely manner, which
management believed resulted in permanent impairment of the value of the
Company's underlying investment in Ridge.
OTHER CHARGES: The Company recorded executive termination costs of $3.4
million in fiscal 1999, relating to three executives whose employment was
terminated during the fiscal year. The costs consisted of $1.9 million in
severance and benefits payments and $1.5 million in non-cash stock
compensation charges resulting from an amendment to one of the executives
option agreements (Note 14). The severance and benefits were paid to two of
the executives upon their termination and the third executive's severance and
benefits is being paid over a two-year term which commenced in the second
quarter of fiscal 1999. The option agreements for one of the terminated
executives were amended to allow the vesting of the options to continue for
two years subsequent to the date of termination of employment.
NOTE 12. ASSETS HELD FOR SALE
In March 1999, the Company sold some land located in California for net
proceeds of $5.1 million, resulting in a gain of $1.6 million recorded in the
fourth quarter of fiscal 1999. Net proceeds from the sale were received in April
1999.
As of March 31, 1999, the Company included in "Other current assets" in
the Consolidated Balance Sheet $41.1 million in assets held for sale
representing several pieces of land in California, and one piece of land and
a building in Colorado. In April 1999, the Company sold some of the land held
for sale in California for net proceeds of $11.5 million, resulting in a gain
of $3.5 million recorded in the first quarter of fiscal 2000. Net proceeds
from the sale were received in April 1999. The gain was included in "Interest
and other income" in the Consolidated Statement of Operations for the year
ended March 31, 2000.
During the third quarter of fiscal 2000, the Company took the land and
building held for sale in Colorado off the market in order to make improvements
to the property. At which time the improvements are completed, the Company will
determine its future requirements for the property. Accordingly, the land and
building held for sale in Colorado have been reclassified to "Property and
equipment" in the Consolidated Balance Sheet as of March 31, 2000. Assets held
for sale totaled $12.9 million as of March 31, 2000, representing the remaining
land in California. In January 2000, the Company entered into a contract to sell
the remaining land in California. The Company expects to consummate the sale by
mid-fiscal 2001.
NOTE 13. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is presented in accordance with SFAS No. 128,
"Earnings per Share", for all periods presented.
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted net income
(loss) per share gives effect to all dilutive potential common shares
outstanding during a period. In computing diluted net income (loss) per share,
the average stock price for the period is used in determining the number of
shares to be purchased from exercise of stock options under the treasury stock
method.
25
Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the years ended
March 31:
2000 1999 1998
----------------------------------- -------------------------------------- ------------------------------------
INCOME SHARES PER SHARE LOSS SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------- ----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC
Net income (loss)
available to
common
stockholders $170,789 103,427 $ 1.65 $(13,293) 110,127 $ (0.12) $172,877 113,172 $ 1.53
======= ======= ======
EFFECT OF DILUTIVE
SECURITIES:
Employee stock
options and
other -- 6,284 -- -- -- 5,260
DILUTED
Net income (loss)
available to common
stockholders and
assumed conversions $170,789 109,711 $ 1.56 $(13,293) 110,127 $ (0.12) $172,877 118,432 $ 1.46
======== ======= ======= ======== ======= ======= ======== ======= ======
26
Options to purchase 563,000 and 2,369,000 shares of common stock were
outstanding at March 31, 2000 and 1998, respectively, but were not included
in the computation of diluted shares for the years ended March 31, 2000 and
1998, respectively, because the options' exercise prices were greater than
the average market price of the common shares. For the year ended March 31,
1999, all outstanding options to purchase 18,384,000 shares of common stock
were excluded from the computation of diluted net loss per share because they
were anti-dilutive, as the Company was a in net-loss position.
The conversion of 4,448,000, 4,452,000 and 4,452,000 shares of common stock
related to the 4 3/4% Convertible Subordinated Notes were not included in the
computations of net income (loss) per share for the years ended March 31, 2000,
1999 and 1998, respectively, because they were anti-dilutive.
During fiscal 2000, the Company entered into several equity contracts
pertaining to its own stock (Note 14). The impact of these equity contracts
on earnings per share for the year ended March 31, 2000, was immaterial.
NOTE 14. STOCKHOLDERS' EQUITY
EMPLOYEE STOCK PURCHASE PLAN
The Company has authorized 10,600,000 shares of common stock for issuance
under the 1986 Employee Stock Purchase Plan ("ESPP"). Qualified employees may
elect to have a certain percentage (not to exceed 10%) of their salary
withheld pursuant to the ESPP. The salary withheld is then used to purchase
shares of the Company's common stock at a price equal to 85% of the market
value of the stock at the beginning or ending of the offering period,
whichever is lower. Prior to March 31, 1998, the offering period was three
months. During fiscal 1999, the Company amended the ESPP to extend the
offering period to six months. Under this Plan, 282,000, 770,000 and 360,000
shares were issued during fiscal 2000, 1999 and 1998, respectively,
representing approximately $6.1 million, $6.6 million and $9.4 million in
employee contributions, respectively.
EMPLOYEE STOCK OPTION PLANS
1999 STOCK OPTION PLAN: During the second quarter of fiscal 2000, the
Company's Board of Directors and its stockholders approved the Company's 1999
Stock Option Plan and reserved for issuance thereunder (a) 1,000,000 shares of
common stock plus (b) any shares of common stock reserved but ungranted under
the Company's 1990 Stock Option Plan as of the date of stockholder approval plus
(c) any shares returned to the 1990 Stock Option Plan, as a result of
termination of options under the 1990 Stock Option Plan after the date of
stockholder approval of the 1999 Stock Option Plan.
The 1999 Stock Option Plan provides for granting of incentive and
non-statutory stock options to employees, consultants and directors of the
Company. Options granted under this plan are for periods not to exceed ten
years, and are granted at prices not less than 100% and 75% for incentive and
nonstatutory stock options, respectively, of the fair market value on the
date of grant. Generally, stock options become fully vested and exercisable
over a four-year period.
1990 STOCK OPTION PLAN: The Company's Stock Option Plan allowed the Board of
Directors to grant to employees, officers, and consultants incentive and
non-statutory options to purchase common stock or other stock rights at exercise
prices not less than 50% of the fair market value of the underlying common stock
on the date of grant. The expiration of options or other stock rights did not
exceed ten years from the date of grant. The Company has issued all stock
options under this plan at exercise prices of at least 100% of fair market value
of the underlying common stock on the respective dates of grant. Generally,
options vest and become exercisable over a four year period. In March 1999, the
Company amended the 1990 Employee Stock
27
Option Plan to permit non-employee directors of the Company to participate in
this plan. The annual grant to the Board of Directors was made on March 31,
1999, under this plan. Upon stockholder approval of the 1999 Stock Option
Plan, the 1990 Stock Option Plan was terminated with respect to new option
grants.
DPT STOCK OPTION PLANS: In connection with the acquisition of DPT in
fiscal 2000, each outstanding stock option under the DPT stock option plans
was converted into an option of the Company's common stock at a ratio of
0.7133. As a result, outstanding options to purchase 1,131,000 shares of the
Company's common stock were assumed. No further options may be granted under
the DPT stock option plans (Note 8).
WILD FILE STOCK OPTION PLAN: In connection with the acquisition of Wild
File in fiscal 2000, each outstanding stock option under the Wild File stock
option plan was converted to an option of the Company's common stock at a
ratio of 0.0691. As a result, outstanding options to purchase 22,000 shares
of the Company's common stock were assumed. No further options may be granted
under the Wild File stock option plan (Note 8).
RIDGE STOCK OPTION PLANS: In connection with the acquisition of Ridge in
fiscal 1999, each outstanding stock option under the Ridge stock option plans
was converted to an option of the Company's common stock at a ratio of
0.6166. As a result, outstanding options to purchase 1,720,000 shares of the
Company's common stock were assumed. No further options may be granted under
the Ridge stock option plans (Note 8).
Option activity under the Employee Stock Option Plans is as follows:
OPTIONS OUTSTANDING
--------------------------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE SHARES EXERCISE PRICE
--------- ------ --------------
BALANCE, MARCH 31, 1997 ... 12,289,098 14,966,372 $19.05
Authorized 4,846,065 -- --
Granted (15,509,116) 15,509,116 $28.81
Exercised -- (2,393,758) $12.05
Cancelled 10,990,488 (10,990,488) $33.30
----------------- ----------------
BALANCE, MARCH 31, 1998 ... 12,616,535 17,091,242 $19.69
Authorized 4,490,166 -- --
Granted (22,837,135) 22,837,135 $13.38
Exercised -- (2,412,849) $10.66
Cancelled 19,731,659 (19,731,659) $18.88
----------------- ----------------
BALANCE, MARCH 31, 1999 ... 14,001,225 17,783,869 $13.71
Authorized 1,000,000 -- --
Assumed -- 1,152,545 $ 5.15
Granted (5,472,427) 5,472,427 $36.66
Exercised -- (7,662,493) $13.41
Forfeited......... -- (646,739) $ 4.73
Cancelled 2,441,230 (2,441,230) $20.72
----------------- ----------------
BALANCE, MARCH 31, 2000 .... 11,970,028 13,658,379 $21.52
================= ================
OPTIONS EXERCISABLE AT:
March 31, 1998............................ 6,861,531 $ 16.41
March 31, 1999............................ 6,995,660* $ 13.49
March 31, 2000............................ 4,688,062 $ 15.60
- ----------
* Amount includes certain vested options repriced in the third quarter of
fiscal 1999 but not exercisable until April 1999. See "Repricing of Stock
Options" below.
28
The following table summarizes information about the Employee Stock Option
Plan at March 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- -------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 3/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/00 EXERCISE PRICE
--------------- ---------- ---------------- -------------- ---------- --------------
$00.00 - $10.00 832,339 4.0 $ 6.85 548,933 $ 6.84
$10.01 - $20.00 7,003,883 7.2 $ 12.86 3,061,486 $ 12.48
$20.01 - $30.00 1,569,585 7.4 $ 23.52 556,508 $ 23.74
$30.01 - $40.00 3,448,150 8.4 $ 34.91 513,946 $ 34.33
$40.01 - $50.00 311,100 9.4 $ 42.17 5,723 $ 40.06
$50.01 - $60.00 492,631 9.2 $ 56.08 1,466 $ 51.52
Greater than $60.00 691 9.7 $130.25 -- $ --
--------- ---------
13,658,379 7.5 $ 21.52 4,688,062 $ 15.60
========== =========
DIRECTORS' STOCK OPTION PLAN
The 1990 Directors' Stock Option Plan provides for the automatic grant to
non-employee directors of non-statutory stock options to purchase common
stock at the fair market value of the underlying common stock on the date of
grant, which is generally the last day of each fiscal year except for the
first grant to any newly elected director. Upon joining the board, each new
non-employee director receives an option for 40,000 shares which vests over
four years and, prior to March 31, 1997, expired five years after the date of
grant. Prior to March 31, 1997, each director received an option at the end
of each fiscal year for 10,000 shares, which vested quarterly and over a four
year period and expired five years after the date of grant. During fiscal
1997, the Company amended the 1990 Directors' Stock Option Plan such that all
newly issued shares expire ten years after the date of grant and all newly
issued annual shares vest over a one year period. In fiscal 1999, the Company
amended the 1990 Directors' Stock Option Plan to increase the annual grant to
15,000 shares for the fiscal year ended March 31, 1999, however, in March
1999, the Company suspended the annual stock option grants to directors under
this Plan. Instead, the fiscal 1999 grant to directors was made under the
amended 1990 Employee Stock Option Plan. In fiscal 2000, the Company's Board
of Directors reinstated the 1990 Directors' Stock Option Plan and fiscal 2000
grants were made under this Plan.
29
Option activity under the 1990 Directors' Stock Option Plan is as follows:
OPTIONS OUTSTANDING
---------------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE SHARES EXERCISE PRICE
--------- ------------ --------------
BALANCE, MARCH 31, 1997 1,310,000 608,750 $ 19.96
Granted (120,000) 120,000 $ 29.83
Exercised -- (101,250) $ 9.32
------------- ------------
BALANCE, MARCH 31, 1998 1,190,000 627,500 $ 23.56
Granted (40,000) 40,000 $ 11.00
Exercised -- (67,500) $ 9.19
------------- ---------
BALANCE, MARCH 31, 1999 1,150,000 600,000 $ 24.34
Granted (120,000) 120,000 $ 41.44
Exercised -- (241,750) $ 20.36
------------- ----------
BALANCE, MARCH 31, 2000 1,030,000 478,250 $ 30.64
============= =========
Options exercisable at:
March 31, 1998 342,500 $22.03
March 31, 1999 467,500 $24.16
March 31, 2000 315,750 $27.06
The following table summarizes information about the 1990 Directors' Stock
Option Plan at March 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- ---------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 3/31/00 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/00 EXERCISE PRICE
--------------- ---------- ---------------- -------------- ---------- --------------
$10.01 - $20.00 30,000 8.3 $11.00 5,000 $ 11.00
$20.01 - $30.00 228,250 3.1 $22.53 228,250 $ 22.53
$30.01 - $40.00 60,000 7.0 $37.25 60,000 $ 37.25
$40.01 - $50.00 160,000 9.4 $43.42 22,500 $ 49.38
------- --------
478,250 6.0 $30.64 315,750 $ 27.06
======== ========
PRO FORMA INFORMATION
Pro forma information regarding net income (loss) and net income (loss) per
share is required to be determined as if the Company had accounted for the
options granted pursuant to its Employee Stock Purchase Plan, Employee Stock
Option Plans, and Directors' Stock Option Plan, collectively called "options",
under the fair value method SFAS No. 123. The fair value of options granted in
fiscal 2000, 1999 and 1998 reported below have been estimated at the date of
grant using a Black-Scholes valuation model with the following weighted average
assumptions:
EMPLOYEE STOCK EMPLOYEE STOCK DIRECTORS' STOCK
PURCHASE PLAN OPTION PLANS OPTION PLAN
------------------------- ------------------------- -----------
2000 1999 1998 2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- ------- ------- ------- ------
Expected life (in years) 0.60 0.34 0.25 5 4 4 5 4 4
Risk-free interest rate 6.4% 5.2% 5.4% 6.4% 5.2% 5.4% 6.4% 5.2% 5.4%
Volatility 62% 62% 52% 62% 62% 52% 62% 62% 52%
Dividend yield -- ---- ---- -- --- --- -- --- ---
30
The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of fair
value of its options. The weighted average estimated fair value of shares issued
under the Employee Stock Purchase Plan during fiscal 2000, 1999 and 1998 was
$3.84, $3.44 and $6.84 per share, respectively. The weighted average estimated
fair value of options granted under the Employee Stock Option Plans during
fiscal 2000, 1999 and 1998 was $20.47, $6.95 and $18.44, respectively. The
weighted average estimated fair value of options granted under the Directors'
Stock Option Plan during fiscal 2000, 1999 and 1998 was $19.86, $5.43 and
$13.56, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro forma
information follows (in thousands, except per share amounts):
2000 1999 1998
--------- --------- ---------
Pro forma net income (loss) $91,178 $ (75,981) $ 127,351
Pro forma basic net income (loss) per share $ 0.88 $ (0.69) $ 1.13
Pro forma diluted net income (loss) per share $ 0.83 $ (0.69) $ 1.08
The effects on pro forma disclosures of applying SFAS No. 123 are not likely
to be representative of the effects on pro forma disclosures of future years,
since it is applicable only to options granted subsequent to March 31, 1995.
Therefore, the pro forma effect of SFAS No. 123 is not fully reflected in fiscal
1998.
REPRICING OF STOCK OPTIONS
On October 21, 1998, the Company approved the cancellation and reissuance of
outstanding stock options under the Company's Employee Stock Option Plans. Under
this program, all current active employees, except for executive officers, with
outstanding stock options with an exercise price in excess of $12.50 per share
could exchange their stock options for new non-qualified stock options with an
exercise price of $12.50 per share, the fair market value of the common stock on
the exchange date. The new options maintain the vesting schedule established by
the canceled stock options, however, the exercisability of the exchanged options
was suspended until April 1999. During fiscal 1999, 11,112,000 stock options
were repriced to $12.50. The weighted average exercise price of the stock
options prior to repricing was $19.53.
On January 30, 1998, the Company approved the cancellation and reissuance of
outstanding stock options under the Company's Employee and Directors' Stock
Option Plans. Under the program, holders of outstanding options with exercise
prices in excess of $22.31 per share were given the choice of retaining these
options, or of obtaining in substitution new options, for the same number of
shares. The new options were exercisable at a price of $22.31 per share, the
fair market value of the common stock on the reissue date. The new options
maintained the vesting schedule established by the canceled option, except that
vesting was suspended for six months, while vesting for officers of the Company
participating in the stock repricing was suspended for twelve months. During
fiscal 1998, 9,536,00 stock options were repriced to $22.31. The weighted
average exercise price of the stock options prior to repricing was $37.50.
STOCK-BASED COMPENSATION
During fiscal 1999, the Company recorded non-cash stock-based compensation
charges of $3.9 million related to restructuring activities (Note 10), $1.5
million in connection with the termination of an executive (Note 11), and $8.5
million in connection with the sale of the high-end PTS business line (Note 9).
The stock-based compensation charges were recorded pursuant to modifications
made to the option holder's original option
31
agreements. The charges were accounted for using either the intrinsic value
method or the fair value method, based on the nature of the modification and
the subsequent relationship with the option holder. The charges were recorded
as an increase to additional paid-in-capital in the period the modification
occurred.
In connection with the acquisition of Wild File, the Company issued 59,000
shares of restricted common stock valued at $2.6 million to a certain Wild File
employee shareholder as incentive for continued employment. The value of the
restricted common stock has been recorded as "Deferred stock-based
compensation", a contra-equity account in the Consolidated Balance Sheet, as of
the acquisition date, the date the restricted shares were issued. The restricted
common stock vests monthly over one year from the date of acquisition. The
stock-based compensation is being amortized over the vesting period. At March
31, 2000, $2.4 million remained in "Deferred stock-based compensation", net of
$0.2 million of amortization recorded subsequent to the issuance date through
March 31, 2000 (Note 8).
RIGHTS PLAN
The Company has reserved 250,000 shares of Series A Preferred Stock for
issuance under the 1996 Rights Agreement which was amended and restated as of
December 5, 1996. Under this plan, stockholders have received one Preferred
Stock Purchase Right ("Right") for each outstanding share of the Company's
common stock. Each Right will entitle stockholders to buy one one-thousandth of
a share of Series A Preferred Stock at an exercise price of $180.00 per right.
The Rights trade automatically with shares of the Company's common stock. The
Rights are not exercisable until ten days after a person or group announces
acquisition of 20% or more of the Company's outstanding common stock or the
commencement of a tender offer which would result in ownership by a person or
group of 20% or more of the then outstanding common stock.
The Company is entitled to redeem the Rights at $0.01 per Right anytime on
or before the tenth day following such an acquisition or tender offer. This
redemption period may be extended by the Company in some cases. If, prior to
such redemption, the Company is acquired in a merger or other business
combination, a party acquires 20% or more of the Company's common stock, a 20%
stockholder engages in certain self-dealing transactions, or the Company sells
50% or more of its assets, each right will entitle the holder to purchase from
the surviving corporation, for $180.00 per share, common stock having a then
current market value of $360.00 per share.
The Series A Preferred Stock purchasable upon exercise of the Rights will
not be redeemable. Each share of Series A Preferred Stock will be entitled to an
aggregate dividend of 1,000 times the dividend declared per common stock. In the
event of liquidation, the holders of the Series A Preferred Stock will be
entitled to a preferential liquidation payment equal to 1,000 times the per
share amount to be distributed to the holders of the common stock. Each share of
Series A Preferred Stock will have 1,000 votes, voting together with the common
stock. In the event of any merger, consolidation or other transaction in which
the common stock is changed or exchanged, each share of Series A Preferred Stock
will be entitled to receive 1,000 times the amount received per common stock.
These rights are protected by customary anti-dilution provisions.
SHARES RESERVED FOR FUTURE ISSUANCE
At March 31, 2000, the Company has reserved the following shares of
authorized but unissued common stock:
Employee Stock Purchase Plan 5,041,536
Employee Stock Option Plans 25,628,407
Directors' Stock Option Plan 1,508,250
Conversion of 4 3/4% Convertible 4,448,316
===========
Subordinated Notes (Note 5) 36,626,509
===========
32
STOCK REPURCHASES
In January 1998, the Company's Board of Directors approved a stock buy
back program under which the Company could repurchase up to 10.0 million
shares of its common stock in the open market. In October 1998, May 1999 and
February 2000, the Company's Board of Directors approved three separate stock
buy-back programs under which the Company could repurchase, in each program,
up to $200.0 million of its common stock in the open market. During fiscal
2000, the Company repurchased and retired 11,442,000 shares of its common
stock for $396.7 million, of which $19.1 million was accrued as of March 31,
2000, and paid on April 1, 2000. During fiscal 1999 and 1998, the Company
repurchased and retired 12,931,000 and 350,000 shares of its common stock for
$200.2 million and $7.8 million, respectively. The transactions were recorded
as reductions to common stock and additional paid-in-capital.
As of March 31, 2000, $111.6 million remained authorized for stock buy back
under the February 2000 program.
In the second quarter of fiscal 2000, the Company sold put warrants that
could have obligated the Company to buy back up to 1.0 million shares of its
common stock at strike prices ranging from $37 to $39 in exchange for up front
premiums of $3.7 million. In the third quarter of fiscal 2000, the put warrants
expired unexercised.
In the fourth quarter of fiscal 2000, the Company entered into several
equity contracts in which the Company sold put warrants and purchased call
warrants. The put warrants could potentially obligate the Company to buy back
up to 2.0 million shares of its common stock at strike prices ranging from
$39 to $47, whereas the call warrants give the Company the right to buy back
up to 1.0 million shares of its common stock at strike prices ranging from
$42 to $45. The premiums on the purchase of the call warrants totaled $5.4
million, and the premiums on the sale of the put warrants totaled $12.9
million, of which $3.8 million was received in April 2000. The premiums were
used for general business purposes. The settlement terms include physical
settlement, cash settlement or net-share settlement at the option of the
Company. In June 2000, the Company physically settled two of the equity
contracts whereby the Company repurchased 1.0 million shares of its common
stock at average prices of $40 and $42 (unaudited). The remaining warrants
will expire by the end of the second quarter of fiscal 2001. The impact on
earnings per share for these equity contracts entered into in the fourth
quarter and for fiscal 2000 was anti-dilutive.
In the first quarter of fiscal 2001, the Company entered into one
additional equity contract which could potentially obligate the Company to
buy back up to 0.5 million shares of its common stock at a strike price of
$22, and gives the Company the right to buy back up to 0.5 million shares of
its common stock at a strike price of $27. The settlement terms include
physical settlement, cash settlement or net-share settlement at the option of
the Company. This equity contract will expire during the third quarter of
fiscal 2001.
WARRANTS TO AGILENT TECHNOLOGIES, INC.
In January 2000, the Company entered into a four-year agreement with Agilent
Technologies, Inc. ("Agilent") to co-develop, market and sell fibre channel host
adapters. In exchange, the Company issued warrants to Agilent to purchase
1,160,000 shares of the Company's common stock at $62.25 per share. The warrants
have a term of four years from the date of issuance and are immediately
exercisable. The warrants were valued at $37.1 million using the Black-Scholes
valuation model. The Company assumed a volatility rate of 65%, a risk-free
interest rate of 6.4% and an estimated life of four years. The value of the
warrants was recorded as an intangible asset in the fourth quarter of fiscal
2000 and is being amortized ratably over the term of the agreement.
In addition, the Company will license Agilent's fibre channel host
adapter and software driver technology, and pay royalties to Agilent based on
revenue from certain products incorporating the licensed technology. The
33
aggregate guaranteed minimum royalty payments of $60.0 million over the term
of the agreement are as follows: $6.0 million in the first year, $12.0
million in the second year, $18.0 million in the third year and $24.0 million
in the fourth year.
As of March 31, 2000, the Company estimated it would pay Agilent
royalties of $1.0 million in the first contract year associated with sales of
the Company's products incorporating the technology licensed from Agilent.
Therefore, in the fourth quarter of fiscal 2000, the Company accrued for and
expensed the remaining guarantee for the first contract year of $5.0 million.
The accrued expense was included in "Cost of revenues" in the Consolidated
Statement of Operations for the year ended March 31, 2000, and in "Accrued
liabilities" in the Consolidated Balance Sheet as of March 31, 2000.
NOTE 15. INCOME TAXES
The components of income before income taxes for the years ended March 31,
are as follows:
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS)
Domestic $ 99,735 $ (46,500) $ 95,400
Foreign 148,845 67,442 149,929
------------- ------------- ------------
Income before income taxes $ 248,580 $ 20,942 $ 245,329
============== ============= ============
The split of domestic and foreign income was primarily impacted by the
write-off of acquired in-process technology and goodwill amortization
associated with acquisitions and startegic investments, restructuring charges
and other charges, offset by the gain on the sale of PTS in the fourth
quarter of fiscal 1999. These items reduced domestic income by $43 million
and $136 million in fiscal 2000 and 1999, respectively.
The components of the provision for income taxes for the years ended
March 31, are as follows:
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Federal
Current $ 47,078 $ 35,542 $ 46,362
Deferred 9,448 (14,077) (11,552)
----------- ------------ -----------
56,526 21,465 34,810
----------- ------------ -----------
Foreign
Current 10,818 12,111 21,520
Deferred 1,170 (738) (319)
----------- ------------ -----------
11,988 11,373 21,201
----------- ------------ -----------
State
Current 10,251 1,448 10,067
Deferred (974) (51) (2,626)
------------ ------------ -----------
9,277 1,397 7,441
----------- ------------ -----------
Provision for income taxes $ 77,791 $ 34,235 $ 63,452
=========== ============ ===========
The tax benefit associated with dispositions from employee stock plans
reduced taxes currently payable for fiscal 2000 by $28.3 million ($18.2 million
and $12.4 million for fiscal 1999 and 1998, respectively). These benefits were
recorded directly to stockholders' equity. The tax benefits associated with
dispositions from employee stock option plans are not currently recognized to
the extent that the resulting tax deduction creates a net operating loss
carryforward. These benefits will be recorded directly to stockholders' equity
when the net operating loss carryforward is realized.
Significant components of the Company's deferred tax assets and liabilities
as of March 31, are as follows:
34
2000 1999
-------- --------
(IN THOUSANDS)
Foreign tax credits $ 14,235 $ 12,660
Gains on investments 12,726 -
Intangible technology 8,598 11,278
Compensatory accruals 8,537 7,190
Other expense accruals 7,526 9,530
Royalty accruals 6,638 110
Intercompany profit adjustment 5,674 20,121
Accrued returned materials 2,841 2,288
Inventory reserves 1,040 3,013
Research and development tax credits 915 --
Uniform capitalization adjustment 336 215
Allowance for doubtful accounts 305 505
State taxes 41 546
Other, net 122 (1,050)
---------- ----------
Gross deferred tax assets 69,534 66,406
Less: Deferred tax liability on
unrealized gain on investments (34,532) --
Fixed assets accruals (5,868) (5,061)
---------- ----------
Net deferred tax assets $ 29,134 $ 61,345
========== ==========
The foreign tax credits generated will expire in fiscal 2005. Management
believes it is more likely than not that these credits will be fully utilized
before their expiration date.
As of March 31, 2000, the Company's federal and state net operating loss
carryforwards for income tax purposes were $139 million and $108 million,
respectively. If not utilized, the federal net operating loss carryforwards
will begin to expire in fiscal 2008, and the state net operating loss
carryforwards will begin to expire in fiscal 2003. With the exception of
$11.9 million in net operating loss carryforwards related to certain acquired
companies, all of the Company's federal and state net operating loss
carryforwards resulted from dispositions from employee stock option plans.
The benefit derived from these net operating loss carryforwards will be
recorded directly to stockholders' equity when realized rather than as a
reduction of the income tax provision.
The provision for income taxes differs from the amount computed by
applying the federal statutory tax rate to income before provision for income
taxes for the years ended March 31, as follows:
2000 1999 1998
------- ------ ------
Federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 2.4 1.4 2.3
Foreign subsidiary income at other than the U.S. tax rate (10.4) (9.6) (10.9)
Tax-exempt interest income (1.3) (15.9) (1.7)
Acquisition write-offs 4.2 100.2 --
Gain on sale of PTS -- 50.1 --
Other 1.4 2.3 1.2
------- ------- --------
Effective income tax rate 31.3% 163.5% 25.9%
======== ======== =========
The Compay's effective tax rate for fiscal 2000 was 31% compared to 164%
and 26% for fiscal 1999 and 1998, respectively. The difference between the
Company's effective tax rate and the U.S. federal statutory tax rate of 35%
is primarily attributable to income earned in Singapore where the company is
subject to a significantly lower effective tax rate, resulting from a tax
holiday relating to certain of its products. The terms of the tax holiday
provide that profits derived from certian products will be exempt fom tax
through fiscal 2005, subject to cetain conditions. As of March 31, 2000, the
Company has not accrued income taxes on $570 million of accumulated
undistributed earnings of it Singapore subsidiary, as these earnings will be
reinvested indefinitely.
The difference between the Company's effective tax rate and the U.S.
federal statutory tax rated is also attributable to the write-off of acquired
in-process technology and good will amortization in excess of amounts
deductible for tax purposes and the gain on the sale of PTS.
The Company's tax related liabilities were $100.7 million and $65.8
million as of March 31, 2000 and 1999, respectively. Fluctuations in the tax
relate liability account are a function of the current tax provisions and the
timing of tax payments. Tax related liabilities are primarily comprised of
income, withholding and transfer taxes accrued by the Company in the taxing
jurisdictions in which it operates around the world, including, but not
limited to, the United States, Singapore, Japan, Germany and Belgium. The
amount of the liability is based on management's evaluation of its tax
exposures in light of the complicated nature of the business transactions
entered into by the Company in a global business environment.
35
NOTE 16. COMMITMENTS AND CONTINGENCIES
The Company leases certain office facilities, vehicles, and certain
equipment under operating lease agreements that expire at various dates
through fiscal 2008. As of March 31, 2000, future minimum lease payments
under non-cancelable operating leases are due and payable as follows
(in thousands):
FISCAL YEAR
2001 $ 5,747
2002 3,055
2003 1,802
2004 1,430
2005 1,113
2006 and thereafter 1,789
-----------
$ 14,936
===========
Net Rental expense was approximately $1.3 million, $3.7 million and $6.6
million during fiscal 2000, 1999 and 1998, respectively.
A class action lawsuit was pending in the United States District Court
for the Northern District of California against the Company and certain of
its officers and directors. The class action lawsuit alleges that the Company
made false and misleading statements at various times during the period
between April 1997 and January 1998 in violation of federal securities laws.
The Company's motion to dismiss the complaint was granted in April 2000. The
plaintiffs were given leave to file an amended complaint, and they have
stated that they intend to do so. The Company believes the class action
lawsuit is without merit and intends to defend itself vigorously.
In addition, a derivative action was filed in the Superior Court of the
State of California against the Company and certain of its officers and
directors, alleging that the individual defendants improperly profited from
transactions in the Company's stock during the same time period referenced by
the class action lawsuit. In July 1999, the Company entered into an agreement
to settle the derivative action. Under the terms of the agreement, the
Company would reimburse the fees and costs incurred by the plaintiff's
attorney of $600,000. The settlement does not affect the class action lawsuit
still pending. The court approved the settlement on December 21, 1999, and as
a result, the derivative action has been dismissed. The amount of the
settlement was paid in full in the fourth quarter of fiscal 2000.
In May 2000, the Company entered into an agreement with a third party
for a patent cross-license. Under the agreement, the Company will pay the
third party a patent settlement fee in return for a release from past
infringement claims prior to January 1, 2000, and a patent license fee for
the use of certain of the third party's patents through June 30, 2004.
Additionally, the Company will grant the third party a license to use all of
its patents for the same period. The aggregate patent fee to be paid by the
Company under the proposed cross-license agreement will range from $11
million to $25 million, depending on the outcome of an evaluation of certain
patents by an independent party. The Company's best estimate of the aggregate
patent fee that
36
will be payable under the proposed cross-license agreement is $18.0 million.
The portion of the estimated patent fee allocated to revenues from periods
prior to December 31, 1999 (the date the amount was probable and estimatable)
of $9.6 million was written off and reflected as a component of cost of
revenues under the caption "Patent settlement fee" in the Consolidated
Statement of Operations for the year ended March 31, 2000. The remaining
estimated patent fee pertaining to future periods was allocated to an
intangible asset and is being amortized over the period from January 1, 2000
through June 30, 2004. At March 31, 2000, $1.9 million of the intangible
asset was included in "Prepaid expenses" and $6.1 million was included in
"Other long-term assets" in the Consolidated Balance Sheet. As of March 31,
2000, $3.6 million of the aggregate estimated patent fee was included in
"Accrued liabilities" and the remaining $14.4 million was reflected as "Other
long-term liability" in the Consolidated Balance Sheet.
The Company is a party to other litigation matters and claims which are
normal in the course of its operations, and while the results of such
litigations and claims cannot be predicted with certainty, the Company believes
that the final outcome of such matters will not have a material adverse impact
on the Company's consolidated financial position or results of operations.
The IRS is auditing the Company's income tax returns for fiscal 1994
through 1996. In addition, in March 2000 the IRS began its audit on the
Company's income tax returns for fiscal 1997 through 1999. No proposed
adjustments have been received for these audits. The Company believes
sufficient taxes have been provided and that the ultimate outcome of the IRS
audits will not have a material adverse impact on the Company's financial
position or results of operations.
NOTE 17. SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
SEGMENT INFORMATION
In the fourth quarter of fiscal 1999, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." In fiscal
1999, the Company evaluated its product segments in accordance with SFAS No. 131
and concluded that its reportable segments were Host Input/Output ("I/O"),
Redundant Array of Independent Disks ("RAID"), Software, PTS and Other.
In the fourth quarter of fiscal 2000, the Company changed the internal
reporting of its business segments and therefore has restated its prior
years' presentation for financial disclosure purposes to conform to this
revised segment reporting. The current segments are organized by technologies
and include Direct Attached Storage ("DAS"), Storage Networking Solutions
("SNS"), Software, PTS and Other. Current market trends indicate that Host
I/O and RAID technologies are converging, that is, data protection is
becoming standard in the majority of server configurations. Accordingly, the
Company has combined two of its former business segments - Host I/O and RAID
- - to form DAS. Additionally, one of the Company's business lines formerly
reported as part of the Host I/O segment -Networking Products Group ("NPG") -
has been reclassified to SNS, a new segment. The Software, PTS and Other
segments remain unchanged.
DIRECT ATTACHED STORAGE: The DAS segment designs, develops, manufactures
and markets I/O management solutions to the entire range of severs,
workstations and high-end desktops. These systems employ internal disk drives
as their primary mass storage solution, but also require high-performance
connectivity to additional internally and externally connected storage and
peripherals. The performance of the I/O subsystem is an important component
of overall system performance. The need for high-performance I/O server
solutions has been increasing due to greater Internet usage, multitasking
operating systems and large multimedia files.
The Company's I/O solutions include Small Computer System Interface
("SCSI") technology delivered via adapter cards and controller chips and
SCSI-based and fibre channel-based RAID technology. These solutions combine
the most advanced SCSI performance with manageability and backwards
compatibility. SCSI technology connects a
37
computer's central processing unit ("CPU") to internal and external
peripherals, including storage devices. The Company's RAID products are
utilized in systems ranging from entry-level workstations to enterprise-class
servers, improving data storage speed, integrity, and reliability.
In December 1999, the Company acquired DPT, a supplier of
high-performance storage solutions, including RAID controllers and storage
subsystems. Subsequent to the acquisition date, operating results of DPT have
been combined with those of the Company.
STORAGE NETWORKING SOLUTIONS: The emerging SNS segment will focus on
bringing new levels of functionality and interoperability with storage area
network ("SAN") initiatives, including fibre channel, ethernet and
infiniband. The SNS segment's primary initiative is developing, manufacturing
and marketing fibre channel adapters, and marketing storage fabric solutions
for the SAN marketplace. In addition, the Company will evaluate new emerging
opportunities in areas such as storage appliances, ethernet-based storage
architectures, and external RAID controllers. Customers' needs for storage
are changing in response to the growth of data brought about by eBusiness and
the Internet. In response to demand for lower cost of data management,
increased data availability, higher performance and simplified storage
scalability, multiple storage architectures are emerging, where storage
devices are connected directly into a network-like fabric. The Company
intends to provide a variety of storage solutions to meet customer demands in
the existing corporate marketplace and in the Internet infrastructure market.
In January 2000, the Company entered into a four-year agreement with
Agilent to co-develop, market and sell fibre channel adapters. The alliance is
targeted at providing interoperability and support to drive customer confidence
and accelerate the adoption of fibre channel in the Windows NT market. The
Company will license Agilent's fibre channel adapter and software driver
technology and pay guaranteed royalties to Agilent based on revenue from certain
products. Amortization of the warrant value and a portion of the guaranteed
royalty costs have been included in the operating results of the SNS segment
beginning in the fourth quarter of fiscal 2000 (Note 14).
SOFTWARE: The Software segment designs, develops and markets primarily
application software for personal computers and optical peripherals,
including compact disk ("CD") recordable ("CD-R"), CD-rewriteable ("CD-RW")
and digital video disks ("DVD") recordable devices. The Company's application
software products allow users to store data, including audio, video and still
photos, to virtually all marketed CD-R and CD-RW drives using industry
standard formats. The application software, along with the peripherals,
provide users with a cost effective alternative to other forms of removable
media for general purpose computing needs, including the ability to transfer
downloaded music from the Internet to CDs for private use or creating
compilations of music from purchased music CD labels. The Company's CD-R
software offerings are available as stand-alone products, and also ship
built-in or "bundled" with most CD-R drives in the desktop market.
In July 1999, the Company acquired CeQuadrat, a German-based software
company, also providing CD-R and CD-RW products, primarily in the European
markets. With the acquisition came enhanced product development and
engineering expertise, as well as a greater European customer base. Beginning
in the second quarter of fiscal 2000, operating results of CeQuadrat were
combined with those of the Company.
In March 2000, the Company acquired Wild File, a software company providing
data protection software that allows desktop users to undo a multitude of
problems arising from system crashes, failed software installations, and user
error. With the addition of Wild File's existing software line, the Company now
offers solutions for moving, managing, and protecting all types of content -
audio, video, photo and data. In March 2000,
38
operating results of Wild File were combined with those of the Company.
On June 8, 2000, the Company announced that it plans to spin off the
Software segment in the form of a fully independent and separate company (the
"Software Company"). The Company anticipates to complete an initial public
offering ("IPO") of approximately 15% of the Software Company's stock and
distribute the remaining shares in a tax-free distribution to the Company's
shareholders. The shareholder distribution will be subject to board approval,
regulatory approval and receipt of a tax-free letter ruling from the IRS.
PTS: The business lines that comprised the PTS segment was sold in
November 1998 and January 1999 to TI and ST, respectively. This segment
designed, developed, manufactured and marketed proprietary integrated
circuits for use in mass storage devices and other peripherals.
OTHER: The Other segment includes unallocated corporate related revenues
and expenses, patent settlement fee interest and other income, interest
expense, write-off of acquired in-process technology resulting from
acquisitions, restructuring charges, other charges and the gain on the sale
of PTS. Additionally, the Other segment includes revenues and expenses
related to the business lines divested in fiscal 1999, including external
storage, satellite networking and fibre channel (Note 9). Although these
business lines were divested, the Company continues to hold a minority
interest in Chaparral, BroadLogic and JNI, the companies which acquired these
business lines, respectively.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The Company does not separately
identify assets or depreciation by operating segments nor are the segments
evaluated under these criteria.
DAS SNS SOFTWARE PTS OTHER TOTAL
----------- ---------- --------- --------- ---------- -------------
(IN THOUSANDS)
FISCAL 2000
Revenues $ 703,634 $ 25,341 $ 78,236 $ -- $ 3,950 $ 811,161
Segment profit (loss) 242,731 318 15,137 -- (9,606) 248,580
FISCAL 1999
Revenues 532,345 19,969 47,110 90,803 2,214 692,441
Segment profit (loss) 154,976 (10,744) 7,219 (30,628) (99,881) 20,942
FISCAL 1998
Revenues 696,042 19,566 38,186 249,786 3,713 1,007,293
Segment profit (loss) 254,633 (21,534) 8,249 32,189 (28,208) 245,329
The following table presents the details of "Other" segment loss for the
years ended March 31:
2000 1999 1998
---------- ---------- -------
(IN THOUSANDS)
Losses from divested businesses $ -- $(31,679) $(34,378)
Unallocated corporate expenses, net (15,378) (8,364) (7,612)
Patent settlement fee (9,599) -- --
Interest and other income 47,080 35,059 32,899
Interest expense (11,577) (12,103) (12,402)
Write-off of acquired in-process technology (20,132) (45,482) --
Restructuring charges -- (39,931) --
Other charges -- (28,857) (6,715)
Gain on sale of PTS -- 31,476 --
-------- -------- --------
$( 9,606) $(99,881) $(28,208)
========= ======== ========
39
GEOGRAPHIC INFORMATION
The following table presents net revenues by country and is attributed to
countries based on location of the selling entity for the years ended March 31:
2000 1999 1998
---------- ----------- ----------
(IN THOUSANDS)
United States $401,753 $295,736 $ 704,334
Singapore 391,871 388,676 294,217
Other countries 17,537 8,029 8,742
-------- -------- -----------
$811,161 $692,441 $ 1,007,293
======== ======== ===========
The following table presents net property and equipment by country based on
the location of the assets as of March 31:
2000 1999
--------- ----------
(IN THOUSANDS)
United States $ 106,099 $ 94,085
Singapore 27,665 31,030
Other countries 1,458 1,619
------------ ------------
$ 135,222 $ 126,734
============ ============
SIGNIFICANT CUSTOMER INFORMATION
The Company had two customers which accounted for 13% and 12% of net
revenues in fiscal 2000 and two customers which accounted for 19% and 11% of
gross accounts receivable as of March 31, 2000. The significant customers
related primarily to the DAS segment. The Company had no significant
customers which accounted for more than 10% of net revenues in fiscal 1999
and 1998 or gross receivables as of March 31, 1999 and 1998.
NOTE 18. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
YEARS ENDED MARCH 31,
2000 1999 1998
---------- ----------- --------
(IN THOUSANDS)
Interest paid $ 10,969 $ 11,100 $ 11,218
Income taxes paid 21,940 14,963 58,537
Income tax refund received -- 23,746 --
40
NOTE 19. COMPARATIVE QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is presented below.
QUARTERS
-----------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
--------- ---------- --------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 2000
Net revenues $ 192,378 $ 194,280 $ 211,446 $ 213,057 $ 811,161
Gross profit $ 125,591 $ 128,013 $ 132,318 $ 132,968 $ 518,890
Net income $ 50,540 $ 52,164 $ 31,668 $ 36,417 $ 170,789
Net income per share:
Basic $ 0.49 $ 0.51 $ 0.31 $ 0.35 $ 1.65
Diluted $ 0.46 $ 0.48 $ 0.29 $ 0.33 $ 1.56
Weighted average shares outstanding:
Basic 104,142 102,523 103,267 103,775 103,427
Diluted 114,191 113,062 110,424 110,072 109,711
FISCAL 1999
Net revenues $ 180,630 $ 143,922 $ 183,872 $ 184,017 $ 692,441
Gross profit $ 100,892 $ 80,835 $ 109,153 $ 117,058 $ 407,938
Net income (loss) $ (58,749) $ (25,924) $ 25,012 $ 46,368 $ (13,293)
Net income (loss) per share:
Basic $ (0.51) $ (0.23) $ 0.23 $ 0.43 $ (0.12)
Diluted $ (0.51) $ (0.23) $ 0.23 $ 0.41 $ (0.12)
Weighted average shares outstanding:
Basic 114,200 111,583 108,040 106,687 110,127
Diluted 114,200 111,583 110,881 111,881 110,127
41
REPORT OF MANAGEMENT
Management is responsible for the preparation and integrity of the
consolidated financial statements and other financial information presented
in the annual report. The accompanying financial statements were prepared in
conformity with accounting principles generally accepted in the United States
and as such include some amounts based on management's best judgments and
estimates. Financial information in the annual report is consistent with that
in the financial statements.
Management is responsible for maintaining a system of internal business
controls and procedures to provide reasonable assurance that assets are
safeguarded and that transactions are authorized, recorded, and reported
properly. The internal control system is continuously monitored by management
review, written policies and guidelines, and careful selection and training of
qualified personnel who are provided with and expected to adhere to the
Company's standards of business conduct. Management believes the Company's
internal controls provide reasonable assurance that assets are safeguarded
against material loss from unauthorized use or disposition, and the financial
records are reliable for preparing financial statements and other data and
maintaining accountability for assets.
The Audit Committee of the Board of Directors meets periodically with the
independent accountants and management to discuss internal business controls,
auditing, and financial reporting matters. The Committee also reviews with the
independent accountants the scope and results of the audit effort.
The independent accountants, PricewaterhouseCoopers LLP, are engaged to
audit the consolidated financial statements of the Company and conduct such
tests and related procedures, as they deem necessary in accordance with
auditing standards generally accepted in the United States. The opinion of
the independent accountants, based upon their audit of the consolidated
financial statements, is contained in this annual report.
/s/ Robert N. Stephens /s/ Andrew J. Brown
- --------------------------------------- ------------------------------------
Robert N. Stephens Andrew J. Brown
PRESIDENT AND CHIEF EXECUTIVE OFFICER VICE PRESIDENT, FINANCE AND
CHIEF FINANCIAL OFFICER
/s/ Kenneth B. Arola /s/ J. Peter Campagna
- --------------------------------------- ------------------------------------
Kenneth B. Arola J. Peter Campagna
VICE PRESIDENT AND CORPORATE CONTROLLER VICE PRESIDENT AND TREASURER
42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Adaptec, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of stockholders' equity
present fairly, in all material respects, the financial position of Adaptec,
Inc. and its subsidiaries at March 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2000, in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP.
- ---------------------------------------
PricewaterhouseCoopers LLP
San Jose, California
April 26, 2000
43
SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS DATA FOR THE YEARS ENDED MARCH 31:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999 1998 1997 1996
----------- ----------- ----------- ----------- --------
Net revenues $ 811,161 $ 692,441 $ 1,007,293 $ 933,868 $ 659,347
Cost of revenues 282,672 284,503 391,100 388,969 275,939
Patent settlement fee 9,599 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 518,890 407,938 616,193 544,899 383,408
- --------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 305,813 441,428 391,361 383,671 257,273
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of a
change in accounting principle 170,789 (13,293) 181,877 107,561 103,375
Cumulative effect of a change in accounting
principle, net of tax benefit -- -- (9,000) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 170,789 $ (13,293) $ 172,877 $ 107,561 $ 103,375
NET INCOME (LOSS) PER SHARE FOR THE YEARS ENDED
MARCH 31:
Basic
Income (loss) before cumulative effect of
a change in accounting principle $ 1.65 $ (0.12) $ 1.61 $ 0.99 $ 0.99
Cumulative effect of a change in
accounting principle -- -- (0.08) -- --
----------- ----------- ------------- ----------- ---------
Net income (loss) $ 1.65 $ (0.12) $ 1.53 $ 0.99 $ 0.99
=========== =========== ============= =========== =========
Diluted
Income (loss) before cumulative effect of
a change in accounting principle $ 1.56 $ (0.12) $ 1.54 $ 0.93 $ 0.95
Cumulative effect of a change in
accounting principle -- -- (0.08) -- --
----------- ----------- ------------- ----------- ---------
Net income (loss) $ 1.56 $ (0.12) $ 1.46 $ 0.93 $ 0.95
=========== =========== ============= =========== =========
Weighted Average Shares Outstanding:
Basic 103,427 110,127 113,172 108,456 104,136
Diluted 109,711 110,127 118,432 115,596 109,073
BALANCE SHEET DATA AS OF MARCH 31:
Cash, cash equivalents and marketable securities $ 662,691 $ 743,912 $ 697,382 $ 548,441 $ 295,494
Working capital 668,360 857,651 850,610 693,629 334,989
Total assets 1,346,284 1,173,068 1,275,229 1,043,494 646,486
Long-term liabilities, net of current portion 244,200 230,000 230,000 230,850 4,250
Stockholders' equity 874,858 790,702 904,745 688,325 511,945
44
The Company's common stock is traded on the Nasdaq Stock Market under the
symbol ADPT. The following table sets forth the range of the high and low
closing prices by quarter as reported by Nasdaq National Market System.
2000 1999
---------------------------- -------------------------
HIGH LOW HIGH LOW
--------- --------- --------- ----------
First quarter $ 39.25 $ 19.75 $ 24.13 $ 12.50
Second quarter 41.94 32.00 15.00 8.38
Third quarter 57.13 36.69 19.88 7.88
Fourth quarter 62.25 35.31 26.75 17.44
At March 31, 2000, there were 811 holders of record of the Company's common
stock. The Company has not paid cash dividends on its common stock and does not
currently plan to pay cash dividends to its stockholders in the near future.
45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
RESULTS OF OPERATIONS
BUSINESS SEGMENTS: In the fourth quarter of fiscal 1999, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information." In
fiscal 1999, the Company evaluated its product segments in accordance with
SFAS 131 and concluded that its reportable segments were Host Input/Output
("I/O"), Redundant Array of Independent Disks ("RAID"), Software, Peripheral
Technology Solutions ("PTS") and Other.
In the fourth quarter of fiscal 2000, the Company changed the internal
reporting of its business segments, and therefore has restated its prior
years' presentation for financial disclosure purposes to conform to this
revised segment reporting. The current segments are organized by technologies
and include Direct Attached Storage ("DAS"), Storage Networking Solutions
("SNS"), Software, PTS and Other. Current market trends indicate that Host
I/O and RAID technologies are converging, that is, data protection is
becoming standard in the majority of server configurations. Accordingly, the
Company has combined two of its former business segments - Host I/O and RAID
- - to form DAS. Additionally, one of the Company's business lines formerly
reported as part of the Host I/O segment -Networking Products Group ("NPG") -
has been reclassified to SNS, a new segment. The Software, PTS and Other
segments remain unchanged.
DIRECT ATTACHED STORAGE: The DAS segment designs, develops, manufactures
and markets I/O management solutions to the entire range of servers,
workstations and high-end desktops. These systems employ internal disk drives
as their primary mass storage solution, but also require high-performance
connectivity to additional internally and externally connected storage and
peripherals. The performance of the I/O subsystem is an important component
of overall system performance. The need for high-performance I/O server
solutions has been increasing due to greater Internet usage, multitasking
operating systems and large multimedia files.
The Company's I/O solutions include Small Computer System Interface
("SCSI") technology delivered via adapter cards and controller chips and
SCSI-based and fibre-channel based RAID technology. These solutions combine
the most advanced SCSI performance with manageability and backwards
compatibility. SCSI technology connects a computer's central processing unit
("CPU") to internal and external peripherals, including storage devices. The
Company's RAID products are utilized in systems ranging from entry-level
workstations to enterprise-class servers, improving data storage speed,
integrity, and reliability.
In December 1999, the Company acquired Distributed Processing Technology,
Corp. ("DPT"), a supplier of high-performance storage solutions, including
RAID controllers and storage subsystems. Subsequent to the acquisition date,
operating results of DPT have been combined with those of the Company.
STORAGE NETWORKING SOLUTIONS: The emerging SNS segment will focus on
bringing new levels of functionality and interoperability with storage area
network ("SAN") initiatives, including fibre channel, ethernet and
infiniband. The SNS segment's primary initiative is developing, manufacturing
and marketing fibre channel adapters, and marketing storage fabric solutions
for the SAN marketplace. In addition, the Company will evaluate new emerging
opportunities in areas such as storage appliances, ethernet-based storage
architectures, and external RAID controllers. Customers' needs for storage
are changing in response to the growth of data brought about by eBusiness and
the Internet. In response to demand for lower cost of data management,
increased data availability, higher performance and simplified storage
scalability, multiple storage architectures are emerging, where storage
devices are connected directly into a
46
network-like fabric. The Company intends to provide a variety of storage
solutions to meet customer demands in the existing corporate marketplace and
in the Internet infrastructure market.
In January 2000, the Company entered into a four-year agreement with
Agilent technologies, Inc. ("Agilent") to co-develop, market and sell fibre
channel adapters. The alliance is targeted at providing interoperability and
support to drive customer confidence and accelerate the adoption of fibre
channel in the Windows NT market. The Company will license Agilent's fibre
channel adapter and software driver technology and pay guaranteed royalties to
Agilent based on revenue from certain products. Amortization of the warrant
value and a portion of the guaranteed royalty costs have been included in the
operating results of the SNS segment beginning in the fourth quarter of fiscal
2000.
SOFTWARE: The Software segment designs, develops and markets primarily
application software for personal computers and optical peripherals, including
compact disk ("CD") recordable ("CD-R"), CD-rewriteable ("CD-RW") and digital
video disks ("DVD") recordable devices. The Company's application software
products allow users to store data, including audio, video and still photos,
to virtually all marketed CD-R and CD-RW drives using industry standard
formats. The application software, along with the peripherals, provides users
with a cost effective alternative to other forms of removable media for
general purpose computing needs, including the ability to transfer downloaded
music from the Internet to CDs for private use or creating compilations of
music from purchased music CD labels. The Company's CD-R software offerings
are available as stand-alone products, and also ship built-in or "bundled"
with most CD-R drives in the desktop market.
In July 1999, the Company acquired CeQuadrat GmbH ("CeQuadrat"), a
German-based software company, also providing CD-R and CD-RW products,
primarily in the European markets. With the acquisition came enhanced product
development and engineering expertise, as well as a greater European customer
base. Beginning in the second quarter of fiscal 2000, operating results of
CeQuadrat were combined with those of the Company.
In March 2000, the Company acquired Wild File, Inc. ("Wild File"), a
software company providing data protection software that allows desktop users
to undo a multitude of problems arising from system crashes, failed software
installations, and user error. With the addition of Wild File's existing
software line, the Company now offers solutions for moving, managing, and
protecting all types of content - audio, video, photo and data. In March
2000, operating results of Wild File were combined with those of the Company.
On June 8, 2000, the Company announced that it plans to spin off the
Software segment in the form of a fully independent and separate company (the
"Software Company"). The Company anticipates to complete an initial public
offering ("IPO") of approximately 15% of the Software Company's stock and
distribute the remaining shares in a tax-free distribution to the Company's
shareholders. The shareholder distribution will be subject to board approval,
regulatory approval and receipt of a tax-free letter ruling from the IRS.
PTS: The business lines that comprised the PTS segment were sold in
November 1998 and January 1999 to Texas Instruments, Inc. ("TI") and
STMicroelectronics, Inc. ("ST"), respectively. This segment designed,
developed, manufactured and marketed proprietary integrated circuits for use
in mass storage devices and other peripherals.
OTHER: The Other segment includes unallocated corporate related revenues
and expenses, patent settlement fee, interest and other income, interest
expense, write-off of acquired in-process technology resulting from
acquisitions, restructuring charges, other charges and the gain on the sale
of PTS. Additionally, the Other segment includes revenues and expenses
related to the business lines divested in fiscal 1999, including external
storage, satellite networking and fibre channel. Although these business
lines were divested, the Company continues to hold a minority interest
Chaparral Network Storage, Inc. ("Chaparral", formerly known as Chaparral
Technologies, Inc.), BroadLogic, Inc. ("BroadLogic") and JNI Corporation
("JNI", formerly known as Jaycor Networks, Inc.), the companies which
acquired these business lines, respectively.
NET REVENUES The Company's fiscal 2000 net revenues increased 17% from
the prior year to $811.2 million. Net revenues for the year were comprised of
$703.7 million from the DAS segment, an increase of 32% from the prior year,
$25.3 million from the SNS segment, an increase of 27% from the prior year,
$78.2 million from the Software segment, an increase of 66% from the prior
year, and $4.0 million of Other net revenues, an increase of 78% from the
prior year. The Company's fiscal 1999 net revenues also included $90.8
million from the PTS segment.
Fiscal 2000 net revenues from the DAS segment increased year over year
primarily as a result of sales of the Company's high end RAID product which was
first introduced in the third quarter of fiscal 1999.
47
Additionally, the DAS segment net revenues increased from sales of SCSI
adapter cards and chips in the workstation and server markets, as a result of
increased demand for high performance I/O, and SCSI-based RAID products sold
to distributors. The increased demand for high performance I/O is driven by
the growth in on-line applications like electronic commerce, on-line
publishing, and proliferation of the Internet and corporate intranets. The
increase was partially offset by a decrease in demand for desktop products,
primarily attributable to continued penetration of products incorporating the
less-expensive Ultra-DMA technology. The Company expects that DAS net
revenues from desktop products will continue to be adversely impacted by
Ultra-DMA technology in the future. Ultra-DMA technology has not had a
material impact on net revenues derived from the workstation and server
markets, although there can be no assurance that Ultra-DMA technology will
not have a material adverse impact in the future.
Fiscal 2000 and 1999 net revenues from the SNS segment were derived from
the networking products business line. Fiscal 2000 SNS net revenues increased
year over year primarily as a result of additional design wins with certain
original equipment manufacturers ("OEMs"). Additionally, beginning in the
fourth quarter of fiscal 1999, the Company restructured certain areas of the
business and began focusing more on sale and marketing activities. In turn,
this increased sales to existing OEMs.
Fiscal 2000 net revenues from the Software segment increased year over
year primarily as a result of continued worldwide growth in the CD-R and
CD-RW drive markets and additional design wins with personal computer ("PC")
OEMs. However, the higher unit volume shipments were partially offset by the
decline in per unit royalties. Additionally, the Company launched Easy CD
Creator 4.0 Deluxe domestically in the second quarter of fiscal 2000 and
worldwide in the third quarter of fiscal 2000. The acquisition of CeQuadrat,
beginning in the second quarter of fiscal 2000, also contributed additional
net revenues, primarily in Europe.
The Company's fiscal 1999 net revenues decreased 31% from the prior year to
$692.4 million. Net revenues for the year were comprised of $532.3 million from
the DAS segment, a decrease of 24% from the prior year, $20.0 million from the
SNS segment, an increase of 2% from the prior year, $47.1 million from the
Software segment, an increase of 23% from the prior year, $90.8 million from the
PTS segment, a decrease of 64% from the prior year and $2.2 million of Other net
revenues.
Fiscal 1999 net revenues from the DAS segment decreased from fiscal 1998
primarily as a result of competitive sales of less expensive desktop products
incorporating Ultra-DMA technology. The decline was partially offset by the
demand for high performance I/O driven by the growth in on-line applications and
the introduction of the Company's high-end RAID product in the third fiscal
quarter.
Fiscal 1999 net revenues from the SNS segment increased 2% year over
year. Net revenues were derived from the networking products business line in
both years. There were no significant factors impacting the slight
fluctuation in net revenues from fiscal 1998 to fiscal 1999.
Fiscal 1999 net revenues from the Software segment increased year over year
as a result of increased demand for CD-R and CD-RW drives.
Fiscal 1999 net revenues from the PTS segment represented approximately nine
months of revenue versus twelve months in fiscal 1998, as the products that
comprised the PTS segment were sold to TI and ST in November 1998 and January
1999, respectively. Proportionately, net revenues from the PTS segment still
declined due to continued weakness in the disk drive industry and Asian markets.
48
GROSS MARGIN The Company's fiscal 2000 gross margin was 64%, compared to
59% in fiscal 1999 and 61% in fiscal 1998. The Company's fiscal 2000 gross
margin was favorably impacted by manufacturing efficiencies obtained through
greater production volumes as compared to fiscal 1999, as well as improved
pricing obtained from the Company's global suppliers. However, the Company's
fiscal 2000 gross margin was also adversely impacted by a patent settlement
fee included as a component of cost of revenues.
In May 2000, the Company entered into a cross-license agreement with a
third party. Under the agreement, the Company will pay the third party a
patent settlement fee in return for a release from past infringement claims
prior to January 1, 2000 and a patent license fee for the use of certain of
the third party's patents through June 30, 2004. The aggregate patent fee to
be paid by the Company under the proposed cross-license agreement will range
from $11.0 million to $25.0 million depending on the outcome of an evaluation
of certain patents by an independent party. The Company's best estimate of
the aggregate patent fee that will be payable under the cross-license
agreement is $18.0 million. The portion of the estimated fee allocated to net
revenues from periods prior to December 31, 1999 (the date the amount was
probable and estimateable) of $9.6 million was written off and reflected as a
component of cost of revenues under the caption "Patent settlement fee" in
the Consolidated Statement of Operations for the year ended March 31, 2000.
The remaining estimated patent fee pertaining to future periods was allocated
to an intangible asset the intangible asset is being amortized over the
period from January 1, 2000 through June 30, 2004, and is included in "Cost
of revenues" in the Consolidated Statement of Operations.
The Company's fiscal 1999 and 1998 results of operations included the PTS
segment, which was divested prior to fiscal 2000. Excluding the divested PTS
segment, fiscal 1999 and 1998 gross margins were 63% and 66%, respectively.
The PTS products generally obtained a lower gross margin that the DAS segment
which represents the largest percentage of net revenues. Additionally, the
fiscal 1999 gross margin was adversely impacted by the proportionately higher
DAS sales to OEMs as a percentage of total DAS sales, due to the Company's
focus on reducing inventory at distributors.
RESEARCH AND DEVELOPMENT EXPENSES The Company's fiscal 2000 research and
development ("R&D") expenses decreased 29% from the prior year to $103.1
million. The decrease was primarily attributable to $30.4 million of R&D
expenses related to the divested PTS segment included in fiscal 1999. The
decrease was also attributable to company-wide cost reduction programs
effected during fiscal 1999 which included reductions in workforce and the
curtailment of costs related to the divesting of certain unprofitable
business activities (see also Restructuring Charges). The Company initiated
cost reduction programs in order to bring operating expenses in line with net
revenues. The business divestitures were completed to further management's
objective to refocus the business along its core competencies. The cost
benefits of these reductions were not fully realized until fiscal 2000.
Fiscal 2000 R&D expenses as a percentage of net revenues were 13% compared
to 21% in fiscal 1999.
The Company's fiscal 1999 R&D expenses decreased 14% from the prior year
to $146.2 million. The decrease was primarily attributable to the
company-wide cost reduction programs mentioned above. Fiscal 1999 R&D
expenses as a percentage of net revenues were 21% compared to 17% in fiscal
1998, due to the decline in fiscal 1999 net revenues.
SELLING, MARKETING, AND ADMINISTRATIVE EXPENSES The Company's fiscal 2000
selling, marketing and administrative expenses decreased 7% from the prior year
to $159.4 million. The decrease is primarily attributable to company-wide cost
reduction programs effected during fiscal 1999, specifically reductions in
workforce (see also Restructuring Charges). The cost benefits of these
reductions were not fully realized until fiscal 2000. In addition, the decrease
was attributable to $5.9 million of selling, marketing and administrative
expenses related to the divested PTS segment included in fiscal 1999. Fiscal
2000 selling, marketing and administrative expenses as a percentage of net
revenues were 20% compared to 25% in fiscal 1999.
The Company's fiscal 1999 selling, marketing and administrative expenses
decreased 18% from the prior year to $170.7 million. The decrease was
primarily attributable to company-wide cost reduction programs mentioned
above, specifically reductions in workforce. Fiscal 1999 selling, marketing
and administrative expenses as a percentage of net revenues were 25% compared
to 20% in fiscal 1998. The increase as a percentage of net revenues is
primarily related to the decline in fiscal 1999 net revenues. Also, the cost
reductions expected from the restructuring and divesting activities were not
fully realized until fiscal 2000.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES The Company's fiscal 2000
amortization of goodwill and other intangibles included in operating expenses
was $23.3 million compared to $10.3 million and $7.7 million in fiscal 1999
and 1998, respectively. Amortization of goodwill and other intangibles for
fiscal 2000 included goodwill associated with the Company's fiscal 1997
acquisition of Data Kinesis, Inc. ("DKI"), goodwill and other intangibles
associated with the Company's fiscal 2000 acquisitions of CeQuadrat, DPT and
Wild File and the amortization of warrant costs associated with the agreement
with Agilent referenced below. Amortization of goodwill and other intangibles
related to the fiscal 2000 acquisitions was recorded from the respective
acquisition dates through March 31, 2000.
49
In January 2000, the Company entered into a four-year agreement with Agilent
to co-develop, market and sell fibre channel host adapters. In exchange, the
Company issued warrants to Agilent to purchase 1,160,000 shares of the Company's
common stock at $62.25 per share. The warrants have a term of four years from
the date of issuance and are immediately exercisable. The warrants were valued
at $37.1 million using the Black-Scholes valuation model. The value of the
warrants was recorded as an intangible asset in the fourth quarter of fiscal
2000 and is being amortized ratably over the term of the agreement.
Amortization of goodwill and other intangibles for fiscal 1999 and 1998
included goodwill associated with the Company's fiscal 1997 acquisitions of
DKI and Western Digital's Connectivity Solutions Group ("WD"), and the
Company's fiscal 1996 acquisition of Future Domain Corporation. Fiscal 1999
amortization of goodwill and other intangibles also included goodwill and
other intangibles associated with the Company's fiscal 1999 acquisition of
Ridge Technologies, Inc. ("Ridge") and the acquisition of read channel and
preamplifier ASIC technologies ("ASIC technologies") purchased from Analog
Devices, Inc. ("ADI"). Fiscal 1998 amortization of goodwill and other
intangibles also included goodwill associated with the Company's fiscal 1997
acquisitions of Sigmax Technology, Inc. ("Sigmax") and Skipstone, Inc.
("Skipstone"). Goodwill and other intangibles associated with acquisitions
prior to fiscal 2000 have either been written off or fully amortized as of
March 31, 2000.
WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY During fiscal 2000 and 1999,
the Company purchased complementary businesses recorded under the purchase
method of accounting, resulting in aggregate write-offs of acquired
in-process technology of $20.1 million and $45.5 million, respectively.
WILD FILE: In March 2000, the Company purchased Wild File, a supplier of
continuous backup and system recovery software. In consideration, the Company
paid $13.2 million in cash, issued 392,000 shares of the Company's common
stock valued at $17.1 million and assumed stock options valued at $0.8
million. The options assumed were valued using the Black-Scholes valuation
model. Due to restrictions placed on the disposal of certain shares, $2.6
million of the common stock was accounted for as "Deferred stock-based
compensation", a contra equity account on the Consolidated Balance Sheet as
of March 31, 2000. The deferred stock-based compensation was not included in
the purchase price. As part of the purchase agreement, $4.4 million of the
purchase price was held back for unknown liabilities that may have existed as
of the acquisition date. The holdback was funded to an escrow account and
therefore does not represent cash or a liability of the Company as of March
31, 2000. The holdback will be paid for such unknown liabilities or to the
seller within one year from the acquisition date and was included as part of
the purchase price. Additionally, the Company incurred $0.4 million in
professional fees, including legal, valuation and accounting fees, related to
the acquisition, which were included as part of the purchase price of the
transaction.
The Company accounted for the acquisition of Wild File using the purchase
method of accounting and the impact of the acquisition was not material to
the Company's consolidated financial results of operations as of the
acquisition date.
50
DPT: In December 1999, the Company purchased DPT, a supplier of
high-performance storage solutions, including RAID controllers and storage
subsystems, for $185.2 million in cash and assumed stock options valued at
$51.8 million using the Black-Scholes valuation model. As part of the
purchase agreement, $18.5 million of the purchase price was held back for
unknown liabilities that may have existed as of the acquisition date. The
holdback remains outstanding and was included in "Accrued liabilities" in the
Consolidated Balance Sheet as of March 31, 2000. The holdback will be paid
for such unknown liabilities or to the seller within 12 months from the
acquisition date and was included as part of the purchase price.
Additionally, the Company incurred $1.1 million in professional fees,
including legal, valuation and accounting fees, related to the acquisition,
which were included as part of the purchase price of the transaction. The
Company accounted for the acquisition of DPT using the purchase method of
accounting.
The Company identified research projects in areas for which technological
feasibility had not been established and no alternative future uses existed.
Approximately $16.7 million of the purchase price was allocated to acquired
in-process technology and written off in the third quarter of fiscal 2000. The
Company acquired technology consisting of next generation RAID controllers. The
value was determined by estimating the expected cash flows from the project once
commercially viable, discounting the net cash flows back to their present value,
and then applying a percentage of completion to the calculated value as defined
below.
NET CASH FLOWS. The net cash flows from the identified project was based
on estimates of net revenues, cost of revenues, selling, marketing and
administrative expenses, R&D expenses, royalty expenses and income taxes from
the project. The Company believes the assumptions used in the valuation as
described below were reasonable at the time of the acquisition. The R&D
expenses excluded costs to bring the acquired in-process project to
technological feasibility.
NET REVENUES. The estimated net revenues were based on management
projections of the acquired in-process project. The business projections were
compared with and found to be in line with industry analysts' forecasts of
growth in substantially all of the relevant markets. Anticipated annual net
revenues from the acquired in-process technology product are expected to
begin in the second half of fiscal 2002 and peak in mid-fiscal 2004.
Anticipated net revenues will then begin to decline as other new products and
technology are anticipated to become available and are expected to fully
replace the in-process technology product in the market place by the end of
fiscal 2006. These projections were based on estimates of market size and
growth, expected trends in technology, and the nature and expected timing of
new product introductions by the Company and its competitors.
OPERATING EXPENSES. The estimated operating expenses used in the valuation
analysis of DPT included cost of revenues, selling, marketing and
administrative expenses and R&D expenses. In developing
future expense estimates and evaluation of DPT's overall business model,
specific
51
product results including both historical and expected direct expense levels
(as appropriate), and an assessment of general industry metrics was conducted.
GROSS MARGINS. Projected gross margins were based on DPT's historical
margins, which were in line with the Company's related products.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Estimated selling,
marketing and administrative expenses were consistent with DPT's historical
cost structure in the first year net revenues were generated and drop in the
later years to account for economies of scale as total net revenues increase.
R&D EXPENSES. Estimated R&D expenses consist of the costs associated with
activities undertaken to correct errors or keep products updated with current
information (also referred to as "maintenance" R&D) after a product is
available for general release to customers. These activities include routine
changes and additions. The estimated maintenance R&D expense ranged from 1%
to 2% of net revenues for the in-process project throughout the
estimation period.
EFFECTIVE TAX RATE. The effective tax rate utilized in the analysis of the
in-process project reflects a combined historical industry average for
the United States federal and state statutory income tax rates.
ROYALTY RATE. The Company applied a royalty charge of 25% of operating
income for the in-process project to attribute value for dependency on
predecessor core technologies.
DISCOUNT RATE. The cost of capital reflects the estimated time to complete
and the level of risk involved. The cost of capital used in discounting the net
cash flows from acquired in-process technology was 25% .
PERCENTAGE OF COMPLETION. The percentage of completion was determined
using costs incurred by DPT prior to the acquisition date compared to the
remaining R&D to be completed to bring the project to technological
feasibility. The Company estimated, as of the acquisition date, the project
was 60% complete and the estimated costs to complete the project were
approximately $7.8 million.
The Company expects to complete the project in the fourth quarter of
fiscal 2001. However, development of this project remains a significant risk
to the Company due to the remaining effort to achieve technical feasibility,
rapidly changing customer markets and significant competition from numerous
companies. Failure to bring these products to market in a timely manner could
adversely impact sales and profitability of the Company in the future.
Additionally, the value of the intangible assets acquired may become impaired.
If the Company had acquired DPT at the beginning of the periods
presented, the Company's unaudited pro forma net revenues, net income (loss)
and net income (loss) per share would have been as follows (in thousands
except per share amounts):
Years Ended March 31, 2000 1999
-------------- --------------
Net revenues $840,173 $719,850
Net income (loss) $144,989 $(74,978)
Net income (loss) per share:
Basic $1.40 $(0.68)
Diluted $1.32 $(0.68)
CEQUADRAT: In July 1999, the Company purchased CeQuadrat, a developer of
CD-R software products, for $24.0 million in cash. As part of the purchase
agreement, $4.8 million of the purchase price was held back for unknown
liabilities that may have existed as of the acquisition date. In the third
quarter of fiscal 2000, the Company paid the holdback to an escrow account,
therefore the amount does not represent cash or a liability of the Company as of
March 31, 2000. The holdback will be paid for such unknown liabilities or to the
seller within 12 months from the acquisition date and was included as part of
the purchase price. Additionally, the
52
Company incurred $0.3 million in professional fees, including legal,
valuation and accounting fees, related to the acquisition, which were
included as part of the purchase price of the transaction.
The Company accounted for the acquisition of CeQuadrat using the purchase
method of accounting and, excluding the write off of acquired in-process
technology, the impact of the acquisition was not material to the Company's
consolidated financial results of operations as of the acquisition date.
The Company identified research projects in areas for which technological
feasibility had not been established and no alternative future uses existed.
Approximately $3.0 million of the purchase price was allocated to acquired
in-process technology and written off in the second quarter of fiscal 2000.
The Company acquired technology consisting of next generation
consumer-oriented CD-R software, next generation professional-oriented CD-R
software and CD backup software; the amount of in-process technology
allocated to each of the projects was approximately $0.6 million, $2.2
million and $0.2 million, respectively. The value for each of the projects
was determined by estimating the expected cash flows from the projects once
commercially viable, discounting the net cash flows back to their present
value, and then applying a percentage of completion to the calculated value
as defined below.
NET CASH FLOWS. The net cash flows from the identified projects were
based on estimates of net revenues, cost of revenues, selling, marketing and
administrative expenses, R&D expenses, third party license fees, royalty
expenses and income taxes from those projects. The Company believes the
assumptions used in the valuation as described below were reasonable at the
time of the acquisition. The R&D expenses excluded costs to bring acquired
in-process projects to technological feasibility.
NET REVENUES. The estimated net revenues were based on management
projections of the acquired in-process projects for the next generation
consumer-oriented CD-R software, next generation professional-oriented CD-R
software and the CD backup software. The business projections were compared
with and found to be in line with industry analysts' forecasts of growth in
substantially all of the relevant markets. Anticipated net revenues from the
acquired in-process technology products are expected to begin in the second
half of fiscal 2000 and peak in mid-fiscal 2001. Anticipated annual net
revenues will decline rapidly as new products and technology are anticipated
to become available and are expected to fully replace the in-process
technology products in the market place by fiscal 2002. These projections
were based on estimates of market size and growth, expected trends in
technology, and the nature and expected timing of new product introductions
by the Company and its competitors.
OPERATING EXPENSES. The estimated operating expenses used in the
valuation analysis of CeQuadrat included cost of revenues, selling, marketing
and administrative expenses, R&D expenses and third party license fees. In
developing future expense estimates and evaluation of CeQuadrat's overall
business model, specific product results including both historical and
expected direct expense levels (as appropriate), and an assessment of general
industry metrics was conducted.
GROSS MARGINS. Projected gross margins were based on CeQuadrat's
historical margins, which were in line with the Company's Software segment
that acquired CeQuadrat.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Estimated selling,
marketing and administrative expenses were consistent with CeQuadrat's
historical cost structure in the first year net revenues were generated and
drop in the later years to account for economies of scale as total net
revenues increase.
53
R&D. Estimated R&D expenses consist of the costs associated with
activities undertaken to correct errors or keep products updated with current
information (also referred to as "maintenance" R&D) after a product is
available for general release to customers. These activities include routine
changes and additions. The estimated maintenance R&D expense was 1.5% of net
revenues for the in-process technologies throughout the estimation period.
THIRD PARTY LICENSE FEES. Estimated third party license fees consist of the
costs associated with licensing third party proprietary technology for use in
CeQuadrat's products. The estimated third party license fees ranged from 1% to
2% of net revenues for the in-process technologies throughout the estimation
period.
EFFECTIVE TAX RATE. The effective tax rate utilized in the analysis of the
in-process technologies reflects a historical tax rate in Germany, where the
majority of the anticipated future operations will take place.
ROYALTY RATE. The Company applied a royalty charge of 30% of operating
income for each in-process project to attribute value for dependency on
predecessor core technologies.
DISCOUNT RATE. The cost of capital reflects the estimated time to complete
and the level of risk involved. The cost of capital used in discounting the net
cash flows from acquired in-process technology was 30% for each of the acquired
in-process technology projects. Higher required rates of return, which would
correspond to higher risk, are partially mitigated by the Company's expertise in
the CD-R market.
PERCENTAGE OF COMPLETION. The percentage of completion for the projects was
determined using costs incurred by CeQuadrat prior to the acquisition date
compared to the remaining R&D to be completed to bring the
projects to technological feasibility. The Company estimated, as of the
acquisition date, the next generation consumer-oriented CD-R software, next
generation professional-oriented CD-R software and the CD backup software
projects were 82%, 69% and 82% complete, respectively, and the estimated costs
to complete the projects were approximately $0.1 million in aggregate.
All of the in-process technology projects acquired from CeQuadrat were
completed during the third quarter of fiscal 2000, and estimated costs to
complete the projects were in line with estimates. The next generation
professional-oriented CD-R software and the CD back up software began
shipping in the third quarter of fiscal 2000. The next generation
consumer-oriented CD-R software will not be commercially released.
RIDGE: During fiscal 1998, the Company invested an aggregate $5.0 million
in Series A Preferred Stock, representing a then 19.9% interest in Ridge. In
conjunction with this investment, Grant Saviers, former Chairman and CEO of
the Company, became a director of Ridge. In December 1997, the Company wrote
down its minority investment by $3.5 million to $1.5 million based on an
identified impairment. In February 1998, the Company guaranteed a $6.8
million line of credit on behalf of Ridge in exchange for a warrant to
purchase up to 200,000 shares of Ridge common stock. During fiscal 1998, the
Company incurred $0.9 million in research and development expenditures
related to consulting services provided by Ridge. In May 1998, the Company
purchased Ridge for 1,241,538 shares of the Company's common stock valued at
$21.2 million and assumed stock options valued at $13.1 million. The options
assumed were valued using the Black-Scholes valuation model. Additionally,
the Company incurred $0.8 million in professional fees, including finance,
accounting, legal and appraisal fees, related to the acquisition, which were
included as part of the purchase price of the transaction. In-process
technology was valued at $39.4 million and was written off in the first
quarter of fiscal 1999. In August 1998, the Company exited the storage
subsystems business line, abandoned the in-process technology projects (these
projects remained incomplete from the date of acquisition through
abandonment) and wrote off the remaining unamortized goodwill of $0.6 million
and an intangible asset of $1.2 million associated with Ridge. The
intangible asset related to the workforce in place.
54
ADI: In April 1998, the Company purchased ASIC technologies from ADI for
$34.4 million in cash. The ASIC technologies purchased from ADI were to be
incorporated into the mainstream removable PTS business line upon completion.
Grant Saviers, former Chairman and CEO of the Company, is a director of ADI. The
Company incurred $0.4 million in professional fees, including finance,
accounting, legal and appraisal fees, related to the acquisition, which were
included as part of the purchase price of the transaction. The in-process
technology was valued at $6.1 million and was written off in the first quarter
of fiscal 1999. In January 1999, the Company sold the mainstream removable PTS
business line, including the in-process technologies purchased from ADI (these
projects remained incomplete from the date of acquisition through their
disposition) and relieved the remaining unamortized goodwill of $18.3 million
and an intangible asset of $1.7 million associated with the ASIC
technologies purchased from ADI. The intangible asset related to the
covenant not to compete.
RESTRUCTURING CHARGES During fiscal 1999, the Company recorded $39.9
million in restructuring charges, including $21.6 million of severance and
benefits ($3.9 million in non-cash stock-based compensation charges), $13.5
million of asset write offs, and $4.8 million in other charges.
FIRST QUARTER RESTRUCTURING PLAN: In the first quarter of fiscal 1999, in
connection with management's plan to reduce costs, improve operating
efficiencies and divest the satellite networking business line, the Company
recorded a restructuring charge of $8.8 million. The Company continues to
hold a minority interest in BroadLogic, the Company which acquired the
satellite networking business line. The restructuring charge was comprised
primarily of severance and benefits of $6.8 million related to the
involuntary termination of approximately 550 employees, primarily in
manufacturing and engineering functions, of which approximately 36% were
based in the U.S. and the remainder were based in Singapore. Additionally,
the Company wrote off machinery and equipment, primarily consisting of
production and test equipment, with a net book value of $1.0 million that was
deemed unnecessary due to the reduction in workforce. The machinery and
equipment was taken out of service and disposed of during the second quarter
of fiscal 1999. The Company incurred $1.0 million in legal, consulting and
accounting charges, related to this restructuring.
The Company recorded a net reduction to the fiscal 1999 first quarter
restructuring provision of $1.4 million in the second quarter of fiscal 1999
and a net increase of $0.2 million in the fourth quarter of fiscal 1999. The
adjustments reflect changes to the anticipated expenses as actual costs
became known. As a result, severance and benefits costs were reduced by $0.6
million, and legal, accounting and consulting costs were reduced by $0.9
million. Additionally, the Company identified an additional $0.3 million of
assets deemed unnecessary due to the first quarter restructuring activities.
SECOND QUARTER RESTRUCTURING PLAN: In the second quarter of fiscal 1999,
the Company recorded a restructuring charge of $26.0 million. This charge was
a direct result of management's decision to refocus the business and divest
certain unprofitable business activities including storage subsystems
(primarily those business activities purchased in connection with the Ridge
transaction), fibre channel, external storage and high-end peripheral
technology solutions. The Company continues to hold a minority interest in
JNI and Chaparral, the companies which acquired the fibre channel and
external storage business lines, respectively.
The second quarter restructuring charge was comprised primarily of
severance and benefits of $9.2 million related to the involuntary termination
of approximately 300 U.S. employees, primarily in engineering functions. The
Company wrote off machinery and equipment (primarily design and development
equipment), furniture and fixtures, and leasehold improvements with a net
book value of $4.4 million, $1.7 million and $1.5 million, respectively. The
assets were taken out of service and disposed of during the second quarter of
fiscal 1999. These assets were deemed unnecessary due to business
divestitures and related reductions in workforce. Additionally, the Company
wrote down test equipment by $0.9 million to its estimated realizable value
of $2.1 million, based on its estimated sales value, and subsequently sold it
in the third quarter of fiscal 1999. Also during the second quarter, the
Company wrote off and scrapped inventory and other assets, including goodwill
associated with the storage subsystems business line, with a net book value
of $1.0 million and $2.0 million,
55
respectively. The Company accrued for contractual obligations of $3.7
million, lease costs of $0.9 million and legal, consulting and accounting
costs of $0.6 million related to the restructuring. The contractual
obligations primarily related to non-cancelable purchase commitments
including approximately $1.6 million of equipment (e.g., development
equipment and computer equipment) and $2.1 million of prototype products. The
lease costs include lease termination costs and estimated future obligations
for non-cancelable lease payments for excess facilities in Northern and
Southern California that were vacated due to the reduction in workforce.
The Company recorded adjustments to the fiscal 1999 second quarter
restructuring provision of $1.4 million in the fourth quarter of fiscal 1999.
The adjustment relates primarily to favorable negotiations with vendors
surrounding contractual obligations where the Company successfully canceled
outstanding purchase orders and reduced cancellation fees for a total of $1.8
million, offset in part by additional legal, consulting and accounting
charges of $0.2 million and additional lease costs of $0.4 million.
Additionally, the adjustments include an increase in severance and benefits
costs of $0.2 million as actual costs were higher per person than
anticipated, and a $0.4 million decrease related to proceeds from the sale of
previously written-off furniture and fixtures and leasehold improvements.
FOURTH QUARTER RESTRUCTURING PLAN: In the fourth quarter of fiscal 1999,
the Company recorded a restructuring charge of $7.8 million. This charge
resulted from a reduction in the infrastructure that supported business lines
divested during fiscal 1999. The restructuring charge was comprised primarily
of severance and benefits of $6.0 million related to the involuntary
termination of approximately 125 employees in various functions, including
manufacturing, sales and administration. Most of these jobs were based in the
United States. The Company wrote off and disposed of equipment (primary
office equipment) with a net book value of $1.2 million deemed unnecessary
due to the reduction in workforce during the fourth quarter of fiscal 1999.
Additionally, the Company accrued for lease costs and legal, consulting and
accounting charges related to the restructuring of $0.2 million and $0.4
million, respectively. The lease costs pertain to lease termination costs for
excess facilities in Washington state that were vacated due to the reduction
in workforce.
The Company anticipates that the remaining restructuring reserve balance
of $0.3 million relating to the second and fourth quarter restructuring plans
will be substantially paid out by the second quarter of fiscal 2001.
ACQUISITION RELATED CHARGES In fiscal 1998, the Company entered into an
agreement to purchase all of the outstanding stock of Symbios, Inc., a
wholly-owned subsidiary of Hyundai Electronics America ("HEA"). In fiscal
1999, the Company and HEA mutually agreed to terminate the agreement. The
Company paid a $7.0 million termination fee and approximately $6.7 million in
nonconsummation fees to HEA. Additionally, the Company incurred approximately
$7.8 million in other acquisition-related charges, including legal,
consulting and other costs. The Company expensed the entire $21.5 million in
fees associated with this terminated acquisition in the first quarter of
fiscal 1999. The charge was reflected in "Other charges" in the Consolidated
Statement of Operations for the year ended March 31, 1999.
ASSET IMPAIRMENT CHARGES The Company regularly evaluates the
recoverability of long-lived assets by measuring the carrying amount of the
assets against the estimated undiscounted future cash flows associated with
them. At the time such evaluations indicate that the future undiscounted cash
flows are not sufficient to recover the carrying value of such assets, the
assets are adjusted to their fair values. Based on these evaluations, the
Company recorded non-cash impairment charges of $4.0 million and $6.7 in
fiscal 1999 and 1998, respectively. The fiscal 1999 impairment charges
related to approximately $1.4 million of manufacturing test equipment located
in Singapore, deemed unnecessary due to non-temporary declines in production
volume and the write-off of approximately $2.6 million of non-trade related
receivables. As of the second quarter of fiscal 1999, net revenues had been
declining over the previous four quarters. Further, the Company was divesting
business lines and did not believe that production volumes would return to
levels necessary to fully utilize the manufacturing equipment. Accordingly,
the testing equipment was taken out of service, written down to zero, and
disposed in the second quarter of fiscal 1999.
56
The fiscal 1998 impairment consisted of impairments of the remaining
balances of goodwill for the acquisitions of Sigmax and Skipstone of $1.5
million and $1.7 million, respectively, and the write-down of the Company's
minority investment in Ridge of $3.5 million. The remaining goodwill for
Sigmax was written off when the Company decided to abandon this business
after the R&D project fell behind and the critical market window was missed,
the engineers acquired in the purchase had left the Company and the
intellectual property was deemed to have no alternative use. The remaining
goodwill from the acquisition of Skipstone was written off when the Company
decided to abandon this business as the market for this technology was not
developing at the rate required to earn a reasonable return on its
investment, most of the engineers acquired in the purchase had left the
Company and the intellectual property had no alternative use. The impairment
and write down of the Ridge minority investment was a result of delays in the
Ridge product. Ridge was not able to bring the Ridge product under
development to market in a timely manner, which management believed resulted
in permanent impairment of the value of the Company's underlying investment
in Ridge.
OTHER CHARGES In fiscal 1999, the Company recorded executive termination
costs of $3.4 million relating to three executives whose employment was
terminated during the fiscal year. The costs consisted of $1.9 million in
severance and benefit payments and $1.5 million in non-cash stock
compensation charges resulting from an amendment to one of the executives
option agreements. The severance and benefits were paid to two of the
executives upon their termination and the third executive's severance and
benefits is being paid over a two-year term which commenced in the second
quarter of fiscal 1999. The option agreements for one of the terminated
executives were amended to allow the vesting of the options to continue for
two years subsequent to the date of termination of employment.
INTEREST AND OTHER INCOME The Company's fiscal 2000 interest and other
income was $47.1 million, compared to $35.1 million and $32.9 million in
fiscal 1999 and 1998, respectively. The increase in interest and other income
from year to year is primarily related to the components of other income.
Fiscal 2000 other income included the gain on the sale of land of $3.5
million, and the gain on the receipt of warrants to purchase JNI common stock
and Chaparral common stock of $11.3 million. Fiscal 1999 other income
represented the gain on the sale of land of $1.6 million. The Company's
fiscal 1998 interest and other income represented only interest earned on
investments.
INTEREST EXPENSE The Company's fiscal 2000 interest expense was $11.6
million compared to $12.1 million and $12.4 million in fiscal 1999 and 1998,
respectively. Interest expense is primarily related to the 4 3/4% Convertible
Subordinated Notes. During fiscal 2000, a noteholder converted $0.2 million
of 4 3/4% Convertible Subordinated Notes into 3,871 shares of the Company's
common stock.
GAIN ON THE SALE OF PTS The Company sold the high-end PTS business line
to TI in November 1998 for $8.5 million in cash. These assets included
manufacturing and test equipment with a net book value of $3.8 million and
inventory with a carrying value of $0.3 million. The unamortized goodwill of
$4.2 million associated with the acquisition of WD
57
was written off against the sale proceeds from TI. Additionally, the Company
incurred legal, accounting and consulting costs of $0.2 million. The Company
did not recognize a gain or loss on this transaction.
The Company sold the mainstream removable PTS business line to ST in
January 1999 for $72.1 million in cash and $3.3 million in cost
reimbursements. The assets sold included manufacturing and test equipment
with a net book value of $5.5 million and inventory with a carrying value of
$2.3 million. The unamortized goodwill of $18.3 million and an intangible
asset of $1.7 million associated with the purchase of ASIC technologies from
ADI and certain other intangible assets of $1.6 million were written off
against the sale proceeds from ST. Additionally, the Company incurred
severance and benefit costs of $12.0 million and legal, accounting and
consulting costs of $2.5 million. The Company recorded a gain of $10.0
million (net of taxes of $21.5 million) on this transaction in the fourth
quarter of fiscal 1999.
INCOME TAXES The Company's effective tax rate for fiscal 2000 was 31%
compared to 164% and 26% for fiscal 1999 and 1998, respectively. The
difference between the Company's effective tax rate and the U.S. federal
statutory tax rate of 35% is primarily attributable to income earned in
Singapore where the Company is subject to a significantly lower effective tax
rate, resulting from a tax holiday relating to certain of its products. The
terms of the tax holiday provide that profits derived from certain products
will be exempt from tax through fiscal 2005, subject to certain conditions.
As of March 31, 2000, the Company has not accrued income taxes on $570
million of accumulated undistributed earnings of it Singapore subsidiary, as
these earnings will be reinvested indefinitely.
The difference between the Company's effective tax rate and the U.S.
federal statutory tax rate is also attributable to the write-off of acquired
in-process technology and goodwill amortization in excess of amounts
deductible for tax purposes and the gain on the sale of PTS.
The Company's tax related liabilities were $100.7 million and $65.8
million as of March 31, 2000 and 1999, respectively. Fluctuations in the tax
relate liability account are a function of the current tax provisions and the
timing of tax payments. Tax related liabilities are primarily comprised of
income, withholding and transfer taxes accrued by the Company in the taxing
jurisdictions in which it operates around the world, including, but not
limited to, the United States, Singapore, Japan, Germany and Belgium. The
amount of the liability is based on management's evaluation of its tax
exposures in light of the complicated nature of the business transactions
entered into by the Company in a global business environment.
CHANGE IN ACCOUNTING POLICY On November 20, 1997, the Emerging Issues
Task Force ("EITF") of the Financial Accounting Standards Board issued EITF
No. 97-13, "Accounting for Costs Incurred in Connection with a Consulting
Contract or an Internal Project that Combines Business Process Reengineering
and Information Technology Transformation." EITF No. 97-13 requires that
business process reengineering costs incurred in connection with an overall
information technology transformation project be expensed as incurred. The
transition provisions of EITF No. 97-13 require that companies that had
previously capitalized such business process reengineering costs charge off
any unamortized amounts as a cumulative effect of a change in accounting
principle. In fiscal 1998, the cumulative effect of the change to the Company
was to decrease net income by $9.0 million (net of tax benefit of $3.0
million).
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES Net cash provided by operating activities during
fiscal 2000 was $278.9 million. Operating cash was generated primarily from
net income of $170.8 million, adjusted for non-cash items, including the
write-off of acquired in-process technology of $20.1 million, depreciation
and amortization expense of $56.5 million and changes in net assets and
liabilities of $19.3 million. Additionally, the Company recorded an income
tax benefit from employee stock transactions of $28.3 million.
58
Net cash provided by operating activities during fiscal 1999 was $207.7
million. Operating cash was generated primarily from the Company's fiscal
1999 net loss of $13.3 million, adjusted for non-cash items including the
write-off of acquired in-process technology of $45.5 million, non-cash
charges associated with restructuring and other charges of $22.9 million and
depreciation and amortization expense of $50.2 million. Additionally, the
Company realized a decrease in its accounts receivable balance from the prior
year of $68.1 million and an increase in its accrued liabilities from the
prior year of $36.2 million, resulting in additional operating cash of $104.3
million.
Net cash provided by operating activities during fiscal 1998 was $245.1
million. Operating cash was generated primarily from net income of $172.9
million which was adjusted for non-cash items, including depreciation and
amortization expense of $42.9 million. Additionally, the Company recorded an
income tax benefit from employee stock transactions of $12.4 million.
INVESTING ACTIVITIES Net cash used for investing activities during fiscal
2000 was $154.5 million. During fiscal 2000, the Company purchased certain
net assets in connection with the acquisitions of CeQuadrat, DPT and Wild
File of $195.0 million (net of cash acquired). The purchases were partially
offset by cash inflows related to proceeds from sales and maturities of
marketable securities, net of reinvestments of $41.9 million.
Net cash provided by investing activities during fiscal 1999 was $55.4
million. During fiscal 1999, the Company received $76.0 million in net
proceeds from the sale of PTS and $43.9 million of proceeds from sales and
maturities of marketable securities (net of reinvestments). The proceeds were
offset in part by the purchase of certain net assets in connection with the
acquisitions of Ridge and ASIC technologies from ADI of $34.1 million (net of
cash acquired) and the purchase of property and equipment of $30.3 million.
Net cash used for investing activities during fiscal 1998 was $346.1
million. During fiscal 1998, the Company reinvested $239.8 million of cash
into marketable securities. The Company also continued to make various
building and leasehold improvements to its facilities and invest in equipment
for product development and manufacturing to support current and future
business requirements. Purchases of property and equipment of $97.7 million
during fiscal 1998 included $11.3 million for land located in California.
FINANCING ACTIVITIES Net cash used for financing activities during fiscal
2000 was $261.5 million. During fiscal 2000, the Company repurchased
11,442,000 shares of its common stock for $396.7 million, of which $19.1
million was accrued as of March 31, 2000 and paid on April 1, 2000. The
repurchases were partially offset by proceeds received from the issuance of
common stock to employees through its stock option and employee stock
purchase plans of $114.1 million
Net cash used for financing activities during fiscal 1999 was $172.7
million. During fiscal 1999, the Company repurchased 12,931,000 shares of its
common stock for $200.2 million. The repurchases were partially offset by
proceeds received from the issuance of common stock to employees through its
stock option and employee stock purchase plans of $33.1 million.
Net cash provided by financing activities during fiscal 1998 was $10.1
million. During fiscal 1998, the Company received proceeds from the issuance
of common stock to employees through its stock option and employee stock
purchase plans of $38.9 million. The proceeds were primarily offset by debt
payments of $21.0 million.
STOCK REPURCHASES In fiscal 2000, the Company repurchased 11,442,000
shares of its common stock at an average price of $34.67 for a total of
$396.7 million, of which $19.1 million was accrued at March 31, 2000 and paid
on April 1, 2000. In fiscal 1999, the Company repurchased 12,931,000 shares
of its common stock at an average price of $15.48 for a total cash outlay of
$200.2 million. In fiscal 1998, the Company repurchased 350,000 shares of its
common stock at an average price of $22.19 for a total cash outlay of $7.8
million. In February 2000, the Company's Board of Directors authorized the
Company to repurchase an
59
additional $200.0 million of its common stock in the open market. As of March
31, 2000 $111.6 million remained authorized for stock buy back under this
program.
LINES OF CREDIT During fiscal 2000, the Company terminated a $10.0
million line of credit it assumed in conjunction with the acquisition of DPT.
Additionally, the Company renewed its existing $60.0 million line of credit
and increased the credit limit to $80.0 million. The renewed line of credit
expires in March 2001.
LIQUIDITY As of March 31, 2000, the Company's principal sources of
liquidity consist of $662.7 million of cash, cash equivalents and marketable
securities and an unsecured $80.0 million revolving line of credit, under
which there were no outstanding borrowings as of March 31, 2000. The Company
believes existing working capital, together with expected cash flows from
operations and available sources of bank, equity and equipment financing,
will be sufficient to support its operations through fiscal 2001.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No.
133 establishes accounting and reporting standards for derivative instruments
and for hedging activities and requires recognition of all derivatives as
assets or liabilities and measurement of those instruments at fair value. In
June 1999, the Financial Accounting Standards Board issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133," which deferred the required date
of adoption of SFAS No. 133 for one year, to fiscal years beginning after
June 15, 2000. The Company will adopt this statement in its first quarter of
fiscal 2002, and is in the process of determining the impact that adoption
will have on its consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." SAB No. 101 provides guidance on applying accounting principles
generally accepted in the United States to revenue recognition in financial
statements. The impact of SAB No. 101 was not material to the Company's
operating results.
In March 2000, the EITF of the Financial Accounting Standards Board
issued EITF No. 00-7, "Application of EITF Issue No. 96-13, Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock, to Equity Derivative Transactions That Contain Certain
Provisions That Require Cash Settlement If Certain Events Occur." EITF No.
96-13 established the accounting standards for equity derivative contracts
indexed to and potentially settled in a company's own stock. It did not
address embedded settlement features which are contingent on events which are
unlikely to occur. EITF No. 00-7 addresses embedded settlement features and
states that contracts which could require cash payment cannot be accounted
for as equity of the issuer. EITF No. 00-7 is effective for new contracts
entered into on or after March 17, 2000. For contracts executed prior to
March 17, 2000, EITF No. 00-7 takes effect on December 31, 2000. The Company
is currently assessing the impact of EITF No. 00-7 on its consolidated
financial statements.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44") "Accounting for Certain Transactions
involving Stock Compensation," an interpretation of APB No. 25. FIN No. 44
clarifies the application of APB No. 25 for (a) the definition of employee
for purposes of applying APB No. 25, (b) the criteria for determining whether
a plan qualifies as a noncompensatory plan, (c) the accounting consequence of
various modifications to the terms of a previously fixed stock option or
award, and (d) the accounting for an exchange of stock compensation awards in
a business combination. FIN No. 44 is effective July 1, 2000, but certain
conclusions cover specific events that occur after either December 15, 1998,
or
60
January 12, 2000. The Company believes the impact of FIN No. 44 will not have
a material effect on its financial position or results of operations.
MARKET RISK DISCLOSURE
As of March 31, 2000, the Company's investment portfolio consisted of
available-for-sale securities, excluding those classified as cash
equivalents, of $482.2 million (See "Note 2. Marketable Securities" of the
Notes to Consolidated Financial Statements for further information). These
securities include both fixed income and equity securities.
The fixed income securities are subject to interest rate risk and will
decline in value if market interest rates increase. If market interest rates
were to increase immediately and uniformly by 10% of levels as of March 31,
2000, the decline in the fair value of the portfolio would not be material to
the Company's financial position.
The equity securities are subject to equity price risk. The Company has
not attempted to reduce or eliminate its market exposure on the equity
securities. The realization of the unrealized gains on its equity securities
is dependent on the market value for the securities, which is subject to
fluctuation and the Company's ability to sell the securities under its
current limitations. There can be no assurance if and when the unrealized
gains will be realized. For each 10% decline in market value of its
available-for-sale equity securities from March 31, 2000, the Company's
marketable securities would decline in value by $10.0 million.
The Company's long-term debt bears interest at a fixed rate. Accordingly,
an immediate 10% change in interest rates would not affect the Company's
long-term debt or on the Company's results of operations.
As of March 31, 2000, the Company had outstanding put warrants that could
obligate the Company to buy back 2.0 million shares of its common stock at
strike prices ranging from $39 to $47 per share at certain dates. The
settlement terms on the put warrants include physical settlement, cash
settlement or net-share settlement at the option of the Company and expire
during the first half of fiscal 2001. The put warrants were priced based on
the market value of the Company's common stock at the date of issuance. The
Company's obligation increases as the market value of its common stock
declines. At March 31, 2000, the market value of the Company's common stock
was $38.625, which is less than the price of the warrants, representing at
$8.8 million obligation at that date. For each $1 decline in market value of
the Company's common stock below the market value of the Company's common
stock at March 31, 2000, the potential obligation of the Company would
increase by $2.0 million. In June 2000, the Company physically settled two of
the equity contracts whereby the Company repurchased 1.0 million shares of
its common stock at average prices of $40 and $42.
In addition to the put warrants, at March 31, 2000, the Company had
outstanding call warrants that would allow the Company to repurchase 1.0
million shares of its common stock at strike prices ranging from $42 to $45
per share at certain dates. The Company has no obligation relative to the
call warrants.
On occasion, the Company enters into forward exchange contracts to hedge
certain firm commitments denominated in foreign currencies. The Company does
not use derivative financial instruments for trading or speculative purposes.
Forward exchange contracts are denominated in the same currency as the
underlying transaction (primarily Singapore dollars) and the terms of the
forward foreign exchange contracts generally match the terms of the
underlying transactions. The effect of an immediate 10% change in exchange
rates on the forward exchange contracts would not affect the Company's
financial position or results of operations, as there were no forward
exchange contracts outstanding as of March 31, 2000 and 1999.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit year is commonly referred to as the Year 2000 Compliance
61
issue. As with many other companies, the Year 2000 Compliance issue presented
risks for the Company. The Company uses a significant number of computer
software programs and operating systems and there are areas in which the Year
2000 Compliance issue could have negatively impacted the Company and its
operations. However, the Company did not experience any significant
interruption of computer systems during the critical transition from the year
1999 to 2000.
The Company defined its critical suppliers and communicated with them to
determine their Year 2000 Compliance readiness and the extent to which the
Company was vulnerable to any third party Year 2000 issues. The Company is
unaware of any significant problems encountered by its critical suppliers
related to the Year 2000 Compliance issue and the Company did not experience
any disruptions in its operations.
The majority of the Company's products are not date sensitive, however,
for those products that are date sensitive, the Company, as a standard part
of its product development cycle, has procedures, tests, and methodologies in
place to ensure its products were Year 2000 Compliant. As a result, the
Company did not encounter any significant problems with the functionality of
its products offerings related to Year 2000.
RISK FACTORS
This annual report may contain forward-looking statements regarding
future events or the future performance of the Company. Actual events or
results could, of course, differ materially. Various factors could adversely
affect its results of operations in the future including its dependence on
the high-performance computer, server and software markets, changes in
product mix, competitive pricing pressures, changes in technological
standards, dependence on wafer suppliers and other subcontractors, changes in
product costs, certain risks associated with acquisitions of other companies
or businesses that the Company may make from time to time or derivative
financial investments, issues related to distributors, dependence on key
personnel, risks associated with international operations, risks associated
with implementation and utilization of new systems, and risks associated with
intellectual property or general economic downturns. For a more complete
discussion of these factors, please refer to the Business section of the
Company's Annual Report on Form 10-K for the fiscal year ended March 31,
2000, and the Company's other public filings.
62