UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934
For the quarterly period ended December 31, 2000 or
-----------------
Transition report pursuant to Section 13 or 15(d) of the Securities
- ------- Exchange Act of 1934
For the transition period from ______ to _______
Commission file number 0-15071
ADAPTEC, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2748530
- -------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
691 S. MILPITAS BLVD., MILPITAS, CALIFORNIA 95035
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 945-8600
- ------------------------------------------------------------------------------
N/A
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of the Company's common stock as of
December 31, 2000 was 98,565,191.
This document consists of 33 pages, excluding exhibits, of which this is page 1.
TABLE OF CONTENTS
Page
------
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6-15
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations:
Results of Operations 16-20
Liquidity and Capital Resources 20
Recent Accounting Pronouncements 20-21
Certain Factors Bearing Risk on Future Operating Results 21-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk 31
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 32
Signatures 33
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Month Period Ended Nine Month Period Ended
------------------------ -----------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenues $ 186,264 $ 211,446 $ 555,159 $ 598,104
Cost of revenues 88,987 69,529 232,327 202,583
Patent settlement fee -- 9,599 -- 9,599
------------ ------------ ------------- ------------
Gross profit 97,277 132,318 322,832 385,922
------------ ------------ ------------- ------------
Operating expenses:
Research and development 33,608 25,804 95,097 73,539
Selling, marketing and administrative 48,175 41,496 135,816 121,106
Amortization of goodwill and other intangibles 19,476 3,094 58,427 5,844
Write-off of acquired in-process technology -- 16,739 -- 19,755
Other charges 28,211 -- 28,211 --
------------ ------------ ------------- ------------
Total operating expenses 129,470 87,133 317,551 220,244
------------ ------------ ------------- ------------
Income (loss) from operations (32,193) 45,185 5,281 165,678
Interest and other income 34,477 8,119 145,193 39,183
Interest expense (2,883) (2,811) (9,006) (8,732)
------------ ------------ ------------- ------------
Income (loss) before provision for income taxes (599) 50,493 141,468 196,129
Provision for income taxes 16,294 18,825 77,274 61,757
------------ ------------ ------------- ------------
Net income (loss) $ (16,893) $ 31,668 $ 64,194 $ 134,372
============ ============ ============= ============
Net income (loss) per share:
Basic $ (0.17) $ 0.31 $ 0.64 $ 1.30
------------ ------------ ------------- ------------
Diluted $ (0.17) $ 0.29 $ 0.63 $ 1.23
------------ ------------ ------------- ------------
Shares used in computing net income (loss) per share:
Basic 98,892 103,267 99,594 103,311
------------ ------------ ------------- ------------
Diluted 98,892 110,424 102,132 109,591
------------ ------------ ------------- ------------
See accompanying notes to condensed consolidated financial statements.
3
ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
December 31, March 31,
2000 2000
------------------ ------------------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 214,084 $ 180,519
Marketable securities 417,090 482,172
Accounts receivable, net 83,356 90,165
Inventories 77,892 68,378
Other current assets 87,770 74,352
------------------ ------------------
Total current assets 880,192 895,586
Property and equipment, net 113,884 135,222
Goodwill and other intangibles 188,469 275,108
Other long-term assets 50,120 40,368
------------------ ------------------
$ 1,232,665 $ 1,346,284
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 31,244 $ 34,009
Accrued liabilities 211,087 193,217
------------------ ------------------
Total current liabilities 242,331 227,226
------------------ ------------------
4 3/4% Convertible Subordinated Notes 229,800 229,800
Other long-term liabilities 20,771 14,400
Contingencies (Note 7)
Stockholders' equity:
Common stock 99 103
Additional paid-in capital -- 58,535
Deferred stock-based compensation (6,845) (2,444)
Accumulated other comprehensive income 2,240 51,800
Retained earnings 744,269 766,864
------------------ ------------------
Total stockholders' equity 739,763 874,858
------------------ ------------------
$ 1,232,665 $ 1,346,284
================== ==================
See accompanying notes to condensed consolidated financial statements.
4
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Month Period Ended
-----------------------
December 31, December 31,
2000 1999
---------------- ----------------
(IN THOUSANDS)
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 90,802 $ 237,239
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of certain net assets in connection with acquisitions, net -- (186,416)
Purchases of property and equipment (23,909) (7,253)
Net proceeds from the sale of property and equipment 43,273 18,518
Purchases of marketable securities (323,103) (961,390)
Purchases of other investments (850) (3,372)
Sales of marketable securities 329,143 630,371
Maturities of marketable securities 89,128 283,174
---------------- ----------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 113,682 (226,368)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock 16,633 88,593
Net proceeds from the issuance of equity contracts -- 3,725
Repurchases of common stock (187,552) (244,132)
Principal payments on long-term debt -- (5,504)
---------------- ----------------
NET CASH USED FOR FINANCING ACTIVITIES (170,919) (157,318)
---------------- ----------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33,565 (146,447)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 180,519 317,580
---------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 214,084 $ 171,133
================ ================
See accompanying notes to condensed consolidated financial statements.
5
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated interim financial statements of Adaptec, Inc. (the
"Company") have been prepared on a consistent basis with the March 31,
2000 audited consolidated financial statements and include all
adjustments, consisting of only normal recurring adjustments, except as
described in Notes 11, 12, 16 and 17, necessary to provide a fair
statement of the results for the interim periods presented. These
interim financial statements should be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report to Stockholders and incorporated by reference
in the Company's Annual Report on Form 10-K for the year ended March
31, 2000. For presentation purposes, the Company has indicated its
third quarter of fiscal 2001 as having ended on December 31, 2000,
whereas in fact, it ended on December 29, 2000. The results of
operations for the three and nine month periods ended December 31, 2000
are not necessarily indicative of the results to be expected for the
entire year.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("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 defers the required date of adoption of
SFAS No. 133 for one year, to fiscal years beginning after June 15,
2000. The Company will adopt SFAS No. 133 in its first quarter of
fiscal 2002, and is in the process of determining the impact the
adoption will have 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
Accounting Principles Board ("APB") No. 25. FIN No. 44 became
effective July 1, 2000, but certain conclusions cover specific events
that occurred after either December 15, 1998, or January 12, 2000. The
adoption of FIN No. 44 did not have a material effect on the Company's
financial position or results of operations.
In September 2000, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board issued EITF No. 00-19,
"Determination of Whether Share Settlement is Within the Control of the
Issuer for Purposes of Applying Issue No. 96-13, `Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company's Own Stock'". EITF No. 96-13 does not address embedded
settlement features which are contingent on events which are unlikely
to occur. EITF No. 00-19 addresses embedded settlement features and
states that contracts which could require cash payment cannot be
accounted for as equity of the issuer unless certain conditions are
met. The adoption of EITF No. 00-19 did not have a material effect on
the Company's financial position or results of operations.
6
3. BALANCE SHEET DETAIL
Inventories are stated at the lower of cost (first-in, first-out)
or market. The components of inventories were as follows:
December 31, March 31,
2000 2000
---------------- ---------------
(IN THOUSANDS)
Raw materials $ 27,593 $ 21,806
Work-in-process 19,186 11,685
Finished goods 31,113 34,887
---------------- ---------------
$ 77,892 $ 68,378
================ ===============
The components of other current assets were as follows:
December 31, March 31,
2000 2000
---------------- ---------------
(IN THOUSANDS)
Deferred income taxes $ 62,260 $ 29,134
Other 25,510 45,218
---------------- ---------------
$ 87,770 $ 74,352
================ ===============
The components of accrued liabilities were as follows:
December 31, March 31,
2000 2000
---------------- ---------------
(IN THOUSANDS)
Tax related $ 140,442 $ 100,689
Accrued compensation and related taxes 24,527 25,430
Acquisition related 18,683 19,097
Sales and marketing related 12,241 13,477
Stock repurchase related -- 19,135
Other 15,194 15,389
---------------- ---------------
$ 211,087 $ 193,217
================ ===============
4. TAIWAN SEMICONDUCTOR MANUFACTURING AGREEMENT
In the first quarter of fiscal 2001, the Company and Taiwan
Semiconductor Manufacturing Co., Ltd. ("TSMC") amended the Option II
Agreement. In accordance with the amendment, the Company paid TSMC an
additional $20.0 million in advance payments to secure guaranteed
capacity for wafer fabrication through December 31, 2004. No other
terms or conditions were amended.
7
5. STATUS OF IN-PROCESS TECHNOLOGY PROJECT
In December 1999, the Company purchased Distributed Processing
Technology, Corp. ("DPT"), a supplier of high-performance storage
solutions, including RAID controllers and storage subsystems. As part
of the purchase, the Company acquired in-process technology consisting
of next generation RAID controllers. The Company expects to complete
the in-process technology project in the first half of fiscal 2002. The
completion of the in-process technology project has been delayed by
approximately six months due to the lack of availability of compatible
industry components and the complexity brought on by additional uses of
this technology in the Company's board level products. However, the
Company still expects the costs to complete the in-process technology
project will be in line with original estimates. 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.
6. LINE OF CREDIT
In March 2000, the Company obtained an unsecured $80.0 million
revolving line of credit which expires in March 2001. 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 required to maintain
certain financial ratios among other restrictive covenants. As of
December 31, 2000, the Company did not meet the requirement of the
minimum fixed charge ratio covenant due to the Agilent minimum
royalty fees and the Agilent asset impairment charge in the third
quarter of fiscal 2001 (Note 11). This covenant requires the Company
to maintain a certain ratio on the sum of operating income plus
operating lease expense, divided by the sum of operating lease
expense plus interest expense and capital expenditures. The Company
intends to request a waiver from the lenders with respect to this
covenant. No borrowings were outstanding under the line of credit as
of December 31, 2000.
7. CONTINGENCIES
In December 1999, the Company purchased DPT and as part of the
purchase agreement, $18.5 million of the purchase price was held
back (the "Holdback Amount") from former DPT stockholders (the "DPT
Stockholders") for unknown liabilities that may have existed as of
the acquisition date. For accounting purposes, the Holdback Amount
was included as part of the acquisition purchase price. Subsequent
to the date of purchase, the Company determined that certain
representations and warranties made by the DPT Stockholders were
incomplete or inaccurate, which resulted in loss of revenues and
additional expenses to the Company. In addition, certain DPT
products were found to be defective and the Company expects to incur
additional product liability expenses. In December 2000, the Company
filed a claim against the DPT Stockholders for the entire Holdback
Amount. In January 2001, the DPT Stockholders notified the Company
as to their objection to the Company's claim. In accordance with the
purchase agreement, both the Company and the DPT Stockholders have
45 days to make a good faith attempt to resolve the claim. If no
such agreement is reached, the claim will then be submitted to
arbitration.
8
7. CONTINGENCIES (CONTINUED)
A class action lawsuit is 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 filed an amended complaint in
July 2000. In October 2000, the Company filed a motion to dismiss the
amended complaint. The Company believes the class action lawsuit is
without merit and intends to defend itself vigorously.
On June 27, 2000, the Company received a statutory notice of
deficiency from the Internal Revenue Service ("IRS") with respect to
its federal income tax returns for fiscal 1994 through 1996. The
Company filed a Petition with the United States Tax Court on September
25, 2000, contesting the asserted deficiencies. On December 15, 2000,
the Company received a statutory notice of deficiency from the IRS with
respect to its federal income tax return for fiscal 1997, and the
Company intends to vigorously contest the asserted deficiencies. The
Company believes it has meritorious defenses against all deficiencies
asserted in these statutory notices. In addition, the IRS is currently
auditing the Company's federal income tax returns for fiscal 1998 and
1999, for which no proposed adjustments have been received. The Company
believes sufficient taxes have been provided in all prior years and the
ultimate outcome of the IRS audits will not have a materially adverse
impact on the Company's financial position or results of operations.
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
materially adverse impact on the Company's financial position or
results of operations.
8. STOCK REPURCHASES
During the third quarter of fiscal 2001, the Company physically
settled an equity contract whereby the Company repurchased 500,000
shares of its common stock at a strike price of approximately $23,
resulting in a cash payment of $11.3 million. During the first nine
months of fiscal 2001, the Company physically settled various equity
contracts whereby the Company repurchased a total of 2,500,000 shares
of its common stock at strike prices ranging from approximately $23 to
$46, resulting in a total cash payment of $97.3 million. No equity
contracts were outstanding as of December 31, 2000.
In addition, during the first nine months of fiscal 2001, the
Company repurchased and retired a total of 3,000,000 shares of its
common stock under its authorized stock buy back program for $71.1
million. The repurchase transactions were recorded as reductions to
common stock, additional paid-in-capital and retained earnings.
9. STOCK PLANS
During the third quarter of fiscal 2001, the Company's Board of
Directors adopted the 2000 Nonstatutory Stock Option Plan and reserved
for issuance to non-executive officer employees 8,000,000 shares of the
Company's common stock.
9
9. STOCK PLANS (CONTINUED)
During the second quarter of fiscal 2001, the Company's Board of
Directors amended the Employee Stock Purchase Plan to extend the
offering period from six months to twenty four months, beginning in
August 2000. Purchases will continue to be made every six months. In
addition, the Company's stockholders approved the 2000 Director Option
Plan and reserved for issuance 1,000,000 shares of the Company's common
stock.
10. STATEMENTS OF OPERATIONS
The components of interest and other income were as follows:
Three Month Period Ended Nine Month Period Ended
------------------------ -----------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS)
Interest income $ 8,946 $ 8,119 $ 23,687 $ 24,750
Gain on sale of JNI common stock (Note 15) 25,531 -- 112,686 --
Gain on sale of property (Note 12) -- -- 8,820 3,513
Gain on warrants received -- -- -- 10,920
------------ ------------ ------------- ------------
$ 34,477 $ 8,119 $ 145,193 $ 39,183
============ ============ ============= ============
11. AGILENT AGREEMENT
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 $62.3 per share. 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 (the "Warrant Costs") and
was to be amortized ratably over four years. As of December 31, 2000,
the remaining balance of the Warrant Costs was $28.2 million.
In addition, the Company licensed Agilent's fibre channel host
adapter and software driver technology, and agreed to pay royalty fees
to Agilent based on revenue from certain products incorporating the
licensed technology. The aggregate minimum royalty fees over the term
of the agreement are $60.0 million, of which $12.0 million is due and
payable at the end of the second contract year in January 2002. The
Company estimated that it would incur Agilent royalty fees of $2.0
million in the second contract year associated with the sale of the
Company's products incorporating the licensed technology. Therefore, in
the third quarter of fiscal 2001, the Company accrued for and expensed
the remaining minimum royalty fees for the second contract year of
$10.0 million. The accrued expense was included in "Cost of revenues"
in the Condensed Consolidated Statements of Operations for the three
and nine month periods ended December 31, 2000, and in "Other long-term
liabilities" in the Condensed Consolidated Balance Sheet as of December
31, 2000.
10
11. AGILENT AGREEMENT (CONTINUED)
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of," the
Company evaluated the recoverability of the Warrant Costs as of
December 31, 2000. Based on the assessment, the Company believed that
the estimated undiscounted future cash flows generated by the sale of
the Company's fibre channel products incorporating the technology
licensed from Agilent would not be sufficient to recover the carrying
value of the Warrant Costs. The Warrant Costs were determined to have
an estimated fair market value of $0. As such, the Company recorded an
asset impairment charge of $28.2 million, representing the remaining
balance of the Warrant Costs as of December 31, 2000. The asset
impairment charge was included in "Other charges" in the Condensed
Consolidated Statements of Operations for the three and nine month
periods ended December 31, 2000.
12. SALE OF PROPERTY
During the second quarter of fiscal 2001, the Company sold its
land and building located in Colorado with a net book value of $21.5
million, for net proceeds of $22.8 million. The sale resulted in a gain
of $1.3 million and was included in "Interest and other income" in the
Condensed Consolidated Statement of Operations for the nine month
period ended December 31, 2000.
During the first quarter of fiscal 2001, the Company sold its land
in California with a net book value of $12.9 million, for net proceeds
of $20.4 million. The sale resulted in a gain of $7.5 million and was
included in "Interest and other income" in the Condensed Consolidated
Statement of Operations for the nine month period ended December 31,
2000.
13. INCOME TAXES
Income tax provisions for interim periods are based on the
Company's estimated annual income tax rate. The Company recorded an
income tax provision of $16.3 million and $18.8 million for the third
quarters of fiscal 2001 and fiscal 2000, respectively. The Company's
effective tax rate is generally less than the combined U.S. federal and
state statutory income tax rate of 40% due to income earned in
Singapore where the Company is subject to a significantly lower income
tax rate, resulting from a tax holiday relating to certain products.
However, in the third quarter and first nine months of fiscal 2001, the
reduction in the Company's effective income tax rate from the Singapore
tax holiday was more than offset by the effects of the Agilent asset
impairment charge and the amortization of goodwill and other
intangibles in excess of amounts deductible for tax purposes.
11
14. NET INCOME (LOSS) PER SHARE
Following is a reconciliation of the numerators and denominators
of the basic and diluted net income (loss) per share computations for
the periods presented below.
Three Month Period Ended Three Month Period Ended
December 31, 2000 December 31, 1999
----------------------------------------- -------------------------------------
Loss Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to
common stockholders $ (16,893) 98,892 $ (0.17) $ 31,668 103,267 $ 0.31
========== ========
EFFECT OF DILUTIVE SECURITIES
Employee stock options -- -- -- 7,157
---------- --------- ---------- -----------
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to
common stockholders and
assumed conversions $ (16,893) 98,892 $ (0.17) $ 31,668 110,424 $ 0.29
============ ========= ========== ========== =========== ========
Nine Month Period Ended Nine Month Period Ended
December 31, 2000 December 31, 1999
----------------------------------------- -------------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC NET INCOME PER SHARE
Net income available to common
stockholders $ 64,194 99,594 $ 0.64 $ 134,372 103,311 $ 1.30
========== ========
EFFECT OF DILUTIVE SECURITIES
Employee stock options -- 2,538 -- 6,280
------------ --------- ------------ ----------
DILUTED NET INCOME PER SHARE
Net income available to common
stockholders and assumed
conversions $ 64,194 102,132 $ 0.63 $ 134,372 109,591 $ 1.23
============ ========= ========== =========== =========== ========
Options to purchase 20,780,000 shares of common stock were
outstanding for the three month period ended December 31, 2000, but
were not included in the computation of diluted net loss per share
because they were anti-dilutive. Additional stock options to purchase
156,000 shares of common stock were outstanding for the three month
period ended December 31, 1999, but were not included in the
computation of diluted weighted average shares outstanding because the
options' exercise price was greater than the average market price of
the common stock.
Additional stock options to purchase 9,771,000 and 1,438,000
shares of common stock were outstanding for the nine month periods
ended December 31, 2000 and 1999, respectively, but were not included
in the computation of diluted weighted average shares outstanding
because the options' exercise price was greater than the average market
price of the common stock.
12
14. NET INCOME (LOSS) PER SHARE (CONTINUED)
The conversion of 4,448,000 and 4,452,000 shares of common stock
related to the 4 3/4% Convertible Subordinated Notes was not included
in the computation of net income (loss) per share for the three and
nine month periods ended December 31, 2000 and 1999, respectively,
because it was anti-dilutive.
15. COMPREHENSIVE INCOME (LOSS)
The Company's comprehensive income (loss) consists of net income
(loss) and the change in the net unrealized gain on available-for-sale
securities, net of income taxes, primarily related to the Company's
investment in JNI Corporation ("JNI") common stock.
The components of comprehensive income (loss), net of income
taxes, were as follows:
Three Month Period Ended Nine Month Period Ended
------------------------ -----------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS)
Net income (loss) $ (16,893) $ 31,668 $ 64,194 $ 134,372
Change in net unrealized gain on available-for-sale
securities, net of income taxes (11,491) 43,394 (49,560) 43,394
------------ ------------ ------------- ------------
$ (28,384) $ 75,062 $ 14,634 $ 177,766
============ ============ ============= ============
During the third quarter and first nine months of fiscal 2001, the
Company sold 272,893 and 1,972,893 shares of JNI common stock and
recorded a gain of $25.5 million and $112.7 million, respectively.
Total proceeds from the sales during the first nine months of fiscal
2001 were $124.1 million. As of December 31, 2000, the Company did not
hold any shares of JNI common stock.
The realized gain/loss on available-for-sale securities, other
than JNI common stock, was immaterial for all periods presented.
Accumulated other comprehensive income presented in the
accompanying Condensed Consolidated Balance Sheets represents the net
unrealized gain on 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 prior to the date of
disposal. There can be no assurance if and when these gains will be
realized.
16. SEGMENT REPORTING
In the third quarter of fiscal 2001, the Company evaluated its
product segments in accordance with SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," and redefined its
reporting segments into Direct Attached Storage ("DAS"), Desktop
Solutions Group ("DSG", a new reporting segment formerly reported as a
component of DAS), Storage Networking Solutions ("SNS"), Software and
Other. Except for the new DSG segment which is described below, a
complete description of the operating segments can be found in the
Notes to Consolidated Financial Statements in the Company's Annual
Report to Stockholders for the fiscal year ended March 31, 2000.
13
16. SEGMENT REPORTING (CONTINUED)
The DSG segment designs, develops, manufactures and markets
high-performance input/output ("I/O") solutions between personal
computers, peripherals and storage devices. The segment is targeted at
the installed base of desktops in homes worldwide, and the products are
primarily sold through the retail market. The Company's current I/O
solutions include Small Computer System Interface ("SCSI") technology
delivered via host adapters, and the 1394/FireWire technology, a fast,
configurable and easy-to-use interface solution that connects desktop
computers to digital video camcorders, digital cameras, external
storage devices and other 1394 peripherals with the ability to handle
high-bandwidth data transfers at high speeds. In the third quarter of
fiscal 2001, the Company introduced FireConnect 4300, a high-quality
digital video editing kit offering the 1394/FireWire connectivity.
Summarized financial information concerning the Company's
reportable segments as of December 31, 2000 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. The Company has restated its prior year's presentation for
financial disclosure purposes to conform to the revised segment
reporting.
Three Month Period Ended Nine Month Period Ended
------------------------ -----------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
--------------- -------------- -------------- ------------
(IN THOUSANDS)
DAS:
Net revenues $ 127,787 $ 144,570 $ 373,310 $ 411,208
Segment profit 14,750 57,761 41,103 162,242
DSG:
Net revenues 22,512 36,861 71,497 118,211
Segment profit 3,028 13,920 14,953 43,457
SNS:
Net revenues 10,219 5,851 26,591 17,644
Segment profit (loss) (48,316) 1,770 (51,220) 4,640
SOFTWARE:
Net revenues 25,746 23,156 83,761 47,783
Segment profit 1,014 3,366 7,849 2,246
OTHER:
Net revenues -- 1,008 -- 3,258
Segment profit (loss) 28,925 (26,324) 128,783 (16,456)
The following table presents the details of "Other" segment profit
(loss):
Three Month Period Ended Nine Month Period Ended
------------------------ -----------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
-------------- ------------- -------------- -----------
(IN THOUSANDS)
Patent settlement fee $ -- $ (9,599) $ -- $ (9,599)
Unallocated corporate expenses, net 266 (5,294) 1,140 (17,553)
Interest and other income 34,477 8,119 145,193 39,183
Interest expense (2,883) (2,811) (9,006) (8,732)
Write-off of acquired in-process technology -- (16,739) -- (19,755)
General and administrative expenses relating
to the Software segment spin-off (2,935) -- (8,544) --
-------------- ------------- --------------- -----------
$ 28,925 $ (26,324) $ 128,783 $ (16,456)
============== ============= ============== ===========
14
17. ROXIO
In June 2000, the Company announced its plan to spin off the
Software segment in the form of a fully independent and separate
company named Roxio, Inc. ("Roxio"). In the second quarter of fiscal
2001, Roxio filed a Registration Statement on Form S-1 to register
the sale of approximately 15% of its outstanding common stock. In
January 2001, Roxio withdrew its Registration Statement on Form S-1
due to unfavorable market conditions. Accordingly, the Company wrote
off approximately $1.0 million of prepaid offering costs in the
third quarter of fiscal 2001.
In December 2000, the Company committed to issue the Company's
employees, who will become employees of Roxio at the date of legal
separation, options to purchase approximately 2.3 million shares of
Roxio common stock with an exercise price of $4.25 per share. In
accordance with APB No. 25 and FIN No. 44, $6.5 million of deferred
compensation was recorded for the intrinsic value of the options on
the grant date and included in "Deferred stock-based compensation"
in the Condensed Consolidated Balance Sheets. The intrinsic value
was based on the Company's determination of the fair value of
Roxio's common stock at $7.06 per share. Since the measurement date
has not been established, these stock options will therefore be
subject to variable plan accounting treatment resulting in a
mark-to-market adjustment to the deferred compensation in future
periods. The deferred compensation is being amortized over four
years, and amortization expense of $0.1 million was recorded in the
third quarter of fiscal 2001.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the items in the Condensed
Consolidated Statements of Operations as a percentage of net revenues:
Three Month Period Ended Nine Month Period Ended
------------------------ -----------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
-------------- --------------- -------------- -------------
Net revenues 100% 100% 100% 100%
Cost of revenues 48 33 42 34
Patent settlement fee -- 5 -- 2
-------- --------- -------- ---------
Gross margin 52 62 58 64
-------- --------- -------- ---------
Operating expenses:
Research and development 18 12 17 12
Selling, marketing and administrative 26 20 24 20
Amortization of goodwill and other intangibles 10 1 11 1
Write-off of acquired in-process technology -- 8 -- 3
Other charges 15 -- 5 --
-------- --------- -------- ---------
Total operating expenses 69 41 57 36
-------- --------- -------- ---------
Income (loss) from operations (17) 21 1 28
Interest and other income 19 4 26 7
Interest expense (2) (1) (2) (2)
-------- --------- -------- ---------
Income (loss) before provision for income taxes -- 24 25 33
Provision for income taxes 9 9 13 11
-------- --------- -------- ---------
Net income (loss) (9)% 15% 12% 22%
========== ========== ========= ==========
BUSINESS SEGMENTS. In the third quarter of fiscal 2001, the
Company evaluated its product segments in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," and redefined its
reporting segments into Direct Attached Storage ("DAS"), Desktop
Solutions Group ("DSG", a new reporting segment formerly reported as a
component of DAS), Storage Networking Solutions ("SNS"), Software and
Other. Except for the new DSG segment which is described below, a
complete description of the operating segments can be found in the
Notes to Consolidated Financial Statements in the Company's Annual
Report to Stockholders for the fiscal year ended March 31, 2000.
The DSG segment designs, develops, manufactures and markets
high-performance input/output ("I/O") solutions between personal
computers, peripherals and storage devices. The segment is targeted at
the installed base of desktops in homes worldwide, and the products are
primarily sold through the retail market. The Company's current I/O
solutions include Small Computer System Interface ("SCSI") technology
delivered via host adapters, and the 1394/FireWire technology, a fast,
configurable and easy-to-use interface solution that connects desktop
computers to digital video camcorders, digital cameras, external
storage devices and other 1394 peripherals with the ability to handle
high-bandwidth data transfers at high speeds. In the third quarter of
fiscal 2001, the Company introduced FireConnect 4300, a high-quality
digital video editing kit offering the 1394/FireWire connectivity.
In June 2000, the Company announced its plan to spin off the
Software segment in the form of a fully independent and separate
company named Roxio, Inc. ("Roxio"). In the second quarter of fiscal
2001, Roxio filed a Registration Statement on Form S-1 to register the
sale of approximately 15% of its outstanding common stock. In
16
January 2001, Roxio withdrew its Registration Statement on Form S-1
due to unfavorable market conditions. Accordingly, the Company wrote
off approximately $1.0 million of prepaid offering costs in the third
quarter of fiscal 2001.
NET REVENUES. Net revenues were $186.3 million for the third
quarter of fiscal 2001, a decrease of 11.9% from net revenues of $211.4
million for the third quarter of fiscal 2000. Net revenues were $555.2
million for the first nine months of fiscal 2001, a decrease of 7.2%
from net revenues of $598.1 million for the first nine months of fiscal
2000.
Net revenues for the third quarter of fiscal 2001 were comprised
of $127.8 million from the DAS segment, a decrease of 11.6% from the
third quarter of fiscal 2000, $22.5 million from the DSG segment, a
decrease of 38.9% from the third quarter of fiscal 2000, $10.2 million
from the SNS segment, an increase of 74.7% from the third quarter of
fiscal 2000, and $25.7 million from the Software segment, an increase
of 11.2% from the third quarter of fiscal 2000.
Net revenues for the first nine months of fiscal 2001 were
comprised of $373.3 million from the DAS segment, a decrease of 9.2%
from the first nine months of fiscal 2000, $71.5 million from the DSG
segment, a decrease of 39.5% from the first nine months of fiscal 2000,
$26.6 million from the SNS segment, an increase of 50.7% from the first
nine months of fiscal 2000, and $83.8 million from the Software
segment, an increase of 75.3% from the first nine months of fiscal
2000.
Net revenues from the DAS segment decreased period over period,
primarily due to a lack of Intel microprocessors and motherboards in
the distribution channel which adversely impacted some server
production in the first half of fiscal 2001. The constraint in the
supply of server motherboards began to ease in the third quarter of
fiscal 2001. Intel underestimated microprocessor demand as they
transitioned their production from 0.25 micron technology to 0.18
micron technology and they experienced problems with their 840 memory
controller hub, a critical component to motherboards. Because demand
for the Company's board level DAS products are dependent on server
production, the Company's net revenues declined in the first nine
months of fiscal 2001. Additionally, net revenues from the DAS segment
in the first nine months of fiscal 2001 were adversely impacted by
defective QLogic Corporation I/O silicon in one of the Company's
mid-range redundant array of independent disks ("RAID") product
offerings. These defects necessitated a recall of a limited number of
the mid-range Distributed Processing Technology, Corp. ("DPT") based
products. Finally, the industry-wide economic slowdown which began
during the third quarter of fiscal 2001 resulted in
slower-than-anticipated seasonal sales in the DAS segment.
The decline in net revenues from the DAS segment in the first nine
months of fiscal 2001 was partially offset by the continued strong
demand for the Company's Ultra 160 SCSI RAID controllers for entry and
mid-range servers, as well as design wins with certain original
equipment manufacturers ("OEMs"). In the first quarter of fiscal 2001,
the Company also introduced a new initiative called "RAID Everywhere",
aimed at driving RAID technology into the PC-server marketplace by
leveraging the Company's channel strengths, global support
infrastructure and ability to make complex technologies easy to use.
Net revenues from the DSG segment decreased period over period,
primarily due to the continued decline in demand for SCSI-based desktop
solutions brought about by penetration of products incorporating the
less-expensive Ultra-DMA technology. However, the decline in net
revenues was partially offset by the introduction of the Company's
FireConnect 4300 video editing kits in the third quarter of fiscal
2001.
17
Net revenues from the SNS segment were derived from sales of
products and solutions for Storage Area Networks ("SAN"). Net revenues
increased period over period primarily as a result of continued growth
in the sales of single-port and multi-port network interface cards and
design wins with certain OEMs. Additionally, the increase was
attributable to the Company's one-gigabit fibre channel adapters,
utilizing technology licensed from Agilent Technologies, Inc.
("Agilent"), which launched in the second quarter of fiscal 2001.
Net revenues from the Software segment increased period over
period, primarily as a result of sales of the Company's Easy CD Creator
4.0 Deluxe which launched domestically in the second quarter of fiscal
2000 and worldwide in the third quarter of fiscal 2000. The increase
was also attributable to continued worldwide growth in the CD-R and
CD-RW drive markets and additional design wins with personal computer
("PC") OEMs. The acquisition of Wild File, Inc. ("Wild File"), a
supplier of continuous backup and system recovery software, in the
fourth quarter of fiscal 2000 also contributed incremental net revenues
in the first nine months of fiscal 2001, as compared to the first nine
months of fiscal 2000.
GROSS MARGIN. Gross margin for the third quarter and first nine
months of fiscal 2001 was 52.2% and 58.2%, respectively, compared to
62.6% and 64.5% for the third quarter and first nine months of fiscal
2000. The Company's gross margin in the first nine months of fiscal
2001 was adversely impacted by the Agilent minimum royalty fees of
$10.0 million, which was included in cost of revenues in the third
quarter of fiscal 2001. In addition, the gross margin was adversely
impacted by excess manufacturing capacity due to lower production
volumes. The lower production volumes were primarily related to reduced
demand for the Company's board level premium DAS products stemming from
the lack of Intel microprocessors and motherboards in the distribution
channel discussed above. The Company's gross margin was also impacted
by proportionately higher sales of the Company's RAID products which
generally obtain lower margin percentages than other Adaptec products,
and also by proportionately higher sales to OEMs which generally carry
lower margin percentages. Finally, in the third quarter of fiscal 2001,
the Company's gross margin was adversely impacted by excess inventory
charges of $1.5 million due to cancellation of orders from a customer
as a result of a decline in their product forecast.
RESEARCH AND DEVELOPMENT EXPENSES. Spending for research and
development was $33.6 million for the third quarter of fiscal 2001, an
increase of 30.2% from $25.8 million for the third quarter of fiscal
2000. Spending for research and development was $95.1 million for the
first nine months of fiscal 2001, an increase of 29.3% from $73.5
million for the first nine months of fiscal 2000. As a percentage of
net revenues, research and development expenses increased to 18.0% and
17.1% in the third quarter and first nine months of fiscal 2001,
respectively, from 12.2% and 12.3% in the third quarter and first nine
months of fiscal 2000, respectively. The increase in research and
development expenses was primarily attributable to additional resources
obtained through the Company's fiscal 2000 acquisitions, and additional
research and development efforts focused on driving the convergence of
storage and networking, delivering interoperable fibre channel products
and building pervasive solutions that broaden the adoption of SAN.
Additionally, the Company recorded amortization of deferred stock-based
compensation of $1.9 million related to the acquisition of Wild File
in the first nine months of fiscal 2001.
SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Spending for
selling, marketing and administrative activities was $48.2 million for
the third quarter of fiscal 2001, an increase of 16.1% from $41.5
million for the third quarter of fiscal 2000. Spending for selling,
marketing and administrative activities was $135.8 million for the
first nine months of fiscal 2001, and increase of 12.1% from $121.1
18
million for the first nine months of fiscal 2000. As a percentage of
net revenues, selling, marketing and administrative expenses increased
to 25.9% and 24.5% in the third quarter and first nine months of fiscal
2001, respectively, from 19.6% and 20.2% in the third quarter and first
nine months of fiscal 2000, respectively. The increase in selling,
marketing and administrative expenses was primarily attributable to
$8.5 million of expenses incurred in connection with the planned
Software segment spin-off during the first nine months of fiscal 2001.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of
goodwill and other intangibles was $19.5 million and $58.4 million for
the third quarter and first nine months of fiscal 2001, respectively,
compared to $3.1 million and $5.8 million in the third quarter and
first nine months of fiscal 2000, respectively. Amortization of
goodwill and other intangibles for the first nine months of fiscal 2001
resulted from the acquisitions of CeQuadrat GmbH ("CeQuadrat"), DPT and
Wild File, as well as the amortization of warrant costs associated with
the license agreement with Agilent. Amortization of goodwill and other
intangibles for the first nine months of fiscal 2000 resulted from the
acquisitions of Data Kinesis, Inc., CeQuadrat and DPT only.
OTHER CHARGES. 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 $62.3 per share. 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 (the "Warrant Costs")
and was to be amortized ratably over four years. As of December 31,
2000, the remaining balance of the Warrant Costs was $28.2 million.
The Company evaluated the recoverability of the Warrants Costs as of
December 31, 2000, and based on the assessment, the Company believed
that the estimated undiscounted future cash flows generated by the
sale of the Company's fibre channel products incorporating the
technology licensed from Agilent would not be sufficient to recover
the carrying value of the Warrant Costs. The Warrant Costs were
determined to have an estimated fair market value of $0. As such,
the Company recorded an asset impairment charge of $28.2 million,
representing the remaining balance of the Warrant Costs as of
December 31, 2000.
INTEREST AND OTHER INCOME. The components of interest and other
income were as follows:
Three Month Period Ended Nine Month Period Ended
------------------------ -----------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS)
Interest income $ 8,946 $ 8,119 $ 23,687 $ 24,750
Gain on sale of JNI common stock 25,531 -- 112,686 --
Gain on sale of property -- -- 8,820 3,513
Gain on warrants received -- -- -- 10,920
------------ ------------ ------------- ------------
$ 34,477 $ 8,119 $ 145,193 $ 39,183
============ ============ ============= ============
INTEREST EXPENSE. Interest expense was $2.9 million and $9.0
million for the third quarter and first nine months of fiscal 2001,
respectively, compared to $2.8 million and $8.7 million for the
third quarter and first nine months of fiscal 2000, respectively.
Interest expense during these periods resulted primarily from the
Company's 4 3/4% Convertible Subordinated Notes.
INCOME TAXES. Income tax provisions for interim periods are based
on the Company's estimated annual income tax rate. The Company recorded
an income tax provision of $16.3 million and $18.8 million for the
third quarters of fiscal 2001 and fiscal 2000, respectively. The
Company's effective tax
19
rate is generally less than the combined U.S. federal and state
statutory income tax rate of 40% due to income earned in Singapore
where the Company is subject to a significantly lower income tax rate,
resulting from a tax holiday relating to certain products. However, in
the third quarter and first nine months of fiscal 2001, the reduction
in the Company's effective income tax rate from the Singapore tax
holiday was more than offset by the effects of Agilent asset
impairment charge and the amortization of goodwill and other
intangibles in excess of amounts deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, the Company's principal sources of
liquidity consisted of $631.2 million of cash, cash equivalents and
marketable securities, and an unsecured $80.0 million revolving line of
credit. As of December 31, 2000, there were no borrowings outstanding
under the line of credit.
Cash, cash equivalents and marketable securities decreased 4.8%
from $662.7 million as of March 31, 2000. During the first nine months
of fiscal 2001, the Company used its liquid assets to repurchase and
retire 5,500,000 shares of its common stock, purchase property and
equipment, and invest in marketable securities. The uses of cash were
offset by cash generated from operations, net proceeds from the sale of
property, proceeds from the issuance of common stock to employees
through its stock option plans, and the net proceeds from the sale of
JNI common stock and other marketable securities in excess of the
unrealized gain as of March 31, 2000.
Operating cash was generated primarily from the Company's net
income, adjusted for non-cash items including the gain on the sale of
property and JNI common stock, depreciation and amortization expense,
write-off of the Warrant Costs and other changes in net assets and
liabilities.
The Company believes that its 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 over the next twelve months.
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 March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain
Transactions involving Stock Compensation," an interpretation of
Accounting Principles Board ("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 became effective July 1, 2000, but certain conclusions cover
specific events that occurred after either December 15, 1998, or
20
January 12, 2000. The adoption of FIN No. 44 did not have a material
effect on the Company's financial position or results of operations.
In September 2000, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board issued EITF No. 00-19,
"Determination of Whether Share Settlement is Within the Control of the
Issuer for Purposes of Applying Issue No. 96-13, `Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled
in, a Company's Own Stock'". EITF No. 96-13 did not address embedded
settlement features which are contingent on events which are unlikely
to occur. EITF No. 00-19 addresses embedded settlement features and
states that contracts which could require cash payment cannot be
accounted for as equity of the issuer unless certain conditions are
met. The adoption of EITF No. 00-19 did not have a material effect on
the Company's financial position or results of operations.
CERTAIN FACTORS BEARING RISK ON FUTURE OPERATING RESULTS
This report contains forward-looking statements that involve
risks and uncertainties. For example, Management's Discussion and
Analysis of Financial Condition and Results of Operations includes
statements relating to the Company's principal financial sources of
liquidity, and the Notes to Condensed Consolidated Financial
Statements include statements relating to the completion of an
in-process technology project. The statements contained in this
document that are not purely historical are forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934,
including without limitation statements regarding our expectations,
beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on
information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements.
Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and
elsewhere in this document. In evaluating our business, prospective
investors should consider carefully the following factors in addition
to the other information set forth in this document.
OUR FUTURE OPERATING RESULTS ARE SUBJECT TO FLUCTUATION, WHICH
COULD REDUCE OUR STOCK PRICE. Our operating results may fluctuate as a
result of a wide variety of factors, including, but not limited to, the
following:
- cancellations or postponements of orders
- shifts in the mix of our products and sales channels
- changes in pricing policies by our suppliers
- shortages of components or wafer fabrication capacity affecting
us, our customers or our suppliers
- the market acceptance of new and enhanced versions of our
products
- product obsolescence
- shortage of skilled labor
- general worldwide economic and computer industry fluctuations
- future accounting pronouncements
- changes in accounting policies
- the timing of acquisitions of other business products and
technologies and any associated charges or earnings
- restructuring actions or other involuntary terminations
21
In addition, operating results in any particular quarter or year
that do not meet the expectations of securities analysts are likely to
cause volatility in the price of our common stock.
Fiscal 2001 operating results were materially impacted by unusual
charges, including the following:
- accrued minimum royalty fees to Agilent Technologies, Inc., or
Agilent, included in cost of revenues
- general and administrative expenses incurred in connection with
the Software segment spin-off
- amortization of deferred stock-based compensation expense
- asset impairment charge
Fiscal 2000 operating results were materially impacted by unusual
charges, including the following:
- accrued minimum royalty fees to Agilent included in cost of
revenues
- write-off of estimated license fees attributable to a patent
settlement agreement
- write-off of acquired in-process technology
IF DEMAND FOR OUR CUSTOMERS' PRODUCTS DECLINE OR OUR CUSTOMERS DO
NOT CONTROL THEIR INVENTORIES EFFECTIVELY, OUR REVENUES MAY BE
ADVERSELY AFFECTED. The volume and timing of orders received during a
quarter are difficult to forecast. Our customers from time to time
encounter uncertain and changing demand for their products. Customers
generally order based on their forecasts. If demand falls below such
forecasts or if customers do not control inventories effectively, they
may cancel or reschedule shipments previously ordered from us. We have
historically operated with a relatively small backlog and have set our
operating budget based in part on expectations of future revenues.
Because much of our operating budget is relatively fixed in the
short-term, if revenues do not meet our expectations, then our
operating income and net income will be disproportionately affected.
IF DEMAND FOR SERVERS, WORKSTATIONS OR HIGH-PERFORMANCE DESKTOPS
DECLINE, OUR REVENUES FROM OUR DAS OR DSG SEGMENTS MAY DECLINE. Our
Direct Attached Storage, or DAS, products are used primarily in
enterprise-class server market, and our Desktop Solutions Group, or
DSG, products are used primarily in personal desktop computer systems.
Our DAS products include host bus adapters, or HBA's, Redundant Array
of Independent Disks, or RAID, controllers, boards and chips that allow
servers and workstations to transfer information to and from
peripherals, such as hard-disk drives, scanners, CD-ROMs, CD-Rs,
CD-RWs, DVD-ROMs, and Zip and Jaz drives among many other devices. Our
DSG products include Small Computer System Interface, or SCSI, based
desktop solutions and 1394/FireWire adapters that enable high-speed
data storage access on Window and Mac-based notebook and desktop
computers. Historically, our growth has been supported by increasing
demand for systems that support:
- client/server applications
- computer-aided engineering
- Internet/intranet applications
- data storage and digital content
- multimedia
- video
In the second half of fiscal 1998, the demand for such systems
slowed as more businesses chose to use relatively inexpensive PC's for
desktop applications, and information technology managers shifted
resources toward resolving Year 2000 problems and investing in network
infrastructure. Our business or operating results could be materially
adversely affected by a similar decline in demand for our products. In
addition, other technologies may replace our existing technologies and
the acceptance of our
22
technologies in the market may not be widespread, which could
materially adversely affect our revenues.
IF THE DEMAND FOR DESKTOP COMPUTER SYSTEMS AND CD-R AND CD-RW
DRIVES DECLINES, REVENUES FROM OUR SOFTWARE SEGMENT MAY DECLINE. Our
software products are used primarily in desktop computer systems to
enable CD-R and CD-RW capabilities. We sell our software products
primarily to major OEMs and distributors. Our business depends on
general economic and business conditions and the growth of the CD-R and
desktop computer markets. If demand for our products slows or the CD-R
market does not develop as quickly as we expect, our business or
operating results may decline materially due to the resulting decline
in demand for our products.
IF WE ARE UNABLE TO PROVIDE ADEQUATE CUSTOMER SERVICE DURING OUR
CUSTOMERS' DESIGN AND DEVELOPMENT STAGE OR IF WE ARE UNABLE TO PROVIDE
SUCH SERVICE IN A TIMELY MANNER, REVENUES MAY BE LOST TO OUR
COMPETITION. Certain of our products are designed to meet our customers
specifications and, to the extent we are not able to meet these
expectations at all or in timely manner, our customers may choose to
buy similar products from another company. As a result, our financial
results could be materially adversely impacted.
WE MAY BE UNABLE TO GENERATE ENOUGH REVENUES FROM PRODUCTS
INCORPORATING TECHNOLOGY LICENSED FROM AGILENT TO OFFSET THE MINIMUM
ROYALTY FEES PAYABLE TO AGILENT, WHICH COULD MATERIALLY ADVERSELY
IMPACT OUR RESULTS OF OPERATIONS. In January 2000, we entered into a
four-year agreement with Agilent to co-develop, market and sell fibre
channel host adapters. As part of the agreement, we agreed to license
Agilent's fibre channel host adapter and software driver technology and
pay minimum royalty fees of $60.0 million over the term of the
agreement 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. During the third quarter of fiscal 2001, the Company
estimated that it would incur royalty fees of $2.0 million in the
second contract year associated with the sale of the Company's products
incorporating the licensed technology. Therefore, the Company accrued
for and expensed the remaining minimum royalty fees for the second
contract year of $10.0 million in the third quarter of fiscal 2001. If
we are unable to generate sufficient revenues to offset our commitment
per the agreement in the future contract years, our results of
operations could be materially adversely impacted.
IF THE CARRYING VALUE OF OUR LONG-LIVED ASSETS ARE NOT
RECOVERABLE, IMPAIRMENT LOSS MUST BE RECOGNIZED WHICH COULD MATERIALLY
ADVERSELY IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION.
Frequently, certain events or changes in circumstances would mandate us
to assess the recoverability of the carrying amount of our long-lived
assets, such as goodwill and other intangibles and property and
equipment. For example, we evaluated the Agilent warrant costs in the
third quarter of fiscal 2001 and determined that the future
undiscounted cash flows were insufficient to recover the carrying value
of the warrant costs. The result of the assessment indicated that the
warrant costs were determined to have an estimated fair market value of
$0. As such, we wrote off the remaining balance of the warrant costs.
We will continue to evaluate the recoverability of the carrying amount
of our long-lived assets, and we may incur additional impairment
charges which could materially adversely impact our results of
operations and financial position.
IF THERE IS A SHORTAGE OF COMPUTER COMPONENTS IN THE MARKET, OUR
SALES MAY DECLINE, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR RESULTS
OF OPERATIONS. If our customers are unable to purchase certain
components which are embedded into their products, then their demand
for our components may decline. Beginning in the fourth quarter of
fiscal 2000, we began to experience the impact of other companies' chip
supply shortages, which reduced the demand for some of our DAS
products. This
23
resulted in a decline in our net revenues in the first nine months
of fiscal 2001. This shortage, as well as other shortages, could
materially adversely impact our sales and thereby our results of
operations going forward.
OUR RELIANCE ON INDUSTRY STANDARDS AND TECHNOLOGICAL CHANGE IN THE
MARKETPLACE MAY CAUSE OUR REVENUES TO FLUCTUATE OR DECLINE. Various
standards and protocols that evolve with time characterize the computer
industry. We design our products to conform to certain industry
standards and protocols such as the following:
TECHNOLOGIES:
- SCSI
- PCI and PCIX
- RAID
- Ultra-DMA (or UDMA)
- Etherstorage
- Infiniband
- Fibre channel
- 1394/FireWire
- Universal Serial Bus (or USB)
OPERATING SYSTEMS:
- Windows (including Windows 98 and Windows NT)
- OS/2
- Netware
- UNIX
- Novell
- Macintosh
- Linux
In particular, a majority of our revenues are currently derived
from products based on the SCSI standard. If consumer acceptance of
these standards declines, or if new standards emerge, and if we did not
anticipate these changes and develop new products, these changes could
materially adversely affect our business or operating results. For
example, we believe that changes in consumers' perceptions of the
relative merits of SCSI based products and products incorporating a
competing standard, Ultra-DMA, have materially adversely affected the
sales of our products beginning in fiscal 1998 and may materially
adversely affect our future sales.
IF OUR PRODUCTS DO NOT INTEROPERATE EFFECTIVELY, THIS COULD
NEGATIVELY IMPACT OUR REVENUES AND REDUCE THE PRICE OF OUR STOCK. We
must design our products to interoperate effectively with a variety of
hardware and software products supplied by other manufacturers,
including the following:
- microprocessors
- peripherals
- operating system software
We depend on significant cooperation with these manufacturers to
achieve our design objectives and produce products that interoperate
successfully. We believe that generally we have good relationships with
leading system, peripheral, and microprocessor suppliers; however,
these suppliers may, from time
24
to time, make it more difficult for us to design our products for
successful interoperability. These suppliers also may decide to
compete with us.
OUR DEPENDENCE ON NEW PRODUCTS MAY CAUSE OUR REVENUES TO FLUCTUATE
OR DECLINE. Our future success is highly dependent upon our completing
and introducing new products at competitive price/performance levels in
a timely manner. The success of new product introductions depends on
several factors, including the following:
- defining products to meet customer needs
- product costs
- timely completion and introduction of new product designs
relative to customers' needs and competitor introductions
- quality of new products
- differentiation of new products from those of our competitors
- market acceptance of our products
As a result, we believe that continued significant expenditures
for research and development will be required in the future. We may
fail to identify new product opportunities and develop and bring new
products to market in a timely manner. In addition, products or
technologies developed by others may render our products or
technologies obsolete or noncompetitive, or our targeted customers may
not select our products for design or integration into the products.
The failure of any of our new product development efforts could have a
material adverse effect on our business or operating results.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY OUR REVENUES AND OUR STOCK
PRICE MAY DECLINE. The markets for all of our products are intensely
competitive and are characterized by the following:
- rapid technological advances
- frequent new product introductions
- evolving industry standards
- price erosion
In the DAS and Storage Networking Solutions, or SNS, segments, we
compete with LSI Logic Corporation, QLogic Corporation, American
Megatrends, Inc., Mylex Corporation (a subsidiary of IBM) and other
captive manufacturers and suppliers. Our principal competitors in the
DSG and Software segment range from small operations to large consumer
companies. As we have continued to broaden our bandwidth management
product offerings into the server, and workstation and desktop
environments, we have experienced, and expect to experience in the
future, significantly increased competition both from existing
competitors and from additional companies that may enter our markets.
Some of these companies have greater technical, marketing,
manufacturing, and financial resources than we do. We cannot assure
that we will have sufficient resources to accomplish any of the
following:
- meet growing product demand
- make timely introduction of new leading-edge solutions in
response to competitive threats
- compete successfully in the future against existing or potential
competitors
- provide OEMs with timely design specifications
- prevent price competition from eroding margins
25
COSTS ASSOCIATED WITH ACQUISITIONS MAY CAUSE OUR FINANCIAL
POSITION OR OPERATING RESULTS TO DECLINE, WHICH COULD BE EXACERBATED IF
WE ARE UNABLE TO INTEGRATE THE ACQUIRED COMPANIES, PRODUCTS OR
TECHNOLOGIES. During fiscal 2000, we acquired CeQuadrat GmbH, or
CeQuadrat, Distributed Processing Technology, Corp., or DPT, and Wild
File, Inc., or Wild File. Each of the acquisitions was accounted for
using the purchase method of accounting. In January 2000, we entered
into an agreement with Agilent to co-develop, market and sell fibre
channel HBAs. In October 2000, we entered into an agreement with
Brocade Communications Systems to deliver, market and support
multi-vendor Storage Area Networks, or SAN, solutions. As part of our
overall strategy, we may continue to acquire or invest in complementary
companies, products, or technologies and enter into joint ventures and
strategic alliances with other companies. In order to be successful in
these activities, we must:
- assimilate the operations and personnel of the combined companies
- minimize the potential disruption of our ongoing business
- retain key technical and managerial personnel
- integrate the acquired company into our strategic and financial
plans
- accurately assess the value of potential target businesses,
products or technologies
- anticipate changes in the market conditions for acquired products
or technologies
- harmonize standards, controls, procedures, and policies
- minimize the impairment of relationships with employees and
customers
We may incur expenses associated with amortization of acquired
intangible assets. The benefits of acquisitions may prove to be less
than anticipated and may not outweigh the costs reported in our
financial statements.
We may not be successful in overcoming these risks or any other
problems encountered in connection with these or other business
combinations, investments, or joint ventures. These transactions may
materially adversely affect our business, financial position or
operating results.
WE DEPEND ON WAFER SUPPLIERS WHOSE FAILURE TO MEET OUR
MANUFACTURING NEEDS COULD NEGATIVELY AFFECT OUR OPERATIONS. Independent
foundries currently manufacture to our specifications all of the
finished silicon wafers used for our products. We currently purchase
most of our wafers through a supply agreement with Taiwan Semiconductor
Manufacturing Corp., or TSMC. The manufacture of semiconductor devices
is sensitive to a wide variety of factors, including the following:
- the availability of raw materials
- the availability of manufacturing capacity
- the level of contaminants in the manufacturing environment
- impurities in the materials used
- the performance of personnel and equipment
While we have been satisfied with the quality, yield, and
timeliness of wafer deliveries to date, we cannot assure that
manufacturing problems may not occur in the future. In addition,
although we have various supply agreements with our suppliers, a
shortage of raw materials or production capacity could lead our wafer
suppliers to allocate available capacity to other customers, or to the
suppliers' internal uses. Any prolonged inability to obtain wafers with
competitive performance and cost attributes, adequate yields, or timely
deliveries from our foundries would delay our production and our
product shipments and could have a material adverse impact on our
business or operating results. We expect that our current suppliers
will seek to convert their fabrication process arrangements to smaller
wafer geometries and to more advanced process technologies. Such
conversions entail inherent technological
26
risks that can affect yields and delivery times. If for any reason our
current suppliers are unable or unwilling to satisfy our wafer needs,
we will be required to identify and qualify additional foundries.
Additional wafer foundries may be unavailable, may prove to be
unqualified, and may be unable to satisfy our requirements on a timely
basis.
In order to secure wafer capacity, from time to time we have
entered into "take or pay" contracts that have committed us to purchase
specified wafer quantities over extended periods, and we have made
prepayments to foundries. In the future, we may enter into similar
transactions, including, without limitation, the following:
- non-refundable deposits
- loans
- equity investments
- joint ventures
- other partnership relationships
Any such transaction could require us to seek additional equity or
debt financing to fund such activities. We may not be able to obtain
any required financing on terms acceptable to us.
WE DEPEND ON SUBCONTRACTORS WHOSE FAILURE TO MEET OUR
MANUFACTURING NEEDS COULD NEGATIVELY AFFECT OUR OPERATIONS. We rely on
subcontractors for the assembly and packaging of the integrated
circuits, or ICs, included in our products. We have no long-term
agreements with our assembly and packaging subcontractors. We also use
board subcontractors to better balance production runs and capacity. We
cannot assure that such subcontractors will continue to be able and
willing to meet our requirements for such components or services. Any
significant disruption in supplies from, or degradation in the quality
of components or services supplied by, such subcontractors could delay
shipments and result in the loss of customers or revenues or otherwise
have a material adverse impact on our business or operating results.
WE DEPEND ON THE EFFORTS OF OUR DISTRIBUTORS, WHICH IF REDUCED,
WOULD RESULT IN LOWER REVENUES AND OPERATING RESULTS. Our distributors
generally offer a diverse array of products from several different
manufacturers. Accordingly, we are at risk that these distributors may
give higher priority to selling products from other suppliers, thus
reducing their efforts to sell our products. A reduction in sales
efforts by our current distributors could materially adversely impact
our business or operating results. Our distributors may on occasion
build inventories in anticipation of substantial growth in sales, and
if such growth does not occur as rapidly as they anticipate,
distributors may decrease the amount of product ordered from us in
subsequent quarters. In addition, if we decrease our price protection
or distributor-incentive programs, our distributors may temporarily
decrease the amounts of product purchased from us. This could result in
a change in distributor business habits, and distributors may decide to
decrease the amount of product held and reduce their inventory levels.
This could reduce our revenues in any given quarter and could
negatively impact our operating results. In addition, we may from time
to time take actions to reduce levels of products at distributors.
These actions could reduce our revenues in any given quarter and could
negatively impact our operating results or revenues.
Gross revenues from distributors accounted for 54% of our total
gross revenues in fiscal 2000. One distributor accounted for 13% of net
revenues in fiscal 2000 and 19% of gross trade receivables as of March
31, 2000. Another distributor accounted for 11% of gross trade
receivables as of March 31, 2000, but represented less than 10% of net
revenues in fiscal 2000.
27
OUR OPERATIONS DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD
AFFECT OUR BUSINESS AND REDUCE OUR FUTURE REVENUES. Our future success
depends in large part on the continued service of our key technical,
marketing, and management personnel, and on our ability to continue to
attract and retain qualified employees, particularly those highly
skilled design, process, and test engineers who are involved in the
design enhancements and manufacture of existing products and the
development of new products and processes. The competition for such
personnel is intense, and the loss of key employees could materially
adversely affect our business, operating results or revenues.
Specifically, the expansion of high technology companies in Silicon
Valley, where our corporate offices are located, has increased demand
and competition for qualified personnel. Our continued growth and
future operating results will depend upon our ability to attract, hire
and retain significant numbers of qualified employees.
CERTAIN OF OUR INTERNATIONAL OPERATIONS ARE RISKY, AND MAY
NEGATIVELY AFFECT OUR OPERATIONS OR REVENUES. Our manufacturing
facilities and various subcontractors it utilizes from time to time are
primarily located in Asia. Additionally, we have various sales offices
and customers throughout Europe, Japan, and other countries. Our
international operations and sales are subject to political and
economic risks, including political instability, currency controls,
exchange rate fluctuations, and changes in import/export regulations,
tariffs, and freight rates. We may use forward exchange contracts to
manage any exposure associated with certain foreign
currency-denominated commitments. In addition, because our primary
wafer supplier, TSMC is located in Taiwan, we may be subject to certain
risks resulting from the political instability in Taiwan, including
conflicts between Taiwan and the People's Republic of China.
WE MAY ENCOUNTER NATURAL DISASTERS, WHICH MAY NEGATIVELY AFFECT
OUR OPERATIONS AND OUR FINANCIAL POSITION. Our corporate headquarters
in California are located near major earthquake faults. Any damage to
our information systems caused as a result of an earthquake, fire or
any other natural disasters could have a material impact on our
business, financial position and results of operations. Additionally,
our primary wafer supplier is located in Taiwan, which has experienced
significant earthquakes. A severe earthquake could interrupt our
manufacturing process and could materially adversely impact our
business, financial position or results of operations.
WE MAY EXPERIENCE VOLATILE FLUCTUATIONS IN OUR STOCK PRICE. The
stock market in general, and the market for shares of technology
companies in particular, has from time to time experienced extreme
price fluctuations. Often, these changes have been unrelated to the
operating performance of the affected companies. In addition, factors
such as technological innovations or new product introductions by us,
by our competitors, or by our customers may have a significant impact
positively or negatively, on the market price of our common stock.
Furthermore, quarter-to-quarter fluctuations in our results of
operations caused by changes in customer demand, changes in the
microcomputer and peripherals markets, or other factors, may have a
significant impact on the market price of our common stock. In
addition, general market conditions and international macroeconomic
factors unrelated to our performance may affect our stock price. These
conditions and other conditions and factors that generally affect the
market for stocks of technology companies could cause the price of our
common stock to fluctuate substantially over short periods.
IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS, WE MAY BE UNABLE TO COMPETE EFFECTIVELY. Historically, we have
devoted significant resources to research and development, and we
believe that the intellectual property derived from such research and
development is a valuable asset that is important to the success of our
business. Although we actively maintain and defend our intellectual
property rights, we may be unable to adequately protect our proprietary
rights. In addition, the laws of certain territories in which our
products are or may be developed, manufactured, or sold,
28
including Asia and Europe, may not protect our products and
intellectual property rights to the same extent as the laws of the
United States.
Despite our efforts, we may be unable to prevent third parties
from infringing upon or misappropriating our intellectual property,
which could harm our business. We have from time to time discovered
counterfeit copies of our products being manufactured or sold by
others. Although we maintain an active program to detect and deter the
counterfeiting of our products, significant availability of counterfeit
products could reduce our revenue and damage our reputation and
goodwill with customers.
THIRD PARTIES MAY ASSERT INFRINGEMENT CLAIMS AGAINST US, WHICH MAY
BE EXPENSIVE TO DEFEND AND RESULT IN ADDITIONAL COSTS AND COULD
MATERIALLY ADVERSELY IMPACT OUR OPERATIONS AND REVENUES. From time to
time, third parties may assert exclusive patent, copyright, and other
intellectual property rights to our key technologies. We cannot assure
you that third parties will not assert infringement claims against us
in the future, that assertions by third parties will not result in
costly litigation, or that we would prevail in such litigation or be
able to license any valid and infringed patents from third parties on
commercially reasonable terms. Litigation, regardless of the outcome,
could result in substantial cost to us and diversion of our resources.
Any infringement claim or other litigation against or by us could
materially adversely impact our business, operating results or
revenues.
In May 2000, we entered into an agreement with a third party for a
patent cross-license. We 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 fully paid-up license fee for the use of certain
of the third party's patents through June 30, 2004. Additionally, we
will grant the third party a license to use all of our patents for the
same period. The aggregate fee to be paid by us under the 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. Our best estimate of the aggregate fee that will be payable
under the cross-license agreement is $18.0 million.
WE MAY BE ENGAGED IN LEGAL PROCEEDINGS THAT COULD NEGATIVELY
AFFECT OUR FINANCIAL POSITION OR BUSINESS OPERATIONS. From time to time
we are subject to litigation or claims that could negatively affect our
financial position or business operations. For instance, a class action
lawsuit is pending in the United States District Court for the Northern
District of California against us and certain of our officers and
directors. This lawsuit alleges that we made false and misleading
statements at various times during the period between April 1997 and
January 1998 and that these statements violated federal securities
laws. Our motion to dismiss the complaint was granted in April 2000.
The plaintiffs filed an amended complaint in July 2000. In October
2000, we filed a motion to dismiss the amended complaint. We believe
this lawsuit is without merit and we intend to defend ourselves
vigorously. However, any dispute, including this lawsuit, could cause
us to incur unforeseen expenses, could occupy an inordinate amount of
our management's time and attention and could negatively affect our
financial position or business operations.
IF WE REPATRIATE CASH FROM OUR FOREIGN SUBSIDIARIES, WE WILL
INCUR ADDITIONAL INCOME TAXES WHICH COULD NEGATIVELY IMPACT OUR
RESULTS OF OPERATIONS AND FINANCIAL POSITION. Our cash and cash
equivalent positions are held principally by our subsidiary in
Singapore. If the need arises whereby we need additional cash to
acquire assets or technology, or to support our operations in the
United States, it may require us to repatriate some of our cash from
Singapore to the United States. We will incur additional income
taxes from the repatriation, which could negatively affect our
results of operations and financial position.
29
WE MAY BE SUBJECT TO A HIGHER EFFECTIVE TAX RATE THAT COULD
NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION. Our
effective tax rate is benefited by a Singapore tax holiday relating to
certain of our 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. If we do not continue to
meet the conditions and requirements of the tax holiday in Singapore,
our effective tax rate will increase, which could materially adversely
impact our results of operations and financial position.
WE MAY BE REQUIRED TO PAY ADDITIONAL FEDERAL INCOME TAXES WHICH
COULD NEGATIVELY IMPACT OUR FINANCIAL POSITION. On June 27, 2000, we
received a statutory notice of deficiency from the Internal Revenue
Service, or IRS, with respect to our federal income tax returns for
fiscal 1994 through 1996. We filed a Petition with the United States
Tax Court on September 25, 2000, contesting the asserted deficiencies.
On December 15, 2000, we received a statutory notice of deficiency from
the IRS with respect to our federal income tax return for fiscal 1997,
and we intend to vigorously contest the asserted deficiencies. We
believe we have meritorious defenses against all deficiencies asserted
in these statutory notices. In addition, the IRS is currently auditing
our federal income tax returns for fiscal 1998 and 1999, for which no
proposed adjustments have been received. While we believe we have
meritorious defenses to the proposed adjustments and that sufficient
taxes have been provided, the final outcome of these matters could
materially adversely impact our results of operations and financial
position.
THE DELAY IN THE SPIN-OFF OF OUR SOFTWARE SEGMENT COULD
MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL
POSITION. In June 2000, we announced our plan to spin off the
Software segment in the form of a fully independent and separate
company named Roxio, Inc., or Roxio. In the second quarter of fiscal
2001, Roxio filed a Registration Statement on Form S-1 to register
the sale of approximately 15% of its outstanding common stock. In
January 2001, Roxio withdrew its Registration Statement on Form S-1
due to unfavorable market conditions, however, we intend to complete
the spin-off at a later date. In addition, we committed to issue our
employees, who will later become employees of Roxio at the date of
legal separation, options to purchase shares of Roxio common stock.
Since the measurement date has not been established, these stock
options will therefore be subject to variable plan accounting
treatment resulting in a mark-to-market adjustment to the deferred
compensation in future periods. We may not be successful in
completing the spin-off, due to prolonged market conditions or
delays in obtaining the necessary approvals. This will adversely
impact Roxio's ability to attract and retain qualified employees and
require us to incur additional expenses associated with the
spin-off, which could have a material adverse effect on our
financial position or operating results.
30
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For financial market risks related to changes in interest
rates, foreign currency exchange rates and derivative securities,
reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in the Company's Annual Report to
Stockholders for the year ended March 31, 2000.
31
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
Exhibit
Number Description
------ -----------
10.1 Adaptec, Inc. 1986 Employee Stock Purchase Plan (amended and
restated June 1998 and August 2000)
10.2 Adaptec, Inc. 2000 Nonstatutory Stock Option Plan and Form
of Stock Option Agreement (incorporated by reference to
Exhibit 10.1 on Form 8-K filed on December 22, 2000)
(b.) Reports on Form 8-K:
On December 22, 2000, the Company filed with the Securities
and Exchange Commission a current Report on Form 8-K, dated December
22, 2000, to report under Item 5 the adoption of the Company's 2000
Nonstatutory Stock Option Plan and the reservation for issuance
8,000,000 shares of the Company's common stock.
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ADAPTEC, INC.
By: /s/ DAVID A. YOUNG Date: January 26, 2001
----------------------
David A. Young
Vice President and
Chief Financial Officer
(principal financial officer)
By: /s/ KENNETH B. AROLA Date: January 26, 2001
----------------------
Kenneth B. Arola
Vice President and
Corporate Controller
(principal accounting officer)
33