EXHIBIT 99.1
PRELIMINARY INFORMATION STATEMENT
ADAPTEC, INC.
691 South Milpitas Boulevard
Milpitas, CA 95035
April , 2001
Dear Stockholder:
I am pleased to report that the previously announced spinoff of Adaptec's
software products group is expected to become effective on May 11, 2001. Roxio,
Inc., a recently formed Delaware corporation that will own substantially all of
the assets of the software products group, will commence operation on that day
as an independent public company. We expect Roxio's shares of common stock will
be listed on the Nasdaq National Market under the symbol "ROXI" upon Nasdaq
approval of Roxio's listing application.
Holders of record of Adaptec common stock as of the close of business on
April 30, 2001, which will be the record date, will receive of a share of
Roxio common stock for every one share of Adaptec common stock held. No action
is required on your part to receive your Roxio shares. You will not be required
either to pay anything for the new shares or to surrender any shares of Adaptec
common stock.
No fractional shares of Roxio common stock will be issued. If you otherwise
would be entitled to a fractional share you will receive a check for the cash
value thereof, which may be taxable to you. In due course you will be provided
with information to enable you to compute your tax bases in both Adaptec and
Roxio common stock.
The enclosed information statement describes the distribution of shares of
Roxio common stock and contains important information about Roxio, including
financial statements. I suggest that you read it carefully. If you have any
questions regarding the distribution, please contact Adaptec's transfer agent,
Mellon Investor Services, OverPeck Centre, 85 Challenger Road, Ridgefield Park,
NJ 07660, telephone (800) 522-6645 (Domestic) or +1 (201) 329-8354
(International), TDD (800) 232-5469 (Domestic) or +1 (201) 329-8354
(International), or send an email to Mellon Investor Services at
shrrelations@mellon-investor.com.
Sincerely,
Robert N. Stephens
President and Chief Executive Officer
INFORMATION STATEMENT
ROXIO, INC.
DISTRIBUTION OF APPROXIMATELY 16,309,045 SHARES OF COMMON STOCK
This information statement is being furnished in connection with the
distribution by Adaptec, Inc. to holders of its common stock, par value $0.001
per share, of nearly all the outstanding shares of Roxio, Inc. common stock, par
value $0.001 per share. Adaptec has transferred or will transfer to us
substantially all of the assets of its software products group as described in
this information statement.
Shares of our common stock will be distributed to holders of Adaptec common
stock of record as of the close of business on April 30, 2001, which will be the
record date. Each such holder will receive of a share of our common stock
for every one share of Adaptec common stock held on the record date. The
distribution will be effective at 11:59 p.m. on May 11, 2001. Stockholders will
receive cash in lieu of fractional shares, which may be taxable.
Adaptec stockholders will not be required to pay for the shares of our
common stock to be received by them in the distribution, or to surrender or to
exchange shares of Adaptec common stock in order to receive our common stock, or
to take any other action in connection with the distribution. There is no
current trading market for our common stock. We have applied to list our common
stock on the Nasdaq National Market under the symbol "ROXI."
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A
PROXY.
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 11.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
INFORMATION STATEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
------------------------
STOCKHOLDERS OF ADAPTEC WITH INQUIRIES RELATED TO THE DISTRIBUTION SHOULD
CONTACT ADAPTEC'S TRANSFER AGENT, MELLON INVESTOR SERVICES, OVERPECK CENTRE, 85
CHALLENGER ROAD, RIDGEFIELD PARK, NJ 07660, TELEPHONE (800) 522-6645 (DOMESTIC)
OR +1 (201) 329-8354 (INTERNATIONAL), TDD (800) 232-5469 (DOMESTIC) OR
+1 (201) 329-8354 (INTERNATIONAL), OR SEND AN EMAIL TO MELLON INVESTOR SERVICES
AT SHRRELATIONS@MELLON-INVESTOR.COM.
The date of this information statement is , 2001.
INFORMATION STATEMENT
TABLE OF CONTENTS
PAGE
--------
Summary.............................. 1
The Distribution..................... 7
Risk Factors......................... 11
Special Note Regarding
Forward-Looking Statements......... 25
Dividend Policy...................... 25
Capitalization....................... 26
Selected Consolidated Financial
Data............................... 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 29
PAGE
--------
Business............................. 40
Management........................... 51
Certain Transactions................. 63
Principal Stockholders............... 71
Description of Capital Stock......... 72
Where You Can Find More Information.. 74
Index to Consolidated Financial
Statements......................... F-1
i
SUMMARY
The following is a summary of some of the information contained in this
information statement. This summary is included for convenience only and should
not be considered complete. This summary is qualified in its entirety by the
more detailed information contained elsewhere in this information statement
which should be read in its entirety. We describe in this information statement
the business to be contributed to us by Adaptec immediately prior to the
distribution, described under "--Our Company," as if it was our business for all
historical periods described.
OUR COMPANY
We are a leading provider of digital media software solutions that enable
individuals to create, manage and move music, photos, video and data onto
recordable compact discs, or CDs. Our principal products are our Easy CD Creator
and Toast families of CD recording software and our GoBack system recovery
software. Our software was bundled with approximately 24 million CD recorders in
2000, which, based on industry data, we believe represented approximately 70% of
the CD recorders shipped in 2000.
We sell our products to a wide range of customers, including leading
personal computer, or PC, and CD recordable drive manufacturers and integrators
such as Dell, Hewlett-Packard, Philips and Yamaha. Sales to PC and CD recordable
drive manufacturers and integrators generated 64% of our net revenues for the
nine months ended December 31, 2000. We also sell our products to retailers
through our distributors, such as Computer 2000, Ingram Micro, Softbank and Tech
Data, and directly to end users. Sales to retailers through our distributors and
directly to end users generated 36% of our net revenues for the nine months
ended December 31, 2000.
In an effort to increase market awareness and upgrade sales of our
full-featured CD recording software, we have established strategic relationships
with Microsoft and RealNetworks under which a version of our CD recording
software with limited functionality is included with Microsoft Windows Media
Player 7 and RealNetworks RealJukebox.
The Internet is becoming widely used as a means of distributing digital
content due to the adoption of high speed Internet connections and the
popularity of web sites that distribute music and other content. Individuals are
also increasingly creating content with devices such as digital cameras and
digital camcorders and uploading it to their PCs. This growth in digital content
has driven consumer demand for applications that allow content to be tailored to
a user's preference, stored and played back in a large number of existing
electronic devices such as portable CD players, digital versatile disk, or DVD,
players, car stereos and home audio systems. With the advent of CD recorders and
CD recording software, individuals can now store digital content using a
high-capacity medium that is inexpensive, reliable and portable. Industry
research firm Santa Clara Consulting Group estimates that the number of CD
recorders installed on electronic devices will grow to over 90 million by the
end of 2001. They also estimate that approximately 4.5 billion recordable CDs
will be sold in 2001.
Our products are used for creating, managing and moving digital content to
CDs and for PC system recovery. We have also recently introduced a product for
recording digital content to DVDs. We focus on delivering software solutions
that are reliable, easy to use and compatible across a broad range of PC
operating systems. Our leading product, Easy CD Creator, allows users to record
music downloaded from the Internet, store digital photos and share large data
files, such as PowerPoint presentations. We devote extensive resources to
testing our CD recording software to ensure that it is compatible with different
CD recorders, works with popular operating systems and supports an extensive
array of technical standards for audio, data, enhanced music and video on CD or
DVD.
Our GoBack system recovery software enables PC users to more quickly recover
data and software applications in the event of a system crash, virus attack or
human error. This recovery is accomplished
1
by restoring a PC's hard drive to its state as of a previous point in time. We
believe that as users in both the home and office spend more time on PCs
connected to the Internet, costs associated with the loss of data and
productivity will grow, increasing the need for data protection and system
recovery solutions for PCs. We believe that GoBack represents a new approach to
providing system recovery for individual PCs. Unlike other system back-up
applications which require affirmative user action to periodically back-up the
PC's hard drive, GoBack works in the background, continuously keeping an
up-to-date record of a PC's hard drive.
Our objective is to become the leading provider of digital media software
solutions. We plan to broaden the deployment of our CD recording technology and
system recovery solutions by expanding our product offerings through internal
development. We also intend to pursue acquisitions and additional partnerships
and introduce new marketing approaches. We believe we are well positioned to
expand our role in the delivery of content over the Internet, participate in
initiatives for the protection of copyrighted material and market our DVD
recording solutions.
RELATIONSHIP WITH ADAPTEC
We are currently a wholly-owned subsidiary of Adaptec. On June 8, 2000,
Adaptec announced its plan to make substantially all of its software products
group, subsequently incorporated as Roxio, Inc., into an independent,
publicly-traded company focused on providing digital media software solutions.
We have entered into agreements with Adaptec that provide for the separation
of our business operations from Adaptec. In general, they provide for the
transfer from Adaptec to us of assets comprising our business and the assumption
by us of liabilities relating to our business.
The agreements between Adaptec and us also govern our various interim and
ongoing relationships. All of the agreements providing for our separation from
Adaptec were made in the context of a parent-subsidiary relationship and were
negotiated in the overall context of our separation from Adaptec. The terms of
these agreements may be more or less favorable to us than if they had been
negotiated with unaffiliated third parties. See "Risk Factors--Risks Relating to
Separating Roxio from Adaptec" and "Certain Transactions."
BENEFITS OF THE SEPARATION
We believe that we will realize benefits from our complete separation from
Adaptec, including the following:
- GREATER FOCUS. The separation will allow us to have our own board of
directors, management team, sales force, and other employees focused
specifically on our business and strategic opportunities. We will have
greater ability to modify our business processes and organization to
better fit the needs of our business, customers and employees. We will
also be able to implement a marketing strategy that focuses on our
business. In addition, our business and engineering resources will be
dedicated solely to our business.
- ALIGNED EMPLOYEE INCENTIVES AND GREATER ACCOUNTABILITY. We expect the
motivation of our employees and the focus of our management will be
strengthened by incentive compensation programs tied to the market
performance of our common stock and linked to the performance of our
business. We also expect that our ability to attract and retain qualified
personnel will be enhanced.
- DIRECT ACCESS TO CAPITAL MARKETS. As a separate company, we will have
direct access to the capital markets to fund operations and acquire
businesses, key products and technologies. In addition, we believe that
after the separation, securities analysts will be more likely to provide
research coverage of our business.
2
THE DISTRIBUTION
Please see "The Distribution" for a more detailed description of the matters
described below. The information contained in this information statement gives
effect to a one for two reverse stock split effected in April 2001.
Distributing Company................... Adaptec, Inc., a Delaware corporation.
Distributed Company.................... Roxio, Inc., a Delaware corporation, which will comprise
substantially all of the business and assets of the
software products group operated by Adaptec and described
in this information statement. Please see "Management's
Discussion and Analysis of Financial Condition and Results
of Operations" and "Business" for a description of this
business.
Distribution Ratio..................... Each holder of Adaptec common stock will receive a
dividend of of a share of our common stock for every
one share of Adaptec common stock held on the record date.
Securities to be Distributed........... Based on 99,073,121 shares of Adaptec common stock
outstanding on March 31, 2001, approximately 16,309,045
shares of our common stock will be distributed. The shares
of our common stock to be distributed will constitute all
of the outstanding shares of our common stock immediately
after the distribution, except for 190,955 shares that
will continue to be held by Adaptec for issuance upon the
exercise of an outstanding warrant to purchase Adaptec
common stock. Adaptec stockholders will not be required to
pay for the shares of our common stock to be received by
them in the distribution, or to surrender or exchange
shares of Adaptec common stock in order to receive our
common stock, or to take any other action in connection
with the distribution.
Fractional Shares...................... Fractional shares of our common stock will not be
distributed. Fractional shares will be aggregated and sold
in the public market by the distribution agent. The
aggregate net cash proceeds of these sales will be
distributed ratably to those stockholders who would
otherwise have received fractional interests. These
proceeds may be taxable to those stockholders.
Distribution Agent, Transfer Agent and
Registrar for the Shares............. Mellon Investor Services will be the distribution agent,
transfer agent and registrar for the shares of our common
stock.
Record Date............................ The record date of the dividend is the close of business
on April 30, 2001.
Distribution Date...................... 11:59 p.m. on May 11, 2001.
Federal Income Tax Consequences of the
Distribution......................... Adaptec is seeking an opinion from PricewaterhouseCoopers
LLP that the distribution of its shares of Roxio common
stock to the holders of its common stock will be tax-free
to Adaptec and its stockholders for United States federal
income purposes.
3
Proposed Nasdaq National Market
Listing.............................. There is not currently a public market for our common
stock. We have applied for our common stock to be listed
on the Nasdaq National Market under the symbol "ROXI." It
is anticipated that trading will commence on a when-issued
basis prior to the distribution. On the first trading day
following the distribution date, when-issued trading in
respect of our common stock will end and regular-way
trading will begin. The price at which Roxio's common
stock will trade during the when-issued period prior to
the distribution and in the regular-way period after the
distribution will depend on prevailing market prices.
Various brokers are expected to make a market, or effect
bids and purchases, in Roxio's common stock during the
when-issued period and after regular-way trading
commences. If our stock does not trade at $5 per share or
more during the first day of regular-way trading, it could
affect our ability to list our common stock on the Nasdaq
National Market. See "Risk Factors--Risks Related to the
Securities Markets and Ownership of Our Common Stock--Our
securities have no prior market, and we cannot assure you
that our stock will be listed for trading on the Nasdaq
National Market or that our stock price will not decline
after the distribution" on page 23.
Relationship Between Adaptec and Us
After the Distribution............... Following the distribution, we will be an independent
public company, and Adaptec will have no continuing stock
ownership interest in us, except for 190,955 shares that
will continue to be held by Adaptec for issuance upon the
exercise of an outstanding warrant to purchase Adaptec
common stock. Prior to the distribution, we and Adaptec
will enter into a Master Separation and Distribution
Agreement and several ancillary agreements for the purpose
of accomplishing the contribution of substantially all of
the business and assets of Adaptec's software products
group to us and the distribution of our common stock to
Adaptec's stockholders. These agreements also will govern
our relationship with Adaptec following the distribution
and provide for the allocation of employee benefit, tax
and some other liabilities and obligations attributable to
periods prior to the distribution. These agreements also
include arrangements with respect to intellectual
property, interim services and a number of ongoing
commercial relationships, including product supply
arrangements. The Master Separation and Distribution
Agreement includes an agreement that we generally will
indemnify Adaptec against liabilities arising out of the
transfer to us of substantially all the business and
assets of its software products group and that Adaptec
generally will indemnify us against liabilities arising
out of Adaptec's retained businesses. Please see "Certain
Transactions" for a more detailed description of these
agreements.
4
Post-Distribution Dividend Policy...... We do not anticipate paying any dividends on our common
stock in the foreseeable future. The payment and amount of
dividends by us after the distribution, however, will be
subject to the discretion of our board of directors.
Anti-Takeover Effects.................. Some provisions of our certificate of incorporation and
bylaws, as each will be in effect following the
distribution, may have the effect of making more difficult
an acquisition of control of us in a transaction not
approved by our board of directors. Following the
distribution, we intend to adopt a rights agreement that
will make more difficult an acquisition of control in a
transaction not approved by our board of directors.
Additionally, provisions in our separation agreements with
Adaptec, which provide that we indemnify Adaptec for tax
liability triggered by an acquisition of us within two
years of the distribution, will also discourage an
acquisition of control of us for two years after
distribution.
Risk Factors........................... You should carefully consider the matters discussed under
"Risk Factors."
Our Principal Executive Offices........ 461 South Milpitas Boulevard
Milpitas, CA 95035
(408) 259-7694
5
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables present our summary consolidated financial data. The
data presented in these tables are derived from our historical consolidated
financial statements and notes to those statements included elsewhere in this
information statement. The consolidated statement of operations data presented
below include the results of operations of CeQuadrat GmbH from July 1, 1999 and
Wild File, Inc. from March 11, 2000, both of which we acquired and accounted for
as purchases. See our unaudited pro forma combined financial information
included elsewhere in this information statement for pro forma information
related to these acquisitions. You should read those sections along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for a further explanation of the financial data summarized here.
The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented.
NINE MONTHS ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------------ ----------------------
1998 1999 2000 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $38,654 $43,129 $77,791 $48,344 $85,568
Gross profit.................................... 29,779 34,129 62,139 37,909 68,728
Income (loss) from operations before provision
for income taxes and cumulative effect of a
change in accounting principle................ 8,261 2,523 9,458 (568) 8,524
Net income (loss)............................... $ 6,094 $ 2,110 $ 5,170 $ (594) $ 5,491
Basic and diluted net income (loss) per share... $ 0.37 $ 0.13 $ 0.31 $ (0.04) $ 0.33
======= ======= ======= ======= =======
Weighted average shares used in computing basic
and diluted net income (loss) per share....... 16,500 16,500 16,500 16,500 16,500
------- ------- ------- ------- -------
The unaudited pro forma consolidated balance sheet data presented below
assumes our separation from Adaptec occurred on December 31, 2000 and reflects
Adaptec's contribution of $30 million in cash and any cash held by our overseas
subsidiaries on the date of our separation from Adaptec. See "Certain
Transactions" for more information regarding assets to be transferred to and
liabilities to be assumed by us on the date of our separation from Adaptec.
AS OF
DECEMBER 31, 2000
-----------------------
ACTUAL PRO FORMA
-------- ---------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ -- $37,933
Working capital............................................. 13,620 51,483
Total assets................................................ 60,509 98,427
Total owner's net investment/stockholder's equity........... 43,046 80,964
6
THE DISTRIBUTION
GENERAL
The board of directors of Adaptec approved the distribution of all of the
outstanding shares of our common stock to the record holders of Adaptec common
stock on April 30, 2001, with the exception of 190,955 shares that Adaptec will
continue to hold for issuance upon the exercise of an outstanding warrant to
purchase Adaptec common stock. In the distribution, each holder of Adaptec
common stock will receive as a dividend of a share of our common stock for
every one share of Adaptec common stock held on April 30, 2001, which will be
the record date for determining the holders of Adaptec stock entitled to receive
the dividend.
On September 26, 2000, we filed a registration statement with the Securities
and Exchange Commission to effect an initial public offering of our common
stock. Due to unfavorable market conditions, on January 3, 2001, we requested
the withdrawal of our registration statement from the Securities and Exchange
Commission. We have not pursued an initial public offering of our common stock
since our request for withdrawal because we do not believe that market
conditions have improved. We cannot assure you that market conditions will
improve in the near future or at all. If market conditions do not improve, our
access to capital through the public markets may be substantially impaired.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the distribution are set forth
in the Master Separation and Distribution Agreement between us and Adaptec.
Under the Master Separation and Distribution Agreement, the distribution will be
effective at 11:59 p.m. on the distribution date, May 11, 2001. As further
discussed below, fractional shares will not be distributed.
ADAPTEC STOCKHOLDERS WILL NOT BE REQUIRED TO PAY FOR SHARES OF OUR COMMON
STOCK RECEIVED IN THE DISTRIBUTION, OR TO SURRENDER OR EXCHANGE SHARES OF
ADAPTEC COMMON STOCK IN ORDER TO RECEIVE OUR COMMON STOCK, OR TO TAKE ANY OTHER
ACTION IN CONNECTION WITH THE DISTRIBUTION. NO VOTE OF ADAPTEC STOCKHOLDERS IS
REQUIRED OR SOUGHT IN CONNECTION WITH THE DISTRIBUTION, AND ADAPTEC STOCKHOLDERS
HAVE NO APPRAISAL RIGHTS IN CONNECTION WITH THE DISTRIBUTION.
Fractional shares of our common stock will not be issued to Adaptec
stockholders as part of the distribution. In lieu of receiving fractional
shares, each holder of Adaptec common stock who would otherwise be entitled to
receive a fractional share of our common stock will receive cash for the
fractional interest, which may be taxable to such holder. For an explanation of
the tax consequences of the distribution, please see "--Federal Income Tax
Consequences of the Distribution." The distribution agent will, as soon as
practicable after the distribution date, aggregate fractional shares into whole
shares and sell them in the open market at the prevailing market prices and
distribute the aggregate proceeds, net of brokerage fees, ratably to Adaptec
stockholders otherwise entitled to fractional interests. The amount of such
payment will depend on the prices at which the aggregated fractional shares are
sold by the distribution agent in the open market shortly after the distribution
date.
In order to be entitled to receive shares of our common stock in the
distribution, Adaptec stockholders must be stockholders of record at the close
of business on the record date, April 30, 2001.
After the distribution, many of our stockholders may hold odd lots, or
blocks of less than 100, of our shares. An investor selling an odd lot may be
required to pay a higher commission rate than an investor selling round lots, or
blocks of 100 shares.
7
REASONS FOR THE DISTRIBUTION
Adaptec's board of directors has determined that separation of our business
from Adaptec's other businesses is in the best interests of Adaptec and its
stockholders. The separation will allow us to have our own board of directors,
management team, sales force and other employees focused specifically on our
business and strategic opportunities. After the separation we will be able to
implement a marketing strategy that focuses on our business. Furthermore, our
business and engineering resources will be dedicated solely to our business. We
expect that, after the separation, the motivation of our employees and the focus
of our management team will be strengthened and our ability to attract and
retain qualified personnel will be enhanced. As a separate company, we will have
direct access to the capital markets, and we believe that securities analysts
will be more likely to provide research coverage of our business.
RESULTS OF THE DISTRIBUTION
After the distribution, we will be an independent public company owning and
operating what has previously been substantially all of the business and assets
of Adaptec's software products group. Immediately after the distribution, we
expect to have approximately holders of record of our shares of common stock
and approximately 16,500,000 shares outstanding, based on the number of record
stockholders and outstanding shares of Adaptec common stock on April 30, 2001
and after giving effect to the delivery to stockholders of cash in lieu of
fractional shares of our common stock. The actual number of shares to be
distributed will be determined on the record date. Prior to the distribution, we
will enter into several agreements with Adaptec in connection with, among other
things, intellectual property, interim services and a number of ongoing
commercial relationships. The distribution will not affect the number of
outstanding shares of Adaptec common stock or any rights of Adaptec
stockholders.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Adaptec is seeking an opinion from PricewaterhouseCoopers LLP that the
distribution will qualify as a tax-free transaction under Section 355 of the
Internal Revenue Code, or the Code.
We expect this opinion to provide that for U.S. Federal income tax purposes:
- Adaptec will not recognize any gain or loss upon the distribution;
- no gain or loss will be recognized by, or be includable in the income of,
a stockholder of Adaptec solely as the result of the receipt of our common
stock in the distribution, except, as described below, in connection with
cash received in lieu of fractional shares of our common stock;
- the basis of the Adaptec common stock and our common stock held by
Adaptec's stockholders immediately after the distribution will be the same
as each holder's basis in Adaptec's common stock immediately before the
distribution, allocated between the common stock of Adaptec and us in
proportion to their relative fair market values on the distribution date;
- the holding period of our common stock received by Adaptec stockholders
will include the holding period of their Adaptec common stock, provided
that such Adaptec common stock is held as a capital asset on the date of
the distribution; and
- stockholders of Adaptec who receive cash from the distribution agent in
respect of fractional shares will recognize gain or loss on the sale of
the fractional share interest equal to the difference between the cash
received and the holder's basis in such fractional share interest. Such
gain or loss will be capital gain or loss to such holder, provided the
fractional share interest is a capital asset in the hands of such holder.
8
The validity of the opinion relating to the qualification of the
distribution as a tax-free transaction is subject to factual representations and
assumptions. We are not aware of any facts or circumstances that would cause
such representations and assumptions to be untrue.
If the distribution were not to qualify as a tax-free transaction, Adaptec
would recognize taxable gain equal to the excess of the fair market value of our
common stock distributed to Adaptec stockholders over Adaptec's tax basis in our
common stock. In addition, each stockholder who receives our common stock in the
distribution would generally be treated as receiving a taxable distribution in
an amount equal to the fair market value of our common stock received.
Even if the distribution otherwise qualifies for tax-free treatment under
Sections 355 and 368 of the Code, it may be disqualified as tax-free to Adaptec
under Section 355(e) of the Code if 50% or more of the stock of Adaptec or our
stock is acquired as part of a plan or series of related transactions that
include the distribution. For this purpose, any acquisitions of our stock or
Adaptec's stock within two years before or after the distribution are presumed
to be part of such a plan, although Adaptec or we may be able to rebut that
presumption. If such an acquisition of our stock or Adaptec's stock triggers the
application of Section 355(e), Adaptec would recognize taxable gain as described
above but the distribution would generally be tax-free to each Adaptec
stockholder. Under the tax sharing agreement between Adaptec and us, we would be
required to indemnify Adaptec against that taxable gain if it were triggered by
an acquisition of our stock. Please see "Relationship Between Adaptec and Our
Company After the Distribution--Tax Sharing Agreement" for a more detailed
discussion of the tax sharing agreement between Adaptec and us.
U.S. Treasury regulations require each Adaptec stockholder that receives
shares of our stock in the distribution to attach to the stockholder's U.S.
Federal income tax return for the year in which such stock is received a
detailed statement setting forth such data as may be appropriate to show the
applicability of Section 355 of the Code to the distribution. Within a
reasonable period of time after the distribution, Adaptec will provide its
stockholders who receive our common stock pursuant to the distribution with the
information necessary to comply with such requirement.
Each Adaptec stockholder should consult his or her tax adviser about the
particular consequences of the distribution to such stockholder, including the
application of state, local and foreign tax laws, and possible changes in tax
law that may affect the tax consequences described above.
LISTING AND TRADING OF OUR COMMON STOCK
There is not currently a public market for our common stock. We have applied
for our common stock to be listed on the Nasdaq National Market under the symbol
"ROXI." It is anticipated that trading will commence on a when-issued basis
prior to the distribution. On the first trading day following the distribution
date, when-issued trading in our common stock will end and regular-way trading
will begin. The price at which our common stock will trade during the
when-issued period prior to the distribution and in the regular-way period after
the distribution will depend on prevailing market prices. Various brokers are
expected to make a market, or effect bids and purchases, in our common stock
during the when-issued period and after regular-way trading commences. If our
stock does not trade at $5 per share or more during the first day of regular-way
trading, it could affect our ability to list our common stock on the Nasdaq
National Market. See "Risk Factors--Risks Related to the Securities Markets and
Ownership of Our Common Stock--Our securities have no prior market, and we
cannot assure you that our stock will be listed for trading on the Nasdaq
National Market or that our stock price will not decline after the distribution"
on page 23.
We cannot assure you as to the price at which our common stock will trade
before, on or after the distribution date. Until our common stock is fully
distributed and an orderly market develops in our common stock, the price at
which our stock trades may fluctuate significantly. In addition, the combined
trading prices of our common stock and Adaptec common stock held by stockholders
after
9
the distribution may be less than, equal to or greater than the trading price of
Adaptec common stock prior to the distribution.
The shares distributed to Adaptec stockholders will be freely transferable,
except for shares received by stockholders who may have a special relationship
or affiliation with us. People who may be considered our affiliates after the
distribution generally include individuals or entities that control, are
controlled by, or are under common control with us. This may include some or all
of our officers and directors. Persons who are our affiliates will be permitted
to sell their shares only pursuant to an effective registration statement under
the Securities Act, or an exemption from the registration requirements of the
Securities Act or Rule 144 thereunder.
REASON FOR FURNISHING THIS INFORMATION STATEMENT
This information statement is being furnished by Adaptec solely to provide
information to stockholders of Adaptec who will receive shares of our common
stock in the distribution. It is not, and is not to be construed as, an
inducement or encouragement to buy or sell any of our securities. The
information contained in this information statement is believed by us to be
accurate as of the date set forth on its cover. Changes may occur after that
date, and we will not update the information except in the course of our
respective public disclosure obligations and practices.
10
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS INFORMATION STATEMENT. OUR BUSINESS, FINANCIAL CONDITION OR
OPERATING RESULTS COULD BE SERIOUSLY HARMED IF ANY OF THESE RISKS MATERIALIZE.
THE TRADING PRICE OF OUR COMMON STOCK MAY ALSO DECLINE DUE TO ANY OF THESE
RISKS.
RISKS RELATING TO OUR BUSINESS
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK PRICE TO
DECLINE.
Our quarterly operating results may fluctuate from quarter to quarter. We
cannot reliably predict future revenue and margin trends, and such trends may
cause us to adjust our operations. Other factors that could affect our quarterly
operating results include:
- timing of new product introductions and our ability to transition between
product versions;
- product returns upon the introduction of new product versions and pricing
adjustments for our distributors;
- seasonal fluctuations in sales;
- anticipated declines in selling prices of our products to original
equipment manufacturers and potential declines in selling prices to other
parties as a result of highly competitive pressures;
- changes in the relative portion of our revenues represented by our various
products and customers;
- adverse changes in the level of economic activity in the United States or
other major economies in which we do business, or in industries, such as
PC manufacturing, on which we are particularly dependent;
- foreign currency exchange rate fluctuations;
- expenses related to possible acquisitions of other businesses;
- changes in the timing of product orders due to unexpected delays in the
introduction of our customers' products, due to lifecycles of our
customers' products ending earlier than expected, or due to market
acceptance of our customers' products; and
- timely and accurate reporting to us by our original equipment manufacturer
customers of units shipped.
OUR CD RECORDING SOFTWARE ACCOUNTS FOR THE MAJORITY OF OUR REVENUE. IF
DEMAND FOR THIS SOFTWARE FALLS, OUR SALES COULD BE SIGNIFICANTLY REDUCED AND
OUR OPERATING RESULTS MAY SUFFER.
Historically, nearly all of our operating revenue has come from sales of our
CD recording software. Any factors adversely affecting the pricing of, demand
for or market acceptance of our CD recording software products, such as
competition or technological change, would materially adversely affect our
business and operating results. In particular, sales of our Easy CD Creator
software have accounted for a significant portion of our revenue. We expect that
this product will continue to account for a majority of our software license
revenue for the foreseeable future. Our future operating results depend on the
continued market acceptance of our CD recording software, including future
enhancements. Competition, technological change or other factors could decrease
demand for these products or make these products obsolete.
If new technologies or formats replace the CD as the preferred method of
consumers to store digital content, such as DVD or portable MP3 players, sales
of our current CD recording products
11
could be seriously harmed. Additionally, if new consumer appliance technologies
replace the PC as the preferred means of personalizing and managing digital
content, our business could be seriously harmed.
WE EXPECT OUR FUTURE SUCCESS WILL HEAVILY DEPEND ON THE SALE OF UPGRADES TO
OUR CD RECORDING SOFTWARE PRODUCTS. IF WE FAIL TO SELL UPGRADES TO SUCH
PRODUCTS EFFECTIVELY, OUR REVENUE MAY NOT INCREASE AND MAY DECLINE.
Historically, we have derived a significant portion of our revenue from
sales of our CD recording software products to original equipment manufacturers
of PCs and CD recorders. Recently, because of competition in the PC industry and
the diminishing margins PC manufacturers have been experiencing, we have reduced
the prices we charge PC manufacturers to include our software in their product
offerings. If this trend continues as anticipated, we expect that revenues
derived from the sale of our CD recording software products to PC manufacturers
in total and as a percentage of net revenue will decline. As such, our future
success will depend in part on our ability to sell software upgrades. Although
we are developing marketing strategies to increase our sales of software
upgrades, we cannot assure you that any marketing strategies we develop will be
successful in increasing our upgrade rate or that users will not be content with
the version of our software that is included in their PC or CD recorder
purchase.
TO GROW OUR BUSINESS, WE MUST DEVELOP NEW AND ENHANCED PRODUCTS AND LEAD IN
THE COMMERCIALIZATION OF NEW TECHNOLOGY.
We sell our products in a market that is characterized by rapid
technological changes, frequent new product and service introductions and
evolving industry standards. Without the timely introduction of new products,
services and enhancements, our existing products and services will likely become
technologically obsolete.
OUR OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE FAIL TO INTEGRATE THE
MEMBERS OF OUR MANAGEMENT TEAM, MANY OF WHOM HAVE BEEN RECENTLY HIRED OR MAY
BE HIRED IN THE NEAR FUTURE.
We recently hired key management personnel. These individuals were added to
fill newly-created positions as a result of our separation from Adaptec. These
individuals and the other members of our management have not previously worked
together and are in the process of integrating as a management team. We cannot
assure you that our new management team will work together effectively or
successfully pursue our business objectives.
IF OUR PRODUCTS DO NOT INTEROPERATE EFFECTIVELY WITH THE DRIVES OF OUR
CUSTOMERS AND CONSUMERS, OUR REVENUES WILL SUFFER.
We must design our CD recording software products to interoperate
effectively with a variety of hardware and software products, including CD
recorders, PCs and operating system software. We depend on significant
cooperation with manufacturers of these products to achieve our design
objectives and to produce products that interoperate successfully.
IF WE FAIL TO ESTABLISH, MAINTAIN OR EXPAND OUR STRATEGIC RELATIONSHIPS FOR
THE INTEGRATION OF OUR SOFTWARE WITH THE SERVICES OF THIRD PARTIES, THE
GROWTH OF OUR BUSINESS MAY CEASE OR DECLINE.
In order to expand our business, we must generate, maintain and strengthen
strategic relationships with third parties. To date, we have established
relationships with Microsoft and RealNetworks, through which they integrate our
software into their services. We may also need to establish additional strategic
relationships in the future. If these parties do not provide sufficient,
high-quality service or integrate and support our software correctly, or if we
are unable to enter into successful new strategic
12
relationships, our revenues and growth may be harmed. We cannot assure you that
the time and effort spent on developing or maintaining strategic relationships
will produce significant benefits to us.
In addition, Microsoft, RealNetworks or any future strategic partners may
offer products of other companies, including products that compete directly with
our products. For example, Microsoft has included system recovery related
functionality in its Windows Me operating system. Additionally, both Apple and
Microsoft have announced their intention to include CD recording software in
future releases of their operating systems. Although we have entered into an
agreement to provide Microsoft with CD recording software with limited
functionality, we cannot assure you that Microsoft will include our CD recording
software in any future releases, that they will not include CD recording
software from one of our competitors, or that they will not develop their own CD
recording software.
A SIGNIFICANT PORTION OF OUR REVENUE CURRENTLY COMES FROM ONE DISTRIBUTOR,
AND ANY DECREASE IN REVENUE FROM THIS OR OTHER DISTRIBUTORS COULD HARM OUR
OPERATING RESULTS.
For the nine months ended December 31, 2000, approximately 19% of our gross
revenue came from Ingram Micro. We expect that a significant portion of our
revenues will continue to depend on sales of our products to a small number of
distributors. Any downturn in the business of our distributors could seriously
harm our revenues and operating results. Prior to our separation from Adaptec,
we distributed our products pursuant to Adaptec's distributor agreements. As
part of our separation from Adaptec, we are currently negotiating new agreements
with many of our distributors and have entered into an agreement with Ingram
Micro. We cannot assure you that we will be able to enter into these new
agreements in a timely manner or on terms and conditions, including cost, as
favorable as those distributor agreements of Adaptec.
WE ARE SUBSTANTIALLY DEPENDENT ON OUR RELATIONSHIPS WITH ORIGINAL EQUIPMENT
MANUFACTURERS, AND OUR FAILURE TO MAINTAIN OR EXPAND THESE RELATIONSHIPS
COULD CAUSE DEMAND FOR OUR PRODUCTS TO DECLINE.
Historically, we have derived a majority of our revenue from sales of our
products to original equipment manufacturers, such as PC and drive manufacturers
and integrators. These original equipment manufacturers typically purchase and
include the standard version of our Easy CD Creator software with PCs and CD
recorders. As a result, these relationships also serve an important role in
distributing Easy CD Creator to the end user and positioning the market for
upgrades to the deluxe version of Easy CD Creator. If our competitors offer
these original equipment manufacturers more favorable terms or if our
competitors are able to take advantage of their existing relationships with
these original equipment manufacturers, then these original equipment
manufacturers may decline to include our software with their PCs and CD
recorders. We cannot assure you that we will be able to maintain or expand our
relationships with original equipment manufacturers.
BECAUSE SALES TO PC MANUFACTURERS PROVIDE A SIGNIFICANT MEANS OF
DISTRIBUTING OUR SOFTWARE TO END USERS, AND BECAUSE SALES TO PC
MANUFACTURERS ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUE, A DOWNTURN
OR COMPETITIVE PRICING PRESSURES IN THE PC INDUSTRY COULD CAUSE OUR REVENUE
TO DECLINE.
The PC industry is highly competitive, and we expect this competition to
increase significantly. In particular, we expect pricing pressures in the PC
market to continue. To the extent that PC manufacturers are pressured through
competition to reduce the prices of their PCs, they may be less likely to
purchase our products on terms as favorable as we have negotiated with our
current PC manufacturer customers, if at all. In addition, if the demand for PCs
decreases, our sales to PC manufacturers will likely decline. If we are unable
to sell our products to PC manufacturers in the amount and on the terms that we
have negotiated with our current PC manufacturer customers, our revenue may
decline.
13
WE RELY ON DISTRIBUTORS AND RETAILERS TO SELL OUR PRODUCTS, AND DISRUPTIONS
TO THESE CHANNELS WOULD ADVERSELY AFFECT OUR ABILITY TO GENERATE REVENUE
FROM THE SALE OF OUR PRODUCTS.
Because we sell a significant portion of our products to distributors, we
are subject to many risks related to distributors' businesses, including risks
related to their inventory levels. Our distributors maintain significant levels
of our products in their inventories. If they attempt to reduce their levels of
inventory or if they do not maintain sufficient levels to meet customer demand,
our sales could be negatively impacted. If we reduce the prices of our products
to our distributors, we may have to compensate them for the difference between
the higher price they paid to buy their inventory and the new lower prices. In
addition, we are exposed to the risk of product returns from distributors,
either through their exercise of contractual return rights or as a result of our
strategic interest in assisting them in balancing inventories.
Our distributors, and the retailers who sell our software to the public,
also sell products offered by our competitors. If our competitors offer our
distributors or retailers more favorable terms, those distributors or retailers
may de-emphasize or decline to carry our products. In the future, we may not be
able to retain or attract a sufficient number of qualified distributors or
retailers. Further, distributors or retailers may not recommend, or continue to
recommend, our products.
IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH EXISTING OR NEW COMPETITORS,
INCLUDING IF THESE COMPETITORS OFFER ORIGINAL EQUIPMENT MANUFACTURERS BETTER
TERMS THAN DO WE, WE COULD EXPERIENCE PRICE REDUCTIONS, FEWER CUSTOMER
ORDERS, REDUCED MARGINS OR LOSS OF MARKET SHARE.
We compete in providing solutions for moving, managing and protecting
digital content. The markets for providing products and services offering these
solutions are highly competitive, and we expect competition to increase in the
future. Key competitors for sales of our CD recording software include Ahead,
Applix, BHA, DataBecker, Oak Technology, Prassi, Sonic Foundry and Veritas. Our
system recovery competitors include Microsoft and PowerQuest. Microsoft has
included system recovery related functionality in its recently introduced
Windows Me operating system. We cannot assure you that this will not have a
negative impact on sales of our GoBack software. Additionally, both Apple and
Microsoft have announced their intention to include CD recording software in
future releases of their operating systems.
IF WE ARE UNABLE TO DEVOTE RESOURCES EQUIVALENT TO THOSE OF OUR COMPETITORS,
WE COULD EXPERIENCE A LOSS OF MARKET SHARE AND REDUCED REVENUES.
Some of our competitors or potential competitors have significantly greater
financial, technical and marketing resources than we do. These competitors may
be able to respond more rapidly than we can to new or emerging technologies or
changes in customer requirements and may be able to leverage their customer
bases and adopt aggressive pricing policies to gain market share. They may also
devote greater resources to the development, promotion and sale of their
products than we do. In addition, some of our competitors or potential
competitors have existing relationships with PC and CD recordable drive
manufacturers, integrators or retailers which currently carry our products. If
our competitors are able to exploit these existing relationships to expand into
our product areas, our business could be harmed.
DIGITAL CONTENT PROVIDERS MAY CLAIM THAT OUR CD RECORDING SOFTWARE
CONTRIBUTES TO COPYRIGHT INFRINGEMENT, AND WE COULD INCUR SIGNIFICANT
EXPENSES OR BE PREVENTED FROM SELLING OUR CD RECORDING SOFTWARE.
In December 1999, A&M Records, Inc. and other record companies filed a civil
suit against Napster, Inc., alleging copyright infringement and related state
law violations. The plaintiffs asserted that Napster's software, which allows
Internet users to exchange MP3 versions of songs with other
14
Internet users, contributes to copyright infringement by providing tools for
Internet users to easily download songs to their hard drives. The plaintiffs are
seeking a permanent injunction enjoining Napster from contributing to the
infringement of their copyrights, restitution of profits, compensatory and
punitive damages. On July 26, 2000, the district court granted plaintiff's
motion for a preliminary injunction against Napster, which was stayed pending
appeal. In a February 12, 2001 opinion, the Ninth Circuit Court of Appeals
concluded on appeal that the plaintiffs had demonstrated a likelihood of success
on the merits of the case and upheld the preliminary injunction. The Ninth
Circuit, however, found that the scope of the injunction was overbroad and
remanded the case to the district court for the purpose of modifying the
preliminary injunction. Until modified by the district court, the preliminary
injunction will remain stayed. While some plaintiffs continue to pursue the suit
against Napster, others, including Bertelsmann AG, the parent company of BMG,
have reached settlement with Napster.
We believe that our software does not pose the same threats of copyright
infringement as Napster's software because there are legitimate, non-infringing
uses for our software. However, we cannot assure you that a lawsuit will not be
filed against us by third parties attempting to protect their rights with
respect to music, video or other digital content. Such a lawsuit could be costly
and time-consuming to defend and could result in significant damages or
injunctions against the development and sale of certain of our products.
TO THE EXTENT THAT CONSUMERS ARE NO LONGER ABLE TO OBTAIN FREE DIGITAL
CONTENT OVER THE INTERNET, SALES OF OUR SOFTWARE MAY DECLINE.
We believe that our CD recording software has been successful in part
because consumers want to personalize, store and access digital content. If
digital content providers are successful in obtaining injunctions against web
sites, such as Napster, which facilitate the free distribution of digital
content, there may be less digital content on the Internet which consumers can
obtain at no cost. To the extent that less free digital content is available on
the Internet, demand for our CD recording software may be harmed.
IF THE INSTALLED BASE OF CD RECORDERS DOES NOT GROW AS EXPECTED, SALES OF
OUR CD RECORDING SOFTWARE MAY DECLINE.
Sales of our CD recording software and related services depend in large part
on the continued growth of the installed base of CD recorders. While this
installed base is rapidly expanding, we cannot assure you that this growth will
continue as expected. Consumers may choose to purchase new PCs that do not
include CD recorders, or existing PC owners may not purchase CD recorders as a
stand-alone product in the numbers that are expected if an alternative
technology emerges or if the demand for moving, managing and storing digital
content is less than expected. Growth in the installed base of CD recorders may
also be limited due to shortages in components required to manufacture CD
recorders or other supply constraints.
IF WE FAIL TO RELEASE OUR PRODUCTS AS SCHEDULED, IT WOULD ADVERSELY AFFECT
OUR REVENUE AND THE GROWTH OF OUR BUSINESS.
We may fail to introduce or deliver new product offerings, or new versions
of existing products, on a timely basis or at all. In fiscal 1999, Easy CD
Creator 4.0 was not ready for release on its scheduled release date. We believe
this delay resulted in a loss of revenues for fiscal 1999. If new versions of
existing products or potential new products are delayed, we could experience a
delay or loss of revenues and customer dissatisfaction. Customers may delay
purchases of Easy CD Creator or other products in anticipation of future
releases. If customers defer material orders of Easy CD Creator or other
products in anticipation of new releases or new product introductions, our
business would be seriously harmed.
15
IF WE FAIL TO MANAGE EXPANSION EFFECTIVELY, WE MAY NOT BE ABLE TO
SUCCESSFULLY MANAGE OUR BUSINESS, WHICH COULD CAUSE US TO FAIL TO MEET OUR
CUSTOMER DEMAND OR TO ATTRACT NEW CUSTOMERS, WHICH WOULD ADVERSELY AFFECT
OUR REVENUE.
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We plan to continue to increase the scope of our operations
domestically and internationally. In addition, we plan to continue to hire a
significant number of employees this year, including several key management
positions. This anticipated growth in future operations will place a significant
strain on our management resources.
In the future we will need to develop and continue to improve our financial
and managerial controls, reporting systems and procedures. In addition, we will
need to continue to expand, train and manage our work force worldwide.
WE MUST INTEGRATE OUR RECENT ACQUISITION OF WILD FILE, AND WE MAY NEED TO
MAKE ADDITIONAL FUTURE ACQUISITIONS TO REMAIN COMPETITIVE. THE PROCESS OF
IDENTIFYING, ACQUIRING AND INTEGRATING FUTURE ACQUISITIONS MAY CONSTRAIN
VALUABLE MANAGEMENT RESOURCES, AND OUR FAILURE TO EFFECTIVELY INTEGRATE
FUTURE ACQUISITIONS MAY RESULT IN THE LOSS OF KEY EMPLOYEES AND THE DILUTION
OF STOCKHOLDER VALUE AND HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS.
We have completed several acquisitions and expect to continue to pursue
strategic acquisitions in the future. In March 2000, we completed our
acquisition of Wild File, provider of our GoBack system recovery software. If we
identify an appropriate acquisition candidate, we may not be able to negotiate
the terms of the acquisition successfully, finance the acquisition, or integrate
the acquired business, products, technologies or employees into our existing
business and operations.
Completing any potential future acquisitions, and integrating Wild File or
other acquisitions, could cause significant diversions of management time and
resources. Financing for future acquisitions may not be available on favorable
terms, or at all. If we acquire businesses, new products or technologies in the
future, we may be required to amortize significant amounts of goodwill and other
intangible assets. If we consummate one or more significant future acquisitions
in which the consideration consists of stock or other securities, our existing
stockholders' ownership could be significantly diluted. If we were to proceed
with one or more significant future acquisitions in which the consideration
included cash, we could be required to use a substantial portion of our
available cash. As of December 31, 2000, we had an aggregate of $30.6 million of
goodwill and other intangible assets remaining to be amortized. The amortization
of the remaining goodwill and other intangible assets will result in additional
charges to operations through the quarter ending March 31, 2003.
WE COULD BE SUBJECT TO POTENTIAL PRODUCT LIABILITY CLAIMS AND THIRD PARTY
LIABILITY CLAIMS RELATED TO USERS' RELIANCE ON OUR GOBACK SYSTEM RECOVERY
SOFTWARE.
Our GoBack system recovery software may be heavily relied upon to protect
important work product, data and other content against human error and computer
viruses. Any errors, defects or other performance problems could result in
financial or other damages to our customers. Although our license agreements
generally contain provisions designed to limit our exposure to product liability
claims, existing or future laws or unfavorable judicial decisions could negate
such limitation of liability provisions. Product liability litigation, even if
it not successful, would likely be time consuming and costly to defend.
16
A SIGNIFICANT PORTION OF OUR REVENUE IS DERIVED FROM INTERNATIONAL SALES.
ECONOMIC, POLITICAL, REGULATORY AND OTHER RISKS ASSOCIATED WITH
INTERNATIONAL SALES AND OPERATIONS COULD HAVE AN ADVERSE EFFECT ON OUR
REVENUE.
Because we sell our products worldwide, our business is subject to risks
associated with doing business internationally. Based on the selling entity,
international sales accounted for approximately 33% of our net revenues for the
nine months ended December 31, 2000. We anticipate that revenue from
international operations will represent an increasing portion of net total
revenue. Accordingly, our future revenue could decrease based on a variety of
factors, including:
- changes in foreign currency exchange rates;
- seasonal fluctuations in sales;
- changes in a specific country's or region's political or economic
condition, particularly in emerging markets;
- unexpected changes in foreign laws and regulatory requirements;
- trade protection measures and import or export licensing requirements;
- potentially adverse tax consequences;
- longer accounts receivable collection cycles;
- difficulty in managing widespread sales and manufacturing operations; and
- less effective protection of intellectual property.
THIRD PARTIES MAY CLAIM WE ARE INFRINGING THEIR INTELLECTUAL PROPERTY, AND
WE COULD SUFFER SIGNIFICANT LITIGATION EXPENSES, INCUR SUBSTANTIAL DAMAGES,
BE REQUIRED TO PAY SUBSTANTIAL LICENSE FEES OR BE PREVENTED FROM SELLING
CERTAIN PRODUCTS.
Third parties may claim that we are infringing their intellectual property
rights, and we may be found to infringe those intellectual property rights. We
cannot assure you that other third parties will not claim infringement by us
with respect to our products and associated technology. While we do not believe
that any of our products infringe the proprietary rights of third parties, we
acquired all of our assets "as is" from Adaptec, and we may be unaware of
intellectual property rights of others that may cover some of our technology. We
are currently covered under a broad patent cross license agreement between
Adaptec and a third party. If we cease to be a majority-owned subsidiary of
Adaptec, we will no longer be covered under this cross license. If we are no
longer a beneficiary of this cross license, we may be required to negotiate a
separate license, which could be costly and time-consuming. In the event that we
are unable to successfully negotiate a separate license, we may be prevented
from selling certain of our products, and our business could be seriously
harmed. In addition, we have received opposition to our registration of DirectCD
as our trademark. We cannot assure you that we will be able to register DirectCD
as our trademark or that we will receive a license to continue using the name
DirectCD in the event that our trademark registration efforts are unsuccessful.
Any litigation regarding patents or other intellectual property, with or
without merit, could be time-consuming, result in costly litigation, divert
management's attention and resources, prevent product shipment, cause delays or
require us to enter into royalty or licensing agreements, any of which could
harm our business. Patent litigation in particular has complex technical issues
and inherent uncertainties. Parties making claims against us could secure
substantial damages, as well as injunctive or other equitable relief which could
effectively block our ability to license our products in the United States or
abroad. Such a judgment could seriously harm our business. Claims of
intellectual property infringement might also require us to enter into costly
royalty or license agreements. In the event that we are unable to obtain royalty
or license agreements on terms acceptable to us or if we are subject to
17
significant damages or injunctions against the development and sale of our
products, our business would be harmed.
THIRD PARTIES MAY INFRINGE OUR INTELLECTUAL PROPERTY, AND WE MAY NEED TO
EXPEND SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR SUFFER COMPETITIVE
INJURY.
Our success depends in large part on our proprietary technology. We rely on
a combination of patents, copyrights, trademarks, trade secrets, confidentiality
and licensing arrangements to establish and protect our proprietary rights. We
have filed over 70 patent applications in the past six years, covering general
CD recording, audio transformations, improving data utilization and methods for
saving and recording data. Ten patents have been issued to us.
Our pending patent and trademark registration applications may not be
allowed or competitors may challenge the validity or scope of these
registrations. Even if patents are issued and maintained, these patents may not
be of adequate scope to benefit us or may be held invalid and unenforceable
against third parties.
We have in the past expended and may be required in the future to expend
significant resources to protect our intellectual property rights. For example,
in April 1998, we filed a lawsuit against Prassi Software USA, Inc. and certain
individuals alleging that they breached their contracts with us and made
unauthorized use of our copyrighted code and trade secrets. We may not be able
to detect infringement and may lose competitive position in the market before we
do so. In addition, competitors may design around our technology or develop
competing technologies. Intellectual property rights may also be unavailable or
limited in some foreign countries.
Despite our efforts to protect our proprietary rights, existing laws,
contractual provisions and remedies afford only limited protection. In addition,
effective copyright and trade secret protections may be unavailable or limited
in some foreign countries. Attempts may be made to copy or reverse engineer
aspects of our product or to obtain and use information that we regard as
proprietary. Accordingly, we cannot assure you that we will be able to protect
our proprietary rights against unauthorized third-party copying or use. Use by
others of our proprietary rights could materially harm our business.
Furthermore, policing the unauthorized use of our products is difficult, and
expensive litigation may be necessary in the future to enforce our intellectual
property rights.
OUR SOFTWARE COULD BE SUSCEPTIBLE TO ERRORS OR DEFECTS THAT COULD RESULT IN
LOST REVENUES, LIABILITY OR DELAYED OR LIMITED MARKET ACCEPTANCE.
Complex software products often contain errors or defects, particularly when
first introduced or when new versions or enhancements are released. We have in
the past discovered, and may in the future discover, software errors in our new
releases after their introduction. Despite internal testing and testing by
current and potential clients, our current and future products may contain
serious defects or errors. Any such defects or errors would likely result in
lost revenues, liability or a delay in market acceptance of these products.
THE CURRENT TECHNOLOGY LABOR MARKET IS VERY COMPETITIVE, AND, TO GROW OUR
BUSINESS, WE MUST BE ABLE TO HIRE AND RETAIN SUFFICIENT QUALIFIED TECHNICAL,
SALES, MARKETING AND ADMINISTRATIVE PERSONNEL IN THIS MARKET.
Our future success depends in part on our ability to attract and retain
engineering, sales, marketing, finance and customer support personnel. Our
separation from Adaptec will require us to hire many additional employees to
perform operational functions which were previously performed by Adaptec
employees. If we fail to retain and hire a sufficient number of these employees,
we will not be able to maintain and expand our business. Competition for
qualified personnel in technology is intense, and our principal operations are
in the Silicon Valley region of Northern California where labor
18
markets are particularly competitive. We believe we have benefited from
Adaptec's name and reputation as an employer in the past. To the extent we do
not obtain similar recognition, our ability to attract and retain personnel
could be harmed. In addition, some employees of Adaptec who worked in our
businesses in the past may have chosen, or may choose, to remain with Adaptec.
We cannot assure you that we will be able to hire and retain a sufficient number
of qualified personnel to meet our business objectives.
WE MAY ENCOUNTER COMPUTER PROBLEMS OR A NATURAL DISASTER AT OUR
HEADQUARTERS, WHICH COULD CAUSE US TO LOSE REVENUE AND CUSTOMERS.
Viruses or bugs introduced into our product development, quality assurance,
production and shipping, customer support or financial and administrative
software systems could cause us to lose data, expose us to time and expense in
identifying and resolving the problem or delay product shipments. Furthermore,
our headquarters are located in a single location in Milpitas, California. We
could be particularly vulnerable in a natural disaster, such as an earthquake.
Any of these events could cause us to lose customers or damage our reputation,
which would decrease our revenues.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND
CALIFORNIA'S CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE
OUR EXPENSES.
California is in an energy crisis that could disrupt our operations and
increase our expenses. In the event of an acute power shortage, that is, when
power reserves for the State of California fall below 1.5%, California has on
some occasions implemented, and may in the future continue to implement, rolling
blackouts throughout California. We currently do not have backup generators or
alternate sources of power in the event of a blackout, and our current insurance
does not provide coverage for any damages we or our customers may suffer as a
result of any interruption in our power supply. If blackouts interrupt our power
supply, we would be temporarily unable to continue operations at our facilities.
Any such interruption in our ability to continue operations at our facilities
could damage our reputation, harm our ability to retain existing customers and
to obtain new customers, and could result in lost revenue.
IF WE REPATRIATE CASH FROM OUR FOREIGN SUBSIDIARIES, WE WILL INCUR
ADDITIONAL INCOME TAXES THAT COULD NEGATIVELY IMPACT OUR RESULTS OF
OPERATIONS AND FINANCIAL POSITION.
A portion of our cash and cash equivalents will be held by one or more of
our foreign subsidiaries. If we need additional cash to acquire assets or
technology, or to support our operations in the United States, we may be
required to repatriate some of our cash from these foreign subsidiaries to the
United States. We are likely to incur additional income taxes from the
repatriation, which could negatively affect our results of operations and
financial position.
RISKS RELATING TO SEPARATING ROXIO FROM ADAPTEC
WE ARE OPERATING WITH A NEW BRAND, WHICH MAY CAUSE OUR PRODUCT SALES TO
SUFFER UNTIL OUR NEW BRAND RECEIVES WIDESPREAD RECOGNITION.
In connection with our separation from Adaptec, we are changing the brand
name and some of the trademarks and trade names under which we conduct our
business. We believe that sales of our products have benefited from the use of
the "Adaptec" brand. Our current customers, suppliers and partners may react
negatively to the separation. In addition, the loss of the "Adaptec" brand may
hinder our ability to establish new relationships.
19
WE CURRENTLY USE ADAPTEC'S OPERATIONAL AND ADMINISTRATIVE INFRASTRUCTURE,
AND OUR ABILITY TO SATISFY OUR CUSTOMERS AND OPERATE OUR BUSINESS WILL
SUFFER IF WE DO NOT DEVELOP OUR OWN INFRASTRUCTURE QUICKLY AND
COST-EFFECTIVELY.
We currently use Adaptec's systems, processes and personnel to support our
operations, including systems to manage inventory, order processing, human
resources, shipping, accounting, payroll and internal computing operations. Many
of these systems and processes are proprietary to Adaptec and are very complex.
These systems and processes have been modified, and are in the process of being
further modified, to enable us to separately track items related to our
business. These modifications, however, may result in unexpected system failures
or the loss or corruption of data.
We are in the process of creating our own systems and processes to replace
Adaptec's systems and processes. We may not be successful in implementing these
systems or processes and transitioning data from Adaptec's systems to ours.
Any failure or significant downtime in Adaptec's or our own information
systems could prevent us from taking customer orders, shipping products or
billing customers. In addition, Adaptec's and our information systems and
processes require the services of employees with extensive knowledge of these
information systems and processes and the business environment in which we
operate. In order to successfully implement and operate our systems and
processes, we must be able to attract and retain a significant number of highly
skilled employees. We cannot assure you that we will be able to attract and
retain the highly skilled personnel required to implement, maintain, and operate
our information systems and processes.
WE MAY BE REQUIRED TO INDEMNIFY ADAPTEC FOR TAX LIABILITIES IT MAY INCUR IN
CONNECTION WITH ITS DISTRIBUTION OF OUR COMMON STOCK.
We have entered into a tax sharing agreement with Adaptec in which we have
agreed to indemnify Adaptec for certain taxes and similar obligations that it
could incur if the distribution does not qualify for tax-free treatment due to
any of the following events:
- the acquisition of a controlling interest in our stock after the
distribution;
- our failure to continue our business after the distribution;
- a repurchase of our stock; or
- other acts or omissions by us.
Internal Revenue Service regulations provide that if another entity acquires
a controlling interest in our stock within two years of the distribution, a
presumption will arise that the acquisition was made in connection with the
distribution, causing the distribution to become taxable. This presumption may
deter other companies from acquiring us for two years after the distribution. In
addition, Adaptec has agreed to indemnify us for any tax liabilities we incur as
a result of our operations and its operations prior to our separation from
Adaptec. Nevertheless, we may be held jointly and severally liable for such
liabilities, and we cannot assure you that we will be able to recover from
Adaptec any losses we may suffer. If we take any action or fail to take any
action that would cause Adaptec's distribution of our common stock to be taxable
to Adaptec, our financial condition could be seriously harmed.
BECAUSE WE WILL SEPARATE OUR BUSINESS FROM THAT OF ADAPTEC, OUR HISTORICAL
FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS AS A COMPANY
SEPARATE FROM ADAPTEC.
Our consolidated financial statements have been carved out from the
consolidated financial statements of Adaptec using the historical operating
results and historical bases of the assets and liabilities of the Adaptec
business that we comprise. Accordingly, the historical financial information we
have included in this information statement does not necessarily reflect what
our financial position,
20
operating results and cash flows would have been had we been a separate,
stand-alone entity during the periods presented. Adaptec did not account for us,
and we were not operated, as a separate, stand-alone entity for the periods
presented. Our costs and expenses include allocations from Adaptec for
centralized corporate services and infrastructure costs, including:
- legal;
- accounting;
- finance;
- manufacturing;
- real estate;
- information technology;
- distribution;
- customer service;
- sales;
- marketing; and
- engineering.
These allocations have been determined on bases that Adaptec and we consider
to be reasonable reflections of the utilization of services provided to or the
benefit received by us. The historical financial information is not necessarily
indicative of what our operating results, financial position and cash flows will
be in the future. We have not made adjustments to our historical financial
information to reflect many significant changes that will occur in our cost
structure, funding and operations as a result of our separation from Adaptec,
including increased costs associated with reduced economies of scale, increased
marketing expenses related to building a company brand identity separate from
Adaptec and increased costs associated with being a publicly-traded, stand-alone
company.
WE WILL NOT BE ABLE TO RELY ON ADAPTEC TO FUND OUR FUTURE CAPITAL
REQUIREMENTS, AND FINANCING FROM OTHER SOURCES MAY NOT BE AVAILABLE ON
FAVORABLE TERMS OR AT ALL.
In the past, our capital requirements have been satisfied by Adaptec.
However, following our separation, Adaptec may no longer provide funds to
finance our working capital or other cash requirements.
We believe our capital requirements will vary greatly from quarter to
quarter, depending on, among other things, capital expenditures, fluctuations in
our operating results, financing activities, acquisitions and investments and
inventory and receivables management. We believe that our future cash flow from
operations, together with the cash being contributed to us by Adaptec and the
cash held by our foreign subsidiaries, will be sufficient to satisfy our working
capital, capital expenditure and product development requirements for the
foreseeable future. However, we may require or choose to obtain additional debt
or equity financing in order to finance acquisitions or other investments in our
business. Future equity financings would be dilutive to the existing holders of
our common stock. Future debt financings could involve restrictive covenants. We
may not be able to obtain financing with interest rates as favorable as those
that Adaptec could obtain or at all.
21
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH ADAPTEC WITH
RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS, AND WE MAY NOT RESOLVE THESE
CONFLICTS ON TERMS FAVORABLE TO US.
Conflicts of interest may arise between Adaptec and us in a number of areas
relating to our past and ongoing relationships, including:
- labor, tax, employee benefit, indemnification and other matters arising
from our separation from Adaptec;
- intellectual property matters;
- employee retention and recruiting;
- the nature, quality and pricing of transitional services Adaptec has
agreed to provide us; and
- business opportunities that may be attractive to both Adaptec and us.
Nothing restricts Adaptec from competing with us.
OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST BECAUSE
OF THEIR OWNERSHIP OF ADAPTEC COMMON STOCK.
Many of our directors and executive officers own substantial amounts of
Adaptec common stock and options to purchase Adaptec common stock. Ownership of
Adaptec common stock by our directors and officers after our separation from
Adaptec could create, or appear to create, potential conflicts of interest when
directors and officers are faced with decisions that could have different
implications for Adaptec and us.
IF THE TRANSITIONAL SERVICES BEING PROVIDED TO US BY ADAPTEC ARE NOT
SUFFICIENT TO MEET OUR NEEDS, OR IF WE ARE NOT ABLE TO REPLACE THESE
SERVICES AFTER OUR AGREEMENTS WITH ADAPTEC EXPIRE, WE WILL BE UNABLE TO
MANAGE CRITICAL OPERATIONAL FUNCTIONS OF OUR BUSINESS.
Adaptec has agreed to provide transitional services to us, including
services related to:
- information technology systems;
- supply chain;
- product order administration;
- buildings and facilities; and
- finance and accounting.
These services may not be provided at the same level as when we were part of
Adaptec, and we may not be able to obtain the same benefits. Other than the
five-year lease for our corporate headquarters, these transitional service and
leasing arrangements generally have a term of one year following the separation.
After the expiration of these various arrangements, we may not be able to
replace the transitional services or enter into appropriate leases in a timely
manner or on terms and conditions, including cost, as favorable as those we will
receive from Adaptec.
These agreements were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of our separation from
Adaptec. The prices charged to us under these agreements may be lower than the
prices that we may be required to pay third parties for similar services or the
costs of similar services if we undertake them ourselves.
22
WE WILL NEED TO OBTAIN THIRD PARTY CONSENTS FOR ADAPTEC'S ASSIGNMENT TO US
OF CERTAIN AGREEMENTS UPON OUR SEPARATION FROM ADAPTEC AND IF WE CANNOT
OBTAIN THESE CONSENTS, WE MAY NOT BE ABLE TO MAINTAIN THESE RELATIONSHIPS ON
FAVORABLE TERMS OR AT ALL.
Prior to our separation from Adaptec, all of our agreements with customers,
suppliers, strategic partners, lessors and others and all of our agreements for
the license of technology are agreements between third parties and Adaptec. Many
of these agreements will be assigned to us upon our separation from Adaptec,
some of which, including our agreements with Microsoft and RealNetworks, require
that the third party consent to this assignment. If we cannot obtain these third
party consents, we may be forced to renegotiate these agreements, or enter into
new agreements, and we cannot assure you that we will be able to negotiate new
agreements on terms as favorable to us as those that we enjoyed as part of
Adaptec, or at all.
RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK
SUBSTANTIAL SALES OF COMMON STOCK MAY OCCUR IN CONNECTION WITH THE
DISTRIBUTION, WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE.
Adaptec currently intends to distribute nearly all of the 16,500,000 shares
of our common stock it owns to its stockholders. Substantially all of these
shares will be eligible for immediate resale in the public market. We are unable
to predict whether significant amounts of common stock will be sold in the open
market following this distribution. We are also unable to predict whether a
sufficient number of buyers will be in the market at that time.
A portion of Adaptec's common stock is held by index funds tied to the
Standard & Poor's 500 Index and other similar indices. If we are not included in
these indices at the time of Adaptec's distribution of our common stock, these
funds may be required to sell our stock. Any sales of substantial amounts of
common stock in the public market, or the perception that such sales might
occur, whether as a result of this distribution or otherwise, could harm the
market price of our common stock.
OUR SECURITIES HAVE NO PRIOR MARKET, AND WE CANNOT ASSURE YOU THAT OUR STOCK
WILL BE LISTED FOR TRADING ON THE NASDAQ NATIONAL MARKET OR THAT OUR STOCK
PRICE WILL NOT DECLINE AFTER THE DISTRIBUTION.
There has not been a public market for our common stock, and an active
public market for our common stock may not develop or be sustained after the
distribution. We have applied to have our common stock listed for trading on the
Nasdaq National Market. Our common stock may not be listed for trading on the
Nasdaq National Market unless we meet its listing criteria, which includes
establishing a minimum bid price of at least $5 per share. Although we have
delivered to Nasdaq an independent third party appraisal which supports a
valuation of us in excess of $5 per share, Nasdaq has indicated that if the
trading price of our common stock does not exceed $5 per share on the first day
of regular-way trading, that our common stock will not be listed on the Nasdaq
National Market. If our common stock is not listed on the Nasdaq National
Market, we anticipate that market makers will quote our shares on the OTC
Bulletin Board. If shares of our common stock do not trade on the Nasdaq
National Market, we may not receive analyst coverage for our business, certain
institutional investors will be prohibited from investing in our common stock,
and an active trading market for our shares may not develop.
In addition, the market price of our common stock could be subject to
significant fluctuations after the distribution. Among the factors that could
affect our stock price are:
- quarterly variations in our operating results;
- changes in revenue or earnings estimates or publication of research
reports by analysts;
23
- failure to meet analysts' revenues or earnings estimates;
- speculation in the press or investment community;
- strategic actions by us or our competitors, such as acquisitions or
restructurings;
- actions by institutional stockholders;
- general market conditions; and
- domestic and international economic factors unrelated to our performance.
The stock markets in general, and the markets for technology stocks in
particular, have experienced extreme volatility that has often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our common stock. In
particular, we cannot assure you that you will be able to resell your shares at
any particular price, or at all.
PROVISIONS IN OUR AGREEMENTS, CHARTER DOCUMENTS AND DELAWARE LAW MAY DELAY
OR PREVENT ACQUISITION OF US, WHICH COULD DECREASE THE VALUE OF YOUR SHARES.
Our certificate of incorporation and bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us
without the consent of our board of directors. These provisions include a
classified board of directors and limitations on actions by our stockholders by
written consent. In addition, our board of directors has the right to issue
preferred stock without stockholder approval, which could be used to dilute the
stock ownership of a potential hostile acquirer. Delaware law also imposes some
restrictions on mergers and other business combinations between us and any
holder of 15% or more of our outstanding common stock. Although we believe these
provisions provide for an opportunity to receive a higher bid by requiring
potential acquirers to negotiate with our board of directors, these provisions
apply even if the offer may be considered beneficial by some stockholders.
Following the distribution, we intend to adopt a rights plan that would also
make it more difficult for a third party to acquire us without the approval of
our board of directors.
24
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this information
statement. This information statement contains forward-looking statements that
involve risks and uncertainties. We use words such as "anticipates," "plans,"
"expects," "future," "intends," "may," "will," "should," "estimates,"
"predicts," "potential," "continue" and similar expressions to identify such
forward-looking statements. This information statement also contains
forward-looking statements attributed to certain third parties relating to their
estimates regarding the growth of certain markets. Forward-looking statements
are subject to known and unknown risks, uncertainties and other factors that may
cause our actual results to be materially different from those expressed or
implied by such forward-looking statements. These risks, uncertainties and other
factors include, among others, those identified under "Risk Factors" and
elsewhere in this information statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other person
assumes responsibility for the accuracy and completeness of these statements.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain all available funds and any future earnings for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends in the foreseeable future.
25
CAPITALIZATION
The following table sets forth our unaudited capitalization as of December
31, 2000. Our capitalization is presented:
- on an actual basis; and
- on a pro forma basis to give effect to the contribution from Adaptec of
$30 million in cash and any cash held by our overseas subsidiaries on that
date.
You should read the information set forth below together with "Selected
Consolidated Financial Data," our historical consolidated financial statements,
the notes to those statements, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Certain Transactions"
included elsewhere in this information statement.
AS OF DECEMBER 31,
2000
----------------------
ACTUAL PRO FORMA
--------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
(UNAUDITED)
Owner's net investment/stockholder's equity:
Common stock, $0.001 par value; 100,000,000 shares
authorized; 16,500,000 shares issued and outstanding
actual and pro forma.................................... $ 17 $ 17
Additional paid in capital................................ 16 81,203
Deferred compensation..................................... (500) (500)
Accumulated other comprehensive income.................... 244 244
Owner's net investment.................................... 43,269 --
Total owner's net investment/stockholder's equity....... 43,046 80,964
------- -------
Total capitalization.................................. $43,046 $80,964
======= =======
26
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of Roxio reflect our
historical operating results and balance sheet data. The historical consolidated
statements of operations data set forth below do not reflect many significant
changes that will occur in the operations and funding of Roxio as a result of
our separation from Adaptec. Our consolidated statement of operations data set
forth below for the years ended March 31, 1998, 1999 and 2000 and the
consolidated balance sheet data as of March 31, 1999 and 2000 are derived from
our audited consolidated financial statements included elsewhere in this
information statement.
The consolidated statement of operations data for the years ended March 31,
1996 and 1997 and the consolidated balance sheet data as of March 31, 1996, 1997
and 1998 are derived from our unaudited consolidated financial statements that
are not included elsewhere in this information statement. The consolidated
statement of operations data for the nine months ended December 31, 1999 and
2000 and the consolidated balance sheet data as of December 31, 2000 are derived
from our unaudited consolidated financial statements included elsewhere in this
information statement and, in the opinion of management, include all
adjustments, consisting only of normal recurring accruals, that are necessary
for a fair presentation of our financial position and results of operations for
these periods. Results for the nine months ended December 31, 2000 are not
necessarily indicative of results that may be expected for the entire year. The
financial information presented below may not be indicative of our future
performance and does not necessarily reflect what our financial position and
operating results would have been had we operated as a separate, stand-alone
entity during the periods presented. See "Risk Factors--Risk Factors Relating to
Separating Roxio from Adaptec--Our historical financial information may not be
representative of our results as a separate company." You should also read
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," which describes a number of factors which have affected our
financial results.
27
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
---------------------------------------------------- -------------------
1996 1997 1998 1999 2000(3) 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues............................. $ 4,973 $ 17,425 $38,654 $43,129 $77,791 $48,344 $85,568
Cost of revenues......................... 1,434 5,644 8,875 9,000 15,652 10,435 16,840
-------- -------- ------- ------- ------- ------- -------
Gross profit........................... 3,539 11,781 29,779 34,129 62,139 37,909 68,728
Operating expenses:
Research and development............... 849 4,830 6,835 8,621 13,917 8,922 13,052
Sales and marketing.................... 984 5,129 10,516 17,715 18,548 14,584 23,682
General and administrative............. 908 3,423 2,917 4,020 9,716 7,491 9,718
Amortization of goodwill and other
intangibles.......................... -- -- 1,250 1,250 6,958 4,464 11,581
Stock based compensation charges....... -- -- -- -- 149(4) -- 2,171(4)
Write-off of acquired in-process
technology........................... 21,700(1) 14,876(2) -- -- 3,393 3,016 --
-------- -------- ------- ------- ------- ------- -------
Total operating expenses............. 24,441 28,258 21,518 31,606 52,681 38,477 60,204
-------- -------- ------- ------- ------- ------- -------
Income (loss) from operations before
provision for income taxes and
cumulative effect of a change in
accounting principle................... (20,902) (16,477) 8,261 2,523 9,458 (568) 8,524
Provision for income tax expense
(benefit).............................. (4,367) (5,120) 1,822 413 4,288 26 3,033
-------- -------- ------- ------- ------- ------- -------
Income (loss) before cumulative effect of
a change in accounting principle....... (16,535) (11,357) 6,439 2,110 5,170 (594) 5,491
Cumulative effect of a change in
accounting principle, net of tax
benefit................................ -- -- 345 -- -- -- --
-------- -------- ------- ------- ------- ------- -------
Net income (loss)........................ $(16,535) $(11,357) $ 6,094 $ 2,110 $ 5,170 $ (594) $ 5,491
======== ======== ======= ======= ======= ======= =======
Basic and diluted net income (loss) per
share.................................. $ (1.00) $ (0.69) $ 0.37 $ 0.13 $ 0.31 $ (0.04) $ 0.33
-------- -------- ------- ------- ------- ------- -------
Weighted average shares used in computing
basic and diluted net income per
share.................................. 16,500 16,500 16,500 16,500 16,500 16,500 16,500
-------- -------- ------- ------- ------- ------- -------
- --------------------------
(1) Represents the write-off of acquired in-process technology in connection
with our acquisition of Incat Systems Software USA, Inc.
(2) Represents the write-off of acquired in-process technology in connection
with our acquisition of Toast CD recordable technology and Corel, Inc.'s CD
Creator software.
(3) The consolidated statement of operations data for the year ended March 31,
2000 includes results of operations of CeQuadrat GmbH from July 1, 1999 and
Wild File, Inc. from March 11, 2000. The acquisitions of CeQuadrat GmbH and
Wild File, Inc. resulted in write-offs of acquired in-process technology of
$3.0 million and $377,000, respectively.
(4) Stock based compensation charges consist of $1,944,000 and $149,000 for the
nine months ended December 31, 2000 and the year ended March 31, 2000,
respectively, relating to research and development activities and $227,000
for the nine months ended December 31, 2000 relating to general and
administrative activities.
AS OF MARCH 31, AS OF
---------------------------------------------------- DECEMBER 31,
1996 1997 1998 1999 2000 2000
-------- -------- -------- -------- -------- ------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficit)........................ $ (161) $ 423 $ 8,082 $ 4,708 $ 6,542 $13,620
Total assets..................................... 2,749 13,863 17,980 10,249 57,866 60,509
Total owner's net investment..................... 887 10,047 14,504 6,393 44,748 43,046
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS INFORMATION STATEMENT.
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS
CONTEMPLATED BY THESE FORWARD-LOOKING STATEMENTS DUE TO CERTAIN FACTORS,
INCLUDING THOSE DISCUSSED BELOW, IN "RISK FACTORS" AND ELSEWHERE IN THIS
INFORMATION STATEMENT.
OVERVIEW
SEPARATION FROM ADAPTEC
We are a leading provider of digital media software solutions which allow
individuals to personalize and store music, photos, video and data onto
recordable CDs. We were incorporated in August 2000 as a wholly-owned subsidiary
of Adaptec to conduct substantially all of the business of its software products
group. At legal separation, Adaptec will contribute to us substantially all of
the assets and liabilities comprising its software products group, as well as
$30 million in cash and any cash held by our overseas subsidiaries.
We have entered into agreements with Adaptec under which Adaptec will
provide services to us during a transition period after the distribution. The
agreements provide for transitional services and support in the areas of
information technology systems, supply chain, buildings and facilities,
marketing and communications, finance and accounting. The transition period is
not intended to exceed 12 months following legal separation. Specified charges
for transition services are generally cost plus 5% and, for products purchased
from Adaptec, cost plus 10%. Although the fees provided for in the agreements
are intended to represent the fair market value of these services, we cannot
assure you that these fees necessarily reflect the costs of obtaining the
services from unrelated third parties or of our providing these services
internally. However, we believe that purchasing these services from Adaptec
provides an efficient means of obtaining these services during the transition
period. We do not believe that these arrangements with Adaptec will materially
alter our financial position or results of operations during the transition
period.
We must also negotiate new or revised agreements with various third parties
as a separate, stand-alone entity. We cannot assure you that the terms we will
be able to negotiate will be as favorable as those that we enjoyed as part of
Adaptec. In addition, as part of Adaptec, we benefited from various economies of
scale including shared global administrative functions, facilities and product
distribution. We expect that our costs will increase as a result of the loss or
renegotiation of these agreements, although the amount of the cost increase has
not been determined at this time.
OUR BUSINESS
Historically, we have derived most of our revenues through sales of our CD
recording software products to original equipment manufacturers, or OEMs, which
consist of PC and CD recordable drive manufacturers and integrators, and to
distributors. Generally, OEMs bundle the standard version of our software
together with their products pursuant to licensing agreements with us.
Distributors resell stand-alone deluxe versions of our products to retailers of
computer software products. Sales to OEMs represented 59% of our net revenues in
fiscal 2000, 67% in fiscal 1999 and 51% in fiscal 1998. Sales to distributors
and direct sales to end users through Adaptec's web site and (800) number
collectively represented 41% of our net revenues in fiscal 2000, 33% in fiscal
1999 and 49% in fiscal 1998. Although sales to our distributors and direct sales
to end users represented 41% of our net revenues in fiscal 2000, the number of
units sold to our distributors and end users represented less than 10% of the
total number of units sold in that year. In the future, we anticipate that
revenues from sales of our standard products to OEMs will decline as a result of
highly competitive pricing pressures in the PC industry. Although our goal is to
offset this decline through increased revenues from sales of our
29
deluxe products, we may not be successful in doing so. International sales
accounted for approximately 37% of our net revenues in fiscal 2000.
Net revenues include revenues from licensing and sales of our software,
reduced by estimated product returns and pricing adjustments. We recognize
licensing revenues from OEMs based on reported product shipments by OEMs,
provided all fees are fixed or determinable, evidence of an arrangement exists
and collection is probable. We recognize revenues from sales to distributors
upon shipment by us, provided all fees are fixed or determinable, evidence of an
arrangement exists and collection is probable. We provide for estimated product
returns and pricing adjustments in the period in which the revenue is
recognized. Our distributor agreements generally provide distributors with stock
rotation and price protection rights as well as the right to return discontinued
products. We recognize revenues from direct product sales to end users upon
shipment by us.
Gross margin is the percentage of profit from net revenues after deducting
cost of revenues, which includes the physical goods shipped, third party
licensed intellectual property, freight, warranty, end user technical support,
scrap and manufacturing variances. Our gross margin from OEM revenues is
generally significantly higher than our gross margin from distributor revenues
primarily due to product costs and to a lesser extent due to a different level
of product support effort associated with OEM sales compared to distributor
sales. For sales of our products through OEMs, these OEMs are responsible for
the first level of product support and we only provide a second level of support
to the OEM. We expect gross margin to fluctuate on a quarterly basis based on
the relative mix of OEM and distributor revenues. Additionally, over time, our
overall gross margin may decline somewhat as the relative percentage of net
revenues derived from distributor sales increases if we are unable to offset
margin reductions through less expensive distribution, packaging and support
costs.
We classify operating expenses as research and development, sales and
marketing and general and administrative. Each category includes related
expenses for salaries, employee benefits, incentive compensation, travel,
telephone, communications, rent and allocated facilities and professional fees.
Our sales and marketing expenses include additional expenditures specific to the
marketing group, such as public relations and advertising, trade shows, and
marketing collateral materials, and expenditures specific to the sales group,
such as commissions. To date, all software product development costs have been
expensed as incurred. We expect our operating expenses to increase following our
separation from Adaptec as we develop an infrastructure to support our level of
business activity, build a corporate brand identity separate from Adaptec and
promote our products, add personnel and create incentive programs with our
distribution partners. In particular, we anticipate spending at a higher than
historical level to improve upon our Internet distribution capabilities by
creating a web site to better directly support our customers and promote our
products.
In July 1999, we acquired CeQuadrat GmbH, or CeQuadrat, a German-based
software company providing CD recording software products primarily in Germany.
The acquisition provided us with enhanced product development and engineering
expertise, as well as a greater European customer base. In March 2000, we
acquired Wild File, Inc., or Wild File, the developer of our GoBack system
recovery software. These acquisitions were accounted for as purchases and the
results of operations are included in our financial statements from the dates of
these acquisitions. Goodwill and other intangibles consist primarily of
capitalized costs incurred through the acquisitions of Wild File and CeQuadrat.
The capitalized costs are amortized over their estimated useful lives of three
years. We periodically review the unamortized balance to determine if the costs
are realizable and may in the future make adjustments to the carrying balance or
amortization period based upon these reviews. Stock based compensation charges
relate to the amortization of costs associated with the assumption of restricted
stock from the Wild File acquisition.
On December 20, 2000, we made a commitment to issue to employees of Adaptec
who are expected to become our employees at the date of legal separation options
to purchase up to 1.15 million shares of our common stock at an exercise price
of $8.50 per share. Due to the binding
30
nature of the commitment, the date of the commitment to grant the options was
assumed to be the date of grant. The options will vest 25% at September 21, 2001
and 6.25% each quarter thereafter. Since the grants of these options constitute
grants to non-employees, the options were valued using the Black-Scholes
valuation model. The estimated fair value of the underlying common stock at the
date of grant was $14.12 per share. The estimated fair value of the options
granted was $11.57, and an aggregate fair value of $13.3 million will be
recognized over the service period, estimated to be 3.75 years. Approximately
$227,000 of amortization of the deferred compensation was recorded and is
included in the stock compensation charges on the consolidated statement of
operations for the nine months ended December 31, 2000.
Since the number of options that will be ultimately granted is uncertain, no
measurement date for these options has been established. These options will
therefore be subject to variable plan accounting treatment, resulting in a
re-measurement of the compensation expense in future periods based on the then
current market value of the underlying common stock until such time as a
measurement date is established. It is expected that the measurement date will
be established prior to distribution, at which time certain employees of Adaptec
will become our employees and a fixed number of options will be granted to these
employees under the 2000 Stock Option Plan. Pursuant to FASB Interpretation
No. 44, or FIN 44, at the date of change in status from non-employees to
employees, the accounting basis for the options will change and the compensation
associated with these options will be re-measured and fixed using the intrisic
value at that date prescribed by APB 25.
BASIS OF PRESENTATION
Our fiscal year ends on March 31. Our fiscal quarters end on a Friday and
are 13 weeks in length. For presentation purposes, we have presented our fiscal
quarters as ending on June 30, September 30 and December 31. Unless otherwise
stated, all years and dates refer to our fiscal year and fiscal quarters.
We have historically conducted our business as an operating segment of
Adaptec. Our consolidated financial statements have been carved out of the
consolidated financial statements of Adaptec using the historical results of
operations of the Adaptec software operating segment and historical bases of the
assets and liabilities of Adaptec that our company comprises. Certain software
products directly related to Adaptec's hardware products, which were
historically reflected in our results of operations in Adaptec's segment
reporting, will be retained by Adaptec going forward. As such, the revenues and
associated costs of sales and operating expenses related to these products have
not been included in our financial statements. Accordingly, the results reported
herein do not reflect the software operating segment disclosures previously
reported under Statement of Financial Accounting Standard, or SFAS, No. 131,
"Disclosures about Segments of an Enterprise and Related Information," within
the Adaptec annual reports. The consolidated financial statements also include
allocations to us of certain shared expenses, including centralized legal,
accounting, finance, manufacturing, real estate, information technology,
distribution, customer services, sales, marketing, engineering and other Adaptec
corporate services and infrastructure costs. The expense allocations have been
determined on bases that Adaptec and we considered to be a reasonable reflection
of the utilization of the services provided to us or the benefit received by us.
Such allocations and charges are based on a percentage of total corporate costs
for the services provided, based on factors such as headcount, revenue, gross
asset value, or the specific level of activity directly related to such costs.
The financial information presented in this information statement is not
necessarily indicative of our financial position, results of operations or cash
flows in the future nor is it necessarily indicative of what our financial
position, results of operations or cash flows would have been had we been a
separate, stand-alone entity for the periods presented. The financial
information presented in this information statement does not reflect the many
significant changes that will occur in our funding and operations as a result of
our becoming a stand-alone entity.
31
RESULTS OF OPERATIONS
The following table sets forth our results of operations as a percentage of
net revenues for the periods indicated:
AS A PERCENTAGE OF NET REVENUES
----------------------------------------------------
NINE MONTHS
ENDED
YEAR ENDED MARCH 31, DECEMBER 31,
------------------------------ -------------------
1998 1999 2000 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
Net revenues............................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues......................................... 23.0 20.9 20.1 21.6 19.7
----- ----- ----- ----- -----
Gross profit........................................... 77.0 79.1 79.9 78.4 80.3
Operating expenses:
Research and development............................... 17.7 20.0 18.1 18.5 15.3
Sales and marketing.................................... 27.2 41.1 23.8 30.2 27.7
General and administrative............................. 7.5 9.3 12.5 15.5 11.4
Amortization of goodwill and other intangibles......... 3.2 2.9 8.9 9.2 13.5
Stock based compensation charges....................... -- -- -- -- 2.5
Write-off of acquired in-process technology............ -- -- 4.4 6.2 --
----- ----- ----- ----- -----
Total operating expenses............................. 55.6 73.3 67.7 79.6 70.4
----- ----- ----- ----- -----
Income (loss) from operations before provision for income
taxes and cumulative effect of a change in accounting
principle.............................................. 21.4 5.8 12.2 (1.2) 10.0
Provision for income tax (expense)....................... (4.7) (1.0) (5.5) -- (3.5)
----- ----- ----- ----- -----
Income (loss) before cumulative effect of a change in
accounting principle................................... 16.7 4.8 6.7 (1.2) 6.4
Cumulative effect of a change in accounting principle,
net of tax benefit..................................... (0.9) -- -- -- --
----- ----- ----- ----- -----
Net income (loss)........................................ 15.8% 4.8% 6.7% (1.2)% 6.4%
===== ===== ===== ===== =====
COMPARISON OF NINE MONTHS ENDED DECEMBER 31, 2000 AND DECEMBER 31, 1999
NET REVENUES
Net revenues for the nine months ended December 31, 2000 were $85.6 million,
a 77.2% increase over net revenues of $48.3 million for the nine months ended
December 31, 1999. The increase in net revenues was primarily the result of
sales of Easy CD Creator 4.0 to distributors and OEMs. Distributor and direct
end user net revenues accounted for 36% of net revenues for the nine months
ended December 31, 2000 compared to 35% for the nine months ended December 31,
1999.
GROSS MARGIN
Gross margin was 80.3% of net revenues for the nine months ended December
31, 2000 and 78.4% for the nine months ended December 31, 1999. Expenses
associated with the licensing of third party intellectual property for
incorporation into Easy CD Creator decreased as a percentage of revenues from
4.9% for the nine months ended December 31, 1999 to 1.4% for the nine months
ended December 31, 2000 because we discontinued using certain of the licensed
intellectual property. This decrease was partially offset by the increased
proportion of distributor revenues as compared to OEM revenues, which resulted
in product costs as a percentage of revenues increasing to 10.2% for the nine
months ended December 31, 2000 from 8.3% for the nine months ended December 31,
1999.
32
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses were $13.1
million for the nine months ended December 31, 2000, a 47.2% increase over
expenses of $8.9 million for the nine months ended December 31, 1999. Research
and development expenses represented 15.3% of net revenues for the nine months
ended December 31, 2000 as compared with 18.5% for the nine months ended
December 31, 1999. Approximately $2.1 million of the increase in spending
resulted from the payroll related costs associated with the personnel acquired
through the acquisition of Wild File and approximately $900,000 from payments to
third parties for work on Easy CD Creator 5.0.
SALES AND MARKETING. Sales and marketing expenses were $23.7 million for
the nine months ended December 31, 2000, a 62.3% increase over expenses of $14.6
million for the nine months ended December 31, 1999. Sales and marketing
expenses represented 27.7% of net revenues for the nine months ended
December 31, 2000 as compared with 30.2% for the nine months ended December 31,
1999. Approximately $2.2 million of the increase in spending resulted from the
payroll related costs associated with expanding our marketing team to pursue
revenue generating opportunities and approximately $6.6 million from advertising
and promotion costs to promote Easy CD Creator 4.0.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $9.7
million for the nine months ended December 31, 2000, a 29.3% increase over
expenses of $7.5 million for the nine months ended December 31, 1999. General
and administrative expenses represented 11.4% of net revenues for the nine
months ended December 31, 2000 as compared with 15.5% for the nine months ended
December 31, 1999. Approximately $1.3 million of the increase in spending
resulted from the payroll related costs associated with establishing a senior
management team and dedicated human resources, information technology and
finance support for us as a stand alone entity and approximately $1.1 million
related to additional costs associated with the ongoing operations of Wild File
in Minnesota.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was $11.6 million for the nine months ended December 31,
2000 a 157.8% increase over expenses of $4.5 million for the nine months ended
December 31, 1999. These expenses represented 13.5% of net revenues for the nine
months ended December 31, 2000 as compared with 9.2% for the nine months ended
December 31, 1999. The increase in amortization expenses resulted from the
acquisition of Wild File in the fourth quarter of fiscal 2000.
STOCK COMPENSATION EXPENSE. Stock compensation expense was $2.2 million for
the nine months ended December 31, 2000. There was no stock compensation expense
for the nine months ended December 31, 1999. This expense represented 2.5% of
net revenues for the nine months ended December 31, 2000. This expense resulted
from $2.0 million associated with the assumption of restricted stock as part of
the Wild File acquisition as well as $227,000 of expense associated with stock
option commitments for Adaptec employees anticipated to become our employees.
COMPARISON OF YEARS ENDED MARCH 31, 2000, 1999 AND 1998
NET REVENUES
Net revenues were $77.8 million in fiscal 2000, an increase of 80.5% over
fiscal 1999. Net revenues were $43.1 million in fiscal 1999, an 11.4% increase
over net revenues of $38.7 million in fiscal 1998. The increase in both fiscal
2000 and 1999 net revenues over the prior periods was primarily a result of
continued worldwide growth in shipments to OEMs. Higher unit volume shipments to
OEMs were partially offset by reduced per-unit license fees. The acquisition of
CeQuadrat in fiscal 2000 contributed additional net revenues of $9.4 million,
primarily in Europe. The growth in fiscal 2000 net revenues over fiscal 1999
resulted largely from our release of Easy CD Creator 4.0 in the second quarter
of fiscal 2000, which substantially increased distributor revenues over the
prior year.
33
GROSS MARGIN
Gross margin was 79.9% of net revenues in fiscal 2000, 79.1% in fiscal 1999,
and 77% in fiscal 1998. Excluding contingent royalty payments of $417,000 in
fiscal 1999 and $1.9 million in fiscal 1998 related to our fiscal 1996
acquisition of Incat Systems, Inc., adjusted gross margin was 80% in fiscal
2000, 80% in fiscal 1999 and 82% in fiscal 1998. These royalty payments were
made to former shareholders of Incat Systems, based on the attainment of
specified revenue milestones. The decrease in adjusted gross margin from fiscal
1998 to 1999 and 2000 is generally the result of a higher mix of distributor
revenues. Despite a higher percentage of lower margin distributor revenues in
fiscal 2000, gross margin was favorably impacted by better utilization of
fixed-cost support resources at higher volumes.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses were $13.9
million in fiscal 2000, a 61.6% increase over fiscal 1999. Research and
development expenses were $8.6 million in fiscal 1999, a 26.5% increase over
research and development expenses of $6.8 million in fiscal 1998. Research and
development expenses as a percentage of net revenues were 18% in fiscal 2000
compared to 20% in fiscal 1999 and 18% in fiscal 1998. The increases in research
and development expenses in fiscal 2000 and 1999 over the prior periods were
driven by additional personnel to support increased product development efforts
and increased spending to support CD recordable drive releases, and in fiscal
2000 by additional spending to develop and maintain the versions of our CD
recording software included in our strategic partnership offerings.
SALES AND MARKETING. Sales and marketing expenses were $18.5 million in
fiscal 2000, a 4.5% increase over fiscal 1999. Sales and marketing expenses were
$17.7 million in fiscal 1999, a 68.6% increase over sales and marketing expenses
of $10.5 million in fiscal 1998. Sales and marketing expenses as a percentage of
net revenues were 24% in fiscal 2000 compared to 41% in fiscal 1999 and 27% in
fiscal 1998. The increase in sales and marketing expenses in fiscal 1999 was
primarily the result of increased spending to drive retail revenues without a
major release of our CD recording software.
GENERAL AND ADMINISTRATIVE. General and administrative expenses were $9.7
million in fiscal 2000, a 142.5% increase over fiscal 1999. General and
administrative expenses were $4.0 million in fiscal 1999, a 37.9% increase over
general and administrative expenses of $2.9 million in fiscal 1998. Excluding
payments for transitional employee compensation related to the CeQuadrat
acquisition of $2.0 million in fiscal 2000, general and administrative expenses
as a percentage of net revenues were 13% in fiscal 2000 compared to 9% in fiscal
1999 and 8% in fiscal 1998. The increase in spending in fiscal 2000 over fiscal
1999 resulted from a combination of bad debt expenses on specific accounts and
increased headcount from acquisitions and legal fees to protect our intellectual
property. The increase in spending in fiscal 1999 over fiscal 1998 resulted
primarily from an increase in the allocated costs from Adaptec due to growth in
our business.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill
and other intangibles was $7.0 million in fiscal 2000 compared to $1.3 million
in fiscal 1999 and 1998. The increase in amortization of goodwill and other
intangibles for fiscal 2000 over the prior periods was the result of the
acquisitions of CeQuadrat and Wild File. Amortization of goodwill and other
intangibles for fiscal 1999 and 1998 was related to the acquisition of the Toast
trademark in fiscal 1997.
WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. In connection with our
acquisitions of CeQuadrat and Wild File in fiscal 2000, which were accounted for
under the purchase method of accounting, we incurred write-offs of acquired
in-process technology of $3.0 million for CeQuadrat and $377,000 for Wild File.
Since the net tangible liabilities, excluding cash acquired, were assumed to
have been
34
contributed to us by Adaptec, the write-offs of acquired in-process technology
are recorded in our consolidated statements of operations.
For each acquisition, we identified research projects in areas for which
technological feasibility had not been established and no alternative future
uses existed. We acquired technology consisting of next generation consumer CD
recording software, next generation professional CD recording software and CD
backup software from CeQuadrat. The amount of in-process technology allocated to
each of the projects was $630,000 for next generation CD recording software,
$2.2 million for next generation professional CD recording software and $223,000
for CD backup software. The value for each project was determined by estimating
the expected cash flows from the projects once commercially viable, discounting
the net cash flows to their present value, and then applying a percentage of
completion.
The percentage of completion for each project was determined using costs
incurred by CeQuadrat prior to the acquisition date compared to the remaining
research and development to be completed to bring the projects to technological
feasibility. As of the acquisition date, we estimated the next generation
consumer CD recording software was 82% complete, next generation professional CD
recording software was 69% complete and the CD backup software project was 82%
complete. The estimated costs to complete the projects were $100,000 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 CD recording software and the CD back up software began shipping in
the third quarter of fiscal 2000. The next generation consumer CD recording
software will not be commercially released.
QUARTERLY RESULTS OF OPERATIONS
The following tables present our operating results for each of the last ten
fiscal quarters in dollars and as a percentage of net revenues. The information
for each of these quarters is unaudited and has been prepared on the same basis
as our audited consolidated financial statements included in this information
statement. In the opinion of management, all necessary adjustments, which
consist only of normal and recurring accruals, have been included to fairly
present the unaudited quarterly results. This data should be read together with
our consolidated financial statements and the notes to those statements included
in this information statement.
THREE MONTHS ENDED
-------------------------------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30,
1998 1998 1999 1999 1999 1999 2000 2000
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
Net revenues...................... $9,750 $12,846 $11,174 $ 9,869 $14,168 $24,307 $29,447 $28,590
Cost of revenues.................. 1,966 2,903 2,142 2,029 3,550 4,856 5,217 6,001
------ ------- ------- ------- ------- ------- ------- -------
Gross profit.................... 7,784 9,943 9,032 7,840 10,618 19,451 24,230 22,589
Operating expenses:
Research and development........ 1,834 2,140 2,693 2,977 2,775 3,170 4,995 4,933
Sales and marketing............. 4,373 4,870 4,748 4,673 4,615 5,296 3,964 6,455
General and administrative...... 745 983 1,371 1,163 2,985 3,343 2,225 2,642
Amortization of goodwill and
other intangibles............. 313 312 312 313 2,076 2,075 2,494 3,860
Write-off of acquired in-process
technology.................... -- -- -- -- 3,016 -- 377 --
Stock based compensation
charges....................... -- -- -- -- -- -- 149 648
------ ------- ------- ------- ------- ------- ------- -------
Total operating expenses...... 7,265 8,305 9,124 9,126 15,467 13,884 14,204 18,538
------ ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations
before provision for income
taxes........................... 519 1,638 (92) (1,286) (4,849) 5,567 10,026 4,051
Provision for income tax expense
(benefit)....................... 85 268 (15) (279) (2,055) 2,360 4,262 1,623
------ ------- ------- ------- ------- ------- ------- -------
Net income (loss)................. $ 434 $ 1,370 $ (77) $(1,007) $(2,794) $ 3,207 $ 5,764 $ 2,428
====== ======= ======= ======= ======= ======= ======= =======
THREE MONTHS ENDED
-------------------
SEP. 30, DEC. 31,
2000 2000
-------- --------
(IN THOUSANDS)
Net revenues...................... $29,482 $27,496
Cost of revenues.................. 6,351 4,488
------- -------
Gross profit.................... 23,131 23,008
Operating expenses:
Research and development........ 4,448 3,671
Sales and marketing............. 8,414 8,813
General and administrative...... 2,931 4,145
Amortization of goodwill and
other intangibles............. 3,860 3,861
Write-off of acquired in-process
technology.................... -- --
Stock based compensation
charges....................... 648 875
------- -------
Total operating expenses...... 20,301 21,365
------- -------
Income (loss) from operations
before provision for income
taxes........................... 2,830 1,643
Provision for income tax expense
(benefit)....................... 938 472
------- -------
Net income (loss)................. $ 1,892 $ 1,171
======= =======
35
AS A PERCENTAGE OF NET REVENUES
---------------------------------------------------------------
THREE MONTHS ENDED
---------------------------------------------------------------
SEP. 30, DEC. 31, MAR. 31, JUNE 30, SEP. 30, DEC. 31,
1998 1998 1999 1999 1999 1999
-------- -------- -------- -------- -------- --------
Net revenues...................... 100% 100% 100% 100% 100% 100%
Cost of revenues.................. 20 23 19 21 25 20
--- --- --- --- --- ---
Gross profit.................... 80 77 81 79 75 80
Operating expenses:
Research and development........ 19 17 24 30 20 13
Sales and marketing............. 45 38 43 47 33 22
General and administrative...... 8 8 12 12 21 14
Amortization of goodwill and
other intangibles............. 3 2 3 3 15 9
Write-off of acquired in-process
technology.................... -- -- -- -- 21 --
Stock based compensation
charges....................... -- -- -- -- -- --
--- --- --- --- --- ---
Total operating expenses...... 75 65 82 92 110 58
--- --- --- --- --- ---
Income (loss) from operations
before provision for income
taxes........................... 5 12 (1) (13) (35) 22
Provision for income tax expense
(benefit)....................... 1 2 -- (3) (15) 10
--- --- --- --- --- ---
Net income (loss)................. 4% 10% (1)% (10)% (20)% 12%
=== === === === === ===
AS A PERCENTAGE OF NET REVENUES
-----------------------------------------
THREE MONTHS ENDED
-----------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31,
2000 2000 2000 2000
-------- -------- -------- --------
Net revenues...................... 100% 100% 100% 100%
Cost of revenues.................. 18 21 22 16
--- --- --- ---
Gross profit.................... 82 79 78 84
Operating expenses:
Research and development........ 17 17 15 14
Sales and marketing............. 13 23 29 32
General and administrative...... 8 9 10 15
Amortization of goodwill and
other intangibles............. 8 14 13 14
Write-off of acquired in-process
technology.................... 1 -- -- --
Stock based compensation
charges....................... 1 2 2 3
--- --- --- ---
Total operating expenses...... 48 65 69 78
--- --- --- ---
Income (loss) from operations
before provision for income
taxes........................... 34 14 10 6
Provision for income tax expense
(benefit)....................... 14 6 3 2
--- --- --- ---
Net income (loss)................. 20% 8% 6% 4%
=== === === ===
We anticipate that our quarterly revenues will be impacted by the timing of
new product releases as well as seasonality. As we introduce new versions of our
products, distributors may return quantities of unsold inventories and place
orders for the newer versions. We generally release major revisions of our
products every 12 to 24 months depending on market requirements. We introduced
Easy CD Creator 4.0 in the September 30, 1999 quarter, replacing the prior
version of Easy CD Creator. In addition, we introduced our newest version of
Easy CD Creator, Easy CD Creator 5.0, in February 2001. In addition to new
product version releases, the retail channel through which we distribute our
products generally experiences increased sales in the fourth calendar quarter,
which we believe influences our business as well.
PROVISION FOR INCOME TAXES
Our operating results historically have been included in Adaptec's
consolidated United States federal and state income tax returns. The provision
for income taxes in our financial statements has been determined on a separate
return basis. Our effective tax rate for fiscal 2000 was 45.3% compared to 16.4%
for fiscal 1999 and 22.1% for fiscal 1998. The difference between the effective
tax rate in fiscal 2000 and the U.S. federal statutory tax rate of 35.0% is
primarily attributable to the write-off of acquired in-process technology and
goodwill amortization in excess of amounts deductible for tax purposes which was
partially offset by income earned in Singapore where income earned has been
subject to a significantly lower effective tax rate, resulting from a tax
holiday relating to certain of our products. The difference between the
effective tax rate in fiscal 1999 and 1998 and the U.S. federal statutory tax
rate of 35.0% is primarily attributable to the tax holiday in Singapore
discussed above.
Our tax related liability was $3.2 million as of March 31, 2000. Our tax
related receivable was $1.2 million as of March 31, 1999. Fluctuations in the
tax related liability account are a function of the current tax provisions and
timing of tax payments. Tax related liabilities are primarily comprised of
income, withholding and transfer taxes accrued in the taxing jurisdictions in
which we operate 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 in a global
business environment.
36
At legal separation, we will no longer benefit from Adaptec's tax holiday
status in Singapore. We are subject to tax in jurisdictions in which we operate
around the world. Our future effective tax rate will be impacted by our
organizational structure and the geographic distribution of our worldwide
revenue and profitability. As a result of these factors, our effective tax rate
may be higher in the future than it has been in the past.
CHANGE IN ACCOUNTING POLICY FOR BUSINESS PROCESS REENGINEERING COSTS
On November 20, 1997, the Emerging Issues Task Force, or EITF, issued EITF
Issue 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 Issue 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 Issue No. 97-13 require that companies that had
previously capitalized such business process reengineering costs write-off any
unamortized amounts and report a cumulative effect of a change in accounting
principle. In fiscal 1998, the cumulative effect of the change allocated to us
by Adaptec was to decrease net income by $345,000, net of a tax benefit of
$115,000.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Adaptec has managed cash on a centralized basis. Adaptec has
collected cash receipts associated with our business and has provided us funding
to cover our disbursements. Accordingly, we have reported no cash or cash
equivalents at March 31, 1999 and 2000 or December 31, 2000.
Net cash provided by operating activities during the nine months ended
December 31, 2000 was $12.0 million. Accounts receivable increased from
$13.5 million at March 31, 2000 to $23.5 million at December 31, 2000 as a
result of approximately $6.7 million due to delays in billing Hewlett-Packard
for royalties. This amount was fully collected in the fourth quarter of fiscal
2001. These associated revenues were recognized in accordance with Staff
Accounting Bulletin 101, or SAB 101. In addition, in the quarter ended
December 31, 2000 we had a higher percentage of revenues from OEMs than in the
quarter ended March 31, 2000, which resulted in a higher receivables balance, as
the payment cycle for OEM customers tends to be longer. Operating cash was
generated primarily from net income of $5.5 million, adjusted for non-cash
items, including depreciation and amortization expense of $12.4 million,
stock-based compensation charges of $2.2 million and changes in net assets and
liabilities of $6.0 million.
Net cash provided by operating activities during fiscal 2000 was $10.8
million. Operating cash was generated primarily from net income of $5.2 million,
adjusted for non-cash items, including the write-off of acquired in-process
technology of $3.4 million, depreciation and amortization expense of $7.3
million and changes in net assets and liabilities of $7.2 million.
Net cash provided by operating activities during fiscal 1999 was $10.5
million. Operating cash was generated primarily from net income of $2.1 million,
adjusted for non-cash items including depreciation and amortization expense of
$1.4 million and changes in net assets and liabilities of $5.5 million.
Net cash provided by operating activities during fiscal 1998 was $1.2
million. Operating cash was generated primarily from net income of $6.1 million
which was adjusted for non-cash items, including depreciation and amortization
expense of $1.4 million and changes in net assets and liabilities of
$8.1 million.
Net cash used in investing activities during fiscal years 1998, 1999 and
2000 was $14,000, $0 and $101,000, respectively and consisted of capital
expenditures for equipment. During fiscal 2000, Adaptec contributed to us
certain net assets in connection with the acquisitions of CeQuadrat and Wild
File of $45.8 million, net of cash acquired which was retained by Adaptec. Net
cash used in investing activities
37
during the nine months ended December 31, 2000 was $2.8 million and consisted of
capital expenditures of $1.2 million for equipment and capital expenditures of
$1.5 million for other intangibles, mainly capitalized web site development
cost.
Net cash used in financing activities was $1.2 million, $10.5 million,
$10.7 million and $9.2 million for each of the years ended December 31, 1998,
1999 and 2000 and for the nine month period ended December 31, 2000,
respectively, and relates to returns of capital to Adaptec. Any other cash
receipts or disbursements from/to Adaptec relate to operating activities and are
classified as such in the cash flow statement and the discussion above.
Generally, payment terms from our customers do not exceed 45 days, while our
liabilities with vendors are due from zero to 30 days following the invoice
date. Generally, payments of receivables by our customers to us are not
contingent upon resale and we have not experienced payment delays due to product
disputes. Adaptec will contribute to us $30 million in cash and any cash held by
our overseas subsidiaries upon legal separation. The contribution is
non-reciprocal and we will not repay any of this amount. We intend to use these
proceeds for working capital after legal separation. We believe that cash from
our future operating results will provide sufficient capital to fund our
operations for the next 12 months and beyond.
Although we have historically generated positive cash flow from operations,
we cannot assure you that we will be able to do so in the future. If we are
unable to generate positive cash flow from operations, we may be required to
obtain additional financing from other sources.
We cannot be certain that financing will be available to us when we need it
on favorable terms or at all. If additional funds are raised through the
issuance of equity securities, dilution to existing stockholders may result. If
sufficient funds are not available, we may not be able to introduce new products
or compete effectively in any of our markets, either of which could materially
harm our business, financial condition and results of operations.
We have never held derivative financial instruments, nor had debt
outstanding at any time. Accordingly, we have not been exposed to near-term
adverse changes in interest rates or other market prices. We may, however,
experience such adverse changes if we incur debt or hold derivative financial
instruments in the future.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, 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 FASB 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. In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment of FASB Statement No.
133," which amends the accounting and reporting standards for certain derivative
instruments and certain hedging activities. We will adopt SFAS No. 133 in our
first quarter of fiscal 2002, and are in the process of determining the impact
that adoption will have on our consolidated financial statements.
In December 1999, the Securities and Exchange Commission issued
SAB No. 101. In June 2000, the SEC released SAB No. 101B which defers reporting
the effects of the adoption of SAB No. 101 until the fourth fiscal quarter of
fiscal 2001. SAB No. 101 provides guidance on applying generally accepted
accounting principles to revenue recognition in financial statements. The impact
of SAB No. 101 was not material to our operating results.
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In March 2000, the FASB issued FIN No. 44, "Accounting for Certain
Transactions involving Stock Compensation," an interpretation of Accounting
Principles Board, or 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 January 12, 2000. Management has adopted this
interpretation. The impact of FIN No. 44 did not have a material effect on our
financial position or results of operations.
MARKET RISK DISCLOSURE
We develop our software in the United States and Europe and sell it in North
America, Europe, the Pacific Rim and Asia. As a result, our financial results
could be affected by factors such as changes in foreign currency exchange rates
or weak economic conditions in foreign markets. For our foreign divisions whose
functional currency is the local currency, we translate assets and liabilities
to U.S. dollars using period-end exchange rates and translate revenues and
expenses using average exchange rates during the period. Exchange gains and
losses arising from translation of foreign entity financial statements are
included as a component of other comprehensive income.
For foreign divisions whose functional currency is the U.S. dollar, certain
assets and liabilities are re-measured at the period end or historical rates as
appropriate. Revenues and expenses are re-measured at the average rate during
the period. Currency translation gains and losses are recognized in current
operations and have not been material to our operating results in the periods
presented.
We sell our products primarily to original equipment manufacturers and
distributors throughout the world. Sales to customers are predominantly
denominated in U.S. dollars and, as a result, we believe that our foreign
currency risk is minimal.
We do not currently hold any derivative instruments and do not engage in
hedging activities. Also, we do not currently hold any variable interest rate
debt or lines of credit. Financial instruments that potentially subject us to
significant concentrations of credit risk consist principally of trade accounts
receivable.
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BUSINESS
OVERVIEW
We are a leading provider of digital media software solutions that enable
individuals to create, manage and move music, photos, video and data onto
recordable CDs. Our principal products are our Easy CD Creator and Toast
families of CD recording software and our GoBack system recovery software. The
quantity of digital content distributed over the Internet to the PC is rapidly
increasing, driven by high speed Internet connections, the increasing number of
web sites focused on the electronic distribution of music and other content, and
the proliferation of digital consumer electronics devices. We expect this trend
will increase the need for our products. Consumers are increasingly using
recordable CDs as a medium for digital content because of their capacity, low
cost, portability and compatibility with a large number of existing play back
devices. We are the industry leader in providing software that enables
individuals to record digital content onto CDs. We distribute our products
primarily through leading PC and CD recordable drive manufacturers, distributors
and strategic partners. Our software was bundled with approximately 24 million
CD recorders in 2000 which, based on industry data, we estimate represents
approximately 70% of the CD recorders shipped in 2000.
INDUSTRY BACKGROUND
Internet use is expanding rapidly. International Data Corporation, or IDC,
estimates that in 2000 approximately 328 million people worldwide had Internet
access, and projects that by 2003 there will be 602 million Internet users.
Individuals are using the Internet for traditional applications such as viewing
web pages or sending e-mail, and increasingly to access and distribute
multimedia data files containing music, photographic images and video. The
Internet is becoming widely used as a means of distributing digital content for
the following reasons:
- ADOPTION OF HIGH SPEED INTERNET CONNECTIONS IN THE HOME. IDC estimates
that the number of U.S. homes with high speed Internet access will grow
from approximately four million in 2000 to approximately 21 million by
2003.
- THE GROWING POPULARITY OF WEB SITES FOCUSED ON THE ELECTRONIC DISTRIBUTION
OF MUSIC AND OTHER CONTENT. Consumer demand for downloadable content, such
as MP3 compressed audio files, has given rise to independent web sites
such as Audible.com, EMusic.com, Liquid Audio, MP3.com and Napster. This
demand has led BMG, Sony and other traditional content providers to
announce plans to make their content available over the Internet.
Forrester Research estimates that almost 25% of media products sold online
in 2004 will be digitally downloaded.
- THE PROLIFERATION OF DIGITAL CONSUMER ELECTRONICS DEVICES. Users are
creating digital content every day by capturing information with portable
consumer electronics devices such as digital cameras, digital camcorders
and scanners. IDC estimates that worldwide shipments of digital cameras
will grow from approximately ten million in 2000 to over 41 million in
2004.
The growth in digital content has created new applications for the PC.
Consumers want the ability to conveniently create, manage and move digital
content, and PCs are being used to perform these functions. For example, audio
files downloaded from the Internet can be assembled into personalized play
lists. Similarly, digital images taken with a digital camera or camcorder can be
transferred to a PC and adapted to create photo albums, flyers, posters or other
composite images. Additionally, consumers want the convenience of viewing or
listening to digital content that they have accessed through their PC with other
consumer electronic devices such as DVD players, portable CD players, car
stereos or home audio systems.
Business users also create, manage and move digital content using PCs. For
example, large multimedia presentations are often viewed by different people
using different PCs or taken on the road for viewing on a laptop PC. Similarly,
product information is frequently shared with a sales team and
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with customers. In these cases, the ability to share digital content across many
separate PCs may be highly important to the operations of a company.
The CD has achieved widespread acceptance as a high-capacity, inexpensive,
reliable and portable medium for transferring and accessing music, videos,
photos and data. For example, software and music are commonly distributed on
read-only CDs, which can play back the content stored on them but cannot be used
to store additional content. With the advent of CD recorders, a term used to
describe both CD-R and CD-RW drives, people can now record their own CDs which
are compatible with the large number of existing CD players. As drive and media
prices have declined, CD recorders have become a mainstream PC peripheral.
Industry research firm Santa Clara Consulting Group estimates that the installed
base of CD recorders will grow to over 90 million by the end of 2001. They also
estimate that approximately 4.5 billion recordable CDs will be sold in 2001.
Sales of DVD players in both the PC and consumer electronics markets are
also growing. DVD players can be used for playing back both CDs and DVDs. As the
number of DVD players grows, a strong market opportunity for DVD recorders is
expected to emerge.
The increasing use of PCs to manage and store digital content has created an
even greater need to protect both home and office users from the effects of
system crashes, virus attacks and human error. In addition, the digital content
stored on the PC can be highly valuable to the user. Recent virus attacks, such
as the Lovebug virus, demonstrate the destructive potential of new forms of
viruses. These risks have given rise to the need for a means to quickly and
easily restore data on the PC once it has been infected, lost or otherwise
corrupted, and to prevent interruptions in the operability of the PC.
OUR SOLUTION
We provide comprehensive software solutions to create, manage and move
digital content. Our software is reliable, easy to use and compatible across a
broad range of operating systems. Our leading product, Easy CD Creator, allows
users to record music downloaded from the Internet, store digital photos and
share large data files, such as PowerPoint presentations. Based on industry
data, we estimate that our CD recording software was included with approximately
70% of the CD recorders shipped in 2000. Our GoBack system recovery software
enables PC users to quickly recover their data and software applications in the
event of system crashes, virus attacks and human error.
Our solutions provide the following key advantages to our customers:
- COMPATIBILITY. We are in frequent contact with our PC and drive
manufacturer customers and devote extensive resources to compatibility
testing. Our CD recording software is compatible with over 1,000 versions
of CD recorders. We strive to maintain compatibility with the many new CD
recorders which become available each month. Our products support an
extensive array of technical standards for audio, data, enhanced music,
and video on a CD or DVD. Our CD recording products support popular
operating systems, including Microsoft Windows 95, 98, NT 4.0, Me and 2000
and Apple's Mac OS 9.
- EASE OF USE. Our software is highly sophisticated but very easy to use.
Our CD recording software allows the user to perform technical tasks
seamlessly with simple, easy-to-learn commands, and to perform a range of
functions, including recording data, video, photos and multimedia
combinations through a single interface. For example, our DirectCD
technology allows users to move or copy files to a CD using a drag and
drop feature, in the same manner as they would save files to a floppy
disk. GoBack provides system recovery for PCs by working in the background
to continuously keep an up-to-date record of a PC's hard drive, unlike
other system recovery applications which require affirmative user action
to periodically back-up the PC's hard drive. We conduct usability testing
to ensure that our products are user-friendly.
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- QUALITY. We believe that we have a reputation in the industry for
producing high quality products. For example, we have received awards of
recognition from leading industry publications, including E-Media, PC Week
and PC World. We invest substantial resources in our product development
and test efforts to assure that our products work reliably across a broad
range of configurations.
- COMPLETE SET OF FEATURES. Easy CD Creator and Toast provide a full suite
of applications to create, manage and move music, video, photographs and
data using CDs. Our software also provides numerous system back up and
recovery features. GoBack is our specialized system recovery software
which enables the user to undo common user errors like deleting or
overwriting files, and to restore the user's hard drive to its former
condition prior to a system crash or virus attack.
OUR STRATEGY
Our objective is to become the leading provider of digital content
management solutions. We intend to pursue the following key strategic
initiatives to accomplish our objective:
- MAINTAIN MARKET LEADERSHIP. To maintain strong relationships with PC and
CD recordable drive manufacturers which include our software with their
products, we will continue to invest significant resources in product
testing, quality assurance and OEM support. We also intend to actively
pursue additional partnerships with complementary software application
providers who want to enhance their applications by adding CD recording
technology. We have agreed to include CD recording software with limited
functionality in Microsoft Media Player 7 and RealNetworks RealJukebox
which will display our brand whenever a CD is recorded and present the
user with an offer to upgrade to a full-featured version. In addition, we
intend to invest in marketing and advertising focused on building the
corporate identity and brand of Roxio, and to continue our current efforts
to build our product brands.
- INTRODUCE NEW MARKETING APPROACHES. We believe there is a significant
opportunity to expand the sales of our full-featured products as upgrades
to current users of our products. Through PC and CD recordable drive
manufacturers, we provide users with a standard version of our Easy CD
Creator software suite. Beginning with Easy CD Creator 5.0, we will focus
on promoting upgrades to the deluxe version from within the user interface
by highlighting the deluxe features of Easy CD Creator that are not
available on the standard version. In addition, we will offer to our PC
and CD recordable drive manufacturer customers the option of a standard
version of Easy CD Creator 5.0 which will allow users to immediately
obtain the full-featured version by purchasing an electronic key from our
web site. We also believe that there is a significant opportunity to
market the individual applications of our software over the Internet to
feature-specific users. Due to the modular design of our software, we can
offer users separate application components downloaded from the Internet,
such as our music recording or photo album applications. We also intend to
more aggressively market our CD recording and system recovery products to
individuals for corporate and business use, particularly in the small and
mid-sized business markets.
- PURSUE STRATEGIC PARTNERSHIPS. We intend to promote broader application
of our technology through the development of strategic partnerships.
Because our technology plays a key role in the movement of digital content
from the PC to a range of consumer playback devices, we believe we are
well positioned to participate through partnerships in the commercial
delivery of digital content over the Internet and the protection of
copyrighted material accessed through the Internet. Additionally, we
believe that our system recovery solutions present us with partnering
opportunities in the virus protection market. For example, GoBack
complements traditional virus protection software applications by allowing
users to recover from the damage caused by virus
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attacks. We plan to pursue partnerships to create channels for us to sell
our system recovery products in the corporate enterprise and small and
mid-sized business markets.
- CONTINUE TO INVEST IN NEW TECHNOLOGY AND PRODUCT DEVELOPMENT. We will
continue to invest in product development and improving our technology to
expand the breadth of our product offerings. For our recording products,
we intend to invest in new technologies that will enable our products to
be compatible with future DVD recording standards, emerging standards for
the protection of copyrighted material, digital appliances and new
operating systems such as Linux. We intend to invest significant resources
to further develop and enhance our system recovery solutions to include
more operating system support, enterprise deployment capabilities and
additional recovery features.
- ACQUIRE COMPANIES AND TECHNOLOGIES. Since July 1995, we have made five
acquisitions of key products and technologies. In 1996, we acquired Incat
Systems, Inc., or Incat, for Adaptec common stock and other cash
consideration. Incat provided for our initial entry into the CD-ROM and
CD-R mastering software market. In 1996, we acquired the CD Creator
product line from Corel Corporation for a purchase price of $12 million,
and in 1997 we acquired the Macintosh-based Toast CD recordable technology
for a purchase price of $8 million. In July 1999, we acquired CeQuadrat
for approximately $24.0 million. CeQuadrat is a German-based software
company providing CD recording software products primarily in Germany.
This acquisition provided us with enhanced product development and
engineering expertise, as well as a greater European customer base. In
March 2000, we acquired Wild File, the developer of our GoBack system
recovery software, for approximately $28.5 million. In order to expand our
product offerings and take advantage of new market opportunities, we may
acquire or invest in other complementary businesses, products and
technologies. While we are not in active discussions with any third party
to acquire any companies or technologies at this time, we believe that
future acquisitions will enable us to rapidly expand our product offerings
and customer base, and take advantage of new market opportunities.
- OFFER DVD RECORDING PRODUCTS. We expect DVD usage to grow to meet the
demand for higher capacity multimedia applications such as video and data
storage. We believe that as the number of DVD recorders and players grows
over the next several years, DVD will emerge as a widely used technology.
We intend to leverage our technology leadership, market position and brand
awareness to offer a breadth of products that will allow users to store
content to recordable DVDs.
PRODUCTS
Our product offerings consist of the following:
EASY CD CREATOR
Easy CD Creator allows users to create their own music, photo, video and
data CDs using the CD recorders on their PC. Easy CD Creator is compatible with
the Microsoft Windows 95, 98, NT 4.0, Me and 2000 operating systems. We recently
began shipping Easy CD Creator Deluxe 5.0, which has replaced Easy CD Creator
Deluxe 4.0. Version 5.0 provides the user with an improved interface and
expanded functionality for recording MP3s and digital photos. In addition, the
user interface on the standard edition of Easy CD Creator 5.0 will highlight the
deluxe features that are not available on the standard edition. Our original
equipment manufacturer customers are in the process of transitioning from
version 4.0 to version 5.0 of the standard edition of Easy CD Creator. However,
some original equipment manufacturer customers may elect not to transition
immediately and may continue shipping version 4.0 with their products for as
long as a year. The suggested retail price for Easy CD Creator
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Deluxe 5.0 is similar to that of Easy CD Creator Deluxe 4.0. The following table
sets forth key features of the three editions of our Easy CD Creator software:
EASY CD CREATOR DISTRIBUTION KEY FEATURES
Audio Recording Plug- Microsoft Media Player Record audio files, such as MP3, to CD at up
in Edition and RealNetworks to 2X recording speed
Standard Edition, PC and CD recordable Record at up to 12X recording speed
Version 4.0 drive manufacturers
and integrators
Store any kind of file to CD, including
presentations, photos, videos or data
Create custom audio CDs from an existing CD
collection
Convert MP3 tracks to CD audio while playing
the track
Download artist/title information from
online music database
Design and print custom CD labels and jewel
case inserts
Use DirectCD to drag and drop files to CD in
Windows Explorer
Make a copy of a CD
Download new drive support and product
updates online
Deluxe Edition, Distributors, retail ALL FEATURES OF THE STANDARD VERSION, PLUS:
Version 5.0 and direct sales
Encode CDs into MP3 format
Create MP3 CDs
Customize transitions between songs with
special effects
Move albums or cassettes to CDs
Create photo albums and slide shows on CDs
Protect PC hard drive data with the Take Two
backup application
Create video CDs that can be played back on
video, CD or DVD players
Create video postcards
GOBACK
Our GoBack system recovery software enables users to return their hard
drives to their former condition as of a previous point in time. This capability
allows users to more quickly and easily recover from system crashes, virus
attacks or user errors. For PC support organizations, GoBack can reduce the
number of service calls and increase user productivity. GoBack is currently
compatible with the Microsoft Windows 95, 98 and Me operating systems and is
expected to be available for the Windows NT 4.0 and 2000 operating systems in
the second calendar quarter of 2001. GoBack provides the following key features
and advantages:
- provides protection continuously and transparently;
- protects all files on the system; and
- can recover data even when Windows fails to start, without requiring a
special boot disk.
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SOUNDSTREAM
SoundStream allows users to create their own customized audio CDs. It is
targeted at users focused on audio recording who do not require all of the
capabilities of Easy CD Creator. SoundStream is compatible with the Microsoft
Windows 95, 98, NT 4.0, Me and 2000 operating systems.
TOAST
Toast is our version of CD recording software for the Macintosh. Its
functionality is similar to Easy CD Creator, and it is available in both
standard and deluxe editions. We have recently begun shipping version 5.0 of
Toast.
JAM
Jam is our companion product to Toast that is designed to provide users with
tools to make professional quality audio CDs.
WINONCD
WinOnCD is our CD recording product targeted at the technical and
professional user. It is marketed in Europe, with the strongest brand
recognition in Germany. WinOnCD is compatible with the Microsoft Windows 95, 98,
NT 4.0 and Me operating systems.
STRATEGIC RELATIONSHIPS
We have established strategic relationships with Microsoft and RealNetworks
under which we provide versions of our software with fewer features than the
versions provided to our PC and drive manufacturer customers. We believe that
these strategic relationships enable us to penetrate additional markets,
increase market awareness of our products and increase upgrade sales. We are
actively pursuing additional strategic alliances.
MICROSOFT. In March 2000, we entered into a strategic relationship with
Microsoft in which we agreed to provide Microsoft with our audio recording
plug-in for inclusion in Windows Media Player 7. In return, Microsoft agreed to
promote our brand and software products, including by displaying information
about upgrades during the CD recording process. While we will not receive any
direct revenue from this agreement, we will receive all of the revenues
generated from product upgrades originating from this relationship. This
agreement expires in June 2002 and may be terminated with 90 days' notice.
Additionally, in August 1999, we entered into a strategic relationship with
Microsoft in which we agreed to supply a portion of our CD recording engine for
integration into future Microsoft operating systems. This is the only element of
our technology that may be embedded in future Microsoft operating systems
pursuant to this agreement.
REALNETWORKS. In December 1999, we entered into a strategic relationship
with RealNetworks in which we agreed to provide RealNetworks with our audio
recording plug-in for inclusion in its RealJukebox product. In return,
RealNetworks agreed to promote our brand and software products. While we will
not receive any direct revenue from this agreement, we will receive the majority
of the revenues generated on product upgrades originating from the RealNetworks
web site. This agreement expires in December 2001. Additionally, we entered into
a strategic relationship with RealNetworks in which we agreed to sell to
RealNetworks upgrades to our audio-recording plug-in for RealJukebox users.
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CUSTOMERS
We sell our software directly to PC manufacturers, CD recordable drive
manufacturers, integrators, distributors and end users.
PC MANUFACTURERS. Sales to PC manufacturers are rapidly becoming our most
significant means of reaching end users. For our fiscal year ended March 31,
2000, sales to PC manufacturers accounted for approximately 17% of our net
revenue. The following are our top five PC manufacturer customers by revenue in
fiscal 2000, which together generated a total of 16.0% of our net revenue in
fiscal 2000 and a total of 23.6% of our net revenue for the nine months ended
December 31, 2000:
- - Compaq - Hewlett-Packard
- - Dell - IBM
- - Gateway
CD RECORDABLE DRIVE MANUFACTURERS. We also sell our software to CD
recordable drive manufacturers who sell their CD recorders as a stand-alone
product to consumers. For our fiscal year ended March 31, 2000, sales to drive
manufacturers accounted for approximately 23% of our net revenue. We expect that
as more PCs are shipped with pre-installed CD recorders our sales to drive
manufacturers as a percentage of our total revenue will decline. The following
are our top five drive manufacturer customers by revenue in fiscal 2000, which
together generated a total of 17.0% of our net revenue in fiscal 2000 and a
total of 16.3% of our net revenue for the nine months ended December 31, 2000:
- - Acer - Sony
- - Philips - Yamaha
- - Plextor
INTEGRATORS. Integrators are companies that bundle a CD recorder with value
added hardware and software and sell the combination as a stand-alone product.
For our fiscal year ended March 31, 2000, sales to integrators accounted for
approximately 19% of our net revenue. For our fiscal year ended March 31, 2000,
sales of our software to Hewlett-Packard, which is both a PC manufacturer and an
integrator customer, accounted for approximately 10% of our gross revenue. We
expect that as more PCs are shipped with pre-installed CD recorders our sales to
integrators as a percentage of our total revenue will decline. The following are
our top three integrator customers by revenue in fiscal year 2000, which
together generated a total of 14.6% of our net revenue in fiscal 2000 and a
total of 11.7% of our net revenue for the nine months ended December 31, 2000:
- - Hewlett-Packard - Lacie
- - I/O Data
DISTRIBUTORS, RETAIL AND DIRECT SALES. The majority of the deluxe versions
of our software reach end users through retailers, who buy our products from our
national and international distributors. Direct sales represented a small
percentage of our total net revenue for the fiscal year ended March 31, 2000.
For our fiscal year ended March 31, 2000, direct sales and sales to distributors
accounted for approximately 41% of our net revenue. Our distributor agreements
generally provide distributors with stock rotation and price protection rights
as well as the right to return discontinued products. We currently sell our
software to more than 40 distributors worldwide. For our fiscal year ended
March 31, 2000, sales to Ingram Micro accounted for 19% of our gross revenue. We
expect that as we expand our marketing efforts around our deluxe products and
market our applications over the Internet, our retail and direct sales as a
percentage of our total revenue will increase. The following are our top four
distributor customers by revenue in fiscal 2000, which together generated a
total of 24.6% of our net
46
revenue in fiscal 2000 and a total of 18.0% of our net revenue for the nine
months ended December 31, 2000:
- - Computer 2000 - Ingram Micro
- - Softbank - Yamaha
We sell upgrades directly to end users through Adaptec's web site and (800)
number. We intend to begin selling directly to end users through our own web
site and (800) number in the near future. We believe that our strategic
relationships with Microsoft and RealNetworks and our relationships with our PC
and drive manufacturer partners will enhance our ability to sell directly to end
users.
SALES, MARKETING AND SUPPORT
Our products are broadly distributed through relationships with PC
manufacturers, CD recordable drive manufacturers, integrators, distributors,
retailers and strategic partners.
We expend a large portion of our marketing resources to market our products
to PC and drive manufacturers. We believe that by partnering with leading PC and
drive manufacturers, we will continue to be well positioned to introduce new
products and develop new markets. We work closely with our PC and drive
manufacturer customers as we develop new products and solicit market feedback
from our customers. Our sales and marketing efforts to PC and drive manufacturer
customers include:
- working closely with them to ensure that our software is compatible with
their products;
- creating awareness of our technical expertise and our brand; and
- co-marketing our software with their products.
We market our products through major distributors who resell to computer
retailers such as Best Buy, Comp USA, Fry's Electronics and Staples, and
Internet and catalog retailers such as Buy.com, CDW, Micro Warehouse and PC
Connection. We build retail shelf presence through promotions including point of
sale displays, newspaper inserts, and in-store training. We generate end user
demand through rebates, national advertising in targeted publications, numerous
trade show appearances, web promotions, direct mail and e-mail, and press and
publicity tours and events.
End users can currently purchase our products directly from us through
Adaptec's web site and (800) number. We expect direct sales to customers as a
percentage of our total net revenue to increase in the future as a result of
increased sales of downloadable modules, plug-ins and unlockable versions that
we make available through our web site.
We have historically focused our promotion efforts on branding for such
products as Easy CD Creator and Toast. We intend to expand our marketing efforts
to increase awareness of our new corporate identity and new products.
As of March 31, 2001, our sales, marketing and support staff consisted of 55
professionals, including field sales representatives, customer service
personnel, product marketing, product management, channel marketing, marketing
communications and market research personnel. A majority of our sales personnel
are located in California. We expect to increase our marketing infrastructure
over the next 12 months as our sales volume increases and as we develop new ways
to market our products.
As of March 31, 2001, our customer service organization consisted of 58
professionals who provide product and technical support to end users who
purchase our products. Additionally, we provide secondary support to our PC and
drive manufacturer customers. We expect to increase the number of professionals
in our customer service organization over the next 12 months as our retail sales
increase.
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PRODUCT DEVELOPMENT
We believe that our expertise in engineering and research and development
enables us to rapidly develop new technologies and products in response to
emerging industry trends. The breadth of our technology enables us to offer
effective digital media software solutions to our users. We have core
competencies in the following areas:
APPLICATION DEVELOPMENT. We have developed a broad range of PC applications
focused on delivering both ease of use and sophisticated functionality. We
intend to continue to build our capabilities in this area, particularly in new
emerging areas such as video.
OPERATING SYSTEMS. We have developed software which supports all the major
PC operating systems in use today. We have extensive expertise with system level
software, including both PC file systems and device drivers.
DEVICE MANAGEMENT. We have developed software which supports over 1,000
versions of CD recorders. We actively work with all of the major drive
manufacturers to ensure compatibility. We actively participate in the planning
of new technology initiatives and offer support for many newly designed drives.
STANDARDS. To deliver products that are compatible and interoperable, we
participate in and lead the development of technology standards. We are
represented on the Board of Directors of the Optical Storage Trade Association
and have been instrumental in promoting CD-Universal Disk Format, a file system
for use on optical media, as the industry standard. We have extensive experience
with the different standards that govern CD and DVD disc formats.
As of March 31, 2001, we employed 106 engineers with specialties in
application design, user interface design, middleware, device drivers and
quality assurance. We maintain a sophisticated compatibility test lab and run
our software through rigorous quality assurance tests. In the future we expect
to continue to make significant investments in product development. Our research
and development expenditures totaled $6.8 million in fiscal 1998, $8.6 million
in fiscal 1999 and $14.0 million in fiscal 2000.
COMPETITION
The markets we are targeting are highly competitive, and we expect
competition to increase in the future. Increased competition is likely to result
in price reductions and may result in loss of market share, which could
significantly reduce our future revenues. Key competitors for sales of our CD
recording software include Ahead, Applix, BHA, DataBecker, Oak Technology,
Prassi, Sonic Foundry and Veritas. Our system recovery competitors include
Microsoft and PowerQuest. Microsoft has included system recovery related
functionality in its Windows Me operating system. Additionally, both Apple and
Microsoft have announced their intention to include CD recording software in
future releases of their operating systems. Also, in an effort to differentiate
their product offerings, our CD recordable drive manufacturer customers may
acquire competing CD recording technologies to incorporate in their products.
We believe that the principal competitive factors affecting the market for
our products and services include product functionality and features, product
price and performance, acceptance of product by distributors and vendors,
quality of customer support, services, styling, availability and brand. We
believe that we compete more favorably than many of our current competitors with
respect to some or all of these factors and that we currently have a competitive
advantage in the CD recording software market due to the complex nature of the
CD recording business and our expertise in this area relative to many of our
competitors and potential competitors. However, we may not be able to maintain
our
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competitive position against current and potential competitors, especially those
with significantly greater resources.
INTELLECTUAL PROPERTY
Our success and ability to compete depend substantially upon our
intellectual property. We have filed over 70 patent applications in the past six
years, covering general CD recording, audio transformations, improving data
utilization and methods for saving and recording data. We currently have ten
United States patents issued, with terms ending in 2012 through 2018.
We may be unsuccessful in prosecuting our patent applications or patents may
not issue from our patent applications. Even if patents are issued and
maintained, these patents may not be of adequate scope to benefit us or may be
held invalid and unenforceable against third parties.
While we rely on patent, copyright, trade secret and trademark law to
protect our technology, we also believe that factors such as the technological
and creative skills of our personnel, new product developments, frequent product
enhancements and reliable product maintenance are essential to establishing and
maintaining a technology leadership position. We cannot assure you that others
will not develop technologies that are similar or superior to our technology.
We own the core technology underlying our CD recording software. However,
some specific deluxe features in our software, such as the PhotoRelay feature in
the deluxe version of Easy CD Creator, are licensed from third parties. Some of
these licenses are terminable at will.
EMPLOYEES
As of March 31, 2001, we had a total of 258 employees, of which 58 were in
customer service and support, 55 were in sales and marketing, 106 were in
engineering and product development and 39 were in finance, administration and
operations. Our future performance depends, in significant part, upon our
ability to attract new personnel and retain existing personnel in key areas
including engineering, technical support and sales. None of our employees are
represented by a collective bargaining agreement. We have not experienced any
work stoppages and we consider our relations with our employees to be good.
FACILITIES
Our principal executive offices are located in Milpitas, California. The
table below lists our leased or licensed facilities as of April 20, 2001.
APPROXIMATE SQUARE
LOCATION DESCRIPTION FOOTAGE LEASE EXPIRATION
- -------- ------------------------ ------------------ ----------------
Milpitas, California.............. Corporation headquarters 42,283 May 2006
Longmont, Colorado................ Office 4,444 April 2004
Maple Grove, Minnesota............ Office 20,555 October 2006
Wurselin, Germany................. Office and warehouse 2,691 May 2005
Tokyo, Japan...................... Office 2,400 March 2003
Maastricht, The Netherlands....... Office 1,733 November 2003
Adaptec has agreed to lease to us space in their Milpitas, California
corporate headquarters and to license to us office space in Longmont, Colorado.
The remaining facilities are subject to leases between Adaptec or its
subsidiaries and a third party; therefore, the leases for these facilities must
be assigned to us by Adaptec. Some of these leases may require the consent of a
third party. If a consent is not obtained, we may not be able to occupy the
space or we may need to negotiate our own lease. See "Certain Transactions--Real
Estate Matters Agreement" for further information. We believe that our
49
leased facilities are adequate to meet our current needs and that additional
facilities will be available to meet our development and expansion needs on
commercially reasonable terms.
LEGAL PROCEEDINGS
On April 6, 1998, we filed a lawsuit in the United States District Court for
the Northern District of California, San Jose Division, against Prassi Software
USA, Inc. and certain individuals. In the complaint, we seek unspecified
damages, injunctive relief and other relief based upon claims including
copyright infringement, trade secret misappropriation, breach of contract,
unfair competition and tortious conduct. The lawsuit stems from our acquisition
of Incat Systems Software USA, Inc. and contracts that were entered into in
connection with the acquisition and subsequent employment of certain of its
employees. We assert in the lawsuit that certain of our former employees
breached their contracts with us and made unauthorized use of our copyrighted
code and trade secrets. The court has issued a preliminary injunction barring
the defendants from the sale of certain products, which injunction remains in
place at this time. On May 8, 1998, the defendants filed a counterclaim against
us seeking unspecified damages, injunctive relief and declaratory relief based
on alleged violations by us of various antitrust laws, intentional and negligent
interference with prospective economic advantage and common law and statutory
unfair competition. We believe that we have meritorious defenses to each of the
counterclaims alleged by the defendants and we intend to defend ourselves
vigorously. We are in the process of negotiating a settlement agreement with the
defendants to settle all of the claims. We cannot assure you that our
negotiations will be successful or that a settlement will be reached.
We are not a party to any pending other legal proceeding that we believe
could, individually or in the aggregate, have a material adverse effect on our
business, financial condition or operating results.
50
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Set forth below is certain information concerning the directors, executive
officers and key employees of the Company and their ages as of April 20, 2001.
NAME AGE POSITION
- ---- ---------- ------------------------------------------
EXECUTIVE OFFICERS AND DIRECTORS
Wm. Christopher Gorog..................... 48 Chief Executive Officer, President and
Director
Thomas J. Shea............................ 36 Senior Vice President and Chief Operating
Officer
R. Elliot Carpenter....................... 36 Vice President of Finance
Robert N. Stephens........................ 55 Director
Richard J. Boyko.......................... 52 Director Nominee
Joseph C. Kaczorowski..................... 45 Director Nominee
Robert Rodin.............................. 47 Director Nominee
KEY EMPLOYEES
Samir Patel............................... 35 Vice President of Engineering
Bradford D. Duea.......................... 32 Vice President of Business Development
Scott A. Steinberg........................ 36 Vice President of Marketing
William E. Growney, Jr.................... 30 Director of Legal Affairs and Secretary
WM. CHRISTOPHER GOROG has served as our chief executive officer, president
and a director since September 2000. From February 1999 to September 2000, Mr.
Gorog served as a consultant in the entertainment and media industry, including
serving as advisor to J.H. Whitney, an asset management company, in HOB
Entertainment, Inc.'s acquisition of Universal Concerts. From November 1995 to
February 1999, Mr. Gorog served as president of new business development at
Universal Studios, an entertainment company. From January 1995 to November 1995,
Mr. Gorog served as executive vice president of group operations at Universal
Studios. Mr. Gorog earned a B.A.S. in Telecommunications and Film from San Diego
State University.
THOMAS J. SHEA has served as our senior vice president and chief operating
officer since September 2000. Mr. Shea joined Adaptec, a storage solutions
company, in 1987 and has served most recently as vice president and general
manager of Adaptec's software products group. Mr. Shea holds a B.S. in
Electrical Engineering and Computer Science from the University of California at
Berkeley.
R. ELLIOT CARPENTER has served as our vice president of finance since
February 2001. From September 2000 until that time, Mr. Carpenter served as our
vice president, corporate controller. Mr. Carpenter joined Adaptec in 1992 and
has held senior finance positions supporting Adaptec's software products group
and direct attach storage group. Most recently, Mr. Carpenter has served as an
assistant treasurer and director of mergers and acquisitions at Adaptec.
Mr. Carpenter holds a B.A. in Business Economics and Germanic Languages from the
University of California at Santa Barbara.
ROBERT N. STEPHENS has served as a director since August 2000. Mr. Stephens
has served as president of Adaptec since October 1998, its chief executive
officer since April 1999 and a director of Adaptec since October 1998.
Mr. Stephens served as Adaptec's chief operating officer from November 1995 to
July 1999. From November 1993 to November 1995, Mr. Stephens founded and was
chairman of the board of directors of Power I/O, Inc., a high-speed network
technologies company. Mr. Stephens holds a B.A. in Philosophy and Psychology and
an M.B.A. from San Jose State University.
RICHARD J. BOYKO will begin serving as a director in May 2001. Mr. Boyko
currently serves as co-president and chief creative officer of Ogilvy & Mather,
an advertising agency. He joined Ogilvy & Mather in November 1989. Mr. Boyko
majored in advertising at Art Center College of Design.
JOSEPH C. KACZOROWSKI will begin serving as a director in May 2001.
Mr. Kaczorowski currently serves as executive vice president and chief financial
officer of HOB Entertainment, Inc., an
51
entertainment company. He joined HOB Entertainment, Inc. in August 1996.
Mr. Kaczorowski holds a B.S. in Accounting from St. John's University.
ROBERT RODIN will begin serving as a director in May 2001. Mr. Rodin is the
founder, chairman of the board and chief executive officer of eConnections, a
real time supply chain management company for the electronics industry. Prior to
founding eConnections, Mr. Rodin served as the president of Avnet, an
electronics distribution company, from November 1999 to April 2000. From 1983 to
November 1999, Mr. Rodin was at Marshall Industries, an electronics distribution
company, where he most recently served as president, chief executive officer and
director. Mr. Rodin holds a B.A. in Psychology from University of Connecticut.
SAMIR PATEL has served as our vice president of engineering since September
2000. Mr. Patel joined Adaptec in May 1997 and has served most recently as vice
president, engineering and director of engineering. Prior to joining Adaptec,
Mr. Patel served as manager and director of business development of Apple
Computer, a personal computer manufacturer, from December 1996 to May 1997. From
August 1994 to December 1996, Mr. Patel served as vice president, engineering of
Opcode Systems, Inc., a music software provider. Mr. Patel holds a B.A. in Math
and Computer Science and an M.S. in Engineering from Cornell University.
BRADFORD D. DUEA has served as our vice president of business development
since February 2001. From January 2000 to February 2001, Mr. Duea served as vice
president, corporate development and corporate secretary of People
Support, Inc., a provider of electronic customer relationship management
solutions. From September 1996 to January 2000, Mr. Duea was an associate of
O'Melveny & Myers LLP, a law firm. Mr. Duea holds a B.A. in Law and Society from
the University of California at Santa Barbara, an M.B.A. in Finance and
International Marketing from the University of Southern California, and a J.D.
from the University of San Diego.
SCOTT A. STEINBERG has served as our vice president of marketing since April
2001. Prior to joining Roxio, from February 2000 to November 2000,
Mr. Steinberg served as senior vice president of marketing of Imagicast, a
wireless electronic commerce services provider. From July 1999 to February 2000,
Mr. Steinberg served as senior vice president of marketing of Liquid Audio, an
internet music delivery company. From October 1994 to July 1999, Mr. Steinberg
held various senior marketing positions at Crystal Dynamics, a provider of
interactive games software, then at Eidos Interactive, an interactive software
products company, following its acquisition of Crystal Dynamics. Mr. Steinberg
holds a B.S. from San Francisco State University and is a graduate of the
Executive Management and Financial Management Programs of Stanford University
Graduate School of Business.
WILLIAM E. GROWNEY, JR. joined Roxio as director of legal affairs and
secretary in April 2001. From September 1995 to April 2001, Mr. Growney was an
associate at Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, a
law firm. Mr. Growney holds a B.A. in Political Science and Economics from the
University of California, Berkeley and a J.D. from Harvard University.
BOARD STRUCTURE AND COMPENSATION
Our board of directors will consist of five authorized members, and our
certificate of incorporation currently provides for a classified board of
directors consisting of three classes of directors, each serving staggered
three-year terms. Messrs. Gorog's and Stephens' initial terms will expire in
2001. Messrs. Boyko's and Rodin's initial terms will expire in 2002.
Mr. Kaczorowski's initial term will expire in 2003. Thereafter, our directors
will be elected to three-year terms. This classification of our board of
directors may delay or prevent a change of control of our company or in our
management. See "Description of Capital Stock--Anti-Takeover Effects of Our
Certificate, Bylaws and Delaware Law."
Upon becoming a member of our board of directors, each non-employee director
will receive an automatic grant of an option to purchase up to 12,500 shares of
our common stock, or 15,000 shares if the director serves as our chairman of the
board, or chairman of our compensation or audit committee. In addition, all
non-employee directors who have served for at least six months receive an annual
52
option to purchase 5,000 shares or, if the non-employee director is our chairman
of the board, chairman of the compensation committee or chairman of the audit
committee, 7,500 shares. We intend to reimburse our directors for costs
associated with attending board meetings.
BOARD COMMITTEES
AUDIT COMMITTEE
The audit committee of our board of directors will consist of
Messrs. Boyko, Kaczorowski and Rodin. Our audit committee will review our
auditing, accounting, financial reporting and internal control functions and
make recommendations to our board of directors for the selection of independent
accountants. In addition, the committee will monitor our compliance with foreign
trade regulations, as well as the non-audit services of our independent
accountants. In discharging its duties, the committee will:
- review and approve the scope of the annual audit and the independent
accountant's fees;
- meet independently with our internal finance staff, our independent
accountants and our senior management; and
- review the general scope of our accounting, financial reporting, annual
audit and internal audit program, matters relating to internal control
systems, as well as the results of the annual audit.
COMPENSATION COMMITTEE
The compensation committee of our board of directors will consist of
Messrs. Kaczorowski and Rodin. Our compensation committee will determine,
approve and report to the board of directors on all elements of compensation for
our executive officers, including targeted total cash compensation and long-term
equity based incentives.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All decisions regarding the compensation of our executive officers have been
made by the officers of Adaptec. Robert N. Stephens, one of our directors, is
the president and chief executive officer and a director of Adaptec.
LIMITATIONS ON DIRECTORS' LIABILITY AND INDEMNIFICATION
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for:
- any breach of their duty of loyalty to the corporation or its
stockholders;
- acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of the law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
- any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities arising under the
federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws provide that we will indemnify
our directors and officers and may indemnify our employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws will cover negligence on the part of indemnified parties, at a minimum.
Our bylaws also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in his or her capacity as an officer, director, employee or other agent,
regardless of whether our bylaws would permit indemnification.
53
We will enter into agreements to indemnify our directors and executive
officers, in addition to the indemnification that will be provided for in our
bylaws. These agreements, among other things, will provide for indemnification
for judgments, fines, settlement amounts and certain expenses, including
attorneys' fees incurred by the director or executive officer, in any action or
proceeding, including any action by or in our right, arising out of the person's
services as a director or executive officer of us, any of our subsidiaries or
any other company or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers.
The limited liability and indemnification provisions that are contained in
our certificate of incorporation and bylaws may discourage stockholders from
bringing a lawsuit against our directors for breach of their fiduciary duty and
may reduce the likelihood of derivative litigation against our directors and
officers, even though a derivative action, if successful, might otherwise
benefit us and our stockholders. A stockholder's investment in us may be
adversely affected to the extent we pay the costs of settlement or damage awards
against our directors and officers under these indemnification provisions.
There is no pending litigation or proceeding involving any of our directors,
officers or employees in which indemnification is sought, nor are we aware of
any threatened litigation that may result in claims for indemnification.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
All of our stock is currently owned by Adaptec. To the extent our directors
and officers own shares of Adaptec common stock at the time of the distribution,
they will participate in the distribution on the same terms as other holders of
Adaptec common stock. In connection with the distribution, certain executives,
including the executive officers named in the Summary Compensation Table in
"--Executive Compensation" below, will be awarded options to purchase shares of
our common stock. See "--Employment Arrangements."
The following table sets forth the number of shares of Adaptec common stock
beneficially owned on March 31, 2000 by each director and each of the executive
officers named in the Summary Compensation Table in "--Executive Compensation,"
and all of our directors and executive officers as a group. Except as otherwise
noted, the individual director or executive officer or their family members had
sole voting and investment power with respect to such securities. The total
number of shares of Adaptec outstanding as of March 31, 2001 was 99,073,121.
SHARES OF ADAPTEC
BENEFICIALLY OWNED
------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE
- ------------------------ -------- ----------
Robert N. Stephens(1)....................................... 717,859 *
Thomas J. Shea(2)........................................... 114,733 *
R. Elliot Carpenter(3)...................................... 20,905 *
Richard J. Boyko............................................ -- --
Wm. Christopher Gorog....................................... -- --
Joseph C. Kaczorowski....................................... -- --
Robert Rodin................................................ -- --
All directors and executive officers as a group
(7 persons)(4)............................................ 853,497 *
- ------------------------
* Represents holdings of less than one percent.
(1) Includes 660,978 shares issuable upon the exercise of options currently
exercisable and exercisable within 60 days of March 31, 2001.
(2) Includes 108,124 shares issuable upon the exercise of options currently
exercisable and exercisable within 60 days of March 31, 2001.
54
(3) Includes 19,767 shares issuable upon the exercise of options currently
exercisable and exercisable within 60 days of March 31, 2001.
(4) Includes those shares set forth in notes (1) through (3) above.
EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
chief executive officer of Adaptec and two other executive officers of Roxio
who, based on salary and bonus compensation from Adaptec and its subsidiaries,
were the most highly compensated for the fiscal year ended March 31, 2000. All
information set forth in this table reflects compensation earned by such
individuals for services with Adaptec and its subsidiaries.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
------------
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) OPTIONS COMPENSATION(2)
- --------------------------- -------- -------- ---------- ------------ ---------------
Robert N. Stephens, Chief Executive
Officer of Adaptec................. 2000 $569,288 $1,200,000 505,000 $1,750
1999 425,000 250,000 330,000 1,682
1998 423,846 -- 350,000 1,877
Thomas J. Shea, Senior Vice President
and Chief Operating Officer........ 2000 217,769 275,000 5,000 347
1999 196,698 90,000 100,000 299
1998 149,756 72,000 18,000 318
R. Elliot Carpenter, Vice President
of Finance......................... 2000 129,616 40,000 13,000 --
1999 115,015 30,000 22,000 --
1998 91,754 22,500 18,000 --
- ------------------------
(1) The amounts shown in this column reflect payments made under Adaptec's
annual discretionary bonus plan.
(2) All other compensation represents life insurance premiums.
GRANTS OF STOCK OPTIONS
The following table shows all grants of options to acquire shares of Adaptec
common stock granted to the executive officers named in the Summary Compensation
Table in "--Executive Compensation" and the chief executive officer of Adaptec
in the fiscal year ended March 31, 2000.
POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL RATE OF STOCK
SECURITIES OPTIONS EXERCISE OR PRICE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO BASE PRICE TERM(3)
OPTIONS ADAPTEC EMPLOYEES PER EXPIRATION -----------------------------------
NAME GRANTED(1) IN FISCAL YEAR(2) SHARE DATE 0% 5% 10%
- ---- ---------- ----------------- ----------- ---------- -------- ---------- -----------
Robert N. Stephens... 500,000 8.75% $24.4375 4/06/09 $ -- $7,633,403 $19,392,486
5,000 .09 49.8750 1/03/10 36,563 216,387 492,273
Thomas J. Shea....... 5,000 .09 49.8750 1/03/10 36,563 216,387 492,273
R. Elliot
Carpenter.......... 8,000 .14 34.3125 6/29/09 10,500 189,735 464,717
5,000 .09 40.0625 10/11/09 7,188 137,684 337,890
- ------------------------
(1) All of the above options are subject to the terms of Adaptec's 1990 Stock
Option Plan or 1999 Stock Option Plan and are exercisable only as they vest.
The options granted to each executive officer vest and become exercisable at
the rate 12.50% of the shares subject to the option six
55
months after the date of grant and at the rate of 6.25% of the shares
subject to the option at the end of each of the next 14 quarters, provided
the optionee continues to be employed by Adaptec.
(2) Based on a total of 5,717,089 shares granted to all Adaptec employees in
fiscal 2000.
(3) Potential realizable values are net of exercise price, but before deduction
of taxes associated with exercise. These amounts represent certain assumed
rates of appreciation only, based on the Securities and Exchange Commission
rules, and do not represent our estimate of future stock prices. No gain to
an optionee is possible without an increase in stock price, which will
benefit all stockholders commensurately. A zero percent gain in stock price
will result in zero dollars for the optionee. Actual realizable values, if
any, on stock option exercises are dependent on the future performance of
our common stock, overall market conditions and the option holders'
continued employment by Adaptec through the vesting period.
EXERCISES OF STOCK OPTIONS
The following table shows aggregate exercises of options to purchase Adaptec
common stock in the fiscal year ended March 31, 2000 by the executive officers
named in the Summary Compensation Table in "--Executive Compensation" and the
chief executive officer of Adaptec.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AS OF IN-THE-MONEY OPTIONS
SHARES MARCH 31, 2000 AS OF MARCH 31, 2000
ACQUIRED ON VALUE --------------------------- ------------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE(1)
- ---- ----------- ---------- ----------- ------------- ----------- ----------------
Robert N. Stephens........... 265,247 $7,417,733 260,479 743,000 $4,114,602 $12,477,039
Thomas J. Shea............... 57,688 1,104,538 20,874 100,501 465,333 2,047,854
R. Elliot Carpenter.......... 14,845 357,818 4,917 37,638 81,480 556,131
- ------------------------
(1) The value of unexercised options is based upon the difference between the
exercise price and the fair market value of $38.625 per share as of March
31, 2000, the closing sales price of Adaptec common stock on that date.
EMPLOYMENT AND CHANGE OF CONTROL ARRANGEMENTS
Mr. Gorog serves as our chief executive officer, president and a director.
Under the terms of his employment arrangement, Mr. Gorog's annual base
compensation is $375,000 and he is eligible for a cash bonus of up to $243,750
pursuant to our annual bonus program, which is tied to our results of
operations. Mr. Gorog's first year bonus is guaranteed. Mr. Gorog also received
a $125,000 hire-on bonus and relocation assistance of $100,000 in fiscal 2000.
In addition, Mr. Gorog received an employee stock option grant to purchase up to
500,000 shares of common stock with an exercise price per share equal to $8.50
per share. This option will vest 25% on September 19, 2001, and after that at
6.25% per quarter over the remaining three years. In the event that Mr. Gorog is
terminated for any reason other than for cause during the first three years of
his employment, he is entitled to receive a severance payment equal to
12 months of his base compensation and COBRA benefits premiums. Additionally, if
Mr. Gorog is terminated during the first year of his employment, he is entitled
to receive a prorated portion of his first year's target bonus, and 25% of his
options will automatically vest. In the event of a change of control, 25% of
Mr. Gorog's unvested options will vest automatically and the remaining options
will continue to vest at the same rate as prior to the change of control. In
addition, Mr. Gorog will receive a cash bonus as follows: (i) the "in-the-money"
value of his vested options on the date of change of control payable on the date
of change of control; and (ii) the "in-the-money" value of his unvested options
on the date of change of control payable (A) 25% at the date of change of
control, (B) 50% at the one-year anniversary of the change of control, and
(C) 25% at the two-year anniversary of the change of control, in each case, if
Mr. Gorog remains with us through the date each payment is due. Finally, in the
event that Mr. Gorog is terminated without cause within 12 months after the date
of a change of control, 100% of his options will automatically vest.
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Mr. Shea serves as our senior vice president and chief operating officer.
Under the terms of his employment arrangement, Mr. Shea's annual base
compensation is $240,000 and he is eligible for a cash bonus of up to $120,000
per year pursuant to our annual bonus program, which is tied to our results of
operations. In addition, Mr. Shea received employee stock option grants to
purchase up to 280,693 shares of common stock with an exercise price per share
equal to the $8.50 per share. Pursuant to Mr. Shea's employment arrangement, an
option to purchase 125,000 shares of common stock will vest 25% on
September 19, 2001, and after that at 6.25% per quarter over the remaining three
years. The remaining options vest according to a number of different vesting
schedules. In the event that Mr. Shea is terminated for any reason other than
for cause prior to the distribution of our shares to Adaptec stockholders,
Mr. Shea will be transferred back to Adaptec in the role of vice president and
general manager in another Adaptec operating business, and the vesting of his
option for 125,000 shares of common stock will be accelerated. In the event that
Mr. Shea's position is terminated for any reason other than for cause within 18
months after distribution of our shares to Adaptec's stockholders, Mr. Shea is
entitled to receive a severance payment equal to 12 months of his base
compensation and COBRA benefits premiums, and the vesting of his option for
125,000 shares of common stock will be accelerated. In the event of a change of
control, 25% of Mr. Shea's unvested options will vest automatically and the
remaining options will continue to vest at the same rate as prior to the change
of control. In addition, Mr. Shea will receive a cash bonus as follows: (i) the
"in-the-money" value of his vested options on the date of change of control
payable on the date of change of control; and (ii) the "in-the-money" value of
his unvested options on the date of change of control payable (A) 25% at the
date of change of control, (B) 50% at the one-year anniversary of the change of
control, and (C) 25% at the two-year anniversary of the change of control, in
each case, if Mr. Shea remains with us through the date each payment is due.
Finally, in the event that Mr. Shea is terminated without cause within
12 months after the date of a change of control, 100% of his options will
automatically vest.
EMPLOYEE AND DIRECTOR BENEFIT PLANS
2000 STOCK OPTION PLAN
The 2000 Stock Option Plan, referred to as the 2000 Stock Plan, was adopted
by our board of directors and approved by our stockholders in November 2000. Our
2000 Stock Plan provides for the grant of incentive stock options to employees,
including officers and employee directors, and for the grant of nonstatutory
stock options and stock purchase rights to employees, directors and consultants.
As of April 20, 2001, a total of 3,600,000 shares of our common stock were
reserved for issuance under the 2000 Stock Plan. If an option to purchase our
common stock or a stock purchase right expires or becomes unexercisable without
having been exercised in full, or is surrendered pursuant to an option exchange
program, which is a program whereby outstanding options are surrendered in
exchange for options with a lower exercise price, the unpurchased shares shall
become available for future grant or sale under our 2000 Stock Plan. As of
April 20, 2001, options to purchase a total of 3,238,721 shares of our common
stock were issued and outstanding under our 2000 Stock Plan.
ADMINISTRATION OF THE 2000 STOCK PLAN. Our board of directors or a
committee of our board of directors administers the 2000 Stock Plan. In the case
of options intended to qualify as "performance-based compensation" within the
meaning of Section 162(m) of the Internal Revenue Code, the committee will
consist of two or more "outside directors" within the meaning of Section 162(m)
of the Internal Revenue Code. The administrator has the power to determine the
terms of the options and stock purchase rights granted, including the exercise
price, the number of shares subject to each option or stock purchase right, the
exercisability of the options and stock purchase rights, and the form of
consideration payable upon exercise of the options. Our board of directors or
its committee has full and exclusive authority to interpret the terms of our
2000 Stock Plan and to determine eligibility. Also, if we experience a stock
dividend, reorganization or other change in our capital structure, the number of
shares available under our 2000 Stock Plan, the outstanding options and other
awards, and the per
57
person limits on grants and the price per share of common stock covered by each
outstanding share, option or other award will be modified to reflect the stock
dividend, reorganization or other change.
OPTIONS. The administrator will determine the exercise price of options
granted under our 2000 Stock Plan. The exercise price of options intended to be
incentive stock options will be at least 100% of the fair market value of our
common stock on the grant date. With respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code and incentive stock options, the
exercise price will be at least equal to the fair market value of our common
stock on the grant date. The term of an incentive stock option may not exceed
ten years, except that with respect to any participant who owns 10% of the
voting power of all classes of our outstanding capital stock, the term must not
exceed five years and the exercise price must at least equal 110% of the fair
market value on the grant date. The administrator determines the term of all
other options.
No optionee may be granted an option to purchase more than 1,000,000 shares
in any fiscal year, except that in connection with his or her initial service,
an optionee may be granted an additional option to purchase up to 1,000,000
shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for six months. In all other cases, the option will
generally remain exercisable for three months. However, no option may be
exercised later than the expiration of its term.
TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Our 2000 Stock Plan
generally does not allow for the transfer of options or stock purchase rights,
and only the optionee may exercise an option or stock purchase right during his
or her lifetime.
ADJUSTMENTS UPON MERGER OR ASSET SALE. Our 2000 Stock Plan provides that,
in the event of our merger with or into another corporation or a sale of
substantially all of our assets, the successor corporation will assume or
substitute an equivalent award for each option or stock purchase right. In
addition, 25% of all outstanding and unvested options shall automatically become
vested and exercisable upon a merger, sale of substantially all of our assets or
other transaction in which there is a change of control. If following such an
assumption or substitution, the holder of an option or stock purchase right is
terminated without cause within 12 months following a change of control, then
the vesting and exercisability of 100% of the then unvested shares subject to
his or her option or stock purchase right shall accelerate. If the outstanding
options or stock purchase rights are not assumed or substituted for in
connection with a merger or sale of assets, the administrator will provide
notice to the optionee that he or she has the right to exercise the option or
stock purchase right as to all of the shares subject to the option or stock
purchase right, including shares which would not otherwise be exercisable, for a
period of 15 days from the date of the notice. The option or stock purchase
right will terminate upon the expiration of the 15-day period.
AMENDMENT AND TERMINATION OF THE 2000 STOCK PLAN. Our 2000 Stock Plan will
automatically terminate in 2010, unless we terminate it sooner. In addition, our
board of directors has the authority to amend, suspend or terminate our 2000
Stock Plan, provided it does not adversely affect any option previously granted
under our 2000 Stock Plan.
2001 STOCK PLAN
The 2001 Stock Plan was adopted by our board of directors and approved by
our stockholders in April 2001. Our 2001 Stock Plan provides for the grant of
incentive stock options to employees, including officers and employee directors,
and for the grant of nonstatutory stock options and stock purchase rights to
employees, directors and consultants. As of April 20, 2001, a total of 1,000,000
shares of our common stock were reserved for issuance under the 2001 Stock Plan.
As of April 20,
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2001, no options have been granted under our 2001 Stock Plan. Our 2001 Stock
Plan provides for annual increases in the number of shares available for
issuance on the first day of each fiscal year, beginning with our 2003 fiscal
year, equal to the lesser of 2,000,000 shares, 6% of our outstanding common
stock on that date, or a lesser amount determined by our board. If an option to
purchase our common stock or a stock purchase right expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an option exchange program, which is a program whereby outstanding options
are surrendered in exchange for options with a lower exercise price, the
unpurchased shares shall become available for future grant or sale under our
2001 Stock Plan.
ADMINISTRATION OF THE 2001 STOCK PLAN. Our board of directors or a
committee of the board administers the 2001 Stock Plan. In the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Code, the committee will consist of two or more "outside
directors" within the meaning of Section 162(m) of the Code. The administrator
has the power to determine the terms of the options and stock purchase rights
granted, including the exercise price, the number of shares subject to each
option or stock purchase right, the exercisability of the options and stock
purchase rights and the form of consideration payable upon exercise of the
options. Our board of directors or its committee has full and exclusive
authority to interpret the terms of our 2001 Stock Plan and to determine
eligibility. Also, if we experience a stock dividend, reorganization or other
change in our capital structure, the number of shares available under our 2001
Stock Plan, the outstanding options and other awards, and the per person limits
on grants and the price per share of common stock covered by each outstanding
share, option or other award will be modified to reflect the stock dividend,
reorganization or other change.
OPTIONS. The administrator determines the exercise price of options granted
under the 2001 Stock Plan, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, the exercise price must be at least
equal to the fair market value of our common stock on the grant date. With
respect to nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue Code
and incentive stock options, the exercise price will be at least equal to the
fair market value of our common stock on the grant date. The term of an
incentive stock option may not exceed ten years, except that with respect to any
participant who owns 10% of the voting power of all classes of our outstanding
capital stock, the term must not exceed five years and the exercise price must
at least equal 110% of the fair market value on the grant date. The
administrator determines the term of all other options.
No optionee may be granted an option to purchase more than 1,000,000 shares
in any fiscal year, except that in connection with his or her initial service,
an optionee may be granted an additional option to purchase up to 1,000,000
shares.
After termination of one of our employees, directors or consultants, he or
she may exercise his or her option for the period of time stated in the option
agreement. Generally, if termination is due to death or disability, the option
will remain exercisable for six months. In all other cases, the option will
generally remain exercisable for three months. However, an option may never be
exercised later than the expiration of its term.
STOCK PURCHASE RIGHTS. The administrator determines the exercise price of
stock purchase rights granted under our 2001 Stock Plan. Unless the
administrator determines otherwise, the restricted stock purchase agreement will
grant us a repurchase option that we may exercise upon the voluntary or
involuntary termination of the purchaser's service with us for any reason,
including death or disability. The purchase price for shares we repurchase will
generally be the original price paid by the purchaser and may be paid by
cancellation of any indebtedness of the purchaser to us. The administrator
determines the rate at which our repurchase option will lapse.
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TRANSFERABILITY OF OPTIONS AND STOCK PURCHASE RIGHTS. Our 2001 Stock Plan
generally does not allow for the transfer of options or stock purchase rights
and only the optionee may exercise an option or stock purchase right during his
or her lifetime.
ADJUSTMENTS UPON MERGER OR ASSET SALE. Our 2001 Stock Plan provides that in
the event of our merger with or into another corporation or a sale of
substantially all of our assets, the successor corporation will assume or
substitute an equivalent award for each option or stock purchase right. If
following such an assumption or substitution, the holder of an option or stock
purchase right is terminated without cause within 12 months following a change
of control, then the vesting and exercisability of 100% of the then unvested
shares subject to his or her option or stock purchase right shall accelerate. If
the outstanding options or stock purchase rights are not assumed or substituted
for in connection with a merger or sale of assets, the administrator will
provide notice to the optionee that he or she has the right to exercise the
option or stock purchase right as to all of the shares subject to the option or
stock purchase right, including shares which would not otherwise be exercisable,
for a period of 15 days from the date of the notice. The option or stock
purchase right will terminate upon the expiration of the 15-day period.
AMENDMENT AND TERMINATION OF OUR 2001 PLAN. Our Stock Plan will
automatically terminate in 2011, unless we terminate it sooner. In addition, our
board of directors has the authority to amend, suspend or terminate the 2001
Stock Plan, provided it does not adversely affect any option previously granted
under our 2001 Stock Plan.
2001 EMPLOYEE STOCK PURCHASE PLAN
Our 2001 Employee Stock Purchase Plan, referred to as the Purchase Plan, was
adopted by our board of directors and approved by our stockholders in April
2001. A total of 500,000 shares of our common stock are available for sale under
the Purchase Plan. In addition, the Purchase Plan provides for annual increases
in the number of shares available for issuance on the first day of each fiscal
year, beginning with our 2003 fiscal year, equal to the lesser of 1.5% of the
outstanding shares of our common stock on the first day of the fiscal year,
100,000 shares, or a lesser amount determined by our board.
ADMINISTRATION OF THE PURCHASE PLAN. Our board of directors or a committee
of our board administers the Purchase Plan. Our board of directors or a
committee of the board has full and exclusive authority to interpret the terms
of the Purchase Plan and to determine eligibility. Also, if we experience a
stock dividend, reorganization or other change in our capital structure, the
number of shares available under the Purchase Plan, the number of shares
available for individual employee purchases and the purchase price will be
modified to reflect the stock dividend, reorganization or other change.
ELIGIBILITY TO PARTICIPATE. All of our employees are eligible to
participate if they are customarily employed by us or any participating
subsidiary for at least 20 hours per week and more than five months in any
calendar year. However, an employee may not be granted the right to purchase
stock under the Purchase Plan if:
- immediately after grant the employee owns stock possessing 5% or more of
the total combined voting power or value of all classes of our capital
stock, or
- the employee's rights to purchase stock under all of our employee stock
purchase plans accrues at a rate that exceeds $25,000 worth of stock for
each calendar year.
OFFERING PERIODS AND CONTRIBUTIONS. Our Purchase Plan is intended to
qualify under Section 423 of the Code and contains consecutive and overlapping
24-month offering periods. Each offering period includes four six-month purchase
periods. The offering periods generally start on the first trading day on or
after February 15 and August 15 of each year, except for the first such offering
period which will
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commence on the first trading day on or after May 14, 2001 and will end on the
last trading day on July 31, 2003.
Our Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 10% of their eligible compensation, which includes a
participant's base salary and commission, but excludes all other compensation
paid to the participant. A participant may purchase a maximum of 1,500 shares
during any six-month purchase period.
PURCHASE OF SHARES. Amounts deducted and accumulated by the participant are
used to purchase shares of our common stock at the end of each six-month
purchase period. The price is 85% of the lower of the fair market value of our
common stock at either the beginning or end of an offering period. If the fair
market value at the end of a purchase period is less than the fair market value
at the beginning of the offering period, participants will be withdrawn from the
current offering period following their purchase of shares on the purchase date
and will be automatically re-enrolled in a new offering period. Participants may
end their participation at any time during an offering period and will be paid
their payroll deductions to date. Participation ends automatically upon
termination of employment with us.
TRANSFERABILITY OF RIGHTS. A participant may not transfer rights granted
under the Purchase Plan other than by will, the laws of descent and distribution
or designation of a beneficiary as provided under the Purchase Plan.
ADJUSTMENTS UPON MERGER OR ASSET SALE. In the event of our merger with or
into another corporation or a sale of all or substantially all of our assets, a
successor corporation may assume or substitute for each outstanding option. If
the successor corporation refuses to assume or substitute for the outstanding
options, the offering periods then in progress will be shortened, and a new
exercise date will be set prior to the merger or sale of assets.
AMENDMENT AND TERMINATION OF THE PURCHASE PLAN. Our Purchase Plan will
terminate in 2011. However, our board of directors has the authority to amend or
earlier terminate our Purchase Plan, except that, subject to exceptions
described in the Purchase Plan, no such action may adversely affect any
outstanding rights to purchase stock under our Purchase Plan.
2001 DIRECTOR OPTION PLAN
Our board of directors adopted the 2001 Director Option Plan, referred to as
the Director Plan, in April 2001. The Director Plan provides for the periodic
grant of nonstatutory stock options to our non-employee directors. As of
April 20, 2001, a total of 100,000 shares of our common stock were reserved for
issuance under the Director Plan. As of April 20, 2001, an option to acquire
12,500 shares of our common stock was issued and outstanding under the Director
Plan.
OPTIONS. All grants of options to our non-employee directors under the
Director Plan are automatic. We will grant each non-employee director an option
to purchase 12,500 shares or, if the non-employee director is our chairman of
the board, chairman of the compensation committee or chairman of the audit
committee, 15,000 shares upon the later of the effective date of the Director
Plan or the date when such person first becomes a non-employee director, except
for those directors who become non-employee directors by ceasing to be employee
directors. In addition, all non-employee directors who have served for at least
six months receive an annual option to purchase 5,000 shares or, if the
non-employee director is our chairman of the board, chairman of the compensation
committee or chairman of the audit committee, 7,500 shares. If an option expires
or becomes unexercisable without having been exercised in full, the unpurchased
shares subject to the option shall become available for future grant or sale
under the Director Plan.
If we experience a stock dividend, reorganization or other change in our
capital structure, the number of shares available under the Director Plan, the
outstanding options and other awards, the per
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person limits on grants and the options' exercise prices will be modified to
reflect the stock dividend, reorganization or other change in our
capitalization.
All options granted under our Director Plan will have a term of ten years
and an exercise price equal to the fair market value of our common stock on the
date of grant. Each option becomes exercisable as to 6.25% of the shares subject
to the option every three months, commencing on the date of grant, provided the
non-employee director remains a director on those dates.
After termination as a non-employee director, an optionee must exercise his
or her option at the time set forth in his or her option agreement. If
termination is due to death, the option will generally remain exercisable for
six months. In all other cases, the option will generally remain exercisable for
a period of three months. However, an option may never be exercised later than
the expiration of its term.
TRANSFERABILITY OF OPTIONS. A non-employee director may not transfer
options granted to him or her under our Director Plan other than by will or the
laws of descent and distribution. Only the non-employee director may exercise
his or her options during his or her lifetime.
ADJUSTMENTS UPON CHANGE OF CONTROL. In the event of our merger with or into
another corporation in which our stockholders before such transaction do not
continue to hold at least 50% of the successor or resulting entity, a sale of
substantially all of our assets and other transactions described in the Director
Plan, all of the options granted under the Director Plan shall immediately
become 100% vested and exercisable. All options will terminate following the
change of control transaction.
AMENDMENT AND TERMINATION OF THE DIRECTOR PLAN. Unless terminated sooner,
our Director Plan will automatically terminate in 2011. Our board of directors
has the authority to amend, alter, suspend or discontinue the Director Plan, but
none of those actions may adversely affect any grant made under the Director
Plan.
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CERTAIN TRANSACTIONS
FOR YOUR CONVENIENCE, WE HAVE PROVIDED A SUMMARY OF THE MATERIAL TERMS OF
THE KEY AGREEMENTS THAT GOVERN OUR SEPARATION FROM ADAPTEC. THE FOLLOWING
DESCRIPTION SUMMARIZES THE MATERIAL TERMS OF THE SEPARATION AGREEMENTS BUT DOES
NOT PURPORT TO DESCRIBE ALL THE TERMS OF THESE AGREEMENTS.
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
The master separation and distribution agreement, or master separation
agreement, outlines the general terms and conditions of the separation and
distribution and the general intent of the parties as to how these matters will
be undertaken and completed.
THE SEPARATION. The separation is scheduled to occur on or around May 5,
2001. On the separation date, we will sign agreements with Adaptec that govern
the transfer of assets and liabilities from Adaptec to us and the various
relationships between Adaptec and us following the separation date. These
ancillary agreements include:
- a general assignment and assumption agreement;
- an indemnification and insurance matters agreement;
- a master patent ownership and license agreement;
- a master technology ownership and license agreement;
- a master confidential disclosure agreement;
- a master transitional services agreement;
- an employee matters agreement;
- a tax sharing agreement;
- a real estate matters agreement;
- a manufacturing agreement; and
- an international transfer of assets agreement.
Except as to indemnification obligations among the parties, to the extent that a
term of any of the ancillary agreements described below contradicts the master
separation agreement, the conflicting term of the ancillary agreement will
govern.
CONTRIBUTION OF CAPITAL. Adaptec and its subsidiaries have agreed to
transfer an aggregate of $30 million in cash, including $20 million that will be
transferred pursuant to the international transfer of assets agreement, and any
cash held by our overseas subsidiaries to us prior to the separation date.
COVENANTS. In addition to transferring control and ownership of various
assets and liabilities relating to our business from Adaptec to us, we have
agreed to exchange information, engage in specific auditing practices and
resolve disputes in particular ways.
INFORMATION EXCHANGE. We have agreed to maintain and share information with
Adaptec such that we may each:
- maintain adequate internal accounting to allow the other to satisfy
reporting obligations and prepare financial statements;
- retain records that may be beneficial to the other for a specified period
of time and allow that if the records are scheduled to be destroyed, the
destroying party will give the other party an opportunity to retrieve all
relevant information from the records; and
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- do our best to provide the other with personnel, directors, officers or
agents that may be used as witnesses in legal proceedings.
AUDITING PRACTICES. So long as Adaptec is required to consolidate our
operating results and financial position, we have agreed to:
- not change accounting firms without Adaptec's consent;
- use our reasonable commercial efforts to cause our auditors to date their
opinion on our financial statements on the same date as Adaptec's
financial statements;
- provide Adaptec all relevant information to enable Adaptec to prepare its
financial statements;
- grant Adaptec's internal auditors access to our records; and
- notify Adaptec of any change in our accounting principles.
Adaptec has agreed to provide us with all relevant information to enable us
to prepare our financial statements and to grant our internal auditors access to
Adaptec's records.
EXPENSES. Adaptec has agreed to pay all costs in connection with the
separation and the distribution.
DISPUTE RESOLUTION. We have agreed with Adaptec to the following procedures
to settle any disputes under the separation agreements:
- unless the dispute relates to confidentiality or intellectual property
claims or if a delay initiating litigation would cause serious and
irreparable damage, we will each make a good faith effort to first resolve
the dispute through informal negotiation;
- then, through a meeting of senior executives from each company; and
- if these efforts fail, we may then litigate the dispute.
All of the agreements between us and Adaptec relating to the separation
contain similar dispute resolution provisions.
NO REPRESENTATIONS AND WARRANTIES. Adaptec is not making any promises to us
regarding:
- the value of any asset that Adaptec is transferring under the separation
agreements;
- whether there is a lien or encumbrance on any asset Adaptec is
transferring under the separation agreements;
- the absence of defenses or freedom from counterclaim with respect to any
claim Adaptec is transferring under the separation agreements; or
- the legal sufficiency of any conveyance of title to any asset Adaptec is
transferring under the separation agreements.
Adaptec is transferring the assets to us "as is," which means that we will
bear the risk that a conveyance is insufficient to transfer the legal title of
an asset free of any lien or encumbrance and without infringement of the rights
of third parties.
GENERAL ASSIGNMENT AND ASSUMPTION AGREEMENT
The general assignment and assumption agreement, or assignment agreement,
identifies which assets and liabilities relating to our business Adaptec will
transfer to us and we will accept from Adaptec as part of the separation. This
agreement also describes when and how the transfer will occur.
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ASSET TRANSFER. On the separation date, Adaptec will transfer the following
assets to us:
- all assets reflected on our balance sheet as of March 31, 2001, minus any
assets disposed of after the date of the balance sheet;
- all written off, expensed or fully depreciated assets that would have
appeared on our balance sheet as of March 31, 2001 if we had not written
off, expensed or fully depreciated them;
- all assets that Adaptec acquired after March 31, 2001 that would have
appeared in our financial statements as of the separation date if we
prepared these financial statements using the same principles we used in
preparing our balance sheet dated March 31, 2001;
- all assets that our business primarily uses as of the separation date but
are improperly not reflected in our balance sheet as of March 31, 2001;
provided, however, that we must give written notice to Adaptec claiming
these particular assets within a year of the distribution;
- all contingent gains related primarily to our business;
- all supply, vendor, capital, equipment lease or other contracts that
primarily relate to our business, including contracts representing
obligations reflected on our balance sheet as of March 31, 2001;
- all outstanding stock, investments or similar interests of certain Adaptec
subsidiaries;
- all computers, disks, equipment and other assets used or managed primarily
by employees of Adaptec who will become our employees due to the
separation;
- certain rights under existing insurance policies; and
- certain other specified assets.
ASSUMPTION OF LIABILITIES. On the separation date, we will assume the
following liabilities from Adaptec:
- all liabilities reflected as liabilities on our balance sheet as of
March 31, 2001, minus any liabilities that were discharged after the date
of the balance sheet;
- all liabilities of Adaptec that arise after March 31, 2001, that would
have appeared in our financial statements as of the separation date if we
prepared such financial statements using the same principles we used in
preparing our balance sheet as of March 31, 2001;
- all liabilities that are primarily related to our business at the
separation date but are improperly not reflected in our balance sheet as
of March 31, 2001; provided, however that we must give written notice to
Adaptec claiming these particular liabilities within a year of the
distribution;
- all contingent liabilities primarily related to our business;
- all liabilities, other than taxes based on net income, primarily resulting
from the operation of our business, or resulting from any asset that
Adaptec transferred to us;
- all liabilities arising out of terminated, divested or discontinued
businesses and operations; and
- certain other specified liabilities.
ASSETS AND LIABILITIES NOT TRANSFERRED. If we and Adaptec discover that
specific assets or liabilities that are primarily related to our business were
not transferred or assumed pursuant to the assignment agreement, we and Adaptec
have agreed to cooperate in good faith to effect the transfer or assumption of
those assets or liabilities.
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DELAYED TRANSFERS. If it is impracticable to transfer specific assets and
liabilities on the separation date, the assignment agreement provides that these
assets and liabilities will be transferred after the separation date.
TERMS OF OTHER ANCILLARY AGREEMENTS GOVERN. To the extent that another
ancillary agreement expressly provides for the transfer of an asset or an
assumption of a liability, the terms of such other ancillary agreement will
determine the manner of the transfer and assumption.
OBTAINING APPROVALS AND CONSENTS. We and Adaptec both agree to use all
reasonable commercial efforts to obtain any required consents, substitutions or
amendments required to novate or assign all rights and obligations under any
contracts that will be transferred in the separation.
NONRECURRING COSTS AND EXPENSES. Any nonrecurring costs and expenses that
are not allocated in the separation agreement, the assignment agreement or any
other ancillary agreement shall be the responsibility of the party that incurs
such costs and expenses.
SPECIFIC CLAIMS AND LITIGATION. The assignment agreement also provides that
we will assume and manage our pending litigation with Prassi Software USA, Inc.
See "Business--Legal Proceedings."
INDEMNIFICATION AND INSURANCE MATTERS AGREEMENT
GENERAL RELEASE OF PRE-SEPARATION CLAIMS. On the separation date, we will
release Adaptec and Adaptec will release us from any liabilities arising from
events occurring on or before the separation date, including events occurring in
connection with the activities to implement the separation and the distribution.
This provision will not impair either Adaptec or us from enforcing the master
separation agreement, any ancillary agreement or any arrangement specified in
any of these agreements.
INDEMNIFICATION. The indemnification and insurance matters agreement also
contains provisions governing indemnification. In general, we have agreed to
indemnify Adaptec from all liabilities arising:
- primarily from our business prior to the separation date unless caused by
the intentional and willful misconduct of an Adaptec employee;
- from our business after the separation date;
- from any of our liabilities or any of our contracts other than liabilities
caused by the intentional and willful misconduct of an Adaptec employee
prior to the separation date;
- from any breach by us of the master separation agreement or any ancillary
agreement; and
- from any untrue statement of a material fact or an omission to state a
material fact in this information statement.
Adaptec has agreed to indemnify us from all liabilities arising from:
- our business prior to the separation date to the extent that we have not
agreed to indemnify Adaptec;
- Adaptec's business other than the businesses transferred to us pursuant to
the master separation agreement; and
- any breach by Adaptec of the master separation agreement or any ancillary
agreement.
The indemnifying party will make all indemnification payments net of
insurance proceeds that the indemnified party receives. The indemnification and
insurance matters agreement also contains provisions governing notice and
indemnification procedures.
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INSURANCE MATTERS. In general, we will be responsible for obtaining and
maintaining our own insurance programs after the separation date.
ENVIRONMENTAL MATTERS. Adaptec has agreed to indemnify us from all
liabilities arising from environmental conditions existing as of the separation
date at facilities transferred to us, or which arise out of operations occurring
before the separation date at these facilities. Further, Adaptec has agreed to
indemnify us from all liabilities arising from environmental conditions
existing, or caused by operations occurring at any time, whether before or after
the separation date, at any Adaptec facility.
We have agreed to indemnify Adaptec from all liabilities arising from
environmental conditions caused by operations after the separation date at any
of the facilities transferred to us, and from environmental conditions at our
facilities arising from an event that occurs on or after the separation date.
After the separation, we will be responsible for all liabilities associated
with any environmental contamination caused by us, and Adaptec will be
responsible for all liabilities associated with any environmental contamination
caused by Adaptec.
MASTER PATENT OWNERSHIP AND LICENSE AGREEMENT
The master patent ownership and license agreement, or master patent
agreement, allocates rights relating to patents, patent applications and
invention disclosures. Under the master patent agreement, Adaptec will assign to
us ownership of specific patents, patent applications and invention disclosures.
We will have unrestricted rights to practice the assigned patents.
Under the master patent agreement, we will grant Adaptec a non-exclusive,
royalty-free patent license under some of the patents acquired by us from
Adaptec. This license will give Adaptec rights to practice those patents outside
the field reserved to us. Adaptec will have the right to transfer its license
with respect to a specific Adaptec product in connection with a transfer of
Adaptec's rights in that product.
The master patent agreement also contains a patent cross-license, whereby
each party will grant a license under its patents to the other party with
respect to functionality existing in the other party's current licensed
products.
MASTER TECHNOLOGY OWNERSHIP AND LICENSE AGREEMENT
The master technology ownership and license agreement, or master technology
agreement, allocates rights in non-patented intellectual property. In the master
technology agreement, Adaptec will assign to us specific technology and
trademarks related to our business. We will have unrestricted rights to use the
assigned technology and related trademarks. Adaptec will also license to us
specific technology and trademarks related to our business. We will have
unrestricted rights to use the licensed technology and related trademarks,
provided that we will sublicense source code contained in the licensed
technology to third parties only under provisions that preserve the
confidentiality of the source code. Adaptec will not grant any licenses to the
licensed technology to certain identified companies for a period of two years.
The master technology agreement will not obligate either us or Adaptec to
provide the other improvements that it makes, whether to its own technology or
to the other party's technology licensed or assigned to it under this agreement.
In the event of an acquisition of either party, the acquired party may
assign the master technology agreement.
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MASTER CONFIDENTIAL DISCLOSURE AGREEMENT
The master confidential disclosure agreement provides that we and Adaptec
agree not to disclose confidential information of the other except in specific
circumstances. We each agree not to use confidential information of the other
except as may be permitted in an ancillary agreement.
MASTER TRANSITIONAL SERVICES AGREEMENT
The master transitional services agreement, or services agreement, governs
corporate support services that Adaptec has agreed to provide to us such as
information technology systems, supply chain, human resources administration,
product order administration, customer service, buildings and facilities and
legal, finance and accounting services, each as specified and on the terms set
forth in the services agreement and in the schedules to the services agreement.
Specified charges for such services are typically the cost of providing the
services, plus 5%. The services agreement also will provide for the provision of
additional services identified from time to time after the separation date that
we reasonably believe were inadvertently or unintentionally omitted from the
specified services, or that are essential to effectuate an orderly transition
under the master separation agreement, so long as the provision of such services
would not significantly disrupt Adaptec's operations or significantly increase
the scope of Adaptec's obligations under the agreement.
EMPLOYEE MATTERS AGREEMENT
The employee matters agreement allocates liabilities and responsibilities
relating to the employees of Adaptec who will become our employees effective as
of the separation date and their participation in the benefits plans, including
stock plans, of us and Adaptec. Generally, all Adaptec employees that are
employees in Adaptec's software products group will become our employees on the
separation date. Generally, any liability with respect to Adaptec benefits plans
from the separation date to the distribution date will be borne by Adaptec. Any
liability incurred with respect to our benefits plans from the distribution date
and forward will be borne by us.
Until the distribution date, all of our eligible employees will generally
continue to participate in the Adaptec benefits plans on the same terms and
conditions to those applicable to Adaptec employees. We intend to establish our
own benefits plans for our employees that will become effective on or shortly
after the distribution date. These plans may be, but are not required to be,
comparable to the plans offered by Adaptec. We have the discretion to determine
the types of benefits plans that will be implemented as well as the level of
benefits that will be offered under our plans. Roxio will not assume any of the
options to purchase Adaptec common stock held by the Adaptec employees who will
become Roxio employees upon legal separation.
Our employees will continue to be eligible to participate in the Adaptec
employee stock purchase plan through the distribution date. As of the
distribution date, we will sponsor an employee stock purchase plan for our
employees and a stock option plan for employees and non-employee directors.
We and Adaptec have also agreed that, as of the distribution date, neither
of us will solicit or recruit the other's employees for a period of one year
following the distribution date.
TAX SHARING AGREEMENT
The tax sharing agreement allocates responsibilities for tax matters between
Adaptec and us. The tax sharing agreement will require us to pay Adaptec for the
incremental tax costs of our inclusion in consolidated, combined or unitary tax
returns with affiliated corporations. In determining these incremental costs,
the tax sharing agreement will take into account not only the group's
incremental tax payments to the Internal Revenue Service or other taxing
authorities, but also the incremental use of
68
tax losses of affiliates to offset our taxable income, and the incremental use
of tax credits of affiliates to offset the tax on our income.
The tax sharing agreement also requires us to indemnify Adaptec for certain
taxes and similar obligations that Adaptec could incur if the distribution does
not qualify for tax-free treatment due to the following events:
- an acquisition of a controlling interest in our stock after the
distribution;
- our failure to continue our business after the distribution;
- a repurchase of our stock; or
- other acts or omissions by us.
Each member of a consolidated group for United States federal income tax
purposes is jointly and severally liable for the group's federal income tax
liability. Accordingly, we could be required to pay a deficiency in the group's
federal income tax liability for a period during which we were a member of the
group even if the tax sharing agreement allocates that liability to Adaptec or
another member.
The tax sharing agreement also assigns responsibilities for administrative
matters such as the filing of returns, payment of taxes due, retention of
records and conduct of audits, examinations or similar proceedings.
REAL ESTATE MATTERS AGREEMENT
The real estate matters agreement addresses real estate matters relating to
the Adaptec leased and owned properties that Adaptec will transfer to or share
with us. The real estate matters agreement describes the manner in which Adaptec
will transfer or license to us various Adaptec leased or owned properties,
including:
- leases for portions of specified properties that Adaptec owns, including a
5-year lease of our corporate headquarters;
- assignments of Adaptec's leases for specified leased properties; and
- licenses permitting our short term use and occupancy of selected owned
sites.
The real estate matters agreement includes a description of each property to
be transferred or licensed to us for each type of transaction. The standard
forms of the proposed transfer documents, such as lease assignment, lease and
license, are contained in schedules to this agreement.
The real estate matters agreement also requires each of us to use reasonable
efforts to obtain any landlord consents required for the proposed transfers of
leased sites, including Adaptec's paying commercially reasonable consent fees,
if required by the landlords, and our agreeing to provide the security required
under the applicable leases.
The real estate matters agreement also provides that we will be required to
accept the transfer of all sites allocated to us, even if a site has been
damaged by a casualty before the separation date. Transfers with respect to
leased sites where the underlying lease is terminated due to casualty or action
by the landlord prior to the separation date will not be made, and neither party
will have any liability related thereto.
The real estate matters agreement provides that all reasonable costs
required to effect the transfers, including landlord consent fees and landlord
attorneys' fees, will be paid by Adaptec.
69
MANUFACTURING SERVICES AGREEMENT
The manufacturing services agreement, or manufacturing agreement, provides
that Adaptec will perform manufacturing services with respect to certain of our
products for a period of one year after the separation date. Adaptec will
manufacture products for us at Adaptec's cost, plus 10%. The initial service
fees are established in the manufacturing agreement and will be revised
quarterly to reflect changing costs. Adaptec will bill us for additional
expenses, such as freight, insurance and taxes, at actual cost plus 5%. We may
terminate the manufacturing agreement upon 60 days' notice. Upon termination, we
must purchase Adaptec's unused inventory of components, work in process and
finished goods relating to items previously manufactured by Adaptec for us.
Adaptec warrants the media upon which our software products are reproduced
for 90 days from the later of the date of delivery or pull from our warehouse.
Adaptec will replace our products that are reproduced on defective media and
returned in accordance with Adaptec's product return procedures.
The manufacturing agreement further provides that we will defend Adaptec for
claims of intellectual property infringement brought against Adaptec based upon
performance of the manufacturing services agreement. Each party will defend the
other party against claims arising from its negligence or that of its agents and
we will defend Adaptec for claims based upon the defective design or code of our
products.
INTERNATIONAL TRANSFER OF ASSETS AGREEMENT
The transfer of CeQuadrat and the intellectual property relating to our
foreign operations will be accomplished through a transfer of assets agreement
entered into between international subsidiaries. Under the general assignment
and assumption agreement, Adaptec will then transfer to us ownership of all
outstanding capital stock of the subsidiary that owns CeQuadrat and the
intellectual property relating to our foreign operations.
70
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 20, 2001 by:
- each of our directors and the executive officers named in the Summary
Compensation Table;
- each person, or group of affiliated persons, who is known by us to
beneficially own 5% or more of our common stock; and
- all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock underlying stock options held by that person that are
currently exercisable or exercisable within 60 days of April 20, 2001 are deemed
beneficially owned. These shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of any other person. Percentage
ownership is based on 16,500,000 shares of common stock outstanding on
April 20, 2001.
Unless otherwise indicated, the address of each of the individuals named
below is: c/o Roxio, Inc., 461 S. Milpitas Blvd., Milpitas, California 95035.
NUMBER OF SHARES PERCENT
BENEFICIALLY BENEFICIALLY
BENEFICIAL OWNER OWNED OWNED
- ---------------- ---------------- ------------
Adaptec, Inc. .............................................. 16,500,000 100%
691 S. Milpitas Blvd.,
Milpitas, CA 95035
Robert N. Stephens ......................................... 16,500,000(1) 100%
c/o Adaptec, Inc.
691 S. Milpitas Blvd.,
Milpitas, CA 95035
Thomas J. Shea.............................................. 69,403(2) *
R. Elliot Carpenter......................................... 11,649(2) *
Wm. Christopher Gorog....................................... -- --
Richard J. Boyko............................................ -- --
Joseph C. Kaczorowski....................................... -- --
Robert Rodin................................................ -- --
All directors and executive officers as a group 16,581,052(3) 100%
(7 persons)(3)............................................
- ------------------------
* Represents holdings of less than 1%.
(1) Includes 16,500,000 shares owned by Adaptec, of which, Mr. Stephens is the
President and Chief Executive Officer.
(2) Represents options that are currently exercisable or exercisable within 60
days of April 20, 2001.
(3) Includes those shares set forth in notes (1) and (2) above.
71
DESCRIPTION OF CAPITAL STOCK
GENERAL
We are authorized to issue 100,000,000 shares of common stock, $.001 par
value, and 10,000,000 shares of preferred stock, $.001 par value. The following
description of our capital stock is subject to and qualified in its entirety by
our certificate of incorporation and bylaws, which are included as exhibits to
the registration statement of which this information statement forms a part, and
by the provisions of applicable Delaware law.
COMMON STOCK
Prior to the distribution, there will be 16,500,000 shares of common stock
outstanding, all of which will be held of record by Adaptec.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding preferred stock, the holders of common stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the board of directors out of funds legally available for that
purpose. See "Dividend Policy." In the event of our liquidation, dissolution or
winding up, the holders of common stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior distribution
rights of preferred stock, if any, then outstanding. The holders of common stock
have no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions applicable to our common stock.
PREFERRED STOCK
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series, which may be
greater than the rights of the common stock. It is not possible to state the
actual effect of the issuance of any shares of preferred stock upon the rights
of holders of the common stock until the board of directors determines the
specific rights of the holders of such preferred stock. However, the effects
might include, among other things:
- restricting dividends on our common stock;
- diluting the voting power of our common stock;
- impairing the liquidation rights of our common stock; or
- delaying or preventing a change in control of us without further action by
our stockholders.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE, BYLAWS AND DELAWARE LAW
Some provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult:
- acquisition of us by means of a tender offer;
- acquisition of us by means of a proxy contest or otherwise; or
- removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits of increased
protection give us the potential ability to negotiate with the proponent of an
unfriendly or unsolicited
72
proposal to acquire or restructure us and outweigh the disadvantages of
discouraging such proposals because negotiation of such proposals could result
in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term, one
class being elected each year by our stockholders. See "Management--Board
Structure and Compensation." Our directors may be removed from office only for
cause by a majority of our stockholders. This system of electing and removing
directors may discourage a third party from making a tender offer or otherwise
attempting to obtain control of us, because it generally makes it more difficult
for stockholders to replace a majority of the directors.
STOCKHOLDER MEETINGS. Under our bylaws, only the board of directors, the
chairman of our board of directors, and until Adaptec owns less than 50% of our
common stock, Adaptec may call special meetings of stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board of directors.
DELAWARE ANTI-TAKEOVER LAW. We are subject to Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder" is
a person who, together with affiliates and associates, owns or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation's voting stock. The existence of this provision may
have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT. Our bylaws eliminate
the right of stockholders other than Adaptec to act by written consent without a
meeting. Adaptec will lose this right once it owns less than 50% of our common
stock.
ELIMINATION OF CUMULATIVE VOTING. Our certificate of incorporation and
bylaws do not provide for cumulative voting in the election of directors.
UNDESIGNATED PREFERRED STOCK. The authorization of undesignated preferred
stock makes it possible for the board of directors to issue preferred stock with
voting or other rights or preferences that could impede the success of any
attempt to change control of us. These and other provisions may have the effect
of deferring hostile takeovers or delaying changes in control or management of
us.
AMENDMENT OF CHARTER PROVISIONS. The amendment of any of the above
provisions would require approval by holders of at least 80% of the outstanding
common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Mellon Investor
Services. The transfer agent's address is OverPeck Centre, 85 Challenger Road,
Ridgefield Park, NJ 07660. The transfer agent's telephone number is
(800) 522-6645 (Domestic) or +1 (201) 329-8354 (International), TDD
(800) 232-5469 (Domestic) or +1 (201) 329-8354 (International). The transfer
agent's email address is shrrelations@mellon-investor.com.
73
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement under the Securities Exchange Act of 1934, as amended, with respect to
the shares of common stock being issued in the distribution. This information
statement does not contain all of the information set forth in the registration
statement and the exhibits and schedules that were filed with the registration
statement. Certain items are omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. For further information
with respect to us and our common stock, reference is made to the registration
statement and the exhibits and any schedules filed with the registration
statement. This information statement contains a summary of the material terms
of contracts or other documents that were filed as exhibits to the registration
statement. Statements contained in this information statement about the contents
of any of these contracts or any other documents are not necessarily complete. A
copy of the registration statement and the exhibits and schedules that were
filed with the registration statement may be inspected without charge at the
public reference facilities maintained by the Securities and Exchange Commission
in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and copies of all
or any part of the registration statement may be obtained from the Securities
and Exchange Commission upon payment of the prescribed fee. The Securities and
Exchange Commission maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The address of the
web site is http://www.sec.gov.
Upon the distribution, we will become subject to the information and
periodic reporting requirements of the Securities Exchange Act of 1934 and, in
accordance with the requirements of the Securities Exchange Act, will file
periodic reports, proxy statements and other information with the Securities and
Exchange Commission. These periodic reports, proxy statements and other
information will be available for inspection and copying at the regional
offices, public reference facilities and web site of the Securities and Exchange
Commission referred to above.
74
ROXIO, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Changes in Owner's Net
Investment/Stockholder's Equity........................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
UNAUDITED PRO FORMA COMBINED
FINANCIAL INFORMATION
Unaudited Pro Forma Combined Financial Information.......... F-28
Unaudited Pro Forma Combined Statement of Operations........ F-29
Notes to Unaudited Pro Forma Combined Financial
Information............................................... F-30
CEQUADRAT GMBH CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-31
Consolidated Balance Sheets................................. F-32
Consolidated Statements of Operations....................... F-33
Consolidated Statements of Shareholders' Equity............. F-34
Consolidated Statements of Cash Flows....................... F-35
Notes to Consolidated Financial Statements.................. F-36
WILD FILE, INC. FINANCIAL STATEMENTS
Report of Independent Accountants........................... F-43
Balance Sheets.............................................. F-44
Statements of Operations.................................... F-45
Statements of Stockholders' Equity.......................... F-46
Statements of Cash Flows.................................... F-47
Notes to Financial Statements............................... F-48
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Owner/Stockholder
of Roxio, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in owner's/stockholder's net
investment and of cash flows present fairly, in all material respects, the
financial position of Roxio, Inc. at March 31, 1999 and 2000, and the results of
its operations and its 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 consolidated 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 that our
audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for business process re-engineering costs in
1998.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 28, 2000
F-2
ROXIO, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
MARCH 31,
------------------- DECEMBER 31,
1999 2000 2000
-------- -------- ------------
(UNAUDITED)
ASSETS
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $109, $575 and $89.......................... $ 4,597 $13,521 $23,546
Inventories............................................... 744 820 1,603
Prepaid expenses.......................................... 257 1,273 1,543
Income taxes receivable from parent....................... 1,219 -- --
Deferred income taxes..................................... 1,747 670 1,859
------- ------- -------
Total current assets.................................... 8,564 16,284 28,551
Property and equipment, net................................. 435 972 1,371
Goodwill and other intangibles, net......................... 1,250 40,610 30,587
------- ------- -------
$10,249 $57,866 $60,509
======= ======= =======
LIABILITIES AND OWNER'S NET INVESTMENT/STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,923 $ 2,260 $ 4,910
Income taxes payable to parent............................ -- 3,211 5,067
Accrued liabilities....................................... 1,933 4,271 4,954
------- ------- -------
Total current liabilities............................... 3,856 9,742 14,931
------- ------- -------
Long term liabilities:
Deferred income taxes..................................... -- 3,376 2,532
------- ------- -------
3,856 13,118 17,463
------- ------- -------
Commitments and contingencies (Notes 4 and 8)
Owner's net investment/stockholder's equity:
Common stock, $0.001 par value; 100,000 shares authorized;
none, none and 16,500 issued and outstanding............ -- -- 17
Additional paid-in capital................................ -- -- 16
Deferred compensation..................................... -- (2,444) (500)
Accumulated other comprehensive (loss) income............. (165) 369 244
Owner's net investment.................................... 6,558 46,823 43,269
------- ------- -------
Total owner's net investment/stockholder's equity....... 6,393 44,748 43,046
------- ------- -------
$10,249 $57,866 $60,509
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
ROXIO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NINE MONTHS
ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ -------------------
1998 1999 2000 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
Net revenues............................................ $38,654 $43,129 $77,791 $48,344 $85,568
Cost of revenues........................................ 8,875 9,000 15,652 10,435 16,840
------- ------- ------- ------- -------
Gross profit.......................................... 29,779 34,129 62,139 37,909 68,728
------- ------- ------- ------- -------
Operating expenses:
Research and development (excludes stock-based
compensation charges of $1,944 for the nine months
ended December 31, 2000; $0 for the nine months
ended December 31, 1999; $149 for the year ended
March 31, 2000 and $0 for the years ended
March 31, 1999 and 1998 respectively)............... 6,835 8,621 13,917 8,922 13,052
Sales and marketing................................... 10,516 17,715 18,548 14,584 23,682
General and administrative (excludes stock-based
compensation charges of $227 for the nine months
ended December 31, 2000 and $0 for the nine months
ended December 31, 1999 and the years ended
December 31, 2000, 1999 and 1998 respectively)...... 2,917 4,020 9,716 7,491 9,718
Amortization of goodwill and other intangibles........ 1,250 1,250 6,958 4,464 11,581
Stock based compensation charges...................... -- -- 149 -- 2,171
Write-off of acquired in-process technology........... -- -- 3,393 3,016 --
------- ------- ------- ------- -------
Total operating expenses............................ 21,518 31,606 52,681 38,477 60,204
------- ------- ------- ------- -------
Income (loss) from operations before provision (benefit)
for income taxes and cumulative effect of a change in
accounting principle.................................. 8,261 2,523 9,458 (568) 8,524
Provision for income tax (expense)...................... (1,822) (413) (4,288) (26) (3,033)
------- ------- ------- ------- -------
Income (loss) before cumulative effect of a change in
accounting principle.................................. 6,439 2,110 5,170 (594) 5,491
Cumulative effect of a change in accounting principle,
net of tax benefit.................................... 345 -- -- -- --
------- ------- ------- ------- -------
Net income (loss)....................................... $ 6,094 $ 2,110 $ 5,170 $ (594) $ 5,491
======= ======= ======= ======= =======
Basic and diluted net income (loss) per share........... $ 0.37 $ 0.13 $ 0.31 $ (0.04) $ 0.33
Weighted average shares used in computing basic and
diluted net income (loss) per share................... 16,500 16,500 16,500 16,500 16,500
------- ------- ------- ------- -------
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
ROXIO, INC
CONSOLIDATED STATEMENTS OF CHANGES IN OWNER'S
NET INVESTMENT/STOCKHOLDER'S EQUITY
(IN THOUSANDS)
ACCUMULATED TOTAL OWNER'S
COMMON STOCK ADDITIONAL OTHER OWNER'S NET INVESTMENT
------------------- PAID-IN DEFERRED COMPREHENSIVE NET /STOCKHOLDERS
SHARES AMOUNT CAPITAL COMPENSATION INCOME INVESTMENT EQUITY
-------- -------- ---------- ------------- -------------- ----------- --------------
Balance at April 1, 1997....... -- $-- $-- $ -- $ -- $ 10,047 $ 10,047
Components of comprehensive
income:
Net income................... -- -- -- -- -- 6,094 6,094
Foreign currency translation
adjustment................. -- -- -- -- (430) -- (430)
------ --- --- ------- ----- -------- --------
Total comprehensive
income................. -- -- -- -- (430) 6,094 5,664
------ --- --- ------- ----- -------- --------
Net cash transfers to
Adaptec.................... -- -- -- -- -- (1,207) (1,207)
------ --- --- ------- ----- -------- --------
Balance at March 31, 1998...... -- -- -- -- (430) 14,934 14,504
------ --- --- ------- ----- -------- --------
Components of comprehensive
income:
Net income................. -- -- -- -- -- 2,110 2,110
Foreign currency
translation adjustment... -- -- -- -- 265 -- 265
------ --- --- ------- ----- -------- --------
Total comprehensive
income................. -- -- -- -- 265 2,110 2,375
------ --- --- ------- ----- -------- --------
Net cash transfers to
Adaptec.................... -- -- -- -- -- (10,486) (10,486)
------ --- --- ------- ----- -------- --------
Balance at March 31, 1999...... -- -- -- -- (165) 6,558 6,393
------ --- --- ------- ----- -------- --------
Components of comprehensive
income:
Net income................... -- -- -- -- -- 5,170 5,170
Foreign currency translation
adjustment................. -- -- -- -- 534 -- 534
------ --- --- ------- ----- -------- --------
Total comprehensive
income................... -- -- -- -- 534 5,170 5,704
------ --- --- ------- ----- -------- --------
Transfer of net assets from
Adaptec related to the
Cequadrat acquisition...... -- -- -- -- -- 19,477 19,477
Transfer of net assets and
deferred compensation from
Adaptec related to the Wild
File acquisition........... -- -- -- (2,593) -- 26,299 23,706
Amortization of deferred
compensation............... -- -- -- 149 -- -- 149
Net cash transfers to
Adaptec.................... -- -- -- -- -- (10,681) (10,681)
------ --- --- ------- ----- -------- --------
Balance at March 31, 2000...... -- -- -- (2,444) 369 46,823 44,748
------ --- --- ------- ----- -------- --------
Components of comprehensive
income:
Net income (unaudited)..... -- -- -- -- -- 5,491 5,491
Foreign currency
translation adjustment
(unaudited).............. -- -- -- -- (125) -- (125)
------ --- --- ------- ----- -------- --------
Total comprehensive
income
(unaudited)............ -- -- -- -- (125) 5,491 5,366
------ --- --- ------- ----- -------- --------
Stock based compensation
charges (unaudited)........ -- -- -- 1,944 -- 227 2,171
Net cash transfers to Adaptec
(unaudited)................ -- -- -- -- -- (9,239) (9,239)
------ --- --- ------- ----- -------- --------
Issuance of common stock
(unaudited)................ 16,500 17 16 -- -- (33) --
------ --- --- ------- ----- -------- --------
Balance at December 31, 2000
(unaudited).................. 16,500 $17 $16 $ (500) $ 244 $ 43,269 $ 43,046
====== === === ======= ===== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
ROXIO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ ----------------------
1998 1999 2000 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 6,094 $ 2,110 $ 5,170 $ (594) $ 5,491
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Cumulative effect of a change in
accounting principle, net of tax
benefit............................... 345 -- -- -- --
Depreciation and amortization........... 1,362 1,358 7,308 4,616 12,382
Stock based compensation charges........ -- -- 149 -- 2,171
Provision for doubtful accounts......... 115 (136) 897 (70) 36
Write-off of acquired in-process
technology............................ -- -- 3,393 3,016 --
Deferred income taxes................... 1,394 1,632 1,077 (397) (2,033)
Changes in assets and liabilities:
Accounts receivable................... (7,691) 5,737 (6,057) (4,049) (10,282)
Inventories........................... (1,295) 880 70 296 (801)
Prepaid expenses...................... -- (214) (679) (824) (276)
Accounts payable...................... 525 1,261 (465) 1,730 2,711
Income taxes payable (receivable) to
(from) parent....................... 1,587 (1,609) 4,125 796 1,899
Accrued liabilities................... (1,215) (533) (4,206) (945) 699
------- -------- -------- ------- --------
Net cash provided by (used in)
operating activities.............. 1,221 10,486 10,782 3,575 11,997
------- -------- -------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....... (14) -- (101) (80) (1,233)
Purchase of other intangible assets....... -- -- -- -- (1,525)
------- -------- -------- ------- --------
Net cash (used in) investing
activities........................ (14) -- (101) (80) (2,758)
------- -------- -------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash transfers to Adaptec............. (1,207) (10,486) (10,681) (3,495) (9,239)
------- -------- -------- ------- --------
Net cash used in financing
activities........................ (1,207) (10,486) (10,681) (3,495) (9,239)
------- -------- -------- ------- --------
Change in cash and cash equivalents......... -- -- -- -- --
Cash and cash equivalents at beginning of
period.................................... -- -- -- -- --
------- -------- -------- ------- --------
Cash and cash equivalents at end of
period.................................... $ -- $ -- $ -- $ -- $ --
======= ======== ======== ======= ========
NON-CASH DISCLOSURE OF INVESTING ACTIVITIES:
Transfer of net assets from Adaptec
related to the CeQuadrat acquisition.... $ -- $ -- $ 19,477 $19,477 $ --
======= ======== ======== ======= ========
Transfer of net assets from Adaptec
related to the Wild File acquisition.... $ -- $ -- $ 26,299 $ -- $ --
======= ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
On June 8, 2000, Adaptec, Inc. ("Adaptec") announced a plan to create a
separate company comprised of substantially all of its software segment,
subsequently named Roxio, Inc. ("Roxio" or the "Company"). Roxio is a provider
of digital media software solutions that enable individuals to personalize and
store music, photos, video and data onto recordable compact discs ("CDs"). The
Company also provides system protection applications that allow users to protect
against viruses, system crashes and data losses by allowing their computer to
revert to an earlier point in time. The Company's CD recordable software
offerings are available as stand-alone products, and also ship built-in or
bundled with CD recordable drives in the desktop market.
Roxio was incorporated in Delaware in August 2000 as a wholly-owned
subsidiary of Adaptec. In August 2000, Roxio authorized and issued 1,000 shares
of $.001 par value common stock to Adaptec.
Effective November 10, 2000, Roxio's Board of Directors authorized a
33,000-for-one stock split resulting in an increase in common stock issued and
outstanding to 33 million shares. Effective April 13, 2001 Roxio's Board of
Directors authorized a one for two reverse stock split resulting in a decrease
in common stock issued and outstanding to 16.5 million shares. This amount has
been presented as common stock in the balance sheet. Shares outstanding and net
income per share have been adjusted for all periods presented.
Adaptec and Roxio have entered into a Master Separation and Distribution
Agreement (the "Separation Agreement") under which Adaptec will contribute at
legal separation (the "Separation Date") $30,000,000 and any cash held by
Roxio's overseas subsidiaries to fund working capital as a stand-alone entity.
Additionally, Adaptec will transfer to Roxio, on the separation date,
substantially all of the assets and liabilities that appear on Roxio's
consolidated balance sheet.
Following legal separation, Adaptec intends to distribute (the "Distribution
Date") all of the shares of Roxio except for 190,955 shares that will continue
to be held by Adaptec for issuance upon the exercise of an outstanding warrant
to purchase Adaptec common stock to Adaptec's stockholders on a pro rata basis
which distribution is intended to qualify as a tax-free transaction under
Section 355 and 368(1)(D) of the Internal Revenue Code.
BASIS OF PRESENTATION
The consolidated financial statements present the results of operations,
financial position, changes in owner's net investment and cash flows applicable
to the operations of the Company and its subsidiaries, after elimination of
intercompany transactions. The consolidated financial statements of the Company
are derived from the historic books and records of Adaptec. Certain software
products directly related to Adaptec's hardware products which were historically
reflected in the software segment's results of operations in Adaptec's segment
reporting in accordance with Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information," will be retained by Adaptec going forward. As such, the revenue,
cost of revenues, operating expenses and assets and liabilities related to these
products have not been included in these financial statements.
During fiscal 2000, Adaptec purchased CeQuadrat GmbH ("CeQuadrat") and Wild
File, Inc. ("Wild File") and allocated the assets and liabilities to Roxio.
These acquisitions were accounted for
F-7
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
using the purchase method of accounting. Accordingly, the results of operations
of these companies and estimated fair value of assets acquired and liabilities
assumed were included in the Company's consolidated financial statements as of
the respective purchase dates. There were no significant differences between the
accounting policies of the Company and these acquired companies. See
Note 3--Business Combinations.
Prior to its separation from Adaptec, the Company did not maintain separate
corporate treasury, legal, tax, purchasing and other similar corporate support
functions. For purposes of preparing the accompanying financial statements,
certain Adaptec corporate costs were allocated to the Company using the
allocation methods described in Note 4. Roxio and Adaptec management believe
that the allocation methods used are reasonable and reflective of the Company's
proportionate share of such expenses. However, the financial information
included herein may not reflect the financial position, operating results,
changes in owner's net investment and cash flows of the Company in the future or
what they would have been had the Company been a separate, stand-alone entity
during the periods presented.
UNAUDITED INTERIM RESULTS
The accompanying interim financial statements as of December 31, 2000 and
for the nine-month periods ended December 31, 1999 and 2000 are unaudited. In
the opinion of management, these unaudited interim statements have been prepared
on the same basis as the audited financial statements, and include all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair statement of results of the periods. The financial data and other
information disclosed in the notes to the financial statements for these periods
are unaudited.
Roxio's fiscal quarters end on a Friday and are 13 weeks in length. For
presentation purposes, the Company has indicated its third quarter of fiscal
2001 as having ended on December 31, 2000, whereas in fact, the Company's third
quarter of fiscal 2001 ended on December 29, 2000. The results of operations for
the nine months ended December 31, 2000 are not necessarily indicative of the
results to be expected for the entire year.
FOREIGN CURRENCY TRANSLATION
For foreign divisions whose functional currency is the local currency, the
Company translates assets and liabilities to U.S. dollars using period-end
exchange rates and translates revenues and expenses using average exchange rates
during the period. Exchange gains and losses arising from translation of foreign
entity financial statements are included as a component of other comprehensive
income.
For foreign divisions whose functional currency is the U.S. dollar, monetary
assets and liabilities are re-measured at the period end or historical rates as
appropriate. Revenues and expenses are re-measured at the average rate during
the period. Currency translation gains and losses are recognized in current
operations and have not been material to the Company's operating results in the
periods presented.
F-8
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Historically, Adaptec has managed cash and cash equivalents on a centralized
basis. Cash receipts associated with the Company's business have been
transferred to Adaptec and Adaptec has funded the Company's disbursements. All
changes in cash and cash equivalents have been included in owner's net
investment for all periods presented.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For the Company's financial instruments, including accounts receivable and
accounts payable, the carrying amounts approximate fair market value due to
their short maturities.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of trade accounts receivable.
The Company sells its products primarily 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. The
Company has historically not experienced significant losses from its accounts
receivable with the exception of a write-off of approximately $500,000 in fiscal
2000 due to the bankruptcy of one customer.
F-9
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
The following individual customers accounted for a significant portion of
gross revenue:
NINE MONTHS
YEARS ENDED ENDED
MARCH 31, DECEMBER 31,
------------------------------ ------------
1998 1999 2000 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
Company A................................... 15% 12% 19% 22% 19%
Company B................................... 8% 16% 10% 10% 11%
The following individual customers accounted for a significant portion of
total gross accounts receivable:
MARCH 31,
------------------- DECEMBER 31,
1999 2000 2000
-------- ---- ------------
(UNAUDITED)
Company A............................................ 8% 2% 7%
Company B............................................ 8% 14% 29%
GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles are amortized on the straight-line method
over the estimated useful lives of three years. The Company periodically
evaluates any possible impairment of long-lived assets using estimates of
undiscounted future cash flows in accordance with SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of." No
impairments have been identified or recorded in any periods presented.
Goodwill and other intangibles amortization was $1.3 million, $1.3 million,
and $7.0 million for the years ended 1998, 1999 and 2000 respectively, and
$4.5 million and $11.6 million for the nine months ended December 31, 1999 and
December 31, 2000, respectively. See Note 3 regarding the acquisitions of
CeQuadrat and Wild File during fiscal 2000.
The Company has adopted the American Institute of Certified Public
Accountants (AICPA) Statement of Position No. 98-1 "Accounting For Cost of
Computer Software Developed or Obtained For Internal Use" and "Emerging Issues
Task Force" Issue 00-2 "Accounting For Website Development Costs." In accordance
with SOP 98-1 and EITF 00-2 the Company has capitalized website development
costs totaling $1.5 million during the nine-month period ended December 31,
2000. Capitalized costs will be amortized over the estimated useful life of
three years.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," requires the disclosure of
comprehensive income to reflect changes in equity that result from transactions
and economic events from non-owner sources. Accumulated other comprehensive
income for the periods presented represents foreign currency translation items
associated with the Company's Japanese and German operations. No tax effect has
been provided on the foreign currency translation items for any period shown, as
the undistributed earnings of the Company's foreign investments will continue to
be reinvested.
F-10
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
REVENUE RECOGNITION
The Company's revenue recognition policy is in accordance AICPA Statement of
Position No. 97-2, "Software Revenue Recognition," as amended. The Company
primarily sells its software products through two channels: OEMs and
distributors. For software product sales to OEMs, revenue is recognized based on
reported product shipments from OEMs to their customers provided that all fees
are fixed or determinable, evidence of an arrangement exists and collectibility
is probable.
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.
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 a direct reduction of revenue and accounts
receivable. Costs related to post-contract customer support ("PCS") are accrued
at the date the related revenue is recognized. PCS obligations relate to
telephone support and minor bug fixes downloadable from the Company's website.
As no separate charge is made for the PCS and the PCS is available for a period
of less than one year, the Company does not ascribe any value to the PCS or
defer any portion of it.
For direct software product sales to end users, revenue is recognized upon
shipment by the Company to the end users.
PRODUCT DEVELOPMENT COSTS
Costs for the development of new software are expensed as incurred until
technological feasibility has been established, at which time any additional
development costs would be capitalized in accordance with SFAS 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed."
Roxio believes its current process for developing software is essentially
completed concurrently with the establishment of technological feasibility;
accordingly, no costs have been capitalized to date.
ADVERTISING COSTS
Advertising costs are expensed as incurred through direct spending and
allocations by Adaptec and were approximately $2.2 million, $4.5 million and
$3.8 million in fiscal 1998, 1999 and 2000, respectively. See Note 4 regarding
allocated costs.
INCOME TAXES
As of March 31, 1998, 1999, 2000 and December 31, 2000, the Company was not
a separate taxable entity for federal, state or local income tax purposes and
its operations are included in the consolidated Adaptec tax returns. The
Company's tax provision has been prepared in accordance with SFAS No. 109,
"Accounting for Income Taxes," on a separate return basis. Accordingly, no tax
benefit for the Company's portion of Adaptec's net operating losses has been
recognized.
F-11
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
Deferred taxes result from differences between the financial and tax bases
of the Company's assets and liabilities and are adjusted for changes in tax
rates and tax laws when changes are enacted. Valuation allowances are recorded
to reduce deferred tax assets when it is more likely than not that a tax benefit
will not be realized by the Company.
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 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 Adaptec'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. Adaptec's policy is to grant options with an exercise price equal
to the quoted market price of its common stock on the grant date. Accordingly,
no compensation expense has been recognized in the Company's Consolidated
Statement of Operations, except as described in Note 6 relating to options
committed to employees in Roxio common stock and in Note 3 relating to Adaptec
restricted common stock issued to certain Wild File employees. 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. No such equity instruments have been
issued.
NET INCOME PER SHARE
In August 2000, Roxio issued 1,000 shares of common stock, all of which is
owned by Adaptec. In November 2000, Roxio effected a stock split resulting in
the number of outstanding shares increasing to 33 million. Subsequently in
April 2001, Roxio effected a one for two reverse stock split resulting in the
number of outstanding shares decreasing to 16.5 million. Historically, basic net
income per share is presented in accordance with SFAS 128 "Earnings Per Share,"
based upon the 16.5 million shares. Dilutive net income per share is computed
using the treasury stock method and taking into account the dilutive effect of
the 1.15 million Roxio stock options committed at December 20, 2000 for grants
at legal separation. As the effect of these stock options is antidilutive, both
basic and diluted average shares outstanding for the nine months ended
December 31, 2000 are 16.5 million shares.
CHANGE IN ACCOUNTING POLICY FOR BUSINESS PROCESS REENGINEERING COSTS
On November 20, 1997, the Emerging Issues Task Force ("EITF") issued EITF
Issue 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 Issue 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 Issue No. 97-13 require that companies that had
previously capitalized such business process reengineering costs write-off any
unamortized amounts and report a cumulative effect of a change in
F-12
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
accounting principle. In fiscal 1998, the cumulative effect of the change
allocated to the Company by Adaptec was to decrease net income by $345,000 (net
of tax benefit of $115,000). See Note 4 regarding allocated costs.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") 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 measurements of those instruments at
fair value. In June 1999, the FASB 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. In
June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities--an Amendment of FASB Statement
No. 133," which amends the accounting and reporting standards for certain
derivative instruments and certain hedging activities. The Company will adopt
these statements in its first quarter of fiscal 2002, and is in the process of
determining the impact that adoption will have on its financial statements.
In December 1999, the Securities and Exchange Commission issued SAB
No. 101, "Revenue Recognition in Financial Statements." In June 2000, the SEC
released SAB 101B which defers reporting the effects of the adoption of SAB 101
until the fourth fiscal quarter of fiscal 2002. SAB No. 101 provides guidance on
applying generally accepted accounting principles 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 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 January 12, 2000.
Management has adopted this interpretation. The impact of FIN No. 44 did not
have a material effect on the financial position or results of operations of the
Company.
F-13
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BALANCE SHEET DETAIL:
MARCH 31,
------------------- DECEMBER 31,
(IN THOUSANDS) 1999 2000 2000
- -------------- ---- ---- ------------
(UNAUDITED)
Inventories:
Raw materials.................................... $ 156 $ 114 $ 8
Work-in-process.................................. 53 23 241
Finished goods................................... 535 683 1,354
------ ------ ------
$ 744 $ 820 $1,603
====== ====== ======
LIFE
-------------
Property and equipment:
Machinery and equipment.......................... 3-5 years $ 68 $ 746 $1,800
Furniture and fixtures........................... 3-8 years 835 863 975
Leasehold improvements........................... Life of lease -- 32 32
------ ------ ------
903 1,641 2,807
Less: Accumulated depreciation and
amortization................................... 468 669 1,436
------ ------ ------
Property and equipment, net........................ $ 435 $ 972 $1,371
====== ====== ======
Accrued liabilities:
Accrued compensation and related taxes........... $ 493 $1,006 $2,236
Accrued technical support........................ 969 1,265 1,410
Accrued royalties................................ 155 525 197
Acquisition related.............................. -- 425 --
Other............................................ 316 1,050 1,111
------ ------ ------
$1,933 $4,271 $4,954
====== ====== ======
NOTE 3--BUSINESS COMBINATIONS:
ACQUISITION OF CEQUADRAT
On July 1, 1999, Adaptec acquired CeQuadrat, a developer of CD recordable
software products, for $24.0 million in cash paid by Adaptec. The net assets
acquired (excluding cash acquired) were assumed to have been contributed to the
Company by Adaptec at the date of acquisition. The Company incurred $300,000 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. The results of operations and the estimated assets
acquired and liabilities assumed were included in the Company's financial
statements as of the date the net assets were assumed to have been contributed
by Adaptec. The allocation of the purchase price to the tangible and
identifiable
F-14
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS COMBINATIONS: (CONTINUED)
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 liabilities (excluding cash acquired and
retained by Adaptec of $4,815)............................ $(4,692)
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..................................... $19,477
=======
The net tangible liabilities were comprised primarily of receivables offset
by accrued liabilities. Roxio 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 recordable software, next generation professional-oriented
CD recordable software and CD backup software; the amount of in-process
technology allocated to each of the projects was approximately $600,000,
$2.2 million and $200,000, 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 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 expense, research and development ("R&D") expenses, third party
license fees, royalty costs and income taxes from those projects. Roxio believes
the assumptions used in the valuation as described below were reasonable at the
time of the acquisition. R&D expenses excluded costs to bring acquired
in-process projects to technological feasibility.
NET REVENUES: The estimated net revenues were based on Roxio management
projections of the acquired in-process projects for the next generation
consumer-oriented CD recordable software, next generation professional-oriented
CD recordable 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 acquired in-process technology products began in the second half of fiscal
2000 and are expected to peak in mid-fiscal 2001. Anticipated annual net
revenues will decline rapidly as new products and technology become available
and fully replace the in-process technology products in the market 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 Roxio and its competitors.
F-15
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS COMBINATIONS: (CONTINUED)
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, an assessment of specific product results including both
historical and expected direct expense levels and general industry metrics was
conducted.
GROSS MARGINS: Projected gross margins were based on CeQuadrat's historical
margins, which were in line with Roxio's gross margins.
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
decrease in later years as total net revenues increase to account for economies
of scale.
R&D EXPENSES: Estimated R&D expenses consist of the cost 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 one to
two percent 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 the historical tax rate in Germany where the
majority of the anticipated future operations will take place.
ROYALTY RATE: Roxio 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 Roxio's expertise in the
CD recordable 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. Roxio estimated, that as of the acquisition date, the
next generation consumer-oriented CD recordable software, next generation
professional-oriented CD recordable software and the CD backup software projects
were 82%, 69% and 82% complete, respectively, and the estimated costs to
complete the projects were approximately $100,000 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 recordable software and the CD backup software began
F-16
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS COMBINATIONS: (CONTINUED)
shipping in the third quarter of fiscal 2000. The next generation
consumer-oriented CD recordable software will not be commercially released.
ACQUISITION OF WILD FILE
On March 11, 2000, Adaptec acquired Wild File, a supplier of continuous
backup and system recovery software. In consideration, Adaptec paid
$13.2 million in cash, issued 392,000 shares of Adaptec common stock valued at
$17.1 million and assumed stock options valued at $800,000. The common stock
issued, including the restricted stock discussed below, was valued in accordance
with EITF 95-19, Determination of the Measurement Date for the Market Price of
Securities Issued in a Purchase Business Combination, using the average of
market value of Adaptec's common stock for several days prior to the date of the
consummation of the acquisition. The options assumed were valued using the
Black-Scholes valuation model. Included with the shares issued was 59,000 shares
of restricted Adaptec common stock valued at $2.6 million to certain Wild File
employee shareholders as incentives for continued employment. These restricted
shares were issued as compensation for services to be provided subsequent to the
date of the acquisition, and as such, in accordance with EITF No. 95-8,
Accounting for Contingent Consideration Paid to the Shareholders of an Acquired
Enterprise in a Purchase Business Combination, the value of the shares were
recorded as deferred compensation. The restricted common stock vests monthly
over one year from the date of acquisition and is being amortized over the
vesting period. At March 31, 2000, $2.4 million remained in deferred
compensation, net of $200,000 of amortization recorded subsequent to the
issuance date through March 31, 2000. The net assets acquired (excluding cash
acquired) were assumed to have been contributed to the Company by Adaptec at the
date of acquisition. 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 $400,000 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. The results of operations and the estimated assets
acquired and liabilities assumed were included in the Company's financial
statements as of the date the net assets were assumed to have been contributed
by Adaptec. The allocation of the purchase price to the tangible and
identifiable intangible assets acquired
F-17
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS COMBINATIONS: (CONTINUED)
and liabilities assumed is summarized below. The allocation was based on an
independent appraisal and estimate of fair value.
(IN THOUSANDS)
- --------------
Net tangible assets (excluding cash acquired and retained by
Adaptec of $5,230)........................................ $ 1,540
In-process technology....................................... 377
Deferred compensation....................................... 2,593
-------
Goodwill and other intangible assets:
Goodwill.................................................. 16,724
Patents................................................... 5,260
Covenant not to compete................................... 1,650
Acquired employees........................................ 887
Trade name................................................ 526
Purchased technology...................................... 118
-------
25,165
Deferred income tax liabilities............................. (3,376)
-------
Net assets acquired..................................... $26,299
=======
The net tangible assets acquired were comprised primarily of receivables
offset by accrued liabilities. The acquired in-process technology was
written-off in the fourth quarter of fiscal 2000.
UNAUDITED PRO FORMA RESULTS
The following unaudited pro forma results assume CeQuadrat and Wild File had
been acquired as of the beginning of each of Roxio's fiscal years ended
March 31, 1999 and 2000. These unaudited pro forma results have been prepared
for comparative purposes only and include certain adjustments, such as
additional amortization expense as a result of goodwill and other intangible
assets and the elimination of non-recurring write-offs of in-process technology
acquired. The unaudited pro forma results for the year ended March 31, 1999
combine the Company's historical statements of operations for the year ended
March 31, 1999, the consolidated statement of operations of CeQuadrat for the
year ended December 31, 1998 and the statement of operations of Wild File for
the year ended June 30, 1999. The unaudited pro forma results for the year ended
March 31, 2000 combine the Company's historical statement of operations for year
ended March 31, 2000, the consolidated statement of operations of CeQuadrat for
the period of April 1 through June 30, 1999 and the statement of operations of
Wild File for the period of April 1, 1999 through March 10, 2000. Revenues of
approximately $3.3 million and net income of approximately $1.4 million of
CeQuadrat for the period of January 1, 1999 through March 31, 1999 are not
included in the pro forma combined consolidated statement of operations.
Revenues of approximately $478,000 and net loss of approximately $738,000 of
Wild File for the period April 1, 1999 through June 30, 1999 have been included
in the pro forma combined consolidated statements of operations of both the
years ended March 31, 1999 and 2000. The pro forma information does not
necessarily reflect the actual results that would have occurred if the
F-18
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--BUSINESS COMBINATIONS: (CONTINUED)
acquisitions had occurred on April 1, 1998 and April 1, 1999, nor is it
necessarily indicative of future results of operations of the consolidated
Company.
YEARS ENDED
MARCH 31,
-------------------
(IN THOUSANDS) 1999 2000
- -------------- ---- ----
(UNAUDITED)
Net revenues.............................................. $54,637 $84,031
Net income (loss)......................................... $(9,668) $ 370
Net income (loss) per share............................... $ (0.59) $ 0.02
Weighted average shares used in computing net income
(loss) per share........................................ 16,500 16,500
NOTE 4--TRANSACTIONS WITH ADAPTEC:
ALLOCATED COSTS
As discussed in Note 1, Roxio's costs and expenses include allocations from
Adaptec for centralized legal, accounting, treasury, real estate, information
technology, distribution, customer service, sales, marketing and other Adaptec
corporate services and infrastructure costs. These allocations have been
determined on the basis that Adaptec and Roxio consider to be reasonable
reflections of the utilization of services provided or the benefits received by
Roxio. The allocations and charges are based on a percentage of total corporate
costs for the services provided, based on factors such as headcount, revenue,
gross asset value, or the specific level of activity directly related to such
costs.
The following summarizes the corporate costs allocated to the Company (in
thousands):
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ -------------------
1998 1999 2000 1999 2000
-------- -------- -------- -------- --------
(UNAUDITED)
Cost of revenues (see note
8)........................... $ -- $ -- $ 274 $ -- $ 210
Research and development....... 1,766 1,874 1,772 1,314 1,407
Sales and marketing............ 7,000 11,260 8,383 6,748 6,877
General and administrative..... 2,281 3,306 3,181 2,193 3,385
------- ------- ------- ------- -------
$11,047 $16,440 $13,610 $10,255 $11,879
======= ======= ======= ======= =======
For purposes of governing certain of the ongoing relationships between Roxio
and Adaptec at and after the separation date and to provide for an orderly
transition, Roxio and Adaptec have entered or will enter into various
agreements, including the Separation Agreement and other agreements outlined
below ("Ancillary Agreements"). A brief description of each of the agreements
follows:
MASTER SEPARATION AND DISTRIBUTION AGREEMENT
The Separation Agreement contains the key provisions relating to the
separation, Roxio's initial funding and the distribution. The agreement lists
the documents and items that the parties must deliver in order to accomplish the
transfer of assets and liabilities from Adaptec to Roxio, effective on the
separation date. The agreement also contains conditions that must occur prior to
the distribution. The parties also entered into ongoing covenants that survive
the transactions, including covenants to exchange information, retain specific
documents, refrain from direct employee solicitation and resolve
disputes in specified ways.
F-19
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--TRANSACTIONS WITH ADAPTEC: (CONTINUED)
ASSIGNMENT AND ASSUMPTION AGREEMENT
The Assignment and Assumption Agreement identifies the assets that Adaptec
will transfer to Roxio and the liabilities that Roxio will assume from Adaptec
in the separation. The assets that will be transferred and the liabilities that
will be assumed are those that appear on Roxio's consolidated balance sheet as
of a date on or near the separation date, after adjustment for activity that
occurs between the balance sheet date and the separation date. In addition,
Adaptec will contribute to Roxio $30 million in cash and any cash held by
Roxio's overseas subsidiaries upon separation.
The Assignment and Assumption Agreement also allocates litigation management
responsibilities regarding specific litigation matters to either Roxio or
Adaptec.
EMPLOYEE MATTERS AGREEMENT
The Employee Matters Agreement outlines how Adaptec and Roxio plan to
allocate responsibility for, and liability related to, the employment of those
employees of Adaptec who will become Roxio employees. The agreement also
contains provisions describing Roxio's benefit and equity plans. From the
separation date to the distribution date, Roxio employees may participate in
various Adaptec benefit plans, including Adaptec's 401(k) plan, deferred
compensation plan, health and welfare plans and equity and other compensation
and bonus plans. The Company will incur actual payroll charges and pay Adaptec
an additional fee amounting to 25% of the actual payroll charges. Roxio will not
assume any of the options to purchase Adaptec common stock held by the Adaptec
employees who will become Roxio employees upon legal separation.
MASTER TRANSITIONAL SERVICES AGREEMENT
The Master Transitional Services Agreement outlines individual transitional
services that Roxio requests Adaptec to provide after separation in order to
conduct the Roxio business. The agreement provides the time period for each
service, a summary of the service to be provided and a description of the
service. Generally, Roxio will pay Adaptec for direct and indirect charges
incurred for services plus five percent. The agreement covers services relating
primarily to accounting, finance, taxes, human resources, information technology
and operations.
REAL ESTATE MATTERS AGREEMENT
The Real Estate Matters Agreement addresses real estate matters relating to
the Adaptec properties that Adaptec will lease to or share with Roxio and the
leases that Adaptec will assign to Roxio. The agreement describes the manner in
which Adaptec will share with Roxio an Adaptec leased property, lease one
property to Roxio and assign certain leases to Roxio. The Real Estate Matters
Agreement provides that Roxio will be required to accept the assignments, leases
or licenses of all properties allocated to Roxio, even if a site has been
damaged by a casualty before the separation date. The Real Estate Matters
Agreement also provides that all costs required to effect the transfers,
including landlord consent fees, landlord attorneys' fees and any costs and
expenses relating to re-negotiation of Adaptec's leases will be incurred and
paid by Adaptec. It is expected that the minimum lease payments under these
agreements will be approximately $1.7 million (unaudited) per year for at least
the next five years.
F-20
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--TRANSACTIONS WITH ADAPTEC: (CONTINUED)
INDEMNIFICATION AND INSURANCE MATTERS
Effective as of the separation date, Roxio and Adaptec will each release the
other from any liabilities arising from events occurring on or before the
separation date. The agreement also contains provisions governing
indemnification. In general, Roxio will indemnify Adaptec from all liabilities
arising from Roxio's business prior to the separation date, unless caused by
misconduct of an Adaptec employee, any of its liabilities arising from Roxio's
business after the separation date, any of its contracts, its breach of the
Separation Agreement or Ancillary Agreements, or any untrue statement of a
material fact or an omission to state a material fact in Roxio's Form 10
Registration Statement. In general, Adaptec will indemnify Roxio from all
liabilities arising from its business or its breach of the Separation Agreement
or Ancillary Agreements, or matters for which Roxio has no indemnification
responsibility. In addition, Adaptec and Roxio will each indemnify the other
against liability for specified environmental matters. Roxio will be responsible
for obtaining and maintaining its insurance programs and arrangements separate
from Adaptec after the separation date.
MANUFACTURING SERVICES AGREEMENT
The Manufacturing Services Agreement provides that Adaptec will perform
manufacturing services with respect to Roxio products ("Products") for a period
of one year at a fee based on Adaptec's standard cost plus ten percent.
Additional expenses including freight, insurance and taxes will be billed at
actual cost plus five percent. Roxio may terminate the Manufacturing Services
Agreement with sixty days notice and will be required to purchase Adaptec's
unused inventory components, work in process and finished goods if the agreement
is terminated.
Adaptec warrants the media upon which the software is reproduced for
90 days from the date of delivery or pull from Roxio's warehouse. Adaptec will
replace Products reproduced on defective media and returned under Adaptec return
merchandise authorization procedures.
The agreement provides that Roxio will indemnify Adaptec for claims of
intellectual property infringement brought against Adaptec based upon its
manufacture of Products for Roxio. Each party will indemnify the other party
against claims arising from its negligence or that of its agents and Roxio will
indemnify Adaptec for claims based upon the defective design or code of
Products.
INTELLECTUAL PROPERTY AGREEMENTS
Under the Master Technology Ownership and License Agreement and the Master
Patent Ownership and Assignment Agreement, Adaptec will transfer to Roxio its
rights in specified patents, specified trademarks, copyrights, related goodwill
and other technology related to Roxio's current business and research and
development efforts upon separation.
Consistent with all other assets to be transferred to Roxio, intellectual
property will be transferred at its net book value on the date of transfer. All
intellectual property to be transferred has been included in Roxio's financial
statements at March 31, 1999 and 2000 and December 31, 2000.
TAX SHARING AGREEMENT
The Tax Sharing Agreement provides for Adaptec's and Roxio's obligations
concerning various tax liabilities. The Tax Sharing Agreement provides that
Adaptec generally will pay, and indemnify Roxio if necessary, with respect to
all federal, state, local and foreign taxes relating to Roxio's business for any
F-21
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--TRANSACTIONS WITH ADAPTEC: (CONTINUED)
taxable period ending prior to the distribution date. In addition, the agreement
provides that Adaptec and Roxio will make payments between them such that the
amount of taxes paid by Adaptec and Roxio will be determined, subject to
specified adjustments, as if Adaptec, Roxio and each of their subsidiaries
included in Adaptec's consolidated tax returns had filed their own consolidated,
combined or unitary return.
The Tax Sharing Agreement also requires Roxio to indemnify Adaptec for
certain taxes and similar obligations that Adaptec could incur if the
distribution does not qualify for tax-free treatment due to the following
events:
- an acquisition of a controlling interest in Roxio stock after the
distribution;
- Roxio's failure to continue its business after the distribution;
- a repurchase of Roxio's stock; or
- other acts or omissions by Roxio.
The Tax Sharing Agreement further provides for cooperation with respect to
certain tax matters, the exchange of information and the retention of records
which may affect the income tax liability of either party.
NOTE 5--INCOME TAXES:
The Company has entered into a tax allocation agreement with Adaptec. See
Note 4 for a description of the agreement.
The components of income before income taxes are as follows:
NINE MONTHS
YEARS ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------ -------------------------
(IN THOUSANDS) 1998 1999 2000 1999 2000
- -------------- -------- -------- -------- -------- --------
(UNAUDITED)
Domestic......................................... $4,362 $ 916 $8,669 $(341) $1,074
Foreign.......................................... 3,899 1,607 789 (227) 7,450
------ ------ ------ ----- ------
Income before income taxes....................... $8,261 $2,523 $9,458 $(568) $8,524
====== ====== ====== ===== ======
F-22
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES: (CONTINUED)
The components of the provision for income taxes are as follows:
NINE MONTHS
YEARS ENDED MARCH 31, ENDED DECEMBER 31,
------------------------------ -------------------
(IN THOUSANDS) 1998 1999 2000 1999 2000
- -------------- -------- -------- -------- -------- --------
(UNAUDITED)
Federal:
Current...................................... $ 299 $(1,109) $1,992 $ 262 $ 3,603
Deferred..................................... 1,150 1,273 961 (353) (1,719)
Foreign:
Current...................................... 68 2 811 108 689
State:
Current...................................... 61 (112) 408 53 774
Deferred..................................... 244 359 116 (44) (314)
------ ------- ------ ----- -------
$1,822 $ 413 $4,288 $ 26 $ 3,033
====== ======= ====== ===== =======
Significant components of the Company's deferred tax assets and liabilities
are as follows:
MARCH 31,
-------------------
(IN THOUSANDS) 1999 2000 DECEMBER 31, 2000
- -------------- -------- -------- -----------------
(UNAUDITED)
Intangible technology..................................... $1,528 $ 2,556 $ 2,556
Compensatory accruals..................................... 113 192 410
Royalty accruals.......................................... 33 210 202
Uniform capitalization adjustment......................... 4 4 4
Accrued liabilities and other provisions.................. 44 210 1,200
Other, net................................................ 25 54 43
------ ------- -------
Total................................................... 1,747 3,226 4,415
------ ------- -------
Less: Valuation allowance................................. -- 2,556 2,556
------ ------- -------
Deferred tax assets....................................... $1,747 $ 670 $ 1,859
Intangibles............................................... -- (3,376) (2,532)
Net deferred tax asset (liabilities)...................... $1,747 $(2,706) $ (673)
------ ------- -------
Federal................................................... $1,514 $(2,367) $ (589)
State..................................................... 233 (339) (84)
------ ------- -------
$1,747 $(2,706) $ (673)
====== ======= =======
F-23
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--INCOME TAXES: (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the federal statutory tax rate to income before taxes as follows:
YEARS ENDED MARCH 31,
------------------------------
(IN THOUSANDS) 1998 1999 2000
- -------------- -------- -------- --------
Federal statutory rate...................................... 35.0% 35.0% 35.0%
State taxes, net of deferred benefit........................ 2.4 6.3 3.6
Foreign income at other than U.S. tax rate.................. (15.7) (22.2) (21.4)
Increase in valuation allowance............................. -- -- 27.0
Goodwill amortization....................................... -- -- 2.9
Other....................................................... 0.4 (2.7) (1.8)
----- ----- -----
Effective income tax rate................................... 22.1% 16.4% 45.3%
===== ===== =====
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 significant 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.
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.
The Company has not accrued income taxes on accumulated undistributed
earnings of its non-U.S. subsidiaries, as these earnings will be reinvested
indefinitely.
NOTE 6--EMPLOYEE BENEFIT PLANS:
WILD FILE STOCK OPTION PLAN
In connection with the acquisition of Wild File, each outstanding stock
option under the Wild File Stock Option Plan was converted to an option to
purchase Adaptec's common stock at a ratio of 0.0691 in accordance with the
terms of the acquisition agreement. As a result outstanding options to purchase
22,000 shares of Adaptec's common stock were assumed by Adaptec in fiscal 2000.
No further options may be granted under the Wild File Stock Option Plan.
ROXIO 2000 STOCK OPTION PLAN
On December 20, 2000, a commitment was made to issue employees of Adaptec,
who will become employees of Roxio at the date of legal separation, options to
purchase 1.15 million shares of Roxio common stock with an exercise price of
$8.50 per share. Due to the binding nature of the commitment, the date of the
commitment to grant the options was assumed to be the date of grant. The options
will vest 25% at September 21, 2001 and 6.25% each quarter thereafter until
fully vested. As the grants of Roxio options constitute grants to non-employees,
the options were valued using the Black-Scholes valuation model with the
following assumptions: expected life of 10 years, risk-free interest rate of 5%,
volatility of 63% and dividend yield of 0%. The estimated fair value of the
underlying common stock at
F-24
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--EMPLOYEE BENEFIT PLANS: (CONTINUED)
the date of grant was $14.12 per share. The estimated fair value of the options
granted was $11.57 and the aggregate fair value of $13.3 million will be
recognized over the service period, estimated to be 3.75 years. No deferred
compensation has been recorded for this amount. Compensation will be recognized
under the model prescribed in FIN 28. Approximately $227,000 of amortization of
the compensation was recorded and is included in Stock compensation charges on
the consolidated statement of operations for the nine months ended December 31,
2000.
As the number of options that will be ultimately granted is unknown, no
measurement date for these options has been established. These options will
therefore be subject to variable plan accounting treatment resulting in a
re-measurement of the compensation expense in future periods based on the then
current market value of the underlying common stock until such time as a
measurement date is established. It is expected that the measurement date will
be established on the date of legal separation at which time certain employees
of Adaptec will become employees of Roxio and a fixed number of options will be
granted to these employees under the Roxio 2000 Stock Option Plan. Pursuant to
FIN 44, at the date of change in status from non-employees to employees, the
accounting basis for the options will change and the compensation associated
with these options will be re-measured and fixed using the intrinsic value at
that date as prescribed by APB 25.
NOTE 7--BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION:
SEGMENT INFORMATION
The Company has organized and managed its operations in a single operating
segment which designs, develops and markets application software.
GEOGRAPHIC INFORMATION
The following table presents net revenues by country and is attributed to
countries based on location of the selling entity:
NINE MONTHS ENDED
YEARS ENDED MARCH 31, DECEMBER 31,
------------------------------ -------------------
(IN THOUSANDS) 1998 1999 2000 1999 2000
- -------------- -------- -------- -------- -------- --------
(UNAUDITED)
United States.................................. $31,420 $26,653 $49,135 $31,461 $57,704
Singapore...................................... 1,365 9,172 11,631 7,157 10,292
Japan.......................................... 5,869 7,304 11,002 6,546 10,515
Other countries................................ -- -- 6,023 3,180 7,057
------- ------- ------- ------- -------
$38,654 $43,129 $77,791 $48,344 $85,568
======= ======= ======= ======= =======
F-25
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION: (CONTINUED)
The following table presents net property and equipment by country based on
the location of the assets:
MARCH 31,
------------------- DECEMBER 31,
(IN THOUSANDS) 1999 2000 2000
- -------------- -------- -------- ------------
(UNAUDITED)
United States............................................... $419 $889 $1,130
Germany..................................................... -- 72 223
Other countries............................................. 16 11 18
---- ---- ------
$435 $972 $1,371
==== ==== ======
NOTE 8--COMMITMENTS AND CONTINGENCIES:
COMMITMENTS
Upon legal separation Roxio will enter into a leasing agreement with Adaptec
for its principal executive office in Milpitas, California, and Roxio will also
be assigned certain leasing agreements which are currently between Adaptec and
other third parties for other facilities in Longmont, Colorado, Maple Grove,
Minnesota and Wurselin, Germany. Subject to the finalization of the facilities
lease at the separation, the future minimum lease payments under non-cancelable
operating leases as of December 31, 2000 are as follows (in thousands):
2002........................................................ $1,631
2003........................................................ $1,682
2004........................................................ $1,733
2005........................................................ $1,783
2006 and thereafter......................................... $1,459
------
$8,288
======
CONTINGENCIES
The Company previously obtained various services from Adaptec and will enter
into various Ancillary Agreements relating to these services at and after the
time of separation. See Note 4, "Transactions with Adaptec."
In May 2000, Adaptec entered into a patent cross-license agreement with a
third party. Under the agreement, Adaptec paid 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, including patents specifically relating
to Roxio products. Additionally, Adaptec granted the third party a license to
use all of its patents for the same period. As long as the Company continues to
be a majority-owned subsidiary of Adaptec, the terms of the third party
agreement apply to the Company.
The aggregate patent fee to be paid by Adaptec 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. Adaptec's
best estimate of the aggregate patent fee that will be payable under the
F-26
ROXIO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--COMMITMENTS AND CONTINGENCIES: (CONTINUED)
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 estimable) of $9.6 million was written off and reflected
as a component of cost of revenues in Adaptec's financial statements. The
Company's portion of the estimated $9.6 million patent fee, or $274,000, was
allocated to the Company based on the Company's portion of Adaptec revenues and
is included in cost of revenues for the year ended March 31, 2000. The remaining
estimated patent fee pertaining to future periods was classified by Adaptec as
an intangible asset and is being amortized by Adaptec over the period from
January 1, 2000 through June 30, 2004. The Company's portion of the amortization
of the patent fee is included in cost of revenues in the statement of operations
through an allocation by Adaptec based on revenues. The Company's portion of the
amortization was $210,000 for the nine months ended December 31, 2000. From the
date of separation to the distribution date, Adaptec will invoice the Company
for the Company's portion of this amortization.
The Company is a party to litigation matters and claims which are normal in
the course of its operations, and, while the results of such litigation 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
financial position or results of operations.
F-27
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The unaudited pro forma combined financial information for Roxio set forth
below gives effect to the business combinations between Roxio and CeQuadrat and
between Roxio and Wild File (collectively, the "Acquisitions"). The Acquisitions
were accounted for using the purchase method of accounting.
The unaudited pro forma combined statement of operations combines the
Company's historical statement of operations for the year ended March 31, 2000,
the consolidated statement of operations of CeQuadrat for the period from
April 1, 1999 through June 30, 1999 and the statement of operations of Wild File
for the period from April 1, 1999 through March 10, 2000, after giving effect to
the Acquisitions as if they had occurred on April 1, 1999. The results of
operations of CeQuadrat and Wild File are included in the Company's results from
their respective dates of acquisition of July 1, 1999 and March 11, 2000.
The historical financial information has been derived from and is qualified
by reference to, the consolidated financial statements of Roxio, the
consolidated financial statements of CeQuadrat and the financial statements of
Wild File, and should be read in conjunction with those financial statements,
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein. The unaudited
pro forma combined statement of operations is presented for illustrative
purposes only and is not necessarily indicative of results of operations that
would have actually occurred had the acquisitions of CeQuadrat and Wild File by
Roxio been effected on the date assumed.
F-28
ROXIO, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CEQUADRAT WILD FILE FOR
ROXIO FOR THE FOR THE PERIOD THE PERIOD FROM
YEAR ENDED FROM APRIL 1, APRIL 1, 1999
MARCH 31, THROUGH THROUGH PRO FORMA PRO FORMA
2000 JUNE 30, 1999 MARCH 10, 2000 COMBINED ADJUSTMENTS TOTAL
------------- -------------- --------------- -------- ----------- ---------
Software revenues................. $77,791 $2,718 $ 2,394 $82,903 $ -- $82,903
Service and other revenues........ -- -- 1,128 1,128 -- 1,128
------- ------ ------- ------- ------- -------
77,791 2,718 3,522 84,031 -- 84,031
Cost of software revenues......... 15,652 340 501 16,493 -- 16,493
Cost of service and other
revenues........................ -- -- 542 542 -- 542
------- ------ ------- ------- ------- -------
15,652 340 1,043 17,035 -- 17,035
------- ------ ------- ------- ------- -------
Gross profit.................... 62,139 2,378 2,479 66,996 -- 66,996
Operating expenses:
Research and development
(excludes stock-based
compensation charges of $149
for Roxio for the year ended
March 31, 2000, $149 under the
caption "Combined" and $2,444
under the caption "Pro Forma
Adjustments")................. 13,917 140 695 14,752 14,752
Sales and marketing............. 18,548 293 878 19,719 -- 19,719
General and administrative...... 9,716 301 2,537 12,554 -- 12,554
Amortization of goodwill and
other intangibles............. 6,958 -- -- 6,958 9,731(1) 16,689
Write-off of acquired in-process
technology.................... 3,393 -- -- 3,393 (3,393)(2) --
Stock based compensation
charges......................... 149 -- -- 149 2,444(3) 2,593
------- ------ ------- ------- ------- -------
Total operating expenses........ 52,681 734 4,110 57,525 8,782 66,307
------- ------ ------- ------- ------- -------
Income (loss) from operations..... 9,458 1,644 (1,631) 9,471 (8,782) 689
------- ------ ------- ------- ------- -------
Interest and other income......... -- 399 172 571 -- 571
Income (loss) from operations
before provision for income
taxes........................... 9,458 2,043 (1,459) 10,042 (8,782) 1,260
------- ------ ------- ------- ------- -------
Provision for income tax expense
(benefit)....................... 4,288 868 (1) 5,155 (4,265)(4) 890
------- ------ ------- ------- ------- -------
Net income (loss)................. $ 5,170 $1,175 $(1,458) $ 4,887 $(4,517) $ 370
======= ====== ======= ======= ======= =======
Unaudited net income per share:
Basic and diluted............... $ 0.31 $ 0.02
------- -------
Weighted average shares used in
computing unaudited net income
per share:
Basic and diluted............... 16,500 16,500
------- -------
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-29
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
Pro forma adjustments to the unaudited pro forma combined statement of
operations for the year ended March 31, 2000 are as follows:
(1) To record additional amortization of goodwill and other intangible assets
related to the acquisitions of CeQuadrat and Wild File. The following
schedule shows relevant information used to determine the pro forma
adjustment for each acquisition (in millions):
AMORTIZATION PRO FORMA
INCLUDED IN ADJUSTMENT FOR
FISCAL 2000 AMORTIZATION
FINANCIAL EXPENSE FOR
STATEMENTS PERIOD FROM
GOODWILL AND FOR PERIOD APRIL 1, 1999
OTHER AMORTIZATION ANNUAL SUBSEQUENT THROUGH THE
DATE OF INTANGIBLES-- PERIOD AMORTIZATION TO DATE OF DATE OF
ACQUIREE ACQUISITION GROSS (IN YEARS) EXPENSE ACQUISITION* ACQUISITION
- -------- ----------- ------------- ------------ ------------ ------------ --------------
CeQuadrat............ 01-Jul-99 $21.2 3 $7.1 $5.3 $1.8
Wild File............ 11-Mar-00 $21.8 3 $8.4 $0.5 $7.9
----
$9.7
====
- ------------------------
* Amortization excludes amortization of $1.3 million for goodwill and
other intangibles acquired prior to the date of these financial
statements for which no pro forma adjustments are required.
(2) To eliminate the write-off of acquired in-process technology recorded by
Roxio in connection with the acquisition of CeQuadrat in the amount of
$3.0 million and Wild File in the amount of $377,000.
(3) To record additional amortization related to deferred compensation on a pro
forma basis for the period from April 1, 1999 through March 10, 2000.
Deferred compensation was recorded for 59,000 shares of restricted Adaptec
stock valued at $2.6 million issued to Wild File employee shareholders as
incentive for continued employment and was not included in the purchase
price. The deferred compensation is being amortized over the vesting period
of one year.
(4) To adjust the tax provision for the tax effect of the pro forma adjustments
related to CeQuadrat and Wild File.
F-30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of CeQuadrat GmbH
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of CeQuadrat
GmbH and its subsidiaries at December 31, 1998 and June 30, 1999 and the results
of their operations and their cash flows for the year ended December 31, 1998
and for the six months ended June 30, 1999, 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 that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers GmbH.
Cologne, Germany
August 28, 2000
F-31
CEQUADRAT GMBH
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
ASSETS
Current assets:
Cash and cash equivalents................................. $5,307 $4,810
Accounts receivable, net of allowance for doubtful
accounts of $108 and $177............................... 1,574 1,720
Inventory................................................. 44 60
Prepaid expenses.......................................... 9 50
Deferred tax asset........................................ 469 710
Other current assets...................................... 44 36
------ ------
Total current assets.................................... 7,447 7,386
Property and equipment, net................................. 90 78
Other assets................................................ 35 30
------ ------
$7,572 $7,494
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 256 $ 58
Accrued liabilities....................................... 3,659 4,048
Deferred revenue.......................................... 741 999
------ ------
Total current liabilities............................... 4,656 5,105
------ ------
Commitments and contingencies (Note 6)
Shareholders' equity:
Paid-in capital........................................... 36 36
Retained earnings......................................... 2,848 2,796
Accumulated other comprehensive income.................... 32 (443)
------ ------
Total shareholders' equity.............................. 2,916 2,389
------ ------
$7,572 $7,494
====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
CEQUADRAT GMBH
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE FOR THE SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------ ----------- --------
(UNAUDITED)
Net revenues................................................ $9,449 $5,399 $5,975
Cost of revenues............................................ 1,175 513 747
------ ------ ------
Gross profit................................................ 8,274 4,886 5,228
------ ------ ------
Operating expenses:
Research and development.................................. 437 221 307
Sales and marketing....................................... 1,583 546 645
General and administrative................................ 967 453 661
------ ------ ------
Total operating expenses................................ 2,987 1,220 1,613
------ ------ ------
Income from operations...................................... 5,287 3,666 3,615
Interest income............................................. 51 5 72
Other income (expense), net................................. (211) 19 805
------ ------ ------
Income before provisions for income taxes................... 5,127 3,690 4,492
Provision for income taxes.................................. 2,298 1,667 1,908
------ ------ ------
Net income.................................................. $2,829 $2,023 $2,584
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
CEQUADRAT GMBH
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
ACCUMULATED
PAID- OTHER TOTAL
IN RETAINED COMPREHENSIVE SHAREHOLDERS'
CAPITAL EARNINGS INCOME EQUITY
-------- -------- ------------- -------------
Balance at December 31, 1997...................... $ 36 $1,394 $(141) $1,289
Dividends declared................................ -- (1,375) -- (1,375)
Components of comprehensive income:
Net income...................................... -- 2,829 -- 2,829
Foreign currency translation adjustment......... -- -- 173 173
------
Total comprehensive income.................... 3,002
----- ------ ----- ------
Balance at December 31, 1998...................... 36 2,848 32 2,916
Dividends declared................................ -- (2,636) -- (2,636)
Components of comprehensive income:
Net income...................................... -- 2,584 -- 2,584
Foreign currency translation adjustment......... -- -- (475) (475)
------
Total comprehensive income.................... 2,109
----- ------ ----- ------
Balance at June 30, 1999.......................... $ 36 $2,796 $(443) $2,389
===== ====== ===== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-34
CEQUADRAT GMBH
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR FOR THE SIX MONTHS
ENDED ENDED JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------ ----------- --------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $2,829 $2,023 $2,584
Adjustments to reconcile net income to net cash provided
by operating activities:
Allowance for doubtful accounts and returns............. 97 19 80
Depreciation and amortization........................... 69 35 31
Changes in current assets and liabilities:
Accounts receivable................................... (104) (203) (400)
Inventory............................................. (10) (11) (22)
Prepaid expenses and other current assets............. (574) (213) (332)
Accounts payable...................................... 122 (46) (173)
Accrued liabilities................................... 2,502 1,719 1,170
------ ------ ------
Net cash provided by operating activities........... 4,931 3,323 2,938
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (60) (31) (27)
Loans to shareholders..................................... -- (1,004) --
------ ------ ------
Net cash used in investing activities............... (60) (1,035) (27)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid............................................ (1,375) -- (2,636)
------ ------ ------
Net cash used in financing activities............... (1,375) -- (2,636)
------ ------ ------
Effect of exchange rate changes on cash..................... 287 22 (772)
------ ------ ------
Net increase (decrease) in cash and cash equivalents........ 3,783 2,310 (497)
Cash and cash equivalents at beginning of period............ 1,524 1,524 5,307
------ ------ ------
Cash and cash equivalents at end of period.................. $5,307 $3,834 $4,810
====== ====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 1 $ 1 $ --
====== ====== ======
Cash paid during the period for taxes..................... $1,645 $ 333 $1,370
====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-35
CEQUADRAT GMBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
THE COMPANY
CeQuadrat GmbH (the "Company") was incorporated in Aachen, Germany on
April 3, 1991. The Company designs and develops software for the compact disc
recordable ("CD-R") market and sells its products to software resellers and
distributors, and licenses its products to original equipment manufacturers
("OEMs").
In July 1999, the Company was acquired by Adaptec, Inc. for $24.0 million in
cash. These financial statements have been prepared on the historical basis and
do not reflect any adjustments resulting from Adaptec's application of purchase
accounting.
CONSOLIDATION
The consolidated financial statements include those of the Company and its
wholly-owned subsidiary, CeQuadrat, Inc., a California corporation.
CeQuadrat, Inc. is principally involved in the sale and licensing of products
developed by CeQuadrat GmbH. All intercompany accounts and transactions are
eliminated upon consolidation.
FOREIGN CURRENCY TRANSLATION
The Company uses the Deutsche Mark as its functional currency. Assets and
liabilities are translated into U.S. dollars at the current exchange rate in
effect at the balance sheet date and revenue and expenses are translated at the
average exchange rates in effect during the reporting period. Foreign currency
translation gains and losses are reported as a component of other comprehensive
income.
USE OF ESTIMATES
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 reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates.
UNAUDITED INTERIM RESULTS
The accompanying interim financial statements for the six months ended
June 30, 1998 are unaudited. In the opinion of management, these unaudited
interim statements have been prepared on the same basis as the audited financial
statements, and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of results of this period. The
financial data and other information disclosed in the notes to the financial
statements for this period is unaudited.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investment instruments with
original maturities of 90 days or less. The carrying value of cash and cash
equivalents approximates their estimated fair market value.
INVENTORY
Inventory includes CD-ROMs, floppy discs and manuals and is stated at the
lower of cost or market, cost being identified by the specific identification
method.
F-36
CEQUADRAT GMBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to five years. Depreciation expense for the year ended
December 31, 1998 and the six months ended June 30, 1998 (unaudited) and 1999
are $69,000, $35,000 and $31,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For the Company's financial instruments, including accounts receivable and
accounts payable, the carrying amounts approximate fair market value due to
their short maturities.
CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its cash primarily in checking,
money market accounts and foreign currency accounts. With the exception of
foreign currency accounts of highly rated financial institutions, the Company's
investment policy limits the amount of credit exposure to any one issuer. The
Company's accounts receivable are derived from revenue earned from customers
located in Germany, Europe and the United States. The Company maintains an
allowance for doubtful accounts receivable based upon the expected
collectibility of all accounts receivable. The Company has historically not
experienced significant losses from its accounts receivable.
The following individual customers accounted for a significant portion of
total revenue:
FOR THE YEAR FOR THE SIX MONTHS
ENDED ENDED JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------- ----------- --------
(UNAUDITED)
Company A....................................... 17% 12% 13%
Company B....................................... 16% 31% --
Company C....................................... 13% 7% 10%
Company D....................................... 12% 8% 7%
Company E....................................... 7% 11% 4%
The following individual customers accounted for a significant portion of
gross accounts receivable:
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
Company A............................................... 39% 22%
Company B............................................... 13% 6%
F-37
CEQUADRAT GMBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
ADDITIONAL PAID IN CAPITAL
As of December 31, 1998 and June 30, 1999, the Company had no shares of
common or preferred stock issued or outstanding. Paid-in capital on the balance
sheet consists of capital contributions from a single investor.
COMPREHENSIVE INCOME
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," requires the disclosure of comprehensive income to
reflect changes in equity that result from transactions and economic events from
non-owner sources. Accumulated other comprehensive income for the periods
presented represents foreign currency translation items associated with the
Company's German operations.
REVENUE RECOGNITION
The Company's revenue recognition policy is in accordance with the American
Institute of Certified Public Accountants Statement of Position No. 97-2,
"Software Revenue Recognition." The Company sells its software products
primarily through two channels: OEMs and distributors. For software product
sales to OEMs, revenue is recognized based on reported product shipments from
OEMs to end users provided that all fees are fixed or determinable, evidence of
an arrangement exists and collectibility is probable.
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.
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 a direct reduction of revenue and accounts
receivable.
RESEARCH AND DEVELOPMENT COSTS
Software development costs incurred prior to the establishment of
technological feasibility are charged to research and development expense as
incurred. Technological feasibility is established upon completion of a working
model, which is typically demonstrated by initial beta shipment. Software
development costs incurred subsequent to the time a product's technological
feasibility has been established through the time the product is available for
general release to customers are capitalized if material. To date, software
development costs incurred subsequent to the establishment of technological
feasibility have been immaterial and accordingly have not been capitalized.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising expense
totaled $132,000 for the year ended December 31, 1998 and $102,000 (unaudited),
and $79,000 for the six months ended June 30, 1998 and 1999, respectively.
F-38
CEQUADRAT GMBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
INCOME TAXES
The Company's tax provision has been prepared in accordance with SFAS
No. 109, "Accounting for Income Taxes." Deferred taxes result from differences
between the financial and tax bases of the Company's assets and liabilities and
are adjusted for changes in tax rates and tax laws when changes are enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized by the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued SAB
No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 provides
guidance on applying generally accepted accounting principles 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 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 January 12, 2000.
The impact of FIN No. 44 did not have a material effect on the financial
position or results of operations of the Company.
NOTE 2--BALANCE SHEET DETAILS:
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
(IN THOUSANDS)
PROPERTY AND EQUIPMENT:
Furniture and fixtures................................ $ 28 $ 27
Equipment............................................. 371 355
Software.............................................. 55 54
------ ------
454 436
------ ------
Less: Accumulated depreciation........................ 364 358
------ ------
$ 90 $ 78
====== ======
ACCRUED LIABILITIES:
Accrued compensation costs............................ $1,119 $ 527
Accrued income taxes.................................. 1,164 1,172
Accrued taxes, other.................................. 872 2,118
Other accrued liabilities............................. 504 231
------ ------
$3,659 $4,048
====== ======
F-39
CEQUADRAT GMBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS:
In June 1998, the Company made a temporary advance of $1,004,000 to the sole
shareholder. The advance was not interest bearing and the funds were repaid out
of the distribution of dividends on August 1, 1998.
NOTE 4--INCOME TAXES:
The components of income (loss) before income taxes are as follows:
FOR THE YEAR FOR THE SIX MONTHS
ENDED ENDED JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------- ----------- --------
(UNAUDITED)
United States............................................... $ (167) $ 250 $ 205
Germany..................................................... 5,294 3,440 4,287
------ ------ ------
$5,127 $3,690 $4,492
====== ====== ======
The provision for income taxes consists of the following:
FOR THE YEAR SIX MONTHS ENDED
ENDED JUNE 30,
DECEMBER 31, ----------------------
1998 1998 1999
------------- ----------- --------
(UNAUDITED)
Federal:
Current................................................... $ 133 $ 151 $ 119
Deferred.................................................. (189) (75) (52)
------ ------ ------
(56) 76 67
Foreign:
Current................................................... 2,663 1,670 2,111
Deferred.................................................. (296) (102) (289)
------ ------ ------
2,367 1,568 1,822
State:
Current................................................... 34 38 33
Deferred.................................................. (47) (15) (14)
------ ------ ------
(13) 23 19
------ ------ ------
Total................................................... $2,298 $1,667 $1,908
====== ====== ======
F-40
CEQUADRAT GMBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INCOME TAXES: (CONTINUED)
Deferred tax assets and liabilities consist of the following:
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
DEFERRED TAX ASSETS:
Accruals and reserves..................................... $ 32 $ 46
Deferred revenue.......................................... 441 667
---- ----
473 713
DEFERRED TAX LIABILITIES:
Depreciation.............................................. 4 3
---- ----
Net deferred tax assets................................... $469 $710
==== ====
NOTE 5--BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION:
SEGMENT INFORMATION
The Company has organized and managed its operations in a single operating
segment which designs, develops and markets application software.
GEOGRAPHIC INFORMATION
The following table presents net revenues by country and is attributed to
countries based on location of the customer:
FOR THE SIX
FOR THE YEAR MONTHS ENDED
ENDED JUNE 30,
DECEMBER 31, --------------------
1998 1998 1999
------------- --------- --------
(UNAUDITED)
(IN THOUSANDS)
Germany...................................... $4,106 $2,807 $3,053
United Kingdom............................... 2,422 1,638 77
Belgium...................................... 1,555 188 544
United States................................ 971 558 1,278
Other........................................ 395 208 1,023
------ ------ ------
$9,449 $5,399 $5,975
====== ====== ======
F-41
CEQUADRAT GMBH
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION: (CONTINUED)
The following table presents net property and equipment by country based on
the location of the assets:
DECEMBER 31, JUNE 30,
1998 1999
------------ --------
(IN THOUSANDS)
Germany................................................. $69 $65
United States........................................... $21 $13
--- ---
$90 $78
=== ===
NOTE 6--COMMITMENTS:
LEASES
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through 2005. Rent expense for the year
ended December 31, 1998 and the six months ended June 30, 1998 and 1999 was
$138,000, $67,000 (unaudited) and $87,000, respectively.
Future minimum lease payments under noncancelable operating leases,
including lease commitments entered into subsequent to June 30, 1999, are as
follows:
YEAR ENDED
DECEMBER 31,
- ------------
1999........................................................ $ 66,000
2000........................................................ 92,000
2001........................................................ 86,000
2002........................................................ 87,000
2003........................................................ 86,000
Thereafter.................................................. 122,000
--------
Total minimum lease payment................................. $539,000
========
F-42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Wild File, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Wild File, Inc. at June 30, 1999
and March 10, 2000, and the results of its operations and its cash flows for the
year ended June 30, 1999 and the period from July 1, 1999 to March 10, 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 that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
July 14, 2000
F-43
WILD FILE, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, MARCH 10,
1999 2000
-------- ---------
ASSETS
Current assets:
Cash and cash equivalents................................. $1,148 $ 5,126
Short-term investments.................................... 94 104
Accounts receivable, net.................................. 368 1,305
Inventory................................................. 16 --
Prepaid expenses and other current assets................. 108 50
Income taxes receivable................................... 135 --
------ -------
Total current assets.................................... 1,869 6,585
Property and equipment, net................................. 420 410
Due from officers........................................... 26 89
------ -------
Total assets............................................ $2,315 $ 7,084
====== =======
LIABILITIES, CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 190 $ 80
Accrued liabilities....................................... 44 112
Deferred revenue.......................................... 445 325
------ -------
Total current liabilities............................... 679 517
------ -------
Commitments and contingencies (Note 5)
Convertible Preferred Stock: $0.0001 par value; 3,076,923
shares authorized; 0 and 1,700,000 shares issued and
outstanding at June 30, 1999 and March 10, 2000........... -- 5,598
Stockholders' equity:
Common Stock: $0.0001 par value; 10,000,000 and 20,000,000
shares authorized; 5,275,565 and 8,338,898 shares issued
and outstanding at June 30, 1999 and March 10, 2000..... 1 1
Additional paid-in capital................................ 1,729 3,373
Deferred stock-based compensation......................... -- (1,303)
Retained earnings (accumulated deficit)................... (94) (1,102)
------ -------
Total stockholders' equity.............................. 1,636 969
------ -------
Total liabilities, convertible preferred stock and
stockholders' equity................................ $2,315 $ 7,084
====== =======
The accompanying notes are an integral part of these financial statements.
F-44
WILD FILE, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE PERIOD FROM FOR THE PERIOD FROM
YEAR ENDED JULY 1, 1998 THROUGH JULY 1, 1999 THROUGH
JUNE 30, 1999 MARCH 10, 1999 MARCH 10, 2000
-------------- --------------------- ---------------------
(UNAUDITED)
Net revenues:
Software.................................... $ 428 $ 42 $ 1,916
Service and other........................... 1,631 1,375 843
------- ------ -------
Total net revenues........................ 2,059 1,417 2,759
Cost of net revenues:
Software.................................... 261 104 350
Service and other........................... 717 465 452
------- ------ -------
Total cost of net revenues................ 978 569 802
------- ------ -------
Gross profit.................................. 1,081 848 1,957
Operating expenses:
Research and development.................... 561 413 549
Sales and marketing......................... 343 134 664
General and administrative.................. 1,526 846 1,917
------- ------ -------
Total operating expenses.................. 2,430 1,393 3,130
------- ------ -------
Loss from operations.......................... (1,349) (545) (1,173)
Interest and other income..................... 67 61 166
Loss before income tax expense................ (1,282) (484) (1,007)
Income tax expense (benefit).................. (135) (135) 1
------- ------ -------
Net loss...................................... (1,147) (349) (1,008)
Dividends on Convertible Preferred Stock...... -- -- (224)
------- ------ -------
Net loss attributable to common
stockholders................................ $(1,147) $ (349) $(1,232)
------- ------ -------
Basic and diluted net loss per share.......... $ (0.24) $(0.07) $ (0.17)
------- ------ -------
Weighted average shares used in computing
basic and diluted net loss per share........ 4,778 4,680 7,098
------- ------ -------
The accompanying notes are an integral part of these financial statements.
F-45
WILD FILE, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
YEAR ENDED JUNE 30, 1999 AND FOR THE PERIOD FROM JULY 1, 1999
THROUGH MARCH 10, 2000
(IN THOUSANDS)
COMMON STOCK ADDITIONAL DEFERRED TOTAL
------------------- PAID-IN STOCK-BASED RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY
-------- -------- ---------- ------------ -------- -------------
Balance at June 30, 1998......... 23 $ -- $ 268 $ -- $ 1,054 $ 1,322
Stock dividend................... 4,657 1 -- -- (1) --
Issuance of common stock......... 595 -- 1,461 -- -- 1,461
Net loss......................... -- -- -- -- (1,147) (1,147)
------ ---- ------ ------- ------- -------
Balances at June 30, 1999........ 5,275 1 1,729 -- (94) 1,636
Issuance of common stock......... 90 -- 226 -- -- 226
Exercises of stock options....... 2,974 -- 313 -- -- 313
Dividends due on Convertible
Preferred Stock................ -- -- (224) -- -- (224)
Deferred stock-based
compensation................... -- -- 1,329 (1,329) -- --
Amortization of deferred stock-
based compensation............. -- -- -- 26 -- 26
Net loss......................... -- -- -- -- (1,008) (1,008)
------ ---- ------ ------- ------- -------
Balances at March 10, 2000....... 8,339 $ 1 $3,373 $(1,303) $(1,102) $ 969
====== ==== ====== ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-46
WILD FILE, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE PERIOD FROM FOR THE PERIOD FROM
YEAR ENDED JULY 1, 1998 THROUGH JULY 1, 1999 THROUGH
JUNE 30, 1999 MARCH 10, 1999 MARCH 10, 2000
-------------- --------------------- ---------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................... $(1,147) $(349) $(1,008)
Adjustments to reconcile net loss to net
cash used in operating activities:
Allowance for doubtful accounts and
returns................................. 40 -- --
Depreciation and amortization............. 66 44 286
Amortization of deferred stock-based
compensation............................ -- -- 26
Changes in current assets and liabilities:
Accounts receivable..................... (310) (603) (937)
Inventory............................... (16) (16) 16
Prepaid expenses and other current
assets................................ 6 15 57
Income taxes receivable................. (135) (135) 136
Accounts payable........................ 165 70 (110)
Accrued liabilities..................... 21 (20) 68
Deferred revenue........................ 334 491 (120)
------- ----- -------
Net cash used in operating
activities.......................... (976) (503) (1,586)
------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales/(purchases) of short-term
investments............................... 393 393 (10)
Purchase of property and equipment.......... (194) (127) (276)
Repayment of amounts due from officers...... 16 -- 2
------- ----- -------
Net cash provided by (used in)
investing activities................ 215 266 (284)
------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A
Convertible Preferred Stock, net of
issuance costs............................ -- -- 5,374
Proceeds from issuance of common stock...... 1,461 -- 474
------- ----- -------
Net cash provided by financing activities..... 1,461 -- 5,848
------- ----- -------
Net increase (decrease) in cash and cash
equivalents................................. 700 (237) 3,978
Cash and cash equivalents at beginning of
year........................................ 448 448 1,148
------- ----- -------
Cash and cash equivalents at end of year...... $ 1,148 $ 211 $ 5,126
======= ===== =======
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITY:
Stock options exercised in exchange for note
receivable from company officer........... $ -- $ -- $ 65
======= ===== =======
The accompanying notes are an integral part of these financial statements.
F-47
WILD FILE, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
THE COMPANY
Wild File, Inc. ("Wild File" or the "Company"), was incorporated in Delaware
on April 19, 1994 and reincorporated in Delaware on October 14, 1999. The
Company originally provided contract development and engineering consulting
services, but within the last three years has transitioned to software design
and development. In 1998, Wild File introduced GoBack, its system recovery
software which enables PC users to more quickly recover data and software
applications in the event of a system crash, virus attack or human error. Wild
File distributes GoBack through original equipment manufacturers ("OEMs"),
integrators, distributors and retailers.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
UNAUDITED INTERIM RESULTS
The accompanying interim financial statements for the period from July 1,
1998 through March 10, 1999 are unaudited. In the opinion of management, these
unaudited interim statements have been prepared on the same basis as the audited
financial statements, and include all adjustments, consisting only of normal
recurring adjustments, necessary for the fair statement of results of the
period. The financial data and other information disclosed in the notes to the
financial statements for this period are unaudited.
REVENUE RECOGNITION
The Company's revenue recognition policy is in accordance with the American
Institute of Certified Public Accountants ("AICPA") Statement of Position
No. 97-2, "Software Revenue Recognition," which provides for recognition of
revenue when delivery has occurred, all fees are fixed and determinable,
evidence of an arrangement exists and collectibility is probable. The Company's
sales to distributors are made under agreements allowing for returns or credits
under certain circumstances. As such, the Company defers recognition of revenue
on sales to distributors until products are resold by the distributor to the
retailer.
The Company provides sales returns reserves for estimated returns from end
users. Estimated costs of telephone technical support are recognized at the time
of product shipment.
The Company recognizes revenue under a fixed fee contract with an OEM
ratably over the term of the agreement due to continuing contractual obligations
through the term of the license.
The Company also derives revenue from software development and consulting
services provided to end users. Revenue from fixed price engagements is
recognized using the percentage of completion method (based on a ratio of costs
incurred to the total estimated project costs). Revenue from time and materials
engagements is recognized as services are rendered. Payments received in advance
of
F-48
WILD FILE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
services rendered are recorded as deferred revenue. The Company reports revenue
net of reimbursable expenses which are billed to and collected from clients.
Provisions for estimated losses on uncompleted contracts are made on a
contract by contract basis and are recognized in the period in which such losses
become probable and can be reasonably estimated. To date, no such losses have
arisen.
Client billings are generated upon achievement of milestones defined in the
engagement contracts. Unbilled accounts receivable relating to revenue
recognized but not billed due to the timing of the achievement of milestones was
$0 and $417,000 at June 30, 1999 and March 10, 2000, respectively, and are
included in accounts receivable on the balance sheet.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. At June 30,
1999 and March 10, 2000, $1.1 million and $5.1 million, respectively, of money
market funds, are included in cash and cash equivalents. The Company deposits
cash and cash equivalents with high credit quality financial institutions. The
fair value of the cash equivalents approximates cost.
SHORT-TERM INVESTMENTS
The Company classifies all short-term investments as available-for-sale in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The Company
places its short-term investments primarily in marketable securities. At
June 30, 1999 and March 10, 2000, the estimated fair value of the investments
approximated their cost, and the amount of gross unrealized gains and losses
were not significant.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist of cash, cash equivalents, short-term investments and
accounts receivable. The Company's accounts receivable are derived from revenue
earned from customers located in the U.S. The Company maintains an allowance for
doubtful accounts receivable based upon the expected collectibility of accounts
receivable.
The following table summarizes the revenues from customers in excess of 10%
of the total revenues:
FOR THE PERIOD FOR THE PERIOD
FROM JULY 1, FROM JULY 1,
YEAR ENDED 1998 THROUGH 1999 THROUGH
JUNE 30, MARCH 10, MARCH 10,
1999 1999 2000
---------- -------------- --------------
(UNAUDITED)
Company A....................................... 61% 84% 31%
Company B....................................... -- -- 26%
Company C....................................... -- -- 16%
F-49
WILD FILE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
Company A, B and C had no accounts receivable at June 30, 1999 and accounted
for 30%, 6% and 20%, respectively, of total accounts receivable at March 10,
2000.
INVENTORY
Inventory includes finished goods and is stated at the lower of cost or
market, cost being determined using the first-in, first-out ("FIFO") method.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three to five years, or the shorter of the lease term or the estimated
useful lives of the respective assets.
The Company evaluates the recoverability of its long-lived assets in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived assets to be disposed
of" ("SFAS No. 121). SFAS No. 121 requires recognition of impairment of
long-lived assets in the event the net book value of such assets exceeds the
future undiscounted cash flows attributable to such assets. In that event, a
loss is recognized based on the amount by which the carrying value exceeds the
fair value of the long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that fair values are reduced for the cost of disposal. No losses
from impairment have been recognized in the financial statements.
STOCK-BASED COMPENSATION
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Under APB No. 25, compensation expense is recognized based on the
difference, if any, on the date of grant between the fair value of the Company's
stock and the amount an employee must pay to acquire the stock.
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") Issue 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 require that such equity instruments are recorded at their fair
value on the measurement date, which is typically the date of grant.
NET LOSS PER SHARE
Net loss per share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings per Share": (SFAS "No. 128") and SEC
Staff Accounting Bulletin No. 98 ("SAB No. 98"). Under the provisions of SFAS
No. 128 and SAB No. 98, basic net loss per share is computed by dividing the net
loss available to common stockholders for the period by the weighted average
number of common shares outstanding during the period. Diluted net loss per
share is computed by
F-50
WILD FILE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES: (CONTINUED)
dividing the net loss for the period by the weighted average number of common
and potential common shares outstanding during the period, if their effect is
dilutive. Potential common shares are comprised of incremental shares of Common
Stock issuable upon the exercise of stock options and warrants and upon the
conversion of Convertible Preferred Stock.
The following table sets forth potential common stock that are not included
in the diluted net loss per share calculation, because to do so would be
antidilutive for the period indicated:
FOR THE PERIOD FOR THE PERIOD
FROM JULY 1, FROM JULY 1,
YEAR ENDED 1998 THROUGH 1999 THROUGH
(IN THOUSANDS) JUNE 30, 1999 MARCH 10, 1999 MARCH 10, 2000
- -------------- -------------- --------------- ---------------
(UNAUDITED)
Effect of potential common stock:
Series A convertible preferred stock............... -- -- 1,700
Employee stock options............................. 3,219 3,114 318
----- ----- -----
3,219 3,114 2,018
===== ===== =====
ADVERTISING
The cost of advertising is expensed as incurred. The Company incurred
approximately $205,000 in advertising costs for the year ended June 30, 1999.
For the periods from July 1, 1998 through March 10, 1999 and July 1, 1999
through March 10, 2000, advertising expense was $68,000 (unaudited) and
$410,000, respectively.
F-51
WILD FILE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--BALANCE SHEET COMPONENTS:
JUNE 30, MARCH 10,
(IN THOUSANDS) 1999 2000
- -------------- -------- ---------
ACCOUNTS RECEIVABLE:
Accounts receivable....................................... $408 $1,320
Less: Allowance for doubtful accounts..................... -- 1
Reserve for sales returns............................ 40 14
---- ------
$368 $1,305
==== ======
PROPERTY AND EQUIPMENT:
Computer equipment........................................ $611 $ 858
Manufacturing equipment................................... 12 14
Furniture and fixtures.................................... 33 63
Leasehold improvements.................................... 35 32
---- ------
691 967
Less: Accumulated depreciation and amortization........... 271 557
---- ------
$420 $ 410
==== ======
ACCRUED LIABILITIES:
Payroll and related expenses.............................. $ 15 $ 41
Technical support......................................... 27 49
Income taxes payable...................................... -- 1
Other....................................................... 2 21
---- ------
$ 44 $ 112
==== ======
NOTE 3--RELATED PARTY TRANSACTIONS:
The balance due to the Company from its officers at June 30, 1999 of $26,000
arose on a mortgage loan to a principal stockholder and company officer, and was
to be repaid over 9.75 years at an interest rate of 7.125%. The loan was repaid
in full on March 31, 2000.
During March 2000, the Company entered into a non-recourse promissory note
with one of its officers. The balance due to the Company of $65,000 arose on the
exercise of stock options and is to be repaid over one year at a 6.45% interest
rate. The note is prepayable at any time and becomes repayable in full
immediately should the officer leave the employment of the Company. The accrued
interest is a non-recourse obligation.
At the exercise date, the original fixed options converted into variable
options resulting in deferred stock-based compensation of approximately
$1.3 million. Amortization of this deferred stock-based compensation will be
over the one-year remaining life of the note and amounted to $26,000 for the
seven day period from the date the note was issued through March 10, 2000, and
has been included in general and administrative expenses in the period from
July 1, 1999 through March 10, 2000. The note was repaid in full on March 13,
2000.
F-52
WILD FILE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INCOME TAXES:
The provision for income taxes consists of the following (in thousands):
FOR THE PERIOD FOR THE PERIOD
FROM JULY 1, FROM JULY 1,
YEAR ENDED 1998 THROUGH 1999 THROUGH
JUNE 30, MARCH 10, MARCH 10,
1999 1999 2000
---------- -------------- --------------
(UNAUDITED)
CURRENT:
Federal............................................... $(136) $(136) $ --
State and local....................................... 1 1 1
----- ----- ---------
(135) (135) 1
===== ===== =========
DEFERRED:
Federal............................................... -- -- --
Other................................................. -- -- --
----- ----- ---------
$(135) $(135) $ 1
===== ===== =========
Deferred tax assets and liabilities consist of the following (in thousands):
JUNE 30, MARCH 10,
1999 2000
--------- ----------
DEFERRED TAX ASSETS:
Net operating loss carryforwards.......................... $237 $458
Deferred revenue.......................................... 134 130
Depreciation.............................................. -- 47
Accruals and reserves..................................... 16 6
---- ----
387 641
DEFERRED TAX LIABILITIES:
Depreciation.............................................. $(32) $ --
Net deferred tax assets................................... 355 641
Less: Valuation allowance................................. 355 641
---- ----
$ -- $ --
==== ====
Management believes that it is more likely than not that the deferred tax
assets will not be utilized, such that a full valuation allowance has been
recorded.
The difference between the statutory and effective tax rates is due to state
taxes net of federal benefit and an increase in the valuation allowance.
At March 10, 2000, the Company had approximately $1.1 million of federal and
$1.5 million of state net operating loss carryforwards available to offset
future taxable income which expire in varying amounts through 2019. Under the
Tax Reform Act of 1986, the amounts of and benefits from net operating loss
carryforwards may be impaired or limited in certain circumstances. Events which
cause limitations in the amount of net operating losses that the Company may
utilize in any one year include, but are not limited to, a cumulative ownership
change of more than 50%, as defined, over a three year period. The acquisition
of the Company in March 2000 (see Note 8) resulted in no limitation of the
Company's net operating losses.
F-53
WILD FILE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--COMMITMENTS:
LEASES
The Company leases office space and equipment under noncancelable operating
leases with various expiration dates through May 2001. Rent expense for the year
ended June 30, 1999 was $73,000. For the periods from July 1, 1998 through
March 10, 1999 and July 1, 1999 through March 10, 2000, rent expense was $51,000
(unaudited) and $45,000, respectively. The terms of the facility lease provide
for rental payments on a graduated scale. The Company recognizes rent expense on
a straight-line basis over the lease period, and has accrued for rent expense
incurred but not paid.
Future minimum lease payments under noncancelable operating leases as of
March 10, 2000, are as follows (in thousands):
OPERATING
PERIOD ENDED MARCH 10, LEASES
- ---------------------- ---------
2001........................................................ $69
2002........................................................ 17
---
$86
===
NOTE 6--REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Redeemable Convertible Preferred Stock at March 10, 2000 consists of the
following (in thousands):
PROCEEDS
SHARES NET OF
------------------------ LIQUIDATION ISSUANCE
SERIES AUTHORIZED OUTSTANDING AMOUNT COSTS
- ------ ---------- ----------- ----------- --------
A.................................. 3,077 1,700 $5,525 $5,374
The holders of Convertible Preferred Stock have various rights and
preferences as follows:
VOTING
Each share of Series A Convertible Preferred Stock has voting rights equal
to an equivalent number of shares of Common Stock into which it is convertible
and votes together as one class with the Common Stock.
As long as any shares of Convertible Preferred Stock remain outstanding, the
Company must obtain approval from at least two-thirds of the holders of
Convertible Preferred Stock in order to amend the Articles of Incorporation as
related to Convertible Preferred Stock, change the authorized number of shares
of Convertible Preferred Stock, repurchase any shares of Common Stock other than
shares subject to the right of repurchase by the Company, change the authorized
number of directors, authorize a dividend for any class or series other than
Convertible Preferred Stock, create a new class of stock or effect a merger,
consolidation or sale of assets where the existing shareholders retain less than
50% of the voting stock of the surviving entity.
F-54
WILD FILE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--REDEEMABLE CONVERTIBLE PREFERRED STOCK: (CONTINUED)
DIVIDENDS
Holders of Series A Convertible Preferred Stock are entitled to receive
compounded cumulative dividends on outstanding shares of Series A Preferred
Stock at the per annum rate of $0.325 per share. Dividends shall accrue on a
daily basis and compound on an annual basis from the date of issuance of the
Series A Preferred Stock. All dividends shall accumulate until payment or
cancellation thereof whether or not such dividends shall have been declared and
whether or not there shall be (at the time such dividends are calculated or
become payable or at any other time) profits, surplus or other funds or assets
of the Company legally available for the payment of dividends. So long as any
Series A Preferred Stock shall remain outstanding, (i) no Common Stock shall be
acquired or redeemed by the Company, without the affirmative vote or consent of
the holders of at least a two-thirds majority of the outstanding Series A
Convertible Preferred Stock; and (ii) no dividend or distribution on any common
stock shall be declared, paid or made by the Company. No dividends on
Convertible Preferred Stock or Common Stock have been declared by the Board from
inception through March 10, 2000. For the period October 14, 1999 through
March 10, 2000 cumulative dividends of $224,000 were recorded on the outstanding
Series A Preferred Stock shares. These dividends remain unpaid at March 10,
2000.
LIQUIDATION
In the event of any liquidation, dissolution or winding up of the Company
either voluntarily or involuntarily, the holders of Series A Convertible
Preferred Stock are entitled to receive an amount of $3.25 per share, plus any
accrued but unpaid dividends prior to and in preference to any distribution to
the holders of Common Stock. Certain events will constitute a deemed
liquidation. These events include (i) fundamental changes, defined as a
reorganization, consolidation or merger in which the Company is a party, or a
sale or other transfer of all or substantially all of the assets of the Company,
and (ii) change in control, defined as any sale, transfer, issuance or
redemption of securities which results in any other person or entity owning
capital stock of the Company possessing the voting power under ordinary
circumstances to elect at least 50% of the Company's Board of Directors. Should
the Company's legally available assets be insufficient to satisfy the
liquidation preferences, the funds will be distributed ratably according to the
Series A Convertible Preferred Stock preferences.
CONVERSION
Each share of Series A Convertible Preferred Stock is convertible, at the
option of the holder, according to a conversion ratio as defined in the
Company's Amended and Restated Articles of Incorporation, subject to adjustment
for dilution. The shares of Series A Convertible Preferred Stock automatically
convert into shares of Common Stock upon the closing of a public offering of
Common Stock at a per share price of at least $11.375 per share with gross
proceeds of at least $20 million.
REDEMPTION
At any time after October 14, 2004, any outstanding shares of Series A
Convertible Preferred Stock are eligible to be redeemed in full upon written
notice by any individual holder in three equal annual installments. In the event
of a redemption, each holder participating in the redemption would be entitled
to receive $3.25 per share, plus any accrued but unpaid dividends on such
shares.
At March 10, 2000, the Company had reserved 1,700,000 shares of Common Stock
for the conversion of Series A Convertible Preferred Stock.
F-55
WILD FILE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLANS:
At March 10, 2000, the Company had reserved 3,207,733 shares of common stock
for sale to employees and directors under the 1994, 1995, 1997 and 1999
Incentive Stock Option Plans. The Plans provide for the granting of stock
options to employees of the Company. Options granted under the 1995, 1997 and
1999 Plans are incentive stock options ("ISOs") and may be granted only to
Company employees (including officers and directors who are also employees).
Options granted under the 1994 Plan are non-qualified stock options ("NSOs")
which may be granted to Company employees and consultants.
Options under the Plans may be granted for periods of up to ten years and
(i) the exercise price of an ISO and NSO shall not be less than 100% of the
estimated fair value of the shares on the date of grant as determined by the
Board of Directors, and (ii) the exercise price of an ISO and NSO granted to a
10% shareholder shall not be less than 110% of the estimated fair value of the
shares on the date of grant.
Stock option agreements under the 1994, 1995, 1997 and 1999 plans formerly
provided that the Company had right of first refusal to repurchase any shares of
common stock purchased by an optionee upon exercise of a stock option. On
February 23, 2000, the Company's Board of Directors waived this right of first
refusal with respect to all shares of stock currently outstanding that were
acquired upon exercise of options and with respect to all shares of stock that
are purchased in the future upon exercise of outstanding options. Accordingly,
none of the shares of common stock that have been acquired or that are acquired
in the future upon exercise of the Company's stock options will be so
restricted. To date, options granted generally vest over five years.
Activity under the stock option plans is as follows:
OPTIONS OUTSTANDING
--------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE FOR NUMBER OF EXERCISE
GRANT SHARES PRICE
------------- --------- --------
(IN THOUSANDS)
Balance at June 30, 1998.................................... 1,886 3,114 $0.10
Additional authorization.................................. 1,500 -- --
Options granted........................................... (105) 105 1.30
----- ------
Balance at June 30, 1999.................................... 3,281 3,219 0.14
Options granted........................................... (83) 83 3.25
Options exercised......................................... -- (2,974) 0.11
Options cancelled......................................... 10 (10) 2.08
----- ------
Balance at March 10, 2000................................... 3,208 318 $1.21
===== ======
F-56
WILD FILE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--STOCK OPTION PLANS: (CONTINUED)
The following table summarizes information about stock options outstanding
at March 10, 2000.
OPTIONS OUTSTANDING AT OPTIONS EXERCISABLE AT
MARCH 10, 2000 MARCH 10, 2000
(IN THOUSANDS) ------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE OUTSTANDING PRICE
- ----------------------- ----------- ------------ -------- ----------- ---------
$0.0001.................................. 141 4.47 $0.0001 141 $0.0001
1.30..................................... 101 9.05 1.30 -- --
2.46..................................... 66 9.72 2.46 -- --
9.00..................................... 10 9.80 9.00 -- --
--- ---
318 141
=== ===
FAIR VALUE DISCLOSURES
The Company has adopted the disclosure only provisions of SFAS No. 123. The
weighted average estimated fair value of shares granted during the year ended
June 30, 1999 and the period from July 1, 1999 through March 10, 2000 was $0.27
and $1.46 per share, respectively. Had compensation cost been determined for
options issued based on the fair value of the options at the grant date for
options granted in 1999 consistent with the provisions of SFAS No. 123, the
Company's net loss would have increased to $1.2 million for the year ended
June 1999 on a pro forma basis. The Company's net loss would have increased to
$1.0 million for the period from July 1, 1999 through March 10, 2000.
The Company calculated the fair value of each option on the date of grant
using the Black-Scholes pricing model with the following assumptions: annual
dividend yield of 0%, risk-free annual interest rate of 5.75% and a weighted
average expected option term of five years.
NOTE 8--SUBSEQUENT EVENTS:
In March 2000, the Company was acquired by Adaptec, Inc. ("Adaptec") for
consideration of $13.2 million in cash, 392,000 shares of Adaptec's common stock
valued at $17.1 million and assumed stock options valued at $0.8 million.
F-57