SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2001.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-32373
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Roxio, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware 77-0551214
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
461 South Milpitas Boulevard, Milpitas, California 95035
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (408) 259-7694
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), Yes [X ] No [ ] and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
As of August 6, 2001, there were 16,776,959 shares of the Registrant's Common
Stock outstanding, par value $0.001.
ROXIO, INC.
TABLE OF CONTENTS
Page
Number
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PART I. Financial Information
Item 1 Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of June 30, 2001
and March 31, 2001................................................. 3
Condensed Consolidated Statements of Operations for the three
month periods ended June 30, 2001 and 2000........................ 4
Condensed Consolidated Statements of Cash Flows for the three month
periods ended June 30, 2001 and 2000............................... 5
Notes to Condensed Consolidated Financial Statements............... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations................................ 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk......... 28
PART II. Other Information
Item 1 Legal Proceedings.................................................. 29
Item 2 Changes in Securities.............................................. 29
Item 3 Defaults Upon Senior Securities.................................... 29
Item 4 Submission of Matters to a Vote of Security Holders................ 30
Item 5 Other Information.................................................. 30
Item 6 Exhibits and Reports on Form 8-K................................... 30
Signatures....................................................................... 31
PART I. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ROXIO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data, unaudited)
June 30, March 31,
2001 2001
-------- ----------
ASSETS
Current assets:
Cash $ 52,583 $ -
Accounts receivable, net of allowance for doubtful accounts of
$375 and $155, respectively 25,006 31,525
Inventories 566 1,211
Prepaid expenses and other current assets 2,410 2,354
Deferred income taxes 3,482 3,133
-------- -------
Total current assets 84,047 38,223
Property and equipment, net 1,431 1,426
Goodwill, net 16,255 16,255
Other intangibles, net 8,893 10,268
Other assets 395 -
-------- -------
Total assets $111,021 $66,172
======== =======
LIABILITIES AND OWNER'S NET INVESTMENT / STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 17,597 $ 7,721
Income taxes payable 1,776 9,508
Accrued liabilities 9,089 6,075
-------- -------
Total current liabilities 28,462 23,304
Long term liabilities:
Deferred income taxes 1,970 2,251
-------- -------
Total liabilities 30,432 25,555
-------- -------
Owner's net investment / stockholder's equity:
Common stock, $0.001 par value; 100,000 shares
authorized; 16,747 and none issued and outstanding 17 17
Additional paid-in capital 91,373 16
Deferred stock-based compensation (10,451) -
Accumulated deficit (702) -
Accumulated other comprehensive income 352 402
Owner's net investment - 40,182
-------- -------
Total owner's net investment / stockholder's equity 80,589 40,617
-------- -------
Total liabilities and owner's net investment / stockholder's equity $111,021 $66,172
======== =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ROXIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data, unaudited)
Three Months
Ended June 30,
--------------------------------
2001 2000
-------------- --------------
Net revenues $36,955 $28,590
Cost of revenues (excludes stock-based
compensation charges of $61, and $0, respectively) 7,641 6,001
-------------- --------------
Gross profit 29,314 22,589
-------------- --------------
Operating expenses:
Research and development (excludes stock-based
compensation charges of $891, and $648, respectively) 6,117 4,933
Sales and marketing (excludes stock-based
compensation charges of $1,219, and $0, respectively) 9,514 6,455
General and administrative (excludes stock-based
compensation charges of $1,321, and $0, respectively) 3,205 2,642
Amortization of intangible assets 1,369 3,860
Stock-based compensation charges 3,492 648
-------------- --------------
Total operating expenses 23,697 18,538
-------------- --------------
Income from operations 5,617 4,051
Other income, net 301 -
-------------- --------------
Income from operations before provision for income taxes 5,918 4,051
Provision for income taxes (3,540) (1,623)
-------------- --------------
Net income $ 2,378 $ 2,428
============== ==============
Basic and diluted net income per share $ 0.14 $ 0.15
============== ==============
Weighted average shares used in computing basic and
diluted net income per share
Basic 16,625 16,500
============== ==============
Diluted 17,006 16,500
============== ==============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ROXIO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, unaudited)
Three Months
Ended June 30,
----------------------------
2001 2000
------- -------
Cash flows from operating activities:
Net income $ 2,378 $ 2,428
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 1,623 3,931
Stock-based compensation charges 3,492 648
Provision for doubtful accounts 220 172
Deferred income taxes (630) (375)
Change in operating assets and liabilities:
Accounts receivable 8,951 (5,052)
Inventories 645 (635)
Prepaid expenses and other assets (451) (537)
Accounts payable 308 1,275
Income taxes payable 3,799 1,998
Accrued liabilities 3,014 (717)
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Net cash provided by operating activities 23,349 3,136
------- -------
Cash flows from investing activities:
Purchases of property and equipment (260) (153)
------- -------
Net cash used in investing activities (260) (153)
------- -------
Cash flows from financing activities:
Net cash transfers from/(to) Adaptec 27,446 (2,983)
Proceeds from issuance of common stock 2,000 -
Proceeds from exercise of stock options 98 -
------- -------
Net cash provided by (used in) financing activities 29,544 (2,983)
------- -------
Effect of exchange rate changes on cash (50) -
Change in cash and cash equivalents 52,583 -
Cash and cash equivalents at beginning of period - -
------- -------
Cash and cash equivalents at end of period $52,583 $ -
======= =======
The accompanying notes are an integral part of these condensed consolidated
financial statements.
ROXIO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The unaudited condensed consolidated financial statements have been
prepared by Roxio, Inc., a Delaware company ("Roxio"), pursuant to the rules
and regulations of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. However,
Roxio believes that the disclosures are adequate to make the information
presented not misleading. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes included in Roxio's annual report on Form 10-K for the year ended March
31, 2001.
Prior to legal separation on May 5, 2001, Roxio conducted its business as
an operating segment of Adaptec. Roxio's consolidated financial statements have
been carved out of the consolidated financial statements of Adaptec, Inc.
("Adaptec") using the historical results of operations of the Adaptec software
operating segment and historical bases of the assets and liabilities of Adaptec
that Roxio comprises. Certain software products directly related to Adaptec's
hardware products, which were historically reflected in Roxio's results of
operations in Adaptec's segment reporting, were retained by Adaptec after legal
separation. As such, the revenues and associated costs of sales and operating
expenses related to these products have not been included in Roxio's 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. Prior to
legal separation, the consolidated financial statements also included
allocations to Roxio 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 a basis that Adaptec and Roxio considered to be a reasonable
reflection of the utilization of the services provided to Roxio or the benefit
received by Roxio. 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.
Roxio's fiscal quarters end on a Friday and are 13 weeks in length. For
presentation purposes, Roxio has indicated its first quarter of fiscal 2002 as
having ended on June 30, 2001, whereas in fact, Roxio's third quarter of fiscal
2001 ended on June 29, 2001. The results of operations for the three months
ended June 30, 2001 are not necessarily indicative of the results to be expected
for the entire year. Unless otherwise stated, all years and dates refer to our
fiscal year and fiscal quarters.
The balance sheet as of March 31, 2001 has been derived from audited
financial statements but does not include all disclosures required by generally
accepted accounting principles. Such disclosures are contained in Roxio's annual
report on Form 10-K for the year ended March 31, 2001.
The condensed consolidated financial statements reflect all adjustments
(which include only normal, recurring adjustments) that are, in the opinion of
management, necessary to state fairly the results for the periods presented. The
results for such periods are not necessarily indicative of the results to be
expected for the full year.
The preparation of condensed consolidated 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 condensed consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
(2) Completion of Separation from Adaptec
On June 8, 2000, Adaptec announced a plan to create a separate company
comprised of substantially all of its software segment, subsequently named
Roxio, Inc.
Adaptec and Roxio entered into a Master Separation and Distribution
Agreement (the "Separation Agreement") under which Adaptec contributed at legal
separation (the "Separation Date") $33.2 million in cash, which included $3.2
million in cash
ROXIO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
held by Roxio's overseas subsidiaries to fund working capital as a stand-alone
entity. Additionally, with the exception of approximately $11.5 million in
income taxes payable, Adaptec transferred to Roxio, on the Separation Date,
substantially all of the assets and liabilities that appeared on Roxio's
consolidated balance sheet.
On April 12, 2001, the board of directors of Adaptec approved the
distribution of all of the outstanding shares of Roxio's common stock to the
record holders of Adaptec common stock on April 30, 2001, with the exception of
190,941 shares that Adaptec continues 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 received as a dividend 0.1646 of a share of
Roxio's common stock for every one share of Adaptec common stock held on April
30, 2001, which was the record date for determining the holders of Adaptec stock
entitled to receive the dividend. Roxio's separation from Adaptec was completed
on May 5, 2001 and the distribution of Roxio's common stock by Adaptec to its
stockholders was completed on May 11, 2001.
(3) Goodwill and Other Intangible Assets
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which Roxio
adopted effective April 1, 2001 and the implementation resulted in Roxio ceasing
to amortize goodwill effective April 1, 2001. The following summary reflects the
condensed consolidated results of operations as if SFAS 142 had been adopted at
the beginning of the periods presented (in thousands, except net income per
share amounts):
Three Months
Ended June 30,
----------------------
2001 2000
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Reported net income:
Reported net income.............................. $2,378 $2,428
Goodwill amortization............................ - 2,490
------ ------
Adjusted net income.......................... $2,378 $4,918
====== ======
Basic and diluted net income per share:
Reported basic and diluted net income per share.. $ 0.14 $ 0.15
Goodwill amortization............................ - 0.15
------ ------
Adjusted basic and diluted net income
per share................................... $ 0.14 $ 0.30
====== ======
The gross carrying amounts and accumulated amortization of intangible
assets, are as follows for the periods presented (in thousands):
Accumulated Amortization
Gross --------------------------
Carrying June 30, March 31,
Amount 2001 2001
------------------------------------
Amortized intangible assets
Patents ....................... $ 5,260 $ 2,279 $ 1,841
Covenant not to compete ....... 6,010 3,561 3,278
Purchased technology .......... 3,258 2,144 1,873
OEM relationships ............. 1,186 791 692
Trade name .................... 1,479 863 740
Others ........................ 1,728 390 229
------- ------- -------
$18,921 $10,028 $ 8,653
======= ======= =======
Goodwill ...................... $29,125 $12,870 $12,870
======= ======= =======
The estimated future amortization expense for intangible assets as of March
31, are as follows (in thousands):
2002 $ 6,324
2003 $ 3,770
2004 $ 174
-------
$10,268
=======
(4) Revenue Recognition
Roxio's revenue recognition policy is in accordance with Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". Roxio
primarily sells its software products through two channels: Original Equipment
Manufacturers ("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 reasonably assured.
For software product sales to distributors, revenue is recognized upon
product shipment to the distributors or receivable of the products by the
distributor, dependent on the shipping terms, provided that all fees are fixed
or determinable, evidence of an arrangement exists and collectibility is
reasonably assured. Roxio's distributor arrangements provide distributors with
certain product rotation rights. Additionally, Roxio permits its distributors to
return products in certain circumstances, generally during periods of product
transition. Roxio 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 Roxio's web site. As no
separate charge is made for the PCS and the PCS is available for a period of
less than one year, Roxio 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 Roxio to the end users.
ROXIO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(5) Net Income Per Share
Basic net income per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted net income per share is
computed using the weighted-average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of a warrant issued in connection with a strategic relationship
agreement with Virgin Holding Inc. ("Virgin"), an indirect subsidiary of EMI
Group plc, and common stock issuable upon exercise of stock options using the
treasury stock method.
The following is a reconciliation of the shares used in the computation of
basic and diluted net income per share (in thousands):
Three Months
Ended June 30,
------------------
2001 2000
------ ------
Basic net income per share--weighted-average number of common shares outstanding..... 16,625 16,500
Effect of dilutive common equivalent shares:
Stock options outstanding................................................. 365 -
Warrant issued in relation to the Virgin agreement........................ 16 -
------ ------
Diluted net income per share--weighted-average number of common shares outstanding... 17,006 16,500
====== ======
(6) Other 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 Roxio's Japanese and European operations. No tax effect has been
provided on the foreign currency translation items for any period shown, as the
undistributed earnings of Roxio's foreign investments will continue to be
reinvested.
The components of comprehensive income, net of tax, are as follows (in
thousands):
Three Months Ended
June 30,
---------------------
2001 2000
------ ------
Net income............................................... $2,378 $2,428
Cumulative translation adjustment........................ (50) 49
------ ------
Total comprehensive income............................... $2,328 $2,477
====== ======
ROXIO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(7) 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. Roxio adopted these statements in
its first quarter of fiscal 2002 and the adoption has not had a material effect
on Roxio's financial position or results of operations to date.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the pooling-of-
interests method. Roxio believes that the adoption of SFAS 141 will not have a
significant impact on its financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is required
for fiscal years beginning after December 15, 2001 and can be early-adopted for
fiscal years beginning after March 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. Roxio implemented SFAS 142 effective April 1, 2001 and
the implementation resulted in Roxio ceasing to amortize goodwill effective
April 1, 2001. The implementation also resulted in the reclassification of
certain intangible assets related to acquired work force to goodwill on Roxio's
balance sheet.
(8) Settlement of litigation
On June 11, 2001 Roxio entered into a settlement agreement with Prassi
Software, Inc. and certain individuals ("Prassi") in relation to a lawsuit filed
by Roxio and Adaptec in the United States District Court for the Northern
District of California on April 6, 1998. In accordance with the settlement,
Prassi paid Roxio $2.0 million in cash during June 2001 and Prassi assigned all
rights in the product CD Right and CD Right Plus. Prassi will keep the right to
sell, distribute, copy and support the product CD Rep for professional CD
mastering applications.
Roxio 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, Roxio believes that the final outcome of
such matters will not have a material adverse impact on Roxio's business,
financial position or results of operations.
(9) Capital Stock
On May 17, 2001, Roxio entered into a strategic relationship with Virgin
to, among other things, develop technology solutions relating to CD recording
technology. As part of the agreement, Virgin will provide strategic guidance and
advice to Roxio for a one-year period. Simultaneously with the execution of the
agreement, Virgin purchased 235,294 of Roxio's common stock at a price of $8.50
per share. Virgin also received a warrant to purchase 117,647 shares of Roxio's
common stock at a price equal to $8.50 per share. The warrant becomes
exercisable by 25% each quarter following the initial agreement. In the first
quarter, approximately $1.1 million in deferred stock-based compensation has
been recorded for the common stock issued. In relation to the common stock and
warrant, approximately $190,000 and $231,000, respectively, of amortization
expense was recorded and is included in stock-based compensation charges in the
consolidated statement of operations for the quarter ended June 30, 2001.
(10) Segment and Geographic Information
Segment information
Roxio has organized and managed its operations in a single operating
segment which designs, develops and markets application software.
ROXIO, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Geographic information
The following table presents net revenues by country and is attributed to
countries based on location of the selling entity:
Three Months Ended
June 30,
---------------------------
(in thousands) 2001 2000
------- -------
United States....................................... $27,250 $18,748
Singapore........................................... 2,084 5,349
Netherlands......................................... 4,180 -
Japan............................................... 2,813 3,906
Other countries..................................... 628 587
------- -------
$36,955 $28,590
======= =======
The following table presents net property and equipment by country based on
the location of the assets:
June 30, March 31,
2001 2000
-------- ---------
(in thousands)
United States....................................... $ 859 $ 1,123
Germany............................................. 322 294
Other countries..................................... 250 9
------- -------
$ 1,431 $ 1,426
======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
In addition to the other information in this report, certain statements in
the following Management's Discussion and Analysis of Financial Condition and
Results of Operation ("MD&A") are forward-looking statements. When used in this
report, the words "expects," "anticipates," "estimates," and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected. Certain of these risks and uncertainties are set forth in
this Report on Form 10-Q under "Risks Relating to Our Business," "Risks Relating
to Separating Roxio from Adaptec" and "Risks Related to the Securities Markets
and Ownership of Our Common Stock." The following discussion should be read in
conjunction with the Condensed Consolidated Financial Statements and notes
thereto included elsewhere in this report.
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, Inc. ("Adaptec") to conduct substantially all of the business of its
software products group. Upon legal separation from Adaptec in May 2001, with
the exception of approximately $11.5 million in income taxes payable, Adaptec
transferred to Roxio substantially all of the assets and liabilities that appear
on Roxio's consolidated balance sheet, as well as $33.2 million in cash, which
included $3.2 million in cash held by our overseas subsidiaries.
We have entered into agreements with Adaptec under which Adaptec provides
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 41% and 52% of our net
revenues in the quarters ended June 30, 2001 and 2000, respectively. Sales to
distributors and direct sales to end users through our web site and (800) number
collectively represented 59% and 48% of our net revenues in the quarters ended
June 30, 2001 and 2000, respectively.
Although sales to our distributors and direct sales to end users
represented 59% of our net revenues during the quarter, the number of units sold
to our distributors and end users represented less than 10% of the total number
of units sold. In the future, we anticipate that CD recording technology
revenues from our standard products to OEMs will decline as a percentage of
total net revenues, as a result of highly competitive pricing pressures in the
PC industry. We anticipate that licensing fees for new features and technologies
as well as increased revenues from sales of our deluxe products, will represent
an increasingly larger percentage of total net revenues in future periods. In
addition, we expect that net revenues from sales of our products will decline in
the quarter ended September 30, 2001 due to an anticipated decline in computer
hardware sales generally and in anticipation of the release of the Windows XP
operating system. International sales, defined as sales from our international
subsidiaries, accounted for approximately 26% and 34% of our net revenues during
the quarters ended June 30, 2001 and 2000, respectively.
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 reasonably assured. We recognize revenues from sales to
distributors upon shipment by us or receivable of the products by the
distributor, dependent on the shipping terms, provided all fees are fixed or
determinable, evidence of an arrangement exists and collection is reasonably
assured. 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 continue 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 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.
Until our current quarter ended June 30, 2001, these capitalized costs were
amortized over their estimated useful lives of three years. We adopted SFAS No.
142, "Goodwill and Other Intangible Assets" effective April 1, 2001, and as such
no longer amortize goodwill and acquired workforce intangibles, which are now
classified as goodwill in the balance sheet in accordance with SFAS No. 142. 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, stock and warrants issued to Virgin Holding Inc., an indirect
subsidiary of EMI Group plc., ("Virgin"), stock options issued to employees, and
the commitment of Roxio stock options to Adaptec employees who became Roxio,
Inc. ("Roxio") employees as described in the paragraphs below.
Roxio 2000 Stock Option Plan
On December 20, 2000, a commitment was made to issue employees of Adaptec,
who were projected to become and who subsequently became 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. Prior to legal
separation, approximately $400,000 additional options had been committed to be
issued. 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% on the one-year anniversary of the later of September 21, 2000 or the
applicable employee's hire date and 6.25% each quarter thereafter until fully
vested. As the grants of these Roxio options constituted grants to non-
employees, prior to the establishment of a measurement date 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 on
the date of legal separation was $12.12 per share. The estimated fair value of
the options granted was $9.72 and the aggregate fair value of $14.6 million was
recognized over the service period, estimated to be 3.75 years. Approximately
$2.4 million was recorded and is included in stock-based compensation expense
for the year ended March 31, 2001.
Because the number of options that were ultimately granted was unknown at
the commitment date, no measurement date for these options was able to be
established. These options were therefore subject to variable plan accounting
treatment, resulting in a re-measurement of the compensation expense based on
the then current market value of the underlying common stock. Approximately
$832,000 was recorded and is included in stock-based compensation for the
quarter ended June 30, 2001 related to the period before legal separation.
The measurement date was established on the date of legal separation at
which time certain employees of Adaptec became employees of Roxio and 1.5
million options were granted to these employees under the Roxio 2000 stock
option plan. Pursuant to Financial Accounting Standards Board Interpretation No.
44, at the date of change in status from non-employees to employees, the
accounting basis for the options changed and the compensation associated with
these options will be re-measured and fixed using the intrinsic value at that
date as prescribed by Accounting Principles Board Opinion No. 25. In the first
quarter, approximately $5.2 million in deferred stock-based compensation has
been recorded for these options. Approximately $248,000 of amortization expense
was recorded and is included in stock-based compensation charges on the
consolidated statement of operations for the quarter ended June 30, 2001.
During the quarter ended June 30, 2001, Roxio issued approximately 1.8
million stock options in addition to the options discussed above, and recorded
approximately $6.6 million in deferred stock-based compensation. These options
have vesting schedules that differ based on the individual employee's
contribution to Roxio. Approximately, $2.0 million of amortization expense was
recorded and is included in stock-based compensation charges on the consolidated
statement of operations for the quarter ended June 30, 2001. The remaining
amortization expense will be recognized over the remaining service period of up
to 4 years.
Issuance of Common Stock and Warrant
On May 17, 2001, Roxio entered into a strategic relationship with Virgin
to, among other things, develop technology solutions relating to CD recording
technology. As part of the agreement, Virgin will provide strategic guidance and
advice to Roxio for a one-year period. Simultaneously with the execution of the
agreement, Virgin purchased 235,294 of Roxio's common stock at a price of $8.50
per share. Virgin also received a warrant to purchase 117,647 shares of Roxio
common stock at a price equal to $8.50 per share. The warrant becomes
exercisable by 25% each quarter following the initial agreement. In the first
quarter, approximately $1.1 million in deferred stock-based compensation has
been recorded for the common stock issued. In relation to the common stock and
warrant, approximately $190,000 and $231,000, respectively, of amortization
expense was recorded and is included in stock-based compensation charges on the
consolidated statement of operations for the quarter ended June 30, 2001.
Basis of Presentation
Prior to legal separation on May 5, 2001, we 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, were retained by Adaptec after legal separation. 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. Prior to legal
separation, the consolidated financial statements also included 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 a basis
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 quarterly report 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 quarterly report 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.
Results of Operations
Comparison of Quarters Ended June 30, 2001 and 2000.
Net Revenues
Net revenues increased 29% to $37.0 million in the quarter ended June 30,
2001 from $28.6 million for the comparable quarter in the prior year. The growth
in net revenue resulted primarily from our release of Easy CD creator 5.0 in the
quarter ended March 31, 2001, which increased distributor revenues in the
quarter ended June 30, 2001 over the comparable quarter in the prior year.
Distributor revenues accounted for $21.9 million or 59% of net revenues in the
quarter ended June 30, 2001 as compared to $13.6 million or 48% of net revenues
for the comparable quarter in the prior year. The remaining increase in net
revenues resulted from the worldwide growth in sales of our products to OEMs.
However, higher unit volume shipments to OEMs were partially offset by reduced
per-unit license fees. OEM revenues accounted for $15.1 million or 41% of net
revenues in the quarter ended June 30, 2001 as compared to $15.0 million or 52%
of net revenues for the comparable quarter in the prior year.
Gross Margin
Gross margin was 79% of net revenues for both the first quarter of fiscal
2002 and 2001. An increase in the percentage of net revenues from distributors
during the first quarter of fiscal 2002, which generally results in a lower
gross margin, was offset by reduced technical support costs, as compared to the
same quarter in the prior year.
Operating Expenses
Research and Development. Research and development expenses increased 24%
to $6.1 million in the quarter ended June 30, 2001 from $4.9 million for the
comparable quarter in the prior year. This increase was driven by additional
personnel and consultants to support increased product development efforts and
increased spending to support CD and DVD recordable drive releases. We expect
that research and development expenses will increase in absolute dollars for the
foreseeable future as we intend to continue to invest in product development.
Sales and Marketing. Sales and marketing expenses increased 47% to $9.5
million in the quarter ended June 30, 2001 from $6.5 million for the comparable
quarter in the prior year. This increase primarily resulted from increased
staffing associated with expanding our marketing team to pursue revenue
generating opportunities and increased advertising and promotion expenses
related to building our product brands. We expect that sales and marketing
expenses will increase in absolute dollars for the foreseeable future as 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.
General and Administrative. General and administrative expenses increased
21% to $3.2 million in the quarter ended June 30, 2001 from $2.6 million for the
comparable quarter in the prior year. This increase resulted primarily from
payroll and other related costs associated with establishing a senior management
team and dedicated human resources, information technology and finance support
for us to operate as a stand-alone entity and additional costs related to the
ongoing operation of Wild File in Minnesota. This increase was partially offset
by a decrease to general and administrative expense as a result of the $2.0
million in cash received in connection with the settlement of the Prassi
litigation.
Amortization of Goodwill and Other Intangibles. Amortization of goodwill
and other intangibles decreased 65% to $1.4 million in the quarter ended June
30, 2001 from $3.9 million for the comparable quarter in the prior year. This
decrease was due to the early adoption of SFAS No. 142, "Goodwill and Other
Intangible Assets", which resulted in the cessation of goodwill amortization
expense effective April 1, 2001.
Stock-Based Compensation Charges. Stock-based compensation charges
increased 439% to $3.5 million in the quarter ended June 30, 2001 from $648,000
for the comparable quarter in the prior year. For the quarter ended June 30,
2001, we amortized $3.5 million in non-cash charges primarily associated with
employee stock options and the common stock and warrant issued as part of our
agreement with Virgin. For the comparable quarter in the prior year, we
amortized $648,000 in non-cash charges related to the assumption of restricted
stock as part of the Wild File acquisition.
Provision for Income Taxes. Income taxes are accounted for in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes", which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the temporary difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Income tax expense is the tax
payable and the change during the period in deferred tax assets and liabilities.
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 income tax rate for the quarter ended June 30, 2001
was 60% as compared to 62% for fiscal 2001. 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.
Liquidity and Capital Resources
Prior to legal separation, Adaptec managed cash on a centralized basis.
Adaptec collected cash receipts associated with our business and provided us
funding to cover our disbursements. Accordingly, we reported no cash or cash
equivalents prior to legal separation on May 4, 2001. As of June 30, 2001, we
reported cash and cash equivalents of $52.6 million. As of June 30, 2001 and
March 31, 2001, we reported working capital of $55.6 and $14.9 million,
respectively.
During the three months ended June 30, 2001, we generated approximately
$23.3 million in cash flow from operating activities as compared to the same
period in the prior year when we generated approximately $3.0 million. Operating
cash flows increased during the quarter ended June 30, 2001 as compared with the
same period in the prior year as a result of decreases in accounts receivable,
decreases in inventory, increases in non-cash charges for depreciation and
amortization and amortization of deferred stock-based compensation, and
increases in accounts payable, income taxes payable, and accrued liabilities.
These increases in cash were partially offset by uses of cash resulting from an
increase in deferred income taxes and a decrease in prepaid and other assets,
and from decreased levels of net income from operations.
Net cash provided by operating activities for the quarter ended June 30,
2000, was generated primarily from net income of $2.4 million, adjusted for non-
cash items, including the write-off of acquired in-process technology of
$648,000, depreciation and amortization expense of $3.9 million and a decrease
in net assets and liabilities of $3.7 million.
Net cash used in investing activities during the quarter ended June 30,
2001 was $260,000 as compared to $153,000 in the same quarter of the prior year.
The net cash used in investing activities in the quarters ended June 30, 2001
and 2000 consisted of capital expenditures.
Net cash generated from financing activities in the quarter ended June 30,
2001 was $29.5 million as compared to cash used of $3.0 million in the same
quarter of the prior year. With the exception of $2.0 million generated from the
issuance of common stock and $98,000 generated from the exercise of stock
options in the quarter ended June 30, 2001, net cash generated from financing
activities relates to net cash received from or transferred to Adaptec. For the
same period in the prior year, all net cash used in financing activities
represented 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.
On May 5, 2001, the date of legal separation, Adaptec contributed $33.2
million in cash to us, which included $3.2 million in cash held by our overseas
subsidiaries. The contribution is non-reciprocal and we will not repay any of
this amount. We intend to use these proceeds for working capital. We believe
that cash from this contribution and from our future operating results will
provide sufficient capital to fund our operations for the next 12 months. After
that, if current sources are not sufficient to meet our needs, we may seek
additional equity or debt financing. In addition, any material acquisition of
complementary businesses, products or technologies or material joint venture
could require us to obtain additional equity or debt financing. We cannot assure
you that such additional financing would be available on acceptable terms, if 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.
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.
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 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.
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 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 have also entered into a strategic relationship
with Virgin to, among other things, develop technology solutions relating to CD
recording technology. 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 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, Microsoft has
announced its intention to include CD recording software in future releases of
its operating systems and Apple has created CD recording software for its
operating system. 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 quarter ended June 30, 2001, and the year ended March 31, 2001,
approximately 34% and 31%, respectively, 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 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 Easy CD Creator 5 Platinum. 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. Hewlett-Packard recently
informed us that they will be bundling one of our competitor's CD recording
software across their PCs and CD recorders and that our solution will likely be
phased out by January 2002. The loss of any of our relationships with original
equipment manufacturers, including Hewlett-Packard, could harm our operating
results.
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.
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 we do, 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.
Microsoft has included system recovery related functionality in its recently
introduced Windows Me operating system and plans to do so in its upcoming
release of Windows XP. While so far this has not had a negative impact on sales,
we cannot assure you that this will not have a negative impact on future sales
of our GoBack software. Additionally, Microsoft has announced its intention to
include CD recording software in future releases of its operating systems and
Apple has CD recording software for its operating system.
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 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.
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 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. 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 and integrating any potential future 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 June
30, 2001, we had an aggregate of $23.8 million of goodwill and other intangible
assets, related to prior acquisitions. We adopted SFAS No. 142, "Goodwill
and Other Intangible Assets" effective April 1, 2001, and as such no longer
amortize goodwill and acquired workforce intangibles, which are now classified
as goodwill in the balance sheet in accordance with SFAS No. 142. 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. The amortization of the remaining
other intangible assets are expected to 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.
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 26% and 34% of our net
revenues for the quarter ended June 30, 2001 and the year ended March 31, 2001,
respectively. We anticipate that revenue from international operations will
repre sent 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.
We could suffer significant litigation expenses, incur substantial damages,
be required to pay substantial license fees or be prevented from selling certain
products.
Any litigation, with or without merit, could be time-consuming, 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. For example, in May 2001, we were sued by Gracenote, Inc. for
breach of contract and patent and trademark infringements. Similarly, Adaptec
was sued by the former principal shareholders of Incat Systems Software USA,
Inc. in February 2001 for breach of contract and we may be asked to defend and
indemnify Adaptec in such lawsuit pursuant to the terms of an agreement between
Adaptec and us. While we believe that we have strong defenses to Gracenote's and
Incat's claims, extended litigation will be costly and 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.
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.
Claims of intellectual property infringement might 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
significant damages or injunctions against the development and sale of our
products, our business would be 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.
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. Twelve 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. 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 has required 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 markets are
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 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, 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 changed 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.
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, 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. We
may be held jointly and severally liable for tax liabilities we incurred as a
result of our operations prior to our separation from Adaptec, 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 separated 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 comprised. Accordingly, the historical financial information we
have included in this annual report does not necessarily reflect what our
financial position, 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 no longer provides 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 upon
separation 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 favorable interest rates or at all.
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, which 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
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.
Risks Related to the Securities Markets and Ownership of Our Common Stock
We cannot assure you that our stock price will not decline.
The market price of our common stock could be subject to significant
fluctuations. 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;
. 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, stockholder rights plan
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. In addition, we have
adopted a stockholder rights plan that makes it more difficult for a third party
to acquire us without the approval of our board of directors. 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.
ITEM 3. Qualitative and Quantitative Disclosure about Market Risk
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 primarily denominated
in U.S. dollars and, as a result, we do not believe that our foreign currency
risk is significant.
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 and accounts payable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On February 13, 2001, several former stockholders of Incat Systems Software
USA, Inc. filed a lawsuit against Adaptec in the Superior Court of California in
the County of Santa Clara. The lawsuit stems from Adaptec's alleged failure to
pay these former stockholders all of the amounts due to them based on an earn-
out agreed to in connection with the acquisition of Incat. We may be asked to
defend and indemnify Adaptec in such lawsuit pursuant to the terms of an
agreement between us. The lawsuit requests a judgment against Adaptec for
actual, compensatory and punitive damages, including interest, court costs, each
in amounts to be proven, and reasonable attorneys' fees incurred. We believe the
lawsuit is without merit and intend to vigorously defend our interests.
On May 10, 2001, Gracenote, Inc. filed a lawsuit against us in U.S.
District Court for the Northern District of California. In the complaint,
Gracenote seeks unspecified damages and injunctive and other relief based upon
claims including patent and trademark infringement and breach of contract. The
lawsuit stems from the use of Gracenote's music recognition service in version 4
of our Easy CD Creator and Toast CD-burning software. In April 2001, we switched
to a competing music recognition service, Freedb.org. On May 17, 2001, Gracenote
filed an exparte application for a temporary restraining order seeking to stop
shipment of version 4 of our Easy CD Creator and Toast CD-burning software. On
May 24, 2001, the court denied Gracenote's motion, finding that it had failed to
establish a likelihood of success on the merits or that Gracenote had been
irreparably harmed. We believe that we have meritorious defenses to each of the
claims alleged by Gracenote and we intend to defend ourselves vigorously. On
June 13, 2001, we filed counterclaims against Gracenote seeking unspecified
damages and injunctive relief and other relief based upon claims including
breach of contract, antitrust violations and tortious interference with business
relationships. On July 26, 2001, Gracenote filed a motion to dismiss some of the
counterclaims that we have asserted. A hearing has been set for September 24,
2001.
On June 11, 2001, we entered into a settlement agreement with Prassi
Software, Inc. and certain individuals in relation to a lawsuit file by Adaptec
and us in the U.S. District Court for the Northern District of California on
April 6, 1998. According to the settlement, Prassi paid us $2,000,000 in June
2001 and Prassi assigned all rights in the product CD Right and CD Right Plus.
Prassi will keep the right to sell, distribute, copy and support the product CD
Rep for professional CD mastering applications.
We are a party to litigation matters and claims which are normal in the
course of our operations, and, while the results of such litigation and claims
cannot be predicted with certainty, we believe that the final outcome of such
matters will not have a material adverse impact on our business, financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES and USE OF PROCEEDS.
On April 19, 2001, we issued options to purchase 3,255,633 shares of our
common stock to employees at an exercise price of $8.50 per share under our
amended and restated 2000 stock option plan. The sale of the above securities
was determined to be exempt from registration under Rule 701 promulgated under
Section 3(b) of the Securities Act of 1933, as amended, as transactions under
compensation benefit plans and contracts relating to compensation as provided
under Rule 701.
On April 19, 2001, we issued options to purchase 55,000 shares of our
common stock to our non-employee directors at an exercise price of $8.50 per
share under our 2001 director option plan. The sale of the above securities was
determined to be exempt from registration under Rule 701 promulgated under
Section 3(b) of the Securities Act of 1933, as amended, as transactions under
compensation benefit plans and contracts relating to compensation as provided
under Rule 701.
On May 17, 2001, we sold 235,294 shares of our common stock to Virgin at a
price per share of $8.50. In addition, we issued Virgin a warrant to purchase
117,647 shares of our common stock at an exercise price of $8.50 per share. The
sale and issuance of these securities were exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of Section
4(2) of the Securities Act and Regulation D thereunder.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Prior to legal separation from Adaptec, Adaptec, as our sole stockholder,
took action by written consent on April 12, 2001 to approve our amended and
restated certificate of incorporation and our amended and restated bylaws and to
approve a one for two reverse stock split of our common stock. On April 19,
2001, Adaptec, as our sole stockholder, took action by written consent to
approve an increase in the number of shares of our common stock issuable upon
exercise of options granted under our amended and restated 2000 stock option
plan and to approve our 2001 stock plan, 2001 director option plan and 2001
employee stock purchase plan. Otherwise, there were no matters submitted to a
vote of security holders during the first quarter of the fiscal year ended March
31, 2002.
ITEM 5. OTHER INFORMATION. None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
See attached exhibit list for exhibits filed as part of this quarterly
report.
(b) Reports on Form 8-K
We filed a report on Form 8-K on May 21, 2001, regarding a press
release filed by Roxio, Inc. ("Roxio") announcing that the board of
directors of Roxio approved the adoption of a stockholder rights plan,
as filed with the Securities and Exchange Commission on May 22, 2001.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
ROXIO, INC.
(Registrant)
Date: August 14, 2001
By: /s/ WM. CHRISTOPHER GOROG
----------------------------------
Wm. Christopher Gorog
Chief Executive Officer, President and
Director (Principal Executive Officer)
By: /s/ R. ELLIOT CARPENTER
-----------------------
R. Elliot Carpenter
Chief Financial Officer
(Principal Financial and Accounting
Officer)
ROXIO, INC.
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------- ------------------------------------------------------------------------
2.1 First Amended and Restated Master Separation and Distribution Agreement
effective as of February 28, 2001 between Adaptec and the Registrant (1)
2.2 General Assignment and Assumption Agreement dated May 5, 2001 between
Adaptec and the Registrant (1)
2.3 Indemnification and Insurance Matters Agreement dated May 5, 2001
between Adaptec and the Registrant (1)
2.4 Master Patent Ownership and License Agreement effective as of May 5,
2001 between Adaptec and the Registrant (1)
2.5 Master Technology Ownership and License Agreement effective as of May 5,
2001 between Adaptec and the Registrant (1)
2.6 Master Confidential Disclosure Agreement effective as of May 5, 2001
between Adaptec and the Registrant (1)
2.7 Master Transitional Services Agreement effective as of May 5, 2001
between Adaptec and the Registrant (1)
2.8 Employee Matters Agreement dated May 5, 2001 between Adaptec and the
Registrant (1)
2.9 Tax Sharing Agreement dated May 5, 2001 between Adaptec and the
Registrant (1)
2.10 Real Estate Matters Agreement dated May 5, 2001 between Adaptec and the
Registrant (1)
2.11 Manufacturing Agreement effective as of May 5, 2001 between Adaptec and
the Registrant (1)
2.12 International Transfer of Assets Agreement dated May 5, 2001 between
Adaptec Mfg(S) Pte Ltd. and Roxio CI Ltd. (1)
2.13 Letter Agreement dated May 5, 2001 between Adaptec and the Registrant
(1)
2.14 Amendment to the Tax Sharing Agreement dated July 19, 2000 between
Adaptec and the Registrant.
3.1 Amended and Restated Certificate of Incorporation of the Registrant (1)
3.2 Amended and Restated Bylaws of the Registrant (1)
3.3 Certificate of Designation of Rights, Preferences and Privileges of
Series A Participating Preferred Stock of Roxio, Inc. (2)
4.1 Form of Common Stock certificate of the Registrant (1)
4.2 Warrant to Purchase Common Stock dated May 17, 2001 between the
Registrant and Virgin Holdings, Inc. (3)
4.3 Registration Rights Agreement dated May 17, 2001 between the Registrant
and Virgin Holdings, Inc. (3)
4.4 Preferred Stock Rights Agreement, dated as of May 18, 2001, between
Registrant and Mellon Investor Services, LLC, including the Certificate
of Designation, the form of Rights Certificate and the Summary of Rights
attached thereto as Exhibits A, B, and C, respectively. (2)
10.1 2001 Employee Stock Purchase Plan (1)
10.2 Amended and Restated 2000 Stock Option Plan (1)
10.3 Form of 2000 Stock Option Plan Agreements (1)
10.4 2001 Director Option Plan (1)
10.5 Form of 2001 Director Option Plan Agreements (1)
10.6 Form of Indemnification Agreement between the Registrant and each of its
directors and executive officers (1)
10.7 Lease Agreement dated May 5, 2001 between Adaptec and the Registrant (1)
10.8 Employment Agreement dated May 11, 2001 between Wm. Christopher Gorog
and the Registrant (3)
10.9 Employment Agreement dated May 11, 2001 between Thomas J. Shea and the
Registrant (3)
10.10 Employment Agreement dated May 11, 2001 between R. Elliot Carpenter and the Registrant (3)
10.11 2001 Stock Plan (1)
10.12 Form of 2001 Stock Plan Agreements (1)
10.13 Employment Agreement dated July 24, 2001 between R. Elliot Carpenter and
the Registrant
_________________
(1) Incorporated by reference to the Registrant's Form 10 Registration
Statement (No. 000-32373) as filed with the Securities and Exchange
Commission on May 15, 2001.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A as filed with the Securities and Exchange Commission on June 5,
2001.
(3) Incorporated by reference to the Registrant's Annual Report on Form 10-K as
filed with the Securities and Exchange Commission on June 29, 2001.