10-Q 1 a2035221z10-q.txt 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) X Quarterly report pursuant to Section 13 or 15(d) of the Securities ------- Exchange Act of 1934 For the quarterly period ended December 31, 2000 or ----------------- Transition report pursuant to Section 13 or 15(d) of the Securities ------- Exchange Act of 1934 For the transition period from ______ to _______ Commission file number 0-15071 ADAPTEC, INC. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 94-2748530 ------------------------------------------------------------------------------- (State of Incorporation) (I.R.S. Employer Identification No.) 691 S. MILPITAS BLVD., MILPITAS, CALIFORNIA 95035 ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (408) 945-8600 ------------------------------------------------------------------------------ N/A ------------------------------------------------------------------------------ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- The number of shares outstanding of the Company's common stock as of December 31, 2000 was 98,565,191. This document consists of 33 pages, excluding exhibits, of which this is page 1. TABLE OF CONTENTS
Page ------ Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Statements of Operations 3 Condensed Consolidated Balance Sheets 4 Condensed Consolidated Statements of Cash Flows 5 Notes To Condensed Consolidated Financial Statements 6-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations 16-20 Liquidity and Capital Resources 20 Recent Accounting Pronouncements 20-21 Certain Factors Bearing Risk on Future Operating Results 21-30 Item 3. Quantitative and Qualitative Disclosures About Market Risk 31 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 32 Signatures 33
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Month Period Ended Nine Month Period Ended ------------------------ ----------------------- December 31, December 31, December 31, December 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net revenues $ 186,264 $ 211,446 $ 555,159 $ 598,104 Cost of revenues 88,987 69,529 232,327 202,583 Patent settlement fee -- 9,599 -- 9,599 ------------ ------------ ------------- ------------ Gross profit 97,277 132,318 322,832 385,922 ------------ ------------ ------------- ------------ Operating expenses: Research and development 33,608 25,804 95,097 73,539 Selling, marketing and administrative 48,175 41,496 135,816 121,106 Amortization of goodwill and other intangibles 19,476 3,094 58,427 5,844 Write-off of acquired in-process technology -- 16,739 -- 19,755 Other charges 28,211 -- 28,211 -- ------------ ------------ ------------- ------------ Total operating expenses 129,470 87,133 317,551 220,244 ------------ ------------ ------------- ------------ Income (loss) from operations (32,193) 45,185 5,281 165,678 Interest and other income 34,477 8,119 145,193 39,183 Interest expense (2,883) (2,811) (9,006) (8,732) ------------ ------------ ------------- ------------ Income (loss) before provision for income taxes (599) 50,493 141,468 196,129 Provision for income taxes 16,294 18,825 77,274 61,757 ------------ ------------ ------------- ------------ Net income (loss) $ (16,893) $ 31,668 $ 64,194 $ 134,372 ============ ============ ============= ============ Net income (loss) per share: Basic $ (0.17) $ 0.31 $ 0.64 $ 1.30 ------------ ------------ ------------- ------------ Diluted $ (0.17) $ 0.29 $ 0.63 $ 1.23 ------------ ------------ ------------- ------------ Shares used in computing net income (loss) per share: Basic 98,892 103,267 99,594 103,311 ------------ ------------ ------------- ------------ Diluted 98,892 110,424 102,132 109,591 ------------ ------------ ------------- ------------
See accompanying notes to condensed consolidated financial statements. 3 ADAPTEC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
December 31, March 31, 2000 2000 ------------------ ------------------ (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 214,084 $ 180,519 Marketable securities 417,090 482,172 Accounts receivable, net 83,356 90,165 Inventories 77,892 68,378 Other current assets 87,770 74,352 ------------------ ------------------ Total current assets 880,192 895,586 Property and equipment, net 113,884 135,222 Goodwill and other intangibles 188,469 275,108 Other long-term assets 50,120 40,368 ------------------ ------------------ $ 1,232,665 $ 1,346,284 ================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 31,244 $ 34,009 Accrued liabilities 211,087 193,217 ------------------ ------------------ Total current liabilities 242,331 227,226 ------------------ ------------------ 4 3/4% Convertible Subordinated Notes 229,800 229,800 Other long-term liabilities 20,771 14,400 Contingencies (Note 7) Stockholders' equity: Common stock 99 103 Additional paid-in capital -- 58,535 Deferred stock-based compensation (6,845) (2,444) Accumulated other comprehensive income 2,240 51,800 Retained earnings 744,269 766,864 ------------------ ------------------ Total stockholders' equity 739,763 874,858 ------------------ ------------------ $ 1,232,665 $ 1,346,284 ================== ==================
See accompanying notes to condensed consolidated financial statements. 4 ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine Month Period Ended ----------------------- December 31, December 31, 2000 1999 ---------------- ---------------- (IN THOUSANDS) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 90,802 $ 237,239 ---------------- ---------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of certain net assets in connection with acquisitions, net -- (186,416) Purchases of property and equipment (23,909) (7,253) Net proceeds from the sale of property and equipment 43,273 18,518 Purchases of marketable securities (323,103) (961,390) Purchases of other investments (850) (3,372) Sales of marketable securities 329,143 630,371 Maturities of marketable securities 89,128 283,174 ---------------- ---------------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 113,682 (226,368) ---------------- ---------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of common stock 16,633 88,593 Net proceeds from the issuance of equity contracts -- 3,725 Repurchases of common stock (187,552) (244,132) Principal payments on long-term debt -- (5,504) ---------------- ---------------- NET CASH USED FOR FINANCING ACTIVITIES (170,919) (157,318) ---------------- ---------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 33,565 (146,447) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 180,519 317,580 ---------------- ---------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 214,084 $ 171,133 ================ ================
See accompanying notes to condensed consolidated financial statements. 5 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements of Adaptec, Inc. (the "Company") have been prepared on a consistent basis with the March 31, 2000 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, except as described in Notes 11, 12, 16 and 17, necessary to provide a fair statement of the results for the interim periods presented. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report to Stockholders and incorporated by reference in the Company's Annual Report on Form 10-K for the year ended March 31, 2000. For presentation purposes, the Company has indicated its third quarter of fiscal 2001 as having ended on December 31, 2000, whereas in fact, it ended on December 29, 2000. The results of operations for the three and nine month periods ended December 31, 2000 are not necessarily indicative of the results to be expected for the entire year. 2. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and requires recognition of all derivatives as assets or liabilities and measurement of those instruments at fair value. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," which defers the required date of adoption of SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. The Company will adopt SFAS No. 133 in its first quarter of fiscal 2002, and is in the process of determining the impact the adoption will have on its consolidated financial statements. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions involving Stock Compensation," an interpretation of Accounting Principles Board ("APB") No. 25. FIN No. 44 became effective July 1, 2000, but certain conclusions cover specific events that occurred after either December 15, 1998, or January 12, 2000. The adoption of FIN No. 44 did not have a material effect on the Company's financial position or results of operations. In September 2000, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board issued EITF No. 00-19, "Determination of Whether Share Settlement is Within the Control of the Issuer for Purposes of Applying Issue No. 96-13, `Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock'". EITF No. 96-13 does not address embedded settlement features which are contingent on events which are unlikely to occur. EITF No. 00-19 addresses embedded settlement features and states that contracts which could require cash payment cannot be accounted for as equity of the issuer unless certain conditions are met. The adoption of EITF No. 00-19 did not have a material effect on the Company's financial position or results of operations. 6 3. BALANCE SHEET DETAIL Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventories were as follows:
December 31, March 31, 2000 2000 ---------------- --------------- (IN THOUSANDS) Raw materials $ 27,593 $ 21,806 Work-in-process 19,186 11,685 Finished goods 31,113 34,887 ---------------- --------------- $ 77,892 $ 68,378 ================ ===============
The components of other current assets were as follows:
December 31, March 31, 2000 2000 ---------------- --------------- (IN THOUSANDS) Deferred income taxes $ 62,260 $ 29,134 Other 25,510 45,218 ---------------- --------------- $ 87,770 $ 74,352 ================ ===============
The components of accrued liabilities were as follows:
December 31, March 31, 2000 2000 ---------------- --------------- (IN THOUSANDS) Tax related $ 140,442 $ 100,689 Accrued compensation and related taxes 24,527 25,430 Acquisition related 18,683 19,097 Sales and marketing related 12,241 13,477 Stock repurchase related -- 19,135 Other 15,194 15,389 ---------------- --------------- $ 211,087 $ 193,217 ================ ===============
4. TAIWAN SEMICONDUCTOR MANUFACTURING AGREEMENT In the first quarter of fiscal 2001, the Company and Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") amended the Option II Agreement. In accordance with the amendment, the Company paid TSMC an additional $20.0 million in advance payments to secure guaranteed capacity for wafer fabrication through December 31, 2004. No other terms or conditions were amended. 7 5. STATUS OF IN-PROCESS TECHNOLOGY PROJECT In December 1999, the Company purchased Distributed Processing Technology, Corp. ("DPT"), a supplier of high-performance storage solutions, including RAID controllers and storage subsystems. As part of the purchase, the Company acquired in-process technology consisting of next generation RAID controllers. The Company expects to complete the in-process technology project in the first half of fiscal 2002. The completion of the in-process technology project has been delayed by approximately six months due to the lack of availability of compatible industry components and the complexity brought on by additional uses of this technology in the Company's board level products. However, the Company still expects the costs to complete the in-process technology project will be in line with original estimates. Development of this project remains a significant risk to the Company due to the remaining effort to achieve technical feasibility, rapidly changing customer markets and significant competition from numerous companies. Failure to bring these products to market in a timely manner could adversely impact sales and profitability of the Company in the future. 6. LINE OF CREDIT In March 2000, the Company obtained an unsecured $80.0 million revolving line of credit which expires in March 2001. The interest rate and commitment fee are based on a pricing matrix, which correlates with the Company's credit rating and market interest rates. Under the arrangement, the Company is required to maintain certain financial ratios among other restrictive covenants. As of December 31, 2000, the Company did not meet the requirement of the minimum fixed charge ratio covenant due to the Agilent minimum royalty fees and the Agilent asset impairment charge in the third quarter of fiscal 2001 (Note 11). This covenant requires the Company to maintain a certain ratio on the sum of operating income plus operating lease expense, divided by the sum of operating lease expense plus interest expense and capital expenditures. The Company intends to request a waiver from the lenders with respect to this covenant. No borrowings were outstanding under the line of credit as of December 31, 2000. 7. CONTINGENCIES In December 1999, the Company purchased DPT and as part of the purchase agreement, $18.5 million of the purchase price was held back (the "Holdback Amount") from former DPT stockholders (the "DPT Stockholders") for unknown liabilities that may have existed as of the acquisition date. For accounting purposes, the Holdback Amount was included as part of the acquisition purchase price. Subsequent to the date of purchase, the Company determined that certain representations and warranties made by the DPT Stockholders were incomplete or inaccurate, which resulted in loss of revenues and additional expenses to the Company. In addition, certain DPT products were found to be defective and the Company expects to incur additional product liability expenses. In December 2000, the Company filed a claim against the DPT Stockholders for the entire Holdback Amount. In January 2001, the DPT Stockholders notified the Company as to their objection to the Company's claim. In accordance with the purchase agreement, both the Company and the DPT Stockholders have 45 days to make a good faith attempt to resolve the claim. If no such agreement is reached, the claim will then be submitted to arbitration. 8 7. CONTINGENCIES (CONTINUED) A class action lawsuit is pending in the United States District Court for the Northern District of California against the Company and certain of its officers and directors. The class action lawsuit alleges that the Company made false and misleading statements at various times during the period between April 1997 and January 1998 in violation of federal securities laws. The Company's motion to dismiss the complaint was granted in April 2000. The plaintiffs filed an amended complaint in July 2000. In October 2000, the Company filed a motion to dismiss the amended complaint. The Company believes the class action lawsuit is without merit and intends to defend itself vigorously. On June 27, 2000, the Company received a statutory notice of deficiency from the Internal Revenue Service ("IRS") with respect to its federal income tax returns for fiscal 1994 through 1996. The Company filed a Petition with the United States Tax Court on September 25, 2000, contesting the asserted deficiencies. On December 15, 2000, the Company received a statutory notice of deficiency from the IRS with respect to its federal income tax return for fiscal 1997, and the Company intends to vigorously contest the asserted deficiencies. The Company believes it has meritorious defenses against all deficiencies asserted in these statutory notices. In addition, the IRS is currently auditing the Company's federal income tax returns for fiscal 1998 and 1999, for which no proposed adjustments have been received. The Company believes sufficient taxes have been provided in all prior years and the ultimate outcome of the IRS audits will not have a materially adverse impact on the Company's financial position or results of operations. The Company is a party to other litigation matters and claims which are normal in the course of its operations, and while the results of such litigations and claims cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a materially adverse impact on the Company's financial position or results of operations. 8. STOCK REPURCHASES During the third quarter of fiscal 2001, the Company physically settled an equity contract whereby the Company repurchased 500,000 shares of its common stock at a strike price of approximately $23, resulting in a cash payment of $11.3 million. During the first nine months of fiscal 2001, the Company physically settled various equity contracts whereby the Company repurchased a total of 2,500,000 shares of its common stock at strike prices ranging from approximately $23 to $46, resulting in a total cash payment of $97.3 million. No equity contracts were outstanding as of December 31, 2000. In addition, during the first nine months of fiscal 2001, the Company repurchased and retired a total of 3,000,000 shares of its common stock under its authorized stock buy back program for $71.1 million. The repurchase transactions were recorded as reductions to common stock, additional paid-in-capital and retained earnings. 9. STOCK PLANS During the third quarter of fiscal 2001, the Company's Board of Directors adopted the 2000 Nonstatutory Stock Option Plan and reserved for issuance to non-executive officer employees 8,000,000 shares of the Company's common stock. 9 9. STOCK PLANS (CONTINUED) During the second quarter of fiscal 2001, the Company's Board of Directors amended the Employee Stock Purchase Plan to extend the offering period from six months to twenty four months, beginning in August 2000. Purchases will continue to be made every six months. In addition, the Company's stockholders approved the 2000 Director Option Plan and reserved for issuance 1,000,000 shares of the Company's common stock. 10. STATEMENTS OF OPERATIONS The components of interest and other income were as follows:
Three Month Period Ended Nine Month Period Ended ------------------------ ----------------------- December 31, December 31, December 31, December 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (IN THOUSANDS) Interest income $ 8,946 $ 8,119 $ 23,687 $ 24,750 Gain on sale of JNI common stock (Note 15) 25,531 -- 112,686 -- Gain on sale of property (Note 12) -- -- 8,820 3,513 Gain on warrants received -- -- -- 10,920 ------------ ------------ ------------- ------------ $ 34,477 $ 8,119 $ 145,193 $ 39,183 ============ ============ ============= ============
11. AGILENT AGREEMENT In January 2000, the Company entered into a four-year agreement with Agilent Technologies, Inc. ("Agilent") to co-develop, market and sell fibre channel host adapters. In exchange, the Company issued warrants to Agilent to purchase 1,160,000 shares of the Company's common stock at $62.3 per share. The warrants were valued at $37.1 million using the Black-Scholes valuation model. The value of the warrants was recorded as an intangible asset (the "Warrant Costs") and was to be amortized ratably over four years. As of December 31, 2000, the remaining balance of the Warrant Costs was $28.2 million. In addition, the Company licensed Agilent's fibre channel host adapter and software driver technology, and agreed to pay royalty fees to Agilent based on revenue from certain products incorporating the licensed technology. The aggregate minimum royalty fees over the term of the agreement are $60.0 million, of which $12.0 million is due and payable at the end of the second contract year in January 2002. The Company estimated that it would incur Agilent royalty fees of $2.0 million in the second contract year associated with the sale of the Company's products incorporating the licensed technology. Therefore, in the third quarter of fiscal 2001, the Company accrued for and expensed the remaining minimum royalty fees for the second contract year of $10.0 million. The accrued expense was included in "Cost of revenues" in the Condensed Consolidated Statements of Operations for the three and nine month periods ended December 31, 2000, and in "Other long-term liabilities" in the Condensed Consolidated Balance Sheet as of December 31, 2000. 10 11. AGILENT AGREEMENT (CONTINUED) In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of," the Company evaluated the recoverability of the Warrant Costs as of December 31, 2000. Based on the assessment, the Company believed that the estimated undiscounted future cash flows generated by the sale of the Company's fibre channel products incorporating the technology licensed from Agilent would not be sufficient to recover the carrying value of the Warrant Costs. The Warrant Costs were determined to have an estimated fair market value of $0. As such, the Company recorded an asset impairment charge of $28.2 million, representing the remaining balance of the Warrant Costs as of December 31, 2000. The asset impairment charge was included in "Other charges" in the Condensed Consolidated Statements of Operations for the three and nine month periods ended December 31, 2000. 12. SALE OF PROPERTY During the second quarter of fiscal 2001, the Company sold its land and building located in Colorado with a net book value of $21.5 million, for net proceeds of $22.8 million. The sale resulted in a gain of $1.3 million and was included in "Interest and other income" in the Condensed Consolidated Statement of Operations for the nine month period ended December 31, 2000. During the first quarter of fiscal 2001, the Company sold its land in California with a net book value of $12.9 million, for net proceeds of $20.4 million. The sale resulted in a gain of $7.5 million and was included in "Interest and other income" in the Condensed Consolidated Statement of Operations for the nine month period ended December 31, 2000. 13. INCOME TAXES Income tax provisions for interim periods are based on the Company's estimated annual income tax rate. The Company recorded an income tax provision of $16.3 million and $18.8 million for the third quarters of fiscal 2001 and fiscal 2000, respectively. The Company's effective tax rate is generally less than the combined U.S. federal and state statutory income tax rate of 40% due to income earned in Singapore where the Company is subject to a significantly lower income tax rate, resulting from a tax holiday relating to certain products. However, in the third quarter and first nine months of fiscal 2001, the reduction in the Company's effective income tax rate from the Singapore tax holiday was more than offset by the effects of the Agilent asset impairment charge and the amortization of goodwill and other intangibles in excess of amounts deductible for tax purposes. 11 14. NET INCOME (LOSS) PER SHARE Following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the periods presented below.
Three Month Period Ended Three Month Period Ended December 31, 2000 December 31, 1999 ----------------------------------------- ------------------------------------- Loss Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) BASIC NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders $ (16,893) 98,892 $ (0.17) $ 31,668 103,267 $ 0.31 ========== ======== EFFECT OF DILUTIVE SECURITIES Employee stock options -- -- -- 7,157 ---------- --------- ---------- ----------- DILUTED NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders and assumed conversions $ (16,893) 98,892 $ (0.17) $ 31,668 110,424 $ 0.29 ============ ========= ========== ========== =========== ========
Nine Month Period Ended Nine Month Period Ended December 31, 2000 December 31, 1999 ----------------------------------------- ------------------------------------- Income Shares Per Share Income Shares Per Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) BASIC NET INCOME PER SHARE Net income available to common stockholders $ 64,194 99,594 $ 0.64 $ 134,372 103,311 $ 1.30 ========== ======== EFFECT OF DILUTIVE SECURITIES Employee stock options -- 2,538 -- 6,280 ------------ --------- ------------ ---------- DILUTED NET INCOME PER SHARE Net income available to common stockholders and assumed conversions $ 64,194 102,132 $ 0.63 $ 134,372 109,591 $ 1.23 ============ ========= ========== =========== =========== ========
Options to purchase 20,780,000 shares of common stock were outstanding for the three month period ended December 31, 2000, but were not included in the computation of diluted net loss per share because they were anti-dilutive. Additional stock options to purchase 156,000 shares of common stock were outstanding for the three month period ended December 31, 1999, but were not included in the computation of diluted weighted average shares outstanding because the options' exercise price was greater than the average market price of the common stock. Additional stock options to purchase 9,771,000 and 1,438,000 shares of common stock were outstanding for the nine month periods ended December 31, 2000 and 1999, respectively, but were not included in the computation of diluted weighted average shares outstanding because the options' exercise price was greater than the average market price of the common stock. 12 14. NET INCOME (LOSS) PER SHARE (CONTINUED) The conversion of 4,448,000 and 4,452,000 shares of common stock related to the 4 3/4% Convertible Subordinated Notes was not included in the computation of net income (loss) per share for the three and nine month periods ended December 31, 2000 and 1999, respectively, because it was anti-dilutive. 15. COMPREHENSIVE INCOME (LOSS) The Company's comprehensive income (loss) consists of net income (loss) and the change in the net unrealized gain on available-for-sale securities, net of income taxes, primarily related to the Company's investment in JNI Corporation ("JNI") common stock. The components of comprehensive income (loss), net of income taxes, were as follows:
Three Month Period Ended Nine Month Period Ended ------------------------ ----------------------- December 31, December 31, December 31, December 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (IN THOUSANDS) Net income (loss) $ (16,893) $ 31,668 $ 64,194 $ 134,372 Change in net unrealized gain on available-for-sale securities, net of income taxes (11,491) 43,394 (49,560) 43,394 ------------ ------------ ------------- ------------ $ (28,384) $ 75,062 $ 14,634 $ 177,766 ============ ============ ============= ============
During the third quarter and first nine months of fiscal 2001, the Company sold 272,893 and 1,972,893 shares of JNI common stock and recorded a gain of $25.5 million and $112.7 million, respectively. Total proceeds from the sales during the first nine months of fiscal 2001 were $124.1 million. As of December 31, 2000, the Company did not hold any shares of JNI common stock. The realized gain/loss on available-for-sale securities, other than JNI common stock, was immaterial for all periods presented. Accumulated other comprehensive income presented in the accompanying Condensed Consolidated Balance Sheets represents the net unrealized gain on available-for-sale securities, net of income taxes. The realization of these gains is dependent on the market value of the securities, which is subject to fluctuation prior to the date of disposal. There can be no assurance if and when these gains will be realized. 16. SEGMENT REPORTING In the third quarter of fiscal 2001, the Company evaluated its product segments in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," and redefined its reporting segments into Direct Attached Storage ("DAS"), Desktop Solutions Group ("DSG", a new reporting segment formerly reported as a component of DAS), Storage Networking Solutions ("SNS"), Software and Other. Except for the new DSG segment which is described below, a complete description of the operating segments can be found in the Notes to Consolidated Financial Statements in the Company's Annual Report to Stockholders for the fiscal year ended March 31, 2000. 13 16. SEGMENT REPORTING (CONTINUED) The DSG segment designs, develops, manufactures and markets high-performance input/output ("I/O") solutions between personal computers, peripherals and storage devices. The segment is targeted at the installed base of desktops in homes worldwide, and the products are primarily sold through the retail market. The Company's current I/O solutions include Small Computer System Interface ("SCSI") technology delivered via host adapters, and the 1394/FireWire technology, a fast, configurable and easy-to-use interface solution that connects desktop computers to digital video camcorders, digital cameras, external storage devices and other 1394 peripherals with the ability to handle high-bandwidth data transfers at high speeds. In the third quarter of fiscal 2001, the Company introduced FireConnect 4300, a high-quality digital video editing kit offering the 1394/FireWire connectivity. Summarized financial information concerning the Company's reportable segments as of December 31, 2000 is shown in the following table. The Company does not separately identify assets or depreciation by operating segments nor are the segments evaluated under these criteria. The Company has restated its prior year's presentation for financial disclosure purposes to conform to the revised segment reporting.
Three Month Period Ended Nine Month Period Ended ------------------------ ----------------------- December 31, December 31, December 31, December 31, 2000 1999 2000 1999 --------------- -------------- -------------- ------------ (IN THOUSANDS) DAS: Net revenues $ 127,787 $ 144,570 $ 373,310 $ 411,208 Segment profit 14,750 57,761 41,103 162,242 DSG: Net revenues 22,512 36,861 71,497 118,211 Segment profit 3,028 13,920 14,953 43,457 SNS: Net revenues 10,219 5,851 26,591 17,644 Segment profit (loss) (48,316) 1,770 (51,220) 4,640 SOFTWARE: Net revenues 25,746 23,156 83,761 47,783 Segment profit 1,014 3,366 7,849 2,246 OTHER: Net revenues -- 1,008 -- 3,258 Segment profit (loss) 28,925 (26,324) 128,783 (16,456)
The following table presents the details of "Other" segment profit (loss):
Three Month Period Ended Nine Month Period Ended ------------------------ ----------------------- December 31, December 31, December 31, December 31, 2000 1999 2000 1999 -------------- ------------- -------------- ----------- (IN THOUSANDS) Patent settlement fee $ -- $ (9,599) $ -- $ (9,599) Unallocated corporate expenses, net 266 (5,294) 1,140 (17,553) Interest and other income 34,477 8,119 145,193 39,183 Interest expense (2,883) (2,811) (9,006) (8,732) Write-off of acquired in-process technology -- (16,739) -- (19,755) General and administrative expenses relating to the Software segment spin-off (2,935) -- (8,544) -- -------------- ------------- --------------- ----------- $ 28,925 $ (26,324) $ 128,783 $ (16,456) ============== ============= ============== ===========
14 17. ROXIO In June 2000, the Company announced its plan to spin off the Software segment in the form of a fully independent and separate company named Roxio, Inc. ("Roxio"). In the second quarter of fiscal 2001, Roxio filed a Registration Statement on Form S-1 to register the sale of approximately 15% of its outstanding common stock. In January 2001, Roxio withdrew its Registration Statement on Form S-1 due to unfavorable market conditions. Accordingly, the Company wrote off approximately $1.0 million of prepaid offering costs in the third quarter of fiscal 2001. In December 2000, the Company committed to issue the Company's employees, who will become employees of Roxio at the date of legal separation, options to purchase approximately 2.3 million shares of Roxio common stock with an exercise price of $4.25 per share. In accordance with APB No. 25 and FIN No. 44, $6.5 million of deferred compensation was recorded for the intrinsic value of the options on the grant date and included in "Deferred stock-based compensation" in the Condensed Consolidated Balance Sheets. The intrinsic value was based on the Company's determination of the fair value of Roxio's common stock at $7.06 per share. Since the measurement date has not been established, these stock options will therefore be subject to variable plan accounting treatment resulting in a mark-to-market adjustment to the deferred compensation in future periods. The deferred compensation is being amortized over four years, and amortization expense of $0.1 million was recorded in the third quarter of fiscal 2001. 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth the items in the Condensed Consolidated Statements of Operations as a percentage of net revenues:
Three Month Period Ended Nine Month Period Ended ------------------------ ----------------------- December 31, December 31, December 31, December 31, 2000 1999 2000 1999 -------------- --------------- -------------- ------------- Net revenues 100% 100% 100% 100% Cost of revenues 48 33 42 34 Patent settlement fee -- 5 -- 2 -------- --------- -------- --------- Gross margin 52 62 58 64 -------- --------- -------- --------- Operating expenses: Research and development 18 12 17 12 Selling, marketing and administrative 26 20 24 20 Amortization of goodwill and other intangibles 10 1 11 1 Write-off of acquired in-process technology -- 8 -- 3 Other charges 15 -- 5 -- -------- --------- -------- --------- Total operating expenses 69 41 57 36 -------- --------- -------- --------- Income (loss) from operations (17) 21 1 28 Interest and other income 19 4 26 7 Interest expense (2) (1) (2) (2) -------- --------- -------- --------- Income (loss) before provision for income taxes -- 24 25 33 Provision for income taxes 9 9 13 11 -------- --------- -------- --------- Net income (loss) (9)% 15% 12% 22% ========== ========== ========= ==========
BUSINESS SEGMENTS. In the third quarter of fiscal 2001, the Company evaluated its product segments in accordance with Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," and redefined its reporting segments into Direct Attached Storage ("DAS"), Desktop Solutions Group ("DSG", a new reporting segment formerly reported as a component of DAS), Storage Networking Solutions ("SNS"), Software and Other. Except for the new DSG segment which is described below, a complete description of the operating segments can be found in the Notes to Consolidated Financial Statements in the Company's Annual Report to Stockholders for the fiscal year ended March 31, 2000. The DSG segment designs, develops, manufactures and markets high-performance input/output ("I/O") solutions between personal computers, peripherals and storage devices. The segment is targeted at the installed base of desktops in homes worldwide, and the products are primarily sold through the retail market. The Company's current I/O solutions include Small Computer System Interface ("SCSI") technology delivered via host adapters, and the 1394/FireWire technology, a fast, configurable and easy-to-use interface solution that connects desktop computers to digital video camcorders, digital cameras, external storage devices and other 1394 peripherals with the ability to handle high-bandwidth data transfers at high speeds. In the third quarter of fiscal 2001, the Company introduced FireConnect 4300, a high-quality digital video editing kit offering the 1394/FireWire connectivity. In June 2000, the Company announced its plan to spin off the Software segment in the form of a fully independent and separate company named Roxio, Inc. ("Roxio"). In the second quarter of fiscal 2001, Roxio filed a Registration Statement on Form S-1 to register the sale of approximately 15% of its outstanding common stock. In 16 January 2001, Roxio withdrew its Registration Statement on Form S-1 due to unfavorable market conditions. Accordingly, the Company wrote off approximately $1.0 million of prepaid offering costs in the third quarter of fiscal 2001. NET REVENUES. Net revenues were $186.3 million for the third quarter of fiscal 2001, a decrease of 11.9% from net revenues of $211.4 million for the third quarter of fiscal 2000. Net revenues were $555.2 million for the first nine months of fiscal 2001, a decrease of 7.2% from net revenues of $598.1 million for the first nine months of fiscal 2000. Net revenues for the third quarter of fiscal 2001 were comprised of $127.8 million from the DAS segment, a decrease of 11.6% from the third quarter of fiscal 2000, $22.5 million from the DSG segment, a decrease of 38.9% from the third quarter of fiscal 2000, $10.2 million from the SNS segment, an increase of 74.7% from the third quarter of fiscal 2000, and $25.7 million from the Software segment, an increase of 11.2% from the third quarter of fiscal 2000. Net revenues for the first nine months of fiscal 2001 were comprised of $373.3 million from the DAS segment, a decrease of 9.2% from the first nine months of fiscal 2000, $71.5 million from the DSG segment, a decrease of 39.5% from the first nine months of fiscal 2000, $26.6 million from the SNS segment, an increase of 50.7% from the first nine months of fiscal 2000, and $83.8 million from the Software segment, an increase of 75.3% from the first nine months of fiscal 2000. Net revenues from the DAS segment decreased period over period, primarily due to a lack of Intel microprocessors and motherboards in the distribution channel which adversely impacted some server production in the first half of fiscal 2001. The constraint in the supply of server motherboards began to ease in the third quarter of fiscal 2001. Intel underestimated microprocessor demand as they transitioned their production from 0.25 micron technology to 0.18 micron technology and they experienced problems with their 840 memory controller hub, a critical component to motherboards. Because demand for the Company's board level DAS products are dependent on server production, the Company's net revenues declined in the first nine months of fiscal 2001. Additionally, net revenues from the DAS segment in the first nine months of fiscal 2001 were adversely impacted by defective QLogic Corporation I/O silicon in one of the Company's mid-range redundant array of independent disks ("RAID") product offerings. These defects necessitated a recall of a limited number of the mid-range Distributed Processing Technology, Corp. ("DPT") based products. Finally, the industry-wide economic slowdown which began during the third quarter of fiscal 2001 resulted in slower-than-anticipated seasonal sales in the DAS segment. The decline in net revenues from the DAS segment in the first nine months of fiscal 2001 was partially offset by the continued strong demand for the Company's Ultra 160 SCSI RAID controllers for entry and mid-range servers, as well as design wins with certain original equipment manufacturers ("OEMs"). In the first quarter of fiscal 2001, the Company also introduced a new initiative called "RAID Everywhere", aimed at driving RAID technology into the PC-server marketplace by leveraging the Company's channel strengths, global support infrastructure and ability to make complex technologies easy to use. Net revenues from the DSG segment decreased period over period, primarily due to the continued decline in demand for SCSI-based desktop solutions brought about by penetration of products incorporating the less-expensive Ultra-DMA technology. However, the decline in net revenues was partially offset by the introduction of the Company's FireConnect 4300 video editing kits in the third quarter of fiscal 2001. 17 Net revenues from the SNS segment were derived from sales of products and solutions for Storage Area Networks ("SAN"). Net revenues increased period over period primarily as a result of continued growth in the sales of single-port and multi-port network interface cards and design wins with certain OEMs. Additionally, the increase was attributable to the Company's one-gigabit fibre channel adapters, utilizing technology licensed from Agilent Technologies, Inc. ("Agilent"), which launched in the second quarter of fiscal 2001. Net revenues from the Software segment increased period over period, primarily as a result of sales of the Company's Easy CD Creator 4.0 Deluxe which launched domestically in the second quarter of fiscal 2000 and worldwide in the third quarter of fiscal 2000. The increase was also attributable to continued worldwide growth in the CD-R and CD-RW drive markets and additional design wins with personal computer ("PC") OEMs. The acquisition of Wild File, Inc. ("Wild File"), a supplier of continuous backup and system recovery software, in the fourth quarter of fiscal 2000 also contributed incremental net revenues in the first nine months of fiscal 2001, as compared to the first nine months of fiscal 2000. GROSS MARGIN. Gross margin for the third quarter and first nine months of fiscal 2001 was 52.2% and 58.2%, respectively, compared to 62.6% and 64.5% for the third quarter and first nine months of fiscal 2000. The Company's gross margin in the first nine months of fiscal 2001 was adversely impacted by the Agilent minimum royalty fees of $10.0 million, which was included in cost of revenues in the third quarter of fiscal 2001. In addition, the gross margin was adversely impacted by excess manufacturing capacity due to lower production volumes. The lower production volumes were primarily related to reduced demand for the Company's board level premium DAS products stemming from the lack of Intel microprocessors and motherboards in the distribution channel discussed above. The Company's gross margin was also impacted by proportionately higher sales of the Company's RAID products which generally obtain lower margin percentages than other Adaptec products, and also by proportionately higher sales to OEMs which generally carry lower margin percentages. Finally, in the third quarter of fiscal 2001, the Company's gross margin was adversely impacted by excess inventory charges of $1.5 million due to cancellation of orders from a customer as a result of a decline in their product forecast. RESEARCH AND DEVELOPMENT EXPENSES. Spending for research and development was $33.6 million for the third quarter of fiscal 2001, an increase of 30.2% from $25.8 million for the third quarter of fiscal 2000. Spending for research and development was $95.1 million for the first nine months of fiscal 2001, an increase of 29.3% from $73.5 million for the first nine months of fiscal 2000. As a percentage of net revenues, research and development expenses increased to 18.0% and 17.1% in the third quarter and first nine months of fiscal 2001, respectively, from 12.2% and 12.3% in the third quarter and first nine months of fiscal 2000, respectively. The increase in research and development expenses was primarily attributable to additional resources obtained through the Company's fiscal 2000 acquisitions, and additional research and development efforts focused on driving the convergence of storage and networking, delivering interoperable fibre channel products and building pervasive solutions that broaden the adoption of SAN. Additionally, the Company recorded amortization of deferred stock-based compensation of $1.9 million related to the acquisition of Wild File in the first nine months of fiscal 2001. SELLING, MARKETING AND ADMINISTRATIVE EXPENSES. Spending for selling, marketing and administrative activities was $48.2 million for the third quarter of fiscal 2001, an increase of 16.1% from $41.5 million for the third quarter of fiscal 2000. Spending for selling, marketing and administrative activities was $135.8 million for the first nine months of fiscal 2001, and increase of 12.1% from $121.1 18 million for the first nine months of fiscal 2000. As a percentage of net revenues, selling, marketing and administrative expenses increased to 25.9% and 24.5% in the third quarter and first nine months of fiscal 2001, respectively, from 19.6% and 20.2% in the third quarter and first nine months of fiscal 2000, respectively. The increase in selling, marketing and administrative expenses was primarily attributable to $8.5 million of expenses incurred in connection with the planned Software segment spin-off during the first nine months of fiscal 2001. AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and other intangibles was $19.5 million and $58.4 million for the third quarter and first nine months of fiscal 2001, respectively, compared to $3.1 million and $5.8 million in the third quarter and first nine months of fiscal 2000, respectively. Amortization of goodwill and other intangibles for the first nine months of fiscal 2001 resulted from the acquisitions of CeQuadrat GmbH ("CeQuadrat"), DPT and Wild File, as well as the amortization of warrant costs associated with the license agreement with Agilent. Amortization of goodwill and other intangibles for the first nine months of fiscal 2000 resulted from the acquisitions of Data Kinesis, Inc., CeQuadrat and DPT only. OTHER CHARGES. In January 2000, the Company entered into a four-year agreement with Agilent to co-develop, market and sell fibre channel host adapters. In exchange, the Company issued warrants to Agilent to purchase 1,160,000 shares of the Company's common stock at $62.3 per share. The warrants were valued at $37.1 million using the Black-Scholes valuation model. The value of the warrants was recorded as an intangible asset (the "Warrant Costs") and was to be amortized ratably over four years. As of December 31, 2000, the remaining balance of the Warrant Costs was $28.2 million. The Company evaluated the recoverability of the Warrants Costs as of December 31, 2000, and based on the assessment, the Company believed that the estimated undiscounted future cash flows generated by the sale of the Company's fibre channel products incorporating the technology licensed from Agilent would not be sufficient to recover the carrying value of the Warrant Costs. The Warrant Costs were determined to have an estimated fair market value of $0. As such, the Company recorded an asset impairment charge of $28.2 million, representing the remaining balance of the Warrant Costs as of December 31, 2000. INTEREST AND OTHER INCOME. The components of interest and other income were as follows:
Three Month Period Ended Nine Month Period Ended ------------------------ ----------------------- December 31, December 31, December 31, December 31, 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (IN THOUSANDS) Interest income $ 8,946 $ 8,119 $ 23,687 $ 24,750 Gain on sale of JNI common stock 25,531 -- 112,686 -- Gain on sale of property -- -- 8,820 3,513 Gain on warrants received -- -- -- 10,920 ------------ ------------ ------------- ------------ $ 34,477 $ 8,119 $ 145,193 $ 39,183 ============ ============ ============= ============
INTEREST EXPENSE. Interest expense was $2.9 million and $9.0 million for the third quarter and first nine months of fiscal 2001, respectively, compared to $2.8 million and $8.7 million for the third quarter and first nine months of fiscal 2000, respectively. Interest expense during these periods resulted primarily from the Company's 4 3/4% Convertible Subordinated Notes. INCOME TAXES. Income tax provisions for interim periods are based on the Company's estimated annual income tax rate. The Company recorded an income tax provision of $16.3 million and $18.8 million for the third quarters of fiscal 2001 and fiscal 2000, respectively. The Company's effective tax 19 rate is generally less than the combined U.S. federal and state statutory income tax rate of 40% due to income earned in Singapore where the Company is subject to a significantly lower income tax rate, resulting from a tax holiday relating to certain products. However, in the third quarter and first nine months of fiscal 2001, the reduction in the Company's effective income tax rate from the Singapore tax holiday was more than offset by the effects of Agilent asset impairment charge and the amortization of goodwill and other intangibles in excess of amounts deductible for tax purposes. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 2000, the Company's principal sources of liquidity consisted of $631.2 million of cash, cash equivalents and marketable securities, and an unsecured $80.0 million revolving line of credit. As of December 31, 2000, there were no borrowings outstanding under the line of credit. Cash, cash equivalents and marketable securities decreased 4.8% from $662.7 million as of March 31, 2000. During the first nine months of fiscal 2001, the Company used its liquid assets to repurchase and retire 5,500,000 shares of its common stock, purchase property and equipment, and invest in marketable securities. The uses of cash were offset by cash generated from operations, net proceeds from the sale of property, proceeds from the issuance of common stock to employees through its stock option plans, and the net proceeds from the sale of JNI common stock and other marketable securities in excess of the unrealized gain as of March 31, 2000. Operating cash was generated primarily from the Company's net income, adjusted for non-cash items including the gain on the sale of property and JNI common stock, depreciation and amortization expense, write-off of the Warrant Costs and other changes in net assets and liabilities. The Company believes that its existing working capital, together with expected cash flows from operations and available sources of bank, equity and equipment financing, will be sufficient to support its operations over the next twelve months. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and requires recognition of all derivatives as assets or liabilities and measurement of those instruments at fair value. In June 1999, the Financial Accounting Standards Board issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," which deferred the required date of adoption of SFAS No. 133 for one year, to fiscal years beginning after June 15, 2000. The Company will adopt this statement in its first quarter of fiscal 2002, and is in the process of determining the impact that adoption will have on its consolidated financial statements. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44 ("FIN No. 44"), "Accounting for Certain Transactions involving Stock Compensation," an interpretation of Accounting Principles Board ("APB") No. 25. FIN No. 44 clarifies the application of APB No. 25 for (a) the definition of employee for purposes of applying APB No. 25, (b) the criteria for determining whether a plan qualifies as a noncompensatory plan, (c) the accounting consequence of various modifications to the terms of a previously fixed stock option or award and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN No. 44 became effective July 1, 2000, but certain conclusions cover specific events that occurred after either December 15, 1998, or 20 January 12, 2000. The adoption of FIN No. 44 did not have a material effect on the Company's financial position or results of operations. In September 2000, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board issued EITF No. 00-19, "Determination of Whether Share Settlement is Within the Control of the Issuer for Purposes of Applying Issue No. 96-13, `Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock'". EITF No. 96-13 did not address embedded settlement features which are contingent on events which are unlikely to occur. EITF No. 00-19 addresses embedded settlement features and states that contracts which could require cash payment cannot be accounted for as equity of the issuer unless certain conditions are met. The adoption of EITF No. 00-19 did not have a material effect on the Company's financial position or results of operations. CERTAIN FACTORS BEARING RISK ON FUTURE OPERATING RESULTS This report contains forward-looking statements that involve risks and uncertainties. For example, Management's Discussion and Analysis of Financial Condition and Results of Operations includes statements relating to the Company's principal financial sources of liquidity, and the Notes to Condensed Consolidated Financial Statements include statements relating to the completion of an in-process technology project. The statements contained in this document that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this document. In evaluating our business, prospective investors should consider carefully the following factors in addition to the other information set forth in this document. OUR FUTURE OPERATING RESULTS ARE SUBJECT TO FLUCTUATION, WHICH COULD REDUCE OUR STOCK PRICE. Our operating results may fluctuate as a result of a wide variety of factors, including, but not limited to, the following: - cancellations or postponements of orders - shifts in the mix of our products and sales channels - changes in pricing policies by our suppliers - shortages of components or wafer fabrication capacity affecting us, our customers or our suppliers - the market acceptance of new and enhanced versions of our products - product obsolescence - shortage of skilled labor - general worldwide economic and computer industry fluctuations - future accounting pronouncements - changes in accounting policies - the timing of acquisitions of other business products and technologies and any associated charges or earnings - restructuring actions or other involuntary terminations 21 In addition, operating results in any particular quarter or year that do not meet the expectations of securities analysts are likely to cause volatility in the price of our common stock. Fiscal 2001 operating results were materially impacted by unusual charges, including the following: - accrued minimum royalty fees to Agilent Technologies, Inc., or Agilent, included in cost of revenues - general and administrative expenses incurred in connection with the Software segment spin-off - amortization of deferred stock-based compensation expense - asset impairment charge Fiscal 2000 operating results were materially impacted by unusual charges, including the following: - accrued minimum royalty fees to Agilent included in cost of revenues - write-off of estimated license fees attributable to a patent settlement agreement - write-off of acquired in-process technology IF DEMAND FOR OUR CUSTOMERS' PRODUCTS DECLINE OR OUR CUSTOMERS DO NOT CONTROL THEIR INVENTORIES EFFECTIVELY, OUR REVENUES MAY BE ADVERSELY AFFECTED. The volume and timing of orders received during a quarter are difficult to forecast. Our customers from time to time encounter uncertain and changing demand for their products. Customers generally order based on their forecasts. If demand falls below such forecasts or if customers do not control inventories effectively, they may cancel or reschedule shipments previously ordered from us. We have historically operated with a relatively small backlog and have set our operating budget based in part on expectations of future revenues. Because much of our operating budget is relatively fixed in the short-term, if revenues do not meet our expectations, then our operating income and net income will be disproportionately affected. IF DEMAND FOR SERVERS, WORKSTATIONS OR HIGH-PERFORMANCE DESKTOPS DECLINE, OUR REVENUES FROM OUR DAS OR DSG SEGMENTS MAY DECLINE. Our Direct Attached Storage, or DAS, products are used primarily in enterprise-class server market, and our Desktop Solutions Group, or DSG, products are used primarily in personal desktop computer systems. Our DAS products include host bus adapters, or HBA's, Redundant Array of Independent Disks, or RAID, controllers, boards and chips that allow servers and workstations to transfer information to and from peripherals, such as hard-disk drives, scanners, CD-ROMs, CD-Rs, CD-RWs, DVD-ROMs, and Zip and Jaz drives among many other devices. Our DSG products include Small Computer System Interface, or SCSI, based desktop solutions and 1394/FireWire adapters that enable high-speed data storage access on Window and Mac-based notebook and desktop computers. Historically, our growth has been supported by increasing demand for systems that support: - client/server applications - computer-aided engineering - Internet/intranet applications - data storage and digital content - multimedia - video In the second half of fiscal 1998, the demand for such systems slowed as more businesses chose to use relatively inexpensive PC's for desktop applications, and information technology managers shifted resources toward resolving Year 2000 problems and investing in network infrastructure. Our business or operating results could be materially adversely affected by a similar decline in demand for our products. In addition, other technologies may replace our existing technologies and the acceptance of our 22 technologies in the market may not be widespread, which could materially adversely affect our revenues. IF THE DEMAND FOR DESKTOP COMPUTER SYSTEMS AND CD-R AND CD-RW DRIVES DECLINES, REVENUES FROM OUR SOFTWARE SEGMENT MAY DECLINE. Our software products are used primarily in desktop computer systems to enable CD-R and CD-RW capabilities. We sell our software products primarily to major OEMs and distributors. Our business depends on general economic and business conditions and the growth of the CD-R and desktop computer markets. If demand for our products slows or the CD-R market does not develop as quickly as we expect, our business or operating results may decline materially due to the resulting decline in demand for our products. IF WE ARE UNABLE TO PROVIDE ADEQUATE CUSTOMER SERVICE DURING OUR CUSTOMERS' DESIGN AND DEVELOPMENT STAGE OR IF WE ARE UNABLE TO PROVIDE SUCH SERVICE IN A TIMELY MANNER, REVENUES MAY BE LOST TO OUR COMPETITION. Certain of our products are designed to meet our customers specifications and, to the extent we are not able to meet these expectations at all or in timely manner, our customers may choose to buy similar products from another company. As a result, our financial results could be materially adversely impacted. WE MAY BE UNABLE TO GENERATE ENOUGH REVENUES FROM PRODUCTS INCORPORATING TECHNOLOGY LICENSED FROM AGILENT TO OFFSET THE MINIMUM ROYALTY FEES PAYABLE TO AGILENT, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS. In January 2000, we entered into a four-year agreement with Agilent to co-develop, market and sell fibre channel host adapters. As part of the agreement, we agreed to license Agilent's fibre channel host adapter and software driver technology and pay minimum royalty fees of $60.0 million over the term of the agreement as follows: $6.0 million in the first year, $12.0 million in the second year, $18.0 million in the third year and $24.0 million in the fourth year. During the third quarter of fiscal 2001, the Company estimated that it would incur royalty fees of $2.0 million in the second contract year associated with the sale of the Company's products incorporating the licensed technology. Therefore, the Company accrued for and expensed the remaining minimum royalty fees for the second contract year of $10.0 million in the third quarter of fiscal 2001. If we are unable to generate sufficient revenues to offset our commitment per the agreement in the future contract years, our results of operations could be materially adversely impacted. IF THE CARRYING VALUE OF OUR LONG-LIVED ASSETS ARE NOT RECOVERABLE, IMPAIRMENT LOSS MUST BE RECOGNIZED WHICH COULD MATERIALLY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION. Frequently, certain events or changes in circumstances would mandate us to assess the recoverability of the carrying amount of our long-lived assets, such as goodwill and other intangibles and property and equipment. For example, we evaluated the Agilent warrant costs in the third quarter of fiscal 2001 and determined that the future undiscounted cash flows were insufficient to recover the carrying value of the warrant costs. The result of the assessment indicated that the warrant costs were determined to have an estimated fair market value of $0. As such, we wrote off the remaining balance of the warrant costs. We will continue to evaluate the recoverability of the carrying amount of our long-lived assets, and we may incur additional impairment charges which could materially adversely impact our results of operations and financial position. IF THERE IS A SHORTAGE OF COMPUTER COMPONENTS IN THE MARKET, OUR SALES MAY DECLINE, WHICH COULD MATERIALLY ADVERSELY IMPACT OUR RESULTS OF OPERATIONS. If our customers are unable to purchase certain components which are embedded into their products, then their demand for our components may decline. Beginning in the fourth quarter of fiscal 2000, we began to experience the impact of other companies' chip supply shortages, which reduced the demand for some of our DAS products. This 23 resulted in a decline in our net revenues in the first nine months of fiscal 2001. This shortage, as well as other shortages, could materially adversely impact our sales and thereby our results of operations going forward. OUR RELIANCE ON INDUSTRY STANDARDS AND TECHNOLOGICAL CHANGE IN THE MARKETPLACE MAY CAUSE OUR REVENUES TO FLUCTUATE OR DECLINE. Various standards and protocols that evolve with time characterize the computer industry. We design our products to conform to certain industry standards and protocols such as the following: TECHNOLOGIES: - SCSI - PCI and PCIX - RAID - Ultra-DMA (or UDMA) - Etherstorage - Infiniband - Fibre channel - 1394/FireWire - Universal Serial Bus (or USB) OPERATING SYSTEMS: - Windows (including Windows 98 and Windows NT) - OS/2 - Netware - UNIX - Novell - Macintosh - Linux In particular, a majority of our revenues are currently derived from products based on the SCSI standard. If consumer acceptance of these standards declines, or if new standards emerge, and if we did not anticipate these changes and develop new products, these changes could materially adversely affect our business or operating results. For example, we believe that changes in consumers' perceptions of the relative merits of SCSI based products and products incorporating a competing standard, Ultra-DMA, have materially adversely affected the sales of our products beginning in fiscal 1998 and may materially adversely affect our future sales. IF OUR PRODUCTS DO NOT INTEROPERATE EFFECTIVELY, THIS COULD NEGATIVELY IMPACT OUR REVENUES AND REDUCE THE PRICE OF OUR STOCK. We must design our products to interoperate effectively with a variety of hardware and software products supplied by other manufacturers, including the following: - microprocessors - peripherals - operating system software We depend on significant cooperation with these manufacturers to achieve our design objectives and produce products that interoperate successfully. We believe that generally we have good relationships with leading system, peripheral, and microprocessor suppliers; however, these suppliers may, from time 24 to time, make it more difficult for us to design our products for successful interoperability. These suppliers also may decide to compete with us. OUR DEPENDENCE ON NEW PRODUCTS MAY CAUSE OUR REVENUES TO FLUCTUATE OR DECLINE. Our future success is highly dependent upon our completing and introducing new products at competitive price/performance levels in a timely manner. The success of new product introductions depends on several factors, including the following: - defining products to meet customer needs - product costs - timely completion and introduction of new product designs relative to customers' needs and competitor introductions - quality of new products - differentiation of new products from those of our competitors - market acceptance of our products As a result, we believe that continued significant expenditures for research and development will be required in the future. We may fail to identify new product opportunities and develop and bring new products to market in a timely manner. In addition, products or technologies developed by others may render our products or technologies obsolete or noncompetitive, or our targeted customers may not select our products for design or integration into the products. The failure of any of our new product development efforts could have a material adverse effect on our business or operating results. IF WE ARE UNABLE TO COMPETE EFFECTIVELY OUR REVENUES AND OUR STOCK PRICE MAY DECLINE. The markets for all of our products are intensely competitive and are characterized by the following: - rapid technological advances - frequent new product introductions - evolving industry standards - price erosion In the DAS and Storage Networking Solutions, or SNS, segments, we compete with LSI Logic Corporation, QLogic Corporation, American Megatrends, Inc., Mylex Corporation (a subsidiary of IBM) and other captive manufacturers and suppliers. Our principal competitors in the DSG and Software segment range from small operations to large consumer companies. As we have continued to broaden our bandwidth management product offerings into the server, and workstation and desktop environments, we have experienced, and expect to experience in the future, significantly increased competition both from existing competitors and from additional companies that may enter our markets. Some of these companies have greater technical, marketing, manufacturing, and financial resources than we do. We cannot assure that we will have sufficient resources to accomplish any of the following: - meet growing product demand - make timely introduction of new leading-edge solutions in response to competitive threats - compete successfully in the future against existing or potential competitors - provide OEMs with timely design specifications - prevent price competition from eroding margins 25 COSTS ASSOCIATED WITH ACQUISITIONS MAY CAUSE OUR FINANCIAL POSITION OR OPERATING RESULTS TO DECLINE, WHICH COULD BE EXACERBATED IF WE ARE UNABLE TO INTEGRATE THE ACQUIRED COMPANIES, PRODUCTS OR TECHNOLOGIES. During fiscal 2000, we acquired CeQuadrat GmbH, or CeQuadrat, Distributed Processing Technology, Corp., or DPT, and Wild File, Inc., or Wild File. Each of the acquisitions was accounted for using the purchase method of accounting. In January 2000, we entered into an agreement with Agilent to co-develop, market and sell fibre channel HBAs. In October 2000, we entered into an agreement with Brocade Communications Systems to deliver, market and support multi-vendor Storage Area Networks, or SAN, solutions. As part of our overall strategy, we may continue to acquire or invest in complementary companies, products, or technologies and enter into joint ventures and strategic alliances with other companies. In order to be successful in these activities, we must: - assimilate the operations and personnel of the combined companies - minimize the potential disruption of our ongoing business - retain key technical and managerial personnel - integrate the acquired company into our strategic and financial plans - accurately assess the value of potential target businesses, products or technologies - anticipate changes in the market conditions for acquired products or technologies - harmonize standards, controls, procedures, and policies - minimize the impairment of relationships with employees and customers We may incur expenses associated with amortization of acquired intangible assets. The benefits of acquisitions may prove to be less than anticipated and may not outweigh the costs reported in our financial statements. We may not be successful in overcoming these risks or any other problems encountered in connection with these or other business combinations, investments, or joint ventures. These transactions may materially adversely affect our business, financial position or operating results. WE DEPEND ON WAFER SUPPLIERS WHOSE FAILURE TO MEET OUR MANUFACTURING NEEDS COULD NEGATIVELY AFFECT OUR OPERATIONS. Independent foundries currently manufacture to our specifications all of the finished silicon wafers used for our products. We currently purchase most of our wafers through a supply agreement with Taiwan Semiconductor Manufacturing Corp., or TSMC. The manufacture of semiconductor devices is sensitive to a wide variety of factors, including the following: - the availability of raw materials - the availability of manufacturing capacity - the level of contaminants in the manufacturing environment - impurities in the materials used - the performance of personnel and equipment While we have been satisfied with the quality, yield, and timeliness of wafer deliveries to date, we cannot assure that manufacturing problems may not occur in the future. In addition, although we have various supply agreements with our suppliers, a shortage of raw materials or production capacity could lead our wafer suppliers to allocate available capacity to other customers, or to the suppliers' internal uses. Any prolonged inability to obtain wafers with competitive performance and cost attributes, adequate yields, or timely deliveries from our foundries would delay our production and our product shipments and could have a material adverse impact on our business or operating results. We expect that our current suppliers will seek to convert their fabrication process arrangements to smaller wafer geometries and to more advanced process technologies. Such conversions entail inherent technological 26 risks that can affect yields and delivery times. If for any reason our current suppliers are unable or unwilling to satisfy our wafer needs, we will be required to identify and qualify additional foundries. Additional wafer foundries may be unavailable, may prove to be unqualified, and may be unable to satisfy our requirements on a timely basis. In order to secure wafer capacity, from time to time we have entered into "take or pay" contracts that have committed us to purchase specified wafer quantities over extended periods, and we have made prepayments to foundries. In the future, we may enter into similar transactions, including, without limitation, the following: - non-refundable deposits - loans - equity investments - joint ventures - other partnership relationships Any such transaction could require us to seek additional equity or debt financing to fund such activities. We may not be able to obtain any required financing on terms acceptable to us. WE DEPEND ON SUBCONTRACTORS WHOSE FAILURE TO MEET OUR MANUFACTURING NEEDS COULD NEGATIVELY AFFECT OUR OPERATIONS. We rely on subcontractors for the assembly and packaging of the integrated circuits, or ICs, included in our products. We have no long-term agreements with our assembly and packaging subcontractors. We also use board subcontractors to better balance production runs and capacity. We cannot assure that such subcontractors will continue to be able and willing to meet our requirements for such components or services. Any significant disruption in supplies from, or degradation in the quality of components or services supplied by, such subcontractors could delay shipments and result in the loss of customers or revenues or otherwise have a material adverse impact on our business or operating results. WE DEPEND ON THE EFFORTS OF OUR DISTRIBUTORS, WHICH IF REDUCED, WOULD RESULT IN LOWER REVENUES AND OPERATING RESULTS. Our distributors generally offer a diverse array of products from several different manufacturers. Accordingly, we are at risk that these distributors may give higher priority to selling products from other suppliers, thus reducing their efforts to sell our products. A reduction in sales efforts by our current distributors could materially adversely impact our business or operating results. Our distributors may on occasion build inventories in anticipation of substantial growth in sales, and if such growth does not occur as rapidly as they anticipate, distributors may decrease the amount of product ordered from us in subsequent quarters. In addition, if we decrease our price protection or distributor-incentive programs, our distributors may temporarily decrease the amounts of product purchased from us. This could result in a change in distributor business habits, and distributors may decide to decrease the amount of product held and reduce their inventory levels. This could reduce our revenues in any given quarter and could negatively impact our operating results. In addition, we may from time to time take actions to reduce levels of products at distributors. These actions could reduce our revenues in any given quarter and could negatively impact our operating results or revenues. Gross revenues from distributors accounted for 54% of our total gross revenues in fiscal 2000. One distributor accounted for 13% of net revenues in fiscal 2000 and 19% of gross trade receivables as of March 31, 2000. Another distributor accounted for 11% of gross trade receivables as of March 31, 2000, but represented less than 10% of net revenues in fiscal 2000. 27 OUR OPERATIONS DEPEND ON KEY PERSONNEL, THE LOSS OF WHOM COULD AFFECT OUR BUSINESS AND REDUCE OUR FUTURE REVENUES. Our future success depends in large part on the continued service of our key technical, marketing, and management personnel, and on our ability to continue to attract and retain qualified employees, particularly those highly skilled design, process, and test engineers who are involved in the design enhancements and manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could materially adversely affect our business, operating results or revenues. Specifically, the expansion of high technology companies in Silicon Valley, where our corporate offices are located, has increased demand and competition for qualified personnel. Our continued growth and future operating results will depend upon our ability to attract, hire and retain significant numbers of qualified employees. CERTAIN OF OUR INTERNATIONAL OPERATIONS ARE RISKY, AND MAY NEGATIVELY AFFECT OUR OPERATIONS OR REVENUES. Our manufacturing facilities and various subcontractors it utilizes from time to time are primarily located in Asia. Additionally, we have various sales offices and customers throughout Europe, Japan, and other countries. Our international operations and sales are subject to political and economic risks, including political instability, currency controls, exchange rate fluctuations, and changes in import/export regulations, tariffs, and freight rates. We may use forward exchange contracts to manage any exposure associated with certain foreign currency-denominated commitments. In addition, because our primary wafer supplier, TSMC is located in Taiwan, we may be subject to certain risks resulting from the political instability in Taiwan, including conflicts between Taiwan and the People's Republic of China. WE MAY ENCOUNTER NATURAL DISASTERS, WHICH MAY NEGATIVELY AFFECT OUR OPERATIONS AND OUR FINANCIAL POSITION. Our corporate headquarters in California are located near major earthquake faults. Any damage to our information systems caused as a result of an earthquake, fire or any other natural disasters could have a material impact on our business, financial position and results of operations. Additionally, our primary wafer supplier is located in Taiwan, which has experienced significant earthquakes. A severe earthquake could interrupt our manufacturing process and could materially adversely impact our business, financial position or results of operations. WE MAY EXPERIENCE VOLATILE FLUCTUATIONS IN OUR STOCK PRICE. The stock market in general, and the market for shares of technology companies in particular, has from time to time experienced extreme price fluctuations. Often, these changes have been unrelated to the operating performance of the affected companies. In addition, factors such as technological innovations or new product introductions by us, by our competitors, or by our customers may have a significant impact positively or negatively, on the market price of our common stock. Furthermore, quarter-to-quarter fluctuations in our results of operations caused by changes in customer demand, changes in the microcomputer and peripherals markets, or other factors, may have a significant impact on the market price of our common stock. In addition, general market conditions and international macroeconomic factors unrelated to our performance may affect our stock price. These conditions and other conditions and factors that generally affect the market for stocks of technology companies could cause the price of our common stock to fluctuate substantially over short periods. IF WE ARE UNABLE TO PROTECT AND ENFORCE OUR INTELLECTUAL PROPERTY RIGHTS, WE MAY BE UNABLE TO COMPETE EFFECTIVELY. Historically, we have devoted significant resources to research and development, and we believe that the intellectual property derived from such research and development is a valuable asset that is important to the success of our business. Although we actively maintain and defend our intellectual property rights, we may be unable to adequately protect our proprietary rights. In addition, the laws of certain territories in which our products are or may be developed, manufactured, or sold, 28 including Asia and Europe, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property, which could harm our business. We have from time to time discovered counterfeit copies of our products being manufactured or sold by others. Although we maintain an active program to detect and deter the counterfeiting of our products, significant availability of counterfeit products could reduce our revenue and damage our reputation and goodwill with customers. THIRD PARTIES MAY ASSERT INFRINGEMENT CLAIMS AGAINST US, WHICH MAY BE EXPENSIVE TO DEFEND AND RESULT IN ADDITIONAL COSTS AND COULD MATERIALLY ADVERSELY IMPACT OUR OPERATIONS AND REVENUES. From time to time, third parties may assert exclusive patent, copyright, and other intellectual property rights to our key technologies. We cannot assure you that third parties will not assert infringement claims against us in the future, that assertions by third parties will not result in costly litigation, or that we would prevail in such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Litigation, regardless of the outcome, could result in substantial cost to us and diversion of our resources. Any infringement claim or other litigation against or by us could materially adversely impact our business, operating results or revenues. In May 2000, we entered into an agreement with a third party for a patent cross-license. We will pay the third party a patent settlement fee in return for a release from past infringement claims prior to January 1, 2000 and a fully paid-up license fee for the use of certain of the third party's patents through June 30, 2004. Additionally, we will grant the third party a license to use all of our patents for the same period. The aggregate fee to be paid by us under the cross-license agreement will range from $11.0 million to $25.0 million, depending on the outcome of an evaluation of certain patents by an independent party. Our best estimate of the aggregate fee that will be payable under the cross-license agreement is $18.0 million. WE MAY BE ENGAGED IN LEGAL PROCEEDINGS THAT COULD NEGATIVELY AFFECT OUR FINANCIAL POSITION OR BUSINESS OPERATIONS. From time to time we are subject to litigation or claims that could negatively affect our financial position or business operations. For instance, a class action lawsuit is pending in the United States District Court for the Northern District of California against us and certain of our officers and directors. This lawsuit alleges that we made false and misleading statements at various times during the period between April 1997 and January 1998 and that these statements violated federal securities laws. Our motion to dismiss the complaint was granted in April 2000. The plaintiffs filed an amended complaint in July 2000. In October 2000, we filed a motion to dismiss the amended complaint. We believe this lawsuit is without merit and we intend to defend ourselves vigorously. However, any dispute, including this lawsuit, could cause us to incur unforeseen expenses, could occupy an inordinate amount of our management's time and attention and could negatively affect our financial position or business operations. IF WE REPATRIATE CASH FROM OUR FOREIGN SUBSIDIARIES, WE WILL INCUR ADDITIONAL INCOME TAXES WHICH COULD NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION. Our cash and cash equivalent positions are held principally by our subsidiary in Singapore. If the need arises whereby we need additional cash to acquire assets or technology, or to support our operations in the United States, it may require us to repatriate some of our cash from Singapore to the United States. We will incur additional income taxes from the repatriation, which could negatively affect our results of operations and financial position. 29 WE MAY BE SUBJECT TO A HIGHER EFFECTIVE TAX RATE THAT COULD NEGATIVELY IMPACT OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION. Our effective tax rate is benefited by a Singapore tax holiday relating to certain of our products. The terms of the tax holiday provide that profits derived from certain products will be exempt from tax through fiscal 2005, subject to certain conditions. If we do not continue to meet the conditions and requirements of the tax holiday in Singapore, our effective tax rate will increase, which could materially adversely impact our results of operations and financial position. WE MAY BE REQUIRED TO PAY ADDITIONAL FEDERAL INCOME TAXES WHICH COULD NEGATIVELY IMPACT OUR FINANCIAL POSITION. On June 27, 2000, we received a statutory notice of deficiency from the Internal Revenue Service, or IRS, with respect to our federal income tax returns for fiscal 1994 through 1996. We filed a Petition with the United States Tax Court on September 25, 2000, contesting the asserted deficiencies. On December 15, 2000, we received a statutory notice of deficiency from the IRS with respect to our federal income tax return for fiscal 1997, and we intend to vigorously contest the asserted deficiencies. We believe we have meritorious defenses against all deficiencies asserted in these statutory notices. In addition, the IRS is currently auditing our federal income tax returns for fiscal 1998 and 1999, for which no proposed adjustments have been received. While we believe we have meritorious defenses to the proposed adjustments and that sufficient taxes have been provided, the final outcome of these matters could materially adversely impact our results of operations and financial position. THE DELAY IN THE SPIN-OFF OF OUR SOFTWARE SEGMENT COULD MATERIALLY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL POSITION. In June 2000, we announced our plan to spin off the Software segment in the form of a fully independent and separate company named Roxio, Inc., or Roxio. In the second quarter of fiscal 2001, Roxio filed a Registration Statement on Form S-1 to register the sale of approximately 15% of its outstanding common stock. In January 2001, Roxio withdrew its Registration Statement on Form S-1 due to unfavorable market conditions, however, we intend to complete the spin-off at a later date. In addition, we committed to issue our employees, who will later become employees of Roxio at the date of legal separation, options to purchase shares of Roxio common stock. Since the measurement date has not been established, these stock options will therefore be subject to variable plan accounting treatment resulting in a mark-to-market adjustment to the deferred compensation in future periods. We may not be successful in completing the spin-off, due to prolonged market conditions or delays in obtaining the necessary approvals. This will adversely impact Roxio's ability to attract and retain qualified employees and require us to incur additional expenses associated with the spin-off, which could have a material adverse effect on our financial position or operating results. 30 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For financial market risks related to changes in interest rates, foreign currency exchange rates and derivative securities, reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Company's Annual Report to Stockholders for the year ended March 31, 2000. 31 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a.) Exhibits:
Exhibit Number Description ------ ----------- 10.1 Adaptec, Inc. 1986 Employee Stock Purchase Plan (amended and restated June 1998 and August 2000) 10.2 Adaptec, Inc. 2000 Nonstatutory Stock Option Plan and Form of Stock Option Agreement (incorporated by reference to Exhibit 10.1 on Form 8-K filed on December 22, 2000)
(b.) Reports on Form 8-K: On December 22, 2000, the Company filed with the Securities and Exchange Commission a current Report on Form 8-K, dated December 22, 2000, to report under Item 5 the adoption of the Company's 2000 Nonstatutory Stock Option Plan and the reservation for issuance 8,000,000 shares of the Company's common stock. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADAPTEC, INC. By: /s/ DAVID A. YOUNG Date: January 26, 2001 ---------------------- David A. Young Vice President and Chief Financial Officer (principal financial officer) By: /s/ KENNETH B. AROLA Date: January 26, 2001 ---------------------- Kenneth B. Arola Vice President and Corporate Controller (principal accounting officer) 33