-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, H5vw58NFbWQCwQsEHPD0GDGnXifdBioxh/zRxH1nAwPr8cPOVhVq3I/asd/L8D39 yfg5TbFOJDCGkdWGwNSTBg== 0000912057-99-003775.txt : 19991109 0000912057-99-003775.hdr.sgml : 19991109 ACCESSION NUMBER: 0000912057-99-003775 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAPTEC INC CENTRAL INDEX KEY: 0000709804 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 942748530 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15071 FILM NUMBER: 99742719 BUSINESS ADDRESS: STREET 1: 691 S MILPITAS BLVD STREET 2: M/S25 CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4089458600 MAIL ADDRESS: STREET 1: 691 SOUTH MILPITAS BLVD STREET 2: M/S25 CITY: MILPITAS STATE: CA ZIP: 95035 10-Q 1 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 SEPTEMBER 30, 1999 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 October 1, 1999 was 102,111,307. This document consists of 35 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........ 6-16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations....................................... 17-23 Liquidity and Capital Resources............................. 24 Factors Affecting Future Operating Results.................. 24-30 Normalized Results of Operations............................ 30-32 Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................................. 32 Part II. Other Information Item 2. Changes in Securities and Use of Proceeds................. 33 Item 4. Submission of Matters to a Vote of Security Holders....... 33 Item 5. Other Information......................................... 33-34 Item 6. Exhibits and Reports on Form 8-K.......................... 34 Signatures.............................................................. 35
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTH SIX MONTH PERIOD ENDED PERIOD ENDED --------------------- --------------------- SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, 1999 1998 1999 1998 --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues....................................... $194,280 $143,922 $386,658 $ 324,552 Cost of revenues................................... 66,267 63,087 133,054 142,825 -------- -------- -------- --------- Gross profit....................................... 128,013 80,835 253,604 181,727 -------- -------- -------- --------- Operating expenses: Research and development......................... 23,210 40,817 47,735 84,814 Sales, marketing and administrative.............. 40,242 44,842 79,610 92,444 Amortization of goodwill and other intangibles... 2,255 1,540 2,750 3,763 Write-off of acquired in-process technology...... 3,016 -- 3,016 45,482 Restructuring and other charges.................. -- 31,924 -- 62,187 -------- -------- -------- --------- Total operating expenses........................... 68,723 119,123 133,111 288,690 -------- -------- -------- --------- Income (loss) from operations...................... 59,290 (38,288) 120,493 (106,963) Interest and other income.......................... 8,193 7,912 20,144 17,045 Interest expense................................... (2,962) (3,047) (5,921) (6,114) -------- -------- -------- --------- Income (loss) before provision (benefit) for income taxes............................................ 64,521 (33,423) 134,716 (96,032) Provision (benefit) for income taxes............... 18,909 (7,499) 38,564 (11,359) -------- -------- -------- --------- Net income (loss).................................. $ 45,612 $(25,924) $ 96,152 $ (84,673) ======== ======== ======== ========= Net income (loss) per share: Basic............................................ $ 0.44 $ (0.23) $ 0.93 $ (0.75) ======== ======== ======== ========= Diluted.......................................... $ 0.42 $ (0.23) $ 0.88 $ (0.75) ======== ======== ======== ========= Shares used in computing net income (loss) per share: Basic............................................ 102,523 111,583 103,333 112,892 ======== ======== ======== ========= Diluted.......................................... 108,610 111,583 109,174 112,892 ======== ======== ======== =========
See accompanying notes to condensed consolidated financial statements. 3 ADAPTEC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, MARCH 31, 1999 1999 -------------- ---------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 142,625 $ 317,580 Marketable securities..................................... 560,401 426,332 Accounts receivable, net.................................. 83,612 67,158 Inventories............................................... 48,888 50,838 Prepaid expenses.......................................... 15,259 15,920 Other current assets...................................... 84,895 132,189 ---------- ---------- Total current assets.................................... 935,680 1,010,017 Property and equipment, net................................. 112,658 126,734 Other long-term assets...................................... 53,486 36,317 ---------- ---------- $1,101,824 $1,173,068 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 31,699 $ 39,487 Accrued liabilities....................................... 131,861 112,879 ---------- ---------- Total current liabilities............................... 163,560 152,366 ---------- ---------- 4 3/4% Convertible Subordinated Notes....................... 230,000 230,000 ---------- ---------- Contingencies (Note 16) Stockholders' equity: Common stock.............................................. 102 106 Additional paid-in capital................................ 15,935 194,521 Retained earnings......................................... 692,227 596,075 ---------- ---------- Total stockholders' equity.............................. 708,264 790,702 ---------- ---------- $1,101,824 $1,173,068 ========== ==========
See accompanying notes to condensed consolidated financial statements. 4 ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTH PERIOD ENDED --------------------- SEPT. 30, SEPT. 30, 1999 1998 --------- --------- (IN THOUSANDS) NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 138,537 $ 72,060 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of certain net assets in connection with acquisitions, net......................................... (14,485) (34,126) Purchases of property and equipment......................... (3,866) (28,671) Net proceeds from the sale of property and equipment........ 1,941 -- Net proceeds from the sale of land held for sale............ 16,577 -- Purchases of marketable securities.......................... (724,266) (279,644) Sales of marketable securities.............................. 385,563 233,307 Maturities of marketable securities......................... 204,634 98,579 Purchase of minority investment............................. (1,000) -- --------- --------- NET CASH USED FOR INVESTING ACTIVITIES...................... (134,902) (10,555) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of common stock.................. 61,817 9,707 Proceeds from the issuance of put warrants.................. 3,725 -- Repurchases of common stock................................. (244,132) (97,216) Principal payments on long-term debt........................ -- (5,550) --------- --------- NET CASH USED FOR FINANCING ACTIVITIES...................... (178,590) (93,059) --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS................... (174,955) (31,554) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 317,580 227,183 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $ 142,625 $ 195,629 ========= =========
See accompanying notes to condensed consolidated financial statements. 5 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1999 (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements have been prepared on a consistent basis with the March 31, 1999 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, except as described in Notes 7 through 11, 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 in the Company's Annual Report on Form 10-K for the year ended March 31, 1999. For presentation purposes, the Company has indicated its second quarter as having ended on September 30, whereas in fact, the Company's second quarter of fiscal 2000 and 1999 ended on October 1, 1999 and October 2, 1998, respectively. The results of operations for the three and six month periods ended September 30, 1999, are not necessarily indicative of the results to be expected for the entire year. Additionally, certain items previously reported in specific financial statement captions have been reclassified to conform with the current presentation. On June 8, 1999, the Company received a comment letter from the Securities and Exchange Commission ("SEC") regarding certain of the Company's previous filings under the Securities Exchange Act of 1934, primarily relating to disclosures in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements. Accordingly, the Company has responded to the SEC's inquiries and provided additional disclosures in its fiscal 1999 Annual Report on Form 10-K and all subsequent 1934 Act filings, including this Report on Form 10-Q for the second quarter of fiscal 2000. However, there can be no assurance that the SEC will not take exception with the Company's disclosures and require that the Company make additional disclosures in its periodic reports or further amend its previous filings. 2. COMPREHENSIVE INCOME As of April 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 requires components of comprehensive income, including unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, to be reported in the financial statements. These amounts are not material to the Company's financial statements for the periods presented. 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". SFAS 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 Statement of Financial Accounting Standards No. 137 ("SFAS 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 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, but does not expect the adoption of SFAS 133 to have a material impact on the Company's financial position, results of operations or cash flows. 6 4. BALANCE SHEET DETAIL Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventory are as follows:
SEPTEMBER 30, MARCH 31, 1999 1999 -------------- ---------- (IN THOUSANDS) Raw materials......................................... $13,443 $16,354 Work-in-process....................................... 10,468 8,202 Finished goods........................................ 24,977 26,282 ------- ------- $48,888 $50,838 ======= =======
The components of accrued liabilities are as follows:
SEPTEMBER 30, MARCH 31, 1999 1999 -------------- ---------- (IN THOUSANDS) Accrued compensation and related taxes............... $ 32,876 $ 22,137 Sales and marketing related.......................... 7,598 7,708 Tax related.......................................... 68,537 65,754 Other................................................ 22,850 17,280 -------- -------- $131,861 $112,879 ======== ========
5. LINE OF CREDIT In March 1999, the Company obtained an unsecured $60.0 million revolving line of credit which expires on March 25, 2000. No borrowings were outstanding under this line of credit as of September 30, 1999. The interest rate and commitment fee is based on a pricing matrix, which correlates with the Company's credit rating. Under the arrangement, the Company is required to maintain certain financial ratios among other restrictive covenants. The Company was in compliance with all such covenants as of September 30, 1999. 6. LONG-TERM DEBT In June 1992, the Company entered into a $17.0 million term loan agreement bearing interest at 7.65%, with principal and interest payable in quarterly installments of $850,000. In the first quarter of fiscal 1999, the Company paid the remaining outstanding principal and interest due on the loan. 7 7. STATEMENTS OF OPERATIONS Restructuring and other charges included:
THREE MONTH SIX MONTH PERIOD ENDED PERIOD ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ------------------- ------------------- (IN THOUSANDS) Acquisition related costs (Note 10)................. $ -- $21,463 Restructuring charges (Note 9)...................... 24,530 33,330 Asset impairments and other charges (Note 10)....... 7,394 7,394 ------- ------- Total restructuring and other charges............... $31,924 $62,187 ======= =======
There were no restructuring and other charges incurred during the second quarter and first half of fiscal 2000. Interest and other income included:
THREE MONTH SIX MONTH PERIOD ENDED PERIOD ENDED --------------------- --------------------- SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, 1999 1998 1999 1998 --------- --------- --------- --------- (IN THOUSANDS) Interest income.................................. $8,193 $7,912 $16,631 $17,045 Gain on sale of land (Note 11)................... -- -- 3,513 -- ------ ------ ------- ------- Total interest and other income.................. $8,193 $7,912 $20,144 $17,045 ====== ====== ======= =======
8. RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS CEQUADRAT: In July 1999, the Company purchased CeQuadrat GmbH ("CeQuadrat"), a developer of CD-R software products, for $24.0 million in cash. As part of the purchase agreement, the Company held back $4.8 million of the purchase price for unknown liabilities that may have existed as of the acquisition date. The amount held back will be paid for such unknown liabilities or to the seller within 12 months from the acquisition date and was capitalized as part of the purchase price. Additionally, the Company incurred $0.3 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. The Company accounted for the acquisition of CeQuadrat using the purchase method of accounting and, excluding the write-off of acquired in-process technology, the impact of the acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The allocation of the Company's purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below. The allocation was based on an independent appraisal and estimate of fair value.
(IN THOUSANDS) Net tangible assets......................................... $ 123 In-process technology....................................... 3,016 Goodwill and other intangible assets: Goodwill.................................................. 10,341 Purchased technology...................................... 3,140 Covenant not to compete................................... 4,360 Acquired employees........................................ 1,173 OEM relationships......................................... 1,186 Trade name................................................ 953 ------- $21,153 ------- Net assets acquired......................................... $24,292 =======
8 The net tangible assets acquired were comprised primarily of cash and receivables offset by accrued liabilities. The acquired in-process technology was written-off in the second quarter of fiscal 2000. The goodwill will be amortized over a period of 3 years. The other intangible assets, having a similar estimated life as the goodwill, will be amortized over the same period. The $3.0 million allocation of the purchase price to the acquired in-process technology has been determined by identifying research projects in areas for which technological feasibility had not been established and no alternative future uses existed. The Company acquired technology consisting of next generation consumer-oriented CD-R software, next generation professional-oriented CD-R software and CD backup software; the amount of in-process technology allocated to each of the projects was $0.6 million, $2.2 million and $0.2 million, respectively. The value for each of the projects was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value, and then applying a percentage of completion to the calculated value as defined below. NET CASH FLOWS. The net cash flows from the identified projects were based on estimates of revenues, cost of sales, research and development costs, selling, general and administrative costs, royalty costs and income taxes from those projects. These estimates were based on the assumptions mentioned below. The research and development costs excluded costs to bring acquired in-process projects to technological feasibility. The estimated revenues were based on management projections of the acquired in-process projects for the next generation consumer-oriented CD-R software, next generation professional-oriented CD-R software and the CD backup software. The business projections were compared with and found to be in line with industry analysts' forecasts of growth in substantially all of the relevant markets. Estimated total revenues from all of the acquired in-process technology products are expected to peak in fiscal 2002 and decline in fiscal 2003 as other new products are expected to become available. These projections were based on estimates of market size and growth, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. Projected gross margins were based on CeQuadrat's historical margins which were in line with the Company's Software segment that acquired CeQuadrat. The estimated selling, general and administrative costs, as well as research and development costs, were consistent with CeQuadrat's historical cost structure. ROYALTY RATE. The Company applied a royalty charge of 30% of operating income for each in-process project to attribute value for dependency on predecessor core technologies. DISCOUNT RATE. Discounting the net cash flows back to their present value was based on the cost of capital for well managed venture capital funds which typically have similar risk and returns on investments. The cost of capital used in discounting the net cash flows from acquired in-process technology was 30% for each of the acquired in-process technology projects. Higher required rates of return, which would correspond to higher risk, are partially mitigated by the Company's expertise in the CD-R market. PERCENTAGE OF COMPLETION. The percentage of completion for the projects was determined using costs incurred by CeQuadrat prior to the acquisition date compared to the remaining research and development to be completed to bring the projects to technological feasibility. The Company estimates, as of the acquisition date, the next generation consumer-oriented CD-R software, next generation professional-oriented CD-R software and the CD backup software projects were 82%, 69% and 82% complete, respectively, and the estimated costs to complete the projects were approximately $0.1 million in aggregate. Substantially all of the acquired in-process technology projects were expected to be completed during the third quarter of fiscal 2000. 9 RIDGE: In May 1998, the Company purchased Ridge Technologies, Inc. ("Ridge"), a development stage company, for 1.2 million shares of the Company's common stock valued at $21.2 million, and assumed stock options valued at $13.1 million. Prior to the acquisition, the Company owned a 19.9% interest in Ridge with a carrying value of $1.5 million and Grant Saviers, former Chairman and CEO of the Company, was a director of Ridge. The Company incurred $0.8 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. In-process technology was valued at $39.4 million and was written-off in the first quarter of fiscal 1999. In August 1998, the Company divested the storage subsystems business, abandoned the in-process technology projects (these projects remained incomplete from the date of acquisition through abandonment) and wrote-off the remaining unamortized goodwill of $0.6 million and other intangible asset of $1.2 million associated with Ridge. The aggregate impact of this acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The tangible liabilities assumed exceeded the tangible assets acquired. The purchase price allocation is included in the Company's fiscal 1999 Annual Report on Form 10-K. ADI: In April 1998, the Company purchased read channel and preamplifier ASIC technologies ("ASIC technologies") from Analog Devices, Inc. ("ADI") for $34.4 million in cash. The ASIC technologies purchased from ADI were to be incorporated into the mainstream removable Peripheral Technology Solutions ("PTS") business line upon completion. Grant Saviers, former Chairman and CEO of the Company, is a director of ADI. The Company incurred $0.4 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. The acquired in-process technology was valued at $6.1 million and was written-off in the first quarter of fiscal 1999. In January 1999, the Company sold the mainstream removable PTS business line, including the in-process technologies purchased from ADI (these projects remained incomplete from the date of acquisition through their disposition), and relieved the remaining unamortized goodwill of $18.3 million and other intangible asset of $1.7 million associated with the ASIC technologies purchased from ADI. The aggregate impact of this acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The purchase price allocation is included in the Company's fiscal 1999 Annual Report on Form 10-K. DPT: On November 1, 1999, the Company announced that it signed a letter of intent to acquire Distributed Processing Technology ("DPT") for $235.0 million, including cash and assumed stock options. DPT is a leading supplier of high-performance storage solutions, including adapters, RAID controllers, storage subsystems, and management software. However, the acquisition is subject to the Company and DPT reaching a definitive agreement, to regulatory approval, and to certain other contingencies. If the acquisition is consummated, the Company will account for the acquisition using the purchase method and will evaluate the allocation of the purchase price to the assets acquired, which may include in-process technology that will be written-off, and goodwill that will be amortized over the benefit period. 9. RESTRUCTURING In the first quarter of fiscal 1999, the Company recorded a restructuring charge of $8.8 million, comprised primarily of severance and benefits. In the second quarter of fiscal 1999, the Company recorded a restructuring charge of $24.5 million, net of an adjustment to the restructuring charge taken in the first quarter of fiscal 1999 of $1.4 million. The second quarter restructuring charge was comprised primarily of severance and benefits and the write-off of fixed assets, inventory and other current and long-term assets. In the fourth quarter of fiscal 1999, the Company recorded a restructuring charge of $6.6 million, net of an adjustment to the restructuring charges taken in the first and second quarters of fiscal 1999 of $1.2 million. The fourth quarter restructuring charge was comprised primarily of severance and benefits. In total, the Company recorded $39.9 million in restructuring charges during fiscal 1999, of which $17.4 million were non-cash charges. During fiscal 1999, the Company paid $20.0 million in cash relating to restructuring activities. The restructuring reserve balance at March 31, 1999 was comprised of $1.5 million 10 for severance and benefits and $1.0 million for other charges, primarily lease payments for vacated facilities. As of September 30, 1999, substantially all of the reserve balance has been paid out. 10. ASSET IMPAIRMENT AND OTHER CHARGES The Company regularly evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Based on these evaluations, the Company recorded non-cash impairment charges of $4.0 million in the second quarter of fiscal 1999, including $1.4 million in manufacturing equipment deemed unnecessary due to non-temporary declines in production volume and the write-off of $2.6 million of non-trade related receivables previously classified in "Other current assets" in the Condensed Consolidated Balance Sheets. Additionally, the Company recorded executive termination costs of $3.4 million in the second quarter of fiscal 1999, relating to three executives. The costs consisted of $1.9 million in severance and benefits payments and $1.5 million in non-cash stock compensation charges resulting from amended option agreements. In February 1998, the Company entered into an agreement to purchase all of the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of Hyundai Electronics America ("HEA"). In June 1998, the Company and HEA mutually agreed to terminate the agreement. The Company paid a $7.0 million termination fee and $6.7 million in nonconsummation fees to HEA. Additionally, the Company incurred $7.8 million in other acquisition related charges, including legal, consulting and other costs. The Company expensed the entire $21.5 million in fees associated with this terminated acquisition in the first quarter of fiscal 1999. 11. ASSETS HELD FOR SALE In March 1999, the Company sold land located in California for net proceeds of $5.1 million resulting in a gain of $1.6 million recorded in the fourth quarter of fiscal 1999. Net proceeds from the sale were received in April 1999. As of March 31, 1999, the Company had $41.1 million in assets held for sale which were included in "Other current assets" in the Condensed Consolidated Balance Sheet, representing several pieces of land in California and land and a building in Colorado. In April 1999, the Company sold some land held for sale in California for net proceeds of $11.5 million resulting in a gain of $3.5 million recorded in the first quarter of fiscal 2000. The gain is included in "Interest and other income" in the Condensed Consolidated Statement of Operations for the six month period ended September 30, 1999. Net proceeds from the sale were received in April 1999. The remaining assets held for sale are valued at cost and included in "Other current assets" in the Condensed Consolidated Balance Sheet. The Company expects to sell these assets within the next six months. 11 12. 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 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 --------------------------------------- --------------------------------------- INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders........... $45,612 102,523 $0.44 $(25,924) 111,583 $(0.23) ===== ====== EFFECT OF DILUTIVE SECURITIES Common stock equivalents: Stock options................. -- 6,075 -- -- Put warrants.................. -- 12 -- -- ------- ------- -------- ------- -- 6,087 -- -- DILUTED NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders and assumed conversions........... $45,612 108,610 $0.42 $(25,924) 111,583 $(0.23) ======= ======= ===== ======== ======= ======
SIX MONTH PERIOD ENDED SIX MONTH PERIOD ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 --------------------------------------- --------------------------------------- INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders........... $96,152 103,333 $0.93 $(84,673) 112,892 $(0.75) ===== ====== EFFECT OF DILUTIVE SECURITIES Common stock equivalents: Stock options................. -- 5,829 -- -- Put warrants.................. -- 12 -- -- ------- ------- -------- ------- -- 5,841 -- -- DILUTED NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders and assumed conversions........... $96,152 109,174 $0.88 $(84,673) 112,892 $(0.75) ======= ======= ===== ======== ======= ======
Additional options to purchase 584,000 shares of common stock were outstanding at September 30, 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 shares during the second quarter of fiscal 2000. The conversion of 4,452,000 shares of common stock related to the 4 3/4% Convertible Subordinated Notes were also not included in the computation of diluted net income per share for the second quarter and first half of fiscal 2000 because they were anti-dilutive. Options to purchase 22,100,000 shares of common stock were outstanding at September 30, 1998, however, the stock options and the conversion of 4,452,000 shares of common stock related to the 4 3/4% Convertible Subordinated Notes were not included in the computations of net loss per share for the second quarter and first half of fiscal 1999 because they were anti-dilutive. 12 13. STOCK REPURCHASES In January 1998, the Company's Board of Directors approved a stock buy back program under which the Company could repurchase up to 10.0 million shares of its common stock in the open market. During the second quarter of fiscal 1999, the Company repurchased and retired 8,261,000 shares of its common stock for $97.2 million under this program. The transactions were recorded as reductions to common stock and additional paid-in-capital. In October 1998, the Company's Board of Directors approved a stock buy back program under which the Company could repurchase up to $200.0 million of its common stock in the open market. In May 1999, the Company's Board of Directors approved another stock buy back program under which the Company could repurchase up to an additional $200.0 million of its common stock in the open market. During the second quarter and first half of fiscal 2000, the Company repurchased and retired 3,054,000 and 7,902,000 shares of its common stock for $112.9 million and $244.1 million, respectively, under the October 1998 and May 1999 stock buy back programs. The transactions were recorded as reductions to common stock and additional paid-in-capital. Aggregate purchases under the October 1998 and May 1999 programs were $343.4 million as of September 30, 1999, leaving $56.6 million remaining authorized for stock buy back under the May 1999 program. In the second quarter of fiscal 2000, the Company sold put warrants that could potentially obligate the Company to buy back up to 1.0 million shares of its common stock at prices ranging from $37 to $39. In exchange, the Company received up front premiums of $3.7 million which were used for general business purposes. The settlement terms include physical settlement, cash settlement or net-share settlement at the option of the Company. The warrants expire during the third quarter of fiscal 2000. The impact on diluted earnings per share for the second quarter and first half of fiscal 2000 was minimal (Note 12). 14. STOCK PLANS During the second quarter of fiscal 2000, the Company's Board of Directors and its stockholders approved the Company's 1999 Stock Plan and reserved for issuance thereunder (a) 1,000,000 shares of common stock plus (b) any shares of common stock reserved but ungranted under the Company's 1990 Stock Plan as of the date of stockholder approval plus (c) any shares returned to the 1990 Stock Plan after the date of stockholder approval of the 1999 Stock Plan as a result of termination of options under the 1990 Stock plan. Upon stockholder approval of the 1999 Stock Plan, the 1990 Stock Plan was terminated with respect to new option grants. The 1999 Stock Plan provides for granting of incentive and nonstatutory stock options to employees, consultants and directors of the Company. Options granted under this plan are for periods not to exceed ten years, and are granted at prices not less than 100% and 85% for incentive and nonstatutory stock options, respectively, of the fair market value on the date of grant. Generally, stock options become fully vested and exercisable over a four-year period. As of September 30, 1999, no shares were issued under the 1999 Stock Plan. 15. INCOME TAXES Income tax provisions (benefits) for interim periods are based on estimated annual income tax rates. The difference between the Company's effective income tax rate and the U.S. federal statutory income tax rate is primarily due to income earned in Singapore where the Company is subject to a significantly lower effective income tax rate. In the second quarter of fiscal 1999, the Company's effective income tax rate, excluding the write-off of acquired in-process technology, was 25%. In the third quarter of fiscal 1999, the Company's effective income tax rate changed from 25% to 28% due to a geographic shift of earnings resulting from restructuring activities and business divestitures. 13 The Company recorded an income tax provision of $18.9 million representing 29.3% of income before provision for income taxes for the second quarter of fiscal 2000 compared with a $7.5 million income tax benefit representing 22.4% of the loss before benefit for income taxes for the second quarter of fiscal 1999. The effective income tax rate used to calculate the income tax provision for the second quarter of fiscal 2000 was higher than 28% primarily as a result of the acquired in-process technology charge associated with the acquisition of CeQuadrat, for which no tax benefit was provided. The effective income tax rate used to calculate the income tax benefit for the second quarter of fiscal 1999 was lower than 25% primarily as a result of the write-off of goodwill and other intangible asset, for which no tax benefit was provided. 16. CONTINGENCIES 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 complaint does not set forth purported damages. The Company believes the class action lawsuit is without merit and intends to defend itself vigorously. In addition, a derivative action was filed in the Superior Court of the State of California against the Company and certain of its officers and directors, alleging that the individual defendants improperly profited from transactions in the Company's stock during the same time period referenced by the class action lawsuit. In July 1999, the Company entered into an agreement to settle the derivative action. Under the terms of the agreement, the Company will reimburse the fees and costs incurred by the plaintiff's attorney in an amount to be approved by the court up to a maximum amount of $600,000. The settlement is subject to approval by the court, and does not affect the class action lawsuit still pending. The potential liability is included in "Accrued liabilities" in the Condensed Consolidated Balance Sheet at September 30, 1999. An outside party has contacted the Company regarding alleged infringement of certain patents. The Company is discussing resolutions of these claims including a possible cross-license agreement. However, there can be no assurance the Company will be able to obtain acceptable terms or conditions for such a license, in which case, these claims may result in litigation. While the outcome is not possible to determine, the Company believes the resolution of these claims will not have a material adverse impact on the Company's financial position. 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 consolidated financial position or results of operations. The IRS is currently auditing the Company's federal income tax returns for its fiscal years 1994 through 1996. No proposed adjustments have been received for these years. The Company believes sufficient taxes have been provided in prior years and that the ultimate outcome of the IRS audits will not have a material adverse impact on the Company's financial position or results of operations. 17. SEGMENT REPORTING The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information" in its fiscal 1999 Annual Report on Form 10-K. The Company evaluated its product segments in accordance with SFAS 131 and concluded that its reportable segments are Host I/O, RAID (Redundant Array of Independent Disks), Software and PTS. The Host I/O segment designs, develops, manufactures and markets host bus adapter ("HBA") boards and chips that allow computers to transfer information to and from peripherals, such as hard disk drives, 14 scanners, CD-ROMs, CD-Rs, CD-RWs, DVD-ROMs, and Zip and Jaz drives among many other devices. The Company's HBAs are based on Small Computer System Interface ("SCSI") technology and are utilized in servers, high-end workstations, desktops and laptops where high performance I/O is a vital component of overall system performance. The RAID segment designs, develops, manufactures and markets bus-based and microprocessor-based RAID solutions. These products are utilized from entry level workstations to enterprise-class servers. The Company's RAID adapters provide performance and functionality, incorporate the latest technical innovations, and offer superior software functionality to make RAID fast, simple and reliable. The Software segment designs, develops and markets primarily application software for optical peripherals, including CD-R, CD-RW and DVD recordable devices. In addition, the segment offers software utility products that simplify connecting a SCSI host adapter and peripherals to a microcomputer system. The Company's application software products allow users to store data, including audio, video and still photos, to virtually all marketed CD-R and CD-RW drives using industry standard formats. The application software, along with the peripherals, provide users with a cost effective alternative to other forms of removable media for general purpose computing needs, including the ability to transfer downloaded music from the Internet to CDs for private use or creating compilations of music from purchased music CD labels. The Company's CD-R software offerings are available as stand-alone products, and also ship built-in or "bundled" with most CD-R drives in the desktop market. In July 1999, the Company acquired CeQuadrat, a German-based software company, also providing CD-R and CD-RW products. With the acquisition, came enhanced product development and engineering expertise, as well as a greater European customer base. Results of CeQuadrat have been combined with those of the Company, specifically the Software segment, for the second quarter of fiscal 2000. The business lines that comprised the PTS segment were sold in November 1998 and January 1999 to Texas Instruments, Inc. ("TI") and ST Microelectronics, Inc. ("ST"), respectively. This segment designed, developed, manufactured and marketed proprietary integrated circuits ("ICs") for use in mass storage devices and other peripherals. 15 Summarized pre-tax financial information concerning the Company's reportable segments is shown in the following table. The Company does not identify or allocate assets or depreciation by operating segments nor are the segments evaluated under these criteria. The "Other" column includes corporate related items and income and expenses not allocated to reportable segments, primarily unusual transactions and business lines divested in fiscal 1999.
THREE MONTH SIX MONTH PERIOD ENDED PERIOD ENDED --------------------- --------------------- SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, 1999 1998 1999 1998 --------- --------- --------- --------- (IN THOUSANDS) HOST I/O: Net revenues..................................... $149,312 $103,802 $307,661 $ 230,881 Segment profit................................... 64,708 22,999 132,679 58,045 RAID: Net revenues..................................... 28,644 3,465 52,120 9,850 Segment profit (loss)............................ 3,102 (5,331) 4,209 (9,783) SOFTWARE: Net revenues..................................... 14,074 10,485 24,627 21,979 Segment profit (loss)............................ (989) 1,303 (1,120) 3,957 PTS: Net revenues..................................... -- 25,603 -- 60,525 Segment loss..................................... -- (10,904) -- (20,716) OTHER: Net revenues..................................... 2,250 567 2,250 1,317 Segment loss..................................... (2,300) (41,490) (1,052) (127,535)
The following table presents the details of "Other" segment loss:
THREE MONTH SIX MONTH PERIOD ENDED PERIOD ENDED --------------------- --------------------- SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, 1999 1998 1999 1998 --------- --------- --------- --------- (IN THOUSANDS) Losses from divested business lines.................. $ -- $(15,375) $ -- $ (31,659) Unallocated corporate profit (loss).................. (4,515) 944 (12,259) 862 Interest and other income............................ 8,193 7,912 20,144 17,045 Interest expense..................................... (2,962) (3,047) (5,921) (6,114) Write-off of acquired in-process technology.......... (3,016) -- (3,016) (45,482) Restructuring and other charges...................... -- (31,924) -- (62,187) ------- -------- -------- --------- Total................................................ $(2,300) $(41,490) $ (1,052) $(127,535) ======= ======== ======== =========
16 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 SIX MONTH PERIOD ENDED PERIOD ENDED --------------------- --------------------- SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, 1999 1998 1999 1998 --------- --------- --------- --------- Net revenues.............................................. 100.0% 100.0% 100.0% 100.0% Cost of revenues.......................................... 34.1 43.8 34.4 44.0 ----- ----- ----- ----- Gross margin.............................................. 65.9 56.2 65.6 56.0 ----- ----- ----- ----- Operating expenses: Research and development................................ 11.9 28.4 12.3 26.1 Sales, marketing and administrative..................... 20.7 31.1 20.6 28.4 Amortization of goodwill and other intangibles.......... 1.2 1.1 0.7 1.2 Write-off of acquired in-process technology............. 1.6 -- 0.8 14.0 Restructuring and other charges......................... -- 22.2 -- 19.2 ----- ----- ----- ----- Total operating expenses.................................. 35.4 82.8 34.4 88.9 ----- ----- ----- ----- Income (loss) from operations............................. 30.5 (26.6) 31.2 (32.9) Interest and other income................................. 4.2 5.5 5.2 5.2 Interest expense.......................................... (1.5) (2.1) (1.5) (1.9) ----- ----- ----- ----- Income (loss) before provision (benefit) for income taxes................................................... 33.2 (23.2) 34.9 (29.6) Provision (benefit) for income taxes...................... 9.7 (5.2) 10.0 (3.5) ----- ----- ----- ----- Net income (loss)......................................... 23.5% (18.0)% 24.9% (26.1)% ===== ===== ===== =====
SEC COMMENT LETTER. On June 8, 1999, the Company received a comment letter from the Securities and Exchange Commission ("SEC") regarding certain of the Company's previous filings under the Securities Exchange Act of 1934, primarily relating to disclosures in the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations and Notes to Consolidated Financial Statements. Accordingly, the Company has responded to the SEC's inquiries and provided additional disclosures in its fiscal 1999 Annual Report on Form 10-K and all subsequent 1934 Act filings, including this Report on Form 10-Q for the second quarter of fiscal 2000. However, there can be no assurance that the SEC will not take exception with the Company's disclosures and require that the Company make additional disclosures in its periodic reports or further amend its previous filings. BUSINESS SEGMENTS. The Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information" in its fiscal 1999 Annual Report on Form 10-K. The Company evaluated its product segments in accordance with SFAS 131 and concluded that its reportable segments are Host I/O, RAID (Redundant Array of Independent Disks), Software and PTS. The Host I/O segment designs, develops, manufactures and markets host bus adapter ("HBA") boards and chips that allow computers 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. The Company's HBAs are based on Small Computer System Interface ("SCSI") technology and are utilized in servers, high-end workstations, desktops and laptops where high performance I/O is a vital component of overall system performance. 17 The RAID segment designs, develops, manufactures and markets bus-based and microprocessor-based RAID solutions. These products are utilized from entry level workstations to enterprise-class servers. The Company's RAID adapters provide performance and functionality, incorporate the latest technical innovations, and offer superior software functionality to make RAID fast, simple and reliable. The Software segment designs, develops and markets primarily application software for optical peripherals, including CD-R, CD-RW and DVD recordable devices. In addition, the segment offers software utility products that simplify connecting a SCSI host adapter and peripherals to a microcomputer system. The Company's application software products allow users to store data, including audio, video and still photos, to virtually all marketed CD-R and CD-RW drives using industry standard formats. The application software, along with the peripherals, provide users with a cost effective alternative to other forms of removable media for general purpose computing needs, including the ability to transfer downloaded music from the Internet to CDs for private use or creating compilations of music from purchased music CD labels. The Company's CD-R software offerings are available as stand-alone products, and also ship built-in or "bundled" with most CD-R drives in the desktop market. In July 1999, the Company acquired CeQuadrat GmbH ("CeQuadrat"), a German-based software company, also providing CD-R and CD-RW products. With the acquisition, came enhanced product development and engineering expertise, as well as a greater European customer base. Results of CeQuadrat have been combined with those of the Company, specifically the Software segment, for the second quarter of fiscal 2000. The business lines that comprised the PTS segment were sold in November 1998 and January 1999 to Texas Instruments, Inc. ("TI") and ST Microelectronics, Inc. ("ST"), respectively. This segment designed, developed, manufactured and marketed proprietary integrated circuits ("ICs") for use in mass storage devices and other peripherals. NET REVENUES. Net revenues were $194.3 million and $386.7 million for the second quarter and first half of fiscal 2000, respectively, an increase of 35.0% and 19.1% from net revenues of $143.9 million and $324.6 million for the second quarter and first half of fiscal 1999, respectively. Net revenues for the second quarter of fiscal 2000 were comprised of $149.3 million from the Host I/O segment, an increase of 43.8% from the second quarter of fiscal 1999, $28.6 million from the RAID segment, an increase of 726.7% from the second quarter of fiscal 1999, $14.1 million from the Software segment, an increase of 34.2% from the second quarter of fiscal 1999, and $2.3 million representing unallocated corporate net revenues. Net revenues for the second quarter of fiscal 1999 also included $25.6 million from the PTS segment. Excluding the PTS segment, total net revenues increased $76.0 million or 64.2% in the second quarter of fiscal 2000, compared to the second quarter of fiscal 1999. Net revenues for the first half of fiscal 2000 were comprised of $307.7 million from the Host I/O segment, an increase of 33.3% from the first half of fiscal 1999, $52.1 million from the RAID segment, an increase of 429.1% from the first half of fiscal 1999, $24.6 million from the Software segment, an increase of 12.0% from the first half of fiscal 1999, and $2.3 million representing unallocated corporate net revenues. Net revenues for the first half of fiscal 1999 also included $60.5 million from the PTS segment. Excluding the PTS segment, total net revenues increased $122.6 million or 46.4% in the first half of fiscal 2000, compared to the first half of fiscal 1999. Net revenues from the Host I/O segment increased year over year as a result of increased demand for high performance I/O. The demand for high performance I/O increased due to growth in on-line applications like electronic commerce, on-line publishing, and the proliferation of the Internet and corporate intranets. Additionally, in the second quarter of fiscal 1999, the Company focused on reducing inventory in the distribution channel as a result of Ultra-DMA penetration in the desktop market. Net revenues from the RAID segment increased year over year as a result of sales of the Company's high-end RAID product which was first introduced in the third quarter of fiscal 1999. Currently, the 18 Company ships to one significant RAID original equipment manufacturer ("OEM") customer. However, the Company is continuing to market its RAID products to all major server manufacturers and continues to work closely with the OEMs on the design of current and next generation products to meet customer requirements. The Company also experienced significant growth year over year in its low-end RAID products through channel distribution. Net revenues from the Software segment increased year over year primarily due to worldwide growth in the CD-R and CD-RW drive markets and additional design wins with PC system OEMs in fiscal 2000. Additionally, net revenues increased due to shipments of the Company's Easy CD Creator 4.0 Deluxe product, which was first introduced at the end of the first quarter of fiscal 2000, and the acquisition of CeQuadrat, which contributed additional net revenues. The increase in net revenues for the first half of fiscal 2000, compared to the first half of fiscal 1999 was partially offset by increased unit volume at lower per unit royalties on the Company's other software products, as the Company strives to maintain its market share in the rapidly expanding CD-R peripheral market. GROSS MARGIN. Gross margin in the second quarter and first half of fiscal 2000 was 65.9% and 65.6%, respectively, compared to 56.2% and 56.0% in the second quarter and first half of fiscal 1999. The higher gross margin experienced in the first half of fiscal 2000 primarily resulted from the exclusion of net revenues and cost of sales from PTS products included in the fiscal 1999 gross margin. The PTS products generally obtained a lower gross margin than the Host I/O segment, which represented the largest percentage of net revenues. Excluding the PTS segment, gross margin in the second quarter and first half of fiscal 1999 was 60.8% and 61.6%, respectively. Excluding the PTS segment, the increase in gross margin was due to manufacturing efficiencies obtained through greater production volumes, as well as improved pricing obtained from the Company's global suppliers in the first half of fiscal 2000. RESEARCH AND DEVELOPMENT. Spending for research and development was $23.2 million and $47.7 million for the second quarter and first half of fiscal 2000, respectively, representing a decrease of 43.1% and 43.7% from $40.8 million and $84.8 million for the second quarter and first half of fiscal 1999, respectively. The decrease in spending for research and development was primarily due to $10.5 million and $21.3 million of spending related to the PTS segment included in the second quarter and first half of fiscal 1999, respectively. The decrease in spending for research and development was also attributable to Company-wide cost reduction programs initiated in fiscal 1999 which included reductions in workforce and the curtailment of costs related to the divesting of certain unprofitable business activities. The Company initiated cost reduction programs in order to bring operating expenses in line with net revenues and the business divestitures were completed to further management's objective to refocus the business. Research and development expenses, as a percentage of net revenues, decreased to 11.9% and 12.3% in the second quarter and first half of fiscal 2000, respectively, from 28.4% and 26.1% in the second quarter and first half of fiscal 1999, respectively. SALES, MARKETING AND ADMINISTRATIVE EXPENSES. Spending for selling, marketing and administrative activities was $40.2 million and $79.6 million for the second quarter and first half of fiscal 2000, respectively, representing a decrease of 10.3% and 13.9% from $44.8 million and $92.4 million for the second quarter and first half of fiscal 1999, respectively. The decrease in spending for selling, marketing and administrative activities was primarily due to $4.0 million and $7.7 million of spending from the PTS segment included in the second quarter and first half of fiscal 1999, respectively. The decrease in spending for selling, marketing and administrative activities was also attributable to Company-wide cost reductions initiated in fiscal 1999, specifically reductions in workforce. As discussed above, the Company initiated cost reduction programs in order to bring operating expenses in line with net revenues. Sales, marketing and administrative expenses, as a percentage of net revenues, decreased to 20.7% and 20.6% in the second quarter and first half of fiscal 2000, respectively, from 31.1% and 28.4% in the second quarter and first half of fiscal 1999, respectively. 19 AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES. Amortization of goodwill and other intangibles was $2.3 million and $2.8 million for the second quarter and first half of fiscal 2000, respectively, compared to $1.5 million and $3.8 million for the second quarter and first half of fiscal 1999, respectively. Amortization of goodwill and other intangibles for fiscal 2000 included goodwill associated with the acquisition of Data Kinesis, Inc. ("DKI") and, as it relates to the second quarter, goodwill and other intangibles assets associated with the acquisition of CeQuadrat. Amortization of goodwill and other intangibles for fiscal 1999 included goodwill associated with the acquisition of DKI, Western Digital's Connectivity Solutions Group and Future Domain Corporation, and goodwill and other intangible assets associated with the purchase of Ridge Technologies, Inc. ("Ridge") and the acquisition of read channel and preamplifier ASIC technologies ("ASIC technologies") purchased from Analog Devices, Inc. ("ADI"). WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. In July 1999, the Company purchased CeQuadrat, a developer of CD-R software products, for $24.0 million in cash. As part of the purchase agreement, the Company held back $4.8 million of the purchase price for unknown liabilities that may have existed as of the acquisition date. The amount held back will be paid for such unknown liabilities or to the seller within 12 months from the acquisition date and was capitalized as part of the purchase price of the transaction. Additionally, the Company incurred $0.3 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price. The Company accounted for the acquisition of CeQuadrat using the purchase method of accounting and, excluding the write-off of acquired in-process technology, the impact of the acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The allocation of the Company's purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below. The allocation was based on an independent appraisal and estimate of fair value.
(IN THOUSANDS) Net tangible assets......................................... $ 123 In-process technology....................................... 3,016 Goodwill and other intangible assets: Goodwill.................................................. 10,341 Purchased technology...................................... 3,140 Covenant not to compete................................... 4,360 Acquired employees........................................ 1,173 OEM relationships......................................... 1,186 Trade name................................................ 953 ------- $21,153 ------- Net assets acquired......................................... $24,292 =======
The net tangible assets acquired were comprised primarily of cash and receivables offset by accrued liabilities. The acquired in-process technology was written-off in the second quarter of fiscal 2000. The goodwill will be amortized over a period of 3 years. The other intangible assets, having a similar estimated life as the goodwill, will be amortized over the same period. The $3.0 million allocation of the purchase price to the acquired in-process technology has been determined by identifying research projects in areas for which technological feasibility had not been established and no alternative future uses existed. The Company acquired technology consisting of next generation consumer-oriented CD-R software, next generation professional-oriented CD-R software and CD backup software; the amount of in-process technology allocated to each of the projects was $0.6 million, $2.2 million and $0.2 million, respectively. The value for each of the projects was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value, and then applying a percentage of completion to the calculated value. 20 In May 1998, the Company purchased Ridge, a development stage company, for 1.2 million shares of the Company's common stock valued at $21.2 million, and assumed stock options valued at $13.1 million. Prior to the acquisition, the Company owned a 19.9% interest in Ridge with a carrying value of $1.5 million and Grant Saviers, former Chairman and CEO of the Company, was a director of Ridge. The Company incurred $0.8 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. In-process technology was valued at $39.4 million and was written-off in the first quarter of fiscal 1999. In August 1998, the Company divested the storage subsystems business, abandoned the in-process technology projects (these projects remained incomplete from the date of acquisition through abandonment) and wrote-off the remaining unamortized goodwill of $0.6 million and other intangible asset of $1.2 million associated with Ridge. The aggregate impact of this acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The tangible liabilities assumed exceeded the tangible assets acquired. The purchase price allocation is included in the Company's fiscal 1999 Annual Report on Form 10-K. In April 1998, the Company purchased ASIC technologies from ADI for $34.4 million in cash. The ASIC technologies purchased from ADI were to be incorporated into the mainstream removable Peripheral Technology Solutions ("PTS") business line upon completion. Grant Saviers, former Chairman and CEO of the Company, is a director of ADI. The Company incurred $0.4 million in professional fees, including legal, valuation and accounting fees related to the acquisition, which were capitalized as part of the purchase price of the transaction. The acquired in-process technology was valued at $6.1 million and was written-off in the first quarter of fiscal 1999. In January 1999, the Company sold the mainstream removable PTS business line, including the in-process technologies purchased from ADI (these projects remained incomplete from the date of acquisition through their disposition), and relieved the remaining unamortized goodwill of $18.3 million and other intangible asset of $1.7 million associated with the ASIC technologies purchased from ADI. The aggregate impact of this acquisition was not material to the Company's consolidated financial results of operations from the acquisition date. The purchase price allocation is included in the Company's fiscal 1999 Annual Report on Form 10-K. On November 1, 1999, the Company announced that it signed a letter of intent to acquire Distributed Processing Technology ("DPT") for $235.0 million, including cash and assumed stock options. DPT is a leading supplier of high-performance storage solutions, including adapters, RAID controllers, storage subsystems, and management software. However, the acquisition is subject to the Company and DPT reaching a definitive agreement, to regulatory approval, and to certain other contingencies. If the acquisition is consummated, the Company will account for the acquisition using the purchase method and will evaluate the allocation of the purchase price to the assets acquired, which may include in-process technology that will be written-off, and goodwill that will be amortized over the benefit period. RESTRUCTURING CHARGES. In the first quarter of fiscal 1999, the Company recorded a restructuring charge of $8.8 million, comprised primarily of severance and benefits. In the second quarter of fiscal 1999, the Company recorded a restructuring charge of $24.5 million, net of an adjustment to the restructuring charge taken in the first quarter of fiscal 1999 of $1.4 million. The second quarter restructuring charge was comprised primarily of severance and benefits and the write-off of fixed assets, inventory and other current and long-term assets. In the fourth quarter of fiscal 1999, the Company recorded a restructuring charge of $6.6 million, net of an adjustment to the restructuring charges taken in the first and second quarters of fiscal 1999 of $1.2 million. The fourth quarter restructuring charge was comprised primarily of severance and benefits. In total, the Company recorded $39.9 million in restructuring charges during fiscal 1999, of which $17.4 million were non-cash charges. During fiscal 1999, the Company paid $20.0 million in cash relating to restructuring activities. The restructuring reserve balance at March 31, 1999 was comprised of $1.5 million for severance and benefits and $1.0 million for other charges, primarily lease payments for vacated facilities. As of September 30, 1999, substantially all of the reserve balance has been paid out. 21 OTHER CHARGES. The Company recorded non-cash impairment charges of $4.0 million in the second quarter of fiscal 1999 including $1.4 million of manufacturing equipment deemed unnecessary due to non-temporary declines in production volume and the write-off of $2.6 million of non-trade related receivables previously classified in "Other current assets" in the Condensed Consolidated Balance Sheets. Additionally, the Company recorded executive termination costs of $3.4 million in the second quarter of fiscal 1999, relating to three executives. The costs consisted of $1.9 million in severance and benefits payments and $1.5 million in non-cash stock compensation charges resulting from amended option agreements. In February 1998, the Company entered into an agreement to purchase all of the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of Hyundai Electronics America ("HEA"). In June 1998, the Company and HEA mutually agreed to terminate the agreement. The Company paid a $7.0 million termination fee and $6.7 million in nonconsummation fees to HEA. Additionally, the Company incurred $7.8 million in other acquisition related charges, including legal, consulting and other costs. The Company expensed the entire $21.5 million in fees associated with this terminated acquisition in the first quarter of fiscal 1999. INTEREST AND OTHER INCOME. Interest income for the second quarter and first half of fiscal 2000 was $8.2 million and $20.1 million, respectively, compared to $7.9 million and $17.0 million for the second quarter and first half of fiscal 1999, respectively. Interest and other income for the first half of fiscal 2000 consisted of $16.6 million of interest income and $3.5 million from the gain on the sale of land recorded in the first quarter of fiscal 2000. Excluding the gain on the sale of land, interest income for the second quarter and first half of fiscal 2000 remained flat compared to the prior year. Interest expense was $3.0 million and $5.9 million for the second quarter and first half of fiscal 2000, respectively, compared to $3.0 million and $6.1 million for the second quarter and first half of fiscal 1999, respectively. The interest expense was primarily related to the 4 3/4% Convertible Subordinated Notes. INCOME TAXES. Income tax provisions (benefits) for interim periods are based on estimated annual income tax rates. The difference between the Company's effective income tax rate and the U.S. federal statutory income tax rate is primarily due to income earned in Singapore where the Company is subject to a significantly lower effective income tax rate. In the second quarter of fiscal 1999, the Company's effective income tax rate, excluding the write-off of acquired in-process technology, was 25%. In the third quarter of fiscal 1999, the Company's effective income tax rate changed from 25% to 28% due to a geographic shift of earnings resulting from restructuring activities and business divestitures. The Company recorded an income tax provision of $18.9 million representing 29.3% of income before provision for income taxes for the second quarter of fiscal 2000 compared with a $7.5 million income tax benefit representing 22.4% of the loss before benefit for income taxes for the second quarter of fiscal 1999. The effective income tax rate used to calculate the income tax provision for the second quarter of fiscal 2000 was higher than 28% primarily as a result of the acquired in-process technology charge associated with the acquisition of CeQuadrat, for which no tax benefit was provided. The effective income tax rate used to calculate the income tax benefit for the second quarter of fiscal 1999 was lower than 25% primarily as a result of the write-off of goodwill and other intangible asset, for which no tax benefit was provided. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 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 Statement of Financial Accounting Standards No. 137 ("SFAS 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 133 for one year, to fiscal years beginning after June 15, 22 2000. The Company will adopt this statement in its first quarter of fiscal 2002, but does not expect the adoption of SFAS 133 to have a material impact on the Company's financial position, results of operations or cash flows. YEAR 2000. The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2-digit year is commonly referred to as the Year 2000 Compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. During fiscal 1998, the Company completed implementation of Enterprise Resource Planning ("ERP") software to replace the Company's core business applications, which support sales and customer service, manufacturing, distribution, and finance and accounting. The ERP software was selected not only because it was Year 2000 Compliant, but more importantly, to add functionality and efficiency to the business processes of the Company. The Company completed Year 2000 testing of the ERP software and is satisfied that it will not present any Year 2000 Compliance issues. In the first half of fiscal 1998, the Company also began a project to analyze and assess the remainder of its business not addressed by the ERP software such as other computer and network hardware and software, production process controllers and related manufacturing equipment. Internal and external resources are being used to complete any required modification and tests for Year 2000 Compliance. Furthermore, with the replacement or upgrade of its internal use software, which is primarily commercial off-the-shelf software, and non-compatible hardware, the Company believes that the Year 2000 Compliance issue will not pose significant operational problems for the Company or its customers. The Company presently believes that its products are Year 2000 Compliant. The majority of the Company's products are not date sensitive. However, for those products that are date sensitive, the Company, as a standard part of its product development cycle, has had procedures, tests, and methodologies in effect since fiscal 1997 to ensure each product's Year 2000 Compliance readiness. In addition, the Company has defined its critical suppliers and communicated with them to determine their Year 2000 Compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 Compliance issues. However, there can be no guarantee that the systems of other companies, on which the Company's operations rely, will be remediated in a timely manner, or that a failure to become Year 2000 Compliant by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse impact on the Company. The Company's costs to date related to the Year 2000 Compliance issue consist primarily of reallocation of internal resources to evaluate and assess systems and products as described above and to plan testing and remediation efforts. The total cost to the Company for Year 2000 Compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year (less than $1.0 million). Such costs exclude costs to implement the ERP system and the reallocation of internal resources, as these costs are not considered incremental to the Company. These costs and the date on which the Company plans to complete the Year 2000 Compliance remediation and testing processes are based on management's best estimates, which were derived utilizing various assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. The Company has developed a contingency plan for some of its applications and systems to address any of the consequences of internal or external failures to be Year 2000 Compliant. The Company has also created a contingency plan for internal and external sources, including key suppliers. 23 LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES. Net cash provided by operating activities for the first half of fiscal 2000 totaled $138.5 million compared to $72.1 million for the first half of fiscal 1999. Net cash provided by operating activities for the first half of fiscal 2000 was primarily attributable to net income of $96.2 million, adjusted for depreciation and amortization expense of $19.4 million and the write-off of acquired in-process technology of $3.0 million. Additionally, net cash provided by operating activities in the first half of fiscal 2000 was generated by the decrease in deferred tax assets of $24.8 million and other current assets of $14.1 million, partially offset by the increase in accounts receivable of $15.4 million and the increase in prepaid expenses of $3.9 million. INVESTING ACTIVITIES. Net cash used for investing activities for the first half of fiscal 2000 totaled $134.9 million, compared to $10.6 million for the first half of fiscal 1999. Net cash used for investing activities for the first half of fiscal 2000 included investments in marketable securities of $134.1 million (net of sales and maturities of marketable securities). Additionally, the Company paid $14.5 million (net of cash received) in connection with the acquisition of CeQuadrat and $3.9 million for capital expenditures, and received $16.6 million for the sale of land held for sale and $1.9 million for the sale of property and equipment. FINANCING ACTIVITIES. Net cash used for financing activities for the first half of fiscal 2000 totaled $178.6 million, compared to $93.1 million for the first half of fiscal 1999. During the first half of fiscal 2000, the Company repurchased 7.9 million shares of its common stock from the open market for $244.1 million. The stock repurchases were partially offset by proceeds of $61.8 million received from the issuance of common stock to employees through the Company's stock option and employee stock purchase plans. In the second quarter of fiscal 2000, the Company sold put warrants that could potentially obligate the Company to repurchase up to 1.0 million shares of its common stock at prices ranging from $37 to $39. In exchange, the Company received up front premiums of $3.7 million, which were used for general business purposes. The settlement terms include physical settlement, cash settlement or net-share settlement at the option of the Company. The warrants expire during the third quarter of fiscal 2000. The impact on diluted earnings per share for the second quarter and first half of fiscal 2000 was minimal. LIQUIDITY. As of September 30, 1998, the Company's principal sources of liquidity consist of $703.0 million of cash, cash equivalents and marketable securities and an unsecured $60.0 million revolving line of credit. As of September 30, 1999, the Company had no borrowings that were outstanding under the line of credit. The Company believes that 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 for the next twelve months. FACTORS AFFECTING FUTURE OPERATING RESULTS This report contains forward-looking statements that involve risks and uncertainties. For example, Management's Discussion and Analysis of Results of Operations and Financial Condition includes statements relating to expected sales growth, gross margins, anticipated operating expenditures and anticipated capital expenditures. 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 the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's 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 24 evaluating the Company's business, prospective investors should consider carefully the following factors in addition to the other information set forth in this document. FUTURE OPERATING RESULTS SUBJECT TO FLUCTUATION. In the second half of fiscal 1998 and the first half of fiscal 1999, the Company's operating results were adversely affected by shifts in corporate and retail buying patterns, increased competition, emerging technologies, economic instability in Asia and turbulence in the computer disk drive industry. In addition, fiscal 1999 operating results were significantly impacted by unusual charges and credits including write-offs of acquired in-process technology, costs related to the termination of the Symbios acquisition, restructuring charges, impairment of assets, terminations of senior executives, the gain on the sale of PTS and the gain on the sale of land. Operating results for the first quarter of fiscal 2000 were also impacted by a gain on the sale of land. Additionally, operating results beginning in the second quarter of fiscal 2000 were affected by the recent acquisition of CeQuadrat GmbH, resulting in increased goodwill amortization expense and the write-off of acquired in-process technology. Additionally, operating results in the future may be affected by the acquisition of Distributed Processing Technology ("DPT"), pending a definitive agreement and regulatory approval. Specifically operating results may be affected by increased goodwill amortization expense and the potential write-off of acquired in-process technology. In the future, the Company's operating results may fluctuate as a result of the factors described above and as a result of a wide variety of other factors, including, but not limited to, cancellations or postponements of orders, shifts in the mix of the Company's products and sales channels, changes in pricing policies by the Company's suppliers, interruption in the supply of custom integrated circuits, the market acceptance of new and enhanced versions of the Company's products, product obsolescence and general worldwide economic and computer industry fluctuations. In addition, fluctuations may be caused by future accounting pronouncements, changes in accounting policies, and the timing of acquisitions of other business products and technologies and any associated charges to earnings. The volume and timing of orders received during a quarter are difficult to forecast. The Company's 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 the Company. The Company has historically operated with a relatively small backlog, especially relating to orders of its Host I/O products and has set its operating budget based in part on expectations of future revenues. Because much of the Company's operating budget is relatively fixed in the short-term, if revenues do not meet the Company's expectations, then the Company's operating income and net income may be disproportionately affected. Operating results in any particular quarter, which do not meet the expectations of securities analysts, are likely to cause volatility in the price of the Company's common stock. CERTAIN RISKS ASSOCIATED WITH THE HIGH-PERFORMANCE COMPUTER MARKET. The Company's Host I/O products are used primarily in high performance computer systems designed to support bandwidth-intensive applications and operating systems. Historically, the Company's growth has been supported by increasing demand for systems that support client/server and Internet/intranet applications, computer-aided engineering, desktop publishing, multimedia, and video. Beginning 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. Should demand for such systems continue to slow, the Company's business or operating results could be materially adversely affected by a resulting decline in demand for the Company's products. CERTAIN RISKS ASSOCIATED WITH THE SERVER MARKET. The Company's RAID products are used primarily in workstations and enterprise servers. The use of RAID technology in this market is an industry standard, however, there can be no assurance that another technology will not replace RAID in the disk array controller marketplace or that there will be continuing widespread acceptance or growth of the use of RAID products in general, or the Company's RAID controllers in particular, in that market. Should demand for such systems slow or should the Company's products not be widely accepted, the Company's 25 business or operating results could be materially adversely affected by a resulting decline in demand for the Company's products. CERTAIN RISKS ASSOCIATED WITH THE SOFTWARE MARKET. The Company's Software products are used primarily in high performance computer systems to enable the control of SCSI peripherals and/or enable CD-R and CD-RW. The Company's sales are primarily to major OEM's and distributors, thus the Company's business depends on general economic and business conditions and the growth of the CD-R and high-performance computer markets. Should demand for the Company's products slow and/or the CD-R market not develop as quickly as expected, the Company's business or operating results could be materially adversely affected by a resulting decline in demand for the Company's products. RELIANCE ON INDUSTRY STANDARDS, TECHNOLOGICAL CHANGE, DEPENDENCE ON NEW PRODUCTS. The computer industry is characterized by various standards and protocols that evolve with time. The Company's current products are designed to conform to certain industry standards and protocols such as SCSI, UltraSCSI, Ultra2 SCSI, Ultra3 SCSI, PCI, RAID, and Fast Ethernet. In particular, a majority of the Company's revenues are currently derived from products based on the SCSI standard. If consumer acceptance of these standards was to decline, or if they were replaced with new standards, and if the Company did not anticipate these changes and develop new products, the Company's business or operating results could be materially adversely affected. For example, the Company believes 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 the Company's products and may materially adversely affect the Company's future sales. The markets for the Company's products are characterized by rapidly changing technology, frequent new product introductions, and declining average selling prices over product life cycles. The Company's future success is therefore highly dependent upon the timely completion and introduction of new products at competitive price/performance levels. The success of new product introductions is dependent on several factors, including proper new product definition, product costs, timely completion and introduction of new product designs, quality of new products, differentiation of new products from those of the Company's competitors, and market acceptance of the Company's and its customers' products. As a result, the Company believes that continued significant expenditures for research and development will be required in the future. There can be no assurance that the Company will successfully identify new product opportunities and develop and bring new products to market in a timely manner, that products or technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive, or that the Company's products will be selected for design into the products of its targeted customers. The failure of any of the Company's new product development efforts could have a material adverse effect on the Company's business or operating results. In addition, the Company's revenues and operating results could be materially adversely impacted if its customers shifted their demand to a significant extent away from board-based I/O solutions to application-specific ICs. COMPETITION. The markets for all of the Company's products are intensely competitive and are characterized by rapid technological advances, frequent new product introductions, evolving industry standards, and price erosion. In the host adapter market, the Company competes with a number of host adapter manufacturers, including LSI Logic Corporation and other small host adapter manufacturers. The Company's principal competitors for RAID solutions in the server market are American Megatrends, Inc., Mylex Corporation and captive suppliers. The Company's principal competitors in the Software segment range from small operations to large consumer software companies. As the Company has continued to broaden its bandwidth management product offerings into the desktop, server, and networking environments, it has experienced, and expects to experience in the future, significantly increased competition both from existing competitors and from additional companies that may enter its markets. Some of these companies have greater technical, marketing, manufacturing, and financial resources than the Company. There can be no assurance that the Company will have sufficient resources to meet growing product 26 demand, that the Company will be able to make timely introduction of new leading-edge solutions in response to competitive threats, that the Company will be able to compete successfully in the future against existing or potential competitors or that the Company's business or operating results will not be materially adversely affected by price competition. CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS. In July 1999, the Company acquired CeQuadrat GmbH in an acquisition accounted for under the purchase method of accounting. As part of its overall strategy, the Company may continue to acquire or invest in complementary companies, products, or technologies and to enter into joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include the difficulty of assimilating the operations and personnel of the combined companies, the potential disruption of the Company's ongoing business, the inability to retain key technical and managerial personnel, the inability of management to maximize the financial and strategic position of the Company through the successful integration of acquired businesses, additional expenses associated with amortization of acquired intangible assets, dilution of existing equity holders, the maintenance of uniform standards, controls, procedures, and policies, and the impairment of relationships with employees and customers as a result of any integration of new personnel. There can be no assurance that the Company will be successful in overcoming these risks or any other problems encountered in connection with this or other business combinations, investments, or joint ventures, or that such transactions will not materially adversely affect the Company's business, financial condition, or operating results. CERTAIN RISKS ASSOCIATED WITH RESTRUCTURING ACTIVITIES. During fiscal 1999, the Company decided to exit certain activities and undertook certain restructuring actions. In connection with these actions, the Company effected a workforce reduction of 975 people. There is no assurance that restructuring activities will be successful or have a long-term positive impact on the Company's future operations. Furthermore, should such actions have a negative impact on the Company's ability to design and develop new products, attract or retain employees, market new or existing products, or produce and/or purchase products at competitive prices, these actions could have a material adverse impact on the Company's results of operations. YEAR 2000 COMPLIANCE ISSUES. The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2-digit year is commonly referred to as the Year 2000 Compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. During fiscal 1998, the Company completed implementation of Enterprise Resource Planning ("ERP") software to replace the Company's existing core business applications and accordingly does not anticipate any internal Year 2000 issues. Additionally, the Company has analyzed the remainder of its business not addressed by the ERP software and has, through its standard product development cycle, ensured its products are Year 2000 Compliant through procedures, tests and methodologies that have been in effect since fiscal 1997. However, if internal systems do not properly recognize and process date information for years into and beyond the turn of the century, there could be a material adverse impact on other Company's operations. A significant disruption of the Company's financial or business systems would materially adversely impact the Company's ability to process orders, manage production and issue and pay invoices. The Company's inability to perform these functions for a long period of time could result in a material adverse impact on the Company's result of operations and financial condition. Failure of these systems could cause a disruption in the manufacturing process and could result in a delay in completion and shipment of product. The Company has communicated with others with whom it does significant business, including major distributors, suppliers, customer, vendors and financial service organizations, to assess their Year 2000 Compliance readiness with respect to both their operations and the products and services they supply. The analysis will continue into fiscal 2000, with corrective action taken commensurate with the criticality of affected products and services. However, if companies with whom the Company does significant business 27 fail because of a Year 2000 malfunction, there could be a material adverse impact on the Company's operating results. The Company believes it is currently being impacted by its customers' redirection of corporate management information system budgets towards resolving Year 2000 Compliance issues. Continuation of this trend could lower the demand for the Company's products if corporate buyers defer purchases of high-end business PCs. The Company has developed a contingency plan for some of its applications and systems to address any of the consequences of internal or external failures to be Year 2000 Compliant. It is also in the process of creating a contingency plan for internal and external sources, including key suppliers, which it expects to complete in the first half of fiscal 2000. The potential ramifications of a Year 2000 type failure are potentially far-reaching and largely unknown. The Company cannot assure that a contingency plan in effect at the time of a system failure will adequately address the immediate or long-term effects of a failure, or that such a failure would not have a material adverse impact on the Company's operations or financial results in spite of prudent planning. DEPENDENCE ON WAFER SUPPLIERS AND OTHER SUBCONTRACTORS. All of the finished silicon wafers used for the Company's products are currently manufactured to the Company's specifications by independent foundries. The Company currently purchases most of its wafers through a supply agreement with TSMC. The manufacture of semiconductor devices is sensitive to a wide variety of factors, including the availability of raw materials, the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of personnel and equipment. While the quality, yield, and timeliness of wafer deliveries to date have been acceptable, there can be no assurance that manufacturing yield problems will not occur in the future. In addition, although the Company has various supply agreements with its supplier, a shortage of raw materials or production capacity could lead the Company's wafer supplier to allocate available capacity to customers other than the Company, or to internal uses. Any prolonged inability to obtain wafers with competitive performance and cost attributes, adequate yields, or timely deliveries from its foundries would delay production and product shipments and could have a material adverse effect on the Company's business or operating results. The Company expects that it will in the future seek to convert its fabrication process arrangements to smaller wafer geometries and to more advanced process technologies. Such conversions entail inherent technological risks that can affect yields and delivery times. If for any reason the Company's current supplier was unable or unwilling to satisfy the Company's wafer needs, the Company would be required to identify and qualify additional foundries. There can be no assurance that any additional wafer foundries would become available, that such foundries would be successfully qualified, or that such foundries would be able to satisfy the Company's requirements on a timely basis. In order to secure wafer capacity, the Company from time to time has entered into "take or pay" contracts that committed the Company to purchase specified wafer quantities over extended periods, and has made prepayments to foundries. In the future, the Company may enter into similar transactions or other transactions, including, without limitation, non-refundable deposits with or loans to foundries, or equity investments in, joint ventures with or other partnership relationships with foundries. Any such transaction could require the Company to seek additional equity or debt financing to fund such activities. There can be no assurance that the Company will be able to obtain any required financing on terms acceptable to the Company. Additionally, the Company relies on subcontractors for the assembly and packaging of the ICs included in its products. The Company has no long-term agreements with its assembly and packaging subcontractors. In addition, the Company is increasingly using board subcontractors to better balance production runs and capacity. There can be no assurance that such subcontractors will continue to be able and willing to meet the Company's 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 effect on the Company's business or operating results. 28 CERTAIN ISSUES RELATED TO DISTRIBUTORS. The Company's distributors generally offer a diverse array of products from several different manufacturers. Accordingly, there is a risk that these distributors may give higher priority to selling products from other suppliers, thus reducing their efforts to sell the Company's products. A reduction in sales efforts by the Company's current distributors could have a material adverse effect on its business or operating results. The Company's distributors may on occasion build inventories in anticipation of substantial growth in sales, and if such growth does not occur as rapidly as anticipated, distributors may decrease the amount of product ordered from the Company in subsequent quarters. In addition, there has recently been an industry trend towards the elimination of price protection and distributor incentive programs and channel assembly. These trends could result in a change in distributor business habits, with distributors possibly deciding to decrease the amount of product held so as to reduce inventory levels. This in turn could reduce the Company's revenues in any given quarter and give rise to fluctuation in the Company's operating results. In addition, the Company may from time to time take actions to reduce inventory levels at distributors. These actions could reduce the Company's revenues in any given quarter and give rise to fluctuations in the Company's operating results. DEPENDENCE ON KEY PERSONNEL. The Company's future success depends in large part on the continued service of its key technical, marketing, and management personnel, and on its ability to continue to attract and retain qualified employees, particularly those highly skilled design, process, and test engineers 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 have a material adverse effect on the Company's business or operating results. CERTAIN RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. The Company's manufacturing facility and various subcontractors it utilizes from time to time are located primarily in Asia. Additionally, the Company has various sales offices and customers throughout Europe, Japan, and other countries. The Company's 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. The Company may use forward exchange contracts to manage any exposure associated with certain foreign currency denominated commitments. In addition, because the Company's wafer supplier, TSMC, is located in Taiwan, the Company may be subject to certain risks resulting from the political instability in Taiwan, including conflicts between Taiwan and the People's Republic of China. INTELLECTUAL PROPERTY PROTECTION AND DISPUTES. The Company has historically devoted significant resources to research and development and believes that the intellectual property derived from such research and development is a valuable asset that has been and will continue to be important to the success of the Company's business. Although the Company actively maintains and defends its intellectual property rights, no assurance can be given that the steps taken by the Company will be adequate to protect its proprietary rights. In addition, the laws of certain territories in which the Company's products are or may be developed, manufactured, or sold, including Asia and Europe, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. The Company has from time to time discovered counterfeit copies of its products being manufactured or sold by others. Although the Company maintains an active program to detect and deter the counterfeiting of its products, should counterfeit products become available in the market to any significant degree, it could materially adversely affect the business or operating results of the Company. From time to time, third parties may assert exclusive patent, copyright, and other intellectual property rights to technologies that are important to the Company. There can be no assurance that third parties will not assert infringement claims against the Company in the future, that assertions by third parties will not result in costly litigation or that the Company 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 its outcome, could result in substantial cost and diversion of resources of the Company. Any infringement claim or other litigation against or by the Company could materially adversely affect the Company's business or operating results. 29 An outside party has contacted the Company regarding alleged infringement of certain patents. The Company is discussing resolutions of these claims including a possible cross-license agreement. However, there can be no assurance that the Company will be able to obtain acceptable terms or conditions for such a license, in which case, these claims may result in litigation. While the outcome is not possible to determine, the Company believes the resolution of these claims will not have a material adverse impact on the Company's financial position. NEED FOR INTEROPERABILITY. The Company's products must be designed to interoperate effectively with a variety of hardware and software products supplied by other manufacturers, including microprocessors, peripherals, and operating system software. The Company depends on significant cooperation with these manufacturers in order to achieve its design objectives and produce products that interoperate successfully. While the Company believes that it generally has good relationships with leading system, peripheral, and microprocessor suppliers, there can be no assurance that such suppliers will not from time to time make it more difficult for the Company to design its products for successful interoperability or decide to compete with the Company. NATURAL DISASTERS. The Company's corporate headquarters are located near major earthquake faults. Any damage to the Company's information systems caused as a result of an earthquake, fire or any other natural disasters could have a material impact on the Company's business, financial condition and results of operations. Additionally, the Company's primary wafer supplier is located in Taiwan, which has recently experienced significant earthquakes. Although there was no major damage to their facilities or the equipment, additional earthquakes could interrupt the Company's manufacturing process and have a material adverse impact on the Company's business, financial condition or results of operations. VOLATILITY OF 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, which have often been unrelated to the operating performance of the affected companies. In addition, factors such as technological innovations or new product introductions by the Company, its competitors, or its customers may have a significant impact on the market price of the Company's common stock. Furthermore, quarter-to-quarter fluctuations in the Company's 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 the Company's common stock. In addition, the Company's stock price may be affected by general market conditions and international macroeconomic factors unrelated to the Company's performance. These conditions, as well as factors that generally affect the market for stocks of high technology companies, could cause the price of the Company's common stock to fluctuate substantially over short periods. NORMALIZED RESULTS OF OPERATIONS The following normalized results of operations do not represent the Company's results of operations or earnings per share information in accordance with generally accepted accounting principles. Normalized operating results have been presented to provide period to period comparability of the Company's underlying operating results excluding revenue and expenses related to the PTS business lines sold in the third and fourth quarters of fiscal 1999, the write-off of acquired in-process technology, restructuring and other charges, gain on the sale of land and the related tax effects for each of these items. The normalized 30 results of operations presented are not necessarily indicative of future operating results and should be read in conjunction with the historical financial statements and related notes.
NORMALIZED THREE MONTH PERIOD ENDED ------------------------------------------- SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 ------------------ ------------------ (1) (2) Net revenues............................................ $194,280 100.0% $118,319 100.0% Cost of revenues........................................ 66,267 34.1 46,429 39.2 -------- ----- -------- ----- Gross profit............................................ 128,013 65.9 71,890 60.8 -------- ----- -------- ----- Operating expenses: Research and development................................ 23,210 11.9 30,282 25.6 Sales, marketing and administrative..................... 40,242 20.7 40,874 34.6 Amortization of goodwill and other intangibles........ 2,255 1.2 580 0.5 -------- ----- -------- ----- Total operating expenses................................ 65,707 33.8 71,736 60.7 -------- ----- -------- ----- Income from operations.................................. 62,306 32.1 154 0.1 Interest and other income............................... 8,193 4.2 7,912 6.7 Interest expense........................................ (2,962) (1.5) (3,047) (2.6) -------- ----- -------- ----- Income from operations before provision for income taxes................................................. 67,537 34.8 5,019 4.2 Provision for income taxes.............................. 18,909 9.7 1,255 1.0 -------- ----- -------- ----- Net income.............................................. $ 48,628 25.1% $ 3,764 3.2% ======== ===== ======== ===== Net income per share: Basic................................................... $ 0.47 $ 0.03 ======== ======== Diluted................................................. $ 0.45 $ 0.03 ======== ======== Shares used in computing net income per share: Basic................................................. 102,523 111,583 ======== ======== Diluted............................................... 113,062 112,603 ======== ========
- ------------------------ (1) As a percentage of net revenues for the three month period ended September 30, 1999 (2) As a percentage of net revenues for the three month period ended September 30, 1998 31
NORMALIZED SIX MONTH PERIOD ENDED ------------------------------------------- SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 ------------------ ------------------ (1) (2) Net revenues............................................ $386,658 100.0% $264,027 100.0% Cost of revenues........................................ 133,054 34.4 101,492 38.4 -------- ----- -------- ----- Gross profit............................................ 253,604 65.6 162,535 61.6 -------- ----- -------- ----- Operating expenses: Research and development................................ 47,735 12.3 63,538 24.1 Sales, marketing and administrative..................... 79,611 20.6 84,774 32.1 Amortization of goodwill and other intangibles........ 2,749 0.7 1,843 0.7 -------- ----- -------- ----- Total operating expenses................................ 130,095 33.6 150,155 56.9 -------- ----- -------- ----- Income from operations.................................. 123,509 32.0 12,380 4.7 Interest and other income............................... 16,631 4.3 17,045 6.4 Interest expense........................................ (5,921) (1.5) (6,114) (2.3) -------- ----- -------- ----- Income from operations before provision for income taxes................................................. 134,219 34.8 23,311 8.8 Provision for income taxes.............................. 37,580 9.8 5,828 2.2 -------- ----- -------- ----- Net income.............................................. $ 96,639 25.0% $ 17,483 6.6% ======== ===== ======== ===== Net income per share: Basic................................................... $ 0.94 $ 0.15 ======== ======== Diluted................................................. $ 0.89 $ 0.15 ======== ======== Shares used in computing net income per share: Basic................................................. 103,333 112,892 ======== ======== Diluted............................................... 109,174 114,170 ======== ========
- ------------------------ (1) As a percentage of net revenues for the six month period ended September 30, 1999 (2) As a percentage of net revenues for the six month period ended September 30, 1998 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For financial market risks related to changes in interest rates and foreign currency exchange rates, reference is made to Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K for the year ended March 31, 1999. In the second quarter of fiscal 2000, the Company sold put warrants that could potentially obligate the Company to buy back up to 1.0 million shares of its common stock at prices ranging from $37 to $39 in exchange for up front premiums of $3.7 million. The settlement terms include physical settlement, cash settlement or net-share settlement at the option of the Company and expire during the third quarter of fiscal 2000. The warrants were priced based on the market value of the Company's common stock at the date of issuance, however, the Company's obligation is subject to declines in the market value of its common stock. At September 30, 1999, the market value of the Company's common stock was greater than the price of the warrants, therefore no obligation existed at that date. For each $1 decline in market value of the Company's common stock below the put warrant price range of $37 to $39, the aggregate potential cash or share settlement obligation of the Company would be $1.0 million. This represents an update to the Quantitative and Qualitative Disclosures About Market Risk contained in the Company's Annual Report on Form 10-K for the year ended March 31, 1999, due to the put warrants issued during the second quarter of fiscal 2000. Actual results may differ materially. 32 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS In the second quarter of fiscal 2000, the Company sold put warrants that could potentially obligate the Company to buy back up to 1.0 million shares of its common stock at prices ranging from $37 to $39 in exchange for up front premiums of $3.7 million. The settlement terms included physical settlement, cash settlement or net-share settlement at the option of the Company and expire during the third quarter of fiscal 2000. The warrants were priced based on the market value of the Company's common stock at the date of issuance, however, the Company's obligation is subject to declines in the market value of its common stock. At September 30, 1999, the market value of the Company's common stock was greater than the price of the warrants, therefore no obligation existed at that date. For each $1 decline in market value of the Company's common stock below the put warrant price range of $37 to $39, the aggregate potential cash or share settlement obligation of the Company would be $1.0 million. The put warrants were issued only to "accredited investors" (as such term is defined under Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act")) in transactions exempt from the registration requirements of the Securities Act pursuant to Section 4(2) under the Securities Act. No underwriters were involved. Each transaction was privately negotiated and each purchaser represented that they acquired the put warrants for their own account and not with a view to, or in connection with, any distribution of such securities. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders of Adaptec Inc. was held on September 9, 1999 in Milpitas, California. Of the total 103,299,529 shares outstanding as of the record date, 94,436,489 shares (91.4%) were present or represented by proxy at the meeting. The table below presents the voting results of election of the Company's Board of Directors:
VOTES VOTES WITHHELD ---------- ---------- John G. Adler....................................... 93,613,515 822,974 Laurence B. Boucher................................. 93,612,799 823,690 Carl J. Conti....................................... 93,641,090 795,399 John East........................................... 93,648,636 787,853 Ilene H. Lang....................................... 93,619,795 816,694 Robert J. Loarie.................................... 93,600,879 835,610 B.J. Moore.......................................... 93,660,043 776,446 W. Ferreall Sanders................................. 93,596,356 840,133 Robert N. Stephens.................................. 93,640,996 795,493 Phillip E. White.................................... 93,559,755 876,734
The stockholders approved the Company's 1999 Stock Plan and the reservation for issuance thereunder of 1,000,000 shares plus (i) any shares which are reserved but unissued under the Company's 1990 Stock Plan as of the date of the stockholder approval of the 1999 Stock Plan and (ii) any shares returned to the 1990 Stock Plan after the date of stockholder approval of the 1999 Stock Plans as a result of the termination of options under the 1990 Stock Plan. The proposal received 44,089,499 affirmative votes, 34,532,627 negative votes, 594,324 abstentions, and 15,220,039 broker non-votes. The stockholders approved an amendment to the Company's Bylaws to prohibit the repricing of outstanding stock options to a lower exercise price during the term of such options without stockholder approval. The proposal received 78,117,854 affirmative votes, 670,029 negative votes, 438,867 abstentions, and 15,209,739 broker non-votes. 33 The stockholders ratified and approved the appointment of PricewaterhouseCoopers LLP as the independent public accountants of the Company for the fiscal year ending March 31, 2000. The proposal received 93,888,588 affirmative votes, 71,795 negative votes, 476,106 abstentions, and no broker non-votes. ITEM 5. OTHER INFORMATION On November 1, 1999, the Company announced that it signed a letter of intent to acquire Distributed Processing Technology ("DPT") for $235.0 million, including cash and assumed stock options. DPT is a leading supplier of high-performance storage solutions, including adapters, RAID controllers, storage subsystems, and management software. However, the acquisition is subject to the Company and DPT reaching a definitive agreement, to regulatory approval, and to certain other contingencies. If the acquisition is consummated, the Company will account for the acquisition using the purchase method and will evaluate the allocation of the purchase price to the assets acquired, which may include in-process technology that will be written-off, and goodwill that will be amortized over the benefit period. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
EXHIBIT NUMBER DESCRIPTION - ------ ------------------------------------------------------------ 10.1 1999 Stock Plan Financial Data Schedule for the quarter ended September 30, 27.1 1999
(b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter. 34 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/ ANDREW J. BROWN Date: November 5, 1999 -------------------------------------- Andrew J. Brown Vice President, Finance Chief Financial Officer (Principal Financial Officer) By: /s/ KENNETH B. AROLA Date: November 5, 1999 -------------------------------------- Kenneth B. Arola Vice President Corporate Controller (Principal Accounting Officer)
35 EX-10.1 2 EX-10.1 Exhibit 10.1 ADAPTEC, INC. 1999 STOCK PLAN 1. PURPOSES OF THE PLAN. The purposes of this Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to Employees and Consultants of the Company and its Subsidiaries and to promote the success of the Company's business. Options granted under the Plan may be incentive stock options (as defined under Section 422 of the Code) or non-statutory stock options, as determined by the Administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code, as amended, and the regulations promulgated thereunder. 2. DEFINITIONS. As used herein, the following definitions shall apply: (a) "ADMINISTRATOR" means the Board or any of its Committees as shall be administering the Plan, in accordance with Section 4 of the Plan. (b) "APPLICABLE LAWS" means the requirements relating to the administration of stock option plans under U.S. state corporate laws, U.S. federal and state securities laws, the Code, any stock exchange or quotation system on which the Common Stock is listed or quoted and the applicable laws of any foreign country or jurisdiction where Options are, or will be, granted under the Plan. (c) "BOARD" means the Board of Directors of the Company. (d) "CODE" means the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto. (e) "COMMON STOCK" means the Common Stock, $.001 par value, of the Company. (f) "COMPANY" means Adaptec, Inc., a Delaware corporation. (g) "COMMITTEE" means a Committee, if any, appointed by the Board in accordance with paragraph (a) of Section 4 of the Plan. (h) "CONSULTANT" means any person, including an advisor, who is engaged by the Company or any Parent or Subsidiary to render services including, without limitation, directors of the Company who are not compensated for their services or are paid only a director's fee by the Company. -1- (i) "CONTINUOUS STATUS AS AN EMPLOYEE OR CONSULTANT" means the absence of any interruption or termination of the employment or consulting relationship by the Company or any Parent or Subsidiary. Continuous Status as an Employee or Consultant shall not be considered interrupted in the case of: (i) sick leave; (ii) military leave; (iii) any other leave of absence approved by the Board, provided that such leave is for a period of not more than ninety (90) days, unless reemployment upon the expiration of such leave is guaranteed by contract or statute, or unless provided otherwise pursuant to Company policy adopted from time to time; or (iv) in the case of transfers between locations of the Company or between the Company, its Parent or Subsidiaries or its successor. If reemployment upon expiration of a leave of absence in excess of ninety (90) days is not guaranteed, on the 181st day of such leave any Incentive Stock Option held by the Optionee shall cease to be treated as an Incentive Stock Option and shall be treated for tax purposes as a Nonstatutory Stock Option. (j) "DISABILITY" means total and permanent disability, as defined in Section 22(e)(3) of the Code. (k) "EMPLOYEE" means any person, including officers and directors, employed by the Company or any Subsidiary. The payment of directors' fees by the Company shall not be sufficient to constitute "employment" by the Company. (l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (m) "FAIR MARKET VALUE" means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on any established stock exchange or a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such system or exchange (or the exchange with the greatest volume of trading in Common Stock) on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is quoted on the NASDAQ System (but not on the National Market System thereof) or regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the high and low asked prices for the Common Stock or on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; -2- (iii) In the absence of an established market for the Common Stock, the Fair Market Value thereof shall be determined in good faith by the Administrator. (n) "INCENTIVE STOCK OPTION" means an Option that satisfies the provisions of Section 422 of the Code. (o) "NONSTATUTORY STOCK OPTION" means an Option that is not an Incentive Stock Option. (p) "OPTION" means an Option granted pursuant to the Plan. (q) "OPTIONED STOCK" means the Common Stock subject to an Option. (r) "OPTIONEE" means an Employee or Consultant who receives an Option. (s) "PARENT" corporation shall have the meaning defined in Section 424(e) of the Code. (t) "PLAN" means this 1999 Stock Plan. (u) "RULE 16B-3" means Rule 16b-3 of the Exchange Act or any successor to Rule 16b-3, as in effect when discretion is being exercised with respect to the Plan. (v) "SHARE" means the Common Stock, as adjusted in accordance with Section 11 of the Plan. (w) "SUBSIDIARY" corporation shall have the meaning defined in Section 424(f) of the Code. In addition, the terms "Cause," and "Change of Control" shall have the meanings set forth, respectively, in Section 9 below. 3. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 9 of the Plan, the total number of Shares reserved and available for distribution pursuant to awards made under the Plan shall be (a) 1,000,000 plus (b) any Shares which have been reserved but unissued under the Company's 1990 Stock Plan (the "1990 Plan") as of the date of stockholder approval of this Plan, and (c) any Shares returned to the 1990 Plan after the date of stockholder approval of this Plan as a result of the termination of options under the 1990 Plan. Subject to Section 9 of the Plan, if any Shares that have been optioned under an Option cease to be subject to such Option (other than through exercise of the Option), or if any Option granted hereunder is forfeited, or any such award otherwise terminates prior to the issuance -3- of Common Stock to the participant, the Shares that were subject to such Option shall again be available for distribution in connection with future Option grants under the Plan. Shares that have actually been issued under the Plan, whether upon exercise of an Option, shall not in any event be returned to the Plan and shall not become available for future distribution under the Plan, except that if Shares of Restricted Stock are repurchased by the Company at their original purchase price, and the original purchaser of such Shares did not receive any benefits of ownership of such Shares, such Shares shall become available for future grant under the Plan. For purposes of the preceding sentence, voting rights shall not be considered a benefit of Share ownership. 4. ADMINISTRATION OF THE PLAN. (a) PROCEDURE. (i) ADMINISTRATION WITH RESPECT TO CONSULTANTS AND OTHER EMPLOYEES. With respect to grants of Options to Employees or Consultants who are neither directors nor officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies, however caused, and remove all members of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws. (ii) MULTIPLE ADMINISTRATIVE BODIES. The Plan may be administered by different bodies with respect to directors, non-director officers and Employees who are neither directors nor officers and Consultants who are not directors. (iii) SECTION 162(M). To the extent that the Administrator determines it to be desirable to qualify Options granted hereunder as "performance-based compensation" within the meaning of Section 162(m) of the Code, the Plan shall be administered by a Committee of two or more "outside directors" within the meaning of Section 162(m) of the Code. (iv) RULE 16B-3. To the extent desirable to qualify transactions hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder shall be structured to satisfy the requirements for exemption under Rule 16b-3. (b) POWERS OF THE ADMINISTRATOR. Subject to the provisions of the Plan and in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: -4- (i) to determine the Fair Market Value of the Common Stock, in accordance with Section 2(m) of the Plan; (ii) to select the Consultants and Employees to whom Options may from time to time be granted hereunder; (iii) to determine whether and to what extent Options or any combination thereof, are granted hereunder; (iv) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (v) to approve forms of agreement for use under the Plan; (vi) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder (including, but not limited to, the share price and any restriction or limitation, or any vesting acceleration or waiver of forfeiture restrictions regarding any Option or other award and/or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion); (vii) to determine whether and under what circumstances an Option may be settled in cash under subsection 7(a)(vi) instead of Common Stock; (viii) to determine whether, to what extent and under what circumstances Common Stock and other amounts payable with respect to an award under this Plan shall be deferred either automatically or at the election of the participant (including providing for and determining the amount (if any) of any deemed earnings on any deferred amount during any deferral period); (ix) to determine the terms and restrictions applicable to Options; and (x) to allow Optionees to satisfy withholding tax obligations by electing to have the Company withhold from the Shares to be issued upon exercise of an Option that number of Shares having a Fair Market Value equal to the amount required to be withheld. The Fair Market Value of the Shares to be withheld shall be determined on the date that the amount of tax to be withheld is to be determined. All elections by an Optionee to have Shares withheld for this purpose shall be made in such form and under such conditions as the Administrator may deem necessary or advisable and shall be subject to the consent or disapproval of the Administrator. (c) EFFECT OF COMMITTEE'S DECISION. All decisions, determinations and interpretations of the Administrator shall be final and binding. -5- 5. ELIGIBILITY. Nonstatutory Stock Options may be granted only to Employees and Consultants. Incentive Stock Options may be granted only to Employees. An Employee who has been granted an Option may, if he or she is otherwise eligible, be granted additional Options. Each Option shall be evidenced by a written Option agreement, which shall expressly identify the Options as Incentive Stock Options or as Nonstatutory Stock Options, and which shall be in such form and contain such provisions as the Administrator shall from time to time deem appropriate. Without limiting the foregoing, the Administrator may, at any time, or from time to time, authorize the Company, with the consent of the respective recipients, to issue Options in exchange for the surrender and cancellation of any or all outstanding Options, other options. Neither the Plan nor any Option agreement shall confer upon any Optionee any right with respect to continuation of employment by the Company, nor shall it interfere in any way with the Optionee's right or the Company's right to terminate the Optionee's employment at any time. 6. TERM OF PLAN. Subject to Section 15 of the Plan, the Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company as described in Section 15. It shall continue in effect for a term of ten (10) years from the date the Plan or any amendment to add shares to the Plan was last adopted by the Board unless sooner terminated under Section 11 of the Plan. 7. OPTIONS. (a) OPTIONS. The Administrator, in its discretion, may grant Options to eligible participants and shall determine whether such Options shall be Incentive Stock Options or Nonstatutory Stock Options. Each Option shall be evidenced by a written Option agreement which shall expressly identify the Options as Incentive Stock Options or as Nonstatutory Stock Options, and be in such form and contain such provisions as the Administrator shall from time to time deem appropriate. Without limiting the foregoing, the Administrator may, at any time, or from time to time, authorize the Company, with the consent of the respective recipients, to issue Options in exchange for the surrender and cancellation of any or all outstanding Options. Option agreements shall contain the following terms and conditions: (i) OPTION PRICE; NUMBER OF SHARES. The per Share exercise price for the Shares issuable pursuant to an Option shall be such price as is determined by the Administrator, but shall in no event be less than 75% of the Fair Market Value of Common Stock, determined as of the date of grant of the Option. The Option agreement shall specify the number of Shares to which it pertains. (ii) WAITING PERIOD AND EXERCISE DATES. At the time an Option is granted, the Administrator will determine the terms and conditions to be satisfied before Shares may be purchased, including the dates on which Shares subject to the Option may first be purchased. The -6- Administrator may specify that an Option may not be exercised until the completion of the service period specified at the time of grant. (Any such period is referred to herein as the "waiting period.") At the time an Option is granted, the Administrator shall fix the period within which the Option may be exercised, which shall not be less than the waiting period, if any, nor, in the case of an Incentive Stock Option, more than ten (10) years, from the date of grant. (iii) FORM OF PAYMENT. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant) and may consist entirely of (1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares acquired upon exercise of an Option either have been owned by the Optionee for more than six months on the date of surrender or were not acquired, directly or indirectly, from the Company, and (y) have a Fair Market Value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, (5) delivery of a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company the amount of sale or loan proceeds required to pay the exercise price, (6) any combination of the foregoing methods of payment, or (7) such other consideration and method of payment for the issuance of Shares to the extent permitted under Applicable Laws. (iv) SPECIAL INCENTIVE STOCK OPTION PROVISIONS. In addition to the foregoing, Options granted under the Plan, which are intended to be Incentive Stock Options under Section 422 of the Code shall be subject to the following terms and conditions: (1) EXERCISE PRICE. The per share exercise price of an Incentive Stock Option shall be no less than 100% of the Fair Market Value per Share on the date of grant. (2) DOLLAR LIMITATION. To the extent that the aggregate Fair Market Value of (i) the Shares with respect to which Options designated as Incentive Stock Options plus (ii) the shares of stock of the Company, Parent and any Subsidiary with respect to which other incentive stock options are exercisable for the first time by an Optionee during any calendar year under all plans of the Company and any Parent and Subsidiary exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options. For purposes of the preceding sentence, (i) Options shall be taken into account in the order in which they were granted, and (ii) the Fair Market Value of the Shares shall be determined as of the time the Option or other incentive stock option is granted. Except as modified by the preceding provisions of this Section 7(a)(iv) and except as otherwise limited by Section 422 of the Code, all of the provisions of the Plan shall be applicable to the Incentive Stock Options granted hereunder. -7- (v) OTHER PROVISIONS. Each Option granted under the Plan may contain such other terms, provisions, and conditions not inconsistent with the Plan as may be determined by the Administrator. (vi) BUYOUT PROVISIONS. The Administrator may at any time offer to buy out for a payment in cash or Shares, an Option previously granted, based on such terms and conditions as the Administrator shall establish and communicate to the Optionee at the time that such offer is made. (b) METHOD OF EXERCISE. (i) PROCEDURE FOR EXERCISE; RIGHTS AS A STOCKHOLDER. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator and as shall be permissible under the terms of the Plan. An Option may not be exercised for a fraction of a Share. An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment may, as authorized by the Administrator (and, in the case of an Incentive Stock Option, determined at the time of grant) and permitted by the Option Agreement consist of any consideration and method of payment allowable under Section 7(a)(iii) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 9 of the Plan. Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter shall be available, both for purposes of the Plan and for sale under the Option, by the number of Shares as to which the Option is exercised. (ii) TERMINATION OF EMPLOYMENT. Upon termination of an Optionee's Continuous Status as an Employee or Consultant (other than upon the Optionee's death or Disability), the Optionee may, but only within three (3) months (or such other period of time as is determined by the Administrator but in no event later than the expiration of the term of such Option as set forth in the stock option agreement) after the date of such termination, exercise his or her Option to the extent that it was exercisable at the date of such termination. -8- (iii) DISABILITY OF OPTIONEE. In the event of termination of an Optionee's Continuous Status as an Employee or Consultant as a result of the Optionee's Disability, the Optionee may, but only within six (6) months from the date of such termination (and in no event later than the expiration of the term of such Option as set forth in the stock option agreement), exercise the Option to the extent that the Optionee was entitled to exercise it at the date of such termination. (iv) DEATH OF OPTIONEE. In the event of the death of an Optionee, Options granted hereunder to such Optionee shall become vested and exercisable, in addition to Shares as to which such Options would otherwise be vested and exercisable, for the lesser of the full number of Shares covered by the Options or an aggregate of 50,000 Shares. Each Option held by the Optionee at the time of death may be exercised at any time within six (6) months following the date of death by the Optionee's estate or by a person who acquired the right to exercise the Option by bequest or inheritance. In no event shall an Option be exercised later than the expiration of the term of the Option, as set forth in the stock option agreement. (c) OPTION LIMITATION. The following limitation shall apply to grants of Options under the Plan: (i) No Employee shall be granted, in any fiscal year of the Company, Options under the Plan to purchase more than 1,000,000 Shares. (ii) The foregoing limitation shall be adjusted proportionately in connection with any change in the Company's capitalization as described in Section 9(a). (iii) If an Option is canceled (other than in connection with a transaction described in Section 9), the canceled Option shall be counted against the limits set forth in Section 7(c)(i). For this purpose, if the exercise price of an Option is reduced, the transaction will be treated as a cancellation of the Option and the grant of a new Option. 8. NON-TRANSFERABILITY OF OPTIONS. Unless determined otherwise by the Administrator, Options may not be sold, pledged, assigned, hypothecated, transferred or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. If the Administrator makes an Option transferable, such Option shall contain such additional terms and conditions as the Administrator deems appropriate. 9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, MERGER, ASSET SALE OR CHANGE IN CONTROL. (a) Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which -9- have been returned to the Plan upon cancellation or expiration of an Option, as well as the price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the aggregate number of issued Shares effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of Shares of stock of any class, or securities convertible into Shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option. (b) In the event of the proposed dissolution or liquidation of the Company, all outstanding Options will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. (c) In the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding Option shall be assumed or an equivalent Option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation. In the event that the successor corporation refuses to assume or substitute for the Option, the Optionee shall fully vest in and have the right to exercise the Option as to one hundred percent (100%) of the Optioned Stock, including Shares as to which it would not otherwise be vested or exercisable. If an Option becomes fully vested and exercisable in lieu of assumption or substitution in the event of a merger or sale of assets, the Administrator shall notify the Optionee in writing or electronically that the Option shall be fully vested and exercisable for a period of fifteen (15) days from the date of such notice, and the Option shall terminate upon the expiration of such period. For purposes of this paragraph, an Option granted under the Plan shall be deemed to be assumed if, following the sale of assets or merger, the Option confers the right to purchase, for each Share of Optioned Stock subject to the Option immediately prior to the sale of assets or merger, the consideration (whether stock, cash or other securities or property) received in the sale of assets or merger by holders of Common Stock for each Share held on the effective date of the transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders if a majority of the outstanding Shares); provided, however, that if such consideration received in the sale of assets or merger was not solely Common Stock of the successor corporation or its parent, the Board may, with the consent of the successor corporation and the participant, provide for the consideration to be received upon exercise of the Option to be solely Common Stock of the successor corporation or its parent equal in Fair Market Value to the per share consideration received by holders of Common Stock in the sale of assets or merger. -10- (d) In the event of a "Change in Control" of the Company (as such term is defined in paragraph (f) below), then any Options outstanding upon the date of such Change in Control that are not yet exercisable and vested on such date shall have their vesting accelerated as to an additional twenty-five percent (25%) of the unvested Shares subject to such Options as of the date of such Change in Control, and such Stock Options shall continue to otherwise vest, (subject to (i) Optionee remaining in Continuous Status as an Employee or Consultant, and (ii) accelerated vesting as provided for in Sections 9(c) or 9(e) of this Plan) at the same rate and as to the same number of Shares per vesting period as immediately prior to the Change in Control. For example, if an Optionee holds an Option that is fifty percent (50%) vested immediately prior to the date of a Change in Control, which Option ordinarily vests so as to be one hundred percent (100%) vested four years after the date of grant (subject to Optionee maintaining his or her Continuous Status as an Employee or Consultant), the Option would become seventy-five percent (75%) vested upon the date of the Change in Control and would resume vesting (subject to (i) Optionee maintaining his or her Continuous Status as an Employee or Consultant, and (ii) accelerated vesting as provided for in Sections 9(c) or 9(e) of this Plan) so as to be one hundred percent (100%) vested three years following the date of grant. (e) In the event an Optionee is involuntarily terminated without Cause within twelve (12) months following a "Change in Control" of the Company (as such terms are defined in Section 9(f) below), then any Options outstanding upon the date of such Change in Control that are not yet exercisable and vested on such date shall become one hundred percent (100%) exercisable and vested. Notwithstanding the foregoing, (unless Optionee is party to a duly authorized written agreement with the Company providing otherwise) this Plan does not constitute a contract of employment or impose on the Company any obligation to retain the Optionee, or to change the Company's policies regarding termination of employment or other provision of services. The employment of Optionees who are Employees is and shall continue to be at-will, as defined under applicable law, and may be terminated at any time, with or without cause. (f) DEFINITIONS. (i) CHANGE IN CONTROL. For purposes of this Section, a "Change in Control" means the occurrence of any of the following: (A) When any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act (other than the Company, a Subsidiary or a Company employee benefit plan, including any trustee of such plan acting as trustee) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing fifty percent (50%) or more of the combined voting power of the Company's then outstanding securities; or -11- (B) A change in the composition of the Board occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. "Incumbent Directors" shall mean directors who either (I) are directors of the Company as of the date hereof, or (II) are elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); (C) The consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (D) The consummation of the sale or disposition by the Company of all or substantially all the Company's assets. (ii) CAUSE. For purposes of this Section, "Cause" shall mean (A) any act of personal dishonesty taken by the Optionee in connection with his responsibilities as a service provider to the Company and intended to result in substantial personal enrichment of the Optionee, (B) the Optionee's conviction of a felony, or (C) a willful act by the Optionee which constitutes gross misconduct and which is injurious to the Company, or (D) continued substantial violations by the Optionee of the Optionee's duties to the Company which are demonstrably willful and deliberate on the Optionee's part after there has been delivered to the Optionee a written demand for performance from the Company which specifically sets forth the factual basis for the Company's belief that the Optionee has committed continued substantial violations of his or her duties. (g) GOLDEN PARACHUTE EXCISE TAX VESTING ACCELERATION LIMITATION. Notwithstanding any other provision of this Plan, in the event that the vesting acceleration provided for in this Plan or amounts or benefits otherwise payable to an Optionee (i) constitute "parachute payments" within the meaning of Section 280G of the Code, and (ii) but for this Section, would be subject to the excise tax imposed by Section 4999 of the Code (the "Excise Tax"), then the Optionee's accelerated vesting hereunder shall be either (i) made in full, or (ii) made as to such lesser extent as would result in no portion of such acceleration, amounts or benefits being subject to the Excise Tax, -12- whichever of the foregoing amounts, taking into account the applicable federal, state and local income taxes and the Excise Tax, results in the receipt by the Optionee on an after-tax basis, of the greatest amount of severance benefits, notwithstanding that all or some portion of such severance benefits may be taxable under Section 4999 of the Code. Unless the Company and the Optionee otherwise agree in writing, any determination required under this Section shall be made in writing in good faith by the accounting firm serving as the Company's independent public accountants immediately prior to the Change of Control (the "Accountants"). In the event of a reduction in benefits hereunder, the Optionee shall be given the choice of which benefits to reduce. For purposes of making the calculations required by this Section, the Accountants may make reasonable assumptions and approximations concerning applicable taxes and may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Optionee shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section. 10. TIME OF GRANTING OPTIONS. The date of grant of an Option shall, for all purposes, be the date on which the Administrator makes the determination granting such Option. Notice of the determination shall be given to each Employee or Consultant to whom an Option is so granted within a reasonable time after the date of such grant. 11. AMENDMENT AND TERMINATION OF THE PLAN. (a) AMENDMENT AND TERMINATION. The Board may at any time amend, alter, suspend, or discontinue the Plan, but no amendment, alteration, suspension, or discontinuation shall be made which would impair the rights of any Optionee under any grant theretofore made, without his or her consent. In addition, to the extent necessary and desirable to comply with Section 422 of the Code (or any other applicable law or regulation), the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (b) EFFECT OF AMENDMENT OR TERMINATION. Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended or terminated. 12. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with respect to an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. -13- As a condition to the exercise of an Option or the issuance of Shares on exercise of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 13. RESERVATION OF SHARES. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the non-issuance or sale of such Shares as to which such requisite authority shall not have been obtained. 14. AGREEMENTS. Options shall be evidenced by written agreements in such form as the Board shall approve from time to time. 15. STOCKHOLDER APPROVAL. Continuance of the Plan shall be subject to approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted as provided in Section 6. Such stockholder approval shall be obtained in the degree and manner required under applicable state and federal law. -14- EX-27.1 3 EXHIBIT 27.1
5 1,000 3-MOS MAR-31-2000 JUL-01-1999 SEP-30-1999 142,625 560,401 86,578 2,966 48,888 935,680 211,269 98,611 1,101,824 163,560 230,000 0 0 102 708,162 1,101,824 194,280 194,280 66,267 66,267 68,723 0 2,962 64,521 18,909 45,612 0 0 0 45,612 0.44 0.42
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