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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 1999.
[ ] 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 0-24765
HI/FN, INC.
(Exact Name of Registrant as specified in its Charter)
DELAWARE 33-0732700
(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification Number)
750 UNIVERSITY AVENUE, LOS GATOS, CALIFORNIA 95032
(Address of principal executive offices and Zip Code)
Registrant's telephone number, including area code: (408) 399-3500
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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
At February 4, 2000, 8,846,458 shares of the Registrant's Common Stock, $.001
par value, were outstanding.
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HI/FN, INC.
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements
Condensed Balance Sheet at December 31, 1999 and September 30, 1999 3
Condensed Statement of Operations for the three months ended
December 31, 1999 and 1998 4
Condensed Statement of Cash Flows for the three months ended
December 31, 1999 and 1998 5
Notes to Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7-19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
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ITEM 1: FINANCIAL STATEMENTS
HI/FN, INC.
CONDENSED BALANCE SHEET
(in thousands; unaudited)
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1999 1999
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash & cash equivalents $71,123 $70,086
Accounts receivable, net 5,388 6,720
Inventories 1,624 1,568
Deferred income taxes 1,559 1,559
Prepaid expenses and other
current assets 2,798 701
------- -------
Total current assets 82,492 80,634
------- -------
Property and equipment, net 2,324 2,389
Deferred income taxes 218 218
Other assets 260 289
------- -------
$85,294 $83,530
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 855 $ 2,461
Income taxes payable -- 1,300
Accrued expenses and other
current liabilities 3,039 3,720
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Total current liabilities 3,894 7,481
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Stockholders' equity:
Common stock 9 9
Additional paid in 62,108
Retained earnings 15,765 13,932
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Total stockholders' equity 81,400 76,049
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$85,294 $83,530
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</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
3
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HI/FN, INC.
CONDENSED STATEMENT OF OPERATIONS
(in thousands, except per share amounts; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------------
1999 1998
-------- -------
<S> <C> <C>
Net revenues $ 10,054 $ 6,139
Cost of revenues 2,163 1,818
-------- -------
Gross profit 7,891 4,321
-------- -------
Operating expenses:
Research and development 3,325 1,445
Sales and marketing 1,699 1,227
General and administrative 779 866
-------- -------
Total operating expenses 5,803 3,538
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Income from operations 2,088 783
Interest income 984 128
Interest expense -- (105)
Other income/(expense), net (17) --
-------- -------
Income before income taxes 3,055 806
Provision for income taxes 1,222 323
-------- -------
Net income $ 1,833 $ 483
======== =======
Net income per share, basic $ 0.21 $ 0.07
======== =======
Net income per share, diluted $ 0.19 $ 0.07
======== =======
Weighted average shares outstanding, basic 8,737 6,449
======== =======
Weighted average shares outstanding, diluted 9,854 7,274
======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
4
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HI/FN, INC.
CONDENSED STATEMENT OF CASH FLOWS
(in thousands; unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,833 $ 483
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 253 163
Gain on sale of marketable securities -- (27)
Loss on disposal of fixed assets -- 220
Changes in assets and liabilities:
Accounts receivable 1,332 727
Inventory (56) (244)
Prepaid expenses and other current assets 17 (436)
Other assets 1 28
Accounts payable (1,606) (902)
Accrued expenses and other current liabilities (681) 14
-------- -------
Net cash provided by operating activities 1,093 26
-------- -------
Cash flows from investing activities:
Sales of marketable securities -- 6,000
Purchases of property and equipment (160) (193)
-------- -------
Net cash provided by (used in)
investing activities (160) 5,807
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock, net 104 75
Proceeds of loan from related party -- 5,000
Transfer of funds to related party, net -- (6,508)
-------- -------
Net cash provided by (used in) financing
activities 104 (1,433)
-------- -------
Net increase in cash and cash equivalents 1,037 4,400
Cash and cash equivalents at beginning of period 70,086 4,084
-------- -------
Cash and cash equivalents at end of period $ 71,123 $ 8,484
======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
5
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HI/FN, INC.
NOTES TO CONDENSED UNAUDITED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
The accompanying condensed unaudited financial statements of hi/fn, inc.
("Hi/fn" or the "Company") has been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the Financial
Statements and notes thereto included in the Company's Form 10-K for period
ending September 30, 1999. In the opinion of management, the accompanying
condensed unaudited financial statements contain all adjustments, consisting
only of normal recurring items, which the Company believes is necessary for a
fair statement of the Company's financial position as of December 31, 1999 and
its results of operations for the three month periods ended December 31, 1999
and 1998, respectively. These condensed unaudited financial statements are not
necessarily indicative of the results to be expected for the entire year.
NOTE 2. NET INCOME PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
Basic earnings per share ("EPS") is calculated by dividing net income by
the weighted average number of common shares outstanding for the period, without
consideration for the dilutive impact of potential common shares ("dilutive
securities") that were outstanding during the period. Diluted EPS is computed by
dividing net income by the weighted average number of common shares outstanding
for the period, increased by dilutive securities that were outstanding during
the period. A reconciliation of the numerators and denominators of the basic and
diluted EPS calculations for the three months ended December 31, 1999 and 1998
are presented below.
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------
1999 1998
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<S> <C> <C>
Net income $1,833 $ 483
====== ======
Shares used in computing net income
per share:
Basic 8,737 6,449
Dilutive effect of stock options 1,117 825
------ ------
Diluted 9,854 7,274
====== ======
Net income per share:
Basic $ 0.21 $ 0.07
====== ======
Diluted $ 0.19 $ 0.07
====== ======
</TABLE>
6
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NOTE 3. BALANCE SHEET (IN THOUSANDS):
<TABLE>
<CAPTION>
December 31, September 30,
------------ -------------
1999 1999
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<S> <C> <C>
Accounts receivable:
Trade receivables $ 5,612 $ 6,971
Less: allowance for doubtful accounts (224) (251)
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$ 5,388 $ 6,720
======= =======
Property and equipment:
Computer equipment $ 1,996 $ 1,999
Furniture and fixtures 655 524
Leasehold improvements 576 562
Office equipment 333 324
------- -------
3,560 3,409
Less: accumulated depreciation (1,236) (1,020)
------- -------
$ 2,324 $ 2,389
======= =======
Accrued expenses and other current
liabilities
Deferred revenue $ 1,059 $ 1,353
Compensation and employee benefits 1,269 1,557
Accrued Royalties 351 377
Other 360 433
------- -------
$ 3,039 $ 3,720
======= =======
</TABLE>
NOTE 4. STAC LOAN:
During the three-month period ended December 31, 1998, the Company entered into
a $5.0 million loan agreement with its former parent company, Stac, Inc. which
was due and payable on September 30, 1999, but which could be prepaid in whole
or part without penalty. In March 1999, the entire $5.0 million loan was repaid.
NOTE 5. LEGAL MATTERS
The Company and certain of its officers and directors have been named as
defendants in several substantially similar class action lawsuits filed in
October 1999 in the United States district Court for the Northern District of
California. The plaintiffs in theses actions purport to represent a class of all
persons who purchased the Company's common stock between July 26, 1999 through
October 7, 1999. The complaints allege that the defendants made misleading
statements in violation of the federal securities laws, including Section 10(b)
of the Securities Exchange Act of 1934. The Company expects the Court to appoint
a lead plaintiff and consolidate the complaints in the near future.
The Company believes that the complaints are without merit and intends to
defend against them vigorously. Nevertheless, litigation is subject to inherent
uncertainties and thus there can be no assurance that these suits will be
resolved favorably to the Company or will not have a material adverse effect on
the Company's financial position or results of operations.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements contained in the following Management's Discussion and
Analysis of Financial Condition and Results of Operations, including, without
limitation, statements containing the words "believes," "anticipates,"
"estimates," "expects," and words of similar import, constitute forward-looking
statements which involve risks and uncertainties. Hi/fn's actual results and the
timing of events could differ significantly from those anticipated in these
forward looking statements as a result of the factors set forth under "Trends
and Uncertainties" below. Certain risks are also described in Hi/fn's Form 10-K
for fiscal year ended September 30, 1999.
7
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OVERVIEW
Hi/fn designs, develops and markets high-performance multi-protocol packet
processors--semiconductor devices designed to enable secure, high-bandwidth
network connectivity and efficient storage of business information. The
Company's packet processor products perform the computation-intensive tasks of
compression, encryption/compression and public key cryptography, providing its
customers with high-performance, interoperable implementations of a wide variety
of industry-standard networking and storage protocols. The Company's products
are used in networking and storage equipment such as routers, remote access
concentrators, firewalls and back-up storage devices.
The Company's encryption/compression and public key processors allow
network equipment vendors to add bandwidth enhancement and security capabilities
to their products. The Company's encryption/compression and public key processor
products provide key algorithms used in virtual private networks ("VPNs"), which
enable businesses to reduce wide area networking costs by replacing dedicated
leased-lines with lower-cost IP-based networks such as the Internet. Using VPNs,
businesses can also provide trading partners and others with secure,
authenticated access to the corporate network, increasing productivity through
improved communications. Storage equipment vendors use the Company's products to
improve the performance and capacity of mid- to high-end tape back-up systems.
Prior to December 16, 1998, the Company was a majority-owned subsidiary of
Stac, Inc. ("Stac"). On December 16, 1998, Stac distributed all of the Company's
outstanding shares held by Stac to Stac stockholders.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain items
to the Company's revenue during the periods shown.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------
December 31, December 31,
------------ ------------
1999 1998
------------ ------------
<S> <C> <C>
Net revenues 100% 100%
Cost of revenues 21 30
--- ---
Gross profit 79 70
--- ---
Operating expenses:
Research and development 33 23
Sales and marketing 17 20
General and administrative 8 14
--- ---
Total operating expenses 58 57
--- ---
Income from operations 21 13
Other income/(expense), net 9 --
--- ---
Income before income taxes 30 13
Provision for income taxes 12 5
--- ---
Net income 18% 8%
=== ===
</TABLE>
Revenue. Revenue increased 63.8% to $10.1 million for the quarter ended
December 31, 1999 from $6.1 million for the quarter ended December 31, 1998. The
increase in revenue was primarily due to increased sales of Hi/fn's data
compression and encryption processors to network equipment manufacturers.
Semiconductor sales to Quantum, an OEM producer of high-performance tape storage
devices, through its manufacturing subcontractor comprised 33% of revenue for
the quarter ended December 31, 1999 and 55% of revenue for the quarter ended
December 31, 1998. Semiconductor sales to Lucent, an OEM producer of networking
equipment, through its manufacturing subcontractors, comprised 42% of revenue
for the quarter ended December 31, 1999.
Gross Margin. Cost of revenue consists primarily of semiconductors which
were manufactured to the Company's specifications by third parties for resale by
the Company. Gross margin increased to 78.5% for the quarter ended December 31,
1999 from the 70.4% for the quarter ended December 31, 1998 primarily due to
higher margins associated with networking products and lower unit costs
negotiated with manufacturing partners.
8
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Research and Development. The cost of product development consists
primarily of salaries, employee benefits, overhead, outside contractors and
non-recurring engineering fees. Such research and development expenses were
approximately $3.3 million and $1.4 million for the quarters ended December 31,
1999 and 1998, respectively. The increase was due primarily to activities
associated with the development of semiconductor products. The Company has made,
and intends to continue to make, substantial investments in the technologies
that form the core of its packet processors, with the goal of providing
price-performance product alternatives and enabling broad adoption and
deployment of packet processing functionality. However, there can be no
assurance that investments in product development programs will be successful or
that the products resulting from such programs will achieve market acceptance.
Sales and Marketing. Sales and marketing expenses consist primarily of the
salaries, commissions and benefits of sales, marketing and support personnel,
and consulting, advertising, promotion and overhead expenses. Such expenses were
approximately $1.7 million and $1.2 million for the three month periods ended
December 31, 1999 and 1998, respectively. The increase was due primarily to
additional personnel costs and overhead.
General and Administrative. General and administrative expenses are
comprised primarily of salaries for administrative and corporate services
personnel, legal and other professional fees. Such expenses were $779,000 and
$866,000 for the three month periods ended December 31, 1999 and 1998,
respectively. The decrease was primarily due to the absence of professional
service charges incurred during the spinout from Stac during the three month
period ended December 31, 1998.
Other income/(expense), net. Net interest income was $984,000 for the three
month periods ended December 31, 1999 and $128,000 for the three month period
ended December 31, 1998. The increase in interest income for the three month
periods ended December 31, 1999 compared to the same period in 1998 was due to
the higher availability of cash during 1999 due to the Company's public offering
of stock during that year. During the three months ended December 31, 1998, the
Company incurred interest expense totaling $105,000 relating to a $5.0 million
loan agreement with its former parent company, Stac, which was due and payable
on September 30, 1999, however was repaid in March 1999.
Income Taxes. The effective income tax rate for three month periods ended
December 31, 1999 and 1998 was 40%.
LIQUIDITY AND CAPITAL RESOURCES
From inception until the spin-off from Stac, in December 1998, the Company
depended upon Stac for financing its operations and capital requirements. At
December 31, 1999, cash and cash equivalents, and marketable securities were
approximately $71.1 million compared to $70.1 million at September 30, 1999.
During the three month period ended March 31, 1999, the Company issued 1,600,000
shares of common stock at a price of $33 per share in an equity offering, which
raised $49.2 million, net of offering expenses. On April 19, 1999, the Company's
underwriters exercised their option to purchase an additional 300,000 shares of
the company's common stock, which yielded an additional $9.3 million to the
Company.
Net cash provided by operating activities was $1.1 million and $26,000 for
the three month periods ended December 31, 1999 and 1998, respectively. During
the three months ended December 31, 1999, the net cash provided by operating
activities was attributed to net income from operations, depreciation and
amortization charges of $253,000, an increase in inventory of $56,000 and
decreases in accounts receivable of $1.3 million, prepaid expenses and other
assets of $18,000, accounts payable of $1.6 million and accrued expenses and
other liabilities of $681,000. During the three months ended December 31, 1998,
the net cash provided by operating activities was attributed to net income from
operations, depreciation and amortization charges of $163,000, a gain on
disposal of marketable securities of $27,000, a loss on disposal of fixed assets
of $220,000, an increase in inventory of $244,000, prepaid expenses and other
current assets of $436,000 and accrued expenses and other current liabilities of
$14,000 and decreases in accounts receivable of $727,000, other assets of
$28,000 and accounts payable of $902,000.
Net cash provided by (used in) investing activities was $(160,000) and $5.8
million for the three month periods ended December 31, 1999 and 1998,
respectively. Net cash used in investing activities for the three month period
ended December 31, 1999 was related to the purchase of property and equipment.
Net cash provided by investing activities for the three month period ended
December 31, 1998 was due to $6.0 million from the sale of marketable
securities, offset by the purchase of $193,000 of property and equipment.
Net cash provided by (used in) financing activities was $104,000 and $(1.4)
million for the three month periods ended December 31, 1999 and 1998,
respectively. The net cash provided by financing activities during the three
month period ended December 31, 1999 was due to the proceeds from issuance of
common stock. The net cash used in financing activities during the three month
period
9
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ended December 31, 1998 was comprised of proceeds from notes payable of
$5.0 million and proceeds from issuance of common stock of $75,000, offset by
the net transfer of funds to a related party of $6.5 million.
The Company uses a number of independent suppliers to manufacture
substantially all of its products. As a result, the Company relies on these
suppliers to allocate to the Company a sufficient portion of foundry capacity to
meet the Company's needs and deliver sufficient quantities of the Company's
products on a timely basis. These arrangements allow the Company to avoid
utilizing its capital resources for manufacturing facilities and work-in-process
inventory and to focus substantially all of its resources on the design,
development and marketing of its products.
The Company requires substantial working capital to fund its business,
particularly to finance accounts receivable and inventory, and for investments
in property and equipment. The Company's need to raise capital in the future
will depend on many factors including the rate of sales growth, market
acceptance of the Company's existing and new products, the amount and timing of
research and development expenditures, the timing and size of acquisitions of
businesses or technologies, the timing of the introduction of new products and
the expansion of sales and marketing efforts.
MARKET RISK DISCLOSURE
Interest Rate Risk - The Company does not use derivative financial instruments
in its investment portfolio. The Company's investment portfolio is generally
comprised of commercial paper. The Company places investments in instruments
that meet high credit quality standards. These securities are subject to
interest rate risk, and could decline in value if interest rates fluctuate. Due
to the short duration and conservative nature of the Company's investment
portfolio, the Company does not expect any material loss with respect to its
investment portfolio. A 10% move in interest rates at December 31, 1999 would
have an immaterial effect on the Company's pre-tax earnings and the carrying
value of its investments over the next fiscal year.
Foreign Currency Exchange Rate Risk - All of the Company's sales, cost of
manufacturing and marketing are transacted in US dollars. Accordingly, the
Company's results of operations are not subject to foreign exchange rate
fluctuations. Gains and losses from such fluctuations have not been incurred by
the Company to date.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1998, the AICPA issued Statement of Position 98-9, Modification
of SOP 97-2, "Software Revenue Recognition, with respect to certain
transactions" ("SOP 98-9"), which amends certain elements of SOP 97-2 and
provides additional authoritative guidance on software revenue recognition. SOP
98-9 is effective for fiscal years beginning after March 15, 1999. The Company
does not expect that the adoption of SOP 98-9 will have a material effect on its
financial statements.
TRENDS AND UNCERTAINTIES
In future periods, Hi/fn's business, financial condition and results of
operations may be affected by many factors, including but not limited to the
following:
We Have A Limited Operating History As An Independent Company.
On August 14, 1996, we were incorporated by Stac, which transferred its
semiconductor business to us in exchange for shares of our Preferred Stock and
Common Stock. Because we are a relatively new company with a limited operating
history, we may experience financial and other difficulties as we attempt to
grow our business. For example, to expand our business we are increasing our
research and development and other operating expenses. This increase in expenses
will negatively affect our financial performance unless we are able to sustain
and grow revenues. If we are not able to evolve and expand our business, we may
not remain profitable and therefore may not be able to sustain a viable
business.
Our Operating Results May Fluctuate Significantly.
Our operating results have fluctuated significantly in the past and we
expect that they will continue to fluctuate in the future. This fluctuation is a
result of a variety of factors including the following:
- General business conditions in our markets as well as global economic
uncertainty;
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- Reductions in demand for our customers' products;
- The timing and amount of orders we receive from our customers;
- Cancellations or delays of customer product orders;
- Any new product introductions by us or our competitors;
- Our suppliers increasing costs or changing the delivery of products to
us;
- Increased competition or reductions in the prices that we are able to
charge;
- The variety of the products that we sell as well as seasonal demand
for our products; and
- The availability of manufacturing capacity necessary to make our
products.
Our revenues and operating results depend upon the amount and timing of
customer orders that we receive in a given quarter. In the past we have
recognized a substantial portion of our revenues in the last month of a quarter.
If this trend continues, any failure or delay to fulfill orders by the end of a
particular quarter will harm our business, financial condition and results of
operations. As a result of these and other factors, we believe that
period-to-period comparisons of our historical results or operations are not a
good predictor of our future performance. If our future operating results are
below the expectations of stock market analysts, our stock price may decline.
We Depend Upon A Small Number Of Customers.
Quantum Corporation ("Quantum"), through its manufacturing subcontractor,
accounted for approximately 45%, 61% and 70%, respectively, of our revenues in
fiscal 1999, 1998 and 1997. During 1999, Lucent, through its manufacturing
subcontractors, accounted for approximately 38% of our revenues for fiscal 1999.
Neither Quantum nor Lucent are under any binding obligation to order from us. If
our sales to Quantum or Lucent decline, our business, financial condition and
results of operations could suffer. We expect that our most significant
customers in the future could be different from our largest customers today for
a number of reasons, including customers' deployment schedules and budget
considerations. As a result, we believe we may experience significant
fluctuations in our results of operations on a quarterly and an annual basis.
Limited numbers of network and storage equipment vendors account for a
majority of packet processor purchases in their respective markets. In
particular, the market for network equipment that would include packet
processors, such as routers, remote access concentrators and firewalls, is
dominated by a few large vendors, including Cisco Systems, Inc., Lucent
Technologies Inc., Nortel Networks, Inc. and 3Com Corporation. As a result, our
future success will depend upon our ability to establish and maintain
relationships with these companies. If these network equipment vendors do not
incorporate our packet processors into their products, our business, financial
condition and results of operations could suffer.
Our Business Depends Upon The Development Of The Packet Processor Market.
Our prospects are dependent upon the acceptance of packet processors as an
alternative to other technology traditionally utilized by network and storage
equipment vendors. Many of our current and potential customers have substantial
technological capabilities and financial resources and currently develop
internally the application specific integrated circuit components and program
the general purpose microprocessors utilized in their products as an alternative
to our packet processors. These customers may in the future continue to rely on
these solutions or may determine to develop or acquire components, technologies
or packet processors that are similar to, or that may be substituted for, our
products. In order to be successful we must anticipate market trends and the
price, performance and functionality requirements of such network and storage
equipment vendors and must successfully develop and manufacture products that
meet their requirements. In addition, we must make products available to these
large customers on a timely basis and at competitive prices. If orders from
customers are cancelled, decreased or delayed, or if we fail to obtain
significant orders from new customers, or any significant customer delays or
fails to pay, our business, financial condition and results of operations could
suffer.
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Our Business Depends Upon The Continued Growth And Our Penetration Of The
Virtual Private Network Market.
We want to be a leading supplier of packet processors that implement the
network security protocols necessary to support the deployment of virtual
private networks. This market, which is still emerging, may not grow and if it
does continue to grow, our products may not successfully serve this market. Our
ability to generate significant revenue in the virtual private network market
will depend upon, among other things, the following:
- Our ability to demonstrate the benefits of our technology to
distributors, original equipment manufacturers and end users; and
- The increased use of the Internet by businesses as replacements for,
or enhancements to, their private networks.
If we are unable to penetrate the virtual private network market, or if
that market fails to develop, our business, financial condition and results of
operations could suffer.
We Face Risks Associated With Evolving Industry Standards And Rapid
Technological Change.
The markets in which we compete are characterized by rapidly changing
technology, frequent product introductions and evolving industry standards. Our
performance depends on a number of factors, including our ability to do the
following:
- Properly identify emerging target markets and related technological
trends;
- Develop and maintain competitive products;
- Enhance our products by adding innovative features that differentiate
our products from those of competitors;
- Bring products to market on a timely basis at competitive prices; and
- Respond effectively to new technological changes or new product
announcements by others.
Our past success has been dependent in part upon our ability to develop
products that have been selected for design into new products of leading
equipment manufacturers. However, the development of our packet processors is
complex and, from time to time, we have experienced delays in completing the
development and introduction of new products. We may not be able to adhere to
our new product design and introduction schedules and our products may not be
accepted in the market at favorable prices, if at all.
In evaluating new product decisions, we must anticipate future demand for
product features and performance characteristics, as well as available
supporting technologies, manufacturing capacity, competitive product offerings
and industry standards. We must also continue to make significant investments in
research and development in order to continue to enhance the performance and
functionality of our products to keep pace with competitive products and
customer demands for improved performance, features and functionality. The
technical innovations required for the Company to remain competitive are
complicated and require a significant amount of time and money. We may
experience substantial difficulty in introducing new products and we may be
unable to offer enhancements to existing products on a timely or cost-effective
basis, if at all. For instance, the performance of our encryption/compression
and public key processors depends upon the integrity of our security technology.
If any significant advances in overcoming cryptographic systems are made, then
the security of our encryption/compression and public key processors will be
reduced or eliminated unless we are able to develop further technical
innovations that adequately enhance the security of these products. Our
inability to develop and introduce new products or enhancements directed at new
industry standards could harm our business, financial condition and results of
operations.
Our Markets Are Highly Competitive.
We compete in markets that are intensely competitive and are expected to
become more competitive as current competitors expand their product offerings
and new competitors enter the market. The markets that we compete in are subject
to frequent product introductions with improved price-performance
characteristics, rapid technological change, and the continued emergence of new
industry standards. Our products compete with offerings from companies such as
Analog Devices, Inc., Information Resource
12
<PAGE> 13
Engineering Inc., International Business Machines Corporation ("IBM"), Rainbow
Technologies, Inc., and Phillips Semiconductors, Inc. In 1994, Stac entered into
two license agreements with IBM in which Stac granted IBM the right to use, but
not sublicense, our patented compression technology in IBM hardware and software
products. Stac also entered into a license agreement with Microsoft Corporation
("Microsoft") in 1994 whereby Stac granted Microsoft the right to use, but not
sublicense, our compression technology in their software products. We expect
significant future competition from major domestic and international
semiconductor suppliers. Several established electronics and semiconductor
suppliers have recently entered, or expressed an interest to enter, the network
equipment market. We also may face competition from suppliers of products based
on new or emerging technologies. Furthermore, many of our existing and potential
customers internally develop solutions which attempt to perform all or a portion
of the functions performed by our products.
A key element of our packet processor architecture is our encryption
technology. In order to export our encryption-related products, the U.S.
Department of Commerce requires us to obtain a license. Foreign competitors that
are not subject to similar requirements have an advantage over us in their
ability to rapidly respond to the requests of customers in the global market.
Many of our current and prospective competitors offer broader product lines
and have significantly greater financial, technical, manufacturing and marketing
resources than us. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to promote the sale of their products. In particular, companies such
as Intel Corporation, Lucent Technologies Inc., Motorola, Inc., National
Semiconductor Corporation, and Texas Instruments Incorporated have a significant
advantage over us given their relationships with many of our customers, their
extensive marketing power and name recognition and their much greater financial
resources. In addition, current and potential competitors may decide to
consolidate, lower the prices of their products or to bundle their products with
other products. Any of the above would significantly and negatively impact our
ability to compete and obtain or maintain market share. If we are unable to
successfully compete against our competitors, our business, results of
operations and financial condition will suffer.
We believe that the important competitive factors in our markets are the
following:
- Performance;
- Price;
- The time that is required to develop a new product or enhancements to
existing products;
- The ability to achieve product acceptance with major network and
storage equipment vendors;
- The support that exists for new network and storage standards;
- Features and functionality;
- Adaptability of products to specific applications;
- Reliability; and
- Technical service and support as well as effective intellectual
property protection.
If we are unable to successfully develop and market products that compete
with those of other suppliers, our business, financial condition and results of
operations could be harmed. In addition, we must compete for the services of
qualified distributors and sales representatives. To the extent that our
competitors offer distributors or sales representatives more favorable terms,
these distributors and sales representatives may decline to carry, or
discontinue carrying, our products. Our business, financial condition and
results of operations could be harmed by any failure to maintain and expand our
distribution network.
Our Business Depends Upon The Growth Of The Network Equipment And Storage
Equipment Markets.
Our success is largely dependent upon continued growth in the market for
network security equipment, such as routers, remote access concentrators,
switches, broadband access equipment, security gateways, firewalls and network
interface cards. In addition, our
13
<PAGE> 14
success depends upon storage equipment vendors incorporating our packet
processors into their systems. The network security equipment market has in the
past and may in the future fluctuate significantly based upon numerous factors,
including the lack of industry standards, adoption of alternative technologies,
capital spending levels and general economic conditions. We are unable to
determine the rate or extent to which these markets will grow, if at all. Any
decrease in the growth of the network or storage equipment market or a decline
in demand for our products could harm our business, financial condition and
results of operations.
Our Operating Results Have Been Substantially Dependent On One Product Family.
Historically, substantially all of our revenue has come from sales of our
compression processor products which accounted for 54%, 79%, and 88%,
respectively, of revenue in the fiscal years ended September 30, 1999, 1998 and
1997 . A significant decline in revenue from our compression processor products,
which is not adequately replaced by increased sales of our
encryption/compression and public key processors, would harm our business,
financial condition and results of operations.
Our Success Depends Upon Protecting Our Intellectual Property.
Our proprietary technology is critical to our future success. We rely in
part on patent, trade, trademark, maskwork and copyright law to protect our
intellectual property. We own 12 United States patents and 4 foreign patents. We
also have 2 pending patent applications in Japan. Our patents and patent
applications cover various aspects of our compression technology and have
expiration dates ranging from 2006 to 2013. Patents may not issue under our
current or future patent applications, and the patents issued under such patent
applications could be invalidated, circumvented or challenged. In addition,
third parties could make infringement claims against us in the future. Such
infringement claims could result in costly litigation. We may not prevail in any
such litigation or be able to license any valid and infringed patents from third
parties on commercially reasonable terms, if at all. Regardless of the outcome,
an infringement claim would likely result in substantial cost and diversion of
our resources. Any infringement claim or other litigation against us or by us
could harm our business, financial condition and results of operations. The
patents issued to us may not be adequate to protect our proprietary rights, to
deter misappropriation or to prevent an unauthorized third party from copying
our technology, designing around the patents we own or otherwise obtaining and
using our products, designs or other information. In addition, others could
develop technologies that are similar or superior to our technology.
We also claim copyright protection for certain proprietary software and
documentation. We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, employees and consultants,
and through other security measures. However, our efforts may not be successful.
Furthermore, the laws of certain countries in which our products are or may be
manufactured or sold may not protect our products and intellectual property.
The Length Of Time It Takes To Develop Our Products And Make A Sale To Our
Customers May Impair Our Operating Results.
Our customers typically take a long time to evaluate our products. In fact,
it usually takes our customers 3 to 6 months or more to test our products with
an additional 9 to 18 months or more before they commence significant production
of equipment incorporating our products. As a result of this lengthy sales
cycle, we may experience a delay between increasing expenses for research and
development and sales and marketing efforts on the one hand, and the generation
of higher revenues, if any, on the other hand. In addition, the delays inherent
in such a lengthy sales cycle raise additional risks of customer decisions to
cancel or change product plans, which could result in the loss of anticipated
sales. Our business, financial condition and results of operations could suffer
if customers reduce or delay orders or choose not to release products using our
technology.
We Depend Upon Independent Manufacturers And Limited Sources Of Supply.
We rely on subcontractors to manufacture, assemble and test our packet
processors. We currently subcontract our semiconductor manufacturing to Atmel
Corporation, Toshiba Corporation and Motorola, Inc. Since we depend upon
independent manufacturers, we do not directly control product delivery schedules
or product quality. None of our products are manufactured by more than one
supplier. Since the semiconductor industry is highly cyclical, foundry capacity
has been very limited at times in the past and may become limited in the future.
We depend on our suppliers to deliver sufficient quantities of finished
product to us in a timely manner. Since we place orders on a purchase order
basis and do not have long-term volume purchase agreements with any of our
suppliers, our suppliers may allocate production capacity to other products
while reducing deliveries to us on short notice. For example, in June 1995, one
of our suppliers delayed the delivery of one of our products. As a result, we
switched production of the product to a new manufacturer. This caused a 3
14
<PAGE> 15
month delay in shipments to customers. We also experienced yield and test
anomalies on a different product manufactured by another subcontractor that
could have interrupted our customer shipments. In this case, the manufacturer
was able to correct the problem in a timely manner and customer shipments were
not affected. The delay and expense associated with qualifying a new supplier or
foundry and commencing volume production can result in lost revenue, reduced
operating margins and possible harm to customer relationships. The steps
required for a new manufacturer to begin production of a semiconductor product
include:
- Adapting our product design, if necessary, to the new manufacturer's
process
- Creating a new mask set to manufacture the product
- Having the new manufacturer prepare sample products so we can verify
the product specification; and
- Providing sample products to customers for qualification.
In general, it takes from 3 to 6 months for a new manufacturer to begin
full-scale production of one of our product. We could have similar or more
protracted problems in the future with existing or new suppliers.
Both Toshiba Corporation and Motorola, Inc. manufacture products for us in
plants located in Asia. To date, the financial and stock market dislocations
that have occurred in the Asian financial markets have not harmed our business.
However, present or future dislocations or other international business risks,
such as currency exchange fluctuations or recessions, could force us to seek new
suppliers. We must place orders approximately 12 to 14 weeks in advance of
expected delivery. This limits our ability to react to fluctuations in demand
for our products, and could cause us to have an excess or a shortage of
inventory of a particular product. In addition, if global semiconductor
manufacturing capacity fails to increase in line with demand, foundries could
allocate available capacity to larger customers or customers with long-term
supply contracts. If we cannot obtain adequate foundry capacity at acceptable
prices, or our supply is interrupted or delayed, our product revenues could
decrease or our cost of revenues could increase. This could harm our business,
financial condition and results of operations.
We regularly consider using smaller semiconductor dimensions for each of
our products in order to reduce costs. We have begun to decrease the dimensions
in our new product designs, and believe that we must do so to remain
competitive. We may have difficulty decreasing the dimensions of our products.
In the future, we may change our supply arrangements to assume more product
manufacturing responsibilities. We may subcontract for wafer manufacturing,
assembly and test rather than purchase finished products. However, there are
additional risks associated with manufacturing, including variances in
production yields, the ability to obtain adequate test and assembly capacity at
reasonable cost and other general risks associated with the manufacture of
semiconductors. We may also enter into volume purchase agreements that would
require us to commit to minimum levels of purchases and which may require
up-front investments. If we fail to effectively assume greater manufacturing
responsibilities or manage volume purchase arrangements, our business, financial
condition and results of operations will suffer.
Network And Storage Equipment Prices Typically Decrease.
Average selling prices in the networking, storage and semiconductor
industries have rapidly declined due to many factors, including:
- Rapidly changing technologies;
- Price-performance enhancements; and
- Product obsolescence.
The decline in the average selling prices of our products may cause
substantial fluctuations in our operating results. We anticipate that the
average selling prices of our products will decrease in the future due to
product introductions by our competitors, price pressures from significant
customers and other factors. Therefore, we must continue to develop and
introduce new products that incorporate features which we can sell at higher
prices. If we fail to do so, our revenues and gross margins could decline, which
would harm our business, financial condition and results of operations.
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<PAGE> 16
We Face Product Return, Product Liability And Product Defect Risks.
Complex products such as ours frequently contain errors, defects and bugs
when first introduced or as new versions are released. We have discovered such
errors, defects and bugs in the past. Delivery of products with production
defects or reliability, quality or compatibility problems could hinder market
acceptance of our products. This could damage our reputation and harm our
ability to attract and retain customers. Errors, defects or bugs could also
cause interruptions, delays or a cessation of sales to our customers. We would
have to expend significant capital and resources to remedy these problems.
Errors, defects or bugs could be discovered in our new products after we begin
commercial production of them, despite testing by us and our suppliers and
customers. This could result in additional development costs, loss of, or delays
in, market acceptance, diversion of technical and other resources from our other
development efforts, claims by our customers or others against us or the loss of
credibility with our current and prospective customers. Any such event would
harm our business, financial condition and results of operations.
We Face Order And Shipment Uncertainties.
We generally make our sales under individual purchase orders that may be
canceled or deferred by customers on short notice without significant penalty,
if any. Cancellation or deferral of product orders could cause us to hold excess
inventory, which could harm our profit margins and restrict our ability to fund
our operations. We recognize revenue upon shipment of products to our customers,
net of an allowance for estimated returns. An unanticipated level of returns
could harm our business, financial condition and results of operations.
We Depend Upon Key Personnel.
Our success greatly depends on the continued contributions of our key
management and other personnel, many of whom would be difficult to replace. We
do not have employment contracts with any of our key personnel, nor do we
maintain any key man life insurance on any of our personnel. Several members of
our management team have joined us in the last 12 months. It may be difficult
for us to integrate new members of our management team. We must also attract and
retain experienced and highly skilled engineering, sales and marketing and
managerial personnel. Competition for such personnel is intense in the
geographic areas and market segments in which we compete, and we may not be
successful in hiring and retaining such people. If we lose the services of any
key personnel, or cannot attract or retain qualified personnel, particularly
engineers, our business, financial condition and results of operations could
suffer. In addition, companies in technology industries whose employees accept
positions with competitors have in the past claimed that their competitors have
engaged in unfair competition or hiring practices. We could receive such claims
in the future as we seek to hire qualified personnel. These claims could result
in material litigation. We could incur substantial costs in defending against
any such claims, regardless of their merits.
Our Rapid Growth May Strain Our Operations.
We have experienced a period of rapid growth and expansion which has
placed, and continues to place, a significant strain on our resources. To
accommodate this growth, we must implement a variety of new and upgraded
operational and financial systems, procedures and controls, including the
improvement of the accounting and other internal management systems which were
provided by Stac. This may require substantial management effort, and our
efforts to do so may not be successful. In addition, we have had to hire
additional employees to accommodate this growth and our product development
activities. This has resulted in increased responsibilities for our management.
Our systems, procedures and controls may not be adequate to support our
operations. If we fail to improve our operational, financial and management
information systems, or to hire, train, motivate or manage our employees, our
business, financial condition and results of operations could suffer.
Our Products Are Subject To Export Restrictions.
The encryption algorithms embedded in our products are a key element of our
packet processor architecture. These products are subject to U.S. Department of
Commerce export control restrictions. Our network equipment customers may only
export products incorporating encryption technology if they obtain an export
license. These U.S. export laws also prohibit the export of encryption products
to a number of countries deemed by the U.S. to be hostile. U.S. export
regulations regarding the export of encryption technology require either a
transactional export license or the granting of Department of Commerce commodity
jurisdiction. These restrictions may make foreign competitors facing less
stringent controls on their products more competitive in the global market than
our network equipment customers. The U.S. government may not approve any pending
or future export license requests. In addition, the list of products and
countries for which export approval is required, and the regulatory policies
with respect thereto, could be
16
<PAGE> 17
revised, and laws limiting the domestic use of encryption could be enacted. The
sale of our packet processors could be harmed by the failure of our network
equipment customers to obtain the required licenses or by the costs of
compliance.
We Face Risks Associated With Our International Business Activities.
We sell most of our products to customers in the United States. If our
international sales increase, we may encounter risks inherent in international
operations. All of our international sales to date are denominated in U.S.
dollars. As a result, if the value of the U.S. dollar increases relative to
foreign currencies, our products could become less competitive in international
markets. We also obtain some of our manufacturing, assembly and test services
from suppliers located outside the United States. International business
activities could be limited or disrupted by any of the following:
- The imposition of governmental controls;
- Export license requirements;
- Restrictions on the export of technology;
- Currency exchange fluctuations;
- Political instability;
- Financial and stock market dislocations;
- Trade restrictions; and
- Changes in tariffs.
Demand for our products also could be harmed by seasonality of
international sales and economic conditions in our primary overseas markets.
These international factors could harm future sales of our products to
international customers and our business, financial condition and results of
operations in general.
We Face Risks Associated With Acquisitions.
We continually evaluate strategic acquisitions of businesses and
technologies that would complement our product offerings or enhance our market
coverage or technological capabilities. We are not currently negotiating any
acquisitions, but we may make acquisitions in the future. Future acquisitions
could be effected without stockholder approval, and could cause us to dilute
shareholder equity, incur debt and contingent liabilities and amortize
acquisition expenses related to goodwill and other intangible assets, any of
which could harm our operating results and/or the price of our Common Stock.
Acquisitions entail numerous risks, including:
- Difficulties in assimilating acquired operations, technologies and
products;
- Diversion of management's attention from other business concerns;
- Risks of entering markets in which we have little or no prior
experience; and
- Loss of key employees of acquired organizations.
We may not be able to successfully integrate businesses, products,
technologies or personnel that we acquire. If we fail to do so, our business,
financial condition and results of operations could suffer.
In addition, if we are a party to a transaction or series of transactions
that result in 50% or more of our outstanding stock being transferred to one or
more persons, the IRS may claim that our spin-off from Stac was a taxable event
to Stac and its stockholders. Under the Tax Allocation and Indemnity Agreement
that we entered into with Stac, we may be obligated to pay the taxes of Stac if
we
17
<PAGE> 18
caused the spin-off to be a taxable event. Our cash flows, business, financial
condition and results of operations would suffer if we became liable for any
such tax liability. See "We Face Certain Risks As A Result Of Our Spin-Off From
Stac."
The Cyclicality Of The Semiconductor Industry May Harm Our Business.
The semiconductor industry has experienced significant downturns and wide
fluctuations in supply and demand. The industry has also experienced significant
fluctuations in anticipation of changes in general economic conditions. This has
caused significant variances in product demand, production capacity and rapid
erosion of average selling prices. Industry-wide fluctuations in the future
could harm our business, financial condition and results of operations.
We Face Certain Risks As A Result Of Our Spin-Off From Stac.
On December 8, 1998, Stac received a private letter ruling from the
Internal Revenue Service ("IRS") stating, among other things, that the
distribution of our Common Stock held by Stac on December 16, 1998 to Stac
stockholders would not result in recognition of taxable income or gain to Stac
or its stockholders under Section 355 of the Internal Revenue Code of 1986, as
amended ("Code") (except to the extent of cash received in lieu of fractional
shares). A tax ruling, while generally binding upon the IRS, is subject to
certain factual representations and assumptions. If the factual representations
and assumptions made by Stac were incorrect in a material respect, the rights of
taxpayers to rely on a tax ruling or Stac's ability to rely on the tax opinion
would be jeopardized.
If the distribution were not to constitute a tax-free spin-off, then Stac
would be treated as recognizing a taxable gain equal to the difference between
(i) the fair market value of our Common Stock that was distributed to Stac
stockholders on December 16, 1998 and (ii) Stac's adjusted basis of such Common
Stock. In addition, under the consolidated tax return rules of the Code, each
member of Stac's consolidated group (including Hi/fn) would be severally liable
for such tax liability. Furthermore, in connection with the spin-off we entered
into a Tax Allocation and Indemnity Agreement with Stac whereby each of us
agreed that if either party took actions after the spin-off that caused Section
355(e) of the Code to apply to Hi/fn's Common Stock, then whichever party first
caused Section 355(e) of the Code to apply to Hi/fn's Common Stock would be
obligated to bear all taxes of Stac resulting from such action. Under recently
enacted Section 355(e) of the Code, if the spin-off was considered to be part of
a plan or series of related transactions (a "Plan") in which, after the
spin-off, a 50% or greater interest in Hi/fn or Stac were acquired by one or
more persons, the IRS would claim that the spin-off was taxable at the corporate
level. Although neither we nor Stac believes the spin-off is part of a Plan to
effect a 50% change in ownership of either Hi/fn or Stac, the IRS has issued no
guidance on the definition of a Plan and for the first two years following the
spin-off, any cumulative 50% change of ownership within the two-year period will
be rebuttably presumed to be the result of a Plan. Our cash flows, business,
financial condition and results of operations would suffer if we became liable
for any such tax liability.
Our Stock Price May Be Volatile.
The market price of our Common Stock has fluctuated in the past and is
likely to fluctuate in the future. In addition, the securities markets have
experienced significant price and volume fluctuations and the market prices of
the securities of technology-related companies including networking, storage and
semiconductor companies have been especially volatile. Such fluctuations can
result from:
- Quarterly variations in operating results;
- Announcements of new products by us or our competitors;
- The gain or loss of significant customers;
- Changes in analysts' estimates;
- Short-selling of our Common Stock; and
- Events affecting other companies that investors deem to be comparable
to us.
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation, which
could result in substantial costs and a diversion of management's attention and
resources.
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<PAGE> 19
The Company and certain of its officers and directors have been named as
defendants in several substantially similar class action lawsuits filed in
October 1999 in the United States district Court for the Northern District of
California. The plaintiffs in theses actions purport to represent a class of all
persons who purchased the Company's common stock between July 26, 1999 through
October 7, 1999. The complaints allege that the defendants made misleading
statements in violation of the federal securities laws, including Section 10(b)
of the Securities Exchange Act of 1934. The Company expects the Court to appoint
a lead plaintiff and consolidate the complaints in the near future.
The Company believes that the complaints are without merit and intends to
defend against them vigorously. Nevertheless, litigation is subject to inherent
uncertainties and thus there can be no assurance that these suits will be
resolved favorably to the Company or will not have a material adverse effect on
the Company's financial position or results of operations.
19
<PAGE> 20
PART II. OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
ITEMS 1, 2, 3, 4 AND 5 ARE NOT APPLICABLE.
20
<PAGE> 21
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.
hi/fn, inc. (Registrant)
Date: February 14, 2000 By: /s/ William R. Walker
------------------------------------
William R. Walker Vice President,
Finance, Chief Financial Officer and
Secretary (principal financial and
accounting officer)
21
<PAGE> 22
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 71,123
<SECURITIES> 0
<RECEIVABLES> 5,612
<ALLOWANCES> 224
<INVENTORY> 1,624
<CURRENT-ASSETS> 82,492
<PP&E> 3,560
<DEPRECIATION> 1,236
<TOTAL-ASSETS> 85,294
<CURRENT-LIABILITIES> 3,894
<BONDS> 0
0
0
<COMMON> 9
<OTHER-SE> 81,391
<TOTAL-LIABILITY-AND-EQUITY> 85,294
<SALES> 10,054
<TOTAL-REVENUES> 10,054
<CGS> 2,163
<TOTAL-COSTS> 7,966
<OTHER-EXPENSES> 17
<LOSS-PROVISION> 19
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,055
<INCOME-TAX> 1,222
<INCOME-CONTINUING> 1,833
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,833
<EPS-BASIC> .21
<EPS-DILUTED> .19
</TABLE>
