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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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 SEPTEMBER 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 0-27755
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JNI CORPORATION
(Exact name of registrant as specified in its charter)
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DELAWARE 33-0740004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9775 TOWNE CENTRE DRIVE
SAN DIEGO, CA 92121
(Address of principal executive offices, including zip code)
(858) 535-3121
(Registrant's telephone number, including area code)
----------------------------------------
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
----- -----
As of October 31, 2000, there were 24,428,037 shares of the registrant's common
stock, $0.001 par value, outstanding.
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TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Balance Sheet at September 30, 2000 (unaudited) and December 31, 1999 2
Statement of Operations (unaudited) for the three and nine months ended
September 30, 2000 and 1999 3
Statement of Cash Flows (unaudited) for the nine months ended
September 30, 2000 and 1999 4
Notes to Financial Statements (unaudited) 5
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
PART II OTHER INFORMATION
Item 2: CHANGES IN SECURITIES AND USE OF PROCEEDS 12
Item 5: OTHER INFORMATION 12
Item 6: EXHIBITS AND REPORT ON FORM 8-K 23
Signatures 24
Exhibit Index 25
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1
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
JNI CORPORATION
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------------- -----------------
(unaudited)
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Current assets:
Cash and cash equivalents $ 8,630 $ 5,062
Marketable securities available for sale 41,223 39,767
Accounts receivable, net 15,693 6,305
Inventories 12,454 4,046
Other current assets 794 711
Deferred income taxes 1,746 946
------------------- -----------------
Total current assets 80,540 56,837
Property and equipment, net 7,027 4,632
Intangible assets, net 6,028 10,047
Deferred income taxes 1,229 1,309
Other assets 721 -
------------------- -----------------
$ 95,545 $ 72,825
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,308 $ 4,124
Accrued liabilities 6,973 3,367
Deferred revenue 1,856 -
------------------- -----------------
Total current liabilities 18,137 7,491
Other liabilities - 112
------------------- -----------------
Total liabilities 18,137 7,603
------------------- -----------------
Stockholders' equity:
Preferred stock, undesignated series, 5,000,000 shares
authorized; none issued - -
Common stock, par value $.001 per share; 100,000,000 shares
authorized; 24,160,084 and 21,838,679 shares issued and
outstanding 24 22
Additional paid-in capital 70,776 67,078
Unearned stock-based compensation (817) (1,311)
Accumulated other comprehensive income (loss) - (23)
Retained earnings (deficit) 7,425 (544)
------------------- -----------------
Total stockholders' equity 77,408 65,222
------------------- -----------------
$ 95,545 $ 72,825
=================== =================
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See accompanying notes to financial statements.
2
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JNI CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
------------- --------------- ----------- -------------
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Net revenues $ 30,013 $ 10,852 $ 72,514 $ 25,764
Cost of revenues 12,201 4,242 29,436 9,695
------------- --------------- ----------- -------------
Gross margin 17,812 6,610 43,078 16,069
------------- --------------- ----------- -------------
Operating expenses:
Research and development 5,016 3,035 13,836 7,973
Selling and marketing 3,268 1,330 8,523 3,403
General and administrative 2,109 859 5,505 2,145
Amortization of intangible assets 1,340 56 4,019 166
Amortization of stock-based compensation 161 236 502 637
------------- --------------- ----------- -------------
Total operating expenses 11,894 5,516 32,385 14,324
------------- --------------- ----------- -------------
Operating income 5,918 1,094 10,693 1,745
Interest income 578 - 1,636 -
Interest expense - affiliate - (105) - (394)
------------- --------------- ----------- -------------
Income before income taxes 6,496 989 12,329 1,351
Income tax provision (benefit) 2,143 549 4,360 (856)
------------- --------------- ----------- -------------
Net income $ 4,353 $ 440 $ 7,969 $ 2,207
============= =============== =========== =============
Earnings per share:
Basic $ 0.18 $ 1.05 $ 0.35 $ 5.25
============= =============== =========== =============
Diluted $ 0.16 $ 0.02 $ 0.30 $ 0.10
============= =============== =========== =============
Number of shares used in per share computations:
Basic 23,934,000 420,000 22,981,000 420,000
============= =============== =========== =============
Diluted 27,106,000 23,062,000 26,712,000 22,867,000
============= =============== =========== =============
</TABLE>
See accompanying notes to financial statements.
3
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JNI CORPORATION
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,969 $ 2,207
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes (720) (1,179)
Tax benefit from stock option transactions 2,143 -
Depreciation and amortization 1,491 969
Amortization of intangible assets 4,019 166
Amortization of stock-based compensation 494 637
Accrued interest expense - affiliate - 394
Changes in assets and liabilities:
Accounts receivable, net (9,388) (2,530)
Inventories (8,408) (1,261)
Other assets (804) (867)
Accounts payable 5,184 1,439
Accrued liabilities 3,606 1,328
Deferred revenue 1,856 -
Other liabilities (112) (1)
-------------------- -------------------
Net cash provided by operating activities 7,330 1,302
-------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities available for sale (1,433) -
Capital expenditures (3,886) (2,099)
-------------------- -------------------
Net cash used in investing activities (5,319) (2,099)
-------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from affiliate - 797
Net proceeds from issuance of common stock 1,557 -
-------------------- -------------------
Net cash provided by financing activities 1,557 797
-------------------- -------------------
Net change in cash and cash equivalents 3,568 -
Cash and cash equivalents, beginning of period 5,062 -
-------------------- -------------------
Cash and cash equivalents, end of period $ 8,630 $ -
==================== ===================
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of property and equipment and intangible
assets in exchange for convertible preferred stock
and warrants to purchase convertible preferred stock $ - $ 10,920
</TABLE>
See accompanying notes to financial statements.
4
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JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1 -- GENERAL
The accompanying unaudited financial statements of JNI Corporation (the
"Company") for the three and nine month periods ended September 30, 2000 and
1999 have been prepared on the same basis as the audited financial statements
for the year ended December 31, 1999 and, in the opinion of management, include
all adjustments (consisting only of normal recurring items) that the Company
considers necessary for a fair presentation of its financial position, results
of operations, and cash flows for such periods. However, the accompanying
financial statements do not contain all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. The interim financial statements and notes are presented as
permitted by the requirements of Form 10-Q and do not contain certain
information included in the Company's annual financial statements and notes
thereto. These financial statements should be read in conjunction with the
Company's audited financial statements and notes thereto presented in its Annual
Report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999
Annual Report"), as filed with the Securities and Exchange Commission. The
interim financial information contained in this Quarterly Report is not
necessarily indicative of the results to be expected for any other interim
period or for the entire year.
NOTE 2 -- INVENTORY
Components of inventories are as follows:
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<CAPTION>
AS OF
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SEPTEMBER 30 DECEMBER 31
2000 1999
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Inventories:
Raw materials.............................. $ 7,859 $ 3,027
Work in process............................ 2,682 299
Finished goods............................. 1,913 720
------------ -------------
Total.......................... $ 12,454 $ 4,046
============ =============
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NOTE 3 -- REVENUE RECOGNITION
Due to its changing product mix, during the second quarter of 2000 the
Company began to recognize revenue from sales to its distributors that have
contractual rights of return upon shipment by the distributors to their end-user
customers. Revenue from product sales to all other customers continues to be
recognized upon shipment.
NOTE 4 -- RECONCILIATION OF NET INCOME AND SHARES USED IN PER SHARE COMPUTATIONS
Earnings per share is computed using the weighted average number of
shares of common stock outstanding and is presented for basic and diluted
earnings per share. Basic earnings per share is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding during the period increased to include, if dilutive, the
number of additional common shares that would have been outstanding if the
potential common shares had been issued. The dilutive effect of outstanding
stock options is reflected in diluted earnings per share by application of the
treasury stock method.
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JNI CORPORATION
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth the computation of basic and diluted earnings per
share:
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- --------------------------------
2000 1999 2000 1999
------------------------------- --------------------------------
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Numerator:
Net income.............................................. $ 4,353 $ 440 $ 7,969 $ 2,207
Denominator:
Denominator for basic earnings per share -
weighted average shares outstanding.................. 23,934,000 420,000 22,981,000 420,000
Effect of dilutive securities:
Dilutive warrants outstanding........................ - 840,000 - 840,000
Dilutive options outstanding......................... 3,164,000 4,079,000 3,708,000 3,884,000
Convertible preferred stock.......................... - 17,723,000 - 17,723,000
Employee stock purchase plan shares.................. 8,000 - 23,000 -
------------------------------- --------------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares..................... 27,106,000 23,062,000 26,712,000 22,867,000
=============================== ================================
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NOTE 5 -- COMPREHENSIVE INCOME
The Company presents unrealized gains and losses on the Company's
available-for-sale securities in its statement of stockholders' equity (deficit)
and comprehensive income on an annual basis and in a footnote in its quarterly
reports. During the three and nine months ended September 30, 2000, total
comprehensive income was $4,396 and $7,992, respectively. Other comprehensive
income or loss consists of unrealized gains or losses on the Company's
marketable securities available for sale and included an unrealized gain of $43
and $23 during the three and nine months ended September 30, 2000, respectively.
During the three and nine months ended September 30, 1999, the Company did not
have marketable securities and therefore had no unrealized gains or losses on
marketable securities.
NOTE 6 -- JAYMARK REORGANIZATION
On July 24, 2000, Jaymark, Inc., previously the parent company of JNI
Corporation, distributed 14,175,000 shares to its stockholders in a
reorganization transaction which resulted in Jaymark's liquidation and
dissolution and eliminated control of JNI by Jaymark. Under a reorganization
agreement among JNI, Jaymark and two of Jaymark's subsidiaries, JNI facilitated
Jaymark's reorganization and liquidating distribution in exchange for certain
lock-up agreements that restrict Jaymark stockholders' ability to sell the JNI
shares received in the distribution.
NOTE 7 -- SUBSEQUENT EVENT
During October 2000, the Company completed a public offering of
5,175,000 shares of common stock (of which 1,000,000 shares were sold by the
Company and 4,175,000 were sold by selling stockholders) at a price to the
public of $74.00 per share, which resulted in net proceeds to the Company of
$69,930 after the payment of underwriters' commission but before the deduction
of offering expenses.
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS: NO ASSURANCES INTENDED
This Report (including the following section regarding Management's
Discussion and Analysis of Financial Condition and Results of Operations)
contains forward-looking statements regarding the Company and its business,
financial condition, results of operations and prospects. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
and similar expressions or variations of such words are intended to identify
forward-looking statements, but are not the exclusive means of identifying
forward-looking statements in this Report. Additionally, statements concerning
future matters such as the development of new products, enhancements or
technologies, sales levels, expense levels and other statements regarding
matters that are not historical are forward-looking statements.
Although forward-looking statements in this Report reflect the good faith
judgment of the Company's management, such statements can only be based on facts
and factors currently known by the Company. Consequently, forward-looking
statements are inherently subject to risks and uncertainties and actual results
and outcomes may differ materially from the results and outcomes discussed in or
anticipated by the forward-looking statements. Factors that could cause or
contribute to such differences in results and outcomes include without
limitation those discussed under the heading "Other Information" in Item 5
below, as well as those discussed elsewhere in this Report and those discussed
in the Company's Annual Report on Form 10-K for the year ended December 31,
1999. Readers are urged not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Report. The Company
undertakes no obligation to revise or update any forward-looking statements in
order to reflect any event or circumstance that may arise after the date of this
Report. Readers are urged to carefully review and consider the various
disclosures made by the Company in this Report, which attempt to advise
interested parties of the risks and factors that may affect the Company's
business, financial condition, results of operations and prospects.
OVERVIEW
We are a leading developer and manufacturer of Fibre Channel hardware and
software products that form critical elements of Storage Area Networks, or SANs.
We offer a broad line of host bus adapters, application specific integrated
circuits (ASICs) and software that provide high bandwidth for data
communication, high speed data transmission without degradation over distances
of up to ten kilometers, guaranteed data delivery and scalability to large
numbers of network connections. We commenced operations in 1993 as a division of
Jaycor, Inc. In February 1997, Jaycor effected a corporate reorganization in
which it formed two new corporations: Jaymark, Inc. and JNI. Jaymark became the
parent of Jaycor and of JNI in that reorganization transaction. Jaycor then
transferred technology and assets relating to its Fibre Channel business to
Jaymark, which in turn contributed these assets to JNI. While operating as a
division of Jaycor, we shipped our first commercially available Fibre Channel
products in 1995. We commenced volume production of host bus adapters in 1996,
and we are currently the leading independent supplier of host bus adapters for
the Sun Solaris operating system. In late 1998, we obtained our initial
certification from an OEM customer for our host bus adapters for the PCI
interface, and in 1999 we introduced a much lower cost host bus adapter for the
PCI interface based on Fibre Channel products and technology acquired from
Adaptec. We first achieved operating income in the quarter ended September 30,
1998. We completed our initial public offering in October 1999. In July 2000,
Jaymark, which owned 14,175,000 shares of JNI common stock, representing
approximately 60% of our outstanding common stock as of June 30, 2000,
distributed those shares to its stockholders in a reorganization transaction
which resulted in Jaymark's liquidation and dissolution and eliminated control
of JNI by Jaymark. Under a reorganization agreement among JNI, Jaymark and two
of Jaymark's subsidiaries, we facilitated Jaymark's reorganization and
liquidating distribution in exchange for certain lock-up agreements that
restrict Jaymark's stockholders' ability to sell the JNI shares received in the
distribution. In October 2000, we completed a second public offering.
We derive substantially all of our revenue from sales of our FibreStar line
of host bus adapters. Historically, we have derived the substantial majority of
our revenues from sales of our FibreStar host bus adapters designed for the SBus
specification. Sun Microsystems manufactures and sells substantially all of the
servers that incorporate the SBus interface. We believe Sun has begun to phase
out the SBus interface in its workstations and low-end servers and may in the
future discontinue using the SBus interface in its high-end servers.
Accordingly, we expect that sales
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of our products designed to work with the SBus interface will eventually
decline, and that our host bus adapters designed for the PCI bus will account
for an increasing proportion of revenues in the future. We also derive revenues
from sales of our proprietary Emerald ASICs. Historically, a limited number of
OEMs and distributor customers has accounted for a significant majority of our
total net revenues in each fiscal period. The loss of any of our key customers,
or a significant reduction in sales to any of those customers, could
significantly reduce our net revenues. We anticipate that our operating results
in any given period will continue to depend to a significant extent upon
revenues from a small number of customers.
Due to our changing product mix, during the second quarter of 2000 we began
recognizing revenue from sales to our distributors that have contractual rights
of return only when these distributors ship our products to their end-user
customers. We continue to recognize revenue upon shipment for sales to all other
customers. We provide allowances for estimated sales returns at the time of
revenue recognition. We sell to our distribution channel customers under volume
purchase agreements. Some of our agreements with distribution channel customers
provide for stock rotation, where the customer may return product provided that
it places a new order for replacement product.
Cost of revenues is comprised principally of payments to our contract
manufacturers, costs of components, material expediting charges, final assembly
costs, manufacturing and quality-related costs, inventory management costs and
support costs. We expect our gross margin to be affected by many factors,
including changes in average unit selling price, fluctuations in demand for our
products, the mix of products sold, the mix of sales channels through which our
products are sold, the timing and size of customer orders, fluctuations in
manufacturing volumes, changes in costs of components, inventory write-offs, new
product introductions both by us and our competitors.
Research and development expenses consist primarily of salaries and
related expenses for engineering personnel, fees paid to consultants and
outside service providers, depreciation of development and test equipment,
prototyping expenses related to the design, development, testing and
enhancements of our products and the cost of computer support services. We
expense all research and development costs as incurred.
Selling and marketing expenses consist primarily of salaries, commissions
and related expenses for personnel engaged in marketing, sales and customer
support functions, public relations, advertising, promotional and trade show
costs and travel expenses.
General and administrative expenses include salaries and related expenses
for personnel engaged in finance, human resources, information technology,
administrative and legal and accounting fees.
Amortization of intangible assets arises from the amortization of intangible
assets acquired in connection with the purchase of products and technology from
Adaptec in November 1998 for 1,132,895 shares of common stock and a warrant to
purchase 840,000 shares of common stock. As a result of the consideration paid
to Adaptec, we recorded $11.6 million in intangible assets related to the core
technology acquired which is being amortized over an estimated useful life of
three years.
Amortization of stock-based compensation relates to deferred compensation
recorded in connection with the grant of stock options to employees in all
operating expense categories where the option exercise price is less than the
fair value of the underlying shares of common stock as determined for financial
reporting purposes. We have recorded deferred compensation within stockholders'
equity of approximately $2.2 million which is being amortized over the vesting
period of the related stock options, generally four years.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET REVENUES. Net revenues increased $19.1 million, or 177%, to $30.0
million in the three months ended September 30, 2000 from $10.9 million in the
three months ended September 30, 1999. The increase was due to an increase in
sales of SBus and PCI host bus adapter products, with a $14.8 million increase
in SBus sales and a $4.9 million increase in PCI sales, partially offset by a
decrease in sales of our ASICs. The increase in net revenues reflects the
increased demand for our products and the continued growth in the market for
Fibre Channel products.
GROSS MARGIN. Gross margin increased $11.2 million, or 170%, to $17.8
million in the three months ended September 30, 2000 from $6.6 million in the
three months ended September 30, 1999. Gross margin as a percentage of net
revenues decreased to 59.3% during the three months ended September 30, 2000
from 60.9% during the three months ended September 30, 1999. The decrease was
due to increased sales of our PCI host bus adapter products
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which generally have lower gross margins than our SBus host bus adapter
products. Gross margins for the three months ended September 30, 2000 also
decreased as a result of inventory reserves recorded for slow moving and
obsolete inventory and higher prices on certain components due to industry-wide
shortages.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $2.0
million, or 65%, to $5.0 million for the three months ended September 30, 2000
from $3.0 million for the three months ended September 30, 1999. The increase
was due primarily to higher personnel costs and contracted services, resulting
from an increase in the number of personnel needed in order to staff a higher
level of research and development, and higher depreciation expense, resulting
from an increase in capital expenditures necessary to expand our research and
development efforts. As a percentage of net revenues, research and development
expenses decreased to 16.7% for the three months ended September 30, 2000 from
28.0% for the three months ended September 30, 1999. This decrease was primarily
attributable to the increase in revenues. We anticipate that research and
development expenses will increase in absolute dollars in future periods as we
hire additional personnel and introduce enhanced versions of our products.
SELLING AND MARKETING. Selling and marketing expenses increased $1.9
million, or 146%, to $3.3 million for the three months ended September 30, 2000
from $1.3 million for the three months ended September 30, 1999. The increase in
selling and marketing expenses was due primarily to an increase in personnel
costs resulting from the expansion of our sales and marketing staff, increased
trade show participation, continued spending on an advertising and marketing
program that we launched in the first quarter to focus on our premium branding
and channel expansion and increased travel expenses. Selling and marketing
expenses as a percentage of net revenues decreased to 10.9% for the three months
ended September 30, 2000 from 12.3% for the three months ended September 30,
1999 primarily due to the increase in our revenues. We anticipate that selling
and marketing expenses will increase in absolute dollars in future periods and
may increase as a percentage of net revenues as we continue our efforts to
increase brand awareness and expand our sales channel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$1.3 million, or 146%, to $2.1 million for the three months ended September 30,
2000 from $859,000 for the three months ended September 30, 1999. The increase
was primarily due to higher personnel costs arising from the addition of new
employees and additional expenses associated with being a publicly traded
company. General and administrative expenses as a percentage of net revenues
decreased to 7.0% for the three months ended September 30, 2000 from 7.9% for
the three months ended September 30, 1999. We anticipate that general and
administrative expenses will increase in absolute dollars in future periods but
will decrease as a percentage of net revenues.
AMORTIZATION OF INTANGIBLE ASSETS. We amortized $1.3 million of intangible
assets during the three months ended September 30, 2000 compared to $56,000
during the three months ended September 30, 1999. The increase in amortization
expense was attributed to the significant increase in intangible assets
resulting from the additional consideration issued to Adaptec in the third
quarter of 1999 for the Fibre Channel technology we acquired from Adaptec in
November 1998.
AMORTIZATION OF STOCK-BASED COMPENSATION. In connection with the grant of
stock options to employees, we recorded total stock-based compensation within
stockholders' equity (deficit) of $2.2 million and amortized stock-based
compensation of $161,000 and $236,000 during the three months ended September
30, 2000 and 1999, respectively.
INTEREST INCOME. Interest income of $578,000 primarily represents interest
earned on our investments in marketable securities during the three months ended
September 30, 2000. We had no interest income in the corresponding period in
1999.
INTEREST EXPENSE. Interest expense for the three months ended September 30,
1999 represents interest associated with our intercompany revolver borrowings
from Jaycor. Subsequent to our initial public offering, we repaid the
outstanding balance to Jaycor in full. Accordingly, we had no interest expense
in the three months ended September 30, 2000.
INCOME TAX PROVISION. We recognized an income tax provision of $2.1 million,
with an effective tax rate of 33.0%, during the three months ended September 30,
2000 as a result of the taxable income generated in the three months ended
September 30, 2000. During the three months ended September 30, 1999, we
recognized an income
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tax provision of $549,000, with an effective tax rate of 55.5%, as a result of
the taxable income generated in the period.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
NET REVENUES. Net revenues increased $46.8 million, or 182%, to $72.5
million in the nine months ended September 30, 2000 from $25.8 million in the
nine months ended September 30, 1999. The increase was due to an increase in
sales of SBus and PCI host bus adapter products, with a $35.3 million increase
in SBus sales and an $11.6 million increase in PCI sales, partially offset by a
decrease in sales of our ASICs. The increase in net revenues reflects the
increased demand for our products and the continued growth in the market for
Fibre Channel products.
GROSS MARGIN. Gross margin increased $27.0 million, or 168%, to $43.1
million in the nine months ended September 30, 2000 from $16.1 million in the
nine months ended September 30, 1999. Gross margin as a percentage of net
revenues decreased to 59.4% during the nine months ended September 30, 2000 from
62.4% during the nine months ended September 30, 1999. The decrease was due to
increased sales of our PCI host bus adapter products which generally have lower
gross margins than our SBus host bus adapter products. Gross margins for the
nine months ended September 30, 2000 also decreased as a result of inventory
reserves recorded for slow moving and obsolete inventory and higher prices on
certain components due to industry-wide shortages.
RESEARCH AND DEVELOPMENT. Research and development expenses increased $5.9
million, or 74%, to $13.8 million for the nine months ended September 30, 2000
from $8.0 million for the nine months ended September 30, 1999. The increase was
due primarily to higher personnel costs and contracted services, resulting from
an increase in the number of personnel needed in order to staff a higher level
of research and development, and higher depreciation expense, resulting from an
increase in capital expenditures necessary to expand our research and
development efforts. As a percentage of net revenues, research and development
expenses decreased to 19.1% for the nine months ended September 30, 2000 from
30.9% for the nine months ended September 30, 1999. This decrease was primarily
attributable to the increase in revenues.
SELLING AND MARKETING. Selling and marketing expenses increased $5.1
million, or 151%, to $8.5 million for the nine months ended September 30, 2000
from $3.4 million for the nine months ended September 30, 1999. The increase in
selling and marketing expenses was due primarily to an increase in personnel
costs resulting from the expansion of our sales and marketing staff, increased
trade show participation and continued spending on an advertising and marketing
program that we launched in the first quarter to focus on our premium branding
and channel expansion. Selling and marketing expenses as a percentage of net
revenues decreased to 11.8% for the nine months ended September 30, 2000 from
13.2% for the nine months ended September 30, 1999 primarily due to the increase
in our revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$3.4 million, or 157%, to $5.5 million for the nine months ended September 30,
2000 from $2.1 million for the nine months ended September 30, 1999. The
increase was primarily due to higher personnel costs arising from the addition
of new employees and additional expenses associated with being a public company.
General and administrative expenses as a percentage of net revenues decreased to
7.6% for the nine months ended September 30, 2000 from 8.3% for the nine months
ended September 30, 1999 primarily due to the increase in our revenues.
AMORTIZATION OF INTANGIBLE ASSETS. We amortized $4.0 million of intangible
assets during the nine months ended September 30, 2000 compared to $166,000
during the nine months ended September 30, 1999. The increase in amortization
expense was attributed to the significant increase in intangible assets
resulting from the additional consideration issued to Adaptec in the third
quarter of 1999 for the Fibre Channel technology we acquired from Adaptec in
November 1998.
AMORTIZATION OF STOCK-BASED COMPENSATION. In connection with the grant of
stock options to employees, we recorded total stock-based compensation within
stockholders' equity (deficit) of $2.2 million and amortized stock-based
compensation of $502,000 and $637,000 during the nine months ended September 30,
2000 and 1999, respectively.
INTEREST INCOME. Interest income of $1.6 million primarily represents
interest earned on our investments in marketable securities during the nine
months ended September 30, 2000. We had no interest income in the corresponding
period in 1999.
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INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1999 represents interest associated with our intercompany revolver borrowings
from Jaycor. Subsequent to our initial public offering, we repaid the
outstanding balance to Jaycor in full. Accordingly, we had no interest expense
in the nine months ended September 30, 2000.
INCOME TAX PROVISION. We recognized an income tax provision of $4.4 million,
with an effective tax rate of 35.4%, during the nine months ended September 30,
2000 as a result of the taxable income generated in the nine months ended
September 30, 2000. During the nine months ended September 30, 1999, we
recognized an income tax benefit of $856,000 due primarily to the utilization of
net operating loss carryforwards and the release of a deferred tax asset
valuation allowance. The valuation allowance was released during the second
quarter of 1999 based on management's determination at the time that our ability
to realize such a benefit was more likely than not. This determination was based
on our historical operating results, which included the fourth consecutive
quarter of pre-tax net income (before non-deductible stock-based compensation),
and anticipated future operating results.
LIQUIDITY AND CAPITAL RESOURCES
Prior to our initial public offering in October 1999, borrowings from
Jaycor, Inc., a wholly-owned subsidiary of our parent corporation Jaymark, Inc.,
were our principal source of working capital. Upon the completion of our initial
public offering, we raised approximately $49.5 million after the payment of
underwriters' commissions but before the deduction of offering expenses.
Subsequent to the initial public offering, all amounts due to Jaycor were paid
in full, and we no longer borrow from Jaycor. In October 2000, we completed a
second public offering in which we raised approximately $69.9 million after the
payment of underwriters' commissions but before the deduction of offering
expenses. The proceeds from our public offerings and cash flow generated from
operations are currently the primary source of funding for our operations.
During the nine months ended September 30, 2000, cash provided by operating
activities was $7.3 million, compared to $1.3 million of cash provided by
operating activities during the nine months ended September 30, 1999. The cash
provided by operations reflects net income before depreciation and amortization
of approximately $14.0 million, increased by an increase in deferred revenue,
accounts payable, accrued liabilities and the tax benefit from stock option
transactions of $12.8 million and offset by the increase in accounts receivable,
inventories, deferred income taxes and other assets and liabilities of
approximately $19.4 million. The cash provided by operations during the nine
months ended September 30, 1999 reflects net income before depreciation and
amortization of approximately $4.0 million, increased by an increase in accounts
payable and accrued liabilities of $2.8 million and offset by the increase in
accounts receivable, inventories, deferred income taxes and other assets of
approximately $5.8 million.
Net cash used in investing activities was $5.3 million in the nine months
ended September 30, 2000 and consisted of capital expenditures and purchases of
marketable securities available for sale. Net cash used in investing activities
was $2.1 million in the nine months ended September 30, 1999 and consisted
solely of capital expenditures. The capital expenditures reflect our investment
in computer and lab equipment, software development tools and facilities, and
manufacturing equipment which are required to support our business expansion.
Net cash provided by financing activities was $1.6 million in the nine
months ended September 30, 2000, which resulted from net proceeds from the
issuance of common stock, primarily consisting of proceeds from the exercise of
stock options and purchases of shares under our employee stock purchase plan.
Net cash provided by financing activities was $797,000 in the nine months ended
September 30, 1999, all of which was provided by advances from Jaycor.
We had $49.9 million of cash and cash equivalents and investments and $62.4
million of working capital at September 30, 2000. We believe that the proceeds
from our public offerings (including the $69.9 million of net proceeds we
received in our October 2000 public offering), together with expected cash flows
from operations, will be sufficient to meet working capital needs at least
through the next 12 months. Our future capital requirements will depend on many
factors, including the rate of revenue growth, the timing and extent of spending
to support product development efforts and expansion of sales and marketing, the
timing of introductions of new products and enhancements to existing products,
and market acceptance of our products. There can be no assurance that additional
equity or debt financing, if required, will be available on acceptable terms, or
at all.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily
to changes in the fair market value of our investments and the amount of
interest income earned on our investment portfolio. In the normal course of
business, we employ established policies and procedures to manage our exposure
to changes in the fair market value of our investments.
Under our current policies, we do not use interest rate derivative
instruments to manage exposure to interest rate changes. We ensure the safety
and preservation of our invested principal funds by limiting default risks,
market risk and reinvestment risk. We mitigate default risk by investing in
investment grade securities. A hypothetical 100 basis point adverse move in
interest rates along the entire interest rate yield curve would not materially
affect the fair value of our interest sensitive financial instruments at
September 30, 2000.
Currently, all of our sales are denominated in U.S. dollars, so we are not
exposed to foreign currency related risks.
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
In September 1999, we filed a registration statement under the Securities
Act of 1933 to sell up to 2.8 million newly issued shares of common stock and
2.2 million shares held by our principal stockholder, Jaymark, Inc. in our
initial public offering ("IPO"). The effective date of the registration
statement was October 26, 1999, under Commission File No. 333-86501. The
offering was managed by Donaldson, Lufkin & Jenrette Securities Corporation,
Hambrecht & Quist LLC, Bear, Stearns & Co. Inc. and DLJdirect Inc. and closed on
October 29, 1999 after we sold an aggregate of 2.8 million shares of common
stock and Jaymark sold 2.1 million shares of common stock at an initial public
offering price per share of $19.00. Also on October 29, 1999, Jaymark sold an
additional 735,000 shares of common stock at an initial public offering price
per share of $19.00 upon the underwriters' exercise in full of their
over-allotment option. The IPO resulted in gross proceeds to us of $53.2
million, $3.7 million of which was applied toward the underwriting discount.
Other expenses related to the offering totaled approximately $1.4 million. Our
net proceeds totaled $48.1 million, all of which were deposited into our
accounts in October 1999. We did not receive any proceeds from Jaymark's sale of
shares in the offering and pursuant to the underwriters' over-allotment option.
Through September 30, 2000, the offering proceeds were applied as follows: $3.1
million to repay our indebtedness to Jaymark and $45.0 million for temporary
investments in marketable securities.
ITEM 5. OTHER INFORMATION
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
RISKS RELATING TO OUR BUSINESS
WE HAVE A LIMITED HISTORY OF PROFITABILITY WHICH MAY BE DIFFICULT TO MAINTAIN.
We shipped our first commercially available Fibre Channel products in 1995,
but we did not achieve operating income until the quarter ended September 30,
1998. You should consider the risks and difficulties frequently encountered by
companies such as ours in new and rapidly evolving markets. Although our net
revenues have grown in recent quarters, we may not be able to sustain this
growth, and we may not realize sufficient net revenues to maintain
profitability. In addition, because of the competition in the Fibre Channel and
SAN markets and the evolving nature of these markets, sustaining profitability
may be extremely challenging.
OUR QUARTERLY OPERATING RESULTS ARE VOLATILE AND MAY CAUSE OUR STOCK PRICE TO
FLUCTUATE.
Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside of
our control. Accordingly, you should not rely on quarter-to-quarter comparisons
of our operating results as an indication of future performance. It is possible
that in some future periods our operating results will be below the expectations
of public market analysts and investors. In this event, the price of
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our common stock will likely decline. Factors that may cause our revenues, gross
margins and operating results to fluctuate include the following:
- the size, timing, terms and fluctuations of customer orders,
particularly large orders from our significant OEM or reseller
customers;
- changes in customer buying patterns;
- declining average selling prices of our products;
- the timing of the introduction or enhancement of products by us, our
significant OEM or reseller customers or our competitors;
- our ability to obtain sufficient supplies of single- or limited-source
components of our products;
- fluctuations in costs of goods sold and potential write-offs of obsolete
inventory as we transition to new products; and
- operating expenses, particularly in connection with our strategies to
increase brand awareness or to invest in accelerated research and
development.
Because our revenues in a given quarter depend substantially on orders
booked in that quarter, a decrease in the number of orders we receive is likely
to adversely and disproportionately affect our quarterly operating results. This
is because our expense levels are partially based on our expectations of future
sales and we may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. As a result, our expenses may be
disproportionately large as compared to sales in a quarter with reduced orders.
Any shortfall in sales in relation to our quarterly expectations or any delay of
customer orders would likely have an immediate and adverse impact on our
business, quarterly operating results and financial condition.
DELAYS IN PRODUCT DEVELOPMENT COULD ADVERSELY AFFECT OUR MARKET POSITION OR
CUSTOMER RELATIONSHIPS.
We have experienced delays in product development in the past and may
experience similar delays in the future. Given the short product life cycles in
the markets for our products, any delay or unanticipated difficulty associated
with new product introductions or product enhancements could cause us to lose
customers and damage our competitive position. Prior delays have resulted from
numerous factors, such as:
- changing OEM product specifications;
- undetected errors or failures in software and hardware;
- changing market or competitive product requirements;
- difficulties in hiring and retaining necessary personnel;
- difficulties in reallocating engineering resources and other resource
limitations;
- difficulties with independent contractors;
- unanticipated engineering complexity; and
- delays in the acceptance or shipment of products by OEM customers.
BECAUSE WE DEPEND ON A SMALL NUMBER OF OEM AND DISTRIBUTION CHANNEL CUSTOMERS
FOR A SIGNIFICANT PORTION OF OUR REVENUES IN EACH PERIOD, THE LOSS OF ANY OF
THESE CUSTOMERS, THE FAILURE TO OBTAIN CERTIFICATIONS OR ANY
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CANCELLATION OR DELAY OF A LARGE PURCHASE BY ANY OF THESE CUSTOMERS COULD
SIGNIFICANTLY REDUCE OUR NET REVENUES.
Historically, a limited number of OEMs and distribution channel customers
has accounted for a significant majority of our total net revenues. The loss of
any of our key customers, or a significant reduction in sales to those
customers, could significantly reduce our net revenues. For the nine months
ended September 30, 2000, our top three customers accounted for 51% of our net
revenues. We anticipate that our operating results in any given period will
continue to depend to a significant extent upon revenues from a small number of
customers.
Before we can sell our products to an OEM or its associated distribution
channel, that OEM must certify our products. The certification process can take
up to six months. This process requires the commitment of OEM personnel and test
equipment, and we compete with our competitors for these resources. Any delays
in obtaining these certifications or any failure to obtain these certifications
would adversely affect our ability to sell our products. In addition, because
none of our customers is contractually obligated to purchase any fixed amount of
products from us in the future, they may stop placing orders with us at any
time, regardless of any forecast they may have previously provided. If any of
our large customers stops or delays purchases, our revenues and profitability
would be adversely affected, which could cause our stock price to decline. We
cannot be certain that we will retain our current OEM or distribution channel
customers or that we will be able to recruit additional or replacement
customers. As is common in an emerging technology industry, our agreements with
OEMs and distribution channel customers are typically non-exclusive and often
may be terminated by either party without cause. Moreover, many of our OEM and
distribution channel customers utilize or carry competing product lines. If we
were to suddenly lose one or more important OEM or distribution channel
customers to a competitor, our business, operating results or financial
condition could be materially adversely affected. Furthermore, some of our OEM
customers could develop products internally that would replace our products. The
resulting reduction in sales of our products to any such OEM customers, in
addition to the increased competition presented by these customers, could have a
material adverse effect on our business, operating results or financial
condition.
BECAUSE A SIGNIFICANT PORTION OF OUR PRODUCTS IS DESIGNED TO WORK WITH HIGH-END
SERVERS FROM SUN MICROSYSTEMS, INC. AND STORAGE ARRAYS FROM EMC CORPORATION, OUR
BUSINESS COULD SUFFER IF SUN OR EMC DISCONTINUES PRODUCTION OF SUCH EQUIPMENT OR
IF WE FAIL TO DEVELOP PRODUCTS THAT WORK EFFECTIVELY WITH SUCH EQUIPMENT.
Our host bus adapters have achieved their greatest market acceptance in
computing environments built with high-end servers from Sun Microsystems due to
our products' interoperability with the Sun Solaris operating system and the
SBus interface developed and promoted by Sun. In addition, we believe that more
than half of our host bus adapters are used to form connections to storage
arrays manufactured by EMC. Accordingly, we depend to a certain extent upon the
increased market penetration of Sun and EMC systems and our ability to continue
to develop products that interoperate effectively in Sun and EMC environments.
If the market for Sun and EMC systems does not continue to expand or we do not
maintain and increase our market share in this market, our business and results
of operations may be harmed.
BECAUSE WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR KEY
COMPONENTS, WE ARE SUSCEPTIBLE TO SUPPLY SHORTAGES THAT COULD ADVERSELY AFFECT
OUR OPERATING RESULTS.
We rely on third-party suppliers for components that are used in our
products, and we have experienced delays and difficulty in securing components
in the past. In times of shortage, we have been required to pay, and may in the
future be required to pay, substantial premiums for components, which could
adversely affect our gross margins. Key components that we use in our products
may, from time to time, only be available from single sources with which we do
not have long-term contracts. In particular, our SBus host bus adapters use
components we obtain from sole source suppliers. The components we use for our
products are based on an emerging technology and may not be available with the
performance characteristics or in the quantities that we require. Any inability
to supply products due to a lack of components or to redesign products to
incorporate alternative components in a timely manner could materially adversely
affect our business, operating results or financial condition.
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OUR OPERATING RESULTS MAY SUFFER BECAUSE OF INCREASING COMPETITION IN THE FIBRE
CHANNEL MARKET, AS WELL AS ADDITIONAL COMPETITION FROM ALTERNATIVE DATA STORAGE
SOLUTIONS.
The market in which we compete is intensely competitive. As a result, we
will face a variety of significant challenges, including rapid technological
advances, price erosion, changing customer preferences and evolving industry
standards. Our competitors continue to introduce products with improved
price/performance characteristics, and we will have to do the same to remain
competitive. Increased competition could result in significant price
competition, reduced revenues, lower profit margins or loss of market share, any
of which would have a material adverse effect on our business, operating results
and financial condition. We cannot be certain that we will be able to compete
successfully against either current or potential competitors in the future.
Many of our current and potential competitors, including Emulex Corporation,
Qlogic Corporation, Interphase Corporation, Hewlett-Packard, Agilent
Technologies, Inc., LSI Logic Corporation and Adaptec, Inc., have substantially
greater financial, technical, marketing and distribution resources than we have.
We face the threat of potential competition from new entrants into the Fibre
Channel market and the SBus segment of that market, which continues to represent
a significant portion of our revenues. These potential new entrants include
large technology companies that may develop or acquire differentiating
technology and then apply their resources, including established distribution
channels and brand recognition, to obtain significant market share. Emerging
companies attempting to obtain a share of the existing market also may compete
with us. Our products may also compete at the end-user level with other current
or future technology alternatives, such as SCSI, InfiniBand and Gigabit
Ethernet. Further, businesses that implement SANs may select fully-integrated
SAN systems that are offered by large technology companies. Because such systems
do not interoperate with products from independent open system suppliers, like
us, customers that invest in these systems will be less likely to purchase our
products. Other technologies designed to address the applications served by
Fibre Channel today are under development, and because we focus exclusively on
Fibre Channel, our business would suffer as a result of competition from such
competing technologies.
CONSOLIDATION OF OUR COMPETITORS MAY CAUSE US TO LOSE CUSTOMERS AND HURT OUR
SALES.
Consolidation in the data storage industry may strengthen our competitors'
positions in our market, cause us to lose customers and hurt our sales. In
addition, acquisitions may strengthen our competitors' financial, technical and
marketing resources and provide them with access to potential customers, which
may harm our business.
OUR FAILURE TO RETAIN THE PRINCIPAL MEMBERS OF OUR MANAGEMENT TEAM OR OUR
FAILURE TO ATTRACT AND RETAIN KEY TECHNICAL, SELLING AND MARKETING PERSONNEL
COULD ADVERSELY AFFECT OUR BUSINESS.
Our success depends upon our retention of the principal members of our
senior management team and other key technical, selling and marketing personnel.
The loss of the services of key members of our management team might
significantly delay or prevent the achievement of our development and strategic
objectives. We do not maintain key person life insurance on any members of our
senior management team, and these employees are under no obligation to continue
providing services to JNI. Moreover, many members of our senior management team
hold stock options that have become fully vested, which may reduce these
individuals' incentives to continue to work for JNI.
Terry M. Flanagan, our President and Chief Executive Officer, has informed
us that he would like to retire. Accordingly, we are actively engaged in a
process to find a suitable candidate to replace Dr. Flanagan as our Chief
Executive Officer. Dr. Flanagan is participating in the search process and plans
to stay with JNI until a successor is found. Dr. Flanagan has also agreed to
provide consulting services to us for a period of twelve months following his
retirement.
We must continue to attract, train and retain technical, selling and
marketing personnel. In particular, we are currently seeking to hire additional
skilled development engineers who are currently in short supply. Competition for
such highly skilled employees in our industry is intense, and we cannot be
certain that we will be successful in recruiting or retaining such personnel. We
also believe that our success depends to a significant extent on the ability of
our key personnel to operate effectively, both individually and as a group. Many
of our employees have only recently joined us, and we intend to expand our
employee base significantly. If we are unable to identify, hire and integrate
new employees in a timely and cost-effective manner, our operating results may
suffer.
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BECAUSE WE FOCUS EXCLUSIVELY ON FIBRE CHANNEL PRODUCTS, OUR REVENUES WILL BE
LIMITED IF THE FIBRE CHANNEL MARKET DOES NOT CONTINUE TO EXPAND.
The growth of the market for our products is depends upon the continued
acceptance of Fibre Channel technology as an alternative to other technologies
utilized for network and storage communications. If the Fibre Channel market
develops more slowly than anticipated or attracts more competitors than we
expect, our business, operating results and financial condition would be
materially adversely affected. We cannot be certain that Fibre Channel products
will gain broader market acceptance or that customers will choose our technology
and products.
To achieve widespread market acceptance, Fibre Channel must supplant current
widely accepted alternative technologies such as Small Computer Systems
Interface, or SCSI. It may be difficult to convince new customers to adopt Fibre
Channel technology because many technology companies with SCSI-based product
portfolios already have:
- well-established relationships with our current and potential customers;
- extensive knowledge of the markets we serve;
- better name recognition; and
- extensive development, selling and marketing resources.
If Fibre Channel does not replace existing technologies such as SCSI in
emerging applications such as SANs or otherwise achieve broad market acceptance,
our growth will be limited. Additionally, new technologies are currently in
development that may compete for market share with Fibre Channel if they are
successfully developed and commercialized. Because these competing new
technologies are likely to have support from technology companies with more
significant resources than we and other Fibre Channel companies have, they may
limit the growth of the Fibre Channel market and therefore our growth.
IN OUR INDUSTRY, TECHNOLOGY AND OTHER STANDARDS CHANGE RAPIDLY, AND WE MUST KEEP
PACE WITH THE CHANGES TO COMPETE SUCCESSFULLY.
The market for our products is characterized by rapidly changing technology,
evolving industry standards and the frequent introduction of new products and
enhancements. Our future success depends in a large part on our ability to
enhance our existing products and to introduce new products on a timely basis to
meet changes in customer preferences and evolving industry standards.
Additionally, changes in technology and customer preferences could potentially
render our current products uncompetitive or obsolete. We cannot be certain that
we will be successful in designing, supplying and marketing new products or
product enhancements that respond to such changes in a timely manner and achieve
market acceptance. We also cannot be certain that we will be able to develop the
underlying core technologies necessary to create new products and enhancements,
or that we will be able to license the core technologies from third parties. In
addition, because our products are designed to work with software produced by
third parties, our operating results could be adversely affected if such third
parties delay introduction of new versions of their software for which we have
designed new products or if they make unanticipated modifications to such
software. If we are unable, for technological or other reasons, to develop new
products or enhance existing products in a timely manner in response to
technological and market changes, our business, operating results and financial
condition would be materially adversely affected.
THE SAN MARKET IN WHICH WE COMPETE IS NEW AND UNPREDICTABLE, AND IF THIS MARKET
DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE, OUR BUSINESS WILL SUFFER.
Our products are principally purchased for use in SANs. Accordingly,
widespread adoption of SANs as an integral part of data-intensive enterprise
computing environments is crucial to our future success. The market for SANs and
the related equipment, including the host bus adapters, ASICs and management
software we offer, has only recently begun to develop and is rapidly evolving.
Because this market is new, it is difficult to predict its potential size or
future growth rate. Potential end-users who have invested substantial resources
in their existing data storage and management systems may be reluctant or slow
to adopt a new approach like a SAN. If this market does not develop as rapidly
as we anticipate, our operating results may be below the expectations of public
market analysts and investors, which would likely cause our stock price to
decline. Furthermore, the evolution of the SAN
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architecture is uncertain. If products are developed that incorporate the host
bus adapter or do not require separate adapters, our adapter products may be
rendered obsolete or unnecessary.
IF WE DO NOT DEVELOP, MARKET AND SELL HOST BUS ADAPTERS THAT INTEROPERATE WITH
OPERATING SYSTEMS OTHER THAN THE SUN SOLARIS OPERATING SYSTEM, THAT INCORPORATE
OUR PROPRIETARY EMERALD ASICS AND THAT USE THE PCI BUS ARCHITECTURE, OUR
BUSINESS WILL SUFFER.
We have derived a substantial majority of our historical revenues from sales
of host bus adapters that include software designed to work with the Sun
Microsystems Solaris operating system, that incorporate third-party ASICs and
that use the Sun SBus interface. While we historically have sold products that
use the PCI interface as well as the SBus interface, we only recently have begun
to ship products that interoperate with operating systems other than the Sun
Solaris operating system and incorporate our proprietary Emerald ASICs.
Our success depends on our ability to continue to develop, market and sell
products with these features. These new products remain in the early stage of
market introduction and are subject to the risks inherent in the
commercialization of new products.
Host bus adapters designed for environments using the Sun Solaris operating
system comprised a substantial majority of the host bus adapters we sold during
the nine months ended September 30, 2000. While we have developed and have begun
to introduce products that interoperate with other operating systems, we may not
be successful in developing solutions for all major operating systems or in
marketing the new products we develop, and we cannot assure you that our
intended customers will purchase our products instead of competing products. Our
failure to obtain a significant share of the market for host bus adapters
compatible with operating systems other than the Sun Solaris operating system
would impair our growth and harm our results of operations.
We also recently have made our first commercial shipments of host bus
adapters that incorporate our proprietary Emerald family of ASICs rather than
the third-party ASICs we historically have used. We are seeking additional OEM
certifications of our host bus adapters that incorporate our Emerald ASICs, but
we may not obtain these certifications on a timely basis or at all. In addition,
we must continue to develop and release new and enhanced versions of our ASICs
to remain competitive, which will require further certifications by our OEM
customers. Accordingly, we may not be successful in marketing products using our
proprietary ASICs, and we cannot assure you that our intended customers will
purchase these products instead of competing products.
Finally, we believe Sun Microsystems has begun to phase out the SBus
interface in its workstations and low-end servers and may in the future
discontinue using the SBus interface in its high-end servers. A significant
portion of our products is currently used to connect high-end Sun servers that
incorporate SBus interfaces to SANs, and these products have accounted for the
substantial majority of our historical revenues. In particular, sales of our
FibreStar host bus adapters designed to work with the SBus interface accounted
for approximately 78% of our net revenues for the nine months ended September
30, 2000, 83% of our net revenues in 1999 and 86% of our net revenues in 1998.
Because Sun Microsystems has announced its intention to phase out the SBus
interface in its workstations and low-end servers, we anticipate that the
percentage of our revenues attributable to sales of our SBus host bus adapters
will decline over time. If Sun Microsystems accelerates its phase out of the
SBus interface, our business would suffer due to decreased sales of SBus host
bus adapters.
IF WE FAIL TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS, OUR RESULTS OF OPERATIONS COULD BE HARMED SIGNIFICANTLY.
Our success will depend on our continuing ability to develop and manage
relationships with significant OEMs, resellers and systems integrators, as well
as on the sales efforts and success of these customers. We may not be able to
expand our distribution channels or manage our distribution relationships
successfully, and our customers may not market our products effectively. Our
failure to expand our distribution channels or manage successfully our
distribution relationships or the failure of our customers to sell our products
could harm our results of operations.
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CONTINUED RAPID GROWTH WILL STRAIN OUR OPERATIONS AND REQUIRE THAT WE INCUR
COSTS TO UPGRADE OUR INFRASTRUCTURE.
We have recently experienced a period of rapid growth and expansion which
has placed, and continues to place, a significant strain on our resources.
Unless we manage such growth effectively, we may make mistakes in operating our
business such as inaccurate sales forecasting, material planning, inventory
management or financial reporting, which may result in unanticipated
fluctuations in our operating results. Our management team has had limited
experience managing such rapidly growing companies on a public or private basis.
We may not be able to install adequate control systems in an efficient and
timely manner, and our current or planned personnel, systems, procedures and
controls may not be adequate to support our future operations. In addition,
although we test substantially all of our products prior to shipment, some of
our customers require additional testing of the products we sell to them. During
the nine months ended September 30, 2000, more than half of the units we shipped
were subject to such additional tests. If our capacity to conduct this testing
does not expand concurrently with the anticipated growth of our business,
product shipments could be delayed, which could result in delayed or lost
revenues and customer dissatisfaction.
THE SALES CYCLE FOR OUR PRODUCTS IS LONG, AND WE MAY INCUR SUBSTANTIAL,
NON-RECOVERABLE EXPENSES OR DEVOTE SIGNIFICANT RESOURCES TO SALES THAT DO NOT
OCCUR WHEN ANTICIPATED OR AT ALL.
Our sales cycle, particularly to OEMs, typically involves a lengthy
certification process during which we generally invest significant resources in
addressing customer specifications. The purchase of our products or of solutions
that incorporate our products typically involves significant internal procedures
associated with the evaluation, testing, implementation and acceptance of new
technologies. This evaluation process frequently results in a lengthy sales
process, typically ranging from three months to longer than a year, and is
subject to a number of significant risks, including budgetary constraints and
internal acceptance reviews. The length of our sales cycle also varies
substantially from customer to customer. Because of the length of the sales
cycle, we may experience a delay between increasing expenses for research and
development and selling and marketing efforts and the generation of higher
revenues, if any, from such expenditures.
THE FAILURE OF OUR OEM CUSTOMERS TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE
AND TO SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS COULD ADVERSELY AFFECT
OUR NET REVENUES.
Our ability to generate increased revenues depends significantly upon the
ability and willingness of our OEM customers to develop and promote products on
a timely basis that incorporate our technology. OEMs must commit significant
resources each time they develop a product that incorporates one of our new
products. If our OEM customers do not invest in the development and marketing of
solutions that incorporate our products and successfully market these solutions,
then sales of our products to the OEM customers will be adversely affected. The
ability and willingness of OEM customers to develop and promote such products is
based upon a number of factors beyond our control.
WE EXPECT THE AVERAGE SELLING PRICES OF EACH OF OUR PRODUCTS TO DECREASE OVER
TIME FOLLOWING ITS RELEASE, WHICH MAY REDUCE GROSS MARGINS OR REVENUES.
The market for Fibre Channel products has experienced rapid erosion of
average selling prices due to a number of factors, including competitive pricing
pressures and rapid technological change. We may experience substantial
period-to-period fluctuations in future operating results due to the erosion of
our average selling prices. We anticipate that the average selling prices of
each of our products will decrease over time following its release in response
to competitive pricing pressures, increased sales discounts, new product
introductions by us or our competitors or other factors. Therefore, to maintain
our gross margins, we must develop and introduce on a timely basis new products
and product enhancements and continually reduce our product costs. Our failure
to do so would cause our revenue and gross margins to decline, which could
materially adversely affect our operating results and cause the price of our
common stock to decline.
OUR PRODUCT CYCLES MAY BE SHORT, AND FROM TIME TO TIME WE MAY NEED TO WRITE OFF
EXCESS AND OBSOLETE INVENTORY.
In the rapidly changing technology environment in which we operate, product
cycles tend to be short. However, we must have sufficient quantities of our
products available to satisfy our customers' demands. Accordingly, we order
significant quantities of our products from our manufacturers prior to receiving
customer orders. Although we expect to
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sell the inventory within a short period of time, products may remain in
inventory for extended periods and may become obsolete because of the passage of
time and the introduction of new products. For example, as we introduce
successive generations of ASICs, we may experience excess inventory of host bus
adapters that incorporate the prior generation of ASICs. In these situations, we
would be required to write off obsolete inventory, which could have a material
adverse effect on our business, financial condition and the results of
operations.
BECAUSE WE RELY ON THIRD PARTIES, AND IN SOME CASES, A SOLE MANUFACTURER, FOR
SUBSTANTIALLY ALL OF OUR MANUFACTURING AND ASSEMBLY, FAILURES BY THESE THIRD
PARTIES TO PROVIDE PRODUCTS OF SUFFICIENT QUALITY AND QUANTITY COULD CAUSE US TO
DELAY PRODUCT SHIPMENTS, WHICH COULD RESULT IN DELAYED OR LOST REVENUES OR
CUSTOMER DISSATISFACTION.
Taiwan Semiconductor Manufacturing Company, or TSMC, is currently our sole
supplier for all of our Emerald ASIC wafers, and various subcontractors, such as
Amkor Technology, Inc., Caesar International Inc. and Siliconware USA Inc.,
perform assembly, packaging and testing of our ASICs so that we purchase and
receive only finished product. SCI Systems, Inc. in Rapid City, South Dakota,
and SMS Technologies, Inc. in San Diego, California perform substantially all
assembly operations for our host bus adapters. We have no firm long-term
commitments from TSMC, SCI or SMS to supply products to us for any specific
period, or in any specific quantity, except as may be provided in a particular
purchase order.
Our reliance on TSMC for fabrication of our Emerald ASIC wafers involves
particular risks. The semiconductor industry is highly cyclical and, in the
past, foundry capacity has been very limited at times and may become limited in
the future. Our dependence on TSMC increases our exposure to this cyclicality
and to possible shortages of key components, product performance shortfalls and
reduced controls over delivery schedules, manufacturing capability, quality
assurance, quantity and costs. If TSMC or any of our other third-party
manufacturers experiences delays, disruptions, earthquakes, capacity constraints
or quality control problems in its manufacturing operations, then product
shipments to our customers could be delayed, which would negatively impact our
net revenues, competitive position and reputation.
Further, our business would be harmed if we fail to effectively manage the
manufacture of our products. Because we place orders with our manufacturers
based on our forecasts of expected demand for our products, if we inaccurately
forecast demand, we may be unable to obtain adequate manufacturing capacity or
adequate quantities of components to meet our customers' delivery requirements,
or we may accumulate excess inventories.
We may in the future need to find new contract manufacturers in order to
increase our volumes or to reduce our costs. We may not be able to find contract
manufacturers that meet our needs, and even if we do, qualifying a new contract
manufacturer and commencing volume production is expensive and time consuming.
If we are required or elect to change contract manufacturers, we may lose
revenues, and our customer relationships may suffer.
OUR RELIANCE ON MANUFACTURERS IN OTHER COUNTRIES OUTSIDE THE U.S. SUBJECTS US TO
RISKS INHERENT IN DOING BUSINESS ON AN INTERNATIONAL LEVEL THAT COULD HARM OUR
OPERATING RESULTS.
Currently, our ASICs products are manufactured by a third party located in
Asia, and we may expand our manufacturing, assembly and testing activities
abroad. Accordingly, we are subject to risks inherent in international
operations, which include:
- political, social and economic instability;
- trade restrictions and tariffs;
- the imposition of governmental controls;
- exposure to different legal standards, particularly with respect to
intellectual property;
- import and export license requirements;
- unexpected changes in regulatory requirements; and
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- potentially adverse tax consequences.
In particular, many Asian countries have in recent years experienced
significant economic difficulties, including currency devaluation and
instability, business failures and a generally depressed business climate,
particularly in the semiconductor industry. In view of our reliance on Asian
manufacturers, and our expanded international operations, any future economic
downturns in the Asian economy may seriously harm our business.
BECAUSE OUR INTELLECTUAL PROPERTY IS CRITICAL TO THE SUCCESS OF OUR BUSINESS,
OUR OPERATING RESULTS WOULD SUFFER IF WE WERE UNABLE TO ADEQUATELY PROTECT OUR
INTELLECTUAL PROPERTY.
Our proprietary technologies are crucial to our success and ability to
compete. We rely primarily on a combination of copyrights, trademarks, trade
secret laws and contractual provisions to establish and protect our intellectual
property rights in our proprietary technologies, including the source code for
our software and the reference designs for our ASICs. We presently have no
patents. We generally enter into confidentiality or license agreements with
employees, consultants and customers and seek to control access to and
distribution of our source code, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy aspects of our products or to obtain and use
information that we regard as proprietary. Policing unauthorized use of our
proprietary information is difficult. Other parties also may independently
develop or otherwise acquire equivalent or superior technology. In addition, the
laws of some of the countries in which our products are or may be developed,
manufactured or sold may not protect our products and intellectual property
rights to the same extent as the laws of the United States, or at all. Our
failure to protect our intellectual property rights could have a material
adverse effect on our business, operating results or financial condition.
WE MAY BECOME INVOLVED IN COSTLY AND LENGTHY PATENT INFRINGEMENT OR INTELLECTUAL
PROPERTY LITIGATION WHICH COULD SERIOUSLY HARM OUR BUSINESS.
In recent years, there has been significant litigation in the United States
and in foreign countries involving patents and other intellectual property
rights. We may become party to litigation in the future as a result of an
alleged infringement of others' intellectual property. From time to time, we
receive inquiries from other companies concerning whether we used their
proprietary information to develop driver software compatible with their
operating systems. Any claims that we improperly use another party's proprietary
information or that we infringe another party's intellectual property, with our
without merit, could adversely affect or delay sales of our products that use
the technology in question, result in costly and time-consuming litigation,
divert our technical and management personnel, or require us to develop
non-infringing technology or enter into royalty or licensing arrangements, any
of which would adversely affect our business, financial condition or operating
results. It also is possible that patent holders will assert patent rights which
apply broadly to our industry, and that such patent rights, if valid, may apply
to our products or technology. These or other claims may require us to stop
using the challenged intellectual property or to enter into royalty or licensing
agreements. We cannot be certain that the necessary licenses will be available
or that they can be obtained on commercially reasonable terms. If we were to
fail to obtain such royalty or licensing agreements in a timely manner or on
reasonable terms, our business, operating results or financial condition could
be materially adversely affected.
OUR EXPORT SALES SUBJECT US TO RISKS THAT COULD ADVERSELY AFFECT OUR BUSINESS.
Export sales accounted for 17% of our net revenues in 1999, compared to 14%
of net revenues in 1998. In addition, export sales accounted for 21% of our net
revenues for the nine months ended September 30, 2000. Accordingly, we encounter
risks inherent in international operations. Because all of our sales are
currently denominated in U.S. dollars, if the value of the U.S. dollar increases
relative to foreign currencies, our products could become less competitive in
international markets. Our export sales could also be limited or disrupted by
any of the following factors:
- restrictions on the export of technology;
- longer accounts receivable payment cycles;
- reduced and limited protections of intellectual property rights;
- trade restrictions; and
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- changes in tariffs.
FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS BY US OR OUR OEM CUSTOMERS COULD
REDUCE OUR SALES OR REQUIRE DESIGN MODIFICATIONS.
Our products are subject to U.S. Department of Commerce and Federal
Communications Commission regulations as well as various standards established
by authorities in other countries. Failure to comply with existing or evolving
U.S. or foreign governmental regulation or to obtain timely domestic or foreign
regulatory approvals or certificates could materially harm our business by
reducing our sales or requiring design modifications to our products or the
products of our OEM customers. Neither we nor our customers may export such
products without obtaining an export license. United States export laws also
prohibit the export of our products to a number of countries deemed by the U.S.
to be hostile. These restrictions may make foreign competitors facing less
stringent controls on their products more competitive in the global market than
we or our customers are. 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 revised.
OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS
THAT COULD LEAD TO AN INCREASE IN OUR COSTS, REDUCE OUR NET REVENUES OR DAMAGE
OUR REPUTATION.
Products as complex as ours frequently contain undetected software or
hardware errors when first introduced or as new versions are released. We have
from time to time found errors in existing products, and we may from time to
time find errors in our existing, new or enhanced products. The occurrence of
hardware or software errors could adversely affect sales of our products, cause
us to incur significant warranty and repair costs, divert the attention of our
engineering personnel from our product development efforts and cause us to lose
credibility with current or prospective customers.
RISKS RELATED TO SECURITIES MARKETS
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE TO FUND THE GROWTH OF OUR BUSINESS,
AND FINANCING MAY NOT BE AVAILABLE.
We currently anticipate that our available capital resources, including the
net cash proceeds from our initial and secondary public offerings, cash flows
from operations and expected interest income, will be sufficient to meet our
expected working capital and capital expenditure requirements for at least the
next 12 months. However, we cannot assure you that such resources will be
sufficient to fund the growth of our business.
We may also raise additional funds through public or private debt or equity
financings if such financings become available on favorable terms, but such
financings would likely dilute our stockholders. We cannot assure you that any
additional financing we may need will be available on terms favorable to us, or
at all. If adequate funds are not available or are not available on acceptable
terms, we may not be able to take advantage of unanticipated opportunities,
develop new products or otherwise respond to competitive pressures. In any such
case, our business, operating results or financial condition could be materially
adversely affected.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT DILUTE OUR STOCKHOLDERS' EQUITY AND
CAUSE US TO INCUR DEBT OR ASSUME CONTINGENT LIABILITIES.
We may pursue acquisitions that could provide new technologies or products.
Future acquisitions may involve the use of significant amounts of cash,
potentially dilutive issuances of equity or equity-linked securities, the
incurrence of debt, or amortization expenses related to goodwill and other
intangible assets.
In addition, acquisitions involve numerous risks, including:
- difficulties in the assimilation of the operations, technologies,
products and personnel of the acquired company;
- the diversion of management's attention from other business concerns;
- risks of entering markets in which we have no or limited prior
experience; and
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- the potential loss of key employees of the acquired company.
We currently have no commitments or agreements with respect to any such
acquisition. In the event that such an acquisition does occur and we are unable
to successfully integrate businesses, products, technologies or personnel that
we acquire, our business, operating results or financial condition could be
materially adversely affected.
OUR STOCK PRICE MAY BE VOLATILE.
The market price of our common stock has fluctuated widely in the past and
is likely to continue to fluctuate in the future. In addition, the stock market
in general, and the stock prices of technology-based companies in particular,
have experienced extreme volatility that often has been unrelated to the
operating performance of any specific public company. Changes in analysts'
estimates of our earnings as well as any of the factors described in "Factors
That May Affect Future Performance" could have a significant impact on the
market price of our common stock. In the past, companies that have experienced
volatility in the market price of their stock have been the subject of
securities class action litigation. If we were the subject of securities class
action litigation, it could result in substantial costs and a diversion of
management's attention and resources.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
JNI filed a Current Report on Form 8-K on August 4, 2000 to announce
that Jaymark, Inc., which owned 14,175,000 shares of JNI common stock,
representing approximately 60% of JNI's common stock outstanding as of
June 30, 2000, distributed these shares to its stockholders in a
reorganization transaction which resulted in Jaymark's liquidation and
dissolution and eliminated control of JNI by Jaymark. Under a
reorganization agreement among JNI, Jaymark and two of Jaymark's
subsidiaries, JNI facilitated Jaymark's reorganization and liquidating
distribution in exchange for certain lock-up agreements that restrict
Jaymark's stockholders' ability to sell JNI shares they received in the
distribution.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
JNI CORPORATION
Date: November 9, 2000 By: /s/ Terry M. Flanagan
---------------------------------
Terry M. Flanagan
President, Chief Executive Officer and
Director
Date: November 9, 2000 /s/ Gloria Purdy
---------------------------------
Gloria Purdy
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
(a) EXHIBITS
27.1 Financial Data Schedule.
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