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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/ / QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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
JNI CORPORATION
(Exact name of registrant as specified in its charter)
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 July 31, 2000 there were 23,807,321 shares of the registrant's common
stock, $0.001 par value, outstanding.
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TABLE OF CONTENTS
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NUMBER
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PART I FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
Balance Sheet at June 30, 2000 (unaudited) and December 31, 1999 2
Statement of Operations (unaudited) for the three and six months ended
June 30, 2000 and 1999 3
Statement of Cash Flows (unaudited) for the six months ended
June 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 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
Item 5: OTHER INFORMATION 13
Item 6: EXHIBITS AND REPORT ON FORM 8-K 23
Signatures 24
Exhibit Index 25
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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>
JUNE 30, DECEMBER 31,
2000 1999
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(unaudited)
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Current assets:
Cash and cash equivalents $ 4,124 $ 5,062
Marketable securities available for sale 40,670 39,767
Accounts receivable, net 12,479 6,305
Inventories 7,368 4,046
Other current assets 996 711
Deferred income taxes 1,746 946
-------- --------
Total current assets 67,383 56,837
Property and equipment, net 5,961 4,632
Intangible assets, net 7,368 10,047
Deferred income taxes 1,229 1,309
Other assets 40 --
-------- --------
$ 81,981 $ 72,825
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,640 $ 4,124
Accrued liabilities 4,840 3,367
Deferred revenue 1,702 --
-------- --------
Total current liabilities 12,182 7,491
Other liabilities 101 112
-------- --------
Total liabilities 12,283 7,603
Stockholders' equity:
Preferred stock, undesignated series, 5,000,000 shares
authorized; none issued -- --
Common stock, par value $.001 per share; 100,000,000 shares
authorized; 23,643,446 and 21,838,679 shares issued and
Outstanding 24 22
Additional paid-in capital 67,622 67,078
Unearned stock-based compensation (977) (1,311)
Accumulated other comprehensive income (loss) (43) (23)
Retained earnings (deficit) 3,072 (544)
-------- --------
Total stockholders' equity 69,698 65,222
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$ 81,981 $ 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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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- ------------------------------
2000 1999 2000 1999
-------------------------------- ------------------------------
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Net revenues $ 24,024 $ 8,549 $ 42,501 $ 14,912
Cost of revenues 9,888 3,166 17,235 5,453
-------------------------------- ------------------------------
Gross margin 14,136 5,383 25,266 9,459
-------------------------------- ------------------------------
Operating expenses:
Research and development 4,798 2,756 8,820 4,938
Selling and marketing 2,934 1,137 5,255 2,073
General and administrative 1,743 612 3,396 1,286
Amortization of intangible assets 1,339 55 2,679 110
Amortization of stock-based compensation 167 238 341 401
-------------------------------- ------------------------------
Total operating expenses 10,981 4,798 20,491 8,808
-------------------------------- ------------------------------
Operating income 3,155 585 4,775 651
Interest income 542 - 1,058 -
Interest expense - affiliate - (156) - (289)
-------------------------------- ------------------------------
Income before income taxes 3,697 429 5,833 362
Income tax provision (benefit) 1,405 (1,413) 2,217 (1,405)
-------------------------------- ------------------------------
Net income $ 2,292 $ 1,842 $ 3,616 $ 1,767
================================ ==============================
Earnings per share:
Basic $ 0.10 $ 4.39 $ 0.16 $ 4.21
================================ ==============================
Diluted $ 0.09 $ 0.08 $ 0.13 $ 0.08
================================ ==============================
Number of shares used in per share computations:
Basic 22,995,000 420,000 22,499,000 420,000
================================ ==============================
Diluted 26,754,000 22,872,000 26,915,000 22,726,000
================================ ==============================
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See accompanying notes to financial statements.
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JNI Corporation
STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
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Six Months Ended June 30,
-------------------------------
2000 1999
-------------------------------
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Cash flows from operating activities:
Net income $ 3,616 $ 1,767
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes (720) (1,446)
Depreciation and amortization 923 583
Amortization of intangible assets 2,679 110
Amortization of stock-based compensation 334 401
Accrued interest expense affiliate - 289
Changes in assets and liabilities:
Accounts receivable, net (6,174) (942)
Inventories (3,322) (1,869)
Other assets (325) 56
Accounts payable 1,516 334
Accrued liabilities 1,473 260
Deferred revenue 1,702 -
Other liabilities (11) (1)
-------------------------------
Net cash provided by (used in) operating activities 1,691 (458)
-------------------------------
Cash flows from investing activities:
Purchases of marketable securities available for sale (923) -
Capital expenditures (2,252) (1,412)
-------------------------------
Net cash used in investing activities (3,175) (1,412)
-------------------------------
Cash flows from financing activities:
Net advances from affiliate - 1,870
Net proceeds from issuance of common stock 546 -
-------------------------------
Net cash provided by financing activities 546 1,870
-------------------------------
Net change in cash and cash equivalents
(938) -
Cash and cash equivalents, beginning of period
5,062 -
-------------------------------
Cash and cash equivalents, end of period $ 4,124 $ -
===============================
</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 six month periods ended June 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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AS OF
-------------------------------
JUNE 30, DECEMBER 31,
2000 1999
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Inventories:
Raw materials.............................. $ 5,744 $ 3,027
Work in process............................ 540 299
Finished goods............................. 1,084 720
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Total.......................... $ 7,368 $ 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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<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -----------------------
2000 1999 2000 1999
------------------------ -----------------------
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Numerator:
Net income........................................... $ 2,292 $ 1,842 $ 3,616 $ 1,767
Denominator:
Denominator for basic earnings per share -
weighted average shares outstanding................ 22,995,000 420,000 22,499,000 420,000
Effect of dilutive securities:
Dilutive warrants outstanding...................... - 840,000 406,000 840,000
Dilutive options outstanding....................... 3,753,000 3,889,000 3,989,000 3,743,000
Convertible preferred stock........................ - 17,723,000 - 17,723,000
Employee stock purchase plan shares................ 6,000 - 21,000 -
------------------------ ------------------------
Denominator for diluted earnings per share -
adjusted weighted average shares................... 26,754,000 22,872,000 26,915,000 22,726,000
======================== ========================
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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 six months ended June 30, 2000, total
comprehensive income was $2,294 and $3,596, respectively. During the three and
six months ended June 30, 1999, the Company did not have marketable securities
and therefore had no unrealized gains or losses on marketable securities.
NOTE 6 -- SUBSEQUENT EVENT
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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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, possible changes in legislation 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 1999 Annual Report. 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 operation 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 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, 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.
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. Sun has
announced its intention to phase out the SBus interface in its workstations
and low-end servers. Accordingly, we expect that sales of our products
designed to work with the SBus interface will eventually
7
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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 have 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.
We generally recognize revenue from product sales upon shipment. 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. 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 upon shipment by the
distributors to their end-user customers. We continue to recognize revenue upon
shipment for sales to all other customers.
Cost of revenues is comprised principally of payments to our contract
manufacturers, 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, material expediting
charges, 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. As a result of the total consideration issued to
Adaptec which consisted of 1,132,895 shares of common stock and a warrant to
purchase 840,000 shares of common stock, 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.
We recognized an income tax benefit during the quarter ended June 30, 1999
due primarily to utilization of net operating loss carryforwards and the release
of a deferred tax valuation allowance in that period. For the periods prior to
June 30, 1999, due to our history of losses, we did not recognize any tax
benefits for net operating losses and did not recognize any research and
development tax credits. In the quarter ended June 30, 1999, we determined that
it was more likely than not that we would be able to use the tax benefits in
future periods. As a result, we realized a tax benefit of $1.4 million in the
quarter ended June 30, 1999, which created a corresponding increase in net
income in that period.
8
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COMPARISON OF THREE MONTHS ENDED JUNE 30, 2000 AND 1999
NET REVENUES. Net revenues increased $15.5 million, or 181%, to $24.0
million in the three months ended June 30, 2000 from $8.5 million in the three
months ended June 30, 1999. The increase was due to an increase in sales of SBus
and PCI host bus adapter products with a $10.9 million increase in SBus sales
and a $4.8 million increase in PCI sales, partially offset by a decrease in
sales of our ASICs. The increase in revenues reflects the increased demand for
our products and the continued growth in the market for Fibre Channel products.
GROSS MARGIN. Gross margin increased $8.8 million, or 163%, to $14.1 million
in the three months ended June 30, 2000 from $5.4 million in the three months
ended June 30, 1999. Gross margin as a percentage of net revenues decreased to
58.8% during the three months ended June 30, 2000 from 63.0% during the three
months ended June 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 three months ended June 30,
2000 also decreased as a result of inventory reserves recorded for slow moving
and obsolete inventory.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$2.0 million, or 74%, to $4.8 million for the three months ended June 30,
2000 from $2.8 million for the three months ended June 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 20.0% for the three months
ended June 30, 2000 from 32.2% for the three months ended June 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 but will continue to decrease as a
percentage of net revenues.
SELLING AND MARKETING. Selling and marketing expenses increased $1.8
million, or 158%, to $2.9 million for the three months ended June 30, 2000 from
$1.1 million for the three months ended June 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
which was 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 12.2% for the three months ended
June 30, 2000 from 13.3% for the three months ended June 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
awarenes and expand our sales channel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$1.1 million, or 185%, to $1.7 million for the three months ended June 30, 2000
from $612,000 for the three months ended June 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 increased
slightly to 7.3% for the three months ended June 30, 2000 from 7.2% for the
three months ended June 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 June 30, 2000 compared to $55,000 during
the three months ended June 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 $167,000 and $238,000 during the three months ended June 30,
2000 and 1999, respectively.
INTEREST INCOME. Interest income of $542,000 primarily represents interest
earned on our investments in marketable securities during the three months ended
June 30, 2000. We had no interest income in the corresponding period in 1999.
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INTEREST EXPENSE. Interest expense for the three months ended June 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 June 30, 2000.
INCOME TAX PROVISION. We recognized an income tax provision of $1.4 million,
with an effective tax rate of 38.0%, during the three months ended June 30, 2000
as a result of the taxable income generated in the three months ended June 30,
2000. We recognized an income tax benefit of $1.4 million in the three months
ended June 30, 1999 due primarily to the utilization of net operating loss
carryforwards and the release of a deferred tax valuation allowance. The
valuation allowance was released during the period 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.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 2000 AND 1999
NET REVENUES. Net revenues increased $27.6 million, or 185%, to $42.5
million in the six months ended June 30, 2000 from $14.9 million in the six
months ended June 30, 1999. The increase was due to an increase in sales of SBus
and PCI host bus adapter products with a $20.5 million increase in SBus sales
and a $6.8 million increase in PCI sales. The increase in revenues reflects the
increased demand for our products and the continued growth in the market for
Fibre Channel products.
GROSS MARGIN. Gross margin increased $15.8 million, or 167%, to $25.3
million in the six months ended June 30, 2000 from $9.5 million in the six
months ended June 30, 1999. Gross margin as a percentage of net revenues
decreased to 59.4% during the six months ended June 30, 2000 from 63.4% during
the six months ended June 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 margin for the six months ended June
30, 2000 also decreased as a result of inventory reserves recorded for slow
moving and obsolete inventory.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$3.9 million, or 79%, to $8.8 million for the six months ended June 30, 2000
from $4.9 million for the six months ended June 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 20.8% for the six months ended June 30,
2000 from 33.1% for the six months ended June 30, 1999. This decrease was
primarily attributable to the increase in revenues.
SELLING AND MARKETING. Selling and marketing expenses increased $3.2
million, or 154%, to $5.3 million for the six months ended June 30, 2000 from
$2.1 million for the six months ended June 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
which was 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 12.4% for the six months ended June 30, 2000 from 13.9%
for the six months ended June 30, 1999 primarily due to the increase in our
revenues.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$2.1 million, or 164%, to $3.4 million for the six months ended June 30, 2000
from $1.3 million for the six months ended June 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
8.0% for the six months ended June 30, 2000 from 8.6% for the six months ended
June 30, 1999.
AMORTIZATION OF INTANGIBLE ASSETS. We amortized $2.7 million of intangible
assets during the six months ended June 30, 2000 compared to $110,000 during the
six months ended June 30, 1999. The increase in amortization expense was
attributed to the significant increase in intangible assets resulting from the
additional consideration
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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 $341,000 and $401,000 during the six months ended June 30, 2000
and 1999, respectively.
INTEREST INCOME. Interest income of $1.1 million primarily represents
interest earned on our investments in marketable securities during the six
months ended June 30, 2000. We had no interest income in the corresponding
period in 1999.
INTEREST EXPENSE. Interest expense for the six months ended June 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 six
months ended June 30, 2000.
INCOME TAX PROVISION. We recognized an income tax provision of $2.2 million,
with an effective tax rate of 38.0%, during the six months ended June 30, 2000
as a result of the taxable income generated in the six months ended June 30,
2000. We recognized an income tax benefit of $1.4 million in the six months
ended June 30, 1999 due primarily to the utilization of net operating loss
carryforwards and the release of a deferred tax valuation allowance. The
valuation allowance was released during the period 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. The
proceeds from our initial public offering and cash flow generated from
operations are currently the primary source of funding for our operations.
Subsequent to the initial public offering, all amounts due to Jaycor were paid
in full, and we no longer borrow from Jaycor.
During the six months ended June 30, 2000, cash provided by operating
activities was $1.7 million, compared to $458,000 of cash used in operating
activities during the six months ended June 30, 1999. The cash provided by
operations reflects net income before depreciation and amortization of
approximately $7.6 million, increased by an increase in deferred revenue,
accounts payable and accrued liabilities of $4.7 million and offset by the
increase in accounts receivable, inventories, deferred income taxes and other
assets of approximately $10.5 million.
Net cash used in investing activities was $3.2 million in the six
months ended June 30, 2000 and consisted of capital expenditures and purchases
of marketable securities available for sale. Net cash used in investing
activities was $1.4 million in the six months ended June 30, 1999 and consisted
solely of capital expenditures. The capital expenditures reflect our investment
in computer and lab equipment, software development tools and facilities, which
are required to support our business expansion.
Net cash provided by financing activities was $546,000 in the six
months ended June 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 $1.9 million in the six months ended June
30, 1999, all of which was provided by advances from Jaycor.
We had $44.8 million of cash and cash equivalents and investments and
$55.2 million of working capital at June 30, 2000. We believe that the proceeds
from our initial public offering, together with expected cash flows from
operations, will be sufficient to meet working capital needs at least through
the next 12 months, although we could be required, or could elect, to seek
additional funding prior to that time. 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
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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.
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 June 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.
As of December 31, 1999, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 17, 2000, JNI held an Annual Meeting of Stockholders at which
the following proposal was voted on by the stockholders:
1. To elect four directors for a one-year term to expire at the 2001
Annual Meeting of Stockholders:
NOMINEE FOR WITHHELD
------- --- --------
John Bolger 20,643,951 47,926
Terry M. Flanagan 20,648,101 43,776
Lawrence E. Fox 20,643,951 47,926
Eric P. Wenaas 20,635,501 56,376
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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 our common
stock will likely decline. Factors that may cause our revenues 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.
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 dependent 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,
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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 (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; obetter 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 b 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 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.
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BECAUSE A SIGNIFICANT PORTION OF OUR PRODUCTS IS DESIGNED TO WORK WITH HIGH-END
SERVERS FROM SUN MICROSYSTEMS, INC. AND STORAGE ARRAYS FROM EMC, 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.
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 majority of the host bus adapters we sold during the six
months ended June 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 must continue to develop, market and sell host bus adapters
using the PCI interface because Sun Microsystems has announced its intention to
discontinue using the SBus interface in its workstations and low-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 adapter designed to work with the
SBus interface accounted for approximately 75% of our net revenues for the six
months ended June 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 SBu interface, our business would suffer due to decreased sales of SBus
host bus adapters.
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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.
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, ANY CANCELLATION OR DELAY
OF A LARGE PURCHASE BY ANY OF THESE CUSTOMERS OR DELAYS IN OBTAINING FUTURE
CERTIFICATIONS FROM OEMS 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 six months ended
June 30, 2000, Info X, Inc. accounted for 21% of our net revenues, Acal
Electronics accounted for 17% of our net revenues and Polaris Service accounted
for 12% 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 stop or delay 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 adversel 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.
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 six months ended June 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.
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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.
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
qualification cycle 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 month 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 OE 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.
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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 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.
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 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.
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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.
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. 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, Agilent is currently the sole supplier of some
components in some of our SBus host bus adapters. 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.
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
- potentially adverse tax consequences.
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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 rights. Any such claims,
with or without merit, could result in costly and time-consuming litigation or
cause product shipment delays which would adversely affect our business,
financial condition or operating results. It 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 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, stock options granted to many members of
our senior management team became fully vested upon Jaymark's distribution of
the shares of our common stock that it held to its stockholders in July 2000,
which may reduce these individuals' incentives to continue to work for JNI.
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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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 23% of our net
revenues for the six months ended June 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
- 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 ou customers may export such
products without obtaining an export license. U.S. export laws also prohibit the
export of our products to a number of countries deemed by the United States 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 public offering, 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
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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
- 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
--------
10.1 Lease dated, July 11, 2000 between Pacific Plaza Carmel Valley
LLC and JNI Corporation (Building A).
10.2 Lease dated, July 11, 2000 between Pacific Plaza Carmel Valley
LLC and JNI Corporation (Building B).
27.1 Financial Data Schedule.
(b) REPORTS ON FORM 8-K
-------------------
None.
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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: August 11, 2000 By: /s/ TERRY M. FLANAGAN
-----------------------------
Terry M. Flanagan
President, Chief Executive Officer
and Director
Date: August 11, 2000 /s/ GLORIA PURDY
-----------------------------
Gloria Purdy
Chief Financial Officer
(Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
(a) EXHIBITS
--------
10.1 Lease dated, July 11, 2000 between Pacific Plaza Carmel Valley
LLC and JNI Corporation (Building A).
10.2 Lease dated, July 11, 2000 between Pacific Plaza Carmel Valley
LLC and JNI Corporation (Building B).
27.1 Financial Data Schedule.
25
