<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to _______
Commission file number 0-15071
ADAPTEC, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2748530
------------------------ ----------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
691 S. MILPITAS BLVD., MILPITAS, CALIFORNIA 95035
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 945-8600
- --------------------------------------------------------------------------------
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Company's common stock as of
October 2, 1998 was 108,041,533.
This document consists of 26 pages, excluding exhibits, of which this is page 1.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations:
Results of Operations 14-16
Liquidity and Capital Resources 17
Factors Affecting Future Operating Results 18-24
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Month Six Month
Period Ended Period Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues $ 143,922 $ 278,088 $ 324,552 $ 549,530
Cost of revenues 63,087 104,530 142,825 212,024
--------- --------- --------- ---------
Gross profit 80,835 173,558 181,727 337,506
--------- --------- --------- ---------
Operating expenses:
Research and development 40,817 42,117 84,814 81,099
Sales, marketing and administrative 44,692 51,700 92,827 100,979
Write-off of acquired in-process technology -- -- 65,762 --
Restructuring and other charges 31,924 1,528 62,187 1,528
--------- --------- --------- ---------
Total operating expenses 117,433 95,345 305,590 183,606
--------- --------- --------- ---------
Income (loss) from operations (36,598) 78,213 (123,863) 153,900
Interest income 7,912 8,442 17,045 15,400
Interest expense (3,047) (3,030) (6,114) (6,090)
--------- --------- --------- ---------
Income (loss) before provision (benefit)
for income taxes (31,733) 83,625 (112,932) 163,210
Provision (benefit) for income taxes (7,499) 20,906 (11,359) 40,802
--------- --------- --------- ---------
Net income (loss) $ (24,234) $ 62,719 $(101,573) $ 122,408
========= ========= ========= =========
Net income (loss) per common share:
Basic $ (0.22) $ 0.56 $ (0.90) $ 1.09
========= ========= ========= =========
Diluted $ (0.22) $ 0.52 $ (0.90) $ 1.03
========= ========= ========= =========
Shares used in computing net income (loss)
per share:
Basic 111,583 112,931 112,937 112,470
========= ========= ========= =========
Diluted 111,583 123,902 112,937 123,042
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------- ----------
(in thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 195,629 $ 227,183
Marketable securities 417,957 470,199
Accounts receivable, net 65,624 132,526
Inventories 55,293 71,297
Prepaid expenses and other 96,007 90,765
---------- ----------
Total current assets 830,510 991,970
Property and equipment, net 191,916 194,798
Other assets 84,826 88,461
---------- ----------
$1,107,252 $1,275,229
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 850
Note payable -- 17,640
Accounts payable 38,003 48,047
Accrued liabilities 69,421 73,947
---------- ----------
Total current liabilities 107,424 140,484
---------- ----------
Long-term debt:
Long-term debt, net of current portion 17,640 --
Convertible subordinated notes 230,000 230,000
---------- ----------
Total long-term debt 247,640 230,000
---------- ----------
Stockholders' equity:
Common stock 108 114
Additional paid-in capital 244,285 295,263
Retained earnings 507,795 609,368
---------- ----------
Total stockholders' equity 752,188 904,745
---------- ----------
$1,107,252 $1,275,229
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Month Period
Ended
------------------------------
September 30, September 30,
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 71,764 $ 155,318
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certain net assets in connection with acquisitions
accounted for under the purchase method of accounting,
net of cash acquired (34,126) --
Purchases of property and equipment (28,671) (56,844)
(Purchases) sales of marketable securities, net 52,242 (184,036)
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES (10,555) (240,880)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 10,003 25,792
Repurchases of common stock (97,216) --
Principal payments on debt (5,550) (1,700)
--------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (92,763) 24,092
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS (31,554) (61,470)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 227,183 318,075
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 195,629 $ 256,605
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(unaudited)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated, interim financial statements have been prepared on a
consistent basis with the March 31, 1998 audited consolidated financial
statements and include all adjustments, consisting of only normal
recurring adjustments, except as described in Notes 8, 9 and 10,
necessary to provide a fair statement of the results for the interim
periods presented. These interim financial statements should be read in
conjunction with the consolidated financial statements and footnotes
thereto incorporated by reference in the Company's Annual Report on Form
10-K for the year ended March 31, 1998. For presentation purposes, the
Company has indicated its second quarter as having ended on September
30, whereas in fact, the Company's second quarter of fiscal 1999 and
1998 ended on October 2, 1998 and October 3, 1997, respectively. The
results of operations for the three and six month periods ended
September 30, 1998, are not necessarily indicative of the results to be
expected for the entire year. Certain items previously reported in
specific financial statement captions have been reclassified to conform
with the current presentation.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
September 30, March 31,
1998 1998
------------- ---------
<S> <C> <C>
Raw materials $12,984 $17,728
Work in process 11,622 18,415
Finished goods 30,687 35,154
------- -------
$55,293 $71,297
======= =======
</TABLE>
3. LINE OF CREDIT
In May, 1998, the Company assumed a $6.8 million unsecured revolving
line of credit, of which $4.7 million was outstanding, in conjunction
with the purchase of Ridge Technologies (Note 8). In the second quarter
of fiscal 1999, the Company paid in full and terminated this line of
credit.
The Company had available an unsecured $17 million revolving line of
credit that was to expire on December 31, 1998. No borrowings were
outstanding under this line of credit as of March 31, 1998, and no
borrowings were made during the first quarter of fiscal 1999. In June
1998, the Company terminated this line of credit.
6
<PAGE> 7
4. NOTE PAYABLE
During fiscal 1998, the Company entered into an agreement with Taiwan
Semiconductor Manufacturing Co., Ltd. ("TSMC") which provided the
Company with a guarantee of increased capacity for wafer fabrication in
return for advance payments totaling $35.3 million. The Company signed a
non-interest bearing promissory note for the $35.3 million which became
due in two equal installments. The first installment was paid in January
1998. The Company and TSMC amended the promissory note to extend,
indefinitely, the second installment of approximately $17.6 million
which was originally due in June 1998. Management does not anticipate
paying the second installment within one year, therefore, the note
payable was reclassified as long-term debt in June 1998.
5. STOCK REPURCHASES
On January 20, 1998, the Company's Board of Directors approved a stock
repurchase program under which the Company is authorized to purchase up
to 10 million shares of its common stock from time to time in the open
market. In July 1998, the Company reinstated this stock repurchase
program, which was suspended during the period of the now terminated
Symbios acquisition. During the second quarter of fiscal 1999, the
Company repurchased and retired 8,261,000 shares of its common stock for
approximately $97.2 million.
On October 16, 1998, the Company's Board of Directors approved a new
authorization for the repurchase of up to $200 million of the Company's
common stock in the open market.
6. STATEMENTS OF OPERATIONS
Restructuring and other charges includes (in thousands):
<TABLE>
<CAPTION>
Three Month Period Three Month Period
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Restructuring charges (Note 9) $24,530 $ --
Asset impairment and other charges (Note 10) 7,394 1,528
------- -------
Total $31,924 $ 1,528
======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Month Period Six Month Period
Ended Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Acquisition related costs (Note 8) $21,463 $ --
Restructuring charges (Note 9) 33,330 --
Asset impairment and other charges (Note 10) 7,394 1,528
------- -------
Total $62,187 $ 1,528
======= =======
</TABLE>
7
<PAGE> 8
7. NET INCOME (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128) "Earnings Per Share," in the third quarter of fiscal 1998. It
replaces the presentation of primary net income (loss) per share with a
presentation of basic net income (loss) per share. It also requires dual
presentation of basic and diluted net income (loss) per share on the
face of the financial statements for all entities with complex capital
structures.
Basic net income (loss) per share is computed by dividing net income
(loss) available to common stockholders (numerator) by the weighted
average number of common shares outstanding (denominator) during the
period and excludes the dilutive effect of stock options. Diluted net
income (loss) per share gives effect to all dilutive potential common
shares outstanding during the period. In computing diluted net income
(loss) per share, the average stock price for the period is used in
determining the number of shares assumed to be purchased from the
exercise of stock options. All prior period net income (loss) per share
amounts have been presented to conform to the provisions of this
statement.
Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations assuming the
standard was applied during all periods presented below.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
-------------------------------------------------- -------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to common
stockholders $(24,234) 111,583 $ (0.22) $62,719 112,931 $ 0.56
======= ======
EFFECT OF DILUTIVE SECURITIES
Common stock equivalents -- -- -- 6,519
4.75% convertible subordinated notes -- -- 2,043 4,452
--------- --------- ------- -------
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to common
stockholders and assumed
conversions $(24,234) 111,583 $ (0.22) $64,762 123,902 $ 0.52
======== ======== ======== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
--------------------------------------------------- --------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE
Net income (loss) available to common
stockholders $ (101,573) 112,937 $ (0.90) $122,408 112,470 $ 1.09
======== ======
EFFECT OF DILUTIVE SECURITIES
Common stock equivalents -- -- -- 6,120
4.75% convertible subordinated notes -- -- 4,176 4,452
---------- ---------- --------- -------
DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to common
stockholders and assumed
conversions $ (101,573) 112,937 $ (0.90) $ 126,584 123,042 $ 1.03
========== ========== ======== ========= ======= ======
</TABLE>
8
<PAGE> 9
At September 30, 1998, options to purchase 22,100,000 shares of common
stock are outstanding, however, the stock options and the convertible
subordinated notes are not included in the computations of diluted
weighted average common shares outstanding for the second quarter and
first half of fiscal 1999 because they are anti-dilutive.
Options to purchase 249,000 and 301,000 shares of common stock were not
included in the computations of diluted weighted average common shares
outstanding for the second quarter and first half of fiscal 1998,
respectively, because the options' exercise price was greater than the
average market price of the common shares during the respective periods.
8. RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS
On April 12, 1998, the Company received regulatory approval to acquire
read channel and preamplifier ASIC technologies from Analog Devices,
Inc. ("ADI") for $34 million in cash. Grant Saviers, former Chairman and
CEO of the Company, is a director of ADI. On May 21, 1998, the Company
acquired Ridge Technologies ("Ridge") for $21 million in common stock
and assumed stock options valued at approximately $13 million. Prior to
the acquisition, the Company owned a 19.9% interest in Ridge with a
carrying value of approximately $2 million and Grant Saviers, former
Chairman and CEO of the Company, was a director of Ridge. Additionally,
the Company incurred approximately $1 million in professional fees
related to the acquisitions.
The Company accounted for both acquisitions using the purchase method of
accounting, and excluding the $65.8 million write-off of acquired
in-process technology from these companies, the aggregate impact to the
Company's financial position and results of operations from the
acquisition dates were not material.
The preliminary allocation of the Company's aggregate purchase price to
the tangible and identifiable intangible assets and liabilities acquired
was based on independent appraisals and is summarized as follows (in
thousands):
<TABLE>
<S> <C>
Net tangible liabilities $ (2,752)
In-process technology 65,762
--------
Goodwill and other intangible assets:
Goodwill 4,798
Covenant not to compete 2,200
Acquired employees 1,375
--------
8,373
--------
Net assets acquired $ 71,383
========
</TABLE>
The tangible liabilities assumed exceeded the tangible assets acquired,
which was comprised primarily of a line of credit (Note 3), accounts
payable and fixed assets. Acquired in-process technology was written off
in the period in which the acquisitions were completed, and the goodwill
and other intangible assets are being amortized over respective benefit
periods ranging from two to three years.
9
<PAGE> 10
In February 1998, the Company entered into an agreement to purchase all
of the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of
Hyundai Electronics America ("HEA"). In June 1998, the Company and HEA
mutually agreed to terminate the agreement. The Company paid a $7
million termination fee and approximately $7 million in nonconsummation
fees to HEA. Additionally, the Company incurred approximately $7 million
in other acquisition related charges, including legal, consulting and
other costs.
During fiscal 1998, Adaptec invested $1 million in, and entered into a
development and license agreement with, a venture stage company whose
founder and CEO, Larry Boucher, is a director and interim CEO of
Adaptec.
9. RESTRUCTURING CHARGES
During the quarter ended June 30, 1998, in connection with management's
plan to reduce costs and improve operating efficiencies, the Company
recorded a restructuring charge of $8.8 million. The restructuring
charge is comprised primarily of severance and benefits related to the
involuntary termination of approximately 550 employees, of which
approximately 36% were based in the United States and the remainder were
based in Singapore.
During the quarter ended September 30, 1998, the Company recorded a
restructuring charge of $24.5 million, net of an adjustment to the
restructuring charge taken in the first quarter of fiscal 1999 of $1.4
million. This charge is a direct result of management's decision to exit
certain unprofitable business activities including storage subsystems
(primarily those business activities purchased in connection with the
Ridge transaction - Note 8), external storage, satellite networking,
fibre channel and high-end proprietary ASICs (Note 15). The second
quarter restructuring charge is comprised primarily of severance and
benefits related to the involuntary termination of approximately 300
U.S. employees and the write-off of inventory, property and equipment,
and other assets including goodwill associated with the storage
subsystems business.
10
<PAGE> 11
The following table sets forth an analysis of the components of the
restructuring charges recorded in the first and second quarters of fiscal 1999
(in thousands):
<TABLE>
<CAPTION>
SEVERANCE
RESTRUCTURING CHARGES AND ASSET OTHER
QUARTER ENDED BENEFITS WRITE-OFFS CHARGES TOTAL
- --------------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Severance and benefits $ 9,231 $ -- $ -- $ 9,231
Inventory write-offs -- 984 -- 984
Property and equipment write-offs -- 8,484 -- 8,484
Contractual obligations -- -- 3,742 3,742
Accrued lease costs -- -- 927 927
Goodwill and other assets -- 2,005 -- 2,005
Other charges -- -- 605 605
Adjustment to prior quarter provision (934) 280 (794) (1,448)
-------- -------- -------- --------
TOTAL SEPTEMBER 30, 1998 $ 8,297 $ 11,753 $ 4,480 $ 24,530
======== ======== ======== ========
JUNE 30, 1998
Severance and benefits $ 6,800 $ -- $ -- $ 6,800
Property and equipment write-offs -- 950 -- 950
Other charges -- -- 1,050 1,050
-------- -------- -------- --------
TOTAL JUNE 30, 1998 $ 6,800 $ 950 $ 1,050 $ 8,800
======== ======== ======== ========
</TABLE>
The following table sets forth the Company's restructuring reserves as of
September 30, 1998 and June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
SEVERANCE
AND ASSET OTHER
RESTRUCTURING RESERVES BENEFITS WRITE-OFFS CHARGES TOTAL
- ---------------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C>
Restructuring charges $ 6,800 $ 950 $ 1,050 $ 8,800
Cash paid (3,244) -- -- (3,244)
Non-cash charges (296) (950) -- (1,246)
-------- -------- -------- --------
BALANCE AT JUNE 30, 1998 $ 3,260 $ -- $ 1,050 $ 4,310
======== ======== ======== ========
Restructuring charges $ 8,297 $ 11,753 $ 4,480 $ 24,530
Cash paid (6,718) -- (272) (6,990)
Non-cash charges (338) (11,753) -- (12,091)
-------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1998 $ 4,501 $ -- $ 5,258 $ 9,759
======== ======== ======== ========
</TABLE>
11
<PAGE> 12
10. ASSET IMPAIRMENT AND OTHER CHARGES
The Company regularly evaluates the recoverability of long-lived assets
by measuring the carrying amount of the assets against the estimated
undiscounted future cash flows associated with them. At the time such
evaluations indicate that the future undiscounted cash flows are not
sufficient to recover the carrying value of such assets, the assets are
adjusted to their fair values. Based on these evaluations, the Company
recorded non-cash impairment charges of $4.0 million and $1.5 million in
the second quarter of fiscal 1999 and 1998, respectively. In addition,
the Company recorded executive termination costs of $3.4 million in the
second quarter of fiscal 1999. There were no executive termination costs
recorded in the second quarter and first half of fiscal 1998.
In connection with the Company's restructuring activities and evaluation
of long-lived assets, the Company is actively pursuing the sale of
certain assets. The fair value of these assets of $7.1 million has been
reclassified to assets held for sale and, as they are expected to be
sold in the next year, are included in current assets as of September
30, 1998. Approximately $6.7 million of the assets held for sale relate
to the sale of the high end peripheral technology solutions business
unit (Note 15).
11. INCOME TAXES
Income tax provisions (benefits) for interim periods are based on
estimated annual income tax rates. Generally, the Company's effective
income tax rate has been 25%. The difference between the Company's
effective income tax rate and the U.S. federal statutory income tax rate
is primarily due to income earned in Singapore where the Company is
subject to a significantly lower effective tax rate. The Company
recorded income tax benefits of $7.5 million and $11.4 million for the
second quarter and first half of fiscal 1999, which it believes is
recoverable for federal tax purposes based on carryback potential
against taxes paid previously. The effective tax rate used to calculate
the income tax benefit for the second quarter and first half of fiscal
1999, is lower than 25% primarily because of book write-offs taken in
the first quarter of fiscal 1999 relating to acquired in-process
technology and the write-off of goodwill taken in the second quarter of
fiscal 1999, which are not deductible for tax purposes.
12. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income". SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components, however, the adoption of this
statement has no impact on the Company's net income (loss) or
stockholders' equity. SFAS 130 requires components of comprehensive
income, including unrealized gains or losses on the Company's
available-for-sale securities and foreign currency translation
adjustments, to be reported in the financial statements. These amounts
are not material to the Company's financial statements for the periods
presented.
13. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of
an Enterprise and Related Information". This statement establishes
standards for the way companies report information about operating
segments in annual financial statements. It also establishes standards
for related disclosures about products and services,
12
<PAGE> 13
geographic areas, and major customers. The disclosures prescribed by
SFAS 131 will first be adopted in the Company's fiscal 1999 annual
report.
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging
activities and requires recognition of all derivatives as assets or
liabilities and measurement of those instruments at fair value. This
statement is effective for fiscal years beginning after June 15, 1999.
The Company will adopt this statement in the first quarter of fiscal
2000 but does not expect the adoption of SFAS 133 to have a material
impact on the Company's financial position or results of operations.
14. CONTINGENCIES
A class action lawsuit has been filed in the United States District
Court for the Northern District of California against the Company and
certain of its officers and directors. The action alleges that the
Company made false and misleading statements at various times during the
period between April 1997 and January 1998 in violation of the federal
securities laws. The complaint does not set forth purported damages. In
addition, a derivative action has been filed in the Superior Court of
the State of California against the Company and certain of its officers
and directors, alleging that the individual defendants improperly
profited from transactions in the Company's stock during the same time
period referenced by the class action lawsuit. The Company believes both
the class action lawsuit and derivative action are without merit and
intends to defend itself vigorously.
The IRS is currently auditing the Company's federal income tax returns
for fiscal 1994 through 1996. No proposed adjustments have been received
for these years. The Company believes sufficient taxes have been
provided in prior years and that the ultimate outcome of the IRS audits
will not have a material adverse impact on the Company's financial
position or results of operations.
15. SUBSEQUENT EVENTS
In October 1998, the Company approved the cancellation and reissuance of
outstanding stock options under the Company's stock option plans. Under
this program, all current active employees, except for executive
officers, with outstanding stock options with an exercise price in
excess of $12.50 per share could exchange their stock options for new
non-qualified stock options with an exercise price of $12.50 per share,
the fair market value of the common stock on the exchange date. The new
options maintain the vesting schedule established by the canceled stock
options, however, the exercisability of the exchanged options is
suspended for six months.
In November 1998, the Company entered into a definitive agreement with
Texas Instruments ("TI") whereby the Company agreed to sell certain
tangible and intangible assets related to the high end peripheral
technology solutions business unit for $8.6 million and license certain
technology for $3.7 million. Approximately $6.7 million of assets
related to the high end peripheral technology solutions business unit
have been classified as assets held for sale and are included in current
assets as of September 30, 1998 (Note 10). TI paid $4.6 million of the
purchase price at closing with the remainder payable in two equal
installments in the fourth quarter of fiscal 1999 and the first quarter
of fiscal 2000. The license payments are paid in varying amounts during
the second quarter through the fourth quarter of fiscal 2000. In
addition, TI has agreed to pay royalties ranging from 2-5% on certain
products for up to five years.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the items in the condensed consolidated
statements of operations as a percentage of net revenues:
<TABLE>
<CAPTION>
Three Month Six Month
Period Ended Period Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 43.8 37.6 44.0 38.6
------- ------- ------- --------
Gross margin 56.2 62.4 56.0 61.4
------- ------- ------- --------
Operating expenses:
Research and development 28.4 15.2 26.1 14.8
Sales, marketing and administrative 31.0 18.6 28.6 18.3
Write-off of acquired in-process technology -- -- 20.3 --
Restructuring and other charges 22.2 0.5 19.2 0.3
------- ------- ------- --------
Total operating expenses 81.6 34.3 94.2 33.4
------- ------- ------- --------
Income (loss) from operations (25.4) 28.1 (38.2) 28.0
Interest income 5.5 3.0 5.3 2.8
Interest expense (2.1) (1.0) (1.9) (1.1)
------- ------- ------- --------
Income (loss) before provision (benefit) for
income taxes (22.0) 30.1 (34.8) 29.7
Provision (benefit) for income taxes (5.2) 7.5 (3.5) 7.4
------- ------- ------- --------
Net income (loss) (16.8)% 22.6% (31.3)% 22.3%
======= ======= ======= ========
</TABLE>
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NET REVENUES
The Company's net revenues are derived from the sale of high performance I/O
solutions, including proprietary ASICs, advanced SCSI and RAID host adapter
boards and software solutions. The Company sells it products primarily in the
desktop, server and workstation markets. Net revenues for the second quarter
ended September 30, 1998 were $143.9 million, a decrease of 48.2% from the same
period of fiscal 1998. Net revenues for the first half of fiscal 1999 were
$324.6 million, a decrease of 40.9% from the corresponding period of fiscal
1998.
The decline in net revenue for the second quarter and first half of fiscal 1999
as compared to the second quarter and first half of fiscal 1998 was due to a
combination of factors. Revenues from SCSI host adapter boards declined as the
Company focused on reducing inventory in the distribution channel and as a
result of Ultra-DMA penetration in the desktop market. Ultra-DMA has not had a
material effect on revenue derived from the workstation and server markets.
Revenue from the sale of proprietary ASICs declined as a result of continued
weakness in the disk drive industry. Revenue was further constrained by
continuing weakness in the Asian markets.
The Company anticipates an increase in host adapter revenue in the third quarter
of fiscal 1999 as compared to the second quarter. This increase will be a result
of increased shipments due to normal distribution channel demand as a result of
the reduction of distribution channel inventories in the second quarter and
seasonality. The increase in host adapter revenue will be partially offset by a
sequential decline from the second quarter in proprietary ASIC revenue.
GROSS MARGIN
Gross margins for the second quarter and first half of fiscal 1999 were 56.2%
and 56.0%, respectively, compared to 62.4% and 61.4% for the second quarter and
first half of fiscal 1998, respectively. The decline in gross margin is
primarily a result of unutilized manufacturing capacity. Gross margin was also
impacted by shifts to newer products with higher manufacturing costs. Gross
margin for the third quarter of fiscal 1999 is expected to be in the range
experienced in the last four quarters.
OPERATING EXPENSES
Excluding non-recurring charges for restructuring, the write-off of acquired
in-process technology, impaired assets and executive termination costs,
operating expenses as a percentage of net revenues for the second quarter and
first half of fiscal 1999 were 59.4% and 54.8%, respectively, versus 33.8% and
33.1%, of the corresponding periods of fiscal 1998. The increase as a percentage
of net revenues is primarily attributable to decreased revenue. Year over year,
operating expenses declined by 8.9% in the second quarter and 2.4% in the first
half of fiscal 1999. The declines are attributable to Company-wide cost
reduction programs which included a reduction in force and the curtailment of
costs related to the exit of certain unprofitable activities.
During the first and second quarter of fiscal 1999, the Company completed a
reduction in workforce of approximately 850 employees, of which approximately
350 related to manufacturing activities, and exited certain unprofitable
activities in order to bring operating expenses in line with revenue. The
Company incurred $8.8 million and $24.5 million in the first and second quarter
of fiscal 1999 related to these restructuring activities. The second quarter
charge is net of an adjustment of $1.4 million related to the charge recorded in
the first quarter. The restructuring charges consisted of severance and benefits
of $6.8 million and $8.3 million, asset write-offs of $1.0 and $11.8 million,
facilities and other costs of $1.1 million and $4.5 million, for the first and
second quarter of fiscal 1999, respectively. During the first and second fiscal
quarters, the Company
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<PAGE> 16
recorded non-cash charges of $1.2 million and $12.1 million, respectively, and
expended $3.2 million and $7.0 million, respectively, of cash related to these
restructuring activities. The balance of the remaining cash outlay is expected
to occur in the second half of fiscal 1999.
During the first quarter of fiscal 1999, the Company acquired complementary
businesses recorded under the purchase method of accounting, resulting in an
aggregate write-off of acquired in-process technology of $65.8 million.
Additionally, the Company incurred $21.5 million in costs related to the
termination of the Symbios acquisition.
The Company also recorded a charge of $4.0 million and $3.4 million in the
second quarter of fiscal 1999 related to the impairment of long-lived assets and
executive termination costs, respectively. The impairment in fiscal 1999
occurred primarily as a result of a drop in production volume which has made
certain test equipment unnecessary. In the second quarter of fiscal 1998 the
Company recorded a charge of $1.5 million related to the impairment of goodwill.
Based on the cost reduction programs implemented in the first half of fiscal
1999, the Company anticipates that operating expenses will decline sequentially
in the second half of fiscal 1999.
INTEREST AND INCOME TAXES
Interest income for the second quarter and first half of fiscal 1999 was $7.9
million and $17.0 million, respectively, compared to $8.4 million and $15.4
million for the corresponding periods of fiscal 1998. The year to date increase
resulted primarily from higher average cash, cash equivalents and short term
investment balances.
Interest expense for the second quarter and first half of fiscal 1999 is related
to the convertible subordinated notes and remained consistent at $3.0 and $6.1
million, respectively, as compared to the corresponding periods in the prior
year.
Interest income could decline in the third quarter of fiscal 1999 if the Company
liquidates investments to repurchase common stock. The Company does not
anticipate any material change in interest expense for the three months ended
December 31, 1998.
The Company recorded an income tax benefit of $11.4 million in the first half of
fiscal 1999, representing 10.0% of the loss before benefit for income taxes
compared to a $40.8 million provision for income taxes or 25% of income before
provision for income taxes in the comparable period of fiscal 1998. The Company
believes the income tax benefit recorded in the first half of fiscal 1999 is
recoverable for federal tax purposes based on carryback potential against taxes
paid previously. Generally, the Company's effective tax rate has been 25%. The
difference between the Company's effective tax rate and the U.S. statutory rate
is primarily due to income earned in Singapore where the Company is subject to a
significantly lower effective tax rate. The effective tax rate used to calculate
the income tax benefit for the first half of fiscal 1999 is lower than 25%
primarily as a result of book write-offs of acquired in-process technology and
goodwill, which are not deductible for tax purposes. Excluding the effect of
these write-offs, the Company's effective tax rate for the three and six month
periods ended September 30, 1998 was 25%.
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<PAGE> 17
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition at September 30, 1998 remains strong, with a
ratio of current assets to current liabilities of 7.7:1, compared to 7.1:1 at
March 31, 1998. The Company ended the quarter with cash, cash equivalents and
short-term investments of $614 million.
The Company generated approximately $71.8 million of cash from operations during
the first half of fiscal 1999. The primary sources of cash from operations were
net income (adjusted for non-cash charges for depreciation, amortization,
acquired in-process technology, asset impairment and stock options) of $12.2
million, a decrease in accounts receivable of $66.9 million (primarily related
to lower revenue and increased collections as a result of relatively linear
shipments in the second quarter), a decrease in inventory of $14.9 million
offset by a reduction in accounts payable of $12.2 million.
Cash used for investing activities during the first half of fiscal 1999 was
approximately $10.6 million consisting primarily of net purchases of property,
plant and equipment ($28.7 million) and the purchase of certain net assets in
connection with acquisitions ($34.1 million) offset by sales of marketable
securities ($52.2 million). The Company also purchased all of the outstanding
shares of Ridge Technologies, Inc. ("Ridge") not owned by it for $21 million in
company stock and assumed stock options valued at approximately $13 million.
Cash used for financing activities during the first half of fiscal 1999 was
approximately $92.8 million consisting of stock repurchases of $97.2 million and
debt repayments of $5.6 million offset by proceeds from stock issuances of $10.0
million.
The Company is authorized to repurchase shares of its common stock in the open
market. The Company repurchased 8,261,000 shares of its common stock, at an
average price of $11.77 per share during the six months ended September 30,
1998, for a total cash outlay of approximately $97.2 million. In October 1998,
the Board of Directors approved a new stock repurchase program under which up to
$200 million in additional repurchases may be made.
As of September 30, 1998, the Company's principal sources of liquidity consist
of $614 million of cash, cash equivalents and short-term investments. The
Company's liquidity is affected by many factors, some of which are based on the
normal ongoing operations of the business, and others of which relate to the
uncertainties of the PC and disk drive industries and global economies. Although
the Company's cash requirements will fluctuate based on the timing and extent of
these factors, management believes that cash generated from operations, together
with the liquidity provided by existing cash balances, will be sufficient to
satisfy the Company's liquidity requirements for the next twelve months.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
During fiscal 1998, the Company completed implementation of Enterprise Resource
Planning (ERP) software to replace the Company's core business applications,
which support sales and customer service, manufacturing, distribution, and
finance and accounting. The ERP software was selected not only because it was
Year 2000 compliant, but more importantly, to add functionality and efficiency
to the business processes of the Company.
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<PAGE> 18
The Company also began a project to analyze and assess the remainder of its
business not addressed by the ERP software such as other computer and network
hardware and software, production process controllers, equipment, and the
products it sells. Internal and external resources are being used to complete
any required modification and test Year 2000 Compliance. The Company presently
believes that its products are year 2000 compliant. Furthermore, with the
replacement or upgrade of its internal use software, which is primarily
commercial off the shelf software, and non-compatible hardware, the Company
believes that the Year 2000 issue will not pose significant operational problems
for the Company or its customers. Successful completion of the testing process
of all significant applications is expected by March 31, 1999.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of Year 2000 Compliance activities has not been
and is not anticipated to be material to its financial position or results of
operations in any given year. These costs and the date on which the Company
plans to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing various assumptions of
future events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from those
plans.
The Company has developed a contingency plan for some of its applications and
systems to address any of the consequences of internal or external failures to
be Year 2000 compliant. It is also in the process of a contingency plan for the
remaining significant applications and systems, which it expects to complete by
March 31, 1999.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The statements contained in this document that are not purely historical are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including
without limitation statements regarding the Company's future revenues, gross
margins, operating expenses, interest and income taxes, and any other statements
covering the Company's expectations, beliefs, intentions or strategies regarding
the future. All forward-looking statements included in this document are based
on information available to the Company on the date hereof, and the Company
assumes no obligation to update any such forward-looking statements. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this document. In
evaluating the Company's business, prospective investors should consider
carefully the following factors in addition to the other information set forth
in this document.
Future Operating Results Subject to Fluctuation. In the second half of fiscal
1998 and the first half of fiscal 1999, the Company's operating results were
adversely affected by shifts in corporate and retail buying patterns, increased
competition, emerging technologies, economic instability in Asia and turbulence
in the computer disk drive industry. In addition, the first half of fiscal 1999
was significantly impacted by one time charges including write-offs of acquired
in-process technology, costs related to the termination of the Symbios
acquisition, restructuring charges, impairment of assets and terminations of
senior executives. In the future, the
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<PAGE> 19
Company's operating results may fluctuate as a result of these factors and as a
result of a wide variety of other factors, including, but not limited to,
cancellations or postponements of orders, shifts in the mix of the Company's
products and sales channels, changes in pricing policies by the Company's
suppliers, interruption in the supply of custom integrated circuits, the market
acceptance of new and enhanced versions of the Company's products, product
obsolescence and general worldwide economic and computer industry fluctuations.
In addition, fluctuations may be caused by future accounting pronouncements,
changes in accounting policies, and the timing of acquisitions of other business
products and technologies and any associated charges to earnings. The volume and
timing of orders received during a quarter are difficult to forecast. The
Company's customers from time to time encounter uncertain and changing demand
for their products. Customers generally order based on their forecasts. If
demand falls below such forecasts or if customers do not control inventories
effectively, they may cancel or reschedule shipments previously ordered from the
Company. The Company has historically operated with a relatively small backlog,
especially relating to orders of its host interface solutions and has set its
operating budget based in part on expectations of future revenues. Because much
of the Company's operating budget is relatively fixed in the short term, if
revenues do not meet the Company's expectations, as happened in the fourth
quarter of fiscal 1998, then the Company's operating income and net income may
be disproportionately affected. Operating results in any particular quarter
which do not meet the expectations of securities analysts are likely to cause
volatility in the price of the Company's Common Stock.
Certain Risks Associated with the High-Performance Microcomputer Market. The
Company's host interface solutions are used primarily in high performance
computer systems designed to support bandwidth-intensive applications and
operating systems. Historically, the Company's growth has been supported by
increasing demand for systems that support client/server and Internet/intranet
applications, computer-aided engineering, desktop publishing, multimedia, and
video. Beginning in the second half of fiscal 1998, the demand for such systems
slowed as more businesses chose to use relatively inexpensive PC's for desktop
applications and information technology managers shifted resources toward
resolving Year 2000 problems and investing in network infrastructure. Should
demand for such systems continue to slow, the Company's business or operating
results could be materially adversely affected by a resulting decline in demand
for the Company's products.
Certain Risks Associated with the Computer Peripherals Market. As a supplier of
controller circuits to manufacturers of computer peripherals such as disk drives
and other storage devices, a portion of the Company's business is dependent on
the overall market for computer peripherals. This market, which itself is
dependent on the market for personal computers, has historically been
characterized by periods of rapid growth followed by periods of oversupply and
contraction. As a result, suppliers to the computer peripherals industry from
time to time experience large and sudden fluctuations in demand for their
products as their customers adjust to changing conditions in their markets. If
these fluctuations are not accurately anticipated, as happened in the second
half of fiscal 1998, such suppliers, including the Company, could produce
excessive or insufficient inventories of various components which could
materially and adversely affect the Company's business and operating results.
The computer peripherals industry is also characterized by intense
price-competition, which in turn creates pricing pressures on the suppliers to
that industry. If the Company is unable to correspondingly decrease its
manufacturing or component costs, such pricing pressures could have a material
adverse effect on the Company's business or operating results.
Reliance on Industry Standards, Technological Change, Dependence on New
Products. The computer industry is characterized by various standards and
protocols that evolve with time. The Company's current products are designed to
conform to certain industry standards and protocols such as SCSI, UltraSCSI,
Ultra80 SCSI, PCI, RAID, Fibre Channel, ATM, and Fast Ethernet. In particular, a
majority of the Company's revenues are currently derived from products based on
the SCSI standard. If consumer acceptance of these standards was to decline, or
if they were replaced with new standards, and if the Company did not anticipate
these changes and
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<PAGE> 20
develop new products, the Company's business or operating results could be
materially adversely affected. For example, the Company believes that changes in
consumers' perceptions of the relative merits of SCSI based products and
products incorporating a competing standard, Ultra-DMA, have recently started to
adversely affect the sales of the Company's products and may adversely affect
the Company's future sales.
The markets for the Company's products are characterized by rapidly changing
technology, frequent new product introductions, and declining average selling
prices over product life cycles. The Company's future success is therefore
highly dependent upon the timely completion and introduction of new products at
competitive price/performance levels. The success of new product introductions
is dependent on several factors, including proper new product definition,
product costs, timely completion and introduction of new product designs,
quality of new products, differentiation of new products from those of the
Company's competitors, and market acceptance of the Company's and its customers'
products. As a result, the Company believes that continued significant
expenditures for research and development will be required in the future. There
can be no assurance that the Company will successfully identify new product
opportunities and develop and bring new products to market in a timely manner,
that products or technologies developed by others will not render the Company's
products or technologies obsolete or noncompetitive, or that the Company's
products will be selected for design into the products of its targeted
customers. The failure of any of the Company's new product development efforts
could have a material adverse effect on the Company's business or operating
results. In addition, the Company's revenues and operating results could be
adversely impacted if its customers shifted their demand to a significant extent
away from board-based I/O solutions to application-specific ICs.
Competition. The markets for the Company's products are intensely competitive
and are characterized by rapid technological advances, frequent new product
introductions, evolving industry standards, and price erosion. In the host
adapter market, the Company competes with a number of host adapter
manufacturers. The Company's principal competitors for semiconductor solutions
in the mass storage market are captive suppliers and Cirrus Logic, Inc. As the
Company has continued to broaden its bandwidth management product offerings into
the desktop, server, and networking environments, it has experienced, and
expects to experience in the future, significantly increased competition both
from existing competitors and from additional companies that may enter its
markets. Some of these companies have greater technical, marketing,
manufacturing, and financial resources than the Company. There can be no
assurance that the Company will be able to make timely introduction of new
leading-edge solutions in response to competitive threats, that the Company will
be able to compete successfully in the future against existing or potential
competitors or that the Company's business or operating results will not be
materially adversely affected by price competition.
Certain Risks Associated With Acquisitions. Since the beginning of fiscal 1996,
the Company has completed the acquisition of 13 complementary companies and
businesses. As part of its overall strategy, the Company may continue to acquire
or invest in complementary companies, products, or technologies and to enter
into joint ventures and strategic alliances with other companies. Risks commonly
encountered in such transactions include the difficulty of assimilating the
operations and personnel of the combined companies, the potential disruption of
the Company's ongoing business, the inability to retain key technical and
managerial personnel, the inability of management to maximize the financial and
strategic position of the Company through the successful integration of acquired
businesses, additional expenses associated with amortization of acquired
intangible assets, dilution of existing equity holders, the maintenance of
uniform standards, controls, procedures, and policies, and the impairment of
relationships with employees and customers as a result of any integration of new
personnel. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems encountered in connection with such
business combinations, investments, or joint ventures, or that such transactions
will not materially adversely affect the Company's business, financial
condition, or operating results.
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Certain Risks Associated with Restructuring. During the first and second quarter
of fiscal 1999, the Company decided to exit certain activities and undertook
certain restructuring actions. In connection with these actions, the Company
effected a workforce reduction of 850 people. There is no assurance that these
actions will be successful or have a positive impact on results of operations.
Furthermore, should such actions have a negative impact on the Company's ability
to design and develop new products, market new or existing products, or produce
and/or purchase products at competitive prices, these actions could have an
adverse impact on the Company's results of operations.
Year 2000 Issues. The "Year 2000 issue" arises because most computer systems and
programs were designed to handle only a two-digit year not a four-digit year.
When the Year 2000 begins, these computers may interpret "00" as the year 1900
and could either stop processing date-related computations or could process them
incorrectly. The Company has recently implemented new information systems and
accordingly does not anticipate any internal Year 2000 issues from its own
information systems, databases or programs. However, the Company could be
adversely impacted by Year 2000 issues faced by major distributors, suppliers,
customers, vendors and financial service organizations with which the Company
interacts. The Company has sent surveys to certain third parties to determine
whether they are Year 2000 compliant and is in the process of evaluating and
following up on responses to determine the impact that third parties who are not
Year 2000 compliant may have on the operations of the Company. The Company
believes it is currently being impacted by the redirection of corporate
management information system budgets towards resolving the Year 2000 issue.
Continuation of this trend could lower the demand for the Company's products if
corporate buyers defer purchases of high-end business PCs.
Dependence on Wafer Suppliers and Other Subcontractors. All of the finished
silicon wafers used for the Company's products are currently manufactured to the
Company's specifications by independent foundries. The Company currently
purchases a substantial majority of its wafers through a supply agreement with
TSMC. The Company also purchases wafers from SGS-Thomson Microelectronics and
Seiko Epson. The manufacture of semiconductor devices is sensitive to a wide
variety of factors, including the availability of raw materials, the level of
contaminants in the manufacturing environment, impurities in the materials used,
and the performance of personnel and equipment. While the quality, yield, and
timeliness of wafer deliveries to date have been acceptable, there can be no
assurance that manufacturing yield problems will not occur in the future. In
addition, although the Company has various supply agreements with its suppliers,
a shortage of raw materials or production capacity could lead any of the
Company's wafer suppliers to allocate available capacity to customers other than
the Company, or to internal uses. Any prolonged inability to obtain wafers with
competitive performance and cost attributes, adequate yields, or timely
deliveries from its foundries would delay production and product shipments and
could have a material adverse effect on the Company's business or operating
results. The Company expects that it will in the future seek to convert its
fabrication process arrangements to smaller geometries and to more advanced
process technologies. Such conversions entail inherent technological risks that
can affect yields and delivery times. If for any reason the Company's current
suppliers were unable or unwilling to satisfy the Company's wafer needs, the
Company would be required to identify and qualify additional foundries. There
can be no assurance that any additional wafer foundries would become available,
that such foundries would be successfully qualified, or that such foundries
would be able to satisfy the Company's requirements on a timely basis.
The Company's future growth will depend in large part on increasing its wafer
capacity allocation from current foundries, adding additional foundries, and
gaining access to advanced process technologies. There can be no assurance that
the Company will be able to satisfy its future wafer needs from current or
alternative sources. Any increase in general demand for wafers within the
industry or any reduction of existing wafer supply from
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<PAGE> 22
any of the Company's foundry sources, could materially adversely affect the
Company's business, financial condition, or operating results.
In order to secure wafer capacity, the Company from time to time has entered
into "take or pay" contracts that committed the Company to purchase specified
wafer quantities over extended periods, and has made prepayments to foundries.
In the future, the Company may enter into similar transactions or other
transactions, including, without limitation, non-refundable deposits with or
loans to foundries, or equity investments in, joint ventures with or other
partnership relationships with foundries. Any such transaction could require the
Company to seek additional equity or debt financing to fund such activities.
There can be no assurance that the Company will be able to obtain any required
financing on terms acceptable to the Company.
Additionally, the Company relies on subcontractors for the assembly and
packaging of the ICs included in its products. The Company has no long-term
agreements with its assembly and packaging subcontractors. In addition, the
Company is increasingly using board subcontractors to better balance production
runs and capacity. There can be no assurance that such subcontractors will
continue to be able and willing to meet the Company's requirements for such
components or services. Any significant disruption in supplies from, or
degradation in the quality of components or services supplied by, such
subcontractors could delay shipments and result in the loss of customers or
revenues or otherwise have a material adverse effect on the Company's business
or operating results.
Certain Issues Related to Distributors. The Company's distributors generally
offer a diverse array of products from several different manufacturers.
Accordingly, there is a risk that these distributors may give higher priority to
selling products from other suppliers, thus reducing their efforts to sell the
Company's products. A reduction in sales efforts by the Company's current
distributors could have a materially adverse effect on its business or operating
results. The Company's distributors may on occasion build inventories in
anticipation of substantial growth in sales, and if such growth does not occur
as rapidly as anticipated, distributors may decrease the amount of product
ordered from the Company in subsequent quarters. In addition, there has recently
been an industry trend towards the elimination of price protection and
distributor incentive programs and channel assembly. These trends could result
in a change in distributor business habits, with distributors possibly deciding
to decrease the amount of product held so as to reduce inventory levels and this
in turn could reduce the Company's revenues in any given quarter and give rise
to fluctuation in the Company's operating results. In addition, as occurred in
the second quarter of fiscal 1999, the Company may from time to time take
actions to reduce inventory levels at distributors. These actions could reduce
the Company's revenues in any given quarter and give rise to fluctuations in the
Company's operating results.
Dependence on Key Personnel. The Company's future success depends in large part
on the continued service of its key technical, marketing, and management
personnel, and on its ability to continue to attract and retain qualified
employees, particularly those highly skilled design, process, and test engineers
involved in the design enhancements and manufacture of existing products and the
development of new products and processes. The competition for such personnel is
intense, and the loss of key employees could have a material adverse effect on
the Company's business or operating results. The Company believes the recent
weakness in its financial performance and the resulting decline in its stock
price has adversely impacted its ability to attract and retain qualified
employees.
Certain Risks Associated with International Operations. The Company's
manufacturing facility and various subcontractors it utilizes from time to time
are located primarily in Asia. Additionally, the Company has various sales
offices and customers throughout Europe, Japan, and other countries. The
Company's international operations and sales are subject to political and
economic risks, including political instability, currency controls,
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exchange rate fluctuations, and changes in import/export regulations, tariffs,
and freight rates. The Company may use forward exchange contracts to manage any
exposure associated with certain foreign currency denominated commitments. In
addition, because the Company's principal wafer supplier, TSMC, is located in
Taiwan, the Company is subject to the risk of political instability in Taiwan,
including the potential for conflict between Taiwan and the People's Republic of
China.
Intellectual Property Protection and Disputes. The Company has historically
devoted significant resources to research and development and believes that the
intellectual property derived from such research and development is a valuable
asset that has been and will continue to be important to the success of the
Company's business. Although the Company actively maintains and defends its
intellectual property rights, no assurance can be given that the steps taken by
the Company will be adequate to protect its proprietary rights. In addition, the
laws of certain territories in which the Company's products are or may be
developed, manufactured, or sold, including Asia and Europe, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. The Company has from time to time discovered
counterfeit copies of its products being manufactured or sold by others.
Although the Company maintains an active program to detect and deter the
counterfeiting of its products, should counterfeit products become available in
the market to any significant degree it could materially adversely affect the
business or operating results of the Company.
From time to time, third parties may assert exclusive patent, copyright, and
other intellectual property rights to technologies that are important to the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertions by third
parties will not result in costly litigation or that the Company would prevail
in such litigation or be able to license any valid and infringed patents from
third parties on commercially reasonable terms. Litigation, regardless of its
outcome, could result in substantial cost and diversion of resources of the
Company. Any infringement claim or other litigation against or by the Company
could materially adversely affect the Company's business or operating results.
Need for Interoperability. The Company's products must be designed to
interoperate effectively with a variety of hardware and software products
supplied by other manufacturers, including microprocessors, peripherals, and
operating system software. The Company depends on significant cooperation with
these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading system, peripheral, and
microprocessor suppliers, there can be no assurance that such suppliers will not
from time to time make it more difficult for the Company to design its products
for successful interoperability or decide to compete with the Company.
Natural Disasters. The Company's corporate headquarters are located near major
earthquake faults. Any damage to the Company's information systems caused as a
result of an earthquake, fire or any other natural disasters could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Volatility of Stock Price. The stock market in general, and the market for
shares of technology companies in particular, have from time to time experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of the affected companies. In addition, factors such as
technological innovations or new product introductions by the Company, its
competitors, or its customers may have a significant impact on the market price
of the Company's Common Stock. Furthermore, as occurred in the first half of
fiscal 1999, quarter-to-quarter fluctuations in the Company's results of
operations caused by changes in customer demand, changes in the microcomputer
and peripherals markets, or other factors, may have a significant impact on the
market price of the Company's Common Stock. In addition, the Company's stock
price may be affected by general market conditions and international
macroeconomic factors unrelated to the Company's performance
23
<PAGE> 24
such as those recently evidenced by the financial turmoil in Asia. These
conditions, as well as factors that generally affect the market for stocks of
high technology companies, could cause the price of the Company's Common Stock
to fluctuate substantially over short periods.
24
<PAGE> 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule for the quarter
ended September 30, 1998
</TABLE>
(b) Reports on Form 8-K:
(i) Report on Form 8-K filed September, 25, 1998, containing
Adaptec, Inc.'s news releases dated September 9 and 17, 1998
with respect to cost cutting actions and one-time charges.
(ii) Report on Form 8-K filed October 26, 1998, containing
Adaptec, Inc.'s news releases dated October 19 and 20, 1998,
with respect to the authorization to repurchase common stock
and the appointment of a president and chief financial
officer.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADAPTEC, INC.
By: /s/ ANDREW J. BROWN
-----------------------------------
Andrew J. Brown, Vice President and
Chief Financial Officer (Principal
Accounting Officer)
Date: November 12, 1998
26
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 195,629
<SECURITIES> 417,957
<RECEIVABLES> 69,489
<ALLOWANCES> 3,865
<INVENTORY> 55,293
<CURRENT-ASSETS> 830,510
<PP&E> 292,883
<DEPRECIATION> 100,967
<TOTAL-ASSETS> 1,107,252
<CURRENT-LIABILITIES> 107,424
<BONDS> 230,000
0
0
<COMMON> 108
<OTHER-SE> 752,080
<TOTAL-LIABILITY-AND-EQUITY> 1,107,252
<SALES> 143,922
<TOTAL-REVENUES> 143,922
<CGS> 63,087
<TOTAL-COSTS> 63,087
<OTHER-EXPENSES> 117,433
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,047
<INCOME-PRETAX> (31,733)
<INCOME-TAX> (7,499)
<INCOME-CONTINUING> (24,234)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,234)
<EPS-PRIMARY> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
