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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 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
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ADAPTEC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
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 August
7, 1998 was 113,591,756.
This document consists of 19 pages, excluding exhibits, of which this is
page 1.
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TABLE OF CONTENTS
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PAGE
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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........................................ 6-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Results of Operations........................... 11-12
Liquidity and Capital Resources................. 12-13
Factors Affecting Future Operating Results...... 13-18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................. 18
Signatures................................................ 19
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH
PERIOD ENDED
--------------------------
JUNE 30, JUNE 30,
1998 1997
----------- -----------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C>
Net revenues................................................ $180,630 $271,442
Cost of revenues............................................ 79,738 107,494
-------- --------
Gross profit.............................................. 100,892 163,948
-------- --------
Operating expenses:
Research and development.................................. 44,029 38,982
Sales, marketing and administrative....................... 48,103 49,279
Write-off of acquired in-process technology and other
charges................................................ 96,025 --
-------- --------
Total operating expenses.......................... 188,157 88,261
-------- --------
Income (loss) from operations............................. (87,265) 75,687
Interest income, net of interest expense.................... 6,066 3,898
-------- --------
Income (loss) before provision (benefit) for income
taxes.................................................. (81,199) 79,585
Provision (benefit) for income taxes........................ (3,860) 19,896
-------- --------
Net income (loss)......................................... $(77,339) $ 59,689
======== ========
Net income (loss) per common share:
Basic..................................................... $ (0.68) $ 0.53
-------- --------
Diluted................................................... $ (0.68) $ 0.51
-------- --------
Shares used in computing net income (loss) per share:
Basic..................................................... 114,200 112,008
-------- --------
Diluted................................................... 114,200 122,181
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1998 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 403,187 $ 227,183
Marketable securities..................................... 278,332 470,199
Accounts receivable, net.................................. 111,144 132,526
Inventories............................................... 57,148 71,297
Prepaid expenses and other................................ 87,359 90,765
---------- ----------
Total current assets.............................. 937,170 991,970
Property and equipment, net................................. 200,946 194,798
Other assets................................................ 97,117 88,461
---------- ----------
$1,235,233 $1,275,229
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit............................................ $ 4,700 $ --
Current portion of long-term debt......................... -- 850
Note payable.............................................. -- 17,640
Accounts payable.......................................... 30,768 48,047
Accrued liabilities....................................... 84,691 73,947
---------- ----------
Total current liabilities......................... 120,159 140,484
---------- ----------
Long-term debt, net of current portion...................... 17,640 --
---------- ----------
Convertible subordinated notes.............................. 230,000 230,000
---------- ----------
Contingencies (Note 12)
Stockholders' equity:
Common stock.............................................. 116 114
Additional paid-in capital................................ 335,289 295,263
Retained earnings......................................... 532,029 609,368
---------- ----------
Total stockholders' equity........................ 867,434 904,745
---------- ----------
$1,235,233 $1,275,229
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED
--------------------
JUNE 30, JUNE 30,
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 26,898 $117,176
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases 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......................... (13,472) (36,748)
Sales (purchases) of marketable securities.................. 191,867 (41,878)
-------- --------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES........ 144,269 (78,626)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 5,687 12,024
Principal payments on debt.................................. (850) (850)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 4,837 11,174
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 176,004 49,724
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 227,183 318,075
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $403,187 $367,799
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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,
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 included 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 first quarter as having
ended on June 30, whereas in fact, the Company's first quarter of fiscal 1999
ended on July 3, 1998 and its first quarter of fiscal 1998 ended on July 4,
1997. The results of operations for the three month period ended June 30, 1998,
are not necessarily indicative of the results to be expected for the entire
year.
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>
JUNE 30, MARCH 31,
1998 1998
-------- ---------
<S> <C> <C>
Raw materials................................... $12,521 $17,728
Work in process................................. 10,298 18,415
Finished goods.................................. 34,329 35,154
------- -------
$57,148 $71,297
======= =======
</TABLE>
3. LINE OF CREDIT
In May, 1998, the Company assumed a $6.8 million unsecured revolving line
of credit in conjunction with the purchase of Ridge Technologies (Note 7). The
Company is required to maintain certain financial ratios among other restrictive
covenants. The Company was in compliance with all such covenants as of June 30,
1998. As of June 30, 1998, $4.7 million was drawn against the line. The Company
intends to pay down and terminate the line of credit in the second quarter of
fiscal 1999.
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.
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 million. The Company signed a non-interest bearing
promissory note for the $35 million which became due in two 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 has been reclassified as long-term debt as of June 30, 1998.
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. STATEMENT OF OPERATIONS
Write-off of acquired in-process technology and other charges includes (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30, 1998
------------------
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Write-off of acquired in-process technology (Note
7)............................................... $65,762
Acquisition related costs (Note 7)................. 21,463
Restructuring charges (Note 8)..................... 8,800
-------
Total.................................... $96,025
=======
</TABLE>
6. NET INCOME (LOSS) PER SHARE
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 a 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
exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the periods
presented below.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
JUNE 30, 1998 JUNE 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 income (loss) per share
Net income (loss) available to common
stockholders........................ $(77,339) 114,200 $(0.68) $59,689 112,008 $0.53
====== =====
Effect of Dilutive Securities
Common stock equivalents.............. -- -- -- 5,721
4.75% convertible subordinated
notes............................... -- -- 2,133 4,452
======== ======= ======= =======
Diluted income (loss) per share
Net income (loss) available to common
stockholders and assumed
conversions......................... $(77,339) 114,200 $(0.68) $61,822 122,181 $0.51
======== ======= ====== ======= ======= =====
</TABLE>
The basic and diluted weighted average common shares outstanding for the
three month period ended June 30, 1998 excludes 1,242,000 restricted shares
issued in conjunction with the acquisition of Ridge Technologies (Note 7).
At June 30, 1998, 1,536,000 stock options and the convertible subordinated
notes are anti-dilutive and have been excluded from diluted weighted average
common shares outstanding.
Options to purchase 615,000 shares of common stock were outstanding at June
30, 1997 but were not included in the computations of diluted net income per
share because the options' exercise price was greater than the average market
price of the common shares.
7. 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, was
a director of ADI. On May 21, 1998, the Company acquired Ridge
7
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Technologies ("Ridge") for $21 million in restricted 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 $66 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 was not material.
The allocation of the Company's aggregate purchase price to the tangible
and identifiable intangible net assets acquired was based on independent
appraisals and is summarized as follows (in thousands):
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Net tangible liabilities.................................... $(2,752)
In-process technology....................................... 65,762
Goodwill and other intangible assets:
Goodwill......................................... 4,798
Covenant not to complete......................... 2,200
Acquired employees............................... 1,375
-------
8,373
-------
Net assets acquired......................................... $71,383
=======
</TABLE>
The tangible liabilities assumed exceeded the tangible assets acquired,
which comprised primarily 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.
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, the Company 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 of the Company and who recently has been
appointed interim CEO of the Company, following the resignation of Grant
Saviers.
8. RESTRUCTURING
During the quarter ended June 30, 1998, the Company recorded a
restructuring charge of $8.8 million. The restructuring charges are 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.
8
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following is an analysis of the components of the restructuring charge
recorded in the first quarter of fiscal 1999 (in thousands):
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<CAPTION>
SEVERANCE
AND OTHER
BENEFITS CHARGES TOTAL
--------- ------- -------
<S> <C> <C> <C>
Restructuring charges.................. $ 6,800 $2,000 $ 8,800
Cash paid.............................. (3,244) -- (3,244)
Non-cash charges....................... (296) (950) (1,246)
------- ------ -------
Balance................................ $ 3,260 $1,050 $ 4,310
======= ====== =======
</TABLE>
9. 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 effective tax rate used to calculate the income tax benefit for the
period presented is lower than 25% primarily because of book write-offs relating
to acquired in-process technology which are not deductible for tax purposes.
10. 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.
11. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of SFAS
133 to have a material impact on the Company's results of operations.
12. CONTINGENCIES
Several class action lawsuits have 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 actions all allege 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 complaints do
not set forth purported damages. In addition, a number of derivative actions
have 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 lawsuits. The Company
believes the lawsuits and derivative actions are without merit and intends to
defend itself vigorously.
The IRS is currently auditing the Company's federal income tax returns for
fiscal 1994 to 1996. No proposed adjustments have been received for these years.
The Company believes sufficient taxes have been
9
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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.
13. SUBSEQUENT EVENTS
On July 30, 1998, Grant Saviers, Chairman of the Board and CEO, resigned.
The Board of Directors appointed Company founder and Board member, Larry
Boucher, as interim CEO. The Company has initiated a search for a permanent CEO.
In addition, John Adler, former Adaptec Chairman and CEO, has been named to the
Board.
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.
10
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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:
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<CAPTION>
THREE MONTH
PERIOD ENDED
--------------------
JUNE 30, JUNE 30,
1998 1997
-------- --------
<S> <C> <C>
Net revenues.............................................. 100.0% 100.0%
Cost of revenues.......................................... 44.1 39.6
----- -----
Gross margin............................................ 55.9 60.4
----- -----
Operating expenses:
Research and development................................ 24.4 14.4
Sales, marketing and administrative..................... 26.6 18.1
Write-off of acquired in-process technology and other
charges.............................................. 53.2 --
----- -----
Total operating expenses........................ 104.2 32.5
----- -----
Income (loss) from operations........................... (48.3) 27.9
Interest income, net of interest expense.................. 3.4 1.4
----- -----
Income (loss) before provision (benefit) for income
taxes................................................ (44.9) 29.3
Provision (benefit) for income taxes...................... (2.1) 7.3
----- -----
Net income (loss)....................................... (42.8)% 22.0%
===== =====
</TABLE>
Net Revenues
Net revenues were $181 million for the first quarter of fiscal 1999
compared with $271 million for the corresponding quarter of fiscal 1998. The
decrease was primarily due to the lower sales of the Company's SCSI host
adapters and peripheral technology solutions. The demand for SCSI and peripheral
technologies continues to be impacted by the trend to lower priced PC's for
mainstream corporate desktop applications and the turbulent disk drive market,
respectively.
Gross Margin
Gross margins for the first quarter of fiscal 1999 were 56% compared to 60%
for the first quarter of fiscal 1998. The decline in gross margin is primarily
due to manufacturing inefficiencies in overhead and labor variances due to lower
production volumes. The gross margin is also adversely impacted by product mix.
Operating Expenses
As a percentage of net revenues, expenditures for research and development
increased to 24% for the first quarter of fiscal 1999 compared to 14% for the
corresponding period of fiscal 1998. The increase as a percentage of revenues is
a direct result of the decline in net revenues. In absolute dollars, spending
for research and development increased 13% to $44 million for the first quarter
of fiscal 1999. The total dollar increase in spending is primarily due to the
Company's acquisition of Ridge Technologies and Analog Devices, Inc.
As a percentage of revenues, selling, marketing and administrative expenses
were 27% of net revenues for the first quarter of fiscal 1999 compared with 18%
for the corresponding period of fiscal 1998. In absolute dollars, spending for
selling, marketing and administrative expenses decreased 2% to $48 million for
the first quarter of fiscal 1999. The increase as a percentage of net revenues
is attributable to the decline in net revenues, while the decrease in total
dollars is a result of both headcount and program reductions associated with
restructuring activities.
11
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During the first three months 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 $66
million. Additionally, the Company incurred $9 million in restructuring charges
and $21 million in acquisition related costs.
Interest and Income Taxes
Interest income, net of interest expense, increased to $6 million for the
first quarter of fiscal 1999 compared to $4 million in the first quarter of
fiscal 1998. The increase is primarily due to higher average cash and marketable
securities balances held in contemplation of the proposed acquisition of
Symbios, Inc.
The Company recorded an income tax benefit of $4 million representing 5% of
income before benefit for income taxes for the first quarter of fiscal 1999
compared with a $20 million provision representing 25% of income before
provision for income taxes for the corresponding period in fiscal 1998.
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 quarter of fiscal 1999 is lower than 25% primarily as a
result of book write-offs of acquired in-process technology which are not
deductible for tax purposes. Excluding the effect of these write-offs, the
Company's effective tax rate was 25% for the first quarter of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash generated from operating activities for the first three months of
fiscal 1999 totaled $27 million compared to $117 million in the corresponding
period of fiscal 1998. The decrease is primarily attributable to a net loss for
the first three months of fiscal 1999 of $77 million. The net loss in fiscal
1999 reflects the impact of $96 million in non-recurring charges including the
write-off of acquired in-process technology, costs related to the termination of
the Symbios transaction and restructuring charges.
Investing Activities
During the first quarter of fiscal 1999, the Company acquired certain
technologies from Analog Devices, Inc., for $34 million in cash. Additionally,
the Company purchased all 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. Prior to the acquisition, the
Company owned a 19.9% interest in Ridge, with a carrying value of approximately
$2 million. Additionally, the Company incurred approximately $1 million in
professional fees related to the acquisition. Total net assets acquired in
connection with these business combinations was $71 million.
Purchases of property and equipment of $13 million during the first three
months of fiscal 1999 included various building and leasehold improvements and
investments in both test equipment and manufacturing equipment to support future
business requirements.
During the first three months of fiscal 1999, the Company sold investments
in marketable securities totaling $192 million to help fund its acquisitions.
Financing Activities
During April 1997, the Company entered into an agreement with TSMC whereby
the Company will make advance payments totaling $35 million to secure additional
wafer capacity for future technology through 2001. The Company signed a $35
million promissory note for the advance payments, which became due in two
installments in January 1998 and June 1998. During the first three months of
fiscal 1999, the Company and TSMC amended the promissory note to extend,
indefinitely, the second payment of $17.6 million.
12
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During the first three months of fiscal 1999 and fiscal 1998, the Company
received proceeds from common stock issued under the employee stock option and
employee stock purchase plans totaling $6 million and $12 million, respectively.
At June 30, 1998, the Company's principal sources of liquidity consisted of
$682 million of cash, cash equivalents and marketable securities and an
unsecured $6.8 million revolving line of credit assumed through the acquisition
of Ridge Technologies. As of June 30, 1998, the Company owed $4.7 million,
however, the Company intends to pay down and terminate the line of credit in the
second quarter of fiscal 1999. The Company believes existing working capital,
together with expected cash flows from operations and available sources of bank,
equity and equipment financing, will be sufficient to support its operations
through fiscal 1999.
Recent Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued SFAS 133
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities and is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company does not expect the adoption of SFAS
133 to have a material impact on the Company's results of operations.
Year 2000
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 is in the process of developing a plan to determine the
impact that third parties who are not Year 2000 compliant may have on the
operations of the Company. The Company could also be impacted by the redirection
of corporate management information system budgets towards resolving the Year
2000 issue and this could lower the demand for the Company's products if
corporate buyers defer purchases of high-end business PCs.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This report contains forward-looking statements that involve risks and
uncertainties. For example, Management's Discussion and Analysis of Results of
Operations and Financial Condition includes statements relating to expected
sales growth, anticipated operating expenditures and anticipated capital
expenditures. The statements contained in this document that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this document. In 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 quarter of fiscal 1999, the Company's operating
results were adversely affected by shifts in corporate and retail buying
patterns, increased competition, economic instability in Asia and turbulence in
the computer disk drive
13
<PAGE> 14
industry. In addition, the first quarter of fiscal 1999 was significantly
impacted by one time charges including write-offs of acquired in-process
technology, costs related to the Symbios termination and restructuring charges.
In the future, the 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 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
14
<PAGE> 15
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.
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 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
15
<PAGE> 16
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 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 plans to 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.
Certain Risks Associated with Implementation and Utilization of New
Information Systems. The Company has recently implemented new information
systems in its operations in the United States, Singapore and Europe and will
implement new information systems in its operations in Japan. There can be no
assurance that the Company will successfully implement and utilize these new
systems efficiently and in a timely manner. Problems with installation or
utilization of the new systems could cause substantial difficulties in
operations, financial reporting and management and thus could have a material
adverse effect on the Company's business or operating results.
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.
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
16
<PAGE> 17
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 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. This trend 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.
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, 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
17
<PAGE> 18
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, La Nina related floods 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 quarter 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 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.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 Amendment No. 1 to Option Agreement III between Adaptec
Manufacturing (S) Pte., Ltd. And Taiwan Semiconductor
Manufacturing Co., Ltd.
27.1 Financial Data Schedule for the quarter ended June 30, 1998
</TABLE>
No reports on Form 8-K were filed during the quarter
18
<PAGE> 19
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.
Registrant
/s/ ANDREW J. BROWN
--------------------------------------
Andrew J. Brown
Vice-President,
Corporate Controller
(Principal Accounting Officer)
and Acting Chief Financial Officer
(Principal Financial Officer)
Date: August 7, 1998
19
<PAGE> 20
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.1 Amendment No. 1 to Option Agreement III between Adaptec
Manufacturing (S) Pte., Ltd. And Taiwan Semiconductor
Manufacturing Co., Ltd.
27.1 Financial Data Schedule for the quarter ended June 30, 1998
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 1 TO OPTION AGREEMENT III
This amendment ("Amendment") is effective as of July 2, 1998 (the
"Effective Date") and amends that certain Option Agreement III ("Agreement")
dated April 21, 1997, by and between Adaptec Mfg (S) Pte. Ltd. ("Adaptec") and
Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC").
I. Under the terms of the Agreement, the second and final installment
of the Option Fee, in the amount of US$17.64 Million (the "Second Installment"),
is due and payable on June 30, 1998. The parties hereby agree that Adaptec may
defer payment of the Second Installment until such time as Adaptec requires the
Option III Capacity, subject to the following:
(a) Adaptec will give TSMC at least one hundred eighty (180)
days prior written notice of its intent to pay the Second Installment;
(b) Until payment of the Second Installment is received by
TSMC, the Option III Capacity will not be included in the "TSMC
Committed Capacity" or in the "Customer Committed Capacity" as those
terms are defined in the Agreement; and
(c) The term of the Agreement will be extended by a period
equal to the time between June 30, 1998 and the date payment of the
Second Installment is received by TSMC, and the parties' respective
obligations to purchase and sell the Wafer Equivalents included in the
Option III Capacity will also be deferred for a like period.
(d) The promissory note for the Second Installment issued by
Adaptec to the order of TSMC dated April 21, 1997 and specifying a due
date of June 30, 1998 (the "Promissory Note"), is hereby amended by
deleting the due date specified therein and replacing it with the date
specified by Adaptec for payment of the Second Installment pursuant to
paragraph I (a) of this Amendment. TSMC agrees that it will attach a
fully-executed copy of this Amendment to the original of the Promissory
Note, and will notify any holder in due course of the Promissory Note
of the terms of this Amendment.
II. Except as expressly amended by this Amendment, the Agreement and
the Promissory Note shall continue in full force and effect in accordance with
their terms. In the event of any conflict between the terms of this Amendment
and the terms of the Agreement or of the Promissory Note, this Amendment shall
control.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed
by their duly authorized representatives.
Adaptec Mfg (S) Pte. Ltd. Taiwan Semiconductor
Manufacturing Co., Ltd.
By: [SIG] By: [SIG]
Title: Vice President Title: Vice President
and Director
Date: 7/2/98 Date: 7/7/98
1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 403,187
<SECURITIES> 278,332
<RECEIVABLES> 115,299
<ALLOWANCES> 4,155
<INVENTORY> 57,148
<CURRENT-ASSETS> 937,170
<PP&E> 292,594
<DEPRECIATION> 91,648
<TOTAL-ASSETS> 1,235,233
<CURRENT-LIABILITIES> 120,159
<BONDS> 230,000
0
0
<COMMON> 116
<OTHER-SE> 867,318
<TOTAL-LIABILITY-AND-EQUITY> 1,235,233
<SALES> 180,630
<TOTAL-REVENUES> 180,630
<CGS> 79,738
<TOTAL-COSTS> 79,738
<OTHER-EXPENSES> 188,157
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,067
<INCOME-PRETAX> (81,199)
<INCOME-TAX> (3,860)
<INCOME-CONTINUING> (77,339)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (77,339)
<EPS-PRIMARY> (0.68)<F1>
<EPS-DILUTED> (0.68)
<FN>
<F1>FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
</FN>
</TABLE>
