<PAGE> 1
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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 DECEMBER 31, 1997
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)
<TABLE>
<S> <C>
CALIFORNIA 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
February 2, 1998 was 114,098,065.
This document consists of 19 pages, excluding exhibits, of which this is
page 1.
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<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................. 6-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Results of Operations................................................ 10-12
Liquidity and Capital Resources...................................... 12-13
Factors affecting future operating results........................... 13-17
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K...................................... 18
Signatures......................................................................... 19
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues................................. $254,163 $251,703 $803,693 $668,760
Cost of revenues............................. 95,304 103,139 307,328 281,735
-------- -------- -------- --------
Gross profit................................. 158,859 148,564 496,365 387,025
-------- -------- -------- --------
Operating expenses:
Research and development................... 49,282 34,859 130,381 93,339
Selling, marketing and administrative...... 64,999 45,042 167,506 114,902
Write-off of acquired in-process technology
and other............................... -- 11,758 -- 80,663
-------- -------- -------- --------
Total operating expenses..................... 114,281 91,659 297,887 288,904
-------- -------- -------- --------
Income from operations....................... 44,578 56,905 198,478 98,121
Interest income, net of interest expense..... 6,349 2,460 15,659 7,393
-------- -------- -------- --------
Income before provision for income taxes and
cumulative effect of a change in accounting
principle.................................. 50,927 59,365 214,137 105,514
Provision for income taxes................... 14,852 17,781 55,654 44,779
-------- -------- -------- --------
Income before cumulative effect of a change
in accounting principle.................... 36,075 41,584 158,483 60,735
Cumulative effect of a change in accounting
principle, net of tax benefit.............. 9,000 -- 9,000 --
-------- -------- -------- --------
Net income................................... $ 27,075 $ 41,584 $149,483 $ 60,735
======== ======== ======== ========
Basic EPS
Basic EPS before cumulative effect of a
change in accounting principle.......... $ 0.32 $ 0.38 $ 1.40 $ 0.56
Cumulative effect of a change in accounting
principle............................... 0.08 -- 0.08 --
-------- -------- -------- --------
Basic EPS.................................. $ 0.24 $ 0.38 $ 1.32 $ 0.56
======== ======== ======== ========
Diluted EPS
Diluted EPS before cumulative effect of a
change in accounting principle.......... $ 0.30 $ 0.36 $ 1.34 $ 0.53
Cumulative effect of a change in accounting
principle............................... 0.07 -- 0.07 --
-------- -------- -------- --------
Diluted EPS................................ $ 0.23 $ 0.36 $ 1.27 $ 0.53
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE> 4
ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1997
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 146,715 318,075
Marketable securities............................................ 581,262 230,366
Accounts receivable, net......................................... 144,776 123,303
Inventories...................................................... 61,617 53,184
Prepaid expenses and other current assets........................ 88,807 93,020
---------- ----------
Total current assets..................................... 1,023,177 817,948
Property and equipment, net........................................ 179,696 141,599
Other assets....................................................... 89,521 83,947
---------- ----------
$1,292,394 1,043,494
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................ $ 1,700 3,400
Note payable..................................................... 35,280 --
Accounts payable................................................. 57,633 52,400
Accrued liabilities.............................................. 96,336 68,519
---------- ----------
Total current liabilities................................ 190,949 124,319
---------- ----------
Convertible subordinated notes and long-term debt, net of current
portion.......................................................... 230,000 230,850
---------- ----------
Shareholders' equity:
Common stock..................................................... 285,471 251,834
Retained earnings................................................ 585,974 436,491
---------- ----------
Total shareholders' equity............................... 871,445 688,325
---------- ----------
$1,292,394 $1,043,494
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
-----------------------------
DECEMBER 31, DECEMBER 31,
1997 1996
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... $ 222,013 $ 164,811
--------- ---------
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.................................................... -- (89,264)
Purchases of property and equipment................................ (73,564) (54,280)
(Purchases) sales of marketable securities......................... (350,896) 4,741
--------- ---------
NET CASH USED FOR INVESTING ACTIVITIES............................. (424,460) (138,803)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of note payable............................................ -- (46,200)
Proceeds from issuance of common stock............................. 33,637 20,967
Principal payments on long-term debt............................... (2,550) (2,550)
--------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES............... 31,087 (27,783)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......................... (171,360) (1,775)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 318,075 91,211
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 146,715 $ 89,436
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, 1997 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, 1997. For presentation purposes, the Company has indicated its third quarter
as having ended on December 31, whereas in fact, the Company's third quarter of
fiscal 1998 ended on January 2, 1998 and its third quarter of fiscal 1997 ended
on December 27, 1996. The results of operations for the nine month period ended
December 31, 1997 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.
Accounts Receivable: The Company maintains an allowance for bad debts based
upon the expected collectibility of all trade accounts receivable. During the
quarter ended December 31, 1997, the Company increased its allowance for bad
debts by $4 million to reflect current business conditions in the disk drive
industry.
Other Assets: The Company periodically assesses whether there has been any
impairment of other assets, including goodwill and minority investments, based
on the estimated future cash flows of the acquired technology. During the
quarter ended December 31, 1997, the Company recorded impairment losses totaling
$5 million related to previously acquired technologies.
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>
DECEMBER 31, MARCH 31,
1997 1997
------------ ---------
<S> <C> <C>
Raw materials........................................ $ 14,945 $12,958
Work in process...................................... 19,142 14,370
Finished goods....................................... 27,530 25,856
------- -------
$ 61,617 $53,184
======= =======
</TABLE>
3. EARNINGS PER SHARE
Basic EPS is computed by dividing net income available to common
shareholders (numerator) by the weighted average number of common shares
outstanding (denominator) during the period and excludes the dilutive effect of
stock options. Diluted EPS gives effect to all dilutive potential common shares
outstanding during a period. In computing Diluted EPS, the average stock price
for the period is used in determining the number of shares assumed to be
purchased from exercise of stock options.
6
<PAGE> 7
Following is a reconciliation of the numerators and denominators of the
Basic and Diluted EPS computations for the periods presented below.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------- ---------------------------------------
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 EPS
Net income available to common
shareholders................. $ 27,075 113,666 $0.24 $41,584 110,555 0.38
===== =====
EFFECT OF DILUTIVE SECURITIES
Common stock equivalents....... -- 6,189 -- 6,231
4.75% convertible subordinated
notes........................ 2,043 4,452 -- --
-------- ------- ------- -------
DILUTED EPS
Net income available to common
shareholders and assumed
conversions.................. $ 29,118 124,307 $0.23 $41,584 116,786 $0.36
======== ======= ===== ======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------------------------- ---------------------------------------
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 EPS
Net income available to common
shareholders................. $ 149,483 112,856 $1.32 $60,735 108,908 $0.56
===== =====
EFFECT OF DILUTIVE SECURITIES
Common stock equivalents....... -- 5,611 -- 5,094
4.75% convertible subordinated
notes........................ 6,218 4,452 -- --
-------- ------- ------- -------
DILUTED EPS
Net income available to common
shareholders and assumed
conversions.................. $ 155,701 122,919 $1.27 $60,735 114,002 $0.53
======== ======= ===== ======= ======= =====
</TABLE>
Options to purchase 631,000 shares of common stock were outstanding during
the three and nine month periods ended December 31, 1997 but were not included
in the computations of diluted EPS because the options' exercise price was
greater than the average market price of the common shares. No options were
excluded in the computations of diluted EPS for the three and nine month periods
ended December 31, 1996 as there were no options with exercise prices greater
than the average market price.
4. CHANGE IN ACCOUNTING POLICY FOR BUSINESS PROCESS REENGINEERING COSTS
On November 20, 1997, the Emerging Issues Task Force (EITF) of the
Financial Accounting Standards Board issued EITF 97-13, "Accounting for costs
incurred in connection with a consulting contract that combines business process
reengineering and information technology transformation." EITF 97-13 requires
that business process reengineering costs incurred in connection with an overall
information technology transformation project be expensed as incurred. The
transition provisions of EITF 97-13 require that companies that had previously
capitalized such business process reengineering costs charge off any unamortized
amounts as the cumulative effect of a change in accounting principle during the
quarter which includes November 20, 1997. The cumulative effect of the change to
the Company was to decrease net income by $9 million (net of tax benefit of $3
million).
7
<PAGE> 8
Pro forma amounts, assuming the new accounting principle was applied during
all periods presented, follow with comparison to actual amounts reported.
<TABLE>
<CAPTION>
THREE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
--------------------------- ---------------------------
DECEMBER DECEMBER DECEMBER DECEMBER
31, 31, 31, 31,
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net income
As reported....................... $27,075 $41,584 $ 149,483 $60,735
Pro forma......................... 36,075 39,884 155,803 56,860
Basic EPS
As reported....................... 0.24 0.38 1.32 0.56
Pro forma......................... 0.32 0.36 1.38 0.52
Diluted EPS
As reported....................... 0.23 0.36 1.27 0.53
Pro forma......................... 0.31 0.34 1.32 0.50
</TABLE>
5. INCOME TAXES
Income tax provisions 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.
Effective tax rates for periods presented are higher than 25% primarily because
of book write-offs which are not deductible for tax purposes.
6. ACQUISITIONS
On April 9, 1996, the Company acquired, for $33 million cash, certain
assets and the ongoing business of Western Digital's Connectivity Solutions
Group (CSG), a supplier of silicon solutions for the SCSI disk drive market. On
June 28, 1996, the Company acquired certain technologies from Corel, Inc. for
$12 million cash. Included in these technologies was Corel's CD Creator product
for the CD-recordable software market. On September 16, 1996, the Company
acquired, for $32 million cash and $15 million in stock, Data Kinesis, Inc.
(DKI), a developer of software for improving system performance in file
management and RAID applications. Additionally, on November 15, 1996, the
Company acquired for $14 million cash, Sigmax Technology, Inc. (Sigmax), a
developer of CD-Rom controllers for ATAPI CD-Rom drives.
The Company accounted for these acquisitions using the purchase method of
accounting, and excluding the $79 million write-off of purchased in-process
technology from these companies, the aggregate impact on the Company's results
of operations from the acquisition date was not material.
The allocation of the Company's aggregate purchase price to the tangible
and identifiable intangible assets acquired was based on independent appraisals
and is summarized as follows (in millions):
<TABLE>
<S> <C>
Tangible assets............................................... $ 10
In-process technology......................................... 79
Goodwill...................................................... 17
----
Assets acquired............................................... $106
====
</TABLE>
The tangible assets acquired were primarily comprised of inventory and
fixed assets. Acquired in-process technology was written off in the periods in
which the acquisitions were completed, and the goodwill is being amortized over
respective benefit periods ranging from three to five years.
On August 12, 1996, the Company completed its acquisition of Cogent Data
Technologies, Inc. (Cogent), a provider of high-performance Fast Ethernet
products for the networking market. The Company acquired all of the outstanding
capital stock of Cogent in exchange for 2.6 million shares of its common stock.
Additionally, the Company incurred $1.7 million in professional fees related to
this acquisition which have
8
<PAGE> 9
been included in "write-off of acquired in-process technology and other." The
Company has recorded this acquisition using the pooling method of accounting.
Cogent's historical operations have not been material to the Company's
consolidated financial statements and, therefore, have not been reflected in the
Company's consolidated financial results prior to the acquisition. Beginning at
the date of acquisition, the book value of the acquired assets and assumed
liabilities as well as the results of Cogent's operations, all of which are not
material to the Company have been combined with those of the Company.
7. SUBSEQUENT EVENTS
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.
On January 21, 1998, a class action lawsuit alleging federal securities
violations was filed against the Company and certain of its directors and
officers. Management believes that the lawsuit is without merit and that the
outcome of the lawsuit will not have a material adverse effect on the financial
position or results of operations of the Company.
9
<PAGE> 10
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 NINE MONTH
PERIOD ENDED PERIOD ENDED
--------------------------- ---------------------------
DECEMBER DECEMBER DECEMBER DECEMBER
31, 31, 31, 31,
1997 1997 1997 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues.............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................... 37.5 41.0 38.2 42.1
----- ----- ----- -----
Gross profit.............................. 62.5 59.0 61.8 57.9
----- ----- ----- -----
Operating expenses:
Research and development................ 19.4 13.8 16.2 14.0
Selling, marketing and administrative... 25.6 17.9 20.9 17.1
Write-off of acquired in-process
technology and other................. -- 4.7 -- 12.1
----- ----- ----- -----
45.0 36.4 37.1 43.2
----- ----- ----- -----
Income from operations.................... 17.5 22.6 24.7 14.7
Interest income, net...................... 2.5 1.0 1.9 1.1
----- ----- ----- -----
Income before provision for income taxes
and cumulative effect of a change in
accounting principle.................... 20.0 23.6 26.6 15.8
Provision for income taxes................ 5.8 7.1 6.9 6.7
----- ----- ----- -----
Income before cumulative effect of a
change in accounting principle.......... 14.2 16.5 19.7 9.1
Cumulative effect of a change in
accounting principle, net of tax
benefit................................. 3.5 -- 1.1 --
----- ----- ----- -----
Net income................................ 10.7% 16.5% 18.6% 9.1%
===== ===== ===== =====
</TABLE>
Net Revenues
Net revenues were $254 million for the third quarter of fiscal 1998
compared with $252 million for the corresponding quarter of fiscal 1997. Net
revenues for the first nine months of fiscal 1998 were $804 million,
representing an increase of 20% over the corresponding period for fiscal 1997.
The growth in net revenues on a year to date basis was primarily attributable to
increased shipments of the Company's host adapters and proprietary integrated
circuits (ICs) used in peripheral technology solutions compared to the same
periods a year ago. These increases reflect growth in the high-performance
microcomputer markets, continued demand for SCSI in the client/server
environment, the ongoing deployment of sophisticated operating systems, and an
increase in the use of diverse peripherals in microcomputer systems compared to
the corresponding prior year period.
Gross Margin
Gross margins for the third quarter and the first nine months of fiscal
1998 were 63% and 62%, respectively, compared to 59% and 58% for the three
months ended December 31, 1996 and first nine months of fiscal 1997,
respectively. The percentage increase is primarily due to the mix of products
shipped, which included increased shipments of the Company's higher margin SCSI
host adapters. Gross margins also increased due to the Company's continued focus
on component cost reductions and on improving manufacturing efficiencies.
10
<PAGE> 11
Operating Expenses
As a percentage of net revenues, expenditures for research and development
increased to 19% and 16% for the third quarter and first nine months of fiscal
1998 compared to 14% for the corresponding periods of fiscal 1997. In absolute
dollars, spending for research and development increased 41% to $49 million for
the third quarter of fiscal 1998 and 40% to $130 million for the first nine
months of fiscal 1998. The increase in spending is primarily due to the
Company's increased staffing levels reflecting its ongoing commitment to invest
in its core products, as well as having invested in newer hardware and software
products incorporating IEEE 1394, Fibre Channel, file array, and CD recordable
software solutions.
As a percentage of revenues, selling, marketing and administrative expenses
was 26% and 21% for the third quarter and first nine months of fiscal 1998,
respectively, compared with 18% and 17% for the corresponding periods of fiscal
1997. In absolute dollars, spending for selling, marketing and administrative
expenses increased 44% to $65 million for the third quarter of fiscal 1998 and
46% to $168 million for the first nine months of fiscal 1998. The increase in
spending was primarily a result of increased staffing levels to support the
Company's worldwide growth and increased advertising and promotional programs.
In addition, the Company increased its allowance for bad debts by $4 million to
reflect current business conditions in the disk drive industry.
During the first nine months of fiscal 1997, the Company acquired
complementary businesses recorded under the purchase method of accounting,
resulting in an aggregate write-off of acquired in-process technology of $79
million. During the first nine months of fiscal 1998, the Company did not
complete any acquisitions.
Interest and Income Taxes
Interest income, net of interest expense, increased 158% to $6 million for
the third quarter of fiscal 1998 and 112% to $16 million for the first nine
months of fiscal 1998. The increase was primarily due to higher average cash and
marketable securities balances as a result of proceeds received in connection
with $230 million of Convertible Subordinated Notes that the Company issued in
February 1997, offset by higher interest expense as a result of higher average
outstanding debt balances.
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 Company recorded a provision for
income taxes of $15 million and $56 million, representing 29% and 26% of income
before income taxes and cumulative effect of a change in accounting principle
for the third quarter and first nine months of fiscal 1998, respectively,
compared with 30% and 42% for the corresponding periods in fiscal 1997. The
effective tax rates for the third quarter and first nine months of fiscal 1998
were higher than 25% primarily as a result of book write-offs which are not
deductible for tax purposes. Excluding the effect of these write-offs, the
Company's effective tax rate was 25% for both the third quarter and first nine
months of fiscal 1998. The effective tax rates in the prior fiscal year were
higher than the 25% rate primarily due to book write-offs of acquired in-process
technology which are not deductible for tax purposes.
Change in Accounting Policy
EITF 97-13 was issued in November 1997 and requires that business process
reengineering costs be expensed as incurred. The transition provisions of EITF
97-13 require that companies that had previously capitalized such business
process reengineering costs charge off any unamortized amounts as the cumulative
effect of a change in accounting principle. The cumulative effect of the change
to the Company was to decrease net income by $9 million.
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
11
<PAGE> 12
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.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash generated from operating activities for the first nine months of
fiscal 1998 totaled $222 million compared to $165 million generated in the
corresponding period of fiscal 1997. The increase is primarily attributable to
net income for the first nine months of fiscal 1998 of $150 million compared
with $61 million for the first nine months of fiscal 1997 reflecting the impact
of a $79 million non-recurring write-off of acquired in-process technology in
fiscal 1997. Operating cash flows for the first nine months of fiscal 1998 were
also increased by the receipt of two amounts totaling $26 million. These amounts
consisted of a refund of a deposit totaling $15 million from Taiwan
Semiconductor Manufacturing Co., Ltd. ("TSMC") and $11 million received from
Lucent Technologies, Inc. ("Lucent") under an agreement in which the Company
sold equipment that it had previously purchased in connection with a separate
agreement.
Investing Activities
Purchases of property and equipment of $74 million during the first nine
months of fiscal 1998 included an investment of $11 million for land located in
Irvine, California to provide for the Company's future growth and $17 million
relating to the implementation of new information systems. During the first nine
months of fiscal 1998 and 1997, the Company continued to make various building
and leasehold improvements to its facilities and to invest in equipment for
product development and manufacturing to support increased demand for its
products and future business requirements. During the first nine months of
fiscal 1997, the Company acquired CSG, certain technologies from Corel, Inc, DKI
and Sigmax for an aggregate purchase price of $106 million in cash and stock.
The Company anticipates capital expenditures relating to property and
equipment will total approximately $15 million for the remainder of fiscal 1998.
The Company may also make investments in increased wafer fabrication capacity or
for acquisitions of complimentary businesses, products, or technologies.
During the first nine months of fiscal 1998, the Company continued to
invest significant amounts of funds in marketable securities, consisting of
various taxable and tax advantaged securities. During the corresponding period
of fiscal 1997, the Company sold marketable securities 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 becomes due in two equal
installments in January 1998 and June 1998. During the first nine months of
fiscal 1997, the Company paid a $46 million note payable due to TSMC in return
for guaranteed future wafer capacity.
During the first nine months of fiscal 1998 and fiscal 1997, the Company
received proceeds from common stock issued under the employee stock option and
employee stock purchase plans totaling $34 million and $21 million,
respectively.
At December 31, 1997, the Company's principal sources of liquidity
consisted of $728 million of cash, cash equivalents and marketable securities
and an unsecured $17 million revolving line of credit which expires on December
31, 1998. The Company believes existing working capital, together with expected
cash flows
12
<PAGE> 13
from operations and available sources of bank, equity, debt and equipment
financing, will be sufficient to support its operations through fiscal 1999.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Statements in this discussion and analysis contain forward looking
information and involve risks and uncertainties which may cause the Company's
actual results in future periods to be materially different from any future
performance that might be inferred from such forward looking statements. In
addition, the Company and its representatives may from time to time make
forward-looking statements, and the following are important factors that could
cause actual results to differ materially from those suggested in such forward-
looking statements.
Future Operating Results Subject to Fluctuation. The Company's operating
results may fluctuate in the future as a result of a wide variety of 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, shifts in corporate buying patterns, product obsolescence,
increased competition and general worldwide economic and computer industry
fluctuations. In addition, fluctuations may be caused by future accounting
pronouncements 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.
Additionally, the Company has historically operated with a relatively small
backlog, especially relating to orders of its board-based I/O solutions.
Further, the Company's expense levels are based in part on expectations of
future revenues, and the Company has been significantly increasing and over the
long term intends to continue to increase operating expenditures and working
capital balances as it expands its operations. As a result of the difficulty of
forecasting revenues and the Company's planned growth in spending, operating
expenses could be disproportionately high for a given quarter, and the Company's
operating results for that quarter, and potentially future quarters, would be
adversely affected. Operating results in any particular quarter which do not
meet the expectations of securities analysts could cause volatility in the price
of the Company's Common Stock.
Certain Risks Associated with the High-Performance Microcomputer
Market. The Company's board-based I/O 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. Should the growth of demand for such systems slow, the
Company's business or operating results could be materially adversely affected
by a 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, 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.
13
<PAGE> 14
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,
Ultra2 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.
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.
14
<PAGE> 15
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 Risks Associated With Acquisitions. Since the beginning of fiscal
1996, the Company has acquired eleven 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 would 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 of New Information
Systems. The Company has implemented new information systems in its operations
in the United States and Singapore and is in the process of implementing new
information systems in its operations in Europe and Japan to enhance its current
and future business processes worldwide. There can be no assurance that the
Company will successfully implement these new systems on a worldwide basis
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. Many computer systems were not designed to handle any
dates beyond the year 1999 and therefore, computer systems will need to be
modified prior to Year 2000 to remain functional. Since the Company has recently
implemented new information systems it 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 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.
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 smaller host adapter
manufacturers. The Company's principal competitors in the mass storage market
are captive suppliers and
15
<PAGE> 16
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 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. Such a slowdown in
orders 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.
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 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
16
<PAGE> 17
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, El Nino 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, 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.
17
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 10-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ ----------------------------------------------------------------------------
<C> <S>
10.1 Amendment Ten to the Revolving Credit Loan Agreement dated June 3, 1992
between the Registrant and Comerica Bank-California expiring December 31,
1998.
10.2 Amendment Five to the Term Loan Agreement dated June 24, 1992 between the
Registrant and Comerica Bank-California (formerly the Plaza Bank of
Commerce) expiring June 30, 1998.
27.1 Financial Data Schedule for the three months ended December 31, 1997.
</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/ PAUL G. HANSEN
--------------------------------------
Paul G. Hansen, Vice-President,
Finance
and Chief Financial Officer
(Principal Financial Officer),
Assistant Secretary
Date: February 2, 1998
/s/ ANDREW J. BROWN
--------------------------------------
Andrew J. Brown, Vice-President and
Corporate Controller
(Principal Accounting Officer)
Date: February 2, 1998
19
<PAGE> 1
AMENDMENT NUMBER TEN TO
REVOLVING CREDIT LOAN AGREEMENT
-------------------------------
THIS AMENDMENT NUMBER TEN To REVOLVING CREDIT LOAN AGREEMENT dated as
of January 27, 1997 (the "Amendment") is entered into by and between ADAPTEC,
INC. "a California corporation (the "Borrower") , and COMERICA BANK-CALIFORNIA
(formerly known as Plaza Bank of Commerce), a California banking corporation
(the "Bank").
WITNESSETH:
-----------
WHEREAS, the Borrower and the Bank are parties to a certain Revolving
Credit Loan Agreement dated as of June 3, 1992, as amended by Amendment Number
one dated as of August 21, 1992, Amendment Number Two dated as of December 31,
1992, Amendment Number Three dated as of April 29, 1994, Amendment Number Four
dated as of July 13, 1994, Amendment Number Five dated as of September 21, 1994,
Amendment Number Six dated as of December 9, 1994, Amendment Number Seven dated
as of December 27, 1995, Amendment Number Eight dated as of December 29, 1995,
and Amendment Number Nine dated as of March 18, 1996 (as so amended, the
"Agreement"); and
WHEREAS, the Borrower and the Bank desire to amend the Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the Borrower and the Bank agree as follows:
1. Capitalized terms used in this Amendment and not otherwise defined
shall have the respective meanings set forth in the Agreement.
2. Section 1.1 of the Agreement is hereby amended to add the following
definition, in proper alphabetical sequence, which reads in its entirety as
follows:
"Convertible Subordinated Debt" shall mean unsecured Debt due
2004 issued by the Borrower in an aggregate principal amount not
exceeding Three Hundred Million Dollars ($300,000,000) at any one time
outstanding pursuant to documentation containing substantially similar
payment terms and substantially identical subordination provisions as
those set forth in the January 21, 1997 draft of the Indenture.
<PAGE> 2
3. section 1.1 of the Agreement in hereby amended to add the following
definition, in proper alphabetical sequence, which reads in its entirety as
follows:
"Equity Securities" of any Person shall mean all common stock,
preferred stock, participations, shares, partnership interests or other
equity interests in and of such Person (regardless of how designated
and whether or not voting or non-voting).
4. Section 1.1 of the Agreement is hereby amended to add the following
definition, in proper alphabetical sequence, which reads in its entirety as
follows:
"Indenture" shall mean that certain Indenture executed in
February, 1997 by and between the Borrower and State Street Bank and
Trust Company, as trustee, pursuant to which the Convertible
Subordinated Debt was issued.
5. Section 1.1 of the Agreement is hereby amended to add the following
definition, in proper alphabetical sequence, which reads in its entirety as
follows:
"Subordinated Debt" shall mean unsecured Debt of the Borrower
or any of its Subsidiaries which is subordinate to the Indebtedness and
having terms and conditions satisfactory to the Bank.
6. The definition of "Termination Date" set forth in Section 1.1 of the
Agreement is hereby amended to read in its entirety as follows:
"Termination Date" shall mean December 31, 1998 (or such later
date as extended pursuant to Section 2.6 or such earlier date on which
the Borrower shall permanently terminate the Bank's commitment under
Section 2.14).
7. Section 2.6 of the Agreement is hereby amended to read in its
entirety as follows:
2.6 Extension of Maturity. At the request of the Borrower, the
Bank may, in its sole discretion, elect to extend the Termination Date
then in affect for additional periods of one (1) year each. The
Borrower shall notify the Bank of its request for such an extension by
delivering written notice signed by an Authorized Officer prior to
November 30, but not before November 15, of each year. If the Bank
elects to grant such extension, the Termination Date then in effect
shall be extended for an additional one (1) year period, as evidenced
by an executed amendment. If the Bank elects not to grant such
extension, the then effective Termination Date shall be and continue in
effect. No extension of the Termination Date shall become effective if
a Default or Event of Default has occurred and is continuing.
2
<PAGE> 3
8. Section 5.5 of the Agreement is hereby amended to read in its
entirety as follows:
5.5 Maintain Tangible Net Worth. On a consolidated basis for
the Borrower and its consolidated Subsidiaries, maintain, as of the end
of each of the Borrower's fiscal quarters hereunder, commencing
September 27, 1996, a Tangible Net Worth of not less than (a) Four
Hundred Forty-Seven Million Eight Hundred Forty-Three Thousand Two
Hundred Fifty Dollars ($447,843,250), plus (b) seventy-five percent
(75%) of Net Income for each fiscal year, commencing with the fiscal
year ending March 31, 1997 (on a cumulative basis but without taking
into account any net loss incurred during any fiscal year), plus (c)
one hundred percent (100%) of the aggregate consideration received from
the issuance or sale of any Equity Securities after September 27, 1996,
net of reasonable and customary fees and expenses (including, without
limitation, filing fees, brokerage commissions, accounting fees and
attorneys fees) incurred in connection with such issuance or sale, plus
(d) one hundred percent (100%) of the aggregate decrease in Debt
resulting from conversions of the Convertible Subordinated Debt or
other liabilities into Equity Securities at any time after September
27, 1996, net of reasonable and customary fees and expenses (including,
without limitation, filing fees, brokerage commissions, accounting fees
and attorneys fees) incurred in connection with any such conversion or
call of the convertible Subordinated Debt.
9. Section 5.7 of the Agreement is hereby amended to read in its
entirety as follows:
5.7 Maintain Quick Ratio. On a consolidated basis for the
Borrower and its consolidated Subsidiaries, maintain, as of the end of
each of the Borrower's fiscal quarters hereunder, the ratio of (a)
unrestricted cash plus unrestricted Cash Investments plus
non-affiliated trade accounts receivable (net of applicable reserves
therefor) to (b) Current Liabilities plus the aggregate principal
amount outstanding under any line of credit or revolving credit
facility (including, without limitation, the aggregate principal
amount of all Revolving Loans and Letter of Credit Loans then
outstanding), at not less than 1.25 to 1.00.
10. Section 6.4 of the Agreement is hereby amended to read in its
entirety as follows:
6.4 Indebtedness. Incur, create, assume or permit to exist
any indebtedness or liability on account of deposits or advances or
any indebtedness or liability for borrowed money, or any other
indebtedness or liability evidenced by notes, bonds, debentures or
similar obligations, or any other indebtedness whatsoever
3
<PAGE> 4
(including sale/leaseback transactions), except (a) the Indebtedness,
(b) other indebtedness of the Borrower or any of its subsidiaries to
the Bank, whether now existing or hereafter arising, (c) trade payables
and accrued expenses incurred and paid in the ordinary course of
business, (d) indebtedness under Capital Leases in an aggregate
principal amount not exceeding Five Million Dollars ($5,000,000) at any
one outstanding on a consolidated basis, (e) indebtedness under
operating leases in the ordinary course of business, (f) outstanding
tax obligations to governmental agencies, (g) unsecured loans or
advances by the Borrower to any Subsidiary, or by any Subsidiary to
either the Borrower or any other subsidiary, (h) the Convertible
Subordinated Debt and other Subordinated Debt, (i) other Debt
(exclusive of Subordinated Debt) in an aggregate principal amount not
exceeding One Hundred Million Dollars ($100,000,000) at any one time
outstanding on a consolidated basis which is either unsecured or
secured by a Permitted Lien;
provided, however, that no Debt otherwise permitted by clauses (d),
(e), (h) and (i) above shall be permitted to be incurred if, after
giving effect to the incurrence thereof, any Default or Event of
Default has occurred and is continuing.
11. Section 6.13 of the Agreement is hereby amended to read in its
entirety as follows:
6.13 Other Agreements. Enter into any agreement containing any
provision which (a) would be violated or breached by the performance of
its obligations under this Agreement or under any instrument or
document delivered or to be delivered by it hereunder or in connection
herewith, (b) prohibits or restricts the creation or assumption of any
lien by the Borrower or any of its Subsidiaries upon its properties,
revenues or assets (whether now owned or hereafter acquired) as
security for the Indebtedness hereunder (other than provisions set
forth in agreements relating to Permitted Liens, joint venture
agreements and lease agreements, provided that such provisions only
prohibit or restrict liens upon the assets specifically the subject of
such agreements), (c) prohibits or restricts the ability of any
Subsidiary to make dividends, advances or payments to the Borrower, or
(d) prohibits or restricts the ability of the Borrower to amend or
otherwise modify this Agreement or any other document executed in
connection herewith.
12. Clause (a) of Section 6.15 of the Agreement is hereby amended to
read in its entirety as follows:
(a) in the case of such acquisitions which are funded in the
form of consideration other than treasury stock or newly-issued equity
securities of the Borrower
4
<PAGE> 5
or any of its Subsidiaries, and which are accounted for on a
consolidated basis with the Borrower and its Subsidiaries in accordance
with GAAP, the Borrower and its Subsidiaries may not give such
consideration in an amount which exceeds, in the aggregate, One Hundred
Fifty million Dollars ($150,000,000) in fair market value thereof (or,
if higher, the book value thereof as reflected in the Borrower's
financial statements) during any fiscal year of the Borrower.
13. Section 6 of the Agreement is hereby amended to add a new Section
6.16 which reads in its entirety as follows:
6.16 Subordinated Debt. (a) Make any payment (whether of
principal, interest or otherwise) on any Subordinated Debt on any day
other than the stated scheduled date for such payment set forth in the
documents and instruments evidencing such Subordinated Debt, except as
permitted by clause (c) hereof, (b) make any payment on any
Subordinated Debt in contravention or violation of the subordination
provisions thereof, (c) prepay, redeem, purchase or defease any
Subordinated Debt, or make any deposit for any of the foregoing
purposes; provided, however, that, with respect to the Convertible
Subordinated Debt, the Borrower may call and prepay such Convertible
Subordinated Debt in accordance with the terms of the Indenture if (i)
at the time such call is announced the market price of the Borrower's
common stock has exceeded for ten (10) consecutive Business Days the
conversion price, and (ii) both before and after giving effect thereto,
no Default or Event of Default has occurred and is continuing, or (d)
enter into any amendment or modification of any Subordinated Debt;
provided, however, that the Borrower may enter into any amendment or
supplement to the Indenture pursuant to clauses (a), (e), (f), (g) and
(h) of Section 10.1 of the Indenture if such amendment or supplement
does not adversely affect the interests of the Bank.
14. Section 7.1 of the Agreement is hereby amended to add a new Section
7.1.10 which reads in its entirety as follows:
7.1.10 Designated Events. A "Change of Control" (as such term
is defined in the Indenture) shall occur.
15. Section 8 of the Agreement is hereby amended to add a new Section
8.13 which reads in its entirety as follows:
8.13 Designated Senior Indebtedness. The Borrower and the Bank
agree that the Indebtedness shall constitute "Designated Senior
Indebtedness" (as such term is defined in the Indenture).
5
<PAGE> 6
16. In reliance on the Borrower's warranties set forth in Paragraph 17
below, the Bank hereby waives any Default or Event of Default which otherwise
might arise under Section 6.13(a) of the Agreement as a result of the Borrower's
incurrence of the Convertible Subordinated Debt.
17. The Borrower hereby represents and warrants to the Bank that (a)
the representations and warranties contained in the Agreement are true and
correct as of the date of this Amendment, and (b) no Default or Event of Default
has occurred and is continuing.
18. Except as specifically amended pursuant to the foregoing paragraphs
of this Amendment, the Agreement shall remain in full force and effect and is
hereby ratified, approved and confirmed in all respects.
19. The Borrower agrees to reimburse the Bank for all reasonable costs
and expenses incurred by it in connection with this Amendment, including the
reasonable fees and expenses of the Bank's counsel with respect thereto.
20. This Amendment may be signed in any number of counterparts, each of
which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. Delivery of an executed counterpart of
the signature page to this Amendment by telecopier shall be effective as
delivery of a manually executed counterpart of this Amendment. If the Borrower
delivers an executed counterpart of the signature page to this Amendment by
telecopier, the Borrower shall thereafter also promptly deliver to the Bank a
manually executed counterpart of this Amendment, but the failure to deliver such
manually executed counterpart shall not affect the validity, enforceability and
binding effect of this Amendment. This Amendment shall become effective as of
the date when the Bank shall have received an original or telefacsimile
counterpart hereof signed by the Borrower.
21. This Amendment and the Agreement constitute the entire agreement
and understanding among the parties hereto and supersede any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.
22. This Amendment shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of California without regard
to principles of conflicts of laws.
6
<PAGE> 7
IN WITNESS WHEREOF, the Borrower and the Bank have caused this
Amendment to be executed by their duly authorized officers as of the day and
year first written above.
ADAPTEC, INC.
BY: /S/ Christopher G. O'Meara
----------------------------------------
Christopher G. O'Meara
Vice President and Treasurer
COMERICA, BANK-CALIFORNIA (formerly known
as Plaza Bank of Commerce)
BY:/S/ Lori S. Edwards
----------------------------------------
Lori S. Edwards
First Vice President
7
<PAGE> 1
AMENDMENT NUMBER FIVE TO
TERM LOAN AGREEMENT
THIS AMENDMENT NUMBER FIVE TO TERM LOAN AGREEMENT dated as of January
27, 1997 (the "Amendment") is entered into by and between ADAPTEC, INC., a
California corporation (the "Borrower"), and COMERICA BANK-CALIFORNIA (formerly
known as Plaza Bank of Commerce), a California banking corporation (the "Bank").
WITNESSETH:
WHEREAS, the Borrower and the Bank are parties to a certain Term Loan
Agreement dated as of June 24, 1992, as amended by Amendment Number One dated as
of July 13, 1994, Amendment Number Two dated as of September 21, 1994,
Amendment Number Three dated as of December 29, 1995, and Amendment Number Four
dated as of March 18, 1996 (as so amended, the "Agreement"); and
WHEREAS, the Borrower and the Bank desire to amend the Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
promises herein contained, the Borrower and the Bank agree as follows:
1. Capitalized terms used in this Amendment and not otherwise defined
shall have the respective meanings set forth in the Agreement.
2. Section 1.1 of the Agreement is hereby amended to add the following
definition, in proper alphabetical sequence, which reads in its entirety as
follows:
"Convertible Subordinated Debt" shall mean unsecured Debt
due 2004 issued by the Borrower in an aggregate principal amount not
exceeding Three Hundred Million Dollars ($300,000,000) at any one
time outstanding pursuant to documentation containing substantially
similar payment terms and substantially identical subordination
provisions as those set forth in the January 21, 1997 draft of the
Indenture.
3. Section 1.1 of the Agreement is hereby amended to add the following
definition, in proper alphabetical sequence, which reads in its entirety as
follows:
"Equity Securities" of any Person shall mean all common stock,
preferred stock, participations, shares,
<PAGE> 2
partnership interests or other equity interests in and of such Person
(regardless of how designated and whether or not voting or non-voting).
4. Section 1.1 of the Agreement is hereby amended to add the following
definition, in proper alphabetical sequence, which reads in its entirety as
follows:
"Indenture" shall mean that certain Indenture executed in
February, 1997 by and between the Borrower and State Street Bank and
Trust Company, as trustee, pursuant to which the Convertible
Subordinated Debt was issued.
5. Section 1.1 of the Agreement is hereby amended to add the following
definition, in proper alphabetical sequence, which reads in its entirety as
follows:
"Subordinated Debt" shall mean unsecured Debt of the Borrower
or any of its Subsidiaries which is subordinate to the Indebtedness and
having terms and conditions satisfactory to the Bank.
6. Section 5.5 of the Agreement is hereby amended to read in its
entirety as follows:
5.5 Maintain Tangible Net Worth. On a consolidated basis for
the Borrower and its consolidated Subsidiaries, maintain, as of the end
of each of the Borrower's fiscal quarters hereunder, commencing
September 27, 1996, a Tangible Net Worth of not less than (a) Four
Hundred Forty-Seven Million Eight Hundred Forty-Three Thousand Two
Hundred Fifty Dollars ($447,843,250), plus (b) seventy-five percent
(75%) of Net Income for each fiscal year, commencing with the fiscal
year ending March 31, 1997 (on a cumulative basis but without taking
into account any net loss incurred during any fiscal year), plus (c)
one hundred percent (100%) of the aggregate consideration received from
the issuance or sale of any Equity Securities after September 27, 1996,
net of reasonable and customary fees and expenses (including, without
limitation, filing fees, brokerage commissions, accounting fees and
attorneys fees) incurred in connection with such issuance or sale, plus
(d) one hundred percent (100%) of the aggregate decrease in Debt
resulting from conversions of the Convertible Subordinated Debt or
other liabilities into Equity Securities at any time after September
27, 1996, net of reasonable and customary fees and expenses (including,
without limitation, filing fees, brokerage commissions, accounting
fees and attorneys fees) incurred in connection with any such
conversion or call of the Convertible Subordinated Debt.
2
<PAGE> 3
7. Section 5.7 of the Agreement is hereby amended to read in its
entirety as follows:
5.7 Maintain Quick Ratio. On a consolidated basis for the
Borrower and its consolidated Subsidiaries, maintain, as of the end of
each of the Borrower's fiscal quarters hereunder, the ratio of (a)
unrestricted cash plus unrestricted Cash Investments plus
non-affiliated trade accounts receivable (net of applicable reserves
therefor) to (b) Current Liabilities plus the aggregate principal
amount outstanding under any line of credit or revolving credit
facility, at not less than 1.25 to 1.00.
8. Section 6.4 of the Agreement is hereby amended to read in its
entirety as follows:
6.4 Indebtedness. Incur, create, assume or permit to exist any
indebtedness or liability on account of deposits or advances or any
indebtedness or liability for borrowed money, or any other indebtedness
or liability evidenced by notes, bonds, debentures or similar
obligations, or any other indebtedness whatsoever (including
sale/leaseback transactions), except (a) the Indebtedness, (b) other
indebtedness of the Borrower or any of its Subsidiaries to the Bank,
whether now existing or hereafter arising, (c) trade payables and
accrued expenses incurred and paid in the ordinary course of business,
(d) indebtedness under Capital Leases in an aggregate principal amount
not exceeding Five Million Dollars ($5,000,000), at any one outstanding
on a consolidated basis, (e) indebtedness under operating leases in the
ordinary course of business, (f) outstanding tax obligations to
governmental agencies, (g) unsecured loans or advances by the Borrower
to any Subsidiary, or by any Subsidiary to either the Borrower or any
other Subsidiary, (h) the Convertible Subordinated Debt and other
Subordinated Debt, (i) other Debt (exclusive of Subordinated Debt) in
an aggregate principal amount not exceeding One Hundred Million Dollars
($100,000,000) at any one time outstanding on a consolidated basis
which is either unsecured or secured by a Permitted Lien;
provided, however, that no Debt otherwise permitted by clauses (d),
(e), (h) and (i) above shall be permitted to be incurred if, after
giving effect to the incurrence thereof, any Default or Event of
Default has occurred and is continuing.
9. Section 6.13 of the Agreement is hereby amended to read in its
entirety as follows:
6.13 Other Agreements. Enter into any agreement containing any
provision which (a) would be violated or breached by the performance of
its obligations under this Agreement or under any instrument or
document delivered
3
<PAGE> 4
or to be delivered by it hereunder or in connection herewith, (b)
prohibits or restricts the creation or assumption of any lien by the
Borrower or any of its Subsidiaries upon its properties, revenues or
assets (whether now owned or hereafter acquired) as security for the
indebtedness hereunder (other than provisions set forth in agreements
relating to Permitted Liens, joint venture agreements and lease
agreements, provided that such provisions only prohibit or restrict
liens upon the assets specifically the subject of such agreements), (c)
prohibits or restricts the ability of any Subsidiary to make dividends,
advances or payments to the Borrower, or (d) prohibits or restricts the
ability of the Borrower to amend or otherwise modify this Agreement or
any other document executed in connection herewith.
10. Clause (a) of Section 6.15 of the Agreement is hereby amended to
read in its entirety as follows:
(a) in the case of such acquisitions which are funded in the
form of consideration other than treasury stock or newly-issued equity
securities of the Borrower or any of its Subsidiaries, and which are
accounted for on a consolidated basis with the Borrower and its
Subsidiaries in accordance with GAAP, the Borrower and its Subsidiaries
may not give such consideration in an amount which exceeds, in the
aggregate, One Hundred Fifty Million Dollars ($150,000,000) in fair
market value thereof (or, if higher, the book value thereof as
reflected in the Borrower's financial statements) during any fiscal
year of the Borrower.
11. Section 6 of the Agreement is hereby amended to add a new Section
6.16 which reads in its entirety as follows:
6.16 Subordinated Debt. (a) Make any payment (whether of
principal, interest or otherwise) on any Subordinated Debt on any day
other than the stated scheduled date for such payment set forth in the
documents and instruments evidencing such Subordinated Debt, except as
permitted by clause (c) hereof,(b) make any payment on any Subordinated
Debt in contravention or violation of the subordination provisions
thereof, (c) prepay, redeem, purchase or defease any Subordinated
Debt, or make any deposit for any of the foregoing purposes; provided,
however, that, with respect to the Convertible Subordinated Debt, the
Borrower may call and prepay such Convertible Subordinated Debt in
accordance with the terms of the Indenture if (i) at the time such call
is announced the market price of the Borrower's common stock has
exceeded for ten (10) consecutive Business Days the conversion price,
and (ii) both before and after giving effect thereto, no Default or
Event of Default has occurred and is continuing, or (d) enter into any
amendment or modification of any Subordinated Debt; provided, however,
that the Borrower may enter into any
4
<PAGE> 5
amendment or supplement to the Indenture pursuant to clauses (a), (e),
(f), (g) and (h) of Section 10.1 of the Indenture if such amendment or
supplement does not adversely affect the interests of the Bank.
12. Section 7.1 of the Agreement is hereby amended to add a new Section
7.1.10 which reads in its entirety as follows:
7.1.10 Designated Events. A "Change of Control" (as such term
is defined in the Indenture) shall occur.
13. Section 8 of the Agreement is hereby amended to add a new Section
8.13 which reads in its entirety as follows:
8.13 Designated Senior Indebtedness. The Borrower and the Bank
agree that the Indebtedness shall constitute "Designated Senior
Indebtedness" (as such term is defined in the Indenture).
14. In reliance on the Borrower's warranties set forth in Paragraph 15
below, the Bank hereby waives any Default or Event of Default which otherwise
might arise under Section 6.13 (a) of the Agreement as a result of the
Borrower's incurrence of the Convertible Subordinated Debt.
15. The Borrower hereby represents and warrants to the Bank that (a)
the representations and warranties contained in the Agreement are true and
correct as of the date of this Amendment, and (b) no Default or Event of Default
has occurred and is continuing.
16. Except as specifically amended pursuant to the foregoing paragraphs
of this Amendment, the Agreement shall remain in full force and effect and is
hereby ratified, approved and confirmed in all respects.
17. The Borrower agrees to reimburse the Bank for all reasonable costs
and expenses incurred by it in connection with this Amendment, including the
reasonable fees and expenses of the Bank's counsel with respect thereto.
18. This Amendment may be signed in any number of counterparts, each
of which shall be an original, with the same effect as if the signatures thereto
and hereto were upon the same instrument. Delivery of an executed counterpart of
the signature page to this Amendment by telecopier shall be effective as
delivery of a manually executed counterpart of this Amendment. If the Borrower
delivers an executed counterpart of the signature page to this Amendment by
telecopier, the Borrower shall thereafter also promptly deliver to the Bank a
manually executed counterpart of this Amendment, but the failure to deliver such
manually executed counterpart shall not affect the validity,, enforceability and
binding effect of this Amendment. This Amendment shall become effective as of
the date when the Bank shall have received an original or telefacsimile
counterpart hereof signed by the Borrower.
5
<PAGE> 6
19. This Amendment and the Agreement constitute the entire agreement
and understanding among the parties hereto and supersede any and all prior
agreements and understandings, oral or written, relating to the subject matter
hereof.
20. This Amendment shall be governed by, and construed and enforced in
accordance with, the internal laws of the State of California without regard to
principles of conflicts of laws.
IN WITNESS WHEREOF, the Borrower and the Bank have caused thiS
Amendment to be executed by their duly authorized officers as of the day and
year first written above.
ADAPTEC, INC.
By: /S/ Christopher G. O'Meara
-----------------------------------------
Christopher G. O'Meara
Vice President and Treasurer
COMERICA BANK-CALIFORNIA
(formerly known as Plaza Bank of Commerce)
By. /S/ Lori S. Edwards
-----------------------------------------
Lori S. Edwards
First Vice President
6
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<S> <C>
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<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> OCT-04-1997
<PERIOD-END> JAN-02-1998
<EXCHANGE-RATE> 1
<CASH> 146,715
<SECURITIES> 581,262
<RECEIVABLES> 152,290
<ALLOWANCES> 7,514
<INVENTORY> 61,617
<CURRENT-ASSETS> 1,023,177
<PP&E> 255,307
<DEPRECIATION> 75,611
<TOTAL-ASSETS> 1,292,394
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<BONDS> 230,000
0
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<COMMON> 285,471
<OTHER-SE> 585,974
<TOTAL-LIABILITY-AND-EQUITY> 1,292,394
<SALES> 254,163
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