<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-15071
ADAPTEC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<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
October 2, 1998 was 108,041,533.
This document consists of 25 pages, excluding exhibits, of which this is
page 1.
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TABLE OF CONTENTS
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<CAPTION>
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...... 6-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Results of Operations..................................... 17-21
Liquidity and Capital Resources........................... 21-22
Recent Accounting Pronouncements.......................... 22
Year 2000................................................. 22-23
Factors Affecting Future Operating Results................ 23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................. 24
Signatures................................................ 25
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
------------------------------------ ------------------------------------
(RESTATED: (RESTATED:
NOTES 1 AND 9) (RESTATED: NOTE 1) NOTES 1 AND 9) (RESTATED: NOTE 1)
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
--------------- ------------------ --------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C> <C> <C>
Net revenues................... $143,922 $278,088 $ 324,552 $549,530
Cost of revenues............... 63,087 104,530 142,825 212,024
-------- -------- --------- --------
Gross profit................... 80,835 173,558 181,727 337,506
-------- -------- --------- --------
Operating expenses:
Research and development..... 40,817 42,117 84,814 81,099
Sales, marketing and
administrative............ 46,382 51,700 96,207 100,979
Write-off of acquired
in-process technology..... -- -- 45,482 --
Restructuring and other
charges................... 31,924 1,528 62,187 1,528
-------- -------- --------- --------
Total operating expenses....... 119,123 95,345 288,690 183,606
-------- -------- --------- --------
Income (loss) from
operations................... (38,288) 78,213 (106,963) 153,900
Interest income................ 7,912 8,442 17,045 15,400
Interest expense............... (3,047) (3,030) (6,114) (6,090)
-------- -------- --------- --------
Income (loss) before provision
(benefit) for income taxes... (33,423) 83,625 (96,032) 163,210
Provision (benefit) for income
taxes........................ (7,499) 20,906 (11,359) 40,802
-------- -------- --------- --------
Net income (loss).............. $(25,924) $ 62,719 $ (84,673) $122,408
======== ======== ========= ========
Net income (loss) per share:
Basic........................ $ (0.23) $ 0.56 $ (0.75) $ 1.09
======== ======== ========= ========
Diluted...................... $ (0.23) $ 0.52 $ (0.75) $ 1.03
======== ======== ========= ========
Shares used in computing net
income (loss) per share:
Basic........................ 111,583 112,931 112,892 112,470
======== ======== ========= ========
Diluted...................... 111,583 123,902 112,892 123,042
======== ======== ========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(RESTATED:
NOTES 1 AND 9) (RESTATED: NOTE 1)
SEPTEMBER 30, MARCH 31,
1998 1998
---------------- ------------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 195,629 $ 227,183
Marketable securities..................................... 417,957 470,199
Accounts receivable, net.................................. 69,606 136,476
Inventories............................................... 55,293 71,297
Prepaid expenses and other................................ 92,025 85,939
---------- ----------
Total current assets................................... 830,510 991,094
Property and equipment, net................................. 191,916 194,798
Other assets................................................ 101,726 89,337
---------- ----------
$1,124,152 $1,275,229
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ -- $ 850
Note payable.............................................. -- 17,640
Accounts payable.......................................... 38,003 48,047
Accrued liabilities....................................... 69,421 73,947
---------- ----------
Total current liabilities.............................. 107,424 140,484
---------- ----------
Long-term debt:
Long-term debt, net of current portion.................... 17,640 --
Convertible subordinated notes............................ 230,000 230,000
---------- ----------
Total long-term debt................................... 247,640 230,000
---------- ----------
Contingencies (Note 15)
Stockholders' equity:
Common stock.............................................. 108 114
Additional paid-in capital................................ 244,285 295,263
Retained earnings......................................... 524,695 609,368
---------- ----------
Total stockholders' equity............................. 769,088 904,745
---------- ----------
$1,124,152 $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
<TABLE>
<CAPTION>
SIX MONTH PERIOD
ENDED
------------------------------------------
(RESTATED: NOTES 1 AND 9)
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------------------- -------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES................ $ 72,060 $ 155,318
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certain net assets in connection with
acquisitions, net...................................... (34,126) --
Purchases of property and equipment...................... (28,671) (56,844)
(Decreases) increases in marketable securities, net...... 52,242 (184,036)
-------- ---------
NET CASH USED FOR INVESTING ACTIVITIES................... (10,555) (240,880)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock.................. 9,707 25,792
Repurchases of common stock.............................. (97,216) --
Principal payments on debt............................... (5,550) (1,700)
-------- ---------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES..... (93,059) 24,092
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS................ (31,554) (61,470)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... 227,183 318,075
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $195,629 $ 256,605
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated, interim financial statements have been prepared on a consistent
basis with the March 31, 1998 audited consolidated financial statements and
include all adjustments, consisting of only normal recurring adjustments, except
as described in Notes 8 through 11, necessary to provide a fair statement of the
results for the interim periods presented. These interim financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto incorporated by reference in the Company's Annual Report on
Form 10-K for the year ended March 31, 1998. For presentation purposes, the
Company has indicated its second quarter as having ended on September 30,
whereas in fact, the Company's second quarter of fiscal 1999 and 1998 ended on
October 2, 1998 and October 3, 1997, respectively. The results of operations for
the three and six month periods ended September 30, 1998, are not necessarily
indicative of the results to be expected for the entire year.
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the current presentation.
2. 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.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information". This statement establishes standards
for the way companies report information about operating segments in their
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
disclosures prescribed by SFAS 131 were adopted in the Company's fiscal 1999
Annual Report on Form 10-K.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires recognition of all derivatives as assets or liabilities and measurement
of those instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 2000. The Company will adopt this statement in the
first quarter of fiscal 2001 but does not expect the adoption of SFAS 133 to
have a material impact on the Company's financial position, results of
operations or cash flows.
6
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ---------
<S> <C> <C>
Raw materials........................................ $12,984 $17,728
Work in process...................................... 11,622 18,415
Finished goods....................................... 30,687 35,154
------- -------
$55,293 $71,297
======= =======
</TABLE>
5. LINE OF CREDIT
In May, 1998, the Company assumed a $6.8 million unsecured revolving line
of credit, of which $4.7 million was outstanding, in conjunction with the
purchase of Ridge Technologies, Inc. ("Ridge") (Note 9). In the second quarter
of fiscal 1999, the Company paid in full and terminated this line of credit.
The Company had available an unsecured $17.0 million revolving line of
credit that was to expire on December 31, 1998. No borrowings were outstanding
under this line of credit as of March 31, 1998, and no borrowings were made
during the first quarter of fiscal 1999. In June 1998, the Company terminated
this line of credit.
6. LONG-TERM DEBT
In June 1992, the Company entered into a $17.0 million term loan agreement
bearing interest at 7.65%, with principal and interest payable in quarterly
installments of $850,000. In the first quarter of fiscal 1999, the Company paid
the remaining outstanding principal and interest due on the loan.
7. TAIWAN SEMICONDUCTOR MANUFACTURING AGREEMENTS
In each of fiscal years 1996 through 1998, the Company entered into
agreements with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"), including
Option I, Option II and Option III Agreements, which provide the Company with
guaranteed capacity for wafer fabrication in exchange for advance payments by
the Company. The Company records the prepayments as either prepaid expenses or
other assets based upon the amount expected to be utilized in the next 12
months. As wafers are received from TSMC, the prepaid expenses balance is
reclassified to inventory.
During fiscal 1998, the Company entered into the Option III agreement with
TSMC which provided the Company with a guarantee of increased capacity for wafer
fabrication in return for advance payments totaling $35.3 million. The Company
signed a non-interest bearing promissory note for the $35.3 million which became
due in two equal installments. The first installment was paid in January 1998.
In the first quarter of fiscal 1999, the Company and TSMC amended the promissory
note to extend, indefinitely, the second installment 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.
7
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. STATEMENTS OF OPERATIONS
Restructuring and other charges includes (in thousands):
<TABLE>
<CAPTION>
THREE MONTH THREE MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Restructuring charges (Note 10)................... $24,530 $ --
Asset impairment and other charges
(Note 11)....................................... 7,394 1,528
------- ------
Total............................................. $31,924 $1,528
======= ======
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
Acquisition related costs (Note 9)................ $21,463 $ --
Restructuring charges (Note 10)................... 33,330 --
Asset impairment and other charges
(Note 11)....................................... 7,394 1,528
------- ------
Total............................................. $62,187 $1,528
======= ======
</TABLE>
9. RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS
In April 1998, the Company purchased read channel and preamplifier ASIC
technologies ("ASIC technologies") from Analog Devices, Inc. ("ADI") for $34.4
million in cash. Grant Saviers, former Chairman and CEO of the Company, is a
director of ADI. Additionally, in May 1998, the Company purchased Ridge for 1.2
million shares of the Company's common stock valued at $21.2 million and assumed
stock options valued at $13.1 million. Prior to the acquisition, the Company
owned a 19.9% interest in Ridge with a carrying value of $1.5 million. The $1.5
million carrying value is net of a $3.5 million write-down of the investment
balance taken in the third quarter of fiscal 1998 for an identified impairment.
Grant Saviers, former Chairman and CEO of the Company, was a director of Ridge.
The Company accounted for both acquisitions using the purchase method of
accounting. Additionally, the Company incurred $1.2 million in professional
fees, including finance, accounting, legal and appraisal fees, related to the
acquisitions, which were capitalized as part of the purchase price of the
transactions.
As previously reported in the Company's Report on Form 10-Q for the quarter
ended September 30, 1998, the purchase of Ridge and the acquisition of ASIC
technologies from ADI, resulted in a first quarter write-off of acquired
in-process technology charge of $39.4 million and $26.4 million, respectively.
In the fourth quarter of fiscal 1999, the Company reduced its estimate of the
amount allocated to acquired in-process technology from the purchase of ASIC
technologies from ADI by $20.3 million from $26.4 million previously reported to
$6.1 million. Amortization of intangibles increased approximately $1.7 million
in each of the first two quarters of fiscal 1999 from $4.9 million to $8.3
million for the six months ended September 30, 1998.
8
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Basic and diluted net loss per share for the first and second quarters of fiscal
1999 were impacted by the restatement as follows:
<TABLE>
<CAPTION>
PRIOR TO SUBSEQUENT TO
FISCAL 1999 RESTATEMENT RESTATEMENT
- ----------- ----------- -------------
<S> <C> <C>
First quarter:
Basic............................................ $(0.68) $(0.51)
Diluted.......................................... $(0.68) $(0.51)
Second quarter:
Basic............................................ $(0.22) $(0.23)
Diluted.......................................... $(0.22) $(0.23)
Sept. 30, 1998 Year-to-date:
Basic............................................ $(0.90) $(0.75)
Diluted.......................................... $(0.90) $(0.75)
</TABLE>
The Company allocated amounts to acquired in-process technology in the
first quarter of fiscal 1999 in a manner consistent with widely recognized
appraisal practices at the date of the acquisition of ASIC technologies from
ADI. Subsequent to the acquisition, the Securities and Exchange Commission
("SEC") staff expressed views that took issue with certain appraisal practices
generally employed in determining the fair value of the acquired in-process
technology that was the basis for the Company's measurement of the acquired
in-process technology charge. The charge of $26.4 million associated with ASIC
technologies purchased from ADI, as first reported, was based upon assumptions
and appraisal methodologies the SEC has since announced it does not consider
appropriate.
As a result of computing the acquired in-process technology using the SEC
preferred methodology, the Company decided to revise the amount originally
allocated to acquired in-process technology relating to the acquisition of ASIC
technologies from ADI in this Report on Form 10-Q/A for the second quarter ended
September 30, 1998. The Company has also revised its results of operations in
its Reports on Form 10-Q for the first and third quarters of fiscal 1999, ended
June 30, 1998 and December 31, 1998, respectively, previously filed with the
SEC.
The $6.1 million allocation of the purchase price to acquired in-process
technology from ASIC technologies purchased from ADI was determined by
identifying research projects, including read channel and preamplifier ASIC
technologies, in areas for which technological feasibility had not been
established and no alternative future uses existed. The value was determined by
estimating the expected cash flows from the projects once commercially viable,
discounting the net cash flows back to their present value and then applying a
percentage of completion to the calculated value as defined below.
Net cash flows. The net cash flows from the identified projects were based
on estimates of revenues, cost of sales, research and development costs,
selling, general and administrative costs, royalty costs and income taxes from
those projects. These estimates were based on the assumptions mentioned below.
The research and development costs included in the model reflect costs to
complete development of technologies acquired and sustain projects, but excluded
costs to bring acquired in-process projects to technological feasibility.
The estimated revenues were based on management projections of the acquired
in-process projects for read channel and preamplifier ASIC products and the
business projections were compared and found to be in line with industry
analysts' forecasts of growth in substantially all of the relevant markets.
Estimated total revenues from the majority of the acquired in-process technology
product areas were expected to peak in fiscal 2001 and decline from 2002 into
2003 as other new products are expected to become available. These projections
were based on estimates of market size and growth, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors.
9
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Projected gross margins were based on management's estimates and are in
line with the Company's business which acquired ASIC technologies from ADI. The
estimated selling, general and administrative costs were in line with comparable
company averages within the industry at approximately 14% of revenues. Research
and development costs were consistent with ADI's historical cost structure.
Discount rate. Discounting the net cash flows back to their present value
was based on cost of capital for start up companies and well managed venture
capital funds which typically have similar risks and returns on investments. The
cost of capital used in discounting the net cash flows from acquired in-process
technology was 25%. Higher required rates of return which would correspond to
higher risk may be somewhat mitigated by the Company's expertise in the disk
drive market.
Percentage of completion. The percentage of completion for the projects
was determined using costs incurred by ADI prior to the acquisitions to date
compared to the remaining research and development to be completed to bring the
projects to technological feasibility. The Company estimates, as of the
acquisition date, the projects in aggregate were approximately 71% complete and
the aggregate costs to complete are $11.0 million ($8.0 million in fiscal 1999
and $3.0 million in fiscal 2000). Substantially all of the acquired in-process
technology projects were expected to be completed and generating revenues within
two years following the acquisition date.
The Company and its advisors believe that the restated acquired in-process
technology charge relating to ASIC technologies purchased from ADI of $6.1
million is valued consistently with the SEC staff's current views regarding
valuation methodologies. There can be no assurances, however, that the SEC staff
will not take issue with any assumptions used in the Company's valuation model
and require the Company to further revise the amount allocated to acquired
in-process technology.
The Company accounted for its acquisitions in Ridge and ASIC technologies
purchased from ADI using the purchase method of accounting. Excluding the $45.5
million write-off of acquired in-process technology, as restated, the aggregate
impact of the acquisitions was not material to the Company's financial position
and results of operations from the acquisition date.
The allocation of the Company's aggregate purchase price to the tangible
and identifiable intangible net assets acquired and liabilities assumed is
summarized below. The allocations were based on independent appraisals and
estimates of fair values (in thousands):
<TABLE>
<S> <C>
Net tangible liabilities................................... $(2,752)
In-process technology...................................... 45,482
Goodwill and other intangible assets:
Goodwill................................................. 25,078
Covenant not to compete.................................. 2,200
Acquired employees....................................... 1,375
-------
28,653
-------
Net assets acquired........................................ $71,383
=======
</TABLE>
The tangible liabilities assumed exceeded the tangible assets acquired,
which comprised primarily a line of credit (Note 5), accounts payable and fixed
assets. Acquired in-process technology was written-off in the period in which
the acquisitions were completed. The goodwill and other intangible assets
associated with Ridge were written-off in the second quarter of fiscal 1999 in
connection with the Company's restructuring activities and decision to exit the
storage subsystems business (Note 10) and the goodwill and other intangible
assets associated with ASIC technologies purchased from ADI are being amortized
over a benefit period of three years.
10
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $7.0 million termination fee and
approximately $6.7 million in nonconsummation fees to HEA. Additionally, the
Company incurred approximately $7.8 million in other acquisition related
charges, including legal, consulting and other costs. In the first quarter of
fiscal 1999 the $21.5 million in fees associated with this terminated
acquisition were expensed and are included in "Restructuring and other charges"
in the Condensed Consolidated Statements of Operations.
During fiscal 1998, the Company purchased $1.0 million in preferred stock,
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 was appointed interim CEO of the Company, following the resignation
of Grant Saviers. Two other directors of the Company are also directors of the
venture stage company.
10. RESTRUCTURING CHARGES
In the first quarter of fiscal 1999, in connection with management's plan
to reduce costs and improve operating efficiencies, the Company recorded a
restructuring charge of $8.8 million. The restructuring charge was 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.
In the second quarter of fiscal 1999, the Company recorded a restructuring
charge of $24.5 million, net of an adjustment to the restructuring charge taken
in the first quarter of fiscal 1999 of $1.4 million. This charge was a direct
result of management's decision to refocus the business and divest certain
unprofitable business activities including storage subsystems (primarily those
business activities purchased in connection with the Ridge transaction -- Note
9), external storage, satellite networking, fibre channel and high-end
peripheral technology solutions (Note 16). The second quarter restructuring
charge is comprised primarily of severance and benefits related to the
involuntary termination of approximately 300 U.S. employees and the write-off of
property and equipment, inventory, and other assets including goodwill
associated with the storage subsystems business. The adjustments to the prior
quarter provisions reflect changes to the estimated cost of anticipated expenses
as actual costs were settled.
11
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth an analysis of the components of the
restructuring charges recorded in the first and second quarters of fiscal 1999
(in thousands):
<TABLE>
<CAPTION>
SEVERANCE
RESTRUCTURING CHARGES AND ASSET OTHER
QUARTER ENDED BENEFITS WRITE-OFFS CHARGES TOTAL
- --------------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Severance and benefits...................... $9,231 $ -- $ -- $ 9,231
Inventory write-offs........................ -- 984 -- 984
Property and equipment write-offs........... -- 8,484 -- 8,484
Contractual obligations..................... -- -- 3,742 3,742
Accrued lease costs......................... -- -- 927 927
Goodwill and other assets................... -- 2,005 -- 2,005
Other charges............................... -- -- 605 605
Adjustment to prior quarter's provision..... (934) 280 (794) (1,448)
------ ------- ------ -------
TOTAL SEPTEMBER 30, 1998.................... $8,297 $11,753 $4,480 $24,530
====== ======= ====== =======
JUNE 30, 1998
Severance and benefits...................... $6,800 $ -- $ -- $ 6,800
Property and equipment write-offs........... -- 950 -- 950
Other charges............................... -- -- 1,050 1,050
------ ------- ------ -------
TOTAL JUNE 30, 1998......................... $6,800 $ 950 $1,050 $ 8,800
====== ======= ====== =======
</TABLE>
The following table sets forth the Company's restructuring reserves as of
September 30, 1998 and June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
SEVERANCE
AND ASSET OTHER
RESTRUCTURING RESERVES BENEFITS WRITE-OFFS CHARGES TOTAL
---------------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C>
Restructuring charges...................... $ 6,800 $ 950 $1,050 $ 8,800
Cash paid.................................. (3,244) -- -- (3,244)
Non-cash charges........................... (296) (950) -- (1,246)
------- -------- ------ --------
BALANCE AT JUNE 30, 1998................... $ 3,260 $ -- $1,050 $ 4,310
======= ======== ====== ========
Restructuring charges...................... $ 8,297 $ 11,753 $4,480 $ 24,530
Cash paid.................................. (6,718) -- (272) (6,990)
Non-cash charges........................... (338) (11,753) -- (12,091)
------- -------- ------ --------
BALANCE AT SEPTEMBER 30, 1998.............. $ 4,501 $ -- $5,258 $ 9,759
======= ======== ====== ========
</TABLE>
The Company anticipates the remaining reserve balance at September 30, 1998
of $9.8 million will be substantially paid out in the second half of fiscal
1999.
11. ASSET IMPAIRMENT AND OTHER CHARGES
The Company regularly evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them. At the time such evaluations indicate
that the future undiscounted cash flows are not sufficient to recover the
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, the Company recorded non-cash impairment charges of
$4.0 million and $1.5 million in the second quarter of fiscal 1999 and 1998,
respectively. The fiscal 1999 impairment related to approximately $1.4 million
in manufacturing
12
<PAGE> 13
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equipment deemed unnecessary due to non-temporary declines in production volume
and the write-off of $2.6 million of non-trade related receivables classified in
other current assets. In the second quarter of fiscal 1998, the Company
wrote-off the unamortized goodwill related to the acquisition of Sigmax
Technology, Inc. ("Sigmax") of $1.5 million, when the Company decided to abandon
this business after the R&D project fell behind and the critical market window
was missed, the engineers acquired in the purchase had left the Company and the
intellectual property was deemed to have no alternative use.
Additionally, the Company recorded executive termination costs of $3.4
million in the second quarter of fiscal 1999, relating to three executives. The
costs consisted of $1.9 million in severance and benefit payments and $1.5
million in non-cash stock compensation charges resulting from amended option
agreements. There were no executive termination costs recorded in the second
quarter and first half of fiscal 1998.
In connection with the Company's restructuring activities and evaluation of
long-lived assets, the Company is actively pursuing the sale of certain assets.
The fair value of these assets of $7.1 million was reclassified to assets held
for sale and, as they are expected to be sold in the next year, are included in
current assets as of September 30, 1998. Approximately $6.7 million of the
assets held for sale relate to the sale of the high-end peripheral technology
solutions business line (Note 16).
12. NET INCOME (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share," in the third quarter of fiscal 1998. It
replaces the presentation of primary net income (loss) per share with a
presentation of basic net income (loss) per share. It also requires dual
presentation of basic and diluted net income (loss) per share on the face of the
financial statements for all entities with complex capital structures.
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period and excludes the
dilutive effect of stock options. Diluted net income (loss) per share gives
effect to all dilutive potential common shares outstanding during the period. In
computing diluted net income (loss) per share, the average stock price for the
period is used in determining the number of shares assumed to be purchased from
the exercise of stock options under the treasury stock method. All prior period
net income (loss) per share amounts have been presented to conform to the
provisions of this statement.
13
<PAGE> 14
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations assuming the standard
was applied during all periods presented below.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
----------------------------------------- -----------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME (LOSS)
PER SHARE
Net income (loss)
available to common
stockholders............ $(25,924) 111,583 $(0.23) $62,719 112,931 $0.56
====== =====
EFFECT OF DILUTIVE
SECURITIES
Common stock
equivalents............. -- -- -- 6,519
4 3/4% Convertible
Subordinated Notes...... -- -- 2,043 4,452
-------- ------- ------- -------
DILUTED NET INCOME (LOSS)
PER SHARE
Net income (loss)
available to common
stockholders and assumed
conversions............. $(25,924) 111,583 $(0.23) $64,762 123,902 $0.52
======== ======= ====== ======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
SIX MONTH PERIOD ENDED SIX MONTH PERIOD ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
----------------------------------------- -----------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
BASIC NET INCOME (LOSS)
PER SHARE
Net income (loss)
available to common
stockholders............ $(84,673) 112,892 $(0.75) $122,408 112,470 $1.09
====== =====
EFFECT OF DILUTIVE
SECURITIES
Common stock
equivalents............. -- -- -- 6,120
4 3/4% Convertible
Subordinated Notes...... -- -- 4,176 4,452
-------- ------- -------- -------
DILUTED NET INCOME (LOSS)
PER SHARE
Net income (loss)
available to common
stockholders and assumed
conversions............. $(84,673) 112,892 $(0.75) $126,584 123,042 $1.03
======== ======= ====== ======== ======= =====
</TABLE>
At September 30, 1998, options to purchase 22,100,000 shares of common
stock were outstanding, however, the stock options and the 4 3/4% Convertible
Subordinated Notes were not included in the computations of diluted weighted
average common shares outstanding because they were anti-dilutive.
At September 30, 1997, additional options to purchase 249,000 shares of
common stock were not included in the computations of diluted weighted average
common shares outstanding because the options' exercise price was greater than
the average market price of the common shares during the quarter.
14
<PAGE> 15
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCK REPURCHASES
On January 20, 1998, the Company's Board of Directors approved a stock
repurchase program under which the Company is authorized to purchase up to 10
million shares of its common stock from time to time in the open market. In July
1998, the Company reinstated this stock repurchase program, which was suspended
during the period of the now terminated Symbios acquisition. During the second
quarter of fiscal 1999, the Company repurchased and retired 8,261,000 shares of
its common stock for approximately $97.2 million.
On October 16, 1998, the Company's Board of Directors approved a new
authorization for the repurchase of up to $200 million of the Company's common
stock in the open market.
14. INCOME TAXES
Income tax provisions (benefits) for interim periods are based on estimated
annual income tax rates. Generally, the Company's effective income tax rate has
been 25%. The difference between the Company's effective income tax rate and the
U.S. federal statutory income tax rate is primarily due to income earned in
Singapore where the Company is subject to a significantly lower effective tax
rate. The Company recorded income tax benefits of $7.5 million and $11.4 million
for the second quarter and first half of fiscal 1999, respectively, which it
believes is recoverable for federal tax purposes based on carryback potential
against taxes paid previously. The effective tax rate used to calculate the
income tax benefit for the second quarter and first half of fiscal 1999, is
lower than 25% primarily because of book write-offs taken in the first quarter
of fiscal 1999 relating to acquired in-process technology and the write-off of
goodwill taken in the second quarter of fiscal 1999, which are not deductible
for tax purposes.
15. CONTINGENCIES
A class action lawsuit has been filed in the United States District Court
for the Northern District of California against the Company and certain of its
officers and directors. The action alleges that the Company made false and
misleading statements at various times during the period between April 1997 and
January 1998 in violation of the federal securities laws. The complaint does not
set forth purported damages. In addition, a derivative action has been filed in
the Superior Court of the State of California against the Company and certain of
its officers and directors, alleging that the individual defendants improperly
profited from transactions in the Company's stock during the same time period
referenced by the class action lawsuit. The Company believes both the class
action lawsuit and derivative action are without merit and intends to defend
itself vigorously.
The IRS is currently auditing the Company's federal income tax returns for
fiscal 1994 through 1996. No proposed adjustments have been received for these
years. The Company believes sufficient taxes have been provided 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.
16. SUBSEQUENT EVENTS
In October 1998, the Company approved the cancellation and reissuance of
outstanding stock options under the Company's stock option plans. Under this
program, all current active employees, except for executive officers, with
outstanding stock options with an exercise price in excess of $12.50 per share
could exchange their stock options for new non-qualified stock options with an
exercise price of $12.50 per share, the fair market value of the common stock on
the exchange date. The new options maintain the vesting schedule established by
the canceled stock options, however, the exercisability of the exchanged options
is suspended for six months.
15
<PAGE> 16
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1998, the Company entered into a definitive agreement with
Texas Instruments ("TI") whereby the Company agreed to sell certain tangible and
intangible assets related to the high end peripheral technology solutions
business line for $8.5 million in cash and license certain technology for $3.7
million. Approximately $6.7 million of assets related to the high end peripheral
technology solutions business line have been classified as assets held for sale
and are included in current assets as of September 30, 1998 (Note 11). TI paid
$4.5 million of the purchase price at closing with the remainder payable in two
equal installments in the fourth quarter of fiscal 1999 and the first quarter of
fiscal 2000. The license payments are paid in varying amounts during the second
quarter through the fourth quarter of fiscal 2000. In addition, TI has agreed to
pay royalties ranging from 2-5% on certain products for up to five years.
16
<PAGE> 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the items in the Condensed Consolidated
Statements of Operations as a percentage of net revenues:
<TABLE>
<CAPTION>
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
------------------------------ ------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues............... 43.8 37.6 44.0 38.6
----- ----- ----- -----
Gross margin................... 56.2 62.4 56.0 61.4
----- ----- ----- -----
Operating expenses:
Research and development..... 28.4 15.2 26.1 14.8
Sales, marketing and
administrative............ 32.2 18.6 29.6 18.3
Write-off of acquired
in-process technology..... -- -- 14.0 --
Restructuring and other
charges................... 22.2 0.5 19.2 0.3
----- ----- ----- -----
Total operating expenses....... 82.8 34.3 88.9 33.4
----- ----- ----- -----
Income (loss) from
operations................... (26.6) 28.1 (32.9) 28.0
Interest income................ 5.5 3.0 5.2 2.8
Interest expense............... (2.1) (1.0) (1.9) (1.1)
----- ----- ----- -----
Income (loss) before provision
(benefit) for income taxes... (23.2) 30.1 (29.6) 29.7
Provision (benefit) for income
taxes........................ (5.2) 7.5 (3.5) 7.4
----- ----- ----- -----
Net income (loss).............. (18.0)% 22.6% (26.1)% 22.3%
===== ===== ===== =====
</TABLE>
17
<PAGE> 18
SEC Comment Letter On June 8, 1999, the Company received a comment letter
from the Securities and Exchange Commission ("SEC") relating to certain previous
1934 Act filings with the SEC, primarily comments about disclosure in the
Company's Management's Discussion and Analysis and Notes to Consolidated
Financial Statements. The Company had addressed the comments in its response to
the SEC dated June 16, 1999 and has incorporated such comments into its
disclosures in this Report on Form 10-Q/A for the quarter ended September 30,
1998 to the extent practicable. However, there can be no assurance that the SEC
will not take exception with the Company's responses and disclosures and require
that the Company file additional responses and disclosures in its periodic
reports.
Net Revenues. The Company's net revenues are derived from the sale of high
performance I/O solutions, including proprietary ASICs, advanced SCSI and RAID
host adapter boards and software solutions. The Company sells it products
primarily in the desktop, server and workstation markets. Net revenues for the
second quarter ended September 30, 1998 were $143.9 million, a decrease of 48.2%
from the same period of fiscal 1998. Net revenues for the first half of fiscal
1999 were $324.6 million, a decrease of 40.9% from the corresponding period of
fiscal 1998.
The decline in net revenue for the second quarter and first half of fiscal
1999 as compared to the second quarter and first half of fiscal 1998 was due to
a combination of factors. Revenues from SCSI host adapter boards declined as the
Company focused on reducing inventory in the distribution channel and as a
result of Ultra-DMA penetration in the desktop market. Ultra-DMA has not had a
material effect on revenue derived from the workstation and server markets.
Revenue from the sale of proprietary ASICs declined as a result of continued
weakness in the disk drive industry. Revenue was further constrained by
continuing weakness in the Asian markets.
The Company anticipates an increase in host adapter revenue in the third
quarter of fiscal 1999 as compared to the second quarter. This increase will be
a result of increased shipments due to normal distribution channel demand as a
result of the reduction of distribution channel inventories in the second
quarter and seasonality. The increase in host adapter revenue will be partially
offset by a sequential decline from the second quarter in proprietary ASIC
revenue.
Gross Margin. Gross margins for the second quarter and first half of fiscal
1999 were 56.2% and 56.0%, respectively, compared to 62.4% and 61.4% for the
second quarter and first half of fiscal 1998, respectively. The decline in gross
margin was primarily a result of unutilized manufacturing capacity. Gross margin
was also impacted by shifts to newer products with higher manufacturing costs.
Gross margin for the third quarter of fiscal 1999 is expected to be in the range
experienced in the last four quarters.
Operating Expenses. Excluding unusual charges for restructuring, the
write-off of acquired in-process technology, impaired assets and executive
termination costs, operating expenses as a percentage of net revenues for the
second quarter and first half of fiscal 1999 were 60.6% and 55.7%, respectively,
versus 33.8% and 33.1%, of the corresponding periods of fiscal 1998. The
increase as a percentage of net revenues was primarily attributable to decreased
revenue. Year over year, operating expenses declined by 7.1% in the second
quarter and 0.6% in the first half of fiscal 1999. The declines were
attributable to Company-wide cost reduction programs which included a reduction
in force and the curtailment of costs related to the exit of certain
unprofitable activities.
Write-off of Acquired In-process Technology. During the first quarter of
fiscal 1999, the Company purchased complementary businesses recorded under the
purchase method of accounting, resulting in an aggregate write-off of acquired
in-process technology of $45.5 million.
As previously reported, the purchase of Ridge Technologies, Inc. ("Ridge")
and the acquisitions of the read channel and preamplifier ASIC technologies
("ASIC technologies") from Analog Devices, Inc. ("ADI"), resulted in a first
quarter write-off of acquired in-process technology charge of $39.4 million and
$26.4 million, respectively. The unamortized goodwill associated with Ridge was
written-off in the second quarter of fiscal 1999, in connection with the
Company's restructuring activities and decision to exit the storage subsystems
business. The write-off was included in "Restructuring and other charges" in the
Condensed Consolidated Statements of Operations. In the fourth quarter of fiscal
1999, the Company reduced
18
<PAGE> 19
its estimate of the amount allocated to acquired in-process technology from the
purchase of ASIC technologies from ADI by $20.3 million from $26.4 million
previously reported in the first quarter of fiscal 1999 to $6.1 million.
Amortization of intangibles increased approximately $1.7 million in each of the
first two quarters of fiscal 1999 ($3.4 million in aggregate for the six months
ended September 30, 1998) from $4.9 million to $8.3 million and is included in
"Sales, marketing and administrative" expenses in the Condensed Consolidated
Statements of Operations. Basic and diluted net loss per share for the two
quarters of fiscal 1999 were impacted by the restatement as follows:
<TABLE>
<CAPTION>
PRIOR TO SUBSEQUENT TO
FISCAL 1999 RESTATEMENT RESTATEMENT
- ----------- ----------- -------------
<S> <C> <C>
First quarter:
Basic.................................... $(0.68) $(0.51)
Diluted.................................. $(0.68) $(0.51)
Second quarter:
Basic.................................... $(0.22) $(0.23)
Diluted.................................. $(0.22) $(0.23)
Sept. 30, 1998 Year-to-date:
Basic.................................... $(0.90) $(0.75)
Diluted.................................. $(0.90) $(0.75)
</TABLE>
The Company allocated amounts to acquired in-process technology in the
first quarter of fiscal 1999 in a manner consistent with widely recognized
appraisal practices at the date of the acquisition of the ASIC technologies from
ADI. Subsequent to the acquisition, the SEC staff expressed views that took
issue with certain appraisal practices generally employed in determining the
fair value of the acquired in-process technology that was the basis for the
Company's measurement of the acquired in-process technology charge. The charge
of $26.4 million associated with ASIC technologies purchased from ADI, as first
reported, was based upon assumptions and appraisal methodologies the SEC has
since announced it does not consider appropriate.
As a result of computing the acquired in-process technology using the SEC
preferred methodology, the Company decided to revise the amount originally
allocated to acquired in-process technology. The Company has revised its results
of operations for fiscal 1999 in this Report on Form 10-Q/A for the second
quarter of fiscal 1999 and in its Reports on Form 10-Q/A for the first and third
quarters of fiscal 1999.
The Company and its advisors believe that the restated acquired in-process
technology charge relating to ASIC technologies purchased from ADI of $6.1
million is valued consistently with the SEC staff's current views regarding
valuation methodologies. There can be no assurances, however, that the SEC staff
will not take issue with any assumptions used in the Company's valuation model
and require the Company to further revise the amount allocated to acquired
in-process technology.
Restructuring and Other Charges. During the six months ended September 30,
1998, the Company incurred $33.3 million in restructuring charges, $21.5 million
in acquisition related charges and $7.4 million in asset impairment and other
charges. During the six months ended September 30, 1997, the Company incurred
$1.5 million in asset impairment charges.
In the first quarter of fiscal 1999, in connection with management's plan
to reduce costs and improve operating efficiencies, the Company recorded a
restructuring charge of $8.8 million. The restructuring charge was comprised
primarily of severance and benefits related to the involuntary termination of
approximately 550 employees, of which approximately 36% were based in the U.S.
and the remainder were based in Singapore.
In the second quarter of fiscal 1999, the Company recorded a restructuring
charge of $24.5 million, net of an adjustment to the restructuring charge taken
in the first quarter of fiscal 1999 of $1.4 million. This charge was a direct
result of management's decision to refocus the business and divest certain
unprofitable business activities including storage subsystems (primarily those
business activities purchased in connection with the Ridge transaction), fibre
channel, external storage, satellite networking and high-end peripheral
technology
19
<PAGE> 20
solutions. The second quarter restructuring charge was comprised primarily of
severance and benefits related to the involuntary termination of approximately
300 U.S. employees and the write-off of inventory, property and equipment, and
other assets including goodwill associated with the storage subsystems business.
The adjustments to the prior quarter provision reflect changes to the estimated
cost of anticipated expenses as actual costs were settled.
The following table sets forth an analysis of the components of the
restructuring charges recorded in the first two quarters of fiscal 1999 (in
thousands):
<TABLE>
<CAPTION>
SEVERANCE
RESTRUCTURING CHARGES AND ASSET OTHER
QUARTER ENDED BENEFITS WRITE-OFFS CHARGES TOTAL
- --------------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Severance and benefits...................... $9,231 $ -- $ -- $ 9,231
Inventory write-offs........................ -- 984 -- 984
Property and equipment write-offs........... -- 8,484 -- 8,484
Contractual obligations..................... -- -- 3,742 3,742
Accrued lease costs......................... -- -- 927 927
Goodwill and other assets................... -- 2,005 -- 2,005
Other charges............................... -- -- 605 605
Adjustment to prior quarter's provision..... (934) 280 (794) (1,448)
------ ------- ------ -------
Total September 30, 1998.................... $8,297 $11,753 $4,480 $24,530
JUNE 30, 1998
Severance and benefits...................... $6,800 $ -- $ -- $ 6,800
Property and equipment write-offs........... -- 950 -- 950
Other charges............................... -- -- 1,050 1,050
------ ------- ------ -------
Total June 30, 1998......................... $6,800 $ 950 $1,050 $ 8,800
====== ======= ====== =======
</TABLE>
The following table sets forth the Company's restructuring reserves (in
thousands):
<TABLE>
<CAPTION>
SEVERANCE
AND ASSET OTHER
RESTRUCTURING RESERVES BENEFITS WRITE-OFFS CHARGES TOTAL
- ---------------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C>
Restructuring charges...................... $ 6,800 $ 950 $1,050 $ 8,800
Cash paid.................................. (3,244) -- -- (3,244)
Non-cash charges........................... (296) (950) -- (1,246)
------- -------- ------ --------
Balance at June 30, 1998................... 3,260 -- 1,050 4,310
======= ======== ====== ========
Restructuring charges...................... 8,297 11,753 4,480 24,530
Cash paid.................................. (6,718) -- (272) (6,990)
Non-cash charges........................... (338) (11,753) -- (12,091)
------- -------- ------ --------
Balance at September 30, 1998.............. 4,501 -- 5,258 9,759
======= ======== ====== ========
</TABLE>
The Company anticipates that the remaining reserve balance at September 30,
1998 of $9.8 million will be substantially paid out in the second half of fiscal
1999. Based on the cost reduction programs implemented in the first half of
fiscal 1999, the Company anticipates that operating expenses will decline
sequentially in the second half of fiscal 1999.
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 $7.0 million termination fee and
approximately $6.7 million in nonconsummation fees to HEA. Additionally, the
Company incurred approximately $7.8 million in other acquisition related
charges, including legal, consulting and other
20
<PAGE> 21
costs. The $21.5 million in fees associated with this terminated acquisition
were expensed in the first quarter of fiscal 1999.
The Company also recorded non-cash impairment charges of $4.0 million and
$1.5 million in the second quarter of fiscal 1999 and 1998, respectively. The
fiscal 1999 impairment related to approximately $1.4 million in manufacturing
equipment deemed unnecessary due to non-temporary declines in production volume
and the write-off of approximately $2.6 million of non-trade related receivables
classified in other current assets. The fiscal 1998 impairment consisted of
impairments of the remaining balances of goodwill from the acquisition of Sigmax
Technology, Inc. ("Sigmax") of $1.5 million. The remaining goodwill for Sigmax
was written off when the Company decided to abandoned this business after the
R&D project fell behind and the critical market window was missed, the engineers
acquired in the purchase had left the Company and the intellectual property was
deemed to have no alternative use.
Additionally, the Company recorded executive termination costs of $3.4
million in fiscal 1999, relating to three executives. The costs consisted of
$1.9 million in severance and benefit payments and $1.5 million in non-cash
stock compensation charges resulting from amended option agreements.
Interest and Income Taxes. Interest income for the second quarter and first
half of fiscal 1999 was $7.9 million and $17.0 million, respectively, compared
to $8.4 million and $15.4 million for the corresponding periods of fiscal 1998.
The year to date increase resulted primarily from higher average cash, cash
equivalents and short-term investment balances.
Interest expense for the second quarter and first half of fiscal 1999 is
related to the 4 3/4% Convertible Subordinated Notes and remained consistent at
$3.0 million and $6.1 million, respectively, as compared to the corresponding
periods in the prior year.
Interest income could decline in the third quarter of fiscal 1999 if the
Company liquidates investments to repurchase common stock. The Company does not
anticipate any material change in interest expense for the three months ended
December 31, 1998.
The Company recorded an income tax benefit of $11.4 million in the first
half of fiscal 1999, representing 11.8% of the loss before benefit for income
taxes compared to a $40.8 million provision for income taxes or 25.0% of income
before provision for income taxes in the comparable period of fiscal 1998. The
Company believes the income tax benefit recorded in the first half of fiscal
1999 is recoverable for federal tax purposes based on carryback potential
against taxes paid previously. Generally, the Company's effective tax rate has
been 25%. The difference between the Company's effective tax rate and the U.S.
statutory rate is primarily due to income earned in Singapore where the Company
is subject to a significantly lower effective tax rate. The effective tax rate
used to calculate the income tax benefit for the first half of fiscal 1999 is
lower than 25% primarily as a result of book write-offs of acquired in-process
technology and goodwill, which are not deductible for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition at September 30, 1998 remains strong,
with a ratio of current assets to current liabilities of 7.7:1, compared to
7.1:1 at March 31, 1998. The Company ended the quarter with cash, cash
equivalents and short-term investments of $613.6 million.
Operating Activities. The Company generated approximately $72.1 million of
cash from operations during the first half of fiscal 1999. The primary sources
of cash from operations were net income (adjusted for non-cash charges for
depreciation, amortization, acquired in-process technology, and other non-cash
charges associated with restructuring and other charges) of $8.0 million, a
decrease in accounts receivable of $66.9 million (primarily related to lower
revenue and increased collections as a result of relatively linear shipments in
the second quarter), a decrease in inventory of $15.0 million offset by a
reduction in accounts payable and accrued liabilities of $16.8 million.
Investing Activities. Cash used for investing activities during the first
half of fiscal 1999 was approximately $10.6 million consisting primarily of net
investments in property, plant and equipment ($28.7 million)
21
<PAGE> 22
and the purchase of certain net assets in connection with acquisitions ($34.1
million) offset by reinvestments in marketable securities ($52.2 million). The
Company also purchased all of the outstanding shares of Ridge not owned by it
for 1.2 million shares of the Company's common stock valued at $21.2 million and
assumed stock options valued at $13.1 million.
Financing Activities. Cash used for financing activities during the first
half of fiscal 1999 was approximately $93.1 million consisting of stock
repurchases of $97.2 million and debt repayments of $5.6 million offset by
proceeds from stock issuances of $9.7 million.
Stock Repurchases. The Company is authorized to repurchase shares of its
common stock in the open market. The Company repurchased 8,261,000 shares of its
common stock, at an average price of $11.77 per share during the six months
ended September 30, 1998, for a total cash outlay of approximately $97.2
million. In October 1998, the Board of Directors approved a new stock repurchase
program under which up to $200 million in additional repurchases may be made.
Lines of Credit. In May 1998, the Company assumed a $6.8 million unsecured
revolving line of credit in conjunction with the purchased of Ridge. As of June
30, 1998, $4.7 million was drawn against the line. In August, 1998, the Company
paid down and terminated this line of credit. Additionally, in June 1998, the
Company terminated its $17.0 million line of credit.
Liquidity. As of September 30, 1998, the Company's principal sources of
liquidity consist of $613.6 million of cash, cash equivalents and short-term
investments. The Company's liquidity is affected by many factors, some of which
are based on the normal ongoing operations of the business, and others of which
relate to the uncertainties of the PC and disk drive industries and global
economies. Although the Company's cash requirements will fluctuate based on the
timing and extent of these factors, management believes that cash generated from
operations, together with the liquidity provided by existing cash balances, will
be sufficient to satisfy the Company's liquidity requirements for the next
twelve months.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information". This statement establishes standards
for the way companies report information about operating segments in their
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
disclosures prescribed by SFAS 131 were adopted in the Company's fiscal 1999
Annual Report on Form 10-K.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires recognition of all derivatives as assets or liabilities and measurement
of those instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 2000. The Company will adopt this statement in the
first quarter of fiscal 2001 but does not expect the adoption of SFAS 133 to
have a material impact on the Company's financial position, results of
operations or cash flows.
YEAR 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
During fiscal 1998, the Company completed implementation of Enterprise
Resource Planning (ERP) software to replace the Company's core business
applications, which support sales and customer service, manufacturing,
distribution, and finance and accounting. The ERP software was selected not only
because it was Year 2000 compliant, but more importantly, to add functionality
and efficiency to the business
22
<PAGE> 23
processes of the Company. The Company completed Year 2000 testing of the ERP
software and is satisfied that it will not present any Year 2000 Compliance
issues.
In the first half of fiscal 1998, the Company also began a project to
analyze and assess the remainder of its business not addressed by the ERP
software such as other computer and network hardware and software, production
process controllers and related manufacturing equipment. Internal and external
resources are being used to complete any required modification and tests for
Year 2000 Compliance. Furthermore, with the replacement or upgrade of its
internal use software, which is primarily commercial off the shelf software, and
non-compatible hardware, the Company believes that the Year 2000 issue will not
pose significant operational problems for the Company or its customers.
The Company presently believes that its products are Year 2000 compliant.
The majority of the Company's products are not date sensitive. However, for
those products that are date sensitive, the Company, as a standard part of its
product development cycle, has had procedures, tests, and methodologies that
have been in effect since fiscal 1997 to ensure each product's Year 2000
readiness.
In addition, the Company has defined its critical suppliers and
communicated with them to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's operations rely will be remediated in a timely manner, or that a
failure to become Year 2000 Ready by another company, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company.
Our costs to date related to the Year 2000 issue consist primarily of
reallocation of internal resources to evaluate and assess systems and products
as described above and to plan our testing and remediation efforts. The total
cost to the Company of Year 2000 Compliance activities has not been and is not
anticipated to be material to its financial position or results of operations in
any given year (less than $1.0 million). Such costs exclude costs to implement
the ERP system and the reallocation of internal resources, as these costs are
not considered incremental to the Company. These costs and the date on which the
Company plans to complete the Year 2000 remediation and testing processes are
based on management's best estimates, which were derived utilizing various
assumptions of future events including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved and actual results could
differ from those plans.
The Company has developed a contingency plan for some of its applications
and systems to address any of the consequences of internal or external failures
to be Year 2000 compliant. It is also in the process of creating a contingency
plan for internal and external sources, including key suppliers, which it
expects to complete in the first half of fiscal 2000.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Report on Form 10Q/A may contain forward-looking statements regarding
future events or the future performance of the Company. Actual events or results
could, of course, differ materially. Various factors could adversely affect its
results of operations in the future including its dependence on the high-
performance computer, server and software markets, changes in the product mix,
competitive pricing pressures, changes in technological standards, dependence on
wafer suppliers and other subcontractors, changes in product costs, certain
risks associated with acquisitions of other companies or businesses that the
Company may make from time to time, issues related to distributors, dependence
on key personnel, risks associated with intellectual property or general
economic downturns. For a more complete discussion of these factors, please
refer to the Business section of the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1999, and the Company's other public filings it
makes from time to time.
23
<PAGE> 24
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
Financial Data Schedule for the quarter ended September 30,
27.1 1998
</TABLE>
(b) Reports on Form 8-K:
(i) Report on Form 8-K filed September 25, 1998, containing Adaptec,
Inc.'s new releases dated September 9 and 17, 1998 with respect to
cost cutting actions and unusual charges.
(ii) Report on Form 8-K filed October 26, 1998, containing Adaptec,
Inc.'s new releases dated October 19 and 20, 1998, with respect
to the authorization to repurchase common stock and the
appointment of a president and chief financial officer.
24
<PAGE> 25
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.
<TABLE>
<S> <C>
By: /s/ ANDREW J. BROWN Date: July 9, 1999
- -----------------------------------------------------
Andrew J. Brown
Vice President, Finance
Chief Financial Officer
(Principal Financial Officer)
By: /s/ KENNETH B. AROLA Date: July 9, 1999
- -----------------------------------------------------
Kenneth B. Arola
Vice President
Controller
(Principal Accounting Officer)
</TABLE>
25
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
Financial Data Schedule for the quarter ended September 30,
27.1 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 195,629
<SECURITIES> 417,957
<RECEIVABLES> 73,471
<ALLOWANCES> 3,865
<INVENTORY> 55,293
<CURRENT-ASSETS> 830,510
<PP&E> 292,883
<DEPRECIATION> 100,967
<TOTAL-ASSETS> 1,124,152
<CURRENT-LIABILITIES> 107,424
<BONDS> 247,640
0
0
<COMMON> 108
<OTHER-SE> 768,980
<TOTAL-LIABILITY-AND-EQUITY> 1,124,152
<SALES> 143,922
<TOTAL-REVENUES> 143,922
<CGS> 63,087
<TOTAL-COSTS> 63,087
<OTHER-EXPENSES> 119,123
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,047
<INCOME-PRETAX> (33,423)
<INCOME-TAX> (7,499)
<INCOME-CONTINUING> (25,924)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,924)
<EPS-BASIC> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
