ADAPTEC INC, 10-Q, 1999-08-12

ADAPTEC INC
10-Q, 1999-08-12
COMPUTER COMMUNICATIONS EQUIPMENT

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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
JUNE 30, 1999

/ / 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 July 2,
1999 was 103,315,256.

This document consists of 28 pages, excluding exhibits, of which this is page 1.

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<PAGE>
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.................................................. 6-14

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations:
Results of Operations................................................................................. 15-19
Liquidity and Capital Resources....................................................................... 19-21
Certain Factors Bearing on Future Operating Results................................................... 21-26

Part II. Other Information
Item 1. Legal Proceedings............................................................................... 27
Item 6. Exhibits and Reports on Form 8-K................................................................ 27
Signatures............................................................................................ 28
</TABLE>

2
<PAGE>
PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ADAPTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED
----------------------
JUNE 30, JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
Net revenues.............................................................................. $ 192,378 $ 180,630
Cost of revenues.......................................................................... 66,787 79,738
---------- ----------
Gross profit.............................................................................. 125,591 100,892
---------- ----------
Operating expenses:
Research and development................................................................ 24,525 43,997
Sales, marketing and administrative..................................................... 39,863 49,825
Write-off of acquired in-process technology............................................. -- 45,482
Restructuring and other charges......................................................... -- 30,263
---------- ----------
Total operating expenses.................................................................. 64,388 169,567
---------- ----------
Income (loss) from operations............................................................. 61,203 (68,675)
Interest and other income................................................................. 11,951 9,133
Interest expense.......................................................................... (2,959) (3,067)
---------- ----------
Income (loss) before provision (benefit) for income taxes................................. 70,195 (62,609)
Provision (benefit) for income taxes...................................................... 19,655 (3,860)
---------- ----------
Net income (loss)......................................................................... $ 50,540 $ (58,749)
---------- ----------
---------- ----------
Net income (loss) per share:
Basic................................................................................... $ 0.49 $ (0.51)
---------- ----------
---------- ----------
Diluted................................................................................. $ 0.46 $ (0.51)
---------- ----------
Shares used in computing net income (loss) per share:
Basic................................................................................... 104,142 114,200
---------- ----------
Diluted................................................................................. 114,191 114,200
---------- ----------
---------- ----------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

3
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ADAPTEC, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 82,808 $ 317,580
Marketable securities............................................................... 650,889 426,332
Accounts receivable, net............................................................ 71,281 67,158
Inventories......................................................................... 47,772 50,838
Other current assets................................................................ 135,125 148,109
------------ ------------
Total current assets.............................................................. 987,875 1,010,017
Property and equipment, net........................................................... 118,139 126,734
Other long-term assets................................................................ 35,591 36,317
------------ ------------
$ 1,141,605 $ 1,173,068
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 30,321 $ 39,487
Accrued liabilities................................................................. 141,140 112,879
------------ ------------
Total current liabilities......................................................... 171,461 152,366
------------ ------------
4 3/4% Convertible Subordinated Notes................................................. 230,000 230,000
------------ ------------
Contingencies (Note 15)
Stockholders' equity:
Common stock........................................................................ 103 106
Additional paid-in capital.......................................................... 93,426 194,521
Retained earnings................................................................... 646,615 596,075
------------ ------------
Total stockholders' equity........................................................ 740,144 790,702
------------ ------------
$ 1,141,605 $ 1,173,068
------------ ------------
------------ ------------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

4
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ADAPTEC, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)
(IN THOUSANDS)

<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED
-----------------------
JUNE 30, JUNE 30,
1999 1998
----------- ----------
<S> <C> <C>
Net Cash Provided by Operating Activities................................................ $ 72,560 $ 28,144
----------- ----------
Cash Flows From Investing Activities:
Purchases of certain net assets in connection with acquisitions, net..................... -- (34,126)
Investments in property and equipment.................................................... (1,883) (14,422)
Decreases (increases) in marketable securities, net...................................... (224,557) 191,867
Net proceeds received from sale of property and equipment................................ 1,941 --
Net proceeds received from the sale of land.............................................. 16,577 --
Purchase of minority investment.......................................................... (1,000) --
----------- ----------
Net Cash Provided by (Used for) Investing Activities..................................... (208,922) 143,319
----------- ----------

Cash Flows From Financing Activities:
Proceeds from issuance of common stock................................................... 32,782 5,391
Repurchases of common stock.............................................................. (131,192) --
Principal payments on debt............................................................... -- (850)
----------- ----------
Net Cash Provided by (Used for) Financing Activities..................................... (98,410) 4,541
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents..................................... (234,772) 176,004
Cash and Cash Equivalents at Beginning of Period......................................... 317,580 227,183
----------- ----------
Cash and Cash Equivalents at End of Period............................................... $ 82,808 $ 403,187
----------- ----------
----------- ----------
</TABLE>

See accompanying notes to condensed consolidated financial statements.

5
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed
consolidated interim financial statements have been prepared on a consistent
basis with the March 31, 1999 audited consolidated financial statements and
include all adjustments, consisting of only normal recurring adjustments, except
as described in Notes 7 through 10, necessary to provide a fair statement of the
results for the interim periods presented. These interim financial statements
should be read in conjunction with the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
year ended March 31, 1999. For presentation purposes, the Company has indicated
its first quarter as having ended on June 30, whereas in fact, the Company's
first quarter of fiscal 2000 and fiscal 1999 ended on July 2, 1999 and July 3,
1998, respectively. The results of operations for the three month period ended
June 30, 1999, are not necessarily indicative of the results to be expected for
the entire year. Additionally, certain items previously reported in specific
financial statement captions have been reclassified to conform with the current
period presentation.

On June 8, 1999, the Company received a comment letter from the Securities
and Exchange Commission ("SEC") relating to certain previous filings under the
Securities Exchange Act of 1934, primarily comments about disclosure in the
Company's Management's Discussion and Analysis and Notes to Consolidated
Financial Statements. The Company has 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 and the Company's fiscal 1999 Annual
Report on Form 10-K filed June 29, 1999, 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.

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
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 PRONOUNCEMENT

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. In June 1999, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 137
("SFAS 137"), "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133," which
deferred the required date of adoption of SFAS 133 for one year, to fiscal years
beginning after June 15, 2000. The Company will adopt this statement in the
first quarter of fiscal 2002 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)

(UNAUDITED)

4. BALANCE SHEET DETAIL

Inventories are stated at the lower of cost (first-in, first-out) or market.
The components of inventory are as follows:

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.............................................................................. $ 13,384 $ 16,354
Work-in-process............................................................................ 9,313 8,202
Finished goods............................................................................. 25,075 26,282
--------- -----------
$ 47,772 $ 50,838
--------- -----------
--------- -----------
</TABLE>

The components of accrued liabilities are as follows:

<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1999 1999
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation and related taxes.................................................... $ 28,500 $ 22,137
Sales and marketing related............................................................... 7,032 7,708
Tax related............................................................................... 83,611 65,754
Other..................................................................................... 21,997 17,280
---------- ----------
$ 141,140 $ 112,879
---------- ----------
---------- ----------
</TABLE>

5. LINE OF CREDIT

In March 1999, the Company obtained an unsecured $60.0 million revolving
line of credit which expires on March 25, 2000. No borrowings were outstanding
under this line of credit as of June 30, 1999. The interest rate and commitment
fee is based on a pricing matrix, which correlates with the Company's credit
rating. Under the arrangement, the Company is required to maintain certain
financial ratios among other restrictive covenants. The Company was in
compliance with all such covenants as of June 30, 1999.

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. STATEMENT OF OPERATIONS

Restructuring and other charges included:

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
JUNE 30, 1998
-------------------------
(IN THOUSANDS)
<S> <C>
Acquisition related costs (Note 8)................................. $ 21,463
Restructuring charges (Note 9)..................................... 8,800
-------
Total restructuring and other charges.............................. $ 30,263
-------
-------
</TABLE>

7
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

7. STATEMENT OF OPERATIONS (CONTINUED)
There were no restructuring and other charges incurred during the three
month period ended June 30, 1999.

Interest and other income included:

<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED
----------------------
JUNE 30, JUNE 30,
1999 1998
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Interest income.......................................................... $ 8,438 $ 9,133
Gain on sale of land (Note 10)........................................... 3,513 --
--------- -----------
Total interest and other income.......................................... $ 11,951 $ 9,133
--------- -----------
--------- -----------
</TABLE>

8. 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.

In May 1998, the Company purchased Ridge Technologies, Inc. ("Ridge"), a
development stage company, 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 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. Excluding the write-off of acquired in-process technology, the
aggregate impact to the Company's financial position and results of operations
from the acquisition dates were not material.

The allocation of the Company's aggregate purchase price to the tangible and
identifiable intangible net assets acquired were based on independent appraisals
and estimates of fair values.

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
JUNE 30, 1998
-------------------------
(IN THOUSANDS)
<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>

8
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

8. RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS (CONTINUED)
The tangible liabilities assumed exceeded the tangible assets acquired,
which comprised primarily a line of credit, accounts payable and fixed assets.
Acquired in-process technology was written-off in the first quarter of fiscal
1999 and subsequently restated in the fourth quarter of fiscal 1999, to conform
with the Securities and Exchange Commission Staff's preferred methodology. The
goodwill and other intangible assets associated with these acquisitions were
amortized over the respective benefit periods ranging from two to three years.
Amortization relating to these acquisitions totaled $2.3 million in the first
quarter of fiscal 1999. Subsequently, the goodwill and other intangible assets
associated with Ridge and the ASIC technologies purchased from ADI were
written-off and relieved in August 1998 and January 1999 as a result of
divesting the storage subsystems business line and the sale of the mainstream
removable Peripheral Technology Solutions ("PTS") business line, respectively.

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
$6.7 million in nonconsummation fees to HEA. Additionally, the Company incurred
$7.8 million in other acquisition related charges, including legal, consulting
and other costs. The entire $21.5 million in fees associated with this
terminated acquisition was expensed and included in "Restructuring and other
charges" in the first quarter of fiscal 1999.

In July 1999, the Company acquired CeQuadrat GmbH for $25.0 million in cash.
The Company will account for this acquisition in the second quarter of fiscal
2000 using the purchase method of accounting. The Company will evaluate the
allocation of the purchase price to the net assets acquired, which may include
in-process technology that will be written-off in the period acquired, and
goodwill and other intangibles that will be amortized over their benefit period.

9. RESTRUCTURING

In the first quarter of fiscal 1999, the Company recorded a restructuring
charge of $8.8 million. The restructuring charge is comprised primarily of
severance and benefits related to the involuntary termination of approximately
550 employees, of which approximately 36% were based in the United States and
the remainder were based in Singapore.

In the second and fourth quarters of fiscal 1999, the Company recorded
restructuring charges of $24.5 million and $6.6 million, net of adjustments to
previous quarters' charges of $1.4 million and $1.2 million, respectively. The
second and fourth quarter fiscal 1999 restructuring charges were comprised
primarily of severance and benefits related to the involuntary termination of
approximately 425 employees of which most were based in the United States, and
the write-off of property and equipment, inventory and other current and
long-term assets.

In total, the Company recorded $39.9 million in restructuring charges during
fiscal 1999, of which $17.4 million were non-cash charges. During fiscal 1999,
the Company paid $20.0 million in cash relating to restructuring activities,
leaving a restructuring reserve balance of $2.5 million at March 31, 1999. The

9
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ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

9. RESTRUCTURING (CONTINUED)
following table presents the Company's restructuring payments during the first
quarter of fiscal 2000 and the restructuring reserve balance at June 30, 1999:

<TABLE>
<CAPTION>
SEVERANCE OTHER
RESTRUCTURING RESERVES AND BENEFITS CHARGES TOTAL
- -------------------------------------------------------------------------------- ------------- ----------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
BALANCE AT MARCH 31, 1999....................................................... $ 1,467 $ 1,026 $ 2,493
Cash paid....................................................................... (702) (526) (1,228)
------ ----------- ---------
BALANCE AT JUNE 30, 1999........................................................ $ 765 $ 500 $ 1,265
------ ----------- ---------
------ ----------- ---------
</TABLE>

The Company anticipates that substantially all of the remaining reserve
balance of $1.3 million at June 30, 1999, will be paid out by September 30,
1999.

10. ASSETS HELD FOR SALE

In March 1999, the Company sold land located in California for net proceeds
of $5.1 million resulting in a gain of $1.6 million recorded in the fourth
quarter of fiscal 1999. Net proceeds from the sale were received in April 1999.

As of March 31, 1999, the Company had $41.1 million in assets held for sale,
included in other current assets, representing several pieces of land in
California and land and a building in Colorado. In April 1999, the Company sold
some land held for sale in California for net proceeds of $11.5 million
resulting in a gain of $3.5 million recorded in the first quarter of fiscal
2000. The gain was included in "Interest and other income" in the Condensed
Consolidated Statements of Operations in the first quarter of fiscal 2000. Net
proceeds from the sale were received in April 1999. The remaining assets held
for sale, valued at cost which approximates net realizable value, are expected
to be sold within the next 9 months and are therefore included in other current
assets as of June 30, 1999.

11. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted net income
(loss) per share gives effect to all dilutive potential common shares
outstanding during a period. In computing diluted net income (loss) per share,
the average stock price for the period is used in determining the number of
shares assumed to be purchased from the exercise of stock options under the
treasury stock method.

10
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

11. NET INCOME (LOSS) PER SHARE (CONTINUED)
Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the periods
presented below.

<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
JUNE 30, 1999 JUNE 30, 1998
---------------------------------------- -----------------------------------------
INCOME SHARES PER-SHARE LOSS 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......................... $ 50,540 104,142 $ 0.49 $ (58,749) 114,200 $ (0.51)
----- -----------
----- -----------

EFFECT OF DILUTIVE SECURITIES
Common stock equivalents............... -- 5,597 -- --
4 3/4% Convertible Subordinated
Notes................................ 2,004 4,452 -- --
------------ ------------- ------------- -------------

DILUTED NET INCOME (LOSS) PER SHARE
Net income (loss) available to common
stockholders and assumed
conversions.......................... $ 52,544 114,191 $ 0.46 $ (58,749) 114,200 $ (0.51)
------------ ------------- ----- ------------- ------------- -----------
------------ ------------- ----- ------------- ------------- -----------
</TABLE>

At June 30, 1999, additional options to purchase 3,574,000 shares of common
stock were outstanding but were not included in the computation of diluted net
income per share for the first quarter of fiscal 2000 because the options'
exercise price was greater than the average market price of the common shares
during the quarter.

At June 30, 1998, options to purchase 17,965,000 shares of common stock were
outstanding, however, the stock options and the 4 3/4% Convertible Subordinated
Notes were not included in the computation of diluted net income per share for
the first quarter of fiscal 1999, because they were anti-dilutive. Additionally,
the basic and diluted weighted average common shares outstanding for the first
quarter of fiscal 1999 excluded 1,242,000 restricted shares issued in
conjunction with the acquisition of Ridge (Note 8).

12. STOCK REPURCHASES

In October 1998, the Company's Board of Directors authorized the purchase of
up to $200.0 million of the Company's common stock in the open market. In May
1999, the Company's Board of Directors authorized the Company to repurchase an
additional $200.0 million of the Company's common stock in the open market.
During the first quarter of fiscal 2000, the Company repurchased and retired
4,848,000 shares of its common stock from the open market under both
authorizations for approximately $131.2 million. The transactions were recorded
as reductions to common stock and additional paid-in capital.

11
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

13. SEGMENT REPORTING

The Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information" in its fiscal 1999 Annual Report on Form 10-K. The Company
evaluated its products segments in accordance with SFAS 131 and concluded that
its reportable segments are Host I/O, RAID (Redundant Array of Independent
Disks), Software and PTS.

The Host I/O segment designs, develops, manufactures and markets host bus
adapter ("HBA") boards and chips that allow computers to transfer information to
and from peripherals, such as hard disk drives, scanners, CD-ROMs, CD-Rs,
CD-RWs, DVD-ROMs, and Zip and Jaz drives among many other devices. The Company's
HBAs are based on Small Computer System Interface ("SCSI") technology and are
utilized in servers, high-end workstations and desktops where high performance
I/O is a vital component of overall system performance.

The RAID segment designs, develops, manufactures and markets bus-based and
microprocessor-based RAID solutions. These products are utilized from entry
level workstations to enterprise-class servers. The Company's RAID adapters
provide performance and functionality, incorporate the latest technical
innovations, and offer superior software functionality to make RAID fast, simple
and reliable.

The Software segment designs, develops and markets optical media software
for CD-R and CD-RW. This segment includes video editing products and software
utility products that simplify connecting a SCSI host adapter and peripherals to
a microcomputer system. The Company's CD-R and CD-RW products are used for data
storage to optical media, including audio, video and still photos, and provide
users storage alternatives to traditional disk and removable media options.
Additionally, CD-RW allows users to transfer downloaded music from the Internet
to CDs for private use. The Company's CD-R software offerings are available as
stand-alone products, and also ship built-in or "bundled" with most CD-R drives
in the desktop market.

The PTS segment designed, developed, manufactured and marketed proprietary
integrated circuits ("ICs") for use in mass storage devices and other
peripherals. The business lines that comprised the PTS segment were sold in
November 1998 and January 1999 to Texas Instruments, Inc. ("TI") and ST
Microelectronics, Inc. ("ST"), respectively.

Summarized pre-tax financial information concerning the Company's reportable
segments is shown in the following table. The Company does not identify or
allocate assets or depreciation by operating segments nor are the segments
evaluated under these criteria. The "Other" column includes corporate

12
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

13. SEGMENT REPORTING (CONTINUED)
related items, including unusual transactions, and income and expenses not
allocated to reportable segments, including businesses divested in fiscal 1999.

<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED
----------------------
JUNE 30, JUNE 30,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
HOST I/O:
Net revenues............................................................................ $ 158,349 $ 127,079
Segment profit.......................................................................... 67,971 35,046
RAID:
Net revenues............................................................................ 23,476 6,385
Segment profit (loss)................................................................... 1,107 (4,452)
SOFTWARE:
Net revenues............................................................................ 10,553 11,494
Segment profit (loss)................................................................... (131) 2,654
PTS:
Net revenues............................................................................ -- 34,922
Segment profit (loss)................................................................... -- (9,812)
OTHER:
Net revenues............................................................................ -- 750
Segment profit (loss)................................................................... 1,248 (86,045)
</TABLE>

The following table presents the details of "Other" segment profit (loss):

<TABLE>
<CAPTION>
THREE MONTH PERIOD
ENDED
----------------------
JUNE 30, JUNE 30,
1999 1998
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Losses from divested businesses........................................................... $ -- $ (16,284)
Unallocated corporate expenses, net....................................................... (7,744) (82)
Interest and other income................................................................. 11,951 9,133
Interest expense.......................................................................... (2,959) (3,067)
Write-off of acquired in-process technology............................................... -- (45,482)
Restructuring and other charges........................................................... -- (30,263)
---------- ----------
Total..................................................................................... $ 1,248 $ (86,045)
---------- ----------
---------- ----------
</TABLE>

14. INCOME TAXES

Income tax provisions (benefits) for interim periods are based on estimated
annual income tax rates. 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. In the first quarter of fiscal 1999, the Company's effective
tax rate, excluding the write-off of acquired in-process technology, was 25%. In
the third quarter of fiscal 1999, the Company's

13
<PAGE>
ADAPTEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

14. INCOME TAXES (CONTINUED)
effective tax rate changed from 25% to 28% due to a geographic shift of earnings
resulting from restructuring activities and business divestitures. The Company
recorded an income tax provision of $19.7 million representing 28% of income
before provision for income taxes for the first quarter of fiscal 2000 compared
with a $3.9 million income tax benefit representing 6% of the loss before
benefit for income taxes for the first quarter of fiscal 1999. The effective tax
rate used to calculate the income tax benefit for the first quarter of fiscal
1999 was lower than 25% primarily as a result of book write-offs of acquired
in-process technology which are not deductible for tax purposes.

15. CONTINGENCIES

A class action lawsuit is pending in the United States District Court for
the Northern District of California against the Company and certain of its
officers and directors. The class action lawsuit alleges that the Company made
false and misleading statements at various times during the period between April
1997 and January 1998 in violation of federal securities laws. The complaint
does not set forth purported damages. The Company believes the class action
lawsuit is without merit and intends to defend itself vigorously.

In addition, a derivative action was 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. In July 1999, the Company entered into an agreement to
settle the derivative action. Under the terms of the agreement, the Company will
reimburse the fees and costs incurred by the plaintiff's attorney's in an amount
to be approved by the court up to a maximum amount of $600,000. The settlement
is subject to approval by the court, and does not affect the class action
lawsuit still pending. The Company has sufficient reserves at June 30, 1999, to
cover the liability.

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.

From time to time, the Company is subject to certain liabilities, claims and
assessments in the normal course of business. The Company believes that any
liability with respect to such routine litigation, individually or in the
aggregate, is not likely to be material to the Company's financial position or
results of operations.

14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
ACTUAL THREE MONTH NORMALIZED(1) THREE
PERIOD ENDED MONTH PERIOD ENDED
---------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues..................................................... $ 192,378 $ 180,630 $ 192,378 $ 145,708
Cost of revenues................................................. 66,787 79,738 66,787 55,063
---------- ---------- ---------- ----------
Gross profit..................................................... 125,591 100,892 125,591 90,645
---------- ---------- ---------- ----------
Operating expenses:
Research and development....................................... 24,525 43,997 24,525 33,256
Sales, marketing and administrative............................ 39,863 49,825 39,863 45,163
Write-off of acquired in-process technology.................... -- 45,482 -- --
Restructuring and other charges................................ -- 30,263 -- --
---------- ---------- ---------- ----------
Total operating expenses......................................... 64,388 169,567 64,388 78,419
---------- ---------- ---------- ----------
Income (loss) from operations.................................... 61,203 (68,675) 61,203 12,226
Interest and other income........................................ 11,951 9,133 8,438 9,133
Interest expense................................................. (2,959) (3,067) (2,959) (3,067)
---------- ---------- ---------- ----------
Income (loss) from operations before provision (benefit) for
income taxes................................................... 70,195 (62,609) 66,682 18,292
Provision (benefit) for income taxes............................. 19,655 (3,860) 18,671 4,573
---------- ---------- ---------- ----------
Net income (loss)................................................ $ 50,540 $ (58,749) $ 48,011 $ 13,719
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net income (loss) per share:
Basic.......................................................... $ 0.49 $ (0.51) $ 0.46 $ 0.12
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted........................................................ $ 0.46 $ (0.51) $ 0.44 $ 0.12
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Shares used in computing net income (loss) per share:
Basic.......................................................... 104,142 114,200 104,142 114,200
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Diluted........................................................ 114,191 114,200 109,739 115,736
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>

- ------------------------

(1) Normalized operating results exclude the following: net revenues and
expenses related to the PTS business lines sold in the third and fourth
quarter of fiscal 1999, the write-off of acquired in-process technology,
restructuring and other charges, the gain on the sale of land, and the
related tax effects for each of these items.

SEC COMMENT LETTER. On June 8, 1999, the Company received a comment letter
from the Securities and Exchange Commission ("SEC") relating to certain previous
filings under the Securities Exchange Act of 1934, primarily comments about
disclosure in the Company's Management's Discussion and Analysis and Notes to
Consolidated Financial Statements. The Company has 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 and the Company's fiscal 1999 Annual
Report on Form 10-K filed June 29, 1999, 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.

15
<PAGE>
BUSINESS SEGMENTS. The Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information" in its fiscal 1999 Annual Report on Form 10-K. The Company
evaluated its products segments in accordance with SFAS 131 and concluded that
its reportable segments are Host I/O, RAID (Redundant Array of Independent
Disks), Software and Peripheral Technology Solutions ("PTS").

The Software segment designs, develops and markets optical media software
for CD-R and CD-RW. This segment includes video editing products and software
utility products that simplify connecting a SCSI host adapter and peripherals to
a microcomputer system. The Company's CD-R and CD-RW products are used for data
storage to optical media, including audio, video and still photos, and provide
users storage alternatives to traditional disk and removable media options.
Additionally, CD-RW allows users to transfer downloaded music from the internet
to CDs for private use. The Company's CD-R software offerings are available as
stand-alone products, and also ship built-in or "bundled" with most CD-R drives
in the desktop market.

MANAGEMENT'S DISCUSSION OF NORMALIZED RESULTS OF OPERATIONS. Normalized
operating results have been provided, in addition to the actual results, as
management believes this presentation is more indicative of the Company's
continuing performance and provides better period to period comparability.
Normalized results of operations excludes net revenues and expenses related to
the PTS business lines sold in the third and fourth quarters of fiscal 1999, the
write-off of acquired in-process technology, restructuring and other charges,
the gain on the sale of land, and the related tax effects for each of these
items.

NET REVENUES. Net revenues of $192.4 million for the first quarter of
fiscal 2000 increased 32.0% from normalized net revenues of $145.7 million for
the first quarter of fiscal 1999. Net revenues for the first quarter of fiscal
2000 were comprised of $158.3 million from the Host I/O segment, an increase of
24.6% from the first quarter of fiscal 1999, $23.5 million from the RAID
segment, an increase of 267.7% from the first quarter of fiscal 1999, and $10.6
million from the Software segment, a decrease of 8.2% from the first quarter of
fiscal 1999. Actual net revenues in the first quarter of fiscal 1999 also
included $34.9 million from the PTS segment.

Net revenues from the Host I/O segment increased year over year as a result
of increased demand for high performance I/O. The demand for high performance
I/O has increased due to growth in on-line applications like electronic
commerce, on-line publishing, and the proliferation of the Internet and
corporate intranets.

Net revenues from the RAID segment increased year over year as a result of
sales of the Company's high-end RAID product which was first introduced in the
third quarter of fiscal 1999. Currently, the Company has one significant OEM
customer with which it does most of its business. However the

16
<PAGE>
Company is continuing to market its RAID products to all major server
manufacturers and continues to work closely with the OEMs on the design of
current and next generation products to meet customer requirements.

Net revenues from the Software segment decreased year over year as a result
of increased unit volume at lower per unit royalties as the Company strives to
maintain its market share in the rapidly expanding CD-R peripheral market. In
July 1999, the Company acquired CeQuadrat GmbH, a German-based company, expected
to provide the Company with enhanced product development and engineering
expertise, as well as a greater European customer base.

GROSS MARGIN. Gross margin for the first quarter of fiscal 2000 was 65.3%
compared to normalized gross margin of 62.2% for the first quarter of fiscal
1999. The increase in gross margin was primarily due to manufacturing
efficiencies obtained through greater production volumes, as well as improved
pricing obtained from the Company's global suppliers in the first quarter of
fiscal 2000. Actual gross margin for the first quarter of fiscal 1999, which
includes the PTS segment, was 55.9%, as the products which comprised the PTS
segment generally obtained lower gross margins.

RESEARCH AND DEVELOPMENT EXPENSES. Spending for research and development
was $24.5 million for the first quarter of fiscal 2000, representing a decrease
of 26.3% from normalized research and development expenses of $33.3 million for
the first quarter of fiscal 1999. The decrease in spending for research and
development was primarily attributable to Company-wide cost reductions programs
initiated in fiscal 1999 which included reductions in workforce and the
curtailment of costs related to the divesting of certain unprofitable business
activities. The Company initiated cost reduction programs in order to bring
operating expenses in line with net revenues and the business divestitures were
completed to further management's objective to refocus the business. As a
result, research and development expenses, as a percentage of net revenues,
decreased to 12.7% in the first quarter of fiscal 2000 from a normalized 22.8%
in the first quarter of fiscal 1999. Actual spending for research and
development in the first quarter of fiscal 1999, which includes $10.7 million
from the PTS segment, was $44.0 million representing 24.4% of actual net
revenues.

SALES MARKETING AND ADMINISTRATIVE EXPENSES. Spending for selling,
marketing and administrative activities was $39.9 million for the first quarter
of fiscal 2000, representing a decrease of 11.7% from normalized spending for
selling, marketing and administrative of $45.2 million in the first quarter of
fiscal 1999. The decrease in spending for selling, marketing and administrative
activities was primarily attributable to Company-wide cost reductions initiated
in fiscal 1999, specifically reductions in workforce. As discussed above, the
Company initiated cost reduction programs in order to bring operating expenses
in line with net revenues. As a result, sales, marketing and administrative
expenses, as a percentage of net revenues, decreased to 20.7% in the first
quarter of fiscal 2000 from a normalized 31.0% in the first quarter of fiscal
1999. Actual spending for selling, marketing and administrative activities for
the first quarter of fiscal 1999, which includes $4.6 million from the PTS
segment, was $49.8 million representing 27.6% of actual net revenues.

WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. In the first quarter of fiscal
1999, the Company purchased read channel and preamplifier ASIC technologies
("ASIC technologies") from Analog Devices, Inc. ("ADI") and Ridge Technologies,
Inc. ("Ridge"), which resulted in a first quarter fiscal 1999 write-off of
acquired in-process technology of $6.1 million and $39.4 million, respectively.
The write-off of acquired in-process technology relating to ASIC technologies
purchased from ADI, reflects a restatement taken in the fourth quarter of fiscal
1999 to conform with the Securities and Exchange Commission Staff's preferred
methodology. The goodwill and other intangible assets acquired in the
acquisitions was amortized over the respective benefit periods ranging from two
to three years. Amortization relating to these acquisitions totaled $2.3 million
in the first quarter of fiscal 1999. Subsequently, the goodwill and other
intangible assets associated with Ridge and ASIC technologies purchased from ADI
were written-off and relieved in

17
<PAGE>
August 1998 and January 1999 as a result of divesting the storage subsystems
business line and the sale of the mainstream removable PTS business line,
respectively.

RESTRUCTURING AND OTHER CHARGES. In the first quarter of fiscal 1999, 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 and fourth quarters of fiscal 1999, the Company recorded
restructuring charges of $24.5 million and $6.1 million, net of adjustments to
previous quarters' charges of $1.4 million and $1.2 million respectively. The
second and fourth quarter fiscal 1999 restructuring charges were comprised
primarily of severance and benefits related to the involuntary termination of
approximately 425 employees of which most were based in the United States, and
the write-off of property and equipment, inventory and other current and
long-term assets.

In total, the Company recorded $39.9 million in restructuring activities
during fiscal 1999, of which $17.4 million were non-cash charges. During fiscal
1999, the Company paid $20.0 million in cash relating to restructuring
activities leaving a restructuring reserve balance of $2.5 million at March 31,
1999. The following table presents the Company's restructuring payments during
the first quarter of fiscal 2000 and the restructuring reserve balance at June
30, 1999:

<TABLE>
<CAPTION>
SEVERANCE OTHER
RESTRUCTURING RESERVES AND BENEFITS CHARGES TOTAL
- -------------------------------------------------------------------------------- ------------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at March 31, 1999....................................................... $ 1,467 $ 1,026 $ 2,493
Cash paid....................................................................... (702) (526) (1,228)
------ ----------- ---------
Balance at June 30, 1999........................................................ $ 765 $ 500 $ 1,265
------ ----------- ---------
------ ----------- ---------
</TABLE>

The Company anticipates that substantially all of the remaining reserve
balance of $1.3 million at June 30, 1999 will be paid out by September 30, 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
$6.7 million in nonconsummation fees to HEA. Additionally, the Company incurred
$7.8 million in other acquisition related charges, including legal, consulting,
and other costs. The entire $21.5 million in fees associated with this
terminated acquisition was expensed and included in "Restructuring and other
charges" in the first quarter of fiscal 1999.

INTEREST AND OTHER INCOME. Interest and other income of $12.0 million for
the first quarter of fiscal 2000 consisted of $8.5 million of interest income
and $3.5 million from the gain on the sale of land located in California. In the
first quarter of fiscal 1999, the Company recorded interest income of $9.1
million. The decrease in interest income from $9.1 million in fiscal 1999 to
$8.5 million in fiscal 2000 is due to the lower cash balances resulting from the
repurchases of the Company's common stock.

INTEREST EXPENSE. Interest expense was $3.0 million for the first quarter
of fiscal 2000, compared to $3.1 million for the first quarter of fiscal 1999.
Interest expense in both periods resulted from the Company's 4 3/4% Subordinated
Convertible Notes.

18
<PAGE>
INCOME TAXES. Income tax provisions (benefits) for interim periods are
based on estimated annual income tax rates. 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. In the first quarter of fiscal 1999, the
Company's effective tax rate, excluding the write-off of acquired in-process
technology, was 25%. In the third quarter of fiscal 1999, the Company's
effective tax rate changed from 25% to 28% due to a geographic shift of earnings
resulting from restructuring activities and business divestitures. The Company
recorded an income tax provision of $19.7 million representing 28% of income
before provision for income taxes for the first quarter of fiscal 2000 compared
with a $3.9 million income tax benefit representing 6% of the loss before
benefit for income taxes for the first quarter of fiscal 1999. The effective tax
rate used to calculate the income tax benefit for the first quarter of fiscal
1999 was lower than 25% primarily as a result of book write-offs of acquired
in-process technology which are not deductible for tax purposes.

LIQUIDITY AND CAPITAL RESOURCES

OPERATING ACTIVITIES. Net cash provided by operating activities for the
first quarter of fiscal 2000 totaled $72.6 million compared to $28.1 million in
the corresponding period of fiscal 1999. Net cash provided by operating
activities for the first quarter of fiscal 2000 was primarily attributable to
net income of $50.5 million adjusted for depreciation and amortization expense
of $9.1 million. Additionally, net cash provided by operating activities in the
first quarter of fiscal 2000 was also impacted by the increase in accounts
payable and accrued liabilities of $16.4 million, partially offset by the
increase in accounts receivable of $4.6 million.

INVESTING ACTIVITIES. Net cash used for investing activities for the first
quarter of fiscal 2000 totaled $208.9 million compared to net cash provided by
investing activities of $143.3 million in the corresponding period of fiscal
1999. Net cash used for investing activities consisted primarily of the net
reinvestment of marketable securities of $224.6 million, offset partially by the
proceeds from the sales of land of $16.6 million. Investments in property and
equipment were offset by net proceeds received from the sale of property and
equipment.

In the first quarter of fiscal 1999, the Company purchased ASIC technologies
from ADI for $34.1 million in cash, net of cash received. Additionally, the
Company purchased all 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. 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.
Additionally, the Company incurred $1.2 million in professional fees related to
the acquisitions. Cash paid in connection with these acquisitions (net of cash
received) was $34.1 million.

FINANCING ACTIVITIES. Net cash used for financing activities for the first
quarter of fiscal 2000 totaled $98.4 million compared to net cash provided by
financing activities of $4.5 million in the corresponding period of fiscal 1999.
During the first quarter of fiscal 2000, the Company repurchased 4.8 million
shares of its common stock for $131.2 million. The repurchases were offset, in
part, by proceeds of $32.8 million received from the issuance of common stock to
employees through its stock option and employee stock purchase plans.

LIQUIDITY. At June 30, 1999, the Company's principal sources of liquidity
consisted of $733.7 million of cash, cash equivalents and marketable securities
and an unsecured $60.0 million revolving line of credit. As of June 30, 1999,
the Company had no borrowings that were outstanding under the line of credit.
The Company believes existing working capital, together with expected cash flows
from operations and available sources of bank, equity and equipment financing,
will be sufficient to support its operations through fiscal 2000.

19
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENT. 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. In June 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of FASB Statement No. 133," which deferred the required date of adoption of
SFAS 133 for one year, to fiscal years beginning after June 15, 2000. The
Company will adopt this statement in the first quarter of fiscal 2002 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 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 Compliance
issue will not pose significant operational problems for the Company or its
customers.

The Company 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, since fiscal 1997, has had procedures, tests, and
methodologies that have been in effect to ensure each product's Year 2000
Compliance 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 Compliance 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 Compliant by another company, or a conversion that
is incompatible with the Company's systems, would not have a material adverse
effect on the Company.

The Company's costs to date related to the Year 2000 Compliance issue
consist primarily of reallocation of internal resources to evaluate and assess
systems and products as described above and to plan testing and remediation
efforts. The total cost to the Company for 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
Compliance 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 materially from
those plans.

20
<PAGE>
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.

CERTAIN FACTORS BEARING ON FUTURE OPERATING RESULTS

This report contains forward-looking statements that involve risks and
uncertainties. For example, Management's Discussion and Analysis of Results of
Operations and Financial Condition includes statements relating to expected
sales growth, gross margins anticipated operating expenditures and anticipated
capital expenditures. The statements contained in this document that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this document. In evaluating the
Company's business, prospective investors should consider carefully the
following factors in addition to the other information set forth in this
document.

FUTURE OPERATING RESULTS SUBJECT TO FLUCTUATION. In the second half of
fiscal 1998 and the first half of fiscal 1999, the Company's operating results
were adversely affected by shifts in corporate and retail buying patterns,
increased competition, emerging technologies, economic instability in Asia and
turbulence in the computer disk drive industry. In addition, fiscal 1999
operating results were significantly impacted by unusual charges and credits
including write-offs of acquired in-process technology, costs related to the
termination of the Symbios acquisition, restructuring charges, impairment of
assets and terminations of senior executives and the gain on the sale of PTS and
the gain on the sale of land. Operating results for the first quarter of fiscal
2000 were also impacted by a gain on the sale of land. Additionally, operating
results beginning in the second quarter of fiscal 2000 will be affected by the
recent acquisition of CeQuadrat GmbH, specifically increased goodwill
amortization expense and the anticipated write-off of acquired in-process
technology. In the future, the Company's operating results may fluctuate as a
result of the factors described above and as a result of a wide variety of other
factors, including, but not limited to, cancellations or postponements of
orders, shifts in the mix of the Company's products and sales channels, changes
in pricing policies by the Company's suppliers, interruption in the supply of
custom integrated circuits, the market acceptance of new and enhanced versions
of the Company's products, product obsolescence and general worldwide economic
and computer industry fluctuations. In addition, fluctuations may be caused by
future accounting pronouncements, changes in accounting policies, and the timing
of acquisitions of other business products and technologies and any associated
charges to earnings. The volume and timing of orders received during a quarter
are difficult to forecast. The Company's customers from time to time encounter
uncertain and changing demand for their products. Customers generally order
based on their forecasts. If demand falls below such forecasts or if customers
do not control inventories effectively, they may cancel or reschedule shipments
previously ordered from the Company. The Company has historically operated with
a relatively small backlog, especially relating to orders of its Host I/O
products and has set its operating budget based in part on expectations of
future revenues. Because much of the Company's operating budget is relatively
fixed in the short-term, if revenues do not meet the Company's expectations then
the Company's operating income and net income may be disproportionately
affected. Operating results in any particular quarter, which do not meet the
expectations of securities analysts, are likely to cause volatility in the price
of the Company's common stock.

CERTAIN RISKS ASSOCIATED WITH THE HIGH-PERFORMANCE COMPUTER MARKET. The
Company's Host I/O products are used primarily in high performance computer
systems designed to support bandwidth-intensive

21
<PAGE>
applications and operating systems. Historically, the Company's growth has been
supported by increasing demand for systems that support client/server and
Internet/intranet applications, computer-aided engineering, desktop publishing,
multimedia, and video. Beginning in the second half of fiscal 1998, the demand
for such systems slowed as more businesses chose to use relatively inexpensive
PC's for desktop applications and information technology managers shifted
resources toward resolving Year 2000 problems and investing in network
infrastructure. Should demand for such systems continue to slow, the Company's
business or operating results could be materially adversely affected by a
resulting decline in demand for the Company's products.

CERTAIN RISKS ASSOCIATED WITH THE SERVER MARKET. The Company's RAID
products are used primarily in workstations and enterprise servers. The use of
RAID technology in this market is an industry standard, however, there can be no
assurance that another technology will not replace RAID in the disk array
controller marketplace or that there will be continuing widespread acceptance or
growth of the use of RAID products in general, or the Company's RAID controllers
in particular, in that market. Should demand for such systems slow or should the
Company's products not be widely accepted, the Company's business or operating
results could be materially adversely affected by a resulting decline for the
Company's products.

CERTAIN RISKS ASSOCIATED WITH THE SOFTWARE MARKET. The Company's Software
products are used primarily in high performance computer systems to enable the
control of SCSI peripherals and/or enable CD-R and CD-RW. The Company's sales
are primarily to major OEM's and distributors, thus the Company's business
depends on general economic and business conditions and the growth of the CD-R
and high-performance computer markets. Should demand for the Company's products
slow and/or the CD-R market not develop as quickly as expected, the Company's
business or operating results could be materially adversely affected by a
resulting decline in demand for the Company's products.

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, Ultra SCSI,
Ultra2 SCSI, Ultra3 SCSI, PCI, RAID, and Fast Ethernet. In particular, a
majority of the Company's revenues are currently derived from products based on
the SCSI standard. If consumer acceptance of these standards was to decline, or
if they were replaced with new standards, and if the Company did not anticipate
these changes and develop new products, the Company's business or operating
results could be materially adversely affected. For example, the Company
believes that changes in consumers' perceptions of the relative merits of SCSI
based products and products incorporating a competing standard, Ultra-DMA, have
materially adversely affected the sales of the Company's products and may
materially adversely affect the Company's future sales.

The markets for the Company's products are characterized by rapidly changing
technology, frequent new product introductions, and declining average selling
prices over product life cycles. The Company's future success is therefore
highly dependent upon the timely completion and introduction of new products at
competitive price/performance levels. The success of new product introductions
is dependent on several factors, including proper new product definition,
product costs, timely completion and introduction of new product designs,
quality of new products, differentiation of new products from those of the
Company's competitors, and market acceptance of the Company's and its customers'
products. As a result, the Company believes that continued significant
expenditures for research and development will be required in the future. There
can be no assurance that the Company will successfully identify new product
opportunities and develop and bring new products to market in a timely manner,
that products or technologies developed by others will not render the Company's
products or technologies obsolete or noncompetitive, or that the Company's
products will be selected for design into the products of its targeted
customers. The failure of any of the Company's new product development efforts
could have a material adverse effect on the Company's business or operating
results. In addition, the Company's revenues and operating results

22
<PAGE>
could be materially adversely impacted if its customers shifted their demand to
a significant extent away from board-based I/O solutions to application-specific
ICs.

COMPETITION. The markets for all of the Company's products are intensely
competitive and are characterized by rapid technological advances, frequent new
product introductions, evolving industry standards, and price erosion. In the
host adapter market, the Company competes with a number of host adapter
manufacturers, including LSI Logic Corporation and other small host adapter
manufacturers. The Company's principal competitors for RAID solutions in the
server market are American Megatrends, Inc., Mylex Corporation and captive
suppliers. The Company's principal competitors in the Software segment range
from small operations to large consumer software companies. As the Company has
continued to broaden its bandwidth management product offerings into the
desktop, server, and networking environments, it has experienced, and expects to
experience in the future, significantly increased competition both from existing
competitors and from additional companies that may enter its markets. Some of
these companies have greater technical, marketing, manufacturing, and financial
resources than the Company. There can be no assurance that the Company will be
able to make timely introduction of new leading-edge solutions in response to
competitive threats, that the Company will be able to compete successfully in
the future against existing or potential competitors or that the Company's
business or operating results will not be materially adversely affected by price
competition.

CERTAIN RISKS ASSOCIATED WITH ACQUISITIONS. In July 1999, the Company
acquired CeQuadrat GmbH in an acquisition accounted for using the purchase
method of accounting. As part of its overall strategy, the Company may continue
to acquire or invest in complementary companies, products, or technologies and
to enter into joint ventures and strategic alliances with other companies. Risks
commonly encountered in such transactions include the difficulty of assimilating
the operations and personnel of the combined companies, the potential disruption
of the Company's ongoing business, the inability to retain key technical and
managerial personnel, the inability of management to maximize the financial and
strategic position of the Company through the successful integration of acquired
businesses, additional expenses associated with amortization of acquired
intangible assets, dilution of existing equity holders, the maintenance of
uniform standards, controls, procedures, and policies, and the impairment of
relationships with employees and customers as a result of any integration of new
personnel. There can be no assurance that the Company will be successful in
overcoming these risks or any other problems encountered in connection with this
or other 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 RESTRUCTURING ACTIVITIES. During fiscal 1999,
the Company decided to exit certain activities and undertook certain
restructuring actions. In connection with these actions, the Company effected a
workforce reduction of 975 people. There is no assurance that restructuring
activities will be successful or have a long-term positive impact on the
Company's future operations. Furthermore, should such actions have a negative
impact on the Company's ability to design and develop new products, attract or
retain employees, market new or existing products, or produce and/or purchase
products at competitive prices, these actions could have a material adverse
impact on the Company's results of operations.

YEAR 2000 COMPLIANCE ISSUES. 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 existing core
business applications and accordingly does not anticipate any internal Year 2000
issues. Additionally, the Company has analyzed the remainder of its business not
addressed by the ERP software and has, through its standard product development
cycle, ensured its products are Year 2000 Compliant through procedures, tests
and methodologies that have been

23
<PAGE>
in effect since fiscal 1997. However, if internal systems do not properly
recognize and process date information for years into and beyond the turn of the
century, there could be a material adverse impact on other Company's operations.
A significant disruption of the Company's financial or business systems would
materially adversely impact the Company's ability to process orders, manage
production and issue and pay invoices. The Company's inability to perform these
functions for a long period of time could result in a material adverse impact on
the Company's result of operations and financial condition. Failure of these
systems could cause a disruption in the manufacturing process and could result
in a delay in completion and shipment of product.

The Company has communicated with others with whom it does significant
business, including major distributors, suppliers, customer, vendors and
financial service organizations, to assess their Year 2000 Compliance readiness
with respect to both their operations and the products and services they supply.
The analysis will continue into fiscal 2000, with corrective action taken
commensurate with the criticality of affected products and services. However, if
companies with whom the Company does significant business fail because of a Year
2000 malfunction, there could be a material adverse impact on the Company's
operating results. The Company believes it is currently being impacted by its
customers' redirection of corporate management information system budgets
towards resolving Year 2000 Compliance issues. Continuation of this trend could
lower the demand for the Company's products if corporate buyers defer purchases
of high-end business PCs.

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. The potential
ramifications of a year 2000 type failure are potentially far-reaching and
largely unknown. The Company cannot assure you that a contingency plan in effect
at the time of a system failure will adequately address the immediate or
long-term effects of a failure, or that such a failure would not have a material
adverse impact on the Company's operations or financial results in spite of
prudent planning.

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 most of its wafers through a supply agreement with TSMC. 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 supplier, a shortage of raw
materials or production capacity could lead the Company's wafer supplier 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
wafer 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 supplier was 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.

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

24
<PAGE>
equity investments in, joint ventures with or other partnership relationships
with foundries. Any such transaction could require the Company to seek
additional equity or debt financing to fund such activities. There can be no
assurance that the Company will be able to obtain any required financing on
terms acceptable to the Company.

Additionally, the Company relies on subcontractors for the assembly and
packaging of the ICs included in its products. The Company has no long-term
agreements with its assembly and packaging subcontractors. In addition, the
Company is increasingly using board subcontractors to better balance production
runs and capacity. There can be no assurance that such subcontractors will
continue to be able and willing to meet the Company's requirements for such
components or services. Any significant disruption in supplies from, or
degradation in the quality of components or services supplied by, such
subcontractors could delay shipments and result in the loss of customers or
revenues or otherwise have a material adverse effect on the Company's business
or operating results.

CERTAIN ISSUES RELATED TO DISTRIBUTORS. The Company's distributors
generally offer a diverse array of products from several different
manufacturers. Accordingly, there is a risk that these distributors may give
higher priority to selling products from other suppliers, thus reducing their
efforts to sell the Company's products. A reduction in sales efforts by the
Company's current distributors could have a material adverse effect on its
business or operating results. The Company's distributors may on occasion build
inventories in anticipation of substantial growth in sales, and if such growth
does not occur as rapidly as anticipated, distributors may decrease the amount
of product ordered from the Company in subsequent quarters. In addition, there
has recently been an industry trend towards the elimination of price protection
and distributor incentive programs and channel assembly. These trends could
result in a change in distributor business habits, with distributors possibly
deciding to decrease the amount of product held so as to reduce inventory levels
and this in turn could reduce the Company's revenues in any given quarter and
give rise to fluctuation in the Company's operating results. In addition, the
Company may from time to time take actions to reduce inventory levels at
distributors. These actions could reduce the Company's revenues in any given
quarter and give rise to fluctuations in the Company's operating results.

DEPENDENCE ON KEY PERSONNEL. The Company's future success depends in large
part on the continued service of its key technical, marketing, and management
personnel, and on its ability to continue to attract and retain qualified
employees, particularly those highly skilled design, process, and test engineers
involved in the design enhancements and manufacture of existing products and the
development of new products and processes. The competition for such personnel is
intense, and the loss of key employees could have a material adverse effect on
the Company's business or operating results.

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 wafer supplier, TSMC, is located in Taiwan, the
Company may be subject to certain risks resulting from the political instability
in Taiwan, including conflicts 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

25
<PAGE>
and intellectual property rights to the same extent as the laws of the United
States. The Company has from time to time discovered counterfeit copies of its
products being manufactured or sold by others. Although the Company maintains an
active program to detect and deter the counterfeiting of its products, should
counterfeit products become available in the market to any significant degree it
could materially adversely affect the business or operating results of the
Company.

From time to time, third parties may assert exclusive patent, copyright, and
other intellectual property rights to technologies that are important to the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertions by third
parties will not result in costly litigation or that the Company would prevail
in such litigation or be able to license any valid and infringed patents from
third parties on commercially reasonable terms. Litigation, regardless of its
outcome, could result in substantial cost and diversion of resources of the
Company. Any infringement claim or other litigation against or by the Company
could materially adversely affect the Company's business or operating results.

NEED FOR INTEROPERABILITY. The Company's products must be designed to
interoperate effectively with a variety of hardware and software products
supplied by other manufacturers, including microprocessors, peripherals, and
operating system software. The Company depends on significant cooperation with
these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading system, peripheral, and
microprocessor suppliers, there can be no assurance that such suppliers will not
from time to time make it more difficult for the Company to design its products
for successful interoperability or decide to compete with the Company.

NATURAL DISASTERS. The Company's corporate headquarters are located near
major earthquake faults. Any damage to the Company's information systems caused
as a result of an earthquake, fire or any other natural disasters could have a
material adverse effect on the Company's business, financial condition and
results of operations.

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.
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.

26
<PAGE>
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In June 1998, a derivative action was 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. In July 1999, the Company
entered into an agreement to settle the derivative action. Under the
terms of the agreement, the Company will reimburse the fees and costs
incurred by the plaintiff's attorney's in an amount to be approved by
the court up to a maximum amount of $600,000. The settlement is subject
to approval by the court, and does not affect the class action lawsuit
still pending in the United States District Court for the Northern
District of California.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a.) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- --------------------------------------------------------------------------------------
<C> <S>
27.1 Financial Data Schedule for the quarter ended June 30, 1998
</TABLE>

(b.) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.

27
<PAGE>
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.

<TABLE>
<S> <C> <C>
ADAPTEC, INC.

By: /s/ ANDREW J. BROWN Date: August 12, 1999
-----------------------------------------
Andrew J. Brown
VICE PRESIDENT, FINANCE
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)

By: /s/ KENNETH B. AROLA Date: August 12, 1999
-----------------------------------------
Kenneth B. Arola
VICE PRESIDENT
CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
</TABLE>

28
<PAGE>
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ----------------------------------------------------------------------------------------------- ---------
<C> <S> <C>
27.1 Financial Data Schedule for the quarter ended June 30, 1998
</TABLE>

(b.) Reports on Form 8-K.

No reports on Form 8-K were filed during the quarter.

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 82,808
<SECURITIES> 650,889
<RECEIVABLES> 73,627
<ALLOWANCES> 2,346
<INVENTORY> 47,772
<CURRENT-ASSETS> 987,875
<PP&E> 217,582
<DEPRECIATION> 99,443
<TOTAL-ASSETS> 1,141,605
<CURRENT-LIABILITIES> 171,461
<BONDS> 230,000
0
0
<COMMON> 103
<OTHER-SE> 740,041
<TOTAL-LIABILITY-AND-EQUITY> 1,141,605
<SALES> 192,378
<TOTAL-REVENUES> 192,378
<CGS> 66,787
<TOTAL-COSTS> 66,787
<OTHER-EXPENSES> 64,388
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,959
<INCOME-PRETAX> 70,195
<INCOME-TAX> 19,655
<INCOME-CONTINUING> 50,540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,540
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.46

</TABLE>