<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-15071
ADAPTEC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2748530
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
691 S. MILPITAS BLVD., MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 945-8600
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Company's common stock as of
January 1, 1999 was 107,761,383.
This document consists of 28 pages, excluding exhibits, of which this is
page 1.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations........ 3
Condensed Consolidated Balance Sheets.................. 4
Condensed Consolidated Statements of Cash Flows........ 5
Notes To Condensed Consolidated Financial Statements... 6 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Results of Operations.................................. 16 - 20
Liquidity and Capital Resources........................ 20 - 21
Factors Affecting Future Operating Results............. 21 - 26
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K.................. 27
Signatures.................................................. 28
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues............................... $183,872 $254,163 $508,424 $803,693
Cost of revenues........................... 74,719 95,304 217,544 307,328
-------- -------- -------- --------
Gross profit............................... 109,153 158,859 290,880 496,365
-------- -------- -------- --------
Operating expenses:
Research and development................. 35,156 45,782 119,970 126,881
Sales, marketing and administrative...... 41,834 63,312 134,661 164,291
Write-off of acquired in-process
technology............................ -- -- 65,762 --
Restructuring and other charges.......... -- 5,187 62,187 6,715
-------- -------- -------- --------
Total operating expenses................... 76,990 114,281 382,580 297,887
-------- -------- -------- --------
Income (loss) from operations.............. 32,163 44,578 (91,700) 198,478
Interest income............................ 7,916 9,375 24,961 24,775
Interest expense........................... (2,992) (3,026) (9,106) (9,116)
-------- -------- -------- --------
Income (loss) from operations before
provision (benefit) for income taxes..... 37,087 50,927 (75,845) 214,137
Provision (benefit) for income taxes....... 10,385 14,852 (974) 55,654
-------- -------- -------- --------
Income (loss) before cumulative effect of
change in accounting principle........... 26,702 36,075 (74,871) 158,483
Cumulative effect of a change in accounting
principle, net of tax benefit............ -- (9,000) -- (9,000)
-------- -------- -------- --------
Net income (loss).......................... $ 26,702 $ 27,075 $(74,871) $149,483
======== ======== ======== ========
Net income (loss) per common share:
Basic
Income (loss) before change in
accounting principle................ $ 0.25 $ 0.32 $ (0.67) $ 1.40
Cumulative effect of change in
accounting principle................ -- (0.08) -- (0.08)
-------- -------- -------- --------
Net income (loss)........................ $ 0.25 $ 0.24 $ (0.67) $ 1.32
======== ======== ======== ========
Diluted
Income (loss) before change in
accounting principle................ $ 0.24 $ 0.30 $ (0.67) $ 1.34
Cumulative effect of change in
accounting principle................ -- (0.07) -- (0.07)
-------- -------- -------- --------
Net income (loss)..................... $ 0.24 $ 0.23 $ (0.67) $ 1.27
======== ======== ======== ========
Shares used in computing net income (loss)
per share:
Basic.................................... 108,040 113,666 111,274 112,868
-------- -------- -------- --------
Diluted.................................. 110,881 124,444 111,274 122,919
======== ======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ----------
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 262,648 $ 227,183
Marketable securities..................................... 392,906 470,199
Accounts receivable, net.................................. 80,357 136,476
Inventories............................................... 48,600 71,297
Prepaid expenses and other................................ 108,674 85,939
---------- ----------
Total current assets.............................. 893,185 991,094
Property and equipment, net................................. 185,551 194,798
Other assets................................................ 38,439 89,337
---------- ----------
$1,117,175 $1,275,229
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ -- $ 850
Note payable.............................................. -- 17,640
Accounts payable.......................................... 36,945 48,047
Accrued liabilities....................................... 78,778 73,947
---------- ----------
Total current liabilities......................... 115,723 140,484
---------- ----------
Convertible subordinated notes.............................. 230,000 230,000
---------- ----------
Stockholders' equity:
Common stock.............................................. 108 114
Additional paid-in capital................................ 236,847 295,263
Retained earnings......................................... 534,497 609,368
---------- ----------
Total stockholders' equity........................ 771,452 904,745
---------- ----------
$1,117,175 $1,275,229
========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED
----------------------------
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................... $ 120,159 $ 222,013
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certain net assets in connection with
acquisitions accounted for under the purchase method of
accounting, net of cash acquired.......................... (34,126) --
Sale of certain net assets in connection with business
divestitures.............................................. 4,543 --
Purchases of property and equipment......................... (32,203) (73,564)
(Purchases) sales of marketable securities, net............. 77,293 (350,896)
--------- ---------
Net cash provided for (used for) investing activities....... 15,507 (424,460)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock..................... 11,863 33,637
Repurchases of common stock................................. (106,514) --
Principal payments on debt.................................. (5,550) (2,550)
--------- ---------
Net cash provided by (used for) financing activities........ (100,201) 31,087
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 35,465 (171,360)
Cash and cash equivalents at beginning of period............ 227,183 318,075
--------- ---------
Cash and cash equivalents at end of period.................. $ 262,648 $ 146,715
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated, interim financial statements have been prepared on a consistent
basis with the March 31, 1998 audited consolidated financial statements and
include all adjustments, consisting of only normal recurring adjustments, except
as described in Notes 9 through 12 and 14, necessary to provide a fair statement
of the results for the interim periods presented. These interim financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended March 31, 1998. For presentation
purposes, the Company has indicated its third quarter as having ended on
December 31, whereas in fact, the Company's third quarter of fiscal 1999 and
1998 ended on January 1, 1999 and January 2, 1998, respectively. The results of
operations for the three and nine month periods ended December 31, 1998, are not
necessarily indicative of the results to be expected for the entire year.
Certain items previously reported in specific financial statement captions have
been reclassified to conform with the current presentation.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1998
------------ ---------
<S> <C> <C>
Raw materials........................................ $13,117 $17,728
Work in process...................................... 7,943 18,415
Finished goods....................................... 27,540 35,154
------- -------
$48,600 $71,297
======= =======
</TABLE>
3. LINE OF CREDIT
In May 1998, the Company assumed a $6.8 million unsecured revolving line of
credit, of which $4.7 million was outstanding, in conjunction with the purchase
of Ridge Technologies (Note 9). In the second quarter of fiscal 1999, the
Company paid in full and terminated this line of credit.
The Company had available an unsecured $17 million revolving line of credit
that was to expire on December 31, 1998. No borrowings were outstanding under
this line of credit as of March 31, 1998, and no borrowings were made during the
first quarter of fiscal 1999. In June 1998, the Company terminated this line of
credit.
4. TAIWAN SEMICONDUCTOR MANUFACTURING AGREEMENT
During fiscal 1998, the Company entered into an agreement with Taiwan
Semiconductor Manufacturing Co., Ltd. ("TSMC") which provided the Company with a
guarantee of increased capacity for wafer fabrication in return for advance
payments totaling $35.3 million. The Company signed a non-interest bearing
promissory note for the $35.3 million which became due in two equal
installments. The first installment was paid in January 1998.
In the first quarter of fiscal 1999, the Company and TSMC amended the
promissory note to extend, indefinitely, the second installment of approximately
$17.6 million which was originally due in June 1998, and the amount was
reclassified as long-term debt as of June 30, 1998.
6
<PAGE> 7
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
In December 1998, the Company and TSMC terminated this agreement and
cancelled the second installment. In addition, TSMC agreed to refund the first
installment of $17.7 million payable in four equal installments over the next
four quarters, commencing December 1998. The first quarterly payment was
received by the Company in February 1999. Long-term debt and Other assets have
been reduced by $17.6 million representing the cancellation of the second
installment.
In January 1999, the Company and TSMC amended its existing wafer
fabrication agreements to extend the wafer fabrication capacity an additional
two years through December 31, 2002. Additionally, TSMC agreed to refund the
Company an additional $5.4 million payable in four equal installments over the
next four quarters, commencing January 1999.
5. STATEMENTS OF OPERATIONS
Restructuring and other charges includes (in thousands):
<TABLE>
<CAPTION>
THREE MONTH THREE MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Asset impairment and other charges (Note
11)........................................ $ -- $5,187
======= ======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Acquisition related costs (Note 9)........... $21,463 $ --
Restructuring charges (Note 10).............. 33,330 --
Asset impairment and other charges (Note
11)........................................ 7,394 6,715
------- ------
Total.............................. $62,187 $6,715
======= ======
</TABLE>
6. STOCK REPURCHASES
On January 20, 1998, the Company's Board of Directors approved a stock
repurchase program under which the Company is authorized to purchase up to 10
million shares of its common stock from time to time in the open market. During
the second quarter of fiscal 1999, the Company repurchased and retired 8,261,000
shares of its common stock for approximately $97.2 million. On October 16, 1998,
the Company's Board of Directors authorized an additional repurchase of up to
$200 million of the Company's common stock in the open market. In the third
quarter of fiscal 1999, the Company repurchased an additional 485,000 shares of
its common stock for approximately $9.3 million.
7. STOCK REPRICING
In October 1998, the Company approved the cancellation and reissuance of
outstanding stock options under the Company's stock option plans. Under this
program, all current active employees, except for executive officers, with
outstanding stock options with an exercise price in excess of $12.50 per share
could exchange their stock options for new non-qualified stock options with an
exercise price of $12.50 per share, the fair market value of the common stock on
the exchange date. The new options maintain the vesting schedule established by
the canceled stock options, however, the exercisability of the exchanged options
is suspended until April 1999.
7
<PAGE> 8
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
8. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period and excludes the
dilutive effect of stock options. Diluted net income (loss) per share gives
effect to all dilutive potential common shares outstanding during the period. In
computing diluted net income (loss) per share, the average stock price for the
period is used in determining the number of shares assumed to be purchased from
the exercise of stock options.
Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations.
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Basic net income per share
Net income available to common
stockholders................. $ 26,702 108,040 $ 0.25 $ 27,075 113,666 $0.24
====== =====
Effect of Dilutive Securities
Common stock equivalents....... -- 2,841 -- 6,326
4.75% convertible subordinated
notes........................ -- -- 2,043 4,452
-------- ------- -------- -------
Diluted net income per share
Net income available to common
stockholders and assumed
conversions.................. $ 26,702 110,881 $ 0.24 $ 29,118 124,444 $0.23
======== ======= ====== ======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Basic net income (loss) per
share
Net income (loss) available to
common stockholders.......... $(74,871) 111,274 $(0.67) $149,483 112,868 $1.32
====== =====
Effect of Dilutive Securities
Common stock equivalents....... -- -- -- 5,599
4.75% convertible subordinated
notes........................ -- -- 6,218 4,452
-------- ------- -------- -------
Diluted net income (loss) per
share
Net income (loss) available to
common stockholders and
assumed conversions.......... $(74,871) 111,274 $(0.67) $155,701 122,919 $1.27
======== ======= ====== ======== ======= =====
</TABLE>
For the three months ended December 31, 1998, options to purchase 4,187,000
shares of common stock were not included in the computation of diluted weighted
average common shares outstanding because the options' exercise price was
greater than the average market price of the common shares during the period.
The conversion of 4,452,000 shares of common stock related to the Convertible
Subordinated notes was also not included in the computation of diluted net
income per share for the three months ended December 31, 1998, as the impact was
anti-dilutive.
8
<PAGE> 9
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
For the nine months ended December 31, 1998, options to purchase 20,981,000
shares of common stock were outstanding, however the stock options and the
Convertible Subordinated Notes were not included in the computation of diluted
net loss per share because they were anti-dilutive.
For the three and nine months ended December 31, 1997, options to purchase
631,000 shares of common stock were not included in the computations of diluted
weighted average common shares outstanding because the options' exercise price
was greater than the average market price of the common shares during the
respective periods.
9. RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS
On April 12, 1998, the Company received regulatory approval to acquire read
channel and preamplifier ASIC technologies from Analog Devices, Inc. ("ADI") for
$34 million in cash. ADI was incorporated into the mainstream peripheral
technology solutions business. Grant Saviers, former Chairman and CEO of the
Company, is a director of ADI. On May 21, 1998, the Company acquired Ridge
Technologies ("Ridge"), a development stage company, for $21 million in common
stock and assumed stock options valued at approximately $13 million. Prior to
the acquisition, the Company owned a 19.9% interest in Ridge with a carrying
value of approximately $2 million and Grant Saviers, former Chairman and CEO of
the Company, was a director of Ridge. Additionally, the Company incurred
approximately $1 million in professional fees related to the acquisitions.
The Company accounted for both acquisitions using the purchase method of
accounting, and excluding the $65.8 million write-off of acquired in-process
technology from these companies, the aggregate impact to the Company's financial
position and results of operations from the acquisition dates were not material.
The preliminary allocation of the Company's aggregate purchase price to the
tangible and identifiable intangible assets and liabilities acquired was based
on independent appraisals and is summarized as follows (in thousands):
<TABLE>
<S> <C>
Net tangible liabilities.................................... $(2,752)
In-process technology....................................... 65,762
-------
Goodwill and other intangible assets:
Goodwill.................................................. 4,798
Covenant not to compete................................... 2,200
Acquired employees........................................ 1,375
-------
8,373
-------
Net assets acquired......................................... $71,383
=======
</TABLE>
The tangible liabilities assumed exceeded the tangible assets acquired,
which was comprised primarily of a line of credit (Note 3), accounts payable and
fixed assets. Acquired in-process technology was written off in the period in
which the acquisitions were completed. The goodwill and other intangible assets
were written off in August 1998 and January 1999 as a result of exiting the
storage subsystem (Ridge) and the mainstream peripheral technology solutions
businesses, respectively (Notes 10 and 12).
In February 1998, the Company entered into an agreement to purchase all of
the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of Hyundai
Electronics America ("HEA"). In June 1998, the Company and HEA mutually agreed
to terminate the agreement. The Company paid a $7 million termination fee and
approximately $7 million in nonconsummation fees to HEA. Additionally, the
Company incurred approximately $7 million in other acquisition related charges,
including legal, consulting and other costs.
9
<PAGE> 10
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
During fiscal 1998, Adaptec invested $1 million in, and entered into a
development and license agreement with, a venture stage company whose founder
and CEO, Larry Boucher, is a director and interim CEO of Adaptec.
10. RESTRUCTURING CHARGES
During the quarter ended June 30, 1998, in connection with management's
plan to reduce costs and improve operating efficiencies, the Company recorded a
restructuring charge of $8.8 million. The restructuring charge 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.
During the quarter ended September 30, 1998, the Company recorded a
restructuring charge of $24.5 million, net of an adjustment to the restructuring
charge taken in the first quarter of fiscal 1999 of $1.4 million. This charge
was a direct result of management's decision to exit certain unprofitable
business activities including storage subsystems (primarily those business
activities purchased in connection with the Ridge transaction -- Note 9),
external storage, satellite networking, fibre channel and high-end peripheral
technology solutions. The second quarter restructuring charge was comprised
primarily of severance and benefits related to the involuntary termination of
approximately 300 U.S. employees and the write-off of inventory, property and
equipment, and other assets including goodwill associated with the storage
subsystems business.
In February, the Company announced that it expects to initiate and complete
a restructuring plan by the end of the fourth fiscal quarter of 1999 primarily
related to reducing the infrastructure that supported businesses recently
divested. The restructuring plan has not yet been finalized; therefore, the
Company cannot quantify the associated costs at this time. The Company
anticipates these costs may include severance and benefits related to the
involuntary termination of employees and asset impairments.
The following table sets forth an analysis of the components of the
restructuring charges recorded in the first and second quarters of fiscal 1999
(in thousands):
<TABLE>
<CAPTION>
SEVERANCE
RESTRUCTURING CHARGES AND ASSET OTHER
QUARTER ENDED BENEFITS WRITE-OFFS CHARGES TOTAL
--------------------- --------- ---------- ------- -------
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1998
Severance and benefits.............................. $9,231 $ -- $ -- $ 9,231
Inventory write-offs................................ -- 984 -- 984
Property and equipment write-offs................... -- 8,484 -- 8,484
Contractual obligations............................. -- -- 3,742 3,742
Accrued lease costs................................. -- -- 927 927
Goodwill and other assets........................... -- 2,005 -- 2,005
Other charges....................................... -- -- 605 605
Adjustment to prior quarter provision............... (934) 280 (794) (1,448)
------ ------- ------ -------
Total September 30, 1998............................ $8,297 $11,753 $4,480 $24,530
====== ======= ====== =======
JUNE 30, 1998
Severance and benefits.............................. $6,800 $ -- $ -- $ 6,800
Property and equipment write-offs................... -- 950 -- 950
Other charges....................................... -- -- 1,050 1,050
------ ------- ------ -------
Total June 30, 1998................................. $6,800 $ 950 $1,050 $ 8,800
====== ======= ====== =======
</TABLE>
10
<PAGE> 11
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
The following table sets forth the Company's restructuring reserves (in
thousands):
<TABLE>
<CAPTION>
SEVERANCE
AND ASSET OTHER
RESTRUCTURING RESERVES BENEFITS WRITE-OFFS CHARGES TOTAL
---------------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C>
Restructuring charges............................. $ 6,800 $ 950 $ 1,050 $ 8,800
Cash paid......................................... (3,244) -- -- (3,244)
Non-cash charges.................................. (296) (950) -- (1,246)
------- -------- ------- --------
Balance at June 30, 1998.......................... $ 3,260 $ -- $ 1,050 $ 4,310
======= ======== ======= ========
Restructuring charges............................. $ 8,297 $ 11,753 $ 4,480 $ 24,530
Cash paid......................................... (6,718) -- (272) (6,990)
Non-cash charges.................................. (338) (11,753) -- (12,091)
------- -------- ------- --------
Balance at September 30, 1998..................... $ 4,501 $ -- $ 5,258 $ 9,759
======= ======== ======= ========
Cash paid......................................... $(3,742) $ -- $(1,794) $ (5,536)
------- -------- ------- --------
Balance at December 31, 1998...................... $ 759 $ -- $ 3,464 $ 4,223
======= ======== ======= ========
</TABLE>
11. ASSET IMPAIRMENT AND OTHER CHARGES
The Company regularly evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them. At the time such evaluations indicate
that the future undiscounted cash flows are not sufficient to recover the
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, the Company recorded non-cash impairment charges of
$4.0 million and $6.7 million in the first nine months of fiscal 1999 and 1998,
respectively. In addition, the Company recorded executive termination costs of
$3.4 million in the first nine months of fiscal 1999.
In connection with the Company's restructuring activities and evaluation of
long-lived assets, the Company is actively pursuing the sale of certain assets.
As of September 30, 1998, the Company had $7.1 million in assets held for sale
which are included in current assets. Approximately $6.7 million related to the
sale of the high end peripheral technology solutions business to Texas
Instruments, Inc. ("TI"), which was completed in November 1998 (Note 12). As of
December 31, 1998, $0.4 million, representing the net realizable value of these
assets, remain in assets held for sale and are expected to be sold within the
next 6 months.
12. BUSINESS DIVESTITURES
On November 6, 1998, the Company entered into a definitive agreement with
Texas Instruments, Inc. ("TI") under which certain assets of the Company's high
end peripheral technology solutions business were transferred to TI for
approximately $8.5 million in cash, including sales tax reimbursement of $0.2
million. The Company received cash proceeds of approximately $4.5 million upon
consummation of the asset purchase agreement. The outstanding balance of $4.0
million is due and payable in two equal installments scheduled for February and
May of 1999. Additionally, the Company agreed to license certain technologies to
TI for $3.7 million. The license payments are due and payable in varying amounts
during the second quarter through the fourth quarter of fiscal 2000. In
addition, TI agreed to pay royalties ranging from 2-5% on certain products for
up to five years. Approximately $6.7 million of assets related to the high end
peripheral technology solutions business classified as assets held for sale and
included in current assets as of September 30, 1998, were transferred to TI in
November 1998.
11
<PAGE> 12
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
On November 12, 1998, the Company entered into a definitive agreement with
Jaycor Networks, Inc. ("JNI") whereby the Company agreed to contribute certain
tangible and intangible assets related to the fibre channel product line in
exchange for ownership interest in the company. The Company's ownership
percentage is 6.7% with warrants to purchase additional shares upon successful
completion of various milestones by JNI. The aggregate price of the warrants is
nominal and would represent an additional 11.7% ownership by the Company upon
exercise. In addition, the Company has agreed to provide JNI with certain other
manufacturing services and lease space to JNI in one of the Company's facilities
for a transitionary period of time. The Company and JNI also entered into a
cross-license agreement whereby JNI will pay royalties on certain products and
the Company will license certain technologies from JNI royalty-free.
On November 25, 1998, the Company entered into a definitive agreement with
Chaparral Technologies, Inc. ("Chaparral") whereby the Company agreed to
contribute certain tangible and intangible assets related to the external
storage product line for 19.9% of the outstanding stock of Chaparral. In
addition, the Company has agreed to provide certain other manufacturing services
and lease space in one of the Company's facilities for a transitionary period of
time. The Company and Chaparral also entered into a cross-license agreement
whereby Chaparral will pay royalties on certain products manufactured by Adaptec
or other manufacturers, respectively. Adaptec will license certain technologies
from Chaparral royalty-free in order to manufacture product for Chaparral.
On December 18, 1998, the Company entered into a definitive agreement with
BroadLogic, Inc. ("BroadLogic") whereby the Company agreed to contribute certain
tangible and intangible assets related to the satellite networking product line
in exchange for 19.9% of the outstanding stock of BroadLogic and warrants to
purchase common stock at $4.00 per share. In addition, the Company has agreed to
provide certain other manufacturing services and lease space to BroadLogic in
one of the Company's facilities for a transitionary period of time. The Company
and BroadLogic also entered into a royalty-free cross-license agreement.
On January 15, 1999, the Company consummated an agreement with
STMicroelectronics, Inc. ("ST") under which ST acquired certain assets and
obtained certain intellectual property rights of the Company's mainstream
peripheral technology solutions business for an aggregate purchase price of
$72.1 million in cash, including sales tax reimbursement of $0.4 million. The
Company received all of the cash proceeds in January 1999 and expects to record
a gain of approximately $25.0 million (net of taxes of $20.5 million) in the
fourth quarter of fiscal 1999. In addition, the Company has agreed to provide
certain other manufacturing services and lease space to ST in one of the
Company's facilities for a transitionary period of time. The Company and ST also
entered into a royalty-free cross-license agreement.
The Company's investments in JNI, Chaparral and BroadLogic approximate fair
value. The combined investments are less than $1.0 million and are not
considered material to the Company's financial position for the periods
presented.
12
<PAGE> 13
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
The following unaudited pro forma results of operations of the Company give
effect to the sale of the PTS business to TI and ST as though the transactions
had occurred at the beginning of the periods presented. The unaudited pro forma
financial results are presented for informational purposes only and are not
necessarily indicative of the results of operations that would have occurred or
which may exist or be obtained in the future.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THREE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net revenues...................................... $159,606 $194,393 $423,633 $599,167
Cost of revenues.................................. 56,752 63,174 158,244 199,021
-------- -------- -------- --------
Gross profit...................................... 102,854 131,219 265,389 400,146
Operating expenses:
Research and development........................ 27,267 34,447 90,805 91,674
Sales, marketing and administrative............. 39,986 58,386 126,603 153,390
Write-off of acquired in-process technology..... -- -- 39,382 --
Restructuring and other charges................. -- 3,500 62,187 3,500
-------- -------- -------- --------
Total operating expenses.......................... 67,253 96,333 318,977 248,564
-------- -------- -------- --------
Income (loss) from operations..................... 35,601 34,886 (53,588) 151,582
Interest income................................... 7,916 9,375 24,961 24,775
Interest expense.................................. (2,992) (3,026) (9,106) (9,116)
-------- -------- -------- --------
Income (loss) from operations before provision
(benefit) for income taxes...................... 40,525 41,235 (37,733) 167,241
Provision (benefit) for income taxes.............. 11,348 11,727 2,063 43,228
-------- -------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle......................... 29,177 29,508 (39,796) 124,013
Cumulative effect of a change in accounting
principle, net of tax benefit................... -- (9,000) -- (9,000)
-------- -------- -------- --------
Net income (loss)................................. $ 29,177 $ 20,508 $(39,796) $115,013
======== ======== ======== ========
Net income (loss) per common share:
Basic
Income (loss) before change in accounting
principle................................... $ 0.27 $ 0.26 $ (0.36) $ 1.10
Cumulative effect of change in accounting
principle................................... -- (0.08) -- (0.08)
-------- -------- -------- --------
Net income.................................... $ 0.27 $ 0.18 $ (0.36) $ 1.02
-------- -------- -------- --------
Diluted
Income (loss) before change in accounting
principle................................... $ 0.26 $ 0.25 $ (0.36) $ 1.04
Cumulative effect of change in accounting
principle................................... -- (0.08) -- (0.07)
-------- -------- -------- --------
Net income.................................... $ 0.26 $ 0.17 $ (0.36) $ 0.97
======== ======== ======== ========
Shares used in computing net income (loss) per
share:
Basic........................................... 108,040 113,666 111,274 112,868
-------- -------- -------- --------
Diluted......................................... 110,881 119,992 111,274 119,057
-------- -------- -------- --------
</TABLE>
13
<PAGE> 14
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
13. INCOME TAXES
Income tax provisions (benefits) for the 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 third quarter of fiscal 1999, the
Company changed its effective tax rate from 25% to 28% due to a geographic shift
of earnings resulting from restructurings and business divestitures. The Company
recorded an income tax provision of $10.4 million in the third quarter of fiscal
1999, and an income tax benefit of $1.0 million for the first nine months of
fiscal 1999, which it believes is fully recoverable for income tax purposes
based on carry back potential against taxes paid previously. The effective tax
rate used to calculate the income tax benefit for the first nine months of
fiscal 1999 is lower than 28% primarily due to book write-offs taken in the
first quarter of fiscal 1999 relating to acquired in process technology and the
write-off of goodwill taken in the second quarter of fiscal 1999 for which no
tax benefit will be derived.
14. CHANGE IN ACCOUNTING POLICY FOR BUSINESS PROCESS REENGINEERING COSTS
On November 20, 1997, the Emerging Issues Task Force (EITF) for the
Financial Accounting Standards Board issued EITF 97-13, "Accounting for costs
incurred in connection with a consulting contract that combines business process
reengineering and information technology transformation." EITF 97-13 requires
that business process reengineering costs incurred in connection with an overall
information technology transformation project be expensed as incurred. The
transition provisions of EITF 97-13 require that companies that had previously
capitalized such business process reengineering costs charge off any unamortized
amount as the cumulative effect of a change in accounting principle during the
quarter which included November 20, 1997. The cumulative effect of the change to
the Company was to decrease net income by $9 million (net of a tax benefit of $3
million).
15. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income". SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components, however, the adoption of this statement has no impact on the
Company's net income (loss) or stockholders' equity. SFAS 130 requires
components of comprehensive income, including unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, to be reported in the financial statements. These amounts are not
material to the Company's financial statements for the periods presented.
16. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 131 (SFAS 131), "Disclosures about Segments of an
Enterprise and Related Information". This statement establishes standards for
the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
disclosures prescribed by SFAS 131 will first be adopted in the Company's fiscal
1999 annual report.
In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 133 (SFAS 133) "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 establishes accounting and reporting standards
for derivative instruments and for hedging activities and requires recognition
of all derivatives as assets or liabilities and measurement of those instruments
at fair value. This statement is effective for fiscal years beginning after June
15, 1999. The Company will adopt this statement in the first quarter of fiscal
2000 but does not expect the adoption of SFAS 133 to have a material impact on
the Company's financial position or results of operations.
14
<PAGE> 15
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(UNAUDITED)
17. CONTINGENCIES
A class action lawsuit has been filed in the United States District Court
for the Northern District of California against the Company and certain of its
officers and directors. The action alleges that the Company made false and
misleading statements at various times during the period between April 1997 and
January 1998 in violation of the federal securities laws. The complaint does not
set forth purported damages. In addition, a derivative action has been filed in
the Superior Court of the State of California against the Company and certain of
its officers and directors, alleging that the individual defendants improperly
profited from transactions in the Company's stock during the same time period
referenced by the class action lawsuit. The Company believes both the class
action lawsuit and derivative action are without merit and intends to defend
itself vigorously.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1994 through 1996 and no notice of proposed amendment has been
received. The Company believes sufficient taxes have been provided in prior
years and that the ultimate outcome of the IRS audits will not have a material
adverse impact on the Company's financial position or results of operations.
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the items in the condensed consolidated
statements of operations as a percentage of net revenues:
<TABLE>
<CAPTION>
THREE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues.................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.............................. 40.6 37.5 42.8 38.2
----- ----- ----- -----
Gross margin.................................. 59.4 62.5 57.2 61.8
----- ----- ----- -----
Operating expenses:
Research and development.................... 19.1 18.0 23.6 15.8
Sales, marketing and administrative......... 22.8 24.9 26.5 20.5
Write-off of acquired in-process
technology............................... -- -- 12.9 --
Restructuring and other charges............. -- 2.1 12.2 0.8
----- ----- ----- -----
Total operating expenses............ 41.9 45.0 75.2 37.1
----- ----- ----- -----
Income (loss) from operations................. 17.5 17.5 (18.0) 24.7
Interest income............................... 4.3 3.7 4.9 3.0
Interest expense.............................. (1.6) (1.2) (1.8) (1.1)
----- ----- ----- -----
Income (loss) before provision (benefit)
for income taxes............................ 20.2 20.0 (14.9) 26.6
Provision (benefit) for income taxes.......... 5.7 5.8 (0.2) 6.9
----- ----- ----- -----
Income (loss) before cumulative effect of a
change in accounting principle.............. 14.5 14.2 (14.7) 19.7
Cumulative effect of a change in accounting
principle................................... -- (3.5) -- (1.1)
----- ----- ----- -----
Net income (loss)............................. 14.5% 10.7% (14.7)% 18.6%
===== ===== ===== =====
</TABLE>
Net Revenues
The Company's net revenues were derived from the sale of high performance
I/O solutions, including advanced SCSI host adapter boards and ICs, disk
controller ICs and RAID and software solutions. The Company sells its products
primarily in the server, workstation and desktop markets. Net revenues for the
third quarter ended December 31, 1998 were $183.9 million, a decrease of 27.7%
from the same period of fiscal 1998. Net revenues for the first nine months of
fiscal 1999 were $508.4 million, a decrease of 36.7% from the corresponding
period of fiscal 1998.
Net revenues for the third quarter of fiscal 1999 were comprised of $13.6
million from software up 17.7% from the comparable period, $24.3 million from
disk controller ICs down 59.4% from the comparable period and $146.0 million
from host adapter boards, ICs and RAID solutions down 20.2% from the comparable
period.
In the second quarter of fiscal 1999 net revenues were comprised of $10.5
million from software, $25.6 million from disk controller ICs and $107.8 million
from host adapter boards, ICs and RAID solutions.
The decline in net revenues for the third quarter and first nine months of
fiscal 1999 as compared to the third quarter and first nine months of fiscal
1998 was due to a combination of factors. Revenues from SCSI host adapter boards
and ICs declined as a result of Ultra-DMA penetration in the desktop market.
Ultra-DMA has not had a material effect on revenue derived from the workstation
and server markets. Revenue from the sale of disk controller ICs declined as a
result of continued weakness in the disk drive industry. Revenue was further
constrained in the nine month period ended December 31, 1998 by weakness in the
Asian markets. The decline in revenues for the third quarter of fiscal 1999 over
that of the comparable period was partially offset by the demand for high
performance I/O fueled by the growth in on-line applications like
16
<PAGE> 17
electronic commerce, on-line publishing, and corporate intranets. The decline
was also partially offset by increased software revenue and initial shipments of
the Company's 64-bit RAID product.
Gross Margin
Gross margins for the third quarter and first nine months of fiscal 1999
were 59.4% and 57.2%, respectively, compared to 62.5% and 61.8% for the third
quarter and first nine months of fiscal 1998. The decline in gross margin is
primarily a result of unutilized manufacturing capacity.
Operating Expenses
Excluding unusual charges for restructuring, the write-off of acquired
in-process technology, impaired assets and executive termination costs,
operating expenses as a percentage of net revenues for the third quarter and
first nine months of fiscal 1999 were 41.9% and 50.1%, respectively, versus
42.9% and 36.3%, of the corresponding periods of fiscal 1998. The increase as a
percentage of net revenues for the nine month period is primarily attributable
to decreased revenue. The decrease as a percentage of net revenues for the three
month period over that of the comparable period in fiscal 1998 and the year over
year operating expense decline of 29.4% in the third quarter and 12.5% in the
first nine months of fiscal 1999, excluding unusual charges, are primarily
attributable to Company-wide cost reduction programs which included a reduction
in force and the curtailment of costs related to the exit of certain
unprofitable activities. In addition, in the third quarter of fiscal 1998, the
Company provided $4.0 million in reserves for specific doubtful accounts
receivable related to business conditions in the disk drive market. No
significant provisions were provided in the third quarter of fiscal 1999.
During the first and second quarter of fiscal 1999, the Company completed a
reduction in workforce of approximately 850 employees, of which approximately
350 related to manufacturing operations, and exited certain unprofitable
activities in order to bring operating expenses in line with revenue. The
Company incurred $8.8 million and $24.5 million in the first and second quarter
of fiscal 1999 related to these restructuring activities. The second quarter
charge is net of an adjustment of $1.4 million related to the charge recorded in
the first quarter. The restructuring charges consisted of severance and benefits
of $6.8 million and $8.3 million, asset write-offs of $1.0 and $11.8 million,
facilities and other costs of $1.1 million and $4.5 million, for the first and
second quarter of fiscal 1999, respectively. During the first and second fiscal
quarters of fiscal 1999, the Company recorded non-cash charges of $1.2 million
and $12.1 million. During the first three quarters of fiscal 1999, the Company
expended $3.2 million, $7.0 million and $5.5 million, respectively, of cash
related to these restructuring activities. The balance of the remaining cash
outlay is primarily expected to occur in the fourth quarter of fiscal 1999.
During the first quarter of fiscal 1999, the Company acquired complementary
businesses recorded under the purchase method of accounting, resulting in an
aggregate write-off of acquired in-process technology of $65.8 million. The
goodwill associated with these acquisitions was written off in August 1998 and
January 1999 as a result of exiting these activities. Additionally, the Company
incurred $21.5 million in costs related to the termination of the Symbios
acquisition.
The Company also recorded a charge of $4.0 million and $3.4 million in the
second quarter of fiscal 1999 related to the impairment of long-lived assets and
executive termination costs, respectively. The impairment in fiscal 1999
occurred primarily as a result of a drop in production volume which has made
certain test equipment unnecessary. These charges were recorded in the
Restructuring and Other Charges line item in operating expenses. In the nine
months ended December 31, 1998, the Company recorded charges of $6.7 million
related to the impairment of goodwill and investments.
Interest and Income Taxes
Interest income for the third quarter and first nine months of fiscal 1999
was $7.9 million and $25.0 million, respectively, compared to $9.4 million and
$24.8 million for the corresponding periods of fiscal 1998. Interest income
declined in the third quarter of fiscal 1999 over the comparable period due to
higher marketable securities balances in the third quarter of fiscal 1998.
Interest income for the nine months ended
17
<PAGE> 18
December 31, 1998 was consistent with the comparable period even through average
balances declined slightly, primarily as a result of higher average interest
rates in fiscal 1999.
Interest expense for the third quarter and first nine months of fiscal 1999
is related to the convertible subordinated notes and remained consistent at $3.0
million and $9.1 million, respectively, as compared to the corresponding periods
in the prior year.
Interest income could decline in the fourth quarter of fiscal 1999 if the
Company liquidates investments to repurchase common stock. The Company does not
anticipate any material change in interest expense for the three months ended
March 31, 1999.
Income tax provisions (benefits) for the 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 third quarter of fiscal 1999, the
Company changed its effective tax rate from 25% to 28% due to a geographic shift
of earnings resulting from restructurings and business divestitures. The Company
recorded an income tax provision of $10.4 million in the third quarter of fiscal
1999, and an income tax benefit of $1.0 million for the first nine months of
fiscal 1999, which it believes is fully recoverable for income tax purposes
based on carry back potential against taxes paid previously. The effective tax
rate used to calculate the income tax benefit for the first nine months of
fiscal 1999 is lower than 28% primarily due to book write-offs taken in the
first quarter of fiscal 1999 relating to acquired in process technology and the
write-off of goodwill taken in the second quarter of fiscal 1999 for which no
tax benefit will be derived.
Change in Accounting Principle
EITF 97-13 was issued in November 1997 and requires that business process
reengineering costs be expensed as incurred. The transition provisions of EITF
97-13 required that companies that had previously capitalized such business
process reengineering costs charge off any unamortized amounts as the cumulative
effect of a change in accounting principle. The cumulative effect of the change
to the Company was to decrease net income by $9 million net of taxes.
Events Subsequent to Quarter End
On January 15, 1999, the Company consummated an agreement with
STMicroelectronics, Inc. ("ST") under which ST acquired certain assets and
obtained certain intellectual property rights of the Company's mainstream
peripheral technology solutions business for an aggregate purchase price of
$72.1 million in cash, including sales tax reimbursement of $0.4 million. The
Company received all of the cash proceeds in January 1999 and expects to record
a gain of approximately $25.0 million (net of taxes of $20.5 million) in the
fourth quarter of fiscal 1999. In addition, the Company has agreed to provide
certain other manufacturing services and lease space to ST in one of the
Company's facilities for a transitionary period of time. The Company and ST also
entered into a royalty-free cross-license agreement.
In January, the Company announced that it expects to initiate and complete
a restructuring plan by the end of the fourth fiscal quarter of 1999 primarily
related to reducing the infrastructure that supported businesses recently
divested. The restructuring plan has not yet been finalized; therefore, the
Company cannot quantify the associated costs at this time. The Company
anticipates these costs may include severance and benefits related to the
involuntary termination of employees and asset impairments.
Business Divestiture
Pursuant to asset purchase agreements dated November 6, 1998 and November
24, 1998, with Texas Instruments, Inc. and STMicroelectronics, Inc.,
respectively, the Company sold its peripheral technology solutions business for
approximately $80.6 million in cash (See Note 12 of Notes to Condensed
Consolidated Financial Statements). The following comments are associated with
the Company's continuing operations.
18
<PAGE> 19
The following table sets forth items in the condensed consolidated
statements of operations as a percentage of net revenues excluding revenue and
expenses from the peripheral technology solutions business.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
THREE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues...................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues.................................. 35.6 32.5 37.4 33.2
----- ----- ----- -----
Gross margin...................................... 64.4 67.5 62.6 66.8
----- ----- ----- -----
Operating expenses:
Research and development........................ 17.1 17.7 21.4 15.3
Sales, marketing and administrative............. 25.0 30.0 29.9 25.6
Write-off of acquired in-process technology..... -- -- 9.3 --
Restructuring and other charges................. -- 1.8 14.7 0.6
----- ----- ----- -----
Total operating expenses.......................... 42.1 49.5 75.3 41.5
----- ----- ----- -----
Income (loss) from operations..................... 22.3 18.0 (12.7) 25.3
Interest income................................... 5.0 4.8 5.9 4.1
Interest expense.................................. (1.9) (1.6) (2.1) (1.5)
----- ----- ----- -----
Income (loss) before provision (benefit) for
income taxes.................................... 25.4 21.2 (8.9) 27.9
Provision for income taxes........................ 7.1 6.0 0.5 7.2
----- ----- ----- -----
Income (loss) before cumulative effect of a change
in accounting principle......................... 18.3 15.2 (9.4) 20.7
Cumulative effect of a change in accounting
principle....................................... -- (4.6) -- (1.5)
----- ----- ----- -----
Net income (loss)................................. 18.3% 10.6% (9.4)% 19.2%
----- ----- ----- -----
</TABLE>
Net Revenues
The Company's net revenues are derived from the sale of high performance
I/O solutions, including advanced SCSI host adapter boards and ICs, RAID and
software solutions. The Company sells its products primarily in the server,
workstation and desktop markets. Net revenues for the third quarter ended
December 31, 1998 were $159.6 million, a decrease of 17.9% from the same period
of fiscal 1998. Net revenues for the first nine months of fiscal 1999 were
$423.6 million, a decrease of 29.3% from the corresponding period of fiscal
1998.
Net revenues for the third quarter of fiscal 1999 were comprised of $13.6
million from software up 17.7% from the comparable period and $146.0 million
from host adapter boards, ICs and RAID solutions down 20.2% from the comparable
period.
In the second quarter of fiscal 1999 net revenues were comprised of $10.5
million from software and $107.8 million from host adapter boards, ICs and RAID
solutions.
The decline in net revenues for the third quarter and first nine months of
fiscal 1999 as compared to the third quarter and first nine months of fiscal
1998 was due to a combination of factors. Revenues from SCSI host adapter boards
and ICs declined as a result of Ultra-DMA penetration in the desktop market.
Ultra-DMA has not had a material effect on revenue derived from the workstation
and server markets. The decline in revenues for the third quarter of fiscal 1999
over that of the comparable period was partially offset by the demand for high
performance I/O fueled by the growth in on-line applications like electronic
commerce, on-line publishing, and corporate intranets. The decline was also
partially offset by increased software revenue and initial shipments of the
Company's 64-bit RAID product.
19
<PAGE> 20
The Company anticipates sequential revenue growth in the fourth quarter of
fiscal 1999 as compared to the third quarter with the principal driver being a
ramp in RAID shipments. The Company also anticipates increased shipments of its
host adapter boards, ICs and software products.
Gross Margin
Gross margins for the third quarter and first nine months of fiscal 1999
were 64.4% and 62.6%, respectively, compared to 67.5% and 66.8% for the third
quarter and first nine months of fiscal 1998. The decline in gross margin is
primarily a result of unutilized manufacturing capacity. Gross margin for the
fourth quarter of fiscal 1999 is expected to be in the range experienced in the
last four quarters, however, gross margin can be affected by shifts in product
mix.
Operating Expenses
Excluding unusual charges for restructuring, the write-off of acquired
in-process technology, impaired assets and executive termination costs,
operating expenses as a percentage of net revenues for the third quarter and
first nine months of fiscal 1999 were 42.1% and 51.3%, respectively, versus
47.7% and 40.9%, of the corresponding periods of fiscal 1998. The increase as a
percentage of net revenues for the nine month period is primarily attributable
to decreased revenue. The decrease as a percentage of net revenues for the three
month period over that of the comparable period and the year over year operating
expense decline of 27.6% in the third quarter and 11.3% in the first nine months
of fiscal 1999 are attributable to Company-wide cost reduction programs which
included a reduction in force and the curtailment of costs related to the exit
of certain unprofitable activities.
Operating expenses, excluding unusual charges, should decline in the fourth
quarter of fiscal 1999 as a result of continued cost reductions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition at December 31, 1998 remains strong, with
a ratio of current assets to current liabilities of 7.7:1, compared to 7.1:1 at
March 31, 1998. The Company ended the quarter with cash, cash equivalents and
short-term investments of $655.6 million.
The Company generated approximately $120.2 million of cash from operations
during the first nine months of fiscal 1999. The primary sources of cash from
operations were net income (adjusted for non-cash charges for depreciation,
amortization, acquired in-process technology, write-off of goodwill, provision
for doubtful accounts, deferred taxes, asset impairment and stock options) of
$53.2 million, a decrease in accounts receivable of $55.3 million (primarily
related to lower revenue and increased collections as a result of relatively
linear shipments in the second and third quarter), a decrease in inventory of
$21.6 million offset by a reduction in accounts payable and accrued liabilities
of $8.7 million.
Cash provided by investing activities during the first nine months of
fiscal 1999 was approximately $15.5 million consisting primarily of net
purchases of property, plant and equipment ($32.2 million) and the purchase of
certain net assets in connection with acquisitions ($34.1 million) offset by
sales of marketable securities ($77.3 million) and proceeds received in
connection with business divestitures ($4.5 million). The Company also purchased
all of the outstanding shares of Ridge Technologies, Inc. ("Ridge") not owned by
it for $21 million in company stock and assumed stock options valued at
approximately $13 million.
Cash used for financing activities during the first nine months of fiscal
1999 was approximately $100.2 million consisting of stock repurchases of $106.5
million and debt repayments of $5.6 million offset by proceeds from stock
issuances of $11.9 million.
The Company is authorized to repurchase shares of its common stock in the
open market. The Company repurchased 8,746,000 shares of its common stock, at an
average price of $12.18 per share during the nine months ended December 31,
1998, for a total cash outlay of approximately $106.5 million.
20
<PAGE> 21
As of December 31, 1998, the Company's principal sources of liquidity
consist of $655.6 million of cash, cash equivalents and short-term investments.
The Company's liquidity is affected by many factors, some of which are based on
the normal ongoing operations of the business, and others of which relate to the
uncertainties of the PC and server industries and global economies. Although the
Company's cash requirements will fluctuate based on the timing and extent of
these factors, management believes that cash generated from operations, together
with the liquidity provided by existing cash balances, will be sufficient to
satisfy the Company's liquidity requirements for the next twelve months.
Year 2000
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a
2-digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
During fiscal 1998, the Company completed implementation of Enterprise
Resource Planning (ERP) software to replace the Company's core business
applications, which support sales and customer service, manufacturing,
distribution, and finance and accounting. The ERP software was selected not only
because it was Year 2000 compliant, but more importantly, to add functionality
and efficiency to the business processes of the Company.
The Company also began a project to analyze and assess the remainder of its
business not addressed by the ERP software such as other computer and network
hardware and software, production process controllers, equipment, and the
products it sells. Internal and external resources are being used to complete
any required modification and test Year 2000 Compliance. The Company presently
believes that its products are year 2000 compliant. Furthermore, with the
replacement or upgrade of its internal use software, which is primarily
commercial off the shelf software, and non-compatible hardware, the Company
believes that the Year 2000 issue will not pose significant operational problems
for the Company or its customers. Successful completion of the testing process
of all significant applications is expected by March 31, 1999.
In addition, the Company has communicated with others with whom it does
significant business to determine their Year 2000 Compliance readiness and the
extent to which the Company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems of other companies on which
the Company's systems rely will be timely converted, or that a failure to
convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of Year 2000 Compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs and the date on which the Company
plans to complete the Year 2000 modification and testing processes are based on
management's best estimates, which were derived utilizing various assumptions of
future events including the continued availability of certain resources, third
party modification plans and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ from those
plans.
The Company has developed a contingency plan for some of its applications
and systems to address any of the consequences of internal or external failures
to be Year 2000 compliant. It is also in the process of a contingency plan for
the remaining significant applications and systems, which it expects to
substantially complete by March 31, 1999.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The statements contained in this document that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
including without limitation statements regarding the Company's future revenues,
gross margins, operating expenses, interest and income taxes, and any other
statements covering the Company's expectations, beliefs, intentions or
strategies regarding the future. All forward-looking statements included in this
document
21
<PAGE> 22
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 nine months of fiscal 1999, the Company's operating
results were adversely affected by shifts in corporate and retail buying
patterns, increased competition, emerging technologies, economic instability in
Asia and turbulence in the computer disk drive industry. In addition, the first
nine months of fiscal 1999 was significantly impacted by one time charges
including write-offs of acquired in-process technology, costs related to the
termination of the Symbios acquisition, restructuring charges, impairment of
assets and terminations of senior executives. In the future, the Company's
operating results may fluctuate as a result of these factors and as a result of
a wide variety of other factors, including, but not limited to, cancellations or
postponements of orders, shifts in the mix of the Company's products and sales
channels, changes in pricing policies by the Company's suppliers, interruption
in the supply of custom integrated circuits, the market acceptance of new and
enhanced versions of the Company's products, product obsolescence and general
worldwide economic and computer industry fluctuations. In addition, fluctuations
may be caused by future accounting pronouncements, changes in accounting
policies, and the timing of acquisitions of other business products and
technologies and any associated charges to earnings. The volume and timing of
orders received during a quarter are difficult to forecast. The Company's
customers from time to time encounter uncertain and changing demand for their
products. Customers generally order based on their forecasts. If demand falls
below such forecasts or if customers do not control inventories effectively,
they may cancel or reschedule shipments previously ordered from the Company. The
Company has historically operated with a relatively small backlog, especially
relating to orders of its host interface solutions and has set its operating
budget based in part on expectations of future revenues. Because much of the
Company's operating budget is relatively fixed in the short term, if revenues do
not meet the Company's expectations, as happened in the fourth quarter of fiscal
1998, then the Company's operating income and net income may be
disproportionately affected. Operating results in any particular quarter which
do not meet the expectations of securities analysts are likely to cause
volatility in the price of the Company's Common Stock.
Certain Risks Associated with the High-Performance Microcomputer
Market. The Company's host interface solutions are used primarily in high
performance computer systems designed to support bandwidth-intensive
applications and operating systems. Historically, the Company's growth has been
supported by increasing demand for systems that support client/server and
Internet/intranet applications, computer-aided engineering, desktop publishing,
multimedia, and video. Beginning in the second half of fiscal 1998, the demand
for such systems slowed as more businesses chose to use relatively inexpensive
PC's for desktop applications and information technology managers shifted
resources toward resolving Year 2000 problems and investing in network
infrastructure. Should demand for such systems continue to slow, the Company's
business or operating results could be materially adversely affected by a
resulting decline in demand for the Company's products.
Certain Risks Associated with the Computer Peripherals Market. As a
supplier of controller circuits to manufacturers of computer peripherals such as
disk drives and other storage devices, a portion of the Company's business is
dependent on the overall market for computer peripherals. This market, which
itself is dependent on the market for personal computers, has historically been
characterized by periods of rapid growth followed by periods of oversupply and
contraction. As a result, suppliers to the computer peripherals industry from
time to time experience large and sudden fluctuations in demand for their
products as their customers adjust to changing conditions in their markets. If
these fluctuations are not accurately anticipated, as happened in the second
half of fiscal 1998, such suppliers, including the Company, could produce
excessive or insufficient inventories of various components which could
materially and adversely affect the Company's business and operating results.
The computer peripherals industry is also characterized by intense price-
competition, which in turn creates pricing pressures on the suppliers to that
industry. If the Company is unable
22
<PAGE> 23
to correspondingly decrease its manufacturing or component costs, such pricing
pressures could have a material adverse effect on the Company's business or
operating results.
Reliance on Industry Standards, Technological Change, Dependence on New
Products. The computer industry is characterized by various standards and
protocols that evolve with time. The Company's current products are designed to
conform to certain industry standards and protocols such as SCSI, UltraSCSI,
Ultra80 SCSI, PCI, RAID, Fibre Channel, ATM, and Fast Ethernet. In particular, a
majority of the Company's revenues are currently derived from products based on
the SCSI standard. If consumer acceptance of these standards was to decline, or
if they were replaced with new standards, and if the Company did not anticipate
these changes and develop new products, the Company's business or operating
results could be materially adversely affected. For example, the Company
believes that changes in consumers' perceptions of the relative merits of SCSI
based products and products incorporating a competing standard, Ultra-DMA, have
recently started to adversely affect the sales of the Company's products and may
adversely affect the Company's future sales.
The markets for the Company's products are characterized by rapidly
changing technology, frequent new product introductions, and declining average
selling prices over product life cycles. The Company's future success is
therefore highly dependent upon the timely completion and introduction of new
products at competitive price/performance levels. The success of new product
introductions is dependent on several factors, including proper new product
definition, product costs, timely completion and introduction of new product
designs, quality of new products, differentiation of new products from those of
the Company's competitors, and market acceptance of the Company's and its
customers' products. As a result, the Company believes that continued
significant expenditures for research and development will be required in the
future. There can be no assurance that the Company will successfully identify
new product opportunities and develop and bring new products to market in a
timely manner, that products or technologies developed by others will not render
the Company's products or technologies obsolete or noncompetitive, or that the
Company's products will be selected for design into the products of its targeted
customers. The failure of any of the Company's new product development efforts
could have a material adverse effect on the Company's business or operating
results. In addition, the Company's revenues and operating results could be
adversely impacted if its customers shifted their demand to a significant extent
away from board-based I/O solutions to application-specific ICs.
Competition. The markets for the Company's products are intensely
competitive and are characterized by rapid technological advances, frequent new
product introductions, evolving industry standards, and price erosion. In the
host adapter market, the Company competes with a number of host adapter
manufacturers. The Company's principal competitors for semiconductor solutions
in the mass storage market are captive suppliers and Cirrus Logic, Inc. As the
Company has continued to broaden its bandwidth management product offerings into
the desktop, server, and networking environments, it has experienced, and
expects to experience in the future, significantly increased competition both
from existing competitors and from additional companies that may enter its
markets. Some of these companies have greater technical, marketing,
manufacturing, and financial resources than the Company. There can be no
assurance that the Company will be able to make timely introduction of new
leading-edge solutions in response to competitive threats, that the Company will
be able to compete successfully in the future against existing or potential
competitors or that the Company's business or operating results will not be
materially adversely affected by price competition.
Certain Risks Associated With Acquisitions. Since the beginning of fiscal
1996, the Company has completed the acquisition of 13 complementary companies
and businesses. As part of its overall strategy, the Company may continue to
acquire or invest in complementary companies, products, or technologies and to
enter into joint ventures and strategic alliances with other companies. Risks
commonly encountered in such transactions include the difficulty of assimilating
the operations and personnel of the combined companies, the potential disruption
of the Company's ongoing business, the inability to retain key technical and
managerial personnel, the inability of management to maximize the financial and
strategic position of the Company through the successful integration of acquired
businesses, additional expenses associated with amortization of acquired
intangible assets, dilution of existing equity holders, the maintenance of
uniform standards, controls, procedures, and policies, and the impairment of
relationships with employees and customers as a result of any
23
<PAGE> 24
integration of new personnel. There can be no assurance that the Company will be
successful in overcoming these risks or any other problems encountered in
connection with such business combinations, investments, or joint ventures, or
that such transactions will not materially adversely affect the Company's
business, financial condition, or operating results.
Certain Risks Associated with Restructuring. During the first and second
quarter of fiscal 1999, the Company decided to exit certain activities and
undertook certain restructuring actions. In connection with these actions, the
Company effected a workforce reduction of 850 people. There is no assurance that
these actions will be successful or have a positive impact on results of
operations. Furthermore, should such actions have a negative impact on the
Company's ability to design and develop new products, market new or existing
products, or produce and/or purchase products at competitive prices, these
actions could have an adverse impact on the Company's results of operations.
Year 2000 Issues. The "Year 2000 issue" arises because most computer
systems and programs were designed to handle only a two-digit year not a
four-digit year. When the Year 2000 begins, these computers may interpret "00"
as the year 1900 and could either stop processing date-related computations or
could process them incorrectly. The Company has recently implemented new
information systems and accordingly does not anticipate any internal Year 2000
issues from its own information systems, databases or programs. However, the
Company could be adversely impacted by Year 2000 issues faced by major
distributors, suppliers, customers, vendors and financial service organizations
with which the Company interacts. The Company has sent surveys to certain third
parties to determine whether they are Year 2000 compliant and is in the process
of evaluating and following up on responses to determine the impact that third
parties who are not Year 2000 compliant may have on the operations of the
Company. The Company believes it is currently being impacted by the redirection
of corporate management information system budgets towards resolving the Year
2000 issue. Continuation of this trend could lower the demand for the Company's
products if corporate buyers defer purchases of high-end business PCs.
Dependence on Wafer Suppliers and Other Subcontractors. All of the finished
silicon wafers used for the Company's products are currently manufactured to the
Company's specifications by independent foundries. The Company currently
purchases a substantial majority of its wafers through a supply agreement with
TSMC. The Company also purchases wafers from SGS-Thomson Microelectronics and
Seiko Epson. The manufacture of semiconductor devices is sensitive to a wide
variety of factors, including the availability of raw materials, the level of
contaminants in the manufacturing environment, impurities in the materials used,
and the performance of personnel and equipment. While the quality, yield, and
timeliness of wafer deliveries to date have been acceptable, there can be no
assurance that manufacturing yield problems will not occur in the future. In
addition, although the Company has various supply agreements with its suppliers,
a shortage of raw materials or production capacity could lead any of the
Company's wafer suppliers to allocate available capacity to customers other than
the Company, or to internal uses. Any prolonged inability to obtain wafers with
competitive performance and cost attributes, adequate yields, or timely
deliveries from its foundries would delay production and product shipments and
could have a material adverse effect on the Company's business or operating
results. The Company expects that it will in the future seek to convert its
fabrication process arrangements to smaller geometries and to more advanced
process technologies. Such conversions entail inherent technological risks that
can affect yields and delivery times. If for any reason the Company's current
suppliers were unable or unwilling to satisfy the Company's wafer needs, the
Company would be required to identify and qualify additional foundries. There
can be no assurance that any additional wafer foundries would become available,
that such foundries would be successfully qualified, or that such foundries
would be able to satisfy the Company's requirements on a timely basis.
The Company's future growth will depend in large part on increasing its
wafer capacity allocation from current foundries, adding additional foundries,
and gaining access to advanced process technologies. There can be no assurance
that the Company will be able to satisfy its future wafer needs from current or
alternative sources. Any increase in general demand for wafers within the
industry or any reduction of existing wafer supply from any of the Company's
foundry sources, could materially adversely affect the Company's business,
financial condition, or operating results.
24
<PAGE> 25
In order to secure wafer capacity, the Company from time to time has
entered into "take or pay" contracts that committed the Company to purchase
specified wafer quantities over extended periods, and has made prepayments to
foundries. In the future, the Company may enter into similar transactions or
other transactions, including, without limitation, non-refundable deposits with
or loans to foundries, or equity investments in, joint ventures with or other
partnership relationships with foundries. Any such transaction could require the
Company to seek additional equity or debt financing to fund such activities.
There can be no assurance that the Company will be able to obtain any required
financing on terms acceptable to the Company.
Additionally, the Company relies on subcontractors for the assembly and
packaging of the ICs included in its products. The Company has no long-term
agreements with its assembly and packaging subcontractors. In addition, the
Company is increasingly using board subcontractors to better balance production
runs and capacity. There can be no assurance that such subcontractors will
continue to be able and willing to meet the Company's requirements for such
components or services. Any significant disruption in supplies from, or
degradation in the quality of components or services supplied by, such
subcontractors could delay shipments and result in the loss of customers or
revenues or otherwise have a material adverse effect on the Company's business
or operating results.
Certain Issues Related to Distributors. The Company's distributors
generally offer a diverse array of products from several different
manufacturers. Accordingly, there is a risk that these distributors may give
higher priority to selling products from other suppliers, thus reducing their
efforts to sell the Company's products. A reduction in sales efforts by the
Company's current distributors could have a materially adverse effect on its
business or operating results. The Company's distributors may on occasion build
inventories in anticipation of substantial growth in sales, and if such growth
does not occur as rapidly as anticipated, distributors may decrease the amount
of product ordered from the Company in subsequent quarters. In addition, there
has recently been an industry trend towards the elimination of price protection
and distributor incentive programs and channel assembly. These trends could
result in a change in distributor business habits, with distributors possibly
deciding to decrease the amount of product held so as to reduce inventory levels
and this in turn could reduce the Company's revenues in any given quarter and
give rise to fluctuation in the Company's operating results. In addition, as
occurred in the second quarter of fiscal 1999, the Company may from time to time
take actions to reduce inventory levels at distributors. These actions could
reduce the Company's revenues in any given quarter and give rise to fluctuations
in the Company's operating results.
Dependence on Key Personnel. The Company's future success depends in large
part on the continued service of its key technical, marketing, and management
personnel, and on its ability to continue to attract and retain qualified
employees, particularly those highly skilled design, process, and test engineers
involved in the design enhancements and manufacture of existing products and the
development of new products and processes. The competition for such personnel is
intense, and the loss of key employees could have a material adverse effect on
the Company's business or operating results. The Company believes the recent
weakness in its financial performance and the resulting decline in its stock
price has adversely impacted its ability to attract and retain qualified
employees.
Certain Risks Associated with International Operations. The Company's
manufacturing facility and various subcontractors it utilizes from time to time
are located primarily in Asia. Additionally, the Company has various sales
offices and customers throughout Europe, Japan, and other countries. The
Company's international operations and sales are subject to political and
economic risks, including political instability, currency controls, exchange
rate fluctuations, and changes in import/export regulations, tariffs, and
freight rates. The Company may use forward exchange contracts to manage any
exposure associated with certain foreign currency denominated commitments. In
addition, because the Company's principal wafer supplier, TSMC, is located in
Taiwan, the Company is subject to the risk of political instability in Taiwan,
including the potential for conflict between Taiwan and the People's Republic of
China.
Intellectual Property Protection and Disputes. The Company has historically
devoted significant resources to research and development and believes that the
intellectual property derived from such research and development is a valuable
asset that has been and will continue to be important to the success of the
25
<PAGE> 26
Company's business. Although the Company actively maintains and defends its
intellectual property rights, no assurance can be given that the steps taken by
the Company will be adequate to protect its proprietary rights. In addition, the
laws of certain territories in which the Company's products are or may be
developed, manufactured, or sold, including Asia and Europe, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. The Company has from time to time discovered
counterfeit copies of its products being manufactured or sold by others.
Although the Company maintains an active program to detect and deter the
counterfeiting of its products, should counterfeit products become available in
the market to any significant degree it could materially adversely affect the
business or operating results of the Company.
From time to time, third parties may assert exclusive patent, copyright,
and other intellectual property rights to technologies that are important to the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertions by third
parties will not result in costly litigation or that the Company would prevail
in such litigation or be able to license any valid and infringed patents from
third parties on commercially reasonable terms. Litigation, regardless of its
outcome, could result in substantial cost and diversion of resources of the
Company. Any infringement claim or other litigation against or by the Company
could materially adversely affect the Company's business or operating results.
Need for Interoperability. The Company's products must be designed to
interoperate effectively with a variety of hardware and software products
supplied by other manufacturers, including microprocessors, peripherals, and
operating system software. The Company depends on significant cooperation with
these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading system, peripheral, and
microprocessor suppliers, there can be no assurance that such suppliers will not
from time to time make it more difficult for the Company to design its products
for successful interoperability or decide to compete with the Company.
Natural Disasters. The Company's corporate headquarters are located near
major earthquake faults. Any damage to the Company's information systems caused
as a result of an earthquake, fire or any other natural disasters could have a
material adverse effect on the Company's business, results of operations and
financial condition.
Volatility of Stock Price. The stock market in general, and the market for
shares of technology companies in particular, have from time to time experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of the affected companies. In addition, factors such as
technological innovations or new product introductions by the Company, its
competitors, or its customers may have a significant impact on the market price
of the Company's Common Stock. Furthermore, as occurred in the first nine months
of fiscal 1999, quarter-to-quarter fluctuations in the Company's results of
operations caused by changes in customer demand, changes in the microcomputer
and peripherals markets, or other factors, may have a significant impact on the
market price of the Company's Common Stock. In addition, the Company's stock
price may be affected by general market conditions and international
macroeconomic factors unrelated to the Company's performance such as those
recently evidenced by the financial turmoil in Asia. These conditions, as well
as factors that generally affect the market for stocks of high technology
companies, could cause the price of the Company's Common Stock to fluctuate
substantially over short periods.
26
<PAGE> 27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 Termination of Option III Agreement between Adaptec
Manufacturing (S) Pte., Ltd. And Taiwan Semiconductor
Manufacturing Co., Ltd.
27.1 Financial Data Schedule for the quarter ended December 31,
1998
</TABLE>
(b) Reports on Form 8-K:
(i) Report on Form 8-K filed December 17, 1998, containing Adaptec, Inc.'s
news releases dated November 24, 1998 with respect to the sale of the
Peripheral Technology Solution group to STMicroelectronics, Inc.
(ii) Report on Form 8-K filed January 29, 1999 with respect to the
disposition of the Peripheral Technology Solutions business.
27
<PAGE> 28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADAPTEC, INC.
By: /s/ ANDREW J. BROWN
------------------------------------
Andrew J. Brown, Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: February 11, 1999
28
<PAGE> 29
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.1 Termination of Option III Agreement between Adaptec
Manufacturing (S) Pte., Ltd. And Taiwan Semiconductor
Manufacturing Co., Ltd.
27.1 Financial Data Schedule for the quarter ended December 31,
1998
</TABLE>
<PAGE> 1
EXHIBIT 10.1
TERMINATION OF OPTION III AGREEMENT
THIS AGREEMENT is made and becomes effective as of October 16, 1998 (the
"Effective Date") by Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"), a
company organized under the laws of the Republic of China with its registered
address at No. 121, Park Ave. 3, Science-Based Industrial Park, Hsinchu,
Taiwan, and Adaptec Manufacturing (S) Pte. Ltd., a company organized under the
laws of Singapore, with its registered address at Six Battery Road, 532-00,
Singapore, 049909 ("Adaptec").
RECITALS
Whereas, TSMC and Adaptec entered into that certain Option III Agreement dated
April 21, 1997 (the "Option III Agreement") and;
Whereas, Adaptec has paid those Option III Fees pursuant to that Option III
Agreement of seventeen million six hundred and forty thousand US dollars
($17,640,000) on January 31, 1998, and;
Whereas, Adaptec has not paid that Option III Fee due on June 30, 1998 and TSMC
agreed to defer that Option III Fee of seventeen million six hundred and forty
thousand US dollars ($17,640,000) pursuant to that Option III Agreement due on
June 30, 1998 to a due date of June 30, 1999 and;
Whereas, Adaptec has requested that TSMC agree to terminate the Option III
Agreement and refund the payments of all Option III Fees paid, and for this
consideration the Parties agree as follows.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and promises contained
herein, the parties agree as follows:
1) DEFINITIONS
All terms in this Agreement shall have the same definitions as the terms
defined in the Option III Agreement.
2) TERMINATION OF OPTION III AGREEMENT
TSMC agrees to terminate the Option III Agreement effective immediately
upon the signing of this Agreement.
3) REFUND OF OPTION III FEES
TSMC agrees to rebate the total amount of the Option III Fees paid pursuant
to the Option III Agreement according to the following terms:
<PAGE> 2
a) At the end of each calendar quarter TSMC shall refund Adaptec one
quarter of the total amount of the monies paid by Adaptec to TSMC
as Option III Fees, that is one quarter of the amount of seventeen
million, six hundred and forty thousand US dollars ($17,640,000) or
the sum of four million, four hundred and ten thousand US dollars
($4,410,000) each calendar quarter commencing on 31 December, 1998
until TSMC has refunded the total amount of the monies paid by
Adaptec to TSMC as Option III Fees, that is until TSMC has refunded
a total amount of seventeen million six hundred and forty thousand
US dollars ($17,640,000).
b) TSMC shall remit the full amount of the refund so calculated to
Adaptec within a period of thirty days after the end of each
calendar quarter.
4) FIRST RIGHT OF REFUSAL
In return for the value received for the cancellation of the Option III
Agreement and the return of the Option III Fee, the value of which is
hereby acknowledged, Adaptec will grant TSMC the right of to be the sole
source for all wafers purchased by Adaptec from Foundry Sources.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first stated above.
TAIWAN SEMICONDUCTOR ADAPTEC MANUFACTURING
MANUFACTURING CO. LTD. (S) Pte. Ltd.
/s/ MAGNUS LYDE for RON NORRIS /s/ SAM KAZARIAN
Signature Signature
Magnus Lyde for Ron Norris Sam Kazarian
(Sr. V.P. TSMC Ltd.) V.P. Adaptec
Name & Title Name & Title
Date 11/24/98 Date 11/11/98
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 262,648
<SECURITIES> 392,906
<RECEIVABLES> 82,068
<ALLOWANCES> 1,711
<INVENTORY> 48,600
<CURRENT-ASSETS> 893,185
<PP&E> 284,108
<DEPRECIATION> 98,557
<TOTAL-ASSETS> 1,117,175
<CURRENT-LIABILITIES> 115,723
<BONDS> 230,000
0
0
<COMMON> 108
<OTHER-SE> 771,344
<TOTAL-LIABILITY-AND-EQUITY> 1,117,175
<SALES> 183,872
<TOTAL-REVENUES> 183,872
<CGS> 74,719
<TOTAL-COSTS> 74,719
<OTHER-EXPENSES> 76,990
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,992
<INCOME-PRETAX> 37,087
<INCOME-TAX> 10,385
<INCOME-CONTINUING> 26,702
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,702
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.24
</TABLE>
