-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CiSRj/Eygn6z2Qxcl8mO8DE2plQAnfWhmkyGDhcgk3by6Z9XSiC1FhhL8ME6naYF 0GxD844jUanVe2RI7KYICw== 0000891618-98-004875.txt : 19981116 0000891618-98-004875.hdr.sgml : 19981116 ACCESSION NUMBER: 0000891618-98-004875 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAPTEC INC CENTRAL INDEX KEY: 0000709804 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 942748530 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15071 FILM NUMBER: 98745937 BUSINESS ADDRESS: STREET 1: 691 S MILPITAS BLVD STREET 2: M/S25 CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4089458600 MAIL ADDRESS: STREET 1: 691 SOUTH MILPITAS BLVD STREET 2: M/S25 CITY: MILPITAS STATE: CA ZIP: 95035 10-Q 1 FORM 10-Q FOR PERIOD ENDED 9/30/98 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 September 30, 1998 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______ to _______ Commission file number 0-15071 ADAPTEC, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) 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) Registrant's telephone number, including area code (408) 945-8600 - -------------------------------------------------------------------------------- N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of the Company's common stock as of October 2, 1998 was 108,041,533. This document consists of 26 pages, excluding exhibits, of which this is page 1. 2 TABLE OF CONTENTS
Page ---- 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 6-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations 14-16 Liquidity and Capital Resources 17 Factors Affecting Future Operating Results 18-24 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 25 Signatures 26
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Month Six Month Period Ended Period Ended ----------------------------- ----------------------------- September 30, September 30, September 30, September 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- (in thousands, except per share data) Net revenues $ 143,922 $ 278,088 $ 324,552 $ 549,530 Cost of revenues 63,087 104,530 142,825 212,024 --------- --------- --------- --------- Gross profit 80,835 173,558 181,727 337,506 --------- --------- --------- --------- Operating expenses: Research and development 40,817 42,117 84,814 81,099 Sales, marketing and administrative 44,692 51,700 92,827 100,979 Write-off of acquired in-process technology -- -- 65,762 -- Restructuring and other charges 31,924 1,528 62,187 1,528 --------- --------- --------- --------- Total operating expenses 117,433 95,345 305,590 183,606 --------- --------- --------- --------- Income (loss) from operations (36,598) 78,213 (123,863) 153,900 Interest income 7,912 8,442 17,045 15,400 Interest expense (3,047) (3,030) (6,114) (6,090) --------- --------- --------- --------- Income (loss) before provision (benefit) for income taxes (31,733) 83,625 (112,932) 163,210 Provision (benefit) for income taxes (7,499) 20,906 (11,359) 40,802 --------- --------- --------- --------- Net income (loss) $ (24,234) $ 62,719 $(101,573) $ 122,408 ========= ========= ========= ========= Net income (loss) per common share: Basic $ (0.22) $ 0.56 $ (0.90) $ 1.09 ========= ========= ========= ========= Diluted $ (0.22) $ 0.52 $ (0.90) $ 1.03 ========= ========= ========= ========= Shares used in computing net income (loss) per share: Basic 111,583 112,931 112,937 112,470 ========= ========= ========= ========= Diluted 111,583 123,902 112,937 123,042 ========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements. 3 4 ADAPTEC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
September 30, March 31, 1998 1998 ------------- ---------- (in thousands) ASSETS Current assets: Cash and cash equivalents $ 195,629 $ 227,183 Marketable securities 417,957 470,199 Accounts receivable, net 65,624 132,526 Inventories 55,293 71,297 Prepaid expenses and other 96,007 90,765 ---------- ---------- Total current assets 830,510 991,970 Property and equipment, net 191,916 194,798 Other assets 84,826 88,461 ---------- ---------- $1,107,252 $1,275,229 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ -- $ 850 Note payable -- 17,640 Accounts payable 38,003 48,047 Accrued liabilities 69,421 73,947 ---------- ---------- Total current liabilities 107,424 140,484 ---------- ---------- Long-term debt: Long-term debt, net of current portion 17,640 -- Convertible subordinated notes 230,000 230,000 ---------- ---------- Total long-term debt 247,640 230,000 ---------- ---------- Stockholders' equity: Common stock 108 114 Additional paid-in capital 244,285 295,263 Retained earnings 507,795 609,368 ---------- ---------- Total stockholders' equity 752,188 904,745 ---------- ---------- $1,107,252 $1,275,229 ========== ==========
See accompanying notes to condensed consolidated financial statements. 4 5 ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Month Period Ended ------------------------------ September 30, September 30, 1998 1997 ------------- ------------- (in thousands) NET CASH PROVIDED BY OPERATING ACTIVITIES $ 71,764 $ 155,318 --------- --------- 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) -- Purchases of property and equipment (28,671) (56,844) (Purchases) sales of marketable securities, net 52,242 (184,036) --------- --------- NET CASH USED FOR INVESTING ACTIVITIES (10,555) (240,880) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuances of common stock 10,003 25,792 Repurchases of common stock (97,216) -- Principal payments on debt (5,550) (1,700) --------- --------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (92,763) 24,092 --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (31,554) (61,470) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 227,183 318,075 --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 195,629 $ 256,605 ========= =========
See accompanying notes to condensed consolidated financial statements. 5 6 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 1998 (unaudited) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated, interim financial statements have been prepared on a consistent basis with the March 31, 1998 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, except as described in Notes 8, 9 and 10, necessary to provide a fair statement of the results for the interim periods presented. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto incorporated by reference in the Company's Annual Report on Form 10-K for the year ended March 31, 1998. For presentation purposes, the Company has indicated its second quarter as having ended on September 30, whereas in fact, the Company's second quarter of fiscal 1999 and 1998 ended on October 2, 1998 and October 3, 1997, respectively. The results of operations for the three and six month periods ended September 30, 1998, are not necessarily indicative of the results to be expected for the entire year. Certain items previously reported in specific financial statement captions have been reclassified to conform with the current presentation. 2. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventory are as follows (in thousands):
September 30, March 31, 1998 1998 ------------- --------- Raw materials $12,984 $17,728 Work in process 11,622 18,415 Finished goods 30,687 35,154 ------- ------- $55,293 $71,297 ======= =======
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 8). 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. 6 7 4. NOTE PAYABLE During fiscal 1998, the Company entered into an agreement with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") which provided the Company with a guarantee of increased capacity for wafer fabrication in return for advance payments totaling $35.3 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. The Company and TSMC amended the promissory note to extend, indefinitely, the second installment of approximately $17.6 million which was originally due in June 1998. Management does not anticipate paying the second installment within one year, therefore, the note payable was reclassified as long-term debt in June 1998. 5. STOCK REPURCHASES On January 20, 1998, the Company's Board of Directors approved a stock repurchase program under which the Company is authorized to purchase up to 10 million shares of its common stock from time to time in the open market. In July 1998, the Company reinstated this stock repurchase program, which was suspended during the period of the now terminated Symbios acquisition. During the second quarter of fiscal 1999, the Company repurchased and retired 8,261,000 shares of its common stock for approximately $97.2 million. On October 16, 1998, the Company's Board of Directors approved a new authorization for the repurchase of up to $200 million of the Company's common stock in the open market. 6. STATEMENTS OF OPERATIONS Restructuring and other charges includes (in thousands):
Three Month Period Three Month Period Ended Ended September 30, 1998 September 30, 1997 ------------------ ------------------ Restructuring charges (Note 9) $24,530 $ -- Asset impairment and other charges (Note 10) 7,394 1,528 ------- ------- Total $31,924 $ 1,528 ======= =======
Six Month Period Six Month Period Ended Ended September 30, 1998 September 30, 1997 ------------------ ------------------ Acquisition related costs (Note 8) $21,463 $ -- Restructuring charges (Note 9) 33,330 -- Asset impairment and other charges (Note 10) 7,394 1,528 ------- ------- Total $62,187 $ 1,528 ======= =======
7 8 7. NET INCOME (LOSS) PER SHARE The Company adopted Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings Per Share," in the third quarter of fiscal 1998. It replaces the presentation of primary net income (loss) per share with a presentation of basic net income (loss) per share. It also requires dual presentation of basic and diluted net income (loss) per share on the face of the financial statements for all entities with complex capital structures. Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period and excludes the dilutive effect of stock options. Diluted net income (loss) per share gives effect to all dilutive potential common shares outstanding during the period. In computing diluted net income (loss) per share, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options. All prior period net income (loss) per share amounts have been presented to conform to the provisions of this statement. Following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations assuming the standard was applied during all periods presented below.
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 -------------------------------------------------- ------------------------------------- INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ ----------- ------------- ------ (in thousands except per share data) BASIC NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders $(24,234) 111,583 $ (0.22) $62,719 112,931 $ 0.56 ======= ====== EFFECT OF DILUTIVE SECURITIES Common stock equivalents -- -- -- 6,519 4.75% convertible subordinated notes -- -- 2,043 4,452 --------- --------- ------- ------- DILUTED NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders and assumed conversions $(24,234) 111,583 $ (0.22) $64,762 123,902 $ 0.52 ======== ======== ======== ======= ======= ======
SIX MONTH PERIOD ENDED SIX MONTH PERIOD ENDED SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 --------------------------------------------------- -------------------------------------- INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- ------ ----------- ------------- ------ (in thousands except per share data) BASIC NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders $ (101,573) 112,937 $ (0.90) $122,408 112,470 $ 1.09 ======== ====== EFFECT OF DILUTIVE SECURITIES Common stock equivalents -- -- -- 6,120 4.75% convertible subordinated notes -- -- 4,176 4,452 ---------- ---------- --------- ------- DILUTED NET INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders and assumed conversions $ (101,573) 112,937 $ (0.90) $ 126,584 123,042 $ 1.03 ========== ========== ======== ========= ======= ======
8 9 At September 30, 1998, options to purchase 22,100,000 shares of common stock are outstanding, however, the stock options and the convertible subordinated notes are not included in the computations of diluted weighted average common shares outstanding for the second quarter and first half of fiscal 1999 because they are anti-dilutive. Options to purchase 249,000 and 301,000 shares of common stock were not included in the computations of diluted weighted average common shares outstanding for the second quarter and first half of fiscal 1998, respectively, because the options' exercise price was greater than the average market price of the common shares during the respective periods. 8. RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS On April 12, 1998, the Company received regulatory approval to acquire read channel and preamplifier ASIC technologies from Analog Devices, Inc. ("ADI") for $34 million in cash. Grant Saviers, former Chairman and CEO of the Company, is a director of ADI. On May 21, 1998, the Company acquired Ridge Technologies ("Ridge") 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): 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 ========
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, and the goodwill and other intangible assets are being amortized over respective benefit periods ranging from two to three years. 9 10 In February 1998, the Company entered into an agreement to purchase all of the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of Hyundai Electronics America ("HEA"). In June 1998, the Company and HEA mutually agreed to terminate the agreement. The Company paid a $7 million termination fee and approximately $7 million in nonconsummation fees to HEA. Additionally, the Company incurred approximately $7 million in other acquisition related charges, including legal, consulting and other costs. During fiscal 1998, 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. 9. 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 is comprised primarily of severance and benefits related to the involuntary termination of approximately 550 employees, of which approximately 36% were based in the United States and the remainder were based in Singapore. 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 is 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 8), external storage, satellite networking, fibre channel and high-end proprietary ASICs (Note 15). The second quarter restructuring charge is comprised primarily of severance and benefits related to the involuntary termination of approximately 300 U.S. employees and the write-off of inventory, property and equipment, and other assets including goodwill associated with the storage subsystems business. 10 11 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):
SEVERANCE RESTRUCTURING CHARGES AND ASSET OTHER QUARTER ENDED BENEFITS WRITE-OFFS CHARGES TOTAL - --------------------- --------- ---------- -------- -------- 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 ======== ======== ======== ========
The following table sets forth the Company's restructuring reserves as of September 30, 1998 and June 30, 1998 (in thousands):
SEVERANCE AND ASSET OTHER RESTRUCTURING RESERVES BENEFITS WRITE-OFFS CHARGES TOTAL - ---------------------- -------- ---------- -------- -------- 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 ======== ======== ======== ========
11 12 10. ASSET IMPAIRMENT AND OTHER CHARGES The Company regularly evaluates the recoverability of long-lived assets by measuring the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. At the time such evaluations indicate that the future undiscounted cash flows are not sufficient to recover the carrying value of such assets, the assets are adjusted to their fair values. Based on these evaluations, the Company recorded non-cash impairment charges of $4.0 million and $1.5 million in the second quarter of fiscal 1999 and 1998, respectively. In addition, the Company recorded executive termination costs of $3.4 million in the second quarter of fiscal 1999. There were no executive termination costs recorded in the second quarter and first half of fiscal 1998. In connection with the Company's restructuring activities and evaluation of long-lived assets, the Company is actively pursuing the sale of certain assets. The fair value of these assets of $7.1 million has been reclassified to assets held for sale and, as they are expected to be sold in the next year, are included in current assets as of September 30, 1998. Approximately $6.7 million of the assets held for sale relate to the sale of the high end peripheral technology solutions business unit (Note 15). 11. INCOME TAXES Income tax provisions (benefits) for interim periods are based on estimated annual income tax rates. Generally, the Company's effective income tax rate has been 25%. The difference between the Company's effective income tax rate and the U.S. federal statutory income tax rate is primarily due to income earned in Singapore where the Company is subject to a significantly lower effective tax rate. The Company recorded income tax benefits of $7.5 million and $11.4 million for the second quarter and first half of fiscal 1999, which it believes is recoverable for federal tax purposes based on carryback potential against taxes paid previously. The effective tax rate used to calculate the income tax benefit for the second quarter and first half of fiscal 1999, is lower than 25% primarily because of book write-offs taken in the first quarter of fiscal 1999 relating to acquired in-process technology and the write-off of goodwill taken in the second quarter of fiscal 1999, which are not deductible for tax purposes. 12. 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. 13. 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, 12 13 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. CONTINGENCIES A class action lawsuit has been filed in the United States District Court for the Northern District of California against the Company and certain of its officers and directors. The action alleges that the Company made false and misleading statements at various times during the period between April 1997 and January 1998 in violation of the federal securities laws. The complaint does not set forth purported damages. In addition, a derivative action has been filed in the Superior Court of the State of California against the Company and certain of its officers and directors, alleging that the individual defendants improperly profited from transactions in the Company's stock during the same time period referenced by the class action lawsuit. The Company believes both the class action lawsuit and derivative action are without merit and intends to defend itself vigorously. The IRS is currently auditing the Company's federal income tax returns for fiscal 1994 through 1996. No proposed adjustments have been received for these years. The Company believes sufficient taxes have been provided 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. SUBSEQUENT EVENTS In October 1998, the Company approved the cancellation and reissuance of outstanding stock options under the Company's stock option plans. Under this program, all current active employees, except for executive officers, with outstanding stock options with an exercise price in excess of $12.50 per share could exchange their stock options for new non-qualified stock options with an exercise price of $12.50 per share, the fair market value of the common stock on the exchange date. The new options maintain the vesting schedule established by the canceled stock options, however, the exercisability of the exchanged options is suspended for six months. In November 1998, the Company entered into a definitive agreement with Texas Instruments ("TI") whereby the Company agreed to sell certain tangible and intangible assets related to the high end peripheral technology solutions business unit for $8.6 million and license certain technology for $3.7 million. Approximately $6.7 million of assets related to the high end peripheral technology solutions business unit have been classified as assets held for sale and are included in current assets as of September 30, 1998 (Note 10). TI paid $4.6 million of the purchase price at closing with the remainder payable in two equal installments in the fourth quarter of fiscal 1999 and the first quarter of fiscal 2000. The license payments are paid in varying amounts during the second quarter through the fourth quarter of fiscal 2000. In addition, TI has agreed to pay royalties ranging from 2-5% on certain products for up to five years. 13 14 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:
Three Month Six Month Period Ended Period Ended ---------------------------- ---------------------------- September 30, September 30, September 30, September 30, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 43.8 37.6 44.0 38.6 ------- ------- ------- -------- Gross margin 56.2 62.4 56.0 61.4 ------- ------- ------- -------- Operating expenses: Research and development 28.4 15.2 26.1 14.8 Sales, marketing and administrative 31.0 18.6 28.6 18.3 Write-off of acquired in-process technology -- -- 20.3 -- Restructuring and other charges 22.2 0.5 19.2 0.3 ------- ------- ------- -------- Total operating expenses 81.6 34.3 94.2 33.4 ------- ------- ------- -------- Income (loss) from operations (25.4) 28.1 (38.2) 28.0 Interest income 5.5 3.0 5.3 2.8 Interest expense (2.1) (1.0) (1.9) (1.1) ------- ------- ------- -------- Income (loss) before provision (benefit) for income taxes (22.0) 30.1 (34.8) 29.7 Provision (benefit) for income taxes (5.2) 7.5 (3.5) 7.4 ------- ------- ------- -------- Net income (loss) (16.8)% 22.6% (31.3)% 22.3% ======= ======= ======= ========
14 15 NET REVENUES The Company's net revenues are derived from the sale of high performance I/O solutions, including proprietary ASICs, advanced SCSI and RAID host adapter boards and software solutions. The Company sells it products primarily in the desktop, server and workstation markets. Net revenues for the second quarter ended September 30, 1998 were $143.9 million, a decrease of 48.2% from the same period of fiscal 1998. Net revenues for the first half of fiscal 1999 were $324.6 million, a decrease of 40.9% from the corresponding period of fiscal 1998. The decline in net revenue for the second quarter and first half of fiscal 1999 as compared to the second quarter and first half of fiscal 1998 was due to a combination of factors. Revenues from SCSI host adapter boards declined as the Company focused on reducing inventory in the distribution channel and as a result of Ultra-DMA penetration in the desktop market. Ultra-DMA has not had a material effect on revenue derived from the workstation and server markets. Revenue from the sale of proprietary ASICs declined as a result of continued weakness in the disk drive industry. Revenue was further constrained by continuing weakness in the Asian markets. The Company anticipates an increase in host adapter revenue in the third quarter of fiscal 1999 as compared to the second quarter. This increase will be a result of increased shipments due to normal distribution channel demand as a result of the reduction of distribution channel inventories in the second quarter and seasonality. The increase in host adapter revenue will be partially offset by a sequential decline from the second quarter in proprietary ASIC revenue. GROSS MARGIN Gross margins for the second quarter and first half of fiscal 1999 were 56.2% and 56.0%, respectively, compared to 62.4% and 61.4% for the second quarter and first half of fiscal 1998, respectively. The decline in gross margin is primarily a result of unutilized manufacturing capacity. Gross margin was also impacted by shifts to newer products with higher manufacturing costs. Gross margin for the third quarter of fiscal 1999 is expected to be in the range experienced in the last four quarters. OPERATING EXPENSES Excluding non-recurring charges for restructuring, the write-off of acquired in-process technology, impaired assets and executive termination costs, operating expenses as a percentage of net revenues for the second quarter and first half of fiscal 1999 were 59.4% and 54.8%, respectively, versus 33.8% and 33.1%, of the corresponding periods of fiscal 1998. The increase as a percentage of net revenues is primarily attributable to decreased revenue. Year over year, operating expenses declined by 8.9% in the second quarter and 2.4% in the first half of fiscal 1999. The declines 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. 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 activities, 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, the Company 15 16 recorded non-cash charges of $1.2 million and $12.1 million, respectively, and expended $3.2 million and $7.0 million, respectively, of cash related to these restructuring activities. The balance of the remaining cash outlay is expected to occur in the second half 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. 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. In the second quarter of fiscal 1998 the Company recorded a charge of $1.5 million related to the impairment of goodwill. Based on the cost reduction programs implemented in the first half of fiscal 1999, the Company anticipates that operating expenses will decline sequentially in the second half of fiscal 1999. INTEREST AND INCOME TAXES Interest income for the second quarter and first half of fiscal 1999 was $7.9 million and $17.0 million, respectively, compared to $8.4 million and $15.4 million for the corresponding periods of fiscal 1998. The year to date increase resulted primarily from higher average cash, cash equivalents and short term investment balances. Interest expense for the second quarter and first half of fiscal 1999 is related to the convertible subordinated notes and remained consistent at $3.0 and $6.1 million, respectively, as compared to the corresponding periods in the prior year. Interest income could decline in the third quarter of fiscal 1999 if the Company liquidates investments to repurchase common stock. The Company does not anticipate any material change in interest expense for the three months ended December 31, 1998. The Company recorded an income tax benefit of $11.4 million in the first half of fiscal 1999, representing 10.0% of the loss before benefit for income taxes compared to a $40.8 million provision for income taxes or 25% of income before provision for income taxes in the comparable period of fiscal 1998. The Company believes the income tax benefit recorded in the first half of fiscal 1999 is recoverable for federal tax purposes based on carryback potential against taxes paid previously. Generally, the Company's effective tax rate has been 25%. The difference between the Company's effective tax rate and the U.S. statutory rate is primarily due to income earned in Singapore where the Company is subject to a significantly lower effective tax rate. The effective tax rate used to calculate the income tax benefit for the first half of fiscal 1999 is lower than 25% primarily as a result of book write-offs of acquired in-process technology and goodwill, which are not deductible for tax purposes. Excluding the effect of these write-offs, the Company's effective tax rate for the three and six month periods ended September 30, 1998 was 25%. 16 17 LIQUIDITY AND CAPITAL RESOURCES The Company's financial condition at September 30, 1998 remains strong, with a ratio of current assets to current liabilities of 7.7:1, compared to 7.1:1 at March 31, 1998. The Company ended the quarter with cash, cash equivalents and short-term investments of $614 million. The Company generated approximately $71.8 million of cash from operations during the first half of fiscal 1999. The primary sources of cash from operations were net income (adjusted for non-cash charges for depreciation, amortization, acquired in-process technology, asset impairment and stock options) of $12.2 million, a decrease in accounts receivable of $66.9 million (primarily related to lower revenue and increased collections as a result of relatively linear shipments in the second quarter), a decrease in inventory of $14.9 million offset by a reduction in accounts payable of $12.2 million. Cash used for investing activities during the first half of fiscal 1999 was approximately $10.6 million consisting primarily of net purchases of property, plant and equipment ($28.7 million) and the purchase of certain net assets in connection with acquisitions ($34.1 million) offset by sales of marketable securities ($52.2 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 half of fiscal 1999 was approximately $92.8 million consisting of stock repurchases of $97.2 million and debt repayments of $5.6 million offset by proceeds from stock issuances of $10.0 million. The Company is authorized to repurchase shares of its common stock in the open market. The Company repurchased 8,261,000 shares of its common stock, at an average price of $11.77 per share during the six months ended September 30, 1998, for a total cash outlay of approximately $97.2 million. In October 1998, the Board of Directors approved a new stock repurchase program under which up to $200 million in additional repurchases may be made. As of September 30, 1998, the Company's principal sources of liquidity consist of $614 million of cash, cash equivalents and short-term investments. The Company's liquidity is affected by many factors, some of which are based on the normal ongoing operations of the business, and others of which relate to the uncertainties of the PC and disk drive industries and global economies. Although the Company's cash requirements will fluctuate based on the timing and extent of these factors, management believes that cash generated from operations, together with the liquidity provided by existing cash balances, will be sufficient to satisfy the Company's liquidity requirements for the next twelve months. 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. 17 18 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 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 are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this document. In evaluating the Company's business, prospective investors should consider carefully the following factors in addition to the other information set forth in this document. Future Operating Results Subject to Fluctuation. In the second half of fiscal 1998 and the first half of fiscal 1999, the Company's operating results were adversely affected by shifts in corporate and retail buying patterns, increased competition, emerging technologies, economic instability in Asia and turbulence in the computer disk drive industry. In addition, the first half 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 18 19 Company's operating results may fluctuate as a result of these factors and as a result of a wide variety of other factors, including, but not limited to, cancellations or postponements of orders, shifts in the mix of the Company's products and sales channels, changes in pricing policies by the Company's suppliers, interruption in the supply of custom integrated circuits, the market acceptance of new and enhanced versions of the Company's products, product obsolescence and general worldwide economic and computer industry fluctuations. In addition, fluctuations may be caused by future accounting pronouncements, changes in accounting policies, and the timing of acquisitions of other business products and technologies and any associated charges to earnings. The volume and timing of orders received during a quarter are difficult to forecast. The Company's customers from time to time encounter uncertain and changing demand for their products. Customers generally order based on their forecasts. If demand falls below such forecasts or if customers do not control inventories effectively, they may cancel or reschedule shipments previously ordered from the Company. The Company has historically operated with a relatively small backlog, especially relating to orders of its host interface solutions and has set its operating budget based in part on expectations of future revenues. Because much of the Company's operating budget is relatively fixed in the short term, if revenues do not meet the Company's expectations, as happened in the fourth quarter of fiscal 1998, then the Company's operating income and net income may be disproportionately affected. Operating results in any particular quarter which do not meet the expectations of securities analysts are likely to cause volatility in the price of the Company's Common Stock. Certain Risks Associated with the High-Performance Microcomputer Market. The Company's host interface solutions are used primarily in high performance computer systems designed to support bandwidth-intensive applications and operating systems. Historically, the Company's growth has been supported by increasing demand for systems that support client/server and Internet/intranet applications, computer-aided engineering, desktop publishing, multimedia, and video. Beginning in the second half of fiscal 1998, the demand for such systems slowed as more businesses chose to use relatively inexpensive PC's for desktop applications and information technology managers shifted resources toward resolving Year 2000 problems and investing in network infrastructure. Should demand for such systems continue to slow, the Company's business or operating results could be materially adversely affected by a resulting decline in demand for the Company's products. Certain Risks Associated with the Computer Peripherals Market. As a supplier of controller circuits to manufacturers of computer peripherals such as disk drives and other storage devices, a portion of the Company's business is dependent on the overall market for computer peripherals. This market, which itself is dependent on the market for personal computers, has historically been characterized by periods of rapid growth followed by periods of oversupply and contraction. As a result, suppliers to the computer peripherals industry from time to time experience large and sudden fluctuations in demand for their products as their customers adjust to changing conditions in their markets. If these fluctuations are not accurately anticipated, as happened in the second half of fiscal 1998, such suppliers, including the Company, could produce excessive or insufficient inventories of various components which could materially and adversely affect the Company's business and operating results. The computer peripherals industry is also characterized by intense price-competition, which in turn creates pricing pressures on the suppliers to that industry. If the Company is unable to correspondingly decrease its manufacturing or component costs, such pricing pressures could have a material adverse effect on the Company's business or operating results. Reliance on Industry Standards, Technological Change, Dependence on New Products. The computer industry is characterized by various standards and protocols that evolve with time. The Company's current products are designed to conform to certain industry standards and protocols such as SCSI, UltraSCSI, Ultra80 SCSI, PCI, RAID, Fibre Channel, ATM, and Fast Ethernet. In particular, a majority of the Company's revenues are currently derived from products based on the SCSI standard. If consumer acceptance of these standards was to decline, or if they were replaced with new standards, and if the Company did not anticipate these changes and 19 20 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 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. 20 21 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 21 22 any of the Company's foundry sources, could materially adversely affect the Company's business, financial condition, or operating results. In order to secure wafer capacity, the Company from time to time has entered into "take or pay" contracts that committed the Company to purchase specified wafer quantities over extended periods, and has made prepayments to foundries. In the future, the Company may enter into similar transactions or other transactions, including, without limitation, non-refundable deposits with or loans to foundries, or equity investments in, joint ventures with or other partnership relationships with foundries. Any such transaction could require the Company to seek additional equity or debt financing to fund such activities. There can be no 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, 22 23 exchange rate fluctuations, and changes in import/export regulations, tariffs, and freight rates. The Company may use forward exchange contracts to manage any exposure associated with certain foreign currency denominated commitments. In addition, because the Company's principal wafer supplier, TSMC, is located in Taiwan, the Company is subject to the risk of political instability in Taiwan, including the potential for conflict between Taiwan and the People's Republic of China. Intellectual Property Protection and Disputes. The Company has historically devoted significant resources to research and development and believes that the intellectual property derived from such research and development is a valuable asset that has been and will continue to be important to the success of the Company's business. Although the Company actively maintains and defends its intellectual property rights, no assurance can be given that the steps taken by the Company will be adequate to protect its proprietary rights. In addition, the laws of certain territories in which the Company's products are or may be developed, manufactured, or sold, including Asia and Europe, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. The Company has from time to time discovered counterfeit copies of its products being manufactured or sold by others. Although the Company maintains an active program to detect and deter the counterfeiting of its products, should counterfeit products become available in the market to any significant degree it could materially adversely affect the business or operating results of the Company. From time to time, third parties may assert exclusive patent, copyright, and other intellectual property rights to technologies that are important to the Company. There can be no assurance that third parties will not assert infringement claims against the Company in the future, that assertions by third parties will not result in costly litigation or that the Company would prevail in such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Litigation, regardless of its outcome, could result in substantial cost and diversion of resources of the Company. Any infringement claim or other 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 half 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 23 24 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. 24 25 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits:
EXHIBIT NUMBER DESCRIPTION ------- ----------- 27.1 Financial Data Schedule for the quarter ended September 30, 1998
(b) Reports on Form 8-K: (i) Report on Form 8-K filed September, 25, 1998, containing Adaptec, Inc.'s news releases dated September 9 and 17, 1998 with respect to cost cutting actions and one-time charges. (ii) Report on Form 8-K filed October 26, 1998, containing Adaptec, Inc.'s news releases dated October 19 and 20, 1998, with respect to the authorization to repurchase common stock and the appointment of a president and chief financial officer. 25 26 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 Accounting Officer) Date: November 12, 1998 26 27 INDEX TO EXHIBITS
Exhibit Number Description - ------ ----------- 27.1 Financial Data Schedule
EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1999 JUL-01-1998 SEP-30-1998 195,629 417,957 69,489 3,865 55,293 830,510 292,883 100,967 1,107,252 107,424 230,000 0 0 108 752,080 1,107,252 143,922 143,922 63,087 63,087 117,433 0 3,047 (31,733) (7,499) (24,234) 0 0 0 (24,234) (0.22) (0.22)
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