-----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, KUW7bbffH67fNlrPTQIgzHSTLCJ3O2AgpcCx2vjg6IyqyH7qdf+fNH0Ha9jMoopW nZTgEuUNKzpSc0Nye1Xr8g== 0000891618-98-003858.txt : 19980814 0000891618-98-003858.hdr.sgml : 19980814 ACCESSION NUMBER: 0000891618-98-003858 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD 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: 98686765 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 THE PERIOD ENDED JUNE 30, 1998 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 JUNE 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 August 7, 1998 was 113,591,756. This document consists of 19 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........................................ 6-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations........................... 11-12 Liquidity and Capital Resources................. 12-13 Factors Affecting Future Operating Results...... 13-18 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K.................. 18 Signatures................................................ 19
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIOD ENDED -------------------------- JUNE 30, JUNE 30, 1998 1997 ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues................................................ $180,630 $271,442 Cost of revenues............................................ 79,738 107,494 -------- -------- Gross profit.............................................. 100,892 163,948 -------- -------- Operating expenses: Research and development.................................. 44,029 38,982 Sales, marketing and administrative....................... 48,103 49,279 Write-off of acquired in-process technology and other charges................................................ 96,025 -- -------- -------- Total operating expenses.......................... 188,157 88,261 -------- -------- Income (loss) from operations............................. (87,265) 75,687 Interest income, net of interest expense.................... 6,066 3,898 -------- -------- Income (loss) before provision (benefit) for income taxes.................................................. (81,199) 79,585 Provision (benefit) for income taxes........................ (3,860) 19,896 -------- -------- Net income (loss)......................................... $(77,339) $ 59,689 ======== ======== Net income (loss) per common share: Basic..................................................... $ (0.68) $ 0.53 -------- -------- Diluted................................................... $ (0.68) $ 0.51 -------- -------- Shares used in computing net income (loss) per share: Basic..................................................... 114,200 112,008 -------- -------- Diluted................................................... 114,200 122,181 -------- --------
See accompanying notes to condensed consolidated financial statements. 3 4 ADAPTEC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) ASSETS
JUNE 30, MARCH 31, 1998 1998 ---------- ---------- (IN THOUSANDS) Current assets: Cash and cash equivalents................................. $ 403,187 $ 227,183 Marketable securities..................................... 278,332 470,199 Accounts receivable, net.................................. 111,144 132,526 Inventories............................................... 57,148 71,297 Prepaid expenses and other................................ 87,359 90,765 ---------- ---------- Total current assets.............................. 937,170 991,970 Property and equipment, net................................. 200,946 194,798 Other assets................................................ 97,117 88,461 ---------- ---------- $1,235,233 $1,275,229 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Line of credit............................................ $ 4,700 $ -- Current portion of long-term debt......................... -- 850 Note payable.............................................. -- 17,640 Accounts payable.......................................... 30,768 48,047 Accrued liabilities....................................... 84,691 73,947 ---------- ---------- Total current liabilities......................... 120,159 140,484 ---------- ---------- Long-term debt, net of current portion...................... 17,640 -- ---------- ---------- Convertible subordinated notes.............................. 230,000 230,000 ---------- ---------- Contingencies (Note 12) Stockholders' equity: Common stock.............................................. 116 114 Additional paid-in capital................................ 335,289 295,263 Retained earnings......................................... 532,029 609,368 ---------- ---------- Total stockholders' equity........................ 867,434 904,745 ---------- ---------- $1,235,233 $1,275,229 ========== ==========
See accompanying notes to condensed consolidated financial statements. 4 5 ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTH PERIOD ENDED -------------------- JUNE 30, JUNE 30, 1998 1997 -------- -------- (IN THOUSANDS) NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 26,898 $117,176 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases 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......................... (13,472) (36,748) Sales (purchases) of marketable securities.................. 191,867 (41,878) -------- -------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES........ 144,269 (78,626) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock...................... 5,687 12,024 Principal payments on debt.................................. (850) (850) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES................... 4,837 11,174 -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS................... 176,004 49,724 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............ 227,183 318,075 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................. $403,187 $367,799 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 6 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements have been prepared on a consistent basis with the March 31, 1998 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods presented. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 1998. For presentation purposes, the Company has indicated its first quarter as having ended on June 30, whereas in fact, the Company's first quarter of fiscal 1999 ended on July 3, 1998 and its first quarter of fiscal 1998 ended on July 4, 1997. The results of operations for the three month period ended June 30, 1998, are not necessarily indicative of the results to be expected for the entire year. 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):
JUNE 30, MARCH 31, 1998 1998 -------- --------- Raw materials................................... $12,521 $17,728 Work in process................................. 10,298 18,415 Finished goods.................................. 34,329 35,154 ------- ------- $57,148 $71,297 ======= =======
3. LINE OF CREDIT In May, 1998, the Company assumed a $6.8 million unsecured revolving line of credit in conjunction with the purchase of Ridge Technologies (Note 7). The Company is required to maintain certain financial ratios among other restrictive covenants. The Company was in compliance with all such covenants as of June 30, 1998. As of June 30, 1998, $4.7 million was drawn against the line. The Company intends to pay down and terminate the line of credit in the second quarter of fiscal 1999. 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. 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 million. The Company signed a non-interest bearing promissory note for the $35 million which became due in two 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 has been reclassified as long-term debt as of June 30, 1998. 6 7 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 5. STATEMENT OF OPERATIONS Write-off of acquired in-process technology and other charges includes (in thousands):
THREE MONTHS ENDED JUNE 30, 1998 ------------------ Write-off of acquired in-process technology (Note 7)............................................... $65,762 Acquisition related costs (Note 7)................. 21,463 Restructuring charges (Note 8)..................... 8,800 ------- Total.................................... $96,025 =======
6. 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 a period. In computing diluted net income (loss) per share, the average stock price for the period is used in determining the number of shares assumed to be purchased from exercise of stock options. Following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the periods presented below.
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED JUNE 30, 1998 JUNE 30, 1997 --------------------------------------- --------------------------------------- INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- ----------- ------------- --------- (IN THOUSANDS EXCEPT PER SHARE DATA) Basic income (loss) per share Net income (loss) available to common stockholders........................ $(77,339) 114,200 $(0.68) $59,689 112,008 $0.53 ====== ===== Effect of Dilutive Securities Common stock equivalents.............. -- -- -- 5,721 4.75% convertible subordinated notes............................... -- -- 2,133 4,452 ======== ======= ======= ======= Diluted income (loss) per share Net income (loss) available to common stockholders and assumed conversions......................... $(77,339) 114,200 $(0.68) $61,822 122,181 $0.51 ======== ======= ====== ======= ======= =====
The basic and diluted weighted average common shares outstanding for the three month period ended June 30, 1998 excludes 1,242,000 restricted shares issued in conjunction with the acquisition of Ridge Technologies (Note 7). At June 30, 1998, 1,536,000 stock options and the convertible subordinated notes are anti-dilutive and have been excluded from diluted weighted average common shares outstanding. Options to purchase 615,000 shares of common stock were outstanding at June 30, 1997 but were not included in the computations of diluted net income per share because the options' exercise price was greater than the average market price of the common shares. 7. 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, was a director of ADI. On May 21, 1998, the Company acquired Ridge 7 8 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) Technologies ("Ridge") for $21 million in restricted 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 $66 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 was not material. The allocation of the Company's aggregate purchase price to the tangible and identifiable intangible net assets 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 complete......................... 2,200 Acquired employees............................... 1,375 ------- 8,373 ------- Net assets acquired......................................... $71,383 =======
The tangible liabilities assumed exceeded the tangible assets acquired, which comprised primarily 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. 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, the Company 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 of the Company and who recently has been appointed interim CEO of the Company, following the resignation of Grant Saviers. 8. RESTRUCTURING During the quarter ended June 30, 1998, the Company recorded a restructuring charge of $8.8 million. The restructuring charges are 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. 8 9 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) The following is an analysis of the components of the restructuring charge recorded in the first quarter of fiscal 1999 (in thousands):
SEVERANCE AND OTHER BENEFITS CHARGES TOTAL --------- ------- ------- Restructuring charges.................. $ 6,800 $2,000 $ 8,800 Cash paid.............................. (3,244) -- (3,244) Non-cash charges....................... (296) (950) (1,246) ------- ------ ------- Balance................................ $ 3,260 $1,050 $ 4,310 ======= ====== =======
9. 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 effective tax rate used to calculate the income tax benefit for the period presented is lower than 25% primarily because of book write-offs relating to acquired in-process technology which are not deductible for tax purposes. 10. 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. 11. RECENT ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued SFAS 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not expect the adoption of SFAS 133 to have a material impact on the Company's results of operations. 12. CONTINGENCIES Several class action lawsuits have 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 actions all allege 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 complaints do not set forth purported damages. In addition, a number of derivative actions have 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 lawsuits. The Company believes the lawsuits and derivative actions are without merit and intends to defend itself vigorously. The IRS is currently auditing the Company's federal income tax returns for fiscal 1994 to 1996. No proposed adjustments have been received for these years. The Company believes sufficient taxes have been 9 10 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (UNAUDITED) 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. 13. SUBSEQUENT EVENTS On July 30, 1998, Grant Saviers, Chairman of the Board and CEO, resigned. The Board of Directors appointed Company founder and Board member, Larry Boucher, as interim CEO. The Company has initiated a search for a permanent CEO. In addition, John Adler, former Adaptec Chairman and CEO, has been named to the Board. 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. 10 11 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 PERIOD ENDED -------------------- JUNE 30, JUNE 30, 1998 1997 -------- -------- Net revenues.............................................. 100.0% 100.0% Cost of revenues.......................................... 44.1 39.6 ----- ----- Gross margin............................................ 55.9 60.4 ----- ----- Operating expenses: Research and development................................ 24.4 14.4 Sales, marketing and administrative..................... 26.6 18.1 Write-off of acquired in-process technology and other charges.............................................. 53.2 -- ----- ----- Total operating expenses........................ 104.2 32.5 ----- ----- Income (loss) from operations........................... (48.3) 27.9 Interest income, net of interest expense.................. 3.4 1.4 ----- ----- Income (loss) before provision (benefit) for income taxes................................................ (44.9) 29.3 Provision (benefit) for income taxes...................... (2.1) 7.3 ----- ----- Net income (loss)....................................... (42.8)% 22.0% ===== =====
Net Revenues Net revenues were $181 million for the first quarter of fiscal 1999 compared with $271 million for the corresponding quarter of fiscal 1998. The decrease was primarily due to the lower sales of the Company's SCSI host adapters and peripheral technology solutions. The demand for SCSI and peripheral technologies continues to be impacted by the trend to lower priced PC's for mainstream corporate desktop applications and the turbulent disk drive market, respectively. Gross Margin Gross margins for the first quarter of fiscal 1999 were 56% compared to 60% for the first quarter of fiscal 1998. The decline in gross margin is primarily due to manufacturing inefficiencies in overhead and labor variances due to lower production volumes. The gross margin is also adversely impacted by product mix. Operating Expenses As a percentage of net revenues, expenditures for research and development increased to 24% for the first quarter of fiscal 1999 compared to 14% for the corresponding period of fiscal 1998. The increase as a percentage of revenues is a direct result of the decline in net revenues. In absolute dollars, spending for research and development increased 13% to $44 million for the first quarter of fiscal 1999. The total dollar increase in spending is primarily due to the Company's acquisition of Ridge Technologies and Analog Devices, Inc. As a percentage of revenues, selling, marketing and administrative expenses were 27% of net revenues for the first quarter of fiscal 1999 compared with 18% for the corresponding period of fiscal 1998. In absolute dollars, spending for selling, marketing and administrative expenses decreased 2% to $48 million for the first quarter of fiscal 1999. The increase as a percentage of net revenues is attributable to the decline in net revenues, while the decrease in total dollars is a result of both headcount and program reductions associated with restructuring activities. 11 12 During the first three months 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 $66 million. Additionally, the Company incurred $9 million in restructuring charges and $21 million in acquisition related costs. Interest and Income Taxes Interest income, net of interest expense, increased to $6 million for the first quarter of fiscal 1999 compared to $4 million in the first quarter of fiscal 1998. The increase is primarily due to higher average cash and marketable securities balances held in contemplation of the proposed acquisition of Symbios, Inc. The Company recorded an income tax benefit of $4 million representing 5% of income before benefit for income taxes for the first quarter of fiscal 1999 compared with a $20 million provision representing 25% of income before provision for income taxes for the corresponding period in fiscal 1998. 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 quarter of fiscal 1999 is lower than 25% primarily as a result of book write-offs of acquired in-process technology which are not deductible for tax purposes. Excluding the effect of these write-offs, the Company's effective tax rate was 25% for the first quarter of fiscal 1999. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Net cash generated from operating activities for the first three months of fiscal 1999 totaled $27 million compared to $117 million in the corresponding period of fiscal 1998. The decrease is primarily attributable to a net loss for the first three months of fiscal 1999 of $77 million. The net loss in fiscal 1999 reflects the impact of $96 million in non-recurring charges including the write-off of acquired in-process technology, costs related to the termination of the Symbios transaction and restructuring charges. Investing Activities During the first quarter of fiscal 1999, the Company acquired certain technologies from Analog Devices, Inc., for $34 million in cash. Additionally, the Company purchased all 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. Prior to the acquisition, the Company owned a 19.9% interest in Ridge, with a carrying value of approximately $2 million. Additionally, the Company incurred approximately $1 million in professional fees related to the acquisition. Total net assets acquired in connection with these business combinations was $71 million. Purchases of property and equipment of $13 million during the first three months of fiscal 1999 included various building and leasehold improvements and investments in both test equipment and manufacturing equipment to support future business requirements. During the first three months of fiscal 1999, the Company sold investments in marketable securities totaling $192 million to help fund its acquisitions. Financing Activities During April 1997, the Company entered into an agreement with TSMC whereby the Company will make advance payments totaling $35 million to secure additional wafer capacity for future technology through 2001. The Company signed a $35 million promissory note for the advance payments, which became due in two installments in January 1998 and June 1998. During the first three months of fiscal 1999, the Company and TSMC amended the promissory note to extend, indefinitely, the second payment of $17.6 million. 12 13 During the first three months of fiscal 1999 and fiscal 1998, the Company received proceeds from common stock issued under the employee stock option and employee stock purchase plans totaling $6 million and $12 million, respectively. At June 30, 1998, the Company's principal sources of liquidity consisted of $682 million of cash, cash equivalents and marketable securities and an unsecured $6.8 million revolving line of credit assumed through the acquisition of Ridge Technologies. As of June 30, 1998, the Company owed $4.7 million, however, the Company intends to pay down and terminate the line of credit in the second quarter of fiscal 1999. The Company believes existing working capital, together with expected cash flows from operations and available sources of bank, equity and equipment financing, will be sufficient to support its operations through fiscal 1999. Recent Accounting Pronouncement In June 1998, the Financial Accounting Standards Board issued SFAS 133 "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The Company does not expect the adoption of SFAS 133 to have a material impact on the Company's results of operations. Year 2000 The "Year 2000 issue" arises because most computer systems and programs were designed to handle only a two-digit year, not a four-digit year. When the Year 2000 begins, these computers may interpret "00" as the year 1900 and could either stop processing date-related computations or could process them incorrectly. The Company has recently implemented new information systems and accordingly does not anticipate any internal Year 2000 issues from its own information systems, databases or programs. However, the Company could be adversely impacted by Year 2000 issues faced by major distributors, suppliers, customers, vendors and financial service organizations with which the Company interacts. The Company is in the process of developing a plan to determine the impact that third parties who are not Year 2000 compliant may have on the operations of the Company. The Company could also be impacted by the redirection of corporate management information system budgets towards resolving the Year 2000 issue and this could lower the demand for the Company's products if corporate buyers defer purchases of high-end business PCs. FACTORS AFFECTING FUTURE OPERATING RESULTS This report contains forward-looking statements that involve risks and uncertainties. For example, Management's Discussion and Analysis of Results of Operations and Financial Condition includes statements relating to expected sales growth, anticipated operating expenditures and anticipated capital expenditures. The statements contained in this document that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this document. In evaluating the Company's business, prospective investors should consider carefully the following factors in addition to the other information set forth in this document. Future Operating Results Subject to Fluctuation. In the second half of fiscal 1998 and the first quarter of fiscal 1999, the Company's operating results were adversely affected by shifts in corporate and retail buying patterns, increased competition, economic instability in Asia and turbulence in the computer disk drive 13 14 industry. In addition, the first quarter of fiscal 1999 was significantly impacted by one time charges including write-offs of acquired in-process technology, costs related to the Symbios termination and restructuring charges. 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 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 14 15 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. 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. 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 15 16 assurance that the Company will be able to obtain any required financing on terms acceptable to the Company. Additionally, the Company relies on subcontractors for the assembly and packaging of the ICs included in its products. The Company has no long-term agreements with its assembly and packaging subcontractors. In addition, the Company is increasingly using board subcontractors to better balance production runs and capacity. There can be no assurance that such subcontractors will continue to be able and willing to meet the Company's requirements for such components or services. Any significant disruption in supplies from, or degradation in the quality of components or services supplied by, such subcontractors could delay shipments and result in the loss of customers or revenues or otherwise have a material adverse effect on the Company's business or operating results. Certain Risks Associated With Acquisitions. Since the beginning of fiscal 1996, the Company has completed the acquisition of 13 complementary companies and businesses. As part of its overall strategy, the Company plans to continue to acquire or invest in complementary companies, products, or technologies and to enter into joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include the difficulty of assimilating the operations and personnel of the combined companies, the potential disruption of the Company's ongoing business, the inability to retain key technical and managerial personnel, the inability of management to maximize the financial and strategic position of the Company through the successful integration of acquired businesses, additional expenses associated with amortization of acquired intangible assets, dilution of existing equity holders, the maintenance of uniform standards, controls, procedures, and policies, and the impairment of relationships with employees and customers as a result of any integration of new personnel. There can be no assurance that the Company 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 Implementation and Utilization of New Information Systems. The Company has recently implemented new information systems in its operations in the United States, Singapore and Europe and will implement new information systems in its operations in Japan. There can be no assurance that the Company will successfully implement and utilize these new systems efficiently and in a timely manner. Problems with installation or utilization of the new systems could cause substantial difficulties in operations, financial reporting and management and thus could have a material adverse effect on the Company's business or operating results. Year 2000 Issues. 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. 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 16 17 experience in the future, significantly increased competition both from existing competitors and from additional companies that may enter its markets. Some of these companies have greater technical, marketing, manufacturing, and financial resources than the Company. There can be no assurance that the Company will be able to make timely introduction of new leading-edge solutions in response to competitive threats, that the Company will be able to compete successfully in the future against existing or potential competitors or that the Company's business or operating results will not be materially adversely affected by price competition. Certain Issues Related to Distributors. The Company's distributors generally offer a diverse array of products from several different manufacturers. Accordingly, there is a risk that these distributors may give higher priority to selling products from other suppliers, thus reducing their efforts to sell the Company's products. A reduction in sales efforts by the Company's current distributors could have a materially adverse effect on its business or operating results. The Company's distributors may on occasion build inventories in anticipation of substantial growth in sales, and if such growth does not occur as rapidly as anticipated, distributors may decrease the amount of product ordered from the Company in subsequent quarters. In addition, there has recently been an industry trend towards the elimination of price protection and distributor incentive programs. This trend 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. 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 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 17 18 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, La Nina related floods or any other natural disasters could have a material adverse effect on the Company's business, results of operations and financial condition. Volatility of Stock Price. The stock market in general, and the market for shares of technology companies in particular, have from time to time experienced extreme price fluctuations, which have often been unrelated to the operating performance of the affected companies. In addition, factors such as technological innovations or new product introductions by the Company, its competitors, or its customers may have a significant impact on the market price of the Company's Common Stock. Furthermore, as occurred in the first quarter 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. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1 Amendment No. 1 to Option Agreement III between Adaptec Manufacturing (S) Pte., Ltd. And Taiwan Semiconductor Manufacturing Co., Ltd. 27.1 Financial Data Schedule for the quarter ended June 30, 1998
No reports on Form 8-K were filed during the quarter 18 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADAPTEC, INC. Registrant /s/ ANDREW J. BROWN -------------------------------------- Andrew J. Brown Vice-President, Corporate Controller (Principal Accounting Officer) and Acting Chief Financial Officer (Principal Financial Officer) Date: August 7, 1998 19 20 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------ ----------- 10.1 Amendment No. 1 to Option Agreement III between Adaptec Manufacturing (S) Pte., Ltd. And Taiwan Semiconductor Manufacturing Co., Ltd. 27.1 Financial Data Schedule for the quarter ended June 30, 1998
EX-10.1 2 AMENDMENT NO.1 TO OPTION AGREEMENT III 1 EXHIBIT 10.1 AMENDMENT NO. 1 TO OPTION AGREEMENT III This amendment ("Amendment") is effective as of July 2, 1998 (the "Effective Date") and amends that certain Option Agreement III ("Agreement") dated April 21, 1997, by and between Adaptec Mfg (S) Pte. Ltd. ("Adaptec") and Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"). I. Under the terms of the Agreement, the second and final installment of the Option Fee, in the amount of US$17.64 Million (the "Second Installment"), is due and payable on June 30, 1998. The parties hereby agree that Adaptec may defer payment of the Second Installment until such time as Adaptec requires the Option III Capacity, subject to the following: (a) Adaptec will give TSMC at least one hundred eighty (180) days prior written notice of its intent to pay the Second Installment; (b) Until payment of the Second Installment is received by TSMC, the Option III Capacity will not be included in the "TSMC Committed Capacity" or in the "Customer Committed Capacity" as those terms are defined in the Agreement; and (c) The term of the Agreement will be extended by a period equal to the time between June 30, 1998 and the date payment of the Second Installment is received by TSMC, and the parties' respective obligations to purchase and sell the Wafer Equivalents included in the Option III Capacity will also be deferred for a like period. (d) The promissory note for the Second Installment issued by Adaptec to the order of TSMC dated April 21, 1997 and specifying a due date of June 30, 1998 (the "Promissory Note"), is hereby amended by deleting the due date specified therein and replacing it with the date specified by Adaptec for payment of the Second Installment pursuant to paragraph I (a) of this Amendment. TSMC agrees that it will attach a fully-executed copy of this Amendment to the original of the Promissory Note, and will notify any holder in due course of the Promissory Note of the terms of this Amendment. II. Except as expressly amended by this Amendment, the Agreement and the Promissory Note shall continue in full force and effect in accordance with their terms. In the event of any conflict between the terms of this Amendment and the terms of the Agreement or of the Promissory Note, this Amendment shall control. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized representatives. Adaptec Mfg (S) Pte. Ltd. Taiwan Semiconductor Manufacturing Co., Ltd. By: [SIG] By: [SIG] Title: Vice President Title: Vice President and Director Date: 7/2/98 Date: 7/7/98 1 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1999 APR-01-1998 JUN-30-1998 403,187 278,332 115,299 4,155 57,148 937,170 292,594 91,648 1,235,233 120,159 230,000 0 0 116 867,318 1,235,233 180,630 180,630 79,738 79,738 188,157 0 3,067 (81,199) (3,860) (77,339) 0 0 0 (77,339) (0.68) (0.68) FOR PURPOSES OF THIS EXHIBIT, PRIMARY MEANS BASIC.
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