-----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, DHecaBPFBRcVPJh1KOMpMPSQh7jBWwH1RxnFRQnJEfWohGtAzEtEc2CWiVLD+0h4 0jgXE2bEvBPlDfv/U+8gdg== 0000891618-99-003071.txt : 19990712 0000891618-99-003071.hdr.sgml : 19990712 ACCESSION NUMBER: 0000891618-99-003071 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19990709 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: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-15071 FILM NUMBER: 99662157 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/A 1 AMENDMENT NO. 1 TO FORM 10-Q DATED 06/30/98 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q/A (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED 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 6, 1998 was 113,591,756. This document consists of 21 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............................. 16-17 Recent Accounting Pronouncements............................ 17 Year 2000................................................... 18 Factors Affecting Future Operating Results.................. 19 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................ 20 Signatures........................................................... 21
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIOD ENDED -------------------------------- (RESTATED: NOTES 1 AND 9) 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.................................. 43,997 38,982 Sales, marketing and administrative....................... 49,825 49,279 Write-off of acquired in-process technology............... 45,482 -- Restructuring and other charges........................... 30,263 -- -------- -------- Total operating expenses.................................... 169,567 88,261 -------- -------- Income (loss) from operations............................... (68,675) 75,687 Interest income............................................. 9,133 6,958 Interest expense............................................ (3,067) (3,060) -------- -------- Income (loss) before provision (benefit) for income taxes... (62,609) 79,585 Provision (benefit) for income taxes........................ (3,860) 19,896 -------- -------- Net income (loss)........................................... $(58,749) $ 59,689 ======== ======== Net income (loss) per common share: Basic..................................................... $ (0.51) $ 0.53 -------- -------- Diluted................................................... $ (0.51) $ 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)
(RESTATED: (RESTATED: NOTES 1 AND 9) NOTE 1) JUNE 30, MARCH 31, 1998 1998 -------------- ---------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 403,187 $ 227,183 Marketable securities..................................... 278,332 470,199 Accounts receivable, net.................................. 116,679 136,476 Inventories............................................... 57,148 71,297 Prepaid expenses and other................................ 81,824 85,939 ---------- ---------- Total current assets.............................. 937,170 991,094 Property and equipment, net................................. 200,946 194,798 Other assets................................................ 115,707 89,337 ---------- ---------- $1,253,823 $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: Long-term debt, net of current portion.................... 17,640 -- Convertible subordinated notes............................ 230,000 230,000 ---------- ---------- Total long-term debt.............................. 247,640 230,000 Contingencies (Note 13) Stockholders' equity: Common stock.............................................. 116 114 Additional paid-in capital................................ 335,289 295,263 Retained earnings......................................... 550,619 609,368 ---------- ---------- Total stockholders' equity........................ 886,024 904,745 ---------- ---------- $1,253,823 $1,275,229 ========== ==========
4 5 ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTH PERIOD ENDED -------------------------- (RESTATED: NOTES 1 AND 9) JUNE 30, JUNE 30, 1998 1997 -------------- -------- (IN THOUSANDS) NET CASH PROVIDED BY OPERATING ACTIVITIES................... $ 28,144 $117,176 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of certain net assets in connection with acquisitions, net......................................... (34,126) -- Investments in property and equipment....................... (14,422) (36,748) Decreases (increases) in marketable securities, net......... 191,867 (41,878) -------- -------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES........ 143,319 (78,626) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock...................... 5,391 12,024 Principal payments on debt.................................. (850) (850) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES................... 4,541 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 ======== ========
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, except as described in Notes 8 through 10, necessary to provide a fair statement of the results for the interim periods presented. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 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. Certain items previously reported in specific financial statement captions have been reclassified to conform with the current presentation. 2. COMPREHENSIVE INCOME As of April 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this statement has no impact on the Company's net income (loss) or stockholders' equity. SFAS 130 requires components of comprehensive income, including unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, to be reported in the financial statements. These amounts are not material to the Company's financial statements for the periods presented. 3. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way companies report information about operating segments in their financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The disclosures prescribed by SFAS 131 were adopted in the Company's fiscal 1999 Annual Report on Form 10-K. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and requires recognition of all derivatives as assets or liabilities and measurement of those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 2000. The Company will adopt this statement in the first quarter of fiscal 2001 but does not expect the adoption of SFAS 133 to have a material impact on the Company's financial position, results of operations or cash flows. 6 7 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventory are as follows (in thousands):
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 ======= =======
5. LINES 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, Inc. ("Ridge") (Note 9). 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 $17.0 million revolving line of credit that was to expire on December 31, 1998. No borrowings were outstanding under this line of credit as of March 31, 1998, and no borrowings were made during the first quarter of fiscal 1999. In June 1998, the Company terminated this line of credit. 6. LONG-TERM DEBT In June 1992, the Company entered into a $17.0 million term loan agreement bearing interest at 7.65%, with principal and interest payable in quarterly installments of $850,000. In the first quarter of fiscal 1999, the Company paid the remaining outstanding principal and interest due on the loan. 7. TAIWAN SEMICONDUCTOR MANUFACTURING AGREEMENTS In each of fiscal years 1996 through 1998, the Company entered into agreements with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"), including Option I, Option II and Option III Agreements, which provide the Company with guaranteed capacity for wafer fabrication in exchange for advance payments by the Company. The Company records the prepayments as either prepaid expenses or other assets based upon the amount expected to be utilized in the next 12 months. As wafers are received from TSMC, the prepaid expenses balance is reclassified to inventory. During fiscal 1998, the Company entered into the Option III agreement with TSMC which provided the Company with a guarantee of increased capacity for wafer fabrication in return for advance payments totaling $35.3 million. The Company signed a non-interest bearing promissory note for the $35.3 million which became due in two equal installments. The first installment was paid in January 1998. In the first quarter of fiscal 1999, the Company and TSMC amended the promissory note to extend, indefinitely, the second installment which was originally due in June 1998. Management does not anticipate paying the second installment within one year, therefore, the note payable has been reclassified as long-term debt as of June 30, 1998. 7 8 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. STATEMENT OF OPERATIONS Restructuring and other charges includes (in thousands):
THREE MONTH PERIOD ENDED JUNE 30, 1998 ------------------ Acquisition related costs (Note 9).......................... $21,463 Restructuring charges (Note 10)............................. 8,800 ------- Total....................................................... $30,263 =======
9. RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS In April 1998, the Company purchased read channel and preamplifier ASIC technologies ("ASIC technologies") from Analog Devices, Inc. ("ADI") for $34.4 million in cash. Grant Saviers, former Chairman and CEO of the Company, is a director of ADI. Additionally, in May 1998, the Company purchased Ridge for 1.2 million shares of the Company's common stock valued at $21.2 million and assumed stock options valued at $13.1 million. Prior to the acquisition, the Company owned a 19.9% interest in Ridge with a carrying value of approximately $1.5 million. The $1.5 million carrying value is net of an approximate $3.5 million write-down of the investment balance taken in the third quarter of fiscal 1998 for an identified impairment. Grant Saviers, former Chairman and CEO of the Company, was a director of Ridge. The Company accounted for both acquisitions using the purchase method of accounting. Additionally, the Company incurred $1.2 million in professional fees, including finance, accounting, legal and appraisal fees, related to the acquisitions, which were capitalized as part of the purchase price of the transactions. As previously reported in the Company's Report on Form 10-Q for the quarter ended June 30, 1998, the purchase of Ridge and the acquisition of ASIC technologies from ADI, resulted in a first quarter write-off of acquired in-process technology charge of $39.4 million and $26.4 million, respectively. In the fourth quarter of fiscal 1999, the Company reduced its estimate of the amount allocated to acquired in-process technology from the purchase of ASIC technologies from ADI by $20.3 million from $26.4 million previously reported to $6.1 million. Amortization of intangibles increased approximately $1.7 million in the first quarter of fiscal 1999 from $2.8 million to $4.5 million. Basic and diluted net loss per share for the first quarter of fiscal 1999 was impacted by the restatement as follows:
PRIOR TO SUBSEQUENT TO FISCAL 1999 RESTATEMENT RESTATEMENT - ----------- ----------- ------------- First quarter: Basic.................................................... $(0.68) $(0.51) Diluted.................................................. $(0.68) $(0.51)
The Company allocated amounts to acquired in-process technology in the first quarter of fiscal 1999 in a manner consistent with widely recognized appraisal practices at the date of the acquisition of ASIC technologies from ADI. Subsequent to the acquisition, the Securities and Exchange Commission ("SEC") staff expressed views that took issue with certain appraisal practices generally employed in determining the fair value of the acquired in-process technology that was the basis for the Company's measurement of the acquired in-process technology charge. The charge of $26.4 million associated with ASIC technologies purchased from ADI, as first reported, was based upon assumptions and appraisal methodologies the SEC has since announced it does not consider appropriate. As a result of computing the acquired in-process technology using the SEC preferred methodology, the Company decided to revise the amount originally allocated to acquired in-process technology relating to the acquisition of ASIC technologies from ADI in this Report on Form 10-Q/A for the first quarter ended 8 9 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) June 30, 1998. The Company has also revised its results of operations in its Reports on Form 10-Q for the second and third quarters of fiscal 1999, ended September 30, 1998 and December 31, 1998, respectively, previously filed with the SEC. The $6.1 million allocation of the purchase price to acquired in-process technology from ASIC technologies purchased from ADI was determined by identifying research projects, including read channel and preamplifier ASIC technologies, in areas for which technological feasibility had not been established and no alternative future uses existed. The value was determined by estimating the expected cash flows from the projects once commercially viable, discounting the net cash flows back to their present value and then applying a percentage of completion to the calculated value as defined below. Net cash flows. The net cash flows from the identified projects were based on estimates of revenues, cost of sales, research and development costs, selling, general and administrative costs, royalty costs and income taxes from those projects. These estimates were based on the assumptions mentioned below. The research and development costs included in the model reflect costs to complete development of technologies acquired and sustain projects, but excluded costs to bring acquired in-process projects to technological feasibility. The estimated revenues were based on management projections of the acquired in-process projects for read channel and preamplifier ASIC products and the business projections were compared and found to be in line with industry analysts' forecasts of growth in substantially all of the relevant markets. Estimated total revenues from the majority of the acquired in-process technology product areas were expected to peak in fiscal 2001 and decline from 2002 into 2003 as other new products are expected to become available. These projections were based on estimates of market size and growth, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. Projected gross margins were based on management's estimates and are in line with the Company's business which acquired ASIC technologies from ADI. The estimated selling, general and administrative costs were in line with comparable company averages within the industry at approximately 14% of revenues. Research and development costs were consistent with ADI's historical cost structure. Discount rate. Discounting the net cash flows back to their present value was based on cost of capital for start up companies and well managed venture capital funds which typically have similar risks and returns on investments. The cost of capital used in discounting the net cash flows from acquired in-process technology was 25%. Higher required rates of return which would correspond to higher risk may be somewhat mitigated by the Company's expertise in the disk drive market. Percentage of completion. The percentage of completion for the projects was determined using costs incurred by ADI prior to the acquisitions to date compared to the remaining research and development to be completed to bring the projects to technological feasibility. The Company estimates, as of the acquisition date, the projects in aggregate were approximately 71% complete and the aggregate costs to complete are $11.0 million ($8.0 million in fiscal 1999 and $3.0 million in fiscal 2000). Substantially all of the acquired in-process technology projects were expected to be completed and generating revenues within two years following the acquisition date. The Company and its advisors believe that the restated acquired in-process technology charge relating to ASIC technologies purchased from ADI of $6.1 million is valued consistently with the SEC staff's current views regarding valuation methodologies. There can be no assurances, however, that the SEC staff will not take issue with any assumptions used in the Company's valuation model and require the Company to further revise the amount allocated to acquired in-process technology. The Company accounted for its acquisitions in Ridge and ASIC technologies purchased from ADI using the purchase method of accounting. Excluding the $45.5 million write-off of acquired in-process technology, 9 10 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) as restated, the aggregate impact of the acquisitions was not material to the Company's financial position and results of operations from the acquisition date. The allocation of the Company's aggregate purchase price to the tangible and identifiable intangible net assets acquired and liabilities assumed is summarized below. The allocations were based on independent appraisals and estimates of fair values (in thousands): Net tangible liabilities.................................... $(2,752) In-process technology....................................... 45,482 Goodwill and other intangible assets: Goodwill.................................................. 25,078 Covenant not to compete................................... 2,200 Acquired employees........................................ 1,375 ------- 28,653 ------- Net assets acquired......................................... $71,383 =======
The tangible liabilities assumed exceeded the tangible assets acquired, which comprised primarily a line of credit (Note 5), accounts payable and fixed assets. Acquired in-process technology was written-off in the period in which the acquisitions were completed, 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 $7.0 million termination fee and approximately $6.7 million in nonconsummation fees to HEA. Additionally, the Company incurred approximately $7.8 million in other acquisition related charges, including legal, consulting and other costs. In the first quarter of fiscal 1999, the $21.5 million in fees associated with this terminated acquisition were expensed and are included in "Restructuring and other charges" in the Condensed Consolidated Statements of Operations. During fiscal 1998, the Company purchased $1.0 million in preferred stock, and entered into a development and license agreement with a venture stage company whose founder and CEO, Larry Boucher, is a director of the Company and who recently was appointed interim CEO of the Company, following the resignation of Grant Saviers. Two other directors of the Company are also directors of the venture stage company. 10. RESTRUCTURING In the first quarter of fiscal 1999, in connection with management's plan to reduce costs and improve operating efficiencies, the Company recorded a restructuring charge of $8.8 million. The restructuring charge was comprised primarily of severance and benefits related to the involuntary termination of approximately 550 employees, of which approximately 36% were based in the United States and the remainder were based in Singapore. 10 11 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth an analysis of the components of the restructuring charges recorded in the first quarter of fiscal 1999 (in thousands):
SEVERANCE AND ASSET OTHER RESTRUCTURING CHARGES BENEFITS WRITE-OFFS CHARGES TOTAL --------------------- --------- ---------- ------- ------ 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 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 ======= ===== ====== =======
The Company anticipates the remaining reserve balance of $4.3 million at June 30, 1998, will be substantially paid out by December 31, 1998. 11. NET INCOME (LOSS) PER SHARE The Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share," in the third quarter of fiscal 1998. It replaces the presentation of primary net income (loss) per share with a presentation of basic net income (loss) per share. It also requires dual presentation of basic and diluted net income (loss) per share on the face of the financial statements for all entities with complex capital structures. Basic net income (loss) per share is computed by dividing net income (loss) available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period and excludes the dilutive effect of stock options. Diluted net income (loss) per share gives effect to all dilutive potential common shares outstanding during the period. In computing diluted net income (loss) per share, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options under the treasury stock method. All prior period net income (loss) per share amounts have been presented to conform to the provisions of this statement. 11 12 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations assuming the standard was applied during all periods presented below.
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............ $(58,749) 114,200 $(0.51) $59,689 112,008 $0.53 ====== ===== EFFECT OF DILUTIVE SECURITIES Common stock equivalents............. -- -- -- 5,721 4 3/4% Convertible Subordinated Notes...... -- -- 2,133 4,452 -------- ------- ------- ------- DILUTED INCOME (LOSS) PER SHARE Net income (loss) available to common stockholders and assumed conversions............. $(58,749) 114,200 $(0.51) $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 (Note 9). At June 30, 1998, options to purchase 17,965,000 shares of common stock were outstanding, however, the stock options and the 4 3/4% Convertible Subordinated Notes were not included in the computations of diluted weighted average common shares outstanding for the first quarter of fiscal 1999 because they were anti-dilutive. At June 30, 1997, additional options to purchase 615,000 shares of common stock were outstanding 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 during the quarter. 12. 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. 13. 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 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 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. 12 13 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company believes the 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 to 1996. No proposed adjustments have been received for these years. The Company believes sufficient taxes have been provided and that the ultimate outcome of the IRS audits will not have a material adverse impact on the Company's financial position or results of operations. 14. SUBSEQUENT EVENTS On July 30, 1998, Grant Saviers, Chairman of the Board of Directors ("Board") and CEO, resigned. The Board 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 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. 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 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....................... 27.6 18.1 Write-off of acquired in-process technology............... 25.2 -- Restructuring and other charges........................... 16.7 -- ----- ----- Total operating expenses.................................. 93.9 32.5 ----- ----- Income (loss) from operations............................... (38.0) 27.9 Interest income............................................. 5.1 2.5 Interest expense............................................ (1.7) (1.1) ----- ----- Income (loss) before provision (benefit) for income taxes... (34.6) 29.3 Provision (benefit) for income taxes........................ (2.1) 7.3 ----- ----- Net income (loss)........................................... (32.5)% 22.0% ===== =====
SEC Comment Letter. On June 8, 1999, the Company received a comment letter from the Securities and Exchange Commission ("SEC") relating to certain previous 1934 Act filings with the SEC, primarily comments about disclosure in the Company's Management's Discussion and Analysis and Notes to Consolidated Financial Statements. The Company had addressed the comments in its response to the SEC dated June 16, 1999 and has incorporated such comments into its disclosures in this Report on Form 10-Q/A for the quarter ended June 30, 1998 to the extent practicable. However, there can be no assurance that the SEC will not take exception with the Company's responses and disclosures and require that the Company file additional responses and disclosures in its periodic reports. Net Revenues. Net revenues were $180.6 million for the first quarter of fiscal 1999 compared with $271.4 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 55.9% compared to 60.4% 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 was also adversely impacted by product mix. Operating Expenses. As a percentage of net revenues, expenditures for research and development increased to 24.4% for the first quarter of fiscal 1999 compared to 14.4% 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 12.9% to $44.0 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, Inc. ("Ridge") and read channel and preamplifier ASIC technologies ("ASIC technologies") purchased from Analog Devices, Inc. ("ADI"). 14 15 As a percentage of revenues, selling, marketing and administrative expenses were 27.6% of net revenues for the first quarter of fiscal 1999 compared with 18.1% for the corresponding period of fiscal 1998. In absolute dollars, spending for selling, marketing and administrative expenses increased 1.1% to $49.8 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. Write-off of In-process Technology. During the first quarter of fiscal 1999, the Company purchased complementary businesses recorded under the purchase method of accounting, resulting in an aggregate write-off of acquired in-process technology of $45.5 million. As previously reported, the Company purchased Ridge and acquired the ASIC technologies from ADI, which resulted in a first quarter write-off of acquired in-process technology charge of $39.4 million and $26.4 million, respectively. In the fourth quarter of fiscal 1999, the Company reduced its estimate of the amount allocated to acquired in-process technology from the purchase of ASIC technologies from ADI by $20.3 million from $26.4 million as previously reported in the first quarter of fiscal 1999 to $6.1 million. Amortization of intangibles increased approximately $1.7 million in the first quarter of fiscal 1999 from $2.8 million to $4.5 million and is included in "Sales, marketing and administrative" expenses in the Condensed Consolidated Statements of Operations. Basic and diluted net loss per share for the first quarter of fiscal 1999 was impacted by the restatement as follows:
PRIOR TO SUBSEQUENT TO FISCAL 1999 RESTATEMENT RESTATEMENT - ----------- ----------- ------------- First quarter: Basic.................................................... $(0.68) $(0.51) Diluted.................................................. $(0.68) $(0.51)
The Company allocated amounts to acquired in-process technology in the first quarter of fiscal 1999 in a manner consistent with widely recognized appraisal practices at the date of the acquisition of the ASIC technologies from ADI. Subsequent to the acquisition, the SEC staff expressed views that took issue with certain appraisal practices generally employed in determining the fair value of the acquired in-process technology that was the basis for the Company's measurement of the acquired in-process technology charge. The charge of $26.4 million associated with ASIC technologies purchased from ADI, as first reported, was based upon assumptions and appraisal methodologies the SEC has since announced it does not consider appropriate. As a result of computing the acquired in-process technology using the SEC preferred methodology, the Company decided to revise the amount originally allocated to acquired in-process technology. The Company has revised its results of operations for fiscal 1999 in this Report on Form 10-Q/A for the first quarter of fiscal 1999 and its Reports on Form 10-Q/A for the second and third quarters of fiscal 1999. The Company and its advisors believe that the restated acquired in-process technology charge relating to ASIC technologies purchased from ADI of $6.1 million is valued consistently with the SEC staff's current views regarding valuation methodologies. There can be no assurances, however, that the SEC staff will not take issue with any assumptions used in the Company's valuation model and require the Company to further revise the amount allocated to acquired in-process technology. Restructuring and Other Charges. In the first quarter of fiscal 1999, the Company incurred $8.8 million in restructuring charges and $21.5 million in acquisition related charges. In the first quarter of fiscal 1999, in connection with management's plan to reduce costs and improve operating efficiencies, the Company recorded a restructuring charge of $8.8 million. The restructuring charges are comprised primarily of severance and benefits related to the involuntary termination of approximately 550 15 16 employees, of which approximately 36% were based in the United States and the remainder were based in Singapore. The following table sets forth an analysis of the components of the restructuring charges recorded in the first quarter of fiscal 1999 (in thousands):
SEVERANCE AND ASSET OTHER RESTRUCTURING CHARGES BENEFITS WRITE-OFFS CHARGES TOTAL - --------------------- --------- ---------- ------- ------ 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 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 ====== ==== ====== ======
In February 1998, the Company entered into an agreement to purchase all of the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of Hyundai Electronics America ("HEA"). In June 1998, the Company and HEA mutually agreed to terminate the agreement. The Company paid a $7.0 million termination fee and approximately $6.7 million in nonconsummation fees to HEA. Additionally, the Company incurred approximately $7.8 million in other acquisition related charges, including legal, consulting and other costs. The $21.5 million in fees associated with this terminated acquisition were expensed in the first quarter of fiscal 1999. Interest and Income Taxes. Interest income, net of interest expense, increased to $6.1 million for the first quarter of fiscal 1999 compared to $3.9 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 $3.9 million representing 6.2% of income before benefit for income taxes for the first quarter of fiscal 1999 compared with a $19.9 million provision representing 25.0% 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. LIQUIDITY AND CAPITAL RESOURCES Operating Activities. Net cash generated from operating activities for the first three months of fiscal 1999 totaled $28.1 million compared to $117.2 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 $58.7 million. The net loss in fiscal 1999 reflects the impact of $75.7 million in unusual 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 ASIC technologies from ADI for $34.4 million in cash. Additionally, the Company purchased all outstanding shares of Ridge not 16 17 owned by it for 2.1 million shares of the Company's common stock valued at $21.2 million and assumed stock options valued at $13.1 million. Prior to the acquisition, the Company owned a 19.9% interest in Ridge, with a carrying value of $1.5 million. The $1.5 million carrying value is net of a $3.5 million write-down of the investment balance taken in the third quarter of fiscal 1998 for an identified impairment. Additionally, the Company incurred approximately $1.2 million in professional fees related to the acquisitions, which were capitalized as part of the purchase price of the transactions. Total net assets acquired in connection with these business combinations was $71.4 million. Investments in property and equipment of $14.4 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 had $191.9 million of cash inflow related to proceeds from sales and maturities of marketable securities, net of reinvestments. Financing Activities. During April 1997, the Company entered into an agreement with TSMC whereby the Company will make advance payments totaling $35.3 million to secure additional wafer capacity for future technology through 2001. The Company signed a $35.3 million promissory note for the advance payments, which became due in two equal 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. 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 $5.4 million and $12.0 million, respectively. Lines of Credit. In May 1998, the Company assumed a $6.8 million unsecured revolving line of credit in conjunction with the purchased of Ridge. As of June 30, 1998, $4.7 million was drawn against the line. The Company intends to pay down and terminate the line of credit in the second quarter of fiscal 1999. Additionally, in June 1998, the Company terminated its $17.0 million line of credit. Liquidity. At June 30, 1998, the Company's principal sources of liquidity consisted of $681.5 million of cash, cash equivalents and marketable securities and an unsecured $6.8 million revolving line of credit, of which $4.7 million was outstanding at June 30, 1998. 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 PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way companies report information about operating segments in their financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The disclosures prescribed by SFAS 131 were adopted in the Company's fiscal 1999 Annual Report on Form 10-K. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities and requires recognition of all derivatives as assets or liabilities and measurement of those instruments at fair value. This statement is effective for fiscal years beginning after June 15, 2000. The Company will adopt this statement in the first quarter of fiscal 2001 but does not expect the adoption of SFAS 133 to have a material impact on the Company's financial position, results of operations or cash flows. 17 18 YEAR 2000 The inability of computers, software and other equipment utilizing microprocessors to recognize and properly process data fields containing a 2-digit year is commonly referred to as the Year 2000 Compliance issue. As the year 2000 approaches, such systems may be unable to accurately process certain date-based information. During fiscal 1998, the Company completed implementation of Enterprise Resource Planning ("ERP") software to replace the Company's core business applications, which support sales and customer service, manufacturing, distribution, and finance and accounting. The ERP software was selected not only because it was Year 2000 Compliant, but more importantly, to add functionality and efficiency to the business processes of the Company. The Company completed Year 2000 testing of the ERP software and is satisfied that it will not present any Year 2000 Compliance issues. In the first half of fiscal 1998, the Company also began a project to analyze and assess the remainder of its business not addressed by the ERP software such as other computer and network hardware and software, production process controllers and related manufacturing equipment. Internal and external resources are being used to complete any required modification and tests for Year 2000 Compliance. Furthermore, with the replacement or upgrade of its internal use software, which is primarily commercial off-the-shelf software, and non-compatible hardware, the Company believes that the Year 2000 Compliance issue will not pose significant operational problems for the Company or its customers. The Company presently believes that its products are Year 2000 Compliant. The majority of the Company's products are not date sensitive. However, for those products that are date sensitive, the Company, as a standard part of its product development cycle, has had procedures, tests, and methodologies that have been in effect since fiscal 1997 to ensure each product's Year 2000 Compliance readiness. In addition, the Company has defined its critical suppliers and communicated with them to determine their Year 2000 Compliance readiness and the extent to which the Company is vulnerable to any third party Year 2000 issues. However, there can be no guarantee that the systems of other companies on which the Company's operations rely will be remediated in a timely manner, or that a failure to become Year 2000 Compliant by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. Our costs to date related to the Year 2000 Compliance issue consist primarily of reallocation of internal resources to evaluate and assess systems and products as described above and to plan our testing and remediation efforts. The total cost to the Company of Year 2000 Compliance activities has not been and is not anticipated to be material to its financial position or results of operations in any given year (less than $1.0 million). Such costs exclude costs to implement the ERP system and the reallocation of internal resources, as these costs are not considered incremental to the Company. These costs and the date on which the Company plans to complete the Year 2000 Compliance remediation and testing processes are based on management's best estimates, which were derived utilizing various assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans. The Company has developed a contingency plan for some of its applications and systems to address any of the consequences of internal or external failures to be Year 2000 Compliant. It is also in the process of creating a contingency plan for internal and external sources, including key suppliers, which it expects to complete in the first half of fiscal 2000. 18 19 FACTORS AFFECTING FUTURE OPERATING RESULTS This Report on Form 10Q/A may contain forward-looking statements regarding future events or the future performance of the Company. Actual events or results could, of course, differ materially. Various factors could adversely affect its results of operations in the future including its dependence on the high- performance computer, server and software markets, changes in the product mix, competitive pricing pressures, changes in technological standards, dependence on wafer suppliers and other subcontractors, changes in product costs, certain risks associated with acquisitions of other companies or businesses that the Company may make from time to time, issues related to distributors, dependence on key personnel, risks associated with intellectual property or general economic downturns. For a more complete discussion of these factors, please refer to the Business section of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1999, and the Company's other public filings it makes from time to time. 19 20 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits:
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
- --------------- * Previously filed with the Company's Report on Form 10-Q for the quarter ended June 30, 1998. (b) Reports on Form 8-K: No reports on Form 8-K were filed during the quarter. 20 21 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 Date: July 9, 1999 - ----------------------------------------------- Andrew J. Brown Vice President, Finance Chief Financial Officer (Principal Financial Officer) By: /s/ KENNETH B. AROLA Date: July 9, 1999 - ----------------------------------------------- Kenneth B. Arola Vice President Controller (Principal Accounting Officer)
21 22 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
- --------------- * Previously filed with the Company's Report on Form 10-Q for the quarter ended June 30, 1998. 22 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 3-MOS MAR-31-1999 APR-01-1998 JUN-30-1998 1 403,187 278,332 120,834 4,155 57,148 937,170 292,594 91,648 1,253,823 120,159 247,640 0 0 116 885,908 1,253,823 180,630 180,630 79,738 79,738 169,567 0 3,067 (62,609) (3,860) (58,749) 0 0 0 (58,749) (0.51) (0.51)
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