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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED MARCH 31, 1999
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 000-15071
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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 945-8600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
COMMON SHARE PURCHASE RIGHTS
(TITLE OF CLASS)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes [ ] No [X]
Based on the closing sale price of the Common Stock on the Nasdaq National
Market System on June 2, 1999, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $2,486,811,915. Shares of Common
Stock held by each officer and director and by each person known by the Company
to own 5% or more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of Registrant's Common Stock, $.001 par
value, was 104,447,315 at June 2, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held on September 9,
1999.
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INTRODUCTORY STATEMENT
References made in this Annual Report on Form 10-K to "Adaptec," the
"Company," or the "Registrant" refer to Adaptec, Inc. and its wholly owned
subsidiaries. Adaptec, Easy CD Creator, Direct CD, Spin Doctor, Toast, Adaptec
Jam and the Adaptec logo are trademarks of Adaptec, Inc., which may be
registered in some jurisdictions. All other trademarks used are owned by their
respective owners.
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PART I
ITEM 1. BUSINESS
OVERVIEW AND DESCRIPTION OF BUSINESS SEGMENTS
Adaptec Inc., a leading supplier of bandwidth management solutions that
significantly enhance total system performance by increasing the data transfer
rates between personal computers ("PCs"), servers, peripherals, and networks,
was incorporated in 1981. The Company operates in four principal segments: Host
I/O (Input/Output), RAID (Redundant Array of Independent Disks), Software and
Peripheral Technology Solutions ("PTS"). A number of trends are driving the need
to increase effective I/O bandwidth between PCs, servers, peripherals and
networks: (i) the introduction of increasingly powerful central processing units
("CPUs"), which require more rapidly accessed and intelligently managed data to
function at their optimal performance level, (ii) operating systems, such as
Windows NT and Windows 98 that allow for faster I/O and multitasking, (iii) the
growth of data-intensive software applications, such as graphics, audio and
video, which require significantly more bandwidth, (iv) the proliferation of
client/server networks, the Internet and corporate intranets, which is in turn
driving growth in the processing power of servers, and (v) growth in high-
performance peripherals, such as high capacity hard disk drives, scanners,
CD-ROMs and CD-R, CD-RW and DVD drives. These factors have created a rapid
increase in the transfer of data between desktop PCs, servers, peripherals, and
networks resulting in substantial I/O and network bottlenecks.
The Host I/O segment designs, develops, manufactures and markets host bus
adapter ("HBA") boards and chips that allow computers to transfer information to
and from peripherals, such as hard disk drives, scanners, CD-ROMs, CD-Rs,
CD-RWs, DVD-ROMs, and Zip and Jaz drives among many other devices. The Company's
HBAs are based on Small Computer System Interface ("SCSI") technology and are
utilized in servers, high-end workstations and desktops where high performance
I/O is a vital component of overall system performance.
The RAID segment designs, develops, manufactures and markets bus-based and
microprocessor-based RAID solutions. These products are utilized from entry
level workstations to enterprise-class servers. The Company's RAID adapters
provide performance and functionality, incorporate the latest technical
innovations, and offer superior software functionality to make RAID fast, simple
and reliable.
The Software segment designs, develops and markets optical media software
for CD-R and CD-RW. This segment includes video editing products and software
utility products that simplify connecting a SCSI host adapter and peripherals to
a microcomputer system. The Company's CD-R and CD-RW products are used for data
storage to optical media, including audio, video and still photos, and provide
users storage alternatives to traditional disk and removable media options.
Additionally, the Company's CD-RW products allow users to transfer downloaded
music from the Internet to CDs for private use. The Company's CD-R software
offerings are available as standalone products, and also ship built-in or
"bundled" with most CD-R drives in the desktop market.
The business lines that comprised the PTS segment were sold in November
1998 and January 1999 to Texas Instruments, Inc. ("TI") and STMicroelectronics,
Inc. ("ST"), respectively. This segment designed, developed, manufactured and
marketed proprietary integrated circuits ("ICs") for use in mass storage devices
and other peripherals.
See "Note 18. Segment Reporting and Foreign Operations" in Notes to
Consolidated Financial Statements on page F-28, for further information on the
Company's operating segments.
CORPORATE STRATEGY
In the second quarter of fiscal 1999, a change in the Company's senior
management team resulted in a decision to refocus the business along its core
competencies. Prior to the change, the Company acquired read channel and
preamplifier application specific integrated circuits ("ASIC") technologies
("ASIC technologies") from Analog Devices, Inc. ("ADI") and purchased Ridge
Technologies, Inc. ("Ridge").
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In April 1998, the Company acquired ASIC technologies from ADI for $34.4
million in cash. The transaction was accounted for using the purchase method of
accounting. The ASIC technologies acquired from ADI were incorporated into the
mainstream removable PTS business line to enhance its product offering. (See
"Note 9. Acquired In-Process Technology and Related Intangibles" in Notes to
Consolidated Financial Statements on page F-13 for further information).
In May 1998, the Company purchased Ridge, a development stage company, for
1.2 million shares of the Company's common stock valued at $21.2 million in
common stock 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 transaction was accounted for using the purchase
method of accounting. The acquisition of Ridge was to allow the Company entry
into the storage subsystems business.
In the first quarter of fiscal 1999, in connection with management's plan
to improve operating efficiencies and reduce costs, the Company recorded a
restructuring charge of $8.8 million. The restructuring charge was comprised
primarily of severance and benefits related to the involuntary termination of
approximately 550 employees, of which approximately 36% were based in the United
States and the remainder were based in Singapore.
In furthering management's objective to refocus the business the Company
divested of certain unprofitable business activities including storage
subsystems (primarily those business activities purchased in connection with the
Ridge transaction, see "Note 8. Business Combinations and Related Party
Transactions" in Notes to Consolidated Financial Statements on page F-11 for
further information) external storage, satellite networking, fibre channel and
high-end peripheral technology solutions. In order to improve long-term
profitability, in the second quarter of fiscal 1999, the Company recorded a
restructuring charge of $24.5 million, net of an adjustment to the restructuring
charge taken in the first quarter of fiscal 1999 of $1.4 million. This charge
was comprised primarily of severance and benefits related to the involuntary
termination of approximately 300 U.S. employees and the write-off of inventory,
property and equipment, and other assets including goodwill associated with the
storage subsystems business line.
On November 6, 1998, the Company entered into a definitive agreement with
TI under which certain assets of the Company's high-end PTS business line were
transferred to TI for $8.5 million in cash. Additionally, the Company agreed to
license certain technologies to TI for $3.7 million. TI also agreed to pay
royalties ranging from 2% - 5% on certain products for up to five years.
On November 12, 1998, the Company entered into a definitive agreement with
Jaycor Networks, Inc. ("JNI") whereby the Company agreed to contribute certain
tangible and intangible assets related to the fibre channel product line in
exchange for an ownership interest in JNI. The Company received 6.7% of JNI's
outstanding capital stock along with warrants to purchase up to an additional
11.7%. The warrants have a nominal exercise price and will become exercisable
upon the achievement of certain milestones by JNI. The Company and JNI also
entered into a cross-license agreement whereby JNI will pay royalties on certain
products and the Company will license certain technologies from JNI
royalty-free.
On November 25, 1998, the Company entered into a definitive agreement with
Chaparral Technologies, Inc. ("Chaparral") whereby the Company agreed to
contribute certain tangible and intangible assets related to the Company's
external storage product line for 19.9% of the outstanding stock of Chaparral.
The Company and Chaparral also entered into a cross-license agreement whereby
Chaparral will pay royalties on certain products manufactured by Adaptec or
other manufacturers, respectively. Adaptec will license certain technologies
from Chaparral royalty-free in order to manufacture product for Chaparral.
On December 18, 1998, the Company entered into a definitive agreement with
BroadLogic, Inc. ("BroadLogic") whereby the Company agreed to contribute certain
tangible and intangible assets related to the Company's satellite networking
product line in exchange for 19.9% of the outstanding stock of BroadLogic and
warrants to purchase BroadLogic common stock at $4 per share. The Company and
BroadLogic also entered into a royalty-free cross-license agreement.
On January 15, 1999, the Company sold to ST certain assets and certain
intellectual property rights relating to the Company's mainstream removable PTS
business line for an aggregate purchase price of
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$72.1 million in cash and $3.3 million in cost reimbursements. The Company
received all of the cash proceeds in January 1999 and recorded a gain of
approximately $10.0 million (net of taxes of $21.5 million) in the fourth
quarter of fiscal 1999. The Company and ST also entered into a royalty-free
cross-license agreement.
The Company's investments in JNI, Chaparral and BroadLogic approximate fair
value and are accounted for under the cost method. The Combined investments are
less than $1.0 million at March 31, 1999.
During the quarter ended March 31, 1999, the Company recorded a
restructuring charge of $6.6 million, net of an adjustment to the restructuring
charges taken in the first and second quarters of fiscal 1999 of $1.2 million.
This charge resulted from a reduction in the infrastructure that supported
businesses divested in fiscal 1999. The Company's fourth quarter restructuring
charge was comprised primarily of severance and benefits related to the
involuntary termination of approximately 125 employees, of which most were based
in the U.S. and the write-off of property and equipment.
PRODUCTS
The Company's products are designed and manufactured using a core set of
technologies and resources. The Company continues to utilize, for all segments,
a process called concurrent engineering, in which manufacturing, marketing, and
engineering work together early in the development cycle to meet the demands of
emerging technologies as well as decrease the "time to volume" of product
shipments. The Company's semiconductor technology design centers develop
products for all markets the Company serves. The Company maintains separate
engineering functions for each of its operating segments. The Company maintains
an Internet Web site to provide its customers with detailed company and product
information.
Host I/O
The Company's Host I/O products, including SCSI host adapter boards and
chips and related firmware and software, meet the demanding I/O and connectivity
requirements of enterprise servers, technical workstations and high-performance
desktop and portable computers across all important microprocessor-based
platforms.
The Company's Host I/O products, which incorporate the Company's
proprietary single chip architectures provide customers comprehensive I/O
solutions in the markets it serves. Ultra2 SCSI products include (peripheral
component interconnect) PCI Ultra2 solutions for workstation applications such
as CAD/CAM, financial analysis and desktop publishing. The Company provides bus
mastering, SCSI host adapters that manage all I/O processing activity, thereby
freeing the CPU to perform other operations. The Company offers these host
adapters across all ranges of bus architectures including PCI, ISA, EISA, and
PCMCIA as well as for previous generations of the SCSI standard. The Company
also provides non-bus mastering host adapters that provide standardized SCSI
connectivity between the CPU and its peripherals. To expand further the market
for its products, the Company continues to develop and market I/O solutions
meeting specific original equipment manufacturer ("OEM") requirements and
turnkey kits for the distributor channels. These kits include a SCSI host
adapter and related software that enable end-users to more readily connect SCSI
peripherals to their microcomputer.
The Company has undertaken numerous initiatives to increase the
accessibility, ease of use, and versatility of the SCSI standard. Advanced SCSI
programming interface ("ASPI"), an industry standard developed by the Company,
enables users to integrate high-performance SCSI peripherals with computers
using popular operating systems, such as Windows 98, Windows NT, NetWare, OS/2,
and UNIX. In addition, the Company has strategic relationships with leading
operating system vendors, such as IBM Corporation, Microsoft Corporation, and
Novell Inc., resulting in joint development projects to embed the Company's
software within their operating systems.
RAID
Adaptec RAID products include bus-based and microprocessor-based RAID
solutions primarily in the NT server market. These products are utilized in a
wide range of servers from entry level workstations to
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enterprise-class servers. Adaptec's RAID adapters provide performance and
functionality, incorporate 64-bit PCI technology and offer superior software
functionality to make RAID creation and manipulation fast, simple and reliable.
The Company believes it is the only significant RAID vendor to offer the benefit
of proprietary SCSI development in its RAID controllers. In addition, Adaptec's
Ultra2 SCSI RAID card family supports advanced RAID features, including bootable
arrays, hot-swap drives, extended parity protection, dynamic sector repairing
and round-the-clock fault tolerance for business and mission critical data.
All Adaptec SCSI RAID Cards are rigorously tested with hundreds of SCSI
systems and peripherals like hard disk drives, tape drives, Zip, Jaz, CD-R,
CD-RW, and scanners to ensure customers are getting compatibility that they can
rely upon.
Software
The Company's software products focus on providing CD-R and CD-RW mastering
capability as well as providing complementary editing utilities. The products
include Easy CD Creator(TM), CD Direct(TM), Spin Doctor(TM), Toast(TM) and
Adaptec Jam(TM) and are popular for data storage to optical media and provides
users a storage alternative to other removable media. Adaptec's software
offerings are available in retail packages and also ship built-in or "bundled"
with most industry-leading CD-R and CD-RW drives.
Peripheral Technology Solutions
The Company developed proprietary ICs for use in mass storage devices. The
Company worked closely with customers to provide complete solutions that
included sophisticated ICs that optimize overall performance.
MARKETING AND CUSTOMERS
Host I/O
The Company believes it has successfully positioned itself as a leading
supplier of a full range of I/O solutions providing bandwidth management. The
Company sells its products through a direct sales force to substantially all
major server and PC manufacturers, as well as most of the major electronic
distributors worldwide. The Company works closely with its OEM customers on the
design of current and next generation products to meet the specific requirements
of system integrators and end-users. The Company provides its OEM customers with
extensive applications and system design support. The Company also sells
board-based products to end-users through major computer product distributors
and provides technical support to its customers worldwide.
The Company's OEM customers include Acer Incorporated, Asustek Computer,
Inc., Compaq Computer Corporation, Dell Computer Corporation, Fujitsu Ltd., IBM
Corporation, Siemens Nixdorf and Solectron Corporation . The Company's major
distributors include Computer 2000, Inc., Ingram Micro, Inc., Karma/CHS
Elektronic, Macrotron Systems, Inc., Merisel, Inc., Nichimen Electronics,
Softbank Corporation, Synnex and Tech Data Corporation. Net revenues from the
Host I/O segment were $520.1 million, $701.1 million and $667.7 million in
fiscal 1999, 1998 and 1997, respectively.
The Company emphasizes solution-oriented customer support as a key element
of its marketing strategy and maintains technical applications groups in the
field as well as at the Company's headquarters. Support provided by these groups
includes assisting current and prospective customers in the use of the Company's
products, writing application notes, and conducting seminars for system
designers. The systems-level expertise and software experience of the Company's
engineering staff is also available to customers with particularly difficult I/O
design problems. A high level of customer support is also maintained through
technical support hotlines, electronic bulletin boards, and dial-in-fax
capability.
RAID
The Company markets its RAID products through a direct sales force to all
major server manufacturers. The Company's marketing and engineering teams work
closely with the OEMs on the design of current and
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next generation products to meet the customer requirements. Adaptec provides its
OEMs with extensive customer support. It also sells RAID solutions to end-users
through major distributors and maintains training and support for distribution
customers such as value added resellers ("VARs"), system integrators and
distributors. Sales and marketing of RAID product to OEM's is primarily handled
by the Company's marketing and engineering teams. Senior management familiar
with the customer's market and needs may also participate in the marketing
process. Sales to other customers such as VAR's, system integrators and
distributors are marketed similarly with somewhat less engineering support than
is required by OEM's.
Dell Computer Corporation is the primary OEM customer for the Company's
RAID product offering. Major distributors for RAID include Tech Data Corporation
and Ingram Micro, Inc. Net revenues from the RAID segment were $32.2 million,
$14.5 million and $3.3 million in fiscal 1999, 1998 and 1997, respectively.
Software
CD-R and CD-RW drives are shipping in ever increasing quantities which is
driven by price performance and backward compatibility with CD-ROM drives. The
Company has leveraged its strength in developing high-performance peripheral
connectivity software to attain its position as a leading supplier of CD-R
software. Through its close relationship with leading CD-RW and DVD drive
manufacturers and system OEMs the Company ensures software support and
compatibility for its product offerings. The Company's product emphasis has been
to provide high-performance, high-quality, consumer-friendly software
applications that enable the usage of optical storage. The Company's strong
brand recognition and retail presence results from its extensive compatibility
and usability testing with its OEMs.
The Company's OEM customers include Compaq Computer Corporation, Hewlett
Packard Company, Sony Corporation, Philips Electronics, N.V., Gateway 2000,
Inc., Yamaha, Smart & Friendly, IBM Corporation, Matshusita/Panasonic, Sanyo,
Samsung Electronics Co., Ltd., Ricoh Corporation, and Mitsumi Electronics
Corporation. The Company's major distribution customers include Ingram Micro,
Inc., Tech Data Corporation, Computer 2000, Inc. Major retailers include
CompUSA, Inc. and Best Buy Co., Inc. Net revenues from the Software segment were
$47.1 million, $38.2 million and $17.4 million in fiscal 1999, 1998 and 1997,
respectively.
The development of compelling new multimedia applications that focus on
data storage, digital photography, music CD creation, the availability of
digital music formats such as MP3, Internet audio, and desktop video drive the
need for optical storage devices.
Peripheral Technology Solutions
PTS ICs were used in rigid and removable mass storage products. PTS
customers included mass storage OEMs such Samsung Electronics Co., Ltd., Western
Digital Corp. and Toshiba. The business lines that comprised the PTS segment
were sold in fiscal 1999. The net revenues from the PTS segment were $90.8
million, $249.8 million and $245.4 million in fiscal 1999, 1998 and 1997,
respectively.
COMPETITION
The markets for all of the Company's products within the Host I/O, RAID and
Software segments are highly competitive and are characterized by rapid
technological advances, frequent new product introductions, evolving industry
standards, and competitive price pressures. The Company's competitors continue
to introduce products with improved performance characteristics, and its
customers continue to develop new applications. As the Company has continued to
broaden its bandwidth management product offerings into the desktop and server
environments, it has experienced, and expects to experience in the future,
significantly increased competition both from existing competitors and from
additional companies that may enter its markets. Some of these companies have
greater technical, marketing, manufacturing, and financial resources than the
Company. The Company will have to continue to develop and market appropriate
products to remain competitive. The Company believes one of the factors in its
competitive success is its continued commitment of resources to research and
development in the future.
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Host I/O
In the Host I/O market, the Company competes with LSI Logic Corporation and
a number of other smaller host adapter manufacturers. The Company's competitive
strategy is to continue to leverage its technical leadership and concentrate on
the most technology-intensive solutions. To address the competitive nature of
the business the Company designs advanced features into its products, with
particular emphasis on data transfer rates, software-defined features, and
compatibility with major operating systems and most peripherals. The Company
believes the principal competitive factors in this market are performance, a
comprehensive array of solutions ranging from connectivity products for the
personal computing market to high-performance products for the enterprise-wide
computing and networked environments, product features, brand awareness,
financial resources, and technical and administrative support. The Company
believes that it presently competes favorably with respect to each of these
factors.
RAID
The markets for the Company's RAID controller products have been highly
competitive and are likely to remain competitive. Furthermore, there are several
companies with established reputations in the RAID controller market, which have
established relationships with several of the large system OEMs. The Company
believes that its principal competitors for RAID controllers are American
Megatrends, Inc. (AMI) and Mylex Corporation. The customers historically
accounting for the most significant volumes of the RAID market are also large
OEMs, any of which could develop their own controllers at any time rather than
purchase such products from the Company.
The Company believes the principle competitive factors in this market are
performance, software features, a comprehensive array of solutions ranging from
entry level servers and workstations to high-end enterprise-class servers, brand
awareness, financial resources and technical and administrative support. The
Company presently believes it competes favorably with respect to each of these
factors.
Software
The rapidly growing CD-RW market has attracted a number of software
competitors ranging from small operations to large consumer software companies.
The Company's believes its competitive strength is its technical expertise in
providing quality connectivity support coupled with its strong retail presence.
Its competitive strategy is to continue to focus on providing its OEM customers
with high-quality software solutions at competitive prices, while leveraging its
OEM presence to drive consumers to upgrade to its full-featured retail
applications. The Company believes the primary competitive factors in the OEM
market to be performance, pricing, and support, while at retail the factors
relate more to the compelling nature of its products and consumer awareness.
Peripheral Technology Solutions
In November 1998 and January 1999, the business lines which constituted the
PTS segment were sold to Texas Instruments, Inc. and STMicroelectronics, Inc.
respectively, and accordingly, the Company no longer participates in this
market.
BACKLOG
At March 31, 1999, the Company's backlog was approximately $56 million
compared with $61 million at March 31, 1998. Backlog levels may vary with
product availability, delivery lead times and customer order delays, changes or
cancellations. Accordingly, the Company's backlog as of any particular date may
not necessarily be an indicator of future operating results.
MANUFACTURING
The Company's Singapore manufacturing facility produces and tests host
adapters, RAID and software products. The Company continuously strives to lower
costs, shorten manufacturing cycle times, and improve
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service to customers. The Company's products make extensive use of standard
logic, printed circuit boards, and random access memory from several outside
suppliers in addition to the Company's custom designed integrated circuits.
All semiconductor wafers used in manufacturing the Company's products are
processed to its specifications by outside suppliers and internally tested by
the Company. The Company has secured capacity through agreements with Taiwan
Semiconductor Manufacturing Co., Ltd. ("TSMC") that ensure availability of a
portion of the Company's wafer needs for both current and future technologies
for which the Company has made advance payments.
PATENTS AND LICENSES
The Company believes that patents are of less significance in its industry
than such factors as innovative skills, technological expertise, and marketing
abilities. However, the Company encourages its engineers to document patentable
inventions and has applied for and continues to apply for patents both in the
United States and in foreign countries when it deems it to be advantageous to do
so. There can be no assurance that patents will be issued or that any patent
issued will provide significant protection or could be successfully defended.
As is the case with many companies in the electronics industry, it may be
desirable in the future for the Company to obtain technology licenses from other
companies. The Company has occasionally received notices of claimed infringement
of intellectual property rights and may receive additional such claims in the
future. The Company evaluates all such claims and, if necessary, will seek to
obtain appropriate licenses. There can be no assurance that any such licenses,
if required, will be available on acceptable terms.
RESEARCH AND DEVELOPMENT
The Company believes research and development is fundamental to its
success, especially in integrated circuit design, software development, and I/O
solutions that encompass emerging technologies. The development of proprietary
integrated circuits that support multiple architectures and peripheral devices
requires a combination of engineering disciplines. In addition, extensive
knowledge of computer and subsystem architectures, expertise in the design of
high-speed digital ICs, and knowledge of operating system software is essential.
The Company's research and development efforts continue to focus on the
development of complete solutions that include proprietary ICs, firmware, and
software that support multiple architectures and peripheral devices. These I/O
solutions facilitate high-speed data transfer rates, which are essential to the
enhanced performance of client/server networking environments, applications
requiring high-performance I/O, and the adoption of various peripheral devices.
The Company intends to continue to leverage its technical expertise and
product innovation capabilities to address I/O solutions across a broad range of
users and platforms. The Company continues to invest resources in all business
segments to develop its core products as well as next generation hardware and
software solutions.
Approximately 25% of the Company's employees are engaged in research and
development. In fiscal 1999, 1998, and 1997, the Company spent approximately
$146.2 million (21.1% of net revenues), $169.0 million (16.8% of net revenues)
and $128.5 million (13.8% of net revenues), respectively, for research and
development.
EMPLOYEES
At March 31, 1999, the Company had 2,123 employees. The Company's continued
success will depend in large measure on its ability to attract and retain highly
skilled employees who are in great demand.
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EXECUTIVE OFFICERS
The following sets forth certain information with regard to executive
officers of Adaptec as of June 23, 1999 except that ages are as of March 31,
1999:
Mr. Robert N. Stephens (age 53) has served as Chief Executive Officer since
April 1999 and President since October 1998. Prior to his promotion, Mr.
Stephens had served as Chief Operating Officer since November 1995. From 1993 to
1995, he founded and served as Chairman for Power I/O Corporation.
Mr. Andrew J. Brown (age 39) has served as Vice President of Finance and
Chief Financial Officer since August 1998. From November 1996 to February 1999,
he served as Vice President, and from May 1994 to February 1999, he served as
Corporate Controller and Principal Accounting Officer. From July 1988 to April
1994 he served in various financial roles within the Company.
Mr. Kenneth B. Arola (age 43) has served as Vice President since June 1998,
and as Corporate Controller and Principal Accounting Officer since February
1999. From July 1995 to June 1998 he served as Director of Corporate Finance.
From December 1990 to July 1995 he served in various financial roles within the
Company.
Mr. J. Peter Campagna (age 46) has served as Vice President and Treasurer
since August 1998. Prior to that, Mr. Campagna served as the Director of Tax
from October 1994 to July 1998.
Mr. Sam Kazarian (age 56) has served as Vice President of Operations since
May 1990.
Mr. Michael A. Ofstedahl (age 39) has served as Vice President of Worldwide
Sales, since February 1998. From January 1996 to February 1998, Mr. Ofstedahl
was Vice President of Sales for Chromatic Research, Inc. and from April 1993 to
January 1996, he was Vice President of Strategic Accounts at Adaptec.
Mr. Henry P. Massey (age 59) has served as Secretary since November 1989.
For more than the last five years, Mr. Massey has been a practicing lawyer and a
member of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, a law
firm and general outside counsel to the Company.
FOREIGN AND DOMESTIC OPERATIONS
See "Note 18. Segment Reporting and Foreign Operations" in Notes to
Consolidated Financial Statements on page F-28.
CERTAIN FACTORS BEARING ON FUTURE RESULTS
This report contains forward-looking statements that involve risks and
uncertainties. For example, Management's Discussion and Analysis of Results of
Operations and Financial Condition includes statements relating to expected
sales growth, gross margins anticipated operating expenditures and anticipated
capital expenditures. The statements contained in this document that are not
purely historical are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, including without limitation statements regarding the Company's
expectations, beliefs, intentions or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth in the
following risk factors and elsewhere in this document. In evaluating the
Company's business, prospective investors should consider carefully the
following factors in addition to the other information set forth in this
document.
Future Operating Results Subject to Fluctuation. In the second half of
fiscal 1998 and the first half of fiscal 1999, the Company's operating results
were adversely affected by shifts in corporate and retail buying patterns,
increased competition, emerging technologies, economic instability in Asia and
turbulence in the computer disk drive industry. In addition, fiscal 1999
operating results were significantly impacted by unusual
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charges and credits including write-offs of acquired in-process technology,
costs related to the termination of the Symbios acquisition, restructuring
charges, impairment of assets and terminations of senior executives and the gain
on the sale of PTS and the gain on the sale of land. 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 I/O products and has set its operating
budget based in part on expectations of future revenues. Because much of the
Company's operating budget is relatively fixed in the short term, if revenues do
not meet the Company's expectations then the Company's operating income and net
income may be disproportionately affected. Operating results in any particular
quarter, which do not meet the expectations of securities analysts, are likely
to cause volatility in the price of the Company's common stock.
Certain Risks Associated with the High-Performance Computer Market. The
Company's host 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 Server Market. The Company's RAID
products are used primarily in workstations and enterprise servers. The use of
RAID technology in this market is an industry standard, however, there can be no
assurance that another technology will not replace RAID in the disk array
controller marketplace or that there will be continuing widespread acceptance or
growth of the use of RAID products in general, or the Company's RAID controllers
in particular, in that market. Should demand for such systems slow or should the
Company's products not be widely accepted, the Company's business or operating
results could be materially adversely affected by a resulting decline for the
Company's products.
Certain Risks Associated with the Software Market. The Company's Software
products are used primarily in high performance computer systems to enable the
control of SCSI peripherals and/or enable CD recording/writing. The Company's
sales are primarily to major OEM's and distributors, thus the Company's business
depends on general economic and business conditions and the growth of the CD
recording and high-performance computer markets. Should demand for the Company's
products slow and/or the CD recording market not develop as quickly as expected,
the Company's business or operating results could be materially adversely
affected by a resulting decline in demand for the Company's products.
Reliance on Industry Standards, Technological Change, Dependence on New
Products. The computer industry is characterized by various standards and
protocols that evolve with time. The Company's current products are designed to
conform to certain industry standards and protocols such as SCSI, UltraSCSI,
Ultra2 SCSI, PCI, RAID, and Fast Ethernet. In particular, a majority of the
Company's revenues are currently derived from products based on the SCSI
standard. If consumer acceptance of these standards was to decline, or if they
were replaced with new standards, and if the Company did not anticipate these
changes and develop new products, the Company's business or operating results
could be materially adversely affected. For
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example, the Company believes that changes in consumers' perceptions of the
relative merits of SCSI based products and products incorporating a competing
standard, Ultra-DMA, have materially adversely affected the sales of the
Company's products and may 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
materially adversely impacted if its customers shifted their demand to a
significant extent away from board-based I/O solutions to application-specific
ICs.
Competition. The markets for all of the Company's products are intensely
competitive and are characterized by rapid technological advances, frequent new
product introductions, evolving industry standards, and price erosion. In the
host adapter market, the Company competes with a number of host adapter
manufacturers, including LSI Logic Corporation and other small host adapter
manufacturers. The Company's principal competitors for RAID solutions in the
server market are American Megatrends, Inc., Mylex Corporation and captive
suppliers. The Company's principal competitors in the Software segment range
from small operations to large consumer software companies. As the Company has
continued to broaden its bandwidth management product offerings into the
desktop, server, and networking environments, it has experienced, and expects to
experience in the future, significantly increased competition both from existing
competitors and from additional companies that may enter its markets. Some of
these companies have greater technical, marketing, manufacturing, and financial
resources than the Company. There can be no assurance that the Company will be
able to make timely introduction of new leading-edge solutions in response to
competitive threats, that the Company will be able to compete successfully in
the future against existing or potential competitors or that the Company's
business or operating results will not be materially adversely affected by price
competition.
Certain Risks Associated With Acquisitions. As part of its overall
strategy, the Company may continue to acquire or invest in complementary
companies, products, or technologies and to enter into joint ventures and
strategic alliances with other companies. Risks commonly encountered in such
transactions include the difficulty of assimilating the operations and personnel
of the combined companies, the potential disruption of the Company's ongoing
business, the inability to retain key technical and managerial personnel, the
inability of management to maximize the financial and strategic position of the
Company through the successful integration of acquired businesses, additional
expenses associated with amortization of acquired intangible assets, dilution of
existing equity holders, the maintenance of uniform standards, controls,
procedures, and policies, and the impairment of relationships with employees and
customers as a result of any integration of new personnel. There can be no
assurance that the Company will be successful in overcoming these risks or any
other problems encountered in connection with such business combinations,
investments, or joint ventures, or that such transactions will not materially
adversely affect the Company's business, financial condition, or operating
results.
Certain Risks Associated with Restructuring. During fiscal 1999, the
Company decided to exit certain activities and undertook certain restructuring
actions. In connection with these actions, the Company effected a workforce
reduction of 975 people. There is no assurance that these actions will be
successful or have a positive impact on results of operations. Furthermore,
should such actions have a negative impact on the
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Company's ability to design and develop new products, market new or existing
products, or produce and/or purchase products at competitive prices, these
actions could have a material adverse impact on the Company's results of
operations.
Year 2000 Compliance Issues. The inability of computers, software and other
equipment utilizing microprocessors to recognize and properly process data
fields containing a 2-digit year is commonly referred to as the Year 2000
Compliance issue. As the year 2000 approaches, such systems may be unable to
accurately process certain date-based information.
During fiscal 1998, the Company completed implementation of Enterprise
Resource Planning ("ERP") software to replace the Company's existing core
business applications and accordingly does not anticipate any internal Year 2000
issues. Additionally, the Company has analyzed the remainder of its business not
addressed by the ERP software and has, through its standard product development
cycle, ensured its products are Year 2000 Compliant through procedures, tests
and methodologies that have been in effect since fiscal 1997. However, if
internal systems do not properly recognize and process date information for
years into and beyond the turn of the century, there could be a material adverse
impact on other Company's operations. A significant disruption of the Company's
financial or business systems would materially adversely impact the Company's
ability to process orders, manage production and issue and pay invoices. The
Company's inability to perform these functions for a long period of time could
result in a material adverse impact on the Company's result of operations and
financial condition. Failure of these systems could cause a disruption in the
manufacturing process and could result in a delay in completion and shipment of
product.
The Company has communicated with others with whom it does significant
business, including major distributors, suppliers, customer, vendors and
financial service organizations, to assess their Year 2000 Compliance readiness
with respect to both their operations and the products and services they supply.
The analysis will continue into fiscal 2000, with corrective action taken
commensurate with the criticality of affected products and services. However, if
companies with whom the Company does significant business fail because of a Year
2000 malfunction, there could be a material adverse impact on the Company's
operating results. The Company believes it is currently being impacted by its
customers' redirection of corporate management information system budgets
towards resolving Year 2000 Compliance issues. Continuation of this trend could
lower the demand for the Company's products if corporate buyers defer purchases
of high-end business PCs.
The Company has developed a contingency plan for some of its applications
and systems to address any of the consequences of internal or external failures
to be Year 2000 Compliant. It is also in the process of creating a contingency
plan for internal and external sources, including key suppliers, which it
expects to complete in the first half of fiscal 2000. The potential
ramifications of a year 2000 type failure are potentially far-reaching and
largely unknown. The Company cannot assure you that a contingency plan in effect
at the time of a system failure will adequately address the immediate or
long-term effects of a failure, or that such a failure would not have a material
adverse impact on the Company's operations or financial results in spite of
prudent planning.
Dependence on Wafer Suppliers and Other Subcontractors. All of the finished
silicon wafers used for the Company's products are currently manufactured to the
Company's specifications by independent foundries. The Company currently
purchases all of its wafers through a supply agreement with TSMC. The
manufacture of semiconductor devices is sensitive to a wide variety of factors,
including the availability of raw materials, the level of contaminants in the
manufacturing environment, impurities in the materials used, and the performance
of personnel and equipment. While the quality, yield, and timeliness of wafer
deliveries to date have been acceptable, there can be no assurance that
manufacturing yield problems will not occur in the future. In addition, although
the Company has various supply agreements with its supplier, a shortage of raw
materials or production capacity could lead the Company's wafer supplier to
allocate available capacity to customers other than the Company, or to internal
uses. Any prolonged inability to obtain wafers with competitive performance and
cost attributes, adequate yields, or timely deliveries from its foundries would
delay production and product
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shipments and could have a material adverse effect on the Company's business or
operating results. The Company expects that it will in the future seek to
convert its fabrication process arrangements to smaller wafer geometries and to
more advanced process technologies. Such conversions entail inherent
technological risks that can affect yields and delivery times. If for any reason
the Company's current supplier was unable or unwilling to satisfy the Company's
wafer needs, the Company would be required to identify and qualify additional
foundries. There can be no assurance that any additional wafer foundries would
become available, that such foundries would be successfully qualified, or that
such foundries would be able to satisfy the Company's requirements on a timely
basis.
In order to secure wafer capacity, the Company from time to time has
entered into "take or pay" contracts that committed the Company to purchase
specified wafer quantities over extended periods, and has made prepayments to
foundries. In the future, the Company may enter into similar transactions or
other transactions, including, without limitation, non-refundable deposits with
or loans to foundries, or equity investments in, joint ventures with or other
partnership relationships with foundries. Any such transaction could require the
Company to seek additional equity or debt financing to fund such activities.
There can be no assurance that the Company will be able to obtain any required
financing on terms acceptable to the Company.
Additionally, the Company relies on subcontractors for the assembly and
packaging of the ICs included in its products. The Company has no long-term
agreements with its assembly and packaging subcontractors. In addition, the
Company is increasingly using board subcontractors to better balance production
runs and capacity. There can be no assurance that such subcontractors will
continue to be able and willing to meet the Company's requirements for such
components or services. Any significant disruption in supplies from, or
degradation in the quality of components or services supplied by, such
subcontractors could delay shipments and result in the loss of customers or
revenues or otherwise have a material adverse effect on the Company's business
or operating results.
Certain Issues Related to Distributors. The Company's distributors
generally offer a diverse array of products from several different
manufacturers. Accordingly, there is a risk that these distributors may give
higher priority to selling products from other suppliers, thus reducing their
efforts to sell the Company's products. A reduction in sales efforts by the
Company's current distributors could have a material adverse effect on its
business or operating results. The Company's distributors may on occasion build
inventories in anticipation of substantial growth in sales, and if such growth
does not occur as rapidly as anticipated, distributors may decrease the amount
of product ordered from the Company in subsequent quarters. In addition, there
has recently been an industry trend towards the elimination of price protection
and distributor incentive programs and channel assembly. These trends could
result in a change in distributor business habits, with distributors possibly
deciding to decrease the amount of product held so as to reduce inventory levels
and this in turn could reduce the Company's revenues in any given quarter and
give rise to fluctuation in the Company's operating results. In addition, the
Company may from time to time take actions to reduce inventory levels at
distributors. These actions could reduce the Company's revenues in any given
quarter and give rise to fluctuations in the Company's operating results.
Dependence on Key Personnel. The Company's future success depends in large
part on the continued service of its key technical, marketing, and management
personnel, and on its ability to continue to attract and retain qualified
employees, particularly those highly skilled design, process, and test engineers
involved in the design enhancements and manufacture of existing products and the
development of new products and processes. The competition for such personnel is
intense, and the loss of key employees could have a material adverse effect on
the Company's business or operating results.
Certain Risks Associated with International Operations. The Company's
manufacturing facility and various subcontractors it utilizes from time to time
are located primarily in Asia. Additionally, the Company has various sales
offices and customers throughout Europe, Japan, and other countries. The
Company's international operations and sales are subject to political and
economic risks, including political instability, currency controls, exchange
rate fluctuations, and changes in import/export regulations, tariffs, and
freight rates. The Company may use forward exchange contracts to manage any
exposure associated with certain
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foreign currency denominated commitments. In addition, because the Company's
wafer supplier, TSMC, is located in Taiwan, the Company is subject to the risk
of political instability in Taiwan, including the potential for conflict between
Taiwan and the People's Republic of China.
Intellectual Property Protection and Disputes. The Company has historically
devoted significant resources to research and development and believes that the
intellectual property derived from such research and development is a valuable
asset that has been and will continue to be important to the success of the
Company's business. Although the Company actively maintains and defends its
intellectual property rights, no assurance can be given that the steps taken by
the Company will be adequate to protect its proprietary rights. In addition, the
laws of certain territories in which the Company's products are or may be
developed, manufactured, or sold, including Asia and Europe, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. The Company has from time to time discovered
counterfeit copies of its products being manufactured or sold by others.
Although the Company maintains an active program to detect and deter the
counterfeiting of its products, should counterfeit products become available in
the market to any significant degree it could materially adversely affect the
business or operating results of the Company.
From time to time, third parties may assert exclusive patent, copyright,
and other intellectual property rights to technologies that are important to the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertions by third
parties will not result in costly litigation or that the Company would prevail
in such litigation or be able to license any valid and infringed patents from
third parties on commercially reasonable terms. Litigation, regardless of its
outcome, could result in substantial cost and diversion of resources of the
Company. Any infringement claim or other litigation against or by the Company
could materially adversely affect the Company's business or operating results.
Need for Interoperability. The Company's products must be designed to
interoperate effectively with a variety of hardware and software products
supplied by other manufacturers, including microprocessors, peripherals, and
operating system software. The Company depends on significant cooperation with
these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading system, peripheral, and
microprocessor suppliers, there can be no assurance that such suppliers will not
from time to time make it more difficult for the Company to design its products
for successful interoperability or decide to compete with the Company.
Natural Disasters. The Company's corporate headquarters are located near
major earthquake faults. Any damage to the Company's information systems caused
as a result of an earthquake, fire or any other natural disasters could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Volatility of Stock Price. The stock market in general, and the market for
shares of technology companies in particular, have from time to time experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of the affected companies. In addition, factors such as
technological innovations or new product introductions by the Company, its
competitors, or its customers may have a significant impact on the market price
of the Company's common stock. Furthermore, quarter-to-quarter fluctuations in
the Company's results of operations caused by changes in customer demand,
changes in the microcomputer and peripherals markets, or other factors, may have
a significant impact on the market price of the Company's common stock. In
addition, the Company's stock price may be affected by general market conditions
and international macroeconomic factors unrelated to the Company's performance
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.
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ITEM 2. PROPERTIES
The Company owns seven buildings (approximately 479,000 square feet) in
California, which are primarily used by the Company for corporate offices,
research, manufacturing, marketing, and sales, and one building (approximately
200,000 square feet) in Longmont, Colorado, for research, technical support,
marketing, sales, and administrative support. The Company is actively pursuing
the sale of the Longmont facility and has classified it in assets held for sale
(current assets) at March 31, 1999.
The Company leases seven buildings (approximately 164,000 square feet) in
California, of which two are used as outside warehouses, four are sublet or
available for sublease and one is occupied by the Company. Other facilities
include Redmond, Washington (3,000 square feet); Hudson, Wisconsin (9,000 square
feet); and Nashua, New Hampshire (23,000 square feet) to support technical
design efforts and sales.
Adaptec Manufacturing Singapore is located in one owned facility
(approximately 172,000 square feet) and is used by the Company for research,
manufacturing, sales and warehousing. The Company also leases four sales offices
in the United States, and one sales office each in Brussels, Belgium; Munich,
Germany; Bretonneux, France; London, England; Lindfield, Australia; Singapore;
Seoul, Korea; Taipei, Taiwan; Hong Kong; and Tokyo, Japan. The Tokyo office also
provides technical design efforts and technical support with the Brussels office
providing technical support to Europe. The Company believes its existing
facilities and equipment are well maintained and in good operating condition and
believes its manufacturing facilities, together with the use of independent
manufacturers where required or desirable, will be sufficient to meet its
anticipated manufacturing needs through fiscal 2000.
The Company also acquired a parcel of land in Fremont California, for $12.9
million in fiscal 1996. The Company is actively pursuing the sale of the Fremont
land and has classified it in assets held for sale (current assets) at March 31,
1999. Additionally, the Company owned three parcels of land in Lake Forest,
California. One parcel was sold in March 1999 and the remaining two parcels were
classified in assets held for sale (current assets) at March 31, 1999 and were
subsequently sold in April 1999. The Company's future facilities requirements
will depend upon the Company's business, and the Company believes additional
space, if required, may be obtained on reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
A class action lawsuit is pending in the United States District Court for
the Northern District of California against the Company and certain of its
officers and directors. The action alleges that the Company made false and
misleading statements at various times during the period between April 1997 and
January 1998 in violation of the federal securities laws. The complaint does not
set forth purported damages. In addition, a derivative action is pending in the
Superior Court of the State of California against the Company and certain of its
current and former officers and directors alleging that the individual
defendants improperly profited from transactions in the Company's stock during
the same time period referenced by the class action lawsuit. The Company
believes the lawsuit and derivative action are without merit and intends to
defend itself vigorously.
The IRS is currently auditing the Company's 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.
From time to time, the Company is subject to certain litigation, claims and
assessments in the normal course of business. The Company believes that any
liability with respect to such routine litigation, individually or in the
aggregate, is not likely to be material to the Company's financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market under
the Nasdaq Stock Market symbol ADPT. The following table sets forth the range of
the high and low prices by quarter as reported by Nasdaq National Market System.
1999 1998
------------------------ ------------------------
HIGH LOW HIGH LOW
---------- ---------- ---------- ----------
First quarter...................................... $24 1/8 $12 1/2 $40 5/8 $30 1/8
Second quarter..................................... 15 8 3/8 51 3/8 38
Third quarter...................................... 19 7/8 7 7/8 54 1/4 33 7/8
Fourth quarter..................................... 26 3/4 17 7/16 39 1/2 19 7/16
At March 31, 1999, there were 986 holders of record of the Company's common
stock. The Company has not paid cash dividends on its common stock and does not
currently plan to pay cash dividends to its stockholders in the near future.
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ITEM 6. SELECTED FINANCIAL DATA
RESULTS OF OPERATIONS DATA FOR THE YEARS ENDED MARCH 31:
Note that certain items below previously reported in specific financial
statement captions have been reclassified to conform with current presentation.
1999 1998 1997 1996 1995
---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenues.................... $ 692,441 $1,007,293 $ 933,868 $659,347 $466,194
Cost of revenues................ 284,503 391,100 388,969 275,939 205,596
Gross profit.................... 407,938 616,193 544,899 383,408 260,598
Operating expenses:
Research and development...... 146,172 169,022 128,530 87,628 60,848
Sales, marketing, and
administrative............. 180,986 215,624 162,979 117,332 81,966
Write-off of acquired
in-process technology...... 45,482 -- 90,457 52,313 --
Restructuring and other
charges.................... 68,788 6,715 1,705 -- --
Total operating expenses........ 441,428 391,361 383,671 257,273 142,814
Gain on sale of PTS............. 31,476 -- -- -- --
Income (loss) before cumulative
effect of a change in
accounting principle.......... (13,293) 181,877 107,561 103,375 93,402
Cumulative effect of a change in
accounting principle, net of
tax benefit................... -- (9,000) -- -- --
Net income (loss)............... (13,293) 172,877 107,561 103,375 93,402
NET INCOME (LOSS) PER SHARE DATA FOR THE YEARS ENDED MARCH 31:
Basic
Income (loss) before
cumulative effect of a
change in accounting
principle................ $ (0.12) $ 1.61 $ 0.99 $ 0.99 $ 0.90
Cumulative effect of a
change in accounting
principle................ -- (0.08) -- -- --
---------- ---------- ---------- -------- --------
Net income (loss).......... (0.12) 1.53 0.99 0.99 0.90
Diluted
Income (loss) before
cumulative effect of a
change in accounting
principle................ $ (0.12) $ 1.54 $ 0.93 $ 0.95 $ 0.87
Cumulative effect of a
change in accounting
principle................ -- (0.08) -- -- --
---------- ---------- ---------- -------- --------
Net income (loss).......... (0.12) 1.46 0.93 0.95 0.87
Weighted average shares
outstanding
Basic...................... 110,127 113,172 108,456 104,136 103,371
Diluted.................... 110,127 118,432 115,596 109,073 106,942
Balance Sheet Data as of March
31:
Working capital............ $ 857,651 $ 850,610 $ 693,629 $334,989 $294,058
Total assets............... 1,173,068 1,275,229 1,043,494 646,486 435,708
Long-term debt, net of
current portion.......... 230,000 230,000 230,850 4,250 7,650
Stockholders' equity....... 790,702 904,745 688,325 511,945 371,644
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NORMALIZED RESULTS OF OPERATIONS DATA FOR THE YEARS ENDED MARCH 31:
The following normalized results of operations of the Company exclude the
write-off of acquired in-process technology, restructuring and other charges,
gain on the sale of Peripheral Technology Solutions ("PTS"), revenue and
expenses related to the PTS segment, gain on the sale of land and the cumulative
effect of a change in accounting principle. The normalized results of operations
presented are not necessarily indicative of future operating results.
Additionally note that certain items previously reported in specific financial
statement captions have been reclassified to conform with current presentation.
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net revenues........................ $601,639 $757,507 $688,488 $530,885 $366,138
Cost of revenues.................... 219,919 255,999 251,762 198,298 144,938
Gross profit........................ 381,720 501,508 436,726 332,587 221,200
Operating expenses:
Research and development.......... 115,758 123,093 90,550 68,356 45,125
Sales, marketing, and
administrative................. 167,545 202,306 149,438 109,928 75,417
Total operating expenses............ 283,303 325,399 239,988 178,284 120,542
Net income.......................... 86,935 147,455 155,469 124,618 80,558
NORMALIZED NET INCOME PER SHARE DATA FOR THE YEARS ENDED MARCH 31:
Net income per share:
Basic............................. $ 0.79 $ 1.30 $ 1.43 $ 1.20 $ 0.78
Diluted........................... 0.77 1.25 1.35 1.14 0.75
Weighted average shares outstanding:
Basic............................. 110,127 113,172 108,456 104,136 103,371
Diluted........................... 112,775 118,432 115,596 109,073 106,942
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the items in the Consolidated Statements of
Operations as a percentage of net revenues:
YEARS ENDED MARCH 31, 1999 1998 1997
--------------------- ---- ---- ----
Net revenues................................................ 100% 100% 100%
Cost of revenues............................................ 41 39 42
--- --- ---
Gross margin.............................................. 59 61 58
--- --- ---
Operating expenses:
Research and development.................................. 21 17 14
Sales, marketing and administrative....................... 26 21 17
Write-off of acquired in-process technology............... 7 -- 10
Restructuring and other charges........................... 10 1 --
--- --- ---
Total operating expenses.......................... 64 39 41
--- --- ---
Income (loss) from operations............................... (5) 22 17
--- --- ---
Interest and other income................................... 5 3 1
Interest expense............................................ (2) (1) --
Gain on sale of PTS......................................... 5 -- --
--- --- ---
Income from operations before provision for income taxes and
cumulative effect of a change in accounting principle..... 3 24 18
Provision for income taxes.................................. 5 6 6
--- --- ---
Income (loss) before cumulative effect of a change in
accounting principle...................................... (2) 18 12
Cumulative effect of a change in accounting principle, net
of tax benefit............................................ -- (1) --
--- --- ---
Net income (loss)........................................... (2)% 17% 12%
=== === ===
NORMALIZED RESULTS OF OPERATIONS
The following unaudited, normalized table sets forth the items in the
Consolidated Statements of Operations on a normalized basis as a percentage of
net revenues and excludes the write-off of acquired in-process technology,
restructuring and other charges, gain on the sale of Peripheral Technology
Solutions ("PTS"), revenue and expenses related to the PTS segment, gain on the
sale of land and the cumulative effect of a change in accounting principle. The
information presented below is not necessarily indicative of future operating
results.
YEARS ENDED MARCH 31, 1999 1998 1997
--------------------- ---- ---- ----
Net revenues................................................ 100% 100% 100%
Cost of revenues............................................ 37 34 37
--- --- ---
Gross margin.............................................. 63 66 63
--- --- ---
Operating expenses:
Research and development.................................. 19 16 13
Sales, marketing and administrative....................... 28 27 22
--- --- ---
Total operating expenses.......................... 47 43 35
--- --- ---
Income from operations...................................... 16 23 28
--- --- ---
Interest income............................................. 6 4 2
Interest expense............................................ (2) (2) --
--- --- ---
Income before provision for income taxes.................... 20 25 30
Provision for income taxes.................................. 6 6 7
--- --- ---
Net income.................................................. 14% 19% 23%
=== === ===
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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 has addressed the comments in its response to the SEC dated June 16,
1999 and has incorporated such comments into its disclosures in this fiscal 1999
Annual Report on Form 10-K 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.
RESULTS OF OPERATIONS
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." The Company evaluated its product segments in accordance
with SFAS 131 and concluded that its reportable segments are Host I/O
(Input/Output), RAID (Redundant Array of Independent Disks), Software and
Peripheral Technology Solutions ("PTS").
The Host I/O segment designs, develops, manufactures and markets host bus
adapter ("HBA") boards and chips that allow computers to transfer information to
and from peripherals, such as hard disk drives, scanners, CD-ROMs, CD-Rs,
CD-RWs, DVD-ROMs, and Zip and Jaz drives among many other devices. The Company's
HBAs are based on Small Computer System Interface ("SCSI") technology and are
utilized in servers, high-end workstations and desktops where high performance
I/O is a vital component of overall system performance.
The RAID segment designs, develops, manufactures and markets bus-based and
microprocessor-based RAID solutions. These products are utilized from entry
level workstations to enterprise-class servers. The Company's RAID adapters
provide performance and functionality, incorporate the latest technical
innovations, and offer superior software functionality to make RAID fast, simple
and reliable.
The Software segment designs, develops and markets optical media software
for CD-R and CD-RW. This segment includes video editing products and software
utility products that simplify connecting a SCSI host adapter and peripherals to
a microcomputer system. The Company's CD-R and CD-RW products are used for data
storage to optical media, including audio, video and still photos, and provide
users storage alternatives to traditional disk and removable media options.
Additionally, the Company's CD-RW products allow users to transfer downloaded
music from the Internet to CDs for private use. The Company's CD-R software
offerings are available as standalone products, and also ship built-in or
"bundled" with most CD-R drives in the desktop market.
The business lines that comprised the PTS segment were sold in November
1998 and January 1999 to Texas Instruments, Inc. ("TI") and STMicroelectronics,
Inc. ("ST"), respectively. This segment designed, developed, manufactured and
marketed proprietary integrated circuits ("ICs") for use in mass storage devices
and other peripherals.
NET REVENUES. The Company's fiscal 1999 net revenues decreased 31% from the
prior year to $692.4 million. Net revenues for the year were comprised of $520.1
million from the Host I/O segment, down 26% from the prior year, $32.2 million
from the RAID segment, up 122% from the prior year, $47.1 million from the
Software segment, up 23% from the prior year, and $90.8 million from the
recently sold PTS segment, down 64% from the prior year. Other net revenues for
fiscal 1999 of $2.2 million represent revenue from recently divested businesses,
including external storage, satellite networking and fibre channel. Although
these businesses were divested, the Company continues to hold minority
investments in Chaparral Technologies, Inc. ("Chaparral"), BroadLogic Inc.
("BroadLogic") and Jaycor Networks, Inc. ("JNI"), the companies which acquired
these businesses.
Fiscal 1999 net revenues from the Host I/O segment declined as a result of
Ultra-DMA penetration in the desktop market. The Company expects that Host I/O
net revenues from the desktop market will continue to be adversely impacted by
Ultra-DMA in the future. Ultra-DMA has not had a material impact on revenue
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derived from the workstation and server markets, although there can be no
assurance that Ultra-DMA will not have a material adverse impact in the future.
The decline was partially offset by the demand for high performance I/O fueled
by the growth in on-line applications like electronic commerce, on-line
publishing, and proliferation of the Internet and corporate intranets. Net
revenues from the RAID segment increased primarily as a result of the
introduction of the Company's high-end RAID product. Net revenues from the
Software segment increased as a result of continued increased demand for CD-R
and CD-RW drives. Net revenues from the PTS segment for fiscal 1999 represent
approximately nine months of revenue versus twelve months in fiscal 1998, as the
products that comprised the PTS segment were sold to TI and ST in November 1998
and January 1999, respectively. Proportionately, net revenues from the PTS
segment still declined due to continued weakness in the disk drive industry and
Asian markets.
The Company's fiscal 1998 net revenues increased 8% from the prior year to
$1,007.3 million. Net revenues for the year were comprised of $701.1 million
from the Host I/O segment, up 5% from the prior year, $14.5 million from the
RAID segment, up 341% from the prior year, $38.2 million from the Software
segment, up 119% from the prior year and $249.8 million from the PTS segment, up
2% from the prior year. Other net revenues for fiscal 1998 of $3.7 million
included the external storage, satellite networking and fibre channel
businesses. Net revenues from the Host I/O segment increased as a result of
growth in the high-performance microcomputer markets, demand for SCSI in the
client/server environment, the ongoing deployment of sophisticated operating
systems and an increase in the use of diverse peripherals such as high capacity
hard drives, scanners and optical drives, offset by a trend toward lower-priced
PCs for mainstream consumer desktop applications as well as enhancements to the
Ultra-DMA standard, which is used predominantly in the desktop market. Net
revenues for the RAID segment increased as a result of growth in market
acceptance of the Company's RAID products. Net revenues from the Software
segment increased due to increased demand for CD-R and CD-RW drives. Net
revenues from the Company's PTS segment were adversely impacted by the turbulent
disk drive market, as well as instability in the Asian markets, which resulted
in a less than expected increase in PTS net revenues.
GROSS MARGIN. The Company's fiscal 1999 gross margin was 59% compared to
61% in fiscal 1998 and 58% in fiscal 1997. The fiscal 1999 gross margin
decreased from fiscal 1998 primarily due to underutilized manufacturing capacity
resulting from the decline in Host I/O net revenues and the sale of the PTS
segment. Additionally, the Company's fiscal 1999 gross margin was adversely
impacted by the increase in Host I/O sales to OEMs as a percentage of total Host
I/O sales, due to the Company's focus on reducing inventory in the channel. The
Company's gross margins increased in fiscal 1998 due to greater shipments of the
Company's higher margin Host I/O products and the Company's continued focus on
component cost reductions and manufacturing efficiencies.
RESEARCH AND DEVELOPMENT EXPENSES. The Company's fiscal 1999 research and
development expenses decreased 14% from the prior year to $146.2 million. The
decrease in total dollars was primarily attributable to company-wide cost
reduction programs which included reductions in workforce and the curtailment of
costs related to the divesting of certain unprofitable business activities. The
Company expects to realize the full benefits of these reductions in fiscal 2000.
Fiscal 1999 research and development expenses as a percentage of net revenues
were 21% compared to 17% in fiscal 1998. The increase as a percentage of net
revenues was directly related to the decline in fiscal 1999 net revenues and the
cost reductions expected from the restructuring and divesting activities were
not fully realized until the end of the fiscal year.
The Company's fiscal 1998 research and development expenses increased 32%
to $169.0 million from $128.5 million in fiscal 1997. The increase in total
dollars was primarily a result of increased staffing levels to support the
Company's investment in new hardware and software solutions, including RAID,
CD-R software solutions, external storage and fibre channel. Fiscal 1998
research and development expenses as a percentage of net revenues were 17%
compared to 14% in fiscal 1997. The increase as a percentage of net revenues was
primarily due to lower than expected revenues.
SALES, MARKETING, AND ADMINISTRATIVE EXPENSES. The Company's fiscal 1999
sales, marketing and administrative expenses decreased 16% from the prior year
to $181.0 million. The decrease in total dollars is primarily attributable to
company-wide cost reduction programs, specifically reductions in workforce. The
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Company expects to realize the full benefits of these reductions in fiscal 2000.
Fiscal 1999 sales, marketing and administrative expenses as a percentage of net
revenues are 26% compared to 21% in fiscal 1998. The increase as a percentage of
net revenues is primarily related to the decline in fiscal 1999 net revenues,
and the cost reductions expected from the restructuring and divesting activities
were not fully realized until the end of the fiscal year.
The Company's fiscal 1998 sales, marketing and administrative expenses
increased 32% to $215.6 million from $163.0 million in fiscal 1997. The increase
in total dollars was a result of increased staffing levels required to support
the Company's worldwide growth. In addition, the Company increased advertising
and promotional programs aimed at leveraging the Company's brand image and
generating demand for its products. Fiscal 1998 sales, marketing and
administrative expenses as a percentage of net revenues were 21% compared to 17%
in fiscal 1997. The increase as a percentage of net revenues was primarily due
to lower than expected net revenues.
WRITE-OFF OF ACQUIRED IN-PROCESS TECHNOLOGY. During fiscal 1999 and 1997,
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 and $90.5 million, respectively.
In the first quarter of fiscal 1999, the Company purchased Ridge
Technologies, Inc. ("Ridge") and acquired read channel and preamplifier ASIC
technologies ("ASIC technologies") from Analog Devices, Inc. ("ADI"), which
resulted in a first quarter write-off of acquired in-process technology charge
of $39.4 million and $26.4 million, respectively. The unamortized goodwill
associated with Ridge was written-off in the second quarter of fiscal 1999, in
connection with the Company's restructuring activities and decision to exit the
storage subsystems business. The write-off was included in "Restructuring and
other charges" in the Consolidated Statements of Operations. 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 in the first quarter
of fiscal 1999 to $6.1 million. Amortization of intangibles increased
approximately $1.7 million in each of the first three quarters of fiscal 1999
from $7.5 million to $12.6 million for the year ended March 31, 1999. In the
fourth quarter of fiscal 1999, the Company relieved the unamortized goodwill of
$20.0 million associated with ASIC technologies purchased from ADI in connection
with the sale of the Company's mainstream removable PTS business line. The
Company reduced the gain originally reported in the Company's Form 8-K dated
January 15, 1999 by $14.0 million from $45.5 million previously reported to
$31.5 million for the fourth quarter and year ended March 31, 1999. Basic and
diluted net income (loss) per share for the four quarters of fiscal 1999 were
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)
Second quarter:
Basic.................................................... $(0.22) $(0.23)
Diluted.................................................. $(0.22) $(0.23)
Third quarter:
Basic.................................................... $ 0.25 $ 0.23
Diluted.................................................. $ 0.24 $ 0.23
Fourth quarter:
Basic.................................................... $ 0.58 $ 0.43
Diluted.................................................. $ 0.55 $ 0.41
There was no impact on fiscal 1999 year-to-date basic or diluted net loss
per share. Additionally, there will be no impact on future results of operations
as the goodwill associated with ASIC technologies purchased from ADI was
relieved in the fourth quarter of fiscal 1999.
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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 acquisitions, 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 revised its results of
operations for fiscal 1999 and will amend its Reports on Form 10-Q for the first
three quarters of fiscal 1999 previously filed with the SEC.
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.
In fiscal 1997, the Company acquired complementary businesses and
technologies consisting of Western Digital's Connectivity Solutions Group
("WD"), CD-R software technology from Corel, Inc. ("Corel"), Data Kinesis, Inc.
("DKI"), Sigmax Technology, Inc. ("Sigmax"), Toast CD-R technology ("Toast"),
and certain assets from Skipstone, Inc. ("Skipstone") for an aggregate purchase
price of $124.3 million, resulting in a write-off of acquired in-process
technology charge of $90.5 million. Unamortized goodwill associated with WD was
relieved in fiscal 1999 in connection with the sale of the high-end PTS business
line to TI, for which no gain was derived. Goodwill associated with Corel was
minimal and expensed in fiscal 1997. Unamortized goodwill associated with Sigmax
and Skipstone was written-off in fiscal 1998 and is included in "Restructuring
and other charges" in the Consolidated Statements of Operations. The acquired
in-process technology associated with DKI was completed subsequent to the
acquisition and is now incorporated in the Company's products which began
shipping in fiscal 1999. The acquired in-process technology associated with
Toast related to further developments of the already existing Toast product.
Such developments were later incorporated into the Company's products. Goodwill
associated with DKI and Toast will be fully amortized during fiscal 2000.
Additionally, in fiscal 1997, the Company acquired Cogent Data
Technologies, Inc. ("Cogent") under the pooling-of-interests method of
accounting. Cogent's historical operations, net assets, and cash flows were not
material to the Company's consolidated financial statements and, therefore, have
not been reflected in the Company's consolidated financial results prior to the
acquisition. Beginning at the date of acquisition, the book value of the
acquired assets and assumed liabilities as well as the results of Cogent's
operations and cash flows, all of which are not material to the Company, have
been combined with those of the Company.
RESTRUCTURING AND OTHER CHARGES. During fiscal 1999, the Company incurred
$39.9 million in restructuring charges, $21.5 million in acquisition related
charges and $7.4 million in asset impairments and other charges. During fiscal
1998, the Company incurred $6.7 million in asset impairments and other charges.
During fiscal 1997, the Company incurred $1.7 million in acquisition related
charges.
During fiscal 1999, the Company completed a reduction in workforce of
approximately 975 employees and divested certain unprofitable business
activities (including storage subsystems, fibre channel, external storage,
satellite networking, and high-end PTS) to strategically refocus the Company and
bring operating expenses in line with net revenues. The Company continues to
hold a minority interest in the fibre channel, external storage and satellite
networking technologies through investments in JNI, Chaparral and BroadLogic,
respectively. The Company incurred approximately $8.8 million, $24.5 million and
$6.6 million of charges in the first, second and fourth quarters of fiscal 1999
related to these restructuring activities. The second and fourth quarter charges
are net of $1.4 million and $1.2 million adjustments, respectively, relating to
charges taken in previous quarters. Total fiscal 1999 restructuring charges are
$39.9 million and consisted of severance
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and benefits of $21.6 million, asset write-offs of $13.5 million and facilities
and other costs of $4.8 million, of which $17.4 million represented non-cash
charges. During fiscal 1999, the Company expended $20.0 million of cash related
to these restructuring activities. The Company substantially completed all of
the restructuring activities as of March 31, 1999 and the remaining balance of
$2.5 million is primarily expected to be paid out in the first two quarters of
fiscal 2000.
The Company expects the fiscal 1999 restructuring activities could result
in an annual expense reduction in the range of $80 - $90 million. These savings
may be potentially offset by incremental costs associated with anticipated
business growth.
In fiscal 1999, the Company recorded $21.5 million in acquisition costs
related to the termination of the Symbios, Inc. acquisition. Additionally, the
Company recorded $4.0 million and $3.4 million in non-cash asset impairment
charges and executive termination costs, respectively. The impairment charges
related to $1.4 million in manufacturing equipment deemed unnecessary due to
non-temporary declines in production volume and the write-off of $2.6 million of
non-trade related receivables classified in other current assets. The executive
termination costs, relating to three executives, consisted of $1.9 million in
severance and benefits and $1.5 million in non-cash stock compensation charges
resulting from amended option agreements.
In fiscal 1998, the Company recorded non-cash asset impairment charges of
$6.7 million. The impairment charges consisted of impairments of the remaining
goodwill balances from the acquisition of Sigmax and Skipstone of $1.5 million
and $1.7 million, respectively, and the write-down of the Company's minority
investment in Ridge of $3.5 million. The remaining goodwill for the acquisition
of Sigmax was written-off when the Company decided to abandon this business
after the R&D project fell behind and the critical market window was missed, the
engineers acquired in the purchase had left the Company, and the intellectual
property was deemed to have no alternative use. The remaining goodwill from the
acquisition of Skipstone was written-off when the Company decided to abandon
this business as the market for this technology was not developing at the rate
required to earn a reasonable return on its investment, most of engineers
acquired in the purchase had left the Company, and the intellectual property had
no alternative use. The impairment and write-down of the Ridge minority
investment was a result of delays in the Ridge product. Ridge was not able to
bring the Ridge product under development to market in a timely manner, which
management believed resulted in a permanent impairment of the value of the
Company's underlying investment in Ridge.
In fiscal 1997, the Company recorded $1.7 million in acquisition costs
related to the acquisition of Cogent.
INTEREST AND OTHER INCOME. The Company's fiscal 1999 interest and other
income increased 7% to $35.1 million from the prior year primarily due to the
gain on the sale of land in California of $1.6 million, which represented the
other income in fiscal 1999. The remaining $33.5 million of interest and other
income represents interest earned on investments. Fiscal 1998 interest income
increased 147% to $32.9 million from $13.3 million in fiscal 1997. The increase
from fiscal 1997 was due to higher cash balances during fiscal 1998 as a result
of cash generated from operations and proceeds received in connection with
$230.0 million of 4 3/4% Convertible Subordinated Notes that the Company issued
in February 1997. Interest expense for fiscal 1999 and 1998 of $12.1 million and
$12.4 million, respectively, is primarily related to the 4 3/4% Convertible
Subordinated Notes. Interest expense for fiscal 1997 of $2.7 million is
primarily related to two months of interest on the 4 3/4% Convertible
Subordinated Notes which were issued in February 1997.
GAIN ON THE SALE OF PTS. The Company sold the high-end PTS business line to
TI in November 1998 for $8.5 million in cash and the mainstream removable PTS
business line to ST for $72.1 million in cash and $3.3 million in cost
reimbursements. The sale of the mainstream removable PTS business line to ST
resulted in a $10.0 million gain, net of taxes of $21.5 million. The gain on the
sale of PTS was reduced in the fourth quarter of fiscal 1999 from that
originally reported in the Company's Form 8-K dated January 15, 1999. The
reduction reflects the increase in goodwill resulting from the fiscal 1999
fourth quarter restatement of acquired in-process technology of ASIC
technologies purchased from ADI, which was incorporated into the business line
sold to ST.
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INCOME TAXES. The Company's effective tax rate for fiscal 1999 was 164%
compared to 26% and 37% for fiscal 1998 and 1997. This increase in effective tax
rate was primarily due to the write-off of acquired in-process technology and
goodwill, which are not deductible for tax purposes, and the gain associated
with the sale of PTS. In the third quarter of fiscal 1999, the Company's
normalized effective tax rate changed (exclusive of the write-off of acquired
in-process technology and goodwill and the gain associated with the sale of PTS)
from 25% to 28% due to a geographic shift of earnings resulting from
restructuring and business divestitures. For fiscal 1998 and 1997, the Company's
normalized effective tax rate was 25% (exclusive of the write-off of acquired
in-process technology and goodwill).
The difference between the Company's normalized effective tax rate and the
U.S. federal statutory tax rate is primarily due to income earned in Singapore
where the Company is subject to a significantly lower effective tax rate,
resulting from a tax holiday relating to certain of its products. The terms of
the tax holiday provide that profits derived from certain products will be
exempt from tax through 2006, subject to certain conditions.
The Company's tax related liabilities were $65.8 million, $25.2 million and
$8.0 million at March 31, 1999, 1998 and 1997 respectively. Tax related
liabilities are primarily comprised of income, withholding and transfer taxes
accrued by the Company in the taxing jurisdictions in which it operates around
the world, including, but not limited to, the United States, Singapore, Japan,
Germany and Belgium. The amount of the liability is based on management's
evaluation of its tax exposures in light of the complicated nature of the
business transactions entered into by the Company in a global business
environment.
NET INCOME (LOSS). The Company's net loss for fiscal 1999 was $13.3
million, representing diluted net loss per share of $0.12, compared to net
income of $172.9 million and $107.6 million in fiscal 1998 and 1997,
representing diluted net income per share of $1.46 and $0.93, respectively. On a
normalized basis, net income for fiscal 1999 was $86.9 million, representing
normalized diluted net income per share of $0.77, compared to normalized net
income of $147.5 million and $155.5 million in fiscal 1998 and 1997,
representing normalized diluted net income per share of $1.25 and $1.35,
respectively. The normalized results exclude the write-off of acquired
in-process technology, restructuring and other charges, gain on the sale of PTS,
revenue and expenses related to the PTS segment, gain on the sale of land and
the cumulative effect of a change in accounting principle.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES. Net cash provided by operating activities during
fiscal 1999 was $207.7 million. Net cash generated from operating activities
during fiscal 1999 resulted from a net loss of $13.3 million adjusted for
non-cash items including the write-off of acquired in-process technology of
$45.5 million, non-cash charges associated with restructuring and other charges
of $22.9 million and depreciation and amortization of $50.2 million.
Additionally, the net loss was adjusted for the pre-tax gain on the sale of PTS
of $31.5 million. Cash generated from operating activities during fiscal 1999
was also impacted by the decrease in accounts receivable and inventory of $68.1
million and $16.8 million, respectively, and the increase in accrued liabilities
of $36.2 million. The change in deferred income taxes and accounts payable was
primarily offset by the income tax benefit from employee stock transactions and
the change in other assets and prepaid expenses (exclusive of land held for sale
reclassified to prepaid expenses).
Net cash provided by operating activities during fiscal 1998 of $245.1
million was primarily attributable to net income of $172.9 million adjusted by
non-cash items including the cumulative effect of a change in accounting
principle of $9.0 million, depreciation and amortization of $42.9 million,
provision for doubtful accounts of $4.0 million and non-cash charges associated
with restructuring and other charges of $6.7 million. Increases in accounts
receivable and inventories were largely offset by decreases in other assets and
prepaid expenses and an increase in accounts payable.
Net cash provided by operating activities during fiscal 1997 of $245.5
million was primarily attributable to net income of $107.6 million adjusted by
non-cash items including the net write-off of acquired in-process technology of
$88.7 million (net of taxes) and depreciation and amortization of $28.6 million.
Increases in accounts receivable and prepaid expenses were largely offset by
increases in accounts payable and accrued liabilities.
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In each of fiscal years 1996 through 1998, the Company entered into
agreements with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") which
provides the Company with guaranteed capacity for wafer fabrication in exchange
for advance payments by the Company. The Company recorded 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. The Company utilized $18.2
million and $9.8 million of the prepayments in fiscal 1999 and 1998,
respectively, which were capitalized into inventory. The advance payments
expected to be realized in the next 12 months of $8.4 million are classified in
prepaid expenses and the remaining advance payments or $21.1 million are
classified in other assets and are expected to be realized by the Company during
the term of the agreements through December 31, 2002.
In fiscal 1998, the Company entered into one of the TSMC agreements, which
provided the Company with increased wafer fabrication capacity in return for
advance payments totaling $35.3 million. The Company signed a non-interest
bearing promissory note for the $35.3 million, which was due in two equal
installments of approximately $17.6 million and $17.7 million. The first
installment was paid in January 1998. During fiscal 1999, the Company
determined, based upon analyses performed each quarter, that the anticipated
future manufacturing requirements would not be sufficient to utilize the prepaid
wafer capacity. Accordingly, the Company and TSMC mutually agreed to terminate
the agreement and the remaining unpaid balance on the related promissory note.
Further, TSMC agreed to refund the Company the $17.6 million previously paid, in
four equal quarterly installments. The Company reversed the $35.3 million of
prepayments classified in other assets as well as the $17.7 million of long-term
debt and recorded a $17.7 million receivable due from TSMC, which is classified
in prepaid expenses.
Additionally, in fiscal 1999, the Company and TSMC amended another
agreement to extend the term of the agreement by two years through December 31,
2002, and TSMC agreed to refund the Company $5.4 million of advanced payments,
payable in four equal quarterly installments. This amount due from TSMC was also
reclassified from other assets to prepaid expenses.
INVESTING ACTIVITIES. Net cash provided by investing activities during
fiscal 1999 was $55.4 million. During fiscal 1999, the Company received $76.0
million in net proceeds from the sale of PTS. The sale was offset in part by the
purchase of certain net assets in connection with acquisition of ASIC
technologies from ADI and purchase of Ridge accounted for under the purchase
method of accounting (net of cash received) of $34.1 million and the purchase of
property and equipment of $30.3 million. Additionally, the Company had $43.9
million of cash inflow related to proceeds from maturities of marketable
securities, net of reinvestments.
Net cash used for investing activities during fiscal 1998 was $346.1
million and included the net reinvestment of $239.8 million of marketable
securities. The Company also continued to make various building and leasehold
improvements to its facilities and invest in equipment for product development
and manufacturing to support current and future business requirements. Purchases
of property and equipment of $97.7 million during fiscal 1998 included $11.3
million for land located in California.
Net cash used for investing activities during fiscal 1997 was $221.3
million. During fiscal 1997, the Company made payments of $107.2 million, net of
cash received, in connection with the acquisitions of WD, Corel, DKI, Sigmax,
Toast and Skipstone. The Company acquired Cogent in a transaction accounted for
as a pooling-of-interests through the issuance of 3 million shares of its common
stock. During fiscal 1997, the Company purchased property and equipment totaling
$88.0 million. Additionally, the Company entered into an agreement with Lucent
Technologies, Inc. ("Lucent") to sell $21.0 million of fabrication equipment
that the Company had previously purchased in fiscal 1997 in connection with a
separate agreement with Lucent that ensured the Company of the availability of
certain levels of wafer capacity from Lucent. The new agreement cancelled the
initial capacity agreement and required Lucent to purchase the equipment from
the Company in fiscal 1998.
FINANCING ACTIVITIES. Net cash used for financing activities during fiscal
1999 was $172.7 million. During fiscal 1999, the Company repurchased $200.2
million of its common stock and made debt payments totaling
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$5.6 million. The Company received proceeds of $33.1 million from the issuance
of common stock to employees through its stock option and employee stock
purchase plans.
Net cash provided by financing activities during fiscal 1998 of $10.1
million was primarily due to the issuance of common stock to employees through
its stock option and employee stock purchase plans of $38.9 million, offset in
part by payments to TSMC of $17.7 million on the short-term note, payments on
debt of $3.4 million, and repurchases of common stock of $7.7 million.
Net cash provided by financing activities during fiscal 1997 was $202.6
million. During fiscal 1997, the Company issued $230.0 million of 4 3/4%
Convertible Subordinated Notes due February 1, 2004, for which the Company
received net proceeds of $223.9 million. The notes provide for semi-annual
interest payments each February 1 and August 1, which commenced on August 1,
1997. The holders of the notes are entitled to convert the notes into common
stock at a conversion price of $51.66 per share through February 1, 2004. The
notes are redeemable, in whole or in part, at the option of the Company, at any
time on or after February 3, 2000 at declining premiums to par. Debt issuance
costs are being amortized ratably over the term of the notes. The Company paid a
$46.2 million short-term note issued to TSMC in connection with an agreement to
ensure increased wafer capacity for future technology. The Company also received
proceeds from the issuance of common stock to employees through its stock option
and employee stock purchase plans of $28.3 million.
STOCK REPURCHASES. In fiscal 1999, the Company repurchased 12,931,000
shares of its common stock at an average price of $15.48 for a total cash outlay
of $200.2 million. In fiscal 1998, the Company repurchased 350,000 shares of its
common stock at an average price of $22.19 for a total cash outlay of $7.7
million. In May 1999, the Company's Board of Directors authorized the Company to
repurchase an additional $200.0 million of its common stock in the open market.
LINES OF CREDIT. During fiscal 1999, the Company terminated its unsecured
$17.0 million revolving line of credit and a $6.8 million line of credit assumed
in conjunction with the fiscal 1999 first quarter purchase of Ridge and obtained
an unsecured $60.0 million revolving line of credit which expires on March 25,
2000.
LIQUIDITY. As of March 31, 1999, the Company's principal sources of
liquidity consist of $743.9 million of cash, cash equivalents and marketable
securities and an unsecured $60.0 million revolving line of credit, under which
there were no outstanding borrowings as of March 31, 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 2000.
CHANGE IN ACCOUNTING POLICY
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the
Financial Accounting Standards Board issued EITF 97-13, "Accounting for Costs
Incurred in Connection with a Consulting Contract that Combines Business Process
Reengineering and Information Technology Transformation." EITF 97-13 requires
that business process reengineering costs incurred in connection with an overall
information technology transformation project be expensed as incurred. The
transition provisions of EITF 97-13 require that companies that had previously
capitalized such business process reengineering costs charge off any unamortized
amounts as a cumulative effect of a change in accounting principle. In fiscal
1998, the cumulative effect of the change to the Company was to decrease net
income by $9.0 million (net of tax benefit of $3.0 million).
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 or results of
operations.
28
29
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 1999, the Company's investment portfolio consisted of fixed
income securities, excluding those classified as cash equivalents, of $426.3
million (See "Note 2. Marketable Securities" of the Notes to Consolidated
Financial Statements on page F-8 for further information). These securities are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to
29
30
increase immediately and uniformly by 10% from levels as of March 31, 1999, the
decline in the fair value of the portfolio would not be material.
The Company's long-term debt bears interest at a fixed rate. Accordingly,
an immediate 10% change in interest rates would not result in the Company's
long-term debt having any effect on the Company's results of operations.
On occasion, the Company enters into forward exchange contracts to hedge
certain firm commitments denominated in foreign currencies. The Company does not
use derivative financial instruments for trading or speculative purposes.
Forward exchange contracts are denominated in the same currency as the
underlying transaction (primarily Singapore dollars) and the terms of the
forward foreign exchange contracts generally match the terms of the underlying
transactions. The effect of an immediate 10% change in exchange rates on the
forward exchange contracts would not be material to the Company's financial
condition or results of operations, as there were no forward exchange contracts
outstanding as of March 31, 1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index appearing under Item 14(a)(1) on page 31 for the Consolidated
Financial Statements of Adaptec, Inc. at March 31, 1999 and 1998 and for each of
the three years in the period ended March 31, 1999 and the Report of Independent
Accountants.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of Adaptec is incorporated by
reference from the information under the captions: "Election of
Directors -- Nominees" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive Proxy Statement for the Annual Meeting
of Stockholders to be held, September 9, 1999 (the "Proxy Statement").
Information with respect to the executive officers of Adaptec is included in
Part I of this Form 10-K under the heading "Executive Officers".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the caption:
"Executive Compensation and Other Matters" and "Election of Directors -- Certain
Transactions" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption: "Election
of Directors -- Security Ownership of Management; Principal Stockholders" in the
Company's Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the caption: "Election
of Directors -- Certain Transactions" in the Company's Proxy Statement.
30
31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following Consolidated Financial Statements of Adaptec, Inc. and the
Report of Independent Accountants, as listed under (a)(1) below, are included in
this document.
(a)(1) FINANCIAL STATEMENTS:
PAGE
-----------
Consolidated Statements of Operations -- Fiscal Years ended
March 31, 1999, 1998, and 1997............................ F-1
Consolidated Balance Sheets at March 31, 1999 and 1998...... F-2
Consolidated Statements of Cash Flows -- Fiscal Years ended
March 31, 1999, 1998, and 1997............................ F-3
Consolidated Statements of Stockholders' Equity -- Fiscal
Years ended March 31, 1999, 1998, and 1997................ F-4
Notes to Consolidated Financial Statements.................. F-5 to F-30
Report of Management........................................ F-31
Report of Independent Accountants........................... F-32
(2) All schedules are omitted because they are not applicable or the required
information is shown in the consolidated financial statements or notes
thereto.
(3) Exhibits included herein (numbered in accordance with Item 601 of Regulation
S-K):
EXHIBIT
NUMBER DESCRIPTION NOTES
- ------- ----------- -----
2.1 Agreement for Purchase and Sale of Stock by and among
Western Digital Corporation, Western Digital CSG
Corporation, and Adaptec, Inc. dated April 9, 1996. (3)
2.2 Agreement and Plan of Reorganization by and among Adaptec,
Inc., Adaptec Acquisition Corporation, and Data Kinesis,
Inc. dated August 6, 1996. (4)
2.3 Asset Acquisition Agreement by and among Adaptec, Inc. and
Analog Devices, Inc. dated March 24, 1998 (16)
2.4 Agreement and Plan of Reorganization by and among Adaptec,
Inc., Ridge Technologies and RDS Acquisition (as of May 21,
1998). (16)
2.5 Agreement and Plan of Merger dated February 23, 1998 between
Registrant and Adaptec, Inc., a California corporation. (16)
2.6 Asset Purchase Agreement between Texas Instruments,
Incorporated and Adaptec, Inc. dated November 6, 1998. (14)
2.7 Asset Acquisition Agreement among Adaptec, Inc., Adaptec
Mfg. (s) Pte. Ltd. And STMicroelectronics, Inc. dated
January 15, 1999. (14)
2.8 Amendment No. 1 to Asset Acquisition Agreement among
Adaptec, Inc., Adaptec Mfg. (s) Pte. Ltd. and
STMicroelectronics, Inc. dated January 15, 1999. (14)
3.1 Certificate of Incorporation of Registrant filed with
Delaware Secretary of State on November 19, 1997. (16)
3.2 Bylaws of Registrant, as amended on June 29, 1999.
4.1 Second Amended and Restated Rights Agreement dated December
5, 1996 between Registrant and Chase Mellon Shareholder
Services, Inc. as Rights Agents. (8)
4.2 First Amendment dated March 12, 1998 to Second Amended and
Restated Rights Agreement. (16)
4.3 Indenture dated as of February 3, 1997 between Registrant
and State Street Bank and Trust Company. (1)
31
32
EXHIBIT
NUMBER DESCRIPTION NOTES
- ------- ----------- -----
4.4 First Supplemental indenture dated as of March 12, 1998
between Registrant and State Street Bank and Trust Company. (16)
10.1+ Registrant's 1986 Employee Stock Purchase Plan. (6)
10.2 Technology License Agreement dated January 1, 1985 between
the Registrant and International Business Machines
Corporation. (10)
10.3+ Registrant's Savings and Retirement Plan. (9)
10.4+ 1990 Stock Plan, as amended. (12)
10.5+ Forms of Stock Option Agreement, Tandem Stock Option/SAR
Agreement, Restricted Stock Purchase Agreement, Stock
Appreciation Rights Agreement, and Incentive Stock Rights
Agreement for use in connection with the 1990 Stock Plan, as
amended. (7)
10.6+ 1990 Directors' Option Plan and forms of Stock Option
Agreement, as amended.
10.7 Option Agreement I Between Adaptec Manufacturing (S) Pte.
Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated
October 23, 1995. (2)
10.8* Option Agreement II Between Adaptec Manufacturing (S) Pte.
Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated
October 23, 1995. (2)
10.9 Consignment Agreement between Adaptec, Inc. and AT&T Corp.
dated January 10, 1996. (2)
10.10 Form of Indemnification Agreement entered into with
directors and officers of Adaptec, Inc., a California
corporation, prior to Registrant's reincorporation into
Delaware. (11)
10.11 Form of Indemnification Agreement entered into between
Registrant and its officers and directors. (16)
10.12 Deposit and Supply Agreement between Taiwan Semiconductor
Manufacturing Co., Ltd. and Adaptec Manufacturing Pte. Ltd. (6)
10.13 Industrial Lease Agreement between the Registrant, as
Lessee, and Jurong Town Corporation, as Lessor. (5)
10.14 Amendment No. 1 to Option Agreement III between Adaptec
Manufacturing (s) Pte. Ltd. And Taiwan Semiconductor
Manufacturing Co. Ltd. (13)
10.15 Termination of Option III agreement between Adaptec
Manufacturing (s) Pte. Ltd. and Taiwan Semiconductor
Manufacturing Co. Ltd. (15)
10.16** Amendment to Option Agreements I & II between Taiwan
Semiconductor Manufacturing Co., Ltd. and Adaptec,
Manufacturing (s) Pte. Ltd.
10.17 Modification to Amendment to Option Agreement I & II between
Taiwan Semiconductor Manufacturing Co., Ltd. and Adaptec,
Manufacturing (s) Pte. Ltd.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants, PricewaterhouseCoopers
LLP. (See Page 34)
24.1 Power of Attorney. (See Page 36)
27.1 Financial Data Schedule for the year ended March 31, 1999.
27.2 Financial Data Schedule for the year ended March 31, 1998.
32
33
EXHIBIT
NUMBER DESCRIPTION NOTES
- ------- ----------- -----
27.3 Financial Data Schedule for the year ended March 31, 1997.
- ---------------
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement Number 333-24557 on Form S-1 on April 4, 1997.
(2) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1996.
(3) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1996.
(4) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 27, 1996.
(5) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1995.
(6) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1994.
(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1993.
(8) Incorporated by reference to Exhibit 1 filed with Amendment No. 4 to
Registrant's Registration Statement Number 0-15071 on Form 8-A as filed on
January 4, 1997.
(9) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1987.
(10) Incorporated by reference to Exhibit 10.15 filed in response to Item 16(a)
"Exhibits," of Registrant's Registration Statement on Form S-1 and
Amendment No. 1 and Amendment No. 2 thereto (file No. 33-5519), which
became effective on June 11, 1986.
(11) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1992.
(12) Incorporated by reference to Exhibit 4.2 to Form 10-Q as filed February 7,
1996.
(13) Incorporated by reference to Exhibit 10.1 to Form 10-Q as filed August 7,
1998.
(14) Incorporated by reference to Exhibits 2.1, 2.2, 2.3, respectively, to Form
8-K as filed January 29, 1999.
(15) Incorporated by reference to Exhibit 10.1 to Form 10-Q as filed February
12, 1999.
(16) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended March 31, 1998.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c) of said form.
* Confidential treatment has been granted for portions of this agreement.
** Confidential treatment has been requested for portions of this agreement.
(b) REPORTS ON FORM 8-K
During the fourth quarter ended March 31, 1999, the Company filed the
following current Reports on Form 8-K:
On January 29, 1999, pursuant to Item 2 thereof, to report the disposition
of the Peripheral Technology Solutions segment.
33
34
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-77321, No. 333-66151, No. 33-02889, No.
333-00779, No. 33-43591, No. 333-14241, and No. 333-12095) and Form S-1 (No.
333-24557) of Adaptec, Inc. and its subsidiaries of our report dated April 28,
1999, relating to the Financial Statements, which appears in this Annual Report
on Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ---------------------------------------------
PricewaterhouseCoopers LLP
San Jose, California
June 29, 1999
34
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ ROBERT N. STEPHENS
- --------------------------------------
Robert N. Stephens
President and Chief Executive Officer
Date: June 29, 1999
35
36
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears
below constitutes and appoints Robert N. Stephens and Andrew J. Brown, jointly
and severally, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any amendments to this Report on Form
10-K, and to file the same, with exhibits thereto and other documents in
connection therewith with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ROBERT N. STEPHENS President, Chief Executive June 29, 1999
- ----------------------------------------------------- Officer
(Robert N. Stephens)
/s/ ANDREW J. BROWN Vice President of Finance, June 29, 1999
- ----------------------------------------------------- Chief Financial Officer
(Andrew J. Brown)
/s/ KENNETH B. AROLA Vice President, Corporate June 29, 1999
- ----------------------------------------------------- Controller and Principal
(Kenneth B. Arola) Accounting Officer
/s/ LAURENCE B. BOUCHER Chairman June 29, 1999
- -----------------------------------------------------
(Laurence B. Boucher)
/s/ JOHN G. ADLER Director June 29, 1999
- -----------------------------------------------------
(John G. Adler)
/s/ CARL J. CONTI Director June 29, 1999
- -----------------------------------------------------
(Carl J. Conti)
/s/ JOHN C. EAST Director June 29, 1999
- -----------------------------------------------------
(John C. East)
/s/ ILENE H. LANG Director June 29, 1999
- -----------------------------------------------------
(Ilene H. Lang)
/s/ ROBERT J. LOARIE Director June 29, 1999
- -----------------------------------------------------
(Robert J. Loarie)
/s/ B. J. MOORE Director June 29, 1999
- -----------------------------------------------------
(B. J. Moore)
/s/ W. FERRELL SANDERS Director June 29, 1999
- -----------------------------------------------------
(W. Ferrell Sanders)
/s/ PHILLIP E. WHITE Director June 29, 1999
- -----------------------------------------------------
(Phillip E. White)
36
37
ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED MARCH 31,
----------------------------------
1999 1998 1997
-------- ---------- --------
Net revenues.............................................. $692,441 $1,007,293 $933,868
Cost of revenues.......................................... 284,503 391,100 388,969
-------- ---------- --------
Gross profit............................................ 407,938 616,193 544,899
-------- ---------- --------
Operating expenses:
Research and development................................ 146,172 169,022 128,530
Sales, marketing, and administrative.................... 180,986 215,624 162,979
Write-off of acquired in-process technology............. 45,482 -- 90,457
Restructuring and other charges......................... 68,788 6,715 1,705
-------- ---------- --------
Total operating expenses........................ 441,428 391,361 383,671
-------- ---------- --------
Income (loss) from operations............................. (33,490) 224,832 161,228
-------- ---------- --------
Interest and other income................................. 35,059 32,899 13,297
Interest expense.......................................... (12,103) (12,402) (2,744)
Gain on sale of PTS....................................... 31,476 -- --
-------- ---------- --------
Income from operations before provision for income taxes
and cumulative effect of a change in accounting
principle............................................... 20,942 245,329 171,781
Provision for income taxes................................ 34,235 63,452 64,220
-------- ---------- --------
Income (loss) before cumulative effect of a change in
accounting principle.................................... (13,293) 181,877 107,561
Cumulative effect of a change in accounting principle, net
of tax benefit.......................................... -- (9,000) --
-------- ---------- --------
Net income (loss)......................................... $(13,293) $ 172,877 $107,561
======== ========== ========
Net income (loss) per share:
Basic
Income (loss) before cumulative effect of a change in
accounting principle............................... $ (0.12) $ 1.61 $ 0.99
Cumulative effect of a change in accounting
principle.......................................... -- (0.08) --
-------- ---------- --------
Net income (loss).................................... $ (0.12) $ 1.53 $ 0.99
======== ========== ========
Diluted
Income (loss) before cumulative effect of a change in
accounting principle............................... $ (0.12) $ 1.54 $ 0.93
Cumulative effect of a change in accounting
principle.......................................... -- (0.08) --
-------- ---------- --------
Net income (loss).................................... $ (0.12) $ 1.46 $ 0.93
======== ========== ========
Shares used in computing net income (loss) per share:
Basic................................................... 110,127 113,172 108,456
Diluted................................................. 110,127 118,432 115,596
See accompanying notes.
F-1
38
ADAPTEC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
AS OF MARCH 31,
------------------------
1999 1998
---------- ----------
Current assets:
Cash and cash equivalents................................. $ 317,580 $ 227,183
Marketable securities..................................... 426,332 470,199
Accounts receivable, net of allowance for doubtful
accounts of $1,895 in 1999 and $4,185 in 1998.......... 67,158 136,476
Inventories............................................... 50,838 71,297
Deferred income taxes..................................... 61,345 46,479
Prepaid expenses and other................................ 86,764 39,460
---------- ----------
Total current assets.............................. 1,010,017 991,094
Property and equipment, net................................. 126,734 194,798
Other assets................................................ 36,317 89,337
---------- ----------
$1,173,068 $1,275,229
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... $ -- $ 850
Note payable.............................................. -- 17,640
Accounts payable.......................................... 39,487 48,047
Accrued liabilities....................................... 112,879 73,947
---------- ----------
Total current liabilities......................... 152,366 140,484
---------- ----------
Long-term debt, net of current portion...................... 230,000 230,000
---------- ----------
Commitments and contingencies (Note 17)
Stockholders' equity:
Preferred stock; $0.001 par value
Authorized shares, 1,000; Series A shares, 250
designated
Outstanding shares, none............................... -- --
Common stock; $0.001 par value
Authorized shares, 400,000
Outstanding shares, 105,507 in 1999 and 113,981 in
1998.................................................. 106 114
Additional paid-in capital................................ 194,521 295,263
Retained earnings......................................... 596,075 609,368
---------- ----------
Total stockholders' equity........................ 790,702 904,745
---------- ----------
$1,173,068 $1,275,229
========== ==========
See accompanying notes.
F-2
39
ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED MARCH 31,
--------------------------------
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................................... $(13,293) $172,877 $107,561
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Cumulative effect of a change in accounting principle,
net of taxes.......................................... -- 9,000 --
Write-off of acquired in-process technology, net of
taxes................................................. 45,482 -- 88,691
Non-cash charges associated with restructuring and other
charges............................................... 22,920 6,715 --
Gain on sale of PTS...................................... (31,476) -- --
Depreciation and amortization............................ 50,166 42,896 28,611
Provision for doubtful accounts.......................... 1,258 4,000 1,000
Deferred income taxes.................................... (14,866) (14,497) (13,896)
Income tax benefit of employees' stock transactions...... 18,157 12,390 22,144
Changes in assets and liabilities:
Accounts receivable................................... 68,060 (17,173) (36,984)
Inventories........................................... 16,836 (18,113) 11,998
Prepaid expenses and other............................ 16,440 21,578 (3,878)
Other assets.......................................... 2,556 21,339 3,329
Accounts payable...................................... (10,753) (4,353) 25,968
Accrued liabilities................................... 36,193 8,428 10,948
-------- -------- --------
Net Cash Provided by Operating Activities.................. 207,680 245,087 245,492
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certain net assets in connection with
acquisitions, net........................................ (34,126) -- (107,214)
Proceeds from the sale of PTS, net......................... 75,999 -- --
Investments in property and equipment, net................. (30,347) (97,699) (87,959)
Decreases (increases) in marketable securities, net........ 43,867 (239,833) (26,083)
Purchase of minority investments........................... -- (8,560) --
-------- -------- --------
Net Cash Provided by (Used for) Investing Activities....... 55,393 (346,092) (221,256)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible debt................. -- -- 223,905
Payments of short-term note................................ -- (17,640) (46,200)
Proceeds from issuance of common stock..................... 33,098 38,921 28,323
Repurchases of common stock................................ (200,224) (7,768) --
Principal payments on debt................................. (5,550) (3,400) (3,400)
-------- -------- --------
Net Cash Provided by (Used for) Financing Activities....... (172,676) 10,113 202,628
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents....... 90,397 (90,892) 226,864
Cash and Cash Equivalents at Beginning of Year........... 227,183 318,075 91,211
-------- -------- --------
Cash and Cash Equivalents at End of Year................. $317,580 $227,183 $318,075
======== ======== ========
Supplemental Disclosures of Cash Flows:
Interest paid.............................................. $ 11,100 $ 11,218 $ 641
Income taxes paid.......................................... 14,963 58,537 67,118
Income tax refund received................................. 23,746 -- --
See accompanying notes.
F-3
40
ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK ADDITIONAL
----------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------- ------ ---------- -------- --------
BALANCE, MARCH 31, 1996................ 106,040 $106 $182,826 $329,013 $511,945
Sale of common stock under employee
purchase and option plans............ 2,814 3 28,320 -- 28,323
Issuance of common stock in connection
with acquisition..................... 2,686 3 18,432 (83) 18,352
Income tax benefit of employees' stock
transactions......................... -- -- 22,144 -- 22,144
Net income............................. -- -- -- 107,561 107,561
------- ---- -------- -------- --------
BALANCE, MARCH 31, 1997................ 111,540 112 251,722 436,491 688,325
Sale of common stock under employee
purchase and option plans............ 2,791 3 38,918 -- 38,921
Income tax benefit of employees' stock
transactions......................... -- -- 12,390 -- 12,390
Repurchases of common stock............ (350) (1) (7,767) -- (7,768)
Net income............................. -- -- -- 172,877 172,877
------- ---- -------- -------- --------
BALANCE, MARCH 31, 1998................ 113,981 114 295,263 609,368 904,745
Sale of common stock under employee
purchase and option plans............ 3,250 3 33,095 -- 33,098
Issuance of common stock in connection
with acquisition..................... 1,207 2 34,339 -- 34,341
Stock-based compensation charges....... -- -- 13,878 -- 13,878
Income tax benefit of employees' stock
transactions......................... -- -- 18,157 -- 18,157
Repurchases of common stock............ (12,931) (13) (200,211) -- (200,224)
Net loss............................... -- -- -- (13,293) (13,293)
------- ---- -------- -------- --------
BALANCE, MARCH 31, 1999................ 105,507 $106 $194,521 $596,075 $790,702
======= ==== ======== ======== ========
See accompanying notes.
F-4
41
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany transactions
and balances. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. In November 1996, the Company effected a two for one split of its
common stock. In March 1998, the Company was reincorporated in the State of
Delaware. The accompanying consolidated financial statements have been
retroactively restated to reflect the stock split and give effect to the
reincorporation. Additionally, certain items previously reported in specific
financial statement captions have been reclassified to conform with current
presentation.
FOREIGN CURRENCY TRANSLATION
For foreign subsidiaries whose functional currency is the local currency,
the Company translates assets and liabilities to U.S. dollars using year end
exchange rates and translates revenues and expenses using average exchange rates
during the year. Exchange gains and losses arising from translation of foreign
entity financial statements have not been material to the Company's operating
results in the periods presented.
For foreign subsidiaries whose functional currency is the U.S. dollar,
certain assets and liabilities are remeasured at the year end or historical
rates as appropriate. Revenues and expenses are remeasured at the average rates
during the year. Currency transaction gains and losses are recognized in current
operations and have not been material to the Company's operating results in the
periods presented.
CASH EQUIVALENTS AND MARKETABLE SECURITIES
Cash equivalents consist of highly liquid investments with original
maturities of three months or less. The Company's marketable securities are
classified as available-for-sale and, at the balance sheet date, are reported at
fair market value which approximates cost.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
marketable securities, and trade accounts receivable. The Company invests in
marketable securities including municipal bonds, corporate bonds and government
securities, all of which are of high investment grade. The Company, by policy,
limits the amount of credit exposure through diversification and investment in
highly rated securities. Sales to customers are denominated in U.S. dollars. As
a result, the Company believes its foreign currency risk is minimal.
The Company sells its products to original equipment manufacturers ("OEMs")
and distributors throughout the world. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for doubtful
accounts based upon the expected collectibility of all accounts receivable.
During fiscal 1998, the Company increased its allowance for bad debt due to
adverse business conditions in the disk drive market. Otherwise, the Company has
historically not experienced significant losses from its accounts receivable.
The Company wrote-off $3.5 million, $4.9 million and $0.1 million of its
accounts receivable in fiscal 1999, 1998 and 1997, respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into foreign currency contracts in order to reduce the
impact of certain foreign currency fluctuations. Certain firmly committed
transactions denominated in foreign currencies are occasion-
F-5
42
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ally hedged with forward exchange contracts. Gains and losses related to hedges
of firmly committed transactions are deferred and recognized as income when the
hedged transaction occurs and have been less than $1.0 million for the periods
presented. At March 31, 1999 and 1998, the Company had forward exchange
contracts outstanding with a notional amount of $0.0 million and $7.7 million,
respectively, to hedge the exposure associated with a firm, fixed liability to
construct an office facility in Singapore. The Company does not hold or issue
derivative financial instruments for trading or speculative purposes. The
amounts potentially subject to credit risk relating to forward exchange
contracts, arising from the possible inability of counterparties to meet the
terms of their contracts, are generally limited to the amounts, if any, by which
the counterparties' obligations exceed the obligations of the Company. The
Company controls credit risk through credit approvals, limits and monitoring
procedures.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For certain of the Company's financial instruments, including cash and cash
equivalents, marketable securities, accounts receivable, notes payable and
accounts payable, the carrying amounts approximate fair value due to their short
maturities. The estimated fair value of the Company's 4 3/4% Convertible
Subordinated Notes was $190.4 million and $190.6 million at March 31, 1999 and
1998, respectively, and is based on quoted market prices. The estimated fair
value of the Company's forward exchange contracts was $7.9 million at March 31,
1998. The Company had no forward exchange contracts outstanding at March 31,
1999.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated or amortized
using the straight-line method over the estimated useful lives of the assets.
The Company capitalizes substantially all costs related to the purchase and
implementation of software projects used for internal business operations,
excluding business process reengineering costs as defined by Emerging Issues
Task Force ("EITF") 97-13. Capitalized internal-use software costs primarily
include licenses fees, consulting fees and any associated direct labor and are
amortized over the estimated useful life of the project, typically a three to
five year period. In fiscal 1997 and 1998, the Company implemented Enterprise
Resource Planning ("ERP") software. Subsequently, costs related to the purchase
and implementation of software projects has been immaterial to the Company's
financial position.
CHANGE IN ACCOUNTING POLICY FOR BUSINESS PROCESS REENGINEERING COSTS
On November 20, 1997, the EITF of the Financial Accounting Standards Board
issued EITF 97-13, "Accounting for Costs Incurred in Connection with a
Consulting Contract that Combines Business Process Reengineering and Information
Technology Transformation." EITF 97-13 requires that business process
reengineering costs incurred in connection with an overall information
technology transformation project be expensed as incurred. The transition
provisions of EITF 97-13 require that companies that had previously capitalized
such business process reengineering costs charge off any unamortized amounts as
a cumulative effect of a change in accounting principle. In fiscal 1998, the
cumulative effect of the change to the Company was to decrease net income by
$9.0 million (net of tax benefit of $3.0 million).
PRODUCT DEVELOPMENT COSTS
The Company's policy is to capitalize internal software development costs
incurred after technological feasibility has been demonstrated. Such internal
software development costs have not been material to date.
F-6
43
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER ASSETS
The Company's other assets include goodwill, minority investments and
long-term advance payments to Taiwan Semiconductor Manufacturing Co., Ltd..
("TSMC"). Amortization totaling $12.6 million, $10.4 million and $6.4 million
was included in the Company's consolidated statements of operations during 1999,
1998 and 1997, respectively. During fiscal 1999, the Company wrote-off $1.4
million of goodwill associated with restructuring activities and relieved $24.8
million of goodwill associated with the sale of the Peripheral Technology
Solutions ("PTS") segment (Notes 10 and 13). Goodwill and minority investments
are evaluated periodically for potential impairment based on the future
estimated cash flows of the acquired technology or investment. The advance
payments to TSMC were made in exchange for guaranteed wafer fabrication capacity
through December 31, 2002 (Note 6). As wafers are purchased and received from
TSMC, the advance payments are relieved and capitalized into inventory. The
Company classifies only those payments expected to be converted into inventory
within one year as current assets and the remaining payments are classified as
other assets. The TSMC balance is evaluated periodically for potential
impairment based on future production requirements. No impairments have been
identified or recorded in any period presented.
REVENUE RECOGNITION
The Company recognizes revenue from its product sales, including software
sales, upon satisfaction of contractual obligations, which is generally at the
time of shipment. The Company records provisions for estimated returns and
allowances at the time of shipment.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." The Company's policy is to grant
options with an exercise price equal to the quoted market price of the Company's
stock on the grant date. Accordingly, no compensation cost has been recognized
in the Company's Consolidated Statements of Operations, except as described in
Notes 10 and 11 relating to restructuring and other charges. The Company has
provided additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation" in Note 15.
COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components, however, the adoption of this statement has no impact on the
Company's net income (loss) or stockholders' equity. It 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.
RECENT ACCOUNTING PRONOUNCEMENTS
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 established 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.
F-7
44
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ACQUIRED IN-PROCESS TECHNOLOGY
The Company reduced its estimate of the amount allocated to acquired
in-process technology from the purchase of read channel and preamplifier ASIC
technologies ("ASIC technologies") from Analog Devices, Inc. ("ADI") by $20.3
million, from $26.4 million previously reported in the first quarter of fiscal
1999 to $6.1 million. Amortization of intangibles increased approximately $1.7
million in each of the first three quarters of fiscal 1999 from $7.5 million to
$12.6 million for the year ended March 31, 1999. In the fourth quarter of fiscal
1999, the Company relieved the unamortized goodwill associated with ASIC
technologies purchased from ADI in connection with the sale of the Company's
mainstream removable PTS business line. The Company reduced the gain originally
reported in the Company's Form 8-K dated January 15, 1999 by $14.0 million from
$46.5 million previously reported, to $31.5 million for the fourth quarter and
year ended March 31, 1999. Basic and diluted net income (loss) per share for the
four quarters of fiscal 1999 were impacted by the restatement, however, there
was no impact on fiscal 1999 year-to-date basic or diluted net loss per share.
Additionally, there will be no impact on future results of operations as the
goodwill associated with ASIC technologies purchased from ADI was relieved in
the fourth quarter of fiscal 1999. The adjustments described above have been
reflected in the Company's Consolidated Financial Statements and related notes
for the year ended March 31, 1999. Further discussion of the analysis and
adjustment of amounts allocated to acquired in-process technology is included in
Note 9.
NOTE 2. MARKETABLE SECURITIES
The Company's portfolio of marketable securities consists of the following:
1999 1998
-------- --------
(IN THOUSANDS)
Municipal bonds............................................. $148,898 $186,346
Corporate bonds............................................. 97,176 185,665
U.S. government securities.................................. 180,258 98,188
-------- --------
$426,332 $470,199
======== ========
At March 31, 1999 and 1998, the net unrealized holding gains and losses on
securities were immaterial. The marketable securities at March 31, 1999 and 1998
by contractual maturity are shown below:
1999 1998
-------- --------
(IN THOUSANDS)
Mature in one year or less.................................. $254,539 $216,252
Mature after one year through three years................... 171,793 253,947
-------- --------
$426,332 $470,199
======== ========
At March 31, 1999, marketable securities totaling $189.7 million were
classified as cash equivalents and included municipal bonds, corporate bonds and
U.S. government securities of $2.6 million, $28.7 million and $158.4 million,
respectively. At March 31, 1998, marketable securities totaling $175 million
were classified as cash equivalents and included municipal bonds, corporate
bonds and U.S. government securities of $6 million, $13 million and $156
million, respectively.
F-8
45
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. BALANCE SHEET DETAIL
INVENTORY
1999 1998
------- -------
(IN THOUSANDS)
Raw materials............................................... $16,354 $17,728
Work-in-process............................................. 8,202 18,415
Finished goods.............................................. 26,282 35,154
------- -------
$50,838 $71,297
======= =======
PROPERTY AND EQUIPMENT
LIFE 1999 1998
------------- -------- --------
(IN THOUSANDS)
Land............................................ -- $ 13,240 $ 41,017
Buildings and improvements...................... 5 - 40 years 51,706 50,761
Machinery and equipment......................... 3 - 5 years 86,591 106,173
Furniture and fixtures.......................... 3 - 7 years 67,771 69,040
Leasehold improvements.......................... Life of lease 3,300 6,662
Construction in progress........................ -- 1,070 4,578
-------- --------
223,678 278,231
Accumulated depreciation and amortization....... (96,944) (83,433)
-------- --------
$126,734 $194,798
======== ========
OTHER ASSETS
1999 1998
------- -------
(IN THOUSANDS)
TSMC advance payments (Note 6).............................. $21,148 $63,840
Goodwill, net of accumulated amortization of $7,438 in 1999
and $19,855 in 1998....................................... 2,238 11,213
Minority investments........................................ 6,629 5,100
Other....................................................... 6,302 9,184
------- -------
$36,317 $89,337
======= =======
ACCRUED LIABILITIES
1999 1998
-------- -------
(IN THOUSANDS)
Accrued compensation and related taxes...................... $ 22,137 $25,273
Sales and marketing related................................. 7,708 11,036
Tax related................................................. 65,754 25,208
Other....................................................... 17,280 12,430
-------- -------
$112,879 $73,947
======== =======
NOTE 4. LINE OF CREDIT
In March 1999, the Company obtained an unsecured $60.0 million revolving
line of credit which expires on March 25, 2000. No borrowings were outstanding
under this line of credit as of March 31, 1999. The interest rate and commitment
fee is based on a pricing matrix, which correlates with the Company's credit
rating and market interest rates. Under the arrangement, the Company is required
to maintain certain
F-9
46
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financial ratios among other restrictive covenants. The Company was in
compliance with all such covenants as of March 31, 1999.
In May 1998, the Company assumed a $6.8 million unsecured revolving line of
credit, of which $4.7 million was outstanding, in conjunction with the purchase
of Ridge Technologies, Inc. ("Ridge") (Note 8). In August 1998, the Company paid
in full and terminated this line of credit.
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 and since March 31, 1998. In June 1998, the
Company terminated this line of credit.
NOTE 5. LONG-TERM DEBT
In February 1997, the Company issued $230.0 million of 4 3/4% Convertible
Subordinated Notes due on February 1, 2004. The Company received net proceeds of
$223.9 million. The notes provide for semi-annual interest payments each
February 1 and August 1, commencing on August 1, 1997. The holders of the notes
are entitled to convert the notes into common stock at a conversion price of
$51.66 per share through February 1, 2004. The notes are redeemable, in whole or
in part, at the option of the Company, at any time on or after February 3, 2000
at declining premiums to par. Debt issuance costs are being amortized ratably
over the term of the notes.
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.
NOTE 6. TAIWAN SEMICONDUCTOR MANUFACTURING AGREEMENTS
In each of fiscal years 1996 through 1998, the Company entered into
agreements with 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. The Company utilized
$18.2 million and $9.8 million of the prepayments in fiscal 1999 and 1998,
respectively, which were capitalized into inventory. The advance payments
expected to be realized in the next 12 months of $8.4 million are classified in
prepaid expenses and the remaining advance payments or $21.1 million are
classified in other assets and are expected to be realized by the Company during
the term of the agreements through December 31, 2002.
In fiscal 1998, the Company entered into the Option III TSMC Agreement,
which provided the Company with increased wafer fabrication capacity in return
for advance payments totaling $35.3 million. The Company signed a non-interest
bearing promissory note for the $35.3 million, which was due in two equal
installments of approximately $17.6 million and $17.7 million. The first
installment was paid in January 1998. In January 1999, the Company and TSMC
mutually agreed to terminate the Option III Agreement and the remaining unpaid
balance on the related promissory note. Further, TSMC agreed to refund the
Company the $17.6 million previously paid, in four equal quarterly installments.
The Company reversed the $35.3 million of payments classified in other assets as
well as the $17.6 million of long-term debt and recorded a $17.7 million
receivable due from TSMC, which is classified in prepaid expenses. At no time
did the Company determine that the prepaid balance was impaired.
Additionally, in fiscal 1999, the Company and TSMC amended the Option I and
Option II Agreements to extend the term of the agreements by two years through
December 31, 2002, and TSMC agreed to refund the Company $5.4 million of
advanced payments, payable in four equal quarterly installments. This amount due
from TSMC was also reclassified from other assets to prepaid expenses.
F-10
47
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
There can be no assurance that the Company will be able to satisfy its
future wafer needs from current or alternative manufacturing sources. This could
result in possible loss of sales or reduced margins.
NOTE 7. STATEMENTS OF OPERATIONS
Restructuring and other charges include:
1999 1998 1997
------- ------ ------
(IN THOUSANDS)
Acquisition related charges (Note 8)........................ $21,463 $ -- $1,705
Restructuring charges (Note 10)............................. 39,931 -- --
Asset impairments and other charges (Note 11)............... 7,394 6,715 --
------- ------ ------
Total............................................. $68,788 $6,715 $1,705
======= ====== ======
NOTE 8. BUSINESS COMBINATIONS AND RELATED PARTY TRANSACTIONS
Fiscal 1999: In April 1998, the Company purchased ASIC technologies from
ADI for $34.4 million in cash. The ASIC technologies purchased from ADI were
incorporated into the mainstream removable PTS business line. Grant Saviers,
former Chairman and CEO of the Company is a director of ADI. Additionally, in
May 1998, the Company acquired Ridge, a development stage company, for 1.2
million shares of the Company's common stock valued at $21.2 million and assumed
stock options valued at $13.1 million. 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.
Fiscal 1998: In both June and September 1997, the Company invested an
aggregate $5.0 million in Series A Preferred Stock, representing a 19.9%
interest in Ridge. In conjunction with this investment, Grant Saviers, former
Chairman and CEO of the Company, became a director of Ridge. In December 1997,
the Company wrote-down its minority investment by $3.5 million to $1.5 million
based on an identified impairment (Note 11). In February 1998, the Company
guaranteed a $6.8 million line of credit on behalf of Ridge in exchange for a
warrant to purchase up to 200,000 shares of Ridge common stock. During fiscal
1998, the Company incurred $0.9 million in research and development expenditures
related to consulting services provided by Ridge.
Fiscal 1997: During fiscal 1997, the Company acquired complementary
businesses and technologies consisting of Western Digital's Connectivity
Solutions Group ("WD"), CD-R software technology from Corel, Inc. ("Corel"),
Data Kinesis, Inc. ("DKI"), Sigmax Technology, Inc. ("Sigmax"), Toast CD-R
technology ("Toast"), and certain assets from Skipstone, Inc. ("Skipstone") for
an aggregate amount of approximately $109.0 million in cash and $15.3 million in
stock options exchanged. These companies were in the business of designing and
developing silicon solutions for the Small Computer System Interface ("SCSI")
disk drive market, CD Creator for the CD-R software market, software for
improving system performance in file management and RAID (Redundant Array of
Independent Disks) applications, CD-ROM controllers for ATAPI CD-ROM drivers
and, CD-R technology for Macintosh platforms.
The Company accounted for these acquisitions using the purchase method of
accounting, and excluding the aggregate write-off of acquired in-process
technology from these acquisitions for fiscal 1999 and 1997, the aggregate
impact of the acquisitions was not material to the Company's consolidated
statements of operations from the acquisition date.
The allocation of the Company's aggregate purchase price to the tangible
and identifiable intangible assets acquired and liabilities assumed is
summarized below. The allocations were based on independent appraisals and
estimates of fair values. The allocation for the ASIC technologies purchased
from ADI in fiscal
F-11
48
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1999 has been restated to conform with the Securities and Exchange Commission
("SEC") staff's current views regarding valuation methodologies (Note 9).
1999 1997
------- --------
(IN THOUSANDS)
Net tangible assets (liabilities)........................... $(2,752) $ 10,979
In-process technology..................................... 45,482 90,457
Goodwill and other intangible assets:
Goodwill............................................... 25,078 22,855
Covenant not to compete................................ 2,200 --
Acquired employees..................................... 1,375 --
------- --------
28,653 22,855
------- --------
Net assets acquired....................................... $71,383 $124,291
======= ========
In fiscal 1999, the tangible liabilities assumed exceeded the tangible
assets acquired, which was comprised primarily of a line of credit (Note 4),
accounts payable and fixed assets. In fiscal 1997, the tangible assets acquired
were primarily comprised of inventory and equipment. Acquired in-process
technology was written-off in the period in which the acquisitions were
completed. The goodwill and other intangible assets associated with Ridge and
the ASIC technologies purchased from ADI were written-off and relieved in August
1998 and January 1999 as a result of divesting the storage subsystems business
and the sale of the mainstream removable PTS business line, respectively (Notes
10 and 13). The goodwill associated with WD was relieved in November 1998 in
conjunction with the sale of the high-end PTS business line (Note 13). The
goodwill associated with Sigmax and Skipstone was deemed impaired and
written-off in fiscal 1998 (Note 11). The goodwill associated with DKI and Toast
is being amortized over a benefit period of three years and will be fully
amortized during fiscal 2000
In fiscal 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 fiscal 1999, 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 Company expensed the
entire $21.5 million in fees associated with this terminated acquisition in
"Restructuring and other charges" in the Consolidated Statements of Operations
in the first quarter of fiscal 1999 (Note 7).
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 also a founder, former interim
CEO, and Chairman of the Board of Directors of the Company. During fiscal 1999,
the Company and the venture-stage company agreed to terminate the development
and license agreement. Two other directors of the Company are also directors of
the venture-stage company.
In fiscal 1997, the Company completed its acquisition of Cogent Data
Technologies, Inc. ("Cogent"). The Company acquired all of the outstanding
capital stock of Cogent in exchange for 2.6 million shares of its common stock.
Additionally, the Company incurred $1.7 million in professional fees related to
this acquisition, which have been included in "Restructuring and other charges"
in the Consolidated Statements of Operations in the periods the costs were
incurred (Note 7). The Company has recorded this acquisition using the
pooling-of-interests method of accounting. Cogent's historical operations, net
assets, and cash flows were not material to the Company's consolidated financial
statements and, therefore, have not been reflected in the Company's consolidated
financial results prior to the acquisition. Beginning at the date of
acquisition, the book value of the acquired assets and assumed liabilities as
well as the results of Cogent's operations and cash flows, all of which are not
material to the Company, have been combined with those of the Company.
F-12
49
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9. ACQUIRED IN-PROCESS TECHNOLOGY AND RELATED INTANGIBLES
During fiscal 1999 and 1997, 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 and $90.5 million,
respectively.
In the first quarter of fiscal 1999, the Company purchased Ridge and
acquired ASIC technologies from ADI, which resulted in a first quarter write-off
of acquired in-process technology charge of $26.4 million and $39.4 million,
respectively. The unamortized goodwill associated with Ridge was written-off in
the second quarter of fiscal 1999, in connection with the Company's
restructuring activities and decision to exit the storage subsystems business.
The write-off was included in "Restructuring and other charges" in the
Consolidated Statements of Operations. 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 in
the first quarter of fiscal 1999 to $6.1 million. Amortization of intangibles
increased approximately $1.7 million in each of the first three quarters of
fiscal 1999 from $7.5 million to $12.6 million for the year ended March 31,
1999. In the fourth quarter of fiscal 1999, the Company relieved the unamortized
goodwill associated with ASIC technologies purchased from ADI in connection with
the sale of the Company's mainstream removable PTS business line. The Company
reduced the gain originally reported in the Company's Form 8-K dated January 15,
1999 by $14.0 million from $45.5 million previously reported to $31.5 million
for the fourth quarter and year ended March 31, 1999. Basic and diluted net
income (loss) per share for the four quarters of fiscal 1999 were 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)
Second quarter:
Basic..................................................... $(0.22) $(0.23)
Diluted................................................... $(0.22) $(0.23)
Third quarter:
Basic..................................................... $ 0.25 $ 0.23
Diluted................................................... $ 0.24 $ 0.23
Fourth quarter:
Basic..................................................... $ 0.58 $ 0.43
Diluted................................................... $ 0.55 $ 0.41
There was no impact on fiscal 1999 year-to-date basic or diluted net loss
per share. Additionally, there will be no impact on future results of operations
as the goodwill associated with ASIC technologies purchased from ADI was
relieved in the fourth quarter of fiscal 1999.
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 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
F-13
50
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
acquisition of ASIC technologies from ADI. The Company has revised its results
of operations for fiscal 1999 and will amend its Reports on Form 10-Q for the
first three quarters of fiscal 1999 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 the 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 reflected 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 were 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 were 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 was 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%, as reported by Bradley A. Fowler in the Business Valuation
Review of March 19, 1996. Higher required rates of return, which would
correspond to higher risk, may have been 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
F-14
51
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
In fiscal 1997, the Company acquired complementary businesses and
technologies consisting of WD, Corel, DKI, Sigmax, Toast and Skipstone for an
aggregate purchase price of $124.3 million, resulting in a write-off of acquired
in-process technology charge of $90.5 million. Unamortized goodwill associated
with WD was relieved in fiscal 1999 in connection with the sale of the high-end
PTS business line to TI, for which no gain was derived. Goodwill associated with
Corel was minimal and expensed in fiscal 1997. Unamortized goodwill associated
with Sigmax and Skipstone was deemed impaired and written-off in fiscal 1998 and
the write-off is included in "Restructuring and other charges" in the
Consolidated Statements of Operations (Note 11). The acquired in-process
technology associated with DKI was completed subsequent to the acquisition and
is now incorporated in the Company's products which began shipping in fiscal
1999. The acquired in-process technology associated with Toast related to
further developments of the already existing Toast product. Such developments
were later incorporated into the Company's products. Goodwill associated with
DKI and Toast will be fully amortized during fiscal 2000.
NOTE 10. RESTRUCTURING CHARGES
During fiscal 1999, the Company recorded $39.9 million in restructuring
charges, including $21.6 million of severance and benefits ($3.9 million in
non-cash stock-based compensation charges -- Note 15), $13.5 million of asset
write-offs, and $4.8 million in other 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 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 U.S.
and the remainder were based in Singapore.
In the second quarter of fiscal 1999, the Company recorded a restructuring
charge of $24.5 million, net of an adjustment to the restructuring charge taken
in the first quarter of fiscal 1999 of $1.4 million. This charge was a direct
result of management's decision to refocus the business and divest certain
unprofitable business activities including storage subsystems (primarily those
business activities purchased in connection with the Ridge transaction -- Note
8), fibre channel, external storage, satellite networking and high-end
peripheral technology solutions. The Company continues to hold a minority
interest in the fibre channel, external storage and satellite networking
technologies through investments in Jaycor Networks, Inc. ("JNI"), Chaparral
Technologies, Inc. ("Chaparral") and BroadLogic Inc. ("BroadLogic"),
respectively (Note 13). The second quarter restructuring charge was comprised
primarily of severance and benefits related to the involuntary termination of
approximately 300 U.S. employees and the write-off of property and equipment,
inventory, and other assets including goodwill associated with the storage
subsystems business. The adjustments to the prior quarter provision reflect
changes to the estimated costs of anticipated expenses as actual costs were
settled.
In the fourth quarter of fiscal 1999, the Company recorded a restructuring
charge of $6.6 million, net of an adjustment to the restructuring charges taken
in the first and second quarters of fiscal 1999 of $1.2 million. This charge
resulted from a reduction in the infrastructure that supported businesses
divested during fiscal 1999 (Note 13). The restructuring charge was comprised
primarily of severance and benefits related to the involuntary termination of
approximately 125 employees, of which most were based in the U.S., and the
write-off of property and equipment. The adjustment to the prior quarter
provisions was primarily a result of favorable negotiations with vendors
surrounding contractual obligations.
F-15
52
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth an analysis of the components of the
restructuring charges recorded in fiscal 1999:
RESTRUCTURING CHARGES
SEVERANCE
AND ASSET OTHER
QUARTERS ENDED BENEFITS WRITE-OFFS CHARGES TOTAL
-------------- --------- ---------- ------- -------
(IN THOUSANDS)
MARCH 31, 1999
Severance and benefits............................. $5,982 $ -- $ -- $ 5,982
Property and equipment write-offs.................. -- 1,245 -- 1,245
Accrued lease costs................................ -- -- 190 190
Other charges...................................... -- -- 354 354
Adjustment to prior quarters' provisions........... 534 (459) (1,245) (1,170)
------ ------- ------- -------
Total March 31, 1999............................... $6,516 $ 786 $ (701) $ 6,601
====== ======= ======= =======
SEPTEMBER 30, 1998
Severance and benefits............................. $9,231 $ -- $ -- $ 9,231
Inventory write-offs............................... -- 984 -- 984
Property and equipment write-offs.................. -- 8,484 -- 8,484
Contractual obligations............................ -- -- 3,742 3,742
Accrued lease costs................................ -- -- 927 927
Goodwill and other assets write-offs............... -- 2,005 -- 2,005
Other charges...................................... -- -- 605 605
Adjustment to prior quarter provision.............. (934) 280 (794) (1,448)
------ ------- ------- -------
Total September 30, 1998........................... $8,297 $11,753 $ 4,480 $24,530
====== ======= ======= =======
JUNE 30, 1998
Severance and benefits............................. $6,800 $ -- $ -- $ 6,800
Property and equipment write-offs.................. -- 950 -- 950
Other charges...................................... -- -- 1,050 1,050
------ ------- ------- -------
Total June 30, 1998................................ $6,800 $ 950 $ 1,050 $ 8,800
====== ======= ======= =======
F-16
53
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table sets forth the Company's restructuring reserves:
SEVERANCE
AND ASSET OTHER
RESTRUCTURING RESERVES BENEFITS WRITE-OFFS CHARGES TOTAL
---------------------- --------- ---------- ------- --------
(IN THOUSANDS)
Restructuring charges............................. $ 6,800 $ 950 $ 1,050 $ 8,800
Cash paid......................................... (3,244) -- -- (3,244)
Non-cash charges.................................. (296) (950) -- (1,246)
------- -------- ------- --------
Balance at June 30, 1998.......................... 3,260 -- 1,050 4,310
======= ======== ======= ========
Restructuring charges............................. 8,297 11,753 4,480 24,530
Cash paid......................................... (6,718) -- (272) (6,990)
Non-cash charges.................................. (338) (11,753) -- (12,091)
------- -------- ------- --------
Balance at September 30, 1998..................... 4,501 -- 5,258 9,759
======= ======== ======= ========
Cash paid......................................... (3,742) -- (1,794) (5,536)
------- -------- ------- --------
Balance at December 31, 1998...................... 759 -- 3,464 4,223
======= ======== ======= ========
Restructuring charges............................. 6,516 786 (701) 6,601
Cash paid......................................... (2,550) -- (1,737) (4,287)
Non-cash charges.................................. (3,258) (786) -- (4,044)
------- -------- ------- --------
Balance at March 31, 1999......................... $ 1,467 $ -- $ 1,026 $ 2,493
======= ======== ======= ========
The Company expects the fiscal 1999 restructuring activities will result in
an annual savings in the range of $80 - $90 million. These savings may be
potentially offset by incremental costs associated with anticipated business
growth. The Company anticipates that the remaining reserve balance at March 31,
1999 of $2.5 million will be substantially paid out in the first half of fiscal
2000.
NOTE 11. ASSET IMPAIRMENTS AND OTHER CHARGES
The Company regularly evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them. At the time such evaluations indicate
that the future undiscounted cash flows are not sufficient to recover the
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, the Company recorded non-cash impairment charges of
$4.0 million and $6.7 in fiscal 1999 and 1998, respectively. The fiscal 1999
impairment charges related to $1.4 million in manufacturing equipment deemed
unnecessary due to non-temporary declines in production volume and the write-off
of approximately $2.6 million of non-trade related receivables classified in
other current assets.
The fiscal 1998 impairment consisted of impairments of the remaining
balances of goodwill for the acquisitions of Sigmax and Skipstone of $1.5
million and $1.7 million, respectively and the write-down of the Company's
minority investment in Ridge of $3.5 million. The remaining goodwill for Sigmax
was written-off when the Company decided to abandon this business after the R&D
project fell behind and the critical market window was missed, the engineers
acquired in the purchase had left the Company, and the intellectual property was
deemed to have no alternative use. The remaining goodwill from the acquisition
of Skipstone was written-off when the Company decided to abandon this business
as the market for this technology was not developing at the rate required to
earn a reasonable return on its investment, most of the engineers acquired in
the purchase had left the Company, and the intellectual property had no
alternative use. The impairment and write-down of the Ridge minority investment
was a result of delays in the Ridge product. Ridge was not able to bring the
Ridge product under development to market in a timely manner, which management
believed resulted in permanent impairment of the value of the Company's
underlying investment in Ridge.
F-17
54
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additionally, the Company recorded executive termination costs of $3.4
million in fiscal 1999, relating to three executives. The costs consisted of
$1.9 million in severance and benefit payments and $1.5 million in non-cash
stock compensation charges resulting from amended option agreements (Note 15).
The asset impairment and other charges above are included in "Restructuring
and other charges" in the Consolidated Statements of Operations in the period
incurred.
NOTE 12. ASSETS HELD FOR SALE
In connection with the Company's restructuring activities and evaluation of
long-lived assets, the Company is actively pursuing the sale of certain assets.
In the fourth quarter of fiscal 1999, the Company recorded a gain on the sale of
land in California of $1.6 million and included the gain in interest and other
income for the year ended March 31, 1999. Cash proceeds from the sale were
received in April 1999. As of March 31, 1999, the Company had approximately
$41.1 million in prepaid expenses as assets held for sale representing land and
buildings in California and Colorado. These assets, valued at cost which
approximates net realizable value, are expected to be sold within the next 12
months and are included in current assets as of March 31, 1999.
In April 1999, the Company sold some of the land held for sale in
California, which resulted in a gain of $3.5 million to be recorded in the first
quarter of fiscal 2000.
NOTE 13. BUSINESS DIVESTITURES
In November 1998, the Company entered into a definitive agreement with
Texas Instruments, Inc. ("TI") under which certain assets of the Company's
high-end PTS business line were sold to TI for approximately $8.5 million in
cash. The Company received cash proceeds of $4.5 million upon consummation of
the asset purchase agreement. The outstanding balance of $4.0 million was paid
in two equal installments in February and May of 1999. Additionally, the Company
agreed to license certain technologies to TI for $3.7 million. The license
payments are due and payable in varying amounts during the second quarter
through the fourth quarter of the Company's fiscal 2000. In addition, TI agreed
to pay royalties ranging from 2 - 5% on certain products for up to five years.
In November 1998, the Company entered into a definitive agreement with JNI
whereby the Company agreed to contribute certain tangible and intangible assets
related to the fibre channel product line in exchange for ownership interest in
JNI. The Company's ownership percentage is 6.7% with warrants to purchase
additional shares upon successful completion of various milestones by JNI. The
aggregate price of the warrants is nominal and would represent an additional
11.7% ownership by the Company upon exercise. In addition, the Company has
agreed to provide JNI with certain other manufacturing services and lease space
to JNI in one of the Company's facilities for a transitionary period of time.
The Company and JNI also entered into a cross-license agreement whereby JNI will
pay royalties on certain products and the Company will license certain
technologies from JNI royalty-free.
In November 1998, the Company entered into a definitive agreement with
Chaparral whereby the Company agreed to contribute certain tangible and
intangible assets related to the external storage product line for 19.9% of the
outstanding stock of Chaparral. In addition, the Company has agreed to provide
certain other manufacturing services for a transitionary period of time and
lease space in one of the Company's facilities. The Company and Chaparral also
entered into a cross-license agreement whereby Chaparral will pay royalties on
certain products. The Company will license certain technologies from Chaparral
royalty-free in order to manufacture product for Chaparral.
In December 1998, the Company entered into a definitive agreement with
BroadLogic whereby the Company agreed to contribute certain tangible and
intangible assets related to the satellite networking product line in exchange
for 19.9% of the outstanding stock of BroadLogic and warrants to purchase common
stock. In
F-18
55
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
addition, the Company has agreed to provide certain other manufacturing services
for a transitionary period of time and lease space to BroadLogic in one of the
Company's facilities. The Company and BroadLogic also entered into a
royalty-free cross-license agreement.
In January 1999, the Company consummated an agreement with
STMicroelectronics, Inc. ("ST") under which ST acquired certain assets and
obtained certain intellectual property rights of the Company's mainstream
removable PTS business line for an aggregate purchase price of $72.1 million in
cash and $3.3 million in cost reimbursements. The Company received all of the
cash proceeds in January 1999 and recorded a gain of $10.0 million (net of taxes
of $21.5 million) in the fourth quarter of fiscal 1999. The gain on the sale of
the business line has been restated to reflect the change in goodwill associated
with the purchase of ASIC technologies from ADI (Note 9). In addition, the
Company has agreed to provide certain other manufacturing services and lease
space to ST in one of the Company's facilities for a transitionary period of
time. The Company and ST also entered into a royalty-free cross-license
agreement.
The Company's unaudited pro forma net revenues (excluding PTS and in
thousands) were $601,639, $757,507 and $688,488 in fiscal 1999, 1998 and 1997,
respectively. The Company's unaudited pro forma net income was $479, $134,412
and $99,972 in fiscal 1999, 1998 and 1997, respectively.
The Company's investments in JNI, Chaparral and BroadLogic approximate fair
value and are accounted for under the cost method. The combined investments are
valued at approximately $1.0 million. Additionally, billings for products and
services provided were less than $2.0 million in fiscal 1999 and are not
anticipated to be material going forward.
NOTE 14. NET INCOME (LOSS) PER SHARE
Net income (loss) per share is presented in accordance with Statement of
Financial Accounting Standards No. 128 ("SFAS 128") for all periods presented.
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted net income
(loss) per share gives effect to all dilutive potential common shares
outstanding during a period. In computing diluted net income (loss) per share,
the average stock price for the period is used in determining the number of
shares to be purchased from exercise of stock options under the treasury stock
method.
Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations for the years ended
March 31:
1999 1998
--------------------------------------- ---------------------------
INCOME SHARES PER SHARE INCOME SHARES
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR)
----------- ------------- --------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC
Net income (loss)
available to common
stockholders.......... $(13,293) 110,127 $(0.12) $172,877 113,172
======
Effect of Dilutive
Securities Common
stock equivalents..... -- -- -- 5,260
4 3/4% Convertible
Subordinated Notes.... -- -- -- --
-------- ------- -------- -------
DILUTED
Net income (loss)
available to common
stockholders and
assumed conversions... $(13,293) 110,127 $(0.12) $172,877 118,432
======== ======= ====== ======== =======
1998 1997
--------- ---------------------------------------
PER SHARE INCOME SHARES PER SHARE
AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
--------- ----------- ------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
BASIC
Net income (loss)
available to common
stockholders.......... $1.53 $107,561 108,456 $0.99
===== =====
Effect of Dilutive
Securities Common
stock equivalents..... -- 6,447
4 3/4% Convertible
Subordinated Notes.... 441 693
-------- -------
DILUTED
Net income (loss)
available to common
stockholders and
assumed conversions... $1.46 $108,002 115,596 $0.93
===== ======== ======= =====
F-19
56
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Options to purchase 18,384,000 shares of common stock were outstanding at
March 31, 1999, however, the stock options and conversion of 4,452,000 shares of
common stock related to the 4 3/4% Convertible Subordinated Notes were not
included in the computation of diluted net loss per share for the year ended
March 31, 1999, because they were anti-dilutive.
Additional options to purchase 2,369,000 shares of common stock were
outstanding at March 31, 1998, but were not included in the computation of
diluted weighted average shares outstanding because the options' exercise price
was greater than the average market price of the common shares during the year
ended March 31, 1998. The conversion of 4,452,000 shares of common stock related
to the 4 3/4% Convertible Subordinated Notes are also not included in the
computation of diluted net income per share for the year ended March 31, 1998,
as the impact was anti-dilutive.
Additional options to purchase 203,000 shares of common stock were
outstanding at March 31, 1997, but were not included in the computation of
diluted weighted average shares outstanding because the options' exercise price
was greater than the average market price of the common shares during the year
ended March 31, 1997.
NOTE 15. STOCKHOLDERS' EQUITY
1986 EMPLOYEE STOCK PURCHASE PLAN
The Company has authorized 10,600,000 shares of common stock for issuance
under the 1986 Employee Stock Purchase Plan (1986 Plan). Qualified employees may
elect to have a certain percentage (not to exceed 10%) of their salary withheld
pursuant to the 1986 Plan. The salary withheld is then used to purchase shares
of the Company's common stock at a price equal to 85% of the market value of the
stock at the beginning or ending of the offering period, whichever is lower.
Prior to March 31, 1998, the offering period was three months. During fiscal
1999, the Company amended the 1986 Plan to extend the offering period to six
months. Under this Plan, 770,006, 359,849 and 285,336 shares were issued during
fiscal 1999, 1998 and 1997, representing approximately $6.6 million, $9.4
million and $5.9 million in employee contributions, respectively.
1990 STOCK PLAN
The Company's 1990 Stock Plan allows the Board of Directors to grant to
employees, officers, and consultants options to purchase common stock or other
stock rights at exercise prices not less than 50% of the fair market value of
the underlying common stock on the date of grant. The expiration of options or
other stock rights is not to exceed ten years after the date of grant. To date,
the Company has issued all incentive and non-statutory stock options under this
Plan at exercise prices of at least 100% of fair market value of the underlying
common stock on the respective dates of grant. Generally, options vest and
become exercisable over a four year period. In March 1999, the Company amended
the 1990 Stock Plan to permit non-employee directors of the Company to
participate in the plan. The annual grant to the Board of Directors was made on
March 31, 1999, under this plan.
F-20
57
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity under the 1990 Stock Plan is as follows:
OPTIONS OUTSTANDING
------------------------------
OPTIONS WEIGHTED AVERAGE
AVAILABLE SHARES EXERCISE PRICE
----------- ----------- ----------------
BALANCE, MARCH 31, 1996............................ 8,196,630 11,639,662 $13.32
Authorized....................................... 9,833,906 -- --
Granted.......................................... (7,296,738) 7,296,738 $24.69
Exercised........................................ -- (2,414,728) $ 8.58
Cancelled........................................ 1,555,300 (1,555,300) $19.33
----------- ----------- ------
BALANCE, MARCH 31, 1997............................ 12,289,098 14,966,372 $19.05
Authorized....................................... 4,846,065 -- --
Granted.......................................... (15,509,116) 15,509,116 $28.81
Exercised........................................ -- (2,393,758) $12.05
Cancelled........................................ 10,990,488 (10,990,488) $33.30
----------- ----------- ------
BALANCE, MARCH 31, 1998............................ 12,616,535 17,091,242 $19.69
Authorized....................................... 4,490,166 -- --
Granted.......................................... (22,837,135) 22,837,135 $13.38
Exercised........................................ -- (2,412,849) $10.66
Cancelled........................................ 19,731,659 (19,731,659) $18.88
----------- ----------- ------
BALANCE, MARCH 31, 1999............................ 14,001,225 17,783,869 $13.71
=========== =========== ======
Options exercisable at:
March 31, 1997................................................ 5,397,068 $12.97
March 31, 1998................................................ 6,861,531 $16.41
March 31, 1999................................................ 6,995,660* $13.49
- ---------------
* Amount includes certain vested options repriced in the third quarter of fiscal
1999 but not exercisable until April 1999. See "Repricing of Stock Options"
below.
The following table summarizes information about the 1990 Stock Plan at
March 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------- ---------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 3/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/99 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
$ 0.37 - $10.00 1,802,552 5.4 $ 6.79 1,529,203 $ 6.84
$10.01 - $20.00 13,333,397 8.2 $12.72 4,071,507 $12.38
$20.01 - $30.00 2,647,920 7.0 $23.43 1,394,950 $23.97
---------- ---------
17,783,869 7.8 $13.71 6,995,660 $13.49
========== =========
1990 DIRECTORS' OPTION PLAN
The 1990 Directors' Option Plan provides for the automatic grant to
non-employee directors of non-statutory stock options to purchase common stock
at the fair market value of the underlying common stock on the date of grant,
which is generally the last day of each fiscal year except for the first grant
to any newly elected director. Upon joining the board, each new non-employee
director receives an option for 40,000 shares which vests over four years and,
prior to March 31, 1997, expired five years after the date of grant. Originally
and prior to March 31, 1997, each director received an option at the end of each
fiscal year for 10,000 shares, which vested quarterly and over a four year
period and expired five years after the date of grant. During fiscal 1997, the
Company amended the Directors' Option Plan such that all newly issued shares
expire ten years
F-21
58
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
after the date of grant and all newly issued annual shares vest over a one year
period. During fiscal 1999, the Company amended the Director's Option Plan to
increase the annual grant to 15,000 shares for the fiscal year ended March 31,
1999, however, in March 1999, the Company suspended the annual stock option
grants to directors under this plan. Instead, the fiscal 1999 grant to directors
was made under the newly amended 1990 Stock Plan.
Option activity under the 1990 Directors' Option Plan is as follows:
OPTIONS OUTSTANDING
----------------------------
OPTIONS WEIGHTED AVERAGE
AVAILABLE SHARES EXERCISE PRICE
--------- -------- ----------------
BALANCE, MARCH 31, 1996............................. 580,000 652,500 $15.80
Authorized........................................ 800,000 -- --
Granted........................................... (70,000) 70,000 $37.25
Exercised......................................... -- (113,750) $ 6.73
--------- -------- ------
BALANCE, MARCH 31, 1997............................. 1,310,000 608,750 $19.96
Granted........................................... (120,000) 120,000 $29.83
Exercised......................................... -- (101,250) $ 9.32
--------- -------- ------
BALANCE, MARCH 31, 1998............................. 1,190,000 627,500 $23.56
Granted........................................... (40,000) 40,000 $11.00
Exercised......................................... -- (67,500) $ 9.19
--------- -------- ------
BALANCE, MARCH 31, 1999............................. 1,150,000 600,000 $24.34
========= ======== ======
Options exercisable at:
March 31, 1997............................................... 248,750 $14.10
March 31, 1998............................................... 342,500 $22.03
March 31, 1999............................................... 467,500 $24.16
The following table summarizes information about the 1990 Directors' Option
Plan at March 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------- ---------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 3/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/99 EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
$10.01 - $20.00.. 127,500 3.6 $14.77 87,500 $16.50
$20.01 - $30.00.. 362,500 3.3 $22.45 297,500 $22.28
$30.01 - $40.00.. 70,000 8.0 $37.25 70,000 $37.25
$40.01 - $50.00.. 40,000 8.5 $49.38 12,500 $49.38
------- -------
600,000 4.3 $24.34 467,500 $24.16
======= =======
PRO FORMA INFORMATION
Pro forma information regarding net income (loss) and net income (loss) per
share is required to be determined as if the Company had accounted for the
options granted pursuant to its 1986 Employee Stock Purchase Plan, 1990 Stock
Plan, and 1990 Directors' Option Plan, collectively called "options", under the
fair value method SFAS 123. The fair value of options granted in fiscal 1999,
1998 and 1997 reported below have
F-22
59
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions:
1986 EMPLOYEE STOCK 1990 DIRECTORS'
PURCHASE PLAN 1990 STOCK PLAN OPTION PLAN
-------------------- -------------------- --------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
Expected life (in years).......... 0.34 0.25 0.25 4 4 4 4 4 4
Risk-free interest rate........... 5.2% 5.4% 5.2% 5.2% 5.4% 6.0% 5.2% 5.4% 6.0%
Volatility........................ 62% 52% 44% 62% 52% 44% 62% 52% 44%
Dividend yield.................... -- -- -- -- -- -- -- -- --
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of fair value of its options. The weighted average estimated fair value
of the 1986 Employee Stock Purchase Plan grants during 1999, 1998 and 1997 was
$3.44, $6.84 and $6.65 per share, respectively. The weighted average estimated
fair value of shares granted under the 1990 Stock Plan during 1999, 1998 and
1997 was $6.95, $18.44 and $12.24, respectively. The weighted average estimated
fair value of shares granted under the 1990 Directors' Plan during 1999, 1998
and 1997 was $5.43, $13.56 and $14.80, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands except per share amounts):
1999 1998 1997
-------- -------- -------
Pro forma net income (loss)......................... $(75,981) $127,351 $83,305
Pro forma basic net income (loss) per share......... $ (0.69) $ 1.13 $ 0.77
Pro forma diluted net income (loss) per share....... $ (0.69) $ 1.08 $ 0.72
The effects on pro forma disclosures of applying SFAS 123 are not likely to
be representative of the effects on pro forma disclosures of future years, since
it is applicable only to options granted subsequent to March 31, 1995.
Therefore, the pro forma effect of SFAS 123 is not fully reflected in fiscal
1998 and 1997.
REPRICING OF STOCK OPTIONS
On October 21, 1998, the Company approved the cancellation and reissuance
of outstanding stock options under the Company's stock option plans. Under this
program, all current active employees, except for executive officers, with
outstanding stock options with an exercise price in excess of $12.50 per share
could exchange their stock options for new non-qualified stock options with an
exercise price of $12.50 per share, the fair market value of the common stock on
the exchange date. The new options maintain the vesting schedule established by
the canceled stock options, however, the exercisability of the exchanged options
was suspended until April 1999. During fiscal 1999, 11,111,933 stock options
were repriced to $12.50. The weighted average exercise price of the stock
options prior to repricing was $19.53.
On January 30, 1998, the Company approved the cancellation and reissuance
of outstanding options under the Company's stock option plans. Under the
program, holders of outstanding options with exercise prices in excess of $22.31
per share were given the choice of retaining these options or of obtaining in
substitution new options for the same number of shares. The new options were
exercisable at a price of $22.31 per share, the fair market value of the common
stock on the reissue date. The new options maintained the vesting schedule
established by the canceled option, except that vesting is suspended for six
months, while
F-23
60
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
vesting for officers of the Company participating in the stock repricing is
suspended for twelve months. During fiscal 1998, 9,536,254 stock options were
repriced to $22.31. The weighted average exercise price of the stock options
prior to repricing was $37.50.
STOCK-BASED COMPENSATION CHARGES
During fiscal 1999, the Company recorded non-cash stock-based compensation
charges of $3.4 million related to restructuring activities (Note 10), $1.5
million in connection with the termination of executives (Note 11), and $9.0
million in connection with the sale of the high-end PTS business line to ST
(Note 13). The stock-based compensation charges were recorded pursuant to
modifications made to the option holder's original option agreements. The
charges were accounted for using either the intrinsic value method or the fair
value method, based on the nature of the modification and the subsequent
relationship with the option holder. The charges were recorded as an increase to
additional paid-in-capital in the period the modification occurred.
RIGHTS PLAN
The Company has reserved 250,000 shares of Series A Preferred Stock for
issuance under the 1996 Rights Agreement which was amended and restated as of
December 5, 1996. Under this plan, stockholders have received one Preferred
Stock Purchase Right ("Right") for each outstanding share of the Company's
common stock. Each Right will entitle stockholders to buy one one-thousandth of
a share of Series A Preferred Stock at an exercise price of $180.00 per right.
The Rights trade automatically with shares of the Company's common stock. The
Rights are not exercisable until ten days after a person or group announces
acquisition of 20% or more of the Company's outstanding common stock or the
commencement of a tender offer which would result in ownership by a person or
group of 20% or more of the then outstanding common stock.
The Company is entitled to redeem the Rights at $0.01 per Right anytime on
or before the tenth day following such an acquisition or tender offer. This
redemption period may be extended by the Company in some cases. If, prior to
such redemption, the Company is acquired in a merger or other business
combination, a party acquires 20% or more of the Company's common stock, a 20%
stockholder engages in certain self-dealing transactions, or the Company sells
50% or more of its assets, each right will entitle the holder to purchase from
the surviving corporation, for $180.00 per share, common stock having a then
current market value of $360.00 per share.
The Series A Preferred Stock purchasable upon exercise of the Rights will
not be redeemable. Each share of Series A Preferred Stock will be entitled to an
aggregate dividend of 1,000 times the dividend declared per common stock. In the
event of liquidation, the holders of the Series A Preferred Stock will be
entitled to a preferential liquidation payment equal to 1,000 times the per
share amount to be distributed to the holders of the common stock. Each share of
Series A Preferred Stock will have 1,000 votes, voting together with the common
stock. In the event of any merger, consolidation or other transaction in which
the common stock are changed or exchanged, each share of Series A Preferred
Stock will be entitled to receive 1,000 times the amount received per common
stock. These rights are protected by customary anti-dilution provisions.
F-24
61
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHARES RESERVED FOR FUTURE ISSUANCE
At March 31, 1999, the Company has reserved the following shares of
authorized but unissued common stock:
1986 Employee Stock Purchase Plan........................... 5,323,183
1990 Stock Plan............................................. 31,785,094
1990 Directors' Option Plan................................. 1,750,000
Conversion of 4 3/4% Convertible Subordinated Notes......... 4,452,187
----------
43,310,464
==========
STOCK REPURCHASES
In January 1998, the Company's Board of Directors authorized the purchase
of up to 10 million shares of the Company's common stock in the open market.
During the fourth quarter of fiscal 1998, the Company repurchased and retired
approximately 350,000 shares of its common stock from the open market for
approximately $7.8 million. During the second quarter of fiscal 1999, the
Company repurchased and retired 8,261,000 shares of its common stock for
approximately $97.2 million. The transactions were recorded as reductions to
common stock and additional paid-in capital.
In October 1998, the Company's Board of Directors authorized an additional
repurchase of up to $200.0 million of the Company's common stock in the open
market. The Company repurchased an additional 485,000 and 4,185,000 shares of
its common stock for approximately $9.3 million and $93.7 million in the third
and fourth quarters of fiscal 1999, respectively. The transactions were recorded
as reductions to common stock and additional paid-in capital.
In May 1999, the Company's Board of Directors approved a third repurchase
program of up to $200.0 million of the Company's common stock in the open
market.
NOTE 16. INCOME TAXES
The components of income before income taxes for the years ended March 31
are as follows:
1999 1998 1997
-------- -------- --------
(IN THOUSANDS)
Domestic........................................... $(46,500) $ 95,400 $ 74,866
Foreign............................................ 67,442 149,929 96,915
-------- -------- --------
Income before income taxes......................... $ 20,942 $245,329 $171,781
-------- -------- --------
The split of domestic and foreign income was impacted by the acquisition
related write-offs of acquired in-process technology, restructuring and other
charges, and the gain on the sale of PTS which reduced domestic income by $136
million for 1999 and $92 million for 1997.
F-25
62
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the provision for income taxes for the years ended March
31 are as follows:
1999 1998 1997
------- ------- -------
(IN THOUSANDS)
Federal
Current................................................... $35,542 $46,362 $45,363
Deferred.................................................. (14,077) (11,552) (10,025)
------- ------- -------
21,465 34,810 35,338
------- ------- -------
Foreign
Current................................................... 12,111 21,520 21,418
Deferred.................................................. (738) (319) (1,961)
------- ------- -------
11,373 21,201 19,457
------- ------- -------
State
Current................................................... 1,448 10,067 11,335
Deferred.................................................. (51) (2,626) (1,910)
------- ------- -------
1,397 7,441 9,425
------- ------- -------
Provision for income taxes................................ $34,235 $63,452 $64,220
The reduction in provision for income taxes for fiscal 1999 reflects the
large decrease in income before taxes. This reduction, however, was offset in
part by acquisition and restructuring related costs for which no tax benefit
will be derived. The tax benefit associated with dispositions from employee
stock plans reduces taxes currently payable for 1999 by $18.2 million ($12.4
million and $22.1 million for 1998 and 1997, respectively). These benefits were
recorded directly to stockholders' equity.
Significant components of the Company's deferred tax assets as of March 31 are
as follows:
1999 1998
------- -------
(IN THOUSANDS)
Not currently deductible reserves........................... $23,854 $16,024
State taxes................................................. 546 2,054
Compensatory accruals....................................... 7,190 9,320
Various expense accruals.................................... 11,928 11,299
Capitalized technology...................................... 11,278 7,156
Foreign tax credits......................................... 12,660 --
Fixed assets................................................ (5,061) (304)
Other....................................................... (1,050) 930
------- -------
Net deferred tax assets..................................... $61,345 $46,479
======= =======
F-26
63
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the federal statutory tax rate to income before taxes for the years ended March
31 as follows:
1999 1998 1997
----- ----- -----
Federal statutory rate...................................... 35.0% 35.0% 35.0%
State taxes, net of federal benefit......................... 1.4 2.3 2.7
Foreign subsidiary income at other than the U.S. tax rate... (9.6) (10.9) (11.9)
Tax-exempt interest income.................................. (15.9) (1.7) (1.2)
Acquisition write-offs...................................... 100.2 -- 12.4
Gain associated with sale of PTS segment.................... 50.1 -- --
Other....................................................... 2.3 1.2 0.4
----- ----- -----
Effective income tax rate................................... 163.5% 25.9% 37.4%
The Company's effective tax rate for fiscal 1999 was 164% compared to 26%
and 37% for fiscal 1998 and 1997. The increase in effective tax rate was
primarily due to the write off of acquired in-process technology and goodwill,
which are not deductible for tax purposes, and the gain associated with the sale
of the PTS segment. In the third quarter of fiscal 1999, the Company's
normalized effective tax rate changed (exclusive of write-off's of acquired
in-process technology and goodwill and the gain associated with the sale of the
PTS segment) from 25% to 28% due to a geographic shift of earnings resulting
from restructuring and business divestitures. For fiscal 1998 and 1997, the
Company's normalized effective tax rate was 25% (exclusive of write-offs of
acquired in-process technology and goodwill).
The Company's subsidiary in Singapore is currently operating under a tax
holiday. If certain conditions are met, the tax holiday provides that profits
derived from certain products will be exempt from Singapore tax through fiscal
2006. In addition, profits derived from the Company's remaining products will be
taxed at a lower rate than the Singapore statutory rate of 26%, through fiscal
1999. As of March 31, 1999, the Company had not accrued income taxes on $394
million of accumulated undistributed earnings of its Singapore subsidiary, as
these earnings will be reinvested indefinitely.
NOTE 17. COMMITMENTS AND CONTINGENCIES
The Company leases certain office facilities, vehicles, and certain
equipment under operating lease agreements that expire at various dates through
fiscal 2007. As of March 31, 1999, future minimum lease payment under
non-cancelable operating leases totaled $14.5 million and are due and payable as
follows (in thousands):
FISCAL YEAR
2000....................................................... $ 4,808
2001....................................................... 4,257
2002....................................................... 2,742
2003....................................................... 1,169
2004....................................................... 441
2005 and thereafter........................................ 1,130
-------
$14,547
=======
Rent expense was approximately $3.7 million, $6.6 million and $5.7 million
during fiscal 1999, 1998 and 1997, respectively.
During fiscal 1996, the Company entered into an agreement with Lucent
Technologies, Inc. ("Lucent") to procure up to $25.0 million of fabrication
equipment for the Lucent facility in Spain. In exchange, the Company would be
ensured availability of certain levels of wafer capacity from Lucent. During
1997, the
F-27
64
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company purchased $21.0 million of equipment in connection with the Lucent
agreement. Subsequently, in the fourth quarter of fiscal 1997, the Company
determined that it would not require the additional wafer capacity and entered
into a separate agreement to sell the fabrication equipment to Lucent at a price
equal to the Company's carrying value and to terminate the wafer capacity
agreement. Accordingly, there was no impairment identified or recorded. There
were also no termination fees associated with the subsequent agreement. Lucent
paid the Company in two installments, both of which were received in fiscal
1998.
A class action lawsuit is pending in the United States District Court for
the Northern District of California against the Company and certain of its
officers and directors. The action alleges that the Company made false and
misleading statements at various times during the period between April 1997 and
January 1998 in violation of the federal securities laws. The complaint does not
set forth purported damages. In addition, a derivative action is pending in the
Superior Court of the State of California against the Company and certain of its
officers and directors alleging that the individual defendants improperly
profited from transactions in the Company's stock during the same time period
referenced by the class action lawsuit. The Company believes the lawsuit and
derivative action are without merit and intends to defend itself vigorously.
The IRS is currently auditing the Company's 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.
From time to time, the Company is subject to certain litigation, claims and
assessments in the normal course of business. The Company believes that any
liability with respect to such routine litigation, individually or in the
aggregate, is not likely to be material to the Company's financial position or
results of operations.
NOTE 18. SEGMENT REPORTING AND FOREIGN OPERATIONS
In fiscal 1999, the Company adopted Statement of Financial Accounting
Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." The Company evaluated its product segments in accordance
with SFAS 131 and concluded that its reportable segments are Host I/O, RAID
(Redundant Array of Independent Disks), Software and PTS.
The Host I/O segment designs, develops, manufactures and markets host bus
adapter ("HBA") boards and chips that allow computers to transfer information to
and from peripherals, such as hard disk drives, scanners, CD-ROMs, CD-Rs,
CD-RWs, DVD-ROMs, and Zip and Jaz drives among many other devices. The Company's
HBAs are based on Small Computer System Interface ("SCSI") technology and are
utilized in servers, high-end workstations and desktops where high performance
I/O is a vital component of overall system performance.
The RAID segment designs, develops, manufactures and markets bus-based and
microprocessor-based RAID solutions. These products are utilized from entry
level workstations to enterprise-class servers. The Company's RAID adapters
provide performance and functionality, incorporate the latest technical
innovations, and offer superior software functionality to make RAID fast, simple
and reliable.
The Software segment designs, develops and markets optical media software
for CD-R and CD-RW. This segment includes video editing products and software
utility products that simplify connecting a SCSI host adapter and peripherals to
a microcomputer system. The Company's CD-R and CD-RW products are used for data
storage to optical media, including audio, video and still photos, and provide
users storage alternatives to traditional disk and removable media options.
Additionally, CD-RW allows users to transfer downloaded music from the internet
to CDs for private use. The Company's CD-R software offerings are available as
standalone products, and also ship built-in or "bundled" with most CD-R drives
in the desktop market.
F-28
65
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The business lines that comprised the PTS segment were sold in November
1998 and January 1999 to TI and ST, respectively. This segment designed,
developed, manufactured and marketed proprietary integrated circuits ("ICs") for
use in mass storage devices and other peripherals.
Summarized financial information concerning the Company's reportable
segments is shown in the following table. The Company does not identify or
allocate assets or depreciation by operating segments nor are the segments
evaluated under these criteria. The "Other" column includes corporate related
items and, as it relates to segment profit (loss), income and expenses not
allocated to reportable segments, primarily related unusual transactions and to
businesses divested in fiscal 1999 (Note 13).
HOST
I/O RAID SOFTWARE PTS OTHER TOTAL
-------- -------- -------- -------- --------- ----------
(IN THOUSANDS)
Fiscal 1999
Revenues....................... $520,148 $ 32,166 $47,110 $ 90,803 $ 2,214 $ 692,441
Segment profit (loss).......... 162,882 (18,650) 7,219 (30,628) (99,881) 20,942
Fiscal 1998
Revenues....................... 701,114 14,494 38,186 249,786 3,713 1,007,293
Segment profit (loss).......... 261,582 (28,483) 8,249 32,189 (28,208) 245,329
Fiscal 1997
Revenues....................... 667,722 3,290 17,425 245,380 51 933,868
Segment profit (loss).......... 259,941 (23,430) (1,471) 53,484 (116,743) 171,781
The following table presents the details of "Other" segment profit (loss):
(IN THOUSANDS)
---------------------------------
1999 1998 1997
-------- -------- ---------
Losses from divested businesses................... $(31,679) $(34,378) $ (20,583)
Unallocated corporate expenses, net............... (8,364) (7,612) (14,551)
Interest and other income......................... 35,059 32,899 13,297
Interest expense.................................. (12,103) (12,402) (2,744)
Write-off of acquired in-process technology....... (45,482) -- (90,457)
Restructuring and other charges................... (68,788) (6,715) (1,705)
Gain on sale of PTS............................... 31,476 -- --
-------- -------- ---------
Total............................................. $(99,881) $(28,208) $(116,743)
======== ======== =========
The following table presents revenues by country and is attributed to
countries based on location of the selling entity:
1999 1998 1997
-------- ---------- --------
(IN THOUSANDS)
United States..................................... $295,736 $ 704,334 $782,622
Singapore......................................... 388,676 294,217 147,367
Other countries................................... 8,029 8,742 3,879
-------- ---------- --------
Total............................................. $692,441 $1,007,293 $933,868
======== ========== ========
F-29
66
ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents long-lived assets by country based on the
location of the asset and includes all non-current assets except non-current
financial instruments and deferred tax assets:
1999 1998
-------- --------
(IN THOUSANDS)
United States............................................... $ 94,085 $167,644
Singapore................................................... 31,030 25,051
Other countries............................................. 1,619 2,103
-------- --------
Total....................................................... $126,734 $194,798
======== ========
The Company had no significant customers which accounted for more than 10%
of net revenues or gross receivables in fiscal 1999, 1998 and 1997.
NOTE 19. COMPARATIVE QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is presented below. Note that certain
items previously reported in specific financial statement captions have been
reclassified to conform with current presentation. Additionally, the following
information has been adjusted to reflect the restatement of the purchase price
allocation of ASIC technologies from ADI (Note 7). The Company will amend its
Reports on Form 10-Q for the first three quarters of fiscal 1999 previously
filed with the SEC.
QUARTERS
------------------------------------------------------
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FISCAL 1999
Net revenues............................... $180,630 $143,922 $183,872 $184,017 $ 692,441
Gross profit............................... $100,892 $ 80,835 $109,153 $117,058 $ 407,938
Write-off of acquired in-process
technology............................... $ 45,482 $ -- $ -- $ -- $ 45,482
Restructuring and other charges............ $ 30,263 $ 31,924 $ -- $ 6,601 $ 68,788
Gain on sale of the PTS segment............ $ -- $ -- $ -- $ 31,476 $ 31,476
Net income (loss).......................... $(58,749) $(25,924) $ 25,012 $ 46,368 $ (13,293)
Net income (loss) per share:
Basic.................................... $ (0.51) $ (0.23) $ 0.23 $ 0.43 $ (0.12)
Diluted.................................. $ (0.51) $ (0.23) $ 0.23 $ 0.41 $ (0.12)
Weighted average shares outstanding:
Basic.................................... 114,200 111,583 108,040 106,687 110,127
Diluted.................................. 114,200 111,583 110,881 111,881 110,127
FISCAL 1998
Net revenues............................... $271,442 $278,088 $254,163 $203,600 $1,007,293
Gross profit............................... $163,948 $173,558 $158,859 $119,828 $ 616,193
Restructuring and other charges............ $ -- $ 1,528 $ 5,187 $ -- $ 6,715
Net income................................. $ 59,689 $ 62,719 $ 27,075 $ 23,394 $ 172,877
Net income per share:
Basic.................................... $ 0.53 $ 0.56 $ 0.24 $ 0.21 $ 1.53
Diluted.................................. $ 0.51 $ 0.52 $ 0.23 $ 0.20 $ 1.46
Weighted average shares outstanding:
Basic.................................... 112,008 112,931 113,666 114,083 113,172
Diluted.................................. 122,181 123,902 124,444 116,558 118,432
F-30
67
REPORT OF MANAGEMENT
Management is responsible for the preparation and integrity of the
consolidated financial statements and other financial information presented in
the annual report. The accompanying financial statements were prepared in
conformity with generally accepted accounting principles and as such include
some amounts based on management's best judgments and estimates. Financial
information in the annual report is consistent with that in the financial
statements.
Management is responsible for maintaining a system of internal business
controls and procedures to provide reasonable assurance that assets are
safeguarded and that transactions are authorized, recorded, and reported
properly. The internal control system is continuously monitored by management
review, written policies and guidelines, and careful selection and training of
qualified personnel who are provided with and expected to adhere to the
Company's standards of business conduct. Management believes the Company's
internal controls provide reasonable assurance that assets are safeguarded
against material loss from unauthorized use or disposition and the financial
records are reliable for preparing financial statements and other data and
maintaining accountability for assets.
The Audit Committee of the Board of Directors meets periodically with the
independent accountants and management to discuss internal business controls,
auditing, and financial reporting matters. The Committee also reviews with the
independent accountants the scope and results of the audit effort.
The independent accountants, PricewaterhouseCoopers LLP, are engaged to
audit the consolidated financial statements of the Company and conduct such
tests and related procedures, as they deem necessary in accordance with
generally accepted auditing standards. The opinion of the independent
accountants, based upon their audit of the consolidated financial statements, is
contained in this annual report.
/s/ ROBERT N. STEPHENS /s/ ANDREW J. BROWN
- -------------------------------------------- --------------------------------------------
Robert N. Stephens Andrew J. Brown
President and Chief Executive Officer Vice President, Finance and
Chief Financial Officer
/s/ KENNETH B. AROLA /s/ J. PETER CAMPAGNA
- -------------------------------------------- --------------------------------------------
Kenneth B. Arola J. Peter Campagna
Vice President, Corporate Controller, and Vice President and Treasurer
Principal Accounting Officer
F-31
68
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Adaptec, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page , present fairly, in all material
respects, the financial position of Adaptec, Inc. and its subsidiaries at March
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for business process reengineering
costs in 1998.
/s/ PRICEWATERHOUSECOOPERS LLP
- ---------------------------------------------------------
PricewaterhouseCoopers LLP
San Jose, California
April 28, 1999
F-32
69
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION NOTES
- ------- ----------- -----
2.1 Agreement for Purchase and Sale of Stock by and among (3)
Western Digital Corporation, Western Digital CSG
Corporation, and Adaptec, Inc. dated April 9, 1996.
2.2 Agreement and Plan of Reorganization by and among Adaptec, (4)
Inc., Adaptec Acquisition Corporation, and Data Kinesis,
Inc. dated August 6, 1996.
2.3 Asset Acquisition Agreement by and among Adaptec, Inc. and (16)
Analog Devices, Inc. dated March 24, 1998
2.4 Agreement and Plan of Reorganization by and among Adaptec, (16)
Inc., Ridge Technologies and RDS Acquisition (as of May 21,
1998).
2.5 Agreement and Plan of Merger dated February 23, 1998 between (16)
Registrant and Adaptec, Inc., a California corporation.
2.6 Asset Purchase Agreement between Texas Instruments, (14)
Incorporated and Adaptec, Inc. dated November 6, 1998.
2.7 Asset Acquisition Agreement among Adaptec, Inc., Adaptec (14)
Mfg.(s) Pte. Ltd. And STMicroelectronics, Inc. dated January
15, 1999.
2.8 Amendment No. 1 to Asset Acquisition Agreement among (14)
Adaptec, Inc., Adaptec
Mfg. (s) Pte. Ltd. and STMicroelectronics, Inc. dated
January 15, 1999.
3.1 Certificate of Incorporation of Registrant filed with (16)
Delaware Secretary of State on November 19, 1997.
3.2 Bylaws of Registrant, as amended on June 29, 1999.
4.1 Second Amended and Restated Rights Agreement dated December (8)
5, 1996 between Registrant and Chase Mellon Shareholder
Services, Inc. as Rights Agents.
4.2 First Amendment dated March 12, 1998 to Second Amended and (16)
Restated Rights Agreement.
4.3 Indenture dated as of February 3, 1997 between Registrant (1)
and State Street Bank and Trust Company.
4.4 First Supplemental indenture dated as of March 12, 1998 (16)
between Registrant and State Street Bank and Trust Company.
10.1+ Registrant's 1986 Employee Stock Purchase Plan. (6)
10.2 Technology License Agreement dated January 1, 1985 between (10)
the Registrant and International Business Machines
Corporation.
10.3+ Registrant's Savings and Retirement Plan. (9)
10.4+ 1990 Stock Plan, as amended. (12)
10.5+ Forms of Stock Option Agreement, Tandem Stock Option/SAR (7)
Agreement, Restricted Stock Purchase Agreement, Stock
Appreciation Rights Agreement, and Incentive Stock Rights
Agreement for use in connection with the 1990 Stock Plan, as
amended.
10.6+ 1990 Directors' Option Plan and forms of Stock Option
Agreement, as amended.
10.7 Option Agreement I Between Adaptec Manufacturing (S) Pte. (2)
Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated
October 23, 1995.
10.8* Option Agreement II Between Adaptec Manufacturing (S) Pte. (2)
Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated
October 23, 1995.
10.9 Consignment Agreement between Adaptec, Inc. and AT&T Corp. (2)
dated January 10, 1996.
70
EXHIBIT
NUMBER DESCRIPTION NOTES
- ------- ----------- -----
10.10 Form of Indemnification Agreement entered into with (11)
directors and officers of Adaptec, Inc., a California
corporation, prior to Registrant's reincorporation into
Delaware.
10.11 Form of Indemnification Agreement entered into between (16)
Registrant and its officers and directors.
10.12 Deposit and Supply Agreement between Taiwan Semiconductor (6)
Manufacturing Co., Ltd. and Adaptec Manufacturing Pte. Ltd.
10.13 Industrial Lease Agreement between the Registrant, as (5)
Lessee, and Jurong Town Corporation, as Lessor.
10.14 Amendment No. 1 to Option Agreement III between Adaptec (13)
Manufacturing (s) Pte. Ltd. And Taiwan Semiconductor
Manufacturing Co. Ltd.
10.15 Termination of Option III agreement between Adaptec (15)
Manufacturing (s) Pte. Ltd. And Taiwan Semiconductor
Manufacturing Co. Ltd.
10.16** Amendment to Option Agreements I & II between Taiwan
Semiconductor Manufacturing Co., Ltd. and Adaptec
Manufacturing (s) Pte. Ltd.
10.17 Modification to Amendment to Option Agreements I & II
between Taiwan Semiconductor Manufacturing Co., Ltd. and
Adaptec Manufacturing (s) Pte. Ltd.
21.1 Subsidiaries of Registrant.
23.1 Consent of Independent Accountants, PricewaterhouseCoopers
LLP. (See Page 34)
24.1 Power of Attorney. (See Page 36)
27.1 Financial Data Schedule for the year ended March 31, 1999.
27.2 Financial Data Schedule for the year ended March 31, 1998.
27.3 Financial Data Schedule for the year ended March 31, 1997.
- ---------------
(1) Incorporated by reference to exhibits filed with Registrant's Registration
Statement Number 333-24557 on Form S-1 on April 4, 1997.
(2) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1996.
(3) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 28, 1996.
(4) Incorporated by reference to exhibits filed with Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 27, 1996.
(5) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1995.
(6) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1994.
(7) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the year ended March 31, 1993.
(8) Incorporated by reference to Exhibit 1 filed with Amendment No. 4 to
Registrant's Registration Statement Number 0-15071 on Form 8-A as filed on
January 4, 1997.
(9) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1987.
(10) Incorporated by reference to Exhibit 10.15 filed in response to Item 16(a)
"Exhibits," of Registrant's Registration Statement on Form S-1 and
Amendment No. 1 and Amendment No. 2 thereto
(file No. 33-5519), which became effective on June 11, 1986.
71
(11) Incorporated by reference to exhibits filed with Registrant's Annual Report
on Form 10-K for the fiscal year ended March 31, 1992.
(12) Incorporated by reference to Exhibit 4.2 to Form 10-Q as filed February 7,
1996.
(13) Incorporated by reference to Exhibit 10.1 to Form 10-Q as filed August 7,
1998.
(14) Incorporated by reference to Exhibits 2.1, 2.2, 2.3, respectively, to Form
8-K as filed January 29, 1999.
(15) Incorporated by reference to Exhibit 10.1 to Form 10-Q as filed February
12, 1999.
(16) Incorporated by reference to exhibits filed with the Registrant's Annual
Report on Form 10-K for the year ended March 31, 1998.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 14(c) of said form.
* Confidential treatment has been granted for portions of this agreement.
** Confidential treatment has been requested for portions of this agreement.