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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended December 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission file number 0-15071
ADAPTEC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State of Incorporation)
94-2748530
(I.R.S. Employer Identification No.)
691 S. MILPITAS BLVD., MILPITAS, CALIFORNIA 95035
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (408) 945-8600
N/A
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No __
The number of shares outstanding of the Company's common stock as of
January 1, 1999 was 107,761,383.
This document consists of 27 pages, excluding exhibits, of which this is page 1.
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TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial
Statements 6-16
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations:
Results of Operations 17-23
Liquidity and Capital Resources 23-24
Recent Accounting Pronouncements 24
Year 2000 24-25
Factors Affecting Future Operating Results 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
---------------------------------- ----------------------------------
(RESTATED: NOTE 10) (RESTATED: NOTE 10)
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------------- ------------ ------------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues $183,872 $254,163 $508,424 $803,693
Cost of revenues 74,719 95,304 217,544 307,328
-------- -------- -------- --------
Gross profit 109,153 158,859 290,880 496,365
-------- -------- -------- --------
Operating expenses:
Research and development 35,156 45,782 119,970 126,881
Sales, marketing and
administrative 43,524 63,312 139,731 164,291
Write-off of acquired in-process
technology -- -- 45,482 --
Restructuring and other charges -- 5,187 62,187 6,715
-------- -------- -------- --------
Total operating expenses 78,680 114,281 367,370 297,887
-------- -------- -------- --------
Income (loss) from operations 30,473 44,578 (76,490) 198,478
Interest income 7,916 9,375 24,961 24,775
Interest expense (2,992) (3,026) (9,106) (9,116)
-------- -------- -------- --------
Income (loss) from operations
before provision (benefit) for
income taxes 35,397 50,927 (60,635) 214,137
Provision (benefit) for income
taxes 10,385 14,852 (974) 55,654
-------- -------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle 25,012 36,075 (59,661) 158,483
Cumulative effect of a change in
accounting principle, net of tax
benefit -- (9,000) -- (9,000)
-------- -------- -------- --------
Net income (loss) $ 25,012 $ 27,075 $(59,661) $149,483
======== ======== ======== ========
Net income (loss) per common
share:
Basic
Income (loss) before change in
accounting principle $ 0.23 $ 0.32 $ (0.54) $ 1.40
Cumulative effect of change in
accounting principle -- (0.08) -- (0.08)
-------- -------- -------- --------
Net income (loss) $ 0.23 $ 0.24 $ (0.54) $ 1.32
======== ======== ======== ========
Diluted
Income (loss) before change in
accounting principle $ 0.23 $ 0.30 $ (0.54) $ 1.34
Cumulative effect of change in
accounting principle -- (0.07) -- (0.07)
-------- -------- -------- --------
Net income (loss) $ 0.23 $ 0.23 $ (0.54) $ 1.27
======== ======== ======== ========
Shares used in computing net
income (loss) per share:
Basic 108,040 113,666 111,274 112,868
======== ======== ======== ========
Diluted 110,881 124,444 111,274 122,919
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(RESTATED: NOTE 10)
DECEMBER 31, MARCH 31,
1998 1998
------------------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents $ 262,648 $ 227,183
Marketable securities 392,906 470,199
Accounts receivable, net 80,357 136,476
Inventories 48,600 71,297
Prepaid expenses and other 108,674 85,939
---------- ----------
Total current assets 893,185 991,094
Property and equipment, net 185,551 194,798
Other assets 53,649 89,337
---------- ----------
$1,132,385 $1,275,229
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ -- $ 850
Note payable -- 17,640
Accounts payable 36,945 48,047
Accrued liabilities 78,778 73,947
---------- ----------
Total current liabilities 115,723 140,484
---------- ----------
Convertible subordinated notes 230,000 230,000
---------- ----------
Contingencies (Note 18)
Stockholders' equity:
Common stock 108 114
Additional paid-in capital 236,847 295,263
Retained earnings 549,707 609,368
---------- ----------
Total stockholders' equity 786,662 904,745
---------- ----------
$1,132,385 $1,275,229
========== ==========
See accompanying notes to condensed consolidated financial statements.
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ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTH PERIOD ENDED
---------------------------------
(RESTATED:
NOTES 1 AND 10)
DECEMBER 31, DECEMBER 31,
1998 1997
--------------- ------------
(IN THOUSANDS)
NET CASH PROVIDED BY OPERATING ACTIVITIES $120,455 $222,013
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certain net assets in connection with
acquisitions, net (34,126) --
Proceeds from the sale of high-end PTS 4,543 --
Investments in property and equipment (32,203) (73,564)
Decreases (increases) in marketable securities, net 77,293 (350,896)
-------- --------
NET CASH PROVIDED FOR (USED FOR) INVESTING ACTIVITIES 15,507 (424,460)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock 11,567 33,637
Repurchases of common stock (106,514) --
Principal payments on debt (5,550) (2,550)
-------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (100,497) 31,087
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 35,465 (171,360)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 227,183 318,075
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $262,648 $146,715
======== ========
See accompanying notes to condensed consolidated financial statements.
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated, interim financial statements have been prepared on a consistent
basis with the March 31, 1998 audited consolidated financial statements and
include all adjustments, consisting of only normal recurring adjustments, except
as described in Notes 2 and 9 through 13, necessary to provide a fair statement
of the results for the interim periods presented. These interim financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto incorporated by reference in the Company's
Annual Report on Form 10-K for the year ended March 31, 1998. For presentation
purposes, the Company has indicated its third quarter as having ended on
December 31, whereas in fact, the Company's third quarter of fiscal 1999 and
1998 ended on January 1, 1999 and January 2, 1998, respectively. The results of
operations for the three and nine month periods ended December 31, 1998, are not
necessarily indicative of the results to be expected for the entire year.
Certain items previously reported in specific financial statement captions
have been reclassified to conform with the current presentation.
2. CHANGE IN ACCOUNTING POLICY FOR BUSINESS PROCESS REENGINEERING COSTS
On November 20, 1997, the Emerging Issues Task Force ("EITF") for the
Financial Accounting Standards Board issued EITF 97-13, "Accounting for costs
incurred in connection with a consulting contract that combines business process
reengineering and information technology transformation." EITF 97-13 requires
that business process reengineering costs incurred in connection with an overall
information technology transformation project be expensed as incurred. The
transition provisions of EITF 97-13 require that companies that had previously
capitalized such business process reengineering costs charge off any unamortized
amount as the cumulative effect of a change in accounting principle during the
quarter which included November 20, 1997. The cumulative effect of the change to
the Company was to decrease net income by $9.0 million (net of a tax benefit of
$3.0 million).
3. COMPREHENSIVE INCOME
As of April 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income". SFAS 130
establishes new rules for the reporting and display of comprehensive income and
its components, however, the adoption of this statement has no impact on the
Company's net income (loss) or stockholders' equity. SFAS 130 requires
components of comprehensive income, including unrealized gains or losses on the
Company's available-for-sale securities and foreign currency translation
adjustments, to be reported in the financial statements. These amounts are not
material to the Company's financial statements for the periods presented.
4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information". This statement establishes standards
for the way companies report information about operating segments in their
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
disclosures prescribed by SFAS 131 were adopted in the Company's fiscal 1999
Annual Report on Form 10-K.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
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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.
5. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are as follows (in thousands):
DECEMBER 31, MARCH 31,
1998 1998
------------ ---------
Raw materials $13,117 $17,728
Work in process 7,943 18,415
Finished goods 27,540 35,154
------- -------
$48,600 $71,297
======= =======
6. LINE OF CREDIT
In May 1998, the Company assumed a $6.8 million unsecured revolving line of
credit, of which $4.7 million was outstanding, in conjunction with the purchase
of Ridge Technologies, Inc. ("Ridge") (Note 10). In the second quarter of fiscal
1999, the Company paid in full and terminated this line of credit.
The Company had available an unsecured $17.0 million revolving line of
credit that was to expire on December 31, 1998. No borrowings were outstanding
under this line of credit as of March 31, 1998, and no borrowings were made
during the first quarter of fiscal 1999. In June 1998, the Company terminated
this line of credit.
7. LONG-TERM DEBT
In June 1992, the Company entered into a $17.0 million term loan agreement
bearing interest at 7.65%, with principal and interest payable in quarterly
installments of $850,000. In the first quarter of fiscal 1999, the Company paid
the remaining outstanding principal and interest due on the loan.
8. TAIWAN SEMICONDUCTOR MANUFACTURING AGREEMENT
In each of fiscal years 1996 through 1998, the Company entered into
agreements with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"), including
Option I, Option II and Option III Agreements, which provide the Company with
guaranteed capacity for wafer fabrication in exchange for advance payments by
the Company. The Company records the prepayments as either prepaid expenses or
other assets based upon the amount expected to be utilized in the next 12
months. As wafers are received from TSMC, the prepaid expenses balance is
reclassified to inventory.
During fiscal 1998, the Company entered into the Option III agreement with
TSMC which provided the Company with a guarantee of increased capacity for wafer
fabrication in return for advance payments totaling $35.3 million. The Company
signed a non-interest bearing promissory note for the $35.3 million which became
due in two equal installments. The first installment was paid in January 1998.
In the first quarter of fiscal 1999, the Company and TSMC amended the promissory
note to extend, indefinitely, the second installment which was originally due in
June 1998. Management did not anticipate paying the second installment within
one year, therefore, the note payable was reclassified as long-term debt as of
June 30, 1998.
In December 1998, 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
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$35.3 million of payments 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. At no time did the Company determine
the prepaid balance was impaired.
In January 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 advance
payments, payable in four equal quarterly installments. This amount due from
TSMC was reclassified from other assets to prepaid expenses in the fourth
quarter of fiscal 1999.
9. STATEMENTS OF OPERATIONS
Restructuring and other charges includes (in thousands):
THREE MONTH THREE MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
Asset impairment and other charges (Note
12) $ -- $5,187
======= ======
NINE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
Acquisition related costs (Note 10) $21,463 $ --
Restructuring charges (Note 11) 33,330 --
Asset impairment and other charges (Note
12) 7,394 6,715
------- ------
Total $62,187 $6,715
======= ======
10. RELATED PARTY TRANSACTIONS AND BUSINESS COMBINATIONS
In April 1998, the Company purchased read channel and preamplifier ASIC
technologies ("ASIC technologies") from Analog Devices, Inc. ("ADI") for $34.4
million in cash. Grant Saviers, former Chairman and CEO of the Company, is a
director of ADI. Additionally, in May 1998, the Company purchased Ridge for 1.2
million shares of the Company's common stock valued at $21.2 million and assumed
stock options valued at $13.1 million. Prior to the acquisition, the Company
owned a 19.9% interest in Ridge with a carrying value of $1.5 million. The $1.5
million carrying value is net of a $3.5 million write-down of the investment
balance taken in the third quarter of fiscal 1998 for an identified impairment
(Note 12). Grant Saviers, former Chairman and CEO of the Company, was a director
of Ridge. The Company accounted for both acquisitions using the purchase method
of accounting. Additionally, the Company incurred $1.2 million in professional
fees, including finance, accounting, legal and appraisal fees, related to the
acquisitions, which were capitalized as part of the purchase price of the
transactions.
As previously reported in the Company's Report on Form 10-Q for the quarter
ended December 31, 1998, the purchase of Ridge and the acquisition of ASIC
technologies from ADI, resulted in a first quarter write-off of acquired
in-process technology charge of $39.4 million and $26.4 million, respectively.
In the fourth quarter of fiscal 1999, the Company reduced its estimate of the
amount allocated to acquired in-process technology from the purchase of ASIC
technologies from ADI by $20.3 million from $26.4 million previously reported to
$6.1 million. Amortization of intangibles increased approximately $1.7 million
in each of the first three quarters of fiscal 1999 from $6.4 million to $11.5
million for the nine months ended December 31, 1998.
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Basic and diluted net income (loss) per share for the first three 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
Dec. 31, 1998 Year-to-date:
Basic $(0.67) $(0.54)
Diluted $(0.67) $(0.54)
The Company allocated amounts to acquired in-process technology in the
first quarter of fiscal 1999 in a manner consistent with widely recognized
appraisal practices at the date of the acquisition of ASIC technologies from
ADI. Subsequent to the acquisition, the Securities and Exchange Commission
("SEC") staff expressed views that took issue with certain appraisal practices
generally employed in determining the fair value of the acquired in-process
technology that was the basis for the Company's measurement of the acquired
in-process technology charge. The charge of $26.4 million associated with ASIC
technologies purchased from ADI, as first reported, was based upon assumptions
and appraisal methodologies the SEC has since announced it does not consider
appropriate.
As a result of computing the acquired in-process technology using the SEC
preferred methodology, the Company decided to revise the amount originally
allocated to acquired in-process technology relating to the acquisition of ASIC
technologies from ADI in this Report on Form 10-Q/A for the third quarter ended
December 31, 1998. The Company has also revised its results of operations in its
Reports on Form 10-Q for the first and second quarters of fiscal 1999, ended
June 30, 1998 and September 30, 1998, respectively, previously filed with the
SEC.
The $6.1 million allocation of the purchase price to acquired in-process
technology from ASIC technologies purchased from ADI was determined by
identifying research projects, including read channel and preamplifier ASIC
technologies, in areas for which technological feasibility had not been
established and no alternative future uses existed. The value was determined by
estimating the expected cash flows from the projects once commercially viable,
discounting the net cash flows back to their present value and then applying a
percentage of completion to the calculated value as defined below.
Net cash flows. The net cash flows from the identified projects were based
on estimates of revenues, cost of sales, research and development costs,
selling, general and administrative costs, royalty costs and income taxes from
those projects. These estimates were based on the assumptions mentioned below.
The research and development costs included in the model reflect costs to
complete development of technologies acquired and sustain projects, but excluded
costs to bring acquired in-process projects to technological feasibility.
The estimated revenues were based on management projections of the acquired
in-process projects for read channel and preamplifier ASIC products and the
business projections were compared and found to be in line with industry
analysts' forecasts of growth in substantially all of the relevant markets.
Estimated total revenues from the majority of the acquired in-process technology
product areas were expected to peak in fiscal 2001 and decline from 2002 into
2003 as other new products are expected to become available. These projections
were based on estimates of market size and growth, expected trends in
technology, and the nature and expected timing of new product introductions by
the Company and its competitors.
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Projected gross margins were based on management's estimates and are in
line with the Company's business which acquired ASIC technologies from ADI. The
estimated selling, general and administrative costs were in line with comparable
company averages within the industry at approximately 14% of revenues. Research
and development costs were consistent with ADI's historical cost structure.
Discount rate. Discounting the net cash flows back to their present value
was based on cost of capital for start up companies and well managed venture
capital funds which typically have similar risks and returns on investments. The
cost of capital used in discounting the net cash flows from acquired in-process
technology was 25%. Higher required rates of return which would correspond to
higher risk may be somewhat mitigated by the Company's expertise in the disk
drive market.
Percentage of completion. The percentage of completion for the projects was
determined using costs incurred by ADI prior to the acquisitions to date
compared to the remaining research and development to be completed to bring the
projects to technological feasibility. The Company estimates, as of the
acquisition date, the projects in aggregate were approximately 71% complete and
the aggregate costs to complete are $11.0 million ($8.0 million in fiscal 1999
and $3.0 million in fiscal 2000). Substantially all of the acquired in-process
technology projects were expected to be completed and generating revenues within
two years following the acquisition date.
The Company and its advisors believe that the restated acquired in-process
technology charge relating to ASIC technologies purchased from ADI of $6.1
million is valued consistently with the SEC staff's current views regarding
valuation methodologies. There can be no assurances, however, that the SEC staff
will not take issue with any assumptions used in the Company's valuation model
and require the Company to further revise the amount allocated to acquired
in-process technology.
The Company accounted for its acquisitions in Ridge and ASIC technologies
purchased from ADI using the purchase method of accounting. Excluding the $45.5
million write-off of acquired in-process technology, as restated, the aggregate
impact of the acquisitions was not material to the Company's financial position
and results of operations from the acquisition date.
The allocation of the Company's aggregate purchase price to the tangible
and identifiable intangible net assets acquired and liabilities assumed is
summarized below. The allocations were based on independent appraisals and
estimates of fair values (in thousands):
Net tangible liabilities $(2,752)
In-process technology 45,482
Goodwill and other intangible assets:
Goodwill 25,078
Covenant not to compete 2,200
Acquired employees 1,375
-------
28,653
-------
Net assets acquired $71,383
=======
The tangible liabilities assumed exceeded the tangible assets acquired,
which comprised primarily a line of credit (Note 6), accounts payable and fixed
assets. Acquired in-process technology was written-off in the period in which
the acquisitions were completed. The goodwill and other intangible assets
associated with Ridge were 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 (Note 11) and the goodwill and other intangible
assets associated with ASIC technologies purchased from ADI are being amortized
over a benefit period of three years.
In February 1998, the Company entered into an agreement to purchase all of
the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of Hyundai
Electronics America ("HEA"). In June 1998, the Company and HEA mutually agreed
to terminate the agreement. The Company paid a $7.0 million termination fee and
approximately $6.7 million in nonconsummation fees to HEA. Additionally, the
Company incurred approximately $7.8 million in other acquisition related
charges, including legal, consulting and other
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costs. In the first quarter of fiscal 1999, the $21.5 million in fees associated
with this terminated acquisition were expensed and are included in
"Restructuring and other charges" in the Condensed Consolidated Statements of
Operations.
During fiscal 1998, the Company purchased $1.0 million in preferred stock,
and entered into a development and license agreement with a venture stage
company whose founder and CEO, Larry Boucher, is a director of the Company and
who recently was appointed interim CEO of the Company, following the resignation
of Grant Saviers. Two other directors of the Company are also directors of the
venture stage company.
11. RESTRUCTURING 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 United
States 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
10), 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 Network, 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 provisions reflect
changes to the estimated cost of anticipated expenses as actual costs were
settled.
In February 1999, the Company announced that it expects to initiate and
complete a restructuring plan by the end of the fourth quarter of fiscal 1999
primarily related to reducing the infrastructure that supported businesses
recently divested. The restructuring plan has not yet been finalized; therefore,
the Company cannot quantify the associated costs at this time. The Company
anticipates these costs may include severance and benefits related to the
involuntary termination of employees and asset impairments.
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The following table sets forth an analysis of the components of the
restructuring charges recorded in the first and second quarters of fiscal 1999
(in thousands):
SEVERANCE
RESTRUCTURING CHARGES AND ASSET OTHER
QUARTER ENDED BENEFITS WRITE-OFFS CHARGES TOTAL
- --------------------- --------- ---------- ------- --------
SEPTEMBER 30, 1998
Severance and benefits $ 9,231 $ -- $ -- $ 9,231
Inventory write-offs -- 984 -- 984
Property and equipment write-offs -- 8,484 -- 8,484
Contractual obligations -- -- 3,742 3,742
Accrued lease costs -- -- 927 927
Goodwill and other assets -- 2,005 -- 2,005
Other charges -- -- 605 605
Adjustment to prior quarter's provision (934) 280 (794) (1,448)
------- ---------- ------- --------
TOTAL SEPTEMBER 30, 1998 $ 8,297 $ 11,753 $ 4,480 $ 24,530
======= ========== ======= ========
June 30, 1998
Severance and benefits $ 6,800 $ -- $ -- $ 6,800
Property and equipment write-offs -- 950 -- 950
Other charges -- -- 1,050 1,050
------- ---------- ------- --------
TOTAL JUNE 30, 1998 $ 6,800 $ 950 $ 1,050 $ 8,800
======= ========== ======= ========
The following table sets forth the Company's restructuring reserves (in
thousands):
SEVERANCE
AND ASSET OTHER
RESTRUCTURING RESERVES BENEFITS WRITE-OFFS CHARGES TOTAL
- ---------------------- --------- ---------- ------- --------
Restructuring charges $ 6,800 $ 950 $ 1,050 $ 8,800
Cash paid (3,244) -- -- (3,244)
Non-cash charges (296) (950) -- (1,246)
------- ---------- ------- --------
BALANCE AT JUNE 30, 1998 $ 3,260 $ -- $ 1,050 $ 4,310
======= ========== ======= ========
Restructuring charges $ 8,297 $ 11,753 $ 4,480 $ 24,530
Cash paid (6,718) -- (272) (6,990)
Non-cash charges (338) (11,753) -- (12,091)
------- ---------- ------- --------
BALANCE AT SEPTEMBER 30, 1998 $ 4,501 $ -- $ 5,258 $ 9,759
======= ========== ======= ========
Cash paid $(3,742) $ -- $(1,794) $ (5,536)
------- ---------- ------- --------
BALANCE AT DECEMBER 31, 1998 $ 759 $ -- $ 3,464 $ 4,223
======= ========== ======= ========
The Company anticipates the remaining reserve balances at December 31, 1998
of $4.2 million will be substantially paid out in the fourth quarter of fiscal
1999.
12. ASSET IMPAIRMENT AND OTHER CHARGES
The Company regularly evaluates the recoverability of long-lived assets by
measuring the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them. At the time such evaluations indicate
that the future undiscounted cash flows are not sufficient to recover the
carrying value of such assets, the assets are adjusted to their fair values.
Based on these evaluations, the Company recorded non-cash impairment charges of
$4.0 million and $6.7 million in the first nine months of fiscal 1999 and 1998,
respectively. The fiscal 1999 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.
12
13
The fiscal 1998 charge consisted of impairments of the remaining balances
of goodwill for the acquisition of Sigmax Technology, Inc. ("Sigmax") and
certain assets from Skipstone, Inc. ("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 for 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 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.
Additionally, the Company recorded executive termination costs of $3.4
million in the first nine months of 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.
The asset impairment and other charges above are included in "Restructuring
and other charges" in the Condensed Consolidated Statements of Operations in the
period incurred.
In connection with the Company's restructuring activities and evaluation of
long-lived assets, the Company is actively pursuing the sale of certain assets.
As of September 30, 1998, the Company had $7.1 million in assets held for sale
which are included in current assets. Approximately $6.7 million related to the
sale of the high-end Peripheral Technology Solutions ("PTS") business line to
Texas Instruments, Inc. ("TI"), which was completed in November 1998 (Note 13).
As of December 31, 1998, $0.4 million, representing the net realizable value of
these assets, remain in assets held for sale and are expected to be sold within
the next 6 months.
13. BUSINESS DIVESTITURES
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
sold to TI for approximately $8.5 million in cash. The Company received cash
proceeds of approximately $4.5 million upon consummation of the asset purchase
agreement. The outstanding balance of $4.0 million is due and payable in two
equal installments scheduled for February and May of 1999. Additionally, the
Company agreed to license certain technologies to TI for $3.7 million. The
license payments are due and payable in varying amounts during the second
quarter through the fourth quarter of fiscal 2000. In addition, TI agreed to pay
royalties ranging from 2-5% on certain products for up to five years.
Approximately $6.7 million of assets related to the high-end PTS business line
classified as assets held for sale and included in current assets as of
September 30, 1998, were sold to TI in November 1998.
On November 12, 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.
On November 25, 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
13
14
other manufacturing services and lease space in one of the Company's facilities
for a transitionary period of time. The Company and Chaparral also entered into
a cross-license agreement whereby Chaparral will pay royalties on certain
products. 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 whereby the Company agreed to contribute certain tangible and
intangible assets related to the satellite networking product line in exchange
for 19.9% of the outstanding stock of BroadLogic and warrants to purchase common
stock at $4.00 per share. In addition, the Company has agreed to provide certain
other manufacturing services and lease space to BroadLogic in one of the
Company's facilities for a transitionary period of time. The Company and
BroadLogic also entered into a royalty-free cross-license agreement.
On January 15, 1999, the Company consummated an agreement with
STMicroelectronics, Inc. ("ST") under which ST acquired certain assets and
obtained certain intellectual property rights of the Company's mainstream
removable PTS business line for an aggregate purchase price of $72.1 million in
cash. The Company expects to record a gain in the fourth quarter of fiscal 1999.
In addition, the Company has agreed to provide certain other manufacturing
services and lease space to ST in one of the Company's facilities for a
transitionary period of time. The Company and ST also entered into a
royalty-free cross-license agreement.
The Company's investments in JNI, Chaparral and BroadLogic approximate fair
value and are accounted for under the cost method. The combined investments are
less than $1.0 million.
The Company's unaudited pro forma net revenues (excluding PTS and in
thousands) were $159,606 and $194,393 for the three month period ended December
31, 1998 and 1997, respectively. The Company's unaudited pro forma net revenues
for the nine month period ended December 31, 1998 and 1997 were $423,633 and
$599,167, respectively. The Company's unaudited pro forma net income was $29,177
and $20,508 for the three month period ended December 31, 1998 and 1997,
respectively. The Company's unaudited pro forma net income/(loss) for the nine
month period ended December 31, 1998 and 1997 was ($39,796) and $115,013,
respectively.
14. NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is computed by dividing net income (loss)
available to common stockholders (numerator) by the weighted average number of
common shares outstanding (denominator) during the period. Diluted net income
(loss) per share gives effect to all dilutive potential common shares
outstanding during the period. In computing diluted net income (loss) per share,
the average stock price for the period is used in determining the number of
shares assumed to be purchased from the exercise of stock options under the
treasury stock method.
14
15
Following is a reconciliation of the numerators and denominators of the
basic and diluted net income (loss) per share computations.
THREE MONTH PERIOD ENDED THREE MONTH PERIOD ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
BASIC NET INCOME PER
SHARE
Net income available to
common stockholders $ 25,012 108,040 $ 0.23 $ 27,075 113,666 $ 0.24
====== ======
EFFECT OF DILUTIVE
SECURITIES
Common stock equivalents -- 2,841 -- 6,326
4 3/4% Convertible
Subordinated Notes -- -- 2,043 4,452
-------- ------- -------- -------
DILUTED NET INCOME PER
SHARE
Net income available to
common stockholders and
assumed conversions $ 25,012 110,881 $ 0.23 $ 29,118 124,444 $ 0.23
======== ======= ====== ======== ======= ======
NINE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
(IN THOUSANDS EXCEPT PER SHARE DATA)
BASIC NET INCOME (LOSS)
PER SHARE
Net income (loss)
available to common
stockholders $(59,661) 111,274 $(0.54) $149,483 112,868 $ 1.32
====== ======
EFFECT OF DILUTIVE
SECURITIES
Common stock equivalents -- -- -- 5,599
4 3/4% Convertible
Subordinated Notes -- -- 6,218 4,452
-------- ------- -------- -------
DILUTED NET INCOME (LOSS)
PER SHARE
Net income (loss)
available to common
stockholders and
assumed conversions $(59,661) 111,274 $(0.54) $155,701 122,919 $ 1.27
======== ======= ====== ======== ======= ======
For the three months ended December 31, 1998, additional options to
purchase 4,187,000 shares of common stock were not included in the computation
of diluted weighted average common shares outstanding because the options'
exercise price was greater than the average market price of the common shares
during the quarter. The conversion of 4,452,000 shares of common stock related
to the 4 3/4% Convertible Subordinated Notes was also not included in the
computation of diluted net income per share for the three months ended December
31, 1998, as the impact was anti-dilutive.
For the nine months ended December 31, 1998, options to purchase 20,981,000
shares of common stock were outstanding, however the stock options and the
4 3/4% Convertible Subordinated Notes were not included in the computation of
diluted net loss per share because they were anti-dilutive.
At December 31, 1997, additional options to purchase 631,000 shares of
common stock were outstanding but were not included in the computations of
diluted weighted average common shares outstanding because the options' exercise
price was greater than the average market price of the common shares during the
quarter.
15
16
15. STOCK REPURCHASES
On January 20, 1998, the Company's Board of Directors approved a stock
repurchase program under which the Company is authorized to purchase up to 10
million shares of its common stock from time to time in the open market. During
the second quarter of fiscal 1999, the Company repurchased and retired 8,261,000
shares of its common stock for approximately $97.2 million. On October 16, 1998,
the Company's Board of Directors authorized an additional repurchase of up to
$200 million of the Company's common stock in the open market. In the third
quarter of fiscal 1999, the Company repurchased an additional 485,000 shares of
its common stock for approximately $9.3 million.
16. STOCK REPRICING
In October 1998, the Company approved the cancellation and reissuance of
outstanding stock options under the Company's stock option plans. Under this
program, all current active employees, except for executive officers, with
outstanding stock options with an exercise price in excess of $12.50 per share
could exchange their stock options for new non-qualified stock options with an
exercise price of $12.50 per share, the fair market value of the common stock on
the exchange date. The new options maintain the vesting schedule established by
the canceled stock options, however, the exercisability of the exchanged options
is suspended until April 1999.
17. INCOME TAXES
Income tax provisions (benefits) for the interim periods are based on
estimated annual income tax rates. The difference between the Company's
effective income tax rate and the U.S. federal statutory income tax rate is
primarily due to income earned in Singapore where the Company is subject to a
significantly lower effective tax rate. In the third quarter of fiscal 1999, the
Company's effective tax rate changed from 25% to 28% due to a geographic shift
of earnings resulting from restructurings and business divestitures. The Company
recorded an income tax provision of $10.4 million in the third quarter of fiscal
1999, and an income tax benefit of $1.0 million for the first nine months of
fiscal 1999, which it believes is fully recoverable for income tax purposes
based on carry back potential against taxes paid previously. The effective tax
rate used to calculate the income tax benefit for the first nine months of
fiscal 1999 is lower than 28% primarily due to book write-offs taken in the
first quarter of fiscal 1999 relating to acquired in-process technology and the
write-off of goodwill taken in the second quarter of fiscal 1999 for which no
tax benefit will be derived.
18. CONTINGENCIES
A class action lawsuit has been filed in the United States District Court
for the Northern District of California against the Company and certain of its
officers and directors. The action alleges that the Company made false and
misleading statements at various times during the period between April 1997 and
January 1998 in violation of the federal securities laws. The complaint does not
set forth purported damages. In addition, a derivative action has been filed in
the Superior Court of the State of California against the Company and certain of
its officers and directors, alleging that the individual defendants improperly
profited from transactions in the Company's stock during the same time period
referenced by the class action lawsuit. The Company believes both the class
action lawsuit and derivative action are without merit and intends to defend
itself vigorously.
The IRS is currently auditing the Company's federal income tax returns for
fiscal years 1994 through 1996 and no notice of proposed amendment has been
received. The Company believes sufficient taxes have been provided 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.
16
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the items in the condensed consolidated
statements of operations as a percentage of net revenues:
THREE MONTH PERIOD ENDED NINE MONTH PERIOD ENDED
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 40.6 37.5 42.8 38.2
----- ----- ----- -----
Gross margin 59.4 62.5 57.2 61.8
----- ----- ----- -----
Operating expenses:
Research and development 19.1 18.0 23.6 15.8
Sales, marketing and administrative 23.7 24.9 27.5 20.5
Write-off of acquired in-process
technology -- -- 8.9 --
Restructuring and other charges -- 2.1 12.2 0.8
----- ----- ----- -----
Total operating expenses 42.8 45.0 72.2 37.1
----- ----- ----- -----
Income (loss) from operations 16.6 17.5 (15.0) 24.7
Interest income 4.3 3.7 4.9 3.0
Interest expense (1.6) (1.2) (1.8) (1.1)
----- ----- ----- -----
Income (loss) before provision (benefit)
for income taxes 19.3 20.0 (11.9) 26.6
Provision (benefit) for income taxes 5.7 5.8 (0.2) 6.9
----- ----- ----- -----
Income (loss) before cumulative effect of
a change in accounting principle 13.6 14.2 (11.7) 19.7
Cumulative effect of a change in
accounting principle -- (3.5) -- (1.1)
----- ----- ----- -----
Net income (loss) 13.6% 10.7% (11.7)% 18.6%
===== ===== ===== =====
SEC Comment Letter. On June 8, 1999, the Company received a comment letter
from the Securities and Exchange Commission ("SEC") relating to certain previous
1934 Act filings with the SEC, primarily comments about disclosure in the
Company's Management's Discussion and Analysis and Notes to Consolidated
Financial Statements. The Company had addressed the comments in its response to
the SEC dated June 16, 1999 and has incorporated such comments into this Report
on Form 10-Q/A for the quarter ended December 31, 1998 to the extent
practicable. However, there can be no assurance that the SEC will not take
exception with the Company's responses and disclosures and require that the
Company file additional responses and disclosures in its periodic reports.
Net Revenues. The Company's net revenues were derived from the sale of high
performance I/O solutions, including advanced SCSI host adapter boards and ICs,
disk controller ICs and RAID and software solutions. The Company sells its
products primarily in the server, workstation and desktop markets. Net revenues
for the third quarter ended December 31, 1998 were $183.9 million, a decrease of
27.7% from the same period of fiscal 1998. Net revenues for the first nine
months of fiscal 1999 were $508.4 million, a decrease of 36.7% from the
corresponding period of fiscal 1998.
Net revenues for the third quarter of fiscal 1999 were comprised of $13.6
million from software up 17.7% from the comparable period, $24.3 million from
disk controller ICs down 59.4% from the comparable period and $146.0 million
from host adapter boards, ICs and RAID solutions down 20.2% from the comparable
period.
In the second quarter of fiscal 1999 net revenues were comprised of $10.5
million from software, $25.6 million from disk controller ICs and $107.8 million
from host adapter boards, ICs and RAID solutions.
17
18
The decline in net revenues for the third quarter and first nine months of
fiscal 1999 as compared to the third quarter and first nine months of fiscal
1998 was due to a combination of factors. Revenues from SCSI host adapter boards
and ICs declined as a result of Ultra-DMA penetration in the desktop market.
Ultra-DMA has not had a material effect on revenue derived from the workstation
and server markets. Revenue from the sale of disk controller ICs declined as a
result of continued weakness in the disk drive industry. Revenue was further
constrained in the nine month period ended December 31, 1998 by weakness in the
Asian markets. The decline in revenues for the third quarter of fiscal 1999 over
that of the comparable period was partially offset by the demand for high
performance I/O fueled by the growth in on-line applications like electronic
commerce, on-line publishing, and corporate intranets. The decline was also
partially offset by increased software revenue and initial shipments of the
Company's 64-bit RAID product.
Gross Margin. Gross margins for the third quarter and first nine months of
fiscal 1999 were 59.4% and 57.2%, respectively, compared to 62.5% and 61.8% for
the third quarter and first nine months of fiscal 1998. The decline in gross
margin is primarily a result of unutilized manufacturing capacity.
Operating Expenses. Excluding unusual charges for restructuring, the
write-off of acquired in-process technology, impaired assets and executive
termination costs, operating expenses as a percentage of net revenues for the
third quarter and first nine months of fiscal 1999 were 42.8% and 51.1%,
respectively, versus 42.9% and 36.3%, of the corresponding periods of fiscal
1998. The increase as a percentage of net revenues for the nine month period is
primarily attributable to decreased revenue. The decreases in total dollars
year-over year of $30.4 million in the third quarter of fiscal 1999 and $31.5
million in the first nine months of fiscal 1999, excluding unusual charges, were
primarily attributable to Company-wide cost reduction programs which included a
reduction in force and the curtailment of costs related to the exit of certain
unprofitable activities. In addition, in the third quarter of fiscal 1998, the
Company provided $4.0 million in reserves for specific doubtful accounts
receivable related to business conditions in the disk drive market. No
significant provisions were provided in the third quarter of fiscal 1999.
Write-off of In-process Technology. During the first quarter of fiscal
1999, the Company purchased complementary businesses recorded under the purchase
method of accounting, resulting in an aggregate write-off of acquired in-process
technology of $45.5 million. The goodwill associated with these acquisitions was
written-off in August 1998 and January 1999 as a result of exiting these
activities.
As previously reported, the purchase of Ridge Technologies, Inc. ("Ridge")
and the acquisition of the read channel and preamplifier ASIC technologies
("ASIC technologies") from Analog Devices, Inc. ("ADI"), 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
Condensed 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 ($5.1 million in
aggregate for the nine months ended December 31, 1998) from $6.4 million to
$11.5 million and is included in "Sales, marketing and administrative" expenses
in the Condensed Consolidated Statements of Operations. Basic and diluted net
income (loss) per share for the three 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)
18
19
PRIOR TO SUBSEQUENT TO
FISCAL 1999 RESTATEMENT RESTATEMENT
----------- ----------- -------------
Third quarter:
Basic $ 0.25 $ 0.23
Diluted $ 0.24 $ 0.23
Dec. 31, 1998 Year-to-date:
Basic $(0.67) $(0.54)
Diluted $(0.67) $(0.54)
The Company allocated amounts to acquired in-process technology in the
first quarter of fiscal 1999 in a manner consistent with widely recognized
appraisal practices at the date of the acquisition of the ASIC technologies from
ADI. Subsequent to the acquisition, the SEC staff expressed views that took
issue with certain appraisal practices generally employed in determining the
fair value of the acquired in-process technology that was the basis for the
Company's measurement of the acquired in-process technology charge. The charge
of $26.4 million associated with ASIC technologies purchased from ADI, as first
reported, was based upon assumptions and appraisal methodologies the SEC has
since announced it does not consider appropriate.
As a result of computing the acquired in-process technology using the SEC
preferred methodology, the Company decided to revise the amount originally
allocated to acquired in-process technology. The Company has revised its results
of operations for fiscal 1999 in this Report on Form 10-Q/A for the third
quarter of fiscal 1999 and in its Reports on Form 10-Q/A for the first two
quarters of fiscal 1999.
The Company and its advisors believe that the restated acquired in-process
technology charge relating to ASIC technologies purchased from ADI of $6.1
million is valued consistently with the SEC staff's current views regarding
valuation methodologies. There can be no assurances, however, that the SEC staff
will not take issue with any assumptions used in the Company's valuation model
and require the Company to further revise the amount allocated to acquired
in-process technology.
RESTRUCTURING AND OTHER CHARGES. During the nine months ended December 31,
1998, the Company incurred $33.3 million in restructuring charges, $21.5 million
in acquisition related charges and $7.4 million in asset impairment and other
charges. During the nine months ended December 31, 1997, the Company incurred
$6.7 million in asset impairment 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), 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., Chaparral Technologies, Inc. and
BroadLogic Inc., respectively. The second quarter restructuring charge was
comprised primarily of severance and benefits related to the involuntary
termination of approximately 300 U.S. employees and the write-off of inventory,
property and equipment, and other assets including goodwill associated with the
storage subsystems business. The adjustments to the prior quarter provision
reflect changes to the estimated cost of anticipated expenses as actual costs
were settled.
19
20
The following table sets forth an analysis of the components of the
restructuring charges recorded in fiscal 1999 (in thousands):
SEVERANCE
RESTRUCTURING CHARGES AND ASSET OTHER
QUARTER ENDED BENEFITS WRITE-OFFS CHARGES TOTAL
--------------------- --------- ---------- ------- --------
SEPTEMBER 30, 1998
Severance and benefits $ 9,231 $ -- $ -- $ 9,231
Inventory write-offs -- 984 -- 984
Property and equipment write-offs -- 8,484 -- 8,484
Contractual obligations -- -- 3,742 3,742
Accrued lease costs -- -- 927 927
Goodwill and other assets -- 2,005 -- 2,005
Other charges -- -- 605 605
Adjustment to prior quarter's provision (934) 280 (794) (1,448)
------- -------- ------- --------
Total September 30, 1998 $ 8,297 $ 11,753 $ 4,480 $ 24,530
JUNE 30, 1998
Severance and benefits $ 6,800 $ -- $ -- $ 6,800
Property and equipment write-offs -- 950 -- 950
Other charges -- -- 1,050 1,050
------- -------- ------- --------
Total June 30, 1998 $ 6,800 $ 950 $ 1,050 $ 8,800
======= ======== ======= ========
The following table sets forth the Company's restructuring reserves (in
thousands):
SEVERANCE
AND ASSET OTHER
RESTRUCTURING RESERVES BENEFITS WRITE-OFFS CHARGES TOTAL
---------------------- --------- ---------- ------- --------
Restructuring charges $ 6,800 $ 950 $ 1,050 $ 8,800
Cash paid (3,244) -- -- (3,244)
Non-cash charges (296) (950) -- (1,246)
------- -------- ------- --------
Balance at June 30, 1998 3,260 -- 1,050 4,310
======= ======== ======= ========
Restructuring charges 8,297 11,753 4,480 24,530
Cash paid (6,718) -- (272) (6,990)
Non-cash charges (338) (11,753) -- (12,091)
------- -------- ------- --------
Balance at September 30, 1998 4,501 -- 5,258 9,759
======= ======== ======= ========
Cash paid (3,742) -- (1,794) (5,536)
------- -------- ------- --------
Balance at December 31, 1998 759 -- 3,464 4,223
======= ======== ======= ========
The Company anticipates that the remaining reserve balance at December 31,
1998 of $4.2 million will be substantially paid out in the fourth quarter of
fiscal 1999.
In February 1998, the Company entered into an agreement to purchase all of
the outstanding stock of Symbios, Inc., a wholly-owned subsidiary of Hyundai
Electronics America ("HEA"). In June 1998, the Company and HEA mutually agreed
to terminate the agreement. The Company paid a $7.0 million termination fee and
approximately $6.7 million in nonconsummation fees to HEA. Additionally, the
Company incurred approximately $7.8 million in other acquisition related
charges, including legal, consulting and other costs. The $21.5 million in fees
associated with this terminated acquisition were expensed in the first quarter
of fiscal 1999 and are included in "Restructuring and other charges" in the
Condensed Consolidated Statements of Operations.
The Company recorded non-cash impairment charges of $4.0 million and $6.7
million in the first nine months of fiscal 1999 and 1998, respectively. The
fiscal 1999 impairment related to approximately $1.4 million
20
21
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 charge consisted of impairments of the remaining balances
of goodwill from the acquisition of Sigmax Technology, Inc. ("Sigmax") and
certain assets from Skipstone, Inc. ("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 abandoned 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 for Skipstone was written-off when
the Company decided to abandon this business due to the facts 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 Ridge product. Ridge was not able to bring the Ridge product under
development to market in a timely manner, which management believes results in a
permanent impairment of the value of the Company's underlying investment in
Ridge.
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.
INTEREST AND INCOME TAXES. Interest income for the third quarter and first
nine months of fiscal 1999 was $7.9 million and $25.0 million, respectively,
compared to $9.4 million and $24.8 million for the corresponding periods of
fiscal 1998. Interest income declined in the third quarter of fiscal 1999 over
the comparable period due to higher marketable securities balances in the third
quarter of fiscal 1998. Interest income for the nine months ended December 31,
1998 was consistent with the comparable period even through average balances
declined slightly, primarily as a result of higher average interest rates in
fiscal 1999.
Interest expense for the third quarter and first nine months of fiscal 1999
is related to the 4 3/4% Convertible Subordinated Notes and remained consistent
at $3.0 million and $9.1 million, respectively, as compared to the corresponding
periods in the prior year.
Interest income could decline in the fourth quarter of fiscal 1999 if the
Company liquidates investments to repurchase common stock. The Company does not
anticipate any material change in interest expense for the three months ended
March 31, 1999.
Income tax provisions (benefits) for the interim periods are based on
estimated annual income tax rates. The difference between the Company's
effective income tax rate and the U.S. federal statutory income tax rate is
primarily due to income earned in Singapore where the Company is subject to a
significantly lower effective tax rate. In the third quarter of fiscal 1999, the
Company's effective tax rate changed from 25% to 28% due to a geographic shift
of earnings resulting from restructurings and business divestitures. The Company
recorded an income tax provision of $10.4 million in the third quarter of fiscal
1999, and an income tax benefit of $1.0 million for the first nine months of
fiscal 1999, which it believes is fully recoverable for income tax purposes
based on carry back potential against taxes paid previously. The effective tax
rate used to calculate the income tax benefit for the first nine months of
fiscal 1999 is lower than 28% primarily due to book write-offs taken in the
first quarter of fiscal 1999 relating to acquired in process technology and the
write-off of goodwill taken in the second quarter of fiscal 1999 for which no
tax benefit will be derived.
CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. EITF 97-13 was
issued in November 1997 and requires that business process reengineering costs
be expensed as incurred. The transition provisions of EITF 97-13 required that
companies that had previously capitalized such business process reengineering
costs charge off any unamortized amounts as the cumulative effect of a change in
accounting principle. The cumulative effect of the change to the Company was to
decrease net income by $9.0 million, net of taxes.
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EVENTS SUBSEQUENT TO QUARTER END
On January 15, 1999, the Company consummated an agreement with
STMicroelectronics, Inc. ("ST") under which ST acquired certain assets and
obtained certain intellectual property rights of the Company's mainstream
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 expects to record a gain in the fourth quarter
of fiscal 1999. In addition, the Company has agreed to provide certain other
manufacturing services and lease space to ST in one of the Company's facilities
for a transitionary period of time. The Company and ST also entered into a
royalty-free cross-license agreement.
In January, the Company announced that it expects to initiate and complete
a restructuring plan by the end of the fourth fiscal quarter of 1999 primarily
related to reducing the infrastructure that supported businesses recently
divested. The restructuring plan has not yet been finalized; therefore, the
Company cannot quantify the associated costs at this time. The Company
anticipates these costs may include severance and benefits related to the
involuntary termination of employees and asset impairments.
BUSINESS DIVESTITURES
Pursuant to asset purchase agreements consummated November 6, 1998 and
January 15, 1999, with TI and ST, respectively, the Company sold its PTS
business lines for approximately $80.6 million in cash and $3.3 million in cost
reimbursements (See Note 13 of Notes to Condensed Consolidated Financial
Statements). The following comments are associated with the Company's continuing
operations.
PRO FORMA NET REVENUES. The Company's net revenues are derived from the
sale of high performance I/O solutions, including advanced SCSI host adapter
boards and ICs, RAID and software solutions. The Company sells its products
primarily in the server, workstation and desktop markets. Net revenues for the
third quarter ended December 31, 1998 were $159.6 million, a decrease of 17.9%
from the same period of fiscal 1998. Net revenues for the first nine months of
fiscal 1999 were $423.6 million, a decrease of 29.3% from the corresponding
period of fiscal 1998.
Net revenues for the third quarter of fiscal 1999 were comprised of $13.6
million from software up 17.7% from the comparable period and $146.0 million
from host adapter boards, ICs and RAID solutions down 20.2% from the comparable
period.
In the second quarter of fiscal 1999 net revenues were comprised of $10.5
million from software and $107.8 million from host adapter boards, ICs and RAID
solutions.
The decline in net revenues for the third quarter and first nine months of
fiscal 1999 as compared to the third quarter and first nine months of fiscal
1998 was due to a combination of factors. Revenues from SCSI host adapter boards
and ICs declined as a result of Ultra-DMA penetration in the desktop market.
Ultra-DMA has not had a material effect on revenue derived from the workstation
and server markets. The decline in revenues for the third quarter of fiscal 1999
over that of the comparable period was partially offset by the demand for high
performance I/O fueled by the growth in on-line applications like electronic
commerce, on-line publishing, and corporate intranets. The decline was also
partially offset by increased software revenue and initial shipments of the
Company's 64-bit RAID product.
The Company anticipates sequential revenue growth in the fourth quarter of
fiscal 1999 as compared to the third quarter with the principal driver being a
ramp in RAID shipments. The Company also anticipates increased shipments of its
host adapter boards, ICs and software products.
PRO FORMA GROSS MARGIN. Gross margins for the third quarter and first nine
months of fiscal 1999 were 64.4% and 62.6%, respectively, compared to 67.5% and
66.8% for the third quarter and first nine months of fiscal 1998. The decline in
gross margin is primarily a result of unutilized manufacturing capacity. Gross
margin for the fourth quarter of fiscal 1999 is expected to be in the range
experienced in the last four quarters, however, gross margin can be affected by
shifts in product mix.
PRO FORMA OPERATING EXPENSES. Excluding unusual charges for restructuring,
the write-off of acquired in-process technology, impaired assets and executive
termination costs, operating expenses as a percentage of
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net revenues for the third quarter and first nine months of fiscal 1999 were
42.1% and 51.3%, respectively, versus 47.7% and 40.9%, of the corresponding
periods of fiscal 1998. The increase as a percentage of net revenues for the
nine month period is primarily attributable to decreased revenue. The decrease
as a percentage of net revenues for the three month period over that of the
comparable period and the year over year operating expense decline of 27.6% in
the third quarter and 11.3% in the first nine months of fiscal 1999 are
attributable to Company-wide cost reduction programs which included a reduction
in force and the curtailment of costs related to the exit of certain
unprofitable activities.
Operating expenses, excluding unusual charges, should decline in the fourth
quarter of fiscal 1999 as a result of continued cost reductions.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial condition at December 31, 1998 remains strong, with
a ratio of current assets to current liabilities of 7.7:1, compared to 7.1:1 at
March 31, 1998. The Company ended the quarter with cash, cash equivalents and
short-term investments of $655.6 million.
OPERATING ACTIVITIES. The Company generated approximately $120.5 million of
cash from operations during the first nine months of fiscal 1999. The primary
sources of cash from operations were net income (adjusted for non-cash charges
for depreciation, amortization, acquired in-process technology, and other non-
cash charges associated with restructuring and other charges of $45.6 million, a
decrease in accounts receivable of $55.3 million (primarily related to lower
revenue and increased collections as a result of relatively linear shipments in
the second and third quarter), a decrease in inventory of $21.7 million offset
by a reduction in accounts payable and accrued liabilities of $8.7 million.
INVESTING ACTIVITIES. Cash provided by investing activities during the
first nine months of fiscal 1999 was approximately $15.5 million consisting
primarily of net investments in property, plant and equipment ($32.2 million)
and the purchase of certain net assets in connection with acquisitions ($34.1
million) offset by cash inflow from maturities of marketable securities ($77.3
million) and proceeds received from the sale of the high-end PTS business line
($4.5 million). The Company also purchased all of the outstanding shares of
Ridge Technologies, Inc. ("Ridge") not owned by it for 1.2 million of the
Company's common stock valued at $21.2 million and assumed stock options valued
at $13.1 million.
FINANCING ACTIVITIES. Cash used for financing activities during the first
nine months of fiscal 1999 was approximately $100.5 million consisting of stock
repurchases of $106.5 million and debt repayments of $5.6 million offset by
proceeds from stock issuances of $11.6 million.
STOCK REPURCHASES. The Company is authorized to repurchase shares of its
common stock in the open market. The Company repurchased 8,746,000 shares of its
common stock, at an average price of $12.18 per share during the nine months
ended December 31, 1998, for a total cash outlay of approximately $106.5
million.
LINES OF CREDIT. In May 1998, the Company assumed a $6.8 million unsecured
revolving line of credit in conjunction with the purchased of Ridge. As of June
30, 1998, $4.7 million was drawn against the line. In August, 1998, the Company
paid down and terminated this line of credit. Additionally, in June 1998, the
Company terminated its $17.0 million line of credit.
LIQUIDITY. As of December 31, 1998, the Company's principal sources of
liquidity consist of $655.6 million of cash, cash equivalents and short-term
investments. The Company's liquidity is affected by many factors, some of which
are based on the normal ongoing operations of the business, and others of which
relate to the uncertainties of the PC and server industries and global
economies. Although the Company's cash requirements will fluctuate based on the
timing and extent of these factors, management believes that cash generated from
operations, together with the liquidity provided by existing cash balances, will
be sufficient to satisfy the Company's liquidity requirements for the next
twelve months.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information". This statement establishes standards
for the way companies report information about operating segments in their
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
disclosures prescribed by SFAS 131 were adopted in the Company's fiscal 1999
Annual Report on Form 10-K.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities and
requires recognition of all derivatives as assets or liabilities and measurement
of those instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 2000. The Company will adopt this statement in the
first quarter of fiscal 2001 but does not expect the adoption of SFAS 133 to
have a material impact on the Company's financial position, results of
operations or cash flows.
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 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
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 Ready 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 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
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the Year 2000 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.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Report on Form 10Q/A may contain forward-looking statements regarding
future events or the future performance of the Company. Actual events or results
could, of course, differ materially. Various factors could adversely affect its
results of operations in the future including its dependence on the high-
performance computer, server and software markets, changes in the product mix,
competitive pricing pressures, changes in technological standards, dependence on
wafer suppliers and other subcontractors, changes in product costs, certain
risks associated with acquisitions of other companies or businesses that the
Company may make from time to time, issues related to distributors, dependence
on key personnel, risks associated with intellectual property or general
economic downturns. For a more complete discussion of these factors, please
refer to the Business section of the Company's Annual Report on Form 10-K for
the fiscal year ended March 31, 1999, and the Company's other public filings it
makes from time to time.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1* Termination of Option III Agreement between Adaptec
Manufacturing (S) Pte., Ltd. And Taiwan Semiconductor
Manufacturing Co., Ltd.
27.1 Financial Data Schedule for the quarter ended December 31,
1998
* Previously filed with the Company's Report on Form 10-Q for the
quarter ended December 31, 1998.
(b) Reports on Form 8-K:
(i) Report on Form 8-K filed December 17, 1998, containing Adaptec,
Inc.'s news releases dated November 24, 1998 with respect to the sale
of the Peripheral Technology Solution group to STMicroelectronics,
Inc.
(ii) Report on Form 8-K filed January 29, 1999 with respect to the
disposition of the Peripheral Technology Solutions business.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADAPTEC, INC.
By: /s/ ANDREW J. BROWN Date: July 7, 1999
----------------------------------------
Andrew J. Brown
Vice President, Finance
Chief Financial Officer
(Principal Financial Officer)
By: /s/ KENNETH B. AROLA Date: July 7, 1999
----------------------------------------
Kenneth B. Arola Vice President
Controller (Principal Accounting
Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.1* Termination of Option III Agreement between Adaptec
Manufacturing (S) Pte., Ltd. And Taiwan Semiconductor
Manufacturing Co., Ltd.
27.1 Financial Data Schedule for the quarter ended December 31,
1998
* Previously filed with the Company's Report on Form 10-Q for the quarter ended
December 31, 1998.