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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) DECEMBER 22, 1999
ADAPTEC, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-15071 94-2748530
(State of Incorporation) (Commission File Number) (I.R.S. Employer
Indentification Number)
691 S. MILPITAS BLVD.
MILPITAS, CA 95035
(Address of principal executive offices)
(408) 945-8600
(Registrants' telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
This document consists of 23 pages, excluding exhibits, of which this is
page 1.
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This Report on Form 8-K/A is filed as an amendment to the Report on
Form 8-K filed by Adaptec, Inc. ("Adaptec") with the Securities and Exchange
Commission on January 6, 2000, in connection with Adaptec's acquisition of
Distributed Processing Technology, Corp. ("DPT").
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(A) On December 22, 1999, Adaptec, a Delaware corporation, acquired DPT, a
Florida corporation. The transaction was effected pursuant to an Agreement
and Plan of Reorganization, dated as of December 3, 1999 (the "Agreement"),
by and among Adaptec, DPT, Adaptec Mfg. (S) Pte. Ltd., a wholly-owned
subsidiary of Adaptec, Adaptec Acquisition Corporation ("Merger Sub"), a
Florida corporation and wholly-owned subsidiary of Adaptec, and Stephen H.
Goldman ("Stockholder"), the principal stockholder of DPT. In accordance
with the Agreement, Merger Sub was merged with and into DPT; DPT was the
surviving corporation and became a wholly-owned subsidiary of Adaptec.
The purchase price consisted of $185.2 million of cash (including
$18.5 million reserved by Adaptec to cover possible breaches of the
representations and warranties made by DPT and Stockholder pursuant to the
Agreement), and the issuance of 1.1 million options to purchase Adaptec
common stock valued at $51.8 million. The cash was in exchange for all of
the outstanding common stock of DPT as of the acquisition date (5.2 million
shares) and was paid from Adaptec's general corporate funds. The Adaptec
common stock options were issued in exchange for outstanding DPT common
stock options. The fair value of the Adaptec common stock options was
computed using the Black-Scholes model on the date the transaction was
consummated (also the date that the number of options issued and the
exercise price of the options became determinable). Additionally, Adaptec
incurred $1.1 million in professional fees related to this acquisition,
including finance, accounting, legal and appraisal fees, which were
capitalized as part of the purchase price of the transaction.
The purchase price was determined through a series of arms length
negotiations between officers, representatives, and the Board of Directors
of Adaptec and DPT. Prior to the planned purchase of DPT by Adaptec, there
were no material relationships between such persons and Adaptec or any of
its affiliates, any director or officer of Adaptec, or any associate of any
such director or officer. Effective upon the closing, Stockholder became an
officer of Adaptec.
DPT's net assets consisted of cash, receivables, inventory, property and
equipment, and other tangible and intangible assets and various liabilities.
In accordance with the purchase method of accounting for business
combinations, the purchase price and associated charges were allocated among
the net tangible assets and identifiable intangible assets of DPT based on
their fair market value on the acquisition date. The excess purchase price
was allocated to goodwill.
The closing of the acquisition was announced by Adaptec in a press release
dated December 23, 1999.
(B) The acquisition by Adaptec of DPT is deemed the indirect acquisition of the
assets of DPT, including DPT's plant, equipment and other physical property.
DPT utilized such assets in the conduct of its business as a supplier of
high performance storage solutions. Adaptec will continue to utilize such
assets in the conduct of its RAID business segment, which designs, develops,
manufactures and markets bus-based and microprocessor-based RAID solutions
utilized from entry-level workstations to enterprise-class servers.
2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED, PURSUANT TO RULE 3-05 OF
REGULATIONS S-X
The following historical financial information of DPT is filed herewith on
the pages listed below:
Report of Independent Certified Public Accountants.......... F-1
Balance Sheets.............................................. F-2
Statements of Operations.................................... F-3
Statements of Cash Flows.................................... F-5
Statements of Stockholders' Equity.......................... F-7
Notes to Financial Statements............................... F-8
(B) PRO FORMA FINANCIAL INFORMATION REQUIRED PURSUANT TO ARTICLE 11 OF
REGULATIONS S-X
The following unaudited pro forma combined financial information of Adaptec
and DPT is filed herewith on the pages listed below:
Unaudited Pro Forma Combined Statements of Operations....... F-16
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ F-18
(C) EXHIBITS IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement and Plan of Reorganization, dated as of
December 3, 1999, by and among Adaptec, Inc., Distributed
Processing Technology, Corp., Adaptec Mfg. (S) Pte. Ltd.,
Adaptec Acquisition Corp. and Stephen H. Goldman
(INCORPORATED BY REFERENCE TO EXHIBIT 2.1 TO FORM 8-K AS
FILED JANUARY 6, 2000)
23.1 Consent of Arthur Andersen LLP, Independant Certified Public
Accountants
99.1 Press Release dated December 23, 1999 (INCORPORATED BY
REFERENCE TO EXHIBIT 99.1 TO FORM 8-K AS FILED JANUARY 6,
2000)
3
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 hereunto duly authorized.
ADAPTEC, INC.
BY: /s/ ANDREW J. BROWN DATE: March 3, 2000
-----------------------------------------
Andrew J. Brown
VICE PRESIDENT, FINANCE AND CHIEF
FINANCIAL OFFICER (PRINCIPAL FINANCIAL
OFFICER)
BY: /s/ KENNETH B. AROLA DATE: March 3, 2000
-----------------------------------------
Kenneth B. Arola
VICE PRESIDENT AND CORPORATE CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders of Distributed Processing Technology, Corp.:
We have audited the accompanying balance sheets of Distributed Processing
Technology, Corp. (a Florida corporation) as of December 31, 1998 and 1997, and
the related statements of operations, stockholders' equity and cash flows for
the years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Distributed Processing
Technology, Corp. as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
- ---------------------
Arthur Andersen LLP
Orlando, Florida,
February 26, 1999 (except with respect to matters discussed in Note 12 on F-15,
as to which the dates are November 19, 1999, and December 22, 1999)
F-1
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
BALANCE SHEETS
SEPTEMBER 30,
1999 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1998 1997
------------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents........................... $ 8,959 $ 18,939 $ 10,327
Accounts receivable, less allowances for doubtful
accounts of $496,000, $80,000 and $150,000,
respectively...................................... 4,906,367 2,744,317 4,781,250
Stockholder and employee notes receivable........... 135,878 537,929 135,088
Inventories, net (Note 4)........................... 4,800,217 3,559,593 3,078,275
Prepaid expenses and other.......................... 432,151 383,733 310,984
----------- ----------- -----------
Total current assets.............................. 10,283,572 7,244,511 8,315,924
Property, plant and equipment (Note 5)................ 5,893,121 6,286,821 7,214,958
Employee notes receivable (Note 10)................... 22,811 25,556 49,964
Other assets.......................................... 438,237 387,456 178,343
----------- ----------- -----------
$16,637,741 $13,944,344 $15,759,189
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 6)............................. $ 5,026,252 $ 2,734,488 $ 3,233,032
Current maturities of capital lease obligation (Note
9)................................................ 25,690 38,406 43,823
Current maturities of notes payable (Note 6)........ 245,227 245,227 --
Accounts payable.................................... 3,424,753 2,101,184 1,068,760
Accrued liabilities................................. 1,977,098 1,624,776 1,133,434
----------- ----------- -----------
Total current liabilities......................... 10,699,020 6,744,081 5,479,049
Capital lease obligation, less current maturities
(Note 9)............................................ 9,978 17,580 31,254
Notes payable, less current maturities (Note 6)....... 1,285,769 1,469,689 --
----------- ----------- -----------
Commitments and contingencies (Note 9)
Total liabilities................................. 11,994,767 8,231,350 5,510,303
----------- ----------- -----------
Stockholders' equity (Note 7):
Common stock, $0.01 par value:
Class A, voting, 90,000,000 shares authorized,
4,312,500 shares issued and outstanding........... 43,125 43,125 43,125
Class B, non-voting, 10,000,000 shares authorized,
892,450, 892,450 and 877,450 shares issued and
outstanding....................................... 8,925 8,925 8,775
Additional paid-in capital.......................... 395,233 395,233 353,982
Subscription notes receivable....................... -- -- (7,010)
Retained earnings................................... 4,195,691 5,265,711 9,850,014
----------- ----------- -----------
Total stockholders' equity........................ 4,642,974 5,712,994 10,248,886
----------- ----------- -----------
$16,637,741 $13,944,344 $15,759,189
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-2
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
STATEMENTS OF OPERATIONS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Net revenues................................................ $27,409,250 $35,516,781
Cost of revenues............................................ 14,073,010 16,661,946
----------- -----------
Gross profit................................................ 13,336,240 18,854,835
----------- -----------
Operating expenses:
Research and development.................................. 9,080,685 7,005,140
Selling................................................... 5,533,797 6,533,939
General and administrative................................ 2,186,957 2,601,612
Technical support......................................... 847,553 1,045,110
----------- -----------
Total operating expenses.................................... 17,648,992 17,185,801
----------- -----------
Income (loss) from operations............................... (4,312,752) 1,669,034
Interest income............................................. 5,947 8,356
Interest expense............................................ (277,498) (145,957)
----------- -----------
Net income (loss)........................................... $(4,584,303) $ 1,531,433
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
STATEMENTS OF OPERATIONS
NINE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
(UNAUDITED) (UNAUDITED)
------------- -------------
Net revenues................................................ $29,012,216 $21,059,181
Cost of revenues............................................ 16,289,291 10,655,035
----------- -----------
Gross profit................................................ 12,722,925 10,404,146
----------- -----------
Operating expenses:
Research and development.................................. 6,472,852 6,320,721
Selling................................................... 4,094,446 3,926,235
General and administrative................................ 2,351,187 1,890,532
Technical support......................................... 510,926 643,556
----------- -----------
Total operating expenses.................................... 13,429,411 12,781,044
----------- -----------
Loss from operations........................................ (706,486) (2,376,898)
Interest income............................................. 7,131 4,391
Interest expense............................................ (370,665) (219,736)
----------- -----------
Net loss.................................................... $(1,070,020) $(2,592,243)
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-4
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $(4,584,303) $ 1,531,433
Adjustments to reconcile net (loss) income:
Depreciation and amortization........................... 1,827,917 1,821,663
Loss (gain) on equipment disposal....................... 3,337 (7,210)
Changes in assets and liabilities:
Accounts receivable, net.............................. 2,036,933 2,632,558
Inventories........................................... (481,318) 433,090
Prepaid expenses and other............................ (281,862) (177,829)
Accounts payable...................................... 1,032,424 (747,974)
Accrued liabilities................................... 491,342 (175,420)
----------- -----------
Net cash provided by operating activities................... 44,470 5,310,311
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (903,117) (2,954,970)
Proceeds from sale of equipment........................... -- 4,300
----------- -----------
Net cash used for investing activities...................... (903,117) (2,950,670)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made on line of credit........................... (498,544) (85,015)
Increase in capital lease obligation...................... 24,732 --
Repayment of capital lease obligation..................... (43,823) (40,410)
Borrowing on notes payable, net........................... 1,714,916 --
Repayment of note payable to stockholder.................. -- (180,077)
Subscription notes receivable collected................... 7,010 14,349
Distributions to stockholders............................. -- (992,235)
Proceeds from issuance of common stock.................... 41,401 --
Redemption of common stock................................ -- (1,078,623)
Stockholder and employee notes (borrowings) receivable
collected............................................... (378,433) 11,537
----------- -----------
Net cash provided by (used for) financing activities........ 867,259 (2,350,474)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 8,612 9,167
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 10,327 1,160
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 18,939 $ 10,327
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 235,974 $ 156,148
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
STATEMENTS OF CASH FLOWS
NINE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
(UNAUDITED) (UNAUDITED)
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(1,070,020) $(2,592,243)
Adjustments to reconcile net loss:
Depreciation and amortization............................. 1,174,143 1,388,084
Loss on equipment disposal................................ 37,410 3,707
Changes in assets and liabilities:
Accounts receivable, net................................ (2,162,050) 1,973,815
Inventories............................................. (1,240,624) (733,045)
Prepaid expenses and other.............................. (99,199) (582,981)
Accounts payable........................................ 1,323,569 791,615
Accrued liabilities..................................... 352,322 544,218
----------- -----------
Net cash (used for) provided by operating activities........ (1,684,449) 793,170
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (817,853) (688,539)
----------- -----------
Net cash used in investing activities....................... (817,853) (688,539)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (payments) on line of credit................... 2,291,764 (1,918,444)
(Repayments) borrowings on notes payable, net............. (183,920) 1,776,222
Decrease in capital lease obligation...................... (20,318) (6,098)
Subscription notes receivable collected................... -- 5,991
Proceeds from issuance of common stock.................... -- 41,401
Stockholder and employee notes receivable collected....... 404,796 17,143
----------- -----------
Net cash provided by (used for) financing activities........ 2,492,322 (83,785)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (9,980) 20,846
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................ 18,939 10,327
----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR...................... $ 8,959 $ 31,173
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Cash paid for interest.................................... $ 295,748 $ 156,041
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK
------------------------------------------
CLASS A CLASS B ADDITIONAL SUBSCRIPTION
-------------------- ------------------- PAID-IN NOTES RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS TOTAL
--------- -------- -------- -------- ---------- ------------ ----------- -----------
BALANCE, DECEMBER 31,
1996..................... 4,572,500 $45,725 902,450 $9,025 $396,173 $(21,359) $10,344,398 $10,773,962
Redemption of common
stock.................... (260,000) (2,600) (25,000) (250) (42,191) -- (1,033,582) (1,078,623)
Distribution to
stockholders............. -- -- -- -- -- -- (992,235) (992,235)
Collection of subscription
notes receivable......... -- -- -- -- -- 14,349 -- 14,349
Net income................. -- -- -- -- -- -- 1,531,433 1,531,433
--------- ------- ------- ------ -------- -------- ----------- -----------
BALANCE, DECEMBER 31,
1997..................... 4,312,500 43,125 877,450 8,775 353,982 (7,010) 9,850,014 10,248,886
Issuance of common stock... -- -- 15,000 150 41,251 -- -- 41,401
Collection of subscription
notes receivable......... -- -- -- -- -- 7,010 -- 7,010
Net loss................... -- -- -- -- -- -- (4,584,303) (4,584,303)
--------- ------- ------- ------ -------- -------- ----------- -----------
BALANCE, DECEMBER 31,
1998..................... 4,312,500 $43,125 892,450 $8,925 $395,233 $ -- $ 5,265,711 $ 5,712,994
========= ======= ======= ====== ======== ======== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-7
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Distributed Processing Technology, Corp. ("DPT") was incorporated in the
State of Florida on June 25, 1986. DPT is a supplier of high-performance storage
solutions including RAID controllers and storage subsystems.
2. UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim financial statements as of September 30, 1999, and
for the nine month periods ended September 30, 1999 and 1998, are unaudited. The
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and, in the opinion of management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly DPT's financial position, results of operations and cash flows as
of September 30, 1999, and for the nine month periods ended September 30, 1999
and 1998. The financial information disclosed in these notes to financial
statements related to these periods is unaudited. The results for the nine month
period ended September 30, 1999, are not necessarily indicative of the results
to be expected for the year ended December 31, 1999.
3. SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
DPT considers all highly liquid investments with a maturity of three months
or less from the date of purchase to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market with cost determined
under the first in, first out method. Material, labor and overhead costs are
included in the cost of in-process and finished goods inventories.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Leasehold
improvements are amortized over the shorter of the lease term or estimated
useful life of the leasehold improvement. The depreciation or amortization
periods are as follows:
YEARS
--------
Building and improvements................................... 7 - 40
Leasehold improvements...................................... 1 - 10
Equipment................................................... 3 - 6
Furniture and fixtures...................................... 7 - 10
DPT reviews the recoverability of long-lived assets whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
F-8
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets include certain network and software drivers used by DPT
during its operations and are included in other assets on the accompanying
balance sheets. These costs are amortized over three to five years using the
straight-line method. Amortization expense for the years ended December 31, 1998
and 1997, was $0 and $24,805, respectively.
REVENUE AND COST RECOGNITION
Revenue is recognized when products are shipped.
Cost of sales includes all direct material and labor costs and those
indirect costs related to the manufacturing of the product. General and
administrative expenses and selling expenses are charged to expense as incurred.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expense includes expenses incurred by DPT for
research, design and development of proprietary technology. Research and
development costs are expensed as incurred. Development costs are required to be
capitalized when a product's technological feasibility has been established by
completion of a working model of the product and ending when a product is
available for general release to customers. To date, completion of a working
model of DPT's product and general release have substantially coincided. As a
result, DPT has not capitalized any development costs.
TECHNICAL SUPPORT EXPENSES
DPT has a technical support and customer service department which provides
telephone and other support to customers subsequent to product sales, provides
training to customers on-site and in connection with industry trade shows, and
administers returns of products from customers. The expenses attributable to the
department are expensed as incurred and have been separately classified in the
accompanying statements of operations. DPT accrues for the estimated future cost
of such support attributable to past sales. Such amounts are included in accrued
liabilities on the accompanying balance sheets.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents, accounts receivable,
stockholder and employee notes receivable, accounts payable and accrued
liabilities approximate fair value due to the short-term maturities of these
assets and liabilities.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-9
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Advertising is expensed as incurred and totaled approximately $650,000 and
$644,000 in 1998 and 1997, respectively, and is included in selling expenses on
the accompanying statements of operations.
INCOME TAXES
DPT has elected to be taxed as an S-corporation for both federal and state
income tax reporting purposes. Accordingly, the taxable income of DPT is
includable in the personal income tax returns of the stockholders. Therefore,
income tax accounts are not included in the accompanying financial statements.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform to the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). This statement became effective for fiscal years beginning
after December 15, 1997. The implementation of SFAS 130 did not have an effect
on the accompanying financial statements.
4. INVENTORIES
Inventories, net of reserves, consisted of the following:
SEPTEMBER 30,
1999 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1998 1997
------------- ------------ ------------
Raw materials.......................... $3,733,724 $3,018,798 $2,451,842
Work-in-process........................ 635,831 312,096 76,609
Finished goods......................... 430,662 228,699 549,824
---------- ---------- ----------
$4,800,217 $3,559,593 $3,078,275
========== ========== ==========
F-10
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
Land............................................... $ 605,063 $ 605,063
Building and improvements.......................... 2,422,997 2,394,864
Leasehold improvements............................. 1,850,366 1,769,570
Equipment.......................................... 8,323,768 8,414,509
Furniture and fixtures............................. 333,384 322,626
----------- -----------
13,535,578 13,506,632
Construction in progress........................... 2,653 16,624
----------- -----------
13,538,231 13,523,256
Less--Accumulated depreciation and amortization.... (7,251,410) (6,308,298)
----------- -----------
$ 6,286,821 $ 7,214,958
=========== ===========
Depreciation and amortization expense related to property, plant and
equipment totaled $1,827,917 and $1,796,858 for the years ended December 31,
1998 and 1997, respectively.
6. DEBT
DPT has a bank line of credit agreement, due on demand, with maximum
available borrowings of $10,000,000. Interest on outstanding borrowings is
payable monthly at the 90-day LIBOR rate plus 200 basis points or prime, as
elected by DPT. Based on DPT's elections, interest was payable at 7.18 percent
and 7.94 percent at December 31, 1998 and 1997, respectively. Interest was
payable at 7.44 percent at September 30, 1999. A commitment fee, on the average
daily available balance, is payable quarterly at an annual rate of
0.25 percent. Borrowings are secured by accounts receivable, inventory,
equipment and the personal guarantee of the DPT's president. The lender has
provided DPT with the ability to borrow up to $2,000,000 in excess of the
borrowing base limit. DPT's borrowing base is computed using a portion of DPT's
qualified accounts receivable and inventories. Any draws against this $2,000,000
sublimit must be repaid within 12 months.
At December 31, 1998 and 1997, $2,734,488 and $3,233,032, respectively, were
outstanding under the line of credit. At December 31, 1998, approximately
$2,463,000 remained available. At December 31, 1998 and 1997, there were no
borrowings in excess of the borrowing base limit. At September 30, 1999,
$5,026,252 was outstanding under the line of credit and approximately $2,510,000
remained available. At September 30, 1999, there were no borrowings in excess of
the borrowing base limit.
DPT has an additional $500,000 bank line of credit available for the
purchase of equipment. At December 31, 1998 and 1997, no borrowings were
outstanding under this agreement. At September 30, 1999, no borrowing was
outstanding under this agreement. Interest on outstanding borrowings is payable
monthly at the prime rate. Borrowings are secured by accounts receivable,
inventory, equipment and the personal guarantee of DPT's president.
F-11
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. DEBT (CONTINUED)
The line of credit agreements include, among other covenants, provisions
setting forth restrictions on borrowings and minimum working capital and equity
levels. DPT was in compliance with these covenants as of December 31, 1998 and
1997. DPT was also in compliance with these covenants as of September 30, 1999.
During 1998, DPT entered into two notes payable with a financial institution
to finance capital acquisitions and buildings. These notes are secured by
accounts receivable, inventory, equipment, trademarks, patents, all intellectual
assets and the personal guarantee of DPT's president.
The notes payable consisted of the following at December 31, 1998:
AMOUNT
----------
Note payable to bank, due in equal monthly principal
installments of $5,436 through March 2013, plus interest
rate at prime (7.75% at December 31, 1998)................ $ 934,916
Note payable to bank, due in equal monthly principal
installments of $15,000 through April 2003, plus interest
rate at prime (7.75% at December 31, 1998)................ 780,000
----------
1,714,916
Less--Current portion....................................... (245,227)
----------
$1,469,689
==========
Maturities of these notes payable at December 31, 1998, are as follows:
YEAR ENDING DECEMBER 31, AMOUNT
- ------------------------ ----------
1999.................................................... $ 245,227
2000.................................................... 245,239
2001.................................................... 245,239
2002.................................................... 245,239
2003.................................................... 125,239
Thereafter.............................................. 608,733
----------
$1,714,916
==========
7. STOCKHOLDERS' EQUITY
The Class B common stock issued under the stock option agreements ("the
Agreements") are in all events subject to rights of repurchase (restrictions),
whereby DPT may reacquire the shares at the original issue price, if such
employees are terminated for reasons other than death or retirement. Upon death
or retirement of an employee, DPT will repurchase the shares, as defined in the
Agreements. Under the terms of the Agreements, the employees have the right to
sell any of their shares back to DPT at the original issue price. There were
15,000 and 0 options granted during 1998 and 1997, respectively, and there were
no outstanding options at December 31, 1998. The options granted during 1998
were immediately exercised by an employee.
F-12
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Pursuant to the terms of the Agreements, 25,000 shares of Class B common
stock were repurchased by DPT in 1997.
On May 28, 1998, DPT adopted an omnibus stock option plan ("the Plan").
Shares are exercisable at a rate of 25 percent annually, following a public
stock offering, immediately upon a change in control or after a period of nine
years has elapsed since the Plan's inception, whichever occurs first. As of
December 31, 1998, 1,454,900 options were granted at an exercise price of $3.75,
and 52,500 options remain available under the Plan.
DPT accounts for the stock options under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," under which no compensation
expense has been recognized. Had compensation expense for the Plan been
determined consistent with SFAS No. 123, "Accounting for Stock-Based
Compensation," DPT's net income would have remained the same as none of the
required events noted above had occurred as of December 31, 1998. Information
regarding outstanding stock options under the Plan is as follows as of
December 31, 1998:
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------------- ----------------
Outstanding, December 31, 1997................ -- $ --
Granted..................................... 1,454,900 3.75
Exercised................................... -- --
Cancelled................................... (4,800) 3.75
---------
Outstanding, December 31, 1998................ 1,450,100 $3.75
=========
Exercisable, end of year...................... -- $ --
=========
8. BENEFIT PLAN
Effective July 1, 1992, DPT established the Distributed Processing
Technology, Corp. Savings & Profit Sharing Plan & Trust ("the 401(k) Plan"). All
company employees age 21 or over are eligible to participate after completing
90 days of employment and become fully vested after two years of service.
Employees may elect to contribute up to 15 percent of compensation to the 401(k)
Plan, not to exceed a dollar limit set by law. Matching company contributions
are discretionary, up to a maximum of 2.5 percent of compensation not to exceed
50 percent of the employee's contribution, not to exceed a dollar limit set by
law. DPT's contributions to the 401(k) Plan were approximately $184,300 and
$175,400 for the years ended December 31, 1998 and 1997, respectively.
9. COMMITMENTS AND CONTINGENCIES
Under the terms of DPT's line of credit agreement, DPT is required to carry
a minimum of $500,000 of life insurance on its president. DPT insures the
president for $3,000,000.
DPT rents its facilities under operating leases that expire through 2008.
Rent expense for the years ended December 31, 1998 and 1997, was approximately
$499,000 and $465,000, respectively. DPT has also entered into capital leases to
acquire certain equipment.
F-13
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum rental payments required under operating and capital leases
that have initial or remaining non-cancelable lease terms in excess of one year
as of December 31, 1998, are as follows:
LEASES
-----------------------
YEAR ENDING DECEMBER 31, OPERATING CAPITAL
- ------------------------ ---------- ----------
1999............................................. $ 486,259 $ 41,079
2000............................................. 419,199 8,863
2001............................................. 327,580 8,863
2002............................................. 213,234 1,478
2003............................................. 172,376 --
Thereafter....................................... 661,490 --
---------- ----------
$2,280,138 60,283
==========
Less--Portion representing interest.............. (4,297)
----------
$ 55,986
==========
DPT is engaged in various matters of litigation arising in the ordinary
course of business. It is the opinion of management that the ultimate outcome of
these matters will not have a material adverse impact on DPT's results of
operations or financial position.
10. RELATED PARTY TRANSACTIONS
DPT had outstanding unsecured notes receivable from certain employees of
$34,431 and $62,185 at December 31, 1998 and 1997, respectively. At
September 30, 1999, $27,876 was outstanding. Such notes bear interest at fixed
rates ranging from 10.25 percent to 13 percent and are due at various dates
through December 2004.
DPT had outstanding noninterest-bearing notes receivable from an officer and
stockholder of $529,054 and $122,867 at December 31, 1998 and 1997,
respectively, which was paid in full just subsequent to the respective balance
sheet dates. At September 30, 1999, DPT had an outstanding noninterest-bearing
note receivable of $130,813 from an officer and stockholder. During the periods
presented, additional noninterest-bearing notes were issued by an officer and
stockholder for payments made by DPT on behalf of the officer and stockholder,
which were paid in full as of the balance sheet dates presented.
DPT paid a related party $28,350 in interest, at rates ranging from
8.25 percent to 8.50 percent, on the outstanding balance of a note payable to a
stockholder for the year ended December 31, 1997.
DPT rents its facilities from a stockholder of DPT who is also a relative of
an officer of DPT (Note 9). The portion of rent expense paid to the stockholder
of DPT was approximately $79,000 during the nine month period ended
September 30, 1999, and $104,000 and $102,000 during the years ended
December 31, 1998 and 1997, respectively.
DPT's president guaranteed lines of credit and certain notes payable made
available to DPT (Note 6).
F-14
DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SIGNIFICANT CUSTOMERS
Approximately $11.9 million and $18.6 million, respectively, of DPT's 1998
and 1997 revenues were export sales, principally to Europe.
Two customers accounted for 15.8 percent and 12.9 percent, respectively, of
revenues for the year ended December 31, 1998, and three customers accounted for
12.0 percent, 10.9 percent, and 10.6 percent, respectively, of revenues for
1997. Two customers accounted for approximately 13.4 percent and 11 percent,
respectively, of DPT's trade accounts receivable balance as of December 31,
1998, and one customer accounted for 33.4 percent of DPT's trade accounts
receivable balance as of December 31, 1997.
12. SUBSEQUENT EVENTS
On November 19, 1999, DPT amended option agreements for three of its
employees, pursuant to the proposed acquisition by Adaptec, such that in the
event that the employees were terminated without cause, their outstanding
unvested DPT options would become vested and exercisable immediately.
Additionally, DPT amended its option plan, pursuant to the completion of the
acquisition by Adaptec, such that in the event that any of its employees were
terminated without cause within one year of the acquisition date, 25 percent of
their outstanding unvested DPT options would become vested and exercisable
immediately.
On December 22, 1999, DPT was purchased by Adaptec Acquisition Corporation,
a wholly-owned subsidiary of Adaptec. Adaptec accounted for the transaction
under the purchase method of accounting. Concurrent with the merger, all of the
outstanding debt held under DPT's line of credit was retired. In addition, DPT
changed its tax and legal corporate structure from an S-Corporation to a
C-Corporation.
Prior to December 22, 1999, the date of acquisition, the noninterest-bearing
note receivable from an officer and stockholder due as of September 30, 1999 of
$130,813 was paid in full.
F-15
ADAPTEC, INC. AND DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ADAPTEC
YEAR DPT PRO FORMA
ENDED YEAR ENDED COMBINED
MARCH 31, DECEMBER 31, PRO FORMA MARCH 31,
1999 1998 ADJUSTMENTS 1999
--------- ------------ ----------------- -----------
Net revenues............................ $692,441 $27,409 $719,850
Cost of revenues........................ 284,503 14,073 847 (A) 299,423
1,349 (C) 1,349
174 (D) 174
-------- ------- --------
Gross profit............................ 407,938 13,336 418,904
-------- ------- --------
Operating expenses:
Research and development.............. 146,172 9,081 312 (D) 155,565
Selling, marketing and
administrative...................... 170,666 7,721 130 (D) 178,517
Technical support..................... -- 847 (847)(A) --
Amortization of goodwill and other
intangibles......................... 10,320 -- 54,273 (B) 64,593
Write-off of acquired in-process
technology.......................... 45,482 -- 45,482
Restructuring and other charges....... 68,788 -- 68,788
-------- ------- --------
Total operating expenses................ 441,428 17,649 512,945
-------- ------- --------
Loss from operations.................... (33,490) (4,313) (94,041)
Interest and other income............... 35,059 6 (8,220)(G) 26,845
Interest expense........................ (12,103) (277) (12,380)
Gain on sale of PTS..................... 31,476 -- 31,476
-------- ------- --------
Income (loss) before provision for
income taxes.......................... 20,942 (4,584) (48,100)
Provision for income taxes.............. 34,235 -- (7,357)(E) 26,878
-------- ------- --------
Net loss................................ $(13,293) $(4,584) $(74,978)
======== ======= ========
Net loss per share:
Basic................................. $ (0.12) $ (0.68)
Diluted............................... $ (0.12) $ (0.68)
Shares used in computing net loss per
share:
Basic................................. 110,127 110,127
Diluted............................... 110,127 110,127
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-16
ADAPTEC, INC. AND DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ADAPTEC DPT
NINE MONTH NINE MONTH
PERIOD PERIOD PRO FORMA
ENDED ENDED COMBINED
DECEMBER 31, SEPTEMBER 30, PRO FORMA DECEMBER 31,
1999 1999 ADJUSTMENTS 1999
------------ ------------- ----------------- ------------
Net revenues............................ $598,104 $29,012 $627,116
Cost of revenues........................ 202,583 16,289 511 (A) 219,383
93 (D) 93
-------- ------- --------
Gross profit............................ 395,521 12,723 407,640
-------- ------- --------
Operating expenses:
Research and development.............. 73,539 6,473 229 (D) 80,241
Selling, marketing and
administrative...................... 121,106 6,445 66 (D) 127,617
Technical support..................... -- 511 (511)(A) --
Amortization of goodwill and other
intangibles......................... 5,844 -- 39,373 (B) 45,217
Write-off of acquired in-process
technology.......................... 19,755 -- (16,739)(F) 3,016
Restructuring and other charges....... 9,599 -- 9,599
-------- ------- --------
Total operating expenses................ 229,843 13,429 265,690
-------- ------- --------
Income (loss) from operations........... 165,678 (706) 141,950
Interest and other income............... 39,183 7 (6,324)(G) 32,866
Interest expense........................ (8,732) (371) (9,103)
-------- ------- --------
Income (loss) before provision for
income taxes.......................... 196,129 (1,070) 165,713
Provision for income taxes.............. 61,757 -- (4,616)(E) 57,141
-------- ------- --------
Net income (loss)....................... $134,372 $(1,070) $108,572
======== ======= ========
Net income per shares:
Basic................................. $ 1.30 $ 1.05
Diluted............................... $ 1.23 $ 0.99
Shares used in computing net income per
shares:
Basic................................. 103,311 103,311
Diluted............................... 109,591 110,015
The accompanying notes are an integral part of these unaudited pro forma
financial statements.
F-17
ADAPTEC, INC. AND DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The unaudited pro forma combined statements of operations assume the
business combination took place as of the beginning of the periods presented.
The unaudited pro forma combined statement of operations for the year ended
March 31, 1999, combines Distributed Processing Technology, Corp.'s ("DPT's")
statement of operations for the year ended December 31, 1998, and Adaptec,
Inc.'s ("Adaptec's") statement of operations for the year ended March 31, 1999.
The unaudited pro forma combined statement of operations for the nine month
period ended December 31, 1999, combines DPT's unaudited statement of operations
for the nine month period ended September 30, 1999 and Adaptec's unaudited
statement of operations for the nine month period ended December 31, 1999.
On a combined basis, there were no material transactions between DPT and
Adaptec during the periods presented. There are no material differences between
the accounting policies of DPT and Adaptec. The pro forma combined provision for
income taxes may not represent the amounts that would have resulted had DPT and
Adaptec filed consolidated income tax returns during the periods presented.
NOTE 2. ACQUISITION ACCOUNTING
In December 1999, Adaptec purchased DPT, a supplier of high-performance
storage solutions, including RAID controllers and storage subsystems, for
$185.2 million in cash and assumed stock options valued at $51.8 million. The
stock options were valued using the Black-Scholes valuation model. As part of
the purchase agreement, $18.5 million of the purchase price was held back for
unknown liabilities that may have existed as of the acquisition date. The
holdback will be paid for such unknown liabilities or to the seller within
12 months from the acquisition date and was included as part of the purchase
price of the transaction. Additionally, Adaptec incurred $1.1 million in
professional fees, including legal, valuation and accounting fees related to the
acquisition, which were capitalized as part of the purchase price of the
transaction.
Adaptec accounted for the acquisition of DPT using the purchase method of
accounting. Excluding the write-off of acquired in-process technology, the
impact of the acquisition was not material to the Adaptec's consolidated
financial results of operations from the acquisition date through December 31,
1999. The preliminary allocation of Adaptec's purchase price to the net tangible
assets and identifiable intangible assets acquired and liabilities assumed on
the date of acquisition was based on an independent appraisal and estimate of
fair value and has been summarized below.
(IN THOUSANDS)
Net tangible assets......................................... $ 4,262
In-process technology....................................... 16,739
Goodwill and other intangible assets:
Goodwill.................................................. 147,825
Purchased technology...................................... 38,621
Covenant not to compete................................... 9,332
Acquired employees........................................ 6,832
Distribution network...................................... 9,292
OEM relationships......................................... 5,190
--------
217,092
--------
Net assets acquired......................................... $238,093
========
F-18
ADAPTEC, INC. AND DISTRIBUTED PROCESSING TECHNOLOGY, CORP.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. ACQUISITION ACCOUNTING (CONTINUED)
The net tangible assets acquired were comprised primarily of inventory,
property and equipment, receivables and accrued liabilities. The acquired
in-process technology was written-off in the third quarter of fiscal 2000. The
estimated weighted average useful life of the intangible assets for purchased
technology, covenant not to complete, acquired employees, distributed network,
OEM relationships and the residual goodwill, created as a result of the
acquisition of DPT, is approximately four years.
The $16.7 million allocation of the purchase price to the acquired
in-process technology was determined by identifying research projects in areas
for which technological feasibility had not been established and no alternative
future uses existed. Adaptec acquired technology consisting of next generation
RAID controllers. The value was determined by estimating the expected cash flows
from the project once commercially viable, discounting the net cash flows to
their present value, and then applying a percentage of completion to the
calculated value.
NOTE 3. PRO FORMA NET INCOME (LOSS) PER SHARE
Basic pro forma net income (loss) per share for the periods presented was
calculated based on the conversion of 5.2 million shares of DPT common stock
outstanding at March 31, 1999, into cash. Diluted net loss per share for the pro
forma combined year ended March 31, 1999, did not include common stock
equivalents from the Adaptec and DPT option plans because they were
antidilutive. Diluted net income per share for the pro forma combined nine month
period ended December 31, 1999, included 6,704,000 equivalent Adaptec shares, of
which 648,000 was attributable to DPT stock options.
NOTE 4. PRO FORMA ADJUSTMENTS
The following unaudited pro forma adjustments give effect to the combination
of Adaptec and DPT as if such transaction occurred as of April 1, 1998. The
unaudited pro forma combined information is presented for illustrative purposes
only and is not necessarily indicative of the operating results that would have
occurred if the transaction had been consummated at the dates indicated, nor is
it necessarily indicative of future operating results.
(A) To reclass DPT's technical support expenses to cost of sales in conformity
with Adaptec's accounting policies.
(B) To record amortization of goodwill and other intangibles related to the
acquisition of DPT. Goodwill and other intangibles related to the
acquisition of DPT are being amortized on a straight line basis over a
weighted average life of four years.
(C) To record the fair market value in excess of the net book value of
inventories acquired from DPT in cost of sales.
(D) To adjust depreciation expense included in cost of sales, research and
development, and selling, marketing and administrative expenses related to
the adjustment to the fair market value of the property, plant and equipment
acquired from DPT.
(E) To adjust the tax provision for additional expenses related to DPT and the
combined entity.
(F) To eliminate the write-off of acquired in-process technology recorded by
Adaptec in connection with the acquisition of DPT.
(G) To record the impact on interest income as if the transaction and related
cash payments of $166.7 million and $18.5 million occurred on April 1, 1998
and April 1, 1999, respectively.
F-19