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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934
For the quarterly period ended June 28, 1996 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.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 94-2748530
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(State of Incorporation) (I.R.S. Employer
Identification No.)
691 S. MILPITAS BLVD., MILPITAS, CALIFORNIA 95035
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (408) 945-8600
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N/A
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(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 common stock as of August 2,1996 was
53,454,143.
This document consists of 14 pages of which this is page 1.
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TABLE OF CONTENTS
Page
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations:
Results of Operations 8-9
Liquidity and Capital Resources 10
Certain Factors Bearing on Future Results 10-12
Part II. Other Information
Item 6.Exhibits and Reports on Form 8-K 13
Signatures 14
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ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
- ------------------------------------------------------------------------------------------------
Three Month Period Ended
------------------------
June 28 June 30
(in thousands, except per share data) 1996 1995
- ------------------------------------------------------------------------------------------------
Net revenues $202,014 $138,025
Cost of revenues 86,046 56,666
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Gross profit 115,968 81,359
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Operating expenses:
Research and development 27,847 18,227
Sales and marketing 23,714 17,077
General and administrative 10,210 7,142
Write-off of acquired in-process technology 26,500 --
- ------------------------------------------------------------------------------------------------
Total operating expenses 88,271 42,446
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Income from operations 27,697 38,913
Interest income, net of interest expense 2,667 2,638
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Income before provision for income taxes 30,364 41,551
Provision for income taxes 12,450 10,388
- ------------------------------------------------------------------------------------------------
Net income $ 17,914 $ 31,163
================================================================================================
Net income per share $ .32 $ .58
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Weighted average common and common
equivalent shares outstanding 55,671 53,942
================================================================================================
See accompanying notes.
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ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
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June 28 March 31
1996 1996*
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ASSETS
Current assets:
Cash and cash equivalents $ 42,618 $ 91,211
Marketable securities 177,056 204,283
Accounts receivable, net 108,957 89,487
Inventories 69,684 55,028
Prepaid expenses and other 27,313 25,271
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Total current assets 425,628 465,280
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Property and equipment, net 116,484 92,778
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Other assets 95,693 88,428
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$637,805 $646,486
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,400 $ 3,400
Note Payable -- 46,200
Accounts payable 26,325 23,974
Accrued liabilities 68,651 56,717
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Total current liabilities 98,376 130,291
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Long-term debt, net of current portion 3,400 4,250
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Shareholders' equity:
Common stock 189,102 182,932
Retained earnings 346,927 329,013
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Total shareholders' equity 536,029 511,945
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$637,805 $646,486
=============================================================================================
See accompanying notes.
* Amounts are derived from the March 31, 1996 audited financial statements.
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ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
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Three Month Period Ended
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June 28 June 30
(in thousands) 1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,914 $ 31,163
Adjustments to reconcile net income to net cash
provided by operating activities:
Write-off of acquired in-process technology, net of taxes 24,734 --
Depreciation and amortization 5,665 3,560
Changes in assets and liabilities:
Accounts receivable (19,470) (9,309)
Inventories (6,625) 46
Prepaid expenses (276) 1,536
Other assets 504 255
Accounts payable 2,351 (5,290)
Accrued liabilities 11,934 18,606
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NET CASH PROVIDED BY OPERATING ACTIVITIES 36,731 40,567
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certain net assets of Western Digital's Connectivity
Solutions Group and Corel, Inc. (44,879) --
Purchase of property and equipment (26,792) (5,365)
Sales of (investment in) marketable securities, net 27,227 (11,779)
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NET CASH USED FOR INVESTING ACTIVITIES (44,444) (17,144)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of short-term note (46,200) --
Proceeds from issuance of common stock 6,170 2,294
Repurchase of common stock -- (7,765)
Principal payments on debt (850) (850)
- ------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (40,880) (6,321)
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (48,593) 17,102
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 91,211 66,835
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42,618 $ 83,937
================================================================================================
See accompanying notes.
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 28, 1996
(unaudited)
1. Basis of Presentation
In the opinion of management, the unaudited condensed consolidated
interim financial statements included herein have been prepared on the
same basis as the March 31, 1996 audited consolidated financial
statements and include all adjustments, consisting of only normal
recurring adjustments, necessary to fairly state the information set
forth herein. The statements have been prepared in accordance with the
regulations of the Securities and Exchange Commission, but omit certain
information and footnote disclosures necessary to present the
statements in accordance with generally accepted accounting principles.
For further information, refer to the consolidated financial statements
and footnotes thereto included in Adaptec's (the Company) Annual Report
on Form 10-K for the year ended March 31, 1996. The results of
operations for the three month period ended June 28, 1996 are not
necessarily indicative of the results to be expected for the entire
year.
2. Supplemental Disclosures of Cash Flows
Cash paid for interest and income taxes is as follows (in thousands):
Three Month Period Ended
------------------------
June 28 June 30
1996 1995
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Interest $ 245 $ 212
Income taxes $5,961 $ 459
3. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are (in thousands):
June 28 March 31
1996 1996
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Raw materials $18,824 $23,415
Work in process 24,972 12,865
Finished goods 25,888 18,748
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$69,684 $55,028
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4. Net Income Per Share
Net income per share for the three month periods ended June 28, 1996
and June 30, 1995, is computed under the treasury stock method using
the weighted average common and common equivalent shares from dilutive
stock options outstanding during the respective periods.
5. Acquisitions
On April 9, 1996, the Company acquired certain assets and the ongoing
business of Western Digital's Connectivity Solutions Group (CSG) for
$33 million cash. CSG supplies silicon solutions to meet the demands of
the multi-gigabyte SCSI disk drive market. Additionally, on June 28,
1996, the Company acquired certain technologies from Corel, Inc. for
$12 million cash.
The Company accounted for these acquisitions using the purchase method
of accounting, and excluding the $26.5 million write-off of purchased
in-process technology from these companies, the aggregate impact on the
Company's results of operations from the acquisition date was not
material.
The allocation of the Company's aggregate purchase price to the
tangible and identifiable intangible assets acquired was based on
preliminary independent appraisals and is summarized as follows (in
thousands):
Tangible assets $ 9,935
In-process technology 26,500
Goodwill 8,444
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Assets acquired $ 44,879
========
6. Income Taxes
The Company's effective tax rate of 41% for the first quarter of fiscal
1997 differed from the 25% rate accrued in the first quarter of fiscal
1996 primarily due to valuation allowances recorded against deferred
tax assets generated by the write-off of in-process technology. The
valuation allowances are appropriate due to sufficient uncertainty
regarding recoverability during the 15 year amortization period
required for tax purposes for in-process technology. Also, the
effective tax rate for the three month period ended June 30, 1995
differed from the federal statutory rate primarily due to income earned
in Singapore where the Company is subject to a significantly lower
effective tax rate.
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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
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June 28 June 30
1996 1995
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Net revenues 100.0% 100.0%
Cost of revenues 42.6 41.1
----- -----
Gross profit 57.4 58.9
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Operating expenses:
Research and development 13.8 13.2
Sales and marketing 11.7 12.3
General and administrative 5.1 5.2
Write-off of acquired in-process technology 13.1 --
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43.7 30.7
----- -----
Income from operations 13.7 28.2
Interest income, net 1.3 1.9
----- -----
Income before provision for
income taxes 15.0 30.1
Provision for income taxes 6.1 7.5
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Net income 8.9% 22.6%
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Net Revenues
Net revenues increased 46% to $202 million in the first quarter of fiscal 1997
from $138 million in the first quarter of fiscal 1996. This growth was
attributable to increased shipments of the Company's host adapters and
proprietary integrated circuits (ICs) used in mass storage devices. These
increases reflect growth in the high-performance microcomputer markets,
continued demand for SCSI in the client/server environment, and an increase in
the use of diverse peripherals in microcomputer systems compared to the same
period a year ago.
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Gross Profit
The gross profit percentage for the first quarter of fiscal 1997 decreased to
57% compared to 59% in the same period of fiscal 1996. The percentage decrease
is due to the mix of products shipped, which included a greater percentage of
mass storage ICs. During the quarter, the Company continued to focus on reducing
component costs as well as implementing design efficiencies. The Company's
ability to maintain current gross profit can be significantly affected by
factors such as the mix of products shipped, competitive price pressures, the
timeliness of volume shipments of new products and the Company's ability to
achieve manufacturing cost reductions.
Operating Expenses
Expenditures for research and development as a percentage of net revenues were
14% for the first quarter in fiscal 1997 compared to 13% for the same period in
fiscal 1996. Actual spending for research and development increased 53% to $28
million in the first quarter of fiscal 1997 from $18 million in the same period
a year ago. This increased spending is a result of the Company's continued
investment in its core SCSI business together with its ongoing commitment to the
development of newer products and technologies including ATM, RAID, and serial
architectures such as Fibre Channel and 1394.
Sales and marketing expenses as a percentage of net revenues were 12% in the
first quarter of both fiscal 1997 and fiscal 1996. Actual spending for sales and
marketing increased 39% to $24 million in the first quarter of fiscal 1997 from
$17 million in the corresponding period in fiscal 1996. This spending increase
was mainly due to increased staffing levels and increased advertising and
promotional activities aimed at introducing new technologies and generating
demand for the Company's products in the microcomputer and file server markets.
General and administrative expenses remained consistent as a percentage of net
revenues at 5% in the first quarter in both fiscal 1997 and 1996.
As discussed under Note 5 of the Notes to Condensed Consolidated Financial
Statements in this report, during the current quarter the Company acquired CSG
and certain technologies from Corel, Inc. for $33 million and $12 million cash,
respectively. These acquisitions were accounted for using the purchase method of
accounting, and the Company recorded a one time after-tax charge of $25 million
for acquired in-process technology. The Company also recorded goodwill of $8
million which will be amortized ratably over a period of five years.
Interest and Income Taxes
Interest income, net of interest expense, in the first quarter of fiscal 1997
was relatively consistent compared to the same period in the prior year. The
Company's effective tax rate of 41% for the first quarter of fiscal 1997
differed from the 25% rate accrued in the first quarter of fiscal 1996 primarily
due to valuation allowances recorded against deferred tax assets generated by
the write-off of in-process technology. The valuation allowances are appropriate
due to sufficient uncertainty regarding recoverability during the 15 year
amortization period required for tax purposes for in-process technology. Also,
the effective tax rate for the three month period ended June 30, 1995 differed
from the federal statutory rate primarily due to income earned in Singapore
where the Company is subject to a significantly lower effective tax rate.
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Liquidity and Capital Resources
Operating Activities
Net cash generated by operations for the first quarter of fiscal 1997 was $37
million compared with $41 million for the corresponding quarter of fiscal 1996.
During the first quarter of fiscal 1997, the majority of funds generated from
operations resulted from $18 million of net income adjusted for non-cash items
including a non-recurring write-off of acquired in-process technology of $25
million, and depreciation and amortization of $6 million. The overall decrease
in cash generated from operations compared to the prior year is mainly a result
of the Company's non-cash working capital increasing at a higher rate compared
to the same period a year ago. This increase in working capital included
increases in accounts receivable and inventories of $19 million and $7 million,
respectively, primarily offset by an increase in accrued liabilities of $12
million. These overall increases were mainly attributable to higher revenue
volumes and increased staffing levels.
Investing Activities
As previously discussed, the Company paid a total of $45 million cash for the
acquisitions of CSG and certain technologies from Corel, Inc. During the first
quarter of fiscal 1997, the Company also continued to invest in the purchase of
equipment for product development, IC testing, board level production, and made
various building and leasehold improvements to its facilities. In connection
with an agreement with Lucent Technologies (Lucent, formerly AT&T) to secure
capacity for wafer fabrication, the Company purchased $7 million of fabrication
equipment which is consigned to Lucent's fab in Madrid, Spain.
The Company anticipates capital expenditures relating to property and equipment
of approximately $80 million for the remainder of fiscal 1997. The Company may
also make investments for increased capacity for wafer fabrication or
acquisitions of complimentary businesses, products, or technologies. The Company
believes existing working capital, together with expected cash flows from
operations and available sources of bank, equity, debt and equipment financing,
will be sufficient to support its operations at least through fiscal 1997.
Financing Activities
In connection with an agreement with Taiwan Semiconductor Manufacturing Co.,
Ltd. (TSMC) that ensures availability of a portion of the Company's wafer
capacity for both current and future technologies, the Company paid a short-term
note of $46 million due to TSMC. In return for this advance payment, the Company
will receive guaranteed future wafer capacity and a discount on purchases that
exceed certain prescribed minimum quantities. Additionally, in connection with
this agreement, the Company will receive access to future process technology.
During the first quarter of fiscal 1997 and fiscal 1996, the Company received
proceeds from common stock issued under the employee stock option and employee
stock purchase plans totaling $6 million and $2 million, respectively.
Certain Factors Bearing on Future Results
The following risk factors should be considered by anyone contemplating an
investment in the Company's Common Stock. In addition, the Company and its
representatives may from time to time make forward-looking statements, and the
following are important factors that could cause actual results to differ
materially from those projected in any such forward-looking statements.
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Reliance on the High-Performance Microcomputer Market. The Company's board-based
I/O solutions are used primarily in high performance computer systems designed
to support I/O intensive applications and operating systems. Historically, the
Company's growth has been supported by increasing demand for systems which
support networking applications, multitasking, CAD/CAM, desktop publishing,
multimedia, and video. Should the growth of demand for such systems slow, the
Company's revenues and income could be adversely affected by a decline in demand
for the Company's products and increased pricing pressures from both competitors
and customers.
Future Operating Results Subject to Fluctuation. The Company's operating results
may fluctuate in the future as a result of a number of factors, including
variations in the Company's sales channels or the mix of products it sells,
changes in pricing policies by the Company's suppliers, the timing of
acquisitions of other businesses, products and technologies and any associated
charges to earnings and the market acceptance of new and enhanced versions of
the Company's products. The volume and timing of orders received during a
quarter are difficult to forecast. Customers generally order on an as-needed
basis and, accordingly, the Company has historically operated with a relatively
small backlog, especially relating to orders of its board-based I/O solutions.
Further, the Company's expense levels are based in part on expectations of
future revenues, and the Company has been significantly increasing and intends
to continue to increase operating expenditures and inventory as it expands its
operations. As a result of the difficulty of forecasting revenues and the
Company's planned growth in spending, operating expenses and inventory levels
could be disproportionately high for a given quarter, and the Company's
operating results for that quarter, and potentially future quarters, would be
adversely affected. Operating results in any particular quarter which do not
meet the expectations of securities analysts or investors could cause volatility
in the price of the Company's Common Stock.
Uncertainty of Timing and Amount of Capital Expenditures. Predicting the timing
and amount of capital expenditures is difficult for a number of reasons,
including (i) the fact that opportunities to acquire other businesses, products
and technologies of interest to the Company may arise on short notice and
require substantial amounts of capital and (ii) that in the increasingly
competitive market for wafer supplies, wafer manufacturers have been frequently
requiring substantial capital commitments by customers in order to obtain
guaranteed wafer capacity. Opportunities to obtain such capacity can arise on
relatively short notice and require significant commitments on the part of the
Company.
Dependence on Suppliers. The majority of the Company's ICs are manufactured by
TSMC and a limited number of manufacturers. If one or more of these
manufacturers were to experience significant difficulty or disruptions in the
shipment of ICs, delays in developing alternative sources could adversely affect
the Company's business. In addition, the Company's host adapter products make
extensive use of standard logic, memory and microprocessor circuits. An extended
supply shortage or a major increase in the market price of these components
could have an adverse effect on the Company's business.
International Operations and Markets. The Company's manufacturing facility and
various subcontractors it utilizes from time-to-time are primarily located in
Asia. Additionally the Company has various sales offices and customers
throughout Europe, Japan, and other countries. The Company's international
operations and sales may be subject to political and economic risks, including
political instability, currency controls, exchange rate fluctuations, and
changes in import/export regulations, tariffs and freight rates. There can be no
assurance that the political and economic risks to which the Company is subject
will not result in customers of the Company defaulting on payments due to the
Company or in the reduction of potential purchases of the Company's products.
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Fluctuation in Demand. The Company's customers encounter uncertain and changing
demand for their products. They typically order products from the Company based
on their forecasts. If demand falls below customers' forecasts, or if customers
do not control their inventories effectively, they may cancel or reschedule
shipments previously ordered from the Company. The Company has in the past
experienced, and may at any time and with minimal notice in the future
experience, cancellations and postponements of orders.
Management of Growth and Acquisitions. The Company recently has experienced
growth in the number of its employees and the scope of its operations and has
completed several acquisitions of other companies resulting in increased
responsibilities for its management. In order to manage potential future growth
and acquisitions, the Company will need to hire, train, motivate and manage a
growing number of employees. A failure to effectively manage growth or
acquisitions could materially adversely affect the Company's business and
operating results.
Reliance on Industry Standards. The Company's products are designed to conform
with certain industry standards such as SCSI, UltraSCSI, PCI, RAID and ATM. If
consumer acceptance of these standards was to decline or if new standards were
to emerge, the Company's business and operating results could be materially
adversely affected.
Technological Change; Competition; Dependence on New Products. The markets for
the Company's products are characterized by rapidly changing technology,
frequent new product introductions and declining average selling prices over
product life cycles. The Company's future success is highly dependent upon the
timely completion and introduction of new products at competitive
price/performance levels. In addition, the Company must respond to current
competitors, who may choose to increase their presence in the Company's markets,
and to new competitors, who may choose to enter those markets. If the Company is
unable to make timely introduction of new products or respond to competitive
threats, its business and operating results could be materially adversely
affected.
Volatility of Stock Price. In recent months, the stock market in general, and
the market for share of technology companies in particular, have experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of the affected companies. In addition, factors such as
technological innovations or new product introductions by the Company, its
competitors or its customers may have a significant impact on the market price
of the Company's Common Stock. Furthermore, quarter-to-quarter fluctuations in
the Company's results of operations caused by changes in customer demand,
changes in the microcomputer and peripherals markets, or other factors, may have
a significant impact on the market price of the Company's Common Stock. These
conditions, as well as factors which generally affect the market for stocks of
high technology companies, could cause the price of the Company's stock to
fluctuate substantially over short periods.
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
EXHIBIT
NUMBER DESCRIPTION
2.1 Agreement for Purchase and Sale of Stock By and Among
Western Digital Corporation, Western Digital CSG
Corporation, and Adaptec, Inc. dated April 9, 1996.
27.1 Financial Data Schedule for the quarter ended June 28,
1996.
No Reports on Form 8-K were filed during the quarter.
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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.
-----------------------------------------
Registrant
\s\ Paul G. Hansen
-----------------------------------------
Paul G. Hansen, Vice-President, Finance
and Chief Financial Officer
(Principal Financial Officer),
Assistant Secretary
Date: August 9, 1996
\s\ Andrew J. Brown
-----------------------------------------
Andrew J. Brown, Corporate Controller
(Principal Accounting Officer)
Date: August 9, 1996
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