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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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(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 27, 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
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ADAPTEC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 94-2748530
(STATE OF INCORPORATION) (I.R.S. EMPLOYER
IDENTIFICATION NO.)
691 S. MILPITAS BLVD., MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (408) 945-8600
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
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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 as of January 17, 1997 was 111,123,044.
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This document consists of 15 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............................ 6-7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
Results of Operations........................................................... 8-9
Liquidity and Capital Resources................................................. 9-10
Certain Factors Bearing on Future Results....................................... 10-14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K........................................... 14
Signatures........................................................................... 15
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTH NINE MONTH
PERIOD ENDED PERIOD ENDED
--------------------- ---------------------
DEC. 27, DEC. 29, DEC. 27, DEC. 29,
1996 1995 1996 1995
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues.................................... $251,703 $176,187 $668,760 $463,322
Cost of revenues................................ 103,139 74,201 281,735 193,526
-------- -------- -------- --------
Gross profit.................................... 148,564 101,986 387,025 269,796
-------- -------- -------- --------
Operating expenses:
Research and development...................... 34,859 23,321 93,339 60,488
Sales and marketing........................... 31,311 22,350 79,914 58,200
General and administrative.................... 13,731 9,241 34,988 23,976
Write-off of acquired in-process technology
and other.................................. 11,758 11,759 80,663 52,313
-------- -------- -------- --------
Total operating expenses.............. 91,659 66,671 288,904 194,977
-------- -------- -------- --------
Income from operations.......................... 56,905 35,315 98,121 74,819
Interest income, net of interest expense........ 2,460 3,116 7,393 8,413
-------- -------- -------- --------
Income before provision for income taxes........ 59,365 38,431 105,514 83,232
Provision for income taxes...................... 17,781 7,844 44,779 20,925
-------- -------- -------- --------
Net income...................................... $ 41,584 $ 30,587 $ 60,735 $ 62,307
======== ======== ======== ========
Net income per share............................ $ .36 $ .28 $ .53 $ .57
======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding............................ 116,786 109,584 114,002 108,794
======== ======== ======== ========
See accompanying notes.
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ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH
DECEMBER 27, 31,
1996 1996*
------------ --------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 89,436 $ 91,211
Marketable securities........................................... 199,542 204,283
Accounts receivable, net........................................ 108,428 89,487
Inventories..................................................... 59,821 55,028
Prepaid expenses and other...................................... 30,268 25,271
-------- --------
Total current assets....................................... 487,495 465,280
-------- --------
Property and equipment, net........................................ 133,157 92,778
-------- --------
Other assets....................................................... 105,835 88,428
-------- --------
$726,487 $646,486
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................... $ 3,400 $ 3,400
Note payable.................................................... -- 46,200
Accounts payable................................................ 26,189 23,974
Accrued liabilities............................................. 83,199 56,717
-------- --------
Total current liabilities.................................. 112,788 130,291
-------- --------
Long-term debt, net of current portion............................. 1,700 4,250
-------- --------
Shareholders' equity:
Common stock.................................................... 222,334 182,932
Retained earnings............................................... 389,665 329,013
-------- --------
Total shareholders' equity................................. 611,999 511,945
-------- --------
$726,487 $646,486
======== ========
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* Amounts are derived from the March 31, 1996 audited financial statements.
See accompanying notes.
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ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE-MONTH PERIOD ENDED
-----------------------------
DECEMBER 27, DECEMBER 29,
1996 1995
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(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................................... $ 60,735 $ 62,307
Adjustments to reconcile net income to net cash provided by
operating activities:
Write-off of acquired in-process technology, net of taxes..... 77,192 39,686
Depreciation and amortization................................. 20,179 12,591
Changes in assets and liabilities:
Accounts receivable........................................... (16,545) (25,786)
Inventories................................................... 5,361 (8,740)
Prepaid expenses.............................................. (3,118) (4,872)
Other assets.................................................. (4,378) (17,255)
Accounts payable.............................................. (243) 817
Accrued liabilities........................................... 25,628 39,306
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.......................... 164,811 98,054
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certain net assets in connection with acquisitions
accounted for under the purchase method of accounting (see Note
5)............................................................... (89,264) (31,177)
Purchase of property and equipment................................. (54,280) (19,407)
Sales of (investment in) marketable securities, net................ 4,741 (12,646)
--------- --------
NET CASH USED FOR INVESTING ACTIVITIES............................. (138,803) (63,230)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of short-term note......................................... (46,200) --
Proceeds from issuance of common stock............................. 20,967 9,483
Repurchase of common stock......................................... -- (7,765)
Principal payments on long-term debt............................... (2,550) (2,550)
--------- --------
NET CASH USED FOR FINANCING ACTIVITIES............................. (27,783) (832)
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... (1,775) 33,992
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................... 91,211 66,835
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $ 89,436 $100,827
========= ========
See accompanying notes.
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 27, 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. The
Company's net income per share, weighted average common and common equivalent
shares outstanding, and other share information included in these financial
statements reflect the two-for-one split of its common stock approved by its
Board of Directors in November 1996. These interim financial statements should
be read in conjunction with the 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 and nine month
periods ended December 27, 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):
NINE-MONTH PERIOD ENDED
-----------------------------
DECEMBER 27, DECEMBER 29,
1996 1995
------------ ------------
Interest................................................... $ 461 $ 604
Income taxes............................................... $ 49,956 $ 14,751
3. 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 27, MARCH 31,
1996 1996
------------ ------------
Raw materials.............................................. $ 13,523 $ 23,415
Work in process............................................ 13,292 12,865
Finished goods............................................. 33,006 18,748
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$ 59,821 $ 55,028
======= =======
4. NET INCOME PER SHARE
Net income per share for the three and nine month periods ended December
27, 1996 and December 29, 1995, is computed under the treasury stock method
using the weighted average number of 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. On June 28, 1996, the Company acquired certain
technologies from Corel, Inc. for $12 million cash. Included in these
technologies was Corel's CD creator product for the CD-recordable software
market. On September 16, 1996, the Company acquired Data Kinesis,
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inc. (DKI) for $32 million and $15 million in cash and stock, respectively. DKI
develops software for improving system performance in file management and RAID
applications. On November 15, 1996, the Company acquired Sigmax Technology, Inc.
(Sigmax) for $14 million cash. Sigmax develops CD-Rom controllers for ATAPI
CD-Rom drives.
The Company accounted for these acquisitions using the purchase method of
accounting, and excluding the $79 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 primarily based on preliminary
independent appraisals and is summarized as follows (in thousands):
Tangible assets........................................................... $ 10,979
In-process technology..................................................... 78,958
Goodwill.................................................................. 16,404
--------
Assets acquired........................................................... $106,341
========
The tangible assets acquired were primarily comprised of inventory and
fixed assets. Acquired in-process technology was written off in the periods in
which the acquisitions were completed, and the goodwill is being amortized over
respective benefit periods ranging from three to five years.
On August 12, 1996, the Company completed its acquisition of Cogent Data
Technologies, Inc. (Cogent). Cogent provides high-performance Fast Ethernet
products for the networking market. The Company acquired all of the outstanding
capital stock of Cogent in exchange for 2.6 million shares of its common stock.
Additionally, the Company incurred $1.7 million in professional fees related to
this acquisition which have been included in "write-off of acquired in-process
technology and other." The Company has recorded this acquisition using the
pooling of interests method of accounting. Cogent's historical operations have
not been material to the Company's consolidated financial statements and,
therefore, have not been reflected in the Company's consolidated financial
results prior to the acquisition. Beginning at the date of acquisition, the book
value of the acquired assets and assumed liabilities as well as the results of
Cogent's operations, all of which are not material to the Company have been
combined with those of the Company.
6. INCOME TAXES
The Company recorded a tax provision of $17.8 million (30% of income before
income taxes) for the three month period ended December 27, 1996. The higher
effective tax rate for the three and nine month periods ended December 27, 1996
primarily resulted from the write-off of in-process technology for which the
Company will receive no corresponding tax benefit. Excluding the effect of the
write-off of in-process technology, the Company's effective tax rate was 25% for
both the three and nine month periods ended December 27, 1996. The difference
between the Company's normal 25% tax rate and the U.S. statutory rate is
primarily due to income earned in Singapore where the Company is subject to a
significantly lower effective tax rate.
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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 NINE MONTH
PERIOD ENDED PERIOD ENDED
--------------------- ---------------------
DEC. 27, DEC. 29, DEC. 27, DEC. 29,
1996 1995 1996 1995
-------- -------- -------- --------
Net revenues........................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................................... 41.0 42.1 42.1 41.8
----- ----- ----- -----
Gross profit........................................... 59.0 57.9 57.9 58.2
----- ----- ----- -----
Operating expenses:
Research and development............................. 13.8 13.2 14.0 13.1
Sales and marketing.................................. 12.4 12.7 11.9 12.6
General and administrative........................... 5.5 5.3 5.2 5.1
Write-off of acquired in-process technology and
other............................................. 4.7 6.7 12.1 11.3
----- ----- ----- -----
36.4 37.9 43.2 42.1
----- ----- ----- -----
Income from operations................................. 22.6 20.0 14.7 16.1
Interest income, net................................... 1.0 1.8 1.1 1.9
----- ----- ----- -----
Income before provision for income taxes............... 23.6 21.8 15.8 18.0
Provision for income taxes............................. 7.1 4.4 6.7 4.6
----- ----- ----- -----
Net income............................................. 16.5% 17.4% 9.1% 13.4%
===== ===== ===== =====
Net Revenues
Net revenues increased 43% to $252 million in the third quarter of fiscal
1997 and 44% to $669 million in the first nine months of fiscal 1997, from $176
million and $463 million in the corresponding periods of fiscal 1996. This
growth was primarily attributable to increased shipments of the Company's host
adapters and proprietary integrated circuits (IC) for mass storage devices.
These increases were primarily the result of continued growth in the markets for
high-performance microcomputers and servers for networking applications,
continued demand for SCSI in the client/server environment and an increase in
the use of diverse peripherals in microcomputer systems.
Gross Margin
Gross margins increased to 59% in the third quarter of fiscal 1997,
compared with 58% in the third quarter of fiscal 1996. For the first nine months
of fiscal 1997, gross margins were unchanged at 58% compared with the same
period in fiscal 1996. The increase in the third quarter was due primarily to
decreased costs of purchased components as well as increased manufacturing
efficiencies, which were offset slightly by the mix of products shipped, which
included a greater percentage of mass storage IC's and networking products. For
the nine months ended in fiscal 1997, gross margins were positively affected by
decreased manufacturing costs which were offset by the mix of products shipped.
Operating Expenses
Research and development expenses as a percentage of net revenues were 14%
during the third quarter and first nine months of fiscal 1997 compared to 13%
for the same periods in fiscal 1996. Actual spending for research and
development increased from the corresponding periods of fiscal 1996 by 49% to
$35 million in the third quarter and by 54% to $93 million in the first nine
months of fiscal 1997. This increased spending was a result of the Company's
continued development of serial architectures such as Fibre Channel and
Firewire,
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networking products, various peripheral technology solutions, and its ongoing
commitment to enhance its core SCSI business.
Sales and marketing expenses decreased to 12% as a percentage of revenues
in both the third quarter and first nine months of fiscal 1997 compared to 13%
for the same periods in fiscal 1996. Actual sales and marketing expenses
increased from the corresponding periods of fiscal 1996 by 40% to $31 million in
the third quarter and 37% to $80 million in the first nine months of fiscal
1997. The increase in actual spending was primarily a result of advertising and
promotional programs aimed at introducing new technologies and generating demand
for the Company's products and increased staffing levels to support the
continued growth of the Company.
General and administrative expenses as a percentage of net revenues in the
third quarter and first nine months of fiscal 1997 remained relatively
consistent with the comparable fiscal 1996 periods. Actual spending increased
from the prior periods primarily due to costs associated with increased staffing
levels to support the Company's growth.
During the first nine months of fiscal 1997, the Company acquired CSG,
certain technologies from Corel, Inc., DKI, and Sigmax for an aggregate purchase
price of $106 million in cash and stock. These acquisitions were accounted for
using the purchase method of accounting. Among the assets acquired was
in-process technology, resulting in an aggregate write-off of $79 million. Also
in connection with its acquisition of Cogent, the Company incurred $1.7 million
in professional fees which have been recorded in "write-off of acquired
in-process technology and other."
Interest and Income Taxes
Interest income, net of interest expense, decreased 21% to $2.5 million in
the third quarter and 12% to $7.4 million in the first nine months of fiscal
1997 compared to the respective periods in fiscal 1996. This was due to lower
cash, cash equivalents, and marketable securities balances in fiscal 1997
primarily as a result of the Company's various strategic acquisitions and
payments made to secure additional capacity for wafer fabrication.
As discussed under Note 6 of the Notes to Condensed Consolidated Financial
Statements in this report, the Company recorded a tax provision of $17.8 million
(30% of income before income taxes) for the three month period ended December
27, 1996. The higher effective tax rate for the three and nine month periods
ended December 27, 1996 primarily resulted from the write-off of in-process
technology for which the Company will receive no corresponding tax benefit.
Excluding the effect of the write-off of in-process technology, the Company's
effective tax rate was 25% for both the three and nine month periods ended
December 27, 1996. The difference between the Company's normal 25% tax rate and
the U.S. statutory rate is primarily due to income earned in Singapore where the
Company is subject to a significantly lower effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash generated by operations for the first nine months of fiscal 1997
was $165 million compared with $98 million for the same period in fiscal 1996.
During the first nine months of fiscal 1997, the majority of funds generated
from operations resulted from $61 million of net income adjusted by non-cash
items including a non-recurring write-off of acquired in-process technology of
$77 million (net of taxes), and depreciation and amortization of $20 million.
Also, contributing to favorable operating cash flows was a $26 million increase
in accrued liabilities mainly resulting from increased staffing and the timing
of federal income tax payments. Primarily offsetting these items was an increase
in accounts receivable of $17 million resulting from the timing and increases of
shipments during the quarter.
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Investing Activities
During the first nine months of fiscal 1997, the Company paid cash of $89
million toward the acquisitions of CSG, DKI, Sigmax, and certain technologies
from Corel, Inc. The Company also continued to invest in equipment for product
development, IC testing, board level production, and made various building and
leasehold improvements to its facilities. The Company anticipates capital
expenditures relating to property and equipment of approximately $10 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. During the first nine months of fiscal
1997, the Company continued to invest proceeds from operating activities in
marketable securities consisting mainly of various U.S. government and municipal
securities and used proceeds from the sale of marketable securities primarily
for acquisitions, equipment purchases, and to obtain guaranteed future wafer
capacity.
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 in June 1996 of $46 million due to TSMC. In return for this prepayment, 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 nine months of fiscal 1997, the Company received proceeds
from common stock issued under its employee stock option and employee stock
purchase plans totaling $21 million.
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
1998.
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.
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 cancellations or postponements of orders, shifts in the mix of the
Company's products and sales channels, changes in pricing policies by the
Company's suppliers, interruption in the supply of custom integrated circuits,
the market acceptance of new and enhanced versions of the Company's products and
the timing of acquisitions of other business products and technologies and any
associated charges to earnings. The volume and timing of orders received during
a quarter are difficult to forecast. The Company's customers from time to time
encounter uncertain and changing demand for their products. Customers generally
order based on their forecasts. If demand falls below such forecasts or if
customers do not control inventories effectively, they may cancel or reschedule
shipments previously ordered from the Company. Additionally, 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 working capital balances as it expands its operations. As a
result of the difficulty of forecasting revenues and the Company's planned
growth in spending, operating expenses 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
could cause volatility in the price of the Company's Common Stock.
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Dependence 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 bandwidth-intensive applications and operating
systems. Historically, the Company's growth has been supported by increasing
demand for systems which support client-server and Internet/intranet
applications, computer-aided engineering, desktop publishing, multimedia, and
video. Should the growth of demand for such systems slow, the Company's business
or operating results could be materially adversely affected by a decline in
demand for the Company's products.
Certain Risks Associated with the Computer Peripherals Market. As a
supplier of controller circuits to manufacturers of computer peripherals such as
disk drives and other storage devices, a portion of the Company's business is
dependent on the overall market for computer peripherals. This market, which
itself is dependent on the market for personal computers, has historically been
characterized by periods of rapid growth followed by periods of oversupply and
contraction. As a result, suppliers to the computer peripherals industry from
time to time experience large and sudden fluctuations in demand for their
products as their customers adjust to changing conditions in their markets. If
these fluctuations are not accurately anticipated, such suppliers, including the
Company, could produce excessive or insufficient inventories of various
components which could materially and adversely affect the Company's business
and operating results. The computer peripherals industry is also characterized
by intense price competition which in turn creates pricing pressures on the
suppliers to that industry. If the Company is unable to correspondingly decrease
its manufacturing or component costs, such pricing pressures could have a
material adverse effect on the Company's business or operating results.
Reliance on Industry Standards; Technological Change; Dependence on New
Products. The computer industry is characterized by various standards and
protocols that evolve with time. The Company's current products are designed to
conform to certain industry standards and protocols such as SCSI, UltraSCSI,
PCI, RAID, ATM and Fast Ethernet. In particular, a majority of the Company's
revenues are currently derived from products based on the SCSI standard. If
consumer acceptance of these standards was to decline or if they were replaced
with new standards, and if the Company did not anticipate these changes and
develop new products, the Company's business or operating results could be
materially adversely affected.
The markets for the Company's products are characterized by rapidly
changing technology, frequent new product introductions and declining average
selling prices over product life cycles. The Company's future success is
therefore highly dependent upon the timely completion and introduction of new
products at competitive price/performance levels. The success of new product
introductions is dependent on several factors, including proper new product
definition, product cost, timely completion and introduction of new product
designs, quality of new products, differentiation of new products from those of
the Company's competitors and market acceptance of the Company's and its
customers' products. As a result, the Company believes that continued
significant expenditures for research and development will be required in the
future. There can be no assurance that the Company will successfully identify
new product opportunities and develop and bring new products to market in a
timely manner, that products or technologies developed by others will not render
the Company's products or technologies obsolete or noncompetitive, or that the
Company's products will be selected for design into the products of its targeted
customers. The failure of any of the Company's new product development efforts
could have a material adverse effect on the Company's business or operating
results. In addition, the Company's revenues and operating results could be
adversely impacted if its customers shifted their demand to a significant extent
away from board-based I/O solutions to application-specific ICs.
Dependence on Wafer Suppliers and Other Subcontractors. All of the finished
silicon wafers used for the Company's products are currently manufactured to the
Company's specifications by independent foundries. The Company currently
purchases a substantial majority of its wafers through a supply agreement with
Taiwan Semiconductor Manufacturing Company, Ltd. ("TSMC"). The Company also
purchases wafers from SGS-Thomson Microelectronics and Seiko Epson. The
manufacture of semiconductor devices is sensitive to a wide variety of factors,
including the availability of raw materials, the level of contaminants in the
manufacturing environment, impurities in the materials used, and the performance
of personnel and equipment. While the quality, yield and timeliness of wafer
deliveries to date have been acceptable, there can
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be no assurance that manufacturing yield problems will not occur in the future.
In addition, although the Company has various supply agreements with its
suppliers, a shortage of raw materials or production capacity could lead any of
the Company's wafer suppliers to allocate available capacity to customers other
than the Company, or to internal uses. Any prolonged inability to obtain wafers
with competitive performance and cost attributes, adequate yields or timely
deliveries from its foundries would delay production and product shipments and
could have a material adverse effect on the Company's business or operating
results. The Company expects that it will in the future seek to convert its
fabrication process arrangements to smaller geometries and to more advanced
process technologies. Such conversions entail inherent technological risks that
can affect yields and delivery times. If for any reason the Company's current
suppliers were unable or unwilling to satisfy the Company's wafer needs, the
Company would be required to identify and qualify additional foundries. There
can be no assurance that any additional wafer foundries would become available,
that such foundries would be successfully qualified, or that such foundries
would be able to satisfy the Company's requirements on a timely basis.
The Company's future growth will depend in large part on increasing its
wafer capacity allocation from current foundries, adding additional foundries
and gaining access to advanced process technologies. There can be no assurance
that the Company will be able to satisfy its future wafer needs from current or
alternative sources. Any increase in general demand for wafers within the
industry, or any reduction of existing wafer supply from any of the Company's
foundry sources, could materially adversely affect the Company's business,
financial condition or operating results.
In order to secure wafer capacity, the Company from time to time has
entered into "take or pay" contracts that committed the Company to purchase
specified quantities over extended periods, and has made prepayments to
foundries. In the future, the Company may enter into similar transactions or
other transactions, including, without limitation, non-refundable deposits with,
or loans to foundries or equity investments in, joint ventures or other
partnership relationships with foundries. Any such transaction could require the
Company to seek additional equity or debt financing to fund such activities.
There can be no assurance that the Company will be able to obtain any required
financing on terms acceptable to the Company.
Additionally, the Company relies on subcontractors for the assembly and
packaging of the ICs included in its products. The Company has no long-term
agreements with its assembly and packaging subcontractors. There can be no
assurance that such subcontractors will continue to be able and willing to meet
the Company's requirements for such components or services. Any significant
disruption in supplies from, or degradation in the quality of components or
services supplied by, such subcontractors could delay shipments and result in
the loss of customers or revenues or otherwise have a material adverse effect on
the Company's business and operating results.
Certain Risks Associated With Acquisitions. Since the beginning of fiscal
1996, the Company has acquired nine complementary companies and businesses. As
part of its overall strategy, the Company plans to continue to acquire or invest
in complementary companies, products or technologies and to enter into joint
ventures and strategic alliances with other companies. Risks commonly
encountered in such transactions include the difficulty of assimilating the
operations and personnel of the combined companies, the potential disruption of
the Company's ongoing business, the inability to retain key technical and
managerial personnel, the inability of management to maximize the financial and
strategic position of the Company through the successful integration of acquired
businesses, additional expenses associated with amortization of acquired
intangible assets, dilution of existing equity holders, the maintenance of
uniform standards, controls, procedures and policies and the impairment of
relationships with employees and customers as a result of any integration of new
personnel. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with such
business combinations, investments or joint ventures or that such transactions
will not materially adversely affect the Company's business, financial condition
or operating results.
Competition. The markets for the Company's products are intensely
competitive and are characterized by rapid technological advances, frequent new
product introductions, evolving industry standards and price
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erosion. The Company's principal competitors in the host adapter market are
Symbios Logic Inc., a subsidiary of Hyundai Electronics America, and other
smaller manufacturers of host adapters. The Company's principal competitors in
the mass storage market are captive suppliers and Cirrus Logic, Inc. As the
Company has continued to broaden its bandwidth management product offerings into
the desktop, server and networking environments, it has experienced, and expects
to experience in the future, significantly increased competition both from
existing competitors and from additional companies that may enter its markets.
Some of these companies have greater technical, marketing, manufacturing and
financial resources than the Company. There can be no assurance that the Company
will be able to make timely introduction of new leading-edge solutions in
response to competitive threats, that the Company will be able to compete
successfully in the future against existing or potential competitors or that the
Company's business or operating results will not be materially adversely
affected by price competition.
Certain Issues Related to Distributors. The Company's distributors
generally offer a diverse array of products from several different
manufacturers. Accordingly, there is a risk that these distributors may give
higher priority to selling products from other suppliers, thus reducing their
efforts to sell the Company's products. A reduction in sales efforts by the
Company's current distributors could have a materially adverse effect on its
business and operating results. The Company's distributors may on occasion build
inventories in anticipation of substantial growth in sales, and if such growth
does not occur as rapidly as anticipated, distributors may decrease the amount
of product ordered from the Company in subsequent quarters. Such a slowdown in
orders could reduce the Company's revenues in any given quarter and give rise to
fluctuation in the Company's operating results.
Dependence on Key Personnel. The Company's future success depends in large
part on the continued service of its key technical, marketing and management
personnel and on its ability to continue to attract and retain qualified
employees, particularly those highly skilled design, process and test engineers
involved in the manufacture of existing products and the development of new
products and processes. The competition for such personnel is intense, and the
loss of key employees could have a material adverse effect on the Company's
business or operating results.
Certain Risks Associated with International Operations. The Company's
manufacturing facility and various subcontractors it utilizes from time to time
are located primarily in Asia. Additionally, the Company has various sales
offices and customers throughout Europe, Japan, and other countries. The
Company's international operations and sales are subject to political and
economic risks, including political instability, currency controls, exchange
rate fluctuations, and changes in import/export regulations, tariffs and freight
rates. In addition, because the Company's principal wafer supplier, TSMC, is
located in Taiwan, the Company is subject to the risk of political instability
in Taiwan, including the potential for conflict between Taiwan and the People's
Republic of China.
Intellectual Property Protection and Disputes. The Company has historically
devoted significant resources to research and development and believes that the
intellectual property derived from such research and development is a valuable
asset that has been and will continue to be important to the success of the
Company's business. Although the Company actively maintains and defends its
intellectual property rights, no assurance can be given that the steps taken by
the Company will be adequate to protect its proprietary rights. In addition, the
laws of certain territories in which the Company's products are or may be
developed, manufactured, or sold, including Asia and Europe, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. The Company has from time to time discovered
counterfeit copies of its products being manufactured or sold by others.
Although the Company maintains an active program to detect and deter the
counterfeiting of its products, should counterfeit products become available in
the market to any significant degree it could materially adversely affect the
business or operating results of the Company.
From time to time, third parties may assert exclusive patent, copyright and
other intellectual property rights to technologies that are important to the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertions by third
parties will not result in costly litigation or that the Company would prevail
in such litigation or be able to license any valid and
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infringed patents from third parties on commercially reasonable terms.
Litigation, regardless of its outcome, could result in substantial cost and
diversion of resources of the Company. Any infringement claim or other
litigation against or by the Company could materially adversely affect the
Company's business or operating results.
Need for Interoperability. The Company's products must be designed to
interoperate effectively with a variety of hardware and software products
supplied by other manufacturers, including microprocessors, peripherals and
operating system software. The Company depends on significant cooperation with
these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading system, peripheral and
microprocessor suppliers, there can be no assurance that such suppliers will not
from time to time make it more difficult for the Company to design its products
for successful interoperability or decide to compete with the Company.
Discretionary Use of Proceeds of Offering. The principal purposes of the
offering are to increase the Company's capital base and financial flexibility.
The Company expects to use the net proceeds principally for general corporate
purposes, including working capital, possible pre-payments or other arrangements
to obtain foundry capacity, capital expenditures and possible acquisitions.
However, the Company has no current specific plans for use of the net proceeds
of this offering. As a consequence, the Company's management will have the
ability to allocate the net proceeds of the offering at its discretion. There
can be no assurance that the proceeds will be utilized in a manner that the
Noteholders deem optimal or that the proceeds can or will be invested to yield a
significant return upon the completion of the offering. See "Use of Proceeds."
Volatility of Stock Price. The market price of the Notes could be
significantly affected by changes in the market price of the Common Stock. The
stock market in general, and the market for shares of technology companies in
particular, have from time to time experienced extreme price fluctuations, which
have often been unrelated to the operating performance of the affected
companies. In addition, factors such as technological innovations or new product
introductions by the Company, its competitors or its customers may have a
significant impact on the market price of the Company's Common Stock.
Furthermore, quarter-to-quarter fluctuations in the Company's results of
operations caused by changes in customer demand, changes in the microcomputer
and peripherals markets, or other factors, may have a significant impact on the
market price of the Company's Common Stock. 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 and, in turn, the price of the Notes, to
fluctuate substantially over short periods.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
3.1 Eighth amended and restated articles of incorporation filed with the California
Secretary of State on November 1, 1996.
3.2 Certificate of determination of rights, preferences and privileges of series A
participating preferred stock filed with the California Secretary of State on
December 31, 1996.
10.1 Amendments Seven, Eight and Nine to the Revolving Credit Loan Agreement dated April
29, 1994 between the Registrant and Comerica Bank -- California expiring August 31,
1997.
10.2 Amendments One, Two, Three and Four to the Term Loan Agreement dated June 24, 1992
between the Registrant and Comerica Bank -- California (formerly the Plaza Bank of
Commerce) expiring June 30, 1998.
27.1 Financial Data Schedule for the three months ended December 27, 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: January 20, 1997
/s/ ANDREW J. BROWN
--------------------------------------
Andrew J. Brown, Vice-President and
Corporate Controller
(Principal Accounting Officer)
Date: January 20, 1997
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
3.1 Eighth Amended and Restated Articles of Incorporation filed with the California
Secretary of State on November 1, 1996.
3.2 Certificate of Determination of Rights, Preferences and Privileges of Series A
Participating Preferred Stock filed with the California Secretary of State on
December 31, 1996.
10.1 Amendments Seven, Eight and Nine to the Revolving Credit Loan Agreement dated April
29, 1994 between the Registrant and Comerica Bank -- California expiring August 31,
1997.
10.2 Amendments One, Two, Three and Four to the Term Loan Agreement dated June 24, 1992
between the Registrant and Comerica Bank -- California (formerly the
Plaza Bank of Commerce) expiring June 30, 1998.
27.1 Financial Data Schedule for the three months ended December 27, 1996.