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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 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
--------------- TO
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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)
------------------------
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 5, 1997 was
112,819,480.
This document consists of 12 pages, excluding exhibits, 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............................................... 7-8
Liquidity and Capital Resources..................................... 8-10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................... 11
Signatures............................................................................ 12
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3
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTH PERIOD
ENDED
---------------------
JUNE 30, JUNE 30,
1997 1996
-------- --------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net revenues........................................................... $271,442 $202,014
Cost of revenues....................................................... 107,494 86,046
-------- --------
Gross profit........................................................... 163,948 115,968
-------- --------
Operating expenses:
Research and development............................................. 38,982 27,847
Selling, marketing and administrative................................ 49,279 33,924
Write-off of acquired in-process technology.......................... -- 26,500
-------- --------
Total operating expenses............................................... 88,261 88,271
-------- --------
Income from operations................................................. 75,687 27,697
Interest income, net of interest expense............................... 3,898 2,667
-------- --------
Income before provision for income taxes............................... 79,585 30,364
Provision for income taxes............................................. 19,896 12,450
-------- --------
Net income............................................................. $ 59,689 $ 17,914
======== ========
Net income per share................................................... $ 0.51 $ 0.16
======== ========
Weighted average common and common equivalent shares outstanding....... 117,730 111,342
======== ========
See accompanying notes to condensed consolidated financial statements.
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4
ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, MARCH 31,
1997 1997
---------- ----------
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents........................................... $ 367,799 $ 318,075
Marketable securities............................................... 272,244 230,366
Accounts receivable, net............................................ 133,726 132,571
Inventories......................................................... 45,843 53,184
Prepaid expenses and other.......................................... 58,308 83,752
---------- ----------
Total current assets........................................ 877,920 817,948
Property and equipment, net........................................... 171,420 141,599
Other assets.......................................................... 116,681 83,947
---------- ----------
$1,166,021 $1,043,494
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................... $ 3,400 $ 3,400
Note payable........................................................ 35,280 --
Accounts payable.................................................... 57,550 52,400
Accrued liabilities................................................. 79,753 68,519
---------- ----------
Total current liabilities................................... 175,983 124,319
---------- ----------
Long-term debt, net of current portion................................ -- 850
---------- ----------
Convertible subordinated notes........................................ 230,000 230,000
---------- ----------
Shareholders' equity:
Common stock........................................................ 263,858 251,834
Retained earnings................................................... 496,180 436,491
---------- ----------
Total shareholders' equity.................................. 760,038 688,325
---------- ----------
$1,166,021 $1,043,494
========== ==========
See accompanying notes to condensed consolidated financial statements.
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ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTH PERIOD
ENDED
---------------------
JUNE 30, JUNE 30,
1997 1996
-------- --------
(IN THOUSANDS)
Net Cash Provided by Operating Activities.............................. $117,176 $ 36,731
-------- --------
Cash Flows From Investing Activities:
Purchase of certain net assets in connection with acquisitions
accounted for under the purchase method of accounting................ -- (44,879)
Purchases of property and equipment.................................... (36,748) (26,792)
Sales (Purchases) of marketable securities............................. (41,878) 27,227
-------- --------
Net Cash Used for Investing Activities................................. (78,626) (44,444)
-------- --------
Cash Flows From Financing Activities:
Payment of short-term note............................................. -- (46,200)
Proceeds from issuance of common stock................................. 12,024 6,170
Principal payments on debt............................................. (850) (850)
-------- --------
Net Cash Provided by (Used for) Financing Activities................... 11,174 (40,880)
-------- --------
Net Increase (Decrease) in Cash and Cash Equivalents................... 49,724 (48,593)
-------- --------
Cash and Cash Equivalents at Beginning of Period....................... 318,075 91,211
-------- --------
Cash and Cash Equivalents at End of Period............................. $367,799 $ 42,618
======== ========
See accompanying notes to condensed consolidated financial statements.
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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited condensed
consolidated interim financial statements have been prepared on a consistent
basis with the March 31, 1997 audited consolidated financial statements and
include all adjustments, consisting of only normal recurring adjustments,
necessary to provide a fair statement of the results for the interim periods
presented. These interim financial statements should be read in conjunction with
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended March 31, 1997. For
presentation purposes, the Company has indicated its first quarter as ending on
June 30, whereas in fact, the Company's first quarter of fiscal 1998 ended on
July 4, 1997 and its first quarter of fiscal 1997 ended on June 28, 1996. The
results of operations for the three month period ended June 30, 1997 are not
necessarily indicative of the results to be expected for the entire year.
2. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are as follows (in thousands):
JUNE 30, MARCH 31,
1997 1997
-------- ---------
Raw materials........................... $ 10,553 $12,958
Work in process......................... 17,663 14,370
Finished goods.......................... 17,627 25,856
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$ 45,843 $53,184
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3. NET INCOME PER SHARE
The Company's net income per share, weighted average common and common
equivalent shares outstanding, and other share information included in these
interim financial statements reflect the two-for-one split of its common stock
approved by its Board of Directors in November 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, (SFAS 128) "Earnings Per Share,"
which the Company is required to adopt beginning in the third quarter of fiscal
1998. Under SFAS 128 primary earnings per share will be replaced by basic
earnings per share and the dilutive effect of stock options will be excluded.
Fully diluted earnings per share will be replaced with diluted earnings per
share. The statement requires retroactive presentation of all earnings per share
amounts. Following are pro forma disclosures of basic and diluted earnings per
share as if the Company had applied SFAS 128 during the periods presented below:
THREE MONTH PERIOD
ENDED
---------------------
JUNE 30, JUNE 30,
1997 1996
-------- --------
Pro forma basic earnings per share........ $ 0.53 $ 0.17
Pro forma diluted earnings per share...... $ 0.51 $ 0.16
4. INCOME TAXES
Income tax provisions for interim periods are based on estimated annual
income tax rates. The effective income tax rate varies from the U.S. federal
statutory income tax rate primarily due to income earned in Singapore where the
Company is subject to a significantly lower effective tax rate.
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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 for the 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 for the quarter ended June 30, 1996 was not material.
The allocation of the Company's aggregate purchase price to the tangible
and identifiable intangible assets acquired was based on independent appraisals
and is summarized as follows (in thousands):
Tangible assets.................................... $ 9,935
In-process technology.............................. 26,500
Goodwill........................................... 8,444
-------
Assets acquired.................................... $44,879
=======
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 MONTHS PERIOD
ENDED
-------------------
JUNE JUNE
30, 30,
1997 1996
------- -------
Net revenues............................................. 100.0% 100.0%
Cost of revenues......................................... 39.6 42.6
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Gross margin............................................. 60.4 57.4
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Operating expenses:
Research and development............................... 14.4 13.8
Selling, marketing and administrative.................. 18.1 16.8
Write-off of acquired in-process technology............ -- 13.1
------ ------
32.5 43.7
------ ------
Income from operations................................... 27.9 13.7
Interest income, net of interest expense................. 1.4 1.3
------ ------
Income before provision for income taxes................. 29.3 15.0
Provision for income taxes............................... 7.3 6.1
------ ------
Net income............................................... 22.0% 8.9%
====== ======
The first quarter of fiscal 1998 contained three additional business days
compared to the corresponding quarter of the prior year. The additional days had
no significant effect on the Company's results of operations.
NET REVENUES
Net revenues increased 34% to $271 million for the first quarter of fiscal
1998 from $202 million for the corresponding quarter of fiscal 1997. This
increase was primarily due to increased shipments of the Company's host adapters
and proprietary integrated circuits (ICs) used in peripheral technology
solutions. 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 corresponding prior year period.
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GROSS MARGIN
The Company's gross margin for the first quarter of fiscal 1998 was 60%
compared to 57% for the corresponding quarter of fiscal 1997. The increase in
gross margin was primarily due to component cost reductions and increased
manufacturing efficiencies. Gross margin was also favorably affected by
increased shipments of the Company's higher margin SCSI host adapters.
OPERATING EXPENSES
As a percentage of net revenues, expenditures for research and development
remained at approximately 14% for both the first quarter of fiscal 1998 and for
the corresponding quarter of fiscal 1997. In absolute dollars, spending for
research and development increased 40% to $39 million for the first quarter of
fiscal 1998 from $28 million for the corresponding prior year quarter. This
increased spending is a result of the Company's ongoing commitment to invest in
its core products as well as newer hardware and software including
1394/FireWire, Fibre Channel, and optical technologies.
As a percentage of revenues, selling, marketing and administrative expenses
increased to 18% for the first quarter of fiscal 1998 compared with 17% for the
corresponding quarter of fiscal 1997. In absolute dollars, spending for selling,
marketing and administrative expenses increased 45% to $49 million for the first
quarter of fiscal 1998 from $34 million for the corresponding quarter of fiscal
1997. The increase in spending was primarily a result of increased staffing
levels to support the Company's worldwide growth.
During the first quarter of fiscal 1997, the Company acquired complementary
businesses recorded under the purchase method of accounting, resulting in
write-offs of acquired in-process technology of $26.5 million. During the first
quarter of fiscal 1998, the Company did not complete any acquisitions.
INTEREST AND INCOME TAXES
Interest income, net of interest expense, increased 46% to $3.9 million for
the first quarter of fiscal 1998 from $2.7 million for the first quarter of
fiscal 1997. The increase was primarily due to higher average cash and
marketable securities balances as a result of proceeds received in connection
with $230 million of Convertible Subordinated Notes that the Company issued in
February 1997, offset by higher interest expense as a result of higher average
outstanding debt balances.
The Company recorded a provision for income taxes of $19.9 million for the
first quarter of fiscal 1998 representing 25% of income before income taxes
compared with 41% for the corresponding quarter of fiscal 1997. The 41% rate in
the prior quarter was higher than the 25% rate primarily due to book write-offs
of in-process technology which are not deductible for tax purposes. The
difference between the Company's effective 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 from operating activities for the first quarter of
fiscal 1998 of $117 million was higher by $80 million compared to the $37
million generated in the corresponding quarter of fiscal 1997. This increase was
primarily due to increased net income and two amounts totaling $25.7 million
collected during the first quarter of fiscal 1998. The two amounts collected
during the first quarter of fiscal 1998 comprised of a refund of a deposit
totaling $14.7 million from Taiwan Semiconductor Manufacturing Co., Ltd.
("TSMC") and $11 million received from Lucent Technologies, Inc. ("Lucent")
under an agreement in which the Company sold equipment that it had previously
purchased in connection with a separate agreement. The amounts from TSMC and
Lucent had both been previously classified as prepaid expenses.
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9
INVESTING ACTIVITIES
Purchases of property and equipment of $37 million during the first quarter
of fiscal 1998 included an investment of $11 million for land located in Irvine,
California to provide for the Company's future growth and $8 million relating to
the implementation of new information systems. The Company will begin utilizing
its new information systems during the second quarter of fiscal 1998. During the
first quarter of fiscal 1998, the Company continued to make various building and
leasehold improvements to its facilities and to invest in equipment for product
development and manufacturing to support increased demand for its products and
future business requirements. During the first quarter of fiscal 1997, the
Company paid a total of $45 million cash for the acquisition of Western
Digital's Connectivity Solutions Group and certain technologies from Corel, Inc.
The Company anticipates capital expenditures relating to property and
equipment will total approximately $65 million for the remainder of fiscal 1998.
The Company may also make investments in increased wafer fabrication capacity or
for acquisitions of complimentary businesses, products, or technologies. During
the first quarter of fiscal 1998 the Company continued to invest significant
amounts of funds in marketable securities, consisting mainly of various tax
advantaged U.S. government and municipal securities.
FINANCING ACTIVITIES
During April 1997, the Company entered into an agreement with TSMC whereby
the Company will make advance payments totaling $35 million to secure additional
wafer capacity for future technology through 2001. The Company signed a $35
million promissory note for the advance payments, which becomes due in two equal
installments in January 1998 and June 1998. During the first quarter of fiscal
1997, the Company paid a short term note of $46 million due to TSMC in return
for guaranteed future wafer capacity.
During the first quarter of fiscal 1998 and fiscal 1997, the Company
received proceeds from common stock issued under the employee stock option and
employee stock purchase plans totaling $12 million and $6 million, respectively.
At June 30, 1997, the Company's principal sources of liquidity consisted of
$640 million of cash, cash equivalents and marketable securities and an
unsecured $17 million revolving line of credit which expires on December 31,
1998. 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 through fiscal 1998.
FORWARD LOOKING STATEMENTS AND RISK FACTORS
Forward looking statements contained in this discussion and analysis, and
which may from time to time be made by the Company and its representatives, are
subject to risks and uncertainties that could cause actual results to differ
materially from the statements made. Factors that may cause the Company's actual
results in future periods to be materially different from statements made
include, but are not limited to, cancellations or postponements of orders,
shifts in the mix of the Company's products and sales channels, changes in
pricing policies by the Company's suppliers, interruption in the supply of
custom integrated circuits, the market acceptance of new and enhanced versions
of the Company's products and the timing of acquisitions of other business
products and technologies and any associated charges to earnings. In addition,
there are risks associated with dependence on the high-performance microcomputer
market, the computer peripherals market, technological change, dependence on new
products, dependence on wafer suppliers and other subcontractors, acquisitions,
implementations of new information systems, competition, issues related to
distributors, dependence on key personnel, international operations,
intellectual property protection and disputes, the need for interoperability and
volatility of stock price. For a more complete discussion of these factors,
refer to the Risk Factors included in the Company's 1997 Annual Report on Form
10-K for the year ended March 31, 1997.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
10.1* Option Agreement III between Adaptec Manufacturing (s) Pte., Ltd. and Taiwan
Semiconductor Manufacturing Co., Ltd. dated April 21, 1997.
27.1 Financial Data Schedule for the quarter ended June 30, 1997.
No Reports on Form 8-K were filed during the quarter.
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* Confidential treatment has been requested for portions of this agreement.
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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
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Paul G. Hansen,
Vice-President, Finance And Chief
Financial Officer
(Principal Financial Officer),
Assistant Secretary
Date: August 7, 1997
/s/ ANDREW J. BROWN
--------------------------------------
Andrew J. Brown,
Vice President and Corporate
Controller
(Principal Accounting Officer)
Date: August 7, 1997
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EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGES
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10.1* Option Agreement III between Adaptec Manufacturing(s) Pte., Ltd. and
Taiwan Semiconductor Manufacturing Co., Ltd. dated April 21, 1997......
27.1 Financial Data Schedule for the quarter ended June 30, 1997............
- ---------------
* Confidential treatment has been requested for portions of this agreement.
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