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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 SEPTEMBER 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 NO. 0-15071
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 November 5, 1997 was
113,652,871.
This document consists of 12 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
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......................... 11
Item 6. Exhibits and Reports on Form 8-K............................................ 11
Signatures............................................................................ 12
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTH SIX MONTH
PERIOD ENDED PERIOD ENDED
--------------------- ---------------------
SEPT. SEPT. SEPT. SEPT.
30, 30, 30, 30,
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues.................................... $278,088 $215,043 $549,530 $417,057
Cost of revenues................................ 104,530 92,550 212,024 178,596
-------- -------- -------- --------
Gross profit.................................... 173,558 122,493 337,506 238,461
-------- -------- -------- --------
Operating expenses:
Research and development...................... 42,117 30,633 81,099 58,480
Selling, marketing and administrative......... 53,228 35,936 102,507 69,860
Write-off of acquired in-process technology
and other.................................. -- 42,405 -- 68,905
-------- -------- -------- --------
Total operating expenses........................ 95,345 108,974 183,606 197,245
-------- -------- -------- --------
Income from operations.......................... 78,213 13,519 153,900 41,216
Interest income, net of interest expense........ 5,412 2,266 9,310 4,933
-------- -------- -------- --------
Income before provision for income taxes........ 83,625 15,785 163,210 46,149
Provision for income taxes...................... 20,906 14,548 40,802 26,998
-------- -------- -------- --------
Net income...................................... $ 62,719 $ 1,237 $122,408 $ 19,151
======== ======== ======== ========
Net income per share............................ $ 0.53 $ 0.01 $ 1.04 $ 0.17
======== ======== ======== ========
Weighted average common and common equivalent
shares outstanding............................ 119,051 113,640 118,030 112,508
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
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ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
SEPTEMBER 30, MARCH 31,
1997 1997
------------- ----------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents........................................ $ 256,605 $ 318,075
Marketable securities............................................ 414,402 230,366
Accounts receivable, net......................................... 160,644 132,571
Inventories...................................................... 49,574 53,184
Prepaid expenses and other....................................... 76,441 83,752
--------- ---------
Total current assets..................................... 957,666 817,948
Property and equipment, net........................................ 183,887 141,599
Other assets....................................................... 97,077 83,947
--------- ---------
$ 1,238,630 $1,043,494
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................ $ 2,550 $ 3,400
Note payable..................................................... 35,280 --
Accounts payable................................................. 50,724 52,400
Accrued liabilities.............................................. 83,551 68,519
--------- ---------
Total current liabilities................................ 172,105 124,319
--------- ---------
Convertible subordinated notes and long-term debt, net of current
portion.......................................................... 230,000 230,850
--------- ---------
Shareholders' equity:
Common stock..................................................... 277,626 251,834
Retained earnings................................................ 558,899 436,491
--------- ---------
Total shareholders' equity............................... 836,525 688,325
--------- ---------
$ 1,238,630 $1,043,494
========= =========
See accompanying notes to condensed consolidated financial statements.
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ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTH PERIOD ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
(IN THOUSANDS)
Net Cash Provided by Operating Activities......................... $ 155,318 $ 71,433
--------- --------
Cash Flows From Investing Activities:
Purchase of certain net assets in connection with acquisitions
accounted for under the purchase method of accounting........... -- (75,365)
Purchases of property and equipment............................... (56,844) (43,445)
(Purchases) sales of marketable securities........................ (184,036) 46,269
--------- --------
Net Cash Used for Investing Activities............................ (240,880) (72,541)
--------- --------
Cash Flows From Financing Activities:
Payment of short-term note........................................ -- (46,200)
Proceeds from issuance of common stock............................ 25,792 10,614
Principal payments on debt........................................ (1,700) (1,700)
--------- --------
Net Cash Provided by (Used for) Financing Activities.............. 24,092 (37,286)
--------- --------
Net Decrease in Cash and Cash Equivalents......................... (61,470) (38,394)
Cash and Cash Equivalents at Beginning of Period.................. 318,075 91,211
--------- --------
Cash and Cash Equivalents at End of Period........................ $ 256,605 $ 52,817
========= ========
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 second quarter as having
ended on September 30, whereas in fact, the Company's second quarter of fiscal
1998 ended on October 3, 1997 and its second quarter of fiscal 1997 ended on
September 27, 1996. The results of operations for the six month period ended
September 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):
SEPTEMBER 30, MARCH 31,
1997 1997
------------- ---------
Raw materials........................................ $11,209 $12,958
Work in process...................................... 19,540 14,370
Finished goods....................................... 18,825 25,856
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$49,574 $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 SIX MONTH PERIOD ENDED
ENDED
----------------------- -----------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Pro forma basic earnings per share............ $0.56 $0.01 $1.09 $0.18
Pro forma diluted earnings per share.......... $0.52 $0.01 $1.03 $0.17
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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ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. ACQUISITIONS
On April 9, 1996, the Company acquired, for $32 million cash, certain
assets and the ongoing business of Western Digital's Connectivity Solutions
Group (CSG), a supplier of silicon solutions for the 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. Additionally, on September 16, 1996, the
Company acquired, for $31 million cash and $15 million in stock, Data Kinesis,
Inc. (DKI), a developer of software for improving system performance in file
management and RAID applications.
The Company accounted for these acquisitions using the purchase method of
accounting, and excluding the $67 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 independent appraisals
and is summarized as follows (in thousands):
Tangible assets............................................ $10,135
In-process technology...................................... 67,200
Goodwill................................................... 14,370
-------
Assets acquired............................................ $91,705
=======
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), a provider of high-performance Fast Ethernet
products for the networking market. The Company acquired all of the outstanding
capital stock of Cogent in exchange for 1.3 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 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.
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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 SIX MONTH
PERIOD ENDED PERIOD ENDED
----------------------- -----------------------
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1997 1996
--------- --------- --------- ---------
Net revenues........................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues....................................... 37.6 43.0 38.6 42.8
----- ----- ----- -----
Gross margin........................................... 62.4 57.0 61.4 57.2
----- ----- ----- -----
Operating expenses:
Research and development............................. 15.2 14.3 14.8 14.0
Selling, marketing and administrative................ 19.1 16.7 18.6 16.8
Write-off of acquired in-process technology and
other............................................. -- 19.7 -- 16.5
----- ----- ----- -----
34.3 50.7 33.4 47.3
----- ----- ----- -----
Income from operations................................. 28.1 6.3 28.0 9.9
Interest income, net of interest expense............... 2.0 1.0 1.7 1.2
----- ----- ----- -----
Income before provision for income taxes............... 30.1 7.3 29.7 11.1
Provision for income taxes............................. 7.5 6.7 7.4 6.5
----- ----- ----- -----
Net income............................................. 22.6% 0.6% 22.3% 4.6%
===== ===== ===== =====
NET REVENUES
Net revenues were $278 million for the second quarter of fiscal 1998 and
$550 million for the first half of fiscal 1998, representing increases of 29%
and 32%, respectively, over the corresponding periods of fiscal 1997. This
growth in net revenues was primarily attributable to increased shipments of the
Company's host adapters and proprietary integrated circuits (ICs) used in
peripheral technology solutions compared to the same periods a year ago. These
increases reflect growth in the high-performance microcomputer markets,
continued demand for SCSI in the client/server environment, the ongoing
deployment of sophisticated operating systems, and an increase in the use of
diverse peripherals in microcomputer systems compared to the corresponding prior
year period.
GROSS MARGIN
Gross margins for the second quarter and the first half of fiscal 1998 were
62% and 61%, respectively, compared to 57% for the three months ended September
30, 1996 and first half of fiscal 1997. The percentage increase is primarily due
to the mix of products shipped, which included increased shipments of the
Company's higher margin SCSI host adapters. Gross margin also increased due to
the Company's continued focus on component cost reductions and on improving
manufacturing efficiencies.
OPERATING EXPENSES
As a percentage of net revenues, expenditures for research and development
remained at approximately 15% for both the second quarter and first half of
fiscal 1998 compared to 14% for the corresponding periods of fiscal 1997. In
absolute dollars, spending for research and development increased 37% to $42
million for the second quarter of fiscal 1998 and 39% to $81 million for the
first half of fiscal 1998. 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 products incorporating IEEE 1394, Fibre Channel, optical standards, and
CD recordable software solutions.
As a percentage of revenues, selling, marketing and administrative expenses
was 19% for the second quarter and first half of fiscal 1998 compared with 17%
for the corresponding periods of fiscal 1997. In absolute
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dollars, spending for selling, marketing and administrative expenses increased
48% to $53 million for the second quarter of fiscal 1998 and 47% to $103 million
for the first half of fiscal 1998. The increase in spending was primarily a
result of increased staffing levels to support the Company's worldwide growth
and increased advertising and promotional programs.
During the first half 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 $42 million and $67 million for
the second quarter and first half of fiscal 1997, respectively. During the first
half of fiscal 1998, the Company did not complete any acquisitions.
INTEREST AND INCOME TAXES
Interest income, net of interest expense, increased 139% to $5.4 million
for the second quarter of fiscal 1998 and 89% to $9.3 million for the first half
of fiscal 1998. 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 $20.9 million and
$40.8 million for the second quarter and first half of fiscal 1998,
respectively, representing 25% of income before income taxes compared with 92%
and 59% for the corresponding periods in fiscal 1997. The rates in the prior
fiscal year were higher than the 25% rate primarily due to book write-offs of
acquired 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 half of fiscal
1998 totaled $155 million compared to $71 million generated in the corresponding
period of fiscal 1997. The increase is primarily attributable to net income for
the first half of fiscal 1998 of $122 million compared with $19 million for the
first half of fiscal 1997 reflecting the impact of a $67 million non-recurring
write-off of acquired in-process technology. Operating cash flows for the first
half of fiscal 1998 were also increased by the receipt of two amounts totaling
$25.7 million that had been previously classified as prepaid expenses. These
payments consisted 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.
INVESTING ACTIVITIES
Purchases of property and equipment of $57 million during the first half of
fiscal 1998 included an investment of $11 million for land located in Irvine,
California to provide for the Company's future growth and $16 million relating
to the implementation of new information systems. During the first half of
fiscal 1998 and 1997, 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 half of fiscal 1997, the Company
paid a total of $75 million cash for the acquisition of CSG, DKI, and certain
technologies from Corel, Inc.
The Company anticipates capital expenditures relating to property and
equipment will total approximately $50 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.
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During the first half of fiscal 1998 the Company continued to invest
significant amounts of funds in marketable securities, consisting of various
taxable and tax advantaged securities. During the corresponding period of fiscal
1997, the Company sold marketable securities to help fund its acquisitions.
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 half 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 half 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 $26 million and $11 million, respectively.
At September 30, 1997, the Company's principal sources of liquidity
consisted of $671 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,
including statements related to anticipated capital expenditures and the
sufficiency of the Company's capital resources, 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 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of shareholders on August 21, 1997. Out
of 112,308,577 shares of Common Stock entitled to vote at such meeting, there
were present in person or by proxy 99,203,017 shares. At the Annual meeting, the
shareholders of the Company approved the following matters:
(a) The election of Laurence B. Boucher, Carl J. Conti, John C. East,
Robert J. Loarie, B. J. Moore, W. Ferrell Sanders, F. Grant Saviers and
Philip E. White as directors of the Company for the ensuing year and until
their successors are elected. The vote for the nominated directors was as
follows:
Laurence B. Boucher, 99,081,579 votes cast for and 121,438 votes
withheld; Carl J. Conti, 99,082,558 votes cast for and 120,459 votes
withheld; John C. East, 99,085,700 votes cast for and 117,317 votes
withheld; Robert J. Loarie, 99,086,425 votes cast for and 116,592 votes
withheld; B.J. Moore 99,053,747 votes cast for and 149,270 votes
withheld; W. Ferrell Sanders 99,091,302 votes cast for and 111,715 votes
withheld; F. Grant Saviers, 99,085,381 votes cast for and 117,636 votes
withheld, Phillip E. White 99,032,849 votes cast for and 170,168 votes
withheld;
(b) Approval of the change in the state of incorporation of the
Company from the state of California to the state of Delaware. 62,849,248
votes were cast for approval; 21,896,296 votes were cast against; 125,028
votes abstained;
(c) Approval of the form of indemnification agreement to be entered
into between the Company and its directors and officers when the change in
the Company's state of incorporation occurs. 98,463,130 votes were cast for
approval; 574,923 votes were cast against; 164,964 votes were abstained;
(d) Ratification of the appointment of Price Waterhouse LLP as
independent public accountants of the Company for the fiscal year ending
March 31, 1998. 99,099,264 votes were cast for approval; 30,999 votes were
cast against and 72,754 votes abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
27.1 Financial Data Schedule for the three months ended September 30, 1997.
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: November 5, 1997
/s/ ANDREW J. BROWN
--------------------------------------
Andrew J. Brown,
Vice-President and
Corporate Controller
(Principal Accounting Officer)
Date: November 5, 1997
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INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
27.1 Financial Data Schedule for the three months ended September 30, 1997.