<PAGE> 1
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 December 30, 1994 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______ to _______
Commission file number 0-15071
ADAPTEC, INC.
(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 January 20, 1995
was 51,371,948.
This document consists of 13 pages of which this is page 1.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Page
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes To Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations 8-10
Liquidity and Capital Resources 10-11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Three Month Nine Month
Period Ended Period Ended
------------ ------------
Dec. 30 Dec. 31 Dec. 30 Dec. 31
(in thousands, except per share data) 1994 1993 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $123,367 $96,071 $336,002 $270,491
Cost of revenues 51,804 47,381 152,138 139,328
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 71,563 48,690 183,864 131,163
- -----------------------------------------------------------------------------------------------------------------------------
Operating expenses:
Research and development 14,835 10,776 43,181 28,629
Sales and marketing 15,805 12,094 43,387 33,513
General and administrative 6,024 5,628 17,161 13,599
- -----------------------------------------------------------------------------------------------------------------------------
Total operating expenses 36,664 28,498 103,729 75,741
- -----------------------------------------------------------------------------------------------------------------------------
Income from operations 34,899 20,192 80,135 55,422
Shareholder settlement -- -- -- (2,409)
Interest income, net of interest expense 1,639 902 4,470 2,565
- -----------------------------------------------------------------------------------------------------------------------------
Income before provision for income taxes 36,538 21,094 84,605 55,578
Provision for income taxes 9,135 5,274 21,152 13,896
- -----------------------------------------------------------------------------------------------------------------------------
Net income $ 27,403 $ 15,820 $ 63,453 $ 41,682
=============================================================================================================================
Net income per share $ .52 $ .29 $ 1.19 $ .78
=============================================================================================================================
Weighted average common and common
equivalent shares outstanding 52,958 53,928 53,364 53,354
=============================================================================================================================
</TABLE>
See accompanying notes.
3
<PAGE> 4
ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
December 30 March 31
(in thousands) 1994 1994*
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 64,295 $ 35,387
Marketable securities 151,928 147,620
Accounts receivable, net 56,406 55,334
Inventories 28,682 38,940
Prepaid expenses 13,481 15,979
- ----------------------------------------------------------------------------------------------------------------
Total current assets 314,792 293,260
- ----------------------------------------------------------------------------------------------------------------
Property and equipment, at cost 91,404 72,114
Less accumulated depreciation and amortization (26,526) (20,592)
- ----------------------------------------------------------------------------------------------------------------
Property and equipment, net 64,878 51,522
- ----------------------------------------------------------------------------------------------------------------
Other assets 18,472 13,693
- ----------------------------------------------------------------------------------------------------------------
$398,142 $358,475
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 3,400 $ 3,400
Accounts payable 12,172 19,654
Accrued liabilities 31,844 15,435
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 47,416 38,489
- ----------------------------------------------------------------------------------------------------------------
Long-term debt, net of current portion 8,500 11,050
- ----------------------------------------------------------------------------------------------------------------
Long-term liability 11,340 11,320
- ----------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock 129,276 138,347
Retained earnings 201,504 159,299
Cumulative translation adjustment 106 (30)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 330,886 297,616
- ----------------------------------------------------------------------------------------------------------------
$398,142 $358,475
================================================================================================================
</TABLE>
See accompanying notes.
* Amounts are derived from the March 31, 1994 audited financial statements.
4
<PAGE> 5
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Nine Month Period Ended
-----------------------
December 30 December 31
(in thousands) 1994 1993
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 63,453 $ 41,682
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,671 8,384
Provision for inventory reserves and doubtful accounts 5,142 4,163
Changes in assets and liabilities:
Increase in accounts receivable (1,222) (13,973)
Decrease (increase) in inventories 5,266 (1,429)
Decrease in prepaid expenses 2,498 5,339
Increase in other assets (4,910) (11,426)
Decrease in accounts payable (7,482) (7,589)
Increase in accrued liabilities and long-term liability 16,429 8,984
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 88,845 34,135
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (22,760) (11,723)
Sales of (investment in) marketable securities, net (4,308) 4,763
- ---------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (27,068) (6,960)
- ---------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 6,229 5,529
Repurchase and retirement of common stock (36,548) --
Principal payments on long-term debt (2,550) (2,122)
- ---------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (32,869) 3,407
- ---------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 28,908 30,582
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 35,387 19,345
- ---------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 64,295 $ 49,927
=========================================================================================================
</TABLE>
See accompanying notes.
5
<PAGE> 6
ADAPTEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 30, 1994
(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, 1994 audited consolidated financial
statements and include all adjustments, consisting of only normal
recurring adjustments, necessary to fairly state the information set
forth herein. The results of operations for the three and nine month
periods ended December 30, 1994 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):
<TABLE>
<CAPTION>
Nine Month Period Ended
-----------------------
December 30 December 31
1994 1993
---- ----
<S> <C> <C>
Interest $ 877 $1,008
Income taxes $18,643 $8,680
</TABLE>
3. Cash, Cash Equivalents, and Marketable Securities
Effective at the beginning of fiscal 1995, Adaptec, Inc. (the Company)
adopted Statement of Financial Accounting Standards No. 115
"Accounting for Certain Investments in Debt and Equity Securities"
(SFAS 115), which requires investment securities to be classified as
either held-to-maturity, trading or available-for-sale. Management
has determined its entire marketable securities portfolio to be
classified as available-for-sale. Under SFAS 115, for those
investments classified as available-for-sale any temporary difference
between an investment's cost and its fair value should be recorded as
a separate component of shareholders' equity. At December 30, 1994,
the fair value of the Company's marketable securities approximated
cost.
4. Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. The components of inventory are (in thousands):
<TABLE>
<CAPTION>
December 30 March 31
1994 1994
---- ----
<S> <C> <C>
Purchased parts and sub-assemblies $ 9,623 $14,674
Work in process 3,823 12,486
Finished goods 15,236 11,780
------- -------
$28,682 $38,940
======= =======
</TABLE>
6
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5. Net Income Per Share
Net income per share for the three and nine month periods ended
December 30, 1994 and December 31, 1993, 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. The financial statements have been
retroactively restated to reflect a two for one split of the Company's
common stock in January 1994.
6. Income Taxes
For the three and nine month periods ended December 30, 1994 and
December 31, 1993, the Company's effective tax rate differed from the
federal statutory rate primarily due to income earned in Singapore
where the Company is not currently subject to income tax. The
Company's pioneer status in Singapore expires during fiscal 1996.
7. Stock Repurchase Program
In fiscal year 1995, the Board of Directors authorized the repurchase
of up to 4 million shares of the Company's common stock in open market
or negotiated transactions. During the nine-month period ended
December 30, 1994, the Company repurchased and retired 2 million
shares at an aggregate cost of $37 million. As of December 30, 1994,
2 million shares remained available for repurchase under the stock
repurchase program.
8. Legal Matters
In December 1990, several suits were filed against the Company, its
directors and certain of its officers alleging violations of federal
securities laws and negligent misrepresentation. A consolidated class
action complaint, which sought unspecified money damages, was filed in
the San Jose Division of the United States District Court, Northern
District of California on February 21, 1991. The Company settled this
action on July 29, 1993 by a letter agreement. The letter agreement,
among other things, provided for payments by the Company and the
insurance carrier by August 9, 1993. These payments were made as
scheduled and are currently maintained in interest-bearing escrow
accounts. The court has dismissed the action with prejudice. Since
the payments were made, the parties have been negotiating the terms of
a formal stipulation of settlement to be filed with the Court.
7
<PAGE> 8
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:
<TABLE>
<CAPTION>
Three Month Nine Month
Period Ended Period Ended
------------ ------------
Dec. 30 Dec. 31 Dec. 30 Dec. 31
1994 1993 1994 1993
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 42.0 49.3 45.3 51.5
----- ----- ----- -----
Gross profit 58.0 50.7 54.7 48.5
----- ----- ----- -----
Operating expenses:
Research and development 12.0 11.2 12.9 10.6
Sales and marketing 12.8 12.6 12.9 12.4
General and administrative 4.9 5.8 5.1 5.0
----- ----- ----- -----
29.7 29.6 30.9 28.0
----- ----- ----- -----
Income from operations 28.3 21.1 23.8 20.5
Shareholder settlement -- -- -- (0.9)
Interest income, net 1.3 0.9 1.4 0.9
----- ----- ----- -----
Income before provision for
income taxes 29.6 22.0 25.2 20.5
Provision for income taxes 7.4 5.5 6.3 5.1
----- ----- ----- -----
Net income 22.2% 16.5% 18.9% 15.4%
===== ===== ===== =====
</TABLE>
Net Revenues
Net revenues increased 28% to $123 million in the third quarter of fiscal 1995
and 24% to $336 million in the first nine months of fiscal 1995, from $96
million and $270 million in the corresponding periods of fiscal 1994. The
majority of this growth resulted from increased shipments of the Company's SCSI
host adapters, as the penetration of SCSI in desktop personal computers and
file servers increased compared to the prior year. A significant portion of
the increase in shipments was a result of the Company benefiting from the
acceptance of its PCI-to-SCSI host adapters in high performance microcomputers.
Offsetting increased net revenues generated from host adapters was a decrease
in sales of the company's disk controller integrated circuits (IC's) compared
with the corresponding quarter in the prior year.
8
<PAGE> 9
Gross Margin
Gross margin for the third quarter and the first nine months of fiscal 1995
increased to 58% and 55% from 51% and 49% in the comparable periods of fiscal
1994, respectively. Gross margin was favorably affected by the mix of products
shipped, primarily consisting of continued increases in shipments of the
Company's host adapters as compared to disk controller IC's. The Company
enjoyed the benefits of improved designs and continued to experience component
cost reductions combined with increased manufacturing efficiencies that also
contributed to the increased gross margins. The Company's ability to maintain
current gross margins can be significantly affected by factors such as the mix
of products shipped, competitive price pressures, the timeliness of volume
shipments of new products and the Company's ability to achieve manufacturing
cost reductions.
Operating Expenses
Expenditures for research and development increased as a percentage of net
revenues to 12% and 13% in the third quarter and first nine months of fiscal
1995 from 11% in both the comparable periods of fiscal 1994, respectively.
Actual spending for research and development increased from the same periods of
fiscal 1994 by 38% to $15 million in the third quarter and 51% to $43 million
in the first nine months of fiscal 1995. These increases are primarily a
result of enhancements of current products and the continued development of
next generation SCSI host adapters, software products, and next generation
IC's. The Company anticipates that research and development expenditures will
increase in absolute dollars over the remainder of the fiscal year.
Sales and marketing expenses approximating 13% of net revenues were essentially
the same for both the third quarter and first nine months of each fiscal year.
Actual sales and marketing expenses increased from the corresponding periods of
fiscal 1994 by 31% to $16 million in the third quarter and 29% to $43 million
in the first nine months of fiscal 1995. This was mainly due to increased
staffing levels in both marketing and sales to maintain the Company's
competitive position in the expanding personal computer and file server
markets. An additional contributing factor was increased advertising and
promotional expenses aimed at generating increased demand for the Company's
products. The Company anticipates that sales and marketing expenses will
increase in absolute dollars for the remainder of fiscal 1995 primarily due to
increased headcount and continued advertising and promotional expenses to
generate increased demand for the Company's products.
General and administrative expenses as a percentage of net revenues remained
relatively consistent in the third quarter and first nine months of fiscal 1995
from the comparable fiscal 1994 periods. Actual spending increased from a year
ago primarily due to costs associated with increased staffing levels.
Shareholder Settlement
During the second quarter of fiscal 1994 the Company entered into a letter
agreement to settle a shareholder class action lawsuit resulting in an
aggregate payment of $2.4 million. See Note 8 to the Condensed Consolidated
Financial Statements for further discussion of the shareholder settlement.
9
<PAGE> 10
Interest and Income Taxes
Interest income, net of interest expense, increased 82% to $1.6 million in the
third quarter and 74% to $4.5 million in the first nine months of fiscal 1995
compared with the respective periods in fiscal 1994. This was a result of
increased average investment balances, continued principal paydowns on debt,
and higher average interest rates. The Company's effective tax rate was 25% in
the third quarter and first nine months of each fiscal year.
The Company's results of operations may be affected in the future by a variety
of factors, including changes in product mix, competitive pressures on prices,
fluctuations in manufacturing yields, product cost increases, the timing of
introduction and market demand for new products, operating expenses, and the
cancellation or rescheduling of orders by its customers. The Company's results
of operations will continue to be affected by technology changes in the markets
in which it competes and by general economic conditions.
Liquidity and Capital Resources
Operating Activities
Net cash generated by operations for the first nine months of fiscal 1995 was
$89 million compared with $34 million for the first nine months of fiscal 1994.
During the first nine months of fiscal 1995, the majority of funds generated
from operations resulted from $63 million of net income adjusted by non-cash
items including depreciation and amortization of $10 million. Additionally
contributing to favorable operating cash flows was a decrease in inventories of
$5 million, and an increase in accrued liabilities and a long-term liability
totaling $16 million. The decrease in inventories is primarily a result of
meeting increased host adapter demand. Primarily offsetting this was a decrease
in accounts payable of $7 million. The decrease in accounts payable is mainly
related to timing of vendor payments for inventories and capital equipment.
During the corresponding period of fiscal 1994, the majority of funds generated
from operations resulted from $42 million of net income adjusted by non-cash
items including depreciation and amortization of $8 million. Also contributing
to positive cash flows was an increase in accrued liabilities and a long-term
liability of $9 million. Offsetting this were increased accounts receivable of
$14 million resulting from increased revenues during the third quarter of
fiscal 1994, and a decrease in accounts payable of $8 million primarily due to
the timing of payments for inventories and capital equipment purchases.
Investing Activities
The Company continues to invest in the purchase of equipment for product
development, IC testing and board level production. Additionally during fiscal
1995, the Company purchased land and buildings for $8 million to support
additional staffing requirements in engineering, sales and marketing. In the
first nine months of fiscal 1994, the primary equipment purchases were for
manufacturing and test equipment. During the first nine months of fiscal
1995, the Company also increased its marketable securities portfolio.
10
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Financing Activities
During the first nine months of fiscal 1995 and 1994, the Company received
proceeds from Common Stock issued under the employee stock option and employee
stock purchase plans totaling $6.2 million and $5.5 million, respectively.
During fiscal 1995, the Company's Board of Directors approved the repurchase of
up to 4 million shares of the Company's common stock. The Company repurchased
2 million shares for $37 million during the first nine months of fiscal 1995.
The Company anticipates capital expenditures of approximately $5 million for
the remainder of fiscal 1995. The sources of funds for these capital
expenditures are expected to be funds generated from operations as well as
working capital on hand. The Company believes existing working capital,
together with expected cash flows from operations and available sources of bank
and equipment financing, will be sufficient to support the Company's operations
through fiscal 1996.
The effect of inflation on the Company's results of operations has not been
material in the period discussed.
11
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Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter.
12
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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: February 3, 1995
/s/ ANDREW J. BROWN
---------------------------------------
Andrew J. Brown, Corporate Controller
(Principal Accounting Officer)
Date: February 3, 1995
13
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<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> 0
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> DEC-30-1994
<EXCHANGE-RATE> 1
<CASH> 64,295
<SECURITIES> 151,928
<RECEIVABLES> 60,832
<ALLOWANCES> 4,426
<INVENTORY> 28,682
<CURRENT-ASSETS> 314,792
<PP&E> 91,404
<DEPRECIATION> 26,526
<TOTAL-ASSETS> 398,142
<CURRENT-LIABILITIES> 47,416
<BONDS> 8,500
<COMMON> 129,276
0
0
<OTHER-SE> 201,610
<TOTAL-LIABILITY-AND-EQUITY> 398,142
<SALES> 123,367
<TOTAL-REVENUES> 123,367
<CGS> 51,804
<TOTAL-COSTS> 51,804
<OTHER-EXPENSES> 36,664
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 308
<INCOME-PRETAX> 36,538
<INCOME-TAX> 9,135
<INCOME-CONTINUING> 27,403
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,403
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
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