-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WPvsSTB/K8szlIdFL2O5EDFHofBHSSwNxlw5N42amPGJ0mF5W/IRt36dA1L40Ab3 BFckvWQ72j2vRXtm3olZCw== 0000891618-96-000075.txt : 19960410 0000891618-96-000075.hdr.sgml : 19960410 ACCESSION NUMBER: 0000891618-96-000075 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19951229 FILED AS OF DATE: 19960209 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAPTEC INC CENTRAL INDEX KEY: 0000709804 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942748530 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15071 FILM NUMBER: 96514510 BUSINESS ADDRESS: STREET 1: 691 S MILPITAS BLVD STREET 2: M/S25 CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4089458600 MAIL ADDRESS: STREET 1: 691 SOUTH MILPITAS BLVD STREET 2: M/S25 CITY: MILPITAS STATE: CA ZIP: 95035 10-Q 1 FORM 10-Q FOR ADAPTEC, INC. 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 29, 1995 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 19, 1996 was 52,562,638. This document consists of 15 pages, excluding exhibits, of which this is page 1. 2 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 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations 9-10 Liquidity and Capital Resources 11-13 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15
2 3 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. 29, Dec. 30, Dec. 29, Dec. 30, (in thousands, except per share data) 1995 1994 1995 1994 -------- -------- -------- -------- Net revenues $176,187 $123,367 $463,322 $336,002 Cost of revenues 74,201 51,804 193,526 152,138 -------- -------- -------- -------- Gross profit 101,986 71,563 269,796 183,864 -------- -------- -------- -------- Operating expenses: Research and development 23,321 14,835 60,488 43,181 Sales and marketing 22,350 15,805 58,200 43,387 General and administrative 9,241 6,024 23,976 17,161 Write-off of acquired in-process technology 11,759 -- 52,313 -- -------- -------- -------- -------- Total operating expenses 66,671 36,664 194,977 103,729 -------- -------- -------- -------- Income from operations 35,315 34,899 74,819 80,135 Interest income, net of interest expense 3,116 1,639 8,413 4,470 -------- -------- -------- -------- Income before provision for income taxes 38,431 36,538 83,232 84,605 Provision for income taxes 7,844 9,135 20,925 21,152 -------- -------- -------- -------- Net income $ 30,587 $ 27,403 $ 62,307 $ 63,453 ======== ======== ======== ======== Net income per share $ .56 $ .52 $ 1.15 $ 1.19 ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding 54,792 52,958 54,397 53,364 ======== ======== ======== ========
See accompanying notes. 3 4 ADAPTEC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
December 29, March 31, (in thousands) 1995* 1995* ------------ --------- ASSETS Current assets: Cash and cash equivalents $100,827 $ 66,835 Marketable securities 192,557 179,911 Accounts receivable, net 84,796 56,495 Inventories 43,252 31,712 Prepaid expenses and other 21,170 15,519 -------- -------- Total current assets 442,602 350,472 -------- -------- Property and equipment, net 76,660 67,863 -------- -------- Other assets 87,351 17,373 -------- -------- $606,613 $435,708 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 3,400 $ 3,400 Note Payable 46,200 -- Accounts payable 24,958 22,008 Accrued liabilities 74,054 31,006 -------- -------- Total current liabilities 148,612 56,414 -------- -------- Long-term debt, net of current portion 5,100 7,650 -------- -------- Shareholders' equity: Common stock 164,956 140,191 Retained earnings 287,945 231,453 -------- -------- Total shareholders' equity 452,901 371,644 -------- -------- $606,613 $435,708 ======== ========
See accompanying notes. * Amounts at December 29, 1995 are unaudited. Amounts at March 31, 1995 are derived from audited annual financial statements. 4 5 ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Nine-Month Period Ended ------------------------------------- December 29, December 30, (in thousands) 1995 1994 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 62,307 $ 63,453 Adjustments to reconcile net income to net cash provided by operating activities: Write-off of acquired in-process technology 52,313 -- Depreciation and amortization 12,591 9,671 Deferred taxes (12,627) -- Changes in assets and liabilities: Accounts receivable (25,786) (1,072) Inventories (8,740) 10,258 Prepaid expenses (4,872) 2,498 Other assets (17,255) (4,910) Accounts payable 817 (7,482) Accrued liabilities 39,306 16,429 --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 98,054 88,845 --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Trillium Research, Inc., Future Domain Corporation and Power I/O, Inc., net of cash acquired (31,177) -- Purchase of property and equipment (19,407) (22,760) Investment in marketable securities, net (12,646) (4,308) --------- -------- NET CASH USED FOR INVESTING ACTIVITIES (63,230) (27,068) --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 9,483 6,229 Repurchase of common stock (7,765) (36,548) Principal payments on long-term debt (2,550) (2,550) --------- -------- NET CASH USED FOR FINANCING ACTIVITIES (832) (32,869) --------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 33,992 28,908 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 66,835 35,387 --------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 100,827 $ 64,295 ========= ========
See accompanying notes 5 6 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 29, 1995 (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, 1995 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to fairly state the information set forth herein. Certain prior year amounts have been reclassified to conform to the current year presentation. The statements have been prepared in accordance with the regulations of the Securities and Exchange Commission, but omit certain information and footnote disclosures necessary to present the statements in accordance with generally accepted accounting principles. For further information, refer to the consolidated financial statements and footnotes thereto included in Adaptec's (the Company) Annual Report on Form 10-K for the year ended March 31, 1995. The results of operations for the three- and nine-month periods ended December 29, 1995 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 29, December 30, 1995 1994 ------------ ------------ Interest $ 604 $ 877 Income taxes $ 14,751 $ 18,643
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 29, March 31, 1995 1995 ------------ --------- Purchased parts and sub-assemblies $ 20,469 $ 12,230 Work in process 11,104 5,839 Finished goods 11,679 13,643 --------- ---------- $ 43,252 $ 31,712 ========= ==========
6 7 4. Net Income Per Share Net income per share for the three- and nine-month periods ended December 29, 1995 and December 30, 1994, is computed under the treasury stock method using the weighted average common and common equivalent shares from dilutive stock options outstanding during the respective periods. 5. Acquisitions On November 3, 1995, the Company acquired all of the outstanding capital stock of Power I/O, Inc. (Power I/O) for $6.7 million in cash. Power I/O, a developmental stage company, develops high-speed input/output and networking technologies. The acquisition was recorded using the purchase method of accounting and, accordingly, the results of operations and cash flows of the acquisition have been included only from the date of acquisition. On July 5, 1995, the Company acquired all of the outstanding capital stock of Trillium Research, Incorporated (Trillium), a Macintosh developer of RAID software for $3 million in cash. The amount paid to Trillium shareholders at the date of acquisition totaled $1.5 million with the remaining amount being paid to the shareholders over a two-year period ratably at six month intervals. On July 13, 1995, the Company acquired all of the outstanding capital stock of Future Domain Corporation (Future Domain) for $25 million in cash. Future Domain designs, manufactures and markets desktop I/O products. The amount paid to Future Domain shareholders totaled $23.8 million with the remaining amount, exclusive of contingent and unknown liabilities which may have existed at the date of acquisition, to be paid in July 1996. On August 23, 1995, the Company acquired all of the outstanding capital stock of Incat Systems Software USA, Incorporated (Incat) for 385,078 shares of the Company's common stock and for future financial consideration, contingent upon certain performance criteria. Incat develops and markets application and I/O software for recordable CD peripherals. These acquisitions have been recorded using the purchase method of accounting and, accordingly, the results of operations and cash flows of such acquisitions have been included only from the date of acquisition. Excluding the one-time write-off of in-process technology of $52.3 million; the aggregate results of operations for the acquired companies from the dates of the respective acquisitions through December 29, 1995 were not material to the Company's results of operations for the three- and nine-month periods ended December 29, 1995. Unaudited proforma revenues, net income and net income per share including the acquired companies mentioned above, were not materially different from the amounts reported in the accompanying condensed consolidated statements of operations. The aggregate purchase price of the acquisitions is shown below (in thousands): Cash paid for Trillium $ 1,500 Cash paid for Future Domain 23,750 Fair market value of stock issued to Incat 17,232 Cash paid for Power I/O 6,696 Amounts payable to Trillium and Future Domain shareholders 2,750 Other acquisition costs 941 --------- $ 52,869 =========
7 8 The allocation of the Company's aggregate purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is based on preliminary independent appraisals from information currently available. The aggregate preliminary purchase price allocation is summarized as follows (in thousands): Tangible assets $ 8,108 In-process technology 52,313 Goodwill 8,200 --------- Assets acquired 68,621 --------- Accounts payable and accrued liabilities 3,125 Deferred tax liability 12,627 --------- Liabilities assumed 15,752 --------- Net assets acquired $ 52,869 =========
6. Income Taxes The Company's effective tax rate for the three and nine month periods ended December 29, 1995 differed from the federal statutory rate primarily due to income earned in Singapore where the Company is subject to significantly lower effective tax rates. 7. Commitments On October 23, 1995, the Company signed 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 agreement is an addition to an existing deposit and supply agreement, and runs through 2001, providing the Company with a guarantee of increased capacity for wafer fabrication in return for advance payments. As of December 29, 1995, the Company has provided TSMC a $20 million advance payment. In addition, the Company has signed a $46 million promissory note payable to TSMC which becomes due June 30, 1996. The majority of these amounts are included in other long term assets. In return for advance payments, the Company will receive a discount on wafer purchases that exceed certain prescribed minimum quantities. 8. Subsequent Events Effective January 10, 1996, the Company signed an agreement with AT&T Corporation, acting through its Microelectronics business unit, that will ensure the availability of a portion of the Company's wafer capacity for both current and future technologies. The contract, which runs through 2001, provides the Company with a guaranteed supply of wafers at a specified level in return for a proposed investment in fabrication equipment of up to $25 million for AT&T Microelectronics' wafer fab. On February 6, 1996, the Company signed a letter of intent to purchase certain assets of Western Digital's Connectivity Solutions Group. The agreement, when concluded will require the Company to make cash payments of approximately $45 million. 8 9 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 income as a percentage of net revenues:
Three Month Nine Month Period Ended Period Ended ------------------------- ------------------------- Dec. 29, Dec. 30, Dec. 29, Dec. 30, 1995 1994 1995 1994 -------- -------- -------- -------- Net revenues 100.0% 100.0% 100.0% 100.0% Cost of revenues 42.1 42.0 41.8 45.3 ----- ----- ----- ----- Gross profit 57.9 58.0 58.2 54.7 ----- ----- ----- ----- Operating expenses: Research and development 13.2 12.0 13.1 12.9 Sales and marketing 12.7 12.8 12.6 12.9 General and administrative 5.3 4.9 5.1 5.1 Write-off of acquired in-process technology 6.7 -- 11.3 -- ----- ----- ----- ----- 37.9 29.7 42.1 30.9 ----- ----- ----- ----- Income from operations 20.0 28.3 16.1 23.8 Interest income, net 1.8 1.3 1.9 1.4 ----- ----- ----- ----- Income before provision for income taxes 21.8 29.6 18.0 25.2 Provision for income taxes 4.4 7.4 4.6 6.3 ----- ----- ----- ----- Net income 17.4% 22.2% 13.4% 18.9% ===== ===== ===== =====
Net Revenues Net revenues increased 43% to $176 million in the third quarter of fiscal 1996 and 38% to $463 million in the first nine months of fiscal 1996, from $123 million and $336 million in the corresponding periods of fiscal 1995. The Company experienced growth in each of its geographic markets worldwide. This growth was primarily attributable to increased shipments of the Company's host adapters compared to the same periods a year ago. This increase in shipments was primarily due to the continued growth of the high-performance desktop microcomputer market and servers for networking applications. Additionally contributing to the increase in net revenues were increased shipments of the Company's integrated circuits (ICs) for storage applications compared to the corresponding periods of fiscal 1995. 9 10 Gross Margin Gross margin for the third quarter and the first nine months of fiscal 1996 was 58% compared to 58% for the three months ended December 30, 1994 and 55% for the first nine months of fiscal 1995. Gross margin for the nine-month period ended December 29, 1995 was favorably affected by continued growth of host adapters in the high-performance microcomputer markets, increases in manufacturing efficiencies and component cost reductions. Operating Expenses Research and development expenses as a percentage of net revenues were 13% during the third quarter and first nine months of fiscal 1996 compared to 12% and 13% in the corresponding periods of fiscal 1995. Actual spending for research and development increased from the corresponding periods of fiscal 1995 by 57% to $23 million in the third quarter and 40% to $60 million in the first nine months of fiscal 1996. This increased spending was a result of the Company's continued investment in its core SCSI business together with its ongoing commitment to the development of new technologies. The Company anticipates that research and development expenses will continue to increase in absolute dollar amounts over the remainder of fiscal 1996 as a result of its investment in current and various future technologies. Sales and marketing expenses as a percentage of net revenues remained consistent at 13% 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 1995 by 41% to $22 million in the third quarter and 34% to $58 million in the first nine months of fiscal 1996. This spending increase was mainly due to increased staffing levels and increased advertising and promotional activities aimed at driving increased demand for the Company's products. The Company anticipates that sales and marketing expenses will increase in absolute dollar amounts for the remainder of fiscal 1996 primarily due to advertising and promotional programs aimed at introducing new technologies and generating demand for the Company's products. General and administrative expenses as a percentage of net revenues remained consistent at 5% in the third quarter and first nine months of fiscal 1996 from the comparable fiscal 1995 periods. Actual spending increased from a year ago primarily due to costs associated with increased staffing levels to support the Company's growth. Interest and Income Taxes Interest income, net of interest expense, increased 90% to $3.1 million in the third quarter and 88% to $8.4 million in the first nine months of fiscal 1996 compared with the respective periods in fiscal 1995. This was primarily a result of increased average interest bearing balances compared to the same periods a year ago and continued principal paydowns on debt. The Company's effective tax rate for the three and nine month periods ended December 29, 1995 differed from the federal statutory rate primarily due to income earned in Singapore where the Company is subject to significantly lower effective tax rates. Excluding the one-time write-off of in-process technology totaling $52 million, the Company's results of operations for the three- and nine-month periods ended December 29, 1995 were not materially affected by the acquisitions of Trillium, Future Domain, Incat, and Power I/O. Management currently believes the Company's results of operations for the remainder of the fiscal year will not be materially affected by these companies acquired during the second and third quarters of the current fiscal year. 10 11 Liquidity and Capital Resources Operating Activities Net cash generated by operations for the first nine months of fiscal 1996 was $98 million compared with $89 million for the first nine months of fiscal 1995. During the first nine months of fiscal 1996, the majority of funds generated from operations resulted from $62 million of net income adjusted by non-cash items including a non-recurring write-off of acquired in-process technology (net of deferred taxes) of $40 million, and depreciation and amortization of $13 million. Additionally contributing to favorable operating cash flows was an increase in accrued liabilities totaling $39 million, resulting from increased staffing, the timing of federal income tax payments, and increased operations. Primarily offsetting these items was an increase in accounts receivable of $26 million primarily resulting from the increased shipments during the quarter, an increase in inventories of $9 million to meet continued increasing shipments, and increases in prepaid expenses and other assets totaling $22 million, mainly as a result of recording a $20 million advance payment to TSMC to secure additional future capacity for wafer fabrication. During the corresponding period 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. Also contributing to positive cash flows was a decrease in inventories of $10 million and an increase in accrued liabilities totaling $16 million. Offsetting this was an increase in other assets of $5 million mainly resulting from a payment in connection with the Company's supply agreement to support its silicon wafer requirements and a decrease in accounts payable of $7 million primarily due to the timing of vendor payments for inventories and capital equipment purchases. Investing Activities During the first nine months of fiscal 1996, the Company continued to invest in equipment for product development, IC testing and board level production. Additionally, the Company has invested in various leasehold and building improvements to continually support increased operations. During the second quarter, the Company added a sixth surface mount technology production line to its manufacturing facility located in Singapore. Purchases of property and equipment in the same period a year ago included $8 million relating to the purchase of land and buildings to support additional staffing requirements. In the first nine months of fiscal 1996, the Company also continued to invest proceeds from operating activities in marketable securities consisting mainly of various U.S. government and municipal securities. During the first nine months of fiscal 1996, the Company used $31 million, net of cash acquired for the acquisitions of Trillium, Future Domain, and Power I/O. The Company anticipates capital expenditures relating to property and equipment of approximately $5 million for the remainder of fiscal 1996. The funds for these expenditures, the expenditures relating to the transactions disclosed in Note 8 of the Notes to Condensed Consolidated Financial Statements, and for capital expenditures in fiscal 1997 are expected to be generated from operations as well as working capital on hand. The Company may also utilize these funds for increased capacity for wafer fabrication, technology investments, or acquisitions of complementary businesses, products or technologies. The Company believes existing working capital, together with expected cash flows from operations and available sources of bank, equity, debt and equipment financing, will be sufficient to support the Company's operations at least through fiscal 1997. 11 12 Financing Activities During the first nine months of fiscal 1996 and 1995, the Company received proceeds from common stock issued under employee stock option and employee stock purchase plans totaling $9 million and $6 million, respectively. Repurchases of common stock by the Company during the same periods totaled $8 million and $37 million, respectively. During 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121), which requires a change in the method used to account for certain long-lived and identifiable intangible assets. SFAS 121 will be effective for the Company's fiscal year beginning April 1, 1996. The Company does not believe that adoption of the standard will have a material impact on its financial position or results of operations. Also in October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". This standard will be effective for the Company beginning in fiscal 1997 and requires measurement of awards made beginning in fiscal 1996. As allowed by the new standard, the Company intends to account for stock-based compensation under existing rules, and as a result, adoption of the new standard will not impact reported earnings or earnings per share. Certain Factors Bearing on Future Results The statements in the third paragraph under the caption "Investing Activities" are forward-looking statements. In addition, the Company may from time to time make oral forward-looking statements. The following are important factors that could cause actual results to differ materially from those projected in any such forward-looking statements. Reliance on the High-Performance Microcomputer Market. The Company's products are used primarily in high performance computer systems designed to support I/O intensive applications and operating systems. Historically, the Company's growth has been supported by increasing consumer demand for systems which support desktop publishing, multimedia, video, CAD/CAM, multitasking and networking applications. Should the growth of demand for such systems slow, the Company's revenues and income may be adversely affected by a decline in demand for the Company's products and increased pricing pressures from both competitors and customers. Uncertainty of Timing and Amount of Capital Expenditures. Predicting the timing and amount of capital expenditures is difficult for a number of reasons, including (i) the fact that opportunities to acquire other businesses, products and technologies of interest to the Company may arise on short notice and require substantial amounts of capital and (ii) that in the increasingly competitive market for wafer supplies, wafer manufacturers have been frequently requiring substantial capital commitments by customers in order to obtain guaranteed wafer capacity. Opportunities to obtain such capacity can arise on relatively short notice and require significant commitments on the part of the Company. Dependence on Suppliers. The majority of the Company's integrated circuits are manufactured by a limited number of semiconductor manufacturers. If one or more of these manufacturers were to experience significant difficulty or disruptions in the shipment of integrated circuits, delays in developing alternative sources could adversely affect the Company's business. In addition, the Company's subsystems and host adapter products make extensive use of standard logic, memory and microprocessor circuits. An extended supply shortage or a major increase in the market price of these components could have an adverse effect on the Company's business. 12 13 Fluctuation in Demand. The Company's customers encounter uncertain and changing demand for their products. They typically order products from the Company based on their forecasts. If demand falls below customers' forecasts, or if customers do not control their inventories effectively, they may cancel or reschedule shipments previously ordered from the Company. The Company has in the past experienced, and may at any time and with minimal notice in the future experience, cancellations and postponements of orders. Management of Growth and Acquisitions. The Company recently has experienced growth in the number of its employees and the scope of its operations and has completed several acquisitions of other companies resulting in increased responsibilities for its management. In order to manage potential future growth and acquisitions, the Company will need to hire, train, motivate and manage a growing number of employees. A failure to effectively manage growth or acquisitions could materially adversely affect the Company's business and operating results. Reliance on Industry Standards. The Company's products are designed to comport with certain industry standards such as SCSI, UltraSCSI, PCI and ATM. If consumer acceptance of these standards was to decline or if new standards were to emerge, the Company's business and operating results could be materially adversely affected. Technological Change; Competition; Dependence on New Products. The markets for the Company's products are characterized by rapidly changing technology, frequent new product introductions and declining average selling prices over product life cycles. The Company's future success is highly dependent upon the timely completion and introduction of new products at competitive price/performance levels. In addition, the Company must respond to current competitors, who may choose to increase their presence in the Company's markets, and to new competitors, who may choose to enter those markets. If the Company is unable to make timely introduction of new products or respond to competitive threats, its business and operating results could be materially adversely affected. Future Operating Results Subject to Fluctuation. The Company's operating results may fluctuate in the future as a result of a number of other factors, including variations in the Company's sales channels or the mix of products it sells, changes in pricing policies by the Company's suppliers, the timing of acquisitions of other businesses, products and technologies and any associated charges to earnings and the market acceptance of new and enhanced versions of the Company's products. 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 significantly increase operating expenditures and inventory as it expands its operations. The rate of new orders may vary significantly from month to month; consequently, if anticipated sales and shipments in any quarter do not occur when expected, operating expenses and inventory levels could be disproportionately high, and the Company's operating results for that quarter, and potentially for future quarters, would be adversely affected. Fluctuations in operating results may cause volatility in the price of the Company's Common Stock. Volatility of Stock Price. In recent months, the stock market in general, and the market for share of technology companies in particular, have experienced extreme price fluctuations, which have often been unrelated to the operating performance of the affected companies. In addition, factors such as technological innovations or new product introductions by the Company, its competitors or its customers may have a significant impact on the market price of the Company's Common Stock. Furthermore, quarter- to- quarter fluctuations in the Company's results of operations caused by changes in customer demand, changes in the microcomputer and peripherals markets, or other factors, may have a significant impact on the market price of the Company's Common Stock. These conditions, as well as factors which generally affect the market for stocks of high technology companies, could cause the price of the Company's stock to fluctuate substantially over short periods. 13 14 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.1* Option Agreement I Between Adaptec Manufacturing (S)Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995 10.2* Option Agreement II Between Adaptec Manufacturing (S)Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995 27 Financial Data Schedule
*The Company has requested confidential treatment for portions of these agreements. No Reports on Form 8-K were filed during the quarter. 14 15 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 8, 1996 \s\ANDREW J. BROWN ----------------------------------------- Andrew J. Brown, Corporate Controller (Principal Accounting Officer) Date: February 8, 1996 15 EX-10.1 2 OPTION AGREEMENT I BETWEEN ADAPTEC & TAIWAN SEMI. 1 OPTION AGREEMENT I Between Adaptec Manufacturing (S) Pte. Ltd. And Taiwan Semiconductor Manufacturing Co., Ltd. October 23, 1995 2 TABLE OF CONTENTS 1. DEFINITIONS 1 2. VOLUME CAPACITY 2 3. WAFER PRICE 3 4. OTHER PURCHASE TERMS AND CONDITIONS 3 5. OBLIGATION TO PAY OPTION FEE FOR OPTION CAPACITY 3 6. FAILURE TO PURCHASE THE OPTION CAPACITY; 4 FIRST RIGHT OF REFUSAL 7. TERM AND TERMINATION 4 8. BOARD APPROVAL 5 9. LIMITATION OF LIABILITY 5 10. NOTICE 5 11. ENTIRE AGREEMENT 6 12. GOVERNING LAW 6 13. ARBITRATION 6 14. ASSIGNMENT 7 15. CONFIDENTIALITY 7 16. FORCE MAJEURE 7 17. NO AGENCY 7 18. GOVERNMENTAL APPROVAL 7 19. COUNTERPARTS 8 3 OPTION AGREEMENT I THIS AGREEMENT is made and becomes effective as of October 23, 1995 (the "Effective Date") by Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"), a company organized under the laws of the Republic of China with its registered address at No. 121, Park Ave. 3, Science Based Industrial Park, Hsinchu, Taiwan and Adaptec Manufacturing (S) Pte. Ltd., a company organized under the laws of Singapore, with its registered address at 6 Battery Road, 532-00, Singapore 049909 ("Customer"). RECITALS WHEREAS, TSMC currently supplies Customer with wafers and Customer wishes to increase the volume of wafers to be purchased from TSMC; WHEREAS, in order to increase its output, TSMC must accelerate its ramp up in Fab 3 and advance the start of Fab 4; WHEREAS, as a condition to TSMC's acceleration of these facilities, TSMC has asked that Customer make a capacity commitment and advance payment for the right to buy additional capacity, and Customer is willing to do so: AGREEMENT NOW, THEREFORE, in consideration of the mutual covenants and conditions contained herein, the parties agree as follows: 1. DEFINITIONS (a) "Base Capacity" used in this Agreement shall mean the annualized run rate that TSMC commits to provide the Customer as set forth in Exhibit B. (b) "Customer Committed Capacity" used in this Agreement shall mean the total capacity that Customer agrees to purchase from TSMC pursuant to this Agreement, either itself or by an Affiliate, and as set forth in Exhibit B. (c) "Foundry Agreement" used in this Agreement shall mean the Foundry Agreement between TSMC and Adaptec, Inc., dated October 29, 1993, together with any amendments thereto. (d) "Option Capacity" used in this Agreement shall mean the firm capacity commitment made by Customer pursuant to this Agreement, for which 1 4 capacity Customer agrees to pay the Option Fee as defined in Section 1(e) below. (e) "Option Fee" used in this Agreement shall mean the deposit that Customer agrees to place with TSMC as the advance payment for the wafers comprising the Option Capacity. (f) "TSMC Committed Capacity" used in this Agreement shall mean the total capacity that TSMC agrees to provide to Customer or its Affiliates, consisting of Base Capacity and Option Capacity as set forth in Exhibit B. (g) "Wager Equivalent" used in this Agreement shall mean the number of six-inch wafers, adjusted by the equivalency factor based on 1996 Base Capacity as set forth on Exhibit A, by which capacity commitments are measured hereunder. An example of such calculation is set forth on Exhibit B-1. Any and all capacity commitments referred to in this Agreement shall be for the calender year and measured in Wafer Equivalents. (h) "Affiliates" used in this Agreement shall mean a party which holds at least a seventy-five percent (75%) ownership interest in Customer or a party in which Customer's parent holds at least a seventy-five percent (75%) ownership interest. 2. VOLUME COMMITMENT (a) Customer agrees to purchase annually form TSMC, either itself or through its Affiliates, the Customer Committed Capacity set forth for such year on Exhibit B and, subject to the payment of the Option Fee by Customer under Section 5 below, TSMC agrees to provide to Customer the TSMC Committed Capacity, as set forth in Exhibit B. In any calender year, the orders placed by Customer or its Affiliates shall first apply to fulfill the Base Capacity portion of the Customer Committed Capacity, and then the Option Capacity portion. (b) Each month, Customer agrees to provide to TSMC a six-month rolling forecast of the number of wafers that Customer will purchase, with the volume for the first twelve weeks being frozen (i.e., Customer must purchase all of the quantity forecast for the delivery in the first twelve weeks of the forecast). The forecast must be based on wafers out. (c) TSMC will use its best efforts to cause its fabs to be capable of producing wafers of more advanced specifications, as set forth in the TSMC Technology Road Map attached to Exhibit C. (The parties anticipate that the conversion factor for migration of 6" to 8" inch wafers will 1.78.) 2 5 ----------------------------------------------------------- Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ----------------------------------------------------------- 3. WAFER PRICE (a) The prices for wafers purchased by Customer during the term of this Agreement shall not be more than TSMC's average wafer prices to the optionees (i.e., other customers that are parties to option agreements similar to this Agreement) for the same technology, the same fab and the same period of time, taking into account Customer's total volume across all TSMC fabs. At Customer's request, TSMC shall permit an independent third party mutually agreed upon by the parties to audit such books and records as may be required to verify TSMC's most favored customer pricing obligations in the preceding sentence. Such audits shall be at Customer's expense at any time during the term of this Agreement upon at least one (1) month prior written notice to TSMC. In the event that the wafer prices do not comply with the first sentence, TSMC will make proper price changes for all unfilled orders upon Customer's notice in writing. (b) The parties shall negotiate in good faith each year the wafer prices for the Option Capacity of the following year, and if no agreement is reached by the parties before October of each year for the succeeding calendar year, the parties agree to submit the dispute to the binding arbitration pursuant to Section 13 below, and under such circumstances, neither party shall have the right to terminate this Agreement under Section 7 below. 4. OTHER PURCHASE TERMS AND CONDITIONS The Foundry Agreement, together with any amendments thereto, will apply to all purchases of wafers by Customer from TSMC, except that the provisions of this Agreement will supersede the Foundry Agreement with respect to the subject matter hereof. 5. OBLIGATION TO PAY OPTION FEE FOR OPTION CAPACITY (a) Customer agrees to pay to TSMC the Option Fee in the amount of [****] per Wafer Equivalent for the right to purchase the Option Capacity pursuant to this Agreement. The Option Fee is set forth in Exhibit D, and Customer agrees to pay the Option Fee for the entire term of this Agreement [********] in cash by November 15, 1995. The Option Fee, once paid, shall be non-refundable, except as provided in Section 6(a) and Section 7(d), and will be credited against payments due for wafers purchased by Customer for the Option Capacity provided by TSMC under this Agreement. 3 6 6. FAILURE TO PURCHASE THE OPTION CAPACITY; FIRST RIGHT OF REFUSAL If, in any calendar year, for any reason, Customer is not able to use or purchase all or a portion of the Customer Committed Capacity for that year, Customer shall promptly notify TSMC of such in writing and first offer TSMC such capacity for sales to any third parties. TSMC may, at its option, accept such offer, in whole or in part, within thirty (30) days following Customer's notification and, if TSMC so accepts, the Option Fee attributable to that capacity will be refunded to Customer without interest. In the event that TSMC decides not to accept such offer, Customer may sell such unused capacity to third parties reasonably acceptable to TSMC (given the processes and capacity then available in its fabs), within two months after TSMC's written notice that it will not accept such offer. If Customer fails to sell such unused Customer Committed Capacity, TSMC shall not be required to refund any portion of the unapplied Option Fee applicable to that unused capacity. TSMC is entitled to sell or use any such capacity thereafter. Forfeiture of the applicable Option Fee shall be TSMC's sole remedy for Customer's failure to purchase the Customer Committed Capacity in any calendar year. 7. TERM AND TERMINATION (a) TERM The term of this Agreement shall commence from the Effective Date, and continue until December 31, 1999. (b) TERMINATION BY TSMC FOR CUSTOMER'S FAILURE TO PAY THE OPTION FEE TSMC may terminate this Agreement if Customer fails to pay the Option Fee pursuant to Section 5 above, and does not cure or remedy such breach within thirty (30) days of receiving written notice of such breach. (c) TERMINATION FOR OTHER BREACH OR FOR BANKRUPTCY Either party may terminate this Agreement if, (i) the other party breaches any material provisions of this Agreement (other than Customer's breach of Section 5 above), and does not cure or remedy such breach within one hundred and twenty (120) days of receiving written notice of such breach, or (ii) becomes the subject of a voluntary or involuntary petition in bankruptcy or any proceeding relating to insolvency, receivership or liquidation, if such petition or proceeding is not dismissed with prejudice within sixty (60) days after filing. 4 7 (d) EFFECT OF TERMINATION In the event of termination of this Agreement, each party shall remain liable to the other party for any outstanding and matured rights and obligations at the time of termination, including payment of the Option Fee applicable to the used Option Capacity and for the wafers already ordered and shipped to Customer. Any wafers then in process pursuant to a Customer order may be completed and shipped to Customer and the applicable Option Fee amount applied against such wafers. In the event Customer terminates this Agreement pursuant to the terms of Section 7(c), any portion of the Option Fee then remaining, which has not been applied against purchases of wafers, will be refunded to Customer within thirty (30) days of termination of this Agreement. 8. BOARD APPROVAL Customer shall obtain the approval by its board of directors of this Agreement, and submit to TSMC, at the time of executing this Agreement, an authentic copy of its board resolution authorizing the representative designated below to execute this Agreement. 9. LIMITATION OF LIABILITY In no event shall either party be liable for any indirect, special, incidental or consequential damages (including loss of profits or loss of use) resulting from, arising out of or in connection with such party's performance or failure to perform under this Agreement, or resulting from, arising out of or in connection with the production, supply and/or purchase and sale of the wafers, whether due to a breach of contract, breach of warranty, tort, or negligence of such party, or otherwise. 10. NOTICE All notices required or permitted to be sent by either party to the other party under this Agreement shall be sent by registered mail prepaid, or by personal delivery, or by fax. Any notice given by fax shall be followed by a confirmation copy within ten (10) days. Unless changed by written notice given by either party to the other, the addresses and fax numbers of the respective parties shall be as follows: 5 8 To TSMC: TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY, LTD. No. 121, Park Avenue 3 Science-Based Industrial Park Hsinchu, Taiwan Republic of China FAX: 886-35-781545 To Customer: ADAPTEC MANUFACTURING (S) PTE. LTD. Block 1001 Jalan Bukit Merah #07/01-20 Singapore 0315 With a copy to: ADAPTEC, INC. Attention: Vice President, Procurement 691 South Milpitas Boulevard Milpitas, California 95035 FAX: (408) 262-2533 11. ENTIRE AGREEMENT This Agreement, including Exhibits A-D, and together with the Foundry Agreement, constitutes the entire Agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior to contemporaneous understandings, agreements, dealings and negotiations, oral or written, regarding the subject matter hereof. No modification, alteration or amendment of this Agreement shall be effective unless in writing and signed by both parties. No waiver of any breach or failure by either party to enforce any provision of this Agreement shall be deemed a waiver of any other or subsequent breach, or a waiver of future enforcement of that or any other provision. 12. GOVERNING LAW This Agreement will be governed by and interpreted in accordance with the laws of the State of California. 13. ARBITRATION Each party will use its best efforts to resolve amicably any disputes or claims under this Agreement between the parties. In the event that a resolution is not reached among the parties within thirty (30) days after written notice by any party of the 6 9 dispute or claim, the dispute or claim shall be finally settled by binding arbitration in the San Francisco Bay Area, California under the Rules of Commercial Arbitration of the American Arbitration Association by three (3) arbitrators appointed in accordance with such rules. The arbitration proceeding shall be conducted in English. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 14. ASSIGNMENT This Agreement shall be binding on and inure to the benefit of each party and its permitted successors and assigns. Customer may assign its purchase rights and obligations under this Agreement (a) to third parties in accordance with Section 6 above, and (b) to its Affiliates. Except as provided in Section 6, neither party shall assign any of its rights hereunder, nor delegate its obligations hereunder, to any third party, without the prior written consent of the other. 15. CONFIDENTIALITY Neither party shall disclose the existence or contents of this Agreement except as required by Customer's assignment of this Agreement to any third parties pursuant to Sections 6 and 14 above, in confidence to its advisors, as required by applicable law, or otherwise with the prior written consent of the other party. 16. FORCE MAJEURE Neither party shall be responsible for delays or failure in performance resulting from acts beyond the reasonable control of such party. Such acts shall include but not be limited to acts of God, war, riot, labor stoppages, governmental actions, fires, floods, and earthquakes. If such delays or failures on the party of either party continue for a period of more than one hundred twenty (120) days, the other party may terminate this Agreement upon written notice, subject to Section 7(d). 17. NO AGENCY No agency, partnership, joint venture, teaming agreement or other joint relationship is created hereby and neither party, nor any of its agents or representatives, has any authority of any kind to bind the other party in any respect whatsoever. 18. GOVERNMENTAL APPROVAL TSMC represents and warrants to Customer that no governmental approval or registration by or with the ROC is required for this Agreement or for the transactions contemplated hereby. In the event any such approval or registration is required, TSMC agrees to indemnify and hold Customer 7 10 harmless from any and all loss or damage to Customer which may result from the failure to procure such approval or effect such registration. 19. COUNTERPARTS This Agreement may be executed in two counterparts, together which will constitute a fully executed Agreement. IN WITNESS WHEREOF, the parties, have executed this Agreement as of the Effective Date by their duly authorized representatives. TAIWAN SEMICONDUCTOR ADAPTEC MANUFACTURING MANUFACTURING CO., LTD. (S) PTE. LTD. By: /s/ DONALD BROOKS By: /s/ SAM KAZARIAN ------------------ ------------------ Donald Brooks Sam Kazarian President Director and Attorney-In-Fact 8 11 Exhibit A CAPACITY FACTOR TABLE Masking W-Plug Complexity Capacity Generic Technology Layers(A) Layers(B) Index(C) Factor(D) (w/o ESD or Polyimide) 1.5um SPDM (BiCMOS) 16 16 1.23 1.2um SPDM (Logic) 13 13 1.00 1.0um SPDM (Logic) 13 13 1.00 1.0um DPDM (BiCMOS) 18 18 1.38 0.8um SPDM (Logic) 13 13 1.00 0.8um DPDM (MixMode) 14 14 1.08 0.8um SPTM (Logic Salicide) 17 17 1.31 0.8um DPDM (BiCMOS) 22 22 1.69 0.6um SPDM (Logic) 14 1 14.5 1.12 0.6um SPTM (Logic) 16 1 16.5 1.27 0.6um DPDM (MixMode) 15 1 15.5 1.19 0.6um DPDM (SRAM) 20 20 1.54 0.6um TPSM (DRAM) 15 1 15.5 1.19 0.6um QPDM (DRAM) 18 1 18.5 1.42 0.5um SPDM (Logic) 14 2 15 1.15 0.5um SPTM (Logic SACVD) 16 3 17.5 1.35 0.5um SPTM (Logic-CMP) 21 3 22.5 1.73 0.5um DPDM (SRAM) 20 1 20.5 1.58 0.5um QPDM (DRAM) 21 1 21.5 1.65 0.35um SPTM (Logic-CMP) 21 3 22.5 1.73 Remarks: (1) Masking Layer of w/i ESD (or Polyimide) = Masking Layer of w/o ESD (or Polyimide) + 1 (2) Masking Layer of Mixed-Mode(DP) = Masking Layer of Logic(SP) + 1 (3) Complexity Index (C) = (A) + (B) / 2 (4) Capacity Factor (D) = (C) / 13, normalized to 0.8um SPDM as 1 Date of issue: 6/9/95 12 EXHIBIT B CUSTOMER/TSMC COMMITTED CAPACITY Unit: K 6" Wafer Equivalent
1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Take or Pay * * Capacity Base Capacity * * * * * (For Options) X% of Base 90% 80% 70% 60% 50% Capacity Option I * * * * Capacity Option II * * * * Capacity TSMC Committed * * * * * Capacity (Base Capacity + Option Capacity) Customer Committed * * * * * Capacity (X% Base Capacity + Option Capacity)
Deposits Required: Option I - At contract signing *** Option II - June 30, 1996 *** ----------------------------------------------------------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ----------------------------------------------------------- [*****] 13 Exhibit B1 WAFER EQUIVALENT CALCULATION TO CALCULATE THE WEIGHTED CAPACITY FACTOR
WEIGHTED CAPACITY WAFER PERCENTAGE CAPACITY PROCESS FACTOR CAPACITY OF VOLUME FACTOR .8um SPDM * * * * .6um SPTM * * * * TOTAL VOLUME * * * * 1996 WEIGHTED CAPACITY FACTOR * .6um SPTM * * * * TOTAL VOLUME * * * 1997 WEIGHTED CAPACITY FACTOR * TO CALCULATE THE EQUIVALENT CAPACITY 1997 COMMITTED CAPACITY * 1997 EQUIVALENT CAPACITY *** *
1997 EQUIVALENT CAPACITY = (1996 WEIGHTED CAPACITY FACTOR/1997 WEIGHTED CAPACITY FACTOR) * 1997 COMMITTED CAPACITY ----------------------------------------------------------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ----------------------------------------------------------- [*****] 14 Exhibit C TSMC TECHNOLOGY ROAD MAP TSMC CMOS Technology Roadmap MIXED 0.6um 0.5um 0.35um MODE 2P3M 2P3M 2P4M 3V 3V LOGIC 0.6um 0.5um 0.35um 1P3M 1P3M 1P4M 3V 1P3M 3V SRAM 0.6um 0.5um 0.45um 0.35um 3V 3V 3V Q1 Q2 Q3 Q4 * * * * * ------------------------------------------------------------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ------------------------------------------------------------- [*****] 15 EXHIBIT D OPTION FEE (OPTION I) Year Option Capacity Option Fee Due Date Established (Unit: Wafer (Unit: US$) Equivalent) * * * * ----------------------------------------------------------- *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ----------------------------------------------------------- [* * *] EX-10.2 3 OPTION AGREEMENT II BETWEEN ADAPTEC & TAIWAN SEMI. 1 OPTION AGREEMENT II Between Adaptec Manufacturing (S) Pte. Ltd. And Taiwan Semiconductor Manufacturing Co., Ltd. October 23, 1995 2 TABLE OF CONTENTS 1. DEFINITIONS 1 2. VOLUME CAPACITY 2 3. WAFER PRICE 3 4. OTHER PURCHASE TERMS AND CONDITIONS 3 5. OBLIGATION TO PAY OPTION FEE FOR OPTION CAPACITY 3 6. FAILURE TO PURCHASE THE OPTION CAPACITY; 4 FIRST RIGHT OF REFUSAL 7. TERM AND TERMINATION 4 8. BOARD APPROVAL 5 9. LIMITATION OF LIABILITY 5 10. NOTICE 5 11. ENTIRE AGREEMENT 6 12. GOVERNING LAW 6 13. ARBITRATION 7 14. ASSIGNMENT 7 15. CONFIDENTIALITY 7 16. FORCE MAJEURE 7 17. NO AGENCY 7 18. GOVERNMENTAL APPROVAL 8 19. COUNTERPARTS 8 3 OPTION AGREEMENT II THIS AGREEMENT is made and becomes effective as of October 23, 1995 (the "Effective Date") by Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC"), a company organized under the laws of the Republic of China with its registered address at No. 121, Park Ave. 3, Science Based Industrial Park, Hsinchu, Taiwan and Adaptec Manufacturing (S) Pte. Ltd., a company organized under the laws of Singapore, with its registered address at 6 Battery Road, 532-00, Singapore 049909 ("Customer"). RECITALS WHEREAS, TSMC currently supplies Customer with wafers and Customer wishes to increase the volume of wafers to be purchased from TSMC; WHEREAS, in order in increase its output, TSMC must accelerate its ramp up in Fab 3 and advance the start of Fab 4; WHEREAS, as condition to TSMC's acceleration of these facilities, TSMC has asked that Customers make a capacity commitment and advance payment for the right to buy additional capacity, and Customer is willing to do so: AGREEMENT NOW, THEREFORE, in consideration of the mutual convents and conditions contained herein the parties agree as follows: 1. DEFINITIONS (a) "Base Capacity" used in this Agreement shall mean the annualized run rate that TSMC commits to provide to Customer as set forth in Exhibit B. (b) "Customer Committed Capacity" used in this Agreement shall mean the total capacity that Customer agrees to purchase from TSMC pursuant to this Agreement, either itself or by an Affiliate, and as set forth in Exhibit B. (c) "Foundry Agreement" used in this Agreement shall mean the Foundry Agreement between TSMC and Adaptec, Inc., dated October 29, 1993, together with any amendments thereto. (d) "Option Capacity" used in this Agreement shall mean the firm capacity commitment made by Customer pursuant to this Agreement, for which 1 4 capacity Customer agrees to pay the Option Fee as defined in Section 1(e) below. (e) "Option Fee" used in this Agreement shall mean the deposit that Customer agrees to place with TSMC as the advance payment for the wafers comprising the Option Capacity. (f) "TSMC Committed Capacity" used in this Agreement shall mean the total capacity that TSMC agrees to provide to Customer or its Affiliates, consisting of Base Capacity and Option Capacity as set forth in Exhibit B. (g) "Wafer Equivalent" used in this Agreement shall mean the number of six-inch wafers, adjusted by the equivalency factor based on 1996 Base Capacity as set forth on Exhibit A, by which capacity commitments are measured hereunder. An example of such calculation is set forth on Exhibit B-1. Any and all capacity commitments referred to in this Agreement shall be for the calendar year and measured in Wafer Equivalents. (h) "Affiliates" used in this Agreement shall mean a party which holds at least a seventy-five percent (75%) ownership interest in Customer or a party in which Customer's parent holds at least a seventh-five percent (75%) ownership interest. 2. VOLUME COMMITMENT (a) Customer agrees to purchase annually from TSMC, either itself or through its Affiliates, the Customer Committed Capacity set forth for such year on Exhibit B and, subject to the payment of the Option Fee by Customer under Section 5 below, TSMC agrees to provide to Customer the TSMC Committed Capacity, as set forth in Exhibit B. In any calendar year, the orders placed by Customer or its Affiliates shall first apply to fulfill the Base Capacity portion of the Customer Committed Capacity, and then the Option Capacity portion. (b) Each month, Customer agrees to provide to TSMC a six-month rolling forecast of the number of wafers that Customer will purchase, with the volume for the first twelve weeks being frozen (i.e., Customer must purchase all of the quantity forecast for the delivery in the first twelve weeks of the forecast). The forecast must be based on wafers out. (c) TSMC will use its best efforts to cause its fabs to be capable of producing wafers of more advanced specifications, as set forth in the TSMC Technology Road Map attached as Exhibit C. (The parties anticipate that the conversion factor for migration of 6" to 8" inch wafers will 1.78.) 2 5 ----------------------------------------------------------- Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ----------------------------------------------------------- 3. WAFER PRICE (a) The prices for wafers purchased by Customer during the term of this Agreement shall not be more than TSMC's average wafer prices to the optionees (i.e., other customers that are parties to option agreements similar to this Agreement) for the same technology, the same fab and the same period of time, taking into account Customer's total volume across all TSMC fabs. At Customer's request, TSMC shall permit an independent third party mutually agreed upon by the parties to audit such books and records as may be required to verify TSMC's most favored customer pricing obligations in the preceding sentence. Such audits shall be at Customer's expense at any time during the term of this Agreement upon at least one (1) month prior written notice to TSMC. In the event that the wafer prices do not comply with the first sentence, TSMC will make proper price changes for all unfilled orders upon Customer's notice in writing. (b) The parties shall negotiate in good faith each year the wafer prices for the Option Capacity of the following year, and if no agreement is reached by the parties before October of each year for the succeeding calendar year, the parties agree to submit the dispute to the binding arbitration pursuant to Section 13 below, and under such circumstances, neither party shall have the right to terminate this Agreement under Section 7 below. 4. OTHER PURCHASE TERMS AND CONDITIONS The Foundry Agreement, together with any amendments thereto, will apply to all purchases of wafers by Customer from TSMC, except that the provisions of this Agreement will supersede the Foundry Agreement with respect to the subject matter hereof. 5. OBLIGATION TO PAY OPTION FEE FOR OPTION CAPACITY (a) Customer agrees to pay to TSMC the Option Fee in the amount of [* *] per Wafer Equivalent for the right to purchase the Option Capacity pursuant to this Agreement. The Option Fee is set forth in Exhibit D, and Customer agrees to pay the Option Fee for the entire term of this Agreement [* * * * * *] in cash by June 30, 1996. The Option Fee, once paid, shall be non-refundable, except as provided in Section 6(a) and Section 7(d), and will be credited against payments due for wafers purchased by Customer for the Option Capacity provided by TSMC under this Agreement. (b) Customer agrees to deliver to TSMC, within seven (7) days following the Effective Date, a promissory note in an amount of the Option Fee and evidencing the payment required pursuant to Section 5(a), payable to TSMC or 3 6 order, which promissory note shall be in the form of Exhibit E. The promissory note shall be cancelled and returned by TSMC to customer within seven (7) days after receipt of the corresponding Option Fee by TSMC. 6. FAILURE TO PURCHASE THE OPTION CAPACITY; FIRST RIGHT OF REFUSAL If, in any calendar year, for any reason, Customer is not able to use or purchase all or a portion of the Customer Committed Capacity for that year, Customer shall promptly notify TSMC of such in writing and first offer TSMC such capacity for sales to any third parties. TSMC may, at its option, accept such offer, in whole or in part, within thirty (30) days following Customer's notification and, if TSMC so accepts, the Option Fee attributable to that capacity will be refunded to Customer without interest. In the event that TSMC decides not to accept such offer, Customer may sell such unused capacity to third parties reasonably acceptable to TSMC (given the processes and capacity then available in its fabs), within two months after TSMC's written notice that it will not accept such offer. If Customer fails to sell such unused Customer Committed Capacity, TSMC shall not be required to refund any portion of the unapplied Option Fee applicable to that unused capacity. TSMC is entitled to sell or use any such capacity thereafter. Forfeiture of the applicable Option Fee shall be TSMC's sole remedy for Customer's failure to purchase the Customer Committed Capacity in any calendar year. 7. TERM AND TERMINATION (a) TERM The term of this Agreement shall commence from the Effective Date, and continue until December 31, 2000. (b) TERMINATION BY TSMC FOR CUSTOMER'S FAILURE TO PAY THE OPTION FEE TSMC may terminate this Agreement if Customer fails to pay the Option Fee pursuant to Section 5 above, and does not cure or remedy such breach within thirty (30) days of receiving written notice of such breach. 4 7 (c) TERMINATION FOR OTHER BREACH OR FOR BANKRUPTCY Either party may terminate this Agreement if, (i) the other party breaches any material provisions of this Agreement (other than Customer's breach of Section 5 above), and does not cure or remedy such breach within one hundred and twenty (120) days of receiving written notice of such breach, or (ii) becomes the subject of a voluntary or involuntary petition in bankruptcy or any proceeding relating to insolvency, receivership or liquidation, if such petition or proceeding is not dismissed with prejudice within sixty (60) days after filing. (d) EFFECT OF TERMINATION In the event of termination of this Agreement, each party shall remain liable to the other party for any outstanding and matured rights and obligations at the time of termination, including payment of the Option Fee applicable to the used Option Capacity and for the wafers already ordered and shipped to Customer. Any wafers then in process pursuant to a Customer order may be completed and shipped to Customer and the applicable Option Fee amount applied against such wafers. In the event Customer terminates this Agreement pursuant to the terms of Section 7(c), any portion of the Option Fee then remaining, which has not been applied against purchases of wafers, will be refunded to Customer within thirty (30) days of termination of this Agreement. 8. BOARD APPROVAL Customer shall obtain the approval by its board of directors of this Agreement, and submit to TSMC, at the time of executing this Agreement, an authentic copy of its board resolution authorizing the representative designated below to execute this Agreement. 9. LIMITATION OF LIABILITY In no event shall either party be liable for any indirect, special, incidental or consequential damages (including loss of profits or loss of use) resulting from, arising out of or in connection with such party's performance or failure to perform under this Agreement, or resulting from, arising out of or in connection with the production, supply and/or purchase and sale of the wafers, whether due to a breach of contract, breach of warranty, tort, or negligence of such party, or otherwise. 10. NOTICE All notices required or permitted to be sent by either party to the other party under this Agreement shall be sent by registered mail postage prepaid, or by personal 5 8 delivery, or by fax. Any notice given by fax shall be followed by a confirmation copy within ten (10) days. Unless changed by written notice given by either party to the other, the addresses and fax numbers of the respective parties shall be as follows: To TSMC: TAIWAN SEMICONDUCTOR MANUFACTURING COMPANY, LTD. No. 121, Park Avenue 3 Science-Based Industrial Park Hsinchu, Taiwan Republic of China FAX: 886-35-781545 To Customer: ADAPTEC MANUFACTURING (S) PTE. LTD. Block 1001 Julan Bukit Merah #07/01-20 Singapore 0315 With a copy to: ADAPTEC, INC. Attention: Vice President, Procurement 691 South Milpitas Boulevard Milpitas, California 95035 FAX: (408) 262-2533 11. ENTIRE AGREEMENT This Agreement, including Exhibits A-E, and together with the Foundry Agreement, constitutes the entire Agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior to contemporaneous understandings, agreements, dealings and negotiations, oral or written, regarding the subject matter hereof. No modification, alteration or amendment of this Agreement shall be effective unless in writing and signed by both parties. No waiver of any breach or failure by either party to enforce any provision of this Agreement shall be deemed a waiver of any other or subsequent breach, or a waiver of future enforcement of that or any other provision. 12. GOVERNING LAW This Agreement will be governed by and interpreted in accordance with the laws of the State of California. 13. ARBITRATION 6 9 Each party will use its best efforts to resolve amicably any disputes or claims under this Agreement between the parties. In the event that a resolution is not reached among the parties within thirty (30) days after written notice by any party of the dispute or claim, the dispute or claim shall be finally settled by binding arbitration in the San Francisco Bay Area, California under the Rules of Commercial Arbitration of the American Arbitration Association by three (3) arbitrators appointed in accordance with such rules. The arbitration proceeding shall be conducted in English. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. 14. ASSIGNMENT This Agreement shall be binding on and inure to the benefit of each party and its permitted successors and assigns. Customer may assign its purchase rights and obligations under this Agreement (a) to third parties in accordance with Section 6 above, and (b) to its Affiliates. Except as provided in Section 6, neither party shall assign any of its rights hereunder, nor delegate its obligations hereunder, to any third party, without prior written consent of the other. 15. CONFIDENTIALITY Neither party shall disclose the existence or contents of this Agreement except as required by Customer's assignment of this Agreement to any third parties pursuant to Sections 6 and 14 above, in confidence to its advisors, as required by applicable law, or otherwise with the prior written consent of the other party. 16. FORCE MAJEURE Neither party shall be responsible for delays or failure in performance resulting from acts beyond the reasonable control of such party. Such acts shall include but not be limited to acts of God, war, riot, labor stoppages, governmental actions, fires, floods, and earthquakes. If such delays or failures on the party of either party continue for a period of more than one hundred twenty (120) days, the other party may terminate this Agreement upon written notice, subject to Section 7(d). 17. NO AGENCY No agency, partnership, joint venture, teaming agreement or other joint relationship is created hereby and neither party, nor any of its agents or representatives, has any authority of any kind to bind the other party in any respect whatsoever. 7 10 18. GOVERNMENTAL APPROVAL TSMC represents and warrants to Customer that no governmental approval or registration by or with the ROC is required for this Agreement or for the transactions contemplated hereby. In the event any such approval or registration is required, TSMC agrees to indemnify and hold Customer harmless from any and all loss or damage to Customer which may result from the failure to procure such approval or effect such registration. 19. COUNTERPARTS This Agreement may be executed in two counterparts, together which will constitute a fully executed Agreement. IN WITNESS WHEREOF, the parties, have executed this Agreement as of the Effective Date by their duly authorized representatives. TAIWAN SEMICONDUCTOR ADAPTEC MANUFACTURING MANUFACTURING CO., LTD. (S) PTE. LTD. By: /s/ Donald Brooks By: /s/ Sam Kazarian ------------------ ------------------ Donald Brooks Sam Kazarian President Director and Attorney-In-Fact 8 11 Exhibit A CAPACITY FACTOR TABLE Masking W-Plug Complexity Capacity Generic Technology Layers(A) Layers(B) Index(C) Factor(D) (w/o ESD or Polyimide) 1.5um SPDM (BiCMOS) 16 16 1.23 1.2um SPDM (Logic) 13 13 1.00 1.0um SPDM (Logic) 13 13 1.00 1.0um DPDM (BiCMOS) 18 18 1.38 0.8um SPDM (Logic) 13 13 1.00 0.8um DPDM (MixMode) 14 14 1.08 0.8um SPTM (Logic Salicide) 17 17 1.31 0.8um DPDM (BiCMOS) 22 22 1.69 0.6um SPDM (Logic) 14 1 14.5 1.12 0.6um SPTM (Logic) 16 1 16.5 1.27 0.6um DPDM (MixMode) 15 1 15.5 1.19 0.6um DPDM (SRAM) 20 20 1.54 0.6um TPSM (DRAM) 15 1 15.5 1.19 0.6um QPDM (DRAM) 18 1 18.5 1.42 0.5um SPDM (Logic) 14 2 15 1.15 0.5um SPTM (Logic SACVD) 16 3 17.5 1.35 0.5um SPTM (Logic-CMP) 21 3 22.5 1.73 0.5um DPDM (SRAM) 20 1 20.5 1.58 0.5um QPDM (DRAM) 21 1 21.5 1.65 0.35um SPTM (Logic-CMP) 21 3 22.5 1.73 Remarks: (1) Masking Layer of w/i ESD (or Polyimide) = Masking Layer of w/o ESD (or Polyimide) + 1 (2) Masking Layer of Mixed-Mode(DP) = Masking Layer of Logic(SP) + 1 (3) Complexity Index (C) = (A) + (B) / 2 (4) Capacity Factor (D) = (C) / 13, normalized to 0.8um SPDM as 1 Date of issue: 6/9/95 12 EXHIBIT B CUSTOMER/TSMC COMMITTED CAPACITY Unit: K 6" Wafer Equivalent
1996 1997 1998 1999 2000 ---- ---- ---- ---- ---- Take or Pay * * Capacity Base Capacity * * * * * (For Options) X% of Base 90% 80% 70% 60% 50% Capacity Option I * * * * Capacity Option II * * * * Capacity TSMC Committed * * * * * Capacity (Base Capacity + Option Capacity) Customer Committed * * * * * Capacity (X% Base Capacity + Option Capacity)
Deposits Required: Option I - At contract signing *** Option II - June 30, 1996 *** ----------------------------------------------------------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ----------------------------------------------------------- [****] 13 Exhibit B1 WAFER EQUIVALENT CALCULATION TO CALCULATE THE WEIGHTED CAPACITY FACTOR
WEIGHTED CAPACITY WAFER PERCENTAGE CAPACITY PROCESS FACTOR CAPACITY OF VOLUME FACTOR .8um SPDM * * * * .6um SPTM * * * * TOTAL VOLUME * * * * 1996 WEIGHTED CAPACITY FACTOR * .6um SPTM * * * * TOTAL VOLUME * * * 1997 WEIGHTED CAPACITY FACTOR * TO CALCULATE THE EQUIVALENT CAPACITY 1997 COMMITTED CAPACITY * 1997 EQUIVALENT CAPACITY *** *
1997 EQUIVALENT CAPACITY = (1996 WEIGHTED CAPACITY FACTOR/1997 WEIGHTED CAPACITY FACTOR) * 1997 COMMITTED CAPACITY ----------------------------------------------------------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ----------------------------------------------------------- [*****] 14 Exhibit C TSMC TECHNOLOGY ROAD MAP TSMC CMOS Technology Roadmap MIXED 0.6um 0.5um 0.35um MODE 2P3M 2P3M 2P4M 3V 3V LOGIC 0.6um 0.5um 0.35um 1P3M 1P3M 1P4M 3V 1P3M 3V SRAM 0.6um 0.5um 0.45um 0.35um 3V 3V 3V Q1 Q2 Q3 Q4 * * * * * ------------------------------------------------------------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ------------------------------------------------------------- [*****] 15 EXHIBIT D OPTION FEE (OPTION II) Year Option Capacity Option Fee Due Date Established (Unit: Wafer (Unit: US$) Equivalent) * * * * ----------------------------------------------------------- *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ----------------------------------------------------------- [****] 16 EXHIBIT E STANDARD FORM OF PROMISSORY NOTE Amount: *** Due Date: June 30, 1996 The undersigned, Adaptec manufacturing (S) Ptd. Ltd. (the "Maker"), unconditionally promise to pay to Taiwan Semiconductor Manufacturing Co., Ltd., or its order the sum of ****** , plus interest calculated from the due date stated herein to the date of full payment at the rate * per annum on any unpaid portion of the principal amount stated herein, and said payment will be made to such account as Maker may direct. This Note shall be governed in all respects by the laws of the State of California. The Maker of this Note agrees to waive protests and notice of whatever kind in connection with the delivery, acceptance, performance, default or enforcement of this Note. Issue Dated: October __, 1995 Issue Place: Singapore By: ______________________ Title: ______________________________ Adaptec Manufacturing (S) Pte. Ltd. 6 Bartery Road. 530-00 Singapore 049909 ----------------------------------------------------------- * Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. ----------------------------------------------------------- [*****] EX-27 4 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLAR 3-MOS MAR-31-1996 SEP-30-1995 DEC-29-1995 1 100,827 192,557 89,569 4,773 43,252 442,602 113,963 37,303 606,613 148,612 5,100 164,956 0 0 287,945 606,613 176,187 176,187 74,201 74,201 66,671 0 202 38,431 7,844 30,587 0 0 0 30,587 .56 .56
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