-----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, O60bvE6oYwTGPB6gjF62ARJEFftLMpigrkueUhwdRWqEnQ++xVfWvDy89kyy2R4o rZ9kSdkofEYLYvfYSXwlXQ== 0000891618-97-003400.txt : 19970814 0000891618-97-003400.hdr.sgml : 19970814 ACCESSION NUMBER: 0000891618-97-003400 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAPTEC INC CENTRAL INDEX KEY: 0000709804 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] 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: 97658273 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 PERIOD ENDED JUNE 30, 1997 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 JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM --------------- TO --------------- 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 August 5, 1997 was 112,819,480. This document consists of 12 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................ 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations: Results of Operations............................................... 7-8 Liquidity and Capital Resources..................................... 8-10 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K..................................... 11 Signatures............................................................................ 12
2 3 ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTH PERIOD ENDED --------------------- JUNE 30, JUNE 30, 1997 1996 -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Net revenues........................................................... $271,442 $202,014 Cost of revenues....................................................... 107,494 86,046 -------- -------- Gross profit........................................................... 163,948 115,968 -------- -------- Operating expenses: Research and development............................................. 38,982 27,847 Selling, marketing and administrative................................ 49,279 33,924 Write-off of acquired in-process technology.......................... -- 26,500 -------- -------- Total operating expenses............................................... 88,261 88,271 -------- -------- Income from operations................................................. 75,687 27,697 Interest income, net of interest expense............................... 3,898 2,667 -------- -------- Income before provision for income taxes............................... 79,585 30,364 Provision for income taxes............................................. 19,896 12,450 -------- -------- Net income............................................................. $ 59,689 $ 17,914 ======== ======== Net income per share................................................... $ 0.51 $ 0.16 ======== ======== Weighted average common and common equivalent shares outstanding....... 117,730 111,342 ======== ========
See accompanying notes to condensed consolidated financial statements. 3 4 ADAPTEC, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
JUNE 30, MARCH 31, 1997 1997 ---------- ---------- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents........................................... $ 367,799 $ 318,075 Marketable securities............................................... 272,244 230,366 Accounts receivable, net............................................ 133,726 132,571 Inventories......................................................... 45,843 53,184 Prepaid expenses and other.......................................... 58,308 83,752 ---------- ---------- Total current assets........................................ 877,920 817,948 Property and equipment, net........................................... 171,420 141,599 Other assets.......................................................... 116,681 83,947 ---------- ---------- $1,166,021 $1,043,494 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt................................... $ 3,400 $ 3,400 Note payable........................................................ 35,280 -- Accounts payable.................................................... 57,550 52,400 Accrued liabilities................................................. 79,753 68,519 ---------- ---------- Total current liabilities................................... 175,983 124,319 ---------- ---------- Long-term debt, net of current portion................................ -- 850 ---------- ---------- Convertible subordinated notes........................................ 230,000 230,000 ---------- ---------- Shareholders' equity: Common stock........................................................ 263,858 251,834 Retained earnings................................................... 496,180 436,491 ---------- ---------- Total shareholders' equity.................................. 760,038 688,325 ---------- ---------- $1,166,021 $1,043,494 ========== ==========
See accompanying notes to condensed consolidated financial statements. 4 5 ADAPTEC, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTH PERIOD ENDED --------------------- JUNE 30, JUNE 30, 1997 1996 -------- -------- (IN THOUSANDS) Net Cash Provided by Operating Activities.............................. $117,176 $ 36,731 -------- -------- Cash Flows From Investing Activities: Purchase of certain net assets in connection with acquisitions accounted for under the purchase method of accounting................ -- (44,879) Purchases of property and equipment.................................... (36,748) (26,792) Sales (Purchases) of marketable securities............................. (41,878) 27,227 -------- -------- Net Cash Used for Investing Activities................................. (78,626) (44,444) -------- -------- Cash Flows From Financing Activities: Payment of short-term note............................................. -- (46,200) Proceeds from issuance of common stock................................. 12,024 6,170 Principal payments on debt............................................. (850) (850) -------- -------- Net Cash Provided by (Used for) Financing Activities................... 11,174 (40,880) -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents................... 49,724 (48,593) -------- -------- Cash and Cash Equivalents at Beginning of Period....................... 318,075 91,211 -------- -------- Cash and Cash Equivalents at End of Period............................. $367,799 $ 42,618 ======== ========
See accompanying notes to condensed consolidated financial statements. 5 6 ADAPTEC, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements have been prepared on a consistent basis with the March 31, 1997 audited consolidated financial statements and include all adjustments, consisting of only normal recurring adjustments, necessary to provide a fair statement of the results for the interim periods presented. These interim financial statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended March 31, 1997. For presentation purposes, the Company has indicated its first quarter as ending on June 30, whereas in fact, the Company's first quarter of fiscal 1998 ended on July 4, 1997 and its first quarter of fiscal 1997 ended on June 28, 1996. The results of operations for the three month period ended June 30, 1997 are not necessarily indicative of the results to be expected for the entire year. 2. INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventory are as follows (in thousands):
JUNE 30, MARCH 31, 1997 1997 -------- --------- Raw materials........................... $ 10,553 $12,958 Work in process......................... 17,663 14,370 Finished goods.......................... 17,627 25,856 ------- ------- $ 45,843 $53,184 ======= =======
3. NET INCOME PER SHARE The Company's net income per share, weighted average common and common equivalent shares outstanding, and other share information included in these interim financial statements reflect the two-for-one split of its common stock approved by its Board of Directors in November 1996. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, (SFAS 128) "Earnings Per Share," which the Company is required to adopt beginning in the third quarter of fiscal 1998. Under SFAS 128 primary earnings per share will be replaced by basic earnings per share and the dilutive effect of stock options will be excluded. Fully diluted earnings per share will be replaced with diluted earnings per share. The statement requires retroactive presentation of all earnings per share amounts. Following are pro forma disclosures of basic and diluted earnings per share as if the Company had applied SFAS 128 during the periods presented below:
THREE MONTH PERIOD ENDED --------------------- JUNE 30, JUNE 30, 1997 1996 -------- -------- Pro forma basic earnings per share........ $ 0.53 $ 0.17 Pro forma diluted earnings per share...... $ 0.51 $ 0.16
4. INCOME TAXES Income tax provisions for interim periods are based on estimated annual income tax rates. The effective income tax rate varies from the U.S. federal statutory income tax rate primarily due to income earned in Singapore where the Company is subject to a significantly lower effective tax rate. 6 7 5. ACQUISITIONS On April 9, 1996, the Company acquired certain assets and the ongoing business of Western Digital's Connectivity Solutions Group (CSG) for $33 million cash. CSG supplies silicon solutions for the SCSI disk drive market. Additionally, on June 28, 1996, the Company acquired certain technologies from Corel, Inc. for $12 million cash. The Company accounted for these acquisitions using the purchase method of accounting, and excluding the $26.5 million write-off of purchased in-process technology from these companies, the aggregate impact on the Company's results of operations for the quarter ended June 30, 1996 was not material. The allocation of the Company's aggregate purchase price to the tangible and identifiable intangible assets acquired was based on independent appraisals and is summarized as follows (in thousands): Tangible assets.................................... $ 9,935 In-process technology.............................. 26,500 Goodwill........................................... 8,444 ------- Assets acquired.................................... $44,879 =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth the items in the condensed consolidated statements of operations as a percentage of net revenues:
THREE MONTHS PERIOD ENDED ------------------- JUNE JUNE 30, 30, 1997 1996 ------- ------- Net revenues............................................. 100.0% 100.0% Cost of revenues......................................... 39.6 42.6 ------ ------ Gross margin............................................. 60.4 57.4 ------ ------ Operating expenses: Research and development............................... 14.4 13.8 Selling, marketing and administrative.................. 18.1 16.8 Write-off of acquired in-process technology............ -- 13.1 ------ ------ 32.5 43.7 ------ ------ Income from operations................................... 27.9 13.7 Interest income, net of interest expense................. 1.4 1.3 ------ ------ Income before provision for income taxes................. 29.3 15.0 Provision for income taxes............................... 7.3 6.1 ------ ------ Net income............................................... 22.0% 8.9% ====== ======
The first quarter of fiscal 1998 contained three additional business days compared to the corresponding quarter of the prior year. The additional days had no significant effect on the Company's results of operations. NET REVENUES Net revenues increased 34% to $271 million for the first quarter of fiscal 1998 from $202 million for the corresponding quarter of fiscal 1997. This increase was primarily due to increased shipments of the Company's host adapters and proprietary integrated circuits (ICs) used in peripheral technology solutions. These increases reflect growth in the high-performance microcomputer markets, continued demand for SCSI in the client/server environment, and an increase in the use of diverse peripherals in microcomputer systems compared to the corresponding prior year period. 7 8 GROSS MARGIN The Company's gross margin for the first quarter of fiscal 1998 was 60% compared to 57% for the corresponding quarter of fiscal 1997. The increase in gross margin was primarily due to component cost reductions and increased manufacturing efficiencies. Gross margin was also favorably affected by increased shipments of the Company's higher margin SCSI host adapters. OPERATING EXPENSES As a percentage of net revenues, expenditures for research and development remained at approximately 14% for both the first quarter of fiscal 1998 and for the corresponding quarter of fiscal 1997. In absolute dollars, spending for research and development increased 40% to $39 million for the first quarter of fiscal 1998 from $28 million for the corresponding prior year quarter. This increased spending is a result of the Company's ongoing commitment to invest in its core products as well as newer hardware and software including 1394/FireWire, Fibre Channel, and optical technologies. As a percentage of revenues, selling, marketing and administrative expenses increased to 18% for the first quarter of fiscal 1998 compared with 17% for the corresponding quarter of fiscal 1997. In absolute dollars, spending for selling, marketing and administrative expenses increased 45% to $49 million for the first quarter of fiscal 1998 from $34 million for the corresponding quarter of fiscal 1997. The increase in spending was primarily a result of increased staffing levels to support the Company's worldwide growth. During the first quarter of fiscal 1997, the Company acquired complementary businesses recorded under the purchase method of accounting, resulting in write-offs of acquired in-process technology of $26.5 million. During the first quarter of fiscal 1998, the Company did not complete any acquisitions. INTEREST AND INCOME TAXES Interest income, net of interest expense, increased 46% to $3.9 million for the first quarter of fiscal 1998 from $2.7 million for the first quarter of fiscal 1997. The increase was primarily due to higher average cash and marketable securities balances as a result of proceeds received in connection with $230 million of Convertible Subordinated Notes that the Company issued in February 1997, offset by higher interest expense as a result of higher average outstanding debt balances. The Company recorded a provision for income taxes of $19.9 million for the first quarter of fiscal 1998 representing 25% of income before income taxes compared with 41% for the corresponding quarter of fiscal 1997. The 41% rate in the prior quarter was higher than the 25% rate primarily due to book write-offs of in-process technology which are not deductible for tax purposes. The difference between the Company's effective tax rate and the U.S. statutory rate is primarily due to income earned in Singapore where the Company is subject to a significantly lower effective tax rate. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES Net cash generated from operating activities for the first quarter of fiscal 1998 of $117 million was higher by $80 million compared to the $37 million generated in the corresponding quarter of fiscal 1997. This increase was primarily due to increased net income and two amounts totaling $25.7 million collected during the first quarter of fiscal 1998. The two amounts collected during the first quarter of fiscal 1998 comprised of a refund of a deposit totaling $14.7 million from Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") and $11 million received from Lucent Technologies, Inc. ("Lucent") under an agreement in which the Company sold equipment that it had previously purchased in connection with a separate agreement. The amounts from TSMC and Lucent had both been previously classified as prepaid expenses. 8 9 INVESTING ACTIVITIES Purchases of property and equipment of $37 million during the first quarter of fiscal 1998 included an investment of $11 million for land located in Irvine, California to provide for the Company's future growth and $8 million relating to the implementation of new information systems. The Company will begin utilizing its new information systems during the second quarter of fiscal 1998. During the first quarter of fiscal 1998, the Company continued to make various building and leasehold improvements to its facilities and to invest in equipment for product development and manufacturing to support increased demand for its products and future business requirements. During the first quarter of fiscal 1997, the Company paid a total of $45 million cash for the acquisition of Western Digital's Connectivity Solutions Group and certain technologies from Corel, Inc. The Company anticipates capital expenditures relating to property and equipment will total approximately $65 million for the remainder of fiscal 1998. The Company may also make investments in increased wafer fabrication capacity or for acquisitions of complimentary businesses, products, or technologies. During the first quarter of fiscal 1998 the Company continued to invest significant amounts of funds in marketable securities, consisting mainly of various tax advantaged U.S. government and municipal securities. FINANCING ACTIVITIES During April 1997, the Company entered into an agreement with TSMC whereby the Company will make advance payments totaling $35 million to secure additional wafer capacity for future technology through 2001. The Company signed a $35 million promissory note for the advance payments, which becomes due in two equal installments in January 1998 and June 1998. During the first quarter of fiscal 1997, the Company paid a short term note of $46 million due to TSMC in return for guaranteed future wafer capacity. During the first quarter of fiscal 1998 and fiscal 1997, the Company received proceeds from common stock issued under the employee stock option and employee stock purchase plans totaling $12 million and $6 million, respectively. At June 30, 1997, the Company's principal sources of liquidity consisted of $640 million of cash, cash equivalents and marketable securities and an unsecured $17 million revolving line of credit which expires on December 31, 1998. The Company believes existing working capital, together with expected cash flows from operations and available sources of bank, equity, debt and equipment financing, will be sufficient to support its operations through fiscal 1998. FORWARD LOOKING STATEMENTS AND RISK FACTORS Forward looking statements contained in this discussion and analysis, and which may from time to time be made by the Company and its representatives, are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. Factors that may cause the Company's actual results in future periods to be materially different from statements made include, but are not limited to, cancellations or postponements of orders, shifts in the mix of the Company's products and sales channels, changes in pricing policies by the Company's suppliers, interruption in the supply of custom integrated circuits, the market acceptance of new and enhanced versions of the Company's products and the timing of acquisitions of other business products and technologies and any associated charges to earnings. In addition, there are risks associated with dependence on the high-performance microcomputer market, the computer peripherals market, technological change, dependence on new products, dependence on wafer suppliers and other subcontractors, acquisitions, implementations of new information systems, competition, issues related to distributors, dependence on key personnel, international operations, intellectual property protection and disputes, the need for interoperability and volatility of stock price. For a more complete discussion of these factors, refer to the Risk Factors included in the Company's 1997 Annual Report on Form 10-K for the year ended March 31, 1997. 9 10 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT NUMBER DESCRIPTION - ------ ---------------------------------------------------------------------------------- 10.1* Option Agreement III between Adaptec Manufacturing (s) Pte., Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated April 21, 1997. 27.1 Financial Data Schedule for the quarter ended June 30, 1997.
No Reports on Form 8-K were filed during the quarter. - --------------- * Confidential treatment has been requested for portions of this agreement. 10 11 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: August 7, 1997 /s/ ANDREW J. BROWN -------------------------------------- Andrew J. Brown, Vice President and Corporate Controller (Principal Accounting Officer) Date: August 7, 1997 11 12 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGES ------ ----------------------------------------------------------------------- ------------ 10.1* Option Agreement III between Adaptec Manufacturing(s) Pte., Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated April 21, 1997...... 27.1 Financial Data Schedule for the quarter ended June 30, 1997............
- --------------- * Confidential treatment has been requested for portions of this agreement. 13 EX-10.1 2 OPTION AGREEMENT III DATED APRIL 21, 1997 1 EXHIBIT 10.1 OPTION AGREEMENT III BETWEEN ADAPTEC MANUFACTURING (S) PTE. LTD. AND TAIWAN SEMICONDUCTOR MANUFACTURING CO., LTD. APRIL 21, 1997 2 TABLE OF CONTENTS 1. DEFINITIONS.....................................................3 2. VOLUME COMMITMENT ..............................................4 3. WAFER PRICE.....................................................5 4. OTHER PURCHASE TERMS AND CONDITIONS ............................5 5. OBLIGATION TO PAY OPTION FEE FOR OPTION CAPACITY ...............6 6. FAILURE TO PURCHASE THE OPTION CAPACITY; FIRST RIGHT OF REFUSAL 7 7. TERM AND TERMINATION............................................7 8. BOARD APPROVAL .................................................8 9. LIMITATION OF LIABILITY ........................................8 10. NOTICE. ........................................................8 11. ENTIRE AGREEMENT................................................9 12. GOVERNING LAW...................................................9 13. ARBITRATION.....................................................10 14. ASSIGNMENT .....................................................10 15. CONFIDENTIALITY ................................................10 16. FORCE MAJEURE ..................................................10 17. NO AGENCY.......................................................11 18. GOVERNMENTAL APPROVAL ..........................................11 19. COUNTERPARTS ...................................................11 EXHIBIT A ..........................................................12 EXHIBIT B ..........................................................13 EXHIBIT B-1 ........................................................14 EXHIBIT C ..........................................................15 EXHIBIT D ..........................................................16 EXHIBIT E ..........................................................17 3 OPTION AGREEMENT III THIS AGREEMENT is made and becomes effective as of April 21, 1997 (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., ("Customer"), a company organized under the laws of Singapore, with its registered address at Six Battery Road, 532-00, Singapore 049909. 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 4 and advance the start of Fab 5; 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 to Customer as set forth in Exhibit B. (b) "Option to Base Capacity" used in this Agreement shall mean that capacity in addition to the Base Capacity that TSMC commits to provide to Customer when the execution of an Option has been completed as set forth in Exhibit B. (C) "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. (d) "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. 3 4 (e) "Option Capacity" used in this Agreement shall mean the firm capacity commitment made by Customer pursuant to this Agreement, for which capacity Customer agrees to pay the Option Fee as defined in Subsection 1 (f) below. (f) "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. (g) "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 to Base Capacity and option Capacity as set forth in Exhibit B. (h) "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. (i) "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 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 and the Option to Base Capacity portions 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. 4 5 (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" wafers will be 1.78.). 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 (a) Foundry Agreement, together with 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. (b) TSMC agrees to subcontract the manufacture of the wafers provided to Customer pursuant to the Option III Capacity to WaferTech, LLC, a Delaware limited liability company, with its registered address at 2600 N.W. Lake Road, Camas, Washington, 98607-9526 ("WaferTech"). 5 6 (c) Customer commits to purchase its Option III Capacity from WaferTech during the term of this Agreement, provided that the processes and capacity available at WaferTech are compatible with Customer's requirements. In the event WaferTech is unable or otherwise fails to provide any portion of Customer's Option III Capacity in any given year, for whatever reason (including, but not limited to, incompatible processes, and/or inadequate capacity), WaferTech and/or TSMC will provide Customer with prompt written notice thereof. Upon notice of such inability or failure, Customer may, at its sole option and as its sole remedy, (I) be released from its obligation to purchase such Option III Capacity and be refunded the Portion of the Option Fee paid for that capacity, or (ii) Purchase such Option III Capacity from TSMC. Customer will provide TSMC with notice of its election of one of the foregoing options within thirty (30) days of receipt of notice from WaferTech and/or TSMC. (d) In the event the Option Fee is to be refunded pursuant to Subsection 4(c) above, TSMC will refund the Option Fee within thirty (30) days of receipt of Customer's notice, together with interest at the Bank of America reference rate (or other rate equivalent to "prime") as published by the "Wall Street Journal" on the date of Customer's notice, calculated from the date of receipt of such Option Fee by TSMC to the date the refund is issued. 5. OBLIGATION TO PAY OPTION FEE FOR OPTION CAPACITY (a) Customer agrees to Pay to TSMC the Option Fee in the amount of of US [***] 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 (US $35.28M) as per this Exhibit. The Option Fee, once paid, shall be non-refundable, except as provided in Subsection 4(c), Section 6 and Subsection 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, two (2) promissory notes each in an amount of the Option Fee due per the payment schedule in 1998 as specified in Exhibit D and evidencing the payment required pursuant to Subsection 5(a), payable to TSMC or order, which promissory notes shall be in the form of Exhibit E. The promissory notes shall be canceled and returned by TSMC to customer within seven (7) days after receipt of the corresponding Option Fee by TSMC. - ------ *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. 6 7 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, 2001. (b)TERMINATI0N 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. 7 8 (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 Subsection 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 it's board resolution authorizing the representative designated below to execute this Agreement. 9. LIMITATION OF LIABILITIES In no event shall either party be liable for any indirect, special, incidental consequential damages (including loss of profits and 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 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: 8 9 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. ATTN: Vice President, Procurement 691 South Milpitas Blvd. Milpitas, CA 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 or 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. 9 10 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 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 advisers, 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 part 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 Subsection 7(d). 10 11 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 govenmental 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/DON BROOKS BY:/s/ F. GRANT SAVIERS -------------------- -------------------- Donald Brooks F. Grant Saviers President Director & Attorney-In-Fact -------------------- -------------------- Date Date 11 12 EXHIBIT A EQUIVALENCY FACTOR TABLE
- --------------------------------------------------------------------------------------- Masking W-Plug Complexity Equivalency 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 (E'2PLD-SACVD) 21 3 22.5 1.73 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) Equivalency Factor (D) = (C) / 13, normalized to 0.8um SPDM as 1 Date of issue: 11/14/95 12 13 EXHIBIT B ADAPTEC/TSMC COMMITTED CAPACITY Unit: K 6" Wafer Equivalent
- ---------------------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ============================================================================ Take or Pay Capacity [*] [*] ============================================================================ Base Capacity [*] [*] [*] [*] [*] [*] (For Options) ============================================================================ % of Base Commit 90% 80% 70% 60% 50% 50% ============================================================================ % X Base Capacity [*] [*] [*] [*] [*] [*] ============================================================================ Option to Base Capacity [*] [*] ============================================================================ Option I Capacity [*] [*] [*] [*] - ---------------------------------------------------------------------------- Option II Capacity [*] [*] [*] [*] - ---------------------------------------------------------------------------- Option III Capacity [*] [*] [*] [*] - ---------------------------------------------------------------------------- Total Option Capacity [*] [*] [*] [*] [*] [*] ============================================================================ TSMC Committed [*] [*] [*] [*] [*] [*] Capacity (Base Capacity + Option to Base Capacity + Option Capacity) ============================================================================ Customer Committed [*] [*] [*] [*] [*] [*] Capacity (X% Base Capacity + Option to Base Capacity + Option Capacity) - ----------------------------------------------------------------------------
* The parties agree to maintain linear run rate throughout any calendar year. Deposits Required: $35.28M - [*] Payment Schedule: $17.64M - January 31, 1998 $17.64M - June 30, 1998 - ------ *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 14 EXHIBIT B-1 WAFER EQUIVALENT CALCULATION EXAMPLE 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 = 1997 COMMITED CAPACITY * (1996 WEIGHTED CAPACITY FACTOR / 1997 WEIGHTED CAPACITY FACTOR) - ------ *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 15 EXHIBIT C TSMC CMOS TECHONOLOGY ROADMAP 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 [*]
- ------ *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 16 EXHIBIT D OPTION FEE (OPTION III)
Years Total Option Option Fee Due Date Capacity (unit (Unit: US$) Wafer Equivalent) - ------------------------------------------------------------------------- 1997- [*] $17.64M January 31, 1998 2001 $17.64M June 30, 1998
- ------ *Certain information on this page has been omitted and filed separately with the Commission. Confidential treatment has been requested with respect to the omitted portions. 16 17 EXHIBIT E STANDARD FORM OF PROMISSORY NOTE Amount: US$ Due Date: -------------------- -------------------- The Undersigned, _____________________ (the "Maker"), unconditionally promise to pay to Taiwan Semiconductor Co., Ltd. or its order the sum of US Dollars __________________ ($__________), plus interest calculated from the Due date stated herein to the date of full payment at the rate of 10% 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 Date: ----------------------- Issue Place: ----------------------- Signature: ----------------------- Title: ----------------------- Address: ----------------------- 17 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS MAR-31-1998 APR-01-1997 JUL-04-1997 367,799 272,244 137,339 3,613 45,843 877,920 231,338 59,918 1,166,021 175,983 230,000 0 0 263,858 496,180 1,166,021 271,442 271,442 107,494 107,494 88,261 0 3,060 79,585 19,896 59,689 0 0 0 59,689 .51 .51
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