<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the quarterly period ended December 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.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
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
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Month Nine Month
Period Ended Period Ended
------------ ------------
Dec. 29, Dec. 30, Dec. 29, Dec. 30,
(in thousands, except per share data) 1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
======== ======== ======== ========
</TABLE>
See accompanying notes.
3
<PAGE> 4
ADAPTEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 29, March 31,
(in thousands) 1995* 1995*
------------ ---------
<S> <C> <C>
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
======== ========
</TABLE>
See accompanying notes.
* Amounts at December 29, 1995 are unaudited. Amounts at March 31, 1995 are
derived from audited annual financial statements.
4
<PAGE> 5
ADAPTEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine-Month Period Ended
-------------------------------------
December 29, December 30,
(in thousands) 1995 1994
------------ ------------
<S> <C> <C>
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
========= ========
</TABLE>
See accompanying notes
5
<PAGE> 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):
<TABLE>
<CAPTION>
Nine-Month Period Ended
------------------------------------
December 29, December 30,
1995 1994
------------ ------------
<S> <C> <C>
Interest $ 604 $ 877
Income taxes $ 14,751 $ 18,643
</TABLE>
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):
<TABLE>
<CAPTION>
December 29, March 31,
1995 1995
------------ ---------
<S> <C> <C>
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
========= ==========
</TABLE>
6
<PAGE> 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):
<TABLE>
<S> <C>
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
=========
</TABLE>
7
<PAGE> 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):
<TABLE>
<S> <C>
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
=========
</TABLE>
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
<PAGE> 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:
<TABLE>
<CAPTION>
Three Month Nine Month
Period Ended Period Ended
------------------------- -------------------------
Dec. 29, Dec. 30, Dec. 29, Dec. 30,
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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%
===== ===== ===== =====
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 14
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C> <C>
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
</TABLE>
*The Company has requested confidential treatment for portions of
these agreements.
No Reports on Form 8-K were filed during the quarter.
14
<PAGE> 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
<PAGE> 1
OPTION AGREEMENT I
Between
Adaptec Manufacturing (S) Pte. Ltd.
And
Taiwan Semiconductor Manufacturing Co., Ltd.
October 23, 1995
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 12
EXHIBIT B
CUSTOMER/TSMC COMMITTED CAPACITY
Unit: K 6" Wafer Equivalent
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
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.
-----------------------------------------------------------
[*****]
<PAGE> 13
Exhibit B1
WAFER EQUIVALENT CALCULATION
TO CALCULATE THE WEIGHTED CAPACITY FACTOR
<TABLE>
<CAPTION>
WEIGHTED
CAPACITY WAFER PERCENTAGE CAPACITY
PROCESS FACTOR CAPACITY OF VOLUME FACTOR
<S> <C> <C> <C> <C>
.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 *** *
</TABLE>
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.
-----------------------------------------------------------
[*****]
<PAGE> 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.
-------------------------------------------------------------
[*****]
<PAGE> 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.
-----------------------------------------------------------
[* * *]
<PAGE> 1
OPTION AGREEMENT II
Between
Adaptec Manufacturing (S) Pte. Ltd.
And
Taiwan Semiconductor Manufacturing Co., Ltd.
October 23, 1995
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 12
EXHIBIT B
CUSTOMER/TSMC COMMITTED CAPACITY
Unit: K 6" Wafer Equivalent
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
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)
</TABLE>
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.
-----------------------------------------------------------
[****]
<PAGE> 13
Exhibit B1
WAFER EQUIVALENT CALCULATION
TO CALCULATE THE WEIGHTED CAPACITY FACTOR
<TABLE>
<CAPTION>
WEIGHTED
CAPACITY WAFER PERCENTAGE CAPACITY
PROCESS FACTOR CAPACITY OF VOLUME FACTOR
<S> <C> <C> <C> <C>
.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 *** *
</TABLE>
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.
-----------------------------------------------------------
[*****]
<PAGE> 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.
-------------------------------------------------------------
[*****]
<PAGE> 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.
-----------------------------------------------------------
[****]
<PAGE> 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.
-----------------------------------------------------------
[*****]
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> SEP-30-1995
<PERIOD-END> DEC-29-1995
<EXCHANGE-RATE> 1
<CASH> 100,827
<SECURITIES> 192,557
<RECEIVABLES> 89,569
<ALLOWANCES> 4,773
<INVENTORY> 43,252
<CURRENT-ASSETS> 442,602
<PP&E> 113,963
<DEPRECIATION> 37,303
<TOTAL-ASSETS> 606,613
<CURRENT-LIABILITIES> 148,612
<BONDS> 5,100
164,956
0
<COMMON> 0
<OTHER-SE> 287,945
<TOTAL-LIABILITY-AND-EQUITY> 606,613
<SALES> 176,187
<TOTAL-REVENUES> 176,187
<CGS> 74,201
<TOTAL-COSTS> 74,201
<OTHER-EXPENSES> 66,671
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 202
<INCOME-PRETAX> 38,431
<INCOME-TAX> 7,844
<INCOME-CONTINUING> 30,587
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,587
<EPS-PRIMARY> .56
<EPS-DILUTED> .56
</TABLE>
