Adaptec 2008 Annual Report Download - page 47

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The following discussion regarding our risk management activities contains “forward-looking statements”
that involve risks and uncertainties. Actual results may differ materially from those projected in the forward-
looking statements.
Cash and Cash Equivalents and Short-term Investments
We regularly maintain a short and long term investment portfolio of various types of government and
corporate debt instruments. We do not directly hold any asset-backed commercial paper. Our investments are
made in accordance with an investment policy approved by our Board of Directors. Maturities of these
instruments are less than three years, with the majority being within one year. To minimize credit risk, we
diversify our investments and select minimum ratings of P-1 or A by Moody’s, or A-1 or A by Standard and
Poor’s, or equivalent. We classify these securities as available-for-sale and they are carried at fair market value.
Investments in instruments with both fixed and floating rates carry a degree of interest rate risk. Fixed rate
securities may have their fair market value adversely impacted because of a rise in interest rates, while floating
rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future
investment income may fall short of expectations because of changes in interest rates, or we may suffer losses in
principal if we were to sell securities that have declined in market value because of changes in interest rates.
We do not attempt to reduce or eliminate our exposure to interest rate risk through the use of derivative
financial instruments.
Senior Convertible Notes
At December 28, 2008, a principal amount of $68.3 million of these Notes remained outstanding and $1.1
million of unamortized debt issue costs were included in Investments and Other Assets. The Notes were
originally issued for $225 million in aggregate principal amount. During 2008, we repurchased $156.7 million
principal amount of our senior convertible notes for $138.3 million and expensed $3.2 million of related
unamortized debt issue costs and transaction costs resulting in a net gain of $15.2 million.
Because we pay fixed interest coupons on these Notes, market interest rate fluctuations do not impact our
debt interest payments. However, the fair value of the senior convertible Notes will fluctuate as a result of
changes in the price of our common stock, changes in market interest rates and changes in our credit worthiness.
Our 2.25% senior convertible Notes are not listed on any exchange or included in any automated quotation
system but are registered for resale under the Securities Act of 1933.
The Notes rank equal in right of payment with our other unsecured senior indebtedness and mature on
October 15, 2025 unless earlier redeemed by us at our option, or converted or put to us at the option of the
holders. Interest is payable semi-annually in arrears on April 15 and October 15 of each year, commencing on
April 15, 2006. We may redeem all or a portion of the Notes at par on and after October 20, 2012. The holders
may require that we repurchase notes on October 15, 2012, 2015 and 2020 respectively.
Holders may convert the Notes into the right to receive the conversion value (i) when our stock price
exceeds 120% of the approximately $8.80 per share initial conversion price for a specified period, (ii) in certain
change in control transactions, and (iii) when the trading price of the Notes does not exceed a minimum price
level. For each $1,000 principal amount of Notes, the conversion value represents the amount equal to 113.6687
shares multiplied by the per share price of our common stock at the time of conversion. If the conversion value
exceeds $1,000 per $1,000 in principal of Notes, we will pay $1,000 in cash and may pay the amount exceeding
$1,000 in cash, stock or a combination of cash and stock, at our election.
47