-----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, UN6NmZCKAEjSm6fVVP3hbr+OtB330SlTn5OfihNpA1sRXX1k4QuL8p/BfswixTDZ Me5usC18CR+LRWJ+gu99XQ== 0000891618-96-000975.txt : 19960624 0000891618-96-000975.hdr.sgml : 19960624 ACCESSION NUMBER: 0000891618-96-000975 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960621 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAPTEC INC CENTRAL INDEX KEY: 0000709804 STANDARD INDUSTRIAL CLASSIFICATION: SEMICONDUCTORS & RELATED DEVICES [3674] IRS NUMBER: 942748530 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-15071 FILM NUMBER: 96584199 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-K405 1 FORM 10-K FOR THE PERIOD ENDED MARCH 31,1996 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ------------------------ (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED). FOR THE FISCAL YEAR ENDED MARCH 31, 1996 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED). FOR THE TRANSITION PERIOD FROM TO . COMMISSION FILE NUMBER 000-15071 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: TITLE OF CLASS COMMON STOCK, $.001 PAR VALUE COMMON SHARE PURCHASE RIGHTS SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE 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 ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes X No ___ Based on the closing sale price of the Common Stock on the NASDAQ National Market System on June 7, 1996, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $2,501,561,255. Shares of Common Stock held by each officer and director and by each person known by the Company to own 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of Registrant's Common Stock, $.001 par value, was 53,363,780 at June 7, 1996. DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV incorporate information by reference from the Annual Report to Shareholders for the fiscal year ended March 31, 1996. Part III incorporates information by reference from the definitive proxy statement for the Annual Meeting of Shareholders to be held on August 22, 1996. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INTRODUCTORY STATEMENT References made in this Annual Report on Form 10-K to "Adaptec", the "Company" or the "Registrant" refer to Adaptec, Inc. and its wholly owned subsidiaries. Adaptec, the Adaptec logo, EZ-SCSI and SCSIselect are trademarks of Adaptec, Inc., which may be registered in some jurisdictions. All other trademarks used are owned by their respective owners. 1 3 PART I ITEM 1. BUSINESS GENERAL Adaptec is a leader in high-performance I/O and connectivity solutions, a foundation technology for the global information infrastructure. Adaptec designs, manufactures, and markets hardware and software products that enhance data transfer rates between computers, peripherals, and networks. Its high-performance I/O, connectivity, and network products are incorporated into the systems and products of major computer and peripheral manufacturers worldwide. Adaptec's board-based solutions range from simple connectivity products for single-user and small-office desktop computers, to intelligent subsystem, high-performance SCSI, RAID and ATM products for enterprise-wide computing and networked environments. The Company's integrated circuit (IC) products include single chip disk controllers for disk drives and single chip SCSI host adapters. BACKGROUND The rapid growth of client/server networking environments, complex microcomputer based applications, and the expanded adoption of various peripheral devices, such as CD-ROM, CD-Recordable (CD-R), and tape drives, continue to be factors beneficial to growth in the markets that the Company operates in. Critical factors driving this growth have been the development of increasingly sophisticated software for applications such as multimedia, multitasking, networking, and high resolution graphics. These application developments continue to result in the need for increased data transmission rates between CPUs and peripherals and the need to facilitate efficient CPU utilization and bandwidth management which would enhance the overall performance of microcomputer systems, servers and networks. The Company addresses these needs with products that significantly enhance and optimize overall microcomputer system performance, particularly in complex operating environments, involving sophisticated applications and multiple peripherals. MARKET OVERVIEW The Company provides high-performance hardware and software products to virtually all major microcomputer and disk drive manufacturers and distributors around the world. The Company believes that technical leadership, product innovation, marketing expertise and brand name recognition allow it to compete favorably worldwide supplying I/O solutions to enterprise and personal computing markets and providing ICs to mass storage markets. Operating systems for computing continue to evolve with Graphical User Interfaces (GUIs), such as Microsoft's Windows 95, being standard in most desktop and portable computers. The need in recent years for the microcomputer to become the information access center continues to drive the growth of complex and graphics-intensive applications including multimedia, multitasking, video, desktop publishing, and networking applications. Additionally, many desktop and portable computers are being configured with a more diverse set of peripherals, such as CD-ROM, Tape, Write Once Read Many (WORM), CD-R and Digital Audio Tape (DAT) drives, either at the time of purchase or after the original equipment sale. These continuing trends in operating systems, applications and peripherals benefit the Company in its markets where the demand for high-performance I/O solutions continues to increase. The enterprise computing market continues to be characterized by increasingly more sophisticated and graphics-intensive applications, such as network management software, distributed multimedia, video and desktop publishing applications. These applications, existing primarily in client/server environments, typically require a file server to be configured with multiple peripherals such as WORM, CD-ROM and DAT drives, together with hard disk subsystems that provide security and data integrity capabilities such as Redundant Array of Independent Disks (RAID). Successful implementation of such critical systems requires significant knowledge of networking software and I/O subsystems. The personal computing market has also rapidly migrated to more high-performance computers in the last few years, with new generations of microprocessors continually increasing CPU speed as well as an increased number of computers being sold with a diverse set of peripherals. This shift in the personal computing market continues to generate demand for products incorporating SCSI technology. 2 4 Virtually every microcomputer is shipped with inexpensive mass storage devices which are required to store vast amounts of information and data. Such devices include CD-ROM, tape drives and most commonly hard disk drives. In the past year, non-hard disk devices, such as Iomega's Zip and Ditto drives, have been increasingly used in addition to a hard disk and often have SCSI interfaces. Common uses for non-hard disk SCSI devices include data backup and archiving for tape drives and storage needed for multimedia programs where video, text, graphics and sound are stored on a CD-ROM or CD-R. Hard disk drives are usually part of a standard desktop, portable or networked microcomputer configuration, and generally are used to store operating systems, user applications and data files. Most hard disk drives are shipped with either an EIDE or a SCSI interface and have relatively fast data access and transfer capabilities. PRODUCTS The Company's products are designed and manufactured using a core set of technologies and resources. The Company's semiconductor technology design centers develop products for all markets the Company serves. The Company continues to utilize a process called concurrent engineering, in which manufacturing, marketing and engineering work together early in the development cycle, to meet the demands of emerging technologies as well as decrease the "time to volume" of product shipments. The Company maintains an Internet Web site (www.adaptec.com) to provide its customers with detailed company and product information. BOARD-BASED I/O SOLUTIONS The Company's board-based I/O solutions, which include SCSI host adapters, ATM network interface cards, and related software, meet the demanding I/O and connectivity requirements of high-performance desktop and portable computers, technical workstations, and enterprise servers, across all important microprocessor based platforms. The Company's proprietary single chip host adapters are the principal component of these products. These ICs, together with the Company's extensive array of software products, provide customers the most comprehensive board-based I/O solutions available in the markets it serves. The Company provides bus mastering, SCSI host adapters that manage all I/O processing activity, thereby freeing the CPU to focus most of its power on task processing. The Company offers these host adapters across all ranges of bus architectures including PCI, ISA, EISA, VL, PCMCIA and Micro Channel. The Company also provides non-bus mastering host adapters which provide standardized SCSI connectivity between the CPU and its peripherals. Demand for the Company's board-based I/O solutions has increased with the continued adoption of SCSI as the high-performance I/O standard in personal computing. Additionally, demand is being driven by the increased use of file servers where SCSI usage approaches 100%. To meet this increased demand, the Company continues to develop and market I/O solutions meeting specific OEM requirements and turnkey kits for the distributor channels. These kits include a SCSI host adapter and related software that enable end- users to more readily connect SCSI peripherals to their microcomputer. The Company also provides ATM network interface cards to major OEMs supporting a number of major operating systems. To facilitate the use of SCSI in microcomputer systems, the Company developed Advanced SCSI Programming Interface (ASPI), an operating system-level interface allowing seamless connectivity between SCSI host adapters, operating systems, and peripherals. ASPI enables users to integrate high-performance SCSI peripherals with microcomputers using popular operating systems, such as DOS, Windows, Windows 95, Windows NT, NetWare, OS/2 and UNIX. The Company is engaged in strategic relationships with leading operating system vendors, such as IBM, Microsoft and Novell, resulting in joint development projects to embed the Company's software within their operating systems. In addition, the Company has developed several software utilities such as Adaptec EZ-SCSI and SCSIselect products, which simplify connecting a SCSI host adapter and peripherals to a microcomputer system. As a result of business acquisitions in fiscal 1996, the Company now provides CD-R products which include powerful, easy-to-use CD writing and photo CD solutions for cross-platform CD data and multimedia applications. Additionally, the Company has incorporated new software with its host adapters and accelerator cards compatible with Power PC based systems. 3 5 INTEGRATED CIRCUITS The Company develops proprietary ICs for use in mass storage devices and microcomputer systems and for use in its own board-based SCSI host adapters and network interface cards (NICs). Adaptec's proprietary ICs provide innovative solutions for managing complex I/O functions in high-performance microcomputer and storage applications. Working closely with customers, the Company provides complete solutions that include sophisticated ICs, with related firmware and software, to optimize overall subsystem design. The Company's current IC products include SCSI, and EIDE programmable storage controllers and single-chip SCSI host adapters. All of the Company's IC products are developed using advanced design technologies to meet market requirements for higher levels of physical integration, increased functionality and performance. The Company's programmable SCSI and EIDE storage controllers are typically configured to address specific customer requirements in the mass storage market and are used primarily in high capacity hard disk drives as well as non-hard disk drives. The Company's SCSI host adapter ICs incorporate similar technology and are used by system manufacturers to embed SCSI on the system motherboard. RESEARCH AND DEVELOPMENT The Company believes research and development is fundamental to its success, especially in integrated circuit design, software development, and I/O solutions that encompass emerging technologies. The development of proprietary integrated circuits that support multiple architectures and peripheral devices requires a combination of engineering disciplines. In addition, extensive knowledge of computer and subsystem architectures, expertise in the design of high-speed digital integrated circuits and knowledge of operating system software is essential. The Company's research and development efforts continue to focus on the development of proprietary integrated circuits that support multiple architectures and peripheral devices. These proprietary integrated circuits are incorporated with a wide range of I/O solutions that facilitate high-speed data transfer rates, which are essential to the enhanced performance of client/server networking environments, applications requiring high-performance I/O, and the adoption of various peripheral devices. The Company continues to leverage its technical expertise and product innovation capabilities to address I/O solutions across a broad range of users and platforms. While SCSI solutions currently remain the core of the Company's business, in fiscal 1996 the Company continued to invest in newer products and technologies including ATM, RAID, and CD-R technologies and invested in the research and development of serial architectures such as Fibre Channel and 1394. Approximately 25% of the Company's employees are engaged in research and development. In fiscal 1996, 1995 and 1994, the Company spent approximately $88 million, $61 million, and $40 million respectively, for research and development. MARKETING AND CUSTOMERS The Company sells its products through both OEM and distributor channels and packages these products to meet the specific requirements of system integrators and end users. The Company works closely with its OEM customers on the design of current and next generation products that incorporate the Company's board-based products and integrated circuits. The Company provides its OEM customers with extensive applications and system design support. The Company also sells boardbased products to end users through major computer product distributors and provides technical support to its customers worldwide. The Company believes it has successfully positioned itself as a leading supplier in offering a full range of I/O solutions providing bandwidth management in both OEM and distributor channels worldwide. The Company focuses its global marketing efforts on major OEM customers and distributors through its direct sales force located in the United States and primary industrial centers in Europe and the Far East. The Company also makes selective use of sales representatives on a worldwide basis. OEM customers include Acer, Compaq, Conner Peripherals, Digital Equipment Corporation, Dell Computer Corporation, Fujitsu, Gateway 2000, Hewlett-Packard Company, IBM Corporation, Intel Corporation, IOmega, Maxtor Corporation, NEC Technologies, Samsung, Siemens Nixdorf and Toshiba America. Distribution customers include, 4 6 Actebis, Computer 2000, Gates/Arrow, Ingram Micro, Merisel, Nissho, and Tech Data. In fiscal 1996, sales to Nissho represented 10% of net revenues. In fiscal 1995 and 1994 no customer accounted for more than 10% of the Company's net revenues. The Company emphasizes solution-oriented customer support as a key element of its marketing strategy and maintains technical applications groups in the field as well as at the Company's headquarters. Support provided by these groups includes assisting current and prospective customers in the use of the Company's products, writing application notes and conducting seminars for system designers. The systems-level expertise and software experience of the Company's engineering staff are also available to customers with particularly difficult I/O design problems. A high level of customer support is also maintained through technical support hotlines, electronic bulletin boards and dial-in-fax capability. International net revenues accounted for approximately 56%, 62% and 58% of net revenues in fiscal 1996, 1995, and 1994, respectively. Sales of the Company's products internationally are subject to certain risks common to all export activities, such as governmental regulation and the risk of imposition of tariffs or other trade barriers. Sales to customers are primarily denominated in U.S. dollars. As a result, the Company believes its foreign currency exchange rate risk is minimal. BACKLOG The Company's backlog was approximately $111 million and $66 million at March 31, 1996 and March 31, 1995, respectively. These backlog figures include only orders scheduled for shipment within six months, of which the majority are scheduled for delivery within 90 days. The Company's customers may cancel or delay purchase orders for a variety of reasons, including rescheduling of new product introductions and changes in inventory policies and forecasted demand. Accordingly, the Company's backlog as of any particular date may not be indicative of the Company's actual sales for any succeeding fiscal period. COMPETITION In the enterprise and personal computing markets, the Company's principal competitors are smaller host adapter companies. The Company's competitive strategy is to continue to leverage its technical leadership and concentrate on the most technology-intensive solutions. To address the competitive nature of the business the Company designs advanced features into its products, with particular emphasis on data transfer rates, software-defined features and compatibility with major operating systems and most peripherals. The Company believes that it obtains a significant competitive advantage by supplying its customers with a comprehensive array of solutions ranging from connectivity products for the personal computing market to high performance products for enterprise-wide computing and networked environments. In addition, technical leadership, product innovation, strong financial position, and brand awareness are important competitive factors in these markets which the Company believes it competes favorably. The Company's principal competitor in the mass storage market is Cirrus Logic, Inc. The Company believes that its competitive strengths in the mass storage market include its ability to obtain major design wins as the result of its systems level expertise, integrated circuit design capability and substantial experience in I/O applications. The Company believes the principal competitive factors in design wins are performance, product features, price, quality and technical and administrative support. Based on these factors, the Company believes it has, in the past, successfully competed for design wins. The markets for the Company's products are highly competitive and are characterized by rapid technological advances, frequent new product introductions and evolving industry standards. The Company's competitors continue to introduce products with improved performance characteristics and its customers continue to develop new applications. The Company will have to continue to develop and market appropriate products to remain competitive. The Company believes one of the significant factors in its competitive success is its continued commitment of significant resources to research and development. 5 7 MANUFACTURING The Company's Singapore manufacturing facility produces and tests high volume host adapter products. The Singapore facility has earned ISO 9001 certification, a stringent quality standard that has become a requirement for doing business globally. By establishing this facility in Singapore in 1988, the Company has experienced lower costs, shorter manufacturing cycle times, and improved service to customers. The Company's products make extensive use of standard logic, printed circuit boards and random access memory supplied by several outside sources. All semiconductor wafers used in manufacturing the Company's products are processed to its specifications by outside suppliers. The Company believes that its current wafer volume and manufacturing technology requirements are best met with subcontracting relationships. In fiscal 1996, the Company secured capacity through 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. Under this agreement, which is effective through 2001, the Company made advance payments of $20 million and has signed a $46 million promissory note which becomes due at the end of June 1996. This agreement is in addition to an existing deposit and supply agreement with TSMC which expires in June 1997. Also in fiscal 1996, the Company signed an agreement with AT&T that provides the Company with a guaranteed supply of wafers from AT&T's fabrication facility located in Madrid, Spain in return for an investment in fabrication equipment of up to $25 million. The Company did not make any payments in connection with this agreement during fiscal 1996. PATENTS AND LICENSES The Company believes that patents are of less significance in its industry than such factors as innovative skills, technological expertise and marketing abilities. However, the Company encourages its engineers to document patentable inventions and has applied for and continues to apply for patents both in the United States and in foreign countries when it deems it to be advantageous to do so. There can be no assurance that patents will be issued or that any patent issued will provide significant protection or could be successfully defended. As is the case with many companies in the electronics industry, it may be desirable in the future for the Company to obtain technology licenses from other companies. The Company has occasionally received notices of claimed infringement of intellectual property rights and may receive additional such claims in the future. The Company evaluates all such claims and, if necessary, will seek to obtain appropriate licenses. There can be no assurance that any such licenses, if required, will be available on acceptable terms. EMPLOYEES At March 31, 1996, the Company had 2,211 employees, including 559 in engineering, 993 in manufacturing (including 841 at its Singapore facility), 115 in customer technical support, 167 in marketing, 187 in sales, and 190 in finance and administration. The Company's continued success will depend in large measure on its ability to attract and retain highly skilled employees who are in great demand. None of the Company's employees are represented by a labor union. FOREIGN AND DOMESTIC OPERATIONS Incorporated by reference from information under the caption "Segment Information" on Pages 47 and 48 of the Annual Report to Shareholders for the fiscal year ended March 31, 1996. CERTAIN FACTORS BEARING ON FUTURE RESULTS The following risk factors should be considered by anyone contemplating an investment in the Company's Common Stock. In addition, the Company and its representatives may from time to time make forward-looking statements, and the following are important factors that could cause actual results to differ materially from those projected in any such forward-looking statements. 6 8 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 by the Company 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 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. 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 conform with certain industry standards such as SCSI, UltraSCSI, PCI, RAID 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 if the Company were unable to adapt to these standards in a timely manner. 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 7 9 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 shares 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. ITEM 2. PROPERTIES. The Company owns six buildings (approximately 375,000 square feet) in Milpitas, California which are primarily used by the Company for corporate offices, research, manufacturing, marketing and sales. The Company leases another building which is mainly occupied to support administrative and sales functions. The Company also leases facilities in Boulder, Colorado (47,000 square feet), Irvine, California (82,000 square feet) and Hudson, Wisconsin (5,000 square feet) to support technical design efforts and sales. Adaptec Manufacturing Singapore is located in two leased facilities (approximately 150,000 square feet). The two buildings are used by the Company for research, manufacturing and sales. The Company also leases ten sales offices in the United States, and one sales office each in Brussels, Belgium; Munich, Germany; Bretonneux, France; Fleet, England; Singapore; Taiwan; and Tokyo, Japan. The Tokyo office also provides technical design efforts and technical support with the Brussels office providing technical support to Europe. The Company believes its existing facilities and equipment are well maintained and in good operating condition and believes its manufacturing facilities, together with the use of independent manufacturers where required or desirable, will be sufficient to meet its anticipated manufacturing needs through fiscal 1997. During fiscal 1996, the Company acquired a parcel of land in Fremont, California for approximately $12 million cash to support anticipated future growth. The Company's future facilities requirements will depend upon the Company's business and, the Company believes additional space, if required, may be obtained on reasonable terms. ITEM 3. LEGAL PROCEEDINGS. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS. Incorporated by reference from the information under the caption "Common Stock Prices and Dividends" on page 52 of the Annual Report to Shareholders for the fiscal year ended March 31, 1996. 8 10 ITEM 6. SELECTED FINANCIAL DATA. Incorporated by reference from the information under the caption "Selected Financial Data" on page 52 of the Annual Report to Shareholders for the fiscal year ended March 31, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Incorporated by reference from the information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" from pages 31 through 35 of the Annual Report to Shareholders for the fiscal year ended March 31, 1996. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Consolidated financial statements of Adaptec, Inc. at March 31, 1996 and 1995 and for each of the three years in the period ended March 31, 1996 and the independent accountants' report thereon are incorporated by reference from pages 36 through 51 of the Annual Report to Shareholders for the fiscal year ended March 31, 1996. The financial statements of Adaptec, Inc. for the year ended March 31, 1994 were audited by other independent public accountants as indicated in the previously mentioned independent public accountants' report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information with respect to directors of Adaptec is incorporated by reference from the information under the captions "Election of Directors -- Nominees" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's definitive Proxy Statement for the annual meeting of shareholders to be held, August 22, 1996 (the "Proxy Statement"). The following sets forth certain information with respect to the executive officers of the Company, and their ages, as of March 31, 1996.
NAME AGE POSITION John G. Adler 59 Chairman of the Board of Directors F. Grant Saviers 51 President and Chief Executive Officer Robert N. Stephens 50 Chief Operating Officer Daniel W. Bowman 51 Vice President of Administration Andrew J. Brown 36 Corporate Controller and Principal Accounting Officer Michael G. Fisher 37 Vice President and General Manager John D. Hamm 36 Vice President and General Manager Paul G. Hansen 48 Vice President of Finance, Chief Financial Officer and Assistant Secretary Sam Kazarian 53 Vice President of Operations Christopher G. O'Meara 38 Vice President and Treasurer S. Sundaresh 39 Vice President and General Manager Henry P. Massey, Jr. 56 Secretary
Executive officers serve at the pleasure of the Board of Directors of the Company. There are no family relationships between any directors or executive officers of the Company. 9 11 Mr. Adler has served as a Director since February 1986. Mr. Adler served as Chief Executive Officer from December 1986 to July 1995, Chief Operating Officer from May 1985 to December 1986 and President from May 1985 to July 1992. Mr. Saviers has served as President since August 1992 and was appointed Chief Executive Officer in July 1995. Mr. Saviers was also appointed a member of the Board of Directors in August 1992. Mr. Saviers served as Chief Operating Officer from August 1992 to July 1995. Prior to that time, Mr. Saviers held several senior level management positions in his 24 year tenure with Digital Equipment Corporation, and more recently served as Vice President of Digital's personal computer systems and peripherals operations. Mr. Stephens has served as Chief Operating Officer since November 1995. From 1993 to 1995, he founded, and served as Chairman for Power I/O Corporation. From 1990 to 1993, Mr. Stephens held the position of President and CEO of Emulex Corporation. Mr. Bowman has served as Vice President of Administration since December 1990 and from September 1988 to December 1990, was Director of Administration. Mr. Brown has served as Corporate Controller and Principal Accounting Officer since May 1994. From July of 1988 to April of 1994 he served in various financial roles with the Company, the most recent as Operations Accounting Controller. Mr. Fisher has served as Vice President and General Manager since November 1994. Between May 1994 and October 1994 he held the position of General Manager, Mass Storage Electronics Product Group. Before then, Mr. Fisher held the position of Director of Hard Disk Drive Products at Exar Corporation form November 1990 until April 1994. Mr. Hamm has served as Vice President and General Manager since February 1994, after serving as Vice President of Sales from December 1990 to February 1994. Mr. Hansen, a certified public accountant, has served as Vice President of Finance and Chief Financial Officer since January 1988, after serving as Corporate Controller from March 1985 to December 1987 and Director of Accounting from March 1984 to March 1985. Mr. Kazarian has served as Vice President of Operations since May 1990. Before joining Adaptec, he served as Executive Vice President and Chief Operating Officer at Rugged Digital Systems from January 1988 to April 1990. Mr. O'Meara has served as a Vice President since July 1992 and as Treasurer since April 1989. Between May 1988 and April 1989, Mr. O'Meara served as the Company's Director of Financial Planning. Mr. Sundaresh has served as Vice President and General Manager since February 1994. From March of 1993 until January of 1994 he served as Director of Marketing. From 1991 to 1993 he served as Director of PC Marketing at Hyundai Electronics America. Mr. Massey has served as Secretary since November 1989. For more than the last five years, Mr. Massey has been a practicing lawyer and a member of Wilson, Sonsini, Goodrich & Rosati, Professional Corporation, a law firm and general outside counsel to the Company. ITEM 11. EXECUTIVE COMPENSATION. Incorporated by reference from the information under the caption "Executive Compensation and Other Matters" and "Election of Directors, Certain Relationships and Related Transactions" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Incorporated by reference from the information under the caption; "Election of Directors -- Security Ownership of Management" in the Company's Proxy Statement. 10 12 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Incorporated by reference from the information under the caption "Election of Directors, Certain Relationships and Related Transactions" in the Company's Proxy Statement. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. The following Consolidated Financial Statements of Adaptec, Inc. and the Report of Independent Public Accountants, as listed under (a) (1) below, are incorporated herein by reference to the Registrant's Annual Report to Shareholders for the year ended March 31, 1996. (a) (1) FINANCIAL STATEMENTS:
PAGE IN ANNUAL REPORT ------- Consolidated Statements of Operations -- Fiscal Years ended March 31, 1996, 1995 and 1994........................................... 36 Consolidated Balance Sheets at March 31, 1996 and 1995.............. 37 Consolidated Statements of Cash Flows -- Fiscal Years ended March 31, 1996, 1995 and 1994.................. 38 Consolidated Statements of Shareholders' Equity -- Fiscal Years ended March 31, 1996, 1995 and 1994............................... 39 Notes to Consolidated Financial Statements.......................... 40-49 Report of Management................................................ 50 Report of Independent Accountants................................... 51
(2) All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (3) Exhibits included herein (numbered in accordance with Item 601 of Regulation S-K): 11 13
EXHIBIT NUMBER DESCRIPTION - ------- ---------------------------------------------------------------------------- 2.1(a) Stock Purchase Agreement By and Among Adaptec, Inc., Future Domain Corporation, Jack A. Allweiss, Patricia A. Allweiss and Certain Shareholders of Future Domain Corporation dated July 13, 1995............................ (2) 2.1(b) Stock Purchase Agreement By and Between Adaptec, Inc. and Certain Shareholders of Future Domain Corporation dated July 13, 1995............... (2) 2.2 Agreement and Plan of Reorganization By and Among Adaptec, Inc., Incat Systems Software USA, Inc., ISS Acquisition Corporation and Certain Shareholders of Incat Systems Software USA, Inc. dated August 23, 1995...... (2) 3.1 Seventh Amended and Restated Articles of Incorporation of Registrant........ (4) 3.2 Bylaws of Registrant, as restated on February 9, 1996. 4.1 First Amended and Restated Common Shares Rights Agreement dated June 30, 1992, between Registrant and Chemical Trust Company of California as Rights Agents...................................................................... (6) 10.1* Registrant's 1986 Employee Stock Purchase Plan.............................. (4) 10.2 Technology License Agreement dated January 1, 1985 between the Registrant and International Business Machines Corporation............................. (8) 10.3* Registrant's Savings and Retirement Plan.................................... (7) 10.4* 1990 Stock Plan, as amended................................................. (10) 10.5* Forms of Stock Option Agreement, Tandem Stock Option/SAR Agreement, Restricted Stock Purchase Agreement, Stock Appreciation Rights Agreement, and Incentive Stock Rights Agreement for use in connection with the 1990 Stock Plan, as amended...................................................... (5) 10.6* 1990 Directors' Option Plan and forms of Stock Option Agreement............. (4) 10.7 Revolving Loan Agreement dated June 3, 1992 between Registrant and Plaza Bank of Commerce (incorporated by reference to Exhibit 10.26 filed with Registrant's Annual Report on form 10-K for fiscal year ended March 31, 1992) and Amendment Number Three to the Revolving Credit Loan Agreement dated April 29, 1994 between the Registrant and Comerica Bank -- California (formerly Plaza Bank of Commerce) expiring August 31, 1997.................. (4) 10.8 Amendments Four, Five and Six to the Revolving Credit Loan Agreement dated April 29, 1994 between the Registrant and Comerica Bank -- California expiring August 31, 1997.................................................... (4) 10.9** Option Agreement I Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995................ (3) 10.10** Option Agreement II Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995................ (3) 10.11 Consignment Agreement between Adaptec, Inc. and AT&T Corp. dated January 10, 1996........................................................................ 10.12 Form of Indemnification Agreement entered into with directors and officers of the Company.............................................................. (9) 10.13 Term Loan Agreement dated June 24, 1992 between the Registrant and Plaza Bank of Commerce expiring June 30, 1998..................................... (9) 10.14** Deposit and Supply Agreement between Taiwan Semiconductor Manufacturing Co., Ltd. and Adaptec Manufacturing Pte. Ltd..................................... (4) 10.15 Industrial Lease Agreement between the Registrant, as Lessee, and Jurong Town Corporation, as Lessor................................................. (1) 13.1 Annual Report to Shareholders for the fiscal year ended March 31, 1996...... 21.1 Subsidiaries of Registrant.................................................. (12) 23.1 Consent of Independent Accountants. Price Waterhouse LLP (See page 14). 23.2 Consent of Independent Public Accountants. Arthur Andersen LLP (See Page 15). 23.3 Report of Independent Public Accountants, Arthur Andersen LLP (see Page 16). 24.1 Power of Attorney. (See Pages 17 and 18). 27.1 Financial Data Schedule for the year ended March 31, 1996.
12 14 - --------------- (1) Incorporated by reference to exhibits filed with Registrant's Annual report on Form 10-K for the year ended March 31, 1995. (2) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended September 29, 1995. (3) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended December 29, 1995. (4) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1994. (5) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1993. (6) Incorporated by reference to Exhibit A filed with the Registrant's Registration Statement Number 0-15071 on Form 8-A on May 11, 1989 and to Exhibit 1.1 to Form 8 Amendments No. 1, No. 2 and No. 3 thereto as filed June 5, 1990, April 8, 1992 and July 20, 1992, respectively. (7) Incorporated by reference to exhibits filed with the Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1987. (8) Incorporated by reference to Exhibit 10.15 filed in response to Item 16(a) "Exhibits", of the Registrant's Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (file No. 33-5519), which became effective on June 11, 1986. (9) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1992. (10) Incorporated by reference to Exhibit 4.2 to Form S-8 as filed February 7, 1996. (11) Incorporated by reference to Exhibit 16 to Form 8-K/A-2 dated July 11, 1994. (12) Incorporated by reference from the information under the caption "Corporate Information" included in the Annual Report to Shareholders for the fiscal year ended March 31, 1996. * Designates management contracts or compensatory plan arrangements required to be filed as an exhibit pursuant to item 14(c) of this report on Form 10-K. ** Confidential treatment has been granted for portions of this agreement. (B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the fourth quarter. 13 15 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 33-02889, No. 33-0779, No. 33-85652) of Adaptec, Inc. of our report dated April 22, 1996 appearing on page 51 of the Annual Report to Shareholders which is incorporated by reference in this Annual Report on Form 10-K. PRICE WATERHOUSE LLP San Jose, California June 20, 1996 14 16 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements File No. 33-36353, No. 33-36352, No. 33-32071, No. 33-25237, No. 33-19125, No. 33-19124, No. 33-8846 and No. 33-68630. ARTHUR ANDERSEN LLP San Jose, California June 20, 1996 15 17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Adaptec, Inc.: We have audited the consolidated statements of operations, shareholders' equity and cash flows of Adaptec, Inc. (a California corporation) and subsidiaries for the year ended March 31, 1994 (incorporated by reference herein). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Adaptec, Inc. and subsidiaries for the year ended March 31, 1994 in conformity with generally accepted accounting principles. /s/ ARTHUR ANDERSEN LLP San Jose, California April 25, 1994 16 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. /s/ F. GRANT SAVIERS F. Grant Saviers President and Chief Executive Officer Date: POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints F. Grant Saviers and Paul G. Hansen, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ JOHN G. ADLER Chairman of the Board of June 20, 1996 - -------------------------------------- Directors, (John G. Adler) /s/ F. GRANT SAVIERS President, and Chief Executive June 20, 1996 - -------------------------------------- Officer (F. Grant Saviers) /s/ ROBERT N. STEPHENS Chief Operating Officer June 20, 1996 - --------------------------------------- (Robert N. Stephens) /s/ PAUL G. HANSEN Vice President of Finance and June 20, 1996 - --------------------------------------- Chief Financial Officer and (Paul G. Hansen) Assistant Secretary /s/ ANDREW J. BROWN Corporate Controller and June 20, 1996 - --------------------------------------- Principal Accounting Officer (Andrew J. Brown) /s/ LAURENCE B. BOUCHER Director June 20, 1996 - --------------------------------------- (Laurence B. Boucher) /s/ CARL J. CONTI Director June 20, 1996 - --------------------------------------- (Carl J. Conti) /s/ JOHN C. EAST Director June 20, 1996 - --------------------------------------- (John C. East)
17 19
SIGNATURE TITLE DATE - ----------------------------------------------- ------------------------------ -------------- /s/ ROBERT J. LOARIE Director June 20, 1996 - ----------------------------------------------- (Robert J. Loarie) /s/ B. J. MOORE Director June 20, 1996 - ----------------------------------------------- (B. J. Moore) /s/ W. FERRELL SANDERS Director June 20, 1996 - ----------------------------------------------- (W. Ferrell Sanders) /s/ PHILLIP E. WHITE Director June 20, 1996 - ----------------------------------------------- (Phillip E. White)
18 20 INDEX TO EXHIBITS
SEQUENTIALLY EXHIBIT NUMBERED NUMBER EXHIBITS PAGE - ------- ------------------------------------------------------------------------ 2.1(a) Stock Purchase Agreement By and Among Adaptec, Inc., Future Domain Corporation, Jack A. Allweiss, Patricia A. Allweiss and Certain Shareholders of Future Domain Corporation dated July 13, 1995........... (2) 2.1(b) Stock Purchase Agreement By and Between Adaptec, Inc. and Certain Shareholders of Future Domain Corporation dated July 13, 1995........... (2) 2.2 Agreement and Plan of Reorganization By and Among Adaptec, Inc., Incat Systems Software USA, Inc., ISS Acquisition Corporation and Certain Shareholders of Incat Systems Software USA, Inc. dated August 23, 1995.................................................................... (2) 3.1 Seventh Amended and Restated Articles of Incorporation of Registrant.... (4) 3.2 Bylaws of Registrant, as restated on February 9, 1996. 4.1 First Amended and Restated Common Shares Rights Agreement dated June 30, 1992, between Registrant and Chemical Trust Company of California as Rights Agents........................................................... (6) 10.1* Registrant's 1986 Employee Stock Purchase Plan.......................... (4) 10.2 Technology License Agreement dated January 1, 1985 between the Registrant and International Business Machines Corporation.............. (8) 10.3* Registrant's Savings and Retirement Plan................................ (7) 10.4* 1990 Stock Plan, as amended............................................. (10) 10.5* Forms of Stock Option Agreement, Tandem Stock Option/SAR Agreement, Restricted Stock Purchase Agreement, Stock Appreciation Rights Agreement, and Incentive Stock Rights Agreement for use in connection with the 1990 Stock Plan, as amended.................................... (5) 10.6* 1990 Directors' Option Plan and forms of Stock Option Agreement......... (4) 10.7 Revolving Loan Agreement dated June 3, 1992 between Registrant and Plaza Bank of Commerce (incorporated by reference to Exhibit 10.26 filed with Registrant's Annual Report on form 10-K for fiscal year ended March 31, 1992) and Amendment Number Three to the Revolving Credit Loan Agreement dated April 29, 1994 between the Registrant and Comerica Bank -- California (formerly Plaza Bank of Commerce) expiring August 31, 1997.................................................................... (4) 10.8 Amendments Four, Five and Six to the Revolving Credit Loan Agreement dated April 29, 1994 between the Registrant and Comerica Bank -- California expiring August 31, 1997............................. (4) 10.9** Option Agreement I Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995..... (3) 10.10** Option Agreement II Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995..... (3) 10.11 Consignment Agreement between Adaptec, Inc. and AT&T Corp. dated January 10, 1996................................................................ 10.12 Form of Indemnification Agreement entered into with directors and officers of the Company................................................. (9) 10.13 Term Loan Agreement dated June 24, 1992 between the Registrant and Plaza Bank of Commerce expiring June 30, 1998................................. (9) 10.14** Deposit and Supply Agreement between Taiwan Semiconductor Manufacturing Co., Ltd. and Adaptec Manufacturing Pte. Ltd............................ (4) 10.15 Industrial Lease Agreement between the Registrant, as Lessee, and Jurong Town Corporation, as Lessor............................................. (1) 13.1 Annual Report to Shareholders for the fiscal year ended March 31, 1996.................................................................... 21.1 Subsidiaries of Registrant.............................................. (12) 23.1 Consent of Independent Accountants. Price Waterhouse LLP (See page 14). 23.2 Consent of Independent Public Accountants. Arthur Andersen LLP (See Page 15). 23.3 Report of Independent Public Accountants, Arthur Andersen LLP (see Page 16). 24.1 Power of Attorney. (See Pages 17 and 18). 27.1 Financial Data Schedule for the year ended March 31, 1996.
EX-3.2 2 BYLAWS OF ADAPTEC AS RESTATED FEBRUARY 9,1996 1 EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF ADAPTEC, INC. (as of February 9, 1996) ARTICLE I CORPORATE OFFICES 1.1 PRINCIPAL OFFICE. The board of directors shall fix the location of the principal executive office of the corporation at any place within or outside the State of California. If the principal executive office is located outside such state, and the corporation has one or more business offices in such state, the board of directors shall fix and designate a principal business office in the State of California. 1.2 OTHER OFFICES. The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or any such the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. 2.2 ANNUAL MEETING. The annual meeting of shareholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of shareholders shall be held on the fourth Thursday of August in each year at 9:30 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected, and any other proper business may be transacted. 2.3 SPECIAL MEETING. A special meeting of the shareholders may be called at any time by the board of directors, the chairman of the board, the chief executive officer, the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or 2 by telegraphic or other facsimile transmission to the chairman of the board, the chief executive officer, the president, the chief operating officer, any corporate vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. 2.4 NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (1) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 3 1 0 of the Corporations Code of California (the "Code"), (ii) an amendment of the articles of incorporation, pursuant to Section 902 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of the Code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall also state the general nature of that proposal, provided, however, that such notice need not state the general nature of the proposal if the proposal is approved by the unanimous vote of those entitled to vote. 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of shareholders shall be given either personally, by first-class mail, by third-class mail but only if the corporation has outstanding shares held of record by five hundred (500) or more persons (determined as provided in Section 605 of the Code) or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first-class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that 3 office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all fixture notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period one (1) year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. 2.6 QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote thereat constitutes a quorum for the transaction of business at all meetings of shareholders. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment)is approved by at least a majority of the shares required to constitute a quorum. 2.7 ADJOURNED MEETING, NOTICE. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 2.6 of these bylaws. When any meeting of shareholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place are announced at the meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set for the original meeting, in which case notice of the adjourned meeting shall be given. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. 2.8 VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of Sections 702 to 704, inclusive, of the Code (relating to voting shares held by a fiduciary, in the name of a corporation or in joint ownership). 4 The shareholders' vote may be by voice vote or by ballot; provided, however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun- On any matter other than the election of directors, any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder falls to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares which the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly-held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the shareholders, unless the vote of a greater number, or voting, by classes, is required by the Code or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any candidate a number of votes greater than the number of votes which such shareholder normally is entitled to cast) unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates placed in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. 2.9 VALIDATION OF MEETING: WAIVER OF NOTICE; CONSENT. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice of a consent to the holding of the meeting or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 2.4 of these bylaws, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting Is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of a matter not included in the notice of the meeting, if that objection is expressly made at the meeting. 5 2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors. All such consents shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares, or a personal representative of the shareholder, or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. Such notice shall be given in the manner specified in Section 2.5 of these bylaws. In the case of approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Code, (ii) indemnification of a corporate "agent" pursuant to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of the Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of the Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. 2.11 RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING CONSENTS. For purposes of determining the shareholders entitled to notice of any meeting or to vote thereat or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in such event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the Code. If the board of directors does not so fix a record date: (a) the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; and (b) the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, (1) when 6 no prior action by the board has been taken, shall be the day on which the first written consent is given or (ii) when prior action by the board has been taken, shall be the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. The record date for any other purpose shall be as provided in Article VIII of these bylaws. 2.12 PROXIES. Every person entitled to vote for directors, or on any other matter, shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the shareholder or the shareholder's attorney-in-fact. A validly executed proxy which does not state that it is `irrevocable shall continue in full force and effect unless (1) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by the person executing the prior proxy and presented to the meeting, or as to any meeting by attendance at such meeting and voting in person by the person executing the proxy or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted, provided, however, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Code. 2.13 INSPECTORS OF ELECTION. Before any meeting of shareholders, the board of directors may appoint an inspector or inspectors of election to act at the meeting or its adjournment. If no inspector of election is so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint an inspector or inspectors of election to act at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting pursuant to the request of one (1) or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. Such inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; (b) Receive votes, ballots or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the night to vote; 7 (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close; Determine the result; and Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. 2.14 ADVANCE NOTICE OF SHAREHOLDER NOMINATIONS. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of shareholders by or at the direction of the board of directors or by any shareholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a shareholders notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than twenty (20) days nor more than sixty (60) days prior to the meeting; provided, however, that in the event less than thirty (30) days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth (a) as to each person, if any, whom the shareholder proposes to nominate for election or re-election as a director: (1) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required by law to be disclosed in solicitations of proxies that is required by taw to be disclosed in solicitations of proxies for election of directors, and (v) such person's written consent to being named as a nominee and to serving as a director if elected; and (b) as to the shareholder giving the notice: (i) the name and address, as they appear on the corporation's books, of such shareholder, and (ii) the class and number of shares of the corporation which are beneficially owned by such shareholder, and (iii) a description of all arrangements or understandings between such shareholder and each nominee and any other person or persons (naming such person or persons) relating to the nomination. At the request of the board of directors any person nominated by the board of directors for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, he shall so declare at the meeting and the defective nomination shall be disregarded. 2.15 ADVANCE NOTICE OF SHAREHOLDER BUSINESS. At the annual meeting of the shareholders, only such business shall be conducted as shall have been property brought before 8 the meeting. To be properly brought before an annual meeting, business must be: (a) as specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a shareholder. Business to be brought before the meeting by a shareholder shall not be considered properly brought if the shareholder has not given timely notice thereof in writing to the Secretary of the corporation. To be timely, a shareholder's notice must be delivered to or mailed an received at the principal executive officers of the corporation not less than twenty (20) nor more than sixty (60) days prior to the meeting; provided, however, that in the event that less than thirty (30) days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting: (1) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (11) the name and address of the shareholder proposing such business, (iii) the class and number of shares of the corporation, which are beneficially owned by the shareholder, (iv) any material interest of the shareholder in such business, and (v) any other information that is required by law to be provided by the shareholder in his capacity as proponent of a shareholder proposal. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section, and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. ARTICLE III DIRECTORS 3.1 POWERS. Subject to the provisions of the Code and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors of the corporation shall be not less than five (5) nor more than nine (9). The exact number of directors shall be nine (9) `I changed, within the limits specified above, by a bylaw Unending this Section 3.2, duty adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duty adopted amendment to the articles of incorporation or by an amendment to this bylaw duty adopted by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that an amendment reducing the number or the minimum number of directors to a number less than five (5) cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not consenting in the case of action by written consent, are equal to more than sixteen and two-thirds percent (16-2/3%) of the outstanding 9 shares entitled to vote thereon. No amendment may change the stated maximum number of authorized directors to a number greater than two (2) times the stated minimum number of directors minus one (1). No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 3.3 ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of shareholders to hold office until the next such annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. 3.4 VACANCIES. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the outstanding shares entitled to vote thereon represented at a duly held meeting at which a quorum is present, or by the unanimous written consent of all shares entitled to vote thereon. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director of directors are elected, to elect the number of directors to be elected at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors, but any such election other than to fill a vacancy created by removal, if by written consent, shall require the consent of the holders of a majority of the outstanding shares entitled to vote thereon. Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE. Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings 10 shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. 3.6 REGULAR MEETINGS. Regular meetings of the board of directors may be held without notice if the times of such meetings are fixed by the board of directors. 3.7 SPECIAL MEETINGS. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the chief executive officer, the `dent, the chief operating officer or any two (2) directors. Notice of the date, time and place of special meetings shall be delivered personally, by telephone, facsimile, telegram, electronic mail or other comparable communication equipment to each director or sent by first-class mail charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally, or by telephone, facsimile, telegram, electronic mail or other comparable communication equipment it shall be delivered at least twelve (12) hours before the time of the holding of the meeting. Any notice given personally, or by telephone, facsimile, telegram, electronic mail or other comparable communication equipment may be either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 3.8 QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section 3.10 of these by laws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Code (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of the Code (as to appointment of committees) and Section 317(e) of the Code (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.9 WAIVER OF NOTICE. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, 11 each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof The waiver of notice or consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting, before or at its commencement, the lack of notice to that director. 3.10 ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. 3.11 NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 3.7 of these bylaws, to the directors who were not present at the time of the adjournment. 3.12 ACTION WITHOUT MEETING. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. 3.13 FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 3.13 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise, and receiving compensation for those services. ARTICLE IV COMMITTEES 4.1 COMMITTEES OF DIRECTORS. The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the Code, also requires shareholders' approval or approval of the outstanding shares; 12 (b) the filling of vacancies in the board of directors or in any committee-, (c) the fixing of compensation of the directors for serving on the board or any committee; (d) the amendment or repeal of these bylaws or the adoption of new bylaws-, (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of such committees. 4.2 MEETINGS AND ACTION OF COMMITTEES. Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice), Section 3.10 (adjournment), Section 3.11 (notice of adjournment) and Section 3.12 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee; special meetings of committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee: The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS 5.1 OFFICERS. The officers of the corporation shall be a president, a secretary and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, a chief executive officer, a chief operating officer, a treasurer, one or more corporate vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. In addition to the officers of the corporation described above, there may also be such administrative vice presidents of the corporation as may be designated and appointed from time to 13 time by the chief executive officer of the corporation in accordance with the provisions of Section 5.14 of these bylaws. 5.2 ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or Section 5.5 of these bylaws, shall be chosen by the board, subject to the rights, if any, of an officer under any contract of employment- 5.3 SUBORDINATE OFFICERS. The board of directors may appoint, or may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors at any regular or special meeting of the board or, except in case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. 5.6 CHAIRMAN OF THE BOARD. The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may be from time to time assigned to him by the board of directors or prescribed by these bylaws. In the absence or disability of the chief executive officer and the president, then the chairman of the board shall also have the powers and duties prescribed in Section 5.7 of these bylaws. 5.7 CHIEF EXECUTIVE OFFICER. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the chief executive officer of the corporation shall, subject to the control of the board of directors, have general supervision, direction and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of the president of a corporation shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 14 5.8 PRESIDENT. The president of the corporation shall have such powers and perform such duties as prescribed by the board of directors or these bylaws. In the absence or disability of the chief executive officer or if there be no such officer, then the president shall have the same powers and be subject to the same restrictions set forth in Section 5.7. 5.9 CHIEF OPERATING OFFICER. The chief operating officer shall have such powers and perform such duties as prescribed by the board of directors or these bylaws. In the absence or disability of the chief executive officer, if there be such an officer, the president and the chairman of the board, the chief operating officer shall perform the duties of chief executive officer and president, and when so acting shall have all the powers, and be subject to all the restrictions set forth in Section 5.7. 5.10 CORPORATE VICE PRESIDENTS. In the absence or disability of the chief executive officer, if there be such an officer, the president, the chairman of the board and the chief operating officer, if there be such an officer, the corporate vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a corporate vice president designated by the board of directors, shall perform all the duties of the chief executive officer and president and when so acting she have all the powers of, and be subject to all the restrictions upon, the chief executive officer and president. The corporate vice presidents shall also have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or these bylaws. 5.11 SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office of the corporation, or such other place as the board of directors may direct, a book of minutes of all meetings' and actions of directors, committees of directors, and shareholders, with the time and place of holding, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings thereof The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by these bylaws or by law to be given, and he she keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.12 CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, 15 receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. 5.13 TREASURER. In the absence or disability of the chief financial officer, the treasurer shall perform all the duties of the chief financial officer and when so acting shall have all the powers of, and be subject to all the restrictions upon, the chief financial officer. The treasurer shall have such other powers and perform such other duties as from time to time may be prescribed respectively by the board of directors or these bylaws. 5.14 ADMINISTRATIVE VICE PRESIDENTS. In addition to the corporate vice presidents of the corporation as provided in Section 5. 1 0 of these bylaws and such subordinate officers as may be appointed in accordance with Section 5.3 of these bylaws, there may also be such administrative vice presidents of the corporation as may be designated and appointed from time to time by the chief I executive officer of the corporation. Administrative vice presidents shall perform such duties and have such powers as from time to time may be determined by the chief executive officer or the board of directors in order to assist the officers of the corporation in the furtherance of their duties. In the performance of such duties and the exercise of such powers, however, such administrative vice presidents shall have limited authority to act on behalf of the corporation as the board of directors shall establish, including but not limited to limitations on the dollar amount and on the scope of the agreements or commitments that may be made by such administrative vice presidents on behalf of the corporation, which limitations may not be exceeded by such individuals or altered by the chief executive officer without further approval by the board of directors. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS. The corporation shall, to the maximum extent and in the manner permitted by the Code, indemnify each of its directors and officers against expenses (as defined in Section 317(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, a "director" or "officer" of the corporation `includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer 16 of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 Indemnification of Others. The corporation shall have the power, to the extent and in the manner permitted by the Code, to indemnify each of its employees and agents (other than directors and officers) against expenses (as defined in Section 3 17(a) of the Code), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding (as defined in Section 317(a) of the Code), arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Article VI, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 Payment of Expenses in Advance. Expenses incurred in defending any civil or criminal action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is permitted pursuant to Section 6.2 following authorization thereof by the board of directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article VI. 6.4 Indemnity Not Exclusive. The indemnification provided by this Article VI shall not be deemed exclusive of any other rights to which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that such additional rights to indemnification are authorized in the Articles of Incorporation. 6.5 INSURANCE INDEMNIFICATION. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation against any liability asserted against or incurred by such person in such capacity or arising out of such person's status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article VI. 6.6 Conflicts. No indemnification or advance shall be made under this Article VI, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (1) That it would be `inconsistent with a provision of the Articles of Incorporation, these bylaws, a resolution of the shareholders or an agreement in effect at the time 17 of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limits indemnification; or (2) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. 6.7 RIGHT to BRING Suit. If a claim under this Article is not paid in full by the corporation within 90 days after a written claim has been received by the corporation (either because the claim is denied or because no determination is made), the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall also be entitled to be paid the expenses of prosecuting such claim. The corporation shall be entitled to raise as a defense to any such action that the claimant has not met the standards of conduct that make it permissible under the Code for the corporation to indemnify the claimant for the claim. Neither the failure of the corporation (including its board of directors, independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is permissible in the circumstances because he or she has met the applicable standard of conduct, if any, nor an actual determination by the corporation (including its board of directors, independent legal counsel, or its shareholders) that the claimant has not met the applicable standard of conduct, shall be a defense to such action or create a presumption for the purposes of such action that the claimant has not met the applicable standard of conduct. 6.8 INDEMNITY AGREEMENTS. The board of directors is authorized to enter into a contract with any director, officer, employee or agent of the corporation, or any person who is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, Joint venture, trust or other enterprise, including employee benefit plans, or any person who was a director, officer, employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation, providing for indemnification rights equivalent to or, if the board of directors so determines and to the extent permitted by applicable law, greater than, those provided for in this Article VI. 6.9 Amendment, Reveal or Modification. Any amendment, repeal or modification of any provision of this Article VI shall not adversely affect any night or protection of a director or agent of the corporation existing at the time of such amendment, repeal or modification. ARTICLE VII RECORDS AND REPORTS 7.1 Maintenance and Inspection of Share Register. The corporation shall keep at `its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the 18 names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation or who holds at least one percent (1%) of such voting shares and has filed a Schedule 14B with the Securities and Exchange Commission relating to the election of directors, may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours on five (5) days' prior written demand on the corporation, (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such fist, a fist of the names and addresses of the shareholders who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. Such list shall be made available to any such shareholder by the transfer agent on or before the later of five (5) days after the demand is received or five (5) days after the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall also be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. 7.2 Maintenance and Inspection of Bylaws. The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at Its principal business office in such state, the original or a copy of these bylaws as amended to date, which bylaws shall be subject to `Inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no Principal business office in such state, the secretary shall, upon the written request of any shareholder, furnish to that shareholder a copy of these bylaws as amended to date. 7.3 MAINTENANCE AND Inspection of OTHER CORPORATE RECORDS. The accounting books and records, and the minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors, shall be kept at such place or places designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or 19 by an agent or attorney, and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. 7.4 INSPECTION by DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney, and the right of inspection includes the right to copy and make extracts of documents. 7.5 ANNUAL REPORT TO SHAREHOLDERS; WAIVER. The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty (120) days after the close of the fiscal year adopted by the corporation. Such report shall be sent at least fifteen (15) days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 2.5 of these bylaws for giving notice to shareholders of the corporation. The annual report shall, contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or, if there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. The foregoing requirement of an annual report shall be waived so long as the shares of the corporation are held by less than one hundred (100) holders of record. 7.6 FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period, that has been prepared by the corporation shall be kept on file in the principal executive office of the corporation for twelve (12) months; and each such statement shall be exhibited at all reasonable times to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an Income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and for a balance sheet of the corporation as of the end of that period, the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, such report shall be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. 20 The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any `Independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. ARTICLE VIII GENERAL MATTERS 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case only shareholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the Code. If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. 8.2 CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks drafts or other orders for payment of money notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. 8.3 CORPORATE CONTRACTS AND INSTRUMENTS: HOW Executed. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and such authority may be general or confined to specific `instances-, and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 21 8.4 CERTIFICATES FOR Shares. A certificate or certificates for shares of the corporation shall be issued to each shareholder when any of such shares are FULLY PAID, and the board of directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board or the president or a vice president and by the chief financial officer or an assistant treasurer or the secretary or an ASSISTANT secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent or registrar at the date of issue. 8.5 LOST Certificates. Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The board of directors may, in case any share certificate or certificate for any other security is lost, stolen or destroyed, authorize the issuance of replacement certificates on such terms and conditions as the board may require, including provision for indemnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of the certificate or the issuance of the replacement certificate. 8.6 CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction and definitions in the Code shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 EMPLOYEE LOANS. If the corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the General Corporation Law of California) on the date of approval by the board of directors, the corporation may make secured or unsecured loans of money or property to, or guarantee the obligations of, any employee of the corporation or its parent or subsidiary, whether or not an officer or director, or adopt an employee benefit plan or plans authorizing such loans or guarantees, upon the approval of the board of directors alone, by a vote sufficient without counting the vote of any interested director or directors, if the board of directors determines that such a loan or guarantee or plan may reasonably be expected to benefit the corporation. ARTICLE IX EMERGENCY PROVISIONS 22 9.1 General. The provisions of this Article shall be operative only during a national emergency declared by the President of the United States or the person performing the President's functions, or in the event of a nuclear, atomic, or other attack on the United States or a disaster making it impossible or impracticable for the corporation to conduct its business without recourse to the provisions of this Article. The provisions of this Article in that event shall override all other Bylaws of the corporation in conflict with any provisions of this Article, and shall remain operative so long as it remains impossible or impracticable to continue the business of the corporation otherwise, but thereafter shall be inoperative; provided that all actions taken in good faith pursuant to such provisions shall thereafter remain in full force and effect unless and until revoked by action taken pursuant to the provisions of the bylaws other than those contained in this Article. 9.2 Unavailable DIRECTORS. All directors of the corporation who are not available to perform their duties as directors by reason of physical or mental incapacity or for any other reason or who are unwilling to perform their duties or whose whereabouts are unknown shall automatically cease to be directors, with like effect as if they had resigned as directors, so long as such unavailability continues. 9.3 AUTHORIZED NUMBER OF DIRECTORS. The authorized number of directors shall be the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 9.2 of these bylaws, or the minimum number required by law, whichever number is greater. 9.4 QUORUM. The number of directors necessary to constitute a quorum shall be one-third of the authorized number of directors as specified in Section 9.3 of these bylaws, or such other minimum number as, pursuant to the law or lawful decree then in force, it is possible for the bylaws of a corporation to specify. 9.5 CREATION OF EMERGENCY Committee. If the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 9.2 of these bylaws is less than the minimum number of authorized directors required by law, then until the appointment of additional directors to make up such required minimum, all the powers and authority which the board of directors could by law delegate, including all powers and authority which the board of directors could delegate to a committee, shall be automatically vested in an emergency committee, and the emergency committee shall thereafter manage the affairs of the corporation pursuant to such powers and authority and shall have all such other powers and authority as law or lawful decree may confer on any person or body of persons during a period of emergency. 9.6 Constitution of Emergency Committee. The emergency committee shall consist of all the directors remaining after eliminating those who have ceased to be directors pursuant to Section 9.2 of these bylaws, provided that those remaining directors are not less than three in number. If the remaining directors number less than three, the emergency committee shall consist of three persons, who shall be the remaining director or directors and either one or two officers or employees of the corporation, as the remaining director or directors may in writing designate. If 23 there is no remaining director, the emergency committee shall consist of the three most senior officers of the corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the corporation. Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the board of directors, and in the absence of such designation, shall be determined by rate of remuneration. If there are no remaining directors and no officers or employees of the corporation available, the emergency committee shall consist of three persons designated in writing by the shareholder owning the largest number of shares of record as of the date of the last record date. 9.7 POWERS OF Emergency Committee. The emergency committee, once appointed, shall govern its own procedures and shall have power to increase the number of members thereof beyond the original number, and if a vacancy or vacancies therein arises at any time, the remaining member or members of the emergency committee shall have the power to fill such vacancy or vacancies. If, at any time after its appointment, all members of the emergency committee shall die or resign or become unavailable to act for any reason whatsoever, a new emergency committee shall be appointed in accordance with the foregoing provisions of this Article. 9.8 DIRECTORS BECOMING AVAILABLE. Any person who has ceased to be a director pursuant to the provisions of Section 9.2 of these bylaws and who thereafter becomes available to serve as a director shall automatically become a member of the emergency committee. 9.9 ELECTION OF BOARD OF DIRECTORS. The emergency committee shall, as soon after its appointment as is practicable, take all requisite action to secure the election of a board of directors, and, upon such election, all the powers and authorities of the emergency committee shall cease. 9.10 TERMINATION OF EMERGENCY COMMITTEE. If after the appointment of an emergency committee, a sufficient number of persons who ceased to be directors pursuant to Section 9.2 of these bylaws become available to serve as directors, so that if they had not ceased to be directors as aforesaid, there would be enough directors to constitute the minimum number of directors required by law, then all such persons shall automatically be deemed to be reappointed as directors and the powers and authorities of the emergency committee shall be at an end. ARTICLE X AMENDMENTS 10.1 AMENDMENT by SHAREHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment as required by applicable law. 24 10.2 AMENDMENT by DIRECTORS. Subject to the rights of the shareholders as provided in Section 9.1 of these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the authorized number of directors (except to fix the authorized number of directors pursuant to a bylaw providing for a variable number of directors), may be adopted, amended, or repealed by the board of directors. 25 CERTIFICATE OF ADOPTION OF BYLAWS OF ADAPTEC, INC. Certificate by Secretary The undersigned hereby certifies that he is the duly elected, qualified and acting Secretary of ADAPTEC, INC. and that the foregoing Bylaws, comprising twenty-four (24) pages, were adopted as the Bylaws of said corporation on February 9, 1996 by the person appointed in the Articles of Incorporation to act as the Incorporator of said corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 11th day of March, 1996. /s/ Henry P. Massey, Jr. ------------------------ HENRY P. MASSEY, JR. EX-10.11 3 CONSIGNMENT AGREEMENT DATED JANUARY 10,1996 1 EXHIBIT 10.11 EXECUTION COPY CONSIGNMENT AGREEMENT THIS AGREEMENT is made and entered into effective January 10, 1996 (the "EFFECTIVE DATE") by and between Adaptec, Inc. ("Company"), a California corporation with its principal place of business at 691 South Milpitas Blvd., Milpitas, California 95035 and AT&T Corp. ("AT&T"), a New York corporation, acting through its Microelectronics business unit having an office at Two Oak Way, Berkeley Heights, New Jersey 07922. -WITNESSETH- WHEREAS, AT&T is engaged in the fabrication of various types of integrated circuit products for both internal consumption within AT&T and for sale to certain external customers; and WHEREAS, AT&T's capacity to fabricate such integrated circuits in its existing clean room ("Madrid I Clean Room") is limited; and WHEREAS, AT&T anticipates expanding wafer processing capacity at its Madrid facility by building a second clean room ("Madrid II Clean Room"); and ,, WHEREAS, Company has been an external customer of AT&T by virtue of its purchase of integrated circuit products from AT&T; and WHEREAS, Company desires an assured supply of processed silicon wafers and AT&T anticipates being able to provide such supply of processed silicon wafers to Company with the building of the Madrid II Clean Room; and WHEREAS, Company requires an interim supply of processed silicon wafers before Madrid II Clean Room is complete; and WHEREAS, Company is willing to secure such interim supply by assisting AT&T `in the expansion of Madrid I Clean Room by purchasing and consigning to AT&T certain integrated circuit fabrication equipment specified by AT&T; and WHEREAS, AT&T is willing to provide such interim supply if Company consigns the EQUIPMENT (as defined below) and provided that Company participates through either an investment or consignment mechanism in the building of the Madrid II Clean Room; NOW, THEREFORE, in consideration of the mutual promises made herein and other good and valuable consideration, the receipt of which is hereby acknowledged, the parties agree as follows: 2 ARTICLE I TERM 1.01 This Agreement is for an initial term of five (5) years (the "INITIAL TERM") commencing upon the EFFECTIVE DATE, and may be renewed for successive two (2) year periods upon written mutual agreement of the parties one (1) year prior to the expiration of the INITIAL TERM, or any extension thereof, unless earlier terminated as provided herein. ARTICLE II SCOPE OF THE AGREEMENT 2.01 The purpose of this Agreement is to set forth terms and conditions under which the parties hereto can work together to secure for Company during the INITIAL TERM hereof and any extensions thereof an interim supply of processed silicon wafers. 2.02 Each of the parties agrees and acknowledges that neither this Agreement, nor any provision hereof, shall commit either party to undertake any work or make any commitments other than those necessary to effectuate the purposes set forth in this Agreement. ARTICLE III RESPONSIBILITIES OF THE PARTIES 3.01 AT&T and Company agree that AT&T will engage in the manufacture of integrated circuit products using the fabrication process technology identified in Exhibit A attached hereto and made a part hereof. AT&T and Company have agreed on the quantity of PRODUCT(1) to be finished by AT&T to Company and the price to be paid therefor by Company for such PRODUCT. The quantity of PRODUCT and the manufacturing cycle time is set forth in Exhibit B attached hereto and made a part hereof The price shall be set forth in the Manufacturing Agreement to be entered into between AT&T and Company ("Manufacturing Agreement"). 3.02 On or before the Effective Date of this Agreement, AT&T advised Company in writing of the type of equipment (the "EQUIPMENT") to be purchased, the specifications and estimated price for such EQUIPMENT and recommended manufacturers of such EQUIPMENT. AT&T further advised the Company that such EQUIPMENT should be the manufacturers to AT&T's Microelectronics facility in Madrid (the "FACILITY"). All of the foregoing information is set forth in Exhibit C attached hereto and made apart hereof. AT&T assures Company that the 0.5 (mu)m TLM, 0.5(mu)m linear and 0.35(mu)m TLM wafers (as outlined in Exhibit A) can be manufactured on such EQUIPMENT. Subject to Section 9.12 (ii), Company shall place purchase - ------------------------ (1) Any term in capital letters which is defined in the DEFINITIONS APPENDIX shall have the meaning specified therein. 3 orders for the EQUIPMENT specifying that such EQUIPMENT is to be delivered to the FACILITY pursuant to this Consignment Agreement and that all warranties, installation and maintenance services and any other support services offered by the manufacturers for the EQUIPMENT are to be fully exercisable by AT&T on behalf of Company. AT&T shall provide Company with all the necessary terms and information required to be included `in the purchase orders and any information it has on export related procedures. AT&T further agrees that it shall provide Company with the cost of installing such EQUIPMENT and that installation shall be at cost. 3.03 AT&T and Company agree that AT&T will cooperate with Company in all reasonable ways to minimize the costs to Company of providing such EQUIPMENT to the FACILITY, provided such assistance does not result in any increased costs to AT&T. Further, AT&T agrees that it will use good faith efforts to explore and negotiate for any incentives that may be offered by the government of Spain in connection with the expansion of capacity at the FACILITY. In the event such incentives are available, AT&T will, where feasible and practicable, involve Company in such negotiations and will share on a pro rata basis with Company the benefits of such incentives. 3.04 Upon delivery and receipt of the EQUIPMENT by AT&T at the FACILITY, AT&T shall promptly install or have installed the EQUIPMENT and shall have the right and obligation to commingle the EQUIPMENT with other equipment either owned by AT&T or held by AT&T under consignments from other parties. AT&T shall have the right and obligation to operate the EQUIPMENT as if AT&T were the owner thereof. AT&T shall have the right and duty to maintain and service the EQUIPMENT either directly or by one or more of AT&T's subcontractors or by the EQUIPMENT manufacturers and shall or self insure such EQUIPMENT for the benefit of Company. 3.05 Subject to Section 9.12(i), the amount of production capacity which shall be allocated to Company by AT&T pursuant to this Agreement is set forth in Exhibit B . Any increase or decrease (where permitted in Exhibit B) in output as a result of changes in productivity or process related to the manufacturing processes in Exhibit A, shall be shared on a pro rata basis with Company. 3.06 The period of consignment for the EQUIPMENT shall be for at least the INITIAL TERM of this Agreement. At least one (1) year prior to the expiration of the INITIAL TERM or any successive two (2) year term, Company and AT&T shall determine whether to extend or further extend, as the case may be, the then existing term of this Agreement. In the event the parties determine that no extension or further extensions, as the case may be, are desirable, then Company shall extend to AT&T the right of first refusal to purchase the EQUIPMENT at its fair market value at the termination date or if Company leased the EQUIPMENT the right to become successor in interest to Company's lease. If AT&T does not opt to purchase or lease the EQUIPMENT, AT&T shall cease using such EQUIPMENT and shall no longer have the rights or obligations with respect to such EQUIPMENT as provided in this Agreement. AT&T agrees to hold such EQUIPMENT for Company for a reasonable time until Company makes the necessary arrangements, at Company's expense, for deinstallation and removal. 4 3.07 AT&T will periodically review its technology development plans and make available to Company such information as is necessary for Company to design devices in the new technology(ies) and thereby facilitate Company's ability to undertake introduction and manufacture of integrated circuit devices utilizing the new technology(ies) when such technology(ies) become(s) qualified for production by AT&T in the FACILITY. AT&T agrees to provide to Company on a timely basis such information as is necessary to allow Company to utilize such new technology(ies) once it (they) become(s) qualified for production by AT&T in the FACILITY. In the event the EQUIPMENT is capable of supporting fabrication of integrated circuit devices in the new technology(ies), AT&T and Company will agree on an appropriate and equitable allocation of such increased fabrication capacity to Company. Such agreement shall be reflected in appropriate amendments to Exhibits A and B. 3.08 To the extent that new technologies are introduced into the integrated circuit fabrication process and such technologies render continued use of the EQUIPMENT wholly or partially impracticable, so long as Company is not in default under this Agreement and unless otherwise requested by Company, AT&T shall continue to provide to Company the technology and allocated capacity as set forth in Exhibits A and B. Company shall also have the opportunity to acquire a portion of AT&T's new fabrication capacity by acquiring new equipment needed to implement the new technology and consigning such equipment to AT&T under the terms and conditions of this Agreement. If Company elects to use the new technology pursuant to the previous sentence then AT&T shall no longer provide to Company the technology and allocation capacity as set forth `in Exhibits A and B. Instead AT&T and Company agree to amend Exhibits A and B to reflect an appropriate and equitable allocation to Company of Products based on such changes in technology and investment, provided that, in no event shall Company receive less wafer starts than the equivalent 0.5(mu)m TLM wafer starts per week as set forth in Exhibit B. 3.09 In the event Company does not take its full allocation of production as set forth in Exhibit B for any production period, AT&T shall have the night to use such EQUIPMENT to manufacture its own products. Company will endeavor to inform AT&T on a timely basis if it does not intend to take its full allocation. 3.10 AT&T agrees that Company will be treated as well as any and all of its other customers. ARTICLE IV RELATIONSHIP OF THE PARTIES 4.01 AT&T and Company are and shall remain independent contractors and the employees of one shall not be considered to be employees of the other. This Agreement is not intended by the parties to constitute or create a joint venture, partnership, or other form of business organization or combination of any kind, and the rights and obligations of the parties shall be only those 5 expressly set forth herein. Neither party shall have the authority to bind the other, except to the extent agreed upon herein, or as may be agreed by the parties in writing in the future. 4.02 Each party shall be responsible for its own expenses incurred by it and its employees hereunder, including, but not limited to, travel, lodging, entertainment employees' salaries, wages or other compensation, together with each party's respective federal, state, municipal or other taxes. Neither party shall incur or assume any expense on behalf of the other party without prior written consent from the party to be charged. 4.03 When representatives of the parties hereto visit each other's place of business in connection with this Agreement, the visiting party shall comply with the hosting party's rules and regulations with regard to safety and security. The hosting party shall inform such personnel of such rules and regulations. The visiting party shall have full control over such personnel and shall be entirely responsible for their complying with the hosting party's rules and regulations. Unless otherwise agreed, the visiting party agrees to indemnify and save the hosting party harmless from any claims or demands, including the costs, expenses and reasonable attorneys' fees incurred on account thereof, that may be made by (i) anyone for injuries to persons or damage to property to the extent they result from the willful misconduct or negligence of the visiting party's personnel; or (ii) the visiting party's personnel under Worker's Compensation or similar laws. The visiting party agrees to defend the hosting party, at the hosting party's request, against any such claim or demand. 4.04 AT&T and Company shall, at all times, retain the administrative supervision of their respective personnel and each party agrees that it will not intentionally utilize this Agreement as a means for recruiting employees of the other party. ARTICLE V NON-DISCLOSURE OF INFORMATION 5.01 In pursuance of the areas in which the sharing of information may be mutually advantageous to the parties hereto, each of the parties hereto may wish to disclose to the other certain specifications, designs, plans, drawings, software, market research or operating data, prototypes, or other business, financial and/or technical information related to products, services or systems which are proprietary to the disclosing party or its AFFILIATES ("INFORMATION"). 5.02 Each of the parties, for itself and each of its AFFILIATES, hereby agrees that all INFORMATION, which may be provided under this Agreement shall be in written or other tangible form marked either as "AT&T - PROPRIETARY" or "Company PROPRIETARY", as appropriate, and shall be maintained confidential (as set forth below) by both parties during the term of this Agreement and, unless otherwise agreed to, for five (5) years following the termination of this Agreement ("CONFIDENTIALITY PERIOD"). Each of the parties shall have exclusive ownership, title, and right of possession and right of disclosure with respect to its own 6 INFORMATION. During the CONFIDENTIALITY PERIOD, unless otherwise agreed to in writing, AT&T and Company each agree to hold all such INFORMATION received from the other in confidence, use such INFORMATION only for those purposes jointly agreed upon either in this Agreement or a subsequent agreement reproduce such INFORMATION only to the extent necessary for such purposes, restrict disclosure of such INFORMATION to those of its employees with a need to know (and advise such employees of the obligations assumed herein), and not disclose such INFORMATION to any third party without the prior written approval of the other party. 5.03 Neither party shall be liable for the inadvertent or accidental disclosure of INFORMATION received from the other party under this Agreement, provided such disclosure occurs despite the exercise of a reasonable degree of care which is at least as great as the care such party normally takes to preserve its own proprietary information of a similar nature; and provided further, however, that the party permitting such unauthorized disclosure shall use its best efforts to stop the unauthorized disclosure and to mitigate any damage caused thereby. 5.04 The restrictions on the use or disclosure of INFORMATION shall not apply to any INFORMATION: (i) which is independently developed by the receiving party or any of its affiliated companies or lawfully received free of restriction from another source having the right to so furnish such INFORMATION; or (ii) after it has become generally available to the public without breach of this Agreement by the receiving party or any of its affiliated companies; or (iii) which at the time of disclosure to the receiving party was known to such party or any of its AFFILIATES free of restriction, as evidenced by documentation in such party's possession; or (iv) which the disclosing party agrees in writing is free of such restrictions. 5.05 INFORMATION shall be subject to the restrictions of this Article V, if it is in writing or other tangible form, and only if clearly marked as proprietary, as provided above, when disclosed to the receiving party or, if not in tangible form, only if summarized in a writing so marked and delivered to the receiving party within thirty (30) days of such disclosure, in which case, the information contained in such summary (not information contained solely in the non-tangible disclosure) shall be subject to the restrictions herein. 5.06 Any other information, other than INFORMATION identified as provided above, shall not be subject to the confidentiality provisions of this Agreement. 5.07 No license to a party, under any trademark, patent, copyright, mask work protection right or any other intellectual property right, is either granted or implied by the conveying of INFORMATION to such party. None of the INFORMATION which may be disclosed or 7 exchanged by the parties shall constitute any representation, warranty, assurance, guarantee or inducement by either party to the other of any kind, and, in particular, with respect to the non-infringement of trademarks, patents, copyrights, mask work protection rights or any other intellectual property rights of third persons or of either party. 5.08 Neither this Agreement nor the disclosure or receipt of INFORMATION shall constitute or imply any promise or intention by either party to enter into any type of business arrangement. 5.09 All INFORMATION shall remain the property of the transmitting party and shall be returned upon written request or upon the receiving party's determination that it no longer has a need for such INFORMATION. 5.10 During the term of this Agreement, either party may find it necessary to disclose INFORMATION to its consultants, suppliers or agents ("ASSOCIATES"). The party making the disclosure shall enter into a Non-Disclosure Agreement with the ASSOCIATE. The Non-Disclosure Agreement shall be of the same scope as the terms and conditions set forth in this Article V and a copy of which shall be provided to such other party. ARTICLE VI DISCLAIMER, LIMITATION OF LIABILITY 6.01 Each party represents to the other that INFORMATION furnished in connection with this Agreement shall be true and accurate to the best of its knowledge and belief, but neither party shall be held to any liability for unintentional errors or omissions therein. 6.02 Except as expressly set forth herein, neither party nor its AFFILIATES and SUBSIDIARIES makes any representations or warranties, expressly or implied. By way of example but not of limitation, AT&T, its AFFILIATES and its SUBSIDIARIES make no representations or warranties to any AT&T INFORMATION or the use thereof or that such AT&T INFORMATION will not infringe any patent or other intellectual property right, and as to any products fabricated by AT&T with the EQUIPMENT or any other equipment at the FACILITY. Correspondingly, Company, its AFFILIATES and its SUBSIDIARIES make no representations or warranties as to any Company INFORMATION or the use thereof or that such Company INFORMATION will not infringe any patent or other intellectual property right or as to the EQUIPMENT consigned hereunder. 6.03 NEITHER PARTY SHALL BE LIABLE FOR ANY INCIDENTAL, SPECIAL OR CONSEQUENTIAL LOSS OR DAMAGE, INCLUDING LOST PROFITS OR LOST REVENUE ARISING OUT OF THIS AGREEMENT, WHETHER ARISING OUT OF BREACH OF WARRANTY, BREACH OF CONTRACT, NEGLIGENCE, STRICT TORT LIABILITY OR OTHERWISE. 8 ARTICLE VII EXPORT CONTROL 7.01 Either party acknowledges that any products, software, and technical information (including, but not limited to, services and training) provided pursuant to this Agreement are subject to U.S. export laws and regulations and any use or transfer of such products, software, and technical information must be authorized under those regulations. Each of AT&T and Company agrees that it will not use, distribute, transfer, or transmit the products, software, or technical information (even if incorporated into other products) except in compliance with U.S. export regulations. Each party agrees to sign written assurances and other export related documents as may be required by the other party to comply with U.S. export regulations. The obligations under this Article VII shall survive and continue after any termination of this Agreement. ARTICLE VIII TERMINATION 8.01 If Company fails to fulfill one or more of its material obligations under this Agreement, AT&T may, upon its election and in addition to any other remedies that it may have, at any time terminate this Agreement by not less than sixty (60) days written notice to Company specifying any such breach, unless within the period of such notice all breaches specified therein shall have been remedied. 8.02 If AT&T fails to fulfill one or more of its material obligations under this Agreement, Company may, upon its election and in addition to any other remedies that it may have, at any time terminate this Agreement by not less than sixty (60) days written notice to AT&T specifying any such breach unless within the period of such notice all breaches specified therein shall have been remedied. 8.03 Neither party may terminate this Agreement without cause during the INITIAL TERM. 8.04 Either party may terminate this Agreement effective immediately by written notice if or when it is discovered that the other party has: (i) intentionally or in a willful, wanton or reckless manner, made any material, false representation, report or claim relative hereto; (ii) violated another's copyright or trademark and such violation was material; (iii) become insolvent, invoked as a debtor any laws relating to the relief of debtors' or creditors' rights, or has had such laws invoked against it; (iv) become involved in any liquidation or termination of business; (v) been adjudicated bankrupt; or (vi) been involved in an assignment for the benefit of its creditors. 8.05 Any termination under this Agreement shall not affect the rights, duties, or obligations of the parties under any other agreement existing between the parties at the time of such termination. 9 8.06 Notwithstanding such termination rights, each party reserves all of its legal rights and equitable remedies, including without limitation those under the Uniform Commercial Code as adopted by the State of New York. 8.07 Upon expiration or termination of this Agreement, each party shall upon the request of the other party immediately return all proprietary INFORMATION originated and owned by the other party. ARTICLE LX MISCELLANEOUS 9.01 PUBLIC DISCLOSURE (a) The parties agree that any disclosure of the existence and the terms and conditions of this Agreement and the relationship between the parties shall be made only with the prior agreement of both parties. (b) Each party shall submit to the other all proposed copy of advertising and publicity material relating to the disclosure of this Agreement. 9.02 TRADEMARKS, TRADENAMES, ETC. No right is granted herein to either party to use any identification (such as, but not limited to, trade names, trademarks, trade devices, service marks or symbols, and abbreviations, contractions or simulations thereof) owned by or used to identify the other party or any of its SUBSIDIARIES or AFFILIATES or any of its or their products, services or organizations, and that, with respect to the subject matter of this Agreement; each party agrees that it will not, without the prior written permission of the other party, (i) use any such identification in advertising, publicity, packaging, labeling or in any other manner to identify itself or any of its products, services or organizations or (ii) represent directly or indirectly that any product, service or organization of it is a product service or organization of the other party or any of its SUBSIDIARIES or AFFILIATES, or that any product or service of it is made in accordance with or utilizes any information of the other party or any of its SUBSIDIARIES or AFFILIATES. 9.03 ASSIGNMENT By the provision of notice thereof in accordance with this Agreement, AT&T shall have the right to assign this Agreement and to assign its rights and delegate its duties under this Agreement, either in whole or in part (an "Assignment"), to any entity in connection with any transaction effecting the restructuring of AT&T and its affiliates announced on September 20, 1995. Such entity shall agree in writing to accept the Assignment and to be bound by the terms and conditions of this Agreement. The notice of Assignment shall state the effective date thereof. Following the effective date and to the extent of the Assignment, AT&T shall be released and discharged from all further duties under this Agreement. Except that AT&T may assign all or any part of its rights and obligations to any successor in interest of its entire business or any of its SUBSIDIARIES. 10 Except that AT&T may assign all or any part of its rights and obligations to any successor in interest of its entire business or any of its SUBSIDIARIES no assignment or other transfer of this Agreement or licenses or rights existing or arising under this Agreement, in whole or in part, or of any `interest therein is permitted. 9.04 NOTICE Any notice, demand, order, acknowledgment or other communication which under the terms of this Agreement or otherwise must or may be given or made by either party will be given in writing by personal delivery, by telecopy (facsimile) or by pre-paid mail addressed to the respective parties as follows: If sent to AT&T: AT&T Corp. Allentown Works 555 Union Boulevard Allentown, PA 18103 Attention: Glen Sclunehl Telephone Number: 610-712-7121 Fax Number: 610-712-6223 cc: AT&T Microelectronics Legal Group AT&T Microelectronics Two Oak Way Berkeley Heights, NJ 07922 Fax Number: 908-771-4582 Attn: Maureen Denton If sent to Company: Adaptec, Inc. 691 South Milpitas Blvd. Milpitas, CA 95035 Attention: Dolores Marciel Vice President, Corporate Procurement Telephone Number: 408-957-6763 Fax Number: 408-945-0711 Notice shall be deemed given upon such delivery or when so mailed or telecopied, respectively. 11 9.05 CHOICE OF LAW The validity, construction and performance hereof shall be governed by the substantive law, but not the conflicts of law, of the State of New York. 9.06 HEADINGS All Section and Article headings, including those in the Appendices are for convenience purposes only and shall in no way affect, or be used, in the interpretation of this Agreement. 9.07 INTEGRATION This Agreement, the Manufacturing Agreement and the agreement covering the terms of the testing processes and procedures incorporated in the Manufacturing Agreement by reference, set forth the entire agreement and understanding between the parties as they relate to the Madrid I Clean Room and to the subject matter hereof and merges all prior discussions between them. This Agreement may not be modified or amended except by a writing signed by authorized representatives of both parties. 9.08 WAIVER No failure, delay, relaxation or indulgence on the part of either party in exercising any power or right conferred upon such party under the terms of this Agreement will operate as a waiver of such power or right nor will any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right under this Agreement. 9.09 RELEASES VOID Neither party shall require waivers or releases of any personal rights from representatives of the other in connection with visits to its premises and both parties agree that no such releases or waivers shall be pleaded by them or third persons in any action or proceeding. 9.10 POWER TO SIGN Company and AT&T covenant warrant and represent that their respective representatives signing this Agreement have full power and proper authority to sign this Agreement and so bind the parties. 9.11 SURVIVAL OF OBLIGATIONS The respective obligations of the parties under this Agreement, which by their nature would continue beyond the termination, cancellation or expiration of this Agreement, shall survive termination, cancellation or expiration of this Agreement. 12 9.12 CONTINGENCIES AT&T and Company agree that this Agreement is contingent on the following: (i) Company participating either through an investment or consignment of a minimum of S 150,000,000 in the building of the Madrid 11 Clean Room. In the event Company elects not to participate, Company shall forfeit its night to allocation capacity from Madrid I as described herein as follows: AT&T shall decrease output from the EQUIPMENT over a twelve months period. The decrease shall be from the production level that was being provided to Company to zero. AT&T shall, at Its option, retain the EQUIPMENT for its use for the INITIAL TERM of this Agreement. In the event AT&T retains the EQUIPMENT, AT&T shall compensate the Company pursuant to Exhibit D. If AT&T does not retain the EQUIPMENT, AT&T shall cease using such EQUIPMENT and shall no longer have the rights or obligations with respect to such EQUIPMENT as stated in Section 3.04 above. AT&T agrees to hold such EQUIPMENT for Company for a reasonable time until Company makes the necessary arrangements, at Company's expense, for deinstallation and removal of the EQUIPMENT. (ii) Company and AT&T executing the Manufacturing Agreement in a timely manner, but in no event later than February 29, 1996 or such other time as mutually agreed to by Company and AT&T. In the event that such Manufacturing Agreement is not timely executed, this Agreement shall be deemed terminated as of the latest date set for execution of the Manufacturing Agreement or as mutually agreed to, and all obligations to purchase or lease the EQUIPMENT, consign the EQUIPMENT, allocate capacity and all other obligations of both parties under this Agreement shall be void and without effect, with the exception of obligations under Article V or other obligations, which by their nature or as stated herein, survive termination. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their duly authorized representatives. ADAPTEC, INC. AT&T CORP. By:__________________________ By:_____________________________ Name:_______________________ Name:___________________________ Title:________________________ Title:____________________________ Date:________________________ Date:____________________________ 13 CONSIGNMENT AGREEMENT DEFINITIONS APPENDIX AFFILIATE means a corporation or other legal entity which is the parent company of a party or one or more other parent companies of such parent company or any SUBSIDIARY, except for such party, of any parent companies. ASSOCIATE means a consultant, agent, supplier, or the like, of a party. CONFIDENTIALITY PERIOD means five (5) years following the termination of this Consignment Agreement, unless otherwise specified in another agreement or other writing between the parties. INFORMATION means that information defined in Section 5.01 of this Consignment Agreement PRODUCT means various types of Company integrated circuits, including improvements and modifications to those circuits, to be fabricated by AT&T in the form of wafers. SUBSIDIARY of a company means a corporation or other legal entity (i) the majority of whose shares or other securities entitled to vote for election of directors (or other managing authority) is now or hereafter controlled by such company either directly or indirectly; or (ii) which does not have outstanding shares or securities but the majority of whose ownership interest representing the right to manage such corporation or other legal entity is now or hereafter owned and controlled by such company, either directly or indirectly; but any such corporation or other legal entity shall be deemed to be a SUBSIDIARY of such company only as long as such control or ownership and control exists. 14 EXHIBIT A TECHNOLOGY ROADMAP
- --------------------------------------------------------------------------------------------------------------------- TECHNOLOGY VDD MASKS/RETICLES DRAW N GATE METAL GATE QUAL (VOLTS) ((MU)M) LEVELS OXIDE DATE - --------------------------------------------------------------------------------------------------------------------- 0.5HD5 5.0 17/14 0.6 3 125 6/93 - --------------------------------------------------------------------------------------------------------------------- 0.5HD3 3.3 17/14 0.5 3 90 9/93 - --------------------------------------------------------------------------------------------------------------------- 0.35(mu) 3.3 17/14 0.36 3 65 3/97 - --------------------------------------------------------------------------------------------------------------------- 0.35(mu) 5.0 17/14 0.5 3 115 6/97 - --------------------------------------------------------------------------------------------------------------------- 0.35(mu) 2.5 17/14 0.36 3 50 9/97 - --------------------------------------------------------------------------------------------------------------------- Linear 5.0 +4 9/97 - --------------------------------------------------------------------------------------------------------------------- 0.3(mu) Undefined (Linear Shrink of 0.35(mu)) - ---------------------------------------------------------------------------------------------------------------------
15 EXHIBIT B ADAPTEC ALLOCATION OF 6" WEEKLY WAFER OUTS, AND MANUFACTURING CYCLE TIME B-1 Weekly WAFER OUTS 0-5(mu) TLM -388 wafers per week(19,400 wafers per year minimum) 0.5(mu)m TLM Linear - 31 0 wafers per week 0.35m TLM - 353 wafers per week(estimated) B-2 Weekly WAFER OUT mix is determined by the 0.5(mu)m TLM equivalent as follows: 0.5(mu)m TLM Wafer Equivalent 0.5(mu)m TLM 1.0 0.5(mu)m TLM Linear 25 0.35(mu)m TLM 1 0 (estimated) B.3 EXAMPLE: Adaptec is entitled to any combination of the above technologies which add up to the equivalent of 388 0.5(mu)m TLM wafers out per week Adaptec requests 200 0.5(mu)m TLM wafers out in Week 1, that leaves them with 188 0.5(mu)m TLM equivalent wafers to distribute between the other technologies. If they want them to be all 0.5(mu)m TLM Linear, then they would additionally order 188/1.25 or 150 0.5(mu)m TLM Linear wafers out in Week 1; resulting in a total wafers out volume of 350 (200 0.5(mu)m TLM and 150 0.5(mu)m TLM Linear) wafers ordered for delivery. In Week 2 Adaptec requests another 200 0.5(mu)m TLM wafers out, again with 188 equivalents to distribute in other technologies. They now want the remainder to be half Linear and half 0.35(mu)m TLM. The resulting order would be for 94/1.25 or 75 0.5(mu)m TLM Linear wafers out in Week 2 and 94/1.1 0 or 85 0.35(mu)m TLM wafers out in Week 2. Total is 360 (200 0.5(mu)m TLM and 75 0.5(mu)m TLM Linear and 85 0.35(mu)m TLM) wafers ordered for delivery. B.4 Unprobed Wafer Manufacturing Cycle Time (Calendar Days) 0.5(mu)m TLM - 56 days 0.5(mu)m TLM linear - 69 days 0.35(mu)m TLM - 62 days (estimated) 16 EXHIBIT C ADAPTEC CONSIGNMENT AGREEMENT EQUIPMENT LIST
# ITEMS DESCRIPTION PRICE 1 LAM TCP Etcher 2,200 2 AE-2001 (Na Rework) 720 2 Aura-100 (PR Rework) 600 1 AMI-500 (or etch) 2,400 1 Nikon-1-line body 11 3,100 2 Track Developers (TEC) 1,300 1 M2 Cluster Tool 3,200 1 AMI-5000 PETEOS Dep 1,800 1 Scrubber 600 1 RTP (AST) 650 1 Furnance Bank (BTI) 850 1 FSI 730 1 QSE Alignment tool 680 1 KLA-2132 1,400 1 PR-Microscope 260 1 Optiprobe (Thermawave) 400 1 OC Optics 500 1 Chem________ 200
17 EXHIBIT D CONSIGNED EQUIPMENT USAGE FEE $339 PER 0.5(MU) TLM WAFER EQUIVALENT EX-13.1 4 ANNUAL REPORT TO SHAREHOLDERS ENDED MARCH 31,1996 1 EXHIBIT 13.1 FINANCIAL CONTENTS Results of Operations . . . . . . . . . . . . . . . . . . . . . 30 Management's Discussion and Analysis. . . . . . . . . . . . . . 31 Consolidated Statements of Operations . . . . . . . . . . . . . 36 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 37 Consolidated Statements of Cash Flows . . . . . . . . . . . . . 38 Consolidated Statements of Shareholders' Equity . . . . . . . . 39 Notes to Consolidated Financial Statements. . . . . . . . . . . 40 Report of Management. . . . . . . . . . . . . . . . . . . . . . 50 Report of Independent Accountants . . . . . . . . . . . . . . . 51 Selected Financial Data . . . . . . . . . . . . . . . . . . . . 52 Corporate Information . . . . . . . . . . . . . . . . . . . . . 53 Adaptec in the Community. . . . . . . . . . . . . . . . . . . . 54
29 2 RESULTS OF OPERATIONS The following table sets forth the items in the consolidated statements of operations as a percentage of net revenues:
Year Ended March 31 1996 1995 1994 ---- ---- ---- Net revenues . . . . . . . . . . . . . . . . . 100% 100% 100% Cost of revenues. . . . . . . . . . . . . . . . 42 44 51 ---- ---- ---- Gross margin. . . . . . . . . . . . . . . . . 58 56 49 ---- ---- ---- Operating expenses Research and development. . . . . . . . . . . 13 13 11 Sales and marketing . . . . . . . . . . . . . 13 13 12 General and administrative. . . . . . . . . . 5 5 5 Write-off of acquired in-process technology . 8 -- -- ---- ---- ---- 39 31 28 ---- ---- ---- Income from operations. . . . . . . . . . . . 19 25 21 Shareholder settlement. . . . . . . . . . . . . -- -- (1) Interest income, net. . . . . . . . . . . . . . 2 2 1 ---- ---- ---- Income before income taxes. . . . . . . . . . 21 27 21 Provision for income taxes. . . . . . . . . . . 5 7 5 ---- ---- ---- Net income. . . . . . . . . . . . . . . . . . 16% 20% 16% ==== ==== ====
30 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FISCAL 1996 COMPARED TO FISCAL 1995 The Company experienced growth worldwide as net revenues increased 41% to $659 million in fiscal 1996 from $466 million in fiscal 1995. The Company's continued increase in net revenues was driven by growth of client-server networking environments, complex microcomputer based applications requiring high-performance I/O, and the expanded adoption of various peripheral devices. This growth combined with the Company's market leadership in SCSI solutions resulted in increased net revenues from the Company's host adapters. During the year, the Company also began shipping products incorporating newer technologies such as RAID, ATM and CD-Recordable (CD-R) software. Fiscal 1996 net revenue from sales of mass storage integrated circuits (ICs) also increased from the prior year as the Company benefitted from next-generation design wins for higher capacity disk drives that are required for advanced applications. Gross margin of 58% in fiscal 1996 increased from 56% in fiscal 1995. Gross margin was favorably affected by the increased revenues from the Company's higher margin products. The Company's focus on design for manufacturability allowed it to continue to experience efficiencies in the manufacturing process and accelerate time to customer volume. Research and development expenditures in fiscal 1996 were $88 million, an increase of 44% over fiscal 1995. As a percentage of net revenues, research and development expenses were 13% for both fiscal 1996 and fiscal 1995. The Company's research and development efforts continue to be focused on solutions which enhance performance in single-user desktop, enterprise-wide computing, and networked environments. This commitment included investing in its current core SCSI business as well as several emerging technologies encompassing RAID, CD-R, ATM, and serial architectures such as 1394 and Fibre Channel. The Company believes these expenditures, consisting primarily of increased staffing levels, have allowed the Company to maintain its position in technical leadership and product innovation. The Company believes it is essential to continue this significant level of investment in research and development and anticipates actual spending in fiscal 1997 will increase. Sales and marketing expenses increased to $82 million in fiscal 1996, an increase of 39% over fiscal 1995. As a percentage of net revenues, fiscal 1996 sales and marketing expenses were 13% in both fiscal 1996 and fiscal 1995. The increase in actual spending was a result of advertising and promotional programs aimed at generating demand in the consumer and enterprise computer markets and increased staffing levels to support the continued growth of the Company. The Company's promotional and advertising programs have allowed it to leverage its brand image around the globe. The Company believes that sales and marketing expenditures will increase in fiscal 1997 primarily to support its existing products as well as products resulting from newer technologies. General and administrative expenses as a percentage of net revenues were consistent at 31 4 5% for both fiscal 1996 and fiscal 1995. Actual spending increased from fiscal 1995, primarily due to increased staffing to support the continued growth of the Company. The Company anticipates general and administrative expenditures will increase in fiscal 1997 to support its growth. During the year, the Company acquired Trillium Research, Inc. (Trillium), Future Domain Corporation (Future Domain), Incat Systems Software, USA, Inc. (Incat), and Power I/O, Inc. (Power I/O). These acquisitions were accounted for using the purchase method of accounting. Among the assets acquired was in-process technology, resulting in write-offs totaling $52 million. Excluding these write-offs, the Company's results of operations for fiscal 1996 were not materially affected by these acquisitions. Interest income, net of interest expense, was $12 million in fiscal 1996, an increase of $5 million over fiscal 1995. The increase was primarily due to the increase in cash and cash equivalents and marketable securities partially offset by lower interest expense. The Company's effective tax rate for fiscal 1996 was 25%, the same as fiscal 1995. During fiscal 1996, the Company concluded negotiations with the Singapore government extending the tax holiday for the Company's manufacturing subsidiary. The terms of the tax holiday provide that profits derived from certain products will be exempt from tax for a period of 10 years, subject to certain conditions. In addition, profits derived from the Company's remaining products will be taxed at a rate of 15%, which is lower than the statutory rate of 27%, through fiscal 1998. While the Company has experienced significant growth in revenues and profitability, various factors could adversely affect its results of operations in the future including its reliance on the high-performance microcomputer and server markets, changes in product mix, competitive pricing pressures, fluctuations in manufacturing yields, changes in technological standards, availability of components, changes in product costs, timing of new product introductions and market demand for these products, capacity for wafer fabrication, the accounting effect of acquisitions of other companies or businesses that the Company may make from time to time, or general economic downturns. FISCAL 1995 COMPARED TO FISCAL 1994 Net revenues increased 25% to $466 million in fiscal 1995 from $372 million in fiscal 1994. The continued adoption of SCSI in personal computers (PCs) resulted in increased sales of the Company's SCSI host adapter products across all performance ranges. Additionally, demand for the Company's host adapters was driven by the growing use of file servers where SCSI usage approaches 100%. During fiscal 1995, the Company introduced several new IOware(R) solutions ranging from connectivity products for the single-user and small-office markets, to high-performance products for enterprise-wide computing and networked environments. The market acceptance of the Company's high-performance host adapters for the PCI local bus market resulted in the fastest product ramp in the Company's history. The Company's fiscal 1995 revenue from mass storage ICs was comparable to the prior 32 5 year. The Company believes this was due to the timing of design win cycles at original equipment manufacturers (OEMs) coupled with significant fluctuations in demand experienced in the disk drive market. During fiscal 1995 the Company won key designs for next-generation products at major OEMs in the Pacific Rim. Gross margin of 56% in fiscal 1995 increased from 49% in fiscal 1994. Gross margin was favorably affected by the increased revenues from the Company's higher margin SCSI host adapters. The Company also continued to experience component cost reductions and manufacturing efficiencies, including the move of the IC production test facility to Singapore where costs are lower. This also allowed the Company to shorten the manufacturing cycle time and better serve its customers. Research and development expenditures in fiscal 1995 were $61 million, an increase of 52% over fiscal 1994. As a percentage of net revenues, research and development expenses increased to 13% in fiscal 1995 compared to 11% in fiscal 1994. This was primarily due to increased staffing levels. The Company continued to invest in its SCSI products, where it has captured a leadership position by improving system performance as the computer industry has become more I/O intensive with more powerful CPUs, multitasking operating systems, and a new generation of intelligent peripherals. While SCSI solutions remained the core of the Company's business, fiscal 1995 saw the Company broaden its portfolio of solutions to include ATM, RAID, serial I/O and infrared technology. Sales and marketing expenses increased to $59 million in fiscal 1995, an increase of 27% over fiscal 1994. As a percentage of net revenues, fiscal 1995 sales and marketing expenses were 13% compared to 12% in fiscal 1994. The increase in actual spending was a result of increased staffing levels to support the continued growth of the Company, including expansion of the Company's international sales and marketing infrastructure. Additionally, increases in advertising and promotional expenses were aimed at strategies to further accelerate and expand SCSI acceptance in the marketplace and drive demand for the Company's products. General and administrative expenses as a percentage of net revenues in fiscal 1995 were consistent with fiscal 1994 at 5%. Actual spending increased from fiscal 1994, primarily due to increased staffing to support the continued growth of the Company. Interest income, net of interest expense, was $7 million in fiscal 1995, an increase of $3 million over fiscal 1994. The increase was primarily due to the increase in cash and cash equivalents and marketable securities coupled with slightly higher average yields on cash and investment balances. The Company's effective tax rate for fiscal 1995 was 25%, the same as fiscal 1994. LIQUIDITY AND CAPITAL RESOURCES Operating Activities Net cash generated from operating activities during fiscal 1996 was $103 million compared to $118 million in fiscal 1995. This aggregate decrease was a result of the 33 6 increase in the Company's current assets to support its overall growth. During fiscal 1996, the majority of funds generated from operations resulted from $103 million of net income adjusted by non-cash items including a non-recurring write-off of acquired in-process technology (net of taxes) of $40 million and depreciation and amortization of $18 million. Additionally contributing to favorable operating cash flows was an increase in accrued liabilities of $22 million reflecting the overall growth of the Company. Offsetting these were increases in current assets, excluding cash and investments, of $60 million. This increase in assets primarily resulted from the Company's continued overall growth. During fiscal 1996, the Company signed an agreement with Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) that will ensure availability of a portion of the Company's wafer capacity for both current and future technologies. The agreement, which runs through 2001, provides the Company with a guarantee of increased capacity for wafer fabrication in return for advance payments of $20 million during fiscal 1996 relating to this agreement. This agreement is in addition to an existing contract with TSMC for guaranteed supply and technology. During fiscal 1995, the majority of funds generated from operations resulted from $93 million of net income adjusted by non-cash items including depreciation and amortization of $16 million. Also contributing to favorable cash flows was a decrease in net inventories of $7 million and increases in accrued liabilities and accounts payable of $7 million. During fiscal 1995, the Company paid an additional advance payment on a deposit and supply agreement to support its silicon wafer requirements. During fiscal 1994, the Company's net cash generated from operating activities primarily resulted from $59 million of net income adjusted by non-cash items including depreciation and amortization of $11 million. An increase in accrued liabilities of $9 million also contributed to positive cash flows. These items were mainly offset by increases in accounts receivable and other assets totaling $24 million. Investing Activities. The Company made payments of $31 million in connection with the acquisitions of Trillium, Future Domain, and Power I/O during the year. Additionally, the Company acquired Incat through the issuance of 385,000 shares of common stock with a fair market value of $17 million. Also in fiscal 1996, the Company continued to invest in equipment for product development and manufacturing to support increased demand for its products and future business requirements. Additionally, to provide for future growth the Company purchased land for $12 million. During fiscal years 1996, 1995, and 1994, the Company continued to invest significant amounts of funds in marketable securities consisting mostly of highly rated municipal instruments. During the 1997 fiscal year, the Company anticipates it will invest approximately $75 million in equipment for future product innovation and 34 7 development as well as land and facilities to support its growth. Also, during fiscal 1996, the Company signed an agreement with AT&T Corporation (AT&T), acting through its Microelectronics business division, that will ensure availability of a portion of the Company's wafer capacity for both current and future technologies. This contract, which runs through 2001, provides the Company with a guaranteed supply of wafers in return for an investment in fabrication equipment of up to $25 million for AT&T's fabrication facility located in Madrid, Spain. The sources for capital expenditures are expected to be funds generated from operations and available sources of financing as well as working capital presently on hand. Subsequent to year end, the Company acquired certain assets and the ongoing business of Western Digital's Connectivity Solutions Group (CSG) which primarily designs, manufactures and markets controller ICs for high-capacity disk drives. In connection with the acquisition, the Company was assigned capacity for wafer fabrication. The Company paid $33 million cash for CSG and will pay future consideration based on certain performance criteria. The Company will account for this acquisition using the purchase method of accounting and will evaluate the allocation of the purchase price to assets acquired, which includes in-process technology that will be written off. The results of operations for CSG were immaterial relative to the Company's financial statements. Financing Activities. During fiscal 1996, the Company continued to receive proceeds from the issuance of common stock under its Employee Stock Option and Employee Stock Purchase Plans totaling $27 million. Also, the Company repurchased 260,000 shares of its common stock through open market transactions totaling $8 million. In fiscal 1995, two million shares totaling $37 million were repurchased. In connection with the TSMC agreement, the Company also issued a $46 million note payable due in June 1996. Subsequent to year end, the Company acquired all of the outstanding capital stock of Cogent Data Technologies, Inc. (Cogent) in a $68 million stock transaction. Cogent provides high-performance Fast Ethernet products for the networking market. The Company will record this acquisition using the pooling method of accounting and will record acquired assets and assumed liabilities at their book values as of the acquisition date. The results of operations for Cogent for the three year period ended March 31, 1996 were immaterial relative to the Company's financial statements. The Company has an unsecured $17 million revolving line of credit under which there were no outstanding borrowings as of March 31, 1996. The Company's liquidity is affected by various factors, some based on its continuing operations of the business and others related to the industry and global economies. Although the Company's cash situation will fluctuate based on the timing of these factors, the Company believes that existing working capital combined with expected cash generated from operations and available sources of bank and equipment financing will be sufficient to meet its cash requirements throughout fiscal 1997. 35 8 CONSOLIDATED STATEMENTS OF OPERATIONS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
Year Ended March 31 1996 1995 1994 -------- -------- -------- Net revenues . . . . . . . . . . . . . . . . . . $659,347 $466,194 $372,245 Cost of revenues . . . . . . . . . . . . . . . . 275,939 205,596 189,526 -------- -------- -------- Gross profit . . . . . . . . . . . . . . . . . 383,408 260,598 182,719 -------- -------- -------- Operating expenses Research and development. . . . . . . . . . . . 87,628 60,848 39,993 Sales and marketing . . . . . . . . . . . . . . 81,548 58,737 46,192 General and administrative . . . . . . . . . . 35,784 23,229 19,399 Write-off of acquired in-process technology . . 52,313 -- -- -------- -------- -------- 275,273 142,814 105,584 -------- -------- -------- Income from operations . . . . . . . . . . . . 126,135 117,784 77,135 -------- -------- -------- Shareholder settlement . . . . . . . . . . . . . -- -- (2,409) Interest income . . . . . . . . . . . . . . . . . 12,694 7,932 5,183 Interest expense . . . . . . . . . . . . . . . . (840) (1,179) (1,306) -------- -------- -------- 11,854 6,753 1,468 -------- -------- -------- Income before income taxes . . . . . . . . . . 137,989 124,537 78,603 Provision for income taxes . . . . . . . . . . . 34,614 31,135 19,653 -------- -------- -------- Net income . . . . . . . . . . . . . . . . . . $103,375 $ 93,402 $ 58,950 -------- -------- -------- Net income per share . . . . . . . . . . . . . . $ 1.89 $ 1.75 $ 1.10 -------- -------- -------- Weighted average number of common and common equivalent shares outstanding . . . . . 54,569 53,357 53,602 -------- -------- --------
See accompanying notes. 36 9 CONSOLIDATED BALANCE SHEETS IN THOUSANDS
As of March 31 1996 1995 -------- -------- Assets Current assets Cash and cash equivalents. . . . . . . . . . . . . . . . . . $ 91,211 $ 66,835 Marketable securities. . . . . . . . . . . . . . . . . . . . 204,283 179,911 Accounts receivable, net of allowance for doubtful accounts of $4,220 in 1996 and $4,431 in 1995. . . . . . . 89,487 56,495 Inventories. . . . . . . . . . . . . . . . . . . . . . . . . 55,028 31,712 Prepaid expenses and other . . . . . . . . . . . . . . . . . 25,271 15,519 -------- -------- Total current assets . . . . . . . . . . . . . . . . . . 465,280 350,472 Property and equipment, net. . . . . . . . . . . . . . . . . . 92,778 67,863 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . 88,428 17,373 -------- -------- $646,486 $435,708 ======== ======== Liabilities and Shareholders' Equity Current liabilities Current portion of long-term debt. . . . . . . . . . . . . . $ 3,400 $ 3,400 Note payable . . . . . . . . . . . . . . . . . . . . . . . . 46,200 -- Accounts payable . . . . . . . . . . . . . . . . . . . . . . 23,974 22,008 Accrued liabilities. . . . . . . . . . . . . . . . . . . . . 56,717 31,006 -------- -------- Total current liabilities. . . . . . . . . . . . . . . . 130,291 56,414 -------- -------- Long-term debt, net of current portion . . . . . . . . . . . . 4,250 7,650 -------- -------- Commitments (Note 7) Shareholders' equity Preferred stock Authorized shares, 1,000 Outstanding shares, none . . . . . . . . . . . . . . . . . -- -- Common stock Authorized shares, 200,000 Outstanding shares, 53,020 in 1996 and 51,677 in 1995. . . 182,932 140,191 Retained earnings. . . . . . . . . . . . . . . . . . . . . . 329,013 231,453 -------- -------- Total shareholders' equity . . . . . . . . . . . . . . . 511,945 371,644 -------- -------- $646,486 $435,708 ======== ========
See accompanying notes. 37 10 CONSOLIDATED STATEMENTS OF CASH FLOWS IN THOUSANDS
Year Ended March 31 1996 1995 1994 -------- -------- -------- Cash Flows From Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . $103,375 $ 93,402 $ 58,950 Adjustments to reconcile net income to net cash provided by operating activities: Write-off of acquired in-process technology, net of taxes . . . . . . . . . . . . . . . . . . . . . . 39,686 -- -- Depreciation and amortization . . . . . . . . . . . . . . 17,593 15,662 11,489 Provision for doubtful accounts . . . . . . . . . . . . . 250 150 2,069 Changes in assets and liabilities: Accounts receivable . . . . . . . . . . . . . . . . . . (30,727) (1,311) (13,020) Inventories . . . . . . . . . . . . . . . . . . . . . . (20,516) 7,228 (5,563) Prepaid expenses . . . . . . . . . . . . . . . . . . . . (8,973) 460 (5,470) Other assets . . . . . . . . . . . . . . . . . . . . . . (19,111) (4,107) (11,478) Accounts payable . . . . . . . . . . . . . . . . . . . . (167) 2,354 (2,781) Accrued liabilities . . . . . . . . . . . . . . . . . . 21,969 4,251 8,867 -------- -------- -------- Net Cash Provided by Operating Activities . . . . . . . . . 103,379 118,089 43,063 -------- -------- -------- Cash Flows From Investing Activities: Purchase of Trillium, Future Domain and Power I/O, net of cash acquired . . . . . . . . . . . . . (31,177) -- -- Investments in property and equipment . . . . . . . . . . . (39,748) (31,576) (17,314) Investments in marketable securities, net . . . . . . . . . (24,372) (32,291) (20,250) -------- -------- -------- Net Cash Used for Investing Activities . . . . . . . . . . . (95,297) (63,867) (37,564) -------- -------- -------- Cash Flows From Financing Activities: Proceeds from issuance of common stock . . . . . . . . . . . 27,459 17,174 13,511 Repurchase of common stock . . . . . . . . . . . . . . . . . (7,765) (36,548) -- Principal payments on debt . . . . . . . . . . . . . . . . . (3,400) (3,400) (2,968) -------- -------- -------- Net Cash Provided by (Used for) Financing Activities . . . . 16,294 (22,774) 10,543 -------- -------- -------- Net Increase in Cash and Cash Equivalents . . . . . . . . . 24,376 31,448 16,042 Cash and Cash Equivalents at Beginning of Year . . . . . . 66,835 35,387 19,345 -------- -------- -------- Cash and Cash Equivalents at End of Year . . . . . . . . . $ 91,211 $ 66,835 $ 35,387 ======== ======== ========
See accompanying notes. 38 11 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY IN THOUSANDS
Common Stock ----------------- Retained Shares Amount Earnings Total ------ -------- -------- -------- Balance, March 31, 1993 . . . . . . . . . . 50,714 $124,806 $100,349 $225,155 Sale of common stock under employee purchase and option plans . . . . . . . . 1,577 7,728 -- 7,728 Income tax benefit of employees' stock transactions . . . . . . . . . . . . . . -- 5,783 -- 5,783 Net income . . . . . . . . . . . . . . . . -- -- 58,950 58,950 ------ -------- -------- -------- Balance, March 31, 1994 . . . . . . . . . . 52,291 138,317 152,299 297,616 Sale of common stock under employee purchase and option plans . . . . . . . . 1,426 11,245 -- 11,245 Income tax benefit of employees' stock transactions . . . . . . . . . . . . . . -- 5,929 -- 5,929 Repurchases of common stock . . . . . . . . (2,040) (15,300) (21,248) (36,548) Net income . . . . . . . . . . . . . . . . -- -- 93,402 93,402 ------ -------- -------- -------- Balance, March 31, 1995 . . . . . . . . . . 51,677 140,191 231,453 371,644 Sale of common stock under employee purchase and option plans . . . . . . . . 1,218 16,512 -- 16,512 Issuance of common stock in connection with acquisition . . . . . . . . . . . . 385 17,232 -- 17,232 Income tax benefit of employees' stock transactions . . . . . . . . . . . . . . -- 10,947 -- 10,947 Repurchases of common stock . . . . . . . . (260) (1,950) (5,815) (7,765) Net income . . . . . . . . . . . . . . . . -- -- 103,375 103,375 ------ -------- -------- -------- Balance, March 31, 1996 . . . . . . . . . . 53,020 $182,932 $329,013 $511,945 ------ -------- -------- --------
See accompanying notes. 39 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE ONE: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries after elimination of intercompany transactions and balances. Foreign currency transaction gains and losses are included in income as they occur. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition. The Company recognizes revenue generally at the time of shipment or upon satisfaction of contractual obligations. The Company records provisions for estimated returns at the time of sale. Fair Value of Financial Instruments. The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. For certain of the Company's financial instruments, including cash and cash equivalents, marketable securities, accounts receivable, accounts payable and accrued expenses, the carrying amounts approximate fair value due to their short maturities. The amounts shown for long-term debt also approximate fair value because current interest rates offered to the Company for debt of similar maturities are substantially the same. Marketable Securities. At March 31, 1996, the Company's marketable securities are classified as available for sale and are reported at fair market value which approximates cost. Marketable securities with maturities after one through three years totaled $153,996,000 with all remaining securities maturing less than one year. Realized gains and losses are based on the book value of the specific securities sold and were immaterial during fiscal 1996, 1995 and 1994. Concentration of Credit Risk. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and trade accounts receivable. The Company places its marketable securities primarily in municipal securities. The Company, by policy, limits the amount of credit exposure through diversification and investment in highly rated securities. Sales to customers are primarily denominated in U.S. dollars. As a result, the Company believes its foreign currency risk is minimal. The Company sells its products to original equipment manufacturers and distributors throughout the world. The Company performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. The Company maintains an allowance for uncollectible accounts receivable based upon the expected collectibility of all accounts receivable. There were no significant amounts charged to this allowance during the current year. 40 13 Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market. Property and Equipment. Property and equipment are stated at cost and depreciated or amortized using the straight-line method over the estimated useful lives of the assets. 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 will be effective for the Company in fiscal 1997. The Company does not expect that adoption of SFAS 121 to have a material impact on its financial position or results of operations. Income Taxes. The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. Net Income Per Share. Net income per share is computed under the treasury stock method using the weighted average number of common and common equivalent shares from dilutive options outstanding during the respective periods. Cash and Cash Equivalents. Cash and cash equivalents consist of funds in checking accounts, money market funds and marketable securities with original maturities of three months or less. NOTE TWO: SUPPLEMENTAL FINANCIAL INFORMATION Marketable Securities
IN THOUSANDS 1996 1995 -------- -------- Municipal securities . . . $203,305 $169,972 U.S. Government securities and other . . 978 9,939 -------- -------- $204,283 $179,911 ======== ========
Inventories
IN THOUSANDS 1996 1995 ------- ------- Raw materials . . . . . . . . . . . . . . $23,415 $12,230 Work-in-process . . . . . . . . . . . . . 12,865 5,839 Finished goods . . . . . . . . . . . . . 18,748 13,643 ------- ------- $55,028 $31,712 ======= =======
Property and Equipment
IN THOUSANDS Life 1996 1995 ------------- -------- -------- Land -- $ 25,154 $ 13,240 Buildings and improvements 5 - 40 years 20,328 18,088 Machinery and equipment 3 - 5 years 59,290 42,810 Furniture and fixtures 3 - 8 years 22,944 17,005 Leasehold improvements Life of lease 5,245 3,968 -------- -------- 132,961 95,111 Accumulated depreciation and amortization (40,183) (27,248) -------- -------- $ 92,778 $ 67,863 -------- --------
41 14 Accrued Liabilities
IN THOUSANDS 1996 1995 ------- ------- Accrued compensation and related taxes $22,440 $15,740 Sales and marketing related 7,443 4,877 Tax related 16,218 5,746 Other 10,616 4,643 ------- ------- $56,717 $31,006 ======= =======
Supplemental Disclosures of Cash Flows
IN THOUSANDS 1996 1995 1994 ------- ------- ------- Interest paid $ 764 $ 1,125 $ 1,300 Income taxes paid $32,869 $29,411 $14,927
NOTE THREE: LINE OF CREDIT The Company has available an unsecured $17 million revolving line of credit which expires on December 31, 1997. Of the total line of credit available, $7 million has been issued as an irrevocable standby letter of credit to guarantee component purchases from a supplier (see Note 7) at a fee of 3/4% per annum. As of March 31, 1996, no borrowings were outstanding under this line of credit. The Company may select its own method of interest payment on borrowings based upon the bank's CD rate plus one percent, Eurodollar rate plus one percent or prime lending rate. A commitment fee of 1/4% per annum is payable on the unused line of credit. In addition, the arrangement requires the Company to comply with certain financial covenants. The Company was in compliance with all such covenants as of March 31, 1996. NOTE FOUR: LONG-TERM DEBT The Company entered into a $17 million term loan agreement in June 1992 bearing interest at 7.65%, with principal and interest payable in quarterly installments of $850,000. All outstanding principal and accrued but unpaid interest is due and payable in June 1998. The arrangement requires the Company to comply with certain financial covenants. The Company was in compliance with all such covenants as of March 31, 1996. NOTE FIVE: ACQUISITIONS During fiscal 1996, the Company acquired all of the outstanding capital stock of Future Domain, Power I/O, Trillium, and Incat for $25 million, $7 million, $3 million, and 385,000 shares of the Company's common stock with a fair market value of $17 million, respectively. Also in connection with the Incat acquisition, the Company will pay consideration, contingent upon certain future performance criteria. These companies design and develop high-performance I/O products, networking technologies and software for recordable CD peripherals for both the consumer and enterprise computing markets. The Company accounted for these acquisitions using the purchase method of accounting, and excluding the aggregate $52 million write-off of purchased in-process technology from these companies, the aggregate impact on the Company's results of operations from the acquisition date was not material. The allocation of the Company's aggregate purchase price to the tangible and identifiable 42 15 intangible assets acquired and liabilities assumed was based on independent appraisals and is summarized as follows:
IN THOUSANDS Tangible assets $ 8,108 In-process technology 52,313 Goodwill 8,200 ------- Assets acquired 68,621 ------- Accounts payable and accrued liabilities 3,125 Deferred tax liability 12,627 ------- Liabilities assumed 15,752 ------- Net assets acquired $52,869 =======
Subsequent to year end, the Company acquired certain assets and the ongoing business of Western Digital's Connectivity Solutions Group (CSG), which primarily designs, manufactures and markets controller ICs for high-capacity disk drives. In connection with the acquisition, the Company was assigned capacity for wafer fabrication. The Company paid $33 million cash for CSG and will pay future consideration based on certain performance criteria. The Company will account for this acquisition using the purchase method of accounting and will evaluate the allocation of the purchase price to assets acquired, which includes in-process technology that will be written off. The results of operations for CSG were immaterial relative to the Company's financial statements. Also subsequent to year end, the Company acquired all of the outstanding capital stock of Cogent Data Technologies, Inc. (Cogent) in a $68 million stock transaction. Cogent provides high-performance Fast Ethernet products for the networking market. The Company will record this acquisition using the pooling method of accounting and will record acquired assets and assumed liabilities at their book values as of the acquisition date. The results of operations for Cogent for the three year period ended March 31, 1996 were immaterial relative to the Company's financial statements. NOTE SIX: STOCK PLANS 1986 Employee Stock Purchase Plan. The Company has authorized 2,800,000 shares of common stock for issuance under the 1986 Employee Stock Purchase Plan (1986 Plan). Qualified employees may elect to have a certain percentage (not to exceed 10%) of their salary withheld pursuant to the 1986 Plan. The salary withheld is then used to purchase shares of the Company's common stock at a price equal to 85% of the market value of the stock at the beginning or ending of a three-month offering period, whichever is lower. Under this Plan, 139,275 shares were issued during fiscal 1996, representing approximately $4,578,000 in employee contributions. 1990 Stock Plan. The Company's 1990 Stock Plan allows the Board of Directors to grant to employees, officers and consultants options to purchase common stock or other stock rights at exercise prices not less than 50% of the fair market value on the date of grant. The expiration of options or other stock rights is not to exceed ten years after the date of grant. To date, the Company has issued substantially all incentive and non-statutory stock options under this Plan at exercise 43 16 prices of 100% of fair market value on the respective dates of grant. Generally, options vest and become exercisable over a four year period. Option activity under the 1990 Stock Plan is as follows:
Options Outstanding Options -------------------------------- Available Shares Price ---------- ---------- ---------------- Balance, March 31, 1993 2,280,412 3,751,052 $ 2.47 to $13.88 Authorized 2,000,000 -- -- Granted (1,837,500) 1,837,500 $11.31 to $21.38 Exercised -- (859,513) $ 2.47 to $15.44 Terminated 330,662 (330,662) $ 2.85 to $16.50 ---------- ---------- ---------------- Balance, March 31, 1994 2,773,574 4,398,377 $ 2.47 to $21.38 Authorized 2,500,000 -- -- Granted (1,914,500) 1,914,500 $15.63 to $35.88 Exercised -- (930,574) $ 2.47 to $21.38 Terminated 599,053 (599,053) $ 2.84 to $27.63 ---------- ---------- ---------------- Balance, March 31, 1995 3,958,127 4,783,250 $ 2.47 to $35.88 Authorized 2,193,900 -- -- Granted (2,294,750) 2,294,750 $22.88 to $56.00 Exercised -- (1,017,131) $ 2.47 to $44.75 Terminated 241,038 (241,038) $ 3.06 to $45.75 ---------- ---------- ---------------- Balance, March 31, 1996 4,098,315 5,819,831 $ 2.47 to $56.00 ========== ========== ================
At March 31, 1996, there were 1,956,767 exercisable options under this Plan at prices ranging from $2.47 to $45.88 per share. 1990 Directors' Option Plan. The 1990 Directors' Option Plan provides for the automatic grant to non-employee directors of non-statutory stock options to purchase common stock at the fair market value on the date of grant, which is generally the last day of each fiscal year except for the first grant to any newly elected director. Each current director receives an option at the end of each fiscal year for 10,000 shares, which vests and becomes exercisable over a four year period. Each newly elected director receives an initial option on the date of his or her appointment or election for 40,000 shares, which also vests and becomes exercisable over a four year period. The options expire five years after the date of grant. Option activity under the 1990 Directors' Option Plan is as follows:
Options Outstanding Options -------------------------------- Available Shares Price ---------- ---------- ---------------- Balance, March 31, 1993 40,000 157,500 $ 2.91 to $13.88 Authorized 500,000 -- -- Granted (50,000) 50,000 $18.38 Exercised -- (5,000) $ 2.91 ---------- ---------- ---------------- Balance, March 31, 1994 490,000 202,500 $ 2.91 to $18.38 Granted (50,000) 50,000 $33.00 Exercised -- (21,250) $ 2.91 to $13.88 ---------- ---------- ---------------- Balance, March 31, 1995 440,000 231,250 $ 2.91 to $33.00 Granted (150,000) 150,000 $44.50 to $48.25 Exercised -- (55,000) $ 2.91 to $18.38 ---------- ---------- ---------------- Balance, March 31, 1996 290,000 326,250 $ 7.69 to $48.25 ========== ========== ================
44 17 At March 31, 1996 there were 93,750 exercisable options under this Plan at prices ranging from $7.69 to $33.00 per share. Rights Plan. The Company has reserved 120,000,000 shares of common stock for issuance under the Rights Plan which was amended and restated as of June 30, 1992. Under this plan, shareholders will receive one Common Share Purchase Right ("Right") for each outstanding share of the Company's common stock. Each Right will entitle shareholders to buy one share of common stock at an exercise price of $50.00 per share. The Rights will trade automatically with shares of the Company's common stock. The Rights are not exercisable until ten days after a person or group announces acquisition of 20% or more of the Company's outstanding common stock or the commencement of a tender offer which would result in ownership by a person or group of 20% or more of the then outstanding common stock. The Company is entitled to redeem the Rights at $.005 per Right anytime on or before the tenth day following such an acquisition or tender offer. This redemption period may be extended by the Company in some cases. If, prior to such redemption, the Company is acquired in a merger or other business combination, a party acquires 20% or more of the Company's common stock, a 20% shareholder engages in certain self-dealing transactions, or the Company sells 50% or more of its assets, each right will entitle the holder to purchase from the surviving corporation, for $50.00 per share, common stock having a then current market value of $100.00 per share. At March 31, 1996, the Company has reserved the following shares of authorized but unissued common stock: 1986 Employee Stock Purchase Plan 869,187 1990 Stock Plan 9,918,146 1990 Directors' Option Plan 616,250 Rights Plan 120,000,000 ----------- 131,403,583 ===========
NOTE SEVEN: COMMITMENTS The Company leases certain office facilities, vehicles and certain equipment under operating lease agreements that expire at various dates through fiscal 2001. As of March 31, 1996, the minimum future payments on existing leases totaled $7,290,000. Rent expense was approximately $3,715,000, $2,377,000 and $1,640,000 during fiscal 1996, 1995 and 1994, respectively. During fiscal 1996, the Company signed an agreement with TSMC totaling $66 million that ensures availability of a portion of the Company's wafer capacity for both current and future technologies. The agreement runs through 2001 providing the Company with a guarantee of increased capacity for wafer fabrication in return for advance payments. As of March 31, 1996, the Company made advance payments to TSMC totaling $20 million and has signed a $46 million promissory note payable which becomes due June 30, 1996. The majority of these amounts are included in other assets in the fiscal 1996 consolidated balance sheets. 45 18 In addition to this agreement, the Company has an existing deposit and supply agreement with TSMC to secure supply of silicon wafers. Under the deposit and supply agreement, the Company has made deposits aggregating $14,650,000 which are classified as other assets in the accompanying consolidated balance sheets. These advances are repayable at the expiration of the agreement in June 1997. The supplier has provided an irrevocable standby letter of credit to the Company in an equal amount to guarantee the repayment of deposits made by the Company. Under the agreement, the Company is committed to minimum purchases of $19,800,000 and $4,950,000 in fiscal 1997 and 1998, respectively. During fiscal 1996, the Company signed an agreement with AT&T, acting through it Microelectronics business division, that will ensure availability of a portion of the Company's wafer capacity for both current and future technologies. This contract, which runs through 2001, provides the Company with a guaranteed supply of wafers at a specified level in return for an investment in fabrication equipment of up to $25 million for AT&T's fabrication facility located in Madrid, Spain. As of March 31, 1996 the Company has not made any payments in connection with this agreement. NOTE EIGHT: INCOME TAXES The components of income before income taxes for the years ended March 31 are as follows:
IN THOUSANDS 1996 1995 1994 -------- -------- ------- Domestic $ 57,882 $ 74,397 $54,972 Foreign 80,107 50,140 23,631 -------- -------- ------- Income before income taxes $137,989 $124,537 $78,603 ======== ======== =======
The split of domestic and foreign income was impacted mainly by the acquisition related write-offs of in-process technology, which reduced domestic income by $52,313,000. The components of the provision for income taxes for the years ended March 31 are as follows:
IN THOUSANDS 1996 1995 1994 ------- ------- ------- Federal Current $22,066 $26,455 $13,899 Deferred (4,263) (311) 2,658 ------- ------- ------- 17,803 26,144 16,557 ------- ------- ------- Foreign Current $15,074 $ 1,106 $ 317 Deferred (1,491) -- -- ------- ------- ------- 13,583 1,106 317 ------- ------- ------- State Current $ 3,611 $ 3,177 $ 3,474 Deferred (383) 708 (695) ------- ------- ------- 3,228 3,885 2,779 ------- ------- ------- Provision for income taxes $34,614 $31,135 $19,653 ======= ======= =======
Significant components of the Company's deferred tax assets, included in prepaid expenses 46 19 in the accompanying consolidated balance sheets as of March 31 are as follows:
IN THOUSANDS 1996 1995 ------- ------- Inventory reserves $ 3,426 $ 1,048 State taxes 1,323 990 Bad debt reserve 1,901 1,829 Compensatory accruals 5,091 4,355 Various expense accruals 5,581 3,725 Other, net 764 2 ------- ------- Net deferred tax assets $18,086 $11,949 ======= =======
The provision for income taxes differs from the amount computed by applying the federal statutory tax rate to income before income taxes for the years ended March 31 as follows:
1996 1995 1994 ------- ------- ------- Federal statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 2.7 2.2 2.9 Foreign subsidiary income at other than the U.S. tax rate (11.8) (9.9) (10.5) Tax-exempt interest income net (2.1) (1.7) (1.6) Other 1.3 (.6) (.8) ------- ------- ------- Effective income tax rate 25.1% 25.0% 25.0% ======= ======= =======
The Company's effective tax rate for fiscal 1996 was 25%, the same as fiscal 1995 and 1994. During fiscal 1996, the Company concluded negotiations with the Singapore government extending the tax holiday for the Company's manufacturing subsidiary. The terms of the tax holiday provide that profits derived from certain products will be exempt from tax for a period of 10 years, subject to certain conditions. In addition, profits derived from the Company's remaining products will be taxed at a rate of 15%, which is lower than the statutory rate of 27%, through fiscal 1998. As of March 31, 1996, the Company had not accrued income taxes on $186,100,000 of accumulated undistributed earnings of its Singapore subsidiary, as these earnings will be reinvested indefinitely. NOTE NINE: SEGMENT INFORMATION Adaptec operates in the microcomputer input/output industry and is a leading supplier of high-performance intelligent subsystems and associated software and very large-scale integrated circuits used to control the flow of data between a microcomputer's CPU and its peripherals. The Company focuses its worldwide marketing efforts on major OEM customers through its direct sales force located in the United States, Europe and Far East and also sells through distributors and sales representatives in each of these geographic areas. Income from operations consists of net revenues less cost of revenues and operating expenses incurred in supporting the revenues of each geographic area. The Company's write-offs of acquired in-process technology are included in the corporate income from operations. All of the Company's identifiable assets are used to support the operations in each geographic area. Corporate assets include cash and cash equivalents, marketable securities, deferred tax assets and certain other assets. Intercompany sales are made at arms-length prices, and revenues for the European subsidiaries consist mainly of commissions earned in connection with obtaining foreign orders. 47 20 NOTE NINE: SEGMENT INFORMATION CONTINUED
Singapore, Adjustments United Far East, and Consolidated IN THOUSANDS States Other Europe Corporate Eliminations Total -------- --------- ------ --------- ------------ ------------ Fiscal 1996 Revenues Sales to customers $609,060 $ 49,211 $1,076 $ -- -- $659,347 Intercompany sales between geographical areas 7,205 399,036 6,175 -- (412,416) -- -------- -------- ------ -------- --------- -------- Net revenues $616,265 $448,247 $7,251 $ -- $(412,416) $659,347 ======== ======== ====== ======== ========= ======== Income from operations 100,838 76,942 668 (52,313) -- 126,135 Identifiable assets 201,128 259,179 2,644 322,910 (139,375) 646,486 Fiscal 1995 Revenues Sales to customers $464,707 $ 1,487 $ -- $ -- -- $466,194 Intercompany sales between geographical areas 10,401 191,360 3,905 -- (205,666) -- -------- -------- ------ -------- --------- -------- Net revenues $475,108 $192,847 $3,905 $ -- $(205,666) $466,194 ======== ======== ====== ======== ========= ======== Income from operations 68,594 48,847 343 -- -- 117,784 Identifiable assets 122,097 123,044 1,070 262,383 (72,886) 435,708 Fiscal 1994 Revenues Sales to customers $371,863 $ 382 $ -- $ -- -- $372,245 Intercompany sales between geographical areas 10,344 119,305 2,375 -- (132,024) -- -------- -------- ------ -------- --------- -------- Net revenues $382,207 $119,687 $2,375 $ -- $(132,024) $372,245 ======== ======== ====== ======== ========= ======== Income from operations 53,945 23,074 116 -- -- 77,135 Identifiable assets 153,340 74,512 347 207,591 (77,315) 358,475
Export Revenues. The following table represents export revenues by geographic region as a percentage of total revenues:
1996 1995 1994 ---- ---- ---- Singapore, Far East, Other 32% 37% 38% Europe 24 25 20 ---- ---- ---- 56% 62% 58% ==== ==== ====
Major Customers. In fiscal 1996, sales to one distributor represented 10% of net revenues. In fiscal 1995 and 1994, no customer accounted for more than 10% of net revenues. 48 21 NOTE TEN: LEGAL MATTERS A class action lawsuit alleging federal securities law violations and negligent misrepresentation was filed against the Company, its directors, and certain of its officers on February 21, 1991. That action was settled by letter agreement on July 29, 1993. The Company has made all payments required under the terms of the letter agreement. Final settlement of the class action lawsuit was made on May 15, 1995 pursuant to the Court's final judgment and order of dismissal. NOTE ELEVEN: COMPARATIVE QUARTERLY FINANCIAL DATA UNAUDITED Summarized quarterly financial data is as follows:
IN THOUSANDS, QUARTERS EXCEPT PER SHARE AMOUNTS FIRST SECOND THIRD FOURTH YEAR -------- -------- -------- -------- -------- Fiscal 1996 Net revenues $138,025 $149,110 $176,187 $196,025 $659,347 Gross profit 81,359 86,451 101,986 113,612 383,408 Net income* 31,163 557 30,587 41,068 103,375 Net income per share* $ .58 $ .01 $ .56 $ .75 $ 1.89 Weighted average shares outstanding 53,942 54,461 54,792 55,061 54,569
*The second and third quarters of fiscal 1996 include write-offs of acquired in-process technology, net of taxes, totaling $33 million and $7 million, respectively. Fiscal 1995 Net revenues $106,061 $106,574 $123,367 $130,192 $466,194 Gross profit 54,888 57,413 71,563 76,734 260,598 Net income 17,592 18,458 27,403 29,949 93,402 Net income per share $ .33 $ .35 $ .52 $ .56 $ 1.75 Weighted average shares outstanding 53,944 53,182 52,958 53,802 53,357
49 22 REPORT OF MANAGEMENT Management is responsible for the preparation and integrity of the consolidated financial statements and other financial information presented in the annual report. The accompanying financial statements were prepared in conformity with generally accepted accounting principles and as such include some amounts based on management's best judgments and estimates. Financial information in the annual report is consistent with that in the financial statements. Management is responsible for maintaining a system of internal business controls and procedures to provide reasonable assurance that assets are safeguarded and that transactions are authorized, recorded and reported properly. The internal control system is continuously monitored by management review, written policies and guidelines, and careful selection and training of qualified people who are provided with and expected to adhere to the Company's standards of business conduct. Management believes the Company's internal controls provide reasonable assurance that assets are safeguarded against material loss from unauthorized use or disposition and the financial records are reliable for preparing financial statements and other data and maintaining accountability for assets. The Audit Committee of the Board of Directors meets periodically with the independent accountants and management to discuss internal business controls, auditing and financial reporting matters. The Committee also reviews with the independent accountants the scope and results of the audit effort. The independent accountants, Price Waterhouse LLP, are engaged to examine the consolidated financial statements of the Company and conduct such tests and related procedures as they deem necessary in accordance with generally accepted auditing standards. The opinion of the independent accountants, based upon their audit of the consolidated financial statements, is contained in this annual report. [SIG] F. Grant Saviers President and Chief Executive Officer [SIG] Paul G. Hansen Vice President, Finance and Chief Financial Officer [SIG] Christopher G. O'Meara Vice President and Treasurer [SIG] Andrew J. Brown Corporate Controller and Principal Accounting Officer 50 23 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Adaptec, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of shareholders' equity present fairly, in all material respects, the financial position of Adaptec, Inc. and its subsidiaries at March 31, 1996 and 1995, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The financial statements of Adaptec, Inc. as of and for the year ended March 31, 1994 were audited by other independent accountants whose report dated April 25, 1994 expressed an unqualified opinion on those statements. PRICE WATERHOUSE LLP San Jose, California April 22, 1996 51 24 SELECTED FINANCIAL DATA IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Statement of Operations Data Year Ended March 31 Net revenues . . . . . . . . . . . . . . . . $659,347 $466,194 $372,245 $311,339 $150,315 Cost of revenues . . . . . . . . . . . . . . 275,939 205,596 189,526 174,179 84,549 -------- -------- -------- -------- -------- Gross profit . . . . . . . . . . . . . . . 383,408 260,598 182,719 137,160 65,766 -------- -------- -------- -------- -------- Operating expenses Research and development . . . . . . . . . 87,628 60,848 39,993 26,324 17,514 Sales and marketing . . . . . . . . . . . 81,548 58,737 46,192 32,525 21,338 General and administrative . . . . . . . . 35,784 23,229 19,399 15,568 10,517 Write-off of acquired in-process technology . . . . . . . . . . . . . . . 52,313 -- -- -- -- -------- -------- -------- -------- -------- 257,273 142,814 105,584 74,417 49,369 -------- -------- -------- -------- -------- Net income . . . . . . . . . . . . . . . . . . $103,375 $ 93,402 $ 58,950 $ 49,390 $ 14,614 -------- -------- -------- -------- -------- Net Income Per Share Net income per share . . . . . . . . . . . . $ 1.89 $ 1.75 $ 1.10 $ .96 $ .35 Weighted average shares outstanding 54,569 53,357 53,602 51,652 41,664 -------- -------- -------- -------- -------- Balance Sheet Data as of March 31 Working capital . . . . . . . . . . . . . . $334,989 $294,058 $243,451 $191,693 $105,671 Total assets . . . . . . . . . . . . . . . . 646,486 435,708 358,475 282,896 138,614 Long-term debt, net of current portion . . . 4,250 7,650 11,050 14,450 423 Shareholders' equity . . . . . . . . . . . . 511,945 371,644 297,616 225,155 117,742
Common Stock Prices and Dividends. The Company's common stock is traded in the over-the-counter market under the NASDAQ symbol ADPT. The following table sets forth the range of the high and low prices by quarter as reported by the NASDAQ National Market System.
1996 1995 High Low High Low ---- --- ---- --- First quarter . . . . . $39-7/8 $29-1/4 $19-1/2 $14 Second quarter . . . . 47-1/4 34-1/2 21-1/4 16-1/4 Third quarter . . . . . 48-3/8 35-5/8 24-3/4 17-1/4 Fourth quarter . . . . 56-3/8 35-1/8 37 21-3/4
In March 1992 and January 1994, the Company's Board of Directors approved a two-for-one-split of its common stock. The above net income per share information has been adjusted to reflect the stock splits. At March 31, 1996, there were 724 holders of record of the Company's common stock. The Company has not paid cash dividends on its common stock and does not currently plan to pay cash dividends to its shareholders in the near future. 52 25 CORPORATE INFORMATION BOARD OF DIRECTORS Daniel W. Bowman HEADQUARTERS COMMON STOCK Vice President, The Company's stock is traded John G. Adler Administration 691 S. Milpitas Blvd. on the National Market System Chairman of the Board Milpitas, CA 95035 under the NASDAQ symbol Andrew J. Brown (408) 945-8600 ADPT. Laurence B. Boucher Corporate Controller and Chairman of the Board, Principal Accounting Officer SUBSIDIARIES ANNUAL MEETING OF Auspex Systems, Inc. SHAREHOLDERS Michael G. Fisher Adaptec Mfg. (S) Pte. Ltd. Carl J. Conti Vice President and Block 1003 The annual meeting will be held Independent Management General Manager Bukit Merah Central #07-09 Thursday, August 22, 1996 at Consultant Singapore 159836 9:30 a.m. PDT at Adaptec's John D. Hamm (011-65) 278-7300 Milpitas site, located at John C. East Vice President and 500 Yosemite Drive, Milpitas President and Chief General Manager Adaptec GmbH California. Executive Officer, Munchner Strasse 19 Actel Corp. Paul G. Hansen 85540 Haar FORM 10-K Vice President, Finance and Germany Robert J. Loarie Chief Financial Officer (011-49) 89-456-4060 A copy of the Company's General Partner, (Assistant Secretary) Form 10-K, as filed with the Morgan Stanley Venture Adaptec Europe SA Securities and Exchange Partners, L.P. Sam Kazarian Dreve Richelle 161 Commission, is available on Vice President, Operations Building A, 2nd Floor request without charge by B.J. Moore B-1410 Waterloo calling (800) 934-2766 or by Independent Management Christopher G. O'Meara Belgium accessing Adaptec's World Consultant Vice President and Treasurer (011-32) 2-352-3411 Wide Web Home Page at http://www.adaptec.com W. Ferrell Sanders S. Sundaresh Adaptec Japan Ltd. General Partner, Vice President and Kioicho Hills, 4F QUARTERLY SHAREHOLDER Asset Management Co. General Manager 3-32 Kioicho INFORMATION Chiyoda-ku, Tokyo 102 F. Grant Saviers Henry P. Massey, Jr. Japan Quarterly financial press releases President and Chief Secretary (011-81) 35-276-9882 and Form 10-Qs are available Executive Officer on request without charge by VICE PRESIDENTS INDEPENDENT calling (800) 934-2766 or by Phillip E. White ACCOUNTANTS accessing Adaptec's World Chairman of the Board, Paulette Altmaier Wide Web Home Page at President and Chief Robert J. Beckwith Price Waterhouse LLP http://www.adaptec.com Executive Officer, Richard J. Clayton San Jose, California Informix Software, Inc. Alva Dee Cravens FINANCIAL LITERATURE Richard S. Gourley LEGAL COUNSEL HOT LINE EXECUTIVE OFFICERS Drew Hoffman Gary Law Wilson, Sonsini, (800) 934-2766 John G. Adler Kok Yong Lim Goodrich & Rosati Chairman of the Board John P. Livingston Palo Alto, California WORLD WIDE WEB Dolores Marciel HOME PAGE F. Grant Saviers Clayton L. Marr TRANSER AGENT President and Chief Francis Massera AND REGISTRAR http://www.adaptec.com Executive Officer Alicia J. Moore Joseph F. Pleso ChaseMellon Copyright 1996 Adaptec, Inc. All rights Robert N. Stephens James R. Scmidt Shareholder Services reserved. Adaptec, the Adaptec logo, Chief Operating Officer William J. Smithson San Francisco, California I0ware, CI/O and EZ-SCSI are (800) 356-2017 trademarks of Adaptec, Inc. which may be registerd in some jurisdictions. Firewire is a trademark of Apple Computer, Inc. used under license. All other trademarks used are owned by their respective owners.
53 26 ADAPTEC IN THE COMMUNITY PROVIDING OPPORTUNITIES Wally and Molly are the information users of tomorrow. But they are the children of today, and often children need our help. Adaptec believes in the importance of giving back to the communities where Wally and Molly are growing and learning. In fiscal 1996 we helped the groups and agencies below in their efforts to make our world more livable for children. Through our commitment to children, Adaptec in fiscal 1997 is making a special $150,000 donation to support literacy and reading programs to help children get a head start on their futures. The Children's Health Council Make-A-Wish Foundation United Way The Tech Museum of Innovation Leavey School of Business, Santa Clara University Reading Research Center, Mission San Jose Elementary School Junior Achievement Second Harvest Food Bank Ronald McDonald House Leukemia Society of America Adaptec Scholarship Indian Peaks Elementary School Milpitas High School San Jose State University Bellarmine College Preparatory Girl Scouts of Santa Clara County Los Altos Educational Foundation Keys School 54 27 [LOGO] AADAPTEC ADAPTEC, INCORPORATED 691 SOUTH MILPITAS BOULEVARD MILPITAS, CALIFORNIA 95035 847000-011 28 ADAPTECH 1996 ANNUAL REPORT EX-27.1 5 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000 YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 1 91,211 204,283 93,707 4,220 55,028 465,280 132,961 40,183 646,486 130,291 4,250 182,932 0 0 329,013 646,486 659,347 659,347 275,939 275,939 257,273 0 840 137,989 34,614 103,375 0 0 0 103,375 1.89 1.89
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