-----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, DZSu2SBESc8NrnySgQdbM71SMEMtHkZ+O0BBcxIs/nKvwABmrNpyO2kVz05VLsCS g1ePKgwb4oRes0kNR0tgAQ== 0000891618-96-001004.txt : 19960626 0000891618-96-001004.hdr.sgml : 19960626 ACCESSION NUMBER: 0000891618-96-001004 CONFORMED SUBMISSION TYPE: PRE 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960822 FILED AS OF DATE: 19960625 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: PRE 14A SEC ACT: 1934 Act SEC FILE NUMBER: 000-15071 FILM NUMBER: 96585428 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 PRE 14A 1 PRELIMINARY PROXY STATEMENT 1 ADAPTEC, INC. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD AUGUST 22, 1996 To The Shareholders: NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Adaptec, Inc. (the "Company"), a California corporation, will he held on August 22, 1996 at 9:30 a.m., local time, at the Company's office located at 500 Yosemite Drive, Milpitas, California 95035, for the following purposes: 1. To elect the following directors to serve for the ensuing year and until their successors are elected: John G. Adler; Laurence B. Boucher; Carl J. Conti; John East; Robert J. Loarie; B.J. Moore; W. Ferrell Sanders; F. Grant Saviers; and Phillip E. White. 2. To approve an amendment to the Company's Amended and Restated Bylaws to establish the range for the authorized number of directors to be seven (7) to twelve (12) with the precise number to be fixed by the Board of Directors. 3. To approve amendments to the Company's 1990 Directors' Option Plan to (i) increase the shares reserved for issuance thereunder by 400,000 to a total of 1,100,000 (ii) increase the term of options granted thereunder from five to ten years, and (iii) amend the vesting provisions of subsequent annual option grants so that such grants will vest quarterly over a one-year period. 4. To ratify and approve the appointment of Price Waterhouse LLP as the independent public accountants of the Company for the fiscal year ending March 31, 1997. 5. To transact such other business as may properly come before the Annual Meeting and any adjournment or postponement thereof. The foregoing items of business are more fully described in the Proxy Statement accompanying this Notice. Only shareholders of record at the close of business on June 24, 1996 are entitled to notice of and to vote at the Annual Meeting. All shareholders are cordially invited to attend the Annual Meeting in person. However, to assure your representation at the Annual Meeting, you are urged to mark, sign and return the enclosed proxy card as promptly as possible in the postage-prepaid envelope enclosed for that purpose. Any shareholder attending the Annual Meeting may vote in person even if he or she returned a proxy. By Order of the Board of Directors HENRY P. MASSEY, JR. Secretary Milpitas, California July 12, 1996 YOUR VOTE IS IMPORTANT TO ASSURE YOUR REPRESENTATION AT THE ANNUAL MEETING, YOU ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. 2 ADAPTEC, INC. PROXY STATEMENT GENERAL The enclosed Proxy is solicited on behalf of the Board of Directors of Adaptec, Inc. (the "Company") for use at the Annual Meeting of Shareholders to be held August 22, 1996 at 9:30 a.m., local time, or at any adjournment or postponement thereof, for the purposes set forth in this Proxy Statement and in the accompanying Notice of Annual Meeting of Shareholders. The Annual Meeting will be held at the Company's office located at 500 Yosemite Drive, Milpitas, California 95035. The Company's telephone number at that location is (408) 945-8600. These proxy solicitation materials were mailed on or about July 12, 1996 to all shareholders entitled to vote at the Annual Meeting. REVOCABILITY OF PROXIES Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before its use by delivering to the Company, Attention: Christopher G. O'Meara, Inspector of Elections, a written notice of revocation or a duly executed proxy bearing a later date or by attending the Annual Meeting and voting in person. The mere presence at the Annual Meeting of the shareholder who has appointed a proxy will not revoke the prior appointment. If not revoked, the proxy will be voted at the Annual Meeting in accordance with the instructions indicated on the proxy card, or if no instructions are indicated, will be voted FOR the slate of directors described herein, for Proposals Two, Three and Four, and as to any other matter that may be properly brought before the Annual meeting, in accordance with the judgment of the proxy holders. VOTING AND SOLICITATION Every shareholder voting for the election of directors may cumulate such shareholder's votes and either give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of shares held by such shareholder or distribute the shareholder's votes on the same principle among as many candidates as the shareholder thinks fit, provided that votes cannot be cast for more than nine candidates. However, no shareholder shall be entitled to cumulate votes unless the candidate's name has been placed in nomination before the voting and the shareholder, or any other shareholder, has given notice at the Annual Meeting, prior to the voting, of the intention to cumulate the shareholder's votes. If anyone shareholder gives such notice, all shareholders may cumulate their votes. On all other matters, each share has one vote. The nine nominees receiving the highest number of affirmative votes of the shares present or represented and entitled to vote shall be elected as directors. On each other matter, the affirmative vote of a majority of the votes cast is required under California law for approval. For this purpose, the "votes cast" are defined under California law to be the shares of the Company's Common Stock represented and voting in person or by proxy at the Annual Meeting. In addition, the affirmative votes must constitute at least a majority of the required quorum, which quorum is a majority of the shares outstanding on the record date for the meeting. Votes that are cast against a proposal will be counted for purposes of determining (i) the presence or absence of a quorum and (ii) the total number of votes cast with respect to the proposal. While there is no definitive statutory or case law authority in California as to the proper treatment of abstentions in the counting of votes with respect to a proposal, the Company believes that abstentions should be counted for purposes of determining both (i) the presence or absence of a quorum for the transaction of business and (ii) the total number of votes cast with respect to the proposal. In the absence of controlling precedent to the contrary, the Company intends to treat abstentions in this manner. Accordingly, abstentions will have the same effect as a vote against the proposal. Broker non-votes will be counted for purposes of determining the presence or absence of a quorum for the transaction of business, but will not be counted for purposes of determining the number of votes cast with respect to a proposal. An automated system administered by the Company's transfer agent tabulates the votes. Each proposal is tabulated separately. 3 All costs associated with soliciting proxies will be borne by the Company. The Company has retained the services of Skinner & Co. to aid in the solicitation of proxies from brokers, bank nominees and other institutional owners. The Company estimates that it will pay Skinner & Co. a fee not to exceed $3,500 for its services and will reimburse them for certain out-of-pocket expenses that are usual and proper. In addition, the Company will reimburse brokerage firms and other persons representing beneficial owners of shares for their expenses in forwarding solicitation material to such beneficial owners. Proxies may be solicited by certain of the Company's directors, officers and regular employees, without additional compensation, personally or by telephone, facsimile or telegram. Only shareholders of record at the close of business on June 24, 1996 are entitled to notice of and to vote at the Annual Meeting. As of June 24, 1996, 53,368,673 shares of the Company's Common Stock were issued and outstanding. PROPOSAL ONE ELECTION OF DIRECTORS NOMINEES The Bylaws of the Company presently provide that there shall be nine directors. A board of nine directors is to be elected at the Annual Meeting. Unless otherwise instructed, the proxy holders will vote the proxies received by them for the Company's nine nominees named below, all of whom are presently directors of the Company. If any nominee of the Company is unable or declines to serve as a director at the time of the Annual Meeting, the proxies will be voted for any nominee designated by the present Board of Directors to fill the vacancy. Management has no reason to believe that any of the nominees will be unable or unwilling to serve if elected. If additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them so that the election of as many of the nominees listed below as possible is assured under cumulative voting. In this event, the specific nominees to be voted for will be determined by the proxy holders. The term of office of each person elected as a director will continue until the next Annual Meeting of Shareholders or until his successor has been elected and qualified. All nominees are presently directors of the Company. Messrs. Adler, Boucher, Loarie, Moore, Sanders, Saviers and White were last elected at the Annual Meeting of Shareholders held on August 24, 1995. Messrs. Conti and East became directors by action of the Board of Directors on October 19, 1995 and December 7, 1995, respectively. The names of the nominees, their ages as of the date of this proxy statement and certain information about them are set forth below:
DIRECTOR NAME OF NOMINEE AGE PRINCIPAL OCCUPATION SINCE -------------------------- --- ------------------------------------------------------ -------- John G. Adler............. 59 Chairman of the Board of Directors 1986 Laurence B. Boucher....... 53 Member of the Board of Directors of Auspex Systems, 1981 Inc., a company engaged in developing and marketing computer network file servers Carl J. Conti............. 58 Independent management consultant 1995 John East................. 51 President, Chief Executive Officer and director, Actel 1995 Corporation, a company engaged in manufacturing field programmable gate arrays Robert J. Loarie.......... 53 General partner of Morgan Stanley Venture Partners, 1981 L.P., a venture capital firm B.J. Moore................ 60 Independent management consultant 1984 W. Ferrell Sanders........ 59 General partner of Asset Management Co., a venture 1982 capital and investment management firm F. Grant Saviers.......... 51 President and Chief Executive Officer of the Company 1992 Phillip E. White.......... 53 Chairman of the Board of Directors, President and 1993 Chief Executive Officer of Informix Software, Inc., a company engaged in development and marketing of database software
2 4 Except as set forth below, each of the nominees has been engaged in his principal occupation described above during the past five years. There is no family relationship between any director or executive officer of the Company. Mr. Adler served as President of the Company from May 1985 to August 1992, as Chief Executive Officer from December 1986 to July 1995, as a director since February 1986 and as Chairman of the Board of Directors since May 1990. Mr. Boucher has served as President from December 1987 to June 1995, as Chief Executive Officer from December 1987 to January 1996, Chairman of the Board of Directors from February 1994 to June 1996, and a director since 1987 of Auspex Systems, Inc., a manufacturer of computer systems. He is a founder of the Company and served as Chairman of the Board of Directors from May 1981 to May 1990 and as Chief Executive Officer from May 1981 to December 1986. Mr. Conti is an independent management consultant. From 1959 to 1991, he held a variety of technical and managerial positions with International Business Machines Corporation, a manufacturer of computer hardware and software, concluding with four years as a Senior Vice President. Mr. East has, since December 1988, served as a director, President and Chief Executive Officer of Actel Corporation, a manufacturer of field programmable gate arrays. Mr. Loarie has, since August 1992, served as a principal of Morgan Stanley & Co. Incorporated, a diversified investment firm, and as a general partner of Morgan Stanley Venture Partners, L.P. and Morgan Stanley Venture Partners II, L.P., venture capital investment partnerships. Prior to that time and for more than the previous five years, Mr. Loarie was a general partner of Weiss, Peck & Greer, an investment management firm, and of several venture capital partnerships affiliated with Weiss Peck & Greer. Mr. Loarie is also a director of Telcom Semiconductor, Inc. and CSG Systems International, Inc. Mr. Moore is an independent management consultant. Mr. Moore served as President of Outlook Technology, Inc., a company engaged in the development, manufacture and marketing of digital test instrumentation, from February 1986 to July 1991. Mr. Moore is also a director of Dionex Inc. Mr. Sanders has served as a general partner of Asset Management Co. since February 1989 and served as a senior associate of Asset Management Co. from March 1987 to February 1989. Mr. Sanders is also a director of Solectron Corporation. Mr. Saviers has served as President and Chief Executive Officer of the Company since August 1992 and July 1995 respectively, and was Chief Operating Officer from August 1992 to July 1995. Prior to joining the Company, Mr. Saviers was employed with Digital Equipment Corporation for more than five years, last serving as Vice President of its personal computer systems and peripherals operation. Mr. White has served as President, Chief Executive Officer, director, and Chairman of the Board of Informix Software, Inc., a software company, since January 1989. Prior to that time and for more than the last five years, Mr. White was President of Wyse Technology, Inc., a manufacturer of computers and computer terminals. Mr. White is also a director of Legato Systems, Inc. BOARD MEETINGS AND COMMITTEES The Board of Directors of the Company held a total of seven meetings during the fiscal year ended March 31, 1996. The Board of Directors has an Audit Committee, a Compensation Committee and a Nominating Committee. The Audit Committee of the Board of Directors consists of Messrs. Loarie, Sanders and Saviers and held six meetings during the last fiscal year. Mr. Adler resigned from the committee during the fiscal year. The Audit Committee recommends engagement of the Company's independent accountants and is primarily responsible for approving the services performed by the Company's independent accountants and for reviewing and evaluating the Company's accounting principles and its system of internal accounting controls. 3 5 The Compensation Committee of the Board of Directors consists of Messrs. East, Moore and White and held three meetings during the last fiscal year. Mr. Boucher resigned from the Committee during the fiscal year. The Compensation Committee establishes the Company's executive compensation policy, determines the salary and bonuses of the Company's executive officers and recommends to the Board of Directors stock option grants for executive officers. The Nominating Committee consists of Messrs. Moore and Sanders. The Nominating Committee is responsible for reviewing qualifications for possible Board membership and recommending candidates for election to the Board of Directors. The Nominating Committee will consider nominees recommended by management and shareholders. Such recommendations may be delivered in writing to the attention of the Nominating Committee in care of the Secretary at the Company's principal executive offices. The Nominating Committee held two meetings during fiscal 1996. No director attended fewer than 75% of the sum of the total number of meetings of the Board of Directors or the total number of meetings of all committees of the Board of Directors on which that director served. See "Other Information -- Executive Compensation" for information on the compensation of non-employee directors. DIRECTOR COMPENSATION Cash Compensation Non-employee directors receive $3,000 per fiscal quarter and $2,000 for each meeting of the Board of Directors attended other than telephonic meetings and are reimbursed for their expenses incurred in attending meetings of the Board of Directors. Directors do not receive compensation for committee or telephonic meetings. Employee directors do not receive additional compensation for attendance at Board Meetings. 1990 Directors' Option Plan Non-employee directors also receive stock options under the Company's 1990 Directors' Option Plan (the "Directors' Plan"). The Directors' Plan was adopted and approved by the shareholders of the Company in 1990. A total of 700,000 shares of Common Stock have been reserved for issuance under the Directors' Plan, as it has been subsequently amended. The Directors' Plan provides for the grant of non-statutory stock options to non-employee directors of the Company. All eligible directors are granted an option to purchase 40,000 shares of Common Stock on the date on which such person first becomes a director, whether through election by the shareholders or appointment by the Board to fill a vacancy. On March 31 of each year, each non-employee director is granted an additional option to purchase 10,000 shares of Common Stock. All options become exercisable for 25% of the shares subject to the option on the first anniversary of the date of grant and for 6.25% of the shares subject to the option for each full calendar quarter thereafter that the optionee remains a director. The per share exercise price of options is established at the fair market value of the Company's Common Stock on the date the option is granted. All options granted under the Directors' Plan have a term of five years. See Proposal Three for information concerning certain proposed amendments to the Directors' Plan. Directors Conti and East were granted options to purchase 40,000 shares of Common Stock on November 1, 1995 at $44.50 and on December 7, 1995 at $44.50, respectively. Pursuant to the Directors' Plan, Directors Boucher, Conti, East, Loarie, Moore, Sanders and White were granted options to purchase 10,000 shares of Common Stock each on March 29, 1996 at an exercise price of $48.25 per share. 4 6 PROPOSAL TWO AMENDMENT OF COMPANY'S BYLAWS The Company's Amended and Restated Bylaws (the "Bylaws"), as currently in effect, provide that the authorized number of directors of the Company may range from five to nine. The Board of Directors and the shareholders are authorized to fix the exact number within this range, and the number is currently fixed at nine. On May 9, 1996, the Board of Directors authorized an amendment to the Bylaws to expand the permitted range to seven to twelve. The Board of Directors and the shareholders would continue to have the authority to increase or decrease the number of directors within this new range, although the actual number of authorized directors continues to be nine. Under the proposed amendment, Article III, Section 3.2 of the Bylaws would be amended to read as follows: "The number of directors of the corporation shall be not less than seven (7) nor more than twelve (12). The exact number of directors shall be nine (9) until changed, within the limits specified above, by a bylaw amending this Section 3.2, duly 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 duly adopted amendment to the articles of incorporation or by an amendment to this bylaw duly 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 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." PURPOSE AND EFFECT OF AMENDMENT The principal purpose of the proposed amendment is to increase the maximum number of directors which the Company may have on its Board of Directors. The amendment does not increase the current size of the Board or create vacancies on the Board; under the terms of the amendment the size of the Board of Directors will remain fixed at nine. However, upon approval of the amendment, the Board will be able, without additional shareholder approval, to increase the size of the Board of Directors to up to twelve directors. Upon an increase in the size of the Board of Directors, the Board would be able to appoint one or more directors to fill the new position or positions created. The Board of Directors has no current intentions of increasing the size of the Board of Directors. The Board believes the Company has been well-served by having a relatively large Board of Directors and experienced directors with varied backgrounds. Because identifying and attracting qualified directors is often difficult, the Company believes it is important to be able to act quickly when a desirable candidate becomes available. As the Board of Directors is currently at its maximum allowable size, the Company's ability to attract new directors may be impaired. The amendment, by giving the Board the power to increase the size of the Board of Directors beyond its current size of nine, would enhance the Company's ability to attract additional qualified directors when and if available. VOTE REQUIRED The approval of the amendment to the Bylaws requires the affirmative vote of a majority of the outstanding shares of Common Stock of the Company. An abstention or nonvote is not an affirmative vote and, therefore, will have the same effect as a vote against the proposal. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE AMENDMENT OF THE COMPANY'S BYLAWS. 5 7 PROPOSAL THREE AMENDMENTS TO 1990 DIRECTORS' OPTION PLAN The 1990 Directors' Option Plan (the "Directors' Plan") was adopted by the Board of Directors in May 1990 and approved by the shareholders in September 1990. A total of 700,000 shares of Common Stock are currently reserved for issuance under the Directors' Plan, of which options to purchase 311,250 shares are issued and outstanding and options to purchase 290,000 shares remain available for future grant. To date, options to purchase 98,750 shares have been exercised at a weighted average exercise price of $8.3410. The Plan is designed to attract capable individuals to serve as directors of the Company, to retain such individuals as directors, and to incentivize non-employee directors, by providing them with an opportunity to acquire a significant ownership interest in the Company's Common Stock, to use their influence and talent to maximize shareholder value for all shareholders. In May 1996, the Board of Directors approved amendments to the Directors' Plan to (i) increase the shares reserved for issuance thereunder by 400,000 to a total of 1,100,000, (ii) increase the term of options granted thereunder from five to ten years, and (iii) amend the vesting provisions of subsequent annual option grants so that such grants will vest quarterly over a one year period. A summary of the Directors' Plan (which assumes the adoption the proposed amendments) is included as Appendix A. Subject to continued service as a director, non-employee directors will receive the option grants set forth in the table below in fiscal 1997. PURPOSE AND EFFECT OF AMENDMENTS The primary purpose of the proposed amendments to the Directors' Plan is to increase the number of shares available for grant under the Directors' Plan and to change the certain features of the options granted to make them more valuable to the grantees. The Board believes that stock option grants are an essential element in attracting and retaining qualified individuals to serve as directors of the Company. The pool of individuals qualified to be directors of growing technology companies is relatively small, and the number of companies seeking such expertise is growing. In addition, many qualified individuals are reluctant to serve on boards unless appropriately compensated for the responsibility and risk they assume. The Board believes that most individuals it seeks as board members expect equity compensation as an inducement for their services. In addition, the Board of Directors believes that equity compensation better aligns the interests of directors with those of the Company and its shareholders than cash compensation. The Board believes that the proposed amendments are in the best interests of the Company for several reasons. First, without the increase in the shares reserved for issuance under the Directors' Plan, the Company will deplete the options available for grant under the Directors' Plan within the few years. The increase is intended to reserve sufficient stock to last until the Directors' Plan's termination in the year 2000. Second, by accelerating the vesting of the options and increasing their term, the Board believes the value of the options to grantees is increased and their usefulness as compensation devices is enhanced. AMENDED PLAN BENEFITS
OPTIONS TO BE GRANTED DURING NAME OF INDIVIDUAL OR IDENTITY OF GROUP FISCAL 1997(1) ----------------------------------------------------------- -------------- Laurence B. Boucher........................................ 10,000 Carl J. Conti.............................................. 10,000 John East.................................................. 10,000 Robert J. Loarie........................................... 10,000 B.J. Moore................................................. 10,000 W. Ferrell Sanders......................................... 10,000 Phillip E. White........................................... 10,000 All current directors who are not executive officers (7 persons)................................................. 70,000
- --------------- (1) The exercise price for all grants will be at the fair market value of the Company's Common Stock at the time of grant. 6 8 REQUIRED VOTE The amendment of the 1990 Directors' Option Plan to (i) increase the number of shares issuable thereunder by 400,000 shares, (ii) increase the term of options granted thereunder from five to ten years, and (iii) amend the vesting provisions of subsequent annual option grants so that such grants will vest quarterly over a one year period requires the affirmative vote of the holders of a majority of the shares of the Company's Common Stock represented in person or by proxy and entitled to vote on the proposal, which shares voting affirmatively must also constitute a majority of the required quorum. See "Voting and Solicitation" above. If the amendment is not approved, the Company will not be authorized to issue more than 700,000 shares under the 1990 Directors' Option Plan. THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE AMENDMENTS TO THE 1990 DIRECTORS' OPTION PLAN. PROPOSAL FOUR RATIFICATION OF APPOINTMENT OF INDEPENDENT PUBLIC ACCOUNTANTS The Audit Committee of the Board of Directors has selected Price Waterhouse LLP, independent public accountants, to audit the financial statements of the Company for the current fiscal year ending March 31, 1997 and recommends that the shareholders ratify this selection. In the event of a negative vote on such ratification, the Board of Directors will reconsider its selection. Representatives of Price Waterhouse LLP are expected to be available at the meeting with the opportunity to make a statement if they desire to do so, and are expected to be available to respond to appropriate questions. THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" RATIFICATION OF THE APPOINTMENT OF PRICE WATERHOUSE LLP AS THE COMPANY'S INDEPENDENT PUBLIC ACCOUNTANTS. 7 9 EXECUTIVE COMPENSATION AND OTHER MATTERS The table below sets forth information for the three most recently completed fiscal years concerning the compensation of the Chief Executive Officer of the Company and the four other most highly compensated executive officers of the Company in the fiscal year ended March 31, 1996: SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION ------------------------- ------------------- RESTRICTED SECURITIES FISCAL SALARY BONUS STOCK UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) AWARD($) OPTIONS(#) COMPENSATION($)(2) - ------------------------------ ------ -------- -------- ---------- ---------- ------------------ John G. Adler................. 1996 $494,135 $558,000 -- 60,000 $4,080 Chairman and former Chief 1995 450,000 625,000 -- 200,000 3,720 Executive Officer 1994 420,000 315,000 -- 160,000 3,720 F. Grant Saviers.............. 1996 468,462 533,000 -- 139,600 2,520 President, Chief Executive 1995 350,000 475,000 -- 200,000 2,780 Officer and Chief Operating 1994 310,000 235,000 -- 80,000 1,260 Officer John D. Hamm.................. 1996 229,711 260,750 -- 53,800 54 Vice President and General 1995 215,000 322,500 -- 50,000 48 Manager 1994 180,000 135,000 -- 50,000 36 Paul G. Hansen................ 1996 229,615 259,500 -- 53,800 1,380 Vice President, Finance and 1995 222,115 291,058 -- 50,000 1,260 Chief Financial Officer 1994 190,000 145,000 -- 40,000 1,260 Sam Kazarian.................. 1996 214,712 243,500 -- 52,900 2,520 Vice President, Operations 1995 200,000 270,000 -- 60,000 2,280 1994 174,615 110,000 -- 40,000 2,280 Subramanian Sundaresh......... 1996 199,327 221,250 $ 19,992(3) 24,000 332 Vice President and General 1995 165,000 140,000 -- 50,000 475 Manager 1994 104,115 50,000 -- 84,000 540
- --------------- (1) In each case, the fiscal year 1995 bonus amounts include an amount equal to one-half of the individual's base salary for fiscal year 1995 that was accrued but not paid by the Company in fiscal year 1995. Half of such amounts were paid to the individuals at the end of fiscal year 1996 and the remaining half will be paid at the end of fiscal year 1997 if the individual remains in the employ of the Company at that date. (2) Life insurance premiums. (3) Represents the grant of 392 Incentive Stock Units pursuant to the Company's 1990 Stock Plan. On the first and second anniversaries of the date of grant, if Mr. Sundaresh is still in the employ of the Company, the Company will redeem one-half of the Incentive Stock Units by giving Mr. Sundaresh either 196 shares of Common Stock of the Company or the fair market value of such shares at the Company's discretion. The value of the grant is based on the fair market value of 392 shares of the Company's Common Stock on the date of grant. As of the March 31, 1996, Mr. Sundaresh held 392 Incentive Stock Units with a value of $18,914 (based on the fair market value of the Company's Common Stock on that date). 8 10 The table below provides the specified information concerning grants of options to purchase the Company's Common Stock made during the fiscal year ended March 31, 1996 to the persons named in the Summary Compensation Table: OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT NUMBER OF % OF TOTAL ASSUMED ANNUAL RATES OF SECURITIES OPTIONS STOCK PRICE APPRECIATION UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(3)(4) OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION --------------------------------- NAME GRANTED(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($) - ----------------------- ---------- ------------ ----------- ---------- -------------- -------------- John G. Adler.......... 60,000(1) 2.6% $ 44.75 8/24/05 $ 1,688,582 $ 4,279,199 F. Grant Saviers....... 100,000(1) 4.4 44.75 8/24/05 2,814,303 7,131,998 39,600(2) 1.7 56.00 3/22/00 1,394,637 3,534,283 John D. Hamm........... 40,000(1) 1.7 44.75 8/24/05 1,125,721 2,852,799 13,800(2) 0.6 56.00 3/22/00 486,010 1,231,644 Paul G. Hansen......... 40,000(1) 1.7 44.75 8/24/05 1,125,721 2,852,799 13,800(2) 0.6 56.00 3/22/00 486,010 1,231,644 Sam Kazarian........... 40,000(1) 1.7 44.75 8/24/05 1,125,721 2,852,799 12,900(2) 0.5 56.00 3/22/00 454,313 1,151,320 Subramanian Sundaresh............ 20,000(1) 0.8 44.75 8/24/05 562,861 1,426,400 4,000(2) 0.2 56.00 3/22/00 140,872 356,998 All Shareholders....... NA NA NA NA $1,608,840,896 $4,077,118,714
- --------------- (1) These options were granted pursuant to the Company's 1990 Stock Plan. The option exercise prices were at the fair market value of the Company's Common Stock on the date of grant. All options expire 10 years from the date of grant, are not transferable by the optionee (other than by will or the laws of descent and distribution), and are exercisable during the optionee's lifetime only by the optionee. The options become exercisable at the rate of 12.5% of the shares subject to the option six months after the date of grant and at the rate of 6.25% of the shares subject to the option at the end of each of the next 14 quarters. To the extent exercisable at the time of employment termination, options may be exercised for an additional three months unless termination is the result of total and permanent disability, in which case the options may be exercised within six months following termination, or unless termination is the result of death, in which case unvested options become exercisable to a maximum of 50,000 shares per individual and may be exercised within six months following death by the individual's estate or other successor. (2) These options were granted pursuant to the Company's 1990 Stock Plan. The option exercise prices were at 110% of the fair market value of the Company's Common Stock on the date of grant. All options expire 4 years from the date of grant, are not transferable by the optionee (other than by will or the laws of descent and distribution), and are exercisable during the optionee's lifetime only by the optionee. 50% of the options subject to the grant become exercisable one year after the date of the grant with the remaining 50% becoming exercisable two years after the date of grant. To the extent exercisable at the time of employment termination, options may be exercised for an additional three months unless termination is the result of total and permanent disability, in which case the options may be exercised within six months following termination, or unless termination is the result of death, in which case unvested options become exercisable to a maximum of 50,000 shares per individual and may be exercised within six months following death by the individual's estate or other successor. (3) Potential gains are net of exercise price, but before taxes associated with exercise. The amounts represent certain assumed rates of appreciation only, based on the Securities and Exchange Commission rules. Actual gains, if any, on stock option exercises are dependent on the future performance of the Common Stock, overall market conditions and the optionholders' continued employment through the vesting period. The amounts reflected in this table may not necessarily be achieved and do not reflect the Company's estimate of future stock price growth. 9 11 (4) In the case of all shareholders, indicates the potential shareholder return over a ten-year period at the respective rate determined from the closing sales price on the Nasdaq National Market of $48.25 on March 31, 1996. On March 31, 1996, there were 53,019,777 shares of Common Stock issued and outstanding. The table below provides the specified information concerning the exercise of options to purchase the Company's Common Stock in the fiscal year ended March 31, 1996 and the unexercised options held as of March 31, 1996 by the persons named in the Summary Compensation Table. AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT SHARES ACQUIRED VALUE REALIZED OPTIONS AT FY-END (#): FY-END ($): EXERCISABLE/ NAME ON EXERCISE(#) ($)(1) EXERCISABLE/UNEXERCISABLE UNEXERCISABLE(2) - ------------------------- --------------- -------------- ------------------------- ------------------------ John G. Adler............ 227,449 $7,082,720 7,500/263,125 $ 26,250/$6,654,258 F. Grant Saviers......... 50,000 2,037,440 261,673/323,384 8,585,137/ 6,427,230 John D. Hamm............. 10,000 472,813 109,063/104,737 3,956,639/ 1,838,361 Paul G. Hansen........... 25,000 1,060,938 65,000/ 98,800 2,037,813/ 1,644,688 Sam Kazarian............. 1,244 46,483 73,072/105,712 2,326,389/ 1,874,494 Subramanian Sundaresh.... 10,000 266,188 57,750/ 90,250 1,713,406/ 2,091,531
- --------------- (1) Market value of underlying securities on date of exercise, minus the exercise or base price. (2) Market value of underlying securities at fiscal year end, minus the exercise or base price. CHANGE IN CONTROL ARRANGEMENTS The 1990 Stock Plan authorizes the acceleration or payment of awards and related shares in the event of a Change in Control as defined in the 1990 Stock Plan. Such acceleration or payment may cause part or all of the consideration involved to be treated as a "parachute payment" under the Internal Revenue Code of 1986 as amended (the "Code"), which may subject the recipient thereof to a 20% excise tax and which may not be deductible by the participant's employer. REPORT OF THE COMPENSATION COMMITTEE OVERVIEW AND PHILOSOPHY The Compensation Committee (the "Committee") of the Board of Directors regularly reviews and approves all executive officer pay plans and develops recommendations for stock option grants for approval by the Board of Directors. These include the following compensation elements: base salaries, annual incentives, stock options and various benefit plans. The Committee is composed of three independent, outside directors. It is the Committee's objective that executive compensation be directly determined by achievement of the Company's planned business performance. Specifically, the Company's executive compensation program is designed to reward exceptional executive performance that results in enhanced corporate and shareholder values. The Committee retains independent compensation consultants to provide objective and expert advice in the review of executive compensation plans. Published industry pay survey data is also reviewed and relied upon in the Committee's assessment of appropriate compensation levels, including the Radford Management Survey and data from companies in the computer industry of comparable size, performance and growth rate supplied by the Committee's compensation consultant, J. Richard & Co. The Committee recognizes that the industry sector in which the Company operates is both highly competitive and undergoing significant globalization with the result that there is substantial demand for 10 12 qualified, experienced executive personnel. The Committee considers it crucial that the Company be assured of retaining and rewarding its top caliber executives who are essential to the attainment of the Company's ambitious long-term, strategic goals. For these reasons, the Committee believes the Company's executive compensation arrangements must remain competitive with those offered by other companies of similar size, scope, performance levels and complexity of operations, including some, but not all, of the companies comprising the Nasdaq -- 100 Index and the Nasdaq Computer Industry & DP Index. ANNUAL CASH COMPENSATION (BASE SALARY, PLUS PERFORMANCE INCENTIVES) The Committee believes that annual cash compensation should be paid commensurate with attained performance. For these reasons, the Company's executive cash compensation consists of base compensation (salary) and variable incentive compensation (annual bonus). In addition in fiscal 1996, the Committee approved a change in the annual cash plan that encourages executives to elect to receive a portion of their earned incentives in the form of stock options that have an exercise price above the stock's fair market value and which vest over two years. Base salaries for executive officers are established considering a number of factors, including the Company's continued, profitable growth; the executive's individual performance and measurable contribution to the Company's success; and pay levels of similar positions with comparable companies in the industry. The Committee supports the Company's compensation philosophy of moderation for elements such as base salary and benefits. Base salary decisions are made as part of the Company's formal annual review process. Generally, base salaries are maintained at approximately the 50th percentile of salaries of similar size, high technology companies. Under the Executive Incentive Plan (EIP), an executive's annual performance award generally depends on three performance factors: the overall financial performance of the Company; the expected performance of the business unit or corporate division the executive is accountable for; and the executive's individual performance. The performance objectives of the Company and the business unit or corporate function derive from the Company's Board approved annual business plan that includes specific financial performance targets relating to revenue and profits growth for the fiscal year. The EIP provides no payment until threshold earnings per share (EPS) level and revenue targets are met. This is established each year on the basis of a planned 25% growth in Revenues and EPS over the prior year's results. A 10% improvement in both revenues and profits must be achieved prior to any EIP payments being made. Long-term strategic goals may also be incorporated for certain unit heads. Individual executive performance is measured against an annual incentive target which represents a percentage of base salary that the executive can earn as bonus compensation if performance warrants. This target percentage ranges from 40% to 100% of an executive's base salary. The incentive target is set at a higher percentage for more senior officers, with the result that the more senior executive officers have a higher percentage of their potential total cash compensation at risk. If business plans are exceeded by 30%, executives can earn up to a maximum of 120% to 200% of their base salaries. However, individual bonuses above 90% of base salary are paid in the form of stock rights or a premium priced stock option that are priced 10% above the fair market value of the stock at the date of grant. The Committee annually reviews and approves specific targets, maximums, and performance criteria for each executive. LONG-TERM INCENTIVE: STOCK OPTIONS The Committee recommends executive stock options under the Stock Plan to foster executive officer ownership, to stimulate a long-term orientation in decisions and to provide direct linkage with shareholder interests. The Committee considers the total compensation package, options previously granted, industry practices and trends, the executive's accountability level, and assumed, potential stock value in the future when granting stock options. The Committee recommends option amounts to provide retention considering projected earnings to be derived from option gains based upon relatively aggressive assumptions relating to planned growth and earnings. In this manner, executive gains closely parallel those of other shareholders over the long-term. Therefore, the stock option program serves as an effective and competitive long-term incentive 11 13 and retention tool for the Company's executives, as well as other key employees. The exercise prices of stock options granted to executive officers are equal to the market value of the stock on the date of grant. Therefore, stock options provide an incentive to executives to maximize the Company's profitable growth which ordinarily, over time, should be reflected in the price of the Company's stock. The Committee believes that the Company's stock option plan has been administered in a manner comparable to its peer group and other high performing companies in the high technology sector. BENEFITS The Company provides benefits to the named executive officers that are generally available to all Company employees. The amount of executive level benefits and perquisites, as determined in accordance with the rules of the Securities and Exchange Commission relating to executive compensation, did not exceed 10% of total salary and bonus for fiscal year 1996, for any executive officer. CHIEF EXECUTIVE OFFICER PERFORMANCE AND COMPENSATION In setting Mr. Saviers' base salary and in determining his performance bonus for fiscal 1996, the Committee took note of the Company's impressive revenue and profit growth in recent years, especially the record fiscal year 1996. Both revenue and profit plan objectives were significantly exceeded. Revenue growth of 41% and 50% improvement in operating income place the Company in the upper quartile of comparable companies in the computer industry. The Committee believes Mr. Saviers, as Chief Executive Officer, significantly contributed to this continued success. Based on this performance, the Committee recommended and the Board approved a 6% salary increase for fiscal year 1996, and a cash bonus of $445,000, which equals 90% of his fiscal year 1996 base salary. In addition, he elected to receive an equity participation opportunity (in lieu of earned cash incentive) equal to 40% of his salary which was delivered in the form of premium priced stock options which had an exercise price 10% higher that the fair market value at time of grant. The Committee has estimated the resulting total cash compensation to equate to approximately the 75th percentile of chief executive officers of other companies of similar size and complexity in the industry as reported in the Radford Management Survey and in data from comparable companies supplied by the Committee's compensation consultant, J. Richard & Co. However, the Committee also has assured itself that both the Company's financial performance and share value improvement during the fiscal year and most recent years exceeded the 75th percentile of the industry. In addition, in 1995, the Committee granted Mr. Saviers a special retention bonus of $175,000. Though accrued by the Company in fiscal 1995, half of the bonus was paid to Mr. Saviers at the end of fiscal 1996 and the other half will be paid at the end fiscal 1997 if he is still in the employ of the Company. The 100,000 share stock option grant made to Mr. Saviers in fiscal year 1996 was made at fair market value and will vest over four years, thus acting as a retention device through fiscal year 2000. The Committee viewed this as an average and modest size grant when compared to previous grants and current competitive practices and trends. It is the opinion of the Committee that the aforementioned compensation policies and structures provide the necessary discipline to properly align the Company's corporate economic performance and the interest of the Company's shareholders with progressive, balanced and competitive executive total compensation practices in an equitable manner. The Compensation Committee B.J. Moore, Chairman John East Phillip E. White 12 14 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Neither B.J. Moore, John East nor Phillip E. White, the members of the Company's Compensation Committee, is an executive officer of any entity for which any executive officer of the Company serves as a director or a member of the Compensation Committee. PERFORMANCE GRAPH
MEASUREMENT PERIOD NASDAQ STOCK NASDAQ (FISCAL YEAR COVERED) ADAPTEC MARKET--U.S. COMPUTER & DP 3/91 100 100 100 3/92 265 127 148 3/93 439 147 165 3/94 624 158 169 3/95 1135 176 228 3/96 1660 239 323
Notwithstanding anything to the contrary set forth in any of the Company's previous filings under the Securities Act of 1933 or the Securities and Exchange Act of 1934 that might incorporate future filings, including this proxy statement, in whole or in part, the preceding Compensation Committee Report on Executive Compensation and the preceding Performance Graph shall not be incorporated by reference into any such filings; nor shall such Report or Graph be incorporated by reference into any future filings. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During fiscal 1996, the Company purchased approximately $291,532 of computer equipment in the ordinary course of business from Auspex Systems, Inc., a supplier of computer network file servers. Mr. Boucher is the Chairman of the Board of Directors and a shareholder of Auspex Systems, Inc. 13 15 SECURITY OWNERSHIP OF MANAGEMENT; PRINCIPAL SHAREHOLDERS The table below sets forth as of May 31, 1996 certain information with respect to the beneficial ownership of the Company's Common Stock by (i) each person known by the Company to own beneficially more than five percent (5%) of the outstanding shares of Common Stock; (ii) each director of the Company, (iii) each executive officer named in the Summary Compensation Table, and (iv) all directors and executive officers as a group.
SHARES APPROXIMATE BENEFICIALLY PERCENT NAME OF PERSON OR IDENTITY OF GROUP OWNED(1) OWNED ------------------------------------------------------------- ------------ ----------- FMR Corp.(2)................................................. 5,979,360 11.2% 82 Devonshire Street Boston, MA 02109-3614 John G. Adler................................................ 130,319 * Laurence B. Boucher.......................................... 8,145 * Carl J. Conti................................................ 0 * John East.................................................... 0 * John D. Hamm(3).............................................. 113,007 * Paul G. Hansen............................................... 57,581 * Sam Kazarian................................................. 86,686 * Robert J. Loarie............................................. 66,427 * B.J. Moore................................................... 47,910 * W. Ferrell Sanders........................................... 54,875 * F. Grant Saviers............................................. 301,751 * Subramanian Sundaresh........................................ 59,557 * Phillip E. White............................................. 11,250 * All current directors and officers as a group (19 persons)... 987,587 1.8
- --------------- * Less than 1% (1) Except as indicated in the footnotes to this table and pursuant to applicable community property laws, the persons and entities named in the table have sole voting and sole investment power with respect to all shares of Common Stock beneficially owned. Amounts shown include the following number of shares, options for which are presently exercisable or will become exercisable within 60 days of May 31, 1996: Mr. Adler, 56,250; Mr. Boucher, 8,125; Mr. Conti, 0; Mr. East, 0; Mr. Hamm, 102,813; Mr. Hansen, 56,875; Sam Kazarian, 86,197; Mr. Loarie, 26,875; Mr. Moore, 26,875; Mr. Sanders, 16,875; Mr. Saviers, 249,476; Mr. Sundaresh, 57,875; Mr. White, 11,250; and all current officers and directors as a group, 742,642. (2) Includes 4,652,770 shares beneficially owned by Fidelity Management & Research Company as a result of serving as investment advisor to various registered investment companies and 1,226,390 shares beneficially owned by Fidelity Management Trust Company as a result of serving as trustee or managing agent for various private investment accounts. FMR Corp. has sole voting power with respect to 611,990 shares and sole dispositive power with respect to 5,879,160 shares. (3) Includes 5,333 shares held in the name of Mr. Hamm's wife. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of a registered class of the Company's equity securities, to file with the Securities and Exchange Commission (the "SEC") initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Officers, directors and 14 16 greater than ten percent shareholders are required by SEC regulation to furnish the Company with copies of all Section 16(a) forms they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended March 31, 1996, all officers, directors and greater than ten percent beneficial owners complied with all Section 16(a) filing requirements. DEADLINE FOR RECEIPT OF SHAREHOLDER PROPOSALS -- 1997 ANNUAL MEETING Proposals of shareholders of the Company which are intended to be presented by such shareholders at the Company's 1997 Annual Meeting must be received by the Company no later than March 15, 1997, in order that they may be included in the proxy statement and proxy relating to that meeting. OTHER MATTERS The Company knows of no other matters to be submitted to the Annual Meeting. If any other matters properly come before the Annual Meeting, it is the intention of the persons named in the enclosed Proxy to vote the shares they represent as the Board of Directors may recommend. BY ORDER OF THE BOARD OF DIRECTORS HENRY P. MASSEY, JR. Secretary Dated: July 12, 1996 15 17 APPENDIX A SUMMARY OF THE 1990 DIRECTORS' OPTION PLAN The essential features of the 1990 Directors' Option Plan, assuming adoption of the proposed amendments, are outlined below. Purpose. The purposes of the 1990 Directors' Option Plan are to attract and retain the best available personnel for service as directors of the Company, to provide additional inventive to the non-employee directors and to encourage their continued services on the Board. Administration. The 1990 Directors' Option Plan is designed to work automatically and not to require administration. However, where administration is necessary, it will be provided by the Board of Directors of the Company. No discretion concerning decisions regarding the 1990 Directors' Option Plan shall be afforded to any person who is not a "disinterested" person under Rule 16b-3. The interpretation and construction of any provision of the 1990 Directors' Option Plan by the Board shall be final and conclusive. Members of the Board receive no additional compensation for their services in connection with the administration of the 1990 Directors' Option Plan. Eligibility. The 1990 Directors' Option Plan provides for the grant of Non-Statutory Stock Options to non-employee directors of the Company. Each such director shall be granted an option to purchase 40,000 shares of Common Stock upon the date on which such person first becomes a director (the "Initial Option"), whether through election by the shareholders or appointment by the Board to fill a vacancy (on or after the effective date of the 1990 Directors' Option Plan, which was May 1, 1990). On March 31 of each year, each non-employee director will be granted an option to purchase 10,000 shares of Common Stock ("Annual Options"). Terms of Options. Options granted under the 1990 Directors' Option Plan have a term of ten years. Each option is evidenced by a stock option agreement between the Company and the director to whom such option is granted. Rule 16b-3. Options granted to directors must comply with the applicable provisions of Rule 16b-3 or any successor thereto and shall contain such additional conditions or restrictions as may be required thereunder to qualify for the maximum exemption from Section 16 of the Securities Exchange Act of 1934 with respect to 1990 Directors' Option Plan transactions. Exercise of the Options. Initial Options become exercisable cumulatively for 25% of the shares subject to the option on the first anniversary of the date of grant and for 6.25% for each full calendar quarter thereafter that the optionee remains a director. Annual options become exercisable cumulatively for 25% of the shares subject to the option at the end of each full calendar quarter after the date of grant while the optionee remains a director. An option is exercised by giving written notice of exercise to the Company, specifying the number of full shares of Common Stock to be purchased and tendering payment to the Company of the purchase price. Form of Consideration. The consideration to be paid for shares issued upon exercise of options granted under the 1990 Directors' Option Plan, including the method of payment, shall be determined by the administrators and may consist entirely of cash, check, promissory note or shares of Common Stock which, in the case of shares acquired upon exercise of an option, have been beneficially owned for at least six months or which were not acquired directly or indirectly from the Company, with a fair market value on the exercise date equal to the aggregate exercise price of the shares being purchased. The Company may also authorize as payment the delivery of a properly executed notice and irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the exercise price or the delivery of an irrevocable subscription agreement for the shares which irrevocably obligates the optionee to take and pay for the shares not more than 12 months after delivery of the subscription agreement. The Company may also authorize payments by any combination for the foregoing methods or by any other method permitted by applicable laws. A-1 18 Option Price. The per share exercise price of options is determined by the Board of Directors and under the 1990 Directors' Option Plan is 100% of the fair market value of the Company's Common Stock on the date of grant. As long as the Common Stock of the Company is traded on the National Market System of the NASDAQ system, the fair market value of a share of Common Stock of the Company shall be the closing sales price for such stock (or the closing bid, if no sales were reported, as quoted on such system) for the last market trading date before the time of determination, as reported in the Wall Street Journal or such other source as the Board deems reliable. Termination of Status as a Director. The 1990 Directors' Option Plan provides that if the optionee ceases to serve as a director of the Company, the option may be exercised within three months after the date he or she ceases to be a director as to all or part of the shares that the optionee was entitled to exercise at the date of such termination. Death. In the event of the death of an optionee, the option may be exercised at any time within six months after death, but only to the extent that the option would have been exercisable at the time of death. Disability. If an optionee is unable to continue his or her service as a director of the Company as a result of his or her total and permanent disability, the option may be exercised at any time within six months after the date of his or her termination, but only to the extent he or she was entitled to exercise it at the time of such termination. Suspension or Termination of Options. No option is exercisable by any person after the expiration of ten years from the date the option was granted. If the President of the Company or his designee reasonably believes that an optionee has committed an act of misconduct, the President may suspend the optionee's right to exercise any option pending a determination by the Board of Directors (excluding the director accused of such misconduct). If the Board of Directors (excluding the director accused of such misconduct) determines an optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty or deliberate disregard of the Company rules resulting in loss, damage or injury to the Company, or if an optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company, or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the optionee nor his or her estate shall be entitled to exercise any option whatsoever. In making such determination, the Board of Directors (excluding the director accused of such misconduct) shall act fairly and shall give the optionee an opportunity to appear and present evidence on optionee's behalf at a hearing before a committee of the Board. Nontransferability of Options. An option is nontransferable by the optionee, other than by will or the laws of descent and distribution, and is exercisable only by the optionee during his or her lifetime or, in the event of death, by a person who acquires the right to exercise the option by bequest or inheritance or by reasons of the death of the optionee. Acceleration of Options. Subject to the Change in Control provisions described below, in the event of a proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation, each outstanding option shall be substituted by an equivalent option by such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the participant will have the right to exercise the option as to all shares subject to such option, including shares as to which the option would not otherwise by exercisable. If the Board determines that options shall be fully exercisable in lieu of assumption or a substitution, the Company shall notify the participant that the option shall be fully exercisable for 15 days from the date of such notice and will terminate upon the expiration of such period. Change in Control Provisions. The 1990 Directors' Option Plan provides that in the event of a "Change in Control" of the Company (as defined below), (i) all outstanding stock options under the 1990 Directors' Option Plan will become immediately vested and fully exercisable and (ii) the value of all outstanding options unless otherwise determined by the administrators before any Change in Control, will be cashed out at the "Change in Control Price" (as defined below). A "Change in Control" means the occurrence of (i) the A-2 19 acquisition by a person or entity (other than the Company, one of its subsidiaries or a Company employee benefit plan or trustee thereof) of more than 50% of the combined voting power of the Company or (ii) a transaction requiring shareholder approval and involving the sale of all or substantially all of the assets of the Company or a merger of the Company with or into any corporation. The "Change in Control Price" shall be, as determined by the Board, (i) the highest closing sale price of a share of Common Stock as reported by the Nasdaq System and as appearing in the Wall Street Journal at any time within 60 days preceding the date of determination of the Change in Control Price by the Board or (ii) the highest price paid or offered, as determined by the Board, in any bona fide transaction or bona fide transaction or bona fide offer related the Change in Control of the Company at any time within such 60-day period. Adjustment Upon Change in Capitalization. In the event any change, such as a stock split or dividend, is made in the Company's capitalization which results in an increase or decrease in the number of outstanding shares of Common Stock without receipt of consideration by the Company, an appropriate adjustment shall be made in the number of shares which have been reserved for issuance under the 1990 Directors' Option Plan and the price per share covered by each outstanding option. In the event of the proposed solution or liquidation of the Company, all outstanding options will terminate immediately before the consummation of such proposed action, unless otherwise provided by the Board of Directors. The Board of Directors may, in its discretion, make provision for accelerating the exercisability of shares subject to options under the 1990 Directors' Option Plan in such event. AMENDMENT AND TERMINATION The Board of Directors may amend, alter, suspend or discontinue the 1990 Directors' Option Plan at any time, but such amendment, alteration, suspension or discontinuation shall not adversely affect any stock options then outstanding under the 1990 Directors' Option Plan, without the participant's consent. To the extent necessary and desirable to comply with Rule 16b-3 or Section 422 of the Code (or any other applicable law or regulation), the Company will obtain shareholder approval of any amendment to the 1990 Directors' Option Plan in such a manner and to such a degree as required. Subject to the specific terms of the 1990 Directors' Plan, the administrators may accelerate any option or waive any conditions or restrictions pertaining to such option at any time. The administrators may also substitute new stock options for previously granted stock options, including previously granted stock options having higher option prices, and may reduce the exercise price of any option to the then current fair market value, if the fair market value of the Common Stock covered by such option shall have declined since the date the option was granted. The 1990 Directors' Option Plan shall continue in effect for a period of ten years unless sooner terminated as described above. FEDERAL INCOME TAX ASPECTS OF THE 1990 DIRECTORS' OPTION PLAN The following is a brief summary of the Federal income tax consequences of transactions under the 1990 Director's Option Plan based on Federal securities and income tax law in effect on January 1, 1996. This summary is not intended to be exhaustive and does not discuss the tax consequences of a participant's death or provisions of the income tax laws of any municipality, state or foreign country in which an optionee may reside. Options granted under the 1990 Directors' Option Plan are Non-Statutory Stock Options. An optionee will not recognize any taxable income at the time he or she is granted a Non-Statutory Stock Option. However, upon its exercise, the optionee will recognize ordinary income for tax purposes measured by the excess of the then fair market value of the shares over the option price. Because the appointee is a director of the Company, the date of taxation (and the date of measurement of taxable ordinary income) may be deferred unless the optionee files an election under Section 83(b) of the Code. Upon resale of such shares by the optionee, any difference between the sales price and the exercise price, to the extent not recognized as ordinary income as provided above, will be treated as capital gain or loss, and will qualify for long-term capital gain or loss treatment if the shares have been held for more than one year. Under current law, net capital gain (net long-term capital gain minus net short-term capital (loss) is taxed as a maximum rate of 28% and capital losses are allowed in full against capital gains plus $3,000 of other income. The Company will be entitled to a tax deduction in the amount and at the time that the optionee recognizes ordinary income with respect to shares acquired upon exercise of an option. A-3 -----END PRIVACY-ENHANCED MESSAGE-----