-----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, DbM46u/+7jGhacNJrh2Q3tAgmzf8EbJ85e9QyUdz22yXEQozddjbkMQdeQ8TMlXc zJKLf+rrqGmX2tjnIR4rhg== 0000891618-97-002700.txt : 19970625 0000891618-97-002700.hdr.sgml : 19970625 ACCESSION NUMBER: 0000891618-97-002700 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19970624 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAPTEC INC CENTRAL INDEX KEY: 0000709804 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER COMMUNICATIONS EQUIPMENT [3576] IRS NUMBER: 942748530 STATE OF INCORPORATION: CA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-24557 FILM NUMBER: 97628966 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 S-1/A 1 AMENDMENT #1 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 24, 1997 REGISTRATION NO. 333-24557 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------------- ADAPTEC, INC. (Exact name of Registrant as specified in its charter) California 36798 94-2748530 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Classification Identification No.) incorporation or Code Number) organization) 691 S. MILPITAS BLVD. MILPITAS, CALIFORNIA 95035 (408) 945-8600 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) --------------------- F. GRANT SAVIERS PRESIDENT AND CHIEF EXECUTIVE OFFICER ADAPTEC, INC. 691 S. MILPITAS BLVD. MILPITAS, CALIFORNIA 95035 (408) 945-8600 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- Copies to: HENRY P. MASSEY, JR., ESQ. DAVID C. DRUMMOND, ESQ. PETER S. HEINECKE, ESQ. WILSON SONSINI GOODRICH & ROSATI PROFESSIONAL CORPORATION 650 PAGE MILL ROAD PALO ALTO, CA 94304 (415) 493-9300 --------------------- Approximate date of commencement of proposed sale to the public: FROM TIME TO TIME AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [x] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ________ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ________ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] --------------------- 2 --------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. 3 ADAPTEC, INC. CROSS REFERENCE SHEET PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF PART I ITEMS OF FORM S-1
Items and Heading in Form S-1 Registration Statement Prospectus Location in Prospectus ----------------------------------------------------- -------------------------------------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus . . . . . . . . . . Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus . . . . . . . . . . . . . . . . . . . . Inside Front and Outside Back Cover Pages 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . Prospectus Summary; Risk Factors 4. Use of Proceeds . . . . . . . . . . . . . . . . . . Prospectus Summary; Use of Proceeds 5. Determination of Offering Price . . . . . . . . . . Not applicable 6. Dilution . . . . . . . . . . . . . . . . . . . . . Not applicable 7. Selling Security Holders . . . . . . . . . . . . . Principal and Selling Shareholders 8. Plan of Distribution . . . . . . . . . . . . . . . Outside and Inside Front Cover Pages; Plan of Distribution 9. Description of Securities to be Registered . . . . Description of Capital Stock; Description of Notes; Dividend Policy 10. Interests of Named Experts and Counsel . . . . . . Legal Matters; Experts 11. Information with Respect to the Registrant . . . . Outside and Inside Front Cover Pages; Prospectus Summary; Risk Factors; Price Range of Common Stock; Dividend Policy; Selected Consolidated Financial Data; Management's Discussion and Analysis of Financial Condition and Results of Operations; Business; Management; Certain Relationships and Related Transactions; Principal Shareholders; Description of Capital Stock; Consolidated Financial Statements; Outside Back Cover Page 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities . . Not applicable
4 PROSPECTUS Adaptec, Inc. U.S. $230,000,000 4 3/4% Convertible Subordinated Notes due February 1, 2004 and Shares of Common Stock Issuable Upon Conversion Thereof --------------------- This Prospectus relates to $230,000,000 aggregate principal amount of 4 3/4% Convertible Subordinated Notes due February 1, 2004 (the "Notes") of Adaptec, Inc. (the "Company") under the Securities Act of 1933, as amended (the "Securities Act"), and the shares of Common Stock, $.001 par value of the Company, ("Common Stock") issuable upon the conversion of the Notes (the "Conversion Shares"). The Notes registered hereby were issued and sold on February 3, 1997 (the "Original Offering") in transactions exempt from the registration requirements of the Securities Act, to persons reasonably believed by Bear, Stearns & Co. Inc., Lehman Brothers, Robertson Stephens & Company LLC, and Unterberg Harris, as the initial purchasers (the "Initial Purchasers") of the Notes, to be "qualified institutional buyers" (as defined by Rule 144A under the Securities Act) or other institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under Regulation D of the Securities Act) or in compliance with the provisions of Regulation S under the Securities Act. The Notes and the Common Stock issuable upon conversion thereof may be offered and sold from time to time by the holders named herein or by their transferees, pledgees, donees or their successors (collectively, the "Selling Securityholders") pursuant to this Prospectus. The Registration Statement of which this Prospectus is a part has been filed with the Securities and Exchange Commission pursuant to a registration rights agreement dated as of February 3, 1997 (the "Registration Agreement") between the Company and the Initial Purchasers, entered into in connection with the Original Offering. The Notes are convertible at the option of the holder into shares of Common Stock of the Company (at any time on or after May 5, 1997 and prior to redemption or maturity, at a conversion rate of 19.3573 shares per $1,000 principal amount of Notes), subject to adjustment under certain circumstances. Interest on the Notes is payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 1997. On June 18, 1997, the closing price of the Common Stock, which is quoted on the Nasdaq National Market under the symbol "ADPT," was $37.00 per share. --------------------- THE NOTES AND THE COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 8. --------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE DATE OF THIS PROSPECTUS IS JUNE 24, 1997 5 The Notes are unsecured general obligations of the Company and are subordinated in right of payment to all existing and future Senior Indebtedness (as defined in the Indenture). See "Description of Notes--Subordination." The Notes will mature on February 1, 2004, and may be redeemed, at the option of the Company, in whole or in part, at any time on or after February 3, 2000 at the redemption prices set forth herein plus accrued interest. Each holder of Notes will have the right to cause the Company to repurchase all of such holder's Notes, payable in cash or, at the Company's option, in Common Stock, in the event the Common Stock is no longer publicly traded or in certain circumstances involving a Change of Control (as defined in the Indenture). The Notes and the Conversion Shares may be offered by the Selling Securityholders from time to time in transactions (which may include block transactions in the case of the Conversion Shares) on any exchange or market on which such securities are listed or quoted, as applicable, in negotiated transactions, through a combination of such methods of sale, or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices. The Selling Securityholders may effect such transactions by selling the Notes or Conversion Shares directly or to or through broker-dealers, who may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders and/or the purchasers of the Notes or Conversion Shares for whom such broker-dealers may act as agents or to whom they may sell as principals, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Company will not receive any of the proceeds from the sale of the Notes or Conversion Shares by the Selling Securityholders. The Company has agreed to pay all expenses incident to the offer and sale of the Notes and Conversion Shares offered by the Selling Securityholders hereby, except that the Selling Securityholders will pay all underwriting discounts and selling commissions, if any. See "Plan of Distribution." The Notes have been designated for trading on the PORTAL Market. Notes sold pursuant to this Prospectus are not eligible for trading on the PORTAL Market. The Selling Securityholders will receive all of the net proceeds from the sale of the Notes and the Common Stock issuable upon conversion of the Notes and will pay all underwriting discounts and selling commissions, if any, applicable to the sale of the Notes and the Common Stock issuable upon conversion of the Notes. The Company is responsible for payment of all other expenses incident to the offer and sale of the Notes and the Common Stock issuable upon conversion of the Notes. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy and information statements, and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy and information statements, and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the regional offices of the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports, proxy statements and other information can also be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a World Wide Web site that contains reports, proxy and -2- 6 information statements, and other information that are filed through the Commission's Electronic Data Gathering, Analysis and Retrieval System. This Web site can be accessed at http://www.sec.gov. The Company has filed with the Commission a Registration Statement on Form S-1 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the Notes and Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company, the Notes and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement, including all exhibits thereto, may be obtained from the Commission's principal office in Washington, D.C. upon payment of the fees prescribed by the Commission, or may be examined without charge at the offices of the Commission described above. Adaptec, EZ-SCSI and SCSIselect are registered trademarks of Adaptec, Inc. This Prospectus also uses trademarks and registered trademarks of companies other than the Company and its subsidiaries. -3- 7 PROSPECTUS SUMMARY The following summary information is qualified in its entirety by the detailed information and financial information appearing elsewhere in this Prospectus. This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. When used in this Prospectus, the words "believes," "intends," "anticipates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include the timing and acceptance of new product introductions, the actions of the Company's competitors and business partners, and those discussed under the caption "Risk Factors." Share and per share data in this Prospectus have been adjusted to reflect a two-for-one split of the outstanding Common Stock of the Company which was effected in November 1996. Unless the context requires otherwise, all references herein to the "Company" or "Adaptec" mean Adaptec, Inc. and its wholly-owned subsidiaries. THE OFFERING ISSUER . . . . . . . . . . . . . . . . . . Adaptec, Inc. (the "Company") SECURITIES OFFERED . . . . . . . . . . . . $230,000,000 of 4 3/4% Convertible Subordinated Notes Due 2004 issued under an indenture (the "Indenture") between the Company and State Street Bank and Trust Company, as trustee (the "Trustee"). INTEREST PAYMENT DATES . . . . . . . . . . . . . . . . . . . February 1 and August 1 of each year, commencing August 1, 1997. MATURITY . . . . . . . . . . . . . . . . . February 1, 2004 CONVERSION . . . . . . . . . . . . . . . . Convertible at the option of the holder at any time on or after May 5, 1997 through the close of business on February 1, 2004, subject to prior redemption and repurchase, into Common Stock of the Company at $51.66 per share, subject to adjustment as set forth herein. See "Description of Notes -- Conversion of Notes." REDEMPTION . . . . . . . . . . . . . . . . The Notes are redeemable, in whole or in part, at the option of the Company, at any time on or after February 3, 2000, at the declining redemption prices set forth herein plus accrued interest to the date of redemption. See "Description of Notes -- Optional Redemption by the Company."
-4- 8 REPURCHASE AT OPTION OF HOLDERS UPON A CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . In the event of a Change of Control (as defined), holders of Notes will have the right to require that the Company repurchase the Notes in whole or in part at a repurchase price of 101% of the principal amount thereof plus accrued interest to the date of repurchase. See "Description of Notes -- Repurchase at Option of Holders." RANKING . . . . . . . . . . . . . . . . . . The Notes constitute general unsecured obligations of the Company and are subordinated in right of payment to all existing and future Senior Indebtedness (as defined) of the Company. As of March 31, 1997, the Company had approximately $4.3 million of outstanding indebtedness that would have constituted Senior Indebtedness (excluding accrued interest and Senior Indebtedness constituting liabilities of a type not required to be reflected as a liability on the balance sheet of the Company in accordance with generally accepted accounting principles). In addition, because certain of the Company's operations are conducted through operating subsidiaries, claims of holders of indebtedness of such subsidiaries, as well as claims of regulators and creditors of such subsidiaries, will have priority with respect to the assets and earnings of such subsidiaries over the claims of creditors of the Company, including holders of the Notes. As of March 31, 1997, the aggregate liabilities of such subsidiaries were approximately $38.7 million (excluding intercompany liabilities and liabilities of a type not required to be reflected on the balance sheets of such subsidiaries in accordance with generally accepted accounting principles). The Indenture does not limit the amount of additional indebtedness which the Company can create, incur, assume or guarantee, nor will the Indenture limit the amount of indebtedness which any subsidiary can create, incur, assume or guarantee. See "Description of Notes -- Subordination." TRADING . . . . . . . . . . . . . . . . . . The Notes have been designated for trading in The PORTAL Market. Notes sold pursuant to this Prospectus are not eligible for trading on the PORTAL Market. The Company's Common Stock is traded on the Nasdaq National Market under the symbol "ADPT".
-5- 9 THE COMPANY Adaptec is a leading supplier of bandwidth management solutions that significantly enhance total system performance by increasing data transfer rates between PCs, servers, peripherals and networks. The Company's products include host adapters, which are primarily based on the SCSI standard, peripheral technology solutions, which are primarily ASIC controllers for hard disk and CD-ROM drives, and network products, which include ATM and Fast Ethernet adapters. Adaptec provides its customers complete solutions, consisting of hardware, software and firmware, which are incorporated into the products of substantially all of the major Intel-based PC and server manufacturers worldwide. A number of trends are driving the need to increase effective input-output ("I/O") bandwidth between PCs, servers, peripherals and networks: (i) the introduction of increasingly powerful CPUs, which require more rapidly accessed and intelligently managed data to function at their optimal performance level, (ii) new advanced operating systems, such as Windows 95 and Windows NT that allow for faster I/O and multitasking, (iii) the growth of data-intensive software applications, such as graphics and video, which require significantly more bandwidth, (iv) the proliferation of client/server networks, the Internet and corporate intranets, which is in turn driving growth in the number and processing power of servers, and (v) growth in high performance peripherals, such as high capacity hard disk drives, scanners, CD-ROMs, and new CD-R and DVD drives. These factors have created a rapid increase in the transfer of data between the desktop, servers, peripherals and networks, resulting in substantial I/O and network bottlenecks. The majority of the Company's products are based on the SCSI standard, which was pioneered by Adaptec. SCSI has been widely adopted as the industry standard I/O bus specification for high performance PCs, servers and peripherals. SCSI allows the "intelligent" transfer of data between computers, peripherals and networks by enabling multitasking and by off-loading the CPU from I/O management, and provides a high performance, system-independent interface that supports multiple peripherals. SCSI adapters are used in servers, where the Company believes that virtually every system now has at least one SCSI adapter and more recently, in high performance desktop PCs. Through succeeding generations, SCSI has evolved from its original standard, which supported data transfer rates of 5 mbps, to the most recent UltraSCSI standard which is capable of data transfer rates of 40 mbps. Adaptec has been the leading supplier of SCSI-based solutions for each generation of SCSI technology. In addition to its SCSI host adapters, the Company offers a broad line of integrated circuit ("IC") solutions for the mass storage market and a line of network adapters based on the ATM and Fast Ethernet standards. The Company has introduced products for emerging high performance I/O technologies such as Firewire, which is used primarily for consumer products; a RAID solution, which includes a proprietary ASIC controller and software; and a software-only product which enables users to master CDs using a CD-R drive. The Company is also developing an adapter for Fibre Channel, an emerging I/O standard which is primarily intended for very high performance data-intensive applications. The Company believes it has successfully positioned itself as a leading supplier of a full range of I/O solutions providing bandwidth management. The Company sells its products through a direct sales force to substantially all major server and PC manufacturers, as well as most of the major distributors worldwide. Customers include Acer, Compaq, Digital Equipment Corporation, Dell Computer, Fujitsu, Gateway 2000, Hewlett-Packard, IBM, Intel, IOmega, Maxtor, NEC, Samsung, Siemons Nixdorf and Toshiba. The Company was incorporated in California in May 1981. Its principal executive offices are located at 691 South Milpitas Boulevard, Milpitas, California 95035, and its telephone number is 408-945-8600. -6- 10 SUMMARY CONSOLIDATED FINANCIAL INFORMATION (IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
Year Ended March 31, 1993 1994 1995 1996 1997 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Net revenues . . . . . . . . . $311,339 $372,245 $466,194 $659,347 $933,868 Income from operations . . . . 62,743 77,135 117,784 126,135 161,228 Net income . . . . . . . . . . 49,390 58,950 93,402 103,375 107,561 Net income per share . . . . . $ 0.48 $ 0.55 $ 0.88 $ 0.95 $ 0.93 Weighted average shares 103,304 107,204 106,714 109,138 115,062 outstanding . . . . . . . . . Adjusted income from operations(1) . . . . . . . . $ 62,743 $ 77,135 $117,784 $178,448 $253,390 Adjusted net income(1) . . . . 49,390 61,359 93,402 142,826 197,957 Adjusted net income per share(1) . . . . . . . . . . $ 0.48 $ 0.57 $ 0.88 $ 1.31 $ 1.72 Ratio of earnings to fixed charges(2) . . . . . . . . . . 46.5x 43.6x 64.4x 67.8x 38.1x
March 31, 1997 -------------- BALANCE SHEET DATA: Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . $ 693,629 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,043,494 Long-term debt, net of current portion . . . . . . . . . . . . . . 230,850 Shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 688,325 - --------------------------
(1) Adjusted for one-time charges primarily related to the write-off of acquired in-process technology. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations." (2) For the purpose of calculating the ratio of earnings to fixed charges, (i) earnings consist of consolidated pre-tax income plus fixed charges and (ii) fixed charges consist of interest expense incurred, and the portion of rental expense under leases deemed by the Company to be representative of the interest factor. -7- 11 RISK FACTORS This Prospectus contains forward-looking statements that involve risks and uncertainties. The statements contained in this Prospectus that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the following risk factors and elsewhere in this Prospectus. In evaluating the Company's business, prospective investors should consider carefully the following factors in addition to the other information set forth in this Prospectus. Future Operating Results Subject to Fluctuation. The Company's operating results may fluctuate in the future as a result of a number of factors, including cancellations or postponements of orders, shifts in the mix of the Company's products and sales channels, changes in pricing policies by the Company's suppliers, interruption in the supply of custom integrated circuits, the market acceptance of new and enhanced versions of the Company's products, and the timing of acquisitions of other business products and technologies and any associated charges to earnings. The volume and timing of orders received during a quarter are difficult to forecast. The Company's customers from time to time encounter uncertain and changing demand for their products. Customers generally order based on their forecasts. If demand falls below such forecasts or if customers do not control inventories effectively, they may cancel or reschedule shipments previously ordered from the Company. Additionally, the Company has historically operated with a relatively small backlog, especially relating to orders of its board-based I/O solutions. Further, the Company's expense levels are based in part on expectations of future revenues, and the Company has been significantly increasing and intends to continue to increase operating expenditures and working capital balances as it expands its operations. As a result of the difficulty of forecasting revenues and the Company's planned growth in spending, operating expenses could be disproportionately high for a given quarter, and the Company's operating results for that quarter, and potentially future quarters, would be adversely affected. Operating results in any particular quarter which do not meet the expectations of securities analysts could cause volatility in the price of the Company's Common Stock. Dependence on the High-Performance Microcomputer Market. The Company's board-based I/O solutions are used primarily in high performance computer systems designed to support bandwidth-intensive applications and operating systems. Historically, the Company's growth has been supported by increasing demand for systems that support client/server and Internet/intranet applications, computer-aided engineering, desktop publishing, multimedia, and video. Should the growth of demand for such systems slow, the Company's business or operating results could be materially adversely affected by a decline in demand for the Company's products. Certain Risks Associated with the Computer Peripherals Market. As a supplier of controller circuits to manufacturers of computer peripherals such as disk drives and other storage devices, a portion of the Company's business is dependent on the overall market for computer peripherals. This market, which itself is dependent on the market for personal computers, has historically been characterized by periods of rapid growth followed by periods of oversupply and contraction. As a result, suppliers to the computer peripherals industry from time to time experience large and sudden fluctuations in demand for their products as their customers adjust to changing conditions in their markets. If these fluctuations are not accurately anticipated, such suppliers, including the Company, could produce excessive or insufficient inventories of various components which could -8- 12 materially and adversely affect the Company's business and operating results. The computer peripherals industry is also characterized by intense price-competition, which in turn creates pricing pressures on the suppliers to that industry. If the Company is unable to correspondingly decrease its manufacturing or component costs, such pricing pressures could have a material adverse effect on the Company's business or operating results. Reliance on Industry Standards, Technological Change, Dependence on New Products. The computer industry is characterized by various standards and protocols that evolve with time. The Company's current products are designed to conform to certain industry standards and protocols such as SCSI, UltraSCSI, PCI, RAID, ATM, and Fast Ethernet. In particular, a majority of the Company's revenues are currently derived from products based on the SCSI standard. If consumer acceptance of these standards was to decline, or if they were replaced with new standards, and if the Company did not anticipate these changes and develop new products, the Company's business or operating results could be materially adversely affected. 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 therefore highly dependent upon the timely completion and introduction of new products at competitive price/performance levels. The success of new product introductions is dependent on several factors, including proper new product definition, product costs, timely completion and introduction of new product designs, quality of new products, differentiation of new products from those of the Company's competitors, and market acceptance of the Company's and its customers' products. As a result, the Company believes that continued significant expenditures for research and development will be required in the future. There can be no assurance that the Company will successfully identify new product opportunities and develop and bring new products to market in a timely manner, that products or technologies developed by others will not render the Company's products or technologies obsolete or noncompetitive, or that the Company's products will be selected for design into the products of its targeted customers. The failure of any of the Company's new product development efforts could have a material adverse effect on the Company's business or operating results. In addition, the Company's revenues and operating results could be adversely impacted if its customers shifted their demand to a significant extent away from board-based I/O solutions to application-specific ICs. Dependence on Wafer Suppliers and Other Subcontractors. All of the finished silicon wafers used for the Company's products are currently manufactured to the Company's specifications by independent foundries. The Company currently purchases a substantial majority of its wafers through a supply agreement with TSMC. The Company also purchases wafers from SGS-Thomson Microelectronics and Seiko Epson. The manufacture of semiconductor devices is sensitive to a wide variety of factors, including the availability of raw materials, the level of contaminants in the manufacturing environment, impurities in the materials used, and the performance of personnel and equipment. While the quality, yield, and timeliness of wafer deliveries to date have been acceptable, there can be no assurance that manufacturing yield problems will not occur in the future. In addition, although the Company has various supply agreements with its suppliers, a shortage of raw materials or production capacity could lead any of the Company's wafer suppliers to allocate available capacity to customers other than the Company, or to internal uses. Any prolonged inability to obtain wafers with competitive performance and cost attributes, adequate yields, or timely deliveries from its foundries would delay production and product shipments and could have a material adverse effect on the Company's business or operating results. The Company expects that it will in the future seek to convert its fabrication process arrangements to smaller geometries and to more advanced process technologies. Such conversions entail inherent technological risks that can affect yields and delivery times. If for any reason the Company's current suppliers were unable or unwilling to satisfy the Company's wafer needs, the Company would be required to identify and qualify additional foundries. There can be no assurance that any additional wafer foundries would become available, that such -9- 13 foundries would be successfully qualified, or that such foundries would be able to satisfy the Company's requirements on a timely basis. The Company's future growth will depend in large part on increasing its wafer capacity allocation from current foundries, adding additional foundries, and gaining access to advanced process technologies. There can be no assurance that the Company will be able to satisfy its future wafer needs from current or alternative sources. Any increase in general demand for wafers within the industry or any reduction of existing wafer supply from any of the Company's foundry sources, could materially adversely affect the Company's business, financial condition, or operating results. In order to secure wafer capacity, the Company from time to time has entered into "take or pay" contracts that committed the Company to purchase specified wafer quantities over extended periods, and has made prepayments to foundries. In the future, the Company may enter into similar transactions or other transactions, including, without limitation, non-refundable deposits with or loans to foundries, or equity investments in, joint ventures with or other partnership relationships with foundries. Any such transaction could require the Company to seek additional equity or debt financing to fund such activities. There can be no assurance that the Company will be able to obtain any required financing on terms acceptable to the Company. Additionally, the Company relies on subcontractors for the assembly and packaging of the ICs included in its products. The Company has no long-term agreements with its assembly and packaging subcontractors. There can be no assurance that such subcontractors will continue to be able and willing to meet the Company's requirements for such components or services. Any significant disruption in supplies from, or degradation in the quality of components or services supplied by, such subcontractors could delay shipments and result in the loss of customers or revenues or otherwise have a material adverse effect on the Company's business or operating results. Certain Risks Associated With Acquisitions. Since the beginning of fiscal 1996, the Company has acquired eleven complementary companies and businesses. As part of its overall strategy, the Company plans to continue to acquire or invest in complementary companies, products, or technologies and to enter into joint ventures and strategic alliances with other companies. Risks commonly encountered in such transactions include the difficulty of assimilating the operations and personnel of the combined companies, the potential disruption of the Company's ongoing business, the inability to retain key technical and managerial personnel, the inability of management to maximize the financial and strategic position of the Company through the successful integration of acquired businesses, additional expenses associated with amortization of acquired intangible assets, dilution of existing equity holders, the maintenance of uniform standards, controls, procedures, and policies, and the impairment of relationships with employees and customers as a result of any integration of new personnel. There can be no assurance that the Company would be successful in overcoming these risks or any other problems encountered in connection with such business combinations, investments, or joint ventures, or that such transactions will not materially adversely affect the Company's business, financial condition, or operating results. Certain Risks Associated with Implementation of New Information Systems. The Company is in the process of implementing new information systems to enhance its current and future business processes worldwide. The Company will implement these systems during fiscal 1998. There can be no assurance that the Company will successfully implement this new system efficiently and in a timely manner. Any significant period of delay to this project could have a material adverse effect on the Company's business or operating results. Competition. The markets for the Company's products are intensely competitive and are characterized by rapid technological advances, frequent new product introductions, evolving industry standards, and price -10- 14 erosion. In the host adapter market, the Company competes with a number of smaller host adapter manufacturers. The Company's principal competitors in the mass storage market are captive suppliers and Cirrus Logic, Inc. As the Company has continued to broaden its bandwidth management product offerings into the desktop, server, and networking environments, it has experienced, and expects to experience in the future, significantly increased competition both from existing competitors and from additional companies that may enter its markets. Some of these companies have greater technical, marketing, manufacturing, and financial resources than the Company. There can be no assurance that the Company will be able to make timely introduction of new leading-edge solutions in response to competitive threats, that the Company will be able to compete successfully in the future against existing or potential competitors or that the Company's business or operating results will not be materially adversely affected by price competition. Certain Issues Related to Distributors. The Company's distributors generally offer a diverse array of products from several different manufacturers. Accordingly, there is a risk that these distributors may give higher priority to selling products from other suppliers, thus reducing their efforts to sell the Company's products. A reduction in sales efforts by the Company's current distributors could have a materially adverse effect on its business or operating results. The Company's distributors may on occasion build inventories in anticipation of substantial growth in sales, and if such growth does not occur as rapidly as anticipated, distributors may decrease the amount of product ordered from the Company in subsequent quarters. Such a slowdown in orders could reduce the Company's revenues in any given quarter and give rise to fluctuation in the Company's operating results. Dependence on Key Personnel. The Company's future success depends in large part on the continued service of its key technical, marketing, and management personnel, and on its ability to continue to attract and retain qualified employees, particularly those highly skilled design, process, and test engineers involved in the manufacture of existing products and the development of new products and processes. The competition for such personnel is intense, and the loss of key employees could have a material adverse effect on the Company's business or operating results. Certain Risks Associated with International Operations. The Company's manufacturing facility and various subcontractors it utilizes from time to time are located primarily in Asia. Additionally, the Company has various sales offices and customers throughout Europe, Japan, and other countries. The Company's international operations and sales are subject to political and economic risks, including political instability, currency controls, exchange rate fluctuations, and changes in import/export regulations, tariffs, and freight rates. In addition, because the Company's principal wafer supplier, TSMC, is located in Taiwan, the Company is subject to the risk of political instability in Taiwan, including the potential for conflict between Taiwan and the People's Republic of China. Intellectual Property Protection and Disputes. The Company has historically devoted significant resources to research and development and believes that the intellectual property derived from such research and development is a valuable asset that has been and will continue to be important to the success of the Company's business. Although the Company actively maintains and defends its intellectual property rights, no assurance can be given that the steps taken by the Company will be adequate to protect its proprietary rights. In addition, the laws of certain territories in which the Company's products are or may be developed, manufactured, or sold, including Asia and Europe, may not protect the Company's products and intellectual property rights to the same extent as the laws of the United States. The Company has from time to time discovered counterfeit copies of its products being manufactured or sold by others. Although the Company maintains an active program to detect and deter the counterfeiting of its products, should counterfeit products become available in the market to any significant degree it could materially adversely affect the business or operating results of the Company. -11- 15 From time to time, third parties may assert exclusive patent, copyright, and other intellectual property rights to technologies that are important to the Company. There can be no assurance that third parties will not assert infringement claims against the Company in the future, that assertions by third parties will not result in costly litigation or that the Company would prevail in such litigation or be able to license any valid and infringed patents from third parties on commercially reasonable terms. Litigation, regardless of its outcome, could result in substantial cost and diversion of resources of the Company. Any infringement claim or other litigation against or by the Company could materially adversely affect the Company's business or operating results. Need for Interoperability. The Company's products must be designed to interoperate effectively with a variety of hardware and software products supplied by other manufacturers, including microprocessors, peripherals, and operating system software. The Company depends on significant cooperation with these manufacturers in order to achieve its design objectives and produce products that interoperate successfully. While the Company believes that it generally has good relationships with leading system, peripheral, and microprocessor suppliers, there can be no assurance that such suppliers will not from time to time make it more difficult for the Company to design its products for successful interoperability or decide to compete with the Company. Volatility of Stock Price. The stock market in general, and the market for shares of technology companies in particular, have from time to time 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 that generally affect the market for stocks of high technology companies, could cause the price of the Company's Common Stock to fluctuate substantially over short periods. Subordination. The Notes are unsecured and subordinated in right of payment in full to all existing and future Senior Indebtedness of the Company. As a result of such subordination, in the event of bankruptcy, liquidation or reorganization of the Company, or upon the acceleration of any Senior Indebtedness, the assets of the Company will be available to pay obligations on the Notes only after all Senior Indebtedness has been paid in full, and there may not be sufficient assets remaining to pay amounts due on any or all of the Notes then outstanding. The Company expects from time to time to incur indebtedness constituting Senior Indebtedness. The Indenture does not prohibit or limit the incurrence of additional indebtedness by the Company or its subsidiaries and the incurrence of additional indebtedness by the Company or its subsidiaries could adversely affect the Company's ability to pay its obligations on the Notes. As of March 31, 1997, the Company had $4.3 million of indebtedness outstanding that would have constituted Senior Indebtedness (excluding accrued interest and Senior Indebtedness constituting liabilities of a type not required to be reflected as a liability on the balance sheet of the Company in accordance with generally accepted accounting principles). In addition, the Notes are structurally subordinated to the liabilities, including trade payables, of the Company's subsidiaries. As of March 31, 1997, subsidiaries of the Company had outstanding $38.7 million of aggregate liabilities (excluding intercompany liabilities and liabilities of a type not required to be reflected as a liability on the balance sheets of such subsidiaries in accordance with generally accepted accounting principles). See "Description of Notes -- Subordination." Limitations on Repurchase of Notes. Upon a Change of Control (as defined), each Holder of Notes will have certain rights, at the Holder's option, to require the Company to repurchase all or a portion of such -12- 16 Holder's Notes. If a Change of Control were to occur, there can be no assurance that the Company would have sufficient funds to pay the purchase price for all Notes tendered by the Holders thereof. In addition, the terms of the Company's existing primary bank facility prohibit the Company from repurchasing any Notes and also provide that under certain circumstances a Change of Control would constitute an event of default thereunder. Any future credit agreements or other agreements relating to other indebtedness (including other Senior Indebtedness) to which the Company becomes a party may contain similar restrictions and provisions. In the event a Change of Control occurs at a time when the Company is prohibited from purchasing Notes by the terms of any indebtedness, the Company could seek the consent of its lenders to the purchase of Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company would remain prohibited from repurchasing Notes. In such case, the Company's failure to repurchase tendered Notes would constitute an Event of Default under the Indenture, which would, in turn, constitute a further default under the Company's existing bank facility and may constitute a default under the terms of other indebtedness that the Company may enter into from time to time. In such circumstances, the subordination provisions in the Indenture would restrict payments to the Holders of Notes. See "Description of Notes -- Repurchase at Option of Holders." -13- 17 USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Notes or the Common Stock issuable upon conversion thereof by the Selling Securityholders. PRICE RANGE OF COMMON STOCK The Company's Common Stock is traded on the Nasdaq National Market under the symbol "ADPT." The following table shows for the periods indicated the high and low sale prices for the Common Stock as reported by the Nasdaq National Market.
HIGH LOW ---------- -------- FISCAL YEAR ENDED MARCH 31, 1995 First quarter . . . . . . . . . . . . . . . . . . . $ 9 3/4 $ 7 Second quarter . . . . . . . . . . . . . . . . . . 10 5/8 8 1/8 Third quarter . . . . . . . . . . . . . . . . . . . 12 3/8 8 5/8 Fourth quarter . . . . . . . . . . . . . . . . . . 18 1/2 10 7/8 FISCAL YEAR ENDED MARCH 31, 1996 First quarter . . . . . . . . . . . . . . . . . . . 19 15/16 14 5/8 Second quarter . . . . . . . . . . . . . . . . . . 23 5/8 17 1/4 Third quarter . . . . . . . . . . . . . . . . . . . 24 3/16 17 13/16 Fourth quarter . . . . . . . . . . . . . . . . . . 28 3/16 17 9/16 FISCAL YEAR ENDED MARCH 31, 1997 First quarter . . . . . . . . . . . . . . . . . . . 30 3/4 22 15/16 Second Quarter . . . . . . . . . . . . . . . . . . 29 13/16 17 1/2 Third Quarter . . . . . . . . . . . . . . . . . . . 41 1/8 28 5/8 Fourth Quarter . . . . . . . . . . . . . . . . . . 46 7/8 32 1/8 FISCAL YEAR ENDED MARCH 31, 1998 First Quarter (through June 18, 1997) . . . . . . . 40 5/8 30 1/8
On June 18, 1997, the last reported sale price of the Common Stock as reported by the Nasdaq National Market was $37.00 per share. As of May 31, 1997, there were approximately 818 holders of record of the Company's Common Stock. DIVIDEND POLICY The Company has not paid any cash dividends on its capital stock to date. The Company currently anticipates that it will retain all future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future. -14- 18 SELECTED CONSOLIDATED FINANCIAL DATA The following selected historical consolidated financial data of Adaptec, Inc., insofar as it relates to each of the fiscal years ended March 31, 1993 through March 31, 1997, has been derived from the audited consolidated financial statements of Adaptec, including the consolidated balance sheets at March 31, 1996 and 1997 and the related consolidated statements of operations and of cash flows for each of the three fiscal years in the period ended March 31, 1997 and the related notes thereto included herein. The data should be read in conjunction with the consolidated financial statements, related notes and other financial information included herein.
Year Ended March 31, -------------------------------------------------------- 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- (in thousands, except ratio and per share data) STATEMENT OF OPERATIONS DATA: Net revenues . . . . . . . . . . . . . $ 311,339 $ 372,245 $ 466,194 $ 659,347 $ 933,868 Cost of revenues . . . . . . . . . . . 174,179 189,526 205,596 275,939 388,969 ---------- ---------- ---------- ---------- ---------- Gross profit . . . . . . . . . . . . 137,160 182,719 260,598 383,408 544,899 ---------- ---------- ---------- ---------- ---------- Operating expenses: Research and development . . . . . . 26,324 39,993 60,848 87,628 128,530 Selling, marketing and administrative 48,093 65,591 81,966 117,332 162,979 Write-off of acquired in-process -- -- -- 52,313 92,162 technology and other . . . . . . ---------- ---------- ---------- ---------- ---------- Total operating expenses . . . . 74,417 105,584 142,814 257,273 383,671 ---------- ---------- ---------- ---------- ---------- Income from operations . . . . . . . 62,743 77,135 117,784 126,135 161,228 ---------- ---------- ---------- ---------- ---------- Shareholder settlement . . . . . . . . -- (2,409) -- -- -- Interest income . . . . . . . . . . . . 4,078 5,183 7,932 12,694 13,297 Interest expense . . . . . . . . . . . (967) (1,306) (1,179) (840) (2,744) ---------- ---------- ---------- ---------- ---------- Interest income, net . . . . . . . . . 3,111 1,468 6,753 11,854 10,553 ---------- ---------- ---------- ---------- ---------- Income before income taxes . . . . . 65,854 78,603 124,537 137,989 171,781 Provision for income taxes . . . . . . 16,464 19,653 31,135 34,614 64,220 ---------- ---------- ---------- ---------- ---------- Net income . . . . . . . . . . . . . . $ 49,390 $ 58,950 $ 93,402 $ 103,375 $ 107,561 ========== ========== ========== ========== ========= Net income per share . . . . . . . . . . $ 0.48 $ 0.55 $ 0.88 $ 0.95 $ 0.93 ========== ========== ========== ========== ========= Weighted average shares outstanding . . . 103,304 107,204 106,714 109,138 115,062 ========== ========== ========== ========== ========= Ratio of earnings to fixed charges(1) . . 46.5x 43.6x 64.4x 67.8x 38.1x
March 31, --------------------------------------------------------------- 1993 1994 1995 1996 1997 ---------- ---------- ---------- ---------- ---------- (in thousands) BALANCE SHEET DATA: Working capital . . . . . . . . . . . . . . . $ 191,693 $ 243,451 $ 294,058 $ 334,989 $ 693,629 Total assets . . . . . . . . . . . . . . . . 282,896 358,475 435,708 646,486 1,043,494 Long-term debt, net of current portion . . . 14,450 11,050 7,650 4,250 230,850 Shareholders' equity 225,155 297,616 371,644 511,945 688,325
- ----------------------- (1) For the purpose of calculating the ratio of earnings to fixed charges, (i) earnings consist of consolidated pre-tax income plus fixed charges and (ii) fixed charges consist of interest expense incurred and the portion of rental expense under leases deemed by the Company to be representative of the interest factor. -15- 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Prospectus contains forward-looking statements that involve risks and uncertainties. The statements contained in this Prospectus that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including without limitation statements regarding the Company's expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth below, under "Risk Factors" and elsewhere in this Prospectus. RESULTS OF OPERATIONS The Company continued its worldwide growth as net revenues increased 42% to $934 million in fiscal 1997 and 41% to $659 million in fiscal 1996. The increase in net revenues has been driven primarily by industry dynamics, including the proliferation of client/server networks, the Internet and corporate intranets, the growth of data intensive software applications such as graphics and video, the ongoing deployment of sophisticated operating systems such as Windows NT, and the adoption of various high performance peripherals such as high capacity hard drives, scanners, and optical drives including CD-ROM and CD-R. These trends, combined with the Company's market leadership in providing SCSI solutions, resulted in increased host adapter net revenues in both the OEM and distributor channels worldwide. Over the last two years net revenues from sales of the Company's application specific ICs have also increased, primarily as a result of design wins with major OEMs for higher capacity disk drives that are required for advanced applications. Gross margin in fiscal 1997 was 58% compared to 58% and 56% in the 1996 and 1995 fiscal years, respectively. Over the last two years the Company's focus on designing its application specific ICs to improve yield has led to increased efficiency in the manufacturing process. Gross margin in fiscal 1997 remained unchanged from fiscal 1996 due to decreased costs of purchased components that were offset by the mix of products shipped. In fiscal 1997 and 1996, the Company maintained its research and development commitment to invest in its core products as well as newer hardware and software solutions including 1394/Firewire, Fibre Channel, and optical technologies. Research and development expenditures in fiscal 1997 increased slightly as a percentage of revenues to 14% compared with 13% in both the 1996 and 1995 fiscal years. Spending for the three fiscal years was $129 million, $88 million, and $61 million, respectively. The Company believes these expenditures, consisting primarily of increased staffing levels, have allowed it to maintain its position in technical leadership and product innovation. Because of the industry dynamics driving the need for increased system bandwidth, the Company believes it is essential to continue its investment in research and development and anticipates that actual spending in fiscal 1998 will increase. Selling, marketing, and administrative expenses in fiscal 1997 decreased slightly as a percentage of revenues to 17% compared with 18% in both the 1996 and 1995 fiscal years. Spending for the three fiscal years was $163 million, $117 million, and $82 million, respectively. These increases in actual spending were primarily a result of advertising and promotional programs aimed at leveraging the Company's brand image and generating demand for its products. Additionally, the Company increased staffing levels to support its worldwide growth. -16- 20 The Company believes it will increase these expenditures in fiscal 1998 primarily due to expanded worldwide marketing activities. During fiscal years 1997 and 1996, the Company acquired various complementary businesses and technologies recorded under the purchase method of accounting, resulting in write-offs of acquired in-process technology of $90 million and $52 million, respectively. Excluding the write-offs, the Company's results of operations for fiscal years 1997 and 1996 were not materially affected by these acquisitions. Additionally, the Company acquired one business, Cogent Data Technologies (Cogent), recorded under the pooling-of-interests method of accounting. The Company incurred $2 million in professional fees in connection with this acquisition, which have been included in "write-off of acquired in-process technology and other." Cogent's historical operations, net assets, and cash flows were not material to the Company's consolidated financial statements and, therefore, have not been reflected in the Company's consolidated financial results prior to the acquisition. Beginning at the date of acquisition, the book value of the acquired assets and assumed liabilities as well as the results of Cogent's operations and cash flows, all of which are not material to the Company have been combined with those of the Company. Interest income, net of interest expense for fiscal 1997, decreased from the prior fiscal year primarily due to lower cash and investment balances in the first half of the year and interest expense incurred in connection with $230 million of Convertible Subordinated Notes that the Company issued in February 1997. The interest rate associated with these notes is 4 3/4%. Interest income, net of interest expense, for both the 1997 and 1996 fiscal years is higher than fiscal 1995 due to higher average cash and investment balances. The Company's effective tax rate for fiscal years 1997, 1996, and 1995 was 37%, 25%, and 25%, respectively. The higher fiscal 1997 rate resulted from write-offs of acquired in-process technology for which the Company will receive no corresponding tax benefit. Excluding the effect of the write-offs of acquired in-process technology in fiscal 1997, the Company's effective tax rate was 25%. The accounting for write- offs of acquired in-process technology changed in fiscal 1997 due to an interpretation of SFAS 109 that the Company adopted upon its issuance. In fiscal 1996, the Company was allowed to gross-up the acquired in-process technology and record a dollar-for-dollar credit against its tax provision, allowing the Company to maintain its 25% effective rate. The difference between the Company's 25% effective tax rate and the U.S. statutory rate is primarily due to income earned in Singapore where the Company is subject to a significantly lower effective tax rate resulting from a tax holiday relating to certain of its products. The terms of the tax holiday provide that profits derived from certain products will be exempt from tax through 2006, 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 Singapore statutory rate of 26%, 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 dependence on the high-performance microcomputer, server, and peripherals markets, changes in product mix, competitive pricing pressures, changes in technological standards, dependence on wafer suppliers and other subcontractors, changes in product costs, certain risks associated with acquisitions of other companies or businesses that the Company may make from time to time, issues related to distributors, dependence on key personnel, risks associated with international operations, risks associated with implementation of new systems, and risks associated with intellectual property or general economic downturns. -17- 21 LIQUIDITY AND CAPITAL RESOURCES Operating Activities. Net cash generated from operating activities during fiscal 1997 was $223 million compared to the $106 million generated in fiscal 1996. The increase in fiscal 1997 is reflected in the increase in the Company's net income excluding non-cash charges compared to the prior year. The increase in cash generated from operations from fiscal 1996 was primarily a result of the overall growth of the Company's operations. Offsetting favorable operating cash flows in fiscal 1997 was an increase in accounts receivable of $42 million reflecting the Company's growth. Investing Activities. The Company made payments of $107 million, net of cash acquired, in connection with the acquisitions of Western Digital's Connectivity Solutions Group (CSG), CD-Recordable (CD-R) software technology from Corel, Inc., Data Kinesis Inc. (DKI), Sigmax Technologies Inc. (Sigmax), Toast CD-R technology for the Macintosh platform, and certain assets of Skipstone, Inc. (Skipstone). Additionally, the Company acquired Cogent in a transaction accounted for as a pooling of interest through the issuance of 2.6 million shares of its common stock. During fiscal 1996, the Company also acquired various complementary businesses and technologies resulting in a $31 million cash payout. In fiscal 1997, the Company continued to invest in equipment for product development and manufacturing to support increased demand for its products and future business requirements. Also included in the $88 million invested in property and equipment during the current fiscal year was an investment of $13 million toward a new facility for one of the Company's research and development centers located in Boulder, Colorado, and an investment of $15 million toward the implementation of new information systems for the Company. The Company will begin utilizing the facility in Boulder during the first quarter of fiscal 1998 and its new information systems in the second quarter of fiscal 1998. During the 1998 fiscal year, the Company anticipates it will invest approximately $90 million in property and equipment, primarily consisting of equipment for future product innovation as well as facilities to support its growth. During fiscal years 1997, 1996, and 1995 the Company continued to invest significant amounts of funds in marketable securities consisting mostly of highly rated municipal instruments. During fiscal year 1997, the Company entered into an agreement with Lucent Technologies, Inc. ("Lucent") to sell $21 million of equipment that it had previously purchased in connection with a separate agreement that ensured availability of certain levels of wafer capacity from Lucent. This new agreement cancels the initial capacity agreement and requires Lucent to purchase the equipment from the Company payable in two installments in fiscal 1998. Financing Activities. In February 1997, the Company issued $230 million of 4 3/4% Convertible Subordinated Notes due February 1, 2004, for which the Company received net proceeds of $224 million. The notes provide for semi-annual interest payments each February 1 and August 1, commencing on August 1, 1997. The holders of the notes will be entitled at any time on or after May 5, 1997 through maturity to convert the notes into common stock at a conversion price of $51.66 per share. The notes are redeemable, in whole or in part, at the option of the Company, at any time on or after February 3, 2000 at declining premiums to par. Debt issuance costs are being amortized ratably over the term of the notes. In June 1996, the Company paid a $46 million short-term note issued to TSMC in connection with an agreement to ensure increased wafer capacity through the year 2001. Subsequent to March 31, 1997, the Company entered into an agreement with TSMC whereby the Company will make advance payments totaling $35 million to secure additional wafer capacity for future technology through 2001. The Company signed a -18- 22 promissory note for $35 million for the advance payments, which become due in two equal installments on January 31, 1998 and June 30, 1998. During fiscal years 1997, 1996, and 1995, the Company received proceeds from the issuance of common stock under its Stock Option and Employee Stock Purchase Plans totaling $50 million, $27 million, and $17 million, respectively. During fiscal 1997, the Company's Board of Directors terminated the Company's stock repurchase program. The Company has an unsecured $17 million revolving line of credit under which there were no outstanding borrowings as of March 31, 1997. The Company's liquidity is affected by various factors, some based on continuing operations of the business and others related to the industry and global economies. Although the Company's cash position 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 1998. BUSINESS Adaptec is a leading supplier of bandwidth management solutions that significantly enhance total system performance by increasing the data transfer rates between personal computers ("PCs"), servers, peripherals, and networks. The Company's products include host adapters, which are primarily based on the small computer system interface ("SCSI") standard, peripheral technology solutions, consisting primarily of application specific integrated circuit ("ASIC") controllers for hard disk and CD-ROM drives, and network products, which include asynchronous transfer mode ("ATM") and Fast Ethernet adapters. Adaptec provides its customers with complete solutions, consisting of hardware, software, and firmware, which are incorporated into the products of substantially all of the major Intel-based PC and server manufacturers worldwide. INDUSTRY BACKGROUND A number of trends are driving the need to increase effective input/output ("I/O") bandwidth between PCs, servers, peripherals and networks: (i) the introduction of increasingly powerful central processing units ("CPUs"), which require more rapidly accessed and intelligently managed data to function at their optimal performance level, (ii) new advanced operating systems, such as Windows NT and Windows 95 that allow for faster I/O and multitasking, (iii) the growth of data-intensive software applications, such as graphics and video, which require significantly more bandwidth, (iv) the proliferation of client/server networks, the Internet and corporate intranets, which is in turn driving growth in the number and processing power of servers, and (v) growth in high-performance peripherals, such as high-capacity hard disk drives, scanners, CD-ROMs, and new CD-R and DVD drives. These factors have created a rapid increase in the transfer of data between desktop PCs, servers, peripherals, and networks, resulting in substantial I/O and network bottlenecks. Industry standards have been developed to enable I/O to keep up with these trends, of which the most important for high-performance applications is SCSI. SCSI has become the industry standard I/O bus specification for high-performance systems. SCSI allows the "intelligent" transfer of data between computers, peripherals, and networks by enabling multitasking and by offloading the system CPU from I/O management. SCSI solutions include a proprietary ASIC and firmware and software for operating system drivers, peripheral drivers, and I/O utilities. Nearly all servers utilize SCSI, and as many as 10% of desktop PCs now -19- 23 incorporate SCSI, with this percentage expected to increase as microprocessors become more powerful and as more complex, data-intensive applications are performed on the desktop. The increase in the usage of data is also creating demand for increasing amounts of data storage as well as new high-capacity peripheral devices. Virtually every microcomputer is shipped with mass storage peripherals such as hard disk drives and CD-ROMs. Each peripheral requires an ASIC controller to manage the operations of that peripheral and to interface with the system bus. Recently, new peripherals, such as CD-ROMs and removable storage devices, have been increasingly used alongside hard disks to provide additional storage capacity. Such devices frequently have SCSI interfaces. In addition, the increasing need for mass storage is also driving the need for controller solutions that can support multi-gigabyte drives in both desktop and server systems. Another I/O-related market that is benefiting from the need for increased bandwidth is the market for network interface cards that reside on servers and PCs and use such standards as ATM and Fast Ethernet. Server bandwidth is moving to the forefront of concern of information system organizations as more Internet and intranet servers are rapidly coming on line. The Company, with its networking solutions, provides both the bandwidth to and from the server as well as augmenting the server's resiliency to unexpected events, such as network infrastructure failures and disk drive crashes, through innovative software features. In addition to SCSI, other high-performance, standards-based host adapter solutions, such as 1394/Firewire and Fibre Channel, are emerging in support of new applications. 1394/Firewire is an industry standard interface used in both personal computers and consumer electronics equipment. In 1997, 1394/Firewire interface will be incorporated in products such as PCs for desktop publishing and video editing, still image cameras, printers, scanners, optical drives, and as many as 50% of all digital camcorders. The popularity of 1394/Firewire is expected to grow due to its high speed and easy-to-use cabling. Fibre Channel is a bus technology targeted for applications with very high-capacity I/O demands, which offers unique capabilities in the clustering and high end multi-processor server environments. 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 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 and Fast Ethernet network interface cards, and related firmware and software, meet the demanding I/O and connectivity requirements of enterprise servers, high-performance desktop and portable computers, and technical workstations across all important microprocessor-based platforms. The Company's board-based I/O products, which incorporate the Company's proprietary single chip architectures and an extensive array of related 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 perform other operations. The -20- 24 Company offers these host adapters across all ranges of bus architectures including PCI, ISA, EISA, and PCMCIA. The Company also provides non-bus mastering host adapters that provide standardized SCSI connectivity between the CPU and its peripherals. Additionally, demand is increasing for the Company's board-based I/O solutions where SCSI is utilized in nearly all servers. To expand further the market for its products, the Company continues to develop and market I/O solutions meeting specific original equipment manufacturer ("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 has undertaken numerous initiatives to increase the accessibility, ease of use, and versatility of the SCSI standard. Advanced SCSI programming interface ("ASPI"), an industry standard developed by the Company, enables users to integrate high-performance SCSI peripherals with microcomputers using popular operating systems, such as Windows 95, Windows NT, NetWare, OS/2, and UNIX. In addition, 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. The Company has several software utilities such as Adaptec EZ-SCSI and SCSIselect products, which simplify connecting a SCSI host adapter and peripherals to a microcomputer system. The Company has developed and continues to develop products for emerging standards such as 1394/Firewire and Fibre Channel. The proliferation of client server architectures, the Internet, and corporate intranets have caused both the expansion and upgrading of corporate networks, thereby creating demand for more powerful bandwidth management solutions for networked environments. The Company offers its family of ATM network interface cards ("NICs"), which provide a robust solution for managing mixed data types such as graphics, video, and voice. As a result of the acquisition of Cogent in fiscal 1997, the Company has expanded its product offerings to include a family of Fast Ethernet NICs, which provide a high-performance solution to the installed base of servers used in Ethernet networks. Integrated Circuits The Company develops proprietary integrated circuits ("ICs") for use in microcomputer systems, mass storage devices, various other peripherals, and for use in its own board-based SCSI host adapters and 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, firmware, and software that optimize overall subsystem design. The Company's current IC products include SCSI and enhanced integrated device electronic ("EIDE") programmable storage controllers, single-chip SCSI host adapters, and single-chip redundant array of inexpensive disks ("RAID")-on-the-motherboard solutions. 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. The Company's RAID-on-the-motherboard solutions provide a cost-effective array solution that maintains motherboard designs and protects the investment in embedded SCSI. -21- 25 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 ICs circuits, and knowledge of operating system software is essential. The Company's research and development efforts continue to focus on the development of complete solutions that include proprietary ASICs, firmware, and software that support multiple architectures and peripheral devices. These I/O solutions 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. The Company also continues to invest significant resources to develop its core products as well as newer hardware and software solutions including CD-R, 1394/Firewire, Fibre Channel, and optical technologies. Approximately 28% of the Company's employees are engaged in research and development, of which approximately 50% are engaged in software development. In fiscal 1997, 1996, and 1995, the Company spent approximately $129 million (14% of net revenues), $88 million (13% of net revenues), and $61 million (13% of net revenues), respectively, for research and development. MARKETING AND CUSTOMERS The Company believes it has successfully positioned itself as a leading supplier of a full range of I/O solutions providing bandwidth management. The Company sells its products through a direct sales force to substantially all major server and PC manufacturers, as well as most of the major electronic distributors worldwide. The Company works closely with its OEM customers on the design of current and next generation products to meet the specific requirements of system integrators and end-users. The Company provides its OEM customers with extensive applications and system design support. The Company also sells board-based products to end-users through major computer product distributors and provides technical support to its customers worldwide. The Company's OEM customers include Acer, Compaq, 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. The Company's major distributors include Actebis, Computer 2000, Gates/Arrow, Ingram Micro, Merisel, Nissho, and Tech Data. In fiscal 1997 and 1995, no customer accounted for more than 10% of the Company's net revenues. In fiscal 1996, sales to one distributor represented 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. -22- 26 International net revenues accounted for approximately 61%, 56%, and 62% of net revenues in fiscal 1997, 1996, and 1995, 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. COMPETITION In the host adapter market, the Company competes with a number of smaller host adapter manufacturers. 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 the principal competitive factors in this market are performance, a comprehensive array of solutions ranging from connectivity products for the personal computing market to high-performance products for the enterprise-wide computing and networked environments, product features, brand awareness, financial resources, and technical and administrative support. The Company believes that it presently competes favorably with respect to each of these factors. The Company's principal competitors in the mass storage market are captive suppliers and Cirrus Logic, Inc. The Company believes that its competitive strengths in the mass storage market include its systems level expertise, integrated circuit design capability, and substantial experience in I/O applications. The Company believes the principal competitive factors in achieving design wins are performance, product features, price, quality, and technical and administrative support. The Company believes that it presently competes favorably with respect to each of these factors. The markets for the Company's products are highly competitive and are characterized by rapid technological advances, frequent new product introductions, evolving industry standards, and competitive price pressures. The Company's competitors continue to introduce products with improved performance characteristics, and its customers continue to develop new applications. As the Company has continued to broaden its bandwidth management product offerings into the desktop, server, and networking environments, it has experienced, and expects to experience in the future, significantly increased competition both from existing competitors and from additional companies that may enter its markets. Some of these companies have greater technical, marketing, manufacturing, and financial resources than the Company. 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. -23- 27 BACKLOG The Company's backlog was approximately $154 million and $111 million at March 31, 1997 and March 31, 1996, 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. 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. Since 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 from several outside suppliers in addition to the Company's custom designed integrated circuits. Additionally, during fiscal 1997, to ensure availability of low cost manufacturing capacity for certain product lines, the Company's Singapore plant expanded its relationship with major local subcontracting manufacturers by consigning certain production equipment to the subcontractors. All semiconductor wafers used in manufacturing the Company's products are processed to its specifications by outside suppliers and internally tested by the Company. The Company believes that its current wafer volume and manufacturing technology requirements are best met with foundry 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 for which the Company made advance payments totaling $66 million. Subsequent to March 31, 1997, the Company entered into an agreement with TSMC whereby the Company will make advance payments totaling $35 million to secure additional wafer capacity for future technology through 2001. The Company signed a promissory note for $35 million for the advance payments, which becomes due in two equal installments on January 31, 1998 and June 30, 1998. EMPLOYEES At March 31, 1997, the Company had 2,794 employees, including 773 in engineering, 1,184 in manufacturing (including 1,077 at its Singapore facility), 130 in customer technical support, 204 in marketing, 206 in sales, and 297 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. 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. -24- 28 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. 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, and one building (approximately 200,000 square feet) in Longmont, Colorado, for research, technical support, marketing, sales and administrative support. The Company leases two buildings (approximately 63,000 square feet) in Milpitas, which are mainly occupied to support administrative and sales functions, and other facilities in Irvine, California (82,000 square feet); Bellevue, Washington (9,000 square feet); Friday Harbor, Washington (85,000 square feet); and Nashua, New Hampshire (17,000 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 eleven sales offices in the United States, and one sales office each in Waterloo, Belgium; Munich, Germany; Bretonneux, France; Camberley, England; Singapore; Seoul, Korea; Taipei, Taiwan; and Tokyo, Japan. The Tokyo office also provides technical design efforts and technical support with the Belgian 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 1998. 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. LEGAL PROCEEDINGS From time to time, the Company is involved in legal proceedings incidental to the conduct of its business. The Company believes that the litigation, individually or in the aggregate, to which it is currently a party is not likely to have a material adverse effect on the Company's results of operations or financial condition. -25- 29 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The names of the Directors and executive officers of Adaptec, Inc., their ages as of March 31, 1997 and certain information about them are set forth below.
NAME OF DIRECTORS AND EXECUTIVE OFFICERS AGE PRINCIPAL OCCUPATION ----------------------------------------- --- --------------------------------------------------------------------------- John G. Adler . . . . . . . . . . . . . . 60 Chairman of the Board of Directors F. Grant Saviers . . . . . . . . . . . . 52 President and Chief Executive Officer of the Company Robert N. Stephens . . . . . . . . . . . 51 Chief Operating Officer Andrew J. Brown . . . . . . . . . . . . . 37 Vice President, Corporate Controller and Principal Accounting Officer Richard J. Clayton . . . . . . . . . . . 56 Vice President and General Manager Michael G. Fisher . . . . . . . . . . . . 38 Vice President and General Manager Richard S. Gourley . . . . . . . . . . . 44 Vice President, Worldwide Sales Paul G. Hansen . . . . . . . . . . . . . 49 Vice President of Finance, Chief Financial Officer and Assistant Secretary Drew S. Hoffman . . . . . . . . . . . . . 40 Vice President and General Manager E.J. Tim Harris . . . . . . . . . . . . . 49 Vice President of Administration Sam Kazarian . . . . . . . . . . . . . . 54 Vice President of Operations Christopher G. O'Meara . . . . . . . . . 39 Vice President and Treasurer Subramanian Sundaresh . . . . . . . . . . 40 Vice President and General Manager Henry P. Massey, Jr. . . . . . . . . . . 57 Secretary Laurence B. Boucher . . . . . . . . . . . 54 Director Carl J. Conti . . . . . . . . . . . . . . 59 Director John East . . . . . . . . . . . . . . . . 52 Director Robert J. Loarie . . . . . . . . . . . . 54 Director B.J. Moore . . . . . . . . . . . . . . . 61 Director W. Ferrell Sanders . . . . . . . . . . . 60 Director Phillip E. White . . . . . . . . . . . . 54 Director
Except as set forth below, each of the Directors and executive officers has been engaged in his principal occupation described above during the past five years. These is no family relationship between any director or executive officer of Adaptec. Mr. Adler served as President of Adaptec 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. Saviers has served as President and Chief Executive Officer of Adaptec since August 1992 and July 1995 respectively, and was Chief Operating Officer from August 1992 to July 1995. Prior to joining Adaptec, 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. 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. Brown has served as Vice President since 1996, and 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. Mr. Clayton has served as Vice President and General Manager since May 1996. From October 1995 until February 1996 he served as Vice President of AVID Technology Corp. and from January 1984 until February 1996 he served as Vice President of Thinking Machines Corp. -26- 30 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 from November 1990 until April 1994. Mr. Gourley has served as Vice President, Worldwide Sales since April 1996. From September 1994 to April 1996 he was a Senior Director at Oracle. From January 1982 to August 1994, Mr. Gourley served in a number of sales and marketing management positions at IBM. Mr. Hansen, a certified public accountant, has served as Vice President of Finance and Chief Financial Officer since January 1988. From March 1984 to December 1987 he served in various financial roles with the Company. Mr. Harris has served as Vice President of Administration since December 1996. From January 1984 to November 1996, he served in various positions at Novell, Inc. most recently as Senior Vice President, Human Resources. Mr. Hoffman has served as Vice President and General Manager since August 1995. Mr. Hoffman served as Vice President, Engineering of Eschelon Systems Corp. from 1991 to 1995. Mr. Kazarian has served as Vice President of Operations since May 1990. Mr. O'Meara has served as a Vice President since July 1992 and as Treasurer since April 1989. 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. Mr. Boucher has, since March 1997, served as President of Alacritech, Inc., a company recently formed to develop and manufacture computer components. Mr. Boucher served as President from December 1987 to June 1995, as Chief Executive Officer from December 1987 to March 1996, as Chairman of the Board of Directors from February 1994 to June 1996, and as a director from December 1987 to March 1997 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. -27- 31 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 certain venture capital investment partnerships affiliated with Morgan Stanley. 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 Aurum Software, 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. 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. COMPENSATION OF DIRECTORS 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 2,200,000 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 (the "Initial Option"). On March 31 of each year, each non-employee director is granted an additional option to purchase 10,000 shares of Common Stock (the "Annual Option"). All Annual Options granted prior to August 22, 1996 and all Initial 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. All Annual Options granted subsequent to August 22, 1996 become exercisable for 25% of the Shares subject to the grant for each full calendar quarter 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 -28- 32 options granted under the Directors' Plan prior to August 22, 1996 have a term of five years. Options granted subsequent to that date have a term of ten years. 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 31, 1997 at an exercise price of $37.25 per share. BOARD MEETINGS AND COMMITTEES The Board of Directors of the Company held a total of seven meetings during the fiscal year ended March 31, 1997. 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. Conti, Loarie and Sanders and held seven meetings during the last 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. The Compensation Committee of the Board of Directors consists of Messrs. East, Moore and White and held five meetings during the last 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 no meetings during the prior fiscal year. 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. 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. -29- 33 EXECUTIVE COMPENSATION 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, 1997: 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) - ----------------------------------------- ------ ---------- -------- ----------- ----------- ------------------ F. Grant Saviers . . . . . . . . . . . . 1997 $524,423 $560,000 -- 265,719 $1,170 President and Chief Executive Officer 1996 468,462 533,000 -- 279,200 2,520 1995 350,000 475,000 -- 400,000 2,780 Paul G. Hansen . . . . . . . . . . . . . 1997 259,423 221,500 -- 72,000 644 Vice President, Finance and Chief 1996 229,615 259,500 -- 107,600 1,380 Financial Officer 1995 222,115 291,058 -- 100,000 1,260 Sam Kazarian . . . . . . . . . . . . . . 1997 239,519 230,000 -- 64,000 1,170 Vice President, Operations 1996 214,712 243,500 -- 105,800 2,520 1995 200,000 270,000 -- 120,000 2,280 Robert N. Stephens . . . . . . . . . . . 1997 373,077 337,500 -- 128,000 703 Chief Operating Officer 1996 105,769 -- $103,122(4) 253,750 400 Subramanian Sundaresh . . . . . . . . . . 1997 229,423 236,750 -- 80,000 291 Vice President and General Manager 1996 199,327 221,250 19,992(3) 48,000 332 1995 165,000 140,000 -- 100,000 475
(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. Payment of such amounts was conditioned on the individuals continued employment with the Company for a two year period. Half of such amounts were paid to the individuals at the end of fiscal 1996 and at the end of fiscal 1997. (2) Represents life insurance premiums. (3) Represents the grant of 784 Incentive Stock Units pursuant to the Company's 1990 Stock Plan. On the first anniversary of the grant the Company redeemed one-half of the Incentive Stock Units by giving Mr. Sundaresh 392 shares of Common Stock of the Company. On the second anniversary of the date of grant, if Mr. Sundaresh is still in the employ of the Company, the Company will redeem the remaining Incentive Stock Units by giving Mr. Sundaresh either 392 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 784 shares of the Company's Common Stock on the date of grant. As of the March 31, 1997, Mr. Sundaresh held 392 Incentive Stock Units with a value of $14,014 (based on the fair market value of the Company's Common Stock on that date). (4) Represents the grant of 4,044 Incentive Stock Units pursuant to the Company's 1990 Stock Plan. On the first anniversary of the grant the Company redeemed one-half of the Incentive Stock Units by giving Mr. Stephens 2,022 shares of Common Stock of the Company. On the second anniversary of the date of grant, if Mr. Stephens is still in the employ of the Company, the Company will redeem the remaining Incentive Stock Units by giving Mr. Stephens either 2,022 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 2,022 shares of the Company's Common Stock on the date of grant. As of the March 31, 1997, Mr. Stephens held 2,022 Incentive Stock Units with a value of $72,286 (based on the fair market value of the Company's Common Stock on that date). -30- 34 The table below provides the specified information concerning grants of options to purchase the Company's Common Stock made during the fiscal year ended March 31, 1997 to the persons named in the Summary Compensation Table: OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants ---------------------------------------------------------- Potential Realizable Number of Value at Assumed Securities % of Total Annual Rates of Stock Underlying Options Exercise Price Appreciation Options Granted to or for Option Term(3)(4) Granted Employees in Base Price Expiration ---------------------------------- Name (#) Fiscal Year ($/Sh) Date 5%($) 10%($) - ------------------------- ------------ ------------- ---------- ---------- -------------- --------------- F. Grant Saviers . . . . 250,000(1) 3.43% $24.88 6/20/06 $ 3,669,170 $ 9,526,110 15,719(2) 0.22 36.78 3/20/01 135,962 282,010 Paul G. Hansen . . . . . 72,000(1) 0.99 24.88 6/20/06 1,056,721 2,743,520 Sam Kazarian . . . . . . 64,000(1) 0.88 24.88 6/20/06 939,307 2,438,684 Robert N. Stephens . . . 128,000(1) 1.76 24.88 6/20/06 1,878,615 4,877,368 Subramanian Sundaresh . . 80,000(1) 1.10 24.88 6/20/06 1,174,134 3,048,355 All Shareholders . . . . NA NA NA NA 1,192,043,447 3,020,870,421
(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 option holders' 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. (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 $35.75 on March 31, 1997. On March 31, 1997, there were 111,540,464 shares of Common Stock issued and outstanding. -31- 35 The table below provides the specified information concerning the exercise of options to purchase the Company's Common Stock in the fiscal year ended March 31, 1997 and the unexercised options held as of March 31, 1997 by the persons named in the Summary Compensation Table. AGGREGATED OPTION EXERCISED IN LAST FISCAL YEAR AND FY-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS AT OPTIONS AT FY-END (#): FY-END ($): SHARES ACQUIRED VALUE REALIZED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE(#) ($)(1) UNEXERCISABLE UNEXERCISABLE(2) - ------------------------------- ---------------- --------------- --------------- ---------------------- F. Grant Saviers . . . . . . . 330,914 $8,215,958 541,475/563,444 $11,963,847/$8,928,695 Paul G. Hansen . . . . . . . . 70,000 1,490,003 154,800/174,800 3,261,105/2,807,356 Sam Kazarian . . . . . . . . . 16,768 532,013 229,900/174,900 5,455,158/2,924,693 Robert N. Stephens . . . . . . 33,024 530,809 72,851/275,875 875,710/3,391,156 Subramanian Sundaresh . . . . . 40,000 705,125 171,500/164,500 4,039,718/2,915,094
(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 Company's 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 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During fiscal 1997, the Company purchased approximately $1,044,527 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. -32- 36 PRINCIPAL SHAREHOLDERS The table below sets forth as of May 31, 1997 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) . . . . . . . . . . . . . . . . . . . . . . . 14,645,160 13% 82 Devonshire Street Boston, MA 02109-3614 John G. Adler . . . . . . . . . . . . . . . . . . . . . . . 162,838 * Laurence B. Boucher . . . . . . . . . . . . . . . . . . . . 15,040 * Carl J. Conti . . . . . . . . . . . . . . . . . . . . . . . 39,750 * John East . . . . . . . . . . . . . . . . . . . . . . . . . 38,750 * Paul G. Hansen . . . . . . . . . . . . . . . . . . . . . . 162,647 * Sam Kazarian . . . . . . . . . . . . . . . . . . . . . . . 258,341 * Robert J. Loarie . . . . . . . . . . . . . . . . . . . . . 115,354 * B.J. Moore . . . . . . . . . . . . . . . . . . . . . . . . 99,520 * W. Ferrell Sanders . . . . . . . . . . . . . . . . . . . . 132,250 * F. Grant Saviers . . . . . . . . . . . . . . . . . . . . . 711,420 * Robert N. Stephens . . . . . . . . . . . . . . . . . . . . 49,643 * Subramanian Sundaresh . . . . . . . . . . . . . . . . . . . 217,600 * Phillip E. White . . . . . . . . . . . . . . . . . . . . . 36,250 * All current directors and officers as a group (21 persons) 2,330,608 2.1
* 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, 1997: Mr. Adler, 55,000; Mr. Boucher, 15,000; Mr. Conti, 38,750; Mr. East, 33,750; Mr. Hansen, 160,300; Mr. Kazarian, 256,400; Mr. Loarie, 56,250; Mr. Moore, 56,250; Mr. Sanders, 56,250; Mr. Saviers, 614,600; Mr. Stephens, 40,852; Mr. Sundaresh, 182,750; Mr. White, 36,250; and all current officers and directors as a group, 1,885,264. (2) Includes 12,583,940 shares beneficially owned by Fidelity Management & Research Company as a result of serving as investment advisor to various registered investment companies and 2,061,220 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 920,610 shares and sole dispositive power with respect to 14,645,160 shares. -33- 37 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 400,000,000 shares of Common Stock, $.001 par value, and 1,000,000 shares of Preferred Stock, $.001 par value, of which 250,000 shares are designated Series A Participating Preferred Stock, $.001 par value (the "Series A Preferred"). COMMON STOCK As of May 31, 1997, there were 112,244,000 shares of Common Stock outstanding held of record by 818 registered shareholders. Subject to preferences that may be applicable to any outstanding Preferred Stock, holders of Common Stock are entitled to receive ratably such dividends as may be declared by the Board of Directors out of funds legally available therefor. The Company has not paid any cash dividends on its Common Stock. Each holder of Common Stock is entitled to one vote for each share held of record on all matters submitted to a vote in the election of directors. In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preference of any outstanding Preferred Stock. Holders of Common Stock have no preemptive rights and have no rights to convert their Common Stock into any other securities and there are no redemption provisions with respect to such shares. All of the outstanding shares of Common Stock are, and the shares of Common Stock issuable upon conversion of the Notes will be, fully paid and non-assessable. The transfer agent and registrar for the Company's Common Stock is ChaseMellon Shareholder Services, L.L.C. PREFERRED STOCK As of March 31, 1997, there were no shares of Preferred Stock outstanding. The Preferred Stock may be issued from time to time in one or more series. The Company's Board of Directors has authority to fix the designation, powers, preferences and rights of each such series and the qualifications, limitations and restrictions thereon and to increase or decrease the number of shares of such series (but not below the number of shares of such series then outstanding), without any further vote or action by the shareholders. Except in accordance with the Rights Plan (described below), the Company has no present plans to issue any shares of Preferred Stock. Preferred Share Rights Plan On April 25, 1989, the Board of Directors of the Company declared a dividend of one common share purchase right (a "Right" or "Rights" collectively) for each outstanding share of Common Stock, $.001 par value (the "Common Shares"), of the Company. The dividend was paid on May 9, 1989 to shareholders of record at the close of business on that date, and Rights have been issued in connection with all Common Shares issued since that date. On December 5, 1996, the Company and ChaseMellon Shareholder Services, LLC (the "Rights Agent") entered into the Second Amended and Restated Rights Agreement (the "1996 Rights Agreement") which, under the circumstances described below, entitles the registered holder of a Right to purchase from the Company one one-thousandth of a share of Series A Preferred at a price of $180.00 (the "Exercise Price"), subject to adjustment. The Rights will not be exercisable until the Distribution Date (defined below). Certificates for the Rights ("Rights Certificates") will not be sent to shareholders and the Rights will attach to and trade only together with the Common Shares. Accordingly, Common Share certificates outstanding on the Record Date will evidence the Rights related thereto, and Common Share certificates issued after the Record Date will contain a notation incorporating the Rights Agreement by reference. Until the Distribution Date (or earlier redemption or expiration of the Rights), the surrender or transfer of any certificates for Common Shares, outstanding as of the Record Date, even without notation or a copy of the Summary of Rights being attached thereto, will also constitute the transfer of the Rights associated with the Common Shares represented by such certificate. -34- 38 The Rights will separate from the Common Shares, Rights Certificates will be issued and the Rights will become exercisable upon the earlier of: (i) the tenth day (or such later date as may be determined by a majority of the Board of Directors, excluding directors affiliated with the Acquiring Person, as defined below (the "Continuing Directors")) following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding Common Shares, or (ii) 10 days (or such later date as may be determined by a majority of the Continuing Directors) following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 20% or more of the outstanding Common Shares. The earlier of such dates is referred to as the "Distribution Date." As soon as practicable following the Distribution Date, separate Rights Certificates will be mailed to holders of record of the Common Shares as of the close of business on the Distribution Date and such separate Rights Certificates alone will evidence the Rights from and after the Distribution Date. All Common Shares issued prior to the Distribution Date will be issued with Rights. Common Shares issued after the Distribution Date may be issued with Rights if such shares are issued (i) upon the conversion of outstanding convertible debentures or any other convertible securities issued after adoption of the Rights Agreement or (ii) pursuant to the exercise of stock options or under employee benefit plans or arrangements, unless any such issuance would result in (or create a risk that) such options, plans or arrangements would not qualify for otherwise available special tax treatment. Except as otherwise determined by the Board of Directors, no other Common Shares issued after the Distribution Date will be issued with Rights. The Rights will expire on the earliest of (i) December 5, 2006 (the "Final Expiration Date"), (ii) redemption or exchange of the Rights as described below, or (iii) consummation of an acquisition of the Company satisfying certain conditions by a person who acquired shares pursuant to a Permitted Offer as described below. Following the Distribution Date, and until one of the further events described below, holders of the Rights will be entitled to receive, upon exercise and the payment of $180.00 per Right, one one-thousandth of a share of the Series A Preferred. In the event that the Company does not have sufficient Series A Preferred available for all Rights to be exercised, or the Board decides that such action is necessary and not contrary to the interests of Rights holders, the Company may instead substitute cash, assets or other securities for the Series A Preferred for which the Rights would have been exercisable under this provision or as described below. Unless the Rights are earlier redeemed, in the event that an Acquiring Person becomes the beneficial owner of 20% or more of the Company's Common Shares then outstanding (other than pursuant to a Permitted Offer), then proper provision will be made so that each holder of a Right which has not theretofore been exercised (other than Rights beneficially owned by the Acquiring Person, which will thereafter be void) will thereafter have the right to receive, upon exercise, Common Shares (or, in certain circumstances as determined by the Board of Directors, cash, other property or other securities) having a market value equal to two times the Exercise Price. Rights are not exercisable following the occurrence of an event as described above until such time as the Rights are no longer redeemable by the Company as set forth below. Similarly, unless the Rights are earlier redeemed, in the event that, after the Shares Acquisition Date (as defined below), (i) the Company is acquired in a merger or other business combination transaction, or (ii) 50% or more of the Company's consolidated assets or earning power are sold (other than in transactions in the ordinary course of business), proper provision must be made so that each holder of a Right which has not theretofore been exercised (other than Rights beneficially owned by the Acquiring Person, which will thereafter be void) will thereafter have the right to receive, upon exercise, shares of common stock of the acquiring company having a value equal to two times the Exercise Price (unless the transaction satisfies certain conditions and is consummated with a person who acquired shares pursuant to a Permitted Offer, in which case the Rights will expire). A Permitted Offer means a tender offer for all outstanding Common Shares that has been made in the manner prescribed by Section 14(d) of the Securities and Exchange Act of 1934, as amended, and determined by a majority of the Continuing Directors to be fair and otherwise in the best interests of the Company and its stockholders. Where the Board of Directors has determined that a tender offer constitutes a Permitted Offer, the -35- 39 Rights will not become exercisable to purchase Common Shares or shares of the acquiring company (as the case may be) at the discounted price described above. At any time after the acquisition by an Acquiring Person of 20% or more of the Company's outstanding Common Shares and prior to the acquisition by such Acquiring Person of 50% or more of the Company's outstanding Common Shares, the Board of Directors of the Company may exchange the Rights (other than Rights owned by the Acquiring Person), in whole or in part, at an exchange ratio of one Common Share per Right. At any time on or prior to the close of business on the earlier of (i) the tenth day following the acquisition by an Acquiring Person of 20% or more of the Company's outstanding Common Shares (the "Shares Acquisition Date") or such later date as may be determined by a majority of the Continuing Directors and publicly announced by the Company, or (ii) the Final Expiration Date of the Rights, the Company may redeem the Rights in whole, but not in part, at a price of $.01 per Right. The Purchase Price payable, the number of Rights, and the number of Series A Preferred or Common Shares or other securities or property issuable upon exercise of the Rights are subject to adjustment from time to time in connection with the dilutive issuances by the Company as set forth in the Rights Agreement. No fractional portion less than integral multiples of one Common Share will be issued upon exercise of a Right and in lieu thereof, an adjustment in cash will be made based on the market price of the Common Shares on the last trading date prior to the date of exercise. Until a Right is exercised, the holder thereof, as such, will have no rights as a stockholder of the Company (other than any rights resulting from such holder's ownership of Common Shares), including, without limitation, the right to vote or to receive dividends. The Series A Preferred purchasable upon exercise of the Rights will not be redeemable. Each share of Series A Preferred will be entitled to an aggregate dividend of 1,000 times the dividend declared per Common Share. In the event of liquidation, the holders of the Series A Preferred will be entitled to a preferential liquidation payment equal to 1,000 times the per share amount to be distributed to the holders of the Common Shares. Each share of Series A Preferred will have 1,000 votes, voting together with the Common Shares. In the event of any merger, consolidation or other transaction in which the Common Shares are changed or exchanged, each share of Series A Preferred will be entitled to receive 1,000 times the amount received per Common Share. These rights are protected by customary anti-dilution provisions. The description above is qualified in its entirety by the 1996 Rights Agreement which is included as an exhibit to the Registration Statement of which this Prospectus is a part. -36- 40 DESCRIPTION OF NOTES The Notes were issued under an Indenture dated as of February 3, 1997 (the "Indenture") between the Company and State Street Bank and Trust Company, as trustee (the "Trustee"). The terms of the Indenture are also governed by certain provisions contained in the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The following summaries of certain provisions of the Notes and the Indenture do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Notes and the Indenture, including the definitions therein of certain terms which are not otherwise defined in this Prospectus and those terms made a part of the Indenture by reference to the Trust Indenture Act as in effect on the date of the Indenture. Wherever particular provisions or defined terms of the Indenture (or of the forms of Notes which are a part thereof) are referred to, such provisions or defined terms are incorporated herein by reference in their entirety. As used in this "Description of Notes," the "Company" refers to Adaptec, Inc., a California corporation, and does not, unless the context otherwise indicates, include its subsidiaries. GENERAL The Notes represent general unsecured subordinated obligations of the Company and are convertible into Common Stock as described below under "--Conversion of Notes." The Notes will mature on February 1, 2004, unless earlier redeemed at the option of the Company or repurchased at the option of the holders upon a Change of Control. The Indenture does not contain any financial covenants or any restrictions on the payment of dividends, the repurchase of securities of the Company or the incurrence of debt by the Company or any of its subsidiaries. The Indenture contains no covenants or other provisions to afford protection to holders of Notes in the event of a highly leveraged transaction or a change in control of the Company except to the extent described under "--Repurchase at Option of Holders" below. The Notes bear interest from the date of original issue at the annual rate set forth on the cover page hereof, payable semi-annually on February 1 and August 1, commencing on August 1, 1997, to Holders of record at the close of business on the preceding January 15 and July 15, respectively. Interest will be computed on the basis of a 360-day year composed of twelve 30-day months. Unless other arrangements are made, interest will be paid by check mailed to holders entitled thereto, provided that with respect to any holder of Notes with an aggregate principal amount equal to or in excess of $5,000,000, at the request (such request to include appropriate wire instructions) of such holder in writing to the Trustee on or before the record date preceding any interest payment date, interest on such holder's Notes shall be paid by wire transfer in immediately available funds. Principal will be payable, and the Notes may be presented for conversion, registration of transfer and exchange, without service charge, at the office of the Trustee or its agent in New York, New York. CONVERSION OF NOTES The holders of Notes are entitled at any time on or after May 5, 1997 through the close of business on February 1, 2004, subject to prior redemption and repurchase, to convert any Notes or portions thereof (in denominations of $1,000 in principal amount or multiples thereof) into Common Stock at a conversion price of $51.66 per share, subject to adjustment as described below; provided that in the case of Notes called for redemption, conversion rights will expire immediately prior to the close of business on the last business day before the date fixed for redemption, unless the Company defaults in payment of the redemption price. A Note (or portion thereof) in respect of which a holder is exercising its option to require repurchase upon a Change of Control may be converted only if such holder withdraws its election to exercise such repurchase option in accordance with the terms of the Indenture. Except as described below, no adjustment will be made on conversion of any Notes for interest accrued thereon or for dividends paid on any Common Stock issued. Holders of Notes at the close of business on a record date will be entitled to receive the interest payable on such Note on the corresponding interest payment date. However, Notes surrendered for conversion after the close of business on a record date and before the opening of business on the corresponding interest payment date must be accompanied by funds equal to the interest payable on such succeeding interest payment date on the principal amount so converted (unless such Note is -37- 41 subject to redemption on a redemption date between such record date and the close of business on the business day following the corresponding interest payment date). The interest payment with respect to a Note called for redemption on a date during the period from the close of business on or after any record date to the close of business on the business day following the corresponding payment date will be payable on the corresponding interest payment date to the registered holder at the close of business on that record date (notwithstanding the conversion of such Note before the corresponding interest payment date) and a holder of Notes who elects to convert need not include funds equal to the interest paid. The Company is not required to issue fractional shares of Common Stock upon conversion of Notes and, in lieu thereof, will pay a cash adjustment based upon the closing price of the Common Stock on the last business day prior to the date of conversion. The conversion price is subject to adjustment by the Company (under formulae set forth in the Indenture) upon the occurrence of certain events, including: (i) the issuance of Common Stock as a dividend or distribution on the outstanding Common Stock, (ii) the issuance to all holders of Common Stock of certain rights, options or warrants to purchase Common Stock at less than the current market price, (iii) certain subdivisions, combinations and reclassifications of Common Stock, (iv) distributions to all holders of Common Stock of capital stock of the Company (other than Common Stock) or evidences of indebtedness of the Company or assets (including securities, but excluding those dividends, rights, options, warrants and distributions referred to above and dividends and distributions in connection with the liquidation, dissolution or winding up of the Company and dividends and distributions paid exclusively in cash), (v) distributions consisting exclusively of cash (excluding any cash portion of distributions referred to in clause (iv) or in connection with a consolidation, merger or sale of assets of the Company as referred to in clause (ii) of the third paragraph below) to all holders of Common Stock in an aggregate amount that, together with (x) all other such all-cash distributions made within the preceding 12 months in respect of which no adjustment has been made and (y) any cash and the fair market value of other consideration payable in respect of any tender offers by the Company or any of its subsidiaries for Common Stock concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 20% of the Company's market capitalization (being the product of the then current market price of the Common Stock times the number of shares of Common Stock then outstanding) on the record date for such distribution and (vi) the purchase of Common Stock pursuant to a tender offer made by the Company or any of its subsidiaries which involves an aggregate consideration that, together with (x) any cash and the fair market value of any other consideration payable in any other tender offer by the Company or any of its subsidiaries for Common Stock expiring within the 12 months preceding such tender offer in respect of which no adjustment has been made and (y) the aggregate amount of any such all-cash distributions referred to in clause (v) above to all holders of Common Stock within the 12 months preceding the expiration of such tender offer in respect of which no adjustments have been made, exceeds 20% of the Company's market capitalization on the expiration of such tender offer. No adjustment of the conversion price will be made for shares issued pursuant to a plan for reinvestment of dividends or interest. Except as stated above, the conversion price will not be adjusted for the issuance of Common Stock or any securities convertible into or exchangeable for Common Stock or carrying the right to purchase any of the foregoing. No adjustment in the conversion price will be required unless such adjustment would require a change of at least 1% in the conversion price then in effect; provided that any adjustment that would otherwise be required to be made shall be carried forward and taken into account in any subsequent adjustment. No adjustment will be made pursuant to clause (iv) of the preceding paragraph if the Company makes proper provision for each holder of Notes who converts a Note to receive, in addition to the Common Stock issuable upon such conversion, the kind and amount of assets (including securities) that the holder would have been entitled to receive if such holder had been a holder of the Common Stock at the time of the distribution of such assets or securities. Rights, options or warrants distributed by the Company to all holders of the Common Stock that entitle the holders thereof to purchase shares of the Company's capital stock and that, until the occurrence of an event (a "Triggering Event"), (i) are deemed to be transferred with the Common Stock, (ii) are not exercisable and (iii) are also issued in respect of future issuances of Common Stock, shall not be deemed to be distributed until the occurrence of the Triggering Event. Under the provisions of the Company's 1996 Rights Agreement, upon conversion of the Notes, the holders will receive, in addition to the Common Stock issuable upon such conversion, the Rights (whether or not the Rights have separated from the Common Stock at the time of the conversion). See "Description of Capital Stock -- Preferred Stock -- Preferred Share Rights Plan." In addition, the Indenture will provide that, if the Company implements a new shareholder rights plan, such rights plan must provide that upon conversion of the -38- 42 Notes the holders will receive, in addition to the Common Stock issuable upon such conversion, such rights (whether or not such rights have separated from the Common Stock at the time of such conversion). In the case of (i) any reclassification or change of the Common Stock (other than changes in par value or from par value to no par value or resulting from a subdivision or a combination) or (ii) a consolidation or merger involving the Company or a sale or conveyance to another corporation of the property and assets of the Company as an entirety or substantially as an entirety (determined on a consolidated basis), in each case as a result of which holders of Common Stock shall be entitled to receive stock, other securities, other property or assets (including cash) with respect to or in exchange for such Common Stock, the holders of the Notes then outstanding will be entitled thereafter to convert such Notes into the kind and amount of shares of stock, other securities or other property or assets which they would have owned or been entitled to receive upon such reclassification, change, consolidation, merger, sale or conveyance had such Notes been converted into Common Stock immediately prior to such reclassification, change, consolidation, merger, sale or conveyance, after giving effect to any adjustment event, assuming that a holder of Notes would not have exercised any rights of election as to the stock, other securities or other property or assets receivable in connection therewith and received per share the kind and amount received per share by a plurality of non-electing shareholders. In the event of a taxable distribution to holders of Common Stock (or other transaction) which results in any adjustment of the conversion price, the holders of Notes may, in certain circumstances, be deemed to have received a distribution subject to the United States income tax as a dividend; in certain other circumstances, the absence of such an adjustment may result in a taxable dividend to the holders of Common Stock. See "Certain Tax Considerations -- U.S. Holders -- Adjustments to Conversion Price." The Company from time to time may to the extent permitted by law reduce the conversion price by any amount for any period of at least 20 days, in which case the Company shall give at least 15 days' notice of such decrease, if the Board of Directors has made a determination that such decrease would be in the best interests of the Company, which determination shall be conclusive. The Company may, at its option, make such reductions in the conversion price, in addition to those set forth above, as the Company deems advisable to avoid or diminish any income tax to its shareholders resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. See "Certain Tax Considerations." SUBORDINATION The payment of principal of, premium, if any, and interest on the Notes is, to the extent set forth in the Indenture, subordinated in right of payment to the prior payment in full of all Senior Indebtedness. Upon any distribution to creditors of the Company in a liquidation or dissolution of the Company or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding related to the Company or its property, in an assignment for the benefit of creditors or any marshaling of the Company's assets and liabilities, the holders of all Senior Indebtedness will first be entitled to receive payment in full of all amounts due or to become due thereon before the holders of the Notes will be entitled to receive any payment in respect of the principal of, premium, if any, or interest on the Notes (except that holders of Notes may receive securities that are subordinated at least to the same extent as the Notes to Senior Indebtedness and any securities issued in exchange for Senior Indebtedness). In the event of any acceleration of the Notes because of an Event of Default, the holders of any Senior Indebtedness then outstanding would be entitled to payment in full of all obligations in respect of such Senior Indebtedness before the holders of the Notes are entitled to receive any payment or distribution in respect thereof (except that holders of Notes may receive securities that are subordinated at least to the same extent as the Notes are subordinated to Senior Indebtedness and any securities issued in exchange for Senior Indebtedness). The Indenture will further require that the Company promptly notify holders of Senior Indebtedness if payment of the Notes is accelerated because of an Event of Default. The Company also may not make any payment upon or in respect of the Notes (except that holders of Notes may receive securities that are subordinated at least to the same extent as the Notes are subordinated to Senior Indebtedness and any securities issued in exchange for Senior Indebtedness) if (a) a default in the payment of the principal of, premium, if any, interest, rent under or other obligations in respect of Senior Indebtedness occurs and is continuing beyond any applicable period of grace or (b) any other default occurs and is continuing with respect to Designated Senior Indebtedness that permits holders of the Designated Senior Indebtedness as -39- 43 to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from a person entitled to give such notice under the Indenture. Payments on the Notes may and shall be resumed (i) in the case of a payment default, upon the date on which such default is cured or waived, and (ii) in the case of a non-payment default, 179 days after the date on which the applicable Payment Blockage Notice is received (or sooner, if such default is cured or waived), unless the maturity of any Senior Indebtedness has been accelerated. No new period of payment blockage based on a non-payment default may be commenced within 365 days after the receipt by the Trustee of any prior Payment Blockage Notice. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. "Senior Indebtedness" means the principal of, premium, if any, and interest on, rent under, and any other amounts payable on or in or in respect of the Company's existing credit agreement and any other Indebtedness of the Company (including, without limitation, any interest accruing after the filing of a petition by or against the Company under any bankruptcy law, whether or not allowed as a claim after such filing in any proceeding under such bankruptcy law), whether outstanding on the date of the Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company (including all deferrals, renewals, extensions or refundings of, or amendments, modifications or supplements to the foregoing); provided, however, that Senior Indebtedness does not include (v) Indebtedness evidenced by the Notes, (w) any liability for federal, state, local or other taxes owed or owing by the Company, (x) Indebtedness of the Company to any subsidiary of the Company except to the extent such Indebtedness may have been pledged, assigned or otherwise transferred to a third party, (y) any indebtedness for the purchase of services, goods or materials if such indebtedness is a trade payable of the Company incurred in the ordinary course of business, except to the extent such indebtedness may have been pledged, assigned or otherwise transferred to a third party, and (z) any Indebtedness in which the instrument creating or evidencing the same or the assumption or guarantee thereof (or related agreements or documents to which the Company is a party) expressly provides that such Indebtedness shall not be senior in right of payment to, or is pari passu with, or is subordinated or junior to, the Notes. "Indebtedness" means, with respect to any person, all obligations, whether or not contingent, of such person (i) (a) for borrowed money (including, but not limited to, any indebtedness secured by a security interest, mortgage or other lien on the assets of the Company that is (1) given to secure all or part of the purchase price of property subject thereto, whether given to the vendor of such property or to another, or (2) existing on property at the time of acquisition thereof), (b) evidenced by a note, debenture, bond or other written instrument, (c) under a lease required to be capitalized on the balance sheet of the lessee under generally accepted accounting principles or entered into as part of a sale and buy back transaction, whether or not required to be capitalized, or under any lease or related document (including a purchase agreement) that provides that the Company is contractually obligated to purchase or cause a third party to purchase and thereby guarantee a minimum residual value of the lease property to the lessor and the obligations of the Company under such lease or related document to purchase or to cause a third party to purchase such leased property, (d) in respect of letters of credit, bank guarantees or bankers' acceptances (including reimbursement obligations with respect to any of the foregoing), (e) with respect to indebtedness secured by a mortgage, pledge, lien, encumbrance, charge or adverse claim affecting title or resulting in an encumbrance to which the property or assets of such person are subject, whether or not the obligation secured thereby shall have been assumed by or shall otherwise be such person's legal liability, (f) in respect of the balance of deferred and unpaid purchase price of any property or assets, (g) under interest rate or currency swap agreements, cap, floor and collar agreements, spot and forward contracts and similar agreements and arrangements; (ii) with respect to any obligation of others of the type described in the preceding clause (i) or under clause (iii) below assumed by or guaranteed in any manner by such person or in effect guaranteed by such person through an agreement to purchase (including, without limitation, "take or pay" and similar arrangements), contingent or otherwise (and the obligations of such person under any such assumptions, guarantees or other such arrangements); and (iii) any and all Indebtedness constituting deferrals, renewals, extensions, refinancings and refundings of, or amendments, modifications or supplements to, any of the foregoing. "Designated Senior Indebtedness" means any particular Senior Indebtedness in which the instrument creating or evidencing the same or the assumption or guarantee thereof (or related agreements or documents to which the Company is a party) expressly provides that such Indebtedness shall be "Designated Senior Indebtedness" for purposes of the Indenture (provided that such instrument, agreement or other document may place limitations and conditions on the right of such Senior Indebtedness to exercise the rights of Designated Senior Indebtedness). -40- 44 By reason of the subordination provisions described above, in the event of the Company's liquidation or insolvency, holders of Senior Indebtedness may receive more, ratably, and holders of the Notes may receive less, ratably, than the other creditors of the Company. Such subordination will not prevent the occurrences of any Event of Default under the Indenture. In the event that the Trustee (or paying agent if other than the Trustee) or any holder receives any payment of principal or interest with respect to the Notes at a time when such payment is prohibited under the Indenture, such payment shall be held in trust for the benefit of, and shall be paid over and delivered to, the holders of Senior Indebtedness or their representative as their respective interests may appear. After all Senior Indebtedness is paid in full and until the Notes are paid in full, holders shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to the holders have been applied to the payment of Senior Indebtedness. The Notes are obligations exclusively of the Company. Since the operations of the Company are partially conducted through its subsidiaries, the cash flow and the consequent ability to service debt, including the Notes, of the Company, is partially dependent upon the earnings of the Company's subsidiaries and the distribution of those earnings to, or upon loans or other payments of funds by those subsidiaries to, the Company. The payment of dividends and the making of loans and advances to the Company by its subsidiaries may be subject to statutory or contractual restrictions, are dependent upon the earnings of those subsidiaries and are subject to various business considerations. Any right of the Company to receive assets of any of its subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of the Notes to participate in those assets) will be effectively subordinated to the claims of that subsidiary's creditors (including trade creditors), except to the extent that the Company is itself recognized as a creditor of such subsidiary, in which case the claims of the Company would still be subordinate to any security interests in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by the Company. As of March 31, 1997, the Company had approximately $4.3 million of indebtedness outstanding that would have constituted Senior Indebtedness (excluding accrued interest and Senior Indebtedness constituting liabilities of a type not required to be reflected as a liability on the balance sheet of the Company in accordance with generally accepted accounting principles). As of March 31, 1997, there was also outstanding approximately $38.7 million of aggregate liabilities of subsidiaries of the Company (excluding intercompany liabilities and liabilities of a type not required to be reflected as a liability on the balance sheets of such subsidiaries in accordance with generally accepted accounting principles) as to which the Notes would have been structurally subordinated. The Indenture does not limit the amount of additional indebtedness, including Senior Indebtedness, that the Company can create, incur, assume or guarantee, nor will the Indenture limit the amount of indebtedness and other liabilities that any subsidiary can create, incur, assume or guarantee. OPTIONAL REDEMPTION BY THE COMPANY The Notes are not redeemable at the option of the Company prior to February 3, 2000. At any time on or after that date, the Notes may be redeemed at the Company's option on at least 15 but not more than 60 days' notice, in whole at any time or in part from time to time, at the following prices (expressed in percentages of the -41- 45 principal amount), together with accrued interest to the date fixed for redemption if redeemed during the 12-month period beginning February 1 (beginning February 3, 2000 and ending January 31, 2001, in the case of the first such period):
Year Redemption Price ---- ---------------- 2000 . . . . . . . . . . . . . . . . . . . . . . . . 102.71% 2001 . . . . . . . . . . . . . . . . . . . . . . . . 102.04 2002 . . . . . . . . . . . . . . . . . . . . . . . . 101.36 2003 . . . . . . . . . . . . . . . . . . . . . . . . 100.68
and 100% at February 1, 2004. If fewer than all the Notes are to be redeemed, the Trustee will select the Notes to be redeemed in principal amounts of $1,000 or integral multiples thereof by lot or, in its discretion, on a pro rata basis. If any Note is to be redeemed in part only, a new Note or Notes in principal amount equal to the unredeemed principal portion thereof will be issued. If a portion of a holder's Notes is selected for partial redemption and such holder converts a portion of such Notes, such converted portion shall be deemed to be taken from the portion selected for redemption. No sinking fund is provided for the Notes. REPURCHASE AT OPTION OF HOLDERS Upon the occurrence of a Change of Control, each holder of Notes shall have the right, at the holder's option, to require that the Company repurchase such holder's Notes in whole or in part in integral multiples of $1,000, at a purchase price in cash in an amount equal to 101% of the principal amount thereof, together with accrued and unpaid interest to the date of repurchase, pursuant to an offer (the "Change of Control Offer") made in accordance with the procedures described below and the other provisions of the Indenture. A "Change of Control" means an event or series of events as a result of which (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act) acquires "beneficial ownership" (as determined in accordance with Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the combined voting power of the then outstanding securities entitled to vote generally in elections of directors of the Company (the "Voting Stock"), (ii) the Company consolidates with or merges into any other corporation, or conveys, transfers or leases all or substantially all of its assets to any person, or any other corporation merges into the Company, and, in the case of any such transaction, the outstanding Common Stock of the Company is changed or exchanged as a result, unless the shareholders of the Company immediately before such transaction own, directly or indirectly, at least 51% of the combined voting power of the outstanding voting securities of the corporation resulting from such transaction in substantially the same proportion as their ownership of the Voting Stock immediately before such transaction, or (iii) Continuing Directors do not constitute a majority of the Board of Directors of the Company (or, if applicable, a successor corporation to the Company); provided that a Change of Control shall not be deemed to have occurred if either (i) the closing price per share of the Common Stock for any 5 trading days within the period of 10 consecutive trading days ending immediately after the announcement of such Change of Control shall equal or exceed 105% of the conversion price of the Notes in effect on such trading day or (ii) at least 90% of the consideration in the transaction or transactions constituting the Change of Control transaction consists of shares of common stock traded on a national securities exchange or quoted on the Nasdaq National Market (or which will be so traded or quoted immediately following the Change of Control) and, as a result of such transaction or transactions, the Notes become convertible solely into such common stock (and any rights attached thereto). "Continuing Directors" shall mean, as of any date of determination, any member of the Board of Directors of the Company who (i) was a member of such Board of Directors on the date of the Indenture or (ii) was nominated for election or elected to such Board of Directors with the approval of a majority of the Continuing Directors who were members of such Board at the time of such nomination or election. Within 30 days following any Change of Control, the Company shall send by first-class mail, postage prepaid, to the Trustee and to each holder of Notes, at such holder's address appearing in the security register, -42- 46 a notice stating, among other things, that a Change of Control has occurred, the purchase price, the purchase date, which shall be a business day no earlier than 30 days nor later than 60 days from the date such notice is mailed, and certain other procedures that a holder of Notes must follow to accept a Change of Control Offer or to withdraw such acceptance. No quantitative or other established meaning has been given to the phrase "all or substantially all" (which appears in the definition of Change of Control) by courts which have interpreted this phrase in various contexts under the laws of the State of New York. To the extent the meaning of such phrase is uncertain, uncertainty will exist as to whether or not a Change of Control may have occurred (and, accordingly, as to whether or not the holders of Notes will have the right to require the Company to repurchase their Notes). Rule 13e-4 under the Exchange Act requires, among other things, the dissemination of certain information to security holders in the event of an issuer tender offer and may apply in the event that the repurchase option becomes available to holders of the Notes. The Company will comply with this rule to the extent applicable at that time. In the event any of the provisions governing a Change of Control Offer conflict with the federal securities laws of the United States, such securities laws shall control. The right to require the Company to repurchase Notes as a result of a Change of Control could have the effect of delaying, deferring or preventing a change of control or other attempts to acquire control of the Company unless arrangements have been made to enable the Company to repurchase all the Notes on the applicable purchase date. Consequently, this right may render more difficult or discourage a merger, consolidation or tender offer (even if such transaction is supported by the Company's Board of Directors or is favorable to the shareholders), the assumption of control by a holder of a large block of the Company's shares and the removal of incumbent management. The foregoing provisions would not necessarily afford holders of the Notes protection in the event of highly leveraged or other transactions involving the Company that may adversely affect holders. Moreover, certain transactions and events that would constitute an actual change of control may not be a Change of Control for purposes of the Indenture. Except as described above with respect to a Change of Control, the Indenture does not contain provisions that permit the holders of the Notes to require that the Company repurchase or redeem the Notes in the event of a takeover, recapitalization or similar restructuring. Subject to the limitation on mergers and consolidations described below, the Company, its management or its subsidiaries could in the future enter into certain transactions, including refinancings, certain recapitalizations, acquisitions, the sale of all or substantially all of its assets, the liquidation of the Company or similar transactions, that would not constitute a Change of Control under the Indenture, but that would increase the amount of Senior Indebtedness (or any other indebtedness) outstanding at such time or substantially reduce or eliminate the Company's assets. There are no restrictions in the Indenture on the creation of Senior Indebtedness (or any other indebtedness) and, under certain circumstances, the incurrence of significant amounts of additional indebtedness could have an adverse effect on the Company's ability to service its indebtedness, including the Notes. The Company's ability to repurchase Notes upon the occurrence of a Change of Control is subject to limitations. There can be no assurance that the Company would have the financial resources, or would be able to arrange financing, to pay the purchase price for all the Notes that might be delivered by holders of Notes seeking to exercise the repurchase right. Moreover, the terms of the Company's existing primary bank facility prohibit the repurchase of Notes by the Company or its subsidiaries, and the Company's ability to repurchase Notes may be limited or prohibited by the terms of any future borrowing arrangements, including Senior Indebtedness existing at the time of a Change of Control. The Company's ability to repurchase Notes with cash may also be limited by the terms of its subsidiaries' borrowing arrangements due to dividend restrictions. Any failure by the Company to repurchase the Notes when required following a Change of Control would result in an Event of Default under the Indenture whether or not such repurchase is prohibited by the subordination provisions of the Indenture. Any such default may, in turn, cause a default under Senior Indebtedness or other indebtedness of the Company. Moreover, the occurrence of a Change of Control could result in an event of default under the Company's existing primary bank facility and may cause an event of default under terms of other indebtedness (including Senior Indebtedness) of the Company. As a result, in each case, any repurchase of the Notes would, absent a waiver, be prohibited under the subordination provisions of the Indenture until the Senior Indebtedness is paid in full. See "-- Subordination." -43- 47 MERGER, CONSOLIDATION AND SALE OF ASSETS The Company shall not consolidate with or merge with or into, or convey, transfer or lease all or substantially all its assets (determined on a consolidated basis), whether in a single transaction or a series of related transactions, to, any person unless: (i) either the Company is the resulting, surviving or transferee person (the "Successor Company") or the Successor Company is a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia, and the Successor Company (if not the Company) expressly assumes by a supplemental indenture, executed and delivered to the Trustee, in form satisfactory to the Trustee, all the obligations of the Company under the Indenture and the Notes, including the conversion rights described above under "-- Conversion of Notes," (ii) immediately after giving effect to such transaction no default or Event of Default has occurred and is continuing and (iii) the Company delivers to the Trustee an Officers' Certificate and an opinion of counsel, each stating that such consolidation, merger or transfer and such supplemental indenture comply with the Indenture. EVENTS OF DEFAULT AND REMEDIES An Event of Default is defined in the Indenture as being: default in payment of the principal of or premium, if any, on the Notes when due at maturity, upon redemption or otherwise, including failure by the Company to purchase the Notes when required as described under "--Change of Control" (whether or not such payment shall be prohibited by the subordination provisions of the Indenture); default for 30 days in payment of any installment of interest on the Notes (whether or not such payment shall be prohibited by the subordination provisions of the Indenture); default by the Company for 90 days after notice in the observance or performance of any other covenants in the Indenture; or certain events involving bankruptcy, insolvency or reorganization of the Company. The Indenture provides that the Trustee may withhold notice to the Holders of Notes of any default (except in payment of principal, premium, if any, or interest with respect to the Notes) if the Trustee considers it in the interest of the Holders of Notes to do so. The Indenture provides that if any Event of Default shall have occurred and be continuing, the Trustee or the Holders of not less than 25% in principal amount of the Notes then outstanding may declare the principal of and premium, if any, on the Notes to be due and payable immediately, but if the Company shall cure all defaults (except the nonpayment of interest on, premium, if any, and principal of any Notes which shall have become due by acceleration) and certain other conditions are met, such declaration may be canceled and past defaults may be waived by the Holders of a majority in principal amount of Notes then outstanding. The Holders of a majority in principal amount of the Notes then outstanding shall have the right to direct the time, method and place of conducting any proceedings for any remedy available to the Trustee, subject to certain limitations specified in the Indenture. The Indenture provides that, subject to the duty of the Trustee following an Event of Default to act with the required standard of care, the Trustee will not be under an obligation to exercise any of its rights or powers under the Indenture at the request or direction of any of the Holders, unless the Trustee receives satisfactory indemnity against any associated loss, liability or expense. SATISFACTION AND DISCHARGE The Indenture will cease to be of further effect as to all outstanding Notes (except as to (i) rights of registration of transfer and exchange and the Company's right of optional redemption, (ii) substitution of apparently mutilated, defaced, destroyed, lost or stolen Notes, (iii) rights of Holders of Notes to receive payments of principal of, premium, if any, and interest on, the Notes, (iv) rights of Holders of Notes to convert to Common Stock, (v) rights, obligations and immunities of the Trustee under the Indenture and (vi) rights of the Holders of Notes as beneficiaries of the Indenture with respect to the property so deposited with the Trustee payable to all or any of them), if (A) the Company will have paid or caused to be paid the principal of, premium, if any, and interest on the Notes as and when the same will have become due and payable or (B) all outstanding Notes (except lost, stolen or destroyed Notes which have been replaced or paid) have been delivered to the Trustee for cancellation or (C) (x) the Notes not previously delivered to the Trustee for cancellation will have become due and payable or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee upon delivery of notice and (y) the Company will have irrevocably deposited with the Trustee, as trust funds, cash, in an amount sufficient to pay principal of and interest on the outstanding Notes, to maturity or redemption, as the case may be. Such trust may only be established if such deposit will not result in a breach or violation of, or constitute a default under, any agreement -44- 48 or instrument pursuant to which the Company is a party or by which it is bound and the Company has delivered to the Trustee an Officers' Certificate and an opinion of counsel, each stating that all conditions related to such defeasance have been complied with. MODIFICATIONS OF THE INDENTURE The Indenture contains provisions permitting the Company and the Trustee, with the consent of the Holders of not less than a majority in principal amount of the Notes at the time outstanding, to modify the Indenture or any supplemental indenture or the rights of the Holders of Notes, except that no such modification shall (i) extend the fixed maturity of any Note, reduce the rate or extend the time of payment of interest thereon, reduce the principal amount thereof or premium, if any, thereon, reduce any amount payable upon redemption thereof, change the obligation of the Company to repurchase Notes upon the happening of a Change of Control, impair or affect the right of a Holder to institute suit for the payment thereof, change the currency in which the Notes are payable, modify the subordination provisions of the Indenture in a manner adverse to the Holders of Notes or impair the right to convert the Notes into Common Stock subject to the terms set forth in the Indenture, without the consent of the Holder of each Note so affected, or (ii) reduce the aforesaid percentage of Notes, without the consent of the Holders of all of the Notes then outstanding. The Indenture also provides that the Company and the Trustee may amend the Indenture without the consent of any holder of the Notes under certain circumstances, (i) to cure any ambiguity, omission, defect or inconsistency, (ii) to provide for the assumption by a successor corporation of the obligations of the Company under the Indenture, (iii) to provide for uncertificated Notes in addition to or in place of certificated Notes or vice versa, (iv) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company, (v) to comply with any requirements of the Commission in connection with qualifying the Indenture under the Trust Indenture Act, or (vi) to make any change that does not adversely affect the rights of any Holder of the Notes. GOVERNING LAW The Indenture will provide that the Notes will be governed by, and construed in accordance with, the laws of the State of New York, without giving effect to applicable principles of conflicts of law. CONCERNING THE TRUSTEE State Street Bank and Trust Company, the Trustee under the Indenture, has been appointed by the Company as the paying agent, conversion agent, registrar and custodian with regard to the Notes. The Trustee and/or its affiliates may in the future provide banking and other services to the Company in the ordinary course of their respective businesses. -45- 49 CERTAIN TAX CONSIDERATIONS GENERAL THE FOLLOWING IS A DISCUSSION OF CERTAIN U.S. FEDERAL INCOME TAX AND ESTATE TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES AS OF THE DATE HEREOF. FOR PURPOSES OF THIS DISCUSSION, A "U.S. HOLDER" IS A HOLDER THAT IS AN INDIVIDUAL WHO IS A CITIZEN OR RESIDENT OF THE UNITED STATES, A CORPORATION OR A PARTNERSHIP THAT IS ORGANIZED UNDER THE LAWS OF THE UNITED STATES OR ANY STATE THEREOF OR AN ESTATE OR TRUST WHOSE INCOME IS INCLUDIBLE IN GROSS INCOME REGARDLESS OF ITS SOURCE. A "NON-U.S. HOLDER" IS A HOLDER THAT IS NOT A U.S. HOLDER. THIS SUMMARY APPLIES ONLY TO NOTES AND COMMON STOCK HELD AS CAPITAL ASSETS WITHIN THE MEANING OF SECTION 1221 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE "CODE"). IT DOES NOT DISCUSS ALL OF THE TAX CONSEQUENCES THAT MAY BE RELEVANT TO A HOLDER IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES OR TO HOLDERS SUBJECT TO SPECIAL RULES, SUCH AS FORMER CITIZENS OR LONG-TERM RESIDENTS OF THE UNITED STATES, DEALERS IN SECURITIES OR FOREIGN CURRENCIES, FINANCIAL INSTITUTIONS, LIFE INSURANCE COMPANIES, OR REGULATED INVESTMENT COMPANIES, OR TO HOLDERS WHOSE FUNCTIONAL CURRENCY IS NOT THE UNITED STATES DOLLAR OR WHO HOLD THE NOTES OR THE COMMON STOCK AS PART OF A SYNTHETIC SECURITY, CONVERSION TRANSACTION, OR CERTAIN "STRADDLE" OR HEDGING TRANSACTIONS. THE U.S. FEDERAL INCOME TAX AND ESTATE TAX CONSIDERATIONS SET FORTH BELOW ARE BASED UPON THE CODE AND REGULATIONS AND RULINGS AND JUDICIAL DECISIONS THEREUNDER AS OF THE DATE HEREOF. SUCH AUTHORITIES MAY BE REPEALED, REVOKED OR MODIFIED, POSSIBLY WITH RETROACTIVE EFFECT, SO AS TO RESULT IN U.S. FEDERAL INCOME TAX CONSEQUENCES DIFFERENT FROM THOSE PRESENTED BELOW. U.S. HOLDERS Interest. Interest on a Note should be taxable to a U.S. Holder as ordinary interest income in accordance with the U.S. Holder's method of accounting for U.S. federal income tax purposes. Sale, Exchange or Retirement of a Note. A U.S. Holder should recognize gain or loss, if any, on the sale, retirement or other taxable disposition of a Note in an amount equal to the difference, if any, between the U.S. Holder's adjusted tax basis in the Note and the amount received therefor (other than amounts attributable to accrued and unpaid interest on the Notes, which should be treated as interest for U.S. federal income tax purposes). Subject to the market discount rules noted under "U.S. Holders -- Market Discount and Bond Premium" below, gain or loss, if any, recognized on the sale, retirement or other taxable disposition of a Note generally should be long-term capital gain or loss if the Note was held for more than one year as of the date of disposition. Market Discount and Bond Premium. If a U.S. Holder acquires a Note subsequent to its original issuance and the Note's stated redemption price at maturity exceeds the U.S. Holder's initial tax basis in the Note by more than a de minimis amount, the U.S. Holder should generally be treated as having acquired the Note at a "market discount" equal to such excess. In addition, if a U.S. Holder's initial tax basis in a Note exceeds the stated redemption price at maturity of the Note, the U.S. Holder should generally be treated as having acquired the Note with "bond premium" in an amount equal to such excess. U.S. Holders should consult their tax advisers regarding the existence, if any, and tax consequences of market discount and bond premium. Conversion of the Notes. A U.S. Holder should not recognize gain or loss upon conversion of the Notes into Common Stock. The U.S. Holder's tax basis in shares of Common Stock received upon conversion should be the same as the U.S. Holder's adjusted tax basis of the Notes converted (reduced by the portion of such basis allocable to any fractional Common Stock interest for which the U.S. Holder receives a cash payment from the Company). The holding period of the Common Stock received in the conversion should include the holding period of the Notes that were converted. A U.S. Holder generally should recognize gain (or loss) upon a conversion to the extent that any cash paid in lieu of a fractional share of Common Stock exceeds (or is less than) its tax basis allocable to such fractional share. Dividends. Dividends paid on Common Stock received upon conversion will be taxable to a U.S. Holder as ordinary income, to the extent paid out of the Company's current or accumulated earnings and profits. Subject to certain restrictions, dividends received by a corporate U.S. Holder generally should be eligible for the 70% dividends received deduction. -46- 50 Sale of Common Stock. A U.S. Holder of Common Stock received on conversion who sells or otherwise disposes of such stock in a taxable transaction will recognize capital gain or loss equal to the difference between the cash and the fair market value of any property received on such sale and the U.S. Holder's tax basis in such stock. Such gain or loss will be long term gain or loss if the holding period for such Common Stock was more than one year. Adjustments to Conversion Price. Pursuant to Treasury Regulations promulgated under Section 305 of the Code, a U.S. Holder of a Note should be treated as having received a constructive distribution from the Company upon an adjustment in the conversion price of the Notes if (i) as a result of such adjustment, the proportionate interest of such U.S. Holder in the assets or earnings and profits of the Company is increased and (ii) the adjustment is not made pursuant to a bona fide, reasonable, anti-dilution formula. An adjustment in the conversion price would not be considered made pursuant to such a formula if the adjustment were made to compensate for certain taxable distributions with respect to the Common Stock into which the Notes are convertible. Thus, under certain circumstances, a decrease in the conversion price of the Notes may be taxable to a U.S. Holder of a Note as a dividend to the extent of the current or accumulated earnings and profits of the Company. In addition, the failure to adjust fully the conversion price of the Notes to reflect distributions of stock dividends with respect to the Common Stock may result in a taxable dividend to the U.S. Holders of the Common Stock. Backup Withholding and Information Reporting. A U.S. Holder of a Note, or of Common Stock issued upon conversion of a Note, may be subject to information reporting and possible backup withholding. If applicable, backup withholding would apply at a rate of 31% with respect to dividends or interest on, or the proceeds of a sale, exchange, redemption, retirement, or other disposition of, such Note or Common Stock, as the case may be, unless (i) such U.S. Holder is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact, or (ii) provides a taxpayer identification number, certifies that the U.S. Holder is not subject to backup withholding, and otherwise complies with applicable backup withholding rules. NON-U.S. HOLDERS The Notes. The payment of interest on a Note should generally not be subject to U.S. federal income tax, if (1) the interest is not effectively connected with the conduct of a trade or business within the United States, (2) the Non-U.S. Holder does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote, (3) the Non-U.S. Holder is not a controlled foreign corporation that is related to the Company actually or constructively through stock ownership and (4) either (i) the beneficial owner of the Note certifies to the Company or its agent, under penalties of perjury, that it is not a U.S. Holder and provides its name and address on U.S. Treasury Form W-8 (or on a suitable substitute form) or (ii) a securities clearing organization, bank or other financial institution that holds customers' securities in the ordinary course of its trade or business (a "financial institution") and holds the Note certifies under penalties of perjury that such a Form W-8 (or suitable substitute form) has been received from the beneficial owner by it or by a financial institution between it and the beneficial owner and furnishes the payer with a copy thereof. A Non-U.S. Holder generally should not be subject to U.S. federal income tax on any gain or income realized in connection with (1) the conversion of a Note into Common Stock or (2) the sale, exchange, retirement, or other disposition of a Note unless (i) the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition, and certain other conditions are met, or (ii) the gain from the disposition is effectively connected to the conduct of a trade or business by the Non-U.S. Holder in the United States. A Note held directly by an individual who, at the time of death, is not a citizen or resident of the United States should not be includible in such individual's gross estate for U.S. estate tax purposes as a result of such individual's death if the individual does not actually or constructively own 10% or more of the total combined voting power of all classes of stock of the Company entitled to vote and, at the time of the individual's death, if payments with respect to such Note would not have been effectively connected with the conduct by such individual of a trade or business in the United States. Even if the Note was includible in the gross estate under the foregoing rules, the Note may be excluded under the provisions of an applicable estate tax treaty. The Common Stock. In general, dividends (including any amounts that are treated as dividends as described above) paid to a Non-U.S. Holder of the Common Stock should be subject to U.S. federal income tax -47- 51 withholding at a 30% rate unless such rate is reduced by an applicable income tax treaty. Dividends that are effectively connected with such Non-U.S. Holder's conduct of a trade or business in the United States or, if a tax treaty applies, attributable to a permanent establishment, or, in the case of an individual, a "fixed base," in the United States ("U.S. trade or business income") are generally subject to U.S. federal income tax at regular rates, but are not generally subject to the 30% withholding tax if the Non-U.S. Holder files the appropriate form with the payer. Any U.S. trade or business income received by a Non-U.S. Holder that is a corporation may also, under certain circumstances, be subject to an additional "branch profits tax" at a 30% rate or such lower rate as may be applicable under an income tax treaty. Dividends paid to an address in a foreign country are presumed (absent actual knowledge to the contrary) to be paid to a resident of such country for purposes of the withholding tax discussed above and, under the current interpretation of Treasury Regulations, for purposes of determining the applicability of a tax treaty rate. Under proposed Treasury Regulations not currently in effect, however, a Non-U.S. Holder of the Common Stock who wishes to claim the benefit of an applicable tax treaty rate would be required to satisfy applicable certification requirements. It is not certain whether, or in what form, the proposed Treasury Regulations will be adopted as final regulations. A Non-U.S. Holder of the Common Stock that is eligible for a reduced rate of U.S. federal withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS. A Non-U.S. Holder of the Common Stock should generally not be subject to U.S. income or withholding tax on gain realized on the sale or exchange of such stock, unless the Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition, and certain other conditions are met, or (ii) the gain from the disposition is effectively connected to the conduct of a trade or business by the Non-U.S. Holder in the United States. Common Stock held directly by an individual who at the time of death is not a citizen or resident of the United States will generally be includible in the gross estate of such individual for U.S. estate tax purposes, subject to contrary provisions of an applicable estate tax treaty. Backup Withholding and Information Reporting. Payments on the Notes made by the Company or any paying agent of the Company and payments of dividends on the Common Stock to certain noncorporate Non-U.S. Holders generally should be subject to information reporting and possibly to "backup withholding" at a rate of 31%. Information reporting and backup withholding do not apply, however, to payments made outside the United States by the Company or a paying agent on a Note or to payments of dividends on the Common Stock if the certification described under "Non-U.S. Holders -- The Notes" above is received, provided in each case that the payer does not have actual knowledge that the Holder is a U.S. Holder. Payment of proceeds from a sale of a Note or the Common Stock to or through the U.S. office of a broker is subject to information reporting and backup withholding unless the Non-U.S. Holder certifies as to its non U.S. status or otherwise establishes an exemption from information reporting and backup withholding. Payment outside the United States of the proceeds of the sale of a Note or the Common Stock to or through a foreign office of a "broker" (as defined in applicable U.S. Treasury Regulations) should not be subject to information reporting or backup withholding, except that if the broker is a U.S. person, a controlled foreign corporation for U.S. federal income tax purposes or a foreign person 50% or more of whose gross income is from a U.S. trade or business, information reporting should apply to such payment unless the broker has documentary evidence in its records that the beneficial owner is not a U.S. Holder and certain other conditions are not met or the beneficial owner otherwise establishes an exemption. THE U.S. FEDERAL INCOME TAX AND ESTATE TAX DISCUSSION SET FORTH ABOVE IS INTENDED FOR GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO A PARTICULAR HOLDER'S SITUATION. PERSONS CONSIDERING A PURCHASE OF THE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE PARTICULAR TAX CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF THE NOTES AND THE COMMON STOCK, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL OR FOREIGN LAWS AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES (POSSIBLY INCLUDING RETROACTIVE, CHANGES) IN U.S. FEDERAL AND OTHER TAX LAWS. -48- 52 [THIS PAGE BLANK] -49- 53 SELLING SECURITYHOLDERS The Notes offered hereby were originally issued by the Company and sold by the Initial Purchasers, in a transaction exempt from the registration requirements of the Securities Act, to persons reasonably believed by such initial purchaser to be "qualified institutional buyers" (as defined in Rule 144A under the Securities Act), or other institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act or in compliance with the provisions of Regulation S under the Securities Act. The Selling Securityholders (which term includes their transferees, pledgees, donees or their successors) may from time to time offer and sell pursuant to this Prospectus any or all of the Notes and Common Stock issued upon conversion of the Notes. The following table sets forth information with respect to the Selling Securityholders and the respective principal amounts of Notes beneficially owned by each Selling Securityholder that may be offered pursuant to this Prospectus. Such information has been obtained from the Selling Securityholders. None of the Selling Securityholders has, or within the past three years has had, any position, office or other material relationship with the Company or any of its predecessors or affiliates, except as noted below. Because the Selling Securityholders may offer all or some portion of the Notes or the Common Stock issuable upon conversion thereof pursuant to this Prospectus, no estimate can be given as to the amount of the Notes or the Common Stock issuable upon conversion thereof that will be held by the Selling Holders upon termination of any such sales. In addition, the Selling Securityholders identified below may have sold, transferred or otherwise disposed of all or a portion of their Notes since the date on which they provided the information regarding their Notes in transactions exempt from the registration requirements of the Securities Act. From time to time, Bear, Stearns & Co. has provided, and it continues to provide, investment banking services to the Company, for which it received or will receive customer fees. None of the other Selling Securityholders has had any position, office or other materials relationship with the Company or its affiliates within the last three years.
NUMBER OF SHARES OF COMMON PRINCIPAL AMOUNT OF NOTES STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED AND OFFERED SELLING SECURITYHOLDER AND OFFERED HEREBY HEREBY (1)(2) ------------------------------------------------------------ --------------------------- --------------------------- Dreyfus Growth & Income Fund . . . . . . . . . . . . . . . 12,000,000 232,288 BZW Securities Limited . . . . . . . . . . . . . . . . . . 10,500,000 203,252 General Motors Employees Domestic Group Trust . . . . . . . 9,750,000 188,734 The TCW Group, Inc. . . . . . . . . . . . . . . . . . . . . 7,775,000 150,503 General Motors Retirement Program for Salaried Employees/General Motors Hourly Rate Employees Pension Plan 6,000,000 116,144 State of Oregon/Oregon Equity Fund . . . . . . . . . . . . 5,500,000 106,465 Societe Generale Securities Corporation . . . . . . . . . . 5,250,000 101,626 JP Morgan Securities, Inc. . . . . . . . . . . . . . . . . 5,095,000 98,625 State of Oregon/SAIF Corporation . . . . . . . . . . . . . 4,000,000 77,429 Robertson Stephens & C. L.L.P. . . . . . . . . . . . . . . 3,935,000 76,171 Pacific Horizon Capital Income Fund . . . . . . . . . . . . 3,275,000 63,395 Transamerica Occidental Life Insurance Company . . . . . . 3,000,000 58,072 Equitable Life Assurance Separate Account Convertibles . . 2,875,000 55,652 Delaware State Employees Retirement Fund . . . . . . . . . 2,700,000 52,264 The Chase Manhattan Bank ttee for IBM Corporation Retirement Plan Trust Dtd 12/18/45 . . . . . . . . . . . . 2,165,000 41,908 Pension Reserves Investment Management Board . . . . . . . 1,615,000 31,262 Aim Balanced Fund . . . . . . . . . . . . . . . . . . . . . 1,465,000 28,358 Bankers Trust ttee for Chrysler Corporation Employee #1 1,270,000 24,583 Pension Plan . . . . . . . . . . . . . . . . . . . . . . . Employers Reinsurance Corporation . . . . . . . . . . . . . 1,250,000 24,196 Hudson River Trust Balanced Account . . . . . . . . . . . . 1,150,000 22,260
-50- 54
NUMBER OF SHARES OF COMMON PRINCIPAL AMOUNT OF NOTES STOCK BENEFICIALLY OWNED BENEFICIALLY OWNED AND OFFERED SELLING SECURITYHOLDER AND OFFERED HEREBY HEREBY (1)(2) ------------------------------------------------------------ --------------------------- --------------------------- Memphis Light, Water, Gas Retirement Fund . . . . . . . . . $ 1,140,000 22,067 State Street Bank Custodian for GE Pension Plan . . . . . . 1,065,000 20,615 State of Delaware Retirement . . . . . . . . . . . . . . . 1,050,000 20,325 Arkansas PERS . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 19,357 Ariston Capital Management Corporation(3) . . . . . . . . . 1,000,000 19,357 Motors Insurance Corporation . . . . . . . . . . . . . . . 1,000,000 19,357 Hudson River Trust Growth Investors . . . . . . . . . . . . 920,000 17,808 American Investors Life Insurance Co. . . . . . . . . . . . 875,000 16,937 Columbia/HCA Money Purchase Plan . . . . . . . . . . . . . 860,000 16,647 Hudson River Trust Growth & Income Fund . . . . . . . . . . 855,000 16,550 Declaration Trust for the Defined Benefit Plan of ICI 820,000 15,873 American Holdings, Inc. . . . . . . . . . . . . . . . . . . Ingelsa Ltd. . . . . . . . . . . . . . . . . . . . . . . . 750,000 14,518 Thermo Electron Balanced Investment Fund . . . . . . . . . 725,000 14,034 Bear Stearns Securities Corporation . . . . . . . . . . . . 675,000 13,066 The J.W. McConnell Family Foundation . . . . . . . . . . . 600,000 11,614 Declaration of Trust for Defined Benefit Plan of ZENECA 580,000 11,227 Holdings Inc. . . . . . . . . . . . . . . . . . . . . . . . Mega Life & Health Insurance . . . . . . . . . . . . . . . 500,000 9,678 Smith Barney Convertible Securities Portfolio . . . . . . . 500,000 9,678 ICI American Holdings Pension Trust . . . . . . . . . . . . 425,000 8,226 Zeneca Holdings Pension Trust . . . . . . . . . . . . . . . 425,000 8,226 Starvest Discretionary . . . . . . . . . . . . . . . . . . 400,000 7,742 The Hotel Union & Industry of Hawaii . . . . . . . . . . . 375,000 7,259 The Frist Foundation . . . . . . . . . . . . . . . . . . . 295,000 5,710 Southern Farm Bureau Life Insurance Co. . . . . . . . . . . 250,000 4,839 Bank of America Convertible Securities Fund . . . . . . . . 250,000 4,839 Hillside Capital Incorporated Corporate Account . . . . . . 250,000 4,839 First Church of Christ Scientist - Endowment . . . . . . . 250,000 4,839 Christian Science Trustees for Gifts & Endowments . . . . . 225,000 4,355 Salomon Brothers Total Return Fund . . . . . . . . . . . . 200,000 3,871 Equitable Life Assurance Separate Account Balanced . . . . 195,000 3,774 NALCO Chemical Co. Retirement Trust . . . . . . . . . . . . 165,000 3,193 Kapiolani Medical Center for Women and Children . . . . . . 150,000 2,903 Employee Benefit Convertible Fund . . . . . . . . . . . . . 125,000 2,419 David Lipscomb University . . . . . . . . . . . . . . . . . 105,000 2,032 The Hotel Industry - ILWU Pension Trust . . . . . . . . . . 130,000 2,516 Island Insurance Convertible Account . . . . . . . . . . . 140,000 2,710 Summer Hill Global Partners, L.P. . . . . . . . . . . . . . 100,000 1,935 Retirement Plan for Pilots of Hawaiian Airlines . . . . . . 100,000 1,935 Hawaii Airlines Employees Pension Plan - IAM . . . . . . . 70,000 1,355 Pacific Innovation Trust Capital Income Fund . . . . . . . 55,000 1,064 Hawaiian Airlines Pension Plan for Salaried Employees . . . 20,000 387 Any other holder of Notes or future transferrees from any such holder(4)(5) . . . . . . . . . . . . . . . . . . . . . 119,815,000 2,319,324 ------------ --------- Total: $230,000,000 4,452,187 ============ =========
(1) Includes shares of Common Stock issuable upon conversion of the Notes. (2) Assumes a conversion price of $51.66 per share, and a cash payment in lieu of any fractional share interest; such conversion price is subject to adjustment as described under "Description of Notes -- Conversion." Accordingly the number of shares of Common Stock issuable upon -51- 55 conversion of the Notes may increase or decrease from time to time. Under the terms of Indenture, fractional shares will not be issued upon conversion of the Notes; cash will be paid in lieu of fractional shares, if any. (3) Shares indicated as owned by Ariston Capital Management Corporation are owned by various private investment accounts for which Ariston Capital Management Corporation serves as trustee or managing agent. (4) Information concerning other Selling Securityholders will be set forth in Prospectus Supplements from time to time, if required. (5) Assumes that any other holders of Notes or any future transferee from any such holder does not beneficially own any Common Stock other than the Common Stock issuable upon conversion of the Notes at the initial conversion rate. The Selling Securityholders identified above may have sold, transferred or otherwise disposed of, in transactions exempt from the registration requirements of the Securities Act, all or a portion of their Notes since the date on which the information in the preceding table is presented. Information concerning the Selling Securityholders may change from time to time and any such changed information will be set forth in supplements to this Prospectus if and when necessary. Because the Selling Securityholders may offer all or some of the Notes that they hold and/or Conversion Shares pursuant to the offering contemplated by this Prospectus, no estimate can be given as to the amount of the Notes or Conversion Shares that will be held by the Selling Securityholders upon the termination of this offering. See "Plan of Distribution." Information concerning the Selling Securityholders may change from time to time and any such changed information will be set forth in supplements to this Prospectus if and when necessary. In addition, the per share conversion price, and therefore the number of shares issuable upon conversion of the Notes, is subject to adjustment under certain circumstances. Accordingly, the aggregate principal amount of Notes and the number of shares of Common Stock issuable upon conversion thereof offered hereby may increase or decrease. -52- 56 PLAN OF DISTRIBUTION The Company will not receive any of the proceeds of the sale of the Securities offered hereby. The Securities may be sold from time to time to purchasers directly by the Selling Securityholders. Alternatively, the Selling Securityholders may from time to time offer the Securities through brokers, dealers or agents who may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders and/or the purchasers of the Securities for whom they may act as agent. The Selling Securityholders and any such brokers, dealers or agents who participate in the distribution of the Securities may be deemed to be "underwriters," and any profits on the sale of the Securities by them and any discounts, commissions or concessions received by any such brokers, dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act. To the extent the Selling Securityholders may be deemed to be underwriters, the Selling Securityholders may be subject to certain statutory liabilities of, including, but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act. The Securities offered hereby may be sold from time to time in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. The Securities may be sold by one or more of the following methods, without limitation: (a) a block trade in which the broker or dealer so engaged will attempt to sell the Securities as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchasers; (d) an exchange distribution in accordance with the rules of such exchange; (e) face-to-face transactions between sellers and purchasers without a broker-dealer; (f) through the writing of options; and (g) other. At any time a particular offer of the Securities is made, a revised Prospectus or Prospectus Supplement, if required, will be distributed which will set forth the aggregate amount and type of Securities being offered and the terms of the offering, including the name or names of any underwriters, dealers or agents, any discounts, commissions, concessions and other items constituting compensation from the Selling Securityholders and any discounts, commissions or concessions allowed or reallowed or paid to dealers. Such Prospectus Supplement and, if necessary, a post-effective amendment to the Registration Statement of which this Prospectus is a part, will be filed with the Commission to reflect the disclosure of additional information with respect to the distribution of the Securities. In addition, the Securities covered by this Prospectus may be sold in private transactions or under Rule 144 rather than pursuant to this Prospectus. To the best knowledge of the Company, there are currently no plans, arrangement or understandings between any Selling Securityholders and any broker, dealer, agent or underwriter regarding the sale of the Securities by the Selling Securityholders. There is no assurance that any Selling Securityholder will sell any or all of the Securities offered by it hereunder or that any such Selling Securityholder will not transfer, devise or gift such Securities by other means not described herein. The Selling Securityholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M which may limit the timing of purchases and sales of any of the Securities by the Selling Securityholders and any other such person. Furthermore, Regulation M of the Exchange Act may restrict the ability of any person engaged in the distribution of the Securities to engage in market-making activities with respect to the particular Securities being distributed for a period of up to five business days prior to the commencement of such distribution. All of the foregoing may affect the marketability of the Securities and the ability of any person or entity to engage in market-making activities with respect to the Securities. Pursuant to the Registration Rights Agreement entered into in connection with the offer and sale of the Notes by the Company, each of the Company and the Selling Securityholders will be indemnified by the other against certain liabilities, including certain liabilities under the Securities Act, or will be entitled to contribution in connection therewith. -53- 57 The Company has agreed to pay substantially all of the expenses incidental to the registration, offering and sale of the Securities to the public other than commissions, fees and discounts of underwriters, brokers, dealers and agents. LEGAL MATTERS The validity of the Notes and the Common Stock being offered hereby will be passed upon for the Company by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. EXPERTS The consolidated financial statements as of March 31, 1997 and 1996 and for each of the three fiscal years in the period ended March 31, 1997 included in this Registration Statement have been so included in reliance on the report of Price Waterhouse LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. -54- 58 ADAPTEC, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Audited Financial Statements: Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Balance Sheets as of March 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations for the three years ended March 31, 1997 . . . . . . . . . F-4 Consolidated Statements of Changes in Shareholders' Equity for the three years ended March 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5 Consolidated Statements of Cash Flows for the three years ended March 31, 1997 . . . . . . . . . F-6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
59 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 changes in shareholders' equity present fairly, in all material respects, the financial position of Adaptec, Inc. and its subsidiaries at March 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1997, 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. /s/ PRICE WATERHOUSE LLP San Jose, California April 25, 1997 F-2 60 ADAPTEC, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS,EXCEPT FOR SHARE AMOUNTS)
AS OF MARCH 31 --------------------------- 1997 1996 ----------- ----------- ASSETS Current assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . $ 318,075 $ 91,211 Marketable securities . . . . . . . . . . . . . . . . . . . . . . . 230,366 204,283 Accounts receivable, net of allowance for doubtful accounts of $5,098 in 1997 and $4,220 in 1996 . . . . . . . . . . . . . . . . 132,571 89,487 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,184 55,028 Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . 83,752 25,271 ----------- ----------- Total current assets . . . . . . . . . . . . . . . . . . . 817,948 465,280 Property and equipment, net . . . . . . . . . . . . . . . . . . . . . 141,599 95,004 Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,947 86,202 ----------- ----------- $ 1,043,494 $ 646,486 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current portion of long-term debt . . . . . . . . . . . . . . . . . $ 3,400 $ 3,400 Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 46,200 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 52,400 23,974 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 68,519 56,717 ----------- ----------- Total current liabilities . . . . . . . . . . . . . . . . . 124,319 130,291 ----------- ----------- Long-term debt, net of current portion . . . . . . . . . . . . . . . 850 4,250 ----------- ----------- Convertible subordinated notes 230,000 -- ----------- ----------- Commitments (Note 7) Shareholders' equity: Preferred stock; $.001 par value Authorized shares, 1,000 Outstanding shares, none . . . . . . . . . . . . . . . . . . . . -- -- Common stock; $.001 par value Authorized shares, 400,000 Outstanding shares, 111,540 in 1997 and 106,040 in 1996 . . . . . 251,834 182,932 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . 436,491 329,013 ----------- ----------- Total shareholders' equity . . . . . . . . . . . . . . . . . 688,325 511,945 ----------- ----------- $ 1,043,494 $ 646,486 =========== ===========
See accompanying notes. F-3 61 ADAPTEC, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended March 31, ----------------------------------------- 1997 1996 1995 --------- --------- --------- Net revenues . . . . . . . . . . . . . . . . . . . . . $ 933,868 $ 659,347 $ 466,194 Cost of revenues . . . . . . . . . . . . . . . . . . . 388,969 275,939 205,596 --------- --------- --------- Gross profit . . . . . . . . . . . . . . . . . 544,899 383,408 260,598 --------- --------- --------- Operating expenses: Research and development . . . . . . . . . . . . . . 128,530 87,628 60,848 Selling, marketing and administrative . . . . . . . . 162,979 117,332 81,966 Write-off of acquired in-process technology and other . . . . . . . . . . . . . . . . . . . . . . 92,162 52,313 -- --------- --------- --------- 383,671 257,273 142,814 --------- --------- --------- Income from operations . . . . . . . . . . . . . . . 161,228 126,135 117,784 --------- --------- --------- Interest income . . . . . . . . . . . . . . . . . . . . 13,297 12,694 7,932 Interest expense . . . . . . . . . . . . . . . . . . . (2,744) (840) (1,179) --------- --------- --------- 10,553 11,854 6,753 --------- --------- --------- Income before income taxes . . . . . . . . . . . . . 171,781 137,989 124,537 Provision for income taxes . . . . . . . . . . . . . . 64,220 34,614 31,135 --------- --------- --------- Net income . . . . . . . . . . . . . . . . . . . . . $ 107,561 $ 103,375 $ 93,402 ========= ========= ========= Net income per share . . . . . . . . . . . . . . . . . $ .93 $ .95 $ .88 ========= ========= ========= Weighted average number of common and common equivalent shares outstanding . . . . . . . 115,062 109,138 106,714 ========= ========= =========
See accompanying notes. F-4 62 ADAPTEC, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK ------------------------- RETAINED SHARES AMOUNT EARNINGS TOTAL ---------- ---------- ---------- ---------- Balance, March 31, 1994 . . . . . . . . . . . . . . . . 104,582 $ 138,317 $ 159,299 $ 297,616 Sale of common stock under employee purchase and option plans . . . . . . . . . . . . . . . . . . . 2,852 11,245 -- 11,245 Income tax benefit of employees' stock transactions . -- 5,929 -- 5,929 Repurchases of common stock (4,080) (15,300) (21,248) (36,548) Net income . . . . . . . . . . . . . . . . . . . . . -- -- 93,402 93,402 ---------- ---------- ---------- ---------- Balance, March 31, 1995 . . . . . . . . . . . . . . . . 103,354 140,191 231,453 371,644 Sale of common stock under employee purchase and option plans . . . . . . . . . . . . . . . . . . . 2,436 16,512 -- 16,512 Issuance of common stock in connection with acquisition . . . . . . . . . . . . . . . . . . . . 770 17,232 -- 17,232 Income tax benefit of employees' stock transactions . -- 10,947 -- 10,947 Repurchases of common stock . . . . . . . . . . . . . (520) (1,950) (5,815) (7,765) Net income . . . . . . . . . . . . . . . . . . . . . -- -- 103,375 103,375 ---------- ---------- ---------- ---------- Balance, March 31, 1996 . . . . . . . . . . . . . . . . 106,040 182,932 329,013 511,945 Sale of common stock under employee purchase and option plans . . . . . . . . . . . . . . . . . . . 2,814 28,323 -- 28,323 Issuance of common stock in connection with acquisitions . . . . . . . . . . . . . . . . . . . 2,686 18,435 (83) 18,352 Income tax benefit of employees' stock transactions . -- 22,144 -- 22,144 Net income . . . . . . . . . . . . . . . . . . . . . -- -- 107,561 107,561 ---------- ---------- ---------- ---------- Balance, March 31, 1997 . . . . . . . . . . . . . . . . 111,540 $ 251,834 $ 436,491 $ 688,325 ========== ========== ========== ==========
See accompanying notes. F-5 63 ADAPTEC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED MARCH 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Cash Flows from Operating Activities: Net income .............................................. $ 107,561 $ 103,375 $ 93,402 Adjustments to reconcile net income to net cash provided by operating activities: Write-off of acquired in-process technology, net of taxes ....................................... 88,691 39,686 -- Depreciation and amortization ......................... 28,611 17,593 15,662 Provision for doubtful accounts ....................... 1,000 250 150 Changes in assets and liabilities, net of the effect of acquisitions: Accounts receivable ................................. (41,688) (30,727) (1,311) Inventories ......................................... 11,998 (20,516) 7,228 Prepaid expenses .................................... (13,070) (8,973) 460 Other assets ........................................ 3,329 (16,952) (3,327) Accounts payable .................................... 25,968 (167) 2,354 Accrued liabilities ................................. 10,948 21,969 4,251 ----------- ----------- ----------- Net Cash Provided by Operating Activities ............... 223,348 105,538 118,869 ----------- ----------- ----------- Cash Flows from Investing Activities: Purchase of certain net assets in connection with acquisitions accounted for under the purchase method of accounting .................................. (107,214) (31,177) -- Investments in property and equipment ................... (87,959) (41,907) (32,356) Investments in marketable securities, net ............... (26,083) (24,372) (32,291) ----------- ----------- ----------- Net Cash Used for Investing Activities .................. (221,256) (97,456) (64,647) ----------- ----------- ----------- Cash Flows from Financing Activities: Proceeds from issuance of convertible subordinated notes ........................ 223,905 -- -- Payment of short-term note .............................. (46,200) -- -- Proceeds from issuance of common stock .................. 50,467 27,459 17,174 Repurchase of common stock .............................. -- (7,765) (36,548) Principal payments on debt .............................. (3,400) (3,400) (3,400) ----------- ----------- ----------- Net Cash Provided by (Used for) Financing Activities ...... 224,772 16,294 (22,774) ----------- ----------- ----------- Net Increase in Cash and Cash Equivalents ................. 226,864 24,376 31,448 Cash and Cash Equivalents at Beginning of Year .......... 91,211 66,835 35,387 ----------- ----------- ----------- Cash and Cash Equivalents at End of Year ................ $ 318,075 $ 91,211 $ 66,835 =========== =========== ===========
See accompanying notes. F-6 64 ADAPTEC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1: 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. Certain prior year amounts have been reclassified to conform to the current year presentation. 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. In November 1996, the Company effected a two-for-one split of its common stock. The accompanying consolidated financial statements have been retroactively restated to reflect this stock split. Foreign Currency Translation. The Company uses the U.S. dollar as its functional currency. Foreign currency transaction gains and losses are included in income as they occur. The effect of foreign currency exchange rate fluctuations on cash and cash equivalents denominated in foreign currencies was not material. Fair Value of Financial Instruments. The Company measures its financial assets and liabilities in accordance with generally accepted accounting principles. The estimated fair value of the Company's convertible subordinated notes was $268 million at March 31, 1997. The estimated fair value of all other debt and financial instruments at March 31, 1997 and 1996 was not materially different from the values presented in the consolidated balance sheets. 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. Marketable Securities. At March 31, 1997, 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 $147 million 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 have been immaterial. 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 securites, 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 uncollectable accounts receivable based upon the expected collectibility of all accounts receivable. There were no significant amounts charged to this allowance during the past three years. Product Development Costs. The Company's policy is to capitalize internal software development costs incurred after technological feasibility has been demonstrated. Such internal software development costs have not been capitalized to date since they were immaterial. Inventories. Inventories are stated at the lower of cost (first-in, first-out) or market. F-7 65 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. The Company capitalizes substantially all costs related to the purchase and implementation of software projects used for internal business operations. Capitalized internal-use software costs primarily include license fees, consulting fees, and any associated direct labor and are amortized over the estimated useful life of the project, typically a three to five year period. The Company's property and equipment as of March 31, 1997 and 1996 included $22 million and $5 million, respectively, of capitalized software costs, net of amortization. Software amortization totaling $3 million, $1 million, and $1 million was included in the Company's consolidated statements of operations during 1997, 1996, and 1995, respectively. Other Assets. The Company's other assets as of March 31, 1997 and 1996 included $23 million and $6 million, respectively, of goodwill, net of amortization. Goodwill amortization totaling $8 million and $2 million was included in the Company's consolidated statements of operations during 1997 and 1996, respectively. The Company assesses impairment of other assets including goodwill based on the future estimated cash flows of the acquired technology. 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. Stock-Based Compensation. The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company's policy is to grant options with an exercise price equal to the quoted market price of the Company's stock on the grant date. Accordingly, no compensation cost has been recognized in the Company's consolidated statements of operations. The Company has provided additional pro forma disclosures as required under Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." 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. NOTE 2: SUPPLEMENTAL FINANCIAL INFORMATION
INVENTORIES (IN THOUSANDS) 1997 1996 ------- ------- Raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,958 $23,415 Work-in-process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,370 12,865 Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,856 18,748 ------- ------- $53,184 $55,028 ======= ======= PROPERTY AND EQUIPMENT (IN THOUSANDS) LIFE 1997 1996 ------------- -------- --------- Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- $ 29,698 $ 25,154 Buildings and improvements . . . . . . . . . . . . . . . . . . . . 5-40 years 26,142 20,328 Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . 3-5 years 79,386 58,789 Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . 3-8 years 31,763 22,944 Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . Life of lease 6,583 5,245 Construction in progress . . . . . . . . . . . . . . . . . . . . . -- 25,976 2,727 -------- -------- 199,548 135,187 Accumulated depreciation and amortization . . . . . . . . . . . . . (57,949) (40,183) -------- -------- $141,599 $ 95,004 ======== ========
F-8 66
ACCRUED LIABILITIES (IN THOUSANDS) 1997 1996 -------- -------- Accrued compensation and related taxes . . . . . . . . $ 25,514 $ 22,440 Acquisition . . . . . . . . . . . . . . . . . . . . . 12,751 2,597 Sales and marketing related . . . . . . . . . . . . . . 12,464 7,443 Tax related . . . . . . . . . . . . . . . . . . . . . . 8,038 16,218 Other . . . . . . . . . . . . . . . . . . . . . . . . . 9,752 8,019 -------- -------- $ 68,519 $ 56,717 ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS (IN THOUSANDS) 1997 1996 1995 ---------- --------- ------- Interest paid . . . . . . . . . . . $ 641 $ 764 $ 1,125 Income taxes paid . . . . . . . . . 67,118 32,869 29,411
NOTE 3: LINE OF CREDIT The Company has available an unsecured $17 million revolving line of credit, that expires on December 31, 1998. 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, 1997, 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 1%, Eurodollar rate plus 1%, or prime lending rate. A commitment fee of 1/4% per annum is payable on the unused line of credit. Under the arrangement, the Company is restricted from paying dividends in excess of 25% of the prior fiscal year's net income, and the Company is required to maintain certain financial ratios among other restrictive covenants. The Company was in compliance with all such covenants as of March 31, 1997. NOTE 4: LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED NOTES 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. Under the arrangement, the Company is restricted from paying dividends in excess of 25% of the prior fiscal year's net income, and the Company is required to maintain certain financial ratios among other restrictive covenants. The Company was in compliance with all such covenants as of March 31, 1997. In February 1997, the Company issued $230 million of 4 3/4% convertible subordinated notes due on February 1, 2004. The Company received net proceeds of $224 million. The notes provide for semi-annual interest payments each February 1 and August 1, commencing on August 1, 1997. The holders of the notes will be entitled at any time on or after May 5, 1997 through February 1, 2004 to convert the notes into common stock at a conversion price of $51.66 per share. The notes are redeemable, in whole or in part, at the option of the Company, at any time on or after February 3, 2000 at declining premiums to par. Debt issuance costs are being amortized over the term of the notes. NOTE 5: ACQUISITIONS During fiscal 1997, the Company acquired complementary businesses and technologies consisting of Western Digital's Connectivity Solutions Group, CD-R software technology from Corel, Inc., Data Kinesis, Inc., Sigmax Technology, Inc., Toast CD-R technology, and certain assets from Skipstone, Inc. for $109 million and $15 million in cash and stock, respectively. These companies design and develop silicon solutions for the SCSI disk drive market, CD creator for the CD-R software market, software for improving system performance in file F-9 67 management and RAID applications, CD-ROM controllers for ATAPI CD-ROM drivers, CD-R technology for Macintosh platforms, and 1394/Firewire products. During fiscal 1996, the Company acquired all of the outstanding capital stock of Future Domain Corporation, Power I/O, Inc., Trillium Research, Inc., and Incat Systems Software USA, Inc. for $35 million and $17 million in cash and stock, respectively. The Company accounted for these acquisitions using the purchase method of accounting, and excluding the aggregate $90 million and $52 million write-offs of acquired in-process technology from these acquisitions for fiscal 1997 and 1996, respectively, the aggregate impact on the Company's consolidated statements of operations from the acquisition date was not material. The accounting for the write-off changed in fiscal 1997 due to an interpretation of SFAS 109 that the Company adopted upon its issuance. In fiscal 1996, the Company was allowed to gross- up the acquired in-process technology and record a dollar-for-dollar credit through its tax provision. The allocation of the Company's aggregate purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed was based primarily on independent appraisals and estimates of fair value and is summarized as follows:
(In thousands) ----------------------- 1997 1996 ---------- ---------- Tangible assets ................................................. $ 10,979 $ 8,108 In-process technology ........................................... 90,457 52,313 Goodwill ........................................................ 22,855 8,200 ---------- ---------- Assets acquired ................................................. 124,291 68,621 Accounts payable and accrued liabilities ........................ -- 3,125 Deferred tax liability .......................................... -- 12,627 ---------- ---------- Liabilities assumed ............................................. -- 15,752 ---------- ---------- Net assets acquired ............................................. $ 124,291 $ 52,869 ========== ==========
The tangible assets acquired were primarily comprised of inventory and fixed assets. Acquired in-process technology was written off in the periods in which the acquisitions were completed, and the goodwill is being amortized over respective benefit periods ranging from two to five years. On August 12, 1996, the Company completed its acquisition of Cogent Data Technologies, Inc. (Cogent). The Company acquired all of the outstanding capital stock of Cogent in exchange for 2.6 million shares of its common stock. Additionally, the Company incurred $1.7 million in professional fees related to this acquisition, which have been included in "write-off of acquired in-process technology and other." The Company has recorded this acquisition using the pooling of interests method of accounting. Cogent's historical operations, net assets, and cash flows were not material to the Company's consolidated financial statements and, therefore, have not been reflected in the Company's consolidated financial results prior to the acquisition. Beginning at the date of acquisition, the book value of the acquired assets and assumed liabilities as well as the results of Cogent's operations and cash flows, all of which are not material to the Company, have been combined with those of the Company. NOTE 6: STOCK PLANS 1986 EMPLOYEE STOCK PURCHASE PLAN. The Company has authorized 5,600,000 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, 285,336 and 278,550 shares were issued during fiscal 1997 and 1996 respectively, representing approximately $6.9 million and $4.6 million in employee contributions. F-10 68 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 of the underlying common stock 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 prices of 100% of fair market value of the underlying common stock on the respective dates of grant. Generally, options vest and become exercisable over a four year period and in some cases over a three year period. Option activity under the 1990 Stock Plan is as follows:
OPTIONS AVAILABLE OPTIONS OUTSTANDING ----------------- ---------------------------- WEIGHTED AVERAGE SHARES EXERCISE PRICE ------------ -------------- Balance, March 31, 1994 ....................... 5,547,148 8,796,754 $ 5.34 Authorized ................................. 5,000,000 -- -- Granted .................................... (3,829,000) 3,829,000 $10.09 Exercised .................................. -- (1,861,148) $ 3.71 Terminated ................................. 1,198,106 (1,198,106) $ 6.55 ----------- ----------- Balance, March 31, 1995 ....................... 7,916,254 9,566,500 $ 7.41 Authorized ................................. 4,387,800 -- -- Granted .................................... (4,589,500) 4,589,500 $22.28 Exercised .................................. -- (2,034,262) $ 5.80 Terminated ................................. 482,076 (482,076) $12.78 ----------- ----------- Balance, March 31, 1996 ....................... 8,196,630 11,639,662 $13.32 Authorized ................................. 9,833,906 -- -- Granted .................................... (7,296,738) 7,296,738 $24.69 Exercised .................................. -- (2,414,728) $ 8.58 Terminated ................................. 1,555,300 (1,555,300) $19.33 ----------- ----------- Balance, March 31, 1997 ....................... 12,289,098 14,966,372 $19.05 =========== =========== Options exercisable at: March 31, 1995 3,117,772 $ 5.21 March 31, 1996 3,913,534 $ 7.90 March 31, 1997 5,397,068 $12.97
F-11 69 The following table summarizes information about 1990 Stock Plan at March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- -------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICES AT 3/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/97 EXERCISE PRICE --------------- ----------- ---------------- -------------- ----------- --------------- $ .37 - $ 10.00 4,943,829 6.7 years $ 7.11 3,298,858 $ 6.99 $ 10.01 - $ 20.00 551,814 7.8 $14.55 283,803 $14.07 $ 20.01 - $ 25.00 7,670,260 8.9 $23.78 1,698,273 $23.36 $ 25.01 - $ 41.88 1,800,469 8.8 $33.08 116,134 $28.29 ---------- --------- 14,966,372 8.1 $19.05 5,397,068 $12.97 ========== =========
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 of the underlying common stock 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 quarterly and over a one year period. Upon joining the board, each new non-employee director receives an option for 40,000 shares, which vests over four years. Prior to March 31, 1997, annual grants vested over a four year period. All options granted prior to March 31, 1997 expire five years after the date of grant, whereas all subsequent grants expire ten years after the date of grant. Option activity under the 1990 Directors' Option Plan is as follows:
OPTIONS AVAILABLE OPTIONS OUTSTANDING ----------------- --------------------------------- WEIGHTED AVERAGE SHARES EXERCISE PRICE ----------- -------------- Balance, March 31, 1994 . . . . . . . . . . . . 980,000 405,000 $ 5.87 Granted . . . . . . . . . . . . . . . . . . (100,000) 100,000 $16.50 Exercised . . . . . . . . . . . . . . . . . -- (42,500) $ 4.81 ----------- ----------- Balance, March 31, 1995 . . . . . . . . . . . . 880,000 462,500 $ 8.26 Granted . . . . . . . . . . . . . . . . . . (300,000) 300,000 $23.12 Exercised . . . . . . . . . . . . . . . . . -- (110,000) $ 4.10 ----------- ----------- Balance, March 31, 1996 . . . . . . . . . . . . 580,000 652,500 $15.80 Authorized . . . . . . . . . . . . . . . . . 800,000 Granted . . . . . . . . . . . . . . . . . . (70,000) 70,000 $37.25 Exercised . . . . . . . . . . . . . . . . . -- (113,750) $ 6.73 ----------- ----------- Balance, March 31, 1997 . . . . . . . . . . . . 1,310,000 608,750 $19.96 =========== =========== Options exercisable at: March 31, 1995 187,500 $ 4.68 March 31, 1996 187,500 $ 7.52 March 31, 1997 248,750 $14.10
F-12 70 The following table summarizes information about 1990 Directors' Option Plan at March 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- ------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 3/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/97 EXERCISE PRICE --------------- ---------- ---------------- -------------- ---------- -------------- $ 3.84 - $ 10.00 152,500 1.5 years $ 7.93 127,500 $ 7.69 $ 10.01 - $ 20.00 91,250 3.0 $ 16.50 41,250 $ 16.50 $ 20.01 - $ 37.25 365,000 4.9 $ 25.85 80,000 $ 23.07 ------- -------- 608,750 3.8 $ 19.96 248,750 $ 14.10 ======= ========
PRO FORMA INFORMATION. Pro forma information regarding net income and earnings per share is required to be determined as if the Company had accounted for its Employee Purchase Plan, 1990 Stock Plan, and 1990 Directors' Option Plan, collectively called "options" under the fair value method of SFAS No. 123. The fair value of options granted in fiscal 1996 and fiscal 1997 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
Employee Stock Purchase Plan 1990 Stock Plan 1990 Directors' Option Plan ---------------------------- --------------- --------------------------- 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- Expected life (in years) .25 .25 4 4 4.12 4.12 Risk-free interest rate 5.2% 5.5% 6.0% 5.9% 6.0% 5.9% Volatility 44% 44% 44% 44% 44% 44% Dividend yield - - - - - -
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of fair value of its options. The weighted average estimated fair value of shares issued under the Employee Stock Purchase Plan granted during 1997 and 1996 was $6.65 and $4.46 per share, respectively. The weighted average estimated fair value of options granted under the 1990 Stock Plan during 1997 and 1996 was $12.24 and $8.95, respectively. The weighted average estimated fair value of options granted under the 1990 Directors' Plan during 1997 and 1996 was $14.80 and $9.81, respectively. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting periods. The Company's pro forma information follows (in thousands except for earnings per share information):
1997 1996 -------- --------- Pro forma net income $ 83,305 $ 97,956 Pro forma earnings per share $ .73 $ .91
The above pro forma disclosures are not likely to be representative of pro forma disclosures of future years, since it is applicable only to options granted subsequent to March 31, 1995. The pro forma effect of SFAS No. 123 will not be fully reflected until fiscal 2001. F-13 71 RIGHTS PLAN. The Company has reserved 250,000 shares of Series A Preferred Stock for issuance under the 1996 Rights Agreement which was amended and restated as of December 5, 1996. Under this plan, shareholders have received one Preferred Stock Purchase Right ("Right") for each outstanding share of the Company's common stock. Each Right will entitle shareholders to buy one one-thousandth of a share of Series A Preferred Stock at an exercise price of $180.00 per right. The Rights 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 that 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 $.01 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 $180.00 per share, common stock having a then current market value of $360.00 per share. At March 31, 1997, the Company has reserved the following shares of authorized but unissued common stock: 1986 Employee Stock Purchase Plan 1,453,038 1990 Stock Plan 27,255,470 1990 Directors' Option Plan 1,918,750 Conversion of subordinated long-term debt 4,452,187 ----------- 35,079,445 ===========
NOTE 7. COMMITMENTS The Company leases certain office facilities, vehicles, and certain equipment under operating lease agreements that expire at various dates through fiscal 2009. As of March 31, 1997, the minimum future payments on existing leases totaled $17.4 million. Rent expense was approximately $5.7 million, $3.7 million, and $2.4 million during fiscal 1997, 1996, and 1995, respectively. During fiscal 1996, the Company signed an agreement with TSMC to ensure availability of a portion of the Company's silicon wafer requirement 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 totaling $66 million. The advanced payments are classified in prepaid expenses, and other assets and will be realized by the Company at specified amounts over the agreement period. 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 $14.7 million, which 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. The advance payment is included in current assets in the fiscal 1997 consolidated balance sheet. Subsequent to March 31, 1997, the Company entered into an agreement with TSMC whereby the Company will make advance payments totaling $35 million to secure additional wafer capacity for future technology through 2001. The Company signed a promissory note for $35 million for the advance payments, which becomes due in two equal installments on January 31, 1998 and June 30, 1998. F-14 72 During fiscal 1997, the Company entered into an agreement with Lucent Technologies Inc. ("Lucent") to sell $21 million of equipment that it had previously purchased in connection with a separate agreement that ensured availability of certain levels of wafer capacity from Lucent. This new agreement cancels the initial capacity agreement and requires Lucent to purchase the equipment from the Company payable in two installments in fiscal 1998. NOTE 8. INCOME TAXES The components of income before income taxes for the years ended March 31 are as follows:
(IN THOUSANDS) 1997 1996 1995 Domestic . . . . . . . . . . . . . . . $ 74,866 $ 57,882 $ 74,397 Foreign. . . . . . . . . . . . . . . . 96,915 80,107 50,140 ---------- --------- --------- Income before income taxes . . . . . . $ 171,781 $ 137,989 $ 124,537 ========== ========= =========
The split of domestic and foreign income was impacted mainly by the acquisition-related write-offs of in-process technology and other, which reduced domestic income by $92 million for 1997 and $52 million for 1996. The components of the provision for income taxes for the years ended March 31 are as follows:
(IN THOUSANDS) 1997 1996 1995 ----------- ----------- ------------ Federal Current . . . . . . . . . . . . . . . . . . . . . $ 45,363 $ 22,066 $ 26,455 Deferred . . . . . . . . . . . . . . . . . . . . (10,025) (4,263) (311) ----------- ----------- ------------ 35,338 17,803 26,144 ----------- ----------- ------------ Foreign Current . . . . . . . . . . . . . . . . . . . . . $ 21,418 $ 15,074 $ 1,106 Deferred . . . . . . . . . . . . . . . . . . . . (1,961) (1,491) -- ----------- ----------- ------------ 19,457 13,583 1,106 ----------- ----------- ------------ State Current . . . . . . . . . . . . . . . . . . . . . $ 11,335 $ 3,611 $ 3,177 Deferred . . . . . . . . . . . . . . . . . . . . (1,910) (383) 708 ----------- ----------- ------------ 9,425 3,228 3,885 ----------- ----------- ------------ Provision for income taxes . . . . . . . . . . . . $ 64,220 $ 34,614 $ 31,135 =========== =========== ============
Significant components of the Company's deferred tax assets, included in prepaid expenses in the accompanying consolidated balance sheets as of March 31 are as follows:
(IN THOUSANDS) ----------------------- 1997 1996 ------- ------- Non-deductible reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,601 $ 5,327 State taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,922 1,323 Compensatory accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,815 5,091 Various expense accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,363 5,581 Capitalized technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,700 -- Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (419) 764 ------- ------- Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . $31,982 $18,086 ======= =======
F-15 73 The provision for income taxes differs from the amount computed by applying the federal statutory tax rate to income before taxes for the years ended March 31 as follows:
1997 1996 1995 ------ ----- ----- Federal statutory rate . . . . . . . . . . . . . . . . . . . . 35.0% 35.0% 35.0% State taxes, net of federal benefit . . . . . . . . . . . . . . 2.7 2.7 2.2 Foreign subsidiary income at other than the U.S. tax rate . . . (11.9) (11.8) (9.9) Tax-exempt interest income, net . . . . . . . . . . . . . . . . (1.2) (2.1) (1.7) Book write-off of in-process technology . . . . . . . . . . . . 12.4 -- -- Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 1.3 (0.6) ------ ----- ----- Effective income tax rate . . . . . . . . . . . . . . . . . . . 37.4% 25.1% 25.0% ====== ===== =====
The Company's effective tax rate for fiscal 1997 was 37% compared to 25% for fiscal 1996 and 1995. The Company's fiscal 1997 effective tax rate was 25% exclusive of the effect of the book write-offs of in-process technology, which are not deductible for tax purposes. In prior years, the tax effect of similar book write-offs was included in the cost of the purchased technology. The Company's manufacturing subsidiary in Singapore is currently operating under a tax holiday. If certain conditions are met, the tax holiday provides that profits derived from certain products will be exempt from Singapore tax through fiscal 2006. In addition, profits derived from the Company's remaining products will be taxed at a rate of 15%, which is lower than the Singapore statutory rate of 26%, through fiscal 1998. As of March 31, 1997, the Company had not accrued income taxes on $279 million of accumulated undistributed earnings of its Singapore subsidiary, as these earnings will be reinvested indefinitely. NOTE 9. SEGMENT INFORMATION Adaptec operates predominantly in one industry segment and provides solutions that enhance bandwidth between servers, PCs, peripherals, and networks. 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.
SINGAPORE, ADJUSTMENTS UNITED FAR EAST, AND CONSOLIDATED STATES OTHER EUROPE CORPORATE ELIMINATIONS TOTAL ------------ ------------ ------------ ------------ ------------ ------------ (IN THOUSANDS) FISCAL 1997 Revenues Sales to customers ......... $ 782,622 $ 150,395 $ 851 $ -- $ -- $ 933,868 Intercompany sales between geographic areas . 4,261 546,678 11,188 -- (562,127) -- ------------ ------------ ------------ ------------ ------------ ------------ Net revenues ......... $ 786,833 $ 697,073 $ 12,039 $ -- $ (562,127) $ 933,868 ============ ============ ============ ============ ============ ============ Income from operations ........ 157,936 95,473 (19) (92,162) -- 161,228 Identifiable assets ........... 352,312 295,333 3,242 589,716 (197,109) 1,043,494
F-16 74
SINGAPORE, ADJUSTMENTS UNITED FAR EAST, AND CONSOLIDATED STATES OTHER EUROPE CORPORATE ELIMINATIONS TOTAL ------------ ------------ ------------ ------------ ------------ ------------ FISCAL 1996 Revenues Sales to customers ......... $ 609,060 $ 49,211 $ 1,076 $ -- $ -- $ 659,347 Intercompany sales between geographic 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 geographic 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
EXPORT REVENUES. The following table represents export revenues by geographic region as a percentage of total revenues:
1997 1996 1995 ---- ---- ---- Singapore, Far East, Other . . . . . . . . . . . 39% 32% 37% Europe . . . . . . . . . . . . . . . . . . . . . 22 24 25 ---- --- --- 61% 56% 62% === === ===
MAJOR CUSTOMERS. In fiscal 1997 and 1995, no customer accounted for more than 10% of net revenues. In fiscal 1996, sales to one distributor represented 10% of net revenues. NOTE 10. PRO FORMA NET INCOME PER SHARE In March 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which changes the manner in which the Company computes earnings per share beginning in the third quarter of fiscal 1998. The statement requires retroactive presentation of all earnings per share amounts. Pro Forma basic and diluted earnings per share are presented below as if the Company had adopted this standard as of March 31, 1997.
FOR THE YEAR ENDED MARCH 31, ---------------------------- 1997 1996 1995 ----- ----- ----- Pro forma basic earnings per share . . . . . . . $ .98 $ .99 $ .91 Pro forma diluted earnings per share . . . . . . $ .93 $ .95 $ .88
F-17 75 NOTE 11: COMPARATIVE QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data is as follows:
QUARTERS --------------------------------------------------- FIRST SECOND THIRD FOURTH YEAR ----- ------ ----- ------ ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FISCAL 1997 Net revenues ............................. $ 202,014 $ 215,043 $ 251,703 $ 265,108 $ 933,868 Gross profit ............................. 115,968 122,493 148,564 157,874 544,899 Net income* .............................. 17,914 1,237 41,584 46,826 107,561 Net income per share* .................... $ .16 $ .01 $ .36 $ .40 $ .93 Weighted average shares outstanding ...... 111,342 113,640 116,786 117,665 115,062 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* .................... $ .29 $ .01 $ .28 $ .37 $ .95 Weighted average shares outstanding ...... 107,884 108,922 109,584 110,122 109,138
- --------- * All quarters of fiscal 1997 include write-offs of acquired in-process technology, net of taxes, totaling $25 million, $42 million, $12 million, and $11 million, respectively. 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. F-18 76 ================================================================================ No dealer, salesman or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus, in connection with the offer made by this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized by the corporation. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create an implication that there has been no change in the affairs of the corporation since the date hereof. This Prospectus does not constitute an offer or solicitation by anyone in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not authorized to do so or to anyone to whom it is unlawful to make such offer or solicitation in such jurisdiction. TABLE OF CONTENTS
PAGE ---- Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Offering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Price Range of Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . 16 Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Principal Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Description of Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Certain Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Selling Securityholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Index to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
U.S. $230,000,000 ADAPTEC, INC. 4 3/4% CONVERTIBLE SUBORDINATED NOTES DUE FEBRUARY 1, 2004 AND COMMON STOCK ISSUABLE UPON CONVERSION THEREOF PROSPECTUS JUNE 24, 1997 ================================================================================ 77 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses payable by the Registrant in connection with the sale and distribution of the securities being registered hereby. Normal commission expenses and brokerage fees are payable individually by the Selling Securityholders. All amounts are estimated except the Securities and Exchange Commission registration fee.
AMOUNT ------------ SEC registration fee . . . . . . . . . . . . . . . . . . . $ 69,697 Accounting fees and expenses . . . . . . . . . . . . . . . 15,000 Legal fees and expenses . . . . . . . . . . . . . . . . . . 20,000 Printing expenses . . . . . . . . . . . . . . . . . . . . . 10,000 Trustee's Fees and Expenses . . . . . . . . . . . . . . . . 10,000 Miscellaneous fees and expenses . . . . . . . . . . . . . . 25,303 ------------ Total . . . . . . . . . . . . . . . . . . . . . . $ 150,000 ============
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 317 of the California General Corporation Law authorizes a court to award, or a corporation's Board of Directors to grant, indemnity to directors and officers who are parties or are threatened to be made parties to any proceeding (with certain exceptions) by reason of the fact that the person is or was an agent of the corporation, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with the proceeding if that person acted in good faith and in a manner the person reasonably believed to be in the best interests of the corporation. This limitation on liability has no effect on a director's liability (i) for acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) for acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iii) relating to any transaction from which a director derived an improper personal benefit, (iv) for acts or omissions that show a reckless disregard for the director's duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of a serious injury to the corporation or its shareholders, (v) for acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation or its shareholders, (vi) under Section 310 of the California General Corporation Law (concerning contracts or transactions between the corporation and a director) or (vii) under Section 316 of the California General Corporation Law (directors' liability for improper dividends, loans and guarantees). The provision does not extend to acts or omissions of a director in his capacity as an officer. Further, the provision has no effect on claims arising under federal or state securities laws and does not affect the availability of injunctions and other equitable remedies available to the Company's shareholders for any violation of a director's fiduciary duty to the Company or its shareholders. Although the validity and scope of the legislation underlying the provision have not yet been interpreted to any significant extent by the California courts, the provision may relieve directors of monetary liability to the Company for grossly negligent conduct, including conduct in situations involving attempted takeovers of the Company. In accordance with Section 317, the Restated Articles of Incorporation, as amended (the "Articles"), of the Company limits the liability of a director to the Company or its shareholders for monetary damages to the fullest extent permissible under California law, and authorizes the Company to provide indemnification to its agents (including officers and directors), subject to the limitations set forth above. The Company's By-Laws further provide for indemnification of corporate agents to the maximum extent permitted by the California General Corporation Law. Pursuant to the authority provided in the Articles, the Company has entered into indemnification agreements with each of its officers and directors, indemnifying them against certain potential liabilities that may arise as a result of their service to the Company, and providing for certain other protection. The Company also maintains insurance policies which insure its officers and directors against certain liabilities. The foregoing summaries are necessarily subject to the complete text of the statute, the Articles, the By-Laws and the agreements referred to above and are qualified in their entirety by reference thereto. II-1 78 Reference is made to the Underwriting Agreements included herein as exhibits to the Registration Statement for provisions regarding indemnification of the Company's officers, directors and controlling persons against liabilities, including liabilities under the Securities Act. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES During February 1997, the Company completed an offering of $230 million of convertible subordinated notes. The notes bear interest at 4 3/4 percent, mature in February 2004, and are convertible into shares of the Company's common stock at $51.66 per share. The notes were sold by the Company to Bear, Stearns & Co. Inc., Lehman Brothers, Robertson, Stephens & Company, and Unterberg Harris (the "Initial Purchasers"). The Initial Purchasers resold $221,250,000 of the Notes, in a transaction exempt from the registration requirements of the Securities Act, to persons reasonably believed by such initial purchaser to be "qualified institutional buyers" (as defined in Rule 144A under the Securities Act), or other institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act. An additional $8,750,000 aggregate principal amount of Notes were issued in the Original Offering by the Company and sold by the Initial Purchasers in compliance with the provisions of Regulation S under the Securities Act. Aggregate discounts to the Initial Purchasers totaled $223,905,000. The net proceeds of the Offering to the Company, after deducting the discounts and offering expenses, were $223,405,000. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
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) 2.3 Agreement for Purchase and Sale of Stock by and among Western Digital Corporation, Western Digital CSG Corporation, and Adaptec, Inc. dated April 9, 1996 . . . . . . . (14) 2.4 Agreement and Plan of Reorganization by and among Adaptec, Inc., Cogent Data Technologies, Inc., CDT Acquisition Corp., and Certain Shareholders of Cogent Data Technologies, Inc. dated May 31, 1996. . . . . . . . . . . . . . . . . . . . . . . . (15) 2.5 Agreement and Plan of Reorganization by and among Adaptec, Inc., Adaptec Acquisition Corporation, and Data Kinesis, Inc. dated August 6, 1996. . . . . . . . . . . . . . . (15) 3.1 Eighth Amended and Restate Articles of Incorporation of Registrant filed with California Secretary of State on November 1, 1996 . . . . . . . . . . . . . . . . . . (16) 3.2 Bylaws of Registrant, as restated on February 9, 1996 . . . . . . . . . . . . . . . . (13) 3.3 Certificate of determination of rights, preferences and privileges of Series A participating preferred stock filed with the California Secretary of State on December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16) 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) 4.2** Indenture dated as of February 3, 1997 between Registrant and State Street Bank and Trust Company 5.1** Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation . . . . . . . . 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 Appreciating Rights Agreement, and Incentive Stock Rights Agreement for use in connection with the 1990 Stock Plan, as amended . . . . . . . . (5)
II-2 79
EXHIBIT NUMBER DESCRIPTION ------ ----------- 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 . . (13) 10.12 Form of Indemnification Agreement entered into with directors and officers of the (9) Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.13 Term Loan Agreement dated June 24, 1992 between the Registrant and Plaza Bank of Commerce expiring June 30, 1988 . . . . . . . . . . . . . . . . . . . . . . . . . . . (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) 10.16 Amendments Seven, Eight and Nine to the Revolving Credit Loan Agreement dated April 29, 1994 between the Registrant and Comerica Bank -- California expiring August 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16) 10.17 Amendments One, Two, Three and Four to the Term Loan Agreement dated June 24, 1992 between the Registrant and Comerica Bank -- California (formerly the Plaza Bank of Commerce) expiring June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . (10) 12.1 Computation of Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . 21.1** Subsidiaries of Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.1 Consent of Independent Accountants, Price Waterhouse LLP 23.2** Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation (included in Exhibit 5.1) 24.1 Power of Attorney. (See Page II-7). 25.1** Statement of Eligibility and Qualification Under the Trust Indenture Act of 1939 of a Corporation disgnated to act as Trustee on Form T-1.
------------------------- (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 Amendment 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. II-3 80 (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 (filed 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. (13) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1996. (14) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1996. (15) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended September 27, 1996. (16) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended December 27, 1996. * Confidential treatment has been granted for portions of this agreement. ** Previously filed. (b) Financial Statement Schedules All schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. ITEM 17. UNDERTAKINGS (a) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to the Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price, set forth in the "Calculation of Registration Fee" table in the effective registration statement; and II-4 81 (iii) To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement. (2) That, for the purpose of determining any liability under the Act, each such post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-offering amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that such a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in Act and will be governed by the final adjudication of such issue. II-5 82 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Milpitas, State of California, on the 23rd day of June, 1997. ADAPTEC, INC. By: /s/ F. GRANT SAVIERS ------------------------------------------ F. Grant Saviers President, Chief Executive Officer, and Director Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
NAME TITLE DATE ---------------------------------------- ----------------------------------------------- ------------- /s/ F. Grant Saviers ---------------------------------------- F. Grant Saviers President, Chief Executive Officer and Director June 23, 1997 /s/ Paul G. Hansen* Vice President, Finance, Chief Financial ---------------------------------------- Officer, (Principal Financial Officer) June 23, 1997 Paul G. Hansen /s/ Andrew J. Brown* Vice President, Corporate Controller (Principal ---------------------------------------- Accounting Officer) June 23, 1997 Andrew J. Brown Director ---------------------------------------- John G. Adler /s/ Laurence B. Boucher* Director ---------------------------------------- Laurence B. Boucher June 23, 1997 Director ---------------------------------------- Carl J. Conti Director ---------------------------------------- John C. East /s/ Robert J. Loarie* Director ---------------------------------------- Robert J. Loarie June 23, 1997 /s/ B.J. Moore* Director ---------------------------------------- B.J. Moore June 23, 1997 /s/ W. Ferrel Sanders* Director ---------------------------------------- W. Ferrel Sanders June 23, 1997 Director ---------------------------------------- Phillip E. White *By: /s/ F. Grant Saviers ----------------------------------- Attorney-in-fact
II-6 EX-12.1 2 COMPUTATION OF RATIO OF EARNINGS FIXED CHARGES 1 EXHIBIT 12.1 ADAPTEC, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Amounts in thousands)
1993 1994 1995 1996 1997 --------- --------- ---------- ---------- ---------- Pre-tax income from continuing operations $ 65,854 $ 78,603 $ 124,537 $ 137,989 $ 171,781 --------- --------- ---------- ---------- ---------- Fixed charges: Interest expense 967 1,306 1,179 840 2,744 Rentals - 33% 480 541 784 1,226 1,881 --------- --------- ---------- ---------- ---------- Total fixed charges 1,447 1,847 1,963 2,066 4,625 --------- --------- ---------- ---------- ---------- Earnings before income taxes and fixed charges $ 67,301 $ 80,450 $ 126,500 $ 140,055 $ 176,406 ========= ========= ========== ========== ========== RATIO OF EARNINGS TO FIXED CHARGES 46.5 43.6 64.4 67.8 38.1 ========= ========= ========== ========== ==========
EX-23.1 3 CONSENT OF INDEPENDENT ACCOUNTANTS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form S-1 of our report dated April 25 1997, relating to the consolidated financial statements of Adaptec, Inc., which appears in such prospectus. We also consent to the reference to us under the heading "Experts." /s/ PRICE WATERHOUSE LLP San Jose, California June 18, 1997 -----END PRIVACY-ENHANCED MESSAGE-----