-----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, E+XiXNEQwDbIn+9wFXhoUU0lCesBnaFmfh2jfp1J6Fw1knZmvXfGW5Rln/UdE2eo ht+jyT0n/z1+NLcJaTSkCA== 0000891618-98-003082.txt : 19980629 0000891618-98-003082.hdr.sgml : 19980629 ACCESSION NUMBER: 0000891618-98-003082 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980626 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: 10-K SEC ACT: SEC FILE NUMBER: 000-15071 FILM NUMBER: 98655180 BUSINESS ADDRESS: STREET 1: 691 S MILPITAS BLVD STREET 2: M/S25 CITY: MILPITAS STATE: CA ZIP: 95035 BUSINESS PHONE: 4089458600 MAIL ADDRESS: STREET 1: 691 SOUTH MILPITAS BLVD STREET 2: M/S25 CITY: MILPITAS STATE: CA ZIP: 95035 10-K 1 FORM 10-K FOR THE YEAR ENDED MARCH 31, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended March 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to . Commission File Number 000-15071 ADAPTEC, INC. (exact name of Registrant as specified in its charter) DELAWARE 94-2748530 (State of incorporation) (I.R.S. Employer Identification No.) 691 S. Milpitas Blvd. Milpitas, California 95035 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 945-8600 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value Preferred Share Purchase Rights (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [X] No [ ] Based on the closing sale price of the Common Stock on the Nasdaq National Market System on June 1, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant was $1,650,641,230. Shares of Common Stock held by each officer and director and by each person known by the Company to own 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares outstanding of Registrant's Common Stock, $0.001 par value, was 114,319,660 at June 1, 1998. DOCUMENTS INCORPORATED BY REFERENCE Parts I, II and IV incorporate information by reference from the Annual Report to Stockholders for the fiscal year ended March 31, 1998. Part III incorporates information by reference from the definitive proxy statement for the Annual Meeting of Stockholders to be held on August 20, 1998. 2 INTRODUCTORY STATEMENT References made in this Annual Report on Form 10-K to "Adaptec," the "Company," or the "Registrant" refer to Adaptec, Inc. and its wholly owned subsidiaries. Adaptec, the Adaptec logo, EZ-SCSI, and SCSIselect are trademarks of Adaptec, Inc., which may be registered in some jurisdictions. All other trademarks used are owned by their respective owners. 1 3 PART I ITEM 1. BUSINESS GENERAL Adaptec is a 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, network products, CD recordable software solutions, peripheral technology solutions, consisting primarily of application specific integrated circuit ("ASIC") controllers for hard disk and CD-ROM drives, and storage system solutions that incorporate RAID and Fibre Channel technologies. 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. Many of these solutions are based on the SCSI standard which has become an important 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. The increase in the usage of data has created the need for solutions involving 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. 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. Adaptec also supports emerging high-performance solutions, such as Fibre Channel and microprocessor based RAID. Fibre Channel is a bus technology targeted for applications with very high-capacity I/O demands over long distances, which offers unique capabilities in the clustering and very high end multi-processor server environments. Fibre Channel has fostered the idea of a "storage area network" where a Fibre Channel network exists independently of a local area network (LAN). The storage area network moves data between storage devices and servers while the LAN moves data between clients and servers. RAID is an acronym for Redundant Array of Inexpensive (or Independent) Disks. A microprocessor RAID array is a collection of drives which collectively act as a single storage system, which can tolerate the failure of a drive without losing data and which can operate independently of each other. RAID offloads overhead from the main CPU allowing for enhanced system performance. 2 4 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. Host Interface Solutions The Company's host interface solutions, which include SCSI host adapters 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 host interface products, which incorporate the Company's proprietary single chip architectures and related software products including CD recordable solutions, provide customers comprehensive I/O solutions in the markets it serves. Ultra2SCSI products include PCI Ultra2 solutions for workstation applications such as CAD/CAM, financial analysis and desktop publishing. Internal RAID solutions include RAID option cards for motherboards equipped with a RAIDport II slot and PCI-to-Ultra SCSI Array Adapters. The Company provides bus mastering, SCSI host adapters that manage all I/O processing activity, thereby freeing the CPU to perform other operations. The Company offers these host adapters across all ranges of bus architectures including PCI, Fibre Channel, ISA, EISA, and PCMCIA as well as for previous generations of the SCSI standard. The Company also provides non-bus mastering host adapters that provide standardized SCSI connectivity between the CPU and its peripherals. 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 also provides networking products such as Fast Ethernet adapters and Duralink software. 3 5 Semiconductor Solutions 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 semiconductor solutions include SCSI and enhanced integrated device electronic ("EIDE") programmable storage controllers and single-chip SCSI host adapters. All of the Company's IC products are developed using advanced design technologies to meet market requirements for higher levels of physical integration, increased functionality, and performance. The Company's programmable SCSI and EIDE storage controllers are typically configured to address specific customer requirements in the mass storage market and are used primarily in high-capacity hard disk drives. The Company's SCSI host adapter ICs incorporate similar technology and are used by system manufacturers to embed SCSI on the system motherboard. Storage System Solutions The Company's storage system solutions include RAID for external storage, primarily in the NT server market, and Fibre Channel solutions. RAID for external storage includes external RAID controller boards and external RAID "canisters". External RAID controller boards are sold to OEMs for integration into their external storage subsystems. Canisters are sold primarily to VARs and resellers through the distribution channel for integration into RAID storage subsystems. The Company's Fibre Channel products include PCI-to-Fibre Channel host adapters which bring Fibre Channel peripheral attachment and clustering interconnection to 32-bit/64-bit PCI workstations and servers. These PCI-to-Fibre Channel host adapters are compatible with a wide range of hardware platforms, operating systems and peripherals and are sold directly to OEMs and through distribution with kitted solutions. 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. 4 6 The Company intends to continue to leverage its technical expertise and product innovation capabilities to address I/O solutions across a broad range of users and platforms. The Company has invested significant resources to develop its core products as well as newer hardware and software solutions including CD-R, Fibre Channel, File Array, RAID and external storage. The Company is currently evaluating the stage of development and market potential of various of these technologies and, as a result of its recent financial performance, may decide to curtail or terminate its development efforts in certain areas. Approximately 28% of the Company's employees are engaged in research and development, of whom approximately 50% are engaged in software development. In fiscal 1998, 1997, and 1996, the Company spent approximately $173 million (17% of net revenues), $129 million (14% of net revenues) and $88 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 Computer, DEC, Dell Computer Corporation, Fujitsu, Gateway 2000, Hewlett-Packard Company, IBM Corporation, Intel Corporation, Samsung, Siemens Nixdorf, Silicon Graphics, Toshiba America, and Western Digital. The Company's major distributors include Actebis, CHS Electronics, Computer 2000, Gates/Arrow, Globelle, Ingram Micro, Metrologie, Merisel, Nissho, and Tech Data. In fiscal 1998 and 1997, 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. International net revenues accounted for approximately 60%, 61%, and 56% of net revenues in fiscal 1998, 1997, and 1996, 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 denominated in U.S. dollars. 5 7 COMPETITION In the host adapter market, the Company competes with a number of 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. As the Company enters the market for storage systems solutions, it expects to experience significant competition from both existing competitors and additional companies that may enter this market. Some of these companies have greater technical, marketing, manufacturing, and financial resources than the Company. The Company's principal competitors for semiconductor solutions in the mass storage market are captive suppliers, Texas Instruments 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 and server 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 factors in its competitive success is its continued commitment of resources to research and development. BACKLOG At March 31, 1998, the Company's backlog was approximately $61 million compared with $154 million at March 31, 1997. The Company believes that the trend to lower priced PCs for mainstream corporate desktop applications, the turbulent disk drive market and the recent instability in the Asian markets are, among other things, factors which may have contributed to the decrease in the backlog. However, backlog levels may also vary with product availability, delivery lead times and customer order delays, changes or cancellations. Accordingly, the Company's backlog as of any particular date may not necessarily be a reliable indicator of future operating results. 6 8 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 1998, to ensure availability of low cost manufacturing capacity for certain product lines, the Company's Singapore plant continued to develop relationships 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 has secured capacity through agreements with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") that ensure availability of a portion of the Company's wafer capacity for both current and future technologies for which the Company has made advance payments. The Company also purchases wafers from SGS-Thompson Microelectronics and Seiko Epson. PATENTS AND LICENSES The Company believes that patents are of less significance in its industry than such factors as innovative skills, technological expertise, and marketing abilities. However, the Company encourages its engineers to document patentable inventions and has applied for and continues to apply for patents both in the United States and in foreign countries when it deems it to be advantageous to do so. There can be no assurance that patents will be issued or that any patent issued will provide significant protection or could be successfully defended. As is the case with many companies in the electronics industry, it may be desirable in the future for the Company to obtain technology licenses from other companies. The Company has occasionally received notices of claimed infringement of intellectual property rights and may receive additional such claims in the future. The Company evaluates all such claims and, if necessary, will seek to obtain appropriate licenses. There can be no assurance that any such licenses, if required, will be available on acceptable terms. EMPLOYEES At March 31, 1998, the Company had 3,276 employees. 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. EXECUTIVE OFFICERS The following sets forth certain information with regard to executive officers of Adaptec as of June 23, 1998 except that ages are as of March 31, 1998: F. Grant Saviers (age 53) has served as Chairman and Chief Executive Officer of Adaptec since May 1998. Mr. Saviers served as Chairman, Chief Executive Officer and President between August 1997 and May 1998 and as President and Chief Executive Officer between July 1995 and August 1997. Mr. Saviers joined Adaptec as Chief Operating Officer in August 1992. Prior to joining Adaptec, Mr. Saviers was 7 9 employed with Digital Equipment Corporation, last serving as Vice President of its personal computer systems and peripherals operation. Robert N. Graham (age 58) has served as President, Storage Systems since May 1998. From 1997 to 1998, Mr. Graham was Chairman, Chief Executive Officer and President of Ridge Technologies, Inc. From 1994 to 1997, he was a director and Chief Operating Officer of Manufacturers' Services, Inc. From 1991 to 1994, he was the General Manager of the Sun Microelectronics Division of Sun Microsystems. Robert N. Stephens (age 52) has served as President, Host Interface Solutions since May 1998. Mr. Stephens joined Adaptec as Chief Operating Officer in 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. Andrew J. Brown (age 38) has served as Vice President since November 1996, and as Corporate Controller and Principal Accounting Officer since May 1994. From July 1988 to April 1994 he served in various financial roles with the Company. Richard J. Clayton (age 57) 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. Michael G. Fisher (age 39) 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. Paul G. Hansen (age 50), 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. E. J. Tim Harris (age 50) 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. Sam Kazarian (age 55) has served as Vice President of Operations since May 1990. James M. McCluney (age 46) has served as Vice President since May 1998. From October 1997 to May 1998 he was Senior Vice President, Wordwide Operations, at Apple Computer. From 1980 to October 1997, he served in various positions at Digital Equipment Corporation, most recently as Vice President of Worldwide Logistics. Michael A. Ofstedahl (age 38) has served as Vice President, Worldwide Sales, since February 1998. From January 1996 to February 1998, Mr. Ofstedahl was Vice President of Sales for Chromatic Research, Inc. and from April, 1993 to January, 1996, he was Vice President, Strategic Accounts, at Adaptec. Prior to that, he served as Senior Vice-President, Sales and Marketing, for Vitarel Microelectronics, Inc. Christopher G. O'Meara (age 40) has served as Vice President since July 1992 and as Treasurer since April 1989. 8 10 Henry P. Massey (age 58) 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. TERMINATION OF SYMBIOS ACQUISITION In February 1998, the Company entered into an agreement to purchase all of the outstanding stock of Symbios, Inc. ("Symbios"), a wholly owned subsidiary of Hyundai Electronics America ("Hyundai") for approximately $768 million. Symbios is a supplier of SCSI devices, OEM storage systems and ASIC solutions. On June 25, 1998, Adaptec and Hyundai announced that they had mutually agreed to terminate the transaction. Adaptec expects to take a charge of approximately $20 million in the first quarter of fiscal 1999 in connection with the transaction. FOREIGN AND DOMESTIC OPERATIONS Incorporated by reference from information under the caption " Note 10. Segment Information" in the Notes to Consolidated Financial Statements on pages B21 and B22 of the Annual Report to Stockholders for the fiscal year ended March 31, 1998. CERTAIN FACTORS BEARING ON FUTURE RESULTS This report contains forward-looking statements that involve risks and uncertainties. For example, Management's Discussion and Analysis of Results of Operations and Financial Condition which is incorporated by reference from the Company's Annual Report includes statements relating to expected sales growth, anticipated operating expenditures and anticipated capital expenditures. The statements contained in this document 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 document. In evaluating the Company's business, prospective investors should consider carefully the following factors in addition to the other information set forth in this document. Future Operating Results Subject to Fluctuation. In the second half of fiscal 1998, the Company's operating results were adversely affected by shifts in corporate and retail buying patterns, increased competition, economic instability in Asia and turbulence in the computer disk drive industry. In the future, the Company's operating results may fluctuate as a result of these factors and as a result of a wide variety of other factors, including, but not limited to, 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, product obsolescence and general worldwide economic and computer industry fluctuations. In addition, fluctuations may be caused by future accounting pronouncements, changes in accounting policies, 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 9 11 or if customers do not control inventories effectively, they may cancel or reschedule shipments previously ordered from the Company. The Company has historically operated with a relatively small backlog, especially relating to orders of its host interface solutions and has set its operating budget based in part on expectations of future revenues. Because much of the Company's operating budget is relatively fixed in the short term, if revenues do not meet the Company's expectations, as happened in the fourth quarter of fiscal 1998, then the Company's operating income and net income may be disproportionately affected. Operating results in any particular quarter which do not meet the expectations of securities analysts are likely to cause volatility in the price of the Company's Common Stock. Certain Risks Associated with the High-Performance Microcomputer Market. The Company's host interface 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. During the second half of fiscal 1998, the demand for such systems slowed as more businesses chose to use relatively inexpensive PC's for desktop applications and information technology managers shifted resources toward resolving Year 2000 problems and investing in network infrastructure. Should demand for such systems continue to slow, the Company's business or operating results could be materially adversely affected by a resulting 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, as happened in the second half of fiscal 1998, such suppliers, including the Company, could produce excessive or insufficient inventories of various components which could 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, Ultra2 SCSI, PCI, RAID, Fibre Channel, 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. For example, the Company believes that changes in consumers' perceptions of the relative merits of SCSI based products and products incorporating a competing standard, Ultra-DMA, have recently started to adversely affect the sales of the Company's products and may adversely affect the Company's future sales. 10 12 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 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 11 13 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. In addition, the Company is increasingly using board subcontractors to better balance production runs and capacity. 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 completed the acquisition of 13 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 will 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 and Utilization of New Information Systems. The Company has recently implemented new information systems in its operations in the United States, Singapore and Europe and will implement new information systems in its operations in Japan. There can be no assurance that the Company will successfully implement and utilize these new systems efficiently and in a timely manner. Problems with installation or utilization of the new systems could cause substantial difficulties in operations, financial reporting and management and thus could have a material adverse effect on the Company's business or operating results. Year 2000 Issues. The "Year 2000 issue" arises because most computer systems and programs were designed to handle only a two-digit year not a four-digit year. When the Year 2000 begins, these computers may interpret "00" as the year 1900 and could either stop processing date-related computations or could 12 14 process them incorrectly. The Company has recently implemented new information systems and accordingly does not anticipate any internal Year 2000 issues from its own information systems, databases or programs. However, the Company could be adversely impacted by Year 2000 issues faced by major distributors, suppliers, customers, vendors and financial service organizations with which the Company interacts. The Company has sent surveys to certain third parties to determine whether they are Year 2000 compliant and is in the process of evaluating and following up on responses to determine the impact that third parties who are not Year 2000 compliant may have on the operations of the Company. The Company believes it is currently being impacted by the redirection of corporate management information system budgets towards resolving the Year 2000 issue. Continuation of this trend could lower the demand for the Company's products if corporate buyers defer purchases of high-end business PCs. 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 erosion. In the host adapter market, the Company competes with a number of host adapter manufacturers. The Company's principal competitors for semiconductor solutions 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. In addition, there has recently been an industry trend towards the elimination of price protection and distributor incentive programs. This trend could result in a change in distributor business habits, with distributors possibly deciding to decrease the amount of product held so as to reduce inventory levels and this in turn 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 design enhancements and 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. The Company believes the recent weakness in its financial performance and the resulting decline in its stock price has adversely impacted its ability to attract and retain qualified employees. 13 15 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. The Company may use forward exchange contracts to manage any exposure associated with certain foreign currency denominated commitments. 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. 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. Natural Disasters. The Company's corporate headquarters are located near major earthquake faults. Any damage to the Company's information systems caused as a result of an earthquake, fire, La Nina related floods or any other natural disasters could have a material adverse effect on the Company's business, results of operations and financial condition. 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 14 16 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, as occurred in the fourth quarter of fiscal 1998, 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. In addition, the Company's stock price may be affected by general market conditions and international macroeconomic factors unrelated to the Company's performance such as those recently evidenced by the financial turmoil in Asia. 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. ITEM 2. PROPERTIES The Company owns seven buildings (approximately 439,000 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 three buildings (approximately 81,000 square feet) in Milpitas, California, 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); Hudson, Wisconsin (6,000 square feet); and Nashua, New Hampshire (23,000 square feet) to support technical design efforts and sales. Adaptec Manufacturing Singapore is located in two leased facilities (approximately 126,000 square feet). The two buildings are used by the Company for research, manufacturing, and sales. The Company also leases six 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 Brussels office providing technical support to Europe. The Company believes its existing facilities and equipment are well maintained and in good operating condition and believes its manufacturing facilities, together with the use of independent manufacturers where required or desirable, will be sufficient to meet its anticipated manufacturing needs through fiscal 1999. During fiscal 1998 and fiscal 1996, the Company acquired parcels of land in Fremont and Irvine, California, for approximately $12 million and $11 million respectively. The Company's future facilities requirements will depend upon the Company's business, and the Company believes additional space, if required, may be obtained on reasonable terms. ITEM 3. LEGAL PROCEEDINGS Incorporated by reference from the information under the caption: Item 5 "Other Events" in the Company's Form 8-K dated February 19, 1998 and from the information under the caption "Note 11 Commitments and Contingencies" in the Notes to Consolidated Financial Statements in the Company's Annual Report to Stockholders for the year ended March 31, 1998. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 15 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Incorporated by reference from the information under the caption: "Common Stock Prices and Dividends" on page B27 of the Company's Annual Report to Stockholders for the fiscal year ended March 31, 1998. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference from the information under the caption: "Selected Financial Data" on page B27 of the Company's Annual Report to Stockholders for the fiscal year ended March 31, 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference from the information under the caption: "Management's Discussion and Analysis of Financial Condition and Results of Operations" from pages B3 through B6 of the Company's Annual Report to Stockholders for the fiscal year ended March 31, 1998. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated by reference from the information appearing under the caption: "Market Risk Disclosure" under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page B6. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated financial statements of Adaptec, Inc. at March 31, 1998 and 1997 and for each of the three years in the period ended March 31, 1998 and the independent accountants' report thereon are incorporated by reference from pages B7 through B26 of the Annual Report to Stockholders for the year ended March 31, 1998. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to directors of Adaptec is incorporated by reference from the information under the captions: "Election of Directors--Nominees" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" in the Company's definitive Proxy Statement for the annual meeting of shareholders to be held, August 21, 1998 (the "Proxy Statement"). Information with respect to the executive officers of Adaptec is included in Part I of this Form 10-K under the heading "Executive Officers". 16 18 ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the information under the caption: "Executive Compensation and Other Matters" and "Election of Directors, Certain Relationships and Related Transactions" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the information under the caption: "Election of Directors -- Security Ownership of Management" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference from the information under the caption: "Election of Directors, Certain Relationships and Related Transactions" in the Company's Proxy Statement. 17 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following Consolidated Financial Statements of Adaptec, Inc. and the Report of Independent Public Accountants, as listed under (a)(1) below, are incorporated by reference to the Registrant's Annual Report to Stockholders for the year ended March 31, 1998. (1) FINANCIAL STATEMENTS: Page in Annual Report --------------------- Consolidated Statements of Operations - Fiscal Years ended March 31, 1998, 1997, and 1996 B7 Consolidated Balance Sheets at March 31, 1998 and 1997 B8 Consolidated Statements of Cash Flows - Fiscal Years ended March 31, 1998, 1997, and 1996 B9 Consolidated Statements of Stockholders' Equity - Fiscal Years ended March 31, 1998, 1997, and 1996. B10 Notes to Consolidated Financial Statements B11 Report of Management B25 Report of Independent Accountants B26
(2) All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. (b) EXHIBITS: (1) Exhibits included herein (numbered in accordance with Item 601 of Regulation S-K): 18 20
EXHIBIT NUMBER DESCRIPTION NOTES - ------ ----------- ----- 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. (6) 2.1(b) Stock Purchase Agreement by and between Adaptec, Inc. and Certain Shareholders of Future Domain Corporation dated July 13, 1995 (6) 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. (3) 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. (4) 2.5 Agreement and Plan of Reorganization by and among Adaptec, Inc., Adaptec Acquisition Corporation, and Data Kinesis, Inc. dated August 6, 1996. (4) 2.6 Asset Acquisition Agreement by and among Adaptec, Inc. and Analog Devices, Inc. dated March 24, 1998 2.7 Agreement and Plan of Reorganization by and among Adaptec, Inc., Ridge Technologies and RDS Acquisition dated as of May 21, 1998. 2.8 Agreement and Plan of Merger dated February 23, 1998 between Registrant and Adaptec, Inc., a California corporation. 3.1 Certificate of Incorporation of Registrant filed with Delaware Secretary of State on November 19, 1997. 3.2 Bylaws of Registrant, as adopted on November 19, 1997.
19 21 4.1 Second Amended and Restated Rights Agreement dated December 5, 1996 between Registrant and Chase Mellon Shareholder Services, Inc. as Rights Agents. (9) 4.2 First Amendment dated March 12, 1998 to Second Amended and Restated Rights Agreement. 4.3 Indenture dated as of February 3, 1997 between Registrant and State Street Bank and Trust Company. (1) 4.4 First Supplemental indenture dated as of March 12, 1998 between Registrant and State Street Bank and Trust Company. 10.1 + Registrant's 1986 Employee Stock Purchase Plan. (7) 10.2 Technology License Agreement dated January 1, 1985 between the Registrant and International Business Machines Corporation. (11) 10.3 + Registrant's Savings and Retirement Plan. (10) 10.4 + 1990 Stock Plan, as amended. (13) 10.5 + Forms of Stock Option Agreement, Tandem Stock Option/SAR Agreement, Restricted Stock Purchase Agreement, Stock Appreciation Rights Agreement, and Incentive Stock Rights Agreement for use in connection with the 1990 Stock Plan, as amended. (8) 10.6 + 1990 Directors' Option Plan and forms of Stock Option Agreement. (7) 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. (7) 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. (7) 10.9* Option Agreement I Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995. (2)
20 22 10.10* Option Agreement II Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995. (2) 10.11 Consignment Agreement between Adaptec, Inc. and AT&T Corp. dated January 10, 1996. (2) 10.12 Letter Agreement between Adaptec, Inc. and Lucent Technologies, Inc. dated January 1, 1997. (14) 10.13 Form of Indemnification Agreement entered into with directors and officers of Adaptec, Inc., a California corporation, prior to Registrant's reincorporation into Delaware. (12) 10.14 Form of Indemnification Agreement entered into between Registrant and its officers and directors. 10.14 Term Loan Agreement dated June 24, 1992 between the Registrant and Plaza Bank of Commerce expiring June 30, 1988. (12) 10.15* Deposit and Supply Agreement between Taiwan Semiconductor Manufacturing Co., Ltd. and Adaptec Manufacturing Pte. Ltd. (7) 10.16 Industrial Lease Agreement between the Registrant, as Lessee, and Jurong Town Corporation, as Lessor. (6) 10.17 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. (5) 10.18 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. (13) 13.1 Those portions of Registrant's Annual Report to Stockholders incorporated by reference herein. 21.1 Subsidiaries of Registrant. 23.1 Consent of Independent Accountants, Price Waterhouse LLP. 24.1 Power of Attorney. (See Pages 25).
21 23 27.1 Financial Data Schedule for the year ended March 31, 1998. 27.2 Financial Data Schedule for the year ended March 31, 1997. 27.3 Financial Data Schedule for the year ended March 31, 1996.
- -------------------------------------------------------------------------------- (1) Incorporated by reference to exhibits filed with Registrant's Registration Statement Number 333-24557 on Form S-1 on April 4, 1997. (2) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1996. (3) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1996. (4) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended September 27, 1996. (5) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended December 27, 1996. (6) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1995. (7) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1994. (8) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1993. (9) Incorporated by reference to Exhibit 1 filed with Amendment No. 4 to Registrant's Registration Statement Number 0-15071 on Form 8-A as filed on January 4, 1997. (10) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1987. (11) Incorporated by reference to Exhibit 10.15 filed in response to Item 16(a) "Exhibits," of Registrant's Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (file No. 33-5519), which became effective on June 11, 1986. (12) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1992. (13) Incorporated by reference to Exhibit 4.2 to Form 10-Q as filed February 7, 1996. 22 24 (14) Incorporated by reference to Exhibits filed with Registrants Annual Report on Form 10-K for the fiscal year ended March 31, 1997. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of said form. * Confidential treatment has been granted for portions of this agreement. (c) REPORTS ON FORM 8-K A current Report on Form 8-K dated February 19, 1998 was filed by the Registrant with the Securities and Exchange Commission to report under Item 5 thereof the press release issued to the public on February 19, 1998 regarding the agreement to acquire Symbios, Inc. The Form 8-K dated February 19, 1998 also reported under Item 5 details regarding several putative securities class action lawsuits filed against the Registrant. A current Report on Form 8-K dated March 12, 1998 was filed by the Registrant with the Securities and Exchange Commission to report under Item 5 thereof the reincorporation of the Registrant as a Delaware corporation. 23 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ADAPTEC, INC. Date: June 18, 1998 \s\ F. Grant Saviers --------------------------------------------- F. Grant Saviers Chairman and Chief Executive Officer 24 26 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENT, that each person whose signature appears below constitutes and appoints F. Grant Saviers and Paul G. Hansen, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE \s\ F. Grant Saviers Chairman and Chief Executive Officer June 18, 1998 - --------------------------------------------------------- (F. Grant Saviers) \s\ Robert N. Stephens Chief Operating Officer June 18, 1998 - --------------------------------------------------------- (Robert N. Stephens) \s\ Paul G. Hansen Vice President of Finance, June 18, 1998 - --------------------------------------------------------- Chief Financial Officer and (Paul G. Hansen) Assistant Secretary \s\ Andrew J. Brown Vice President, Corporate Controller and June 18, 1998 - --------------------------------------------------------- Principal Accounting Officer (Andrew J. Brown) \s\ Laurence B. Boucher Director June 18, 1998 - --------------------------------------------------------- (Laurence B. Boucher) \s\ Carl J. Conti Director June 18, 1998 - --------------------------------------------------------- (Carl J. Conti) \s\ John C. East Director June 18, 1998 - --------------------------------------------------------- (John C. East) \s\ Ilene H. Lang Director June 18, 1998 - --------------------------------------------------------- (Ilene H. Lang) \s\ Robert J. Loarie Director June 18, 1998 - --------------------------------------------------------- (Robert J. Loarie) \s\ B. J. Moore Director June 18, 1998 - --------------------------------------------------------- (B. J. Moore) \s\ W. Ferrell Sanders Director June 18, 1998 - --------------------------------------------------------- (W. Ferrell Sanders) \s\ Phillip E. White Director June 18, 1998 - --------------------------------------------------------- (Phillip E. White)
25 27 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION NOTES - ------ ----------- ----- 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. (6) 2.1(b) Stock Purchase Agreement by and between Adaptec, Inc. and Certain Shareholders of Future Domain Corporation dated July 13, 1995 (6) 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. (3) 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. (4) 2.5 Agreement and Plan of Reorganization by and among Adaptec, Inc., Adaptec Acquisition Corporation, and Data Kinesis, Inc. dated August 6, 1996. (4) 2.6 Asset Acquisition Agreement by and among Adaptec, Inc. and Analog Devices, Inc. dated March 24, 1998 2.7 Agreement and Plan of Reorganization by and among Adaptec, Inc., Ridge Technologies and RDS Acquisition dated as of May 21, 1998. 2.8 Agreement and Plan of Merger dated February 23, 1998 between Registrant and Adaptec, Inc., a California corporation. 3.1 Certificate of Incorporation of Registrant filed with Delaware Secretary of State on November 19, 1997. 3.2 Bylaws of Registrant, as adopted on November 19, 1997.
28 4.1 Second Amended and Restated Rights Agreement dated December 5, 1996 between Registrant and Chase Mellon Shareholder Services, Inc. as Rights Agents. (9) 4.2 First Amendment dated March 12, 1998 to Second Amended and Restated Rights Agreement. 4.3 Indenture dated as of February 3, 1997 between Registrant and State Street Bank and Trust Company. (1) 4.4 First Supplemental indenture dated as of March 12, 1998 between Registrant and State Street Bank and Trust Company. 10.1 + Registrant's 1986 Employee Stock Purchase Plan. (7) 10.2 Technology License Agreement dated January 1, 1985 between the Registrant and International Business Machines Corporation. (11) 10.3 + Registrant's Savings and Retirement Plan. (10) 10.4 + 1990 Stock Plan, as amended. (13) 10.5 + Forms of Stock Option Agreement, Tandem Stock Option/SAR Agreement, Restricted Stock Purchase Agreement, Stock Appreciation Rights Agreement, and Incentive Stock Rights Agreement for use in connection with the 1990 Stock Plan, as amended. (8) 10.6 + 1990 Directors' Option Plan and forms of Stock Option Agreement. (7) 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. (7) 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. (7) 10.9* Option Agreement I Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995. (2)
29 10.10* Option Agreement II Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995. (2) 10.11 Consignment Agreement between Adaptec, Inc. and AT&T Corp. dated January 10, 1996. (2) 10.12 Letter Agreement between Adaptec, Inc. and Lucent Technologies, Inc. dated January 1, 1997. (14) 10.13 Form of Indemnification Agreement entered into with directors and officers of Adaptec, Inc., a California corporation, prior to Registrant's reincorporation into Delaware. (12) 10.14 Form of Indemnification Agreement entered into between Registrant and its officers and directors. 10.14 Term Loan Agreement dated June 24, 1992 between the Registrant and Plaza Bank of Commerce expiring June 30, 1988. (12) 10.15* Deposit and Supply Agreement between Taiwan Semiconductor Manufacturing Co., Ltd. and Adaptec Manufacturing Pte. Ltd. (7) 10.16 Industrial Lease Agreement between the Registrant, as Lessee, and Jurong Town Corporation, as Lessor. (6) 10.17 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. (5) 10.18 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. (13) 13.1 Those portions of Registrant's Annual Report to Stockholders incorporated by reference herein. 21.1 Subsidiaries of Registrant. 23.1 Consent of Independent Accountants, Price Waterhouse LLP. 24.1 Power of Attorney. (See Pages 25).
30 27.1 Financial Data Schedule for the year ended March 31, 1998. 27.2 Financial Data Schedule for the year ended March 31, 1997. 27.3 Financial Data Schedule for the year ended March 31, 1996.
- -------------------------------------------------------------------------------- (1) Incorporated by reference to exhibits filed with Registrant's Registration Statement Number 333-24557 on Form S-1 on April 4, 1997. (2) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1996. (3) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 1996. (4) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended September 27, 1996. (5) Incorporated by reference to exhibits filed with Registrant's Quarterly Report on Form 10-Q for the quarter ended December 27, 1996. (6) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1995. (7) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1994. (8) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the year ended March 31, 1993. (9) Incorporated by reference to Exhibit 1 filed with Amendment No. 4 to Registrant's Registration Statement Number 0-15071 on Form 8-A as filed on January 4, 1997. (10) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1987. (11) Incorporated by reference to Exhibit 10.15 filed in response to Item 16(a) "Exhibits," of Registrant's Registration Statement on Form S-1 and Amendment No. 1 and Amendment No. 2 thereto (file No. 33-5519), which became effective on June 11, 1986. (12) Incorporated by reference to exhibits filed with Registrant's Annual Report on Form 10-K for the fiscal year ended March 31, 1992. (13) Incorporated by reference to Exhibit 4.2 to Form 10-Q as filed February 7, 1996. (14) Incorporated by reference to Exhibits filed with Registrants Annual Report on Form 10-K for the fiscal year ended March 31, 1997. + Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) of said form. * Confidential treatment has been granted for portions of this agreement. EX-2.6 2 ASSET ACQUISITION AGREEMENT 1 EXHIBIT 2.6 ASSET ACQUISITION AGREEMENT This ASSET ACQUISITION AGREEMENT (this "AGREEMENT") is made and entered into as of March 24, 1998 (the "EFFECTIVE DATE"), by and among, on the one hand, Analog Devices, Inc., a Massachusetts corporation ("SELLER"), on behalf of itself and the Seller Subsidiaries (collectively "SELLER"), and, on the other hand, Adaptec, Inc., a Delaware corporation ("PURCHASER"), and Adaptec Singapore Mfg. (S) Pte. Ltd., a wholly-owned Singapore subsidiary of Purchaser ("SUB"). W I T N E S S E T H: WHEREAS, Seller desires to sell and assign to Purchaser and Sub, and Purchaser and Sub desire to purchase and acquire from Seller, certain assets associated with Seller's Storage Products Business (as defined below), all upon the terms and subject to the conditions set forth in this Agreement; and WHEREAS, Purchaser and Sub desire to enter into licenses to use certain intellectual property rights of Seller in connection with the design, development and manufacture of Products and commercial exploitation of technology associated with the Storage Products Business; and WHEREAS, in connection with the sale of assets and licenses described above, Seller has permitted Purchaser to interview and make offers of employment to employees of Seller who work in the Storage Products Business; NOW, THEREFORE, in consideration of the facts stated in the above recitals and of the mutual agreements and covenants hereinafter set forth, and for good and valuable consideration, the receipt, sufficiency and adequacy of which is hereby acknowledged, the parties hereby agree as follows: ARTICLE I CERTAIN DEFINITIONS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings: "AFFILIATE" means, with respect to a specified person, any other person that directly or indirectly controls, is controlled by, or is under common control with, such specified person, except that the term "affiliate" shall not be deemed to apply to officers and directors of a party hereto acting in their own personal individual capacity and not for the benefit of or on behalf of a party hereto or such party, subsidiaries or entity affiliates. "ANCILLARY AGREEMENTS" means, collectively, the Bills of Sale, the Patent Assignments, the Copyright Assignments, the Mask Work Assignments, the Technology and Patent License Agreement, the R&D Services and Transition Support Agreement, the Foundry Agreement and the Non-Competition Agreements (as such terms are defined herein). 1 2 "BUSINESS ASSETS" means the Purchased Assets and the Licensed Assets (as each such term is defined below). "BUSINESS DAY" means a day of the year on which banks are not required or authorized to be closed in the city of San Francisco, California. "BUSINESS PLAN" means collectively that certain business plan for the Storage Products Business (as defined below), a copy of which has been delivered to Purchaser, together with that certain technology map for the Storage Products Business, a copy of which has been delivered to Purchaser. "CIRCUITS" shall have the meaning ascribed to such term in the Technology and Patent License Agreement. "COMPETITION ACT" means The Competition Act, 1991 (as amended) of Ireland. "CONTROL" (including the terms "CONTROLLED BY" and "UNDER COMMON CONTROL WITH") means the possession, directly or indirectly, or as trustee or executor, of the power to direct or cause the direction of the management policies of a person, whether through the ownership of stock, as trustee or executor, by contract or otherwise. "CO-OWNED PATENTS" means the Patent Assets listed on Schedule 15 hereto, subject to the Cross-License Agreements. "COPYRIGHT ASSETS" means all copyrights, whether or not registered, owned by Seller as of the Closing Date, including all registrations and applications therefor, including those listed on SCHEDULE 1 hereto (the "LISTED COPYRIGHT ASSETS"). "CROSS-LICENSE AGREEMENTS" means those certain cross-license agreements entered into by Seller with third parties listed on SCHEDULES 2A AND 2B hereto. "DOLLARS" or "$" means U.S. dollars. "EMPLOYEE ASSETS" means all personal property assets owned (or leased) by Seller, wherever located, that are utilized by New Hires (as defined in Section 6.01(b)) in the normal course of the performing their duties for the Storage Products Business during the time period beginning on the Effective Date and ending on the Closing Date (as defined in Section 2.04 below), including work-stations, personal computers, personal digital assistants and all associated assignable licenses to use third-party software applications used thereon, excluding assets used on an incidental basis. "ENCUMBRANCE" means any pledge, lien, collateral assignment, security interest, mortgage, deed of trust, title retention, conditional sale or other security arrangement, or any charge, adverse claim of title, ownership or use, or any other encumbrance of any kind, excluding the Cross-License Agreements. "ENVIRONMENTAL LAWS" means all U.S. and non-U.S. federal, state, local laws and regulations relating to pollution, the protection of human health or the environment (including 2 3 without limitation ambient air, surface water, ground water, land surface or subsurface strata), including without limitation laws and regulations relating to emissions, discharges, releases or threatened releases of Hazardous Substances, or otherwise relating to the manufacture, processing, distribution, use, treatment, disposal, transport or handling of Hazardous Substances, or relating to occupational health and safety. "ERISA" means the U.S. Employee Retirement Income Security Act of 1974, as amended, and the rulings and regulations promulgated thereunder. "EXCLUDED ASSETS" means (i) the Retained Assets (as defined below), (ii) all Seller's cash, bank accounts and securities; (iii) all Seller's accounts receivable, unbilled receivables, accounts payable, notes and other amounts receivable or payable from or to third parties; (iv) all insurance policies of Seller and all rights of Seller of every nature and description under or arising out of such insurance policies; (v) claims for refunds of Taxes (as defined below) actually paid by Seller prior to the Closing Date; (vi) all assets of, or held by or with respect to, any employee benefit plan (whether or not governed by ERISA) or any trust, fund or account that is related to any such employee benefit plan or that is similar in purpose or function thereto; and (vii) lease or other agreements related to the Facilities (as defined in Section 3.19 below). "GOVERNMENTAL ANTITRUST AUTHORITY" means any non-U.S., federal, state or local governmental or quasi-governmental authority charged with the administration or enforcement of antitrust laws. "HAZARDOUS SUBSTANCES" means: (i) any pollutant, contaminant, toxic, hazardous or noxious substance or waste which is regulated by the laws of any state, local, federal or other governmental authority or jurisdiction, including but not limited to the United States, the Republic of Ireland and the States of Delaware and North Carolina, and includes but is not limited to (a) any oil or petroleum compounds, flammable substances, explosives, radioactive materials, or any other materials or pollutants which pose a hazard to persons or cause any real property to be in violation of any Environmental Laws, (b) to the extent so regulated, asbestos or any asbestos-containing material of any kind or character, (c) polychlorinated biphenyls, as regulated by the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., (d) any materials or substances designated as "hazardous substances" pursuant to (1) Section 311 of the Clean Water Act, 33 U.S.C. Section 1251 et seq., or (2) Section 101 of the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. Section 9601 et seq., (e) "chemical substance," "new chemical substance," or "hazardous chemical substance or mixture" pursuant to Sections 3, 6 and 7 of the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., and (f) any "hazardous waste" pursuant to Section 1004 of the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq.; and (ii) as of any date of determination, any additional substances or materials which now or hereafter may be incorporated in or added to the definition of "chemical substance," "new chemical substance," "hazardous chemical substance or mixture," "hazardous waste," "hazardous substance" or "toxic substance" or similar substance for purposes of any Environmental Law. "HSR ACT" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder. 3 4 "INTANGIBLE ASSETS" means, collectively, (i) the Patent Assets, the Copyright Assets, and the Mask Work Assets; and (ii) all other intangible assets, properties and rights of Seller including, without limitation, technology, know-how and technical and business trade secrets and all rights therein (whether or not protectable under any Intellectual Property Rights) existing as of the Closing Date. "INTELLECTUAL PROPERTY RIGHTS" means, collectively, all of the following worldwide intangible legal rights, including those existing or acquired by ownership, license (to the extent such can be sublicensed) or other legal operation, whether or not filed, perfected, registered or recorded, existing as of the Closing Date in or to: (i) the Patent Assets; (ii) the Copyright Assets; (iii) the Mask Work Assets; (iv) Seller's rights in trade secrets; (v) all rights relating to the protection of the foregoing; and (vi) all rights to sue or make any claims for any past, present or future infringement, misappropriation or unauthorized use of any of the foregoing rights and the right to all income, royalties, damages and other payments that are now or may hereafter become due or payable with respect to any of the foregoing rights, including without limitation damages for past, present or future infringement, misappropriation or unauthorized use thereof. "INTERNAL REVENUE CODE" means the U.S. Internal Revenue Code of 1986, as amended, and the Treasury regulations (final and temporary) promulgated thereunder and the administrative pronouncements issued by the Internal Revenue Service relating thereto. "KEY ASSETS" means the Purchased Assets, Licensed Technology Deliverables and Circuits. "LIABILITIES" (or when used with reference to a single item described below, "LIABILITY") means debts, liabilities and obligations (whether pecuniary or not, including without limitation obligations to perform or forbear from performing acts or services), fines or penalties, whether accrued or fixed, absolute or contingent, matured or unmatured, determined or determinable, known or unknown, including without limitation those arising under any law, action or governmental order, liabilities for Taxes and those arising under any contract, agreement, arrangement, commitment or undertaking of any kind whatsoever (whether written or oral, express or implied), including those arising under any Seller Contract, whether or not related to the Products and/or the Storage Products Business. "LICENSED ASSETS" means the Intangible Assets and all Intellectual Property Rights therein and thereto, but excluding the Listed Patent Assets, the Listed Copyrights Assets, the Mask Work Assets, the Retained Assets and other Intellectual Property Rights licensed to Seller without the rights to sublicense. "LICENSED TECHNOLOGY DELIVERABLES" means the deliverables listed on SCHEDULE 3A hereto. "MASK WORK ASSETS" means the mask works, whether or not registered, including all registrations and applications therefor, listed on SCHEDULE 4 hereto; such schedule includes Seller's internal number for each such mask work and correlates each mask work to the applicable Product(s). 4 5 "MATERIAL" means any fact, event, action or failure to act, or other circumstance with respect to, involving or affecting Seller, any Seller Subsidiary or any other affiliate of Seller that: (i) involves in excess of $100,000 or that results or is reasonably likely to result in a financial loss of at least $100,000; (ii) involves exclusivity or non-competition covenants or arrangements; or (iii) involves Intellectual Property Rights. "MERGERS ACT" means the Mergers, Takeovers and Monopolies Control Act (1978) (as amended) of Ireland. "PATENT ASSETS" means all patents, patent applications, patent disclosures and related patent rights, including any and all continuations, divisions, reissues, reexaminations, or extensions thereof, which have been filed, issued or acquired by Seller as of the Closing Date, all inventions conceived of or reduced to practice as of the Closing Date, including those listed on SCHEDULE 5 hereto (the "LISTED PATENT ASSETS"), subject to the Cross-License Agreements. "PERSON" means any individual, partnership, limited liability company, firm, corporation, association, trust, unincorporated organization or other entity, as well as any syndicate or group that would be deemed to be a person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended. "PRODUCT DESIGNS" means the particular arrangement of the Circuits that comprise the Products, as reflected in the layouts and schematic databases listed on SCHEDULE 6. By way of clarification, "Product Design" does not include the particular individual Circuits included in the Products. "PRODUCTS" means the current products and products under development of Seller listed in SCHEDULE 7 hereto, whether or not ever commercially offered. "RETAINED ASSETS" means those tangible and intangible assets owned by or licensed to Seller and any Seller Subsidiary or affiliate of Seller that are necessary or required to enable Purchaser, following the Closing to own, conduct, operate and continue the Storage Products Business substantially as historically conducted or as proposed to be conducted through the Closing Date, other than assets used on a merely incidental basis, that will not be sold to Purchaser hereunder or licensed to Purchaser pursuant to the Technology and Patent License Agreement, which assets are listed on SCHEDULE 8 hereto. "SELLER CONTRACTS" means all leases, licenses and other agreements, contracts, understandings, arrangements, commitments and purchase orders listed on SCHEDULE 9 hereto. "SELLER'S DISCLOSURE LETTER" means Seller's Disclosure Letter dated as of the Effective Date which is being delivered to Purchaser concurrently with the execution of this Agreement. "SELLER'S KNOWLEDGE": A particular fact or other matter shall be deemed to be within "Seller's knowledge" if any officer or, with respect to the particular matters they are responsible for, any employee of Seller, any Seller Subsidiary or any other affiliate of Seller, has knowledge of such fact or other matter. An individual shall be deemed to have "knowledge" of a particular fact or other matter if (a) such individual is actually aware of such fact or other matter, or (b) such individual would reasonably be expected to be aware of such fact by virtue of performing 5 6 his or her duties. Notwithstanding the foregoing, solely for purposes of Section 3.17 below, an individual shall be deemed to "have knowledge" of a particular fact or other matter only if such individual is actually aware of such fact or other matter. "SELLER SUBSIDIARY" shall mean any past or present subsidiary or branch of Seller. "SOLD TECHNOLOGY DELIVERABLES" means the deliverables listed on SCHEDULE 3B hereto. "STORAGE PERIPHERALS" means optical disk drives, tape drives, removable disk drives, rigid disk drives, and any combination of the foregoing. "STORAGE PRODUCTS BUSINESS" means Seller's business of designing, developing, manufacturing, testing, marketing, licensing, selling, distributing, using, modifying, operating, installing, servicing, supporting, maintaining, repairing or otherwise using or commercially exploiting one or more of the Products or the Product Designs for Storage Peripherals. "TANGIBLE ASSETS" means, collectively, the Employee Assets and other tangible personal property assets, wherever located, listed on SCHEDULE 10 hereto (the "TANGIBLE ASSETS SCHEDULE"). "TAX" or "TAXES" means all taxes or similar governmental charge, impost or levy of any kind whatsoever (whether payable directly or by withholding), including without limitation, income taxes, gross receipts taxes, franchise taxes, transfer taxes or fees, stamp taxes, sales taxes, use taxes, excise taxes, ad valorem taxes, value added taxes, documentary taxes, intangible personal property taxes, withholding taxes, real or personal property taxes, employee withholding taxes, worker's compensation, payroll taxes, unemployment insurance, social security, minimum taxes or windfall profits taxes, together with any related liabilities, penalties, fines, additions to tax or interest, imposed by the United States, Ireland, The Netherlands, or any state, county, provincial, local or foreign government or any instrumentality, subdivision or agency thereof. "THIRD PARTY ASSETS" means (i) all personal property assets, wherever located, whether tangible or intangible that are licensed or leased to Seller, any Seller Subsidiary or any other affiliate of Seller by a third party under any Seller Contract; and (ii) all Seller's license or other rights to such third-party assets under any Seller Contract. "UNDERTAKINGS LAW" means the European Communities Safeguarding of Employees Rights on Transfer of Undertakings Regulations 1980 which implements the European Union Acquired Rights Directive 1977. 6 7 ARTICLE II ACQUISITION OF ASSETS SECTION 2.01. Assets to Be Acquired. (a) Purchased Assets. Subject to the terms and conditions of this Agreement (including without limitation the allocation provisions of Section 2.08), on the Closing Date Seller shall sell, assign, transfer, convey and deliver to Purchaser and Sub (or cause to be sold, assigned, transferred, conveyed and delivered to Purchaser and Sub) and Purchaser and Sub shall purchase and acquire from Seller, free and clear of any and all Encumbrances whatsoever, all right, title and interest in and to all of the following (collectively, the "PURCHASED ASSETS"): (i) the Products; (ii) the Product Designs; (iii) the Tangible Assets; (iv) the Listed Patent Assets; (v) an undivided one-half interest in the Co-Owned Patents; (vi) the Listed Copyright Assets; (vii) the Mask Work Assets; (viii) the Sold Technology Deliverables; (ix) all worldwide Intellectual Property Rights of Seller in and to all of the assets described in clauses (ii) through (viii) above (collectively, the "INTELLECTUAL PROPERTY ASSETS"); (x) the right to enforce confidentiality, non-disclosure, employee invention assignment and other proprietary rights agreements between Seller and New Hires (as defined in Section 6.01(b) below) with respect to the Storage Products Business; (xi) all of Seller's rights under the Seller Contracts, including Third Party Assets; and (xii) true, accurate and complete copies of Seller's marketing and sales information, pricing, marketing plans, business plans, financial and business projections and other files and records pertaining specifically to the Storage Products Business, but excluding any personnel files of any past or present employee of Seller (collectively, the "BUSINESS RECORDS"). (b) Licensed Assets. The parties acknowledge that certain assets related to the Storage Products Business also are essential to other businesses conducted by Seller. 7 8 Accordingly, with respect to the Licensed Assets Seller shall provide Purchaser a license on the terms and conditions of that certain Technology and Patent License Agreement, in substantially the form of Exhibit A hereto, to be entered into by the parties as of the Closing Date (the "TECHNOLOGY AND PATENT LICENSE AGREEMENT"). (c) Other Assets. Should it be determined at any time after the Closing Date that any tangible or intangible assets which, pursuant to this Agreement, should have been transferred to Purchaser, are still in the possession of Seller, Seller Subsidiaries or Affiliates of Seller, such assets (and related rights) shall be delivered to Purchaser by Seller (or Seller shall cause them to be delivered) promptly without additional charge. SECTION 2.02. No Liabilities Assumed. As a material inducement and consideration to Purchaser to enter into this Agreement and perform its obligations hereunder, the parties agree that Purchaser shall assume no obligations or Liabilities whatsoever from Seller or any Seller Subsidiary or affiliate (whether now existing or hereafter arising), and Seller, all Seller Subsidiaries and all Seller's other affiliates shall retain, and shall be solely responsible and liable for paying, performing and discharging when due, all such Liabilities (collectively, the "EXCLUDED LIABILITIES"). By way of example and not by way of limitation, the Excluded Liabilities not being assumed by Purchaser include those liabilities described on EXHIBIT B hereto. SECTION 2.03. Purchase Price; Other Payments; Allocation of Purchase Price. (a) Payment at Closing. The aggregate purchase price for purchase of the Purchased Assets (the "PURCHASE PRICE") of Twenty-Seven Million Dollars ($27,000,000) (the "CLOSING PAYMENT") shall be paid by Purchaser and Sub to Seller on the Closing Date. (b) Product Development Fee. Purchaser shall pay Seller an aggregate of Seven Million Dollars ($7,000,000) as a product development fee ("DEVELOPMENT FEE"), payable in two equal installments of Three Million Five Hundred Thousand Dollars ($3,500,000) at the end of the first two fiscal quarters of Purchaser following the Closing. (c) Allocation and Characterization of Purchase Price and Other Payments. (i) Purchase Price. Prior to the Closing Date, Purchaser and Seller shall use their reasonable efforts to agree to allocate, among the Purchased Assets, in accordance with the allocation requirements of Section 1060 of the Internal Revenue Code, the Closing Payment. The allocation of the Purchase Price agreed on by the parties pursuant to this Section shall be reduced to a writing executed by Seller and Purchaser that shall be delivered by Seller and Purchaser to each other at the Closing (the "PURCHASE PRICE ALLOCATION AGREEMENT"). Any subsequent adjustments to the allocable Purchase Price shall be reflected in the Purchase Price Allocation Agreement in a manner consistent with Treasury Regulation Section 1.1060-lT(f). (ii) Consistent Treatment and Characterization of Amounts. For all Tax purposes Purchaser and Seller agree to report the transactions contemplated in this Agreement in a manner consistent with the Purchase Price Allocation Agreement, and will not take any position inconsistent therewith in any Tax return, in any refund claim, in any litigation or 8 9 otherwise, unless required to do so by a governmental authority. Seller and Purchaser shall each be responsible for the preparation of their own Section 1060 statements and forms in accordance with applicable Tax laws, and each shall execute and deliver to each other such statements and forms as are reasonably requested by the other party. SECTION 2.04. Closing. Subject to the terms and conditions of this Agreement, the sale, purchase and transfer of the Business Assets and the assumption of the Assumed Liabilities contemplated hereby shall take place at a closing at the offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California (the "CLOSING") at 10:00 a.m., local time, on the second Business Day after the satisfaction or waiver of the conditions to Closing set forth in Article VIII or at such other time or on such other date or at such other place as Seller and Purchaser may mutually agree in writing (the day on which the Closing takes place being the "CLOSING DATE"). SECTION 2.05. Closing Deliveries by Seller. At the Closing, Seller shall deliver or cause to be delivered to Purchaser: (a) executed counterparts of all of the Ancillary Agreements to be executed and entered into by Seller; (b) the Purchase Price Allocation Agreement; (c) a receipt for the Closing Payment; and (d) all other items, tangibles, agreements, documents, certificates and payments to be delivered by Seller at the Closing under Section 8.02 of this Agreement or any other provision hereof or pursuant to any Ancillary Agreement. SECTION 2.06. Closing Deliveries by Purchaser. At the Closing, Purchaser and Sub shall deliver to Seller: (a) the Closing Payment of $27,000,000 in cash (by wire transfer) in accordance with Section 2.03 against receipt thereof from Seller; (b) executed counterparts of all of the Ancillary Agreements to be executed and entered into by Purchaser; (c) the Purchase Price Allocation Agreement; and (d) all other items, tangibles, agreements, documents, certificates and payments to be delivered by Purchaser at the Closing under Section 8.01 of this Agreement or any other provision hereof or pursuant to any Ancillary Agreement. SECTION 2.07. Unassignable Assets. Notwithstanding any other provision of this Agreement or any of the Ancillary Agreements, but subject to Section 8.02(q) hereof, to the extent that any of the Seller Contracts or any other assets constituting part of the Purchased Assets are not assignable or otherwise transferable to Purchaser and Sub, or if such assignment or transfer would constitute a breach thereof or a violation of any applicable law, then neither this Agreement nor such Ancillary Agreements shall constitute an assignment or transfer (or an 9 10 attempted assignment or transfer) thereof until such consent, approval or waiver of such party or parties has been duly obtained. With respect to each Seller Contract whose assignment or transfer to Purchaser or Sub requires the consent, approval or waiver of another party thereto or any third party, Seller shall use its best efforts to obtain such consent, approval or waiver of such other party or parties or such third party to such assignment or transfer as promptly as practicable, but in any event prior to the Closing Date. Purchaser and Sub agree to cooperate with Seller and supply relevant information to such party or parties or such third party in order to assist Seller in its obligations under this Section. Notwithstanding the foregoing, nothing contained herein shall obligate Seller or Purchaser to expend or pay any amount to third parties to obtain any consents, approvals or waivers. SECTION 2.08. Allocation of Assets. The Purchased Assets purchased and acquired hereunder shall be sold and assigned to Purchaser and, at its option, one or more subsidiaries of Purchaser and such assets and the consideration therefor shall be allocated between Purchaser and such subsidiaries as determined by Purchaser in its sole discretion and as reflected in an agreement or memorandum executed by them. SECTION 2.09. Non-U.S. Assets. From the Effective Date until the Closing Date, Seller will, and will cause all Seller Subsidiaries and all affiliates of Seller to, cooperate and assist Purchaser with the evaluation and identification of Purchased Assets located in or related to countries other than the United States. SECTION 2.10. Further Assurances. In case at any time after the Closing Date any further action is necessary or desirable to carry out the purposes of this Agreement, each of the parties will take such further action (including the execution and delivery of such further instruments and documents) as any other party reasonably may request. Seller will sign and deliver any and all instruments and documents necessary or appropriate to fully effect and perfect the transfer or license, as the case may be, to Purchaser and Sub (or if Purchaser so elects, any Purchaser Subsidiary) of any and all of the Business Assets. ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER Seller hereby represents and warrants to Purchaser and Sub that, except as expressly set forth in the Seller's Disclosure Letter, all of the following statements, representations and warranties are true and correct: SECTION 3.01. Organization and Good Standing of Seller. Seller is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and is in good standing in each jurisdiction in which Business Assets are located. Seller has all requisite corporate power and authority to carry on the Storage Products Business as now conducted and to enter into this Agreement, the Ancillary Agreements and the Seller Closing Documents (as defined in Section 8.02) and the transactions contemplated hereby and thereby. 10 11 SECTION 3.02. Authorization and Validity. All corporate action on the part of Seller, its officers and directors necessary for the authorization, execution and delivery of this Agreement, the Ancillary Agreements and the Seller Closing Documents, the performance of all obligations of Seller hereunder and thereunder, has been taken or will be taken prior to the Closing. This Agreement and the Non-Competition Agreements have been, and at the Closing the other Ancillary Agreements and the Seller Closing Documents will be, duly executed and delivered by Seller. This Agreement and the Non-Competition Agreements constitute, and, upon Seller's execution of each of the other Ancillary Agreements and the Seller Closing Documents, each of the other Ancillary Agreements and each of the Seller Closing Documents will constitute, a legal, valid and binding obligation of Seller enforceable against Seller in accordance with its terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally; and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. The execution, delivery and performance by Seller of this Agreement and each of the Ancillary Agreements have been duly and validly approved and authorized by Seller's Board of Directors. No approval of Seller's stockholders is required to effect the transactions contemplated by this Agreement, the Ancillary Agreements or the Seller Closing Documents. SECTION 3.03. Subsidiaries or Affiliates. Except as set forth in SCHEDULE 11, none of the Purchased Assets are owned, licensed to, leased to or otherwise held or used by any Seller Subsidiary or by any other affiliate of Seller. SECTION 3.04. No Conflict. The execution, delivery and performance of this Agreement, the Ancillary Agreements and the Seller Closing Documents by Seller and the consummation of the transactions contemplated hereby and thereby do not and will not result in a violation or default in any material respect of: (a) any provision of Seller's charter documents, (b) any judgment, order, writ or decree applicable to Seller or to any of the Business Assets, (c) or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a breach, violation or default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, any of the Seller Contracts or any material contract of Seller, or (d) result in the creation of any material Encumbrance on any of the Business Assets. SECTION 3.05. Consents. (a) Consents and Approvals. No consent, approval, order or authorization of or registration, qualification, designation, declaration or filing with, any governmental entity on the part of Seller is required in connection with the consummation of the transactions contemplated by this Agreement, except for compliance with the HSR Act and the Mergers Act. (b) Consents to Assign. SCHEDULE 10 sets forth a true and complete list of each and every Purchased Asset, including Seller Contract, with respect to which the consent or approval of any third party or governmental authority is required in order for Seller or any of Seller's Subsidiaries or other affiliates to assign or transfer to Purchaser or Sub any of the Purchased Assets or any rights or obligations under Seller Contracts. 11 12 SECTION 3.06. Tax Matters. (a) Tax Assessments. There is no claim or assessment pending or, to the knowledge of Seller or any branch of the Seller, threatened for any alleged deficiency in Tax attributable to the affiliated group of which Seller is the parent (the SELLER GROUP"), Seller, or any branch of the Seller relating to the Business Assets, and neither Seller Group, Seller or any branch of the Seller knows of any audit or investigation with respect to any liability of Seller for Taxes attributable to the Seller Group, Seller or any branch of the Seller relating to the Business Assets or any business activities related thereto. (b) No Tax Liens. There are (and as of immediately following the Closing there will be) no material Encumbrances or charges of any sort on any of the Business Assets relating to or attributable to Taxes. (c) Tax Exempt Use Property. None of the Business Assets are "tax-exempt use property" within the meaning of Section 168(h) of the Internal Revenue Code. SECTION 3.07. Title to and Condition of Purchased Assets and Third Party Assets; Sufficiency of Business Assets. (a) Purchased Assets. Seller owns all the Purchased Assets and has good and marketable title in and to all of the Purchased Assets, free and clear of all material Encumbrances whatsoever, except Encumbrances listed in Section 3.07 of Seller's Disclosure Letter and the Cross-License Agreements listed in Schedule 2A. Title to all the Purchased Assets is freely transferable from Seller to Purchaser and Sub free and clear of all material Encumbrances without obtaining the consent or approval of any person. All of the tangible personal property included in the Purchased Assets is in good working condition and repair, ordinary wear and tear excepted, and is suitable for the purposes for which it is presently used. The current location of all tangible Purchased Assets is set forth in Schedule 10, and Seller will not re-locate any material tangible Purchased Assets from the location(s) shown for such Purchased Assets on Schedule 10 without Purchaser's prior written consent. None of the Business Assets (whether tangible or intangible) that were used in the Storage Products Business as of December 31, 1997, which in the aggregate are material, have been removed from use in such business since such date. The Tangible Asset Schedule was prepared in the ordinary course, in a manner consistent with Seller's past practice and in accordance with Seller's business records. (b) Third Party Assets. Those assets which constitute Third Party Assets are identified as such on SCHEDULE 9 hereto. Seller has the right to transfer the Third Party Assets, without restriction and without degradation to the rights assigned. Seller has paid in full all royalties, fees and any other payments that have ever become due and payable under all Seller Contracts or related to any of the Third Party Assets and no further royalties, license fees, maintenance and support fees or any other payments whatsoever are due and payable, nor will any further royalties, license fees, maintenance and support fees or any other payments whatsoever become due and payable in the future, under any license agreements included among the Seller Contracts or with respect to any Business Assets under any circumstances. Schedule 9 indicates the amount owing and payment schedule, if any, with respect to Seller Contracts and Third Party Assets. 12 13 (c) Sufficiency of Business Assets. The Business Assets constitute all assets, properties, rights and Intellectual Property Rights that are necessary or required to enable Purchaser, following the Closing, to own, conduct, operate and continue the Storage Products Business substantially as historically conducted and as proposed to be conducted by Seller through the Closing Date, other than the Retained Assets, without: (i) the need for Purchaser to acquire or license any other asset, property or Intellectual Property Right, (ii) the breach or violation of any contract or commitment, and (iii) to Seller's knowledge, infringement of any Intellectual Property Right of any party. Except as may be set forth in the Disclosure Letter or any schedule to this Agreement, none of the Business Assets are licensed or leased from any third party and no royalties, license fees or similar payments are due or payable (or may become due or payable) to any third party under any license, lease or other agreement. Except as set forth in Schedule 2B, none of the Purchased Assets are licensed to any third party, including any Seller Subsidiary or any other affiliate of Seller. SECTION 3.08. Seller Contracts. True and complete copies of the documents listed in Schedule 9 have been made available to Purchaser. All Seller Contracts are valid, in full force and effect, and enforceable in accordance with their respective terms, and no party has repudiated or claimed a breach of any provision thereof and no breach or default thereunder will result from this Agreement, any of the Ancillary Agreements, or any of the transactions contemplated hereby or thereby. Neither Seller nor, to the knowledge of Seller, any other party to any Seller Contract is in material breach or default in performance of any of their respective obligations thereunder, and no event exists which, with the giving of notice or lapse of time or both, would constitute a material breach, default or event of default on the part of Seller or, to Seller's knowledge, on the part of any other party, to any Seller Contract that is continuing unremedied. Those contracts, leases, licenses and other agreements related to the Storage Products Business not listed in Schedule 10 are not in the aggregate material to the Storage Products Business. SECTION 3.09. No Restrictive Agreements. No Business Asset is bound or affected by, any judgment, injunction, order, decree, contract, covenant or agreement (noncompete or otherwise) that restricts or prohibits (or purports to restrict or prohibit) Seller (or would restrict Purchaser) from freely engaging in the Storage Products Business as now conducted or proposed to be conducted by Seller through the Closing Date or from competing in the mass storage business anywhere in the world (including without limitation any contracts, covenants or agreements restricting the geographic area in which Seller may sell, license, market, distribute or support any Products or Business Assets) (collectively, "RESTRICTIVE AGREEMENTS") other than the Non-Competition Agreements between Seller and Purchaser to be entered into concurrently with the execution of this Agreement. SECTION 3.10. Litigation. There is no claim, action, suit, arbitration, mediation, investigation or other proceeding of any nature pending or, to the best of Seller's knowledge, threatened, at law or in equity, by way of arbitration or before any court, governmental department, commission, board or agency that: (i) may adversely affect, contest or challenge Seller's authority, right or ability to sell or convey any of the Business Assets to Purchaser or Sub hereunder or otherwise perform Seller's obligations under this Agreement or any of the Ancillary Agreements; (ii) challenges or contests Seller's right, title or ownership of any of the Business Assets or seeks to impose an Encumbrance on, or a transfer of title or ownership of, any Business Asset; (iii) asserts that any Business Asset, or any action taken by any employee, consultant or 13 14 contractor of Seller, any Seller Subsidiary or any other affiliate of Seller with respect to any Business Asset, infringes or misappropriates any Intellectual Property Rights of any third party; (iv) seeks to enjoin, prevent or hinder operation of the Storage Products Business, the sale, license, marketing or distribution of any of the Products or the consummation of any of the transactions contemplated by this Agreement or any of the Ancillary Agreements; (v) to the knowledge of Seller, would impair or have an adverse affect on Purchaser's or Sub's right or ability to use or exploit any of the Business Assets or impair or have an adverse effect on the value of any Business Asset; or (vi) involves or relates to any potentially material claim against Seller by any creditor of Seller related to the Storage Products Business. There are no judgments, decrees, injunctions or orders of any court, governmental department, commission, agency, instrumentality or arbitrator pending or binding against Seller which affect any of the Business Assets or Purchaser's ability to hire any Employee. SECTION 3.11. Compliance with Laws. Seller has complied in all material respects with and has not received any notices of violation with respect to, any Irish, United States or non-U.S., federal, state or local statute, law or regulation (including any Environmental Law) applicable to the Storage Products Business or any of the Business Assets. SECTION 3.12. No Representation to Employees. Seller has made no representation to any employee, consultant or contractor of Seller, any Seller Subsidiary or any other affiliate of Seller that Purchaser can or will terminate the employment of its employees only upon certain terms or conditions or only on certain grounds or that such employment is anything other than "at will". SECTION 3.13. Employees. (a) Employee List. Set forth in SCHEDULE 13 is a complete and accurate list of all the employees of Seller, any Seller Subsidiary or affiliate of Seller who work in the Storage Products Business. Schedule 13 also contains a complete and accurate list of all consultants currently hired, retained or engaged by Seller or by any Seller Subsidiary or any other affiliate of Seller to perform any work or services related to the Products and/or the Storage Products Business (collectively "CONSULTANTS" and each individually a "CONSULTANT"). Seller has provided to Purchaser a true and accurate list of all locations at which Employees (as defined in Section 6.01) and/or Consultants are working as of the date hereof. With respect to "New Hires" (as defined in Section 6.01), Schedule 13 also contains the date of hire and years of employment or service. Seller has provided to Purchaser a true and accurate list for each New Hire of the current annual base salary and (in the case of Consultants) current compensation arrangement for each Consultant, their status as exempt or non-exempt, all sick or vacation benefits accrued or payable, all bonuses, profit sharing, or commissions accrued or payable, any special compensatory or reimbursement arrangements, comp time or other arrangements with such Employees and any other compensatory agreements between such Employee and Seller. In addition, Seller has provided to Purchaser a list of all employees or Consultants no longer providing services to Seller who did work in the Storage Products Business at any time on or after January 1, 1995. (b) Employment and Consulting Agreements. Schedule 13 includes a complete and accurate list of (i) all employment contracts, agreements or arrangements with or related to any 14 15 New Hire (if any) that are (or will prior to the Closing be) in effect and (ii) all consulting or similar agreements related to any Consultant that are (or will at the Closing be) in effect. (c) No Terminations Planned; No Restrictions. Seller has not received any notice, nor, to Seller's knowledge is there any reason to believe, that any executive or key employee of or Consultant to the Storage Products Business unit or any group of employees working on or contributing to the Storage Products Business has any plans to terminate his, her or their employment with Seller. To Seller's knowledge, no such executive or key employee or Consultant is subject to any agreement, obligation, order or other legal hindrance that impedes or might impede such executive or key employee from devoting his or her full business time to the affairs of Seller prior to the Closing Date and, if such person becomes an employee of Purchaser, to the affairs of Purchaser after the Closing Date. SECTION 3.14. Pension and Employee Benefit Matters. Neither Seller nor any entity which, within the last 5 years, has been under common control of or affiliated with Seller (an "ERISA AFFILIATE") within the meaning of Section 414(b), (c) or (m) of the Internal Revenue Code, has ever been obligated to contribute to any "multi-employer plan" as such term is defined in Section 3(37) of ERISA. No material liability to the Pension Benefit Guaranty Corporation is expected to be incurred in connection with the transactions contemplated hereby. SCHEDULE 13 includes a true and complete list of all Employees, who are or may become entitled to benefits under any severance agreement as of the Closing (other than an arrangement generally applicable to all or substantially all Employees), and the terms thereof. SECTION 3.15. Supplier and Customer Relationships. To date no Products have been sold. SCHEDULE 14 lists the potential customers who are currently evaluating prototypes of the Products, whether pursuant to written beta test, submission or evaluation agreements (collectively "EVALUATION AGREEMENTS") with Seller or otherwise. Seller has good commercial working relationships with its suppliers for the Storage Products Business and since January 1, 1997, no supplier accounting for two percent (2%) or more of Seller's purchases of supplies related to the Storage Products Business has canceled or otherwise terminated its relationship with Seller, decreased or limited materially its materials supplied to Seller from the corresponding period in 1996, or, to Seller's knowledge, threatened to take any such action. SECTION 3.16. Product Liability. Neither Seller nor any Seller Subsidiary has any Liability (and, to Seller's knowledge, there is no basis for any present or future action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand against Seller or any Seller Subsidiary or any affiliate of Seller giving rise to any Liability) arising out of any injury to individuals or property as a result of the ownership, possession or use of any Product or prototype of any Product manufactured or delivered by Seller or any Seller Subsidiary or any affiliate of Seller prior to the Closing Date. SECTION 3.17. Intellectual Property Rights. (a) Ownership. Seller is the sole and exclusive owner or has the right to use the Key Assets pursuant to license, sublicense, agreement, or other valid permission, all Intellectual Property Rights necessary or desirable for the operation of the Storage Products Business as presently conducted and as presently proposed to be conducted, except for those Intellectual 15 16 Property Rights incorporated into or forming a part of or critical to the development, manufacture or use of the Products identified on the applicable Schedules as being licensed to Seller by third parties, and except for rights granted to Seller under the Cross License Agreements. Except for rights granted to Seller under the Cross-License Agreements, each Intellectual Property Right owned, licensed to or used by Seller in the Storage Products Business immediately prior to the Closing Date hereunder will be owned or licensed to and available for use by Purchaser and Sub in the identical manner used by Seller as of December 31, 1997 with respect to read channel and pre-amp product development. (b) Assets Sufficient. To Seller's knowledge, except as indicated in Schedule 2A, the Business Assets include all assets, properties and Intellectual Property Rights necessary to enable Purchaser and Sub to continue to develop and test the Products in identical manner of Seller's Product developing and testing. Except as indicated in Schedule 2A, to Seller's knowledge, the Business Assets include all assets, properties and Intellectual Property Rights necessary to enable Purchaser and Sub to manufacture, use, and sell the Products, provide technical support therefor and to conduct the Storage Products Business in the manner in which such business was conducted by Seller on December 31, 1997, and as such business is proposed to be conducted through the Closing Date. (c) No Infringement. The Products and, as and to the extent used in the development of or integrated or incorporated in the Products, the Key Assets and other Business Assets have not infringed or violated and currently do not infringe or violate upon, or misappropriate any copyright, mask work or trade secret, or to Seller's knowledge, any patent or other intellectual property rights (other than trademarks) of any third party, and no third party has asserted or threatened to assert against Seller any claim of infringement or misappropriation of any such rights. To Seller's knowledge, no third party has interfered with, infringed upon, misappropriated, or otherwise come into conflict with any of the Intellectual Property Rights in any manner affecting the Storage Products Business. None of the Intellectual Property Rights is owned by or registered in the name of any current owner (other than Seller) or former owner, shareholder, partner, director, executive, officer, employee, salesman, agent, customer, contractor or representative of Seller; nor does any such person have any interest therein or right thereto, including (but not limited to) the right to royalty or other payments. No other representation or warranty in this Section 3.17 shall be deemed to cover matters covered by this Section 3.17(c). (d) Recorded Intellectual Property Rights and Licenses. Schedules 5, 1, 4 and 2B, when taken together, identify: (i) each Listed Patent Asset, Listed Copyright Asset, and mask work (and/or registration thereof) which has been granted or registered and issued to Seller in any jurisdiction, (ii) each pending Listed Patent Asset application or application for registration of a Listed Copyright Asset, Product mask work or similar right which Seller has made in any jurisdiction, (iii) all unregistered copyright works and mask works included within the Technology Deliverables and (iv) each license, agreement, or other permission which Seller has granted to any third party with respect to any Purchased Assets or, to the extent that they relate to the Products or their development, the Licensed Assets. Seller has delivered to Purchaser correct and complete copies of all such patents, patent applications, copyrights and mask work registrations covering the Product Designs and all applications, licenses, agreements and permissions (as amended to date) required to make, use or sell Products, other than the Cross License Agreements listed in Schedule 2A, for which Seller has provided Purchaser with 16 17 accurate abstracts of the license grants by Seller, and Seller has made available to Purchaser correct and complete copies of all other written documentation evidencing ownership or other rights of Seller, as the case may be, of each such item. Seller has provided Purchaser with accurate abstracts of the Cross-License Agreements listed in Schedule 2B. Seller has not filed any copyright or mask work registrations or applications therefore related to the Storage Products Business in the United States or any foreign country. Except for rights licensed to the Seller pursuant to the Cross-License Agreements, Seller has the exclusive right, to the extent such right exists, to file, prosecute, and maintain patent applications and applications to register copyrights and mask works related to or included in the Key Assets and the patents and registrations that issue therefrom. All fees to maintain Seller's rights in the Intellectual Property Rights in and to the Purchased Assets that are due on or before the Closing Date, including (without limitation) registration, maintenance and prosecution fees, and all professional fees incurred in connection therewith, have been paid. (e) Restrictions. With respect to each Intellectual Property Right, license, agreement or other permission required to be identified in Schedules 1, 4, 5 and 9, to the extent that the subject Intellectual Property Right covers or embodies Purchased Assets: (i) Seller possesses all right, title and interest in and to such Intellectual Property Right, license, agreement or permission free and clear of any Encumbrance or other restriction; and (ii) no action, suit, proceeding, hearing, investigation, complaint, claim or demand is pending or, to Seller's knowledge, is threatened, which challenges the legality, validity, enforceability, use or ownership of such Intellectual Property Rights, license, agreement or permission. (f) Licenses. Except for rights licensed by Seller pursuant to the Cross-License Agreements, Schedule 9 and Schedule 2A set forth and summarize each license Seller has granted to any third party with respect to the Key Assets in connection with the manufacture, use or sale of Products for Storage Peripherals. Such Schedules 9 and 2A also sets forth and summarizes each Intellectual Property Right that a third party owns and that Seller uses pursuant to a license, sublicense, agreement or other permission in connection with the manufacture, use or sale of Products. Except for the Cross-License Agreements, Seller has delivered to Purchaser correct and complete copies of all such licenses, sublicenses, agreements, and permissions (as amended to date). With respect to each Intellectual Property Right required to be identified in such Schedule 9, except for rights under the Cross-License Agreements: (i) the license, sublicense, agreement or permission covering the item is legal, valid, binding, enforceable and in full force and effect; (ii) the license, sublicense, agreement or permission will continue to be legal, valid, binding, enforceable and in full force and effect on identical terms to Purchaser's and Sub's benefit immediately following the Closing and all consents to the assignment of each Seller Contract (including without limitation each Seller Contract that is a license, sublicense, agreement, permission or covenant not to compete together with all Intellectual Property Rights relating thereto) needed to assign any such Seller Contract to Purchaser and/or Sub or any other subsidiary of Purchaser designated by Purchaser have been obtained or will be obtained prior to Closing; (iii) the license, sublicense, agreement or permission does not restrict Seller's ability to do business in any jurisdiction or with respect to the read channel and preamp market or industry; (iv) Seller is not in breach or default of, and to Seller's knowledge, no other party to any such license, sublicense, agreement or permission is in breach or default of, and no event has occurred which, with notice or lapse of time or both, would constitute a breach or default of, or permit 17 18 termination, modification or acceleration of, any such license, sublicense agreement or permission; (v) to Seller's knowledge, no party to the license, sublicense, agreement or permission has repudiated or contested any provision thereof; (vi) with respect to each sublicense, to Seller's knowledge, the representations and warranties set forth in clauses (i) through (v) above are true and correct with respect to the underlying license; (vii) no action, suit, proceeding, hearing, investigation, complaint, claim, or demand is pending to which Seller is a party, participant or recipient or, to Seller's knowledge, is threatened which challenges the legality, validity or enforceability of any such license, sublicense, agreement or permission or any Intellectual Property Right governed thereby; and (viii) except as provided in Schedule 2B, Seller has not granted any sublicense or similar right with respect to the license, sublicense, agreement or permission related to the manufacture, use or sale of Products. Neither Seller, nor any Seller Subsidiary nor any affiliate of Seller is liable for, or has made any contract or arrangement whereby it may become liable to, any person for any royalty, fee or other compensation for the ownership, use, license, sale, distribution, manufacture, reproduction or disposition of any Purchased Asset or any Licensed Asset. Except as provided in Schedule 2A, no person other than Seller holds any license or other right granted or authorized by or received from Seller or any affiliate or predecessor in interest to Seller to manufacture, modify, distribute or market any of the Products or has granted rights under the Intellectual Property Rights pertaining to Product Designs. No person (other than Purchaser and Sub) will be or become entitled to receive a copy of source code of any software or other tangible deliverable included among the Purchased Assets as a result of this Agreement, any Ancillary Agreement or any other agreement or transaction contemplated by this Agreement and no person holds or has been granted access to any copy of source code of any software or Confidential Information constituting or constituted in a Key Asset other than Confidential Information that is customarily shared with customers and potential customers of products like the Products. (g) Employee Invention Agreements. All employees, contractors and consultants of Seller, any Seller Subsidiary or any other affiliate of Seller (including but not limited to all the Employees and all the Consultants) and any other third parties who have been involved in the development of any Product or any Purchased Asset, have executed invention assignment and confidentiality agreements in the form delivered to Purchaser's counsel, and all employees and consultants of Seller who have access to confidential information or trade secrets authored, created or developed in the conduct of the Storage Products Business and/or the Purchased Assets have executed nondisclosure agreements in the form delivered to Purchaser's counsel. Seller has taken reasonable steps, consistent with industry standards, to protect the secrecy and confidentiality of all nonpublic information pertaining to the Products and other Key Assets, the secrecy of which is customarily protected in the semiconductor device industry, including (without limitation) the marking of all Seller Confidential Information (as defined below) with appropriate "Proprietary" or "Confidential" legends, the establishment of policies for the handling, disclosure and use of confidential or propriety information and the acquisition of valid written non-disclosure agreements from any party receiving the same. (h) Nondisclosure Agreements. No third party is in possession of any confidential information pertaining to the design of any Product, except for prototype evaluation units provided by Seller to potential customers. Seller has not knowingly taken or knowingly failed to take any action that, directly or indirectly, has caused any Listed Patent Assets or Listed 18 19 Copyright Assets to enter the public domain, or has in any way affected its absolute and unconditional ownership of Intellectual Property Rights in and to the Product Designs. All use, disclosure or appropriation of confidential or proprietary information related to the Storage Products Business not owned by Seller has been pursuant to the terms of a written agreement between Seller and the owner of such information, or is otherwise lawful. (i) Seller Contracts. Except as provided in Schedule 9, the Seller Contracts include all contracts or licenses to which Seller is or has been a party or, to Seller's knowledge, that are or may be necessary for Purchaser and Sub to hold in order to operate the Storage Products Business after the Closing and/or to manufacture, have manufactured, use, sell, lease, license, market, distribute, install, service, support or otherwise commercially exploit any or all of the Products or, subject to the Technology and Patent License Agreement, Purchased Assets without: (i) the need to purchase, license or acquire any other asset or property that is the subject of a Seller Contract; (ii) violating any contractual rights of any third party; or (iii) to Seller's knowledge, infringing, misappropriating or misusing any software, technology, Industrial Property or Intellectual Property Rights of any third party. (j) Status of Product Development. Seller has in all material respects made a full, complete and accurate disclosure to Purchaser regarding the state of development of the Products and the use of development tools and other development resources used by Seller (and Seller's contract personnel) in the development of the Products. (k) Product Compliance. All of the Products will perform (including but not limited to the processing of any data) in the same manner during and after the year 2000 as they do before the year 2000, without the need to modify or alter any of such Products in any respect. (l) No Government Funding. No governmental or third party funding, grants or resources were utilized in connection with designing, developing or manufacturing the Products or otherwise conducting the Storage Products Business and no governmental entity has any rights in or to any of the Key Assets, Products or Intellectual Property Rights related thereto. SECTION 3.18. Brokers. Neither Seller, any Seller Subsidiary nor any of their affiliates has employed any broker, finder, investment banker or agent, incurred or agreed to pay any brokerage fee, finder's fee or commission with respect to the transactions contemplated by this Agreement, or dealt with anyone purporting to act in the capacity of a broker, finder, investment banker or agent with respect thereto. SECTION 3.19. Environmental Matters. (a) Environmental Obligations. Seller, each Seller Subsidiary and each other affiliate of Seller is conducting, and at all times has conducted, the Storage Products Business and its operations at the facilities or sites at which the Storage Products Business is now or has previously been conducted by Seller, any Seller Subsidiary or any other affiliate of Seller, or any of their predecessors-in-interest (collectively, the "FACILITIES"), in accordance with and in material compliance with all Environmental Laws. 19 20 (b) No Outstanding Orders or Actions. There are no outstanding orders, injunctions or decrees against Seller, nor are there any pending or threatened investigations of any kind against Seller, related to the Storage Products Business concerning any Environmental Laws. (c) No Waste Disposal. All Hazardous Substances and waste materials generated, used, transported, treated, stored or disposed of in connection with the Storage Products Business have been handled, stored, treated and disposed of in accordance with applicable Environmental Laws. SECTION 3.20. Insurance. Seller has policies of insurance (i) covering risk of loss on the Purchased Assets, (ii) covering liability for fire, property damage and personal injury, and (iii) for business interruption. All such insurance policies are valid, in full force and effect and enforceable in accordance with their respective terms and will be maintained in effect until the Closing Date. SECTION 3.21. Disclosure. Seller has fully provided Purchaser with all the information (orally or in writing) that Purchaser has reasonably requested for deciding whether to enter into this Agreement and the transactions contemplated hereby, including (but not limited to) the status of product development. This Agreement, the Schedules attached hereto, the Seller Disclosure Letter, the Seller Closing Documents and the Ancillary Agreements, and all other information (oral and written) relating to the Products and the Storage Products Business delivered in connection herewith, when taken together, do not contain any untrue statement of a material fact or omit to state a material fact required to be stated herein or therein or necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER Purchaser hereby represents and warrants to Seller that all of the following statements, representations and warranties are true, accurate and correct: SECTION 4.01. Organization and Good Standing. Each of Purchaser and Sub is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction and is in good standing under the laws of its jurisdiction of incorporation, and has all requisite corporate power and authority to carry on its business as now conducted and to enter into this Agreement, the Ancillary Agreements and the Purchaser Closing Documents (as defined), as applicable, and the transactions contemplated hereby and thereby. SECTION 4.02. Authorization. All corporate action on the part of each of Purchaser and Sub, its officers and directors necessary for the authorization, execution and delivery of this Agreement, the Ancillary Agreements and the Purchaser Closing Documents, the performance of all obligations of Purchaser and Sub hereunder and thereunder, has been taken or will be taken prior to the Closing. This Agreement and the Non-Competition Agreements constitute, and the other Ancillary Agreements and the Purchaser Closing Documents when executed and delivered, will constitute, valid and legally binding obligations of Purchaser and Sub, as applicable, 20 21 enforceable in accordance with their respective terms, except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally and (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies. The execution, delivery and performance by each of Purchaser and Sub of this Agreement and each of the Ancillary Agreements, as applicable, have been duly and validly approved by its Board of Directors. No approval of the stockholders of Purchaser or Sub is required to effect the transactions contemplated by this Agreement, the Ancillary Agreements or the Purchaser Closing Documents. SECTION 4.03. Governmental Consents. No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental entity on the part of Purchaser or Sub is required in connection with the consummation of the transactions contemplated by this Agreement, except for compliance with the HSR Act and the Mergers Act. SECTION 4.04. Litigation. There is no action, suit, proceeding or investigation pending or currently threatened against Purchaser or Sub that questions the validity of this Agreement, the Ancillary Agreements or the Purchaser Closing Documents, or the right of Purchaser or Sub to enter into this Agreement, the Ancillary Agreements or the Purchaser Closing Documents or to consummate the transactions contemplated hereby or thereby. SECTION 4.05. Compliance with Other Instruments and Laws. The execution, delivery and performance of this Agreement, the Ancillary Agreements and the Purchaser Closing Documents by each of Purchaser and Sub and the consummation of the transactions contemplated hereby and thereby do not and will not result in a violation or default in any material respect of: (a) any provision of the charter documents of Purchaser or Sub, or (b) any judgment, order, writ, or decree applicable to the assets of Purchaser or Sub, or (c) or constitute a default (or event which with the giving of notice or lapse of time, or both, would become a breach, violation or default) under any material contract to which it is a party. Neither Purchaser nor Sub is in violation or default in any material respect of any provision of its charter documents, or of any instrument, judgment, order, writ, decree or contract to which it is a party or by which it is bound that could reasonably be expected to have a material adverse effect on its business, or, to the best of its knowledge, of any provision of any federal or state statute, rule or regulation applicable to it that could reasonably be expected to have a material adverse effect on it. SECTION 4.06. Brokers. Neither Purchaser, Sub nor any of their affiliates has employed any broker, finder or agent, incurred or agreed to pay any brokerage fee, finder's fee or commission with respect to the transactions contemplated by this Agreement, or dealt with anyone purporting to act in the capacity of a broker, finder or agent with respect thereto. 21 22 ARTICLE V COVENANTS SECTION 5.01. Conduct of Business Prior to the Closing. Seller covenants and agrees that, between the date hereof and the Closing Date, it will (except as Purchaser otherwise agrees in its sole discretion, which as to clause (d) below will not unreasonably be withheld): (a) not sell, transfer, assign, convey, license, move, relocate, encumber or otherwise dispose of any of the Business Assets or permit any Seller Subsidiary or any other affiliate of Seller to do so; (b) conduct, at Seller's expense, the Storage Products Business in the ordinary course and consistent with Seller's past practice (taking into account the sale of the Business Assets contemplated hereby and Seller's other agreements hereunder) except for such actions of Seller as may be contemplated by this Agreement or agreed to by Purchaser in a writing signed by Purchaser; (c) not transfer any Employee (as defined in the first sentence of Section 6.01(a)) to any other division or position of employment within Seller or any of Seller's Subsidiaries or any other affiliates of Seller; (d) not terminate the employment of any Employee (as defined in the first sentence of Section 6.01(a)); (e) not encourage or otherwise act to cause any Employee not to accept any offer of employment by Purchaser made pursuant to Section 6.01 hereof; (f) not change the base salaries or bonus programs of any Employee or establish a bonus plan or any new employee benefits for any Employee without Purchaser's prior written approval; (g) continue to provide Purchaser with reasonable access to and the opportunity to meet and interview each Employee for the purpose of negotiating offers of employment contingent upon the consummation of the sale and transfer of the Business Assets to Purchaser and Sub and the other transactions contemplated hereby (Seller expressly acknowledges that it consents to such activities undertaken by Purchaser prior to the Effective Date); (h) use Seller's best efforts to secure and preserve good and marketable title in Seller's name in and to all of the Business Assets, free of all material Encumbrances, and to cause the conditions to Closing set forth in Article VIII to be fulfilled as promptly as possible; (i) terminate any license rights held by any Seller Subsidiary or any other affiliate of Seller with respect to any of the Purchased Assets; and (j) terminate or cause to be released or expunged all Encumbrances on any Purchased Assets. 22 23 SECTION 5.02. Interim Sales Representation and Marketing Cooperation. (a) Appointment as Interim Period Sales Representative. Seller hereby authorizes Purchaser, between the Effective Date and the earlier of (i) the Closing Date or (ii) the termination of this Agreement in accordance with its terms (the "INTERIM PERIOD"), to market and to act as a sales representative for Products on the terms and conditions of the existing Joint Marketing and Sales Representative Agreement between Purchaser and Seller, dated December 1, 1997, which agreement shall remain in full force and effect until the Closing, at which time it shall be terminated. (b) Recognition of Revenue Accruing Pre and Post Closing. No sales of the Products have occurred to date and none are expected to occur prior to the Closing Date. Revenues accrued per GAAP as a result of deliveries after Closing of Products sold in connection with Evaluation Agreements existing prior to the Closing Date will be for Purchaser's account, and Seller will not be entitled to any compensation with respect thereto, except as expressly provided in Sections 2.03(b) and (d). (c) Seller Non-disturbance of Prospects. To avoid impairing negotiations between Purchaser and any prospective customer ("PROSPECT"), neither Seller nor any Seller Subsidiary nor any person or entity acting upon Seller's or any Seller Subsidiary's instructions will, without Purchaser's prior written consent, contact any such Prospects, or cause to be communicated to any such Prospect any proposal with respect to any Product, except that Seller will upon Purchaser's request cooperate with Purchaser in dealing with each Prospect. If Purchaser ceases to actively pursue any Prospect as a customer for Products, Purchaser will so notify Seller in which case the restrictions of this subsection will cease to apply as to the Prospect specified in such notice. (d) Assumption and Disclaimer as to Obligations. All Liabilities arising under any Evaluation Agreement existing prior to the Closing Date will be Excluded Liabilities except as expressly provided in this clause (d). If Closing never occurs, Purchaser will never have and will not assume any Liabilities or obligations under any Evaluation Agreement, and all such Liabilities or obligations will remain Excluded Liabilities. If Closing does occur, then notwithstanding anything in Article II hereof to the contrary, each Evaluation Agreement shall become an Seller Contract. In no event will Purchaser be liable or responsible for paying any of Seller's sales personnel in connection with any transactions contemplated by this Section 5.02. SECTION 5.03. Consent of Third Parties. Prior to the Closing Date, Seller shall obtain the consent in writing of all persons, if any, necessary to permit Seller to assign and transfer all of the Purchased Assets (including, but not limited to, the Seller Contracts) to Purchaser, free and clear of all material Encumbrances. SECTION 5.04. Future Agreements. In the event Seller enters into any material agreement between the date of this Agreement and the Closing that relates to the Storage Products Business or Products, at the request of Purchaser, Seller agrees to include any such agreement within the Seller Contracts. 23 24 SECTION 5.05. Certain Notifications. At all times prior to the Closing, Seller shall promptly notify Purchaser in writing of the occurrence of any event which will result, or has a reasonable prospect of resulting, in the failure to satisfy any of the conditions specified in Article VIII hereof. SECTION 5.06. Post-Closing Access to Information. If, after the Closing Date, in order properly to operate the Storage Products Business or utilize the Business Assets, or prepare documents or reports required to be filed with governmental entities or prepare Purchaser's or Sub's financial statements for the Storage Products Business, it is reasonably necessary that Purchaser obtain additional information within Seller's possession relating to the Storage Products Business or the Business Assets, Seller shall furnish or cause its representatives to furnish such information to Purchaser as promptly as possible. Such information shall include, without limitation, all agreements between Seller and any person relating to the Storage Products Business or the Business Assets. Seller agrees to maintain any and all information and records regarding its business and operations which are not transferred to Purchaser pursuant to this Agreement necessary to permit Purchaser to calculate the availability to it of Tax credits for increasing research activities under Section 41 of the Internal Revenue Code. Seller shall maintain and make available the information and records specified in this Section for a period of seven (7) years after the Closing Date. SECTION 5.07. Payroll Information. Following execution of this Agreement, Seller will notify Purchaser of the name, telephone, fax and electronic mail address of the Seller employee who is principally responsible for administering payroll for the Employees. Seller shall use its best efforts (to the extent practicable) to provide to Purchaser, within five (5) days of the Closing Date, all W-2 information for calendar 1998 with respect to each United States Employee and all information regarding Seller's payments for unemployment insurance (including FUTA and SDU), paid by Seller in respect of each United States Employee and similar information with respect to each non-U.S. Employee, as required by the applicable jurisdiction. SECTION 5.08. Pre-Closing Access to Information. From the date hereof to the Closing Date, Seller will afford to the representatives of Purchaser, including its counsel and auditors, during normal business hours, access to any and all of the Business Assets and information with respect to the Storage Products Business to the end that Purchaser may have a reasonable opportunity to make such a full investigation of the Business Assets and the Storage Products Business in advance of the Closing Date as it shall reasonably desire, and the officers of Seller will confer with representatives of Purchaser and will furnish to Purchaser, either orally or by means of such records, documents, and memoranda as are available or reasonably capable of preparation, such information as Purchaser may reasonably request, and Seller will furnish to Purchaser's auditors all consents and authority that they may reasonably request in connection with any such examination. In addition, Seller and Purchaser shall cooperate on Tax information and record-keeping matters with regard to the transition of the ownership of the Purchased Assets and the Storage Products Business. SECTION 5.09. Taxes. Seller shall, to the extent that failure to do so could adversely affect the Storage Products Business or the Business Assets, (a) continue to file within the time period for filing all returns and reports relating to Taxes, and such returns and reports shall be true, correct and complete, and (b) pay when due any and all Taxes attributable to or levied or 24 25 imposed upon (i) the Business Assets used in the Storage Products Business for periods (or portions thereof) through the Closing Date and (ii) the operations of the Seller. SECTION 5.10. Confidentiality. (a) Existing Agreement. The terms of the Mutual Confidential Disclosure Agreement dated as of January 13, 1998 (the "EXISTING CONFIDENTIALITY AGREEMENT") between Seller and Purchaser are hereby incorporated herein by reference and shall continue in full force and effect until the Closing Date, at which time the Existing Confidentiality Agreement shall terminate. If this Agreement is terminated prior to the Closing for any reason then the Existing Confidentiality Agreement shall continue in full force and effect. (b) Seller's Confidential Information. Excluding Acquired Confidential Information (as defined below), all tangible manifestations of confidential and/or proprietary information of Seller disclosed to Purchaser in the course of negotiating the transaction contemplated by this Agreement ("SELLER'S CONFIDENTIAL INFORMATION") will be held in confidence and not disclosed by Purchaser or any of its employees, affiliates or stockholders for a period of five (5) years from the Closing Date and will be promptly destroyed by Purchaser or returned to Seller, upon Seller's written request to Purchaser, provided that Purchaser will not at any time use, or disclose to others, any Licensed Technology Deliverables (in tangible form) for any purpose other than the development of read channels and pre-amps for Storage Peripherals. Purchaser's employees, affiliates and stockholders will not be given access to Seller Confidential Information except on a "need to know" basis. It is agreed that Purchaser Confidential Information will not include information that: (a) is proven to have been known to Purchaser prior to receipt of such information from the Seller; (b) is disclosed by a third party having the legal right to disclose such information and who owes no obligation of confidence to the Seller; (c) is now, or later becomes part of the general public knowledge or literature in the art, other than as a result of a breach of this Agreement by Purchaser; or (d) is independently developed by Purchaser without the use of any Seller Confidential Information. Notwithstanding anything to the contrary, Purchaser may use for any commercial purpose Confidential Information received from Seller (whether or not such Confidential Information constitutes Purchased Assets or Licensed Assets), provided that such Confidential Information is Residual Information (as defined below) and provided that the right to use Residual Information shall not be deemed a grant of rights under any patents or copyrights of Seller. For purposes of this Agreement, "RESIDUAL INFORMATION" means (i) information that has been remembered by Purchaser's consultants and employees (including but not limited to employees that once were employed by Seller) without referring to such information in a tangible form received from Seller, and (ii) any tangible item created by a Purchaser employee or consultant that may embody such information that has been remembered by such employee or consultant without referring to such information in a tangible form received from Seller. Purchaser shall not instruct its consultants or employees to memorize Seller's Confidential Information so that it can be used as Residual Information or can be disseminated for unauthorized use. (c) Purchaser's Confidential Information. All copies of financial information, marketing and sales information, pricing, marketing plans, business plans, financial and business projections, manufacturing processes and procedures, formulae, methodologies, inventions, product designs, product specifications and drawings, and other confidential and/or proprietary 25 26 information of Purchaser disclosed to Seller in the course of negotiating the transaction contemplated by this Agreement ("PURCHASER CONFIDENTIAL INFORMATION") will be held in confidence and not used or disclosed by Seller or any of its employees, affiliates or stockholders for a period of five (5) years from the Closing Date and will be promptly destroyed by Seller or returned to Purchaser, upon Purchaser's written request to Seller. Seller's employees, affiliates and stockholders will not be given access to Purchaser Confidential Information except on a "need to know" basis. It is agreed that Purchaser Confidential Information will not include information that: (a) is proven to have been known to Seller prior to receipt of such information from the Purchaser; (b) is disclosed by a third party having the legal right to disclose such information and who owes no obligation of confidence to the Purchaser; (c) is now, or later becomes part of the general public knowledge or literature in the art, other than as a result of a breach of this Agreement by Seller; or (d) is independently developed by Seller without the use of any Purchaser Confidential Information. (d) Acquired Confidential Information. Except for marketing and sales information which has been publicly disseminated to Seller's prospective customers for the Storage Products Business prior to the Effective Date in the ordinary course of business consistent with past business practice, all copies of financial information, marketing and sales information, pricing, marketing plans, business plans, financial and business projections, customer lists, methodologies, inventions, software, know-how, product designs, product specifications and drawings, and other confidential and/or proprietary information which constitutes Purchased Assets (collectively, "ACQUIRED CONFIDENTIAL INFORMATION") will be maintained by Seller in confidence at all times after the Effective Date of this Agreement in the same manner and to the same extent that Seller, acting reasonably, maintains Seller's Confidential Information in confidence. At all times following the Closing, Seller will: (i) continue to hold all Acquired Confidential Information in strict confidence, (ii) will not use for itself or third parties any of Acquired Confidential Information which constitutes or is constituted in Purchased Assets to any third party, (iii) will not disclose to third parties any of Acquired Confidential Information which constitutes or is constituted in Purchased Assets to any third party, and (iv) upon Purchaser's or Sub's request, promptly destroy or deliver to Purchaser and/or Sub any Acquired Confidential Information which constitutes or is constituted in Purchased Assets in Seller's possession or control; except that Seller may internally use the original copies of all Business Records solely to prepare and file Tax returns and prepare Seller's financial statements, and Seller may disclose any Acquired Confidential Information as may be required to comply with requests from all governmental agencies, including without limitation the SEC; provided that Seller must provide Purchaser with prior written notice of any proposed disclosure to government agencies and with respect to the SEC, an opportunity to seek confidential treatment of such proposed disclosure. It is agreed that Acquired Confidential Information will not include information that is now, or later becomes, part of the general public knowledge or literature in the art, other than as a result of a breach of this Agreement or the Existing Confidentiality Agreement by Seller. SECTION 5.11. No Other Bids. Until the earlier to occur of (a) the Closing or (b) the termination of this Agreement pursuant to its terms, Seller shall not, and Seller shall not authorize any of its officers, directors, employees, agents or other representatives to, directly or indirectly, (i) initiate, solicit or encourage (including by way of furnishing evaluation material or other information regarding the Storage Products Business or the Business Assets) any inquiries, 26 27 or make any statements to third parties which may reasonably be expected to lead to any proposal, concerning the sale of the Storage Products Business or all or a portion of the Business Assets, or (ii) negotiate, engage in any substantive discussions, or enter into any agreement, with any person concerning the sale of the Storage Products Business or the Business Assets. SECTION 5.12. Public Announcements. On and prior to the Closing Date, Purchaser and Seller shall advise and confer with each other prior to the issuance of any reports, statements or releases concerning this Agreement (including the exhibits hereto) and the transactions contemplated herein. Neither Purchaser nor Seller will make any public disclosure prior to the Closing or with respect to the Closing unless both parties agree on the text and timing of such public disclosure, except as required by law. Nothing contained in this Section shall prevent any party at any time from furnishing any information pursuant to the requirements of any governmental entity. SECTION 5.13. Books and Records. If, in order properly to prepare documents required to be filed with governmental authorities (including Tax authorities) or its financial statements, it is necessary that any party hereto or any successors be furnished with additional information relating to the Business Assets, the Assumed Liabilities or the Storage Products Business, and such information is in the possession of any other party hereto, such party agrees to use its good faith efforts to promptly furnish such information to the party needing such information, at the cost and expense of the party being furnished such information. From and after the date of this Agreement and continuing beyond the Closing, Seller shall cooperate with Purchaser and provide to Purchaser at Purchaser's expense all financial information that may be required to enable Purchaser to comply with all applicable laws, rules and regulations, and any governmental filing requirements, whether imposed by the Federal Trade Commission or otherwise, with respect to reporting and reflecting the transactions contemplated by this Agreement. SECTION 5.14. Regulatory and Other Authorizations; Consents. (a) Efforts. Each party hereto will use its reasonable best efforts to obtain all authorizations, consents, orders and approvals of all United States, Irish and other non-U.S., federal, state and local regulatory bodies and officials that may be or become necessary for the execution and delivery of, and the performance of its obligations pursuant to, this Agreement and the Ancillary Agreements and will cooperate fully with the other party in promptly seeking to obtain all such authorizations, consents, orders and approvals. Each party hereto agrees to make an appropriate filing of a Notification and Report Form pursuant to the HSR Act and the required filings under the Mergers Act with respect to the transactions contemplated hereby as promptly as is practicable after the date hereof and to supply promptly any additional information and documentary material that may be requested by any governmental authority pursuant to the HSR Act or the Mergers Act. The parties hereto will not take any action that will have the effect of delaying, impairing or impeding the receipt of any required approvals. Without limiting the generality of the parties' undertakings pursuant to this Section, the parties shall use their reasonable best efforts to prevent the entry in a judicial or administrative proceeding brought under any antitrust law by any Government Antitrust Authority or any other party of any permanent or preliminary injunction or other order that would make consummation of the acquisition of the Business Assets in accordance with the terms of this Agreement unlawful or that would prevent or delay such consummation. 27 28 (b) Communications. Each party hereto shall promptly inform the other of any material communication between such party and the Federal Trade Commission, the Department of Justice or any other United States federal or state, or non-U.S. government or governmental authority regarding any of the transactions contemplated hereby. If any party or any affiliate of such party receives a request for additional information or for documents or any material from any such government or governmental authority with respect to the transactions contemplated hereby, then such party shall endeavor in good faith to make or cause to be made, as soon as reasonably practicable and after consultation with the other party, an appropriate response in compliance with such request. Further, no written materials shall be submitted by any party to the Federal Trade Commission, the Department of Justice or any other United States federal or state, or non-U.S. governmental agency in connection with HSR Act compliance or the merger control or competition regulations of any other country (including without limitation, the Mergers Act), nor shall any oral communications be initiated with such governmental entities by any party, without prior disclosure to and coordination with the other parties and their counsel. Each party hereto will cooperate in connection with reaching any understandings, undertakings or agreements (oral or written) involving the Federal Trade Commission, the Department of Justice or any other United States federal or state, or non-U.S. governmental authority in connection with the transactions contemplated hereby. SECTION 5.15. Solvency . Seller is solvent and neither intends or expects to file or seek relief under the United States Bankruptcy Code or any other insolvency or similar law. SECTION 5.16. Further Actions. Each of the parties hereto shall, at its own expense, execute and deliver such documents and other papers and take such further actions as may be reasonably required to carry out the provisions of this Agreement and the Ancillary Agreements and to give effect to the transactions contemplated by this Agreement and the Ancillary Agreements. In the event that any Subsidiary or affiliate of Seller owns or holds rights to any of the Business Assets, Seller covenants and agrees to cause each such Subsidiary or affiliate to take whatever action and execute whatever documents as are necessary to implement this Agreement and the Ancillary Agreements. SECTION 5.17. Further Asset Transfer. From and after the date of the Closing, Seller agrees to convey, transfer, and assign to Purchaser, free and clear of all Encumbrances, any tangible or intangible rights, properties or assets then held by the Seller the conveyance, transfer or assignment of which would have been necessary for representations and warranties of the Seller herein to be true and correct as of the date of the Closing, or the conveyance, transfer or assignment of which was or is required by the covenants of the Seller contained in this Agreement. SECTION 5.18. Technology and Patent License Agreement. At the Closing, the Technology and Patent License Agreement, in substantially the form of EXHIBIT A, shall be executed and delivered by Seller and Purchaser. SECTION 5.19. Non-Competition Agreement. Concurrently with the execution of this Agreement, Seller and Purchaser shall execute and deliver Non-Competition Agreements in the form of EXHIBIT C attached hereto (the "NON-COMPETITION AGREEMENTS"). 28 29 SECTION 5.20. Transfer of Assets. Seller shall take, or shall cause its subsidiaries and affiliates to take, all action necessary to transfer all right, title and interest in and to the Purchased Assets to Analog Devices, Inc. prior to the Closing. SECTION 5.21. Export Compliance. Without prior authorization of the United States Office of Export Administration, neither Seller nor Purchaser shall knowingly export or reexport (including but not limited to delivery to a foreign national) directly or indirectly any technical data received from the other party, any technical data relating to the commodities received from the other party or any immediate products (including processes and services) produced directly by use of any of such technical data to any country to the extent such export or reexport violates the Export Control Regulations of the Bureau of International Commerce of the United States Department of Commerce. SECTION 5.22. Survival of Covenants. Each of the covenants set forth in Sections 5.02(b), 5.02(c), 5.06, 5.07, 5.09, 5.10(b), 5.10(c), 5.10(d), 5.13, 5.16, 5.17, 5.20 and 5.21 shall survive the Closing. The covenants set forth in Section 5.10(a) and 5.12 above shall survive the termination of this Agreement for any reason. ARTICLE VI EMPLOYEE MATTERS SECTION 6.01. Right to Offer Employment. (a) Employees. SCHEDULE 13 contains a current list (the "PRELIMINARY LIST") of each employee of Seller, of any of Seller's Subsidiaries or of any other affiliates of Seller who works in, or provides services in connection with, the Storage Products Business (each an "EMPLOYEE"). At least five (5) days prior to the Closing Date, Seller shall update the list of the Employees (the "FINAL LIST") and shall identify those Employees who are active Employees of the Storage Products Business as of that date, including those on vacation, sick leave, disability leave, family leave or personal leave of absence and which shall separately identify those Employees who are on a workers' compensation-related or disability leave. For purposes of this Article VI, "EMPLOYEES" means only those individuals included on the Final List. (b) Offers of Employment. At Purchaser's request, Seller shall cooperate with Purchaser in identifying those Employees that Purchaser may wish to hire and in facilitating the employment by Purchaser, conditioned upon the Closing, of those Employees (including any Employees who become such after the Effective Date) whom Purchaser elects to employ. Prior to the Closing, Purchaser shall have the right to contact such Employees at reasonable times and places for the purpose of making offers of employment with Purchaser (in each case such offers of employment shall be contingent on consummation of the transactions contemplated by this Agreement). (Seller hereby expressly consents to offers of employment being extended prior to or after the Effective Date.) Seller agrees to use its best efforts to (i) retain Employees as employees of Seller through the Closing Date, and (ii) assist Purchaser in securing the employment on the Closing Date of those Employees to whom Purchaser (or an affiliate designated by Purchaser) makes offers of employment; provided, however, that Seller shall not be required to incur any financial obligation beyond continuing to pay for current employee 29 30 compensation and benefits through the Closing Date, except as otherwise required by this Agreement, and further provided that Seller shall not be restricted from terminating any Employee for cause if Purchaser is advised a reasonable period of time in advance of such action. Seller shall not transfer any Employee to employment with Seller outside of the Storage Products Business prior to the Closing without the consent of Purchaser. Seller shall notify Purchaser promptly if any Employee terminates employment with Seller after the date of this Agreement but prior to the Closing. Each such Employee who is employed by Seller on the Closing Date and who actually accepts an offer of employment with Purchaser (or any affiliate designated by Purchaser) effective as of or promptly following the Closing Date as a result of an offer of employment made by Purchaser is hereafter referred to as a "NEW HIRE". Seller will provide each New Hire a period equal to the balance of the term of his or her option to exercise any outstanding options to purchase Seller securities held by such New Hires and shall as of the Closing Date vest all outstanding unvested options held by such New Hire. Seller hereby consents to the hiring of such New Hires by Purchaser and waives, with respect to the employment by Purchaser of such New Hires, any claims or rights Seller may have against Purchaser with respect thereto and against any such Employee under any non-competition, confidentiality or employment agreement with respect to the Storage Products Business. Purchaser shall not, however, be obligated to offer employment to any Employee and the parties hereby acknowledge that Purchaser is under no obligation whatsoever to employ any current or future employees of Seller or any of its affiliates. Such offers of employment as may be extended by Purchaser to Employees who are on a workers' compensation-related or disability leave or a Family Medical Leave Act leave or other statutory leave shall be conditioned upon their return from such leave in accordance with Seller's leave of absence policy. (c) Employee Compensation. Purchaser shall be liable for and obligated to pay and indemnify, and hold Seller and its affiliates harmless from, any and all expenses, contracts, agreements, commitments, obligations, claims, suits, and other liabilities of any nature whatsoever, whether known or unknown, accrued or not accrued, fixed or contingent, or arising hereafter, directly or indirectly, with respect to (i) the employment by Purchaser or termination of employment by Purchaser of any current or future employee or consultant of Purchaser or any of its affiliates, including without limitation, the employment or termination of a New Hire after the Closing Date, whether in connection with the transactions contemplated hereby or otherwise; (ii) any claims of discrimination under state or federal law provided such claims arise from the New Hire's employment or service with or termination by Purchaser after the Closing Date; (iii) any other claims or obligations arising out of the terms and conditions of employment of any person by Purchaser whether for salary, wages, bonuses, profit sharing, commissions, severance, vacation pay, sick pay or otherwise; (iv) any duties or obligations of Purchaser or administrators under any existing or future employee benefit plans or arrangements maintained by Purchaser with respect to its employees; or (v) any present or future obligations or liabilities of Purchaser to prior, existing or future employees of Purchaser. SECTION 6.02. Employment Taxes. Seller shall be responsible for any withholding or employment Taxes with respect to any Employees which accrue or become payable during the period of such Employee's employment or service with Seller or any affiliate of Seller or arise out of the termination of such person's employment with Seller or any affiliate of Seller. Seller shall be responsible for filing all United States and non-U.S. federal, state and local employment 30 31 Tax returns with respect to such Employees attributable to periods of employment or service with Seller or any affiliate of Seller. SECTION 6.03. Termination of Employment. Seller agrees to comply with the provisions of the Undertakings Law and any other United States or non-U.S. federal, state or local statute or regulation regarding termination of employment, plant closing or layoffs and to perform all obligations required by Seller with respect to the cessation of any operations of the Storage Products Business or any other business of Seller or reductions in workforce or the termination, re-assignment, re-location or change in position of any Employee (or other employee of Seller or of any of Seller's Subsidiaries or any other affiliate of Seller) prior to, on or after the Closing Date. Seller shall indemnify and hold Purchaser and Sub harmless with respect to any liability under the Undertakings Law or other applicable United States or non-U.S. federal, state or local statute or regulation affecting termination of employment arising in connection with the transactions contemplated by this Agreement. SECTION 6.04. No Employment Obligations Assumed; Vesting. Without limiting Sections 3.13 and 3.14, Seller shall be liable for and obligated to pay and indemnify and hold Purchaser and its affiliates harmless from any and all expenses, contracts, agreements, commitments, obligations, claims, suits, and other Liabilities of any nature whatsoever, whether known or unknown, accrued or not accrued, fixed or contingent or arising hereafter, directly or indirectly, with respect to (i) any of Seller's obligations under this Article VI; (ii) the employment or termination of employment by Seller of any current or future employee or consultant of Seller or any of its affiliates, including without limitation Employees or Consultants, whether in connection with the transactions contemplated hereby or otherwise; (iii) any claims of discrimination under United States or non-U.S., federal, state or local law provided such claims arise from such Employee's employment or service with or termination by Seller; (iv) any other claims or obligations arising out of the terms and conditions of employment (including under any Seller agreement), whether for salary, wages, bonuses, profit sharing, commissions, severance, vacation pay, sick pay or otherwise relating to employment by Seller; (v) any duties or obligations of Seller or administrators under any existing or future employee benefit plans of Seller or any of its affiliates; or (vi) any present or future Liabilities of Seller or any of its affiliates to prior, existing or future employees of Seller or any of its affiliates, whether or not specifically described in this Article VI. Seller shall pay to all terminated Employees, including New Hires, any Liability for accrued vacation, sick leave or similar benefits with respect to such Employees attributable to periods of employment or service with Seller, consistent with Seller's policies and applicable law, and shall make such payment within the statutory time period therefor but in no event later than five days after such Employee's employment with Seller is terminated. As of the Hire Date of each New Hire, Seller shall fully vest such New Hire under all applicable qualified and non-qualified plans of Seller. Purchaser shall be responsible for any Liability for any employment contract or employment contractual obligations to New Hires entered into by Purchaser. Purchaser shall be responsible for any Liability with respect to any claims of discrimination under United States, non-U.S. federal, state or local law arising on or after a New Hire's Hire Date. SECTION 6.05. COBRA and Insurance Coverage. Seller shall be responsible for any COBRA coverage continuation notices or similar employee benefit type notices required to be provided with respect to any Employees under applicable laws. 31 32 SECTION 6.06. Non-U.S. Employees. Without limiting any other provision hereof, Seller acknowledges and agrees that if Purchaser elects to offer employment to some but not all Employees located in particular non-U.S. jurisdictions, or if requisite notice prior to the Effective Date or the Closing Date is not given to certain non-U.S. Employees or non-U.S. governmental agencies regarding possible employment transitions to Purchaser of certain Employees, certain non-U.S. laws, rules or regulations may be violated or may not be complied with, possibly resulting in Liability, possibly including without limitation a need to pay or accrue severance, a need for Seller to continue employing non-U.S. Employees for some mandated period, a need for Purchaser or a Purchaser Subsidiary to commence employing non-U.S. Employees that Purchaser does not wish to employ ("MANDATED EMPLOYEES"), a need for Purchaser to pay salary to Mandated Employees and then severance to them upon terminating them as soon as legally permissible, an obligation of Purchaser to honor non-U.S. Employees' pension obligations, and fines, sanctions and penalties imposed on Seller or Purchaser or related parties and related Liabilities with respect thereto and Liabilities associated with claims brought against Seller or Purchaser or related parties by non-U.S. Employees or non-U.S. governmental agencies or Mandated Employees with respect to any of the foregoing (collectively, "FOREIGN EMPLOYEE LIABILITIES"). Nevertheless, without limiting any other provision hereof, Seller agrees to indemnify, hold harmless and defend Purchaser from and against any and all such Foreign Employee Liabilities, including without limitation those arising under the Undertakings Law, and to take all actions required to avoid (where possible) or minimize such Foreign Employee Liabilities, including without limitation, paying or accruing severance or other amounts and giving all notices and obtaining all approvals and paying all fines required to do so, without regard to the limitations on indemnification provided in Article IX hereof. Purchaser agrees to exercise commercially reasonable efforts to minimize Foreign Employee Liabilities, but shall have no liability for failing to do so and no actual or alleged failure to do so shall relieve Seller from any of Seller's obligations or Liabilities under this Section. SECTION 6.07. General Matters. (a) Compensation Program. Purchaser and Seller shall work together to provide an incentive program for Employees to whom Purchaser offers employment to accept such offers. Purchaser shall, among other things, grant options to purchase shares of Purchaser's stock to New Hires, pay a joining bonus to each New Hire, pay the reasonable costs of relocation of New Hires and his/her family to the location selected by Purchaser, and enroll the New Hire in Purchaser's standard employee benefit programs, subject to Purchaser's standard policies applicable thereto. (b) Immigration, Visas. Purchaser shall be responsible for obtaining any required visas or other immigration approvals to allow New Hires to become employed by Purchaser at whatever location is specified by Purchaser. Seller shall cooperate with and provide information reasonably requested with respect to such efforts. (c) Indemnity. Seller shall be responsible for any Liability for severance, termination or like payments to any Employee that accrues or becomes payable during the period of such Employee's employment or service with Seller or any affiliate of Seller or arise out of the termination of such person's employment with Seller or any affiliate of Seller, whether occurring prior to or following the Closing Date and whether arising pursuant to the Undertakings Law or otherwise. Seller shall defend and indemnify Purchaser and Sub and hold Purchaser and Sub 32 33 harmless from and against all Liabilities to Purchaser or Sub to the extent that the same arise as a result of any Employee's alleging that the acquisition of the Business Assets hereunder and the hiring (or non-hiring) of Employees by Purchaser on the Closing Date constitutes a termination entitling such Employee to severance or any similar benefit or right pursuant to a plan maintained by Seller or pursuant to applicable statutes. Notwithstanding anything to the contrary herein, there shall be no monetary or time limitation or "basket" on Seller's liability to Purchaser and Sub in Article IX hereof or elsewhere under this Section 6.07(c). (d) No Terminations. Seller covenants and agrees that it will not terminate any Employee or Consultant who does not become a New Hire and that such Employees and Consultants shall be assigned by Seller to perform services pursuant to that certain R&D Services and Transition Support Agreement (as defined in Section 8.01(e) below) to be entered into by Seller and Purchaser at the Closing and that Seller presently intends to reassign (in a manner that would not constitute a constructive termination under applicable law) each such Employee and Consultant within Seller's organization at the expiration of the R&D Services and Transition Support Agreement. SECTION 6.08. No Solicitation. Except as provided by law, for a period of one (1) year after the Closing Date, without Purchaser's written permission, Seller shall not hire or employ any New Hire, and for a period of three (3) years after the Closing Date, without Purchaser's written permission, Seller shall not actively solicit any New Hire to terminate his or her employment with Purchaser or to become an employee of Seller. Except as provided by law, for a period of one (1) year after the Closing Date, without Seller's written permission, Purchaser shall not hire or employ any employee of Seller assigned to work on the R&D Services and Transition Support Agreement ("R&D EMPLOYEE"), and for a period of three (3) years after the Closing Date, Purchaser shall not actively solicit any R&D Employee to terminate his or her employment with Seller or to become an employee of Purchaser, without the prior written consent of Seller. For purposes of this Section, the term "actively solicit" shall not mean or include the placement of advertisements, participation in career days, utilizing headhunters or placement agencies or responding to unsolicited inquiries, applications or resumes. SECTION 6.09. No Rights Conferred Upon Employees. Nothing in this Article VI or any other provision of this Agreement shall confer any rights or remedies on any employee (including without limitation any Employee, New Hire or R&D Employee) and no employee (including without limitation any Employee, New Hire or R&D Employee) shall be a third party beneficiary with respect to any covenant, representation or agreement in this Agreement. SECTION 6.10. Survivability. Each of the agreements and covenants set forth in this Article VI shall survive the Closing. ARTICLE VII TAX MATTERS SECTION 7.01. Transaction Taxes; Representation. Seller shall be responsible for, and shall defend, indemnify and hold Purchaser and Sub harmless against and in respect of, any and all excise, value added, registration, stamp, property, documentary, transfer, sales, use and 33 34 similar Taxes, levies, charges and fees (including all real estate transfer taxes) incurred, or that may be payable to any taxing authority (other than the State of Colorado), in connection with, the transactions (including without limitation the sale, transfer, and delivery of the Purchased Assets, acquisition of the other Business Assets and the assumption of the Assumed Liabilities) contemplated by this Agreement (collectively, "TRANSACTION TAXES"). SECTION 7.02. Parties' Responsibility. Seller is and shall remain solely responsible for all tax matters arising from or relating to the Business Assets and related businesses on or prior to the Closing Date ("PRE-CLOSING PERIOD"). Seller shall indemnify and hold harmless Purchaser and Sub from any liability for, or arising out of or based upon, or relating to any tax matter arising from the Business Assets and related businesses during the Pre-Closing Period. Purchaser and Sub shall be solely responsible for all tax matters arising from or relating to the Purchased Assets and related businesses beginning after the Closing date ("POST-CLOSING PERIOD"). Purchaser and Sub shall indemnify and hold harmless Seller from any liability for, or arising out of or based upon, or relating to any tax matter arising from the Purchased Assets and related businesses during the Post-Closing Period. Seller, Purchaser and Sub shall cooperate concerning all tax matters relating to this division of responsibility, including, but not limited to, the filing of Tax Returns and other governmental filings associated therewith. SECTION 7.03. No Limitation. Notwithstanding anything to the contrary in Article IX or elsewhere herein, there shall be no limitation or "basket" on the amount of Seller's liability with respect to its indemnification obligations under Section 7.01 or on Seller or Purchaser or Sub's liability with respect to their respective indemnification obligations under Section 7.02 hereof, and Seller, Purchaser, Sub or their successors and assigns may assert any such indemnity claim at any time prior to expiration of the applicable legal statute of limitations applicable to the subject matter of the claim underlying the claim for indemnification under applicable law. SECTION 7.04. Treatment of Indemnity Payments. All payments made by Seller or Purchaser, as the case may be, to or for the benefit of the other party pursuant to any indemnification obligations under this Agreement shall be treated as adjustments to the Purchase Price for Tax purposes and such agreed treatment shall govern for purposes of this Agreement, unless otherwise required by law. ARTICLE VIII CONDITIONS TO THE CLOSING SECTION 8.01. Conditions to Obligations of Seller. The obligations of Seller to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (a) Accuracy of Representations and Warranties; Covenants. The representations and warranties of Purchaser contained in Article IV of this Agreement shall be true and correct in all material respects as of the Closing, with the same force and effect as if made as of the Closing, other than such representations and warranties as are made as of another date, and all the covenants contained in this Agreement to be complied with by Purchaser on or before the Closing shall have been complied with in all material respects, and Seller shall have received a certificate of Purchaser to such effect signed by a duly authorized officer thereof (such 34 35 certificate, together with the Purchase Price Allocation Agreement, shall constitute the "PURCHASER CLOSING Documents"). (b) HSR Act and Merger Act. Any applicable waiting periods under the HSR Act applicable to the transactions contemplated by this Agreement shall have expired without a second request or early termination shall have been granted. The parties shall have complied with all applicable requirements of the Mergers Act and any governmental approval or consent required in connection therewith shall have been received. (c) No Order. No non-U.S. or United States federal, state or other governmental authority or other agency or commission or non-U.S. or United States federal, state or other court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, injunction or other order (whether temporary, preliminary or permanent) which is in effect and has the effect of making the transactions contemplated by this Agreement and/or the Ancillary Agreements illegal or otherwise restraining or prohibiting consummation of such transactions; provided, however, that the parties hereto shall use their best efforts to have any such order or injunction vacated. (d) No Litigation. No suit, claim, cause of action, arbitration, mediation, investigation or other proceeding under which a third party or governmental entity is contesting, challenging or seeking to alter, enjoin or adversely affect the transfer of the Business Assets contemplated by this Agreement or any other transaction contemplated by this Agreement, will be pending or threatened. (e) R&D Transition Support Agreement. Seller and Purchaser shall have negotiated, executed and delivered an R&D Services and Transition Support Agreement, in form and substance satisfactory to Seller and its counsel, that incorporates the terms specified on EXHIBIT D hereto (the "R&D SERVICES AND TRANSITION SUPPORT AGREEMENT"). (f) Ancillary Agreements. Purchaser and Sub shall have executed and delivered counterparts of each of the Ancillary Agreements not referenced in clause (e) above to which Purchaser or Sub, respectively, is a signatory and Purchaser and Sub shall have made all payments and performed all obligations required to be completed by each of them prior to or at the Closing under all of the Ancillary Agreements. (g) Purchase Price Allocation Agreement. Purchaser shall have executed and delivered to Seller the Purchase Price Allocation Agreement. (h) Closing Payment. Purchaser and Sub shall have made the Closing Payment to Seller in the manner contemplated by Section 2.03. SECTION 8.02. Conditions to Obligations of Purchaser. The obligations of Purchaser and Sub to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (a) Accuracy of Representations and Warranties; Covenants. The representations and warranties of Seller contained in Article III of this Agreement (as qualified by Seller's Disclosure Letter) shall be true and correct in all material respects as of the Closing, with the same force and 35 36 effect as if made as of the Closing, other than such representations and warranties as are made as of another date, and all the covenants contained in this Agreement to be complied with by Seller on or before the Closing shall have been complied with in all material respects, and Purchaser and Sub shall have received a certificate of Seller, dated as of the Closing Date, to such effect signed by a duly authorized officer thereof. (b) No Material Adverse Change. There shall have been no material adverse effect in or with respect to Seller's right, title or interest in or to any of the Business Assets; and no material Business Asset shall have been subject to any damage, injury, loss, casualty or theft (whether or not covered by insurance); and at least twenty of the New Hires and four of the five key employees shall be able and available to commence employment with Purchaser on the Closing Date; and Purchaser and Sub will have received a certificate to that effect, dated as of the Closing Date, executed by a duly authorized officer of Seller. (c) Conduct of Seller's Business in Ordinary Course. From the Effective Date to the Closing Date, Seller will have conducted the Storage Products Business only in the ordinary course, consistent with Seller's past practices, except for actions expressly permitted or contemplated by this Agreement, matters incident to carrying out this Agreement, or such further matters as may be consented to by Purchaser and Sub in writing, and Purchaser and Sub will have received a certificate to such effect, dated as of the Closing Date, executed by a duly authorized officer of Seller. (d) Intellectual Property Assignments. Purchaser shall have received from Seller: (i) assignments substantially in the forms of EXHIBIT E (the "PATENT ASSIGNMENTS"), by which Seller shall assign to Purchaser and Sub the Listed Patent Assets and an undivided interest in the Co-Owned Patents, executed on Seller's behalf by an officer of Seller with his or her execution notarized, in a form acceptable for recording with the United States Patent and Trademark Office; and (ii) assignments from Seller to Purchaser and Sub of all registered copyrights and mask works included in the Purchased Assets, duly executed on behalf of Seller by an officer and notarized, and in a form acceptable for recording with the United States Copyright Office in substantially the forms of EXHIBIT F attached hereto (the "COPYRIGHT ASSIGNMENTS") and EXHIBIT G attached hereto (the "MASK WORK ASSIGNMENTS"). (e) Bills of Sale. Bills of Sale substantially in the forms of EXHIBIT H shall have been executed and delivered by Seller at the Closing. (f) Delivery. Purchaser and its legal counsel shall be satisfied that all Business Assets shall have been duly delivered by or for Seller to Purchaser and Sub as required by this Agreement. All software and intangible deliverables included in the Business Assets and all other Business Assets that can be delivered electronically, will have been delivered to Purchaser electronically to Purchaser's facilities at Longmont, Colorado, U.S.A. and all Business Assets that cannot be delivered electronically will have been delivered to Purchaser FOB at its Longmont, Colorado, U.S.A. facility or at another location specified by Purchaser, at Purchaser's option, and in such manner as Purchaser directs, in each case at Seller's cost and expense (except that the Purchaser and/or Sub shall reimburse Seller for one-half of the freight costs of shipping assets to Longmont, Colorado). 36 37 (g) HSR Act and Mergers Act. Any applicable waiting periods under the HSR Act and the Mergers Act applicable to the transactions contemplated by this Agreement shall have expired without a second request or early termination shall have been granted. The parties shall have complied with all applicable requirements of the Mergers Act and any governmental approval or consent required in connection therewith shall have been received. (h) No Order. No Irish or other non-U.S. or United States federal, state or other governmental authority or other agency or commission or non-U.S. or United States federal, state or other court of competent jurisdiction shall have enacted, issued, promulgated, enforced or entered any statute, rule, regulation, injunction or other order (whether temporary, preliminary or permanent) which is in effect and has the effect of making the transactions contemplated by this Agreement and/or the Ancillary Agreements illegal or otherwise restraining or prohibiting consummation of such transactions; provided, however, that the parties hereto shall use their best efforts to have any such order or injunction vacated. (i) No Litigation. No suit, claim, cause of action, arbitration, mediation, investigation or other proceeding under which a third party or government entity is contesting, challenging or seeking to alter, enjoin or adversely affect the Business Assets or the transactions contemplated by this Agreement will be pending or threatened. (j) R&D Services and Transition Support Agreement. Seller and Purchaser shall have negotiated, executed and delivered the R&D Services and Transition Support Agreement, in form and substance satisfactory to Purchaser and its counsel, which shall incorporate the terms specified on EXHIBIT D hereto. (k) Foundry Agreement. Seller and Purchaser shall have negotiated, executed and delivered a Foundry Agreement, in form and substance satisfactory to Purchaser and its counsel, that incorporates the terms specified on EXHIBIT I hereto (the "FOUNDRY AGREEMENT"). (l) Ancillary Agreements. Seller shall have executed and delivered counterparts of each of the Ancillary Agreements not referenced in clauses (j) and (k) above and provided all deliverables and performed all obligations required to be completed by Seller prior to or at the Closing under all of the Ancillary Agreements. (m) Purchase Price Allocation Agreement. Seller shall have executed and delivered to Purchaser the Purchase Price Allocation Agreement. (n) Receipt. A duly authorized officer of Seller shall have executed and delivered to Purchaser a written receipt for the Closing Payment. (o) No Withdrawal of Acceptances by Employees Offered Employment. At least twenty (20) of the Employees listed on Schedule 13 and at least four of the five key Employees identified in a letter from Purchaser to Seller dated as of the Effective Date referencing this Subsection 8.02(o) shall not have withdrawn their acceptances of the written offers of employment extended to them by Purchaser. (p) Proceedings and Documents Satisfactory. All proceedings, corporate or other, to be provided or undertaken by Seller in connection with the transactions contemplated by this 37 38 Agreement, and all documents incident thereto, shall be reasonably satisfactory in form and substance to counsel to Purchaser. (q) Third Party Consents Obtained. Seller shall have obtained all consents, waivers and approvals from third parties and governmental entities necessary to effect the assignment and transfer to Purchaser of the Purchased Assets for which such consents, waivers and approvals are required to sell, assign, license or otherwise transfer such Purchased Assets to Purchaser as contemplated by this Agreement and the Ancillary Agreements. (r) Transfer of Assets. Seller shall have taken, or shall cause its subsidiaries and affiliates to have taken, all action necessary to transfer all right, title and interest in and to the Purchased Assets to Analog Devices, Inc. prior to the Closing. (s) Opinions. Purchaser and Sub will have received favorable opinions of Seller's counsel, Hale and Dorr LLP and/or A&L Goodbody, with respect to the matters set forth in EXHIBIT J attached hereto. (t) Bulk Sale Compliance. Seller shall have fully complied with all bulk sales or bulk transfer notices and other requirements under the laws of all applicable jurisdictions and provided proof thereof to Purchaser. (u) Transaction Taxes. Purchaser shall have received proof of payment by Seller of all applicable Transaction Taxes, if any, except those imposed by the State of Colorado. The various certificates, documents, opinions and schedules deliverable at Closing by or on behalf of Seller are referred to herein as the "SELLER CLOSING DOCUMENTS". ARTICLE IX INDEMNIFICATION SECTION 9.01. Loss Defined; Indemnitees. For purposes of this Article IX, the term "LOSS" will mean and include any and all Liability, loss, damage, claim, expense, cost, fine, fee, penalty, obligation, injury or amounts paid in settlement, including, without limitation, those resulting from any and all claims, actions, suits, demands, assessments, investigations, judgments, orders, awards, arbitrations, settlements or other proceedings, together with reasonable costs and expenses, including the reasonable attorneys' and experts' fees, court costs, arbitration costs, filing fees and other legal costs and expenses relating thereto. As used in this Article IX, the term "PURCHASER INDEMNITEES" means and includes Purchaser, Sub and any present or future officer, director, employee, affiliate, stockholder or agent of Purchaser or Sub and its or their respective successors and assigns. As used in this Article IX, the term "SELLER INDEMNITEES" means and includes Seller and any present or future officer, director, employee, affiliate, stockholder or agent of Seller and its respective successors and assigns. SECTION 9.02. General Indemnification by Seller. Seller agrees, subject to the other terms, conditions and limitations of this Agreement (including the provisions of Section 9.06 hereof), to indemnify Purchaser, Sub and each of the other Purchaser Indemnitees against, and to 38 39 hold Purchaser, Sub and each of the other Purchaser Indemnitees harmless from, all Loss arising out of, resulting from, caused by or attributable to: (a) the failure of any representation or warranty of Seller contained in this Agreement (including any schedule or exhibit hereto), to be true and correct as of the Effective Date or as of the Closing Date or the failure of any representation or warranty contained in the Ancillary Agreements or the Seller Closing Documents to be true and correct as of the Closing Date; (b) the breach or violation by Seller of any covenant or agreement of Seller contained in this Agreement (including any schedule or exhibit hereto), the Ancillary Agreements or the Seller Closing Documents; (c) any of the Excluded Assets or any of the Excluded Liabilities or any other obligations or Liability of Seller not expressly assumed by Purchaser under this Agreement; (d) the operation or management of the Storage Products Business or the Business Assets at any time or times on or prior to the Closing Date (including without limitation any and all Taxes arising out of, or payable with respect to, Seller's business operations through the Closing Date) and any charges or actions brought by employees, agents or representatives of Seller arising out of or based upon events occurring on or prior to the Closing Date; (e) Liability for (or any Liability applicable to Purchaser, Sub or any other Purchaser Indemnitee as a result of) noncompliance with any bulk sales, bulk transfer, fraudulent conveyance or similar laws applicable to the transactions contemplated by this Agreement or any claim asserting that any transactions contemplated by this Agreement constitutes a fraudulent conveyance or any similar claim; (f) any demand, claim, debt, suit, cause of action, arbitration or other proceeding that is made or asserted by any third party arising out of any product or service that was sold, licensed or otherwise provided by Seller to third parties (either prior to, on or after the Closing); (g) any demand, claim, debt, suit, cause of action, arbitration or other proceeding made or asserted against Purchaser arising because of the failure to comply with any applicable bulk sale or similar asset transfer laws; (h) any (A) Foreign Employee Liabilities (including without limitation those arising under the Undertakings Law); or (B) demand, claim, debt, suit, cause of action, arbitration, investigation or other proceeding made or asserted by any Mandated Employee or any other employee or independent contractor of Seller, any Seller Subsidiary or any affiliate of Seller or any former employee or independent contractor of Seller, any Seller Subsidiary or any affiliate of Seller, that relates in any manner to any alleged, actual or constructive termination by Seller, any Seller Subsidiary or any affiliate of Seller of such person's employment or the services of such person, or that involves a claim of adverse employment action, discrimination, relocation, promotion, demotion, unequal pay or any other matter relating to the employment of such person by Seller, any Seller Subsidiary or any affiliate of Seller; (i) termination by Seller, any Seller Subsidiary or any affiliate of Seller of the employment of any of the Employees at any time prior to, on or after the Closing Date, severance 39 40 benefits related to any Employee's termination of employment with Seller, any Seller Subsidiary or any Seller affiliate, and any failure by Seller, any Seller Subsidiary or any Seller affiliate to pay or withhold any Taxes payable with respect to the employment by Seller, any Seller Subsidiary or any Seller affiliate of any Employee or any failure by Purchaser to hire such Employee; (j) any Transaction Taxes payable on or with respect to the purchase, sale, transfer or delivery of the Purchased Assets hereunder (other than those imposed by the State of Colorado); (k) any Encumbrance upon the Purchased Assets existing at the Closing or arising as a result of the transactions contemplated by this Agreement, without regard to the Seller Basket provided in Section 9.06(a); (l) the failure of the Tangible Assets delivered to Purchaser at Longmont, Colorado to conform to the Tangible Assets Schedule, without regard to the Seller Basket provided in Section 9.06(a); and (m) the failure of Seller to comply with any Environmental Law. SECTION 9.03 Infringement Indemnification by Seller. (a) Indemnity Obligation. Subject to Section 9.06, Seller agrees to indemnify Purchaser, Sub and each of the other Purchaser Indemnitees against, and to hold Purchaser, Sub and each of the other Purchaser Indemnitees harmless from, all Losses not exceeding the "Maximum Amount" (as defined below) that are payable to third parties arising out of, resulting from, caused by or attributable to any violation or infringement by the Products or the use of any Business Assets in the manner used by Seller prior to the Closing, of any copyright, mask work, trade secret, or other intellectual property or related right of any third party other than trademarks, but excluding any violation or infringement primarily based on (i) a modification of the Products or other Business Assets, other than a modification provided by Seller, if the violation or infringement would not have occurred but for the particular modification, (ii) a combination, other than a combination provided by Seller, of the Products, or components or elements of a Product, with other products, components, elements or technologies not provided by Seller, if the violation or infringement would not have resulted but for the particular combination, or (iii) which would not have resulted but for Purchaser's failure to implement a "Design Around" (as defined in that certain Design Letter, dated of even date herewith between Seller and Purchaser). "MAXIMUM AMOUNT" shall mean (A) the lesser of (1) Twenty Million Dollars ($20,000,000), less any amounts previously paid by Seller under Section 9.02, and (2) the total amount of all royalties paid or accrued for payment, or later accrued for payment under the Technology and Patent License Agreement, both before and after a Claim is made, (B) less any amounts previously paid by Seller to Purchaser under this Section 9.03. For clarification, the aggregate Maximum Amount payable under this Section 9.03 shall in no event exceed the amount of all royalties paid or accrued for payment, or later accrued for payment under the Technology and Patent License Agreement, both before and after a Claim is made. 40 41 (b) Infringed Patent Licenses. Upon the occurrence of a "Patent Indemnity Event" (defined below), Seller shall use diligent efforts, not to exceed commercially reasonable efforts, to obtain for Purchaser, at Seller's sole cost and expense not to exceed the Maximum Amount, a license ("3RD PARTY LICENSE") from the third party owner of any patent ("PATENT OWNER") that is the subject of the Patent Indemnity Event, granting Purchaser and its affiliates the right to manufacture, have manufactured, use, sell and import read channel and magneto resistive preamp Products for Storage Peripherals, and to grant sublicenses of any such rights. For purposes of this Agreement, "PATENT INDEMNITY EVENT" means the occurrence of any of the following events (including any combination of events): (i) A written claim of patent infringement by a Product is received from a third party and Purchaser's patent counsel determines that the claim is valid ("TYPE A INDEMNITY EVENT"); or (ii) A claim for injunctive relief has been sought against Purchaser, and Purchaser's patent counsel determines that injunctive relief is likely to be granted to a third party due to patent infringement by a Product ("TYPE B INDEMNITY EVENT"); or (iii) Injunctive relief due to a claim for patent infringement by a Product is granted to a third party ("TYPE C INDEMNITY EVENT"). If for any reason Purchaser does not obtain the 3rd Party License by the "Required License Date" (as defined below), then, at Purchaser's option, Purchaser may obtain the 3rd Party License directly from the Patent Owner and receive, promptly upon request to Seller, reimbursement ("FEE REIMBURSEMENT") from Seller. However, the aggregate Fee Reimbursement from all Patent Owners shall not exceed the Maximum Amount, nor shall the Fee Reimbursement include amounts, if any, paid to the Patent Owner for license rights in respect of intellectual property not infringed by the Products. If the 3rd Party License covers any such additional license rights, then the Fee Reimbursement shall be calculated as a fraction of the total 3rd Party License fees. Such fraction shall correspond to the proportional economic value of the intellectual property that is infringed by the Products (as compared to all intellectual property rights granted under the 3rd Party License). Purchaser may offset royalties under the Technology and Patent License Agreement against Fee Reimbursement amounts not yet received by Purchaser. "REQUIRED LICENSE DATE" means the date that the 3rd Party License is required, calculated as the earliest of (a) ninety (90) days after a Type A Indemnity Event, (b) sixty (60) days after a Type B Indemnity Event, and (c) thirty (30) days after a Type C Indemnity Event. (c) Design Around Abandonment. Seller shall have no indemnity obligation under Section 9.03(a) above for any violation or infringement referred to in that certain Design Letter if Purchaser has instructed engineers performing work on the Design Arounds pursuant to the R&D Services and Transition Support Agreement to abandon development ("ABANDONMENT INSTRUCTION") of applicable Design Arounds and the Design Arounds, if implemented by Purchaser, would have avoided the violation or infringement. An assignment of one or more engineers to particular tasks of relatively short duration (measured in terms of days) not related to Design Arounds development, or to perform a function that can be performed 41 42 contemporaneously with such engineer's Design Arounds development activities, will not be deemed to be an Abandonment Instruction. (d) .6 Micron and .35 Micron Product Patent Limitation. Seller shall have no indemnity obligation under Section 9.03(a) above for any patent violation or infringement that arises with respect to any product that is not a .6 micron or .35 micron product if the corresponding .6 micron and .35 micron Products do not violate or infringe such patent. SECTION 9.04. Indemnification by Purchaser. Purchaser agrees, subject to the other terms, conditions and limitations of this Agreement (including the provisions of Section 9.06 hereof), to indemnify Seller and each of the other Seller Indemnitees against, and to hold Seller and each of the other Seller Indemnitees harmless from, all Loss arising out of, resulting from, caused by or attributable to: (a) the failure of any representation or warranty of Purchaser contained in this Agreement (including any schedule or exhibit hereto), to be true and correct as of the Effective Date or as of the Closing Date or the failure of any representation or warranty contained in the Ancillary Agreements or the Purchaser Closing Documents to be true and correct as of the Closing Date; (b) the breach or violation by Purchaser of any covenant or agreement of Purchaser contained in this Agreement (including any schedule or exhibit hereto), the Ancillary Agreements or the Purchaser Closing Documents; (c) the operation of the Storage Products Business by Purchaser after the Closing Date; (d) any demand, claim, debt, suit, cause of action, arbitration or other proceeding (including, but not limited to, a warranty claim, a strict product liability claim or any other claim) that is made or asserted by any third party that relates to any product defects, including latent defects, of any product or service, including any of the Products, provided by Purchaser to any customer after Closing unless such Products are produced after the Closing Date and contain a design defect based on unmodified designs transferred as part of the Business Assets; and (e) any demand, claim, debt, suit, cause of action or proceeding made or asserted by any employee or independent contractor or any former employee or independent contractor of Purchaser, that relates in any manner to any termination after the Closing Date by Purchaser of a New Hire or any other matter relating to Purchaser's employment of a New Hire after the Closing Date; provided however, that nothing in this Section 9.04 shall impose on Purchaser any duty to indemnify Seller for any Excluded Liabilities. SECTION 9.05. Procedures for Indemnification. (a) As used herein, an "INDEMNIFIED PARTY" means a Purchaser Indemnitee seeking indemnification pursuant to Section 9.02 or Section 9.03 hereof or a Seller Indemnitee seeking indemnification pursuant to Section 9.04 hereof. The Indemnified Party agrees to give the other 42 43 party ("INDEMNITOR") prompt written notice of any event, or any claim, action, suit, demand, assessment, investigation, arbitration or other proceeding by or in respect of a third party (a "THIRD PARTY CLAIM") of which it has knowledge, for which such Indemnified Party is entitled to indemnification under this Article IX (including in any case copies of any summons, complaint or other pleading which may have been served on it and any written claim, demand, invoice, billing or other document evidencing or asserting the same). No delay on the part of an Indemnified Party in giving the Indemnitor notice of a Third Party Claim shall relieve the Indemnitor from any obligation hereunder unless (and then solely to the extent) that the Indemnitor is prejudiced thereby. (b) The Indemnitor will have the right, at its sole cost and expense, to defend the Indemnified Party against the Third Party Claim with counsel of the Indemnitor's choice that is reasonably satisfactory to the Indemnified Party so long as (i) the Indemnitor notifies the Indemnified Party in writing within ten (10) days after the Indemnified Party has given notice of the Third Party Claim that the Indemnitor intends to undertake such defense, (ii) the Indemnitor provides each Indemnified Party with evidence reasonably acceptable to the Indemnified Party that the Indemnitor will have the financial resources to defend against the Third Party Claim and fulfill its Indemnification obligations hereunder, (iii) the Third Party Claim involves only money damages and does not seek an injunction or other equitable relief, (iv) settlement of, or an adverse judgment with respect to, the Third Party Claim is not, in the good faith judgment of the Indemnified Party, likely to establish a precedential custom or practice materially adverse to the continuing business interests of the Indemnified Party, (v) the Indemnitor conducts the defense of the Third Party Claim actively and diligently; and (vi) the counsel chosen by the Indemnitor does not have any conflict of interest in representing the interests of the Indemnified Party. (c) So long as the Indemnitor is conducting the defense of the Third Party Claim in accordance with Section 9.05(b) above, (i) the Indemnified Party may retain separate co-counsel and participate in the defense of the Third Party Claim at its own cost and expense (except as provided below) and shall have the right to receive copies of all pleadings, notices and communications with respect to the Third Party Claim to the extent no privilege is thereby waived, (ii) the Indemnified Party may participate in settlement negotiations with respect to the Third Party Claim, and (iii) the Indemnitor will not consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim unless (A) each affected Indemnified Party consents thereto in writing (which consent will not unreasonably be withheld) or (B) the settlement, compromise or consent includes an unconditional release from all Liability with respect to the claim in favor of each affected Indemnified Party. Notwithstanding the foregoing, if an Indemnified Party is offered a written settlement proposal by a third party that has as its sole component the payment of money by the Indemnified Party and the Indemnitor recommends to the Indemnified Parties in writing that they accept such settlement proposal (the "SANCTIONED SETTLEMENT") and the Indemnified Parties refuse to accept such settlement proposal, in such event if the ultimate settlement terms agreed to by the Indemnified Party with such third party or the final monetary damages award against the Indemnified Parties after exhaustion of all appeals either referred to as (the "FINAL SETTLEMENT AMOUNT"), is greater than the amount of the Sanctioned Settlement, the Indemnified Party shall be responsible for the differential between the Final Settlement Amount and the Sanctioned Settlement and the Indemnitor's liability shall be limited to the amount specified in the Sanctioned Settlement. 43 44 (d) If the Indemnitor does not elect to assume control of or otherwise participate in the defense or settlement of any Third Party Claim, or if the Indemnitor does so elect but any of the conditions in Section 9.05(b) above is or becomes unsatisfied, or if the Indemnitor ceases to any time to actively defend the Third Party Claim, then, (i) the Indemnified Party may defend against and consent to the entry of any judgment or enter into any settlement with respect to the Third Party Claim, provided, however, that the Indemnitor (A) shall have the right to receive copies of all pleadings, notices and communications with respect to the Third Party Claim so long as the receipt of such documents by the Indemnitor does not affect any attorney-client privilege relating to the Indemnified Party, and (B) may participate in settlement negotiations with respect to the Third Party Claim and the Indemnified Party shall not enter into any settlement without the prior written consent of the Indemnitor (which consent shall not be unreasonably withheld), (ii) the Indemnitor will reimburse the Indemnified Party promptly and periodically for all costs and expenses incurred in defending against the Third Party Claim (including without limitation reasonable attorneys' and experts' fees and expenses and court and arbitration costs), and (iii) the Indemnitor will remain responsible for any Loss the Indemnified Party may suffer resulting from, arising out of, relating to or caused by the Third Party Claim to the fullest extent provided in this Article IX. SECTION 9.06. Limitations on Indemnification. (a) Limits on Seller Indemnification. Seller's liability to indemnify Purchaser and other Indemnified Parties for Loss under this Article IX shall not be subject to any limitation except as set forth below in clauses (i) and (ii) of this Section 9.06(a) or except as set forth in Section 9.03 with respect to infringement indemnification: (i) Seller shall not be required to provide indemnification under this Article IX unless and until the aggregate Loss for which one or more Purchaser Indemnitees seeks indemnification hereunder exceeds an aggregate of Two Hundred Fifty Thousand Dollars ($250,000) (the "SELLER BASKET"), in which event Seller shall be liable to indemnify the Purchaser Indemnitees for all Loss, including any Loss within the Seller Basket. (ii) The maximum aggregate Loss recoverable by Purchaser Indemnitees (considered together as a group) against Seller under this Article IX shall not exceed Twenty Million Dollars ($20,000,000) (the "SELLER CAP"). Notwithstanding the foregoing, Purchaser and any other Indemnified Party shall be entitled to recover any Loss arising from (i) fraud or willful misconduct on the part of Seller, (ii) the failure of any representation or warranty of Seller contained in Article VII to be true and correct as of the Closing or (iii) the rescission of or injunction against any transaction contemplated by this Agreement, in each case regardless of the Seller Basket and/or the Seller Cap provisions contained in this Section 9.06(a). (b) Limits on Purchaser Indemnification. Purchaser's liability to indemnify Seller Indemnitees for Loss under Section 9.04 shall be subject to the limitations as set forth below in clauses (i) and (ii): 44 45 (i) Purchaser shall not be required to provide indemnification under this Article IX unless and until the aggregate Loss for which one or more Seller Indemnitees seeks indemnification hereunder exceeds an aggregate of Two Hundred Fifty Thousand Dollars ($250,000) (the "PURCHASER BASKET"), in which event Purchaser shall be liable to indemnify the Seller Indemnitees for all Loss, including any Loss within the Purchaser Basket. (ii) The maximum aggregate Loss recoverable by Seller Indemnitees (considered together as a group) against Purchaser under this Article IX shall not exceed Five Million Dollars ($5,000,000) (the "PURCHASER CAP"). The Purchaser Basket and Purchaser Cap shall not apply to the failure by Purchaser to pay Seller the Development Fee or the consideration specified in Section 4 of the Technology and Patent License Agreement; provided, however, that the foregoing shall not prevent Purchaser from exercising the set off rights provided in Section 9.07. (c) Time Limits. Notwithstanding anything herein to the contrary, no claim for indemnification under this Article IX may be brought after the third (3rd) anniversary of the Closing Date; provided, however, that with respect to the representations and warranties of Seller contained in Sections 3.07, 3.17 and 3.19 of this Agreement and with respect to claims pursuant to the intellectual property indemnity provided in Section 9.03 above, a claim for indemnification under this Article IX may be brought until the fifth (5th) anniversary of the Closing Date or the end of the statutory period, whichever is longer. To preserve a claim for indemnification under this Article IX, an Indemnified Party need only provide written notice in reasonable detail of such claim to the Indemnitor prior to the expiration of the applicable time limit (if any) described in the preceding sentence; and if an Indemnified Party provides such notice prior to the expiration of such time limit, such Indemnified Party may pursue such claim for indemnification after the expiration of such time limit. SECTION 9.07. Setoff Rights. In addition to its foregoing rights under this Article IX, Purchaser and Sub may offset the amount of any Loss for which Purchaser and Sub are entitled to indemnification under this Article IX as a credit against Purchaser's and Sub's obligations under Article II hereof to pay Seller the Development Fee and to pay Seller amounts payable pursuant to any of the Ancillary Agreements, and Purchaser and Sub may effect such offset by withholding payment to Seller of the applicable amount from the Development Fee and/or from amounts payable to Seller pursuant to the Ancillary Agreements. - -Purchaser and Sub may set off a Loss under the preceding sentence even if the Basket is not yet exceeded. Purchaser shall give Seller written notice of its intent to withhold and set off any part of the Development Fee or amounts payable pursuant to the Ancillary Agreements and an opportunity for fifteen (15) days to object thereto in writing, provided that the basis of the objection is specified in detail. To ensure that Purchaser and Sub will be able to exercise its rights under this Section 9.07, Seller shall not, directly or indirectly, assign or transfer to any other person any right to receive any portion of the Development Fee or the amounts payable pursuant to the Ancillary Agreements. SECTION 9.08. No Limitation on Other Rights or Injunctive Relief. The foregoing provisions of Article IX, together with the other specific indemnifications and allocations of liability specified in other Sections or Articles of this Agreement and/or the Ancillary Agreements, are the sole remedy of an Indemnified Party for a breach of a representation, 45 46 warranty, covenant or agreement of the other party contained in this Agreement; provided, however, that nothing herein shall be deemed to restrict a party's ability to seek and obtain injunctive relief. ARTICLE X TERMINATION, AMENDMENT AND WAIVER SECTION 10.01. Termination. This Agreement may be terminated at any time prior to the Closing: (a) by the mutual written consent of Seller and Purchaser; or (b) by either Purchaser or Seller at any time prior to Closing, if the other commits a material breach of this Agreement that is not cured within ten (10) days after notice thereof; or (c) by either Seller or Purchaser, if the Closing shall not have occurred prior to May 2, 1998; provided, however, that the right to terminate this Agreement under this Section 10.01(c) shall not be available to any party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or shall have resulted in, the failure of the Closing to occur prior to such date; or (d) by either Seller or Purchaser if there shall have been instituted, pending or threatened (and not withdrawn) any action or proceeding by any governmental authority or administrative agency before any governmental authority, administrative agency or court of competent jurisdiction, or there shall be in effect any judgment, decree or order of any governmental authority, administrative agency or court of competent jurisdiction, in either case, seeking to prevent consummation of any of the transactions contemplated by this Agreement or the Ancillary Agreements, or seeking to prohibit or limit Purchaser or any of its subsidiaries from exercising all material rights and privileges pertaining to the Business Assets or the ownership, use or operation by Purchaser or any of its subsidiaries of all or a material portion of the Business Assets, or seeking to compel Purchaser or any of its subsidiaries to dispose of or hold separate all or any material portion of the Business Assets. SECTION 10.02. Effect of Termination. In the event of termination of this Agreement as provided in Section 10.01, this Agreement shall forthwith become void (excepting only those provisions hereof that by their terms survive the termination of this Agreement) and there shall be no liability on the part of any party hereto; provided that nothing herein shall relieve either party from liability for any willful breach hereof. SECTION 10.03. Waiver. At any time prior to the Closing, any party hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto, or (c) waive compliance with any of the agreements or conditions contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party to be bound thereby. 46 47 ARTICLE XI DISPUTE RESOLUTION SECTION 11.01. Management Negotiation. (a) Purchaser and Seller shall attempt to resolve disputes between the Purchaser and the Seller arising out of or in connection with this Agreement through good faith negotiations as provided herein. The parties agree that disputes shall be fully discussed by the functional representatives of Purchaser and the Seller involved in the dispute in an attempt to achieve a prompt resolution of such dispute. In the event that such dispute shall not be promptly resolved by the mutual agreement of the functional representatives of Purchaser and Seller, the dispute shall be submitted to senior management representatives of each of Purchaser and Seller. Such senior management representatives of Purchaser and Seller shall meet and fully discuss such dispute in an attempt to achieve a prompt resolution of the dispute. If such dispute is not promptly resolved by the mutual agreement of such senior management representatives of Purchaser and Seller, each of Purchaser and Seller shall be free to exercise any of the remedies available to it (i) pursuant to the terms of this Agreement or (ii) otherwise at law or in equity. (b) Purchaser and Seller acknowledge that, from time to time, certain material disputes arising out of or in connection with this Agreement may objectively require immediate resolution. Accordingly, any such dispute may, at the option of either the Purchaser or the Seller, be processed through an abbreviated mediation process. Such abbreviated mediation process shall entail submitting any such dispute to the senior management representatives of each of the Purchaser and Seller designated by each of the Purchaser and the Seller for a prompt and expeditious resolution. In the event that a prompt and expeditious resolution of such dispute is not achieved through the mutual agreement of such senior management representatives of the Purchaser and the Seller, each of Purchaser and Seller shall be free to exercise any of the remedies available to it (i) pursuant to the terms of this Agreement or (ii) otherwise at law or in equity. (c) Each of Purchaser and Seller agrees to act reasonably and in good faith in connection with all matters arising out of or in connection with this Agreement that are submitted to the mediation process set forth in this Article XI. SECTION 11.02. Waiver of Jury Trial. The parties hereby waive trial by jury in any litigation in any court with respect to, in connection with, or arising out of this Agreement, the Ancillary Agreements or the transactions contemplated thereby. ARTICLE XII GENERAL PROVISIONS SECTION 12.01. Expenses. All costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred. 47 48 SECTION 12.02. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given or made (and shall be deemed to have been duly given or made upon receipt) by delivery in person, by courier service, by cable, by telecopy, by telegram, by telex or by registered or certified mail (postage prepaid, return receipt requested) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): (a) if to Seller: Analog Devices, Inc. Three Technology Way Norwood, MA 02062-9106 Attention: President and General Counsel Telecopy: (781) 461-3491 with a copy to: Hale and Dorr LLP 60 State Street Boston, MA 02109 Attention: Paul P. Brountas, Esq. Telecopy: (617) 526-5000 (b) if to Purchaser or Sub: Adaptec, Inc. 691 South Milpitas Boulevard Milpitas, CA 95035 Attention: President and General Counsel Telecopy: (408) 957-7137 with a copy to: Fenwick & West LLP Two Palo Alto Square Palo Alto, CA 94306 Attention: Dennis R. DeBroeck, Esq. Timothy A. Covington, Esq. Telecopy: (650) 494-1417 SECTION 12.03. Public Announcements. Except as may otherwise be required by law, neither party shall make or cause to be made any public announcements in respect of this Agreement or the transactions contemplated herein or otherwise communicate with any news media without the prior written consent of the other party. Upon execution of this Agreement the parties shall issue a joint press release. SECTION 12.04. Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 48 49 SECTION 12.05. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the greatest extent possible. SECTION 12.06. Entire Agreement. This Agreement, the Ancillary Agreements and the Purchase Price Allocation Agreement constitute the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersede all prior agreements and undertakings with respect to the subject matter hereof, both written and oral. Upon the effectiveness of the Closing, the Existing Confidentiality Agreement shall terminate. SECTION 12.07. Assignment. This Agreement shall not be assigned by Purchaser or Seller without the prior written consent of the non-assigning party; provided, however, that Purchaser and/or Sub may assign all or a portion of its rights and obligations hereunder to one or more wholly-owned subsidiaries or affiliates of Purchaser. SECTION 12.08. No Third-Party Beneficiaries. This Agreement is for the sole benefit of the parties hereto and their permitted assigns and nothing herein, express or implied, is intended to or shall confer upon any other person or entity any legal or equitable right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. SECTION 12.09. Amendment; Waiver. This Agreement may not be amended or modified except by an instrument in writing signed by Seller and Purchaser (which instrument will bind Sub). Waiver of any term or condition of this Agreement shall only be effective if in writing and shall not be construed as a waiver of any subsequent breach or waiver of the same term or condition, or a waiver of any other term or condition of this Agreement. SECTION 12.10. Governing Law; Jurisdiction and Venue. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of California applicable to contracts executed in and to be performed by residents of California within that State. Seller consents to submit to the jurisdiction of any federal or state court located in the State of California and agrees not to object to venue in the federal or state courts located in Santa Clara County, California. The provisions of the U.N. Convention on Contracts for the International Sale of Goods shall not apply to this Agreement. SECTION 12.11. Construction of "Seller". Except as the context otherwise requires, the term "Seller", wherever used in this Agreement, shall be deemed to refer to each, any and/or all of Analog Devices, Inc. and each Seller Subsidiary who owns or holds rights to any of the Purchased Assets or Licensed Assets as of the Effective Date. SECTION 12.12. Counterparts. This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when 49 50 executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. [REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK] 50 51 IN WITNESS WHEREOF, Seller, Purchaser and Sub have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. "SELLER" "PURCHASER" ANALOG DEVICES, INC. ADAPTEC, INC. By: [SIG] By: /s/ F. GRANT SAVIERS Name: Name: F. Grant Saviers Title: V.P. Finance and CFO Title: Chairman, President & CEO "SUB" ADAPTEC SINGAPORE MFG. (S) PTE. LTD. By: /s/ F. GRANT SAVIERS Name: F. Grant Saviers Title: Director [SIGNATURE PAGE TO ASSET ACQUISITION AGREEMENT] 51 EX-2.7 3 AGREEMENT AND PLAN OF REORGANIZATION 1 EXHIBIT 2.7 AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG ADAPTEC, INC., RIDGE TECHNOLOGIES, INC. AND RDS ACQUISITION CORP. MAY 21, 1998 2 TABLE OF CONTENTS
PAGE ---- 1. Certain Definitions......................................................................1 2. The Merger...............................................................................2 2.1 Merger; Effective Time of the Merger..............................................2 2.2 Closing...........................................................................3 2.3 Effect of the Merger..............................................................3 2.4 Tax-Free Reorganization...........................................................3 3. Effect of Merger on the Capital Stock of the Constituent Corporations; Exchange of Certificates.................................................................3 3.1 Exchange of Stock.................................................................3 3.2 Fractional Shares.................................................................4 3.3 Ridge Capital Stock Owned by Adaptec or Ridge.....................................4 3.4 Capital Stock of Merger Sub.......................................................4 3.5 Exchange of Certificates..........................................................4 3.6 Escrow Agreement..................................................................5 3.7 Stock Option Plan.................................................................5 4. Securities Act Compliance................................................................6 4.1 Securities Act Exemption..........................................................6 4.2 Stock Restrictions................................................................6 5. Representations and Warranties of Ridge..................................................6 5.1 Organization, Qualification, and Corporate Power..................................6 5.2 Authorization.....................................................................7 5.3 Capitalization....................................................................7 5.4 Noncontravention..................................................................7 5.5 Fees..............................................................................8 5.6 Financial Statements..............................................................8 5.7 Subsidiaries......................................................................8 5.8 Title to Assets...................................................................8 5.9 Events Subsequent to Fiscal Period End............................................8 5.10 Undisclosed Liabilities..........................................................11 5.11 Legal Compliance.................................................................11 5.12 Tax Matters......................................................................11 5.13 Properties.......................................................................12 5.14 Intellectual Property............................................................13 5.15 Tangible Assets..................................................................14 5.16 Inventory........................................................................14
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PAGE ---- 5.17 Contracts........................................................................14 5.18 Notes and Accounts Receivable....................................................16 5.19 Power of Attorney................................................................16 5.20 Insurance........................................................................16 5.21 Litigation.......................................................................17 5.22 Product Warranty.................................................................17 5.23 Product Liability................................................................17 5.24 Product Liability................................................................17 5.25 Guaranties.......................................................................21 5.26 Environment, Health, and Safety..................................................21 5.27 Certain Business Relationships With Ridge........................................23 5.28 No Adverse Developments..........................................................23 5.29 Full Disclosure..................................................................23 6. Representations and Warranties of Adaptec and Merger Sub................................23 6.1 Organization, Qualification and Corporate Power..................................24 6.2 Capitalization...................................................................24 6.3 Authorization. ..................................................................24 6.4 Noncontravention.................................................................25 6.5 SEC Filings; Financial Statements................................................25 6.6 No Undisclosed Liabilities.......................................................26 6.7 Absence of Litigation............................................................26 6.8 Information Statement............................................................26 6.9 Full Disclosure..................................................................26 6.10 Adaptec Common Stock.............................................................26 6.11 No Material Adverse Change.......................................................26 6.12 Material Agreements..............................................................27 7. Pre-Closing Covenants...................................................................27 7.1 General..........................................................................27 7.2 Notices and Consents.............................................................27 7.3 Operation of Business............................................................27 7.4 Preservation of Business.........................................................27 7.5 Access to Information............................................................28 7.6 Notice of Developments...........................................................28 7.7 Amendment to Ridge Certificate of Incorporation..................................28 7.8 Stockholder's Agreements.........................................................28 7.9 Employment Agreements............................................................29 7.10 Preparation of the Information Statement.........................................29 7.11 Solicitation of Written Consents. ..............................................29
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PAGE ---- 7.12 Exclusivity......................................................................29 7.13 Options..........................................................................29 8. Additional Agreements...................................................................30 8.1 General..........................................................................30 8.2 Litigation Support...............................................................30 8.3 Transition.......................................................................30 8.4 Ridge Employees..................................................................30 8.5 S-3 Registration.................................................................30 8.6 Assumption of Options............................................................31 9. Conditions to Obligation to Close.......................................................32 9.1 Conditions to Adaptec's Obligation to Close......................................32 9.2 Conditions to Ridge's Obligation.................................................33 10. Survival of Representations, Warranties and Covenants; Indemnification..................35 10.1 Escrow Fund......................................................................35 10.2 Survival.........................................................................35 10.3 Indemnification Provisions for Benefit of Adaptec................................35 10.4 Limitations on Indemnification Claims............................................35 10.5 Procedure for Indemnification Claims; Matters Involving Third Parties............36 11. Termination.............................................................................37 11.1 Termination of the Agreement.....................................................37 11.2 Effect of Termination............................................................38 12. Miscellaneous...........................................................................38 12.1 Press Releases and Public Announcements..........................................38 12.2 No Third-Party Beneficiaries.....................................................38 12.3 Entire Agreement.................................................................38 12.4 Succession and Assignment........................................................38 12.5 Counterparts.....................................................................39 12.6 Headings.........................................................................39 12.7 Notices..........................................................................39 12.8 Governing Law....................................................................40 12.9 Forum Selection; Consent to Jurisdiction.........................................40 12.10 Amendments and Waivers...........................................................40
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PAGE ---- 12.11 Severability.....................................................................40 12.12 Expenses.........................................................................40 12.13 Construction.....................................................................41 12.14 Incorporation of Exhibits and Schedules..........................................41 12.15 Ridge Stockholders' Representatives..............................................41 12.16 Attorneys' Fees..................................................................42 13. Location of Definitions.................................................................42
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PAGE ---- EXHIBITS Exhibit 3.6 Form of Escrow Agreement Exhibit 5 Ridge Disclosure Schedule Exhibit 6 Adaptec Disclosure Schedule Exhibit 7.8(a) Form of Stockholders Agreement Exhibit 7.8(b) List of Senior Employees Exhibit 7.9(a) List of Key Employees Exhibit 7.9(b) Form of Employment Agreement Exhibit 9.1(h) Form of Opinion of Counsel for Ridge Exhibit 9.1(m) Form of General Release Exhibit 9.2(f) Form of Opinion of Counsel for Adaptec
-v- 7 AGREEMENT AND PLAN OF REORGANIZATION This Agreement and Plan of Reorganization (the "Agreement") is entered into as of May 21, 1998, by and among ADAPTEC, INC., a Delaware corporation ("Adaptec"), RIDGE TECHNOLOGIES, INC., a Delaware corporation ("Ridge"), and RDS ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of Adaptec ("Merger Sub"). Adaptec, Ridge and Merger Sub are sometimes referred to herein individually as a "Party" and collectively as the "Parties." RECITALS A. Pursuant to the terms and subject to the conditions of this Agreement and in accordance with the Delaware General Corporation Law, the shares of Common Stock and Preferred Stock of Ridge, issued and outstanding immediately prior to the effective time of the Merger will be converted into shares of Common Stock of Adaptec and all outstanding stock options of Ridge shall be converted into stock options of Adaptec. B. The Parties desire to enter into this Agreement for the purpose of setting forth certain representations, warranties and covenants made by each to the other as an inducement to the execution and delivery of this Agreement, and to serve as conditions precedent to the consummation of the merger of Merger Sub into Ridge. C. The respective Boards of Directors of Adaptec, Ridge and Merger Sub have approved and adopted this Agreement, and the agreement is intended to be a plan of reorganization under the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended; NOW, THEREFORE, in consideration of these premises and of the mutual agreements, representations, warranties and covenants herein contained, the parties hereto do hereby agree as follows: AGREEMENT 1. Certain Definitions. As used in this Agreement the following terms have the following meanings (terms defined in the singular to have a correlative meaning when used in the plural and vice versa). Certain other terms are defined in the text of this Agreement, the location of which is set forth in Section 13 hereof. "Affiliate" of a Person means any other Person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with such Person. 8 "Business Condition" means the assets, liabilities, properties, business, financial condition, operations or results of operations of such corporate entity. "Intellectual Property" means (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, trade names, and corporate names, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, drawings, specifications, customer and supplier lists, pricing and cost information, financial information, and business and marketing plans and proposals), (e) all computer software (including data and related documentation), (f) all other proprietary rights relating to the foregoing, and (g) all copies and tangible embodiments thereof (in whatever form or medium). "Material Adverse Effect" shall mean a material adverse effect on the Business Condition of the parent corporation and its subsidiaries. "Ordinary Course of Business" means the ordinary course of business consistent with past custom and practice (including with respect to quantity and frequency). "Person" means an individual, a partnership, a corporation, an association, a joint stock company, a trust, a joint venture, an unincorporated organization, or a governmental entity (or any department, agency, or political subdivision thereof). "Security Interest" means any mortgage, pledge, lien, encumbrance, charge, or other security interest, other than (a) mechanic's, materialmen's, and similar liens, (b) liens for taxes not yet due and payable, (c) purchase money liens and liens securing rental payments under capital lease arrange- ments, and (d) other liens arising in the Ordinary Course of Business and not incurred in connection with the borrowing of money. 2. The Merger. 2.1 Merger; Effective Time of the Merger. Subject to the terms and conditions of this Agreement, Merger Sub will be merged with and into Ridge (the "Merger") in accordance with the Delaware General Corporation Law (the "DGCL"). In accordance with the provisions of this Agreement, a certificate of merger in such form as is required by, and executed in accordance with, the DGCL, shall be filed with the Delaware Secretary of State in accordance with the DGCL on the Closing Date (as defined in Section 2.2) and each issued and outstanding share of common stock, par value $0.001 per share, of Ridge ("Ridge Common Stock") and each issued and outstanding share of preferred stock, par value $0.001 per share, of Ridge ("Ridge Preferred Stock") except those shares of Ridge Preferred Stock which are held by Adaptec, shall be converted into shares of Common Stock, par value $0.001 per share, of Adaptec ("Adaptec Common Stock") in the manner -2- 9 contemplated by Section 3 hereof. The Merger shall become effective at the time of the filing of such certificate of merger with the Delaware Secretary of State (the date of such filing being hereinafter referred to as the "Effective Date of the Merger" and the time of such filing being hereinafter referred to as the "Effective Time of the Merger"). 2.2 Closing. The closing of the Merger (the "Closing") will take place as soon as practicable on the first business day after satisfaction or waiver of the latest to occur of the conditions set forth in Section 9 (the "Closing Date"), at the offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page Mill Road, Palo Alto, California 94304-1050, unless a different date or place is agreed to by the Parties. 2.3 Effect of the Merger. At the Effective Time of the Merger, (i) the separate existence of Merger Sub shall cease and Merger Sub shall be merged with and into Ridge (Ridge and Merger Sub are sometimes referred to herein as the "Constituent Corporations" and Ridge after the Merger is sometimes referred to herein as the "Surviving Corporation"), (ii) the Certificate of Incorporation of Merger Sub shall be the Certificate of Incorporation of the Surviving Corporation, (iii) the Bylaws of Merger Sub shall be the Bylaws of the Surviving Corporation, (iv) the initial directors of Merger Sub shall be the directors of the Surviving Corporation until their respective successors are duly elected or appointed and qualified, (v) the initial officers of Merger Sub shall be the officers of the Surviving Corporation until their respective successors are duly appointed and (vi) the Merger shall, from and after the Effective Time of the Merger, have all the effects provided by applicable law. 2.4 Tax-Free Reorganization. The Merger is intended to qualify as a tax free reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). 3. Effect of Merger on the Capital Stock of the Constituent Corporations; Exchange of Certificates. 3.1 Exchange of Stock. As of the Effective Time of the Merger, each share of Ridge Common Stock and Ridge Preferred Stock that is issued and outstanding immediately prior to the Effective Time of the Merger (other than shares owned by Adaptec) shall, by virtue of the Merger and without any action on the part of the Ridge stockholders, be converted into that number of shares of Adaptec Common Stock as is determined by (i) dividing Twenty One Million Two Hundred Thousand dollars ($21,200,000) by the Average Closing Price (as defined below) and (ii) dividing the result by the total number of issued and outstanding shares of Ridge Common Stock and Ridge Preferred Stock which are not held by Adaptec. For purposes hereof, the "Average Closing Price" shall mean the average of the last sale prices of a share of Adaptec Common Stock for the five most recent days that the Adaptec Common Stock has traded ending on the trading day immediately prior to the Effective Time of the Merger, as such prices are reported on the Nasdaq National Market. -3- 10 3.2 Fractional Shares. No fractional share of Adaptec Common Stock shall be issued in the Merger. In lieu thereof, each holder of shares of Ridge Common Stock or Ridge Preferred Stock who would otherwise be entitled to receive a fraction of a share of Adaptec Common Stock shall receive from Adaptec an amount of cash (rounded to the nearest whole cent) equal to the product of the fraction of a share of Adaptec Common Stock to which such holder would otherwise be entitled, multiplied by the Average Closing Price of one share of Adaptec Common Stock. For the purpose of determining fractional shares, all shares of Adaptec Common Stock to be issued to any Ridge stockholder shall be aggregated. 3.3 Ridge Capital Stock Owned by Adaptec or Ridge. At the Effective Time, (i) all shares of Ridge Common Stock or Ridge Preferred Stock that are owned by Ridge as treasury stock shall be canceled and extinguished without any conversion thereof, and (ii) each share of Ridge Common Stock or Ridge Preferred Stock owned by Adaptec or any direct or indirect wholly owned subsidiary of Adaptec immediately prior to the Effective Time shall remain outstanding and shall become one fully paid and assessible share of the Surviving Corporation. 3.4 Capital Stock of Merger Sub. As of the Effective Time of the Merger, each share of the capital stock of Merger Sub that is issued and outstanding immediately prior to the Effective Time of the Merger shall, by virtue of the Merger, be converted into and become one fully-paid and nonassessable share of common stock, par value $0.001 per share, of the Surviving Corporation. 3.5 Exchange of Certificates. (a) Exchange Agent. Prior to the Closing Date, Adaptec shall appoint ChaseMellon Shareholder Services to act as the exchange agent (the "Exchange Agent") in the Merger. (b) Adaptec to Provide Adaptec Common Stock. Promptly after the Effective Date of the Merger (but in no event later than ten business days thereafter), Adaptec shall make available for exchange in accordance with this Section 3, through such reasonable procedures as Adaptec may adopt, the shares of Adaptec Common Stock issuable pursuant to Section 3.1 in exchange for outstanding shares of Ridge Common Stock and Ridge Preferred Stock. (c) Exchange Procedures. Within ten days after the Effective Date of the Merger, the Exchange Agent shall mail to each holder of record of a certificate or certificates, which immediately prior to the Effective Time of the Merger represented outstanding shares of Ridge Common Stock or Ridge Preferred Stock (the "Certificates") whose shares were converted into Adaptec Common Stock pursuant to Section 3.1 hereof, (i) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent and which shall be in such form and have such other provisions as Adaptec and Ridge may reasonably specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing Adaptec Common Stock. Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as -4- 11 may be appointed by Adaptec with the reasonable concurrence of the former Ridge stockholders, together with such letter of transmittal, duly executed, the holder of such Certificate shall be entitled to receive in exchange therefor a certificate representing the number of shares of Adaptec Common Stock to which the holder of Ridge Common Stock or Ridge Preferred Stock is entitled pursuant to Section 3.1 hereof. The Certificate so surrendered shall forthwith be canceled. In the event of a transfer of ownership of Ridge Common Stock or Ridge Preferred Stock which is not registered on the transfer records of Ridge, a certificate representing the appropriate number of shares of Adaptec Common Stock may be delivered to a transferee if the Certificate representing such Ridge Common Stock or Ridge Preferred Stock is presented to the Exchange Agent and accompanied by all documents required to evidence and effect such transfer and to evidence that any applicable stock transfer taxes have been paid. From and after the Effective Time of the Merger, until surrendered as contemplated by this Section 3.4, each Certificate shall be deemed for all corporate purposes to evidence the number of shares of Adaptec Common Stock into which the shares of Ridge Common Stock or Ridge Preferred Stock represented by such Certificate have been converted and the holder thereof shall have the rights with respect thereto as provided by the DCGL. (d) No Further Ownership Rights in Capital Stock of Ridge. All Adaptec Common Stock delivered upon the surrender for exchange of shares of Ridge Common Stock or Ridge Preferred Stock in accordance with the terms hereof shall be deemed to have been delivered in full satisfaction of all rights pertaining to such Ridge Common Stock or Ridge Preferred Stock. There shall be no further registration of transfers on the stock transfer books of the Surviving Corporation of Ridge Common Stock or Ridge Preferred Stock which were outstanding immediately prior to the Effective Date of the Merger. If, after the Effective Date of the Merger, Certificates are presented to the Surviving Corporation for any reason, they shall be canceled and exchanged as provided in this Section 3.5, provided that the presenting holder is listed on Ridge's stockholder list as a holder of Ridge Common Stock or Ridge Preferred Stock. 3.6 Escrow Agreement. At the Closing, the Indemnifying Stockholders (as defined in Section 10.1) shall execute and deliver an escrow agreement (the "Escrow Agreement") substantially in the form attached hereto as Exhibit 3.6. Pursuant to the Escrow Agreement, 20% of the shares to be issued to the Indemnifying Stockholders shall be placed in escrow for the purpose of securing the indemnity obligations of the Indemnifying Stockholders with respect to the representations and warranties set forth in Section 5 hereof, subject to the terms, conditions and limitations specified in Section 10 hereof. 3.7 Stock Option Plan. At the Effective Time of the Merger, all options to purchase Ridge Common Stock then outstanding under the Ridge 1997 Stock Option Plan (the "Ridge Stock Option Plan") or held by the Willow Trust, The Jonathan Mark Jackson Living Revocable Trust est. 8/28/97, The Jackson Education Trust, The Robert J. Graham 1997 Irrevocable Trust and the Santa Clara Group Trust (the "Trusts") shall be assumed by Adaptec in accordance with Section 8.6 hereof. -5- 12 4. Securities Act Compliance. 4.1 Securities Act Exemption. The issuance of the Adaptec Common Stock in the Merger shall not be registered under the Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the exemption contained in Section 4(2) of the Securities Act. 4.2 Stock Restrictions. (a) The certificates representing the shares of Adaptec Common Stock issued pursuant to this Agreement shall bear a restrictive legend (and stop transfer orders shall be placed against the transfer thereof with Adaptec's transfer agent), which legend shall be removed in connection with the registration of such shares pursuant to Section 8.5, stating substantially as follows: "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD, OFFERED FOR SALE, TRANSFERRED, ASSIGNED OR OTHERWISE DISPOSED OF EXCEPT (I) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (II) IN COMPLIANCE WITH RULE 144 OR (III) PURSUANT TO AN OPINION OF COUNSEL FOR RIDGE THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933." (b) The certificates issued to Robert J. Graham ("Graham") and to the individuals listed in Exhibit 7.8(b) (the "Key Employees") shall also include the legends contemplated by the Stockholder's Agreement (as defined below). 5. Representations and Warranties of Ridge. Ridge hereby represents and warrants to Adaptec and Merger Sub that the statements contained in this Section 5 are true and correct as of the date of this Agreement, except as set forth in the disclosure schedule delivered by Ridge to Adaptec on the date hereof (and initialed by Adaptec and Ridge), a copy of which is attached hereto as Exhibit 5 (referred to herein as the "Ridge Disclosure Schedule"). The Ridge Disclosure Schedule will be arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this Section 5. 5.1 Organization, Qualification, and Corporate Power. Ridge is a corporation duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation. Ridge is duly authorized to conduct business and is in good standing under the laws of each jurisdiction where such qualification is required. Ridge has full corporate power and authority, and has all necessary licenses and permits, to carry on the businesses in which it is engaged and to own and use the properties owned and used by it. Section 5 of the Ridge Disclosure Schedule lists the directors and officers of Ridge. -6- 13 5.2 Authorization. Ridge has full power and authority to execute and deliver this Agreement, and, subject to receipt of the requisite approvals of its stockholders, to consummate the transactions contemplated hereunder and to perform its obligations hereunder and no other proceedings on the part of Ridge are necessary to authorize the execution, delivery and performance of this Agreement. This Agreement constitutes the valid and legally binding obligation of Ridge, enforceable against Ridge in accordance with its terms and conditions, except as such enforceability may be limited by (i) bankruptcy laws and other similar laws affecting creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law. Ridge need not give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement. 5.3 Capitalization. (a) Capital Stock. The entire authorized capital stock of Ridge immediately prior to the Effective Time of the Merger will consist of 15,000,000 shares of Ridge Common Stock, 2,075,392 of which are issued and outstanding, and 2,542,809 shares of Ridge Preferred Stock, consisting of 1,000,000 shares designated as Series B Preferred Stock, none of which are issued and outstanding and 1,542,809 shares designated as Series C Preferred Stock, 1,542,809 of which are issued and outstanding. All of the issued and outstanding shares of capital stock have been duly authorized, are validly issued, fully paid, and non-assessable, and are held of record by the respective stockholders as set forth in Section 5.3(a) of the Ridge Disclosure Schedule. All of the outstanding shares of Ridge's capital stock have been offered, issued and sold by Ridge in compliance with applicable Federal and state securities laws. (b) No Other Rights or Agreements. Section 5.3(b) of the Ridge Disclosure Schedule lists all of the holders of options, warrants, purchase rights, subscription rights, conversion rights, exchange rights and other rights that could require Ridge to issue, sell or otherwise cause to become outstanding any of its capital stock (the "Stock Rights"), and if determinable, the number of shares of Ridge Common Stock subject to such Stock Rights. Except as set forth in Section 5.3(b) of the Ridge Disclosure Schedule, there are no other outstanding or authorized Stock Rights. There are no outstanding or authorized stock appreciation, phantom stock, profit participation, or similar rights with respect to Ridge. To the knowledge of Ridge, there are no voting trusts, proxies, or other agreements or understandings with respect to the voting of the capital stock of Ridge. 5.4 Noncontravention. Neither the execution and the delivery of this Agreement by Ridge nor the consummation of the transactions contemplated hereby, will (A) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Ridge is subject or any provision of its charter or bylaws, or (B) (i) conflict with, (ii) result in a breach of, (iii) constitute a default under, (iv) result in the acceleration of, (v) create in any party the right to accelerate, terminate, modify, or cancel, or (vi) require any notice under, any agreement, contract, lease, license, instrument, franchise permit or other arrangement to which Ridge is a party or by which it is bound -7- 14 or to which any of its assets is subject (or result in the imposition of any Security Interest upon any of its assets). 5.5 Fees. Ridge has no liability or obligation to pay any fees or commissions to any broker, finder, agent or attorney with respect to the transactions contemplated by this Agreement, except as described in Section 5.5 of the Ridge Disclosure Schedule. 5.6 Financial Statements. Section 5.6 of the Ridge Disclosure Schedule contains the unaudited balance sheet, statement of operations and statement of cash flows (the "Financial Statements") as of and for the period from its inception through March 31, 1998 (the "Fiscal Period End") for Ridge. The Financial Statements (including the notes thereto) have been prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods covered thereby ("GAAP") and present fairly the financial condition of Ridge as of such dates and the consolidated results of operations of Ridge as for such periods; provided, however, that the Financial Statements lack footnotes and certain other presentation items and are subject to normal year end adjustments. The books of account of Ridge reflect as of the dates shown thereon substantially all items of income and expenses, and all assets, liabilities and accruals of Ridge required to be reflected therein, in accordance with GAAP. 5.7 Subsidiaries. Ridge has no subsidiaries. 5.8 Title to Assets. Ridge has good and marketable title to, or a valid leasehold interest in or license to use, the properties and assets (including, without limitation, all Intellectual Property material to the conduct of its business) used by it, located on its premises, or shown on the balance sheet contained within the Financial Statements (the "Balance Sheet") or acquired after the date thereof, free and clear of all Security Interests. No Person other than Ridge will own at the time of the Closing any assets or properties currently utilized in or reasonably necessary to the operations or business of Ridge or situated on any of the premises of Ridge (other than the lessors of assets subject to leases and the licensors of rights subject to licenses.) There are no existing contracts, agreements, commitments or arrangements with any Person to acquire any of the assets or properties of Ridge (or any interest therein) except for this Agreement and those contracts entered into during the Ordinary Course of Business for the sale of products and services to customers of Ridge. 5.9 Events Subsequent to Fiscal Period End. Since the Fiscal Period End, there has not been any material adverse change in the Business Condition of Ridge. Without limiting the generality of the foregoing, since that date: (a) Ridge has not sold, leased, transferred, or assigned any assets or properties, tangible or intangible, except in the Ordinary Course of Business; (b) except for those agreements, contracts, leases and commitments identified in Section 5.13, Section 5.14 or Section 5.17 of the Ridge Disclosure Schedule, Ridge has not entered into, assumed or become bound under or obligated by any agreement, contract, lease or commitment (collectively, a "Ridge Agreement") or extended or modified the terms of any Ridge Agreement -8- 15 which (i) involves the payment of greater than $10,000 per annum or which extends for more than one (1) year, (ii) involves any payment or obligation to any Affiliate of Ridge, (iii) involves the sale of any material assets, (iv) involves any OEM relationship, or (v) involves any exclusive or extraordinary license of Ridge's technology; (c) no party (including Ridge) has accelerated, terminated, made modifications to, or canceled any agreement, contract, lease, or license to which Ridge is a party or by which it is bound and Ridge has not modified, canceled or waived or settled any debts or claims held by it, or waived or settled any rights or claims of a substantial value; (d) none of the assets of Ridge, tangible or intangible, has become subject to any Security Interest; (e) Ridge has not made any capital expenditures except in the Ordinary Course of Business and not exceeding $10,000 in the aggregate of all such capital expenditures; (f) Ridge has not made any capital investment in, or any loan to, any other Person; (g) Ridge has not created, incurred, assumed, prepaid or guaranteed any indebtedness for borrowed money and capitalized lease obligations, or extended or modified any existing indebtedness; (h) Ridge has not granted any license or sublicense of any rights under or with respect to any Intellectual Property, except to customers in the Ordinary Course of Business; (i) there has been no change made or authorized in the charter or bylaws of Ridge; (j) Ridge has not issued, sold, or otherwise disposed of any of its capital stock, or granted any options, warrants, or other rights to purchase or obtain (including upon conversion, exchange, or exercise) any of its capital stock; (k) Ridge has not declared, set aside, or paid any dividend or made any distribution with respect to its capital stock (whether in cash or in kind) or redeemed, purchased, or otherwise acquired any of its capital stock; (l) Ridge has not experienced any damage, destruction, or loss (whether or not covered by insurance) to its property in excess of $10,000 in the aggregate of all such damage, destruction and losses; (m) Ridge has not suffered any repeated, recurring or prolonged shortage, cessation or interruption of inventory shipments, supplies or utility services; -9- 16 (n) Ridge has not made any loan to, or entered into any other transaction with, or paid any bonuses in excess of an aggregate of $10,000 to, any of its Affiliates, directors, officers, or employees or their Affiliates, and, in any event, any such transaction was on fair and reasonable terms no less favorable to Ridge than would be obtained in a comparable arm's length transaction with a Person which is not such a director, officer or employee or Affiliate thereof; (o) Ridge has not entered into any employment contract or collective bargaining agreement, written or oral, or modified the terms of any existing such contract or agreement; (p) Ridge has not granted any increase in the base compensation of any of its directors or officers, or, except in the Ordinary Course of Business, any of its other employees; (q) Ridge has not adopted, amended, modified, or terminated any bonus, profit-sharing, incentive, severance, or other plan, contract, or commitment for the benefit of any of its directors, officers, or employees (or taken any such action with respect to any other Employee Benefit Plan); (r) Ridge has not made any other change in employment terms for any of its directors or officers, or any material change in employment terms for any of its other employees; (s) Ridge has not suffered any material adverse change or any threat of any material adverse change in its relations with, or any loss or threat of loss of, any of its major customers, distributors or dealers; (t) Ridge has not suffered any material adverse change or any threat of any material adverse change in its relations with, or any loss or threat of loss of, any of its major suppliers; (u) Ridge has not received notice or had knowledge of any actual or threatened labor trouble or strike, or any other occurrence, event or condition of a similar character; (v) Ridge has not changed any of the accounting principles followed by it or the method of applying such principles; (w) Ridge has not made a change in any of its banking or safe deposit arrangements; (x) Ridge has not entered into any material transaction other than in the Ordinary Course of Business; and (y) Ridge has not committed to any of the foregoing. -10- 17 5.10 Undisclosed Liabilities. Ridge has no liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due, including any liability for taxes) of a character which, under GAAP, should be accrued, shown or disclosed on a balance sheet of Ridge, except for (i) liabilities set forth on the Balance Sheet, (ii) liabilities which have arisen after the Fiscal Period End in the Ordinary Course of Business, and (iii) liabilities arising out of the transactions contemplated by this Agreement. 5.11 Legal Compliance. Ridge has complied in all material respects with all applicable laws (including rules, regulations, codes, plans, injunctions, judgments, orders, decrees, rulings, and charges thereunder) of federal, state, local, and foreign governments (and all agencies thereof). No action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, notice or inquiry has been filed or commenced against Ridge by any governmental body alleging any failure to so comply. The licenses, permits, approvals, registrations, qualifications, certificates and other governmental authorizations that are listed on Section 5.11 of the Ridge Disclosure Schedule are the only governmental authorizations that are necessary for the operations of Ridge as they are presently conducted, except where the failure to obtain any such authorization would not have a Material Adverse Effect on Ridge. 5.12 Tax Matters. (a) For purposes of this Agreement, "Taxes" means all federal, state, municipal, local or foreign income, gross receipts, windfall profits, severance, property, production, sales, use, value added, license, excise, franchise, employment, withholding, capital stock, levies, imposts, duties, transfer and registration fees or similar taxes or charges imposed on the income, payroll, properties or operations of Ridge, together with any interest, additions or penalties, deficiencies or assessments with respect thereto and any interest in respect of such additions or penalties. (b) Ridge has filed all reports and returns with respect to any Taxes ("Tax Returns") that it was required to file. All such Tax Returns were correct and complete in all respects, and no such Tax Returns are currently the subject of audit. All Taxes owed by Ridge (whether or not shown on any Tax Return) were paid in full when due or are being contested in good faith and are supported by adequate reserves in the Financial Statements. Ridge has provided adequate reserves in the Financial Statements for the payment of any taxes accrued but not yet due and payable. Ridge is not currently the beneficiary of any extension of time within which to file any Tax Return, and Ridge has not waived any statute of limitations in respect of Taxes or agreed to any extension of time with respect to any Tax assessment or deficiency. (c) There is no dispute or claim concerning any Tax liability of Ridge either (A) claimed or raised by any government or taxing authority in writing or (B) based upon personal contact with any agent of such authority. There are no tax liens of any kind upon any property or assets of Ridge, except for inchoate liens for taxes not yet due and payable. -11- 18 (d) Ridge has not filed a consent under Sec. 341(f) of the Code concerning collapsible corporations. Ridge has not made any payments, is not obligated to make any payments, and is not a party to any agreement that under any circumstances could obligate it to make any payments as a result of the consummation of the Merger that will not be deductible under Code Sec. 280G. Ridge has not been a United States real property holding corporation within the meaning of Code Sec. 897(c)(2) during the applicable period specified in Code Sec. 897(c)(1)(A)(ii). Ridge is not a party to any tax allocation or sharing agreement. Ridge (A) has not been a member of any affiliated group within the meaning of Code Sec. 1504 or any similar group defined under a similar provision of state, local, or foreign law (an "Affiliated Group") filing a consolidated federal Income Tax Return (other than a group the common parent of which was Ridge) and (B) has no liability for the taxes of any Person (other than Ridge) under Treas. Reg. Section 1.1502-6 (or any similar provision of state, local, or foreign law), as a transferee or successor, by contract, or otherwise. (e) The unpaid Taxes of Ridge (A) did not, as of the Fiscal Period End, exceed by any amount the reserve for Tax liability (excluding any reserve for deferred taxes established to reflect timing differences between book and tax income) set forth on the face of the Balance Sheet (rather than in any notes thereto) and (B) will not exceed by any material amount that reserve as adjusted for operations and transactions through the Closing Date in accordance with the past custom and practice of Ridge in filing its Tax Returns. 5.13 Properties. (a) Ridge owns no real property. (b) Section 5.13 of the Ridge Disclosure Schedule lists and describes briefly all real property leased or subleased to Ridge. Ridge has delivered to Adaptec correct and complete copies of the leases and subleases listed in Section 5.13 of the Ridge Disclosure Schedule (as amended to date). With respect to each lease and sublease listed in Section 5.13 of the Ridge Disclosure Schedule, to the knowledge of Ridge: (i) the lease or sublease is legal, valid, binding, enforceable, and in full force and effect in all respects, except as such enforceability may be limited by (i) bankruptcy laws and other similar laws affecting creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law; (ii) no party to the lease or sublease is in material breach or default, and no event has occurred which, with notice or lapse of time, would constitute a breach or default or permit termination, modification, or acceleration thereunder; (iii) no party to the lease or sublease has repudiated any material provision thereof; (iv) there are no disputes, oral agreements, or forbearance programs in effect as to the lease or sublease: -12- 19 (v) Ridge has not assigned, transferred, conveyed, mortgaged, deeded in trust, or encumbered any interest in the leasehold or subleasehold; and (vi) to the knowledge of Ridge, all facilities leased or subleased thereunder have received all approvals of governmental authorities (including licenses and permits) required in connection with the operation thereof, and have been operated and maintained in accordance with applicable laws, rules, and regulations in all material respects. 5.14 Intellectual Property. (a) Ridge has not interfered with, infringed upon, misappropriated or violated any Intellectual Property rights of third parties in any respect, and has not received since its inception any charge, complaint, claim, demand, or notice alleging any such interference, infringement, misappropriation, or violation (including any claim that Ridge must license or refrain from using any Intellectual Property rights of any third party). To the knowledge of Ridge, no third party has interfered with, infringed upon, misappropriated, or violated any Intellectual Property rights of Ridge. (b) Section 5.14(b) of the Ridge Disclosure Schedule identifies each patent or registration which has been issued to Ridge or any Affiliate of Ridge with respect to any of the Intellectual Property used in Ridge's business, identifies each pending patent application or application for registration which Ridge or any Affiliate of Ridge has made with respect to any of the Intellectual Property used in Ridge's business, and identifies each license, agreement, or other permission which Ridge or any Affiliate of Ridge has granted to any third party with respect to any of the Intellectual Property used in Ridge's business (together with any exceptions). Ridge has delivered to Adaptec correct and complete copies of all such patents, registrations, applications, licenses, agreements, and permissions (as amended to date). Section 5.14(b) of the Ridge Disclosure Schedule also identifies (i) each trade name or unregistered trademark used by Ridge or any Affiliate of Ridge in connection with any of its businesses, and (ii) each registered copyright owned by Ridge or any Affiliate of Ridge with respect to Intellectual Property used in Ridge's business. With respect to each item of Intellectual Property required to be identified in Section 5.14(b) of the Ridge Disclosure Schedule or material to the conduct of Ridge's business: (i) Ridge possesses, or will possess prior to the Closing, all right, title, and interest in and to the item, free and clear of any Security Interest, license, or other restriction (except for rights of third parties under licenses disclosed in the Ridge Disclosure Schedule); (ii) the item is legal and valid and in full force and effect and is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge; (iii) no action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand is pending or, to Ridge's knowledge, threatened in writing which challenges the legality, validity, enforceability, use or ownership of the item; and -13- 20 (iv) Ridge has never agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the item. (c) Section 5.14(c) of the Ridge Disclosure Schedule identifies each item of Intellectual Property that any third party owns and that Ridge uses pursuant to license, sublicense, agreement, or permission, other than generally available software that can be acquired without signing an agreement. Ridge has delivered to Adaptec correct and complete copies of all such licenses, sublicenses, agreements, and permissions (as amended to date). With respect to each item of Intellectual Property required to be identified in Section 5.14(c) of the Ridge Disclosure Schedule: (i) the license, sublicense, agreement or permission covering the item is legal, valid, binding, enforceable, and in full force and effect in all respects, except as such enforceability may be limited by (i) bankruptcy laws and other similar laws affecting creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law; (ii) to the knowledge of Ridge, no party (other than Ridge) to the license, sublicense, agreement, or permission is in breach or default, and no event has occurred which with notice or lapse of time would constitute a breach or default or permit termination, modification or acceleration thereunder; (iii) to the knowledge of Ridge, no party (other than Ridge) to the license, sublicense, agreement, or permission has repudiated any provision thereof; and (iv) Ridge has not granted any sublicense or similar right with respect to the license, sublicense, agreement, or permission. 5.15 Tangible Assets. To the knowledge of Ridge, the buildings, machinery, equipment, and other tangible assets that Ridge owns and leases are free from material defects (patent and latent), have been maintained in accordance with normal industry practice, and are in good operating condition and repair (subject to normal wear and tear) and are usable in the Ordinary Course of Business. 5.16 Inventory. To the knowledge of Ridge, all of the inventory of Ridge, which consists of raw materials and supplies, manufactured and processed parts, work in process, and finished goods, is usable, merchantable and fit for the purpose for which it was procured or manufactured, and none of such inventory is slow-moving, obsolete, damaged, or defective, subject only to the reserve for inventory write down reflected on the Balance Sheet as adjusted for operations and transactions through the Closing Date in accordance with the past custom and practice of Ridge. 5.17 Contracts. Section 5.17 of the Ridge Disclosure Schedule lists the following contracts, agreements, commitments and other arrangements to which Ridge is a party or by which Ridge or any of its assets is bound: -14- 21 (a) any agreement (or group of related agreements) for the lease of personal property to or from any Person providing for lease payments in excess of $10,000 per annum; (b) any agreement (or group of related agreements) for the purchase or sale of raw materials, commodities, supplies, products, or other personal property, or for the furnishing or receipt of services, the performance of which will extend over a period of more than one year or involve consideration in excess of $10,000; (c) any agreement for the purchase of supplies, components, products or services from single source suppliers, custom manufacturers or subcontractors; (d) any agreement concerning a partnership or joint venture; (e) any agreement (or group of related agreements) under which it has created, incurred, assumed, or guaranteed any indebtedness for borrowed money or any capitalized lease obligation in excess of $10,000 or under which it has imposed a Security Interest on any of its assets, tangible or intangible; (f) any agreement concerning confidentiality, noncompetition or restraint of trade; (g) any agreement with any Ridge stockholder or any of such stockholder's Affiliates (other than Ridge) or with any Affiliate of Ridge; (h) any profit sharing, stock option, stock purchase, stock appreciation, deferred compensation, severance, or other plan or arrangement for the benefit of its current or former directors, officers, and employees; (i) any collective bargaining agreement; (j) any agreement for the employment of any individual on a full-time, part-time, consulting, or other basis; (k) any agreement under which it has advanced or loaned any amount to any of its directors, officers, or employees other than amounts advanced for business expenses incurred in the Ordinary Course of Business; (l) any agreement under which the consequences of a default or termination could be reasonably expected to have a Material Adverse Effect on Ridge; (m) any agreement with any original equipment manufacturer entered into or performed by Ridge since its inception; -15- 22 (n) any agreement pursuant to which Ridge is obligated to provide maintenance, support or training for its products; (o) any standard form agreement used by Ridge, including, but not limited to, any purchase order, statement of standard terms and conditions of sale, or employment offer letter; (p) any agreement pursuant to which any of Ridge's products is manufactured; and (q) any other agreement (or group of related agreements) the performance of which involves consideration in excess of $10,000 or which is expected to continue for more than six months from the date hereof. Ridge has delivered to Adaptec a correct and complete copy of each written agreement listed in Section 5.17 of the Ridge Disclosure Schedule and a written summary setting forth the terms and conditions of each oral agreement referred to in Section 5.17 of the Ridge Disclosure Schedule. With respect to each such agreement: (A) the agreement is legal, valid, binding, enforceable, and in full force and effect in all respects, except as such enforceability may be limited by (i) bankruptcy laws and other similar laws affecting creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law; (B) no party is in breach or default of any material provision of such agreement, and no event has occurred, which with notice or lapse of time would constitute such a breach or default, or permit termination, modification, or acceleration, under the agreement; (C) no party has repudiated any material provision of the agreement; and (D) Ridge does not have any reason to believe that the service called for thereunder cannot be supplied in accordance with its terms. 5.18 Notes and Accounts Receivable. All notes and accounts receivable of Ridge, all of which are reflected properly on the books and records of Ridge, are valid receivables subject to no setoffs, defenses or counterclaims, and, to the knowledge of Ridge, are collectible, in accordance with their terms at their recorded amounts, subject only to the reserve for bad debts reflected on the Balance Sheet as adjusted for operations and transactions through the Closing Date in accordance with the past custom and practice of Ridge. 5.19 Power of Attorney. There are no outstanding powers of attorney executed on behalf of Ridge. 5.20 Insurance. Ridge has delivered to Adaptec copies of each insurance policy (including policies providing property, casualty, liability, and workers' compensation coverage and bond and surety arrangements) with respect to which Ridge is a party, a named insured, or otherwise the beneficiary of coverage. With respect to each such insurance policy: (A) the policy is legal, valid, binding, enforceable, and in full force and effect in all respects (and there has been no notice of cancellation or nonrenewal of the policy received); (B) neither Ridge nor any other party to the policy is in breach or default (including with respect to the payment of premiums or the giving of -16- 23 notices), and no event has occurred which, with notice or the lapse of time, would constitute such a breach or default, or permit termination, modification, or acceleration, under the policy; (C) no party to the policy has repudiated any provision thereof; and (D) there has been no failure to give any notice or present any claim under the policy in due and timely fashion. Section 5.20 of the Ridge Disclosure Schedule describes any self-insurance arrangements presently maintained by Ridge. 5.21 Litigation. Section 5.21 of the Ridge Disclosure Schedule sets forth each instance in which Ridge (or any of its assets) (i) is subject to any outstanding injunction, judgment, order, decree, ruling, or charge or (ii) is or has been since its inception a party, or, to the knowledge of Ridge, is threatened to be made a party, to any action, suit, proceeding, hearing, arbitration, or investigation of, in, or before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator. To the knowledge of Ridge, there are no facts or circumstances which would form the basis of any claim against Ridge. 5.22 Product Warranty. Substantially all of the products manufactured, sold, leased, and delivered by Ridge have conformed in all respects with all applicable contractual commitments and all express and implied warranties, and, to Ridge's knowledge, Ridge has no liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due) for replacement or repair thereof or other damages in connection therewith, other than in the Ordinary Course of Business in an aggregate amount not exceeding $10,000. Substantially all of the products manufactured, sold, leased, and delivered by Ridge are subject to standard terms and conditions of sale or lease. Section 5.17(o) of the Ridge Disclosure Schedule includes copies of the standard terms and conditions of sale or lease for Ridge (containing applicable guaranty, warranty, and indemnity provisions). 5.23 Product Liability. Ridge has no liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due) arising out of any injury to individuals or property as a result of the ownership, possession, or use of any product manufactured, sold, leased, or delivered by Ridge. 5.24 Employee Matters and Benefit Plans. (a) Definitions. With the exception of the definition of "Affiliate" set forth in Section 5.24(a)(i) below (which definition shall apply only to this Section 5.24), for purposes of this Agreement, the following terms shall have the meanings set forth below: (i) "Affiliate" shall mean any other person or entity under common control with Ridge within the meaning of Section 414(b), (c), (m) or (o) of the Code and the regulations issued thereunder; (ii) "Ridge Employee Plan" shall mean any plan, program, policy, practice, contract, agreement or other arrangement providing for compensation, severance, -17- 24 termination pay, deferred compensation, performance awards, stock or stock-related awards, fringe benefits or other employee benefits or remuneration of any kind, whether written or unwritten or otherwise, funded or unfunded, including without limitation, each "employee benefit plan," within the meaning of Section 3(3) of ERISA which is or has been maintained, contributed to, or required to be contributed to, by Ridge or any Affiliate for the benefit of any Employee, or with respect to which Ridge or any Affiliate has or may have any liability or obligation; (iii) "COBRA" shall mean the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended; (iv) "DOL" shall mean the Department of Labor; (v) "Employee" shall mean any current or former employee, consultant or director of Ridge or any Affiliate; (vi) "Employee Agreement" shall mean each management, employment, severance, consulting, relocation, repatriation, expatriation, visas, work permit or other agreement, contract or understanding between Ridge or any Affiliate and any Employee; (vii) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended; (viii) "FMLA" shall mean the Family Medical Leave Act of 1993, as amended; (ix) "International Employee Plan" shall mean each Ridge Employee Plan that has been adopted or maintained by Ridge or any Affiliate, whether informally or formally, or with respect to which Ridge or any Affiliate will or may have any liability, for the benefit of Employees who perform services outside the United States; (x) "IRS" shall mean the Internal Revenue Service; (xi) "Multiemployer Plan" shall mean any "Pension Plan" (as defined below) which is a "multiemployer plan," as defined in Section 3(37) of ERISA; (xii)"PBGC" shall mean the Pension Benefit Guaranty Corporation; and (xiii) "Pension Plan" shall mean each Ridge Employee Plan which is an "employee pension benefit plan," within the meaning of Section 3(2) of ERISA. (b) Schedule. Section 5.24(b) of the Ridge Disclosure Schedule contains an accurate and complete list of each Ridge Employee Plan and each Employee Agreement under each Ridge Employee Plan or Employee Agreement. Ridge does not have any plan or commitment -18- 25 to establish any new Ridge Employee Plan, to enter into any new Employee Agreement, or to modify any Ridge Employee Plan or Employee Agreement (except to the extent required by law or to conform any such Ridge Employee Plan or Employee Agreement to the requirements of any applicable law, in each case as previously disclosed to Adaptec in writing, or as required by this Agreement). (c) Documents. Ridge has provided to Adaptec: (i) correct and complete copies of all documents embodying each Ridge Employee Plan and each Employee Agreement including (without limitation) all amendments thereto and all related trust documents; (ii) the most recent annual actuarial valuations, if any, prepared for each Ridge Employee Plan; (iii) the three (3) most recent annual reports (Form Series 5500 and all schedules and financial statements attached thereto), if any, required under ERISA or the Code in connection with each Ridge Employee Plan; (iv) if any Ridge Employee Plan is funded, the most recent annual and periodic accounting of such Ridge Employee Plan's assets; (v) the most recent summary plan description together with the summary(ies) of material modifications thereto, if any, required under ERISA with respect to each Ridge Employee Plan; (vi) all IRS determination, opinion, notification and advisory letters, and all applications and correspondence to or from the IRS or the DOL with respect to any such application or letter; (vii) all material written agreements and contracts relating to each Ridge Employee Plan, including, but not limited to, administrative service agreements, group annuity contracts and group insurance contracts; (viii) all communications material to any Employee or Employees relating to any Ridge Employee Plan and any proposed Ridge Employee Plans, in each case, relating to any amendments, terminations, establishments, increases or decreases in benefits, acceleration of payments or vesting schedules or other events which would result in any material liability to Ridge; (ix) all correspondence to or from any governmental agency relating to any Ridge Employee Plan; (x) all COBRA forms and related notices; (xi) all policies pertaining to fiduciary liability insurance covering the fiduciaries for each Ridge Employee Plan; (xii) all discrimination tests for each Ridge Employee Plan for the most recent plan year; and (xiii) all registration statements, annual reports (Form 11-K and all attachments thereto) and prospectuses prepared in connection with each Ridge Employee Plan. (d) Employee Plan Compliance. Except as set forth in Section 5.24(d) of the Ridge Disclosure Schedule, (i) Ridge has performed in all material respects all obligations required to be performed by it under, is not in default or violation of, and has no knowledge of any default or violation by any other party to each Ridge Employee Plan, and each Ridge Employee Plan has been established and maintained in all material respects in accordance with its terms and in compliance with all applicable laws, statutes, orders, rules and regulations, including but not limited to ERISA or the Code; (ii) there are no actions, suits or claims pending, or, to the knowledge of Ridge, threatened or reasonably anticipated (other than routine claims for benefits) against any Ridge Employee Plan or against the assets of any Ridge Employee Plan; (iii) each Ridge Employee Plan can be amended, terminated or otherwise discontinued after the Effective Time in accordance with its terms, without liability to Adaptec, Ridge or any of its Affiliates (other than ordinary administration expenses); and (iv) there are no audits, inquiries or proceedings pending or, to the knowledge of Ridge or any Affiliates, threatened by the IRS or DOL with respect to any Ridge Employee Plan. -19- 26 (e) Pension Plan. Neither Ridge nor any Affiliate has ever maintained, established, sponsored, participated in, or contributed to, (i) any Pension Plan which is subject to Title IV of ERISA or Section 412 of the Code or (ii) any Ridge Employee Plan intended to qualify under Section 401(a) of the Code. (f) Multiemployer Plans. At no time has Ridge or any Affiliate contributed to or been required to contribute to any Multiemployer Plan. (g) No Post-Employment Obligations. Except as set forth in Schedule 5.24(g), no Ridge Employee Plan provides, or reflects or represents any liability to provide, retiree life insurance, retiree health or other retiree employee welfare benefits to any person for any reason, except as may be required by COBRA or other applicable statute, and Ridge has never represented, promised or contracted (whether in oral or written form) to any Employee (either individually or to Employees as a group) or any other person that such Employee(s) or other person would be provided with retiree life insurance, retiree health or other retiree employee welfare benefit, except to the extent required by statute. (h) COBRA. Neither Ridge nor any Affiliate has, prior to the Effective Time and in any material respect, violated any of the health care continuation requirements of COBRA, the requirements of FMLA or any similar provisions of state law applicable to its Employees. (i) Effect of Transaction. (i) Except as set forth in Section 5.24(i) of the Ridge Disclosure Schedule, the execution of this Agreement and the consummation of the transactions contemplated hereby will not (either alone or upon the occurrence of any additional or subsequent events) constitute an event under any Ridge Employee Plan, Employee Agreement, trust or loan that will or may result in any payment (whether of severance pay or otherwise), acceleration, forgiveness of indebtedness, vesting, distribution, increase in benefits or obligation to fund benefits with respect to any Employee. (ii) Except as set forth in Section 5.24(i) of the Ridge Disclosure Schedule, no payment or benefit which will or may be made by Ridge or its Affiliates with respect to any Employee as a result of the transactions contemplated by this Agreement or otherwise will be characterized as a "parachute payment," within the meaning of Section 280G(b)(2) of the Code (but without regard to clause (ii) thereof). (j) Employment Matters. Ridge: (i) is in compliance in all material respects with all applicable foreign, federal, state and local laws, rules and regulations respecting employment, employment practices, terms and conditions of employment and wages and hours, in each case, with respect to Employees; (ii) has withheld and reported all amounts required by law or by agreement to be withheld and reported with respect to wages, salaries and other payments to Employees; (iii) is not liable for any arrears of wages or any taxes or any penalty for failure to -20- 27 comply with any of the foregoing; and (iv) is not liable for any payment to any trust or other fund governed by or maintained by or on behalf of any governmental authority, with respect to unemployment compensation benefits, social security or other benefits or obligations for Employees (other than routine payments to be made in the normal course of business and consistent with past practice). There are no pending or, to the knowledge of Ridge, threatened or reasonably anticipated claims or actions against Ridge under any worker's compensation policy or long-term disability policy. No Employee has advised any executive officer of Ridge prior to the Closing Date that he or she plans to terminate employment with Ridge during the next twelve months. (k) Labor. No work stoppage or labor strike against Ridge is pending or, to the knowledge of Ridge, threatened or reasonably anticipated. Ridge does not know of any activities or proceedings of any labor union to organize any Employees. Except as set forth in Section 5.24(k) of the Ridge Disclosure Schedule, there are no actions, suits, claims, labor disputes or grievances pending, or, to the knowledge of Ridge, threatened or reasonably anticipated relating to any labor, safety or discrimination matters involving any Employee, including, without limitation, charges of unfair labor practices or discrimination complaints, which, if adversely determined, would, individually or in the aggregate, result in any material liability to Ridge. Neither Ridge nor any of its subsidiaries has engaged in any unfair labor practices within the meaning of the National Labor Relations Act. Except as set forth in Section 5.24(k) of the Ridge Disclosure Schedule, Ridge is not presently, nor has it been in the past, a party to, or bound by, any collective bargaining agreement or union contract with respect to Employees and no collective bargaining agreement is being negotiated by Ridge. (l) International Employee Plan. Ridge does not now and never has established or maintained an International Employee Plan. 5.25 Guaranties. Ridge is not a guarantor or otherwise responsible for any liability or obligation (including indebtedness) of any other Person. 5.26 Environment, Health, and Safety. (a) For purposes of this Agreement, the following terms have the following meanings: "Environmental, Health, and Safety Laws" means any and all federal, state, local or municipal laws, rules, orders, regulations, statutes, ordinances, codes, plans, injunctions, judgments, decrees, requirements or rulings now or hereafter in effect, imposed by any governmental authority regulating, relating to, or imposing liability or standards of conduct relating to pollution or protection of the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata), public health and safety, or employee health and safety, concerning any Hazardous Materials or Extremely Hazardous Substances, as such terms as defined herein, or otherwise regulated, under any Environmental, Health and Safety Laws. The term "Environmental, Health and Safety Laws" shall include, without limitation, the Clean Water Act -21- 28 (also known as the Federal Water Pollution Control Act), 33 U.S.C. Section 1251 et seq., the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq., the Federal Insecticide, Fungicide and Rodenticide Act, 7 U.S.C. Section 136 et seq., the Safe Drinking Water Act, 42 U.S.C. Section 300f et seq., the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq., the Superfund Amendment and Reauthorization Act of 1986, Public Law 99-4, 99, 100 Stat. 1613, the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001 et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901 et seq., and the Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq., all as amended, together with any amendments thereto, regulations promulgated thereunder and all substitutions thereof. "Extremely Hazardous Substance" means a substance on the list described in Section 302 (42 U.S.C. Section 11002(a)(2)) of the Emergency Planning and Community Right to Know Act, 42 U.S.C. Section 11001 et seq., as amended. "Hazardous Material" means any material or substance that, whether by its nature or use, is now or hereafter defined as a pollutant, dangerous substance, toxic substance, hazardous waste, hazardous material, hazardous substance or contaminant under any Environmental, Health and Safety Laws, or which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and which is now or hereafter regulated under any Environmental, Health and Safety Laws, or which is or contains petroleum, gasoline, diesel fuel or other petroleum hydrocarbon product. (b) To the knowledge of Ridge, each of Ridge and its predecessors and Affiliates (A) has complied with the Environmental, Health, and Safety Laws in all material respects (and no action, suit, proceeding, hearing, investigation, charge, complaint, claim, demand, directive or notice has been filed or commenced against any of them alleging any such failure to comply), (B) has obtained and been in substantial compliance with all of the terms and conditions of all permits, licenses, certificates and other authorizations which are required under the Environmental, Health, and Safety Laws, and (C) has complied in all material respects with all other limitations, restrictions, conditions, standards, prohibitions, requirements, obligations, schedules, and timetables which are contained in the Environmental. Health, and Safety Laws. (c) To the knowledge of Ridge, Ridge has no liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated, and whether due or to become due), and none of Ridge and its predecessors and Affiliates has handled or disposed of any Hazardous Materials or Extremely Hazardous Substances, arranged for the disposal of any Hazardous Materials or Extremely Hazardous Substances, exposed any employee or other individual to any Hazardous Materials or Extremely Hazardous Substances, or owned or operated any property or facility in any manner that could give rise to any liability, for damage to any site, location, surface water, groundwater, land surface or subsurface strata, for any illness of or personal injury to any employee or other individual, or for any reason under any Environmental, Health, and Safety Law. -22- 29 (d) To the knowledge of Ridge, no Extremely Hazardous Substances are currently, or have been, located at, on, in, under or about all properties and equipment used in the business of Ridge and its predecessors and Affiliates. (e) To the knowledge of Ridge, no Hazardous Materials are currently located at, on, in, under or about all properties and equipment used in the business of Ridge and its predecessors and Affiliates in a manner which violates any Environmental, Health and Safety Laws or which requires cleanup or corrective action of any kind under any Environmental, Health and Safety Laws. 5.27 Certain Business Relationships With Ridge. No director or officer of Ridge, nor any member of their immediate families, nor any Affiliate of any of the foregoing, owns, directly or indirectly, or has an ownership interest in (a) any business (corporate or otherwise) which is a party to, or in any property which is the subject of, any business arrangement or relationship of any kind with Ridge, or (b) any business (corporate or otherwise) which conducts the same business as, or a business similar to, that conducted by Ridge other than, in either case, shares of publicly traded securities. 5.28 No Adverse Developments. There is no development (exclusive of general economic factors affecting business in general) or, to Ridge's knowledge, threatened development affecting Ridge (or affecting customers, suppliers, employees, and other Persons which have relationships with Ridge) that (i) is having or is reasonably likely to have a Material Adverse Effect on Ridge, or (ii) would prevent Adaptec from conducting the business of the Surviving Corporation following the Closing in the manner in which it was conducted or planned to be conducted by Ridge prior to the Closing. 5.29 Full Disclosure. No representation or warranty in this Section 5 or in any document delivered by Ridge pursuant to the transactions contemplated by this Agreement, and no statement, list, certificate or instrument furnished to Adaptec pursuant hereto or in connection with this Agreement contains any untrue statement of a material fact, or omits to state any fact necessary in the light of the circumstances in which it was made, to make any statement herein or therein not materially misleading. There is no fact, development or threatened development (excluding general economic factors affecting business in general) which Ridge has not disclosed to Adaptec in writing and which is having or is reasonably likely to have a Material Adverse Effect on Ridge. Ridge has delivered to Adaptec true, correct and complete copies of all documents, including all amendments, supplements and modifications thereof or waivers currently in effect thereunder, described in the Ridge Disclosure Schedule. 6. Representations and Warranties of Adaptec and Merger Sub. Adaptec and Merger Sub jointly and severally represent and warrant to Ridge that the statements contained in this Section 6 are true and correct as of the date of this Agreement, except as set forth in the disclosure schedule delivered by Adaptec and Merger Sub to Ridge on the date hereof (and initialed by Adaptec, Merger Sub and Ridge), a copy of which is attached hereto as Exhibit 6 (referred to herein as the "Adaptec -23- 30 Disclosure Schedule"). The Adaptec Disclosure Schedule will be arranged in paragraphs corresponding to the numbered paragraphs contained in this Section 6. 6.1 Organization, Qualification and Corporate Power. Each of Adaptec and Merger Sub is a corporation duly organized, validity existing, and in good standing under the laws of the State of Delaware. Adaptec is duly authorized to conduct business and is in good standing under the laws of each jurisdiction in which the failure to be so qualified would have a Material Adverse Effect on Ridge. 6.2 Capitalization. (a) As of March 31, 1998, the authorized capital stock of Adaptec consisted of (i) 1,000,000 shares of Preferred Stock, $.001 par value, of which 250,000 have been designated Series A Participating Preferred Stock, none of which are outstanding and (ii) 400,000,000 shares of Adaptec Common Stock, of which 113,980,937 shares were issued and outstanding, 32,616,940 shares were reserved for issuance pursuant to Adaptec's employee and director stock plans and 4,452,187 shares were reserved for issuance upon conversion of subordinated long term debt. The authorized capital stock of Merger Sub consists of 100 shares of Common Stock, $.001 par value, all of which, as of the date hereof, are issued and outstanding. All of the outstanding shares of Adaptec's and Merger Sub's respective capital stock have been duly authorized and validly issued and are fully paid and nonassessable. Except as set forth in this Section 6.2, there are no options, warrants or other rights, agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of Adaptec or any of its subsidiaries or obligating Adaptec or any of its subsidiaries to issue or sell any shares of capital stock of, or other equity interests in, Adaptec or any of its subsidiaries. (b) The shares of Adaptec Common Stock to be issued pursuant to Section 3.1 of this Agreement and the Adaptec stock options to be issued pursuant to Section 3.7 of this Agreement are duly authorized and reserved for issuance. 6.3 Authorization. Adaptec and Merger Sub each has full power and authority (including full corporate power and authority) to execute and deliver this Agreement, to consummate the transactions contemplated hereunder and to perform its obligations hereunder and no other proceedings on the part of Adaptec or Merger Sub are necessary to authorize the execution, delivery and performance of this Agreement. This Agreement constitutes the valid and legally binding obligation of Adaptec and Merger Sub, enforceable against Adaptec and Merger Sub in accordance with its terms and conditions, except as such enforceability may be limited by (i) bankruptcy laws and other similar laws affecting creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law. Adaptec has full corporate power and authority to execute and deliver the Stockholder's Agreement. The Stockholder's Agreement constitutes the valid and binding obligation of Adaptec, enforceable against Adaptec in accordance with its terms and conditions. Neither Adaptec nor Merger Sub need give any notice to, make any filing with, or obtain any authorization, consent, or approval of any government or governmental agency in order to consummate the transactions contemplated by this Agreement. -24- 31 6.4 Noncontravention. Neither the execution and the delivery of this Agreement and, to the extent applicable, the Stockholder's Agreement, by Adaptec or Merger Sub nor the consummation of the transactions contemplated hereby, will (A) violate any constitution, statute, regulation, rule, injunction, judgment, order, decree, ruling, charge, or other restriction of any government, governmental agency, or court to which Adaptec or any of its subsidiaries or Merger Sub is subject or any provision of their respective charters or bylaws, or (B) (i) conflict with, (ii) result in a breach of, (iii) constitute a default under, (iv) result in the acceleration of, (v) create in any party the right to accelerate, terminate, modify, or cancel, or (vi) require any notice under, any agreement, contract, lease, license, instrument, or other arrangement to which Adaptec or any of its subsidiaries or Merger Sub is a party or by which any of them is bound or to which any of their assets is subject. 6.5 SEC Filings; Financial Statements. (a) Adaptec has filed all forms, reports and documents required to be filed with the SEC since March 31, 1997, and has heretofore delivered to Ridge, in the form filed with the SEC, (i) its Annual Report on Form 10-K for the fiscal year ended March 31, 1997, (ii) its Quarterly Reports on Form 10-Q for the periods ended June 30, 1997, September 30, 1997 and December 31, 1997, (iii) all proxy statements relating to Adaptec's meetings of stockholders (whether annual or special) held since March 31, 1997, (iv) all other reports and registration statements filed by Adaptec with the SEC since March 31, 1997 and (v) all amendments and supplements to all such reports and registration statements, including Adaptec's Annual Report filed pursuant to Rule 14a-3 promulgated under the Exchange Act, filed by Adaptec with the SEC (collectively, the "Adaptec SEC Reports"). The Adaptec SEC Reports (i) were prepared in accordance with the requirements of the Securities Act or the Exchange Act, as the case may be, and (ii) did not at the time they were filed (or if amended or superseded by a filing prior to the date of this Agreement, then on the date of such filing) contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. None of Adaptec's subsidiaries is required to file any forms, reports or other documents with the SEC. (b) Each of the consolidated financial statements (including, in each case, any related notes thereto) contained in the Adaptec SEC Reports has been prepared in accordance with GAAP applied on a consistent basis throughout the periods involved (except as may be indicated in the notes thereto) and each fairly presents the consolidated financial position of Adaptec and its subsidiaries as at the respective dates thereof and the consolidated results of its operations and cash flows for the periods indicated, except that the unaudited interim financial statements were or are subject to normal and recurring year-end adjustments which were not, or are not expected to be, material in amount. (c) Adaptec has heretofore furnished to Ridge a complete and correct copy of any amendments or modifications, which have not yet been filed with the SEC but which are required to be filed, to agreements, documents or other instruments which previously had been filed by Adaptec with the SEC pursuant to the Securities Act or the Exchange Act. -25- 32 6.6 No Undisclosed Liabilities. Neither Adaptec nor any of its subsidiaries has any liabilities (absolute, accrued, contingent or otherwise) which are in the aggregate material to the business, operations or financial condition of Adaptec and its subsidiaries taken as a whole, except liabilities adequately reserved for in the balance sheet included in Adaptec's Quarterly Report on Form 10-Q for the quarter ended December 31, 1997 (the "Adaptec Balance Sheet") or incurred since December 31, 1997 in the Ordinary Course of Business and liabilities incurred in connection with this Agreement. 6.7 Absence of Litigation. Other than as disclosed in the Adaptec SEC Reports, there are no claims, actions, suits, proceedings or investigations pending or, to the knowledge of Adaptec, threatened against Adaptec or any of its subsidiaries, or any properties or rights of Adaptec or any of its subsidiaries, before any court, arbitrator or administrative, governmental or regulatory authority or body, domestic or foreign, that, individually or in the aggregate, could have a Material Adverse Effect on Adaptec. 6.8 Information Statement. The information supplied by Adaptec for inclusion in the Information Statement (as defined below) shall not, on the date the Information Statement is first mailed to the Ridge stockholders, and at the Effective Time of the Merger, contain any statement which, at such time and in light of the circumstances under which it shall be made, is false or misleading with respect to any material fact, or shall omit to state any material fact necessary in order to make the statements therein not false or misleading. If at any time prior to the Effective Time of the Merger any event relating to Adaptec, Merger Sub or any of their respective affiliates, officers or directors should be discovered by Adaptec or Merger Sub which should be set forth in a supplement to the Information Statement, Adaptec or Merger Sub will promptly inform Ridge. Notwithstanding the foregoing, Adaptec and Merger Sub make no representation or warranty with respect to any information supplied by Ridge which is contained in any of the foregoing documents. 6.9 Full Disclosure. No representation or warranty in this Section 6 or in any document delivered by Adaptec or Merger Sub to Ridge pursuant to the transactions contemplated by this Agreement contains or shall contain any untrue statement of a material fact or omits or shall omit to state any material fact necessary, in the light of the circumstances under which it was made, in order to make the statements herein or therein not misleading. 6.10 Adaptec Common Stock. The Adaptec Common Stock to be issued in accordance with Section 3.1 and the Adaptec Common Stock to be issued in accordance with Section 8.6 of Agreement will be validly issued, fully paid and nonassessable and not subject to preemptive rights. 6.11 No Material Adverse Change. Since December 31, 1997, there has not been any material adverse change in the Business Condition of Adaptec. There is no development (exclusive of general economic factors affecting business in general) or, to Adaptec's knowledge, threatened development affecting Adaptec that is having or is reasonably likely to have a Material Adverse Effect on Adaptec. -26- 33 6.12 Material Agreements. With respect to each agreement that has been filed as an exhibit to the Adaptec SEC Reports: (A) the agreement is legal, valid, binding, enforceable, and in full force and effect in all respects, except as such enforceability may be limited by (i) bankruptcy laws and other similar laws affecting creditors' rights generally and (ii) general principles of equity, regardless of whether asserted in a proceeding in equity or at law; (B) no party is in breach or default of any material provision of such agreement, and no event has occurred, which with notice or lapse of time would constitute such a breach or default, or permit termination, modification, or acceleration, under the agreement; (C) no party has repudiated any material provision of the agreement; and (D) Adaptec does not have any reason to believe that the service called for thereunder cannot be supplied in accordance with its terms and without resulting in a loss to Adaptec. 7. Pre-Closing Covenants. With respect to the period between the execution of this Agreement and the earlier of the termination of this Agreement and the Effective Time of the Merger: 7.1 General. Each of the Parties will use their best efforts to take all action and to do all things necessary, proper, or advisable in order to consummate and make effective the transactions contemplated by this Agreement as promptly as possible (including satisfaction, but not waiver, of the closing conditions set forth in Section 9 below). 7.2 Notices and Consents. Ridge will give any notices to third parties and will use its reasonable best efforts to obtain any third party consents that Adaptec reasonably may request in connection with the matters identified in Section 5.4 of the Ridge Disclosure Schedule. Notwithstanding the foregoing, nothing in this Section 7.2 shall be construed to require any Party to transfer or assign rights or other assets to a Person who is not a Party. 7.3 Operation of Business. Ridge will not engage in any practice, take any action, or enter into any transaction outside the Ordinary Course of Business or except as disclosed in Section 5.9 of the Ridge Disclosure Schedule. Without limiting the generality of the foregoing, Ridge will not (i) cause or permit any amendment to its Certificate of Incorporation or Bylaws (except as specifically contemplated by this Agreement), (ii) issue any capital stock or issue or grant any options, warrants or rights to acquire any capital stock (other than in connection with the exercise of stock options outstanding on the date of this Agreement) or (iii) declare, set aside, or pay any dividend or make any distribution with respect to its capital stock or redeem, purchase, or otherwise acquire any of its capital stock (except from former employees, directors and consultants in accordance with agreements providing for the repurchase of shares upon termination of their services), or (iv) otherwise engage in any practice, take any action, or enter into any transaction of the sort described in Section 5.9 above. In addition, Ridge will comply with all laws, statutes, ordinances, rules, regulations and orders applicable to it or to the conduct of its business, except for violations that would not subject Ridge to a penalty or loss that would constitute a Material Adverse Effect on Ridge. -27- 34 7.4 Preservation of Business. Ridge will use all commercially reasonable efforts to keep its business and properties substantially intact, including its present operations, physical facilities, working conditions, and relationships with lessors, licensors, suppliers, customers, and employees. 7.5 Access to Information. Ridge will permit Adaptec and its representatives to have access at all reasonable times, and in a manner so as not to interfere with the normal business operations of Ridge, to the business and operations of Ridge. Neither such access, inspection and furnishing of information to Adaptec and its representatives, nor any investigation by Adaptec and its representatives, shall in any way diminish or otherwise effect Adaptec's right to rely on any representation or warranty made by Ridge hereunder. All information received or made available to Adaptec and its representatives pursuant to this Section 7.5 shall be subject to and deemed covered by the terms of the Master Mutual Nondisclosure Agreement dated June 20, 1997 between Adaptec and Ridge. 7.6 Notice of Developments. Each Party will give prompt written notice to the others of any material adverse development causing a breach of any of its own representations and warranties in Section 5 or Section 6 above. No disclosure by any Party pursuant to this Section 7.6, however, shall be deemed to amend or supplement the Ridge Disclosure Schedule or the Adaptec Disclosure Schedule or to prevent or cure any misrepresentation, breach of warranty, or breach of covenant. 7.7 Amendment of Ridge Certificate of Incorporation. Ridge shall use its best efforts to amend Article IX, Section 3 of Ridge's Certificate of Incorporation to eliminate any right of any holders of Ridge Preferred Stock to receive proceeds of a liquidation, dissolution or winding up of Ridge in excess of the Original Issue Price (as defined in the Ridge Certificate of Incorporation) applicable to such Ridge Preferred Stock. 7.8 Stockholder's Agreements. (a) Ridge shall use its best efforts to cause each holder of Ridge Common Stock or Ridge Preferred Stock to execute and deliver to Adaptec on or before the Closing Date, an agreement in the form of Exhibit 7.8 (a) attached hereto (each a "Stockholder's Agreement"), setting forth, among other things, certain restrictions upon the transferability of Adaptec Common Stock in compliance with the Securities Act and representations in connection with the continuity of interest requirement under the Code. (b) The Stockholder's Agreements for each of the Ridge employees listed on Exhibit 7.8(b) attached hereto (the "Senior Employees") (and the Trusts to whom certain Senior Employees have transferred certain shares) shall also include (i) a restriction on the transfer of the shares of Adaptec Common Stock received by such individuals in the Merger, which restriction shall lapse at the rate of one-sixth (1/6th) of such shares per each three month period elapsing after the Effective Date of the Merger and (ii) an agreement to be bound by the indemnification provisions set forth in Section 10 of this Agreement. -28- 35 (c) The Stockholder's Agreement for Graham (and the Trust to whom Graham has transferred certain shares) shall be executed as of the date hereof and shall also include (i) a restriction on the transfer of the shares received by Graham in the Merger, which restriction shall lapse at the rate of one-tenth (1/10th) of such shares per each three month period elapsing after the Effective Date of the Merger, (ii) a provision prohibiting Graham from transferring any Ridge capital stock or voting any shares of Ridge capital stock in favor of any acquisition of Ridge (other than the acquisition contemplated by this Agreement) prior to the earlier of the Effective Time of the Merger or the termination of this Agreement and (iii) an agreement to be bound by the indemnification provisions set forth in Section 10 of this Agreement. 7.9 Employment Agreements. Prior to the Effective Time of the Merger, Ridge will use its best efforts to cause the persons listed on Exhibit 7.9(a) attached hereto (the "Key Employees") to enter into an employment agreement and covenant not to compete (the "Employment Agreement") in the form attached hereto as Exhibit 7.9(b). 7.10 Preparation of the Information Statement. As promptly as practicable after the date hereof, Ridge will prepare an information statement to be delivered to the stockholders and option holders of Ridge for purposes of soliciting their consent to the Merger (the "Information Statement"). The Information Statement shall be in form reasonably satisfactory to Adaptec and its counsel. Adaptec will take any reasonable action required to be taken under any applicable state securities or "blue sky" laws in connection with the issuance of the Adaptec Common Stock in the Merger. 7.11 Solicitation of Written Consents. Ridge will solicit the written consent to the Merger from each of the stockholders and option holders of Ridge as soon as practicable following the execution of this Agreement, and shall use its best efforts to obtain such consent. The Board of Directors of Ridge will recommend in the Information Statement the approval of the Merger by the Ridge stockholders, which recommendation shall be unanimous except for any abstention by any director designated by Adaptec. 7.12 Exclusivity. Prior to the earlier of the Effective Time of the Merger or the termination of this Agreement, Ridge will not and will use its best efforts to cause its Affiliates not to (i) solicit, initiate, or encourage the submission of any proposal or offer from any Person relating to the acquisition of any capital stock or other voting securities, or any substantial portion of the assets, of Ridge or its subsidiaries (including any acquisition structured as a merger, consolidation, or share exchange) or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any Person to do or seek any of the foregoing. 7.13 Options. Prior to the Closing Date, Ridge shall take all actions necessary and appropriate to allow for the assumption of options by Adaptec pursuant to Section 8.6. Ridge shall use its best efforts to cause each optionee to sign, prior to the Closing Date, an acknowledgment and waiver, in a form acceptable to Adaptec and Ridge, providing for such optionee's acceptance of the terms of -29- 36 the option assumption and waiver of any right or claim against Ridge or Adaptec with respect to such assumption. 8. Additional Agreements. 8.1 General. In case at any time after the Effective Time of the Merger any further action is necessary to carry out the purposes of this Agreement, each of the Parties will take such further action (including the execution and delivery of such further instruments and documents) as any other Party reasonably may request, all at the sole cost and expense of the requesting Party (unless the requesting Party is entitled to indemnification therefor under Section 10 below). 8.2 Litigation Support. In the event and for so long as any Party actively is contesting or defending against any action, suit, proceeding, hearing, investigation, charge, complaint, claim, or demand in connection with (i) any transaction contemplated under this Agreement or (ii) any fact, situation, circumstance, status, condition, activity, practice, plan, occurrence, event, incident, action, failure to act, or transaction (A) on or prior to the Effective Time of the Merger involving Ridge or (B) arising out of Adaptec's operation of the business of the Surviving Corporation following the Effective Time of the Merger in the manner in which it is presently conducted and planned to be conducted, each of the other Parties will cooperate with the Party and its counsel in the contest or defense, make available their personnel, and provide such testimony and access to their books and records as shall be reasonably necessary in connection with the contest or defense, all at the sole cost and expense of the contesting or defending Party (unless the contesting or defending Party is entitled to indemnification therefor under Section 10 below). 8.3 Transition. Ridge will not take any action that is designed or intended to have the effect of discouraging any lessor, licensor, customer, supplier, or other business associate of Ridge from maintaining the same business relationships with the Surviving Corporation after the Effective Time of the Merger as it maintained with Ridge prior to the Effective Time of the Merger. 8.4 Ridge Employees. Except for the Ridge employees, who will be executing Employment Agreements, all employees of Ridge as of the Closing will be offered employment with Adaptec or the Surviving Corporation at compensation levels at least as favorable as their current compensation at Ridge, subject to Adaptec's standard employment terms and practices. Except as otherwise prohibited, these employees will be eligible to participate in all standard Adaptec benefit plans based upon seniority determined by their respective dates of hire by Ridge except for the Adaptec Sabbatical Program for which eligibility will be determined based on the Closing Date. 8.5 S-3 Registration. Adaptec will use its best efforts to file, within 30 days following the Effective Date of the Merger, a registration statement on Form S-3 (or any successor form to Form S-3) so as to register the Adaptec Common Stock issued in the Merger. The Company will (i) promptly give written notice of the proposed registration to all Ridge stockholders who received shares of Adaptec Common Stock in the Merger, and (ii) use its best efforts to effect such registration (including, without limitation, the execution of an undertaking to file post-effective amendments, appropriate qualification under applicable blue sky or other state securities laws and -30- 37 appropriate compliance with applicable regulations issued under the Securities Act and any other governmental requirements or regulations) as would permit or facilitate the sale and distribution of all such shares of Adaptec Common Stock. 8.6 Assumption of Options. At the Effective Time of the Merger, each outstanding option to purchase shares of Ridge Common Stock under the Ridge Stock Option Plan or held by the Trusts, whether vested or unvested, will be assumed by Adaptec. Section 8.6 of the Ridge Disclosure Schedule sets forth a true and complete list as of the date hereof of all holders of outstanding options, including those granted under the Ridge Stock Option Plan, and includes the number of shares of Ridge capital stock subject to each such option, the exercise or vesting schedule, the exercise price per share and the term of each such option. On the Closing Date, Ridge shall deliver to Adaptec an updated Section 8.6 of the Ridge Disclosure Schedule current as of such date. Each such option so assumed by Adaptec under this Agreement shall continue to have, and be subject to, the same terms and conditions set forth in such option and, if applicable, in the Ridge Stock Option Plan immediately prior to the Effective Time, including provisions with respect to vesting, except that (i) such option will be exercisable for that number of whole shares of Adaptec Common stock equal to the product (rounded down to the nearest whole share) of the number of shares of Ridge Common Stock that were issuable upon exercise of such option immediately prior to the Effective Time multiplied by a fraction, the numerator of which shall be 1,720,000 and the denominator of which shall be the total number of shares of Ridge Common Stock that were issuable upon exercise of options to purchase Ridge Common Stock then outstanding under the Ridge Stock Option Plan or held by the Trusts, and (ii) the per share exercise price for the shares of Adaptec Common stock issuable upon exercise of such assumed option will be the last sale price for a share of Adaptec Common Stock on the trading day immediately preceding the Closing Date, as reported on the Nasdaq National Market. Consistent with either the terms of the Ridge Stock Option Plan and the documents governing the outstanding options under such Plan or the documents governing the outstanding options held by the Trusts, the Merger will not terminate any of the outstanding options under the Ridge Stock Option Plan or held by the Trusts or accelerate the exercisability or vesting of such options or the shares of Adaptec Common Stock which will be subject to those options upon Adaptec's assumption of the options in the Merger. It is the intention of the parties that the options so assumed by Adaptec qualify, to the maximum extent permissible, following the Effective Time of the Merger as incentive stock options as defined in Section 422 of the Code to the extent such options qualified as incentive stock options prior to the Effective Time of the Merger. Adaptec shall take all corporate action necessary to reserve for issuance a sufficient number of shares of Adaptec Common Stock for delivery upon the exercise of the options assumed by Adaptec in accordance with this Section 8.6. Adaptec will use its best efforts to file, within thirty (30) days following the Effective Date of the Merger, a registration statement on Form S-8 (or any successor form to Form S-8) so as to register the Adaptec Common Stock subject to the options assumed by Adaptec pursuant to this Section 8.6 and shall use its best efforts to effect such registration and to maintain the effectiveness of such registration statement (and the current status of the prospectus contained therein) for so long as such options remain outstanding. -31- 38 9. Conditions to Obligation to Close. 9.1 Conditions to Adaptec's Obligation to Close. The obligation of Adaptec and Merger Sub to consummate the transactions to be performed by them in connection with the Closing is subject to satisfaction of the following conditions: (a) the representations and warranties set forth in Section 5 above shall be true and correct in all material respects at and as of the Closing Date (except for (i) such representations and warranties that are qualified by their terms by a reference to materiality, which representations and warranties as so qualified shall be true in all respects and (ii) such representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date); (b) Ridge shall have performed and complied with all of its covenants hereunder in all material respects through the Closing; (c) Ridge shall have procured all of the third party consents specified in Section 7.2 above; (d) no action, suit, or proceeding shall be pending before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement, (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation, (C) affect the right of Adaptec to control the Surviving Corporation following the Effective Time of the Merger, or (D) affect adversely the right of Ridge or the Surviving Corporation to own its assets (including without limitation its intellectual property assets) or to operate its businesses (and no such injunction, judgment, order, decree, ruling or charge shall be in effect) and no law, statute, ordinance, rule, regulation or order shall have been enacted, enforced or entered which has caused or will likely cause any of the effects under clause (A), (B), (C), or (D) of this Section 9.1(d) to occur. (e) the Chief Financial Officer of Ridge shall have delivered to Adaptec a certificate to the effect that each of the conditions specified above in Sections 9.1(a) to 9.1(d) (inclusive) is satisfied in all respects; (f) the Parties shall have received all authorizations, consents, and approvals of governments and governmental agencies referred to in Section 5.4 above or disclosed in a corresponding Section in the Ridge Disclosure Schedule; (g) a sufficient number of Key Employees listed on Exhibit 7.9(a) attached hereto (as to which Ridge and Adaptec will agree) shall have executed and delivered an Employment Agreement or offer letter and such agreement or letter shall be in full force and effect; -32- 39 (h) Adaptec shall have received from counsel to Ridge an opinion in form and substance as set forth in Exhibit 9.1(h) attached hereto, addressed to Adaptec, and dated as of the Closing Date; (i) this Agreement and the Merger will have been approved by the vote of the holders of 100% of the outstanding Ridge Common Stock and 100% of the outstanding Ridge Preferred Stock, and no such stockholder shall have exercised or be eligible to exercise any dissenters' rights with respect to the Merger; (j) all actions to be taken by the Ridge stockholders and Ridge in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to Adaptec and its counsel; (k) the Certificate of Incorporation of Ridge shall have been amended as described in Section 7.7; (l) the acknowledgments referred to in Section 7.13 shall have been obtained by Ridge and Ridge shall have taken such other actions relating to the restructuring of its stock option plans as are reasonably requested by Adaptec; (m) each officer and director of Ridge shall have executed and delivered a general release of any claims against Ridge and its successors in the form attached hereto as Exhibit 9.1(m); (n) each of the Ridge stockholders shall have executed and delivered the Stockholder's Agreements; and (o) the Ridge Stockholders' Representatives shall have executed and delivered the Escrow Agreement. Adaptec may waive any condition (in whole or in part) specified in this Section 9.1 if it executes a writing so stating at or prior to the Closing. 9.2 Conditions to Ridge's Obligation. The obligation of Ridge to consummate the transactions to be performed by it in connection with the Closing is subject to satisfaction of the following conditions: (a) the representations and warranties set forth in Section 6 above shall be true and correct in all material respects at and as of the Closing Date (except for (i) such representations and warranties that are qualified by their terms by a reference to materiality, which representations and warranties as so qualified shall be true in all respects and (ii) such representations and warranties that speak as of a specific date, which representations and warranties shall be true and correct as of such date); -33- 40 (b) Adaptec shall have performed and complied with all of its covenants hereunder in all material respects through the Closing; (c) no action, suit, or proceeding shall be pending before any court or quasi-judicial or administrative agency of any federal, state, local, or foreign jurisdiction or before any arbitrator wherein an unfavorable injunction, judgment, order, decree, ruling, or charge would (A) prevent consummation of any of the transactions contemplated by this Agreement or (B) cause any of the transactions contemplated by this Agreement to be rescinded following consummation (and no such injunction, judgment, order, decree, ruling, or charge shall be in effect) and no law, statute, ordinance, rule, regulation or order shall have been enacted, enforced or entered which has caused or will likely cause any of the effects under clause (A) or (B) of this Section 9.2(c) to occur; (d) the Chief Financial Officer or other duly authorized officer of Adaptec shall have delivered to Ridge a certificate to the effect that each of the conditions specified above in Sections 9.2(a) to 9.2(c) (inclusive) is satisfied in all respects; (e) the Parties shall have received all authorizations, consents, and approvals of governments and governmental agencies referred to in Section 5.4 above or disclosed in a corresponding Section in the Ridge Disclosure Schedule; (f) Ridge shall have received from counsel to Adaptec an opinion in form and substance as set forth in Exhibit 9.2(f) attached hereto, addressed to Ridge, and dated as of the Closing Date; (g) the shares of Adaptec Common Stock to be issued pursuant to Section 3.1 shall have been approved for quotation on the Nasdaq National Market, upon official notice of issuance thereof; (h) all actions to be taken by Adaptec and Merger Sub in connection with consummation of the transactions contemplated hereby and all certificates, opinions, instruments, and other documents required to effect the transactions contemplated hereby will be reasonably satisfactory in form and substance to Ridge and its counsel; (i) Ridge shall have received an opinion of Ernst & Young LLP, in customary form, to the effect that the Merger, when consummated as contemplated by this Agreement, will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code; and (j) Adaptec shall have executed and delivered (i) counterparts of each of the Stockholder's Agreement and (ii) the Escrow Agreement. Ridge may waive any condition (in whole or in part) specified in this Section 9.2 if it executes a writing so stating at or prior to the Closing. -34- 41 10. Survival of Representations, Warranties and Covenants; Indemnification. 10.1 Escrow Fund. As soon as practicable after the Effective Time of the Merger, twenty percent (20%) of the shares of Adaptec Common Stock to be issued to Graham, Samuel E. Bain, Jr. ("Bain"), the Key Employees, the Trusts and 38 Silicon Valley Partners LLC (collectively, the "Indemnifying Stockholders") in the Merger (the "Escrow Shares") shall be registered in the name of, and be deposited with, an institution selected by Adaptec, and reasonably acceptable to Ridge, to act as escrow agent (the "Escrow Agent"), such deposit to constitute the "Escrow Fund" and to be governed by the terms set forth herein and in the Escrow Agreement. The Escrow Fund shall be available to compensate Adaptec for breaches of the representations and warranties of Ridge contained in Section 5 hereof, as more specifically provided in this Section 10. 10.2 Survival. All of the representations and warranties of the Parties contained in Sections 5 and 6 shall survive the Closing (even if the damaged Party knew or had reason to know of any misrepresentation or breach of warranty at the time of the Closing) and continue in full force and effect for a period of one year following the Closing (the "Survival Termination Date"). The covenants and agreements in this Agreement shall survive the Closing except to the extent they are specifically limited by their terms. 10.3 Indemnification Provisions for Benefit of Adaptec. Subject to the terms and conditions of this Section 10, in the event of any breach of any of the representations, warranties, agreements or covenants of Ridge contained herein, provided that Adaptec makes a written claim for indemnification in the manner provided for in this Section 10 on or prior to the Survival Termination Date, the Indemnifying Stockholders shall indemnify, defend and hold harmless Adaptec and the Surviving Corporation, and their respective officers, directors, agents and employees, from and against the entirety of any and all actions, suits, proceedings, hearings, investigations, charges, complaints, claims, demands, injunctions, judgments, orders, decrees, rulings, damages, dues, penalties, fines, costs, reasonable amounts paid in settlement, liabilities, obligations, taxes, liens, losses, expenses, and fees, including court costs and reasonable attorneys' fees and expenses ("Adverse Consequences") that Adaptec may suffer through and after the date of the claim for indemnification resulting from, arising out of, in the nature of, or caused by such breach. 10.4 Limitations on Indemnification Claims. (a) The Indemnifying Stockholders shall not be required to provide indemnification for any Adverse Consequences unless and until the aggregate amount of all Adverse Consequences under all claims of indemnification asserted under this Section 10 ("Claims") exceeds $100,000, in which case Adaptec shall be entitled to indemnification for the full amount of Adverse Consequences, including the first $100,000. In determining the amount of any Adverse Consequences attributable to a breach, any materiality standard contained in a representation, warranty or covenant of Ridge shall be disregarded. -35- 42 (b) The Escrow Fund shall be divided into two parts: Fund A, which shall consist of 50% of the Escrow Shares and Fund B, which shall consist of the remaining 50% of the Escrow Shares. (c) The maximum amount recoverable from the Indemnifying Stockholders in respect to all Claims other than Capitalization - Related Claims (as defined in Section 10.4(e) below) shall be the amount represented by Fund A. (d) In the event that (i) one or more Capitalization - Related Claims are asserted and (ii) Fund A is inadequate to cover both (A) the Adverse Consequences in respect to such Capitalization - Related Claim(s) and (B) all other Claims, then Fund B shall be available as an additional source of indemnification solely for the excess amount of such Capitalization - Related Claims. (e) For purposes of this Section 10, "Capitalization - Related Claims" shall mean Claims based upon a breach of the representations and warranties contained in Section 5.2 (with respect to stockholder approval) and Section 5.3. (f) In any event, the maximum amount recoverable from the Indemnifying Stockholders pursuant to this Section 10 shall be the amount of the Escrow Fund, and no claim for indemnification shall be asserted against any of the Indemnifying Stockholders or any other stockholders of Ridge other than against the Escrow Fund pursuant to this Section 10 and the Escrow Agreement. 10.5 Procedure for Indemnification Claims; Matters Involving Third Parties. (a) In the event that Adaptec (the "Indemnified Party") makes a Claim against the Indemnifying Stockholders, it shall notify the Ridge Stockholders' Representatives in writing as to the existence, nature and amount of such Claim (with reasonable specificity) (the "Claim Notice"). If the Ridge Stockholders' Representatives dispute the existence or the amount of such Claim, the Ridge Stockholders' Representatives shall notify the Indemnified Party in writing (with reasonable specificity) within thirty (30) days following the Ridge Stockholders' Representatives receipt of the Claim Notice (the "Response Notice"). Upon such an exchange of written notification, the parties will negotiate in good faith for up to thirty (30) days or such other period of time as the parties mutually agree in an effort to resolve their differences with respect to such Claim. In the event that the Claim is not resolved within such period, the Indemnified Party may at any time thereafter submit the claim to the Escrow Agent pursuant to the Escrow Agreement. (b) If any third party shall notify an Indemnified Party with respect to any matter (a "Third Party Claim") which may give rise to a Claim against the Indemnifying Stockholders under this Section 10, the Indemnified Party shall promptly notify the Ridge Stockholders' Representatives thereof in writing; provided, however, that no delay on the part of the Indemnified Party in notifying the Ridge Stockholders' Representatives shall relieve the Indemnifying -36- 43 Stockholders from any obligation hereunder unless and then solely to the extent the Indemnifying Stockholders are prejudiced thereby. (c) In the event that the Indemnified Party provides notice to the Ridge Stockholders' Representatives of a Third Party Claim, the Ridge Stockholders' Representatives will undertake control of the defense thereof by counsel of their choosing, reasonably acceptable to the Indemnified Party. The Indemnified Party may participate in the defense through its own counsel at its own expense. If (i) the Ridge Stockholders' Representatives fail or refuse to undertake the defense of such Third Party Claim within fifteen (15) days after written notice of such Third Party Claim has been delivered to the Ridge Stockholders' Representatives, (ii) the Third Party Claim seeks only injunctive or other equitable relief or (iii) Adaptec determines, in good faith, that the Third Party Claim, if determined adversely, could be reasonably expected to have a Material Adverse Effect on Adaptec, the Indemnified Party shall have the right to undertake the defense, compromise and settlement of such Third Party Claim with counsel of its own choosing. The Indemnified Party and the Ridge Stockholders' Representatives shall cooperate with each other in all reasonable respects in connection with the defense of any Third Party Claim, including making available records relating to such claim and furnishing employees of the Indemnified Party or its Affiliates as may be reasonably necessary for the preparation of the defense of any such Third Party Claim or for testimony as witness in any proceeding relating thereto. (d) Unless (i) the Ridge Stockholders' Representatives shall have failed to fulfill their obligations under Section 10.5(c) or (ii) Adaptec has assumed control of the defense of a Third Party Claim pursuant to Section 10.5(c), no settlement by the Indemnified Party of any Third Party Claim shall be made without the prior written consent by or on behalf of the Indemnifying Stockholders. If the Ridge Stockholders' Representatives have assumed the defense of a Third Party Claim, as contemplated hereunder, no settlement of such Third Party Claim may be made by the Ridge Stockholders' Representatives without the prior written consent by or on behalf of the Indemnified Party, unless such settlement includes a complete release of all claims against the Indemnified Party. Upon any settlement of a Third Party Claim in accordance with this Section 10.5(d), the Parties shall instruct the Escrow Agent to release funds from the Escrow Fund, to the extent available (and subject to the limitations set forth in Section 10.4), to effect such settlement. 11. Termination. 11.1 Termination of the Agreement. Certain of the Parties may terminate this Agreement as provided below: (a) Adaptec and Ridge may terminate this Agreement as to all Parties by mutual written consent at any time prior to the Closing; (b) Adaptec may terminate this Agreement by giving written notice to Ridge at any time prior to the Closing (A) in the event Ridge has breached any representation, warranty, or covenant contained in this Agreement in any respect, and the breach has continued without cure for a period of thirty (30) days after the notice of breach; (B) if the Closing shall not -37- 44 have occurred on or before June 30, 1998 by reason of the failure of any condition precedent under Section 9.1 hereof (unless the failure results primarily from Adaptec itself breaching any representation, warranty, or covenants contained in this Agreement); or (C) in the event there has occurred a Material Adverse Effect with respect to Ridge. (c) Ridge may terminate this Agreement by giving written notice to Adaptec at any time prior to the Closing (A) in the event Adaptec has breached any representation, warranty, or covenant contained in this Agreement in any respect, and the breach has continued without cure for a period of thirty (30) days after the notice of breach; (B) if the Closing shall not have occurred on or before June 30, 1998, by reason of the failure of any condition precedent under Section 9.2 hereof (unless the failure results primarily from Ridge itself breaching any representation, warranty, or covenants contained in this Agreement); or (C) in the event there has occurred a Material Adverse Effect with respect to Adaptec. 11.2 Effect of Termination. If any Party terminates this Agreement pursuant to Section 11.1 above, all rights and obligations of the Parties hereunder shall terminate without any liability of any Party to any other Party (except for any liability of any Party then in breach); provided, however, that the confidentiality provisions contained in Section 7.5 above shall survive termination. 12. Miscellaneous. 12.1 Press Releases and Public Announcements. No Party shall issue any press release or make any public announcement relating to the subject matter of this Agreement prior to the Closing without the prior written approval of Adaptec and Ridge; provided, however, that any Party may make any public disclosure it believes in good faith is required by applicable law or any listing or trading agreement concerning its publicly-traded securities (in which case the disclosing Party will use its reasonable best efforts to advise the other Parties prior to making the disclosure). 12.2 No Third-Party Beneficiaries. This Agreement shall not confer any rights or remedies upon any Person other than the Parties, the stockholders and option holders of Ridge and their respective successors and permitted assigns. 12.3 Entire Agreement. This Agreement (including the documents referred to herein) constitutes the entire agreement among the Parties and supersedes any prior understandings, agreements, or representations by or among the Parties, written or oral, to the extent they related in any way to the subject matter hereof. 12.4 Succession and Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties named herein and their respective successors and permitted assigns. No Party may assign either this Agreement or any of its rights, interests, or obligations hereunder without the prior written approval of the other Parties; provided, however, that Adaptec may (i) assign any or all of its rights and interests hereunder to one or more of its Affiliates and (ii) designate one or more of its Affiliates to perform its obligations hereunder (in any or all of which -38- 45 cases Adaptec nonetheless shall remain responsible for the performance of all of its obligations hereunder). 12.5 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together will constitute one and the same instrument. 12.6 Headings. The section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. 12.7 Notices. All notices, requests, demands, claims, and other communications hereunder will be in writing. Any notice, request, demand, claim, or other communication hereunder shall be deemed duly given if (and then two business days after) it is sent by registered or certified mail, return receipt requested, postage prepaid and addressed to the intended recipient as set forth below: If to Adaptec: Adaptec, Inc. 691 S. Milpitas Blvd. Milpitas, California 95035 Attention: Christopher G. O'Meara Dana Miles, Esq. Copy to: Wilson Sonsini Goodrich & Rosati Professional Corporation 650 Page Mill Road Palo Alto, California 94304-1050 Attention: David C. Drummond, Esq. If to Ridge: Ridge Technologies, Inc. 2199 Zanker Road San Jose, California 95131 Attention: Robert J. Graham Copy to: Gray Cary Ware & Freidenrich LLP 400 Hamilton Avenue Palo Alto, California 94301 Attention: Dennis C. Sullivan, Esq. -39- 46 Any Party may send any notice, request, demand, claim, or other communication hereunder to the intended recipient at the address set forth above using any other means (including personal delivery, expedited courier, messenger service, telecopy, telex, ordinary mail, or electronic mail), but no such notice, request, demand, claim, or other communication shall be deemed to have been duly given unless and until it actually is received by the intended recipient. Any Party may change the address to which notices, requests, demands, claims, and other communications hereunder are to be delivered by giving the other Parties notice in the manner herein set forth. 12.8 Governing Law. This Agreement shall be governed by and construed in accordance with the domestic laws of the State of Delaware without giving effect to any choice or conflict of law provision or rule (whether of the State of Delaware or any other jurisdiction) that would cause the application of the laws of any jurisdiction other than the State of Delaware. 12.9 Forum Selection; Consent to Jurisdiction. All disputes arising out of or in connection with this Agreement shall be solely and exclusively resolved by a court of competent jurisdiction in the State of California. The Parties hereby consent to the jurisdiction of the Superior Court of the State of California for the County of Santa Clara and the United States District Court for the Northern District of California and waive any objections or rights as to forum nonconveniens, lack of personal jurisdiction or similar grounds with respect to any dispute relating to this Agreement. 12.10 Amendments and Waivers. No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by Adaptec and Ridge. No waiver by any Party of any default, misrepresentation, or breach of warranty or covenant hereunder, whether intentional or not, shall be deemed to extend to any prior to subsequent default, misrepresentation, or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent occurrence. 12.11 Severability. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions hereof or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. 12.12 Expenses. Each of the Parties hereto will bear its own costs and expenses (including legal fees and expenses) incurred in connection with this Agreement and the transactions contemplated hereby, provided that (i) if Ridge's out-of-pocket costs and expenses (including but not limited to legal and accounting fees and any brokers', finders' or advisory fees but excluding costs and expenses which are not solely and directly related to the Merger or the exchange of Ridge Common Stock and Ridge Preferred Stock for Adaptec Common Stock in accordance with the guidelines established in Revenue Ruling 73-54) incurred in connection with this Agreement and the transactions contemplated hereby ("Ridge's Expenses") are less than One Million Dollars ($1,000,000) then the Ridge stockholders will be liable for one-half (1/2) of the amount of such expenses and (ii) if Ridge's Expenses exceed One Million Dollars ($1,000,000) then the Ridge stockholders will be liable for Five Hundred Thousand dollars ($500,000) of such expenses plus the amount by which such expenses exceed One Million Dollars ($1,000,000). Ridge's expenses for -40- 47 which the Ridge stockholders are liable are referred to as the "Excess Transaction Expenses." A schedule of all Ridge's Expenses incurred or to be incurred shall be submitted to Adaptec not later than two (2) business days prior to the Closing. The number of shares of Adaptec Common Stock issuable to Graham and Bain (in his individual capacity) pursuant to Section 3.1 shall be reduced, on a pro rata basis, in a total amount equal to the dollar value of the Excess Transaction Expenses, based on the Average Closing Price. 12.13 Construction. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring any Party by virtue of the authorship of any of the provisions of this Agreement. Any reference to any federal, state, local, or foreign statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The word "including" shall mean including without limitation. 12.14 Incorporation of Exhibits and Schedules. The Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part hereof. 12.15 Ridge Stockholders' Representatives. For the purposes of this Agreement the Indemnifying Stockholders, without any further action on the part of any such stockholder, shall be deemed to have consented to the appointment of Graham and Bain as representatives of such stockholders (the "Ridge Stockholders' Representatives"), as the attorneys-in-fact for and on behalf of each Indemnifying Stockholder, and the taking by the Ridge Stockholders' Representatives of any and all actions and the making of any decisions required or permitted to be taken by them under this Agreement or the Escrow Agreement, including, without limitation, the exercise of the power to (i) execute the Escrow Agreement, (ii) receive or give any notice on behalf of the Indemnifying Stockholders pursuant to this Agreement or the Escrow Agreement, (iii) authorize delivery to Adaptec of the Escrow Fund, or any portion thereof, in satisfaction of Claims, (iv) agree to, negotiate, enter into settlements and compromises of, and demand arbitration and comply with orders of courts and awards of arbitrators with respect to such Claims, (v) resolve any Claims and (vi) take all actions necessary in the judgment of the Ridge Stockholders' Representatives for the accomplishment of the foregoing and all of the other terms, conditions and limitations of this Agreement and the Escrow Agreement. Accordingly, the Ridge Stockholders' Representatives have unlimited authority and power to act on behalf of each Indemnifying Stockholder with respect to this Agreement and the Escrow Agreement and the disposition, settlement or other handling of all claims, rights or obligations arising from and taken pursuant to this Agreement. The Indemnifying Stockholders will be bound by all actions taken by the Ridge Stockholders' Representatives in connection with this Agreement and the Escrow Agreement, and Adaptec shall be entitled to rely on any action or decision of the Ridge Stockholders' Representatives evidenced by a written document executed by both of the Ridge Stockholders' Representatives as the action or decision of each of the Indemnifying Stockholders. The Ridge Stockholders' Representatives (in their capacity as Ridge Stockholders' Representatives and not as Indemnifying Stockholders) will incur no liability with respect to any action taken or suffered by them in reliance upon any notice, direction, instruction, consent, statement or other document believed by them to be genuine and to have been signed by the proper person (and shall have no responsibility to determine the authenticity thereof), nor for any other action or inaction, except their own willful misconduct, bad faith or gross negligence. In all -41- 48 questions arising under this Agreement or the Escrow Agreement, the Ridge Stockholders' Representatives may rely on the advice of counsel, and for anything done, omitted or suffered in good faith by the Ridge Stockholders' Representatives based on such advice, the Ridge Stockholders' Representatives (in their capacity as Ridge Stockholders' Representatives and not as Indemnifying Stockholders) will not be liable to anyone. At any time during the term of the Escrow Agreement, holders of a majority of the Escrow Shares may appoint new Ridge Stockholders' Representatives by written consent by sending notice and a copy of the written consent appointing such new Ridge Stockholders' Representative signed by holders of a majority of the Escrow Shares to Adaptec and the Escrow Agent. Such appointment will be effective upon the later of the date indicated in the consent or the date such consent is received by Adaptec and the Escrow Agent. 12.16 Attorneys' Fees. If any legal proceeding or other action relating to this Agreement is brought or otherwise initiated, the prevailing party shall be entitled to recover reasonable attorneys fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled). 13. Location of Definitions. The following table sets forth the Sections of this Agreement in which certain terms are defined:
Term Section - ----------------------------------------------- ------- Adaptec Introduction Adaptec Balance Sheet 6.6 Adaptec Common Stock 2.1 Adaptec Disclosure Schedule 6 Adaptec SEC Reports 6.5(a) Adverse Consequences 10.3 Affiliate 1 Affiliated Group 5.12(d) Agreement Introduction Average Closing Price 3.1 Balance Sheet 5.8 Bain 10.1 Business Condition 1 Capitalization-Related Claims 10.4(e) Certificates 3.5(c) Claims 10.4(a) Claim Notice 10.5(a) Closing 2.2 Closing Date 2.2 COBRA 5.24(a) Code 2.4 Constituent Corporations 2.3
-42- 49
Term Section - ----------------------------------------------- ------- DGCL 2.1 DOL 5.24(a) Effective Date of the Merger 2.1 Effective Time of the Merger 2.1 Employee 5.24(a) Employee Agreement 5.24(a) Employee Benefit Plan 5.24(a) Employee Pension Benefit Plan 5.24(a) Employment Agreement 7.9 Environmental, Health and Safety Laws 5.26(a) ERISA 5.24(a) Escrow Agent 10.1 Escrow Agreement 3.6 Escrow Fund 10.1 Escrow Shares 10.1 Exchange Agent 3.5(a) Excess Transaction Expenses 12.12 Extremely Hazardous Substance 5.26(a) Financial Statements 5.6 Fiscal Period End 5.6 FMLA 5.24(a) GAAP 5.6 Graham 4.2(b) Hazardous Material 5.26(a) Including 12.13 Indemnified Party 10.5(a) Indemnifying Stockholders 10.1 Information Statement 7.10 Intellectual Property 1 International Employee Plan 5.24(a) IRS 5.24(a) Key Employees 4.2(b) Material Adverse Effect 1 Merger 2.1 Merger Sub Introduction Multiemployer Plan 5.24(a) Ordinary Course of Business 1 Parachute Payment 5.24(i) Parties Introduction
-43- 50
Term Section - ----------------------------------------------- ------- Party Introduction PBGC 5.24(a) Pension Plan 5.24(a) Person 1 Response Notice 10.5(a) Ridge Introduction Ridge Agreement 5.9(b) Ridge Common Stock 2.1 Ridge Disclosure Schedule 5 Ridge Employee Plan 5.24(a) Ridge Expenses 12.12 Ridge Preferred Stock 2.1 Ridge Stock Option Plan 3.7 Ridge Stockholders' Representatives 12.15 Security Interest 1 Senior Employees 7.8(b) Stockholders Agreement 7.8(a) Stock Rights 5.3(b) Survival Termination Date 10.2 Surviving Corporation 2.3 Taxes 5.12(a) Tax Returns 5.12(b) Third Party Claim 10.4(b) Trusts 3.7
-44- 51 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on as of the date first above written. RIDGE TECHNOLOGIES, INC. Ridge: By: [SIG] -------------------------- Title: ----------------------- Adaptec: ADAPTEC, INC. By: -------------------------- Title: ----------------------- Merger Sub: RDS ACQUISITION CORP. By: -------------------------- Title: ----------------------- -45- 52 IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on as of the date first above written. RIDGE TECHNOLOGIES, INC. Ridge: By: -------------------------- Title: ----------------------- Adaptec: ADAPTEC, INC. By: [SIG] -------------------------- Title: ----------------------- Merger Sub: RDS ACQUISITION CORP. By: [SIG] -------------------------- Title: ----------------------- -45- EX-2.8 4 AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 2.8 AGREEMENT AND PLAN OF MERGER OF ADAPTEC INC., A DELAWARE CORPORATION, AND ADAPTEC INC., A CALIFORNIA CORPORATION THIS AGREEMENT AND PLAN OF MERGER dated as of February 23, 1998 (the "Agreement") is between Adaptec, Inc. a Delaware corporation ("Adaptec Delaware"), and Adaptec Inc., a California corporation ("Adaptec California"). Adaptec Delaware and Adaptec California are sometimes referred to herein as the "Constituent Corporations." RECITALS A. Adaptec Delaware is a corporation duly organized and existing under the laws of the State of Delaware and has an authorized capital of 401,000,000 shares, $0.001 par value, of which 400,000,000 shares are designated "Common Stock" and 1,000,000 shares are designated "Preferred Stock" of which Two-Hundred Fifty Thousand (250,000) shares are designated as Series A Participating Preferred. As of February 23, 1998, 100 shares of Common Stock were issued and outstanding, all of which are held by Adaptec California, and no shares of Preferred Stock were issued and outstanding. B. Adaptec California is a corporation duly organized and existing under the laws of the State of California and has an authorized capital of 401,000,000 shares, $0.001 par value, of which 400,000,000 are designated "Common Stock" and 1,000,000 shares are designated "Preferred Stock" of which Two-Hundred Fifty Thousand (250,000) are designated as Series A Participating Preferred Stock. As of February 23, 1998, 113, 737,361 shares of Common Stock were issued and outstanding, and no shares of Preferred Stock were issued and outstanding. C. The Board of Directors of Adaptec California has determined that, for the purpose of effecting the reincorporation of Adaptec California in the State of Delaware, it is advisable and in the best interests of Adaptec California and its shareholders that Adaptec California merge with and into Adaptec Delaware upon the terms and conditions herein provided. D. The respective Boards of Directors of Adaptec Delaware and Adaptec California have approved this Agreement and have directed that this Agreement be submitted to a vote of their respective shareholders and executed by the undersigned officers. NOW, THEREFORE, in consideration of the mutual agreements and covenants set forth herein, Adaptec Delaware and Adaptec California hereby agree, subject to the terms and conditions hereinafter set forth, as follows: 2 I MERGER 1.1 Merger. In accordance with the provisions of this Agreement, the Delaware General Corporation Law and the California General Corporation Law, Adaptec California shall be merged with and into Adaptec Delaware (the "Merger"), the separate existence of Adaptec California shall cease and Adaptec Delaware shall survive the Merger and shall continue to be governed by the laws of the State of Delaware, and Adaptec Delaware shall be, and is herein sometimes referred to as, the "Surviving Corporation," and the name of the Surviving Corporation shall be Adaptec, Inc. 1.2 Filing and Effectiveness. The Merger shall become effective when the following actions shall have been completed: (a) This Agreement and the Merger shall have been adopted and approved by the shareholders of each Constituent Corporation in accordance with the requirements of the Delaware General Corporation Law and the California General Corporation Law; (b) All of the conditions precedent to the consummation of the Merger specified in this Agreement shall have been satisfied or duly waived by the party entitled to satisfaction thereof; (c) An executed and acknowledged counterpart of this Agreement meeting the requirements of the Delaware General Corporation Law shall have been filed with the Secretary of State of the State of Delaware; and (d) An executed counterpart of this Agreement meeting the requirements of the California General Corporation Law shall have been filed with the Secretary of State of the State of California. The date and time when the Merger shall become effective, as aforesaid, is herein called the "Effective Date of the Merger." 1.3 Effect of the Merger. Upon the Effective Date of the Merger, the separate existence of Adaptec California shall cease and Adaptec Delaware, as the Surviving Corporation, (i) shall continue to possess all of its assets, rights, powers and property as constituted immediately prior to the Effective Date of the Merger, (ii) shall be subject to all actions previously taken by its and Adaptec California's Boards of Directors, (iii) shall succeed, without other transfer, to all of the assets, rights, powers and property of Adaptec California in the manner as more fully set forth in Section 259 of the Delaware General Corporation Law, (iv) shall continue to be subject to all of its debts, liabilities and obligations as constituted immediately prior to the Effective Date of the Merger, and (v) shall succeed, without other transfer, to all of the debts, liabilities and obligations of Adaptec California in the same manner as if Adaptec Delaware had itself incurred them, all as more fully provided under the applicable provisions of the Delaware General Corporation Law and the California General Corporation Law. -2- 3 II CHARTER DOCUMENTS, DIRECTORS AND OFFICERS 2.1 Certificate of Incorporation. The Certificate of Incorporation of Adaptec Delaware as in effect immediately prior to the Effective Date of the Merger shall continue in full force and effect as the Certificate of Incorporation of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. 2.2 Bylaws. The Bylaws of Adaptec Delaware as in effect immediately prior to the Effective Date of the Merger shall continue in full force and effect as the Bylaws of the Surviving Corporation until duly amended in accordance with the provisions thereof and applicable law. 2.3 Directors and Officers. The directors and officers of Adaptec California immediately prior to the Effective Date of the Merger shall be the directors and officers of the Surviving Corporation until their respective successors shall have been duly elected and qualified or until as otherwise provided by law, or the Certificate of Incorporation of the Surviving Corporation or the Bylaws of the Surviving Corporation. III MANNER OF CONVERSION OF STOCK 3.1 Adaptec California Common Stock. Upon the Effective Date of the Merger, each share of Adaptec California Common Stock, par value $.001, issued and outstanding immediately prior thereto shall, by virtue of the Merger and without any action by the Constituent Corporations, the holder of such shares or any other person, be changed and converted into and exchanged for one fully paid and nonassessable share of Common Stock, $.001 par value, of the Surviving Corporation. Each Purchase Right issued or issuable pursuant to the Second Amended and Restated Rights Agreement (the "Rights Agreement") dated as of December 5, 1996 between Adaptec, Inc. and Chase Mellon Shareholder Services, LLC shall become exercisable, when and as described in the Rights Agreement, for Adaptec Delaware Series A Participating Preferred Stock. Each share of Adaptec Delaware Common Stock issued pursuant to this Agreement shall have one such Purchase Right associated with it. 3.2 Adaptec California Options, Stock Purchase Rights and Convertible Securities. Upon the Effective Date of the Merger, the Surviving Corporation shall assume and continue any stock option plans and all other employee benefit plans of Adaptec California. As of the date hereof, there are options outstanding under Adaptec California's stock option plans to purchase a total of 18,008,523 shares of Common Stock of Adaptec California. As of the date hereof, there are outstanding convertible notes in aggregate principal amount of $230,000,000 convertible into Common Stock of Adaptec California and rights to purchase Common Stock of Adaptec California issued pursuant to Adaptec California's Employee Stock Purchase Plan. Each outstanding and unexercised option or other right to purchase Adaptec California Common Stock or security convertible into Adaptec California Common Stock shall become an outstanding and unexercised option or right to purchase the Surviving Corporation's Common -3- 4 Stock or a security convertible into the Surviving Corporation's Common Stock on the basis of one share of the Surviving Corporation's Common Stock for each share of Adaptec California Common Stock issuable pursuant to any such option, stock purchase right or convertible security, on the same terms and conditions and at an exercise price per share equal to the exercise price applicable to any such Adaptec California option, stock purchase right or convertible security at the Effective Date of the Merger. A number of shares of the Surviving Corporation's Common Stock shall be reserved for issuance upon the exercise of options, stock purchase rights or convertible securities equal to the number of shares of Adaptec California Common Stock so reserved immediately prior to the Effective Date of the Merger. 3.3 Adaptec Delaware Common Stock. Upon the Effective Date of the Merger, each share of Common Stock, $0.001 par value, of Adaptec Delaware issued and outstanding immediately prior thereto shall, by virtue of the Merger and without any action by Adaptec Delaware, the holder of such shares or any other person, be canceled and returned to the status of authorized but unissued shares. 3.4 Certificates. After the Effective Date of the Merger, each outstanding certificate theretofore representing shares of Adaptec California Common Stock shall be deemed for all purposes to represent the same number of whole shares of the Surviving Corporation's Common Stock. IV GENERAL 4.1 Covenants of Adaptec Delaware. Adaptec Delaware covenants and agrees that it will, on or before the Effective Date of the Merger: (a) Qualify to do business as a foreign corporation in the State of California and in connection therewith irrevocably appoint an agent for service of process as required under the provisions of Section 2105 of the California General Corporation Law; (b) File any and all documents with the California Franchise Tax Board necessary for the assumption by Adaptec Delaware of all of the franchise tax liabilities of Adaptec California; and (c) Take such other actions as may be required by the California General Corporation Law. 4.2 Further Assurances. From time to time, as and when required by Adaptec Delaware or by its successors or assigns, there shall be executed and delivered on behalf of Adaptec California such deeds and other instruments, and there shall be taken or caused to be taken by Adaptec Delaware and Adaptec California such further and other actions, as shall be appropriate or necessary in order to vest or perfect in or conform of record or otherwise by Adaptec Delaware the title to and possession of all the property, interests, assets, rights, privileges, immunities, powers, franchises and authority of Adaptec California and otherwise to carry out the purposes of this Agreement, and the officers and directors of -4- 5 Adaptec Delaware are fully authorized in the name and on behalf of Adaptec California or otherwise to take any and all such action and to execute and deliver any and all such deeds and other instruments. 4.3 Abandonment. At any time before the filing of this Agreement with the Secretary of State of the State of Delaware, this Agreement may be terminated and the Merger may be abandoned for any reason whatsoever by the Board of Directors of either Adaptec California or Adaptec Delaware, or both, notwithstanding the approval of this Agreement by the shareholders of Adaptec California or by the sole stockholder of Adaptec Delaware, or by both. 4.4 Amendment. The Boards of Directors of the Constituent Corporations may amend this Agreement at any time prior to the filing of this Agreement with the Secretaries of State of the States of California and Delaware, provided that an amendment made subsequent to the adoption of this Agreement by the shareholders of either Constituent Corporation shall not: (1) alter or change the amount or kind of shares, securities, cash, property and/or rights to be received in exchange for or on conversion of all or any of the shares of any class or series thereof of such Constituent Corporation, (2) alter or change any term of the Certificate of Incorporation of the Surviving Corporation to be effected by the Merger, (3) alter or change any of the terms and conditions of this Agreement if such alteration or change would adversely affect the holders of any class of shares or series thereof of such Constituent Corporation, or (4) alter or change any of the principal terms of this Agreement. 4.5 Registered Office. The registered office of the Surviving Corporation in the State of Delaware is located at Corporation Trust Center, 1209 Orange Center, in the city of Wilmington, County of New Castle, 19801 and The Corporation Trust Company is the registered agent of the Surviving Corporation at such address. 4.6 Expenses. Each party to the transactions contemplated by this Agreement shall pay its own expenses, if any, incurred in connection with such transactions. 4.7 Agreement. Executed copies of this Agreement will be on file at the principal place of business of the Surviving Corporation at 500 Yosemite Drive, Milpitas, California 95035 and copies thereof will be furnished to any shareholder of either Constituent Corporation, upon request and without cost. 4.8 Governing Law. This Agreement shall in all respects be construed, interpreted and enforced in accordance with and governed by the laws of the State of Delaware and, so far as applicable, the merger provisions of the California General Corporation Law. 4.9 Counterparts. In order to facilitate the filing and recording of this Agreement, the same may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. -5- 6 IN WITNESS WHEREOF, this Agreement, having first been approved by resolutions of the Boards of Directors of Adaptec Delaware and Adaptec California, is hereby executed on behalf of each of such two corporations and attested by their respective officers thereunto duly authorized. ADAPTEC, INC. a Delaware corporation By: ------------------------------------ F. Grant Saviers President and Chief Executive Officer ATTEST: - ------------------------------------ Henry P. Massey, Jr. Secretary ADAPTEC, INC. a California corporation By: ------------------------------------ F. Grant Saviers President and Chief Executive Officer ATTEST: - ------------------------------------ Henry P. Massey, Jr. Secretary -6- 7 ADAPTEC, INC. (California Corporation) OFFICERS' CERTIFICATE F. Grant Saviers and Henry P. Massey, Jr. certify that: 1. They are the President and the Secretary, respectively, of Adaptec, Inc., a corporation organized under the laws of the State of California. 2. The corporation has authorized two classes of stock, designated "Common Stock" and "Preferred Stock". There are authorized 400,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock. 3. There were 112,308,577 shares of Common Stock, and no shares of Preferred Stock, outstanding as of the record date (the "Record Date") of the shareholders' meeting at which the Agreement and Plan of Merger attached hereto (the "Merger Agreement") was approved. All shares of Common stock outstanding on the Record Date were entitled to vote on the merger. 4. The principal terms of the Merger Agreement were approved by the Board of Directors and by the vote of a number of shares of each class of stock which equaled or exceeded the vote required. 5. The vote required was a majority of the outstanding shares of Common Stock. 6. F. Grant Saviers and Henry P. Massey, Jr. further declare under penalty of perjury under the laws of the State of California that each has read the foregoing certificate and knows the contents thereof and that the same is true of their own knowledge. Executed in Milpitas, California on February 23, 1998. ------------------------------------ F. Grant Saviers, President ------------------------------------ Henry P. Massey, Jr., Secretary 8 ADAPTEC, INC. (Surviving Corporation) OFFICERS' CERTIFICATE F. Grant Saviers and Henry P. Massey, Jr. certify that: 1. They are the President and the Secretary, respectively, of Adaptec, Inc., a corporation organized under the laws of the State of Delaware. 2. The corporation has authorized two classes of stock, designated "Common Stock" and "Preferred Stock". There are authorized 400,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock. 3. There were 100 shares of Common Stock outstanding and entitled to vote on the Agreement and Plan of Merger attached hereto (the "Merger Agreement"). There were no shares of Preferred Stock outstanding. 4. The principal terms of the Merger Agreement were approved by the Board of Directors and by the vote of a number of shares of each class and series of stock which equaled or exceeded the vote required. 5. The vote required was a majority of the outstanding shares of Common Stock. 6. F. Grant Saviers and Henry P. Massey, Jr. , further declare under penalty of perjury under the laws of the State of Delaware that each has read the foregoing certificate and knows the contents thereof and that the same is true of their own knowledge. Executed in Milpitas, California on February 23, 1998. ------------------------------------ F. Grant Saviers, President ------------------------------------ Henry P. Massey, Jr., Secretary EX-3.1 5 CERTIFICATE OF INCORPORATION 1 Exhibit 3.1 SX CERTIFICATE OF INCORPORATION OF ADAPTEC, INC. ARTICLE ONE The name of the Corporation is Adaptec, Inc. (the "Corporation"). ARTICLE TWO The address of the Corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle, zip code 19801. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE THREE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. ARTICLE FOUR Part 1. Authorized Capital Stock. This Corporation is authorized to issue two classes of shares of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares which the Corporation is authorized to issue is 401,000,000 shares consisting of: (i) 400,000,000 shares of Common Stock, $.001 per share par value; and (ii) 1,000,000 shares of Preferred Stock, $.001 per share par value of which Two-Hundred Fifty Thousand (250,000) shares have been designated Series A Participating Preferred Stock. Part 2. Undesignated Preferred Stock. The Board of Directors is hereby authorized, subject to limitations prescribed by the Corporation Law, to provide for the issuance of the shares of undesignated Preferred Stock in one or more series, and by filing a certificate pursuant to the Corporation Law, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each series of undesignated Preferred Stock shall include, but not be limited to, determination of the following: 2 (i) the number of shares constituting that series and the distinctive designation of that series; (ii) the dividend rate on the shares of that series, whether dividends shall be cumulative, and if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series; (iii) whether that series shall have voting rights in addition to the voting rights provided by law, and if so, the terms of such voting rights; (iv) whether that series shall have conversion privileges, and if so, the terms and conditions of such privileges, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (v) whether or not the shares of that series shall be redeemable, and if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption rates; (vi) whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and if so, the terms in the amount of such sinking funds; (vii) the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (viii) any other relative rights, preferences and limitations of that series. Unless otherwise provided in the certificate establishing the designation, powers, preferences, and rights of shares of Undesignated Preferred Stock, the number of shares of any series of Undesig nated Preferred Stock may be increased (but not above the total number of authorized shares of Undesignated Preferred Stock) or decreased (but not below the number of shares thereof then outstanding) by a certificate pursuant to the Corporation Law. In case the number of shares of any series of Undesignated Preferred Stock shall be decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series of Undesignated Preferred Stock. Part 3. Series A Participating Preferred Stock. The Series A Participating Preferred Stock shall have the following designations, powers, preferences and relative and other special rights and qualifications, limitations and restrictions: (i) Proportional Adjustment. In the event the Corporation shall at any time after the issuance of any share or shares of Series A Participating Preferred Stock (a) declare any dividend on Common Stock of the Corporation ("Common Stock") payable in shares of Common Stock, (b) subdivide the outstanding Common Stock or (c) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Corporation shall simultaneously effect a -2- 3 proportional adjustment to the number of outstanding shares of Series A Participating Preferred Stock. (ii) Dividends and Distributions. (a) Subject to the prior and superior right of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Participating Preferred Stock with respect to dividends, the holders of shares of Series A Participating Preferred Stock shall be entitled to receive when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the last day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Participating Preferred Stock, in an amount per share (rounded to the nearest cent) equal to 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Participating Preferred Stock. (b) The Corporation shall declare a dividend or distribution on the Series A Participating Preferred Stock as provided in paragraph (a) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock). (c) Dividends shall begin to accrue on outstanding shares of Series A Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Participating Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. -3- 4 (iii) Voting Rights. The holders of shares of Series A Participating Preferred Stock shall have the following voting rights: (a) Each share of Series A Participating Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. (b) Except as otherwise provided herein or by law, the holders of shares of Series A Participating Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) Except as required by law, holders of Series A Participating Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. (iv) Certain Restrictions. (a) The Corporation shall not declare any dividend on, make any distribution on, or redeem or purchase or otherwise acquire for consideration any shares of Common Stock after the first issuance of a share or fraction of a share of Series A Participating Preferred Stock unless concurrently therewith it shall declare a dividend on the Series A Participating Preferred Stock as required by Section (ii) hereof. (b) Whenever quarterly dividends or other dividends or distributions payable on the Series A Participating Preferred Stock as provided in Section (ii) are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not: 1. declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Participating Preferred Stock; 2. declare or pay dividends on, make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with Series A Participating Preferred Stock, except dividends paid ratably on the Series A Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; 3. redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Participating Preferred Stock, provided that the Corporation may at -4- 5 any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Participating Preferred Stock; 4. purchase or otherwise acquire for consideration any shares of Series A Participating Preferred Stock, or any shares of stock ranking on a parity with the Series A Participating Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (c) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section (iv), purchase or otherwise acquire such shares at such time and in such manner. (v) Reacquired Shares. Any shares of Series A Participating Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. (vi) Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A Participating Preferred Stock shall be entitled to receive an aggregate amount per share equal to 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock plus an amount equal to any accrued and unpaid dividends on such shares of Series A Participating Preferred Stock. (vii) Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. (viii) No Redemption. The shares of Series A Participating Preferred Stock shall not be redeemable. (ix) Ranking. The Series A Participating Preferred Stock shall rank junior to all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such series shall provide otherwise. -5- 6 (x) Amendment. The Certificate of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preference or special rights of the Series A Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority of the outstanding shares of Series A Participating Preferred Stock, voting separately as a class. (xi) Fractional Shares. Series A Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Participating Preferred Stock. ARTICLE FIVE The name and mailing address of the incorporator are as follows: Wady H. Milner Wilson Sonsini Goodrich & Rosati, Professional Corporation 650 Page Mill Road Palo Alto, CA 94304 ARTICLE SIX The Corporation is to have perpetual existence. ARTICLE SEVEN The election of directors need not be by written ballot except to the extent provided in the Bylaws. ARTICLE EIGHT The number of directors which constitute the whole Board of Directors of the Corporation shall be designated in the Bylaws of the Corporation. ARTICLE NINE In furtherance and not in limitation of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to adopt, alter, amend or repeal the Bylaws of the Corporation, but the stockholders may make additional Bylaws and may alter or repeal any Bylaw whether adopted by them or otherwise. ARTICLE TEN -6- 7 A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived any improper personal benefit, and to the extent such exemption from liability or limitation thereof is not permitted under the Delaware General Corporation Law as the same exists or may hereafter be amended. If the Delaware General Corporation Law is amended after the filing of this Certificate of Incorporation to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. Neither any amendment nor repeal of this Article, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article, shall eliminate or reduce the effect of this Article in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. ARTICLE ELEVEN Except as otherwise provided herein, at the election of directors of the Corporation, each holder of Common Stock shall be entitled to one vote for each share held. No stockholder will be permitted to cumulate votes at any election of directors. ARTICLE TWELVE Meetings of stockholders may be held within or without the State of Delaware, as the Bylaws may provide. The books of the Corporation may be kept (subject to any provision contained in the laws of the State of Delaware) outside of the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the Bylaws of the Corporation. ARTICLE THIRTEEN The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by the laws of the State of Delaware, and all rights conferred herein are granted subject to this reservation. -7- 8 The undersigned incorporator hereby acknowledges that the foregoing Certificate of Incorporation is her act and deed and that the facts stated herein are true. Dated: November 19, 1997 ----------------------------- Wady H. Milner Incorporator -8- EX-3.2 6 BYLAWS OF REGISTRANT 1 Exhibit 3.2 BYLAWS OF ADAPTEC, INC. 2
TABLE OF CONTENTS Page ---- ARTICLE I CORPORATE OFFICES.....................................................................1 1.1 REGISTERED OFFICE.................................................................1 1.2 OTHER OFFICES.....................................................................1 ARTICLE II MEETINGS OF STOCKHOLDERS.............................................................1 2.1 PLACE OF MEETINGS.................................................................1 2.2 ANNUAL MEETING....................................................................1 2.3 SPECIAL MEETING...................................................................2 2.4 NOTICE OF STOCKHOLDERS' MEETINGS..................................................2 2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE......................................2 2.6 QUORUM............................................................................3 2.7 ADJOURNED MEETING; NOTICE.........................................................3 2.8 VOTING............................................................................3 2.9 VALIDATION OF MEETING; WAIVER OF NOTICE...........................................4 2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING ..........................4 2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING........................................4 2.12 PROXIES...........................................................................5 2.13 INSPECTORS OF ELECTION............................................................5 2.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE.............................................6 2.15 ADVANCE NOTICE OF STOCKHOLDER NOMINATIONS.........................................6 2.16 ADVANCE NOTICE OF STOCKHOLDER BUSINESS............................................7 ARTICLE III DIRECTORS...........................................................................7 3.1 POWERS............................................................................7 3.2 NUMBER OF DIRECTORS...............................................................8 3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS...........................8 3.4 RESIGNATION AND VACANCIES.........................................................8 3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE..........................................9 3.6 FIRST MEETINGS....................................................................9 3.7 REGULAR MEETINGS.................................................................10 3.8 SPECIAL MEETINGS; NOTICE.........................................................10 3.9 QUORUM...........................................................................10 3.10 WAIVER OF NOTICE.................................................................10 3.11 ADJOURNMENT......................................................................11 3.12 NOTICE OF ADJOURNMENT............................................................11 3.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING................................11 -i-
3 3.14 FEES AND COMPENSATION OF DIRECTORS...............................................11 3.15 APPROVAL OF LOANS TO OFFICERS....................................................11 3.16 REMOVAL OF DIRECTORS.............................................................12 ARTICLE IV COMMITTEES..........................................................................12 4.1 COMMITTEES OF DIRECTORS..........................................................12 4.2 COMMITTEE MINUTES................................................................12 4.3 MEETINGS AND ACTION OF COMMITTEES................................................13 ARTICLE V OFFICERS.............................................................................13 5.1 OFFICERS.........................................................................13 5.2 ELECTION OF OFFICERS.............................................................13 5.3 SUBORDINATE OFFICERS.............................................................14 5.4 REMOVAL AND RESIGNATION OF OFFICERS..............................................14 5.5 VACANCIES IN OFFICES.............................................................14 5.6 CHAIRMAN OF THE BOARD............................................................14 5.7 CHIEF EXECUTIVE OFFICER..........................................................14 5.8 PRESIDENT........................................................................15 5.9 CHIEF OPERATING OFFICER..........................................................15 5.10 CORPORATE VICE PRESIDENTS........................................................15 5.11 SECRETARY........................................................................15 5.12 CHIEF FINANCIAL OFFICER..........................................................16 5.13 TREASURER........................................................................16 5.14 ADMINISTRATIVE VICE PRESIDENTS...................................................16 5.15 AUTHORITY AND DUTIES OF OFFICERS.................................................17 ARTICLE VI INDEMNITY...........................................................................17 6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS........................................17 6.2 INDEMNIFICATION OF OTHERS........................................................17 6.3 PAYMENT OF EXPENSES IN ADVANCE...................................................18 6.4 INDEMNITY NOT EXCLUSIVE..........................................................18 6.5 INSURANCE INDEMNIFICATION........................................................18 ARTICLE VII RECORDS AND REPORTS................................................................19 7.1 MAINTENANCE AND INSPECTION OF RECORDS............................................19 7.2 MAINTENANCE AND INSPECTION OF BYLAWS.............................................20 7.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS............................20 7.4 INSPECTION BY DIRECTORS..........................................................20 7.5 REPRESENTATION OF SHARES OF OTHER CORPORATIONS...................................21 -ii-
4 ARTICLE VIII GENERAL MATTERS...................................................................21 8.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING............................21 8.2 CHECKS...........................................................................21 8.3 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.................................22 8.4 STOCK CERTIFICATES; PARTLY PAID SHARES...........................................22 8.5 SPECIAL DESIGNATION ON CERTIFICATES..............................................22 8.6 LOST CERTIFICATES................................................................23 8.7 CONSTRUCTION; DEFINITIONS........................................................23 8.8 DIVIDENDS........................................................................23 8.9 FISCAL YEAR......................................................................23 8.10 TRANSFER OF STOCK................................................................24 8.11 STOCK TRANSFER AGREEMENTS........................................................24 8.12 REGISTERED STOCKHOLDERS..........................................................24 ARTICLE IX EMERGENCY PROVISIONS................................................................24 9.1 GENERAL..........................................................................24 9.2 UNAVAILABLE DIRECTORS............................................................25 9.3 AUTHORIZED NUMBER OF DIRECTORS...................................................25 9.4 QUORUM...........................................................................25 9.5 CREATION OF EMERGENCY COMMITTEE..................................................25 9.6 CONSTITUTION OF EMERGENCY COMMITTEE..............................................25 9.7 POWERS OF EMERGENCY COMMITTEE....................................................26 9.8 DIRECTORS BECOMING AVAILABLE.....................................................26 9.9 ELECTION OF BOARD OF DIRECTORS...................................................26 9.10 TERMINATION OF EMERGENCY COMMITTEE...............................................26 ARTICLE X AMENDMENTS...........................................................................27 ARTICLE XI DISSOLUTION.........................................................................27 ARTICLE XII CUSTODIAN..........................................................................28 12.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES......................................28 12.2 DUTIES OF CUSTODIAN..............................................................28 -iii-
5 BYLAWS OF ADAPTEC, INC. ARTICLE I CORPORATE OFFICES I.1 REGISTERED OFFICE The registered office of the corporation shall be fixed in the certificate of incorporation of the corporation. I.2 OTHER OFFICES The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS II.1 PLACE OF MEETINGS Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the board of directors. In the absence of any such designation, stockholders' meetings shall be held at the principal executive office of the corporation. II.2 ANNUAL MEETING The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. In the absence of such designation, the annual meeting of stockholders shall be held on the fourth Thursday of August in each fiscal year at 9:30 a.m. However, if such day falls on a legal holiday, then the meeting shall be held at the same time and place on the next succeeding full business day. At the meeting, directors shall be elected and any other proper business may be transacted. II.3 SPECIAL MEETING 6 A special meeting of the stockholders may be called at any time by the board of directors, the chairman of the board, the chief executive officer, the president or by one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, then the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the chief executive officer, the president, the chief operating officer, any corporate vice president or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the stockholders entitled to vote, in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will be held at the time requested by the person or persons calling the meeting, so long as that time is not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, then the person or persons requesting the meeting may give the notice. Nothing contained in this paragraph of this Section 2.3 shall be construed as limiting, fixing or affecting the time when a meeting of stockholders called by action of the board of directors may be held. II.4 NOTICE OF STOCKHOLDERS' MEETINGS All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30)) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, and (i) in the case of a special meeting, the general nature of the business to be transacted (no business other than that specified in the notice may be transacted) or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the stockholders (but any proper matter may be presented at the meeting for such action). The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees who, at the time of the notice, management intends to present for election. II.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE Written notice of any meeting of stockholders shall be given either personally, by first-class mail, by third-class mail, but only if the Corporation has outstanding shares held of record by five hundred (500) or more persons, or by telegraphic or other written communication. Notices not personally delivered shall be sent postage prepaid and shall be addressed to the stockholder at the address of that stockholder appearing on the books of the corporation or given by the stockholder to the corporation for the purpose of notice. Notice shall be deemed to have been given at such time as -2- 7 it is delivered personally or deposited in the mail or sent by telegram or other means of written communication. An affidavit of the mailing or other means of giving any notice of any stockholders' meeting, executed by the secretary, assistant secretary or any transfer agent of the corporation giving the notice, shall be prima facie evidence of the giving of such notice. II.6 QUORUM The holders of a majority of the shares entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of business at all meetings of stockholders, except as otherwise provided by statute or by the certificate of incorporation. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. When a quorum is present at any meeting, the affirmative vote of holders of a the majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the laws of the State of Delaware or of the certificate of incorporation or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of the question. II.7 ADJOURNED MEETING; NOTICE Any stockholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 2.6 of these bylaws. When any meeting of stockholders, either annual or special, is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than forty-five (45) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 2.4 and 2.5 of these bylaws. II.8 VOTING The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.11 of these bylaws, subject to the provisions of -3- 8 Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgers and joint owners of stock and to voting trusts and other voting agreements). Except as provided in the last paragraph of this Section 2.8, or as may be otherwise provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. On any matter other than the election of directors, any stockholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the stockholder fails to specify the number of shares which the stockholder is voting affirmatively, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares which the stockholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented and voting at a duly-held meeting (which shares voting affirmatively also constitute at least a majority of the required quorum) shall be the act of the stockholders, unless the vote of a greater number, or voting by classes, is required by law or by the certificate of incorporation. II.9 VALIDATION OF MEETING; WAIVER OF NOTICE Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. II.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING The stockholders of the corporation may not take action by written consent without a meeting but must take any such actions at a duly called annual or special meeting. II.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING For purposes of determining the stockholders entitled to notice of any meeting or to vote thereat, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting and in such event only stockholders of record on the date so fixed are entitled to notice and to vote, notwithstanding any transfer of any shares on the books of the corporation after the record date. -4- 9 If the board of directors does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting unless the board of directors fixes a new record date for the adjourned meeting, but the board of directors shall fix a new record date if the meeting is adjourned for more than thirty (30) days from the date set for the original meeting. The record date for any other purpose shall be as provided in Section 8.1 of these bylaws. II.12 PROXIES Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. II.13 INSPECTORS OF ELECTION Before any meeting of stockholders, the board of directors shall appoint one or more inspectors to act at the meeting and make a written report thereof. The board of directors may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Such inspectors shall: (a) ascertain the number of shares outstanding and the voting power of each; (b) determine the shares represented at a meeting and the validity of proxies and ballots; (c) count all votes and ballots; (d) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and (e) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the inspectors' duties. -5- 10 II.14 LIST OF STOCKHOLDERS ENTITLED TO VOTE The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. II.15 ADVANCE NOTICE OF STOCKHOLDER NOMINATIONS Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to vote in the election of directors at the meeting who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation not less than twenty (20) days nor more than sixty (60) days prior to the meeting; provided, however, that in the event less than thirty (30) days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (a) as to each person, if any, whom the stockholder proposes to nominate for election or re-election as a director: (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person, (iv) any other information relating to such person that is required by law to be disclosed in solicitations of proxies for election of directors, and (v) such person's written consent to being named as a nominee and to serving as a director if elected; and (b) as to the stockholder giving the notice: (i) the name and address, as they appear on the corporation's books, of such stockholder, (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder, and (iii) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) relating to the nomination. At the request of the board of directors any person nominated by the board of directors for election as a director shall furnish to the Secretary of the corporation that information required to be set forth in the stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section. The chairman of the meeting shall, if the facts warrant, -6- 11 determine and declare at the meeting that a nomination was not made in accordance with the procedures prescribed by these bylaws, and if he should so determine, he shall so declare at the meeting and the defective nomination shall be disregarded. II.16 ADVANCE NOTICE OF STOCKHOLDER BUSINESS At the annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be: (a) as specified in the notice of meeting (or any supplement thereto) given by or at the direction of the board of directors, (b) otherwise properly brought before the meeting by or at the direction of the board of directors, or (c) otherwise properly brought before the meeting by a stockholder. Business to be brought before the meeting by a stockholder shall not be considered properly brought if the stockholder has not given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive officers of the corporation not less than twenty (20) nor more than sixty (60) days prior to the meeting; provided, however, that in the event that less than thirty (30) days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address of the stockholder proposing such business, (iii) the class and number of shares of the corporation, which are beneficially owned by the stockholder, (iv) any material interest of the stockholder in such business, and (v) any other information that is required by law to be provided by the stockholder in his capacity as proponent of a stockholder proposal. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section. The chairman of the annual meeting shall, if the facts warrant, determine and declare at the meeting that business was not properly brought before the meeting and in accordance with the provisions of this Section, and, if he should so determine, he shall so declare at the meeting that any such business not properly brought before the meeting shall not be transacted. ARTICLE III DIRECTORS III.1 POWERS Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the -7- 12 stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. III.2 NUMBER OF DIRECTORS The authorized number of directors shall be eight (8). This number may be changed by a duly adopted amendment to the certificate of incorporation or by an amendment to this bylaw adopted by the vote or written consent of the holders of a majority of the stock issued and outstanding and entitled to vote or by resolution of a majority of the board of directors. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. III.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS Except as provided in Section 3.4 of these bylaws, directors shall be elected at each annual meeting of stockholders to hold office until the next annual meeting. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Each director, including a director elected to fill a vacancy, shall hold office until his successor is elected and qualified or until his earlier resignation or removal. Elections of directors need not be by written ballot. III.4 RESIGNATION AND VACANCIES Any director may resign effective on giving written notice to the chairman of the board, the president, the secretary or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. Vacancies in the board of directors may be filled by a majority of the remaining directors, even if less than a quorum, or by a sole remaining director; provided, a vacancy created by the removal of a director by the vote of the stockholders or by court order may be filled only by the affirmative vote of a majority of the shares represented and voting at a duly held meeting at which a quorum is present (which shares voting affirmatively also constitute a majority of the required quorum). Each director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or -8- 13 convicted of a felony, or if the authorized number of directors is increased, or if the stockholders fail, at any meeting of stockholders at which any director of directors are elected, to elect the number of directors to be elected at that meeting. The stockholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. If at any time, by reason of death or resignation or other cause, the corporation should have no directors in office, then any officer or any stockholder or an executor, administrator, trustee or guardian of a stockholder, or other fiduciary entrusted with like responsibility for the person or estate of a stockholder, may call a special meeting of stockholders in accordance with the provisions of the certificate of incorporation or these bylaws, or may apply to the Court of Chancery for a decree summarily ordering an election as provided in Section 211 of the General Corporation Law of Delaware. If, at the time of filling any vacancy or any newly created directorship, the directors then in office constitute less than a majority of the whole board (as constituted immediately prior to any such increase), then the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten (10) percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by the provisions of Section 211 of the General Corporation Law of Delaware as far as applicable. III.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE Regular meetings of the board of directors may be held at any place within or outside the State of Delaware that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board may be held at any place within or outside the State of Delaware that has been designated in the notice of the meeting or, if not stated in the notice or if there is no notice, at the principal executive office of the corporation. Any meeting of the board, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another; and all such directors shall be deemed to be present in person at the meeting. III.6 FIRST MEETINGS The first meeting of each newly elected board of directors shall be held at such time and place as shall be fixed by the vote of the stockholders at the annual meeting and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or -9- 14 place of such first meeting of the newly elected board of directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the board of directors, or as shall be specified in a written waiver signed by all of the directors. III.7 REGULAR MEETINGS Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. III.8 SPECIAL MEETINGS; NOTICE Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board, the chief executive officer, the president, the chief operating officer or any two (2) directors. Notice of the date, time and place of special meetings shall be delivered personally, by telephone, facsimile, telegram, electronic mail or other comparable communication equipment to each director or sent by first-class mail, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone, facsimile, telegram, electronic mail or other comparable communication equipment, it shall be delivered at least twelve (12) hours before the time of the holding of the meeting. Any notice given personally or by telephone, facsimile, telegram, electronic mail or other comparable communication equipment may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. III.9 QUORUM A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section III.11 of these bylaws. Every act or decision done or made by a majority of the directors present at a duly held meeting at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of the certificate of incorporation and applicable law. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. III.10 WAIVER OF NOTICE -10- 15 Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. III.11 ADJOURNMENT A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. III.12 NOTICE OF ADJOURNMENT Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section III.8 of these bylaws, to the directors who were not present at the time of the adjournment. III.13 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, shall individually or collectively consent thereto in writing. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent and any counterparts thereof shall be filed with the minutes of the proceedings of the board. III.14 FEES AND COMPENSATION OF DIRECTORS Directors and members of committees may receive such compensation, if any, for their services and such reimbursement of expenses as may be fixed or determined by resolution of the board of directors. This Section 3.14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee or otherwise and receiving compensation for those services. III.15 APPROVAL OF LOANS TO OFFICERS -11- 16 The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. III.16 REMOVAL OF DIRECTORS Unless otherwise restricted by statute, by the certificate of incorporation or by these bylaws, any director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. ARTICLE IV COMMITTEES IV.1 COMMITTEES OF DIRECTORS The board of directors may, by resolution adopted by a majority of the authorized number of directors, designate one (1) or more committees, each consisting of two (2) or more directors, to serve at the pleasure of the board. The board may designate one (1) or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a -12- 17 dissolution of the corporation or a revocation of a dissolution, or (v) adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. IV.2 COMMITTEE MINUTES Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. IV.3 MEETINGS AND ACTION OF COMMITTEES Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.5 (place of meetings and meetings by telephone), Section 3.7 (regular meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10 (waiver of notice), Section 3.11 (adjournment), Section 3.12 (notice of adjournment), and Section 3.13 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS V.1 OFFICERS The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, a chief executive officer, a chief operating officer, a treasurer, one or more corporate vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. In addition to the officers of the corporation described above, there may also be such administrative vice presidents of the corporation as may be designated and appointed from time to time by the chief executive officer of the corporation in accordance with the provisions of Section 5.14 of these bylaws. V.2 ELECTION OF OFFICERS -13- 18 The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment. V.3 SUBORDINATE OFFICERS The board of directors may appoint, or empower the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. V.4 REMOVAL AND RESIGNATION OF OFFICERS Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. V.5 VACANCIES IN OFFICES A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. V.6 CHAIRMAN OF THE BOARD The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such other powers and duties as may from time to time be assigned to him by the board of directors or as may be prescribed by these bylaws. If there is no chief executive officer, then the chairman of the board shall also have the powers and duties prescribed in Section 5.7 of these bylaws. V.7 CHIEF EXECUTIVE OFFICER Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the chief executive officer of the corporation shall, -14- 19 subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the stockholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. V.8 PRESIDENT The president of the corporation shall have such powers and perform such duties as prescribed by the board of directors or these bylaws. In the absence or disability of the chief executive officer or if there be no such officer, then the president shall have the same powers and be subject to the same restrictions set forth in Section 5.7. V.9 CHIEF OPERATING OFFICER The chief operating officer shall have such powers and perform such duties as prescribed by the board of directors or these bylaws. In the absence or disability of the chief executive officer, if there be such an officer, the president and the chairman of the board, the chief operating officer shall perform the duties of chief executive officer and president, and when so acting shall have all the powers, and be subject to all the restrictions set forth in Section 5.7. V.10 CORPORATE VICE PRESIDENTS In the absence or disability of the chief executive officer, if there be such an officer, the president, the chairman of the board and the chief operating officer, if there be such an officer, the corporate vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a corporate vice president designated by the board of directors, shall perform all the duties of the chief executive officer and president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the chief executive officer and president. The corporate vice presidents shall also have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors or these bylaws. V.11 SECRETARY The secretary shall keep or cause to be kept, at the principal executive office of the corporation, or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders, with the time and place of holding, whether regular or special (and, if special, how authorized and the notice given), the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as determined by -15- 20 resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required by these bylaws or by law to be given, and he shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. V.12 CHIEF FINANCIAL OFFICER The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all money and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all of his transactions as chief financial officer and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or these bylaws. V.13 TREASURER In the absence or disability of the chief financial officer, the treasurer shall perform all the duties of the chief financial officer and when so acting shall have all the powers of, and be subject to all the restrictions upon, the chief financial officer. The treasurer shall have such other powers and perform such other duties as from time to time may be prescribed respectively by the board of directors or these bylaws. V.14 ADMINISTRATIVE VICE PRESIDENTS In addition to the corporate vice presidents of the corporation as provided in Section 5.10 of these bylaws and such subordinate officers as may be appointed in accordance with section 5.3 of these bylaws, there may also be such administrative vice presidents of the corporation as may be designated and appointed from time to time by the chief executive officer of the corporation. Administrative vice presidents shall perform such duties and have such powers as from time to time may be determined by the chief executive officer or the board of directors in order to assist the officers of the corporation in the furtherance of their duties. In the performance of such duties and the exercise of such powers, however, such administrative vice presidents shall have limited -16- 21 authority to act on behalf of the corporation as the board of directors shall establish, including but not limited to limitations on the dollar amount and on the scope of the agreements or commitments that may be made by such administrative vice presidents on behalf of the corporation, which limitations may not be exceeded by such individuals or altered by the chief executive officer without further approval by the board of directors. V.15 AUTHORITY AND DUTIES OF OFFICERS In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNITY VI.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, indemnify any person against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was a director or officer of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation shall mean any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. The corporation shall be required to indemnify a director or officer in connection with an action, suit, or proceeding (or part thereof) initiated by such director or officer only if the initiation of such action, suit, or proceeding (or part thereof) by the director or officer was authorized by the board of Directors of the corporation. Any repeal or modification of the foregoing provisions of this Article shall not adversely affect any right or protection hereunder of any person in respect of any act or omission occurring prior to the time of such repeal or modification. VI.2 INDEMNIFICATION OF OTHERS -17- 22 The corporation shall have the power, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware as the same now exists or may hereafter be amended, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit, or proceeding, in which such person was or is a party or is threatened to be made a party by reason of the fact that such person is or was an employee or agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) shall mean any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. VI.3 PAYMENT OF EXPENSES IN ADVANCE The corporation shall pay the expenses (including attorney's fees) incurred by a director or officer of the corporation entitled to indemnification hereunder in defending any action, suit or proceeding referred to in this Section 6.1 in advance of its final disposition; provided, however, that payment of expenses incurred by a director or officer of the corporation in advance of the final disposition of such action, suit or proceeding shall be made only upon receipt of an undertaking by the director or officer to repay all amounts advanced if it should ultimately be determined that the director or officer is not entitled to be indemnified under this Section 6.1 or otherwise. VI.4 INDEMNITY NOT EXCLUSIVE The rights conferred on any person by this Article shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the corporation's Certificate of Incorporation, these bylaws, agreement, vote of the stockholders or disinterested directors or otherwise. VI.5 INSURANCE INDEMNIFICATION The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not the corporation would have the power to indemnify him or her against such liability under the provisions of the General Corporation Law of Delaware. -18- 23 ARTICLE VII RECORDS AND REPORTS VII.1 MAINTENANCE AND INSPECTION OF RECORDS The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its stockholders listing their names and addresses and the number and class of shares held by each stockholder. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger and a list of its stockholders and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. The officer who has charge of the stock ledger of a corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. The record of stockholders shall also be open to inspection on the written demand of any stockholder or holder of a voting trust certificate, at any time during usual business hours, for a purpose reasonably related to the holder's interests as a stockholder or as the holder of a voting trust certificate. Any inspection and copying under this Section 7.1 may be made in person or by an agent or attorney of the stockholder or holder of a voting trust certificate making the demand. VII.2 MAINTENANCE AND INSPECTION OF BYLAWS -19- 24 The corporation shall keep at its principal executive office, or if its principal executive office is not in the State of California, at its principal business office in such state, the original or a copy of these bylaws as amended to date, which bylaws shall be subject to inspection by the stockholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in such state, the secretary shall, upon the written request of any stockholder, furnish to that stockholder a copy of these bylaws as amended to date. VII.3 MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS The accounting books and records, and the minutes of proceedings of the stockholders and the board of directors and any committee or committees of the board of directors, shall be kept at such place or places designated by the board of directors or, in absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any stockholder or holder of a voting trust certificate, at any reasonable time during usual business hours, for a purpose reasonably related to the holder's interests as a stockholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. Such rights of inspection shall extend to the records of each subsidiary corporation of the corporation. VII.4 INSPECTION BY DIRECTORS Every director shall have the absolute right at any reasonable time to inspect all books, records and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. Such inspection by a director may be made in person or by an agent or attorney, and the right of inspection includes the right to copy and make extracts of documents. The corporation shall also, on the written request of any stockholder, mail to the stockholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. VII.5 REPRESENTATION OF SHARES OF OTHER CORPORATIONS -20- 25 The chairman of the board, the chief executive officer, the president, the chief operating officer, any corporate vice president, the treasurer, the secretary or the chief financial officer of this corporation, or any other person authorized by the board of directors or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. ARTICLE VIII GENERAL MATTERS VIII.1 RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING For purposes of determining the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action. In that case, only stockholders of record at the close of business on the date so fixed are entitled to receive the dividend, distribution or allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided by law. If the board of directors does not so fix a record date, then the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution, or the sixtieth (60th) day before the date of that action, whichever is later. VIII.2 CHECKS From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. VIII.3 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the -21- 26 name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. VIII.4 STOCK CERTIFICATES; PARTLY PAID SHARES The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the president or vice-president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. VIII.5 SPECIAL DESIGNATION ON CERTIFICATES If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special -22- 27 rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. VIII.6 LOST CERTIFICATES Except as provided in this Section 8.6, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. VIII.7 CONSTRUCTION; DEFINITIONS Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. VIII.8 DIVIDENDS The directors of the corporation, subject to any restrictions contained in the certificate of incorporation, may declare and pay dividends upon the shares of its capital stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. VIII.9 FISCAL YEAR The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. VIII.10 TRANSFER OF STOCK Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to -23- 28 transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. VIII.11 STOCK TRANSFER AGREEMENTS The corporation shall have power to enter into and perform any agreement with any number of stockholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. VIII.12 REGISTERED STOCKHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE IX EMERGENCY PROVISIONS IX.1 GENERAL The provisions of this Article shall be operative only during a national emergency declared by the President of the United States or the person performing the President's functions, or in the event of a nuclear, atomic, or other attack on the United States or a disaster making it impossible or impracticable for the corporation to conduct its business without recourse to the provisions of this Article. The provisions of this Article in that event shall override all other Bylaws of the corporation in conflict with any provisions of this Article, and shall remain operative so long as it remains impossible or impracticable to continue the business of the corporation otherwise, but thereafter shall be inoperative; provided that all actions taken in good faith pursuant to such provisions shall thereafter remain in full force and effect unless and until revoked by action taken pursuant to the provisions of the bylaws other than those contained in this Article. IX.2 UNAVAILABLE DIRECTORS All directors of the corporation who are not available to perform their duties as directors by reason of physical or mental incapacity or for any other reason or who are unwilling to perform their -24- 29 duties or whose whereabouts are unknown shall automatically cease to be directors, with like effect as if they had resigned as directors, so long as such unavailability continues. IX.3 AUTHORIZED NUMBER OF DIRECTORS The authorized number of directors shall be the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 9.2 of these bylaws, or the minimum number required by law, whichever number is greater. IX.4 QUORUM The number of directors necessary to constitute a quorum shall be one-third of the authorized number of directors as specified in Section 9.3 of these bylaws, or such other minimum number as, pursuant to the law or lawful decree then in force, it is possible for the bylaws of a corporation to specify. IX.5 CREATION OF EMERGENCY COMMITTEE If the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 9.2 of these bylaws is less than the minimum number of authorized directors required by law, then until the appointment of additional directors to make up such required minimum, all the powers and authority which the board of directors could by law delegate, including all powers and authority which the board of directors could delegate to a committee, shall be automatically vested in an emergency committee, and the emergency committee shall thereafter manage the affairs of the corporation pursuant to such powers and authority and shall have all such other powers and authority as law or lawful decree may confer on any person or body of persons during a period of emergency. IX.6 CONSTITUTION OF EMERGENCY COMMITTEE The emergency committee shall consist of all the directors remaining after eliminating those who have ceased to be directors pursuant to Section 9.2 of these bylaws, provided that those remaining directors are not less than three in number. If the remaining directors number less than three, the emergency committee shall consist of three persons, who shall be the remaining director or directors and either one or two officers or employees of the corporation, as the remaining director or directors may in writing designate. If there is no remaining director, the emergency committee shall consist of the three most senior officers of the corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the corporation. Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the board of directors, and in the absence of such designation, shall be determined by rate of remuneration. If there are no remaining directors and no officers or employees of the corporation available, the emergency committee shall consist of three persons designated in writing -25- 30 by the stockholder owning the largest number of shares of record as of the date of the last record date. IX.7 POWERS OF EMERGENCY COMMITTEE The emergency committee, once appointed, shall govern its own procedures and shall have power to increase the number of members thereof beyond the original number, and if a vacancy or vacancies therein arises at any time, the remaining member or members of the emergency committee shall have the power to fill such vacancy or vacancies. If, at any time after its appointment, all members of the emergency committee shall die or resign or become unavailable to act for any reason whatsoever, a new emergency committee shall be appointed in accordance with the foregoing provisions of this Article. IX.8 DIRECTORS BECOMING AVAILABLE Any person who has ceased to be a director pursuant to the provisions of Section 9.2 of these bylaws and who thereafter becomes available to serve as a director shall automatically become a member of the emergency committee. IX.9 ELECTION OF BOARD OF DIRECTORS The emergency committee shall, as soon after its appointment as is practicable, take all requisite action to secure the election of a board of directors, and, upon such election, all the powers and authorities of the emergency committee shall cease. IX.10 TERMINATION OF EMERGENCY COMMITTEE If after the appointment of an emergency committee, a sufficient number of persons who ceased to be directors pursuant to Section 9.2 of these bylaws become available to serve as directors, so that if they had not ceased to be directors as aforesaid, there would be enough directors to constitute the minimum number of directors required by law, then all such persons shall automatically be deemed to be reappointed as directors and the powers and authorities of the emergency committee shall be at an end. ARTICLE X AMENDMENTS The original or other bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that -26- 31 such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. ARTICLE XI DISSOLUTION If it should be deemed advisable in the judgment of the board of directors of the corporation that the corporation should be dissolved, the board, after the adoption of a resolution to that effect by a majority of the whole board at any meeting called for that purpose, shall cause notice to be mailed to each stockholder entitled to vote thereon of the adoption of the resolution and of a meeting of stockholders to take action upon the resolution. At the meeting a vote shall be taken for and against the proposed dissolution. If a majority of the outstanding stock of the corporation entitled to vote thereon votes for the proposed dissolution, then a certificate stating that the dissolution has been authorized in accordance with the provisions of Section 275 of the General Corporation Law of Delaware and setting forth the names and residences of the directors and officers shall be executed, acknowledged, and filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such certificate's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. Whenever all the stockholders entitled to vote on a dissolution consent in writing, either in person or by duly authorized attorney, to a dissolution, no meeting of directors or stockholders shall be necessary. The consent shall be filed and shall become effective in accordance with Section 103 of the General Corporation Law of Delaware. Upon such consent's becoming effective in accordance with Section 103 of the General Corporation Law of Delaware, the corporation shall be dissolved. If the consent is signed by an attorney, then the original power of attorney or a photocopy thereof shall be attached to and filed with the consent. The consent filed with the Secretary of State shall have attached to it the affidavit of the secretary or some other officer of the corporation stating that the consent has been signed by or on behalf of all the stockholders entitled to vote on a dissolution; in addition, there shall be attached to the consent a certification by the secretary or some other officer of the corporation setting forth the names and residences of the directors and officers of the corporation. ARTICLE XII CUSTODIAN XII.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES -27- 32 The Court of Chancery, upon application of any stockholder, may appoint one or more persons to be custodians and, if the corporation is insolvent, to be receivers, of and for the corporation when: (i) at any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or (ii) the business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or (iii) the corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets. XII.2 DUTIES OF CUSTODIAN The custodian shall have all the powers and title of a receiver appointed under Section 291 of the General Corporation Law of Delaware, but the authority of the custodian shall be to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court of Chancery otherwise orders and except in cases arising under Sections 226(a)(3) or 352(a)(2) of the General Corporation Law of Delaware. -28- 33 CERTIFICATE OF ADOPTION OF BYLAWS OF ADAPTEC, INC. Adoption by Incorporator The undersigned person appointed in the Certificate of Incorporation to act as the Incorporator of ADAPTEC, INC. hereby adopts the foregoing bylaws, comprising 28 pages, as the Bylaws of the corporation. Executed this 19th day of November 1997. ---------------------------------------- Wady H. Milner, Incorporator Certificate by Secretary of Adoption by Incorporator The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of ADAPTEC, INC. and that the foregoing Bylaws, comprising 28 pages, were adopted as the Bylaws of the corporation on November 19, 1997, by the person appointed in the Certificate of Incorporation to act as the Incorporator of the corporation. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 19th day of November 1997. ----------------------------------------- Christopher G. O'Meara, Secretary -29- EX-4.2 7 1ST AMEND. TO 2ND AMENDED & RESTATED RIGHTS AGMT. 1 EXHIBIT 4.2 ADAPTEC, INC. This First Amendment (the "FIRST AMENDMENT") to the Second Amended and Restated Rights Agreement dated December 5, 1996 (the "RIGHTS AGREEMENT") between Adaptec, Inc., a California Corporation, ("ADAPTEC CALIFORNIA") and ChaseMellon Shareholder Services, LLC ("CHASEMELLON"), as Rights Agent, is entered into as of March 12, 1998 by Adaptec, Inc., a Delaware Corporation ("ADAPTEC DELAWARE"), and Chase Mellon. WHEREAS, Adaptec California and Chase Mellon have previously entered into the Rights Agreement; WHEREAS, Effective as of the date of this First Amendment, Adaptec California has merged with and into Adaptec Delaware (the "MERGER"), with Adaptec Delaware as the surviving corporation in the Merger pursuant to an Agreement and Plan of Merger, dated as of February 23, 1998, between Adaptec California and Adaptec Delaware; and WHEREAS, Pursuant to the Merger each outstanding share of common stock of Adaptec California has been converted into one outstanding share of common stock of Adaptec Delaware; WHEREAS, Section 27 of the Rights Agreement provides that it may be amended prior to a Distribution Date at the direction of Adaptec California without approval of the holders of the Rights; and WHEREAS, pursuant to Section 28 of the Rights Agreement, Adaptec Delaware is the successor to Adaptec California. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, Adaptec Delaware and ChaseMellon hereby agree as follows: 1. For the purposes of this First Amendment, except as otherwise herein expressly provided or unless the context otherwise requires the capitalized terms and expressions used herein shall have the same meanings as corresponding terms and expressions used in the Rights Agreement. 2. Adaptec Delaware hereby represents that it is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. 3. Adaptec Delaware hereby assumes all of the rights and obligations of Adaptec California under the Rights Agreement. From and after the effective time of the Merger, the Rights shall be exercisable for shares of Series A Preferred Stock of Adaptec Delaware on the same terms and conditions (and subject to the same adjustments under the Rights Agreement) as the Rights were exercisable for shares of Series A Preferred Stock of Adaptec California prior to the effectiveness of the Merger, and on and after the effective time of the Merger references in the Rights Agreement to "Preferred Shares" shall be deemed to be references to the Series A Preferred Stock of Adaptec 2 Delaware, references to Common Shares shall be deemed to be references to the Common Stock of Adaptec Delaware, and references to the "Company" shall be deemed to be references to Adaptec Delaware. 4. ChaseMellon accepts the amendment of the Rights Agreement effected by this First Agreement and agrees perform its duties under the Rights Agreement, as hereby amended. 5. This First Amendment shall form a part of the Rights Agreement for all purposes, and every holder of Rights heretofore or hereafter shall be bound hereby. 6. This First Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of such counterparts shall together constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the date first above written. Adaptec, Inc. ChaseMellon Shareholder Services, LLC a Delaware Corporation By: By: ------------------------------------ ------------------------------------ Paul Hansen Name: Chief Financial Officer Title: -2- EX-4.4 8 FIRST SUPPLEMENTAL INDENTURE 1 EXHIBIT 4.4 ADAPTEC, INC. 4-3/4% Convertible Subordinated Notes Due 2004 FIRST SUPPLEMENTAL INDENTURE Dated as of March 12, 1998 to INDENTURE Dated as of February 3, 1997 STATE STREET BANK AND TRUST COMPANY 2 FIRST SUPPLEMENTAL INDENTURE (the "First Supplemental Indenture") dated as of March 12, 1998 between Adaptec, Inc., a Delaware corporation ("Adaptec Delaware"), and State Street Bank and Trust Company, a Massachusetts Trust Company (the "Trustee"). W I T N E S S E T H: WHEREAS, there has previously been executed and delivered to the Trustee an Indenture dated as of February 3, 1997 (the "Indenture"), providing for the issuance of $230,000,000 in aggregate principal amount of 4-3/4% Convertible Subordinated Notes due 2004 (the "Notes") of Adaptec, Inc., a California corporation ("Adaptec California"); and WHEREAS, Effective as of the date of this First Supplemental Indenture, Adaptec California has merged with and into Adaptec Delaware (the "Merger"), with Adaptec Delaware as the surviving corporation in the Merger pursuant to an Agreement and Plan of Merger, dated as of February 23, 1998, between Adaptec California and Adaptec Delaware; and WHEREAS, pursuant to the Merger each outstanding share of common stock of Adaptec California is converted into one outstanding share of common stock of Adaptec Delaware; and WHEREAS, in the case of a merger of Adaptec California with and into any other corporation, Article XI of the Indenture requires that the surviving corporation execute and deliver to the Trustee a supplemental indenture providing for the assumption by the surviving corporation all of the obligations of the Company under the Indenture and the Notes; and WHEREAS, Section 10.01 of the Indenture provides that the Company (as defined in the Indenture) and the Trustee may, without the consent of any Noteholders, enter into a supplemental indenture to comply with the terms of Article XI of the Indenture; and WHEREAS, in accordance with Sections 11.1 of the Indenture, the Company (as defined in the Indenture) has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that the Merger and the First Supplemental Indenture comply with the applicable provisions of the Indenture; and WHEREAS, all acts and proceedings required by law, under the Indenture and by the Certificate of Incorporation of Adaptec Delaware to constitute this First Supplemental Indenture a valid and binding agreement for the uses and purposes set forth herein, in accordance with its terms, have been done and taken, and the execution and delivery of this First Supplemental Indenture have been in all respects duly authorized by Adaptec Delaware; and WHEREAS, the foregoing recitals are made as representations of fact by Adaptec Delaware and not by the Trustee; 3 NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, Adaptec Delaware and the Trustee hereby agree as follows: 1. For the purposes of this First Supplemental Indenture, except as otherwise herein expressly provided or unless the context otherwise requires: (i) the capitalized terms and expressions used herein shall have the same meanings as corresponding terms and expressions used in the Indenture; and (ii) the words "herein," "hereof" and "hereby" and other worlds of similar import used in this First Supplemental Indenture refer to this First Supplemental Indenture as a whole and not to any particular section hereof. 2. Adaptec Delaware hereby represents that it is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. 3. Adaptec Delaware hereby represents that upon the effectiveness of the Merger no Event of Default, and no event which after notice or lapse of time or both, would become an Event of Default, has happened or is continuing. 4. Adaptec Delaware hereby assumes all of the obligations of the Company under the Notes and the Indenture, including the obligation to make due and punctual payment of the principal of and premium, if any, and interest on all of the Notes and the due and punctual performance of all of the covenants and conditions to be performed by the Company under the Indenture. From and after the effective time of the Merger, the Notes shall be convertible into shares of common stock of Adaptec Delaware on the same terms and basis (and subject to the same adjustments under the Indenture) as the Notes were convertible into common stock of Adaptec California prior to the effectiveness of the Merger, and on and after the effective time of the Merger references in the -2- 4 Indenture to "Common Stock" shall be deemed to be references to common stock of Adaptec Delaware. 5. The Trustee accepts the amendment of the Indenture effected by this First Supplemental Indenture and agrees to execute the trust created by the Indenture, as hereby amended, including the terms and conditions as set forth in the Indenture, as hereby amended, including the terms and provisions defining and limiting the liabilities and responsibilities of the Trustee, which terms and provisions shall in like manner define and limit its liabilities in the performance of the trust created by the Indenture, as hereby amended, and without limiting the generality of the foregoing, the Trustee has no responsibility for the correctness of the recitals of fact herein contained which shall be taken as the statements of Adaptec Delaware and makes no representations as to the validity or sufficiency of this First Supplemental Indenture and shall incur no liability or responsibility in respect of the validity thereof. 6. Except as expressly amended hereby, the Indenture is in all respects ratified and confirmed, and all the terms, conditions and provisions hereof shall remain in full force and effect. 7. This First Supplemental Indenture shall form a part of the Indenture for all purposes, and every holder of Securities heretofore or hereafter authenticated shall be bound hereby. 8. This First Supplemental Indenture may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of such counterparts shall together constitute one and the same instrument. 9. This First Supplemental Indenture shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be governed by and construed in accordance with such laws. -3- 5 IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed, and their respective seals to be hereunto affixed and attested, all as of the day and year first above written. ATTEST: ADAPTEC, INC. a Delaware Corporation By:----------------------------- By:------------------------------------ Henry P. Massey, Jr. Paul Hansen Secretary Chief Financial Officer ATTEST: STATE STREET BANK AND TRUST COMPANY, a Massachusetts Trust Company, as Trustee By:----------------------------- By:------------------------------------ Name: Name: Title: Title: -4- EX-10.14 9 FORM OF INDEMNIFICATION AGREEMENT 1 EXHIBIT 10.14 ADAPTEC, INC. INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is effective as of _______________, 19__, by and between Adaptec, Inc., a Delaware corporation (the "Company"or "Adaptec Delaware"), and FIELD (Name) ("Indemnitee"). WHEREAS, Adaptec, Inc., a California corporation ("Adaptec California"), and Indemnitee entered into an Indemnification Agreement, pursuant to which Adaptec California agreed under certain conditions to indemnify Indemnitee; WHEREAS, on March 12, 1998, Adaptec California merged with and into Adaptec Delaware (the "Merger"), following approval of the Merger by the Boards of Directors of Adaptec California and Adaptec Delaware, the sole stockholder of Adaptec Delaware and a majority of the shareholders of Adaptec California (which approval also included approval of the adoption of this Agreement); WHEREAS, in order to induce Indemnitee to continue to provide services to the Company, the Company wishes to provide for the indemnification of, and advancement of expenses to, Indemnitee to the maximum extent permitted by law; WHEREAS, Indemnitee does not regard the current protection available as adequate under the present circumstances, and the Indemnitee and other directors, officers, employees, agents and fiduciaries of the Company may not be willing to continue to serve in such capacities without additional protection; WHEREAS, the Company and Indemnitee recognize the continued difficulty in obtaining liability insurance for the Company's directors, officers, employees, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited; and WHEREAS, in view of the considerations set forth above, the Company desires that, effective upon consummation of the Merger, Indemnitee shall be indemnified by the Company as set forth herein; 2 NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth below. 1. Certain Definitions. (a) "Change in Control" shall mean, and shall be deemed to have occurred if, on or after the date of this Agreement, (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company acting in such capacity or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing more than 20% of the total voting power represented by the Company's then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Company's stockholders was approved by a vote of at least two thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of related transactions) all or substantially all of the Company's assets. (b) "Claim" shall mean any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other. (c) References to the "Company" shall include, in addition to Adaptec Delaware, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger to which Adaptec Delaware (or any of its wholly owned subsidiaries) is a party which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if 2 3 its separate existence had continued. (d) "Expenses" shall mean any and all expenses (including attorneys' fees and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, to be a witness in or to participate in, any action, suit, proceeding, alternative dispute resolution mechanism, hearing, inquiry or investigation), judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of any Claim regarding any Indemnifiable Event and any federal, state, local or foreign taxes imposed on the Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement. (e) "Expense Advance" shall mean an advance payment of Expenses to Indemnitee pursuant to Section 3(a). (f) "Indemnifiable Event" shall mean any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, agent or fiduciary of the Company, or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity. (g) "Independent Legal Counsel" shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 2(c) hereof, who shall not have otherwise performed services for the Company or Indemnitee within the last three years (other than with respect to matters concerning the rights of Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements). (h) References to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. (i) "Reviewing Party" shall mean any appropriate person or body consisting of a member or members of the Company's Board of Directors or any other person or body appointed by the Board of Directors who is not a party to the particular Claim for which Indemnitee is seeking indemnification, or Independent Legal Counsel. (j) "Voting Securities" shall mean any securities of the Company that vote 3 4 generally in the election of directors. 2. Indemnification. (a) Indemnification of Expenses. The Company shall indemnify Indemnitee to the fullest extent permitted by law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any Claim by reason of (or arising in part out of) any Indemnifiable Event against Expenses, including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses. Such payment of Expenses shall be made by the Company as soon as practicable but in any event no later than five (5) business days after written demand by Indemnitee therefor is presented to the Company. (b) Reviewing Party. Notwithstanding the foregoing, (i) the obligations of the Company under Section 2(a) shall be subject to the condition that the Reviewing Party shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel referred to in Section 2(c) hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) the obligation of the Company to make an Expense Advance shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control, the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Absent such litigation, any determination by the Reviewing Party shall be conclusive and binding on the Company and Indemnitee. 4 5 (c) Change in Control. The Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Company's Board of Directors who were directors immediately prior to such Change in Control), then with respect to all matters thereafter arising concerning the rights of Indemnitee to payments of Expenses and Expense Advances under this Agreement or any other agreement or under the Company's Certificate of Incorporation or Bylaws as now or hereafter in effect, Independent Legal Counsel, if desired by Indemnitee, shall be selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law and the Company agrees to abide by such opinion. The Company agrees to pay the reasonable fees of the Independent Legal Counsel referred to above and to indemnify fully such counsel against any and all expenses (including attorneys' fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto. Notwithstanding any other provision of this Agreement, the Company shall not be required to pay Expenses of more than one Independent Legal Counsel in connection with all matters concerning a single Indemnitee, and such Independent Legal Counsel shall be the Independent Legal Counsel for any or all other Indemnitees unless (i) the Company otherwise determines or (ii) any Indemnitee shall provide a written statement setting forth in detail a reasonable objection to such Independent Legal Counsel representing other Indemnitees. (d) Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement other than Section 9 hereof, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in defense of any Claim regarding any Indemnifiable Event, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection therewith. 3. Expenses; Indemnification Procedure. (a) Advancement of Expenses. The Company shall advance all Expenses incurred by Indemnitee. The advances to be made hereunder shall be paid by the Company to Indemnitee as soon as practicable but in any event no later than five (5) business days after written demand by Indemnitee therefor to the Company. (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to Indemnitee's right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the Chief Executive Officer of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. 5 6 (c) No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law, shall be a defense to Indemnitee's claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether the Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled. (d) Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 3(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Claim in accordance with the terms of such policies. (e) Selection of Counsel. In the event the Company shall be obligated hereunder to pay the Expenses of any Claim the Company, if appropriate, shall be entitled to assume the defense of such Claim with counsel approved by Indemnitee (not to be unreasonably withheld) upon the delivery to Indemnitee of written notice of the Company's election so to do. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Claim; provided that, (i) Indemnitee shall have the right to employ Indemnitee's separate counsel in any such Claim at Indemnitee's expense and (ii) if (A) the employment of separate counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitee's separate counsel shall be at the expense of the Company. 4. Additional Indemnification Rights; Nonexclusivity. (a) Scope. The Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws (as now or hereafter in effect) or by statute. In the event of any change after the date of this 6 7 Agreement in any applicable law, statute or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors or an officer, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder except as set forth in Section 9(a) hereof. (b) Nonexclusivity. The indemnification provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws (as now hereafter in effect), any other agreement, any vote of stockholders or disinterested directors, the General Corporation Law of the State of Delaware, or otherwise. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity. 5. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, provision of the Company's Certificate of Incorporation, Bylaw (as now or hereafter in effect) or otherwise) of the amounts otherwise indemnifiable hereunder. 6. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 7. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge that in certain instances, federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, agents or fiduciaries under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. 8. Liability Insurance. To the extent the Company maintains liability insurance applicable to directors, officers, employees, agents or fiduciaries, Indemnitee shall be covered by such policies in such a manner as to provide Indemnitee the same rights and benefits as are provided to the most favorably insured of the Company's directors, if Indemnitee is a director; or of the Company's officers, if Indemnitee is not a director of the Company but is an officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee is not an officer or director but is a key employee, agent or fiduciary. 7 8 9. Exceptions. Notwithstanding any other provision of this Agreement, the Company shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Action or Omissions. To indemnify Indemnitee for acts, omissions or transactions from which Indemnitee may not be indemnified under applicable law. (b) Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to actions or proceedings brought to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Company's Certificate of Incorporation or Bylaws now or hereafter in effect relating to Claims for Indemnifiable Events, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Section 145 of the Delaware General Corporation Law, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be. (c) Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous. (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 10. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. 11. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. 12. Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), spouses, heirs and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect, and whether by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business or assets of the Company, by written agreement in form and 8 9 substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect regardless of whether Indemnitee continues to serve as a director, officer, employee, agent or fiduciary (as applicable) of the Company or of any other enterprise at the Company's request. 13. Attorneys' Fees. In the event that any action is instituted by Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee with respect to such action, regardless of whether Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless as a part of such action a court of competent jurisdiction over such action determines that each of the material assertions made by Indemnitee as a basis for such action was not made in good faith or was frivolous. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee's counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, unless as a part of such action a court having jurisdiction over such action determines that each of Indemnitee's material defenses to such action was made in bad faith or was frivolous. 14. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and signed for by the party addressed, on the date of such delivery, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 15. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be commenced, prosecuted and continued only in the Court of Chancery of the State of Delaware in and for New Castle County, which shall be the exclusive and only proper forum for adjudicating such a claim. 16. Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 9 10 17. Choice of Law. This Agreement shall be governed by and its provisions construed and enforced in accordance with the laws of the State of Delaware as applied to contracts between Delaware residents entered into and to be performed entirely within the State of Delaware. 18. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. 19. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed to be or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. 20. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. 21. No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries or affiliated entities. 10 11 IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement as of the date first above written. ADAPTEC, INC. By: -------------------------- Title: ----------------------- Address: 691 S. Milpitas Boulevard Milpitas, CA 95035 AGREED TO AND ACCEPTED INDEMNITEE: ------------------------------ (signature) FIELD (Name) ------------------------------ (name of Indemnitee) ------------------------------ ------------------------------ (address) 11 EX-13.1 10 PORTIONS OF REGISTRANT'S ANNUAL REPORT 1 EXHIBIT 13.1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS The Company's net revenues increased 8% to $1,007 million in fiscal 1998, 42% to $934 million in fiscal 1997 and 41% to $659 million in fiscal 1996. The increase in net revenues has been primarily attributable to increased shipments of the Company's host adapters. This has reflected growth in the high-performance microcomputer markets, demand for SCSI in the client/server environment, the ongoing deployment of sophisticated operating systems and an increase in the use of diverse peripherals such as high capacity hard drives, scanners and optical drives. While net revenues and shipments of the Company's host adapters and ASICs increased year over year between the 1996 and 1998 fiscal years, net revenues for the fourth quarter of fiscal 1998 decreased 23% compared with revenues for the fourth quarter of 1997. This decrease was primarily due to lower sales of the Company's SCSI host adapters and peripheral technology solutions. The demand for SCSI has been adversely impacted by the trend to lower priced PCs for mainstream corporate desktop applications as well as enhancements to the EIDE standard which is used predominantly in the desktop market. The Company believes that the resulting shift of corporate buying towards lower cost, more limited function PCs has been fueled by the delay in the introduction of Windows NT 5.0 and Windows 98 and by the redirection of corporate management information systems budgets towards resolving the Year 2000 issue and investing in backbone network infrastructure. Net revenues from sales of the Company's peripheral technology solutions have been adversely impacted by the turbulent disk drive market and the recent instability in the Asian markets. The Company presently expects that its sales growth is unlikely to resume before the third quarter of fiscal 1999 at the earliest. Gross margin in fiscal 1998 was 61% compared to 58% in both the 1997 and 1996 fiscal years. Gross margin in fiscal 1998 increased from fiscal 1997 primarily due to proportionally greater shipments of the Company's higher margin SCSI host adapters. Gross margins also increased due to the Company's continued focus on component cost reductions and on improving manufacturing efficiencies. Research and development expenditures in fiscal 1998 increased as a percentage of revenues to 17% compared with 14% and 13% for the 1997 and 1996 fiscal years, respectively. The percentage increase between fiscal 1997 and 1998 was primarily due to lower than expected revenues for fiscal 1998. In absolute dollars, spending for the three fiscal years was $173 million, $129 million and $88 million, respectively. The increase in spending in fiscal 1998 was primarily a result of increased staffing levels to support the Company's commitment to invest in newer hardware and software solutions, including RAID and external storage, Fibre Channel, File Array and CD recordable software solutions. Sales, marketing and administrative expenses in fiscal 1998 increased as a percentage of revenues to 22% compared with 17% and 18% for the 1997 and 1996 fiscal years, respectively. The percentage increase between fiscal 1997 and 1998 was primarily due to lower than expected revenues for fiscal 1998. Spending for the three fiscal years was $219 million, $163 million and $117 million, respectively. These increases in actual spending were primarily a result of increased staffing levels to support the Company's worldwide growth. In addition, the Company increased advertising and promotional programs aimed at leveraging the Company's brand image and generating demand for its products. During fiscal 1997, the Company acquired complementary businesses recorded under the purchase method of accounting, resulting in an aggregate write-off of acquired in-process technology of approximately $90 million. Additionally, the Company acquired one business under the pooling-of-interests method of accounting. Professional fees totaling approximately $2 million were incurred in connection with the acquisition and have been included in "write-off of acquired in-process technology and other charges. The Company did not complete any acquisitions during fiscal 1998, but did enter into agreements to acquire Symbios, Inc. ("Symbios") and read channel technology from Analog Devices, Inc. ("ADI"). At March 31, 1998, these acquisitions were subject to regulatory approval. In addition, subsequent to March 31, 1998, the Company acquired Ridge Technologies. The Company believes that the integration of these acquisitions will result in higher research and development and sales, marketing and administrative expenditures in fiscal 1999. In addition, the Company anticipates that it will incur significant one time charges in connection with these acquisitions. Interest income, net of interest expense for fiscal 1998 increased 94% from the prior fiscal year due to higher cash and balances during the year primarily as a result of cash generated by operations and proceeds received in connection with $230 million of Convertible Subordinated Notes that the Company issued in February 1997. The coupon interest rate associated with these notes is 4-3/4%. 2 The Company's effective tax rate for fiscal years 1998, 1997 and 1996 was 26%, 37% and 25%, respectively. Excluding the effect of write-offs in fiscal 1998 and write-offs of acquired in-process technology in fiscal 1997, the Company's effective tax rate was 25% in each of these fiscal years. 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 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. LIQUIDITY AND CAPITAL RESOURCES OPERATING ACTIVITIES Net cash generated from operating activities during fiscal 1998 was $245 million compared to $245 million in fiscal 1997 and $116 million in fiscal 1996. Cash from operating activities for fiscal 1998 was primarily attributable to net income of $173 million adjusted by non-cash items including the cumulative effect of a change in accounting principle of $9 million, depreciation and amortization of $43 million, provision for doubtful accounts of $4 million and impairment losses totaling $7 million. Increases in accounts receivable and inventories were largely offset by decreases in other assets and prepaid expenses and other and an increase in accounts payable. Cash from operating activities for fiscal 1997 was primarily attributable to net income of $108 million adjusted by non-cash items including net write-off of acquired in-process technology of $89 million and depreciation and amortization of $29 million. Increases in accounts receivable and prepaid expenses and other were largely offset by increases in accounts payable and accrued liabilities. Cash generated from operating activities for fiscal 1996 was primarily a result of the overall growth of the Company's operations. INVESTING ACTIVITIES Net cash used for investing activities during fiscal 1998 was $346 million compared to $221 million for fiscal 1997 and $97 million for fiscal 1996. During fiscal 1998 the Company purchased $240 million of marketable securities consisting primarily of municipal bonds, corporate bonds and government securities, all of which are of high investment grade. The Company also continued to make various building and leasehold improvements to its facilities and to invest in equipment for product development and manufacturing to support current and future business requirements. Purchases of property and equipment of $98 million during fiscal 1998 included $11 million for land located in Irvine, California. During fiscal 1999, the Company anticipates that it will invest approximately $70 million in property and equipment to support its growth. The Company may also make investments in "take or pay" prepayments to support future wafer requirements or in acquiring complimentary businesses, products or technologies. During fiscal 1997, the Company made payments of $107 million, net of cash acquired, in connection with the acquisitions of Western Digital's Connectivity Solutions Group, CD-Recordable software technology from Corel, Inc., Data Kinesis Inc., Sigmax Technologies Inc., Toast CD-R technology for the Macintosh platform, and certain assets of Skipstone, Inc.. Additionally, the Company acquired Cogent Data Technologies, Inc. in a transaction accounted for as a pooling of interest through the issuance of 3 million shares of its common stock. During fiscal 1997, the Company purchased property and equipment totaling $88 million and 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. The new agreement canceled the initial capacity agreement and required Lucent to purchase the equipment from the Company in fiscal 1998. FINANCING ACTIVITIES During fiscal 1998 financing activities provided $10 million compared to $203 million provided during fiscal 1997 and $5 million during fiscal 1996. Cash provided by financing activities during fiscal 1998 and fiscal 1996 was primarily through the issuance of common stock to employees through its stock option and employee stock purchase plans for $39 million and $16 million, respectively, offset in both years by repurchases of stock and payments on debt. Advance payments totaling $18 million were made in fiscal 1998 against a promissory note for $35 million in connection with an agreement with Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") whereby the Company will make advance payments totaling $35 million to secure additional wafer capacity for future technology through 2001. In addition the Company made payments in fiscal 1998 totaling $3 million related to a term loan and repurchased common stock totaling $8 million. 3 During fiscal 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. During fiscal 1997, the Company paid a $46 million short term note issued to TSMC in connection with an agreement to ensure increased wafer capacity for future technology through 2001. The Company also received proceeds from the issuance of common stock totaling $28 million under its Stock Option and Employee Stock Purchase Plans. The Company has an unsecured $17 million revolving line of credit under which there were no outstanding borrowings as of March 31, 1998. In February 1998, the Company entered into an agreement to purchase all of the outstanding stock of Symbios for approximately $768 million in cash. The completion of the Symbios acquisition is subject to regulatory approval. The Company anticipates arranging for two rounds of financing to fund the acquisition. The first round is expected to be a bank revolving loan for approximately $500 million to be available upon close of the acquisition. Following the close, the Company expects to undertake a public debt-offering for approximately $250 million. The proceeds of the debt offering would generally be used to pay down the bank loan. There can be no assurance that such financings will be available on favorable terms, or at all. 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 financing will be sufficient to meet its cash requirements throughout fiscal 1999. CHANGE IN ACCOUNTING POLICY EITF 97-13 was issued in November 1997 and requires that business process reengineering costs be expensed as incurred. The transition provisions of EITF 97-13 require that companies that had previously capitalized such business process reengineering costs charge off any unamortized amounts as the cumulative effect of a change in accounting principle. The cumulative effect of the change to the Company was to decrease net income by $9 million. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose statements. The disclosure requirements of SFAS 130 are first expected to be reflected in the Company's first quarter of fiscal 1999 interim financial statements. In June 1997, the FASB issued SFAS No. 131 "Disclosures and Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas and major customers. SFAS 131 will be first reflected in the Company's fiscal 1999 Annual Report. Adoption of SFAS 130 and SFAS 131 will not impact the Company's consolidated financial position, results of operations or cash flows. In October 1997, the American Institute of Certified Public Accountants' ("AICPA") issued Statement of Position ("SOP") 97-2 "Software Revenue Recognition". This SOP supersedes SOP 91-1 "Software Revenue Recognition" and provides more stringent guidelines for revenue recognition. Adoption of this statement is not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows. MARKET RISK DISCLOSURE At March 31, 1998, the Company's investment portfolio consisted of fixed income securities, excluding those classified as cash equivalents, of $470 million (see Note 4 of Notes to Consolidated Financial Statements). These securities, are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of March 31, 1998, the decline in the fair value of the portfolio would not be material. 4 The Company's long term debt bears interest at a fixed rate while the note payable to TSMC bears no interest. Accordingly, an immediate 10% change in interest rates would not result in the Company's long-term debt or note payable to TSMC having any effect on the Company's results of operations. The Company enters into forward exchange contracts to hedge certain firm commitments denominated in foreign currencies. The Company does not use derivative financial instruments for trading or speculative purposes. Forward exchange contracts are denominated in the same currency as the underlying transaction (primarily Singapore dollars) and the terms of the forward foreign exchange contracts generally match the terms of the underlying transactions. The effect of an immediate 10% change in exchange rates on the forward exchange contracts would not be material to the Company's financial condition or results of operation. YEAR 2000 The "Year 2000 issue" arises because most computer systems and programs were designed to handle only a two-digit year not a four-digit year. When the Year 2000 begins, these computers may interpret "00" as the year 1900 and could either stop processing date-related computations or could process them incorrectly. The Company has recently implemented new information systems and accordingly does not anticipate any internal Year 2000 issues from its own information systems, databases or programs. However, the Company could be adversely impacted by Year 2000 issues faced by major distributors, suppliers, customers, vendors and financial service organizations with which the Company interacts. The Company has sent surveys to certain third parties to determine whether they are Year 2000 compliant and is in the process of evaluating and following up on responses to determine the impact that third parties who are not Year 2000 compliant may have on the operations of the Company. The Company believes it is currently being impacted by the redirection of corporate management information system budgets towards resolving the Year 2000 issue. Continuation of this trend could lower the demand for the Company's products if corporate buyers defer purchases of high-end business PCs. RISK FACTORS This annual report may contain forward-looking statements regarding future events or the future performance of the Company. Actual events or results could, of course, differ materially. 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 and utilization of new systems, and risks associated with intellectual property or general economic downturns. In addition, there can be no assurance that the Company will receive regulatory approval to consummate the Symbios acquisition nor can there be any assurance that financing required to fund the acquisition will be available on favorable terms, or at all. For a more complete discussion of these factors, please refer to the Business section of the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1998 and the Company's other public filings it makes from time to time. 5 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Year Ended March 31, 1998 1997 1996 ------------ ------------ ------------ Net revenues $ 1,007,293 $ 933,868 $ 659,347 Cost of revenues 391,100 388,969 275,939 ------------ ------------ ------------ Gross profit 616,193 544,899 383,408 ------------ ------------ ------------ Operating expenses Research and development 172,522 128,530 87,628 Sales, marketing, and administrative 218,839 162,979 117,332 Write-off of acquired in-process technology and other charges -- 92,162 52,313 ------------ ------------ ------------ 391,361 383,671 257,273 ------------ ------------ ------------ Income from operations 224,832 161,228 126,135 ------------ ------------ ------------ Interest income 32,899 13,297 12,694 Interest expense (12,402) (2,744) (840) ------------ ------------ ------------ 20,497 10,553 11,854 ------------ ------------ ------------ Income before income taxes and cumulative effect of a change in accounting principle 245,329 171,781 137,989 Provision for income taxes 63,452 64,220 34,614 ------------ ------------ ------------ Income before cumulative effect of a change in accounting principle 181,877 107,561 103,375 Cumulative effect of a change in accounting principle, net of tax benefit 9,000 -- -- ------------ ------------ ------------ Net income $ 172,877 $ 107,561 $ 103,375 ============ ============ ============ Net income per share: Basic Income before cumulative effect of a change in accounting principle $ 1.61 $ 0.99 $ 0.99 Cumulative effect of a change in accounting principle 0.08 -- -- ------------ ------------ ------------ $ 1.53 $ 0.99 $ 0.99 ============ ============ ============ Diluted Income before cumulative effect of a change in accounting principle $ 1.54 $ 0.93 $ 0.95 Cumulative effect of a change in accounting principle 0.08 -- -- ------------ ------------ ------------ $ 1.46 $ 0.93 $ 0.95 ============ ============ ============ Shares used in computing net income per share: Basic 113,172 108,456 104,136 Diluted 118,432 115,596 109,073 ============ ============ ============
See accompanying notes. 6 CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
As of March 31, 1998 1997 ---------- ---------- ASSETS Current assets Cash and cash equivalents $ 227,183 $ 318,075 Marketable securities 470,199 230,366 Accounts receivable, net of allowance for doubtful accounts of $4,185 in 1998 and $5,098 in 1997 132,526 123,303 Inventories 71,297 53,184 Deferred income taxes 46,479 31,982 Prepaid expenses and other 44,286 61,038 ---------- ---------- Total current assets 991,970 817,948 Property and equipment, net 194,798 141,599 Other assets 88,461 83,947 ---------- ---------- $1,275,229 $1,043,494 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Current portion of long-term debt $ 850 $ 3,400 Note payable 17,640 -- Accounts payable 48,047 52,400 Accrued liabilities 73,947 68,519 ---------- ---------- Total current liabilities 140,484 124,319 ---------- ---------- Long-term debt, net of current portion 230,000 230,850 ---------- ---------- Commitments and Contingencies (Note 11) Stockholders' equity Preferred stock; $0.001 par value Authorized shares, 1,000; Series A shares, 250 designated Outstanding shares, none -- -- Common stock; $0.001 par value Authorized shares, 400,000 Outstanding shares, 113,981 in 1998 and 111,540 in 1997 114 112 Additional paid-in capital 295,263 251,722 Retained earnings 609,368 436,491 ---------- ---------- Total stockholders' equity 904,745 688,325 ---------- ---------- $1,275,229 $1,043,494 ========== ==========
See accompanying notes. 7 CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Year Ended March 31, 1998 1997 1996 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 172,877 $ 107,561 $ 103,375 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of a change in accounting principle, net of tax 9,000 -- -- Write-off of acquired in-process technology and other charges, net of taxes -- 88,691 39,686 Depreciation and amortization 42,896 28,611 17,593 Provision for doubtful accounts 4,000 1,000 250 Write-down of goodwill and minority investments 6,800 -- -- Deferred income taxes (14,497) (13,896) (6,137) Income tax benefit of employees' stock transactions 12,390 22,144 10,947 Changes in assets and liabilities, net of the effect of acquisitions: Accounts receivable (13,223) (36,984) (29,946) Inventories (18,113) 11,998 (20,516) Prepaid expenses and other 16,752 (3,878) (3,617) Other assets 22,130 3,329 (16,952) Accounts payable (4,353) 25,968 (167) Accrued liabilities 8,428 10,948 21,969 ---------- ---------- ---------- NET CASH PROVIDED BY OPERATING ACTIVITIES 245,087 245,492 116,485 ---------- ---------- ---------- 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, net (97,699) (87,959) (41,907) Investments in marketable securities, net (239,833) (26,083) (24,372) Purchase of minority investments (8,560) -- -- ---------- ---------- ---------- NET CASH USED FOR INVESTING ACTIVITIES (346,092) (221,256) (97,456) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of convertible debt -- 223,905 -- Payments of short-term note (17,640) (46,200) -- Proceeds from issuance of common stock 38,921 28,323 16,512 Repurchases of common stock (7,768) -- (7,765) Principal payments on debt (3,400) (3,400) (3,400) ---------- ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 10,113 202,628 5,347 ---------- ---------- ---------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (90,892) 226,864 24,376 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 318,075 91,211 66,835 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 227,183 $ 318,075 $ 91,211 ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS Interest paid $ 11,218 $ 641 $ 764 Income taxes paid $ 58,537 $ 67,118 $ 32,869 ---------- ---------- ----------
See accompanying notes. 8 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands)
Common Stock Additional ------------------------- Paid-in Retained Shares Amount Capital Earnings Total ---------- ---------- ---------- ---------- ---------- BALANCE, MARCH 31, 1995 103,354 $ 103 $ 140,088 $ 231,453 $ 371,644 Sale of common stock under employee purchase and option plans 2,436 3 16,509 -- 16,512 Issuance of common stock in connection with acquisition 770 1 17,231 -- 17,232 Income tax benefit of employees' stock transactions -- -- 10,947 -- 10,947 Repurchases of common stock (520) (1) (1,949) (5,815) (7,765) Net income -- -- -- 103,375 103,375 ---------- ---------- ---------- ---------- ---------- BALANCE, MARCH 31, 1996 106,040 106 182,826 329,013 511,945 Sale of common stock under employee purchase and option plans 2,814 3 28,320 -- 28,323 Issuance of common stock in connection with acquisition 2,686 3 18,432 (83) 18,352 Income tax benefit of employees' stock transactions -- -- 22,144 -- 22,144 Net income -- -- -- 107,561 107,561 ---------- ---------- ---------- ---------- ---------- BALANCE, MARCH 31, 1997 111,540 112 251,722 436,491 688,325 Sale of common stock under employee purchase and option plans 2,791 3 38,918 -- 38,921 Income tax benefit of employees' stock transactions -- -- 12,390 -- 12,390 Repurchases of common stock (350) (1) (7,767) -- (7,768) Net income -- -- -- 172,877 172,877 ---------- ---------- ---------- ---------- ---------- BALANCE, MARCH 31, 1998 113,981 $ 114 $ 295,263 $ 609,368 $ 904,745 ========== ========== ========== ========== ==========
See accompanying notes. 9 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 amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. In March 1998, the Company was reincorporated in the State of Delaware. The accompanying consolidated financial statements have been retroactively restated to give effect to the reincorporation. FOREIGN CURRENCY TRANSLATION For foreign subsidiaries whose functional currency is the local currency, the Company translates assets and liabilities to U.S. dollars using year end exchange rates and translates revenues and expenses using average exchange rates during the year. Exchange gains and losses arising from translation of foreign entity financial statements are included as a component of stockholders' equity. For foreign subsidiaries whose functional currency is the U.S. dollar, certain assets and liabilities are remeasured at the year end or historical rates as appropriate. Revenues and expenses are remeasured at the average rates during the year. Currency transaction gains and losses are recognized in current operations and have not been material to the Company's operating results in any period. CASH EQUIVALENTS AND MARKETABLE SECURITIES Cash equivalents consist of highly liquid investments with original maturities of three months or less. The Company's marketable securities are classified as available for sale and, at the balance sheet date, are reported at fair market value which approximates cost. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, marketable securities, and trade accounts receivable. The Company places its marketable securities primarily in municipal bonds, corporate bonds and government securities, all of which are of high investment grade. The Company, by policy, limits the amount of credit exposure through diversification and investment in highly rated securities. Sales to customers are 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 doubtful accounts based upon the expected collectibility of all accounts receivable. During fiscal 1998 the Company increased its allowance for bad debts by $4 million to reflect current business conditions in the disk drive market, otherwise the Company has historically not experienced significant losses on accounts receivable. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into foreign currency contracts in order to reduce the impact of certain foreign currency fluctuations. Firmly committed transactions denominated in foreign currencies are hedged with forward exchange contracts. Gains and losses related to hedges of firmly committed transactions are deferred and recognized in income when the hedged transaction occurs. The Company does not hold or issue derivative financial instruments for trading or speculative purposes. FAIR VALUE OF FINANCIAL INSTRUMENTS For certain of the Company's financial instruments, including cash and cash equivalents, marketable securities, accounts receivable, notes payable and accounts payable, the carrying amounts approximate fair value due to their short maturities. The estimated fair value of the Company's convertible subordinated notes and forward exchange contracts was $190 million and $8 million, respectively, at March 31, 1998. The estimated fair values of the convertible subordinated notes and forward exchange contracts are primarily based on quoted market prices. 10 INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. PROPERTY AND EQUIPMENT Property and equipment are stated at cost and depreciated or amortized using the straight-line method over the estimated useful lives of the assets. CHANGE IN ACCOUNTING POLICY FOR BUSINESS PROCESS REENGINEERING COSTS On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board issued EITF 97-13 "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation." EITF 97-13 requires that business process reengineering costs incurred in connection with an overall information technology transformation project be expensed as incurred. The transition provisions of EITF 97-13 require that companies that had previously capitalized such business process reengineering costs charge off any unamortized amounts as a cumulative effect of a change in accounting principle. The cumulative effect of the change to the Company was to decrease net income by $9 million (net of tax benefit of $3 million). Pro forma amounts assuming the new accounting principle was applied during all periods presented follow with comparison to actual amounts reported:
(In thousands, except per share amounts) Year Ended March 31, ------------------------------------------------ 1998 1997 1996 ------------ ------------ ------------ Net Income As reported $ 172,877 $ 107,561 $ 103,375 Pro forma $ 179,197 $ 101,436 $ 103,180 Net income per share: Basic As reported $ 1.53 $ 0.99 $ 0.99 Pro forma $ 1.58 $ 0.94 $ 0.99 Diluted As reported $ 1.46 $ 0.93 $ 0.95 Pro forma $ 1.51 $ 0.88 $ 0.95
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. IMPAIRMENT OF OTHER ASSETS The Company's other assets include goodwill and minority investments. Goodwill and minority investments are evaluated periodically for potential impairment based on the future estimated cash flows of the acquired technology/investment. Goodwill amortization totaling $9 million, $8 million and $2 million was included in the Company's consolidated statements of operations during 1998, 1997 and 1996, respectively. REVENUE RECOGNITION The Company recognizes revenue upon satisfaction of contractual obligations which is generally at the time of shipment. The Company records provisions for estimated returns and allowances 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." 11 RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which establishes standards for reporting and displaying comprehensive income and its components in a full set of general-purpose statements. The disclosure requirements of SFAS 130 are first expected to be reflected in the Company's first quarter of fiscal 1999 interim statements. In June 1997, the FASB issued SFAS No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information," which establishes annual and interim reporting standards for an enterprise's business segments and related disclosures about its products, services, geographic areas, and major customers. SFAS 131 will be first reflected in the Company's fiscal 1999 Annual Report. Adoption of SFAS 130 and SFAS 131 will not impact the Company's consolidated financial position, results of operations or cash flows. In October 1997, the American Institute of Certified Public Accountants' ("AICPA") issued Statement of Position ("SOP") 97-2 "Software Revenue Recognition." This SOP supersedes SOP 91-1 "Software Revenue Recognition" and provides more stringent guidelines for revenue recognition. Adoption of this statement is not expected to have a material effect on the Company's consolidated financial position, results of operations or cash flows. NOTE 2. NET INCOME PER SHARE Basic net income per share is computed by dividing net income available to common stockholders (numerator) by the weighted average number of common shares outstanding (denominator) during the period and excludes the dilutive effect of stock options. Diluted net income per share gives effect to all dilutive potential common shares outstanding during a period. In computing Diluted net income per share, the average stock price for the period is used in determining the number of shares to be purchased from exercise of stock options. All prior period net income per share data presented has been restated in accordance with SFAS 128. Following is a reconciliation of the numerators and denominators of the Basic and Diluted net income per share computations for the years ended March 31:
(In thousands, except per share amounts) 1998 1997 -------------------------------------------- -------------------------------------------- Income Shares Per-Share Income Shares Per-Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- --------- ----------- ------------- --------- BASIC Net Income available to common stockholders $172,877 113,172 $ 1.53 $107,561 108,456 $ 0.99 ======= ======= EFFECT OF DILUTIVE SECURITIES Common Stock Equivalents -- 5,260 -- 6,447 4.75% convertible subordinated notes -- -- 441 693 -------- -------- -------- -------- DILUTED Net income available to common stockholders and assumed conversions $172,877 118,432 $ 1.46 $108,002 115,596 $ 0.93 ======== ======== ======= ======== ======== =======
(In thousands, except per share amounts) 1996 -------------------------------------------- Income Shares Per-Share (Numerator) (Denominator) Amount ----------- ------------- --------- BASIC Net Income available to common stockholders $103,375 104,136 $ 0.99 ======= EFFECT OF DILUTIVE SECURITIES Common Stock Equivalents -- 4,937 4.75% convertible subordinated notes -- -- -------- -------- DILUTED Net income available to common stockholders and assumed conversions $103,375 109,073 $ 0.95 ======== ======== =======
The conversion of 4,452,000 shares of common stock related to the Convertible Subordinated Notes was not included in the computation of Diluted net income per share for the year ended March 31, 1998 as the impact is anti-dilutive. Options to purchase 2,369,000, 203,000 and 619,000 shares of common stock were outstanding at March 31, 1998, 1997 and 1996 respectively, but were not included in the computation of Diluted net income per share because the options' exercise price was greater than the average market price of the common shares. NOTE 3. ACQUISITIONS In February 1998, the Company entered into an agreement to purchase all of the outstanding stock of Symbios, Inc. ("Symbios"), a wholly owned subsidiary of Hyundai Electronics America for approximately $768 million. Symbios is a supplier of SCSI devices, OEM storage systems and ASIC solutions. In March 1998, the Company entered into an agreement to purchase read channel ASIC technology from Analog Devices, Inc. ("ADI"). The agreement calls for an initial 12 cash payment of $34 million, to be followed by subsequent payments totaling $6 million for research and development services during a transition period, and up to $20 million in royalties based on sales by the Company of products incorporating the acquired ADI technology. At March 31, 1998, completion of the Symbios and ADI acquisitions were subject to regulatory approval under the Hart-Scott-Rodino Act. Both acquisitions will be accounted for under the purchase accounting method. The Company will evaluate the allocation of the purchase price to assets acquired, which include in-process technology that will be written off, and goodwill which will be amortized over the respective benefit periods. 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 an aggregate amount of approximately $109 million in cash and $15 million in stock. 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 management and RAID applications, CD-ROM controllers for ATAPI CD-ROM drivers and, CD-R technology for Macintosh platforms. 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 an aggregate amount of approximately $35 million in cash and $17 million in stock. 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 for the respective fiscal year 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 equipment. 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 approximately 3 million shares of its common stock. Additionally, the Company incurred $2 million in professional fees related to this acquisition which were included in "write-off of acquired in-process technology and other." The Company 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, were not 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 were not material to the Company were combined with those of the Company. 13 NOTE 4. MARKETABLE SECURITIES The Company's portfolio of marketable securities consists of the following:
(In thousands) 1998 1997 -------- -------- Municipal bonds $186,346 $230,366 Corporate bonds 185,665 -- U.S. government securities 98,188 -- -------- -------- $470,199 $230,366 ======== ========
At March 31, 1998 and 1997, the net unrealized holding gains and losses on securities were immaterial. The marketable securities at March 31, 1998 and 1997 by contractual maturity are shown below:
(In thousands) 1998 1997 -------- -------- Mature in one year or less $216,252 $ 83,124 Mature after one year through three years 253,947 147,242 -------- -------- $470,199 $230,366 ======== ========
At March 31, 1998, marketable securities totaling $175 million were classified as cash equivalents and included municipal bonds, corporate bonds and U.S. government securities of $6 million, $13 million and $156 million, respectively. At March 31, 1997 marketable securities totaling $17 million, comprising of municipal bonds, were classified as cash equivalents. NOTE 5. BALANCE SHEET DETAIL INVENTORY
(In thousands) 1998 1997 -------- -------- Raw materials $ 17,728 $ 12,958 Work-in-process 18,415 14,370 Finished goods 35,154 25,856 -------- -------- $ 71,297 $ 53,184 ======== ========
14 PROPERTY AND EQUIPMENT
(In thousands) Life 1998 1997 -------------- -------- -------- Land -- $ 41,017 $ 29,698 Buildings and improvements 5-40 years 50,761 26,142 Machinery and equipment 3-5 years 106,173 79,386 Furniture and fixtures 3-8 years 69,040 31,763 Leasehold improvements Life of lease 6,662 6,583 Construction in progress -- 4,578 25,976 -------- -------- 278,231 199,548 Accumulated depreciation and amortization (83,433) (57,949) -------- -------- $194,798 $141,599 ======== ========
OTHER ASSETS
(In thousands) 1998 1997 -------- -------- TSMC advance payments (see Note 11) $ 63,840 $ 53,200 Goodwill, net of accumulated amortization of $19,855 in 1998 and $7,633 in 1997 11,213 23,435 Minority investments 5,100 -- Other 8,308 7,312 -------- -------- $ 88,461 $ 83,947 ======== ========
ACCRUED LIABILITIES
(In thousands) 1998 1997 -------- -------- Accrued compensation and related taxes $ 25,273 $ 25,514 Acquisition related 2,374 12,751 Sales and marketing related 11,036 12,464 Tax related 25,208 8,038 Other 10,056 9,752 -------- -------- $ 73,947 $ 68,519 ======== ========
15 NOTE 6. LINE OF CREDIT The Company has available an unsecured $17 million revolving line of credit which expires on December 31, 1998. As of March 31, 1998, no borrowings were outstanding under this line of credit. The Company may select its own method of interest payment on borrowings based upon the bank's CD rate plus one percent, Eurodollar rate plus one percent, or prime lending rate. A commitment fee of - -1/4% per annum is payable on the unused line of credit. Under the arrangement, the Company is restricted from paying dividends in excess of 25% of the prior fiscal years 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, 1998. NOTE 7. LONG-TERM DEBT 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. 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, 1998. NOTE 8. STOCKHOLDERS' EQUITY 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, 359,849 and 285,336 shares were issued during fiscal 1998 and 1997, representing approximately $9 million and $7 million in employee contributions, respectively. 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. 16 Option activity under the 1990 Stock Plan is as follows:
Options Outstanding ------------------------------- Options Weighted Average Available Shares Exercise Price ----------- ----------- --------------- 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 Cancelled 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 Cancelled 1,555,300 (1,555,300) $19.33 ----------- ----------- ------ BALANCE, MARCH 31, 1997 12,289,098 14,966,372 $19.05 Authorized 4,846,065 -- $ -- Granted (15,509,116) 15,509,116 $28.81 Exercised -- (2,393,758) $12.05 Cancelled 10,990,488 (10,990,488) $33.30 ----------- ----------- ------ BALANCE, MARCH 31, 1998 12,616,535 17,091,242 $19.69 =========== =========== ====== Options exercisable at: March 31, 1996 3,913,534 $ 7.90 March 31, 1997 5,397,068 $12.97 March 31, 1998 6,861,531 $16.41
The following table summarizes information about the 1990 Stock Plan at March 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------- ---------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 3/31/198 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/98 EXERCISE PRICE - ---------------- ------------ ---------------- -------------- ----------- -------------- $ 0.37 - $10.00 3,213,690 5.8 $ 7.28 2,796,758 $ 7.59 $10.01 - $20.00 378,424 6.8 $14.65 265,791 $14.30 $20.01 - $30.00 13,463,261 8.4 $22.75 3,788,698 $23.01 $30.01 - $40.00 33,017 9.1 $37.97 10,034 $38.61 $40.01 - $52.50 2,850 9.5 $46.32 250 $41.88 ------------ ---------- 17,091,242 7.9 $19.69 6,861,531 $16.41 ============ ==========
17 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 Outstanding ------------------------------ Options Weighted Average Available Shares Exercise Price --------- -------- ---------------- 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 Granted (120,000) 120,000 $29.83 Exercised -- (101,250) $ 9.32 --------- -------- ------ BALANCE, MARCH 31, 1998 1,190,000 627,500 $23.56 ========= ======== ====== Options exercisable at: March 31, 1996 187,500 $ 7.52 March 31, 1997 248,750 $14.10 March 31, 1998 342,500 $22.03
The following table summarizes information about the 1990 Directors' Option Plan at March 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ----------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES AT 3/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/98 EXERCISE PRICE --------------- ----------- ---------------- -------------- ----------- -------------- $ 6.25 - $10.00 67,500 0.9 $ 9.19 67,500 $ 9.19 $10.01 - $20.00 87,500 2.0 $16.50 62,500 $16.50 $20.01 - $30.00 362,500 4.3 $22.45 142,500 $23.07 $30.01 - $40.00 70,000 8.9 $37.25 70,000 $37.25 $40.01 - $50.00 40,000 9.5 $49.38 -- $ -- ---------- ---------- 627,500 4.5 $23.56 342,500 $22.03 ========== ==========
18 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 123. The fair value of options granted in fiscal 1997 and fiscal 1998 reported below has been estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
1990 Directors' Employee Stock Purchase Plan 1990 Stock Plan Option Plan ---------------------------- ---------------------------- --------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- Expected life (in years) 0.25 0.25 0.25 4 4 4 4.12 4.12 4.12 Risk-free interest rate 5.4% 5.2% 5.5% 5.4% 6.0% 5.9% 5.4% 6.0% 5.9% Volatility 52% 44% 44% 52% 44% 44% 52% 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 Employee Stock Purchase Plan grants during 1998, 1997 and 1996 was $6.84, $6.65 and $4.46 per share, respectively. The weighted average estimated fair value of shares granted under the 1990 Stock Plan during 1998, 1997 and 1996 was $18.44, $12.24 and $8.95, respectively. The weighted average estimated fair value of shares granted under the 1990 Directors' Plan during 1998, 1997 and 1996 was $13.56, $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 period. The Company's pro forma information follows (in thousands except for earnings per share information):
1998 1997 1996 -------- -------- -------- Pro forma net income $127,351 $ 83,305 $ 97,956 Pro forma Basic net income per share $ 1.13 $ 0 .77 $ 0.94 Pro forma Diluted net income per share $ 1.08 $ 0 .72 $ 0.90
The effects on pro forma disclosures of applying SFAS 123 are not likely to be representative of the effects on 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 123 will not be fully reflected until fiscal 1999. REPRICING OF STOCK OPTIONS During the fourth quarter of fiscal 1998, the Company approved the cancellation and reissuance of outstanding options under the Company's stock option plans. Under the program, holders of outstanding options with exercise prices in excess of $22.31 per share were given the choice of retaining these options or of obtaining in substitution new options for the same number of shares. The new options are exercisable at a price of $22.31 per share, the fair market value of the common stock on the reissue date. The new options maintain the vesting schedule established by the canceled option, except that vesting is suspended for six months while vesting for officers of the Company participating in the stock repricing is suspended for twelve months. 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, stockholders have received one Preferred Stock Purchase Right ("Right") for each outstanding share of the Company's common stock. Each Right will entitle stockholders to 19 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 which would result in ownership by a person or group of 20% or more of the then outstanding common stock. The Company is entitled to redeem the Rights at $0.01 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% stockholder 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. The Series A Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of Series A Preferred Stock will be entitled to an aggregate dividend of 1,000 times the dividend declared per common stock. In the event of liquidation, the holders of the Series A Preferred Stock 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 stock. Each share of Series A Preferred Stock will have 1,000 votes, voting together with the common stock. In the event of any merger, consolidation or other transaction in which the common stock are changed or exchanged, each share of Series A Preferred Stock will be entitled to receive 1,000 times the amount received per common stock. These rights are protected by customary anti-dilution provisions. SHARES RESERVED FOR FUTURE ISSUANCE At March 31, 1998, the Company has reserved the following shares of authorized but unissued common stock: 1986 Employee Stock Purchase Plan 1,093,189 1990 Stock Plan 29,707,777 1990 Directors' Option Plan 1,817,500 Conversion of subordinated notes 4,452,187 ---------- 37,070,653 ==========
STOCK REPURCHASE In January 1998, the Company's board of directors authorized the purchase of up to 10 million shares of the Company's common stock in the open market. During fiscal 1998, the Company repurchased and retired approximately 350,000 shares of its common stock from the open market for approximately $8 million. The transactions were recorded as reductions to common stock and additional paid-in capital. NOTE 9. INCOME TAXES The components of income before income taxes for the years ended March 31 are as follows:
(In thousands) 1998 1997 1996 -------- -------- -------- Domestic $ 95,400 $ 74,866 $ 57,882 Foreign 149,929 96,915 80,107 -------- -------- -------- Income before income taxes $245,329 $171,781 $137,989 -------- -------- --------
The split of domestic and foreign income was impacted by the acquisition related write-offs of in-process technology and other charges, which reduced domestic income by $92 million for 1997 and $52 million for 1996. 20 The components of the provision for income taxes for the years ended March 31 are as follows:
(In thousands) 1998 1997 1996 -------- -------- -------- Federal Current $ 46,362 $ 45,363 $ 22,066 Deferred (11,552) (10,025) (4,263) -------- -------- -------- 34,810 35,338 17,803 -------- -------- -------- Foreign Current 21,520 21,418 15,074 Deferred (319) (1,961) (1,491) -------- -------- -------- 21,201 19,457 13,583 -------- -------- -------- State Current 10,067 11,335 3,611 Deferred (2,626) (1,910) (383) -------- -------- -------- 7,441 9,425 3,228 -------- -------- -------- Provision for income taxes $ 63,452 $ 64,220 $ 34,614 ======== ======== ========
The tax benefit associated with dispositions from employee stock plans reduces taxes currently payable for 1998 by $12 million ($22 million and $11 million for 1997 and 1996, respectively). These benefits were recorded directly to stockholders' equity Significant components of the Company's deferred tax assets as of March 31 are as follows
(In thousands) 1998 1997 -------- -------- Non-deductible reserves $ 16,024 $ 10,601 State taxes 2,054 1,922 Compensatory accruals 9,320 7,815 Various expense accruals 11,299 6,363 Capitalized technology 7,156 5,700 Other 626 (419) -------- -------- Net deferred tax assets $ 46,479 $ 31,982 ======== ========
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:
1998 1997 1996 ------ ------ ------ Federal statutory rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 2.3 2.7 2.7 Foreign subsidiary income at other than the U.S. tax rate (10.9) (11.9) (11.8) Tax-exempt interest income (1.7) (1.2) (2.1) Acquisition write-off -- 12.4 -- Other 1.2 0.4 1.3 ------ ------ ------ Effective income tax rate 25.9% 37.4% 25.1% ====== ====== ======
21 The Company's effective tax rate for fiscal 1998 was 26% compared to 37% and 25% for fiscal 1997 and 1996. 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 were 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 lower rate than the Singapore statutory rate of 26%, through fiscal 1999. As of March 31, 1998, the Company had not accrued income taxes on $408 million of accumulated undistributed earnings of its Singapore subsidiary, as these earnings will be reinvested indefinitely. NOTE 10. SEGMENT INFORMATION Adaptec operates predominately in one industry segment and provides solutions that enhance bandwidth communication between servers, PC's, 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.
(In thousands) Singapore, Adjustments United Far East, and Consolidated States Other Europe Corporate Eliminations Total -------- --------- -------- ---------- ------------ ------------ Fiscal 1998 Revenues Sales to customers $704,334 $302,457 $ 502 $ -- $ -- $1,007,293 Intercompany sales between geographic areas 18,331 519,036 21,742 -- (559,109) -- -------- -------- -------- ---------- ---------- ---------- Net revenues $722,665 $821,493 $ 22,244 $ -- $ (559,109) $1,007,293 ======== ======== ======== ========== ========== ========== Income from operations $ 79,634 $144,086 $ 1,112 $ -- $ -- $ 224,832 Identifiable assets $388,557 $274,840 $ 4,105 $ 755,831 $ (148,104) $1,275,229 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 $786,883 $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 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
22 EXPORT REVENUES The following table represents export revenues by geographic region as a percentage of total revenues:
1998 1997 1996 ---- ---- ---- Singapore, Far East, Other 38% 39% 32% Europe 22% 22% 24% ---- ---- ---- 60% 61% 56% ---- ---- ----
MAJOR CUSTOMERS In fiscal 1998 and 1997, no customer accounted for more than 10% of net revenues. In fiscal 1996, sales to one distributor represented 10% of net revenues. NOTE 11. COMMITMENTS AND CONTINGENCIES 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, 1998, the minimum future payments on existing leases totaled $21 million. Rent expense was approximately $7 million, $6 million, and $4 million during fiscal 1998, 1997 and 1996, respectively. The Company has a commitment denominated in Singapore dollars related to the construction of the Company's manufacturing facility in Singapore. To minimize the foreign currency exposure related to this commitment, the Company entered into several forward exchange contracts to purchase 13 million Singapore dollars. The maturities of these instruments are less than 12 months. Deferred gains or losses are not material. During fiscal 1998, 1997, and 1996, the Company entered into agreements with Taiwan Semiconductor Manufacturing Co., Ltd. ("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 $35 million, $15 million and $66 million in fiscal 1998, 1997, and 1996, respectively. The advance payments that are expected to be utilized in the next 12 months are classified in prepaid expenses and the remaining advanced payments are classified in other assets and will be realized by the Company at specified amounts over the agreement period. In fiscal 1998, the Company signed a non-interest bearing promissory note for the $35 million advance payment. At March 31, 1998, $18 million remained outstanding, and is due in June 1998. There can be no assurance that the Company will be able to satisfy its future wafer needs from current or alternative manufacturing sources. This could result in possible loss of sales or reduced margins. 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. The new agreement canceled the initial capacity agreement and required Lucent to purchase the equipment from the Company in fiscal 1998. Several class action lawsuits have been filed in the United States District Court for the Northern District of California against the Company and certain of its officers and directors. The actions all allege that the Company made false and misleading statements at various times during the period between April 1997 and January 1998 in violation of the federal securities laws. The complaints do not set forth purported damages. In addition, a number of derivative actions have been filed in the Superior Court of the State of California against the Company and certain of its officers and directors alleging that the individual defendants improperly profited from transactions in the Company's stock during the same time period referenced by the class action lawsuits. The Company believes the lawsuits and derivative actions are without merit and intends to defend itself vigorously. The IRS is currently auditing the Company's income tax returns for fiscal 1994 to 1996. No proposed adjustments have been received for these years. The Company believes sufficient taxes have been provided in prior years and that the ultimate outcome of the IRS audits will not have a material adverse impact on the Company's financial position or results of operations. 23 NOTE 12. RELATED PARTY TRANSACTIONS AND SUBSEQUENT EVENTS During fiscal 1998, the Company invested $5 million in Series A Preferred Stock representing a 19.9% interest in Ridge Technologies ("Ridge" ). In conjunction with this investment, the Chairman and CEO of the Company became a director of Ridge. During fiscal 1998, the Company incurred $900,000 in research and development expenditures related to consulting services provided by Ridge. In February 1998, the Company guaranteed a $7 million line of credit on behalf of Ridge in exchange for a warrant to purchase up to 200,000 shares of Ridge common stock. On May 21, 1998, the Company acquired Ridge in a stock transaction valued at approximately $21 million and assumed stock options valued at approximately $13 million. The Chairman and CEO of the Company is a director of Analog Devices, Inc. ("ADI"). In April 1998, the Company received regulatory approval to purchase read channel ASIC technology from ADI (see Note 3). During fiscal 1998, the Company invested $1 million in, and entered into a development and license agreement with, a venture stage company whose founder and CEO is a director of the Company. Two other directors of the Company are also directors of the start up company. NOTE 13. COMPARATIVE QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data is as follows:
(In thousands, except per share amounts) Quarters -------------------------------------------------- First Second Third Fourth Year -------- -------- -------- -------- ---------- FISCAL 1998 Net revenues $271,442 $278,088 $254,163 $203,600 $1,007,293 Gross profit $163,948 $173,558 $158,859 $119,828 $ 616,193 Net income $ 59,689 $ 62,719 $ 27,075 $ 23,394 $ 172,877 Net income per share Basic $ 0.53 $ 0.56 $ 0.24 $ 0.21 $ 1.53 Diluted $ 0.51 $ 0.52 $ 0.23 $ 0.20 $ 1.46 Weighted average shares outstanding Basic 112,008 112,931 113,666 114,083 113,172 Diluted 122,181 123,902 124,444 116,558 118,432 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 Basic $ 0.17 $ 0.01 $ 0.38 $ 0.42 $ 0.99 Diluted $ 0.16 $ 0.01 $ 0.36 $ 0.39 $ 0.93 Weighted average shares outstanding Basic 106,040 106,817 110,011 110,956 108,456 Diluted 111,343 113,640 116,786 120,614 115,596
- ---------- * The first, second, third and fourth 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. 24 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Adaptec, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of stockholders' equity present fairly, in all material respects, the financial position of Adaptec, Inc. and its subsidiaries at March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, 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 our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for business process reengineering costs in 1998. San Jose, California April 29, 1998, except for Note 12 which is as of May 21, 1998 25 LEGAL PROCEEDINGS Several putative securities class actions have been filed in the United States District Court for the Northern District of California against Adaptec, Inc. and certain of its officers and directors. The actions, Murphy, et al. v. Adaptec, Inc., et al., No. C 98-00224-CAL (N.D. Cal.)(filed January 21, 1998), Raiken et al. v. Adaptec, Inc., et al. No. C 98-0282-SI (N.D. Cal.)(filed Jan 26, 1998), Shaheen et al. v. Adaptec, Inc. No. C 98-0355-BZ (N.D. Cal.)(filed January 30, 1998), Haarman et al. v. Adaptec, Inc. et al. No. C 98-00538-CRB (N.D. Cal)(filed February 20, 1998) and Hammond et al. v. Adaptec, Inc. No. C 98-20072-JW (N.D. Cal)(amended action filed February 10, 1998), all allege that the Company made false and misleading statements at various time during the period between April 1997 and January 1998 in violation of the federal securities laws. The complaints do not set forth purported damages. The Company believes the lawsuits are without merit and intends to defend itself vigorously. 26
SELECTED FINANCIAL DATA (In thousands, except per share amounts) Quarters 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA YEAR ENDED MARCH 31, Net revenues $1,007,293 $ 933,868 $ 659,347 $ 466,194 $ 372,245 Cost of revenues 391,100 388,969 275,939 205,596 189,526 - -------------------------------------------------------------------------------------------------------------------------------- Gross profit $ 616,193 $ 544,899 $ 383,408 $ 260,598 $ 182,719 - -------------------------------------------------------------------------------------------------------------------------------- Operating expenses Research and development $ 172,522 $ 128,530 $ 87,628 $ 60,848 $ 39,993 Sales, marketing, and administrative 218,839 162,979 117,332 81,966 65,591 Write-off of acquired in-process technology and other charges -- 92,162 52,313 -- -- - -------------------------------------------------------------------------------------------------------------------------------- $ 391,361 $ 383,671 $ 257,273 $ 142,814 $ 105,584 - -------------------------------------------------------------------------------------------------------------------------------- Cumulative effect of a change in accounting principle, net of tax benefit $ 9,000 $ -- $ -- $ -- $ -- - -------------------------------------------------------------------------------------------------------------------------------- Net Income $ 172,877 $ 107,561* $ 103,375* $ 93,402 $ 58,950 ================================================================================================================================ Net income per share Basic $ 1.53 $ 0.99 $ 0.99 $ 0.90 $ 0.57 Diluted $ 1.46 $ 0.93 $ 0.95 $ 0.87 $ 0.55 Weighted average shares outstanding Basic 113,172 108,456 104,136 103,371 103,023 Diluted 118,432 115,596 109,073 106,942 107,170 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA AS OF MARCH 31, Working capital $ 851,486 $ 693,629 $ 334,989 $ 294,058 $ 243,451 Total assets $1,275,229 $1,043,494 $ 646,486 $ 435,708 $ 358,475 Long-term debt, net of current portion $ 230,000 $ 230,850 $ 4,250 $ 7,650 $ 11,050 Stockholders' equity $ 904,745 $ 688,325 $ 511,945 $ 371,644 $ 297,616
* Includes the after-tax effect of write-offs associated with acquired in-process technology. COMMON STOCK PRICES AND DIVIDENDS The Company's common stock is traded in the over-the-counter market under the NASDAQ symbol ADPT. The following table sets forth the range of the high and low prices by quarter as reported by NASDAQ National Market System.
1998 1997 ------------------- ------------------- High Low High Low First quarter $40 5/8 $30 1/8 $30 3/4 $22 5/16 Second quarter 51 3/8 38 29 13/16 17 1/2 Third quarter 54 1/4 33 7/8 41 1/8 28 5/8 Fourth quarter 39 1/2 19 7/16 46 7/8 32 1/8
At March 31, 1998, there were 1,018 holders of record of the Company's common stock. The Company has not paid cash dividends on its common stock and does not currently plan to pay cash dividends to its stockholders in the near future. EX-21.1 11 SUBSIDIARIES OF REGISTRANT 1 Exhibit 21.1 Subsidiaries: Adaptec Mfg. (S) Pte. Ltd. Block 1003 Bukit Merah Central #07-09 Singapore 159836 (011-65) 278-7300 Adaptec GmbH Munchner Strasse 19 85540 Haar Germany (011-49) 89-456-4060 Adaptec Europe SA Dreve Richelle 161, BP8 Building M Waterloo Office Park B-1410 Waterloo Belgium (011-32) 2-352-3411 Adaptec Japan Ltd. Harmony Tower, 3F 3-32, Honcho 1-chome Nakano-ku, Tokyo 164 Japan (011-81) 35-365-6700 EX-23.1 12 CONSENT OF INDEPENDENT ACCTS, PRICE WATERHOUSE LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-02889, No. 333-00779, No. 33-43591, No. 333-14241, and No. 333-12095) of Adaptec, Inc. of our report dated April 29, 1998, except for Note 12 which is as of May 21, 1998 appearing in the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. PRICE WATERHOUSE LLP San Jose, California June 24, 1998 EX-27.1 13 FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED 3/31/98
5 1,000 YEAR MAR-31-1998 APR-01-1997 MAR-31-1998 227,183 470,199 136,711 4,185 71,297 991,970 278,231 83,433 1,275,229 140,484 230,000 0 0 295,377 609,368 1,275,229 1,007,293 1,007,293 391,100 391,100 391,361 4,000 12,402 245,329 63,452 181,877 0 0 9,000 172,877 1.53 1.46
EX-27.2 14 FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED 3/31/97
5 1,000 YEAR MAR-31-1997 APR-01-1996 MAR-31-1997 318,075 230,366 128,401 5,098 53,184 817,948 199,548 57,949 1,043,494 124,319 230,850 0 0 251,834 436,491 1,043,494 933,868 933,868 388,969 388,969 383,671 1,000 2,744 171,781 64,220 107,561 0 0 0 107,561 0.99 0.93
EX-27.3 15 FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED 3/31/96
5 1,000 YEAR MAR-31-1996 APR-01-1995 MAR-31-1996 91,211 204,283 89,143 4,220 55,028 465,280 135,187 40,183 646,486 130,291 4,250 0 0 182,932 329,013 646,486 659,347 659,347 275,939 275,939 257,273 250 840 137,989 34,614 103,375 0 0 0 103,375 0.99 0.95
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