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