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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, 1997 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)
<TABLE>
<S> <C>
CALIFORNIA 94-2748530
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
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691 S. MILPITAS BLVD.
MILPITAS, CALIFORNIA 95035
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 945-8600/WEB SITE
(WWW.ADAPTEC.COM)
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
COMMON 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 6, 1997, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $3,140,225,720. Shares of Common
Stock held by each officer and director and by each person known by the Company
to own 5% or more of the outstanding Common Stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of Registrant's Common Stock, $.001 par
value, was 112,270,705 at June 6, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Shareholders to be held on August 21, 1997.
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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.
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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, peripheral technology
solutions, consisting primarily of application specific integrated circuit
("ASIC") controllers for hard disk and CD-ROM drives, and network products,
which include asynchronous transfer mode ("ATM") and Fast Ethernet adapters.
Adaptec provides its customers with complete solutions, consisting of hardware,
software, and firmware, which are incorporated into the products of
substantially all of the major Intel-based PC and server manufacturers
worldwide.
INDUSTRY BACKGROUND
A number of trends are driving the need to increase effective input/output
("I/O") bandwidth between PCs, servers, peripherals and networks: (i) the
introduction of increasingly powerful central processing units ("CPUs"), which
require more rapidly accessed and intelligently managed data to function at
their optimal performance level, (ii) new advanced operating systems, such as
Windows NT and Windows 95 that allow for faster I/O and multitasking, (iii) the
growth of data-intensive software applications, such as graphics and video,
which require significantly more bandwidth, (iv) the proliferation of
client/server networks, the Internet and corporate intranets, which is in turn
driving growth in the number and processing power of servers, and (v) growth in
high-performance peripherals, such as high-capacity hard disk drives, scanners,
CD-ROMs, and new CD-R and DVD drives. These factors have created a rapid
increase in the transfer of data between desktop PCs, servers, peripherals, and
networks, resulting in substantial I/O and network bottlenecks.
Industry standards have been developed to enable I/O to keep up with these
trends, of which the most important for high-performance applications is SCSI.
SCSI has become the industry standard I/O bus specification for high-performance
systems. SCSI allows the "intelligent" transfer of data between computers,
peripherals, and networks by enabling multitasking and by offloading the system
CPU from I/O management.
SCSI solutions include a proprietary ASIC and firmware and software for
operating system drivers, peripheral drivers, and I/O utilities. Nearly all
servers utilize SCSI, and as many as 10% of desktop PCs now incorporate SCSI,
with this percentage expected to increase as microprocessors become more
powerful and as more complex, data-intensive applications are performed on the
desktop.
The increase in the usage of data is also creating demand for increasing
amounts of data storage as well as new high-capacity peripheral devices.
Virtually every microcomputer is shipped with mass storage peripherals such as
hard disk drives and CD-ROMs. Each peripheral requires an ASIC controller to
manage the operations of that peripheral and to interface with the system bus.
Recently, new peripherals, such as CD-ROMs and removable storage devices, have
been increasingly used alongside hard disks to provide additional storage
capacity. Such devices frequently have SCSI interfaces. In addition, the
increasing need for mass storage is also driving the need for controller
solutions that can support multi-gigabyte drives in both desktop and server
systems.
Another I/O-related market that is benefiting from the need for increased
bandwidth is the market for network interface cards that reside on servers and
PCs and use such standards as ATM and Fast Ethernet. Server bandwidth is moving
to the forefront of concern of information system organizations as more Internet
and intranet servers are rapidly coming on line. The Company, with its
networking solutions, provides both the bandwidth to and from the server as well
as augmenting the server's resiliency to unexpected events, such as network
infrastructure failures and disk drive crashes, through innovative software
features.
In addition to SCSI, other high-performance, standards-based host adapter
solutions, such as 1394/Firewire and Fibre Channel, are emerging in support of
new applications. 1394/Firewire is an industry standard interface used in both
personal computers and consumer electronics equipment. In 1997,
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1394/FireWire interface will be incorporated in products such as PCs for desktop
publishing and video editing, still image cameras, printers, scanners, optical
drives, and as many as 50% of all digital camcorders. The popularity of
1394/FireWire is expected to grow due to its high speed and easy-to-use cabling.
Fibre Channel is a bus technology targeted for applications with very
high-capacity I/O demands, which offers unique capabilities in the clustering
and high end multi-processor server environments.
PRODUCTS
The Company's products are designed and manufactured using a core set of
technologies and resources. The Company's semiconductor technology design
centers develop products for all markets the Company serves. The Company
continues to utilize a process called concurrent engineering, in which
manufacturing, marketing, and engineering work together early in the development
cycle to meet the demands of emerging technologies as well as decrease the "time
to volume" of product shipments. The Company maintains an Internet Web site to
provide its customers with detailed company and product information.
Board-based I/O Solutions
The Company's board-based I/O solutions, which include SCSI host adapters,
ATM and Fast Ethernet network interface cards, and related firmware and
software, meet the demanding I/O and connectivity requirements of enterprise
servers, high-performance desktop and portable computers, and technical
workstations across all important microprocessor-based platforms.
The Company's board-based I/O products, which incorporate the Company's
proprietary single chip architectures and an extensive array of related software
products, provide customers the most comprehensive board-based I/O solutions
available in the markets it serves. The Company provides bus mastering, SCSI
host adapters that manage all I/O processing activity, thereby freeing the CPU
to perform other operations. The Company offers these host adapters across all
ranges of bus architectures including PCI, ISA, EISA, and PCMCIA. The Company
also provides non-bus mastering host adapters that provide standardized SCSI
connectivity between the CPU and its peripherals. Additionally, demand is
increasing for the Company's board-based I/O solutions where SCSI is utilized in
nearly all servers. To expand further the market for its products, the Company
continues to develop and market I/O solutions meeting specific original
equipment manufacturer ("OEM") requirements and turnkey kits for the distributor
channels. These kits include a SCSI host adapter and related software that
enable end-users to more readily connect SCSI peripherals to their
microcomputer.
The Company has undertaken numerous initiatives to increase the
accessibility, ease of use, and versatility of the SCSI standard. Advanced SCSI
programming interface ("ASPI"), an industry standard developed by the Company,
enables users to integrate high-performance SCSI peripherals with microcomputers
using popular operating systems, such as Windows 95, Windows NT, NetWare, OS/2,
and UNIX. In addition, the Company is engaged in strategic relationships with
leading operating system vendors, such as IBM, Microsoft, and Novell, resulting
in joint development projects to embed the Company's software within their
operating systems. The Company has several software utilities such as Adaptec
EZ-SCSI and SCSIselect products, which simplify connecting a SCSI host adapter
and peripherals to a microcomputer system. The Company has developed and
continues to develop products for emerging standards such as 1394/FireWire and
Fibre Channel.
The proliferation of client server architectures, the Internet, and
corporate intranets have caused both the expansion and upgrading of corporate
networks, thereby creating demand for more powerful bandwidth management
solutions for networked environments. The Company offers its family of ATM
network interface cards ("NICs"), which provide a robust solution for managing
mixed data types such as graphics, video, and voice. As a result of the
acquisition of Cogent in fiscal 1997, the Company has expanded its product
offerings to include a family of Fast Ethernet NICs, which provide a
high-performance solution to the installed base of servers used in Ethernet
networks.
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Integrated Circuits
The Company develops proprietary integrated circuits ("ICs") for use in
microcomputer systems, mass storage devices, various other peripherals, and for
use in its own board-based SCSI host adapters and NICs. Adaptec's proprietary
ICs provide innovative solutions for managing complex I/O functions in high-
performance microcomputer and storage applications. Working closely with
customers, the Company provides complete solutions that include sophisticated
ICs, firmware, and software that optimize overall subsystem design.
The Company's current IC products include SCSI and enhanced integrated
device electronic ("EIDE") programmable storage controllers, single-chip SCSI
host adapters, and single-chip redundant array of inexpensive disks
("RAID")-on-the-motherboard solutions. All of the Company's IC products are
developed using advanced design technologies to meet market requirements for
higher levels of physical integration, increased functionality, and performance.
The Company's programmable SCSI and EIDE storage controllers are typically
configured to address specific customer requirements in the mass storage market
and are used primarily in high-capacity hard disk drives as well as non-hard
disk drives. The Company's SCSI host adapter ICs incorporate similar technology
and are used by system manufacturers to embed SCSI on the system motherboard.
The Company's RAID-on-the-motherboard solutions provide a cost-effective array
solution that maintains motherboard designs and protects the investment in
embedded SCSI.
RESEARCH AND DEVELOPMENT
The Company believes research and development is fundamental to its
success, especially in integrated circuit design, software development, and I/O
solutions that encompass emerging technologies. The development of proprietary
integrated circuits that support multiple architectures and peripheral devices
requires a combination of engineering disciplines. In addition, extensive
knowledge of computer and subsystem architectures, expertise in the design of
high-speed digital ICs circuits, and knowledge of operating system software is
essential. The Company's research and development efforts continue to focus on
the development of complete solutions that include proprietary ASICs, firmware,
and software that support multiple architectures and peripheral devices. These
I/O solutions facilitate high-speed data transfer rates, which are essential to
the enhanced performance of client/server networking environments, applications
requiring high-performance I/O, and the adoption of various peripheral devices.
The Company continues to leverage its technical expertise and product
innovation capabilities to address I/O solutions across a broad range of users
and platforms. The Company also continues to invest significant resources to
develop its core products as well as newer hardware and software solutions
including CD-R, 1394/FireWire, Fibre Channel, and optical technologies.
Approximately 28% of the Company's employees are engaged in research and
development, of which approximately 50% are engaged in software development. In
fiscal 1997, 1996, and 1995, the Company spent approximately $129 million (14%
of net revenues), $88 million (13% of net revenues), and $61 million (13% of net
revenues), respectively, for research and development.
MARKETING AND CUSTOMERS
The Company believes it has successfully positioned itself as a leading
supplier of a full range of I/O solutions providing bandwidth management. The
Company sells its products through a direct sales force to substantially all
major server and PC manufacturers, as well as most of the major electronic
distributors worldwide. The Company works closely with its OEM customers on the
design of current and next generation products to meet the specific requirements
of system integrators and end-users. The Company provides its OEM customers with
extensive applications and system design support. The Company also sells
board-based products to end-users through major computer product distributors
and provides technical support to its customers worldwide.
The Company's OEM customers include Acer, Compaq, Digital Equipment
Corporation, Dell Computer Corporation, Fujitsu, Gateway 2000, Hewlett-Packard
Company, IBM Corporation, Intel Corporation,
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Iomega, Maxtor Corporation, NEC Technologies, Samsung, Siemens Nixdorf, and
Toshiba America. The Company's major distributors include Actebis, Computer
2000, Gates/Arrow, Ingram Micro, Merisel, Nissho, and Tech Data. In fiscal 1997
and 1995, no customer accounted for more than 10% of the Company's net revenues.
In fiscal 1996, sales to one distributor represented 10% of the Company's net
revenues.
The Company emphasizes solution-oriented customer support as a key element
of its marketing strategy and maintains technical applications groups in the
field as well as at the Company's headquarters. Support provided by these groups
includes assisting current and prospective customers in the use of the Company's
products, writing application notes, and conducting seminars for system
designers. The systems-level expertise and software experience of the Company's
engineering staff are also available to customers with particularly difficult
I/O design problems. A high level of customer support is also maintained through
technical support hotlines, electronic bulletin boards, and dial-in-fax
capability.
International net revenues accounted for approximately 61%, 56%, and 62% of
net revenues in fiscal 1997, 1996, and 1995, respectively. Sales of the
Company's products internationally are subject to certain risks common to all
export activities, such as governmental regulation and the risk of imposition of
tariffs or other trade barriers. Sales to customers are primarily denominated in
U.S. dollars.
COMPETITION
In the host adapter market, the Company competes with a number of smaller
host adapter manufacturers. The Company's competitive strategy is to continue to
leverage its technical leadership and concentrate on the most
technology-intensive solutions. To address the competitive nature of the
business the Company designs advanced features into its products, with
particular emphasis on data transfer rates, software-defined features, and
compatibility with major operating systems and most peripherals. The Company
believes the principal competitive factors in this market are performance, a
comprehensive array of solutions ranging from connectivity products for the
personal computing market to high-performance products for the enterprise-wide
computing and networked environments, product features, brand awareness,
financial resources, and technical and administrative support. The Company
believes that it presently competes favorably with respect to each of these
factors.
The Company's principal competitors in the mass storage market are captive
suppliers and Cirrus Logic, Inc. The Company believes that its competitive
strengths in the mass storage market include its systems level expertise,
integrated circuit design capability, and substantial experience in I/O
applications. The Company believes the principal competitive factors in
achieving design wins are performance, product features, price, quality, and
technical and administrative support. The Company believes that it presently
competes favorably with respect to each of these factors.
The markets for the Company's products are highly competitive and are
characterized by rapid technological advances, frequent new product
introductions, evolving industry standards, and competitive price pressures. The
Company's competitors continue to introduce products with improved performance
characteristics, and its customers continue to develop new applications. As the
Company has continued to broaden its bandwidth management product offerings into
the desktop, server, and networking environments, it has experienced, and
expects to experience in the future, significantly increased competition both
from existing competitors and from additional companies that may enter its
markets. Some of these companies have greater technical, marketing,
manufacturing, and financial resources than the Company. The Company will have
to continue to develop and market appropriate products to remain competitive.
The Company believes one of the significant factors in its competitive success
is its continued commitment of significant resources to research and
development.
BACKLOG
The Company's backlog was approximately $154 million and $111 million at
March 31, 1997 and March 31, 1996, respectively. These backlog figures include
only orders scheduled for shipment within six months, of which the majority are
scheduled for delivery within 90 days. The Company's customers may cancel or
delay purchase orders for a variety of reasons, including rescheduling of new
product introductions
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and changes in inventory policies and forecasted demand. Accordingly, the
Company's backlog as of any particular date may not be indicative of the
Company's actual sales for any succeeding fiscal period.
MANUFACTURING
The Company's Singapore manufacturing facility produces and tests high
volume host adapter products. The Singapore facility has earned ISO 9001
certification, a stringent quality standard that has become a requirement for
doing business globally. Since establishing this facility in Singapore in 1988,
the Company has experienced lower costs, shorter manufacturing cycle times, and
improved service to customers. The Company's products make extensive use of
standard logic, printed circuit boards, and random access memory from several
outside suppliers in addition to the Company's custom designed integrated
circuits. Additionally, during fiscal 1997, to ensure availability of low cost
manufacturing capacity for certain product lines, the Company's Singapore plant
expanded its relationship with major local subcontracting manufacturers by
consigning certain production equipment to the subcontractors.
All semiconductor wafers used in manufacturing the Company's products are
processed to its specifications by outside suppliers and internally tested by
the Company. The Company believes that its current wafer volume and
manufacturing technology requirements are best met with foundry relationships.
In fiscal 1996, the Company secured capacity through an agreement with Taiwan
Semiconductor Manufacturing Co., Ltd. ("TSMC") that ensures availability of a
portion of the Company's wafer capacity for both current and future technologies
for which the Company made advance payments totaling $66 million. Subsequent to
March 31, 1997, the Company entered into an agreement with TSMC whereby the
Company will make advance payments totaling $35 million to secure additional
wafer capacity for future technology through 2001. The Company signed a
promissory note for $35 million for the advance payments, which becomes due in
two equal installments on January 31, 1998 and June 30, 1998.
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, 1997, the Company had 2,794 employees, including 773 in
engineering, 1,184 in manufacturing (including 1,077 at its Singapore facility),
130 in customer technical support, 204 in marketing, 206 in sales, and 297 in
finance and administration. The Company's continued success will depend in large
measure on its ability to attract and retain highly skilled employees who are in
great demand. None of the Company's employees are represented by a labor union.
FOREIGN AND DOMESTIC OPERATIONS
See "Segment Information" on page F-15.
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CERTAIN FACTORS BEARING ON FUTURE RESULTS
This report contains forward-looking statements that involve risks and
uncertainties. 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. The Company's operating
results may fluctuate in the future as a result of a number of factors,
including cancellations or postponements of orders, shifts in the mix of the
Company's products and sales channels, changes in pricing policies by the
Company's suppliers, interruption in the supply of custom integrated circuits,
the market acceptance of new and enhanced versions of the Company's products,
and the timing of acquisitions of other business products and technologies and
any associated charges to earnings. The volume and timing of orders received
during a quarter are difficult to forecast. The Company's customers from time to
time encounter uncertain and changing demand for their products. Customers
generally order based on their forecasts. If demand falls below such forecasts
or if customers do not control inventories effectively, they may cancel or
reschedule shipments previously ordered from the Company. Additionally, the
Company has historically operated with a relatively small backlog, especially
relating to orders of its board-based I/O solutions. Further, the Company's
expense levels are based in part on expectations of future revenues, and the
Company has been significantly increasing and intends to continue to increase
operating expenditures and working capital balances as it expands its
operations. As a result of the difficulty of forecasting revenues and the
Company's planned growth in spending, operating expenses could be
disproportionately high for a given quarter, and the Company's operating results
for that quarter, and potentially future quarters, would be adversely affected.
Operating results in any particular quarter which do not meet the expectations
of securities analysts could cause volatility in the price of the Company's
Common Stock.
Dependence on the High-Performance Microcomputer Market. The Company's
board-based I/O solutions are used primarily in high performance computer
systems designed to support bandwidth-intensive applications and operating
systems. Historically, the Company's growth has been supported by increasing
demand for systems that support client/server and Internet/intranet
applications, computer-aided engineering, desktop publishing, multimedia, and
video. Should the growth of demand for such systems slow, the Company's business
or operating results could be materially adversely affected by a decline in
demand for the Company's products.
Certain Risks Associated with the Computer Peripherals Market. As a
supplier of controller circuits to manufacturers of computer peripherals such as
disk drives and other storage devices, a portion of the Company's business is
dependent on the overall market for computer peripherals. This market, which
itself is dependent on the market for personal computers, has historically been
characterized by periods of rapid growth followed by periods of oversupply and
contraction. As a result, suppliers to the computer peripherals industry from
time to time experience large and sudden fluctuations in demand for their
products as their customers adjust to changing conditions in their markets. If
these fluctuations are not accurately anticipated, such suppliers, including the
Company, could produce excessive or insufficient inventories of various
components which could 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.
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Reliance on Industry Standards, Technological Change, Dependence on New
Products. The computer industry is characterized by various standards and
protocols that evolve with time. The Company's current products are designed to
conform to certain industry standards and protocols such as SCSI, UltraSCSI,
PCI, RAID, ATM, and Fast Ethernet. In particular, a majority of the Company's
revenues are currently derived from products based on the SCSI standard. If
consumer acceptance of these standards was to decline, or if they were replaced
with new standards, and if the Company did not anticipate these changes and
develop new products, the Company's business or operating results could be
materially adversely affected.
The markets for the Company's products are characterized by rapidly
changing technology, frequent new product introductions, and declining average
selling prices over product life cycles. The Company's future success is
therefore highly dependent upon the timely completion and introduction of new
products at competitive price/performance levels. The success of new product
introductions is dependent on several factors, including proper new product
definition, product costs, timely completion and introduction of new product
designs, quality of new products, differentiation of new products from those of
the Company's competitors, and market acceptance of the Company's and its
customers' products. As a result, the Company believes that continued
significant expenditures for research and development will be required in the
future. There can be no assurance that the Company will successfully identify
new product opportunities and develop and bring new products to market in a
timely manner, that products or technologies developed by others will not render
the Company's products or technologies obsolete or noncompetitive, or that the
Company's products will be selected for design into the products of its targeted
customers. The failure of any of the Company's new product development efforts
could have a material adverse effect on the Company's business or operating
results. In addition, the Company's revenues and operating results could be
adversely impacted if its customers shifted their demand to a significant extent
away from board-based I/O solutions to application-specific ICs.
Dependence on Wafer Suppliers and Other Subcontractors. All of the finished
silicon wafers used for the Company's products are currently manufactured to the
Company's specifications by independent foundries. The Company currently
purchases a substantial majority of its wafers through a supply agreement with
TSMC. The Company also purchases wafers from SGS-Thomson Microelectronics and
Seiko Epson. The manufacture of semiconductor devices is sensitive to a wide
variety of factors, including the availability of raw materials, the level of
contaminants in the manufacturing environment, impurities in the materials used,
and the performance of personnel and equipment. While the quality, yield, and
timeliness of wafer deliveries to date have been acceptable, there can be no
assurance that manufacturing yield problems will not occur in the future. In
addition, although the Company has various supply agreements with its suppliers,
a shortage of raw materials or production capacity could lead any of the
Company's wafer suppliers to allocate available capacity to customers other than
the Company, or to internal uses. Any prolonged inability to obtain wafers with
competitive performance and cost attributes, adequate yields, or timely
deliveries from its foundries would delay production and product shipments and
could have a material adverse effect on the Company's business or operating
results. The Company expects that it will in the future seek to convert its
fabrication process arrangements to smaller geometries and to more advanced
process technologies. Such conversions entail inherent technological risks that
can affect yields and delivery times. If for any reason the Company's current
suppliers were unable or unwilling to satisfy the Company's wafer needs, the
Company would be required to identify and qualify additional foundries. There
can be no assurance that any additional wafer foundries would become available,
that such 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
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made prepayments to foundries. In the future, the Company may enter into similar
transactions or other transactions, including, without limitation,
non-refundable deposits with or loans to foundries, or equity investments in,
joint ventures with or other partnership relationships with foundries. Any such
transaction could require the Company to seek additional equity or debt
financing to fund such activities. There can be no assurance that the Company
will be able to obtain any required financing on terms acceptable to the
Company.
Additionally, the Company relies on subcontractors for the assembly and
packaging of the ICs included in its products. The Company has no long-term
agreements with its assembly and packaging subcontractors. There can be no
assurance that such subcontractors will continue to be able and willing to meet
the Company's requirements for such components or services. Any significant
disruption in supplies from, or degradation in the quality of components or
services supplied by, such subcontractors could delay shipments and result in
the loss of customers or revenues or otherwise have a material adverse effect on
the Company's business or operating results.
Certain Risks Associated With Acquisitions. Since the beginning of fiscal
1996, the Company has acquired eleven complementary companies and businesses. As
part of its overall strategy, the Company plans to continue to acquire or invest
in complementary companies, products, or technologies and to enter into joint
ventures and strategic alliances with other companies. Risks commonly
encountered in such transactions include the difficulty of assimilating the
operations and personnel of the combined companies, the potential disruption of
the Company's ongoing business, the inability to retain key technical and
managerial personnel, the inability of management to maximize the financial and
strategic position of the Company through the successful integration of acquired
businesses, additional expenses associated with amortization of acquired
intangible assets, dilution of existing equity holders, the maintenance of
uniform standards, controls, procedures, and policies, and the impairment of
relationships with employees and customers as a result of any integration of new
personnel. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with such
business combinations, investments, or joint ventures, or that such transactions
will not materially adversely affect the Company's business, financial
condition, or operating results.
Certain Risks Associated with Implementation of New Information
Systems. The Company is in the process of implementing new information systems
to enhance its current and future business processes worldwide. The Company will
implement these systems during fiscal 1998. There can be no assurance that the
Company will successfully implement this new system efficiently and in a timely
manner. Any significant period of delay to this project could have a material
adverse effect on the Company's business or operating results.
Competition. The markets for the Company's products are intensely
competitive and are characterized by rapid technological advances, frequent new
product introductions, evolving industry standards, and price erosion. In the
host adapter market, the Company competes with a number of smaller host adapter
manufacturers. The Company's principal competitors in the mass storage market
are captive suppliers and Cirrus Logic, Inc. As the Company has continued to
broaden its bandwidth management product offerings into the desktop, server, and
networking environments, it has experienced, and expects to experience in the
future, significantly increased competition both from existing competitors and
from additional companies that may enter its markets. Some of these companies
have greater technical, marketing, manufacturing, and financial resources than
the Company. There can be no assurance that the Company will be able to make
timely introduction of new leading-edge solutions in response to competitive
threats, that the Company will be able to compete successfully in the future
against existing or potential competitors or that the Company's business or
operating results will not be materially adversely affected by price
competition.
Certain Issues Related to Distributors. The Company's distributors
generally offer a diverse array of products from several different
manufacturers. Accordingly, there is a risk that these distributors may give
higher priority to selling products from other suppliers, thus reducing their
efforts to sell the Company's products. A reduction in sales efforts by the
Company's current distributors could have a materially adverse effect on its
business or operating results. The Company's distributors may on occasion build
inventories in
10
<PAGE> 11
anticipation of substantial growth in sales, and if such growth does not occur
as rapidly as anticipated, distributors may decrease the amount of product
ordered from the Company in subsequent quarters. Such a slowdown in orders could
reduce the Company's revenues in any given quarter and give rise to fluctuation
in the Company's operating results.
Dependence on Key Personnel. The Company's future success depends in large
part on the continued service of its key technical, marketing, and management
personnel, and on its ability to continue to attract and retain qualified
employees, particularly those highly skilled design, process, and test engineers
involved in the manufacture of existing products and the development of new
products and processes. The competition for such personnel is intense, and the
loss of key employees could have a material adverse effect on the Company's
business or operating results.
Certain Risks Associated with International Operations. The Company's
manufacturing facility and various subcontractors it utilizes from time to time
are located primarily in Asia. Additionally, the Company has various sales
offices and customers throughout Europe, Japan, and other countries. The
Company's international operations and sales are subject to political and
economic risks, including political instability, currency controls, exchange
rate fluctuations, and changes in import/export regulations, tariffs, and
freight rates. In addition, because the Company's principal wafer supplier,
TSMC, is located in Taiwan, the Company is subject to the risk of political
instability in Taiwan, including the potential for conflict between Taiwan and
the People's Republic of China.
Intellectual Property Protection and Disputes. The Company has historically
devoted significant resources to research and development and believes that the
intellectual property derived from such research and development is a valuable
asset that has been and will continue to be important to the success of the
Company's business. Although the Company actively maintains and defends its
intellectual property rights, no assurance can be given that the steps taken by
the Company will be adequate to protect its proprietary rights. In addition, the
laws of certain territories in which the Company's products are or may be
developed, manufactured, or sold, including Asia and Europe, may not protect the
Company's products and intellectual property rights to the same extent as the
laws of the United States. The Company has from time to time discovered
counterfeit copies of its products being manufactured or sold by others.
Although the Company maintains an active program to detect and deter the
counterfeiting of its products, should counterfeit products become available in
the market to any significant degree it could materially adversely affect the
business or operating results of the Company.
From time to time, third parties may assert exclusive patent, copyright,
and other intellectual property rights to technologies that are important to the
Company. There can be no assurance that third parties will not assert
infringement claims against the Company in the future, that assertions by third
parties will not result in costly litigation or that the Company would prevail
in such litigation or be able to license any valid and infringed patents from
third parties on commercially reasonable terms. Litigation, regardless of its
outcome, could result in substantial cost and diversion of resources of the
Company. Any infringement claim or other litigation against or by the Company
could materially adversely affect the Company's business or operating results.
Need for Interoperability. The Company's products must be designed to
interoperate effectively with a variety of hardware and software products
supplied by other manufacturers, including microprocessors, peripherals, and
operating system software. The Company depends on significant cooperation with
these manufacturers in order to achieve its design objectives and produce
products that interoperate successfully. While the Company believes that it
generally has good relationships with leading system, peripheral, and
microprocessor suppliers, there can be no assurance that such suppliers will not
from time to time make it more difficult for the Company to design its products
for successful interoperability or decide to compete with the Company.
Volatility of Stock Price. The stock market in general, and the market for
shares of technology companies in particular, have from time to time experienced
extreme price fluctuations, which have often been unrelated to the operating
performance of the affected companies. In addition, factors such as
technological innovations or new product introductions by the Company, its
competitors, or its customers may have a significant impact on the market price
of the Company's Common Stock. Furthermore, quarter-to-
11
<PAGE> 12
quarter fluctuations in the Company's results of operations caused by changes in
customer demand, changes in the microcomputer and peripherals markets, or other
factors, may have a significant impact on the market price of the Company's
Common Stock. These conditions, as well as factors that generally affect the
market for stocks of high technology companies, could cause the price of the
Company's Common Stock to fluctuate substantially over short periods.
ITEM 2. PROPERTIES
The Company owns six buildings (approximately 375,000 square feet) in
Milpitas, California, which are primarily used by the Company for corporate
offices, research, manufacturing, marketing, and sales, and one building
(approximately 200,000 square feet) in Longmont, Colorado, for research,
technical support, marketing, sales, and administrative support. The Company
leases two buildings (approximately 63,000 square feet) in Milpitas, 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); Friday Harbor, Washington (85,000 square feet);
and Nashua, New Hampshire (17,000 square feet) to support technical design
efforts and sales.
Adaptec Manufacturing Singapore is located in two leased facilities
(approximately 150,000 square feet). The two buildings are used by the Company
for research, manufacturing, and sales. The Company also leases eleven sales
offices in the United States, and one sales office each in Waterloo, Belgium;
Munich, Germany; Bretonneux, France; Camberley, England; Singapore; Seoul,
Korea; Taipei, Taiwan; and Tokyo, Japan. The Tokyo office also provides
technical design efforts and technical support with the 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 1998.
During fiscal 1996, the Company acquired a parcel of land in Fremont,
California, for approximately $12 million cash to support anticipated future
growth. The Company's future facilities requirements will depend upon the
Company's business, and the Company believes additional space, if required, may
be obtained on reasonable terms.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings incidental
to the conduct of its business. The Company believes that the litigation,
individually or in the aggregate, to which it is currently a party is not likely
to have a material adverse effect on the Company's results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
12
<PAGE> 13
PART II
ITEM 5.MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded publicly on the NASDAQ Stock market
under the symbol ADPT. The following table sets forth the range of the high and
low prices by quarter as reported by NASDAQ National Market System.
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
HIGH LOW HIGH LOW
---- --- ---- ---
<S> <C> <C> <C> <C>
First quarter........................ $30 3/4 $2215/16 $19 15/16 $14 5/8
Second quarter....................... 29 13/16 17 1/2 23 5/8 17 1/4
Third quarter........................ 41 1/8 28 5/8 24 3/16 17 /16
Fourth quarter....................... 46 7/8 32 1/8 28 3/16 17 /16
</TABLE>
At May 31, 1997, there were 818 holders of record of the Company's common
stock. The Company has not paid cash dividends on its common stock and does not
currently plan to pay cash dividends to its shareholders in the near future.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
---------- -------- -------- -------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
YEAR ENDED MARCH 31
Net revenues..................... $ 933,868 $659,347 $466,194 $372,245 $311,339
Cost of revenues................. 388,969 275,939 205,596 189,526 174,179
---------- -------- -------- -------- --------
Gross profit..................... 544,899 383,408 260,598 182,719 137,160
---------- -------- -------- -------- --------
Operating expenses
Research and development...... 128,530 87,628 60,848 39,993 26,324
Selling, marketing and
administrative.............. 162,979 117,332 81,966 65,591 48,093
Write-off of acquired
in-process technology and
other....................... 92,162 52,313 -- -- --
---------- -------- -------- -------- --------
383,671 257,273 142,814 105,584 74,417
---------- -------- -------- -------- --------
Net income......................... $ 107,561* $103,375* $ 93,402 $ 58,950 $ 49,390
========== ======== ======== ======== ========
NET INCOME PER SHARE
Net income per share............. $ .93* $ .95* $ .88 $ .55 $ .48
Weighted average shares
outstanding................... 115,062 109,138 106,714 107,204 103,304
---------- -------- -------- -------- --------
BALANCE SHEET DATA AS OF MARCH 31
Working capital.................. $ 693,629 $334,989 $294,058 $243,451 $191,693
Total assets..................... 1,043,494 646,486 435,708 358,475 282,896
Long-term obligations............ 230,850 4,250 7,650 11,050 14,450
Shareholders' equity............. 688,325 511,945 371,644 297,616 225,155
</TABLE>
- ---------------
* Includes the after-tax effect of write-offs associated with acquired
in-process technology.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The Company continued its worldwide growth as net revenues increased 42% to
$934 million in fiscal 1997 and 41% to $659 million in fiscal 1996. The increase
in net revenues has been driven primarily by industry dynamics, including the
proliferation of client/server networks, the Internet and corporate intranets,
13
<PAGE> 14
the growth of data intensive software applications such as graphics and video,
the ongoing deployment of sophisticated operating systems such as Windows NT,
and the adoption of various high performance peripherals such as high capacity
hard drives, scanners, and optical drives including CD-ROM and CD-R. These
trends, combined with the Company's market leadership in providing SCSI
solutions, resulted in increased host adapter net revenues in both the OEM and
distributor channels worldwide. Over the last two years net revenues from sales
of the Company's application specific ICs have also increased, primarily as a
result of design wins with major OEMs for higher capacity disk drives that are
required for advanced applications.
Gross margin in fiscal 1997 was 58% compared to 58% and 56% in the 1996 and
1995 fiscal years, respectively. Over the last two years the Company's focus on
designing its application specific ICs to improve yield has led to increased
efficiency in the manufacturing process. Gross margin in fiscal 1997 remained
unchanged from fiscal 1996 due to decreased costs of purchased components that
were offset by the mix of products shipped.
In fiscal 1997 and 1996, the Company maintained its research and
development commitment to invest in its core products as well as newer hardware
and software solutions including 1394/FireWire, Fibre Channel, and optical
technologies. Research and development expenditures in fiscal 1997 increased
slightly as a percentage of revenues to 14% compared with 13% in both the 1996
and 1995 fiscal years. Spending for the three fiscal years was $129 million, $88
million, and $61 million, respectively. The Company believes these expenditures,
consisting primarily of increased staffing levels, have allowed it to maintain
its position in technical leadership and product innovation. Because of the
industry dynamics driving the need for increased system bandwidth, the Company
believes it is essential to continue its investment in research and development
and anticipates that actual spending in fiscal 1998 will increase.
Selling, marketing, and administrative expenses in fiscal 1997 decreased
slightly as a percentage of revenues to 17% compared with 18% in both the 1996
and 1995 fiscal years. Spending for the three fiscal years was $163 million,
$117 million, and $82 million, respectively. These increases in actual spending
were primarily a result of advertising and promotional programs aimed at
leveraging the Company's brand image and generating demand for its products.
Additionally, the Company increased staffing levels to support its worldwide
growth. The Company believes it will increase these expenditures in fiscal 1998
primarily due to expanded worldwide marketing activities.
During fiscal years 1997 and 1996, the Company acquired various
complementary businesses and technologies recorded under the purchase method of
accounting, resulting in write-offs of acquired in-process technology of $90
million and $52 million, respectively. Excluding the write-offs, the Company's
results of operations for fiscal years 1997 and 1996 were not materially
affected by these acquisitions. Additionally, the Company acquired one business,
Cogent Data Technologies (Cogent), recorded under the pooling-of-interests
method of accounting. The Company incurred $2 million in professional fees in
connection with this acquisition, which have been included in "write-off of
acquired in-process technology and other." Cogent's historical operations, net
assets, and cash flows were not material to the Company's consolidated financial
statements and, therefore, have not been reflected in the Company's consolidated
financial results prior to the acquisition. Beginning at the date of
acquisition, the book value of the acquired assets and assumed liabilities as
well as the results of Cogent's operations and cash flows, all of which are not
material to the Company have been combined with those of the Company.
Interest income, net of interest expense for fiscal 1997, decreased from
the prior fiscal year primarily due to lower cash and investment balances in the
first half of the year and interest expense incurred in connection with $230
million of Convertible Subordinated Notes that the Company issued in February
1997. The interest rate associated with these notes is 4 3/4%. Interest income,
net of interest expense, for both the 1997 and 1996 fiscal years is higher than
fiscal 1995 due to higher average cash and investment balances.
The Company's effective tax rate for fiscal years 1997, 1996, and 1995 was
37%, 25%, and 25%, respectively. The higher fiscal 1997 rate resulted from
write-offs of acquired in-process technology for which the Company will receive
no corresponding tax benefit. Excluding the effect of the write-offs of acquired
in-
14
<PAGE> 15
process technology in fiscal 1997, the Company's effective tax rate was 25%. The
accounting for write-offs of acquired in-process technology changed in fiscal
1997 due to an interpretation of SFAS 109 that the Company adopted upon its
issuance. In fiscal 1996, the Company was allowed to gross-up the acquired
in-process technology and record a dollar-for-dollar credit against its tax
provision, allowing the Company to maintain its 25% effective rate. The
difference between the Company's 25% effective tax rate and the U.S. statutory
rate is primarily due to income earned in Singapore where the Company is subject
to a significantly lower effective tax rate resulting from a tax holiday
relating to certain of its products. The terms of the tax holiday provide that
profits derived from certain products will be exempt from tax through 2006,
subject to certain conditions. In addition, profits derived from the Company's
remaining products will be taxed at a rate of 15%, which is lower than the
Singapore statutory rate of 26%, through fiscal 1998.
While the Company has experienced significant growth in revenues and
profitability, various factors could adversely affect its results of operations
in the future including its dependence on the high-performance microcomputer,
server, and peripherals markets, changes in product mix, competitive pricing
pressures, changes in technological standards, dependence on wafer suppliers and
other subcontractors, changes in product costs, certain risks associated with
acquisitions of other companies or businesses that the Company may make from
time to time, issues related to distributors, dependence on key personnel, risks
associated with international operations, risks associated with implementation
of new systems, and risks associated with intellectual property or general
economic downturns.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities. Net cash generated from operating activities during
fiscal 1997 was $223 million compared to the $106 million generated in fiscal
1996. The increase in fiscal 1997 is reflected in the increase in the Company's
net income excluding non-cash charges compared to the prior year. The increase
in cash generated from operations from fiscal 1996 was primarily a result of the
overall growth of the Company's operations. Offsetting favorable operating cash
flows in fiscal 1997 was an increase in accounts receivable of $42 million
reflecting the Company's growth.
Investing Activities. The Company made payments of $107 million, net of
cash acquired, in connection with the acquisitions of Western Digital's
Connectivity Solutions Group (CSG), CD-Recordable (CD-R) software technology
from Corel, Inc., Data Kinesis, Inc. (DKI), Sigmax Technologies, Inc. (Sigmax),
Toast CD-R technology for the Macintosh platform, and certain assets of
Skipstone, Inc. (Skipstone). Additionally, the Company acquired Cogent in a
transaction accounted for as a pooling of interest through the issuance of 2.6
million shares of its common stock. During fiscal 1996, the Company also
acquired various complementary businesses and technologies resulting in a $31
million cash payout.
In fiscal 1997, the Company continued to invest in equipment for product
development and manufacturing to support increased demand for its products and
future business requirements. Also included in the $88 million invested in
property and equipment during the current fiscal year was an investment of $13
million toward a new facility for one of the Company's research and development
centers located in Boulder, Colorado, and an investment of $15 million toward
the implementation of new information systems for the Company. The Company will
begin utilizing the facility in Boulder during the first quarter of fiscal 1998
and its new information systems in the second quarter of fiscal 1998. During the
1998 fiscal year, the Company anticipates it will invest approximately $90
million in property and equipment, primarily consisting of equipment for future
product innovation as well as facilities to support its growth.
During fiscal years 1997, 1996, and 1995 the Company continued to invest
significant amounts of funds in marketable securities consisting mostly of
highly rated municipal instruments.
During fiscal year 1997, the Company entered into an agreement with Lucent
Technologies, Inc. ("Lucent") to sell $21 million of equipment that it had
previously purchased in connection with a separate agreement that ensured
availability of certain levels of wafer capacity from Lucent. This new agreement
cancels the initial capacity agreement and requires Lucent to purchase the
equipment from the Company, payable in two installments in fiscal 1998.
15
<PAGE> 16
Financing Activities. In February 1997, the Company issued $230 million of
4 3/4% Convertible Subordinated Notes due February 1, 2004, for which the
Company received net proceeds of $224 million. The notes provide for semi-annual
interest payments each February 1 and August 1, commencing on August 1, 1997.
The holders of the notes will be entitled at any time on or after May 5, 1997
through maturity to convert the notes into common stock at a conversion price of
$51.66 per share. The notes are redeemable, in whole or in part, at the option
of the Company, at any time on or after February 3, 2000 at declining premiums
to par. Debt issuance costs are being amortized ratably over the term of the
notes.
In June 1996, the Company paid a $46 million short-term note issued to TSMC in
connection with an agreement to ensure increased wafer capacity through the year
2001. Subsequent to March 31, 1997, the Company entered into an agreement with
TSMC whereby the Company will make advance payments totaling $35 million to
secure additional wafer capacity for future technology through 2001. The Company
signed a promissory note for $35 million for the advance payments, which become
due in two equal installments on January 31, 1998 and June 30, 1998.
During fiscal years 1997, 1996, and 1995, the Company received proceeds
from the issuance of common stock under its Stock Option and Employee Stock
Purchase Plans totaling $50 million, $27 million, and $17 million, respectively.
During fiscal 1997, the Company's Board of Directors terminated the Company's
stock repurchase program.
The Company has an unsecured $17 million revolving line of credit under
which there were no outstanding borrowings as of March 31, 1997. The Company's
liquidity is affected by various factors, some based on continuing operations of
the business and others related to the industry and global economies. Although
the Company's cash position will fluctuate based on the timing of these factors,
the Company believes that existing working capital combined with expected cash
generated from operations and available sources of bank and equipment financing
will be sufficient to meet its cash requirements throughout fiscal 1998.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index appearing under Item 14(a)(1) on page 19 for the consolidated
financial statements of Adaptec, Inc. at March 31, 1997 and 1996 and for each of
the three years in the period ended March 31, 1997 and the independent
accountant's report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
<PAGE> 17
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, 1997 (the "Proxy Statement").
The following sets forth certain information with respect to the executive
officers of the Company, and their ages, as of March 31, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------- --- ------------------------------------------------------------
<S> <C> <C>
John G. Adler 60 Chairman of the Board of Directors
F. Grant Saviers 52 President and Chief Executive Officer
Robert N. Stephens 51 Chief Operating Officer
Andrew J. Brown 37 Vice President, Corporate Controller and Principal
Accounting Officer
Richard J. Clayton 56 Vice President and General Manager
Michael G. Fisher 38 Vice President and General Manager
Richard S. Gourley 44 Vice President, Worldwide Sales
Paul G. Hansen 49 Vice President of Finance, Chief Financial Officer and
Assistant Secretary
Drew S. Hoffman 40 Vice President and General Manager
E.J. Tim Harris 49 Vice President of Administration
Sam Kazarian 54 Vice President of Operations
Christopher G. O'Meara 39 Vice President and Treasurer
Subramanian Sundaresh 40 Vice President and General Manager
Henry P. Massey, Jr. 57 Secretary
</TABLE>
Executive officers serve at the pleasure of the Board of Directors of the
Company. There are no family relationships between any directors or executive
officers of the Company.
MR. ADLER served as President of Adaptec from May 1985 to August 1992, as
Chief Executive Officer from December 1986 to July 1995, as a director since
February 1986, and as Chairman of the Board of Directors since May 1990.
MR. SAVIERS has served as President and Chief Executive Officer of Adaptec
since August 1992 and July 1995, respectively, and was Chief Operating Officer
from August 1992 to July 1995. Prior to joining Adaptec, Mr. Saviers was
employed with Digital Equipment Corporation for more than five years, last
serving as Vice President of its personal computer systems and peripherals
operation.
MR. STEPHENS has served as Chief Operating Officer since November 1995.
From 1993 to 1995, he founded and served as Chairman for Power I/O Corporation.
From 1990 to 1993, Mr. Stephens held the position of President and CEO of Emulex
Corporation.
MR. BROWN has served as Vice President since 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.
MR. CLAYTON has served as Vice President and General Manager since May
1996. From October 1995 until February 1996 he served as Vice President of AVID
Technology Corp. and from January 1984 until February 1996 he served as Vice
President of Thinking Machines Corp.
MR. FISHER has served as Vice President and General Manager since November
1994. Between May 1994 and October 1994 he held the position of General Manager,
Mass Storage Electronics Product
17
<PAGE> 18
Group. Before then, Mr. Fisher held the position of Director of Hard Disk Drive
Products at Exar Corporation from November 1990 until April 1994.
MR. GOURLEY has served as Vice President, Worldwide Sales since April 1996.
From September 1994 to April 1996 he was a Senior Director at Oracle
Corporation. From January 1982 to August 1994, Mr. Gourley served in a number of
sales and marketing management positions at IBM Corporation.
MR. HANSEN, a certified public accountant, has served as Vice President of
Finance and Chief Financial Officer since January 1988. From March 1984 to
December 1987 he served in various financial roles with the Company.
MR. HARRIS has served as Vice President of Administration since December
1996. From January 1984 to November 1996, he served in various positions at
Novell, Inc. most recently as Senior Vice President, Human Resources.
MR. HOFFMAN has served as Vice President and General Manager since August
1995. Mr. Hoffman served as Vice President, Engineering of Echelon Systems Corp.
from 1991 to 1995.
MR. KAZARIAN has served as Vice President of Operations since May 1990.
MR. O'MEARA has served as Vice President since July 1992 and as Treasurer
since April 1989.
MR. SUNDARESH has served as Vice President and General Manager since
February 1994. From March 1993 until January 1994 he served as Director of
Marketing. From 1991 to 1993 he served as Director of PC Marketing at Hyundai
Electronics America.
MR. MASSEY has served as Secretary since November 1989. For more than the
last five years, Mr. Massey has been a practicing lawyer and a member of Wilson,
Sonsini, Goodrich & Rosati, Professional Corporation, a law firm and general
outside counsel to the Company.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the caption "Executive
Compensation and Other Matters" and "Election of Directors, Certain
Relationships and Related Transactions" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption: "Election
of Directors -- Security Ownership of Management" in the Company's Proxy
Statement.
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.
18
<PAGE> 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following Consolidated Financial Statements of Adaptec, Inc. and the
Report of Independent Public Accountants, as listed under (a)(1) below, are
included in this document.
(a)(1) FINANCIAL STATEMENTS:
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Consolidated Statements of Operations -- Fiscal Years ended March 31,
1997, 1996, and 1995.................................................. F-1
Consolidated Balance Sheets at March 31, 1997 and 1996.................. F-2
Consolidated Statements of Cash Flows -- Fiscal Years ended March 31,
1997, 1996, and 1995.................................................. F-3
Consolidated Statements of Shareholders' Equity -- Fiscal Years ended
March 31, 1997, 1996, and 1995........................................ F-4
Notes to Consolidated Financial Statements.............................. F-5 to F-16
Report of Management.................................................... F-17
Report of Independent Accountants....................................... F-18
</TABLE>
(2) All schedules are omitted because they are not applicable or the
required information is shown in the consolidated financial statements
or notes thereto.
(3) Exhibits included herein (numbered in accordance with Item 601 of
Regulation S-K):
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION NOTES
------ -------------------------------------------------------------------------- -----
<S> <C> <C>
2.1(a) Stock Purchase Agreement by and among Adaptec, Inc., Future Domain (6)
Corporation, Jack A. Allweiss, Patricia A. Allweiss and Certain
Shareholders of Future Domain Corporation dated July 13, 1995.............
2.1(b) Stock Purchase Agreement by and between Adaptec, Inc. and Certain (6)
Shareholders of Future Domain Corporation dated July 13, 1995.............
2.2 Agreement and Plan of Reorganization by and among Adaptec, Inc., Incat (2)
Systems Software USA, Inc., ISS Acquisition Corporation and Certain
Shareholders of Incat Systems Software USA, Inc. dated August 23, 1995....
2.3 Agreement for Purchase and Sale of Stock by and among Western Digital (3)
Corporation, Western Digital CSG Corporation, and Adaptec, Inc. dated
April 9, 1996.............................................................
2.4 Agreement and Plan of Reorganization by and among Adaptec, Inc., Cogent (4)
Data Technologies, Inc., CDT Acquisition Corp., and Certain Shareholders
of Cogent Data Technologies, Inc. dated May 31, 1996......................
2.5 Agreement and Plan of Reorganization by and among Adaptec, Inc., Adaptec (4)
Acquisition Corporation, and Data Kinesis, Inc. dated August 6, 1996......
3.1 Eighth Amended and Restated Articles of Incorporation of Registrant filed (5)
with California Secretary of State on November 1, 1996....................
3.2 Bylaws of Registrant, as restated on February 9, 1996..................... (2)
3.3 Certificate of determination of rights, preferences and privileges of (5)
Series A participating preferred stock filed with the California Secretary
of State on December 31, 1996.............................................
4.1 First Amended and Restated Common Shares Rights Agreement dated June 30, (9)
1992, between Registrant and Chemical Trust Company of California as
Rights Agents.............................................................
4.2 Indenture dated as of February 3, 1997 between Registrant and State Street (1)
Bank and Trust Company....................................................
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION NOTES
------ -------------------------------------------------------------------------- -----
<S> <C> <C>
10.1 Registrant's 1986 Employee Stock Purchase Plan............................ (7)
10.2 Technology License Agreement dated January 1, 1985 between the Registrant (11)
and International Business Machines Corporation...........................
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, (8)
Restricted Stock Purchase Agreement, Stock Appreciation Rights Agreement,
and Incentive Stock Rights Agreement for use in connection with the 1990
Stock Plan, as amended....................................................
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 (7)
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......................................................................
10.8 Amendments Four, Five and Six to the Revolving Credit Loan Agreement dated (7)
April 29, 1994 between the Registrant and Comerica Bank -- California
expiring August 31, 1997..................................................
10.9* Option Agreement I Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan (2)
Semiconductor Manufacturing Co., Ltd. dated October 23, 1995..............
10.10* Option Agreement II Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan (2)
Semiconductor Manufacturing Co., Ltd. dated October 23, 1995..............
10.11 Consignment Agreement between Adaptec, Inc. and AT&T Corp. dated January (2)
10, 1996..................................................................
10.12 Letter Agreement between Adaptec, Inc. and Lucent Technologies, Inc. dated
January 1, 1997...........................................................
10.13 Form of Indemnification Agreement entered into with directors and officers (12)
of the Company............................................................
10.14 Term Loan Agreement dated June 24, 1992 between the Registrant and Plaza (12)
Bank of Commerce expiring June 30, 1988...................................
10.15* Deposit and Supply Agreement between Taiwan Semiconductor Manufacturing (7)
Co., Ltd. and Adaptec Manufacturing Pte. Ltd..............................
10.16 Industrial Lease Agreement between the Registrant, as Lessee, and Jurong (6)
Town Corporation, as Lessor...............................................
10.17 Amendments Seven, Eight, and Nine to the Revolving Credit Loan Agreement (5)
dated April 29, 1994 between the Registrant and Comerica
Bank -- California expiring August 31, 1997...............................
10.18 Amendments One, Two, Three, and Four to the Term Loan Agreement dated June (13)
24, 1992 between the Registrant and Comerica Bank -- California (formerly
the Plaza Bank of Commerce) expiring June 30, 1998........................
12.1 Computation of Ratio of Earnings to Fixed Charges.........................
21.1 Subsidiaries of Registrant................................................ (14)
23.1 Consent of Independent Accountants, Price Waterhouse LLP. (See Page 22)
24.1 Power of Attorney. (See Pages 23).
</TABLE>
20
<PAGE> 21
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION NOTES
------ -------------------------------------------------------------------------- -----
<S> <C> <C>
25.1 Statement of Eligibility and Qualification Under the Trust Indenture Act (1)
of 1939 of a Corporation designated to act as Trustee on Form T-1.........
27.1 Financial Data Schedule for the year ended March 31, 1997.
</TABLE>
- ---------------
(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 A filed with Registrant's Registration
Statement Number 0-15071 on Form 8-A on May 11, 1989 and to Exhibit 1.1 to
Form 8 Amendments No. 1, No. 2 and No. 3 thereto as filed June 5, 1990;
April 8, 1992; and July 20, 1992, respectively.
(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 S-8 as filed February 7,
1996.
(14) Incorporated by reference from the information under the caption "Corporate
Information" included in the Annual Report to Shareholders for the fiscal
year ended March 31, 1996.
* Confidential treatment has been granted for portions of this agreement.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the fourth quarter.
21
<PAGE> 22
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-02889, No. 33-00779, No. 33-85652) and Form S-1
(No. 333-24557) of Adaptec, Inc. of our report dated April 25, 1997 appearing on
page F-18 of this Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
June 18, 1997
22
<PAGE> 23
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, 1997 /s/ F. GRANT SAVIERS
--------------------------------------
F. Grant Saviers
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- --------------
<S> <C> <C>
/s/ JOHN G. ADLER Chairman of the Board of June 18, 1997
- --------------------------------------------- Directors
(John G. Adler)
/s/ F. GRANT SAVIERS President and Chief Executive June 18, 1997
- --------------------------------------------- Officer
(F. Grant Saviers)
/s/ ROBERT N. STEPHENS Chief Operating Officer June 18, 1997
- ---------------------------------------------
(Robert N. Stephens)
/s/ PAUL G. HANSEN Vice President of Finance, Chief June 18, 1997
- --------------------------------------------- Financial Officer and Assistant
(Paul G. Hansen) Secretary
/s/ ANDREW J. BROWN Vice President, Corporate June 18, 1997
- --------------------------------------------- Controller and Principal
(Andrew J. Brown) Accounting Officer
/s/ LAURENCE B. BOUCHER Director June 18, 1997
- ---------------------------------------------
(Laurence B. Boucher)
/s/ CARL J. CONTI Director June 18, 1997
- ---------------------------------------------
(Carl J. Conti)
/s/ JOHN C. EAST Director June 18, 1997
- ---------------------------------------------
(John C. East)
</TABLE>
23
<PAGE> 24
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------------- --------------
<S> <C> <C>
/s/ ROBERT J. LOARIE Director June 18, 1997
- ---------------------------------------------
(Robert J. Loarie)
/s/ B. J. MOORE Director June 18, 1997
- ---------------------------------------------
(B. J. Moore)
/s/ W. FERRELL SANDERS Director June 18, 1997
- ---------------------------------------------
(W. Ferrell Sanders)
/s/ PHILLIP E. WHITE Director June 18, 1997
- ---------------------------------------------
(Phillip E. White)
</TABLE>
24
<PAGE> 25
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
----------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Net revenues............................................... $933,868 $659,347 $466,194
Cost of revenues........................................... 388,969 275,939 205,596
-------- -------- --------
Gross profit.......................................... 544,899 383,408 260,598
-------- -------- --------
Operating expenses
Research and development................................. 128,530 87,628 60,848
Selling, marketing and administrative.................... 162,979 117,332 81,966
Write-off of acquired in-process technology and other.... 92,162 52,313 --
-------- -------- --------
383,671 257,273 142,814
-------- -------- --------
Income from operations................................... 161,228 126,135 117,784
-------- -------- --------
Interest income............................................ 13,297 12,694 7,932
Interest expense........................................... (2,744) (840) (1,179)
-------- -------- --------
10,553 11,854 6,753
-------- -------- --------
Income before income taxes............................... 171,781 137,989 124,537
Provision for income taxes................................. 64,220 34,614 31,135
-------- -------- --------
Net income............................................... $107,561 $103,375 $ 93,402
======== ======== ========
Net income per share....................................... $ .93 $ .95 $ .88
======== ======== ========
Weighted average number of common and common equivalent
shares outstanding....................................... 115,062 109,138 106,714
======== ======== ========
</TABLE>
See accompanying notes.
F-1
<PAGE> 26
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF MARCH 31
-----------------------
1997 1996
---------- --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Current assets
Cash and cash equivalents.......................................... $ 318,075 $ 91,211
Marketable securities.............................................. 230,366 204,283
Accounts receivable, net of allowance for doubtful accounts of
$5,098 in 1997 and $4,220 in 1996............................... 132,571 89,487
Inventories........................................................ 53,184 55,028
Prepaid expenses and other......................................... 83,752 25,271
---------- --------
Total current assets....................................... 817,948 465,280
Property and equipment, net.......................................... 141,599 95,004
Other assets......................................................... 83,947 86,202
---------- --------
$1,043,494 $646,486
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt.................................. $ 3,400 $ 3,400
Note payable....................................................... -- 46,200
Accounts payable................................................... 52,400 23,974
Accrued liabilities................................................ 68,519 56,717
---------- --------
Total current liabilities.................................. 124,319 130,291
---------- --------
Long-term debt, net of current portion............................... 850 4,250
---------- --------
Convertible subordinated notes....................................... 230,000 --
---------- --------
Commitments (Note 7)
Shareholders' equity
Preferred stock; $.001 par value
Authorized shares, 1,000
Outstanding shares, none........................................ -- --
Common Stock; $.001 par value
Authorized shares, 400,000
Outstanding shares, 111,540 in 1997 and 106,040 in 1996......... 251,834 182,932
Retained earnings.................................................. 436,491 329,013
---------- --------
Total shareholders' equity................................. 688,325 511,945
---------- --------
$1,043,494 $646,486
========== ========
</TABLE>
See accompanying notes.
F-2
<PAGE> 27
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31
-----------------------------------
1997 1996 1995
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 107,561 $103,375 $ 93,402
Adjustments to reconcile net income to net cash provided
by operating activities:
Write-off of acquired in-process technology, net of
taxes................................................ 88,691 39,686 --
Depreciation and amortization........................... 28,611 17,593 15,662
Provision for doubtful accounts......................... 1,000 250 150
Changes in assets and liabilities, net of the effect of
acquisitions:
Accounts receivable.................................. (41,688) (30,727) (1,311)
Inventories.......................................... 11,998 (20,516) 7,228
Prepaid expenses..................................... (13,070) (8,973) 460
Other assets......................................... 3,329 (16,952) (3,327)
Accounts payable..................................... 25,968 (167) 2,354
Accrued liabilities.................................. 10,948 21,969 4,251
--------- -------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES................. 223,348 105,538 118,869
--------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of certain net assets in connection with
acquisitions accounted for under the purchase method of
accounting.............................................. (107,214) (31,177) --
Investments in property and equipment..................... (87,959) (41,907) (32,356)
Investments in marketable securities, net................. (26,083) (24,372) (32,291)
--------- -------- --------
NET CASH USED FOR INVESTING ACTIVITIES.................... (221,256) (97,456) (64,647)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible subordinated
notes................................................... 223,905 -- --
Payment of short-term note................................ (46,200) -- --
Proceeds from issuance of common stock.................... 50,467 27,459 17,174
Repurchase of common stock................................ -- (7,765) (36,548)
Principal payments on debt................................ (3,400) (3,400) (3,400)
--------- -------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES...... 224,772 16,294 (22,774)
--------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................. 226,864 24,376 31,448
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR.......................................... 91,211 66,835 35,387
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 318,075 $ 91,211 $ 66,835
========= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 28
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
-------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE, MARCH 31, 1994.......................... 104,582 $138,317 $159,299 $297,616
Sale of common stock under employee purchase and
option plans................................... 2,852 11,245 -- 11,245
Income tax benefit of employees' stock
transactions................................... -- 5,929 -- 5,929
Repurchases of common stock...................... (4,080) (15,300) (21,248) (36,548)
Net income....................................... -- -- 93,402 93,402
-------- -------- -------- --------
BALANCE, MARCH 31, 1995.......................... 103,354 140,191 231,453 371,644
Sale of common stock under employee purchase and
option plans................................... 2,436 16,512 -- 16,512
Issuance of common stock in connection with
acquisition.................................... 770 17,232 -- 17,232
Income tax benefit of employees' stock
transactions................................... -- 10,947 -- 10,947
Repurchases of common stock...................... (520) (1,950) (5,815) (7,765)
Net income....................................... -- -- 103,375 103,375
-------- -------- -------- --------
BALANCE, MARCH 31, 1996.......................... 106,040 182,932 329,013 511,945
Sale of common stock under employee purchase and
option plans................................... 2,814 28,323 -- 28,323
Issuance of common stock in connection with
acquisitions................................... 2,686 18,435 (83) 18,352
Income tax benefit of employees' stock
transactions................................... -- 22,144 -- 22,144
Net income....................................... -- -- 107,561 107,561
-------- -------- -------- --------
BALANCE, MARCH 31, 1997.......................... 111,540 $251,834 $436,491 $688,325
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of intercompany transactions
and balances. Certain prior year amounts have been reclassified to conform to
the current year presentation. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In November 1996, the Company effected a two-for-one split of its common stock.
The accompanying consolidated financial statements have been retroactively
restated to reflect this stock split.
Foreign Currency Translation
The Company uses the U.S. dollar as its functional currency. Foreign
currency transaction gains and losses are included in income as they occur. The
effect of foreign currency exchange rate fluctuations on cash and cash
equivalents denominated in foreign currencies was not material.
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance
with generally accepted accounting principles. The estimated fair value of the
Company's convertible subordinated notes was $268 million at March 31, 1997. The
estimated fair value of all other debt and financial instruments at March 31,
1997 and 1996 was not materially different from the values presented in the
consolidated balance sheets.
Cash and Cash Equivalents
Cash and cash equivalents consist of funds in checking accounts, money
market funds, and marketable securities with original maturities of three months
or less.
Marketable Securities
At March 31, 1997, the Company's marketable securities are classified as
available for sale and are reported at fair market value which approximates
cost. Marketable securities with maturities after one through three years
totaled $147 million with all remaining securities maturing less than one year.
Realized gains and losses are based on the book value of the specific securities
sold and have been immaterial.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
marketable securities, and trade accounts receivable. The Company places its
marketable securities primarily in municipal securities. The Company, by policy,
limits the amount of credit exposure through diversification and investment in
highly rated securities. Sales to customers are primarily denominated in U.S.
dollars. As a result, the Company believes its foreign currency risk is minimal.
The Company sells its products to original equipment manufacturers and
distributors throughout the world. The Company performs ongoing credit
evaluations of its customers' financial condition and, generally, requires no
collateral from its customers. The Company maintains an allowance for
uncollectible accounts receivable based upon the expected collectibility of all
accounts receivable. There were no significant amounts charged to this allowance
during the past three years.
F-5
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Product Development Costs
The Company's policy is to capitalize internal software development costs
incurred after technological feasibility has been demonstrated. Such internal
software development costs have not been capitalized to date since they were
immaterial.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market.
Property and Equipment
Property and equipment are stated at cost and depreciated or amortized
using the straight-line method over the estimated useful lives of the assets.
The Company capitalizes substantially all costs related to the purchase and
implementation of software projects used for internal business operations.
Capitalized internal-use software costs primarily include license fees,
consulting fees, and any associated direct labor and are amortized over the
estimated useful life of the project, typically a three to five year period. The
Company's property and equipment as of March 31, 1997 and 1996 included $22
million and $5 million, respectively, of capitalized software costs, net of
amortization. Software amortization totaling $3 million, $1 million, and $1
million was included in the Company's consolidated statements of operations
during 1997, 1996, and 1995, respectively.
Other Assets
The Company's other assets as of March 31, 1997 and 1996 included $23
million and $6 million, respectively, of goodwill, net of amortization. Goodwill
amortization totaling $8 million and $2 million was included in the Company's
consolidated statements of operations during 1997 and 1996, respectively. The
Company assesses the impairment of other assets including goodwill based on the
future estimated cash flows of the acquired technology.
Revenue Recognition
The Company recognizes revenue generally at the time of shipment or upon
satisfaction of contractual obligations. The Company records provisions for
estimated returns at the time of sale.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company's policy is to grant options with an
exercise price equal to the quoted market price of the Company's stock on the
grant date. Accordingly, no compensation cost has been recognized in the
Company's consolidated statements of operations. The Company has provided
additional pro forma disclosures as required under Statement of Financial
Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation."
Net Income Per Share
Net income per share is computed under the treasury stock method using the
weighted average number of common and common equivalent shares from dilutive
options outstanding during the respective periods.
F-6
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SUPPLEMENTAL FINANCIAL INFORMATION
Inventories
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials............................................ $12,958 $23,415
Work-in-process.......................................... 14,370 12,865
Finished goods........................................... 25,856 18,748
-------- --------
- -
$53,184 $55,028
========= =========
</TABLE>
Property and Equipment
<TABLE>
<CAPTION>
LIFE 1997 1996
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land.................................... -- $ 29,698 $ 25,154
Buildings and improvements.............. 5-40 years 26,142 20,328
Machinery and equipment................. 3-5 years 79,386 58,789
Furniture and fixtures.................. 3-8 years 31,763 22,944
Leasehold improvements.................. Life of lease 6,583 5,245
Construction in progress................ -- 25,976 2,727
--------- ---------
199,548 135,187
Accumulated depreciation and
amortization.......................... (57,949) (40,183)
--------- ---------
$141,599 $ 95,004
========= =========
</TABLE>
Accrued Liabilities
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued compensation and related taxes................... $25,514 $22,440
Acquisition related...................................... 12,751 2,597
Sales and marketing related.............................. 12,464 7,443
Tax related.............................................. 8,038 16,218
Other.................................................... 9,752 8,019
-------- --------
$68,519 $56,717
======== ========
</TABLE>
Supplemental Disclosures of Cash Flows
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest paid................................. $ 641 $ 764 $ 1,125
Income taxes paid............................. 67,118 32,869 29,411
</TABLE>
NOTE 3. LINE OF CREDIT
The Company has available an unsecured $17 million revolving line of
credit, that expires on December 31, 1998. Of the total line of credit
available, $7 million has been issued as an irrevocable standby letter of credit
to guarantee component purchases from a supplier (see Note 7) at a fee of 3/4%
per annum. As of March 31, 1997, no borrowings were outstanding under this line
of credit. The Company may select its own method of interest payment on
borrowings based upon the bank's CD rate plus 1%, Eurodollar rate plus 1%, or
prime lending rate. A commitment fee of 1/4% per annum is payable on the unused
line of credit. Under the arrangement, the Company is restricted from paying
dividends in excess of 25% of the prior fiscal year's net income, and the
Company is required to maintain certain financial ratios among other restrictive
covenants. The Company was in compliance with all such covenants as of March 31,
1997.
F-7
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED NOTES
The Company entered into a $17 million term loan agreement in June 1992
bearing interest at 7.65%, with principal and interest payable in quarterly
installments of $850,000. All outstanding principal and accrued but unpaid
interest is due and payable in June 1998. Under the arrangement, the Company is
restricted from paying dividends in excess of 25% of the prior fiscal year's net
income, and the Company is required to maintain certain financial ratios among
other restrictive covenants. The Company was in compliance with all such
covenants as of March 31, 1997.
In February 1997, the Company issued $230 million of 4 3/4% convertible
subordinated notes due on February 1, 2004. The Company received net proceeds of
$224 million. The notes provide for semi-annual interest payments each February
1 and August 1, commencing on August 1, 1997. The holders of the notes will be
entitled at any time on or after May 5, 1997 through February 1, 2004 to convert
the notes into common stock at a conversion price of $51.66 per share. The notes
are redeemable, in whole or in part, at the option of the Company, at any time
on or after February 3, 2000 at declining premiums to par. Debt issuance costs
are being amortized over the term of the notes.
NOTE 5. ACQUISITIONS
During fiscal 1997, the Company acquired complementary businesses and
technologies consisting of Western Digital's Connectivity Solutions Group, CD-R
software technology from Corel, Inc., Data Kinesis, Inc., Sigmax Technology,
Inc., Toast CD-R technology, and certain assets from Skipstone, Inc. for $109
million and $15 million in cash and stock, respectively. These companies design
and develop silicon solutions for the SCSI disk drive market, CD creator for the
CD-R software market, software for improving system performance in file
management and RAID applications, CD-ROM controllers for ATAPI CD-ROM drivers,
CD-R technology for Macintosh platforms, and 1394/FireWire products. During
fiscal 1996, the Company acquired all of the outstanding capital stock of Future
Domain Corporation, Power I/O, Inc., Trillium Research, Inc., and Incat Systems
Software USA, Inc. for $35 million and $17 million in cash and stock,
respectively.
The Company accounted for these acquisitions using the purchase method of
accounting, and excluding the aggregate $90 million and $52 million write-offs
of acquired in-process technology from these acquisitions for fiscal 1997 and
1996, respectively, the aggregate impact on the Company's consolidated
statements of operations from the acquisition date was not material. The
accounting for the write-off changed in fiscal 1997 due to an interpretation of
SFAS 109 that the Company adopted upon its issuance. In fiscal 1996, the Company
was allowed to gross-up the acquired in-process technology and record a
dollar-for-dollar credit through its tax provision.
The allocation of the Company's aggregate purchase price to the tangible
and identifiable intangible assets acquired and liabilities assumed was based
primarily on independent appraisals and estimates of fair value and is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996
-------- -------
(IN THOUSANDS)
<S> <C> <C>
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
======== =======
</TABLE>
F-8
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tangible assets acquired were primarily comprised of inventory and
fixed assets. Acquired in-process technology was written off in the periods in
which the acquisitions were completed, and the goodwill is being amortized over
respective benefit periods ranging from two to five years.
On August 12, 1996, the Company completed its acquisition of Cogent Data
Technologies, Inc. (Cogent). The Company acquired all of the outstanding capital
stock of Cogent in exchange for 2.6 million shares of its common stock.
Additionally, the Company incurred $1.7 million in professional fees related to
this acquisition, which have been included in "write-off of acquired in-process
technology and other." The Company has recorded this acquisition using the
pooling of interests method of accounting. Cogent's historical operations, net
assets, and cash flows were not material to the Company's consolidated financial
statements and, therefore, have not been reflected in the Company's consolidated
financial results prior to the acquisition. Beginning at the date of
acquisition, the book value of the acquired assets and assumed liabilities as
well as the results of Cogent's operations and cash flows, all of which are not
material to the Company, have been combined with those of the Company.
NOTE 6. STOCK PLANS
1986 Employee Stock Purchase Plan
The Company has authorized 5,600,000 shares of common stock for issuance
under the 1986 Employee Stock Purchase Plan (1986 Plan). Qualified employees may
elect to have a certain percentage (not to exceed 10%) of their salary withheld
pursuant to the 1986 Plan. The salary withheld is then used to purchase shares
of the Company's common stock at a price equal to 85% of the market value of the
stock at the beginning or ending of a three-month offering period, whichever is
lower. Under this Plan, 285,336 and 278,550 shares were issued during fiscal
1997 and 1996 respectively, representing approximately $6.9 million and $4.6
million in employee contributions.
1990 Stock Plan
The Company's 1990 Stock Plan allows the Board of Directors to grant to
employees, officers, and consultants options to purchase common stock or other
stock rights at exercise prices not less than 50% of the fair market value of
the underlying common stock on the date of grant. The expiration of options or
other stock rights is not to exceed ten years after the date of grant. To date,
the Company has issued substantially all incentive and non-statutory stock
options under this Plan at exercise prices of 100% of fair market value of the
underlying common stock on the respective dates of grant. Generally, options
vest and become exercisable over a four-year period and in some cases over a
three-year period.
F-9
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity under the 1990 Stock Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS AVAILABLE
-----------------
OPTIONS OUTSTANDING
-----------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
---------- --------------
<S> <C> <C> <C>
Balance, March 31, 1994............ 5,547,148 8,796,754 $ 5.34
Authorized....................... 5,000,000 -- $ --
Granted.......................... (3,829,000) 3,829,000 $10.09
Exercised........................ -- (1,861,148) $ 3.71
Terminated....................... 1,198,106 (1,198,106) $ 6.55
---------- ---------- ------
Balance, March 31, 1995............ 7,916,254 9,566,500 $ 7.41
Authorized....................... 4,387,800 -- $ --
Granted.......................... (4,589,500) 4,589,500 $22.28
Exercised........................ -- (2,034,262) $ 5.80
Terminated....................... 482,076 (482,076) $12.78
---------- ---------- ------
Balance, March 31, 1996............ 8,196,630 11,639,662 $13.32
Authorized....................... 9,833,906 -- $ --
Granted.......................... (7,296,738) 7,296,738 $24.69
Exercised........................ -- (2,414,728) $ 8.58
Terminated....................... 1,555,300 (1,555,300) $19.33
---------- ---------- ------
Balance, March 31, 1997............ 12,289,098 14,966,372 $19.05
========== ========== ======
Options exercisable at:
March 31, 1995..................... 3,117,772 $ 5.21
March 31, 1996..................... 3,913,534 $ 7.90
March 31, 1997..................... 5,397,068 $12.97
</TABLE>
The following table summarizes information about 1990 Stock Plan at March
31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 3/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/97 EXERCISE PRICE
- ---------------- ----------- ---------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ .37 - $10.00 4,943,829 6.7 years $ 7.11 3,298,858 $ 6.99
$10.01 - $20.00 551,814 7.8 $ 14.55 283,803 $ 14.07
$20.01 - $25.00 7,670,260 8.9 $ 23.78 1,698,273 $ 23.36
$25.01 - $41.88 1,800,469 8.8 $ 33.08 116,134 $ 28.29
---------- ---------
14,966,372 8.1 $ 19.05 5,397,068 $ 12.97
========== =========
</TABLE>
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.
F-10
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Option activity under the 1990 Directors' Option Plan is as follows:
<TABLE>
<CAPTION>
OPTIONS AVAILABLE
-----------------
OPTIONS OUTSTANDING
---------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
-------- --------------
<S> <C> <C> <C>
Balance, March 31, 1994............. 980,000 405,000 $ 5.87
Granted........................... (100,000) 100,000 $16.50
Exercised......................... -- (42,500) $ 4.81
--------- -------- ------
Balance, March 31, 1995............. 880,000 462,500 $ 8.26
Granted........................... (300,000) 300,000 $23.12
Exercised......................... -- (110,000) $ 4.10
--------- -------- ------
Balance, March 31, 1996............. 580,000 652,500 $15.80
Authorized........................ 800,000
Granted........................... (70,000) 70,000 $37.25
Exercised......................... -- (113,750) $ 6.73
--------- -------- ------
Balance, March 31, 1997............. 1,310,000 608,750 $19.96
========= ======== ======
Options exercisable at:
March 31, 1995...................... 187,500 $ 4.68
March 31, 1996...................... 187,500 $ 7.52
March 31, 1997...................... 248,750 $14.10
</TABLE>
The following table summarizes information about 1990 Directors' Option
Plan at March 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- -------------------------------
NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 3/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 3/31/97 EXERCISE PRICE
- ---------------- ----------- ---------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$ 3.84 - $10.00 152,500 1.5 years $ 7.93 127,500 $ 7.69
$10.01 - $20.00 91,250 3.0 $ 16.50 41,250 $ 16.50
$20.01 - $37.25 365,000 4.9 $ 25.85 80,000 $ 23.07
------- -------
608,750 3.8 $ 19.96 248,750 $ 14.10
======= =======
</TABLE>
Pro Forma Information
Pro forma information regarding net income and earnings per share is
required to be determined as if the Company had accounted for its Employee
Purchase Plan, 1990 Stock Plan, and 1990 Directors' Option Plan, collectively
called "options" under the fair value method of SFAS No. 123. The fair value of
options granted in fiscal 1996 and fiscal 1997 reported below has been estimated
at the date of grant using a Black-Scholes option pricing model with the
following weighted average assumptions:
<TABLE>
<CAPTION>
1990 DIRECTORS'
EMPLOYEE STOCK OPTION
PURCHASE PLAN 1990 STOCK PLAN PLAN
--------------- --------------- ---------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Expected life (in years).......... .25 .25 4 4 4.12 4.12
Risk-free interest rate........... 5.2 % 5.5 % 6.0 % 5.9 % 6.0 % 5.9 %
Volatility........................ 44% 44% 44% 44% 44% 44%
Dividend yield.................... -- -- -- -- -- --
</TABLE>
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
F-11
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of fair
value of its options. The weighted average estimated fair value of shares issued
under the Employee Stock Purchase Plan granted during 1997 and 1996 was $6.65
and $4.46 per share, respectively. The weighted average estimated fair value of
options granted under the 1990 Stock Plan during 1997 and 1996 was $12.24 and
$8.95, respectively. The weighted average estimated fair value of options
granted under the 1990 Directors' Plan during 1997 and 1996 was $14.80 and
$9.81, respectively.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows (in thousands except for earnings per share
information):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Pro forma net income..................................... $83,305 $97,956
Pro forma earnings per share............................. $ .73 $ .91
</TABLE>
The above pro forma disclosures are not likely to be representative of pro
forma disclosures of future years, since it is applicable only to options
granted subsequent to March 31, 1995. The pro forma effect of SFAS No. 123 will
not be fully reflected until fiscal 2001.
Rights Plan
The Company has reserved 250,000 shares of Series A Preferred Stock for
issuance under the 1996 Rights Agreement which was amended and restated as of
December 5, 1996. Under this plan, shareholders have received one Preferred
Stock Purchase Right ("Right") for each outstanding share of the Company's
common stock. Each Right will entitle shareholders to buy one one-thousandth of
a share of Series A Preferred Stock at an exercise price of $180.00 per right.
The Rights trade automatically with shares of the Company's common stock. The
Rights are not exercisable until ten days after a person or group announces
acquisition of 20% or more of the Company's outstanding common stock or the
commencement of a tender offer that would result in ownership by a person or
group of 20% or more of the then outstanding common stock.
The Company is entitled to redeem the Rights at $.01 per Right anytime on
or before the tenth day following such an acquisition or tender offer. This
redemption period may be extended by the Company in some cases. If, prior to
such redemption, the Company is acquired in a merger or other business
combination, a party acquires 20% or more of the Company's common stock, a 20%
shareholder engages in certain self-dealing transactions, or the Company sells
50% or more of its assets, each right will entitle the holder to purchase from
the surviving corporation, for $180.00 per share, common stock having a then
current market value of $360.00 per share.
At March 31, 1997, the Company has reserved the following shares of
authorized but unissued common stock:
<TABLE>
<S> <C>
1986 Employee Stock Purchase Plan........................ 1,453,038
1990 Stock Plan.......................................... 27,255,470
1990 Directors' Option Plan.............................. 1,918,750
Conversion of subordinated long-term debt................ 4,452,187
----------
35,079,445
==========
</TABLE>
F-12
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. COMMITMENTS
The Company leases certain office facilities, vehicles, and certain
equipment under operating lease agreements that expire at various dates through
fiscal 2009. As of March 31, 1997, the minimum future payments on existing
leases totaled $17.4 million. Rent expense was approximately $5.7 million, $3.7
million, and $2.4 million during fiscal 1997, 1996, and 1995, respectively.
During fiscal 1996, the Company signed an agreement with TSMC to ensure
availability of a portion of the Company's silicon wafer requirement for both
current and future technologies. The agreement runs through 2001 providing the
Company with a guarantee of increased capacity for wafer fabrication in return
for advance payments totaling $66 million. The advance payments are classified
in prepaid expenses, and other assets and will be realized by the Company at
specified amounts over the agreement period.
In addition to this agreement, the Company has an existing deposit and
supply agreement with TSMC to secure supply of silicon wafers. Under the deposit
and supply agreement, the Company has made deposits aggregating $14.7 million
which are repayable at the expiration of the agreement in June 1997. The
supplier has provided an irrevocable standby letter of credit to the Company in
an equal amount to guarantee the repayment of deposits made by the Company. The
advanced payment is included in current assets in the fiscal 1997 consolidated
balance sheet.
Subsequent to March 31, 1997, the Company entered into an agreement with
TSMC whereby the Company will make advance payments totaling $35 million to
secure additional wafer capacity for future technology through 2001. The Company
signed a promissory note for $35 million for the advance payments, which becomes
due in two equal installments on January 31, 1998 and June 30, 1998.
During fiscal 1997, the Company entered into an agreement with Lucent
Technologies Inc. ("Lucent") to sell $21 million of equipment that it had
previously purchased in connection with a separate agreement that ensured
availability of certain levels of wafer capacity from Lucent. This new agreement
cancels the initial capacity agreement and requires Lucent to purchase the
equipment from the Company payable in two installments in fiscal 1998.
NOTE 8. INCOME TAXES
The components of income before income taxes for the years ended March 31
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic................................... $ 74,866 $ 57,882 $ 74,397
Foreign.................................... 96,915 80,107 50,140
-------- -------- --------
Income before income taxes................. $171,781 $137,989 $124,537
======== ======== ========
</TABLE>
The split of domestic and foreign income was impacted mainly by the
acquisition-related write-offs of in-process technology and other, which reduced
domestic income by $92 million for 1997 and $52 million for 1996.
F-13
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The components of the provision for income taxes for the years ended March
31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Federal
Current.................................... $ 45,363 $22,066 $26,455
Deferred................................... (10,025) (4,263) (311)
-------- ------- -------
35,338 17,803 26,144
Foreign
Current.................................... 21,418 15,074 1,106
Deferred................................... (1,961) (1,491) --
-------- ------- -------
19,457 13,583 1,106
State
Current.................................... 11,335 3,611 3,177
Deferred................................... (1,910) (383) 708
-------- ------- -------
9,425 3,228 3,885
-------- ------- -------
Provision for income taxes................... $ 64,220 $34,614 $31,135
======== ======= =======
</TABLE>
Significant components of the Company's deferred tax assets, included in
prepaid expenses in the accompanying consolidated balance sheets as of March 31
are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Non-deductible reserves.................................. $10,601 $ 5,327
State taxes.............................................. 1,922 1,323
Compensatory accruals.................................... 7,815 5,091
Various expense accruals................................. 6,363 5,581
Capitalized technology................................... 5,700 --
Other, net............................................... (419) 764
-------- --------
Net deferred tax assets.................................. $31,982 $18,086
======== ========
</TABLE>
The provision for income taxes differs from the amount computed by applying
the federal statutory tax rate income before taxes for the years ended March 31
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit................. 2.7 2.7 2.2
Foreign subsidiary income at other than the U.S.
tax............................................... (11.9) (11.8) (9.9)
Tax-exempt interest income, net..................... (1.2) (2.1) (1.7)
Book write-off of in-process technology............. 12.4 -- --
Other............................................... 0.4 1.3 (0.6)
------ ------ ------
Effective income tax rate........................... 37.4% 25.1% 25.0%
====== ====== ======
</TABLE>
The Company's effective tax rate for fiscal 1997 was 37% compared to 25%
for fiscal 1996 and 1995. The Company's fiscal 1997 effective tax rate was 25%
exclusive of the effect of the book write-offs of in-process technology, which
are not deductible for tax purposes. In prior years, the tax effect of similar
book write-offs was included in the cost of the purchased technology.
The Company's manufacturing subsidiary in Singapore is currently operating
under a tax holiday. If certain conditions are met, the tax holiday provides
that profits derived from certain products will be exempt from Singapore tax
through fiscal 2006. In addition, profits derived from the Company's remaining
products
F-14
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
will be taxed at a rate of 15%, which is lower than the Singapore statutory rate
of 26%, through fiscal 1998. As of March 31, 1997, the Company had not accrued
income taxes on $279 million of accumulated undistributed earnings of its
Singapore subsidiary, as these earnings will be reinvested indefinitely.
NOTE 9. SEGMENT INFORMATION
Adaptec operates predominantly in one industry segment and provides
solutions that enhance bandwidth between servers, PCs, peripherals, and
networks. The Company focuses its worldwide marketing efforts on major OEM
customers through its direct sales force located in the United States, Europe,
and Far East and also sells through distributors and sales representatives in
each of these geographic areas.
Income from operations consists of net revenues less cost of revenues and
operating expenses incurred in supporting the revenues of each geographic area.
The Company's write-offs of acquired in-process technology are included in the
corporate income from operations. All of the Company's identifiable assets are
used to support the operations in each geographic area. Corporate assets include
cash and cash equivalents, marketable securities, deferred tax assets, and
certain other assets. Intercompany sales are made at arms-length prices, and
revenues for the European subsidiaries consist mainly of commissions earned in
connection with obtaining foreign orders.
<TABLE>
<CAPTION>
SINGAPORE, ADJUSTMENTS
UNITED FAR EAST, AND CONSOLIDATED
STATES OTHER EUROPE CORPORATE ELIMINATIONS TOTAL
-------- --------- ------- --------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
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
FISCAL 1995
Revenues
Sales to customers.......... $464,707 $ 1,487 $ -- $ -- $ -- $ 466,194
Intercompany sales between
geographic areas....... 10,401 191,360 3,905 -- (205,666) --
--------- --------- -------- --------- ---------- -----------
Net revenues.............. $475,108 $ 192,847 $ 3,905 $ -- $ (205,666) $ 466,194
========= ========= ======== ========= ========== ===========
Income from operations...... 68,594 48,847 343 -- -- 117,784
Identifiable assets......... 122,097 123,044 1,070 262,383 (72,886) 435,708
</TABLE>
F-15
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Export Revenues
The following table represents export revenues by geographic region as a
percentage of total revenues:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Singapore, Far East, Other.............................. 39% 32% 37%
Europe.................................................. 22 24 25
-- - -- -
---
61% 56% 62%
=== === ===
</TABLE>
Major Customers
In fiscal 1997 and 1995, no customer accounted for more than 10% of net
revenues. In fiscal 1996, sales to one distributor represented 10% of net
revenues.
NOTE 10. PRO FORMA NET INCOME PER SHARE
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share," which changes the
manner in which the Company computes earnings per share beginning in the third
quarter of fiscal 1998. The statement requires retroactive presentation of all
earnings per share amounts. Pro Forma basic and diluted earnings per share are
presented below as if the Company had adopted this standard as of March 31,
1997.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
MARCH 31,
----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Pro forma basic earnings per share..................... $.98 $.99 $.91
Pro forma diluted earnings per share................... $.93 $.95 $.88
</TABLE>
NOTE 11. COMPARATIVE QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
QUARTERS
-----------------------------------------
FIRST SECOND THIRD FOURTH YEAR
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
FISCAL 1997
Net revenues................................ $202,014 $215,043 $251,703 $265,108 $933,868
Gross profit................................ 115,968 122,493 148,564 157,874 544,899
Net income*................................. 17,914 1,237 41,584 46,826 107,561
Net income per share*....................... $ .16 $ .01 $ .36 $ .40 $ .93
Weighted average shares outstanding......... 111,342 113,640 116,786 117,665 115,062
FISCAL 1996
Net revenues................................ $138,025 $149,110 $176,187 $196,025 $659,347
Gross profit................................ 81,359 86,451 101,986 113,612 383,408
Net income*................................. 31,163 557 30,587 41,068 103,375
Net income per share*....................... $ .29 $ .01 $ .28 $ .37 $ .95
Weighted average shares outstanding......... 107,884 108,922 109,584 110,122 109,138
</TABLE>
- ---------------
* All quarters of fiscal 1997 include write-offs of acquired in-process
technology, net of taxes, totaling $25 million, $42 million, $12 million, and
$11 million, respectively. The second and third quarters of fiscal 1996
include write-offs of acquired in-process technology, net of taxes, totaling
$33 million and $7 million, respectively.
F-16
<PAGE> 41
REPORT OF MANAGEMENT
Management is responsible for the preparation and integrity of the
consolidated financial statements and other financial information presented in
the annual report. The accompanying financial statements were prepared in
conformity with generally accepted accounting principles and as such include
some amounts based on management's best judgments and estimates. Financial
information in the annual report is consistent with that in the financial
statements.
Management is responsible for maintaining a system of internal business
controls and procedures to provide reasonable assurance that assets are
safeguarded and that transactions are authorized, recorded, and reported
properly. The internal control system is continuously monitored by management
review, written policies and guidelines, and careful selection and training of
qualified personnel who are provided with and expected to adhere to the
Company's standards of business conduct. Management believes the Company's
internal controls provide reasonable assurance that assets are safeguarded
against material loss from unauthorized use or disposition and the financial
records are reliable for preparing financial statements and other data and
maintaining accountability for assets.
The Audit Committee of the Board of Directors meets periodically with the
independent accountants and management to discuss internal business controls,
auditing, and financial reporting matters. The Committee also reviews with the
independent accountants the scope and results of the audit effort.
The independent accountants, Price Waterhouse LLP, are engaged to audit the
consolidated financial statements of the Company and conduct such tests and
related procedures as they deem necessary in accordance with generally accepted
auditing standards. The opinion of the independent accountants, based upon their
audit of the consolidated financial statements, is contained in this annual
report.
F. Grant Saviers
President and Chief Executive Officer
Christopher G. O'Meara
Vice President and Treasurer
Paul G. Hansen
Vice President, Finance and
Chief Financial Officer
Andrew J. Brown
Vice President, Corporate
Controller, and
Principal Accounting Officer
<PAGE> 42
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Adaptec, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 19 present fairly, in all material
respects, the financial position of Adaptec, Inc. and its subsidiaries at March
31, 1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended March 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe our audits
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
April 25, 1997
F-18
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION NOTES PAGE
------ ------------------------------------------------------------------------- -----
<S> <C> <C> <C>
2.1(a) Stock Purchase Agreement by and among Adaptec, Inc., Future Domain (6)
Corporation, Jack A. Allweiss, Patricia A. Allweiss and Certain
Shareholders of Future Domain Corporation dated July 13, 1995............
2.1(b) Stock Purchase Agreement by and between Adaptec, Inc. and Certain (6)
Shareholders of Future Domain Corporation dated July 13, 1995............
2.2 Agreement and Plan of Reorganization by and among Adaptec, Inc., Incat (2)
Systems Software USA, Inc., ISS Acquisition Corporation and Certain
Shareholders of Incat Systems Software USA, Inc. dated August 23, 1995...
2.3 Agreement for Purchase and Sale of Stock by and among Western Digital (3)
Corporation, Western Digital CSG Corporation, and Adaptec, Inc. dated
April 9, 1996............................................................
2.4 Agreement and Plan of Reorganization by and among Adaptec, Inc., Cogent (4)
Data Technologies, Inc., CDT Acquisition Corp., and Certain Shareholders
of Cogent Data Technologies, Inc. dated May 31, 1996.....................
2.5 Agreement and Plan of Reorganization by and among Adaptec, Inc., Adaptec (4)
Acquisition Corporation, and Data Kinesis, Inc. dated August 6, 1996.....
3.1 Eighth Amended and Restated Articles of Incorporation of Registrant filed (5)
with California Secretary of State on November 1, 1996...................
3.2 Bylaws of Registrant, as restated on February 9, 1996.................... (2)
3.3 Certificate of determination of rights, preferences and privileges of (5)
Series A participating preferred stock filed with the California
Secretary of State on December 31, 1996..................................
4.1 First Amended and Restated Common Shares Rights Agreement dated June 30, (9)
1992, between Registrant and Chemical Trust Company of California as
Rights Agents............................................................
4.2 Indenture dated as of February 3, 1997 between Registrant and State (1)
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 (11)
and International Business Machines Corporation..........................
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, (8)
Restricted Stock Purchase Agreement, Stock Appreciation Rights Agreement,
and Incentive Stock Rights Agreement for use in connection with the 1990
Stock Plan, as amended...................................................
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 (7)
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.....................................................................
10.8 Amendments Four, Five and Six to the Revolving Credit Loan Agreement (7)
dated April 29, 1994 between the Registrant and Comerica
Bank -- California expiring August 31, 1997..............................
</TABLE>
<PAGE> 44
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION NOTES PAGE
------ ------------------------------------------------------------------------- -----
<S> <C> <C> <C>
10.9* Option Agreement I Between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan (2)
Semiconductor Manufacturing Co., Ltd. dated October 23, 1995.............
10.10* Option Agreement II Between Adaptec Manufacturing (S) Pte. Ltd. and (2)
Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995......
10.11 Consignment Agreement between Adaptec, Inc. and AT&T Corp. dated January (2)
10, 1996.................................................................
10.12 Letter Agreement between Adaptec, Inc. and Lucent Technologies, Inc.
dated January 1, 1997....................................................
10.13 Form of Indemnification Agreement entered into with directors and (12)
officers of the Company..................................................
10.14 Term Loan Agreement dated June 24, 1992 between the Registrant and Plaza (12)
Bank of Commerce expiring June 30, 1988..................................
10.15* Deposit and Supply Agreement between Taiwan Semiconductor Manufacturing (7)
Co., Ltd. and Adaptec Manufacturing Pte. Ltd.............................
10.16 Industrial Lease Agreement between the Registrant, as Lessee, and Jurong (6)
Town Corporation, as Lessor..............................................
10.17 Amendments Seven, Eight, and Nine to the Revolving Credit Loan Agreement (5)
dated April 29, 1994 between the Registrant and Comerica
Bank -- California expiring August 31, 1997..............................
10.18 Amendments One, Two, Three, and Four to the Term Loan Agreement dated (13)
June 24, 1992 between the Registrant and Comerica Bank -- California
(formerly the Plaza Bank of Commerce) expiring June 30, 1998.............
12.1 Computation of Ratio of Earnings to Fixed Charges........................
21.1 Subsidiaries of Registrant............................................... (14)
23.1 Consent of Independent Accountants, Price Waterhouse LLP. (See Page 22)
24.1 Power of Attorney. (See Pages 23).
25.1 Statement of Eligibility and Qualification Under the Trust Indenture Act (1)
of 1939 of a Corporation designated to act as Trustee on Form T-1........
27.1 Financial Data Schedule for the year ended March 31, 1997.
</TABLE>
- ---------------
(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.
<PAGE> 45
(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 A filed with Registrant's Registration
Statement Number 0-15071 on Form 8-A on May 11, 1989 and to Exhibit 1.1 to
Form 8 Amendments No. 1, No. 2 and No. 3 thereto as filed June 5, 1990;
April 8, 1992; and July 20, 1992, respectively.
(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 S-8 as filed February 7,
1996.
(14) Incorporated by reference from the information under the caption "Corporate
Information" included in the Annual Report to Shareholders for the fiscal
year ended March 31, 1996.
* Confidential treatment has been granted for portions of this agreement.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the fourth quarter.
<PAGE> 1
EXHIBIT 10.12
LETTER AGREEMENT
THIS LETTER AGREEMENT is made and entered into effective January 1, 1997,
between Adaptec, Inc. ("Adaptec"), a California corporation with its principal
place of business at 691 South Milpitas Blvd., Milpitas, California 95035,
Lucent Technologies Inc. ("Lucent"), a Delaware corporation, acting through its
Microelectronics group, having an office at Two Oak Way, Berkeley Heights, New
Jersey 07922 and Lucent Technologies Microelectronica Espana S.A.
("Lucent-Spain"), a Spanish company with offices at Poligono Industrial, Tres
Cantos, Zona Oeste, 28760 Tres Cantos, Madrid, Spain (the "Letter Agreement").
-WITNESSETH-
WHEREAS, Lucent and Adaptec entered into a Consignment Agreement effective
January 10, 1996 (the "Consignment Agreement"); and
WHEREAS, pursuant to the Consignment Agreement, Adaptec purchased and consigned
to Lucent certain EQUIPMENT which has been installed in the Madrid I Clean Room;
and
WHEREAS, at the request of Adaptec, Adaptec and Lucent have agreed to terminate
the Consignment Agreement; and
WHEREAS, Adaptec desires to sell the EQUIPMENT and Lucent-Spain has agreed to
purchase the EQUIPMENT; and
WHEREAS, the parties wish to set forth the terms and conditions pursuant to
which Adaptec will sell the EQUIPMENT to Lucent-Spain and Lucent-Spain will
purchase the EQUIPMENT.
NOW, THEREFORE, in consideration of the mutual promises made herein and other
good and valuable consideration, the receipt of which is hereby acknowledged,
the parties agree as follows:
All terms, unless defined herein, have the meaning assigned to them in the
Consignment Agreement.
1. The Consignment Agreement is terminated effective as of the date of this
Letter Agreement.
2. The EQUIPMENT will be sold by Adaptec to Lucent-Spain in two portions, namely
List A Equipment and List B Equipment as outlined in Attachment A hereto.
<PAGE> 2
-2-
3. Adaptec shall separately invoice Lucent -Spain for List A Equipment and List
B Equipment in 1997.
4. Lucent-Spain shall pay the invoiced amount for List A Equipment within thirty
(30) days of receipt of such invoice. Adaptec shall invoice Lucent-Spain for
List B Equipment in January 1998 and Lucent-Spain shall pay the invoiced amount
within thirty (30) days of receipt of such invoice. Provided however, that
Lucent-Spain has the option to request Adaptec to invoice Lucent-Spain earlier.
5. With respect to List A Equipment the amount invoiced shall be the price
actually paid by Adaptec for such List A Equipment plus any transportation costs
and duties billed to Adaptec and actually paid by Adaptec.
6. With respect to List B Equipment the amount invoiced shall be 90% of the
price actually paid by Adaptec for such List B Equipment plus any transportation
costs and duties billed to Adaptec and actually paid by Adaptec.
7. Lucent shall provide Adaptec with a list of the serial number and/or shop
identification number for each of the EQUIPMENT.
8. Lucent-Spain shall be responsible for all installation charges related to the
installation of the EQUIPMENT.
9. On receipt of payment for the List A Equipment all title, rights and any
interest whatsover that Adaptec has or had in the EQUIPMENT, win end and be
transferred to Lucent-Spain, provided however, that Adaptec will retain a
purchase money security interest in the List B Equipment (and any equivalent
rights of a secured creditor as may be available and applicable under Spanish
law) until payment in full therefor is received. Both Lucent and Lucent-Spain
agree that they will reasonably cooperate with Adaptec in preparing and filing
appropriate documents with government. agencies and taking such other actions as
may be necessary or desirable to preserve, perfect and enforce such security
interest of Adaptec. Any expenses, fees or any other costs related to the
perfecting and enforcing of any such security interest shall be borne entirely
by Adaptec.
10. Adaptec represents that on each of the date of the purchase by Lucent-Spain
of List A Equipment and List B Equipment, (i) the EQUIPMENT shall be on that
date paid for in full, (ii) Adaptec has full title and ownership of the
EQUIPMENT, (iii) no third party has any ownership right, title, interest, claim
or lien on any of the EQUIPMENT and (iv) Adaptec has the right and authority to
sell such EQUIPMENT to Lucent-Spain.
<PAGE> 3
-3-
11. Adaptec represents that to the best of its knowledge the amounts invoiced
for the EQUIPMENT are the actual amounts paid for such EQUIPMENT minus any
amounts that Adaptec received as refunds, credits or any other form of payments.
12. In consideration of Lucent-Spain purchasing the EQUIPMENT from Adaptec,
Lucent-Spain shall have the right to use the EQUIPMENT as of January 1, 1997,
without paying Adaptec any usage fee or any other type of compensation as a
result of such usage. Risk of loss shall be borne by Lucent-Spain as of January
1, 1997.
13. Adaptec agrees to pass on to Lucent-Spain the ability to exercise, if
necessary, any warranty rights Adaptec may have in the EQUIPMENT. Adaptec agrees
to take the necessary steps to ensure this.
14. The validity, construction and performance hereof shall be governed by the
substantive law, but not the conflicts of law rules, of the State of New York.
15. Lucent and Adaptec covenant, warrant and represent that their respective
representatives signing this Agreement have full power and proper authority to
sign this Agreement and so bind the parties. Lucent further covenants, warrants
and represents to Adaptec that Lucent is the successor to all of the rights and
interests of AT&T Corp. under the Consignment Agreement and is fully empowered
to execute this Letter Agreement and terminate the Consignment Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
ADAPTEC, INC. LUCENT TECHNOLOGIES INC.
By: /s/ SAM KAZARIAN By: /s/ PAUL J. MOSTEK
------------------------ -----------------------------
Name: Sam Kazarian Name: Paul J. Mostek
------------------------ -----------------------------
Title: Corp. VP Operations Title: Customer Satisfaction &
------------------------ Business Development
Vice President
Date: 3/18/97 Date: 3/12/97
------------------------ -----------------------------
<PAGE> 4
- 4 -
LUCENT TECHNOLOGIES
MICROELECTRONICA ESPANA S.A.
By: /s/ Edward C. Akers
------------------------
Name: Edward C. Akers
------------------------
Title: Managing Director
------------------------
Date: 3/13/97
------------------------
<PAGE> 5
Page 1 of 2
APPENDIX A
EQUIPMENT LIST A (PAYMENT DUE IN 1997)
<TABLE>
<CAPTION>
ADAPTEC
SUPPLIER EQUIPMENT ESE # P.O. NO. QUANTITY PAID
- -------- --------- ----- -------- -------- ----
<S> <C> <C> <C> <C> <C>
Nikon I-Line Body 11 89-023 MA35641 1 $ 2,895,761.90
Varian M2I Cluster Tool 58-023 MA35642 1 $ 2,744,070.00
LAM TCP 9606 Etcher 12-062 MA35653 1 $ 1,671,642.39
KLA 2132 Insp. system 12-026 MA35663 1 $ 1,760,987.50
TEL Developer 17-021 MA35664 1 $ 692,655.00
Thermawave Optiprobe 2600 12-025 MA35656 1 $ 396,930.00
Gasonics Aura-1000/1 12-060 MA35635 1 $ 182,632.80
Metron Chemfill N/A MA35759 1 $ 129,901.00
Edwards TCP 9606 Pumps 12-062 MA35630 4 $ 85,958.00
Edwards M2I Pumps 58-023 MA35643 4 $ 79,576.00
Optilas M2I Gas Analyzer 58-023 MA35644 5 $ 67,065.92
Leybold Aura 1000/1 Pump 12-060 MA35637 1 $ 32,173.29
TOSOH Targets 58-023 MA35677 1 $ 21,422.69
VDA TCP 9606 Transformer 12-062 MA35631 1 $ 6,336.00
--------------
Total $10,767,112.49
</TABLE>
<PAGE> 6
Page 2 of 2
APPENDIX A (continued)
EQUIPMENT LIST B (Payment Due in 1998)
<TABLE>
<CAPTION>
SUPPLIER EQUIPMENT ESE # P.O. NUMBER ADAPTEC PAID $ 1998 (90%)
- -------- --------- ----- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Applied Matls Oxide AMI 5000 12-063 MA35640 1 $ 2,455,538.20 $ 2,209,984.38
Applied Matls AMI PETEOS 58-030 MA35645 1 $ 1,871,664.87 $ 1,684,498.38
KLA 2132 Insp.System 12-031 MA35729 1 $ 1,760,987.50 $ 1,044,888.75
AST RTP 028-021 MA35646 1 $ 768,240.00 $ 691,416.00
Bruce Int. Furnace Bank 04-005 MA35648 1 $ 758,724.00 $ 682,851.60
BIORAD Q6+ Retrofit 77-016 MA35650 1 $ 702,675.12 $ 632,407.61
TEL Developer 17-022 MA35664 1 $ 692,655.00 $ 623,389.50
Gasonics AE-2001 Etcher 12-061/12-038 MA35632 2 $ 679,721.00 $ 611,748.90
TEL Scrubber 64-031 MA35760 1 $ 509,743.77 $ 458,769.39
LEICA INS2000 Insp.System 77-017 MA35686 1 $ 425,724.10 $ 383,151.69
Semitool WSST 31-015 MA35649 1 $ 378,815.00 $ 340,933.50
Gasonics Aura 1000/1 12-066 MA35636 1 $ 181,032.90 $ 162,929.61
S. Gobain/Norton Process Tubes 04-005 MA35654 4 $ 113,157.00 $ 101,841.30
Leybold Aura 1000/1 Pump 12-066 MA35638 1 $ 32,173.29 $ 28,955.96
Leybold AE2001 PuMps 12-061/12-038 MA35633 2 $ 64,346.58 $ 57,911.92
-------------- --------------
Total $11,395,198.33 $10,255,678.50
</TABLE>
<PAGE> 1
EXHIBIT 12.1
ADAPTEC, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Amounts in thousands)
<TABLE>
<CAPTION>
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Pre-tax income from continuing operations $124,537 $137,989 $171,781
-------- -------- --------
Fixed charges:
Interest expense 1,179 840 2,744
Rentals - 33% 784 1,226 1,881
-------- -------- --------
Total fixed charges 1,963 2,066 4,625
-------- -------- --------
Earnings before income taxes and fixed charges 126,500 140,055 176,406
======== ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 64.4 67.8 38.1
======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 318,075
<SECURITIES> 230,366
<RECEIVABLES> 137,669
<ALLOWANCES> 5,098
<INVENTORY> 53,184
<CURRENT-ASSETS> 817,948
<PP&E> 199,548
<DEPRECIATION> 57,949
<TOTAL-ASSETS> 1,043,494
<CURRENT-LIABILITIES> 124,319
<BONDS> 230,850
0
0
<COMMON> 251,834
<OTHER-SE> 436,491
<TOTAL-LIABILITY-AND-EQUITY> 1,043,494
<SALES> 933,868
<TOTAL-REVENUES> 933,868
<CGS> 388,969
<TOTAL-COSTS> 388,969
<OTHER-EXPENSES> 383,671
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,744
<INCOME-PRETAX> 171,781
<INCOME-TAX> 64,220
<INCOME-CONTINUING> 107,561
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,561
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
</TABLE>
